芯源系統 (MPWR) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Monolithic Power Systems Second Quarter 2007 Earnings Conference Call. My name is Oneka and I will be your Operator for today.

(OPERATOR INSTRUCTIONS).

At this time, I would now like to turn the call over to Mr. Richard Neely, Chief Financial Officer. Please proceed, sir.

Good afternoon and welcome to the Second Quarter Fiscal 2007 Monolithic Power Systems Conference Call. Mike Hsing, CEO and Founder of MPS is with me on today's call.

In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty.

For example, our business outlook including our business and financial outlook for the third quarter of 2007; projected third quarter net revenues and gross margins; our expectations for third quarter litigation and non-GAAP operating expenses; our target operating model ranges 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 and geographic markets; anticipated outcomes and schedules 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 first quarter Form 10-Q, filed on April 27, 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, both on a GAAP and a non-GAAP basis.

These non-GAAP financial measures exclude charges related to stock-based compensation, legal settlement and provision costs, and one-time lease write-downs or write-ups and the related tax effects.

We'll also discuss our expected non-GAAP research and development and selling, general and administrative expense for the third 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 second quarter of 2007 business highlights. Following this update, I will discuss our financial results.

We will conclude by discussing our current expectations for the third fiscal quarter of 2007 and then we will open up the call to your questions.

Let's start with the business highlights.

Demand for MPS products continues to be strong. Our second quarter revenues and non-GAAP earnings exceeded our guidance, as we recorded our second best calendar quarter in the Company's history, and our best second calendar quarter in the Company's history, with revenues of $30.8 million and non-GAAP earnings of $0.12 per share.

MPS maintained solid gross margins at 63.5% and closed the quarter with over $92 million in cash.

We shipped our initial production quantities of our new high current, high voltage MiniMonsters product family, products such as the MP8666 and the MP8668, in the second quarter.

We are seeing good design activities in multiple key target markets, such as large flat panel TVs, telecommunication equipment, high-end desktop servers and notebooks. Although our overall revenue remains small, we are optimistic about the MiniMonster family.

The second quarter also saw the reduction of a major legal roadblock in our CCFL business as the jury in the 722 patent trial with O2 Micro returned a verdict that we did not infringe the patent and that the patent was not valid.

This event has cleared up much of the uncertainty regarding our CCFL business and should allow us to compete openly in the marketplace based on the strength of our products, performance and technologies. In addition, MPS has reached a settlement with Taiwan Sumida Corporation, or TSC, in our indemnity contract dispute.

In the manufacturing arena, MPS was able to offset pricing pressures in our older product offerings and maintain our gross margin in the upper end of our target model for the second quarter, recording a gross margin of 63.5%.

Our inventory days were flat with the prior quarter at 96 days, as we prepared for stronger anticipated second half demand.

We continue to grow our cash balances as we increased cash and cash equivalents by $4.8 million in the quarter to $92.3 million as of June 30, 2007.

On the expense side, our non-GAAP operating expenses were $15.2 million, up $2.4 million from the first quarter of 2007 as our second quarter litigation spending was about $4 million due to the O2 Micro trial that we discussed about in May.

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

On the profit and loss statement, we can start on the revenue line. The second quarter of 2007 net revenues were $30.8 million, up 16% from the second quarter of 2006 and above our guidance going into the quarter. This compares to net revenues of $24.5 million in the prior quarter, an increase of 26% sequentially.

Let's look at our second quarter revenue by product line. DC to DC product sales were $19.1 million, about flat to the $19.2 million recorded in the year ago quarter and up 14% from the first quarter of 2007.

Year-over-year, our core DC to DC products actually grew about 6%, while the white LED driver segment continued to decline from difficult pricing additions, it was down about 52% year-over-year.

We see the white LED business improving in the future, however, as new applications and backlighting for high-end portable devices using 3-inch to 10-inch LCD panels are seeing strong design activities. These applications include products like smart phones, GPS, and digital picture frames.

LCD backlight revenues for the second quarter were $9 million, an increase of 29% from the same quarter a year and up 49% from the prior quarter.

This exceeded our expectations for revenues in the product area as we grew our business with existing customers who are seeing good growth in the notebook segment.

Audio revenues hit record levels, coming in at $2.7 million, up 580% from the $402,000 recorded in the year ago quarter and up 63% from Q1 2007.

This performance reflects the continuing product ramp at several major consumer appliance customers in the LCD TV space.

On the gross margin line, our second quarter gross margin was 63.5% compared to 63% in the same quarter of 2006 and 63.4% in the prior quarter.

Despite strong ASP pressures in some of our older product offering, MPS was able to maintain stable gross margins. This was largely due to favorable product mix and excellent cost controls.

Looking at our reported expenses, our GAAP operating expenses came in at $26.9 million in the second quarter.

This includes a $9.8 million provision for a litigation settlement with Taiwan Sumida and $4 million for patent litigation for costs incurred in the May trial with O2 Micro.

$13.5 million was recorded in R&D and SG&A expense, which includes $2.4 million for stock compensation expense under FAS 123R accounting rules.

There was a $496,000 credit for the write-up of our old [Los Cados] building lease as we were able to sub-lease one building at better terms than expected at the end of fiscal 2006.

Compared with the second quarter of 2006, GAAP operating expenses increased by $11.9 million.

This change is comprised of a decrease in stock comp expense of $550,000, an increase in litigation costs of $1.2 million, as we incurred higher costs for the O2 Micro patent trial in the second quarter.

There was also an increase in a one-time legal provision of $9.8 million for the Taiwan Sumida settlement agreement.

R&D spending increased $1.4 million, while SG&A spending increased $576,000. And finally, our -- there was a decrease in one-time charges of $496,000 for the building lease that was written up.

Looking at these on a non-GAAP operating expense basis, excluding stock compensation, our non-GAAP operating expenses for the second quarter were $15.2 million compared to $12 million in the second quarter of 2006 and $12.8 million in the first quarter of 2007.

The $2.4 million expense increase from the first quarter, was primarily due to litigation spending, which increased by $1.2 million due to the O2 Micro trial.

Non-GAAP R&D costs were up $645,000, as we increased new product introduction. Sales, general, and administrative costs increased by $590,000 due to higher commissions and marketing costs.

Going to the net income line, on a GAAP basis, our second quarter GAAP net loss was $6.4 million, or a loss of $0.20 per basic share. This compares to net income of $1 million for the second quarter of 2006 or $0.03 per fully diluted share a year ago.

In the prior quarter, MPS recorded net income of $62,000 or $0.00 per fully diluted share.

On a non-GAAP basis, our net income for the second quarter of 2007 was $4.3 million or $0.12 per fully diluted share, and this excludes the one-time settlement provision of $9.8 million, excludes the reversal of the lease write-off of $540,000, and it excludes total stock comp expense of $2.5 million and the related tax effect of $1.1 million using an estimated tax rate of 25%.

In comparison, for the second quarter of 2006, the non-GAAP net income was $3.7 million or $0.11 a share, which excluded stock comp expense of $3.1 million and the adjusted tax amount of $419,000.

Let's look at some of the major changes to the balance sheet.

Cash, cash equivalents, current restricted cash and investments were $92.3 million at the end of the second quarter, up from $87.5 million at the end of the first quarter of 2007 and up almost $28 million from the $64.5 million recorded one year ago.

The increase in cash from March 31, 2007 came from operating cash flow of about $6.3 million and stock option and ESP exercises contributed another $2.9 million this quarter.

This was offset by an increase in inventory and working capital of $2.2 million and capital expenditures of $2.1 million, resulting in quarter-over-quarter cash growth of about $4.8 million.

Accounts receivable ended the quarter at $8 million compared with $7.8 million at the end of Q1 '07 and down from the $9.9 million at the end of the second quarter of 2006.

Days sales outstanding were 24 days at the end of Q2 2007 compared with 29 days at the end of the first quarter of 2007 and 34 days at the end of the second quarter of 2006.

Our inventories at the end of the second quarter were $11.9 million or about 96 days of inventory. This compares with 90 -- $9.4 million or 95 days of inventory at the end of the first quarter.

Looking back, at the end of the second quarter of fiscal 2006, our inventories totaled $9.1 million or about 84 days of inventory.

We are comfortable that our current inventory levels are adequate to meet projected business needs in the second half of 2007 as our projected sales volumes are higher than a year ago.

I would now like to turn to a discussion of general business conditions. We had excellent booking activity in the second quarter as volume production projects at large companies in Europe and the U.S. started to ramp at the end of Q2.

We have also noted that our current growth is coming both from new business penetration as well as general market growth. New customers and new applications and markets opened up with the product introductions for the past 18 months.

Geographically, sales continued their diversification to regions outside of greater China. In the second quarter of 2007, 64% of MPS sales were shipped to Taiwan and China compared to 73% of MPS sales in the second quarter of 2006. The regions seeing the greatest percentage growth are Japan, Korea and Europe.

For the CCFL product line, sales for the second quarter of 2007 exceeded our expectations, coming in at $9 million.

With the recent jury verdict in the 722 patent trial, we believe we will be able to gain back some market share in the converter portion of the backlighting market in the near future as well as participate in the natural growth of the notebook segment of the market.

The audio product line grew very well in the second quarter and we anticipate similar revenue levels in the near term as our designs in flat panel TVs reached their volume production levels.

In the new product area, in Q3 we expect to introduce a 15-amp AC to DC MiniMonster to add to our existing portfolio of high current switching voltage regulators.

End-market applications that are seeing the strong activity for MPS products includes flat panel TVs, smart phones, GPS devices, digital picture frames, and general computation.

Now turning to out outlook for the third quarter of 2007.

Our revenue guidance is in the range of $33 million to $35 million, reflecting the positive bookings environment that we've experienced in the quarter.

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 $2.5 million to $3 million.

We expect non-GAAP research and development and selling, general and administrative expense in the range of $11.5 million to $12.5 million. This estimate excludes the stock compensation estimates mentioned above.

Finally, we expect litigation expense in the range of $2.2 million to $2.7 million as we conclude the O2 Micro trial and other legal issues.

In conclusion, we are pleased to report that MPS surpassed $30 million in quarterly revenues for only the second time in its history and the first time for the second calendar quarter of the year.

New applications are beginning to kick in for existing products and the product introductions of the past 18 months are starting to generate noticeable revenues.

We continue to generate significant cash, adding almost $28 million over the prior year figures. We see solid revenue growth in the third quarter and are optimistic that our new high-current, high-voltage products based on our BCD Plus process technology will continue that growth in the future.

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

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Rick Schafer with CIBC World Markets. Please proceed.

Yes, hi, nice quarter guys. I've got a couple of questions for you. Number one, just the CCFL business was, I guess, up more than I expected the second quarter.

Is it -- I know you kind of hit on it briefly in your comments. Is this -- is that just reflective of the notebook business coming back or does that include some contribution from some of the new markets like LCD TV and monitor that maybe you're starting to target now?

This is primarily from the mobile growth from the second quarter.

And Michael do you have any sense of like sort of where your share kind of troughed at in notebook and where it is now?

We haven't seen a -- we have a lot of development activities recently, but we had a bigger, much bigger, market share a couple of years ago and now we try to regain back.

Okay. But you can't quantify or put any numbers to it?

No, we cannot quantify what that percentage is now.

Okay. And can you give us any color on when we might see -- start seeing the contribution from some of the new end-markets that maybe you're targeting CCFL that way?

We -- did you say new markets that we targeted?

Well like LCD TV, things like that maybe that you have?

We do have -- we don't have a high voltage driver and some other controllers that were introduced to the market. And in particular after the lawsuit, it opens up more opportunities for MPS.

But is it safe to say it's more of an '08 opportunity?

Yes.

Okay. And then just a quick update on the lawsuit, I guess, the Sumida trial, just so I'm clear where we stand.

Basically with the way things worked out, I guess you guys are just -- I saw the accrual and everything in the release, but I mean, do you guys write a check in the third quarter and are done with it? And is there a chance that Sumida comes back as a customer?

Yes, Rick, let me answer that one. The -- as you had seen before, there will be a trial in August, that one's off. We just reached a settlement. We're done with the trial.

We basically have announced in the press release that we settled the suspected indemnity contract dispute. So we will make a cash payment of $2.5 million to cover the legal fees that were part of the contract.

And the second part of it is $7.3 million is really an arrangement where pending the outcome of the case, that as you recall the $7.3 million was a judgment awarded several years ago and that's under appeal.

So however that turns out, that's the maximum amount we'll have to pay. It could be different amounts, but that's the maximum, so that's what we've done.

And Rick, any timing you could put to that?

Oh boy, no. The appeal process is -- no, I wouldn't want to comment on that.

Okay. And then on the Sumida question, I mean, is there a chance they come back then as a customer? Or where do things sit with --

I'll pass that back to Michael. There's always a chance.

We don't know yet. And we believe our product is superior and it really depends on Sumida whether they want to do business with us or not.

Okay. And then just on the LTC suit, are you guys still going to plan on ramping up that for the quarter? Should we assume the legal expense kind of ticks back up in 4Q for that?

[Linear's] case is still in the early stages. There haven't been any real material developments. The trial is set for April 2008, so a number of months before that we would, if we go to trial, do that. But it's still pretty early to speculate.

In the discovery --.

Stage.

Stage. Okay. But overall it won't -- it would not affect our revenue.

Okay. Great. All right. Well thanks a lot guys.

Okay. Thank you.

Your next question comes from the line of Craig Berger with Wedbush. Please proceed.

Hi. This is actually (inaudible) for Craig. I had a few quick questions. One was about the long-term OpEx investment profile. How is that going to look maybe for '08 and '09?

Well we -- we'll continue to, particularly this quarter, we had significant new product introduction costs.

Over half of the increase quarter-on-quarter was mass charges, tooling, testing, all for new product introductions. So we have the heavy new product introduction scheduled this year as we get these MiniMonsters out.

I think our goal is to continue to put new products out, though we doubt it will be at the same pace. The increase we have this quarter is not likely to be sustained, though we will plan to continue to grow R&D.

The other area that's related is our sales channels need to grow commensurate with our broader product lines. But our G&A costs have been holding back relatively stable, so the combined SG&A should be growing at a reasonable pace. So we're not constraining the expenses of the Company relative on the R&D side.

So, I mean are we looking at probably like $15 million, is that for kind of the '08, on a per quarter basis?

Well, we don't give guidance that far out. We've given our guidance for next quarter, so we've done that on the non-GAAP side, seeing this combined non-GAAP R&D, SG&A will be $11.5 million to $12.5 million for Q3. We're not really projecting that far out into '08.

I just had another question. Do you feel that you're underinvesting in actually marketing or distribution?

Good question..

What was the --?

Are we underinvesting in sales and distribution?

Let me answer that question. Okay? I think a year ago, we said we were very -- we had a limited capability or channel to sell our product in the new markets, new applications. And we did it. We did it last year.

And as the result of the -- a big effort from 12 months ago, we were able to penetrate the new markets. But now we're still very light in the other regions, in the U.S., Europe and Japan.

Yes, we did have a 10 percentage point swing, we lowered our greater China mix by 10 percentage points, so we still have a ways to go. And the areas where we need to invest in are not the -- are the higher cost areas, so that's why we anticipate increasing the sales channel costs as we grow into those areas.

Overall in Europe, the U.S. and in Japan, the revenues are still very small and the opportunities are huge there.

I had a question about legal expenses [will] for Q3. It seems like it's much higher than expected? Is that kind of -- why is that so much higher? I thought it was actually going to drop off?

Well, it dropped off significantly from the first quarter was about $2.8 million, $2.9 million, second quarter was $4 million. So it's dropped off significantly from those ranges.

But predicting the costs in these trials is very difficult because there's carry-on portions of the O2 that have not been completed yet and in order to finish the O2 trial, complete the Sumida settlement and other things, we estimate that is the current amount.

Okay. Can I ask one last question? What's the sustainable kind of audio revs per quarter going forward here?

Sustainable audio? The audio product, as I've said a couple of conference calls ago, and we have a -- one product that we introduced a couple of models. As a result, we have a couple of significant users or customers. And we're now winding up.

We tried to broaden the customer base and we will introduce more products in the audio segment. I don't expect it to grow tremendously in the next quarter -- in the next few quarters, but there will be a growth.

One last quick follow-up on the legal expenses for Q4. Can you provide any guidance with regard to that?

No, we're going to stick with our policy of just giving guidance one quarter out, Craig.

Okay.

But overall, the legal expenses are going down and the trend is going down and the foreseeable future, we don't have a lot of legal activities and that's compared to the -- 12 months ago.

Okay. Terrific. Thank you so much.

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

Hi. Thank you. I think you commented on excellent booking activity and in particular related to some volume production starting at some large customers in Europe and the United States. Can you expand a little bit more on that?

What kind of customers are these in Europe and the United States? And it seems that that is pretty incremental to your more traditional Asian business? I just wanted to understand the change here?

Okay. These are still from the -- our -- mostly it is still from the growth from the existing products. But we did penetrate the new applications and -- such as the digital picture frame as an example.

And other, like servers and high-end desktops and the telecom equipment. And regional sites mostly, again, both from a U.S. and Europe, obviously they are everywhere.

In Europe, we have some telecom wins, some set-top box wins that will ramp up in Q3. And we've talked before disk drive wins that are showing up now in revenues. Again, those don't -- those are often U.S. and Europe based designs.

The product may be assembled out in Asia, so that hasn't changed the actual physical assembly point, but the design points are U.S. and Europe.

Okay. And then when I kind of look at your growth expectations for the third quarter, would you say that that's majority driven by your MiniMonster design wins ramping? Or is that more driven by some of your CCFL business coming back as you've regained some of those old customers?

Let me try to answer that first part. The MiniMonster is still significant, but they're growing and we see a lot of design win activities and we see a lot more design wins in the second quarter.

But CCFL continually will do well. On the Q3 revenues, most of it is from every segment of our product line.

Okay. Could you guys quantify how much MiniMonsters is a percent of your sales today and where you think you're going to exit by the end of the year?

We -- it's still a small [inversion]. We don't want to put a number out there now. In six, seven and mostly due to six or [AN] product, we had a design win in the Q1 and for small form factors desktop. And as revenues start ramping, but overall it's still small.

Okay. And just lastly, when you commented on having seen some pricing pressure in your older products this quarter, yet you said you saw a better mix and your margin improved. By better mix, do you mean the higher CCFL product line?

And should we assume that that got better margins? Or are you referring to pricing pressure in the white LED space or can you just kind of explain the combination of a better mix and more pricing pressure?

Somewhat lower in the DC to DC products facing price pressures and other high-end and DC to DC products and [they] do, do very well. The CCFL product is just in the middle of our margins -- our gross margin range.

Okay. Got it. By better mix, you would have just been referring mostly to higher proportion of your newer, higher margin, DC to DC products?

Exactly. And DC to DC I think grew 16% quarter-over-quarter, so we're -- we had a significant growth and then the newer product introductions grew a little bit better, so those had the better margins.

Got it. Thank you so much.

Okay.

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

Yes, it's Tore Svanberg. A couple of questions. First of all, how much of your revenue is still white LED? The lower margin stuff?

Tore, we don't break it out specifically, but its been turning in the dollar range for awhile because again we walked away from some of the low-price design wins awhile back and have started bumping along at that level.

Yes, as Rick said in a conference call -- said earlier, this year we reduced about 52% from the last year. And it became insignificant in our revenue.

Okay, very well. And did you have any 10% customers? And if so, who were they?

The usual distributors are our 10% customers. So in terms of an OEM type customer, no. But distributors, AIT is one of our distributors, [Yosin], those are 10%.

AIT.

Those are our 10% guys.

Okay. And just coming back to audio, you expect to keep this level for awhile. Could you talk a little bit about your competitive advantage there and who specifically are you competing against in the flat panel TV market for audio?

In the TV area -- in the TV segment, we're competing with all the large dealer companies, such as the TIs, STS, Thompsons, Philips and Maxims and there's many companies that have audio solutions. We'll be -- we're offering much more form factors at a much higher sound quality.

Okay.

There are also efficiencies. We're pretty efficient, so the heat is low.

Okay. Very good. And you mentioned share gains in the notebook market. Do you know who that would be at the expense of?

Actually, Tore, we said specifically we don't -- it's too early to say we have any market share gains that we can calculate, but we did see overall market growth. So we had problems at best because of legal issues, the market grew, but we didn't.

Our marketing department said notebooks were about 20% year-over-year, I don't know if that's an accurate figure, but that's an internal figure. So we're able to -- our existing customers are growing and that's what's helping our CCFL business.

I don't know what --

And then finally, you are starting to diversify this (inaudible) with audio for coming on stream, what's next for MPS even beyond MiniMonsters? Would you care to maybe talk about any other areas within analog that you're penetrating?

yes, in the last conference, if you remember, I mentioned that we do a high-voltage product line. I mean high voltage means higher than 24-volts or 30-volts, okay? We are going much higher. Highest volts. And both applications for TVs and for flat panel TVs, power supplies, and LED lighting.

Great. Thank you very much.

Okay.

Your next question comes from the line of Vernon Essi with Needham and Company. Please proceed.

Thank you. Nice quarter. Just two quick housekeeping questions, Rick, then I have some subjective questions. First up, what was depreciation in the quarter?

About $990,000 -- about, about $990,000.

And what would you put the tax rate at on a go-forward basis for the rest of the year?

We continue to estimate around 25% on a non-GAAP basis. But this quarter the actual calculated rate was about 14%. It's because we had a large provision that you can't deduct what looks on the outcome of this P&L doesn't reflect the number. But it's around 14% this quarter, we still have to estimate it at 25% for the year.

Okay. And given sort of all the comments so far, I'm just trying to get my arms around where you think that the biggest piece of your growth delta is going to come from June to September?

You've discussed a couple of interesting programs for some storage on the DC to DC side, it looks like the CCFL's picking up.

I mean should we assume that it's spread across all of these product categories or will we see more growth coming out of CCFL say for instance from June to September than the other areas?

Yes. Okay. Let me comment on it. I'm excited about this. We have the growth coming from all product lines it's not concentrated on one.

Okay. So you're sort of saying it's pretty much across the board then?

That's right.

And if we were to just, I guess this is a -- since you're one of the key market participants once again on the inverter front, where Michael, do you think that this market is going to wind up sort of, I hate to use the peak word, but where do you think it's going to peak in terms of dollar value?

Do you think it's going to grow from 2008 to 2009? Or do you think it'll start to turn towards the LED-based solutions?

Its difficult predict. And LED definitely is the future. My guess is the '09 [budget] time frame.

Okay. All right. That's all. Thanks.

Okay.

Your next question comes from the line of Patrick Wang with Thomas Weisel Partners. Please proceed.

Hey guys. Great quarter, you guys. And also a great job securing the agreement with Sumida.

Just first off, in terms of bookings, I know that you guys don't really talk too much in terms of up turns and what your coverage has been. How are your bookings going this quarter thus far and just your confidence regarding the mid-point of your guidance for 3Q?

Well, Patrick, as you know, we don't release book-to-bills because the nature of our business is highly turns oriented.

So what we do comment though is we've seen positive -- very strong bookings activity, that's why we put the guidance, revenue guidance, that we did, $33 million to $35 million, which is higher than we had anticipated before, so that just reflects the current bookings environment. That's about all we look out is quarter-by-quarter.

Yes, you can look at our pattern of -- seasonality pattern and in the past we don't believe we will deviate from that.

Okay. Okay. Great. And also in terms of mix, I mean I know that CCFL definitely came back and had a strong quarter there for you guys.

But just when you guys get to a steady state in the next two to three quarters, how do you think mix is going to look in terms of DC to DC versus CCFL with some audio amplifiers in there?

I hope we can grow the DC to DC revenues and audio products we see a lot more price pressure and we are relying on the new product line -- or new product lines.

One of them that we talk about quite often is the MiniMonsters. We expect that that product line -- that product will -- family will take off faster than the others.

Okay. Okay. I mean I know you guys said that you're going to be cancelling the 15-amp part this quarter, any update on the 20-amp part there?

Well we wish to sample it in the current quarters for higher current.

The higher current. Okay. Okay. And then just lastly, I know that you talked about the high-voltage BCD products earlier.

Any update there in terms of how that's going and any sense of when that might start sampling and anything that gets you guys really excited there?

We haven't released any product yet. But as you'll recall, early last year we announced we introduced with the -- we developed a process technology called BCD Plus.

And we completed that phase for the high voltage version of it and we haven't released any products. And we plan to release a couple of products in the second half of this year.

Oh, in the second half. So, the one that goes from low voltage to high voltage and also the EL backlighting product?

Yes, that's correct.

Okay. Great. All right. Thanks a lot guys.

Alright. Thank you.

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

Hi guys. I echo the comments on the nice quarter. Rick, could you just walk through really quick, or as quickly as possible, the litigation side? What's still outstanding?

I know you're not guiding for the fourth quarter, but when you talk about it lessening, if you could just give us a general idea of where there's outstanding cases, what it's going to take to wrap those up in a general sense? It might be helpful to all of us.

Okay. As you recall, the O2 trial has two components, one was the jury part on the patent and that's been done. There's some non-patent claims that are going to be done -- they're going to be going to trial soon, I think in August. So those should wrap up this Q3.

There's some post-trial briefings in the O2 case and the other part that will probably go on for awhile is we expect O2 will appeal the jury verdict that their patent is invalid and we'll have to defend that. So that will probably start right after the final judgment is put in place.

And finally on the Linear case, Sumida we just have to wrap up a little bit of detail and finalize the settlement, not a lot.

But on Linear, it's, again, we talked about before, that the discovery process has started, it's early in the process and there's been some hearings and so forth, but again the trial date is April '08, so the level will start from now and gradually increase in this trial in April. So that's really it.

There's really a -- as Mike will mention, there's no revenue impact on any of these cases, these are all either wrapping up older ones or some expenses. So that's really the summary that gets you where you need to go.

But you guys make the decision whether to go after the Linear one or not and how much to spend on it and the trade off on revenues.

But the other two, most of the legal work has been done, correct? The appeal process with the O2 side doesn't take a ton of new expenses on your side is that right?

It's -- the person doing the appealing spends the most. We have to just do some briefs and things and, but it costs us a lot less.

Okay. So, and barring anything new coming up, that should mean just generally '08 would be well below '07 on that line?

Oh, certainly the $6 million or $7 million we did the first -- just the first half of '07, it'll be significantly less than that hopefully. Unless some major case comes up.

Okay. Great. And then some of the stuff you talked about on the mix side, I realize that it was kind of within the DC to DC side that the profitability mix went to the higher end. Between your three segments that you talk about, what's the relative ranking on gross margin contribution?

They are very, very similar. Now the audio comes up, audio is ranked the lowest.

Yes, and as Michael said, CCFL's in the middle and DC's a little higher. But they're not large differences.

Yes, they're very close. Within a few percentage. And as you are ranking them, DC to DC is highest and audio's in the lowest.

But just to give you the flavor, we thought -- I mean, our guidance for gross margin was more in the middle, like a 62% range.

We're only a point off and half of it might have been mix, half of it might have been a little bit of cost control. So there wasn't this huge margin swing. It's more of a fine tuning in our lines.

So the range isn't really five points either side --.

No, no. The mix changes and changes the margins a point. I mean so it's not a big driver. It happened before, a couple of quarters ago, we had a point up. So we can do a point down. It doesn't have as big of an effect.

And what -- you guys talked about your inventory and why you're comfortable with the level, given the growth you're looking for. What are you seeing at those 10% disti customers? What's the disti inventory looking like?

Well, we are -- we track that pretty closely. In fact, our distributor inventory is about where we want it, even [plant]. We watch it all closely with retail reports.

Compared to a year ago, we had probably too much in the channel. We drained that all down in '06 and now we're at the levels we want, still at the levels we want with our distributors.

Are they asking for more or is it something that they've been either draining or building?

They are -- they recently, they asked for more inventories.

Okay. And then the final part about it, the MiniMonster ramp, how should we think about that happening over the next say 12 months?

I realize it's very, very small right now, but given that's a pretty significant new product area, how can we monitor that, whether it's a percentage of sales or by design wins or what would you suggest?

I would say in the revenues, within the next few quarters, when the volume become more significant we will talk about the numbers.

And at this time, still, we have a lot of design wins and all the design activities, which I'm very encouraged about. And in all different market segments. And -- but still this is not in high volume production yet. But we'll be able to talk about it in a couple of quarters down the road.

Okay. Then the last question for me, given that you said that the inventory timing might even be a little light in the channel, have you seen lead times extending anywhere? Whether your diffy partners are seeing it or you guys are having to take a little bit more time to service demand?

We don't see the -- see any different from our product and from the -- the train is a very similar from last year quarter-to-quarter -- year-to-year.

And I would echo what Michael said, we haven't had any -- obviously there's always 1 or 2 products where there's always a mismatch of supply and demand, but other than that, we haven't seen any stretch out of lead times. Our capacities are operating fine.

One of the reasons we build up our die banks and so forth in the first half of the year is so that for the second half we have smooth production ramps despite the increases in demand.

Great. Thank you.

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

Great. Thanks. Apologies, I missed a few minutes of the call, so if I repeat something, I'm sorry to waste your time.

But just a question on margin, it looks like the gross margin you reported was above the high end of your range and I was just curious is there potential for you to take up the high end of the range going forward?

No, we were a little bit higher than our guidance on the gross margin this quarter, Steve.

Maybe only by a point, but practically, as we were talking about in the call earlier, the mix swings can help us out a little bit or sometimes we get some cost improvements, but by and large, we don't expect and are trying to increase our gross margin. We're just trying to hold it stable in the range.

The -- MPS wants to grow revenue first and gross margin is there to be maintained, not to grow and that's our current view from a strategic point of view, is we want to grow the Company's revenue and we're not interested in growing the gross margin right now, just keeping it in the general range.

Okay. So if all the different product lines are relatively similar, we shouldn't -- I mean, you gave it -- your guidance is not at the upper end of the range, but going, say, into Q3, wouldn't expect it to move down very much, it should be pretty similar right, given --?

It can be pretty similar. I mean, that's our view, is plus or minus a point or half a point, we can't predict, but it should be in a similar range in the last few quarters.

In the near term, we don't see any significant change. But our long-term model is to remain at 58% to 63%.

Okay. Great. Thanks very much.

Your next question comes from the line of [Hang Yong] with Wedbush Morgan Securities. Please proceed.

Hi, this is actually Craig. I had a question on the audio products. Nice job by the way, guys.

On the audio products, it did gap higher here. I'm just wondering is this a lumpy business that's going to kind of gap down in future quarters? Or do we think about this as kind of a sustainable base upon which we'll have kind of normal variations.

We -- yes, we did have a significant growth in this product line and as I expected and it will continue to grow and it will grow in a less pace. And -- but it definitely is not a blip.

Okay. With respect to the MiniMonster stuff and I think this has kind of been asked, but we'll try it again here, can you kind of talk about what the end products are that you're seeing the most design-in activity? I.e. for most to less?

Yes. Well the encouraging news is that we had more design wins in the various applications, like the servers, flat TVs, telecom improvement, car entertainment and the high occurrence was targeted for the games in the notebooks, servers and graphics quality in the printers and so on.

And which of those are going to be ramping earlier as opposed to later?

We are ramping in the small files, small form factors, desktop. And we expect to have the TVs and ramping up volume in TVs and the telecom equipment.

And then this is quite a few things. I mean this -- these are what I remember as a -- from our customer side.

Great. Last question for me is can you just discuss your smart phone exposure or high-end cell phone exposure and/or cell phone exposure and/or any models that you're in the smart phone segment?

Well in terms of -- the revenues from those products are small and we are introducing products in that area for smart phones or handheld applications.

The current products have battery chargers and we have some small -- some revenues, but the total amount is not significant.

Yes, Craig, to follow-up, in terms of exposure, we don't have a lot of exposure I guess if you're looking at it from a conservative point of view.

On the other hand, our newer products that we've been coming out with that we are going to go out after some new wins is battery chargers where we still have some presence in cell phones.

It's really limited to the smart phones, where our higher performance white LEDs can demand a price premium. But other than some smart phones, we're not really in the high volume phones.

Thank you for the detail.

Okay.

Your next question comes from the line of Sangeeth Peruri with Seligman. Please proceed.

Hey guys. Great report. Definitely better than I was expecting.

Thank you, Sangeeth.

A couple of questions, first of the CCFL side, so have you guys had any benefit from the lawsuit yet? Or are those share gains, if you get them, for later on? This is really just kind of inventory rebalancing and notebook market growth?

Again, our product design-in cycle is from about nine to 15 months, or it takes even longer. I expect to have a -- I expect that it is mostly from the mobile market rebounding.

Okay. So if you gain share, that's hopefully a benefit in '08 or that sort of time frame?

Yes. Certainly.

That would be an '08 event if it was share based.

Okay. And then CCFL outside of notebook, where -- when -- could we expect kind of material ramps in '08? Or when do you start kind of getting revenues on those products? When does that start?

We currently do have some revenues in the non-notebook area, but they're small. We are really introducing a variety of new products and we're still in the design cycle on those. So --.

Yes, the controllers are actually doing pretty well, but we don't want to discuss the details.

Okay. This is kind of '08 you were hopeful for revenues or is it more '09?

No, it's happening in the now.

I see. Okay. And then the LED side, should we just plan like that's flattish or that could actually grow here at some point?

I think it's flattish, okay? We find some niche applications and also we're growing on the other side of the business, which is the high -- larger panel side. So given these are very good opportunities.

Yes, we have some new drivers that are really made -- that we're putting together for the potential swing to that backlighting in notebooks, so that's a future product.

We're not shipping those in the next few quarters. You won't see those in the numbers. So we're really, I would say, flat with our current products for awhile, until the new ones come in.

And you're doing that for TVs and monitors as well on the LED side?

No, we don't have a product for that now.

Just on the notebook?

Not even shipping the -- for the notebook now. For the volumes idea, we have three to 10-inch panels.

Oh, I see, I see. Okay.

Now the OpEx, you talked about R&D growing here quite a bit, do we -- should we just expect it to continue to grow going forward or does it dip for a quarter and then grow because you've spent so much recently?

R&D, I mean we -- a good chunk of the growth quarter-over-quarter were one-time math charges and things that won't recur, but so we will expect R&D to just -- to flatten out in the near term, but we still plan to hire as many good engineers as we can find. That hasn't changed.

But we shouldn't expect any down quarters after the mass spending before you grow again?

I wouldn't expect any.

Okay. So maybe it flattens and then grows so the (inaudible) come down and --?

Flattening out would be the logical. I wouldn't expect any down quarters before flattening out.

I see. Okay. I'll -- now the MiniMonsters, is that all new revenues for you guys or does that cannibalize any existing revenues?

All new is -- the good news is its all new revenues. New markets that we didn't have before.

So it doesn't canibalize anything that you have?

No.

And then your current products, excluding MiniMonster, are they starting to taper out or are they going to keep on growing?

They'll keep on growing and some of the applications will drop out and I would say if stiff competition and it's a tradeoff is the business position they have. So other ones are, as I said last year, we focus on the new market segments and we did it really well.

Okay. That makes sense. Now you talked about your customers wanting to build inventory, but were they able to or have you allowed them to?

You mean our distribution?

Distributors? Correct, your distributors.

Well they said that they want more inventories, okay? But the -- we --

Yes, they're -- compared to a year ago, they're down from where they were a year ago, which was probably appropriate. They're probably a little bit on the lean side --

My preference is that we keep an inventory in house.

Yes.

I see. So if -- so you could potentially get a little bit of a boost if the disties accumulate a little bit and kind of get to normal levels? I mean, it sounds like you're --

No, we don't do that.

Okay. But it seems like they're running a little bit lighter than they should? Or it's at optimal levels?

It could --

It's in the lower end of the range, it was. Our distributors are primarily distance based. They don't have a price protection, so they don't want to carry 60 days. So they carry in the range of 30 to 40 days and it's probably at the lower end of that range right now.

Now your kind of revenue on the DC to DC side, excluding MiniMonsters, how -- what's kind of long-term growth for this segment?

I mean, is it -- or for you guys. I mean, is this 20%, 10%, 5% and then MiniMonsters on top? Or how should we be thinking about it?

Actually both, okay? What the growth rate in the MPS model is at 20% to 30% a year.

Okay. And most of that comes from the core products or from the MiniMonster, you think, going forward?

Going forward, I mean, going forward, it's for 12 months from now, I expect that this is from the high current product.

The high current, that's --?

That's the MiniMonster product, yes.

Okay. Okay.

And also we have other products and they will also grow. The MiniMonster is a lot more exciting product, okay? Technically and it is also very new to MPS. And it addresses a -- it also changes -- it addresses a very large market.

Okay.

But that's only one of our product lines.

Now, I think six to 12 months ago you guys announced, is it Memec or is it disty?

Memec.

And are you getting any benefit from that yet or is that more '08?

Yes we do.

We're gradually increasing every quarter. We're shipping more every quarter through Avnet than the prior quarter and twice as much this year as last year. So it's growing. It's -- they had the same, by the way, 18 to 24 month design cycle as everybody else.

So we started with them in the second quarter, first or second quarter last year. So you would expect to start to see things toward the end of this year and early next year in terms of increases. They have the same ramp cycle as we do.

So how far are they kind of in their ramp? I mean is that second inning or fifth inning and will they become a 10% or 20% customer here in the next year or two?

I'd say second inning. In terms of the 10% customer, that's -- we don't expect like that far out.

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

Oh -- well thank you very much for attending our call this quarter and we look forward to sharing more results with you at the end of September for that quarter. Thank you.

Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.