Power Integrations Inc (POWI) 2008 Q2 法說會逐字稿

Thank you for standing by, and welcome to the second quarter 2008 financial results conference call for Power Integrations. Today's conference is being recorded. Now at this time it's my pleasure to turn the conference over to Joe Shiffler, Director of Investor Relations and Corporate Communications. Mr. Shiffler, please go ahead.

Thank you and good afternoon. I'm Joe Shiffler, Director of IR and Corporate Communications for Power Integrations. With me on the call today are Balu Balakrishnan, President and CEO of Power Integrations; and Bill Roeschlein, our Chief Financial Officer. Balu and Bill 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 principals. Please refer to today's press release for an explanation of 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, suggest, project, forecast, 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; and our Form 10Q filed on May 9, 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. I'd like to begin by welcoming Bill Roeschlein to Power Integrations as our new Chief Financial Officer. Bill joined us on June 30 from Selectica, where he had been CFO since 2006. He has an outstanding background in finance in the technology sector, including public accounting and investment banking experience, as well as corporate financial management experience at Ultra Clean holdings, Asyst Technologies, and Hewlett Packard. I am delighted to have him on our team, and I'm confident that he'll make a big impact here at Power Integrations.

Turning now to our second quarter results, revenues were up 3% sequentially and 24% year-over-year to a record $53.6 million. That was within our guidance, despite the sudden and unexpected bankruptcy of HNT Company, which had been the largest supplier of cell phone chargers to Samsung.

As we reported on our Q1 call, we had expected two new designs to ramp up at HNT during the quarter in place of the competing solutions from BCD Semiconductor. Unfortunately, after taking a small preproduction order, HNT closed its doors and cancelled its outstanding orders. We estimate that shutdown cost us about $1 million in revenues for Q2, which would have put us right around the midpoint of our guidance.

While this was obviously a disappointing development, our business with another one of Samsung's subcontractors is on track, and should contribute material revenues in the September quarter. In fact, the customer has now awarded us a second design, which should ramp up over the next couple of quarters. While it remains to be seen how Samsung reallocates its charger volumes after the shutdown of HNT. We currently expect these two designs to reach an annualized run rate of $8 million to $10 million once they reach full production volume.

While Q2 revenues are otherwise in line with our expectations, we are cautious about the broader demand picture. We observed a broad based slowdown in bookings during the later part of the quarter, and orders have remained subdued thus far in July. We also saw weaker than expected distribution sell through for Q2 and exited the quarter with channel inventories higher than our normal range of four to four and a half weeks.

These trends strongly suggest that macro economic factors have begun to impact end market demand. The uncertain macro environment limits our visibility even more than usual, making it very difficult to predict the strength of the seasonal ramp. Accordingly, we are projecting a relatively wide range of $55 million to $60 million in revenue for the September quarter, or an increase of 10% to 20% year-over-year.

Notwithstanding the challenging macro economic environment, our secular growth story is gaining momentum. Energy efficiency standards, rising labor costs, higher raw material prices are tilting the economics of power supply industry in favor of higher levels of integration. Pricing of discrete components has remained firm in recent quarters, reflecting the higher cost of raw materials, while the cost of manufacturing power supplies has risen, due to higher labor costs in Asia.

These strengths obviously favor the use of integrated solutions like ours, which use fewer components than discrete solutions, and are much less labor intensive to manufacture.

Meanwhile, we have upgraded all of our core AC/DC product lines with higher levels of integration and performance over the past two years, putting us in a strong position to capitalize on the changing dynamics of the industry.

We are also aggressively targeting the imaging LED lighting opportunity, where we now have a pipeline of literally hundreds of design opportunities, and we are on track to expand (inaudible) significantly over the next two years by entering the high power segment of the AC/DC market, comprised of applications above 50 watts.

We announced our first foray into the high power market last week with a new offering for the notebook computer market, which I'll come back to in a moment. Within our core markets design actually remains extremely robust, and Q2 was another strong quarter for design wins. Key wins in the quarter included a high volume set top box for Vestel using TinySwitch-III, cordless phone designs for Panasonic and Uniden with LinkSwitch, a ViewSonic LCD monitor with TOPSwitch-HX, a Sony L3 projector also with TOPSwitch, and an Electrolux dishwasher with TinySwitch-III.

We had a number of wins in the PC market, including designs for Dell and HP, as well as several designs for the clone market. As you may know, we have an extremely high share of the branded segment of the desktop PC market, thanks to the importance of standby efficiency in that market. The efficiency is also becoming increasingly important in the clone market, and we are now beginning to make some headway there.

Our second quarter design wins also included several high volume programs with LinkSwitch-II, a new product just launched in May. The LinkSwitch-II family is a dramatic step forward in terms of innovation for the power supply industry. Until now most power supplies have required complicated and expensive circuitry to send feedback signals from the output side of the power supply back to the primary side. LinkSwitch-II eliminates this feedback circuitry by sensing the output through the power supply's transformer, a technique known as primary side regulation, or PSR. PSR is not a new concept, in fact earlier versions of LinkSwitch already use this technique.

However, until now PSR technology has provided a level of accuracy sufficient only for loosely regulated power supplies, typically used to replace linear transformers. LinkSwitch-II, on the other hand, senses the output much more accurately, making it suitable for higher power levels and a wider range of applications.

The elimination of feedback circuitry takes out as many as 16 components compared to a typical discrete solution, and as many as 9 components compared to our TinySwitch solutions. This saves not only component cost and design cycle time, but also improves efficiency since the feedback components consume a material amount of power on standby.

LinkSwitch-II is off to a strong start, with two high volume design wins at (inaudible) chargers and suppliers. The new Samsung design mentioned earlier also utilizes LinkSwitch-II and we have a promising pipeline of ongoing design activity.

Another recent product that continues to gain traction is TOPSwitch-HX, which addresses the higher end of our current power range. HX is proving highly competitive in applications like set top boxes, LCD monitors, and high power external adaptors. TOPSwitch-HX has proprietary multimode switching technology that automatically selects the most energy efficient mode at any given load level. This enables us to deliver constant efficiency, regardless of load, whereas the efficiency of traditional PWD control drops out at lighter loads, such as standby mode.

This constant efficiency has been a major factor in the success of TinySwitch over the years, and now we are able to offer it at a significantly higher power level with the TOPSwitch-HX family. The multimode operation of TOPSwitch-HX is one of the subtle innovations enabling our entry into the notebook computer market, which we announced last week.

We are now offering HX in a proprietary new package called the eSIP package. eSIP is a highly cost effective, low profile package that stands only two millimeters high when placed flat on the circuit board. We combined this low profile chip with a proprietary low profile transformer available only to our customers. This combination enables a thin, lightweight adaptor that costs significantly less than other slim line adaptors on the market today.

This is a generated breakthrough and a great example of the kind of innovation we bring to the power supply market, not just at the chip level, but also at the system level. We believe this new solution for notebook market adds $50 million to $70 million to our addressable market for 2009.

Looking further down the road, we expect to roll out a series of additional high power product targeting high volume applications in the 50 watt to 500 watt range. I expect the next high power product to launch in the fourth quarter, with additional products to follow next year. This series of new products has the potential to add another $400 million to our [stand], increasing it to about $2.1 billion by the end of 2009.

Before I turn the call over to Bill, I'd like to give you a brief update on the latest developments with regard to energy efficiency specifications, which continue to proliferate thanks to a growing desire to reduce carbon emissions around the world. As you know, California implemented tight mandatory standards on virtually all external power supplies effective July 2007. These standards became incrementally tighter on July 1 of this year, and also became effective nationwide as a portion of the energy bill passed by congress last year.

The European Union is working toward a virtually identical standard as part of its Euro Design Directive, while similar standards are also scheduled to take effect in Australia on December 1, 2008, and New Zealand on April 1, 2009. In addition to these mandatory standards, the voluntary code of conduct specs for the EU will tighten on January 1, 2009, while version two of ENERGY STAR's spec is scheduled to take effect on November 1 of this year. Although ENERGY STAR is voluntary for OEMs, the U.S. government is required to purchase ENERGY STAR products whenever possible, which obviously gives additional weight to these new specifications.

While external power supplies have received most of the attention over the past couple of years, we continue to see increasing developments relating to applications with imbedded power supplies. On the Q1 call we outlined some of the efforts being made in developing countries, including Brazil, China, and India, where the governments are extremely concerned about the growth of energy consumption as their societies modernize.

More recently we have seen a new proposal out of the EU that would apply a blanket standard for standby consumption across a wide range of end products, including appliances, consumer electronics, and IT equipment. The exact data of the program and the timeline for implementation are still to be determined, but this has the potential to be a significant development for the electronic industry, and is something we'll be keeping an eye on going forward.

In any case, the momentum behind the energy efficiency movement continues to build, and we expect that to be a tail wind for our business for many years to come. With that, I'll turn it over to Bill for a review of Q2 results. Bill?

Thanks Balu, and good afternoon. Let me start by saying how incredibly excited I am to join the POWI team. I think this is truly one of the premiere stories in the semiconductor industry, with an abundance of secular growth drivers, an addressable market that's expanding into high power applications and LED lighting, and a strong team in place to execute that strategy.

I'm also excited by the high caliber of our investor base and I plan to spend plenty of time on the road meeting with many of you in the months and years ahead.

Turning to our second quarter results, revenues were $53.6 million, up 3% sequentially. The main growth driver was the computer market, which rebounded from a weak first quarter and grew more than 30% sequentially. The strength came mainly from desktop PCs as well as smart phone chargers, which we have historically included in the computing segment.

Industrial revenues grew low single digits sequentially, as did consumer revenues, with growth in consumer electronics largely offset by lower demand in major appliances. We also saw seasonally lower revenues from the air conditioning market, which we include in the consumer segment.

Communication revenues were down high single digits sequentially, driven by lower revenues from the cell phone market. The main driver of the decline was an inventory overhang at Nokia's charger suppliers, which was discussed on the Q1 call. We also saw modestly lower sales from LGs charger vendors, and, as Balu mentioned, we believe we missed out on roughly $1 million in Samsung revenue due to the bankruptcy of HNT.

Overall, despite the setback caused by the HNT bankruptcy, our second quarter revenues grew 24% year-over-year, despite a $4 million decline in revenues from Samsung compared to the year ago quarter.

Looking at the revenues in a bit more detail, 62% of revenues were through the distribution channel, and 38% were direct, unchanged from the prior quarter. As Balu noted, channel inventory was higher than normal, and we exited the quarter at about 4.8 weeks, up from 4.5 weeks at the end of March. Distributors Abna and ATM were both 10% customers during the quarter, comprising 19% and 10% of revenues respectively. Fahong, a power supply manufacturer that uses our products in a wide variety of designs, also accounted for 10% of revenue.

Turns orders comprised 59% of revenues during the quarter, at an average selling price of $0.33, down from $0.34 in the prior quarter. Detail and revenue mix by product, and in market, is provided in the text of our press release, and is part of the accompanying tables.

Gross margin for the quarter was 53.7% on a GAAP basis, down 50 basis points from the previous quarter, but slightly above the high end of our guidance. For Q3 we expect GAAP gross margin of approximately 53%, plus or minus half a percentage point, including a one point impact from stock based compensation.

GAAP operating expenses totaled $21.8 million, up $900,000 from the prior quarter. The majority of the increase was driven by the CFO transition as well as severance expenses associated with a hand full of other personnel changes which took place during the quarter.

Litigation expense was $633,000 in the second quarter, well below the $1 million we had forecast. Although litigation expenses are somewhat difficult to forecast in any given quarter, we continue to believe that $1 million per quarter is a reasonable run rate for at least the remainder of this year.

Other income for the quarter was $2.3 million, up slightly from the first quarter. Interest income was lower, as expected, due to the declining interest rate environment. However we also receive a benefit from our Z&O insurance carrier, which was partially offset by other nonrecurring expenses. The net of these two items was a benefit of about $0.5 million.

Our tax rate for the second quarter was 18% on a GAAP basis, and 19% on a non-GAAP basis. We expect our non-GAAP tax rate to be 20% plus or minus a percentage point, for the remainder of the year.

Diluted EPS was $0.23 on a GAAP basis and $0.33 on a non-GAAP basis, which excludes stock based compensation.

Our balance sheet remains exceptionally strong. We added $24 million in cash during the quarter, and exited June with $238 million in cash and investments, or nearly $8.00 per share. Cash from operations drove the majority of the increase during the quarter, totaling $15.6 million. Cap Ex during the quarter was $2.2 million.

We repurchased 109,000 shares of our common stock during the quarter, using a total of $3.4 million. That leaves $41 million of our $50 million repurchase authorization still to be used. We conduct the buyback using a predetermined formula that varies the pace of the program according to the stock price. So buyback activity would accelerate on any pull back on the stock price, and vice versa.

We ended the quarter with 30 days sales outstanding, unchanged from the prior quarter. Inventory turns decreased slightly to 4.2, remaining within our target of 4 to 5 turns.

As Balu indicated, we're taking a cautious view of the third quarter revenue outlook based on recent order trends and distribution sell through rates. We are also providing a wider than normal range reflecting the high level of uncertainty in the current environment.

Our forecast is for Q3 revenues to range between $55 million and $60 million, or up 3% to 12% sequentially. While this range is below current street estimates, the midpoint would be up about 15% year-over-year in the face of a challenging macro environment, the unexpected bankruptcy of HNT, and a tough comparison that includes the anniversary of the Nokia ramp last year.

Again, we expect a gross margin of 53% on a GAAP basis, plus or minus half a percentage point. Operating expenses are expected to remain approximately flat compared to Q2, with slightly higher litigation expenses, offset by lower core operating expenses. With that, I'll turn it back over to Joe. Joe?

Thanks Bill. At this point we're ready to take questions, and in order to make sure we get around to everyone, we'd appreciate it if you'd limit yourself to one question and a follow up, and then as time permits we'll be happy to come back for a second round. Operator, would you give the Q&A instructions please?

(OPERATOR INSTRUCTIONS) Our first question will come from Ross Seymore with Deutsche Bank.

Hi guys, can you give a little more color on the HNT bankruptcy, when it happened in the quarter, how that impacts you? You gave a little color on the top line, but what does that do on the bottom line, and did that have any impact on your inventory?

Well first of all just to give you how it played out, when we had the conference call we didn't know anything about this. In fact we had shipped a small amount already. But the main production shipment that we tried to ship we found out that the bank would not honor the LC, we were on an LC basis. And it wasn't until, I would say the second half of June we knew that they had actually gone bankrupt. They kept postponing the shipment until into June and then in June we found out they actually closed down and went bankrupt. So we didn't know until then.

And what was the next question after that, was it inventory?

So that was about $1 million that you would have otherwise shipped and did that not get made up for by other suppliers amongst these power supply guys that help out Samsung?

Well we had one other design at a second subcontractor, and that was going into production a little bit later, and that is on track. In fact the volume from that will be higher because of HNT going away. But in addition to that we got a second design at this other subcontractor, and we don't know the exact combined volume, but our estimate is that once these two designs are in production the yearly run rate would be between $8 million and $10 million.

And then I guess the follow up question to that Balu was the inventory impact. Did that contribute to your inventory going up sequentially, since they didn't take the product? And then if you could just ballpark what that meant to your EPS in the quarter.

Well I guess you could say that had some impact, but generally it's not uncommon for us to have a slightly higher inventory at the end of Q2, because the second half of the year is the seasonally stronger part of the year. So we actually build inventory during the first half.

Ross, its Joe. On the gross margin or on the EPS impact, we obviously don't give the gross margin on particular programs, but that being a high volume program you can assume it was somewhat below average gross margin and of course that pretty much all would have flowed through to the bottom line.

Okay, great, thank you.

Our next question will come from Sumit Dhanda with Bank of America Securities.

Yes, hi Balu, I just wanted to follow up on your Samsung subcontractors. So first, the target that you're suggesting now, $8 million to $10 million on an annualized basis, it seems, in aggregate, lower than the 10 -- 15 you talked about on the last call. If you could just fill in the blanks in terms of what we're missing there, is it the HNT bankruptcy that's causing this?

Yes. If you remember in the last call we said we had two designs at HNT. Basically Samsung has two different models that covers pretty much all of their volume, and we had design wins on both models at HNT, and HNT was the largest supplier for Samsung, they were about 40% of Samsung's charger volume. And so we were expecting significantly higher business because of that, and at the same time we had one of the design wins at the other subcontractor, the second subcontractor, but after HNT went away we got the second one.

So when we gave you $10 million to $15 million range, that was based on two designs at HNT and one design at the other subcontractor.

I see, and then who makes up for that lost HNT volume? I mean I'm assuming they would need to be supplied somehow.

Yes they have about five or six other subcontractors and we understand from Samsung that they're going to redistribute the volume among other subcontractors. What we don't know is exactly how it's going to be redistributed but based on the feedback of the (inaudible) of the (inaudible) of this second subcontractor, we think we'll be in the $8 million to $10 million run rate at the best we can calculate at this point.

And just as a follow up, who gets that remaining business? Does it stay with BCD or, effectively, even post the redistribution, it seems like you have a smaller piece of the pie.

Well clearly is they're going away from BCD. Samsung does not want to continue with BCD. But whatever we don't get will go to discrete solutions, both RCC and [controller-based] discrete solutions.

Okay great. I'll come back later, if there's time.

Okay.

Our next question, then, is Gus Richard with Piper Jaffray.

Yes, thanks for taking my question. Could you talk a little bit about the slowdown you've seen into June and July? And, you know, can you attribute it to any specific end market? Or, your products, your product portfolio, is it more ToPSwitch or Link? Any color there would be helpful.

Yes. We have looked quite a bit into it. It looks very broad based, both in terms of applications, products and also in terms of geography. It really looks like a very broad based slowdown that started some time in late May, early June.

Okay. And so, it's across all regions and customers and sort of, you know, is it -- did order rates just completely dry up? Or not completely dry up but, you know, you had expected the June quarter to be up, month on month, 40%. Was it more --- I'm sorry; about 40% of your quarter up a little bit. Did it just flatten out, or, I mean, sort of --- what is the shape of it? Is it accelerating, in terms of slowing down? Again, any color?

Well the June quarter was about 15% or so less than ---for the June month, it was 15% less than May. And normally, we would expect a slight increase in June in preparation for Q3.

And did that softness carry into July?

Yes, the softness has continued into July. It's not getting worse but we are not seeing it as getting better, so far.

Okay; all right, all right. Thanks a lot.

You're welcome.

(OPERATOR INSTRUCTIONS). We'll go to Sumit Dhanda, with Banc of America.

I didn't expect to be back this soon. I just wanted to, first, Bill, if you could tell us, last quarter you did 59% turns. What's the implied turns guidance for the mid point; implied turns number for the midpoint, the guidance for this quarter?

It would be in the mid-60s.

The other question I have for you, Balu, on the Notebook product. When can we realistically expect to see volumes of any significance there?

I would say in the second half of next year. Because, it's a pretty established market so penetrating that market will take some time.

And do you view this to be a niche market? I mean, do you think this is going to be a replacement for mainstream Notebook adaptors? How do you think will be positioned?

Well, our products, we have a set of three products [of engineers] will not only enable very low cost, lightweight, slim adaptors. It is also very cost effective in the regular adaptors, or the ones we call the chunky adaptors.

So, we can address, actually, a pretty large portion of the Notebook market very cost effectively, and that, I would say, anything below 75 watts. And, the biggest chunk of the volume is in the 65 watt range. It's roughly about a little over two-thirds of the Notebook volume. So maybe about 70% of the Notebook volume.

And so, we can address that market very effectively with the solution that we have just announced.

The other question I had was, as it relates to your comments about, perhaps you can answer this Bill; on the slowdown at Nokia for you, I guess I'm a little surprised because my view was, or my understanding was that you had actually comprehended some kind of a slowdown at Nokia, in terms of the impact on your communications business.

So, did this occur in the second quarter? Or, can you help us fill in the blanks there?

Yes, let me answer that question. Yes, we --- the Nokia reduction in revenue was fully anticipated and included in our guidance. So there is no surprise in the Nokia number. It is consistent with the overhang we were aware of at our customers and their run rate.

And then one housekeeping question for you, Bill; so how should we think about modeling the interest income line, going forward, given the benefit in the second quarter? Or the overall other income line, I suppose?

Yes. I would look at, you know, $500,000 was considered extraordinary and we had $2.3 million, so that would drop that down to $1.8 million. And, given the current interest rate environment, I would look at a $1.6 million to $1.8 million level.

Okay, thank you.

We have three in the queue. We'll next go to Steve Smigie, with Raymond James.

Great, thanks. This is Andrew Banish calling in for Steve Smigie. Balu, I just had a question; did you, or can you quantify your LED revenue for the quarter? And perhaps give us some color on the back half of 2008 for this market?

Yes. The LED revenue in Q2 was approximately flat with Q1.

Okay, so roughly $1 million, then?

Yes, yes. Just slightly under $1 million.

And do you still see this as a roughly, you know, roughly a half-billion dollar year, per year market, globally? Or has the macro weakness, you know, domestically, has that changed that at all?

Well, we have not given any forecast of the [SAM] information on the LED because it's such an emerging market, we don't have much information on how quickly it's going to grow.

But in terms of the growth prospect of the market for us it's extremely positive. There are a huge number of designs that are going on in the LED market. So, we are very optimistic that LED will continue to get much stronger going forward.

Great; thank you very much.

You're welcome.

Our next question is from Ross Seymore with Deutsche Bank.

Hey guys, I like the quick turnaround for the follow ups here.

Okay.

A quick question on the split of the comms business. What was it between handsets and your wire line in the quarter?

Handsets were up just under 20% of total revenue. And that's out of the 26% that is in the comms, the comm end market.

Okay and then the, you mentioned a little bit about the Nokia overhang not really being a surprise in the quarter. What should we look for in that segment, inventory-wise, heading into the third quarter? Do you still have an overhang to work through? Or is it all kind of rationalized now?

Well as far as we know and none of the customers we have had reported any overhang like they did in Q1. So, it should be normal but we don't know how well Nokia is going to do in Q3 and whether they continue to get the same share. So far, they're getting their fair share.

Okay and then one last question on the HNT bankruptcy side; given how late that happened in the quarter, that you said it cost you about $1 million in revenue, how should we think about what you otherwise would've expected that business to do in the third quarter, even if we net out the business that you picked up at the other Power Supply guy that helped Samsung?

Well, it's hard to know for sure. I think, Ross, to the best we can tell, we'd estimate it's probably somewhere between $1.5 million and $2 million that we would take out of the third quarter.

It's hard to know, again, how much our other customers, how much of the slack they might pick up, but $1.5 million to $2 million is probably the best estimate we could come up with.

Okay and then, to the extent we can avoid surprises like that in the future, anybody else, out of your customers, that are teetering on the edge of bankruptcy, that you have to worry about?

I don't know. This actually came as a total surprise to us. I never expected the largest supplier to Samsung to go bankrupt at all. I thought they would be in very good shape, but, obviously, these things happen. No, I don't know of anybody else.

Okay, thank you.

You're welcome.

Our next question is from Gus Richard, with Piper Jaffray.

Yes, quickly, Balu, in the past you haven't participated in the Notebook market because of thermal issues with your integrated set and, you know, higher power dissipation. Is the solution you now have for the Notebook market, is that a discrete set? Or how did you get around that thermal issue?

Yes, that's a very good question. I probably can explain to you more in detail in person but, at a high level, there are really two or three things that enable us to address this market. One is our package, we have a [proprietary] package, which is extremely effective in getting the heat out of the MOSFET and keeping it cool.

It is an integrated MOSFET. It is actually the HX family and the second advantage is the energy efficiency requirement, which requires that you have an average efficiency of more than 87%. And I think I have talked to you about this before that, to maintain that average efficiency with a discrete solution, you have to have much higher efficiency at full load, which requires a much larger MOSFET. So, in other words, our technology becomes more cost effective with the multi-mode operation of the ToPSwitch HX family.

The third area where we really benefit a lot is our proprietary design of the transformer. And in some ways, it's also coupled to the HX because HX operates at a much higher frequency so we can get away with a very simple flat transformer that is proprietary to us. So, we allow our customers to use it only with our [chips]. And what that does is it gives you a very slim design without the cost penalty associated with the low profile design.

Usually, the low profiles then cost quite a bit more than the chunky designs. But with our designs the difference is very small.

Okay, that's helpful. And then, when I look at my model for Link in the quarter, I was thinking it was going to be up about $1 million sequential and it was down about $500,000. And I'm assuming that the HNT bankruptcy probably was $1 million of that and I'm expecting your Nokia business was probably down 10% in sequential. Is that correct?

It was a double digit decline, sequentially, in the Nokia business; yes.

In or around 10%?

A little higher than that, so, yes, I think the decline in the LinkSwitch business, sequentially, was driven by the Nokia decline, which was expected. And then, you're right, the HNT business was LinkSwitch business as well.

Right, okay. And then, I would assume that, if you just look at everything else, other than Nokia and Samsung, it would appear as if the Link was effectively down —- or actually, effectively flat, plus or minus $100,000 or so. Is that about right, for Link?

That sounds roughly right, yes.

Okay and so have you seen the indigenous Chinese cell phone guys start to come back? I know they were weak in Q1. Were they still weak in Q2? And, do you expect them to sort of come back to the trough, if you will, in Q3?

I'd say we saw a slight improvement in the China bucket of the cell phone revenue but still relatively soft.

But, I must add there that our LinkSwitch-II product has been received very well by two or three major cell phone charger manufacturers in China. So, we are optimistic that we'll get some additional share there, going forward.

Okay. So, that particular product line, I could model sort of a nice sequential [cling], maybe normal seasonality?

That's hard to predict, especially with the macro environment and also the design in time that takes, with the new LinkSwitch-II product.

Got it. Okay thanks; I'll open it up for somebody else.

But with that, that is our last question in the queue. I'll turn the call to Joe Shiffler for a closing comment.

Okay, thanks. That concludes the call this afternoon. A replay will be available shortly on the investor info section of our website, which is investors.powerint.com. The telephone replay is available for 48 hours by dialing 888 203 1112, from within the U.S., or 719 457 0820 from outside the U.S. And the code for the replay is 4025946.

Thanks for listening and good afternoon.