Power Integrations Inc (POWI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Power Integrations Q3 2011 financial results conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Joe Shiffler, Director of Investor Relations. Sir, you may begin.

Good afternoon and thanks for joining us to discuss Power Integrations' financial results for the third quarter of 2011. With me on the call are Balu Balakrishnan, President and CEO of Power Integrations, and Sandeep Nayyar, our Chief Financial Officer. During today's call, we will refer to financial measures not calculated according to generally accepted accounting principals. Please refer to today's press release available on our website at investors.powerint.com for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results. Also, our discussion today including 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, goal, anticipate, 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 1-A Risk Factors in part 2 of our most recent form 10-Q filed with the SEC on August 8, 2011. 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. And now I'll turn the call over to Balu.

Thanks, Joe, and good afternoon. By now, our story is going to sound familiar to those of you who have been following semiconductor companies over the past few weeks. Like virtually all of our industry peers, we are experiencing a slowdown in demand with limited visibility beyond the current quarter. I don't think we have a great deal to add to the macro picture beyond what others have said, so I'll just briefly give you our two cents worth on that and then spend the rest of the remarks updating you on our progress in some key strategic areas. As you may recall, we indicated on last quarter's conference call that bookings had begun to soften in June and then slowed further in July. Based on that trend, we projected that third quarter revenue would be down as much as 8% from the June quarter and we ultimately came in at $75.1 million, a sequential decrease of 6%. After falling off in July, bookings improved modestly in August and September, but remained well below the rates we saw earlier in the year and have continued at relatively subdued levels in the current quarter. As a result, we are forecasting revenues to be between $63 million and $69 million, compared with $75.1 million for the third quarter.

As we ride out the macro issues, we are staying focused on the things that we can control. First, we are taking prudent short term steps to minimize the financial and operational impact of the downturn. We have reduced production volumes and we are also taking steps to achieve immediate reductions in operating expenses. In both cases, we are aiming for a balance between near-term results and remaining well-positioned for growth when demand returns. We also continue to focus on cost reductions to offset the margin impact of higher input costs, especially from the decline of the dollar versus the yen, which has driven up the price of vapors from our Japanese foundries. As discussed on the past couple of conference calls, we expect these effects to begin bearing fruit in the fourth quarter. While the downturn in demand and continued strength of yen will cause gross margin expansion to be more gradual than we had initially expected, our cost reductions are on track and we expect an improvement of approximately 100 basis points in the fourth quarter.

Lastly and most importantly, we remain focused on executing our growth strategy, capitalizing on the demand for more reliable, energy efficient power supplies, developing our fast growing LED lighting business and penetrating the high power market which is a $0.5 billion dollar opportunity that we have just begun to address. We are excited about our progress in each of these areas. Our LED lighting business continues to grow despite the weak overall demand environment. Revenues increased at a mid-teens rate sequentially in the third quarter and accounted for well over 5% of our total revenues for the quarter. We won more than 100 new LED designs during the quarter and we continue to win more designs in LED lighting than any other application. This reflects not only the rapid development of LED lighting market, but also the attractiveness of our products for high voltage lighting applications.

Because energy efficiency is a primary purpose of LED lighting and also because heat is the biggest enemy of LED performance, an efficient driver is essential and we offer the industry's highest efficiency thanks to our EcoSmart Technology and our single state architecture with integrated power factor collection. This single stage approach also allows us to offer industry's highest level of integration and with integration comes reliability, a crucial factor since the life of the end product is typically limited by the life of the power supply. Integration also enables very compact power supplies, which is critical in space constraint applications like screw-in light bulbs or fluorescent tube replacements. For overcoming space constraints, the ultimate challenge for LED designers is probably the candelabra-style bulb commonly used in household chandeliers, known in the lighting industry as the B10 form factor.

We are pleased that Cree has specified our LinkSwitch-PL products for the new B10 reference design which was announced last week. The power supply in the new design contains just 20 components and fits neatly into the tiny space in the base of the bulb while delivering 87% efficiency to easily meet Cree's tough thermal specifications. We think this is a great endorsement of our capabilities in LED lighting and we are delighted to be working with an industry leader like Cree. Turning to the high power market, which comprises power conversion applications above 50 watts, we continue to make headway in the PC market with our Hiper product family, recently securing our third tier 1 power supply customer with a combination of our HiperPFS power factor correction chips and our HiperTFS converter chips. We also won a pair of new designs at an existing tier 1 PC power supply customer during the quarter. Our 2 speed high voltage diodes were also designed into several PC and server power supplies during the quarter, plus a number of other applications, including LED street lights and our first significant design win in the automotive market, an on-board charger for a new plug-in electric car.

In September, we launched our latest high power product, HiperLCS, which is a highly integrated resonant [mort and motor] chip targeting flat panel TVs, ultra high efficiency PCs, LED street lights and other applications requiring extremely high efficiency and/or very compact form factors. With the increasing popularity of all-in-one desktop PCs and ultra slim televisions, a small form factor is becoming a crucial requirement for power supply designers in the PC and TV markets. Meanwhile, the growth of the 80 plus efficiency program for PCs and the pending new TV efficiency requirements from Energy Star and the California Energy Commission are causing TV manufacturers to specify increasingly efficient power supplies. HiperLCS covers both of these bases extremely well, enabling efficiency as high as 97% while drastically reducing footprint by eliminating up to 30 discreet and passive components.

While our Hiper products allow us to address applications up to about 500 watts with silicon based ICs, we also have our sights on much a higher power levels that can benefit from the use of more exotic materials such as silicon carbide. Last fall, we announced a strategic investment in SemiSouth Laboratories, which we believe has the world's most advanced cost-effective silicon carbide technology. We announced yesterday that we have signed a subsequent agreement to act as a sales representative for SemiSouth silicon carbide JFETs and diodes in all markets outside of Europe, complimenting our high voltage, high power product portfolio while enabling SemiSouth to expand its reach by leveraging our global sales and support infrastructure.

I'd like to end with a brief update on energy efficiency standards where there have been few noteworthy developments with implications for our business. As reported a few weeks ago on our Mr. Green blog, the California Energy Commission recently conducted a scoping workshop to identify the next set of products that will be targeted for new standards under the [safe] Title 20 Appliance Efficiency Rules. Product categories under consideration include lighting, computers and servers, set top boxes, game consoles, imaging equipment and displays. We expect more details to be announced between now and the end of the year regarding which product categories will be addressed and when the standards will be slated to take effect. Because they are mandatory and because California is obviously a large end market, CEC standards have the potential to transform markets. The CEC's 2007 standards for external power supplies were a watershed event for the power supply industry that caused a dramatic spike in redesign activity and greatly accelerated the demise of the notorious inefficient linear transformer power supplies known as energy vampires.

Meanwhile, the Energy Star program, which takes more of a carrot approach as approach to the CEC's stick has augmented their traditional labeling program with the new most efficient designation which recognizes the most efficient products on the market in selected product categories. The program currently covers televisions, washers, refrigerators, and heating and cooling equipment, with more product categories to be added over time. By encouraging manufacturers to one-up each other rather than simply meet a minimum efficiency spec, this program has the potential to accelerate the design of more efficient products and drive greater innovation in power conversion and power management technologies which would obviously be very good news for us.

Meanwhile, Europe continues to move forward with its mandatory Eco-Design standards, covering a broad range of end products. Europe's across the board limitation on stand-by power consumption which took effect in 2010 is scheduled to tighten in 2013 with most products limited to 500 milliwatts of standby. We believe this is a challenging standard for many applications and we are well-positioned with our EcoSmart Technology as well as complimentary products such as CAPZero and SENZero, which targets specific sources of standby power waves such as the bleed resistors and sense resistors used in many high power applications. So while the near term business environment is clearly very challenging, we believe energy efficiency will continue to be a driver for us for years to come in the electronics market as well as lighting market and we think we are extremely well positioned to capitalize on that as we have done very successfully for many years. With that, I will turn the call over to Sandeep.

Thanks, Balu, and good afternoon. I'll briefly review the details of the third quarter results and the fourth quarter outlook and then we'll move to the Q&A. Revenues for the second quarter were $75.1 million, down 6% sequentially, but within the range we projected at the time of our last earnings release. The decline was driven by widespread softness across major end markets, revenues from the communication and computing markets were down mid-teens, while industrial revenues were down mid-single digits as growth in LED lighting helped offset weakness in other industrial applications. Revenues from the consumer end market increased slightly versus the prior quarter with pockets of strength in consumer electronics more than offsetting the continued softness we are seeing in the appliance market. Distributors accounted for 72% of sales during the quarter, while direct customers made up 28%.

Average selling price for the quarter was $0.28, down $0.01 from the prior quarter, reflecting a shift in product mix. Specifically, TOPSwitch accounted for 21% of sales, down 3 points from the prior quarter, while lower ASP TinySwitch products were up 2 percentage points to 33% of sales. LinkSwitch products were unchanged from the prior quarter at 43% of revenue, while other products were 3% of sales, up from 2% in the prior quarter. The other category is composed primarily of our new high power products. Gross margins were in line with our projections, decreasing slightly on a sequential basis. GAAP gross margin was 46.7%, down 20 basis points from the prior quarter. Excluding stock-based compensation as well as amortization of acquisition-related intangibles and inventory mark up, non-GAAP gross margin was 47.2%, down 30 basis points from the prior quarter. As Balu mentioned, we expect our gross margin to move up in the fourth quarter as we gain traction with the various cost reduction efforts we have implemented to offset the impact of higher input prices most notably the higher cost of vapors from our Japanese foundries due to the weaker dollar versus the yen.

Operating expenses were $24.5 million on a GAAP basis, flat versus the prior quarter. Non-GAAP operating expenses, which exclude stock-based compensation as well as the amortization of acquisition related intangibles were $22.9 million, up $700,000 from the prior quarter. The increase was driven by higher patent litigation expenses, which increased by more than $0.5 million compared to Q2, but remain on track with our expectations for the full year, which is a total of between $5 million and $6 million for the year. Due to the reduced business outlook, which causes our income to be skewed more heavily to high tax jurisdictions, we now expect our effective tax rate for the year to be 24% on a GAAP basis and 21% non-GAAP. Our tax provision for Q3 includes a catch-up to bring the 9 month effective tax rate in line with our expectation for the full year. This results in third quarter GAAP and non-GAAP tax rates of 32% and 27% respectively.

Our average diluted share count for the quarter was 29.9 million, down about 0.5 million shares from the prior quarter. We bought back just under 1 million shares during the quarter and, of course, that activity is only partially reflected in the average for Q3. I expect a further decrease in share count for the fourth quarter as the Q3 repurchase activity is averaged in and because we have continued buying back stock in the fourth quarter. At quarter end, we had about $14 million remaining on our $50 million buy back authorization. As indicated in our press release, our Board has allocated an additional $30 million on top of that amount. Coming down to the net income line, GAAP net income was $0.25 per diluted share, while non-GAAP EPS was $0.32.

Note that the higher tax rate impacted GAAP EPS by about $0.04 and non-GAAP EPS by about $0.03. Turning to the balance sheet, cash and investments totaled $223 million at quarter end, down $11 million from the prior quarter. We utilized a total of $32.9 million for buy backs and dividends during the quarter, plus $3.7 million for capital expenditures. Cash flow from operations was $19.4 million for the quarter, bringing the year-to-date total to just over $60 million. Internal inventories fell for the second straight quarter, dropping by more than $2 million to $51.8 million or 118 days of inventory, in line with our targeted range. Inventories in the distribution channel declined for the fourth straight quarter to 5.2 weeks, down from 5.5 weeks at the end of the prior quarter.

Turning to the outlook, in light of the still subdued order rates we have seen thus far in the quarter, we currently expect fourth quarter revenues to be in the range of $63 million to $69 million, because nearly 75% of our sales go through distribution and we recognize all of our distribution revenue on sell through, the revenues and shipments can differ considerably in any given quarter. As a result, backlog coverage and turns requirements which are based on shipments are not necessarily a meaningful metric. However, if we assume that revenues equal shipments, we will need turns business in the high $30 millions from the beginning of the quarter to achieve the mid-point of the range. We expect our gross margin to move up by approximately 100 basis points in the fourth quarter as we begin to see the impact of our cost reduction initiatives.

This is a smaller improvement than we had expected due mainly to the weaker demand environment which has resulted in slower turnover of high cost inventory. We expect further improvements in 2012 as we work through the higher cost inventory and make further progress on cost reduction though the magnitude and the timing of the increases will depend on factors such as production levels, exchange rates, commodity prices, and the overall pricing environment, all of which are, of course, highly unpredictable. As Balu mentioned, we have implemented various expense reductions in response to the weakening demand outlook and we expect these efforts to result in a sequential decrease in our non-GAAP operating expenses in the fourth quarter. Specifically, we expect non-GAAP OpEx to be between $21.5 million and $22.5 million, a decrease of roughly $1 million at the mid-point. Adding back about $2.5 million for stock-based compensation and amortization of acquisition-related intangibles results in a range of $24 million to $25 million for GAAP expenses. Lastly, I expect the fourth quarter tax rate to be approximately 24% on a GAAP basis and approximately 21% on a non-GAAP basis, consistent with our revised expectation for the full year effective tax rate. With that, I'll turn it back over to Joe.

Thanks, Sandeep. We're ready to open it up for a Q&A session. And in the interest of time, I'd like to ask everyone to adhere to a limit of one question plus a follow up. But time permitting, we will be happy to come back for a second round of questions after that. Operator, would you please give the instructions for the Q&A session?

Thank you.

(Operator Instructions)

Our first question or comment comes from Vernon Essi of Needham & Company. Your line is open.

Thank you, very much. Just wondering if we could go back and revisit your turns assumptions. I think if we go back about two years ago, you were looking for turns [of this high], obviously backlog has dropped a lot. It's an obvious question we're asking a lot of companies these days, so what gives you the confidence that you're going to see better turns rates? Are you getting any signals from the channel that suggest that you're going to see a little bit more pull through by your customers in the fourth quarter?

Vernon, so traditionally, you're correct. We have had turns as high as 60% to 70% and then in the past few quarters they have gone back to 20%s. Although the order rates are depressed, we are seeing a larger percentage of the orders for delivery within the current quarter. So that's expecting higher turns relative to where we were is not unreasonable. And, of course, if the distributors continue to drown on the inventory, we would need even lesser turns. But it is, as you know, a little difficult to forecast in this environment and nothing is certain but it's the best estimate that we have at this point of time with all the information we have.

Okay. So it feels pretty scrubbed down, then, from your perspective?

Based on the data that we have, yes.

Okay. And then just in terms of your gross margin, quite glad to see it's reversing. You know, it's an obvious question, but in the past, the hints that side, the [charter] side has always been sort of a little bit of a drag on that. It has gone down a little bit it looks like in terms of proportion of revenue. Can you just go through again kind of the mechanics and levers around the gross margin versus -- I guess just the mechanical things you're doing to offset it -- wafer costs and materials improvements versus say the sales mix. Thank you.

Yes, Vernon, so as you know we had a lot of cost reductions in the [shiddis] including the dye [shrink] going from gold to copper, renegotiation a new wafer pricing. Those were the things that we had talked about that we had been working off over the last year to get our benefits coming in fourth quarter, which has been delayed partly because of the magnitude of the decline in revenue and the turn of the existing higher level of inventory. From your standpoint in terms of mix, as we've always said, the industrial market has the highest followed by the consumer, then the computer and then the communication. Even though communication is down, we have also even, as you see, softness in the appliance area, though often the consumer electronics and we've also seen the decline in industrial, which is the higher margin. So between the appliances and the decline in industrial, it has kind of offset even though the benefit we could have got for the decline in the communication.

Okay. And just one final little point here. You had said you saw some spots of strength in consumer electronics. Is there any specific end markets you'd highlight as actually coming in perhaps a little bit better than you would have thought?

It's across the board. Just we didn't want to pick out specifically, it's different end markets within the consumer electronics.

Okay. Thank you.

Thank you. Our next question or comment comes from Ross Seymore of Deutsche Bank. Your line is opened.

Hello. As you look back at prior cycles, you are usually a canary in the coal mine to the down side and to the up side. Balu, as you compare this to a normal cycle, looks like your revenue peak-to-trough will drop even a little worse than a normal down turn. Can you talk a little bit about how it's a balance between supply and demand and how you think about looking into the first half of next year?

Well, that is true. In the past down turns, we have always seen the down turn before other people and we will come out of the down turn before other people and, you know, I assume it is somewhat similar this time. If you look at our guidance last -- for the last quarter, we were a little bit worse than most people, but most people had to come back later on in the semiconductor space to reduce their guidance. Luckily, we came well within our guidance. So but in terms of coming out of this, the visibility is quite limited at this point. This feels a little different than the 2008 down turn where it was very, very sharp and there's a lot of psychological reasons, people were very negative. This one feels very different. It seems to be more gradual and so it's not clear how quickly it will come back. So we are managing our business assuming that it's not going to come back very quickly.

I guess as a follow-up on that, then, on the OpEx side of things, I guess the mid-point you're lowering it by about $1 million. How should we be thinking about what you'll be doing with OpEx going forward? Is this the absolute dollar you're going to keep flat until you see demand pick up or are there some cuts you're doing that will only take a partial impact in the fourth quarter, so we should think that first quarter would drop again?

So Ross, what we have done is we are implementing a number of what we call prudent expense reductions like hiring freeze, curtailing travel discretionary, which is reflected in our Q4 guidance and what we are trying to do in our expense structure is basically manage what is the short-term versus the long term so that we're not trading our future and as a result I think we have tried to come up with a fine balance. We are working on our 2012 plan at this point of time and we'll update you that at the beginning of next year.

I guess one quick follow-up. Is there anything in the first quarter that you have like an annual bump up, bonus accruals, FINRA taxes, whatever the case may be?

Yes, typically you have either the FICA taxes really resume and that bump it up. That generally bumps it up by about $400,000 or so typically. That's one thing that does happen.

Great. Thank you.

Our next question comes from Tore Svanberg. Your line is opened.

Yes, thank you. First question, and maybe coming back to the guidance and the sell through for Q4. So you said channel inventory is down to 5.2 weeks. Has it really been this low before? I just can't recall it being this low.

If you look at historically, I mean it's not in the near history, but if you go back a little, it has been as low as 4, but, you know, right now, as you know, our lead times are between 4 to 6 weeks, so it's within the range, but considering the environment we are, I mean it won't be surprising if they bring it down further. So it's very possible that it can go down further to 4, 4.5, can't be certain at this point of time.

Okay. And initially, you recognize revenues in a sell through basis, so if you look at down 12% at the mid-point, is it your assessment that the end markets for your products is actually down 12% sequentially in Q4 or do you think this is just the distys bringing inventories down as low as they possibly can?

Well, it's really hard to understand what the actual demand is, but it is hard to believe that in just 2 quarters, the demand has come down somewhere in the 15% to 20% range. That's very difficult to believe. And historically, also, we haven't had more than two quarters of significant down turn like this. So I am thinking that the market is overreacting because of the slowdown and hopefully it's not as bad as it sounds.

Sounds good. Last question. Can you just put some numbers around your new products again? So if you look at high power LED lighting, Smart Meter and specifically percentage contribution this year and what you're expecting in 2012? Thank you.

Well, LED, as we have said and I believe we are on track for that, will be roughly around $20 million in revenue for this year, which is about 50% roughly growth from last year's revenue. And in terms of the high power, we had almost no high power revenue last year and this year we projected $5 million to $8 million and we still believe that we'll achieve in that range.

Okay. And any numbers for next year or do I have to wait until January?

I think you'll have to wait for January. It's very limited visibility right now.

Sounds good. Thank you, Balu. Thank you.

You're welcome, Tore.

Thank you. Our next question or comment comes from Andrew Huang. Your line is opened.

Thank you. I just had a question about your revenue guidance, which is I think down about 12% sequential at the mid-point of the range. If I look at your revenue by end market, could you talk about where you might see some relative strengths and then some relative weakness?

So, Andrew, as you know, 75% of our revenue goes through distribution, and it's very hard. I think the way to look at it is we continue to see some softness in communication and in appliances and industrial. So it's been quite widespread if you look at it in total. So it's a little hard to predict where it will be specifically. But I think the 3 areas that I kind of indicated have been where we've been seeing the softness of late.

So you expect that softness to continue into Q4 for those same segments?

Yes, because it's hard for us to say which it will be because we don't know when we get the orders where it will go into because it's the same product goes into different end application, but seeing the trend, it looks in that direction.

Okay. And then the second or the follow-up question is for the March quarter, I know it's a little further out, but would you expect to see further benefits from your cost reduction programs so that the gross margin could continue to head higher should the revenues remain reasonably steady?

So we would have actually expected that to happen because of the cost reduction and the delay from this year, so that's a natural thing, but we've also lowered our production levels, so we believe that the benefits -- the tail winds that we have got from the cost reduction would get offset by the production level reductions at this point of time.

Got it. Okay. Thank you very much.

Thank you. Our next question or comment comes from Christopher Longiaru of Sidoti & Company. Your line is open.

Hello. How are you doing?

We're doing well, thanks.

So a couple of questions. First, in terms of -- I think you said you had 100 LED design wins in the quarter?

Yes.

And what's the progression typically from those design wins to revenue in terms of time?

Well, the criteria we use for design wins is actually quite stringent. We actually have to receive an order for a certain amount before we declare it a design win. And so the designs should go into production within the next quarter or two.

So it's pretty quick -- and100 is a lot for you. Can you give us a relative number on that because LED is kind of a new business for you, but in terms of your other legacy business units, is 100 design wins a faster ramp than typical?

Chris, I guess it's hard to compare it to any other application because it's such a unique market. I think we did mention that we're getting more design wins in the LED application than any other application we address, which I think gives you kind of a sense of how fast that market is growing, but also how fragmented it is and how many customers there are out there. So I think that's probably the best way to look at it.

Okay. That's helpful. And then just in terms of both the CEC and the Energy Star initiatives here, I guess there's not timing on all of these things, but would this be a 2012 contributor in terms of the TVs and the PCs? I think they're going to probably wait on some of the other applications, but just in terms of that design activity, are you seeing some of that already and can you comment on your penetration so far and what you expect that to be long term?

Well, the CEC initiative to add more products will probably take a couple of years just based on history before it takes over, but the highest efficiency labeling of Energy Star is already in effect. In fact, there are 4 or 5 large customers who have already gotten the name, including Panasonic, LG, Samsung and, let's see, who else, Maytag and there's one more company. So that's already in effect. So some of them are already in effect, but CEC will take some time. The European Eco directive goes to the next tier of standby on a broad range of products and that will take effect in 2013.

All right. That's helpful. Thank you.

You're welcome.

Thank you.

(Operator Instructions)

Our next question and comment comes from Gus Richard of Piper Jaffray. Your line is open.

Yes, thanks for taking my question. If I'm trying to get a better idea of what the full impact of the cost reductions coming would be. So if revenue levels stayed the same and mix stayed the same and you were sort of at normal production run rates, where would gross margins go? Would it be in the 51% to 52% range? Is that correct?

What we had said before, and that is so that I'm not confusing now with the production levels are coming down, it's different. But what we had said before the production is that we would get to about 200 basis points by the end of this year, which now we have reduced because of the slower revenue turn and what we had told earlier was that we would have further reductions and be able to get us up to about the 50%. That's what we have been saying in the past. Now, the timing, we would still be able to get, but the timing of that and the magnitude of the benefit we get over what period of time is going to vary because of all these uncertain things that are happening around us at this point of time.

I think it will be safe to say that we expect the 2012 gross margin to be higher than 2011.

Okay. And then just -- at current revenue run rates, would you run through the high cost material in Q1, would that be exhausted by that point?

That is what I was saying is that the benefit that we would have got for the price reduction, which was the addition of the 100 basis points that we did not get this quarter, would have been a tail wind, but with the production level reduced will get offset.

So the answer to your question is yes, the high cost inventory we would have gone through in Q4.

In Q1.

Sorry

By Q1.

I got it.

By Q1 we'll be done.

Okay. And then just in terms of our pricing and pricing pressure you guys see any currently, has discrete pricing been getting more aggressive or any color there would be helpful?

Well, until Q2, I would say the pricing environment was very benign. Since Q3 and this quarter, we are back to the normal historical price erosion, which is typically in the range of mid-single digits per year. I wouldn't say there's anything unusual going on at this time, but it's certainly -- we had very little in terms of price erosion for almost a year and a half and now we are seeing it coming back to normal.

All right. And then last one for me. I mean, given the disruption in drive supply, I would imagine there might be some weakness in DVRs and PCs. Can you talk about -- have you seen any of that and do you expect it to impact in your fourth quarter?

Well, first of all, we haven't had any direct impact, even though we have one of our assembly vendors in Thailand, they are far enough away from the floods that it is not a problem. However, what we don't know is whether there is any indirect impact because people can't get other components to make the end product that uses our chips. The only thing we know is an anecdotal information from one of the customers in Japan who have told us that they are unable to get some certain other parts that are manufactured in Thailand and other than that, we have not heard anything so far, but it's very possible that, for example, the disk drives could impede the number of units that -- of PCs built, but we just don't have any information at this point.

Okay. Got it. Got it. All right. Thanks so much.

You're welcome.

Thank you. Our next question or comment comes from Steve Smigie of Raymond James. Your line is opened.

Great. Thanks. And I apologize if this question was asked, but just generally I was hoping you could talk a little bit about the competitive environment for the handset charger market and, why you might be gaining or are you gaining share and, if so, what is it about your products that's allowing you to do that? Have you had any major new OEMs there? Thanks.

There is no significant change in terms of our customers. We basically have 4 large customers and a bunch of smaller customers and we -- you'll have noticed that our revenue in cell phones have come down, if you look at the communications revenue. That's finally because 2 out of the 4 large customers have had challenges in terms of their share in the market. So they have lost share, by definition, we have lost some share in the cell phone market. And other than that, I won't say there is anything unusual other than some -- 2 of our customers having some challenges.

Okay. Any chance you can add to your 4 customers, do you have a couple more or anything like that? Is that unlikely?

Of course, we are always trying to add more customers, so we -- you know, that's a given.

Okay. Can you talk a little bit about what you see as sort of the three-year growth rate for the LED and for the high power businesses respectively?

That's a tough one, especially with what's happening in the macro economy.

Let's assume it's sort of like a 3.5 goal GDP type of environment.

Well, from everything we can see, LED is taking very strong hold, especially in the commercial and the industrial sectors where the pay back is very obvious. So my expectation is that LED will continue to grow very nicely and historically, until this year, we've been growing at 100% rate and this year we are at about 50% rate. I wouldn't be surprised if we had another 50% growth next year, but I have no way of knowing for sure. On the high power, we just started getting revenue and we have now 3 large PC power supply manufacturers who have started using our product and I'm optimistic that they will expand our design into other products and we will continue to grow nicely. It's hard to put a number on it.

Okay. Great. Thanks a lot. I appreciate it.

You're welcome.

Thank you. I am hey not showing any further questions at this time. I would now like to turn the call back to Mr. Shiffler for any further remarks.

Okay. That will conclude the call for today. Thanks everyone for listening and we will have a replay of this call available on our investor website which is investors.powerint.com. Thanks everyone and good afternoon.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone have a great day.