芯源系統 (MPWR) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2008 Monolithic Power Systems, Inc. earnings conference call. My name is [Millennia] and I will be your coordinator for today. At this time, all participants are in listen only mode. We will be facilitating a question and answer session toward the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call Mr. Rick Neely, Chief Financial Officer of MPS. Please proceed.

Good afternoon and welcome to the second quarter fiscal 2008 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 risks and uncertainties. For example, our business outlook, including our business and financial outlook for the third quarter of 2008, projected third quarter revenues and gross margins, our expectations for third quarter litigation, stock based compensation and non GAAP operating expenses, our target operating model range for gross margins and operating expenses, our third quarter projected bookings, our projected average tax rate for 2008, our feeling that MPS is well positioned for future growth, planned and new product introductions, potential customer acceptance and the various opportunities these present, expected growth or declines in our product lines, end market applications and geographic markets, and finally inventory levels and projected changes in inventory levels.

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 2007 Form 10 KA filed on March 12th, 2008, which is accessible through our web site, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call.

We will be discussing operating expense and net income 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 their related tax effects. We will also discuss our expected non GAAP research and development and selling, general and administrative expense for the third quarter of 2008, which excludes our expected charges related to stock based compensation. A table that outlines the differences between the non GAAP financial measures to GAAP financial measures is included in our earnings release which we have filed with the SEC. I would refer investors to this release as well as to the reconciling tables that are posted on our website.

I'd also like to remind you that today's conference call is being webcast live over the Internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today.

We would like to start this call by reviewing our second fiscal quarter 2008 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2008. We will then open up the call to your questions.

Let's start with the business highlights. MPS is pleased to report our best sales quarter ever as we recorded revenues of $41.5 million, an increase of 35% over the second quarter of 2007 and above our guidance for the quarter. We have talked extensively about our many new product introductions over the past 18 to 24 months and these efforts are clearly bearing fruit. Our new high current, high voltage MiniMonster's product family and our new battery charger product family continue to grow nicely for early stage products. We are also seeing steady growth in our core DC to DC products and expansion into a variety of markets, such as set top boxes and new products requiring greater than 40 volts operating rating. These products are typically used in printers, automotive and industrial applications. Regionally, we continue to make very good progress in growing our revenues outside of Greater China.

In the manufacturing area we met our expectations maintaining our gross margins in the upper end of our target model for the second quarter recording a gross margin of 63%. On the expense side, non GAAP operating expenses were $18.6 million, up from the first quarter of 2008 as we incurred significant legal costs in our litigation with Linear Technology. And we also saw heavy new product introduction expenses that increased our R&D spending. Bottom line, non GAAP net income was $7.1 million, or $0.20 per share.

Now, let's look at the financials in more detail. Looking at the P&L on the revenue line, second quarter 2008 net revenues of $41.5 million grew 35% from the second quarter of 2007 and were up sequentially by 17% from the $35.4 million recorded in the prior quarter. Let me break down our second quarter revenues by product line. DC to DC product sales were $28.6 million, up 50% from the $19.1 million recorded in the year ago quarter and up $3.1 million or 12% from the first quarter of 2008. The majority of this growth came in the flat panel TV, communications, set top box and general consumer markets. We continue to see increase in sales volumes in our new MiniMonster and battery charger products as we mentioned before. LCD backlight revenues for the second quarter were $9.5 million, an increase of 5% from the same quarter a year ago and up 31% from the prior quarter.

Drilling down into this market segment, MPS saw its unit shipments for the notebook portion increase 35% year over year, but also saw its CCFL unit shipments into multi media applications, such as portable DVD players, and digital picture frames declined by almost 70% from the prior year. The net effect of these two trends along with normal ASP declines account for the lower than average annual revenue growth in our backlight business. Audio revenues came in at $3.4 million, up 26% from the $2.7 million recorded in the year ago quarter and up 25% from the first quarter of 2008. This product area is growing due to our continued success with several major consumer product customers in the LCD TV space.

Let's move down to the gross margin line. Our second quarter gross margin was 63.0% compared to 63.5% in the same quarter of 2007 and 63.2% in the prior quarter. We are very pleased with our execution in managing our production processes and maintaining strong cost control in spite of the negative environment for higher production costs and lower price Asian competitors. If you look at our GAAP operating expenses they were $21.8 million in the second quarter. This includes $17.5 million in R&D and SG&A expense, which includes $3.2 million for stock compensation expense under FAS 123R accounting rule and litigation expense of $4.3 million. Compared with the second quarter of 2007 GAAP operating expenses decreased by $5.1 million. This amount comprises an increase in litigation costs of $266,000, a decrease in litigation settlement costs of $9.8 million, an increase in R&D spending of $2.2 million, an increase in SG&A spending of $1.8 million. And finally we had a one time lease credit in Q2 2007 that did not reoccur in 2008 and that had a net effect of increasing expenses by $496,000. Our GAAP operating margin was 10% in the second quarter up significantly from the negative 24% 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 second quarter of 2008 were $18.6 million compared to $15.2 million in the second quarter of 2007 and $14.3 million in the first quarter of 2008. The $4.3 million expense increase from the first quarter of 2008 was primarily due to our jury trial with Linear Technology in June. Based on the court's ruling that MPS did not breach the 2005 settlement agreement, MPS has the right to seek recovery of its legal fees. Non GAAP R&D costs showed a sequential increase of $841,000 as we continued an aggressive schedule of new product introduction and hiring.

SG&A spending declined by $100,000 as one time charges for changes in our distribution channel did not recur. Our non GAAP operating margin was 18.5%, but if you exclude legal expense we had a 29% non GAAP operating margin. [Going to] the bottom line for Q2 our GAAP net income for the second quarter was $4.6 million or $0.13 per fully diluted share. This compares quite favorably with the GAAP loss of $6.4 million recorded a year ago, which was heavily impacted by a one time legal settlement of $9.8 million.

Our non GAAP net income in the second quarter on a non GAAP basis our Q2 net income was $7.1 million or $0.20 per share. This result is computed with a non GAAP tax rate of 15%, our expected average tax rate for 2008. Compared to the prior year, and excluding both stock compensation and the one time settlement, MPS increased its non GAAP net income by $2.9 million or 69% year over year.

Finally, we bought back about $4.4 million of our stock in the second quarter as part of our authorized $25 million share repurchase plan. We have now purchased a cumulative total of $13.9 million or approximately 775,000 shares at an average price of $17.97 since our buyback program started in the first quarter of this fiscal year.

Now, let's look at some of the major changes to the balance sheet. Cash, cash equivalents, restricted cash and investments were $126.8 million at the end of the second quarter of 2008, up from $92.3 million at the end of the second quarter of 2007 and up $11.2 million from the $115.6 million recorded at the end of Q1 '08. In Q2, MPS had operating cash flow of about $10.4 million and stock option exercises of $6.6 million. This was offset by capital spending of $1.2 million and the stock buyback of $4.4 million.

Accounts receivable ended the second quarter at $13 million compared with $11.3 million at the end of Q1 '08 and $8 million at the end of the second quarter of 2007. Days sales outstanding or DSO remained at normal levels for MPS coming in at 29 days for the second quarter of 2008. This is flat to the 29 days recorded at the end of the prior quarter.

Our inventories at the end of the second quarter were $24.1 million or about 143 days of inventory. This compares with $16.4 million or 114 days of inventory at the end of the prior quarter. Looking back at the end of the second quarter of fiscal 2007 our inventories totaled $11.9 million or about 96 days of inventory. All of the inventory increase from the first quarter of 2008 was in the die and work in process segments. Our finished goods inventories actually declined from Q1 '08 and dropped almost $2 million from the end of December 2007. Our distribution channel also declined as our days of inventory ended up below our target range of 30 to 45 days at the end of the quarter. Therefore, in order to service our anticipated increased second half demand MPS will utilize more of our internal inventory stocks. We anticipate that our inventory days will decline to about 100 to 120 days by the end of 2008.

I would now like to turn to a discussion of general business conditions. We saw excellent revenue growth in the second quarter of 2008 achieving record sales for MPS. Our new product families are doing very well in designs and market segments we have not served before and we are pleased with their early revenue contributions as a result.

Geographically in the first half of 2008, 59% of MPS sales were shipped to Taiwan and China and 41% to other regions. This compares favorably to the first half of 2007 when MPS had 66% of our sales in Greater China. In addition to our strategy to improve our regional strength, MPS has seen broad gains in a variety of diverse market segments, what we would like to call the single digit percentage success model. This reference to single digits is the fact that many of our innovative, highly integrated parts can be used in a whole host of end market applications. No one application is huge, but the cumulative effect of getting 2% or 3% or 5% of our sales in a wide variety of segments is part of the fuel behind our extraordinary sales growth record.

For example, we have grown our revenues in the set top box end market by a factor of four times from Q2 '07. And we now have about 5% or 6% of our total sales in these products. Our fully integrated synchronous buck converters provide ideal price and performance for this application. This is just one example of the power of a single digit market model. MPS in general has very broad market and end application coverage providing both multiple opportunities for growth, but also some buffers should any one segment suffer from poor market dynamics.

In the new product area we are introducing a new series of highly integrated very cost effective CCFL controllers from the monitor segment. These products should see production revenues in 2009. Our new 40 volt DC to DC converters are being used in laser printers, car accessories and industrial applications like utility meters. All of these efforts plus many more new products should help MPS maintain our well above industry average revenue growth rates in the future.

Now, turning to our outlook for the third quarter of 2008. Our revenue guidance is in the range of $46 million to $49 million reflecting growing demand for our products in the third 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 $3.2 million to $3.6 million. We expect non GAAP research and development and selling, general and administrative expense in the range of $15 million to $16 million. This estimate excludes the stock compensation estimates mentioned above. Finally, we expect litigation expense in the range of $1.4 million to $1.8 million.

In conclusion we are pleased to report that MPS had an excellent second quarter. We grew much faster than the overall analog market with 35% year over year revenue growth. Once again, MPS is proving that its key initiatives of continuing to introduce new, high performance power management products at a faster rate and continuing to expand both our global market presence and multiple end market applications is the right strategy for success. MPS feels very well positioned for future growth.

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

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please proceed.

Yes, that's Thomas Weisel Partners. Thank you. A couple questions. First of all, on your guidance and the range there can you just talk a little bit about some of the moving parts? What gets you to the lower end? What maybe gets you to the higher end of that range, please?

Okay, Tore. Which parts of the guidance?

Sorry, the revenue.

Oh, the revenue. In general, Q3 as you know is our strongest quarter. Everything tends to go up in Q3. That's generally how it works. Michael, I don't know if you have anything more to add.

Yes. We don't have any low end and high end. They all generally move up. All our new products are doing extremely well, so that also contributes a part of it.

Okay. Can you also talk a little bit about visibility? What are some of your customers telling you about current demand?

Customer current demand is all across the board. We see the other companies see the consumer business as weak. We see it very strong. But again we're a small company relative to others. There's a lot of opportunity for MPS.

I guess I would say when you look at our bookings for Q3, I mean we feel our bookings are good and will support our guidance for Q3. So, that's what we see near term. We can't comment on other companies' situations, but that's what we see.

Very fair. And then also on the litigation with Linear Tech can you just elaborate a little bit more on what we should now expect going forward both as far as maybe getting some monies back. Maybe more important then just on your own competitive positioning in the marketplace.

Well, we continue to develop products. This lawsuit is not related to the future product. That's in the past. The product never shipped. We shipped less than $100.

I guess what I'm getting to is were you blocked with those products and now you can actually go and win some of those [sockets]. I guess that's what I'm getting to.

The product actually would never ship any meaningful amount. So, those [suppliers] would never intend to sell those products.

Okay. Very fair. And then how about recouping some of the legal expenses?

On the contract side our the judge's ruling allows us the right to ask for our legal fee and we definitely intend to ask for our legal fees back. The case actually has not concluded yet. The reason there's a little bit of spending in Q3 is there's a third section of the case that the judge is going to be hearing later on this fall. At that point, he'll issue his final ruling, but the judge has already ruled on the contract side that we did not breach the agreement and the agreement has a clear clause in there that the loser has to pay the other's legal fees. That's what it says.

Great. Thank you and congratulations on the results.

Thank you.

Your next question comes from the line of Greg Hagenback with Goldman Sachs. Please proceed.

Yes, thank you. Rick, on the gross margins front with guidance of mid to upper end of the range can you just talk looking out over the next year or so at some point where you think gross margins might settle out or more importantly what's been able how you've been able to kind of keep the gross margins at that upper end of the range?

Greg, that's a good question. As we said our guidance actually on gross margins is the same as it's been for probably the last two or three quarters, mid to upper end. In the past year or two we've been a little bit over the upper end of our range and we've always said we've felt glad, lucky and happy to be there, but again we expect to grow the Company. We expect to maintain our revenue growth in the 25% range by doing the kind of gross margins we're doing.

Right now we're still operating at a good level, mid to upper end. The factors that come in play are on the downside there's lower priced Asian competitors. On the upside our regional growth into areas particularly like Europe and the U.S. and into market applications such as industrial tend to give you slightly better margins. So, that's one factor on the upside. Another factor on the upside is new products which tend to be a little bit higher margins.

So, the balance between those three elements of new regions and applications and new products and lower priced Asian competition that's what will determine where it's going to go. In terms of us reading the tea leaves it's difficult to say. Michael, do you have any comments?

I don't have any comment, but overall for MPS growth for MPS become a much bigger company and the margin pressure is always there. So, we try very hard to introduce new product, develop new technology. That's what gives MPS its edge.

Okay. And then if I can have a follow up, Rick, on the inventory front. Any more color in terms of on an absolute basis where the inventory might trend in Q3 and into Q4?

Sure. I mean, right now we're already at 120 days. The way it just worked out we don't time our inventory purchases. We bought a lot of dye and that's how it ended up at the end of the quarter, but we're already at 120. I expect we'll be about that in Q3. We'll probably be more like 100 days by the end of the year. We usually do this. The second half is our big demand period. If we can buy dyes strategically we do that. Again, our finished goods declined. We didn't build a lot of packages we just built up the dye bank.

Okay. Thank you.

Your next question comes from the line of Rick Schafer with Oppenheimer. Please proceed.

Hey, guys. Nice quarter. I just have a couple questions. Just wanted to follow up on the inventory question. Is there any production issues maybe that you saw in the second quarter maybe related to the earthquake with the Qingdao back end package test facility that you guys have?

No, actually not at all. We have a capacity for our second year. As you see in the past we sort of always build our inventory in the first half for to meet the second half demand. These are not vegetables and bananas. Our products last for seven to 10 years. So, we're not really worried about the high inventory.

Okay. I was just interested because it was like your finished goods really didn't change much, but you're WIP, I think, almost doubled, I think, sequentially.

Almost doubled. More like 70%, 80%.

We have a compared in the past we talk about it before and we run it way to low. Now, we have over 200 products and a lot of them are new. We have a stack of all these inventories waiting for all these products for ramping.

Got it.

I would have to comment, too. Michael and I are amazed that the company went through a major earthquake in Qingdao, but the team in China did a tremendous job and 24 hours after the earthquake all the IT was up and 48 hours later we were ready to go in producing parts. So, it had no impact. We have a brand new factory, very well built apparently. So, good news. So, we managed to get through that with no [protobation]. And as you can see there's no impact on the numbers.

Okay. Well, that's great. Another question just back on litigation for a second. I think you explained really well what's going on in the second and third quarter with litigation maybe being a little bit higher than I had modeled, but if we look forward like into the fourth quarter or even looking into next year what's sort of a normalized litigation run rate for you guys? Is it $1.25 million? $500,000 a quarter?

It's hard to give the range, but what we can say is there's no major litigation scheduled at this time. So, there's a lot of smaller bits. The smaller bits tend to add up, but maybe your range is probably reasonable.

The reason we can't comment is we don't have any litigation is an unforeseeable event and we can't control our Q2 cost. Your model and our Q2 cost is higher the litigation cost is higher than their model, too. So, in the future we can't really tell, but as far as I know we have no major cases going on anymore.

That's good news. And then just on the notebook CCFL market. I don't know if there's a way to quantify or talk about maybe some of the share gains that you've seen there. What you think your share got back up to in notebook? Where do you think its going? That kind of thing. And maybe as part of that can you talk about any plans for the LCD TV market in terms of CCFL?

Okay. I'll start with the market. We did look at it because on a unit basis as we said we felt we were doing fine in the notebook market. I think we grew our units 35% year over year. I think we're maintaining our share in notebooks. The notebook market is good. Where we saw a slight drop off was is sort of these smaller portable devices like DVD players and digital picture frames were hot in '07 and then switched to different solutions. And that happens all the time, but in our mainstream notebook market we think we're doing fine in market share. In terms of the other products, Michael, you can

I want to add to Rick's point that we saw smaller LCD panels switch to LED. And also, the train started in the notebook side. We saw that. So, the unit numbers for smaller panels dropped quite a bit in CCFL shipments, but on the notebook we gained quite a bit.

For the revenue side we don't grow that much because of the price. The price erosion is pretty bad, but we'll still maintain a relatively good margin. As I said in the past in the last quarters, the CCFLs for notebooks and small panels is a mature market. We don't see a big growth. Last time we said it was flat to slightly growth. For the TV side, we don't have a major shipment for CCFL backlight. We have a lot of DC to DC products.

Backlight in our major CCFL growth driver in the future will be a segment we haven't served, the monitor segment. We have some new products we're introducing now. We think we should get some growth on the monitor segment next year. Again, notebooks will probably be mature. The monitors we should see some growth. TV's we really don't make backlighting products for that market.

Got it. Michael, just to clarify. When you say pricing is getting kind of rough or worse in CCFL. To you, what's rough? Is it 20% a year, 15% a year kind of range or is it worse?

No, because last year we won the lawsuit and we get back in again. So, we get back to games with a better price. So, we want those market and we want those shares. These are very profitable for MPS. So, the price is worse than the previous year.

Okay. And then just one quick housekeeping for Rick, I think. Can you tell us again what turns were are this quarter versus last quarter? And that's all I have. Thanks a lot.

Turns for what?

Your sales turns for the current quarter versus last quarter. Is it sort of roughly the same as they were last quarter? Are they lower or higher?

Oh, you're talking about I got you. Our bookings were good. Typical bookings for Q3 which is a bigger quarter, so our bookings in Q2 support those.

We don't see a surprise.

It's what we expected for this type of quarter.

Okay. Thanks a lot guys.

Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Doug Freedman with AmTech Research. Please proceed.

Hi, guys. Thanks for taking my question. Can you talk a little bit about efforts to expand your sales footprint? What's going on there as far as headcount and maybe just programs and distribution as you try to broaden your sales reach?

Sure. I don't have a clear number for you now. We definitely expanding in the U.S. sales team and application teams. These are not only the sales people in the application, but really the application engineers really the person to sell the product as well as in Europe and Japan. Over the past history we are always on the conservative side. The sales growth a lot faster than the headcount growth and we will maintain that same way.

Are you finding a larger percentage of sales coming through the distribution or do you think that it will in the future?

We try to do in the distant regions there are different stories. In Europe, we do a lot of sales by ourselves than to use a rep rather than in the U.S., Japan high we must rely on (inaudible).

Okay. And then just one housekeeping. I don't know if I missed it. Did you offer the blended ASP in the quarter?

No, we don't do that because we have so many different products with so many different price ranges it doesn't really come up with anything.

It is difficult for us and overall product line we're within a few percentage difference with our average.

Typically, we don't give a blended ASP because of the breadth of our products.

Can I squeeze one more question in then? New products introduced in the quarter and how many you expect to introduce next quarter.

I don't have a number because we're still on track and as I said before expect about 30 to 40 new products every year. This year I think we're better than that.

We're better than that. I guess I could go the other way. On the R&D side the reason we're up above maybe even some guidance or above last quarter was $400,000 or $500,000 of extra mass costs and all those go to new products. So, just on the expense side we're spending on a lot of new products. We don't spend a lot of time counting them, but the expenses show up there in the R&D area.

Terrific. And congratulations on the next quarter.

Thank you.

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

Thank you. Nice quarter. Just wanted to revisit the geographic questions and make sure that I understand what you're trying to get at here with the situation with China. In terms of revenue coming down you're obviously increasing your exposure in other regions. First of all, what specific region would you say if you were to look over the last two quarters has grown the most relative to the others? And where do you see most of that growth development coming from?

Well, I have the advantage we just filed our Q today, so I can just look at the six months. This past six months this is '07. One of the bigger growths, for example, Europe was $3 million in the first six months of '07 and $5.5 million in the first half of '08. Similarly, same things in Japan. We grew from $4.7 million of $7.7 million. So, again, Japan and Europe are two good examples of much higher than Company growth rates in areas where we get good advantages from the technical innovation of our products and we can get good prices.

Which in both of these you expect to have good seasonality into the rest of the year?

Yes.

Okay. And just one other point. You talked earlier about and this is a question on a lot of our minds. You've got a lot of mixed results out there from different companies. Some people are seeing a weaker consumer cycle and I'm just trying to figure out and your guidance is great relative to a lot of other companies. You're not really coming out and saying this, but is it safe to assume that you are seeing increased dollar penetration within same accounts across most of the accounts? Or do you feel as though you're seeing true organic growth rates at the end market?

I think it's everything what you said. This year a lot of new product we got into a lot of new accounts we were not in last year. And also the regional growth and also these are new accounts. So, the existing account and existing products were also doing really well. So, all of about. I can't really tell you what's the future. Again, the same as the last quarter. I see the blue skies and I don't know the horizon from the cliff or not.

Let me add a little more. Just a couple examples, Vern. It does go both ways. For example, in set top boxes we've always done well in Europe, but now we're starting to get those design wins in the U.S. as well. Same solution, but these customers we haven't served before, but we're taking that solution into other customers. So, that's some of the growth in the set top box.

For example, markets where we have know the customers very well, like notebooks, we're starting to ship some MiniMonster power management into notebooks, so that increases our dollar content in notebooks. Same thing in TVs. We've done well in TV, but the Mini Monsters are coming in and increasing our content in the TVs. So, it's a combination. Some of our markets it's an additional wider customer base like set top box. Other markets its increasing dollar content as well.

That's very helpful. Thank you.

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

Hi. This is Bob Gujavarty for Ross. Just a few housekeeping questions. You mentioned you spent $4.4 million on buybacks. How many shares did you repurchase?

In the quarter? I'd have to look.

The average price was $17 something.

I think it's 400 I'd have to add them up. Actually, in the quarter we repurchased about 220,000 in the quarter.

Okay. Great. How much was depreciation in the quarter?

Depreciation was about $1.5 million.

Okay. And you guys talked about this LED CCFL transition. You always commented that it was too expensive. Have you seen any further movement to LEDs? What's your guess on what the LED penetration in notebooks could be, let's say, at the end of the year?

I don't know what the percentage. I think we've said it before is '09 is the year. They will have a bigger transition. We all expected that.

The trend is moving the way we thought. I don't know how much the percentage is, but it's definitely going as people have expected it.

'08 is still smaller numbers. '09 could be a very meaningful number.

You'll have a product ready for that transition in '09?

We have a product in the pipeline.

Okay. Great. Thanks guys.

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

Great. Thank you. I was just curious on the set top box win that you're getting is that sort of traditional set top boxes, HD stuff. Are you seeing wins in IP, TD set top boxes?

Yes, actually, I'm using that as a broad category, Steve. Good question. It's IP boxes, converter boxes, cable boxes. It's sort of saying similar some have different functions, but yes.

In the U.S. and the HDTV, digital TV things that will help.

The analog conversion to digital that's [our] box.

I don't want to we try hard not to have a huge impact on the MPS revenues. You grow much faster than any other category. We maintained 25% growth every year.

Okay. And just some quick housekeeping stuff. Sometimes you break out MiniMonsters. I think you said dollar amount revenue. And then you (inaudible) share count for Q3. Any interest income for Q3?

In term of share count we're around 36 and change. I think that's where we're heading. A lot of it depends, again, on stock price which will make the fully diluted number different, but in the 36 million range is about where we're at.

On the MiniMonsters as we've said we try not to give out exact numbers. We're very pleased at we're at the upper end of our expectations for the year it looks like on MiniMonsters in terms of dollars, so that's the good news.

Obviously, we're happy with our sales. As we expected they're in the upper end of our expectations.

And the interest income?

Interest income is down a little bit because interest rates are down across the board. I think everybody's the same. I think interest rates are down to 2%. So, I think it's about $800,000 maybe in the forecast. I'd have to go back and recalculate. But it's pretty easy to do.

Okay. Thanks. Congratulations on some great revenue there.

Your next question comes from the line of Vijay Rakesh with Thinkpanmure. Please proceed.

Hey, guys. Good quarter here. On the gross margin side what are the numbers you're seeing as you go forward on improving that?

The main way an established company improves the gross margin is with new products and new applications which have better pricing. So, the main thrust is selling into new regions where (technical difficulty) with more integration. At the same time new products. So, those two things will help it go up.

The things that always push on the downside which Michael mentioned. As you get larger there's always more price pressure to take volume deals. There's always low price Asian competitors out there. So, the balance of those things depends on what happens. We've been very good in the last two years. We've stayed at the upper end of our target range for quite some time.

So, we work hard at it and we can't predict exactly what's going on, but we're happy with being one of the top gross margin guys in the industry.

And here as you look at the notebook side you mentioned some good ramps in new designs. Do you have any new tier one [guys] on the notebook side in Q2 or do you expect in Q3?

What was the question?

Do we have any new tier one notebook customers Q2, Q3?

Tier one. I don't have any answers. We may have them, but we certainly shipped a lot of volume to it. The MiniMonster product was smaller. What do you call it?

Like small PCs, those little student PCs.

What is it called? EPC. We shipped quite a bit on EPC. Other ones for the tier one were either design win or the product is shipping. It's progressing every quarter. I don't know. But certainly there's a large volume yet.

Okay. On the DC to DC it looks like very nice pick up. Any vertical markets like set top box that you're seeing good growth on the DC to DC side and where do you see it going forward?

Actually, Rick said the set top box or I said it, too. It's one other component to our revenue. These revenues would be a significant these are single digit and we have a lot of these TVs and other single digit. Is it noticeable? We have many, many others. A lot of them are 1% or 2% of our business. It's really difficult to tell.

Okay. Great. Thanks, guys. Good job.

Thank you.

Your next question comes from the line of Michael McConnell with Pacific Crest Securities. Please proceed.

Thank you. Rick, just wanted to ask on the inventory front. Obviously, being now at 120 days you've already made some considerable progress from how you finished the quarter, but I've got to ask just with the sell in model how comfortable are you just with the amount of inventory you're carrying on the balance sheet that the distributors don't drop inventories even further then maybe what you've seen historically. I mean, a much bigger competitor had a problem with that this past quarter. So, could you talk about if there's any risk associated with that?

That's a good question, Mike. What we do is we try and manage a range. We like the distributors to carry 30 to 45 days. As I mentioned on the call they're actually below that. So, on an average basis they're below what we want them to take. So, if they take a little more we'd be happy. Near term that's not the issue for MTS. We had very low channel inventories at the end of the quarter, so I'm not concerned right now.

Okay. And then just looking at the lead times could you just comment on your lead times? What they were last quarter? What they are currently and kind of what's been the trend over last couple quarters?

In the past we see about 30 days. About 26 to 30 days in the past for the lead time. We don't see any significant change at this time.

So, you haven't been bringing those down?

The lead time is our business for the term business.

Four to six weeks is what we typically do. That's been working fine. There hasn't been any change in that.

Great. Thank you.

Your next question comes from the line of Srini Pajjuri with Merrill Lynch. Please proceed.

Hi, guys. It's Ryan Goodman for Srini. I just want to know can you help me understand how you're thinking about R&D and SG&A in terms of getting to your target model? Specifically with R&D are you growing that as a percentage of revenue or is there a fixed dollar amount you're targeting for each year?

Right now if you look at it on a non GAAP basis, Ryan, our R&D is around 17 16%, 17% of sales. Our goal is to have it between 14% and 16%. So, we're at the upper end of our goal, but that's not one we want to spend the money. This year we had a very heavy new product introduction, so I'm happy to be at 16%, 17% in R&D.

At the same time as you heard in the phone call, sales and marketing have to grow because there's a lot of new regional applications we can get into, but we have to hire the sales and application team to do it. The area where we're actually getting leverage it's not broken out, but G&A is declining as a percentage of sales because you don't need additional people that way. So, we're getting leverage on G&A.

We're probably going to grow sales and marketing and R&D is going to be we're a technology company. We're an innovative new product company, so that's what we do. We're not going to stint save money in R&D. That's not the place to do it. I'd say this year if you're looking at the Q3 guides that's about where we'll stay. It's a good year to invest and continue to invest in R&D.

Okay. And I know you get asked this every quarter for an end market break out and you usually don't give it, but maybe you can help me just understand at this point. Do you think consumer (inaudible) is taking up a bigger chunk of your revenues than notebooks?

Well, yes. The notebook when I did the math is 16% to 18%. Notebook continues to decline as a key part of our business just because we're getting much bigger and the notebook market is mature and flat. So, it's definitely in the 16% to 18% range.

Is that including the converters going into notebooks or are you just talking ?

That's just the (inaudible). I don't know the power going in there is still fairly small.

Okay.

Notebooks are under that, well under 20. So, that's what I know. What was the other part of your question?

That was actually it. Just if consumer had passed notebooks. I wasn't sure how much the DC to DC business was actually going into notebooks.

It's a small number. We have most of the volume in the small notebook.

Okay. Great. That's all I've got. Thanks.

Your next question comes from the line of Patrick Wang with Wedbush Morgan securities. Please proceed.

Hey guys. Nice quarter. Quick question on CCFL revenues. It looks like you guys it looks like revenues have snapped act pretty well in Q2 versus Q1. Does a lot of that have to do with the ramp of a customer you recently regained?

Yes. We gain a lot of customers in unit volume as I said even grow more spectacularly. The revenue grows slightly and as I said there's a significant dollar we can make. We want these units.

The other part of it was Q1 as we said on our call last quarter, Q1 CCFL revenue was abnormally low. There wasn't a lot of ordering going on across the board. Some of it was more of a seasonal pickup and the rest of it as Michael said was some design wins and things.

Okay. Got you. And I know you talked about, I guess, aggressive pricing recently. When you think about Q3 and Q4 what are you guys expecting in terms of erosion on the same market?

The price erosion in the last couple of years or this year are slightly more than two years ago. We continuously introduce new products and ramping all these new products and growing the different regions. And also cost cutting, too. So, that's why we're very lucky. We still stay in the 63% range.

That's great. You guys have done a great job there. So, I guess this next question OpEx here. If I think about OpEx from a dollar perspective how would I look at SG&A and R&D to grow from Q2 to Q3?

I think if you look at the guidance most of that growth will come in R&D. Two thirds of the growth in the guidance I gave you would be R&D and maybe a third would be sales and marketing.

Okay. Thanks for that. And then also in the quarter you guys had a nice 15% non GAAP tax rate. How should we be thinking about tax rate next quarter based on a longer term basis?

I think, again, now that I'm halfway through the year I can work out the tax rate now. Actually, no one can ever forecast the tax rate. It looks like the range of somewhere between 12% and 17% would be the average rate. You kind of hit a 14% or 15% number. That's where the average is likely to be. That's my current view.

Best guess there. Okay. And then, I guess, just last one real quick. You guys have an update on the high voltage and high current products you started sampling?

As Rick said we have 40 volts and we have a 60 volt and we have higher voltages, some 100 volt product. These are in the telecom and telecommunications automotive applications and printers, laser printers and picture printers. That's where we are now.

Your next question comes from the line of Craig Berger with FBR Capital Markets. Please proceed.

Thanks and nice job on the results. Rick, on the taxes is 15 where we should be dialing in for '09?

That's my non GAAP rate for this year. Probably that would be good for '09.

Wow. Okay. Just on the high voltage stuff since you talked about it. How much of the R&D is being spent on high voltage or other more advanced products; newer stuff than MiniMonster?

I can't really tell because it's all blending into one single technology, which is the DCD Plus. We have a many design guides and build the product. We have several products for telecom market.

Right. When you said MiniMonster was coming in toward the high end of your range of expectations what was that range of expectations.

We try and stay away from the numbers, but we had said before all we needed was $5 million or $10 million for MiniMonster this year and we would be very happy. So, you can take it at the upper end of that range.

Your next question comes from the line of Gus Richard from Piper Jaffray. Please proceed.

Thanks for taking my question. First of all, on your inventory internally do you include dye bank and finished goods or is that WIP?

WIP.

WIP, okay. So, you generally can ship to your customers in two to four weeks if need be, right?

Cycle on the back end assuming we have everything lined up. That's about it.

Those are not in our inventory. We have a dye bank and the finished goods.

In the 10 Q it will show the work in progress include dye bank and then finished goods was literally products with packages on it.

Right, which I would imagine it's pretty small.

Yes, as I said it's actually down from year end and down from prior quarter. So, finished goods we built up the dye bank so that we can respond. Again, it's about correct; from dye to finished product depending on what kind of product you're asking for.

Got it. And then are your (inaudible) pulling for more inventory at this point given that you're below your target range or are they comfortable with your ability to deliver what they need?

Well, I think the key is that we believe we can manage the inventory better than (inaudible) manage it. That's a big reason. They always have because we've been ramping so many new products now and they complain about the shortage of this product and that product. So, we build up a lot of inventory for the new product and they always ask for more.

I think Michael's got a good point. Our preference is rather than let the distributor guess if we hold the dye bank and you can get it to them in two to four weeks that covers our general lead time. So, the fact also that we have and the distributors know we have a large dye bank. That makes them feel a little better about not having a lot of finished goods.

And now I'd like to turn the call back to Rick Neely for closing remarks.

Well, thank you everybody for listening to the call. It's taken over an hour, but I appreciate all your questions and look forward to talking to you in about three months at our next call. Thank you.

Thank you.

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