Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Incorporated's Third Quarter 2018 Earnings Conference Call. At this time all lines are on a listen-only mode. Later we will conduct a question-and-answer session and instructions will be provided at that time. And as a reminder, this conference is being recorded. I'd now like to turn the conference over to Bernie Blegen, Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to the third quarter 2018 Monolithic Power Systems' conference 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 included in our Form 10-K filed on March 1, 2018, and Form 10-Q filed on August 2, 2018, both of which are accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call. We'll 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 on 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 2017, Q2 2018 and Q3 2018 earnings 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 one year, along with the earnings release filed with the SEC earlier today. Let me start by telling everyone that our Q3 2018 quarterly…

Thank you. Our first question comes from Matt Ramsay with Cowen. Your line is now open. Matthew D. Ramsay - Cowen & Co. LLC: Good afternoon, guys, and congratulations on a strong set of results with a lot of uncertainty out there. The question that we've been getting the most often is, there's a lot of new content growth and market share gains that are embedded into the long-term forecasts that investors have for your company across a number of businesses. Maybe Michael, you could talk about at a high level how you're progressing there and then just juxtapose that against a lot of concerns about a weaker macro environment. I know that folks have an expectation of 20% growth for your company over the next couple of years and we're just trying to understand the risks associated with that versus the opportunities for share gains. Thank you.

All right, okay. As you know, MPS, we're not in a position to answer what the macro position is and we only heard from you guys. And we have a very small percentage of market share, particularly in those greenfield market segments such as auto, in data centers as well as the industrial side. And we have a very little market segment. Those segments should be relatively immune to what the market condition is and we expect it to grow according to our plan, and the next few years we are all set.

I think one-point to add to that is that, we're continuing to be very aggressive as far as securing new design wins. And that as we said in our prepared comments, that while there has been a downturn that's reflected most in our consumer business, we didn't lose market share, in fact we continue to make gains. Matthew D. Ramsay - Cowen & Co. LLC: No. That commentary is really, really helpful. And I guess, as a follow up, I've spent a decent amount of time with my team digging into the programmable aspect of many of your solutions as you sort of bring programmability into the portfolio. Michael, maybe you could talk a little bit about at a high level, what percentage of the products that you're shipping now and winning designs with, and then I guess second, winning designs with are programmable in nature today, and how you might see that trend going forward and what that might mean for market share? Thank you.

All right. Okay. At this point, still probably single-digit percentage of our total revenues and we expect to quadruple in the next couple of years. And probably, most likely in the four or five years and a 100% of our products will be programmable. Matthew D. Ramsay - Cowen & Co. LLC: Got it. No, that's really helpful and I'll jump back into queue, if you don't mind. My congratulations and well done. Cheers.

Thank you.

Thank you. Our next question comes from Rick Schafer with Oppenheimer. Your line is now open. Rick Schafer - Oppenheimer & Co., Inc.: Yeah. Thanks. I'll add my congratulations guys on a nice quarter. So maybe obviously auto and industrial, each up 50% plus in the quarter. I think the auto business is .tracking to something north of $80 million this year. Mostly it's been infotainment, and I think now you're starting to see lighting and motor control start to ramp. Maybe you could walk us through what that next leg of growth there looks like. I know Michael you talk a lot about having two, three years of really solid visibility there. I'm curious as ADAS and BMS wins ramp, kind of, a, what the timeline looks there and then what we could see for a margin impact? I guess when would we start to see sort of a noticeable margin impact within that auto business?

Even as I talk about infotainment, we still scratch the surface. We just start to periphery and as we just went through the auto business, the deep dive in the auto segments and we're just starting that. Even in those – in the infotainment. And for next couple of years, and we have all these products in designing such as the lighting, including headlights and also as Bernie said earlier, the body controls (19:04) models and any kind of moving pieces in a car. We have electronic control and we have those product design. In ADAS, I see it in three years out and all these activities and we have to pick and choose which product we want to do and we just don't have enough people and our name is out, our product reputation is out and we are proven to be a quality supply. And so the margin will stay the same as now or even be higher. Rick Schafer - Oppenheimer & Co., Inc.: Got it. Thanks. And maybe switching gears to e-commerce. I know it's something that I think a lot of people care about with you guys. Maybe start with any customer feedback or what the feedback has been from customers so far. I know you've talked about adding hundreds of customers there. I know you've also talked about I believe first revenues or material revenues sort of in 2020. I guess I'm curious, do smaller customers that e-commerce would be targeting, I mean do they need to go through a full call, like some of your more established larger customers? And I guess what I'm getting at is could we see revenues in e-commerce kind of pull forward? Could we see those start to hit before 2020?

Very possible, particularly those are smaller customers in industrial shops. They buy 10,000 to 20,000 units a year. And those are the ones – those are the customers in a – if we have – if we prove to be a quality supply, and they will stay with us for years and so those ones just starting now. So in terms of how their feedback is, so far our website still – it's not – we still have a lot more to do and particularly in the e-commerce market segments and how do we do digital marketing and we start to do it this year and early next year. You will see some significant changes. In terms of the current feedback, so far we hand them a floppy disk and they download it – almost every one of them, they're very happy. They want to see more these type of products and, well, I can't say every one of them and we have in recent months we gain a few, more than a few hundred customers and most of them said they wanted this kind of a product. Rick Schafer - Oppenheimer & Co., Inc.: And have you seen any competitive response from some of the larger HPA guys?

I think (22:37) we address the very segment in the market and we don't see any other players and that they do a similar thing as we do. Rick Schafer - Oppenheimer & Co., Inc.: Okay, thanks a lot, Michael. Thanks.

Thank you. Our next question comes from Quinn Bolton with Needham. Your line is now open. Quinn Bolton - Needham & Co. LLC: Hi, guys. Congratulations again on the very steady execution. Michael, Bernie, just wanted to sort of address, I guess one of the biggest investor fears I hear is kind of the order rates declining in China region. Can you give us any sense whether those order rates which sound like they started to decline late summer, whether that stabilized or are they still sort of on a downward trend and maybe just address the sort of where you are in terms of starting backlog looking into the fourth quarter of 2018, I think the last few quarters you'd gotten in to the quarter with nearly 100% of plan in backlog and then maybe a couple of product follow-ups? Thanks.

Sure. I think that you can see from the Q3 numbers that, and again the comments that we referenced that in the Greater China market that we did see a downturn in demand, particularly for consumer and so as a result of that, we are sort of monitoring to see if that branches out into our other end markets or if there are any changes in ordering pattern. You referenced also our last three quarters as far as what our experience has been with backlog going into the quarter, and in fact what we've seen in this quarter is that we've sort of returned to a more normalized level where we're not at the accelerated pattern that we've been experiencing previously but is really again return to a more normalized backlog for this time in the quarter. So it's something that we have to continue to monitor and certainly as there are different developments, we have demonstrated the ability to respond to that. But I think the thing that is most encouraging for us is that the targeted areas that we focused on, again the automotive, the computing and storage and the industrial, where they have long ordering visibility that those remain very solid and that we're just seeing gains that are significantly better than market. Quinn Bolton - Needham & Co. LLC: Great. And then maybe Michael, could you just address, you know, as we look into the end of 2018 and 2019, Intel will be launching their Cascade Lake platform by the end of the year, and then the new Whitley or Cooper Lake platform, maybe second half of 2019. I know Pearly (25:50) was a big uptick for you in terms of server content. How do you feel about your position with Cascade Lake and Whitley or Cooper Lake over the next 12 months?

I think that we – I expected that I think we grow just – we don't expect it to have anything different, again, in all the designing activity and all the new product release and we expected that same as the last couple of quarters and I think, we even grow faster. Then most of revenue in this world in the next 2019, all the way through 2022. Quinn Bolton - Needham & Co. LLC: So a steady – sort of a steady ramp in server power management over that 2019 to 2022 timeframe?

Yes. And the others in a similar way rate of before. Quinn Bolton - Needham & Co. LLC: Got it. Okay. Thank you.

Quinn? Quinn Bolton - Needham & Co. LLC: Oh, go ahead, Bernie.

No. I was going to say that what you were referencing is that Intel has been adjusting their product release schedule around a couple of different issues. And obviously, that's something we need to adapt to. We don't see it as a negative to or an impediment to the growth that Michael is referring to.

I care less about couple of... Quinn Bolton - Needham & Co. LLC: Yes.

...plus/minus, a couple of quarters. Quinn Bolton - Needham & Co. LLC: Yes.

And that's out of our controls but the direction of growth and we cover not only from traditional servers, all these new AR systems and the new type of servers, we cover all of them. Quinn Bolton - Needham & Co. LLC: Great. Thank you.

Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Hi guys. Congrats on the resultant guide in this tough environment. Just wanted to get into the inventory in the channel side and dovetail that into the backlog question that was asked a bit ago here. Well, Bernie you said that the backlog coverage has returned to normal. Over the course of this year, correct me if I'm wrong, but have you guys been shipping to the elevated backlog? Have you been controlling it? And where does channel inventory stand today?

Sure. So, in the reference that you're talking to is between Q1 and Q2 that we'd actually had a decline in terms of channel inventory, in terms of days and as we look ahead here both as far as how we finished Q3 and in Q4, a lot of the sales commitments that we have for both quarters are related to commitments that were made upwards of four to six months ago. And so, we are continuing to deliver against that but with the amount of uncertainty that is in the market, the timing of when that gets drawn from the channel is a little bit changed. And so, we went up a little bit in Q3. And I don't know, I don't have a forecast for how Q4 is looking, whether they'll go up or down a little bit. But again it's something that we have to continue to monitor.

I guess similarly to that, as the backlog falls, the fear people have for the whole market and companies like yourself is, what goes from 100% coverage plus to something that's normal, then the next step is a further step down. I know you guys have a great secular trend over the course of a number of years, but how do you guys mitigate that risk as we look into say the first half of next year?

Yeah, okay. The inventories (30:09) questions now, Ross. We have a lot of growth in the new market segments and it changes the pattern how we do inventories in auto, industrials and telecom. Now the 5G networks, although the revenue is small they'll start to ramping and also the – as well as the data centers and the cloud computings. We really need a lot of inventory to cover the ramp. And regarding all these traditional high volume business and those businesses we can go in or out within half years, so we're not worried about the inventory.

So we're basically prepared to be able to service the targeted markets and we believe that as you look at the first half of 2019 that they are less impacted by the price sensitivities that might occur as a result of the tariffs or geopolitical trade policies. And then as Michael just said, that on the areas that are more affected, we have the ability to course correct and as we demonstrated in Q3 even within the quarter, to be able to achieve our revenue goals.

Yes, high inventory, I will say again is my favorite now, okay, high inventory in a company like the MPS, we have to build a reputation, regardless of the condition we'll ship and we will ship our product and that we are – we're the newcomer. We have a record of reliability as well as a continuation of delivery. We never have that kind of problem. Any one glitch that caused a lot more problems, a much bigger market cap hit than a few million dollars being a few days of inventory.

Okay. I guess as my last question, as you guys look back to the last cycle and kind of late 2015 and early 2016, there was barely a blip for MPS, you still in 2016 grew I think 16%, 17% year-over-year way above the analog market as a whole. If you just compare and contrast the positioning of MPS today versus what it was looking like back three years ago, can you just walk through some of the puts and takes as you see it?

Sure. I think that obviously with all of the new product releases that we've had that really started to ramp beginning in the second half of 2017 and now we are in full swing. We have a much different portfolio that we're able to manage. And so, from that regard, I think that the diversification both in terms of products and markets and geographies, allows us an awful lot of flexibility that we didn't have back at the second half of 2015. Having said that, I would hate to try and draw a parallel between 2015, which ended up being a rather short-term and pretty much an issue specific to the semiconductor industry and what we're observing today. I don't think that people have enough visibility or confidence as to how long this current environment might last.

Great. Congrats, guys. Thank you.

Thank you.

Thank you.

Thank you. Our next question comes from William Stein with SunTrust. Your line is now open.

Great. Thanks for taking my question. I just want to make sure I understand the sort of the narrative around end markets and demand trends. So consumer came in light as customers backed off orders in that end market that you think is attributable to tariffs. But you made up more than the difference in the comms' end market. I want to make sure I have that right and also understand better about what drove that upside in comms, is that something that perhaps if the consumer end market would have been fine, that you would have posted meaningful upside to the quarter or was this something that sort of came and surprised you to the upside or was there a lot of extra work that it took to drive this to allow you to deliver good results as you usually do? Helping me understand that would be great. Thank you.

Thanks, Will. There's a couple of observations. If you look at consumer sequentially from Q2 to Q3, this was a lower increase than we historically experience, and it was fairly broad-based as far as the number of areas that were impacted. Interestingly that's in traditional consumer or high value consumer end markets, we actually performed pretty well. And then as far as the ability to course correct within a quarter even with relatively short lead time, we play opportunistically in a lot of different markets. And historically, we have not taken on the comms business. This is referring to our legacy gateway and router business because it tends to be lower margin. And in this quarter, we were able to really just pivot. So it was not a lot of effort in order to be able to accept opportunities that we have an opportunity to quote on and bring that in within the quarter. So as I look ahead, I think the most encouraging thing is that we can have that opportunity. We see the comms business is actually lining up in very good shape for Q4. But I think one of the most encouraging things that might have been a slight upside surprise is that we started to see some very initial sales on the 5G side.

The comm business as in the last few quarters, we are flat or slightly down. And so we have refresh, okay, and we're getting some market shares. But there's a significant portion of it, we see the 5G network and start to ramp. And those product we're designing back in a couple of years ago.

A follow up, if I can. When people ask about what's perhaps something that investors don't understand about Monolithic, one of the answers I've heard you give is that well consensus for next year is up 16% and we think long-term growth is at 20%. Would you still endorse a 20% growth number for 2019 or would you think that's too optimistic given the geopolitical and other risks?

I think that – we will clearly beat whatever your forecast is for the next year industrial growth, okay. We will beat it by 15 points or higher.

I think that when we look at next year as far as our confidence in 20%, that remains very consistent and solid. Again, one of the things that we want to be known for is our consistency of execution. And that, we can support that again with the amount of visibility we have particularly in these targeted areas that have the longer design cycles and longer ordering patterns. Now having said that, we're not immune to the macro and certainly in the first half of the year, we feel reasonably confident that we have the shots on goal to be successful. We don't have clear visibility on how that's going to play out in the early stages of the year.

Okay. Thanks.

Thank you. Our next question comes from Tore Svanberg with Stifel. Your line is now open. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: Yes. Thank you and congratulations on the record operating margin. A few questions here. So, first of all, I know you have some operations in China and certainly, your supply chain is there, any changes to that strategy at all? I mean, I know it's really early days, right? But just given some of the macro political turmoil, any changes to the thinking at all about your operations in China at this point?

When we have diversified, and we have a lot of resources from – in China. But we started – two years ago we started diversify in the different political regions. And in terms of R&D, mostly on these development jobs and all these other geopolitical issues and that is out of our controls, if we see the one region down, the other region is up, okay, and that's the area we really want to focus on and diversify on our presence. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: Okay. Very good.

And, Tore – go ahead. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: No, no, go ahead. Finish the answer, yeah.

Yeah, I was just going to say that on the supply chain issues right now, Michael's exactly right. We don't have control or visibility as far as what the next steps in the process. And again, to the extent that we diversify in the end markets that we sell into and the different customers we have, we would probably adapt similar profile longer term for our supply chain as well. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: That's very fair. And a question on 5G. So you're starting to see some revenue contribution there. Is that power management that's based on Intelli-phase or QSMod just like in the data center market or are these different types of power products?

And other types of product in a different network segment. And as well, it's what you said that it is based on the Intelli-phase. And those products in a high-powered computing segment hub of 5G. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: Okay. Very good. And I think you may have already answered this question, Michael, but as far as your lead times, since you obviously are so focused on making sure the deliveries are there, I assume your lead times are still very stable. They were stable in the first half. They're stable now?

Yes. The lead times are very stable. Bernie can add on, okay.

Yeah. We've had no change in the lead times in all phases of production, whether it's wafer packaging test. Everything is going very consistently. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: Okay. Very good. Just one last question, you generated almost $50 million in free cash flow this quarter. I mean, I know sort of your approach to capital management, but just kind of based on where the stock price is, any thought about how to put that free cash flow to use?

Well, either we're going to increase the dividend or looking for some technology company to acquire. So, I'm not going to buy another company for revenue increase. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: Sounds good. Congratulations again on all the record results this quarter. Thank you.

Thank you.

Thank you. Our next question comes from Alessandra Vecchi with William Blair. Your line is now open. Alessandra Vecchi - William Blair & Co. LLC: Hi guys, congratulations on a great quarter.

Thanks, Alex. Alessandra Vecchi - William Blair & Co. LLC: Just to go in a little bit more on the consumer side and the weakness you've been seeing there, I think historically you guys have said that of your consumer revenue about 50% of it is traditional, I think 30% of it's high value and 20% of it's gaming. Are you seeing the weakness in gaming as well or is it only in that 50% traditional bucket, and if it's in the traditional bucket, should we consider the whole 50% weak or is only parts of that? Just sort of trying to quantify where consumer could go from here given that seems to be the one bucket that's the most at risk in the short term.

Yeah, I hate to say that in the last couple of times when we talked about gaming, our customer is not happy, okay. And one time I said it wasn't my favorite topic and our customer heard that too so really it's my – there is a lot of money to be made with 100% of support. But here is the – for that we got and we see high volumes in – we're not talking about what kind of gaming, okay. And then we see a bit softness in these high volume ones, and other than that and we see the connected devices or the IoT if you will, okay. And the variety of other gadgets and we see in our designing, we see the market demand still very similar. Alessandra Vecchi - William Blair & Co. LLC: Okay. And then similarly just in terms of the Q4, you guys traditionally don't give us any sort of granularity on the directional segment or the direction of the different segments. But if you had to save on the segment from Q4, what's strongest to weakest. Should we still think about computing and storage as the strongest and then maybe industrial and optical or how has that shifted?

Yeah, again, I think if you look at the results, clearly what we saw in computing and storage, automotive, industrial, those weren't onetime drivers. This is all about the secular expansion that we've been discussing now for several years and we're now seeing the results come in full term. And so I don't see anything in the outlook that would indicate a diminution of those growth rates. And then as far as how we manage the margin with the consumer, that's something that we're adept at being able to do. So I think that as we look at Q4, we feel very confident not just in the number in total, but also the individual markets as far as we're going to source that growth. Alessandra Vecchi - William Blair & Co. LLC: Understand. That's very helpful. Okay. I think that's it for me.

Thanks, Alex.

Thank you.

Thank you. Our next question comes from Chris Caso with Raymond James. Your line is now open. Chris Caso - Raymond James & Associates, Inc.: Yes, thank you. Just first question with regard to inventory levels. Can you talk about what your visibility is both to the distribution channel and to OEM inventories? And I know that through the year you guys have been taking steps to try to discourage customers, prevent customers from building excess inventory. Could you speak to some of those actions and your level of visibility and confidence in the inventory levels?

Yeah, my favorite question. Inventories, I tried to convince you all of you guys, okay, it's good for us to increase. And now I think we are pretty normal.

And then as far as inventory in the channels, again, I'd just refer to an earlier response is that, in the prior three quarters we had experienced a pattern of over ordering and this is reflected in higher than normal historic backlog levels at certain points in the quarter. And while we've seen a moderation of that, that is changed because there is a certain level of uncertainty, and we want to make sure that we're really satisfying real demand as opposed to creating a problem for us down the road. Now, having said that, with the channel and we did a very thorough assessment of it at the end of Q3 as well as what we expect to be the sell through in Q4. And that all got taken into account as we gave our guidance for Q4 in total. So right now, we were feeling that we're getting timely feedback and we're managing it accordingly. Chris Caso - Raymond James & Associates, Inc.: All right, great. And I guess just following on from that. Could you talk about what you consider to be normal seasonal patterns in Q1? And I know there's not a lot of visibility right now and that you're probably doing a lot of work on that. But are there any aspects that we should take into consideration with regard to Q1 based on what you're seeing right now?

Yeah. We only provide guidance one quarter ahead. And so, I don't want to overreach with any comment. But if you traditionally looked at with the exception of last year which was an unusual set of circumstances because we had greenfield opportunities particularly in the compute and storage that were introduced, that we've traditionally had a step down from Q4 to Q1 of between 3% to 4%. Chris Caso - Raymond James & Associates, Inc.: Got it. Okay. Thank you.

Thank you. And we do have follow up from Quinn Bolton with Needham. Your line is now open. Quinn Bolton - Needham & Co. LLC: Hey. Bernie, you kind of addressed it in answering Chris' question, but just I guess I wanted to ask specifically, as you look into your distribution channels. I think there's especially in uncertain environments, a tendency for the distributors to reduce their inventories into calendar year-end. And so I guess when you look at your fourth quarter forecast, you said you took into account sort of the supply chain in the disti channel. Are you expecting them to reduce their days of inventory in the fourth quarter? Or do you expect them to sort of keep a constant days inventory on hand, any guidance you could provide us would be helpful?

Yeah, the formula sort of works that the channel tries to reduce the dollar value of inventory in Q4. But the denominator as far as the quarterly revenue in Q4 is less than Q3. So, my expectation is that the dollars will be at or below the Q3 level and the days may be at or maybe even a little above in Q4 and that's really a arithmetic exercise rather than anything that we're concerned about. Quinn Bolton - Needham & Co. LLC: Okay. Thank you.

Thank you.

Thank you. I show no further questions in queue so I'd like to turn the conference back over to Bernie Blegen for closing remarks.

Thank you. I'd like to thank you all for joining us for this conference call. And I look forward to talking to you again in our fourth quarter conference call, which will likely be in February. Thank you and have a nice day.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.