Monolithic Power Systems (MPWR) Q4 2016 Results - Earnings Call Transcript

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Monolithic Power Systems, Inc. (NASDAQ:MPWR) Q4 2016 Earnings Call February 9, 2017 5:00 PM ET

Executives

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Michael R. Hsing - Monolithic Power Systems, Inc.

Analysts

Quinn Bolton - Needham & Co. LLC

Vincent Celentano - Raymond James & Associates, Inc.

Rick Schafer - Oppenheimer & Co., Inc.

Matt Diamond - Deutsche Bank Securities, Inc.

Anil Kumar Doradla - William Blair & Co. LLC

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems' Q4 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Bernie Blegen, Chief Financial Officer. You may begin.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Good afternoon, and welcome to the fourth quarter and fiscal year 2016 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 Q4 earnings release and in our SEC filings, including our Form 10-K filed on February 29, 2016, and Form 10-Q filed on November 3, 2016, 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 will 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 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 Q4 releases for 2015 and 2016, 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's begin with a top-level summary of 2016 revenue. Our full-year revenue was $388.7 million, up 16.7% from the $333.1 million MPS reported for 2015. This year-over-year growth compared favorably with the analog industry which SIA estimates grew 5.8% over the prior year.

On a GAAP basis, full-year 2016 gross margin of 54.3% expanded 20 basis points from the prior year. GAAP operating income grew to $54.4 million, representing a 32.6% increase over 2015. Finally, MPS recorded GAAP EPS of $1.26.

On a non-GAAP basis, gross margin expanded 20 basis points from the prior year to 55.2%. Non-GAAP operating income of $102.6 million grew 25.6% over 2015. MPS achieved record non-GAAP full-year earnings of $2.30 per share, 21.7% higher than 2015.

Diving into year-over-year revenue growth by market segment. Full-year computing and storage revenue was up 42.4% and industrial revenue grew 35.1%. Full-year consumer revenue was up 6.0% over 2015 and communications revenue was essentially flat between years.

Let me speak to highlights by market segment. In computing and storage, full-year 2016 revenue of $80.6 million increased $24.0 million year-over-year, reflecting strong sales growth for cloud computing, SSD storage and high-end PCs. Computing and storage revenue represented 20.7% of MPS's total revenue in 2016.

In the industrial market segment, revenue grew $23.2 million to $89.6 million, fueled by product sales for applications in automotive, security, smart meters and power sources. Industrial revenue as a percentage of total revenue grew to 23.1% in 2016.

Revenue from consumer markets increased to $153.7 million and represented 39.6% of our total revenue. The year-over-year revenue increase was driven primarily by gains in high-value consumer markets, including home appliances and battery management systems.

While MPS has consistently achieved high rates of revenue growth, we believe our technology lead is widening, and we are in the early stages of expanding our addressable market. With increasing visibility into long-term design engagements, we believe MPS is uniquely positioned to deliver sustainable, profitable growth.

As a case in point, with our superior digital power solutions, we continue to successfully win and gain share for high-end, space-limited notebook solutions. As Intel transitions to the Purley server cycle later this year, we believe MPS' energy-efficient solutions positions us for growth in cloud-based data centers.

In gaming, our QS Mod solutions are being adopted by a major gaming OEM for its high-end console. In addition, we believe the significant automotive design win momentum experienced during the past four years will continue to drive industrial revenue growth.

Finally, we have completed development of a high-voltage SOI process technology, which will enable us to grow into a number of new market segments. In the next few quarters, we will be introducing a number of products utilizing this technology for the medical market.

Switching to Q4, MPS had a record fourth quarter with revenue of $103.6 million, 2.7% lower than revenue generated in the prior quarter, but 19.2% higher than the comparable quarter in 2015. By market segment, revenue for computing and storage grew 60.8%, and industrial revenue rose 40.5% over the same period of 2015. Quarterly revenue for the communications segment increased 7.6% over the prior-year period, while consumer revenue was essentially flat with the prior-year period.

GAAP gross margin was 54.5%, 10 basis points higher than the prior quarter of 2016 and 50 basis points higher than the fourth quarter of 2015. Our GAAP operating income was $17.5 million, compared to $15.0 million reported in the prior quarter of 2016 and $11.8 million reported in the fourth quarter of 2015.

For the fourth quarter of 2016, non-GAAP gross margin was 55.4%, 10 basis points higher than the prior quarter of 2016 and 40 basis points higher than the fourth quarter from a year ago. Our non-GAAP operating income was $29.0 million, compared to the $29.4 million reported in the prior quarter and the $22.5 million reported in the fourth quarter of 2015.

Let's review our operating expenses. Our GAAP operating expenses were $39.0 million in the fourth quarter, compared with $42.9 million in the third quarter of 2016. Our non-GAAP fourth quarter 2016 operating expenses were $28.4 million, down from the $29.4 million we spent in the third quarter and up from the $25.3 million reported in the fourth quarter of 2015.

On both a GAAP and on a non-GAAP basis, fourth quarter litigation expenses represented a $321,000 net credit, as a portion of a $3 million IP settlement was recorded as income. The remainder of this settlement will be recorded as income over the next several years.

The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters being discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan, as well as a write-off of contingent consideration recorded in the fourth quarter of 2015. Stock comp expense was $10.4 million in the fourth quarter of 2016, compared with $13.1 million in the prior quarter of 2016.

Switching to the bottom line. Q4 GAAP net income was $16.6 million or $0.39 per fully diluted share, compared with $0.34 per share in the previous quarter of 2016 and $0.24 per share in the fourth quarter of 2015. Q4 non-GAAP net income was $27.5 million or $0.65 per fully diluted share, compared with $0.66 per share in the previous quarter of 2016 and $0.51 per share in the fourth quarter of 2015.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $273.6 million at the end of the fourth quarter of 2016, above the $264.4 million at the end of the prior quarter of 2016. For the full-year 2016, MPS generated operating cash flow of about $107.8 million and for Q4 2016 operating cash flow was $31.0 million. Cash proceeds from employee stock option exercises contributed about $1.3 million for all of 2016 and $153,000 in Q4. These cash flows were partially offset by $8.1 million to purchase capital equipment in Q4 of 2016.

Accounts receivable ended the fourth quarter at $34.2 million or 30 days of sales outstanding, which was slightly higher than the $33.4 million or 28 days reported at the end of the prior quarter of 2016. This modest increase was due to a higher proportion of the quarter's sales being recorded in the third month of Q4 compared with the prior quarter.

Fourth quarter 2016 days sales outstanding were 2 days lower than the 30 days posted in the fourth quarter of 2015. Our internal inventories at the end of the fourth quarter of 2016 were $71.5 million, up from the $70.7 million at the end of the prior quarter. Days of inventory increased to 138 days at the end of Q4 from the 133 days at the end of the third quarter of 2016.

I would like to turn to our outlook for the first quarter of 2017. We are forecasting Q1 revenue in the range of $98 million to $102 million. We also expect the following: GAAP gross margin in the range of 53.8% to 54.8%; non-GAAP gross margin in the range of 54.8% to 55.8%; total stock-based compensation expense of $12.1 million to $14.1 million, including approximately $400,000 that would be charged to cost of goods sold; litigation expenses of $150,000 to $250,000; non-GAAP R&D and SG&A expenses to be in the range of $28.3 million to $30.3 million, this estimate excludes stock compensation and litigation expenses; other income of $300,000 to $400,000 before foreign currency exchange, gains or losses; fully diluted shares to be in the range of 42.8 million to 43.8 million shares before any share buyback.

In conclusion, in the last several years, MPS has focused on investing in new products and targeted markets. Starting this year, we believe MPS will begin to benefit from those investments, which will translate to strong revenue growth in 2018 and beyond.

I'll now open the microphone for questions.

Question-and-Answer Session

Operator

And our first question comes from Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton - Needham & Co. LLC

Hey, guys. Congratulations on the nice results and outlook. Wanted to start, Michael and Bernie, on the notebook business. We just had the formal launch of Kaby Lake at CES, and so wondering if you could sort of give us your outlook now that that processor formally launched.

And a sort of related question, Intel I think is planning yet another fourth generation – I'm sorry, 14-nanometer processor to be introduced in the second half of the year. I think with Kaby Lake, you guys picked up market share. As we look forward to that eighth-generation core processor Intel was talking about introducing towards the end of the year, do you think you might be poised for additional share gains on those client platforms?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Sure. Quinn, thank you very much for the question. So, as we look at 2017 and 2018, certainly going into the Kaby Lake, we've benefited significantly by having the reference design, and we've been able to see a lot of very good traction for our power solutions, because, as we mentioned in the script, of the overall efficiency and the small form factor. So, as we look at the current year, we continue to see sort of a similar growth rate as we've experienced in the previous generation of Intel products.

Now, as we look out to the product, which I believe you're referring to of Intel's next generation Cannonlake, which I believe may come out at the end of this year or in the early part of 2018, we go from not only being a reference design, but also we have been designed into their core product, which is a significant enhancement over our previous position. So we remain very optimistic in that relationship for the high-end notebooks.

Michael R. Hsing - Monolithic Power Systems, Inc.

Quinn, this is Michael Hsing. Let me add on. I'm very aware, like any other investors, that notebook is associated with lower margins. And however, we develop those based on the QS Mod, that technology. We develop those product and these are very unique ones. And we're only focused on size constraint, and that requires a very – notebook has a longer run time, which is very highly efficient.

And also, it's a time to market because our product is very easy to use. So we only focus on those high-end market. As I see the notebook market segment, it's only one of the product line and we're not really concentrated on it. We really focus on a balanced growth in the overall MPS.

Quinn Bolton - Needham & Co. LLC

Thanks for the additional color. I sort of wanted to move on to the new process technology that you just announced on the call, the high-voltage SOI process. And, Bernie, I think in the script you mentioned some medical products.

I guess I would have thought that there could be applications for low-power SOI in other perhaps industrial or perhaps even comm, other related markets. So wondering is there a particular application or use case within medical? Or do you see that really is just the first market and you've got opportunities well beyond the medical market for that SOI process?

Michael R. Hsing - Monolithic Power Systems, Inc.

You mentioned exactly right. There are other market segments that MPS couldn't – within the industrials, even autos and medicals, and for some of the product segments, we couldn't adjust it. And we think long and hard that's the high-voltage SOI is the best, it's the best way. So we took us a couple of years to develop that technology, and the first few products will be in the medical market segment.

Quinn Bolton - Needham & Co. LLC

And, Michael, is that with one of the existing four foundries? Or will that be a process that require the new foundry engagement?

Michael R. Hsing - Monolithic Power Systems, Inc.

We – both actually. This product is in the new foundry, yeah.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

New foundry.

Quinn Bolton - Needham & Co. LLC

Okay. Okay. Great. Thank you.

Operator

Thank you. Our next question comes from Steven Smigie with Raymond James. Your line is open.

Vincent Celentano - Raymond James & Associates, Inc.

Thanks. This is Vince Celentano on for Steve. So, right now infotainment is your biggest part of revenue within auto. Is that more so due to Monolithic deciding that this is the area that you're best positioned to take share in? Or is it more of a matter of infotainment having the highest content opportunity? If it's the latter, what would you say are your next largest content opportunities within auto?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

There are a number of opportunities that were designed into in automotive. I think that our initial footprint, when we started out in the area four years ago, was definitely in the infotainment. And now we've moved into many of the lighting systems, a lot of the systems that are either in the body or designed into sensors.

We're into some of the light ADOS areas. So I don't think that we're necessarily restricted in any way, and that I think we have a broad set of offerings for automotive. And, as we referenced, we've had design wins and a lot of momentum that we expect to continue out into 2018 and 2019.

Vincent Celentano - Raymond James & Associates, Inc.

Okay. Thanks. And last quarter you mentioned that server was 10% to 15% of computing in 2015. Is there a way you can give us an update on what 2016 was, and what your expectations are for growth in 2017?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

So I think that, with server, we feel very positive and optimistic. And that optimism is due to a lot of the reference designs that we have, in addition to the fact that, in the next generation Purley, we are going to be not just increasing the number of OEMs that we'll be working with, but also we'll be increasing the dollar content of going from something in the mid-teens up to the high $40 on a per-server basis.

So we see, as the rollout occurs here in the second half of the year, that we should get some good momentum. And that we really should see some sales gains occurring in the early part of 2018.

Vincent Celentano - Raymond James & Associates, Inc.

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from Rick Schafer with Oppenheimer. Your line is open.

Rick Schafer - Oppenheimer & Co., Inc.

Yeah. Thanks. I'll add my congratulations, guys. Maybe a quick follow-up on server since we were just talking about it. Could you maybe walk us through or talk about the competitive landscape and what kind of visibility you guys have regarding market share on Purley, specifically later this year and as we look into 2018?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Well, I think to begin with, on the servers, this is an area where we had essentially zero market share as recent as a couple of years ago. So this is almost a continuing greenfield opportunity for us. Obviously, there's a couple of very dominant players in this market who are very well established as far as their relationships, as well as the technology.

The feedback that we've been receiving, particularly in the area of cloud computing that we're most interested in being able to take advantage of, has been very positive. We think that we have a unique offering that sufficiently differentiates ourself in order to be able to get the design win and also to command very attractive ASPs and margins.

Rick Schafer - Oppenheimer & Co., Inc.

Okay. So, no hints on are there any visibility on what kind of market share you might kind of have there coming?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

I think in a earlier call that we allowed for the potential of being between 10% and 20%. And again, I think that's a long-term opportunity and what we want to do is, remember, there's well-established competitors here and that we're starting from a very small space.

Rick Schafer - Oppenheimer & Co., Inc.

Okay. Okay.

Michael R. Hsing - Monolithic Power Systems, Inc.

Yeah. Let me add something. Okay. And we can divide it into what the market share means, okay? And you see our servers are pretty steady growth and we will see the acceleration end of this year and next year. So which are these areas, okay? And a few years ago, our point of below (25:25) product penetrated into server. Now it's widely adopted and across the board.

And two years ago, we introduced the electronic fuse and now became almost the sole source for some of the first-tier server makers. And from a core power, we penetrated, in the last couple years, we penetrated these second-tier server makers and now we're growing the revenues. And also, last year we penetrated a few first-tiers.

However, we emphasize not on the bulk of the volumes and for a common footprint. We're not participate in that because those are lower margin product. We only concentrate on the highly efficient, high frequency. So those servers require that. And we believe in the longer term, that's the market trend. And we will get a majority (26:41) we will get a high percentage of our market shares in 2018 and in 2019.

Rick Schafer - Oppenheimer & Co., Inc.

Got it. That's really helpful, Michael. And then maybe as a follow-up, any update – I didn't hear you guys mention it in your prepared remarks, any update on the timing of your new website launch and where we are now with your new e-commerce initiative? And maybe as part of that answer, is there any way to help us quantify what that dollar opportunity or what that potential could be there, and what that ramp might look like?

Michael R. Hsing - Monolithic Power Systems, Inc.

The programmable modules we're launching already. And you will see our – we're still selling through the traditional channels. However, the new website was delayed a little bit. But it will be either in March or in April, we will see the new website.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

And if I could add to this, there's sort of a continuum here where what we're beginning to see is good traction with regard to our pre-design modules where they're generating a good amount of money, a good amount of revenue on a quarterly basis. And then what we expect to do is introduce the new website, and that will be how we'll launch the field programmable modules as well. So I think that everything is tracking exactly as we had hoped it would.

Rick Schafer - Oppenheimer & Co., Inc.

Got it. And if I could just sneak one last one in. Just any update that you guys could give us on the Intersil lawsuit would be great. Thanks a lot.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Sure.

Michael R. Hsing - Monolithic Power Systems, Inc.

We can't comment too much, okay, because that's in the courtroom in the legal proceedings. And that's the only thing we said, okay, MPS will defend vigorously our IP.

Rick Schafer - Oppenheimer & Co., Inc.

Okay. Thank you, guys.

Operator

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

Matt Diamond - Deutsche Bank Securities, Inc.

Hey, guys. This is actually Matt Diamond on Ross's behalf. I'll echo the congrats on the solid results. My question's been alluded to by some previous callers but I just want to ask it a little more directly. There was some talk in the script about the visibility into longer-term design engagements, one of which being server.

I'm curious if you could give us the rough timing of the magnitude of those random – the high-end notebook solutions were mentioned, the gaming with QS Mod, and more generally the auto design win momentum. Is there any way to roughly time when that acceleration should happen? Or is it just the general framework that we should be thinking about, or thinking about that framework in general?

Michael R. Hsing - Monolithic Power Systems, Inc.

We think in the second half of this year, in the server side the revenue will ramp, all the designing activity. Even though the core power, we still will gain a significant amount of market shares, okay? And those may not be in mainstreams, but we have in other – I'm talking about other first tiers. But it's a giant step for MPS.

Matt Diamond - Deutsche Bank Securities, Inc.

And the timing of gaming and auto, should we think of that then the same way as in the second half? Or would the timing differ?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Well, I think as far as automotive, that's a continuation of the momentum that we've been generating in each of the last three prior years. Whereas gaming, I think that we have some new opportunities that will be additive and we should look for those to start to kick-in in Q3 of this year.

Matt Diamond - Deutsche Bank Securities, Inc.

Okay. And on the OpEx front, I know last year was an investment year. Could you give us your initial outlook for spending plans later in 2017? Obviously, we have the 1Q guide, but any initial color on OpEx for the rest of the year would be helpful.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Yeah. So I think you're familiar with what our long-term model is, and we want to grow operating expenses at a rate that is 50% to 60% that of our revenue growth rate. Certainly, in 2016, we've mentioned that we had some excellent opportunities as far as generating new product investments as well as sales and marketing resources, as well as the investment in our fourth fab. And we expect to continue to invest in all three of those initiatives, albeit at a lower rate of growth in 2017. And we do not plan to add head count at the same level as we did in 2016.

Matt Diamond - Deutsche Bank Securities, Inc.

Okay. Thanks so much.

Operator

Thank you. Our next question comes from Anil Doradla from William Blair. Your line is open.

Anil Kumar Doradla - William Blair & Co. LLC

Close enough. It's Doradla. So...

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

I was going to help out.

Anil Kumar Doradla - William Blair & Co. LLC

Michael and Bernie, congrats on my end, too. So, 2017, clearly a very inflection year in some ways, right? You've got, like, these three, four product segments. You talked about the server's second half. You've got the programmable stuff, you've got autos kicking in.

So, when we step back, I think you've given some color, but if you were to sum it up really 2017 in general, it sounds like a pickup in the second half, primarily driven by the server. And how should I be looking at some of the programmable stuff? So, if you can help us understand kind of the objects of first half/second half big picture, that would be great.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Sure. I think just the way you positioned that comment is actually very helpful to understanding the dynamics here. We actually have three, four, five unique opportunities that are coming on-stream in 2017. And when we look at the timing and the order of magnitude for them, I think it's good to be a little bit cautious only because there are certain events that aren't 100% in our control and those that are we have some level of execution risk. So, as we look ahead to 2018, we believe that those elements will all have sorted itself out and that we'll be able to fully capitalize on the – take advantage of these opportunities.

Michael R. Hsing - Monolithic Power Systems, Inc.

Yeah. Let me add on. To me, the 2017 is done. All the designing products, okay, I don't think our customer can change it. And it will take an extraordinary effort to change that. And so when the revenue happens, okay, particularly in the cloud computing, but some of the notebooks, some of the servers and some of the data centers, and these are depending our customers.

And also, the third-party really the product is like Intel's processors. And so to me, these all done within plus or minus of a few months. So, related to other market segments like auto, this is very steady-state growth. We seen a lot more designing activities in the last couple of years. That all will translate into revenues second half of 2017 and 2018. And at the same time, don't forget we still have a high-end consumer business. IC and IoT will grow this year tremendously.

Anil Kumar Doradla - William Blair & Co. LLC

Right. So sounds like from the investment community point of view, I think we should be focused on the server opportunity in 2017. That seems to be the most perhaps material delta as the year progresses.

Michael R. Hsing - Monolithic Power Systems, Inc.

Frankly, I see very similar growth rate.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Yeah.

Michael R. Hsing - Monolithic Power Systems, Inc.

And the company designed it that way, very balanced growth, and with growth in the high rate.

Anil Kumar Doradla - William Blair & Co. LLC

Right. Okay.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Yeah. I'd have to agree with Michael there that I think that you'd be limiting the message to focus solely on servers. I mean we're, again, very excited about that opportunity, but not at the expense of what we're seeing with the high-end notebooks, what we're seeing with the gaming opportunity. And Michael brought to light what we're seeing with appliances through the Internet of Things and high-end consumer.

Anil Kumar Doradla - William Blair & Co. LLC

Okay. Great. And finally, Bernie, your guidance of 54.8% to 55.8% on the gross margin front similar to what you guided, I think, in the December quarter. But given that the mix and the mix shift seems to be moving towards some of these higher margin businesses, is that guidance based on just conservativeness? I mean, I'm thinking that the gross margin should trend upwards as the year goes by.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Yeah. I think that if you look at how we progressed gross margin in 2016, we went up 10 to 20 basis points quarter-over-quarter. So we ended up with gross margin in Q4 that was 40 basis points higher than the year before. And I would expect a similar trend line to occur.

You are right that a lot of the new revenue growth is at higher margins. And we're also seeing some of the investments we made, particularly with the new fab, that those should also generate improvements to gross margin. But the thing that we want to manage first and foremost is very predictable, modest, as I said, 10 to 20 basis points increases in gross margin, and to the extent that we can afford to add in lower margin business to accelerate revenue growth, that's really what our business model is based around.

Anil Kumar Doradla - William Blair & Co. LLC

Great. Thanks a lot, guys.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Okay. Thank you.

Operator

Thank you. And our next question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes. Michael, Bernie, congratulations on another solid growth year. First question is on the high-voltage SOI process. Should we think about the competitive advantage share being similar to some of your other processes, meaning being able to integrate many components? Or are there other elements to the advantage as well?

Michael R. Hsing - Monolithic Power Systems, Inc.

Exactly. And including other components down the road. And we think that this is really a game change, okay? We take a look at the other opportunities and the technology that we targeted. And so we will be able to deliver signal much more cleaner. And also, we integrate a lot more than a silicon technology is capable.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. And my second question is on your module business. So could you just update us where you stand there? And are you in production already on the programmable module products?

Michael R. Hsing - Monolithic Power Systems, Inc.

It is in production now. And sales volumes are very little and just at the initial stage. And these are mostly for industrial applications and also smaller customers, variety of them, and including some of the small customers in the consumer space. And so we really emphasize the website which we'll launch in March or April.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

And I think that there's also a longer-term opportunity in the communications market for the field programmability. So it's sort of an interesting product family where we're trying to encourage more of these low-end, small volume industrial and consumer opportunities, but at the same time we see a longer-term opportunity in the wireless infrastructure for the comms market.

Michael R. Hsing - Monolithic Power Systems, Inc.

Yeah. Forgot about the programmable product for telecom, for the infrastructures. And that we launched a product, and again you can see on the YouTube, you can see on our website, you can parallel all of them from 20 amps to all the way to 1,000 amps. And in the APAC show (40:49) in March, we will demonstrate something like 1,000 amps or 2,000 amps solutions. And those are one of a kind and well, well received among telecom companies.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Okay. And maybe on the topic of communications, it was flat year-over-year. And sort of in the spirit of balanced growth, how should we think about the communications market for you this year? Do you expect some growth? Or will it still maybe lag a little bit some of the other end markets?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

I think, at this point, and again let's talk about the nature of the market, you've got the gateway wireless, which tends to be a little bit low end and has some characteristics that are similar to consumer. And then you have the higher-end network, which, as we were just talking, we believe has great promise for us. We're very committed to that part of the market.

As we are just introducing the products now, and while the feedback has been very positive from the telco companies, it's like any product release, it takes time. And this tends to be a lumpy marketplace where you can – if you win a large customer, you can have a significant order. But the time it takes to win the trust and win the relationship and demonstrate the value of your technology, it makes it a little hard to predict.

So I think the way we've tended to look at the comms market is it can be any quarter plus or minus $1 million, and there will be a point of inflection but it's probably later in 2018.

Michael R. Hsing - Monolithic Power Systems, Inc.

Yes. Very much agree.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yeah. Fair enough. Just one last question. We're hearing about some foundry capacity getting tight. You're obviously expecting another good growth year this year. Do you feel like you have, with all your foundry partners, you have all the capacity in place for another good growth year this year?

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Yes. We've made the investment in order to be able to manage the growth for 2018-2019 and even beyond that. And it's not just on pure capacity, but as we're referencing as far as a partner to help us with the new technology, we feel very, very well-positioned.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. Congrats again. Thank you.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Thank you.

Michael R. Hsing - Monolithic Power Systems, Inc.

Thank you.

Operator

Thank you. And we have a follow-up from Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton - Needham & Co. LLC

Hi, guys. Just wanted to sort of follow up on some of these new product drivers. You've got high-end notebooks ramping nicely through the year. You've got the new game console. You've got Purley power management. A lot of those seem like they're pretty back-end loaded into the second half of the year.

You typically have pretty strong seasonality with the third quarter typically the peak. I guess what I'm trying to get a sense of is do you think that these new opportunities and the timing of those ramps could change seasonal patterns this year and into 2018? Or is it best to sort of think that those products ramp, but probably don't ramp to such a degree that it's going to change your typical seasonal pattern?

Michael R. Hsing - Monolithic Power Systems, Inc.

Yeah. That's a very good question, so that we are also puzzled (44:37). MPS like a trend has a start about four, five years ago, have a transition also like into more diverse market segments. And last year, I hope that we had every quarter's consecutive growth, okay, but we think with a lack of Q4. But Q1, Q2, Q3 and Q4 is shy just a little. And so, obviously, the pattern is changing and what we'll see probably this year is a very similar or even I can hope – I still hope we can have a consecutive quarter-to-quarter growth for four or five quarters in a row.

Quinn Bolton - Needham & Co. LLC

Great. Thank you, Michael.

Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Bernie Blegen for any closing remarks.

Theodore Bernie Blegen - Monolithic Power Systems, Inc.

Great. I would like to thank you all for joining us for this conference call and look forward to talking to you again during our first quarter conference call, which will be most likely at the end of April. Thank you and have a nice day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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