Monolithic Power Systems Inc

NASDAQ:MPWR

Earnings Call Transcript 2021-Q3

[Genevieve Cunningham, Marketing Communications Manager]

Welcome, everyone, to the MPS Third Quarter 2021 Earnings Webinar. Please note that this webinar is being recorded and will be archived for one year on our Investor Relations page at www.monolithicpower.com. My name is Genevieve Cunningham, and I will be the moderator for this webinar. Joining me today are Michael Hsing, as CEO and Founder of MPS; and Bernie Blegen, VP and CFO. During this webinar, we will discuss our Q3 2021 financial results and guidance for Q4 2021, followed by a Q&A session. [Operator Instructions]

In the course of today's webinar, 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 Q3 2021 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2021, and our Form 10-Q filed on August 9, 2021, which are 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 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 Q3 2020, Q2 2021 and Q3 2021 releases as well as to the reconciling tables that are posted on our website.

Now I would like to turn the call over to Bernie Blegen.

[Bernie Blegen, Vice President & Chief Financial Officer]

Thanks, Jen. MPS achieved record third quarter revenue of $323.5 million, 10.3% higher than revenue in the second quarter of 2021 and 24.7% higher than the comparable quarter in 2020. Looking at our revenue by market, third quarter 2021 industrial revenue of $52.2 million increased 20.5% from the second quarter of 2021, due primarily to increased revenue for industrial meters and power sources. Industrial revenue represented 16.1% of our total third quarter 2021 revenue.

Third quarter 2021 communications revenue of $44.7 million was up 19.3% from the second quarter of 2021, primarily due to increased infrastructure demand. Communication sales represented 13.8% of our total third quarter 2021 revenue. In our computing and storage market, third quarter revenue of $98.6 million increased $10.9 million or 12.4% from the second quarter of 2021. The sequential quarterly revenue growth primarily reflected sales gains in storage applications.

Computing and storage revenue represented 30.5% of MPS' third quarter 2021 revenue. Third quarter automotive revenue of $54.4 million grew $5.7 million or 11.7% over the second quarter of 2021. This improvement reflects continued gains in applications for infotainment, lighting and ADAS. Automotive revenue was 16.8% of MPS' total third quarter 2021 revenue.

In our consumer markets, third quarter 2021 revenue of $73.6 million fell 3.3% from revenue reported in the second quarter of 2021. This decrease in consumer revenue reflected lower handset sales. Consumer revenue represented 22.8% of our third quarter 2021 revenue.

Third quarter 2021 GAAP gross margin was 57.6%, which was 160 basis points higher than the second quarter of 2021 and 245 basis points higher than the third quarter of 2020. Non-GAAP gross margin for the third quarter of 2021 was 57.8%, 148 basis points higher than the gross margin percentage reported from the second quarter of 2021 and 231 basis points higher than the third quarter from a year ago.

Third quarter 2021 gross margin on both a GAAP and a non-GAAP basis included a $4 million litigation settlement. Excluding this onetime benefit, non-GAAP gross margin would have been 56.6%, essentially flat with the second quarter of 2021 and 110 basis points higher than the third quarter of 2020.

Our GAAP operating income was $77.1 million compared to $60.6 million reported in the second quarter of 2021 and $60.0 million reported in the third quarter of 2020. Our third quarter 2021 non-GAAP operating income was $108.4 million compared to $94.9 million reported in the prior quarter and $84.9 million reported in the third quarter of 2020.

Let's review our operating expenses. Our GAAP operating expenses were $109.2 million in the third quarter of 2021 compared with $103.6 million in the second quarter of 2021 and $83.1 million in the third quarter of 2020. Our non-GAAP third quarter 2021 operating expenses were $78.7 million, up from the $70.3 million we spent in the second quarter of 2021 and up from the $59.1 million reported in the third quarter of 2020.

The sequential increase in Q3 non-GAAP operating expenses primarily reflected in increased spending in R&D for qualifying parts for production and securing foundry capacity. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss on an unfunded deferred compensation plan.

For the third quarter of 2021, total stock compensation expense, including approximately $922,000 charged cost of goods sold was $31.6 million, compared with $32.1 million recorded in the second quarter of 2021.

Switching to the bottom line. Third quarter 2021 GAAP net income was $68.8 million or $1.44 per fully diluted share compared with $55.2 million or $1.16 per share in the second quarter of 2021 and $55.6 million or $1.18 per share in the third quarter of 2020.

Q3 non-GAAP net income was $98.6 million or $2.06 per fully diluted share compared with $86.5 million or $1.81 per share in the second quarter of 2021 and $79.4 million or $1.69 per share in the third quarter of 2020. Fully diluted shares outstanding at the end of Q3 2021 were 47.9 million.

Now, let's look at the balance sheet. Cash, cash equivalents and investments were $744.5 million at the end of the third quarter of 2021 compared to $672.9 million at the end of the second quarter of 2021. For the quarter, MPS generated operating cash flow of about $117.8 million, compared with Q2 2021 operating cash flow of $96.9 million. Third quarter 2021 capital spending totaled $18.6 million.

Accounts receivable ended the third quarter of 2021 at $79.9 million, representing 22 days of sales outstanding which was two days lower than the 24 days reported at the end of the second quarter of 2021 and 11 days lower than the 33 days at the end of the third quarter of 2020.

Our internal inventories at the end of the third quarter of 2021 were $208.1 million, up $30.8 million from the $177.3 million reported at the end of the second quarter of 2021. Inventory at the end of the third quarter of 2021 represented 134 days, which were nine days higher than at the end of the second quarter of 2021.

Historically, we have calculated days of inventory on hand as a function of the current quarter revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match.

On this basis, you can see inventory at the end of the third quarter of 2021 represented 135 days, 18 days higher than the 117 days at the end of the second quarter of 2021 and six days higher than the 129 days at the end of the third quarter of 2020. Currently, our inventory levels remain lean. We are working very hard to return inventory to the 180 day to 200 day level necessary to support our future growth.

I would now like to turn to our outlook for the fourth quarter of 2021. We are forecasting Q4 revenue in the range of $314 million to $326 million. We also expect the following: GAAP gross margin in the range of 56.0% to 56.6%; non-GAAP gross margin in the range of 56.3% to 56.9%; total stock-based compensation expense of $30.8 million to $32.8 million, including approximately $950,000 that we'd be charged to cost of goods sold.

GAAP R&D and SG&A expenses should be between $107.8 million and $111.8 million. Non-GAAP R&D and SG&A expenses to be in the range of $77.9 million to $79.9 million. Litigation expense is expected to be in the range of $3.5 million to $3.9 million.

Interest income is expected to range from $1.0 million to $1.4 million. Fully diluted shares to be in the range of 47.9 million to 48.9 million shares. In conclusion, we are continuing to execute our strategy.

I will now open the webinar up for questions.

[Genevieve Cunningham, Marketing Communications Manager]

Thank you, Bernie and analyst. I would now like to begin our Q&A session. [Operator Instructions] Our first question comes from Tore Svanberg of Stifel. Tore, your line is now open.

[Tore Svanberg, Stifel]

Yes. Thank you and congratulations on these continued stellar results. First question, and not to, sort of, pick on segments there, but your consumer segment was down sequentially, and you talked about cellphone. I wasn't aware -- we don't think power had that much exposure to cellphones. Is this mainly on the charger side or anything else there that we should be aware of?

[Michael Hsing, President & Chief Executive Officer]

Hi, Tore. Yes, I think, It is on the charger side. And we do these fast chargings, and we picked up some revenues in the last few years in those cellphone companies. And they thought that they can have a more adoption in the market. So they have some inventories, but it's an unusual way of charging of phones and that came in still not very popular.

[Tore Svanberg, Stifel]

Great. Thanks for clarifying that. And as my follow-up, you have a luxury problem now. You have about $0.75 billion in cash on your balance sheet. I know you're out there trying to secure more capacity. So first of all, could you update us on where you are on securing capacity, especially for the next few years? And related to that, will you start to use some of that cash more aggressively to potentially buying more equipment as you continue to obviously show very strong growth? Thank you.

[Michael Hsing, President & Chief Executive Officer]

All right. Let me answer the first part first. It is -- the expansion is still on track, okay. And the fab issues, we don't have -- we have less fab issues. And we came -- we are on the way to expand our capacity in sometimes in the middle or -- middle of the next year to over $2 billion -- supporting $2 billion of sales. But at the same times, we do have to buy more equipment for testing, for qualifications and also, we need to hire more people. And as you know, to qualify each part it takes time. And the revenues there, opportunities there, it's just a matter of time. And so the second part is buying more equipment. On the other hand, as an investor, our shareholders, investors are very critical about our -- criticized in the past our spending, okay? I mean, we are out of -- we are slightly out of our model now, okay, and I -- we spend money on -- what I mean, a lot more careful, okay? But the opportunity is there, but we do more sensibly.

[Bernie Blegen, Vice President & Chief Financial Officer]

Yeah. And I think if I can just add to Michael's comment there is that as far as the model that we've always pursued, it was to have our fab partners and our assembly house partners absorb much of the capital required in order to build up capacity, and that remains our being as a fabless company. So nothing has changed in our model. We're just adapting it to this rate of growth that we're enjoying right now.

[Tore Svanberg, Stifel]

Thanks again. I’ll go back in line.

[Genevieve Cunningham, Marketing Communications Manager]

Our next question is from Matt Ramsay of Cowen. Matt, your line is now open.

[Matt Ramsay, Cowen]

Thank you very much. Good afternoon, everybody. For my first question, Michael, I wanted to ask about a couple of the different computing markets that you guys have product to support. The first one, I think you could -- I don't know, from my perspective, if you could kind of drive a bus through what different PC expectations are for next year. And I wonder if you might touch on what -- rough percentage, Bernie, of revenue might come from the notebook market? And what your underlying planning assumptions are on the PC market for next year? And I guess, in contrast to that, how -- Intel is launching Sapphire Rapids, AMD is launching Genoa next year. What kind of a tailwind from a content perspective could those upgrades in the server market be? And then I have a follow-up. Thanks guys.

[Michael Hsing, President & Chief Executive Officer]

Okay. For the notebook side, obviously, we gained some market shares in the high-end notebook in this -- after the pandemic, okay, or it was still the tail end of the pandemic. And we increased quite a bit of our market share. And -- but the story there is not -- it's not just we're gaining, that's all we can get. We -- as we increased our new generation with our technologies that's in place, and we will further reduce the cost, and we will address the high-end of our consumer side. And allow me if I address the -- answered your questions, Matthew. And on the server side, we are still a very, very small players. There's a lot more room for MPS to gain.

[Bernie Blegen, Vice President & Chief Financial Officer]

Yeah. And I don't think that we've ever specifically broken out what percent of the group's revenue is tied to any one of the categories that we track. But I think we have been clear that in each of the last two years, that the growth in notebooks has outpaced the rest of the sectors, including server and storage.

Now having said that, one of the things that we're benefiting from is that diversification of how we're positioned in this group. As Michael indicated, we are a relatively small player when it comes to core power management for servers and we believe that with both the next generation of Intel and AMD processor releases, that we stand to benefit from market share gains.

And in the more near-term element, as we called out in Q3, we're actually seeing a nice increase in storage sales, which is usually a precursor to ongoing infrastructure spending within the data centers.

So I think that we're having a great difficulty, as anybody, in understanding when work from home or work from work, as it relates to notebooks, begins or ends. But I think that we're well positioned because of our diversification to enjoy continued growth in this category for a number of years.

[Matt Ramsay, Cowen]

Yes. Thank you.

[Michael Hsing, President & Chief Executive Officer]

Let me go back to the notebook side that I can -- I think that part of the question, I didn't answer. And again, we're still facing shortages and still a lot of demand in the notebook side. And we don't see the -- we see revenues from -- in the middle of the next year even.

[Matt Ramsay, Cowen]

Got it. Thank you very much for all that commentary guys. Just a quick couple of things on gross margin. One, Bernie, the one-timer that was in Q3, any particular reason you didn't pull that out of the non-GAAP number?

And secondly, with the pricing environment that we're feeling today, how do you guys think about price increases going forward relative to input costs and what that could mean to margins? Thank you very much.

[Bernie Blegen, Vice President & Chief Financial Officer]

I'll take the first half of that question real quickly. And then Michael will give comments on the second. As far as how we try to manage GAAP and non-GAAP reporting, is really to be a reflection of what is cash. And in this case, we highlighted that there was a settlement, and that was a cash payment that we received. And so that's the thinking behind not adjusting it as a non-GAAP item.

Conversely so, if we have something that works to our detriment and it also has cash implications, we wouldn't non-GAAP that out either. So the two areas that we stay pretty closely to, or three, I should say, are only stock comp, gain and loss from a deferred comp plan and if we have any intangible acquisition amortization.

[Michael Hsing, President & Chief Executive Officer]

Okay. The second part is how it affected our gross margins on the current supply shortages. I think, as I said, all these new -- well, let me say this, yes, we do see the cost increase in, fortunately, in all the product that we released have gained market shares as all these greenfield products.

We started to gain momentum a couple of years ago. And these all have higher margins. And our customers give us a very long-term forecast commitment, and we honor those. We can absorb some in -- some of the cost and -- because the way these products have a much higher margins. And -- so during this time, we value the customer relationship and we don't gouge price.

[Genevieve Cunningham, Marketing Communications Manager]

All right. Our next question is from Ross Seymore of Deutsche Bank. Ross, your line is now open.

[Ross Seymore, Deutsche Bank]

Thanks for letting me ask a question. Congrats on continued strong reports and guides. One question on an end market. The communications side, Bernie or Michael, you guys said that, that was up because of infrastructure. That's been a really choppy market for you guys between the infrastructure side going on and off and then the kind of the access side. Can you just talk a little bit more about what you meant by the infrastructure side? And is that the start of something that's going to continue, or should you expect that segment to continue to be lumpy going forward?

[Michael Hsing, President & Chief Executive Officer]

Well, Ross, you know then that we're transitioning from a these Wi-Fi routers and those to more in real infrastructures like I mean in data centers or these communication between the data centers and the switchers and even towers. So the last years, our customers are pulling a lot of revenues. And this time, then we see all the other things are going like 5Gs and including the commercial Wi-Fi systems and then and – where we play a critical role on these in these areas. And we see the expansions, and we will see a further – continue to expand in the next few quarters.

[Bernie Blegen, Vice President & Chief Financial Officer]

Yes. I think we remain very optimistic about our long-term positioning within the communication sector and in particular, infrastructure as it relates to 5G. But I think that right now, we have not hit a constant investment cadence on the part of the carriers in either Europe or North America. So we think that as that starts to gain momentum and gets more predictable, we're very well positioned to participate in that.

[Ross Seymore, Deutsche Bank]

Thanks for that color. I guess as my follow-up, seasonality versus kind of cyclicality and/or supply-driven moves. Obviously, your fourth quarter has guided a bit better than your traditional seasonality kind of flattish this year. But how are you thinking about that as we go into next year and beyond? Is it mainly going to be driven by the product cycles you have in short supply in aggregate? So those would be big tailwinds, or do you believe seasonality is going to become a framework that's something that investors should consider as we go into 2022?

[Michael Hsing, President & Chief Executive Officer]

Well, Ross, you see the – this market is an exceptionally strong market, I mean. And like I mean, a lot of demand is everywhere, so like I mean, also are constrained by the supply. And we do have a delinquencies. And I mean, but that's we're facing delinquency for many quarters, like I mean – and for – I think we still have the – my opinion is that we still have some kind of seasonality in fourth quarters because all these holidays, all these and it will kind of affect us. And so we see the – as I said earlier, we see the demand is still very strong. So like I mean we're just cautious, and we are on our guidance.

[Ross Seymore, Deutsche Bank]

And just to add to that is that right now, what we are continuing to do is investing and expanding our capacity because we do believe that this robust demand that we're experiencing will continue, and we want to be able to participate, optimize to the best of our ability, this growth opportunity.

[Michael Hsing, President & Chief Executive Officer]

Yes, let me clarify the shortages, okay. All these – what I mean with shortage is that we have a few thousand products and always have some mixed issues. And as we don't have a serious – we don't have fab capacity issues. And – but all these are mixed in the – for particular product that we may have – we have a few products that have a – are facing shortages now. So – and as we transfer to a different fab, it just takes time to qualify this.

[Ross Seymore, Deutsche Bank]

Got it. Thanks, guys.

[Genevieve Cunningham, Marketing Communications Manager]

Our next question is from Alex Vecchi of William Blair. Alex, your line is now open.

[Alex Vecchi, William Blair]

Hey, guys. Congratulations on the strong results. Maybe just to piggyback on Ross' question a little bit with seasonality. Bernie, can you give a little color on how we should think about the sequential growth rate by end market for Q4 in terms of maybe strongest end market to weakest?

[Bernie Blegen, Vice President & Chief Financial Officer]

Sure. So, when you look at Q4, I think that the two primary drivers are going to be computing and continuation of automotive. And then you would normally expect and we expect to see a slight downturn in consumer.

So, I think many of the trend lines that we're familiar with are continuing and ongoing, but the amplitude might be a little up or down from what the traditional seasonality has been.

[Alex Vecchi, William Blair]

Great. that's helpful. And then similarly, I think on the communications line as well over the last couple of quarters, I believe you guys have pointed to ramp up to that Tier 2 5G OEMs. How should we be thinking about the opportunity eventually next year to crack into a Tier 1, or just generally, how to think about how you're positioned there geographically?

[Michael Hsing, President & Chief Executive Officer]

Yes. We are designing all -- in all Tier 1s now. And we are so small still like I mean in these big growing market segments. As you know, we don't have anything in 4G, and we expect that we'll be a significant players in there.

[Alex Vecchi, William Blair]

Okay, that’s helpful. With that, I'll go back in queue.

[Michael Hsing, President & Chief Executive Officer]

Okay.

[Genevieve Cunningham, Marketing Communications Manager]

Our next question is from Quinn Bolton of Needham. Quinn, your line is now open.

[Quinn Bolton, Needham]

Hi guys. Let me offer my congratulations. Michael or Bernie, I guess I wanted to -- I know there have been a lot of disruptions in Southeast Asia, more on the package and test side. Wondering if you could just say whether or not you have any exposure to Malaysia subcons and whether that affected your ability to ship or receive products here in the third quarter or in the fourth quarter looking forward?

[Michael Hsing, President & Chief Executive Officer]

Yes. There's not so much that affected it. Maybe some products, not I mean -- because we control a lot of our -- the new product, we control our own package technologies. And so we always qualify in a different locations. And so we came in that -- the Southeast Asia problems, okay, we can go through it. We didn't have that much of issues.

[Bernie Blegen, Vice President & Chief Financial Officer]

Correct, in either Q3 or our outlook for Q4.

[Michael Hsing, President & Chief Executive Officer]

Yes.

[Quinn Bolton, Needham]

Got it. My second question just on the supply chain is it sounds like from your comments, you're not seeing some of the fab constraints that you'd seen earlier. And inventory increased by $30 million sequentially.

I guess my question is, as that capacity comes online, as you ramp inventory on hand, do you think that, that could lead to an acceleration in your ability to meet former delinquencies and see revenue growth rate potentially accelerate as you meet some of those delinquencies, or it -- does it really all come down to that product mix of what customers are demanding versus what you have in inventory that you see that mismatch potentially continuing for several quarters?

[Michael Hsing, President & Chief Executive Officer]

Yes, to answer your question, as today, absolutely. And we have a lot more we can chew off now. And as the shortages go on or the new product adoptions in all the greenfield products that we ramp up much, much faster than we expected, and we have a normal out-of-forecast orders and we cannot fulfill.

And these ones, our customers understand that. I mean -- and so we -- so now, as of today, we have a blue skies. And -- but doesn't mean -- we're not regulators, so I can't forecast it.

[Bernie Blegen, Vice President & Chief Financial Officer]

Just to add, it's a balancing act, as you can appreciate, because for some of the more mature products that we have, they already have developed markets and a fairly predictable growth in the current market. But what we're trying to do is make sure that these new product introductions can be successful, because that is going to be the future growth opportunity for the company. So, we're trying to satisfy sort of the run rate business in this heightened demand, a period of heightened demand, and at the same time, have very successful new product launches with new customers.

[Quinn Bolton, Needham]

Got it. Can I squeeze one last one in? Do you guys have any meaningful exposure to Chromebooks? And is that a share gain opportunity as you look into 2022? Thank you.

[Michael Hsing, President & Chief Executive Officer]

Yes, we have. And it's -- if we have a local product, we might as well make them and go design, I mean, everywhere.

[Bernie Blegen, Vice President & Chief Financial Officer]

Yes. Chromebooks are unique, because while they're considered a -- we tend to go after high-value notebooks, and Chromebooks are known to be lower priced. But they depend on the access to the cloud and good processing power. So the power management, our power management solution is very key. It's a high value for the Chromebooks.

[Michael Hsing, President & Chief Executive Officer]

Yes. As I said earlier, as our technologies bring online in -- become more mature, so that can mean why not just attacking all these other markets that we're not in.

[Quinn Bolton, Needham]

Yes. Thank you.

[Michael Hsing, President & Chief Executive Officer]

Yes.

[Genevieve Cunningham, Marketing Communications Manager]

Our next question is from William Stein of Truist. William, your line is now open.

[William Stein, Truist]

Great. Thanks for taking my question. Congrats on the great results and outlook. I'm -- I want to ask one question about supply chain stuff and one about long-term growth. First, on the supply chain, it seems -- certainly, if we look not just at your business but across semis, that customers have been in sort of freak-out expedite mode for quite some time.

I wonder if you could give us a sense as to whether that abated at all. Did the level or breadth of expedite requests change meaningfully in the quarter? Is it getting hotter or colder in any end market with regard to this sort of urgency of expedites and pull-ins and upsides and all that activity we've heard about? And then again, I have a long-term growth question.

[Michael Hsing, President & Chief Executive Officer]

Yes. Okay. The answer is okay. I wish that they come down a little bit, then I mean -- and that they're exactly the same as the last quarter and the quarter before. And -- yes, okay.

[William Stein, Truist]

Okay. So the long-term growth question, Michael, I think we've discussed this many times, but we're aware that there's this long-term potential to transition to more of a solutions provider with modules relative to your traditional semi device business. Can you talk about the trajectory of growth of the modules business? An update on perhaps percent of revenues today relative to a quarter ago and where you think it -- that could go over time? Thank you.

[Michael Hsing, President & Chief Executive Officer]

Yes. I -- our homegrown modules, okay, well, all this strategy, there's MPS involved. There are a lot of technicals in the gate in terms of delivering the end product. Okay, it feels -- there's no end project, it's a mid product, as I feel it well. So our strategies are move up to a food games. And since we put -- we have the knowledge and why win are not captured all the values.

And for currently -- current, our module growth, okay, I mean it's much faster than other semiconductors side or selling the chips. But the volume overall is still very small, so like I mean, compare the entire revenues.

We tried it different ways in like a launch our websites and like a NPS analyses. And then, they're also using e-commerce, okay?

These are doing well. And -- but -- now I'm thinking about it, why we're just applying companies, like I mean, -- and we know that, we need to gain knowledge, gain sales channels, like I mean -- and have those company adopting an MPS technology, we can provide them with better tools, again.

And I think the first field attempt in -- are very, very, very encouraging. So like I mean, obviously, I can't talk the detail now. So again, -- and I think that's our strategy.

[Bernie Blegen, Vice President & Chief Financial Officer]

And if I can just remind you, Will that we talked about this -- touched on it last quarter. And we indicated that what we're trying to do is source different technologies through either IP acquisitions or talent acquisitions that are complementary to our business. And that will accelerate our ability to be a solutions provider for our customers in the next seven, eight years.

[Michael Hsing, President & Chief Executive Officer]

Yeah. I just don't like it. We have so much knowledge to put an end to it. And in the end, we sell a piece of silicon averaging well below $1, okay? We should sell our solutions at much more than $1, so like a $5, $6, $10, those type of things. And those customers will really appreciate it. They don't have to design from scratch.

[William Stein, Truist]

That's helpful insight. Thank you both.

[Genevieve Cunningham, Marketing Communications Manager]

Our next question is from Rick Schafer of Oppenheimer. Rick, your line is now open.

[Wei Mok, Oppenheimer]

Hi. Good afternoon. This is Wei Mok on the call for Rick Schafer. I just wanted to echo congrats on the results. So for my first question, it's in regards to auto, so it's pretty much well known that the market is supply constrained though you guys are still growing nearly 90% this year.

With industry reports showing vehicle unit production improving in 2022, how should we think about your auto business as we look into 2022?

[Michael Hsing, President & Chief Executive Officer]

Well, it's a very -- at this time, we see everything is very rosy now. And we -- but on the other hand, in -- we are so small. There's no reason, we would not grow, even the downturns. And as we have looked at the addressable market is that this is like over $6 billion, okay? I mean that's conservatively numbers.

That's a conservative numbers. And as we introduce more products in especially in ADAS and the EV proportion size. And, okay, we are developing products. I mean, all of these, and again, we can address the future growth really well.

So like I mean, there is 2022 -- and okay, there's no reason not if it's a -- I would not say there's a lack of tool like last year, so like also in the auto industry just stopped like I mean, it was a in the normal times. And there's no reason for us not to grow.

[Bernie Blegen, Vice President & Chief Financial Officer]

And I think to just follow on to the previous question. When we look at automotive, we actually have system-level design wins in ADAS, regenerative braking systems and in external lighting.

And all of these solutions have much higher dollar content for us, $60 to $100 per vehicle. So I think this is a very exciting example of how the solution strategy could play out in different end markets for us as well.

[Wei Mok, Oppenheimer]

Got it. Great. Thanks for that. As for my second question, it's regards to the console. You guys highlighted consumer being down in 4Q. So is this more of a reflection of normal seasonality, or are you seeing any supply constraints impacting consoles? Thanks.

[Michael Hsing, President & Chief Executive Officer]

Well, Q3 -- in Q3 in consumer side, it shouldn't be the highest to us. And I think at our customer side, they have too much inventory in the -- for the cell phones in like I mean that affects us. And then in the cellphones especially that's in China, like I mean when they – when the US had an embargo on one of our companies, but the other ones, they thought they can gain the market share. Like I mean, actually, they didn't. And so they're stuck with the inventory.

[Bernie Blegen, Vice President & Chief Financial Officer]

And I think that what we tried to do in our prepared comments is really make that dip more narrowly defined, but it is really the fast charger in the handsets as opposed to anything that is more broad or pervasive in the rest of consumer?

[Wei Mok, Oppenheimer]

Okay. Thanks for that.

[Michael Hsing, President & Chief Executive Officer]

Yeah, we didn't have much of an exposure in the handsets, and that wasn't my favorite either anyway. So we've got the least products, however in the last years and okay, why not, okay? But now it's okay. We thought it would be a good.

[Bernie Blegen, Vice President & Chief Financial Officer]

The technology has actually been very well positively received. It's just the imbalance as far as the demand that was expected has trailed those expectations. And so we believe that they have excess inventory and so we're seeing a slowdown for that particular individual category.

[Genevieve Cunningham, Marketing Communications Manager]

Our next question is from Kevin Garrigan of Rosenblatt. Kevin, your line is now open.

[Hans Mosesmann, Rosenblatt]

This is Hans for Kevin. Congrats. A couple of questions. Along the lines of inventory, I think AMD, Micron, on the PC side of things, and Texas Instruments on a broader basis, are indicating that customers are changing their behavior a bit in terms of how they take in components in a supply-constrained environment. So rather than just take everything they can get, they're being more selective. Is that something you guys are seeing? And is that unusual if you are seeing that? Thanks.

[Michael Hsing, President & Chief Executive Officer]

We are too small, but these – we're a very small player, much smaller players compare with the Texas Instruments or the other guys. We don't have a luxury of picking market segments. We're only focusing on long terms. Focus or not focus. We don't do short-term business anyway.

[Bernie Blegen, Vice President & Chief Financial Officer]

Yeah. To answer your question really succinctly, we haven't seen any change in ordering patterns or our delivery schedule and really don't have an opinion on what the broader market or other market participants are experiencing.

[Hans Mosesmann, Rosenblatt]

Fair enough. And so just the last question, your visibility in terms of when you can capture or get back to that 180 to 200 days of inventory, has that changed? And what is that time line? Is it the end of next year? Is it 2023? Thanks.

[Michael Hsing, President & Chief Executive Officer]

I think the end of the next year would be a good number. Yeah. That's what we – that's a – if the market goes – continue to go this strong, so like I mean hopefully, some we can catch up at the end of the next year.

[Hans Mosesmann, Rosenblatt]

And that's – is that a push-out, or is that a pull-in from last quarter?

[Bernie Blegen, Vice President & Chief Financial Officer]

I'm sorry?

[Michael Hsing, President & Chief Executive Officer]

Again, you said I talked about last quarter, pull-in or push-out. And like I mean, as I said earlier, we have a – we still have a delinquent season, like I mean – and we're having more delinquency than a customer push-out let's say it that way.

[Hans Mosesmann, Rosenblatt]

Okay.

[Bernie Blegen, Vice President & Chief Financial Officer]

I think the important thing is that, even with the demands that are placed upon us and Michael is correct that we saw no change in Q3 from what we experienced in Q1 or Q2. We were able to increase inventory in a meaningful way this quarter. So again, I refer back to an earlier answer. We said the balancing act that we're trying to do between satisfy more run rate business at the same time as we're meeting demand for our new products as well as building inventory that gives us more flexibility.

[Hans Mosesmann, Rosenblatt]

Great. Thank you.

[Michael Hsing, President & Chief Executive Officer]

Okay.

[Genevieve Cunningham, Marketing Communications Manager]

Next question is from Tore Svanberg of Stifel. Tore, your line is now open

[Tore Svanberg, Stifel]

Yes. Thank you. I just had a few follow-ups. First of all, Bernie, the gross margin guidance for Q4, that does not include any more litigation impact, right? That's...

[Bernie Blegen, Vice President & Chief Financial Officer]

That is correct.

[Tore Svanberg, Stifel]

Okay. Great. So the other question is, a lot of your competitors are discrete companies, and they're probably allocating their products all over the place right now, which I assume means you're gaining share. Can you just talk a little bit to the stickiness of that? I mean I assume once they go with an integrated solution there, they're not going to go back

[Michael Hsing, President & Chief Executive Officer]

That's very true. And when they've tasted a simple, easy solution, it's difficult. And for these high end -- a little bit of high end in the market, that's what we focus on. The customer pay for it, and they deviated from the way they -- their behavior, how they design product. And I think that's a huge benefit to us. And our other customers, the more in the low-end consumer business, we don't care.

[Tore Svanberg, Stifel]

Got it. Just one last question. Michael, in the past, you've talked about, especially in servers and automotive, kind of just getting the side dishes. But eventually, you'll get the main course. Should we expect those two segments to see some main course revenue in 2022?

[Michael Hsing, President & Chief Executive Officer]

Yes, yes. We are keep eating the crumbs, okay. We eat a lot of crumbs like a whales. Well, not whales. We -- we're small fish trying to eat a lot of crumbs. And now the fish is like, we grow ourselves a little bit, we can eat the real meals, like I mean we -- as you we keep saying, okay, we have the reference design in Intels, and then the real OEMs pick up a onesie and a twosie for these projects and but these are the real beast, like I mean, end up a little bit small.

So I think in the next years, we will grow much bigger in so called VR14s and VR13.5. We benefit a lot in -- and other than the point of loans and the E-Fuse and that kind of growth came in, now we really have a core power, have a meaningful revenue coming next years. And now talking about VR14 yet again.

And the other thing that worth to mention about and there's about a 48-volt process, as we said earlier. And like I mean by these years, and we forecast about this year and the next year, the cross point had to happen. And like I mean we're waiting -- we were waiting about three, four years ago. And we said that until we end up -- when the powers keep increasing and the heat generation, heat dissipations, they cannot handle anymore, they have to use the 48-volt solutions, and this has happened. And start from AR and next year, we see many data centers adopting 48-volt solutions. And well, we have a benefit of a large lake.

[Tore Svanberg, Stifel]

Great. Thank you very much

[Michael Hsing, President & Chief Executive Officer]

Okay. Thank you.

[Genevieve Cunningham, Marketing Communications Manager]

[Operator Instructions] As there are no further questions, I would like to turn the webinar back over to Bernie.

[Bernie Blegen, Vice President & Chief Financial Officer]

I'd like to thank you all for joining us for this conference call, and we look forward to talking to you again during the fourth quarter conference call, which will likely be in early February. With that, thank you, and have a nice day.

[Michael Hsing, President & Chief Executive Officer]

Okay. Goodbye.