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Monolithic Power Systems posts strong Q2 FY2025 results and upbeat guidance, but rising inventory and operating expenses pose potential margin risks despite robust demand and supply chain diversification.

# Monolithic Power Systems Delivers Robust Q2 FY2025 Beat, But Inventory and Cost Pressures Loom

---

## Executive Summary

- **Monolithic Power Systems (MPWR) delivered a standout Q2 FY2025, with revenue of $664.6M (+31% YoY) and non-GAAP EPS of $4.21, both well above consensus.** Growth was broad-based, led by Storage & Computing (+70% YoY), Automotive (+66.4% YoY), and Communications (+69.3% YoY).  
- **Earnings quality remains solid,** with stable gross margins (non-GAAP: 55.5%) and improved operating margins, despite a modest sequential compression and rising operating expenses, particularly from stock-based compensation.  
- **Management struck a bullish tone,** highlighting successful supply chain diversification (now 50% outside China), robust demand across end markets, and a transformation toward a full-service silicon-based solutions provider. Q3 revenue guidance of $710–$730M implies 7–10% sequential growth, in line with market expectations.  
- **Risks are emerging around rising inventory levels (now 150 days) and accelerating operating expenses,** which could pressure margins if demand softens. However, supply chain diversification and investments in AI and automotive content provide long-term upside.  
- **Catalyst watch:** Near-term, expect positive investor reaction to the headline beat and strong guidance. Key upcoming catalysts include Q3 AI/Enterprise data ramp (20–30% sequential growth expected) and further updates on inventory management.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $664.6M    | $635M     | +4.7%    | +31%       |
| Non-GAAP EPS          | $4.21      | $3.85     | +9.4%    | +35%       |
| GAAP EPS              | $2.78      | $2.60     | +6.9%    | +32%       |
| GAAP Gross Margin     | 55.1%      | 55.0%     | +0.1pt   | -0.3pt QoQ |
| Non-GAAP Gross Margin | 55.5%      | 55.3%     | +0.2pt   | -0.2pt YoY |
| GAAP Op. Margin       | 24.8%      | 24.5%     | +0.3pt   | +1.2pt YoY |
| Inventory (COGS)      | $490.6M    | —         | —        | +17%       |
| Inventory Days        | 150        | —         | —        | +4 days    |

**Key Segment Growth:**  
- Storage & Computing: +70% YoY  
- Automotive: +66.4% YoY  
- Communications: +69.3% YoY

---

## Earnings Quality

Monolithic Power Systems’ Q2 revenue growth was broad-based, with all major segments posting outsized gains. **Gross margins remained stable** (non-GAAP: 55.5%), reflecting strong pricing power and product mix, though there was a slight sequential and annual compression. **Operating margins improved YoY** (GAAP: 24.8%), but rising operating expenses—driven by a 9.1% QoQ increase in stock-based compensation—are a watch item. Inventory levels rose 17% YoY, now at 150 days, which could become a headwind if demand moderates.

---

## Management Commentary & Guidance

Management’s tone was **confident and bullish**, emphasizing the company’s transformation into a full-service silicon-based solutions provider and the success of its supply chain diversification (now 50% outside China). **Q3 revenue guidance of $710–$730M** (7–10% sequential growth) is in line with consensus and reflects continued strong demand, especially in AI/Enterprise and automotive. Margin guidance remains stable, but management acknowledged potential volatility in Storage & Computing for H2 and flagged short lead times as a risk.

---

## Key Risks

- **Inventory risk:** Inventory days increased to 150 (from 146), raising the risk of write-downs or margin pressure if demand softens.
- **Operating expense inflation:** Stock-based compensation and overall opex are rising faster than revenue, which could compress margins if not offset by continued top-line growth.
- **Macroeconomic/geopolitical risk:** Ongoing global uncertainties could impact demand or supply chain stability, despite diversification efforts.
- **Demand cyclicality:** Storage & Computing segment remains historically volatile.

---

## Expected Market Reaction

Analysts and investors are likely to **react positively** to the strong revenue and EPS beats, as well as the robust Q3 guidance. The broad-based growth and supply chain improvements are likely to be well received. However, some caution may persist around the rising inventory and cost base, which could temper enthusiasm if not addressed in coming quarters.

---

## Final Takeaway

**Q2 FY2025 was a strong quarter for Monolithic Power Systems,** with broad-based growth, margin stability, and a bullish outlook. The market may be underestimating the risks from rising inventory and operating expenses, but also may not be fully crediting the company’s strategic transformation and supply chain diversification. **Key upcoming catalysts** include the Q3 AI/Enterprise data ramp and further progress on inventory management. Investors should watch for sustained demand momentum and cost discipline as the year progresses.

MPWR: Strong Q2, Inventory and Cost Risks Emerge

Monolithic Power Systems (MPWR) is delivering strong revenue growth, especially in Storage & Automotive, but rising capex is pressuring margins and free cash flow, warranting close investor attention to near-term profitability.

# Monolithic Power Systems, Inc.: Q2 FY2025 Earnings Outlook – Navigating Robust Growth, Margin Pressures, and Market Surprises

## Executive Summary: Bullish Momentum with Margin Watch

We maintain a **Bullish** outlook for Monolithic Power Systems, Inc. (MPWR) heading into Q2 FY2025, underpinned by **strong revenue momentum** and **segment outperformance** in Storage & Computing (+77.6% YoY) and Automotive (+66.4% YoY). Q1 FY2025 revenue of **$637.6M (+39% YoY, +2.6% QoQ)** and management’s Q2 guidance of **$640–$660M** signal continued top-line strength. Margins remain healthy, with Q1 gross margin at **55.4%** and operating margin at **26.5%**. However, the market may be underestimating the **potential for short-term free cash flow and margin pressure** due to a **152% YoY increase in capex** and a sequential decline in free cash flow. Investors should closely monitor the interplay between growth investments and near-term profitability.

## Recent Trends Signal What’s Next

Recent quarters reveal a clear pattern of accelerating revenue and stable margins, with segment-level divergence. Q1 FY2025 delivered **record revenue** and robust segment growth, while Enterprise Data lagged (–11.2% YoY). The following table summarizes the last four quarters’ key financials:

### Quarterly Financial Trends

| Quarter      | Revenue ($M) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 FY2024    | 458.0        | 54.2             | 24.8                 | 20.1          | 2.85    |
| Q3 FY2024    | 523.0        | 54.8             | 25.2                 | 20.7          | 3.25    |
| Q4 FY2024    | 613.0        | 55.1             | 26.0                 | 21.5          | 3.80    |
| Q1 FY2025    | 637.6        | 55.4             | 26.5                 | 21.8          | 4.04    |

**Trend:** Revenue has grown sequentially each quarter, with gross and operating margins expanding modestly. EPS has followed suit, reflecting operational leverage. The **Storage & Computing** and **Automotive** segments are the primary growth engines, while **Enterprise Data** remains a drag.

## Management’s Forward Tone and Positioning

Management’s Q1 FY2025 commentary balanced optimism with caution. Phrases such as **“record quarterly revenue”** and **“broad-based growth”** were paired with **“let’s leave it wide open for right now”** regarding demand visibility. This marks a subtle shift from prior quarters’ more confident tone, reflecting both the upside from AI server ramps and the uncertainty in Enterprise Data. The Q2 guidance of **$640–$660M** and tight opex control signal a focus on **predictable execution**. The reiteration of a **15% non-GAAP tax rate** and stable share count further reinforce management’s intent to minimize surprises.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs stand out for Q2 FY2025:

1. **Inventory Levels:**  
   Channel inventory remains **“very lean”**, positioning MPWR to quickly capitalize on any demand uptick.  
2. **Capex:**  
   Q1 capex was **$40.3M (+152% YoY)**, reflecting aggressive capacity expansion.  
3. **Short Interest:**  
   Short interest has declined to **5.2%–6.7% of float**, and options activity suggests a potential for upside surprise.

### KPI Movement Table

| KPI                | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Inventory (days)   | 52        | 48        | 45        | –7         | –3         |
| Capex ($M)         | 16.0      | 35.0      | 40.3      | +152%      | +15%       |
| Short Interest (%) | 7.1       | 6.7       | 5.2       | –1.9       | –1.5       |

**Implications:**  
- **Lean inventory** supports margin resilience and rapid fulfillment.
- **Elevated capex** could pressure near-term free cash flow and margins if revenue growth does not accelerate further.
- **Declining short interest** and options activity may amplify positive earnings surprises.

## Missed by the Street

A key overlooked signal is the **decline in free cash flow** despite record revenue:  
- **“FCF declined to $216.1M from $232.1M in Q1 FY2024.”** (Q1 FY2025 10-Q)  
This suggests that the **capex ramp is outpacing incremental revenue gains**, potentially compressing margins and limiting near-term cash returns. The Street’s focus on top-line growth may be missing this subtle but important margin headwind.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($M) | Non-GAAP EPS | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|--------------|----------------------|------------------------------------------------------|
| Bull     | 660          | ~4.15        | ~27                  | Accelerated Storage/Auto growth, supply chain eases  |
| Base     | 650          | ~4.04        | ~26.5                | In-line execution, stable demand, controlled costs   |
| Bear     | 640          | ~3.95        | ~26                  | Enterprise Data lags, supply/logistics headwinds     |

**Most Likely:** The **Base case** is most probable, given management’s tight guidance, stable KPI trends, and a balanced tone. Upside exists if demand in high-growth segments accelerates, but margin and FCF pressures from capex are real risks.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($M) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q2 FY2024    | 458.0        | 2.85    | 54.2             | 24.8                 |
| Q3 FY2024    | 523.0        | 3.25    | 54.8             | 25.2                 |
| Q4 FY2024    | 613.0        | 3.80    | 55.1             | 26.0                 |
| Q1 FY2025    | 637.6        | 4.04    | 55.4             | 26.5                 |

### KPI Movement (YoY and QoQ)

| KPI                | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Inventory (days)   | 52        | 48        | 45        | –7         | –3         |
| Capex ($M)         | 16.0      | 35.0      | 40.3      | +152%      | +15%       |
| Short Interest (%) | 7.1       | 6.7       | 5.2       | –1.9       | –1.5       |

### Key Management Quotes

1. **“We delivered record quarterly revenue and broad-based growth.”**  
   – Q1 FY2025 Earnings Call  
   *Signals confidence in demand drivers.*

2. **“Let’s leave it wide open for right now.”**  
   – Q1 FY2025 Earnings Call  
   *Implies uncertainty in forecasting, especially in Enterprise Data.*

3. **“Channel inventory remains very lean.”**  
   – Q1 FY2025 Earnings Call  
   *Suggests potential for rapid upside if demand accelerates.*

4. **“Capex increased to $40.3 million, primarily for capacity expansion.”**  
   – Q1 FY2025 10-Q  
   *Indicates aggressive investment, but also near-term FCF risk.*

5. **“We expect Q2 revenue in the range of $640 million to $660 million.”**  
   – Q1 FY2025 Earnings Call  
   *Sets a clear, stable expectation for the next quarter.*

6. **“Non-GAAP tax rate will remain at 15%.”**  
   – Q1 FY2025 Earnings Call  
   *Signals no major tax-related surprises ahead.*

7. **“Free cash flow declined to $216.1 million from $232.1 million in Q1 FY2024.”**  
   – Q1 FY2025 10-Q  
   *Highlights a subtle margin and cash flow headwind.*

---

**Bottom Line:**  
Monolithic Power Systems enters Q2 FY2025 with strong revenue momentum and healthy margins, but investors should watch for near-term margin and FCF pressures from aggressive capex. The base case scenario is most likely, but upside exists if high-growth segments outperform and supply chain risks abate.

MPWR: Growth Outpaces Margins Amid Capex Surge