Power Integrations Inc (POWI) 2004 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for holding. Welcome to the Power Integrations 2004 fourth quarter and the year-end financial results conference call.

At this time, all participants are in a listen-only mode to prevent background noise. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Joe Shiffler. Thank you sir, you may begin.

Good afternoon, I’m Joe Shiffler, Director of IR and Corporate Communications for Power Integrations. Thank you for joining us today to discuss our fourth quarter financial results, which are presented in a press release that we issued just a few minutes ago. Our release has been sent directly to those of you on our distribution list and is also available on the Investor info section of our website www.powerint.com.

With me on the call today is Balu Balakrishnan, President and CEO of Power Integrations and John Cobb, our Chief Financial Officer. Balu and John each have a set of prepared remarks after which we’ll take your questions.

Before we begin, I’d like to caution you that our discussion today, including the q-and-a session will include forward-looking statements reflecting management’s current forecast of certain aspects of the Company’s future business. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, anticipate, and similar expressions that look toward future events or performance.

Forward-looking statements are based on current information that is by its nature dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements. Risks and uncertainties affecting our business, which could cause actual results to differ materially are discussed in our most recent reports on Forms 10-K and 10-Q filed with the SEC.

With that, I’ll turn the call over to Balu.

Thanks Joe and good afternoon everyone. We are pleased to report that our fourth quarter results came in ahead of expectations on both the top and bottom lines. Business was relatively soft through October and November as expected, but shipments did not decline further in December as we would normally expect due to seasonality. As a result, we ended the quarter with sequential revenue growth of 2 percent, about the high end of our guidance. Gross margin was 48.3 percent up half a point from the third quarter and in line with our expectations. Operating expenses were down slightly compared to the prior quarter.

Adding it all up, earnings were $0.14 per share, a penny above the high end of our guidance. We also made substantial progress on the share repurchase, which we announced in October, completing more than half of the program as of yesterday.

While our fourth quarter results are encouraging, it is not yet clear that we have reached the end of the period of market softness that began in mid-2004. The uncertainty of current market conditions makes it difficult to forecast how much we’ll grow in 2005. However, while 2004 was a challenging year in many ways, we did succeed on a number of initiatives to position ourselves for growth in 2005.

In terms of market penetration, we made great strides in the consumer and industrial markets. We grew our consumer revenues 25 percent and our industrial revenues 20 percent for the year despite the second-half slowdown. Thanks to significant increases in our share of DVD, set-top and appliance markets, consumers was our largest market in 2004 for the first time ever.

In terms of products, our competitive position is now as strong as ever. We added a number of new products to our portfolio this year, including LinkSwitch-TN and LinkSwitch-HF and we expanded our TinySwitch II family introducing our most cost-effective TinySwitch devices yet.

We also expanded our DPA-Switch family to address power-over-ethernet, which we now believe will be the most important application in the DC to DC market. We also reduced our production costs significantly in 2004, and we have more reductions to come. We achieved savings in silicon costs by improving our process technology, and through price reductions from our foundries. Our test costs also came down as we moved greater percentage of our volumes offshore. Through this combination of cost reductions, we were able to offset nearly all of the ASP decline for the year.

As a note, apart form the impact of currency fluctuations our gross margin was nearly flat compared to 2003 in spite of the highly-competitive pricing environment. In terms of personnel, we added a number of key additions to our team in 2004. In particular, we significantly expanded and upgraded our sales and field engineering capabilities adding strong, experienced people in key markets such as China, Taiwan, and the U.S.

Finally, because our success depends upon remaining at the leading edge of innovation, we pressed our intellectual property advantage aggressively in 2004. The new products we introduced last year are the most advanced, cost-effective power-connotion [ph] ICs available, well ahead of our competition.

We also had a record year for patent awards in 2004, adding 36 U.S. patents and 20 foreign patents to our portfolio, and we took action to defend our patents against infringement by 2 competitors.

Returning to our fourth quarter results, as I mentioned revenues were up 2 percent sequentially. Computer and industrial revenues were up 10 percent and 17 percent respectively, more than offsetting the continuing weakness in consumer. Consumer revenues were down 5 percent sequentially as a result of weakness in set-top and DVD applications. Communications revenues were flat compared to the third quarter. Our full-year results demonstrate the success of diversification efforts.

Total revenue increased 9 percent to $136.6 million. We achieved this goal in spite of a 6 percent decline in communications revenues, which have been our largest market. Excluding communications, revenues were up 17 percent for the year in spite of a weak second half. Consumer and industrial were main drivers of this growth, up 25 percent and 20 percent respectively as I mentioned earlier. In consumer, we grew nearly 50 percent in DVD players and more than 30 percent in set-top boxes, and more than 25 percent in appliances, all driven by significant increases in our market penetration.

In the industrial market, we saw strong growth across a variety of applications, including metering and control applications. We also had a strong year in the computing market, up 6 percent driven by double-digit growth in PC and several standby applications.

The communications market, which is predominately cell phone charges, was extremely challenging in 2004. Revenues declined 6 percent driven by a number of factors. First, as many of you know, we lost a portion of Samsung’s charges business in the third quarter of 2003 to a competing part that we believe infringes on our patents.

Second, ASP declines were greater in cell phones than any other market driven partially by the competition, but also by ongoing migrations to lower power charges, which use our smaller, lower power, lower ASP chips. This trend is being driven by [indiscernible] power management in cell phones, which enables the use of smaller batteries.

The third significant driver of the decline in cell phone revenues was the China market, which was weak throughout the year and dropped off sharply in the third quarter. In 2003, Chinese customers and other lower-tier customers accounted for more than a third of our cell phone revenues. Because of the weakness in China, these revenues declined by about 50 percent in 2004, creating a major drag on our overall revenue growth for the year.

On the positive side, LG [ph] became a significant customer for us in 2004. We also had significant design wins at Sharp, Byrd, Alcatel [ph], and Sendo [ph] with LinkSwitch, and we have ongoing links with design activity to replace linear chargers at several other OEMs. We expect cell phones to remain an extremely competitive market in 2005. However, we believe that we are positioned to begin rebuilding our share as we diversify our customer base and as more OEMs begin to move away from linears to electronic solutions.

This transition brings into play about half of the overall cell phone market, which was previously unaddressable. Our LinkSwitch products are superior to any other integrated or discreet solution for linear replacement, so as the transition occurs, we are well positioned to benefit. The transition away from linears has been a long time coming. It is an opportunity that we recognized more than 2 years ago when we introduced LinkSwitch. As is always the case in power-supply market, there is a great deal of inertia working to keep the entrenched, older technologies in place. This inertia comes from the time and cost involved in redesign and in seeking agency approvals for new power supplies, from a lack of consumer awareness about the benefits of electronic power supplies, and simply from force of habit. However, if all is believed then energy efficiency would be the key factor that tips the market in our favor, and these developments should help accelerate this transition.

Within the last 2 months, 3 new standards have emerged that will encourage and in one case force manufacturers to move away from linears. On January 1, the European Commission tightened the standby requirement for external adapters to 300 milliwatts and also added minimum operating efficiency requirements, which are impractical to need with linear transformers on Europe’s high-voltage mains.

On January 6, the EPA announced new standards for external adapters as part of the Energy Star program. Manufacturers wanting to earn the Energy Star label on their products must now meet 500 milliwatt no-load standard as well as stringent operating energy efficiency requirements, which will be virtually impossible for linears to meet.

Both of these programs are voluntary so they will encourage a change but not force it. However, in mid-December the State of California issued new efficiency standards for a wide range of appliances including external adapters. These standards will become mandatory as of July 2006, meaning that California has effectively outlawed the use of linears in external adapters. The impact of these new rules will be far reaching because adapters are sold with such a wide range of devices, including cell phones, cordless phones, tools, toys, computer peripherals, personal appliances, portable audio players, and many other applications.

In California alone, it is estimated that about 27 million external power supplies are sold annually, and because of its size, California has the potential to influence what happens in the entire industry. Adapters built with EcoSmart ICs can easily satisfy these requirements, and we are aggressively marketing our technology as a solution of choice for manufacturers. The efficacy of our EcoSmart technology has already been proven in many applications, including cell phone chargers, DVD players, LCD monitors, appliances, and especially PCs where the Federal Government’s one-mark standard continues to have a major impact.

In the fourth quarter alone, our Tiny-Switch II products won more than $6 million worth of business for one-mark PC standby designs at OEMs such as Dell and Samsung. We believe we have been the dominant supplier for the one-mark compliance in PCs and that has been a major driver of market share for us.

We also believe that a similar opportunity now exists in the external adapter market. Details on all of the new regulations and our EcoSmart technology can be found in the Green Room section of our website.

Looking ahead to the first quarter, given that the orders thus far in January are tracking slightly below fourth quarter levels, we are forecasting revenues for the quarter to be down 2 to 8 percent sequentially. We expect gross margins to remain in the 48 to 49 percent range, and we expect earnings between $0.10 and $0.13 per share.

Because of the uncertainty of current market conditions, it is extremely difficult to predict our growth rate for 2005 with any degree of confidence. For that reason, we will not provide a full-year forecast at this time. Clearly, we are still feeling the effects of the industry-wide slowdown that began in mid-2004. However, we believe that we have a good chance to outperform the broader semiconductor industry this year. We had a strong 2004 in terms of design wins, and we have a robust pipeline of ongoing design activity.

Although our overall supply chain conditions and end-market demand remains uncertain, inventories of products at our power supply and OEM customers are relatively lean as usual. As a result, our growth should be highly responsive to improvements in the overall business environment.

Before I turn it over to John, I’d like to take a moment to express my concerns regarding the financial and human resource costs of complying with Sarbanes-Oxley Section 404. While we agree with the spirit of 404, we believe the implementation of the rules has gone far beyond the original intent of the United States Congress. Having implemented Section 404, it is clear that the cost of compliance far exceeds the benefits to stockholders. The cost of 404 compliance unfairly burdens smaller companies and creates a competitive disadvantage for all American companies. We hope that the investment community will encourage Congress to revise the rules to make them less burdensome while maintaining the original intent of protecting stockholders.

Now, for a more complete review of the financials and the guidance, I will turn it over to John. John?

Thanks Balu, and good afternoon. I’ll give a brief recap of the fourth quarter and full-year financials before we take your questions. Overall, we are pleased by the modest improvement in revenue, and we had another good quarter in terms of gross margin and expense control. We also completed our initial internal control review to comply with Sarbanes-Oxley 404, and we made significant progress on our stock repurchase program.

As Balu noted, revenue for the quarter was $33.6 million up 2 percent sequentially and 4 percent year-over-year. Our guidance for the quarter was for revenue to decline 2 to 8 percent sequentially. Turns orders were 74 percent of revenue for the quarter. Distributors accounted for 60 percent of total revenue in the quarter, including Cynics and Mimic at 24 percent and 19 percent respectively. As a reminder, we recognize distributor revenue on sell-through, not sell-in.

Gross margin for the quarter was 48.3 percent up 50 basis points from the prior quarter and within our 48 to 49 percent range. The improvement was driven by lower product cost resulting from lower wafer cost and process technology improvements. Operating expenses for the quarter were $9.7 million down from $9.9 million the prior quarter and up 5 percent from a year ago. G&A expenses were the largest driver of the year-over-year increase, rising 22 percent due primarily to costs related to Sarbanes-Oxley 404.

Income from operations in the third quarter was $6.5 million giving us an operating margin of 19.4 percent, up more than 1.5 points from the prior quarter. Our effective tax rate for the quarter was 34 percent. This reflects an adjustment to bring our full-year tax rate to 28 percent, excluding the $1.1 million tax benefit we recognized in the third quarter. We had an increase in our 2004 to 28 percent from 26 percent due to a higher than expected proportion of revenues coming from the U.S. market. We expect our tax rate to decrease by 26 percent in 2005.

Net income was $4.5 million or $0.14 per share, including a $0.01 negative impact from the higher tax rate. Weighted average diluted shares for the fourth quarter were $31.9 million, down slightly from $32 million for the third quarter. The share count will drop further in the first quarter as we get a full quarter’s impact from our shares’ repurchase. We repurchased 590,000 shares during the fourth quarter, and as of today, we have repurchased a total of 1.1 million shares.

Turning to the full-year numbers, I won’t do a complete rundown of the income statement, but I will mention a couple of key points. Revenue growth for the year was 9 percent, while operating expenses increased by only 2 percent in spite of more than $1 million spent on Sarbanes-Oxley 404 compliance. This demonstrates the exceptional leverage we obtained from our operating expenses. From 2001 to 2004, our revenues grew 45 percent while our operating expenses increased only 13 percent. This operating expense leverage has been and will continue to be one of the hallmarks of our business model.

Returning for a moment to Sarbanes-Oxley, as I mentioned we spent in excess of $1 million this year on consulting services to complete our own internal control testing and documentation, as well as increased audit fees and the addition of a full-time headcount to manage the process. As for the results of this process, while our auditors have not yet completed their own assessment, our own very thorough review uncovered no material weaknesses in our internal control system.

Moving to the balance sheet, we ended the fourth quarter with $134.6 million in cash and investments, up $19.2 million for the year, and down $9.5 million from the prior quarter. We used $11.8 million during the fourth quarter for our share repurchase program, and our purchases to date have used $20.1 million, or just over half of our $40 million repurchase authorization.

On the remaining balance sheet items, the accounts receivable were up $2.6 million during the quarter to $12. 2 million with DSO coming in at 33 days, a closer to normal level than last quarter’s 26 days. Inventories increased by $3.1 million to $25.4 million giving us inventory turns of 2.7. This figure is slightly below our target range of 3 to 4 turns. However, we remain comfortable with this level of inventories for the time being and have not made any major adjustments to our production levels. We believe we can accumulate some inventory during periods of weak demands due to the relatively generic nature of our products, and our long product life cycles, which gives us very low risk of obsolescence.

Turning to the outlook, as Balu noted given the lack of visibility down the supply chain it is difficult to forecast the upcoming quarter, let alone the full year. Based on our backlog in January orders thus far, we are anticipating a first-quarter sequential revenue decline of 2 to 8 percent while we require a 70 percent turns orders within the quarter in order to achieve the mid-point of this range.

Our gross margins guidance for the first quarter is the same as it was for the fourth quarter, 48 to 49 percent. We expect operating expenses to increase 8 to 10 percent sequentially, driven largely by patent litigation expenses as we expect activity on both of our patent suits in the first quarter. This will result in earnings per share in the range of $0.10 to $0.13.

Finally, while we are not providing a full-year forecast, I would like to make a comment on a few factors that will influence our financial performance in 2005. First, as noted earlier, our gross margin decline by about 2 percentage points in 2004 due largely to the strengthening of the Yen versus the dollar. In 2005 we expect some incremental margin pressure due to the further weakening of the dollar in late 2004 and due to ongoing competitive pricing pressure. Our cost reduction efforts should largely offset these factors, and barring any further weakening of the dollar, we would expect our gross margin to remain approximately flat compared to 2004.

On operating expenses, patent litigation costs will be a significant driver this year as indicated by our first quarter guidance. Total operating expenses for the year should increase by approximately 10 percent with more than half of this increase due to litigation expense.

Finally, as I mentioned earlier we should see a decline in our effective tax rate to approximately 26 percent.

With that, I’ll turn the call back to Balu for a few final remarks before we take questions. Balu?

Thanks John. Due largely to the progress we made in 2004, our fundamental story remains firmly intact going into 2005. Old technologies are steadily giving away to advanced integrated circuit technologies in the power connection market just as they’ve done in other electronics markets. This transition to integrated solutions will only accelerate as the consumers and manufacturers become more aware of the benefits of integration, that is portability, simplicity of design, and ease of manufacture. And as regulators test manufacturers to make their products more energy efficient, we will all feel the effects of the changes in the end market and supply chain conditions.

However, as the leading innovator in power conversions, our business has a built-in growth engine fueled not only by market growth but also by our ability to win the lion’s share of the market as it converts to new technologies. This has always been our business model and today, that model is as strong as ever. We are looking forward to a successful 2005.

With that, I’ll turn it back to Joe. Joe?

Thanks Balu. Before we go to questions, I’ll quickly run through our first quarter conference calendar. We will be participating in Piper Jaffray’s Analog Summit in Philadelphia on February 4; the CSFB Global Semiconductor and Capital Equipment Conference in Miami on March 3 and 4; and the Raymond James Institutional Investors’ Conference on March 7 in Orlando.

And now Operator, would you please open the line for questions.

Certainly sir. (OPERATOR INSTRUCTIONS). Ross Seymore, Deutsche Bank.

Thanks guys, just a couple of questions. First on the revenue side of things, Balu you mentioned in December that orders really didn’t turn down as you would have expected. What was the reasoning behind that? And what’s really happened as you went into January? Is it must more of a swap between those 2 months?

To be honest, I don’t know exactly why it didn’t go down as it normally does. We have seen a pretty lean year booking and shipment throughout Q4, and going into Q1 it is slightly weaker than the rate at which we were booking in Q4.

Is that sort of slowdown normal, abnormal, the January part of it?

Well, the first quarter is usually lower than the fourth quarter for us purely because of seasonality. So I would say it is relatively normal.

And then if the revenues were a little bit better than you would have expected in the December quarter, I was a bit surprised to see that inventories rose. Can you go into a few of the drivers as to what led those inventories to be higher in the quarter?

We’ve made the decision to keep our production levels fairly constant. We don’t to disrupt our manufacturing process, so as we commented because of the nature of our products, we can build some inventory. So what we’re doing is keeping our production fairly constant with the idea that the market is going to pick up at some point in 2005, and then when the market does pick up and our revenue starts to grow, then our inventory levels will come down. But we went into the quarter knowing that we were going to have some inventory build.

And a final question, on the California Energy Commission regulations, the first mandatory one, what’s the sort of lead time when the design wins associated with regulation like that start to occur versus the mandatory date being mid-’06?

Well the reason they chose mid-’06, they were originally were trying to do it for January ’06 but the manufacturers complained that was too short a time to redesign products. And so they gave them an additional 6 months. And I think 1-1/2 years is a comfortable time for manufacturers to redesign because as we have said before, it takes approximately a year for a product to be redesigned and this just gives an additional 6 months buffer to take it into production.

So by this summer, you would expect to see some designs going in that direction?

We should see them before that.

Great, thank you.

Shawn Slayton, SG Cowen.

Hi gentlemen, good afternoon. Balu for many years, power integrations has targeted first and foremost the high-volume end markets, handsets, PCs, DVD players, set-top boxes, etc. It recently appears that you guys are ramping efforts to address lower unit markets as well. Can you help us maybe understand this trend somewhat, and maybe share with us kind of your metrics as a company? How do you guys measure yourself as it pertains to new design wins? And I have a couple of follow-ups. Thanks.

Yes certainly. As we said about 3 years ago, we decided to diversify the customer base and the applications so that we are not dependent on only the large customers. As a small Company, it is very efficient for us to address the tier-one customers because you get the best return on your investment of resources. But as we are growing bigger, we want to diversify into as many customers and as many applications as possible so that we are not dependent on any one market or one customer.

And the PCs and the cell phones that obviously are extremely concentrated, they were a great way to grow the Company in the earlier years. But as we grow, we really want more tier-two and tier-three customers, and that’s the reason why we have grown the consumer and industrial market because those markets are highly-fragmented and diversified and gives us a much more stable customer base and growth.

Okay, so we should kind of, the metric there is just principally the mix of those consumer and industrial relative to the other parts of the business.

Yes, I think it is -- we want a good balance. We can’t ignore the tier-one markets, but I think we are at a size, and we have the tools and the resources to grow the second and third tiers so that it gives us a much better balance than we have had in the past.

Okay, if I missed this I apologize, but Samsung wasn’t on the 10 percent list?

No Samsung was not 10 percent.

You mentioned them in your scripted comments, but I mean should we expect to see those?

No, actually Samsung I would not expect in the near term to be a 10 percent customer. As we’ve mentioned several times in the past, in the cell phone market if you go back a couple of years ago, all of our ICs for Samsung cell phones we shipped to Samsung, and then they sent them along to their contractors. However, now I’m not sure if it’s half, but a large portion of the ICs for Samsung’s cell phone charges we ship directly to the contractors of Samsung. So even though the overall business that we do with them is above 10 percent, the amount that we ship directly to Samsung is less than 10 percent.

Okay, fair enough. My last question here, I guess I can understand your reluctance to give ’05 guidance, but you did mention in your prepared comments that you expect it to grow in excess of the overall market this year. And obviously, you guys grew less that the overall market last year. So can you help us explain why you expect to grow in excess of the market this year? Thanks.

Well, last year as we explained, the problem was really in the communications sector. Everything else we grew very nicely.

Okay.

In the communications area, we lost share, I mean as you can tell from the numbers and the growth that particular area has had. However, we think we are very well positioned to re-grow our market share in cell phones, especially with the LinkSwitch replacing the linear transformer type chargers. And so that will allow us to grow and penetrate the market and grow better than the end-market growth.

Okay, thanks guys.

Craig Elliott, Smith Barney.

Thank you, good afternoon guys. Looking at the forward guidance down 2 to 6 percent, how should we think about that from an end-market stand?

At this point, we’re not really differentiating between the end markets in terms of which is stronger and which is weaker. So we can’t really provide any more guidance on individual markets.

If we were to look back at normal seasonality John, what typically would have been strongest for you in the first quarter?

Well, as Balu mentioned earlier Q1 tends to be down seasonally, which is mainly a consumer area so from a historical standpoint, you would probably expect some of the consumer areas to be weaker coming off of Christmas. But again, we can’t provide any specific guidance on that at this time for this year.

Okay thanks, and then it sounds like inventories may build quarter-on-quarter in the first quarter. How should we think about where you want to end the quarter with your inventory balance?

I would expect the inventories would go up slightly in the first quarter, but not as much as they did in the fourth quarter. We have made some adjustments to our production level, but they haven’t been dramatic reductions, but we have made some reductions. So there could be an incremental build, but not as much as what we did in the fourth quarter.

Okay, and then you cited in past conference calls the importance of the handset market in China for revenues, and obviously, that’s been a tough place in 2004. Any sense as to whether we’re at the bottom of the component inventory correction, that things are getting better for you? And relatively what impact does the Lunar New Year have on your business?

So in terms of China as we mentioned last quarter and in the prepared remarks, the China business went down dramatically in Q3, and I think it’s fairly safe to say that it’s bottomed. And obviously, we’re hoping that it’s going to come back. We haven’t seen it start to come back, but it’s safe to say it hasn’t gone down further.

In terms of the Lunar New Year, it doesn’t really impact the quarter in total, but what it does is it depresses our revenue in February. Q1 is typically a U-shaped quarter in that January and March are a little stronger and February is weaker because of the Lunar New Year. So it doesn’t have an impact on the total quarter, but it impacts the revenue in each of the months.

All right, thanks very much guys.

Rob Adams, Adams Harkness.

Thanks guys, good afternoon. Could we talk a little bit about your fab diversification efforts? How much is EMD in terms of a percentage of your output now, and where do you think that’s going to be by the end of the year?

We don’t normally provide that information publicly. But the way we lowered the foundries is obviously based on their pricing. The lowest-priced foundry will usually get the higher share. But we tried to also keep all of the foundries loaded because we will need the capacity when the market turns up.

So in terms of EMD, we started production at EMD in the last quarter, in Q4, and so it is ramping up. We never will start a foundry at a very high production level, so we ramp slowly every month.

Okay, fair enough, so would you say that so far so good in terms of performance relative to expectations with that ramp?

Absolutely.

Okay, excellent. Could we also talk about your continuing outsource of test and package. Has that percentage changed quarter-over-quarter? And should we expect material change by the end of the year?

Well, I know for 2004 the percentage increased significantly from 2003. And our goal is to over the longer term transfer most of our production overseas. And in the shorter term, the rate of transfer is really more to do with maximizing our equipment usage so that we have minimum component costs.

Just to add to that, so our packaging has always been offshore. It’s the testing that we’re moving offshore. And in 2003, we had about 10 percent of our testing offshore. In 2004, we had 30 percent offshore. And as Balu mentioned, we’ll continue to increase that percentage.

Okay great, thanks. And maybe just one more, on the LinkSwitch if I could. You’ve talked I think historically about seeing a tier-one handset design with that product. Can you talk about the LinkSwitch ramp? Would you say that we’re accelerating momentum ’04 over ’05 in terms of product acceptance there?

Well, certainly from a design end point of view, LinkSwitch has been quite successful. We’ve had a number of high-volume design wins. But the softness in the market has delayed programs to some of the customers, and also the customers who we have been shipping in production quantities are buying much less than they originally anticipated. So to a large extent, the revenues from LinkSwitch will depend upon when the market turns back, when inventories or market demand issues get resolved and it turns back. That’s why we did not give the yearly guidance because it’s not clear to us when the softness will be over.

Okay, fair enough, thanks very much.

Steve Smigie, Raymond James.

Great, thank you. I was wondering if you could comment a little bit on the possibility of business with Nokia. I know that you had talked about European standard making it more difficult for the linear transformers, and I thought that might give you guys an opportunity to get in there. Is that something that you’re following up on?

Yes Steve, Nokia has actually signed up with the European union to meet the standard, which is effective January 1. However, the standard applies only to the new products so when they go to the new products they have agreed to meet the standards. But the existing products can continue. It is a voluntary standard for one thing. I think what is going to have a bigger impact on Nokia is the California standard because California is the seventh-largest economy in the world, and by the middle of 2006 all manufacturers selling into California have to meet the new standard, which for all practical purposes eliminates the linear transformers.

I mean, I just don’t know how linear transformers can meet the stringent efficiency requirements of the standard. So we are hoping that that will be a catalyst to get the Nokia switching over to integrated solutions.

Okay, great thanks. And could you talk a little bit about your design win activity. You mentioned that it was robust, but could you give us any sense of maybe on a dollar basis how design activity looks now versus a year ago, and how it might correlate to growth, or if we can draw those conclusions from that?

Yes, we don’t do that because of 2 or 3 different reasons. One is we design most of our products into a power supply manufacturer, so you can design the product and if they don’t win the design or if they don’t win the volume of design they are planning to win, that changes the amount of products that are shipped.

Secondly, the number of designs is not a good indicator either because not all designs are created equal. The tier-one designs can be very high-volume, and the tier-two and tier-three designs can be very small volume. So we think that any numbers we give you could be very misleading, and so that’s the reason why we don’t provide that.

Okay, well just one last question on designs then. Have you seen any advantage in terms of competing with discreet designs at this point over the last quarter?

Well, certainly any product that needs to meet energy efficiency, we have a significant advantage over discreets. If you are in China for the Chinese market, at the moment many of the products don’t have to meet energy efficiency, so you are competing only on price. But even that is changing. China, for example, many of the DVDs do meet energy efficiency. And also China is exporting a lot of products now so those products have to meet energy efficiency.

Okay, great, thank you very much.

Andrew Huang, American Technical Research.

Hi, can you hear me okay?

Yes, I can hear you Andrew.

So I just have 3 questions. First in your prepared remarks you mentioned the fact that you feel that inventory levels at your customers are kind of right-sized. My question is I think earlier in 2004 there were some concerns that some of your customers had too much inventory. So what kinds of, I guess what gives you the conviction now that those inventories are now right-sized?

So first of all Andrew, I’m not aware that our customers had inventory issues, and as I think Balu mentioned in his comments, typically our customers’ inventories are fairly lean. Now, we sell to distributors and power supply makers, so to the extent there were excess inventories it would have been farther down the channel in the OEMs or in the retail. But at our particular customers, I don’t think we had an issue with inventory.

I might mention at the end of December, our distributors were carrying 3-1/2 weeks of inventory, which is the lowest it’s been since about a year ago.

And that’s mainly because our lead times are so short on all of our products there is really no reason for our distributors or our customers to hold a lot of inventory. We have been a very good supplier in terms of just delivery. So they have gotten used to it, and they take full advantage of it.

Got it, okay. And my second question is related to the California Energy Commission. There are 2 parts. First, is that July ’06 date, does that apply to products manufactured by that date or products that are going to be sold by that date?

It applies to products manufactured after that date.

Okay, got it. And the second kind of part to that question is what exactly happens if let’s say Black and Decker sells Dust Buster, or I’m sorry manufactures a Dust Buster and sells that product that has a linear transformer that meets California on August 1. Do they get some kind of financial penalty, or do you know what happens?

That’s a good question. I don’t think I know the answer to that. This is a relatively new experience for us with the California standard. I know California has had very strict appliance standards outside of just energy efficiency of power supplies. They do have standards on energy efficiency of the appliance itself, but I am not sure how they enforce it. And I will take that question down and try to find out for you.

Okay thanks. And then my last question is I think in the past you’ve kind of talked about your Company’s revenue growth on an annual basis, and kind of put it in the framework or market growth versus market share gains. So if I look at 2004, your revenue was 10 percent for the full year. How much of that can be characterized for the end-market growth versus share gain?

It depends on the market. Certainly in cell phones, we not only didn’t grow, but we actually lost market share as you can imagine from the numbers we gave you. But in consumer and industrial, we definitely grew well above the end-market growth. In computers, I would think that we are in line with the market growth. So we did very well in consumer and industrial. We did reasonably well in computer. It’s the cell phone that really hurt us last year.

Okay, thank you.

Tore Svanberg, Piper Jaffray & Company.

Yes, good afternoon. A couple of questions. First of all John, do you have the ASP in the December quarter?

Forty-five cents.

Great thanks, and also Balu on the LinkSwitch if I recall correctly, when that product was introduced it was in price parity with the discreets, so I’m a little bit surprised that hasn’t really gotten more traction in the market place. Could you give us a little bit more color on what’s happening there, just talk about the dynamics? And then also in light of that, when you lost some share last year, was that related to [indiscernible] because they were using your Legacy products?

I missed the last question -- when we bought the share last year?

No, when you lost some share, especially in Q2 of ’03, was that, what type of product was that, and do you expect to regain that with LinkSwitch?

Okay, so let me answer the first question. In terms of LinkSwitch, even if you are in cost parity there is a lot of cost involved in redesigning the product and getting agency approval worldwide. And that’s the main inertia that prevents people from switching over quickly.

Secondly, these linear power supplies are made by Chinese and other Asian manufacturers, and they generally don’t have expertise to build electronic power supplies because linear transformers are just windings on an iron core. So they have a tremendous resistance to give up that business, so they tend to be very, very aggressive on price, even if it means that they don’t make much of a margin on that. But I think what will happen is once you can work a portion of that, then that capacity will go away forever because nobody will want to get back into the linear business.

But I am certainly disappointed that it’s not happening as fast as we would like it to happen. However, the trend is very, very clear. As I said, we have 4 large cell phone design wins. We have a number of other design wins including home appliances, such as floor vacuum cleaners and other major home appliances and so on. And I think with the C-Standard, this could be a significant catalyst. There is talk about other states adopting the California standard, and historically that has happened quite frequently, as you know for car emissions. California is always the first one to come up with a type of standard, and everyone else copies. So we are optimistic that that would accelerate a change. It is changing, there is no question about it. The question is how fast are we going to change the linear transformers over to electronic solutions.

Now, the second part in terms of -- give me the second one again.

Yes, the share loss in late 2003 was at Samsung, and that was a TinySwitch product that was replaced by a competitor product, which as we mentioned in the prepared remarks, we believe the competitor infringes on our patent. It’s at a power level that it wouldn’t be replaced by a LinkSwitch, but it could be replaced by one of our newer versions of a TinySwitch product.

So from that perspective and as far as you can tell, you have not lost any share to any discreet solutions?

Not at Samsung. We have not lost any -- that was only to one of the competitors that we talked about and that happened in Q2 of 2003. We always lose and gain to discreet solutions depending on the geography. I would say that the only geography where RCC has been a major competitor at this time is China, and that is mainly because some of the internal markets don’t require any energy efficiency requirements.

Great, fair enough, and looking at power-over-ethernet, could you just give us an update there what your prospects are for ’05, and what your competitor positioning is?

I think we are, from everything we can tell we are very much more competitive than any other solution that is out there for the power conversion in the power-over-ethernet application. We have a lot of design actually going on at various OEMs, and I am very optimistic that we will get designed in based on the cost savings and the number of components savings we provide. However, that market is a slowly-emerging market because the current infrastructure of Ethernet in most office buildings does not have power on it, so you have to actually change the hub [indiscernible] to provide power-over-ethernet, so it’s going to take some time for the transition to occur. And once that happens, there will be a lot of appliances that will be designed to work directly off of the network rather than having an additional power supply. So again, in the long term, it looks very, very promising.

The other thing that’s happening in that area is that they are working on a higher power standard, which will utilize the unused wires in the Ethernet cable to provide significantly higher power that will widen the applications that can use the network power instead of DC power. For example, right now the power of Ethernet is only about 11 or 12 watts. They are thinking about expanding that to about 25, maybe as much as 45 watts, and then you can see that when that happens, you can have a lot more products that can work off of the network.

Okay, thank you.

Vernon Essi, Janney Montgomery Scott.

Thank you, most of my questions have been answered here. Just one sort of quick question for you John. On the operating expense guidance, I wanted to just go over that again. For next year, you’re talking about a number growing about 10 percent?

Correct.

And half of that you said was going to be litigation-related.

Actually we said more than half was going to be litigation-related.

What would be, just out of curiosity, if that grows is there any piece of that puzzle that might actually come in a little bit higher than expected? Do you have any other R&D efforts underway that might be sort of one-time events, and devices you’re rolling out that might have a higher cost or anything like that?

No, the only item that I can think of at this point that could fluctuate differently than what we would expect is a litigation expense because it’s extremely hard to predict. The rest of our spending we’ve done a pretty good job of managing it and estimating it. So I think the litigation is the only area where really it could be higher or lower than what we might think today.

Okay, thank you.

Ray Rund, Shaker Investments.

Yes, thank you. I was wondering if you could just repeat what the breakdown by application of your revenue was, both for the quarter and for the year. I wasn’t able to follow it quickly enough.

So we didn’t break it down by application, but we broke it down by market.

That’s what I mean, by market.

Okay, for the year, and we didn’t provide the quarter, so we only provided the year, but for the year it was 33 percent consumer, 31 percent communications, 22 percent computer, 8 percent industrial, and 6 percent other.

And it is in our press release.

Okay, I’m sorry, I guess I was confused and thought that you had broken it down for the quarter as well.

No, we haven’t done that.

Okay, thank you very much. Did you give growth for the quarter in those areas?

No, we didn’t.

Okay, thank you.

Todd Cooper, Stephens, Inc.

Balu is there any appreciable difference in the gross margin you received from the LinkSwitch products versus the Company average?

Yes, like any new product until it goes into high volume, the gross margin starts out lower, and as it gets to high volume, we are able to fine tune the manufacturing process and get the gross margins to the same level as other products.

On the LinkSwitch, we have had some time, so we have been working very hard to get the margins up, and so hopefully, we won’t have any negative impact on margin because of LinkSwitch.

Even as it matures, even with the lower ASP, you think you can get it to the 48 percent plus type range?

That’s right.

Okay, and recent stock option grants that just hit the tape, it looks like they’re exercisable immediately. Is that correct?

No, do you know what he’s talking about? No, they’re not. They vest over 4 years.

Okay.

They are no different than our previous stock options.

Okay, and then have you given any more thought about what you plan to do with your stock options, any potential to expedite the vesting of those before you have to report them in GAAP?

We haven’t had any thorough discussions on that, but at this point in time I would expect that we won’t do anything different than what we always do, which the answer would be no, probably not, most likely not.

Do you have any idea of what percent of the current outstanding options that haven’t vested are out of the money?

That haven’t vested are out of the money -- I do not know exactly, but I would say it’s somewhere between 10 and 20 percent that are out of the money.

Okay, and Balu I guess if I could change the subject a little bit, I’m interested in the power-over-ethernet. What differentiates your technology from others, and what product family do you use to address that market?

The main difference is the number of components because we integrate a lot more than other people do. And the second one is cost, we are significantly lower cost at a power supply level compared to any other solution for this application. The products that apply to power-over-ethernet are the ones that were introduced in January, the first quarter of 2004. We introduced a bunch of products in the DPA family, just an extension of the DPA family for this power level.

Okay, good, thank you very much.

Sumit Dhanda, Banc of America Securities.

Hi, this is Jason Jones for Sumit. How’s it going? Let’s see, I had a couple of real quick questions. As far as your production levels go, I mean you’re saying you’re going to keep them at a constant level. What level of revenue is that aligned with?

Well, actually what I said is we didn’t make major adjustments, so we took down our production slightly in the fourth quarter, and we’ll take it down again in the first quarter. But we’ll still expect to have some inventory builds. I would guess at a level of about $36 million in revenue, somewhere in that area we would be neutral in terms of inventory levels.

Okay, great, and then the other question was for your ASP decline this quarter. Can you break that down by mix versus decline in individual product prices?

No, not at this time.

Okay, well thanks a lot.

Matt Robison, Ferris, Baker and Watts.

Most of my questions have been asked, but can you comment on the timeframe if you know one for Markman [ph] hearings on these cases? And also CapEx DNA and remind us what the ASP was in the September quarter?

Let me talk about the lawsuit, and then John can answer the other questions. We don’t normally give you details about what’s going on. All I can say is that things are progressing in a typical manner if you will. These things go through the normal process through the courts, so both of them are going to the courts in a typical manner.

And then the ASP in the September quarter was $0.47. And you wanted CapEx, but for which period?

December quarter.

For December it was $1.8 million.

And DNA?

One point seven.

Can you comment if you’ve scheduled the Markman hearing yet?

No, I can’t comment on that.

Okay, thank you.

Shawn Slayton, SG Cowen & Company.

Hi guys, you touched on this briefly John, but taxes. We’ve had a couple of surprises this earnings season with a couple of companies giving tax rate guidance for the year that they’re dramatically lower than their prior tax rates due to these various restructurings. Can you help us out to understand the implications for you guys on a go-forward basis, taxes what you’re doing in those efforts?

Right, as I think we’ve discussed before, we established an international corporate structure back in late 2003, which follows our operations but will also provide some tax benefits. In fact, as a result of that structure, our tax rate in 2004 was 8 percentage points lower than it otherwise would have been. If we didn’t have that structure, our tax rate would be 36 percent, and instead we’re at 28 percent. So it obviously provides significant benefits.

One of the downsides of that structure is because we now have to look at the profits more closely in terms of where the geography is, it creates some difficulty in terms of forecasting or predicting the tax rate, which is why in the fourth quarter we took our rate up because we ended up having more profits in the U.S. than what we had originally expected. Obviously, without the legal structure that’s not a concern. So the upside is we get a lower tax rate. The downside is it makes the tax rate a little more difficult to predict.

As we continue to move our tests offshore and increase our international business, our tax rate will come down, which is why it was 28 percent this year, and we expect it to be 26 percent next year, and then frankly I would expect it to go lower into 2006 and beyond.

That answered my question, thanks much.

Gentlemen, we have no further questions at this time. Do you have any closing comments for our audience?

Only to say thanks and that concludes our call for this afternoon. And a replay will be available shortly on the Investor info section of our website, www.powerint.com. A telephonic replay is available for one week by dialing 877/660-6853 from within the U.S. or 201/612-7415 from abroad. The replay account number that you need is 1628, and the conference ID number is 1299908.

Thanks for listening, and good afternoon.

Thank you gentlemen. This concludes today’s teleconference. Thank you for your time and participation. You may disconnect your lines at this time.