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Advanced Analogic Technologies, Inc. (NASDAQ:AATI)

Q1 2010 Earnings Call Transcript

April 26, 2010 4:30 pm ET

Executives

Lisa Laukkanen – IR, The Blueshirt Group

Richard K. Williams – President, CEO and CTO

Brian McDonald – VP and CFO

Analysts

Tore Svanberg – Thomas Weisel Partners

Patrick Wang – Wedbush Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Advanced Analogic Technologies first quarter 2010 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 conference is being recorded today Monday, April 26, 2010. I would now like to turn the conference over to Ms. 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 first quarter 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 analogictech.com.

On today’s call are Richard K. Williams, President, 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 first quarter ended March 31st, 2010. 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 fax or email 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 files 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 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 K. Williams

Thank you for joining us today as AnalogicTech reports its first quarter 2010 results. During the call I will provide a brief recap of the business highlights I will then turn the call over to Brian to review the details of our financial performance followed by guidance for the second quarter. We will then open up the call to your questions.

Our first quarter results were in line with expectations. Revenue was $21.9 million, which represents a 32% year-over-year increase and a 5% sequential increase.

Net loss for the quarter was $4.2 million $4.2 million or $0.10 per share on a GAAP basis. On a non-GAAP basis net loss was $2.9 million or $0.07 per share.

We experienced broad based demand for our product across geographies with the strongest sales increases in China. Sales increased 30% sequentially in Taiwan primarily due to increased shipments for our camera flash products to support Google’s Android phones.

In China, we experience increasingly diverse demand for our wireless data card and lighting management products for both a local handset and major international brands. Distributor inventories remained at the low end of our two to four month target. POS activity during the quarter was up more than 10% sequentially.

Sales to Samsung and LG in Q1 represented 35% and 19% of total revenues, respectively. As planned, continued growth in Taiwan and anticipated seasonal declines in Korea handset revenue reduced sales concentration to these two customers. As we add new customers and increase our non handset revenue, we expect this trend to continue. At the same time, we anticipate continued solid revenue contributions from Samsung and LG.

Our design win momentum continues across a broad portfolio of handsets and Samsung, including Galaxy, Montage, Wave, Saturn, Short Tool [ph], and Moment. Recent design wins include a new generation linear batter charger and our first RFPA buck for smart phones.

We also recently secured a design win for our first multi-channel PMU comprising one switching and four linear regulators. This is to power the feature phone’s camera module. This design win represents the first deployment of a new product line of PMUs fully reconfigurable even after packaging using one-time programmable memory uniquely available in our proprietary ModularBCD technology. This OTP functionality allows us to use a single core to produce multiple products with multiple feature sets and performance parameters.

At LG, ongoing sales cover a wide range of models including Pop, Chocolate, Remark, and Accolade. New LG design wins include four new backlight drivers with power-saving CABC features and ten highly integrated lighting management units, or LMUs. These LMUs represent in a higher dollar content and higher value solution than our existing discrete charge pumps are expected to ramp aggressively in Q3.

Outside of Korea, we are pleased to recognize meaningful revenue growth from our design wins in the Google phone and its accessories comprising high-current LED camera flash, over voltage protected safety switch products, and a protection SmartSwitch for car kit and afters.

For Smart phones we also designed and commenced wafer fabrication of a highly integrated PMIC comprising an over voltage protected OVP dynamic switching charger and a USB OTG power supply, precision monitor amplifier for fuel gauging, a 40 volt serial boost for LED backlighting, and linear regulator for powering USB transceivers. This product completed design in record time primarily using ModularBCD cell libraries developed previously and made available in a standard cell library.

As discussed on the last quarter’s call, for 2010 we are strategically investing in R&D. we realigned our engineering resources to concentrate on developing products for HDTV, monitors, notebooks, mobile Internet devices, and solid state drives. Our handset engineering effort focuses on highly integrated ICs targeting feature phones that can also be repurposed for applications outside of the handset market. In keeping with this strategy, during the first quarter, we introduced an impressive 25 new products comprising six platform and 19 derivatives. 15 of the new products use our ModularBCD technology.

In Q1, ModularBCD remained strong as a percentage of sales at 25%. We currently have 40 ModularBCD products in development. We also continue to make progress on extending the capability of our ModularBCD technology, including commencing wafer fabrication of our 150-volt product and the imminent release of our first 50-volt backlight driver for notebook computers.

Our diversification into products for low power computing, including Netbooks and mobile Internet devices, tablet computing, solid state drives, wireless data cards and wireless LAN applications continued to progress during the first quarter. We began ramping our next generation DC-to-DC converter specifically targeted for the latest 802.11n chip sets requiring superior transient voltage regulation. We also began sampling a higher current version of this DC-to-DC converter.

We began sampling a highly integrated PMIC for mobile Internet devices and tablet computing comprising an OVP protected high current dynamic switching regulator, a low-noise linear battery charger, a USB on-the-go boost regulator, a 40-volt boost convert for YLED’s, an LDO linear regulator for powering USB transceivers, and full analog fuel gauge front end.

We began sampling final silicon of a new highly integrated PMU for 3G wireless data cards. In response to a new Qualcomm reference design we’ve received our first customer enquiries regarding our latest generation of SmartSwitch products for ultra-smart phones, MID, UMPC, and a Netbook application.

Turning to our diversification efforts in large screen LCDs, including high definition televisions, monitors, notebooks, and in-dash displays, I am pleased to report that we are supporting the design efforts of two major TV models now in their final stages of development. Unlike handset design wins, TV backlighting requires significant applications support and involvement. For these particular projects we designed and debugged a number of printed circuit boards optimizing them for good thermal performance, a key factor in reliable TV design. Recent measurements indicate that our design operates nearly 20 degrees cooler than our competition. We are currently awaiting confirmation of TV models and production schedules and still anticipate revenue in Q4 of this year.

We are currently engaged in design efforts with over 25 TV and module manufacturers, including two confirmed design wins of backlight and power supply products for notebook and small TVs at local brand manufacturers. We are also working with four manufacturers for TV power supply applications.

To address the rapidly evolving display market, we are defining a new generation of TV backlight drivers offering higher performance than today’s high-voltage edge solutions at a lower cost than current available direct backlighting solutions.

Beyond the TV display market we began promoting a new family of products for notebook backlighting applications and have secured our first design win. We began prototyping a 17.3 inch monitor in Taiwan and have confirmed three design wins in Japan and Korea for our first panel power LMU for in-dash applications. Other design wins continue across all geographies.

In summary, in Q1 we made significant progress towards diversifying our business in the markets beyond handsets while refocusing our mobile product engineering efforts in the higher value applications, including integrated lighting management units, switching regulators for RFPAs and our first OVP switching battery charger.

Our developments in lower power computing, including a highly integrated PMIC for tablets, our most complex IC ever, and a Qualcomm reference design are beginning to bear fruit. These efforts along with our substantial commitment to penetrating the TV and large screen LCD market underscore our dedication to our diversification strategy. Our ability to manage the diverse opportunities in these new market applications is a direct result of our strategic investment in expanding our engineering capabilities.

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 second quarter of fiscal 2010. 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.

Revenue for Q1 of 2010 was $21.9 million compared to $20.8 million in Q4 of ’09 and $16.5 million in Q1 of ’09. Revenue increased by 5% sequentially and increased 32% from Q1 of ’09.

For the quarter, sales in Korea were $12.2 million, China $4.5 million, Taiwan $4.2 million, and all others at $1 million. Sales in Taiwan increased 31% sequentially primarily due to continued penetration in high-end smart phones and other mobile communication products. Distributor inventory level remained at the low end to two-to-four month target.

Sales in China increased 16% sequentially primarily due to higher demand in the local handset and computing market. Distributor inventory levels remained at the low end of our two-to-four month target Sales to Chief Tech were up sequentially and represented 7% of our total revenues.

Sales in Korea decreased sequentially due to lower shipments to Samsung and LG. Sales to Samsung combined with the contract manufacturers accounted for 35% of the total revenue as compared to 39% last quarter. Sales to LG represented 19% of our total revenues as compared to 21% in the last quarter.

Gross margin for the quarter was 48.4%. This compares to 47.6% in the prior quarter and 44.9% in Q1 of ’09. Sequentially, gross margin increased due to favorable manufacturing balances [ph] offset by higher E&O charges.

R&D spending was $7.1 million, or 32% of revenue for the quarter, flat from the prior quarter and an increased of $0.5 million from Q1 of ’09. Included in the R&D spending was $0.6 million of stock-based compensation expense.

SG&A spending was approximately $6.2 million, or 28% of revenue for the quarter. This represents an expense of about $0.1 million from the prior quarter and $0.7 million from Q1 of ’09. This sequential increase was primarily due to higher payroll related expenses, offset by lower stock-based compensation expense. Included in the SG&A spending was $0.7 million of stock-based compensation expense.

Patent litigation expense was $1.1 million for the quarter as compared to $1.3 million in the prior quarter and $0.3 million in Q1 of ’09. Operating expenses in total were $14.3 million. This compares to $14.6 million in the prior quarter and $12.3 million in Q1 of ’09. Stock-based compensation expense was $1.3 million for the quarter compared to $2 million in the prior quarter and $1.6 million in Q1 of ’09.

Inclusive of stock compensation expense the operating loss was $3.7 million for the quarter as compared to an operating loss of $4.7 million in the prior quarter and $4.9 million in Q1 of ’09. Other income, net, was $0.1 million for the quarter. This compares to $0.1 million in the prior quarter and $400,000 in Q1 of ’09.

Tax expense was $0.5 million as compared to a negative $0.6 million last quarter and $0.7 million in Q1 of ’09.

The net loss for the quarter was $4.2 million or $0.10 per share compared to a net loss of $4 million or $0.09 per share in the prior quarter and compared to net loss of $5.2 million or $0.12 per share in Q1 of ‘09.

Now, moving on to the balance sheet, during the quarter we continued to maintain a solid debt-free balance sheet. Cash and equivalents totaled $98.6 million at the end of the quarter, down $3.4 million from the prior quarter.

Net accounts receivable was $11.5 million at the end of the quarter, up $2.2 million from the prior quarter, primarily due to increased sales and linearity of shipments towards the end of the quarter. DSO for the quarter was 48 days compared to 41 in the prior quarter.

Net inventories were $8.8 million at the end of the quarter, up $1.6 million from the prior quarter. Inventory turns for the quarter were 5.1 as compared to 6.0 last quarter. Inventory levels increased to support growing demand.

Now, let me comment on Q2 of 2010. We expect Q2 revenues to be in the range $22 million to $24 million; the GAAP gross margin between 46% and 48%; R&D expenses in the range of 6$.9 million to $7.1 million, exclusive of stock-based compensation expense, stock comp of $0.6 million; SG&A expenses in the range of $5.4 million to $5.6 million, exclusive of stock-based compensation expense, with stock comp of $0.7 million; patent litigation expense in the range of $0.4 million to $0.6 million; stock-based compensation expense of about $1.4 million; other income of about $0.1 million; a tax expense of $0.6 million; and a GAAP EPS loss to between $0.11 and $0.09.

That concludes my remarks. Now I would like to open the line for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) our first question comes form the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes, thank you, a few questions. First of all, Brian, can you talk a little bit about your visibility into Q2, may be comment a little bit on backlog and also the visibility you are getting from your customers, please?

Brian McDonald

Yes, Tore, the beginning backlog coverage for the quarter was about 35% and that was at the beginning of the quarter, which is pretty close to what we normally run. We normally run the 32%, 33% range. And as recently as this morning, we had about 63% coverage, which is pretty much in line with what we would expect. We’ve actually seen some recent orders coming in and actually starting to fill into the Q3 quarter at a little faster rate than we would normally see and that was from some of the non-handset customers. So I would say the visibility is pretty good right now looking into the quarter, as good as it could be.

Tore Svanberg – Thomas Weisel Partners

Now, if you look at some of the drivers in Q2, is it going to be fairly broad based especially with your diversification efforts or results of Korea coming back in Q2?

Brian McDonald

We are not expecting a strong uptick in Korea in Q2, so I would expect more contribution from the non-Korean handset customer.

Richard K. Williams

In fact we are being a little cautious on the Samsung, so we are taking it on the conservative side to see what their strategy and response will be to the emerging smart phone market because it’s going through a lot of dynamics right now.

Tore Svanberg – Thomas Weisel Partners

And, Richard, you mentioned a new LMU that’s going to be ramping at LG in Q3 and seems like it’s going to be ramping quite considerably. Can you just elaborate a little bit more on that please?

Richard K. Williams

Yes, so those LMUs basically, we have two categories of LMUs. I think the first ones that are ramping mix the backlight with voltage regulation products. So they can handle the camera or the display (inaudible) so there is a different combination. So there is another type that mixes voltage regulation with flash. So, in the case of LG we lost some market share before just because it was a – the discrete market was evolving into a higher integration and with this new level of integration that we are offering, we believe we will be taking back market share and at a higher value, higher ASP product than the discrete charge pumps have eroded down to.

So, this is kind of signifies that in the handset we are trying to – to move upward in integration to a higher value product and to start to divest of the low-end charge pump business, which is getting very commoditized and in fact generally being designed out of the first tier handset makers even as we speak

Tore Svanberg – Thomas Weisel Partners

Great and I have two more questions on the TV side. So you mentioned that you are working with two major OEMs with some design and you are pretty confident you are going to get some revenues there in Q4. If you can elaborate on that and also you mentioned that you have a solution now that really cuts down the cost of direct versus edge lighting and I was hoping you can elaborate on that as well? Thanks.

Richard K. Williams

Okay, so your first question was what, say again?

Tore Svanberg – Thomas Weisel Partners

You said on – you have some design work with two major TV OEMs on the LED backlighting side, and you are confident you are going to get revenues in Q4. I was just hoping you could add some more color on that confidence.

Richard K. Williams

Okay, so the way that works is that you have to go through a whole series of evaluations. So they normally like to pick a large screen form factor because those have the highest LED currents and therefore the most heating concerns. And so we started out with a TV in the 55 inch range. And when we started out we did our first printed circuit board in our first operating conditions and set the whole thing up. And when your very first iteration you end up with a chip that’s too hot, and then gradually you improve the BIOS [ph] conditions and you also change the board layout and by the time we are done we got to our system solution almost 20 degrees cooler than our competitors, our peers. So we think that that is a huge issue not only a benefit, not only in efficiency and green performance, but also just on thermal management and reliability. And so that process is very different than that of a handset where you basically – you get into the handset and then the decision is done, and in the case of the TV you have to work right through and once they have debugged that now they go to the process of okay, which models are they going to ramp. So they could ramp the model that we are in that they basically debugged our solution with or they could easily go to a smaller size, which would have even less heating concerns and put us in that. So we are looking at both of those and there is a variety of models and sizes and quite frankly, these companies are quite confidential about their actual launch plans. Probably because this is such a competitive market they don’t want anybody to know what they are doing or when they are going to release it, but we are told that we are in a premier position for a number of opportunities, including the one that we are qualified in or a derivative of the one we are qualified. And so we can't really elaborate more than that without going beyond what we should say other than the fact that there is good prospects for a ramp in Q4 and of course things could change, but technically we’ve got the green light and that’s really good news for us because this was a hard-earned application support. Like I said, it’s quite different than a handset design win. It’s a new level of application support for us and that’s one of the reasons that we did in fact expand and invest in our applications team to handle this more completely and thoroughly.

Tore Svanberg – Thomas Weisel Partners

Great. And the last question was on, you mentioned a low-cost direct lighting version?

Richard K. Williams

Okay. So, it turns out that high voltage edge where you have the light bars, which are all that is essentially one uniform brightness doesn’t have much green improvement. It’s more efficient than CCFLs, but it’s the worst of the LED family simply because their entire backlight is of a uniform brightness and therefore you are not getting any local dimming benefit. On the other extreme, high resolution direct, you can get very good green efficiency by local dimming of each and every little area of the display with anywhere from may be 60 – 50, 60 tiles all the way up to 256 [ph] tiles. So , there you have a lot of energy efficiency improvement. But the problem is that you have a very high cost.

So, what we have found in the middle is two whole new markets emerging, one which we call dynamic edge, of segmented edge, where the light bar is broken up, each light bar is broken up to two or four sections and those sections are used to eliminate only a portion of the display, so a TV might be divided in anywhere from eight to 32 little areas, typically 16, and then you have to have a different algorithm and a different driver for driving that segmented edge than what you need in high voltage edge. In particular, you need to be able to dim each channel separately and in that sense it’s like a high voltage edge driver that has some features like a direct drive, like a direct backlight drive. So that would be a performance upgrade of a high voltage edge.

Now the other way is to take this high resolution array of LEDs behind the screen and break them in not into small little tiles, but large tiles with fewer LEDS, run at a higher current. And so now your building materials’ cost, your BOM cost drop, and the drive is much less channels because may be you only have 20 to 40 tiles, you don’t have 200 tiles, and each one of them would be illuminated at just the area – the brightness needed for that area of the display. Well that’s of course higher resolution. It’s not bound to be illuminated from the edge, so you get better savings, and you still get a much, much lower cost than direct.

So, it’s –you can say that the – what we call large tile direct is going to be higher cost than dynamic edge, but still better power savings, but in any event both of them, dynamic edge and large tile direct will be cheaper than today’s direct and higher performance and more green than today’s high voltage edge. And that’s where we think ultimately the market is going to converge. The high resolution will dominate the high performance market. The high voltage edge will dominate the very low end market and the rest of the market will move to the middle where you get a balance between performance, energy efficiency and cost.

Tore Svanberg – Thomas Weisel Partners

Very helpful. Thank you very much.

Brian McDonald

Thanks, Tore.

Operator

Thank you. Our next question comes from the line of Patrick Wang with Wedbush Securities. Please go ahead.

Richard K. Williams

Hey, Patrick.

Patrick Wang – Wedbush Securities

Yes, hi, thanks for taking my question, and, Richard thanks for that really detailed answer. That’s a lot of good–

Richard K. Williams

You can read the transcript.

Patrick Wang – Wedbush Securities

No, no, it’s – you took away half of my questions, but anyway, first stop, I just wanted to get a sense of – your view on Korea and I know that you said that you have fairly conservative view on just – on the growth there, handset market. But when do you think that – when do you – what’s your sense there, when do you feel like things are going to return back to more normalized environments, when do you start seeing the next catalyst there in that market?

Brian McDonald

Well in the handset in Korea, it’s going to be – Samsung is working their strategy and what to do on the smart phone side of the business. And when they get that squared away, we’ve got a lot of products that are targeted at the high end and we could – we will benefit from them getting strategy pulled together.

Richard K. Williams

So, another way to say it is the things that are starting to try to sell into the Android phone can also be sold into Samsung’s smart phones, including if they launch a broad line of Android lines then there is opportunity there. And then the other is, as I said in the case of LG and other companies that the migration toward LMUs and away from discrete lighting solutions is good for us because the higher level of integration, more multi-voltage ICs, higher ASP, higher value and fewer competitors make that market attractive to us as well.

Patrick Wang – Wedbush Securities

Okay, got you. But in terms of timing for when you start to see that reaccelerating, what’s your best guess at this point?

Richard K. Williams

So, I feel pretty good about Q3 for the LMU portion of the business. I think we have to be cautious until – on Samsung until they articulate a strategy, I certainly wouldn’t want to be speaking for them. So, we can keep our eyes filled [ph] for what their press releases say about their smart phone strategy. But, suffice it to say when they define that strategy, we are ready to support them.

Patrick Wang – Wedbush Securities

Got you. Okay. That’s helpful. Alright. Well, you know, I also want to touch on some of the TV traction as well. Outside of just the standard backlighting solution, which, just like I said, I think you gave a great explanation of the strategy there. And you also talked about addressing the power supply. What’s going on there?

Richard K. Williams

Okay. So, there is two different pieces to that. One, in the power supplies that go into the backlight module, and the other the power supplies that go into paneling, to powering the panel, okay, the front of the display. So in the backlight, normally the voltage that comes into the module is not the correct voltage and that is typically something like a 24-volt input or a 12-volt input. And that has to be kept down to power the ICs and in many cases it has to stepped up to power the LEDs. So, stepping down to power the ICs is essentially a voltage regulator function, a switching converter. And we are developing a whole broad line of DC-to-DC converters with that voltage range of input. And we’ll use of course our influence on the driver side to help sell those Dc-to-DC converters. Now, on the supply that powers the LEDs, that is not at a fixed voltage, that is actually dynamically adjusting the voltage based on the LED string [ph] voltage, which is a – varies with manufacturing and with the operating conditions that are setting the brightness of the display. So we have an integrated feedback network that finds what strings the high voltage and make sure that it supplies the right voltage to that string through a boost converter, which we sell, or through an interface IC, which we call an operational trans conductor and amplifier. It’s a feedback IC that drives the power supply bridge in case of where they are using the AC-to-DC converter to power the high voltage for the LED. And so it doesn’t matter what architecture they use, if they need to step up the voltage, step down the voltage or use a module, we have a solution for it.

Then, on the front of the panel, we are now going systematically through every step, biasing [ph] the LCD, providing the power to the other chips in the front, powering the signals on the line, which are called the VCOM and the VCOM trim and so – and the gamma corrections, we are one by one knocking off each application. And our target is of course to integrate as much of that as possible. So, what we did from the integration front, is we already started putting all those under one chip for the smaller displays, because they are easier to define and easier to integrate and that’s where we have our first design wins on a in-car navigation, in-dash navigation and infotainment display. So these are actually units that can be put into dash of an automobile, either a factory installed or aftermarket. And now that we have got our first experiences with design wins there, now we are starting to move up into the notebook and the TV solutions for panel power. And we think that there are several dollars of content per display opportunity in the front electronics as well as anything beyond in the backlight module.

And I might comment that they are not necessarily the same customer because the guy who makes the TV is one customer and he buys the backlight module from a module company. So in one case we may sell to a module company, in the other case we are actually selling directly to the TV brand. So, there is a lot of different conduits where we go to market, and that’s why you saw that we are supporting at least 25 different customers, not to mention all the different groups within those customer. So, it’s a very aggressive and active sales and product development cycle that we are in.

Patrick Wang – Wedbush Securities

Got you, okay. That was again very helpful. You know, I want to touch on a couple of other things here. First off, just on the inventory, inventory is up I guess 22% sequentially and I understand that that’s in preparation for some future businesses, but what was the distribution between (inaudible) any sense on–?

Brian McDonald

Yes, Patrick, it was almost mostly all WIP [ph], okay, pulling wafers out of fab and positioning it for the second quarter end. And starting a little bit and thinking about the third quarter.

Patrick Wang – Wedbush Securities

Okay, got you.

Richard K. Williams

Kind of a normal cycle that you get to build ahead now to support the back half of Q2 and the beginning of Q3.

Patrick Wang – Wedbush Securities

Okay, got it. And then just on gross margins, it almost seem like your gross margin guidance seem just a tad light. What are some moving parts there between Q1 and Q2?

Richard K. Williams

Well, one thing as we are entering new markets, we have to launch new products. So, we always guide, when we start to see new products roll on like the LMUs and then later the TV products, we always try to guide conservatively on the yields an the manufacturing variances that can arise when you are starting to ramp a new market – a new product into a new market. There is always surprises, whether it’s – Murphy’s Law, it’s always something basically that you have to go through that learning curve and so we like to factor that in.

Brian McDonald

Yes, and then so in addition to the new products and may be the yield ramp there, we also factor in like we do a semi-annual price reduction with Samsung and that will kick in this quarter, so that puts some downward pressure on the margins. So we try to put as many of the moving pieces in as we can and that’s where we got the – we’ll be – we broadened the range a little bit, Patrick, thinking that we could put some cost reductions in place, but toss it some of that, but it’s going to take us a little time, so we did broaden the range.

Richard K. Williams

And then on the side if the LMUs do ramp sooner, or ramp with fewer problems, then we’d get an upside, but we can never know that until it happens.

Patrick Wang – Wedbush Securities

Got you, yes, that’s helpful. And if we think about margins going forward and just directionally, and you have got the semi-annual price cuts going into, going to Samsung here, is there going to be kind of a modest expansion going forward or are we going depressed that kind of a 47% gap for a while.

Richard K. Williams

Well the goal is always to try to upgrade into new product lines that have higher ASPs and higher margins by basically staying ahead of what they need. I think the Samsung case is a little bit worse than typical right now because they have not articulated a clear smart phone strategy. Were they to do so, and start to get some traction, then the products that we sell into that market will naturally be on the higher end of the margins where right now they are getting growth out of the ULC phones, which, as you know, are very low-cost and therefore naturally under a lot more pressure. Also, those are types of products that you have to ship very high volumes to make any substantial top line revenue. So, while we like to Samsung in a broad based fashion, then if we can get more engagement in some successful smart phone models, it will make the job a lot easier for us to manage the margin.

Patrick Wang – Wedbush Securities

Got you, okay. Thanks so much, guys, and good luck.

Richard K. Williams

Okay, thank you.

Brian McDonald

Thanks, Patrick.

Operator

Thank you. And at this time I am not showing any further questions. I would now like to turn it back to management for any closing remarks. Please go ahead.

Brian McDonald

No. Thank you very much for attending the call.

Richard K. Williams

Yes, thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today’s conference please dial 303-590-3030 or at 1-800-406-7325 using the access code 4282091. Thank you for your participation. You may now disconnect.

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Source: Advanced Analogic Technologies, Inc. Q1 2010 Earnings Call Transcript
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