O2micro International Ltd (OIIM) 2007 Q3 法說會逐字稿

Good day, and thank you for joining us today to discuss O2Micro's earnings for the third quarter of the fiscal year of 2007. If you would like a copy of the press release, please call Pamela Campbell at 401-987-5920, extension 8095, and we will fax you a copy immediately. It is also posted on O2Micro's website at www.o2micro.com. There will be a replay available through November 7th by calling 1-888-203-1112 or 1-719-457-0820, using passcode 5954697. Following the presentation by Management, the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Good afternoon, and thank you for dialing into O2Micro's third quarter 2007 financial results ending September 30th, 2007, conference call. This is Mitch Benus, Director of IR. I would like to remind the listeners that this discussion of business outlook for O2Micro contains forward-looking statements. Statements made in this release that are not historical facts 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, the Form F-3 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 risk factors. The statements made herein are dated information. The Company assumes no responsibility to provide updates to this information. With me today are Perry Kuo, CFO, our Head of Marketing and Sales and a member of the Board of Directors, James Keim, and Sterling Du, O2Micro's Founder, CEO, and Chairman. After the report, the floor will open for questions as time permits. Mr. Kuo will highlight operating results and projections followed by Mr. Keim. Mr. Keim will provide market highlights and closing comments will be made by Mr. Sterling Du. Now may I introduce Perry Kuo, CFO of O2Micro, for a discussion of the revenue, income, and financial highlights of the third quarter of fiscal 2007 ended September 30th, 2007. Perry.

Thank you. Good afternoon, everyone. This is O2Micro's earnings report announcement (inaudible - highly accented language) Q3 2007 ending September 30, 2007. As everyone has a copy of the earnings report press release I will be brief and recall the highlights. (Inaudible - highly accented language) for third quarter 2007, revenue for Q3 was $45.1 million which represent an increase of 18.2% from the preceding quarter and an increase of 43.5% for the comparable quarter of the prior year. Net income for Q3 was $11.4 million, compared to the preceding quarter of net income $5.7 million and net income of $550,000 for the comparable quarter of the prior year. (Inaudible - highly accented language) stock compensation $635,000, the non-GAAP income will be $12 million. Earnings per ADS, fully diluted for Q3 ended September 30, 2007, $0.29 per ADS compared to $0.15 per ADS for the preceding quarter and $0.01 for the comparable quarter of the prior year. Gross profit margin for Q3 was 57.5% compared to 56.7% for the preceding quarter and at least 53.3% for the comparable quarter of the prior year.

R&D expense excluding stock-based compensation charge of $273,000 for Q3 was $8.4 million or 18.6% of revenue. SG&A expense excluding stock-based compensation charge of $362,000 (inaudible - highly accented language) expense of $2.8 million, and (inaudible - highly accented language) income of $5.5 million for Q3 was $8.6 million or 19.1% of revenue. Income takes for Q3 was $448,000 mainly based on the effective rate of each technical location of the prior year. In Q3 2007 non-ADS has been repurchased. Revenue by end market, as a percentage of total revenue for Q3, was consumer in the range of middle 50% range, computer in the range of low 40% range, industrial and communication each at more single-digit percentage of the revenue. Balance sheet, O2Micro has over $75 million in cash and short-term investments. This represents cash and equivalent per ADS shares of $1.96. In addition, O2Micro has (inaudible - highly accented language) short-term investment (inaudible - highly accented language) money invested in (inaudible - highly accented language) bonds of at least AA rating and the government bonds of certain developed countries.

Capital expenditures in Q3 was $1.2 million. Accounts receivable at the end of Q3 was $24.8 million for a DSO of 50 days. Inventory trends ratio for Q3 was 3.9 compared to 4.1 for the previous quarter and 3.8 for the comparable quarter of the prior year. Cash in flow from operations for Q3 was $7.7 million. Human resources, O2Micro now has 1,089 employees. 57% of which are engineers. This positions us well for product development, the continuous introduction of new products and the more customer design wins in the future.

Now I move to guidance for Q4 2007. O2Micro estimates Q4 revenue compared to Q3 will be an increase in the range of 1 to 7%. Compared to the comparable quarter of the prior year, an increase in the range of 25% to 33%. Gross margin in Q4 will be in 56.5 to 58%, mainly based on the product mix. R&D spend excluding stock compensation in Q4 will be 19 to 21% of revenue. SG&A expense excluding stock-based compensation charges, pending litigation expense and (inaudible - highly accented language) income for Q4 will be in the range of 17 to 19% of revenue. We expect net (inaudible - highly accented language) expense for Q4 to be in the range of $900,000 to $1.2 million. Stock compensation. We expect the stock compensation expense for Q4 to be in the range of $600,000 to $700,000. Tax rate of 8% to 10% of pro forma income for (inaudible - highly accented language) will be $700,000. CapEx in Q4 expected in the range of $2.5 million to $3.5 million.

In summary, Q3 was a very good quarter in terms of continuous revenue growth. Q3 grew 43.5% from Q3 2006, and the gross margin improved by 420 basis points from Q3 2006. The expenses were under control. In legal area, the net of settlement payment and the legal expense was $2.7 million. We ended the quarter with a strong balance sheet, sufficient cash for growing the business and authorization to buy back additional stock. Growing all product lines in all appreciations, we anticipate the revenue for Q4 could be up more than 25 to 30% over the prior year December quarter. Our efforts in cost reduction have already shown benefit and we expect to have cost savings in all product lines. In Q3 our inhouse testing unit Ocean 1 (inaudible - highly accented language) has reached a target area of cooperation to help the cost structure and the supported unit growth in Q3 which result in full gross margin.

In Q4 gross margin will be more product mix related. Regarding operating expense, with U.S. currency we'll have a negative impact on operating expense over the short-term. Longer term, our Asian-based R&D sales operation structure will continue to generate new product revenue for new applications and market penetration with competitive cost structure. But there may be some limiting expansion in SG&A dollars spent as a result to new (inaudible - highly accented language) and one-time year-end items. SG&A should not expand as far as revenue towards some leverage. We are investing heavily in our business and are beginning to leverage our operating model. I would now pass the call to James Keim, Director.

Thank you, Perry. Q3 showed strong growth over Q2 with very large gains over the prior year. Our projected Q4 reflects ongoing growth while taking into account some market softness and supply chain inventory issues that are typical for this time of year. Let me address both the markets and product expansion. There is some concern over the general economic situation due to subprime mortgage issues and oil prices. While these may have some slowing effect on the general economy, we see worldwide demand for electronic products like LCD TV and notebooks diversifying with increasing consumption outside the United States. We also see an ongoing transition of the TV market for the CRT to LCD continuing at a rapid pace. This trend has kept glass manufacturing for LCD displays running at capacity, with ongoing capital expenditures being made to increase capacity to meet market needs in 2008 and beyond. Based on these market trends, we believe that Q4 2007 and calendar year 2008 will see increasing demand for our products that address these growing markets.

Let us review growth trends in specific markets of interest. The LCD TV market continues to expand rapidly, having grown from approximately 44 million units in 2006 to 78 million units in 2007. With LCD TV having gained worldwide acceptance and the pricing of LCD TVs continuing to decline rapidly, we expect 2008 to grow by approximately 30% to over 100 million units. We are the leading supplier in back lighting for this market and expect to see ongoing growth from this market in Q4 and 2008. The notebook market continued to expand in Q3, and we were able to increase penetration in several key product areas, most notably power products. We believe that the notebook market will show some seasonality late this year and into early 2008 but expect the notebook market to increase from 90 million units in 2007 to approximately 115 million units in 2008. We remain confident that our increasing product portfolio of notebook-based products will enable us to continue to make market share gains in the notebook market.

The LCD monitor market continued its rapid growth trend in Q3 and O2Micro believes we enjoy excellent market share in this key market. We expect some seasonality Q4 but believe this market will grow approximately 20% in 2008 to 180 million units. This should be an exciting market going forward as smart monitor products are introduced into the market by major OEMs. O2Micro is well position to do take advantage of this market. I will also comment briefly on our major product lines. Intelligent lighting continues to expand with new product design wins in all key markets and an expanding customer base. Our patent tending family of high efficiency LED controllers continues to enjoy new design wins and increasing revenue. We see the rapid expansion of LED lighting in markets like DVD players, GPS systems and notebooks as offering major new growth opportunities for O2Micro. Intelligent power, our system and processor DC/DC products continue to win new notebook designs with increasing market penetration. We are also seeing significant opportunities for advanced charger products and expect these products to continue to our ongoing growth in notebooks. As our power product offering continues to broaden, we will focus on growing both our business in notebooks and other growth markets.

Intelligent e-commerce continues to increase in revenue following design wins at a number of industry-leading notebook OEMs. We continue to expand this product line with new and more cost effective products and will also start focusing on other markets as we move forward. Our intelligent battery product offering incorporates innovative, intellectual property to more accurately control charging and discharging of batteries. This is essential in critical applications where safety and accuracy are required. We are now shipping production volumes into computer, consumer, and industrial applications utilizing our advanced technology and expect growing revenues. We see ourselves well-positioned for ongoing growth. Our VPN security products are growing both in terms of capability and market recognition. We expect to see increasing contribution from this product in 2008. To summarize we've seen solid growth in all our key markets in 2007 and expect ongoing growth in 2008. Additionally, we expect new products to enable us to expand both our market focus and customer base. I will now pass the call on to Sterling Du, CEO and Chairman, for closing remarks.

Thank you, Jim. Our third quarter 2007 finish with record high revenue of $45.1 million and a record high profit. The revenue was an increase of 18% from Q2. More importantly, Q3 revenue were up over 40% from the third quarter of 2006. Gross margin in Q3 was 57.5%, which was up 80 basis points from Q2 2007. We are ever to grow revenue to a record high and expand our gross margin at the same time. Net income in Q3 was $11.4 million due to growing sales, market shares gains, litigation income and expanding gross margin. As Perry mentioned last quarter, we see continued improvement in our gross margin and operating margin as O2Micro achieved significant milestones, including ongoing progress in our China-based supply chain for outside testing, inhouse testing and assembly line. Our new product lines also show good growth momentum.

Q3 is a strong season. We saw growth from the two major areas, first, our core product supporting LCD TV and notebook came out very strong accompanied by our LCD monitor products. We also see strong growth in portable consumer devices using either YLED or CCFL back lighting. Some panel manufacturers reduced large size panel production in order to support a growing 7" panel demand for popular personal devices. PCI chipset, our second core product, expanded market share and enhanced both our (inaudible - highly accented language) and performance. The second area is our new product portfolio including our DC/DC families where we have four lines for notebook computer usage. MDCPU DC/DC, GPU DC/DC, PCI Preference DC/DC, and assisted DC/DC. We see continued market penetration in the product expansion. Our charger grew at a slower rate while we add new IC to this family.

Battery Power Management grew to (inaudible - highly accented language) sectors of battery applications. Our focus is three to four sales notebook computers and five to nine sales industry applications. We are please to do see a significant number of design wins in the first (inaudible - highly accented language) mass production to these two markets. While ED server IC successfully penetrated notebook computer segment, we serve multiple first-tier computer companies with wire ED, back lighting, (inaudible - highly accented language) IC. Wide screen LCD monitor, high definition LCD TV, personal navigator and portable DVDs are all the consumer trend and we provide one of the best industry CCFL (inaudible - highly accented language) server families of products for this segment. The VPN firewall family continues good revenue growth in the recent quarters. We established a partnership with a (inaudible - highly accented language) China top-tier security companies in the channel business. Sales to the Thailand government is a significant milestone.

Our patent portfolio grew from 321 in Q2 2007 to 346 in Q3 2007. Our patent claims grew from 7,613 in Q2 2007 to 8,109 in Q3. In regards to tenants, our China team grew from 682 in Q2 2007 to 715 in Q3. Our worldwide R&D engineer pool now stands at 623 engineers. This does not consider additional application engineering tenants which we have in sales and marketing. In summary, our channel strategy enabled our R&D team to provide better service to the local customers and access to the market. We grew Q3 43% revenue from prior year Q3. We target new products such as wire, DC/DC, battery management and security, while our core business continued to penetrate LCD TV, LCD monitor, and notebook computer market (inaudible - highly accented language). Your ongoing interest and support of O2Micro is appreciated. Thank you.

Thank you, Sterling. Before we take questions I would like to remind listeners that O2Micro will be holding a number of investor conferences this quarter, including the ADA Classic Financial Conference in Monterey and the Deutsche Bank Securities Corporate Marketing Forum in San Francisco. Ladies and gentlemen, the conference call is now open for questions and answers as time permits. Operator, may we please have our first question?

Thank you. We'll take our first question from Vernon Essi with Needham.

Thank you very much. Nice quarter there. I wanted to just go into a couple of questions here specifically related to the fourth quarter, of course, and just can you give us a sense of where you're seeing growth in particular? I mean, if we were to look at going into the fourth quarter, into the first quarter, you're obviously going to have a seasonal shift. I am trying to understand where you're -- if you're getting a little bit conservative on the growth rate given some of the other information flow we've seen on some of these earnings calls, TV's very robust as is notebook. Should we be thinking that some of your revenue may actually be recognized more into the January and February timeframe or how should we look at that seasonal shift? Can you kind of give us some more color on the end markets there and how you see that shaping out?

Yes. We can certainly try to do that. The markets have been somewhat difficult primarily due to many shortages in the marketplace. Some customers have had difficulty getting glass in notebooks and some have had difficulty getting integrated circuit components of certain types and in some cases even batteries. We do see the market being strong in LCD TV in Q4. However, that will be somewhat limited by the ability of the glass manufacturers to increase their volume. We understand that the volume increase in the glass area may be somewhere in the 2 to 5% area in Q4 which allows for somewhat limited expansion, so while LCD TV sales will be up, it will be limited by the capacity in the glass manufacturing. We do believe that the notebook market will actually be quite strong in Q4 primarily due to some demand due to some of the shortage issues that occurred in Q3 for some of the notebook manufacturers. Nevertheless, that same issue resulted some inventories that were in place in Q4 and that is a very difficult item to estimate, so we are deliberately taking somewhat of a conservative view based upon the potential inventories out there but, nevertheless, we do see good market activity in Q4. I hope that answers your question.

It does. Just to dive in on that, it is obviously related to some of the inventory build that you have on your balance sheet, I mean, certainly not necessarily out of line with your revenue patterns, but relative to other companies it is a pretty aggressive working down of inventory, and you seem to be keeping it rather robust in the backdrop. Can we assume, then, if things come in better than expected, I mean you're sort of giving us a conservative angle here. This obviously has room for upside if we see higher demand and sell-through at the end markets going into the fourth quarter?

Well, we would certainly hope there is higher sell-through, but again we do have to understand that, in particular, glass manufacturing is running at capacity which does limit the potential growth of LCD TV. There is much, much investing, capital investing that is going on that will relieve that situation as we move into 2008. But again, the projections we've seen out of the glass manufacturers is only for additional glass capacity increase of 2 to 5% in Q4. Let me also mention something about inventories in general. We do not have the depth of supply chain that many companies do. We do not have worldwide distribution for instance, so we can monitor inventories somewhat better than other companies, and we think we have limited exposure there.

Okay. Thank you.

We'll take our next question from Tore Svanberg of Thomas Weisel.

Yes. Good afternoon. Great quarter. A couple questions. Could you talk a little bit about your bookings linearity here the last couple of months and especially after the first month in Q4 how are things tracking vis-a-vis Q3?

Actually booking linearity has been very good going into Q4, and we see no issues, from a bookings point of view, but again we don't have a distribution channel that clouds that issue for us.

Okay. So your caution and conservativism is not reflective of your bookings but just your own personal assumption of what's going to happen in the latter month of the quarter?

That is correct.

Okay. And I know you usually don't talk much about Q1, but could you at least talk qualitatively how you feel about Q1, what are your customers telling you, what types of forecasts are you getting?

Well, we certainly see the LCD TV market continuing to be robust as we move into Q1 because there has been some manufacturing limitations in that area. The projections out of some of the notebook at this point in time are good, but again based on historical factors one is always cautious about seasonality in Q1.

Okay. And you recorded a legal income of $5.5 million this quarter. Can you elaborate a little bit on what exactly that was, please?

No. We don't disclose that detail.

Okay. Can you at least talk about if there is a possibility of other legal incomes down the road just for modeling purposes, we're just trying to understand if this is it for now or will from be more to come?

Yes. In Q4 we do expect one -- we do expect (inaudible).

So your litigation guidance, did that include that income or no.

Legacy next (inaudible).

Okay. Very good. And on the gross margin can you talk a little bit about your improvement there, how much is coming from a better mix and how much is coming from your improvement in manufacturing especially on the test side?

I think it is about 40% from the inhouse and 50% from the mix.

Great. And you mentioned you expect CapEx to go up by at least another $1 million in Q4. Can you talk a little bit about what extra spending that's going to?

Originally we did keep the guidance Q3 CapEx in the area of between $2.5 million to $3.5 million. We saw delay of (inaudible). We expect in Q3 actually delayed to Q4. We saw dip in the department in the testing half actually, it will not impact on our delivery, but we do expect the delivery of the test in Q4, that's why the CapEx increased up to --

Great, and Sterling, in the past you talked about the new products and how well received they've been. Could you maybe update us on new products and perhaps some of the reception that you've gotten the last couple of months, please?

We have three area. One is DC/DC. We make in-road to the notebook PCs, especially the GPU area, area, and we're happy to see the momentum over there and extent to 2008 based on the design wins. And the second is our industrial applications. As I mentioned, we have significant number of design wins. Those designs vary from sector to sector, but initially that will be take some time to ramping up, but those ensuring that our technology leadership and also of the safety of the battery is major concern for the industry. The number three, VPN firewall. As I mentioned we're happy to make the milestone and sell the IM machine to Thailand government although it is a small order but did open the window that we are recognized by the government label IT departments that O2Micro does provide world class firewall machine for the high speed applications, so this three is our major milestone in the past quarter. Thank you.

Thanks again. Great quarter. I will follow up more later. Thanks.

Now we'll go to Bill Lu of Morgan Stanley.

Yes, hi. Congrats on the good quarter. A couple of questions for me. One is on the MPS call yesterday they talked about share gains in CCFL market and yet you just reported a very strong quarter as well, and I would have thought that your shares going up with the recent settlements as well, can you just talk a little bit more about the competitive landscape here?

Basically when you look, we go back to glass production for most of the view of the CCFL marketplace, and we certainly do not see ourselves losing market share. I cannot speak to MPS because I don't really view their situation, but we certainly do not see ourselves losing market share. They may be gaining in other product areas besides CCFL.

So I like to add some comments. Our product the CCFL driver ICs is different (inaudible - highly accented language) from our competitors MPS, and we don't have the most integrated, and they do, and there is some other competitors out there in the marketplace that also have the same type of integration with the most RAM, so we believe that will be the area that they may be talking to this segment, niche segment, of the notebook, and we probably will be less interest by those integrate (inaudible - highly accented language). We are in a separate (inaudible - highly accented language) business.

Okay. So it very well could be that you are both gaining share at the expense of others, I see. Thanks. A couple of other questions. Perry, in terms of expenses going forward, certainly you're still within range or within your long-term goal, but I would have thought that with revenue being as good as it is, that maybe R&D and SG&A was starting to come down a little more as a percentage of sales. You gave us guidance for the fourth quarter. Can you talk more about going into first half of '08 how we should model that?

In the fourth quarter or the future?

Yes. Beyond the fourth quarter.

Beyond the fourth quarter?

Yes.

I think as we continue to see the leverage of our expenses, our R&D dollar spend in the China, Singapore and also other cities most of the (inaudible) are already done. So the variable one and also the new one will be smaller amount increase compared to the revenue growth. I think the R&D growth in terms of the rate will be much slower than revenue at least quarter-to-quarter change, and I think the total rate of the R&D will continue to be increased. However, it will be in the area of the 18 to 20% area by the year 2008. In the area of the SG&A, without the duration of the one-time extraordinary items, I think the SG&A excludes stock compensation and also the litigation area, the SG&A area would like to be in the area of 17 to 19% area. The reason higher than 18% I think there is one item which is actually new area for us and list currency. The impact is not big. However, it is on the range of the 18%.

Got it. Thanks. And then just one last question for me. In response to Tory's question I think you guys said that 40% of the margin improvement came from the manufacturing going inhouse. Can you just talk a little more about how much of the production is actually done now inhouse and how much room is there to go going forward?

We currently it is about 50%, 50%.

Okay. And then what could that be in the fourth quarter and beyond?

The fourth quarter would be 45 to 50%, and in the future we will continue to make the use of our partners in China and also Taiwan, so in the future, the capacity will be probably up to 40% area.

Got it. Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll go to Steven Park of Wedbush Morgan.

Hi. Just a quick question about Q4, so can you -- so it seems like LCD TVs are actually going up and it seems like notebooks are going to be down. Can you provide any kind of detail of any -- is there any specific sizes you're seeing demand, stronger demand for LCD TVs and also with notebooks as well?

I think it remains to be seen on the notebook market for Q4. We're actually getting indications from some of the producers that they may have a good Q4, remembering that many of them had product shortages, glass shortages, battery shortages, IC shortages in Q3, so it's a very complex market in Q3 for many of the notebook producers. We do think that notebooks may be reasonably strong in Q4. I think it is a little bit too early to really project where that is going to end. I think for certainty we can say that the LCD TV market will be very strong in Q4 and again that may be held back by capacity issues in glass manufacturing.

So is there any specific sizes regarding the LCD TV market where you're seeing additional strength, is it in larger sizes or is it in the smaller sizes or across the board?

Well, generally speaking, in the market there is ongoing push toward higher end with the glass manufacturers, so the higher end is certainly a major focus of all the major OEMs. That having been said, there is getting to be a broader mix sold as some of the smaller LCD TVs become ever more competitive in price.

Just another quick question. Regarding kind of the guidance you gave as 1 to 7% up. Is that just regarding uncertainty? Is that more conservatism? Can you talk about kind of why the wide range of -- for the guidance there?

Well, there is certainly uncertainty due to the fact that again there may be some inventory issues. We know there are some inventory issues, so it takes into account some of that, and then there is always the issue of sale-through, particularly in the notebook market, LCD monitor type market, so it remains to be seen how strong December will be, late December, for particularly those two areas, but if they're strong I think we could expect a good quarter for the higher end of our expectation.

One last quick question. Where are you guys seeing lead times?

Well, lead times are all over the map. Our lead times are good at this point, but many of the notebook manufacturers, as I mentioned, have experienced some serious shortages in certain key products for them. There remains some glass allocation, so it all really depends on the market and the particular manufacturer related to their supply chain.

Great. Thank you.

We'll go to Andrew Huang with American Technology Research.

Hi. Can you hear me okay?

Yes.

Congratulations on the quarter. First question is for LCD TVs on a product basis is your product -- is it primarily inverters or are there any other products for LCD TVs?

It is primarily inverters.

Great. Second question is, on gross margins, I think you talked a little bit about mix shift in favor of -- a favorable mix shift in the quarter. Would you expect that mix shift to continue in Q4?

Yes, it is possible, but it depends on the final shipments selected by the customers. We continue to see the possible trend because of the largest size of the TV and also wider screen of the LCD and also more choices of LED.

And along those lines, as a follow-up, I guess if you look at your sales by different products, within lighting I guess my question is, is white LED drivers becoming meaningful percentage of lighting or is it still very small?

Still very small.

Okay. And then one more question on test capacity and then packaging capacity. I guess historically you've done most of that in Taiwan. Are there plans to move that to China in '08?

Yes. We are in the fortifying process of the assembly.

So do you have a timeframe as to when you might get that new capacity approved and up and running?

It is -- this is the problem also we need to work with our customers, so it is also up to customers final decision, so normally it will take a quarter to get approval.

Got it. Okay. Thanks very much.

We'll go to Craig Berger of FBR.

Good afternoon. Thanks for taking my question. Had some questions on your VPN business. Are you able to provide any metrics to us with respect to the operating profitability of that segment or what the break even level of that segment might be or how many heads are dedicated to that segment? I am trying to understand how profitable your chip business is without the forward spending associated with that VPN business. Thank you.

I am sorry at the moment we don't disclose the details of the VPN business. However, this business eventually it will offer high growth margin and also the SP will continue to improve. (Inaudible) grow one year by one year because of the addition of the sole work by the customers and also the interest area is very high to others once we get into the system, so the initial introduction costs will be higher, but however with this kind of a nature of the business this is actually very much (inaudible) O2Micro expertise. So this is very good for us, and we will start to see more and more benefit from the VPN side of our business.

Are you able to tell me how many engineers are working on VPN in China?

Sorry, no, it is quite a few a month, but we cannot disclose the details of the engineers.

Uh-huh. And can you just recap what legal issues outstanding you have working through the courts? I think you have the MPS appeal, but what else besides that?

Well basically, there is a litigation against a IC manufacturer that would occur early next year. We can't discuss however details of any negotiations that may be going on relative to settlement.

What's the name of the company?

That activity is against Rome of Japan.

Right. Can you help me understand, I know there is some shortages and maybe people are building inventory this quarter and maybe demand pushes into next quarter, but if you ignore all that stuff and look at a typical Q4, I always thought TV components would be flattish at best in a typical Q4 as the build unwinds in the middle of the quarter. Is that accurate or is that not accurate?

I think there is the TV market in general, and then there is the LCD TV, and the LCD TV is continuing to rapidly gain share within the whole TV marketplace, and the activity in LCD TV is very high at this point in time and again the glass manufacturers are actually limited in capacity in that market at this point in time.

Jim, can you help us understand the price dynamics in the CCFL market and also number of chips per TV or lamps driven per chip? Any of those dynamics. Thank you.

That's very complex because that varies significantly from OEM to OEM, and some of the designs use single chips, some do use multiple chip, but it is very difficult and in some cases also delves into proprietary information.

What are your typical annual price declines in your CCFL inverters?

I don't know that we actually monitored that, although given the proprietary nature of much of our product, the ASP declines have not been as significant as they are in much of the IC business.

Thank you very much. And congrats on the turnaround over the last year.

We'll go next to [Paul Schutt] with Paul Schutt Associates.

Sorry. My question was answered. Thank you very much.

You're welcome.

We'll take a follow-up from Andrew Huang of American technology.

Thank you very much. Perry, when you guided to Q4 litigation expense of $1.2 million, can you give us a breakdown of the income and then the expense?

I am sorry, no, not at this moment.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And we have a follow-up from Tore Svanberg of Thomas Weisel.

Yes, thanks. I know you can't talk about the specifics of the settlements you've had. But can you talk maybe just generally how it has impacted you in the marketplace the last couple of months? Are you working with some of these companies you've settled with? I am looking for general comments as opposed to specific.

The answer is yes, we are working with them.

Okay. Thank you.

Ladies and gentlemen, that concludes the question-and-answer session and also concludes the conference today. A replay is available through November 7th by calling 1-888-203-1112 or 1-719-457-0820 using pass code 5954697. Again, that concludes today's call. We thank you for your participation, and you may now disconnect.