芯源系統 (MPWR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Monolithic Power Systems, Incorporated, Earnings Conference Call. My name is Eric; I'll be your audio coordinator for today. Now at this time all participants are in a listen-only mode. We will facilitate the question-and-answer session toward the end of the presentation. (OPERATOR INSTRUCTIONS.)

I would now like to turn your presentation over to your host, Mr. Rick Neely, Chief Financial Officer. Please proceed.

Thank you, Eric. Good afternoon and welcome to the fourth quarter and fiscal year 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 risk and uncertainty. For example, our business outlook, including our business and financial outlook for the first quarter of 2009; projected first quarter net revenues and gross margins; our expectations for first quarter of litigation, stock compensation and non-GAAP research and development and selling, general, and administrative expenses; our target operating model range for gross margins; planned new product introductions, potential customer acceptance, and the various opportunities these present; our focus on cutting variable costs; our relative competitive position; our management of production cycles; the inventory levels and projected changes in inventory levels; anticipated outcomes and schedules of our pending litigation; and finally, our plans to weather the current economic conditions and use 2009 to position the Company to grow revenues in the futures once end customer demand returns.

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 October 23, 2008, which is accessible through our website, www.monolithicpower.com, and our 2008 Form 10-K, to be filed on or before March 17, 2009.

Also, please note that during this call, we will discuss net income and operating expense on both a GAAP and a non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation, legal settlement and provision costs and one-time lease write-downs or write-ups, and their related tax effects.

We will also discuss our expected non-GAAP research and development and selling, general, and administrative expense for the first quarter of 2009, 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 would 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 2008 business highlights. Following this update I will discuss our financial results. I will then turn the call over to Michael, and he will conclude with an overview of current business conditions. We will then open up the call to your questions.

Let's start with the business highlights. MPS had a good year in 2008, as we grew our annual revenue by 20% over 2007, setting a new yearly revenue record of $160.5 million. Our fourth quarter revenues were $34.7 million, a decrease of 10% from the fourth quarter of 2007, as end product demand dropped precipitously due to the global economic slowdown. Non-GAAP earnings for the year grew faster than revenue, as non-GAAP EPS was up 22% from our 2007 performance, coming in at $0.90 per share.

In the product arena, MPS had a stellar year. Our output of new product introductions set new records as our expanded design teams worldwide were able to use MPS's innovative process and design technology to come up with many new products and product families. In 2008, we saw production quantity shipments of our high-current, high-voltage MiniMonsters product family and our new battery charger family, which together accounted for over $10 million of new revenue.

Our regional growth strategy continued outside of our traditional strength in greater China, with 41% of our sales from outside that region. Our expanded product portfolio has allowed MPS to penetrate larger end customers, as evidenced by our sales to our top 25 end customers, all of which are over $1 million in annual revenue, which grew 45% year over year. We believe all of these activities have prepared the Company for excellent growth prospects once the worldwide economy recovers.

In the manufacturing area, MPS saw the impact of dramatically reduced end market demand in the fourth quarter as our gross margin came in at 58% for the quarter. While we were able to drop our inventory dollars from the third quarter by $3.4 million, the tremendous falloff in end customer demand resulted in increased inventory reserves and lower capacity utilization. For the fiscal year, our gross margin was 62%.

As business declined in the fourth quarter, we focused on improving working capital, and as a result, we increased cash, cash equivalents, short-term restricted cash and investments by $21 million in the quarter to about $150 million as of December 31, 2008.

On the expense side, our non-GAAP operating expenses were $14.3 million, down $2.5 million from the third quarter of 2008 as we moved rapidly to reduce variable spending.

Now let's look at the financials in more detail. On the P&L, starting at the revenue line, fourth quarter 2008 net revenues of $34.7 million declined 10% from the fourth quarter of 2007 as a result of the dramatic falloff in worldwide demand. This is reflected in the 29% sequential decrease in revenue from the $48.9 million we did in Q3 '08. For the fiscal year, revenue was $160.5 million, up 20% from 2007 revenue of $134 million.

Let's break down our fourth quarter and 2008 revenue by product line. DC-to-DC product sales were $27.3 million, up 8% from the $25.3 million recorded in the year-ago quarter, and down 20% from the third quarter of 2008. Year over year, our DC-to-DC product grew from $86.7 million in 2007 to $115.4 million in 2008, an increase of 33%. The majority of this growth came in the communications segment, with products such as modems, routers, servers, and wireless LANs, flat-panel TVs, set-top box, and other consumer products such as digital video recorders and digital picture frames. As mentioned before, our new MiniMonster and battery charger products made significant contributions to the DC-to-DC growth in 2008.

CCFL revenues for the fourth quarter were $5.2 million, a decrease of 46% from the same quarter a year ago, and down 49% from the prior quarter. For the year, total CCFL revenues were $32.3 million, a decrease of 10% from the $35.7 million sold in 2007.

Audio revenues for the fourth quarter came in at $2.2 million, down 37% from the $3.5 million recorded in the year-ago quarter, and down 50% from the third quarter of 2008. Fiscal 2008 revenue for audio totaled $12.8 million, an increase of 11% from 2007.

Looking at the gross margin line, our fourth quarter gross margin was 58% compared to 63.9% in the same quarter of 2007 and 62.8% in the prior quarter. Our baseline margins were fairly consistent with prior quarters, but due to the decline in end demand, we increased our inventory reserves and had some capacity underutilization in our test facility. These two factors took about three to four percentage points off of our gross margin for Q4. For the year, our gross margin was 61.9%.

Moving down and looking at reported expense and operating margin, our GAAP operating expenses were $17.9 million in the fourth quarter of 2008. This includes $17.3 million in R&D and SG&A expense, which includes $3.6 million for stock compensation expense and litigation expense of $594,000. Compared with the fourth quarter of 2007, GAAP operating expenses increased by $1.2 million. This amount is made of a decrease in litigation costs of $449,000, an increase in R&D spending of $1.8 million, and a decrease in SG&A spending of $94,000.

I would now like to review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the fourth quarter of 2008 were $14.3 million, compared to $13.7 million in the fourth quarter of 2007 and down sequentially from the $16.8 million in the third quarter of 2008. The $2.5 million expense decrease from the prior quarter of 2008 was due to reduced spending across the board as MPS decreased its variable spending in the fourth quarter to compensate for reduced sales revenue.

Our non-GAAP operating margin for the fourth quarter of 2008 was 17%, down 12 percentage points from Q4 '07 and down 12 percentage points from the 29% recorded in the prior quarter.

Our fourth quarter and 2008 GAAP net income was--for the fourth quarter, GAAP net income was $3.2 million, or a profit of $0.09 per fully diluted share. This compares to a profit of $9.3 million for the fourth quarter of 2007, or $0.26 per fully diluted share. In the third quarter of 2008, MPS recorded a net profit of $10.5 million, or $0.29 per fully diluted share.

For the fiscal year, MPS earned $24.2 million, or $0.67 per fully diluted share compared to a profit of $11.6 million, or $0.33 per fully diluted share, in 2007. Net margin was 9% for the quarter and 15% for the year.

Looking at the quarter and the year, net income on a non-GAAP basis, for the fourth quarter of 2008, we had net income of $5.5 million or $0.16 per fully diluted share, which excludes stock compensation expense of $3.7 million and a related tax effect of $1.4 million and uses an estimated tax rate of 15%. In comparison to the fourth quarter of 2007, the non-GAAP net income was $9.2 million or $0.26 per share, which excluded stock compensation expense of $3.2 million and an adjusted tax amount of $3.2 million.

For the fiscal year on a non-GAAP basis, MPS earned $32.3 million, or $0.90 per share. This compares to a non-GAAP net income of $25.7 million, or $0.73 per share in 2007. Non-GAAP net margin was 15% for the quarter and 20% for the year.

Now I would like to discuss some of the major changes in the balance sheet. Cash, cash equivalents, current restricted cash and investments were $150 million at the end of the fourth quarter in the fiscal year, up from $129 million at the end of the third quarter of 2008, and up $32 million from the $118 million recorded a year ago. The increase in cash on September 30, 2008, came from operating cash flow of about $27 million, which includes an increase in working capital of $19 million. This was offset by capital expenditures of $1 million and a completion of the stock buyback program for $5 million, resulting in quarter-over-quarter cash growth of $21 million.

Accounts receivable ended the fourth quarter at $9.1 million compared with $18.8 million at the end of Q3 '08, and up slightly from the $8.2 million at the end of the fourth quarter of 2007. Collections were good for the quarter, as our day sales outstanding finished at 24 days for Q4 2008, compared with 35 days at the end of the third quarter of 2008 and 19 days at the end of 2007.

Our inventories at the end of the quarter were $18.9 million, or about 118 days of inventory. This compares with $22.3 million, or 112 days of inventory at the end of the prior quarter. A year ago, at the end of the fourth quarter of fiscal 2007, our inventories totaled $17.5 million, or about 114 days of inventory.

In our distribution channels, the dollars of inventory held by distributors at the end of the fourth quarter declined as well from the third quarter of 2008. We were able to manage our internal inventories to a reasonable level this quarter despite the large demand swing. Going forward, we may manage our production cycles to both meet anticipated demand, but also to take advantage of cost efficiencies in the supply chain.

To conclude my portion of this call, I would like to discuss our outlook for the first quarter of 2009. Our revenue guidance for Q1 is in the range of $24 to $29 million, reflecting the extreme drop in general worldwide demand and lack of visibility for the first quarter of the year. Gross margin is expected to be below the lower end of our target range of 60% to 63%. We expect stock-based compensation expense in the range of $3.5 million to $3.8 million. We expect non-GAAP research and development and selling, general, and administrative expense in the range of $12.5 million to $13.5 million. This estimate excludes the stock compensation estimates mentioned above. And finally, we expect litigation expense in the range of $1.5 million to $2.0 million.

I would now like to turn the call over to Michael for a discussion of general business conditions.

Thank you, Rick. In the first three quarters of 2008, MPS had good growth and excellent new product execution. We outgrew the industry and gained market share. However, like other analog companies, our bookings slowed dramatically in the fourth quarter, which was substantially different from our normal seasonality pattern. Typical seasonality would see the fourth quarter revenues flat or slightly lower than the third quarter. This is the first time we had almost a 30% revenue decline in one quarter.

The outlook for 2009 is still very uncertain. Our customers are not giving us their usual forecasts. Therefore, it is difficult for us to predict the revenue accurately. However, in comparison with last November or December, we do see some booking improvements, especially after Chinese New Year. But the overall rate of the bookings is still erratic and below our expectations.

MPS has always maintained a lean and adaptive culture. Our operating costs will reflect with the revenue growth and the profitability. Last November was an extraordinarily fast business transition from the good to bad. We were able to reduce both our inventory and the variable costs substantially. MPS remains profitable.

Overall, we see the downturn as a business opportunity. Internally, we can strengthen our lean and amenable culture in the view of stronger team. Externally, like any other downturn, customers are more open to look at our innovative products. As a result, we are seeing more opportunity for our products.

MPS's history has proven that we are on the right track. We are continuing to stay on the course with our execution strategy, which is (1) continue to develop new, innovative technology and to maintain our superiority; (2) diversify our new product portfolio to address many different markets; and (3) expanding our global presence, especially sales in North America and in Europe.

I'm optimistic about our future. As Rick mentioned, we had a stellar year in 2008 for product development. These new products have generated many new opportunities for MPS, particularly we have had excellent customer feedback about the newly released, fully integrated single-chip high-current driver MOS family known as Gazelle. This is the industrial first 20 amp driver MOS that fits in a five-by-five millimeter package, and it enables our customers to reduce their size up to 60%. This product family is targeting network servers, graphics processors, and the notebook CPU market.

In summary, with the breadth of the new products released in 2008, I'm confident that when the macroeconomic conditions stabilize, MPS will resume its growth.

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

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of Rick Schafer with Oppenheimer. Please proceed.

Hey, guys. I had a couple of questions for you following up. I guess the first is just on, I need just a little more color, maybe, on the order patterns that you guys have seen since October. I know, Michael, I knew you had mentioned that it's gotten better this year, especially since Chinese New Year. Could you give us an idea of the magnitude of the uptick in bookings, or is what you're trying to say is that bookings are just declining at a less bad rate, or they're becoming less bad? How do we think about your order patterns?

It is much less bad compared with November or December. The November to December, and particularly December, was going backwards. And now, in January, and as I said, after Chinese New Year, the orders go forward.

We have pretty good bookings, and Richard can talk about it, but still the booking rate is still very erratic, as I said.

Yes, Rick. As Michael said, this quarter, we started the quarter with a lower backlog than we've ever had. At the same time, after Chinese New Year, we've had better bookings. So if you balance the two out, it's better, but I think I would use your characterization, it's less bad--but it's probably not good, but it's less bad, so to speak.

Okay. And Rick, you usually give us a number. Can you give us an idea of what sort of level of turns you'd need to make it to the midpoint of the top line guide?

Yes. We usually don't give any details, but this is an unprecedented time, and I think we should tell our shareholders a lot more clear. We have currently about the bookings, that 90% of the lower end, lower end of our guidance. But we, it's very difficult for us to forecast what's next week, because, as I said, it's very erratic.

Okay, so that's great. And then just a second question. You have done a nice job of cutting costs so far and keeping up with the revenue declines, but it seems like '09 revs are probably tracking to a little more than $100 million this year, give or take, I guess, which is similar to a couple of years ago. What would you guys need to see to take a harder look at cutting costs, or how much could you really cut from here without jeopardizing future growth? Can you give me any kind of idea or magnitude, or do you quantify that at all?

Well, I'll start off and then Michael will probably finish it. As you can see from the decline in operating expenses, we have a large variable component to our expenses, primarily bonuses. We have some, obviously, moves we took. We had a shutdown in December. That helped out. We have squeezed travel down, like most people. But primarily, it's our bonuses. So what you see in Q1, if you look at our guidance, Rick, that reflects pretty much no bonuses. We operate in Silicon Valley. Unlike some other companies, I guess, if we don't make any money, we don't pay any bonuses. So that's what Q1 reflects.

However, if business picks up, we will pay some bonuses as it picks up. If it doesn't, we won't. So I don't really know how to answer your question of trend. I can just tell you in a quarter like Q1, where it looks like we'll be marginally profitable, we don't pay any bonuses, and that helps our operating expenses.

In terms of how long you would have to go to make any structural changes, Michael can probably speak to that.

Yes. I don't--MPS, as I've said, has always operated very lean, and we have a very lean culture. And so our expenditures and most of them related to our sales commissions and also performance bonus is directly related to the profitability and the revenue growth. So in the first quarter of this year, it's automatic, and it's soft, and we don't just--revenues, lower revenues, lower profits, and lower operation costs.

Okay. And then just one last question, I guess, on the P&L. Rick, or Michael, do you guys anticipate a further inventory charge in the first quarter? You said gross margin will be below the target range a little bit again. Can you give us an idea of the magnitude of how much below, maybe, and is it just reflecting on the utilization or is it also, is there a further inventory charge coming?

Yes, the inventory charge is dependent on how demand looks for the future. The primary outlook right now is underutilization. As you know, our test area in Chengdu, most of these test areas are very heavily fixed cost, and a lot of the machines in there and depreciation, so it doesn't matter whether you run them or not, there's a certain amount of cost. And that's reflected in the--the gross margin impact this quarter is primarily going to be, from the model, is primarily capacity utilization. We would expect that to turn around, of course, as business picks up.

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

Thanks, guys. Thanks for taking my question. Looking at your results, DC-to-DC converters down 20% really outperformed the LED business there--excuse me, the backlighting business. Can you talk a little bit about what contributed to relative strength in DC-to-DC? Or are you seeing new wins that are starting to shift in sample volumes? Or is it just that the end markets that that sells into weren't down as much or there wasn't as much inventory? What explanation can you offer?

Well, part of it, Doug, is--Michael talked to it prior. But part of it, like we said, we generated over $10 million of new product revenue in 2008 from MiniMonsters and battery chargers that was zero in the year before. So that helped contribute with those types of new products. Michael?

Oh, yes. Did you say--? I heard, I guess I heard the wrong question. Was it decline?

Well, DC-to-DC was relatively better than that.

Okay, okay, I've got that, okay. Yes. DC-to-DC, as I said, we released a lot of new products, and we had generally a lot of activity in the second half of the last year. In that we, as normal, we expected and in this year we'll pick up some revenues. But for this year we can't really foresee what will happen.

Yes, and I probably could answer maybe the next question someone would ask in advance to (inaudible). But the decline in CCFL was more in relation to the notebook market really fell off a cliff. If you see some of the other companies in the backlighting business or the GPU business, Q4 saw an extreme drop in demand, so it's more of a demand drop on the CCFL side that caused that to go down so much.

Great. Can you talk a little bit about tracking your design wins and maybe a little bit more color on the relative value of the design wins that you've achieved in the last quarter?

In the last quarter, the driver MOS and obviously, the new product that we (inaudible) in many, many customer place. And we had very good feedback. Our customers are excited about it, and so we are continuing to work with them and try to get some design wins. That's one area.

The other areas are lower current levels of four or five amp current levels, and we're designing into many different places. And if I mention one of them, it will be a small percentage. So I'll just mention one just for information. Again, the TV, we continued to win design wins in the TV side. Set-top box in Europe. And among other things, industrial applications. So every one of them contributes a very small, small revenue.

Yes, as you know, Doug, typically in our business and certainly for MPS, we don't have any design wins that bring in $50 million or anything like that. We have a whole bunch of small ones that add up cumulatively, but we don't have the kind of business where one or two design wins drive lots of revenue.

All right, terrific. And I'll jump back in the queue with some more questions. Thank you.

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

Yes, hey, guys. Thanks a lot for the opportunity to ask questions here. First, can you talk a little bit more about inventories here? Expectations is as if your channel inventory does get any leaner from this point? And also, if you could give us with finished goods and maybe quantify the reserve you guys took last quarter?

Yes, in a normal climate, I've said many times before that our inventory level is not usually related to our future business, and that sometimes it was strategically and piled up more inventory than others. And so this time, our inventories in the channels are extremely low in the way may or may not increase, and it depends on our customers' demand. So at this time, it's not clear.

Yes, the end channel, as we said, we dropped inventory there. We dropped our own. In terms of the color of our inventory split, Patrick, we increased reserves right around $1 million, so $1 million of the drop is reserve related. The rest is actual decline, and it was declined in finished goods in WIP.

Okay, and also just to get some clarification, Mike, on your comment there, so is it fair to say that a lot of the inventory burn in the channel is over with at this point?

Yes, and it's declined slightly from the last quarter, and so, but we want to, and we believe, always believe, we can manage inventory a lot better than our distributors. And so we still keep them lean, and so at the same time, we'll try to find out what our customers demand.

Okay, got you. And as my follow-up here, I just wanted to ask a little bit more about gross margins here. I know that, as Richie said, was it about three or four points was lower due to inventory reserve and underutilization. If we think about Q1 gross margins here--and I know that you said that a lot of that's due to underutilization here--beyond that, if we were to back out the charges in Q4, we get to a 61-ish percent gross margin. Is that a fair normalized level to think about for Q2 and beyond?

Yes, maybe I read it too quickly, but part of my script was that our baseline gross margins remained about the same. So if you took what the, take away the extraordinary capacity or inventories, we'd be 61% to 62% without those extraordinary situations.

Okay, perfect. Thanks so much.

Your next question comes from the line of Anthony Stoss with Craig-Hallum. Please proceed.

Hi, guys. Just wondering what you're hearing from your customers in terms of order push-out. (Inaudible) that you guys were expected to be in. Also, if you could comment on the netbook market, if there's been any share changes. And also, Michael, if you can give us a sense of how many new products you might launch in 2009? Thanks.

Okay, Tony. I'll start a little bit on it. The issues of the push-outs were a Q4 phenomenon that a lot of, when Michael said November and December were bad, what happened was all the orders that came in were matched by orders that got pushed out to the next quarter. So that was why the end of the year was bad for everybody in the business. We haven't seen--after those push-outs, we haven't seen as much of that this quarter. It sort of hit the bottom. So I don't see any more of that right now. That was more a Q4 phenomenon. Yes, I'll turn the rest over to Mike.

To answer your last question about the number of products that we're going to release. The numbers can vary quite a bit. Last year, we introduced like 70 products, and so this year, I don't expect the numbers will be lower than that, and so as we increase our design engineering team and the products, I predict it will be more.

Okay. Then also, I wonder if you guys could comment on where you stand share, any changes at all that you can tell?

No, I think that the world turns around too fast, and our customer hasn't really reacted to that. And as far as we see, we haven't lost any socket.

Okay. Great. Thanks, guys.

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

Thanks for taking my question, and I apologize for beating a dead horse here on gross margin gate. But I just want to ask a point of clarification. Rick, are you saying that you're not going to have any reserve charges in the first quarter?

No, I said I don't know.

You don't know. I'm sorry, okay.

So that's why we guided where we did. So if you look at just the numbers, remember what we're doing, if you just take the midpoint of our guidance, it's about half of what we were doing six months ago, so obviously our factory, we can't downsize it by half. So the three or four points, about three points it hit the gross margin from that. There may or may not be any changes in inventory reserve; I just don't know. It's a four-month forward look for us when we do it. We'll figure that out when we get to the end of the quarter.

Okay, sure. I understand that. So thanks for clarifying. And then I haven't heard any comments on this, but how did pricing hold up, and what's your outlook on how things are out there in the current environment?

Michael will answer that one.

The pricing is continuously sliding down and sliding down faster, but at the same time, we introduced a lot of new products in the second half of last year. And we see a lot of activity. So I can't really tell whether, which way our gross margin will go. I think in the near quarters, near future, I don't expect a large swing.

Okay. So, you mean, you've always been pretty good at balancing down on the foundry side, so you're in a zone where you feel that's not slipping faster on the pricing side versus your cost side, is that correct?

No, I said that the foundry sides are closer and they're very empty, too, and so they really want, like any other company want us to start in wafers and tell me where there's favorable costs and at the same time, our customers also ask the price down. So but my point is that the new products that we released in the second half of last year usually will contribute to a favorable gross margin. But during this time, we can't really see whether, how, we can't really predict how fast our customers will adopt it and go with the new solutions.

Okay. And then just my last question here. If you were to rank your end target markets in 2009, trying to, just if you could work through the noise level of an inventory rebuild, what would be, what would you say would be your top end markets going into the end of 2009 from a demand perspective? I'm trying to get a gauge here on your design activity, and where do you see the most robust dollar content opportunities right now?

Obviously, we can increase our mobile content. From a year ago, from last year, maybe a couple of dollars and get to $5.00 or $6.00, and we keep increasing the content in TV. Some are $3.00 or $4.00 to even more, $6.00 to $7.00. In the graphics card area, we have a new driver MOS product and we expect to be doing well in the start of the second half of this year or early next year. So I don't know if I answered your question.

I think Michael got them all. There's a couple of smaller ones, Vern, that we did well in this year. We had very good growth in set-top boxes this year. We also had good growth in what we call our communications area, which is the modems, routers, servers, and switches. So the communications area grew by about 40-some percent this year, and set-top box almost doubled this year. So again, the dollars are smaller, but I think they'll keep contributing.

Okay, that's very helpful. Thanks.

Your next question comes from the line of Sukhi Nagesh with Deutsche Bank. Please proceed.

Yes, hi. Thanks for taking my question. Rick, just a couple of housekeeping questions here. What do you expect the interest income and your tax expenses for the first quarter?

The tax rates for the year we expect to be between 10% to 12%, although that depends on profitability. If you don't make any money, your tax rate will drop a little bit. On interest income, unfortunately, Treasury rates are quite low and overall interest rates are low, so we would expect probably a decline. Even though our cash balances are larger, the interest income percentage is lower. So we're probably right now looking at less interest income in '09 than '08.

Okay, that's helpful. And then on the revenue segments for the first quarter, if you were to rank the three segments that you usually give out, how would you rank them in terms of which one would be better than expected--better than the other segments?

Well, of the three segments, as you noticed even from this year, where we grew DC-to-DC 32% and the company average was 20%, almost all of our new products in the last two years and all of our technology expansion has been in the DC-to-DC area. It's also the area which is a $6 billion market for power management. We have a long ways to go to continue to gain market share.

Backlighting, which was our traditional market, that was the first market for the Company, is a smaller, more restricted market, and that's flattened out and matured. So we wouldn't expect much there. And we expect most of the growth in DC-to-DC.

Got it. And then in follow up to that, are the margins in DC-to-DC better than CCFL? How should the mix play out?

Five to ten. The newer products tend to have better margins, but older products, even an older DC-to-DC product, will tend to have margin compression. So it's more of a mix issue than not. As CCFL parts tend to be older, their margins tend to be a little bit lower. That's another way to look at it.

Great. Thank you.

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

Yes, thanks for taking my question. Michael, can you characterize the designing activity that you're doing currently? Is it mostly for new products, or is it more for cost reductions for existing products?

Actually, we do both. But I have to correct, my correction to your question is okay, it's not a cost, reduce in cost. We increase the dollar content to replace our existing products. Our products, especially in the DC-to-DCs, and our unit price will slightly increase and to cannibalize our older generations. The reason we can do that is because we (inaudible) more components.

The newer products, of course, and I'm excited about the driver MOS family. And this opens up another market which we didn't have before.

Okay. And then, Rick, just a couple of quick ones. Currently the order rate's very spotty. Is that just the fact that customers are ordering from just immediate need and they need it or they don't kind of thing?

I would say that's correct. What we just saw, and obviously January was quiet because everybody was on vacation, either in the US or when we got back, everyone went on vacation for Chinese New Year. So we've seen some more regularity in February, but again, that's just a few weeks. So I think, given the situation of the ODMs and so forth, I think they're ordering when a customer screams at them and they order from us. But it's pretty much hand to mouth as far as we can tell. That's why it's erratic.

Yes, in, just logically (inaudible), November and December had a zero booking level. And so they're starved enough, and then they had to order something. And I can't foresee whether they can keep going up or it's going to flatten out or going down later. So I can't really predict that.

Okay. Thanks so much.

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

Yes, thank you. First question, just coming back to the firm in bookings, I realize it's erratic, but any area that's relatively coming better than others at this point?

No. We have a pulling in some new products across our product family. And these are just spike.

Very good. And Michael, on the 8698, which you just launched. It seems like a pretty good product, and you mentioned graphics, servers and notebook as a house for that product. Which of those three would you start to see the first revenue, and when would you actually materialize that revenue?

This product is only for the, is the first product we released in the family, which is for the notebook application. We have another product for servers and the graphics cards. So the revenue, I expect, will be from the notebook first.

Great. And lastly, on the legal expenses, it continues to be quite lumpy. So how should we model those expenses going forward?

It's always very difficult, and Tore, you know, you have been with us before, covered us for many years. The legal expense is really controlled by the court and by outside lawyers. And I can't really give you a very accurate description, and so we just leave it like that as $1.5 million to $2.0 million in the first quarter.

Fair enough. And then just lastly on the gross margin, and without the potential inventory or non-inventory reserve this quarter, gross margin would still be up sequentially, right, Rick?

Are you talking Q4?

No, Q1.

Q1, the biggest issue in Q1, Tore, was some underutilization of capacity. If we have our, our test facility is mostly fixed cost. It's mostly a building with a bunch of machines in it. So you've got that cost whether you run them or not. So the biggest impact to gross margin this quarter is the three or four points on the capacity side. Assuming that we get back to a normalized run rate soon, that will go back up.

Yes, we, Rick said it earlier. Whether we will write off or keep, or further writing off inventory in Q1. On that, we haven't really made that decision yet. Because we talk to our customers and try to find out what the demand will be, and it will depend on that, and we will make a decision on which product is going to be a write-off, and other ones are not. So it's still early. We don't, we try very hard to find those informations.

Understood. Thank you very much.

Your next question comes from the line of Craig Hettenbach with Goldman Sachs. Please proceed.

Hi, guys. This is Ian in for Craig. Can you talk a little bit about--I think, Michael, you made the comment that you're seeing more opportunities because of this dislocation? Can you talk a little bit about where that is, either by channel or customer or product?

I think it's our business is 80% to 90% is we'll control our own design. Our channels don't do that design. And it's all MPS. It's actually across the board, and from industrial applications and from set-top boxes and even TVs. And so we see a lot more demand in the foundry, particularly from--sorry, not demand--the design wins, the designing activity, and particularly from the products that we released in the second half of last year.

Yes, just to add another comment that we had talked about in the call was that MPS in the last couple of years has brought (inaudible). We can now (technical difficulty), so what we said on the call was that our growth in the top 25--meaning the top 25 end customers that all do over $1 million--we grew 45% year over year, even though our Company average was 20%, so it just shows that we're starting to get these design opportunities at major accounts in parts of the world we haven't been in before, in all different kinds of segments. So I think that's really what we wanted to emphasize.

Okay, thanks. And then, Rick, just with the cash moving up, can you tell us how you're thinking about buybacks and sources used for the cash in 2009? Thanks.

Well, we did one last year, but this is the year where everyone--you know, cash is king--so we're going to keep our $150 million this year until we see the light at end of the tunnel, so to speak. So we don't have any plans to do that this year.

Okay, great. Thank you.

The next question comes from the line of Dan Myers with Crosslink. Please proceed.

Hey, Rick. Just a housekeeping issue. You gave non-GAAP OpEx of 12.5 to 13.5. And then litigation of 1.5 to 2.

Correct.

Is litigation inside the OpEx?

No, that's the additive. The 12.5 to 13.5 is your R&D and SG&A, those numbers.

Okay, and so you don't consider litigation as part of SG&A? So we should look at a total of 14 to 15.5?

Right.

So we, that's a historical reason. We always listed it in a particular, in a separate format.

My goal someday is to have it all combined in there, Dan. Someday I would like to do that.

Well, you'd like that litigation to be zero someday, right?

That's exactly my point. You got it.

Okay, perfect. Thank you very much. Good quarter.

Your next question comes from the line of Johnny Brown with Stephens Incorporated. Please proceed.

Hey, Rick and Michael. Thanks for taking my question. You mentioned that you're 90% booked to the low end of guidance currently. I was wondering if you'd be willing to give your lead times. I imagine they're pretty low right now, so what are those running you currently?

It varies, and the orders that we got in the last few weeks or few days are rush orders.

Yes, we are keeping our lead--our lead times are very short. We have a lot of pretty much, all the parts available if people want it. So that was Michael's point. People are putting in rush orders because I think everybody in the channel didn't order anything for three months, so they're finding shortages, and you're starting to see that show up. But as that's the cause of the erratic nature of it, so as we've said, we've booked and shipped, our booking and shipping to date is over 90% of the low end. But that's where we put the guidance so that we would, in this environment, be conservative in how we look at it.

I mean, frankly, argument of 24 to 29 is a very wide range, and how do we come up with 24? It's not very scientific. It's in, so we try to do a whole lot better with (inaudible). That's all we can do at this time.

Okay. Good job, guys. Thanks a lot.

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

Yes. You just said that litigation expense was kind of a wild card here, but as you look out for the year, do you have any idea, do you expect this to kind of last for a couple of quarters? I know that you had a court day, so do you expect it to expand to two quarters?

The point is that the problem in my experience, the court is always a chance, and so it really, then it depends on the call days, so I can't really give you which quarters and say how much.

Okay. So consider it, you kind of hold it steady for both quarters, is what you probably think?

Yes.

Yes.

Okay. And when you look at your product segments, I noticed there to be a couple of wins in TV on the CCFL side in TV for the year. But most of the traction is on the DC-to-DC side. So for the year, we expect acceleration in the DC-to-DC to be much higher, like 75% to 80% of the revenues, and the audio should be significantly lower from where it is at the mix?

Almost. Yes, from the past history, that's the trend. And though the majority of our products being introduced in the last year is mostly these are DC-to-DC products. Yes, your assumption's correct.

Yes, the majority of the audio revenue is in TVs, and so it just depends on how that market goes. If it goes better, it would go up. If it doesn't, it will go down.

Sure. And the last question here is obviously, with the macro, the top line is coming down a little bit, pretty much in line (inaudible). But how can we get some leverage in the (inaudible)? I know (inaudible) is coming down, but the litigation is going up a little bit, but where else do you have, or what levers do you have in order to get earnings leverage?

Well, the main thing we're doing, we're controlling what we can, and we made major steps in dropping our operating expenses, we dropped inventory, we improved our working capital. So we're doing all the right financial moves we can do. But the thing that's affected everybody is if nobody's buying cars from Toyota or electronic products from Sony, we're not going to sell any chips, either. So the problem with the worldwide demand has affected everybody. So we can't affect the top line near term. That's the current situation. So we're trying to get leverage where we can control it. We're keeping our costs lean and dropping out that stuff. That's all we can do.

Got it. Okay, great. Thanks a lot, guys.

Ladies and gentlemen, this concludes the question-and-answer session. Now I would like to turn the call over for closing remarks.

Well, thank you, everybody.

Thank you as well. We'll see you next quarter.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.