O2micro International Ltd (OIIM) 2008 Q2 法說會逐字稿

Good day and thank you for joining us today to discuss O2Micro's earnings for the second 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 August 6th, 2008 until 9:59 PM Pacific Time by calling 1-800 -- I'm sorry, 1-888-203-1112, or 1-719-457-0820. Please use passcode 9146108. Following the presentation by management, the conference will be open for questions and answers as time permits.

Gentlemen, you may begin.

Thank you, Patrick. Good afternoon and thank you for dialing into O2Micro's second quarter financial results conference call for the period ended June 30th, 2008. 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 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 Sales and Marketing and Director, Jim Keim; and Sterling Du, O2's Founder, CEO and Chairman.

After the report, the floor will be opened 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, I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the revenue, income and financial highlights of the second quarter ending June 30th, 2008. Perry?

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

We will now review our financial results for Q2, 2008. Please note that financial results will be presented on a non-GAAP basis unless we state otherwise. The non-GAAP results include stock-based compensation expense. Starting with this quarter we have included litigation expense in SG&A and we will not be reporting this number with operating expense separately. Our full-GAAP results are available in our press release that was issued moments ago.

Net revenue in the second quarter of 2008 was $40.8 million. This reflects an increase of 6.8% from the comparable quarter of 2007. It is also within the $40 million to $42 million range of our guidance.

GAAP net income in the second quarter of 2008 was $4.4 million. If we exclude stock-based compensation of $721,000, then our GAAP income would be $5.1 million.

GAAP earnings per ADS in the second quarter of 2008 were $0.12. Non-GAAP earnings per ADS were $0.13. Both the GAAP and the non-GAAP earnings for ADS were significantly ahead of the Street consensus estimate.

Gross margin was 58.2% in Q2. The gross margin exceeded the 57% to 58% range that we expected due to available product mix. The gross margin was approximately flat with Q1 and it increased by 142 basis points from Q2 of 2007 due to our success of our China supply chain, as well as efficient designs and the new products.

R&D spend was $9.2 million or 22.5% of revenue. This amount excludes stock-based compensation expense of $288,000 in the quarter. This was lower than our guidance as some R&D will move into Q3.

SG&A spend was $9.3 million or 22.8% of revenue. This amount excludes stock-based compensation expenses of $433,000 in the quarter. This was in line with our guidance.

Income tax was $344,000 in the second quarter, mainly based on the effective tax rate of each taxable location for the prior year, and the normal annual tax approval adjustments.

In Q2 2008 we repurchased 292,153 ADS units at a cost of $2.5 million. As of June 30th, 2008, there were more than 3.6 million ADS remaining in our authorization.

Q2 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 single digit percentages, respectively.

At this time, I would like to provide some additional information. After our share buyback, O2Micro finished the second quarter with more $82 million in unrestricted cash and short-term investments. This represents cash and equivalents of $2.19 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q2 was $26.8 million. Our DSO is 57 days. This is within our target range of 40 to 60 days.

Q2 inventory finished at $20.7 million. This was down from $22.2 million in Q1. Days inventory improved from 128 days in Q1 to 113 days in Q2. (Inaudible) also increased from 2.8 times in Q1 to 3.2 times in Q2.

From a cash flow perspective, we generated $7.9 million in cash flow from operating activities in Q2, 2008, due primarily to a decrease in inventories and the prepaid expenses and an increase in net income during the quarter.

Capital expenditures were $361,000 in the second quarter and were primarily driven by equivalent purchases.

Depreciation and amortization was $1.8 million in Q2.

At the end of the second quarter of 2008, O2Micro had 1,063 employees, 57% of which are engineers. This positions us well for new product development, and allows us to maintain our technological advantage which in turn leads to new design wins and high-margin business.

At this time, I would like to provide our financial guidance for the third quarter of fiscal year 2008. This guidance reflects our best estimate for the current environment and 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 Q3 revenue should be in the range of $41 to $43 million. This represents sequential growth of 1% to 5% from Q2 levels.

We are guiding the Q3 gross margin to a range of 57% to 59% 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.

Given the high inflation and the weak US currency, we will continue to control our expenses without compromising future growth.

R&D spend, excluding stock-based compensation, should be 23% to 25% of Q3 revenue. This increase is mainly due to the [NIE], the move from Q2 to Q3.

SG&A should be in the range of 22% to 25% of our Q3 revenue, excluding stock-based compensation expense. Stock-based compensation should be approximately $700,000 in the third quarter.

We expect our tax rate to be in the range of 7% to 10% of non-GAAP pretax income to the third quarter.

At this point, I hope our financial guidance shows the strong profitability of our business and the focus of our team. Core markets are expected to see some seasonal increases, and we should continue to benefit from this trend. Our new products are doing well, and new designs should propel the Company forward.

At this time, I will turn the call over to Jim Keim to talk more about our business.

Thank you, Perry.

Q2 followed our projections closely. However, it is important to understand that sales trends in core markets are highly dependent on market conditions.

The notebook market remains quite robust and O2Micro continues to enjoy increasing demand in all products except E-Commerce. We are reducing some low margin E-Commerce business at a major OEM which will result in our E-Commerce revenue being approximately $2 million lower in Q3 than it was in Q2.

At the same time, we are pleased that demand for our higher margin analog and mixed signal products continues to expand with new product design wins. Unlike notebooks, the LCD monitor and LCD-TV markets have both experienced market turbulence.

Late in Q2 key customers fell short in forecasted sales of LCD monitors and LCD TVs, and supply chain inventories began to climb. By early July the market began to see reports of this trend. This included announcements that Samsung was significantly cutting inventories. Sony's weak demand for large screen TVs was forcing it to cut production. LG display had worse revenue than expected and was shifting to smaller LCD TV sizes due to the weak economy. [AUL] announced June revenue was down 17.2% and Q2 revenue was down 9.6%. [BBT] reported that June sales were down 16.6% sequentially and sales of large size panel units were down 11% month-over-month, and down 12% versus June, 2007.

This swift change in market obviously impacted the supply chain. The positive news is that glass manufacturers reacted quickly. They began a series of reductions in glass pricing. These pricing moves appear to have had some recent success in spurring market demand for LCD monitors and LCD TV.

Another important market factor to understand is that unit volume growth in the current environment is being driven by low-cost models. These lower-end models often have a reduction in silicon content. This results in semiconductor growth that is not keeping pace with system unit growth as a result of both the reduced semiconductor content and normal ASP reductions that semiconductors experience.

While the TV and monitor markets remain focused on mid and lower-end products, we believe that inventories have largely cleared and the market is firming.

At this time, I'd like to comment briefly on our major product lines. First, Intelligent Lighting. Our industry-leading product portfolio continues 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 increasing revenue.

As we publicly announced in late March, several top-tier notebook computer manufacturers have chosen O2Micro's LED backlight drivers for their new high-end models. 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 players, GPS systems and notebooks, as offering significant growth opportunities for O2Micro. We remain excited about the opportunity to expand our lead in backlighting as the LED market develops further.

We would also highlight that, in addition to our own growth opportunities in the LCD market, O2Micro derives revenue from agreements with third-party LCD TV OEMs and IC suppliers, based upon O2Micro's intellectual property and innovative products.

Our Intelligent Battery product offering continues to gain recognition and design wins in applications where safety and accuracy are required. We continue to ship increasing volumes 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.

In Intelligent Power our System and Processor DC/DC products continue to win new notebook designs. 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 will focus on growing both our business in notebooks, as well as other markets.

Intelligent E-Commerce products continue to evolve with the recent announcement of patents being issued in this product area. We continue to expand this product line with new and more innovative products with enhanced margins and will also focus on expanding into more 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 increasing contribution from this product line in 2008.

To summarize, we are successfully navigating through customer -- through consumer headwinds in LCD TV and monitor markets. But we expect these markets to recover in the coming quarters and continue their pattern of long-term growth. 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.

Thank you, Jim.

Our second quarter 2008 net sales were $40.8 million, up 8.6% from the first quarter of 2008 and up 6.8% from the same quarter of prior year. It is important to monitor our progress because it shows O2's outpacing our semiconductor industry peers.

The GAAP gross margin on net sales was 58.2% and was up from 56.7% from the second quarter of prior year. This is a key indication that our business remains healthy in spite of strong market competition and the general market softness.

During Q2 we expanded our IP with 16 new patents which brings our total patent portfolio to 443 patents and 9,929 plans. This new IP shows our dedication to R&D and gives us confidence that we can deliver strong results in the future when consumer markets reaccelerate.

In Q2 we had 1,063 employees in O2Micro, and 608 of them are in R&D. We also have 678 employees in China and the goal for our China team is to expand business without needing to further expand the team. In this regard we have also successfully extended our manufacturing supply chain to China which has helped us to offset a normal ASP decline.

In last quarter's conference call we predicted Q2 would be back to normal. So to follow relative normal patters and we achieve our financial target, even though the US economy remains sluggish. As we look ahead we continue to expect the second half of 2008 to be challenging, as Jim previously mentioned, and a short order cycle of LCD monitor and LCD TV continues. And inventory needs to adjust some large-panel manufacturing or transition to smaller panels.

The (inaudible) of LCD TV is under pressure, but we have some new designs to increase the content offsetting pressure. Monitors are also weak and the low-end notebooks are dominating the mix. These are challenges that we are addressing with new products in the coming quarters. We have also in a successful legal settlements which should protect our interests in the key LCD TV and monitor areas.

In Q3 we are also reducing some low-end E-Commerce business to keep our gross margin high. It will lower our revenue a little bit, but will not decrease our profit by too much. This is one major reason we are guiding to sequential growth of 1% to 5% in Q3.

From a new product perspective, we released four new backlighting products in Q2, 2 for LCD drivers and 2 for CCFL to address the low cost LCD monitor sector.

On the computer side of our business we introduced 3 new products in the PCI Express family during Q2. These products should help us penetrate new customers by integrating new functionalities and, thereby, increase our (inaudible) content.

We also expect our DC/DC to gain mainstream market acceptance in notebooks with our new Intel DC/DC for CPU.

Our cool charge continues to target the UMPC sector and the design momentum is appearing with top-tier customers.

In our industrial market our Battery products are also revving up as we penetrate the power tool and the light transportation markets.

In conclusion, we are looking forward to seeing our new product area, including DC/DC, Battery and Internet Security grow at a stronger pace and our traditional backlighting and PCI Express product families. While it shouldn't be a surprise our markets are weak, we are taking the opportunity to develop new products to capitalize on an inevitable recovery.

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

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

Yes, sir. (OPERATOR INSTRUCTIONS.) We'll take our first question from Tore Svanberg with Thomas Weisel Partners.

Yes. Thank you. A couple questions. First of all, with PCI being down a couple million in the September quarter, wouldn't that sort of result in a positive bias on your gross margin?

Yes. So, we are -- we carry our gross margin from 56% to 58% in Q2 to 57% to 59% in Q3.

Okay. And then also, your SG&A guidance does now include legal expenses? First of all, is that correct and, second of all, could you give us a rough idea on how much legal expenses still are?

Yes. We -- for the Q3 we -- for the Q2 we included litigation expense in the regular (inaudible) area. And as we mentioned earlier, in Q3 the litigation expense will be in the area of the $500,000 to $1 million area.

Okay, very good. And Jim, you mentioned obviously some headwinds in the TV and monitor market, yet you also seem confident that some of these inventories will clear pretty quickly. Could you just elaborate a little bit more on that? And maybe can you perhaps talk about timing of when that market would stabilize?

Well, we are beginning to see with the reduction in glass pricing already some of the ODMs beginning to step up their ordering activity based on OEM orders that they are taking due to the reduced glass pricing. So, we do expect that will have benefit in both the late August and September timeframe.

Great. And moving on to the topic of LED backlighting, it seems like you're already well positioned with all the majors there. Could you just talk a little bit about what some of the notebooks OEMs are telling you as far as the transition from CCFL to LED?

The OEM, eventually they like to utilize an LED for the high-end notebook. But as I also mentioned, the low-end notebook is dominating the mix. So, we expect there will be a penetration for the LED for 2008 or beyond was driven by how much successful it is for the mainstream sector of the notebook sector the LED driver, LED backlighting. So, we believe (inaudible) we have normally a nominal growth in terms of LED penetration because the low-end notebook is now using LED.

Great. And you mentioned in your press release that your new products are really starting to see some nice ramps. Could you just add a little bit more color there and maybe specifically update us on some of your Battery programs?

On the Battery we have a large number and also quite a variety of application design and also production. And some of them ahead of the curve to do the major production right now.

We were not surprised to see our Q3 updated (inaudible) will be one of the high percentage in terms of revenue. And we are confident to see the 2009 Battery group will become one of the major revenue generation.

Great. Thank you very much.

We'll take our next question from Charlie Chan with Morgan Stanley.

Hi. Good afternoon. Congrats for a good result. And I've got three questions. First is that we see the increasing LED backlighting. So, I'm wondering why it's O2's strategy to maintain as high as not this year as in CCFL. What (inaudible) O2 have in this segment? And what's O2's technology compared to PS-like (inaudible), National Semi and TI? And what consumer relationship in LED technology versus in CCFL?

The LED backlighting, right now we have -- it has been the leadership in terms of notebook penetration, coming from two major areas. One is we have the expertise to controller, the large number of LED. In some instance is a 60 different LED we have manage. And we are focused on a high number of LED. We are not interested to do the 1 or 2-LED system.

We are -- so, that's why we come out some topology which is efficiently optimize the large amount of the -- the large number of LED backlighting design and applications. So, that's how we get acceptance from the high-end notebook computers that utilize our technologies.

As far as the peer group you mentioned about, the [Max] and TI National, well, there's quite a variety of application opportunities for LED. And some of them in different sector and some of them probably have been a different number of LED you want to drive. And are not in a single or small number. What we are was working with a large number. As I said two-dimension in a metrics, maybe 6 by 10 or 5 by 10, these kind of applications.

So, the second question you mention about our patent strength. It is true that LED, it is a new area compared to CCFL backlighting, which was started back to 1995. The LED is a quite new area in terms of patent history. But we do have module pattern we think is very key. And (inaudible) will receive those patents because we filed those patents probably a few years ago. And we do have the confidence that those patents we're going to receive is going to protect our interests in this key sector. So, I hope I answer your questions, Charlie.

Yes, thank. So, maybe can you estimate your monthly share at LED backlighting right now?

Charlie, is a little difficult to because we don't have the base, how much penetration because they have different people talking about different thing. Even IDCs only talk about there's a large of notebook penetration rate. So, due to that, it's difficult to analyze our percentage-wise on market share. But we have been in the major top-tier notebook computers, LED application production with them. I think we probably have more than half with each single one. But how many LEDs are produced from their side, which is we don't know.

Okay. Thanks. And my last question will be related to financial. Maybe Perry can help us. So, what's a gross margin, operating margin guidance for -- or you were talking for 2009? And how do we forecast operating expense in 2009?

Charlie, 2009 is still too far away so we only guided for the current quarter.

Okay. Because I think the gross margin improvement in second quarter is pretty upbeating. So, I just want to look at the gross margin change in 2009. Can we -- to improve our gross margin to above 50%, which is company's long-term gross margin go.

Charlie, I think the long-term gross margin model is still very good for us in the year 2009. Our effort of the new products and also for the effort in setting up the supply chain in China, which will contribute a lot in the year 2008. We still see the trends in the cost saving program. However, this will be offset by some ASP decline while we compete in the market. We like to maintain our gross margin in the way of a gross margin in the upper side while we get the momentum of the sales growth.

Okay. Okay. Thanks.

We'll take our next question from Jay Srivatsa with Roth Capital Partners.

Hi, guys. This is [Eric] calling in for Jay. Want to ask a few questions here. Maybe just a follow-up on some of that market share commentary. In the LCD TV and monitor space, some of your competitors have put up some pretty good numbers. Do you think you're losing share there or maintaining share? Maybe just a little bit more commentary on that, if you will.

Well, let me comment on that. Basically, as we've indicated, that in addition to our own growth opportunities that we do drive some revenue from agreements that we have with third-party LCD TV OEMs and IC suppliers based upon our intellectual property and products.

We cannot comment on specific settlement activities that we have. However, in some cases where you may hear parties indicating that they have captured some market share, that does not necessarily lead to a negative situation for O2Micro.

We do track market shares. We do watch market shares very closely. And we feel comfortable with our market share situation, from notebooks all the way to LCD TV.

Eric, I'm not exactly sure what you're referring to. We're not seeing what you just suggested. Was there a specific competitor you were wondering about?

Well, I think VCA and Freescale put up some pretty good -- Fairchild -- had put up pretty good numbers. And I just wanted to see if you were seeing any sort of shifts based on some of the comments that they had made.

Not really.

No. Okay. Okay. Maybe then just going into the numbers here. Beyond Q3, how do you see the second half of the year, specifically Q4 -- I know it's a little early -- but playing out so you can essentially finish the year at least breakeven or up on revenues on a year-over-year basis? Is that still something that's possible at this point?

I think it's very difficult to look at the market dynamics that are literally happening on a week-to-week basis and project Q4. We certainly did see some (inaudible), as we indicated, in the markets in the late June timeframe when that began. We have seen that smooth out. We do see a firming of the markets going on.

We have visibility into August, September. I think it's difficult to project Q4 at this point. We certainly hope that the overall economics certainly are strong in Q4 and that we can see some good growth. But I think that's beyond our ability to predict with certainty at this point.

One point to make also, just to reiterate. We've got a couple million dollars on the E-Commerce business, on a run rate basis quarterly a couple million that we have to overcome. That was low-margin business to us.

But from an absolute top line perspective, to answer your question, we would have to make that up somewhere else. And is it possible, yes. (Inaudible) the visibility, we're not going to comment at this point.

Okay, great. Thanks.

We'll take our next question from Andrew Huang with American Technology Research.

Thanks, guys. Can you hear me okay?

Yes.

So, there's been a lot of debate kind of going back and forth on inverter market share. So, I was wonder if you could share your thoughts on revenue and dollar growth for the inverter market; so for the overall market in calendar '08.

Well, first of all, it depends how you talk about the overall market. If you're talking strictly about CCFL backlighting.

Let's start there.

Okay. In the CCFL backlighting area, we've heard a lot of conjecture about market shares. And the fact of the matter is, there has been some market share shifting, but that does not necessarily come at an O2Micro expense. We have seen some suppliers lose market share, some gain market share. We do track that. As I indicated earlier, we track market share quite closely on individual design wins and we feel comfortable with our market share situation.

But I meant more like on the overall unit growth for the market, not just O2. I meant the overall inverter market for CCFLs. Is that unit growth growing faster than the market for monitors, TV and notebooks or is it growing less than that unit growth opportunity?

Well, in some instances it's been growing less because, as we indicated, there are lower-end systems being shipped. For instance, in TVs where some suppliers at the high end were shipping multiple parts. Right now, the very high end of the TV market has been downsized to smaller TVs for much of the market and that does impact the overall unit growth.

Got it. Okay. And I guess the same would go for the notebook market as well, for the low-end notebooks?

Well, typically in the notebook area, it's always been pretty much a one-on-one situation; one inverter for one notebook. Except, of course, we do see LEDs creeping into the market. And basically, some notebooks still use very low-end solutions that I would not label as inverters.

Okay. That actually leads me to my next question, which is when we think about your inverter business for low -- at the low end for notebooks, and then the LED business for the high-end notebooks, would you say that the net effect of those two is positive, neutral or negative to your revenues?

Well, generally speaking, we're happy to see the LED notebooks because they're higher-end notebooks. And typically, that has a beneficial effect for us.

So, maybe you can comment on, like, on a comparable basis the ASP or the margin for LED drivers versus the inverters.

In the notebook space, again, we are happier with the LED situation simply because the notebook is in fact a lowest end type situation for a classical inverter.

Okay.

We don't want to get into giving out prices, Andrew.

Okay. And then last question. You mentioned that the E-Commerce business would be down by about $2 million in Q3. Is that correct relative to Q2?

Yes.

Yes.

So, in Q3, does that mean E-Commerce is totally gone or it's down by $2 million?

It's down by $2 million. We mentioned one major customer that we backed away from them.

Okay. So, I guess my question is, are you still going to have E-Commerce revenue contribution in Q3?

Oh, yes. Yes. And as we mentioned, we are continuing to develop new products and we're actually establishing some patent position with new products. And it's our intent, as that product line continues to evolve, that over time it will become a higher margin type product that we are shipping in the E-Commerce.

Got it. Okay. Thanks very much.

Thank you, Andrew.

We'll take our next question from Patrick Wang with Wedbush Morgan Securities.

Yes. (Inaudible.) I wanted to quickly talk about the future growth in notebook outside of CCFL. Last quarter you guys had mentioned products targeted for IMVP6. Just wanted to see what you guys are seeing on that. Those are the next -- I guess Intel's got a next generation of products coming out there on Montevina.

And then also on subnotebooks, the MPCs, I guess the ones based on that. And you also mentioned products targeting the IMVP6+ standards as well as I guess the USB interface chip. Can you talk abut what you're seeing on that side as well?

For the IMVP6+, that one we are offer to the market. Right now we do have some activity. And IMVP6 itself we had to almost -- I mean the Q3 going to sample. And right now we are (inaudible). And for UMPC, we not only to target for the Intel CPU (inaudible) which is using IMVP6+. And we also have several other things, like our charger was targeting UMPC. So, for UMPC we probably have a multiple PMU opportunity. Of course, that in addition to possible LED driver for the backlighting, plus some of the PC Express opportunity.

Okay. So -- I mean, when do you think you think you start seeing some revenue growth from the UMPC market?

The project for UMPC?

Yes, exactly. Like, when do you think that we're going to see some revenue contribution from those products?

Right. Right now we do already have some contribution from UMPC (inaudible) right now. And we also have another major activity probably early next year.

Okay. Next, can you talk about what you're seeing in the channel inventory for I guess the monitor and TV supply chains? I know you guys had some comments there, but some additional details would be great.

Well, let's discuss our channel. We do not move product through the distribution channel. So basically--.

--No. I understand that you guys don't do it that way, but you had mentioned that some of the weakness there was due to excess inventory there. I just wanted to get some color there.

Okay. Well, basically, we did see inventory building going on in the second half of the June timeframe. We see that inventory now largely being cleared out. And basically, one of the effects of that is that the ODMs now are working on a very short cycle time. I believe if you look at our finances you'll see that our inventories are actually down at this point. And in fact, we see now that these channels quite clear, at least from our position.

Got you. Earlier you talked about some new products targeted for low-end TVs, given the shift from high-end to low-end. When do you think we'll see some contribution from these parts, also? Revenues?

The low-end TV we are contribution for -- from a low-end LCD TV. We do have some new product we introduce just for the low LCD monitor as well. LCD monitor, generally speaking, they utilize even a lower cost. So, we should (inaudible).

Got you. So, are these parts just sampling today?

Yes.

Okay. Okay. And then just I guess on inventory. Jim, you had mentioned earlier about the inventory decline and we're working on a shorter cycle time here. Can you guys kind of remind us what your target range for inventory days is? And it seems like you guys are comfortable with inventory right now. Is it largely because you guys are guiding us to a relatively subdued third quarter?

Yes. I think the inventory times will be 100 days. And during this two to three quarters, actually we are building some China supply -- supply chain in China. So, we have some strategic [buildup] for the inventory. But (inaudible) the inventory target days will be 100 days.

100 days. Okay. And then just last question here. Just in terms of your progress, I know you're using a number of foundries here, including Europe and China. Can you talk about, I guess ballpark, what the mix was last quarter and where that goes in the next couple of quarters?

We don't want to go there directly.

Okay.

In the call.

Okay. That's fine. Great. Thanks very much.

Thanks, Patrick.

And due to time constrains we have time for one last question. We'll go next to Vernon Estes with Needham & Company.

Thank you. Wanted to ask just a couple of accounting things here, Perry. What is the logic behind the litigation now being included in the SG&A instead of being broken out?

Vern, it's a normal operating expense. No one breaks it out except a couple people in our industry. GE doesn't break it out. Microsoft doesn't break it out. Intel doesn't break it out. For us, we have always said in Q1 the big driver was US litigation. We're done with that. So, it's a normal operating expense. You don't exclude it so why should we break it out?

Well, it's just you've done it in the past. That's all.

Yes, we're done with that--.

--And some people do this stuff at a fiscal year turn. You're doing it in midstream. It's just a question.

Yes. Because we had a big Q1. But it's normal now.

And you don't expect this to be jumping around between gains and unusual expenses then? Or will you be breaking that out? I mean, in other words, if this thing winds up being a $2 million gain in a given quarter, will we be made aware of that?

Yes. We're not expecting any unusual gains and we're not forecasting at this time any unusually large expenses. It's a normal operating expense where we stand today.

Okay. And then on the balance sheet, I see an item now, "Assets Held For sale." I don't know if you explained that, Perry, in your prepared comments? What is that?

Vern, we actually are selling our test group. We locked in the pricing and so we're just basically using it as a way to drive our expenses down a little bit.

So is it -- I guess I can try to revisit this later, but is there a -- so this is you're trying to capitalize the cost of it? Is that what--?

--No, we're just divesting it. It's 100 people. Over time we'll recapture that.

So, this is the -- what is called, Ocean--?

Yes, it was the Ocean One group, right.

Right. And then I don't want to beat the dead horse here, but I've got to revisit the questions on market share. I mean, it's a tough logical argument here. You've got revenue that has a good chance of not growing 2007 to 2008.

I appreciate your point about saying it doesn't come out of the expense but, even at the operating income level, it looks like you're going to have a very tough time growing. In fact, you're going to be down probably double digits year-over-year.

I mean, I'm trying to rationalize the logic behind the scenes as to how you're thinking that the Street's going to accept this answer. I just don't -- I mean, I don't think many people that are grinding through these numbers -- and you're getting all these questions -- are going to see it that way.

Vern, it's quite simple. We're focusing on profitability first and foremost, increasing it; not holding it steady. And part of the divestiture of the Ocean One group is a piece of that. Part of the -- focusing on the higher margin business is another piece of that. We can't control the end markets and the revenue that those markets generate.

I think Andrew's question earlier about what's the growth in the market, unfortunately, our sector doesn't have an independent third party like IDC or Dataquest tracking it. So, you guys are forced to listen to the answer of one company and then the next and the next and we all point at each other. The reality--.

--Well, let me -- let me back up a step here. First of all, I don't think a lot of us just lay on the railroad tracks what other people tell us. We try to do the best we can. I think it's hard to say that these markets aren't growing in units year-over-year.

In revenue.

Well, either way. I guess the bottom line here is the numbers are -- backing up. The bottom line here is you have a lot of people that are interested in the Company. I think a mea culpa attempt to try to explain what's really going on would be beneficial. I'll offer that over to you, Sterling. So, take it for what it's worth. That's all I have. Thanks.

Okay. Thank you.

Operator, I think we're about through.

Thank you. This concludes today's conference. And a replay of the call will be available through August 6th, 2008, at 9:59 Pacific Time. That replay can be accessed by calling 1-888-203-1112 or 1-719-457-0820 and entering passcode number 9146108. We thank you for your participation and you may now disconnect your lines.