芯源系統 (MPWR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Incorporated, fourth quarter and fiscal year 2006 earnings conference call. My name is [Mike], and I'll be your operator today. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to our host for today's call. Please proceed.

Good afternoon, and welcome to the fourth quarter and fiscal year 2006 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 first quarter of 2007, projected first quarter net revenues and gross margins, our expectations for first quarter litigation and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, planned new product introductions, potential customer acceptance, and the various opportunities these present, our process development, design activities and relative competitive position, expected growth or declines in our product lines in geographic markets and anticipated outcomes of our pending litigations.

Forward-looking statements are not historical facts or guarantees of future performance or events and are based on current expectations, 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 third quarter 2006 Form 10-Q, filed on November 6, 2006, which is accessible through our website, and our 2006 Form 10-K, to be filed on or before March 16, 2007.

Also, please note that during this call we will discuss net income and operating expense on both a GAAP and a non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation, legal settlement costs, and one-time lease writeoffs and their tax effects.

We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the first quarter of 2007, which excludes our expected charges related to stock-based compensation.

A table that outlines the differences between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which is filed with the SEC. I will refer investors to this release, as well as to the reconciling tables that are posted 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 fourth quarter fiscal year 2006 business highlights. Following this update, I will discuss our financial results. We will conclude by discussing our current expectations for the first fiscal quarter of 2007. We will then open up the call to your questions.

So let's start with the business highlights. The general analog market for the fourth quarter of 2006 was not strong, but MPS performed relatively well. Results for MPS met our expectations as we reached revenues of $26.4 million, delivered solid gross margin of 63.9%, achieved our first design wins for our new high-current MiniMonster products and ended the year with $78.5 million in cash and cash equivalents.

Our third-generation process technology, BCD Plus, continues to deliver excellent early results. In the first quarter of 2006, we released the BCD Plus process technology and said our first products would come out in the third quarter, and we met that target.

Our first two products in this family, which are nicknamed the MiniMonsters, are the MP8666 and the MP8668. These products were sampled in the third quarter of 2006, and we are pleased to announce that our first production orders have been received for shipment in the first half of 2007.

The initial application is for a high-end desktop PC, but we are seeing a lot of design activity in our other target vertical markets, such as power modules for laptops, large LCD TVs, communication equipment, low to mid-range ODM-supplied graphics cards, servers and other similar markets that can utilize the high-current, high-voltage, high-efficiency and very small form factor of our MiniMonster chips.

MPS is very excited about achieving design wins for our new high-current products from the initial sample runs. Recent customer visits have shown enthusiastic interest in these innovative products. We have more products in the pipeline, and we expect to open up new market applications and revenue opportunities for MPS as we continue to execute on our new technology and product line.

In the manufacturing arena, MPS continued to deliver excellent performance, as we met our gross margin expectations for the fourth quarter, recording a gross margin of 63.9%. We continued to watch our inventories closely, keeping our days of inventory at a modest 68 days. We are steadily growing our cash balances as we increase cash and cash equivalents by $4.5 million in the quarter to $78.5 million as of December 31, 2006.

Year-over-year, cash and cash equivalents has increased by $11.6 million. On the expense side, our non-GAAP operating expenses were down quarter-over-quarter, as litigation spending of $1.9 million was well below our expectations as our trial preparation took a breather until the first quarter of 2007.

We moved to a new headquarters building in December 2006, and as a result we recorded a one-time charge of $1.2 million to write off the lease of our old building in the fourth quarter.

Now let's look at the financials in more detail. On the profit and loss statement, starting at the revenue line, fourth fiscal quarter net revenues were $26.4 million, a decrease of 19% from the fourth quarter of 2005. This compares to net revenues of $27.3 million in the prior quarter, a slight decrease of 3%, sequentially. For the fiscal year, revenue was $105 million, up 6% from 2005 revenue of $99 million.

Let me break down our fourth quarter revenue by product line. DC to DC product sales were $17.3 million, down 8% from $18.8 million recorded in the year-ago quarter and down the same amount from our third quarter 2006 figure of $18.8 million.

For fiscal 2006, total DC to DC product sales were approximately $71.7 million, compared to $57.8 million in 2005, which is a growth rate of 24%. Year-over-year, our core DC to DC products actually grew about 30%, while the white LED driver segment suffered from difficult market conditions. It was down about 7% year-over-year.

LCD backlight revenues for the fourth quarter were $7.4 million, a decline of 42% from the same quarter a year ago. This result was consistent with our expectations of essentially flat revenues quarter-over-quarter in this product area, as our third quarter 2006 backlight revenues were also $7.4 million. For fiscal 2006, total CCFL product revenues were $29.2 million, versus $38.1 million in fiscal 2005, a decline of 23%.

Just to remind our listeners, the big drop in revenue year-over-year in the CCFL area was due to several factors. First, we had order cancellations related to the [senior limit] litigation and end customer buying decisions that were impacted by ongoing litigation.

Secondly, we had a large inventory build at the distributor channel in the fourth quarter of 2005 that did not occur in 2006. Finally, audio revenues showed a good acceleration, coming in at $1.7 million, well over the $900,000 recorded a year ago and up from the $1 million we sold in the third quarter of this year, as several new designs came to market.

For fiscal 2006, total audio revenues were $4.1 million up 26% from the $3.3 million shipped in 2005. Let's move down to the gross margin line on the P&L. Our fourth quarter gross margin was 63.9%, compared to 64.0% in the same quarter of 2005 and 65.6% in the third quarter of 2006.

We did not expect to repeat last quarter's record gross margin performance, which reflected some one-time unusual mix swings, but we are operating in our expected range near term. Our overseas test operations are executing well and overall capacity availability in our segment of the analog foundry and assembly markets is normal. Now let's look at reported expenses.

Our GAAP operating expenses came in at $15.6 million in the fourth quarter. This includes $1.9 million for patent litigation costs, which is less than we expected, due to certain delays in the court proceedings. As you know, the case schedule is often fluid and subject to change, but we do do our best to estimate in light of such circumstances.

GAAP expenses also included $12.5 million in R&D and SG&A expense, which includes $2.7 million for stock compensation expense under FAS-123R accounting rules, and, finally, $1.2 million for a one-time write-off of building lease obligations resulting form our recent move to a larger facility in San Jose.

Compared with the third quarter of 2006, GAAP operating expenses decreased by $2.9 million. This amount is comprised of a decrease in litigation costs of $3.9 million, as we spent about $900,000 less in base litigation costs in Q4 of this year, compared to Q3 of this year, as we did not have the one-time settlement fee of $3 million to Micrel that was recorded in the third quarter of 2006.

There was also a one-time expense increase for a lease write-off of $1.2 million in this quarter. R&D spending remain constant quarter-to-quarter at $5.9 million, and there was a decrease in SG&A spending of $300,000 this quarter.

Now I'd like to review our expenses on a non-GAAP basis. Our non-GAAP operating expenses, excluding stock compensation and the one-time lease write-off for the fourth quarter were $11.8 million, compared to $12.7 million in the third quarter of 2006. This compares to $12.6 million in the fourth quarter of 2005, which also excludes a one-time legal settlement in that quarter.

The $900,000 expense decrease on a non-GAAP basis from the third quarter was primarily in litigation-related areas. In Q3 '06, we had $2.8 million of base litigation, while in the fourth quarter we -

[technical difficulties].

Ladies and gentlemen, please stand by. We are experiencing technical difficulties. Please stand by.

Please proceed, sir.

Hello. Sorry for the disconnection. The phone went out, so I'm going to go back over the non-GAAP operating expenses because I'm not sure exactly where we kicked off.

So let's review the non-GAAP operating expenses this quarter again. Excluding stock compensation and the one-time lease write-off, our non-GAAP operating expenses for the fourth quarter were $11.8 million, compared to $12.7 million in the third quarter of 2006. This compares to $12.6 million in the fourth quarter of 2005, which also excludes a one-time legal settlement in that quarter.

The $900,000 expense decrease from the third quarter was primarily in litigation-related areas. In Q3 '06, we had $2.8 million of base litigation, while in the fourth quarter we only had $1.9 million in base litigation expense.

Non-GAAP R&D costs were up $145,000, while sales, general, and administrative costs actually declined by $224,000. The R&D increase reflects our major new product push, while the decline in SG&A reflects tight spending controls and reduced commissions.

Let's look at the fourth quarter GAAP net loss and hope the telephone doesn't cut out again. In any case, our fourth quarter GAAP net loss was $1.6 million, or a loss of $0.05 per basic share, which includes a $3.6 million tax provision. This compares to net income of $3.8 million for the fourth quarter of 2005, or $0.12 per fully diluted share.

The fourth quarter 2006 figure includes the impact of the recent implementation of FAS-123R, as MPS recorded a total stock-based compensation expense of $2.8 million for Q4 '06. We had a tax provision of $3.6 million on pre-tax GAAP income of slightly less than $2 million, or a tax rate of about 180%.

This unusual tax rate was due to several factors. Approximately 67 percentage points of the rate are due to our FAS-123R stock-based compensation expenses and the related tax effect. These expenses are not deductible under tax rules until the options are actually exercised and an actual tax deduction is determined.

In addition, we had an adjustment to our future outlook of the viability of our deferred tax assets, and we booked an increase to our valuation allowance of approximately $2.6 million in the fourth quarter, and that had an impact of about 71 percentage points on the rate for the quarter and for the year. Those were the two impacts that caused the tax rate to be as high as it was. Over time, we expect our tax rate will diminish, but for now that is the main cause of the high tax rate.

Fourth quarter non-GAAP net income on a non-GAAP net basis for the fourth quarter of 2006, we had net income of $4.2 million, or $0.13 per fully diluted share, which excludes total stock comp expense of $2.8 million, the lease write-off in total of $1.3 million, and the adjusted tax amount of $1.8 million.

In comparison, for the fourth quarter of 2005, the non-GAAP net income was $6 million, or $0.19 per share, which excluded stock comp expense of $1.2 million, a legal settlement expense of $1.5 million, and the adjusted tax amount of $500,000.

Now let's look at some of the major changes to the balance sheet. Cash, cash equivalents, current restricted cash, and investments were $78.5 million at the end of the year, up from $74 million at the end of the third quarter of 2006, and up from $66.8 million a year ago. The increase in cash from the third quarter resulted from good working capital control and reduced inventories.

Accounts receivable ended the quarter at $9.2 million, compared with $9.6 million at the end of Q3 '06, and $9.5 million at the end of the fourth quarter of 2005. Days sales outstanding were 32 days at the end of the fourth quarter of 2006, consistent with the 32 days at the end of the third quarter this year and close to the 27 days for the end of the fourth quarter of 2005.

Our inventories ended the quarter at $6.7 million, or about 68 days of inventory. This compares with $7.4 million, or 72 days of inventory at the end of the third quarter of 2006. As of the end of the end of the fourth quarter of fiscal 2005, our inventories totaled $6.2 million, or about 49 days of inventory.

We have done a good job controlling our inventory levels to projected business needs in the latter half of 2006, after seeing an inventory spike at the end of 2005 in our distributor channel.

I would now like to turn to a discussion of general business conditions. We see our business continuing to be fairly normal, with potential new business coming from our newly introduced products in the battery charger, high-voltage and high-current market. We expect our revenue for the first quarter to decline modestly from the prior quarter due to plant shutdowns for the holiday periods in Asia.

Geographically, sales continue to grow in regions outside of Asia. Europe had a tremendous year, recording total sales of $2.3 million in the fourth quarter and $7.1 million for fiscal year 2006.

This compares to only $2.3 million in fiscal 2005, which is an increase of 206%. Sales in Japan were 107% higher than the same quarter a year ago, coming in at a run rate that will soon approach a $10 million annualized figure. In the U.S., we continue to make progress on major design wins at first-tier customers, but much of that revenue is built and shipped overseas.

For the CCFL product line, we expect sales for the first quarter of 2007 to decline 10 to 15% compared to the fourth quarter of 2006, primarily related to the holiday shutdown period mentioned above. In the new product area, we expect to continue the introduction of our leading-edge MiniMonster products in the first half of 2007 by taping out 10, 15 and 20-amp versions of these innovative products.

The products we introduced in the fourth quarter of 2006, which we mentioned in our last earnings call, the six amp and eight amp step-down switching voltage regulators in small three-millimeter by four-millimeter QFN packages, are receiving strong customer interest.

One reason is that our design achieves greater than 95% efficiency at the more frequently used low-current draw, as well as the high-current draw that the part was designed for. This provides the customer with significant power savings, particularly in server and notebook applications.

Though we're not providing a specific forecast at this time, we expect these products to begin contributing to revenue as early as the second quarter of 2007, as well as in the second half of the year.

Now, turning to our outlook for the first quarter of 2007, our revenue guidance is in the range of 23 to $25 million, reflecting the holiday season impacts that we normally see, as mentioned above. 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 2.4 to $2.7 million. We expect non-GAAP research and development and selling, general, and administrative expense in the range of 10 to $11 million. This estimates exclude the stock compensation estimates mentioned above.

Finally, we expect litigation expense in the range of 3.3 to $3.7 million as we prepare for the '02 Micrel trial on the 722 patent at the end of April 2007.

In conclusion, we are pleased to report that MPS is creating a stream of new products based on innovative technologies to address different market segments and expand our customers base. We are broadening our revenue base geographically, particularly in Europe and Japan.

We continue to generate cash and manage our working capital well while maintaining R&D spending to effectively support new product development and design win activity.

Finally, we are confident that the types of products we can create on our proprietary BCD Plus process, such as the MiniMonster family, with high-current handing capability and great cost-performance ratios will add significant new revenue growth and profits to MPS in the future.

Now, we would like to open the microphone and take your questions. Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS]

And the first question comes from the line of Craig Berger with Wedbush Morgan Securities. Please proceed.

Good afternoon. Thanks for taking my question. Let's see, first off, on the litigation, I guess a lot of stuff came out this morning and some of your customers were let off the hook on some of the claims. I was just wondering, do you expect to get any business back from those customers as a result of today's news?

Hi, Craig. It's too early to make any conversations on that. What we released today was really the judge ruled on a variety of motions, pre-trial motions, and we've posted that on the website so everyone could read it. The gist of what your question, however, we are still going to trial in April, and pending the results of that trial, we will be able to answer your question more fully. But until that trial is over on April 30th, we won't know the answer to that.

Okay, next question, out of the $7 million a quarter roughly that you ship to CCFL, how much of that is subject to the litigation and the 722 patent? How much of that would you say is not subject to the litigation.

The majority of that revenue, I mean, almost all of that revenue, is the older products, the integrated products that have been subject to litigation for a number of years. So for all intents and purposes, most of it. We haven't really given specific guidance, because it really depends upon a variety of factors in the case.

Okay, and then switching gear to MiniMonsters, it sounds like you guys are getting some initial traction. What type of contribution do you think it can make in the back half of the year and into 2008? I know you're not putting guidance out there, but any color would be helpful.

We have many design wins, design activities, occurring now, and as you know the design activities not always turn into revenue, so we can't give you very clear in terms of what percentage or what contributed to the second half of '07 revenues. But we do receive first orders, which is in the high end of desktop computers.

Let me try it one more way. How much do you think the new products expand your addressable market?

That one we have taken a look at. The reason we chose to update the technology, not only for the normal reasons that you do in the chip industry is that we needed to address new markets that we didn't serve today, and the question we asked ourselves last fall was MPS is a $100 million company, how do we add the next incremental growth? We didn't mean $5 million, we meant how do you add the next 50 to $100 million to MPS?

So we looked at vertical markets that could support in general, in combined amount, the ability over the next few years to grow those types of numbers. Now, we're not projecting any specific timeframe to reach it, but we want to find out from these products, we believe they can have significant new market potential to MPS, though as we roll out into late '07 and into '08, we'll be able to quantify that a lot more.

Rick mentioned several vertical markets. These are the markets which we're in now. We're in LCD TV and PDP TVs and notebooks and printers. These are the other examples.

Last question, can you just provide any additional commentary on demand trends or inventory or customers or are we getting close to the bottom of this down cycle here? Thanks.

Yes, actually, Craig, MPS is not that large of a company, so we really drive the inventory trends. For our won products, we're watching it closely, both ourselves and in our channel, so we haven't really been affected by what a lot of the other companies, the larger companies, have been announcing, so we've so far been able to avoid that.

Michael, any other comments?

No, as Rick said, we are still a small company and we can't predict what a several billion dollar market swings.

Thanks a lot, guys.

And the next question comes from the line of Simona Jankowski with Goldman Sachs. Please proceed.

Hi, thank you. Just wanted to ask you a question about the timing of your MiniMonster revenues coming in. It sounded like you might be getting your first desktop revenues coming in in Q2. And then, following that, should we be expecting revenues in notebook and servers as early as perhaps Q3, or is that more of an '08 kind of revenue stream?

Yes, Simona, the revenues we're getting now are from the products we introduced, the six amp and eight amp products. Those are not -- though some of the applications can work in the things you talked about, notebooks and servers, they aren't broadly applicable.

The chips that we're taping out in the first half of '07 are targeted to the notebook market, for example, so we would not of course expect any revenue on those until '08, but we'll see some revenues this year from the parts, the six amp and eight amp, but the 10, 15, and 20 amp parts that we're taping out here in the first half, you won't see any real revenue until next year.

Okay, thanks, and then just to follow up on a couple of other design wins I think you have talked about in the past, I think, one, you had talked about a hard drive design win. I was just wondering if that's still on the table and expected to ship.

And then, secondly, Rick, I think when you talked about some of your design win activity earlier in the prepared remarks, I don't know if you mentioned printers, and I just wanted to follow up on that, as well.

I'm sorry, Simona, what was the last part of your question?

Laser printers.

Laser printers. In terms of the hard disk drive, we are shipping into Southeast Asia area, into the hard disk drive segment for some of our parts that we talked before. These aren't MiniMonsters, they're other voltage regulators, so we are shipping into that vertical segment. On the laser printers, Michael's been to Japan. He can tell you a little bit about that.

The laser printers, again, these are not -- we don't have revenue for the MiniMonster product yet, but these are the older products, two or three amp rated versions.

But do you have any design win activity in laser printers with the six and the eight amp products from Q4.

Yes.

Okay, and that would be for later in '07 or in '08, in laser printers for MiniMonsters.

It's very possible for 2007.

Okay, and then just last question from me, on the R&D side, it seemed like you guys kept it pretty flat and seems you've been guiding pretty flat, as well. And I was just wondering if you've hired any additional engineers in Q4, or what are the other parameters in there that's keeping it flattish?

Actually, Simona, in the second half of '06, we had incrementally probably 4 or $500,000 of costs associated with tape outs and masks and test engineering and things that are more related to the pace of new product introduction.

We still have a lot of products coming out, but we kind of had a huge amount coming out in the second half of '06. It's slowing down a little to flatten out, so in terms of headcount, we've got a good engineering team.

We actually have plenty of people in all of the areas relative to the products we're trying to do, so we probably won't be increasing headcount a lot, but the incremental increases of 100 to $200,000 a quarter are more related to the new product introductions.

Thank you very much.

And then next question comes from the line of Quinn Bolton with Needham & Company. Please proceed.

Hey, guys, a few questions. First, just wanted to come back to the press release, summary judgment that was posted on the website today. It looks like O2's damages claim was thrown out, and now that you've had a little bit of time to review the summary judgment, was wondering what your opinion is, is O2 now going to be able to reintroduce new damages testimony or is this now going to just be a trial that determines whether or not you will face an injunction?

Thanks, Quinn. Basically, due to the length of the court rulings, instead of going through the details on this call, we did go ahead and file an 8-K, which summarized the rulings, but we also attached the entire orders on the exhibits, and you can view and download those on our website if you'd like.

But due to the complexity of the case, we're not going to try to interpret the rulings and how they impact the final outcome of the case. Our own lawyers are still trying to do that.

But what I can tell you is in the litigations against O2 Micro, we received two orders on February 8th, as you know, from the Court of California, Northern District Court. The trial is still scheduled to begin on April 30th, and only one patent, the 722 and various state law claims are left to be tried.

The court ruled that O2 Micro failed to meet its burden of proving damages, and thus has presented no evidence of damages under the patent. Therefore it appears that O2 would not be allowed to seek damages under the patent infringement case. That's what we have interpreted at this point.

Now, I'm not a lawyer. Would that give them the right to come back and seek damages in another patent case, or is it once they've lost that right, they've lost it?

On 722, no, they can't. Obviously, they have other patents. That's a different question.

So really what you face now is if you're found to infringe they can still receive an injunction, but no monetary damages.

That appears to be the case. As you've correctly stated, we still have to go to trial, and if you lost at trial, you always could be subject to that, but it doesn't like the damages are in there anymore.

Okay, next question on the MiniMonster with the six and the eight amp that start to ramp in the first half. You mentioned it was for desktop applications. Can you talk about sort of what in the desktop you're powering?

I think in the desktop, although we are now very clear and it is our customers design and believe it's in DDR memory.

Okay, that's the initial design, for DDR memory in the desktop system.

That's correct.

Okay, great. Next question, just on the audio business, looks like you had a good pickup in the fourth quarter for the audio. Do you think that that was a seasonal? You'd mentioned some new designs coming into volume production.

Can you just kind of give us a sense how you see that trending in March and then, assuming there might be some seasonality in March, do you think it continues to grow in June, or just your outlook for that audio business?

No, this is not a seasonal. Seasonal is not a factor. As I mentioned in the last conference call, I expect the revenue will grow in audio in the fourth quarter. So we released a few products, and those are the revenue comes from the new products.

Okay, and then lastly, I know you're not giving guidance out beyond Q1, but in a seasonal year you guys have historically seen good growth in Q2 and good sequential growth again in Q3 and then kind of a flat to down Q4. Based on what you see now, does it look like we're going to see more of a seasonal year in '07?

Yes, Quinn, as you know, we don't give annual guidance. In fact, this year, because of the upcoming trial, we probably wouldn't attempt that at all. I mean, you did highlight the normal patterns for MPS. So far, that's what we're seeing, but we'll see how it goes in the future.

Okay, great. Thank you.

And the next question comes from the line of Rick Schafer with CIBC World Markets. Please proceed.

Yes, guys, I've got a couple of quick questions for you. First, I guess you guys are about halfway through the quarter now, roughly the midpoint, I guess. Can you talk about what turns look like from here and compare this to what they looked like this time last quarter. I know this is kind of a seasonally softer quarter for you guys, but are you seeing any noticeable change or improvement, just in booking trends, and I looked across your different business units.

Yes, Rick, we always track that. We're like a lot of analog companies. with the type of products we sell, it's not a long lead time item. They don't place orders nine months in advance for our products, so we're going into this quarter pretty much, on average, with the amount of backlog we expect.

So it's a very typical quarter for us. We're feeling it's not the high end or the low end of what we come up with. It's pretty much right on the average number of turns, so that's the quarter right now.

Can you put a number to it?

As we said, we don't put numbers on that. Our average turns ratio is like other analog companies tend to be -- I think most people, a lot of them, are around half, 40 to 50% turns. Those are normal, but for us it varies, so we're pretty much average to other people.

Okay, okay, and then on your DC/DC business, can you guys give us any breakout, maybe anything that would be helpful to talk about areas of strength there. I know you talked about LED being weak for you guys last year and obviously cost you some growth in that business, but can you highlight a couple areas of strength.

And more than anything, what I'm trying to get to is what's going to drive growth this year in your DC to DC business?

It is difficult to quantify which market that we are in, although we do know the majority of it, since our product is a basic building block and the larger customers, like [Foxcom], they bought our DC to DC products for many usages, so we can't really quantify it, but we do know that we have a large percentage in the portable DVD area and in the LCD TVs and laser printers.

Okay, and then just last question, with your CCFL inverter business being flat sequentially, can you guys give us a little more color on what's going on there? Is that more a reflection of the notebook business starting to stabilize for you guys, or is that you guys starting to see some more success in diversifying maybe into DTV or other areas, other end markets? And that's it. Thanks.

In terms of guidance, we have seen in the last several quarters that the customers who are using us, who are continuing to use us, are still ordering. New customer growth has been somewhat limited by the pending litigation, so it's not as much -- that's more of an influencer than the actual products themselves. Now, you did mention some of these controller chips and so forth and we are selling those, although they're still a small component of that total revenue.

Okay, and just to finish that, so do you expect that CCFL business to be sort of flattish this year, or do you expect to see growth in the CCFL biz?

We're only projecting a quarter at a time. This quarter, we projected what we said, it would follow the normal pattern of everything else this quarter, but Q2 is all dependent on the trial, probably. For that it's either -- it's going to be a different number. I don't know what it's going to be.

Okay, thanks.

And the next question comes from the line of Eric Gomberg with Thomas Weisel Partners. Please proceed.

Thank you. I was hoping you could -- just going back to the press release, you said that it was a challenging, is a challenging market exiting the year. Just wondering specifically what you're seeing that's most challenging. Is it excess inventory that's out there from others that's causing tough pricing, or interesting new products from competition, and what changes that atmosphere in the seasonally weaker early part of 2007?

Well, I think as you mentioned, Eric, if you look at the universe of analog companies, by and large most of the reports have not been very good relative to demand, and most people are guiding down for the quarters ahead. So that reflects a less than robust analog market. So you'll always have to, even if you're a small fish, like MPS, you're still in the stream, so some of that does impact you. Again, we're trying to focus on certain vertical markets and product differentiation, but the overall market trends do affect you. That was the nature of that comment.

Relative to what we see, I don't know if Michael had any other comments.

Well, we in a way are -- we're still finding our way, although the business environment is that we heard from other companies is not as positive as we see now.

Okay, just clarification, on the 10, 15, 20 amp parts, those are taping out, but should not expect -- and maybe there'll be wins this year, but you're not expecting revenue from those products until 2008?

That's correct. I mean, if we get samples out by the end of the year that work well, that's a victory.

Because the normal design recycle is about 12 to 18 months, so maybe some small volumes will be coming early, mostly, but the characteristics of analog products and design wins is about 12 to 18 months.

Okay, a question on litigation. With the case coming in Q2, should we expect litigation expense to fall off fairly materially in the back half of the year?

That's our expectation. We don't have any major trials pending, so it should drop significantly.

And how should we be thinking about a tax rate for the first quarter, or maybe for the year?

Well, we've been looking at probably a 25% rate to think about. We've gone through a lot of things last year. That's our current belief. We'll give you an update on that as we go through our tax provisions.

Okay, thanks very much.

And the next question comes from the line of [Bob Cujardi] with Deutsche Bank. Please proceed.

Hi, this is Bob Cujardi for Ross Seymore. Hey, guys, just a quick one. What was depreciation in the quarter?

Depreciation I think was about $500,000. We've increased this year relative to -- we've added new equipment in China.

So I know you're not giving guidance for '07, but what do you think depreciation would do, just in a range? Do you think it's up a little bit, down a little bit, flat?

We're going to do our normal capital expending this year, so depreciation will increase, but not as much as it did this year. It will go up sequentially, but not a large amount.

Okay, great, thanks. And also could you guys talk a little bit about what you think about the uptake of OLED backlighting in notebooks or even in TVs. Do you think that is an '07 event, or an '08 event?

The notebooks are transitioning from a CCFL to LEDs and also the TVs have a lot of talks about changing the backlight from CCFL to LEDs, too, and I think it's not going to be in '07. That would be a majority of you start to see a lot more models come out in '08 or '09.

And is there a distinction between organic LED or just LED

OLED, these panel sizes are very small. Although we see in a couple of Japanese companies putting out six inch applications. But I believe the majority of markets still remain in LCD.

Okay, thanks, guys.

And the next question comes from the line of Tore Svanberg with Piper Jaffray. Please proceed.

Yes, good afternoon. A couple of questions. First of all, the MiniMonster ramp up is obviously pretty important here, so could you give us a little bit more details on the schedule, especially the 10, 15, and 20 amp products. When in the first half are they potentially going to be sampling?

We still try to qualify those products now. We haven't released it yet, so we can't really comment on when it will generate revenue.

Yes, Tore, at the end of the day, these are new, innovative products, and we did well on the first ones. They came out on schedule and we've met our design targets before. So we can leave you with that particular fact, but there's too many ifs in the semiconductor world to be precise on tape outs, because a lot of things can happen. So we do feel comfortable with the first half, so that's why we've talked about that general base.

Fair enough, and your audio business is really starting to hit more cylinders. What would be some of the areas where you've had the most success lately?

That's in LCD TV.

The applications, yes. For example, a lot of the audio growth is in TVs.

Okay, very good, and you guys had a manufacturing transition in '06, moving a lot of the tests in house. Can you just go through that and explain to us how much of a possible accretion that had to your business?

I think the main effect, you saw it in the first few quarters, you saw that we had like about a $500,000 startup expense in the first quarter, and that reduced it about half. So in terms of the startup expense, it actually is gone by now, but it gives us maybe, it's hard to say, but it's probably more of a logistics impact on our ability to control inventories better, because we don't have to send products back and forth across the U.S. and across the Pacific Ocean, is what I meant, multiple times.

We can hold lower finished goods back end and bigger die banks, which helps us on the inventory side, at the same time, gives us a lot of product to fill unmet needs. So that's our biggest advantage.

In terms of the margin, maybe it's a half a point or something. Again, it's test only, remember. It's just test. Now, the other part that you pointed out that's a savings is us doing tests in house is cheaper than doing it either in Los Gatos or subcontracted, both those ways. So we save a little bit, but it's not the biggest element of the cost.

Okay, and then following up on the LED question, I'm not referring to OLED here, but to LED specially, is that something that you're working on? Because I assume that those products would also take 12 to 18 months, so just wondering if you have any activity there.

Yes, we have a couple of products where we're sampling for the notebooks and we're also sampling other LED drivers, which are for general lighting.

Okay, and then final question, when you look at pricing in DC to DC converters, was 2006 any different than other years, and if so do you expect 2007 to stabilize?

Yes, we don't see any difference. In 2007, we expect it to be very similar.

Yes, we track, our ASP, it goes the way it does in the chip industry with slight declines over time. It doesn't have any major movements, obviously in all products in the semiconductor world. We know who they are the more there was a decline.

So you didn't see any competitive landscape changes in '06 for pricing to get more aggressive?

Well, there's the older products, there's always the price pressures, and we just focus on bringing new products in all new products. We want to sustain it, keep the [pocket].

Understood. Okay, thank you very much.

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And our next question comes from the line of Nimal Vallipuram with Hapoalim Securities. Please proceed.

Yes, first of all, most of my questions have been answered. Just a final question, can you give us an idea -- you said that your sales in Europe and Japan had been increasing pretty well and the fourth quarter was where your sales from Japan and Europe were strong.

Can you give us an idea that you had been talking about it for some time that you have to diversify your sales and what kind of actions you have taken and how do you expect that to play out in 2007?

Okay, yes, we've seen good growth in these two regions based on design work of the prior years. We added people in both Europe and Japan the last two years to get a big enough team. All the growth in those particular areas are in the DC to DC product lines, Nimal.

In Japan, a lot of the activity is in flat-panel TVs and printers, in Europe it's set-top boxes, TVs, telecommunications. Those are areas of applications.

But, primarily, it's again, we've seen it two years ago. Three years ago, I don't think we had anybody there. Now two years ago we started putting people and distributors in place, and now we're starting to reap the benefits.

So you see your design wins in those areas. Do you expect that momentum to continue into 2007, as well?

Oh, yes, definitely. Analog market is about half the market is other than in greater China or in Korea. MPS in Europe, Japan and Europe, two years ago, as Rick said, we don't even have any people on the ground and we see a lot more opportunities there and we expect to have a lot more growth.

All right, thanks a lot, gentlemen.

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

Great, thank you. I was wondering if you could give an end market breakout, or at least roughly?

End market?

Sure.

That one's always tough for us, Steve, because one area we know, CCFL, a lot of those go into notebooks, but beyond that our DC to DC products are much more spread out, as Michael said. They go into a wide variety of applications.

Just to give you -- I just said it, our product is the building block of some kind of unit, like, example, an LCD TV. We're one of the building blocks. But a company like Foxcom, the [Shocks], they buy a lot of the same products, and we don't know what do they really use it for.

Yes, they'll use it in five different products that have the same part, since a step-down regulator is a pretty common function. So they may use it in a notebook or a TV or other kind of electronic device, and they don't really tell us and it's not that easy to figure out.

Now, one of the differences coming in the future with some of our targeted products for targeted vertical markets, we'll have a more specific idea on some of the MiniMonsters, where they're going, because they are designed for specific applications in mind. So we're probably going to be able to give you a better view then, but right now a lot of our products are more general applications.

Okay, and other than MiniMonsters and the products of that line, are there other DC to DC products that we should be looking for that might come out over the next few months or so?

Yes, we always bring -- there's a MiniMonster product that we talk about quite a bit because we are addressing a new market, a new circuit, where we were not in it before. So we do have a lot of other products, and those are in the general direction of those products are high frequencies and higher operating voltage.

Okay. And just to follow up on the question earlier about the size of your total addressable market, so you're saying basically with the MiniMonsters you increase your market, or at least the share that you think you can take to another 50 to $100 million is sort of what you're thinking you've got an increase of?

No, these are not only the MiniMonsters. We have other products that would be contributing to that part of the total revenue, too.

Okay, I guess I'm just trying to get a sense of what type of top-line growth do guys think you can get to over the next few years in sort of a normalized environment?

Yes, we don't give a general guideline. We only give a quarter.

Yes, we have talked about our company model, our goal, is to try to grow 25 to 30%. We think the size of the company, once we get into what you call more normal situations, we think 25 to 30% growth is an area we can achieve. Now, we're not putting that onto any particular year, particularly 2007, we're not focusing on that number for the year, but the products we're coming out with should be able to give us that kind of growth in '08 and beyond if we execute and other factors come into line.

But no chance to return to the 100% type growth you've seen in the past couple of years?

I think that that would be awfully hard.

That's a lot of large numbers after two or three years more of that, we'll be pretty big.

Just being hopeful. Okay, thanks a lot, guys.

And no further questions.

Okay, well, thank everyone for attending the call, and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much and have a good day.