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Executives

Rick Neely – CFO and Treasurer

Michael Hsing – President and CEO

Analysts

Rick Schafer – Oppenheimer & Co.

Doug Freedman – AmTech

Patrick Wang – Wedbush Morgan

Anthony Stoss – Craig-Hallum Capital

Vernon Essi – Needham & Company

Sukhi Nagesh – Deutsche Bank

Gus Richard – Piper Jaffray

Tore Svanberg – Thomas Weisel Partners

Ian [ph] – Goldman Sachs

Dan Myers – Crosslink

Johnny Brown – Stephens Inc.

Vijay Rakesh – ThinkEquity

Monolithic Power Systems, Inc. (MPWR) Q4 2008 Earnings Call Transcript February 12, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Monolithic Power Systems Incorporated Earnings Conference Call. My name is Eric. I will be your audio coordinator for today. And at this time all participant are in a listen-only mode. We will facilitate the question-and-answer session toward the end of the presentation. (Operator instructions) I would now like to turn your pan over to your host, Mr. Rick Neely, Chief Financial Officer. Please proceed.

Rick Neely

Thank you, Eric. Good afternoon and welcome to the fourth quarter and fiscal year 2008 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today's call.

In the course of today's conference call, we will make forward-looking statements and projections that involve risks and uncertainties, for example, our business outlook, including our business and financial outlook for the first quarter of 2009; projected first quarter net revenues and gross margins; our expectations for first quarter litigation, stock compensation, and non-GAAP research and development, and selling, general, and administrative expenses; our target operating model range for gross margins; planned new product introductions, potential customer acceptance and the various opportunities these present; our focus on cutting variable costs; our relative competitive position; our management of production cycles; inventory levels and projected changes in inventory levels; anticipated outcomes and schedules of our pending litigation; and finally our plans to weather the current economic conditions and use 2009 to position the Company to grow revenues in the future once end customer demand returns.

Forward-looking statements are not historical facts or guarantees of future performance or events and are based on current expectations, estimates, beliefs, assumptions, goals and objectives and involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from the results expressed or implied by these statements. Risks, uncertainties, and other factors that could cause actual results to differ are identified in our SEC filings, including, but not limited to, our third quarter Form 10-Q filed on October 23rd, 2008, which is accessible through our website, www.monolithicpower.com, and our 2008 Form 10-K to be filed on or before March 17th, 2009.

Also, please note that during this call we will discuss net income and operating expense on both a GAAP and a non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation, legal settlement, and provision cost, and one-time lease write-downs or write-ups and the related tax effects. We will also discuss our expected non-GAAP research and development and selling, general, and administrative expense for the first quarter of 2009, which excludes our expected charges related to stock-based compensation. A table that outlines the differences between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to this release as well as to the reconciling tables that are posted on our website.

I'd also like to remind you that today's conference call is being webcast live over the Internet and will be available for replay on our website for one year.

We would like to start this call by reviewing our fourth quarter and fiscal year 2008 business highlights. Following this update, I will discuss our financial results. I will then turn the call over to Michael and he will conclude with an overview of current business condition. We will then open up the call to your questions.

Let's start with the business highlights.

MPS had a good year in 2008 as we grew our annual revenue by 20% over 2007, setting a new yearly revenue record of $160.5 million. Our fourth quarter revenues were $34.7 million, a decrease of 10% from the fourth quarter of 2007 as end product demand dropped precipitously due to the global economic slowdown.

Non-GAAP earnings for the year grew faster than revenues as non-GAAP EPS was up 22% from our 2007 performance coming in at $0.90 per share.

In the product arena, MPS had a stellar year. Our output of new product introduction set new records as our expanded design teams worldwide were able to use MPS’ innovative process and design technology to come up with many new products and product families. In 2008, we saw production quantity shipments of our high-current, high voltage MiniMonsters product family and our new batter charger family, which together accounted for over $10 million of new revenue.

Our regional growth strategy continued outside of our traditional strength in Greater China with 41% of our sales from outside that region. Our expanded product portfolio has allowed MPS to penetrate larger end customers as evidenced by our sales to our Top 25 end customers, all of which are over $1 million in annual revenue, which grew 45% year-over-year. We believe all of these activities have prepared the Company for excellent growth prospects once the worldwide economy recovers.

In the manufacturing area, MPS saw the impact of dramatically reduced end market demand in the fourth quarter as our gross margin came in at 58% for the quarter. While we were able to drop our inventory dollars from the third quarter by $3.4 million, the tremendous fall off in end customer demand resulted in increased inventory reserves and lower capacity utilization. For the fiscal year, our gross margin was 62%.

As business declined in the fourth quarter, we focused on improving working capital and as a result we increased cash, cash equivalents, short term restricted cash and investments by $21 million in the quarter to about $150 million as of December 31, 2008.

On the expense side, our non-GAAP operating expenses were $14.3 million, down $2.5 million from the third quarter of 2008 as we moved rapidly to reduce variable spending.

Now, let’s look at the financials in more detail. On the P&L, starting at the revenue line, fourth quarter 2008 net revenue of $34.7 million declined 10% from the fourth quarter of 2007 as a result of the dramatic fall off in worldwide demand. This is reflected in the 29% sequential decrease in revenue from the $48.9 million we had in Q3 ’08.

For the fiscal year revenue was $150.5 million, up 20% from 2007 revenue $134 million.

Let’s break out our fourth quarter and 2008 revenue by product line. DC to DC product sales were $27.3 million, up 8% from the $25.3 million reported in the year-ago quarter and down 20% from the third quarter of 2008. Year-over-year our DC to DC products grew from $86.7 million in 2007 to $115.4 million in 2008, an increase of 33%.

The majority of this growth came in the communications segment, with products such as modems, routers, servers, and wireless LAN, flat panel TVs, set top box, and other consumer products such as digital video recorders and digital picture frame. As mentioned before, our new MiniMonster and battery charger products made significant contribution to the DC to DC growth in 2008.

CCFL revenues for the fourth quarter were $5.2 million, a decrease of 46% from the same quarter a year ago and down 49% from the prior quarter. For the year, total CCFL revenues were $32.3 million, a decrease of 10% from the $35.7 million sold in 2007.

Audio revenues for the fourth quarter came in at $2.2 million, down 37% from the $3.5 million recorded in the year ago quarter and down 50% from the third quarter of 2008. Fiscal 2008 revenue fro audio totaled $12.8 million, an increase of 11% from 2007.

Looking at the gross margin line, our fourth quarter gross margin was 58% compared to 63.9% in the same quarter of 2007, and 52.8% in the prior quarter. Our base line margins were fairly consistent with prior quarters, but due to the decline in end demand, we increased our inventory reserves and had some capacity under utilization in our test facility. These two factors took about three to four percentage points off of our gross margin for Q4. For the year, our gross margin was 61.9%.

Moving down and looking at reported expense and operating margin, our GAAP operating expenses were $17.9 million in the fourth quarter of 2008. This includes $17.3 million in R&D and SG&A expense, which includes $3.6 million for stock compensation expense and litigation expense of $594,000. Compared with the fourth quarter of 2007, GAAP operating expenses increased by $1.2 million. This amount is made of a decrease in litigation costs of $449,000, an increase in R&D spending of $1.8 million and a decrease in SG&A spending of $94,000.

I would now like to review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the fourth quarter of 2008 were $14.3 million compared to $13.7 million in the fourth quarter of 2007, and down sequentially from the $16.8 million in the third quarter of 2008.

The $2.5 million expense decrease from the prior quarter of 2008 was due to reduced spending across the board as MPS decreased its variable spending in the fourth quarter to compensate for reduced sales revenue.

Our non-GAAP operating margin for the fourth quarter of 2008 was 17%, down 12 percentage points from Q4’07 and down 12 percentage points from the 29% recorded in the prior quarter.

Our fourth quarter and 2008 GAAP net income was – for the fourth quarter GAAP net income was $3.2 million or a profit of $0.09 per fully diluted share. This compares to a profit of $9.3 million for the fourth quarter of 2007 or $0.26 per fully diluted share. In the third quarter of 2008 MPS recorded a net profit of $10.5 million or $0.29 per fully diluted share.

For the fiscal year MPS earned $24.2 million or $0.67 per fully diluted share, compared with a profit of $11.6 million or $0.33 per fully diluted share in 2007. Net margin was 9% for the quarter and 15% for the year.

Looking at the quarter and the year net income on a non-GAAP basis, for the fourth quarter of 2008 we had net income of $5.5 million or $0.16 per fully diluted share, which excludes stock compensation expense of $3.7 million and a related tax effect of $1.4 million and uses an estimated tax rate of 15%. In comparison, for the fourth quarter of 2007, the non-GAAP net income was $9.2 million or $0.26 per share, which excludes stock compensation expense of $3.2 million and an adjusted tax amount of $3.2 million.

For the fiscal year on a non-GAAP basis, MPS earned $32.3 million or $0.90 per share. This compares to a non-GAAP net income of $25.7 million or $0.73 per share in 2007. Non-GAAP net margin was 15% for the quarter and 20% for the year.

Now, I would like to discuss some of the major changes in the balance sheet. Cash, cash equivalents, current restricted cash, and investments were $150 million at the end of the fourth quarter and fiscal year, up from $129 million at the end of the third quarter of 2008 and up $32 million from the $180 million recorded a year ago.

The increase in cash from September 30, 2008 came from operating cash flow of about $27 million, which includes an increase in working capital of $19 million. This was offset by capital expenditures of $1 million and the completion of the stock buyback program for $5 million, resulting in quarter-over-quarter cash growth of $21 million.

Accounts receivable ended the fourth quarter at $9.1 million compared with $18.8 million at end of Q3 ’08, and up slightly from the $8.2 million at the end of the fourth quarter of 2007.

Collections were good for the quarter as our days sales outstanding finished at 24 days for Q4 2008 compared with 35 days at end of the third quarter of 2008 and 19 days at the end of 2007.

Our inventories at the end of the quarter were $18.9 million or about 118 days of inventory. This compares with $22.3 million or 112 days of inventory at the end of the prior quarter. A year ago, at the end of the fourth quarter of fiscal 2007, our inventories totaled $17.5 million or about 114 days of inventory.

In our distribution channel, the dollars of inventory held by distributors at the end of the fourth quarter declined as well from the third quarter of 2008. We were able to manage our inventory – our internal inventories to a reasonable level this quarter despite the large demand swings. Going forward, we may manage our production cycles to both meet anticipated demand, but also take advantage of cost efficiencies in the supply chain.

To conclude my portion of this call, I would like to discuss our outlook for the first quarter of 2009. Our revenue guidance for Q1 is in the range of $24 million to $29 million, reflecting the extreme drop in general worldwide demand and lack of visibility for the first quarter of the year.

Gross margin is expected to be below the lower end of our target range of 60% to 63%. We expect stock based compensation expense in the range of $3.5 million to $3.8 million.

We expect non-GAAP research and development and selling, general, and administrative expense in the range of $12.5 million to $13.5 million. This estimate excludes the stock compensation estimates mentioned above. And finally, we expect litigation expense in the range of $1.5 million to $2.0 million.

I would now like to turn the call over to Michael for a discussion of general business conditions.

Michael Hsing

Thank you, Rick. In the first three quarters of 2008, MPS had good growth and excellent new product execution. We outgrew the industry and gained the market share. However, like other analog companies, our booking slowed dramatically in the fourth quarter, which was substantially different from our normal seasonality pattern. Typical seasonality will see the fourth quarter revenue flat or slightly lower than the third quarter. This is the first time we had almost a 30% revenue decline in one quarter.

The outlook for 2009 is still very uncertain. Our customers are not giving us their usual forecast. Therefore, it is difficult for us to predict the revenue accurately. However, in comparison with the last November or December we do see some booking improvements especially after Chinese New Year, but the overall rate of the bookings is still erratic and below our expectations.

MPS has always maintained a lean and adaptive culture. Our operation cost – our operating cost will reflects with the revenue growth and the profitability. Last November was an extraordinary fast business transition from good to bad. We were able to reduce both our inventory and the variable cost substantially. MPS remained profitable.

Overall, we see the downturn as a business opportunity. Internally, we can strengthen our lean and a nimble culture and build a stronger team. Externally, like other – any other downturn, customers are more open to look at our innovative products. As a result, we are seeing more opportunity for our products. MPS history has proven that we are on the right track.

We are continuing to stay on the course with our execution strategy, which is, one, continue to develop new innovative technologies and maintain our superiority. Two, diversify our new product portfolio to address many different markets. And three, expanding our global presence especially sales in North America and the Europe.

I am optimistic about our future. As Rick mentioned, we had a stellar year in 2008 for product development. These new products have generated many new opportunities for MPS particularly we have had excellent customer feedbacks about the newly released fully integrated single chip high current DriverMOS family known as Gazela [ph]. This is the industry first 20 M DriverMOS that fits in a 5x5 millimeter package. And it enables our customers to reduce their size up to 60%. This product family is targeting network servers, graphics processors, and the notebook CPU market.

In summary, with the breadth of new products released in 2008, I am confident that when the macro economic conditions stabilize MPS will resume its growth.

Now, we’d like to open the microphone and take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Rick Schafer with Oppenheimer & Co. Please proceed.

Rick Schafer – Oppenheimer & Co.

Hey guys, I had a couple of questions for you following up I guess the first is just on – I know you – just a little more color maybe on eh order patterns you guys have seen since October. I know – Michael I know you have mentioned it’s gotten better this year but since Chinese New Year, could you give us an idea sort of the magnitude of the uptick in bookings or is – or what you’re trying to say is that bookings are just declining at a less bad rate or they are becoming less bad. I mean how do we think about your order patterns?

Michael Hsing

It is much less bad compared with November or December. The November-December is in a – particularly December is going backwards. And now in January and as I’ve said after Chinese New Year the orders go forward. We had a pretty good bookings Richard can talk about it, but still the booking rate is still very erratic, as I’ve said.

Rick Neely

Yes, Rick, as Michael said, this quarter, we started the quarter with a lower backlog than we ever had. At the same time, after Chinese New Year, we had better bookings, so if you balance the two out, it’s better, but it’s – I think I would use your characterization of it’s less bad, but it’s probably not good, but it’s less bad, so to speak.

Rick Schafer – Oppenheimer & Co.

Okay, so you usually give us number I mean can you give us an idea of the like sort of the level of turns you need to make let’s say the midpoint of the top line guidance.

Michael Hsing

Yes, we usually don’t give any details, but this is unprecedented and I think it’s – we should tell our shareholders lot more clear. We have currently about – the booking at the 90% our lower end – lower end of our guidance. But we – it’s very difficult to – for us to forecast what’s next week, because as I said very erratic.

Rick Schafer – Oppenheimer & Co.

Okay. That’s great and then – okay, so that’s great. And then just a second question. You’ve done a nice job cutting costs so far and kind of keeping up with the revenue declines, but I mean it seems like ’09 revs are probably tracking to little more than $100 million this year give or take I guess, which is similar to a couple of years ago. I guess what would you guys need to see to sort of take a harder look at cutting cost or how much could you really cut from here without jeopardizing future growth? Can – any kind of idea of magnitude or do you quantify that at all?

Rick Neely

Well, I’ll start off and then Mike will probably finish it. I mean as you can see from the decline in operating expense, we have a large variable component to our expenses, primarily bonuses. We have some obviously moves we took, we had a shutdown in December, that helped out. We have (inaudible) travel down like most people, but primarily it’s our bonuses and so what you see in Q1 if you look at our guidance, Rick, that reflects pretty much no bonuses. We operate in Silicon Valley unlike some other companies, I guess. We don’t make any money, we don’t pay any bonuses. So that’s what Q1 reflects. However, if business picks up we’ll – we will pay some bonuses if it picks up. If it doesn’t, we won't. So I don’t really know how to answer your question of trend. I can just tell you in quarter like Q1 where it looks like we will be marginally profitable we don’t pay any bonuses and that helps operating expenses.

In terms of how long we would have to go to make any structural changes, Michael can probably speak to that.

Michael Hsing

I don’t – MPS, as I said, has always operated a very lean – we have a very lean culture. And – so our expenditures and most of it related to our sales commissions and also performance bonus is – will directly related to the profitability and the revenue growth. So in the first quarter of this year it’s automatic in it sets itself. And we don’t just – revenues – lower revenue, lower profit and low operation cost.

Rick Schafer – Oppenheimer & Co.

Okay. And then just one last question I guess on the P&L. Rick or Michael, do you guys anticipate a further inventory charge in the first quarter? I mean you said gross margin will be below the target range a little bit again. Can you give us an idea of the magnitude of how much below maybe and if it’s just – is it just reflecting under utilization or is it also – is there a further inventory charge coming?

Rick Neely

Yes, the inventory charge will depend on how demand looks for the future. The primary outlook right now is under utilization as – as you know our test here in Chengdu, most any test areas are very heavily fixed cost and a lot of the machines in there and depreciation. So, it doesn’t matter whether you run them or not, there is a certain amount of cost. And that’s reflected in the – the gross margin impact this quarter is primarily going to be from the model is primarily capacity utilization. We would expect that to turn around of course, as business picks up.

Operator

(Operator instructions) Your next question comes from the line of Doug Freedman with AmTech. Please proceed.

Doug Freedman – AmTech

Thanks guys. Thanks for taking my question. Looking at your results, DC to DC converters down 20%, really outperformed the LED business there, the – backlighting business. Can you talk a little bit about what contributed to sort of relative strength in DC to DC or are you seeing new wins that are starting to ship in sample volumes or is it just that the end market that that sells into weren’t down as much or there wasn’t as much inventory? What explanation can you offer?

Rick Neely

Well part of it, Doug is – as Michael talked on the new products – but part of it like we said, we generated 10 – over $10 million of new product revenue in 2008 from MiniMonsters and battery charges that was zero in the year before. So that helped contribute with those types of new products. Michael?

Michael Hsing

Yes, did you say – okay, I heard the – I guess I heard the wrong question. Was it declined?

Rick Neely

Well no, DC to DC was relatively better than backlight –

Michael Hsing

Yes, okay, okay, I got that, okay. Yes, DC to DC, but as I said we released a lot of new products and we have – generated a lot of activity in last – second half of the last year. And we (inaudible) we expected this year will pick up the – some revenues, but this year we can't really foresee what will happen.

Rick Neely

Yes, I probably could answer maybe the next question someone will ask in advance later on, the decline in CCFL was more in relation to the notebook market really fell off the cliff. If you just see some of the other companies in the backlighting business or the GPU business, it’s – Q4 saw an extreme drop in demand. So that’s – it’s more of a demand drop on the CCFL side that caused that to go down so much.

Doug Freedman – AmTech

Great. Can you talk a little bit about sort of tracking your design wins and maybe a little bit more color on the relative value of the design wins that you’ve achieved in the last quarter?

Michael Hsing

In the last quarter, in the DriverMOS and obviously the new product that we beta tested in many customer place. And we had very good feedback. Our customers are excited about it and so we are continuing to work with them and try to get some design wins. That’s one area. The other area lower current levels, 4-5 amp current levels and we are designing into many different places and if I mention one of them it will be a small percentage. So I just mention one just for information. Again, the TV, okay, we continue to win design wins in the TV side set top box in Europe and among other industrial applications. So, every one of them are very – contributes to very small revenues.

Rick Neely

Yes, as you know, Doug, typically in our business and certainly for MPS, we don’t have any design wins that bring in $50 million or anything like that. We have a whole bunch of small ones that add up cumulatively. But we don’t have the kind of business where one or two design wins drive lots of revenue.

Doug Freedman – AmTech

Alright, terrific and I’ll jump back into queue. I have some more questions. Thank you.

Operator

Your next question comes from the line of Patrick Wang with Wedbush Morgan. Please proceed.

Patrick Wang – Wedbush Morgan

Yes, hey guys. Thanks for the opportunity to ask questions here. First, hey, can you talk a little bit more about inventories here just I guess expectations is as if – if your channel inventory does get any leaner from this point, then also if you can give us I guess what finished goods and maybe quantify the reserves you guys took last quarter.

Michael Hsing

Yes, in a normal climate I’ve said it many times – I said many times before that our inventory level is not usually related to our future business and sometimes we strategically pile up more inventory than other. So this time in – our inventory in the channels are extremely low and we may or may not increase and depend on if we – - depend on our customers – our customers’ demand. So at this time it’s not clear.

Rick Neely

Yes, the in-channel – as we said we dropped inventory there, we dropped our own. In terms of the color of our inventory split, Patrick, we increased reserve right around $1 million, so $1 million of the drop is reserve related. The rest is actual decline. And it was declined in finished goods.

Patrick Wang – Wedbush Morgan

Okay. And also just to get some clarification, I guess, Mike, on your comment there so is it fair to say that a lot of the inventory burn in the channel is over with at this point?

Michael Hsing

Yes and they declined slightly from the last quarter and so – but we want to and we believe, always believe, we can manage inventory a lot better than our distributors. And so we still keep them lean and so at the same time we’ll try to find out what’s our customer demand.

Patrick Wang – Wedbush Morgan

Okay, got you. And as my follow-up here, I just want to ask you a little bit more about gross margins here. I know that I guess Richard said that was it – about three or four points was lower due to the inventory reserves and under utilization. If we think about Q1 gross margins here, and I know that you said that a lot of that’s due to under utilization here. Beyond that, if we were to back out the charges in Q4, we get to kind of like 61-ish gross margin. Is that the fair normalized level to think about for Q2 and beyond?

Rick Neely

Yes, maybe I read it too quickly, but part of my script was that our base line gross margins remained about the same. So if you took what the – take away the extraordinary capacity or inventories we’d be 61-62 without those extraordinary situations.

Patrick Wang – Wedbush Morgan

Okay, perfect. Thanks so much.

Operator

Your next question comes from the line of Anthony Stoss with Craig-Hallum Capital. Please proceed.

Anthony Stoss – Craig-Hallum Capital

Hi guys, just wondering if you are – what you are hearing from your customers in terms of order push-outs model that you guys were expected to be in, also if you could comment on the network market, has there been any share changes? And also if, Michael, if you can give us a sense of how many new products do you might launch in 2009? Thanks.

Rick Neely

Okay, Tony, hi. I will start a little bit – the issues of the push-outs were a Q4 phenomenon that a lot of – when Michael said November, December what happened was all the orders that came in were matched by orders that got pushed out to the next quarter. So that was why the end of the year was bad for everybody in the business. We haven’t, after those push-outs there we haven’t seen as much of that this quarter. It sort of hit the bottom. But – so I don’t see any more of that right now. That was more a Q4 phenomenon. I will turn it over to Mike.

Michael Hsing

Anthony, last question is about a number of products that we are going to release and – it’s – the members of – it varies quite a bit. Last year we introduced like 70 products and so this year I don’t expect that number will be lower than that. And so as we increase our design engineering and the products I predict will be more.

Anthony Stoss – Craig-Hallum Capital

Okay, and then also if one of you guys could comment on where you stand share any changes at all that you can tell?

Michael Hsing

No there is a – I think that the worst time is around too fast and customer hasn’t really reacted that. And as far as we see we haven’t lost any socket.

Anthony Stoss – Craig-Hallum Capital

Okay, great, thanks guys.

Operator

Your next question comes from the line of Vernon Essi, Needham and Company. Please proceed.

Vernon Essi – Needham & Company

Thanks for taking my question and I apologize for beating a dead horse here on gross margin gain, but I just want to ask a point of clarification. Rich are you saying you are not going to have any reserve charges in the first quarter.

Rick Neely

Well, no, I said I don’t know.

Vernon Essi – Needham & Company

You don’t know, I am sorry, okay.

Rick Neely

So, that’ why we guided where we did. So I – if you look at just the numbers, remember what we are doing – you just take the midpoint of our guidance, it’s about half of what we were doing six months. So obviously our factory, we can't downsize it by half. So, there is three or four points. About three points that hit the gross margins from that. There may or may not be any change in inventory reserves, I just don’t know. It’s a four month forward look for us and we do it. We’ll figure that out when we get to the end of the quarter.

Vernon Essi – Needham & Company

Okay, sure understand that. Thanks for clarifying. And I’ve heard your comments on this but how did pricing hold up and what’s your outlook on sort of how things are out there in terms of environment.

Rick Neely

Well, Michael will answer that one.

Michael Hsing

The pricing is continuously sliding down and sliding down faster but at the same time we introduced a lot of new products in the second half of last year and we see lot activities. So I can't really tell whether – which way our gross margin will go. I think that in the near quarters – near future, I don’t expect a large swing.

Vernon Essi – Needham & Company

Okay. So you mean you’ve always been pretty good at balancing that on the foundry side. So you are in a zone where you feel that’s not slipping faster on the pricing side versus your cost side, correct?

Michael Hsing

No, I said that that foundry side, of course, they are in a very empty too, so they really want like any other company want us to starting wafers and with a favorable cost, and the same times our customers also ask the price down. And so – but my point is that the new product that we’ve released in the last – second half of last year, usually will contribute the – to a favorable gross margins but in – during this times we can't really see whether – how, we can't really predict how fast our customer would adapt

To the new solutions.

Vernon Essi – Needham & Company

Okay. And then just my last question here. If you were to rank your end target markets in 2009, trying to – if you can work through the noise level of an inventory rebuild, what would the – would you sort of say would be your top end markets going into the end of 2009 from a demand perspective? I mean I am trying to get a gauge here on your design activity. I mean where do you see the most robust dollar content opportunities right now?

Michael Hsing

Obviously – we can't increase our notebook content from a year ago from last year maybe a couple of dollars and get to $5-$6 and we keep increase the content in TV fro $3 or $4 to even more $6 to $7. And the (inaudible) area and we have a new DriverMOS product and we are expecting doing well and start to – start second half of this year’s or early next year. So, I don’t know if you – if I answered your question.

Rick Neely

I think Michael got them all. There is a couple of smaller ones, Vern, that we did well in this year. We had very good growth in set top boxes this year. We also had good growth in what we call our communications area, which is the modems, routers, servers, and switches. So those – I mean the communications area grew by about 40% some this year and set top box almost doubled this year. So again the dollars are smaller but I think they will keep contributing.

Vernon Essi – Needham & Company

Okay. That’s very helpful. Thanks.

Operator

Your next question comes from the line of` Sukhi Nagesh with Deutsche Bank. Please proceed.

Sukhi Nagesh – Deutsche Bank

Yes, hi, thanks for taking my question. Rick, just a couple housekeeping questions here. What does your – what do you expect the interest income and your tax expenses for the first quarter?

Rick Neely

The tax rate for the year we expect to be between 10% to 12% although that depends on profitability. If we don’t make any money, your tax rate will drop real bad. If – on interest income, unfortunately treasury rates are quite low and overall interest rates are low. So we would expect to probably decline. Even though our cash balances are larger the interest income percentage is lower. So we probably are right now looking at less interest income in ’09 than ’08.

Sukhi Nagesh – Deutsche Bank

Okay. That’s helpful. And then on the revenue segment for the first quarter if you were to rank the three segments that you usually give out, how would you rank them in terms of which one would be better than expected – better than the other segments.

Rick Neely

Well the – of the three segments, as you noticed even from this year where we grew DC to DC 32% and the Company average was 20%, almost all of our new products in the last few years and all of our technology expansion has been in the DC to DC area. It’s also the area which is a $6 billion market for power management. We have a long ways to go to continue to gain market share.

Backlighting, which was our traditional market, that was the first market for the Company, is a smaller, more restricted market, and that’s flattened out and we didn’t expect much there. We expect most of the growth in DC to DC.

Sukhi Nagesh – Deutsche Bank

Got it. And then a follow-up to that. Are the margins in DC to DC better than CCFL? And how should that – how should the mix play out?

Rick Neely

It depends. The newer products tend to have better margins but older products, even an older DC to DC product; we tend to have margin compression. So, it’s more of a mix issue than not. As CCFL products tend to be older, their margins tend to be a little bit lower. And that’s another way to look at it.

Sukhi Nagesh – Deutsche Bank

Great. Thank you.

Operator

Next question comes from the line of Gus Richard with Piper Jaffray. Please proceed.

Gus Richard – Piper Jaffray

Yes, thanks for taking my question. Michael, can you characterize the designing activity that you are doing currently? Is it mostly for new products or is it more for cost reductions for existing products?

Michael Hsing

It’s not a cost – okay, actually we do both. And – but I have to correct my – correction to your question is that okay, it’s not a cost reduce and cost it’s – we increase the dollar content to replace our existing product. Our product especially in the DC to DC and our unit price will slightly increase and to cannibalize our older generation. The reason we can do that is because we need to bring in more components.

The newer product, of course, and I am excited about the DriverMOS family and this opens up another market, which we don’t – we didn’t have before.

Gus Richard – Piper Jaffray

Okay and then Rick, just a couple of quick ones. Currently the order rate is very spotty. Is that just the fact that customers are ordering from just immediate need and you know even if they don’t kind of thing?

Rick Neely

I would say that’s correct. I mean what you saw obviously in January was quite because everybody was on vacation either in the U.S. or when we got back everyone went on vacation for Chinese New Year. So, yes, we’ve seen some more regularity in February, but again, it’s just a few weeks. So, I think given the situation of the ODMs and so forth I think they are ordering when a customer screams at them and they order from us. But it’s pretty much hand and mouth as far we can tell. That’s why it’s erratic.

Michael Hsing

Yes I – in a – just logically per se, the November the last – in November in December have a zero booking almost and net – and so they stop enough. They had to order something and I – but I can’t foresee whether they keep going up or it’s going to flat out or going down later. So I can't really predict that.

Gus Richard – Piper Jaffray

Okay, thanks so much.

Operator

(Operator instructions) Your next question comes from the line of` Tore Svanberg with Thomas Weisel Partners. Please proceed.

Tore Svanberg – Thomas Weisel Partners

Yes, thank you. First question, just coming back to the (inaudible) bookings I realize it’s erratic, but any area that’s relatively performing better than others at this point.

Michael Hsing

No, we have a pulling and some new products in – across the – or our across product family. And these are just spikes.

Tore Svanberg – Thomas Weisel Partners

Very good. And Michael on the 8698, which you just launched, seems like a pretty good product, and you mentioned graphic servers and notebook as a house for that product, but which of those three would you start to see the first revenue and when would you actually materialize the revenue?

Michael Hsing

This product is only for the – is the first product we released in a family, which is for the notebook application. We have other products for servers and graphics cards. So the revenue I expected will be from notebook first.

Tore Svanberg – Thomas Weisel Partners

Great. And lastly on the legal expenses, they continue to be quite lumpy, so how do we model – how should we model those expenses going forward.

Michael Hsing

It’s always very difficult and Tore you know and you have been with us for – cover us for many years. The legal expense is really controlled by the court and by our outside lawyers and I really can't – can't really give you a very accurate description and so – we just leave it like $1.5 million to $2 million in first quarter.

Tore Svanberg – Thomas Weisel Partners

Fair enough. And then just lastly on the gross margin and without the – an inventory – a potential inventory or non-inventory reserve this quarter, gross margin will still be up sequentially, right, Rick?

Rick Neely

Are you talking Q4?

Tore Svanberg – Thomas Weisel Partners

No, in Q1. So –

Rick Neely

Q1, I mean the biggest issue in Q1, Tore is some under utilization capacity and we have our test facilities mostly in fixed cost, it’s mostly a building with a bunch of machines and so you’ve got that cost whether you run them or not. So, the biggest impact to gross margin this quarter is the – three or four points on the capacity side assuming we get back to a normalized run rate soon that will go back up.

Michael Hsing

Yes, we – Rick said it earlier, whether we were right of – keep further writing off inventory in Q1 or not, we haven’t really made it – make that decision yet. Because – we talk to our customers and try to find out what the demand will be. So – and depend on that and we will make a decision in which product will be right up and other ones are not. So still early, we don’t – we try very hard to find those information.

Tore Svanberg – Thomas Weisel Partners

Understood. Thank you very much.

Michael Hsing

Okay.

Operator

The next question comes form the line of Craig Hettenbach with Goldman Sachs. Please proceed.

Ian – Goldman Sachs

Hi guys, this is Ian [ph] in for Craig. Can you talk a little bit about, I think Michael you made the comment that you are seeing more opportunity because of this dislocation. Can you talk a little bit about where that is either by channel or customer or product?

Michael Hsing

I think our business is 80% to 90% is (inaudible) own design. Our channels don’t do that design, okay, and is all MPS. It’s actually across the board. And from industrial application and set top boxes and even TV so we so lot more demand. And from the – particularly from – not, sorry, not demand, the design win – the designing activity and particularly from these – the product that we released in the second half of last year.

Rick Neely

Yes, just to add another comment that we had talked about in the call was that the as MPS as – in the last couple of years has broadened its product portfolio we can now – so we said – so we said on the call was that our growth in the Top 25 meaning the Top 25 end customers are all (inaudible) million dollars. We grew 45% year-over-year even though the – our Company average is 20. So, it just shows that we are starting to get these design opportunities at major accounts all – in parts of the world we haven’t been in before in all different kinds of segments. So I think that’s really what we wanted to emphasize.

Ian – Goldman Sachs

Okay, thanks. And then just Rick, with the cash moving up, can you tell us how you are thinking about buybacks and sources and uses of cash in 2009? Thanks.

Rick Neely

Well, we did one in last year, but this is the year where everyone – cash is king, so we are going to keep our $150 million this year till we see the light at the end of the tunnel so to speak. So we don’t have any plans to do that this year.

Ian – Goldman Sachs

Okay, great. Thank you.

Operator

Question comes from the line of Dan Myers with Crosslink. Please proceed.

Dan Myers – Crosslink

Hey, Rick, just a housekeeping issue. You gave non-GAAP OpEx of $12.5 million to $13.5 million and then litigation of $1.5 million to $2 million.

Rick Neely

Correct.

Dan Myers – Crosslink

Is the litigation inside the OpEx?

Rick Neely

No, that’s additive. I mean the $12.5 to $13.5 million is your R&D, SG&A –

Dan Myers – Crosslink

Okay, and so you don’t consider litigation as part of this – it’s – so we should look at a total of $14 million to $15.5 million?

Rick Neely

Right.

Michael Hsing

So, we – that’s a historical reason. We always listed in a separate format.

Rick Neely

My goal someday is to have it all combined in there, Dan. Someday I would like to do that.

Dan Myers – Crosslink

Well, you’d like that litigation to be zero someday.

Rick Neely

That’s exactly my point. You got it.

Dan Myers – Crosslink

Okay, perfect. Thank you very much. Good quarter.

Rick Neely

Okay.

Operator

The next question comes from the line of Johnny Brown with Stephens Inc. Please proceed.

Johnny Brown – Stephens Inc.

Hey, Rick and Michael, thanks for taking my question. You mentioned that you are 90% booked to the low end of guidance currently. I was wondering if you’d be willing to give your lead times. I imagine they are pretty low right now. So where are those running currently?

Michael Hsing

It varies and the order that we got in the last few weeks or few days, are rush orders.

Rick Neely

Yes, so we are keeping – our lead times are very short. We have a lot of pretty much all the product are available if people want it. So that was Michael’s point. People are putting in rush orders because I think everybody in the channels didn’t order anything for three months. So they are finding shortages and you are starting to see that show up, but that causes the erratic nature of it. So, as we said, we booked and shipped – our booking and shipping to-date is over 90% low end but that’s where we put the guidance so that we would – in this environment be conservative in how we look at it.

Michael Hsing

I mean frankly, (inaudible) 24 to 29 is a very wide range. And how do we come up at 24, it’s not a very, very scientific estimate. It’s a – in a – so we can – we try to do a whole lot better that’s all we can do at this time.

Johnny Brown – Stephens Inc.

Okay, good job guys, thanks a lot.

Operator

The next question comes from the line of Vijay Rakesh with ThinkEquity. Please proceed.

Vijay Rakesh – ThinkEquity

Yes, hi guys. I am just – you just said the litigation expense was kind of a wild card here. But as we look out for the year do you have any idea of – do you expect this to kind of flat for a couple of quarters. I know there is – I mean do we have a court date or do you expect that span two quarters?

Michael Hsing

The court days – the problem in my experience, the court days always change and so I – and it really then depends on the court days and so I can't really give you like which quarter is how much.

Vijay Rakesh – ThinkEquity

Okay. So conservatively kind of hold it steady for a couple of quarters is what I think?

Rick Neely

Yes, yes.

Michael Hsing

Yes.

Vijay Rakesh – ThinkEquity

And when you look at your product segments I know you said you had a couple of wins in TV on the CCFL side and TVs for the year, but most of the traction is on the DC to DC side. So for the year do you expect exiting the year kind of DC to DC kind of to be much higher like 75% to 80% of revenues and the audio should be significantly lower from where it is as a mix?

Michael Hsing

From – yes, from the past history, that’s the trend and we – majority of our product introduced in the last year is mostly are – these are DC to DC products. Yes, your assumption is correct.

Rick Neely

Yes, let me add, the majority of the audio revenue is in TVs and so it just kind of depends on how that market goes. If it goes better, it would go up, if it doesn’t it will go down.

Vijay Rakesh – ThinkEquity

Got it. And one last question here is obviously with the kind of the macro the top line is coming down a little bit, and pretty much in line with peers. But how can we get some leverage in the model. I know (inaudible) rate is coming down but the litigation is going up a little bit but where else do you have the – what levers do you have with the model to get some earnings leverage?

Rick Neely

Well the main thing we are doing we are controlling what we can. We made major steps in dropping our operating expenses. We dropped inventory, we improved our working capital. So we are doing all the right financial moves we can do. That’s a thing that affected everybody is if nobody is buying cars from Toyota or electronic products from Sony, we are not going to sell any chips either. So, the problem with the worldwide demand is affecting everybody. So what we – we can't affect the top line near term. That’s the situation. So we are trying and take a leverage where we can control it. We are keeping our costs lean and dropping off the excess, that’s what we can do.

Vijay Rakesh – ThinkEquity

Got it. Okay, great. Thanks a lot guys.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call over for closing remarks.

Michael Hsing

Well, thank you everybody.

Rick Neely

Thank you as well. We’ll see you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.

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