芯源系統 (MPWR) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Monolithic Power Systems Second Quarter 2006 Conference Call. At this time all participant's lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded, Wednesday, August 2nd of 2006. At this time I'd like to turn the presentation over to Rick Neely, Chief Financial Officer. Please go ahead, sir.

Good morning. Good morning, and welcome to the Second Quarter 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 risks and uncertainties. For example our business outlook which includes our outlook for the third quarter of 2006, projected third quarter net revenues and gross margins, our expectations for third quarter litigation, GAAP and non-GAAP operating expenses.

Our target operating model range for gross margins and operating expenses, our activities and plans for production in our China test facility, our new product plans, process development, design activities and relative competitive position, expected growth or declines in our product lines, and estimated unit and dollar shipments in the Notebook market.

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 first quarter 2006 Form 10-Q filed on May 9, 2006, which is accessible through our website, and our second quarter 2006 Form 10-Q to be filed on or before August 9, 2006.

Also please note that during this call, we will discuss net income and operating expense on both a GAAP and a non-GAAP basis. The non-GAAP financial measures exclude charges related to stock-based compensation. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our Earnings Release, which we have filed with the SEC, and included on our website at www.monolithicpower.com. 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.

We would like to start this call by reviewing our second quarter business highlights. Following the business updates, I will discuss our financial results for the second fiscal quarter of 2006. We will conclude today by discussing our current expectations for the third fiscal quarter of 2006. We will then open up the call to your questions. Let's get started by looking at the financial highlights.

In the second fiscal quarter net revenues were $26.6 million, an increase of 20% from the second quarter of 2005. This compares to net revenues of $24.8 million in the prior quarter. Gross margin was 63% compared to 63% for the same quarter a year ago, and 62% last quarter. Net income on a GAAP basis was $1.1 million or $0.03 per share on a fully diluted basis, compared with a net loss of $6.7 million or $0.24 per share in the second quarter of 2005. This figure includes the impact of the recent implementation of FAS 123R, and MPS has recorded a total stock-based compensation expense of $3.1 million for Q2 '06.

Excluding this expense, non-GAAP net income for the second quarter of 2006 was $3.9 million or $0.12 per share on a fully diluted basis. For the second quarter of 2005 the non-GAAP net loss, which excludes $1.3 million of total stock-based compensation expense, was a loss of $5.5 million or $0.20 per share. Non-GAAP operating expenses, excluding litigation costs, were $9.2 million in the second quarter, down sequentially by $800,000 from the first quarter of 2006.

Second quarter revenues from DC to DC products were $19.2 million, up 46% from the same quarter a year ago. For the first quarter of 2006, DC to DC revenues were $16.4 million for sequential growth of 17%. LCD Backlight revenues came in at $7 million, which is a decline of 17% from the same quarter a year ago. In the first quarter of 2006, LCD Backlight revenues were $7.4 million for a sequential decline of 6%.

Looking at these business highlights in more detail, as we mentioned, DC to DC revenue growth was strong, up by 46% year-over-year. We also recently announced our third generation BCD Plus process technology, which enables MPS to achieve the highest power density currently available in the industry. For example, we just introduced a 1.4 megahertz, high voltage 2 amp buck converter in a two-by-two millimeter package. We believe this enables our customers to achieve high performance in the smallest footprint solution available.

The battery charger family that we introduced in the first quarter of 2006 is gaining traction. We are starting to ship production quantities for digital still camera applications. Many other customers are in evaluation for uses in handsets and other portable devices, with positive results. Finally, our change in test operations are ramping to full production, which enhances our cost structure to sustain our business model and improve our logistics and service capabilities.

In the litigation area, there were no material developments in the second quarter. So let's move on to the detailed financial results. Starting with the profit and loss statement, on the revenue side I would like to break down our Q2 '06 revenue by product line. I will list the second quarter results and then compare them to the second quarter of '05, and the first quarter of 2006 so everyone can understand what the product lines are doing.

Starting with the LCD Backlight Group, in Q2 we had revenue of $7 million compared to $8.4 million in the prior year, and $7.4 million in the first quarter of '06. For the DC to DC product line we came in at $19.2 million in the second quarter of '06, compared to 13.2 million in the second quarter of '05; and this also compares to 16.4 million in the first quarter of '06. Finally in the Audio product line, revenue in the second quarter was $400,000, compared to $700,000 in the prior year, and $1 million in the first quarter of '06.

Looking at these individually, LCD Backlight revenues decreased because of several factors. First, there has been some unfavorable impact from litigation by 02Micro against MPS customers and competitors, that has affected the buying decisions of some customers who are choosing alternative solutions from parties not directly involved in the litigation. Secondly, the Notebook market where the majority of the MPS CCFL inverters are sold was weak in the second quarter, with reported estimates of unit growth of only 15% year-over-year for the second quarter.

If you factor in normal price declines, we would estimate that the dollar value for the CCFL portion of the Notebook segment did not grow much in the second quarter of 2006. I would also like to note, that the higher than normal inventory levels in our distribution channel at the end of 2005 and the first quarter of 2006 have been largely resolved. Distributor inventory levels are back to normal. Our second quarter DC to DC product sales of $19.2 million showed solid growth year-over-year and quarter-over-quarter.

Our gross margin in the second quarter was [63%] compared to 63% in the second quarter of 2005 and 62% in the first quarter of 2006. Our second quarter gross margin was negatively impacted by approximately $260,000 or 1 percentage point for the changing start up of our test facilities. This was in line with our planned ramp of this new facility in the second quarter of 2006. GAAP based operating expenses came in at $14.9 million in the second quarter, and this includes $2.8 million for patent litigation costs and $12.1 million in R&D and SG&A expense.

The $12.1 million includes $2.9 million for stock compensation expense under the new FAS 123R accounting rules. Compared with Q2 '05, GAAP operating expenses decreased by $10.7 million. This is comprised of a decrease in litigation costs of $14.6 million and increase in R&D spending of $1.7 million, and increase in SG&A of $2.2 million. Compared to the first quarter of 2006, which had GAAP operating expenses of $16.6 million, our GAAP operating expenses in the second quarter declined by $1.7 million.

Let's go into a little more detail on some of these expense changes. The major change in litigation expense was due to the one-time provision for a $12 million preliminary jury award in the 02 Trade Secret Trial in the second quarter of 2005. In addition litigation costs dropped $2.6 million year-over-year, due to reduced trial related activity in our cases. If you look at R&D, the increase in R&D spending year-over-year and quarter-over-quarter reflects the company's continuing investment in growing our design teams and new product introductions.

Year-over-year we have added about 15 to 18 design engineers. Our SG&A expense growth year-over-year, was driven by headcount increases in the sales force and financial teams, as well as the continuing cost of SOX compliance. Let's look at the non-GAAP side, which excludes stock compensation. So if you exclude stock compensation and litigation costs, our operating expenses were $9.2 million in the second quarter of '06 compared to $7.1 million in the second quarter of 2005 and $10 million in the first quarter of '06.

The $800,000 expense decrease from the first quarter was primarily due to the reduction in G&A costs, where the first quarter included large one-time charges for our restatement project that were eliminated in the second quarter. Second quarter GAAP net income was $1.1 million or $0.03 per fully diluted share, which includes a $1.3 million tax provision. This compared to a loss of $6.7 million for the second quarter of 2005 or a loss of $0.24 per basic share last year.

Our tax rate for the second quarter of 2006 was $61%. This rate is higher than the prior quarter, primarily due to increased stock compensation expense, which is non-deductible, a change in taxable income forecast and other elements associated with the implementation of our international tax structure. Finally, our second quarter non-GAAP net income was $3.9 million or $0.12 per fully diluted share, which excludes total stock comp expense of $3.1 million. The stock comp expense difference between the $2.9 million for operating expenses and the total of 3.1, reflects the stock compensation as included in our cost of goods sold.

Turning now to the balance sheet, cash, cash equivalents, restricted cash and investments was $64.5 million at the end of the quarter, down from $68.2 million at the end of the first quarter, but up from $51.8 million a year ago. The drop in cash from the first quarter primarily resulted from $3.2 million in capital equipment purchases for productions. Accounts receivable ended the quarter at $9.9 million, compared with $7.4 million at the end of Q1 '06 and $6.7 million at the end of the second quarter of 2005.

Days sales outstanding were 34 days at the end of the second quarter of 2006, compared with 28 days at the end of the first quarter, and also compared to 27 days at the end of the second quarter of 2005. Our inventories ended the quarter at $9.1 million or about 84 days of inventory. This compares with $8.5 million or 83 days of inventory at the end of the first quarter of 2006. As of the end of the second quarter of fiscal 2005, our inventories totaled $6.3 million or about 72 days of inventory. The level of inventory was controlled to meet our expected demand for the second half of the year.

Commenting on general business conditions, in the DC to DC market, we continue to penetrate new customers and applications, and we expect to start volume shipment in the second half for applications such as digital still camera, passive optical network and gaming. Geographically, sales continue to grow in regions outside of Asia. Our 2006 European sales will likely be three times our total 2005 European sales. Second quarter 2006 sales in Japan were over 70% than the second quarter of one year ago.

We project volume shipments in the second half to U.S. customers for new applications, such as IP set-top box and cable modems, and we have closed several major design wins at first tier U.S. customers. For the CCFL product line, we project approximately flat sales for the third quarter of 2006 compared to the second quarter of 2006. We expect to introduce several leading edge products in the third quarter for new applications and new markets such as a high voltage 40 volt Step-Down converter for automotive and printer applications.

A high performance LDO for handheld RF applications, and the world's first 24 volt 4 megahertz 2 amp buck converter for many diverse applications, that require a very small footprint. Initial customer feedback on these products is very positive. In the second half of the year we also expect to introduce high current integrated DC to DC converters using our BCD Plus technology. These cost effective products are aimed at high volume PC applications, large flat panel TVs, telecom and other high performance markets. We expect these products to begin contributing to revenue in 2007.

Let's turn to our outlook for the third quarter of 2006. Revenues for the third quarter are expected to approximately flat from the second quarter, in the range of 25 to $27 million. Gross margin is expected to be in the upper end of our target range of 58 to 63%. We expect stock-based compensation expense in the range of 3.0 to $3.5 million. We expect research and development and selling, general and administrative expense in the range of 9.5 to $10.5 million. This estimate excludes the stock compensation estimates mentioned above. Finally, we expect litigation expense in the range of 2.5 to $3.5 million.

In conclusion we'd like our listeners to remember that MPS is continuing to develop new products and technologies to address different market segments. We have expanded our sales channels and customer base, increasing our revenues geographically. We are controlling our costs, but are maintaining our R&D spending to effectively support our new product development and design win activity. Finally, we continue to innovate with our proprietary BCD Plus process, introducing many new products on this third generation technology in this second half of 2006. We expect this technology to enable the types of unique products that made MPS what it is today.

Now, we'd like to open the microphone and take your questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question will come from Tore Svanberg with Piper Jaffray. Please go ahead.

Yes good morning, thank you for taking my questions. First of all, could you just add a little bit of color on your visibility for the September quarter, either talking by end markets or any booking type trends that you may be experiencing currently?

Hi, Tore. Yes thanks for the question. We don't disclose our bookings and backlog trends, because of the nature of our business where the lead time is quite short in general. So the trends we talked about were primarily the CCFL revenue from our perspective will probably be flat into the third quarter.

Can you maybe elaborate on the assumptions for Backlight to be flat? I'm just trying to understand -- Notebook versus maybe penetration into new markets, and things like that.

Yes relatively we project -- the issue, as you people know, the majority of our CCFL revenue comes from the Notebook market so we don't expect more penetration in Notebook market. So as we mentioned, we're projecting approximately flat revenue compared to Q2, as a result of some of the issues we talked about. We're not able to predict any more impacts one way or the other, other than that. And in the new markets such as TVs and flat panels and so forth, we're still relatively new in those markets, such that there's not an appreciable impact yet in the revenue number.

Very well. And then if you look at Europe and Japan, those areas grew quite dramatically for you year-over-year. Could you maybe expand a little bit on some of the reasons behind that?

Well, Michael will take this one.

As we strengthen our sales teams, and -- compare a year ago, we don't have a one or two -- one people two people in Europe now, we have four or five. And in Japan we sign on a [mark] because [Optimal] is our new distributors, and the results are great and that's why we see the growth this year.

Great. Two more quick ones, first of all do you have the cash flow from operations number in the quarter?

Cash flow from operations, again we had $1 million net profit, $700,000 of depreciation, so about $2 million of operating cash flow if you take away the effect of things like capital equipment purchase and things.

Great. And then just a final question, your inventories are around mid 50s on an inventory day basis, what should we assume here next quarter and maybe longer term for inventory days?

I'm sorry, you said the days -- the days we've reported were around 84 days, right?

Yes so I'm just trying to understand where that number will be going forward because you used to have slightly lower inventory days than that historically?

Yes historically actually the inventory days from the prior year were too low. We were too hand-in-mouth in those cases, in fact some of the inventory fills the distributor made at the end of '05 were responsive to not feeling comfortable with our own inventory situation so they ordered extra. So we believe in this environment we should have between 70 and 90 days, that's our target depending on the product mix. We think we've controlled it about right. When we're up in the 100, that's really preparing for a large increase, we keep it down into the range between 70 and 90, that's our target.

Great. Thank you, very much.

Thank you. Our next question comes from Rick Schafer with CIBC World Markets. Please go ahead.

Hi, thanks guys, good morning. I had a couple questions, first one just to follow-up a little bit on Tore's question about the forward outlook for third quarter. I understand you sort of -- it sounds like sort of a flattish quarter for the CCFL business, I guess that would -- in my model anyway, that would imply basically, given your guidance, flattish DC to DC business as well. Can you give us a little bit of color on what's going on there? I would have expected to maybe see some growth in the third quarter in DC to DC.

Yes one of the product groups -- we'll talk about the product family in DC to DC, one of the product groups in that family, White LED, is under fierce price competition because the cell phone market has become commoditized, which was where we sold our products. As such we're only fulfilling orders at the high performance end of the market. The other DC to DC segments are growing but not at the rate we'd like to see, so a lot of our focus on introducing some of the newer high performance product in the BCD Plus technology. I mentioned earlier a selection of these types of high voltage products, so that's really what's going on in the DC to DC area right now.

And I'd like to add the existing -- from existing products there are a lot of different applications in the different markets that we are not [selling] as we station our team both in the -- are in the U.S., Europe and in Japan. We're finding a lot of new opportunities such as Rick mentioned before in the set-top boxes and the passive optical network [so on].

And for PON and set-top box and things like that, I mean I know you guys talked about 2007 when it starts to really sort of hit the top line. Should we be thinking more back half of the year next year? Or I guess when do the products start to roll into the top line?

I think that we expect to ship in the second half of this year.

Okay. Another question on Notebook, just to kind of follow-up on CCFL, I know you talked about inventory [from] the channel and [inaudible] clearing, so that's great. Can you give us any color on any noticeable share shifts that are going on? I mean do you guys feel like you're holding share? Anything out of the ordinary in pricing? I know normal pricing I think is roughly 10 15% a year. And sort of what's the impact of Maxim been getting into this space?

On CCFL?

Yes, all CCFL, sorry.

Yes. Yes I didn't know which one you wanted, Tore. In terms of price declines that you mentioned ASP, that's about the normal range in our market, 10 to 15%, and that's consistent when we see some price decline. But that's normal. The main trend we see in CCFL market is that, a few selected customers have delayed their purchasing decisions because of the result of recent litigation.

On the other hand, the trend we see and though we can't confirm it precisely, but this was only based on public announcements of other people, is that it looks like the choices are going to people not involved in any litigation or CCFL choices. So that would include people like Maxim, I think it might be gaining share, we can't say for sure, but we know we're flat so the business is probably going in that direction.

Okay. And then just a last question, just a little bit of an update on the lawsuits. I know you said there wasn't that much incremental going on there, but could you talk about where we stand with Micro now? You know the timing of any court date, or any chances of a settlement there -- this year kind of thing. And then kind of 02 color you can give us? I know the venue got moved up to California and that's great, but I guess sort of where do you think we go from there? What are we going to hear from those guys?

Yes I can give you -- briefly, as you know the case against MPS that 02 filed in Texas was recently transferred to California. We don't have trial dates in either of the pending 02 cases, they haven't been set yet so we can't pass those along. Summary Judgment Motions have been filed and we will be heard in those cases on October 13, that's probably the next date we have that's firm on Summary Judgment Motions in these cases, October 13.

We don't have a trial date in the Micro case, things are just starting to warm up a little bit on discussions and discovery, so it's a preliminary phases. I can't really comment on settlement or not but we're in the discovery phases where things are starting to ramp up relative to that. Settlement is always a possibility in any litigation and we remain open to reasonable solutions consistent with both parties' business needs.

Okay. Thanks a lot, guys.

Thank you. Our next question comes from Eric Gomberg with Thomas Weisel Partners. Please go ahead.

Hi. Just following up on the last question, could you tell us how much of your DC to DC revenue is actually White LED?

We don't break that out as a separate component any more, it's not the largest piece, its not the smallest piece. So I can't give you a lot of color there, that's the problem is we don't break that out any more. You had -- you know it has some impact on our growth rate.

In terms of your non-White LED charge pump business you'd expect growth in the third quarter?

Our non-LED DC to DC is growing in the third quarter, yes.

Okay. And on the new BCD Plus products, could you -- it sounds like you are introducing them in the back half of the year, do you talk about where you are in terms of -- are you sampling them? Or do you actually have multiple wins at this point? And I think you mentioned something in graphics, are you talking about non-graphics cards?

No we're still in the development stage, and we have a product come out based on BCD Plus technologies. And the high current one [we're seeing] them in the development stage, at the end of the development stage.

Yes, we'll be sampling some products in the second half, meaning they'll come out of fab, they'll be at [inaudible] -- per our schedule, if we meet our schedules, that we'd have working silicon to show people. But that's the stage we're at.

Okay. So in terms of volume though, it's more -- basically it sounds like '07 then?

Yes.

Okay. Can you talk about just on the new test facility in Changzhou, how that's going? And do you still expect it to have a positive impact on second half margins?

Well, that facility has been going well to our plans. As I said, we ramped -- the first quarter was really taking the -- the first quarter was taking the whole thing and just getting it started. The second quarter we probably used about half the capacity and we've put a significant amount of capital in place, we've met our capital plan for the year, so that's about $5 million of equipment. So the final stage is, we're finalizing moving sort over there, so we'll have the full sort and test capabilities completed in the third quarter.

We're very pleased with that start up in a very -- at the end of December we probably had a handful of people there and now we've got well over 100 and all of our test operations and sort operations there. So that's -- we've been able to do that with very minimal impact to our gross margins. As we said, the second quarter, if you -- it only had about a 1 percentage point impact so we should start to see -- again our guidance going forward is our margin should be at the upper end of our range.

Okay. Just a last question, on CCFL. Do you expect that this is kind of the new base level, that we shouldn't expect revenues to go lower than where they are? And also I'm just wondering, and I'm not sure you have this information, but is CCFL profitable as kind of a stand-alone business at this point, at these revenue levels?

In general in CCFL, several factors are influencing the market, we talked about some of the litigation impact. There's also the migration of some CCFL Backlight applications to LED solutions, however for those we do have products in the development pipeline for an LED driver for those types of applications. For MPS we believe the long-term outlook for the CCFL Backlight product line really depends on the impact of litigations and the competitiveness of our products. We're fairly confident on the competitiveness of our products historically, we can't comment on the trends in litigation. So we'll just have to see how that plays out.

Okay. Well, thank you.

Thank you. Our next question comes from Simona Jankowski with Goldman Sachs. Please go ahead.

Hi, thanks very much. I just wanted to follow-up on your comments. I think you mentioned something about gaming applications in the second half of this year and also PC applications in 2007. So I just wanted to see if you can expand on the products you're developing and a little bit more specifics there.

The gaming side, there are a whole of spectrums, some are the handheld. Another one is like in Japan they have the Pachinko machines, and we have several design wins in those areas. And in terms of PC applications, and [these special] graphics cards, and we are trying to develop a product this type of application.

Okay, and that would be with your high turn products that you're developing on your new BCD Plus profits?

That's right.

Okay. And would that be for the higher end higher power graphics cards, or more mainstream?

It is still too early to predict and to say which area we're going to target until we have a product. In the historical MPS always focused on the higher high volume market.

Can you maybe comment then on the power or amps of the product that you're designing?

These are 6 to 20 amp kind of current.

Okay. And then separately I think you mentioned that you added 15 to 18 engineers on a year-over-year basis, I just wanted to clarify if that's a net number? Meaning net of anybody who might have left? And also if you can comment on your total number of engineers at this point and whether most of your hiring has been of experienced or of college graduates?

Yes Simona, our -- just to answer, our total design engineering population right now is about 25 to 30 and that's -- so the number I gave before was net. We're trying just to show the net numbers at the end of the period. Our hiring in this year, now that we're at the stage where we have significant numbers of people, we hire the experienced ones when we find the right ones. We are able now to start hiring some junior engineers. We're doing these in other parts of -- other geographical areas outside of California. So we are starting to hire some less experienced people because we do have enough senior engineers to mentor them.

Okay. And then just lastly, your OpEx guidance seems to be about 1 million higher than last quarter, I just wanted to see if most that increase is in SG&A or R&D, and basically just point to what that's related to.

It's basically split between the two, some R&D growth and some SG&A. Again in SG&A we've, compared this quarter, we have been adding some permanent staff to make sure that financial controls are in place. On the R&D side we continue to add some people there as part of our -- keep trying to stay at our model of 14 to 16%. So it's split between the two.

Okay, thank you.

Thank you. Our next question comes from Craig Berger with Wedbush. Please go ahead.

Good morning, a couple questions. First one on the taxes, how should we be modeling taxes on a go-forward basis?

Yes the tax rate is higher than we previously projected based on changes in a lot of the elements and I can talk to you in more detail, you'd have to have about an hour to go through the tax situation. But in essence we expect to be about this level this year. As the international tax structure takes effect and a lot of the income elements that are associated with the U.S. now go away, the -- we expect our tax rate to decline in 2007.

Towards what level?

It'll be significant, it'll drop substantially.

Below 20?

We don't want to give a firm number until we get closer to forecasting for that year, but substantial would certainly be -- you know if the statutory rate's 35 to 40, it would definitely be half of the statutory rate.

Great. And then with respect to your DC to DC business, do you see any inventory out there among your customers or distributors?

We've spent a lot of time on the inventory control side of the distributor area, Craig, and the -- any one distributor might be out of mix on one product or something, but overall when you look at the sum total, we're relatively happy with the mix of products out there. We think there's no particular excess inventory in the channel at the moment, it's about where we wanted it. So we've held back, controlled our shipments and our distributors' profile before we bid so we get to the right mix. And we've done that fairly quickly.

Yes we don't have the same problem as we had in first quarter.

In Q1, yes.

And then with respect to the CCFL business, should we be expecting that business to decline further in the fourth quarter and into 2007? Or is this kind of it?

It's -- I'm sorry, Michael, go ahead.

It is -- the orders are very -- the lead times are very short and we -- still the outcome depends on our litigation.

Yes and just to further comment, the -- we don't give guidance more than one quarter forward or into '07 so we can just comment on the general market trends though. We won't be able to give any specific numbers until we get closer.

Could you then comment on design wins for next year or penetration at Dell, HP and Lenovo?

Yes. You're still in the CCFL part of the business? Or overall?

CCFL.

Well CCFL is in -- some of the customers not exposed it in the litigations and still stay with us, and other ones they will reduce the litigation risk and they're choosing the third party who are not involved in this mess.

And basically all of the customers you've mentioned, Craig, are still customers. Our CCFL products, we believe our CCFL products competitively are superior, particularly for Notebook computer applications. And we strongly believe in our intellectual property position and will continue to defend ourselves in our intellectual position.

So, though we currently are experiencing some customer concerns due to these litigations, we're committed to recapturing market share and we are selling to all those -- all the computer customers today. It's just a matter of in some cases they're slowing up the decision processes for new models and have not made their decisions one way or the other. We're confident on the product side that we have the right products.

And then for the TV and monitors, specifically TVs, can you comment on the design win activity for 2007 and --?

These are similar customers and they have similar concerns:

However, as we mentioned, some of the -- Japan has been one of our faster growing regions and that's heavy in the type of products you mentioned, TVs and things like that. So that's an example of where we are making progress.

So there's still litigation concerns on the non-integrated CCFLs?

Oh, you mean the CCFL controller only?

Right.

Oh yes. Yes.

And then on the --.

Some of the large TV makers are being sued.

Yes the large TV makers are being sued by Bi-Tech. Bi-Tech was a controller maker as well so this covers the board.

Got it. And then with respect to the White LED business, are you seeing the competition impacts begin in the first half of the year or Q2? Or is that -- are your comments more related to a go-forward basis?

We sort of saw it last year, in the beginning of last year we see the price -- we seen the, especially on the cell phone side the market became very -- the products became very much commoditized and they were staying [inaudible] comparable product out there. And the customers, they can change over night.

So yes just to summarize, the market had gotten just 10 to 15 players in it and the prices had gotten to a point last year where we chose not to pursue certain major customers, because of the pricing situation. So the revenue was not going to grow in that area and that's continued. So it's started to decline now that the design wins we didn't go after are moving forward.

And do you see 2006 as a year where Q4 revenues are essentially going to be consistent with Q3, as you've commented in the past?

We can't comment on more than a quarter.

Okay.

Yes we'll stick with that.

Okay. Thanks a lot.

Our next question comes from Ross Seymore with Deutsche Bank. Please go ahead.

Hey, guys. A lot of the specific questions have been asked but I just wanted to get your view on the Notebook market as a whole. You've talk a bit about some of the market share going away from you guys because of the litigation, what are you seeing in the Notebook market as a whole as far as the timing of normal seasonality? Is it normal, the strength of the ramp, etcetera?

Okay I'll start first and then Michael will chime in. As we mentioned in the call we have been looking at data from outside sources. And unit demand wasn't very good in the first half and certainly we have some -- first quarter is always down from Q4 but second quarter was also down -- is going to be down as much as 10% from Q1, that's the information we saw on a unit basis. Now so you add all that up and it's not a very robust growth in the Notebook market. So that's what we see on a unit basis, not a lot of activity in the first half.

I can't -- we don't follow it closely enough, Ross, to project the second half Notebook market, I can't really say what that is at the moment, we don't have enough information. I'm just commenting on historically the first half wasn't very good in the Notebook market from what we can tell on a unit basis. And therefore, as someone mentioned before, given normal ASP declines, if you have a 15% unit drop -- 15% unit growth year-over-year, and your normal 10 to 15% ASP drop, you pretty much have not much revenue growth at all. And that's what we see in the first half Notebook market. Michael, any other comments?

Yes that's all we hear from our customers, and this year is not as strong as last year. Well, last several years.

And given the fact that you guys are guiding for that segment to be flat in the third quarter, you I guess by default are taking some view on the third quarter at least. Are you just basically saying that your customers aren't telling the demand's good and you're not sure whether it's the seasonality -- weak seasonality, or business going to other suppliers? You really don't know the delta between those two at this point?

Well last year we did close to, on the CCFL side we did almost $10 million and this year we got flat in the product line. And we -- at this time we don't really know whether it is -- what's the impact from slowdown on the Notebook growth and the litigation factors.

Is the reason that these customers are getting a lot more sensitive now than they've been in the past because of the [SMEDA] Judgment? Just give us a little bit more color why the customers care so much about the litigation now versus let's say a year ago?

Well, I think the impact last November was the SMEDA verdict, and then earlier this year there was another company called Bi-Tech, so there's been a couple of court cases that's affected the decision processes. And last year those were in process and not completed, I think those two trials had some impact on the conclusion. Some people have concluded one way and some have not, our revenue is still holding in there fairly well so it hasn't -- it's just had some impact relative to last year.

Okay. And then my last question on the LED side of things, I know you're not breaking it out specifically anymore, but relatively speaking versus a year ago when you did break it out, I think it was kind of in the 15% of sales range. Is it massively different than that now?

That's in the -- yes that's where we were last year, it hasn't doubled or shrunk significantly, it's in that range.

Okay. Thanks, guys.

The next question comes from [Lamal Alafurem] with [LM] Securities. Please go ahead.

Hi, thanks for the time. Just, Rick and Mike, I just want to spend some time trying to understand the market dynamics here. Please do excuse me if the question has already been asked. As far as the Notebook market is concerned, almost everyone seems to be -- the market observer seems to be very surprised by how it acted interest he second quarter. Given the fact that the Micro [processor] vendor who owns 90% of the market was going through a huge product transition, it should have been obvious the second quarter for the market observers the second quarter market is going to be so much softer.

After having said that, what I'm trying to understand is that I am not expecting the second half Notebook market to over compensate by growing for the weakness of the first half, I am trying to get some more granularity here. Is there a risk of -- are you worried about some stealth inventory of your products out there? Are they giving anything more specific to you when they say that they are not too sure about the third quarter demand? Can you add some more color on that?

Well Lamal, thanks for the question. One thing we try and hard enough to focus on what our own chip business is doing, it's harder for us to speculate on the next level down on the Notebook market. So our comment on the Notebook market, we don't really know where the Notebook market's going, we just know where our products are. And as we say, we mentioned they were flat. Relative to your question, inventory wise, no we've actually done inventory audits.

We've physically gone out and select given inventory to distributors. So we feel relatively confident that we know what the inventory numbers are and where they're at. So we don't think there's any stealth inventory out there.

Okay. Just a follow-up on that, on a longer-term basis, and I'm not asking you for the forecast or anything, on a longer-term basis if you look at your total sales, it grew very healthy last year year-over-year and it has faced some issues because of the litigation.

And it looks like by the guidance you're giving and to some extent, if you look at the seasonality and input from fourth quarter guidance, you might potentially end up being either flat year-over-year or up marginally, and hopefully with the new products you can show a stronger growth in 2007.

Can you give us some idea as to what should be the leading indicator that you are hitting those benchmarks going forward that as analysts and investors we can watch and say that the 2007 would be a much better growth year?

What you can see in the next few months is a number of our products that we're going to release. And Rick mentioned several examples of leading products we will introduce in the third quarter I'm very excited about are these products. These products will -- is a similar product [that made] MPS to date.

Yes I would echo that. I mean we're not making any excuses, we've been dealing with a lot of distractions at MPS including litigations and restatements and the growth of a private company to a public company. We think we've gotten through this pretty well. We're heavily focused on introducing these high performance cost effective products that we mentioned early, particularly the high current high voltage products.

And these are the types of products, unique products that have allowed MPS to grow so fast and we're definitely making sure that we're maintaining our R&D spending to effectively support this type of new product development. However we're watching our costs. If you've noticed, we dropped cost in Q2 to the numbers we said we would, we're keeping good control in the second half relative to what our opportunities are.

So we're going to get out of the box primarily the way all chip companies do with their technology base is we're going to keep developing and introducing new products. So keep an eye on the product introductions in the second half. And the market conditions and litigation situations, we'll just have to see how they play out. No one can really predict those.

Alright. Thanks a lot, gentlemen, thanks for your time.

Thank you. Our next question comes from Mark Donohue with Ferris, Baker Watts. Please go ahead.

Yes how are you doing? Some of the end products outside of handsets in the DC to DC area, can you comment a little bit on where you're seeing the most volume?

The current volume of our -- our products are building blocks for multiple markets, therefore it is often hard to connect in our design wins or the product where it shifts to the specific market trend. However, you know we're in a DC to DC product that we started shipping product in the middle of last year to flat panel TVs, and we still see very healthy growth. And other products were shipped to the wireless LANs and networking products. This year we're seeing a different segment, such as digital still cameras, and passive optical networks, gaming, telecom products.

Okay thanks. And you know maybe in your margins, if we can back up a little bit, can you split out how the DC to DC is performing versus the CCFL market?

Mark, our margins are -- we don't -- between the product lines they're all relatively close. There isn't any particular difference. We did mention that the one product area, White LED inside DC, that's the one specific product where margin pressure is high. But in general our product lines have similar margins.

In the White LED side, although we don't break out, but we did mention it in the last few quarters that the margins are not as good as the rest of our products.

Okay. And on the headcount front I know you've mentioned some adds here, can you tell us how the headcount has changed quarter-over-quarter?

Well total headcount is there's -- we really -- you want to focus -- we kind of look at it in two areas, the U.S. headcount and then the Asian headcount. When we started up the factory in Changzhou, as we said last year if you go back a year ago to second quarter was probably 10 people, I don't know I'm just guessing. So not very many people because we were just breaking ground and getting the thing going. Right now we have 130 people in Changzhou so that gives you -- the major growth year-over-year that you'll see disclosed in the upcoming Qs is really related to the growth in Asia.

But again that gives us not only -- that 130 people can replace about 15 or 20 people in the U.S. on a cost basis so we've got a significant improvement in our productive capacity over there. In the U.S. we've definitely grown the headcount in the R&D areas and SG&A areas. As we have said, we have tried to catch up in the financial area, we've got that under control. And R&D, we continue to look for key people and hire them when we find them.

Overall U.S. headcount is either flat or lower.

Well, actually yes, we intend to -- we think the U.S. is about where we need to be, we'll control that headcount the rest of the year that was Michael's comment. Compared to prior year, Mark, yes we've definitely been adding headcount.

Okay. Okay. And just last question I have, I think last quarter you gave some commentary on wafer pricing and how that was going. Do you have any thoughts on what the trends are like this quarter or what you think they'll be going forward?

For the wafer pricing?

Yes. You had said that it was up last quarter, you were seeing some pressure.

Well, this quarter we don't see a change.

Okay. Alright thanks a lot, I appreciate it.

Our next question will come from Quinn Bolton with Needham & Company. Please go ahead.

Hey guys, good morning. I wanted to just come back to the DC to DC and your comment that you said it's not growing as fast as you'd like right now. Can you just provide a little bit more color there? Is that that these products have seen increased competition from other competitors in Asia? Are they not as sort of high performance or sexy? I mean if other people leap-frogged those products that were probably introduced there now maybe a year or two ago, can you just sort of talk about what you see going on in that business?

Yes Quinn, thanks. I'll give a couple of elements, and then Michael will finish off. In the DC market we went to one area with the price competition. The other factor on a lot of our DCs, [not] a lot of our products, is that we don't have as broad of a product range as other analogue companies.

I mean in these types of areas, Step-Up and Step-Back converters, you have a lot of variety. We have a pretty good product mix, but again our products are focused on certain applications and what we think is -- the applications we focused on, particularly in Asia, we've reached more of a flat point, or not a saturation, but we've really mined those wells of opportunity as much as we can in those particular areas.

That's why Michael's been emphasizing new product development for products that are -- get us into different applications, the different markets. So that's really where the emphasis is, not that the products are performing or not performing, but you basically with these types of products have to have a strong and large applications and sales channel out there to chase after all the different applications. And we're a smaller company in that regard, compared to some of the larger competitors.

We don't have as many feet on the Street worldwide as they do, so when we find certain application areas we get a lot of them, but then they tend to flatten out. So that's where we need more capability with broader range of products, with more capabilities that other people don't have. That's really Michael's focus on the type of products we're developing that house --.

Well said. Really the emphasis is we need accelerating bring more and more products in -- from a leading edge side, and we have uncovered a new market, new applications within the same end product. Examples in the large TVs, or the TV size became bigger and bigger and the current requirements are much higher. And we don't have those products. These are the opportunities.

The same thing happened in the printer areas and we just don't have those -- we're currently shipping product to these guys, but we don't cover all the sockets. So there's clearly the customer's message to us, we need a higher power product, and that's where -- what we're developing and based on the new BCD Plus technology which can allow us to integrate more features at the higher power levels.

Okay. And then just a couple questions on the new products, the LDOs, the Op Amps, battery chargers, as these start to generate revenues how are you going to report that? Are you going to lump that into DC to DC or are you going to start to break that out?

That's a good question, Quinn, you must have been bugging our recent conference calls because internally we -- some of the newer product areas we're probably going to segment out. We haven't quite figured out how yet, but we definitely need to start breaking it out a little bit better. So we'll let you know and we'll probably ask some of your advice on that too, but yes we'll do something as we move into that.

So are these new products still sort of immaterial in terms of revenue today in the second quarter?

Yes.

Okay. And then lastly, just on the gross margin you mentioned 100 basis points of start up costs in Q2, you're moving sort over in Q3, do you still have some drag from start up costs in the third quarter? Or do you think you make back that 100 basis points?

We shouldn't -- our projections are there shouldn't be any impact in the third quarter.

Okay. And then, any product mix shifts you see in the quarter that would significantly change the margin level from where it was in Q2?

I mean we expect the product mix to remain approximately the same in Q2 so, but again we project it to be at the upper end of our range in third quarter.

Okay great. Thank you.

Thank you.

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Our next question will come from Michael Davies with Next Generation Equity Research. Please go ahead.

Yes good morning, guys, thanks for taking my call. Most of my questions have been answered but I just wanted to review a couple of things. One on the DC Converter business, can you just talk about this new BCD Plus processing technology? What additional leverage can we expect? And in terms of the product focus, what are you bringing to the table there in terms of what is this value proposition so to speak?

I'll start basically on the projection side, Mark, we're -- Michael, I'm sorry. We've got the -- these products are coming out of fab this second half, some of them are going to be sampled and so forth. So given the normal introduction times we have said they will impact '07 revenue and not really '06 revenue. So that's on the revenue side. Michael can comment on the performance side.

Yes, it's basically the technology provides us with much higher switching frequencies and higher current higher voltage with the smaller die size. So, it gives us a competitive edge in terms of cost, and at the same time we can integrate more features in the same die. And this is the evolution or new improvement from our older generations. As you recall six seven years ago, we introduced a product that nobody else can make, and this is the same kind of technology, and the same kind of product that we're going to introduce.

So in essence, we're integrating the microcontroller and the drivers on the piece of silicon, as well as increasing the amperage going forward?

Yes in everything else what you said, other than the microcontroller, we don't integrate microcontroller. We integrate some digital features, and mostly it's the analogue controller side.

Thank you, guys.

Thank you. Management, at this time we have no additional questions in the queue. We'll now turn the conference over to you for any further remarks.

Well thank you for participating this morning, it's quite early on the west coast, but we wanted to try this different format and see how it went. So, any comments later on let me know. Thank you again, for participating. Take care.

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference. We thank you for your participation on the program. At this time you may now disconnect, and please have a pleasant day.