芯源系統 (MPWR) 2022 Q3 法說會逐字稿

Welcome, everyone, to the MPS Third Quarter 2022 Earnings Webinar. Please note that this webinar is being recorded and will be archived for 1 year on our Investor Relations page at www.monolithicpower.com. My name is Genevieve 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 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. 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. 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, 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 SEC and is currently available on our website. Now I'd like to turn the call over to Bernie Blegen.

Thanks, Jen. First of all, today, I'm greeting you from Europe. We held our third quarter Board of Directors meeting in our Barcelona office. We have our Board members tour the facility and oversee the operations here.

Now to the financial results. MPS achieved record third quarter revenue of $495.4 million, 7.5% 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 60.0% year-over-year. Automotive revenue represented 17.6% of MPS' 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.

In our enterprise data market, third quarter 2022 revenue of $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' third quarter 2022 revenue compared with 9.2% in the third quarter of 2021.

Third quarter 2022, industrial revenue of $58.7 million increased 5.1% 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 of $112.9 million decreased 7.7% from the second quarter of 2022. The sequential revenue decline was primarily due to softening of customer demand 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' third quarter 2022 revenue compared with 21.3% in the third quarter of 2021.

Third quarter consumer revenue of $89.2 million decreased 8.4% from the second quarter of 2022. The sequential quarterly revenue decline was primarily due to softening of overall demand. Third quarter 2022 consumer revenue was up 21.1% year-over-year. Consumer revenue represented 18.0% of MPS' 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 6 quarters, we have faced product shortages, especially in consumer storage and computing. Now we have started to see our customers reduce 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 4,000 different products which are required to support thousands of our customers' applications. On average, our product life cycles exceeds 6 to 8 years. so we are not concerned with carrying an inventory level above target.

MPS' 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 MPS have expended 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 continue to proactively support our customers' needs. We've established MPS 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 MPS as a strategic partner.

We are cautious about the overall business conditions 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 controllables and additional companies have been added to the entities list. As of today, we see immaterial revenue impact directly or indirectly from those new trade restrictions. Our products utilize 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 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 59.0%, 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, compared to $179.4 million reported in the second quarter of 2022.

Let's review our operating expenses. Our GAAP operating expenses were $139.0 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 reported in the third quarter of 2021. The differences between non-GAAP operating expenses and 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 charge to cost of goods sold was $43.0 million compared with $42.9 million recorded in the second quarter of 2022.

Switching to the bottom line. Third quarter 2022 GAAP net income was $124.3 million or $2.57 per 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 $2.06 per share 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, MPS 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 and increase in other long-term assets reflected a $170 million prepaid payment made during the quarter to secure a long-term purchasing commitment. Accounts receivable ended the third quarter of 2022 at $153.4 million, representing 28 days of sales outstanding which was 3 days higher than the 25 days reported at the end of the second quarter of 2022 and 6 days higher than the 22 days at the end of the third quarter of 2021.

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 5 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 believe comparing current inventory levels with the following quarter's 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 than 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 58.3% 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, our market share gains continue 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.

(Operator Instructions) Our first question comes from Matt Ramsay of Cowen

Michael, Bernie, can you hear me okay?

Oh, yes. (inaudible).

So 2 different questions from me. One sort of related to the model and the near term, and the other one on a different topic. So the first question, Bernie, if 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 if you could maybe talk about things by segment and what your guidance implies on a quarterly basis by segment, I think that would be helpful. And then I have a follow-up.

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 positioned to show growth between Q3 and Q4. The only sort of qualifier that we're still trying to learn about the strength and the run rate of the communications segment.

So I think what we've done is we feel very, very comfortable with both how we've been communicating our expected results, but we've added a little conservatism to the outlook.

Got it. Great. Michael, my second question is on the topic of China. And over the last I would say, 3 or 4 weeks since some of the new commerce and BIS restrictions have come into place, I've been getting a ton of investor questions about this topic with relation to your company on 2 fronts. I guess the first being MPS has a significant employee base in China. If you could maybe quantify what maybe percentage of your employees and in what functions are actually in China. And if you've heard from any of these restrictions that there could be any -- restrictions on those employees, need to relocate anybody, those kind of things?

And then the second part of the question is on your 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 SMIC, 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 are you guys along in -- or maybe the mix of your capacity that's now outside of China. You get the nature of the questions, but they've been a pretty frequent and acute over the last 3 or 4 weeks. So it'd be great if you could just kind of address some of those topics.

Yes. Very nice questions. Okay. I'm glad you asked, that what all your concern is that I think that most of the people totally misconstrued whatever the regulation dips. And we do have a presence. We have a large presence in -- within China. This is a U.S. companies, okay? And we're not subject to sanctions at all. We don't have to have people to leave -- Americans have to leave an MPS office within China. And that's not in essentially entity list, and we are not in an essentially entity list. And other one is the manufacturing.

So in the last couple of quarters, we already talked about it. We diversified out of China and we started 5, 6 years ago. And also, I should mention that we talk about the engineering manpower. This is -- MPS started in 2017. And we are in Barcelona announced, and okay, we grew the very large team here and -- with local government support. And again, we're outside of China. And that's not because we -- because of sanctions. Because we are well diversified, automatically, we will grow into a different region in the same time zones where we give our customers a 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.

Just a very, very, quick follow-up. 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?

It is very convoluted. And it is very convoluted in the packaging and also the process -- wafer manufacturers. And it's very convoluted. We don't have clear figures now. But going back to the Bernie's questions -- Bernie's answers, our technologies, we're using 40-nanometer above. And the current sanctions is 14-nanometer below. We are far where -- as Bernie mentioned in the script, we are far from that [same chip] in the way using the trading edge. We're using the -- really using the trading edge of a fab equipment.

And if I can just follow up on one quick point you made in our script here, is that as the supply demand imbalance has normalized, that frees us up from just being in pure production mode to actually be able to invest time in business relationships to be able to expand and diversify our capacity which we talked about, about 3 quarters ago, we're going to go from $2 billion of capacity currently to $4 billion within the next 2 years -- 2 to 3 years.

These are mostly (inaudible) -- these are outside of China.

Our next question is from Quinn Bolton of Needham. Quinn.

I don't want to pile on the export control questions that Matt has just asked. But I have one other clarification. You're at 40-nanometer and above, and so you're not directly affected. But my understanding is that to the extent a facility, a manufacturing facility in China has multiple process nodes, some above 16-nanometer and some below 16-nanometer that, that mixed-use facility would be affected. And so I'm just wondering for those Chinese manufacturing facilities, the fab by fab, are any of the fabs that you're running 40-nanometer and above, do they also produce 16-nanometer and below and might therefore be affected by equipment and/or support restrictions?

No. These are fab usually. They don't -- advanced fabs, okay, these are 14-nanometer below, so they don't share with this outdated fabs like 40-nanometer above. Okay, we're primarily using a 65-nanometer. So these are totally different fabs.

That's right. I just wanted to clarify because I know that as Matt said, there have been lots of questions on this topic.

Maybe one for Bernie. I know you're not guiding beyond the December quarter. But 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 continues into next year? And I guess the offset would be Monolithic Power has some pretty, I think, meaningful market share gains, both on the server CPU side as well as 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 -- and again, Quinn, thank you for focusing on more longer-term and strategic issues here. I think it's very easy to get caught in thinking about next quarter and just the quarter after that. And everything, all the indicators that we're receiving as far as the share gains occurring in the data center are on track. Nothing has been changed there at all.

And then as far as how we look at the next few quarters, again, when we apply cautiousness to Q4, I think we could expect that anything that -- any growth opportunities are more likely to be weighted in the second half of 2023.

Yes. That's our guess. And that's all we experience. And I might as well add, you mentioned the CPUs and the CPU power, data centers, MTS is a lot more than that. And you look at 30 or -- read our script, and you have automotive and the data the enterprise data centers and other ones in communications, these are still -- all of them are growing, except the consumer-related, notebooks, gaming, those type of things.

And as everybody is aware of, okay, they are softening. There are the swings from shortage to oversupplies and in kind of almost overnight. And these kind of things, we cannot predict. I mean you guys probably predict better than we know. We just have to react fast. And overall NPS business, all these greenfield products will start to ramp in the last few years and will continue to ramp.

Sorry, Michael, I didn't want to shortchange it by only focusing on the data center opportunity, so.

Our next question is from William Stein of Truist. Will.

I have one near-term one, and then a longer-term one. From a near-term perspective, I'm hoping you can talk about pricing trends and also how your backlog might be changing in terms of the duration of what you have on the books today versus where we've been recently? And then again, I have a sort of longer-term follow-up question, please.

For shorter terms, okay, here's what we see. For the long cycle -- longer cycle business is continued. And because there are no questions related to a price, okay? Because all the products, they will last 4, 5 years or even longer. And these products are in the ramping cycles.

In shortest -- in the shorter cycle, consumer related, as I said it earlier, like on notebooks in gaming or the other personal electronics, these ones, okay, they're oversupplied. There's no question the -- we don't have any questions about the pricing. And that trouble will come in, okay later, and another quarter later, so like it will be a new project design. That's where we -- that's -- pricing was a question -- pricing will start to emerge.

And Will, you also mentioned backlog the sort of condition of the backlog overall. And relative to historical norms, we still remain very, very -- we're much higher than they have been historically. And what this has given us an opportunity to do is address with our customers, in fact, we've been engaged in these conversations for several quarters now on when they expect real demand to be. So I think that as far as our book of business is looking ahead, it remains very healthy.

Great. And then the longer-term question, I tend to ask each quarter about some of the more differentiated products and services NPS has modules in particular. I wonder about the traction of those products and whether you're seeing the uptake of that either expand or falter given the current environment?

And then same thing with e-commerce, like you have seen more or less of that given the changing demand environment.

Yes. Those -- all the product, the modules and the e-commerce business, we don't see any changes, and they are just continuing. And that's where NPS and future business would be, and we're even more diversified than MPS' current business.

And I think it's interesting as far as market acceptance for the modules, it really is not concentrated in any market. It's actually pretty evenly distributed against all of our markets. So that, to me, is a real clear indicator that it fits in well with our diversification strategy.

Yes, frankly, if you ask me, where these module goes, we don't have an ideas, and that is the beauty of it.

Our next question comes from Jeremy Kwan of Stifel, Jeremy.

Can you hear me okay?

Yes.

Great. Just a couple of questions. First, just looking at the lighting business, it looked like it had a nice increase sequentially this quarter. Is there anything that you can call out there? Just want to understand some of the dynamics in that business.

Automotive.

I'm sorry, the lightning? Oh, it's automotive. Okay. That's what's been driving it?

Yes. As we said in the prepared comments that there were new platforms that were launched, most of them are tied to the 2023 model year. And there were probably 3 areas, lighting being one of them, that really contributed to the uplift in the automotive in Q3.

So is this something that we can look at as a new baseline and the sort of like a steady ramp here? Or should we expect kind of more step functions with each new model here?

Well, the lighting is in automotive lighting have a variety of and you have a downlight, you have indicators all kind of indicators you have signals. Then you have a head light, okay. And so this is the last couple of quarters you see stepping up. And that's kind of -- that's part of the greenfield product in automotive start to ramp. And the content in the cars, we're growing the content. And -- but the number of cars we have and just at the beginning, we still have a small -- very small market share. So it will continue to grow, yes.

Got it. Great. And just turning to the long-term purchasing agreement that you talked about, Bernie, can you give us a little bit more details on this, maybe the magnitude or size of this deal, and how different is this from things -- 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 because 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 existing as well as with new fabs. And so in this instance, we wanted to secure a purchasing agreement that in order -- that gave us dedicated capacity regardless of what the economic environment was.

Got it. 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 it's the geographic footprint, are there things that you can call out there as well?

Most -- let me answer that way. Okay, most of our modules assembly is outside of China.

Our next question is from Rick Schafer of Oppenheimer.

Rick, can you hear us?

Yes. Sorry, I was muted. Can you hear me now, Bernie?

Yes.

Great. Maybe my first one, just on supply. TSM, obviously, your newest foundry partner. I was just curious if you could kind of level set us on where you guys are at in terms of the qualification process eventual capacity ramp sort of maybe even get a sense of how much capacity they're going to have for you ultimately? And how much of that might be 8 versus 12-inch? Just trying to get a better handle on them as a partner.

Yes. Most of it, we use a 12-inch. And also the advanced process of course, that seeing in the TSMC okay, we do use their advanced node. And these are for microcontrollers, that type of a product, we do use them. And these are not winning in China at all. And lot of these product are at the very, very beginning of a rank, okay? So now, we have all the capacities for the these new product. Mostly these are for automotive and communications. And so now give us a lot more room to grow.

So Michael, just to kind of get a sense, I mean, is this -- could TSM be sort of a 10% contributor to capacity in, say, a year's time? Or is that too aggressive to kind of think of how quickly they could ramp?

It's on the lower side, okay, as we see now.

And then a follow-up. I'm just curious to get an update on silicon carbide progress, particularly traction inverters. I mean how many customers you're engaged with now and when we might expect to see initial revenues. And I know you've talked about it in the past, Michael, but just kind of remind us what that dollar content for MPS looks like ex EV? And I'm assuming it would be sort of subsystem, but would anything be discrete or would that all be sort of module/subsystem?

Yes. Thank you very much to ask that question. Yes, that kind of thing, the silicon carbides and high-power modules, okay, that's what gets me excited. And we do have our first product and go through the qualification now. It's working. And MPS is not intent to sell as a power device, as a power device only and like power sets only. We will sell -- within using our -- combined with our silicon technology, produce small modules. And we do have many customers engaged in automotive sections and also the large energy storage and as well as BMS, again, the car charging stations and those kind of things are visible, we don't have any revenue yet, okay, 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?

I think these are contents that will be enormous, okay? I don't even have a -- that would be in the biddings. And I don't have a name a couple of million dollars of opportunity is a smaller side. It's a very conservative estimate. Just thinking about it, all the power trains, again, driver trains, all the charging stations, NPS is not going to make -- sell chip only, we're selling the entire systems.

Our next question is from Alex Vecchi of William Blair.

Bernie, 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 and notebooks in consumer, I would have thought is lower gross margin mix. So anything you can do to help on that and how to think of it from here.

Sure, Alex. So there's a lot of ingredients that play into the gross margin outlook. And certainly, the direct margin by end market is a significant part of it. Another is the amount of -- I don't want to call it necessarily unused capacity, but 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 that's putting a little bit of downward pressure on the gross margin.

Okay. And then similarly to that extent, just to expand on Rick's questions regarding the new fab partner or TSMC. Do you view that relationship eventually being gross margin accretive or dilutive versus your Chinese partners?

Well, these are the events to note. And we're moving that towards in the territories. And therefore, these are more microcontrollers and more highly digital content of products, and it's a different product.

And we -- there is no gross margin issues, okay? We don't go compete with the price. All the products that we add is more -- these values more in the software side.

And I think that when you look at TSMC, these are new and advanced products that we're developing with them whereas we're at the same time, doing an expansion and diversification away from China, and that would include other fabs, both in South Korea as well as in Taiwan.

Our next question is from Melissa Fairbanks of Raymond James.

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, does the near-term demand weakness impact those longer-term plans? And then when we're looking at getting to $4 billion in revenue, what's the path to that ramp and the cadence of the investment needed to get there?

Well, it's a -- you -- we always -- if you look at our past, okay, if you look at how we expand our capacity. What is the -- what's our investment, okay? And if you look at the past 8, 9, 12 years in -- it's the same pattern as the next 4, 5 years. And we're not going to over invest. We're not going to less invest it, okay? And so the trend, if you look at, if you're plotting our OpEx and also the growth rate, it should remain pretty constant in the past 4 years and in the past 8 years, in 12 years, in the last -- last 2 or 3 years, the growth pattern is really different from -- in the -- from previous 4 years. And whatever the growth rate we have in the next 4 years, you can use a tracking that -- you can use the same kind of percentage range.

And 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 rate that Michael is referring to, that's more heavily concentrated in test equipment, which can fluctuate from anywhere between $8 million per quarter to $14 million per quarter.

It just so happens that we made a lot of those investments earlier in the year, and that's why we're lower. The other thing that we invest in is that we do buy or we develop our own facilities. And those can be layered on, and currently, there are no investments of any material nature.

Yes. Let me clarify this a little more. I can rather than give you a model. NPS, we don't own the fab. We don't own fab equipment. And the cost of associating with capacity expansion, one is we have to qualify the process. And the large portion of it is to qualify our products. We have 4,000 -- over -- well over 4,000 products. And each product go through qualifications. That takes about 8 to 9 months. That cost -- that's very costly in -- so that's -- if we don't -- if we slow down and the demand slow down, so we don't have to qualify as fast, okay? And so the cost will be spread up.

And those costs are borne in our R&D expenditure line.

(Operator Instructions) As there are no further questions, I would now like to turn the webinar back over to Bernie.

Thanks, Jen. 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. Thank you, and have a nice day.