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Monolithic Power Systems, Inc. (NASDAQ:MPWR)

Q3 2009 Earnings Call Transcript

October 22, 2009 5:00 pm ET

Executives

Rick Neely – SVP and CFO

Michael Hsing – President and CEO

Steve Pratt – Marketing Director

Analysts

Rick Schafer – Oppenheimer

Vernon Essi – Needham & Company

Evan Wang – Thomas Weisel

Doug Freedman – Broadpoint

Patrick Wang – Wedbush

Arnab Chanda – Roth Capital

Steven Smigie – Raymond James

Bob Gujavarty – Deutsche Bank

Gus Richard – Piper Jaffray

Joanne Anzley [ph] – Robert W. Baird

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Monolithic Power Systems Inc. earnings call. My name is Jeff, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to our host for today, Mr. Rick Neely, Chief Financial Officer. Please proceed, sir.

Rick Neely

Thank you. Good afternoon and welcome to the third quarter fiscal 2009 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 risk and uncertainty. For example, our business outlook, including our business and financial outlook for the fourth quarter of 2009; projected fourth quarter revenues and gross margins; our expectations for fourth quarter litigation, stock-based compensation and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, our expected average tax rate for 2009; our belief that MPS is well positioned for future growth; our expectations for future cost reductions, and new product introductions, potential customer acceptance and the opportunities these present.

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 Form 10-K filed on February 27, 2009 and our Form 10-Q filed on July 30, 2009, which are accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today’s call.

We will be discussing operating expense and net income on both a GAAP and a non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation, one time net effect of a litigation provision reversal, and in the case of net income their related tax effects. We will also discuss our expected non-GAAP research and development and selling, general, and administrative expense for the fourth quarter of 2009, which excludes our expected charges related to stock-based compensation.

A table that outlines the reconciliation 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 would 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 along with the earnings release filed with the SEC earlier today.

We would like to start this call by reviewing our third fiscal quarter 2009 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the fourth fiscal quarter of 2009. We will then open up the call to your questions.

Let's start with the business highlights. MPS had a healthy third quarter growing revenues 16.5% from the prior quarter while recording net sales of $48 million. This total almost reached the companies all-time quarterly revenue high of $48.9 million that were sold in the third quarter of 2008. This was an excellent achievement in an uncertain economic environment. MPS saw significant growth in its largest product family, the DC to DC product group in Q3. Total DC to DC revenues of $36.7 million in the third quarter were up almost 24% sequentially from the second quarter of 2009 and up 16% year-over-year.

The third quarter also saw a record number of new product releases. These new offerings range from high-efficiency battery charger ICs for netbook PCs to new high-voltage white LED solutions for general lighting applications. We continue to strengthen our revenue diversity by using a very broad approach in developing solutions for computing consumer and industrial applications. In the manufacturing area, gross margin increased from the prior quarter to 60.7%, reflecting the gradual improvement in the market conditions. Our internal days of inventory dropped slightly below our target range coming in at 98 days while inventory at our distributors continue to be lean.

Bottom line, non GAAP net income was $8.8 million or $0.24 per fully diluted share. Our GAAP net income for the quarter was $12.6 million or $0.34 per fully diluted share, which reflect a one-time credit of $6.4 million for the net effect of the reversal of a legal provision from 2007.

Now let us go through the financials in more detail. On the P&L, starting at the revenue line, third quarter 2009 net revenue of $48 million increased 16.5% sequentially from the second quarter of 2009, and were about flat to the $48.9 million recorded in the third quarter of 2008. The third quarter is typically MPS' strongest revenue quarter and this year MPS' sales performed well once again in a recovering market.

Let's break out our third-quarter revenue by product type. DC to DC product sales were $36.7 million, up 24% from the second quarter of 2009, and up 16% from the $31.7 million reported in the year ago quarter. The growth was led by our MiniMonster product family which is continuing to set sales records but all of the DC to DC product did well this quarter. The largest end markets for MPS in this product family were flat panel TVs, general consumer electronics products, set-top boxes and wireless LAN cards.

Lighting control revenues for the third quarter were $8.5 million, an increase of 16% in the second quarter of 2009, but a decrease of 33% from the same quarter a year ago. The year-over-year decline reflects the continuing shift of notebooks and other backlighting from CCFL solutions to white LED solutions. However, within the lighting control group, MPS did report both sequential and year-over-year growth with its newer product releases of backlight controller and white LED drivers. Audio revenues came in at $2.7 million, down 34% from the $4.1 million reported in the prior quarter and down 38% from the third quarter of 2008. In this competitive environment, we don't expect any near-term growth in this group.

Let us move down to the gross margin line. Third-quarter gross margin was 60.7% compared to 59.1% in the prior quarter of 2009 and 52.8% in the third quarter of 2008. This result met our expectations given the current economic conditions which saw a slightly improving product mix and pricing environment in the third quarter. Looking at our reported expenses and operating margins, our GAAP operating expenses were $60 million in the third quarter. This includes $19.5 million in R&D and SG&A expense, which includes $3.1 million for stock compensation expense, litigation expense of $2.8 million and a credit of $6.4 million as a result of the net effect of reversing a patent litigation provision, initially recorded in Q2 of 2007 for the Taiwan Sumida case.

Comparing with the second quarter of 2009, GAAP operating expenses were down by $5.3 million. The expense mix changed as follows. R&D increased by $348,000, SG&A increased by $117,000, litigation increased by $578,000, a one-time credit for expense decreased for the net effect of the reversal of the litigation provision for $6.4 million. As a result, our GAAP operating profit was 27% in the third quarter, compared with a GAAP operating profit of 7% in the second quarter of 2009.

Let us review our non -GAAP operating expenses. Excluding stock compensation and the net effect of the one-time legal provision reversal, our non-GAAP operating expenses for the third quarter of 2009 were $19.2 million compared to $17.5 million in the second quarter of 2009, and $16.8 million in the third quarter of 2008. The $1.7 million expense increase in the second quarter of this year was primarily due to higher litigation spending, which increased by almost $600,000 from the prior quarter and R&D costs grew by $626,000 to support the record number of new product introductions.

SG&A costs grew $527,000 from the second quarter due to variable cost increases associated with the strong revenue growth performance. Compared to the third quarter of 2008, non -GAAP R&D costs were up by $722,000 as we continue to grow our R&D team and broaden our product offering. Non-GAAP SG&A spending was flat from Q3 of the prior year. Our non -GAAP operating margin was 20.6% in the third quarter of 2009 compared with 17% in the second quarter of 2009 and 28.4% in the third quarter of 2008. On the bottom line, our Q3 09 GAAP net income was $12.6 million or $0.34 per diluted share. On a non-GAAP basis, our Q3 09 net income was $8.8 million or $0.24 per fully diluted share. This result was computed with a non-GAAP tax rate of 12.5% within our expected average tax rate range for 2009 of 10% to 15%.

Now let us look at some of same major changes to the balance sheet. Cash, cash equivalents and investments were $169.2 million at the end of the third quarter of 2009, up from $163.8 million at the end of the second quarter of 2009, and up significantly from the $128.8 million on the book in the year ago quarter. In Q3, MPS had operating cash flow of about $2.2 million as the strong net income figure was offset by an increase in accounts receivables. We spent about $2.3 million on capital in the third quarter which was more than offset by cash growth fees of $5.6 million from option exercises and purchases under employee stock options.

Accounts receivables ended the third quarter at $19.5 million compared with $12.4 million at the end of Q2 09 and $18.8 million at the end of the third quarter of 2008. The increase in receivables reflected a similar pattern to our third quarter of 2008 where more shipments were made later in the quarter and therefore not collected by the end of Q3. However, as of today's call, MPS has collected approximately $10.4 million of the receivables that were outstanding debt the third quarter end. Days sales outstanding increased to 37 days in Q3 09 as a result of the shipment timing issue I just described which is in line with the 35 days we showed at the end of the third quarter of 2008.

Our inventories at the end of the third quarter were $20.4 million or about 98 days of inventory on a historical basis. This compares with $20.1 million or 109 days of inventory at the end of the second quarter of 2009. Inventory in our distribution channels grew $5 million to support the higher revenues. The total days of inventory remained below our target range of 30 to 45 days of inventory for the distribution channel.

I would now like to turn to a discussion of general business conditions. The third quarter of 2009 continued to show the positive product momentum that has made up for a slow start to the year. Geographically in the third quarter of 2009, MPS shipped 55% of revenues to Taiwan and China and 45% to other regions with Korea and Europe performing particularly well. MPS continues to diversify its customer base as our shipments to regions outside of Taiwan and China increased from 42% in the third quarter of 2008 to the 45% just mentioned.

In the new product area, the highlight of the quarter was the record number of new products released across a board spectrum of applications. MPS has more than doubled its rate of new product introductions year-over-year. Some of the product highlights include high-voltage bright LED solutions that expand our presence in LCD backlighting and white LED illumination solutions that increase our served available market including street lighting and the replacement of halogen, incandescent and fluorescent bulb applications. We are also very pleased with the progress of our newer product families such as MiniMonsters, LDOs and white LED drivers. Some examples of where these products are going, include flat-panel TVs, monitors and cable modems for MiniMonsters, industrial applications for LDOs, and notebook and TV backlighting for white LED drivers.

Finally, in the new process technology development area, we had a new interconnect and wafer fabrication technology in production which we call Mesh Connect [ph]. This unique technology, which has a patent pending, enables us to reduce our cost, increases the switching frequency by up to four times with a much higher packing density. Using this technology, we successfully introduce a 24 amp Intelli-Phase driver last quarter and we're looking forward to converting all of our product lines to use this proprietary approach.

I would now like to move to our outlook for the fourth quarter of 2009. MPS continued its strong booking pattern from the second quarter in Q3 and while keeping channel inventory lean. The fourth quarter is typically a slight seasonal drop for MPS and therefore our expectations for revenues are in the range of $43 million to $46 million. Gross margin is expected to be at a similar level to the third quarter of 2009. We expect stock-based compensation expense in the range of 3.1 to $3.5 million. We expect non-GAAP research and development and selling general and administrative expenses in the range of $16.2 million to $17.2 million. This estimate excludes the stock compensation estimate mentioned above. Finally we expect litigation expense in the range of $2.6 million to $3 million due to the commencement of the ITC hearing this month.

In conclusion, we are pleased to report that MPS once again performed very well in a difficult economic environment. We have been generating strong revenues, investing in R&D, and expanding our product families in geographic diversification. Our focus on the introduction and design in of very high-performance new products and product families will position MPS very well for future growth.

Now we would like to open the microphone and take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Rick Schafer with Oppenheimer. Please proceed sir.

Rick Schafer – Oppenheimer

Hi guys, nice quarter. I just had a question actually just on your guidance and sort of what order patterns look like post golden week [ph], can you give us an idea maybe have you seen any unusual slowdown in bookings, can you give us any kind of answer, book to bill still positive, just seems like down 8% at the midpoint for 4Q, seems a little lower than seasonal, can you give us any color there, maybe what turns you need to get there for the fourth quarter?

Michael Hsing

Now we particularly this month we see a pretty normal business seasonal pattern. What I say normal, it's like a couple of years ago or so, and we see the lead times and the booking rate and it seems to me it is not like a couple of quarters ago. It is more normal I'd say.

Rick Neely

Yes, I think I would echo what Michael said, it seems to be behaving pretty normally this quarter. I think our midpoint is down 7% if I did the math right, Rick, but that typically we are down 5% to 10%. We have spent 3% in the best years and 10% in the worst years and last year was another year. So we think it is a reasonable expectation for the general market conditions we have.

Rick Schafer – Oppenheimer

Okay. And Rick, can you give us an idea of turns maybe, Rick, like what you need to do to get the fourth quarter midpoint?

Rick Neely

Nothing out of the ordinary. The bookings were good to support you know what I would call a normal amount of turns we go into the quarter with, so we are not – we don't see anything on the horizon that looks bad, it looks all pretty good for us actually.

Rick Schafer – Oppenheimer

Okay, can you – okay, that is fine. Just got a follow up question on your – I just was curious on the litigation front, you know is there anything that is getting pulled in from 2010 into the third and fourth quarter this year? I mean I guess sort of what's changed it , I know it's really hard to predict that litigation expenses but anyway to handicap what's going on there?

Michael Hsing

No, the current litigation is scheduled, everything is on time, and nothing delayed, and we expect it to have litigation expense much reduced in Q1.

Rick Neely

As you said, Rick, the hardest thing to predict is legal expenses, because you have to react to how the case moves and changes, and we always go in these things to do well, so we have to spend the money as necessary. So it is difficult always to forecast as you said, but the hearings we are starting now, but by the first half of next year, it will be done. So we don't – that is really the mountain we have to get through, and that is really what we're looking at.

Rick Schafer – Oppenheimer

Okay. So you still hope to wrap things up sort of May kind of timeframe, is that fair enough?

Michael Hsing

Probably earlier than that if everything according to schedule.

Rick Neely

Yes, per the schedule, there'll be a preliminary ruling in January and then both parties go back and then there is usually a final ruling in the May June timeframe, that is still the schedule.

Michael Hsing

Cost of all doing that is much less than have a trial.

Rick Schafer – Oppenheimer

Got it, got it.

Michael Hsing

So I expect that in Q1 it's much less.

Rick Schafer – Oppenheimer

Okay, thanks a lot guys.

Michael Hsing

Thank you.

Operator

Our next question comes from the line of Vernon Essi with Needham & Company. Please proceed.

Vernon Essi – Needham & Company

Thank you very much. Wanted to just get some more color on the gross margin and sort of what went into that this quarter. I noticed your audio was down and wondering if the gross margin expansion was a function of mix or volume and sort of how that might play out over the next couple of quarters?

Rick Neely

Yes, Vernon, you're right. When we sell more DC to DC, that mix shift tends to help our gross margin, and that is the primary reason behind the increase in gross margin this quarter. Going forward, again, the audio will stay at those levels, so will probably be the same. That is why we gave the guidance that we expect to be in a similar range in Q3.

Vernon Essi – Needham & Company

(inaudible) the audio sort of more of a proactive function on you guys seem to sort of not let that business, you haven't really spent a lot of money on it, let's put it that way. Is that more of a function of the market or you sort of not pushing as hard as you used to?

Michael Hsing

We never, we only push hard one-time, three years ago. And we never pushed this product very hard. But I don't really expect that product line (inaudible) so maintain the current level alive and keep you know we don't expect to have any growth on it.

Vernon Essi – Needham & Company

Okay. And then just a follow up on the gross margin front, as you ramp the Mesh Connect, is there any startup costs you see with that, or do you expect now, obviously you think you're going to…

Michael Hsing

No, I don't think that the cost is already the past in the last couple of years and we spent a lot of effort in the last two years to develop this technology. Going forward is the design all the new products and lot of them were cannibalized our existing product and all the new products will be based on this technology.

Vernon Essi – Needham & Company

And when will the transition pass sort of the 50% of volume point for your products?

Michael Hsing

50% of volume point, that will be difficult to say. Because some of it require customers qualifications and probably in the next year or so, end of next year, we will – I am just pulling numbers from a head…

Vernon Essi – Needham & Company

No, that is fine. I mean just to get an idea when…

Michael Hsing

Yes. Probably end of next year, or something like that, probably more than that. And we expect to move to the new technology very quickly.

Vernon Essi – Needham & Company

Okay, thank you.

Operator

Our next question comes from the line of Tore Svanberg with Thomas Weisel Partners, please proceed.

Evan Wang – Thomas Weisel

Hi, thank you. This is Evan Wang calling in for Tore. I was wondering if you could comment on your new products and first I would like to congratulate you on doubling your rate of new product releases, I was wondering if you can provide some color on whether in general where analog products take some time to ramp and to contribute revenue materially, in this environment, do you see your that ramp shortening because customers are demanding more innovative products faster, would you see still a normal pace like you have more products in play?

Michael Hsing

To answer your – it is a long question, I answer your last part, last question first, it is the seems to me the designing cycle little bit shorter and we see couple of as I give you a couple of examples in Intelli-Phase and we sort of have a design wins in we would expecting some revenue sometime next year and other product like LED drivers for general lighting and we introduced both products not very long ago, now we see quite significant revenues coming. So to that question, yes, it is absolutely right, and customers looking for want more innovation, want more – looking for better product. And they are looking for their niche.

Evan Wang – Thomas Weisel

Great.

Michael Hsing

What's the other part of that? I forgot that one.

Evan Wang – Thomas Weisel

That's okay. I think you answered it very well. And I just have a, this is not really a question, but I think you gave some details on this litigation reversal and I was wondering if you could just go through the details again, and I was wondering if it has any bearing on, any ongoing cases now?

Rick Neely

No, and I'll answer that. It is history, if we dig up the Q2 2007 financial report, we recorded a provision for a settlement of Taiwan Sumida related to a case they had down in Texas with O2 Micro, but that case is under appeal, so we put our settlement amount was put into escrow for the last couple of years. It is in our balance sheet as restricted assets for a couple of years and then when we won the cases last year on the 722 patent, that reversed that decision. That was all appeal – the appeals were adopted and litigation processes is done, and therefore we reversed that settlement. We didn't need to – we don't need to pay that. So that's this quarter that was finally several years later completed and we reversed the position and the net effect is a $6.4 million credit.

Evan Wang – Thomas Weisel

Thank you very much.

Operator

Our next question comes from the line of Doug Freedman with Broadpoint. Please proceed.

Doug Freedman – Broadpoint

Hi Michael and Rick, thanks for taking the time. If you could, I was interested in your commentary about your inventory coverage out of distribution, are you guys contemplating taking any actions to increase the amount of inventory being carried at yours distributors, and if so when and how do you handle that?

Rick Neely

I'll start and then Michael will finish. We have learned in the last 18 months it is better for us to carry it than our distributors, so we will probably keep them at the low-end of the range which is four weeks range, around 3 to 4 weeks, which is where we are right now. There is a lot of advantages to us from our perspective and the fact that we have all of our manufacturing in Asia, we can deliver products very quickly. So logistically, we can manage it pretty well. Michael?

Michael Hsing

Yes. In general, the mature product, we tend to have our distributors have more inventory. However, in the last couple of quarters, or even in the last years, we introduced a lot of new products, and these are designing and ramp production ramp very erratic. So it is better for MPS to keep all the inventory, so we can manage the inventory much better. However, in the when all those products are in the mature stage, and you'll probably see some inventory increase, and so the inventory has much less to do with our coming revenues in the next couple of quarters or so. So it is I know you guys want to figure out the inventory related to the next few quarters revenue, so in MPS case, it is not quite related.

Doug Freedman – Broadpoint

Okay, very good. Thanks for all the color there. During this earnings season, we have heard from a couple of companies talk about extended lead times in challenging environment to get product with some companies actually benefiting from their competitors inability to ship, can you talk whether you guys think you have seen any of that, and what the present situation is in sort of your end markets, and what you're feeling from your customer base?

Rick Neely

Yes. We actually haven't seen that in the types of products we are in, so I – also our marketing director Steve Pratt's with us, Steve, have you seen anything?

Steve Pratt

We only heard about it and haven't seen the effects of it. We have heard customers talking about it. So this is really in the early stage of delivery shortage.

Rick Neely

And it is no products of ours but it could be some secondary products.

Steve Pratt

So we expected there to be some opportunities, absolutely.

Doug Freedman – Broadpoint

And can you talk about what you're seeing right now as far as ASP trends in the marketplace and the aggressiveness or lack there of, of aggressive pricing from your competitors?

Michael Hsing

ASP, from the ASP side, it's we don't see much decline in Q2 and early late Q1 and early Q2. And so you can call it now stabilized.

Doug Freedman – Broadpoint

Great, that is great to hear. My last question is in regards to your relationships with large OEMs and whether you've received any more significant supplier qualifications this quarter or what your expectations are for the forward quarter?

Michael Hsing

Well actually we always want to minimize any spikes in the revenue concentration from any OEMs. So yes, we have a number of these design wins from major OEMs, but these if you want to have decent revenue spike up, that is our back pocket, but in general, if everything else doing good, and within that kind of thing happen.

Doug Freedman – Broadpoint

Great, thank you and congratulations on a strong quarter.

Michael Hsing

Thank you.

Operator

Our next question comes from the line of Patrick Wang with Wedbush. Please proceed sir.

Patrick Wang – Wedbush

Thanks and great job on the quarter guys. First you know I was hoping you could talk a little bit more about the Intelli-Phase product and potentially what impact we saw maybe in the second half this year and a sense of how you think that is going to grow next year?

Michael Hsing

Yes, it is I talk we had a press release and I got excited about it both product and it is from our customers feedback these are really if I can call it revolution products, at least the big leap of faith in evolution path. Both products are design in and we see we are shipping initial samples and remember this is all in half year's time. And so we will expect to see some revenue next year.

Patrick Wang – Wedbush

Okay. Any sense of how you can maybe frame the magnitude of that impact?

Michael Hsing

Well, we address a huge market. This product line is only the first product on this new technology platform and we aim the market for CPU power, including mobile and as well as the service, and same as for graphics card. These all require very high current and very high power density, high-frequency switching frequency applications. So that product we have a product line coming out and it is all for this market. So the size of the market I guess you guys know better than we do so I am not giving – these are we estimate it over billion dollars. And so that is the first product for this new technology.

Patrick Wang – Wedbush

I seek, got you. Okay. And then you know just talk real quickly about Mesh Connect, I know you talk about it a little bit, can you go in little bit more detail in terms of the benefits, the performance, and then maybe Rick you can chime in and just on the impact to your cost structure?

Michael Hsing

Yes, okay. We spent a couple of years to study this very fundamental study, these are metallurgical junctions, and how to even the head expansion between the selections and the very thick metal. And so we resolved the problem and we using different from a different industry do this Mesh Connect. Okay these are mesh, metal mesh, and we grow on the die, and so that is the cost is much less than use multiple layer of metals. And second thing is the performance increase, however, we can produce because of the power densities in those metals can carry is much higher. Our device's die size is smaller. At the same time, the connection the distance much less, we can increase the frequencies by what we see now well over four times.

Rick Neely

On the cost side, Patrick, the main improvement not only to the densities and size that Michael talked about, we did this to eliminate gold wires. We have I think as Michael would correct me if I'm wrong, big lumps of copper there soldered whether, so really that way, that is help on the cost structure certainly going forward. It is really been the elimination of the gold wire with a better connect.

Patrick Wang – Wedbush

Okay. So it is sounds like this is a continuation of innovation beyond I guess your BCD, your proprietary BCD process, right?

Michael Hsing

It is a more beyond silicon process, this is really – it's a combination of silicon design and as well as the packaging side.

Patrick Wang – Wedbush

Got you. And then just one last quick one, just Rick in terms of OpEx, you are guiding OpEx a little bit higher in the fourth quarter, even though I mean typically you know maybe OpEx might be low, can you talk about where that increase is coming from?

Rick Neely

Actually the guidance is flat. R&D is I think the one place where it is going up, typically it flattens out in Q3. So if I look at our forecast, we are basically showing G&A is, our fabrication is flat. Sales and marketing and G&A is about flat so I'm not sure where you're getting the up. I think it is maybe a few hundred Ks…

Patrick Wang – Wedbush

Just a couple of hundreds, like about $300,000…

Rick Neely

Yes, ok.

Michael Hsing

They are probably in the noise range, and we expect to put a lot many products in Q4 too.

Rick Neely

There is one area where there will be some slight expense increases in sales and marketing area because we are out performing our plan in terms of revenue. In fact, one thing I would point out, based on midpoint of our guidance, we will actually have positive annual growth. We will be above $160 million this year. I don't know of too many companies actually growing the top line this year, so again that is above our expectations, the sales team is performing well, so there'll be higher commissions associated with that in Q4.

Patrick Wang – Wedbush

Okay, great job, and thanks so much.

Michael Hsing

Okay, thank you.

Operator

Our next question comes from the line of Arnab Chanda with Roth Capital. Please proceed.

Arnab Chanda – Roth Capital

Thanks. A couple of questions. First of all, either Rick or Michael, and do you think the negative effect of the CCFL will be offset by the positive effect of the LED transitions, the growth areas?

Operator

Ladies and gentlemen, we will pause momentarily as we have lost our speaker for the moment. I'm going to turn the music back on until we get Mr. Neely and the CEO back online. Thank you and we will pause momentarily. Okay. Our next question comes from the line of Steve Smigie with Raymond James. Please proceed.

Rick Neely

Well, actually you need to go back to Arnab Chanda.

Operator

Okay.

Rick Neely

Arnab didn't get his question, I'm sorry their phone went out, so Arnab needs to repeat his question.

Operator

Okay, one moment. Go ahead, Arnab, your line is open.

Arnab Chanda – Roth Capital

Thank you. I promise I didn't do anything.

Michael Hsing

Arnab, it's a tough question to have, our line just went down, I have at the appropriate then and then I consulted my lawyers.

Arnab Chanda – Roth Capital

Yes. I probably am not smart enough to ask a question that you need a lawyer for. Anyway. I have two questions, one is know it seems like in your lighting control business, you are seeing a transition between the growth area which is more LED driven and the kind of declining areas in CCFL, what timeframe will one kind of cross the other where you can get the benefit of the growth? And I have another follow-up.

Michael Hsing

Yes, it's good question. In the CCFL for the notebook backlight, in particularly for these types of applications, I don't see it die down to zero. And it will level off somewhere and always gives notebook application; we always have other applications that needs CCFL backlight because it is a few much cheaper than LED and for portable devices, the LEDs for portable. But it was a large one for wall display; I believe the CCFL still will have some market. So I don't expect it to die down completely. To answer your question when is the cross point, it is I really don't know when is the cross point, and we increase design activity in that LED backlight LED in general lighting started about a year ago or so. We introduced a lot of products that we see a lot of acceptance and also the market the same time is to ramp up very, very quickly. So my wild guess is sometimes in the next year and we see the growth sometimes in the second half of next year we see the growth in this product line.

Rick Neely

Yes, Arnab, I can add a little mechanical numbers to that. If you're looking at it year-over-year obviously the big comp, the last big comp we had was Q3 of 2008. But if you're starting at Q4 2008, I mean that was 6.5 in our usual Q1 drop but we did 7.3 in Q2, 8.5. We are actually growing again in the new products of lighting control, that is the white LED drivers and the controllers for monitors. CCFL, the traditional CCFL number has been about flat. If you go back three four quarters, it has been in the 3 to 4,000,000 range every quarter, that is it. I think Michael is right, it is not going to change much, it is not going to disappear, it is not going to change much, so the growth we're seeing, the differential in the last three or four quarters is all the newer stuff.

Michael Hsing

Compared to year ago CCFL for the notebook was down significantly, what was the numbers, I forgot, a few million dollars.

Rick Neely

Compared to one year ago, $6 million.

Michael Hsing

Yes, $6 million of reduction and so we made a wrap up in other products.

Arnab Chanda – Roth Capital

Well, I appreciate that. That was great. A lot of detail. One question on the margin structure, is it is very kind of macro thing, but Rick your revenues are up year-over-year. However, your R&D as a percentage of sales actually are higher this year than last year, is this part of that, you're kind of going what contrarian or you are investing more so that that helps in the future, I'm just curious what you thought process is? Thank you.

Michael Hsing

Absolutely. Our engineers are a lot more mature and we can put up lot more products and that is something I don't want to cut expense.

Rick Neely

I think we have already said in the past too that recessions are good for us, gives us opportunities to go and get design wins, so we have been pouring the coal on during the down times and other people cutback we have been adding and putting out more products than ever, so we think that it's the right strategy that will pay off. We don't as an R&D technical driven company, that is one area we don't mind spending a lot of money in.

Arnab Chanda – Roth Capital

So Rick just sorry just one quick follow-up to that should we assume that in the future depending on what kind of revenue growth you get, is R&D going to remain sort of growth with sales, or there is not going to be a lot of R&D leverage, it is more going to come from other areas or how do you want to speak about it?

Michael Hsing

Yes. As I said in the last conference, I don't expect the R&D costs will go tracking our revenue growth. In the history of MPS never did it. It was always somewhat lagging on expense side including R&D. And I don't see the next couple of quarters will jump up significantly because we have the record number of product release in Q3 and Q4 I expect to have a similar numbers may be slightly lower. And so in the next couple of quarters I don't see a significant jump, so our R&D expense will stay very similar. In the longer term, I don't see it will increase even more if it is not going down.

Arnab Chanda – Roth Capital

Okay, thank you very much.

Operator

Okay. Our next question comes from the line of Steve Smigie with Raymond James. Please proceed sir.

Steven Smigie – Raymond James

Great, thank you. I was wondering you guys could talk a little bit about how much revenue MiniMonster was in the quarter?

Rick Neely

Yes actually, as we said, last year we were kind of in the 5,000,000 to 10,000,000 range. This year we are closing in on a run rate that would put us in the $15 million to $20 million range so on an annualized run rate. So we are seeing significant growth in the MiniMonster lines.

Steve Richardson

Okay. And could you talk about breakout sort of other major product families, albeit LDO, Intelli-Phase, battery charges etc., just to get a sense of what are the other big chunks in there, in DC to DC?

Rick Neely

Well in DC to DC, the main mature products generate most of the revenues. We do highlight in our conference call the new growers but in terms of how much they contribute on a percentage wise it is not a lot but the fact is that they're growing at a very high rate is what we have highlighted. In terms of any individual products, I said the biggest single contributor of the product family is MiniMonsters.

Steven Smigie – Raymond James

Right. I was just asking I guess more about some of the older families.

Steve Pratt

Some of the older products…

Rick Neely

Yes, Steve will…

Steve Pratt

LDOs we had (inaudible) over the last year, we've tripled our number of LDOs, and so those are gaining traction, so we are going to see very good – we are seeing already very good growth in that product family, just to name one, and that was a relatively very small product area for us, specially relative to MiniMonster.

Steven Smigie – Raymond James

Okay, last question…

Michael Hsing

Main of these products increase give us a million or two million kind of dollar revenues and so we ended up in MiniMonster really significant but every one of them is a big number. And all these things, we are making all kind of other things. Just like it is a rangefinder and those kinds of things that we see pretty good market and thermostats that is another one. And many products I mean in we don't even have to name what the product line how to fit in the product line, so we have lot of these kinds of things. And by the way our reporting system is not very informative and we will probably do some change.

Steven Smigie – Raymond James

Okay, great. Thanks.

Rick Neely

Steve, another product area just as another example, current limit switches, we have done a very good job of expanding our product into what we call portfolio which is described as a part that can go into many applications, many customers, and the current limit switch line has grown significantly going after. It is predominantly portfolio based, many customers, and that is starting to gain traction.

Michael Hsing

I think we call it smart – what is it, smart use…

Rick Neely

ECUs [ph], that is a segment of this. Yes. (inaudible) USB switch which is a more traditional kind of limit switch.

Steven Smigie – Raymond James

Okay. And then just on within the LED piece of the lighting business, can you talk about sort of where you are now in terms of how much is say notebooks versus other products you are in, just give us some sense of what the breakout is now, which ones are going to be your biggest growers?

Michael Hsing

We have a notebook and a netbook, these are – I don't have exactly the breakdown here, but the general lighting is pretty significant product. Maybe Rick can tell us you something.

Rick Neely

Yes, we have – like usual with MPS, the way we try and do it is to spread out is that if you take all of our white LED, probably the smallest portion, the portion we used to sell into was mobile handsets, and that is a pretty small number now. But the bigger numbers for us now recently has been monitors, flat-panel TVs, and the consumer devices like GPS.

Steven Smigie – Raymond James

Okay, great. Thank you very much.

Operator

Okay. Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed sir.

Bob Gujavarty – Deutsche Bank

Hi. This is Bob Gujavarty for Ross Seymore. Hi guys. I notice obviously audio amps was found. I also noticed QonQ your Korea related revenue was down and there is obviously chatter about some key Korean customers cutting back on orders. Was that impact – did you see any of that in the quarter?

Michael Hsing

Probably obvious sort of revenue is lower and some of it is made due to the impact on the orders slower in the first. Our competitive make regarding to those market, it is difficult for us to say.

Bob Gujavarty – Deutsche Bank

Okay, fair enough. On a more positive note, it seemed like year on year, you've done a great job in boosting your revenue from US and Europe and is that really a function of your expanded sales channel or the new products, can you talk about your strategy there. I think you concertedly effort – you have a concerted effort to increase your revenue from the US and Europe.

Michael Hsing

Yes. This US Europe and Japan we calculated about 50% of the entire analog market and we thought in those market is only about four years ago and some of it is only three years ago and so we did really, really well. And ASP is very different in China Taiwan market is much lower, the US Europe particularly much, much higher. So by no means we will give up and we just started and we do really well and we continue to do well. Usually we don't design any product only for those markets and all the product we do is fixed for everything.

Bob Gujavarty – Deutsche Bank

Okay. Just a quick follow-up. You mentioned ASPs in those market were a little better, so do you think over time as you penetrate those markets, there is an opportunity to kind of boost your ASP as you get more revenues from US Europe and Japan?

Michael Hsing

Yes, if we don't grow Taiwan, China side, yes, ASP will go up. By no means we would slow down the growth in the China and Taiwan market. And so how we balance that I really can't tell. If the Asian markets grow faster probably ASP will decline a little bit.

Bob Gujavarty – Deutsche Bank

Okay, fair enough. Thanks guys.

Operator

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

Gus Richard – Piper Jaffray

Yes. Thanks for taking my question. I had a number of questions on your LED driver for the general lighting, I'm assuming that it's an AC to DC product, is that correct?

Michael Hsing

Not quite. AC to DC is sort of we haven't generated significant revenue in the product line but those are not for general lighting yet. But those are we have is on the DC side and after convert to AC to DC all product is driving the lamps on the DC side.

Gus Richard – Piper Jaffray

Okay. So it is not a complete solution for lighting, not for general-purpose lighting?

Rick Neely

No.

Michael Hsing

No, not yet.

Gus Richard – Piper Jaffray

Okay, and then…

Michael Hsing

But will be soon release those products. We have released those products already.

Gus Richard – Piper Jaffray

Okay. And then sort of what power range can your product handle?

Michael Hsing

We can handle 50, 70 W power.

Gus Richard – Piper Jaffray

Okay. So like a normal 250 W bulb would put out, sort of…

Michael Hsing

It is a group of LEDs in a different, our product will take 60 watts power.

Gus Richard – Piper Jaffray

Okay. And then just switching gears here, it looks like you know you guys are pretty comfortable with the inventory that you have in the channel, a little bit of a push right at the end of the quarter, is it fair to say you’re your customers you feel pretty comfortable that you are at a point where the push to get product out the door is somewhat slowed, people kind of comfortable with their inventory position and not expediting and nervous of the availability?

Michael Hsing

We keep the inventory we our customers as I said earlier the business kind of in normal seasonal pattern now and our disti doesn't push us, only our customers, because we do – we use our disti as a logistic fulfillment, and we have a direct link with our customers and we can ship within 24 hours and so we don't see that now.

Gus Richard – Piper Jaffray

Okay. And then the last one from me, I would assume the Intelli-Phase product, the order of market penetration likely graphics, notebooks and server last?

Michael Hsing

Yes.

Gus Richard – Piper Jaffray

Okay. And could you just talk a little bit about you know which level of graphics card is low end, mid range or high-end graphics the Intelli-Phase is going after?

Rick Neely

Steve, you can talk about it?

Steve Pratt

Yes, it is the high end. It is definitely the high-end where these are add-on on graphic cards, not once that are in typically low-end models, the high-end that need extreme power density, multi phase and a lot of cooling expertise.

Michael Hsing

But you are only talking about Intelli-Phase right?

Gus Richard – Piper Jaffray

Correct.

Michael Hsing

All right. We have other products where really MiniMonsters I said a couple of years ago designed for notebook for the graphics market and we see a lot of revenue from that.

Gus Richard – Piper Jaffray

Okay, got it. And sort of graphics might come in for you first half of next year or second half?

Michael Hsing

What we will see is dependent on I can is dependent on our customers, or depend on the graphics chip makers and if they delay it, we will delay it, and definitely sometime next year. I don't expect that much of a delay.

Gus Richard – Piper Jaffray

Okay, right. Thanks so much.

Michael Hsing

Okay.

Operator

Our next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed.

Joanne Anzley – Robert W. Baird

Hi. This is Joanne Anzley [ph] calling in for Tristan. My first question in regards to distribution, do you expect to ship ahead or below sell-through in the fourth quarter?

Rick Neely

Yes, Joanne, you see most of the distributors in Asia; those are all done on a sell-in basis. In terms of the disties, I think Q3, we don't have other reselling partners, pretty well net, they go through inventory a little bit, but we had higher sales, so it turned out to be about even. Q4 is typically the reason for us it is seasonally down is what I would call a two-month quarter, by December things are pretty quiet. They don't take a lot of products in because they don't want them by year end. So typically Q4 is an even quarter, sell-through versus what they bring in to even pushing out a little more than they take in because most distributors on a calendar year end, they don't want to show a lot of parts on the balance sheet at year end.

Joanne Anzley – Robert W. Baird

Okay, thank you. And then just a preliminary sense of first quarter, initial thoughts, do you think it can track above seasonal?

Rick Neely

We have very little visibility into Q1. I could only refer you to the normal seasonal pattern; Q1 is always our lowest quarter. That is our typical seasonality but we don't have any actual other than looking at history we have no view as one yet, it is too early for us.

Joanne Anzley – Robert W. Baird

Okay, thank you.

Operator

Mr. Neely, there are no more questions in the queue at this time.

Rick Neely

Okay. Well, thank you everybody and we look forward to talking with you on our next call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.

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Source: Monolithic Power Systems, Inc. Q3 2009 Earnings Call Transcript
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