Power Integrations Inc (POWI) 2007 Q1 法說會逐字稿

Good day and welcome to the Power Integrations' Q1 2007 earnings release conference call. Today's call is being recorded. I would now like to turn the call over to Mr. Joe Shiffler. Please go ahead, sir.

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. Balu and Rafael will each have some prepared remarks, after which we'll take your questions.

Earlier this afternoon, we issued a press release outlining selected preliminary financial results for the first quarter of 2007. This press release is available on the investor page of our website, which is investors.powerint.com, and the release has also been e-mailed to those of you on our distribution list.

At this point I'd like to note that all financial data presented and discussed for the first quarter of 2007 should be considered preliminary and subject to change since we have yet to complete our customary close and review procedures.

Also, our discussion today, including the Q&A session, will include forward-looking statements reflecting management's current forecasts 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 forward 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, as well as our most recent report on Form 10-K, filed with the SEC.

Lastly, please note that this conference call is the property of Power Integrations and any recording or rebroadcasting of this conference call is expressly prohibited without the written consent of Power Integrations.

With that, I'll turn the call over to Rafael.

Thanks, Joe, and good afternoon. Since our last conference call in mid-February, we have made considerable progress in our efforts to catch up on our SEC filings and regain our NASDAQ listing. In early March we completed the restatement of our historical financial statements from 1998 to 2005 and we filed our 2005 10-K.

With the restatement behind us, we turned our attention to completing the financial close for 2006. The close is now finished and we are in the final stages of the financial and SOX 404 internal controls audit. We should be in a position to release our audited 2006 financial results, as well as our final results for the first quarter of 2007 in 2 to 3 weeks. We expect to be current with our SEC filings by the end of June and we anticipate regaining our NASDAQ listing shortly thereafter.

While the restatement and subsequent efforts to regain our listing have been a lengthy process, we have not allowed ourselves to be distracted from executing our strategy and growing the business. Our preliminary first quarter results provide further proof of that fact.

Preliminary first quarter revenues were $45.3 million, up 10% sequentially and 29% year-over-year, well above the forecast we provided in February. Orders were strong throughout the quarter, reflecting broad-based growth across all of our end markets. Orders were especially strong in the second half of March, including some significant turns orders that shipped just before quarter end.

Based on this pattern and the fact that we came in well above our normal seasonality for Q1, we think some of the Q1 upside was revenue that we would have expected to see in Q2 and that's reflected in our outlook for the June quarter.

Our preliminary first quarter gross margin also came in higher than our previous forecasts. We expect our gross margin to be in the range of 54% to 55% on a GAAP basis, including an impact of about 1 margin point from stock-based compensation. The upside on margin was driven by a combination of cost reductions from wafers and test, as well as customer mix as we continue to see good traction in our efforts to penetrate smaller, higher-margin accounts.

We expect operating expenses for the first quarter to come in at or below the low end of the projections we provided, with total expenses between $18 million and $19 million. This includes $2.5 million to $3 million of stock-based compensation. Also included will be $2 million to $2.5 million of expenses related to the restatements and approximately $600,000 for patent litigation.

Looking ahead, we expect second quarter revenues to be in a range of $44 million to $46 million. We expect second quarter gross margin to be 53% to 55% on a GAAP basis, with an impact of less than 1 margin point from stock-based compensation.

We expect second quarter operating expenses to be in the range of $17 million to $18 million, including stock-based compensation expenses of $2 million to $3 million. We expenses related to the restatement and the outstanding SEC filings to be about $1 million and patent litigation expenses should be in the range of $600,000 to $800,000.

We believe we are on track for a strong 2007 in terms of revenue growth and profitability. We look forward to issuing the final Q1 numbers, along with our audited 2006 financials, in the next few weeks.

And, of course, we are eagerly anticipating our return to NASDAQ, which is now well within our reach.

At this point, I'd like to turn it over to Balu for a little more color on the quarter.

Thanks, Rafael, and good afternoon. 2007 got off to a great start with preliminary first quarter revenues up 10% compared to the fourth quarter, while many of our peers were down on a sequential basis. As Rafael indicated, some of the first quarter upside may have come at the expense of the second quarter, simply due to timing of orders, which in any case we are on track-- but in any case we are on track for a strong first half of 2007.

If we achieve the mid-point of our second quarter outlook, we would be up 18% for the first quarter of the year, compared to the first quarter of 2006. The strong revenue growth we are currently seeing reflects accelerating market penetration, driven by a variety of factors, including our expanded sales force, the replacement of linear power supplies, good traction with the recently introduced products like TinySwitch 3, increasing penetration at smaller customers, and growth in new markets such as lighting and power over Ethernet. Most of these drivers are just beginning to have an impact, so we think we still have a great deal of growth ahead of us.

Our first quarter revenue growth was broad-based with all four of our end markets showing strong sequential and year-over-year growth. Computer revenues came back nicely after a weak fourth quarter, growing in the low teens sequentially, led by the strength in LCD monitors and PC standby applications. Communications revenue increased more than 10%, led by growth in cell phone chargers, DSL modems and IP phones. Industrial revenues grew in the high single digits and were driven by a wide range of applications such as metering, industrial controls, lighting and tools. Consumer revenues also grew in the high single digits, driven primarily by appliances and DVD players.

The breadth of our first quarter revenue growth reflects the diversity of our addressable market and the wide range of growth opportunities we are targeting. Our technology is applicable in virtually any electronic product up to a certain power level and our current product portfolio can address about two-thirds of all AC to DC power supplies, as well as high voltage DC to DC applications up to 100 watts. This includes all current and proposed wattage levels for power over Ethernet.

Over the past few years, we have made a deliberate effort to go after a bigger cross section of addressable market by expanding our sales force and our field engineering staff, adding a number of small regional distributors and increasingly targeting smaller customers, especially in the industrial and consumer markets. These efforts have resulted in accelerating design wins and revenue growth and have helped us achieve healthy balance in our revenue base in terms of applications and customer size.

The percentage of our revenues coming from the cell phone market has come down dramatically in recent years from well over 40% to the low 20s today and the only other category accounting for more than 10% of our revenue is major appliances, a relatively stable and fragmented market. Consumer, industrial and so-called other applications now account for more than half of our revenues and these markets tend to be highly fragmented with smaller accounts and less sensitive-- less sensitivity to price.

While product cost reductions have been the main driver of our gross margin expansion over the past 3 years, the increased penetration of smaller customers has played a significant role and there is a virtuous cycle at work, since the margin uplift from smaller customers give us flexibility to be more aggressive at larger accounts, as needed. We expect that this cycle will be in evidence over the next several quarters as a number of tier-one designs go into production. These include several high-volume DVD designs, plus a number of high-volume linear displacement designs, as we see more of an impact from the new efficiency standards on external power supplies, which take effect in July.

Our gross margin will continue to fluctuate, depending on the mix and timing of high and low-volume designs. Over the past several quarters, a preponderance of lower-volume designs has been able to help us as they help to grow our gross margin and we expect to see a slight reversal in the trend in the second half of this year as more tier-one business comes on line. Overall, however, we expect our gross margins to remain significantly above 50% for the foreseeable future.

In general, the number of designs we are winning and the pace of ongoing design activity continue to point toward strong growth over the next several quarters. The replacement of linear power supplies continues to be an important driver of design wins, as evidenced by the growth of our LinkSwitch products, which grew more than 40% in the first quarter compared to a year ago.

This trend is being driven by elevated prices for raw materials such as copper and iron, as well as the CEC efficiency standards, which for all practical purposes outlaw the use of linear transformers in external power supplies.

In general, energy efficiency should continue to provide a tail wind for a long time to come. As we all know, there's an increasing sense of urgency surrounding the issue of greenhouse gas emissions and improving the energy efficiency of electronics is a major opportunity for savings.

Another area getting a lot of focus lately is lighting. Incandescent lamps are highly inefficient light sources. Only about 5% of the electricity used by the incandescent lamp is turned into light, while the rest is turned into heat.

According to recent estimates, the U.S. could save as much as $18 billion a year in energy costs by converting to efficient lighting sources. This is the output equivalent of up to 80 coal-fired power plants.

In just the past few months, Australia and Canada have announced plans to ban the use of incandescent lights over the next several years and the recent media reports indicate that the U.S. may take similar steps. Meanwhile, California has already effectively outlawed the use of incandescent lighting in all new residential construction and remodels.

Today, compact fluorescent lights or CFLs are the most readily available substitute for incandescent. However, LED technology is rapidly coming down the cost curve and is expected to emerge as a viable alternative over the next few years. LEDs offer a much-- offer a number of advantages over CFLs, including smaller size, light that is far more pleasing to the eye and an absence of mercury, which is a major drawback of CFLs.

Offline LED lighting is an ideal application for our technology and we have recently introduced a new ultra-small package option for our LinkSwitch products that is an excellent fit for LED bulbs and fixtures, as well as other applications where board space is constrained. In connection with this new package option, we introduced a new reference design for an AC to DC power supplier that fits into the base of a standard light bulb, enabling LEDs to be used as direct replacements for traditional incandescent lamps.

We look for the lighting market to be one of the several growth drivers over the next few years. The impact of our expanded sales force, recent product introductions, tier-two, tier-three penetration and linear replacement are just beginning to take hold. We expect further incremental growth to come from other emerging markets such as power over Ethernet, particularly as the power over Ethernet standards expand to accommodate high power levels. Our expanding presence in Japan, following the expiration of our licensing agreement with MEI also continues to be a driver of incremental growth.

We also look forward to the outcome of our patent litigation against Fairchild, which has the potential to change the competitive landscape, since Fairchild-- Fairchild is our largest competitor in terms of integrated solutions. Last fall a jury ruled that Fairchild has been willfully infringing four of our patents and we expect these patents to be upheld by a second jury next month. We then plan to seek an injunction against the infringing Fairchild parts and an enhancement of the damage-- damage award, based on the finding of willful infringement.

To conclude, we are extremely excited about the future we have in front of us. The power conversion market is rife with opportunities and we have developed the technology, the products, the applications expertise and the sales and marketing infrastructure to exploit these opportunities far better than any of our competition. The value of integration is clearly evidenced not only in our revenue growth, but also in the strong gross margins we are achieving in a highly price-sensitive marketplace. We think the importance of integration will only increase over time, and we're extremely well positioned to benefit from that.

With that, we are ready to take questions.

Operator, would you give the instructions for Q&A, please?

Thank you. (OPERATOR INSTRUCTIONS) Our first question today is Tore Svanberg from Piper Jaffray.

Yes, good afternoon, and congratulations on the strong results. Could you elaborate a little bit more on the Q1 versus Q2? I do realize that you got a lot of business in Q1, maybe some pull-ins, but could you just elaborate a little bit more and maybe-- maybe also focus on your visibility for your new numbers for Q2?

Well, as we said earlier, we got very strong bookings throughout Q1 and especially in March. We not only got very strong bookings in March, we got a lot of short-term terms orders, which indicates to us that some of the business might be from Q2.

It's also reinforced by the fact that the orders in April were slightly weaker than March and, of course, in May, the first week of May is basically shut down in Asia because of the May-- May Day week. So based on that and based on the turns business we had in Q1, which was in the high 60s, assuming the same kind of turns and based on the bookings we had in the beginning of the quarter, we are giving the guidance we have given you.

The other variable is the fact that Q1 is seasonally our down quarter and it was actually a very, very strong quarter. So that's another part of the pattern.

Understood. Now on gross margin, you're expecting it to come down a little bit second half of the year. But then I do assume that you then also expect your top-line growth to maybe grow a little bit faster, given the penetration into some of these tier-one accounts?

Yes. That's a reasonable assumption. Yes.

Okay. And just given that mix, longer term I do realize that the mix is going to change second half, but longer term should we continue to expect for you to penetrate some smaller and smaller accounts so that your gross margin can come back to maybe 55%?

It will really depend upon the ratio of the smaller customers with the large volume customers. So we want to have a good balance so that we have stable revenues and stable margins, but at any given quarter if we have a significantly higher tier-one revenue, that will have some negative impact on the margins. On the other hand, the tier-two, tier-three revenue should continue to grow and contribute more profit dollars each quarter and that will allow us to be a little bit more aggressive with tier-one customers and grow the tier-one revenue using some of those-- the higher margins that we get from tier-two, tier-three.

But given all that, I would say that for the foreseeable future we expect to be significantly higher than 50% margin.

Okay. And finally on lighting and LED, can you maybe point to some programs or applications where you're starting to get a lot of traction on? Maybe in terms of design wins or pre-production volumes?

Do you have any? We don't have any specifically. We have a number of designs that are in progress. We have won a number of designs. We expect the LED lighting revenue to grow significantly this year and most of those designs are offline designs, meaning that they're for general lighting. So they go into lighting fixtures that are used in buildings, but we also have applications in emergency lighting, in exit lighting, signage and so on.

Great. Final question, for Rafael, I know this tough to answer, but where is the tax rate right now, just approximately?

Yes, I couldn't tell you where it is, but what I can tell you is, well, I'm in the middle of evaluating what it's going to be for '07.

Okay.

So what I would use for now is 20% and we'll update you further as we get a little more clarity.

Great. I appreciate that. Thank you very much.

We will go next to Vernon Essi from M.S. Howells.

Thank you. Nice numbers there. Just to follow on the LED line of questioning, are we to assume these are going to be with the major manufacturers of some of these products, or is this still sort of in a scattered phase in terms of how those design cycles are playing out?

Well, this will be fixture manufacturers. So we would sell our chips to the manufacturer of the fixture and they will buy the LEDs from someone else.

Okay.

And I'm not sure that you would know the names. There are a lot of names. Color Kinetics is one of them, but they are really in a much more boutique market, but there are a number of other companies which are in the broader market.

Okay. And then there's been a lot of press out of-- out of Philips on this movement and I just was curious if you've been in discussions with them on their next-generation approach to that?

I am sure we are talking to them, but I don't have any specifics right now?

Okay. Also, just a sense for how -- I mean, you may have made a comment, I apologize if I missed it -- on how pricing played out in the quarter?

Meaning? Could you elaborate on your question? Meaning ASPs?

The ASP trend for the quarter.

Yes, ASP for the quarter came in at about $0.39.

And just in terms of-- one of the things, a follow-on, you made an announcement a while back about an investment, I think, in a packaging technology. Does this have anything to do with this-- this new packaging option you were discussing on the AC to DC product?

No. It had nothing to do with that.

Okay. And then finally, on the guidance, just to give a sense of your different-- different revenue buckets, you had the-- it looked like you had pretty nice gains in TinySwitch. Are we to expect to, obviously, continue with what's going on in terms of guidance? Will we see the same proportionate coming out of that or do you expect any other pieces to, perhaps, grow more on a sequential basis?

Well, the TinySwitch revenue was driven by mainly Tiny 3 product line, the new product line we introduced, which is allowing us to get into some new markets that we couldn't enter in the past. But going forward, I would expect the LinkSwitch revenue to grow much more rapidly because of the CEC regulation coming into place in July. So in the second half, you should see that LinkSwitch revenue as a percentage should significantly grow relative to other product families.

Okay. So should we-- going into the second quarter, should we be seeing an incremental move upwards in LinkSwitch with that deadline approaching, I mean, materially offsetting a decline in TinySwitch? I'm just wondering-- I'm trying to sort out the guidance -- it seems like you had such a robust take rate -- why that would be kind of flattish? I know you're trying to be conservative, as well, but can you just kind of walk through the difference there and how you might see those two pieces of revenue between TinySwitch and LinkSwitch going into the second quarter, how that might play out?

Well, I think you will see a significant increase in LinkSwitch, based on the design activity and the design wins we have, in the second half. Whether you will see a little bit of that in the second quarter still remains to be seen. You may see some in terms of second quarter, but you'll see a more significant increase of the LinkSwitch revenue in the third and fourth quarters.

Okay. Thank you very much.

You're welcome.

We will take a question from Sumit Dhanda from Banc of America.

Hi, Sumit.

Hi, Balu, can you hear me?

Yes.

Okay. I apologize for the noise in the background. So I had a couple of questions. I think on the last conference call you alluded to the fact that the margins could come under pressure because of your worries around commodity pricing and here you're talking about slightly better gross margin output, driven in part by what you're seeing in the mix of small customers versus large customers.

So, I guess, was the latter the dominant driver of the upside or were you pleasantly surprised by what happened on the commodity pricing front? And how is that factored into your expectations going forward?

That's a very good observation and let me explain. In terms of the discrete components, the pricing has been, actually, stable for the quarter. Initially, there was some indications that the discrete components might be going down, but that didn't happen. So that was the good news.

However, if you look at the discrete solutions, they are more and more going away from completely discrete solutions, meaning that solutions that have no ICs at all, to solutions that have controllers, controllers plus MOSFETs and a few other components. And these controllers are primarily coming from China and Taiwan companies. They don't have the same integration level as we do, but they are pretty aggressively priced and they're mainly targeting tier-one customers.

So in the tier-one customer design wins, you would be-- normally have lower margins because we are competing with discrete solutions, whereas when we go to tier-two and tier-three, we get significantly higher margins, because they-- they appreciate the integration we bring, the yield of design and fewer components and so on and so forth.

Okay.

So the gross margin improvement in Q1 came from several areas. One is the size of the cost traction we achieved both in the product area and test area. Some also, of course, came from the products and customer mix we talked about.

Okay.

Okay?

Yes. The other question I had, Balu, can you give us a sense on how different your margin profile is, small versus large customers, what your percentage of overall customers are classified as small customers and then sort of what's the growth delta between small and large customers?

Okay. Currently, what we call tier-two and tier-three customers are approximately 40% of our revenue, so that 60% still comes from the tier-one customers.

And the gross margin, like any other semiconductor company, depends on the volume. So the highest volume customers, we have lower gross margins than the small customers. So the overall gross margin depends upon the ratio.

I must also add that the tier-two, tier-three revenue has been growing consistently for the last several years and it'll continue to grow, however the tier-one revenue will also grow and that can have quite a significant variation from quarter to quarter. Because one tier-one revenue customer added will-- can increase the tier-one revenue significantly.

It's very hard to predict the exact margin each quarter, other than to say that we expect to be-- expect the margins to be well above 50% for the foreseeable future.

Right. No, I understand that, but, I mean, could you give us a sense, tier-two, tier-three, on average, is the gross margin 10 points higher? Is it more than that? And would you say that they have been growing 5 points faster, on average? Has it been growing at exactly the same rate as the tier-one customers? I'm just-- I know you can't give me exact details, but some quantification would help.

Yes. It could easily be a 10 point difference between a tier-one and a tier-two customer.

Okay. And then the growth rates have been slightly higher for the small-volume customers or have they been significantly higher if you had to sort of look at normalized growth over the last 2 or 3 years?

Well, that's a little difficult to answer and the reason for that is tier-two, tier-three tends to have a consistent growth pattern whereas tier-one has a lot of volatility, just by the nature of timing of orders and so on. So I would say that the tier-two, tier-three has been growing consistently, but as a percentage, if you just measure it on one quarter, that can vary quite a bit, because of the tier-one revenue, which has a lot of variability in it.

Okay. Let me just switch gears here. As your options investigation draws to a close, you, like-- probably more so than most semiconductor companies have a ton of cash. Is there-- is there any plans of aggressively repurchasing stock post the-- post the completion of the filings?

Well, just as you pointed out, we can't do-- we can't do any repurchase until we are all compliant and we are back on NASDAQ, number one. Number two, our board looks at the uses of cash almost every time we meet. We discuss what we should do. There are only several options and we look at all of them, including buybacks, dividends and potential uses of cash for acquisitions and so on. So we will look at that every time.

Right. I guess my question, is there more of a focus in light of what's happening with your peer group?

I can't say. I mean, it all depends upon a number of factors, including our stock price, including acquisition opportunities and so on and so forth.

Okay. One last question, what's the-- what's the exact timeline on phase two of the trial?

It starts on June 4th and it lasts for 4 days and then, of course, the deliberation could last another day or so.

Okay. Thank you, Balu.

You're welcome.

And we will take our next question from Kelly Pan from Pantheon Capital.

Hi, yes. My questions have been answered. Thanks very much.

And we will go next to Gus Richard from First Albany Capital.

A couple quick questions on the model. It looks like SG&A expenses, I'm guessing, is what's coming down in Q2. Is that the rolloff in the restatement activity and an increase being offset by an increase in litigation activity?

Yes, the main thing that's coming down in Q2 over Q1 is the FAS-123R expenses.

Right. Oh, okay.

That's number one. They're just lower because we haven't issued any new options. So that'll continue until we issue new items.

Okay.

That's one item.

And then behind that, I'm assuming SG&A is--

Behind that would be the restatements. We did have $2.2 million, roughly, in restatement-related costs and we're projecting that that will be roughly $1 million in the coming quarter. So that's the number two item.

Okay. And then finally-- and then-- what's-- and litigation is kind of holding in there flat or ramping a little bit in Q2?

Yes. So litigation came in at about $0.6 million for Q1 and our model has it at roughly-- the mid-point would be roughly $700,000 on an ongoing basis. So we expect that litigation expenses will remain relatively stable throughout the year.

I'm thinking specifically about Q2, because you're going to trial. I'm assuming that's going to go up a bit?

Yes. Yes, that needs some explanation. We have negotiated with our attorneys to have a more uniform cost, litigation cost throughout the year. So we'll spread the expense throughout the year. So for the rest of the year, it'll be between $600,000 and $800,000 per quarter, which is instead of having a big chunk in Q2 and unpredictable amounts in other quarters.

Okay. That begins to make sense. Okay, I got that.

And then you talked about tier-ones ramping and I'm assuming this is in relation to the new California regs for energy efficiency in cordless handsets for the home. Is that where you're getting your big ones in tier-one customers? And-- or is it more cell phones? I'm assuming it's some of both, but are those the two big areas and which one is kind of driving the ramp in tier-ones in the second half?

Well, it's all of those areas wherever there's external power supplies, because many of these power supply manufacturers ship to many, many different applications. So-- but essentially driven by the linear replacement we expect to have a significant tier-one revenue component in Q3 and Q4.

Okay and then when you look at the deltas and margin between a high-volume tier-one and, say, somebody that's taking 10,000 units a month, is-- is it safe to assume there's something like a 20-- 20% delta in gross margin between those two customers?

Well, the best way I can answer is we are not that different from any other semiconductor company.

Okay, all right. Fair enough. All right. I think that's it for me. Thanks.

Thank you.

And we will go next to Ross Seymore from Deutsche Bank.

Thanks. Guys, you talked a little bit about the lighting business over the longer term. Can you give us any idea what percentage of revenues, roughly, that generates now and what you think it would by, say, exiting this year?

No. I mean, Ross, this is Joe. The total lighting business is a very small piece of our revenue today and including LED and some of the other applications Balu mentioned, it's a percent or two, probably.

Got you. Okay.

It's still very early days on the LED business. That's still really in its infancy.

So it's really more of an '08 story?

Probably '08 and beyond, yes.

Got you. And then thinking about the second quarter and the flat guidance, can you talk a little bit about the turns assumption that you had coming into this quarter, what you actually hit in turns and then what you're using to the mid-point of your guidance for the second quarter?

Yes. Turns for Q1 was in the high 60s to hit the number that we hit.

Okay.

And we'd expect turns between 65% and 70% to hit the middle of the guidance.

So you're-- you talked like you were being a little more conservative, but it sounds like from the turns perspective you're assuming flat turns sequentially. That seems a bit counter-intuitive. Am I missing something there?

We are assuming flat turns, but you also have to remember we are approaching the middle of the year when CEC impact starts. So we should start seeing some improvement in business in the third month of the quarter.

Okay.

We are taking a lot of different factors into consideration.

That makes sense. And then as far as the CEC goes, all else being equal, is it a fair assumption if we have kind of the cycle at our back from just a pure semiconductor point of view, you have normal seasonality that you guys almost always enjoy in the third quarter and even in the second half and then CEC layered on top of that. Is that a fair way to look at things with the summation being kind of seasonal plus a certain amount being a reasonable expectation for the back half of the year?

Well, we would certainly like to think so. I can never predict the seasonality, but I have no reason to believe that we won't have similar seasonality this year?

Well and even with the tier-ones ramping, if anything, it sounds like it'd even be more than normal seasonality.

Well, I just can predict that far. I mean, we haven't given any forecasts for the second half, but as I said, I don't know why it would be different than usual seasonality and then, of course, we have the benefit of CEC.

Great. And the last one for me, probably best for Rafael is on the OpEx side of things you talked about smoothing out the litigation expense a bit. The more ongoing aspect of OpEx, how should we think about that throughout the year? You've increased the sales force nicely over the last couple of years. Is that going to grow with revenues or remain kind of flat, which it seems like is pretty close to what you're guiding for the second quarter?

Yes, I mean, it'll come up incrementally. I would model something like-- roughly $1 million up towards the end of the year in terms of increases between Q1 and Q4. So that's the incremental piece that I would add to kind of the variability as revenues ramp.

Great. Very helpful. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We will go next to Andrew Huang from American Technology.

Hi, guys. Can you hear me okay?

Yes, very well.

I apologize if this question has been asked, but did you give an ASP for the quarter yet?

Yes, we did. The ASP was $0.39.

$0.39? Okay. And I was just wondering if you could kind of help me out here in terms of kind of a scenario analysis here with Fairchild. I know you're very limited as to what you can say, but I'm just trying to figure out, in the worst possible scenario, let's say you lose, what you think could happen to your business?

Well, if we lose, nothing much changes really other than the fact that we've spent all this time and effort and money. If we win, it gives us a competitive advantage on designs that are already in production.

On new designs, already we are winning against Fairchild simply because people are uncomfortable using Fairchild knowing that the decision is right in front of them. But on the existing designs, they're continuing to sell Fairchild until they know that Fairchild has lost, for sure, because then they know they have enough time to switch over.

Okay. Just to focus more on the worst case scenario, because I feel pretty comfortable with the best case scenario for you.

Okay.

But in the worst case scenario, is there a chance, for example, that-- because Fairchild is suing you for patent infringement, as well, correct?

Yes and that was the Texas case and we asked for that case to be transferred to Delaware and that has been granted. And so it's now in Delaware and if we win the case, the validity case, then it will greatly diminish the Texas case, because they are related.

Got it. Okay and then just to kind of follow up on the cordless phone question, I think some of the major players in the cordless phone may include like, maybe, VTech and Panasonic and I think there's another one in the U.S. here, right?

Yes, there is Uniden.

Right.

Then there is VTech, Panasonic and there is a couple of others.

Right. So my question was going to be on Panasonic. Is there any kind of business relationship going on with MEI on the-- as a chip supplier and Panasonic on the cell phone side which would kind of give you a little bit of an edge?

Well, remember that we have discontinued our technology licensing with MEI.

Right.

Which is really Panasonic.

Right.

However, the-- Panasonic is a very large company and they don't treat their internal semiconductor division any different than external suppliers like ourselves. They will go with however provides the best product and best service. So we have equal opportunity to go after the business.

And having said that, you also have to remember that Panasonic makes the phones, but they buy the chargers. Even though they sometimes have a say in what technology is used, they don't actually make the chargers. They buy from vendors and we work with a number of vendors who supply to all of the cordless phone manufacturers.

Got it. Okay, thanks.

You're welcome.

And we will take a question from Steve Smigie from Raymond James.

Great. Thank you. I was just curious on the timing of the filings, et cetera. You said-- it sounds like most stuff's done in the next 2 or 3 weeks, but then you have other stuff you have to do by the end of June?

Yes. So what's done in the next 2 to 3 weeks is our audits and reviews related to 2006 and Q1 of 2007, so-- meaning that our numbers will be audited numbers and we'll be able to disclose that. In parallel, we have drafted our filings and are now in various stages of review. So those would be completed towards the latter part of June.

Okay.

At that time we would be able to become current and file those outstanding filings.

So highest probability of when you guys would be relisted?

Shortly thereafter. It could be within days after we become fully compliant.

Okay. All right. That's it for me. Thank you.

Thank you.

And we will take a question from Jim Bitzer from EGM Capital.

Yes. Hi, guys, I don't know if anyone's congratulated you on a nice quarter, but the revenues and the profitability were excellent.

Thank you.

Thank you.

Rafael, a question on the profitability level. Depending on how-- what you add back or not, and I add back the stock-based comps and some of the restatement, I get you at over 25% operating profit margins already and I guess how do I think about that in the second half as your revenues ramp? Do you have sort of a target for normalized operating margin that you guys--?

Yes, I think the mid-20s target is-- plus or minus a couple points is probably reasonable and a lot of just depends on the types of margins that we get. There is some-- some risk to the margins, meaning that even though they're coming in mid-50s now, they could come down as we ramp higher volume tier-one-type designs in the latter half. But nonetheless, I think that somewhere in the mid-20s is a reasonable target.

Okay. And the way you said that, I guess, are there some tier-one designs that you've already won that you expect to ramp or is that more on the come, if we get them, type of comment, I guess?

Well, there are a number of tier-one designs. Some of them we've already won in cordless phones and cell phones and so on. Some of them are still in progress. Depending on how fast they ramp, the-- our tier-one revenue in Q2 and Q3 could change, could vary, and that'll have some impact on the margins. That's why it's hard to predict exactly what it would be, but we are comfortable that it will be significantly north of 50%.

Okay, that's great. And then on the cash flow, again, another reasonably nice quarter of cash flow and I haven't seen a full cash flow statement in a while, but that's even with all these extraordinary charges. And what do you think your sort of normalized cash flow from operations is in a given year?

Yes, I think at these types of revenue and profitability run rates, excluding all these special charges, you're somewhere north of $40 million a year.

Yes, I would say $10 per quarter, north of $10 million per quarter.

Okay, great. All right. Thank you, guys.

Thank you.

Thank you.

And our last question today will be from Gus Richard from First Albany Capital.

Yes. Just to follow up on the litigation. There was a trial that was held in front of the Supreme Court that delayed your trial date with Fairchild because it went to the heart of obvious patents and it appears as if that ruling went in favor of the company that was defending itself against patent infringement. At this point, do you guys have any thoughts as to what, if any, impact it will have on your trial?

We don't think it'll have any impact. What that case-- the outcome of that case was that it makes it easier to invalidate a patent based on obviousness. In our case, we don't believe our patents are obvious at all. So that's not an issue for us.

And the-- proving a patent is an obvious element-- invalidating a patent requires a very high level of proof, a much higher level of proof than infringement, because the patents are assumed to be valid unless you can prove with convincing evidence that it's invalid.

So we think that our case is as strong as it was before this outcome.

And if you just-- bear with me, I'm sorry about this line of questioning. If you just take one of the four patents that you are suing Fairchild over and just sort of discuss its invention versus the prior way of doing things, just to give us a sense of what leap you made in creating these patents and just to give me a sense of if that seems to obvious to me or not?

Well, we are not allowed to discuss the case, because the trial is still yet to complete.

Can you at least discuss one of the patents and walk through it or give me the patent numbers and I can go look it up?

Well, the patent numbers are public. It's in our press release. I don't have it with me right now.

All right, Balu, you know what, I'll follow up and look up the patents.

Let me-- let me say this. They-- Fairchild was found to willfully infringe on all four of the patents and all of the claims we had asserted on those patents. So they have to prove each and every claim in each of the four patents to be invalid for them to win the case, which is pretty hard to do. I just wanted to give you kind of the scope of the challenge that they have on their side.

Okay. Thanks a lot.

You're welcome.

That does conclude our question-and-answer session. At this time I'd like to turn the call back over to Joe Shiffler for any additional or closing remarks.

Okay, thanks. I just want to say that concludes the call and we'll have a replay available on the investor section of our website, which is investors.powerint.com. The telephone replay number is 888-203-1112 from within the U.S. and from abroad it's 719-457-0820 and the code is 1045861.

Thanks for listening and good afternoon.

That does conclude today's conference call. Thanks for your participation. You may now disconnect.