Power Integrations Inc (POWI) 2007 Q4 法說會逐字稿

Good afternoon and welcome to the fourth quarter and full year 2007 financial results conference call for Power Integrations. Today's call is being recorded. At this time, I would like to turn the conference call over to Mr. Joe Schiffler, director of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon. I'm Joe Schiffler, 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 each have some prepared remarks, after which we'll take your questions.

Earlier this afternoon, we issued a press release outlining our financial results for the quarter and fiscal year ended December 31st, 2007 and a separate press release announcing our acquisition of Potentia Semiconductor. Those press releases are available on the investor page of our website, investors.powerint.com and have also been e-mailed to those of you on our distribution list.

During today's call, we will make reference to certain financial metrics that are not calculated under generally accepted accounting principles. Please refer to the financial results press release available on our website for an explanation of our reasons for using such non-GAAP metrics as well as a table reconciling these measures to our GAAP results.

I would also like to note that our discussion today, including the Q&A session, will including 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, plan, anticipate and similar expressions that look toward the 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 reports on Forms 10K and 10Q filed with the SEC.

Lastly, this conference call is the property of Power Integrations and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of Power Integrations. With that, I'll turn the call over to Balu.

Thanks Joe and good afternoon. Power Integrations had an excellent fourth quarter, with record revenue of $52.7 million, up 6% sequentially and 28% year-over-year. This growth was broad based with all four major end markets up more than 20% from a year ago. We also increased our gross margin slightly, compared to the third quarter, and we earned $0.38 per share on a non-GAAP basis, up $0.06 from the prior quarter.

These fourth quarter results put an exclamation point on an outstanding 2007. In a year when analog semiconductor revenue declined for the first time since 2001, Power Integrations delivered 18% top line growth, despite having more than $10 million worth of business taken by an infringing competitor.

We also demonstrated the strength of our financial model with a non-GAAP gross margin of 54.8% for the year and more than $60 million in cash flow from operations. Reflecting the strength of our balance sheet, our board of directors has authorized a $50 million stock buyback program, which we expect to activate next week.

We have a lot of momentum coming out of 2007 and we are extremely excited about the prospects of 2008. Thanks to the growing importance of energy efficiency, the power commercial market is more dynamic than ever and we are extremely well position to take advantage.

Over the past few years, we have tripled the size of our sales force, reshaped our distribution channel and our online presence to reach more customers in more markets around the world. And we have introduced highly attractive next generation products for all segments of our core low-power [AC to DC] market.

We also have plans to introduce a series of new products that should expand our addressable market by at least 25% over the next couple of years. The acquisition of Potentia Semiconductor, which we are announcing this afternoon, is a key part of that effort. I will come back to that in a moment but I'd like to first spend a few minutes recapping the latest developments in terms of energy efficiency where there's been considerable activity of late.

For almost 10 years now, our EcoSmart technology has represented the state of the art in power supply energy efficiency. And we decided many years ago to make that a cornerstone of our product development and marketing efforts, even when it seemed we were a bit ahead of our time.

Today, after many years of pushing this capability as a nice-to-have feature, energy efficiency is increasingly becoming a must have for OEMs and power supply manufacturers and we are finally beginning to feel a strong pull in the market place.

The best example of this strength is the replacement of Linear transformers, the copper-and-iron bricks also known as "energy vampires." This technology has been around for more than a century and has maintained a significant share of the power supply industry until very recently, despite the obvious drawbacks of size, weight and energy waste.

The inertia that kept this technology alive for so long has finally broken down. This is partly due to higher raw material prices, but it is also because of the energy efficiency standards, such as the California Energy Commission's external power supply standards, which took effect in mid-2007.

The demand for our LinkSwitch products, which replace linear power supplies, demonstrates how quickly this transition is taking place. LinkSwitch revenue increased 150% in 2007 and grew 300% from Q4 to Q4.

LinkSwitch comprised 28% of our sales in the fourth quarter, compared to just 9% in the year-ago quarter. This success story is not only great for our business but it's also very good for the environment. Each chip we sell in place of a linear transformer will save something like 35 kilowatt hours of electricity over its lifetime in standby consumption alone, which amounts to a saving of about 47 lbs of CO2 emissions from coal-fired power plants, for each and every chip. With hundreds of millions of linears already replaced and many more still to go, the total savings are very significant. And that's just one of our product lines.

In total, we estimate that all of our EcoSmart products combined saved something like 6 billion kilowatt hours of electricity in 2007. In terms of carbon emissions, this is the equivalent to taking almost 700,000 cars off the road for a year.

This is a great start but it is just the beginning. As we all know, the sense of urgency about reducing carbon emissions continues to grow. And the policymakers see energy efficiency as a major opportunity for savings.

Ultimately, related sources and other prospective means of reducing emissions take a long time to develop and require a large capital investment. In contrast, energy efficiency technologies, like EcoSmart are available and cost effective today and can provide an immediate reduction in emissions with no capital investment and no change in consumer behavior.

And early successes like the CEC standards are increasing development of tighter and more widespread specifications around the world. For example, the energy bill signed in December by President Bush, essentially makes the CEC standards mandatory on a nationwide basis, effective July 1st of this year. The national standards will be equivalent to the second stage of CEC standards, which are tighter than the standards currently in effect. The European Union is scheduled to use similar mandatory standards later this year as part of its Eco-Designs directive.

These mandatory standards are complemented by voluntary standards that increase even higher levels of efficiency. Version 2 of ENERGY STAR specifications for external power supplies is scheduled to take effect later this year, followed by an update to the European Code of Conduct specifications. These specs are substantially tighter than the mandatory standards and will be challenging for many electronic power supplies designed as (inaudible) components.

While these standards are voluntary, they appear to have a significant impact on the market as we are already receiving inquiries from customers who want to be ready when these specs become effective.

External power supply (inaudible) have a big impact on industry, because they cover a wide range of end products; everything from high tech products, like cell phones and cable modems, to low tech products, like cordless phones and electric shavers.

However, an even bigger impact is coming in the lighting market. Just like Linear transformers in the power supply market, incandescent lighting has been around for more than a century and has survived because of its simplicity and low cost. However, incandescent lights are terribly inefficient, wasting more than 95% of the energy they consume as heat. Plans to phase out this technology have been announced in Australia, Canada and Europe and last year's energy bill requires significant improvements in lighting efficiency in the U.S. beginning in 2012.

While it remains to be seen how the market will respond to this development, it is clear that LEDs are poised to become a mass market technology for general lighting over the next several year. LEDs are far more efficient than incandescent lamps and continue to improve in terms of cost and performance. They also have none of the drawbacks of (highly accented language) technology, such as poor color rendering, slow turn on, bulky form factors and mercury content, which requires special disposal procedures.

LED lighting is a promising new application for AC to DC power conversion and 2007 gave us a taste of what's to come. We generated about $1.5 million in LED related revenue during the year and won dozens of new designs primarily in the second half of the year. Design activity continues to pick up so we could see a meaningful revenue contribution from LED applications in 2008 and we anticipate much more to come.

While we are pleased with the 2007 results, we are even more excited about the opportunities ahead. Our growth in recent quarters has been driven by low power applications and we continue to see strong growth in that segment of the market. However, we are also expecting high power applications to become a much bigger part of the story, going forward.

Last fall, we introduced TOPSwitch HX, our fifth generation TOPSwitch. HX offers significant improvements in system costs and efficiency, compared to previous editions and gives us a highly competitive offering for applications like LCD monitors, [VBRs], Set Top boxes and printers. Early customer response has been very positive and we expect HX to begin contributing material revenue in the second half of 2008.

While HX addresses the high end of our current power range, we also have plans to expand into markets that we do not currently serve. Our estimated addressable market of $1.6 billion includes only about 70% of all the AC/DC power supply market while the remaining 30% requires more power than we can deliver cost effectively with our current technology. Developing solutions for the high power market has been a focus of our R&D efforts over the past several years. And we have made a number of breakthroughs that we plan to bring to the market over the next couple of years. We are also very excited about the acquisition of Potentia Semiconductor, a Canadian company specializing in high powered AC to DC applications.

Potentia's talented and experienced team of engineers will form the core of a new design group based in Ottawa, Canada. The acquisition brings us not only the power supply experience and intellectual property but also additional R&D bandwidth we can dedicate to new high power opportunities while remaining focused on our core low power markets. We are especially pleased to establish a long-term presence in Ottawa, which offers a strong engineering talent pool and a vibrant high tech community.

Over the next couple of years, we plan to introduce a series of new products, targeting high power applications, to increase the size of our estimated addressable market from $1.6 billion, to more than $2 billion. We expect the first of these new products to launch later this year and begin contributing material revenue in 2009. This is a very exciting time for Power Integrations. The power (highly accented language) market is adopting (highly accented language) at a faster rate than ever before and we are the clear leader of the trend.

Energy efficiency, once an after thought, is becoming an essential factor in power supply design and we are extremely well positioned to capitalize. We continue to out innovate our competition and defend our intellectual property against competitors that now take shortcuts by copying our ideas.

And now, through a combination of our own innovation and timely acquisition, we are poised to enter new markets, with significant revenue potential. We look forward to sharing our progress with you in the months ahead.

And now for a review of financials, I'll turn it over to Rafael. Rafael?

Thank you, Balu. I'll quickly cover a few highlights of the fourth quarter and then spend a couple of minutes discussing our outlook for the first quarter and the rest of 2008.

Looking at the fourth quarter results in detail, our sequential revenue increase of 6% was led by the communications market, with growth in the mid-teens, driven by cell phone chargers and a variety of non-cell phone applications. Consumer revenues grew low double-digits, driven by appliances, gaming consoles and external adaptors. Industrial revenues were down mid single-digits while computer revenues declined at a high single-digit rate, coming off a very strong third quarter.

As Balu noted, all four major end markets grew more than 20%, year-over-year in the fourth quarter, contributing to our 28% growth rate for total revenues. 64% of fourth quarter revenues were through the distribution channel, consistent with recent historical levels. Avnet, our largest distributor, accounted for 16% of revenues and was our only 10% customer for the quarter. As a reminder, we recognize all distribution revenue on a sell-through basis.

Average selling price for the quarter was $0.34, down $0.02 for the third quarter, reflecting the continued ramp of LinkSwitch sales, which were up more than 40% sequentially.

LinkSwitch serves a low end of the power range and therefore has lower ASP by definition.

Our gross margin in the fourth quarter was 53.2% on a GAAP basis and 53.8% on a non-GAAP basis, excluding stock based compensation, both up slightly from the prior quarter. Fourth quarter operating expenses totaled $21.4 million, up $1.3 million sequentially, driven by the $1.4 million charge for in process R&D from the Potentia acquisition. Stock based compensation expenses included an Op Ex for $3.5 million, down slightly from $3.6 million in the third quarter.

Setting aside stock based compensation and the IP R&D charge, which are broken out in detail in our press release, fourth quarter operating expenses were flat sequentially. Expenses stemming from our financial restatement project declined significantly, as expected, offset by higher patent litigation and sales and marketing expenses.

Our fourth quarter GAAP tax rate of 31% was higher than recent levels, due primarily to the impact of the IP R&D charge, higher FAS122R (sic) expenses in foreign tax jurisdictions, as well as higher profitability in the U.S. For the full year our GAAP tax rate was 23%. Going forward we expect the GAAP tax rate to continue in a range of 22% to 24%. Our non-GAAP tax rate was approximately 16% for the quarter, bringing our full year tax rate to 17%. Going forward we expect the non-GAAP tax rate to go up slightly to a range of 18% to 20%, driven primarily by the conclusion of the restatement related expenses which resided in U.S. tax jurisdictions.

GAAP net income was $6.6 million or $0.20 per diluted share. Non-GAAP net income, which excludes stock based compensation and the IP R&D charge, was $12.4 million or $0.38 per diluted share, up $0.06 from the third quarter.

Looking at the balance sheet, cash and investments total $206 million at quarter end, up $28 million from the prior quarter. The increase was driven by $19 million of cash flow from operations, plus $17 million from option proceeds, partially offset by the $5.5 million used for the Potentia acquisition.

Weighted average share count was 32.3 million for the quarter, up about 1 million shares sequentially. As you may recall, employees were precluded from exercising options for several quarters during our restatement project, so we're seeing some catch up now. We also had several officers who exercised expiring options toward the end of 2007.

Receivables and inventories continue to be highlights of our balance sheet. Receivables declined by $0.5 million during the quarter to $14.2 million, with DSO's down from 26 to 24 days. Inventories decreased slightly to $19.7 million or five turns on an annual basis. Going forward we are targeting inventories in the range of four to five turns, compared to our historical range of three to four. The improvement reflects the excellent progress we've made in streamlining our supply chain over the past couple of years, including the move to offshore testing for about 80% of our finished product.

Looking ahead, our starting backlog for the first quarter was slightly higher than the fourth quarter, and bookings remained healthy throughout the month of January. However, it is extremely difficult to predict the level of turns orders we can expect once we get to the Lunar New Year holiday, particularly in light of the macroeconomic uncertainty reflected in the commentary of our tier companies. Accordingly we are giving a relatively wide range of $50 million to $54 million for our first quarter revenue expectations. The mid point of that range would be up about 15% compared to a very strong first quarter a year ago.

We expect gross margin in the first quarter to be similar to the fourth quarter levels. Margins should remain well above 50% for the balance of the year, with a slight bias to the downside as we target certain high volume design opportunities consistent with the strategy discussed on previous calls. We expect total operating expenses of $20 million to $20.5 million in the first quarter including $3.5 million in stock based compensation and about $1 million in patent litigation expenses.

In terms of core expenses for the first quarter, in addition to the normal step up coming from the resumption of payroll taxes, we also expect the Potentia acquisition to add $800,000 to $900,000 to our expense run rate on a quarterly basis, with the bulk of that hitting the R&D line. These factors should be partially offset in the first quarter by slightly lower sales and marketing expenses, which were elevated in Q4 due to our technical seminars in which we train customers on our products in more than 40 cities around the world.

Beyond the first quarter, growth in core R&D expenses should be very gradual throughout the remainder of the year, as the Potentia acquisition takes care of the majority of our hiring needs in that area for the foreseeable future. Growth in core sales and marketing and G&A expenses should also be well below the rate of revenue growth, so we expect to begin showing leverage in our financial model once we get beyond the first quarter.

Moving down the income statement, we expect to see lower interest income beginning in the first quarter as a result of the downturn trend in short term interest rates, which has brought our returns on cash and short term investments down to just over four percentage points currently. We expect a non-GAAP tax rate of 18% to 20% for the first quarter, consistent with our expectations for the full year. With that, we're ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble our queue. We'll go first to Vernon Essi with Needham and Company. Your line is open, please go ahead.

Sorry about that. Good quarter guys. I wanted to just touch base on the turns levels that you're looking at right now into the first quarter. What do you expect it to look like?

We need roughly something slightly less than 60% turns to meet the middle of the guidance in the first quarter.

Okay. And another housekeeping question here; did you disclose the split between distributor and direct?

We did, we said that distribution was roughly 64% of revenues.

Okay. And then just some comments on Potentia, can you just go into a little bit the logic behind the acquisition? It looks like the have some end market presence in flat panel television on their website. I just wonder if you could elaborate on that.

Well the main reason for acquiring Potentia is really part of our high power strategy. We've been looking at high power for quite a while and dedicating a part of our R&D resources, and we think we have had some breakthroughs that will allow us to get there, but we need additional resources. But the plus we're getting with Potentia is they already have expertise in high voltage. So they bring some additional intellectual property, expertise in high voltage and also analog design capability. And so we will add that to our design R&D capabilities so that we can address both low power and high power markets without defocusing one or the other.

Is there anything specifically in the HV side that you would discuss right now that they have that you specifically were looking at? Is it a specific process technology or is it more in the design side?

Their expertise is on the system level of power supplies and in the IC design. So those are the two different areas they bring.

Okay. And then if you could just go through the -- I know you have a lot of efficiency standards; you went through several of them. But can you give us an understanding of, in 2008, what are some of the key milestone turning points that you see, that is going to auger more product volumes? What's sort of the timeline for some of these?

Okay probably the most immediate one is the CEC standard, which will become national because it has been adopted by the U.S. energy bill that was signed by President Bush recently. And that will go into effect in July of this year, which means all states, not just California and a few others; all states have to comply with the CEC standards. And on top of that, the CEC standard that was adopted is the second phase of the CEC standard that was supposed to go into effect in California July 1 of this year. This is actually a tighter standard than the one that is currently applicable. So that's one major development.

The other one is that the European Union has decided that they are going to introduce mandatory standards for various types of product applications, and one of them is the external power supply standard, which is expected to be effective sometime later this year. The date is not final yet and as you all know, it has been subject to changes, as from our past experience. But the good news is that the momentum toward mandatory standards is spreading across the world.

The other side of it, the warranty standards are also getting much tighter. The Energy Star Version 2, which is expected to go into effect sometime later this year, has a much tighter specification for external power supplies, which is very difficult for Discrete solutions to meet. And surprisingly, even though it's a voluntary standard, we are getting a lot of inquiries from our customers and OEMs to be able to meet that standard when it does become effective. And that standard will also be, it looks like that standard will be adopted by the European voluntary standard called the European Code of Conduct, and that will probably follow soon after. We don't know the exact timing on that.

So those are the major ones in power supplies. So in terms of LED lighting you probably have noticed there's a lot of things going on in terms of eliminating the user base of incandescent lamps over time, and the replacement technology for that is either CFL or LED, but LED is much more attractive because of the reasons we mentioned.

Okay, let's move on to the next question.

We'll go next to Sumit Dhanda with Banc of America Securities.

Hi Balu, nicely done on the quarter. A couple of questions; can you talk about whether you're starting to see any benefit from regaining share at Samsung or any update on what's happening on that front?

Okay, at Samsung we are very optimistic that we would get a part of our share back before the end of this quarter. We don't have anything to announce yet, but what is clear is that the subcontractors are scrambling to design adaptors to replace the BCD solution.

And just to be clear, this is not baked into your outlook for the first quarter. Is some benefit baked into the outlook for the first quarter, I guess is my question.

No, because it will probably be very little, if any, for this quarter.

Also on the Nokia ramp, I know last quarter you talked about the fact that it's ahead of plan and you're tracking to a run rate of above $10 million a year. Has there been an acceleration in the pace, you would think that up tick has peaked; best you can tell, at Nokia? Can you give us an update on what is occurring there?

We think that it has reached a steady state, but having said that, it can go up or down depending on how Nokia decides to share the volume between various vendors. They tend to have cost negotiations every so often, and based on those negotiations the actual share may change. At the moment, as we mentioned earlier, we think we are getting a fair share of their highest volume model, given that we have two of the five vendors. So we're getting a proportional share of that.

Back to your comments on the tighter version of the CEC standard, you know so far a big part of your share gains has been versus the Linear transformer based solutions. Is your view now that effectively you'll end up being the de facto replacement and you'll gain share at the expense of even the Discrete based solutions, given the tighter standards? Are you already starting to see material evidence to that?

Well I would say we are getting an unfair share, but not all of it. Like any other redesign we're always competing with Discrete. It's hard to exactly calculate what percentage share we have because it's changing so quickly. So if I were to guess I would say that close to 50% of the Linears have been already converted, and we probably have half of that.

I guess my question really was, with further tightening of the standard, do you expect to win more than 50% of the share going forward?

I'm sorry, yes. The answer is yes, because the Energy Star Version 2 is extremely difficult to meet with the Discrete solution, and we're already a lot of inquiries because of that.

Okay. I had a question for you, Rafael. The turns you said this quarter expectations below 60, is it fair to assume you finished roughly mid 60s last quarter?

It's roughly similar, so it was roughly 60 and it will be roughly 60 this coming quarter.

We'll go next to Andrew Huang with American Technology Research.

Hey guys, congratulations on really bucking the trend here. The first question I had was, you made a comment about the overall analog industry being down, and you guys being up 18% year-over-year. How much of that, do you think, is share gains at the expense of competitors like Fairchild or SP or someone like that?

Well it's hard to calculate that. It's clear that we are gaining share quite nicely, not only against Fairchild but also against all other competing solutions, mainly Discrete solutions. And specifically in terms of Fairchild, we have won a number of designs away from them after the last trial, and we have another large number of them that we are working to replace the Fairchild solution. So we are very pleased with the impact of the outcome of the trial.

So then theoretically those wins that you're working on, those new wins at least with the Fairchild, those probably wouldn't kick into revenue until the back half of this calendar year?

Well when we win a design it typically takes about two to three quarters before it goes to full volume, yes you could say second to third quarter is when we'll see the impact. Although there is one design that we won early in the last quarter that would go into production sometime late this quarter; and that's actually a large volume design win. It's a [Ipsilips] DVD design win in China.

Okay. The second question is kind of related to the gross margin. I feel like in '07 you made a lot of progress penetrating like Tier Two and Tier Three power supply makers. Now if that were to reverse in '08 and you kind of get a lot more growth from the Tier One power supply makers, will that pressure your gross margins? And if so, what kind of steps can you do to offset that gross margin pressure?

That's a very good point. That is the balance that we are going after. We continued to double up the Tier Two/Tier Three markets by enhancing our online offerings, both the tools and the collateral material. But as you all know, the Tier Two/Tier Three, because it consists of so many customers for the same revenue, you can't grow that very fast. You can only grow at a certain rate, whereas Tier One can give a significant growth rate. So we are trying to balance the two. So last year we certainly had a large contribution from Tier One that allowed us to grow 18%, and I think this year also we have a lot of growth from Tier One, which will put a little bit of pressure on our gross margin, however we're working hard to offset that with cost reductions and of course from a timing point it won't be perfect. Some quarters will be a little bit higher gross margin, or maybe some quarters a little bit lower. But the best we can estimate there will be a slight trend down through the year, 2008. But any given quarter can be up or down.

Okay. And then one last question if you don't mind, maybe for Rafael. Do you think that in light of that gross margin pressure in calendar '08 that your EPS growth will be able to exceed your revenue growth?

Well I think so, yes, I think that would be the simple answer. We do expect growth in '08 over '07. We immediately will see some compression in EPS in Q1 mainly because of the additional expenses related to Potentia. But we'll see leverage in the model after Q1, so we will get back to higher growth on the EPS side, so that will start accelerating again beginning in the second quarter. But overall year-over-year we should see some growth.

Just to clarify, the operating income we believe will grow at a significantly higher rate than the revenue. But the actual EPS also depends on the interest income, which is hard to predict. Because right now our interest rate has already dropped a little over 4% and we don't know exactly what interest rates will do for the rest of the year. That happens to be a portion of our EPS, a source of our EPS.

We'll go next to Ross Seymore with Deutsche Bank.

Thanks guys. Just continuing on that Op Ex thing, Rafael, the $800,000 to $900,000 you talked about for Potentia, is that included in the 20 to 20.5 Op Ex guidance?

It is, yes.

Okay. And then a little bit of clarification also on a prior question. With the nationalization of the CEC, kind of Version 2, Balu you talked about it gets more difficult to use a Discrete solution. Are you already seeing those that switched from Linear to Discrete a year ago switching again? So OEM customers having to make that switch twice?

Maybe I confused you a little bit. The CEC standard that is being adopted by the U.S. energy bill is only slightly tighter than the existing CEC standard. The one that is dramatically tighter is the Energy Star Version 2 standard, which is a voluntary standard, and that's where we are seeing that the people who are using Discrete solutions today are inquiring about our solutions, because we can meet that very easily, even though it's a very tight standard. But as far as CEC goes, the second phase of CEC is only 1% higher in efficiency roughly.

Okay so that in and of itself, the fact that it's mandatory is the change, not that it's incrementally that much tougher than CEC?

Correct.

Okay. As far as the quarter you just reported, which was nice upside, how would you guys break down the up 6% versus the flat? What was the surprise by either products or end markets, and kind of how did it unfold through the quarter?

Well we saw growth in both consumer and the cell phone market, and of course not so much in the communications market. In the communications market the contribution came both from cell phones and non-cell phone applications. So it was actually quite broad based, except for the industrial market, which was down slightly.

Okay and it wasn't as if all of a sudden turns came in late in the quarter, it was relatively steady? Or vice versa, it slowed down at the end, or anything?

It was a typical fourth quarter for us where our shipments are strongest in October and it declines slightly in November and again in December. That's pretty standard fourth quarter for us.

Okay. Then the last question, a little bit of housekeeping, how should we think about litigation expense for 2008 as a whole?

So what we've modeled so far is somewhere in the neighborhood of $3 million to $5 million for the year, and it will be lumpy depending on just legal activity, obviously. But for the first quarter we're assuming roughly $1 million.

Great, thanks.

We'll go next to Craig Ellis with Citi.

Thanks guys and good job in the quarter. Rafael, first a question for you on the way you're looking at gross margins in calendar 2008. Obviously you're leaving an allowance for growth in the Tier One customer base. Are you thinking that the year-on-year decline would be similar to what we saw in 2007, or are you thinking that the Tier One customer growth would leave you with a greater decline than we saw last year?

Well I guess I look at it a little differently. If you look at where margins are today, at 53.8, my best guess is they go down slightly as we ramp Tier One programs. So I think it will be a modest decline from that level throughout 2008. And the big variable, one again, it will depend on mix, particularly in light of whatever concentration we see in Tier One.

Okay, so not quantifying anything, but it sounds like you're saying it would be less than 100 basis points.

I can't give you a specific number. It will be significantly above 50, but slightly lower than where they're at today.

It also depends on how effective we are with the Tier One programs we are going after.

The positive, if we do grow margins will come down, is we'll get much more profit dollars and operating dollars to the bottom line.

Okay. Can you talk at all about where you think you have specific OEM opportunities, given that that's going to be an initiative this year?

Well there are a number of them; the one obvious one is of course getting some of the Samsung business back. But there's quite a few of them, not just in the cell phone area, but in lots of different areas. I'm not sure we want to go into specific customer names at this point.

Okay, but they would be in that communications end market, Balu?

Not necessarily.

Okay. And then lastly, you announced the $50 million buy back program, there's $200 million in cash on the balance sheet, so how did you look at what the right amount was for the buy back, and how should we think about the pace at which you'll be using that?

Well we picked the $50 million after discussing with the board; I'm not at liberty to discuss everything that happens on the board. But given where we are on our stock price, we think that this is a very good move to go repurchase stocks.

We look at the typical variables of alternative uses of cash, and this was obviously one of them. We came up with the $50 million number which was reasonable to us and approval by the board of course.

We'll go next to Gus Richard with Piper Jaffray.

Yes, thanks for taking my question. The mix of Link in the quarter was a little bit stronger than I would have thought, and given that, I would expect a little bit more gross margin pressure in the quarter, given that's a newer product and a little bit below corporate average. What was the offset to help keep gross margins actually up sequentially?

That's a very good observation. I think I mentioned in the last conference call the demand for Nokia wrapped up so fast, we were barely able to meet the demand in Q3 and we didn't have a chance to fine tune the manufacturing efficiencies. We did have a chance to do that in Q4, which improved our gross margin on that business. So that allowed us, that was the main reason; there were a few other improvements we have done. But basically cost reduction, manufacturing cost reduction.

Is that mostly in the test program?

It's actually a combination of packaging cost reduction and test program, I mean the yield implement and test program time reductions.

Okay and then you mentioned a couple of times that you've got this Energy Star Version 2 going into effect later this year. Can you narrow down to maybe what quarter you think it might be implemented, and any obstacles to that standard being implemented?

The date that has been proposed is July 1, but I would not be surprised if it is delayed by a month or two. And as far as we can tell, there is not a lot of opposition for it at this point in time. We can only tell what we see in meetings.

Okay. And then in the Q1 guidance is there any revenue coming from Potentia, and when would you expect revenue from that acquisition to start layering in, if not Q1?

So there are no revenues coming in from Potentia in Q1, we may see immaterial revenues in 2008 and hopefully material revenues in 2009.

But just to clarify, Potentia brings some expertise, but going forward we won't distinguish their products from the rest of the company's products, because it will be really an extension of our design team. And there's a lot of cross pollination of ideas and it's the combination of the two that will end up in the products. So just to be clear, the high power products will not contribute any material revenue this year, but we expect it to contribute in 2009.

And just roughly that acquisition, how much dilution do you think that had for all of calendar '08?

How much dilution it will have for all of calendar '08?

Right.

It's in the range of $0.09 to $0.10 for the full year.

Okay.

This is basically $800,000 to $900,000 per quarter. So that's like $0.03 per quarter.

Okay, got it.

A little less than $0.03, it's in the neighborhood of $0.09 to $0.10 for the full year.

Okay, got it. I think that's it for me, thanks.

Thank you.

Thank you.

We'll go next to Steve Smigie with Raymond James.

Great, thank you very much. I'm just hoping you could talk a little bit about what growth might look like in 2008. And you've had some great successes in 2007. You already brought on Nokia; you've said the Linear market's about 50% switched over to Semiconductor Solutions and I'm just curious. How does that impact growth in 2008? Or is there still -- can you grow faster in '08 than '07?

Well, we haven't given the guidance for 2008. Everything I see looks very, very positive in terms of the market share we're winning. The biggest question, of course, is the macroeconomic environment. There is a lot of talk about a downturn in demand. Even though we haven't seen it, we are cautious about that. Because a number of our peers seem to have seen it.

Our January was quite a normal month and our February, of course, the first week is always low in bookings because of Lunar New Year holidays in Asia. So, until we go through the rest of the quarter, we won't know whether there's any downturn in demand. But, assuming there is no downturn in demand, 2008 should be a very good year for us.

Okay. And, with regards to the LED lighting, could you talk a little bit about your product portfolio there? Exactly, what you're addressing with your products and what parts you may have coming out for that? And what the competition looks like there?

Well, we addressed the offline LED market, that is, LEDs that are plugged into the wall outlet, are connected to the wall outlet. So, these are high voltage AC to DC converters. And because LED requires DC drive, pretty much any of our products can be used to drive LED. They just actually fit very well with the LED application.

Predominantly, it is LinkSwitch or TinySwitch. There are some LED applications where we use TOPSwitch also.

Okay. And I guess, with defeating Fairchild here and it sounds like you're going to get business back from BCD; have there been other people coming in, seeking to copy from you, or after winning five or six of these lawsuits, it's pretty clear that your IP is pretty strong?

We sure hope they learned something from what we have gone through and we are hoping that we won't have blatant violations going forward.

Okay; great. Thank you.

We'll take a follow up from Sumit Dhanda with Banc of America Securities.

Yes, Balu, a couple of questions; any update into wireless and other cordless phone customer bases or (inaudible). I remember that I've seen a slower than anticipated uptake. Anything you could update on that?

Yes, that's a good question. That's been the slowest market to adopt new technology. And, in fact, they've been resisting this for a long time. And what we are finding is that, to meet the California Energy standard, they actually put more money into the Linear, to make it a little bit more efficient. And the existing CEC standard is loose enough that they are barely able to pass under it.

However, with the European standard coming out, that's going to be a lot harder because of the higher voltages. With the two 30 ((highly accented language) they would have great difficulty meeting the efficiency with the Linear transformer. So, we are hoping that that will force them to change completely.

Having said that, we have a couple of, you know, two dozen customer designs in cordless phones. But still, there's a lot more to convert to switches.

Okay. A question on TinySwitch, if my math is correct, it seems like revenue there was actually down on a dollar basis. If that is accurate, can you explain what happened there?

On a sequential basis you mean?

On a sequential basis.

I think very slightly; I think that's correct.

So it's nothing that we should be reading into that?

The biggest impact that I would think is the computer business, which went down. Computer was very strong in Q3 and it went down in Q4. And a large portion of that business is TinySwitch, in the PC standby.

Can I ask a couple more? Just first, you know, a couple of your peers have talked about weakness in the China handset market. Could you remind us what exposure, if any, you have left there and what trends you've seen in that particular segment of your business?

Are you talking about China?

Yes.

Well, we've been calling our customers to see whether there is any sign of a downturn. And all of our customers, or the customers we have talked to, in fact, our VP of sales was there in China last week; and they're all concerned about the impending downturn. But they have not seen anything.

This is what is puzzling to us, that we haven't seen it; they haven't seen it but all of us are concerned about it.

And, could you remind us again, what is your exposure to China handsets, 10%?

Oh China handsets?

Yes, China handset.

As a percentage of the handset revenue, it probably ranges anywhere from 10% to 20% of the total, depending on the quarter.

And you've seen no weakness in that particular sub segment?

That's a good question We don't get into that kind of detail on a monthly basis. So, we would know that better at the end of the quarter because, the bookings, on a monthly basis, have a lot of variations. It's kind of hard to make any conclusions of it.

As best we can tell, that part of the business was flat to slightly up, in the fourth quarter.

And one last question for you; on Fairchild, you know, any more clarity on when we could see the actual injunction and any -- and you know, the final damages? And let's assume that the damages are significantly higher than initially assessed, what would you propose doing with that cash, more buybacks?

Let me answer your first question. The post-trial motions have all been filed. And we are waiting for the judge to schedule a post-trial meeting. And that can happen any day. I'm assuming -- it could happen in February, this month. And the decision is totally up to the judge. He could make it at the motion, at the post-trial meeting or he could do it any time after that.

And anything you want to add on the damages, what you might do with the extra cash?

Oh; in terms of the damages, well, first of all, we won't probably get the money in our hands for a while. So, I'm not too worried about exactly what to do with it. But there are several things we can do, including buybacks, for example.

Yes, as far as use, it'll really depend on what opportunities are in front of us at that point.

At that point in time.

And also, can you give us a timeframe on the buyback? Is it a couple of quarters? Are you being opportunistic because the stock price has come down significantly too?

It'll really depend; it's based on certain price and volume opportunities. But it just depends on where the price is and the ability to buy back at certain price levels.

Thank you.

We'll take two more questions.

We'll go next to Andrew Huang with American Technology Research.

Oh, thanks for the follow up. So just on litigation, I just want to make sure I have everything outstanding. You still have a system general and BCD. Is that correct?

That's correct.

Okay and (inaudible).

We also have a little bit of expense on Fairchild because these post-trial motions (inaudible).

Right. So, when you talk about those post-trial motions, is that basically Fairchild's appeal?

Fairchild can appeal the decision and they probably will. But that's different; that's after, I think, the judge makes the decisions, usually, is when that's done.

Okay. And I guess the second question I had was, with respect to the energy bill, I mean, once CEC kicked in, I mean, do you feel like most OEMs out there already started to make the transition? So, I guess where I'm going is, how much incremental business do you think the energy bill can generate for you in terms of, like, (inaudible) new designs?

Yes, that's a good question. I think most OEMs were going to use the energy efficient solutions across the country. But what this does is, it puts a nail on their -- it puts a definite date on it.

So, in the past, they might have decided to take it out of California first and slowly migrate to other states. But now, they have to migrate it to all states by July 1st.

Right.

So, I think that it accelerates the conversion, from Linears.

Right, got it. Okay and, oh; can you repeat your LED revenue number for 2007? I missed it.

It was $1.5 million, roughly.

Okay. Thank you very much.

Okay; let's take our last question.

We'll take our last question from Steve Smigie with Raymond James.

Great, thanks. I was hoping you could give us an update on the Japanese business.

Do you have that?

Well, we are looking for it; we don't have it in front of us.

I think it's fair to say it grew faster than the rest of the business last year, which is, you know, not surprising, considering it's a fairly small piece of the overall revenue and we, as you pointed out, have put some more focus in that area. But we don't break out the exact numbers.

Okay and then could you talk a little bit about how you're seeing pricing out there on Discretes? And then finally, just, you talked about ASP decline for your own parts. But, could you talk about how, like, on the same part, if there's any price decline?

Okay, so, in terms of Discretes, the individual components, like transistors, [resistors], and capacitors and so on; they've been relatively stable because of the raw material costs, which have been going up. In fact, in some cases, they've gone up, like (inaudible) have gone up in price slightly.

But the controllers that are sold into many of the Discrete solutions, they have been eroding in price over the last couple of years, especially in China. These are Chinese manufacturer controllers. So overall, our price erosion, there is some price erosion. But that is small compared to the ASP reduction we are seeing, which is more driven by mix than the price erosion.

So with (inaudible), maybe 8% on an annual basis?

Good question; I don't have the exact number. My guess would be on the order of 5% to 7%. But we need to calculate that.

Okay; great. Congratulations on a good quarter.

Mid single digits, we'll say.

Thank you everyone. That does conclude today's question and answer session. I'd now like to turn the conference back over to Mr. Schiffler for any closing remarks.

Okay, thank you. That concludes the call and a replay will be available shortly on the investor info section of our website, which is investors.powerint.com. There's a telephone replay available for 48 hours. The number for that is 888 203 1112, in the U.S., or 719 457 0820 from outside the U.S. And you'll need the code 1646294.

Thanks for listening and good afternoon.

Thank you. That concludes today's conference. You may now disconnect.