Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Incorporated First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Meera Rao, Chief Financial Officer. Please go ahead.

Thanks, Kate. Good afternoon, and welcome to the First Quarter 2014 Monolithic Power Systems Conference Call. Michael Hsing, CEO and Founder of MPS, is with me on today's call. In the course of today’s conference call, we will make forward-looking statements and projections that involve risks and uncertainty, which could cause results to differ materially from management’s current views and expectations. Please refer to the Safe Harbor statements contained in the earnings release published today. Risks, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 10, 2014, which is accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today’s call. We will be discussing gross margins, operating expense, 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 the measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q1 2013, Q4 2013 and Q1 2014 releases, as well as to the reconciling tables that are posted on our website. I’d also like to remind you that today’s conference call is being webcast live over the internet and will be available for replay on our website for 1 year, along with the earnings release filed with the SEC earlier today. MPS is pleased to announce record first quarter revenue of $60.1 million, representing a 16.7% increase from the first…

[Operator Instructions] Our first question comes from the line of Tore Svanberg with Stifel.

My first question is on your outlook for the second quarter. I was hoping you could talk a little bit about your visibility either by backlog or current bookings?

Sure. We've had very good bookings so far, and I think we're kind of seeing an environment that is better than what we saw a quarter ago. And that's what's drives the guidance that we have now given for the second quarter.

Very good. And you mentioned your HDD business was down in Q1. Are we at a point now where SSD revenue is higher than HDD revenue?

Yes. It's -- more than half of our revenue is now coming in from SSD, and SSD continues to be a segment that's growing for us.

Doesn't mean that HDD continue to go down. As the newer model ramping up, we expect the revenue start to pick up again.

Yes. So one design win that has started decreasing in the second quarter of last year has now bottomed out.

Okay, very good. And on your consumer revenue, I know last year you actually grew it in dollar terms, but I know it became smaller percentage. But if we look at how things are progressing so far this year, could consumer still grow in dollar terms or expecting it to be more flatted out?

We expect consumer revenues to also grow this year in dollars.

Okay, very good. Last question for me. Your gross margin guidance for Q2, does that assume just a natural improvement in mix or is there anything else behind that?

It contemplates a slow and steady improvement in our gross margins as we've always talked about in the past, and I think that's what you're seeing in the second quarter as our revenue mix gets richer.

Our next question comes from the line of Steve Smigie with Raymond James.

This is Vince Celentano speaking for Steve Smigie. My first question was, with the recent price cuts in LED bulbs, I was wondering if you knew going forward when it would translate into a pickup in sales?

The second -- as Meera said in the script, the second half of the year, our third generation of our LED will gain sales revenue.

Okay, great. And with the Broadwell delay, I was wondering if you see that impacting your 2015 outlook?

Will you say that again? The first part, I can't hear.

I'm sorry, I said with the Broadwell delay. I was wondering if you see that impacting your 2015 numbers?

Broadwalk?

Broadwell.

Oh, Broadwell.

On the Intel.

Oh, that. Oh, you switched topics, okay. Yes, these models, it was 2015 starting to see -- not in 2015 revenues. So we're not going to go beyond that. I don't -- I'm not very familiar with these names.

Our next question comes from the line of Ross Seymore with Deutsche Bank.

This is actually Matt Diamond on for Ross. I'm curious if you could give us a breakdown on your second quarter guide of the end market which comms consumer, computing, industrial, what all of those should be expected to do directionally?

Sure. I'd like to kind of put it in context, as I have in the past, that we don't have as much visibility to break it down by the different end markets when we are looking at bookings and a forecast as we do when we have the end quarter POS or resales data. But directionally, I can tell you that I expect to see growth in consumer in the second quarter. I also think that we will see growth in computing, since I expect both storage and notebook revenue to increase in that quarter. And I expect the -- all the other markets also to do fairly well.

Okay. And in somewhat of a different vein on your OpEx, it looks like if I back out the litigation benefit, it appears as though it came in a couple of million above the midpoint of guidance fee -- I'm sorry, coming in at above the top end of non-GAAP guidance. I'm curious if there's anything beyond stock comp that would explain that or what the dynamics there is at large?

Well let me -- before Meera answers, here's a correction. Meera in the script has said the settlement. This is not a settlement. This is a verdict from the court. Okay, Meera, please answer the question.

Yes. So the $3.1 million that you're referring to is actually special bonuses that were given to employees in the first quarter. And I think that's the difference that you're picking up, and that's what I talked about in the commentary a little earlier. And I think out of that $3.1 million, $2.8 million of that was in OpEx and about $300,000 went into cost of goods and impacted gross margin.

Our next question comes from the line of Rick Schafer with Oppenheimer Funds.

First question, I guess, is, could you give us an idea, I guess, as mix improves and manufacturing costs are dropping, maybe walk us through your thought process on your longer-term gross margin targets. I mean, I guess, what I'm asking is what's actually going to keep gross margins below 60% longer term?

Well, 60%, that's a big jump, Rick. Big jump. As we said in the long term, we're transitioning from -- we are broadening our market coverage and the gross margin world growth. And when -- how we're going to get 60%? I would say the possibility is there. And as we do the more annuity products and then we will get there. So -- but the questions is really -- really, the question is when will it get there? And as you know, this year, consumer business we're going to do really well, and they make very good bucket. Increase our -- keep increase our EPS and, I mean, these are money you can't walk away. And so we will see. I think in the next 5, 6 years, I think as a possibility it's very good.

Rick, I mean, our focus has always been on maximizing the operating income on a non-GAAP basis, right? So we also try at the same time to improve our top line while steadily expanding our gross margin. And as Michael said, there's absolutely no headwinds when it comes to gross margin, and you're going to see it improve. And as we get more revenue coming from some of our newer products, we also transition to a richer mix. And all that's going to help with our gross margin expansion as we go forward.

And so maybe a second part of that question would be if you could give us some color on the percentage of your sales now that are BCD3 versus how much you're still on BCD2, and then maybe remind us sort of what that cost, relative cost savings was as you move from BCD2 to 3?

Sure. Our revenue from BCD3 and BCD4 is above 60% of our revenues in the first quarter. And the cost savings that we got, that came out of it, came both from having 20% to 50% die size reduction and the cost savings that came from it for the different products, as well as some of the packaging advances that we had made. Of course, some of that cost advantage gets narrower as we go forward as our competitors continue to drop prices. But it clearly allows us to still match a competitors' prices in the consumer market with a group of family of products and yet get a corporate gross margin that's in our model of 53% to 58%.

And Meera, this is my very last question. But -- so would you say that on your consumer and PC businesses that the gross margins are actually improving there as well? Because of these cost reduction efforts, you're seeing a margin -- gross margin actually improve there?

I mean, we get picked up periodically as new products roll onto it. But some of the benefits have also come from some of the newer consumer markets we get into. And these newer markets have better gross margin profiles than traditional.

Yes, the one we -- Meera just mentioned it, the very management -- and certainly it's much higher than a corporate average gross margins. And other consumer products we just recently introduced for the smart TVs. And those products are generally has a much higher gross margin compared on the existing one.

Our next question comes from the line of Anil Doradla with William Blair.

Meera, you talked about a charger. I just wanted to clarify. Would some of the applications of these chargers be in the automotive industry for electric vehicle charging? Would that be an application?

No. Our charging is, a lot of them is for consumers products and other one is the hand tools.

Okay. So it's a little step away. And also, you talked about LED being a driver in second half of 2014. Can you give us a little bit more color on what you meant by that?

Well we just introduced the third generation of our LED drivers in early this year or second half of last year, and it's well, well received. In the conference call, we should have bring that up to our shareholders and that will have some additional revenues in the second half of this year.

Can you quantify it or that's difficult at this stage?

It's -- as you know, the LED market is very fragmented, and a lot of customer competing with the same sockets. And some's going to win, some are going to lose, okay, but ended up it's okay in [indiscernible]. These sockets are either more into the consumer side. And so it's difficult for us to forecast from the design wins to revenues.

Okay. And finally, I mean, in your last Analyst Day, you did talk about going from $2 billion TAM to $6 billion TAM as you entered into new markets? Is there an update on the Tam now, I mean, is it more than $6 billion that you're trying to address or can you give us an update on that front?

Since then, one of the newer markets that we entered into, that we have discussed publicly is the gaming market. And I don't think we have announced any newer markets since then.

Yes I think -- but we don't look at the TAM or calculate the TAM every quarter. From the last year's Analyst Day, we announced that here is the TAM we're going to cover, so this is the opportunity and then since then, of course, we introduced a lot more product than we will have more TAM, but we don't have any particular numbers.

Our next question is a follow-up question from the line of Tore Svanberg with Stifel.

As a follow-up on your Monolithic Power Module, I was hoping you could give us an update on recent trends and also on optimizing the structure for that product line?

Tore, could you please say that again? You're breaking up.

Yes. Sorry, I was hoping you could update us on design wins for Monolithic Power Module and also on the cost structure initiatives there?

Yes. We have, of course, we have seen a lot more design wins from the last quarter to -- well from the 2 quarters ago to the last quarter's. And then Meera talked about in the script that we have a more industrial design wins, more in SSD, more in the consumer side, actually. And some wearable device, some these action cams, those kind of a thing. Cameras, they require very small devices, and they want to use a high-performance product. And so we have a lot of these design activities. And so the revenue -- we're translating the revenues and some are sooner than the other one, okay, and consumer being the fastest and the industrial is relatively slowest. Also, the automotive and we have several activity -- several design wins. These will be probably take us 3 years to generate any revenues. From the cost side, the cost is really not -- and at this time, it's not really our concern because we're selling values. And the gross margin is a much, much higher than the corporate average. And so it's a less concern. But we believe our -- the way we implement the module is the lowest cost in the market. We don't use the PCB. We don't use any multiple chips in there and everything is the same. We utilized integrated circuit packaging technology which we developed. And available in -- we implement it in the assembly and it can be mass-produced. So the reliability and the cost that we clearly will have an advantage now.

And, Tore, one of the things that is truly exciting about this module is the variety of markets into which it's being adopted into. We have design wins all the way from SSDs to appliances, to smart meters and to automotives, other industrial applications, servers, networking. So we have seen these products being kind of being adopted very widely. And the revenue, as Michael said, some of it consumer will be earlier to ramp and the others will take a little longer. But you're going to see us talk more about this and having this be a more significant part of our revenues, particularly in 2015 and 2016.

Very good. Last question, you're a relatively new entrant into the high-voltage markets. I was hoping you could just update us a little bit there and will you actually start to break out BCDHV-based revenue?

The last portion was a break...

The BCDH.

Oh, the BCDH, okay. Well I'm glad that you mentioned it. This is the fastest growth segment in our revenue stream. The high-voltage device, and we started about 4, 5 years ago, and the revenue grows and it grows phenomenally, and as in AC to DC side, and also as well the LED lighting.

And just add to that, our AC/DC products essentially sell across to more than one of our end markets. While a lot of it goes into industrial, we also have one of our AC/DC parts, the synchronous rectifier that's going in for gaming as we announced a few quarters ago. So we won't be able to break it out that way, but we will give some color as we go on through the rest of this year and next year.

Well most of it -- a lot of them is -- these are power -- these are micro transmitters, [indiscernible] and the WiFis and network for connectivities.

I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

I'd like to thank you all for joining us on this call today, and look forward to talking to you all again at the next earnings release. Thanks, and have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.