Monolithic Power Systems - Q1 2023

Transcript

Operator (participant)

Welcome everyone to the MPS first quarter 2023 earnings webinar. My name is Jennifer Cunningham, and I will be the Moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS, and Bernie Blegen, VP and CFO. 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 Q1 earnings release and in our SEC filings, including our Form 10-K, filed on 24th February 2023, which is accessible through our website. 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, other income before income taxes, 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 Q1 2023 earnings release, which we have furnished to the SEC and is currently available 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.

I'd like to turn the call over to Bernie Blegen.

Bernie Blegen (VP and CFO)

Thanks, Jen. MPS' first quarter revenue of $451.1 million came in about as expected, 19.4% higher than the first quarter of 2022, but 1.9% lower than revenue reported in the fourth quarter of 2022. Our results for the quarter were mixed, with weaker quarter-to-quarter demand in our enterprise data and industrial markets, overshadowing improvements in consumer and automotive. Let's take a quick look at our first quarter 2023 revenue by market. First quarter 2023 consumer revenue of $63.4 million increased 19.5% from the fourth quarter of 2022. First quarter 2023 revenue was down 20.8% year-over-year.

Consumer revenue represented 14.0% of our first quarter 2023 revenue, compared with 21.2% contribution in the first quarter of 2022. First quarter 2023 automotive revenue of $105.3 million increased $8.0 million or 8.2% from the fourth quarter of 2022. This sequential revenue increase was primarily due to continued acceptance of our highly integrated solutions for advanced driver assistance systems, the digital cockpit, and lighting applications. First quarter 2023 revenue was up 93.1% year-over-year. Automotive revenue represented 23.3% of MPS's first quarter 2023 revenue, compared with 14.4% in the first quarter of 2022.

First quarter 2023 communications revenue of $67.9 million rose $3.6 million or 5.6% from the fourth quarter of 2022. This quarter-over-quarter increase primarily reflected a modest revenue improvement in 5G infrastructure. First quarter 2023 revenue was up 22.2% year-over-year. Communications revenue represented 15.1% of MPS's first quarter 2023 revenue, compared with 14.7% in the first quarter of 2022. In our storage and computing market, first quarter 2023 revenue of $119.8 million was essentially flat with revenue recorded in the fourth quarter of 2022, as decline in storage revenue was offset by higher notebook sales. First quarter 2023 revenue was up 24.1% year-over-year.

Storage and computing revenue represented 26.6% of MPS's first quarter 2023 revenue, compared with 25.6% in the first quarter of 2022. First quarter 2023 industrial revenue of $47.5 million decreased $8.6 million or 15.3% from the fourth quarter of 2022. This quarter-over-quarter decrease was due to lower security and power source revenue. First quarter 2023 industrial revenue was down 2.2% year-over-year. Industrial revenue represented 10.5% of our first quarter 2023 revenue, compared with 12.9% in the first quarter of 2022.

In enterprise data, first quarter 2023 revenue of $47.2 million decreased $21.3 million or 31.1% from the fourth quarter 2022 due to broad-based weakness in data center spending. First quarter 2023 revenue was up 10.9% year-over-year. Enterprise data revenue represented 10.5% of MPS's first quarter 2023 revenue, compared with 11.2% in the first quarter 2022. I'd like to share some general business observations. During our two most recent earnings calls, we highlighted that customers were becoming more concerned with near-term business conditions and that ordering patterns might oscillate. This behavior continued through the first quarter 2023.

We do see order acceleration for products related to artificial intelligence, autonomous driving, and power modules, and our customer engagement in design win momentum remains strong across all of our markets. Regarding operating expenses, we continue to invest in our operations to support long-term growth. In response to customer concerns, we are expanding and geographically diversifying both our global production operations and our R&D activities. In summary, we have strong customer engagement, design win momentum, and are continuing to invest at long-term, even though timing of the revenue ramp from our customers remains uncertain. Moving now to a few comments on gross margin. GAAP gross margin was 57.4%, 80 basis points lower than the fourth quarter of 2022, and 60 basis points lower than the first quarter of 2022.

Our GAAP operating income was $124.3 million, compared with $136.9 million reported in the fourth quarter of 2022. For the first quarter of 2023, non-GAAP gross margin was 57.7%, 80 basis points lower than the fourth quarter of 2022, and 60 basis points lower than the first quarter of 2022. This downward pressure on gross margin is expected to continue near term as we work through higher value inventory built up during the supply demand imbalance following the pandemic. Our non-GAAP operating income was $164.1 million, compared- $174.1 million reported in the fourth quarter of 2022. Let's review our operating expenses.

Our GAAP operating expenses were $134.5 million in the first quarter of 2023, compared with $130.9 million in the fourth quarter of 2022. Our non-GAAP first quarter 2023 operating expenses were $96.0 million, up from $94.8 million reported in the fourth quarter of 2022. The differences between GAAP and non-GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss from an unfunded deferred compensation plan. For the first quarter of 2023, total stock compensation expense, including approximately $1.1 million charged to cost of goods sold, was $37.0 million, compared to $35.3 million recorded in the fourth quarter of 2022. Switching to the bottom line.

First quarter 2023 GAAP net income was $109.8 million or $2.26 per fully diluted share, compared with $119.1 million or $2.45 per fully diluted share in the fourth quarter of 2022. First quarter 2023 non-GAAP net income was $146 million or $3 per fully diluted share, compared with $154 million or $3.17 per fully diluted share in the fourth quarter of 2022. Fully diluted shares outstanding at the end of Q1 2023 were 48.7 million. Let's look at the balance sheet.

Cash, cash equivalents and investments were $919.1 million at the end of the first quarter of 2023, compared to $739.6 million at the end of the fourth quarter of 2022. For the quarter, MPS generated operating cash flow of about $218.8 million, compared with operating cash flow of $52.2 million in the fourth quarter of 2022. First quarter 2023 capital spending totaled $8.9 million. Accounts receivable ended the first quarter of 2023 at $184.3 million, or 37 days of sales outstanding, up one day from 36 days at the end of the fourth quarter of 2022.

Our internal inventories at the end of the first quarter of 2023 were $430.8 million, down from $447.3 million at the end of the fourth quarter of 2022. Days of inventory decreased to 204 days at the end of Q1 2023, compared with 212 days at the end of fourth quarter of 2022. Comparing current inventory levels with the following quarter's projected revenue, you can see days of inventory decreased to 203 days at the end of the first quarter of 2023 from 212 days at the end of the fourth quarter of 2022.

I would now like to turn to our outlook for the second quarter of 2023. We are forecasting Q2 revenue in the range of $430 million-$450 million. We also expect the following: GAAP gross margin in the range of 55.9%-56.5%. non-GAAP gross margin in the range of 56.2%-56.8%. GAAP R&D and SG&A expenses between $132.5 million and $136.5 million. GAAP R&D and SG&A expenses to be in the range of $94.9 million-$96.9 million. This estimate excludes stock compensation expense, but includes litigation expense.

Total stock-based compensation expense of $38.8 million-$40.8 million, including approximately $1.2 million that would be charged to cost of goods sold. Interest and other income is expected to range from $3.8 million-$4.2 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 48.6 million-49.0 million shares. In conclusion, while we remain cautious about near-term business conditions, MPS will continue to focus on business development and investing in infrastructure as necessary to support our long-term growth. I'll now open the webinar up for questions.

Operator (participant)

Thank you, Bernie. Analysts, I would now like to begin our Q&A session. As a reminder, if you would like to ask a question, please click on the participant's icon on the menu bar, and then click the Raise Hand button. Our first question is from Tore Svanberg of Stifel. Tore, your line is now open.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Yes, thank you. I was hoping you could elaborate a little bit more, Bernie, on your comment about the business conditions 'cause it sounds like the design win momentum is still very strong, the activity is very strong, but you also sort of added there was uncertainty in certain ramps. You know, maybe you could elaborate a little bit of that, especially when, thinking about the second half, which, seems to be a period where the industry could potentially recover.

Michael Hsing (CEO and Founder)

Let me answer, Mike. Tore, let me answer first, okay? You look at all these industries, we, it's about servers, computing, including that's servers and AI product. That's about 10% of the MPS revenue. We experienced these areas, the entire company experienced a hyper-growth in the last 2 or 3 years. Now the automotives too, we're about 23% of the business. Total together, It's about 30%. AI, other than, and across the boards, other than AI and automotive, and so far, still we experience this still very heavy demand.

Other than that, again, all these design win activities that happened in the last, four or five years, they start to ramp last couple of years. A lot of, because the reason we have all the inventory, we have e-expanded capacities, and we grow much faster than the average. Now that to answer your question directly, there's a Our customers, all these products during a ramp, they have a pause. They don't know, okay, what's coming. The new product, they push out.

We just caught in the, in a period, which is not bad to me, because in the last two or three years, we have been in this unsustainable growth and hyper-growth. It's like a 30%, 40% on year-over-year, that will break the company. I'm glad to announce we're coming to back to the normals. I mean, we will ride this global market uncertainties, and we just adapt as in the past. Bernie, maybe you can add some more detail.

Bernie Blegen (VP and CFO)

I think Michael has really laid out a very compelling case as far as the growth that we've experienced over the last 3 years, and also identifying that the automotive market remains solidly intact. Particularly in enterprise data, with the exception of AI, that we are seeing lag in ordering patterns there and general weakness in our other markets. I think the thing to reinforce here is that the business model here remains intact. You know, we've built MPS around sustainable growth over the long haul. Right now we're looking at a quarter where the end customer demand is not picking up as well as we might have anticipated a quarter or two quarters ago. Again, the business model is intact.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Well, that's great perspective. As my follow-up, you talked about gross margin coming down very, very moderately because of higher value inventory. Could you talk about how long you expect that to play out and even some ranges? I mean, I assume maybe you'll get to, I don't know, 55%-56% gross margin. Yeah, any color you can give on how long that lower gross margin would last.

Bernie Blegen (VP and CFO)

Sure. The good news here is that cycle times and pricing both in the fab and the assembly houses are coming down. We'll be able to participate in the lower costs after we burn down the inventory, which is currently at about 203-204 days. I would expect that we'll see downward pressure on margins through Q2 and Q3, and then perhaps a moderation leveling in around Q4.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Great. Thank you for-

Michael Hsing (CEO and Founder)

Yeah.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Yeah, go ahead, Michael.

Michael Hsing (CEO and Founder)

Yeah. I might as well. In, clearly we see, we're going to a downturn situations. I mean, we don't know, so like in some segment would grow. MPS is because of very diverse companies and like some area would be still good. In general, the consumers and the products and even some notebook may come back in the second year. The point is I've tried to make is regarding to growth margins.

As in the past, when the industry start to slow down and like MPS will be more aggressive on, in price, to gain more consumer segment of the market because it can do six months later when you turn the knob, we actively pursue those product. Six months later, those are fast designing cycles, and you will turn the knobs in the revenues in about six months time. We care less about the short-term growth margins, but the long-term growth margins and it's still the same. We emphasize and as in the last 10 years or so, we'll still pursue those model.

In a consumer segments, we may just shorten and focus on the, in the short-term to maintain the growth.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Makes sense to me. Thank you.

Michael Hsing (CEO and Founder)

Okay.

Operator (participant)

Our next question is from Quinn Bolton of Needham. Quinn, your line is now open.

Quinn Bolton (Senior Analyst)

Hey guys, thanks for taking my question. I just wanted to follow up on Tore's question really, Michael and Bernie, as you look into the second half of the year, that's normally a seasonally stronger period for the company. Obviously, it feels like there are lots of puts and takes, lots of uncertainty, customers delaying product ramps. Can you give us any sense how you're thinking about the second half of the year? Will you see sort of a normal seasonal uptick in September, or are you thinking September could be flattish with kind of the 1Q, 2Q run rate? You know, any additional color would be helpful just to try to think about this, the second half.

Bernie Blegen (VP and CFO)

Sure. I think that right now, normal seasonality still applies. In our case, it's a little more muted because so much of our growth in the business is attached to those new product introductions being made by our customers. If we look in enterprise data in which our major customers or the products that we're supporting have had product delays. When you look at other aspects of our business, for example, communications, that's still what I'd refer to as lumpy. It's not necessarily trending in a seasonal pattern. I think that your comment is very balanced, and all I'm tilting is to the new product introductions being delayed, probably being a larger factor than just seasonality.

Michael Hsing (CEO and Founder)

Yeah. I think as we can't say really like a normal seasonality anymore. I mean, we experienced in the past, you have some segments grow really well. I mean, some segments hit kind of a bottoms and like in last Q3, last year, Q4, especially like a notebook side. Now you see some, like, it's awakening up. MPS has one orders design in those reference designs, and, like, we have the powers and the e-power solutions. We see some, second half. Mostly, all the other rest of our business, other than AI, automotive, and we don't, we have no clear views.

That's the short-terms.

Quinn Bolton (Senior Analyst)

Understood. Wanted to follow up on the enterprise data segment. Obviously, weaker results, it sounds like some of the product or customer delays are sort of focused in that segment. Do you still think as the new server cycle ramps that you can get your share of the Vcore, our management market towards 20%? Is that still the right opportunity, thinking about longer term, even if some of those customer programs have pushed out by somewhat?

Michael Hsing (CEO and Founder)

Absolutely. Okay. I confidently say that, okay? I mean, because we see all these projects has not really fully ramped yet. In all the data centers, okay, clearly, and you guys know better, okay? I mean, now is slow down dramatically. I don't know whether the way they expand, overexpanded last couple years, okay? I mean, now slow, take a pause, okay? We don't have clear views. What we know, okay, they from last quarter to to Q1, from Q4, Q1 to now, and they kind of slowed down.

Bernie Blegen (VP and CFO)

If I can add to that. Again, using, I know that you're focused right now on the short-term as far as the second half of the year. In the GPU space for artificial intelligence, we have a very senior market share position and, as we look ahead to even the next generation, we're in a very good position to take advantage of the next generation of GPUs. We're really still in early stages as far as being able to leverage up our position and expand our share.

Michael Hsing (CEO and Founder)

Oh, yeah. Yeah. That's. Yeah, I didn't add that part. The GPU part, okay, in the AI side, we have a current design win and as well as the next design. In the future, it will release end of the year or next years. Those were MPS product will ramp to this. Earlier I referred to is that all of the data centers, CPU powers, okay, all data center powers overall. We still have a, maybe just if not a single-digit, just barely a double-digit market shares. A lot of it's from a transition from a VR13 to VR14, it's not complete yet.

We won a lot of design wins in VR14. It will turn into revenues.

Quinn Bolton (Senior Analyst)

Thank you for all that color, Michael and Bernie.

Operator (participant)

Our next question is from Matt Ramsay of TD Cowen. Matt, your line is now open.

Matthew Ramsay (Managing Director and Senior Analyst)

Thank you very much. Good afternoon, everybody. Guys, I wanted to ask, I guess, a two-part question on gross margin. This is sort of you guys had been gone from sort of 54%, 55%, 56% on that steady cadence of 10-20 basis points a quarter, and that was amazingly steady. Then during the period of supply-demand imbalance, we jumped up to 58% or so. Now we've come back in, and you guys discussed that in the short-term.

As you look out over the next two, three years, and you think about the strategy to be aggressive and grow, and contrast that to some of the opportunities that you have for new design wins and higher content, maybe you could level set us on the long-term gross margin. Has anything changed there? Where's the new normal? I guess the second part of that thought, guys, is have you seen any specific price pressure in any markets as some of your competitors maybe get more supply? Thanks.

Michael Hsing (CEO and Founder)

Yeah. Okay. Let me answer your last part first. Any high volumes, our customers have multiple suppliers. We, they always have a price pressures. Other than the last 2 or 3 years. Other than that. They couldn't ship only the MPS. Most of our company have struggled with shipments, MPS, we have less. Nowadays, all the high volumes, as we expected in the last couple years. Also remember, we didn't talk that much. We introduced new technologies, which is much lower the cost. That would be a fight. So to answer that part of the questions.

Earlier I said it, okay, I care less about a gross margin really, okay? We're still operating within the models, okay? We're not dramatically go down. Clearly it will go down and, but in the long-term model, to answer your question of 2 or 3 years out, the business, MPS business is still pretty much intact. We are focused on those, higher values. We're transitioning from IC to solutions to sell solutions. That still remain our focus. Our long-term business will go that way and which generate and offers more values, and we have higher gross margins.

Bernie Blegen (VP and CFO)

I think just to polish off the comment there is that, as far as our model, we've been operating over the last several years between 55% and approaching 60% as far as a non-GAAP gross margin. As we introduce these higher value products, they tend to have higher margins. What that allows us to do is then manage the mix of business such that we stay within our model. While we've sort of anticipated in the near term, downward pressure with a flattening here in the next three to four quarters, we'll continue to look to be opportunistic in managing gross margin to accelerate revenue growth.

Matthew Ramsay (Managing Director and Senior Analyst)

Got it. Thank you for all the detail there, guys. As my follow-up, and I apologize for this being a nearer term question, With all the different end market volatility, Bernie, if you could help us on your guidance by segment, just the revenue trends that you guys see into the June quarter, that would be great. Thanks, guys.

Bernie Blegen (VP and CFO)

Sure. I think that we said earlier in the call.

Michael Hsing (CEO and Founder)

Well, it's a it's fair to ask a short-term question because it is a very uncertain period.

Bernie Blegen (VP and CFO)

I think to sort of make a simple point on it, is that automotive continues to be doing very well. There, it's both the market itself as well as the share gains that we're enjoying. I said earlier that communications is lumpy, and the other areas, including storage and compute, enterprise data, and consumer and industrial, are sort of flattish for the near term.

Michael Hsing (CEO and Founder)

Well, also the storage, okay, I mean, in the AI segments, and the AI segments, I mean, in data center, that computing segments maybe is flattish, okay? I mean, I think the majority of our revenues still come from servers. You see it in the ramping in the last 18 months or so. The AI and the total portion and AI in the total revenues, okay, it's still smaller %. The other things I pointing out, and there's a memory sections, and again, they're changing a new format, and it is start to ramp now. This is the results, and we're kind of flattish, okay?

I mean, it depend on how fast you ramp up to DDR5. MPS has a engage with all the major memory companies, okay? We have a design, we have design wins. If they ramp a bit faster than the we will gain, we'll increase that portion of revenues. It's depend on what the DDR5 ramp up. Okay. Yeah. Matt, are you still there? All right. Okay. I think we can. Oh, we lost? Okay.

Operator (participant)

Our next question is gonna be from Richard Schafer of Oppenheimer. Rick, your line is now open.

Richard Schafer (Managing Director and Senior Equity Analyst)

Oh, thanks. I appreciate all the color so far, you guys. Maybe if I could ask one on 48-volt, back on the AI product question. I know I heard you say, Michael, or sorry, Bernie said it, you have that senior market share position there. I'm curious, with your primary competitor in 48-volt apparently still struggling, are we at a point now, if we look at 2023, where you guys think you'll likely stay sort of sole source, sort of on the A100 and H100 this year? I'm just curious as part of that question, I heard you mention content there.

You know, is there any color you can give us around what content does as we transition to sort of more powerful accelerators over time? I mean, is it similar to what you guys have talked about with the move from VR13 to 14 on Vcore power where you're talking about going from sort of $50 a core or something to, something like 70? Finally, Michael, for you, I'm just really curious, who else are you seeing, out there working on 48-volt power? I mean, this seems to be a pretty solid and growing market.

Michael Hsing (CEO and Founder)

Okay, let me answer my part first.

Bernie Blegen (VP and CFO)

That's the more fun part.

Michael Hsing (CEO and Founder)

From the landscape, okay, I truly, it's okay, say it like a man. We don't see. We see some competitions, and okay, I think our product remain the best so far. That's why. We have. We do see some other competitions, okay, maybe as a generation or laters, okay. I mean, as that market segment grow, and okay, the competition welcomes, okay. I mean, the market is too big for MPS, and we welcome other peoples, okay? I mean, we welcome corporations. As a matter of fact, that's what we're doing in that, okay? As MPS is not big enough for the for that market.

We'll be glad to be leaders.

Richard Schafer (Managing Director and Senior Equity Analyst)

Okay.

Bernie Blegen (VP and CFO)

Yeah. Again, reinforcing Michael's point there is that it actually, when we enjoy a leadership position, and we expect to continue to, competition's very important as far as driving technology improvements. As far as your other question, as far as dollar content, when we look at the CPU market, generally we denominate it with a dual processor. Based on that, we're able to offer an expectation of what the average selling price will be, per server. With the GPUs, the model is still sorting itself out, where you can have any number of configurations up to and including eight GPU boards. It's a little harder to denominate what our dollar content is.

Again, we're still in the early stages of watching this model ramp. I think that we'll have enough experience in about 2-3 quarters to have a more accurate read on the dollar content, but it is much higher than what we're experiencing with CPUs.

Richard Schafer (Managing Director and Senior Equity Analyst)

Well, thanks for all that color, guys. For my follow-up, I'd love to ask you about 5G RAN. I know you guys have said in the past that you're selling to the Big Three, RAN equipment OEMs. I'm just curious how you would describe the ramp there, in terms of content, in terms of share. What I'm trying to do is get a sense of how big 5G is now versus how big it could be for you guys. To something you mentioned earlier, Bernie, I'm just really curious here is, could the ramp in 5G sort of smooth some of that lumpiness you described in your comm segment? Thanks.

Bernie Blegen (VP and CFO)

Yeah. If I was to draw a comparison of our experience with enterprise data, where we started out with low-dollar content and then graduated up the value chain, including power management, we're probably about 3 to 4 years behind in the communications market, where we're still focusing on the low-dollar content for like point of load MEFUs. Where this is about to get very exciting is we are getting adoptions for later designs that include our power management for the processors. At this stage, we're sort of moving with the market again, as an early entrant. Yes, long-term, I do think you're gonna see a similar growth profile as what we expect to have with enterprise data.

Michael Hsing (CEO and Founder)

Yeah. Admittedly now, I keep saying PS is a small company, but we're not nobody anymore. We engage with these 5G makers, and, it's only handful of a company. As speaking now, so okay, we're in the process of signing on the contract now. So all of these, okay, it's just a matter of time.

Richard Schafer (Managing Director and Senior Equity Analyst)

Thanks for that color.

Michael Hsing (CEO and Founder)

Yeah.

Operator (participant)

Our next question is from Ross Seymore of Deutsche Bank. Ross, your line is now open.

Ross Seymore (Managing Director and Senior Equity Analyst)

Hi, guys. Can you hear me?

Michael Hsing (CEO and Founder)

Yes.

Bernie Blegen (VP and CFO)

Yeah.

Michael Hsing (CEO and Founder)

We have a high inventory, yes. We admit it, okay, Ross?

Ross Seymore (Managing Director and Senior Equity Analyst)

How about the channel inventory? We've heard a bunch of companies talk about the channel coming down, and that's a headwind of revenue growth. I know you guys proactively manage that, so you put it on your own balance sheet, but what's the channel looking like?

Michael Hsing (CEO and Founder)

It's also on the high side.

Bernie Blegen (VP and CFO)

Yeah. About three quarters ago, we saw a increase in channel inventories, and they've remained at about that same level. There isn't any real new news as far as the sell-through characteristics.

Ross Seymore (Managing Director and Senior Equity Analyst)

Is that something that's weighing against your revenue right now, or are you comfortable running, that, at that relatively higher level?

Michael Hsing (CEO and Founder)

No, we want it a little lower. We want it lower, and again, in particular in the first quarters, and a lot of, customer threatens and, like, much higher volumes, okay? That's why we shipped. Now they have a break. As a result, inventory didn't decrease that much in the channel.

Ross Seymore (Managing Director and Senior Equity Analyst)

It went down on your books more so than in the channel?

Bernie Blegen (VP and CFO)

Yeah. The way to look at another aspect to this is that the inventory in the channel, it depends on what our end customers' lead times are. As we even commented on in the prepared comments, we're seeing a very unusual demand pattern in that we have three areas where we're seeing an acceleration as far as the ordering pattern. They're doing it with a very, an expectation of having a very short lead time. As Michael said earlier, that the channel was built up in the anticipation that the customers were gonna realize the sales gains with the new products. As those have been pushed out, that's left us in this position.

We're gonna continue to manage the channel as we always have, but right now, as I said, it's at an elevated level.

Ross Seymore (Managing Director and Senior Equity Analyst)

Got it. Then one on the gross margin for you, Bernie. When you talked about the headwinds for it, we see this across the board, so I don't think it's anything particularly different for Monolithic. The one thing you didn't mention was mix. I get that you're carrying higher cost inventory, and it takes a while to flush through. As you go opportunistically into the consumer market, is that rising as a percentage of sales something that is also weighing against gross margins? If so, when do you think that will kind of normalize as a percentage of sales, if not decrease?

Michael Hsing (CEO and Founder)

Yeah, you can see as a normalize because the consumer market hasn't happened yet. Okay, We've downed the consumer down to the big percentage now. Okay. Mostly it's a high, high value in inventory.

Ross Seymore (Managing Director and Senior Equity Analyst)

Got it. Thank you.

Michael Hsing (CEO and Founder)

Yeah.

Operator (participant)

Our next question is from William Stein of Truist. William, your line is now open.

William Stein (Managing Director and Senior Equity Analyst)

Great. Thank you for taking my questions. Regarding something you just spoke about a moment ago, you spoke about elevated inventory and pushouts of projects. I think obsolescence risk is relatively small for Monolithic, but maybe you can reassure us on that matter.

Michael Hsing (CEO and Founder)

Absolutely. Actually, a very helpful question. If you look at our history, we've never had a significant inventory write-off. A lot of the reasons around that is that our products have long life in the market and long shelf life. So we're actually, if you look back at 2019, we built up inventories and were able to capitalize when the market bounced back in '20, and particularly when the pandemic infusion of capital occurred. So we don't see inventory on our balance sheet as a negative. In fact, when the markets do get more stabilized, particularly in enterprise data, and in storage and computing, I think we're well positioned to take advantage of that uplift.

William Stein (Managing Director and Senior Equity Analyst)

Great. Like to sort of ask a double question about supply and your supply base. Other analog companies have talked about how their foundries are absolutely not cutting costs, and they never see it happening. You've highlighted this trend in your business. Is it because you're on more advanced nodes, and so that's just how sort of pricing in that market works? Maybe you could also comment on the manufacturing plan, both in terms of long-term capacity and geographic diversity. Thanks, guys.

Michael Hsing (CEO and Founder)

Well, that we advance our technology every two, three years. We're relentlessly cutting the cost and utilize the better technologies. Better geometries and like in the fab now, the last 3 years, the fab cost and that came has not been lower, it's higher as a matter of fact. We utilize the geometries and also the new technologies that we implement, we'll be able to lower the cost. Your the other question that you're making is that diversify the manufacturing. We anticipated that, and we announced it, that we have a new partnership outside of China, that's in Singapore.

We will continue to do so, okay? Really outside, okay, there's no U.S. manufacturing for our application or for our product, okay? It all resides in Asian carriers and like in Taiwan and in the Southeast Asia. What in all our module business we can do it from outside of China.

William Stein (Managing Director and Senior Equity Analyst)

Great. Thanks, guys.

Michael Hsing (CEO and Founder)

Okay.

Operator (participant)

If there are any follow-up questions, please click the Raise Hand button. As there are no further questions, I would now like to turn the webinar back over to Bernie.

Michael Hsing (CEO and Founder)

I'd like to thank you all for joining us for this Q1 2023 earnings webinar. I look forward to talking to you again during our second quarter conference call, which will likely be in July. Thank you. Have a nice day.