Monolithic Power Systems, Inc. Q1 2010 Earnings Call Transcript

May. 4.10 | About: Monolithic Power (MPWR)

Monolithic Power Systems, Inc. (NASDAQ:MPWR)

Q1 2010 Earnings Call Transcript

April 29, 2010 5:00 pm ET

Executives

Rick Neely – SVP and CFO

Steve Pratt – Marketing Director

Michael Hsing – CEO and Founder of MPS

Analysts

Tore Svanberg – Thomas Weisel Partners

Rick Schafer – Oppenheimer

Bob Gujavarty – Deutsche Bank

Vernon Essi – Needham & Company

Patrick Wang – Wedbush Securities

Andrew [ph] – Raymond James

Gus Richard – Piper Jaffray

Jason Schmidt – Craig-Hallum

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2010 Monolithic Power Systems, Inc. earnings conference call. At this time, all attendees are in a listen-only mode and we will conduct a Q&A session at the end of today's remarks. (Operator Instructions) I would like to now turn the call over to your host for today's call, Mr. Rick Neely, Chief Financial Officer. Please proceed, sir.

Rick Neely

Good afternoon and welcome to the first quarter fiscal year 2010 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today's call.

In the course to 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 second quarter of 2010, projected second quarter 2010 revenues and gross margins, our expectations for second quarter litigation, stock-based compensation and non-GAAP operating expenses. Our target operating range for gross margins and inventory, our expectations for revenue and net income growth beyond Q2 2010, our expected average non-GAAP tax rate for 2010, our expected production capacity in future quarters, our belief that MPS is well-positioned for future growth, the expected seasonality of our business, our expectations for future cost reduction and new product introductions, potential customer acceptance and the opportunities these present and the prospects 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 16, 2010 which is 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 and in the case of net income, their related tax effect. We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the second 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 first quarter fiscal year 2010 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the second fiscal quarter of 2010. We will then open up the call to your questions.

Let's start with the business highlights. MPS had an unprecedented first quarter, growing revenue 71% from the first quarter of the prior year and recording record net sales of $50.3 million. This figure is not only a new quarterly revenue record for MPS, but it is a sequential increase of 8% from the prior quarter and MPS typically sees a seasonal drop of 10% to 15% in our first quarter of the year.

MPS saw strong demand in all of its major end markets. For the first quarter, MPS increased its DC to DC penetration as a result of the broad spectrum of new products we have released in the past 18 to 24 months. Of particular note, inside the DC to DC segment, our Q1 2010 MiniMonster sales growth rate was more than double the overall company growth rate compared to the first quarter of 2009 and we expect continued growth throughout this year.

One example is our new high-voltage, high-current DC to DC buck converter family designed into 2010 model notebook computers for system regulation. These parts are ramping very well and will contribute material revenue in the second half of 2010.

In the lighting market, our white LED revenues almost tripled in Q1 2010 compared to a year ago and are on track to grow well over 100% by year end. We continue to gain market share in white LED backlighting applications in 2010 and 2011 model notebook and netbook computers and LCD monitors that take advantage of our integration and high-voltage technology.

An example of our market expansion in the white LED segment is our design and success in high brightness white LED lighting. We have several significant designs wins street lighting and decorative lighting in appliances and automotive interior decorative lighting as well.

In the manufacturing area, gross margin was 58.3% which was up from the 57.6% gross margin recorded in the first quarter of 2009 and down slightly from the fourth quarter of 2009. Our internal days of inventory were 64 days, as strong end demand dropped us below our target range. Inventory dollars at our distributors grew slightly but remained at the lower end of our target range of 30 to 45 days of stock.

Bottom line, non-GAAP net income was $9.9 million or $0.26 per fully diluted share. This resulted in non-GAAP net income of 20% of revenue. Our GAAP net income for the first quarter was $6.4 million or $0.17 per fully diluted share.

Let's look at the financials in more detail, starting with the P&L. Looking at the revenue line, first quarter 2010 net revenue of $50.3 million increased 8% sequentially from the fourth quarter of 2009 and were up 71% from the $29.3 million recorded in the first quarter of 2009.

Looking at our revenue by product type, first quarter DC to DC product sales were $40.3 million, up 12% from the fourth quarter of 2009 and up 91% from the $21.2 million recorded in the year-ago quarter. This growth was led by our MiniMonster product family which grew 154% year-over-year and increased sales from the fourth quarter of 2009 by 37%.

We were also very pleased with the growth of some of our new product families in the DC to DC segment. Our combined LDO and current limit switch revenues were over $2 million in the first quarter, up 350% from a year ago.

The largest end markets for MPS in the DC to DC product family continue to be flat-panel TVs, general consumer electronics products, set-top boxes, routers and wireless LAN cards. MPS also enjoyed its best results ever in the industrial segment in Q1, as sales to smart-meter customers have been ramping.

Lighting control revenues for the first quarter were $7.4 million which was slightly up from the $7.3 million we did in the fourth quarter of 2009, but an increase of 59% from the same quarter a year ago. As we mentioned in our last conference call, within the Lighting control group, MPS had substantial year-over-year growth for its newer product releases of white LED drivers and backlight CCFL controllers, while the traditional CCFL inverters shrank 25% year-over-year.

We only shipped about $1.5 million in traditional CCFL backlighting solutions in the first quarter of 2010. The year-over-year decline in traditional CCFL reflects the continuing shift to notebook and other backlighting from CCFL solutions to white LED solutions.

Audio revenues came in at $2.5 million, down 23% from the $3.3 million recorded in the prior quarter and down 28% from the first quarter of 2009 as we continued to modulate our participation in this segment based on market conditions.

Looking at the gross margin line, our first quarter gross margin was 58.3% compared to 58.7% in the prior quarter 2009 and 57.6% in the first quarter of 2009. This result was in line with our expectations and guidance for the quarter. As a reminder from our last conference call, we explained how we had priced some of our DC to DC products aggressively in the LCD TV market to both get design wins, but also to send existing sockets in the second half of 2009. This tactic was successful as evidenced by our record revenues in Q1 2010. But as expected, this has impacted our gross margin in the last few quarters.

At the expense line, if you look at our GAAP operating expenses, they were $23 million in the first quarter which includes $21.4 million in R&D and SG&A expense, which includes $3.9 million for stock and compensation expense and litigation expense of $1.6 million.

Compared with the fourth quarter of 2009, GAAP operating expenses were up by $82,000. The expense mix change is as follows. R&D increased by $674,000, SG&A increased by $208,000 and litigation decreased by $800,000. As a result, our GAAP operating profit was 13% in the first quarter 2010, compared with a GAAP operating expense of 9% in the fourth quarter of 2009.

Compared to the first quarter of 2009, our GAAP operating expenses were up $5 million. R&D expense was up $2.9 million, SG&A was up $2.6 million and litigation expense decreased by $0.5 million from the first quarter of 2009.

On a non-GAAP basis, if you look at our operating expenses excluding stock compensation, our non-GAAP operating expense for the first quarter of 2010 were $19.1 million, up slightly from the $18.8 million we spent in the fourth quarter of 2009 and up from the $14.6 million we spent in the first quarter of 2009.

Our non-GAAP operating expenses grew significantly from the prior year, but the Q1 2009 numbers reflected the very tight, variable expense management we enforced due to the dramatic revenue decline in the first quarter of 2009 and this expense level was not a realistic operating rate. Compared to the fourth quarter of 2009, non-GAAP R&D costs were up by $691,000, as we continued to grow our R&D team and add more products to our portfolio.

Non-GAAP SG&A spending was up $397,000 from Q4 of the prior year, primarily due to increased commissions and bonuses.

Finally, litigation expense in the first quarter was $1.6 million which was down by $800,000 from the fourth quarter of 2009 due to reduced litigation activity.

Our non-GAAP operating margin was 20.5% in the first quarter of 2010, compared with 18.5% in the fourth quarter of 2009 and 8% in the first quarter of 2009.

Switching to the bottom line, on a GAAP basis, our Q1 2010 net income was $6.4 million or $0.17 per fully diluted share. On a non-GAAP basis, our Q1 '10 net income was $9.9 million or $0.26 per fully diluted share and we hit almost 19% of sales as our non-GAAP operating net profit percentage in the first quarter. This result is computed with a non-GAAP tax rate of 7.5%.

Looking at the balance sheet, cash, cash equivalents and investments were $195.1 million at the end of the first quarter of 2010, up from $185.1 million at the end of the fourth quarter of 2009 and up significantly from the $150.8 million on the books in the year-ago quarter.

In Q1, MPS had operating cash flow of about $10.4 million. We purchased capital equipment and outfitted our new R&D building in Chengdu, China for a total of about $5.4 million in the first quarter, which was offset by cash proceeds of $5.1 million from the option exercises and employee stock purchases by employees.

Accounts receivables ended the first quarter at $24.5 million, compared with $15.5 million at the end of 2009 and $13.4 million at the end of the first quarter of 2009. The increase in receivables from the prior quarter was the result of our record revenues, unusually high turns booking late in the quarter and a mix swing of relatively more shipments to customers with longer payment terms.

Days sales outstanding were 44 days in Q1 of this year as a result of the elements I just described. In Q4 of 2009, our DSOs were 30 days and in Q1 2009 they were 41 days.

Our internal inventories at the end of the first quarter were very lean at $14.6 million or about 64 days of inventory on a historical basis as a result of the record shipments in the first quarter. This compares with $19.6 million or 93 days of inventory at the end of the fourth quarter of 2009.

Inventory in our distribution channel grew slightly in dollars to match the Q1 revenue increase and total days of distributor inventory was at the lower end of our target range of 30 to 45 days for the distribution channel.

I would now like to turn to a discussion of general business conditions. MPS started the New Year in a very strong fashion, hitting a new all-time quarterly revenue record in a quarter that historically is our weakest seasonal period of the year.

Geographically in the first quarter of 2010, MPS shipped 56% of revenues to Taiwan and China and 44% to other regions, with Korea, the U.S. and Europe performing well. MPS has made good progress in the U.S. and Southeast Asia regions this quarter, growing revenues by over $3 million or 149% from the first quarter of 2009.

We have talked continuously about an avalanche of new products in the past 18 months and we are now seeing many of these go into initial volume production this year. We mentioned the very high percentage growth rate in our new current limit switch and LDO products, as we are making major strides in the storage and communications markets with these products. We expect to see our first significant ramp in notebook power management in the second half of 2010, as our new high-current DC-DC buck converter has several design wins that are planning to ramp.

Similarly, we have new designs for our white LED backlight driver solutions that will increase our share in the LCD TV and monitor markets.

The first quarter was a record unit shipment and revenue quarter for MPS, but as a result, we ran down our internal inventory and are experiencing some short-term bottlenecks in wafer capacity and product availability. We haven't addressed our back-end test capacity as we will open up a new 150,000 square foot R&D facility in Chengdu in July that will enable our existing test manufacturing floor to more than double in size.

We are working very hard to catch up with the tremendous demand that we are seeing and expect to solve the wafer capacity shortages by the third quarter of this year.

I would now like to turn to our outlook for the second quarter of 2010. Q1 2010 was a record revenue quarter for MPS in what is usually one of the lowest revenue quarters of the fiscal year for MPS. And we continue to see very good bookings activity.

We expect second quarter 2010 revenue in the range of $53 million to $57 million. For the second quarter of 2010, we expect gross margins in a similar range to the first quarter of 2010. We expect stock-based compensation expense in the range of $5.0 to $5.5 million. This forecast is higher than previous run rates, as this year MPS is issuing performance grants to its executives rather than time-based grants as we did in the past.

We believe this new practice better aligns shareholder and employee interests. However, the accounting rules for performance-based grants result in MPS having to record between 56% and 84% of the total grant value in the first year, rather than expenses the grants 25% per year under the typical four-year time-based grants.

We expect non-GAAP research and development and selling, general and administrative expense in the range of $17.5 million to $19.5 million. This estimate excludes the stock compensation estimate mentioned above. We expect litigation expense in the range of $2.0 million to $2.4 million due to the ITC hearing process.

Finally, we expect our non-GAAP tax rate to remain in the range of 5% to 10%, based on our sales and profit patterns globally.

In conclusion, we are pleased to report that MPS had an outstanding first quarter of the year, hitting record revenues and continuing to innovate in technology. We are delivering on our promise to broaden our product portfolio and grow revenues above the industry average and see many long-term growth opportunities in our future.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And your first question comes from the line of Tore Svanberg of Thomas Weisel Partners. Please proceed.

Tore Svanberg – Thomas Weisel Partners

I'm standing in for Tore. Congratulations on a great quarter. I was wondering if you could talk a little bit about what this capacity constraint may have done for your lead time. Is your lead time stretched out quite a bit or is it still within your expected range?

Rick Neely

Yes. I'm sorry. Let me introduce Steve Pratt who is our Marketing Director. He's with us on the call today. Michael and I and Steve are in the room, so Steve this is your call.

Steve Pratt

Good afternoon. So as you know, we've experienced unprecedented growth and sure, that's put a constraint on our lead times. Average lead times are 8 to 12 weeks.

Tore Svanberg – Thomas Weisel Partners

And what was it before?

Steve Pratt

Probably about half of that.

Tore Svanberg – Thomas Weisel Partners

And given the strength and the demand for your products and also just on the data that you may have. Can you sort of talk about what the outlook might be for the second half? Do you believe the strength will continue beyond the June quarter?

Michael Hsing

The new product introductions from the couple of years– we see the revenue coming in the second half of last year and then this year. In the past, we announced we have all these– a tremendous amount of new products introduced. Most of the new products, we haven't seen the revenue yet.

Tore Svanberg – Thomas Weisel Partners

That's great. Thank you very much.

Operator

And your next question comes from the line of Rick Schafer from Oppenheimer. Please proceed.

Rick Schafer – Oppenheimer

Hey guys, nice quarter. I've got a couple questions, actually. I'll start with one that just because there was some chatter out here recently about some Monolithic Power sort of share loss in TV power, specifically to AOS. I mean can you guys comment on what you're seeing in TV in terms of market share and maybe just talk about the competitive – I guess your competitive viewpoint right now?

Michael Hsing

Yes. You're right – in particularly, in the last few days I heard a lot more about AOS and our investor called me, instead of the one taking share was MPS, their solution is better. And I don't want to start with a pissing contest. If you don't want to do it, I will accommodate that. All the details in terms of all these negative comments for the MPS product, I'll let Steve respond to that.

Steve Pratt

Yes. So let me just start by making a short story on this. Last design cycle in the TV market, we did see AOS in certain markets and so we competed head-to-head and we beat them out. And in this design cycle, we're about to undertake, we're going to see the same thing and we have our next-generation product that is an improved version of what we were able to beat them out within the last design cycle. So we expect to continue to dominate in this space.

Rick Schafer – Oppenheimer

So you don't make much of the claims that they're lower – I guess you're less efficient at higher powers or any of that kind of stuff you've been hearing?

Steve Pratt

We did hear some of that and it was very interesting, because the product that we competed with a year ago is a different product that they compared us with, with their product. The product that we won is a product that we're promoting in last year's design cycle and that efficiency was actually better than the product that they compared with their part– their comparison part versus ours. The part that they compared us to isn't even recommended for new designs. It wasn't at the time and it's a five-year old part.

Rick Schafer – Oppenheimer

Okay. Okay. Let's put that to bed. The other question, maybe, I don't know for Rick or for Michael – but I mean do you guys have a feel for mix trends, sort of as we move through the year? I mean ultimately what I'm digging for is sort gross margin trends as we move through 2010. I mean it seems like pricing is more benign this year versus last year. It seems like MiniMonster, Intelli-Phase – some of your newer higher margin parts are ramping. I mean could gross margins sort of – should we think of them as kind ticking up slightly as we move through the year and getting back above 60% or should we just think of them kind of flat-line here?

Steve Pratt

Let me start with a comment on that, Rick. A year ago, we were very aggressively going after market share. So our prices were very aggressive. We're in a different market now. Our prices are much more stable this time around this year.

Michael Hsing

Particularly this year, if you reckon. Pratt, as you said, it's benign. And I don't want to speculate that the margin will go up. We won't say it until we do it, just like we always have done in the past. So just let's put it in that way.

Rick Schafer – Oppenheimer

Okay. Fair enough. And then maybe a question, just I know I'm jumping all over but on M&A– I mean you've seen a lot of tuck-in type M&A. It seems really to have accelerated in the analog space in particular in the last couple of quarters. You guys have got a decent multiple. You've got a great balance sheet. I mean what's your M&A– I guess how much does M&A figure into your growth plans and what areas would you focus on potentially?

Michael Hsing

So far, we haven't really seen any smaller companies that we can acquire that would be accretive. So far we haven't found one yet. But we are not ruling out that we acquire some smaller company for talent or for technology.

Rick Schafer – Oppenheimer

Okay. And then just a follow up, just clarification; on the capacity constraints you guys mentioned, is there any way to quantify what you might be leaving on the table here in 2Q or 3Q in terms of top line? And then that's it. Thanks a lot.

Rick Neely

Yeah, actually. Rick, that one's– as you know, our business is heavily churn dependent so it's difficult to estimate any exact numbers and we haven't spent much time doing that. Obviously, we did miss some potential business this quarter, but we still had record revenues and good guidance. So we don't stay up nights worrying how much. We work hard on fixing the capacity shortages.

Michael Hsing

It we actually started last year and we worked with our fab to increase– to resolve some bottleneck issues and also at the same time, we invested– we started a new building just for foreseeable testing for capacity issues. So this year, we're able to deliver this kind of revenue, particularly for Q1 and also for Q2 as we gave the guidance. For Q3, we don't see any constraints. If there is any, it's very minor.

Rick Schafer – Oppenheimer

Got it. Thanks guys.

Operator

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

Bob Gujavarty – Deutsche Bank

Hi. This is Bob Gujavarty for Ross. Just a couple of quick questions; first on the CapEx; you mentioned you spent about $5.4 million. What should we think of for the full year CapEx now?

Rick Neely

Yeah. I think the full year would be closer to $15 million, because we're going to spend a significant amount on this new building to finish it off and a lot more test equipment than we had spent in the last year. So $15 million to $20 million would probably be a good range for the year.

Bob Gujavarty – Deutsche Bank

Okay. Great. And just kind of feathered in across the three quarters then?

Rick Neely

Yes.

Bob Gujavarty – Deutsche Bank

Okay. The other one was on DSOs. Your explanation made a lot of sense. So would you expect it to be a little bit of a spike here in Q2 and then trend lower in the back half and is that how we can think about it?

Rick Neely

That's how it works. I mean obviously instead of taking 100 divided by 4 and do 25 per year in a normal deal. You take 50% to 80% in the first year. So obviously it trends off. By quarter, it's a little hard to predict but certainly by the end of year it will be dropping down because it's front-loaded.

Bob Gujavarty – Deutsche Bank

Okay. Fair enough. And then certainly by next year it would be lower because you took most of the expense this year.

Rick Neely

Yes. For those grants that's what happens, yes.

Bob Gujavarty – Deutsche Bank

Okay. And just curious if you had any – this is kind of a similar question to the previous analyst – but did you have any delinquencies in the quarter that you'll be able to kind of ship in 2Q?

Rick Neely

Well, as I said in my previous answer, in terms of how much revenue didn't we get or delinquencies; as a company that's churn dependent without looking at the backlog as often, the delinquencies tend to be something hard to measure because in this churns business if you don't satisfy the order, it goes somewhere else. So it's hard to measure both of those. So we don't, again, spend a lot of time on measuring that. We spend a lot of time on fixing the problem.

Bob Gujavarty – Deutsche Bank

Okay. Fair enough. Thanks.

Operator

And your next question comes from the line of Vernon Essi of Needham & Company. Please proceed.

Vernon Essi – Needham & Company

Thank you very much. Obviously just wanted to elaborate a little more on the investments your making and was curious just to think about the back-end spending that you're going through in bringing capacity online. When you say you're going to have enough capacity to meet Q3 demand, can you give us an idea of sort of the footprint size you're going to increase this or the throughput or any data that sort of makes us understand what kind of revenue range you can address over time before you have to revisit this again.

Steve Pratt

I'll kind of do the back-end and Michael who's working right now with expanding on the front end. On the back end, as I said, we put a new R&D building in place because our current test building has two floors. One floor is test and one is R&D. By moving the R&D next door to this brand new building, we'll more than double the test floor space. Plus, we spent almost $4 million this quarter on new tester that are coming online. And the testers we use can be purchased and we don't have a shortage of them. So the test capacity is already being fixed. So we don't see any back-end issue there. Michael is working on expanding our foundry capacity. He can talk about that.

Michael Hsing

Yeah. We started working on foundry capacity since the middle of last year. So we are glad we can get through this Q2. And Q3 the bottleneck will be further resolved and the capacity will be increased much more. However, you can't pin down the numbers. There are so many factors in it. But we feel very comfortable.

Steve Pratt

We're getting the wafer starts now that we believe we need. The problem is the lag of three months. If we could have those wafer starts three months ago, that would be great but we didn't. But we will catch it up.

Vernon Essi – Needham & Company

And to refresh, how many partners do you have right now that you're working with?

Michael Hsing

We are working with two, opening up the three, the third one.

Vernon Essi – Needham & Company

Okay. And then that's obviously what your working on right now is to get the third one on board?

Michael Hsing

Well the existing two are the majority of work and will come up from these two. The third one we just started and looking [ph].

Vernon Essi – Needham & Company

Okay. And then could you just anecdotally go over the end market demands and sort of where you've seen the most activity? Obviously you're in a little bit different position than most of the North American companies; having the exposure over in the Pac rim with more feet on the ground there. What did you see in the quarter that sort of surprised you on the upside? I mean there was broad demand, but is there anything that particularly was just very active relative to the rest?

Michael Hsing

Well, for the TV side, we saw a tremendous increase over Q4 of last and it will continue in the Q2 this year. But overall, every market segment increased quite a bit. Steve, if you have any comments?

Steve Pratt

No. I just want to reiterate what you already said, that TV unprecedented growth and TV extending into DVD players, blue-ray players and set-top box.

Michael Hsing

Yeah. And we obviously in the Q4 in the last year, in the last conference, I mentioned that we gained a lot share in the TV market. So it continued on and it is really to our surprise that we did so well in the market.

Vernon Essi – Needham & Company

Okay. And last question here, if you could take just a guesstimate broad brush stroke as to what the breakout of your revenue would be between consumer-driven end markets versus perhaps the IT enterprise side – if you have any idea?

Rick Neely

Yeah. Actually I looked at that, Vernon. It's actually similar to prior quarters. We generally have about 50% to 55% in consumer and Q1 was right in the middle of that range. Computing is only about 10% to 15% of our revenues now and Q1 was in the middle of that. And communications is about 30% and industrial rose up to 6% this time. So that's where we came out this quarter. About the same, what increased was industrial went up a couple of percentage points and com stayed strong at around 30%.

Vernon Essi – Needham & Company

Interesting. Okay. So it all grew kind of fairly linearly.

Rick Neely

It really did. Everything grew well and probably– the one sub-segment that we really like as we have been pointing out, but you can't see it because of the lighting control and the way it's reported is white LED revenue is about three times what they were ago on a quarterly basis. It's buried inside lighting control because you've got the decline of the traditional CCFL in there.

Vernon Essi – Needham & Company

And just for clarification. I'm sorry, one more question here. If you were to look at your LED lighting non-CCFL, if you do the back of the envelope calculation here – but what ratio of that would be backlighting versus just standard LED lighting?

Rick Neely

How much is backlighting versus say like floor lighting or something?

Steve Pratt

You mean in our business? The majority of it currently is backlighting. Yes, so we have two segments. We have the illumination which is the lighting bulb replacement type of market and then the backlighting. And the backlighting currently is dominating.

Vernon Essi – Needham & Company

Okay. Thank you very much.

Operator

And your next question comes from the line of Patrick Wang of Wedbush Securities. Please proceed.

Patrick Wang – Wedbush Securities

Great. Thanks for taking my question. A couple of questions here, first off it looks like your first quarter was a little bit back-end loaded. I'm just kind of curious – what kind of linearity are you seeing for the second quarter? And then also, I know that your business is very broad in terms of products here. But what potentially could take you to that low end or the high end of the range of the guidance?

Rick Neely

Well, I'll start off on the linearity. As we've said on the call, Patrick, Q1 typically we have, shipments are less in the third month and the first month. But this quarter, we had strong shipments all the way through the quarter. In fact, a lot of churns in the month of March which was related to why our receivables are high because had a lot of churns that go into the last month. So that was what was different.

This quarter, the shipment pattern is staying the same early on. I don't know whether it will continue – usually it's strong in the first two months and tapers off by the end, but we'll see how that goes. It's too early to say. But shipping patterns are still strong. Demand is still strong.

Relative to what would make us go above the guidance, I think this quarter demand is ahead of supply, so it's really – this is one quarter where everything we can get out, we can probably ship.

Michael Hsing

Also it's because we have so many products and they depend on the demand of each product. And it's difficult to forecast.

Patrick Wang – Wedbush Securities

Okay. No that's fair. Alright and then second question; I just wanted to talk a little bit about the pricing environment again. I know as we moved through the year, component shortages are going to be alleviated for a lot – for you guys as well as some of your competitors. And I also know that you've got a bunch of new products – MiniMonster and such ramping. But what are you expecting in terms of the pricing environment in the back half of the year?

Michael Hsing

As far as we know, at least for our side, the new products have higher margins and compensates the existing products and so at least in the first half of the year, it's stabilized and in the last couple of quarters. And for the second half of the year, as I said earlier, I don't want to speculate what that gross margin is, but for pricings and for the new products introduction, I think it will be similar as in the past.

Steve Pratt

I see it as being fairly stable in the second half of the year as well.

Patrick Wang – Wedbush Securities

Okay. So I mean your sense is that we're going to be in a more normalized type environment a couple months out?

Steve Pratt

Yes. Correct.

Michael Hsing

Yes.

Patrick Wang – Wedbush Securities

Got you. And then also one of your more exciting design wins that I picked up recently is of course your MiniMonster shipments into a couple key high-profile notebook guys. Can you talk about some of the – can you give us just a little bit more detail in terms of how that came about, when that ramp is going to be and also who you're competing against and what kind of pricing you're seeing there?

Steve Pratt

Yes. I can shed some color on that. We competed against the discrete controller set combination. We beat them out on obviously the size factor. And that was the key and we were price competitive. And the whole architecture has changed in notebooks recently, which is to our advantage. And then what was –

Michael Hsing

I think that's your question, right?

Patrick Wang – Wedbush Securities

Yes. I mean just in terms of the ramp; I mean we knew that Intel ramped up their Calpella platform in January. I'm just kind of curious about the timing of – are we looking for the Calpella refresh?

Steve Pratt

That's right. Yes, I remember you asked that part. So yes, we're starting the ramp up right now.

Patrick Wang – Wedbush Securities

Got you. Okay. Great. Thanks. And the last question is on litigation. I guess Rick, litigation is a little bit higher in the second quarter than you're guiding and than I expected. Does that mean that's also going to drop off faster in the third quarter?

Rick Neely

Yeah. We'd expect it to drop off. This should be the last quarter at that range as far as we know. There's obviously the finishing of the ITC trial. There's a potential trial in July in a Northern district on the same patent. So that's where we get the 2.2. In Q3 it should be down, in Q4 down even further. I don't know the exact magnitude of dollars, but that's how you should look at it.

Patrick Wang – Wedbush Securities

Okay. Great. Congrats, guys. Thanks.

Operator

And your next question comes from the line of Steve Smigie of Raymond James. Please proceed.

Andrew – Raymond James

Hi. This is Andrew [ph] calling in for Steve. Rick, did you guys give a figure for new products for the quarter-released?

Rick Neely

No. This quarter we didn't. Steve might have one off the top of his head.

Steve Pratt

A number of new products? We released 15 products this quarter.

Andrew – Raymond James

And that's up from 21 last quarter, was it?

Steve Pratt

Up. It's actually down quarter-on-quarter.

Andrew – Raymond James

Oh. Okay.

Steve Pratt

Yes. But for the year it will be up. We'll end the year higher than last year.

Andrew – Raymond James

Right. Okay. Can you provide an update on the MeshConnect and Intelli-Phase?

Michael Hsing

We have a lot of designs and we are really pleased with the results and we expect the revenues in Q3 and in Q4.

Steve Pratt

First Intelli-Phase product in Q3 –

Michael Hsing

Yes. We have revenue now and we'll see some significant increase in the second half.

Steve Pratt

And then regarding MeshConnect, MeshConnect is not just an Intelli-Phase technology. We are using MeshConnect to cross many different DC to DC converter products and that's continuing to proliferate into other products and help us in performance and cost.

Rick Neely

But in terms of revenue, those are still in the design stage, not in the revenue ramping stage. The Intelli-Phase will be the first one out with that technology.

Andrew – Raymond James

Okay. Great. And then finally just any thoughts on a share count next quarter?

Rick Neely

Share count. The forecast for that– I can tell you about what we're thinking – see right now I'd say about 38 to 38.2.

Andrew – Raymond James

Okay. Great. Thanks a lot. Congratulations.

Operator

And your next question comes from the line of Gus Richard of Piper Jaffray. Please proceed.

Gus Richard – Piper Jaffray

Yes. Thanks for taking my question. Hey Michael, on the backlight opportunity for LCD TV, do you have any thought– have people settled on architectures for models for the fourth quarter and sort of depending on which way people go and there are a lot of variations– how do you guys feel you're positioned?

Michael Hsing

The question you asked – we still don't know. And there's a lot of speculations on which architecture to go and our customers have multiple solutions and we offer multiple solutions. And until revenue hits, we will let you know.

Steve Pratt

It hasn't stabilized. It's disruptive, so we have to have multiple options and we do.

Gus Richard – Piper Jaffray

And when do you think that those decisions get made? Is it June timeframe?

Michael Hsing

I don't think that they will determine on one solution. I think that they will introduce all of them.

Steve Pratt

Yes. One architecture is not going to dominate. They're going to go into the market with different architectures, depending upon the size and the type of TV and the market. So it's going to be different architectures across the board for the year.

Gus Richard – Piper Jaffray

Okay. And then just– I know this is an odd question, just what is it that the customer cares about? Is it gamma and particularly in terms of the LED drivers, is it efficiency? Kind of help me out what's driving their thought process in trying to figure out where they're going.

Michael Hsing

Well, actually it's different models that require different things and we are kind of puzzled as to which direction. One is for efficiency the other is for better illumination and the one is doing the edge letting [ph] and it's obviously for size. And they have all kinds of requirements and we offered some very good solutions that we thought were best for efficiencies but it doesn't fit for all the models. Some customers – even within a customer they like our solution but other models they don't.

Steve Pratt

I mean there are subtle features that they are really architecting around is the whole cost of getting from the AC to the DC point to the wide LED, so that's a driver. And that's just based around the most cost-efficient and energy-efficient solution. And the other is dimming control. Those are a couple of key features.

Gus Richard – Piper Jaffray

Got it. Okay and then just to be clear on the MiniMonster design-ins in the notebooks. That was for utility regulators – the chipset memory and graphics, is that correct?

Michael Hsing

That's right.

Steve Pratt

Yes.

Gus Richard – Piper Jaffray

Okay. And then let's see – and then, sort of at the end of the quarter you guys had some acceleration. Was that driven by PC, TV or something else?

Rick Neely

What do you mean by acceleration, Gus?

Gus Richard – Piper Jaffray

It sounded like you had a strong back end of the quarter; right? Your DSOs were up, etc. So business got stronger at the end. Was it just across the board?

Rick Neely

No particular market. I mean demand was higher than supply so it was across the board.

Gus Richard – Piper Jaffray

Okay. And your primary constraints now– just last question and I'll leave you alone– is it testers or is it wafers?

Steve Pratt

Wafers.

Gus Richard – Piper Jaffray

Got it.

Michael Hsing

Wafers and some testers and so we're going to resolve this in this quarter.

Gus Richard – Piper Jaffray

Okay. Got it. I'll let the next person – nice quarter, guys. Thanks.

Operator

And your next question comes from the gentlemen from Thomas Weisel Partners standing in for Tore Svanberg. Please proceed.

Tore Svanberg – Thomas Weisel Partners

Yes. This is actually Tore Svanberg. Great quarter, I had a few follow ups. First of all, could you talk a little bit about your backlog and your churns in the upcoming June quarter? I assume since lead times have stretched out a little bit that getting as many churns has become a little bit more challenging. So just help me understand how that's going to play out please.

Rick Neely

Hi, Tore. I'm glad you're standing in for yourself this time. That's good. As you know, typically we don't talk about backlog and the reason is we're using roughly 50/50 churns and backlog, so there's not a lot of information. This will be another quarter of a reason not to do it, because we have very strong demand, people want to place a lot of orders and whether – it looks good, but we really have no problem with the demand this quarter. It looks very good, so that's what I would say on the bookings. Again, it's more of a supply challenge this quarter than a demand challenge. That's how I would characterize it.

Tore Svanberg – Thomas Weisel Partners

Yes. And in fact that was actually my point; I mean since your backlog is so strong, I was just wondering – and also with your lead times a little bit longer – can you actually get 50% churns in a quarter like this or that now going to be quite a bit lower?

Rick Neely

No. We wouldn't get – this would be clearly not.

Tore Svanberg – Thomas Weisel Partners

Okay. Okay very good. And you mentioned that the distribution inventory days were at the low end of the range of 30 to 45. How long do you expect that to continue? Are the distributors trying to get a little bit higher? Help me understand how that's going to play out for the next couple of quarters.

Rick Neely

In the near-term, as you know in the last couple of quarters before that, we actually were below 30 and we wanted the distributors to actually increase to get to what we considered the reasonable amount that they should carry. Now that's about where they are in low 30s and they probably won't change in the near-term until we have more product available. It's just everything they get in goes right out, so there won't be much change in that I would expect in the near-term.

Tore Svanberg – Thomas Weisel Partners

Great. And last question; obviously you're going start to ramp some more capacity here. Once you do those types of ramps, what type of revenue run rate will you be able to support at that point?

Michael Hsing

It's difficult to say. In the past conference call, I mentioned it somewhere 55 to 60 is our limit. And obviously in the second quarter this year we're within the limits. But last year, however, we worked with the fab capacities and also the test capacity and we're going to do a whole lot more. Until we deliver – until we are in order of these issues, I can't really tell where the bottlenecks are in overall of capacity.

Tore Svanberg – Thomas Weisel Partners

Very good. Great quarter. Thank you.

Operator

And your next question comes from the line of Jason Schmidt of Craig-Hallum. Please proceed.

Jason Schmidt – Craig-Hallum

Hey guys. Great quarter. Wondering if with the strong first half you're seeing if you expect normal seasonality in Q3 and Q4?

Rick Neely

That's a question everybody has been asking us and I have to say – can't say, Michael?

Michael Hsing

Yeah. If it's a normal seasonality that would be increase of like 27% and 27% is out of $50, some million. It's a big number and I don't know if we can supply that. We probably can, but it will be difficult. But I'm not speculating what the market demand is.

Rick Neely

Q3, we don't really have a good view of Q3 at this point in time. So we'll put in the capacity to do everything we can and whether it's – generally this year I could say Jason that this year has not– the last three quarters have. None of the historical averages have applied. We did a plus 8% sequentially in Q1. We normally were down 10% or 15%. So it's hard to gauge what the Q3 will be like.

Jason Schmidt – Craig-Hallum

All right. Fair enough. And lastly, are you guys fearful that you're seeing any double ordering right now?

Steve Pratt

Actually, we spend a lot of time looking at double orders. We're constantly scrubbing the backlog and reviewing our distributors' inventories. So we think we're doing a pretty good job managing that.

Jason Schmidt – Craig-Hallum

Okay. Perfect. Thanks guys.

Operator

And gentlemen, at this time there are no more questions in the Q&A queue. I would like to now turn the call back over to Mr. Rick Neely for any closing remarks.

Rick Neely

Thank you, everyone for attending the call and we look forward to talking with you in three months. Take care.

Operator

Ladies and gentlemen, thank you for attending today's conference call. Your conference call is now ended. And you may now disconnect your lines. Have a nice day.

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