Monolithic Power Systems Reports Another Solid Quarter

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We are buyers of Monolithic Power as the company continues to prove to be one of the best product-cycle stories in the semiconductor industry. The company delivered yet another solid quarter and provided an outlook above Street expectations. Second-quarter pro forma EPS of $0.37 were $0.02 ahead of the consensus. Revenue of $68.4 million exceeded our estimate of $67.2 million and the Street consensus of $67.0 million. The company guided to third-quarter revenue of $76 million to $80 million (up 14% sequentially at the midpoint), above the consensus estimate of $73.8 million heading into the quarter.

The highlight of the quarter was strength in the industrial segment (up 52% year-over-year) because of increased demand for smart meter and other industrial applications as well as the consumer segment (up 19% yearover- year) as a result of strong demand for TVs and gaming consoles. From our point of view, the company’s continued ability to execute to (or above) Street expectations validates not only the healthy demand for its products, but also the strength of its product cycles. In our opinion, Monolithic Power is one of the best product-cycle stories in the semiconductor industry, and over the next three years, the company has the ability to double its revenue as it settles back to its historical market share of 8% to 10%.

Monolithic Power shares are trading at 24 times our 2015 EPS estimate. As we progress through 2014, we believe that Monolithic Power will continue to significantly outgrow the sleepy analog market. With sales moving from highly volatile and price-sensitive consumer applications to longer-product-cycle markets that value Monolithic Power’s technology, we believe there are tailwinds on the margin front. We maintain our Outperform rating. Revenue of $68.4 million increased 14% sequentially and exceeded the midpoint of management’s previously issued guidance by $1.4 million. Strength in the industrial segment (17.7% of sales and up 52% year-over-year) was driven by strong demand for smart meter and other industrial applications, while the consumer segment (41.6% of sales and up 19% year-over-year) performed well as a result of higher demand for TV and gaming.

Storage and computing (15.8% of sales and down 1% year-over-year) was the only segment to decline from the year-ago period, because of an SSD design win ramping down; however, management is positive on this segment’s outlook for the third quarter. Pro forma gross margin of 54.5% was up 70 basis points sequentially. Monolithic Power reported pro forma operating expenses of $21.8 million, up 4% from the year-ago period. The company reported pro forma operating margin of 22.7%, a significant improvement from 17.5% a year ago. The company continues to see steady gross margin expansion as it diversifies its product mix into different endmarkets that are willing to pay a premium for their technology.

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