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Monolithic Power Systems Inc (MPWR 2.82%)
Q3Â 2018 Earnings Conference Call
Oct. 25, 2018, 6:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to Monolithic Power Systems Incorporated Third Quarter 2018 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions) And as a reminder, this conference is being recorded.
I'd now like to turn the conference over to Bernie Blegen, Vice President and Chief Financial Officer. Please go ahead.
Bernie Blegen -- Vice President and Chief Financial Officer
Thank you. Good afternoon and welcome to the third quarter 2018 Monolithic Power Systems conference call. In the course of today's conference call, we will make forward-looking statements and projections that involve risks and uncertainties, which could cause results to differ materially from management's current views and expectations. Please refer to the Safe Harbor statements 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 earnings release and in our SEC filings included in our Form 10-K filed on March 1, 2018, and Form 10-Q filed on August 2, 2018; both of which are accessible through our website www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call.
We'll be discussing gross margins, operating expense, R&D, and SG&A expense, operating income, interest and other income, net income and earnings on both a GAAP and on a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.
A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q3 2017, Q2 2018 and Q3 2018 earnings releases, as well as to the reconciling tables that are posted on our website.
I'd also like to remind you that today's conference call is being webcast live over the Internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today.
Let me start by telling everyone that our Q3 2018 quarterly revenue of $160.0 million established another record for MPS, our fifth high watermark for quarterly revenue in the last six quarters. Likewise, non-GAAP gross margin grew 10 basis points sequentially, representing the 12th consecutive quarter MPS's non-GAAP gross margin has either expanded or matched the prior quarter's performance.
As expected, we reached the $160 million revenue milestone reflecting strength in each of our targeted market segments. Q3 revenue for computing and storage, up 64% year-over-year, automotive, up 54%, and industrial, up 52%. During the quarter, MPS did experience some unexpected softness in high volume consumer-related businesses, especially in the Greater China region. However, we still see high demand for these products and remain optimistic in our prospects for high-end consumer products. We also gained market share in low-end communication segment. We will stay opportunistic in these high-volume businesses and focus on growing higher margin products.
Looking at our revenue by end market. In our computing and storage market, revenue of $47.7 million increased $18.6 million or 64.2% year-over-year. Growth in the market was broad-based when compared to the year-ago quarter with all applications, high-end notebooks, cloud computing and storage increasing at rates well above the market average.
Computing and storage revenue represented 30% of MPS's third quarter 2018 revenue compared with 23% in Q3 2017. Third quarter 2018 industrial revenue of $24.9 million increased $8.5 million or 52.1% from the third quarter of 2017, primarily due to increased sales for applications in power sources, meters and security. This market represented 16% of our total third quarter revenue versus 13% in the prior year.
Third quarter automotive revenue of $19.8 million grew $6.9 million or 53.9% over the same period of 2017 as a result of increased sales of infotainment, safety and connectivity application products. Automotive is MPS's largest sale opportunity at $7 billion and we are in the early stages of penetrating this market. In the years ahead, we plan to offer a number of new products for applications in body control, lighting, infotainment, ADAS and battery management. Automotive revenue was 12% of MPS's total Q3 2018 revenue compared with 12% for Q3 2017.
Third quarter communications revenue of $19.2 million increased $3.8 million or 24.6% over the same period of 2017. This represents a combination of share gains in our legacy markets and initial ramping in products for the 5G network. Revenue from consumer markets of $48.5 million decreased $6.8 million or 12.4% from the third quarter of 2017. Consumer revenue accounted for 30% of our total Q3 revenue compared with 43% in the prior year. While lots of revenue in these high-volume consumer markets is likely a reflection of geopolitical or trade policy changes, we did not lose projects and continued to gain market share.
GAAP gross margin was 55.6%, 10 basis points higher than the second quarter of 2018 and 60 basis points higher than the third quarter of 2017. Our GAAP operating income was $33.5 million compared to $24.9 million reported in the second quarter of 2018 and $23.8 million reported in the third quarter of 2017. The third quarter 2018 non-GAAP gross margin was 56.1%, 10 basis points higher than the second quarter of 2018 and 40 basis points higher than the third quarter of 2017.
Our non-GAAP operating income was $49.2 million compared to $41.4 million reported in the prior quarter and $38.9 million reported in the third quarter of 2017. Let's review our operating expenses. Our GAAP operating expenses were $55.5 million in the third quarter compared with $52.7 million in the second quarter of 2018 and $47.0 million in the third quarter of 2017. Our non-GAAP third quarter 2018 operating expenses were $40.5 million, up from the $36.9 million we set in the second quarter of 2018 and up from $32.9 million reported in the third quarter of 2017. On both a GAAP and a non-GAAP basis, third quarter litigation expenses were $343,000 compared with a $639,000 expense in Q2 of 2018 and a $327,000 expense in Q3 2017.
The difference between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss from an unfunded deferred compensation plan. Total stock compensation, including $471,000 charge to cost of goods sold for the third quarter of 2018, was $14.8 million compared with $15.9 million recorded in the second quarter of 2018.
Switching to the bottom line. Third quarter 2018 GAAP net income was $31.6 million or $0.71 per fully diluted share compared with $0.55 per share in the second quarter of 2018 and $0.54 per share in the third quarter of 2017. Q3 non-GAAP net income was $47.3 million or $1.06 per fully diluted share compared with $0.90 per share in the second quarter of 2018 and $0.84 per share in the third quarter of 2017. Fully diluted shares outstanding at the end of Q3 2018 were $44.7 million.
Now let's look at the balance sheet. Cash, cash equivalents and investments were $353.1 million at the end of the third quarter of 2018 compared to $318.7 million at the end of the second quarter of 2018. For the quarter, MPS generated operating cash flow of about $52.2 million compared with Q2 2018 operating cash flow of $25.4 million. Third quarter 2018 capital spending totaled $5.1 million.
Accounts receivable ended the third quarter of 2018 at $59.9 million or 34 days of sales outstanding compared to $53.5 million or 35 days reported at the end of the second quarter of 2018 and the $50.8 million or 36 days reported in the third quarter of 2017.
Our internal inventories at end of the third quarter of 2018 were $136.8 million, up from the $128.9 million at the end of the second quarter of 2018. Days of inventory decreased to 175 days at the end of Q3 2018 from the 189 days at the end of the second quarter of 2018. Days of inventory are in our new range reflecting changing customer requirements, particularly in automotive and computing, and our new product introductions.
Turning now to our outlook for the fourth quarter of 2018. We are forecasting Q4 revenue in the range of $151 million to $157 million. We also expect the following: GAAP gross margin in the range of 55.2% to 56.2%; non-GAAP gross margin in the range of 55.6% to 56.6%; total stock based compensation expense of $13.5 million to $15.5 million, including approximately $500,000 that would be charged to cost of goods sold; GAAP R&D and SG&A expenses between $50.6 million and $55.6 million; non-GAAP R&D and SG&A expenses to be in the range of $37.6 million to $40.6 million; this estimate excludes stock compensation and litigation expenses; other income is expected to range from $1 million to $1.2 million before foreign exchange gains or losses; fully diluted shares to be in the range of 44.6 million to 45.6 million shares.
In conclusion, as expected, we continue to execute according to our plan of diversification in both products and geographical markets. We grew in greenfield segments while gaining share in high-value products and consumer and communication among the uncertainty in the market and geopolitical environment.
I will now open the phone lines up for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Matt Ramsay with Cowen, your line is now open.
Matt Ramsay -- Cowen and Co. -- Analyst
Good afternoon, guys and congratulations on a strong set of results with a lot of uncertainty out there. The question that we've been getting most often is, there's a lot of new content growth and market share gains that are embedded into the long-term forecast that investors have for your company across a number of businesses. Maybe, Michael, you can talk about it at a high level how you're progressing there and then just (inaudible) that against a lot of concerns about a weaker macro environment. I know that folks have an expectation of 20% growth for your company over the next couple of years and we're just trying to understand the risks associated with adverse of the opportunities for share gains. Thank you.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
As you know MPS -- we are not in a position to answer what the macro position and that we only heard from you guys. And we have a very small percentage of a market share, particularly in those greenfield market segments such as autos and datacenters, and as well as the industrial side. And we have a very little market segment. Those segments should be relatively immune to what that market condition is. And we expect it to grow in according to our plan. And in next few years, we're all set. (multiple speakers)
Bernie Blegen -- Vice President and Chief Financial Officer
I think one point to add to that is that we are continuing to be very aggressive as far as securing new design wins. And that as we said in our prepared comments that while there has been a downturn that's reflected most in our consumer business, we didn't lose market share, in fact we continued to make gains.
Matt Ramsay -- Cowen and Co. -- Analyst
No, that commentary is really, really helpful. And I guess as a follow-up, I've spent a decent amount of time with my team, digging into the programmable aspect of (inaudible) solutions as you sort of bring programmability into the portfolio. Michael, and you could talk a little bit about it at a high level, what percentage of the products that you're shipping now and winning designs with. And then second, winning designs with our programmable in nature today and how you might see that trend going forward and what that might mean for market share? Thank you.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
At this point, it's still probably single-digit percentage of our total revenues. And we expect a quadruple in the next couple of years. And probably most likely in the four or five years, 100% of our products will be programmable.
Matt Ramsay -- Cowen and Co. -- Analyst
Got it. Now that's really helpful and I'll jump back in the queue. If you don't mind, congratulations and well done.
Operator
Our next question comes from Rick Schafer with Oppenheimer, your line is now open.
Rick Schafer -- Oppenheimer -- Analyst
Thanks, I'll add my congratulations guys on a nice quarter. So maybe, obviously, auto and industrial each up 50% plus in the quarter. I think the auto business is tracking to something north of $80 million this year. Mostly it's been infotainment, I think now you're starting to see lighting and motor control start to ramp. Maybe you could walk us through what that next leg of growth there looks like.
I know, Michael, you talked a lot about having two to three years of really solid visibility there. I'm curious as ADAS and BMS wins ramps, kind of a) what the timeline looks there and then what we could see for a margin impact. I guess, when would we start to see sort of a noticable margin impact within that auto business?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Even I talked about our infotainment, we're still scratching the surface. We started just thoughts of for referring. And as we just went through the other business and deep diving on our auto segments, we just starting it; even in the infotainment. And for next couple of years we have all these product designing such as the lighting, including headlights and also as Bernie said earlier, the body controls, (inaudible) models and any kind of moving pieces in a car we have an electronics control and we have those product designed. In ADAS, I see that in three years out. And all these activities, we have to pick and choose which product we want to do. And we just don't have enough people. And that our main result, our product reputation is out. And we are proven to be a quality supplier and so the margin will be stay the same as now or even bit higher.
Rick Schafer -- Oppenheimer -- Analyst
Got it, thanks. And maybe switching gears to e-commerce, I know it's something that a lot of people care about with you guys. Maybe start with any customer feedback or what the feedback has been from customers so far. I know you've talked about adding hundreds of customers there. I know you've also talked about, I believe first revenues -- material revenues sort of in 2020. I guess I'm curious, do smaller customers that e-commerce would be targeting. I mean do they need to go through a full call, like some of your more established larger customers? And I guess what I'm getting at is, could we see revenues in e-commerce kind of pull forward, could we see those start to hit before 2020?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Very possible. Particularly those are smaller customers. In industrial shops they buy 10,000 to 20,000 units a year and those are the customers and -- if we have -- if we prove to be a quality supplier and that they will stay with us for years. And so those ones just starting now. So in terms of how their feedbacks is, so far our website still -- it's up and it's it's not -- we still have a lot more to do and that particularly under the e-commerce market segments in how do we do digital marketing and we started to do this year and early next year, you will see some significant changes.
In terms of our current feedback, so far we hand them a floppy disk and (inaudible). Almost every one of them, they are very happy. They want to see more of these type of products. And I can't say everyone of them and we have -- in recent months we gained a few -- more than a few hundred (inaudible) customers. And most of them, they wanted these kind of products.
Rick Schafer -- Oppenheimer -- Analyst
And have you seen any competitive response from some of the larger HPA guys?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
I think these (inaudible) we addressed every segment of the market and we don't see any other players and that they do a similar thing as we do.
Rick Schafer -- Oppenheimer -- Analyst
Okay, thanks a lot, Michael. Thanks.
Operator
Thank you. Our next question comes from Quinn Bolton with Needham, your line is now open.
Quinn Bolton -- Needham -- Analyst
Hi, guys, congratulations again on the very steady execution. Michael, Bernie, just wanted to sort of address, I guess one of the biggest investor fears I hear is kind of the order rates declining in China region. Can you give us any sense whether those order rates, which sounds like they started to decline late summer, weather that's stabilized or are they still sort of on a downward trend. And maybe just address the sort of where you are in terms of starting backlog. Looking into the fourth quarter of 2018, I think the last few quarters you'd gotten in to the quarter with nearly 100% of plan in backlog. And then maybe a couple of products follow-ups. Thanks.
Bernie Blegen -- Vice President and Chief Financial Officer
Sure. I think that you can see from the Q3 numbers that -- and again the comments that we referenced that in the Greater China market that we did see a downturn in demand particularly for consumer. And so as a result of that we are sort of monitoring to see if that branches out into our other end markets, or if there are any changes in ordering pattern.
You referenced also our last three quarters as far as what our experience has been with backlog going into the quarter. And in fact what we've seen in this quarter is that we've sort of returned to a more normalized level. We're not at the accelerated pattern that we'd been experiencing previously, but it has really again returned to a more normalized backlog for this time in the quarter. So it's something that we have to continue to monitor and certainly as there are different developments, we have demonstrated the ability to respond to that.
But I think the thing that is most encouraging for us is that the targeted areas that we focused on, again, the automotive, the computing and storage, and the industrial where they have long ordering visibility, that those remain very solid and that we're just seeing gains that are significantly better than market.
Quinn Bolton -- Needham -- Analyst
Great, and then maybe Michael, could you just address, as we look into the end of 2018 and 2019, Intel will be launching their Cascade Lake platform by the end of the year and then the new (inaudible) platform maybe second half of '19. I know Perle was a big uptick for you in terms of server content. How do you feel your position with Cascade Lake and (inaudible), Cooper Lake over the next 12 months?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
I think that we -- I expected and I think when we grow -- we don't expect that they have anything different like in all the designing activity and all the new product release and we expected that the -- same as the last couple of quarters. And I think even grow faster. Most of the revenue in this (inaudible) in the next -- 2019, all the way through 2022.
Quinn Bolton -- Needham -- Analyst
So sort of a steady ramp in server power management over that '19 to '22 timeframe?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Yes. And they are in a similar wave of growth.
Ross Seymore -- Deutsche Bank -- Analyst
Got it, OK. Thank you. Go ahead, Bernie.
Bernie Blegen -- Vice President and Chief Financial Officer
No, I was going to say that, what you are referencing is that Intel has been adjusting their product release schedule around with a couple of different issues. And obviously that's something we need to adapt to. We don't see it as a negative to or an impediment to the growth that Michael was referring to.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
(multiple speakers) plus or minus, couple of quarters. And that's out of our -- power controls, but the action level grows and that we cover not only from a traditional growth. And then we cover not only from a traditional servers, all these are AI systems and the new type of our servers, we cover all of them.
Quinn Bolton -- Needham -- Analyst
Great, thank you.
Operator
Thank you. Our next question comes from Ross Seymore with Deutsche Bank, your line is now open.
Ross Seymore -- Deutsche Bank -- Analyst
Just wanted to get into the inventory and the channel side and dovetail that into the backlog question that was asked a bit ago here. While Bernie, you said that the backlog coverage has returned to normal. Over the course of this year, correct me if I'm wrong, but have you guys been shipping to the elevated backlog, have you been controlling it and where does channel inventory stand today?
Bernie Blegen -- Vice President and Chief Financial Officer
Sure. So, in the reference that you're talking to is between Q1 and Q2 that we'd actually had a decline in terms of channel inventory in terms of days. And as we look ahead here, both as far as how we finished Q3 and in Q4, a lot of the sales commitments that we have for both quarters are related to commitments that were made upwards of four to six months ago. And so we are continuing to deliver against that.
But with the amount of uncertainty that is in the market, the timing of when that gets drawn from the channel is a little bit changed. And so, we went up a little bit in Q3, and I don't know, I don't have a forecast for how Q4 is looking, whether it will go up or down a little bit, but again it's something that we are continuing to monitor.
Ross Seymore -- Deutsche Bank -- Analyst
I guess similarly to that, as the backlog falls, the fear people have for the whole market and companies like yourself is that what goes from a 100% coverage plus to something that's normal, then the next step is a further step down. I know you guys have a great secular trend over the course of the number of years, but how do you guys mitigate that risk as we look into say the first half of next year?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Yes, OK. The inventory has become my favorite questions now, (inaudible). We have lot of works in growth in the new market segments. And it changes the pattern of how we do inventory. In auto, industrials and telecom, now the 5G networks, although the revenue is small, it started to ramping. And also as well as the data centers and the cloud computing. We really need a lot of inventory to cover the ramp. And regarding to all these traditional high-volume business -- in those business we can go in and out within the half years. And so, we are now worried about the inventory.
Bernie Blegen -- Vice President and Chief Financial Officer
So we are basically prepared to be able to service the targeted markets and we believe that as you look at the first half of 2019 that they are less impacted by the price sensitivities that might occur as a result of the tariffs or geopolitical trade policies. And then as Michael just said that on the areas that are more affected, we have the ability to course correct. And as we've demonstrated in Q3. even within the quarter, to be able to achieve our revenue goals.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Yes. So high inventories are -- against is not favor enough. High inventory in a company like MPS, we have to build the repetitious in regardless of the condition what we ship. And we'll ship our product and that we're the newcomers, we have -- we have a record of reliability as well as a continuation of a delivery. We never have that kind of problems. (inaudible) that cause a lot more problems, lot much bigger market cap -- then assuming a lot of thing a few days of inventory.
Ross Seymore -- Deutsche Bank -- Analyst
I guess just my last question, as you guys look back to the last cycle and kind of late 2015 and early 2016, it was is barely a blip for MPS, you still in 2016 grew I think 16%, 17% year-over-year, way above the analog market as a whole. If you just to compare and contrast the positioning of MPS today versus what it was looking like back three years ago, can you just walk through some of the puts and takes as you see it?
Bernie Blegen -- Vice President and Chief Financial Officer
Sure. I think that obviously with all of the new product releases that we've had that really started to ramp beginning in the second half of 2017 and now are in full swing. We have a much different portfolio that we're able to manage. And so from that regard, I think that the diversification, both in terms of products and markets and geographies allows us an awful lot of flexibility that we didn't have back at the second half of 2015.
Having said that, I would hate to try and draw a parallel between 2015, which ended up being a rather short term and pretty much an issue specific to the semiconductor industry than what we're observing today. I don't think that people have enough visibility or confidence as to how long this current environment might last.
Ross Seymore -- Deutsche Bank -- Analyst
Great. Congrats guys. Thank you.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from William Stein with SunTrust, your line is now open.
William Stein -- SunTrust -- Analyst
I just want to make sure I understand the narrative around end markets and demand trends. So consumer came in light as customers backed off orders in that end market, that you think is attributable to tariffs, but you made up more than the difference in the comms end market. I want to make sure I have that right and also understand better about what drove that upside in comms?
Is that something that you know perhaps if the consumer end market would have been fine, that you would have posted meaningful upside to the quarter or was this something that came and surprised you to the upside or was there a lot of extra work that took to drive this to allow you to deliver good results as you usually do. Helping me understand that would be great. Thank you.
Bernie Blegen -- Vice President and Chief Financial Officer
Thanks, Will. There's a couple of observations. If you look at consumer, sequentially from Q2 to Q3, this was a lower increase than we historically experienced. And it was fairly broad based as far as the number of areas that were impacted. Interestingly, that's in traditional consumer. In our high-value consumable end markets, we actually performed pretty well.
And then as far as the ability to course correct within the quarter, even with relatively short lead time, we play opportunistically in a lot of different markets and historically we have not taken on the comms business. This is our -- referring to our legacy gateway and router business because it tends to be lower margin. And in this quarter we were able to really just pet it, so it was not a lot of efforts in order to be able to accept opportunities that we have an opportunity to quote on and bring that in within the quarter.
So as I look ahead, I think the most encouraging thing is that we can have that opportunity. We see the comms business is actually lining up in very good shape for Q4. But I think one of the most encouraging things that might have been a slight upside surprise is that we started to see some very initial sales on the 5G side.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
The comms business in the last few years were flat or slightly down. And so, they had a refresh and that we gained some market shares. But the -- the significant portion of it, we see the 5G network and it has started to ramp. And those products we designed back in a couple of years ago.
William Stein -- SunTrust -- Analyst
A follow-up if I can. When people ask about what's perhaps something that investors don't understand about Monolithic, one of the answers I've heard you give is that, well, consensus for next year's up 16% and we think long-term growth at 20%. Would you still endorse a 20% growth number for 2019 or would you think that's too optimistic given the geopolitical and other risks?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
I think that's a -- we will clearly exceed whatever your forecast is for the next year industrial growth bucket, we'll exceed about 15 points or higher.
Bernie Blegen -- Vice President and Chief Financial Officer
I think that when we look at next year as far as our confidence in 20%, that remains very consistent and solid. Again one of the things that we want to be known for is our consistency of execution. And that we can support that, again with the amount of visibility we have particularly in these targeted areas that have a longer design cycles and longer ordering patterns. Now having said that, we're not immune to the macro and certainly in the first half of the year, we feel reasonably confident that we have the shots on goal to be successful. We don't have clear visibility on how that's going to play out in the early stages of the year.
William Stein -- SunTrust -- Analyst
Okay. Thanks.
Operator
Thank you. Our next question comes from Tore Svanberg with Stifel, your line is now open.
Tore Svanberg -- Stifel -- Analyst
Yes, thank you and congratulations on the record operating margin. A few questions here. So first of all, I know you have some operations in China and certainly your supply chain is there. Any changes to that strategy at all. I know it's really early days, but just given some of the macro political turmoil, any changes to the thinking at all about your operations in China at this point?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
We need to diversify it and we have a lot of resources from China. But we started there two years ago, we started diversifying in different political regions. And in terms of R&D, mostly all is (inaudible). And all these other geopolitical issues that we have, out controls, if we see that one region down, the other reason is up, that's area we really want to focus on and establish our presence.
Tore Svanberg -- Stifel -- Analyst
Okay, very good.
Bernie Blegen -- Vice President and Chief Financial Officer
Yes, I was just going to say that on the supply chain issues right now, Michael is actually right. We don't have control of visibility as far as what the next steps in the process. But again to the extent that we diversify in the end markets that we're selling to and the different customers we have, we would probably adapt similar profile longer term for our supply chain as well.
Tore Svanberg -- Stifel -- Analyst
That's very fair. And a question on 5G. So you're starting to see some revenue contribution there. Is that power management that's based on (inaudible) or QS Mod just like in the data center market or are the different types of power products?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
And there are other type of products in a different network segment. And as well as the way you said it that it is a -- based on the (inaudible). And those product in a high power computing segment of 5G.
Tore Svanberg -- Stifel -- Analyst
Okay, very good. And I think you may have already answered this question, Michael. But as far as your lead times, since you obviously are so focused on making sure the deliveries are there, I assume your lead times are still very stable. They were stable first half, they are stable now?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Yes. The lead time is very, very stable. Bernie can add on.
Bernie Blegen -- Vice President and Chief Financial Officer
Yes, we've had no changes in lead times in all phases of production, whether it's wafer packaging test, everything is going very consistently.
Tore Svanberg -- Stifel -- Analyst
Okay, very good. Just one last question, you generated almost $50 million in free cash flow this quarter. I know sort of your approach to capital management, but just kind of based on where the stock price is, any thought about how to put that free cash flow to use?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
We will either increase the dividend or (inaudible). I'm not going to buy another company for revenue increase.
Tore Svanberg -- Stifel -- Analyst
Sounds good. Congratulations again on all the record results this quarter. Thank you.
Operator
Thank you. Our next question comes from Alessandra Vecchi with William Blair, your line is now open.
Alessandra Vecchi -- William Blair -- Analyst
Hi, guys, congratulations on a great quarter. Just to go in a little bit more on the consumer side and the weakness you've been seeing there, I think historically you guys have said that of your consumer revenue about 50% of it's traditional, I think 30% of it's high-value, and 20% of it's gaming. Are you seeing the weakness in gaming as well or is it only in that 50% traditional bucket?
And if it's in the traditional bucket, should we consider the whole 50% weak or it's only parts of that. Just sort of trying to quantify where consumer could go from here given that seems to be the one bucket that's the most at risk in the short term.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Yes, I hate to say that -- when the last couple of times (inaudible) it wasn't my favorite topics and our customer heard that (inaudible). So (inaudible) is my (technical difficulty) there is a lot of money to be made with 100% of the support. But with that regards and we see high volumes and we're not talking about what kind of gaming and we see a bit softness, and it needs a high volume wins. And other than that, and we see the connected device or the IoT if you will, and other variety of other gauges and we see -- and our designing or we see the market demand is still very similar.
Alessandra Vecchi -- William Blair -- Analyst
Okay. And then similarly, just in terms of the Q4, you guys traditionally don't give us any sort of granularity on the directional segment or the direction of the different segments. But if you had to say on the segment from Q4 what's strongest and weakest, so we still think about computing and storage is the strongest, and then maybe industrial and optical or how is that shifted?
Bernie Blegen -- Vice President and Chief Financial Officer
Yes. Again, I think if you look at the results, clearly what we saw in computing and storage, automotive, industrial, those weren't one-time drivers. This is all about the secular expansion that we've been discussing now for several years and we're now seeing the results come in full term. And so I don't see anything in my -- in the outlook that would indicate a diminishing of those growth rates.
And then as far as how we manage the margin with the consumer, that's something that we are adept at being able to do. So, I think that as we look at Q4, we feel very confident not just in the number in total, but also the individual markets as far as (inaudible) source that growth.
Alessandra Vecchi -- William Blair -- Analyst
Understand that. Very helpful. I think that's it from me.
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Thanks, Alex.
Bernie Blegen -- Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from Chris Caso with Raymond James, your line is now open.
Chris Caso -- Raymond James -- Analyst
Yes, thank you. Just first question with regard to inventory levels. Can you talk about what's your visibility is, both to the distribution channel and to OEM inventories. And I know that through the year you guys have been taking steps to try to discourage customers -- prevent customers from building excess inventory. Could you speak to some of those actions and your level of visibility and confidence in the inventory levels?
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Yes. It is my favorite question. And inventory, I tried to convince you all of you guys are (technical difficulty) to increase that. And now, I think we're pretty normal.
Bernie Blegen -- Vice President and Chief Financial Officer
And then as far as inventory in the channels, again I'd just refer to an earlier response, is that in the prior three quarters we had experienced a pattern of over-ordering and this is reflected in higher-than-normal historic backlog levels at certain points in the quarter and while we've seen a moderation of that, that is changed because there is a certain level of uncertainty.
And we want to make sure that we're really satisfying real demand as opposed to creating a problem for us down the road. And having said that, with the channel, we did a very thorough assessment of it at the end of Q3, as well as what we expect to be the sell-through in Q4, and that all got taking into account as we gave our guidance for Q4 in total. So, right now we're feeling that we're getting timely feedback and we're managing it accordingly.
Chris Caso -- Raymond James -- Analyst
All right, great. And I guess, just following on from that, could you talk about what you consider to be normal seasonal patterns in Q1? And I know there's not a lot of visibility right now and you're probably doing a lot of work on that, but are there any aspects that we should take into consideration with regard to Q1 based on what you're seeing right now?
Bernie Blegen -- Vice President and Chief Financial Officer
Yes. We only provide guidance one quarter ahead. And so, I don't want to overreach with any comment, but if you traditionally look at -- with the exception of last year, which was an unusual set of circumstances, because we had greenfield opportunities particularly in the computing storage that were introduced, that we've traditionally had a step down from Q4 to Q1 of between 3% to 4%.
Chris Caso -- Raymond James -- Analyst
Got it. Okay, thank you.
Operator
Thank you. (Operator Instructions) And we do have follow-up from Quinn Bolton with Needham, your line is now open.
Quinn Bolton -- Needham -- Analyst
Bernie, you kind of addressed it answering Chris' question, but just I guess wanted to ask specifically, as you look into your distribution channels I think there's especially in an uncertain environment, a tendency for the distributors to reduce their inventories into calendar year-end. And so I guess, when you look at your fourth quarter forecast, you said you took into account sort of the supply chain in the (inaudible) channel. Are you expecting them to reduce their days of inventory in the fourth quarter or do you expect them to keep a constant days inventory on hand, any guidance you could provide us would be helpful.
Bernie Blegen -- Vice President and Chief Financial Officer
Yes. The formula sort of works that the channel tries to reduce the dollar value of inventory in Q4, but the denominator is for as the quarterly revenue in Q4 is less than Q3. So, my expectation is that the dollars will be at or below the Q3 level and the days may be at or maybe little above in Q4 and it's really a arithmetic exercise rather than anything that we're concerned about.
Quinn Bolton -- Needham -- Analyst
Okay, thank you.
Operator
Thank you. I show no further questions in queue. So I'd like to turn the conference back over to Bernie Blegen for closing remarks.
Bernie Blegen -- Vice President and Chief Financial Officer
Thank you. I'd like to thank you all for joining us for this conference call and I look forward to talking to you again in our fourth quarter conference call, which will likely be in February. Thank you and have a nice day.
Operator
Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.
Duration: 54 minutes
Call participants:
Bernie Blegen -- Vice President and Chief Financial Officer
Matt Ramsay -- Cowen and Co. -- Analyst
Michael Hsing -- Chairman of the Board, President and Chief Executive Officer
Rick Schafer -- Oppenheimer -- Analyst
Quinn Bolton -- Needham -- Analyst
Ross Seymore -- Deutsche Bank -- Analyst
William Stein -- SunTrust -- Analyst
Tore Svanberg -- Stifel -- Analyst
Alessandra Vecchi -- William Blair -- Analyst
Chris Caso -- Raymond James -- Analyst
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