O2micro International Ltd (OIIM) 2010 Q3 法說會逐字稿

Good day and thank you for joining us today to discuss O2 Micro's earnings for the third quarter of the fiscal year 2010. 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 O2 Micro's website at www.O2Micro.com. There will be a replay available through November 10, 2010 at 9.59 p.m. Pacific time by calling 1-888-203-1112 or 1-719-457-0820, passcode 8222046. Following the presentation by management, the conference call will be open for questions and answers as the time permits. Gentlemen, you may begin.

Good morning and thank you for dialing into O2 Micro's third-quarter financial results conference call for the period ending September 30, 2010. This is Gary Abbott, Director of Investor Relations.

I would like to remind listeners that this discussion of business outlook for O2 Micro 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 reports and other documents filed with the SEC from time to time. Listeners are referred to the O2 Micro 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. After the prepared marks from these gentlemen, the floor will be open for your questions. Now I would like to introduce Perry Kuo, CFO of O2 Micro, for a discussion of the financial highlights for the third quarter ended September 30, 2010. Perry?

Thank you and good afternoon. This is O2 Micro's quarterly conference call. This call will cover our financial results for the third quarter of 2010. We will now review our financial results for Q3 2010. Please note that financial results will be presented on a non-GAAP basis unless we designate otherwise.

The non-GAAP result excludes stock-based compensation expense and one-time nonrecurring charges. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the third quarter of 2010 was $34.5 million. In Q3, our IC revenue was $33.8 million and our security revenue was about $740,000.

GAAP net income in the third quarter of 2010 was $1.7 million. If we exclude stock-based compensation of $1 million and a one-time expense for the long-lived asset impairment charge of $2.2 million. The non-GAAP net income would be $4.5 million. GAAP net income per ADS in the third quarter of 2010 was $0.05. Non-GAAP net income per ADS was $0.14.

Gross margin was 61.8% in Q3. We experienced good product mix and good sales of new product with higher gross margin in Q3. R&D expense was $8.3 million, or 20.1% of revenue. This amount excludes stock-based compensation expense of $204,000 in the quarter. SG&A expense was $7.7 million, or 22.4% of revenue. This amount excludes stock-based compensation expense of $841,000 and one-time expense for the impairment of long-lived assets of $2.2 million. The impairment charge is related to the write-off of the intangible assets (inaudible) O2 security unit.

Income tax was $449,000 in the third quarter and is mainly based on the effective tax rate of each taxable location for the prior year. In Q3 2010, we repurchased 271,109 ADS units at a cost of $1.7 million.

Q3 2010 revenue by end market breaks down into the following percentages. Consumer was 55% to 60% of revenue. Computer was 25% to 30% of revenue. Industrial was 10% to 15% of revenue. Communication was less than 5% of revenue.

At this time, I would like to provide some additional information. O2 Micro finished the third quarter with more than $108.2 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $3.21 per ADS. In addition, O2 Micro has no debt.

Accounts receivable at the end of Q3 was $14.3 million. Our DSO is 43 days and is in our target range of 40 to 60 days. Q3 inventory was $14.4 million at the end of the third quarter. This represents 93 days of inventory and inventory turned over of 3.9 times in Q3.

From a cash flow perspective, we generated $2.1 million in cash flow from operating activities in Q3. Capital expenditures were about $474,000 in the third quarter for IT and R&D equipment. Depreciation and amortization was $1.3 million in Q3. At the end of the third quarter of 2010, O2 Micro had 839 employees, 62% of which are engineers.

At this time, I would like to provide our financial guidance for the fourth quarter of fiscal year 2010. 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 update it with a public announcement in the future.

O2 Micro expects Q4 revenue to be down in the range of 6% to 10%. We are guiding the Q4 gross margin to a range of 58% to 60%. R&D spend, excluding stock-based compensation, should be $8.5 million to $9 million in Q4. SG&A should be $8.5 million to $9 million in Q4, excluding stock-based compensation expense. Stock-based compensation should be in the range of $1 million to $1.1 million in the fourth quarter. Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of $500,000 to $600,000 in the fourth quarter.

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

Thank you, Perry. In last quarter's commentary, we were one of the first companies to note the slowing in the TV, monitor and notebook business. This market softness extended through Q3 and into early Q4. However, as we enter November, we are beginning to see some improvement in market conditions.

Despite difficult economic conditions, Q3 marked a very significant shift in the Company direction. We evidenced what we believe are ongoing and accelerating design win activities in all of our analog and mixed signal power management business, including new market areas such as automotive, industrial, solar and general lighting systems.

These design wins are setting the stage for a significant expansion of future revenues into new applications that includes a growing market and application base in not only Asia, but Japan, Europe and North America. We expect to see increasing revenue contribution and growth from these design wins in the first half of 2011. We will highlight some of this activity as we now review each productline.

First, let's review Intelligent Power products. We have been focusing much of our R&D effort in the past 18 months to move our power technology into new customers and new market areas. Despite some initial frustration, we now see a flurry of new design wins across an array of applications. We will briefly mention a few of them showing the diversity of this activity.

Our new USB 3.0 boost charger with protection circuit will go into high-volume production by early next year in a major Japanese camcorder program. We have a major GPU DC-to-DC design win for an AMD-based graphics mobile device going into high-volume production early next year. We have delivered our first prototype production of 500 watt constant ripple current DC-to-DC modules to an automotive OEM for use in their electric vehicles and we will soon deliver 1000 watt DC-to-DC modules.

We are also expanding our Intel-based product design wins. These design wins include applications from Intel design boards that find applications worldwide in many market sectors. In the notebook area, we continue to expand our product offering and design wins. We are now positioned to support both AMD and Intel-based notebook designs and believe the first half of 2010 -- pardon me -- first half of 2011 will see our first production of IMVP7 DC-to-DCs to support Intel's new Sandy Bridge CPU.

In Intelligent Lighting, O2 Micro has a whole new array of patent-pending products to serve a rapidly expanding market that is much larger than our traditionally served markets. These include AC/DC product for LED bulbs and tubes, DC-to-DC for MR16 volts, flashlight and bike light controllers and street lighting products. We have growing confidence with increasing design win activity that O2 Micro will become a major supplier in the rapidly evolving general lighting market.

Our new products are all patent-pending and incorporate novel design methodology, including integrated MOSFETs, TRIAC control and integrated power factor correction circuitry. Our products can support both isolated and non-isolated designs. Applications for these products involve customers worldwide, including Japan where we are already shipping production volumes and have a number of ongoing design activities with well-known companies.

All of our new products are already in early production stages at MOTable customers, except for street lighting, which is in the active design-in stage. We expect all these products to attain an increasing number of design wins and generate significantly increasing revenue in 2011.

In our traditional markets of TV and monitor, we continue to be the industry leader in lighting control. These markets have seen some weakness that is clearly noted in the production of glass. However, we believe this market has bottomed and is beginning to move in a positive direction.

Positioning of O2 Micro in this market remains excellent and our first patents have recently been issued by both Asian and Western countries that will help protect and further solidify our market position. We expect an increasing number of patents to be issued in the coming quarters.

Intelligent Battery Management products continue to enjoy design wins worldwide and are now being shipped in volume to leading companies in all major markets, including Europe and Japan. These design wins include industrial applications for power tools and UPS systems, as well as electric vehicles of all sizes.

While the automotive market will be slow to ramp into high volume, we believe we have already established our technology leadership in the market with our power tool design wins ramping into production at the world's leading power tool manufacturers, including those based in Europe, Japan and the United States.

While the power tool, UPS and lower end EV applications should generate good revenue growth for us in 2011, the longer-term, high-volume market will be automotive. We have already delivered prototype production battery management systems for a leading automotive OEM and are working directly with other OEMs, as well as leading battery manufacturers, to adapt their battery technology and battery packs to not only automotive, but a myriad of other applications. Based on our strategic positioning and rapidly increasing intellectual property in this critical area, we believe we will continue to see a multitude of new design wins and ongoing revenue growth.

Intelligent E-Commerce will see increasing revenues starting in 2011 based on new high-volume PCI Express design wins at MOTable top-tier notebook OEMs. These design wins will ramp into production in Q1 and reach high volume by Q2. However, our long-term focus is to position the Company to move into advanced product in industrial applications that can generate both higher Company revenue and profitability.

Our first engagement is a joint development program with a major printer manufacturer with revenues expected in the second half of 2011. We have recently experienced our design activity in the industrial applications area and we expand and we now are working with additional design win activity.

To summarize, we see a rapid expansion into new markets that includes all product areas, notably Intelligent Battery, Intelligent Lighting, Intelligent Power and Intelligent E-Commerce. We believe that our new products will continue to constitute a growing percentage of our overall business, increase our revenue base and make our Company less prone to adverse economic conditions and increasing competition and commodity products. At this time, I will turn the call over to Sterling Du for some additional remarks. Thank you.

Thanks, Jim. I am here today to give an update of our business. First, our revenue was $34.5 million in the third quarter. This was less than we originally expected where the oversupplied conditions in the LCD display market continue to be higher. However, our non-GAAP EPS was good at $0.14 per share and this shows our excellent cost control. Even in challenging environments, we can still earn a lot of money.

There are many things happening in our business that give us confidence in the future is why we like to talk about the near-term and long-term potential of each market sector. First, the consumer market is our largest segment. This segment is mainly driven by our LCD TV and LCD monitor backlighting products.

As we have previously discussed, the TV market is working through excess inventory. The good news here is that there is strong underlying demand for this technology. An [excess] supply should be [exhausted] in the next few months as the Christmas season and early Chinese New Year sales are finished. And then it should return to normal.

In addition, the subsegments of the LCD TV market for LED TV, 3D TV and connected TV should support strong long-term growth from the overall market, which is good for O2 Micro. On the monitor side, we expect a move to LED to pick up in the coming months in 2011. It is because the LED supply chain has built enough capacity and an oversupply of our LCD TV in the near term has allowed more of this capacity to go into monitors. For O2, this means our CCFL inverters will be upgraded to our LED driver and this means a higher ASP and higher gross margin on average.

Our second major market is computer segment. This market has also gone through slow seasons. However, most participants in this supply chain seem to believe that the supply and demand has recently come back into balance. For O2 Micro, this means that our core lighting and power products for notebook should follow seasonal trends for PCI Express products, a rebound in the computer sector to come in time for the new visions of our connectivity IC to be released in 2011.

For the next generation of notebooks, our PCI Express group will add USB 3.0 connectivity and we expect to see this group recover from the low point with this new functionality. At the same time, we expect to continue to gain traction with our DC/DC and charger products and to continue to participate in the ramp-up of the template market.

Our industrial market is the next area of focus. In this segment, we continue to cultivate lighting opportunity with our LED driver in the next generation applications. In addition, we have increased our investment into the battery to providing the total solution for power-related products to the new applications. We continue to be successful with the power tool and explore the E-Bike market and we are now bringing that learning to the automotive industry.

We have MSIs in the Chinese market opportunity for this EV group and we have key design wins in place. In the coming quarters, we should have more to say about this.

Our smallest market remains in our communication segment. The security (inaudible) products that comprise the Six Sigma continue to win awards and improve technological (inaudible). We have described this as the (inaudible) stage business and continue in that model.

At this point, I hope it is easy to see that I am confident in our future. The seasoned demand should be driving our core consumer market back into the balance in the near term. We also have a new content, new market to address in both the computer industrial segments. We're working very hard to be successful in each of these areas and we commit to delivering strong financial results in any economical environment. And now, I would like to turn the call back to Gary Abbott.

Thank you, Sterling. Operator, we would now like to take questions from the audience.

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

How are you doing? Thanks for taking my questions. I am wondering just if we could go into depth a little bit on some of these discussions around your productlines, specifically on the LED side. Jim, I don't know if you have sort of done an analysis of what revenue opportunity lies ahead for 2011, but obviously there is a lot of vendors that are out there looking at this market and you are addressing a lot of different touchpoints in these solutions. But do you have any way you could articulate or sort of walk us through how you see that market from a revenue perspective, maybe all in and then what penetration rates you expect out of O2 Micro?

Well, we don't go over the marketshare penetration rates per se. However, we do see the traditional markets, as we call them, continuing to expand. We to expect, as we indicated with LCD TV, LED TV, those markets to begin their expansion. Again, we already believe that has been triggered at this point and we are seeing upsides in the market at this point. We do believe 2011 can be a reasonable growth year in those markets. We have a very solid position with the key customers in those areas.

So I think as I indicated, we see a huge upside for ourselves in the whole general lighting market. The general lighting market now is quickly evolving, primarily due to legislation that is beginning to have a very, very significant impact on the market. There is almost a race at this point to get into the market. We are strategically positioned with products, as I mentioned, to go into many of these applications. And we are already shipping product in volume with some leaders in the industry and we now have some very significant design-in activity going forward.

So we believe that this market will expand very, very rapidly. We think we are strategically positioned and we think we can have very significant growth in the general lighting area. That is where we have a very significant focus while again retaining our market position in the traditional markets.

And just to follow on the general -- I mean obviously this is what I was referring to was the general lighting area, but are you classifying that revenue in the industrial bucket when you are breaking out your revenue?

Yes, most of it is -- you are hearing some questions. Most of it is in the industrial area. Some of it is actually in automotive. We are already shipping into automotive headlight, brake light applications for a well-recognized name in the industry. So some will go into the automotive again as that applies back to the industrial. So yes.

Okay. I had an automotive question there, but -- and hold that spot because I want to revisit that. But if we were to look at sort of general lighting year to date, are we looking at a revenue of any critical mass or is it still sort of in the $1 million or $2 million kind of bobbing along range?

Well, I don't think bobbing along is the right word. It is ramping and basically, we do see some very significant ramp in that area. That ramp has begun in Q4. It will accelerate in Q1 and we expect ongoing acceleration next year. So this will be a multimillion dollar type revenue very quickly for us.

Okay. And I don't mean to use the word bobbing along, it is just a lot of your competitors, I mean this revenue has taken a long time. These designs have been around for two years and it has been tough for a lot of companies to get critical mass in some of these general lighting areas.

Well, we are in volume production and we are ramping and we are ramping at a number of customers and that has just generated more interest in keeping us quite busy right now.

Okay. And then just on the automotive, to switch gears, the EV design win, I think you had said with a major OEM, is this the same sort of -- or is it the same relationship rather you have on the lighting side with that customer is the same customer or is it a completely different development group and a totally different customer?

That is a different group and a different customer.

Okay, so it is a different OEM. And then, finally, just in general on a numbers question here. This is probably more in Perry's camp, but the inventory build went up quite a bit here on a sequential basis. Could you just discuss what happened there?

Yes. We actually prepare some more (inaudible) who support some upside demand by the end of Q3. However, the market changes very quickly. We kept the (inaudible) so that we can support our customer whenever the (inaudible) pricing we can support the customer. So we keep the die bank. So our $1.5 million of the Die Bank increase in the inventory now where is the number you can see.

Okay, and then my last question on that and then I will hand it over, if you had prepared that, you are looking -- let me back up a step. Your gross margin guys obviously for gross margin will be down sequentially and I assume part of that would be due to the fact that you probably built these die banks in a more or less favorable price situation than yourselves before things softened. Are we going to get impacted by that I guess is what I'm asking on a gross margin basis, further downside than what you have provided in this guidance? Is that possible?

Actually, in the Q2/Q3, we experienced a very high gross margin. That was one special product for the timeframe of Q2, Q3. And Q4, Q1, I start to see our gross margin will fall into our high end of our financial model.

Okay, thank you very much, guys.

Tore Svanberg, Stifel Nicolaus.

Hi, thank you. This is Evan calling in for Tore. If I may start with just following up on the previous question, in the general lighting area, could you talk about what the competitive environment is like? As you gain penetration, are you running into the current players? Are these new opportunities?

Well, basically, I think there is two segments to that answer. In the traditional market, we do see some competitors that have come in and in some cases looked at basically trying to move into our market space, but we are very solidly positioned with customer relationships and a history of very high quality, good delivery that is difficult for them to do. And as I mentioned, we are also starting to get patent position.

In the new market areas, for instance, going into the general lighting area, we have never been there before. So we are going in and we are competing against companies that are more established semiconductor companies, well-known names from Europe, well-known names from the United States and Japan, but we brought some of our novel technology that we had developed in lighting into our products. And this has enabled us to quickly capture some key design wins with some very significant companies. And as that product has started shipping, obviously their competitors see it and it has really fueled a very high level of interest in our products. So we are actually competing in a new area against more established type companies.

Okay. And also, I was wondering if you can talk a little bit about your patents and your legal strategy going forward?

Well, patents are very simple. We will continue to focus on patents and we will continue to develop positioning as far as intellectual property is concerned. I think one of the key things for our strategy is many of our patents now are more system-oriented type patents, which carry a wider breadth of intellectual property with them.

Also, as we work with more companies in the new market areas, these are established companies and they show a greater respect for intellectual property. So we don't expect to have to go back through much of the same scenario that we have already been through. And we have established our reputation that we will protect our intellectual property and we see that now getting a very high level of respect in the market.

Okay, great. And if I may turn to your guidance for 4Q, can you give us a little bit more about your thinking behind your gross margin guidance? We note that last quarter you guided to approximately 60%. This quarter, there is more of a range and it is still at the high end of your target model, but it seems to be a little bit lower than last quarter. Is it mainly due to the lower revenue level?

This is Gary. We have always been conservative because of mix and things like that. We have had this question every single quarter this year, last year. We have guided around 60%, 58% to 60% all three quarters of this year. So we have said, just given the mix of products, DC/DC, PCI Express, those things carry below-average corporate gross margins. Over the long term, we think we are going to stabilize in the high end of that target range, 58% to 60%.

So I don't want to get too precise. We are not trying to tell you that the gross margin is going to decline sequentially. What we're going to tell you is, every quarter, the mix is what drives it and we try to be conservative. So it is nothing different than we have said for the last three quarters, but as those other areas do better, as Jim pointed out, that is going to drive the mix below 60%.

Okay, that is fair enough. And my last question, without actually asking for quantitative numbers for 2011, I was just wondering if you could talk maybe in more general terms about the kind of revenue growth that you are sort of seeing and what the normal seasonality may take you to?

In this economic environment, it is very difficult to really project out and I think it is difficult for us to do that certainly in traditional markets. We have been surprised by how strong the market was early this year and then it got weak. Now it seems to be picking up a little bit. So there is a lot of surprises economically.

I think what we can say is that we do see very significant new markets for us. We are seeing good design wins in those markets and that can provide revenue growth for us in 2011. But I think it remains to be seen that growth goes on top of what number. So I think, at this point, it is very difficult for us to project 2011 other than to say that we do have some significant new design wins that could go into good volume production.

Okay, thank you very much for taking my questions.

Graham Tanaka, Tanaka Capital.

Hi, guys. Jim, you were particularly upbeat about the design wins and if I could focus first on the industrial products, the battery management. What could that be, the new products become as a percent of sales say in the fourth quarter and next year versus the first nine months of this year?

The new product percentage? The new product, current new product percentages for the security, for the security power --.

Battery.

Battery area, it is about 15% to 20%.

Yes, Graham, we expect the new products to be about 15% of revenue for the year, which is -- what I have encouraged is to look at them in a basket right now, which consists of Security, DC/DC and battery, power product, charger, and for now, that number should be about 15% plus this year. (multiple speakers)

DC/DC and what?

Basically security, DC/DC and battery should represent about 15% plus of revenue this year if we hit our targets.

And what could that be next year? I am trying to get a feel for what --

Well, yes, I know you asked specifically about the battery piece and I think battery will be probably the fastest growing piece of those three. So we don't want to break that out yet and I don't want to -- like Jim said, it has the potential to be very, very big. We don't want to try to play bigger than a bread box smaller than a barn at this time. We are optimistic about how big it can be.

And if it gets what's driving it, will it be more auto or hand tools?

It will be hand tools because, as I mentioned, and maybe you didn't catch it, the automotive is going to be slow because it takes a lot of time to go through all the road testing, it takes a lot of time to bring production online. These are very complex designs and has a history of automotive. Power tools ramp quickly. Some of the same type products are used in power tools and that is an important indicator of technology capability. But we are already in high volume and we are getting more design wins. And as I mentioned, we have design wins in power tools, not only in the United States and Europe and Asia, but also in Japan now. We have just started ramping in production in Japan for power tools. We are very solidly positioned in power tools and we see that market as beginning to ramp quite quickly at this point.

I am trying to get a feel for, for example, if the basic core business is flat next year, how much would the new product design win add to revenue? Are we talking about 10%, more possibly next year because -- or doubling because it goes from 15% to 30%? I am just trying to get a feel in rough order of magnitude feel for the new products' contribution to 2011, do a range.

Well, we mentioned that we expect to see some ramp starting in Q1, but the volume ramp really begins in Q2 and beyond. I am not sure we are ready to give a projection of the volume at this point in time, but most of the volume will come as you move through Q2 and on into the second half of next year.

And this would be from all three -- security, DC/DC and battery?

That is how we disclosed them publicly, yes.

Okay, the other thing is on general lighting, what is general lighting -- how big could that become say in the next year? Is that another -- is that separate from what you just mentioned?

Well, general lighting would be included in industrial or something, but it wouldn't be part of security, DC/DC or battery.

I'm sorry, what?

It would be separate.

Yes, okay. And how large could that be because it is virtually very little this year, so how large could that be in terms of increment to revenues next year?

We don't want to set expectations at this point. It is not a number we want to give out.

I think it is too early to tell.

Sorry?

Too early to tell because that would be -- that is a new market. The time is going to take how long and that would be very difficult at this moment to predict.

There is a very wide range of possibilities, so we don't want to get involved with trying to predict it right now. We have got a lot of design wins that make us very optimistic and that is how we want to describe it today.

Okay. And what is going to be the gating factor on its deployment, the uptake in the industry? Is it going to be the end-market demand or is it something else like government support? What is the gating factor?

Well, the government support is already there. They have mandated changes. So what you have is incandescent phasing out and we will be phasing out very quickly and so you see the opportunity for a new generation of lighting to come in. So that ramp will be quite quick. The real key issue is is the manufacturers you're working with, how quickly will they ramp these products and what is their capability to ramp these products into those markets. And of course, they are careful because they go through a lot of qualifications. You are looking at an LED light bulb, they are guaranteeing the thing for a long period of time, so they go through a lot of qualification testing.

So the real key issue is how quickly they ramp. And I think it is early to try to give any numbers on that. What we can tell you is we do already have some designs that are in production. We have a lot of design win activity that is going on and again, we are very optimistic. This is a market that could develop quickly, but it is impossible really for us to sit here and give you good hard numbers at this point in time.

Okay. How about marketshare and are you, in terms of general lighting, are you talking about only LED lighting or are there some other possibilities in (technical difficulty) or other areas?

Well, there is other possibilities out there as well. We are heavily focused on the LED portion because we have moved our technology from traditional markets in LED into this area. But certainly, there are other technologies as well that we will be looking at to support.

Okay. And the LED space, are the -- is it IP that is getting the attention and what kind of marketshares can you get in the LED space?

Well, it's too early to talk about marketshare, so we can't do that. But I think you mentioned IP and we certainly have developed intellectual property in this area. And we have, in all of our products, filed for patents. But of course, it takes some time to get those through the patent office, obviously.

Thank you.

Michael Bertz, Kennedy Capital.

Good morning, gentlemen. I just wanted to follow up on one thing. You touched a little bit on this around inventory and of course, on the margins. One, do you expect inventory to fall then into Q4? And if so, by how much do you think you can sort of pull that back? And then secondly, I understand gross margin varies much more with mix on a quarterly basis, but if you could -- any quantification you can put around how much of the absorption impact might impact gross margin, if it is 50 bps or something like that, on a quarterly basis as the inventory comes down, if it does, that would be helpful.

For the inventory, we expect to start to go now from end of November to December. I think that we can move up to the inventory trends up to the 4.1 to 4.2 times by the end of the quarter.

Regarding the gross margin, it is really driven not only by the product mix, also by the application of the product group shipped to the monitor or TV area. So it is kind of complexity and also, we do offer all different kinds of solutions to different applications. So for us, for O2, Michael, the gross margin is only up 55% to 60%. It is mainly due to the product mix and inventory.

You wouldn't expect really any impact to your gross margin from inventory changes really much at all then?

No, no, no.

Okay, thanks.

At this time, I would like to turn the call back to management for any closing remarks.

All right, well, thank you, everyone, for joining us today. If you have any questions, I am available for follow-up as usual. You can reach me by e-mail at Gary.Abbott@O2Micro.com or at 408-987-5920. Thank you and have a nice day. Bye-bye.

That concludes our call for today. And ladies and gentlemen, there is a replay available through November 10 by calling 1-888-203-1112 or 719-457-0820 using the passcode 8222046. That concludes our call. Thank you for your participation.