Monolithic Power Systems Inc

NASDAQ:MPWR

Earnings Call Analysis

MPS Q2 2024 Thrives with AI-Powered Solutions

Monolithic Power Systems (MPS) celebrated a record Q2 2024 with revenues of $507.4 million, exceeding their guidance. The growth stemmed from strong demand for AI-powered solutions, improved order trends, and design wins. MPS is transitioning from a chip supplier to a full solutions provider, driving long-term growth. The company continues to see significant opportunities in enterprise data, communications, storage, computing, and automotive markets. Despite market uncertainties, MPS remains confident in its strategy and future growth, projecting strong performance across various sectors and an increasing role in the AI landscape.

Another Record-Breaking Quarter

Monolithic Power Systems (MPS) has reported an impressive second quarter for 2024, with revenue reaching $507.4 million, exceeding their guidance. The significant revenue growth is driven by multiple factors: the rising demand for AI-powered solutions, improving orders from various end markets, and revenue gains from design wins made in previous years. Strong performance in these areas has allowed MPS to continue executing its long-term growth strategy and transform from a chip supplier to a full solutions provider.

Expanding Global Supply Chain

MPS continues to expand and diversify its global supply chain to ensure supply stability and capture future growth. This strategy is crucial in maintaining strong performance and supporting the increasing demand for their products across various sectors.

Enterprise Data Segment a Key Growth Driver

The Enterprise Data segment remains a significant focus for MPS, contributing heavily to revenue growth. The company has experienced substantial growth in this area, with continued expansion expected in Q3. There is also notable progress and opportunities in other segments like Consumer, Communications, and Automotive. MPS's design wins in these areas are beginning to take effect, indicating a potential recovery and growth in these segments.

Investments in Advanced Technologies

MPS is actively working on advanced technologies, notably in power supply solutions for data centers. Since 2016, MPS has been developing silicon carbide solutions that promise high efficiency and smaller sizes, tailored for data center applications. Although current revenue from these innovations is minimal, significant growth is anticipated as adoption increases.

Vertical Power Delivery Innovations

A major area of innovation for MPS is vertical power delivery, which involves placing voltage regulators directly under CPUs for optimal efficiency. While there's complexity and technical challenges in this approach, MPS is at the forefront, offering solutions that promise highest efficiency levels. This expertise positions MPS well against competitors and opens up substantial growth opportunities.

Transforming into a Solutions Provider

MPS is shifting its business model from being purely a semiconductor company to a solutions provider. Selling not just chips, but complete solutions has allowed MPS to increase the value of their offerings significantly. Solutions now account for 20-25% of MPS's revenue, with this segment growing faster than the overall company. By offering modular and integrated solutions, the company can capture higher revenue per product.

Steady Growth in Automotive Sector

The automotive sector remains a promising area for MPS, particularly with electric vehicles (EVs) and advanced driver-assistance systems (ADAS). MPS has secured numerous design wins in these areas, which are expected to drive growth over the next few years. Revenue from automotive applications is likely to gain momentum as these technologies become more widespread.

Managing Seasonal Fluctuations

Historically, MPS experienced seasonal downturns in the December quarter. However, the shift in business mix now mitigates this trend, making future performance less predictable but potentially more stable. MPS continues to navigate inventory fluctuations while adapting to demand changes, which adds complexity to short-term forecasting.

Addressing Market Challenges and Opportunities

Despite challenges in the market, including export limitations affecting some semiconductor companies, MPS remains resilient. They do not have significant exposure to companies like Huawei, and their product portfolio is not subject to the same export restrictions. This positions MPS favorably despite broader market uncertainties.

Looking Ahead with Confidence

MPS's strategic focus on expanding their solutions offering, investments in innovative technologies, and diversification across end markets positions them well for sustained growth. While some sectors like Automotive face near-term uncertainties, the long-term outlook remains positive with continuous improvements and high potential in areas like AI, data centers, and EVs.

Earnings Call Transcript 2024-Q2

[Genevieve Cunningham, executive]

Welcome, everyone, to the MPS Second Quarter 2024 Earnings Webinar. My name is Genevieve Cunningham, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; Bernie Blegen, EVP and CFO; and Tony Balow, Vice President of Finance.

Earlier today, along with our earnings announcement, MPS released a written commentary on the results of our operations. Both of these documents can be found on our website. Before we begin, I would like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainty. Risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q2 earnings release and in our SEC filings, including our Form 10-K, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information.

Now I'd like to turn the call over to Bernie Blegen.

[Bernie Blegen, executive]

Thanks, Gen. Good afternoon, and a big welcome to all of you. Let me open by saying MPS reported yet another record quarter with Q2 2024 revenue of $507.4 million, exceeding the high end of our guidance. Our strong revenue growth was attributed to 3 factors: increased demand for AI-powered solutions, improving order trends in several of our end markets; and lastly, initial revenue ramps associated with design wins secured in past years.

Separately, we continue to expand and diversify our global supply chain to ensure supply stability and capture future growth. As we have emphasized for many years, our results reflect continued success of our proven long-term growth strategy and our transformation from being only a chip supplier to a full solutions provider.

I will now open the webinar up for questions.

[Bernie Blegen, executive]

Gen, can you please ask the first caller?

[Genevieve Cunningham, executive]

Our first question is from Matt Ramsay of Cowen.

[Matthew Ramsay, analyst]

Mike and Bernie, congratulations on, I'll just say, it's nice to have a call part in the storm relative to what's been -- what all of us have been dealing with over the last 2 weeks. So congrats. I wanted to ask a couple of questions that I imagine the Enterprise Data segment is going to be a huge focus on this call. So maybe I'll just start with the first question.

Bernie, if you could maybe give us some directional color by end market in your guidance for September, I'd appreciate it. And secondly, Michael, if you could talk a little bit about what you're seeing in some of the non-enterprise data segments, like, things like Consumer, Comms, Auto.

There's -- the model has been driven by this big growth in Enterprise Data. But from what I can tell, your company has had a lot of design win success in some of these other areas where the macro has really been challenging. And I'm wondering if you're starting to see any green shoots there yet for a recovery in some of those other segments.

[Bernie Blegen, executive]

Sure. I'll keep my comments fairly short as far as the Q3 outlook by end market. Essentially, the bookings trend that we carried into Q3 has improved quite a bit over the last few quarters and has been fairly broad as far as the end market participation.

If you look specifically at Enterprise Data, you'll see that we took a fairly large step up in each of the last 2 quarters. And then in the third quarter outlook, we see continued growth in Communications, Storage and Computing, with incremental improvements also in our other groups.

[Michael R. Hsing, executive]

Yes. Your second question is, as Bernie said it, we do see some of our other business would now relate to AI. And now it is difficult to separate AI. Now AI is -- other business, we designed it in which we, let's say that, okay, we ship these products half year ago. A year before, we see the markets start wakening up. And -- but that's -- whatever it is, whatever it is, okay?

And we do see a lot of new design -- new requirement, which is much higher power for -- especially for Communications and -- well, as a matter of fact, it's across the board. And these designs are much higher power than the previous versions. And these are all related to the new design related to AI and AR requirements. And these design wins will probably trickle down, so that came in 2 or 3 years, a change of revenues.

[Matthew Ramsay, analyst]

Got it. I appreciate it. I ask 2 questions at once. So I'll get back in the queue.

[Genevieve Cunningham, executive]

Our next question is from Dustin Fowler of Oppenheimer.

[Dustin Fowler, analyst]

Just a couple of quick questions. So for power isolation, I believe you ramp later this year in Auto, followed by Data Center next year. I think both markets could be greenfield opportunities in the hundreds of millions each. Could you just give us a sense of the ramp in both markets, the competitive landscape and maybe any market sizing, if you can?

[Bernie Blegen, executive]

Dustin, I apologize. This is Bernie. I didn't hear which 2 markets.

[Dustin Fowler, analyst]

Sorry, that was Auto and Data Center for power isolation.

[Michael R. Hsing, executive]

Okay. Yes, we do -- we start to ship a product for the higher powers for Data Centers. And this is only the beginning. And that's -- what you say, that's very true. Although it's been known, and we -- when ADAS -- and that became more and more cars converting to the ADAS, okay, and which we believe being 2 or 3 years, all the cars will have that features. And we -- so far, we provide all the -- we have design wins in all these car makers, especially in the EVs.

[Dustin Fowler, analyst]

Okay. And I guess, as we think about kind of Auto this year, I think the Street has Auto model flat. I guess, how realistic is that given the 70% content gains you have with your largest auto customer before power installation, plus the wins with Chinese OEMs? And I guess, maybe for Bernie, are you modeling Auto flat this year? And how should we kind of think about share gains?

[Michael R. Hsing, executive]

Well, we cannot pick that up. Our -- you want to pick the models and give me -- and you want to pick them. I can't give you a model. My accuracy is a plus/minus 12 months. And going forward, we are very confident.

[Bernie Blegen, executive]

Yes, I think the near-term outlook for Automotive remains a little bit fuzzy. And for example, in Q2, we were expecting a nice uplift, which did not occur. And so Michael is correct is that positioning within the next 2, 3 quarters is hard to predict for Auto more broadly, and EV specifically. But our long-term positioning is only getting better with additional design wins.

[Genevieve Cunningham, executive]

Our next question is from William Stein of Truist.

[William Stein, analyst]

Great. Michael, I'm hoping you can linger on that comment you made about solution selling, I think, might have been the term you used. I think in the past, we've been conditioned to hear about modules versus semis. Can you linger as to what you're -- maybe spend a minute explaining what sorts of products and what end markets and what growth you see coming from that activity?

[Michael R. Hsing, executive]

I like that question. Yes. Okay. But as we said that we started that journey a long time ago, okay. At the beginning, maybe I didn't know or we didn't know what the hell we were talking about, okay, but that's the direction. And that's including a part of e-commerce, okay? And we sell plug-and-play solutions.

So the effort is the journey will be, we are -- we're known to be a semiconductor company. And yes, we do. We do all that we provide. And when we sell a silicon, we're selling -- actually, we're selling solutions. We know all the technical details in terms of how we implement these solutions. So my effort is we want to monetize all our knowledges.

MPS in the end doesn't make any things. And we are making the money from our knowledge, while we just capitalize the -- or the entire -- our capabilities. And so the journey, we started. Now we're selling the solutions. It's probably 20%, 25% of our total MPS total revenue. Every piece of silicon -- we used to be selling somewhere between $1.50 to $1. Some of them, a lot of them even lower for the mass market, and which we kind of very little announced, especially in Consumer business.

And now turning to a solution company is still a semiconductor-based solutions. We sell those solutions. Now particularly, as you call it, as a module, and I don't know like what the proper word for that, okay? And so today, it's a 25 -- 20% to 25% of our total revenues. MPS module business, excluding AI, we're running a couple of hundred -- close to $200 million, and we're growing every year by more than company's percentage growth.

And if you look at it this way, every chip we sell, all the solution is more than a chip price, okay? And you generate $4, $5, $6, $10 of content that we can sell. So that's the result today, and we will commit on the journeys. And again, we're transforming our company to a silicon-only to silicon-based solution providers.

[Bernie Blegen, executive]

And Will, if I could just add 2 comments quickly. The first is -- and this is specific to your question that it's across all of our markets, it primarily focuses on those that have longer design cycles, where we can add expertise in design solution. And the second point is, again, while we are driving a lot higher percentage of our business to the modules or to the more complete solutions, we have the ability, like no other company, to be able to deliver the type of solution our customer wants, whether it's a die, a chip or some package in between.

[Michael R. Hsing, executive]

Yes. And many, many traditional semiconductor companies, okay, they are hard to distinguish, whether they are solution providers or selling modules, selling solutions or selling semiconductor only. And that's especially the case, okay, and apply for AI powers. And there's a very few company using a silicon-based module solution to power up this AI solution or data centers.

[William Stein, analyst]

If I can add a follow-up, please. Can you talk about what you're doing in vertical power delivery? I know there's some -- there's a lot of companies that are claiming to have it or be ramping it. And I know you guys are one of those companies that are, I think, more clearly delivering. But maybe you can talk about what your efforts are yielding in that area.

[Michael R. Hsing, executive]

We are in the leading positions, okay. I said, okay, and there's maybe one, I will say, the 1 or 2 companies, maybe one company, have the capability, have been similar to MPS. The market is huge, and it's growing. And MPS is the leading position is because it's not by 1 day. So when AR happened, developed that. We developed years ago for that. And there's not many semiconductor companies that are based -- so the semiconductor company have that kind of a capability.

[Genevieve Cunningham, executive]

Our next question is from Quinn Bolton of Needham.

[Quinn Bolton, analyst]

Let me offer my congratulations. Maybe just first, Bernie, a quick follow-up on Matt Ramsay's question on the drivers of sequential growth in the third quarter. I think you mentioned Comms and Storage and Computing, but I didn't hear you specifically say Enterprise Data. I just want to confirm Enterprise Data is still one of the big growth drivers in the third quarter, and then I'll get to the 2 questions.

[Bernie Blegen, executive]

Right. On the Enterprise Data, the way I tried to tee that up, first off, yes, it is expected to grow. But we have grown significantly in each of the 4 prior quarters to this. So the rate of growth is slowing down. And the biggest -- for this quarter only.

And I offer that because there's a lot of opportunities that have yet to begin to ramp with a number of the different companies that we're currently working on designs with. But I was calling out, in particular, that both Storage and Computing and Consumer -- or not Consumer, Communications will be good drivers in Q3.

[Michael R. Hsing, executive]

Quinn, the VR13.5, 13.5%, and we start to have a significant revenues, okay? And that was the beginning. You know that. And VR14, and which hasn't really ramped up yet, and we have a lot of design win. We increased -- VR13.5 is like MPS is a test case. And so when during the shortages, okay, a lot of -- revenues -- a lot of volumes shifted to MPS. And other -- our competitors delivers -- and we delivered. And now the benefit is, for VR14, we will be significant players in the market segment.

[Bernie Blegen, executive]

And particularly in the second half of this year, it looks like that segment is starting to take off.

[Michael R. Hsing, executive]

Yes.

[Quinn Bolton, analyst]

Great. That was going to be sort, I guess, my first question was just, could you talk within the Enterprise Data about some of the opportunities, whether it's on the CPU power side or just broadening out of your AI portfolio? And then I'll have another question on vertical power, if I could squeeze in that second question.

[Michael R. Hsing, executive]

Go ahead.

[Quinn Bolton, analyst]

So question on vertical power, I mean, just on different competitors may mean different things when they're talking about vertical power. And I just wanted to kind of get your guys' view on the market. When you guys talk about vertical power, is that true vertical power, where the voltage regulator is sitting underneath the processor substrate and supplying current vertically into the processor?

Or do you guys consider sort of stacked packages, where you've got one or more voltage regulators or phases in a module with the power inductors and capacitors and other things that might be stacked vertically but still delivering current lateral into the processor? What's your definition of vertical? Because I think there's some confusion in the market what may be vertical and what might look vertical but actually still supply current laterally.

[Michael R. Hsing, executive]

Yes, you're right. There is a -- there's one is -- some customers, they're top surface lateral power supply, which is like very similar to server -- the server CPU power supply. And other ones turn it into the back side, still lateral powers. And more advanced one is directly under the CPU. And so to answer that question is, MPS's supply, currently, we're running all 3 solutions. Chip, all modules, we have everything there.

[Bernie Blegen, executive]

And Quinn, if I could also add to this that the necessity for the different deliveries of power is as you get into increasingly higher current. And in addition to either lateral or vertical power, we also have liquid cooled that we believe that we have a position on.

[Michael R. Hsing, executive]

Yes. Quinn, to answer your question is that the most efficient and difficult to do is you're making a module directly under the CPU. And that's the highest efficiency power delivery. There's a lot of problems and a lot of technical issues associated with that type of approach.

So many companies take a conservative approach, okay, and some companies just do only like servers and top surface-level power delivery. And for those very high powers, well over 1,000 watts, all these powers, these -- the power modules directly under the CPUs, and these are the highest efficiency.

[Christopher Caso, analyst]

Our next question is from Chris Caso of Wolfe.

[Bernie Blegen, executive]

Chris, can you hear us?

[Christopher Caso, analyst]

Sorry, I was on mute. Can you hear me now?

[Michael R. Hsing, executive]

Yes.

[Christopher Caso, analyst]

All right. Sorry. The first question is on seasonality and how that may be changing for you. In the past, the December quarter typically was a seasonally down quarter, but your business mix has changed quite a bit since those days. And the revenue is now coming from segments that are not as seasonally -- not a seasonal December quarter.

With that, how should we look at December seasonality going forward? Is the old model no longer appropriate as we look forward? And if there's anything you want to comment on with respect to December.

[Michael R. Hsing, executive]

Yes.Well, look, we are seeking advices from you. What's the current [indiscernible] -- with the new business, with all these inventory oscillating out from our customers, okay, and we don't know. So that came in, you have a huge shortage. So then it comes up, the huge oversupplies. And again now, so okay, demand, I assume, so now our customers consume all these excess of inventory. Now the market is waking up. And is this another shortage? I don't know, okay, and that it's difficult to forecast in short -- the lead time is still very short.

[Bernie Blegen, executive]

Okay. So we'll do our best. We're not ever going to...

[Michael R. Hsing, executive]

Yes, yes. You can tell us, okay? Okay.

[Christopher Caso, analyst]

All right. That's fair enough. As my follow-up question, I wanted to follow up with vertical power as well. And what we know, particularly within the Enterprise segment, AI, we've got some higher wattage processors coming. Can you talk about what you expect for content on that? And what, in particular, you expect for vertical power next year?

Because I know there's some debate. It certainly doesn't seem to be a debate over whether you're ready for vertical power, or whether the ecosystem is ready for vertical power. And does that make a difference with regard to your content as you go into the next generation of processors because the wattage is certainly going higher?

[Michael R. Hsing, executive]

Yes. I can tell you this. Our customers would not be appreciated talking about how many dollars per their unit or GPU unit, okay? And so they don't want us to talk about it. And second, I don't know. I don't want to know about it.

[Christopher Caso, analyst]

Okay. All right. I understand. But I mean just in terms of the opportunity, maybe you could speak in more general terms about the opportunity that's available to you.

[Michael R. Hsing, executive]

Oh, sure, yes. And now you look at our revenues, right, okay? For a couple of companies, okay, from last year was like is 1% or 2%. Or maybe last year's, okay, couple of percentage of our total revenue. Well, today, sort of, we're running like what, 20% -- and 20%. So that's a $400 million, $500 million, okay?

And we were told this is at the beginning. And there's a lot of other companies -- like our opportunities and our design win hasn't really ramped up in a company like Google and AWS and Meta, and those are coming later. So I see the huge opportunities. And I do see, okay, this is not MPS only. The market is way too big. We don't want it turning to a AR company only.

[Bernie Blegen, executive]

Yes. I think the only thing I'd probably add on top of that, besides for the direct AI opportunity, I think you've heard us talk about the AI trickle down effect, whether that could be memory, it can be optical, it could be pull through of networking. I think there's a lot of opportunity for MPS beyond even the direct AI business.

[Michael R. Hsing, executive]

That's a good comment. Yes.

[Genevieve Cunningham, executive]

Our next question is from Tore Svanberg of Stifel.

[Tore Svanberg, analyst]

Yes. Thank you, Michael, Bernie, and congrats again on another stellar quarter. I wanted to follow up on enterprise data, but I'm going to move away from the process or power management and ask you more about opportunities elsewhere in the data center, especially power supply. I know historically, you haven't talked a whole lot about GaN and silicon carbide, but I'm pretty sure you have some activities there. So can you elaborate a little bit on what you're doing on the power supply side of data centers?

[Michael R. Hsing, executive]

Yes, I like that one. But I can't tell you the revenue yet, but it's a small, okay. And we -- since 2016s and okay, we started to develop our own silicon carbides. We're not selling as fabs. It will be a part of our solutions. I said very, very early, so okay, we now intend to sell a fab as a power device alone only. So now, okay,we designed those 3-kilowatt, 6-kilowatt, 12-kilowatt power supply. And you guess what? It's a data center. It's evaluating. So we have a very little revenues. But the biggest is the MPS only, owned.

All our test [ blot ], we're using a huge amount of power supply, and MPS is our own customers. All these testing equipment that we have to design, we have to invent it how to test these modules, particularly, and also as well as [ burning ]. And MPS supply these power module to our vendors, and our vendors improve them into the system, and it became our test equipment.

And so that's the revenues we started generating. And -- but for 4Gs and for data centers, and these are still in the -- well, we engaged them in a year ago or so, a couple of years ago. And so the revenue is small, but we're looking for the big revenues from that segment because MPS provides the highest efficiency and the smallest size.

[Tore Svanberg, analyst]

Yes. That's great perspective. As my follow-up, I recall, because we've gone through a few cycles together, I recall, usually, you use downturns to gain a lot of share. I know everyone is excited about AI and data centers today. But what are some of the areas where you're starting to see more meaningful share gains from a designer perspective, now that we're sort of navigating here at the bottom of the cycle.

[Bernie Blegen, executive]

Sure. So I think that we've been very clear about the positioning that we have in Automotive and how that's continuing to grow across a multitude of different platforms with a multitude of different Tier 1 suppliers and OEMs. I think the most recent area for improvement, where some of these greenfield opportunities are becoming more visible in the market, would be, in particular, with Communications.

We're seeing that in the wireless and 5G. And I think that we've seen some early indications of continuing investment in that segment. So I'd say that's probably the area that will be most visible. But obviously, I don't want to forget industrial, which, even though, right now is a relatively modest part of our business and has not shown a lot of momentum towards growth, probably is the next area where we have a lot of greenfield opportunities that will materialize in the next 4 quarters.

[Michael R. Hsing, executive]

Yes, and -- go ahead.

[Tore Svanberg, analyst]

Yes, I was just going to ask, and the RV market, is that going to be under Auto or Industrial?

[Michael R. Hsing, executive]

RV?

[Tore Svanberg, analyst]

The RV market, the camping car market. I know you've talked about that.

[Michael R. Hsing, executive]

Yes. Okay. That's one of my favorite ones, okay. I think it will be in the industrial market. Because share all these products, they share the same signatures as we do for data centers for our own test blot in the -- for test equipment, okay, will be shared -- very much share the same characteristics.

And for -- and also for robotics. And for -- especially for those moving, not stationary robot, and these are -- these robot move around, and they all need that type of a power supply and the charging and the battery management. And these share very much the same characteristics as RV, okay? RVs have them.

[Bernie Blegen, executive]

Yes. Those could be Industrial or Consumer or even the humanoid stuff, too. So I don't think I want to just put those...

[Michael R. Hsing, executive]

I think, in a way, we're probably in the Industrial side, okay.

[Bernie Blegen, executive]

Yes, yes.

[Genevieve Cunningham, executive]

Our next question is from Quinn Bolton of Needham.

[Quinn Bolton, analyst]

Just wanted a quick follow-up question. There have been a few semiconductor companies this earnings season that have sort of mentioned having licenses to Huawei being revoked in the quarter, and it's raised some questions from investors. I just wondered if you guys could address, do you have a license to ship to Huawei? If you did, has it been revoked? Is that -- is there any real exposure at MPS to that customer? It's obviously not impacting your near-term outlook, but I figured I'd just ask because we've gotten a number of questions on potential Huawei exposure across the semi coverage.

Speaker 1

Quinn, I can make this pretty simple. We don't have any licensing or contractual arrangements with Huawei. -- that are at all, so they can't be canceled. Any business we have with them has always just done on a PO basis, and we have no indication of a change in their relationship.

Unknown Speaker

Yes.

Speaker 9

So Bren, I guess there was more of the export license question. Do you need an export license to ship to them because I think that

Speaker 4

Our product, it's not like under -- below 24-nanometer or whatever it's a that we are not as far as now...

Speaker 1

Yes, you're right.

Speaker 4

And as far as I know, we are not subject to the export limit -- have any limitations, again. And -- but we will talk to our -- to answer your question precisely, I will consult our legal cost of

Speaker 0

If there are any follow-up questions, please click the raise hand button -- as there are no further questions, I would now like to turn the webinar back over to Bernie.

Speaker 1

Great. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during our third quarter conference call, which will likely be in late October. Thank you. Have a nice day.