O2micro International Ltd (OIIM) 2005 Q2 法說會逐字稿

Good day, everyone, and thank you for joining us today to discuss 02Micro's earnings for the second quarter of the fiscal year 2005. If you would like a copy of the press release, please call Pamela Campbell at 408-987-5920, extension 8095, and we will fax you a copy immediately.

It is also posted on 02Micro's Website at www.02Micro.com. There will be a replay available through August 10th by calling 1-888-203-1112, or 1-719-457-0820. The pass code for the replay is 1381478. Following the presentation by Management, the conference call will have an open for questions and answers as time permits. Gentlemen, you may please begin.

Thank you, operator. Good afternoon, and welcome to the 02Micro Q2 fiscal year 2005 earnings report conference call. This is Gil Goodrich, Director of Investor Relations for 02Micro and I would like to remind listeners that the discussion of business outlook for 02Micro, 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 F-1, Form F-3 and 20-F reports, and other documents filed with the SEC from time to time. Listeners are referred to the 02Micro earnings press release and the documents filed with the SEC, to understand these forward-looking statements and the associated risk factors. The statements made herein are dated information.

With us on today on the conference call are Perry Quo, Chief Financial Officer; Jim Keim, Director; and Sterling Du, CEO and Chairman. After the report, the floor will be open for questions as time permits.

Now I would like to introduce Perry Kuo, CFO of 02Micro, for a discussion of the revenue, the income and financial highlights for the second quarter of 2005, ended June 30th, 2005.

Thank you and good afternoon, everyone. This is 02Micro's earnings announcement covering Q2 2005 ended June 30th, 2005. I will highlight our operating results and projections; then Jim Keim, Director, will provide market highlights. Closing comments will be made by Sterling Du, CEO and Chairman of 02Micro, after which we will answer questions.

I will be brief in my overall report, because everyone has a copy of the earnings report press release. I will report the highlights only.

[Unintelligible] announced for Q2 2005. During our conference call on May 4th, 2005, we projected Q2 revenue to be up in the range of 8% to 10%, from Q1 revenue of 23,277,000. Revenue for Q2 was 25,636,000, a record high revenue for the Company. This revenue of 25,636,000 represents an increase of 10% from the preceding quarter, and an increase of 7% from the comparable quarter of the prior year. Net income for Q2 was 2,980,000, compared to 2,089,000 of the preceding quarter and to 4,148,000 for the comparable quarter of the prior year.

Earnings per share fully diluted for Q2 ended June 30th, 2005 was $0.07 per share, compared to $0.05 per share for the preceding quarter, and $0.10 per share for the comparable quarter of the prior year. Earnings per share fully diluted, exclusive of litigation in the amount of 2,597,000 for Q2 was $0.14 per share.

Gross profit margin for Q2 was 62.6%. R&D expense for Q2 was 6,260,000 and represented 24.4% of revenue. This is above the range of 18% to 23% of the long-term financial model. SG&A expense for Q2 was 5,960,000 not including the litigation expense of 2,597,000.

The total SG&A expense, including litigation, is 7,693,000. This represents 20% of revenue. This is above the range of 13% to 18% of the long-term financial model. While we were above the guidelines of our financial model for SG&A, we continue to carefully monitor and control expenses.

Income tax for Q2 was a negative 250,000, or better said, there was an income tax benefit of 252,000. This represents a tax rate of less than 0. This is a one-time event that was due to the reversal of our tax [accrual] of 658,000 in Q4 2004, due to the import value correction in our Taiwan branch office.

Share repurchases in Q2 was 37,800 shares for a total of 365,000. Revenue as a percentage of total revenue by end markets for Q2 was consumer in 60% level, computer in the range of low 30%, and the industrial and the communications each a small single digit percent of the revenue.

Balance sheet. 02Micro has over 116 million in cash and short-term investments. This represents cash and the equivalents per share of $2.95. In addition, 02Micro has no debt. Short-term investments or money invested in corporate bonds of at least A-rating and a government bonds of certain developed countries.

Accounts receivable at the end of Q2 was 9,463,000 for a DSO of 33 days. Inventory turns ratio for Q2 was 3.9 compared to 3.8 for the previous quarter and the 5.2 for the comparable quarter of the prior year. Cash flow from operations for Q2 was 5,761,000.

Human resources. 02Micro now has 530 employees, 64% of which are engineers. This positions us well for new product development, the continuous introduction of new products, and more customer design wins in the future.

Guidance for Q3 2005. O2Micro estimates Q3 revenue compared to Q2 to be up in the range of up 8% to 10% from Q2. The gross profit margin target range of the Company's financial model is 55% to 60%. And we expect gross profit margin in Q3 to be in the high-end of the range of the range of 55% to 60% or slightly higher.

The R&D expense range of the Company's financial model is 18% to 23%, and we expect R&D in Q3 to be in the high-end of this range or slightly higher, as continued investment in R&D is vital to the future growth of the Company.

The SG&A target range of the Company's financial model is 13% to 18%. We expect SG&A, without litigation expense, for Q3 to be in the high-end of this range or slightly higher. We expect litigation expense for Q3 to be in the range of 2 million to 3 million. This will bring the total SG&A expense for Q3 to be above the range of the long-term financial model.

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

Thank you, Perry. I will begin by making some comments regarding our litigation activity. The recently completed trial in Northern California District Court was originally filed in 2000, after some of our customers were led to believe that we might violate a newly issued Monolithic Power Systems patent.

02 Micro filed a judgment that we did not infringe Monolithic Power System patents and that the patents were invalid. This suit also alleged misappropriation of certain trade secrets such as transformer design. We are glad to report that the federal court jury found in our favor on those key points. Additional details are available in our July 18th press release that can be found on our website.

We will now focus our efforts upon two upcoming trials in the Eastern District of Texas, related to patent infringement of our intellectual lighting product. The first is scheduled for next month and involves Taiwan Simeda, a large user of Monolithic Power System's product.

The second involving Beyond Innovation Technology Company Limited, or commonly known as BI Tech, two of its users, FPI and [Lee & Chang], is scheduled for December. BI Tech is an IC manufacturer and licensee of Monolithic Power Systems.

Despite the legal activity, we are maintaining or focus on expansion of our business and growth market. Q2 saw continuation of our rapid expansion in the consumer market, with numerous design wins that continue to lessen our dependence on the notebook market. This trend should continue through the balance of 2005, as we continue to expand our presence in key consumer markets.

Our product lines continue to see design win acceleration. Our Intelligent Lighting Group, where we are the established industry leader, is seeing a wide diversity of design wins, coupled with an ever-increasing customer base. We remain very optimistic in this area as we see rapid market expansion and expect LCD TV to experience very strong growth for the foreseeable future.

We are also pleased with the continued expansion of our Intelligent Lighting patent portfolio with 18 United States patents now having been issued.

As mentioned in the prior quarter, we do expect to see growth in the notebook business as our next generation of cost effective notebook products gains market acceptance. Our new line of cost-effective Intelligent Power and Intelligent E-commerce products are experiencing an increasing number of design wins in the notebook market.

We are also rapidly expanding our offering of Intelligent Power products to also focus on consumer and industrial markets and we expect to see increasing revenue growth from our Intelligent Power product in these markets.

We also remain pleased with the progress of our Intelligent Battery product line, that has evaluation silicon at key customers. We expect to begin generating revenue as we move into next year, in both computing and industrial applications from this new product area.

Our VPN Firewall activity continues to expand, but as we mentioned in prior conference calls, this market will take time to develop and we do not expect major revenue contribution in 2005.

I will conclude with some general market comments. 02Micro began as the leading provider of Power Management products for the notebook market. 02Micro is continuing to focus its efforts into Power Management and has a broadening market. We have now evolved into a leader in the Power Management for consumer as well as notebook markets.

We will continue to focus on profitable product line expansion in major computer, consumer, industrial and communications markets, where we can take full advantage of both our system and integrated circuit intellectual property.

Finally, I will mention a few words about our supply chain. As we see both our product offerings and customer base broadening, we will need to make sure we have the resources in place to properly service our rapidly growing unit volumes. We are continuing to strategically invest in our supply chain with increasing emphasis on China, as we see a greater percentage of our products shipping into this country.

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

Thank you, Jim. Our second quarter 2005 finished with a record high revenue of 25.6 million. It was an increase of 6% from the preceding quarter and an increase of 7% from the comparable quarter of the prior year. The EPS for the second quarter 2005, fully diluted, was $0.07 per share, compared to $0.05 per share in the preceding quarter and $0.10 per share in the comparable quarter of the preceding year.

Back in year 2001, we started to set up China design center. We grew our engineers in China from 176 in first quarter 2005, to 221 in the second quarter. These 45 new engineers in China support our new technologies and new product development and logistic support.

There are still many challenges ahead for us to be successful in China. Our goal is to not only [build] up that engineering team, but to understand how our China strategy should be defined. We witness China's dynamic high [core] in the past 4 years, and though we further expanded our engagement with China in the first half market, technology, customers, suppliers, partners, [university], [new product implementation], IP awareness promotion and attendant engineers recruiting [into an] education program. With direct access to the potential, taking logic to the [calling] markets in the world. [Then] it's [unintelligible] strength. This we have more than 4 years investment and experience in China.

Our new products for consumer market are [HSSB] education specific solution products. Our new PMU IC for portable media player is designed for hard integrated and [unintelligible] modular function. Our VideoDJ [inaudible] new IC for camera phone are industry's first to address [unintelligible] on [unintelligible]. We expect both the IC for its initial revenue in the second half of 2005.

Both our [IB] EPU 50 internet securities systems solutions make the [unintelligible] and SS, which is secure socket layer base machine for small and medium business users continue to get [unintelligible] interest from China and Taiwan.

Our next goal is to build up [unintelligible] team for South Asia marketplace.

Our intellectual property for [unintelligible] continues to grow, with the patent [unintelligible] increasing to 100 as of June 30th, 2005, from the 94 in the preceding quarter. [Unintelligible] increasing to 2,517, from 2,478 in the preceding quarter.

We are pleased to see [unintelligible] District Court return a favorable jury verdict to 02Micro [unintelligible] on July 18, this year. Respectively, [unintelligible] is our Company policy.

Thank you for listening to our conference call.

[OPERATOR INSTRUCTIONS] Andrew Huang, American Technology.

I was wondering if you could give us a sense of contribution from LCD TV markets? Obviously, the consumer segment [inaudible] very rapidly, but I want to kind of get a relative sense on LCD TV.

We do not give precise figures, however, we will give you some relative indications as best we can. We do see that market growing very rapidly at this point, and we do see ourselves in a strong market share position, and we do see ourselves growing with that market. But again, we will not breakout specific figures for that.

Okay, great. And I was wondering also if you could comment in general on the notebook side or computer side of the business, did that kind of come in within your expectations or a little bit better?

That came in within our expectations. There continues to be a great deal of price pressure in that marketplace. The unit volumes, while they continue to expand, are doing that only with the result of notebook pricing continuing to come down and that gets reflected through the supply chain. So we are seeing ongoing price pressure, but we feel very good about our positioning in that market and the expectations that we have for the quarter were met.

And then the last question, is there any kind of guidance you can give us for litigation expense for the year 2006?

No. I think it's depending on the court date and also the general counsel date. So we will [unintelligible].

Shawn Slayton, SG Cowen.

Hey, Jim, help us to understand a little bit the breakout of the product segments. So, consumer's growing as a percentage of sales and computer is shrinking a little bit. The LCD TV is ramping. And I guess your gross margin's ramping, as the consumer segment grows as a percentage.

It seems to me that inverter sales for 02Micro right now, that a vast majority of the sales, a growing majority of the sales are inverter related. What range are we talking about here? It seems to me that maybe 75% of the Company's revenues can be coming from inverter sales right now. Is that in the ballpark accurate?

Not precisely. The situation you have to realize is that in the notebook environment the notebooks have been commoditized over the past 4 or 5 years.

Right, on the power management side of stuff, right?

Yes. That, by the way also includes the inverter side, for that matter. And what we have seen is a dramatic decrease in the functionality of some of the devices in some cases, but also the ASP. So you've seen chargers, for instance, come down very significantly in price. We've seen the DC type product come down very significantly in price in the notebook marketplace.

So even though volume shipments are actually up, the ASPs have more than offset that on the other side. And we, in fact, have continued to develop new generations of products. We actually are expanding our customer base significantly in the Intelligent Power area at this point in notebooks, which we're very proud of. Again, those are lower ASPs and we continue to ship more product into that marketplace.

Okay, but just from a dollar--so Intelligent Lighting, kind of on a--and I'm not going to hold you to the exact decimal point, but Intelligent Lighting, snapshot in time, Q2, is it some 3/4 of the business as a percentage of revenues?

No, it is not, but it's certainly been growing more rapidly, primarily due to the significant growth, not only in terms of LCD TV, but the monitor growth has been extremely high and we've also seen other areas, including some of the global positioning systems, DVD players, grow very quickly.

Okay. So maybe not that high then. On the LCD TV side, you guys had mentioned that Sony is a customer, going back maybe a year or two and then now we have the litigation with Sony and Rohm. Can you speak to that?

Let us speak to that in perhaps some general terms. In past conference calls, we've mentioned that we received the patents that involve system level patent claims and we mentioned that that was an important area for us in terms of intellectual properties. And this suit does in fact involve system level patent claims and Sony happened to be the system manufacturer for the particular TV. This does involve LCD TV. System level patent claims are important and they do have a higher intellectual property value in certain instances. So this is an important area for us to defend this intellectual property. So that's why the suit was filed.

Now you also have to realize, I don't know the specifics of this particular instance, frankly, but also in some instances, the end-customer or downstream customer may in fact not be the direct customer for the product. Many times there is interim companies involved that do the assembly and also haven't done the petition agreement with the system manufacturer.

Okay. I was trying to understand it in the near-term. Because there's a lawsuit with Samsung and Sony now. Obviously, that's a huge portion of the LCD TV market. How does that impact your ability to sell to those end customers?

We don't see ourselves losing market share. And I think the flip of that is that we have had very significant system level patent claims issued to us in the recent past. And so, we are not contracting our focus on LCD TV or other areas. Our intellectual property now is moving more and more into that area and that's a really significant issue for us as a Company as well as for stockholders.

[OPERATOR INSTRUCTIONS] Tore Svanberg, Piper Jaffray.

This is actually Jeremy calling for Tore. Question first in terms of the guidance. Can you help us understand a little bit better, maybe more visibility into this target for 8 to 10% growth?

I'm sorry, Jeremy, could you repeat that question?

What kind of visibility do you have into the growth, maybe just in terms of design wins or any type of order activity or things that you can talk about?

There's really two sides of that. First of all, we continue to see the design win activity to be very strong. As we mentioned earlier, the LCD TV market continued to expand very rapidly this year, but other markets do as well. And we do have very good insight to design wins, so we're certainly comfortable with that.

I will also mention, however, that in the market there is a rapid shuffling going on as far as many of the manufacturers, particularly of the subsystems. So in some cases we are getting shorter lead times from them. But we've also mentioned in the past that we work closely with the downstream major OEMs, so we get a good idea of their volumes into the marketplace. And so we continue to work off forecasts and we do see forecasts during this quarter being very good.

Great. And maybe just moving onto, I think you mentioned the VideoDJ product. Did I hear correctly that this is going to communications applications and can you help us understand what type of platform these are designed into?

This for the camera cell phone, which is with the camera and it has a flashlight equipment inside. And we are to the ASSP. We look at the different [unintelligible] phone and we come on having the greatest first of [inner] things to providing a single IT achieve with the charge off of the flashlight. And also can achieve with the [flash] charger between a [unintelligible].

And can you talk about any early customers or partners you're working with?

We don't have design wins--we [unintelligible] design wins to [unintelligible] order. And right now we got an MP-ready component to sample to order a customer. We should be already very [unintelligible]. So we feel [unintelligible] initial and small revenue in [unintelligible].

Great. And just one final question for Perry. It looks like the PP&E went up quite a bit. Can you perhaps give us a little more insight here? Was this maybe a building purchase or did you buy some extra capital equipment?

May I restate the question and see if it's what you've asked. You're looking at the balance sheet and asking about property, plant and equipment and how it moved up?

Yes.

Okay. So the increase is coming off in two parts. One is 5.6 million for the purchase of the office [pro] in China. And the 6.1 million for the purchase of both [unintelligible] and also R&D treatments.

Sean Connor, Waterstone Capital.

Hi guys, good quarter. I was wondering if you could just give a little bit more clarity around your gross margin guidance of 60%, slightly higher from that. In a sense you guys have been continuing to increase your gross margin. Should we assume that they're going to be somewhat flattish to up, quarter-over-quarter or is there a reason that they would actually be down quarter-over-quarter, from the current level?

Our gross margin is the function of the product mix. So we estimation that we also expecting some business [coming in the] e-commerce in the future. In this area, in general, we have a lower, below the average [cost rate] labor. So in the future I think we still can get a financial model of 55 to 60%.

In the current quarter, September quarter, we expect the e-commerce area, in terms of the product ratio, it's in lower portion. So, I mentioned earlier that we are in the higher end on even [unintelligible].

All right. And then just second of all, could you just tell us what CapEx and depreciation were for the quarter?

Our depreciation in the quarter is $700,000.

And then what was CapEx?

It's 2.1.

Quinn Bolton, Needham & Company.

Just a couple of clarifications first and then a couple of questions. On the notebook side, it looks like notebook revenues on an absolute dollar basis were down, given the percentage splits, but I just wanted to make sure I heard those numbers right. Quarter-over-quarter in June, notebook revenues declined?

Our e-commerce, yes.

Okay, so that was down. When do you think that notebook revenues on an absolute basis--they've been declining now for I think 4 to 6 quarters sequentially. When do you think that that actually stabilizes? When could be the first quarter of growth you would expect in notebooks? Is that second half of this year or will notebooks continue to decline until sometime next year when the new Intelligent Power and new e-commerce products start to ship in higher volume?

We will see a reversal in I think the Q1 timeframe. And much of this has to do with the indicators of the e-commerce area. We specifically withdrew from very low-end card bus activity. We had one commodity product called 6912. We simply ceased manufacturing that. Although we have moved on. We have some good design wins in the e-commerce products that started to revenue ramp in Q1. So we expect a reversal in that timeframe.

We've already seen pick up in some of our Intelligent Power area. But again, there's been quite a bit of ASP attrition. But we do expect the actual value of those numbers also going up next year.

Okay, so maybe continued slight declines through the balance of '05 and then reversal and starting to see revenue growth on an absolute dollar basis beginning Q1 of '06?

Yes, that's fair.

Okay, great. Second question is just, with regards to the lawsuits, and Shawn sort of hit on a lot of these topics, but can you talk about whether you see--obviously, the concern is you're suing Sony, you're suing Samsung, you're suing Taiwan Simeda. These are three of the biggest LCD TV or back-light module manufacturers in the world.

Can you give us any confidence, anything you can say about maybe design win activity with those specific customers that gives you confidence that you're not losing share at those accounts? Or perhaps can you say something about do Sony and Samsung in particular, did they design their own back-light modules or is that all completely outsourced and they are going to be indemnified by the actual back-light module suppliers?

Well that covered a myriad of legal items. Let me simply say that first of all, in some areas you have to realize that Sony and Samsung have had some collaboration and I don't know the full situation there. But never the less, there has been some working level agreements between those two companies.

Fundamentally, we do not see ourselves losing market share. One of the key issues here that you need to understand is that much of our patent portfolio at this point in the Intelligence Lighting area does not just involve IC designs. It also involves the systems level methodology of some of these systems. So, some of this intellectual property goes beyond just the integrated circuit area. And if you would like to go further into that area, I think it would probably be best to have offline discussions with some of our legal people.

But, it is important to realize that some of these are significant system level claims and not just integrated circuit claims that are involved in those two lawsuits.

Okay. Maybe just one last question on that. Can you talk anything about design activity with say a Sony or a Samsung? You don't have to name specifically which one, but are you seeing continued ongoing design activity with those accounts? Assuming that Sony and Samsung don't source their back-light inverters, or even their modules 100% from one supplier, so I'm sure there's dual sourcing going on. But can you just talk about design win activity with those accounts?

Well, in general, again, they tend to be at the downstream customer, but we do see ongoing good design win activity in this area.

Okay, great. And then just moving on, you talked about the move to sourcing product more from China. I was just wondering if you could give us some sort of timeline as to how that rolls out? Or perhaps can you give us a sense today, is there 5% of the product already sourced from China, or do you have any targets as to what percent might be sourced from China, say within a year or two. And more importantly, what kind of margin benefit do you think you can get from moving production to China?

Our product needs to have a long time of development with the partners. So we have to use a foundry [unintelligible] Thailand. [Unintelligible] put a lot of the [unintelligible] from Thailand in China. We have some percent [unintelligible]. But in terms of [unintelligible] in the single-digits.

For the potential cost saving progress, it's the fab [unintelligible] area. But it's still too early to tell, because the [unintelligible] very key factor for the real number. But this is the transfer to move ahead. And in this area also there is ability [unintelligible] very important.

Shawn Slayton, SG Cowen.

I don't want to beat this lawsuit topic to death, but you do have some overhang, but there's also some tailwinds with regard to these favorable rulings that you've had, vis-a-vis Monolithic Power. Can you help us understand maybe how this recent activity in your favor is going to benefit your business going forward?

You had this Taiwan district court dismiss some MPS allegations regarding the Fair Trade Law. How is that going to help your business in the near term and maybe you could help us understand in laymen's terms this jury decision here in Northern California and how that might help the business going forward? Thanks.

I think one of the benefits of actual court actions and court decisions as they come down is it helps clarify for the customers, in fact, what patent issues they may or may not have. Because in some cases, with many, many filings going on from different companies, there can be a confusion as to what patents may apply or may not apply to specific designs in their cases.

And as the decisions are made, I think that makes it very clear for the customers and fortunately for us, we've been in a good position and it clarifies the patents that we have in place. And it enables the customers to have a good visibility and a clear understanding of our patent position. And that, in fact, does help customers to move forward with 02Micro and we do expect enhancement of design win activity as a result of these decisions.

Okay. And can you differentiate between what happened here in Northern California and what happened here with this Fair Trade Law, give me a little more granular?

I think, again, that goes into some legal depth and it would really be more apropos for that to be discussed directly with our legal people. But let me indicate that both of those are significant decisions for us.

Darspal Mann; Delta Partners.

A couple of questions, if I may. First of all, new products, is there a way to understand how many new products were kind of launched in this quarter? And secondly, R&D and SG&A, they've been growing for last quarter and this quarter. What levels do you see them capping out at? Thanks.

Basically, we do not enumerate the new products that we're introducing every quarter. And one of the reasons for that is virtually every product line is introducing new products, and in many cases, a number of products out of their product line.

And in fact, we as a Company have continually expanded our R&D activity as you see in the R&D numbers, which maybe Perry can review with you. But, basically, that expansion in R&D is continuing to lead to more and more new products and more and more product areas over more and more markets.

So the R&D is in fact being spent with the focus of continuing to expand our product offerings in an ever increasing way. So there is a means to the end [unintelligible] and that is the R&D spending related to additional products at an accelerated rate. So, in fact, we are introducing more products at the bottom line of that all the time--.

And Sterling, is there a way to understand it more qualitatively, if not quantitatively? Like, the new products, are they carrying better margins, better ASP or better--whatever is possible to better understand how the new product is going to help shape up coming up, like the revenue going forward?

In general terms, we do not introduce a product unless it meets our margin guidelines going forward. Perry has stated those today. And in fact, we look at each individual product before it's even developed, to ascertain ourselves that on a going forward basis those products can meet our margin guidelines or perhaps exceed those. So new products are developed that will in fact enable good margins, just profitability in the future.

And to speak to the other end of that, we've also mentioned that we did back away from some low-end product in the notebook marketplace that specifically was not meeting margin guidelines. So we backed away from that to focus on new products that could.

So our whole objective as a Company is to develop products that do fall within margin guidelines and also have some intellectual property content in them.

Got you. And the other part, R&D and SG&A, what level do you see capping out at?

I'd like to give you more colors on this. [I predict my information] in last conference call, in our R&D area we are continue to invest in the development of the VPN 51 area. And this is actually very important to our future, not only in the [unintelligible] area, but also to contribution to the gross margin area. And also, we continue to [build up] our personal programming team of R&D in China area. So, these two are a kind of investment in current [unintelligible] and this will contribute 2% to 3% more [unintelligible] higher than our financial model.

So in the next two quarters, I believe [unintelligible] in the high end of our financial model or slightly higher than the model, of which is [unintelligible] 23 to 25% area.

In the SG&A area, this is mainly due to our professional fees for [unintelligible] the Department of the 404 [unintelligible] and also we do have some [internal] patents for [unintelligible]. We do have inter-log capability, which is very important to protect our [unintelligible].

Also, we start to set up our supply chain in China, as Sterling just mentioned. And so this extra [unintelligible]. I think it's to the [unintelligible] 2 to 3% more than the market.

Got you. Thanks and congrats for the quarter.

Andrew Huang, American Technology Research.

I think you mentioned, in answer to one of the earlier questions that you would expect a reversal in the [inaudible] sales to the notebook market or you think you can get in the first quarter of '06. Can you kind of remind us what type of products are ramping or is it just something we haven't heard about?

Based on design wins, the ramp in the Q1, we rollout the significant ramp we think in the e-commerce area in our Intelligent Power product will also continue to ramp in the notebook.

You also commented that you're seeing a great deal of price pressure in the notebook market. I was wondering, what kind of price pressure are you seeing in the LCD TV and monitor market?

There are really issues in LCD TV, particularly at the high end, which in many cases are more relevant to the systems than the IC. Companies are always looking for methodology of costing down their systems and some of our system level intellectual property is one of the ways in which they can reduce their system cost, but not necessarily reducing our integrated circuit cost.

So we're still in the position in that market where we're reducing cost by simplifying the system. On the other hand, in some areas like notebooks that tend to be more mature, the designs focus more on product price reductions than they do on a system methodology reduction.

At this time there are no further questions in the queue. I will turn it back to you for any closing remarks you may have.

Thank you, operator. Thank you very much for joining the Q2 2005 quarter earnings conference call for 02Micro. We'll meet again next quarter. Thank you.

Ladies and gentlemen, this does conclude our conference call. If you would like to listen to a replay for this conference, the replay will be available through August 10th, by calling 1-888-203-1112, or 1-719-457-0820, pass code 1381478.