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Advanced Analogic Technologies Inc. (NASDAQ:AATI)

Q3 2009 Earnings Call

October 28, 2009; 4:30 pm ET

Executives

Richard Williams - President, Chief Executive Officer & Chief Technical Officer

Brian McDonald - Vice President of Finance & Chief Financial Officer

Lisa Laukkanen - The Blueshirt Group

Analysts

Tore Svanberg - Thomas Weisel Partners

Anthony Stoss - Craig-Hallum

Patrick Wang - Wedbush Morgan

Vernon Essi - Needham & Co.

Gus Richard - Piper Jaffray

Operator

Ladies and gentlemen thank you for standing by and Welcome to the Advanced AnalogicTech third quarter 2009 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

This time I’d like to the turn the conference over to Lisa Laukkanen. Please go ahead, ma’am.

Lisa Laukkanen

Good afternoon and thank you for joining us on today’s conference call to discuss AnalogicTech’s third quarter 2009 results. This call is being broadcast live over the web and can be accessed for 90 days in the Investor Relations section of the AnalogicTech’s website at www.analogictech.com.

On today’s call are Richard K. Williams, President and Chief Executive Officer and Chief Technical Officer; and Brian McDonald, VP of Finance and Chief Financial Officer. After the market closed today, AnalogicTech’s issued a press release discussing the results for its third quarter ended September 30, 2009. The press release is accessible online at the company’s website or you can call The Blueshirt Group at 415-217-4961, and we’ll email or fax your copy.

We would like to remind you that during the course of this conference call, AnalogicTech’s management team may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are simply predictions and actual events or results may differ materially.

We refer you to the documents the company filed from time-to-time with the Securities and Exchange Commission specifically the company’s most recent Forms 10-Q and 10-K. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

With that said I’d like to now turn the call over to AnalogicTech’s President, CEO and CTO, Richard Williams.

Richard Williams

Thank you for joining us today as AnalogicTech reports its third quarter 2009 results. During the call, I will provide a brief recap of the financial results and business highlights. I will then turn the call over to Brian to review the details of our financial performance followed by guidance for the third quarter. We will then open up the call to your questions.

Our third quarter results exceeded expectations as we experienced strong sales growth across geographies. Revenue was $26.1 million up 14% sequentially. Net loss for the quarter was $1 million or $0.02 per share on a GAAP basis. We achieve the non-GAAP net operating profit of $0.08 million inclusive of litigation expenses and ended the quarter was $103 million in cash and equivalent.

AnalogicTech experience the strongest increasing sales in Korea and Taiwan. Sales in Korea grew by the increase shipments of lighting of battery management products to our two largest customers. In Taiwan the increase was primarily driven by strong sales in consumer product such as set top boxes and DSL modems with multiple customers while wireless LAN products sales remind of the consistent level to last quarter.

Distributor inventories remained lean across all geographies with the less than two months of products on the shelves. POS activity during the quarter was up 16% sequentially. Sales at Samsung accounted for approximately 43% of total revenue in Q3 driven by the continued growth in a high-current LED flash applications and backlight solutions for high end camera phones using ModularBCD technology.

We also continue to see increased revenue from over voltage protected battery charges. With the addition of this application we have seen our dollar content rise in 2009 in a number of handsets. Our design wind momentum continues across the broad product portfolio including premium models such as Jet, Omnia II, Galaxy and Star. Including models use end market adoption at present appears mixed and use demand remains for now difficult to project.

Accordingly we proceed the ongoing adjustment in the Samsungs present demand and year end forecast represents a near term correction not in common in high volume dynamic markets. Third quarter sales to LG accounted for 25% total revenue. Sales of our six channel and three channel LED backlight drivers increased while our high-current camera flash products continue to make a meaningful contribution.

Ongoing sales to LG continue to across our wide range of models including Arena, Cookie and Crystal. As expected voltage regulation for wireless data common computing continue to solid in the third quarter. Specifically Broadcom reference design related business, accounted for approximately 4% of total sales for the third quarter, reflecting normal seasonality. While 3G wireless data cards reached 5% of sales.

Overall, 68% of revenues in Q3 were from display and lighting products, 14% from voltage regulation and DC-to-DC converter products and 4% from interface and audio products. Battery management, while still a small portion of total revenues at 6% grew more than 60% sequentially, demonstrating our significant design win traction for this product volume.

ModularBCD revenues grew sequentially and remain strong as a percentage of sales at 26% in Q3. To date we’ve released 83 ModularBCD products in production and currently have 44 in development. We continue to expand a voltage capability of the process including the successful qualification of our first 40 volt product and the commencement of our qualification plan for lateral trench DMOS devices ranging from 60 volts to 200 volts.

Our ModularBCD design efforts continue to focus on expanding our library of analog sales in IP, integrated PMUs, PMICs and Power FOCs. We are also pleased to announce that we have successfully qualified our 5 volt, 12 volt and OTP memory modules of ModularBCD in a second wafer foundry also using an 8 inch 0.35 micron former DRAM facility.

In the third quarter, we introduced a total of 21 new products comprising six platform and 15 derivatives expanding all product line. In lighting and display solutions for our handheld devices, we introduced two new highly integrated MMU lighting management units targeting the high end smartphone and released our high end development 14 products offering new generation features including CABC, Content Adaptive Backlight Control.

Automatically, adjusting displays brightness in accordance with the image in order to reduce power consumption and extent battery life. Battery charger is increasingly contributing to our growth and we expanded our product portfolio during the third quarter to include a solar charger for cell phones and two new OVP battery chargers for smartphones.

Now in production, our voltage regulator and PMU efforts continue to focus on diversifying our revenue in the markets beyond handsets, including the production release of a new generation fast transient, high efficiency voltage regulator with one of the industry smaller footprint and a low noise boost converter targeted for solid state memory cards. Overall we release six new voltage regulators and two new PMUs to production. We also completed design and began fabrication of highly integrated multi-voltage, multi-function, PMIC for smartphone and MID applications, representing the most complex integrated circuit in the company’s history.

We continue to expand our broad portfolio of interface products during the quarter including the production release of a SmartSwitch optimize for solid state drive applications retiming OVP SafetySwitch and many PMU for figure print identification applications. We also demonstrate of the industries first 100 volt haptic motor driver IC enabling a more natural feeling tactile response in touch screen applications.

Large screen LCD panels from notebooks monitors and high definition TVs represent a new and rapidly growing market opportunity for AnalogicTech consisted with our ongoing market diversification strategy. Dramatic changes in the construction architecture and operations of such displays requires new semiconductor components in almost every electrical system and power circuit including panel backlighting, integrated power management and voltage regulation, Gamma correction display basing and even Class D audio amplification.

For example LED backlighting for large screen displays offers superior brightness image contract, color saturation, energy efficiency and greener operation then existing fluorescent backlight, while eliminating use of Hazardous materials such as mercury, commonly present in today CCFL backlight solutions. AnalogicTech’s portfolio of large screen LED backlight and panel products for HDTVs, monitors and notebooks now comprised 14 products in various stages of development.

As a first offering we are please to announce production release of our first highly integrated high voltage LED driver chipset for direct backlighting. Now, sampling and being evaluated in numerous design in opportunities. This platform product contains core power management IP such as high voltage boost converters, high voltage LED current control, Jitter free clock synchronization and high speed system communication, facilitating salaries and supporting rapid design methodologies as we proliferate our product portfolio in the coming year.

We are also happy to report that we are successfully designed fabricated and commenced sampling, our second generation direct backlogging solution, comprising a versatile 16 channel smart LED driver, along with a 40 volt boost converter companion chip most in peak efficiencies over 94%.

This chipset enables us flexible multi-package distributed architecture accommodating a wide range of panel sizes in a modular fashion. While we do seeing overall component count and offering low noise and superior thermal management. We also completed design, commenced fabrication of our first high voltage LED backlight driver for Edge lighting solutions.

Beyond the backlight, we are also sampling and beginning to see design win traction for our first panel, power, PowerSOC, integrating multi high-voltage power supplies for biasing the display with high-voltage, high LED drivers and VCOM display buffers. Our broad product offering for large screen LCDs, illustrates our total power management approach for diversifying into new markets.

In summary, AnalogicTech continues to execute its plan of diversifying revenue with new products for large screen LCDs and HDTVs while expanding its dollar content and handsets and mobile Internet devices through a higher value integrated solutions in lighting power management, voltage regulation, and over voltage protected battery charging.

Our demonstrated ability to populate a broad portfolio of new LCD products, while offering more highly integrated PMIC solutions for handsets, of exemplifies the value of cell based design and IP reuse made possible through our patented proprietary multiple voltage, multi function process technology modular VCD. While our existing customer base in handsets and handheld consumer devices is expected to continue exhibit seasonal adjustments and suffer occasional market pervasions and corrections.

We remain confident through innovation and superior performance products. AnalogicTech can penetrate new verticals, such as large screen LCDs, mobile Internet devices and notebook computing, while maintaining our strong position as a technology leader in total power management solutions for handsets.

I will now turn the call over to Brian, for a detailed financial review.

Brian McDonald

Thank you, Richard and thank you everyone for attending our conference call. I will review our results for the quarter, and then briefly discuss our outlook for the fourth quarter of fiscal ‘09. Please keep in mind, that the financial data mentioned within this call, will be on a GAAP basis unless otherwise noted.

Now, let me outline the details, revenues for Q3 ‘09 was $26.1 million, compared to $23 million in Q2 ‘09, and $25.4 million in Q3 of ‘08, revenue increased by 14% sequentially, and increase 3% from Q3 of ‘08. Sales in Korea were $18.2 million, China $4.7 million, Taiwan $2.5 million and all others at $0.7 million.

Sales in Korea increased sequentially, due to higher shipments to Samsung and LG. Sales to Samsung combined with these contract manufacturers accounted 43% of total revenue that’s compared to 38% last quarter. Sales to LG represented 25% of our total revenue similar to last quarter. Shipments to LG exceeded expectation due to aggressive hub pools at the end of the third quarter.

Sales in Taiwan increased 60% sequentially, primarily due to expansion in computing and consumer product shipments. This represents to broadening a business outside of our wireless LAN. Distributor inventory level dropped as POS activity strengthen during the quarter.

Distributor inventory level remained at the low end of our two to four month target. Sales in China decreased 13% sequentially, primarily due to lower wireless LAN product shipments. Distributor inventory levels remained at the low end of our two to four month target. Sales to G-Tek were down sequentially and represented 6% of our revenues.

Gross margin for the quarter was 51.2%, this compares to 48.3% in the prior quarter and 50% in Q3 of ‘08. Sequentially, gross margin increase due to favorable product mix and lower E&O charges, partially offset by some unfavorable yields. R&D spending was $6.9 million or 27% of revenue for the quarter and increase of $0.1 million for the prior quarter and a decrease of 600,000 from Q3 of ‘08. The sequential increase was higher in our related expenses included in the R&D spending was $0.8 million of stock-based compensation expense.

SG&A spending was approximately $6.3 million or 24% of revenue for the quarter. This represents an increase of $0.1 million for the prior quarter and from Q3 of ‘08. The sequential increase was primarily attributable to higher stock-based compensation. Including the SG&A spending was $0.9 million of stock-based compensation expense.

Patent litigation expense was $1 million for the quarter as compared to $0.4 million in the prior quarter and $0.2 million in Q3 of ‘08. Operating expenses in total were $14.3 million, this compares to $13.5 million in the prior quarter and $13.9 million in Q3 of ‘08.

Stock-based compensation expense in total was $1.7 million for the quarter, compared to $1.6 million in the prior quarter and $1.8 million in the third quarter of 2008. Inclusive of stock compensation expense, the operating loss was $0.9 million for the quarter, as compared to operating loss of $2.4 million in the prior quarter and $1.2 million in Q3 of ‘08.

Other income net was $0.1 million for the quarter, this compares to $0.3 million in the prior quarter and $0.7 million in Q3 of ‘08. The decrease was primarily due to lower interest income. Tax expense was $0.3 million, as compared to $0.4 million last quarter and $0.2 million in Q3 of ‘08.

Net loss for the quarter was $1 million or $0.02 per share compared to a net loss of $2.5 million or $0.06 per share on the prior quarter and compared to a net loss of $0.07 million, or $0.02 per share in Q3 of ‘08. During the quarter, we continued to maintain a solid debt free balance sheet. Cash and equivalents totaled $103 million at the end of the quarter, down $1.6 million from the prior quarter. The decrease was primarily attributable to higher DSOs on a higher receivable number.

Net accounts receivable was $14 million at the end of the quarter, up $2.7 million from the prior quarter primarily due to increased sales. DSO for the quarter was 49 days, compared to 45 days in the prior quarter. Net inventories were $9.4 million at the end of the quarter, down $0.5 million from the prior quarter. Inventory turns for the quarter were 5.5 as compared to 4.8 last quarters. Lower inventory level reflects our effort in managing our inventories.

Now, let me comment on the fourth quarter of 2009, we expect Q4 ‘09 revenues to be in the range of $19 million to $23 million. We broaden the range in response to the business dynamics of one of our largest customers. GAAP gross margin will be between 49%-51%. R&D expenses in the range of $5.8 million to $6 million, exclusive of stock-based compensation expense, stock comp to be about $0.9 million.

SG&A expense in the range of $5.3 million to $5.5 million, exclusive of stock-based compensation expense, stock comp of $1 million. Patent litigation expenses in the range of $1.1 million to $1.3 million, stock based compensation expense in total of about $2 million, other income about $0.1 million, tax expenses were about $0.1 million and GAAP EPS loss to be between $0.11 and $0.07.

That concludes my remarks. Now, I’d like to open the line for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tore Svanberg - Thomas Weisel Partners

Tore Svanberg - Thomas Weisel Partners

Could you just talk a little bit more about the dynamic around your largest customer, especially regards to bookings, when do you expect those to bottom out and potentially start increasing again?

Richard Williams

So our understanding is kind of a complicated situation, because it certain in models that are not moving and it’s not clear what promotional programs have been put in place on those models. So we are still waiting to see weather or not their strategy will be to launch initiatives to promote, those models get a moving or weather not they will shift that demand to different cell phones, for example, camera phones instead of smartphones.

So we expect that increased visibility will occur in the next two weeks and then the orders will follow in accordance with whatever their change or adjustment in their strategy. So that’s why we’re keeping the range pretty open right now, because we don’t have a lot visibility in it, but at the same time we know historically that our customers tend to be pretty aggressive and generally launch pretty aggressive recovery programs whenever there are seen slowdown, so it remain to be seem still.

Tore Svanberg - Thomas Weisel Partners

As far as you can tell, are we talking about an inventory adjustment here of ATI components or is this one inventory adjustment of actual and system phones?

Brian McDonald

It’s end system phones and so for example the smartphone were to be later and replaced by a phone that was high end camera phone are content might to the same. If the smartphone will replaced with a mid year phone without no camera flash, we would see a dropped in our content and it was to be replaced by a mid year sales the camera phone, then we might see a drop in the ASP content, but not nearly a substantial as it went to a low end phone.

So what’s kind of an adjustment of their mix that determines what our net financial impact is going to be, we see that right now our understanding is the high end demand as the portion that is slowdown and that should affect other vendors, the more exclusive part is to those high end phones, the more that particular vendor would be affected.

Tore Svanberg - Thomas Weisel Partners

Moving onto the TV side of the business, you obviously have a lot on new products there and a low design activity. Could you maybe add a little bit color on when you could potentially get some revenue in the TV segment, should we view this as potentially in the first half, second half and maybe even which parts of your extension is start to get revenues and that will great, thanks.

Richard Williams

Tore, we’re still modeling this as a second half revenue driver and we have porch that are already fully functional and spectrum brand in the area of direct lighting and that we have our Edge lighting solution in fab and that should be out eminently and then we will get sampling on that.

So I think we are well positioned on the growing portfolio of direct lighting products and Edge were a little bit behind, but we’re catching up very quickly and we think that our new Edge lighting solution has a number of various versatile unique features that non-available in any of the part in the industry. We also believe that the highly integrated approach is going to be more attractive to our customers than using the discrete approach are having one Switching Regulator for every Light Mar, which is though the present architecture that is being used in the early models for direct lighting and for Edge lighting.

So we think that both should be available for revenue lamps in second half, but we’re a little later on the Edge, but Edge also is easier to get designed in, so that revenue might come faster. So theoretically, they could end up being fairly aligned and when they actually ramp.

Tore Svanberg - Thomas Weisel Partners

Two questions for Brian. Brian, given this inventory may not be your key customer, how early were you able to identify that and I’m just thinking about your own inventories here in Q4? If you’re going to be able to hold those fairly flattish or will that should be up sequentially?

Richard Williams

They would be up, but I won’t expect it to be up too much. We did catch wind to this and we’re able to reduce the starts pretty quick on the wafer starts. So I wouldn’t expect a spike in the inventory in the fourth quarter.

Brian McDonald

In our case, a lot these products are not exclusive for anyone customer. So we can’t sell them elsewhere. So we don’t think we’re going to be in a situation, where we have a lot of products that don’t demand elsewhere. We can still move them.

Tore Svanberg - Thomas Weisel Partners

The last question was the operating cash flow number for the quarter, Brian, do you have that?

Brian McDonald

Operating cash flow for the quarter was a negative $1 million and that was primarily attributable to the growth in the AR, which was up almost $3 million.

Operator

Your next question comes from Anthony Stoss - Craig-Hallum.

Anthony Stoss - Craig-Hallum

Can you guys give me a sense of camera flash as a percentage of revenues through Q3?

Brian McDonald

Camera flash as a percentage of revenues in Q3 was 17% of the total.

Anthony Stoss - Craig-Hallum

Brian, also if you remind, talk a little more in detail on litigation expense? I mean it’s kind of picked up again, what do you expect next quarter and 2010…?

Brian McDonald

We’re currently expecting in the fourth quarter, we’re actually we’ve got our court date set and the lawyers are snickering about and that is why we’re forecasting the $1 million to which type number.

Richard Williams

So the actual court date is in January, so some of that expenses in the population for that January event.

Brian McDonald

Then I would expect that number to be flattish in Q1, and then you would start to see a dropdown in the second, third and fourth quarter, probably getting down to that 500K range that we talked about by the end of the fourth quarter.

Anthony Stoss - Craig-Hallum

Also you made comments about HTC potentially cameras mid customer, also any other color you can shine on new handset customers coming on to elevate some of the pressure of being quarterly in the LG, Samsung cams?

Brian McDonald

HTC is one that we talked about. There’s another customer, China that we don’t talk about, but…

Richard Williams

Doesn’t like to be name-by-name, but they’re all major player and we’re pretty well connected with them.

Anthony Stoss - Craig-Hallum

Are you seeing any revenue yet, Richard, or when can we expect any kind of material revenue from that customer?

Richard Williams

We’re seeing revenue in other products from them and the cell phone portion is just starting and it would probably be maybe second quarter of next year, we’d start to see some of the cell phone components for that customer, but they are becoming a larger customer for us.

Anthony Stoss - Craig-Hallum

Also earlier in the year you guys brought back stock. I’m wondering, what your views are now with your sizable cash balances?

Brian McDonald

We’re aggressively pursing that option. Certainly at this range in stock price we will aggressively look at that from time-to-time pickup some shares.

Anthony Stoss - Craig-Hallum

Also refreshes on your gross margin targets kind of it 2010 and what percent of ModularBCD might be of total revenue if you can ballpark in?

Richard Williams

The margin targets, obviously that the long term models to get into the mid 50s and we would like to do that with the roll on of some cam of the TV business and second half probably the end of 2010.

Anthony Stoss - Craig-Hallum

That you’ve seen on margins pickup quite a bit already?

Richard Williams

Correct, it gone from 46 to 50, 152 over the last three quarters.

Brian McDonald

ModularBCD revenues, which ran about 26% at the end of this quarter, we would expect it to get up into the 60% range by the end of, pretty maybe higher in that, Tony. If the TV starts kicks in, it could be north of 60.

Operator

Your next question comes from Patrick Wang - Wedbush Morgan

Patrick Wang - Wedbush Morgan

Brian, can you just give the numbers for geography again, I missed them. I missed Korea and China.

Brian McDonald

So Korea was $18.2 million, China at $4.7 million, Taiwan at $2.5 million and all other at $0.7 million.

Patrick Wang - Wedbush Morgan

I’m just wondering, if you guys could you talk about your coverage today and what was it entering fourth quarter and how do expect the turns business you need?

Brian McDonald

Of coverage at the end of the last quarters, the beginning of this quarter was 31% and that are the mid point of the range we give out and that is actually consistent with what it was going into the third quarter. The coverage as of today is approximately 56% and that’s a few percentage points behind where we were same time last quarter.

Patrick Wang - Wedbush Morgan

So that’s excluding the hub?

Brian McDonald

That is excluding the hub. If you were add the hub into it would be up around 72% currently.

Patrick Wang - Wedbush Morgan

I think last quarter you said about 60% at this point…?

Brian McDonald

Yes, it’s a little bit below exactly.

Patrick Wang - Wedbush Morgan

I mean it’s familiarity of the last quarter, because of that just for the handset orders and then also just where those LAN shipments and then how should we think about for the fourth quarter?

Richard Williams

I think, it was pretty linear it was almost the third last quarter on the shipments. I’d say right now, we’re looking fairly Linear, but obviously a lot of that will depend upon on a final revenue number and what our large customer does.

Patrick Wang - Wedbush Morgan

Is it typical Linear in the fourth quarter?

Brian McDonald

Typically you see customer shutdown towards the end of December.

Richard Williams

So the last two weeks, we expect at least the Korea portion to slowdown. It’s a little more difficult to say on the China portion because of the timing of Chinese New Year is next year.

Patrick Wang - Wedbush Morgan

You got one free cash flow positive previous quarter, or expected it to be in the fourth quarter. If you think what’s the guidance say?

Brian McDonald

Free cash flow positive, but I expected to be close to neutral.

Patrick Wang - Wedbush Morgan

Hopefully, bring on AR bounce there?

Brian McDonald

That’s correct and typically we do that in the fourth quarter.

Patrick Wang - Wedbush Morgan

Okay, despite typical in the third quarter, in AR?

Brian McDonald

It is because of some of the growth spread.

Patrick Wang - Wedbush Morgan

Then just last question for you guys. You guys mentioned unfavorable yields in the third quarter would that also apply in the fourth quarter and what exactly is, unfavorable yield?

Brian McDonald

Unfavorable yields are variances you get on some new products that are introduced and they’re not hitting production levels right out of the shoot. We have a couple of high volume parts, that did start to ramp in the third quarter. We’d probably see a little bit of that residual into the fourth quarter and then we’d expect it to flat now by the end of the quarter.

Richard Williams

We have teams working on both programs right now, so.

Operator

Your next question comes from Vernon Essi - Needham & Co.

Vernon Essi - Needham & Co.

You’re ramping up another foundry partner first half is there anything to do with the yields and what capabilities or differences are going to be…?

Richard Williams

Actually, the yields have nothing to do with beyond and the capabilities of this are almost an identical dual source, so that the transportability of a design between the two facilities is a very, very great. So that means that, we can feel very confident that if the design is yielding in one Fab, it will yield to the similar level in the other fab and with onetime programmable programming, the OTP gives us the ability to trend in a post package way.

So we believe that we can maintain yields on a given design, even if reported into the other Fab. So we’ve actually done that on many different test devices on what we call a test mask, where we putting multiple product on one and we’ve already evaluated this transportability and we feel really encouraged by that. They all are similar generation facilities, so they have a very similar equipment profile.

As you know, our prophet is not subject to any variability from diffusions, because we don’t have any diffusions or high temperature steps and that’s the number one cause the variability along with that and we don’t use epitaxy either. So that’s why we’re able to do this and tuned to be almost identical. So we’re really encouraged by this and we’re very happy to be working with all other fab partner and we believe that customers like this, it’s a very comfortable having co-sourcing these days because of the importance of avoiding in kind of lying down condition for whatever reason.

Vernon Essi - Needham & Co.

I assume there’s going to be a cost advantage to doing this by having a dynamic loading situation?

Brian McDonald

Actually, we work pretty closely with our fab partners. So I don’t think this is not motivated by trying to bid them off against each other. Normally, when we’re working in a commodity market, all suppliers actually give us special arrangements to make sure that we remain competitive with the cost requirements of that market. So we’re getting some of that anyway, but this gives us a confidence that, we can have a continuous supply of any product under any circumstance.

Vernon Essi - Needham & Co.

Just to go back to the LED television side of things and probably still remains the six channel request out there by a major vendor and you’re involved in that, a lot of other folks who’re looking at that as well. What is the status of that in terms of that design activity, has that been awarded to any specific vendors? Just in your own words, where we add on that and sort of what is timing perspective, you think going into the first half of next year on that progression?

Richard Williams

If you’re referring to an Edge lighting solution, we believe that we have gathered all the information from the market and putting into our chip to the best features and to handle a wide range of requirements for such a chip, including solving our power concentration problem that other solutions have and also handling, facing and phase control, which other chips do not offer and that chip is using the same core technologies that are into our direct lighting solution and it is in wafer fab right now and should out eminently, so we’re targeting to sample soon.

Vernon Essi - Needham & Co.

There was a six channel direct solution, correct of back maybe six months ago, that was also being…?

Richard Williams

I don’t know of six channel direct solution and the one that I’ve seen were always higher channel account 16 channel. So the newest LAN with 16 channel, I wonder is being evaluated now as we speak, there’s also eight channel that I don’t know of the six channel direct that I know of.

Vernon Essi - Needham & Co.

Just sort of clarification, are you designed in the Nav’s right now?

Richard Williams

We have design wins already, we have nothing, we would qualify the design win, because until a model ramps, we don’t count it. There are whole TVs being built around our chipset and being evaluated. So obviously, our customer have to be pretty serious or they don’t go to that level of effort, but this is a very dynamic market and our position is to make sure, we have a wide portfolio products. So the matter, which way they move, we have a solution.

Vernon Essi - Needham & Co.

Then finally, just to move around on Taiwan front, noticed things look good there, is there some change in terms of your customers or we need some information there that something has changed in terms of your product mix going into there. Could you give us an update on what’s going on there and also your partner’s chief teams have gone down, which have some exposure there. Did you change your sales strategy or what’s happened?

Richard Williams

So let’s take in one piece at a time, Taiwan, we actually did some management change and brought in some new sales talent and we’re pleased with the team, that were put together. We also have been producing product that is visualizing better suited for the Taiwan market then the products that we were offering a year ago.

So I’d say it’s both the shift in products and in our selling talents or selling connections and channels. So, I’m quite encouraged by this new momentum that we’re starting to pickup in Taiwan and we continue to believe that both of those things will progress in a favorable way, both that the channel, sales connections and the product portfolio.

In China, looking at a particular distributor, you get into the issue of, who was covering which accounts and if that particular distributor including some of the Broadcom reference design related business, which as you know has it’s own seasonality, and so that can happen, so is bobbed on drops in a given quarter and that distributor is handling Broadcom, they will see a corresponding drop as well.

I think that the larger picture on China strategy is something that we’re now doing the same kind of effort. On China that we did six months ago to invigorate Taiwan and now our sales team is putting a whole strategy together on that and once again, we have new products into renew markets that diversify ourselves away from handset, that actually expand our served available market in China, beyond where we were a year ago.

Vernon Essi - Needham & Co.

Richard, just a follow-on, it’s my last question, but you said in Taiwan you’ve got better products that are suited for that market. Any examples you want to say there and specifically what’s been successful?

Richard Williams

I think some of the voltage regulators we’re showing going into modems and set-top boxes. We got more high voltage stuff coming, you’ve got all the TV stuff coming, you’ve got panel power ICs for smaller displays that are sampling ,so I would say just in general, products that support netbooks, notebooks, computing and a non-handset communication are all starting to rollout in varying degrees and that improves our market penetration opportunities in Taiwan.

Operator

Your final question comes from Gus Richard - Piper Jaffray.

Gus Richard - Piper Jaffray

Brian, can you quickly discuss to the puts and takes of gross margin for the quarter? There was a nice upside and I know you had a yield issue, but I just want to get an idea of what the sequential up tick was over the absorption, etc.?

Brian McDonald

So that the gross margin was up 51.2%, I will say. The majority of that was on product mix, so lot of that attributable to continued camera flash and lower E&O was about a 1% contributor to it. The favorable mix was about 2.5% contributor to it and then the unfavorable would basically be the net number that took it down to the total of 2.9%.

Gus Richard - Piper Jaffray

What was the E&O again?

Brian McDonald

E&O was a positive 1%.

Gus Richard - Piper Jaffray

Then Richard, you went through a number of products, is it fair to assume that LCD TV is sort of most to me upside and largest going forward or were am I giving that wrong?

Richard Williams

We’ve been working on this diversification strategy for sometime now and I think that large screen LCDs is a new vertical market for us, that gives us multiple opportunities starting with backlight solutions, but then eventually including the electronics that drive the display itself that’s the power management, that what we call panel power, gamma correction and so on and then eventually, even the Class D Audio.

So it turns out, but there’s a slightly different solution and a slightly different level of integration involved, that depends on the size of the panel and what we have been doing is taking a fairly ambushes plan of trying to offer a portfolio for the entire range of panels and that’s taking sometime, but we are gradually beginning to you get design in traction on the smaller panels, where we have highly integrated solutions and then on the very large panels, we think that this distributed architecture for backlighting and less level of integration for the front panel is probably more versatile.

So they can run a wider range of panels without buying a product that’s too expensive or inadequate, but actually having something that can scale. So, we’re covering the whole range on the panels and that’s why that market is so attractive to us is because, there is a lot of content in a lot of different solutions, but that’s not to say, that we’re not investing and what we view as the natural evolution of the smartphone, which is the mobile internet device.

Devices that have screens larger than our handset, because there is a lot power management requirements and we believe that the battery management requirements in that kind of platform is going to push those devices towards the similar kind of expectations from the market as the cell phone, which is that you have to be able to last a long time a battery charge and because of that.

We think the notebook architecture, which typically gives people about five hour battery life, four hour battery life, isn’t going to cut it. So we view the MID market is another exciting market, where we think that they’re going to mix it up and try new things, when people new things then we have an opportunity over the incumbents.

Gus Richard - Piper Jaffray

Let me just try another angle, Apptix applications you’re looking at, I think I’m fairly familiar with the solution, that’s a pretty high voltage requirement. Do you have any sense on when that type of product would ramp and would that help moving into new cell phone customers?

Richard Williams

That’s one of those products where we do a test case and then we show the capability and then we let market guide us. I think, people who have tried low voltage Apptix, have not been very excited by the result of that, it doesn’t have very much of a natural feelings. People who use motors to try to get the Apptix to work, it doesn’t feel that all like a push button.

So our belief is that you need more torque, you need more voltage. So we’ve made the driver available as a vehicle and we’ll let the other side of the market, which we think is the motor itself evolve and will be ready when that market comes, but we have no insight at this point as to when that will happen or if it will happen, but we’re ready if it does.

Operator

Thank you and gentlemen, there are no further questions at this time, please continue.

Richard Williams

I think that would conclude the conference call. Thank you everybody for your attendance.

Brian McDonald

Yes, thank you very much.

Operator

Thank you, sir. Ladies and gentlemen, if you’d like to listen to a replay of today’s conference, please dial 1800-406-7325 or 303-590-3030, using the access code of 4169932 followed by the pound key. This does conclude the Advanced AnalogicTech third quarter 2009 conference call. Thank you very much for your participation. You may now disconnect.

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Source: Advanced Analogic Technologies Inc Q3 2009 Earnings Call Transcript
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