芯源系統 (MPWR) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2010 Monolithic Power Systems Incorporated earnings conference call. My name is Chanel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions)

I would like to now turn the presentation over to your host for today's call, Mr. Rick Neely, CFO. Please proceed.

Good afternoon and welcome to the second quarter fiscal year 2010 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today's call.

In the course to today's conference call, we will make forward-looking statements and projections that involve risks and uncertainties. For example, our business outlook, including our business and financial outlook for the third quarter of 2010; projected third quarter revenues, gross margins and net margins; our expectations for third quarter litigation, stock-based compensation and non-GAAP operating expenses; our target operating range for gross margins, net margins and inventory; our expectations for revenue and net income growth beyond Q3 2010; our expected average non-GAAP tax rate for 2010; our expected production capacity in future quarters; our belief that MPS is well-positioned for future growth; the expected seasonality of our business; our expectations for future cost reduction and new product introductions, potential customer acceptance and the opportunities these present and the prospects of expanding our market share.

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-Q filed on April 29, 2010 which is 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 effect. We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the third quarter of 2010 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 would like to start this call by reviewing our second quarter fiscal year 2010 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2010. We will then open up the call to your questions.

Let's start with the business highlights. In the second quarter, MPS experienced the best quarter in its history, growing revenue 35% from the second quarter of the prior year to hit record net sales of $55.7 million. This figure is not only a new quarterly record for MPS, but it is a sequential increase of 11% from the prior quarter, when MPS set its previous record quarterly revenue total. This outstanding revenue performance also leads to our most profitable quarter in history, with non-GAAP net income of $11.7 million.

MPS continues to see strong demand in all of its major end markets and our second quarter revenues were limited by product availability, not customer orders. This quarter MPS saw substantial growth in our DC to DC market. Our fastest growing product family in this segment continues to be our MiniMonster product. MiniMonster sales grew over 255% from the second quarter of 2009 to over $9 million for the second quarter of 2010.

MPS continues to rollout new MiniMonster solutions to support design activity for products such as the 2011 model year flat panel TV monitor and Blu-ray players. In addition we expanded our served available market with the industry's highest current density, highest input voltage integrated DC to DC buck converters for computing and industrial application. We have also added to our industrial, telecom and networking portfolios with the introduction of the 55-volt high current DC to DC boost regulator that leverages our high-voltage and high-current process technology strength.

In the lighting market we introduced our first offline high-brightness white LED driver for the LCD TV market and a 12-plus channel white LED driver with expandability for large LCD panels.

The revenue growth opportunities that MPS is finding with our new products are driving an improved longer-term outlook for our financial model. We now feel confident that for the third quarter of 2010 we can target non-GAAP net profit in the range of 22 to 27% of sales as our new model, up from our prior target of 20 to 25% of sales.

In the manufacturing area, gross margin was 58.2% which was sequentially flat from the first quarter of 2010 and down slightly from the 59.1% gross margin recorded in the second quarter of 2009. Our internal days of inventory fell further to 57 days, as very strong end demand kept us well below our target inventory range. Inventory dollars at our distributors grew due to shipment timing issues and remained at the lower end of our target range of 30 to 45 days of stock.

Bottom line, non-GAAP net income was $11.7 million or $0.31 per fully diluted share. This resulted in non-GAAP net income of 21% of revenue. Our GAAP net income for the [third] quarter was $6.4 million or $0.17 per fully diluted share.

Finally, today we announced a stock repurchase plan of up to $50 million to be executed between August 2010 and December 31, 2011, which allows us to increase value to shareholders from the strong cash flow that MPS is generating.

Let's look at the financials in more detail. Starting with the Profit and Loss statement, on the revenue line, second quarter 2010 net revenue of $55.7 million increased 11% sequentially from the first quarter of 2010, and are up 35% from the $41.2 million recorded in the second quarter of 2009.

Breaking down the revenue by product type; first quarter DC to DC product sales were $45.6 million, up 13% or $5.3 million from the first quarter of 2010 and up 53% from the $29.7 million recorded in the year-ago quarter. This growth was led by our MiniMonster and LDO product families. The MiniMonster line grew more than 255% year-over-year and also increased sequential sales from the first quarter of 2010 by 58%. Our new LDO product did very well in the second quarter, growing 169% from a year ago and 121% from the prior quarter.

The largest end markets for MPS in the DC to DC product family continue to be flat-panel TVs, general consumer electronics products, set-top boxes, routers and wireless LAN cards.

Lighting control revenues for the second quarter were $7.5 million which was about flat to the $7.4 million we did in the first quarter of 2010 and a small increase of 2% from the same quarter a year ago.

As we discussed in the past, there has been a substantial revenue shift within the Lighting control group as the preferred technical solution moves from CCFL backlighting to white LED backlighting. In our new white LED driver products we grew revenues about 128% year-over-year to about $4 million per quarter in the second quarter of 2010. At the same time, our traditional CCFL inverters and CCFL controllers shrank 47% year-over-year. This year-over-year decline in traditional CCFL is likely to continue as we reflect the continuing shift of notebooks and other backlighting solutions from CCFL to white LED solutions.

Audio revenues came in at $2.6 million, up slightly from the $2.5 million MPS did in the prior quarter but down 36% from the $4.1 million recorded in the second quarter of 2009, as we continue to manage our participation in this segment based on market conditions.

Let's move down to the gross margin line. Our second quarter gross margin was 58.2%, flat to the 58.3% we did in the prior quarter of 2010 and down slightly from the 59.1% in the second quarter of 2009. This result was in line with our expectations and guidance for the quarter. We have been experiencing very tight wafer capacity availability the past two quarters and we expect to catch up to end demand in the fourth quarter of 2010.

Now let's look at our reported expenses and operating margins. On a GAAP basis our operating expenses were $25.6 million in the second quarter. This includes $23.4 million in R&D and SG&A expense, which includes $5.4 million for stock and compensation expense and litigation expense of $2.2 million.

Compared with the first quarter of 2010, GAAP operating expenses were up by $2.6 million. The expense mix change is as follows. R&D increased by $745,000; SG&A increased by $1.2 million, litigation increased by $651,000. As a result, our GAAP operating profit of 12% was slightly down in the second quarter 2010, compared to our GAAP operating profit of 13% in the first quarter of 2010. Compared to the second quarter of 2009, our GAAP operating expenses were up by $4.3 million. R&D expense was up by $2.1 million; SG&A increasing by $2.3 million and litigation expense was flat to the second quarter of 2009.

On a non-GAAP basis, our operating expenses, excluding stock compensation for the second quarter of 2010 were $20.2 million, up slightly from the $19.1 million we spent in the first quarter of 2010 and up from the $17.5 million we spent in the second quarter of 2009. Looking at the detail of second quarter non-GAAP spending, all of the quarter-over-quarter increase was due to litigation expense as we wrapped up the ITC case that covered our older CCFL parts. Our combined R&D and SG expenses were flat from the first quarter of 2010.

Compared to the second quarter of 2009, non-GAAP R&D costs were up by $1.7 million as we continued to grow our new product offerings and R&D team. Non-GAAP SG&A spending was up $1 million from Q2 of the prior year, primarily due to increased headcount and commissions. Finally, litigation expense in the second quarter was $2.2 million which was flat compared to the second quarter of 2009.

Our non-GAAP operating margin was 22.2% in the second quarter of 2010, compared with 20.5% in the prior quarter of 2010 and 16.8% in the second quarter of 2009, a very nice increase.

Switching to the bottom line, on a GAAP basis, our Q2 2010 net income was $6.4 million or $0.17 per fully diluted share. On a non-GAAP basis, our Q2 2010 net income was $11.7 million or $0.31 per fully diluted share and we achieved a non-GAAP net profit percentage of 21% of sales in the second quarter. This result is computed with a non-GAAP tax rate of 7.5%.

Let's look at some of the major changes to the balance sheet. Cash, cash equivalents and investments were $209.3 million at the end of the second quarter of 2010, up from $195.1 million at the end of the first quarter of 2010 and up substantially from the $163.8 million we had on the books in the year-ago quarter.

In Q2, MPS had operating cash flow of about $14.1 million. We purchased capital equipment and outfitted our new R&D building in Chengdu, China for a total of about $7.2 million in the second quarter, which was offset by cash proceeds of $7.7 million from the option exercises by employees.

Accounts receivables ended the second quarter at $30.3 million, compared with $24.5 million at the end of the first quarter of 2010 and $12.4 million at the end of the second quarter of 2009. The increase in receivables from the prior quarter were the result of our second quarter in a row of record revenues, higher shipments than normal for the third month of the quarter and a mix swing of relatively more shipments to customers with longer payment terms.

Days sales outstanding were 50 days in Q2 2010 as a result of the elements I just described. In Q1 of 2010, our DSOs were 44 days and in Q2 2009 they were 28 days.

Our internal inventories at the end of the second quarter were extremely low at $14.5 million or about 57 days of inventory on a historical basis, as a result of the continuation of our record quarterly shipments in the second quarter. This compares with $14.6 million or 63 days of inventory at the end of the first quarter of 2010.

Inventory in our distribution channel grew in dollars to match the Q2 revenue increase but total days of distributor inventory were at the lower end of our target range of 30 to 45 days for the distribution channel, flat with the past two quarters.

I would now like to turn to a discussion of general business conditions. MPS has had an extremely strong 2010, hitting all-time quarterly revenue records two quarters in a row. Geographically in the second quarter of 2010, MPS shipped 51% of revenues to Taiwan and China and 39% to other regions with Korea performing particularly well in Q2. By segment, MPS had excellent growth in the industrial area as our power management products are penetrating the growing smart meter market and automotive displays and increased sales in the communications segment primarily driven by new router and set-top box business.

Last quarter we talked about an avalanche of new products in the past 18 months and we are now seeing the revenue results. In Q2 almost half of our revenue came from products introduced since the first quarter of 2008, a very significant achievement and a good leading indicator of more growth to come. In the second half of 2010 we expect significant new revenues in white LED drivers for monitors and car devices for panel manufacturers and high-powered high-voltage DC to DC converters including our new Intelli-Phase line for high-end graphic cards used in notebook computers.

Existing markets are running on all cylinders as MPS continues to grow. We estimate that our served available market has increased by $800 million to $1 billion with this new product push and believe this will set the stage for continued strong revenue growth in the future.

I would now like to turn to our outlook for the third quarter of 2010. Q2 2010 was another record revenue quarter for MPS and we continue to see very healthy bookings. Our lead times remain in the range of about 12 to 16 weeks. Our second quarter revenue was constrained by product supply, not customer demand. We made efforts to increase our production capacity aggressively at the beginning of the year and we are paying higher wafer prices to secure more production volume. However, Q3 revenue will continue to be limited by product supply, particularly for the new products released in the last 18 months.

We project third quarter 2010 revenue in the range of $66 to $70 million with gross margin in the 54 to 56% range. We are running the business to maximize the bottom line, not solely focusing on maximizing gross margin. This year we saw a great opportunity to grow our revenues rapidly and feel we are about at the optimum point for trading off revenue and gross margin for the rest of the year. In the future, we will react to market opportunities which in the end will determine whether our gross margins go up or down. Longer term, we will likely operate in the 50 to 55% gross margin range.

Going forward, our focus will be on revenue and non-GAAP net profit growth.

For the third quarter of 2010 we expect non-GAAP net profit percentage to be at the mid to upper end of our new revised net margin target model of 22 to 27% of sales. We expect stock-based compensation expense in the range of $4.7 to $5.2 million. This forecast remains higher than historical averages, as MPS issued performance grants at the beginning of this year to its executives, rather than time based grants we had used in the past. The accounting rules for the performance based grants result in MPS having to record more of the total expense in the first year than under the typical four-year time-based grants.

We expect non-GAAP research and development and selling, general and administrative expense to be about flat from Q2 2010, in the range of $18 million to $19 million. This estimate excludes the stock compensation estimate mentioned above. We expect litigation expense to decline to $500,000 to $700,000 due to the completion of our outstanding CCFL litigation. Finally, we expect our non-GAAP tax rate to remain in the range of 5% to 10%, based on our sales and profit patterns globally.

In conclusion, we are pleased to report that MPS has made continuous investments in R&D and new product innovation over the past two years. It is clear that the new products have translated into significant growth in revenue. We're delivering a broader product portfolio that is dramatically growing revenue and the bottom line. We expect to continue to execute and grow our market share and profits with this approach.

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

(Operator instructions) Our first question is from Steve Smigie of Raymond James.

Congratulations on the very solid revenue growth here. I guess the first question is on the gross margin; is the majority of the sequential drop from Q2 to Q3, is that based on paying higher to get the extra capacity or are there other factors in there?

Yes Steve, that's it. Of the 3 percentage point drop, most of that is just higher wafer prices that we'll be paying in Q3. We did get the capacity; you can see that in our revenue, but we had to pay higher wafer prices.

It sounded like your new gross margin range is 50 to 55 so I guess is that a GAAP 50 to 55 and is that something that will happen near-term? In the past you sort of said you have lower stuff and you kept performing better than that, so I guess I'm wondering if three quarters out you get the capacity back will it snap back up and then the 50 to 55 is maybe two years out before you really get there?

That's exactly right and this is a long-term model, 18 to 24 months out. In the near quarters we expect to remain the same or even the wafer price getting better, we will improve the gross margin, but I'm not forecasting. And usually when wafer price is getting better, also the market gets more competitive.

Also Steve, there's very little difference between our GAAP and non-GAAP gross margin, so I really don't talk about it. It's the same number primarily.

You guys obviously benefiting from significant introduction of new products. I think you went from 2007 to 2008, you demined 151 products and then went from 151 to 230 in 2009. What's the pace for 2010; does that 230 jump to 350 or something like that or are the numbers getting big enough that you don't quite see that significant jump?

Our plan for 2010 for the year is going to be similar to what we did in 2009. 2009 was a huge step; 60 to 70% more new products in 2009 than 2008. In 2010 we are going to be shifting our products - we'll have the same number of products introduced - similar number of products introduced in 2009 but when you look at the complexity of the products in 2010, they'll be more complicated DC to DC buck converters as opposed to 2009, where we introduced quite a few low dropout linear regulators and current limit switches.

Your next question is from Vernon Essi of Needham & Company.

Wondering if you could discuss a little bit about the lighting market and you had said obviously you've got the CCFO legacy business working against you there. Can you give us an understanding of the breakout on the LED versus CCFO for the quarter?

Basically like we said, this is the crossover quarter in that the majority of our revenue in lighting control is now white LED, so we did about $4 million of the 7.5 was white LED. The traditional CCFL inverter is down to about $1 million and the rest of it is CCFL controllers.

As far as the markets, we're seeing very nice growth ramping in the second half of this year in the white LED backlighting space and the market drivers there are in the panel manufacturers for notebook computers and for monitors. And then a little bit longer term would be the TV space.

That leads to my other question; any anecdotal signs out there on the notebook market? There seems to be some supply interruptions and what have you; any thoughts as to how that's shaping out into the summer months here?

It's really early to tell for us. We're seeing continued backlog buildup and we're seeing steady revenue through the second half of the year. There may be some slight push outs as the other products catch up. And remember that 2010, the second half of this year, we're still a relatively small percentage of the notebook market, so we may not see it as significantly as some of the other players.

I understand. Your revenue growth trajectory is very robust in this sequential transition so you're sort of an outlier of sorts and obviously I know you've got new products coming out. My last question, which is on Intelli-Phase, any update there? Sounds like you got some interesting wins possibly that are coming into the fold in the back half.

Vernon, Intelli-Phase is a long-term selling process. This is a big product going at the CPU core, a new space for us and Intelli-Phase is the muscles behind the high-current multiphase CPU core power supply. So our emphasis hasn't changed; we're focusing on servers and that's a longer-term sell.

But to answer your question, in the short-term we do see the volumes ramping up now in a different application. In a graphics card, as I said earlier, those product lifecycles are much shorter and we expect it to ramp-up now.

Okay, so you're primarily with Intelli-Phase getting traction in graphics more than anywhere else right now?

In the short-term, yes.

And also some of the notebooks in the near-term - in the midterm.

Is midterm still this year or we're talking 2011 here obviously?

No, 2011.

Your next question is from Ross Seymore of Deutsche Bank.

Just want to dive into the gross margin side a little bit. Walk us through the availability side of things as you go forward on the wafer side; is that from bringing on new foundry partners or is your capacity limited to the CapEx increases that would happen at your existing partners?

I'll start off. Basically, we just basically bought from our current partners so we've gotten more capacity from our current partners and of course they've taken advantage of the shortages to increase their prices like they've done with all the other fabless customers so we're no different than that. But Michael can tell you about our efforts to expand into other partners.

We are expanding and we are engaged with other foundries to reduce or minimize the liabilities and we take a very conservative approach and we're just paying higher wafer price to secure this year's volumes. The Q3 revenue reflects that. We're expecting catching everything up and catch up most of our customer demand in Q4.

So I guess that leads to my next question. Did you just say you're going to be caught up in Q3 so Q4 would be kind of normal seasonality or is it going to take you through Q4 to catch up, given the extra supply you purchased?

Ross, we said in the script, we will be still product limited in Q3. We expect to catch up in Q4.

So this being equal, being up much more than normal seasonal to the extent normal is even an accurate term these days, being bigger than the normal third quarter doesn't in any way rob from the fourth quarter, I guess is the way to read that?

Well, actually you can think of it as a normal seasonality. Now we have every quarter is a record and I remember in the past in the third quarter we jump some 20-some percent and we did it again in the past the demand is limited and now this time not the demand; demand is even much bigger; we couldn't deliver those - fulfill our customers' requirements.

So I guess the follow-up linking it back to my original gross margin question is if we're back to some semblance of normal seasonality for the fourth and first quarters, those are usually down quarters. I would assume that that allows a little more leeway on the demands from your foundries; is that where you would expect pricing and/or kind of your scale to allow the gross margin to improve as your costs come down there?

At this point we focus our wafer capacity and that's our main focus, to fulfill our customers' demand and Q4, we don't see that clear now and the demand is still quite strong for MPS products, but we can't tail down the quarter yet.

But I guess conceptually if you are down in those quarters the normal seasonal that would alleviate some of the capacity concerns?

Traditionally, nothing's been normal recently. Typically Q3 is our biggest quarter and Q4 is seasonally down, so that's the normal historical pattern that hasn't always held recently. And I think the other question, the reason Michael and I can't really answer it is we're in a competitive business; if demand goes down, wafer prices might go down or they might not. It's unclear yet where that's going to shake out. So it's not up to us whether wafer prices go down; we really have to look at the general demand.

Your next question is from Patrick Wang of Wedbush Morgan Securities.

Congrats on the huge revenue guide. I guess the first question I just wanted to ask about that guidance, when you think about the growth here in the third quarter, can you talk about some of the bigger pieces that are taking you guys up for such robust growth?

Patrick, some of the growth drivers, obviously TVs, Blu-ray players are doing quite well and that's been a consistent theme before at MPS, so more of the same. Now looking beyond that, we're very excited about industrial automotive. In that segment we'll be closing out 2010 the revenue contribution from that product family is going to be more than 10%, so we're really excited about that product family.

In other areas we have communications for example, set-top box, more products are going from LGO to a DC to DC converter to comply to Energy Star compliance and European code of conduct, so those are really good opportunities for MPS. And another segment, enterprise storage, we're seeing very good growth in DC to DC power and also load protection solutions in enterprise storage. And the last, notebook computing and in the short-term we'll see a good second half in that space for DC to DC power and a little bit longer-term moving into servers and gaming opportunities for our DC to DC power solutions.

Okay that's helpful. I guess another way to look at it was geographically Korea has become a more important part of your business here. Are you guys continuing to see an up-tick here in the third quarter? Is there any sort of mix geographically, any trends that we should keep an eye on?

No, I think it's more of the same.

Appreciate that. Then for my follow-up I wanted to ask a little bit more about gross margins. I just want to make sure I understood it correctly. You guys got gross margin of 55% here in the quarter. Rick you talked about a 50 to 55% longer-term target and in the midterm it sounds like when supplies get better it almost sounds like your margins could improve again before coming down again. Did I get that right?

Yes. What we're trying to do, Patrick is we think for the rest of this year we'll be about the range we are right now, 54 to 56%. We've always said we want to communicate where our business opportunities are and what the direction is and so we think if you look out the next 18 to 24 months it's more likely to be below 55 than above 55 so we wanted to communicate that.

Whatever it takes. The bottom line is, I want to increase the EPS and whatever it takes.

I think that makes a lot of sense. I guess lastly on margins here, again, I completely understand the reasoning behind this. When we think about the previous target range, 58 to 63 and we think about the new longer-term range 50 to 55, the delta there, how much of that do you think is contributions from higher wafer costs and how much of that is you guys extending your footprint by going to more cost competitive solutions for accelerating top-line growth?

In this quarter it is the coming quarters and the last quarters and most all the gross margin impact is as Rick said it is, mostly it's from the high wafer cost.

I understand but when we talk about four to six quarters out, when you guys could be in that 50 to 55% range, I'm assuming that's wafer supplies and it starts improving and you get that foundry partner on line; at that point it's more about attacking the other sockets on the board, increasing your TEM and growing the top line. Is that what's moving it?

That's exactly our point. We're expanding our footprint and so that's our strategy, that's going to get us the growth and increase the top line and our net profit.

Got you. Congrats and good luck guys.

Your next question is from Steve Smigie of Raymond James.

Thanks for taking the follow-ups here. In terms of thinking about revenue growth and gross margin going forward, it sounds like something like a product like an Intelli-Phase and probably other products you're starting to get more into stuff like notebooks, and ultimately I understand what you're saying about the server, but it seems like you're getting more into sort of computing applications like a notebook that maybe that's part of the reason why you would be getting lower gross margin but also you would have higher volumes.

And so part of the question is, is part of the reason you're going down is that you're getting into applications where you're going to have lower margin? And the second part of the question is, are you prepared to manufacturing wise, handle really much higher volume orders, because I think a lot of the orders you probably have now are probably not the multimillion dollar orders? I'm just curious if you could talk to that.

First of all we're moving the long-term model gross margin to be lower and that's because I think if we do that it will significantly increase the EPS. That's the purpose. But it doesn't mean our product is not competitive anymore. There's a huge market segment. As Steve just said, in this year the industrial applications, we can exit the year to be more than 10% of our revenue. Remember, we just started this segment about three years ago. That's a phenomenal growth and these are high margin business. But I believe we can grow the company much faster by lowering the gross margins and we can be in more and attack other consumer markets.

Just to add in Steve, if you go back to say a couple of years ago, we were doing 2 or 3% of our revenue in the industrial segment and we're about 7 or 8% in this quarter, so we've had significant change already. And as everybody knows, we can get high volume in the consumer segments and the margins aren't as high but they're really good volume and they definitely add to our bottom line. I wanted to emphasize that we increased our net margin target model by 2 points, from 22 to 27%, so we think we can actually do better by going after those volumes.

You also asked about the question are we ready to handle that kind of volume. We absolutely are. If you just look at the TV space, when you think about having multiple sockets per television or per panel, we're already running at very high volume so we're well prepared for that growth expanding into notebooks.

Okay. The next question is, if you look at your SG&A as a percentage of revenue, I think you're at a record there by quite a bit. You've introduced so many new products and will introduce more. Does it make sense at this point to meaningfully build up the sales force, maybe spend a little bit of money? You're getting great margins already; would that also help drive higher growth?

Absolutely. We are talking about our sales force, our marketing teams for about more than a couple of quarters and we're absolutely building a lot more bigger, stronger team. We just recently reassembled almost the entire region and we're about to complete this transition.

Okay. Last question; could you give an update on the general illumination market, not so much the white LED drivers for the monitors, but I know there's a lot of different end markets there and sort of how do you go to market there, given there are that many segments that you're addressing?

The lighting illumination market, it's a very large potential market, its ramp-up is slow, its adoption to white LEDs from incandescent or florescent bulbs is relatively slow so we're preparing ourselves and the market with new products. The products we have now serve a very small segment in the lower wattage, the MR16 type bulb replacement, some of the automotive interior decorative lighting and then in the long-term we'll be moving into many offline solutions and higher wattage solutions. So you know, it's a moderate size contributor for 2010 and you'll see much more in 2011. I'd describe the growth as moderate.

Let me clarify this. We introduced a couple of products; we have like 5-6 products we're about to release now and these address (inaudible) replacement, florescent tube replacement and also street illumination. But the problem is on the current market is limited by the LED supply and we know all the LEDs are in shortage now.

Michael mentioned street lighting; we've seen some good traction there where the countries are getting subsidized from government subsidies are given incentive to use LED solutions as alternatives.

Okay that sounds great. Good luck with that stuff.

Your next question is from Tore Svanberg of Stifel Nicolaus.

This is Evan Wang calling in for Tore Svanberg. I was wondering if you could talk a little bit about your ASP trend and how your record new products play into that? And maybe also what impact your gross margin has on the ASP?

Actually, Evan, we don't talk about ASP, because it just depends on a product by product. And ASPs can actually go down and gross margin can go up, so it's not a very good indicator, so we never discuss ASPs directly.

Okay, that's fair. And what about the composition of sales? It looks like that maybe shifting as well. What is the implication on some of the metrics that could be meaningful to look at such as the turns business in the quarter or long-term growth rate, not just now, when you are penetrating those markets and also what impact it might have on your sales force, etc?

You probably have to repeat the question. If you're asking how we're doing in the outside market, we're definitely gaining market share. Our revenue is growing faster than the market. Can you be more specific about what you're looking for?

Maybe you could add some color on the composition of your revenue. In other words, by end markets, what are some of the new markets and what are the characteristics of these new markets that you are entering?

Yes, Steve just mentioned it. And we have a router set-top box, the Blu-ray, TVs and notebooks and these are main ones. And graphics cards and these are the big items and it probably consists not more than 60% of our revenue. The rest of the stuff I can't even count it.

And then the product focus has been in the predominantly the DC to DC power where we excel in high voltage and at the highest current densities. And for backlighting, white LED backlighting, our solutions, white LED solutions, multi-channel, single channel, covering a broad range of white LED monitor sizes.

Your next comes from the line of Rick Schafer of Oppenheimer & Company.

Hi guys, this is Shawn Simmons calling in for Rick. Just had a couple of questions for you. I guess whenever you're looking at the pricing environment out there, have you seen anything outside of just normal ASP declines or is the pricing becoming more competitive?

Well, in this high-demand market, the ASP -- I mean, the general requirements from our customer is shipping product, not talking, not negotiating on the price.

So pricing has been stable.

Okay, great. And then, you mentioned that you left some revenue on the table this quarter. Could you guys possibly quantify that and also looking out into 3Q, it sounds like you could leave a little bit on the top line there as well? Any color on that would be great.

Yes, relatively. Looking forward, you're not able to do that because there's too many pieces. But we'd estimate in Q2, it's probably between $5 million and $10 million more we could have done, so that's 60% to 65% is our general estimate of what Q2 could have been if we had the product. It's hard to say about Q3; it's too early to tell.

Your next question comes from the line of Doug Freedman, Gleacher & Company.

Hi guys, thanks for taking my question. Rick, your new net profit margin goal, given the seasonality that the company does see, is that a goal that you think you can keep to even in the down quarters? And if so, how is that going to be achieved? Is that how much flexibility, is there in the operating lines?

Hi Doug. Yes, the thing with our target model, that's where we want to build the company's product to achieve and we expect to achieve in it the seasonably good quarters. In the weakest quarter of the year, we generally wouldn't achieve it. But if we average it out, most of the quarters, we should be able to hit it.

Okay. And can you talk a little bit -- I think what people are really struggling with is the movement in the margins at a time when supply is tight and ASPs are holding up fairly well per your comments. Is there no possibility to be able to pass along the higher cost that you are seeing to your customers or whether in existing designs or even in future designs?

Yes, you can do this. Of course, we always can increase the price and keep the margin. But I see this is an opportunity for MPS. What I would really want is to secure the future volumes, future design wins, because we have a huge number of products that we've released. And want to get these products turned into revenue. And that's why we didn't have the cost increase as much as we could.

We're more concerned about a long-term relationship with our customers. And so we think the right decision is to, as much as we can, maintain where we are and focus on delivering products.

Okay. Rick, onto a little bit more of a technical question. With the buyback and you mentioned that there was cash provided this quarter due to share exercises; can you give us a projection of where you think share counts are going to look like and maybe a little bit going forward from there as well?

Well, my best estimate of the share count for Q3 is maybe 38.8 something like that. Right now, we're at 38.4, probably it'd go up a little bit on a diluted basis in Q3.

Okay. And then going back towards your Intelli-Phase product, that marries up to a CPU power management controller. Have you guys had any progress on securing a partner for that or is that something that you're still looking into doing, any progress made there?

We have relationships with existing controller manufacturers, so we partner with them. And then we're continuing to develop that.

All right. And given your comments around supply, can you give us some comment about lead times; where are leads times presently in a number and how long will it be before they come down and what would you call normal?

Okay. Doug, so for the first half of the year, our lead times have been extending and there hasn't been much change at all in general in the lead times between Q1 and Q2, so we're around 12 weeks to 16 weeks in general for the products that have lead time issues.

Any projection on when they'll come back into - is normal 8 weeks to 10 weeks?

Yes, normal is 8 to 10 weeks. And like we said earlier, the Q4 timeframe.

If the demand does not go up like in Q3.

Also to clarify Doug. We're continuing to see improvements on individual products. We've been able to get more capacity, we're now shipping products from that increased capacity. So lead times are coming down and improving on individual products.

In the Q1 conference call, I made a statement that I believe we can catch up in Q3, but I was wrong; the demand is even higher. So now I say that we believe we can catch up in Q4; that remains to be seen.

(Operator instructions) Your next question comes from the line of Gus Richard from Piper Jaffray.

Thanks guys for taking my question. Let's see, I've only got one, huh? In the decision between growth and gross margin, what precipitated the thought here and what do you think -- it's a two part question -- and what do you think the incremental growth rate is over nominal, can you get like 10%-15% higher revenue growth because of this new philosophy? If you can just add a little bit of color as to why you did this and sort of what do you think it means for top line?

For the top line, we said it. We are a targeting about a 25% to 30% of growth. In this year, we see our business, we can do a whole lot more than that. But, unfortunately, last year or the year before, we didn't prepare for that kind of ramp. And going in the future, I see the product we released in the last 18 months, we can do that. So that's why we made that kind of a decision; we look at the EPS, we model the EPS and then we can increase it dramatically.

Your next question comes from the line of Mike McConnell of Pacific Crest Securities.

Thanks. I just had a question, again, not to beat on an old drum here, but just the choice here between, again, growth at the expense of gross margins. We're looking into next year, I guess, are you going to be more aggressive with pricing, why wouldn't and when we get into a normalized supply environment start to see gross margins begin to tick back up? Are we just now permanently going to be kind of moving pretty dramatically from your old target of 58% to 62% to 50% to 55% I guess, you were expecting no improvement now as we move even into the later stages of next year as you start to see some supply improvements?

Again, I do whatever to get every penny out of that, out of any product. So I want to get the EPS up and whatever the gross margin ended up to be, higher or lower, let it be. Since you guys want to put in a spreadsheet and you want gross margins, okay, we'll give you a model number.

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

Hi, I'm going to unfortunately follow-up on the same line of question. In terms of new products or end markets, if you could specify where you feel the need to be more aggressive on the front margin growth to maintain the growth that you had achieved in the past; if you can just give more specifics on the product line or end markets?

Well, it's just expanding our footprint, like some of the previous callers that we've responded to. So by expanding our footprint into other growth markets, that's going to give us the best return on top line and net profit.

Ladies and gentlemen, that concludes the Q&A session. I'd now like to turn the call back over to your CFO, Rick Neely.

Well thank you everybody for attending the call and asking the questions. We look forward to speaking with you at the next quarterly conference call. Have a good week.

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.