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Monolithic Power Systems (NASDAQ:MPWR)

Q4 2009 Earnings Call

February 04, 2010, 5:00 am ET

Executives

Rick Neely - CFO

Michael Hsing - CEO & Founder of MPS

Steve Pratt [ph] – Marketing Director

Analysts

Rick Schafer - Oppenheimer & Company

Vernon Essi - Needham & Company

Ross Seymore - Deutsche Bank

Steve Smigie - Raymond & James

Tore Svanberg - Thomas Weisel Partners

Tristan Gerra - Robert Baird

Doug Freedman - Broadpoint

Arnab Chanda - Roth Capital

Pat Wang - Wedbush Securities

Auguste Richard - Piper Jaffray

Brian Piccioni - BMO Capital Markets

Craig Berger - FBR Capital Markets

Vijay Rakesh - ThinkEquity

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year Monolithic Power Systems, Inc. Earnings Conference Call. My name is Jasmine 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)

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

Rick Neely

Thank you. Good afternoon and welcome to the fourth quarter and fiscal year 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 risks and uncertainties. For example, our business outlook including our business and financial outlook for the first quarter 2010 projected first quarter and full-year 2010 revenues, net income and gross margin, our expectations for first quarter litigation, stock-based compensation and non-GAAP operating expenses, our target operating range for gross margins and inventory, our expectation for revenue and net income growth beyond Q110, our expected average non-GAAP tax rate for 2010, our expected pricing practices for 2010, 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 and the prospect of expanding our market share.

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 October 22, 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 first quarter of 2010, 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'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 along with the earnings release filed with the SEC earlier today.

We would like to start this call by reviewing our fourth quarter and fiscal year 2009 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the first fiscal quarter of 2010. We will then open up the call to your questions.

Let's start with the business highlights. MPS had an excellent fourth quarter growing revenues 34% from the prior year while recording net sales of $46.5 million. For the year, our 2009 revenue came in at $165 million, which was an increase of 3% over our 2008 total of $160.5 million. MPS clearly outperformed the analog industry this year as we grew our revenue while the current SIA and WSTS estimates are for the total analog industry revenues to shrink 10 to 12% year-over-year.

For the fiscal year, MPS is one of the few analog semiconductor companies that were able to achieve positive revenue. All product lines except lighting control showed growth, and DC-to-DC revenues were up almost 14% from 2008 levels. This was a truly outstanding performance in a very tough year that reflects the success of our new product strategy.

The fourth quarter saw the completion of a record number of new products releases for the year for MPS. For the year, we grew our new product introductions by more than 60%, a phenomenal achievement. In the fourth quarter, some of these new offerings included high-voltage white LED solutions for general lighting applications and large panel backlighting as well as a new monolithic integrated step-down converter for the notebook and netbook markets.

In the manufacturing area, gross margin was 58.7%, which was up one point from the fourth quarter of 2008, but down two points from the third quarter of 2009. Our internal days of inventory remained below our target range coming in at 97 days while inventory at our distributors continued to be lean.

Bottom line, non-GAAP net income was $7.7 million or $0.20 per fully diluted share. For 2009, our non-GAAP net income was $24.9 million or $.0.68 per share excluding stock compensation and a one-time litigation benefit. Our GAAP net income for the fourth quarter was $4.7 million or $0.12 per fully diluted share.

Let's look at the financial in a bit more detail. Starting with the P&L, at the top line of revenue, fourth quarter 2009 net revenues of $46.5 million decreased 3% sequentially from the third quarter of 2009 but were up 34% from the $34.7 million recorded in the fourth quarter of 2008. For the fiscal year 2009, MPS revenues were $165 million, up 3% from the $160.5 that were sold in 2008.

If you look at our revenue by product type, fourth quarter DC-to-DC product sales were $36 million, down 2% from the third quarter of 2009 but up 38.5% from the $26 million recorded in the year-ago quarter. For the fiscal year, DC-to-DC revenues were $123.6 million, up 14% from $108.6 million that MPS did in 2008. This annual growth was led by our MiniMonster product family, which grew about 66% year-over-year and also increased sales in the fourth quarter compared to the third quarter of 2009.

Our LDO product line had the highest annual percentage growth record in our DC-to-DC line though they started from a smaller base. The largest end markets for MPS in the DC-to-DC product family were flat panel TV, general consumer electronics product, set-top boxes and wireless LAN cards.

Lighting control revenues for the fourth quarter were $7.3 million, a decrease of 14% from the third quarter of 2009, but an increase of 12% from the same quarter a year-ago. The quarterly sequential decline reflects the continuing shift of notebook and other backlighting from CCFL solutions to white LED solutions.

For fiscal 2009, total lighting control revenues were $27.8 million, down 29% from the $39.1 million recorded in 2008. However, within the lightning control group, MPS has substantial year-over-year growth with its newer product releases of backlight CCFL controllers and white LED drivers, while the traditional CCFL inverters shrank by over 50% year-over-year.

Audio revenues came in at $3.3 million, up 19% from the $2.7 million recorded in the prior quarter and up 47% from the fourth quarter of 2008. For fiscal 2009, audio revenues were 12.8 million, up 6% from the 11.6 million reported in 2008.

We continue to operate this product line based on market conditions and therefore, we don’t expect any near-term growth in this product area.

Let us move down to the gross margin line. Our fourth-quarter gross margin was 58.7% compared to 60.7% in the prior quarter of 2009 and 58% in the fourth quarter of 2008. In 2009, the market saw a dramatic shift away from our traditional CCFL backlighting solution to white LEDs. This happened faster than we expected and negatively impacted 2009 revenues by about $15 million year-over-year. We reacted by pricing some of our DC-to-DC products aggressively in the LCD TV market to both get design wins but also to sell existing sockets. This impacted our gross margin for the fourth quarter. The success of our strategy, however, is evident in our outstanding revenue growth relative to the general analog market in 2009.

If you look at our operating expenses on a GAAP basis, they were $22.9 million in the fourth quarter. This includes $20.6 million in R&D and SG&A expense, which includes $4.2 million for stock compensation expense, and litigation expense of $2.4 million. Compared with the third quarter of 2009, GAAP operating expenses were up by $6.9 million.

Expense mix changed as follows. R&D increased by $286,000, SG&A increased by $747,000, litigation decreased by $444,000. And in Q3 of 2009, there was a one-time credit or expense decrease for the net effect of the reversal of a litigation provision of $6.4 million that was not repeated in the fourth quarter.

As a result, our GAAP operating profit was 9% in the fourth quarter compared to the GAAP operating profit of 27% in the third quarter of 2009. Compared to the fourth quarter of 2008, our GAAP operating expenses were up $5 million, R&D expenses up $1.1 million, SG&A was up $2.1 million and litigation expense increased by $1.8 million from the fourth quarter of 2008.

On a non-GAAP basis, our operating expenses, excluding stock compensation and a one-time reversal of a litigation provision were $18.8 million for the fourth quarter of 2009, down from $19.2 million in the third quarter of 2009, and up from the $14.3 million we spent in the fourth quarter of 2008.

Total non-GAAP operating expenses of $18.8 million in the fourth quarter were down $465,000 from the prior quarter, primarily due to a decrease in litigation expense. Non-GAAP R&D and SG&A costs were flat sequentially. Compared to the fourth quarter of 2008, non-GAAP R&D costs were up by $1.1 million as we continue to grow our R&D teams and broaden our product offering. But the 2009 figures reflect higher variable compensation than in the prior year.

Non-GAAP SG&A spending was up $1.6 million from Q4 of the prior year. MPS performed well above the sales plan for the year compared to underperformance in the fourth quarter of 2008.

Finally, litigation expense in the fourth quarter of $2.4 million was up $1.8 million from the fourth quarter of 2008 due to litigation in the ITC. Our non-GAAP operating margin was 18.5% in the fourth quarter of 2009 compared with 20.7% in the third quarter of 2009 and 17.1% in the fourth quarter of 2008.

Switching to the bottom line. On a GAAP basis, our Q4 '09 net income was $4.7 million or $0.12 per fully diluted share. For the fiscal year, our GAAP net income was $19.7 million or $0.54 per share. On a non-GAAP basis, our Q4 '09 net income was $7.7 million or $0.20 per fully diluted share. This result is impaired with a non-GAAP tax rate of 12.5%. For the fiscal year excluding stock compensation and the one-time litigation benefit, our non-GAAP net income was $24.9 million or $0.68 per share.

Now let's look at our balance sheet. Cash, cash equivalent and investments were $185.1 million at the end of the fourth quarter of 2009, up from $169.2 million at the end of the third quarter of 2009, and up significantly from the $150 million on the books in the year ago quarter.

In Q4, MPS had operating cash flow of about $15 million as we lowered our accounts receivable balances from the prior quarter. We purchased capital equipment of about $2.3 million in the fourth quarter, which is offset by cash proceeds of $2.8 million from option exercises by employees.

Cash receivable ended the fourth quarter at $15.5 million compared with $19.5 million at the end of Q3 '09 and $9.1 million at the end of the fourth quarter of 2008. The decrease in receivables from the prior quarter reflected our normal seasonal shipping patterns for the fourth quarter where more shipments are made earlier in the quarter and therefore are collected by the end of Q4.

Days sales outstanding declined to 31 days in Q409 as a result of the shipment timing issue I just described. In Q4 of 2008, our DSOs were 24 days due to the dramatic growth in revenue at the beginning of the recession last year.

Our internal inventories at the end of the fourth quarter were $19.6 million or about 93 days of inventory on a historical basis. This compares with $20.4 million or 98 days of inventory at the end of the third quarter of 2009.

Inventory in our distribution channels shrank slightly in dollars to match the Q4 revenue pattern and total days of distributor inventory was at the low end of our target range of 30 to 45 days for the distribution channels.

I would now like to turn to a discussion of general business conditions.

MPS finished fiscal 2009 in style hitting record revenues for the fourth of the year as well as growing our annual revenue to a new high. Geographically, in the fourth quarter of 2009, MPS shipped 54% of revenues to Taiwan and China and 46% 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 fourth quarter of 2008 to the 46% just mentioned.

In the new product area, MPS has continued to innovate rapidly with a record rate of new product introductions, increasing our number of new product introductions by over 60% from 2008. Some of the product highlights include the high-voltage white LED solutions that expand our served available market in LCD backlighting for a large panel and white LED general illumination solution that increase our total available market.

We expect material revenue contribution from white LED backlighting solutions in the second half of 2010, particularly in the notebook, monitor and TV markets. In January, 2010, we sampled an industry leading monolithic integrated DC-to-DC buck converter that operates from a wide input voltage range from 5 volts up to 28 volts and delivers up to 6 Amps continuous load current. The combination of a wide input voltage range and industry leading ultra small FEPS [ph] makes this an ideal solution for a notebook computer that demand the highest sufficiency in a space critical application.

The new process and product technology that we introduced in 2009 are progressing very well. The interconnect and wafer fabrication technology which we call MeshConnect [ph] and our 25 amp Intelli-Phase driver for microprocessor core power management in servers and notebook computing are both contributing to future cost reductions and significant future revenues as design win progress continues.

2009 was a recessionary year and MPS reacted aggressively. We used a few select products to secure and gain a significant share in a very competitive LCD TV market. This resulted in a relatively small reduction in gross margin percentage but we were able to grow our annual revenue despite a sharp decline in both our CCFL revenue and ASPs in general.

For 2010, we expect our pricing approach to return to normal practices. Our best achievement in 2009 was the development and release of the new technology that will expand our market segments and reduce manufacturing cost in the future. Based on these technologies, we released a record number of new products in 2009. With these new products, we believe that we will penetrate new markets and continue to expand our market share on a much broader scale.

We believe this strategy will enable MPS to accelerate our revenue and net income growth rate well above our analog [ph] competition in 2010.

I would now like to turn to our outlook for the first quarter of 2010. As a reminder to everyone, the first quarter of the year is typically a drop of 7% to 15% in revenue from the fourth quarter and is usually the lowest revenue quarter of the fiscal year for MPS. Now, for the first time, we are seeing very good bookings activities for the first quarter of the year.

We expect first quarter 2010 revenues in the range of $45 million to $49 million. For the first quarter of 2010, we expect gross margins flat to slightly down from the fourth quarter of 2009. We expect stock based compensation expense in the range of $3.2 million to $3.6 million. We expect non-GAAP research and development and selling general and administration expense in the range of $16 million to $17 million. This estimate excludes the stock compensation estimate mentioned above. We expect litigation expense in the range of $1.8 million to $2.2 million due to the ITC hearing process.

Finally, we expect our non-GAAP tax rate to drop to the range of 5% to 10% based on our sales and profit patterns globally for the year 2010. In conclusion, we are pleased to report that MPS was one of the top performers in the semiconductor industry in 2009, executing very well in a challenging economic environment. We saw last year as an opportunity and we grew revenue despite a major transition for notebook CCFL backlighting to white LED backlighting.

We will continue to execute a new product and technology development and broaden our market segment and expand geographically. We firmly believe that we can capture the current and long-term growth opportunities in front of us. And we are optimistic for our future.

Now, we will 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 & Company. Please proceed.

Rick Schafer - Oppenheimer & Company

Hey guys, nice quarter. I just had a couple of questions. I guess first, just on the gross margin down tick, can we get a little bit more color maybe on how short-term it might be? Is it like basically a short-term mix issue? It seemed to me that TV ought to continue to grow as a percentage of sales this year. And I guess I'm curious what kind of lingering impact the pricing action you took to take that share, I guess how does it play out with gross margin this year?

Michael Hsing

Rick, let me tell you does it, happen, what had happened. Starting from the early part of a last year and during that period and despite of economic conditions, our outlook for the last year revenue wasn’t clear, because we were told by the panel makers that they were accelerating the LED backlighting much faster, that converged on the CCFL to LED in a much faster rate, because of some of the economic conditions. So we took very aggressive strategy as Rick had mentioned earlier, used some with the DC-to-DC product and we easily gained, at the time, we believe we can easily gain the market share. As I said it before, we compete in a consumer market with a 60% gross margin and with only 40% gross margin guidance.

Most of the consumer business on the semiconductor, they all have that kind of a margin. So we competed with our very high gross margins. So we made a decision, just lowered a couple of percentage, as a result you see today. And we grabbed a lot of market in the TV side. So now the question is what is it going forward? It is difficult for us to say it and because we have a lot of turn's business, TV volumes is difficult for us to forecast either. So we said, last quarter we indicated 58.7, in this quarters, in this we said a very similar number, but beyond that, it's very difficult for us to say. We don’t even know what the TV volume is, but overall we're not using the same strategy as the last year. We will maintain our new product gross margins and we're not selling silicon, we're selling solutions now. And we get the most, best margins out of that.

Rick Schafer - Oppenheimer & Company

So to sum up, it sounds like, it sounded to me like you're saying gross margin actually probably has a little bit of tailwind, as we move forward in the second quarter and the rest of the year. Is that a fair take away from that Michael?

Michael Hsing

It's difficult for us to say and I think in the first quarter, we said we will stay in the same range. And for going beyond, I know everyone of you, probably have putting the model in there. I would say that just I don’t clearly know the numbers and fluctuates a percent up or percent down, not going to surprise me. So I will say just for your own benefit to put in the 58%.

Richard Neely

Yeah. Rick, maybe add in there, as we said, there is always a lag on both things. So the designs we got last year that the people are still shipping the TVs and things, and so there is a carry over effect on the margin. We intend to return to normal pricing practice this year, selling in the value of the technology, and that will kick in, but there's also a lag time to that. So I think somewhere again that makes it difficult but that’s the lag that you have to deal with in figuring it out.

Rick Schafer - Oppenheimer & Company

Okay. Well, that helps. And then Rick, I know you mentioned record number of new products and stuff, can you give us, like maybe quantify the number of new parts you had out last year or in the fourth quarter and then maybe give an idea sort of in terms of your top line sort of how much is made up of new typically higher margin parts, let’s say like less than three year old kind of parts?

Richard Neely

In terms of mix…

Rick Schafer - Oppenheimer & Company

Yeah.

Richard Neely

I mean, we do look at, the first 18 months to two year, it’s a small percentage as you would expect because of the 18 to 24 months design cycle. So that’s typically 5% or 10%. If we go back three years, it’s probably much higher than that, I don’t have a solid number for you on that one. Relative to the number of products, I'll let Steve Pratt [ph] who's our Marketing Director to step in.

Steve Pratt

Okay. So in Q4, we released approximately 21 new products, and within that, there were actually more individual parts, but 21 release products to the field, that was in Q4. And a year ago, it's about twice as much in Q4 of '09 than in Q4 of '08.

Rick Schafer - Oppenheimer & Company

Okay. All right. Well, thanks, guys.

Operator

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

Vernon Essi - Needham & Company

Thank you very much. I wondered, if you could possibly, Rick, go over your discussion on the data points in the CCFL erosion versus LED gain and how we should look at that? I mean you gave sort of a 50% figure, could you just walk through that again, so we have something to hang on to here?

Rick Neely

Yeah. Sure. The 50% was on a percentage basis, so I guess later on in the conversation, I said on a year-over-year basis, if you total up all the dollars, it dropped by about $15 million. So in 2008, we did 25 to 30, and in 2009, we did about 10 to 15 of CCFL, the classic CCFL inverter.

Michael Hsing

The second part of the question is about LED.

Vernon Essi - Needham & Company

Well, right. So obviously we should assume the rest of that balance is LED and then…

Michael Hsing

Yes. A part of is LED for backlight for the notebook. Other one is in the general lighting market; we gain a part of bit.

Rick Neely

Yes, the way to split it up, Vernon, if you take the number I reported of 7.3, less than half of that is our classic inverter, the rest of it is kind of split between CCFL controllers and then white LEDs, white LED drivers are a little bit better than the controllers. So those groups have both been keep growing as the classic inverter has been shrinking. So most of our white, currently most of our lighting control number is no longer CCFL, the majority are controllers or drivers.

Vernon Essi - Needham & Company

And so then if we -- your whole point about being aggressive on price sounds somewhat of a Trojan Horse strategy on the DC-to-DC side to get to influence on the signal chain and grow it from there. Is that sort of the way we should be thinking about this? And I guess the follow-on obvious question is, when do you go back to the market and your vendors or your customers and try to renegotiate these prices? The people that you’ve unseated, how are they going to respond to that and how do you expect to deal with it?

Michael Hsing

We already stopped that product. This is sort of like a one-time event. And as I said always in the past, I can -- anything what we do is in fact two years from now, but -- there is something I can do, and in fact about half year from, which I can turn the knob on the ASP, and I can grow the revenue, that’s what I did. And I see this is best way to grow the EPS for that extraordinary time. And so then to answer your question, we go back to the normal practice. And we don’t give away the product anymore. The reaction is normal, that's what’s MPS, we're selling solution, we're selling our values.

Vernon Essi - Needham & Company

Okay. And then just to switchgears to MeshConnect [ph], is there a way to quantify sort of your expectations on proportion of revenue you expect to generate? I mean we’ve talk some pretty big market figures in the past now that the stuff is sampling, how should we thinking about that progression for 2010.

Michael Hsing

I don’t see a major impact on a -- everybody is talking gross margin. On the gross margin, I don’t see a major impact on the gross margin thing. We released those products and these are -- some of them cannibalized our sales with low cost, so I expect those revenues start to increase in end of the year. And so the gross margin won't be impacted that much by the MeshConnect [ph] technology.

Vernon Essi - Needham & Company

But my question wasn’t so much gross margin, but just in terms of proportion, given the dialog you are having with folks on that product, where do you expect that to be at the exit of the 2010 as a percent of sales for instance?

Michael Hsing

The percent of the sales, I think it would be a low single digit..

Vernon Essi - Needham & Company

That’s helpful. Thank you very much.

Michael Hsing

Okay.

Operator

Your next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.

Ross Seymore - Deutsche Bank

Hey, guys. Just one last time looking at the gross margin side of things, you know, it all makes sense for a full year pricing strategy et cetera, but why did you really creep up just in this quarter given that you guided flat in gross margin? This quarter meaning the fourth quarter, I should say?

Rick Neely

Yeah. If you are telling, why were you two points up the quarter, that one basically was relative to the turns, the turns came in the second half of the Q4 worse than we thought, so we were…

Michael Hsing

Yeah. It’s a really a product mix. And if you look at the TV, number of TV shipments and it’s sort of matched. And the large TV makers that ships a lot of product, then they have a lot of product units, that’s what happens.

Ross Seymore - Deutsche Bank

So the audio amp stuff going up, whatever 18%, 19% sequentially, that was the driver?

Rick Neely

That was part of it and also DC-to-DC too.

Ross Seymore - Deutsche Bank

Got you. Okay. And then over into the revenue side of things, like you said earlier, Rick, usually you guys are down in the first quarter quite a bit, being up at all is a big change, do you think that’s at all pulling forward demand out of the second quarter?

Rick Neely

That’s a really, really…

Steve Pratt

Great question, we're going to ask you that question, but it’s okay.

Michael Hsing

I think if we didn’t do that within – quite aggressively early last year, I don’t think that we are going to grow revenue this first quarter. As we said, gross margins do similar to the last quarter, we still see -- and in this quarter, we did see a lot of TV shipments.

Ross Seymore - Deutsche Bank

Okay. So you just still taking share there?

Rick Neely

I guess, the last question. You kind of gave the numbers, but for the lighting control business, it seems like the vast majority of the headwinds from CCFL are now behind us. Would you expect that final bit of CCFL to just completely disappear this year and how should we consider that process versus the other part of that segment growing?

Rick Neely

Yeah. I think on a year-over-year comparison, we are kind of out of the woods, as you said, Ross. I think we are down to few million dollars a quarter and it may trickle off to a million by the end of the year. There is always a few applications.

Michael Hsing

theirs is always a few oddball [ph] applications not in the main stream anymore.

Ross Seymore - Deutsche Bank

Got you. But you are not going to - you just don’t even have the revenues left to lose 15 million year-over-year.

Rick Neely

Exactly. We couldn’t lose 15 because there is not that much to lose.

Michael Hsing

So that’s why we didn’t do that, have a aggressive pricing strategy because we see the business going to normal, and we don’t have the hole to fill.

Ross Seymore - Deutsche Bank

Got you. Then the last one for me, I am not sure you actually can even answer but the update on the timing of any other cases with the litigation?

Rick Neely

I can update. The major updates is the ITC, the ITC trade court which originally I think had told us something like in February they’d gives us a decision, they have now postponed that to April for the first round, if you know the process. And the final round in August so it’s been pushed out at least three, four months for the ITC trial, that’s what we know.

Ross Seymore - Deutsche Bank

And did that just prolong this kind of 2 million a quarter issue until August or you kind of did all the spending you need to do till you now hear the decision?

Michael Hsing

It is -- you can just follow the model, we don’t even now. For your model, just keep the same, but overall this year, we expect that the litigation will go down.

Rick Neely

It will go down from the last year may stretch out a little bit into another quarter, I think that’s probably accurate.

Ross Seymore - Deutsche Bank

Got you. Any idea of the down how much year-over-year, is that, or my guess is as good as yours?

Rick Neely

We will let you guess that one.

Michael Hsing

We would be pretty much, it will be significantly lower, but all these cases, I can’t really control.

Ross Seymore - Deutsche Bank

Okay. Thanks, guys.

Rick Neely

Hello?

Operator

Ladies and gentlemen, due to the number of questions in queue, please keep your questions down to one question and one follow-up. Your next question comes from the line of Steve Smigie with Raymond James. Please proceed.

Steve Smigie - Raymond James

Great. Thanks. Hoping you could talk a little bit more in the LED business, which categories within LED you see to be the big drivers in 2010?

Michael Hsing

Hi. I have Steve to answer.

Steve Pratt

Yes, so the big drivers for 2010 are going to be in the TV space and the monitor space.

Steve Smigie - Raymond James

Okay. And so you don’t see like street lighting’s going take a while to get there and…

Steve Pratt

Street lighting and decorative lighting, those are the illumination segment and those are going to be a lesser extent still growing, but to a lesser extent of the white LED product.

Michael Hsing

Yes, that market is still maturing and we are at the forefront of that?

Rick Neely

Yeah. I think the good news on that, Steve, is that we will have what we can consider probably significant revenue in that kind of market, which is more than a $1 million, which on an annual basis isn’t much, but it is a very good start for that type of product.

Steve Smigie - Raymond James

Okay. And if you could just talk a little bit to update on battery charger and Intelli-Phase and LDO stuff too? Thanks.

Rick Neely

In the battery charger space, we have a new family of switching chargers. It’s our first product. Prior to that, it’s been all linear going into mobile phones, one cell devices. Now we can get into one and two cell higher current applications beyond just a phone. And so those products are currently in the design in phase, they are release products for MPS, and so they will contribute revenue in the later half of the 2010. And the end products, the end products that they are going into, the nice thing about that is beyond mobile phones, we’re seeing it in portable, POS terminals. We’re seeing it in any hand-held device, so it’s a very -- it’s a broad based application set, far beyond just the mobile phone application.

Steve Smigie - Raymond James

And the LDO stuff...

Michael Hsing

And then in the LDO space, actually we’re very excited about the LDO product line. We have -- last year was a great year for new product introductions. We more than doubled our new products in that space and our revenue has done very well for these products. They are portfolio based going into a broad number of applications from mobile phone to industrial applications, HVAC, they are just used --and we have 1 amp, we have 2 amp solutions, which obviously are well beyond a handheld device. So those products are getting into a broader base of applications and our revenue is doing quite well in that space.

Michael Hsing

And also the gross margins are doing really well. And usually LDO is associated with very low margin, these are very high performance product, and also we selectively go into, these are very high end applications.

Steve Smigie - Raymond James

So may be a few million dollars revenue from each of those categories this year?

Michael Hsing

Yes. May be higher.

Operator

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 is looks like you are bookings are pretty strong so far in the quarter, so could you just talk a little bit about you backlog coverage or may be quantitatively talked about your confidence level with your revenue target for Q1?

Rick Neely

Yeah. Thanks Tore. If you had listened to our calls before, we don’t give out backlog numbers because typically it doesn’t mean that much given the high turns ratio we have. But we could say based on, as we said in the press release, very good bookings, above normal, well above normal, so obviously that would give us a higher confidence level.

Tore Svanberg - Thomas Weisel Partners

Very good. And my follow-up, sort of coming back to gross margin issue, but there were reports out there that your gross margin is going to be lower because of any activity in the notebook market, but it just seems like it was solely in the TV market last year and it’s got nothing to do with notebooks this year.

Michael Hsing

That’s right. It’s mostly from LCD TV market and we have very little notebook. This is the first quarter the entire history of the company where we’re very little exposed to notebooks. The DC-to-DC has not quite ramped up yet but we have no intention to give the product up.

Tore Svanberg - Thomas Weisel Partners

Okay. Let me just sneak in one last one. You know you talked about TV being a pretty important business for your second half of the year and the LED. Are we talking about multi-million dollar opportunity here or is this going to be more of hundreds of thousands of dollars.

Rick Neely

It is hard to project because I don’t know those model will ramp up, and so it is difficult for us to say, but we will see by the end of the day, by the end of the year. And some customer will tell us, we are going to ramp this other one, the project is delayed, and I don’t have a very good grip on the real number yet.

Operator

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

Tristan Gerra - Robert Baird

Hi. Good afternoon. Did you have sales prepaid to small China-based distributors in the quarter and if so how did that compare with Q3?

Michael Hsing

Yes, Tristan. We do for our small distributors in Asia, we generally do pre-payment terms, that’s one of the reasons our DSO hover around 30 days. The amount this quarter -- I don’t actually have the number in front of me but I know it wasn’t a significant change from the prior quarter. The biggest change in the DSO was really the timing pattern of the shipments, which allows us to collect it, not the pre-payments from the smaller Chinese vendors.

Tristan Gerra - Robert Baird

Okay. So fair to assume that it’s going to be, it could be stable going forward as opposed to something that’s done opportunistically and could be lumpy from quarter to quarter.

Michael Hsing

The thing that drives our DSO, while we are pretty strict on our payment terms, but the DSO will move up and down as you could historically up from 31 to 37, to pay down on when more shipments go out. If they go out early in the quarter, we collect it. If they go out more in the third month of the quarter, then we will have a higher DSO, that’s usually the pattern that you see.

Operator

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

Doug Freedman - Broadpoint

Great. Thanks, guys, for taking my question. You have been forthcoming with your goal about growing the industry, would you mind sharing with us what you are expecting the industry growth rate next year to look like?

Rick Neely

What Rick means, the company is set up to beat the competition. We have a few models and we want to beat those companies, and that’s how all the stuff, the company operates, and the heart of each department, each segment is being measured on it. That’s what we meant. And of course, industrial growth, I think you guys know a lot better than we do. I only can keep, just keep executing, and whatever happens, we can -- if we can react, we react; if not, we let it be.

Doug Freedman - Broadpoint

I guess can you give us some idea of, do you believe you are presently shipping to your customers’ demand levels or do you believe that they are in the process of building inventory or holding their inventories in line with their production levels?

Rick Neely

That’s a good question, Doug. I think that’s something everybody’s trying to figure out. What we can track, as we have said every time, our inventories, we can track our distis’ inventories, and both are staying at the lean levels as we mentioned, it’s harder for us to figure out down the stream. So as far as can we tell, we are ordering to demand, that we can see. Further up the chain, however, we’re usually unable to see the end retail chain, we don’t have data on that.

Michael Hsing

Yeah, I just heard the news, okay. I don’t know, you guys didn’t know that too. This year has more LCD buyers in this country than the last year, so I guess they are buying for the current shipping, I guess.

Operator

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

Arnab Chanda - Roth Capital

Thank you. Sorry, I probably have to beat a dead horse here, but a question about, if I can ask I mean hopefully the last question on gross margins, is it sort of related to the fact that your competitive utilization is low, so their pricing is more aggressive? And when that changes around, that should change your gross margins too? And then what the lag time, if that’s true, if you could may be elaborate on that a little bit?

Rick Neely

Hi. Arnab. This is Rick. The lag time -- again on pricing, like if you win a deal today, and I think 3, 9, the chips that you already have designed in, and it is going to production and lasts for 12 months, if that could be the lag time. If you’re referring to last year, a lot of people were aggressive on pricing as you know because their capacities were empty and certainly what it seems to be this quarter, it’s capacity has filled up, I think generally both in the fabs and the assembly. So again I think that relates to our comment that we think we can get back to normal pricing practices this year and that’s one of the reasons the competitors built up their capacities a bit. So with that in mind that’s what we mean. Again as Michael said, the second half 2010 margin, it depends on the uptick of new things, the downtick of the old things, and we couldn’t make an accurate call, so we don’t try and go that far ahead. We only give the near-term guidance.

Arnab Chanda - Roth Capital

Great. And then just one follow-up on the – if you are looking at your kind of revenue mix, normally Q1 and Q4 are down quite a bit and then Q2 and Q3 are up a lot. Given the fact that you are actually up in Q1 but your inventories are down, qualitatively speaking should we assume a little more muted but continuous growth or how does your internal models look on that?

Michael Hsing

As I said many, many times, our inventory is not quite like other companies related to our - our future revenues. And so we always manage it; shift the product to our customers, so we react very fast.

Operator

Your next question comes from the line of Pat Wang with Wedbush Securities. Please proceed.

Pat Wang - Wedbush Securities

That’s pretty cool. It’s actually Wedbush but my answer -- my questions have been answered. Thanks, guys.

Operator

Your next question comes from the line of Auguste Richard with Piper Jaffray. Please proceed.

Auguste Richard - Piper Jaffray

Thanks for taking my question. And again it’s all related to the same thing. When I think of modeling your company going forward, if you have a weak gross margin quarter, would that imply that you are going to have a really strong top-line, because you are going to be taking share with the aggressive pricing that you’ve put in place? That’s how it’s going to work and so given the analog trade off between growth and gross margin, given that you are in economic whirlpool, last year, you just basically took the shots knowing you would gain the market share.

Michael Hsing

Absolutely. It was gross margin going down, okay. And without seeing the EPS going up, we screwed it up, okay. And I don't think we screwed it up, I think we - I'm glad I have made that decision last year. MPS is a small company, and despite of economic, we should have grow actually because the CCFL switch is going away from us, went away from us last year that rapidly, okay. We didn't expect it. And that's why I made a drastic different decision to grow the EPS.

Rick Neely

Right. I think that's a great point because when we looked at our Q4 EPS, it's one of the best ones we have done in a Q4, and I kind of knew that if you look at Q1, it's normally our first quarter, as you mentioned, is a low revenue quarter. We are growing in this quarter with very good revenues. I expect, if you look at our guidance and do the math, you will probably end up with something around a 60% increase in EPS versus the last three years history So it's a significant improvement in EPS from what we have been doing, certainly it's going to show in the Q1 data.

Auguste Richard - Piper Jaffray

And let me just try one follow on. In talking to you guys over the year…

Rick Neely

Hello?

Operator

Your next question comes from the line of Brian Piccioni with BMO Capital Markets. Please proceed.

Brian Piccioni - BMO Capital Markets

Thank you. I thought I missed the cut there. We have seen an impact to your business as LEDs have replaced cold cathode in backlighting and one of the hot trends in the television market is to go from white LEDs to multi-colored LEDs in order to improve the color gamut. Do you view that as being positive, negative or neutral for the backlighting business, for your backlighting business not for the..?

Michael Hsing

All of that is absolutely positive because we don't have CCFL solution for large panels such as the TV applications. Now we have a very good solution for LCD TV and as well as offline lighting, LED solution. So it's all positive.

Brian Piccioni - BMO Capital Markets

I guess there would be more drivers because there's more LEDs as well?

Michael Hsing

Not quite. Yes, lot of LEDs, depends on the how they construct it. They have a different, multiples screen, or they have one screen. It's all different. So you need a few solutions. So, how to do the backlighting for TV? It's not quite standardized like a CCFL. CCFL is pretty much, everybody doing the same way. But LEDs are not quite settled yet.

Operator

Your next question comes from the line of Craig Berger with FBR Capital Markets. Please proceed.

Craig Berger - FBR Capital Markets

Hey, guys. Nice job on the results. Can you just remind us kind of where MiniMonster has penetrated in terms of end markets or applications and kind of what is still in front of us in terms of growth?

Michael Hsing

Some of the notebooks and little TVs and these are the non noticeable things, okay. But we have audio and telecommunications and set-top boxes and in many other applications.

Steve Pratt

And industrial applications. I mean one of our advantages is, our technology is high voltage, and we have add some high-voltage products out now for well over a year, and so we are seeing revenue in those products with 50 and 60 volts input capability.

Craig Berger - FBR Capital Markets

And then as part of that, a follow up question is, just can you talk about how much fab capacity you have available and whether you are seeing any production bottlenecks and then also as part of that, what you expect wafer price trends to do in the first half of the year? Thanks.

Michael Hsing

Overall, we don't have production constraints and although the revenue increased quite a bit. The shipment increased a lot. And we have a very good relationship with our foundry partners always. Any time we ship over 200 kinds of product and at any time, we would have some kind of allegation, but overall we don't have a problem.

Operator

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

Vijay Rakesh - ThinkEquity

Yeah. Hi, guys. Just looking at the DC-to-DC converter segment, can you give a breakdown by products, which are the key products and what percentage they are like handsets -- not handsets, but what are the rest of segments within DC-to-DC?

Rick Neely

Hi, Vijay. In general, we don’t -- if you look at the company in total, it's similar to what we said in the past in terms of the range for the fourth quarter. About half our revenues is what we would call it consumer segment, about a third is communication, and computing is down to say 15%. But actually industrial grew to around 5%, given a lot of activity in smart meter. So the biggest interest, I think Michael made a comment, notebooks are now single-digit of our revenue, less than 10%, so that’s actually how it splits out. But DC-to-DC would be similar

Vijay Rakesh - ThinkEquity

The mix is similar.

Rick Neely

The mix are similar, yes.

Vijay Rakesh - ThinkEquity

And on the LED TV side, you mentioned you are trying to get in, did some aggressive pricing, you mentioned sockets there, but if you were to assume 15 million LED TVs for 2010, if you were to take a stab, what market share could you get exiting 2010?

Michael Hsing

It’s very difficult for us to address the market share because some large TV use six, seven DC-to-DC converters, and some are smaller, use one or two, and there are only a few LCD makers that will shift to these guys and we don’t know how to differentiate it, how do they use it.

Vijay Rakesh - ThinkEquity

Okay.

Operator

There are currently no more questions in the queue. I would now like to turn the call back over to your host for today, Mr. Rick Neely. Please proceed.

Rick Neely

Thank you everyone for attending the call. We look forward to talking you in about three months for the Q1 call. Thanks, again.

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 Q4 2009 Earnings Call Transcript
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