芯源系統 (MPWR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Monolithic Power Systems Incorporated Earnings Conference Call. My name is Louisa and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

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

Thank you. Good afternoon and welcome to the second quarter fiscal 2009 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 third quarter of 2009, 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 expected average tax rate for 2009, our belief that MPS is well positioned for future growth, new product introductions, potential customer acceptance and the various opportunities these present, and 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 Form 10-K filed on February 27, 2009, and our Form 10-Q filed on April 28, 2009, which are accessible through our website, 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, and in the case of net income 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 2009, which excludes our expected charges related to stock-based compensation.

A table that outlines the reconciliation 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'd like to start this call by reviewing our second fiscal quarter 2009 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2009. We will then open up the call to your questions.

Let's start with the business highlights. MPS rebounded dramatically from the first quarter of the year by notching a sequential revenue increase of 40%, reporting net sales of $41.2 million for the second quarter of 2009. This total was about flat to the $41.5 million MPS sold in the second quarter of 2008, an excellent achievement given the worldwide economic slowdown.

MPS saw sequential growth across all segments and product families in Q2. As we noted last quarter, several of our newest product families continued to see both sequential growth and year-over-year revenue growth in the second quarter.

We are very excited to announce that we have shipped our first pilot production units of our new 25-amp Intelli-Phase driver family this month, which is a tremendous accomplishment for a product whose first fully functional silicon was in the first quarter of this year. This new product family opens up high-end product markets for MPS, such as core power for notebooks, high-performance graphics cards, communications equipment and servers.

In the manufacturing area, gross margin moved up to 59.1%, which met our expectations for this metric. Our days of inventory dropped back to our target range, coming in at 109 days and inventory at our distributors remained very lean even with the big jump in Q2 revenue. Bottom line, non-GAAP net income was $6.1 million or $0.17 per fully diluted share.

Let's look at the finanicals in more detail. Starting with the P&L, on the revenue line, second quarter 2009 net revenues of $41.2 million increased 40% sequentially from the first quarter of 2009 and were about flat to the $41.5 million recorded in the second quarter of 2008. This sequential increase in revenue reflected a rebound in demand across all product areas from the depressed levels of the first quarter of the year.

Let's break down our second quarter revenue by product category. DC-to-DC product sales were $29.7 million, up 40% from the first quarter of 2009 and up 11% from the $26.8 million recorded in the year ago quarter. The main reason for this increase was the good performance of the consumer and communications end markets for MPS, which includes products such as flat-panel TVs, general consumer electronics products, set-top boxes, modems and wireless LAN cards.

Lighting control revenues for the second quarter were $7.3 million, a significant increase of 57% from the first quarter of 2009, but a decrease of 35% from the same quarter a year ago. This mixed performance reflects that historically the first quarter is our weakest seasonal demand quarter for backlighting revenues. The 57% sequential performance reflects a bounce up from the typically low demand levels in the first quarter due to this seasonality as well as the global recession. On a macro level, the year-over-year revenue decline reflects the continuing shift of notebook backlighting from CCFL solutions to white LED solutions.

Audio revenues came in at $4.1 million, up 18% from the $3.5 million recorded in the prior quarter and up 20% from the second quarter of 2008.

Let's move down to the gross margin line. Our second quarter gross margin was 59.1%, compared to 57.6% in the prior quarter of 2009 and 63% in the second quarter of 2008. This result is at the lower end of our target range and met our expectations given the current economic conditions.

In positive economic cycles, we have operated at the mid to upper end of our target range of 58% to 63% gross margin. But during difficult times, we expect to operate at the lower end of this range due to reduced demand and pricing pressures.

Looking at reported expenses and operating margins, our GAAP operating expenses were $21.3 million in the second quarter. This includes $19.1 million in R&D and SG&A expense, which includes $3.8 million for stock compensation expense and litigation expense of $2.2 million. Compared with the first quarter of 2009, GAAP operating expenses were up by $3.3 million.

The expense mix changed as follows. R&D increased by $1.6 million, SG&A increased by $1.5 million, and litigation increased by $0.2 million.

Our GAAP operating profit was 7% in the second quarter compared with a GAAP operating loss of 4% in the first quarter of 2009.

Let's review our expenses on a non-GAAP basis. Excluding stock compensation, our non-GAAP operating expenses for the second quarter of 2009 were $17.5 million compared to $14.6 million in the first quarter of 2009 and $18.6 million in the second quarter of 2008. The $2.9 million expense increase from the first quarter of this year was primarily due to higher variable spending, such as commissions, travel and bonuses, that were curtailed in Q1 '09.

Compared to the second quarter of 2008, non-GAAP R&D costs were up by $839,000, as we continue to strengthen our R&D teams by adding head count. Non-GAAP SG&A spending was only up $130,000 from Q2 of the prior year.

Our non-GAAP operating margin was 17% in the second quarter of 2009, compared with 8% in the first quarter of 2009 and 18% in the second quarter of 2008.

On the bottom line, our Q2 '09 GAAP net income was $3.2 million or $0.09 per fully diluted share. On a non-GAAP basis, our Q2 '09 net income was $6.1 million or $0.17 per fully diluted share. This result is computed with a non-GAAP tax rate of 12.5%, within our expected average tax rate range for 2009 of 10% to 15%.

We continue to be proud of the fact that MPS has been profitable on a non-GAAP basis, excluding stock compensation and litigation settlements, since our IPO in Q4 of 2004.

Let's move down to the balance sheet and look at some of the major changes this quarter. Cash, cash equivalents, restricted cash and investments were $163.8 million at the end of the second quarter of 2009, up from $150.8 million in the first quarter of 2009 and up significantly from the $126.8 million on the books in the year ago quarter.

In Q2, MPS had operating cash flow of about $13.7 million, as the late Q1 surge in receivables was collected. We spent about $3.8 million on capital in the second quarter, which was largely offset by cash proceeds of $3.1 million from option exercises and purchases under employee stock plans.

Accounts receivable ended the second quarter at $12.4 million, compared with $13.4 million at the end of Q1 '09 and $13 million at the end of the second quarter of 2008. The decrease in receivables was due to the fact that the majority of Q1 '09 shipments were made later in the quarter, and therefore collected by the end of the second quarter.

Days sales outstanding declined in Q2 '09 to 28 days, as a result of the shipment timing issue I just described. Our inventories at the end of the second quarter were $20.1 million or about 109 days of inventory on a historical basis. This compares with $18.6 million or 136 days of inventory at the end of the first quarter of 2009.

Inventory in our distribution channel grew slightly in dollars, but the large increase in quarterly revenue meant that we came in well below our target range of 30 to 45 days of inventory for distributors for the quarter.

I would now like to turn to a discussion of general business conditions. The second quarter of 2009 made up for a slow start to the year as revenue increased sequentially across all product groups.

Geographically, in the second quarter of 2009, MPS shipped 56% of revenues to Taiwan and China and 44% to other regions with Korea performing particularly well. MPS continues to diversify its customer base as our shipments to regions outside of Taiwan and China increased from 38% in the second quarter of 2008 to the 44% just mentioned.

In the new product area, the highlight of the quarter was the initial production shipments of our Intelli-Phase driver family optimized for multiphase system core voltage power supplies in products such as notebooks, computers, graphics cards and blade servers. This family is the world's first Monolithic-integrated driver plus high-side and low-side MOSFET, resulting in a 50% to 60% improvement in total solution size and system cost. This rapid ramp to initial pilot production confirms our belief that customers are very excited about the potential benefits of this innovative product family.

We also released other high-performance products, such as the new 50-Volt Buck Converter for industrial and automotive applications, an Ultra-Small 3 Megahertz Synchronous Buck Converter for handheld and portable applications, and a 50-Volt 8-String White LED Driver for notebook and net-book backlighting applications.

Some of our other new product families, such MiniMonsters, USB Current-Limit Switches and LDOs, continued their sequential and year-over-year revenue growth in the second quarter of 2009. Some examples of where these products are going include flat panel TVs and communication products for MiniMonsters, portable computing for USB Current-Limit Switches, and multimedia applications for LDOs.

I would now like to turn to our outlook for the third quarter of 2009. MPS saw very strong bookings and healthy backlogs in the second quarter, far above normal as the channel had to restock from the low order rates in late 2008 and early 2009.

For the third quarter, visibility is slightly improved but still less than normal due to the economic downturn. Channel inventories are lean, so we believe that third quarter revenue should reflect actual demand. Our expectations for Q3 revenues are in the range of $42 million to $46 million.

Gross margin is expected to be at the lower end of our target range of 58% to 63%. We expect stock-based compensation expense in the range of $3.5 million to $3.9 million. We expect non-GAAP research and development and selling, general and administrative expense in the range of $15.3 million to $16.3 million. This estimate excludes the stock compensation estimates mentioned above. Finally, we expect litigation expense in the range of $1.8 million to $2.2 million due to the commencement of the ITC hearing in October.

In conclusion, we are pleased to report that MPS executed very well in a difficult economic environment. We grew revenues sharply but still controlled our inventory channels closely. We are growing revenues in new product families and continuing our geographic diversification. We are focused on the introduction and design-in of very high performance new products and product families. We believe these actions will position MPS very well for future growth.

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

(Operator Instructions). And your first question comes from the line of Rick Schafer with Oppenheimer. Please proceed.

Hey guys, nice quarter. I had a couple of questions for you. The first one, it looks like on the revenue line, it looks like we are on track through the first half to sort to be flat or maybe even show some growth year-over-year in 2009. I mean, I guess what are your expectations if you look into the second half for demand? I know you said we're basically shipping to demand I think at this point. I mean, it sounds like you don't think there is any more restocking left to happen in the channel. I mean, I guess just -- I guess basically what are you looking at for the second half?

Rick, so far, outlook is pretty good. But I still -- it's difficult for me to say the general business conditions because we're still a small company, shipping below $0.50 parts. But I am excited about all the new products and all the designing activities happening in last year and early this year and we believe will kick in in the second half of this year.

Yeah, just to add a little bit more as -- Rick, to Michael's comment, as we said in the call, visibility is a little bit better; instead of two-week order lead times we are getting maybe four weeks. So we're getting some visibility that's better. But as Michael said, as a smaller company we can't really project into Q4, we can really just look at the current quarter.

But Rick, if you -- you mentioned that you're below that -- you're at the low-end of your target range for distie days of inventory below 30. I mean, do you think there could be some more -- do you feel like channel inventories are still basically too low, there could be some restocking?

That's a good question. I think the main point we see there is it allows us -- the distributors don't have any extra inventory, so any orders they get will be coming right through and therefore reflect demand. In terms of restocking I think that would have to probably be more psychological of whether people thought things were going to get better and they wanted to have more parts or not, so I am not sure that's going to happen or not.

Yeah, but overall, we wanted -- we believe we can control the inventories much better than our distributors. And secondly, during all these new product ramps, especially we need to control the inventories because demand will be sporadic and erratic for the new product ramps, and we don't know when we will start to ramp and how -- and what the quantity it will ramp. So, we'll continue to operate very lean in the distribution side.

And so net-net Michael, are you feeling -- I know you mentioned you are nervous on the last -- on the second quarter -- the first quarter conference call, you mentioned you were really nervous about the second half. Are you feeling better about the second half and the demand picture today versus...?

Yes. Generally, yes, in the business we look forward is there and our customers are a lot more upbeat, but we are still cautious on the existing product.

And then just one follow-up question on gross margin. I mean, you mentioned that you expect it to be sort of at the lower end of your range for the third quarter. Should we expect it to actually move up though in percentage terms or should it be up sequentially versus what we just saw? I mean, I guess how much of an offset is pricing right now?

Well, it's difficult for us to say that. A competitor slashes a big price and so we will follow it. And at the same time, we introduced a lot of new products, which have much higher gross margins depending on when and the qualities of the ramp, and in the second half of year, it's very difficult for us to predict that. However, I don't see it will dramatically drop or dramatically increase in a year, in the next couple of quarters.

Okay, thanks a lot guys.

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

Yes, thank you. Great quarter. I had a question on your guidance, $42 million to $46 million, I know you usually don't give backlog or bookings, but could you maybe at least just qualitatively talk about how you are tracking to the low end of that range especially now that we're already a month into the quarter?

Hi Tore. Yeah, as you mentioned, we don't give our backlog because given the short lead times we have, it's not really indicative of things. I would just go back to how MPS gives our guidance. We have a good short-term process that if you look at our track record is pretty good. So we feel comfortable with this range I guess and that's -- saying that that's about all I can add unless Michael has something more.

As I said it in a previous question, in my answer to Rick's question, the second half we feel optimistic in existing product and more excited about the new product, of course. So everything so far is positive.

I guess, maybe I can ask the question differently. You mentioned June was a very strong month at least based on your DSOs. Is July perhaps even a little bit stronger than June?

I don't have that data. I believe it's about the same.

Great. And congratulations on getting the Intelli-Phase product run out so quickly. Can you maybe talk a little bit about when you start -- when you expect to start to see some revenue contribution from that product line please?

It's a new product and it's in the high-end notebook. It's a new product line and how they plan to ramp at the end of the year or beginning -- early next year, but we don't know what the quantity will be. But the Intelli-Phase -- this is only initial introduction. We target in a big market, entire notebook, high end, low end and medium end, we want everything. And with this type of kind of cost and performance we expect to have a bigger market share.

Okay, thanks. And last question, last quarter you talked about maybe getting some traction in the automotive market. Could you maybe update us on the company's position in automotive please?

Automotive market, very, very small. We introduced some very special product for switch protections and other product, DC-to-DC with very high energy surge protections. Those have started to generate some revenues, very, very small, and as you know in an automotive particularly, they ramp product very, very slowly. But that's the area we'll focus on for the next couple of years and we believe we will generate -- it's our long-term investment.

Yeah, just...

Very well.

Yeah, as he said, we've introduced some 50 volt Buck Converters, which fit right into the automotive market, so again it takes time to get the designs, but we've got those types of products.

It's a very long design cycle and we've been selective on those and decided to get into automotive and that's also crossed over to industrial. So that will actually probably ramp up quicker than the automotive sector.

And that was Steve Pratt, our Marketing Director.

Very well, thank you. Good quarter.

Thank you.

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

Thanks so much and also great quarter guys. Couple of questions. I guess first just on the margins, it looks like you guys are now officially expanding your margin target to 58% to 63%. Can you talk a little bit about kind of the thought process there?

Well, I'm hopeful we can ramp our new product fast enough to go up -- to increase margins slightly, but that's not the purpose, okay. We want the market shares and we want to increase our top line, and margin is really secondary to MPS. It's really a measurement of how well our product is performing in the market.

Yeah, exactly. The practical reason, Patrick, it's just mathematical. We've been at 57% or 58% in a couple of quarters, so we just said, okay, the range is good times, bad times, high to low, you just come up with 58% to 63%. So that's where we think we can operate and keep growing our revenue the way we have.

Okay, got you, it wasn't too surprising, but I wanted to see if there was anything else there. Okay, and the second question here, just in terms of lighting during the second quarter, can you talk a little bit about the breakdown of where you got the most benefit in lighting? I mean, I know you have got a ton of content in notebooks and you're ramping monitors, but could you kind of help us out within those moving pieces?

Yes, I can tell you that. The CCFL for notebooks, we see the demand is dropping, and CCFL controllers -- I mean the control for monitors and those products are doing well and as well as LED lighting, they are doing well.

Okay. Could you maybe perhaps help us break out a little bit between LED and CCFL for you today?

I don't have the numbers. And Rick, do you have the numbers?

Yeah, I can help. Basically right now, white LED is up at higher numbers. It's $1.5 million to $2 million a quarter now, the white LEDs. Controllers are similar numbers and the rest are CCFL.

Okay, got you, great. That's helpful. Okay, and then also I guess just on Intelli-Phase products that you launched, I know that in terms of timing and units is a little bit questionable, but in terms of the content for this, content for notebook and the positive impact there, can you talk about the kind of growth you see there?

It's difficult for us to gauge now. I think we are targeting the overall like $6, $7 in the content and now I think we are very close to it now.

Okay.

Well, we are talking about having the product introduced that can get to that number. Now in terms of designs that have that kind of content, we don't have any designs like that yet. So we'll have to work our way into it. The Intelli-Phase family helps a lot. That's several dollars.

That's a big ASP.

Big ASP, that's a $2 to $3.

(multiple speakers) we are already in. So that's -- like Rick said, that's a $2 to $3 adder depending upon the number of phases, so that will be a good share, a good incremental revenue increase over time.

Okay, got you. That's helpful. And the last question here, I guess this is for you, Rick. How should we think about OpEx if we exclude litigation I guess as a percentage of sales going forward? I know that things -- some of your expenses have started to come back in from the depressed levels earlier, but if you could help us think about that just qualitatively beyond Q3 would be great? Thank you.

Yeah, I think qualitatively what MPS sees is we're going full bore on keeping our R&D strong and also now that we have so many products, we probably have more product than we can handle into the field, so we are increasing our field applications resources. So at the same time, actually when you look at the details, G&A expenses are flat to down year-over-year. So we are not growing G&A, which is appropriate for this company, but we are putting -- we believe we have more opportunities and we are not cutting hiring, we are in fact hiring and increasing expenses. We will keep doing that as we see a lot opportunities in new markets and products.

And therefore as Michael had said, we now have something we've been working out for several years, but we have not only our core of 25 or so engineers in the US doing designs, we have a similar number overseas that are now contributing. So we have a big new product machine and that's going to keep going for MPS. So in terms of how many dollars increase per quarter, that's kind of hard to say. You can see our guidance in Q3, Patrick, it's fairly flattish from Q2, not up much. But that's more or less what to expect. I think once you take away -- Q1, as I said before, was not a normal quarter. We cut every expense we could and we now are at -- when we are hitting north of $40 million, we are back to normal expenses.

And is that mid to high 30s as a percentage of sales, is that kind of a fair way of thinking about that?

Mid to high 30s, what?

As a percentage of sales?

For total?

For OpEx excluding litigation.

Yes, that's about where we're running now. I think as some of these new products kick in, you will start to leverage that R&D more, but right now we are in the build-up phase.

Got you. Okay, thanks and nice job on the quarter again.

Thank you.

Your next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed.

Hi, good afternoon. Your revenues from China were up 60% sequentially. What is your expectation for China in Q3? It looks like your guidance implies a significant slowdown and I am just wondering if the mix potentially also had a little bit of an impact on gross margin?

Yeah, Tristan. I have -- one of the things that -- we report our revenues on a shipped-to basis, so China tends to build mostly like a good chunk of electronic products. Even if the orders are taken in Japan or Taiwan, they all have their own factories in China. So it looks like China is building lots of things. They are building lots of things, they are not consuming most of that. So, it's really a building number, so it's really hard to say that has anything to do with demand. So, we really look at the total number and the fact that the China number is the one that -- the numbers in the other countries show you what's produced in those countries as well, but the China one is more of a catch-all for the entire electronics products. It doesn't really have any implication as to what's going on.

But when you see the number is -- it's not a demand creation.

Right.

And -- but the real demand creation is in China for MPS relatively not as big. And we see with -- as we strengthen our teams and we see the revenue will steadily grow.

Okay. And then in terms of wafer supply, what are the pricing trends outlook for the second half and would you have any expectation for potential pricing strengthening as utilization rates have picked up and continue to pick up in Q3?

I think the pricing pressures that is in the recent quarters and I will say in the coming quarters, it will be really much less than in Q1 and Q2 and especially in Q2, and so that's my comment.

Okay. But no big bounce back, I guess nothing that could be material that you can see for the time being?

Certainly in our business, I never see a price increase in this. Certainly that's not the MPS business model. We only want to increase gross margin by introducing new product.

Okay. And then finally are you feeling somewhat constrained at the back-end or do you have enough of the people you need there and do you see the potential for allocation in the overall industry later this year?

MPS, if you look at the history, MPS is never constrained by our supply, by our manpowers and we'll continue to do the same way. We are very nimble, very quick reactions and we will meet the growth. And as I said in a previous conference, we want to manage our growth to 20% to 30% in a normal economic condition.

Yeah, just to add to that, Tristan, one of things if you noted in the conference call, we had a fairly -- or at least an increase in capital spending for the quarter up to $3.8 million. Most of that was additional production equipment for the back-end, which actually is going to support -- free up our production to produce more, at the same time support the R&D. So we have enough -- that was part of the CapEx increase was to do exactly that. As Michael said, we make sure we have enough capacity to both support the R&D product engineering work and upside production.

Great. Thank you.

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

Thank you. Just to follow on the geographic question, I think, Rick, in your prepared comments you said Korea was one of the bigger areas of growth. Are we to assume that a majority of that delta from the China revenue sequentially was going to Korea or was it pretty much across all regions?

Korea had a good quarter. They -- and it's really reflective of the -- I think in this economic environment the Korean TV and consumer goods makers have been doing well and that's reflected in our numbers as well.

Okay. And then just in that same vein on, Taiwan also was up nice sequentially. Are we to assume that was probably lighting driven?

Yeah, it was a snapback. The Q1 was just a dismal quarter for backlighting and Q2 picked up. That was the main reason.

Okay. And then going out on your favorite topic, on litigation, sarcasm there, wondering what we should be looking for in the fourth quarter. I think you have a big event coming up in Q3. Is this going to tone down a lot or should we be looking for a relatively consistent number from Q3 to Q4?

Yeah. The trial starts in October, Vernon, but it's not over. So it will -- there's a first hearing and then there's a second hearing and that will continue on to May of '09, something -- or May of 2010, I'm sorry. So it will probably look to be similar levels would be my best estimate, although that's -- it's very difficult to estimate the legal fees, but that's my best estimate.

Yeah, again our favorite question, our destiny will be controlled by the judge.

Okay. And then finally on Intelli-Phase, just in terms of that dollar, can you just go through again what sort of ASP implications you're looking at on that product to get to the dollar content numbers you were articulating earlier?

The notebooks now have a two or three phase and the majority are three phase. And I'll let Steve comment about the pricing.

By the way, Steve Pratt is our Marketing Director. So just to make sure everyone understood that the third person is talking now. Go ahead, Steve.

Hi Vernon, yeah. So each phase is just under $1, and so -- in notebook. And so with three phases, you're close to $3 just right there. And it's depending -- and that also will modulate to some extent by volume. And then there's also what probably hasn't been brought up yet is there is the server segment, which will be more phases and more dollar content. But back to the notebook space, a lot of that is under $1 per phase, just under $1 per phase and that's where you get a sizable contribution to the net-book dollar content.

Okay, all right. Thank you very much.

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

Great. Thank you. I was hoping you could talk a little bit about the products. I think as of -- at the end of last year you had introduced about 150 new products in 2008. How many of those are going to be ramping revenue-wise in the second half as you talked about? Is it all those ramping or is it some of those ramping? And then you had to add the FAEs to get the rest of the products out, just help me understand that.

Yeah, let me answer that question. I think you lose our product in the count and so do I. I would -- I think the best answer for our marketing director to answer that, okay.

Okay.

So we actually released about half the products you mentioned, okay.

I think the 150 was the total number, Steve, but --

Total number, right, okay.

We released well under that. And so the traction takes about two years, okay. So you're not going to get material revenue this year. Of course a few of those products will take off. But in general, we expect the material gain in revenue from 2008 releases will be in the 2010 timeframe.

What we do highlight, Steve, is when we have very fast pilot production, for example with the Intelli-Phase, we'd like to highlight that because that's a leading indicator that people like the product.

Right. And that's the product that -- it's sort of surprising how quickly you got that out. Was there something specific about what you guys did there to get that one out faster than others?

Well, we've actually been working on it since 2008 and we've put a lot of resources into that. So I think it was MPS putting the resources into it and then working closely with several notebook and server customers to make that work for those individual accounts.

And then just finally on the lighting, on the LED product and the white LED drivers, how much of that business that's there is still sort of legacy white LED business versus new stuff ramping?

Most of that's all new.

Yeah, most of that's all new and we see the lighting, okay, since you mentioned the LED lighting and we see the big opportunities both in the display market as well as in the general lighting. And we see our products are doing really well out there. And we'll continue to bring a few more significant products in that area.

Okay. And the last question [for you] is within -- on the display side, how much of that now -- how much of that market at this point is CCFL market and how much is LED at this point do you think?

Rick, maybe you have the numbers, so I can --

Yeah, I mean, it looks like the -- I mean, the current shipment volume, CCFL is still slightly ahead, but the new designs seem to be mostly white LED.

You're talking about design, talking about revenues.

Yeah, revenues are still CCFL, but it will swing the other way.

Yes.

I meant of the displays being produced by your customers, how many -- what percentage of what they are producing now is LED versus --?

The LED is still smaller numbers and I think in the large format.

Right.

But the notebook side and IT, 50% of notebook was -- is already in LED displays. Only 15, 17 inch large panel still use CCFL.

Okay, great. Thank you very much.

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

Hi, guys. A couple of gross margin related questions. When you talk about the low end -- going to the low end of your historic range because of what's going on in macro that makes a ton of sense. Approximately how good does macro have to get again before you think that pressure abates? Or is it really going to be driven -- your gross margin going back up going to be driven more by the new product penetration?

Let me answer your first part of that question first. In Q1, end of Q1 and Q2 timeframe, the competitors slashed a big -- big price -- slashed the prices relatively in a very high percentage, okay, so we followed. A majority of our products are affected by it. And new product introductions all have -- it sort of disrupted the rhythm. And as you look at it in the last two or three years, they were very stable. And so by this event our margin dropped a couple of percent. I don't see in the near future sort of where we will jump back to 63%. But how we'll do after that is really dependent on our new product introductions and the speed of acceptance.

Okay. So is there any way you can help us judge, and I know it's -- you don't control how those products ramp necessarily with your customers, but if it is the middle of next year or end of this year versus end of next year, what sort of percent of your revenues would be coming from those new products, just to give us an idea how we should expect them to ramp?

Yeah, Ross, as we had said actually on our last conference call and I'll probably repeat it for this conference call is for 2009 we don't expect much change in the environment that would affect gross margins. I mean, the difficult economic environment will persist, and so we don't expect any boost from that this year. As to whether it happens in the middle of next year, I think you guys and the economists can try to figure that out. We don't really know that. So as Michael said, we're going to focus on the new products.

And one of the issues -- not an issue, it's just a reality. If you remember Steve Pratt's comment, with an 18-month to 2-year design cycle, I mean, for us we're excited when we ship a few hundred thousand dollars of a product. Well, there isn't enough of that obviously to affect the gross margin. So it takes awhile to get enough of those new products in there to affect the gross margin. So we wouldn't expect from just the general numbers; that that's a 2010 event.

But here, the MPS is again for margin is secondary to us, okay. Although we may swing up a percent, a percent and a half, okay, it's very, very possible because revenue numbers keep increasing and become normal, so more predictable in Q1 or Q2 times. And so we can optimize a lot more, so, not surprising; we'll go up about a couple of percent or so. But overall, we do not focus on our margins. We focus on our product introductions and getting more market shares and also getting into a new market.

Great. And then a follow-up question, it's not so much gross margin related and I realize you're not guiding for the fourth quarter, but historically, you're usually down, I don't know, 3% to 5% sequentially or so with your normal seasonality in the fourth quarter. Given what's going on in macro, the snapback you're seeing right now, lengthening lead times, short inventory -- lean inventory I should say, et cetera, could you just walk us through what the puts and takes might be that would make the fourth quarter of this year either kind of normal seasonality, better than normal, worse than normal?

Well, it's very difficult for us to see it and I try to. And I think this year is from -- I'm looking from today and this year will be a normal year. But I can't really forecast just based on what I might -- I'm pulling the numbers from my hairs.

I think that's -- a normal year, as you said, Ross, is down 5% to 7%, something like that would be the typical normal year. What would make it better would be some unusual positive activity. I think what would make it worse is Christmas is gloomy and even lower. So I don't know which way that's going to happen. So we're not trying to predict that and I think we'll just keep doing, that's why we don't give guidance.

Steve tries to answer your questions.

Great. That's it from me. Thank you very much.

Your next question comes from the line of Arnab Chanda with Roth. Please proceed.

Thank you. A couple of questions either for Michael, Richard or Steve. A question about the gross margin again, sorry if I was -- if it's not going through my head here. Normally if you have revenue growth, you should probably see some margin expansion excluding pricing I would guess. Based on the guidance that you gave, should we assume margins are basically flat, because the low end of the range is a little bit hard for me to understand? And with high -- and at the same time, if you have revenues going down, should that go the opposite direction? If you could kind of explain that, that would be great.

Well, I guess I'll start off and then Michael can finish that. I mean the assumption that when revenue goes up, gross margin goes up, that's not necessarily true for fabless companies. We don't get any OpEx. We don't even leverage out of increased margins except the mix. And the mix can change, or the number of product can change. But a fabless company gets nothing out of ups or downs per se, that's the advantage of it. So I wouldn't go along with increased revenue equals higher gross margin, not for us.

Yeah, that's kind of business (inaudible). But we have so many different products and depending on which side is -- has more volumes, it would change. And again, I don't see -- if it's a 1% swing, okay, it's very usual. And so far you see our history is very, very steady, but we don't swing a lot. And other than that, we can't say anything more to report.

Okay, great. Well, the reason I mentioned is you did see a 40% revenue growth and margins did go up from Q1 to Q2. So is it mostly just mix and pricing that really drives margins would you say for you?

Yeah, mix and pricing. In Q1 when revenue was way down at $29 million, we do have a back-end [test facility]. It doesn't have much impact on margin, but maybe a point when it's way underutilized. That's now gone, so there's a slight impact. That was part of the uptick, but the rest of it was mix. DC-DC grew well and that's a good margin mix for us.

Thanks, Rick. Can I ask a question about your -- the new product, you're talking about the Intelli-Phase driver? A couple things about it, one is that could you talk about sort of what sort of TAM expansion that affords you when all the products are released? And then secondly it seemed like you were able to release the products very quickly, especially for -- compared to competition. Is this because you have a benefit in process, is there an operational benefit or is there something that you're doing that's a little bit different, and how sustainable that lead is? Thank you.

Relative to why our -- and there's other drivers out there, but we're the first monolithic one, meaning integrated one, in a small size and that's due to our technology. And I'll pass it off to Steve.

Yeah. Regarding the technology, what we're replacing is not just the existing solutions, but the way we designed our part. It's a monolithic part. It runs at a higher frequency; that saves external components. And that total solution is a significant reason why customers are gravitating to our solutions and the higher efficiencies.

And the TAM question?

The TAM question.

Well, that's one -- we can use a term our sales guy would say, it's huge. I mean, that's more of a joke, sorry, have to lighten this thing up. The --

This -- in the notebook space --

In the notebook space, you can say you can take $2 or $3 and multiply it times notebooks, that's --

It's doubling our served available market.

It doubles our served available market. In servers, we don't really -- we're not in servers, so it's pretty much you can take the thing...

100% increase in the server available market.

100% increase to servers, and how big is the server market, I think those are $5 plus per server at least, it's multiplied times the number of servers. So you can figure that out.

But it's huge, that's not a joke.

Yeah, that's not a joke.

We increased roughly over [$1 billion].

That is a huge number, okay. One last question if I could about your Lighting Control business. Obviously most of it's CCFL. From your commentary what I didn't understand exactly was do you think you'll have higher or lower share in LED versus CCFL and is that a benefit for you or is there a crossover time where one will decline and the other will grow? If could you just qualitatively describe that a little bit, that would be great.

Absolutely, one is decline, the other one is going to increase. And LED lightings we spread over in many different areas. And so that market we see will increase and the market size will increase and so are our products, a number of our products. And CCFL particularly for notebook will subside.

Yeah, I think the way to look at it, CCFL backlighting was a very specific difficult product area with four -- three, four guys in it, but it wasn't very big. White LED will have a lot more competitors. At the same time it's a lot bigger market. The reason we called -- we named it Lighting and Control, it's not just backlighting for notebooks anymore, it's general lighting, it's home lighting, it's industrial lighting. There's a lot of lighting areas in white LEDs over the next five years that we see big opportunities. So I think what you'll see is our individual share will be a lot -- percentage-wise smaller, but the market's a lot bigger. But I think that's, you put the two together.

Sure. Rick, just one last question about that, when do you think that when LED basically subsumes -- the growth in LED subsumes decline of CCFL, and that product line grows, is it a couple years away or is it going to be faster than that?

Yeah. That's actually where -- I expect you analysts to earn your money and figure that out for us.

We don't try.

We like your backup model, Rick, but then we can tell you. Thank you.

Your next question comes from the line of Doug Freedman with Broadpoint AmTech. Please proceed.

Hi guys. Thanks again for taking my question, and a great quarter that you've put up. I guess a lot of questions have been asked and answered. But if you could talk a little bit about the audio market and what trends you see there? And then I may double back on one or two things just for clarification.

Yeah, you mentioned the least favorite of our product lines. And that's a loss in gross margins and we tried to stabilize. And although we see -- still see some growth in -- but I don't like the product line, okay, and we try to minimize the effect.

It's not a product emphasis for MPS. We're not putting the same resources that we're putting into Intelli-Phase. It's a difficult market, it's highly competitive. So it's not an emphasis for MPS.

Okay. Is it safe to say that Intelli-Phase ramping offsetting audio trends would be positive to gross margins just from a mix transition?

It's not a one to one and we have a lot of products that can offset it and I will make sure that -- of that. And so we have all the other products I am very excited about. And so -- but overall, we still manage a 20% to 30% growth in the normal economic conditions.

Okay. And then Rick, any chance you can offer a CapEx number for the full year?

Yeah, actually a good question. For the year so far it's been about -- probably about $5 million to $6 million. We will probably spend another similar amount in the second half, so it's probably $8 million to $10 million.

Okay. And if I could just sort of revisit some of your commentary as far as the market and what you're seeing, would it be correct to say that you think your book-to-bill for the September quarter is going to look flat and that would mean that you're shipping to demand? I mean, I'm having trouble understanding your commentary as far as distribution inventories remain lean. But remind me, I believe you are still on a selling accounting base. Any chance that distribution would stock up and that you would ship maybe above demand levels and that you would end up -- if you could just talk a little bit about some of those comments that to me don't seem to go completely hand in hand?

Well, I think that the comment was simply that the distribution channel -- we are in a selling basis. So even though we grew revenue a lot, I wanted to assure investors that we didn't grow revenue by putting a bunch of product into distribution. We didn't. So distribution inventories were up slightly, but on a days basis were well below the 30 days target. So the main purpose of that, Doug, was to assure people we didn't get the number by putting a bunch of product into distributors.

So the second part of your question, I don't know. I mean, the distributors typically in a difficult economic environment because they're in the sell-in mode, they cannot return parts to us, they can't get price changes and so forth. What they buy, they keep. So they tend to be more reluctant to stock inventory and they only do it with what I will call real demand. And that was the nature of the comment, it's likely in this environment that they'll -- what they're selling through and ordering from us is "real demand" because they're nervous about stocking stuff up. Now that's just our belief. We don't have foresight on that, but that was really the nature of the comment. Does that answer your question?

Yes. So --

So let me add to it, okay, and yes, one thing that Rick has pointed out, the revenue effect of stocking in distribution will affect our revenues numbers. But we don't actually -- from the financial side, yes, that's what Rick sees. From the real operation side, we do believe we can control the inventory much, much better than our distributors. All our products ship out from Chengdu, China and within a day or two we can reach to our customers. And there is no reason for our distributor to stock inventory. However, in the normal time, I mean, instead of normal time now to me is unusual time because we have like 50 or 70 new products ramping and we can't control the rate of a ramping. That's why we control the inventories. But in steady state times, okay, we do want to stock the inventory in our distributions.

Okay. I do follow that, thank you. Rick, can you talk about -- you've had very strong cash performance. What's your present view on the future use of cash and share count, whether you would enter into -- reengage in a buyback program?

Yeah, I think I can make the same comment I made last quarter. We're happy we're a big cash generator. But in the difficult economic times, you can never have enough cash. So at this time we're going to hold on to it. We did a good buyback last year, which helped keep our share count flat year-over-year. On the other hand, in these conditions, we still believe we're not out of the woods and more cash is better. So that's what we're doing for now.

All right, great. Thanks guys and congrats on a nice quarter.

Thank you.

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

Well, thank you everyone for listening to our call and we look forward to chatting with you at the end of the third quarter. Thanks.

Thank you.

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect and have a great day.