Monolithic Power Systems, Inc. (MPWR) Q2 2009 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2009 Monolithic Power Systems Incorporated Earnings Call. My name is Louisa, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Rick Neely, Chief Financial Officer. Please proceed sir.

Good afternoon and welcome to the second quarter fiscal 2009 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS is with me on today's call. In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty. For example, our business outlook, including our business and financial outlook for the third quarter of 2009; projected third quarter revenues and gross margins; our expectations for third quarter litigation, stock-based compensation, and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, our expected average tax rate for 2009; our belief that MPS is well positioned for future growth; new product introductions, potential customer acceptance and the various opportunities these present and inventory levels and projected changes in inventory levels. Forward-looking statements are not historical facts or guarantees of future performance or events and are based on current expectations, estimates, beliefs, assumptions, goals and objectives and involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from the results expressed or implied by these statements. Risks, uncertainties, and other factors that could cause actual results to differ are identified in our SEC filings, including, but not limited, to our Form 10-K filed on February 27, 2009 and our Form 10-Q filed on April 28, 2009, which are accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today’s call. We will be discussing operating expense and net income on both a GAAP and a non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation and in the case of net income their related tax effects. We will also discuss our expected non-GAAP research and development and selling, general, and administrative expense for the third quarter of 2009, which excludes our expected charges related to stock-based compensation. 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 this release, as well as to the reconciling tables that are posted on our website. I would 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. We would like to start this call by reviewing our second fiscal quarter 2009 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2009. We will then open up the call to your questions. Let's start with the business highlights. MPS rebounded dramatically from the first quarter of the year by notching a sequential revenue increase of 40%, recording net sales of $41.2 million with the second quarter of 2009. This total was about flat to the $41.5 million MPS sold in the second quarter of 2008, and excellent achievement given the worldwide economic slowdown. MPS saw sequential growth across all segments and product families in Q2. As we noted last quarter, several of our newest product families continue to see both sequential growth and year-over-year revenue growth in the second quarter. We are very excited to announce that we have shipped our first pilot production unit of our new 25 amp Intelli-Phase driver family this month, which is a tremendous accomplishment for our products is first fully functional silicon within the first quarter of this year. This new product family opens up high-end product markets for MPS, such as core power to notebooks, high performance graphics cards, communications equipment and servers. In the manufacturing area, gross margin moved up to 59.1%, which met our expectations for this metric. Our days of inventory dropped back to our target range coming in at 109 days and inventory at distributors remain very lean even with the big jump in Q2 revenue. Bottom line, non-GAAP net income was $6.1 million, or $0.17 per fully diluted share. Let’s look at the financials in more detail. Staring with the P&L, on the revenue line, second quarter 2009 net revenues of $41.2 million increased 40% sequentially from the first quarter of 2009. We were about flat to the $41.5 million recorded in the second quarter of 2008. This sequential increase in revenue reflected a rebound in demand across all product areas from the depressed levels of the first quarter of the year. Let's break down our second quarter revenue by product type. DC to DC product sales were $29.7 million, up 40% from the first quarter of 2009 and up 11% from the $26.8 million reported in the year ago quarter. The main reason for this increase was the good performance of the consumer and communications end markets for MPS, which includes products such as flat panel TVs, general consumer electronics products, set-top boxes, modems and wireless LAN cards. Lighting control revenues for the second quarter were $7.3 million, a significant increase of 57% from the first quarter of 2009, but a decrease of 35% from the same quarter a year-ago. This mixed performance reflects that historically, the first quarter is our weakest seasonal demand quarter for backlighting revenue. The 57% sequential performance reflects a bounce up from the typically low demand levels in the first quarter due to the seasonality as well as the global recession. On a macro level, the year-over-year revenue decline reflects the continuing shift of notebook backlighting from CCFL solutions to white LED solutions. Audio revenues came in at $4.1 million, up 18% from the $3.5 million recorded in the prior quarter and up 20% from the second quarter of 2008. Let's move down to the gross margin line. Our second quarter gross margin was 59.1% compared to 57.6% in the prior quarter of 2009 and 53% in the second quarter of 2008. This result is at the lower end of our target range and met our expectation given the current economic condition. In positive economic cycles we have operated at the mid-upper end of our target range of 58% to 63% gross margin, but during difficult times we expect to operate at the lower end of this range due to reduced demand and pricing pressure. Looking at the reported expenses and operating margins, our GAAP operating expenses were $21.3 million in the second quarter. This includes $19.1 million in R&D and SG&A expense, which includes $3.8 million for stock compensation expense and litigation expense of $2.2 million. Compared with the first quarter of 2009, GAAP operating expenses were up by $3.3 million. The expense mix changed as follows: R&D increased by $1.6 million; SG&A increased by $1.5 million and litigation increased by $0.2 million. Our GAAP operating profit was 7% in the second quarter compared with a GAAP operating loss of 4% in the first quarter of 2009. Let's review our expenses on a non-GAAP basis. Excluding stock compensation, our non-GAAP operating expenses for the second quarter of 2009 was $17.5 million compared to $14.6 million in the first quarter of 2009 and $18.6 million in the second quarter of 2008. The $2.9 million expense increase from the first quarter this year, is primarily due to higher variable spending such as commission, travel and bonuses that were curtailed in Q1 '09. Compared to the second quarter of 2008, non-GAAP R&D costs were up $839,000 as we continue to strengthen our R&D [piece] by adding headcount. Non-GAAP SG&A expense was only up $130,000 from Q2 of the prior year. Our non-GAAP operating margin was 17% in the second quarter of 2009 compared with 8% in the first quarter of 2009 and 18% from the second quarter of 2008. On the bottom line, our Q2 '09 GAAP net income was $3.2 million or $0.09 per fully diluted share. On a non-GAAP basis, our Q2 '09 net income was $6.1 million or $0.17 per fully diluted share. This result is computed with a non-GAAP tax rate of 12.5% within our expected average tax rate range for 2009 of 10% to 15%. We continue to be proud of the fact that MPS has been profitable on a non-GAAP basis excluding stock compensation and litigation settlement since our IPO in Q4 of 2004. Let's move down to the balance sheet and look at some of the major changes this quarter. Cash, cash equivalents, restricted cash and investments were $163.8 million at the end of the second quarter of 2009, up from $150.8 million in the first quarter of 2009, and up significantly from the $126.8 million on the books in the year ago quarter. In Q2, MPS had operating cash flow of about $13.7 million as the late Q1 surge in receivables was collected. We spent about $3.8 million on capital in the second quarter, which is largely offset by cash proceeds of $3.1 million from option exercises and purchases under employee stock plans. Accounts receivable ended the second quarter at $12.4 million compared with $13.4 million at the end of Q1 '09, and $13 million at the end of the second quarter of 2008. The decrease in receivables was due to the fact that the majority of Q1 '09 shipments were made later in the quarter and therefore collected by the end of the second quarter. Day sales outstanding declined in Q2 ‘09 to 28 days, as a result of the shipment timing issue I just described. Our inventories at the end of the second quarter were $20.1 million, or about 109 days of inventory basis. This compares with $18.6 million, or 136 days of inventory at the end of the first quarter of 2009. Inventory in our distribution channels grew slightly in dollars, but the large increase in quarterly revenue meant that we came in well below our target range of 30 to 45 days of inventory for distributors for the quarter. I would now like to turn to discussion of general business conditions. The second quarter of 2009 made up very slow start to the year, as the revenue increased sequentially across all product groups. Geographically, in the second quarter of 2009, MPS shipped 56% of revenue to Taiwan and China, and 44% to other regions, with Korea performing particularly well. MPS continues to diversify its customer base, as our shipment to regions outside of Taiwan and China increased from 38% in the second quarter of 2008 to 44% just mentioned. In the new product area, the highlight of the quarter was the initial production shipments of our Intelli-Phase driver family optimized for multiphase system core voltage power supplies in product such as notebook, computer, graphics cards and blade servers. This family is the worlds first monolithic integrated driver plus high side and low side MOSFET resulting in a 50% to 60% improvement in total solution side in system cost. This rapid ramp to initial pilot production confirms our belief the customers are very excited about the potential benefit of this innovative product family. We also released other high performance product such our new 50V buck converter for industrial and automotive application and ultra small 3 MHz synchronous buck converter for handheld and portable application and a 50V (inaudible) white LED driver for notebook and netbook backlighting application. Some of our other new product families such as MiniMonster, USB Current-Limit Switches, and LDOs continued the sequential and year-over-year revenue growth in the second quarter of 2009. Some examples, where all of these products are going include the flat panel TVs and communication products for MiniMonster, portable computing for USB Current-Limit Switches and multimedia applications for LDOs. I would now like to turn to our outlook for the third quarter of 2009. MPS saw very strong bookings and healthy backlogs in the second quarter far above normal as the channel had to restocks from the low order rates in late 2008 and early 2009. For the third quarter, visibility has slightly improved, but still less than normal due to the economic downturn. Channel inventories are lean, so we believe that third quarter revenue should reflect actual demand. Our expectations for Q2 revenues are in the range of $42 million to $46 million. Gross margin is expected to be at a lower end of our target range of 58% to 63%. We expect stock-based compensation expense in the range of $3.5 million to $3.9 million. We expect non-GAAP research and development, and selling, general and administrative expense in the range of $15.3 million to $16.3 million. This estimate excludes the stock compensation estimate mentioned above. Finally we expect litigation expense in the range of $1.8 million to $2.2 million due to the commencement of the ITC hearing in October. In conclusion, we are pleased to report that executed very well in the difficult economic environment. We grew revenues sharply, but still control by inventory channels closely. We are growing revenue in new product family and continuing our geographic diversification. We are focused on introduction and design of very high performance new products and product families. We believe these actions will position MPS very well, for future growth. Now, we would like to open the microphone and take in your questions.

(Operator Instructions). Your first question comes from the line of Rick Schafer with Oppenheimer. Please proceed.

Hey guys, nice quarter. I had a couple of questions for you. The first one, it looks like on the revenue line looks like we are on track to the first half to be flatter maybe even show some growth year-over-year in 2009. What are your expectations if you’re looking at the second half for demand? You said were basically shipping to demand. I think at this point it sounds like you don’t features anymore restocking left to happen in the channel. I guess basically what are you looking out for the second half?

Rick, so far in the way and outlook is a pretty good. It’s difficult for me to say the general business like conditions because we asked to do this. More company shippings below $0.50 parts on them, but I'm excited about all the new product and other designing activities happened in the last years and early this year. We believe we are kicking in the second half of this year.

Just to add a little bit more related to Michael's comment, as we said in the call, the visibility is little bit better. Instead of two week orderly times, we are getting maybe four weeks. So, we are getting some visibility that’s better, but as Michael said, as a smaller company, we can't really project into Q4; we can really just look at the current quarter.

Rick, you mentioned that you are below that low end of your target range for just [three] days of inventory below 30. If the channel inventories are still basically too low, there could be some restocking?

That’s a good question. The main point we see there is that the distributors don’t have any extra inventory. So, any orders they get will be coming right through and therefore reflect demand. In terms of restocking, I think that would have to probably maybe more psychological of whether people thought things are going to get better and they wanted to have more parts or not. So, I am not sure that’s going to happen or not.

Yes, overall we believe we can control the inventories much better than our distributors. Secondly, during all these new product ramp, especially we need to control the inventories, because the demand will be sporadic and erratic for the new product ramp. We don’t know when will it start to ramp and what the quantity it will ramp. So, we will continue to operate it very lean in the distribution side.

Michael, on the first quarter conference call you mentioned you are really nervous about the second half. Are you feeling better about the second half and the demand for today versus?

Yes, generally. The business we look forward there and our customers are a lot more upbeat but we are still cautious on the existing products.

Then just one follow-up question on gross margin. You mentioned that you expect it to be at the lower end of your range for the third quarter. Should we expect it to actually move up, in percentage terms it should be up sequentially versus what we saw? I guess how much of an offset is pricing right now?

It's difficult for us to say. Our competitors have slashed the big price and so we will follow it. At the same time we introduced a lot of new products which have a much higher gross margins depending on when and what the quality, the ramp in the second half of the year. It's a very difficult for us to predict that. However, I don’t see that we will dramatically drop or dramatically increase in the next couple of quarters.

Okay. Thanks a lot, guys.

Your next question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please proceed.

I had a question on your guidance, $42 million to $46 million. I know you usually don’t backlog or bookings, but could you maybe at least just qualitatively talk about how you're tracking through the low end of that range, especially now that we're already a month into the quarter?

Tore, as you mentioned, we don’t give our backlog because given the short lead times we have, it's not really indicative of things. I would just go back to how MPS gives our guidance. We have a good short-term process that if you look at our track record is pretty good. So, we feel comfortable with this range. That's about all I could add unless Michael adds something more.

Yes, as I've said in the previous questions and my answer to Rick's question. So the second half, we feel optimistic in the existing product and more excited by the new products of course. So, everything so far is positive.

Maybe I can ask the question differently. You mentioned June was a very strong month at least based on you DSOs. Is July perhaps even a little bit stronger than June?

I don't have that data. I believe it's about the same.

Great and congratulations on getting the Intelli-Phase product run out so quickly. Could you maybe talk a little bit about when you expect to start to see some revenue contributions on that product line please?

It's a new product and it's in the high end of notebook and it's the new product line. And they plan to ramp in the end of the year or beginning early next year. But, we don't know what the quantity that will be, but the Intelli-Phase just only the initial introductions. We are targeting the big market, entire notebook, high-end, low-end and medium-end, we want everything. And with this kind of cost and the performance we expect to have a bigger market share.

Last question, last quarter you talked about maybe getting some traction in the automotive market, could you may be update us on the company's position in automotive please?

Automotive market is very small. And we introduced some very special product in for surge protection or the product DC to DC with very high energy surge protections and those start to generate some revenues very, very small as you know in automotive particularly and they ramped product very, very slowly. That’s the area, we focus on it for next couple of years and I believe we will general, it’s our long-term investment.

Yes, as we said, we have introduced some 50V buck converters, which fit right in to the automotive market. So, again it takes time to get the design. We got those types of product.

It’s a very long design cycle and selective on what we decide to get in to automotive and that’s also across over to industrial. So, that will actually, probably ramp up quicker then the automotive segment.

That was obviously prior to our marketing directives.

Your next question comes from the line of Patrick Wang with Wedbush. Please proceed.

Thanks so much and also great quarter guys. Couple of questions, I guess first just on the margins. It looks like you guys are now officially expanding your margin target to 58 to 63. Can you talk a little bit about kind of the thought process there?

Well, as I hope we can ramp our new product fast enough to go up to increase margin (Inaudible), but that’s not the purpose, okay. We want the market shares and we want to increase our top line. Margin is really a secondary to MPS. Is really a measurements, how well our products performing in the market.

It wasn't too surprising, but I want to see if there is anything else there. The second questionnaire just in terms of lighting during the second quarter, can you talk a little bit about the breakdown that we got the most benefit in lighting. I know you guys [a ton of] content in notebooks and you ramping monitors, but could you help us out within these moving pieces?

Yes. I tell you that, the CCFL for notebooks and that we see the demand is dropping. CCFL controllers, I mean the control for monitors and those products are doing well and as well as the LED lighting. They're doing well.

Okay. Because you maybe perhaps help us breakout a little bit between LED and CCFL for today?

I don't have the numbers. Rick do you have the numbers?

Yes, I can have. We are basically right now, white LEDs is up at the higher numbers, its 1.5 million to 2 million a quarter now, white LEDs. Controllers are similar numbers in the rest of CCFL.

Then also I guess, just on the Intelli-Phase products we launched. I know that in terms of a timing and unit, but in terms of the content for notebook and the positive impact there. Can you talk about the growth you see there?

It's difficult for us to gauge. I think that we're targeting the overall like a $6, $7 in the content and now I think we are very close to it now.

Well, where we are talking about having the product introduced that can I guess to that number.

Yes.

Now in terms of designs and have that kind of content, we don’t have any design like that yet. So, we have to work our way into it. The Intelli-Phase damn its helps a lot that’s several dollars.

That’s a big ASP.

Big ASP about $2 to $3.

We already in, so that’s like Rick said that’s $2 to $3 adder depending upon the number of phases. So, that will be good share, a good incremental revenue increase over time.

The last question, here I guess this is for you Rick, how should we think about OpEx, if we exclude litigation I guess as a percentage of sales going forward. I know that I think some of your expenses start to come back in from the depressed levels earlier, but if you could help us think about that just qualitatively beyond Q3 would be great. Thank you.

Yes, I think qualitatively, what MPS sees is, we are going full board on keeping our R&D strong and also not only we have so many products and probably have more products we can handle in the fields. So, we are increasing our field application resources. So, at the same time, actually when you look at the details G&A expenses are flat to down year-over-year. So, we are not growing G&A, which is appropriate for this company, but we are putting, we believe we have more opportunities and we are not cutting hiring. In fact hiring, an increase in expenses will keep doing that, as we see a lot opportunities in new markets and products and therefore, as Michael have said we now have something we’ve been working out for several years, but we have not only our core of 25 or so engineers in the US that we designs. We have a similar number overseas that are now contributing. So, we have a big new product machine and that’s going to keep going for MPS. So, in terms of how many dollars decrease the quarter that’s hard to say. You can see our guidance in Q3, Patrick, is fairly flattish from Q2 not as much. So that's more or less than what to expect once you take away Q1. As I said before it was not a normal quarter, we cut every expense we could. We were hitting north of $40 million, we are back to normal expenses.

And is that mid to high 30s as a percentage of sales, is that kind of the fair way of thinking about that?

Mid to high 30s what?

As a percentage of sales?

For total?

For all expense, excluding litigations.

Yes, that's about we are running now. As some of these new products kick in, you will start to leverage that R&D more, but right now we are in the build-up phase.

Your next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed.

Hi, good afternoon. Your revenues from China were up 60% sequentially. What is your expectation for China in Q3? It looks like your guidance implies a significant slowdown and I am just wondering if the mix potentially also had a little bit of an impact on gross margin?

Yes, Tristan. One of thing is that we report our revenues on the shipped-to basis. So China tends to build good chunk of electronic products even if the orders are taken in Japan or Taiwan, they all have their own factories in China. So it looks like China is building lots of things. They are not consuming most of that. So it's really a building number. So it's really hard to say that it has anything to do with demand. So, we really look at the total number and the numbers in the other countries show you what's produced in those countries as well, but the China one is more of a catchall for the entire electronics products. It doesn’t really have any implication as to what's going on.

The number is not a demand creation. But the real demand creation is in China for MPS is relatively not as big and as we strengthen our teams, we will see the revenue will steadily grown.

Then in terms of wafer supply, what are the pricing trend outlook for the second half and would you have any expectation for potential pricings, strengthening as utilization rates have picked up and continue to pickup in Q3?

I think the pricing pressure is in the recent quarters. I said in the coming quarters, it will be a relief, much less than in Q1 and Q2 and especially Q2. And, so that’s my comment.

Okay, but no big bounce back, nothing that could be material that you can see for the time being?

Certainly in our business, I never see a price increase. Certainly not the MPS business model. We only want to increase the gross margin by introducing a new product.

Okay, and then finally are you feeling somewhat constrained at the backend or do you have enough of the people you need there and do you see the potential for allocation in the overall industry later this year?

MPS, if you look at the history, MPS have never constrained buyer supply of our man powers and we continue to do that same way. We are very nimble, very quick reactions and we will meet the growth and as I said in the previous conference, we want to manage our growth to 20% to 30% in a normal economic condition.

Now just to add to that, Tristan, one of things, if you note in the conference call, we had a fairly increase in capital spending for the quarter, up to $3.8 million. Most of that was additional production equipment for the backend, which actually is going to support, free up our production to produce more, at the same time support the R&D. So, that was part of the CapEx increase was to do exactly that. As Michael said, we make sure we have enough capacity to both support the R&D product engineering works and upsite productions.

Your next question comes from the line of Vernon Essi with Needham & Company. Please proceed. Vernon Essi - Needham & Company: Just to follow on the geographic question. I think, Rick in your prepared comments you said Korea was one of the bigger areas of growth. Are we to assume that a majority of that delta from the China revenues sequentially was going to Korea or was it pretty much across all regions?

Korea had a good quarter. In this economic environment, the Korean TV and consumer goods makers have been doing well and that’s reflected in our numbers as well. Vernon Essi - Needham & Company: Then just in that same event on Taiwan also is up nice sequentially. Are we to assume that was probably lighting driven?

Yes, it was a snapback. The Q1 was just a dismal quarter for backlighting and Q2 picked up, that was the main [reason]. Vernon Essi - Needham & Company: Okay. And, then going out on your favorite topic on litigation, I'm wondering what we should be looking for in the fourth quarter? You have big event coming up in Q3. Is this going to tone down a lot or should we be looking for a relatively consistent number from Q3 to Q4?

Yes, the trial starts in October and it's not over. There is a first hearing and then the second hearing what I’ll continue on to May of 2010. So, probably look at the similar levels would be my best estimate. It's very difficult to estimate the legal fees. So, that’s my best estimate.

Our similar question I will definitely controlled by the judge. Vernon Essi - Needham & Company: Then finally, on Intelli-Phase just in terms of that [dark], can you just go through again what ASP implications you're looking at on that product to get to the dollar content numbers you were articulating earlier?

The notebook now, have a two or three phase, and majority is three phase, and I'll let Steve comment about the pricing.

By the way Steve perhaps our Marketing Director, so I just to make sure that everyone understood the third person talking now.

So, each phase is just under a dollar, and so in notebook. So, with three phases you're close to $3 a strike there and that also modulates to some extent by volume. Then there's also probably hasn’t been brought up yet, is there is the server segment, which will be more phases and more dollar content. Back to the notebook phase, a lot of that under a dollar per phase, just under a dollar per phase and that’s really get a sizable contribution to the netbook dollar content.

The next question comes from the line of Steve Smigie with Raymond James. Please proceed.

I think you could talk a little bit about the products, at the end of last year you had introduced about 150 new products in 2008. How many of those are going to be ramping revenue license second half as you talked (Inaudible) all those ramping or is it some of those ramping and then you to have, how the FAEs to get the rest of the products out. Help me understand that?

Let me answer the question. I think you lose our product in the count and so do I. The best answer for our Marketing Director to answer that.

We actually released about half the products you mentioned, okay.

I think the one basically it was the total number, Steven.

Total number, right okay.

We released well under that. So, the traction takes about two years, okay. So, you are not going to get material revenue this year, of course a few of those products will take off and in general we expect a material gain in revenue from 2008 releases will be in the 2010 timeframe.

What we do highlight, Steve is when we have very fast product production for example with Intelli-Phase without the highlights because that's a leading indicator that people like the product.

Right and that the product was so surprising how quickly you got that out, was there something specific about what you guys did there (Inaudible) out faster than others?

We actually been working on it since 2008 and we put a lot of resources in to that. So, I think it was MPS putting the resources in to it and then working closely with several notebook and server customers to make that work for those individual accounts.

Then just fairly on the whiting, on the LED product and white LED drivers. How much of that business its there is still sort of like legacy white LED business versus new stuff ramping?

Most of that all new.

Yes, most of all is new. Since you mentioned the LED lighting and that we see the big opportunities both in the display market as well as general lighting. We see our products are doing really well out there. We will continue to bring a few more significant products in the area.

Last question (inaudible) is within on the display side, how much of that market is point CCFL market and how much is LED at this point you think?

Rick, you maybe, you have numbers.

The current shipment volume, CCFL still slightly ahead, but the new design seem to be mostly white LED.

You’re talking about design. Talk about revenues.

Revenues are still, CCFL that it will shrink the other way.

At the end of this place being produced by your customers, how many, what percentage of what they are producing now is 17 versus?

In LCD still a smaller numbers and I think in the large format. The notebook side and I see 50% of notebook it’s already in the LED displayed. Only 15, 17 inch large panel is still use CCFL.

Your next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.

A couple of gross margin related questions, when you talk about the low end, going a little low end if your historic range, because what's going on in macro that make a ton of sense. Approximately how good is macro have to get again before you think that pressure abates or is it really going to be driven your gross margin going back up going to be driven more by the new product penetration.

Let me answer your first part of question first. We have in the end of Q1 and Q2 times in a timeframe the competitors slashed price relatively in a very high percentage and so we followed. Majority of our products are expected a [bit] and new product introductions is distracted. And as you look at it in the last two or three years, we are very stable. And so by this event and our margin dropped a couple of percent. I don’t see in the near future that it will jump back to the 63%. And after it really depend on our new product introductions and the speed of acceptance.

You don't control how those products ramp necessarily with your customers, but, if it's the middle of next year or end of this year versus end of next year, what sort of percent of your revenues will be coming from those new products, just to give us an idea how we should expect them to ramp?

Ross, as we had said actually in our last conference call and I probably repeated for this conference call is for 2009, we don’t expect much change in the environment that would affect those margins. The difficult economic environment (inaudible). So, we don’t expect any boost from that this year. As to whether it happens in the middle of next year, you guys and the economist can try and figure that out. We don’t really know that. So, as Michael said, we are going to focus on the new product. That is not an issue, it's just a reality. If you remember [Steve Bratz] commented, with an 18 month to two-year design cycle, for us we are excited. We ship a few hundred thousand dollars of a product. While there isn't enough of that obviously to effect the gross margin. So, it takes a while to get enough of those new products in there to affect the gross margin. So, we wouldn’t expect a general number and that’s an '010 event.

But MPS again, for margin is secondary to us. Although we may swing up 1% or 1.5%. It's very possible because the revenue numbers keep increase and becomes normal. So more predictable in the Q1 or Q2 time. And we can optimize on (inaudible) and so I’m not surprising we’ll go up about a couple of percent or so. But overall, we do not focus on our margins. We focus on our product and introductions and getting out more market shares and also getting to a new market.

Great, then a follow-up question. It's not so much gross margin related and I realized you are not guiding for the fourth quarter, but historically you are usually down 3% to 5% sequentially or so with your normal seasonality in the fourth quarter. Given what’s going on in macro, the snapback you are seeing right now, lengthening lead times, short inventory, lean inventory I should say et cetera. Could you just walk us through what the puts and takes might be, that would make the fourth quarter of this year either kind of a normal seasonality better than normal, worse than normal?

Well, it’s very difficult for us to say. This year looking from today, this year will be a normal year, but I can’t really forecast just based on what I am pulling the number from my hair.

I think that’s a normal year as you said, Ross. It's down 5% to 7%. Something like that will be the typical normal year. What would make it better would be some unusual positive activity. I think what will make it worse is Christmas is gloomy and even lower, so I don't which way that's going to happen. So we are not trying to predict that. I think we are just, keep doing that.

First, you try to answer your question.

Your next question comes from the line of [Arnab Chanda] with (inaudible). Please proceed.

Normally if you have revenue growth, you should probably see some margin expansion excluding pricing I would guess. Based on the guidance that you gave, should we assume margins are basically flat because the low end of the range is a little bit hard for me to understand. At the same time, we have revenues going down, should that go the opposite direction? If you could kind of explain that, that will be great.

I will start off and then Michael can finish. The assumption that when revenue goes up, gross margin goes up, that's not true for fabless companies. We don’t get any OpEx, we don’t get any leverage out of increased margins except the mix. And the mix can change or the number of products can change, but a fabless company gets nothing out of ups or downs per se. That's the advantage and so I wouldn't go along with increased revenue equals higher gross margin, not for us.

Yes, that's kind of business (inaudible). But we have so many different products. And it depend on which side have a more volume. So, it would change and again I don't see it’s a 1% swing, so it's very usual. So far you'll see our history is very steady. We don't swing a lot and other than that, we can't say any thing more.

Well, the reason I mention is you did see a 40% revenue growth and margins it go up from Q1 to Q2. So, is it mostly just mix and pricing that really drives the margin we say for you.

Mix in pricing, we had. In Q1 when revenue was way down at $29 million, we do have back end (inaudible), it doesn’t have much impact on margin, but maybe a point, whether it’s way underutilized that’s now gone. So, there is a slight impact that was part of the uptick, but the rest of that was mix. DC, DC grew well and that’s a good margin.

Thanks, Rick. Can I ask you question about your new products you are taking about Intelli-Phase driver. Couple of things about, one is that, could you talk about what (inaudible) expansion that affords you, when all the products are released. Then secondly it seem like you were able to release the products very quickly especially for compare to competition. Is this because you have a benefit in process, is there an operational benefit or is that something that you are doing, that’s a little bit different and how sustainable that lead is. Thank you.

There is other driver is out there, but where the first model. I think when we integrated one in the small side and that’s due to our technology and I’ll tap it up.

Regarding the technology we are replacing is not just existing solution, but the way we designed our part, it’s a Monolithic part that runs at a higher frequency. That’s it external components and that total solution is getting, is a significant region, why customers are gravitating to our solution and higher efficiency.

On the [TAM] question?

The TAM question?

We can use term our sales guidance. It’s huge. I think that’s more of a joke. That’s why missing up. In the notebook phase you can take $2 or $3, multiple times notebooks.

It's doubling our server market.

It doubles our servile market. In servers, we are not in servers. So, it's pretty much you can think the same.

100% increase in server market.

100% increase to servers and how big is the server market. I think those are five plus dollars for server at least it multiply 10 times a server. So, you can figure that out.

It’s a huge. That’s not a joke.

Yes. That’s not a joke.

We increased roughly over $1 billion.

That is a huge a number, okay. One last question, if I could, about your lighting control business. Obviously, most of its CCFL, you know from your commentary what I didn’t understand exactly was do you think you will have higher or lower share in LED versus CCFL and is that a benefit for you or is there crossover time, where one will decline and the other will grow? If you could just clod to and describe that a little bit, that would great?

Absolutely, one is decline the other one is going to increase. In LED lightings, we spread over in many different areas. So, that market we see will increase and market size will increase and as so is our product. CCFL particularly for in notebook was upside.

I think when we look at it. Our CCFL backlight it was a very specific difficult product area with four, three guys in it, but it wasn’t very big. White LED will have a lot more competitors. At the same time at it’s a lot bigger market. The reason we called, we named it lighting and control, it's not just backlight in for notebook anymore. It's general lighting. It’s a home lighting. It's industrial lighting. There is a lot of lighting in white LED over the next five years that we see big opportunities. So, I think what you'll see is, our individual share will be a lot percentage vise smaller, but the markets a lot bigger.

So, Rick, just the one last question about that, the growth LED assumes decline of CCFL and that product line grows. Is it a couple of years away or is it can be faster than that?

That’s actually, I’ll expect you analyst to earn the money and figure that out.

We don’t try.

We like your backup model, Rick, but then we can tell you. Thank you.

Your next question comes from the line of Doug Freedman with Broadpoint AmTech. Please proceed.

Thanks again for taking my question and great quarter that you put up. I guess a lot of questions have been asked and answered, but if you could talk a little bit about the audio market, what trends you see there, and then I may double back on one or two things just for clarification.

Yes. You mentioned that at the least favor of a product line. That’s a loss of gross margins and we tried to stabilize. Although we see still see some growth and Doug, I don't like the product line and then we try to minimize the effect.

It's not a product emphasis for MPS. We're not putting the same resources that what we putting into Intelli-Phase. Though it's a difficult market it is highly competitive. So, it's not an emphasis for MPS.

Is it safe to say that Intelli-Phase ramping, offsetting, audio trends would be positive to gross margins as from a mixed transition?

It's not a one-to-one, and we have a lot of products, become offset and I make sure of that. So, we have all the other products, I'm very excited about it, but overall we still manage at 20% to 30% growth in the normal economic conditions.

Okay and then Rick any chance you can offer a CapEx number for the full year?

Yes, actually a good question. For the year, so far it's been probably about 5 to 6. It will probably stand another similar amount in the second half. So it's probably 8 to 10.

If I could just sort of revisit some of your commentary as far as the market and what you're seeing, would it be correct to say that you think you're book-to-bill for this September quarter is going to look flat and that would mean that you are shipping to demand. I am having troubling understanding your commentary as far as distribution inventories remain lean, but remind me, I believe you're still on a sell-in accounting base. Any chance that distribution would stock up and that you would shift maybe above demand levels and that you would end up, if you could just talk a little bit about some of those comments that to me don't seem to go completely hand in hand.

We are in the selling basis. So even though we grew revenue a lot, I want to assure investors that we didn't grow revenue by putting a bunch of product in the distribution. So distribution inventories are up slightly, but on a days basis we're well below the 30 days target. So, the main purpose of that Doug was to assure people we didn't get the number by putting a bunch of products in the distributors. So, the second part of your question, the distributor is typically in a difficult and economic environment, because in the selling mode, they cannot return parts to it. They can't get price changes and so forth. What they buy, they keep. So, they tend to be more reluctant to stock inventory and they only do it with what I would call real demand and that was the nature of the comment. It's likely in this environment that what they are selling through and ordering from us is called real demand because they are nervous about stocking. Now that's just our belief, we don't have a core side on that. But that was really the nature of the comment. Does that answer your question?

Yes.

One thing that Rick had pointed out, the revenue effect of the stocking in the distribution with expect the revenue numbers, we don’t actually from a financial side. That’s what Rick sees, from that real operation side and we do believe and we can control the inventory much better than our distributors. All our product shipped out from [Shandong] China. And within a day or two, we can reach to our customers. There is no reason for our distributor to stock inventory. However, now to me is unusual time because we have like a 50 or 70 new product ramping. And we can control the rate of the ramping, that's why we control that inventories. But in a steady state time we do want to stop the inventory in our distributions.

Rick, can you talk about. You have had very strong cash performance. What's your present deal on the future use of cash and share account, whether you would enter into reengaging a buyback program?

Yes, I can the same comment I made last quarter, where we are happy, we were a big cash generator but in the difficult economic times, you can never have enough cash. So at this time, we're going to hold on to it. We did a good buyback last year which helped to keep our share account flat year-over-year. On the other hand in these conditions, we still believe we are not out of the woods and more cash is better. So, that's what we are doing for now.

At this time, I would like to turn the call back over to Mr. Rick Neely for any closing remarks. Sir?

Well, thank you everyone for listening to our call. And we look forward to chatting with you at the end of the third quarter. Thanks.

Thank you.

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect and have a great day.