Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems third quarter earnings conference call. [Operator instructions.] I would now like to hand the conference over to Meera Rao, chief financial officer. Please go ahead.

Thanks, operator. Good afternoon, and welcome to the third 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 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 earnings release and in our SEC filings, including our Form 10-K filed on March 10, 2014 and our Form 10-Q filed July 29, 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 margin, operating expense, operating 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 Q1 through Q3 releases for both 2013 and 2014, as well as to the reconciling tables that are posted on our website. I’d also like to remind you that today’s conference call is being webcast live over the internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today. As expected, MPS delivered again. In the third quarter…

[Operator instructions.] Our first question comes from the line of Steve Smigie from Raymond James.

I was hoping you could talk a little bit about your segments here. In particular, you had a lot of strength in consumer. I think you mentioned gaming. Is that seasonal? And then as we look into next quarter, any color on how the segments might perform?

Some of the strength in consumer, like in gaming, is seasonal. There’s a definite seasonal pattern to it. But one of the things that we are excited is we have gotten into a bunch of new markets that we call high value markets, where they pay a premium for performance products. And those are markets like gaming, where we have battery management, we have lighting, and we have appliances. In all these markets, we have seen growth in the third quarter. Q4, typically there is a seasonal decline from Q3 to Q4, and we do expect to see some seasonal softness in consumer and consumer-like markets.

And one item you mentioned there, battery management, you guys talk about that a lot. Sorry if you’ve addressed this in previous calls, but can you go into a little bit more detail about what exactly you’re addressing with battery management.

Our battery solutions in battery management, these are mostly for [polar volts] and then electrical vehicles. So everything from either handheld, some industrial use, to tablets. We have very good solutions. Just two years ago, we released the product, and now we have meaningful revenue.

And on the gross margin, another nice improvement. I think it’s essentially flat sequentially, but down seasonal quarter. You’ve got a little bit of back end capacity, so is that what’s causing the flatness sequentially, just sort of maybe utilization? And if that’s the case, what utilization rate are we at on the test?

It’s not exactly utilization. We just look at the mix, and essentially expect gross margin to be in the same range in Q4 as well.

And our next question comes from the line of Tore Svanberg from Stiefel.

I was hoping you could talk a little bit about what you said about the distribution channel. You said it was at a two-year low. Would you care to quantify that?

We’ve been managing our inventory in the channel very well over the last two years, and we’ve been able to hold it at the same level for over eight quarters, I would say. And in Q3, we had addressed some of the concerns that it could be double booking, etc., by shipping early and managing the [unintelligible] concern. And we were able to complete the quarter with lower days of inventory in the channel than we have seen in two years.

And my second question is in relation to your computing business. It was up 19% sequentially. Is that a reflection of some of the design wins in Grantley? Or is this more seasonality and then the Grantley designs are yet to come?

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The Grantley just started, and there’s a lot more revenue behind it.

Yeah, that’s what I was trying to get to. And then lastly, your communications business was up a lot in Q2. That’s probably why it took a breather in Q3. But can you talk a little bit about the dynamics there? Are we getting to a point now where some of your bigger design wins in networking could potentially start to become more meaningful production?

What we saw in Q2 was some of the networking and telecom design wins that we’d been talking about in the past started ramping in Q2. And what we saw in Q3 was, while we still have good revenues coming from the networking and telecom, we saw a certain amount of softness, I would say, in more traditional Gateway business. These are things like the modems, the routers, the line cards that we sell mostly on the client side. And that’s where we saw a little bit of softness. But the networking and telecom we still saw good revenues this quarter.

Given your conservatism, and also the way you’re managing your distribution channels, is it fair to say that your backlog percentage into your guidance is actually very high?

I’d say that we’re very happy with it.

And our next question comes from the line of Ross Seymore of Deutsche Bank.

Just following on Tore’s question, on the Gateway business, that was a little bit weak, the traditional comms. Is that something that is just choppy, or is it something that you expect to be a persistent headwind?

I think it was just choppy.

These are the businesses we have. These are the set-top boxes and wireless [unintelligible]. Those type of business, which we’re not really concentrated. What’s exciting about that is that it’s infrastructure. We made a significant headwind and we do expect revenues and world growth. But you know, these designing cycles take two to three years.

And I guess on a last follow up on the revenue side of things, when you talked about the conservatism that you put into your guidance from what everybody else is seeing, what are you guys seeing as far as the bookings on your side?

Our bookings, I will have Meera talk about booking. I would say our future is great. We’re executing, in the last two or three years, all the products that we released [unintelligible] to revenue.

In terms of bookings, Ross, we’ve seen good bookings as we go through the quarter. We’re not seeing any signs of softness. But we are cognizant of the fact that if there is a slowdown, it’s going to impact us, and we just want to give a guidance that we’re comfortable that we’re going to be able to meet. As you know, we have a history of meeting our guidance, and so we just factored that in.

You guys have done a great job controlling opex. Can you just talk about how you think opex versus revenues could grow as we think a little bit longer term, into 2015, 2016, etc.? What sort of band should we put about the relationship in growth rates between the top line and opex?

I would say we will continue to hold expenses, but we will have pay raises that will go in the first of each year, which could be in the range of $500,000 to $600,000 impact. And then as we see growth coming in, we will do some investment in the future. We did a bit of that this year. So a lot of it is going to be tied with our growth as we go forward.

Those pay raises, that was on a quarterly basis, I assume?

Yes.

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

I guess my first question is talking about mix. You guys have doubled your industrial and comms business as a percentage of revenue over the past three years or so. I guess what’s the right mix longer term? And maybe part of that answer, if you could talk about your design win backlog, if you look at how it breaks out, what percent would be sort of comms and industrial, auto, that kind of stuff, versus your more legacy PC consumer stuff?

Right now, we have growth drivers in every one of these segments. And even industrial, which typically is a segment where we’d have expected to see growth coming in slower, we are seeing very strong growth. And as you know, we don’t typically give guidance as to growth by segment, but I think when you see next year, assuming regular macro, you would see us growing in every one of these segments.

Let’s put it that way. It’s difficult to give you what the percentage of each market segment. What we really focus on, [unintelligible], our customer value, the performance from our products. And they pay a premium, and also, if the market is sustainable, we will growth that market segment.

And the key is also we are focused on diversified revenue growth, so we are happy to see growth across multiple segments versus just one.

And I know you talked about premium customers on the consumer side. As those guys become a bigger piece of the mix, should we think of the consumer segments enjoying higher gross margin over time, a better mix over time, within just consumer?

Absolutely. We’re not going to a commodity.

And just a question on the power modules business. When does that begin to ramp in a meaningful way? Is it 2015? Or is this really something more out in 2016? And as part of that question, I’m assuming your consumer business would adopt and ramp the power mods first? Is that right? And then same kind of gross margin question. Is that a gross margin positive versus overall corporate average gross margin?

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Right now, it’s just early revenues. So we have got fairly big design momentum here. So you’re going to see those revenues start ramping next year, and we’ll see very significant revenues in 2016.

In terms of putting a number on it, is this a 10% business unit sometime in the next two years?

If I think about 2016 MPS growth, in 2016 would be difficult, but it will be there in the next few years.

And our next question comes from the line of Anil Doradla from William Blair.

I’m trying to figure out how to ask this question. I know it’s kind of tough, but when I look at Monolithic Power, obviously it’s a product cycle story versus the rest of the industry. So let us say the macro does weaken further over the next couple of quarters. Now, given that you’ve got some very strong product cycles, even in macro-sensitive environments, could you share which are the end markets, or which of the four segments would you start seeing the effect of it on the overall revenue composition?

As you guessed, that’s a hard one to answer, because in all these segments we have both a combination of new markets that we’re just getting in, newer customers where we are ramping up, as well as markets where we are taking market share from our peers. It would be very hard for us to call, because I don’t know how the macroeconomic conditions would impact different end markets. But I can say, just looking at the last few years history, that even if the macro gets weaker, we still expect to do better than our peers.

And last quarter, I know BCB 3 and 4 were about 60% of revenues. How much was it this quarter?

I think still in the 60s. A little bit above. I think it’s getting close to two thirds of revenue.

And then finally, could you give us a little bit more color on the breakdown between TVs and some of the gaming devices?

I would say right now if you look at things like set top boxes and TVs, they would be a smaller portion of consumer, and just these newer high value markets that we talked about, that would easily be a third or more of our consumer revenue. And then you have set top boxes, TVs, and a lot of different stuff that we call general purpose, that would make up the rest of the two thirds.

And finally, if I can squeeze in, Michael, given the mixed signals that we’re getting in China, especially China 4G, you’ve got some exposure to some of the OEMs there. How does that play out for Monolithic Power, the volatility on the 4G buildouts in China?

The telecom business essentially, for MPS, is at the beginning. As long as our customer is expanding then opportunity for MPS is enormous, regardless whether one region is shrinking or expanding.

So effectively you’re not too worried about the volatility in the Chinese 4G, that’s what I’m hearing?

No.

That’s the beauty of a diversified model.

Our next question comes from the line of David Wong of Wells Fargo.

You commented about inventory levels in the channel being so particularly low. So is there a need, actually, for inventories to be rebuilt in the near future, or do you anticipate they’ll continue going down from the current levels?

No, we don’t anticipate that they’ll go down. They’ll be at the same levels or maybe at more traditional levels that we’ve had. So we kind of look at this inventory level that we had in Q3 as a sign of how well we have managed to execute in managing channel inventory. And it also gives us confidence as we look at our Q4 forecast.

And the other thing is, on the matter of pricing, with all your new product cycles, are you seeing pricing going up at all in any segments?

The new products that we’ve released all have a premium price. And for the competitive landscape, I won’t put my fingers on the elephant and describe what kind of elephant it is.

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

I was hoping you could talk a little bit about gross margin across your end markets. And I guess within consumer, if you could differentiate the low end stuff versus the high end?

Sure, as you know, industrials is our best gross margin. And within the different segments, you take communications, our networking and telecom has a better gross margin profile compared to the traditional Gateways. If you look at consumer, the newer markets that we call our high-value markets, they clearly have a better than average gross margin profile compared to the rest of our traditional consumer. And then when you look at computing, SSD is better than HDD, and the cloud computing margins are very good.

All the new products and product families, they all have a higher margin profile. And in this conference call, we never mentioned AC/DC, and that product line had a phenomenal growth this year and next year.

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No, I wouldn’t say it’s quite half of industrial, but it is growing. We anticipate that at some point in the future, when it’s large enough on its own, that we will break it out of industrial. But I think at least for the near term, we will continue to include it with industrial.

If you could talk a little bit about LED lighting and the growth prospects of that over the next 12 to 24 months. It seems like we’re kind of at an inflection point for that. I know you’ve kind of got portions where you’re better than others, but I was just curious if you could talk about that overall opportunity there.

We’re seeing a lot of growth in LED lighting, particularly the incandescent bulb replacement. We believe we have a product that has a superior dimming solution, in particular, so we’re seeing a lot of sales from that, and strong growth every quarter. Our longer term view in this market is we’re interested in industrial and commercial LED lighting more than consumer. But right now, when it’s still got an attractive gross margin profile, we’re happy to play in consumer as well.

That’s well said, and industrial and commercial is our focus, but we’re opportunistic and will take whatever the revenue is with the higher gross margin.

Thank you. And that concludes our question and answer session for today. I would like to turn the conference back to Meera Rao for any closing comments.