O2micro International Ltd (OIIM) 2014 Q3 法說會逐字稿

Good morning and thank you for joining us today to discuss O2Micro's financial results for the third quarter of fiscal year 2014. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at 408-987-5920, extension 8095, and we will fax a copy immediately. It is also posted on the O2Micro website at www.O2Micro.com under the heading Investors.

There will be a replay of available through November 6, 2014 at 9 AM Pacific Time by calling 1-888-203-1112 or 1-719-457-0820 using pass code 726-6590. Following the presentation by management the conference will be open for questions and answers as time permits. Gentlemen, you may begin.

Good morning and thank you for dialing into O2Micro's financial results conference call for the third quarter of 2014 ending September 30, 2014. This is Scott Anderson, Director of Investor Relations.

I would like to remind listeners that the discussion of business outlook for O2Micro contains forward-looking statements. Statements made in this release that are not historical facts are forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially due to numerous risk factors.

Such risk factors are enumerated in the Company's 20-F annual filings, our annual 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, our CFO and Director; our Head of Marketing and Sales and Director, Jim Keim; and Sterling Du, O2's Founder, CEO and Chairman. After the prepared remarks of these gentlemen the floor will be open to your questions. Now I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the third quarter ending September 30, 2014. Perry?

Thank you, Scott. We will now review our financial results for Q3 2014. Please note that the financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results exclude stock-based compensation expense, one-time charges, non-recurring gains and losses from discontinued operations. Our (inaudible) results are available in our press release that was issue earlier today.

[GAAP](inaudible) in the third quarter of 2014 was $15.4 million. GAAP net loss in the third quarter of 2014 was $2.9 million. If we exclude stock-based compensation of $548,000, the non-GAAP net loss would be $2.4 million. GAAP net loss per ADS in the third quarter of 2014 was $0.11. Non-GAAP net loss per ADS was $0.09.

Gross margin was 51.8% in Q3. The gross margin reflects the current revenue level and the product mix. R&D expense was $5.4 million or 34.9% of revenue. This amount excludes stock-based compensation expense of $131,000. SG&A expense was $5.6 million or 36.4% of revenue. This amount excludes stock-based compensation expense of $417,000.

The non-operating income was $850,000, a $704,000 increase over the preceding quarter of $146,000. The increase of $704,000 was mainly due to the foreign-exchange GAAP increase of $381,000 due to the depreciation of NT dollar investment gain of $258,000 and disposal of investment shares in Etrend and cash dividend income of $110,000 from our investment shares.

Income tax was $250,000 in the third quarter and is mainly based on the estimated effective of tax rate of each taxable location. In Q3 2014 we repurchased [347,988] units at a cost of $1.300 million -- sorry, $1.030 million.

Q3 2014 revenue by end market breaks down into the following percentages: consumer was 50% to 60% of revenue; computer was 15% to 25% of revenue; industrial was 20% to 30% of revenue; communication was less than 5% of revenue.

At this time I would like to provide some additional information. O2Micro finished the third quarter with $64.9 million in uninstructed cash and short-term investment. This represents cash and cash equivalent of $2.40 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q3 was $8.3 million. Our DSO of 54 days is in our target range of 40 to 60 days. Inventory was $10.2 million at the end of the third quarter. This represents 120 days of inventory and inventory turnover was three times in Q3.

From a cash flow perspective we generated [678] cash outflow from operating activities in Q3. Capital expenditures were about $151,000 in the third quarter of computer and software license. Depreciation and amortization was $900,000 in Q3. At the end of the third quarter of 2014 O2Micro had 478 employees, 59% of which are engineers.

Before I provide our financial guidance for the fourth quarter I would like to address recent investor questions related to the value of our long-term investments and real estate assets.

We have conducted and completed an estimated value study of what these assets may be worth. The property valuation discussed here are subject to multiple risks and uncertainties including fluctuations in the real estate market, actual market demand and other unknown variables which can affect the final valuations thereof. Please refer to the Safe Harbor statement contained in the earnings release published today.

O2Micro owns three real estate assets in Santa Clara, California; Shanghai, China; and Hsinchu, Taiwan. We believe these real estate assets may be worth approximately $25 million and our book value for these properties is approximately $20 million.

In addition, over time we have made several strategic investments with supply chain and manufacturing partners. We believe the value of these long-term investments may be worth approximately $10 million to $20 million. In order to maximize shareholder value we are in the process of making decisions in order to monetize some of these assets.

In Q4 of this year we plan to sell a portion of the real estate asset in Hsinchu, Taiwan. And if this is completed we may recognize approximately $2 million as a net increase to our cash balance.

Also during Q3 we saw a portion of our shares in one of our long-term investments. We expect to sell the remaining shares in this same long-term investment in Q4 of this year.

While we wait for our anticipated next significant product cycle to materialize, the goal of the management team and the Board of Directors is to maximize shareholders' value and we are taking the necessary steps to do this. We will provide updates to the additional measures to enhance shareholders value on our next quarterly conference call following our fourth quarter.

At this time I would like to provide our financial guidance for the fourth quarter of fiscal year 2014. This guidance reflects our best estimates for the current environment and is subject to change. This is the only one official guidance we will provide unless we update it with a public announcement in the future.

O2Micro expects Q4 revenue to be flat to down 8%. We are guiding the Q4 gross margin to be in the range of 50% to 52%. Our guidance for the fourth quarter of 2014 reflects the ongoing [rates] in our General Lighting and Battery product line, offset by continued weakness in our Power Measurement business for notebook as well as typical seasonal weakness.

We will continue to invest in our carefully chosen growth driver -- General Lighting, Intelligent Battery, Intelligent Power and (inaudible) Lighting. And we remain confident that the innovation and the investment we are making in this product segment, combined with strong design win activity and market share gains, will lead to consistent growth and the return to profitability in the future.

Given the uncertain demand and the macro environment we are prepared to continue to [measure] costs as needed. Although believe we have aligned current cost base on current and anticipated revenue levels, we remain very confident in our ability to support current and future customer demands and program rates.

Finally, regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. At the end of Q3 we had [$14.5 million] remaining in our share buyback authorization. Returns to shareholders are much on our mind and will continue to be a focus in the future.

I would like to thank everyone for participating and I turn the call over to Jim Keim to talk more about our business. Jim.

Thank you, Perry. Good morning, everyone. While we did have an issue in Q3 in our charger product which will likely affect power revenues through the first half of 2015, we nevertheless continued to expand our penetration into key market areas with our proprietary products in General Lighting and Battery Management. Both product areas are projected to continue their quarterly growth in Q4 and on into 2015.

Previously we mentioned that key customers like GE, Panasonic, Toshiba, [Irosoyama] and Samsung are utilizing our product technologies in General Lighting. This customer list continues to expand and now includes other majors like Osram, TCP and IKEA as we see a broader based acceptance of our proprietary free dimming and two color dimming products in more and more varying applications at a widening international customer base.

We have also successfully introduced our TRIAC controller lighting products for the legacy dimmable fixtures and see these products being actively designed into systems by majors.

The second rapidly growing product area we highlighted in our last call was Battery Management. Our Battery Management products continue to expand into new designs and applications in power tool, eBike, eVehicle and appliances.

Additionally, we are seeing increasing design activity for our products in uninterrupted power supply applications and continue to see the usage of our battery management products expand at major OEMs. Despite an ongoing weak TV market, LED backlighting designs continue to expand and we are forecasting ongoing growth in 2015 based on our strong position in TV and the beginning of shipments in new smartphone and tablet lighting applications.

As mentioned earlier, one disappointing area that has been dampening our growth has been our power products where a combination of weak notebook sales and a problem in a key charger product affected our revenue growth in Q3 and will continue to impact sales in the first half of 2015.

Nevertheless, our new charger and DC/DC products are gaining acceptance in new tablet and notebook designs. We expect renewed growth in this area in the second half of 2015.

Finally, we again mentioned that sales of legacy CCFL products were less than 1% of sales and are expected to remain below this level going forward. I will now turn the call over to our CEO, Sterling Du, for closing remarks.

Thanks, Jim. Q3 revenue was in a range of updated guidance that we provided in early October. We generated revenue of $15.4 million in the second quarter of 2014, a decrease of 12% sequentially and down 17% from the same quarter last year -- I'm sorry, third quarter.

In terms of end market General Lighting remains the high-growth story and our Battery Management business continued solid growth projection. Backlighting, especially for TVs and monitors, remained (inaudible) recovery from softness.

Our power management business for notebook was weak, as mentioned, in the third quarter due to the IC issue for a major customer for charger ICs coupled with overall good management in the notebook market. We have resolved the part issue with this customer.

While there are some signs of renewed consumer interest and activities, the overall market for the notebook PC remained challenging primarily in emerging markets. We reported a GAAP loss of $2.9 million in the third quarter of 2014 compared to a GAAP net loss of $4.5 million in the second quarter last year. [Refocus] margin of 51.8% in Q3 and increased from the 51.4% gross margin we reported in Q3 last year.

During this challenging environment we were able to increase our gross margin by 40 basis points (inaudible) to our proprietary technology performance priority, high-quality as a result of our effort to streamline our cost structure profile. We continue make significant progress in our goal of (inaudible) smartphone tablet manufacturer.

We are engaged with several Tier 2 white-box smartphone tablet manufacturers and we expect to realize additional revenue from this customer in 2015 next year. We have as many as six different products that we are targeting to this customer and we expect production to ramp in the current order.

The product (inaudible) now also including the DC/DC for CPU including a 6 or 8 [coil] applications, a battery [gas gauge] including (inaudible) counting and a charger IC and a booster for the micro USB to support on-the-go technology and backlighting ICs.

Finally, our strong engineering and customer service present in the Chinese market enable O2 to expand our customer base in this region. I'd like to highlight our considerable progress that we have made in the key growth drivers.

LED General Lighting business continued grow rapidly based on two factors. Number one, the overall replacement market for the light bulb is (inaudible) significant growth base, is becoming well-established. As a leader in LED General Lighting since 2009, continue to take advantage of global ship LED lighting and the strategy to use new product innovation (inaudible) dimming to drive our growth.

Second, we again designed and developed new product for General Lighting since early 2009 and we are very early entrants of (inaudible) worldwide (inaudible) market has been pay off, and both type of customers have relied on the innovation reliability of O2 product. Following successful penetration in Japan and US we are now engaged with some of the largest LED General Lighting manufacturers in Chinese market.

On (inaudible) battery product for power tool, household appliance and other products are showing significant growth and design win momentum, which will translate into meaningful revenue in upcoming quarters. While gaining share in this market expect to be the market leader for Battery Management solutions.

We remain very focused on product innovation expanding our product offering, develop a safer, more reliable (inaudible) extend battery operating time and efficiency. We provide customers specific design (inaudible) for power tools such as protection and [secondary protection] ICs. These products we're developing are optimized for product performance ratio which gained market share.

Similar to last quarter, we saw a meaningful number of design wins, new [style] ramp and significant market share gains in the quarter. Very pleased with the progress that we've been projecting in many our long-term growth drivers including General Lighting, (inaudible) Lighting, Intelligent Battery and the many new products supporting smartphone and the tablet markets.

In closing, we're excited about our successful -- across all the core power management, including those growth drivers I just mentioned. We look forward to providing you more detail of progress throughout the remainder of the year. At this time I would like to thank you for listening to our conference call. Send back to the -- Scott. Thank you.

Thank you, Sterling. Operator, at this point we would like to open the call to questions.

(Operator Instructions). Tore Svanberg, Stifel.

This is [Evan Wang] standing in for Tore. Thank you for taking my questions. I would like to just start with a question on your inventory days. It is up quite a bit for a second or third quarter in a row. Can you provide us with your rationale on why inventory is up so much and what your plan is?

The inventory, we have some increases starting in Q3 over Q2 (inaudible) to prepare some more waivers to support the new product ramp. And the new product ramps actually are -- they probably need some more time, so from Q3 to Q4. I expect (inaudible) the consumption of the inventory in Q4 would be lower than Q3. And this inventory more or less in the (inaudible) area.

Okay, great. Thank you. And then in your prepared remarks or in the press release you mentioned about cost reduction. I was wondering if you can give us a little more color on that as to whether your OpEx for this quarter establishes a new base or if the cost reductions are more temporary measures.

The cost reduction is [measurement] we continue to do some majors and do some trimming on the -- by a project basis each product group. So the OpEx area actually that we reduced by not a big amount, but sequentially it's quarter by quarter that we continue to lower down our breakeven point. So I would think that this is our trend from this quarter through the next quarter and next year.

Okay, great. In this environment for O2Micro how do you -- can you talk about how you manage to retain talent at -- analog design talent?

We have the major architect in US-based office. Then we also have quite a number of the analog engineer design, which is we have been with the Company as many as like 10 years, 10 year in China, Chinese offices and that spread over to several cities.

We have seen that several offices probably have very stabilized and also the turnover rate is below the market value -- market data. And in some offices like Shanghai probably not easy to retain. Fortunately a strategy plan will since we start the design center in China we do have a few inner-city as our major design team location. And the two cities is relatively much more stabilized. This is from an environment point of view.

And internally we do provide the continued training and also providing very challenged project and fulfill that people feel achievement and that also including the environment of support from the management team and also from our HR team and make the people to understand the situation of the whole environment and the new market and the new potential opportunity.

This how we keep the people filled up and which is true once we overcome and will become very high potential successful in the product development and market penetration.

Okay, let me ask one more quick question, then I will hop back in the queue. You had mentioned that the free dimming products enjoy a higher margin and help to balance the overall margin for your LED products. Can you tell us approximately how much of your LED revenue right now is from free dimming and how is that specific product group growing?

Well, let me simply answer. In the past phone calls we had indicated that we had anticipated getting our general lighting revenues up to about 15% of the total revenue.

As we run out the year we are in fact close to that guideline and we have done that by focusing not on the highest volume very low cost product but rather on our free dimming and our proprietary technologies in General Lighting. And with that we have been able to enjoy good margins in General Lighting that are actually above the corporate guidelines at this point.

Okay great, thank you.

Dane Lewis, San Francisco Investment Management.

I have two questions. First, so Sterling, the stock is trading at a 30% discount to cash. And it seems that the message from investors is that they have little or no confidence in a turnaround, which I think is understandable given the four years of revenue decline. My question is, can you tell us why you are confident in a turnaround in 2015?

As in my -- today's conference speech, I talked to the growth driver which is we have great confidence for those. Number one, for General Lighting we start this market since 2009 and the free dimming is a proprietary of the patent protection. And right now we start to see from the major customers from different countries such as Panasonic, they not only demonstrate, they also put in a commercial to promote this.

Among these General Lighting, people like to looking for the differentiation from vendor A to vendor B and free dimming does provide those opportunities people can use and providing special value add and product to consumers. And to couple with the free dimming we also have the TRIAC, we have one of the best TRIAC to support the conventional TRIAC compatibility product.

And then we also have to address the regular commodity light bulb product. We have a very complete product portfolio to serve Chinese manufacturers enabling they not only produce the proprietary free dimming and also the high end [TRIACing] and they also can provide in a commodity the consumer market centric light bulb.

So in General Lighting we have a 3D strategy. So we feel confident for that. And for the new white-box smartphone and tablet market, they are using the 2 core and 4 core CPU for starting (inaudible) this year within 12 year -- this 12 months change a lot.

We are seeing that like MediaTek, we are seeing that like QUALCOMM and many other CPU providers, they enter (inaudible) 8 core CPU and when you look at that at about 21 plus. When you look at 21 of -- 20 plus or 20 watt and plus (inaudible) consumption, that is stepping to the notebook area.

So O2Micro started to provide CPU DC/DC for the notebook many years ago, which is about 15 years ago. We were providing both Intel CPU. So we have enough tenants we can address this market. So that is why we are invited to provide CPU DC/DC for the existing CPU vendor and who has their 0P power (inaudible) IC co PMIC.

However, for the 6 core and 8 core (inaudible) performance and power efficiency will tie into the (inaudible). So they need a third-party to help. So by the CPU DC/DC we have an opportunity to provide in a charger because when a CPU becomes a more power-hungry CPU, then you needed a much bigger battery. Then how you going to charge all the battery within a limited time.

So then you probably heard from our peer group and also a major CPU company like QUALCOMM mentioned about their quick charge and (inaudible) charge. And we are one of the people to providing those. And that is the third IC we can do for this IC -- for these applications. And don't forget we have very strong in (inaudible) lighting, (inaudible) lighting for one [stream] for the smartphone tablet.

We started already shipping for one major smartphone player in the US and we also are providing the same (inaudible) and also similar family -- same part in the same family and to the tablet PC and the smartphone white-box second-tier in China. So this area we address is multi-hundreds million unit per year and this is (inaudible) for O2Micro. So we feel confident for that.

And thirdly the battery power. The battery power is an industrial which is come in the nature of stable growth and also high gross margin. So you can see that we increased 40 (inaudible) from the same quarter last year. During this environment very tough and people probably compromised the pricing (inaudible) to get the deal -- the (inaudible).

But when we came into the market because of proprietary and also we do provide the best quality. So people still pay for the premium for gross margin.

So then the last one, the TV. The TV is softness for many years. But then we figured out a new way and a new product is coming out. We going to see our attachment rate will continue to gain and also will upside the next year. So you can see that is 300 million minus/plus the TV unit number per year.

And that already has a (inaudible) space which utilized before that -- before 2011 they are using our (inaudible) lighting and we transfer -- convert to the LED and right now we are gaining market share back. And that is existing customer -- existing customer relationship with this the 3+1. So we put confident that for next year we going to (inaudible). Now I hope I answered your question, Dane.

No, that is good. Thank you, that is helpful. So my other question is, just looking at comparable semiconductor companies, and by comparable I mean small caps with similar gross margins in the 50% margin rate. These companies have sold for two to three times revenue.

And because O2 is losing money I suspect it wouldn't (inaudible) close to that, but I think 1 or 1.5 times revenue seems like a reasonable estimate which, given your $60 million run rate now, is $60 million or $90 million. And if you add the $75 million in cash and investments and the extra $5 million for the real estate, plus the IP portfolio, the math translates to $140 million to $170 million in value for the Company which is $5.00 or $6.00 per share.

And that is no value for the IP portfolio. I mean it sounds a little ridiculous to ask the question with the stock trading at $2.00. But, Sterling, if you were offered $5.00 or $6.00 or more per share, would you seriously consider selling the Company? And if not, why not?

Well, I will prefer to defer this question to our internal discussion and actually we have some discussion with the Board and also executive members with us. And that's not something my personal at this moment answer you.

Okay, thank you. Good luck.

(Operator Instructions). Lisa Thompson, Zacks.

I just have a few little questions here and there. Can you talk -- first off, can you talk a little bit specifically about the smartphone business? Have you gotten -- have any more success in getting design into anything or other any interesting prospects out there?

Yes, Lisa. We have one design in the US base, but however we do have (inaudible) chips design and also already have some small production expected in the end of the year for the smartphone, the tablet. And that application varies. They probably -- first of all the screen size. They found a regular typical smartphone all the way go to the big tablet and including the mini size and also some big screen smartphone.

And their functionality also varies, which we like because we are not better only one single application some is designing a (inaudible) battery (inaudible) over the TV [BTT] and which is more a powerful box. And they probably becomes a regular tablet but the under the different name because they are white boxing.

The historical net scale of this market, when those Chinese CPU vendors, they're providing a solution and they're also providing the design for the whole system, including some mechanical design. And so (inaudible) Chinese based system integrator very quickly turning to the production. This is a little different from a notebook. In terms of food chain, right.

So what we engage with is multiple CPU providers in China and that they are providing the whole design turnkey to the system integrator. And the system integrator comes out of the end product to the various sector of worldwide emerging-market or US market, European market including Chinese market.

And so it is important to understand when we say that we have many design activities, which is we emphasize that we go with the CPU [play] phone and then the CPU play phone will be turnkey the whole thing to the (inaudible) greater and turning to the market with a couple months.

So when you talk about (inaudible) significantly, we have been in several famous branding appliances. I will say the smartphone and tablet, mostly in tablet at this moment because they more use a core CPU in China including [crew pad] and including Google (inaudible). (inaudible) is a famous (inaudible) data encryption capability, so that is utilized by the government of (inaudible) because (inaudible) providing encryption security (inaudible).

So (inaudible) gaining market share and several new play phones from (inaudible) is using our ICs just to give you an example. So I hope I answered your question here.

Yes, great. Sounds good. And one thing you said about a product in the LED business, something about two color, can you tell me what that is? Two color dimming?

The two color is emphasized that, first of all, from the typical to the two color is try to save the cost. Because when you support the two color that is separate cost and simplify the (inaudible) of the design and then start providing a much easier -- to the white (inaudible).

Right now we see all the color typically is a blue light and using the coding and it becomes white LED. But two color they are using red and yellow and they're trying to do the same thing. And because of the easy manufacture of the (inaudible) the cost is optimized. So this is of course a two color technology. So the driver itself will be the different driver because they are driving the different LED to generate the different (inaudible).

Lisa, this is Jim Keim, let me just mention, Sterling mentioned the fact that one of the companies utilizing this is going to be running some advertisements on TV we have been told. So we will get a copy of that and actually put it up on our website so you can see it.

It is a very well known brand name company that's utilizing this. And actually there are several other large OEMs using it as well. So we will put it up so you can see it just as soon as the ads run. I understand that will happen sometime this next month, November.

So, what is the product? Like, I don't get it. Like why would somebody want one of these? What do they do?

Well, basically, for instance, some people like to have like what you can do is like for instance in a bedroom situation you can go from white light to like a very soft blue light. So it gives you a very soft white that some people like.

And then how do you switch it from one color to the next? How does that work?

(Inaudible) providing several (inaudible) including -- you maybe can (inaudible) to change the color. But it depends on the manufacturer, how they design. How we provide these options they can use. For example, the vendor A may be using a switch toggle then you can toggle from yellow-ish light to the more bluish.

And another vendor, maybe they just give you -- they (inaudible) this delivery to you. But we provide (inaudible) driver IC to providing to other people can choose their color wavelength (inaudible).

Okay.

And that should be demonstrated, Lisa, I think in the TV advocates run.

So this is -- so that will be sold in the US? Are your free dimmables being sold here now?

Yes. Yes, they are. And as a matter of fact, the company running the two color ad will not be a US Company, it will be a foreign company. But one large US company is already moving into production with the two color. So they will have it as well.

That's nice. Who is selling your free dimmable's in this country, what brand do I find that in?

Yes, we will have to give you the retail names -- we work with the supply base that supplies into retail. But I can ask Scott (inaudible) for you and find that out. But they are available now, yes.

Cool, that is good. All right. And can you just clarify -- I couldn't quite catch -- you sold off some stock or the investment in which company was it and that you are going to sell again this quarter?

Etrend, a Taiwan [DC] company.

Etrend?

Yes, Etrend, it's listed in our 20-F under one of our long-term investments where they are all listed on there.

Okay, and that is a public Company, right?

Yes, listing Taiwan stock market.

Okay, cool. All right, great. That is all I have for now. Thank you.

Tom Sepenzis, Northland Capital Markets.

I apologize, but can you run through the segment breakdowns again real quick?

So in the third quarter consumer was 50% to 60% of revenue, computer was 15% to 25% of revenue, industrial was 20% to 30% of revenue, and communications again was less than 5% of revenue.

Okay. And LEDs, the LED business, that was subsequently on a revenue basis or was that down?

Do you mean LED backlight or LED General Lighting?

General Lighting.

General Lighting. Yes, our General Lighting is continuing to expand. As I mentioned, we expect to end the year at this point somewhere in the 12% to 14% area in terms of total revenue will be LED General Lighting and we expect General Lighting to continue to expand quite rapidly next year.

I currently project -- and this is a rough estimate -- but I would expect that the General Lighting in the first half will probably be somewhere in the 15% to 20% of our total revenue base in the first half of next year.

Okay. But sequentially just from a top-line perspective was it up or down?

It was -- I would have to go back and look at the exact number, but it is basically growing quarter to quarter. Yes, we've seen --.

Okay, great.

Yes, yes, yes. So we have seen (technical difficulty) quite rapid expansion of the General Lighting product area.

And then can you talk about just the timing of some of the smaller form factor wins of smartphones and tablets next year?

So the timing will be already starting from the Q -- before end of this year and that -- they are some cycle. They are using one play phone and expand to other play phone. And then we also go to the second CPU provider they also are designing our ICs. And then they also go to the third CPU provider.

So we have three CPU providers utilizing our power ICs for the smartphone tablet. And each of the CPU providers, they also give to the different application the different play phone. So that would be initially -- maybe the cycle may be longer a little bit, like a couple of two quarter and they don't -- or you will see the (inaudible) effect because of when the people start to go to a multiple play phone and a multiple CPU vendor and that growth will be -- expect will be much higher.

Now the key point (inaudible) you want to follow up is if you look at the 8 core or 6 core CPU, which is the CPU is more powerful, the percentage penetration rate for those, that was the key. Lots of people use 6 core to 8 core and they need a third-party CPU, a DC/DC and then they also need it a much bigger the battery. And that will be (inaudible) professional power IC vendor in such as O2Micro. So this is a good sign you could trace, yes.

All right, thank you. And then just looking down the road a bit, I suspect the answer is this they shouldn't have any impact on you, but I just wanted to ask. Synaptics and others that handle the touch panels and now are beginning to integrate display drivers, I'm wondering if that would have any impact on the backlighting business if they are planning on integrating that as well or if that will stay -- do you think will stay a separate component?

That will stay separate because the people integrate the driver for the screen and the touchscreen IC, this too, they're probably in the same boat. They may not be putting the same IC because too many ping count. The backlighting driver IC due to the power consumption, generally the heat dissipation, they mostly would stay in a different (inaudible).

For reason number one, pick and choose different (inaudible) vendor. The reason number two is easy to maintain in the (inaudible) because you don't have to put away the whole display panel because you have less complicated IC inside the panel. And the reason number three is then your heat dissipation is easy to design for the heat pipe.

So for those we don't see right now that people want to integrate backlighting into the display at this moment in a smartphone tablet. But however in the future probably if they have a new technology or something want to assembly package together which is that is the future factor.

Great, thank you very much. Appreciate it.

Thank you. And there are no further questions in queue. At this time I would like to turn the call back over to Scott for any closing remarks.

Thank you all for your attention this morning. Please feel free to contact me at area code 408-987-5920, extension 8888 with any follow-up questions. So have a good day and thank you again for your attention. Goodbye.

This concludes today's conference. As a reminder, a replay of today's conference is available until 9 AM Pacific Time on November 6 by calling 1-888-203-1112 or 1-719-457-0820 using pass code 726-6590. Thank you for your participation.