芯源系統 (MPWR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Monolithic Power Systems earnings conference call. My name is Danielle, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

On our call with us today is Michael Hsing, CEO, and Rick Neely, CFO of Monolithic Power Systems. I would now like to turn the call over to Rick Neely. Please proceed, sir.

Thank you. Good morning, and welcome to the first quarter fiscal 2007 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 second quarter of 2007, projected second quarter net revenues and gross margins, our expectations for second quarter litigation and non-GAAP operating expenses, our target operating model range for gross margin 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 and 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, 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 2006 Form 10-K, filed on March 16, 2007, which is accessible through our website, www.monolithicpower.com.

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, legal settlement costs, and one-time lease write-offs and the related tax effects.

We will also discuss our expected non-GAAP research and development and selling, general, and administrative expense for the second 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 we have filed with the SEC. I would refer investors to this release, as well as to the reconciling tables that are posted on our website.

I'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 first quarter of 2007 business highlights. Following this update, I will discuss our financial results. We will conclude by discussing our current expectations for the second quarter of fiscal 2007.

We will then open up the call to your questions. Let's start with the business highlights. Q1 is typically a down quarter for MPS, due to seasonal factors, and this year reflected that pattern. MPS met expectations on both the top and bottom line, as we recorded revenues of $24.5 million, delivered solid gross margins of 63.4%, and continued to generate excellent cash flow.

As we have previously discussed, our third-generation process technology, BCD Plus, continues to deliver excellent results. We are sampling our high-current, high-voltage MiniMonster product family, such as the MP8666, and the 10-amp version of the MP8668.

The first two products mentioned, the six and eight amp DC to DC converters, are now released for production, and the last product mentioned is our new 10-amp DC to DC chip that was sampled in the first quarter of 2007.

We are generating design activity in several key target markets, such as large flat-panel TVs, telecommunication equipment, laser printers, and servers. Our latest technology is not limited to switching voltage regulators such as the MiniMonsters.

We have just developed a 600-volt very high voltage silicon process technology named BCD HV, which enables MPS to create products with superior competitive advantages for offline and handheld LED, CCFL and EL lighting.

The first product based on this technology is the MP1900. This product offers a manufacturer direct power conversion from offline power to the board.

For example, a 400 volt DC to DC offline power supply could directly drive a CCFL lamp through the MP1900, offering great cost and energy savings to the manufacturer.

The second product from BCD HV is a 120-volt EL driver for general monochrome display and cell phone keypad lighting. These products provide unique, cost-effective solutions to our customers and are the first in our planned family of high-voltage gate drivers. We hope to sample this chip to the markets in the second half of 2007.

In the manufacturing arena, MPS continued our track record of consistent performance as we kept our gross margin in the upper end of our target model for the first quarter, recording a gross margin of 63.4%.

We did grow our inventory substantially, with our days of inventory at 96 days, as we usually do so to prepare for second-half demand.

We continued to grow our cash balances, as we increased cash and cash equivalents by $9 million in the quarter, to $87.5 million as of March 31, 2007.

On the expense side, the non-GAAP operating expenses were about $10 million, just $100,000 over fourth quarter 2006, while our first-quarter litigation spending was about $2.8 million.

Now let's look at these financials in more detail.

On the P&L, looking at the revenue line, first quarter 2007 net revenues were $24.5 million, about flat to the first quarter of 2006 and in line with our expectations. This compares to net revenues of $26.4 million in the prior quarter, a decrease of 7% sequentially.

Let me break down our first quarter revenue by product line. DC to DC product sales were $16.8 million, up 2% from the $16.4 million recorded in the year-ago quarter and down sequentially 3% from the fourth quarter of 2006.

Year-over-year, our core DC to DC products actually grew about 16%, while the white LED driver segment of the DC area suffered from tough pricing conditions and it was down about 57% year-over-year.

LCD backlight revenues for the first quarter were $6 million, a decline of 18% from the same quarter a year ago and down 18% from the prior quarter.

This was consistent with our expectations of essentially flat to declining revenues in this product area, pending key litigation events scheduled for trial in late April 2007.

Audio revenues continued to do well, coming in at $1.7 million, up 78% from the $945,000 recorded in the year-ago quarter and down 3% from Q4 2006.

Let's move down to the gross margin line. Our first quarter gross margin was 63.4%, compared to 62.1% in the same quarter of 2006, and 63.9% in the prior quarter.

If you recall, our new test plant located in Chengdu, China, was in startup mode in the first quarter of 2006, which accounts for the improvements in gross margin year-over-year. Let's look at reported expenses.

Our GAAP operating expenses came in at $15 million in the first quarter. This includes $2.8 million for patent litigation costs, slightly less than we expected for the quarter.

It also includes $12.1 million in R&D and SG&A expense, which includes $2.2 million for stock compensation expense under FAS 123R accounting rules. Compared with the fourth quarter of 2006, GAAP operating expenses decreased by $653,000.

This amount is comprised of an increase in litigation costs of $937,000, as we raised our spending rate preparing for a major trial in the second quarter.

A small increase in R&D spending of $118,000, SG&A spending that was down $46,000 from the fourth quarter of 2006, a decrease in stock compensation expense of $445,000 and a decrease in one-time charges of $1.2 million for the building lease that was written off at the end of 2006.

Let's look at our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the first quarter were $12.8 million, compared to $11.8 million in the fourth quarter of 2006, which excludes the $1.2 million lease write-off mentioned above.

This compares to $14 million of non-GAAP operating expenses in the first quarter of 2006. The $1 million expense increase from the fourth quarter of 2006 was primarily due to litigation spending.

In Q4 '06, we had $1.9 million of base litigation costs and this increased to $2.8 million in the first quarter of 2007.

As I mentioned, non-GAAP R&D costs were up $118,000, while sales, general, and administrative costs actually declined by $46,000.

On the bottom line, our Q1 GAAP net income, our first quarter GAAP net income was $62,000, which rounds to $0.00 per fully diluted share and includes a $1.5 million tax provision. This compares to a net loss of $408,000 for the [first] quarter of 2006, or a loss of $0.01 per basic share.

In the prior quarter, MPS recorded a net loss of $1.6 million, or $0.05 per basic share. We had a tax provision of $1.5 million on pre-tax GAAP income of $1.6 million, or a booked tax rate of about 96%.

This unusual tax rate was due to a reduction in our deferred tax assets, as those assets related to stock compensation were given a valuation allowance.

Over the balance of 2007, we expect our effective tax rate to normalize, as the large tax revisions in the past two quarters related to stock compensation tax effects have been fully worked through.

Our Q1 non-GAAP net income -- on a non-GAAP basis for the first quarter of 2007, we had net income of $2.7 million, or $0.08 per fully diluted share, which excludes total stock comp expense of $2.3 million, and the related tax effect of $298,000 and uses a statutory tax rate of $34%.

In comparison for the first quarter of 2006, the non-GAAP net income was $1.4 million, or $0.04 per share, which excludes stock comp expense of $2.7 million and the adjusted tax amount of $847,000.

Now let's look at some of the major changes to the balance sheet. Cash, cash equivalents, current restricted cash, and investments were $87.5 million at the end of the first quarter, up from $78.5 million at the end of the fourth quarter of 2006, and up from $68.2 million a year ago.

The increase in cash from December 31, 2006, came from operating cash flow of $6 million, higher than normal stock option and ESPP exercises at $3.5 million, and a tax adjustment to our pre-paid taxes of $2.3 million.

This was offset by the inventory build of $2.8 million, resulting in the quarter-over-quarter cash growth of $9 million.

Accounts receivable ended the first quarter at $7.8 million, compared with $9.2 million at the end of Q4 '06 and was similar to the $7.4 million at the end of the first quarter of '06.

Days sales outstanding were 29 days at the end of Q1 '07, compared with 32 days at the end of 2006 and 31 days at the end of the first quarter of 2006.

Our inventories at the end of the quarter were $9.4 million, or about 95 days of inventory. This compares with $6.7 million, or 65 days of inventory at the end of the prior quarter.

Looking back, at the end of the first quarter of fiscal 2006, our inventories totaled $8.5 million, or about 83 days of inventory.

As we mentioned earlier, MPS uses the lower production rates of the seasonally slow first quarter to build up the necessary inventory levels to meet projected business needs in the later half of 2007 and we feel our inventory is about where we want it to be.

I would now like to turn to a discussion of general business conditions. We have seen our booking activity come back to solid levels in March and April after the usual seasonal slowness in the first few months related to plant shutdowns for the holiday period in Asia. Geographically, sales continued to diversify to regions outside of greater China.

In the first quarter of 2007, 67% of MPS sales were shipped to Taiwan and China, compared to 70% for the full year of 2006. 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.

Our actual results were in that range, with a decline of 18% from the prior quarter. While we anticipate that second quarter CCFL shipments will return to the quarterly run rates of 2006, we do not expect significant changes in revenue in this product line until the outcome of a major case is decided in the May 2007 timeframe. The audio product line, which grew well, should continue to grow over first quarter levels.

In the new product area, we will continue to introduce more versions of our leading-edge MiniMonster product in the first half of 2007 by taping out the highest-current version of these innovative parts.

Though we are not providing a specific forecast at this time, we expect these products to begin contributing revenue in the second and third quarter of 2007. However, major volumes are not likely to occur until early 2008.

In-market applications that are seeing strong activity for MPS products include flat-panel TVs, LED lighting for homes, battery chargers, GPS devices, digital picture frames and after-market automotive entertainment products.

Now, turning to our outlook for the second quarter of 2007, our revenue guidance is in the range of $28 million to $30 million, reflecting the positive bookings environment mentioned above.

Gross margin is expected to be in the middle of our target range of 58% to 63% due to product margin mix effects and continued pricing pressure on older products. We expect stock-based compensation expense in the range of $2 million to $2.5 million.

We expect non-GAAP research and development and selling, general and administrative expense in the range of $10.5 million to $11.5 million. This estimate excludes the stock compensation estimates mentioned above.

Finally, we expect litigation expense in the range of $3 million to $3.5 million, as we prepare for the O2 Micro trial next week.

In conclusion, we are pleased to report that MPS is utilizing its innovative technologies to address new and different market segments and product areas, including high-voltage power drivers, as well as high-current to high-voltage switching voltage regulators. We continue to generate cash and manage our expenses well.

Finally, we are confident the types of products we can create, and processes, such as BCD HV, products like the MP1900, with extremely high voltage handling capability and great cost profiles for our customer solutions 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.

[OPERATOR INSTRUCTIONS]

Your first question will come from the line of Craig Berger with Wedbush Morgan. Please proceed, sir.

Good morning. It sounds like things have kind of picked back up here and you're seeing solid order growth. Remind us, what are the typical seasonal trends that you see in the back half of the year?

Yes, Craig, as we've mentioned, because of the plant shutdowns in Q1, it's always a slow quarter. Q2 increases and then typically for us the second half has been bigger than the first half. That's been the case in recent years. A lot of our products go into consumer-type markets and the second half of the year is the bigger selling seasons for those types of products.

Right, on the gross margin guidance in the middle of your historical range, can you address why that's in the middle of the range, again?

Yes, as we said, we've put a range in place because we said we're going to operate the company primarily to grow revenue, not to increase margin. We've been lucky in the last few quarters. we've kept it in the high end of the range.

This particular quarter, we've grown -- our audio revenue is growing significantly, and we've been very aggressive in pricing, so we've gotten some good revenue growth out of audio, and we'll get more in Q2. But the audio products, for example, are on the lower end of our margin range.

So Q2 is looking like a margin mix issue from the types of products we're selling. As Michael has said, we're going to grow revenue and we're not concerned about increasing the margin relative to growing revenue faster than that. So that's why we've always given people a range of margins.

Michael, did you have any additional comments?

Yes, if you look in the past, in the MPS gross margin always fluctuates a couple of percent higher and a couple of percent lower, and due to the mix of a product, in that last quarter, it was pretty high. And in the long-term I think the company will stay healthy in the 58% to 63% range.

Thank you.

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

Hi, this is [Bob Gajavarde] for Ross. Just a little clarification. I have here CCFL business in 2006 run rating between seven -- around 7 million, would that be a reasonable number for 2Q '07?

Yes, we're not providing a specific number, but when I said in the run rates of 2006, Bob, that's exactly it. We ran around seven, 7.2, those kinds of numbers.

Okay, great. And you mentioned you built some inventory in anticipation of the revenue growth in 2Q. What do you think inventories will be on a dollars basis, ending 2Q?

Well, we hope to keep them flat because, again, we have to not only met the higher shipments of Q2, but also, as was mentioned, we typically have higher growth in the second half, so we're planning to keep them about the same, so we can have enough inventory for the second half.

Okay, great. And, also, it seems like your DC to DC business is just doing really well. Is that really just the new products, the MiniMonsters, really, getting some good traction?

Well, MiniMonsters, the product line, we do see a lot of activities, but the growth from DC to DC is still primarily from the other products.

Okay, great, thanks.

We'll have a geographic growth and also we found the new applications in the greater China market.

Okay, great, thanks, guys.

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

Hi, thank you. Just wanted to ask first on the inventory, clearly, you've been increasing it historically from Q4 to Q1. But it does seem that this year the increase is a little bit more significant, so should we extrapolate from that that you're expecting a better second half this year than you've had in the past?

Hi, Simona. Well, that would be interesting. We don't project that far forward. As you know, our backlog doesn't even stretch into the fourth quarter. So we wouldn't build that far ahead. It's really more for covering near-term needs.

Okay, and then on the gross margin additional color you provided as far as the audio business, now, that is such a small percent of your revenue that it's tough to say how that alone had such a significant impact on pricing and mix. Can you just maybe give us a little more information on the other factors going into your lower margin guidance?

Well, as we'd mentioned, in some areas, and you've heard that probably in other calls, some areas of DC to DC, there's not only some of our older products, but also products like charge phones and white LED have continued to have difficult pricing, so those elements have gone down.

So our view is, the way that we've looked at it, is the products we're increasing our revenue the most in Q2 are products at the lower end of our range. It includes audio. It also includes, as we mentioned, CCFL will increase quarter-over-quarter. That's on the lower end of our range.

DC to DC is growing, but the mix is shifting this quarter a little bit towards the lower-margin products.

Yes, these are primarily due to a mix of our product, and you see the LED drivers and the audio combine all these. They're significant, about 10% range, more than 10%. So it will impact gross margin by a 0.5% or --

Yes, a point. We're talking a point of that from that mix and there's been some ASP pressure, might be a point, so that's about it.

Okay, got it, and then just lastly, on your CCFL business, let's say you win the case over the next month. Do you expect that CCFL business to meaningfully come back, or do you think that customers have kind of walked away from both litigants at this point and maybe found alternative solutions?

So in a sense even if you win the battle, you lose the war, or do you think it will actually come back meaningfully?

Yes, as we've mentioned, we've been pretty flat other than the seasonal factors for quite a while in CCFL based on waiting for outcomes of litigation. So we've seen design activity is pretty much in a lull, waiting. So we would expect, based on our product performance, to grow that business again. We couldn't say how quickly or how much.

Some of the long-term trends you talk about, we're certainly aware that over time some portions of backlighting is going -- they're going to move to LED and other solutions, and we certainly are aware of that and have products in the pipeline for that.

But, near term, we would -- if the outcome is positive in the case, we would expect to [re-groom] some growth in that product line.

Great, thank you very much and congratulations on a good quarter and guidance.

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

Hey, guys, good morning. I was hoping that you could perhaps comment on what the new application that you found in China for the DC-DC parts, since last year you had said that you thought the legacy DC-DC had largely saturated the opportunities in China and Taiwan.

Rick mentioned it. We see a lot of growth from flat-panel TV and those are due to the design wins in the middle of last year, and we gained depth in each major LCD for the flat-panel TV makers.

The other ones are LED lighting for homes and battery chargers for battery charge applications using DC to DC, and a GPS device, digital picture frames and all of those are small applications, but altogether we're getting a pretty large quantity.

Yes, Michael highlighted them. Each one by themselves are not big, but they're each accumulating enough to be consistently.

So a whole bunch of end market segments where you'll have higher participation where you expect over the course of '07 than you did last year.

That's right.

The ones we've mentioned, digital picture frames, it sounds like a cute thing, but it doesn't take very many of those to be sold to have quite a good volume. Digital picture frame is where you basically plug your pictures in and they keep changing, so those are a big application. We have some big design wins on those.

Okay, could you maybe help and size the market for the BCD HV opportunity, what that process opens to you in terms of addressable market in I guess '08 and beyond?

Yes, though Rick mentioned it, the first two products, one is in a power supply area, and it's just general power supply. And the other one is for the EL lighting.

EL lighting is the biggest application is for the cell phone keypad. So added together, we don't have any solid numbers on what that as a TAM is, but I expect it is over $500 million to about $1 billion.

TAM, yes.

Okay, on the litigation, I guess the trial starts very shortly. Just wondering how we should think of litigation expense post 2Q, how much it's likely to be ramping down.

Yes, Eric, in the past we've said it would be significantly lower in the second half, but it won't go away. There are still some follow-up case work and some other things. I've estimated roughly in the first half, with our guidance and so forth, it ends up being $6 million or $7 million.

I'd say it would be about half of that in the second half, and then we'll update you more after the trial, because there could be additional things that come out of it that increase spending.

We don't really know yet, so I've roughly said about half in the second half from the first half.

Okay, and I guess one last question. Just wondering if you can make any additional commentary regarding, I guess, bookings to date in April, maybe how that compares to March, or any thoughts just in terms of inventory levels at your distis at this point?

Well, our inventory levels in the distribution channel are in good shape. We have --

Normal.

Normal to light, actually. Normal to light would be what I would call the distribution inventories, so there's no issues there.

In terms of bookings, bookings in April have been good, so we're booking faster for the quarter than normal. Don't know if that's more of an overflow from March or not. We don't have a long-term trend, but the bookings environment has been good in April?.

But, remember, our business is considered a lot of it term business and we can't predict it one way or the other.

Okay, thanks very much.

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

Yes, thank you and good morning. First of all, on your BCD HV process, Michael, can you talk a little bit more about how different that is from some other processes that are out there? I'm just trying to understand your competitive advantage with that process?

It is -- the first product is the 1900, has provided an interface between the low-voltage PWM controllers to high-voltage power transistors. So it's an interface, it's a level shift, shift from a lower voltage to very high voltage. So it's significantly reduced power supplies design, the complexity of that design. That's the first product.

And the second product is, as you know, the EL panels for cell phone keypad applications and also other monochrome displays requires 200 volts or 200 volts plus technology. MPS is using that BCD HV process technology to design that kind of product.

So BCD HV basically takes you from 48 volts all the way up to 600?

We have a capability -- yes, it goes about 600 or 700 volts.

Okay, very good, and where are you going be fabbing this process?

What did you say?

Where it's going to be wafer fabbed?

Wafer fab, in SMC, or ASMC, yes.

Okay, very good. And you talked a little bit about bookings being strong so far in April, but can you give us any other visibility metrics towards your guidance, please?

Well, the only other one relative to what we had thought before, the numbers for Q2 are higher than prior expectations, so I guess that we'd say we're in a positive upswing for Q2 relative to what we'd seen before, and that's been reflected in the bookings. I don't know what more we can say on that. Michael, did you have any comments?

General business conditions are good and the booking in the past, though, is never to be the strong indicators, but that this quarter it's pretty good.

Okay, very good, and you mentioned some MiniMonster revenue contribution already Q2, Q3. How much contribution should we expect from that product line for the year as a whole?

Overall, still small, but the product line, we received a lot of positive feedback for small size, high efficiencies and high power handling capabilities. But design wins, that takes a little time, but we do ship in volume now.

The good news is we actually have production orders that are going out this quarter and next quarter for the six and eight amp devices. What we've found is, as we've said in the prior calls, these are new products and we're going to go out and market them and see a different application for them.

What we've found is the strongest demand are in areas like telecommunication, servers, high-end desktops, things like that, where they really like the product characteristics, but these are areas that have longer design cycles than some of the consumer areas that we've talked about before.

So what we're seeing is strong design activity, but these take longer to come to market and they have longer testing periods and longer qualification periods. So that's why we said we don't expect any significant contribution in 2007, because of the product introduction cycles, but we still are quite confident that these products will do well in the next year.

Okay, very well, and then on the legal side, you mentioned the O2 Micro trial, but could you also give us an update on your indemnification trial with Sumida and then also what's the update on your situation with Linear Technology?

Okay, on the Linear case, Linear filed a case against us, alleging patent infringement on two products that were released just shortly, and the revenue was quite small. The case is in the early stages.

No material developments have happened and the trials date has been set for April 2008, so Linear is sort of in long-term mode here. Relative to Sumida, we're really -- the case is going to trial in August 2007, so at this point we can't comment or predict the outcome of the case.

Okay, but I guess the trial being scheduled for August, would that cause any extra legal expenses, or should we still just model that half of the $6 million, $7 million for the second half?

All of these cases are very intertwined and we can't really budget anything now.

I understand, okay. Very good. All right, well, thank you very much.

[OPERATOR INSTRUCTIONS].

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

Hey, guys, nice job on the guidance. First wanted just to ask sort of some of the specifics of the trial that starts with O2 next week. Is this going to be a jury trial? How many days are you given to make your arguments, just trying to get a sense when you think we might hear something back from the jury, assuming it's a jury trial, in that situation?

Yes, Quinn, the trial is scheduled to commence next Monday, eight-thirty a.m. in the Northern Federal District Court of Oakland. It's going to run two to three weeks. Three weeks is probably the long end of it and you can't really predict for sure. And it is a jury trial on the patent infringement portion.

It's a combination of a jury trial and a bench trial.

And what's being argued in the jury trial versus the bench trial? Specifically what kind of damages claim has O2 resubmitted for this case?

Well, actually, Quinn, we're not going to comment on all of the technical specifics. They're pretty complex. The things that have been released have been released on 8-Ks, but the patent infringement portion is in front of a jury.

Okay.

And all of these things, as Rick mentioned, is complex and there's a change quite often, so we don't know what would be the result.

However, you did mention, you did ask about damages, but the prior rulings that have been sent out that the past damages have been removed from the case, from the patent infringement case, still hold true. The patent infringement damages for the patent case have been removed. That had been released in an 8-K prior and that's still the case.

Just so I understand, there are no past damages?

If we were found to infringe, there are no damages for past infringement, that's correct.

And moving to the business, can you talk about the 10, 15, and 20-amp MiniMonsters? I know you said you're sampling the 10-amp, but can you give us sort of an update on the 15 and the 20, as I think those are going to be pretty important parts for the notebook, some of the servers, some of the graphics card markets?

Yes, [without a doubt], those parts are in our lab now and the first test results are very good.

Any idea when you think you might be able to release those for sampling or production?

Oh, yes, we plan to, and we keep evaluating our first product and we plan to release as soon as we can, in the next couple of months.

Okay, okay, great. And then, lastly, on the BCD HV process, just wondering if you guys are looking at other applications. I know you've mentioned the AC/DC offline, the EL, but could you use this, say, in an LED driver application, where with 600 volts, I imagine, you can drive a fair number of LEDs, assuming you've got the right current capability coming off the process?

Yes, you're just ahead, just dead on. Those are the products. We are in those markets and we will develop this technology exactly for that kind of a market, for that kind of application, like LED lighting or LED backlight.

Would this give you, do you think, an advantage as the notebook, monitor and LCD TV markets over time transition from CCFL backlighting to LED-based backlighting?

Absolutely, but I'm not so sure that's for notebook. Notebook is primarily below 60 volts and our existing products are good enough. So these are for offline power supply, if you will, and the power is always plugged in the wall, except the EL, which is converting the battery voltage to a high-voltage AC line.

Okay, great. Thanks, guys.

Your next question comes from the line of Vernon Essi with M. S. Howells & Company. Please proceed.

Thank you, and a nice quarter there, guys. Just to follow on the HV line of questioning, on the EL front, that's going to be like an integrated charge pump-type device, as well, have all those features?

No, it's not a charge pump and it is a switching device.

It's a switch, okay.

Yes.

And then just to go back to -- most of the questions, I guess, have been mulled over, but I wanted to revisit the inventory question. It sounds like this was more of an opportunistic situation with AMSC on the fab front to pull in the production. Is that a fair assessment of what you did, also just planning ahead, but there was obviously a cost consideration here?

Well, if you look at MPS, the past history, in the first couple of quarters and the first half of the year is always increased inventory for preparation of the second half, and that's always the case, if you look at our history.

Yes, we typically get down to 60 to 40-some days in Q3, Q4 and then we build it back up to 80 or 90 days in the first half, so it's pretty much in that. For our point of view, we actually wanted to build inventory.

When we looked at our distribution channels, they don't have a lot of inventory, so we need to build it. We don't have the kind of parts that people order four months in advance. They have pretty short lead times, so we have to have available inventory.

Yes, this is not a mismanagement or anything. We deliberately [do it] to build more inventory.

Let me just ask that a different way. Did you get any pricing concessions out of your fab partner on that, by having it at a slower time of the year?

We don't want to comment on our strategies there, but we are able to take advantage of different things, because we can inventory products a little more easily than others, but we don't reveal any specific issues.

Yes, our product has a longer life cycle and the fab in the first half is a slower season, so we will take advantage of the slower season to keep the fab full.

Okay, that's what I was getting at there. And then just finally on the audio products, can you just discuss the supply chain into that customer and sort of what their lead times look like and how you see that faring out for the rest of the year?

A lot of the audio is going into some big consumer electronics wins like TVs. We have --

I didn't quite get your questions. Is it that your audio products are for which application?

Not only that, because it's obviously in the televisions and [cell notes], but I'm just curious how that supply chain looks to you in terms of are they scrambling or has it been pretty steady in terms of turns? How is that faring? I mean, this has obviously been a nice piece of performance for you. Just wondering how that's going to look in the second and third quarter.

In the past, we have one product, and we are doing pretty well for one product per se. And now we introduce a couple more products, and those are still very highly concentrated in one or two customers. And so that's where we are now and those are products very successful.

Very successful, but in terms of the supply chain, I see what you're getting at, Vern, is because it's concentrated, TVs are made by a few big guys. And it's concentrated in a few of those and they'll tend to do their production in batches, so we'll tend to get a lot of pressure to deliver a bunch of parts and so they'll control the dial, so to speak.

I would say that revenue will be based on the customer's build plans and it could vary because of that.

So we try to broaden our customer base for that product line.

Right now, as I said, Q2 looks like a very good quarter for audio. It should be up over Q1 numbers, so that would say people are building those products for the second half.

Okay, thanks a lot, guys.

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

Hey, guys. I just had a couple of quick questions. First, I was wondering if you could -- going back to Chengdu, I know you mentioned it briefly on the call.

Is there any way to quantify the benefit there, when we'll see the bulk of the impact hit the model? I guess quantifying in terms of gross margins I guess would help us the most, probably.

Yes, the thing we mentioned in the call, Rick, was that last year we actually were starting it up and had about a $500,000 hit to gross margin because of it.

Now it's obviously in good production mode and the cost savings have already been realized, so whatever savings we would have gotten, which is always difficult to separate out, are embedded in our current numbers. So we wouldn't expect any change going forward from Chengdu.

What it does give us is much better logistics, as well as overall lower costs, but again, that's all in the mix of changing ASPs and margins as well, so I wouldn't expect to see any benefit right now.

Okay, thanks and then just one other one, is just can you talk about the number of new design wins that you had in the quarter or what your target is for the year and just give us some kind of idea of what percent of your revenues are coming from new products this year, that kind of thing? Thanks.

Yes, that's always a difficult question for us because one of the good things about MPS is we're very diverse. We just sat through our quarterly business review and the China group -- and China is only a portion of our sales -- stood up and basically they have 250 customers.

So they're top-end customers are 30% to 40% of their revenues. So it's so spread out in China I couldn't tell you. There's a few other places where we have some concentration, but we're pretty spread out and so we don't track individual design wins, because any one design win doesn't typically mean that much money, but when you have 150 of them, they accumulate up, as Michael said.

So we don't track design wins in that way. What we look at is the group, new application areas that we can put a lot of DC products in or, for example, audio success, we've been very successful in entertainment and TVs, so we've made some push there.

And we've been able to take that and move it into other areas once we learned how to get the application success, so that's what we look at and that's what Michael mentioned, some of the areas like battery chargers.

Digital still cameras are something where we're working on putting those in and a lot of other devices like that. So what we do is we find an application and application area and go into it, but any particular customer design win doesn't really mean that much.

It doesn't track or project our revenue.

Okay, got it. Thanks, guys.

At this time, there are no more questions in the queue. I would like to turn back to Mr. Rick Neely for any closing remarks.

Well, thank you, everyone, for getting up early. At least we got up early, and maybe on the East Coast you didn't, but hopefully -- next quarter, we'll probably do it in the afternoon, so we can get some more sleep. But thanks for coming in, and we'll talk to you later.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.