Power Integrations Inc (POWI) 2006 Q3 法說會逐字稿

Good afternoon. My name is Paige, and I will be your conference operator today. At this time I would like to welcome everyone to the Power Integrations third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]. Thank you. Mr. Shiffler, you may begin your conference.

Thank you and good afternoon. I'm Joe Shiffler, director of IR and Corporate Communications for Power Integrations. With me on the call today are Balu Balakrishnan, President and CEO of Power Integrations, and Rafael Torres, our Chief Financial Officer.

We'll each have some prepared remarks after which we'll take your questions . A short time ago we issued a press release outlining selected financial results for the third quarter as well as our outlook for the fourth quarter. This press release is available on our website, www.powerint.com, and has also been e-mailed to those of you on our distribution list.

Before I turn the call over to Balu, I'd like to bring the following to your attention. The date of this call is November 2, 2006. This call is the property of Power Integrations, Inc., and any recording, reproduction, or transmission of this conference call without the express prior written consent of Power Integrations is strictly prohibited. Further, our discussion today including the Q&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. Such risks and uncertainties are discussed in today's press release which is available on our website and 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. We have had quite a bit of good news since our last conference call including positive outcomes in our patent litigation against Fairchild and System General, good progress on our financial restatement, and most recently a resumption of trading on NASDAQ Global Market. Most importantly, our business continues to perform extremely well. The design win momentum that we saw in the first half of the year is now translating into strong revenue growth and we expect a good fourth quarter and an even better 2007.

Many of the revenue drivers that we have talked about throughout this year are just starting to have an impact and should have a greater impact next year and beyond. Before we discuss our third quarter results, I want to touch briefly on our listing status and our pending restatement. As we announced last week, our appeal of the de-listing from NASDAQ was successful and NASDAQ has given us additional time to complete our restatement and file our outstanding SEC reports. Our shares resumed trading on the NASDAQ Global Market at the start of this week and we now have until December 18th to complete the restatement and file our outstanding SEC reports.

While this process is not entirely within our control, we have made good progress and we are doing everything in our power to complete the restatement and become current in our SEC filings prior to December 18th. Rafael will provide a more detailed update on the restatement in his remarks.

We are looking forward to getting the restatement behind us and fully disclosing our financial results for the first 3 quarters of 2006. Our top priority while working on the restatement has been to continue growing the business and delivering strong financial results. We have succeeded in this effort thanks to the dedication and focus of our employees around the world and we are confident that results will speak for themselves when we can disclose them in full.

Our third quarter revenue provides a strong indicator of how well our business is performing. Revenue exceeded the high end of our expectations coming in at a record $44.4 million, up 22% year over year. Sequentially the revenue was up 7% from the $41.5 million reported in the second quarter. However, as you may recall, our second quarter revenue included a $2.7 million benefit from the ship and debit settlements with two distributors. Without this benefit, our revenue in the second quarter would have been 38.7 million. On this basis, our third quarter revenue was up 15% sequentially.

While we are not able to discuss margins and other financial metrics in detail today, we are very pleased with the state of our underlying financial model, particularly of our gross margin which remains well above 50%. While we continue to have significant spending on patent litigation and the restatement, we expect these expenses to decrease dramatically after the fourth quarter, so we are well positioned to deliver strong operating margins in 2007.

Returning to the revenue story, our growth in the fourth quarter was broad based with all four primary end markets contributing. The computer market led the way with revenues up more than 40% sequentially thanks to strengthened PC standby, PDA chargers, and also LCD monitors which were up more than 60% compared to the second quarter. We believe that much of the growth in LCD monitors was directly attributable to our successful IP case against System General as OEMs are choosing to source power supplies from manufacturers using our chips rather than SG's infringing parts.

The industrial market continues to be a significant source of growth for us which is emblematic of our focus on reaching smaller customers and diversifying into broader range of applications. Industrial revenue grew in the mid-teens sequentially driven by control and metering applications, external power supplies, and also lighting. Our revenues from lighting market have grown more than 70% year to date compared to the same period last year. This market includes emergency lighting systems, various other industrial lighting systems, and increasingly LED lighting.

Off light LED drivers are an excellent emerging application for our technology and we are getting good traction with manufacturers of LED fixtures for commercial signage and other applications. We are also well positioned to benefit as LEDs begin to penetrate the general lighting market in the years ahead. This is being driven by the improving cross profile of LEDs and also by efficiency regulations such as California Title XXIV which mandates efficient lighting in all new commercial construction. These standards can only be met with compact fluorescent bulbs or LEDs, so they present an opportunity for the LEDs to get a share of the general lighting market.

Moving on, our consumer revenue was also strong in the third quarter growing in the low teens driven by a range of applications including major appliances, set top boxes, DVD players, and flat panel TVs. Consumer audio also contributed nicely thanks to the ramp up of programs for Bose and XM Satellite Radio, two designs that we won in the first half of the year. Year to date, our revenues from the consumer audio category are up more than 50% compared to last year.

Communications revenue increased in the low single digits as strength in cell phones and cordless phones was partially offset by lower shipments for other communications applications. Our third quarter revenue performance is a direct result of the strong design activity that you have seen over the past several quarters. As we noted on our last conference call, we had an excellent first half in terms of design wins including a record level of design wins in the second quarter. Those design wins are now turning into revenue and should continue to ramp over the next couple of quarters. The displacement of linear power supplies has been a driver of design wins throughout this year and an increasingly important source of revenue growth. Linears are being replaced for two reasons. One being the increase in the cost of copper and iron which make up the bulk of the materials in a linear power supply. And the other being the onset of California Energy Standards on external power supplies which go into effect next year.

Revenue from our LinkSwitch products, which are designed specifically to replace linears, increased more than 20% sequentially in the third quarter and went up 100% year over year. And based on the level of design activity related specifically to linear displacement and to external power supplies in general, it is clear that raw material costs and the California standards are having a significant impact on the market.

The cordless phone market is an excellent example of this trend. This market was virtually impenetrable until recently due to the industry's strong reliance on linear power supplies. The CEC Standards and the rising cost of linears has opened the door and we estimate that our share of the cordless market will be about 5% this year up from virtually zero in 2005. We won several new cordless phone designs in the third quarter and we expect more as the July, 2007 California deadline approaches.

Overall, design activity with LinkSwitch continues to be very encouraging in relation to the cordless phone designs for V-Tech and Uniden. LinkSwitch won a high volume cell phone design for Alcatel TCL, two appliance designs for Electrolux, a charger for an electric shaver, and a number of other designs ranging from small appliances to air conditioners to utility meters.

Also, as we announced earlier this week, our LinkSwitch LP part has been chosen by Phihong, one of the world's top power supply manufacturers, for a new line of external power supplies meant to replace linears for a variety of different applications. Phihong is going after the linear displacement opportunity very aggressively so we are very pleased that they are making our technology a key part of that effort.

While the pace of linear displacement appears to be accelerating, primarily to the benefit of our LinkSwitch products, we also continued to see excellent design activity across all of our major product lines. TinySwitchIII has nearly overtaken TinySwitchII in terms of quarterly design wins after just over half a year in the market. This is a faster ramp than we typically see with new products and it reflects attractive [inaudible], expanded power range and high level of cost effectiveness that TinySwitchIII offers. TinySwitchIII designs in the third quarter included a PC standby design for Lenovo, a portable DVR, a high volume design for Microsoft's new zoom MP3 player, as well as other designs for applications, appliances, set top boxes, flat panel TVs and cordless phones.

TinySwitchII is still going strong as well, winning a high volume design for a Blackberry charger, several PC standby designs, an Oreck air filter system, efficient cycle washing machine, and a wide range of other consumer and industrial designs. TOPSwitch-GX, our high powered product line, also had a strong quarter in terms of design wins including standby power for an Apple workstation, a Sony LCD projector, an LCD monitor for Lenovo, an Epson printer and several industrial applications including emergency lighting, security systems, and industrial controls.

DPA Switch, our DC to DC product line, continues to make excellent headway in the emerging power over Ethernet market. We estimate that our market share in IP phone, the number one application for the power over Ethernet, is now north of 15%. We are currently in Cisco's highest volume IP phone model and won two additional IP phone designs in the third quarter at [Sigem] and [Imentech].

Overall, we had another excellent quarter in terms of design wins thanks in large part to the expansion of our global sales force and our first increase of penetration of smaller customers. As we have noted on the prior conference call, we have more than doubled our sales and presence since the beginning of 2004 and we are now seeing a significant payback on that investment.

While we have made excellent progress this year, I am confident that we have a lot more growth ahead of us. Next year we expect to see a much bigger impact from the new efficiency standards on external power supplies in California and other states. We also see an improving competitive environment thanks to a successful patent infringement litigation against two competitors.

As I mentioned earlier, our successful ITC case against SG is already having an impact and now that the ITC process is complete, our District Court case against SG can proceed. In that case, we intend to seek action against initial infringement parts that are not subject to the ITC exclusion order and we are seeking financial damages as well. Also last month a jury found that Fairchild Semiconductor has willfully infringed all 4 of the patents that we had set at the trial and awarded us damages of approximately $34 million. A second trial is scheduled to begin December 4th, addressing the validity of infringed patents. We are confident in the ability of our patents and we are looking forward to a favorable outcome in this second trial. Afterwards, we intend to ask the judge to issue an injunction against the infringing parts and also to increase the damage award based on the jury's finding of willful infringement.

Obviously while there is still work to be done, we are extremely pleased by the outcome we have achieved thus far in these two patent cases. Patent losses are expensive, time consuming undertaking and the outcomes are never certain. However, our intellectual property is the very foundation of our company and we intend to protect it vigorously whenever appropriate.

Before I turn the call over to Rafael, I'd like to comment on our outlook for the fourth quarter. We started the fourth quarter with a slightly lower backlog than we have entering the third quarter as we believe there has been some supply chain related softness consistent with the commentary of other analog companies. However, we believe the design win momentum which we have seen throughout this year is helping to offset this weakness which is reflected in strong bookings for the month of October. As a result, we are expecting fourth quarter revenue to be approximately flat compared to the third quarter plus or minus 2 percentage points which is consistent with our historical seasonality.

Flat sequentially revenue in the fourth quarter would give us a full year revenue growth of approximately 15% for 2006. At this point, I'd like to turn the call over to Rafael for a few further comments about the progress of our restatement as well as a bit of additional color on the third quarter. Rafael?

Thank you, Balu, and good afternoon. Since joining Power Integrations in July, my primary focus as CFO has been on the restatement of our historical financials which, as you know, is the result of the internal investigation we conducted earlier this year into our practices for granting and accounting for stock options. Like many other companies, the investigation determined that for certain stock option grants, the measurement dates that were originally used for accounting purposes, could not be relied upon. And the result, we need to restate prior year's financials in order to record non-cash compensation expenses.

The restatement has been an extremely complex process and frankly has taken longer than we expected. This is partly a function of the fact that we were one of the first companies to undertake this process and that we were initially operating without the benefit of any guidance on choosing measurement dates for some of the stock option grants in question. It is also a function of the fact that because we changed audit firms in 2005, we have been working with 2 independent audit firms throughout this process which adds another layer of review and complexity. However, in the 3 months since our last conference call, we have continued to move forward and we have submitted our proposed accounting treatment to the SEC for pre-clearance.

We believe that the accounting treatment we submitted is consistent with the formal guidance issued by the SEC last month and while we cannot predict the timing or the content of the SEC response, we hope that the process will move forward quickly from this point on. Once we have finalized our accounting treatment with the SEC, we will be in a position to file our outstanding 2005 10K and 2006 10Qs reasonably quickly. As Balu noted, we are doing everything possible to conclude this process prior to NASDAQ's December 18th deadline.

At this point we are able to provide a range around the stock based compensation charges that we expect to recognize in our restated financials. As noted in our press release, we expect charges totaling between 40 and 45 million on a pretax basis or between $25 and $30 million after tax. These charges are non-cash and will fall primarily into the years 1998 through 2005 with no material impact expected in 2006 and beyond. With that said, I'd like to do a brief recap of the quarter from a financial perspective.

All the numbers reported on today's conference call should be considered preliminary as the company has yet to complete its customary close and review procedures. Total preliminary third quarter revenue was $44.4 million, up 7% sequentially. As Balu noted, sequential revenue growth was significantly higher absent the ship and debit settlement benefit of $2.7 million that we recognized in the second quarter. Excluding that benefit, our second quarter revenues would have been $38.7 million and on that basis, our third quarter revenue grew by 15%.

Revenue mix for the quarter by end market was 31% consumer, 25% communications, 22% computer, 15% industrial, and 7% other. Turns orders comprised 65% of revenue, down from 69% in the second quarter. Our turns requirement for the fourth quarter is in the mid 60s. Distribution accounted for 62% of revenue in the quarter, all recognized on a sell through basis as usual. One distributor, Adnet, accounted for about 25% of revenue, and that was our only 10% customer for the quarter.

As Balu noted, while we can't give specific numbers on margins, our overall financial model is in excellent shape with our gross margins remaining well above 50%. We do anticipate a somewhat more competitive pricing environment relative to Discreet's over the next several quarters and we are experiencing some modest cost pressure from raw material prices. However, we expect to roughly offset these impacts through continued cost reductions such as the off shoring of our test operations which are now 60% outsourced and through a continued focus on growing our space at smaller, less price sensitive customers. As a result, we expect our gross margin to remain well above 50% for the foreseeable future presuming no major changes in the dollar to yen exchange rate which of course would impact our wafer cost. Looking at operating expenses, we're still limited on what we can disclose at this point due to the pending restatement. But we can say that spending on patent litigation totaled $1.8 in the third quarter while spending on our restatement activities was 3.6 million for the quarter. Other income for the quarter was $1.6 million driven primarily by interest income. Our average diluted share count for the quarter was 29.2 million.

Looking at our balance sheet, our cash balance grew to $128.4 million, up nearly $4 million from the prior quarter despite the considerable spending on litigation and the restatement. Inventories grew at a rate consistent with our revenue growth and remained within our historical range of 3 to 4 turns. DSOs were also consistent with our recent range and in fact were at the lower end of the range at about 28 days.

For the fourth quarter, we are expecting revenues to be approximately flat compared to the third quarter plus or minus 2 percentage points. We expect to spend approximately $2 million for patent litigation in the fourth quarter, driven by the two trials in the Fairchild case. We expect spending on the restatement to be significant but most likely less than the third quarter level. And now I'll turn it back to Joe.

Thanks, Rafael. Before we take questions, I would just like to mention that we will be attending a couple of conferences later this month. The AEA Classic next week in Monterey, and then the UBS Communications and Technology Conference on November 15th in New York. And now, Operator, would you please give the instructions for the Q&A session?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Tore Svanberg with Piper Jaffray

Yes, good afternoon and congratulations on the results. A couple of questions. First of all, Balu, you mentioned the replacement of linear chargers is accelerating and you talked about the pricing of iron and copper. Could you elaborate a little bit on that and maybe put some numbers or framework around it?

Yes, I can. The linear transformer costs have gone up approximately 30% over the last year driven by copper and iron costs. And I think at this point, purely on a cost basis, the [inaudible] supplies are fairly attractive for all new designs. But of course the California Energy Commission's regulations will also force the older designs to convert to switching power supplies. And we believe the LinkSwitch is the best solution, most cost effective solution for converting those linears.

Great, and it looks like your gross margin is really starting to track better than historical. Is that result of cost or mix? Help us understand a little bit where that's coming from.

It's really several factors. One is we've done a very good job of reducing manufacturing costs in several areas. One is offshore testing. The other one is we have transitioned to a new silicon process technology which has finer geometries that have reduced the die size of most of our products and that has flowed through our inventory this year so that has helped us reduce the cost of the die. On top of that, we are also going after smaller customers, the Tier II and Tier III customers who tend to have a significantly higher margin. And so as a percentage, that is growing, and that's also helping us.

And the last one is the pricing stability. Over the last 6 months, the discreet prices initially have gone up and they've been relatively stable in the last quarter and that has also helped us grow our gross margin nicely. Going forward, however, we think the discreet prices will start going down in prices following the usual price erosion we have seen in the past. However, we think we can offset that through further manufacturing cost reduction and we expect to be well above 50% for the foreseeable future.

Great, thanks. And finally, you mentioned the legal expenses should drop off considerably after Q4. At the same time, it looks like you're going to continue some action against System General. So how should I look at those legal expenses? Are these trial type amounts or should we model it considerably lower than that?

Well the System General case to a large extent is already prepared for through the ITC case. So the main costs of that case will be the trial in the District Court which I don't think will happen in 2007. In fact, the earliest it will happen is in 2008. But there will also be some residual costs on the Fairchild case if there are appeals and so on. So for the next year, I would say the legal costs will be, to the best of my guess at this point, which is really hard to say, my best guess would be $2 million or less for the whole year of 2007.

Very helpful, thank you very much.

Your next question comes from the line of Vernon Essi with M.S. Howells.

Thank you very much. Just to follow up on the litigation question, did those expenses come in a lot stronger than you though or a lot higher than you thought for the quarter?

Yes, they did. We initially modeled about $1 million and they came in at $1.8.

Yeah, the legal expenses are always very difficult to project because it depends on how the case unfolds. So it is extremely difficult to project. So we did exceed that for the third quarter, yes.

Can you just sort of go through how the channel looks from here in terms of customer pull rate? Sort of how that's been progressing? It seems that you've done a very good job of stocking the channel in anticipation of the CEC mandate. Can you talk about how that's sort of evolving as we go into the turn of the year?

Well, in terms of our distributors, they usually don't maintain any more than 4 to 4.5 weeks of inventory. And the reason for that is we have very short lead times and there is no incentive for them to have lots of inventory. And we certainly don't have an incentive to have inventory at the distributors. We'd much rather have all the inventory in one place so that we can service our customers better across the world. And also because we recognize revenue on sell through, it really doesn't matter to us where the inventory is, and it's actually better for us to have all the inventory here.

As far as the inventory itself, it has grown consistent with our revenue in anticipation of the growth from CEC and other drivers we talked about and I think it's well within the 3 to 4 turns range that we like to see.

Overall, Vernon, the visibility that we have is only at the distributor level, but the two key things that we can point to is that inventories are actually leaner this quarter than they were last quarter relative to our revenues at our distributors. And then also our bookings trend has been pretty healthy at the beginning of this quarter so it gives us some confidence that there's no excess inventory issue. At least at this point.

Yeah, just to clarify, we have only visibility to our distributor inventory and to some of our large customer inventories. We believe those are in control. What we don't know is the inventory at the OEM level. That is, we sell to the power supply manufacturers and they sell to OEMs like Motorola and HP and so on. And we don't have much visibility into how much inventory they have.

Okay, and then just one final question on the computing segment. Obviously the LCD monitor came in very nicely, nice sharp move upward. How should we see that going forward? Is it sort of at the typical run rate you'd expect given certain season that you're in right now? Or is this kind of a situation where some of that came in towards the end of the quarter and we can expect that to continue growing as a proportion of sales?

We expect the LCD monitor revenue to continue to grow as a result of our ITC action against SG. So there are two things happening. One is, the OEMs are choosing to buy power supply for LCD monitors from vendors who use our solution rather than SG's solution for obvious reason. And that's the easiest way for them to switch over. But we are also seeing a lot of design activity where we are working with customers to replace SG designs.

Okay, so we should expect obviously just, on terms of market share in general, this is going to continue to climb? I mean, this is not just a one time - - I know it will continue to go up, but what I'm curious is just are we flat going here from this level onward or should we continue to see increased penetration rates in LCD?

You should see increased penetration rates in LCD monitors.

Okay. All right, thank you.

Your next question comes from the line of Steve Smigie with Raymond James.

Great, thank you. Could you give some indication on the operating expenses just generally if say R&D on a dollar spend under old accounting system is still roughly in line with where it has been?

Yeah, so the best - - we haven't reported operating expenses, but the best indication that I can give you is that they are slightly higher than they were last year and I couldn't tell you how much higher. But I think the benefit, or the way to look at this, is what do operating expenses look like after you take out the restatement and the significant patent litigation. And what I can tell you there is that there's a lot of leverage, even higher leverage than we saw in our model in 2004 and 2005. So going into next year, we're in a very good situation to keep improving our operating margin by quite a bit.

Okay.

I know that's vague, but at least directionally speaking, we are improving and will continue to improve our operating margin once you carve out these expenses.

Once you carve out expenses, right. And could you say are SG&A and R&D respectively relatively consistent with the previous patterns excluding all the other stuff, just in terms of its percentage say of your operating mix, operating expense mix?

In terms of a mix between R&D and SG&A, yeah, the mix is roughly the same. Roughly.

Great. Thanks.

Your next question comes from the line of Craig Ellis with Citigroup.

Thanks guys, and good job on the revenues. On Adnet, 25% customer this quarter, where were they last quarter?

Roughly the same level.

Same level, okay. And then Balu, you mentioned that you've got 5% of the cordless phone market now. Where do you think you could be at the end of '07?

That's a good question. Obviously we want to go aggressively to convert as many of those customers as possible, but very hard for me to predict at this point. It will depend upon how successful we are in getting a large share of that cordless market which is our goal.

Can you just talk about what the gating factors to your growth would be as the number of dedicated sales people that you have or is it cracking a particular account that you're not in yet? Just give us a little bit more color on that?

Well historically it's been two things. One is that the power supplies get redesigned only so often so you've got only so many chances every year or you have only certain percentage of the power supplies available for redesign. And that's being of course now accelerating because of the energy efficiency regulations which are forcing manufacturing to redesign power supplies which otherwise they wouldn't. The second factor is just number of people in our sales force because our designs are relatively application intensive and to the extent that we have more people, we can go after more designs. And that has been a limiting factor and that's the reason why we added so many people in our sales force and will probably continue to add, not at the same rate, but at maybe a slightly lower rate because we believe that is where one of our bottlenecks is.

Okay. And then let's see, lastly, as we think about the outlook, can you just provide some commentary around the relative strength of your different end markets against an outlook that is center point flat?

I'm sorry, I missed the last part of the question.

Just looking at your end markets, Balu, and the outlook, which would be relatively stronger versus weaker?

I would say we have so many customers now, most of our growth is broad based. I don't have a lot of visibility into the end markets anymore than you do. So we focus on getting more market share and the end market does what it does. So there's not a whole lot of control we have on the end market.

Okay, thanks for all that.

Your next question comes from the line of Sumit Dhanda with Banc of America Securities. Mr. Dhanda, your line is open.

Well, why don't we move onto the next and maybe he'll come back in.

Your next question comes from the line of Gus Richard with First Albany Capital.

Nice quarter, guys. Just a couple quick housekeeping questions. Share count for the quarter was 29.2, did I get that right?

That's right.

And other interest income was 1.6?

Correct.

Cool. And then roughly the LCD monitor market, what percentage of your PC business is that at this point?

I'd put it at about the teens as a percentage of our computer segment.

Okay. Mid teens, is that a good guess?

Yeah, mid to high teens.

Okay, and then if you think about System General's revenues, do you guys have a though as to how much of that market share you can get? Or how much of that business you can pick up? Do you think you can get all of it, half of it, a third of it? What sort of, do you have a handicap there?

Well, I can tell you we won't get all of it because any time a design opens up, people look at displaced designs along with Power Integration's chips. Our goal is to get as much of it as possible. It's really hard to predict at this point. We are certainly doing everything we can to work with customers who are using SG designs, but interestingly enough, what we are finding is our initial growth is coming from customers who already designed and they're getting a much larger share at the OEMs, instead of the SG design. So that's the fastest way the OEMs can respond. There is a design, doing new designs take a longer time. So our goal is to get as much of it as possible, but it would be very difficult for me to predict how much we will get.

Okay, and then based on the initial success trial with Fairchild, are you seeing any of Fairchild's customers migrate over to your solutions? Has there been any movement in market share there?

There is certainly a lot of interest from customers who are currently using Fairchild. So we are seeing a lot of activity from them. But designs always take some time.

Okay, and then if you look at sort of large chunks of incremental revenue opportunity next year let's say low end cell phones, cordless phones, LCD monitors. Could you rank those or any other opportunities you have next year which ones you think will be the largest piece of incremental revenue?

You know, to be honest, I really have not looked at it, so I don't think I can do that on the fly.

Okay, fair enough. I think that's it for me. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Ross Seymore with Deutsche Bank.

Yeah, hi, this is Sukhi for Ross. Congratulations on the good quarter, guys. A couple of questions here. Could you give us a book to bill ratio for the quarter? I thought you said bookings were strong, but I don't recall you giving us book to bill ratio.

You know, we don't really follow book to bill ratio. I know a lot of other semiconductor companies do. We have such short lead times, it's not very useful metric for us. What I would say is that our bookings in July was very strong, it moderated a little bit in August and September, but in October it again became very strong. So even though we have a slightly lower backlog for Q4, the strong bookings in October give us confidence that we will be approximately flat.

Right, that's exactly what I was trying to get at. Also, you had mentioned that you're seeing improved competitive environments and so I was wondering if you could give some kind of idea of what you expect to see in 2007?

Yeah, what I was referring to is the benefit of the conclusion of the SG ITC case. And also the Fairchild will conclude by the end of this year. And we are very optimistic that the second part of the trial also will be in our favor. And those two will put us in a very comfortable position because Fairchild is our single most aggressive competitor with the infringing chips. So that's what I meant by saying favorable competitive environment.

Okay, great. And then one last question. On the DPA Switch side, you said you had some design wins into Cisco's IP phone and also at Sagem. How are you looking at that opportunity in 2007? And who would you consider to be your main competitors there?

Well, Cisco is obviously the largest customer, so we are hopeful and we are optimistic I should say that we will get additional designs at Cisco and of course we are also working with all of our IP, large IP phone manufacturers. And we have several of them we have already won and we will continue that. So we expect for us to grow share in the POE market and then hopefully the POE market will also grow very nicely next year since it is projected to grow nicely next year.

Great, thank you.

I'm sorry, the competitors, I didn't answer the second part of the question. In terms of competitors, we are usually replacing either Linear Technology or MAX_Mem in these cases.

Great. Thanks, guys.

Your next question comes from the line of Sumit Dhanda with Banc of America Securities.

Hi guys, sorry I dropped off accidentally there. I guess my first question, Balu, you know, you commented about the fact that the competitive environment will get more benign with rulings in your favor here. Wouldn't that help you on the pricing front? Because you did make a comment earlier in the call that you do expect more pricing pressure.

Yes and no. It certainly helps when you are competing against Fairchild or SG. But you have to remember there is always Discreet Solution which is the largest competitor for us. If you remember that competition slide, the biggest competition is Discreet, and so we have to make sure that we're always competitive with Discreet. And so far this year, Discreet has behaved very well in terms of pricing. But we are getting indications that Discreet's, their pricing may start going down in the fourth quarter and may continue to go down in the future. Not aggressively but the typical erosion grade, which obviously we are used to, it's not new to us, it has been that way for many years until very recently it's firmed up and has been stable. So that's the reason I think that it is unlikely we will grow the margin from here, but we feel reasonably confident that with cost reductions that can offset the Discreet price erosion.

So on that question, you said your gross margins are well above 50. I can interpret that as 52 or 58, so can you help us get in the right ballpark here because that obviously drives significant leverage in our model.

Yeah, unfortunately we just can't until we report GAAP and non-GAP margins so that's as much color as we can provide at this point. By the way, we didn't say well above 55.

All right, that's fair enough. A couple more question. If all goes well in this Fairchild trial and you get another cash infusion onto an already cash rich balance sheet here, any plans to aggressively take on share count? And if not, why not?

Well we certainly look at it. Unfortunately we can't do anything right now until we are in compliance with the SEC. We can't do anything. So the board looks at how to use the cash in the best possible way for the investors. Almost every board meeting we discuss that. Obviously there are 3 alternatives. One is a share buyback, the other one is dividends, the third one is acquisitions. So we look at all of those things and make decisions accordingly.

All right, thank you very much.

We don't have a lot of use for the cash because our capital expenditures are relatively small.

Right. Okay, thank you.

Your next question comes from the line of Andrew Huang with American Technology Research.

Hi, guys. Congratulations on the good quarter and the good guidance especially in relation to most of the other analog companies out there. First question is, in your prepared remarks you talked about your computer business being up especially strong sequentially. And you mentioned the LCD monitor business in particular. Now, I was just wondering if you could walk us through like what gives you the conviction that it's the System General verdict that kind of helped you monitor business along this quarter?

Well, we had designs on LCD monitors with several customers already, and what we found is that their shipments went up dramatically and when we asked them what happened, they said that they are getting a large, the bigger share of the OEMs market because of the SG problem. That they are buying it from them rather than from vendors who have SG designs.

So the PC makers are buying monitors from your customers as opposed to the System General customers. Is that right?

Usually it is tine LCD monitor maker, not the PC maker.

Right, I'm sorry, that's what I meant. Right. Okay. Great. And you feel that you're going to have a little bit more of this continuing into the fourth quarter?

We think so, and also we are working with customers who currently, I mean who have used SG designs before to convert them over to our design. And so that will also kick in at some point.

Great. Okay. And then can you comment on the ASP for the quarter?

It was $0.41.

And do you have an idea just to kind of help us out longer term what kind of operating margin target we should be looking for? Like let's say exiting '07, if you exclude stock compensation expense and if you exclude the stock option investigations and litigation?

Yeah, I can give you some idea. I think it will be well above 20% and probably closer to the mid 20s once you carve out everything and continue on the type of trajectory that we're going on.

Great. Then a last question, I was just kind of curious if you're seeing kind of any increased design activity with Samsung as your customer in light of the jury verdict with Fairchild?

Well we are certainly working very closely with Samsung and their subcontractor who is using the Fairchild chip. Our intent is to get that share back because we have lost a significant share there through one of their subcontractors who is the largest subcontractor it so happens. So we are working very closely with them as a backup solution and I really can't comment much more on that at this point.

Great, thank you.

At this time there are no further questions. I'll turn it back over to Mr. Shiffler for any closing remarks.

Okay, thanks. That concludes the call for this afternoon. A replay will be available on the investor info section of our website which is www.power.int.com, or there's a telephone replay available for one week by dialing 800-642-1687. That's from within the U.S. Or 706-645-9291 from abroad. And the pass code is 8548123. Thanks for listening and good afternoon.

Thank you, this does conclude Power Integrations' third quarter financial results conference call. You may now disconnect.