芯源系統 (MPWR) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Monolithic Power Systems, Incorporated Earnings Conference Call. My name is Jaquila and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Rick Neely, Chief Financial Officer. Please proceed.

Good afternoon and welcome to the Third 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 fourth quarter of 2007, projected fourth quarter net revenues and gross margins, our expectations for fourth quarter litigation, stock compensation and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, continuing market acceptance of our MiniMonster, LDO, battery charger and other high performance products, 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 finally, 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 second quarter Form 10-Q filed on August 1, 2007, which is accessible through our Web site, 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. 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 their related tax effects.

We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the fourth quarter of 2007, which excludes our expected charges related to stock-based compensation. A table that outlines the differences between a 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 Web site. 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 Web site for one year.

We would like to start this call by reviewing our third quarter of 2007 business highlights. Following this update, I will discuss our financial results. Then, we will conclude by discussing our expectations for the fourth fiscal quarter of 2007. We will then open up the call to your questions. So, let's start with the business highlights.

MPS set a new record for revenue in the third quarter of 2007 as demand for our products was very strong. Our third quarter revenues exceeded our updated guidance as we recorded our best quarter in the Company's history with revenues of $40.2 million and non-GAAP earnings of $0.27 per share. MPS maintained solid gross margins of 63.5% and closed the quarter with over $101 million in cash and cash equivalents.

For new product introductions, we increased shipments of early production quantities of our new high current, high voltage, MiniMonsters product family in the third quarter. We are also seeing good design activity for this product family in multiple key target markets, such as large, flat panel TV, telecommunication equipment, set-top boxes, high end desktop servers and notebooks. Early revenue levels are meeting our expectations and we continue to be optimistic about the MiniMonster family. We are also seeing good activities in our new LDO and battery charger products in different market segments. We believe these high speed, high precision, low power consumption products will be winners in these markets.

The third quarter also saw a resurgence of growth in the CCFL product area as MPS was able to take advantage of the significant sequential growth in the notebook computer market. In the manufacturing arena, MPS was able to offset pricing pressures in our older product offerings with greater cost efficiencies and maintain our gross margin in the upper end of our target model for the third quarter of 2007, recording a gross margin of 63.5%.

Our inventory days were flat at 98 days as we filled the strong demand from our distributors' inventories and kept our own stocks intact to the prior quarter. We continue to grow our cash balances as we increase cash and cash equivalents by $9.5 million in the quarter to $101.8 million as of September 30, 2007. On the expense side, our non-GAAP operating expenses were $13.9 million, down $1.2 million from the second quarter of 2007 as our third quarter litigation spending was $1.5 million as a result of reduced activities in the O2 Micro case and we avoided some trial expense as a result of the settlement with Taiwan Sumida.

Now, let's look at the financials in more detail. Turning to the P&L on the revenue line, third quarter 2007 net revenues of $40.2 million grew 47% from the third quarter of 2006 and above our guidance going into the quarter and the update given in mid-September. This compares to net revenues of $30.8 million in the prior quarter, an increase of 30% sequentially. Let me break down our third quarter revenue by product line. DC/DC product sales were $25.6 million, up 36% from the $18.8 million recorded in the year ago quarter and up 34% from the second quarter of 2007. Year-over-year, our DC/DC products grew in the flat panel TV, set top box, GPS and digital picture frame markets, as some examples. We also started to see meaningful sales volumes in some of our newer product areas, such as battery chargers and LDOs.

LCD backlight revenues for the third quarter were $10.9 million, an increase of 47% from the same quarter a year ago and up 21% from the prior quarter. This exceeded our expectations for revenues in this product area as we grew our business with existing customers as the notebook segment saw good growth in the quarter. Audio revenues once again hit record levels, coming in at $3.7 million, up 262% from the $1 million recorded in the year ago quarter and up 34% from Q2 2007. This performance reflects the continuing production ramp at several major consumer product customers in the LCD TV space.

Let's move down to the gross margin line. Our third quarter gross margin was 63.5% compared to 65.6% in the same quarter of 2006 and flat to the 63.5% in the prior quarter. Despite strong ASP pressures in some of our older product offerings, MPS was able to maintain stable gross margins. This was largely due to excellent cost control and efficiencies.

Let's look at our reported expenses on a GAAP basis. On a GAAP operating basis, our expenses were $17 million in the third quarter. This includes $15.5 million in R&D and SG&A expense, which includes $3.1 million for stock compensation expense under FAS 123R accounting rules and litigation expense of $1.5 million. Compared with the third quarter of 2006, GAAP operating expenses decreased by $1.5 million. This amount comprises of an increase in stock compensation expense of $226,000, a decrease in litigation cost of $1.6 million, an increase in R&D spending of $1.6 million, an increase in SG&A spending of $964,000, and a decrease in one-time charges of $3 million as we recorded a legal settlement with [Micral] in the prior year.

I would now like to review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the third quarter were $13.9 million compared to $12.7 million in the third quarter of 2006 and $15.2 million in the second quarter of 2007. The $1.3 million expense decrease from the second quarter of 2007 was due to litigation spending, which decreased by $2.6 million from the second quarter of 2007. Non-GAAP R&D costs were up $687,000 as we increased new product introductions and employee bonuses. Non-GAAP sales, general and administrative costs increased by $644,000 due to higher commissions and employee bonus costs.

Our third quarter GAAP net income was $8.3 million or a profit of $0.23 per fully diluted share. This compares to a net loss of $1.9 million for the third quarter of 2006 or $0.06 per basic share. In the prior quarter, MPS recorded a net loss of $6.4 million or $0.20 per basic share. On a non-GAAP basis, for the third quarter of 2007, we had net income of $9.7 million or $0.27 per fully diluted share, which excludes stock comp expense of $3.2 million and a related tax effect of $1.8 million and uses an estimated tax rate of 25%. In comparison, for the third quarter of 2006, the non-GAAP net income was $3.9 million or $0.12 per share, which excluded stock comp expense of $3 million and the adjusted tax amount of $207,000.

Let's look at some of the major changes on the balance sheet this quarter. Cash, cash equivalents, current restricted cash and investments were $101.8 million at the end of the third quarter, up from $92.3 million at the end of the second quarter of 2007, and up $27.8 million from the $74 million recorded a year ago. The increase in cash from June 30, 2007 came from operating cash flow of about $12.6 million and stock option exercises and ESPP purchases, which is our Employee Stock Purchase Plan, of about $6.3 million. This was offset by an increase in inventory and working capital of $7.3 million and capital expenditures of $2.1 million, resulting in quarter over quarter cash growth of $9.5 million.

Accounts receivable ended the third quarter at $12.8 million compared with $8 million at the end of Q2 '07 and up from the $9.6 million at the end of the third quarter of 2006. Collections continued to be well managed as our day sales outstanding were 29 days at the end of Q3 2007, compared with 24 days at the end of the second quarter of 2007 and 32 days at the end of the third quarter of 2006.

Our inventories at the end of the quarter were $15.8 million or about 98 days of inventory. This compares with $11.9 million or 96 days of inventory at the end of the prior quarter. Looking back at the end of the third quarter of fiscal 2006, our inventories totaled $7.4 million or about 72 days of inventory. We kept our internal inventory levels higher than normal in the third quarter to offset low distributor channel inventory and meet our October shipment schedules, and we are comfortable with this level of inventory.

I would now like to turn to a discussion of general business conditions. We had outstanding revenue and booking activity in the third quarter as all three MPS product lines grew in concert. This growth came from a combination of new business penetration as well as general market growth in notebook computers, flat panel TVs and consumer accessories. Geographically, in the third quarter of 2007, 65% of MPS sales were shifted to Taiwan and China, and 35% to other regions with the largest growth in Europe and Korea from the second quarter. U.S. revenue is also showing significant growth in diverse markets with excellent momentum going into 2008.

For the CCFL product line, sales for the third quarter of 2007 did very well. With the legal issues largely behind us, we participated in the strong third quarter growth of the notebook segment of the computation market and we believe we will be able to gain back some market share in the inverter portion of the backlighting market in the near future. In the new product area, we are very excited about several new product initiatives beyond the well publicized MiniMonster family. One of the new product families that are getting a lot of design attention is our high voltage 40 volt DC/DC offering. This is an ideal product for the automotive and industrial markets and our application team has seen very heavy activity.

Another product family we are excited about is our next generation battery charger family. We plan to release about five products by the end of this year, and they will offer features and cost advantages that are unrivaled by any existing competitor. Finally, we are seeing growing revenues in our high performances LDO product area. We see all these compelling solutions as very high potential products for MPS in 2008 and 2009.

Now, turning to our outlook for the fourth quarter of 2007, our revenue guidance is in the range of $37 million to $39 million, reflecting normal seasonal patterns for our products in the fourth quarter. Gross margin is expected to continue in the upper end of our target range of 60% to 63%. We expect stock based compensation expense in the range of $3.0 million to $3.5 million. We expect non-GAAP research and development and selling, general and administrative expense in the range of $12.5 million to $13.5 million. This estimate excludes the stock compensation estimates mentioned above. Finally, we expect litigation expense in the range of $1.5 million to $1.8 million.

In conclusion, we are pleased to report that MPS had record quarterly revenues and strong earnings in the third quarter of 2007. All three product lines grew sequentially at double digit rates as new applications are beginning to kick in for the existing products and the product introductions for the past 18 months are starting to generate noticeable revenues. We continue to generate significant cash, adding over $9 million over the prior quarter figures. We see normal revenue patterns for our heavily consumer rated business in the fourth quarter, and are optimistic that our many new products, including the MiniMonster, battery charger, high performance LDO, and high voltage products that are based on our BCD Plus process technology, will add substantial revenues for the Company in the future.

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

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Vernon Essi with Needham and Company. Please proceed.

Thank you, nice numbers there. Wondering if you could give us a sense of what the market break-outs might look like. I know you don't normally disclose that, but can we get an understanding of -- I know it's obviously broad, but is there any specific area you would highlight more than any others that grew stronger quarter-on-quarter?

We had a press release a few weeks ago that we see a stronger demand from the LCD TVs and the notebook.

No, I mean I understand that, I'm sorry Michael, but I guess I apologize -- I am talking about into -- the guidance into the fourth quarter?

Oh, in the fourth quarter. No, in the fourth quarter, the -- our business in kind of term business, but we still expected a strong demand from our consumer side, like LCD TV.

And Vernon, by segment, there isn't any particular guide. All our segments will probably go down a little bit, that's where the outlook and that's based on just the consumer pattern -- seasonal patterns, but there's no one segment will go down more than the other. We expect them all to decline slightly.

Okay. On -- just one more question here, on your next gen product line, especially focusing in on battery charger, what power range are you looking at and what application?

Well, battery charger is only one of the products and we introduced several other ones, like high performance -- I mean, the high speed LDOs and high voltage products. To answer your exact -- the question exactly that these are for switching chargers and the linear chargers that we will have a new product, either we release or still in line, and those are charging currents from a 1 to 3 or 4 amp current.

Okay. And then finally, just in terms of inventory levels that are out there, a lot of companies are seeing pull-downs on their inventory levels in the channel. You seem to be holding yourself well. Any thoughts on how that might play out into the end of the year, do you feel comfortable with where you're at with your distribution partners?

Yes, as we mentioned on the call, Vernon, our channel inventory levels were actually a little bit lower than normal. So, we feel that the channel is well under control. And so, we ourselves have reasonable inventories, we are doing significantly higher revenues and volumes obviously in the second half, so we are keeping the inventory ourselves and our distributor level -- channels are fairly lean.

Okay, thank you.

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

Hey guys, just got a couple of questions for you. First one is it seems like you guys finished the September quarter very strong, an upside even from your pre-announcement. Can you comment or give us any flavor for book to bill, it seems like it ought to be positive. I don't know if I'm off-pace there, maybe comment a little bit on what turns are this quarter compared to last, and have you actually started to see things sort of start slowing down seasonally or is this just, you're kind of basing this on years past kind of normal seasonality?

Yeah, Rick, as [per the tap], we don't put out bookings and backlog numbers, because we have a heavy component of turns, like most analog companies. We saw good bookings this quarter that will support our Q4 guidance, so that's about as far as we can say on the bookings. Bookings were reasonable, so that they could support the guidance, so we see it as a normal quarter on bookings. Relative to how the market is trending, Michael will chime in on that.

Yes, in -- the bookings seems like it's a -- we never can accurately predict it and even the pattern is -- even though we don't have a clear pattern. The market trend is a -- we still -- MPS is still a small Company, and we can't accurately predict what the market is, but we do see strong demand from LCD panels or related business. So, they are going well as we see in the third quarter. The fourth quarter, we see the similar trend, but we don't know how long it will continue.

Okay, so you haven't actually seen it start to seasonally sort of soften up yet?

No.

It's too early, that would be a December situation. I mean, it is October and November, we can't tell you.

Okay. But, Rick, is it safe to say turns are pretty similar this quarter to where you were last quarter?

Yes, I would say that's safe to say.

Okay. And another question, just if you can comment on the sort of success you're seeing -- I know you talked about CCFL, the notebooks have been up 20% -- I think it was 20% or 21% sequentially. I know you talked about share gains as we look in '08, do you think we're already starting to see some share gains or is that really something, you know what I mean, that we are going to be able to rely on next year?

Well, the CCFL, it is clearly the legal risk is behind us and I can't really quantify that whether it's from a market share gain or it's from the market itself, I mean the Web -- unit volume increase by itself. Well, next year, we will feel good about it.

But, Michael, then part of that are you starting to see -- are you getting calls from some of your former customers maybe that are thinking about coming back or starting to look at Monolithic parts again or --?

Yes, absolutely, and we started right after the trial and we see the increase of activity.

Okay.

Yes, and then we have seen a [trigger] increase, but you won't see the revenues because it is 9 to 12 months, so this frame models hopefully will be in some of those that spring them away, but it's just too early to get anything else.

Okay. That's what I was getting at Rick, thanks. That's what I was trying to dig for, when we might start to seeing it on the top line. And then, the last question was just if you could give any color on sort of -- but I know you probably don't want to give the numbers, but if you do that's great, but I'd be curious what the relative profitability of let's say, some of your core CCFL business might be versus let's say the DC/DC biz, and then, if you could give us any idea of -- is MiniMonster big enough now to be talked about separately, I mean is it 5% of the total revs yet or you got any idea where MiniMonster sits?

Okay. On the first one, our gross margin -- well, we do have, we have a range between all the products, it's a fairly narrow range, so, as we've said before, the DC/DC products tend to be a little bit higher and CCFLs more middle of our range, but there isn't a broad separation. In other words, we don't have 80% products and 40% products. Everything is fairly narrow gross margin range, so we don't break it out. On our MiniMonster side, you have to remember the first product sample shipped a year ago, so actually, less than that, nine months ago, sorry, so nine to ten months ago.

So, the fact we have as much revenue as we have, we're really excited because it is the fastest growing product we have had, but we are not releasing the numbers because we don't want to put them out separately yet. It is something we look at internally, because we look at it as a ramp over 18 to 24 months, not -- the fact we are shipping things in nine months is amazing to us, so that is really how we see it.

Let us put that way, that is one of the fastest -- it is now one of the fastest growing products in the Company -- in the history of the Company, and other than initial CCFL product back in ten years ago, but the product line grows really well and we are very excited about it.

Within DC/DC MiniMonsters, I'm assuming.

Yes, it is in there.

Yes.

But I am saying, but it is higher margin even within DC/DC, is that safe to guess?

It's for the -- currently, the volume are small, the margins are higher, so by the way, expect the volume will be significantly larger, the margins we will be in our business model.

Yes, it is the same as the other DC products, I think.

Okay, great. Thanks guys.

And your next question comes from the line of Craig Berger with FBR. Please proceed.

Good afternoon guys, nice job. Quick question on the audio, it looks like it's $3.7 million this quarter. That's getting to be I guess fairly significant. What are the customer programs that that's ramping into, who are the customers, and kind of what is the outlook from here?

We can't release the customer name, but the products are grown and we have a couple of new products. We -- some large TV makers and [the designed] the thing and the revenue shoot up, okay. This is not a typical MPS business, we want to address as many customers as we can, but this is an audio product line. It is just a few customers and we try to broaden up. And again, this product -- one of our product line is that we don't see it as a high growth as a MiniMonster product family.

Michael, is this still a pet project of yours or has it graduated beyond the pet project at this point?

Well, let us say that it has graduated beyond that and we tried to get more engineers and enhance the engineering capability in our product line. It's -- you know what it is -- we inherit the main -- the [audited] product let's say in the -- have the product -- separate the product line.

Right. And moving over to the inventories, your inventories went up. You said you are carrying more because your distis are carrying so little. Can you help us understand what this two weeks of inventory is, maybe what lead time trends have done and how you got a comfort around your customer inventory levels?

Okay, Craig, on our distributor inventory levels, we typically target for them to have around 30 to 45 days, and they're below that minimum level into the quarter and that's forecasted into next quarter. So, we know their inventories are laying, we get resell reports on a continuous basis and we check those and so forth. So, our inventories are actually flat Q2 to Q3. Typically, we would drop a little bit in Q3, we have kept them flat because we know our channel inventories are lower than normal, so that is how we have been managing it.

How do you know or how do you gain comfort that maybe your customers aren't stopped by lowering inventory, the OEMs or how do we gain comfort that we are not going to wake up on January 2nd and have a big inventory problem?

I get that question often and I can say, we control our inventories, our distributors and their sell-through, but there is multiple, there is probably five levels B from an analog product to the retail shelf, there is probably five or six levels and we are honest, we have no idea if Best Buy or our retail people have a lot of inventories or not. We don't have that kind of visibility. We are just trying to control our near term customer interfaces that we understand and manage from there, but there is no way we have any of that visibility.

How are your lead times or pricing trends with your foundry suppliers in case you needed more upside?

We still have room and we can grow. I mean, we can grow and also, we have a lot of inventory too and we are not worried about it -- that our revenues of our products in the near future.

Last question from me, can you just remind us what normal seasonality looks like in the first quarter and whether you think there are any factors that might cause us to diverge from normal seasonality this year?

Okay, Craig. Yes, as you know, typically, Q3 is our biggest quarter and there is a slight drop off to Q4 which is what our guidance shows and Q1, we -- because almost all of our products are shipped to Asia and all the manufacturing is in Asia, there is a holiday period of 10 days or so, we typically see a 10% to 15% reduction in Q1 revenues. And as far as we can tell at this moment, though we are not giving any guidance for Q1 '08, we see that kind of seasonality as likely. So, that's typically what happens.

Yes, in terms of -- yes, our product line and the characteristic of our market, characteristic of our product, though hasn't really changed. So, we expect 2008, the trend will be similar to 2007 or 2006. Will be lower on a first half -- revenue will be lower in the first half and higher on the second half.

Thanks a lot guys, good job.

Thank you.

And your next question comes from the line of Steven Park with Wedbush. Please proceed.

Hi, I just had a quick question about kind of the long term growth rate for the CCFL and the DC/DC business. Is that something that's 20% to 25% or is that something better than that?

I mean, our target for the Company, Steven, is to grow around 20% to 25% and trying to break it out by product line is too difficult to call. I think in general, we believe a lot of our new product introductions have been in the DC/DC area. We expect that to grow strongly. On the other hand, CCFL in general, is a more mature product line. However, the notebook unit has been growing very quickly.

So, I don't know if the fact is the more mature product line right now has been offset by very good notebook growth. As you know, a lot of desktops have been replaced by notebooks and these continue to be the trend. So, we don't -- we just look at the general mix and it's probably 20% to 25% over time and that is how we target the Company's part and reduction strategies and that is how we target the Company to grow.

The 20% to 25%, does that actually, does that kind of incorporate the market share potential gains for LCD TVs or is that more just kind of [add-in or matter] on top?

In general, Steven, we only have a few markets where we can track our products, even a lot of our customers -- we have 2,000 customers spread across 50 different market areas, so ones that we know we have some concentration in are notebook computers with the backlighting and a lot of our business in Japan and Korea and in Europe are in TVs, DC/DC power management, so those are areas we know.

But in general, some of our -- many of our DC products can be used in five different markets, so meaning from a disk drive to a handheld to a TV and set-top box, so it's all been difficult for us to assign broad market characteristics. What we do is look at the product -- well, we have it and then we try and increase penetration within the market that we have gotten foothold in. That's the more typical MPS strategy.

Okay, just one additional question. Regarding kind of gross margins in the longer term, are you -- out a year or two, do you expect them to kind of maintain at the 63%, kind of 62%, 63% level or can we see some potential upside on that -- in the kind of the outyear?

Well, actually, MPS is -- we feel fortunate to be operating at the upper end of our range. We have been able to be at the higher end of the range, but our goal is not gross margin expansion, Steve, it is bottom line margin expansion. So, we have a long ways to go to get our bottom line margin expansion and we want to grow revenue. Size is more important to us on the revenue side. If our gross margins are in the current range that we talked about, we're happy. We are not trying to improve gross margins, but we know if we go revenue 20% to 25% a year, we will be improving our bottom line.

Yes, we are really concentrating on the top line and the bottom line, and our long term business model, again, is in the high 50s and the low 60s gross margin.

Okay, great. Thank you.

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

Thanks, guys, and congrats again on a strong quarter. What's your expectation for your own inventory at the end of the fourth quarter, would it go down or up sequentially?

It will be at about the same level. Again, we are keeping our channel inventories lean and so, we got a mixture, we have enough, because this is a lot of turns, we have a lot of turns business, so I expect it to stay around the same level.

What do you expect the channel inventory to do?

About the same as well, that's our current outlook.

Okay.

About the same as Q3, I mean.

Got you.

It could be a little higher, it could be a little lower, and so that's -- we don't expect it to have a drastic business change.

Okay, that makes sense. And then, the linearity of orders in the quarter given that you positively pre-announced and then beat that number, is it safe to assume that strength continued through the very end of the quarter?

Yes, we had customer request and we had a turn, so we obviously -- we can even beat our number by a little bit than we thought. So, yes, it is kind of little -- not a huge amount, but enough to push us over the top there.

Unless you guys have these new products that you are talking about, whether it be the MiniMonsters, the battery chargers, LDOs, et cetera. What way would you suggest to us to be able to track the progress of those products within your business mix and the implications either for revenues, gross margins or both?

It is even -- for you, it is harder, for us -- okay, for us it is hard. And -- because as Rick said, we have so many customers and there were so many products. Each product only contributes a little bit on the revenue growth side. And so, it is kind of difficult, but we can talk about it, we can keep talking about the product introduction and a product design activity and through a different market, and that is all we can do, frankly.

Right. So, for us externally, we just rely on what you tell us every quarter, pretty much?

Yes. We tell what -- we tell you exactly what we know.

Okay. And then, the last question from me is on the OpEx side of things. How should we think about OpEx? If your goal is to grow the top line 20% to 25% year-over-year, how scalable is the OpEx? How fast you do have to grow that to deliver that sort of sales?

That's a good question, Ross. In general, right now, at this stage of the Company, we probably can't grow R&D that fast if we try. It is difficult to find the skilled people. We have grown a lot this year, but I doubt we can keep up with that growth rate in R&D. G&A doesn't really have to grow that fast that we can get -- we get a lot of scaling and leverage at our current size. Probably one area that, in the near term, should grow is sales, because we have a lot of sales channels to build out in sales and marketing. We would expect to model, grow that with sales growth because there is, for example we only have five or six sales guys in the U.S. right now and similar in Europe.

So, there's many areas of the world where we can increase our penetration with -- by increasing our sales and marketing growth. We are very careful, Michael and I are very conservative, so we are not going to overspend, but we would expect sales and marketing to grow with sales, and R&D and G&A to be a little bit less, just one of the factors that you don't -- R&D because it is difficult and G&A because you don't really need to grow that fast.

What percentage roughly of SG&A is the S?

About -- I think it's about 60-40%.

60-40% sales to G&A or the other way around?

Sales and marketing, basically.

Sales and marketing is 60%.

Sales and marketing is higher than G&A.

Okay, got you. Okay, that's helpful. Thanks and congrats again.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of [Tory Samberg] with Thomas Weisel Partners. Please proceed.

Yes, good afternoon, great quarter. A couple of questions. First of all, Michael, you mentioned the TV market still seems strong here in October. Have you seen any changes at all in the notebook market so far?

We haven't quite -- still very similar, and -- but we don't know how long it will last.

Yes, we see market there. I mean, Q3 was a big unit quarter and Q4 is supposed to be slight growth, so that flat in unit. So, but we haven't seen any corroborating evidence here one way or the other.

Did you run into any supply constraint issues in your markets, not necessarily your products, but from other component makers?

No, we don't notice that. We -- for the -- either for the notebook business or TV business, we are the small component, shipping to those OEM or ODMs. And we -- for us, it is difficult to know what their constraints are.

Fair enough. And I know you don't give bookings data, but could you talk qualitatively about forecast from your customers, are those forecasts getting better, same or worse?

I think it is similar to and they are -- very much follow the seasonality as -- just like last year.

Yes, in terms of quality, Tory, I can't recognize any change, better or worse.

Okay. And you mentioned your plan to release five new charger products by the end of the year, what would be some of the main applications for those chargers?

I don't know, it is a five chargers or not. We plan to release a number of LDO products and the chargers and some other high voltage products in the recent quarters.

Okay. And your 40-volt products, when should we expect to see some revenue from those?

Any product that we introduce, we expect to see the revenues about 12 to 18 months. But every -- almost every of our product, and I will follow that similar pattern, and other than the MiniMonster products because we see a lot -- ramping up a lot faster.

Okay. And then just lastly, would you care to break out just roughly by end market your revenues, meaning is notebook half, is it a third, just trying to get a better flavor of that.

For those new products?

No, for the -- your total revenue this quarter.

Total revenues. Rick can answer that for you.

Well, it's the only one because of the -- the only one that you can reliably do is to look at the CCFL number, knowing that most of that is notebook computers and then you can divide that by notebook units. Other than that, we don't really, it is too difficult because the same -- again, the same DC Power Management Chip can be in five different applications and we don't get that kind of data from our supply chain. So, it is more of a guess. The only one that we have really -- can get a handle on is CCFL because it is a unique part, no one else has one and it only goes one place.

Very good, just one final question. Could you give us tax guidance for Q4 in '08 please?

Yes. I said the non-GAAP rates for the year will stay around 25%. I think that is our -- our effective tax rate for the year is about that right now. Quarter-by-quarter, it's hard to say, but that is probably fair for '07, and if we have any changes for '08, we will let you know in the next call.

Great quarter again, thanks.

Okay.

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

Hi, thanks very much. Rick, I just wanted to clarify one more item on the inventory. So, were you basically saying that your channel inventory declined during the quarter?

Yes.

Yes.

Okay. So, really your shipments, if you kind of look at them on an end market perspective or even higher than once you reported, because you are facing that headwind.

We don't do a resale, but I guess so.

That's the difference, yes, yes.

Right. Because you recognize on sale into the [distributors], right?

Right.

Okay. And why do you think your distributors are reducing inventories of your products when they are facing such a significant growth?

Well, because remember about a year ago, two years ago -- about two years ago now, almost two years ago, we had inventory issues from our distributors, and so, we controlled very tightly, we tightened the leash since then.

We tightened the leash. The other part to it, it's just the basic economics of it -- the amount of inventory is substantially higher, they had to pay us in 30 days. So, there is -- I mean, if we just look back, I mean our revenue numbers are 50% higher in almost than a year ago. So, the distributors just from a cash basis are -- they are just being a little bit lean as well.

Okay, that's helpful. And then secondly, I think you had said last quarter that at some point of the quarter at least, your CCFL products were in allocation with your customers. Your business grew roughly in line with notebook shipments, so that seems okay. But did you get any sense at all that you might have over-shipped end demand? Is that the kind of thing you would be able to see from where you sit?

Well, so far we shipped -- our customers buy it. And then, we look at the overall market as the same way as you do then when the Q4 and the Q1 was the notebook -- it is the notebook volumes.

Okay. And then on the DC/DC business, which was up 34% sequentially and that's, I think, the second best sequential growth you have had in that business ever. What are some of the chunkier items in there you can call out for us just to understand a little bit what drove that significant growth? Were there significant design wins that ramp or what else can you point to to will help us understand?

As I stated, what - actually, back I mean, in a year and a half ago, we said that we will have lot of design wins in the flat TV area, and this is the result of that. And this year, it's in the fourth quarter -- third quarter and in this quarter, we have seen a significant unit growth, I mean -- the TV unit growth and the MPS has ultimately benefited from it.

Sure. I know you can't really distinguish kind of where exactly your chips end up in the end market, but do you have a sense of whether TVs may be close to half of your DC/DC business?

No, no, not -- not near that.

Okay.

And we see a few percentages, in our case, the growth come from the TV side. That is how we can identify a clear winner from the rest of the market. Actually overall, our product applications are -- we have more applications and all these applications and the members are -- the units are growing -- the units grow in the third quarter.

Okay. And then just lastly, I think Rick was mentioning that there has been some increased traction in some of the broader based markets in the U.S. Is that through your Avnet relationship or other channels?

Yes, it is both. Avnet is doing well, I mean we are doing per quarter, and we did per year and a year ago. So, it is -- the sales team is pleased because as you recall, when we signed up Avnet last year, they had to start from scratch. They are basically out there to get new design in industrial and smaller markets in the U.S., because we don't have the sales channel to cover.

So, they had to start from scratch and do that 18 months design cycle just like we would with any product and they are doing a good job. Pretty much 18 months into it, they are starting to get some good attraction. The other part of Michael's comment was more about business that doesn't show up in the U.S. numbers, but gets transferred to Asia. So, the design team is doing a -- and the sales team in the U.S. is doing a good job, generating a lot of business and ends up being built in Asia, but the design win is done in the U.S.

Great. Thank you very much.

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

Great, thanks. I was hoping you could talk a little bit about seasonality after Q1 also? Seems like Q2 would be a pretty big ramp, and then Q3 even bigger ramp and then Q4 back down a little bit?

That's typically how it happens. Q1s typically -- go down 10% to 15% just from -- some of that is, just -- you just take the number of days of Chinese New Year, divide by number of manufacturing days and you almost come up with that number. Ours are not the kinds of products that people backlog. I mean, they buy them when they need them and when the factory isn't running, they don't buy them. We are pretty basic products that are -- they expect to have available, so they don't order six months in advance. So, that is why we typically have the Q1 dip. And Q2 goes up, Q3 is our strongest quarter right now, because of our strong notebook and consumer mix. Q4 is usually flat to slightly down, that's our typical Q4.

So, what you will find is that second half is usually, it is more like a 55-45 scatter whatever. If you take your annual number and it will be much greater in the second half or 60-40, I guess it's more likely, the second half is significantly higher than the first half. So, it does make us a little difficult to model from some of the larger companies where they are all spread out, kind of tend to have incremental quarterly growth, and we have surges and declines, but because of the -- we are a smaller Company, dependent on different markets, we don't have the broad sort of industrial medical market that sort of even it out.

Okay. And specifically, what would sort of you expect seasonality to be for Q2 this time around?

Next year, it is too -- that's too early to call that it.

I think it would be as follow as, say the early, the figure follow our past, and Q2 will be stronger than the Q1.

Yes.

And the Q1 is the weakest than --

Q3 is stronger.

Q3, always the strongest and they are much stronger than the Q2. And Q4 is the lowest or flat or to a little lower. That is the pattern that we have in last four, five years.

Okay. Turning to your operating expenses, touching on a little bit, some questions they asked earlier. If I just look at the percentage of revenue in this quarter, it dropped pretty significantly. I understand the way you explained your GAAP, non-GAAP stuff, right. And I guess, partly I would guess that was just because you had such fast revenue growth. And so, as I look out to -- the quarterly guide here, it seems like that percentage should come back up again. And then, would that kick back up even a little bit more Q1 as you have that sort of revenue weakness there, but maybe, right now, to get -- as we get into '08, so following up a little bit on the earlier question.

Yes, that is correct. I mean Q3, we -- I mean our non-GAAP operating income was 29%. So, it was almost at our model of 30%. Obviously Q4, expenses will creep up a little bit as they always do and revenue will flatten out and go down slightly. So, yes, the margins would drop a little bit. In Q1, they drop even further and then they go back up. So, you kind of have to average amount for the year. But then -- our operating expenses don't fluctuate a lot, so when you have a big quarter, the only thing that fluctuated this quarter was the variable expenses for rep commission and sales commissions, of course. And things like that will go up but in general, you grow your business 30% a quarter, you don't increase your OpEx that much and establish a chip company. So, that is what you will see and the operating margins will move with the sales movement.

Okay, great, thank you.

(OPERATOR INSTRUCTIONS).

And your next question comes from the line of Sang Peruri with Seligman. Please proceed.

Hey guys, great quarter. Just had a couple questions. First thing, on the CCFL side, did you guys gain any share this quarter or the benefits of that is all really next year?

The benefit, we wish that we will have a benefit from the litigations in next year.

Yes.

Okay. Just trying to --

This year, we don't know, I don't think so. And our royal customers, just -- they have volume ramp up and we -- our unit goal is to grow with them.

So, it is just market trend basically here. So, if you gain the share of all the litigation, that's all next year, that benefit still has to come?

I don't think so. I don't think that they can design anything that quick.

Yes, it takes 9 to 12 months. I think, everyone else -- many people have used MPS in the past, so we might have a faster design cycle than normal, but even that is a 9 to 12 months, and no one is going to stop their notebook production line. This -- to put it there, they're going to wait till the next models come out next spring, so that -- that's really something --

But it could happen.

And you are saying next year is too quick or you are saying this year is too quick?

This year, I mean that's --

This year is too quick. Logically, that would be too quick, although it can happen.

Okay.

Typically, they are not going to stop their production line to replace it, unless there's some major reason, but they would look at you for their next set of notebook models, which they typically release new lines in the spring or the next set of notebook models that come out, that is what we are competing for.

Okay, so hopefully that helps next year.

Yes.

Now, how big is the Avnet relationship for you guys and what's the kind of potential, if we look at couple of years out, kind of what U.S. distribution could be for you guys?

Well, the U.S. analog business market is still very, very large. And so, we -- we don't separate a reporting on the Avnet revenue now and, but the --

I mean, is it 10% of revs yet or is it even much smaller?

No, it is not 10% now. If it's 10%, probably we won't report it. And it is a very lucrative market when -- we have a very high hope in it.

Now, if we look longer term, is that something that could be 10%, 20% of revs a couple of years out or that's -- it's not - it's just more incremental?

It is difficult to -- okay, Avnet business is the -- a slow, steady growth. And we don't expect to have a 20% or more than 20% in the next couple of years.

Yes, that would be to 10% to 20%. The next two years will be too high, it will be less than that.

I see, I see. And can you talk about just some of the new products that you guys are introducing, I mean, before you used to talk mostly about MiniMonsters, can you go through the MiniMonsters, the LDOs, the battery chargers, just in terms of kind of the TAM that you are addressing or how much TAM growth you get in '08 and '09 and --?

We don't have -- we don't have a clear number, but we know expanded our TAM just greatly, our TAM greatly and we don't have those products. And there is a lot of units out there, a lot of pocket that we can getting. And so, those are the products that we are just focused on. The key is we are focused on, broadened our product line. And same customers, same design engineers, same system design engineers that we talk to, they can use not only one product, they can use a whole range of a product from MPS.

I mean, if this --

[Deficiencies] of our sales will increase as we grow.

Can you maybe do a high level for some of these products? I mean, are these kind of the different products you are talking about -- are these kind of $50 million to $100 million SAMS or $100 million to $500 million or, how should we be thinking about these?

All these are new products including MiniMonsters, okay, close to $1 billion.

Okay, each of them or all combined?

Combined.

Combined.

Okay, okay. And what is your current SAM right now you think, before all these new products?

Very low.

No, I mean but is your SAM going from $500 million to $1 billion or is it going from $200 million to $1 billion?

I mean, for example, high current high voltage, until we had the MiniMonsters family, we had zero, we didn't have any product that serves that. And same thing with the battery charge and LDOs, we didn't have the products. So, Michael was talking about the TAM or SAM is low, we don't sell a lot of them, yes.

Okay, okay. So, you are saying it is kind of like $1 billion of additional market and you are hoping that to get whatever portion of that, basically.

Yes.

Yes.

Okay. And how much do you need to forward spend there? I mean, if you are running at a $100 million a year or slightly more than that, and you have an opportunity that's massively greater, how -- do you need to forward spend a lot or you can target a lot of that with your existing and fast investment?

Sang, our current R&D is that spending. The products we are making now, that are introduced now, they produce a revenue in 18 to 24 months from now. So, it is always the case in general, where most analog companies, what you spend on R&D now is your two years forward products. So, we are spending that money now. That's why our R&D has grown significantly this year. And as we talk a lot about every quarter, all the new product introductions and all the new product costs and new product maps and all those types of things, we have talked about the increases in our R&D this year, which have been substantial but that is what we are doing, we're putting out these products. We will -- should see the revenues going forward.

But the key is that we settle down and we certainly -- we get it [wing] of our customers, our competitors, it is very difficult to dig us out and we expand from there.

Now, in terms of the DC/DC market and all the new products that are coming, I mean, should we expect similar sort of growths in '08 or does it accelerate or is it really '09 where things start to really kick in to high gear again, with all the new stuff lining up?

Well, I will give you my answer first. As the CFO, I am a more conservative guy. I think 20% to 25% is really good in the analog markets, so I'd be happy with that. I don't know about Michael, though.

Well, last time, we grew 100% and the year after, we grew 6% and the Wall Street didn't give us any credit. And you guys will all -- can look at us, to grow 20%, that is why we target at 20%.

Okay. So, you are hoping to do more, but you don't want to promise anything.

That is right.

Okay, thank you guys.

And your next question comes from the line of Krishna Shankar with JMP Securities. Please proceed.

Yes, congratulations on a good quarter, also. And I had a couple of questions. One, as we look at your exposure to notebook, is the CCL part of your revenues pretty much a proxy for notebook or are there products in the other areas, which we should look at for your notebook exposure?

The CCFL does include, we do have some half-bridge and full-bridge parts and some go into monitors and TVs, and but the vast majority goes into notebooks. They also go into similar sized screens and into other products with screens of that size, a notebook-type screen that are lit by CCFL single lamps. So, yes, there is generally -- it is a relatively close proxy, probably 80% to 85% of the revenue goes into notebooks.

Okay. And as you ramp up some of the new products in both MiniMonster and DC/DC, as you look at '08 or maybe '09, can you talk about exposure to other more stable markets which don't have as much seasonality such as industrial, medical, telecom and areas like that?

Well, Michael's going to answer, but I got one little tidbit that I just got from the sales guy, it kind of gives you the idea -- how long it takes to get in the industrial market. Just last week you remember, we are in 2007, last week, our sales guys were very excitedly -- there is the major industrial guy in the U.S., we won't give the name, equipment maker, that has invited MPS to bid on the next generation product, which is a 2009 contract which will start taking effect in 2011 and runs through 2016, okay.

So, that's the U.S. industrial market. It takes a long time to get in, but once you're in, you're in it for a long time. So, that's -- the U.S. we are talking here, excited about getting over a contract that's not going to kick in for three years, but that's industrial design will turn over every five to seven years in the U.S., so that's the problem with the growth. It's slow and steady, but it takes years to have fast growth. And MPS has really been built on the faster growing consumer business out in Asia. So, I pass it over to Michael to give any comment.

Well, I think that -- I want to really clarify this. The perception is that growth is not only from the MiniMonsters. We -- all the other products, the older products this year grow really well. As -- in the beginning of the last year, I said that we want to focus on the different market segments, and we did. And as a result, this year, we grow as we expected.

Okay, great. And again, can you -- can you reiterate your longer term model again for gross and operating margins?

Well, the operating margin, our target is to have operating margins of non-GAAP without stock comp of 30% to 32%, that's our target. We came -- we are pretty much almost there this quarter, so that's our goal, is to keep growing revenues so we can reach that operating model, operating margins.

Okay. And my final question is are you seeing -- can you talk about the competitive environment whether it's from New York's analog - fab-less analog companies or other Asian analog companies, can you talk about the competitive environment in general?

Well, we compete, more people, analog companies, and they're from U.S. And the analog business is still dominated by the U.S. companies and we compete all, almost all the U.S. companies. Asia companies are still small, but they are growing.

Okay, thank you.

Okay.

(OPERATOR INSTRUCTIONS).

And there are no further questions in queue at this time. I would now like to turn the call over to Mr. Neely for closing remarks.

Well, thank you, everyone, for participating in our third quarter conference call. We look forward to a full set of investor meetings in November, which have been announced on our Web site and we look forward to talking to you for the fourth quarter results next year. Thank you.

Thank you for your attendance in today's presentation. This concludes the conference. You may now disconnect. Good day.

Thank you.