Power Integrations Inc (POWI) 2008 Q1 法說會逐字稿

Good afternoon and welcome to the first quarter 2008 financial results conference call for Power Integrations. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Schiffler. Please go ahead, sir.

Thank you and 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.

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

I would also like to note that our discussion today, including the Q&A session, will include forward-looking statements reflecting management's current forecast of certain aspects of the company's future business.

Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, anticipate, and similar expressions that look toward future events or performance. Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid and even abrupt changes.

Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release and under the caption Item 1A, Risk Factors, in our Form 10K filed with the SEC on March 10, 2008.

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. On behalf of myself and everyone here at Power Integrations I want to begin today by offering my thanks to Rafael, who has informed me that he will be leaving the company to pursue other interests. He has made a tremendous contribution as our CFO including his leadership through the extraordinary challenging [restatement] that we completed last year. I am grateful that he has agreed to remain in his position for the next several months as we search for his successor. And I'm confident that with his help, we will have a smooth transition.

Rafael is leaving us in excellent shape from a financial standpoint. Our balance sheet is as strong as ever. Our internal controls are solid and our business is performing well, both in terms of growth and profitability as evidenced by our strong first quarter results.

Our revenues for the first quarter were in the middle of our projected range, at $51.8 million, down 2% sequentially but up 14% compared to an unseasonably strong first quarter last year. Our non-GAAP gross margin was 55.1%, up significantly from the fourth quarter and we had another strong quarter, in terms of cash flow with nearly $10 million in cash flow form operations.

More importantly, we exited a critical quarter with considerable momentum. Orders came back strong after a soft patch in February and we saw the highest monthly bookings in our history in the month of March.

We also had an excellent quarter in terms of design wins. Most notably, we won designs at two suppliers of cell phone chargers to Samsung and we now expect to regain a substantial portion of the business taken from us last year by BCD. The fact that we have won this business back so quickly is a testament to the high level of integration, quality and reliability that we offer and proved the notion that a cheap solution is not always a low cost solution.

We have begun (inaudible) shipments on these designs and expect them to ramp up to full volume by the fourth quarter of this year. While it's difficult to predict the pace this production (inaudible), we believe these designs will ultimately represent somewhere between one-third and one-half of Samsung's chargers in volume. This will give us a substantial share of the charger business at three of the top five cell phone OEMs, making our cell phone business better diversified than it has been historically.

More broadly, we are very pleased with the breadth and diversity of designs won in the first quarter. We have a healthy mix of Tier One designs and smaller Tier Two and Tier Three programs. A few noteworthy designs include a high volume digital camera charger, also for Samsung; a cordless phone design for Uniden, using LinkSwitch; PC Standby designs for HP, Dell and Acer, using TinySwitch; a universal adaptor for Mobility Electronics, also with TinySwitch; a number of appliances and metering designs with LinkSwitch and an LCD TV design with TOPSwitchHX.

We have also one of our dozen new designs for LED lighting, which continues to be a promising emerging market for our products. We believe our products are extremely well positioned for this market because the power conversion use of LED lighting plays right into our strengths.

For example, because LEDs last up to 50,000 hours, they require highly reliable and durable driver circuits, which is a key benefit of our technology compared to discrete solutions. Also, because space is severely constrained in many LED applications, compact, highly integrated driver circuits are critical. And, of course, [energy] efficiency is one of the key benefits of LEDs, so it's obviously important to drive them with energy efficient power conversion circuitry.

We have an impressive pipeline of ongoing design opportunities across a wide range of LED applications and we think this market is shaping up to be a significant growth driver this year and for a long time to come.

The revolution that's taking place in the lighting market is a part of an unmistakable trend that we are all aware of at this point, which is the adoption of clean technologies in order to solve [most] energy related problems. To a large extent, this trend is picking up steam on its own, as consumers' awareness grows and manufacturers are increasingly able to differentiate their products on the basis of how green they are.

However, policymakers are also working to [accelerate] this pace of change and they continue to look at electronics as a major source of potential energy savings. In the past couple of years, for example, we have seen the emergence of widespread efficiency specifications, covering external power supplies, beginning with the mandatory California standards that took effect last year. These standards will become incrementally tighter on July 1st of this year and are also scheduled to take effect nationwide on July 1st, as a result of the Energy Bill signed by President Bush in December.

Meanwhile, the European Union is scheduled to introduce a similar mandatory standard later this year as part of its Ecodesign directive, while Version 2 of the Energy Star Specification for external power supplies is set to take effect on November 1st of this year.

External power supplies are the low hanging fruit of the power supply market because, by definition, they can be regulated independently from the end products they are paired with. Specifications for other end products tend to be a bit more complicated but we are seeing new developments on that front as well.

In the U.S., the California Energy Commission is developing standards for battery charging systems, such as those used with rechargeable tools. Energy Star has finalized a new specification for television sets, which is scheduled to take effect late this year. And the CEC is developing a mandatory standard for TVs that could take effect as early as next year.

Meanwhile, EU's Ecodesign program is in the process of developing mandatory standards on a wide range of products, including set top boxes, televisions, office equipment, computers and appliances.

And perhaps, most interesting of all, is the movement we are seeing outside of Europe and the U.S. Earlier this month, I attended the International Conference on Standby Power in New Delhi, India. This two-day conference brought together over 120 policymakers, scientists, manufacturers and technology providers from around the world to discuss ongoing efforts to reduce energy consumption of electronic products.

I was struck not only by the level of attendance at this event, compared to the past years, but also by the increased sense of urgency among the (highly accented language) of developing countries like Brazil, India and China. These countries understand that, as their societies advance and their middle classes grow, their energy needs are going to explode if something is not done.

For example, only 50% of the households in India currently have access to electricity. The government's goal is to provide electricity to every household by 2012, which according to the government, would require an additional 100 Gigawatts of generating capacity, which is equivalent to approximately 400 coal-fired power plants. Naturally, the Indian government is concerned about the potential environmental and economic consequences of this kind of growth.

Seeing LED efficiency as part of the solution, they have instituted a new labeling program that currently applies to products like air conditioners, refrigerators and freezers but is also now expanding to cover consumer electronics like televisions and set top boxes.

Similarly, Brazil has introduced a mandatory labeling program for TVs that has been extremely successful and is now considering standards for a range of other consumer electronics and computer equipment.

Meanwhile, China has implemented mandatory standards on TVs and now requires all governmental departments to purchase energy efficient products. South Korea, which has been disappointed in the results of its voluntary labeling program, is introducing a mandatory program that's expected to cover about 20 different product categories over the next several years.

Because this process is happening on a country-by-country, product-by-product basis one small step at a time, it is difficult to measure how our business will be impacted over time. However, the overall direction is absolutely clear. Electronics manufacturers, through a combination of consumer demand and regulatory pressure, are being forced to consider the energy consumption of their products more than ever before.

Improved power supply efficiency is a critical part of that equation and no company is better positioned to enable that than Power Integrations. The drive to improve energy efficiency of electronic products should continue to be a growth driver in our business for a long time to come. In addition, we are very excited about the significant growth opportunities in new markets, such as LED lighting and high power AC to DC power supplies.

Our current product portfolio is focused primarily on the lower power portion of the market, below about 50 watts. However, as we mentioned on our last conference call, we have plans to expand our addressable market by 25% or more over the next couple of years by addressing high power applications. Our acquisition of Potentia Semiconductor back in December, is a key piece of the puzzle and we are very pleased with the progress we are making on that front.

Potentia's design and application teams have been fully integrated into our organization and we are on track with our plans to begin introducing high power products beginning later this year and continuing into 2009.

We will certainly have a lot more to say on that front over the next several quarters. And with that, I will turn it over to Rafael for a review of first quarter financials. Rafael?

Thanks Balu and good afternoon. I would like to reiterate some of Balu's comments regarding my decision to leave Power Integrations, which was a difficult one to say the least.

We have accomplished a great deal, from a financial perspective, in my time with Power Integrations, most notably the demanding restatement process that we finished last year. Now having completed the project and put in place a new set of processes and controls, I've decided it's an appropriate time for me to move on and take on new challenges.

I am extremely comfortable with the financial condition of our business and the finance team that we have in place. And I've told Balu that I'm fully committed to remaining onboard for the next several months and doing everything possible to insure a smooth transition to a new CFO.

I'd like to spend a few minutes now on some of the detail behind our first quarter results. We had a very solid quarter, from a financial perspective, with revenues in the middle of our range at $51.8 million, a non-GAAP gross margin of 55.1% and nearly $10 million in cash flow from operations.

Earnings per share declined sequentially, as expected, driven primarily by the incremental expenses from the Potentia acquisition, as well as a steeper than expected drop in interest income, due to falling rates.

Our balance sheet remains exceptionally strong, and we began putting that to work in the first quarter, buying back $5.5 million worth of company stock.

Taking a closer look at revenues, we were down 2% on a sequential basis, to $51.8 million. The industrial and communications markets both grew at low to mid single digit rates, partially offset by slightly lower consumer revenues. Computer revenues declined in the low teens sequentially, driven primarily by seasonally lower shipments for desktop PCs.

On a year-over-year basis, we grew 14% against a tough compare. As you may recall, we had an unseasonably strong first quarter last year. Also we have not yet reached the anniversary of the Samsung business loss to BCD, and that had been running in the range of $5 million to $6 million per quarter, before ramping down in the second quarter of last year.

62% of our revenues in the first quarter were through the distribution channel, consistent with recent historical levels. ADNET, our largest distributor, accounted for 12% of revenues, and was our only 10% customer for the quarter. We ended the quarter with about 4.5 weeks of inventory in the channel, consistent with historical norms, but at the high end of the normal range. Turns orders comprised 58% of revenues during the quarter, and average selling price was $0.34, unchanged from the prior quarter. Detail on revenue mix by product, and by end market, is provided in the text of our press release, and as part of the accompanying tables.

Our gross margin for the quarter was 55.1% on a non-GAAP basis, up 130 basis points from the previous quarter. Roughly 40 basis points of the improvement was a one time benefit from the sale of inventory that we had previously written down. However, setting this impact aside, we still saw a meaningful sequential improvement in our gross margin, driven primarily by a combination of cost reductions and strong growth in revenues from Tier Two and Tier Three customers.

These gains were partially offset by the impact of the stronger Yen compared to the dollar, which impacts the pricing on wafers from our Japanese foundries. The exchange rate should put further pressure on our gross margin in the second quarter, as will the ramp of the Samsung design wins. However, we also continue to reduce product costs and increase our penetration of smaller, higher margin customers.

In light of all the different variables involved, it's difficult to predict where gross margin will be in any given quarter, and some fluctuation is inevitable. However, we continue to expect our gross margin to be well above 50% for the foreseeable future.

Looking now at operating expenses, we came in at $20.9 million on a GAAP basis, including $3.7 million in stock based compensation expenses. Operating expenses other than stock based compensation increased by $650,000 sequentially, driven by higher R&D expenses reflecting the Potentia acquisition.

As we mentioned on our previous conference call, Potentia has $800,000 to $900,000 in operating expenses per quarter, predominantly on the R&D line. The higher R&D expenses were partially offset by slightly lower G&A expenses, while the sales and marketing line was essentially flat.

Going forward we expect growth in R&D expenses to be very modest, as the Potentia acquisition satisfied most of our hiring needs in this area for the foreseeable future. Sales and marketing, and G&A expenses should increase at a slightly faster rate than R&D, but still well below the rate of revenue growth.

Non-GAAP EPS for the first quarter was $0.33, down $0.05 sequentially. The Potentia acquisition accounted for about half of the decrease, as expected. Other income declined by about $800,000 sequentially, contributing another $0.02 to the decline in EPS. This was driven by a larger than expected decrease in interest income due to the falling interest rate environment.

Our non-GAAP tax rate was 21% in the first quarter, and we expect it to remain in the 20% range for 2008.

Weighted average shares outstanding were 32.1 million on a diluted basis, down slightly from the prior quarter. We repurchased 202,000 shares of our stock during the quarter, at an average price of about $27.00 per share, using $5.5 million out of our $50 million authorization. We are conducting the buy back under predetermined guidelines that reduce the number of shares purchased as our stock price rises, so at current prices the buy back activity is ongoing, but at a slower rate than we saw in the first quarter.

Despite the buy back activity, our balance of cash and investments increased by $9 million during the quarter, to $213 million. Our investment portfolio consists primarily of cash equivalents and high quality commercial paper, rated AA and above. We have no exposure to option rate or asset backed securities, and have not experienced any write downs related to the difficult credit market conditions.

Cash flow from operations was $9.9 million during the quarter, a bit below the level we've seen in recent quarters, as inventories and receivables return to more normal levels compared to the historic lows they had reached in the fourth quarter.

We ended the first quarter with 30 day sales outstanding, up from 24 days. Inventories increased by about $2 million, to $21.9 million. This level equals 4.3 turns, well within our target range of four to five turns. Looking ahead, our starting backlog for the first quarter was slightly higher than the fourth quarter, thanks to the record bookings in March. Based on the healthy bookings trend we have seen thus far in April, we are expecting second quarter revenues in the range of $53 million to $56 million. The mid point of that range would be up 26% compared to the second quarter of 2007.

Gross margins should come down in the absence of the one time benefit that I mentioned earlier, with some modest incremental pressure from the Dollar/Yen exchange rate, and the start of the Samsung ramp. These factors should be partially offset by ongoing cost reductions and further growth in Tier Two/Tier Three revenues. Netting out these factors, we are expecting a second quarter gross margin of 53% on a GAAP basis, plus or minus half a point. That includes a one point impact from stock based compensation.

We expect total operating expenses of approximately $21 million in the second quarter, including about $3.7 million of stock based compensation and $1 million in patent litigation expenses. I expect interest income to continue trending downward, though the sequential decline in Q2 should be considerably smaller than what we saw in the first quarter. And again, we expect our non-GAAP tax rate to remain around 20% throughout 2008. With that, we're ready to take questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Ross Seymore with Deutsche Bank.

Thanks, and congratulations on the results, guys. Balu, could you go a little bit into the Samsung business, remind us how big it was at one point, and if there's any major ASP difference, so while you might get back half the units the total revenue might be a different opportunity?

Yes. So the Samsung business used to run about $5 million to $6 million a quarter. With the design wins we have gotten so far, we think that we would get about one-third to one-half of the Samsung business, and that's actually very hard to quantify right now, because we don't know exactly what percentage our subcontractors would get. However assuming it's in that range, our revenue potential on an annualized basis would be $10 million to $15 million.

Okay and you said that will start shipping a little bit in the second quarter already. How should we think generally about the linearity?

Well it's going to pre-production in Q2, the business in Q2 we think could be as much as $1 million, but by Q4 they should be in full production.

Great, so you'd be up closer to -- and I guess there's normal seasonality, so you'd be up closer to, say, $4 million or something in the fourth quarter?

Yes if you're on the high end of the numbers I gave you.

With normal seasonality as well.

Right.

Okay, and along those lines, how was your communications business within this first quarter split, between wire line and wireless? And any color between those two would be helpful.

Ross, its Joe. The cell phone business was about 22% of total revenues for the quarter, and as you saw in the press release, the total communications segment, including cell phone, was about 30%.

Okay, so the cell phone business actually went up pretty nicely sequentially. Was there anything - if Samsung wasn't shipping was this just more penetration with Nokia?

Yes, our Nokia business increased in Q1, and so did our LG business. But we think that there is a little bit of over hang from the Q1 purchase at our customers for the Nokia suppliers, so we expect the Nokia business to be slightly softer in Q2 because of that. Because apparently the demand from Nokia was weaker in Q1 than our customers expected.

Okay, and then the last question is, when you look at the legal front, can you give us an update on where you are both with Fairchild as well as BCD please?

Sure, as far as Fairchild goes, we are still waiting for the judge to rule on the post trial motions. We were expecting that that ruling would have come by this time, but apparently the judge is very busy. So we are hoping that will come very soon. There are a number of motions, including the tripling of the damages that we were asking for, based on the willful infringement. As you know, we got a $34 million jury verdict for damages that we're asking the judge to triple.

And as far as the BCD goes, we are in the early stages of discovery, and as you may know, BCD is trying to move the case back to California, and we have been given access to information in the company to prove the jurisdiction is valid in Delaware.

Okay, so litigation expense and how that rolls out for the year, just keep thinking of it as pretty consistent?

For the whole year we still think it's going to be in the order of $4 million, but it could be lumpy, depending upon how much discovery gets done in any given quarter. But it's hard to predict, so we are just assuming $1 million on the average, per quarter.

Okay, great. Thank you very much.

You're welcome.

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

Yes, hi. Good luck with the new opportunities, Rafael.

Thank you Sumit.

The one clarification I wanted, Balu, can you tell us how many charger suppliers there are to Samsung? You've got two wins, two separate wins, so just from the perspective of what percentage of the share you have.

Sure. There are about six suppliers to Samsung, but they're not all equal. It just so happens one of the designs, one of the customers we won, is the largest supplier to Samsung, and that supplier is the one who actually brought in BCD into Samsung. So it's kind of ironic that they were the first ones to design out the BCD solution in favor of our new product. And actually at that customer we have two separate models; one is the BCD replacement, but Samsung also has a new low power charger that we are designing too and that uses one of our existing chips, which is LinkSwitch-LP.

And the second customer, which is a subcontractor, another subcontractor to Samsung, and once again we have won business there, and we are hoping we can get more business from other subcontractors now that we've been able to get qualified through two different subcontractors.

Thank you. On LinkSwitch, the first quarter in a while that it didn't grow as a percentage of your revenue mix, despite computing being the weak segment and Palm being the stronger segment. Any particular area where LinkSwitch was weaker?

Not really, as a fact the Nokia business was up during the quarter, and I think the LinkSwitch business will continue to grow, because the low power design that I talked about in Samsung will be using the LinkSwitch-LP product. But it probably won't grow at the same rate as it has grown in the past, because the products that had linear transformers, we think about 50% of that market has converted. The other 50% will probably take a longer period of time, so the LinkSwitch (inaudible) will continue to grow, but not at the same rate as it has grown in the past.

And then on the LED opportunity, you did about $1.5 million in '07, you thought it would double or triple in '08. Has that changed with ostensibly a dozen design wins? Could that number be even higher than that this year? Or is two to three X still the right way to think about it?

Well in the first quarter, we were slightly under $1 million in revenue from LEDs. As compared to, for the entire year last year, we did $1.5 million. So, that bodes well for the LED revenue growth this year. So, I think 3 times the revenue is very, very doable. It could be even higher.

Okay. That's all I have for now; thank you.

Okay. Thanks, Sumit.

Our next question comes from Andrew Huang, with American Technology.

Hi guys. Can you hear me okay?

Yes. Hi, Andrew.

Hi, Andrew.

First, Rafael, good luck with your new opportunities.

Thank you.

Balu, maybe you could talk a little bit about -- I just wanted to clarify one thing on Samsung, because, you had talked about the business being $5m million to $6 million a quarter. Is that specifically the cell phone business? Because there are, obviously, lots of other electronics that Samsung does and I was just wondering if that includes that.

No. It was just the cell phone business. Yes, we do a lot of other businesses with Samsung, including this new design win we got with digital camera, which is actually a pretty high volume design win.

Okay.

So, that $5 million to $6 million that we had in the first quarter of last year is just cell phone business.

Okay. And then, I was wondering, can you comment on what the gross margin would have been, excluding the inventory that, I think was it, did you say was sold?

Yes. We previously wrote it down to zero and were able to find customers and sell it. So, that was roughly 40 basis points. So, it would've been 54.7, roughly

That was non-GAAP The non-GAAP would have been 54.7; that will be the co-gross margin, excluding this one time credit.

Balu, can you explain to me how you're able to kind of buck the trend and keep that gross margin going up on a sequential basis?

Well, really, two areas; one is cost reductions. We have done a very good job and we continue to do a good job. We have a number of other initiatives that will reduce cost over time.

The second one is that our Tier Two/Tier Three revenue grew significantly in Q1, partially because industrial usually does very well in Q1. And also because we have been focusing on our efforts to increase our Tier Two/Tier Three customers through a number of initiatives, including web-based tools and collateral material and so on and so forth.

You know, one thing I think that would be helpful is that, when I talk to investors, a lot of people are concerned about the CEC kicking in on, I guess, July 1st of 2007, when that happened. People are just kind of trying to figure out, that already happened in 2007, but, you know, with President Bush signing the energy bill and Europe kicking in, I mean, how much is that really going to impact your business, going forward? Because some people feel like after CEC was announced, everyone already kind of decided to transition over to switching power supplies.

That is -- in some respects, it is true, in a sense that many manufacturers switched over, not just for California, but for the whole country.

Having said that, there is still significant conversion yet to happen. Our best guess is about half of the linears have converted. Let me give you one example.

In cordless phones, that conversion is yet to happen. Only a very small percentage of cordless phones have been converted. The remaining cordless phones continue to use linears. They have gone to more expensive linears to meet the CEC standard. However, once the European standard comes through, which is similar to CEC but European voltages are higher, which makes it even harder for the linears to meet the standard, it's very difficult to meet it for the European made.

And we are already seeing the cordless phone manufacturers, who were reluctant to change and now are thinking of changing because of the European standard. So, I think there are a number of areas, including tools and so on and so forth, where the linear to electronic conversion is yet to happen.

Got it. Okay. Okay, that's all I have for now. Thank you very much.

You're welcome, Andrew.

(OPERATOR INSTRUCTIONS).

Next, we'll hear form Vernon Essi, with Needham and Company.

Thank you and also, good luck, Rafael.

Thank you, Vern.

Just to follow on that last line of questioning, I always hear the saga in the background, in the engineering front, about, I think it's a surge protection issue that people will have with your solution for cordless phones. I guess the PODs engineers and the telephone network get all worked up about that.

Can you discuss how that debate is going and if that's ever going to turn a corner?

Well, there were concerns that they cannot meet some of the specifications for cordless phones without using a linear. But now there are a number of cordless phones that meet the spec in the marketplace, especially in Japan, where, to meet the energy efficiency requirements, you have to use an electronic power supply.

So, I think it's more of a fear of the unknown and I think that they're basically slowly getting used to the fact that you can design a power supply to meet the surge requirements.

Okay and if we were to look at sort of the target market opportunities that have yet to really embrace the switching technology, you would still put this as probably one of the highest untapped markets in terms of units?

Correct. Yes, that is number one, followed by tools and then after that it's very fragmented. There are probably 100 different applications and, if you just walk around your house, you'll say how many transformers are hanging up the wall, including security systems, you know, the early warning fire systems, low voltage lighting for your garden and so on and so forth. And then the heating and cooling systems, they all have transformers.

Okay, just to switch gears here to channel inventory, do you feel comfortable with the level you have right now? Would you like to have more?

Historically, we have not increased our distributors to have more than more than four to four-and-a-half weeks of inventory. The reason being, it's a lot easier to service our customers having all the inventory at the factory now and in one place.

And the lead times in our products are only about four weeks. And so, there is no reason for the distributors to have more than four weeks to service their customers. And if you look back, I mean, as far as I can remember, it's always been between four and four-and-a-half weeks. So, we are very comfortable with that.

Also, the other part of the trend is the fact that inventories did increase in January/February that have actually come down in March. So hopefully that trend continues.

Are you talking internal inventories there?

No. I'm talking about inventories in the channel.

Okay, okay. And that's the other question too, is just in terms of production, things are sort of steady as she goes with your foundry partners. Is there any shifting going on? Are you doing any cost-downs, by the way, in the near-term?

Well, as you know, we added a new foundry last year, which is Epson and it's a very competitive foundry, so we are in the process of ramping (inaudible) to that foundry that will give us some overall cost advantage.

But we're also doing other things at our existing foundries to reduce cost, like going from five-inch to six-inch wafers at OKI.

Okay and how much of the production would that be then, like, towards the back half of the year? Would you be looking at mostly all six inch?

Currently, the (inaudible), which used to be [ZMB], and Epson is six-inch. And OKI and MEI are five-inch, but as I said, we have just begun qualifying six-inch at OKI. But it probably won't be fully qualified until next year.

All right; that's all. Thank you very much.

You're welcome.

And we will move next to Steve Smigie with Raymond James.

Great, thank you. Can you hear me okay?

Yes. We can hear you very well, Steve.

Great. Balu, given the CEC standards and the whole movement to more energy efficient, you know, products that are demanded out there, can you talk about if you've seen any change in how frequently or how important power management has become in terms of designs? I think traditionally you guys would tell a story and suggest that, you know, power was fairly slow. You know, maybe every two, three years you might have a new design come up and so, while your product was excellent, you know, it often took you a while to get into stuff just because the re-designs didn't happen very often.

Have you seen that speed up or accelerate at all because of those standards?

Absolutely. That's one of the advantages of the energy efficiency standard. It forces more design, re-design, than would happen normally in terms of new products coming out with new power supplies.

So, that gives us an opportunity to grow our revenue faster because there are a lot more re-designs going on.

Okay. And could you talk a little bit about, you know, cost comparison, versus, discrete solutions? I've missed a little bit of the start of the call so maybe you'd addressed it already but how you're doing sort of currently, versus the competitive solutions? And if the price of, you know, higher commodity prices, like gold and copper and etc., have made your solution maybe even more efficient since you have only one part and your competition has multiple parts?

Yes, because by definition, the discrete components have more material and more labor involved. And both the raw material costs and labor costs have been going up. As you might have heard, labor costs in China have been going up at a 30% per year rate.

So, all of that bodes well for into their solutions because it has less raw materials and it takes much less labor to assemble them.

Have you seen any pick up in design wins based on that?

Well, what we do is we price our products so that we are equivalent to the (inaudible) solutions at the system level. And that's been our policy. We are not a price leader.

But we - at the system level, there is no price penalty to use our product. But we bring a number of advantages, including ease of manufacturing, much higher quality and reliability. And I think that's the reason we actually got back the Samsung business, even though, on the surface, BCD's solution looked cheaper. But the subcontractors had significant trouble manufacturing it and we've also heard that there have been quality and reliability problems.

Okay and then, the last question is just about Nokia. I think you talked about it already a little bit but, if I could just understand, you do not see any weakness this quarter or in terms of your guidance, in terms of the Nokia business?

Well, in Q1 our Nokia business actually grew slightly. However, the customers we're working with tell us that they have some inventory left over from Q1, which means in Q2 there will be a slight decline in our shipments to them. And the main reason was that the Nokia demand was softer in Q1 than originally anticipated. But all of that is actually figured into our guidance.

Right, so it would seem that, you know, it's you guys are maybe both on some of the high end as well as the low end handsets at Nokia. I'm just trying to, you know, understand that part of your business a little bit better because, it's positive. In certain ways, it seems like for Nokia, they're going to have some higher end handsets, probably shipping some new products coming out in the back half that could help you but the low end is also growing very fast for them. So, it seems like you're in both sides of the story. Does that seem accurate to you?

I would say we are more in the lower end charger, which constitutes 75% of their shipments. And there are five suppliers and we have two of those and, from everything we can tell, we are getting the fair share of their highest volume model.

Okay; all right. Thanks a lot; I appreciate it.

You're welcome.

And next we'll move to Gus Richard, with Piper Jaffray.

Yes, thanks for taking my question. Just quickly, on accounts receivable, they were up pretty significantly and sequentially. I was wondering if you'd just talk about that.

Briefly, obviously, as revenues trended down from Q4 to Q1, so that's really the biggest effect. Outside of that, 30 days is very typical in our business. The reason they've been low historically, is just effectively, when you're on a ramp the way that we were, you're aging -- you're collecting a lot faster. Also, year-end, you also make a big, big push at year-end to pull in as much dollars and cents as you can and customers typically expect that.

So, just seasonally, you're going to see slightly higher aging, beginning in the first quarter.

Just to add color to that, if you look historically, our days' outstanding has always been low at the end of the year, because the December is the weakest month of the fourth quarter. So we have already collected the money from November, and December we don't ship as much.

Got it, and then typically, as I recall, you guys tend to try to keep your foot steady on the production pedal, and typically build a little bit of internal inventory in the first half, when demand is weaker.

Absolutely, in fact if you look at our turns, we ended the year last year at five, because the second half is always stronger for us. We are now building inventory, we are at 4.3.

Right. Did that have an impact on gross margins in the quarter? You're basically running at a little bit higher run rate in terms of manufacturing. Did that give you a little bit of boost to the gross margins?

There is a boost from building out inventory in earlier quarters and then shipping them in the follow on quarters.

Just be clear though, we try to maintain the manufacturing at a very sturdy level, gradually growing. So the gross margins are relatively stable as far as the manufacturing part goes. To the extent we are shipping more units, it does help with gross margin, and that's one of the places we got the benefit because we are shipping more units than we were shipping a year ago, for that matter.

Okay. And then sticking with gross margins for a second, is there a seasonal pattern to demand from Tier One versus Tier Two/Tier Three customers? Tier Ones would tend to be cell phone guys, and PC guys I would imagine, would have Q1 seasonality where there's weakness and then Tier Two/Tier Three might be smaller industrial/medical, whatever applications that tend to do a little bit better in the first half. Is that something you guys are experiencing, or is that -- it's just a guess?

Well the only trend I have noticed is that in Q1 industrial, for some reason, is always stronger, related to other quarters. But even that must change if LED becomes a huge growth factor in the industrial market. Other than that, the Q1 is really a reflection of how much overhang there is from the holiday season in December. Sometimes there is some overhang so Q1 is down; in fact I think most quarters it has been slightly down. Some quarters we have grown right through it, last year was a very strong Q1, primarily because some of the shipments occurred late in the quarter that were really meant for Q2. And that's one of the reasons the year-to-year comparison is only 14%. And as you notice with our mid point of the guidance in Q2 we would grow 26% because Q2 was weaker last year as we lost Samsung in the middle of Q2.

Okay. And then, the final one for me, Balu you went through a number of new regulatory standards around the world, and a number of products that will increasingly have regulation coming to them for standby power, etc. Sort of what regions and what markets, outside of external power supplies, would you expect to see new regulations drive your business? And which ones of these do you think would have the biggest impact?

That's hard to say, but I can name applications where we know the energy efficiency is driving our business; one is DVD, the other one is set top boxes, the other one is TV standby. Once again, for standby they have to use a separate standby power supply, and of course it's been the key driver for us in the PC main market, where we are in the standby power supply. Then also LCD monitors will be another area where it will help us in the future, and appliances, all sorts of appliances, refrigerators, washing machines, dishwashers, they all have energy efficiency requirements depending on the geography, and we've had a lot of design wins there because of that.

Okay and I would imagine the first three are the bigger market opportunities for you, DVD, set top box and TV standby.

Yes, but I wouldn't underestimate the appliance market. We have done really well in the appliance market.

Okay. All right, I'll stop here. Thanks so much.

You're welcome.

And we'll move next to Donald Bissom with Evergreen Investments.

Hi guys. Real quick, did you mention litigation expense in the quarter?

Litigation expense was roughly $1 million in the quarter.

Okay, thanks. Good luck Rafael.

Sure, thank you.

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We'll hear next from Steve Smigie.

Just on that appliance business is that product only for AC/DC motors, or does a shift to DC motors help out on those appliances?

It's actually independent of the variable speed DC motors. Because most appliances these days have electronic controls, if you've noticed, they're going away from the mechanical controls. So that electronics board requires usually a few watts of power, typically in the two to five watt range, and so we have a lot of design wins with TinySwitch and LinkSwitch in those markets. And surprisingly they are going away rapidly from linear transformers with LinkSwitch, because of the cost of the transformer.

Can you talk about whether you think Q3 will look like normal seasonal pattern, meaning up 16% or so, you don't have to comment on 16%, but a strong seasonal quarter?

Well we haven't given any guidance beyond Q2, but I have no information one way or the other in terms of seasonality. Q3 has been usually a high growth quarter for us in almost all of the past years.

Then you have no reason at this point to believe that it wouldn't be?

Correct.

All right, thank you.

And we will move next to a follow up from Sumit Dhanda with Banc of America Securities.

Rafael, could you remind us again the sensitivity to the movement of the Dollar/Yen exchange rate, and then the lag time versus when it shows up in the gross margin?

Sure. Roughly a 10 point change in the Yen exchange rate translates into roughly a one margin point impact, and that's typically a two month to three month lag.

And how often do you renegotiate your wafer pricing contracts?

Usually once a year.

Okay, so if the dollar starts to head in the other direction, appreciate versus the Yen, we won't see any immediate benefit, maybe in the second half.

Yes it takes - we have a cycle time of about two months and then we have to flush through the inventory, so it could take a few months for the exchange rate effect to flow through to the gross margin.

The other question I have was just on the business in general, is the targeted turns very similar, is it 58%, slightly higher, slightly lower, to hit the mid point of the guidance? And then you said orders were very strong in March; did that strength persist through the first three weeks of April.

We would need similar turns to what we experienced in Q1 to meet the middle of the guidance for Q2, which was high 50s.

And then the strength of March has that persisted through April?

March was extraordinarily strong, April is also very healthy. Not as strong as March, but strong. I think March was an exception. I would say that April is very good bookings, and if this continues we'll do really well in Q2.

And then just the big picture, Balu, if we see something close to normal seasonality in the second half of the year, you're easily knocking on 20% growth this year. Do you feel comfortable, if you take the macro out of the equation, given all the opportunities you have, that this is, at least over the next couple of years, a sustainable sort of growth rate we can look forward to?

Again if you remove the macro out of this, I think we are in for a very strong growth over the next few years, because of all the drivers, and energy efficiency will continue to drive us because of the standards on other appliances and external power supplies. The second one, in terms of the timing, energy efficiency is already impacting us; it will continue to impact us positively for the next few years. Number two, the high power products should start generating material revenue starting next year, and will add to our growth. Number three is LED, that's a little bit further out, even though it's growing very fast right now, the total dollar value, well it depends upon how fast it gets into the mainstream. But if I were to guess, that's the third in terms of time that will help us grow.

So we have a lot of overlapping growth factors that will help us keep growing very nicely for the next several years.

Thank you very much.

You're welcome.

And we have no further questions in the queue. I'd like to turn the conference back over to Mr. Schiffler for additional or closing remarks.

Okay, thank you. That concludes the call for this afternoon. A replay will be available shortly on the investor info section of our website, which is investors.powerint.com, or there's a telephone replay available for 48 hours, and that number is 888-203-1112 in the U.S., or 719-457-0820 from outside the U.S., and the access code is 6343649. Thanks for listening, and good afternoon.

That does conclude today's conference; we thank you for your participation. Have a great day.