Q3 2022 Monolithic Power Systems Inc Earnings Call
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Botox and <unk>.
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Welcome everyone to the MTS third quarter 2022 earnings Webinar. Please note that this webinar is being recorded and will be archived for one year on our Investor Relations page at Www Dot monolithic power Dotcom my.
My name is Genevieve Cunningham and I will be the moderator for this webinar joining me today are Michael Hsing, CEO and founder of M. P S and Bernie Blegen VP and CFO .
In the course of today's webinar, 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 risk.
Risks uncertainties and other factors that could cause actual results to differ are identified in the safe Harbor statements contained in the Q3 2022 earnings release and in our latest 10-K and 10-Q filings that can be found on our website.
M. P. S 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 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 Q3 2022 earnings release, which we have furnished to the S. C.
SEC and is currently available on our website.
Now I'd like to turn the call over to Bernie Blegen.
Thanks, Jeff.
First of all today I am reading you from Europe , we held our third quarter <unk> Board of directors meeting.
Our Barcelona office, we had our board members to the facility overseas the operations here.
Now to the financial results MTS achieved record third quarter revenue of $495 $4 million seven 5% higher than revenue in the second quarter of 2022, and 53, 1% higher than revenue in the third quarter of 2021.
This broad based year over year revenue growth was the result of consistent execution against our strategies.
Looking at our third quarter 2022 revenue by market.
Third quarter automotive revenue of $87 1 million increased 42, 7% from the second quarter of 2022, due primarily to new platform launches.
Third quarter 2022, automotive revenue was up 68% year over year.
Automotive revenue represented 17, 6% of Mps's third quarter 2022 revenue compared with 16, 8% in the third quarter of 2021.
Third quarter 2022 communications revenue of $72 $3 million was up 21, 9% from the second quarter of 2022.
Most of this sequential revenue increase was related to the continued communications infrastructure ramp.
Third quarter 2022 communications revenue was up 61, 8% year over year.
Communications sales represented 14, 6% of our total third quarter 2022 revenue compared with 13, 8% in the third quarter of 2021.
And our enterprise data market third quarter 2022 revenue was $75 $3 million increased 15, 5% from the second quarter of 2022, primarily due to continued strength in our data center and workstation computing sales.
Third quarter 2022 revenue represented 15, 2% of Mps's third quarter 2022 revenue compared with nine 2% in the third quarter of 2021.
Third quarter 2022, industrial revenue of $58 $7 million increased five 1% from the second quarter of 2022.
Third quarter 2022, industrial revenue was up 12, 5% year over year.
Industrial revenue represented 11, 8% of our third quarter 2022 revenue compared with 16, 1% in the third quarter of 2021.
Storage and computing revenue.
$112 9 million.
Decreased seven 7% from the second quarter of 2022.
The sequential revenue decline was primarily due to softening of customer demand from those for notebooks third quarter 2022 storage and computing revenue was up 63, 9% year over year storage and computing revenue represented 22, 8% of Mps's third quarter 2002.
Turning to revenue compared with 21, 3% in the third quarter of 2021.
Third quarter consumer revenue of $89 $2 million decreased eight 4% from the second quarter of 2022.
Sequential quarterly revenue decline was primarily due to softening of overall demand.
Third quarter 2020 to consumer revenue was up 21, 1% year over year consumer revenue represented 18, 8% of Mps's third quarter 2022 revenue compared with 22, 8% in the third quarter of 2021.
Let's talk about the general business conditions.
For the prior six quarters, we have faced product shortages, especially in consumer storage and computing.
Now we have started to see our customers reduced their orders and push out shipments.
We've experienced similar patterns in the past, we anticipate order patterns might oscillate in the near future.
This is not a surprise to us.
As a result of this change in ordering patterns, our inventory levels will catch up to our target of 180 to 200 days and possibly be higher in the near term.
In addition, we have over 4000 different products, which are required to support thousands of our customers applications.
On average our product lifecycle succeed six to eight years. So we are not concerned with carrying in inventory level above target.
Mps's business is in a better position today.
Rather than managing product shortage problems, we can now focus on long term business development.
For longer cycle business like automotive enterprise data comms infrastructure.
And industrial both our customers and NPS have extended the significant effort and made joint investments in the development of multiple leading edge products and applications.
As a result, we have secured business, which we believe will ramp over the next several years driving revenue growth.
For shorter cycle consumer related business, we will continued proactively support our customers needs. We've established MTS as a reliable supplier with excellent customer support during this extended period of product shortages.
Accordingly, we believe both longer and shorter cycle customers value NPS as a strategic partner.
We are cautious about the overall business conditions and.
And believe we can swiftly adapt to market changes as we have done successfully during similar macroeconomic changes in the past.
There have been recent changes to export controls and additional companies have been added to the MTV is list at hub today, we see immaterial to revenue impact.
Directly or indirectly from those new trade restrictions are products utilized process nodes in excess of 40 nanometer, which falls well outside the current restrictions.
Moving now to a few comments on gross margin and operating income.
Third quarter 2022, GAAP gross margin was 58, 7%, which was 10 basis.
10 basis points lower than the second quarter of 2022, and 110 basis points higher than the third quarter of 2021.
Our GAAP operating income was $151 9 million compared to $141 9 million.
Reported in the second quarter of 2022.
non-GAAP gross margin for the third quarter of 2022 was 59, 8% essentially flat from the gross margin percentage reported in the second quarter of 2022, and 120 basis points higher than the third quarter from a year ago.
Our non-GAAP operating income was $193 7 million.
Impaired to $179 $4 million reported in the second quarter of 2022.
Let's review, our operating expenses, our GAAP operating expenses were 139 <unk>.
Zero million.
In the third quarter of 2022, compared with $129 1 million.
In the second quarter of 2022.
And $109 2 million in the third quarter of 2021.
Our non-GAAP third quarter 2022, operating expenses were $98 4 million up from $92 7 million in the second quarter of 2022 and up from the $78 $7 million recorded in the third quarter of 2021.
The differences between non-GAAP operating expenses at GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or expense from an unfunded deferred compensation plan.
For the third quarter of 2022 total stock compensation expense, including approximately $1 2 million.
Charged to cost of goods sold was $43.
<unk> <unk>.
Compared with $42 9 million.
Recorded in the second quarter of 2022.
Switching to the bottom line third quarter 2020 to GAAP net income was $124 $3 million for $2 57.
Fully diluted share compared with $114 7 million or $2 37.
Per share in the second quarter of 2022, and $68 8 million or $1 44 per share in the third quarter of 2021.
Q3, 2022, non-GAAP net income was $170 7 million or $3 53 per fully diluted share compared with $157 million.
Or $3 25 per share in the second quarter of 2022, and $98 6 million or $2 <unk>.
Sure in the third quarter of 2021.
Fully diluted shares outstanding at the end of Q3 2022 were $48 3 million.
Now, let's look at the balance sheet.
Cash cash equivalents and investments were.
$738 1 million at the end of the third quarter of 2022 compared to $814 1 million at the end of the second quarter of 2022.
For the quarter MTS generated operating cash flow of about $18 2 million.
Compared with Q2, 2022 operating cash flow of $105 2 million.
The decline in operating cash flow an increase in other long term assets reflected a $170 million prepaid.
Prepaid payment made during the quarter to secure a long term purchase commitment.
Accounts receivable ended the third quarter of 2022 at $153 4 million, representing 28 days sales outstanding which was three days higher than the 25 days reported at the end of the second quarter of 2022, and six days higher than the 22 days at the end of the third quarter of 2010.
One.
Our internal inventories at the end of the third quarter of 2022 were 397 4 million up $37 8 million from the $359 6 million reported at the end of the second quarter of 2022.
Inventory at the end of the third quarter of 2022 represented 167 days, which were five days lower than at the end of the second quarter of 2022.
Historically, we have calculated days of inventory on hand, as a function of the current quarter revenue we.
We believe comparing current inventory levels with the following quarters revenue.
Provides a better economic match on this basis, you can see inventory at the end of the third quarter of 2022 represented 189 days 29 days higher.
Then the 160 days at the end of the second quarter of 2022, and 56 days higher than the 133 days at the end of the third quarter of 2021.
I would now like to turn to our outlook for the fourth quarter of 2022.
We are forecasting Q4 revenue in the range of $450 million to $470 million.
We also expect the following.
GAAP gross margin to be in the range of 58, 1% to 58, 7%.
non-GAAP gross margin in the range of $58 three to 58, 9%.
Total stock based compensation expense of $37 $7 million.
To $39 $7 million, including approximately $1 $1 million that would be charged to cost of goods sold.
GAAP R&D and SG&A expenses should be between $131 million and $135 million.
non-GAAP R&D and SG&A expenses are expected to be in the range of $94 4 million to $96 4 million.
Litigation expense is expected to be in the range of $1 3 million to $1 7 million.
Interest income is expected to be in the range from $1 1 million to $1 5 million.
Fully diluted shares are expected to be in the range of $48 2 million to $49 2 million shares.
In conclusion.
Even though business conditions are softening or market share gains continued to expand reflecting high customer engagement and our ability to secure design wins, we can now focus on growing our long term business I will now open the webinar up for questions.
Thank you Bernie.
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 participants icon on the menu bar and then click the raise hand button.
Our first question comes from Matt Ramsay of Cowen Matt. Your line is now open.
Thank you very much I guess good evening guys, if you're in Europe . So Michael Barney can you hear me okay.
Yes, we have noticed.
Thanks, guys.
So two two different questions from me.
One one sort of related to the model in the near term and the other one on a different topic. So the first question.
Bernie you could help us a little bit I mean, the guidance was a bit light and you talked about some of the macro conditions, but it seemed like.
Weakness was concentrated in the storage and computing segment. So.
You could maybe talk about things by segment and what Youre going guidance implies on a quarterly basis by segment I think that would be helpful. And then I'll follow up thank you.
Sure just to clarify that the softness that we're seeing is both in the storage and computing as well as consumer.
The other segments are still.
Physician to show growth between Q3 and Q4.
The only sort of qualifier that we're still trying to.
Learn about the strength in the run rate of the communications.
Segment.
So I think what we've done is we feel very very comfortable with.
Both how we have been communicating our expected results, but we've added a little conservatism into the outlook.
Got it great and thank you for that.
Michael My My second question is on the topic of China and over the last I'd say three or four weeks since some of the new.
Commerce and Bas restrictions come into place.
<unk> been getting a ton of investor questions about this topic with relation to your company on two fronts I guess the first being.
Yes.
MTS has a significant employee base.
In China.
If you could maybe quantify what maybe percentage of your employees and and what functions are actually in China, and if you've heard from any of these restrictions that that there could be any.
Restrictions on those employees need to relocate anybody.
Those kinds of things and then the second part of the question is on your manufacturing.
The manufacturing footprint I know, it's spread across China, Taiwan increasingly in Korea.
We've heard some stories from semi cap companies needing to pull employees out of Snake for example in other places because of these new restrictions so anything in your manufacturing operations that might be disrupted at all because of some of the China restrictions and how far you guys along in or maybe.
The mix of your capacity, that's now outside of China. Those you get the nature of the questions, but they've been a pretty frequent and acute over the last three or four weeks. So it'd be great. If you could just kind of address some of those topics. Thank you.
Yeah.
Very nice questions and Im glad you asked that.
What all your concern is I think is the most of the people totally misconstrued.
So one of the regulation.
Uh huh.
<unk>.
We do have a presence we have the largest presence in the E. Within China. This is a U S company and we're not subject to sanctions at all we don't have to have people at the leap.
American I believe.
NPS office CE within China, and that's not in the.
I say she entity list.
And we are not in.
Essentially entity list and.
Other one is the manufacturing so that you.
And the last couple of quarters.
Can you talk about it we diversified.
China is weak and we're starting.
556 years ago and.
Also I should've mentioned that.
We talked about it.
Engineering manpower. This NPS started at 2000 2017.
And.
We are.
Barcelona announce a week more than 1 billion loss team here at <unk>.
And with a local government support and again.
Well outside of China.
That's not because.
The same sheets, because we went on a diversified that Joe Mexicali will.
I'll go into a into a different region and even in the same time zones away, we give our customers the better support.
And just to finish up on Michael's comment there to be perfectly clear our technology and our products are not subject to restrictions.
No. Thank you very much just really really quick follow up.
What what would you say the percentage Michael of the products or the revenue.
That is actually sourced from manufacturing footprints inside of China today versus outside and thank you very much for indulging my questions guys I appreciate it.
It is a very convoluted and it is a very common loaded.
Packaging.
And also.
Uh huh.
Process.
Many are in wafer manufacturers and.
It's very company, but we don't have a clear figures now and.
But going back to the.
A bunch of questions and.
The answers our technologies.
We're using a 40 nanometer above.
And.
Current sanctions.
14 nanometer or below.
We are off.
Well as I mentioned in the.
In a swift way.
Fast Rhonda sanctions and the way using the trading edge.
Wafer, we using really using the trading edge.
Oh.
Of a fab equipment.
And if I can just follow up on one quick point, we made in our script here is that as the <unk>.
Supply demand imbalances normalize that frees us up from just being in pure production mode to actually be able to.
Invest time and business relationships.
To be able to expand and diversify our capacity.
Which we talked about about three quarters ago, we're going to go from $2 billion of capacity currently to $4 billion within the next two years two to three years.
Yes.
These are mostly with plenty of it is outside of China.
Yeah.
Our next question is from Quinn Bolton of Needham Quinn. Your line is now open.
Thanks.
Don't want to pile on the export control questions that Matt was just asked but have one other clarification.
You were at 40 nanometer and above and so youre not directly affected but my understanding is that the extent of facility and manufacturing facility in China has multiple process nodes.
Some above 60 nanometer and some below 16 nanometers does that mixed use facility would be affected and so I was just wondering you know for those Chinese manufacturing facilities, the fab by fab or any of the fabs that youre running 40 nanometer and above did they also produce 16 nanometer and below.
There were four b.
Affected by equipment <unk> support.
Restrictions.
No. These are the fab are usually didn't.
The advanced Fabs. Okay. These are 40.
<unk> been at all so that they don't share with visa.
Our data to Fabs.
40 nanometer above okay.
Primarily using a 65 nanometer. So these are totally different.
If in fact.
Thanks, Michael and Thats, what I thought I, just wanted to clarify because I know that they have.
As Matt said there've been lots of questions on this topic.
Maybe one for Bernie I know youre not guiding beyond the December quarter.
Obviously, the environment is pretty soft right now, especially on orders and so I guess as you look out beyond December can you give us any thoughts as to whether you would see.
Less than normal seasonality in March as some of this weakness.
And the next year and I guess, the offset would be.
All of the power has some pretty meaningful market share gains both on the server CPU side as well as the.
The data center GPU side, when would you think that those share gains.
Start to kick in and might get you back to normal seasonal if not better than seasonal patterns.
Sure so.
Again, a point and thank you for focusing on more longer term and strategic issues here.
I think it's very easy to get caught and thinking about next quarter, just the quarter after that and everything all the indicators that we're receiving as far as the <unk>.
Share gains occurring in the datacenter are on track nothing has been changed.
There at all.
And then as far as how we look at.
The next.
A few quarters again, when we apply.
Cautiousness too.
Q4, I think we could expect that.
Anything that.
Any growth opportunities are more likely to be weighted in the second half of 2023.
Yeah.
Our that's our guess.
And Thats, all we experience in our mobile web.
And it could be in the <unk>.
You mentioned the Cpus.
CPU power data centers.
MKS is a lot more than that.
And.
If you look at it.
These.
Ill read our script and.
You'll have automotives.
So the data.
The enterprise data centers again.
Other ones, we're looking communication otherwise of communications.
These are still.
The all of them are growing except.
Our consumer related.
Notebooks gaming those type of things and everybody.
Everybody aware of us they are.
Softening pay up.
This swing too far.
Shortage to all of our suppliers.
Almost overnight.
These kind of things that we cannot predict.
You guys are probably a predictability that we know.
We just have to react fast and.
Overall NPS business all of these are greenfield products, we start to ramp in the last few years it will continue to ramp.
Sorry, if I didn't want to short change it by only focusing on the data center opportunities.
Okay. Thanks for that color.
Thank you Matt.
Our next question is from William Stein of Truest William Your line is now open.
Okay. Thank you so much for taking my questions.
One near term.
One and then a longer term one from a near term perspective, I am hoping you can talk about pricing trends.
And also how your backlog.
Might be changing in terms of the duration.
You have on the books today versus where we've been recently and then again I have a.
Longer term follow up question. Please.
For shorter terms than I can.
Here, though what we see is some okay.
For the long cycle longer cycle business is a continued and.
Because there are no questions related to our price okay because of all the products like a middle of last four or five years or even longer than that.
These are products that are ramping cycles.
In the short and.
In the shorter cycle consumer related as I said at the earliest and I've got notebooks.
<unk> gaming.
Or the other.
Personal electronics.
And.
Visa was oversupply.
No question.
Have any questions about the pricing.
<unk>.
Pablo what Cummins.
Later another quarter later.
It would be a new project designed to okay. That's the way that's a.
Pricing was.
A question of pricing.
Question on some of them will start to emerge.
And well.
You also mentioned backlog sort of condition to the backlog overall.
And relative to historical norms.
Still remain.
They're very much.
Much higher than they had been historically.
And what this has given us an opportunity to do is address to their customers. In fact, we have been engaged in these conversations for several quarters now on what they expect real demand to be.
So I think that is.
As far as our book of business looking ahead, it remains very healthy.
Great and then the longer term question I tend to ask each quarter about some of the.
And the more differentiated products and services NPS has.
Modules in particular, I wonder about the traction of those products and whether you you're seeing the uptake of that.
Either expand or falter, given the current environment and then same thing with E Commerce.
<unk> seen.
More or less of that given the changing demand environment. Thank you.
Yeah.
All the product of that.
The molecules in the e-commerce business Okay.
We don't see any changes in the end.
They are just continued and that.
That's a way of NPS.
Yeah.
Future business it would be okay.
We're even more diversified than it had been and then NPS currently.
And I think it's interesting as far as market acceptance for the modules.
It really is not concentrated in any one end market.
It's actually a pretty evenly distributed it against all of our markets. So that to me is.
A real clear indicator that it fits in well with our diversification strategy.
Yeah.
Frankly, if you ask me.
Where these are module golfs.
We don't have an idea.
That is the beauty of it.
Thank you.
Okay.
Our next question comes from Jeremy Kwan of Stifel. Jeremy Your line is now open.
Good evening and you can hear me okay.
Oh, yes.
Right.
Just a couple of questions first.
Just looking at the lighting business it looked like it had a nice.
Increased sequentially this quarter.
There anything that you can call out there I'm, just just want to understand some of the dynamics in that business.
Automotive.
Im sorry, the lighting automotive okay.
Yes.
That's what's been driving it.
Yes, as we said in our prepared comments.
There are new platforms that were launched most of them are tied to the 2023 model year.
And there were probably three areas lighting being one of them that really contributed to the uplift in automotive in Q3.
So this is something that we can look at it as a new baseline and then sort of like a steady ramp from here or should we expect kind of more step functions with each new model year.
Well the lighting.
Automotive lighting.
Have a variety of ascending you'll have a don't lie to you have a PMA indicators that all kind of indicators are signals then you have a headlight okay.
Uh huh.
So this this is a.
The last couple of quarters.
You see stepping up and.
That's kind of that's a part of a greenfield product aimed in the automotive start to ramp.
And.
Our content in a car so market with growing the content.
But the number of a car.
Okay.
Just at the beginning we still have a small very small market share.
So it will continue to grow.
Got it great.
And just turning to <unk>.
The long term purchasing agreement that you have.
Talked about Bernie can you give us a little bit more details on this maybe the magnitude of the size of this deal in.
How different is this from things to you in the way you may have done.
Business in the past.
Just any more detail and help us to understand your strategic thinking behind this that would be very helpful.
Sure so.
When you think about the period of the supply demand imbalance that we came out of.
We had actually a superior competitive position.
We had invested in our supply chain earlier.
Than our competition and that allowed us to have part availability when they didn't and that allowed for incremental market share gains.
So as we continue to expand.
Capacity.
We're looking for new opportunities and with.
With existing as well as with new.
And so in this instance.
We wanted to secure a purchasing agreement that.
It gave us dedicated capacity, regardless, what the economic environment was.
Got it.
Thank you and then just one last question just touching again on the modules.
Can you give us any insight into the other differences in terms of the manufacturing supply chain that needs to be managed here.
And.
In terms of.
Whether it's sourcing or whether its geographic.
Geographic footprint.
Are there things that you can call out there as well.
Most of them, let me answer that way so most of our modules assemblies.
It's outside of China.
Great. Thank you very much.
Our next question is from Rick Schafer of Oppenheimer. Rick Your line is now open.
Yeah.
Okay.
Okay.
Brian can you hear us.
Yes, sorry, I was muted can you hear me now Bob Bernie.
Yes.
Oh, great Hey.
Hey, guys. Thanks for letting me ask a question.
Maybe my first one just on supply.
TSM, obviously your newest foundry partner.
Just curious if you could kind of level set us on where we are where you guys are at in terms of the qualification process.
Eventual capacity ramp sort of maybe you can get a sense of how much capacity, they're going to have for you ultimately and.
And how much of that might be eight versus versus 12, and so I'm just trying to get a better handle on them as well as our partner.
Yes, most of them will use of <unk> and <unk>.
And also.
Advanced process knowledge of course, the best team.
In the TSMC Syndicate, we are we are.
We do use there.
The advanced node gave me in.
Lisa Paul.
For Microcontrollers that type of a product to them, we do use them in these out.
<unk>.
And within China.
At all.
And.
A lot of our visa product.
At the very very beginning of a ramp okay.
So now we have all the capacity.
For.
<unk> you Paul.
New product, mostly these are for automotive today in our communications and so.
Give us a lot more room to grow.
So Michael just to kind of get a sense of is this.
<unk> be sort of a 10% contributor to capacity and say a year's time or is that too aggressive to kind of think about how quickly that could ramp.
On the on the on the lowest side okay.
We see now.
Thanks, a lot and then.
Follow up I'm, just curious to get an update on on Silicon carbide progress, particularly Chuck action of burgers.
How many customers you're engaged with now and when we might expect to see initial revenues.
I know you've talked about in the past, Michael but just kind of remind us what that dollar content for MTS.
It looks like ex E D.
And I'm, assuming given the sort of sub system, but when anything be discrete or would that all be sort of module slash such system.
Yeah. Thank you very much a tier two asset.
There are questions.
Yeah.
A lot of things.
Our silicon carbide and the high power modules, that's the work can be excited and.
We do have our first products and that goes through the qualification now it's working.
And.
MTS is not.
He turned to sale.
As a hollow device.
As a power device only.
Like a public pollo effects.
And the only way.
We will sell with them using our combined with our silicon technology produces either small molecules and we do have many customers engaged all in automobiles.
Automotive sections to and also the <unk>.
Large energy storage and as well as.
BMS the courtyard.
<unk> charging stations and those kind of things.
No we don't have any revenue yet, but it will be in the next few years.
And Michael just a reminder, just sort of what it does to content for you guys or potential content in a car or a vehicle.
Think of the visa content the way, we enormous snuck I don't even have that.
That will be in the business.
And I don't have it.
And then.
A couple of billion dollars of opportunity. It is a smaller part is.
It's a very conservative.
I mean, it just thinking about it all the power trains a cab driver training all of the charging station NPS is not making a cell chip only with solid anti assistance.
Great. Thanks, a lot for all the color.
Our next question is from Alex Vecchi of William Blair. Alex Your line is now open.
Hey, everyone. Thanks for taking my question.
Pardon me, maybe one for you just on a housekeeping question around gross margins.
Can you.
Elaborate a little bit on the down sequential the only reason I'm asking is given the end market weakness in notebooks and consumer I would've thought is lower gross margin mix.
So anything you can do.
On that and how they take will go from here.
Sure Alex.
There is a lot of ingredients that play into the gross margin outlook and certainly the direct margin by end market as a significant part of it. Another is the amount of I don't want to call it necessarily unused capacity with the fixed cost that isn't necessarily absorbed by the same volume. So it's really.
The fixed cost issue as opposed to the.
Sales mix.
Putting a little bit of downward pressure on the gross margin.
Okay, and then similarly tabetic side, just expand on what makes your questions regarding.
And then your fab partner TSMC.
Do you view that relationship.
Surely be gross margin accretive or dilutive versus your Chinese partners.
Well these are the advanced node and we're moving that to offset that.
Induct territory. So in that case, if all of these are more micro controllers in decades and.
Hum.
Highly digital content products.
It's a different product and.
We did.
There is no gross margin issues. Okay. We don't go about competing with a price all of the products that are we added is the mall ease of values and more in the software side.
And I think that the.
When you look at Houston C. These are new and advanced products that were developing with them.
Whereas we are at the same time doing an expansion and diversification away from China and that would include other fabs both in shell.
South Korea, as well as any Taiwan.
Uh huh.
That's really helpful.
With that I'll go back into queue. Thank you.
Our next question is from Melissa Fairbanks of Raymond James Melissa Your line is now open.
Hi, guys, thanks very much.
We saw Capex, maybe a little longer term question for you we saw Capex dip a little in the third quarter.
Maybe could you give us an update on your longer term capacity planning not just with TSMC.
But more broadly just the near term demand weakness impact goes longer term plan and then when we're looking at getting to $4 billion in revenue, what's the path to that ramp in the cadence of the investment needed to get there.
Well, yes.
Hugh.
We always if you look at our past.
If you look at how we expand.
Our volume.
Sure.
Our capacity what is the.
What's our investment in.
If you look at our past <unk>.
Nine to 12 years.
It's a same path. It's the same pattern as the next four or five years.
And we're not going to over invest with now.
Leslie invested okay.
So the.
The train if you look at it if you're plotting the.
Our opex and also the growth rate in that.
It should be remained pretty constant.
In the past.
Four years and in the past eight years.
12 years and.
Although nevertheless for last two or three years the gross patent.
Really different format.
If I'm a <unk>.
Previous.
Four years and whatever the growth rate we have.
In the next four years, you can use up talking that you can't use the same kind of percentage range.
Melissa keep in mind that when we do the fab expansion the capital expenditures are borne by our partners not directly by US. So when you look at our run rates that Michael's referring to that's more heavily concentrated in test equipment, which can fluctuate anywhere between $8 million per quarter.
<unk> to $14 million per quarter. It just so happens that we've made a lot of those investments earlier in the year and Thats why were lower but the other thing that we invest in is that we do buy.
We develop our own facilities and those can be layered on and currently there are no investments of any material nature. Yeah. Let me, let me clarify this a little more than the market rather than give you the.
Let's give you a model.
NPS is but we don't.
We don't own the fab.
On the fab equipment and.
Cost of associating with the.
With.
Uh huh.
Capacity expansion one is.
We have to qualify the process and the large portion of it it's a qualify our products we have a false oven, although well all the fall.
Product and.
Each product goes through our qualifications, thus takes up all at eight 8% to nine months that call. So that's a very costly.
And.
So that's if.
If we don't if we slow down and.
The demand slowed down some but we don't have a quantified.
Uh huh.
As fast, okay, and so the costs will be spread up.
And those costs are borne in our R&D expenditure expenditure loan.
Okay, great that's very clear thanks, very much guys.
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.
Thank you Shannon I'd like to thank you all for joining US for this conference call and look forward to talking to you again during the fourth quarter conference call, which is likely to be held in early February .
You have a nice day.
Yeah.
Yeah.