O2micro International Ltd (OIIM) 2008 Q1 法說會逐字稿

Good day and thank you for joining us to discuss today's O2Micro Earnings for the First Quarter of the fiscal year 2008. 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 O2Micro's website at www.o2micro.com.

There will be a replay available through May 7th, 2008 at 959 PM Pacific Time by calling 1-888-203-1112 or by toll, 1-719-457-0820 and use passcode 8341358. Following the presentation by management, the conference will be open for questions and answers as time permits.

Gentlemen, you may begin.

Good afternoon, and thank you for dialing into O2Micro's First Quarter Financial Results ended March 31st, 2008 Conference Call. This is Gary Abbott, Director of Investor Relations.

I would like to remind listeners that this discussion of business outlook for O2Micro contains forward-looking statements. Statements made in this press release that are not historical fact are forward-looking statements within the meaning of the Federal securities laws. Actual results may differ materially due to numerous risks 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 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 Director, Jim Keim; and Sterling Du, O2Micro's Founder, CEO and Chairman.

After the report, the floor will open for questions as time permits. Today, Mr. Kuo will highlight the operating results and projections, followed by Mr. Keim. He will provide market highlights, and closing comments will be made by Sterling Du. Now May I introduce Perry Kuo, CFO of O2Micro, for a discussion of the revenue, income and financial highlights of the first quarter ended March 31, 2008. Perry-?

Thank you and good afternoon. This is O2Micro's quarterly conference call. This call will cover our financial results for the first quarter of 2008.

We will now review our financial results for Q1 2008. Please note the financial that will be presented on a non-GAAP basis unless we state otherwise. The non-GAAP results include stock-based compensation expense, as well as education income and expense. Our full GAAP results are available in our press release that was issued moments ago.

Net revenue in the first quarter of 2008 was $37.6 million. This reflects an increase of 7.2% from the comparable quarter of 2007. It is also within the $37 to $39 million range of our guidance. Q1 revenue is typically a seasonal time for O2Micro and we look forward to sequential increases in Q2 and in the second half of 2008.

GAAP net income in the first quarter of 2008 was $2.3 million. If we exclude net education expense of $1.2 million and the stock-based compensation of $673,000, then our GAAP income would be $4.1 million. As you can see, the biggest difference between GAAP and the non-GAAP net income is the net education expense and we are working diligently to reduce this expense.

GAAP earnings per ADS in the first quarter of 2008 were $0.06. Non-GAAP earnings per ADS were $0.11. Both the GAAP and non-GAAP ADS were significantly ahead of the Street consensus estimates.

Gross margin was 58.5% in Q1. The gross margin was at the upper end of the 57 to 59% range that we expected, due to available product mix. The gross margin was approximately flat with the fourth quarter and it increased by 390 basis points from Q1 of 2007. The year-to-year increase in our gross margin is a function of our success with our [Ocean One] initiatives as well as efficient designs in the new products.

R&D spend was $9.8 million or 25.3% of revenue. This amount includes stock-based compensation expense of $258,000 during the quarter. This was consistent with our guidance and should decline as a percentage of revenue as revenue increases.

SG&A spend was $8.4 million or 22.5% of revenue. This amount includes stock-based compensation expenses of $415,000, education expense of $3.2 million, and education income of $2.0 million in the quarter. It was also in line with guidance.

Income tax was $492,000 in the first quarter, mainly based off the effective tax rate of each taxable location for the prior year and then the normal annual tax approval adjustments.

In Q1 2008, we repurchased 531,751 ADS units at a cost of $4.5 million. As of March 31st 2008, there were more than 3.1 million shares remaining in our authorization.

Q1 2008 revenue by end market breaks down into the following percentages- Consumer was 45 to 50% of revenue. Computer was 45 to 50% of revenue. Industrial and the Communications were both less than 5% respectively.

At this time, I would like to provide some additional information. After our share buyback, O2Micro finished the first quarter with more $84 million in cash and short-term investments. This represents cash and equivalents of $2.21 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q1 was $24.9 million. Our DSO is 59 days. This is within our target range of 40 to 60 days.

From a cash flow perspective, we were approximately neutral in Q1 2008 due primarily to an increase in prepaid expenses and a decrease in the comparables that offset major cash flow intake during the quarter.

Capital expenditures were $794,000 in the first quarter and were primarily driven by equivalent purchases.

Depreciation and amortization was $1.7 million in Q1.

At the end of the first quarter of 2008, O2Micro had 1,075 employees. 57% of these [are] engineers. This positions us well for new product development and allows us to maintain our technological advantage which this in turn leads to new design wins and high-margin business.

At this time, I would like to provide our financial guidance for the second quarter of fiscal 2008. This guidance reflects our best estimate for the current environment that is subject to change. This is the only official guidance we will provide unless we are faced with a public announcement in the future.

O2Micro estimates that O2Micro's Q2 revenue should be in the range of $40 to $42 million. This represents sequential growth of 6% to 12% from Q1 levels. We are very pleased to be in a position to guide to growth rates that are as much as three to four times the sequential growth that many of our peers are expecting.

We are guiding the Q2 gross margin to a range of 57% to 58% to reflect a conservative product mix. Our expectation is that the gross margin will remain in the upper end of our 55 to 60% target range for all of 2008.

R&D spend, excluding stock-based compensation should be 23% to 25% of Q2 revenue. As we previously indicated, this percentage should decline as our revenue increases. However, the weak dollar does have an impact on the expense cost (inaudible) of our headcount overseas.

SG&A should be in the range of 21% to 23% of our Q2 revenue, excluding stock-based compensation, education income and education expense. This percentage should also decline as our revenue follows normal seasonal trends.

We expect education expense for Q2 to be about $1.0 million. Stock-based compensation should be approximately $700,000 in the second quarter. We expect our tax rate to be in the range of 0% to 10% of (inaudible) pretax income to the second quarter.

At this point, I hope our financial guidance shows the resilience of our business and the confidence of our team. Core markets are experiencing seasonal increases and we should continue receive benefit from this trend.

Our new products are doing well and new design wins should propel the Company forward. At this time, I will turn the call over to Jim Keim to talk about our business.

Thank you, Perry. In our last call, we expected Q1 would reflect some seasonality as well as some inventory correction in the supply chain, due to the slowing economies. Indeed, this did occur.

As we enter Q2, we believe the market situation has now stabilized. We see growth opportunities in both core markets and new markets. We expect notebook volumes to grow approximately 14% in 2008 to 120 million units, and the LCD monitor market to grow approximately 18% to 180 million units. This is good growth for a recessionary environment.

The LCD-TV market is expected to grow approximately 40% to 102 million units. But sales of 40-inch and larger TVs are lower than previously projected by some leading TV manufacturers, which is driving changes in the markets.

Philips is ceasing direct sales of LCD-TVs in the United States and Sharp has significantly shifted its focus from LCD-TV sales, to panel sales. We expect these market shifts to positively benefit both Sony and Samsung, both of whom are customers of O2Micro.

In addition to our own growth opportunities, we have entered into a significant settlement agreement with [Wall] of Japan. We expect that the settlement agreements we entered into will have a positive impact on our earnings.

At this time, I would like to comment briefly on our major product lines. Our industry-leading Intelligent Lighting product portfolio continues to expand and we continue to see new product design wins in all key markets, as well as ongoing expansion of the customer base. While we continue to develop and patent new innovative LCD backlighting solutions, our patent-pending family of high-efficiency LED controllers continues to enjoy design wins and increase in revenue.

As we publicly announced on March 27th, several of the top-tier notebook computer manufacturers have chosen O2Micro's LED backlight drivers for their new high-end notebook products. Our patent-pending area lighting technology for LEDs reduces motion blur in video and improves contrast ratio of the display. We see the rapid expansion of LED lighting in DVD drivers, GPS systems and notebooks, as offering significant growth opportunities for O2Micro. We are very excited about the opportunity to extend our lead in backlighting as the LED market develops further.

Our Intelligent Battery product offering continues to gain recognition and design wins in applications where safety and accuracy are required. We are now shipping increasing (inaudible) of product into notebook, power tool, E-bike and automotive applications; utilizing our advanced technology. We see ourselves well-positioned for ongoing growth in this dynamic market.

Our Intelligent Power System and Processor DC/DC products continue to win new notebook designs with increasing market penetration. We see significant opportunities for advanced charger products and expect these products to contribute to our ongoing growth in notebooks.

As our Power product offering continues to broaden, we are focused on growing both our business in notebooks and other markets.

Intelligent E-Commerce continues to win new designs at leading notebook OEMs. We continue to expand this product line with new and more cost-effective products and will focus on other markets as we move forward.

Our VPN security products are growing both in terms of capability and market recognition. We now are shipping product to nine countries including China and the United States, and expect to see increase in contribution from this product line in 2008.

To summarize, we expect to achieve good growth in our markets 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 first quarter 2008 net sales were a record $37.6 million, up 7% from the first quarter of the prior year. It is important to compare on a year-to-year basis because it shows O2Micro has steady growth, above the old record Q1 of last year, 2007.

The GAAP gross margin on net sales was 58.5% and it was up from the 54.6% from the first quarter of 2007. Our gross margin is high because we have strong technologies and IP. In Q1, we expanded our IP with 22 new patents which bring our total patent portfolio to 385 patents. (Inaudible) has 8,778 plans.

I'm pleased with Q1 and believe that is a good start to the year. In the first quarter seasonality was challenging because of a sluggish U.S. economy and an inventory correction. But we anticipate the market should get back to normal in Q2.

Right now the order cycles are short and the inventories are long. We also see our focus LCD-TV and notebook markets continue to grow at a strong pace, despite the general market softness.

On the consumer side of our business, LCD-TV market (inaudible) to O2Micro are winning patent-protected solution, offer better price for [cost] ratio, for low-end LCD-TV sectors. While our superior technology appeals to the high-end OEM, in addition, our LCD-monitor remains healthy and should grow with the overall market.

There were four new backlighting products released in Q1. Three were LCD-TV low-cost LCD monitor; and the highly integrated part for portable electronics, in additional to the (inaudible) LED for the notebook, which Apple Mac (inaudible). As far a LED is concerned, we are very excited about the potential market where we have run off to an early lead.

On the computer side of our business, we expect to benefit from the continued trend of the notebook to replace the desktop computer. In addition, the new low-cost- a notebook market such as the Intel Mobile Internet Device, MID, and the similar machines present a new path for us to target.

For the new product front, we shipped four new (inaudible) and a charger order in Q1 including (inaudible) and a CPU DC/DC. We expect our charger business to grow this year as we target the MID sector, which our cool charge application is suitable. We also expect our PCI express chip set business with (Inaudible) and (inaudible) with one of our top-tier Japanese notebook customers.

(Inaudible), we achieved with the core consumer/computers segment compliments our effort in (inaudible) management and security. Our patent power management business is extended. There are many design wins; as our volume increases we are ready to ramp up our China supply-chain base and bring our cost-down solution to the market.

At the same time, we are building a pipeline in our Security product in order to drive sequential growth. Our business is doing well and I would like to talk about our China headcount.

Right now we have 1,075 employees at O2, and out of that 690 are based in China. Our China strategy is to be able to compete with the local analog companies by providing better quality, not low prices. On a global scale, we're going to compete with top-tier analog companies by offering better technical support and field engineering resources. We think that our (inaudible) proposition is difficult to match for traditional analog companies and this is why we will win.

In summary, O2Micro is past it's seasonally low quarter and we are very confident in our competitive position for the rest of the year. We believe our core business is doing well and new products will provide a meaningful contribution.

At this time, I would like to thank you everyone for participating and I'd like to turn this call back over to Gary Abbott. Gary--?

Thank you, Sterling. I'd now like to turn the call back to the Operator to begin the question-and-answer session.

(Operator Instructions). And it appears we have a question from Andrew Huang from American Technology.

Thank you. Can you hear me okay, guys?

Yes, go ahead.

Okay, great. So it looks like your guidance kind of reflects normal seasonality. I was kind of wondering if you could comment on what could potentially get you to the high end or what would cause you to go to the low end of that guidance.

More than anything, the general economic conditions; I think there is still concern on the part of many companies, including O2Micro, regarding the world's economies. And in fact, many of the large OEMs are placing orders on a short-term basis, reflecting what they are seeing in the market at that point in time.

Okay, then maybe kind of taking a step back a little bit; for the full year, I mean I know you talked in the past about kind of a revenue contribution from new products. Can you talk a little bit, specifically about the power tool, E-bike and automotive markets for the battery products?

The battery product we continue to have many design wins and indications extend to different forming of the power tool and also the differing forming out of the EV or HEV or (inaudible) bicycle, to the motorcycle; there are many applications. So each sector has different characteristics to working out the business for O2Micro. But we do see encouraging signs now that [Beardly], our manufacturing base in China, they have been in restoration for the factory expansion and that they also emphasize on the quality due to these many quality issues in the battery inventory.

We do see, this year in 2008, the remaining year that will be good growth for the battery sector for O2Micro. And for the power [tool], we are seeing that as I just mentioned, the DC/DC the CPU will extend to the different areas such as Intel and also we do see the MIDs which are those portable small devices dedicate functions such as dedicate for GPS and communication and dedicate to the search engine or dedicated to special functions that we call MID and those function (inaudible) ECP or other mini-notebook; (inaudible) created a new [tap] for the O2Micro power for the potential target.

So for those, for the power, our charger-- cool charger ideally for those applications, we'd rather wait and apply our DC/DC for portable computers being enhanced. And right now we include in the Intel CPU, that we have a (inaudible) in a (inaudible) CPU that we have assisted DC/DC and also (inaudible) complete right now for the power trend for the whole notebook applications. So I think this is good for O2Micro right now to compete with our competitor in this business, as we have the full solution for the people's needs.

So overall, we think we will continue to have a higher growth comparatively for the core business this year, compared to last year.

Okay, thank you. I think-- I don't know if this is right, but this is the first time I've heard you mention Intel on your DC/DC processor business. Is this relatively new?

Yes, you're right. We have Intel [IVP] 6-plus; so the difference between IVP 6 and IVP 6-plus is ideally for the lightweight notebook sector. So the power rating is less, however the power saving specifications-- it's more complicated.

Got it. Okay, thank you very much.

Thank you.

And next we'll hear from Amit Kapur from Piper Jaffray.

Great, thank you gentlemen. In terms of-- you kind of talked about some of the macro economic headwinds you're seeing. Could you update us as to some of the lead times you've seen even this far into Q2, the amount of visibility you have maybe compared to this time last year and the linearity of orders are in Q1?

Well, we have seen generally speaking, a firming up of forecasts in Q2 from major customers. In addition to that, what is encouraging is we're seeing an increasing number of short-term orders come in on top of that. So we are seeing what we think is some pick-up in the market. And at the same time, there are very limited amounts of inventory in the market. So those are all encouraging signs to us.

Okay. And in terms of inventory, it looks like inventory days seem to increase a little bit quarter on quarter. Can you discuss kind of what the proportion of raw materials versus finished goods was compared to Q4 and how we should think of inventory going forward?

The inventory level in terms of the dollar amount in Q1 is almost about at Q4. However, in the year, the product mix and also for the (inaudible) actually we consider are more finished goods in Q1. We continue to keep some wafer and (inaudible) for Q1. As Jim just mentioned, we've got more and more short cycle time orders so we like to pick up the cycle times in our order so it's our policy to keep a higher (inaudible) in Q1.

We expect to see the inventory level in Q2 start to decrease in (inaudible).

Okay, great. Maybe one final question; just more housekeeping; you talked about Q2, your legal expenses to be at about $1 million. How should we expect that in the second half of 2008?

It is difficult to predict right now but we expect we will continue to keep on the low side unless there is some extra expense for the appealing procedure.

We're not modeling it up. $1 million is the place holder.

Okay, thanks. That's helpful.

You know one other point about the inventory; Q3-Q4 as you know, we've been moving, particularly our newer designs to China fabs, away from (inaudible), Texas. And so Q3-Q4, as we ramp up, some of the newer products we actually intentionally built some inventory so that actually has more to do with the actual level than anything else. It isn't that it's built; it's that we intentionally did it in Q3-Q4.

Okay, thanks.

And next we'll hear from Tore Svanberg from Thomas Weisel Partners.

Hi, thank you; I've got a couple questions; first of all, Jim you mentioned you were really gaining some traction on the LED backlight for notebooks. How competitive is this market relative to CCFL and can you talk a little bit about O2Micro's competitive position, specifically for LED versus CCFL?

Basically, Tore that's a multi-faceted question. But basically we do think we have some technology edge in the LED backlighting areas for notebooks. That's why we have some very significant design wins with majors. We feel that we have a significant competitive edge in that area and basically we view ourselves as being able to maintain a very significant edge for that marketplace. So we view this as really as increasing as the whole backlighting volume for us, including both LCD and LED.

Great. And you also talked about Samsung and Sony potentially benefiting from Sharp being a little bit more focused on the panel side of things. Could you just elaborate a little bit on that and maybe specifically could Sony and Samsung really become much bigger customers for you here in '08?

Yes, that is again a fairly complex subject. However, there is literally a price war going on in LCD-TV at this point in time. We have seen Philips pull back from the North American market as we have indicated. We've also seen Sharp turn and focus on the panel market. At the same time, that has enabled Sony in Japan to utilize more panels from Sharp to focus on increasing their market share. The same is true with Samsung. So we see Samsung and Sony very much focused on market share at this point in time. We expect them to gain market share in the LCD-TV marketplace. And we do have agreements with both of those companies that we think will leave us in a good position in the LCD-TV market.

Great, thanks. And Sterling, you sounded a little more upbeat about cool chargers this quarter. Does that mean this product line is finally starting to see some ramp?

Yes. But we do like understand the MID or the lightweight, some notebook or mini-notebook; whatever it's called; is first of all an emerging sector, is from a small promotion to tomorrow maybe it will be (inaudible) mainstream. So we will see some exciting news as to some of the AC adapter vendors able to support O2Micro format and that's very encouraging, which we have pursued over the last two years. And we also see some out of I think-- a few out of the notebook manufacturing including one (inaudible) interesting and it's (inaudible).

And we think that's very meaningful because that's providing our greatest and latest technology to charge the battery, which will leave the charger outside of the notebook box itself. But for the revenue, it's going to be relatively small this year. But we're looking forward to when the MID or the light-weight or mini-notebook will pick up over the next couple years. That will be one (inaudible) IP protect architecture we provide to that marketplace.

Great, and then finally you mentioned very recently here that you're undergoing some transitioning with your foundry partners and maybe less from Europe and more from China. Can you talk a little bit about what the percentage is right now and is it a benefit that you're currently seeing or is it still to come? Because I assume that inventory that you've built for China foundries is inventory that's going to be in your current revenue for the second half.

Yes. You see our gross margin in the last couple of quarters-- I believe we are four quarters steady and also I expect from a year ago, our results on this China-based foundry in the supply chain are cost saving, despite our competition which is very severe at this moment.

Right now, if you asked me the same question about 18 months ago, our Europe foundry probably had more than 60% or 70%. Right now it's around 50%, and even sometimes under the 50% of capacity right now. But that doesn't mean that we will be totally (inaudible) European-based foundry as far as ideally for automotive application for wide-range temperature range solution. It just means that a new consumer marketplace will expand is primarily-- we are supplied from China.

But also you see the LCD-TV and the monitor; some of the lower-end LCD-TVs sell faster than high-end. For those low-end-- primarily is manufactured probably is China-based or Taiwan-based and for those low-cost LCD-TV and monitor, they require very price sensitive solutions and we leverage our China base on the supply chain to do it.

And looking forward, we believe add to the balance of one third will continue from our Europe foundry and two thirds is coming from several different partners in China. And a separate page in the same story, just at about 6 months or 8 months behind at the foundry, we moved to China for the (inaudible) packaging. Due to a (inaudible), Taiwan and China as (inaudible) is private so the move to China is a little behind the foundry. But it is continuing to improve.

Right now we do see probably double-digit, which is about 15-20 or 20% plus assembly is done in China right now. We do see that (inaudible) continue to grow this year and beyond. And that also will be helpful to cost down savings from our program.

Great. Thank you very much for that update. Thanks again.

And next we'll hear from Vernon Estes from Needham & Company.

Thank you very much. A couple of follow-on questions here; I was wondering if you could talk a little bit more in detail about the-- I guess you're calling it the MID market here-- this mini-notebook? And I want to make sure I understand. Are you having other work besides the cool charger products in this program and is a reference design of sorts or are you still competing with other firms on analog content there?

Let me first overview this MID. MID itself is a concept sector and Intel has several system parts and they demonstrate many different kinds of applications. Overall, the concept-- we try to cover the device and that's like your blackberry, but it's going to be dedicated sort of services. Although it also comes with (inaudible) but it's emphasized that this line is for gaming. You play the game, like PST or this one for the GPS functionality. But this also comes with some e-mail services. So this is certainly MID.

So the people who MID, this is very bad; some people try to do the palm-sized MID. Some people like to do very low cost like the EPC (inaudible). And HP announced its mini-note computer [Zeus EPC] a couple of days ago. And that one is more expensive than the EPC is running-- the Intel and the video technology of those CPU chips (inaudible).

That is overall. So it is very different. It's very conceptual as a sector is very difficult to pinpoint exactly what MID-- and everybody has a different definition, which is depending on who you ask. What we're providing is-- so first of all this is a low-cost EPC so they are not using (inaudible), they're using inverter. So we have to finish switches for those (inaudible). Of course we meet with the inverter, our competition, as usual. But our China-based low-cost [converter] is ideally for this low-cost entry sector.

And number two, DC/DC-- most of the current, the mini-notebook or the EPC prefers to use whatever the low cost. Sometimes they're only using LDO. But Intel defines MID the (inaudible), and those are using the good quality DC/DC which is much (inaudible). So it depends on which sector.

So for the low-cost LDO, then we don't compete. We compete in the DC/DC single channel, dual channel; the memory for those applications. For example, our OEM manufacturer, they are using commercial parts which our DC/DC penetrates to the (inaudible) and that would be most of the share by this mini-note (inaudible). So it's not-- this single channel is only dedicated to the particular mini note because they probably share a component inside of our OEM manufacturing site.

For the PC Express, the PC Express is for the notebook and we do have another part in the family- is USB interface. For those sector- EPC or mini-note or MID, they prefer using USB due to the cost reason, not for the performance. So we do have the low-cost the device reader which is USB interfaced. (Inaudible).

So overall, we believe this is a new sector. People maybe have a regular notebook for the desktop, on the table top, but there is a sector where you maybe buy extra MID or EPC for the trip or for the portable reason. So we think that will be an additional market for O2Micro as we see that as our current low-cost solution suitable for that sector.

Okay, and sort of just to be clear because cool charger is appealing to both the very portable devices as well as the sort of sub-cheap notebook or are you talking about both markets that that will address or just one and not the other?

One. Our cool charger is a little different from the one I just mentioned our PCI or DC/DC, but a cool charge is ideally to charge a battery without the heat. That is more (inaudible) of the thermal management for the small notebook; so cool charge is ideal for those.

Okay and back to the mobile side, the super mobile and I'm jumping around here. But what sort of dollar content do you think you have possibly if you stitch all these different pieces together on a unit basis (inaudible) in dollar terms per device?

That's a little difficult to answer you right now. We need to do some more research because from the mini-note as far as costs are mapped on a computer is not easy to calculate because we see our current content. But for the MID detail, because of that different functionality and some are for the (inaudible), there's some automotive; we don't know really how many because MID have different parameters. We don't know how much more (inaudible) versus another so that's difficult to do an estimation for MID.

Okay. And then you always disclose this range on your computing and notebook revenue and it's a classic question. But in the last quarter, what did the breakout look like just roughly between backlighting versus non-backlighting in that revenue segment?

Vernon, we don't actually disclose that as you know, but what we call consumer is- pretty much all backlighting or the vast majority and then a big chunk of computer. So it's fair to infer that well about 50% of our business is backlighting, LED and inverter. And then as you know, the carve up PCI express is a significant chunk of business and the other pieces are very small. So you can kind of guess in a range that's probably pretty close.

I'll keep trying. I highly suggest you might want to just at least give us an idea so we can track your progress on some of these interesting initiatives and then-- lastly the one final question; and I'm sure you're getting a lot of questions on the Street. Here's a good chance to address it. But market share; obviously on the even the notebook side but also on the LCD-TV side, lots of rumblings that you're losing sockets and are going to have tougher comps in the back half of 2008. What are your thoughts on that and do you see this happening?

Let me take the first question because I actually listen to all of the competitor calls. One competitor reported yesterday they were down more sequentially than we were. Another competitor reported last week and they had much less emphasis, qualitatively speaking, than they had in prior quarters in this segment. This is our business. We follow the seasonal factors. They're good competitors, they're credible and we compete with them. But we are the number-one player and we are the market leader and that has not changed.

Jim, do you want to talk just to sockets? What you're seeing in the market.

Basically, we have not seen any loss in market share. We feel that we're doing very well in new designs in TV, new designs in monitors and designs in notebook where we're even mentioned LED. So we feel that we're very well-positioned in the backlighting area. And we view the whole area of backlighting. It's not just the LCD but LED and there are other lighting areas beyond that. So we see this whole market as continuing to grow substantially year upon year for the foreseeable future.

Okay. Thank you very much.

And next we'll hear from Bill Lu from Morgan Stanley.

Hi there. I've got a few follow-up questions as well. First of all, on the gross margins; I think that's one area where you've basically supplied some of the upside or at least some [MDINs] in the last several quarters. And yet the guidance appears to be a little bit conservative. I'm just wondering certainly there is a mix issue there. But if you're thinking out beyond the second quarter, if you're looking longer term, as you continue to ramp into China, what is a more reasonable long-term level to think about?

(Inaudible) your answer to your question, you are saying there is some meaning behind the gross margin. We are not a single product and we are not a single technology Company. We do have a lot of digital products; they're up and down quarter by quarter. So sometimes our gross margin is 58.5, sometimes it's 58.7; it's not very easy that we are shipping one regular order to the PC Express which is commencing a lower gross margin, this will effect that.

But top line, our analog contender, our big line inverter, LED and our higher DC/DC we don't see those margins- not (inaudible), although there is price pressure just like you said. We are also using China-based supply chain to offset this pressure. So we those continue (inaudible).

Sometimes we see our margins go up and down but we also have those other business units; that is a result of product mix. Therefore we're looking for -- Perry, do you want to take--

For the second quarter, as Sterling mentioned, we expect that a lot of new product start to ship more in Q2-- so some of the new product may (inaudible) so this is going to be very good for the second half of '08. And for the longer term, actually we don't change our model. I think for the longer term the gross margin will be 55 to 60%, given the very severe market condition and also we (inaudible).

Okay, great. Thank you. I guess the second question is really a follow up as well. I know you don't break your backlighting versus the other businesses, but I've got to think if I look at the year of your comparison, the backlight business is kind of looking flattish if I'm looking at 1Q and 2Q and the other businesses are growing?

Jim just said that the backlight or at least the backlight market should grow this year. I was just wondering if you could reconcile the two for me and if I'm looking at that wrong.

We don't break it out, but indicated in the prior question, backlighting is significantly more than half the revenue of the Company. So in order for the Company to grow whatever 7-8% year to year, then backlighting can't be materially different to get a weighted average growth rate that's consistent with the Company.

If you look at this now for Q1, even Q1 had a (inaudible), but we still were 7% up from the 2007 quarter 1. So as Gary just mentioned, you can easily see our backlighting sector is more than half the business of O2Micro. If that is does not grow then even in Q1 how can we grow 7% over last year? So I think our backlighting (inaudible) inverter will grow, but we also should understand that some of the notebook inverters are converting to LED and even in LED (inaudible) we also added leadership. And overall, the (inaudible) last year even Q1 compared to '07Q1, we see that as growth as very consistent to our Company growth rate.

I was going to say the economy grew 0.6% in the first quarter too. Don't discount-- we are very economically sensitive so don't discount that in looking at year-to-year.

If I look at your 1Q results and Q2 guidance its basically increased in absolute terms about a couple of million. I guess I just would have thought that the new business would have grown at least by that much, the non-backlight business?

Including (inaudible)?

Just anything that is non-backlight, non-CCFO and non-LED backlight.

Well you also have to understand as we've indicated in similar commentary, that we are introducing very rapidly more cost-effective products and we know that that in e-commerce for instance, so the fact of the matter is that in some product areas ASPs have declined significantly, particularly in notebook and e-commerce happens to be one of those. So while we have been growing market share, nevertheless the ASPs have come down substantially and we have designed new products that are more cost-effective that have enabled us to also enhance our margins while that is occurring.

So there is a big difference between revenue growth and also volume growth and you need to keep that in mind as well in this market.

Bill, it's worth adding-- we always said that new products as we defined as primarily DC security and would add two to three points of growth to the overall Company for the year and that was sort of how when we talked about the growth rate. You're talking about, based on '07 numbers, $3 to $5 million. So when you talk about the sequential increases, $3 million in Q2; that's what we expect as a whole of the "new products" for the year. So I think-- if you're saying that you would have expected those products to contribute $12 million for the year instead of 4 or 5--

(Inaudible) when you see our gross margin compared to the Q1 2007, we grew about 54% or today 58%. Now you understand our digital part has low gross margin. If we didn't grow our inverter or copper wire, how can we grow our gross margin?

I appreciate the clarification I guess I just don't quite understand how the numbers work out, but that's fine. That's fine; thank you.

Okay, we leave Gary to you.

Okay, great. And then just one last question Perry. If I look at your SG&A expenses, it appears to be slightly lower quarter on quarter. Is that a trend that's going to be sustainable going forward or was that really more a result of lower sales in 1Q?

SG&A I think is in the area of the year 2008 we tried to (inaudible); and as we look into China, we expect some savings and also some (inaudible) to China customers.

The fourth quarter also had some bonuses approved last year.

Okay, great. Thank you.

Operator, I think it's getting close to 6 o'clock. Maybe we'll take one more question.

Certainly, and next we'll hear from [Patrick Wong] from Wedbush.

Okay, thank you. Patrick, go ahead.

Okay. Thanks for the question. So I just wanted to ask a question on the big picture on markets here. We take a look at the notebook market and obviously you guys are highly levered for that market. What are you guys looking for in terms of seasonality in the second quarter?

Well, there's certainly ongoing seasonality. Q2 tends to be a weak quarter, as Q1 does. But certainly we're through what we think were inventory issues and we do see good volume growth continuing in several areas, especially LCD-TV. We do see some growth; however, I'm going now into monitors and some in notebook. So basically, we do see the market now starting to expand.

Got you. That's helpful. And I guess if you look at TVs, I know that last quarter we had a bit of a problem with higher-end TVs not selling through. I know you made some commentary on that before. What kind of exposure do you have I mean in terms of-- if you take at TVs high-end to low-end, how O2Micro participates there; where are you guys more focused? Is it equally distributed top to bottom or is it more focused on kind of the higher end TVs? Can you help us out there?

Yes. We focus top to bottom. However, the complexity of the design is less at the bottom than it is at the top, so we do see some effect when there's a drop off at the higher end of the market.

Okay. And I guess in terms of expectations on the second quarter, we're still looking for kind of low-to-mid end TVs performing stronger than the higher TVs. Is that correct?

Yes. The growth pace of the lower and the below 40-inch will be more rapid.

Okay.

We need to wrap this call up. Operator, can you wrap this up please?

Certainly. This does conclude today's O2Micro First Quarter Earnings Release Call. Again, the press release is available on O2micro's website and also a replay of this conference is available. We thank you for your participation and ask that you enjoy the remainder of your evening.

Thank you.