O2micro International Ltd (OIIM) 2003 Q3 法說會逐字稿

Good afternoon and thank you for joining today to discuss O2Micro's earnings for the third quarter of fiscal year 2003. If you would like a copy of the press release, please call Pamela Campbell at 408 987-5920, ext. 8095. And we will fax you a copy immediately. It is also posted on O2Micro's web site at www.O2Micro.com. There will be a replay available through Nov. 5th at 1-800-428-6051 or 1-973-709-2089, pass code 307035.

Following the presentation by management the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

This is Gil Goodrich, Director of Investor Relations. I would like to open with our disclosure statement and then with us today on the conference call are Perry Kuo, Chief Financial Officer and James Keim, Director and Chief Marketing Officer and Sterling Du, Chief Executive Officer and Chairman.

After the reports, the floor will be open for questions. Welcome to the O2Micro third-quarter earnings report conference call. I would like to remind listeners that this discussion of business outlook for O2Micro contains forward-looking statements. Statements made in this release that are not historical in fact are forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially due to numerous risk factors. Such risk factors are enumerated in the form F1, form F3, and 20 F reports and other documents filed with the SEC from time to time.

Listeners are referred to the O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risks. Statements made herein are dated information.

Now I would like to introduce Perry Kuo, Chief Financial Officer of O2Micro for a discussion of the revenue, the income and the financial highlights of the third-quarter of fiscal year 2003.

Thank you and good afternoon, everyone. This is O2Micro's earnings announcement covering the Q3 2003 ended Sept. 30th, 2003.

I will highlight our operating results and operations and Jim Keim, Director (ph), will provide highlights. Most of the comments will be made by Sterling Du, CEO and Chairman of O2Micro after which we will answer questions.

First, I want to emphasize O2Micro continues to grow and continues to be profitable. O2Micro Q3 revenue are up quarter over quarter and year-over-year. [indiscernible] Q3 23,193,000 - an increase of 11 percent from the preceding quarter and an increase of 29 percent from comparable quarter of the prior year. This is an all time record [indiscernible] quarter for O2Micro.

The passing [indiscernible] revenue quarter of 20,895,000 in Q2 2003. Q3 is the 10th consecutive quarter of sequential revenue growth for O2Micro.

Net income for Q3 was 3,959,000 compared to 2,439,000 of the preceding quarter and 2,545,000 for the comparable quarter of the prior year.

Gross profit margin for Q3 was 56.7 percent - compared to 55.9 percent for the preceding quarter. We think the Company's financial model of 55 percent to 60 percent is amended (ph) due to product mix. R&D expense for Q3 was 4,845,000 - an increase of 2,000 from the preceding quarter of 0 percent and an increase from the comparable quarter of the prior year of 2 percent. There is not a [indiscernible] R&D [indiscernible].

SG&A expense for Q3 was 4.559m - an increase from the preceding quarter of 6 percent - and an increase of the comparable quarter of the prior year of 39 percent.

SG&A is modeled in the range of 18 percent to 22 percent in our financial model. We are raising our guidelines and we continue to carefully monitor and control expenses.

Operating profit margin for Q3 was 16.2 percent - compared to 12 percent for the preceding quarter and up to 15 percent for the comparable quarter of the prior year. Income tax for Q3 was 502,000 compared to 401,000 in the preceding quarter and 355,000 for the comparable quarter of the prior year. Earnings per share (indiscernible) Q3 ending September 30, 2003 were 10 cents per share - compared to 6 cents per share for the preceding quarter and 7 cents per share for the comparable quarter of the prior year.

O2Micro had over 112 million in [indiscernible]. In addition, O2Micro has no debt. Total investment or money invested in corporate bonds of at least Aa rating and government bonds of certain developed countries. [indiscernible] for Q3 were 10,502,000 compared to 7,869,000 (ph) in the preceding quarter. This represents a DSO of 41 days for Q3 compared to 34 days for the preceding quarter. Our model is 55 days to 65 days. This is due to a mix of customers (indiscernible) to locations.

Inventory [indiscernible] for Q3 was 3.7 compared to 2.8 for the previous quarter and 4.4 for the comparable quarter of the prior year. Cash flow from operations in Q3 was 2. -- 2,695,000. O2Micro now has 317 [indiscernible] - 63 percent of [indiscernible] engineered (indiscernible) new product development that continues introduction of the new product and more customer design wins in the future.

Now I'd like to give the guidance for the fourth-quarter of 2003. O2Micro (indiscernible) Q4 revenue to grow sequentially from Q3 in the range of mid single digits to high single digit percentage.

The gross profit margin range of the Company's financial model 55 percent to 60 percent and the [indiscernible] margin to be in the same area range of Q3. We expect R&D in Q4 to be in the range of 20 percent -- 20 percent to 23 percent or slightly below 25 percent to 30 percent range of our financial model, as it was in Q3.

SG&A [indiscernible] financial model is 18 percent to 22 percent which [indiscernible] we expect SG&A for Q4 to be on the low end of this 18 percent to 22 percent range.

I'll now pass the call to Jim Keim, Director, and he will review the market and customers.

Thank you, Perry. Q3 stock continued growth in a number of key markets in which we participated. It includes notebook computers, security and a variety of LCD products including monitors and TVs. While these markets are growing, some markets - such as notebooks - are seeing more robust volume growth in their same revenue growth.

This results from the consumer sector growing rapidly, while corporate sales still are (indiscernible). We have kept our focus on the higher performance end of these markets, where more sophisticated power management is demanded and higher ASPs may be obtained. It's no accident that O2Micro's power products continue to be found in more and more leading products in the world's leading companies.

Our focus strongly remains on improved power management for battery managed applications. Small handheld applications to support utility vehicle. It's no accident that products from O2Micro will now be found in GM and Ford vehicles as well as leading Japanese producers like Toyota.

Q3 also saw the beginning of some key product shortages developing in several semiconductor product areas. Wait for lead times have moved out down significantly at several major [indiscernible]. We are pleased to report that our focus on expanding fab capacity in developing strategic relationships during the recession, including investment in one analog fab, has enabled O2Micro to continue to grow its business both in dollar volume as well as in the number of different products that we're shipping.

As O2Micro continues to grow, we will continue to offer innovative teller (ph) management products with increasing voltage ranges that will take us into more and more markets. This will continue to make our growth less dependent on any one given market.

I'll now briefly mention activity in each of our four product areas.

Q3 saw the continuing expansion of our intelligent lighting leadership - in both technology and key design activities. Armed with our strong patent position in Inverter technology including 2 switch 4 switch and (indiscernible) products O2Micro continues to focus on penetrating new market areas.

Our design wins in key products like [indiscernible] and [indiscernible] accelerated during the quarter and production of these products will continue to expand. While maintaining a strong focus on LCD monitor and LCD TV, we're continuing to expand our product offering to cover other lighting markets beyond LCD.

Our Intelligent Power Group continues to strengthen its patent position in product portfolio. We're pleased with our accelerating design activity in both our Magic Star Charger family and DC to DC products. Magic Star Charger family is continuing to expand its design wins are continuing to increase. In DC/DC, we're now working with leading suppliers to both Intel and AMD processors. Our goal is to be number 1 in these markets. Not in volume but in high-performance areas needed for critical high-end power management application.

Our Intelligent e-commerce group continues to enjoy market leadership. Our SmartCardBus and 4-in-1 Memory Card products continue to ramp in volume at leading suppliers, we continue to strategically pull back from older (indiscernible) products that offer minimal profitability.

We have announced the phaseout of one of our oldest and least profitable products and will continue to focus on expansion of the security area where we have strong IP and engineering leadership.

Intelligent Battery Group continues to focus its efforts on new batteries' related technology including the standard family of battery management products that can extend beyond the notebook product. We are now working with a strategic battery manufacturing partner and expect to have our first production in the first half of next year.

We will conclude with some general market comments. We have seen markets steadily improve. However, some key customers are continuing to see restricted capital equipment expenditures in the corporate sector that is still limiting growth of their high-end market.

While we're happy to see the market improving in general, we need to be cautious that we may see typical cyclical weakenings in Q1 and Q2 of 2004. And much of the current market expansion remains predominantly in the consumer sector.

The to focus as a Company will be continue to move forward with strong development programs that lead to more and more power management products based on our patented technologies and new intellectual property filings.

We strongly believe that power management will continue to be an expanding market that will allow for growth of our Company and profitability.

I'll now pass the call on to Sterling Du, CEO and Chairman for closing remarks.

Thank you, Jim. Let me highlight what we've achieved during the third-quarter 2003. We finished the third-quarter 2003 with revenue of 103.2 million (indiscernible) growth of 11 percent this quarter and 29 percent over the comparable quarter of the prior year. EPS for third-quarter 2003 fully diluted or 10 cents per share compared to 6 cents per share in the preceding quarter and 7 cents per share in the comparable quarter of the prior year.

This is due to the market segments (indiscernible) best indication providing superior management and security technologies. As a result of our effort, computing intellectual properties, our [indiscernible] claim increased to 1,222 from 1,144 in the last quarter.

Our intellectual property for (indiscernible) progress become stronger each day in protecting our intellectual property which is very critical to our business. We see the market becoming more globalized. We see ITE industry driving a computing power into wireless, portable, and a more and more powerful devices. We see customers [indiscernible] more LCD display that is conventional CRT (ph).

We see increasing security issues which will enable most markup technologies deployment. We also see top battery management technologies going beyond global PCs and they bring this technology [indiscernible] to other markets. For a diversified market lead we believe our system experience and the patent technologies were (indiscernible) the best performance price ratio solutions. Automation, [indiscernible] we see [indiscernible] growth in PC area the supply chain becomes more critical and a good portion of many sector base has been moved to China from Taiwan.

We have planned ahead and have done some good investments to our fab assembly and [indiscernible] in the past year. Which will ensure our supply chain and construction to remain strong. Our global R&D infrastructure remains very important as our design (indiscernible) are close to the customers and increasing number of tenant engineers enabled ongoing technology leadership in power management, LCD displays and [indiscernible] devices. Thank you.

Ladies and gentlemen, the floor is open for questions and answers as time permits. Operator, may we take the first question?

[Operator Instructions] Tore Svanberg from Piper Jaffray.

Good afternoon and congratulations on the 10th quarter of growth. I had a couple of questions. First Sterling, you mentioned that security issues are increasingly becoming important and with your SmartCardBus technology today you're certainly enabling part of that market. It looks like today in the notebook market it is more of an option rather than something that is already embedded in a laptop. When do you think we will seek an inflection point here where most notebook OEM vendors will really have all their laptops with SmartCard technology embedded in them?

Yes, good question, Tory. After years [indiscernible] testing [inaudible] industry, the most exciting news is that in the middle of this year which is July timeframe, the leading PC manufacturer of notebook computers, (indiscernible) computers, has launched their [indiscernible] notebook, Playzone have standout feature have SmartCardBus built in and that SmartCardBus utilizes '02 micro technologies and that started the first step to provide a vehicle to application for employment of Smart Card technologies. Without that and if the Smart Card device is how we are only optional as hours add, 1, inconvenience being high-cost to our consumers. With the move of the Dell Computer's we do see stimulate other PC manufacturers also jumping to the bandwagon and try to leverage this trend looking forward.

So as far as we know the Dell Computer also providing several solutions to different segments needs. Today in Dell online shopping you can buy the various different smart card software and smart card [indiscernible] for sale from different vendors and for those it becomes to penetrate [indiscernible] the security, convenience, and visibility really make the consumer enjoy the security.

We always believed that security features become very important and more important in the future as wireless will be dominated complication between person to person and those personal [indiscernible] without a secured [indiscernible] all those data and a security issue [indiscernible] snowball. So I think how well deployment, this is just beginning of the chapter. Thank you.

Also, a question for Jim. Jim, you mentioned you have some early penetration into the LC [indiscernible] market, you gave us an insight as to what is happening in the notebook market, overall. But what is really happening out there in the LCD/TV market if you could just add some color there?

I think anyone who watches TV is seeing, virtually, more and more ads all the time for an LCD TV. Coming from a number of sources including even Dell and Gateway are showing ads for LCD TV. We certainly see a major trend coming forth or we think LCD TV will quickly accelerate in the marketplace and will - within a reasonable number of years - totally replaced the CRT TV in the marketplace.

So we feel that the LCD TV is just at the very beginning of its growth phase.

Very good and finally, a question for Perry, great job on the growth margin there. And just looking ahead next couple of quarters, do you think gross margins will stay within this range or how should we view the gross margin next couple of quarters?

Yes, I think the growth margin is generically a function of the product mix. Although we have a better gross margin in ,Q3 we believe that how we continue to improve our product mix by quarter as [indiscernible] I do believe that our gross margin will continue to improve as the product mix improves.

Thank you very much and, again, great quarter.

Shawn Slayton from Ferris Baker Watts.

Hi good afternoon and nice quarter. Jim, could I get you to expand a little bit on -- on your comments regarding the first half of next year, was a little unclear to me -- are you talking about just the demand landscape for IT spending you think is going to be weak in that first half?

What we've seen, Shawn, is a lot of the expansion that is gone on in some of these markets for instance if you look at the notebook market - it is heavily consumer oriented. It has really not been that strong in the corporate sector. So we are somewhat cautious in terms of waiting for still a stronger rebound in capital spending for the corporate sector of the notebook and other marketplaces. And if in fact the capital spending does not pick up significantly I think you're likely to see a traditional consumer quarter in Q1 and Q2 where there may be some pullback in terms of market growth, not necessarily in terms of actual downturn but in terms of the flowing of the growth.

Traditionally consumer of course, Q3 Q4 very strong - Q1, Q2 tend to be weaker.

I appreciate it and I got on the call a little late -- I don't know if you characterize various revenue contributions by segment -- and I know you guys don't normally like to break it out, to the percentage point, but can you talk in broad terms -- I am assuming Intelligent Lighting was still the lion's share of revenue?

Basically we said in the past that -- certainly during the past few quarters, we have seen a substantial portion of the growth come out of two of our product lines which was Intelligent E-commerce as well as Intelligent Lighting.

However, I would say that as we move into next year we will start to see more and more activity out of our intelligent power activity which is now beginning to see very significant number of design wins with our Charger Family and we will begin to get more and more design activity with our DC/DC.

We do expect that product line to begin to expand as we move into next year and we also mentioned since you were late joining the call and maybe a few others were as well our Intelligent Battery activity is in the development stage and we do expect to start shipping first revenues in the first half of next year. And that will continue to expand as we move through next year.

So into next year we expect to see reasonable expansion in all of our product areas.

Okay -- for next year -- for your September quarter -- you had a great quarter that exceeded expectations. What product segment do you think was most -- can we must attribute that to? Is it Inverter sells -- without talking about numbers etc. but qualitatively speaking was it the inverters that had the most -- the largest incremental contribution?

We had expanding activity in the e-commerce areas we mentioned the SmartCard area we had expanded activity certainly in our [indiscernible] lighting area and we also had expanded activity in our Standard Charger [indiscernible] [inaudible]

So all segments contributed? So Intelligent -- the Intelligent DJ products that's under the -- the auspices of the intelligent battery business segment?

Yes and that business remains quite flat.

(indiscernible) you guys haven't discontinued that product line.

Not by any means, we're still working with major customers on next generation product.

Andrew Huang with American Technology Research.

I was wondering if you could comment as to when you think you could get -- start seeing some meaningful revenues for LCD televisions?

We are already seeing revenue from LCD television. The LCD TV marketplace where we have a leadership role with our [indiscernible] product we expect to continue to see rapid expansion of that whole market as we move forward 2004 2005. And we think we're just really in the infancy stage of LCD TV. (indiscernible) already shipping as I made comments earlier with our [indiscernible] product as well as other solutions I might add.

Is it a legitimate question to ask you, maybe what percentage of revenues you expect that to represent for you potentially?

We do not care to break that out.

J.D. Padgett from Founders Asset Management.

Good quarter -- (indiscernible) the gross margin trend. Had a couple of questions one, Jim, on the battery charger product that you maybe take first revenue in the first half is that magics tar (ph) or is that a different product?

That will be from continuing expansion of MagicStar (ph) product offering.

So maybe some new OEM wins there?

Yes we're continuing to see design wins with OEMs with our MagicStar (ph) family.

Could we look forward to some additional announcements of some named accounts?

Possibly. At this point we've not chosen to name specific OEMs utilizing a product but there are already major OEMs utilizing our MagicStar (ph) family

You already have revenue from that now - it is just a few people to ramp up in the first-ever (indiscernible)?

Yes that's correct. J.D., these are [indiscernible] Jim mentioned about next year [indiscernible] revenue referred to battery management [indiscernible] out of the Charger.

So that's the product you're selling to the actual battery makers.

Yes.

Great and then -- on the off X front how much was the legal spend you characterized as above normal right now and what was it year-to-date?

[indiscernible] progress and in Q3 timeframe that we already have tight expense control [indiscernible] the model and continue -- continuously in the December quarter we will [indiscernible] in the area of 18 percent. We will continue to have [indiscernible] to continue our [indiscernible] progress. However, I believe you will become our minimum [indiscernible]. So we don't want to comment on the individual number of the [indiscernible].

So in the December quarter we can see SG&A at 18 percent of revenue and within that legal the kind of extraordinary legal would be small?

[indiscernible] [inaudible] [indiscernible]

Do you think about reworking that model a little bit lower as your revenue grows and your SG&A doesn't need to scale like that?

I think [indiscernible] you will find your model covering [indiscernible] 200 million.

That would show more leverage there. And the other question the other income I think was up on like an FX game, right to think that that reverts back down to like 3, 400,000 a quarter in the December quarter?

It depends on the currency exchange rate. It is possible but it depends on the exchange rate, however, [indiscernible] (inaudible) very strong so we need to [indiscernible] (inaudible) at the end of December.

Okay, so we could see SG&A drop in dollars in the fourth quarter?

SG&A, I beg your pardon?

You're saying, J.D., you're asking the question could SG&A actually decline in dollars. Perry has been saying that SG&A will be at the low end of our model as a percent of revenue in terms of dollars.

Sang Pureri (ph) from J. and W. (indiscernible).

Great quarter. First question were any segments down in the quarter?

I have not actually looked at the detail breakout - I do not believe so.

You grew 11 percent quarter for quarter, what segments grew above corporate average and what segments grew below corporate average?

We've indicated in the prior calls that in the past few quarters or up through the end of the year we would expect that the intelligent e-commerce and intelligent lighting would be growing above average.

Okay and that trend continued in this quarter?

Yes. Again, I have not seen the detailed breakout but, yes, that's the trend through the end of the year.

Okay, great, and about what portion of your e-commerce (indiscernible) this Standard CardBus vs. [indiscernible] CardBus.

We do not break that out.

Shawn A. Slayton from Ferris Baker Watts.

Jim the transition -- the Company's transition to a more [indiscernible] ASAB product can you talk a little more about that? Is it correct to characterize the Company as migrating servicing what we would say proprietary type sockets to more of a consumer-oriented standard type IC?

The (indiscernible) answer to that question is yes. Although some product lines have already been doing that but the answer is yes.

Maybe if you look several years down the road what do you expect in very gross terms what the blend of that product might be? I guess I am trying to understand if this is a large time of business model altering transition or if this is just a modest transition to make sense over time? Can you talk about that?

I think it is a general transition that makes sense for us as a Company because when we started [indiscernible] and some investors that had followed us for some time, some of our early products were targeted for very specific customers and they tended to be custom type designs. For instance in the Charger we were very custom-oriented for several major customers that we mentioned in the past. And as we have evolved that product line, we have focused on bringing standard charges into the marketplace under the Magic Star (ph) name and we've been very successful with that and we will continue to involve products of that nature. I hope that answers your question.

What kind of impact does [indiscernible] as a percentage of [indiscernible] type products increase over time and what kind of impact is that going to have on the Company? Is it material or is it going to be noticeable?

Well, I think it helps us engage over a broader mix of customers and over a broader marketplace. So it enables us to expand our horizons, if you please, and our market opportunities so it opens up more and more market total available market if you want to talk about in terms of [indiscernible].

The TAM (ph) increases -- what about gross margins ? Will you still be able to demand have the same pricing authority that you guys have right now?

We think so, given our technology that we have and we have to remember that Standard products offer many advantages in terms of you're not limited to just one customer and inventory control for 1 specific customer. And you're able to more effectively cost down these products over time with the efficiency of manufacturing tests.

Okay, fair enough. Last question ASP erosion on a year-over-year basis for maybe your Inverter products and your power management products. Can you characterize that?

Again, our strong intellectual property position places us in a very capable position of maintaining good ASPs and good margins and that's what we indicated from our standard models which we expect to be able to retain. So, certainly, there is always in this business a downtrend in ASPs but we're able to offset that with ongoing cost reductions in the manufacture of products.

Yeah obviously you'd be able to offset from a cost reduction perspective but in general terms in your business -- for Inverters and your power management chips, what's an average? Or talk about your industry average ASP decline year-over-year basis it doesn't have to be too O2Micro specific -- talk about what topic is the erosion you see in your industry that you serve? From your experience over the last couple of years?

For the whole industry we observe very (indiscernible) erosion, because those chips are higher [indiscernible] if you look at the max [indiscernible] competition their Charger doesn't stand for too much ASP [indiscernible] and I also want to add a comment in terms of O2Micro strategy. We not only closed down all supply chains but also we always have a higher integration with IP protection. And [indiscernible] our ASPs not decline but also even increased. So back to your general question for those [indiscernible] major [indiscernible] we observe very small decline year by year.

Rick Faust from AG Edwards.

Hello? You mentioned you have some initial progress with your DC/DC product. When do you think you might see revenues for that?

DC/DC product, we maybe see some small stock revenue Q1 next year.

That is for the notebook market [indiscernible]

That will be in a server area. And, also, [indiscernible] the DC/DC in notebook placement.

Rick Leggett from Arbor Capital.

Rick Leggett from Arbor. I am quite positively surprised by the fact that e-commerce is growing above corporate as much as it is. Given your comments that you're backing away from the commodity lower end consumer part of the market which is where I perceived you'd be getting much of your volume growth in prior quarters. What am I off track on here?

You're not off track in the total scope of things, Rick, what we indicated was we are in the process of beginning to phase out one of our oldest low-end lowest profit products. However, in this business we don't typically phase those out in one quarter. So we will be in the phase out process of that product for some time going on many quarters. So, basically, we just in the past quarter announced that we would phase out of the low-end product but that...

That phase out? Did that negatively impact you this year or this quarter or were you still riding the wave of the low-end machines being the hot sellers?

Really it had no impact this quarter because we have to continue to maintain its flow of product for that while we phase out. So the quickest you can phase out of a product of this nature is in the fixed nine-month timeframe.

So your comment that e-commerce was growing above corporate average and will continue to do so through year end. And this specific area is being driven by this low-end market?

Well, it's being driven by the low end of the market in some instance, but as Sterling indicated there is also an expansion going on from several major manufacturers in the SmartCardBus and 4-in-1 MemoryCardBus. So we are seeing expanded revenues due to some very nice design wins we had earlier in the year.

Andrew Huang from American Technology Research.

Just some follow-up questions. First, in regard to the comments regarding an overall shift from proprietary products to ASAPs (ph). Should that happen, will you start to use semiconductor distributors to get your product out to market?

We already have one distributor in Japan as we do broaden our customer mix in the number of markets that we're in, we will have to continue to expand the way in which we go to market with our channels. That will be one thing that we again take a look at as potential expansion into some of the distribution channels.

And the next -- can you comment on any progress on the cell phone end market?

Cell phone market we're still working on the next generation prototyping. We have shipped we're still under shipment to the [indiscernible] Sony [indiscernible] shipped about a couple of quarters right now and the shipment is stable but [indiscernible] not (indiscernible) in terms of our Company.

And then in this September quarter, it looks like the tax rate was a little bit below 14 percent. I just wanted to know what we should use model to model going forward?

(indiscernible) uses 13 percent. September quarter was lower by the larger amount in the other income.

So going forward I should use we should use 13 percent.? And the last thing, you commented on wafer lead time starting to stretch. Did that in any way hinder your revenue growth in the quarter?

No, it did not.

And do you see that happening in the foreseeable future?

Not really, no. Because we, again, did some very strategic alignments with our wafer fab activity and we feel that we positioned ourselves very well to handle this type of market.

Ashish Shah from Merrill Lynch.

Nice quarter by the way. I got on the call a little late, if you could just go over your guidance for next quarter and then maybe you could talk a little bit about -- you always said in the past, the last couple of quarters that the corporate market is really not growing so your revenue growth has been hindered, pretty good acceleration, obviously, on a sequential basis take -- is it coming still from consumer or has corporate picked up as well?

We had guided to revenue growth for Q4 of mid single digit to high single digit and I'm sorry I missed the last part of your question, Ash.

The question was in the past several quarters, the to notebook market was growing - in terms of unit terms - was growing materially faster on a sequential basis than your revenues had been growing. This quarter you've seen an acceleration in the revenue growth and you had been saying that one of the reasons why the revenues had not been growing as fast as the overall notebook market was because, well, it's been more of low end consumer products that have been growing as opposed to corporate desktops -- I mean, corporate notebooks where you have a greater ASP and penetration into. So can you talk about whether or not you think that some of (indiscernible) seeing some growth in the corporate market that is accelerating your growth here on a sequential basis or is there something else going on that is causing the sequential uptick?

Since you got on the call late, let's reiterate a few of the things that we indicated. Certainly there is growth - rapid growth - in the notebook market in terms of the number of units being shipped but that does not mean that the revenue growth from the notebooks is that great because the notebooks have been trending heavily in the consumer type area. What we did indicate is that in this quarter we have continued to expand our markets outside of notebooks and so we did see some nice growth and we expect to continue to see ongoing growth out of markets that go beyond notebook.

If you were going to look at your business and decide relative to plan was notebooks on plan and the upside came from LCD and other markets? Is that a way for me to characterize your business? This quarter, specifically?

You are talking about the upside versus what we had originally indicated.

That's right.

I think that -- I think that that's a little bit difficult to analyze at this point but let me say this that we did see robust growth across all of the products in which -- or all the markets in which we participate. There's also -- I think one has to look and say at this point it is difficult to tell if there was inventory growth that went on in some of the channels. Because we do think with some of the wafer lead times smoothing out that there was a tendency one the part of some customers to perhaps build some inventory. So that can have some impact on the quarter.

But, certainly, as far as upside is concerned, I think that all of the markets benefited from a stronger economy than was expected.

J.D. Padgett from Founders Asset Management.

Two quick final thoughts, on the gross margin side, now that you've got the trajectory going in a positive direction, can you see the run rate to get gross margins higher than sort of your target model, especially as you prune some of the lower margin products from the portfolio?

Do I interpret your question, JD, to say when will we be having gross margins greater than 60 percent?

I guess to cut to the chase - yes. OR do you see, based on the product portfolio, as you rebalanced it, that you could push in that direction?

I think, certainly, as we look to Q4 and what we said last quarter was we thought we were in a trough, that there had been some downticks in the gross margin in the past few quarters. It did indicate that, yes, some of the pruning going on and some of the older products, some of our newer products coming online, that we thought we would reach a trough and would have the ability to begin to come back up. I think [indiscernible] but what that is going to precisely do in Q4 is difficult because you, again, have product max issues. And I think Perry indicated that certainly our model [indiscernible] up to 55-60 percent and it will continue to depend upon the max certainly for the next few quarters.

I was thinking more in long-term to the extent you get rid of those lower margin products and replace those with higher margin or something 58, 62 is unreasonable.

I think, JD, that is hard to predict at this moment.

Little early to make that call?

Yes.

And the other question, just Jim, your comment about typical seasonality in the first part of next year? Are there things you see in terms of design wins, new product introductions you think you'll be able to have a first-quarter revenue not decline sequentially or are we better off to model a seasonal decline or how would you approach that?

We think that -- we think that we have design wins that can keep us from potentially declining in actual revenues but my comment was more to the fact that we do not expect to see the kind of robust growth going on in the Q1 Q2 timeframe that you'll see in the Q3 Q4.

Right. But you would hope to keep revenues flat to growing in Q1.

I always hope to.

If there are no further questions, this concludes the O2Micro International third-quarter earnings report conference call. You may access a replay of this call by dialing 1-800-428-6051 or 973-709-2089 and enter a pass code ID number of 307035. That concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.