Monolithic Power Systems [MPWR] Conference call transcript for 2022 q3
2022-10-27 22:47:05
Fiscal: 2022 q3
Company Representatives: Michael Hsing - Chief Executive Officer, Founder Bernie Blegen - Vice President, Chief Financial Officer Genevieve Cunningham - Marketing Communications Manager
Genevieve Cunningham : Welcome everyone to the MPS Third Quarter 2022 Earnings Webinar. Please note that this webinar is bring 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, CEO and Founder of MPS; and Bernie Blegen, VP and CFO. In the course of todayâs webinar we will be making forward-looking statements and projections that involve risk and uncertainty, which could cause results to differ materially from managementâs 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 2022 earnings release and in our latest 10-K and 10-Q filings that can be found on our website. MPS assumes no obligation to update the information provided on todayâs call. We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, other income, income before income taxes, 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 Q3 2022 earnings release, which we have furnished to the SEC and is currently available on our website. Now Iâd like to turn the call over to Bernie Blegen.
Bernie Blegen: Thanks, Gen. First of all, today Iâm greeting you from Europe. We held our third quarter Board of Directors meeting in our Barcelona office. We have our Board Members tour of the facility and oversee the operations here. Now, to the financial results. MPS achieved record third quarter revenue of $495.4 million, 7.5% higher than revenue in the second quarter of 2022, and 53.1% higher than revenue in the third quarter of 2021. This broad based year-over-year revenue growth was the result of consistent executions against our strategies. Looking at our third quarter 2022 revenue by market. Third quarter automotive revenue of $87.1 million increase 42.7% from the second quarter of 2022, due primarily to new platform launches. Third quarter 2022 automotive revenue was up 60.0% year-over-year. Automotive revenue represented 17.6% of MPSs third quarter 2022 revenue compared with 16.8% in the third quarter of 2021. Third quarter 2022 communications revenue of $72.3 million is up 21.9% from the second quarter of 2022. Most of the sequential revenue increase was related to the continued communications infrastructure ramp. Third quarter 2022 communications revenue was up 61.8% year-over-year. Communication sales represented 14.6% of our total third quarter 2022 revenue compared with 13.8% in the third quarter of 2021. In our enterprise data market, third quarter 2022 revenue $75.3 million increased 15.5% from the second quarter of 2022, primarily due to continued strength in our data center and workstation computing sales. Third quarter 2022 revenue represented 15.2% of MPSs third quarter 2022 revenue, compared with 9.2% in the third quarter of 2021. Third quarter 2022 industrial revenue of $58.7 million increased 5.1% from the second quarter of 2022. Third quarter 2022 industrial revenue was up 12.5% year-over-year. Industrial revenue represented 11.8% of our third quarter 2022 revenue compared with 16.1% in the third quarter of 2021. Storage and computing revenue of $112.9 million decreased 7.7% from the second quarter of 2022. The sequential revenue decline was primarily due to softening of customer demand from notebooks. Third quarter 2022 storage and computing revenue was up 63.9% year-over-year. Storage and computing revenue represented 22.8% of MPSâs third quarter 2022 revenue compared with 21.3% in the third quarter of 2021. Third quarter consumer revenue of $89.2 million decreased 8.4% from the second quarter of 2022. The sequential quarterly revenue decline was primarily due to softening of overall demand. Third quarter 2022 consumer revenue was up 21.1% year-over-year. Consumer revenue represented 18.0% of MPSs third quarter 2022 revenue, compared with 22.8% in the third quarter of 2021. Let's talk about the general business conditions. For the prior six quarters, we have faced product shortages, especially in consumer, storage and computing. Now we have started to see our customers reduce their orders and push out shipments. Weâve experienced similar patterns in the past. We anticipate order patterns might oscillate in the near future. This is not a surprise to us. As a result of this change in ordering patterns, our inventory level will catch up to our target of 180 to 200 days and possibly be higher in the near term. In addition, we have over 4,000 different products which are required to support thousands of our customers' applications. On average, our product lifecycle succeeds six to eight years, so we are not concerned with carrying an inventory level above target. MPSs business is in a better position today. Rather than managing product shortage problems, we can now focus on long-term business development. For longer cycle, business like automotive, enterprise data, coms infrastructure and industrial, both our customers and MPS have extended significant effort and made joint investments in the development of multiple leading edge products and applications. As a result, we have secured business which we believe will ramp over the next several years driving revenue growth. For shorter cycle consumer related business, we will continue to proactively support our customers' needs. We have established MPS as a reliable supplier with excellent customer support during this extended period of product shortages. Accordingly, we believe both longer and shorter cycle customers value MPS as a strategic partner. We are cautious about the overall business conditions and believe we can swiftly adapt to market changes as we have done successfully during similar macroeconomic changes in the past. There have been recent changes to export control rules and additional companies have been added to the MPs list. As of today we see immaterial revenue impact, directly or indirectly from those new trade restrictions. Our products utilize process nodes in excess a 40 nanometer, which falls well outside the current restrictions. Moving now to a few comments on gross margin and operating income. Third quarter 2022 GAAP gross margin was 58.7%, which was 10 basis points lower than the second quarter of 2022, and 110 basis points higher than the third quarter of 2021. Our GAAP operating income was $151.9 million compared to $141.9 million reported in the second quarter of 2022. Non GAAP gross margin for the third quarter of 2022 was 59.0%, essentially flat from the gross margin percentage reported in the second quarter of 2022 and 120 basis points higher than the third quarter from a year ago. Our non-GAAP operating income was $193.7 million compared to $179.4 million reported in the second quarter of 2022. Let's review our operating expenses. Our GAAP operating expenses were $139.0 million in the third quarter of 2022 compared with $129.1 million in the second quarter of 2022, and $109.2 million in the third quarter of 2021. Our non GAAP third quarter 2022 operating expenses were $98.4 million, up from $92.7 million in the second quarter of 2022 and up from the $78.7 million reported in the third quarter of 2021. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or expense from an unfunded deferred compensation plan. For the third quarter of 2022, total stock compensation expense, including approximately $1.2 million charged to cost of goods sold was $43.0 million, compared with $42.9 million recorded in the second quarter of 2022. Switching to the bottom line, third quarter 2022 GAAP net income was $124.3 million or $2.57 per fully diluted share compared with $114.7 million or $2.37 per share in the second quarter of 2022 and $68.8 million or $1.44 per share in the third quarter of 2021. Q3 2022 non GAAP net income was $170.7 million or $3.53 per fully diluted share compared with $157 million or $3.25 per share in the second quarter of 2022, and $98.6 million or $2.06 per share in the third quarter of 2021. Fully diluted shares outstanding at the end of Q3, 2022 were $48.3 million. Now, letâs look at the balance sheet. Cash, cash equivalents and investments were $738.1 million at the end of the third quarter of 2022 compared to $814.1 million at the end of the second quarter of 2022. For the quarter, MPS generated operating cash flow of about $18.2 million compared with Q2, 2022 operating cash flow of $105.2 million. The decline in operating cash flow and increase in other long term assets reflected a $170 million prepaid payment made during the quarter to secure a long term purchasing commitment. Accounts receivable ended the third quarter of 2022 at $153.4 million, representing 28 days of sales outstanding, which was three days higher than the 25 days reported at the end of the second quarter of 2022, and six days higher than the 22 days at the end of the third quarter of 2021. Our internal inventories at the end of the third quarter of 2022 were $397.4 million, up $37.8 million from the $359.6 million reported at the end of the second quarter of 2022. Inventory at the end of the third quarter of 2022 represented 167 days, which were five days lower than at the end of the second quarter of 2022. Historically, we have calculated days of inventory on hand as a function of current order revenue. We believe comparing current inventory levels with the following quarterâs revenue provides a better economic match. On this basis, you can see inventory at the end of the third quarter of 2022 represented 189 days, 29 days higher than 160 days at the end of the second quarter of 2022 and 56 days higher than the 133 days at the end of the third quarter of 2021. I would like now to turn to our outlook for the fourth quarter of 2022. We are forecasting Q4 revenue in the range of $450 million to $470 million. We also expect the following: GAAP gross margin to be in the range of 58.1% to 58.7%; non-GAAP gross margin in the range of 58.3% to 58.9%. Total stock-based compensation expense of $37.7 million to $39.7 million, including approximately $1.1 million that would be charged to cost of goods sold. GAAP R&D and SG&A expenses should be between $131 million and $135 million. Non-GAAP R&D and SG&A expenses are expected to be in the range of $94.4 million to $96.4 million. Litigation expense in expected to be in the range of $1.3 million and $1.7 million. Interest income is expected to be in the range from $1.1 million to $1.5 million. Fully diluted shares are expected to be in the range of 48.2 million to 49.2 million shares. In conclusion, even though business conditions are softening, our market share gains continue to expand reflecting high customer engagement and our ability to secure design wins. We can now focus on growing our long term business. I will now open the webinar up for questions.
A - Genevieve Cunningham: Thank you, Bernie. Analysts, I would now like to begin our Q&A session. Our first question is from Matt Ramsay of Cowen. Matt your line is now open.
Matt Ramsay: Thank you very much. I guess good evening guys if you're in Europe. So Michael, Bernie can you hear me, okay.
Bernie Blegen : Yeah, buenos noches.
Matt Ramsay: Thanks guys. So two different questions from me. One sort of related to the model and the near term and the other one on a different topic. So the first question, Bernie, if you could help us a little bit, I mean the guidance was a bit light and you talked about some of the macro conditions, but it seemed like weakness was concentrated in the storage and computing segment. So if you could maybe talk about things by segment and what you're guidance implies on a quarterly basis by segment. I think that would be helpful and then I have a follow up. Thank you.
Bernie Blegen : Sure, just to clarify that the softness that we're seeing is both in the storage and computing as well as consumer. The other segments are still positioned to show growth between Q3 and Q4. The only sort of qualifier that we're still trying to learn about the strength and the runrate of the communications of that segment. So I think what we've done is we feel very, very comfortable with both, how we've been communicating our expected results, but we've added a little conservatism to the outlook.
Matt Ramsay: Got it. Great! And thank you that. Michael, my second question is on the topic of China, and over the last, Iâd say three or four weeks since some of the new commerce and BIS restrictions have come into place, I've been getting a ton of investor questions about this topic with relation to your company on two fronts. I guess the first being, MPS has a significant employee base in China. If you could maybe quantify what maybe percentage of your employees and in what functions are actually in China, and if you've heard from any of these restrictions that there could be any restrictions on those employees need to relocate anybody, those kind of things? And then the second part of the question is on your manufacturing footprint. I know itâs spread across China, Taiwan, increasingly in Korea. We've heard some stories from semi cap companies needing to pull employees out of SMIC for example, in other places because of these new restrictions. So anything in your manufacturing operations that might be disrupted at all because of some of the China restrictions and how far are you guys along or maybe the mix of your capacity that's now outside of China. You get this nature of the questions, but they've been a pretty frequent and acute over the last three or four weeks. So, it would be great if you could just kind of address some of those topics. Thank you.
Michael Hsing: Yes, very nice questions. Michael, I'm glad you asked, that what all your concern is I think most of the people totally misconstrued whatever the regulation is. And we do have a presence, we have a large presence within China. This is a U.S. companies, okay, and weâre not subject for sanctions at all. We don't have to have the people to leave â Americans have to leave an MPS office within China and that's not in the sanction entity list, and we are not in a sanction entity list. And other one is the manufacturing in the last couple of quarters, we already talked about it. Weâve diversified out of China and weâre starting five, six years ago. Also, I should mention that we talk about it on the engineering manpower. This MPS started at 2017, and we are in Barcelona now. Weâve moved a very large team here with the local government support. We are outside of China, and that's not because we â because of sanctions, because we want to diversify. Geometrically weâll â we will grow into a different region, in the same time zones, wherever we want. We give our customers the better support.
Bernie Blegen : And just to finish up on Michael's comment there, to be perfectly clear, our technology and our products are not subject to restrictions.
Matt Ramsay: No, thank you very much. Just a really, really quick follow-up. What would you say the percentage Michael of the products or the revenue that is actually sourced from manufacturing footprints inside of China today versus outside. And thank you very much for indulging my question guys, I appreciate it.
Michael Hsing: It is very convoluted and it is very convoluted and packagingâs and also the process wafer manufacturers, and it's very convoluted, we don't have a clear figures now. But going back to the Bernieâs question and of Bernieâs answers, our technologies, we're using 40 nanometer above and the current sanction is a 14 nanometer below. We are far â as Bernie mentioned in the script, we are far from that sanctions in the way using the trading edge. We are really using the trading edge of a fab equipment.
Bernie Blegen : And if I can just follow-up on one quick point as we made in our script here, is that as the supply demand imbalance has normalized, that frees us up from just being in pure production mode to actually be able to invest time in business relationships, to be able to expand and diversify our capacity, which we talked about about three quarters ago, where we're going to go from $2 billion of capacity currently to $4 billion within the next two years, two to three years.
Michael Hsing: These are mostly, we planned these outside of China.
Bernie Blegen : Yeah.
Operator: Our next question is from Quinn Bolton of Needham. Quinn, your line is open.
Quinn Bolton: Thanks. I don't want to pile on the export control questions that Matt was just asked, but I have one other clarification. You're at 40 nanometer and above and so you're not directly affected. But my understanding is that to the extent a facility, a manufacturing facility in China has multiple process nodes, some above 16 nanometer and some below 16 nanometer that that mixed-use facility would be affected. So I'm just wondering you know, for those Chinese manufacturing facilities, the fab-by-fab, are any of the fabs that you're running 40 nanometer and above, do they also produce 16 nanometer and below and might therefore be affected by equipment and/or support restrictions.
Michael Hsing: No. These are fab usually, they don't â advanced fabs, okay, these are 14 nanometer below, and I did not share where these outdated fabs like 40-nanometer above, okay. We're primarily using 65 nanometer. So these are totally different fabs.
Quinn Bolton: Thanks Michael. That's right, but I just wanted to clarify because I know that yeah, as Matt said, there have been lots of questions on this topic. Maybe one for Bernie. I know you're not guiding beyond the December quarter. But obviously the environment is pretty tough right now, especially on orders. And so I guess as you look out beyond December, can you give us any thoughts as to whether you would see less than normal seasonality in March as some of this weakness continues into next year? And I guess the offset would be, Monolithic Power has some pretty, I think meaningful market share gains, both on the server CPU side, as well as the data center GPU side. When would you think that those share gains start to kick in and might get you back to normal seasonal if not better than seasonal patterns.
Bernie Blegen : Sure. So â and again Quinn, thank you for focusing on more longer-term and strategic issues here. I think it's very easy to get caught in thinking about next quarter and just the quarter after that. And everything, all the indicators that we're receiving as far as the share gains occurring in the data center are on track. Nothing has been changed there at all. And then as far as how we look at the next few quarters. Again, when we apply cautiousness to Q4, I think we could expect that anything â that any growth opportunities are more likely to be weighted in the second half of 2023.
Michael Hsing: Yes, that's our guess and that's our experience. And I might as well add. You mentioned the CPUs and the CPU power, data centers and MPS is a lot more than that. And you look at Bernieâs, read our script and you have automotive and the data â the enterprise data centers and other ones in communication - the other ones, the communications, these are still, all of them are grown, except the consumer related notebooks, gaming, those type of things, and as everybody is aware of, they are softening. They swings from shortage to oversupplies and then you know kind of almost overnight. These kind of things we cannot predict. I mean you guys probably predict it better than we know. We just have to react fast, and the overall MPS business, all these are greenfield products will start to ramp in the last few years and will continue to ramp.
Quinn Bolton: Sorry Michael, I didn't want to shortchange it by only focusing on the data center opportunity. So, thanks for that color.
Bernie Blegen : Thank you.
Operator: Our next question is from William Stein of Truist. William your line is now open.
William Stein : Hey! Thank you so much for taking questions. I have one near-term one and then a longer-term one. From a near-term perspective, I'm hoping you can talk about pricing trends and also how your backlog might be changing in terms of the duration of what you have on the books today versus where we've been recently? And then again, I have a sort of longer-term follow-up question, please.
Michael Hsing: For shorter terms and I can name this. Here what we see is for the long cycle, longer cycle business is continued. And because there is no questions related to price, okay? Because all the products, they will last four, five years or even longer, okay, and these products are in the ramping cycles. In the shortest â in the shorter cycle, consumer related, as I said it earlier, Iâve got notebooks and gamings or the other personal electronics, and these ones okay, they are oversupplied. There's no question â we don't have any questions about the pricing. And that probably will come in, like in later, another quarter later, what will be a new project design, thatâs where we, thatâs pricing â a question, pricing questions will start to emerge.
Bernie Blegen: And well, you also mentioned backlog, the sort of condition in the backlog overall. And relative to historical norms, we still remain very â you know we're much higher than we have been historically, and â but this has given us an opportunity to address with our customers. In fact, we've been engaged in these conversations for several quarters now, on what they expect real demand to be. So I think that as far as our book of business is looking ahead, it remains very healthy.
William Stein : And then the longer-term question, I tend to ask each quarter about some of the you know more differentiated products and services MPS has, modules in particular. I wonder about the traction of those products and whether you're seeing the uptake of that either expand or falter given the current environment? And then same thing with e-commerce, like you have seen more or less of that given the changing demand environment. Thank you.
Michael Hsing: Yes, all the products, the modules and the e-commerce business okay, and we don't see any changes and they are just continuing and that's where MPS future business would be and we're even more diversified than MPS' current business.
Bernie Blegen : And I think it's interesting as far as market acceptance for the modules. It really is not concentrated in any one â any market. It's actually pretty evenly distributed against all of our markets. So that to me is a real clear indicator that it fits in well with our diversification strategy.
Michael Hsing: Yes, frankly if you ask me where these module goes, we don't have ideas and that is the beauty of it.
William Stein : Thank you.
Operator: Our next question comes from Jeremy Kwan of Stifel. Jeremy your line is now open.
Jeremy Kwan: Yes, good evening. Can you hear me okay?
Bernie Blegen : Yes.
Jeremy Kwan: Great! Just a couple of questions. First, just looking at the lighting business, it looks like it had a nice increase sequentially this quarter. Is there anything that you can call out there? I just want to understand some of the dynamics in that business.
Bernie Blegen : Automotive.
Jeremy Kwan: I'm sorry, the lighting â oh! Itâs automotive. Okay. That's what's been driving it.
Bernie Blegen : Yes. As we said in the prepared comments, that there were new platforms that were launched, most of them are tied to the 2023 model year and there were probably three areas, lighting being one of them that really contributed to the uplift in the automotive in Q3.
Jeremy Kwan: So this is something that we can look at as a new baseline and the sort of like a steady ramp from here or should we expect kind of more step functions with each new model here?
Michael Hsing : Well, the lighting is â in automotive lighting have a variety. You have a down light, you have indicators, all kind of indicators, you have the signals, then you have the headlight, okay. So this is the last couple of quarters you see stepping up and that's kind of, that's part of the Greenfield product and automotive start to ramp. The content in the cars, we're growing the content. For the number of cars we have okay, and just at the beginning, we still have a small, very small market here, so it will continue to grow.
Jeremy Kwan: Got it. Great! And just turning to the long term purchasing agreement that you talked about Bernie, can you give us a little bit more details on this, maybe the magnitude or the size of this deal and you know how different is this from things, the way you may have done business in the past. Just any more detail and help us you know to understand your strategic thinking behind this, that would be very helpful.
Bernie Blegen : Sure. So when you think about the period of the supply-demand imbalance that we came out of, we had actually a superior competitive position because we had invested in our supply chain earlier than our competition, and that allowed us to have part availability when they didn't and that allowed for incremental market share gains. So as we continue to expand capacity, we're looking for new opportunities and with existing as well as with new fabs, and so in this instance we wanted to secure a purchasing agreement that in order â that gave us dedicated capacity regardless of what the economic environment was.
Jeremy Kwan: Got it, thank you. And then just one last question, just touching again on the modules. Can you give us any insight into the other differences in terms of the manufacturing supply chain that needs to be managed here? And you know in terms of whether it's sourcing or whether it's the geographic footprint. Are there things that you can call there as well?
Michael Hsing: Most of it â let me answer it that way. Most of our modules assembly is outside of China.
Jeremy Kwan: Great! Thank you very much.
Operator: Our next question is from Rick Schafer of Oppenheimer. Rick, your line is now open.
Bernie Blegen : Rick, can you hear us?
Rick Schafer: Yes, sorry I was muted. Can you hear me now, Bernie?
Bernie Blegen : Yes.
Rick Schafer: Great. Well hey guys! Thanks for letting me ask you a question. Maybe my first one just on supply. You know TSM, obviously your newest foundry partner, I was just curious if you could kind of level set us on where you guys are at in terms of the qualification process, you know eventual capacity ramp, sort of maybe even get a sense of how much capacity they are going to have for you ultimately and how much of that might be eight versus 12-inch? Just trying to get a better handle on them as a partner.
Michael Hsing: Yes, most of what we use is 12-inch and also the advanced process modes, of course that thing is in the TSMC. We do use the advanced nodes of gaming and these are for microcontrollers, that type of a product that we do use them and these are not winning in China at all. And a lot of these are product at the very beginning of a ramp and so now we have all the capacities for these new products. Mostly these are for automotive and communications and so now it gives us a lot more room to grow.
Rick Schafer: So Michael, just to kind of get a sense. I mean, is this â could TSM be sort of a 10% contributor to capacity in say a year's time or is that too aggressive to kind of think of how quickly they could ramp?
Michael Hsing: On the lower side as we see now.
Rick Schafer: Thanks a lot and then a follow-up, I'm just curious to get an update on silicon carbide progress, particularly traction inverters. I mean how many customers you're engaged with now and when we might expect to see initial revenues? And I know you've talked about it in the past Michael, but just kind of remind us what that dollar content for MPS looks like ex-EV? And I'm assuming it would be sort of subsystem, but would anything be discrete or would that all be sort of module/subsystem?
Michael Hsing: Yes. Thank you very much to ask that question. Yeah, that kind of things, the silicon carbides and the high-power modules okay, that work gets me excited. We do have our first product going through the qualification now; it's working. MPS does not intend to sell as a power device, as a power device only and like a power set only. We will sell within using our combined with our silicon technology produce these small modules. And we do have many customers engaged in automotive, automotive sections and also the large energy storage and as well as BMS, the car charging stations and those kind of things, we don't have any revenue yet, okay, but it will be in the next few years.
Rick Schafer: And Michael, just a reminder just sort of what it does to content for you guys or potential content in a car or a vehicle?
Michael Hsing: I think these content will be enormous, okay? I don't even have a - that would be in the billion, and I don't have a â a couple of billion dollars of opportunity is a smaller. It's a very conservative estimate. Just thinking about it, all the power trains okay, driver trains, all the charging stations, MPS is not going to make and sell a chip only, weâre selling the entire systems.
Rick Schafer: Great! Thanks a lot for all the color.
Operator: Our next question is from Alex Vecchi of William Blair. Alex, your line is now open.
Alex Vecchi: Hey everyone! Thanks for taking my questions. Bernie, maybe one for you just on a housekeeping question around gross margins. Can you elaborate a little bit on the down sequential? The only reason I'm asking is given the end market weakness and notebooks in consumer I would have thought is lower gross margin mix. So anything you can do to help on that and how to think of it like from here.
Michael Hsing: Sure, Alex. So there's a lot of ingredients that play into the gross margin outlook and certainly the direct margin by end market is a significant part of it. Another is the amount of - I don't like to call it necessarily unused capacity. The fixed cost that isn't necessarily absorbed by the same volume. So it's really the fixed cost issue as opposed to the sales mix that's putting a little bit of downward pressure on the gross margin.
Alex Vecchi: Okay. And then similarly to that extent, just expand on Rick's questions regarding the new fab partner or TSMC. Do you view that relationship eventually being gross margin accretive or dilutive versus your Chinese partners?
Michael Hsing: Well, these are the events note and we're moving that towards that â in the territories and therefore these are more microcontrollers, and more highly digital content products and it's a different product. We â there is no gross margin issues. So in that case we don't go down compete with the price. All the products that we add is more. These are values more in the software side.
Bernie Blegen : And I think that when you look at TSMC, these are new and advanced products that we're developing with them, whereas we're at the same time doing an expansion and diversification away from China and that would include other fabs, both in South Korea as well as in Taiwan.
Alex Vecchi: Okay, thatâs really helpful. With that Iâll go back into queue. Thank you.
Operator: Our next question is from Melissa Fairbanks of Raymond James. Melissa, your line is now open.
Melissa Fairbanks: Hi guys! Thanks very much. We saw CapEx â maybe a little longer-term question for you. We saw CapEx dip a little in the third quarter. Maybe could you give us an update on your longer-term capacity planning, not just with TSMC, but more broadly? Does the near-term demand weakness impact those longer-term plans? And then when we're looking at getting to $4 billion in revenue, what's the path to that ramp and the cadence of the investment needed to get there?
Michael Hsing: Well, it's a â we always â if you look at our past. If you look at how we expand our capacity, what is our investment, and if you look at the past eight, nine, 12 years, it's the same pattern as the next four, five years. And we're not going to over invest. We're not going to less invest it, okay. So the trend, if you look at it. If you're plotting our OpEx and also the growth rate, and it should remain pretty constant in the past four years and in the past eight years, in 12 years, in also the last two or three years the growth pattern is really different from previous four years, and whatever the growth rate we have in the next four years, you can use the plotting â you can use the same kind of percentage range.
Bernie Blegen : And Melissa, keep in mind that when we do the fab expansion, the capital expenditures are borne by our partners not directly by us. So when you look at our run rate that Michael is referring to, that's more heavily concentrated in test equipment, which can fluctuate from anywhere between $8 million per quarter to $14 million per quarter. It just so happens that we made a lot of those investments earlier in the year, and that's why we're lower. The other thing that we invest in is that we do buy or we develop our own facilities and those can be layered on and currently there are no investments of any material nature.
Michael Hsing: Yes, let me clarify this a little more, rather than give you a model. You know MPS, we don't own the fab, we don't own fab equipment, and the cost of associating with capacity expansion, one is we have to qualify the process, and the large portion of it is to qualify our products. We have 4,000, well over 4,000 products, and each product to go through a qualification, that takes about eight to nine months. That cost, that's very costly and so that's â if we don't â if we slow down and the demand slows down, we don't have to qualify as fast okay, and so the cost will be spread out.
Bernie Blegen : And those costs are borne in our R&D expenditure line.
Melissa Fairbanks: Okay great, thatâs very clear. Thanks very much guys.
Operator: . As there are no further questions, I would now like to turn the webinar back over to Bernie.
Bernie Blegen : Thanks Jen. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during the fourth quarter conference call, which is likely to be held in early February. Thank you and have a nice day!
