芯源系統 (MPWR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Monolithic Power Systems Earnings Conference Call. My name is Jennifer, and I will be your operator for today. At this time, all participants are in listen-only mode. And later, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Rick Neely, Chief Financial Officer. Please proceed.

Good afternoon, and welcome to the Third 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 of today's conference call, we will make forward-looking statements and projections that involve risks and uncertainty. These statements will cover a number of areas concerning our business outlook, including our business and financial outlook for the fourth quarter of 2010, projected fourth quarter 2010 revenues and gross margins, our expectations for fourth quarter litigation, stock-based compensation, GAAP and non-GAAP operating expenses, our target operating ranges for gross margins, net margins and inventory, 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, and 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 than the results expressed or implied by these statements.

Risks, uncertainties, and other factors that could actual results to differ are identified in our SEC filings, including, but not limited to, our Form 10-Q filed on July 28th, 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, net income, and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP, and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. 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 web cast 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 third quarter fiscal year 2010 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the fourth fiscal quarter of 2010. We will then open up the call to your questions. Let's start with the business highlights.

In the third quarter, MPS experienced outstanding results growing revenues 37% from the third quarter of the prior year to achieve its third straight quarterly record figure with net sales of $65.8 million. This was a sequential increase of 18% from the prior quarter, when MPS set its previous record quarterly revenue total. This notable revenue performance leads to our most profitable quarter in history with non-GAAP net income of $16.4 million or 25% of sales. MPS saw very strong demand in the first three quarters of 2010 in all of its major end markets. The third quarter saw substantial growth in our DC to DC and lighting control markets. Our MiniMonster product family continues to progress crossing the $10 million quarterly run rate for the first time, which compares well to the $4 million we did in the third quarter of 2009.

The new LDL family grew to $4 million in the quarter, a significant increase from a year ago when we sold less than $1 million in this family. The LDL products are being used in applications such as set top boxes, flat panel televisions, enterprise disc storage, and gaming machines. In the lighting control segment, MPS had its best quarter ever for white LED-based devices, shipping over $7 million in the third quarter compared with less than $3 million in the year-ago quarter.

We continue to expand our footprint in computing applications with introduction of the industry's smallest monolithic 12-volt 25-amp DC to DC step-down converter for single-stage power conversion applications in end markets such as enterprise server, storage and telecom base stations. In our ongoing initiative to increase our total available market, we are excited to announce our entry in to the AC/DC offline market.

We recently announced a family of solutions for the one-watt to 300-watt AC to DC power conversion that will target all applications that plug into an AC outlet, from TVs and white goods to PCs and set top boxes. The success of our new products enabled MPS to reach 25% non-GAAP net profit as a percentage of sales for the quarter right at the mid-point of our new target range of 22% to 27% of sales.

In the manufacturing area, gross margin was 54.7%, which is sequentially down to the second quarter of 2010, but within our expected guidance range of 54% to 56% of sales. Our internal days of inventory improved slightly to 59 days as production started to catch up to the strong demand we have seen the first nine months of this year.

Inventory dollars at our distributors ended the quarter above our target range of 30 to 45 days, as we were unable to adjust our inventory levels to add our distributors quickly enough in response to an anticipated decline in demand for our products in the future quarter. These near turn demand fluctuations have caused our fourth quarter outlook to diminish. Bottom line, non-GAAP net income was $16.4 million or $0.43 per fully diluted share. This resulted in non-GAAP net income of 25% of revenue. Our non-GAAP net income for the third quarter was -- our GAAP net income for the third quarter was $13.2 million or $0.35 per fully diluted share.

Now let's look at the financials in more detail. Starting with the P&L on the revenue line, our third quarter 2010 net revenues of $65.8 million increased 18% sequentially from the second quarter of 2010, and were up 37% from the $48 million recorded in the third quarter of 2009. Looking at our revenue by product type, third quarter DC to DC product sales were $55.2 million, up 21% or $9.7 million from the second quarter of 2010, and up 50% from the $36.7 million recorded in the same quarter a year ago.

This dollar growth was led by our general purpose DC to DC products, but about one-half of the year-over-year growth was contributed by our MiniMonster and LGL product families that I described earlier in this conference call. The largest end markets for MPS and 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 $9.4 million, which was up 25% from the $77.5 million we did in the second quarter of 2010, and an increase of 10% for the same quarter a year ago.

Our newer white LED driver products are taking charge of this segment as we did over $7 million in white LED revenue compared with $4 million in the prior quarter, and less than $3 million in the same quarter a year ago. We are finding new design success in flat-panel monitors, notebook computers, and general consumer products for our white LED chips. Our traditional CCFL converters and CCFL controllers make-up the remainder of the revenue in this segment. This decline in traditional CCFL is likely to continue as it reflects the continuing shift of notebook and other backlighting solutions from CCFL to white LED solutions.

Audio revenues came in at $1.2 million, down from the $2.6 million MPS did in the prior quarter, and down from the $2.7 million recorded in the third quarter of 2009. Let's move down to the gross margin line. Our third quarter gross margin was 54.7%, down from the 58.2% we did in the prior quarter 2010, and down from the 60.7% in the third quarter of 2009. This result was in line with our expectations and guidance for the quarter.

We recently adjusted our target financial model to focus on top line and bottom line growth, as we expected to participate in several new fast-growing market segments with different margin profiles than in the past, which had an impact of one to two percentage points. We are also still shipping the higher priced wafers we bought earlier in the year, which impacted or reported gross margins by about two percentage points.

Let's look at our reported expenses and operating margins. On a GAAP basis, our operating expenses were $22.6 million in the third quarter. This includes $21.6 million in R&D and SG&A expense, which includes $4.1 million for stock compensation expense and litigation expense of $964,000. Compared with the second quarter of 2010, GAAP operating expenses were down by $3.1 million.

The expense mix changed as follows, R&D decreased by $494,000, SG&A decreased by $1.3 million, litigation decreased by $1.3 million. As a result, our GAAP operating profit of 20.4% was significantly up in the third quarter of 2010 compared to our GAAP operating profit of 12.2% in the second quarter of 2010.

Compared to the third quarter of 2009, our GAAP operating expenses were up by $222,000, excluding the litigation provision reversal of $6.4 million. R&D expense was up $1.2 million, SG&A increased by $858,000, and litigation expense was down by $1.8 million, compared to the third quarter of 2009.

Let's review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the third quarter of 2010 were $18.5 million, down $1.7 million from the $20.2 million we spent in the second quarter of 2010, and down $773,000 from the $19.2 million we spent in the third quarter of 2009, excluding the litigation provision reversal of $6.4 million.

The sequential decrease in non-GAAP third quarter spending was primarily driven by lower litigation expense as we have completed the ITC case that covered our older CCFL parts. Our combined R&D and SG&A expenses were down $482,000 for the second quarter of 2010. Compared to the third quarter 2009, non-GAAP R&D costs were up by $973,000 as we continued to grow our new product offerings and R&D teams. Non-GAAP SG&A spending was only slightly up $101,000 from Q3 of the prior year, as efficiencies in the G&A area have offset increased sales and rep commissions.

Finally, litigation expense in the third quarter was $964,000, which was down $1.8 million when compared to the third quarter of 2009. Our non-GAAP operating margin was 27% in the third quarter of 2010, compared with 22% in the prior quarter of 2010, and 21% in the third quarter of 2009, a very good performance.

Switching to the bottom line, on a GAAP basis, our Q3 2010 net income was $13.2 million or $0.35 per fully diluted share. On a non-GAAP basis, our Q3 2010 net income was $16.4 million or $0.43 per fully diluted share. 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 $204.4 million at the end of the third quarter of 2010, down from the $209.3 million at the end of the second quarter of 2010, but up substantially from the $169.2 million we had on the books in the same quarter one year ago.

In Q3, MPS had operating cash flow of about $17 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 third quarter, which was offset by cash proceeds of $2.3 million from option exercises and employee stock sales.

MPS announced a $50 million stock buy-back effective from August 2010 until December 2011 in our last conference call. Under this program, we bought back approximately 983,000 shares for a total of $17 million in the third quarter. Accounts receivable into the third quarter at $32.3 million, compared with $30.3 million at the end of the second quarter of 2010, and $19.5 million at the end of the third quarter of 2009.

The increase in receivables from the prior quarter was a result of our third quarter in a row of record revenues and higher shipments than normal for the third month of the quarter. Days sales outstanding decreased to 45 days in Q3 2010 as a result of the elements I just described. In Q2 of 2010, our DSOs were 50 days and in Q3 of 2009, they were 37 days.

Our internal inventory at the end of the third quarter remained low at $19.5 million, or about 59 days of inventory on a historical basis as a result of the continuation of our record quarterly shipments in the third quarter. This compares with $14.5 million, or 57 days of inventory at the end of the second quarter 2010.

Inventory in our distribution channel grew in dollars as a result of the Q3 revenue increase, and total days of distributor inventory exceeded the upper end of our target range of 30 to 45 days by about $4 million to $5 million. The increased level of distributor inventory was the result of two key factors, both of which are nonrecurring.

First, we have had very extended lead times due to product shortages for several quarters causing distributors to put orders on our books earlier than normal, and to keep those orders in place for fear of not getting the supply their end customers need. Secondly, when the fourth quarter demand outlook deteriorated in September, we were unable to adjust their inventory levels quickly enough by reducing our shipment. In response, we have modified our inventory review procedures, and we expect to be better equipped to track and respond to changes in demand and inventory levels at our distributors. We expect to burn off most of this excess distributor inventory in the fourth quarter.

I would now like to turn to a discussion of general business conditions. MPS has had a robust nine-month period, hitting all-time quarterly revenue records three quarters in a row. Geographically, in the third quarter of 2010, MPS shipped 62% of revenues to Taiwan and China, and 38% to other regions, with Europe and Japan performing particularly well in Q3.

By segment, MPS had excellent growth in the communications and computing segments primarily driven by new router and set top box business, and new notebook power and white LED backlighting wins. Last quarter, we introduced a new white LED driver for the high growth incandescent bulb and CFL tube replacement lighting market. This part interfaces to a universal offline input from 65-volts AC to 265-volts AC.

We significantly increased the number of power supply rails we can support with the introduction of the industry's highest current density, 6-amp to 25-amp, 12-volt to 21-volt, AC to DC step-down converters. Our 6-amp to 10-amp point of load solutions operates on an input voltage as high as 28-volts, ideal for notebook PC and industrial applications, and are housed in a tiny 3 by 4 millimeter QFN package. Similarly, our monolithic 25-amp buck includes a 10-milliohm high-side fit, and a 3-milliohm low-side fit, and comes in a tiny 6 by 6 millimeter QFN package. We also expanded our set top box and TV footprint with the introduction of our ASSP power supply for the low noise block commonly referred as the LNB.

I would now like to turn to our outlook for the fourth quarter of 2010. While Q3 2010 was another record revenue quarter for MPS, we have seen a drop in bookings activities for the fourth quarter for several reasons.

First, our lead times remain well above average until late in the third quarter as we were constrained by product supply. This situation made it difficult to follow the true in-product demand because our distributors were reluctant to cancel their backlog. It now appears that in-demand for products such as flat-panel TVs, monitors and other general consumer products will decline in the fourth quarter more than seasonally. And this will impact our fourth quarter revenues by about $6 million to $7 million.

Secondly, our lack of product availability earlier this year in the high-volume TV and monitor market for several major customers in Korea to seek alternative suppliers. This will impact our near-term revenue outlook by another $6 million to $7 million per quarter. Finally, as we mentioned above we will burn off our excess distributor inventory in the fourth quarter, which will have a revenue impact of approximately $4 million to $5 million.

In total, we project fourth quarter 2010 revenues in the range of $45 million to $50 million. We expect gross margin in the 50% to 52% range, primarily due to underutilized capacity in our test area, which will have an impact of approximately three percentage points in comparison to Q3 2010. Our overall gross margin continues to be impacted by higher than normal wafer prices that were purchased earlier this year, which accounts for approximately another two percentage points of gross margin compared to the second quarter of this year.

We expect stock-based compensation expense in the range of $4.2 million to $4.6 million. We expect non-GAAP research and development and selling, general, and administrative expense to decline to the range of $17.5 million to $18.5 million. This estimate excludes the stock compensation estimate mentioned above. We expect litigation expense approximately flat to the third quarter at $1 million.

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, while we were pleased to report three consecutive record revenue quarters, our revenue outlook in the near term is below our performance in the most recent quarters. We will be working hard to improve our planning, forecasting, and demand management processes. We believe that the breadth of new products with good technology advantages in new market segments will get MPS back to the expected levels of revenue growth that have always characterized our Company.

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

(Operator Instructions). Please limit to one question and one follow-up. Your first question comes from the line of Steve Smigie from Raymond James. Please proceed.

Great. Thanks, guys. I was hoping we could talk a little bit about on the revenue guidance, you mentioned there was about $6 million to $7 inventory work-down or something of that matter, and another $6 million to $7 million that will affect you for the quarters going before. If we were to not have the inventory work-down, you would still be probably $6 million to $7 million below the peak going forward, just assuming things stayed as they were. Just trying to understand the nature of that, the revenue change there going forward.

Yeah, Steve, I'll start out. Steve Pratt, our Marketing Director, is also with us on the call, and he may chip in later. Yes, you are correct. There are three elements to the revenue drop. One is we lost some business at several Korean TV makers, that's a $6 million to $7 million reduction in the quarterly revenue outlook. There's another $6 million to $7 million that we would call seasonality or low demand combination, and then the $4 million to $5 million of inventory that we ended up at the end of Q3, more inventory in our distribution channel than we would normally have, that $4 million to $5 million that will be burned off in Q4. So that's $4 million to $5 million distributor inventory, $6 million to $7 million seasonality in demand, and $6 million to $7 million of --

TV market.

-- lost business in the Korean TV markets.

Okay. So as I think about seasonality for Q1, you are normally down quite a bit, but sounds like you are burning through a lot of that stuff already Q4? How should we think about Q1 seasonality given how much stuff has come down here, I guess, in this quarter?

Well, I think that's going to depend on demand. We usually don't like to go out and give any outlook for Q1, and we're probably going to stick with that process here. So I would just assume normal seasonality for Q1 at this point.

Yes, that's what we planned ahead, and we -- the market is not very stable, although in the last few weeks, we see the demand as stabilized, and now we're praying for a normal seasonality -- a seasonal change in the Q1 quarter.

Great. If I could sneak one more in. I think there was about 200 basis points you mentioned of gross margin that you've used because you're using the high-cost wafers that you had to use. When -- have you burned through those wafers so you get that bump back up as you're using lower-cost wafers again?

At this time, currently we're still buying higher wafer -- higher-priced wafers, and as a fab capacity reduced, and normally the price will reduce is not happening -- hasn't happened now.

Okay. Great. Thanks, guys.

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

This is Bob Gujavarty for Ross. I had a question about the underutilization charges. Is that kind of a one-quarter phenomenon, and you can bring back utilization at the back-end facilities, or do you expect kind of that to persist a little bit longer?

That's a good question, Bob. The outlet which we talked about there is about a three percentage point hit to our gross margin in Q4 guidance because of that. And as you know, we had a huge demand this year; we put into capacity in terms of testers, people, building, increased the size of the building, moved people out into an RD building, and so forth, to be able to handle $70 million plus. So in the near-term when the revenue dropped significantly from, say, $65.7 million to the $45 million to $50 million range, we can't adjust that capacity. So as capacity -- as revenues improve next year, we should be able to absorb that. So we can't predict when that's going to be, but when we get closer to $60 million in revenue, we should be able to absorb most of that manufacturing capacity hit. And that really is our test area.

Fair enough. And then it looks like you are kind of, given the current demand outlook and also the fact that you had a pretty big CapEx number this quarter, what do you kind of thinking about CapEx for next quarter? And then maybe, I don't know, if you want to talk on a sustainable level as a percentage of revenue what you think that number should be?

We expect to do $20 million to $25 million in CapEx this year, and that's relative to finishing off the building in Chengdu and so forth. Our typical CapEx is around $10 million to $12 million a year. So we're about double this year because of the new building and some additional testers.

Thanks guys.

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

Yes, thanks for taking my question. In terms of the Korean customers, you know, where you've lost share, you know, is that permanent, is that just because you haven't been able to deliver on time, can you sort of talk about the loss, and then sort of plans going forward?

Yeah. Hey, Gus, this is Steve. You know, I have to go back a little bit in time to answer this question in full. In 2008, we saw the transition from CCFL business to white LED. So we went in to 2009 really attacking all the sockets, all of the opportunities we could, especially in the TV and monitor business, and we did a great job, and that was reflected in our growth in 2010 revenue.

You compound that success in our market penetration with the TV market exploding in 2010, which was unforecasted; caught us by surprise. We spent two quarters not being able to deliver to the customers' real demand, and that pain felt at the customer level, in some cases, they eventually had to seek other alternatives in certain specific applications, specifically TVs and monitors, and impacted us most in the Korean market. Is it permanent? No. In some cases it's shorter term, in other cases it's building back up that relationship and catching the next design cycle.

Got it. And then could you speak a little bit -- there's been, I believe, some turnover in the sales force. Can you talk a little bit about that and sort of the plans going forward?

Oh, okay. Gus, this is Michael. We have a complete -- as we said it in -- before in a few conference, we're completely changed/upgraded our sales force, and we have all the new management -- they are in place now.

Okay. So pretty much the -- you're through this process at this point; is that correct?

Yeah, it's a -- we finish the changing now.

Okay. All right. Thanks so much.

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

Thanks for taking my question. Just wanted to ask, going into 2011 on the OpEx front, what should we be thinking about with your R&D levels? They have grown nicely in 2010. It sounds like you have these newer products rolling out. Should we be seeing sort of the similar growth rate in R&D or how should that play out?

Yeah, I think the commitment of the Company as the technology and product of the Company, that's the one area we'll probably continue to hire people and expand new product expenses. The only comment -- I'll turn it over to Michael for more comment, but the only other comment as you know with our -- the way we have our OpEx put together, Vern, we have a variable compensation component, and if profits decline, some of our profit sharing decline and our expenses decline; you're seeing that already in the Q4 guidance. So there will be some declines in OpEx based on those kind of variable expenses that we talked about. But in terms of actually cutting back on new products, I don't think so. Michael?

Yeah, on the R&D side, all of the expenses we have to say in a reasonable -- in reasonable levels, and you will expect the same of -- in the same level of the 2010.

Okay. So expect -- I guess you are saying expect it to be sort of flattish in terms of dollars?

Yeah, in terms of flattish and slightly higher in -- slightly higher in the 2011.

Okay. And then, Rick, just -- sort of my follow-up question to revisit the -- I guess your analysis of the distribution channel, and sort of fixing what you perceive to be the problem. How far back has this been going on? I guess one concern people may have is did this happen all the way back from earlier this year onward? And will we be at sort of a depressed revenue level as a result going into 2011? Or do you feel this is really sort of a one-quarter phenomenon?

No, I think it's a one-quarter phenomenon of an overshoot. I think you have heard a few other companies talk about excess distributor inventories as well in their calls. And all -- remember in the first two quarters of the year, we had no inventory. The distributors had about 30 days, that they weren't even at the -- in Q2 they were at the lower end of the range, and some of them were underneath the range. So up until probably September, they never had enough parts. A lot of our parts were in allocation until recently and the lead times have only recently come down.

So the distributors were left with the dilemma of -- I've had 16-week lead times, where if you didn't put a four-month order in, and remember, MPS normally has 6 to 8 week lead times, and we generally turned half of our business every quarter. So a distributor normally doesn't have to put any new business in front of you for maybe 8 to 10 weeks out. And now we're telling him put an order out in 16-weeks ahead. So he's got to do that or he can't get the part. So his trade-off is do I keep the order, do I push it out, do I disappoint my customers? So they kept holding on to their backlogs until September/October, when clearly there's a lower demand, you can see the TV business is down, the monitor business is down, and other consumer products are down.

So for Q4 it's not an issue of them being able to sell; they'll simply sell it through in Q4, but they won't be ordering as much from us. I think that's pretty much a near-term correction.

Right.

The only other comment I can say to that is we don't know what the Q1, Q2 demands are going to be, but I don't think it would be related to -- we should get most of that inventory flushed out in Q4.

Okay. That's helpful. Thanks a lot.

Your next question comes from the line of Tore Svanberg from Stifel Nicolaus. Please proceed.

Hi, this is [Alan Wang] calling in for Tore Svanberg. I would like to ask you about your new products that you mentioned in your prepared remarks. AC power and white LED lighting? Could you give some more specifics on these new products, specifically when do you think these might see some revenue ramp or contribute to your revenue growth?

Hey, Alan, this is Steve. So, I'll take one product group at a time. Both of them brand new for us in 2010. On the white LED front, we entered into the white LED space with backlighting as an extension of our CCFL business. And white LED lighting, now getting into bulb replacement, these products that we're introducing over the last six -- well, we started that in 2009 with some street light applications, and now we're getting into the more mainstream bulb replacement this year. We'll see in 2011, single-digit-type revenues.

It takes time to get the design ends, and there are a number of customers, a very fragmented market, and we just have -- we're doing the promotional campaign into the bulb replacement now as we speak. So we're just getting into that space. And then in AC power, this, too, is a very new market for MPS, and we're going to selectively go after the AC offline universal input global-type of AC applications, especially if they're related to a systems solution cell. If we have the white LED driver, we can also include the AC offline component of that. And that's something that is very unique compared to our peers. And the revenue contribution, again, especially since we're going to be selective in our AC offline penetration, it will gradually grow through to 2011, but be relatively insignificant in 2011.

Just to clarify on your -- about your answer, are you sort of implying that the AC power would not be sold independently of the white LED drivers?

No, we see -- oh, this is Michael. We see the AC to DC power is a big market, and we are selectively choose some very high energy efficiency-related product. We address only those market, and that's included in -- as Steve said earlier in the LED lighting.

Okay.

Applications.

Right. So the market is huge, and, you know, what Michael and I are saying is that if we -- we're going to be selective. And it could be stand-alone offline solutions, but it's really where we add value, not just customers looking for a lower cost alternative.

Okay. Thank you for that clarification. My follow-up question is about your gross margin operating margin target model. You had stated last earnings call that you are revising your model to 50% to 55% gross margin, 22%, 27% operating margin. I was looking at your Q4 guidance and your run-rate going forward, especially your OpEx plan, how should we think about you reaching your operating margin target? What kind of timeframe are we looking at? And how might you -- what's your strategy in achieving that?

Okay, Alan, I'll start out the answer and then turn it over to Michael. On the gross margin model, we still feel that that's the right model, the 50% to 55%. If we can -- if the wafer costs go back to normal and we can absorb our capacity back, we would be about 55 points -- so 55, 56 points. So we're about -- we feel we're -- except for those extraordinary issues, we don't feel there's any problem with the 50% to 55% range. Although, admittedly in the near term, it will take us a few quarters to get those two factors erased.

On the rest of it, Michael can comment.

Yes, as Rick said earlier, this quarter is kind of a disappointment in -- overall the Company is in a good foundation, and we haven't changed any -- have any strategy shift. And the first nine months we demonstrate we can grow the top line, and we can increase the bottom lines by huge amount, and we will continue that path. And -- however, in the next -- in the next couple of quarters, we do have a bigger hole to fill because that absence of Korean TV market, and -- but in a few quarters after that, okay, we believe we can grow out of that.

Great. Thank you for answering my questions.

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

Great. Thanks. Hey, the first question I wanted to just follow-up on the gross margin comments. You know, when I kind of back out some of your one-time -- your underutilization charges, and your wafer, high wafer costs, I get something like 55% to 56%. I'm just curious, you know, when you think a little bit longer term when the market starts to stabilize a bit here, what do you think your steady-state margins would be, you know, I guess second half of next year, assuming all things equal, right? And then just on that same line of thought here, your underutilization charges from your back-end facility, when that does come back up sometime, you know, first quarter, I'm just curious how long does the underutilization charges hang around for?

Well, okay. If you said all things are equal, so -- other than after the fab cost -- the wafer cost reduced to a normal level, to previous levels, because we anticipated a huge growth in this year we did use, we did bought a lot of expensive wafers. And if we go -- if the price go back down to the normal levels, and if everything else keep the same, and if we keep -- and we have a run-rate at somewhere upper $50 million to $60 million revenue per quarter, our gross margin will be somewhere in about 54% to 56% levels.

Okay. And the underutilization charges, I mean, how long does that hang around for?

I think it's reflective of you have got to get your volume and revenues up to absorb it.

Oh --

Again, (inaudible) it's mostly fixed costs, so when we get to those revenue levels that Michael talked about that's when it will be fully absorbed. It will be partially absorbed along the way, but --

It will be partially absorbed, yeah.

From where we are now to 60%, but that's what we see.

Okay. I guess my question is more directed towards the cycle time here. If it takes -- I don't know three months to get through that or if it's just one month, how quickly those charges dissipate?

On the fab side -- or on the test side, our cycle time is pretty short. Getting back to your other question, I can understand it better. We are still using the wafers we bought earlier in the year. There is a three-month cycle time, and then we've actually, since our demand has dropped, we are currently slowing down our wafer purchases, but we still have in our fab WIP line all of the higher priced wafers.

And that will continue through Q4, at least, and probably into Q1. We had said that before that when we had said in the last conference call we expect 54% to 56% to persist the whole all year because of those higher priced wafers, and wasn't going to be able to get them out of our WIP through this year, and that looks like that's true for sure. And probably go somewhat into Q1.

Got you. And my other question has to do with revenues. Can you guys talk a little bit about some of the share loss that Korea -- how that impacts some of your other business at those customers? If you guys have -- are kind of on a blacklist for a period of time? And then also based on your conservative guidance here, how much visibility in backlog [coverage] you've got here? Thanks.

Steve you want to start --

Yeah, sure. I answered some of this in a previous question, but just to follow-up, it's ongoing with the TV market in Korea. In some customers, it's getting back the relationship, and we have not -- really, the biggest hit for MPS has been in one application segment, and that's the TVs and monitors. So in other -- in the large customers, where they are broad based and they're into other applications such as networking, set top box, there is an overall MPS short-term issue at the accounts.

They haven't taken -- removed us. They haven't found alternatives across the board in every application. Really, it was a select number of products focused in one application segment, and we have to grow our way back in there. We have to get our reputation back in order, and that will take some time. And another significant TV monitor customer in Korea, we basically worked with them on making some tough choices in a particular design cycle, and so our opportunity is as soon as the next design cycle in 2011.

We still have a lot of business in Korea. These are the storage -- what is it SST -- SSD --

SSD. Set top box, there's general networking, there's cards, networking cards. There's also the white LED (inaudible)

And also LED, yeah. We still have a lot of revenues. So that we expect it to get it in 2011. The only setback is in the TV side, which have a -- we -- and DC/DC in for TV application, which we expose in the -- we have a very large exposure in our first nine months.

Okay.

Okay.

That's helpful. And then, can you help out with the backlog coverage?

Backlog, we don't give out backlog numbers, because as I said, they're not a reliable indicator of the quarter. But we do try and put our guidance together such that we're comfortable with the revenue guidance range, and I would say we're comfortable with the revenue guidance range that we put out.

Okay. Great. Thanks so much, guys.

Thanks.

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

Thanks for taking my question, guys. You know, if I could focus a little bit on the booking side of the equation. Rick, you were able to give us what your sales outlook looked like sort of linearly. Can you tell us how the bookings have progressed? Not only during the quarter, but now that we're about month into the fourth quarter how bookings have looked? Maybe give us a little bit of insight into what the book-to-bill look like, maybe what you think book-to-bill is going to look like?

We actually don't do the book-to-bill for the same reason as we are a high-turns business and usually do 50/50. This has also been a very unusual nine months for the Company as we've had more backlog than we ever had because we've had products in allocation. We've often had backlogs much higher than the -- in fact, in Q3, we had backlog higher than the quarterly number. Because a lot of people were ordering parts we couldn't deliver, we couldn't even schedule them. So looking at those numbers, it hasn't really been able to help us out on the booking side.

What we really are seeing this quarter is where people took -- and the distributors took the orders and they rescheduled them into different periods. We really didn't see cancellations; we've just seen what we call push-out and reschedules. The distributors still want the parts, they just don't want as many in the current period. So mostly Q4, the bookings number wouldn't tell you the activity. It's really -- the backlog is in good shape, it has mostly been rescheduled from the Q3 time, the Q4 time.

The going in quarters, we see push out and then we see pulling all within a -- in a happen -- within a couple of weeks times.

Are you still seeing push-outs presently? Is -- I mean are we -- can you give us a sense of what you have seen in the last couple of weeks?

I think Michael said it has stabilized.

Yeah.

It seems to be stabilized at this moment.

Yeah, stabilized. In the beginning of the quarter we see -- well, not in the beginning, but the middle of the quarter, we see a lot of push-out, and then we see pulling, and now sort of stabilizing.

Okay. Can you talk a little bit about what you are seeing as far as ASP trends. It's quite common when lead times do come in, we --pricing has not been a real hot button for anybody lately, but now that lead times are returning to normal in the industry, are you starting to see early signs that customers are more price sensitive? Noticeably, you guys are going to be more price sensitive trying to buy wafers better? Are your customers not going to be asking for lower prices as well?

Actually our ASPs are very stable throughout our years. So customer now is -- customers always ask for lower, lower, lower price, and I think the bigger issue for us is still dealing with the shipment allocation. We just gone through that, and our -- that's our biggest issue is with our -- the relation -- the biggest relationship issues with our customers.

Okay. Thank you.

Your next question comes from the line of Brian Piccioni from BMO Capital Markets. Please proceed.

Yes, as you can imagine, most of my questions have been asked and answered. I was wondering if we could maybe get back to the new product comments, in particular the AC to DC products. If you could maybe go into a little bit more detail. It's a space that you're relatively new to, and one that has a lot of existing players. How do you expect to distinguish yourself in that space, and if you could be specific as to the type of applications that you think your products would be particularly suited to? Thanks.

I'll start first, and Steve can add. It is a very large, well-established market, but the same time, there is a lot of new requirement, Energy Star, and European Code of Conduct, and also as well as in China and Japan have a similar kind of requirements. That opens the door for MPS, because we have these high-voltage technology, process technology. We can -- we have the capability to go over a thousand volts on one -- on an integrated power -- integrated version, so we don't use a discreet device. And these are very unique -- unique technologies, and because of these new requirements, new regulations, that really opens the door for a company like MPS.

Yeah, and just to add a little bit more color on this, the market is huge, so like we've said earlier, our strategy is to really focus on the solution sale. So our first targets are where we're already into existing accounts, where the system is transitioning to meet Energy Star requirements, and have to switch their systems to have better light load efficiency. For example, a set top box, where we're already well entrenched in to that space.

It is relatively easy for us to migrate in to the AC offline section there. Another example is white LED lighting, the illumination segment of that, that's an easy -- easier solution sale for MPS where we can add some value there, completing the solution from AC all the way to the DC, driving the LEDs. Just two examples and another example is where they need the highest-efficiency performance would be like an adapter. Some of the set top boxes use adapters. That would be a target. Adapters for notebooks, that are trying to get smaller, high efficiency, less power dissipation, no load efficiency.

We are not talking about general adapters, therefore, notebooks. Okay there are some -- some are small, very ultra mobile, if you will. And also these -- these are touch screen mobile units, and these require very small, ultra small adapters. Those are the area we can provide value.

Okay. Well, thanks for the background. Appreciate it. Thank you.

Your next question comes from the line of Nicholas Aberle from Janney Capital Markets. Please proceed.

Hey, guys thanks for taking my questions. Not to bring up Korea again, but just looking at the $6 million to $7 million decline that you guys are assuming for Q4, are there more designs coming in the first half that would continue to show some bleed on that front or is that $6 million to $7 million kind of worse-case scenario for what you guys are expecting?

I'm just trying to clarify the question. You said -- I mean, we expect -- and this is a design loss, so we're -- they would carry forward into the next quarter if that's your question.

Yeah, are there more designs that are coming behind it, that are going to be launched or is this just one design cycle that all of a sudden is just turning off and going away?

Okay. There are is a combination. There are some accounts where the design will carry over into 2011. And there are other opportunities where we have to catch the next design cycle, which happens also in 2011. So some are shorter term than others.

Well, I think that -- I think that the key -- the question you ask, are there any other major design -- other mag -- like a $6 million, $7 million magnitude loss in the Q1? And the answer is no, and only the major impact is the Korean customers. Other ones, we haven't -- we don't lose any major customers.

Got you. Yeah, I'm just basically trying to parse through. I mean backing into it $10 million to $15 million worth design wins that are going to be -- that I need to take out of the model for 2011, I was just wondering if that was the correct number roughly.

Oh, no. We have a -- all our new product we introduced in the last couple of years, and still are well in progress, and still we can make a comment on it. And all of these are Intelli-Phase and all these LDLs as Rick said earlier, and these are -- we have -- we start to have revenue ramping.

Yeah, there are definitely other opportunities that are going to --

Let me separate -- I'm sorry to break in. I'm going to separate the question, Nick. Are you -- if you are talking about new revenue growth opportunities outside of the Korean TV market, that's exactly what Michael talked about. If you are talking about the impact with TV in Korea and monitors, then Steve can fill that in.

I think I was talking about the decline in the TV business that you're forecasting for Q4 as a result of losing share. Is that contained in Q4, and then we run-rate off of that? Or is there more trickle through of designs --

Yeah, that's -- in the near-term, meaning the next quarter or two, as Steve said for the design cycles, the design cycles for TVs are such that it will take a few -- the next two quarters we expect to have a similar reduction in revenues; then similar effect Q1 and Q2. In the second half of 2011, as Steve says, we have opportunities to get some of that back. I would say the next two quarters, that's whatever, Q4, Q1, and Q2, that's the design cycle of these products. So you can't get back in until the next cycle.

Got you. And then when you talk about $4 million to $5 million impact of inventory burn, are your assumptions being that inventories are going to be back to normalized levels or do we overshoot on the downside now and see some restocking in the first half? What are you assumptions?

That's a good question, because that will depend on end-market demand. Certainly our plan is to get to the normal levels at the end of December, but then normal means some assumption of what demand is going to be in the first half, and that's always a moving target. So again, we're going to try and manage it to the 30 to 45 days window. As long as we get it under 45 days, we're fine. The distributor's job is to carry some inventories. When they had 25 to 30 days of inventory during the year, that was really not enough. So we have no quarrel with them carrying, you know, up to 45 days of inventory; we want them to do that, and we expect by the end of the year we will get there and see how demand goes from there.

Got you. And qualitatively speaking, looking into Q1, you have got the inventory burns, assuming that doesn't come back, the TV business is not coming back, and it just leaves you guys to demand. You've said that some backlog or some bookings have actually been pushed to Q1. Shouldn't that actually mean that maybe you do a couple million dollars better than normal seasonality in Q1, just assuming all of those things?

This is where we leave it to you analysts to understand the end market. At this point, sitting here in November looking for Q1 numbers, I wouldn't really want to risk it -- hazard a guess, because things change. But all of those things are good things to look at as the market develops for Q1.

Got you. And then you guys didn't really talk about end markets too much outside of saying that PCs and Com were strong. Does that mean that industrial and consumer were a little light in Q3? And then, you know, what -- more specifically industrial I wanted to talk about it into Q4. That's been an area where you guys have been doing really well. Is that taking a breather, as well?

So, actually, in Q3 industrial was similar. Their dollars were about flat to Q2. So we're within the range of 6% to 8% of industrial in Q3. Q4, going forward --

We continue to see good growth prospects.

Good growth pros -- but I think on a percentage basis it will get higher because our consumer will drop because of the TV drop.

Got you. And then just last question on the gross margin, it sounds like maybe just to be modeling low 50% -- low end of the range, 50% to 52% in the first half of next year, and then some reversion to the means in the back half of the year? Is that a fair cut at it?

I think that would be a fair way to do it. That's what we're driving for in the Company.

Perfect. Thanks, guys.

Due to time constraint, the last question comes from the line of Arnab Chanda from Roth Capital Markets. Please proceed.

Thank you. Just a couple of quick questions. One is, if you could talk about -- you've announce a couple of new products, a couple of families. One, you talked about your notebook power (technical difficulties). And then you also talked about (inaudible) AC to DC. Can you talk a little bit about when you expect to see revenues from those two products? And then one qualitative question for -- I know you talked about Q1 kind ad infinitum, but of the three factors that have impacted your Q4, it would seem that share loss continues, but the inventory may start to get range. Do you think those two could offset each other, and you get back to whatever the demand was? Or could they be both kind of taking in a negative direction? Thank you.

I'll answer the first part, and then Rick and Michael can answer the second part. So, Arnab, to address your market and new product intro questions, notebook power, we're actually in that space to a small extent, and the new product introductions are getting us into our -- an increasing our footprint. And so, we're in these designs and they are starting to ramp up. Notebook had a bit of a setback in just market softening, but we'll continue to see a relatively good growth in 2011, and with the new product introductions, that should grow nicely.

Just gradually, because it's still relatively a small segment for MPS and growing nicely. And the same is true with AC power. Again, this is a very, very new product introduction for MPS. We're just rolling these parts out now and starting the promotional campaign. So the revenue contribution in 2011 will be relatively small and growing nicely over time.

Yes.

And the second part of the question? I missed part of it --

The backlog -- burning through the backlog.

Burning through the backlog, in terms of the -- as I said, our backlog in delinquencies, we've caught up with our delinquencies, lead times are coming down, we should, this quarter, get back to kind of normal business -- normal business visibility that MPS has had before.

Actually, my question was more -- you talked about the three factors that are probably causing worst-than-expected drop in Q4, and just qualitatively speaking do you think a couple of those factors offset each other in Q1, and you get whatever the demand is, which is obviously impossible to know right now or do they still kind of --

The distributor inventory build should not re-occur. I mean, the $4 million to $5 million inventory build should be nonrecurring. Seasonality is likely to occur. Q1 is a seasonally down quarter typically. And the other one, the Korean TV and monitor market losses will be there, as well.

Thanks a lot, guys.

There are no further questions at this time, and I will now turn the call back over to Rick Neely for closing remarks.

Thank you, everybody for -- this was a long call, and we look forward to talking with you next quarter. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.