O2micro International Ltd (OIIM) 2009 Q4 法說會逐字稿

Good day and thank you for joining us today to discuss O2Micro's earnings for the fourth quarter of the fiscal year 2009. 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 the O2Micro's website at www.O2Micro.com.

There will be a replay available through February 10, 2009 at 9:59 p.m. Pacific Time by calling 1-888-203-1112 or 1-719-457-0820 and reference pass code 439-2341. Following the presentation by management the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Good morning and thank you for dialing in to O2Micro's fourth-quarter financial results conference call for the period ending December 31, 2009. This is Gary Abbott, Director of Investor Relations. I'd 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 risk factors. Such risk factors are enumerated in the form F-1, Form F-3 and 20-F report and other documents filed with the SBC 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, our CFO; our Head of Sales and Marketing and Director, Jim Keim; and Sterling Du, O2's Founder, CEO and Chairman. Today Mr. Kuo will highlight operating results and projections followed by Mr. Kime; he'll provide market highlights and closing comments will be made by Sterling Du.

After some introductory remarks from these gentlemen the floor will be open for your questions. Now I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the fourth quarter ended December 31, 2009. Perry?

Thank you and good morning. This is O2Micro's quarterly conference call. This call will cover our financial results for the fourth quarter of 2009. We will now review our financial results for Q4 2009.

Please note that financial results will be presented on a non-GAAP basis unless we (inaudible) otherwise. The non-GAAP result is (inaudible) based compensation expense and one-time nonrecurring charges. Our full GAAP results are available in our press release that was issued moments ago.

Net revenue in the fourth quarter of 2009 was $33.1 million. In Q4 our IT revenue was $32.4 million and our security revenue was about $738,000. GAAP net income in the fourth quarter of 2009 was $962,000. (inaudible) stock-based compensation of $810,000, the non-GAAP net income will be $1.8 million.

GAAP net income for ADS in the fourth quarter of 2009 was $0.03. Non-GAAP net income per ADS was $0.05. Gross margin was 60.6% in Q4. The gross margin is slightly above the high end of our 55% to 60% target range. We experienced good product mix and good sales of new products with high gross margins in Q4. R&D expense was $8.3 million or 25% of revenue. This amount excludes stock-based compensation expense of $267,000 in the quarter. This was in line with our guidance.

SG&A expense was $9.9 million or 29.8% of revenue. This amount excludes stock-based compensation expense of $543,000; this was better than our guidance because our cost reduction efforts are making good progress. Income tax was $320,000 in the first quarter and is mainly based on the year end tax accrual adjustment to [H-Teck] both locations. In Q4 2009 we repurchased 801,417 ADS units at a cost of $3.6 million.

Q4 2009 revenue by end market breaks down into (inaudible) percentage. Consumer was 55% to 60% of revenue; computer was 25% to 30% of revenue; industrial was 10% to 15% of revenue; communications with less than 5% of the revenue. At this time I would like to provide some additional information.

O2Micro finished the fourth quarter with more than $113.3 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $3.13 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q4 were $14.6 million, our DSO is 40 days, is at the low end of our target range of 40 days to 60 days.

Q4 inventory finished at $9.5 million; this decreased by $1.7 million from $11.1 million in Q3 2009. O2Micro finished the fourth quarter with 71 days of inventory and inventory turns, 5.1 times in Q4. This is also a significant improvement from 76 days and 4.7 turns at the end of Q3 2009.

From a cash growth perspective we had $2.4 million in cash outflow from operating activities in Q4, primarily due to a balance sheet decrease in account payable in the fourth quarter. Capital expenditures were about $90,000 in the fourth quarter for IT and R&D equipment. Depreciation and amortization was $1.5 million in Q4. At the end of the fourth quarter of 2009 O2Micro had 850 employees, 53% of which are engineers.

At this time I would like to provide our financial guidance for the first quarter of fiscal year 2010. This guidance reflects our best estimate for the current environment and is subject to change. This is only a [visual] guidance we will provide unless we update with a public announcement in the future.

O2Micro estimates that Q1 revenue should be in the range of $32 million to $34 million. We are being reasonably conservative because the first-quarter revenue is influenced by Chinese Lunar New Year and because it's especially difficult to predict in the market after the Lunar New Year. We are guiding the Q1 gross margin to a range of 58% to 60%.

R&D expense, excluding stock-based compensation, should be $8 million to $8.5 million in Q1. We are trying to keep this item as (inaudible) as possible in the near term. SG&A should be $9.5 million to $10.5 million in Q1 excluding stock-based compensation expense.

Stock-based compensation should be in the range of $800,000 to $900,000 in the first quarter. Based on the service income of our subsidiaries in different countries, we expect our [tax amount] to be in the range of $400,000 to $500,000 in the first quarter.

At this point I would like to remind everyone that we have great strength in our balance sheet. We also have new product with excellent gross margins and we are optimistic about our future. At this time I would like to thank everyone for participating and turn the call over to Jim to talk more about our business.

Thank you, Perry. Q4 evidenced ongoing success and expansion of our analog and mixed signal power management business into new market areas. Each of our major analog product lines had significant progress in the past quarter. Intelligent Lighting business continues to grow with its leadership position in LCD monitor and LCD TV.

While maintaining leadership in traditional CCFL backlighting, we see our LED backlight products gaining wide acceptance from major TV producers. We have also seen a large number of design wins across major markets, including the new Apple iPad, 3-D TV, commercial and general LED lighting where we are already shipping product, and a major automotive brake lighting design that begins volume shipments in Q3.

These are design wins are based on advanced product features including properties that enable advanced 3-D TV lighting and intelligent user friendly dimming control for commercial and general lighting applications. We have received our first patents for these innovative LED products and expect to continue to broaden our design wins across more customers and expanded markets while maintaining our leadership position in TV.

Intelligent Battery Management products continue to win new design in both industrial and automotive areas. We are working with OEM car manufacturers, as well as their key suppliers, in developing next-generation lithium-ion battery management products. We are also working directly with leading battery manufacturers to help adapt their battery technology and battery packs to a multitude of applications including solar energy storage. We have high confidence in the future of this product line based on broadening customer acceptance, increasing revenue and our rapidly growing intellectual property in this critical area.

Intelligent power products continue to expand in market usage with industrial design wins and ongoing expansion of computer design wins. We are pleased to announce that the recently introduced Dell Adamo XPS notebook, which is the thinnest notebook design in the world, utilizes our patented Cool Charge technology.

We see our Charger technology expanding into more and more of notebook applications along with DC/DC products in notebook applications worldwide. We also expect ongoing expansion of our design wins into more and more industrial and automotive applications.

Intelligent eCommerce business is continuing to be scaled back in lower margin notebook-based business. We are however forging ahead with new advanced product in industrial applications that can generate reasonable revenue and profitability.

And three, our growing analog and mixed signal revenue is the direct result of our marketing and R&D efforts to expand our product offering into these new markets with correspondingly significant expansion of our customer base. This expansion into new markets includes all product areas, notably Intelligent Battery, Intelligent Lighting, Intelligent Power and Security products.

We believe that our new products will continue to constitute a growing percentage of our overall business to make our company less prone to adverse economic conditions and increasing competition in commodity products. While focusing on market expansion we will continue to develop new products for the computing market where we believe we can grow our leadership role in next-generation notebooks and netbooks.

We continue to believe that we are extremely well positioned to expand O2Micro business into more and more customers across more markets, including automotive and industrial as we move forward. I will now pass the call on to Sterling Du, CEO and Chairman, for closing remarks.

Thank you, Jim. We are pleased to report non-GAAP EPS of $0.05 for Q4 2009. This was ahead of all analyst estimates for the fourth quarter; it shows our focus to keep tight expense control and it will continue to do so in 2010. And our plan is to deliver good profitability.

In 2009 I talked about how we commit to R&D, new technology and a new product investment. Despite cutting our companywide expenses we maintain investment approximately 50% minus/plus of our R&D dollars for the new products. These are the products in our DC/DC, Battery and Security families.

We are also very happy to tell you that our investment is paying off. In 2009 those products were 12% of revenue, which is up from 9% of revenue in 2008. In addition, we executed successfully on the backlighting market transitioning from CCFL to LED driver while LED driver successfully penetrated the major notebook and LCD TV markets. In 2010 this will be a very important market in TV where we have many design wins with domestic Chinese LCD TV manufacturers.

We are excited as China will quickly grow into the biggest LCD TV market in the world by 2010. In the meantime our cost effective solution is suitable for this market. In fact, we shall see some early adoption later this month with the LED TV sales for the Chinese Lunar New Year.

Our LED driver technology is very good, we have the key load-balancing, teaming and switching technology. This allows us to run in power efficient mode at a cool temperature. It also is a better technology that we can bring to new markets such as automotive where we have had new success. In fact it is one of our goals of 2010 to broaden the use of our LED driver to new applications beyond backlighting for (inaudible) growth in the future.

Regarding the notebook computer, we have seen our DC/DC productline penetrate into major accounts, including both (inaudible) Intel (inaudible) DC/DC. Our battery (inaudible) IC got into more notebook computers while high series battery balance IC got into more power tools, electrical bike, green motorcycle and the electrical bus.

In conclusion I'd like to say that O2Micro is looking forward to an exciting 2010 and I'd like to turn the call back to Gary Abbott.

Thank you, Sterling. Operator, we'd like to take questions right now.

(Operator Instructions). Tore Svanberg, Thomas Weisel Partners.

Thank you and good results here. Several questions. First of all, can you just elaborate a little bit more on LED backlighting? You mentioned several design wins for some of the majors. I'm just trying to figure out how this is going to play out this year. And especially with China potentially starting to ramp already next month, how do you see that impacting your business both in Q1 and for the whole year?

Well, first of all we think China is already ramped, they've been ramping for some time particularly in the LCD TV business, moving forward very quickly. Tore, we've already seen a significant switch, as some people are well aware, from the CCFL business into the LED. The majority of the notebook business has already switched. A good portion of the monitor business -- we expect monitors to be as high as 50% as we move out into 2010 in the LED backlighting area; LCD TV is already started in that direction.

And obviously we've made a successful transition because we're continuing to grow our business in those areas while also getting higher margin results. So when we look at the broad picture we think that we've been successful in the transition, but, more importantly, we now see opportunities in LED backlighting that carries us into other markets including our design wins which we're very proud of in industrial and automotive areas.

Very good. And I guess we should now also add tablet to the categories of LED. I'm just wondering, are you going to be reporting that as part of your computing business or consumer business? And you mentioned one pretty important win there, but how about other tablet makers? Are you also working with them at this point?

Yes. We are working basically, Tore, with all the majors. We've been positioned with all the major manufacturers and we obviously will continue to work with all the majors. And we feel we've achieved good success (inaudible) period.

Very good. And congratulations on the Cool Charger finally starting to get into production. And you mentioned one customer win there. Are you also expecting to see potentially more Tier 1's adopting the Cool Charger technology here in 2010?

At this moment we are working with several (inaudible), but it is probably not easy to disclose. But we do see the (inaudible) maker's interest in Cool Charge, and we expect that will be happening in 2010. Whether that's Tier 1 or Tier 2, probably early to say that right now.

Very good. And I know you don't split out by product line, but it seems like your DC/DC converter business is doing exceptionally well. Could you give us either a sense of how big that business is for you or what type of share that you're starting to garner in the DC/DC converter market?

Right out now the DC/DC, it is made up of several system DC/DC all the way to [B core]; difficult to estimate because that's a different location of the motherboard. We do have all the majors; we do have production and we're going to have more production with them. And we are happy to see that and internally we do see as one of the fastest growing sectors inside the Company. And we foresee that 2010 the growth rate should be double-digit.

Very good. And then could you also just update us on litigation, especially as far as litigation expenses going forward, please?

Yes, Tore, we continue to manage the litigation expense. From the (inaudible) we start to see the decreases in our litigation expense. I expect to see the decreases of the litigation in the coming quarters.

Very good. Thank you very much.

Andrew Huang, GC Research.

Good morning. The first question is related to PCI Express business. If that business was weaker than the overall business for the full year, can you give us a sense of whether or not the lighting business actually increased in 2009?

Basically all of our analog business increased as we went through the year. We did cut back fairly substantially in some of the eCommerce area as we went through the year.

Great. And just as a reminder, when you talk about lighting, that would be backlighting for notebooks and TVs as well as driver ICs for industrial applications like automotive and street lighting?

That is correct, yes.

Okay. And then second, can you share with us your exposure to the LCD monitor market and maybe comment on the relative strength of that market right now?

Well, that market is basically at this point quite flat. It did take some dip last year. But we have actually seen a stabilization of that market and at this point we view the market as being very stable and we could see some growth as we move through the year.

Okay, great. Thank you for the questions.

(Operator Instructions). Vernon Essi, Needham & Company.

Thank you, thanks for taking my question, a nice quarter here. I just wanted to go back to your prepared comments. I think, Sterling, you gave out a figure and I didn't quite catch it on a percentage in the Battery area. There was some figure you gave year over year, I didn't catch the number. I don't know if you have the transcript in front of you.

You might be referring -- he said our new products were 12% of revenue and that consists of three primary families -- it's DC/DC, Battery and Security.

Okay. So it's 12% over 4% was it year over year?

Over 9%.

Okay. And on the battery side, I think just to follow on Tore's question. What is the -- I don't know if you guys disclose this, but what is the approximate dollar content or percent of sales that you took in 2009 for DC/DC?

Well, that's included in that 12%, it's the biggest piece in there.

Okay.

And we disclose securities, so you can (multiple speakers).

Got you. All right. Good point there. And then just to follow on, two other things here. It sounds like you've got a little bit of a -- you've won, if you will, on a technology basis with some of these customer, specifically I'm referring to Cool Charge. And then also it sounds like you won some business on the LED side in automotive, user-friendly dimming is how it's characterized. Could you go into detail as to technically what it was that helped you win those customers and what differentiates you from the competition?

Maybe I'll answer the LED. LED, we are using some topology that is different from the traditional. And the conversion efficiency is high so that our LED conversion -- power conversion portion we probably can achieve about 10 degree Celsius cooler than an older conventional design. And that is important for some automotive because they're (inaudible) to accommodate this LED driver module is quite small while the head lighting needs high power to driving it. And the heat dissipation is the issue.

This is the same thing that applied to the (inaudible) computer, such as some of the Apple Computers you probably can see that very thing. And that's the cooler (inaudible) LED driver power conversion that I mentioned about.

And another question regarding the Cool Charge. And Cool Charge, it is a new way to do the charger. And we removed some of the charger power conversion function LED from the machine itself from the (inaudible) computer up to the AC adapter which is the one hanging outside of light box. By doing so the temperature inside of the netbook computer compartment also probably had a double-digit degree of Celsius difference. And that is the so-called Cool Charge.

Although these two technologies, they are different (inaudible) a different functionality, but they all achieve the cooler. So that's in my -- in my script I mentioned about the cooler balance for the [white] LED and also the Cool Charge for the Dell model machine.

And I appreciate that. I understand the Cool Charge concept. I guess what I'm trying to understand -- is there a change in --? Well, first of all, I mean this is obviously a nice win, a high visibility win. Is this just a standalone SKU out there by a major vendor, or do you get the impression that this could be a change in religion, if you will, on how the vendors are going to be architecting their power in notebooks? I'm just kind of curious if this is going to be something you feel could be a high penetration rate or is it still going to be somewhat of a nitchie approach?

Well, Vern, over time we've seen an ongoing trend towards thinner and thinner notebooks. And this is the thinnest notebook in the market. And as you go thinner you have a bigger problem with your heat. So, the heat dissipation will get more and more review and is getting more and more review on the part of virtually all the major OEMs. We can't say that it's become an industry standard, but we see an awful lot of interest at this point in time due to the heat dissipation issues getting more and more major as the notebooks get thinner.

Okay. And then my less question, just if you could quantify if you were to go and take your overall lighting business as you migrate from -- this is always a question everybody in the investment community is curious about. But if you took all of your lighting business as you migrate from CCFL to LED across the board from notebooks to monitor's to CCFL, what is the aggregate dollar content shift that you're going to see going from one to the other? Either in percentage terms or dollar terms, just a rough idea?

As people try to model this out if you could -- it's very confusing because obviously there are a lot of different ways to skin the cat on the LED front with very high dollar content for local dimming to just plain old dumb straight backlighting. Just curious what your take is and how you're handling that in a macro sense.

Well, in a macro sense we actually see the ASP go up because, you're right, there is a lot of dumbing down, if you please, in some of the traditional CCFL area. Many manufacturers go to the very, very low end and so there is added content value. So in general terms we see our AFC situation go up. But beyond that I want to continue to impress on you this just isn't a one-for-one situation because the LED market takes us into many, many other areas, other market areas -- industrial, general lighting, automotive -- where we're already seeing good design wins. This opens up whole new market areas for us.

Let me clarify one point. If you're seeing ASPs go up, do you also imply that the dollar content per unit will increase?

Yes.

Okay. All right, thank you.

Graham Tanaka, Tanaka Capital Management.

Hi, guys. Nice quarter coming out of this, congratulations. Just a little bit more on the LED. So just to get a feeling for LED, what kind of (technical difficulty) LED become drivers and (technical difficulty) become (technical difficulty) and then maybe going forward?

Graham, can you repeat that please?

Yes. Sorry, just wondering to what extent LED -- how large could that become as a percent of sales in 2010, LED and related components? Roughly what percent of sales?

You know, Graham, we don't want to put a public number out at this point to forecast that.

I think, Graham, I think it's maybe too early to tell this year and normally we don't have the year forecast because it's very early right now.

Right.

Yes, specific for the how for (inaudible) and that's even more difficult for us. So -- but that would be the one of the major momentums for 2010 growth.

Okay. So possibly -- not to (technical difficulty) major part of growth (technical difficulty). I just get a feel for when it could be. Maybe a better way to ask it is in the future could it become as big as 20% or 25% of sales in say two or three years? Because at that (technical difficulty) market?

Yes, it will certainly become a significant portion of sales and it could go well beyond that number.

(technical difficulty) great. The other is (inaudible) it was great, terrific that you have (technical difficulty) and it really obviously (technical difficulty) as an end market. What kind of a (technical difficulty) larger part of the Company's (technical difficulty)?

Graham, we can't hear you. We're hearing every other word. Can you repeat that?

Oh, yes, sorry, I've got the speakerphone on. I'm just wondering about China and what that could become as a percent of end market sales in sort of over the longer term?

Well, it's a little difficult as normal we actually for some time have shipped the majority of our product into China and then from there it goes across the world. So basically we do see the internal Chinese markets growing significantly in basically all areas and we've had a good amount of success in that. We also see the worldwide markets growing, whether it's South America, India or other markets. So we do see the whole worldwide market growing. And obviously we will continue to ship the majority of our products into China for some time because that's where the supply chains are.

I just -- have you done a macroanalysis of the end markets? And I'm just wondering what you think the dollar weighted total end market, total available market might grow in 2010. And I'm thinking obviously (technical difficulty) by market or maybe you have it broken down by end market (technical difficulty) computers (technical difficulty)?

There are publications that do address that; let me indicate that. I think our difficulty is it's difficult to project the economy as we move through the year, so we're hesitant to do that. We do believe, however, that the LCD TV will continue to grow despite the economic trends, other areas like notebook and monitor are more nebulous to us. But we are also a new entrant into areas like automotive, industrial -- both are large markets and we've not been a player. So to us there's nothing but growth opportunity there.

In the automotive and industrial (technical difficulty) company is a new, a relatively new player in the auto and industrial markets. I'm just wondering if the gestation period might be a little longer. In other words, how long a ramp might the ramp be until you really get material sales in those markets? Are you already there? (technical difficulty) design (technical difficulty) are the design cycles longer because you haven't been in those markets or are you already actually penetrated?

Well, we're already shipping in lighting into the commercial industrial market; we indicated we'll start shipping in volume in the automotive market in Q3.

Perfect, congratulations. Thank you.

(Operator Instructions). Tore Svanberg, Thomas Weisel Partners.

Yes, just two follow questions. First of all, you did mention that your guidance was conservative. So I'm just wondering, does that mean you already have a fairly good coverage? What are you expecting as far as turns and so on for the March quarter?

Basically we have seen very good backlog. We're basically in a very strong position, almost covered for the quarter at this point, Tore. The concern to us is always what happens after Chinese New Year. We do believe that there could be some inventory building that may have occurred, so we are trying to be conservative. But we do believe that we need to leave some margin for possible inventory correction.

Very good. And the second question is coming back to LED for TV, there might be some misperception out there. But there are some people that say you have to have an ultra high level digital process in order to be a player in this market. And then you also really have to participate with the majors in multiple design stages. But it just seems like maybe the LED world is a little bit more complex than that. So can you maybe elaborate a little bit from your perspective, A, what about process technology? And B, how do you go about gaining incremental share in that market?

Maybe I'll answer the second question first. How do we increase the (inaudible) content incremental business. The way we do it is we are not just providing one LED driver. As we all know this is a DC/DC which we call LED driver, that is always opportunity that will integrate the power chain all the way from the AC from the wall mount. So we are developing several ICs which is probably later part of this year we will integrate more power conversion all the way from the wall mount to the white LED. And that is incremental (inaudible) content. And LED TVs are our starting point.

The first question is you're asking so-called the high-voltage and low voltage. And the way is you do the LCD TV white LED driver, you have several topologies, that depends on the customer preference. You can utilize one driver to drive many, many LED and because the large number of LED then using high-voltage driving it because you need high-voltage to the integrated current. And you're using a lower voltage probably you can (inaudible) less.

A lower voltage, apparently the ease of design and also all the components surrounding a subsystem is much more cost effective and also easy to sourcing from the procurement point of view. And high-voltage probably you are facing some more special design and you probably have high concentration to choose all the discrete passive components.

So we do see that people have a preference, depends on their needs. And at O2Micro we have no preference; we have low voltage which is right now that most people are driving that because it kind of becomes the standard to driving using a low voltage. We also have a high-voltage IC, the high-voltage IC market where people want to use it people can use it. So we have plenty, so which is we have high-voltage low-voltage, even a low-voltage we have a different driver capability.

So this is not a single product, you're coming out to serve the different needs. It's a lot of variety, not only high-voltage/low-voltage per se, also have high current/low current driving. And then on top of that we have the technology to do balancing, to do (inaudible), to do better topology PWM, intelligent way to do it, we have a cooler temperature when the power conversions happen. So I hope I answered your question.

Very good clarification. Thank you very much.

Andrew Huang, GC Research. I'm sorry, we have Robert Gardiner, Wasatch Advisors.

Yes, just a question. So you've talked about having very high market share on LED TV with Chinese manufacturers. Does that include guys like Vizio who will sell back into the US market?

Vizio is a Taiwanese manufacturer. Yes, (inaudible) include, but that's not something -- when we talk about China -- refer to Chinese one that is like [TCO], (inaudible) -- yes, the high (inaudible), those people.

But do you have design wins with Vizio? Have you --?

Yes, of course, yes.

Okay. And then how are you doing in terms of design wins with like the Korean manufacturers? Do you expect -- I know some of your competitors have had a stronger position on the LED side there, do you expect to have success this year and gain some design wins in those?

Yes, we do as a matter of fact, Robert. We think we have a leading edge position as we go forward into some of the new TV areas.

On the battery side, what percentage of the revenues would be like power tools versus electric bike and bus? And when would you expect any pure auto business outside of bus and bike? I'm talking cars?

Well, right now it's really a mix of power tool and [eBike]. The automotive will take longer; however, we do and expect to begin to generate some revenue as we move to the end of 2010 this year.

Okay. Could you give out the computer and consumer breakout again? I didn't catch that, Perry? What the number was?

Consumer was 55% to 60%, computer was 25% to 30%.

Another question I had is on the security business, that in 2008 you had lost quite a bit. In your filings you break out the income from that and you had lost quite a bit of income -- had a substantial loss. Are some of the cost cutting in that on the security side -- is it still losing a lot of money or have you cut a lot of costs out there and are just running it more lean in 2009? I'm just curious to how much it lost.

In 2009 we actually did better expense control and we expect the GAAP, the bottom line of the security in our company will be getting better managing 2010.

Okay. On the litigation, I know you haven't broken it out exactly. Do I understand that by Q2 it will be substantially -- I mean, just kind of backing into the numbers it seems like it still ran fairly high in Q4, while it was less than Q3. And just from your guidance I'm thinking Q1 is going to be similar to Q4. But then I'm anticipating that there's a substantial drop in Q2. Am I on the right page?

Q2, still too early to tell because of lots of other situations. But Q1 at this moment, I think it's -- based on current situation Q1 will be lower than Q4.

So can you just go through the litigation? Because it's been frustrating to some of us who are shareholders that we've spent so much on it. So what is it that's maybe dragging into Q2?

Well, Robert, I think Q2 I think we expect that Q2 will be less, less than Q1. And how much less we -- of course, we hope it will be much less and we (inaudible) that direction, but just as Perry was indicating, probably if not today, probably not the exact number or the range is difficult to say. But, yes, you're on the right page because IDC is done. So the major time -- the price tag of the US litigation is going to be winding down and eventually we hope (inaudible) disappear.

Can you tell us when we'll get any news on how that has turned out, the litigation?

The litigation originally was in Q1, right now delayed to the Q2 timeframe. But this delay is going to be closer (inaudible) legal fee to sustain that.

All right, thank you, guys.

Andrew Huang, GC Research.

Just to clarify on that very last question. So there's going to be some litigation expense in Q1, but you expect an ITC decision sometime in Q2?

Yes.

Okay. And then just a follow-up on the gross margin guidance. Your revenue guidance is flat and you're sticking with your gross margin guidance of 58% to 60%. But you just printed 60.6% in Q4. So can you explain the discrepancy there?

(inaudible), we can't predict precisely, so we give you conservative guidance. We don't expect our gross margin to be sustainable over 60%.

Right. Okay, thank you very much.

Thank you. And that does conclude our question-and-answer session for today. I'd like to turn the call back over to Mr. Abbott for closing remarks.

Okay, thank you for joining us. And we'll be happy to take your calls over the next few weeks. Thank you, and have a nice day.

Thank you for participating in today's call. Once again, there will be a replay available through February 10, 2009 at 9:59 p.m. Pacific Time by calling 888-203-1112 or 719-457-0820 and reference pass code 439-2341.