Power Integrations Inc (POWI) 2009 Q3 法說會逐字稿

Good day, and welcome to the Power Integrations third quarter 2009 results conference call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr. Joe Shiffler. Please go ahead.

Thank you, and good morning. I'm Joe Shiffler, Director of Investor Relations and Corporate Communications for Power Integrations. With me are Balu Balakrishnan, President and CEO of Power Integrations and Bill Roeschlein, our Chief Financial Officer. During today's call, we will make reference to financial measures that are not calculated according to generally accepted accounting principles. Please refer to today's press release which is available on our website at www.PowerInt.com for an explanation of for our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results. Also, our discussion today including the question and answer 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 Part Two of our most recent Form 10-Q filed with the SEC on August 6, 2009. 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 will turn the call over to Balu.

Thank, Joe, and good morning, everyone. Power Integrations had an outstanding third quarter with record quarterly revenues of $60 million, up 22% sequentially and 12% from a year ago. Against a backdrop of negative year-over-year revenue growth for the broader analog [semicon] industry. We also delivered non-GAAP earnings of $0.36 per share, GAAP earnings of $0.32 per share on record net income, and over $16 million of operating cash flow. We have seen a sharp recovery from the downturn with revenues up nearly 50% since bottoming in the first quarter. While the steep slope of recovery is partially due to factors such as inventory replenishment and consumer subsidies in China, we believe that our outperformance versus the broader industry over the past year is primarily a reflection of our increased penetration of the AC to DC power supply market. With the improvement in overall business conditions over the past couple of quarters, we are now seeing the top line impact of last year's record design wins, which was muted during the economic downturn. And while metrics related to design wins are really only useful as a qualitative indicator, we believe our momentum has continued through 2009. The expected dollar value of designs won through the first three quarters already exceeds our full year total for 2008, which leaves us well positioned for the fourth quarter and for 2010.

We currently expect revenues in the fourth quarter to increase by 5% to 10% sequentially. At the midpoint of our range, revenues for the quarter would be up 52% year-over-year, and our full year revenues for 2009 would be up 6% over 2008. That's compared with an expected double digit decline for the analog industry as a whole. We believe our recent success in marketplace is the result of strong execution against the growth strategy we have pursued over the past several years. Over the past five to six years, we have tripled the size of our sales force, invested millions of dollars in our power supply design software and other customer support resources, [pleased an early more] advantage in emerging markets like LED lighting and smart meters, diligently protected our intellectual property, and completely refreshed our core TOPswitch, TinySwitch, and LinkSwitch product families. We have also invested millions of R&D dollars internally and made an acquisition in order to move into the high power AC to DC market, which we believe will expand our addressable market by at least 25% and begin contributing meaningful revenues in 2010. And most importantly, we have worked hard to position ourselves for the emergence of energy efficiency as a critical factor in power supply design, and those efforts are now clearly paying off.

Power Integrations has been a pioneer in energy efficient power conversion since 1998 when we introduced our EcoSmart technology, which drastically reduces standby and no load power consumption. Although at that time efficiency was seldom a consideration in power supply design, we chose to make it a central component of our product offerings, anticipating that efficiency would eventually become a differentiator in the power supply market. That day has now arrived as the world has become concerned with the environmental and economic consequences of the growing demand for energy. And while most of the headlines have gone to alternative energy technologies, many policymakers have recognized that the most cost-effective way to reduce energy consumption today is simply to use it more efficiently. This has led to an explosion of new efficiency policies for the electronics industry. Several of which have had significant positive impacts on our business over the past couple of years. While much has been done already, the pipeline of standards and specifications continues to expand. Use of mandatory ecodesign standards for external power supplies, set-top boxes, refrigerators and televisions are scheduled to take effect in 2010, along with the horizontal standard for standby power consumption across a wide range of end products. Additional ecodesign standards are in development for washing machines, dishwashers, air conditioners, audio-video products and a number of other categories.

Meanwhile, as you may have seen in the news over the past few weeks, the California Energy Commission is moving forward with the first significant mandatory standards in the US governing energy usage by flat panel TVs with a targeted effective date of January 1, 2011 for the Tier One standards and 2013 for the tighter Tier Two standards. In parallel, ENERGY STAR is developing its own voluntary TV specifications, which are targeted to take effect in mid-2010 and then tighten further in 2012. ENERGY STAR is also developing a wide range of new specifications on audio and video products including Blu-Ray and DVD players, stereo components, speakers, clock radios, and more. While the details of all these emerging standards and specs are still to be determined, it is clear that more and more end products will be subject to efficiency specs in the years ahead, and that the required efficiency levels will get tighter over time. While no single standard is likely to have a sudden or dramatic impact on our business, we believe that energy efficiency will continue to drive an elevated level of design activity in the power supply market for many years to come, giving us more opportunities to penetrate the market. And we believe that any time energy efficiency is a requirement, Power Integrations has a built-in, competitive advantage, not only because of our EcoSmart technology, but also because of the system level design expertise we have developed over the past two decades.

Just to wrap up before I turn it over to Bill, I would say that we are extremely proud of our recent performance and excited about what lies ahead in the balance of this year as well as 2010. Obviously, there are external factors like end-market demand and supply chain oscillations that make it difficult to predict future revenues. But it is clear that the [secular] trend toward highly integrated power supplies has picked up steam thanks to tighter efficiency standards as well as a growing appreciation for the other benefits of integration on the part of manufacturers, including the liability, manufacturability, and ease of design. And while we have ample room for growth in our core markets, with less than 20% penetration of the low power AC to DC market, we think the future looks even more promising as we layer on incremental opportunities like LED lighting, which is already becoming a significant revenue contributor. And also the high power market, comprised of power supplies about 50 watts, which I mentioned earlier, represents a 25% to 30% expansion of the addressable market. And should begin to contribute meaningful revenue for us next year. And now I'll turn it over to Bill for a review of Q3 financials. Bill?

Thanks, Balu, and good morning. We had an excellent quarter from a financial perspective, delivering record revenues and GAAP net income, while demonstrating two of the key strengths of our financial model. Operating expense leverage and high cash flow. Our balance sheet remains extremely strong with more than $6.00 per share in cash and investments, and we are realizing significant EPS accretion from our aggressive repurchase of stock through the downturn with diluted shares outstanding down 13% from a year ago. I'll do a quick recap of the third quarter results and the fourth quarter outlook, and then we'll take your questions.

Revenues for the third quarter came in at just over $60 million, or 22% sequentially. The sequential growth was extremely balanced with each of the four end-market categories growing 19% or better. On a year-over-year basis, revenues grew 12%, led by the consumer market with growth of better than 20%, as well as double digit growth in the communications market driven primarily by recent market share gains in mobile phone chargers. Industrial revenues increased mid-single digits year-over-year, as growth in smart meters and LED lighting offset the weakness in the broader market. Computer was the only market where revenues were down from a year ago, declining slightly due to softness in desktop PCs, which account for the majority of our revenues in the computer market. Please refer to the financial tables in our press release for complete details on end-market and product revenue mix.

Turns business was in the high 50% as a percent of revenues, down from 70% in the prior quarter, reflecting longer lead times on certain products as discussed on last quarter's call. Average selling price for the quarter was $0.32, down a $0.01 from the prior quarter. Direct sales accounted for 35% of revenues during the quarter, while distributors accounted for 65%. And as a reminder, all of our distribution revenue is recognized on sell-through. Avnet and ATM, our two top distributors, were our only 10% customers for the quarter, accounting for 15% and 11% of revenues, respectively. Channel inventories at quarter-end stood at five weeks, down from 5.3 weeks last quarter.

GAAP gross margin was 48.5% for the quarter, while non-GAAP gross margin was 48.8%, down 90 basis points sequentially. Roughly two thirds of the decline was due to non-recurring items, including unanticipated scrap and rework charges. Apart from these items, gross margin was down slightly as the benefit of the higher volumes was offset by product mix, specifically the strong ramp of LinkSwitch-II, which jumped from 10% of revenue in Q2 to nearly 15% in Q3. I've discussed on last quarter's call, LinkSwitch-II has been the most successful product launch in our history and a major contributor to the growth of our top line, but have created a near-term margin headwind for us since the product has not yet had time to come down the cost curve. We expect LinkSwitch-II unit costs to be in line with our other current generation products within the the next two to three quarters with gradual improvement each quarter.

For the fourth quarter, the continued ramp of LinkSwitch-II as a percentage of revenue will continue to work against us -- our gross margin, as will the weaker dollar versus the y.en which impacts labor costs from our Japanese foundries. However, these headwinds should be more than offset by the benefits of higher volumes, the ongoing unit cost improvements on LinkSwitch-II, and the absence of the one-time items mentioned earlier. As a result, we expect our non-GAAP gross margin to increase to 50% in the fourth quarter; plus or minus 0.5%. GAAP gross margin should be in the range of 49% to 50%, including a 0.5% impact from stock-based compensation.

Non-GAAP operating expenses for the third quarter were $16.8 million, which was flat both sequentially and year-over-year and in line with our expectations. Non-GAAP operating expenses were 28.1% of revenues, the lowest level in recent history. As a result, our non-GAAP operating margin expanded by more than 5% to nearly 21%, demonstrating the leverage in our financial model. GAAP operating expenses were $18.1 million, down $1.1 million sequentially. The decrease was driven by lower stock-based compensation, as we reversed some previously recognized expenses associated with our employee stock purchase plan as a consequence of the increase in our stock price. Going forward, we expect the OpEx component of stock-based compensation to return to about $2.5 million per quarter, still well below historical levels of nearly $4 million thanks to the stock option repurchase we executed at the end of 2008.

Our GAAP and non-GAAP tax rates for the quarter were 19% and 18%, respectively. Lower than expected, reflecting our strong revenue performance, which increased the proportion of our income coming from international markets subject to lower tax rates. We also benefited from tax true-ups following the filing of the our tax return.

Non-GAAP net income was $10.4 million, down from a year ago due to drastically lower interest income, but non-GAAP EPS was up year- over-year to $0.36, reflecting the accretion from our stock buyback. GAAP net income was a record $9.2 million, or $0.32 per share. Cash flow from operations was $16.1 million for the quarter. Subtracting $4.1 million of capital expenditures results in $12 million of free cash flow, or 20% of revenues. Accounts receivable increased $6 million, reflecting the strong revenue growth. The DSO increasing slightly but remaining just under 30 days. Inventories decreased by about $2 million, again reflecting the stronger than expected sales. Inventories stood at 60 days at the end of the quarter, down from about 80 days last quarter. We expect to build inventory over the next couple of quarters as we return to our desired range of about 75 to 90 days.

Turning to the outlook, we expect fourth quarter revenues to be up 5% to 10% sequentially, or 49% to 56% year-over-year. As we mentioned on our last quarter's call, our lead times on several high volume products have stretched out to about eight weeks, up from the normal four weeks, which has encouraged customers to place orders further in advance than normal. As a result, we entered October with a much higher backlog than we would normally expect, and we require only about 20% turns business to reach the midpoint of our forecast. As noted earlier, we expect fourth quarter gross margin to increase compared to Q3 with a midpoint of 50% on a non-GAAP basis and 49.5% on a GAAP basis. GAAP operating expenses should be in the range of $19.5 to $20 million, including $2.5 million of stock-based compensation expenses. We therefore expect non-GAAP operating expenses to be between $17 million and $17.5 million, a slight increase from Q3. We expect our GAAP and non-GAAP tax rates to be in the mid- and low 20%, respectively for the fourth quarter. With that, we are ready for Q and A.

(Operator Instructions) We'll go first to Tory Svanberg of Thomas Weisel Partners.

Thank you very much, and congratulations on the strong results. A few questions here. First of all, looks like your backlog is pretty amazing just based on your turns requirement in Q4. Are you being just conservative, then, with your guidance? Because obviously, I don't think the Company has ever only done 20% turns. Could you just qualitatively talk a little bit more about that, please?

Hi, Tory, good morning, and thanks for the compliment. While it is very unusual for us to have such low turns, but it is also very unusual for us to have such a long lead time. And it has essentially forced our customers to book for most of the quarter ahead of time. So this is our best estimate of what we think we'll have in terms of turns. And another indication, of course, is how much turns we have booked since the beginning of the quarter. Normally, we would have booked quite a bit in the first month of the quarter, but we started out with a requirement of 20% turns. As of today we have -- we need another 10% turns. So we have booked roughly about 90%. But again, I want to caution that it also depends upon how much sell-through we have, and so this assumes that our inventory distribution stays approximately at five weeks. So what that says is that the turns bookings will reduce over time. In fact, we have noticed that the October bookings have reduced relative to last quarter which was a very, very strong bookings quarter for obvious reasons, because people not only booked for that quarter but also for the Q4 quarter. So it is an unusual time, but we believe that the guidance we are giving is the best guidance we can give. It's obviously very difficult to tell.

Sounds good. Maybe a follow up to that. Just given how solid the backlog is and the lead times, does this give you maybe a little bit more confidence as we go into Q1? That's seasonally a down quarter, but do you now have -- you feel you have a little bit better visibility into Q1?

Well, Q1 is always an interesting quarter because to a large extent it will depend upon how much sell-through occurs through the channels for the holiday season. And also how much build up there is for the lunar new year. So it is really very difficult to tell. If I were to guess, I would say that Q1 would be slightly down from Q4. And that's just a gut feeling.

Very good. And turning to some of the business dynamics and product lines. So you said LED is already contributing meaningfully to revenue. Could you just add a little bit more color there as far as customer penetration, and how you expect that business to ramp throughout next year?

At the moment, the best we can estimate we think we have a 20% share of the worldwide LED market for AC to DC. That is for general lighting. And that translates to roughly about $6 million to $8 million a year -- for this year, for 2009. And because it is an emerging market, it could grow rapidly over the next few years. So we could potentially double from last year, and it could double again next year.

Okay. Very good. Finally, a question for Bill. How should we treat gross margin here into 2010? You gave us all the dynamics for Q4. But especially given the uncertainty around the exchange rate, yen, US US dollar going into next year. How should we think about the gross margin?

Well, we are forecasting 50% next quarter, and as long as we continue to have acceleration in production, that should be to our benefit. And then, any bump up from here on out in the yen is -- would help us as well. And so, there's some indication that we may be hitting a low point here at least with concern to the yen-dollar.

Very good. Actually, I did have one final question. Could you just give us a very brief update on legal and your proceedings with Fairchild, please?

Well, as you know, we are almost complete procedurally with the Fairchild one case. We are waiting for the judge to rule on the last part of the case, which is the willfulness trial that took place in June. And so we could hear from the judge any time now. The second case is expected to go into trial phase in fall of next year.

Very good. Again, congratulations on the strong results.

Thanks, Tory.

Next, we will go to Sukhi Nagesh of Deutsche Bank.

Hello. Congratulations on a very solid quarter here. Just a couple of questions I had. If you look at your end-markets, it looks like it was pretty even in the last quarter. What's your expectations for the fourth quarter here, by end-markets?

That's a good question. It is really hard to project because 65% of our revenue goes through distribution. And until we get POS information, we don't usually know. But if I look at the trend, it looks like we are gaining share across all markets. So if I were to, again, guess it would be a broad increase across all markets.

Okay.

Next, we'll go to Vernon Essi of Needham and Company.

Thank you very much. I guess just to follow on that quickly. Balu, are there any specific programs that you know that were very high volume. And not looking for brand names here, but was there any specific product areas that came in larger than you expected? I know everything is broad, but anything specific?

Not in Q3. I think it was pretty broad-based. In Q4, we know that we have gained additional share in cell phone. So I'm expecting that we would get incremental business in that segment.

Then just to go back to gross margin. Specifically, you said the LinkSwitch-II ramp was somewhat of a headwind. Could you discuss how that's going to play out, and where specifically is it? Is it more on the fabrication side or package -- where is this happening?

It's primarily in the test and silicon side. We started out -- when we start a new product we usually test them over temperature. And then once we get sufficient data then we can correlate everything to room temperature. So we test it only once. And we have already accomplished that on a percentage of LinkSwitch-II, but there is still additional products in LinkSwitch and also additional fabs that we have qualified on LinkSwitch-II that are still on double test as we call it. And so that will -- as we go to single test on all of those products and all of those fabs, we started out in one fab which now is on single test. But because of the demand, we have now transferred into two more fabs. And they will eventually go to a single test and that will have an impact. The other thing is any time we introduce a new product, the die size is not always optimized. And we are working on it as we speak, and we should get at least some of the products converted into a more optimum die size through die streams some time in the second quarter of next year, which will also have a significant impact on our gross margin. So I would say in about two to three quarters LinkSwitch should be similar to all of the products in gross margin.

Okay. And just a quick point here. On the test front, some of your peers have noted, basically, capacity shortages. Are you seeing anything along those lines in your back-end partnerships?

Well, we don't have a capacity shortage either in our silicon fabs or in our assembly and test operations. We have a lead time problem because the demand went up so fast that we are running our fabs at close to their peak capacity for a period of time so that we can catch up on the demand. But our peak capacity is very high compared to our average demand. So that's not a problem. And as far as the test and assembly capacity, the lead times on those are so short -- relatively short, compared to the cycle time of the fab. And so we are able to put sufficient capacity in place as the [vapors] come out. In fact, we recently bought a large number of testers as reflected by the capital expenditure we had in Q3. And those are already in place to a large extent, and so that's not going to be a limitation either.

Okay. Thanks a lot.

You're welcome.

Next, we'll go to Sumit Dhanda of Banc of America-Merrill Lynch.

Hi, Balu, nicely done. I had a couple of questions. On the backlog, I remember last quarter you had said that you had had visibility into the outquarter. In other words, at the time had you the conference call, you had indicated that the fourth quarter was 10% booked. Any similar metric you could share that relates to Q1? Do you have even more booked in backlog as you look into the first quarter?

We certainly have more booked in Q1 than we normally would have had at this time of the quarter -- the previous quarter. So that's again an indication of our lead times. I prefer not to share the exact details of how much we are booked in Q1.

That's fine. The other thing, you highlighted that your handset customer base would pick up here in the fourth quarter. I'm curious, you have exposure to the Korean handset OEMs. Any softness that you've seen here that the market recently has been focused on?

Not really. Because we have growing share in Korea, we have not seen any softness. In fact, even as late at yesterday, we booked significant orders into November, December, and January from Korea. So I did see -- read the reports yesterday for about one of the big Korean manufacturers. But we don't see -- we don't see any softness at all.

Okay. Okay. Great. Then on the quote, unquote reduction in October bookings in the context of the strong backlog. If you were to compare with July, which was an exceptionally strong month for you, is it only down somewhat? Or is it down meaningfully from that run rate?

I would say it is lower than July. And just to give you a little bit more color. August was even higher than July buy about 15% to 20%. And then, September was similar to July. And October is so far -- is slower than July or September.

Okay. Alright. That's very helpful. One question for you, Bill. You mentioned that your gross margins would benefit from higher sales volumes. I guess that has me surprised a little bit given the [fabrus] model. Is there a lot of fixed overheads and back-end capacity that you will see absorption of? Or what's the dynamic driving the gross margins there?

Well, we have some indirect labor associated with supply chain management, and its primarily those folks. But in addition to production volumes, as Balu mentioned, where we would have additional cost reduction take place on LinkSwitch-II, and that should benefit us significantly in 2010. So when you factor those two items together, we should be comfortably at 50% or better.

I guess maybe a different way to frame the same question is, what's the more dominant driver? Is it the fixed cost absorption? Or is it the cost reductions that you'll see?

Well, right now, it's been the fixed cost absorption because we ramped so significantly so quickly. But as we go into the next few quarters here, you are going to see more cost reduction on LinkSwitch--II that will end up contributing to the bottom line and gross margin.

Okay. Thank you so much.

Next, we will go to Steve Smigie of Raymond James.

Great, thank you. I was hoping you could talk a little bit about what the ramp is going to look like for the greater than 50 watt products as we get into next year? Is it looking like it's Q2, Q3 -- just the timing and the magnitude on that?

It's hard to tell exactly by quarter. But I would say for the whole year, we expect that we should be getting multiple millions of dollars in revenue, possibly in the $5 million to $10 million range for above 50 watts for next year.

When do you think that starts?

It will start in Q1, but it will be, obviously, more back-end loaded, simply because it takes time to go into production. And so most of that will be in the seconds half of next year.

And that's mostly thin notebook adapters, or is it other stuff?

No, it will be across the entire spectrum of high power market. As we said that by the end of this year, we will have introduced products to address all of the high volume markets. And we expect a contribution from all of those markets.

Okay. On the LinkSwitch-II, can you talk a little bit about what factor or factors are driving the success in that product?

Primarily, it is the technology we have developed over the last six or seven years. We invested probably $10 million to $15 million in developing silicon technology, packaging technology, and also intellectual property in terms of architectures and so on. That gives us the ability to compete against discrete solutions in the 50 to 500 watt range and still make the margins about 50%. So it's a pretty significant set of innovations that allows us to do that. Especially when you consider what we replace are generally large [mott] sets controllers and discrete components, which all have very low margins relative to the margins that we make. And so, it took us quite a while, but we are very confident now that we have a set of innovations that will allow us to make very high margins. And, of course, there is also very high ASP, which is very nice in terms of growing the revenue.

I guess Link-II versus Link-I or whatever, you achieved a couple extra points of efficiency because of the silicon and the packaging. The packaging is in a smaller package, and you are getting a [form] factor. [better real estate].

I just want to clarify. My comments earlier was for the high power products between 50 and 500 watts. Maybe I answered the wrong question. So your question is Link-II?

Right. Yes.

I'm sorry. So Link-II, the big difference between LinkSwitch-II and LinkSwitch-I is LinkSwitch-II provides much more accurate output voltage and current relative to LinkSwitch-I. Both of them use what is known as primary size regulation. That means they can regulate the output through the transformer without requiring any feedback component. And that's what make the LinkSwitch so cost-effective. But LinkSwitch-II provides much higher level of accuracy, which means it has a much broader application. And that's the reason LinkSwitch-II has been so popular.

Great. Thank you very much.

You're welcome.

And we'll go next to Arnab Chanda with Roth Capital.

A couple questions. First of all, if you look at the gross margin, it was a little bit less than you had expected for Q3. I'm just curious as to -- could you quantify a little bit more about what the one-time items were? And if you got any benefits in Q4? And then, if mix remains the same, and if you get the cost reduction for LinkSwitch-II, what happens to that, say middle of next year? I have a couple of follow ups.

Arnab, approximately 0.6% was one-time items. There was some scrap in rework, as well as some lead frame [adder] charges that was a catch-up from a couple quarters earlier in charges that we received from one of our assembly houses. So they were clearly one-time, and we wouldn't expect that to recur. The remaining portion of the change in gross margin, quarter-to-quarter was mostly mix. What's your follow up?

I was asking about what happens next year if you get the cost reductions?

As we get the cost reduction because this is real time, we are working on it right now. We expect to have comfortably 50% or better gross margins as a result of what we are doing with cost reduction and our current manufacturing volumes.

Okay. Great. Maybe a question for Balu about the -- some of the growth you are seeing in backlog versus turns. So Q4, your revenues are going to be up, like you said, 52%. And you are saying your lead times have gone up, and maybe in October you are not seeing as many go to backlog. Are you concerned that there's an excess inventory in the channel, and things are getting pushed back and slowing down? Or what do you see this relative to your history as a Company?

Well, I was concerned about that last quarter, but so far we have not seen any cancellations or pushouts in our bookings. It is always a concern. When the demand goes up so fast, it's always a concern that customers are overreacting. However, at this point since we are already almost one month into the quarter, it's unlikely that if there is inventory building up down the chain that it will affect Q4. If at all, it will affect Q1. As far as October bookings, I am not at all surprised that it's softer because Q3 was an extremely strong quarter for bookings. Our bookings in Q3 was up 50% over Q2. And that does not represent a run rate but rather represents people ordering ahead of time because of the longer lead times on few of our products. So the October bookings are totally expected -- the softness in bookings. I also expect the turn business to slow down because so much of it is already booked. None of this surprises it. But you're right. There is always some concern that the customers may be overreacting, and we will know that only in Q1.

Okay. And then last question about your acquisition. Could you talk a little bit about what type of acquisition it was? What kind of revenue contribution you think it's possible for next year? And then, whether it's accretive or dilutive or neutral in the near-term? Thanks.

Just to be clear, the acquisition we made was a very small company, and the primary reason for the acquisition was the design resources. They had both [IC] design and the power supply design resources. And it was about $5.5 million. We did that about two years ago, and they are essentially an extension of our design capability. And we needed that to address high power products. Most of the technology was already developed in the power divisions. They did bring some expertise in certain types of topologies, and we are now combining what we have developed in terms of silicon technology, packaging technology with their expertise in certain topologies to come up with products. And so, the products we come out with is actually a joint effort. So it's hard to attribute any specific product to the Potentia group. However, you will see the return on investment starting next year.

Okay. Thanks, Balu. Thank, Bill.

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

Hello. I think most of my questions have been answered. Excellent quarter. Phenomenal guidance. What's going on in the street market? Are things still tight in that market as well?

Well, what we are hearing is that certain components are in shortage. Specifically, capacitors and high voltage transistors. And that has helped keep the prices firm which we are happy about. And that's not surprising either. Because the demand has gone up so quickly I am not at all surprised that there are shortages in some components.

And when do you feel you will get caught up on the -- I'm not sure if it's delinquencies or not -- but the extended lead times that you're seeing. When do you think you can get it back into the two to four week?

We think by the end of this year, we'll be caught up on all of our demand. But we may not have built enough inventory that we are comfortable with until probably some time in Q1.

Okay. So lead times should come back in by the end of the year, and then you'll keep on building a little bit of buffer so it doesn't happen again.

I wouldn't say the lead time will have come in by the end of the year. But we are satisfied the demand of our customers to a full extent by end of December. And it may take us too some extra time to build enough inventory so that we can pull in the lead times to our normal four weeks.

Okay. And then typically, you see things before most other companies in terms of changes in demand. It's fairly apparent that there is some weakness in demand out of some of the the cell phone suppliers, and it doesn't sound like you are seeing any impact from that whatsoever. And I think your articulation is that you are just gaining so much share at the Korean OEMs, that it's just not an impact. I guess I would have the same question for Nokia. Or the Europeans. Are you seeing any changes in demand profile from those cell phones suppliers?

Give us one minute, we will take a look at the numbers here. Nokia did go up significantly in Q3, but I'm not sure how much I would attribute to that because it does fluctuate a lot from quarter to quarter. For a couple of reasons. One is, the OEM themselves don't purchase uniformly. Secondly, the share they give to different vendors changes every quarter depending on price. But specifically in Q3, our revenue from Nokia went up quite significantly actually compared to Q2.

Okay. And you are seeing no changes in that pattern going into Q4?

As I said overall, I think Q4, cell phone revenue will be higher because of the share gains we are having across the board.

Got it. Okay. Alright. Thanks a lot.

You're welcome.

(Operator Instructions) We will go to a follow-up with Steve Smigie of Raymond James.

Thanks for taking the follow-up. You talked a little bit about orders potentially coming from replenishment. I was hoping you could give some more color on what you mean by that?

Again, when the demand goes up so quickly, it's hard to tell how much of that is replenishment and how much of it is real demand. But what is very clear is that relative to our competitors, we are gaining share. So we are doing definitely better than other companies, but it's still hard to tell -- how much of what we are shipping is replenishment into the inventory at our customers and their customers.

So it's not -- you are not necessarily saying there is replenishment, you are saying you are not sure whether it is there or not?

Correct. Last quarter, for example, I thought there was quite a bit of this was replenishment. And I even mentioned potentially double ordering and so on. But so far as we said, we have not seen any cancellation or pushout. And we are already as I said one month into this quarter, and we are pretty fully booked as you can tell. And it's unlikely if there is any of those impacts that it will happen in Q4. You will see it in Q1. Depending upon how this holiday season and the lunar new year consumption turns out.

Okay. And then you've had revenue jump up pretty quickly here. I was hoping you could talk about what you think R&D and SG&A as a percent of revenue might look like in 2010? Do you have any targets or goals, or just -- ?

As an overall goal, we wouldn't expect our OpEx to increase any more than one half of the growth rate of revenue. So if you wanted to model that in, you'd be -- that would probably be a good way to look at it.

Okay. Great. Thank you very much.

That is all the questions we have at this time. I will turn it back over to you, Mr. Shiffler, for any closing comments or remarks.

Thank you. That concludes the call this morning. We will have an archive of the webcast of the call available shortly on the Investors section of our website which is Investors.PowerInt.com. Thanks for listening, and have a great day.

That concludes today's conference. We thank you for your participation.