芯源系統 (MPWR) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Monolithic Power Systems Incorporated Earnings Conference Call. My name is Rob and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question and answrr session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

At this time, I'd now like to turn the presentation over to your host for today's call, Mr. Rick Neely, Chief Financial Officer. You may proceed.

Good afternoon, and welcome to the fourth quarter and fiscal year 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 outlook and financial outlook for the first quarter of 2008; projected first quarter net revenues and gross margins; our expectations for first 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 relative to competitive position; expected growth or declines in our product lines in geographic markets; inventory levels and projected changes in inventory levels; 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 third quarter Form 10-Q, filed on November 1st, 2007, which is accessible through our website, www.monolithicpower.com and our 2007 Form 10-K, to be filed on or before March 17, 2008. 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 the related tax effects. We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the first quarter of 2008, which excludes our expected charges related to stock-base 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 fourth quarter and fiscal year 2007 business highlights. Following this update, I will discuss our financial results. We will conclude by discussing our expectations for the first fiscal quarter of 2008. We will then open up the call to your questions.

Let's start with the business highlights. MPS had an excellent year in 2007, as we grew our annual revenue by 28% over 2006, setting a new yearly revenue record of $134 million. Our fourth quarter revenues were $38.5 million, an increase of 46% from the fourth quarter of 2006. Non-GAAP earnings for the year were $0.74 per share, up 83% from 2006 levels.

In the product arena, MPS continued its robust schedule of new product introductions that have characterized all of 2007. We were very pleased to see increasing shipments of production quantities of our new high-current, high-voltage MiniMonster product family. In addition, our new battery charger family ramped up production in the fourth quarter.

We see positive design activity for these two product families in multiple key target markets, such as large, flat-panel TVs, telecommunication equipment, set-top boxes, notebooks and handheld devices.

In addition, our regional growth outside of our traditional strength in Greater China was outstanding. We continued to grow our presence at larger end customers, as our sales to our top 25 end customers, all of which are over $1 million in annual revenue, grew 48% year over year. The range and depth of products we have introduced over the past five quarters is remarkable and we believe we have prepared the Company for excellent growth prospects in the next few years.

In the manufacturing area, MPS continued our track record of wringing cost efficiencies out of production as we maintained our gross margin in the upper end of our target model for the fourth quarter, recording a gross margin of 63.9%. Our net inventory increased in the fourth quarter, as we added to our internal stocks to cover the addition of new suppliers in both the fab and assembly segments. We continued to grow our cash balances as we increased cash, short-term restricted cash and cash equivalents by $16.4 million in the quarter to $118.2 million as of December 31, 2007?

On the expense side, our non-GAAP operating expenses were $13.7 million, which were down $267,000 from the third quarter of 2007, as our fourth quarter litigation spending declined quarter over quarter due to reduced activities in our remaining litigation.

Finally, today we announced a stock repurchase plan of up to $25 million that will provide a good outlet for the cash MPS is generating. Now let's look at the financials in more detail. Starting with the profit and loss statement, on the revenue line, fourth quarter 2000 net revenues of $38.5 million grew 46% from the fourth quarter of 2006 and were in the range of our guidance going into the quarter.

This compares to net revenues of $40.2 million in the prior quarter, a decrease of 4% sequentially, in line with prior years' seasonality. For the fiscal year, revenue was $134 million, up 28% from 2006 revenue of $105 million. Let me break down our fourth quarter and 2000 revenue by product lines.

DC-to-DC product sales were $25.3 million, up 46% from the $17.3 million in the year-ago quarter and about flat from the third quarter of 2007. Year over year, our DC-to-DC products grew from $71.7 million in 2006 to $86.7 million in 2007, an increase of 21%.

The majority of this growth came in the flat-panel TV, communication, GPS and digital picture frames markets, to name a few. We also started to see meaningful sales volumes in our new MiniMonster and battery charger products.

LCD backlight revenues for the fourth quarter were $9.7 million, an increase of 32% from the same quarter a year ago and down 11% from the prior quarter. This met our expectations for backlighting in the fourth quarter, as we typically see slower notebook computer activity towards the end of the calendar year.

For the year, total CCFL revenues were $35.7 million, an increase of 22% over 2006. Audio revenues did very well, coming in at $3.5 million, up 102% from the $1.7 million recorded in the year-ago quarter, and down slightly, by 4%, from the third quarter of 2007.

Fiscal 2007 revenue totaled $11.6 million for our audio products, an increase of $7.5 million, or 183%, from 2006. This performance reflects our success with several major consumer product customers in the LCD TV space.

Let's move down to the gross margin line. Our fourth quarter gross margin was 63.9%, compared to 63.9% in the same quarter of 2006 and 63.5% in the prior quarter. Despite strong price pressure in some of our older product offerings, MPS was able to maintain stable gross margins in 2007, averaging 63.6% gross margin for the entire year.

This was largely due to new product introductions and excellent cost controls, efficiencies in managing our production and a good product mix from different regions of the globe. Let's look at our reported expenses and operating margins.

On a GAAP operating basis, our operating expenses were $16.7 million in the fourth quarter. This includes $15.6 million in R&D and SG&A expense, which includes $3 million for stock compensation expense and litigation expense of $1 million.

Compared with the fourth quarter of 2006, GAAP operating expenses increased by $1.1 million. This amount comprises an increase in stock comp expense of $361,000, a decrease in litigation costs of $868,000, an increase in R&D spending of $1.5 million, an increase in SG&A spending of $1.2 million, a decrease in one-time charges of $1.2 million, as we recorded a lease write-down in the prior year. And, finally, our GAAP operating margin was 21% in the fourth quarter, which is up significantly from 5% in the prior year.

On a non-GAAP basis, our operating expenses, which exclude stock compensation and one-time write-downs -- our non-GAAP operating expenses for the fourth quarter of 2007 were $13.7 million, compared to $11.8 million in the fourth quarter of 2006 and $13.9 million in the third quarter of 2007.

The $267,000 expense decrease from the prior quarter of 2007 was primarily due to litigation spending, which decreased by $410,000 from the third quarter of 2007. Non-GAAP R&D cost had a slight increase of $84,000, as we continued an aggressive schedule of new product introductions. Non-GAAP sales, general, and administrative costs were relatively flat to the prior quarter. Our non-GAAP operating margin was 28%, only down one percentage point from our record revenue quarter in Q3 '07 and up nine percentage points from the 19% recorded a year ago.

Our Q4 and 2007 GAAP net income, our fourth quarter net income was $7.3 million, or a profit of $0.20 per fully diluted share. This compares to a net loss of $1.6 million for the fourth quarter of 2006, or $0.05 per basic share.

In the third quarter of 2007, MPS recorded a net profit of $8.3 million, or $0.23 per fully diluted share. For the fiscal year, MPS earned $9.3 million, or $0.26 per fully diluted share, compared to a net loss of $2.9 million, or $0.10 per basic share, in 2006. Net margin was 19% for the fourth quarter and 7% for the year.

Q4 and 2007 non-GAAP net income on a non-GAAP net basis, for the fourth quarter of 2007, we had net income of $9.2 million, or $0.26 per fully diluted share, which excludes stock comp expense of $3.2 million and the related tax effect of $1.3 million and uses an estimated tax rate of 25%.

In comparison, for the fourth quarter of 2006, the non-GAAP net income was $4.2 million, or $0.13 per share, which excluded stock compensation expense of $2.8 million and adjusted tax amount of $1.8 million and a one-time lease write-off of $1.3 million. For the fiscal year, on a non-GAAP basis, MPS earned $25.9 million, or $0.74 per share. This compares to a non-GAAP net income of $13.4 million, or $0.40 per share, in 2006. Non-GAAP net margin was 24% for the quarter and 19% for the year.

Let's look at some of the major changes to the balance sheet. Cash, cash equivalents, current restricted cash and investments were $118 million at the end of the fourth quarter and fiscal year, up from $102 million at the end of the prior quarter of 2007 and up $40 million from the $78 million recorded a year ago. The increase in cash from September 30, 2007, came from operating cash flow of about $12 million, stock option exercises and ESPP purchases of $5 million and an increase in working capital of $1 million. This was offset by capital expenditures of approximately $2 million, resulting in quarter-over-quarter cash growth of $16 million.

Accounts receivable ended the fourth quarter at $8.2 million, compared with $12.8 million at the end of Q3 '07 and down from the $9.2 million at the end of the fourth quarter 2006. As you can tell, collections were good for the quarter, as our days sales outstanding finished at 19 days for Q4 2007, compared with 29 days at the end of the third quarter of 2007 and 32 days at the end of 2006.

Our inventories at the end of the quarter were $17.5 million, or about 114 days of inventory. This compares with $15.8 million, or 98 days of inventory, at the end of the prior quarter. We grew our internal inventory levels in the fourth quarter for three reasons.

First, we are adding a new wafer foundry and assembler to our supply chain and we need additional work in process to cover the qualification cycles. Secondly, we built ahead for the two-week Chinese New Year shutdown of our factory in Chengdu.

Finally, we added inventory in Q4 to take advantage of available capacity. I would now like to turn to a discussion of general business conditions. We saw normal revenue and booking activity in the fourth quarter for MPS. Our new product families continued to penetrate new designs and we saw good growth in the flat-panel TV and consumer accessories segment.

Geographically, in the fourth quarter of 2007, 60% of MPS sales were shipped to Taiwan and China and 40% to other regions. This is a big turnaround from the prior years. We saw the largest growth in Japan, Korea and Southeast Asia from the third quarter. For the fiscal year, MPS made significant progress in its strategy to expand our sales channels beyond Greater China.

The total 2007 revenue from China and Taiwan decreased six percentage points, from 70% in 2006 to 64% in 2007. Japan grew by 78% year over year and Europe outpaced the company average growth rate as well, with 30% year-over-year improvement. Finally, U.S. demand creation has increased significantly and we are very pleased with our progress.

For the CCFL product line, sales for the fourth quarter of 2007 were in the range of our expectations, as MPS typically sees some seasonal volume decline in the major end market for our integrated inverter, which is the notebook computer market.

For the fiscal year, putting the longstanding litigation issues behind us in the CCFL arena allowed us to participate in the strong annual growth of the notebook segment of the computer 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 satisfied with the tremendous volume of new product introductions we achieved in 2007. We introduced several new product families beyond the well-publicized MiniMonster family, such as our high-voltage DC-to-DC offering and our next-generation battery charger family. We see all these consolidated solutions as very high-potential products for MPS in 2008 and 2009.

Now, turning to our outlook for the first quarter of 2008, our revenue guidance is in the range of $33 million to $35 million, reflecting normal seasonal patterns for our products in the first quarter of the year. Gross margin is expected to be in the mid to upper end of our target range of 60% to 63%. We expect stock-based compensation expense in the range of $3 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 estimate mentioned above. Finally, we expect litigation expense in the range of $1 million to $1.4 million.

In conclusion, we are pleased to report that MPS grew revenues 28% for the fiscal year and grew fourth quarter revenues 46% above prior-year figures. All three product lines grew well in the year, as new applications are beginning to kick in for the existing products and the product introductions of the past 18 months are starting to generate noticeable revenues.

We continue to generate significant cash, finishing the year close to $120 million in cash and cash equivalents. For the beginning of 2008, we see normal revenue patterns for our business in the first quarter. We feel we are very well positioned for this year, and there are many new products, including the MiniMonster, battery charger, high-performance LDOs, high-voltage products that are based on our BCD Plus Process technology will address new sockets and customers we have not been able to penetrate in the casts.

MPS will continue to offer faster, more integrated and more cost-effective solutions than the competition and grow our revenue substantially in the future. Now, we would like to open the microphone and take your questions. Operator, you can open the question lines.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Craig Berger of FBR.

Hey, guys, thanks for taking my question. Good job on the clean print. I had a question first on inventories. I know you cited a few reasons why they're up. First of all, who's the new foundry you're ramping?

Well, Craig, at this time, the production volume is not of a material effect. Now, it's very small. So we don't want to release the new foundry name now.

Okay. Rick, you guys have been as low as 34 days of inventory back in June of '04 and as high as 116 days right now. Is this the top for the inventory, or might it go higher?

Yes, as, Craig, you point out, MPS has changed its inventory strategy for several reasons. First, we're a much larger company than we were several years ago, and we're now serving much larger customers. These much larger customers expect us to have products on hand, so we actually ran well below the industry average in the past.

I recently saw some data that showed the industry average for analog companies is in the 95 days range or so, and we were always below that, but the problem with that is, as you start serving larger customers is they have much bigger volumes and higher expectations. So we feel it's more prudent to operate in the 95 to 100-day range, and that's where we've changed in the last couple of quarters.

Can I ask one on Avnet? I know about 18 months ago you guys worked to start ramping them up. What's the contribution there? And then also, are you able to quantify any contribution from MiniMonster here in the fourth quarter?

On Avnet, we're pleased with our progress. Again, we signed them up in early '06 and if you look at the 18-month kind of cycle that you do, 18 to 24 months, they're really on track for what we're looking for as adding sales in the U.S. You heard us talk about a positive outlook for the U.S. in '08 and Avnet's certainly part of that outlook.

On the MiniMonsters, we're very happy with the progress. We have some very high-performance products out there that we're making sure we're selling for good prices. So what we will say on MiniMonsters is in '07, which was basically one year after introduction, we're shipping these products in the hundreds of thousands per quarter and in '08 we'll be shipping it in the millions per quarter, and that's about all we'll say on that.

Thanks, guys.

Craig, in the first quarter of '08, the total MiniMonster number is the entire 2007 numbers.

Yes, as Michael said, Q1 '08 will be more than all of '07.

What are the first applications you're shipping into?

We have various applications and in the panel-top PCs, telecoms, telecom equipment and flat-panel TVs, among others. Again, a MiniMonster product is very similar to other MPS DC products and we have a variety of sockets.

Are you guys seeing any of the macro weakness out there that everyone else is seeing or citing or worried about?

Well, as Rick said earlier, we don't see any difference from our prior years, and the first quarters are slightly down from the fourth quarters and although MPS is still a small company and our visibility is limited.

Yes, as we said on the call, we see -- in fact, Q4 unfolded as we thought, Q1 looks normal to us for the way we run, so we see things normal. As Michael said, we're not macroeconomic forecasters, so we just really focus on the new products we're introducing, the regional channel growth. Those are the things we've worked on we're very confident about how those are outlooking for the year. The macroeconomic is beyond us.

Great, thank you.

And your next question comes from the line Rick Schafer from Oppenheimer.

Yes, hi, guys. Just a quick follow-up on that notebook question, or I'll make it a specific notebook question, anyway. It doesn't seem like you are seeing some of maybe the incremental weakness that some of your competitors have talked about recently in notebook. Is that a function of you guys gaining share already? Are we seeing that, or is it maybe more of a function of who you have exposure to? I mean, are there any particular OEMs or anybody that you're sort of overweight or underweight right now in notebook?

Certainly, Rick. Certainly we're gaining share, and you look at '06 numbers compared to '07 numbers, we grow faster than the market. Of course, we're gaining shares. So in terms of '08, the first quarter we see a normal seasonality change, and the first quarters are slightly down from the fourth quarter.

Okay, and could you comment on sort of who you have exposure to in notebook CCFL? Are there any big names that are missing or any big names that you're overweight?

I think that we are all -- either we have a design win or we ship to all the notebook makers, OEM or ODMs.

Okay, and then just a quick question on margins. I heard Rick say kind of toward the upper end of the range again. You guys have been beating that target I feel like for a couple of years now. I mean, is there any plans to raise that target, or what do you guys expect to see, or what are you seeing out there that makes you believe that the margins are actually going to come down to that target range one day?

Rick, actually, I may have stumbled in my call. I said mid to upper end, which is the guidance, which, as you said, we've been lucky and we're getting closer to the upper end. In terms of changing that model, the answer to that has consistently been we don't think so, because we use our range of 60% to 63% to target how we plan to keep the top line growing at the rate we want it to. So our goal isn't margin expansion. But there are things that could expand margins and there are things that could pull them down.

The things that pull them down are always the price competition is tough, particularly in the consumer segments. On the other hand, our regional growth, particularly in areas of Japan, U.S. and Europe puts us into high-performance markets where the ASP pressure is less. So we have a lot of offsetting pluses and minuses. Plus, new products tend to improve our margins.

So we don't really -- we just keep the range where it is and we don't aim the Company to grow margins. We aim the Company to stay in that range and grow the top line.

Okay, and just one last question. Nobody's asked about it, including me, in a while. Any update on the Chip Advanced lawsuit you guys filed I guess a couple of months ago?

That'd be CAT?

Yes.

Yes, it's in the fairly early stages. There's really no update beyond what was published before.

Is there anything we should throw in -- like, if we look forward for '08, should we be throwing anything in the litigation line for the model?

This time, we are on the plaintiff side, so we can control the costs a lot more.

Right, okay, thanks, guys. Nice quarter.

Okay, thank you.

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

Thanks very much. Rick, I think you mentioned that you had a remarkable pace of introductions of new products in 2007. Can you just put that in context for us by maybe comparing that to the number of products introduced in prior years, whether it's on a year-over-year percent growth perspective or maybe you can kind of tell us how that compares to your earlier, previous records of product introduction.

Simona, that's a good question, and Michael is the product guru, so I'll turn it over to him.

Hi, Simona.

Hi, Michael.

As you recall, last year, we talked about our MiniMonster products and maybe I over-talked about it. That's the only thing we talked about in early last year, and I also said I wasn't happy for the product introduction early last year on the conference call. And this year I'm happier.

I'm very confident that all the products that we released will significantly increase the revenues. The products that we introduced last year and did well is the high voltage DC-to-DC, which is in just automotive market and telecom markets, battery chargers. And these are for a variety of consumer products, either -- mainly handheld products. And those products are doing really well in the fields and we will expect a much higher growth in this year, 2008.

Just to add a little bit more, Simona, when I said remarkable, it's not the quantity, because in prior years we had a higher quantity of products, but they were little niche products that didn't really address new markets. What was remarkable for us, in our view, was we actually introduced products that could significantly increase our available market this year.

In '07, we introduced products that in '08 and '09 will put us into markets we've never been in. Sockets, we've never been in. So that's what's remarkable. It's not another product similar to the old product. These are high current, high voltage or chips like the battery charger for handheld devices we've never been in. So that's really what Michael's excited about. It's brand-new territory, not just incremental new products.

And have you guys been able to quantify the increase in your served addressable market for these products?

We've talked about three markets, for example -- the notebook market, notebook power is something we're pushing into with our high-current, higher-amp products, and those, we have zero dollars today and you can take the number of notebooks sold times how many dollars per notebook and that's a significant, multi-hundred-million-dollar market. You can take handheld devices. That battery charger market is a very large market.

And you take a third one which we've talked about, LCD TVs, where we're just getting a lot of penetration with our two and three-amp devices and there's a lot of sockets inside a TV that are much more high current than that. So those are just three markets that are very large that we're doing well in already, but we're coming in with these products. So you can put in multiple hundreds of millions of dollars of increased market and I'm not counting markets that our products would go into of a smaller side.

Well, MPS, I might as well add, MPS's existing products address the market size somewhere like $6 billion to $8 billion, very, very big. And so all the new focus -- the new focus for MPS is in the notebook and for telecom equipment and the servers and TVs. So those are the products that we released or we plan to release in the next couple quarters.

Okay, that's very helpful. And then just one more near-term question. I saw your DSOs were down a lot, and I know, Rick, you've said that you've had better collections. But can we also read something about the linearity of your Q4 form that? In other words, did things kind of slow down towards the end, as you'd expect, or more than you'd expect?

And also, related to that, we've heard from a number of your peers that coming out of Q4 there has been excess inventory in the supply chain, in particular in retail and that's impacted a lot of other companies' guidance and they've seen kind of a slowdown so far in January. How are your orders tracking so far in January? It seems like you're actually relatively faring a little bit better here than a lot of your peers?

Okay, I think I saw two questions there. The first one was on collections, the fourth quarter typically -- October is sort of a carryover from the hot Q3, so there's more shipments in October and then they trend down. That's usually how the quarter works. That's how our quarter works, so we collect more of the October shipments. So that's why that happened. It's more the way the quarter usually plays out. It gets quiet by December, January. We anticipated that in our guidance. That's what we thought. That's usually how it works. That's how Q1 works.

After Chinese New Year, things, we'll see how they pick up. But relative to the other questions on visibility in the channel, as you know, we know our inventories, we know our disti inventories, so we watch those. Our disti inventories are targeted at around 40 to 45 days. They came in at the lower end of that range in Q4, so we're happy with the disti inventories. We're happy with our inventories, so we don't see any issues there.

Okay, thanks a lot.

And your next question comes from the line of Tore Svanberg of Thomas Weisel Partners.

Yes, hi, this is Evan Wang, calling in for Tore. Have you seen the new SPIC single-power IC product from O2Micro that integrates DC-DC and inverter for the LCD TV market? I was wondering if you could let us knew what your opinion is on that product and talk about whether MPS has something similar.

I don't know what you're talking about.

Yes, we typically don't do product-to-product comparisons on a financial conference call. So if you wanted to talk to us offline, we'd be happy to answer your question.

Okay, sure. Let me move to a different area, then. I was wondering what kind of bookings visibilities you have going into the March quarter?

Well, we're an analog company that has a lot of turns. We're very typical of analog companies. We don't give out bookings because we do a high degree of turns. What we can say is that our bookings for the quarter were normal. We booked the amount we expected and we reflect that in our guidance. Our guidance reflects what we think we're going to do for the quarter and it includes all the bookings and so forth. So our bookings rate was normal for the Q1 and it's all included in our guidance.

Okay, normal for Q1, that's good. About your inventory levels, how are they at your distribution customers?

As I said in the prior question, we have a target range. We would like our distributors to carry between 30 and 45 days. We looked at the distributor inventories, they're on the lower end of that range right now, so we're okay. Our distributor channel is fine, from our perspective.

Okay, my last question here, regarding your inverter sales, it was down 11% in Q4 and it seems to be down more than market. Could you elaborate on that?

We don't know the market information. We see this as our normal seasonality.

Okay, great, that's fine. Thank you very much.

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

Great, thank you. With regards to your operating expense guidance, would there be anything unusual with regards to more R&D versus SG&A, et cetera, in that, or would it be pretty much still on a percentage basis in Q1?

Well, Steve, you've really got to look at it on a dollar basis. Revenue always is seasonally down in Q1, but the percents change. But you look at what we did in Q4 and we typically flatten out in Q1-ish, so that was included in our guidance of $12.5 million to $13.5 million OpEx, which is actually fairly consistent with the prior quarter.

Okay, but it's not like all of a sudden you're going to start ramping up R&D or something like that?

No, we manage our expenses correctly.

Okay, and just in terms of your DC-to-DC revenue, I was hoping you could talk a little bit about what that looks like -- in all companies, they have products that last quite a while. You can see growth often for many years. I was wondering if you could talk about the nature of what your product portfolio looks like. Now you have a certain set of products. Do you expect those to continue to grow or see the growth slow in new product introductions like MiniMonsters and the battery charger stuff to carry the bulk of the growth going forward?

Yes, the analog model, typically, as you said, the bulk of your revenue for most analog companies will come from products introduced three to four to five years ago, and that's true for us as anybody else. But on the DC side, we have focused most of our product introductions in the last three years have been all DC-to-DC oriented, because that's where we see a lot of areas where we can take advantage of our BCD process technology, where in other markets w have less ability to do that.

But there's a lot of product areas Michael's found where our BCD process technology really works well, particularly for integration and efficiency and cost savings. So we're using that to grow that line. And the biggest thing that's interesting to us is, as we've said, we only introduced the MiniMonster line a year ago and it usually takes two to three years to start to see the whites of their eyes, so to speak, in terms of large markets.

We're just beginning to see that grow and there's actually probably about 25% of those products are just being introduced now, Michael. We got a lot out and we still have more to get out.

We have a lot more products that are highly integrated, very, extremely, ultra-high-current products, and that is totally integrated, one of a kind and nobody else can make that type of 25-amp or 30-amp integrated DC-to-DC. MPS is the only company that can do that, and those are products and still in the pipeline and, as I said last year, toward the beginning, we plan to introduce the eight amp, 10 amp, 15 amp and 20 amps. And we did that in the last year. Those revenues are still very little and we expect a lot more from this year.

Okay, and last question was just on the audio products. Obviously they've been experiencing a very high growth rate here, sort of off a small set of numbers. What's the normalized growth rate for that business, do you think, or at least what's it going to look like in 2008?

Yes, Steve, as you mentioned, we have a very good growth rate. We basically got some good penetration. We expect that to stabilize at its current levels. We wouldn't expect significant growth this year. It'll still grow some this year, but not as much as the Company average because we've penetrated some big designs. But it's a good product line and we're happy with it.

We need a different product to grow the audio product line.

Okay, great. Thank you very much.

And your next question comes from the line of Vernon Essi of Needham & Company.

Thank you. Nice quarter. I pretty much burned through all these questions. One sort of thing I was wondering, if you could compare 2007 to 2008, what -- are you going to see any major differences in your channel sales, in other words, direct versus distributor? It looks like you're getting some pretty large customers. Is there going to be any difference or are you going to be using the same channels throughout 2008 that you're using right now?

Yes, Vern, as we said, I've talked about having 25 end customers over $1 million, growing 48% year over year. That's correct. We are getting into the bigger customers. These bigger customers buy bigger volumes. On the other hand, we're still going to use our distributor partners, particularly outside of Greater China, just because feet on the street, I guess to say.

We're hiring people but it takes a long time and the distributors are good partners, helping us, so I wouldn't expect to change that sales channel near term. I mean, it takes a long time to build your own direct force and we're working on it but we definitely use our distributors very well in these areas?

Okay, so just to be clear, there's no strategic initiative to beef up the direct salesforce?

No, no.

And then my other question, just on tax rate, should we still be looking for 25% going forward pretty much on a non-GAAP basis?

I would guide it this year as between 20% and 25% would be a good number to use this year.

Okay, all right, thank you very much.

And your next question comes from the line of Gus Richard of Piper Jaffray.

Hi, guys, thanks for taking my question. Just quickly, on the gross margin side, it looks like you go some benefit from a shift in regional channel. Could you talk about the impact of increasing your sales in Korea, Japan, Europe, et cetera and how that's impacting your margins?

I can go through it some and then Michael will add in. The difference is Asia tends to be very consumer oriented, where price is king and performance is okay, but price is king. A lot of the traditional analog markets in industrial, medical, telecom, high-power servers, a lot of the areas -- high-quality TVs, areas of Japan, Korea, U.S., and Europe, the performance is key.

And MPS always has the highest performance -- very often has the highest-performance products, I think, very good performance products. So we can get the money in those markets because they'll pay for the value. In other markets, they don't care about performance as much, so the advantage for us as we expand our channels is we can go into higher-ASP markets.

Okay.

In the U.S., Europe and Japan, to some extent the Korean market, too, they more care about the high performance of a product, integrations and efficiency. So those markets we can get a higher ASP.

Got it. And so it sounds like those markets are the classic high-performance analog markets that tend to be slower volume certainly than consumer. How quickly can you penetrate those markets? How quickly can you grow that channel relative to your -- clearly you did a nice job in '07. Can you continue to drive that channel?

Yes. As you said, on those markets in particular, European and the North American market, they are somewhat slower, but you look at the overall picture, U.S., Europe and Japan has over 50% of analog market. We barely have any scratch, so we have a lot more room but in slower, and we are determined to penetrate those markets. And we will have very good years to come in the future.

Yes, it takes time, but we've taken it from -- if you go back three or four years, I think we had 90% of our revenue in Greater China. We're down into the 60s for the quarter. So, it takes time, but we're getting there.

Okay, got it --

I [cornered] the market. Indeed, I have a long life in designing and these are annuity products, and since MPS products, like particularly some of our DC-to-DCs have a six to 10 years life [expects] and expansions, so those are products well suited for those annuity markets.

So when I think about gross margins going forward, to wrap it up, there will be ongoing pricing pressure in the Greater China market, in the more consumer-oriented, but that'll be offset by a richer mix of the industrial com markets in those other regions? Is that the way to think about it, and the push and the pull will kind of keep your margins in and around your target range?

Yes, and there's one more component. Even in the Greater China, the newer products always have higher gross margins. So the two components tend to contribute -- or actually three, other than the production cost -- contributes to stable gross margin. One is the regional growth in North America and Europe. People appreciate a higher-performance product. The second thing is the rate of product introductions.

Got it.

I agree, just to put that in. Michael's right. I agree with what he said.

Got it, and then the third factor, regional new product, and you said there were three factors?

Well, three factors, of course, the manufactured cost.

Okay, got it.

You always have to add your yields and your costs. We're good at that.

Got it, all right. And then just jumping onto one other quick topic. You're ramping up a new foundry. Can you sort of give a little bit of color as to why? Are your larger customers asking for a second foundry source? Can you get better pricing, want to diversify revenue, better process? Can you just walk me through the thinking of bringing on a second source at this point?

The primary reason, we're well over -- $134 million this year and we're going to be growing the Company and we start engaging with these larger customers, a single source of supply is questioned sometimes. We like our current suppliers. It's nothing against them at all. It's simply if you diversify it helps you with your capacity and serving larger customers.

I'll give you more detail. As MPS grows, our customers require us to have a dual foundry.

Okay, fair enough. And so you're going to be running the exact same process or processes in the two foundries?

Correct.

And the build in inventory is not necessarily for the transition, because you're not really going to do -- you're going to still have the existing supplier. The build of inventory was just more to make your customers comfortable? Or there was some commentary about that?

You have to have a qualification. When you switch fabs, the customer is using your part and you give them the exact same part but it's built in a different fab, major customers require that to be requalified. So you're basically building it twice. You've got to qualify at the same time.

So some of the new fab's production is already in your inventory.

Yes. You kind of double up, because you've got to build some for qualification cycles, you've got to build some production.

Got it.

And some customers won't take the new fab with this product. They'll have to wait until the other products. You add more work in process. That's always what happens.

Okay, and the qualification cycle in terms of impact on the R&D line, what does that lump look like? Have you already started to do the quals and that's already being --

It's already in the numbers. Last two quarters, some of the R&D increase has been because of that.

Okay, so the June to September quarter is a pretty hefty increase in R&D.

If you look at, some of that is included in these, yes.

Okay, and so one would expect that to start to trail off as these quals get completed?

We have more to go. We also have a lot of new products that we're introducing. I'm not sure it's going to take --

When you see the numbers, the increase from Q3 and Q4 last quarter is it's only partially due to the fab qualifications, but mostly it's due from our new product development.

Okay, okay, fair enough. I've asked enough questions. Thank you for your time.

And the next question comes from the line of Srini Pajjuri from Merrill Lynch.

Hi, this is Ryan. Thanks for taking my call. I actually had a follow-up to that last question on the OpEx. As we enter a bit of a macroeconomic slowdown coming up in this year, how should we think about OpEx going forward? Would R&D continue to grow and what should we be thinking with SG&A relative to revenue?

Well, as I said on the call, Ryan, we're not trying to be macroeconomic forecasters. So the way we run our business, if you notice, we're very good at managing operating expenses to meet the market demands, so you could expect to see that on the SG&A lines.

In R&D, we're typically limited by availability of good people, so we tend to hire those people and build our R&D teams as we can and we don't look to that near term. So on the other hand we're operating at our model right now, around 16%, 17% of sales. That's what we want to do, so we're happy with our R&D numbers right now and our goal is to keep adding quality people.

Okay, and then I had one just kind of higher-level question on the backlight industry. Have you guys stared to see any more of that transition from CCFL backlighting to LED. I guess the first market that's going to hit mostly now that we're past handsets is in notebooks. Is that touching on anything? And how would that impact your business long term?

Well, we do see the transition coming, but not as soon as -- not as quick as, at least, Wall Street expected. And MPS is well positioned in the LED backlight market, too. We have a product in the market and also we have a product in the pipeline.

Is the product in the market making meaningful revenue yet, or is that more of an '09?

Overall market is very, very small.

We tried to estimate it. It's less than 5%.

Okay.

And the biggest issue with the transition is simply cost. It's just much more expensive to put LEDs in the backlight than CCFL, and the majority growth of notebooks has been in the sub-$1,000 category, and therefore cost is a big problem. So we'll see the transition coming in the high performance. Everyone's probably seen the new Apple computer, the Air, that's an LED backlight, very thin, but I think it's rather expensive. So those are the types of transitions you'll see I think in those kind of designs.

Okay, thank you.

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

Thanks, guys. A lot of questions asked and answered already. Just a couple on my side. If we look at the $9.7 million in the CCFL and then look a couple of years ago, you guys I think peaked out at almost $13 million. How should we think about the upside potential that remains in that market for market share gains rather than just the gains because the notebook market expands as a whole.

Well, at this point, I think we believe, as Rick said earlier, we believe we can gain more market shares, but often compared a couple of years ago at the $13 million range and the markets are substantially smaller. So now we're only at $9 million or something, but we firmly believe that there's a lot more room that we can grow there.

You said the market is smaller now or the market was smaller then?

Oh, the market is bigger now. I mean, volumes are much higher.

Right, okay, I just wanted to make sure there wasn't any ASP change or anything. Okay, and then as we look at the three segments for the first quarter, anything that will be massively better or worse than the general guidance you gave on a percentage basis?

I mean, we expect all three product lines to go down about the same rate. I mean, that's our current view. There isn't any difference. It's more the seasonality -- I mean, our own factory in Chengdu is shut down for two weeks and most of the other ones are, too. So we see it more as a general drop.

Okay, and then you mentioned kind of normal seasonality. As I look back to your June quarters historically, I don't have any clue how to constitute normal. Can you help with that?

Well, Ross, we're sticking to our policy of one quarter ahead guidance, so sorry. I don't have any good ideas for you.

But overall, Ross, if you remember, and I said that in the end of 2006 or early 2007, so the Company is now well positioned and we started implementing some strategies and now we're a lot more comfortable this year and we're well positioned for 2008 and 2009. In terms of macroeconomics, I can't really predict it, but overall, with our regional growth and as well as new product introductions, we are well positioned now.

Okay, and then the last one for me, Rick, more of a housekeeping one. Share count, just give us any rough idea on that metric, if you could.

Around 37 million fully diluted would be a good number near term.

Okay, does that assume part of the buyback is already put in place?

No, that's without a buyback. I can't predict on that one.

Okay, great. Congrats on a strong quarter. Thank you.

And your next question comes from the line of [Patrick Wang] of Wedbush Morgan Securities.

Hey, guys, and nice quarter, also. You guys keep on posting very healthy margins and I understand the advantage of unit costs with your manufacturing. And I was hoping you could comment on the general pricing environment. For instance, curious if you're walking away from low-margin business and such.

Yes, Patrick, as I said earlier, and our gross margins had three factors. One is the easy one, is our cost. So I tell our cost guys to keep real lowering the costs, because that's only one direction. And the other two is the regional growth versus the new product introductions. They all increased in North America and Europe market tend to have higher-ASP products, so we grow these areas and we'll contribute higher gross margins.

In Asia and Greater China, have higher ASP pressures, but we also introduced our new product.

I think one thing that everyone needs to be clear on is you read a lot about -- there's always price pressure in the chip industry. That's what it's all about. The prices always go down. That's normal. And you do hear about how Asian competitors are really tough. But the reality is, in a lot of areas, they're really putting out products where the performance doesn't really matter.

A lot of our newer products that we're putting out that they don't have the technology to build, that not many of our American or other competitors have the technology to build them. So that's what Michael's really saying, is a lot of the new products that have much fewer competitors that can't build it, and then when you're talking about, for example, Asian price competition in the near term, they're unlikely to be able to match the performance at all or the integration, so that's the offset.

Clearly, price pressures are always there. We see them as much as anybody, and that's how we offset them, is with the three things Michael talked about.

Okay, great. And then I guess just the longer-term question. Most of the short-term ones have been asked already. A couple quarters ago, you guys talked about the low-to-high voltage chips and some electroluminescent chips for handsets, the high-voltage BCD stuff. Can you give us an update there? Thank you.

Yes, some of the products that we released and the other products we have announced, so these are -- the products that you just talk about it is one of 20 or 30 -- these are amounting 20 or 30 that we released in the last year or so. Those are products that haven't really generated any significant revenue.

Yes, they're just in the sampling stage now.

Okay, and these are the types of products that you would expect to kind of start gaining momentum throughout the year?

Sure, in '08 and '09, absolutely.

Okay, great. Thanks a lot.

And your next question comes from the line of Todd Cooper of Stephens, Incorporated.

Thank you. Michael, I'm curious, as your ICs move up into higher power ranges, are you taking sockets from the DC-to-DC converter module manufacturers in any of the applications or end markets?

I think of both, and module markets are kind of limited. A lot of the major markets still reside as controllers plus power [fence], so these are sort of multiple-chip solutions and MPS is offering one-chip solutions for those high-power applications.

But in some telecom -- some of your telecom customers, what about there? Are you replacing any modules in that market?

Yes, that's our intention.

Okay, and, Rick, are you expecting a ramp in legal expenses in the second quarter and how should we think about that line item going forward.

Yes, as we said in the -- the one thing we talked about is we have one major litigation left with Linear Technology scheduled I think in June. So we've said that that's about $3 million in the first half. So as Q1's lighter, you would expect Q2 to be more expensive as we get closer to the trial date.

Okay, thank you.

And your next question comes from the line of Brian Alger of Strata Management.

Hey, guys, great quarter. Thanks for taking the question. You guys have done a great job outlining the products. One thing you offered up this call, which I think is new, is the commentary regarding 25 customers with over $1 million annual revenue. I'm curious, what's that total number up from the previous year and how do you think -- call it the big account number -- is going to trend as we go into '08 and '09 as you're geographically diversifying your customer base?

Yes, Brian, one of the things is our customers were a mix of distributors and direct customers. The customers of the customers is what we're talking about, the guys how really use the chips. In some cases it's in OEMs. In some cases, it's ODMs who build a variety of things. So basically the number we talked about is, yes, our ability to get into the bigger guys is growing.

Going back in prior years, I'm looking at the number, '07 was a significantly higher growth rate than in the past, and that's based on the kinds of products we're putting out. If you remember, go back to '03 and '04, the Company in '04 was half the revenue was CCFL, right? That's a limited number of guys who do that. Now we have a much, much broader base, so the kind of growth rates with the broader products we have is really showing with that 48% growth and that's one thing to keep in mind about MPS.

We have a lot of guys. The 25th guy is still over $1 million. We have a lot of customers spread out. We don't have any one customer that's half our revenue or a fourth of our revenue. The biggest of these end customers is a single-digit percentage. So that's one of our strengths.

Great, thanks, guys. Keep up the good work.

Thank you, ladies and gentlemen. As that was our last question, I'll turn it back over to management for closing remarks.

Well, thank you, everyone, and we'll see you next quarter.

Thank you.

Ladies and gentlemen, this concludes your presentation. Thank you for your participation in today's conference. You may now disconnect, and have a good day.