Executives: Bernie Blegen – Vice President and Chief Financial Officer Michael Hsing – Chairman, President and Chief Executive

Officer
Analysts: Quinn Bolton – Needham Rick Schafer – Oppenheimer Matt O’Connor – Deutsche Bank Tore Svanberg –

Stifel
Operator: Good day, ladies and gentlemen, and thank you for your patience. You joined the Monolithic Power Systems’ Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the call over to your host Chief Financial Officer of Monolithic Power Systems, Mr. Bernie Blegen. Sir, you may begin.

Bernie Blegen: Thank you very much. Good afternoon, and welcome to the first quarter 2017 Monolithic Power Systems’ conference call.

Michael Hsing, CEO and Founder of MPS, is with me on today’s call. In the course of today’s conference call, we will make forward-looking statements and projections that involve risk and uncertainty, which could cause results to differ materially from management’s current views and expectations. Please refer to the Safe Harbor Statement contained in the earnings release published today. Risks, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2017, which is accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today’s call.

We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, interest and other income, net income and earnings on both a GAAP and on a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q1 2016, Q4 2016 and Q1 2017 releases, as well as to the reconciling tables that are posted on our website. I’d also like to remind you that today’s conference call is being webcast live over the Internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today.

MPS had a record first quarter with revenue of $100.4 million, 3.1% lower than revenue generated in the fourth quarter of 2016, 18.8% higher than the comparable quarter in 2016. MPS continues to benefit from technological leadership and our diversified multi-market strategy. Looking at our revenue by market, first quarter 2017 industrial revenue of $27.7 million grew 50.2% over the same period of 2016, fueled by product sales for applications in automotive, power sources, and smart meters. Industrial revenue as a percentage of total Q1 2017 revenue grew to 27.6%. In our computing and storage market, revenue of $20.6 million increased, $5.2 million or 33.9% year-over-year reflecting strong sales growth for SSD storage, cloud computing and high-end notebooks.

Computing and storage revenue represented 20.5% of MPS’ first quarter 2017 revenue. Revenue from consumer markets increased 5.3% over the first quarter of 2016 to $35.6 million and represented 35.5% of our Q1 revenue. The year-over-year revenue increase reflected solid improvements in high value consumer markets including home appliances and lighting tempered by lower sales for set-top boxes. First quarter 2017 communication revenue of $16.4 million decreased 2.5% from the first quarter of 2016 and represented 16.4% of our total first quarter revenue. GAAP gross margin was 54.6%, 10 basis points higher than the prior quarter of 2016 and 70 basis points higher than the first quarter of 2016.

Our GAAP operating income was $13.6 million, compared to $17.5 million reported in the fourth quarter of 2016 and $10.4 million reported in the first quarter of 2016. For the first quarter of 2017, non-GAAP gross margin was 55.5%, 10 basis points higher than the prior quarter of 2016 and 50 basis points higher than the first quarter from a year ago. Our non-GAAP operating income was $26.5 million, compared to $29.0 million reported in the prior quarter and $20.0 million reported in the first quarter of 2016. Turning to automotive, macro economic trends in the industry appear soft. However, our market penetration is in the very early stages.

And we believe our future growth will be largely driven by gaining market share. Accordingly we expect revenue for the next several years continue to grow at a rate significantly above market as MPS’ footprint and automotive is relatively small by the market size and opportunities are tremendous. Growth trends in automotive electronic applications align well with MPS technology as consumers demand higher connectivity and access to more intelligent content. More importantly, the proliferation of sensors and multi-core processors for autonomous driving capabilities provide MPS with increased available dollar content for each vehicle. These trends will have a strong positive influence on our business prospects over the long-term.

In addition to continued momentum from automotive, we expect to layer on new revenue streams in 2017 and in the years ahead. Beginning in Q2 2017 product ramps for MPS’ superior digital power solutions will drive growth in applications for cloud computing, gaming council and high-end notebooks. We expect our digital power solutions will be further adapted in 2017 and 2018 for use in field programmable applications, networking and automotive. Let’s review our operating expenses. Our GAAP operating expenses were $41.3 million in the first quarter, compared with $39.0 million in the fourth quarter of 2016 and $35.1 million in the first quarter of 2016.

Our non-GAAP first quarter 2017 operating expenses were $29.2 million, up from the $28.4 million we spent in the fourth quarter and up from the $26.4 million reported in the first quarter of 2016. On both a GAAP and a non-GAAP basis, first quarter litigation expenses were $286,000, compared with a $322,000 net credit in Q4 2016, a portion of a Q4 2016 IP settlement was recorded as income in that quarters litigation expenses and a similar adjustment was not repeated in the first quarter of this year. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation and income or loss on an unfunded deferred compensation plan. Total stock compensation including approximately $400,000 that was charged cost of goods sold, for the first quarter of 2017 was a $11.7 million compared with $10.7 million recorded in the fourth quarter of 2016. Switching to the bottom line.

First quarter 2017 GAAP net income was $14.5 million or $0.33 per fully diluted share, compared with $0.39 per share in the fourth quarter of 2016 and $0.25 per share in the first quarter of 2016. Q1 non-GAAP net income was $25.2 million or $0.58 per fully diluted share, compared with $0.65 per share in the previous quarter of 2016 and $0.45 per share in the first quarter of 2016. Fully diluted shares outstanding at the end of Q1 2017 were $43.3 million, which included a one-time increase of approximately 500,000 shares upon adoption of the new accounting standards for stock compensation. Now let’s look at the balance sheet. Cash, cash equivalents and investments were $284 million at the end of the first quarter of 2017, compared to $273.6 million at the end of the fourth quarter of 2016.

For the quarter, MPS generated operating cash flow of about $21.9 million, compared with Q4 2016 operating cash flow of $31.0 million. First quarter 2017 capital spending totaled $3.4 million. Accounts receivable ended the first quarter of 2017 at $38.1 million or 35 days of sales outstanding, which was slightly higher than the $34.2 million or 30 days reported at the end of the first quarter of 2016. This modest increase was due to a higher proportion of the quarter sales being recorded in the third month of Q1 compared with the prior quarter. Day sales outstanding for the first quarter of 2017 were four days higher than the 31 days posted in the first quarter of 2016.

Our internal inventories at the end of the first quarter of 2017 were $78.5 million, up from the $71.5 million at the end of the fourth quarter of 2016. Days in inventory increased to 157 days at the end of Q1 2017 from 138 days at the end of the fourth quarter of 2016 and 145 days at the end of the first quarter of 2016. I would now like to turn to our outlook for the second quarter of 2017. We are forecasting Q2 revenue in the range of $109 million to $113 million. We also expect

the following: GAAP gross margin in the range of 54.1% to 55.1%; non-GAAP gross margin in the range of 55.0% to 56.0%; total stock-based compensation expense of $12.5 million to $14.5 million, including approximately $400,000 that would be charged to cost of goods sold; litigation expenses ranging between $200,000 to $300,000; GAAP R&D and SG&A expenses between $42.0 million and $46.0 million; non-GAAP R&D and SG&A expenses to be in the range of $29.9 million to $31.9 million.

This estimate excludes stock compensation and litigation expenses; other income is expected to be in the range from $400,000 to $500,000 before foreign exchange, gains or losses; fully diluted shares to be in the range of 42.9 million to 43.9 million shares before share buyback. In conclusion, we continue to grow and continue to enhance shareholder value. I will now open the phone lines for questions.

Operator: Thank you, sir. [Operator Instructions] Our first question comes from the line of Quinn Bolton of Needham.

Your line is open.

Quinn Bolton: Hey guys, congratulations on the nice result. So I just wanted to start up with some of the revenue drivers for 2017-2018, it just sounds like the transition share gains on game console related devices and then server power management are kind of the three near-term next 12 months drivers. And just in terms of the timing kind of it feels like probably notebooks first, game consoles maybe starts to ramp late here in Q2 and then servers closer to year-end and just wanted to see if that’s kind of the right timing from your perspective in terms of the ramp of those three opportunities.

Bernie Blegen: Hi, Quinn.

Thank you very much. I think that the way that you’ve sequenced those opportunities is correct and let me just add a little bit of color. So the notebook opportunities, we expect to be sort of steady and consistent growth. It’s not as if there’s a big bang that’s going to occur in one quarter and then grow from there. When we look at gaming, obviously, that’s driven around the holiday season, so we would expect that with the adoption of the gaming console business that that should be weighted more heavily into Q3 although it may have a tail into Q4 as well.

And then certainly with the servers as we’ve discussed in the past much of that while we’ve continued to see good revenue growth, much of the next layer of growth we believe is expected with the Grantley the Purley transition, which is expected to the second half. And there again, we see good games to come for as we are designed into new platforms and also we branched out into dual OEMs and that would include both our POL and our E-Fuse products. And then we believe over time that we’ll see adoption rates for our VCORE power management solution that we called QS Mod as that goes from that tier-2 to tier-1 and in particularly the cloud providers.

Quinn Bolton: And on these cloud providers, they tend to be sort of earlier adaptors in the sort of server upgrade cycle. Did that that kind of ramp do you think maybe enters the tailwind of 2017? I know Intel often provides early access to some of those Hyper-Scale guys or do you think that’s still kind of more closer to year end and in to early 2018 for that Hyper-Scale Cloud opportunity.

Bernie Blegen: I think that when we look at the MPS is overall energy efficiency solutions, they really do bases for growth in the cloud based data centers. And yes, they do have earlier adoption rates.

Michael Hsing: Quinn, this is Michael. All these are the Company’s strategies, we don’t really care which market segment, how we time it and how we time it and that relates to growing our MPS revenues. So these – we actually in opposite, we don’t want to – we want to disassociated with or we are tied to Xbox, or we are tied to whatever the game – whatever the game console, in game platforms and in the game – in the Intel’s of when we were to release – release productions for whatever the process so yes.

These are just our opportunity and that we only want to getting show our gross margin in the steady growth. And our customers facing – whatever the – whichever the product is, I can – we don’t contact and it’s all within a plus minus six, seven months, as I said earlier.

Quinn Bolton: Okay, great. And then just…

Bernie Blegen: I’m sorry just a finishing thought on Michael there, one of the interesting characteristics as Michael has just laid it out as well is that it provides for a steady growth ramp both for the second half of 2017, as well as throughout 2018.

Quinn Bolton: Great.

And then just the follow up question about JV, you’ve talked about sort of some general macro economic weakness in the automotive sector, but share gains would allow you sort of over the next several years to grow faster than the market. And I’m just kind of wondering, do you think that there’s any point in time where macroeconomic conditions can change the near-term outlook, I mean, does macro change so quickly that it can fetch your quarter-to-quarter revenue ramp on automotive or do you think the share gains are really the driving factor there and even with soft macro environment sort of steady share gains that you have for more consistent growth. Just trying to get your sense on whether or not, we should be thinking automotive could be lumpy.

Michael Hsing: For the automotive Quinn in MPS as you know, we entered a market about four or five years ago, and four or five years ago our revenue almost is zero. And even two, three years ago very teeny-tiny.

And it takes a long time to get the revenue. And so design cycle is about three to four years. And we our total ten in Automotive is about $6 billion, probably now is more than that. And so what is our percentage is less than a percent. So it’s a total greenfield for us to grow.

As I see it in the next few years all the design win activities happen in the last couple of years. So it’s all designing. Unless they cancelled a car, they canceled their entire cars and are now going to move to a production market and of course the very effective MPS revenue. But it’s highly unlikely they’ll not introduce a car any more. So, we yes that’s why we said lucky.

Is we – and also at the same time we’re gaining share. We’re gaining share we’re entering other applications and we’re winning other sockets. So the overall for us it’s very optimistic.

Quinn Bolton: Great, that’s great. Now Samsung Galaxy Note7 automobiles coming into marketing anytime soon.

And thanks and congratulations.

Michael Hsing: Okay, thank you.

Operator: Thank you. Our next question comes from Rick Schafer of Oppenheimer. Your line is open.

Rick Schafer: Thanks and I’ll add my congratulations on another nice quarter. Maybe just a quick follow-up on [indiscernible] I’m just curious which your guys thoughts are and how you see that mix migration and what it looks like over the next 12 months to 18 months. I mean, are we going to – is it a relatively rapid crossover possibly like the first half of 2018 or is it going to take a little while longer for that mix to shift?

Michael Hsing: I don’t think it’s going to be are very sharp cross over. So that will be a gradual, a gradual change. So our revenue as I said in the last few quarters so the second half this year we start to gradually see revenue coming.

Bernie Blegen: And I think I would add to that a lot of the initial revenue will come from similar dollar content hence we have in the in the Grantley cycle. And that is based on the POL and the eFUSE opportunities. And then we’ll continue to gradually layer in our next generation as far as power management the QS Mod, over the next, the course of the next two years. So I think that Michael is summed it up nicely that we see it steady ramping in that for us.

Rick Schafer: Okay.

Thanks.

Bernie Blegen: Again, the opportunity for us in a car computing is well over $1 billion. And we have a very few, I don’t know what is the percentage – it’s less than the couple of percent.

Rick Schafer: And maybe just a follow-on to that then I mean how do you guys feel like you’re positioned with ARM servers for co-power or Point of Load or eFUSE do you expect any revenue are you working on any projects along those lines in the next, same kind timeframe next 12, 18 months?

Michael Hsing: Of course, we want to cover everything like if we entered the market okay, without taking our technologies and we can be easily adapted into different platforms. And so we are working on it all these other solutions of them and a lot of them where we have it now.

Rick Schafer: Okay. And then maybe just on switching gears to e-commerce and the initiative there maybe could, first I guess is the website live and is it up and running, I know you talked about sort of March, April timeframe for launch maybe if you could remind us or kind of frame out how big that opportunity is in terms of potential new customers and when we might start to see revenues from that effort?

Bernie Blegen: Yes, I will open up by saying that e-commerce solution and the opportunity that is afforded through ask field programmability and we’ve been viewing that really the second half of 2018 and 2019 as far as when the revenue ramp begins. So to answer your question specifically, this quarter we did have a rollout of basically an upgrade over our all website. And then we’re expecting in about another 3 to 4 months time that will go up at the first generation of the next-gen website which will have an e-commerce component.

Rick Schafer: Got it.

Okay thanks, guys.

Michael Hsing: Just an update, okay its very I call it baby steps I mean it’s just we show – we have other components in all the interactive and the e-commerce question haven’t really kicking yet and I hope in the next few months the new website will be live.

Rick Schafer: Got it. Thanks guys.

Operator: Thank you.

Our next question comes from Ross Seymore of Deutsche Bank. Your question please. Matt O’Connor: Hey, guys, this is actually Matt on Ross’ behalf. Congrats on the results once again, but I’m curious about two in-markets in particular, comms and storage and computing. It looks like they – you’re just a tad bit softer than at least we expected.

Was there anything beyond your prepared remarks that could explain the directionality of those two? And it sounds like that you’re pretty optimistic about both of them in the second half, but anything you could talk about one in the near-term and anything over and beyond what was already answered from the previous caller concerning the long-term?

Bernie Blegen: Yes. So let me address just focusing quarter – year-over-year on the quarter’s performance. So the computing – storage and computing revenue for that market went up 34% year-over-year and a lot of it was driven by storage SSD in particular. And if I could offer sort of a thought is that storage for us has been somewhat constrained because lack of availability of NAND. And we had a very good bump and we expect that to continue for the next several quarters as there have been certain of the larger suppliers that have been able to extend greater availability, and so that’s removed a bottleneck for us.

And then as far as the server and the notebook; notebook, we are benefiting as we transition from Skylake to Kaby Lake, and that is going to increase the number of OEMs that we serve, it actually increases it by building five or six. And we expect that to ramp incrementally right now, but have continued growth through the remainder of this year and well into next year. And likewise, I think we’ve already addressed the server which is going to be driven by the Grantley Proleague conversion. On the comms market, I think we sort of had a very consistent theme that we are very enthusiastic of the opportunity there, we believe that the field programmable solutions for power management that we have are ideally suited, particularly for high voltage opportunities in the wireless infrastructure, but that is a long-term proposition. And so, quarter-to-quarter we expect the comms market to sort of increase or decrease by a margin of about $1 million until we really start to get some attraction in next generation products and new customers.

Michael Hsing: Yes, as I’ve said, we’re going to introduce some acquainted product and that killer product is out, will be introduced. And I expected to have a next couple years that we’re going to grow that business significantly. Matt O’Connor: Okay, great. And on the OpEx front, could you give any rough color on this second half outlook. It sounds like again we talked about the growth drivers on OCM, but just a rough idea of what OpEx should do in the second half of the year.

Bernie Blegen: Sure. I think that we said in the last call that, we expect to be within our financial model growing operating expenses in this year at a rate that is represents 50% to 60% the rate of revenue growth. In Q1, we actually came in middle, low end of that point. And I sort of say that we’re targeting plus or minus 2 percentage points of the midpoint of that for the full year. Matt O’Connor: Okay.

Thanks so much.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Tore Svanberg of Stifel. Your question please.

Tore Svanberg: Yes.

Thank you and congratulations on another consistent quarter. My first question is for you Michael on all the consolidation we’ve seen so far especially our power and management companies. I’m just wondering if it seems that changed in the marketplace whether it’s pricing or capacity because it seems like your competitors are getting global got the recorder how so, any thoughts on that would be helpful. Thanks.

Michael Hsing: I think of the – we gained a lot of large, but these are first here customers in the recent years.

I think of that attribute to, I was there to first our technologies and that came – and secondly I came out I think that yes I do agree there is some effect. And our customers need a multiple sources and the source of that kind of dried out. And the some it kind of forced them to looking into another supplied. And a combination we’re both I think we gain a lot of recognition in the last couple of years. And particular, these are very well established at first year customers in auto and a industrial side.

Tore Svanberg: Yes, that’s helpful. And on the high end note books other than the process or change, is it anything about the power management architecture there that’s along you to gain some incremental share.

Michael Hsing: I think of for the high end note books I get where we are – consider now we can provide a total solutions and for the power management. And so obviously – and other peripheral we can gain some more shares. But we don’t want to associate that to MPS is a notebook company.

And we only address that those are small vary thing, vary portable and long battery running times.

Tore Svanberg: Yes. And then on the industrial side, which obviously have the strongest growth the last 12 months, any further thoughts on the distribution strategy. There seems to be some mixed strategies out there, some companies are relying less on distributors, some are kind of stepping them up. What do you stand as far as leveraging the distribution channel in the industrial market?

Michael Hsing: Yes.

We’re in the past [indiscernible] sales guys are really have a hard work as opining the pavements to get our customers attentions. And all these distributors just frankly just ignore us. And then now they’re run out of source they come to us too. And so I think as where we’re going to futures in the next couple years there will huge benefit to MPS.

Tore Svanberg: Yes.

Very good just one last question for Bernie, Bernie the inventory days were not, but little bit sequentially I understand it tends to do that in the March quarter but anything else going on there basically just getting ready for a strong period in Q2, Q3.

Bernie Blegen: Sorry. That’s exactly I think that as you look at the market that the fab capacity is being mentioned as a concern for some people. And I believe we’ve positioned ourselves very well to manage the growth that we expect to get in the second half of this year.

Tore Svanberg: Very good.

Again congratulations for the consistency. Thank you.

Bernie Blegen: Thank you, Tore.

Operator: Thank you. At this time I like to turn the call back over to Mr.

Blegen for any closing remarks, sir.

Bernie Blegen: Sure, thank you. I’d like to thank you all for joining us for this conference call and look forward to talking to you again during our second quarter conference call, which will likely be at the end of July. Thank you and have a nice day.

Operator: Ladies and gentlemen that does conclude your program.

Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.