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Executives

Rick Neely – CFO

Michael Hsing – CEO and Founder of MPS

Steve Pratt – Marketing Director

Analysts

Steve Smigie – Raymond James

Vernon Essi – Needham & Company

Ross Seymore – Deutsche Bank

Patrick Wang – Wedbush Securities

Evan Wang – Stifel Nicolaus

Shawn Simmons – Oppenheimer & Co.

Doug Freedman – Gleacher & Company

Gus Richard – Piper Jaffray

Mike McConnell – Pacific Crest Securities

Tristan Gerra – Robert W. Baird

Monolithic Power Systems (MPWR) Q2 2010 Earnings Call July 28, 2010 6:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Monolithic Power Systems, Incorporated earnings conference call. My name is Chanel and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Rick Neely, CFO. Please proceed.

Rick Neely

Good afternoon and welcome to the second 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 third quarter of 2010, projected third quarter 2010 revenues, gross margins and net margins, our expectations of the third quarter litigation, stock-based compensation and non-GAAP operating expenses; our target operating range for gross margins, net margins, and inventory; our expectations for revenue and net income growth beyond Q3 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 and our expectations for future cost reductions 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, assumption, 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 April 29th, 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 effects. We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the third 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’d 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 second quarter fiscal year 2010 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2010. We will then open up the call to your questions.

Let's start with the business highlights. In the second quarter, MPS experienced the best quarter in its history, growing revenue at 35% from the second quarter of the prior year to hit record net sales of $55.7 million. This figure is not only a new quarterly record for MPS, but it is a sequential increase of 11% from the prior quarter, when MPS set its previous record quarterly revenue total. This outstanding revenue performance also leads to our most profitable quarter in history with non-GAAP net income of $11.7 million.

MPS continues to see strong demand in all of its major end markets and our second quarter revenues were limited by product’s availability, not customer orders. This quarter, MPS saw substantial growth in our DC to DC market. Our fastest growing product family in this segment continues to be our MiniMonster products.

MiniMonster sales grew over 255% from the second quarter of 2009 to over $9 million for the second quarter of 2010. MPS continues to rollout new MiniMonster solutions to support design activity for products such as the 2011 model year flat panel TV monitor and Blu-ray players.

In addition, we expanded our served available markets with the industry’s highest current density, highest input voltage, integrated DC to DC buck converters for computing and industrial application. We’ve also added to our industrial, telecom and networking portfolios for new introduction a 55-volt high-current DC to DC boost regulator that leverages our high-voltage and high-current process technology strength.

In the lighting market, we introduced our first offline high brightness while LED driver for the LCD TD market and a 12 plus channel white LED drivers with expandability for large LCD panels.

The revenue growth opportunities that MPS is finding with our new products are driving an improved longer term outlook for our financial model. We now feel confident that for the third quarter of 2010, we can target non-GAAP net profit in the range of 22% to 27% sales as our new models up from our prior target of 20% to 25% of sales.

In the manufacturing area, gross margin was 58.2% which was sequentially flat from the first quarter of 2010 and down slightly from the 59.1% gross margin recorded in the second quarter of 2009. Our internal days of inventory fell further to 57 days as very strong end demand kept us well below our target inventory range. Inventory dollars at our distributors grew due to shipment timing issue and remained at the lower end of our target range of 30 to 45 days of stock.

Bottom line, non-GAAP net income was $11.7 million or $0.31 per fully diluted share. This resulted in non-GAAP net income of 21% of revenue. Our GAAP net income for the second quarter was $6.4 million or $0.17 per fully diluted share.

Finally, today we announced a stock repurchase plan of up to $50 million to be executed between August 2010 and December 31, 2011 which allows us to increase value of the shareholders from the strong cash flow that MPS is generating.

Let’s look at the financials in more detail, starting with the profit and loss statement on the revenue line. Second quarter 2010 net revenue of $55.7 million increased 11% sequentially from the first quarter of 2010 and were up 35% from the $41.2 million recorded in the second quarter of 2009.

Breaking down the revenue by product type; first quarter DC to DC product sales were $45.6 million, up 13% or $5.3 million from the first quarter of 2010, and up 53% from the $29.7 million recorded in the year-ago quarter. This growth was led by our MiniMonster and LDO product family.

The MiniMonster line grew more than 255% year-over-year and also increased sequential sales from the first quarter of 2010 by 58%. Our new LDO products did very well in the second quarter, growing 169% from a year-ago and 121% from the prior quarter.

The largest end markets for MPS in the DC to DC product family continued to be flat-panel TVs, general consumer electronics products, set-top boxes, routers and wireless LAN cards.

Lighting control revenues for the second quarter were $7.5 million, which was about flat to the $7.4 million we did in the first quarter of 2010, and a small increase of 2% from the same quarter a year-ago.

As we discussed in the past, there has been a substantial revenue shift within the lighting control group as the preferred technical solution moves from CCFL backlight to while LED backlighting.

Our new white LED driver products, we grew revenues about 128% year-over-year to about $4 million per quarter in the second quarter of 2010. At the same time, our traditional CCFL inverters and CCFL controllers shrink 47% year-over-year. This year-over-year decline in traditional CCFL is likely to continue as it reflects the continuing shift in notebooks and other backlighting solutions from CCFL to white LED solutions.

Audio revenues came in at $2.6 million, up slightly from the $2.5 million MPS did in the prior quarter, but 36% from the $4.1 million recorded in the second quarter of 2009 as we continued to manage our participation in this segment based on market conditions.

Let’s move down at the gross margin line, as our second quarter gross margin was 58.2% flat to the 58.3% we did in the prior quarter of 2010, and down slightly from the 59.1% in the second quarter of 2009. This result was in line with our expectations and guidance for the quarter. We have been experiencing very tight labor capacity availability the past two quarters and we expect to catch up to end demand in the fourth quarter of 2010.

Now, this is our reported expenses and operating margin. On a GAAP basis, our operating expenses were $25.6 million in the second quarter. This includes $23.4 million in R&D and SG&A expense, which includes $5.4 million for stock and compensation expense and litigation expense of $2.2 million.

Compared with the first quarter of 2010, GAAP operating expenses were up by $2.6 million. The expense mix change is as follows. R&D increased by $745,000, SG&A increased by $1.2 million, litigation increased by $651,000. As a result, our GAAP operating profit of 12% was slightly down in the second quarter of 2010, compared to our GAAP operating expense of 13% in the first quarter of 2010.

Compared with the second quarter of 2009, our GAAP operating expenses were up by $4.3 million with R&D expense up by $2.1 million, SG&A increasing by $2.3 million and litigation expense was flat to the second quarter of 2009.

On a non-GAAP basis, our operating expenses excluding stocks and compensation, for the second quarter of 2010 were $20.2 million, up slightly from the $19.1 million we spent in the first quarter of 2010 and up from the $17.5 million we spent in the second quarter of 2009.

Looking at the detail of second quarter non-GAAP spending, although the quarter-over-quarter increase was due to the litigation expense as we wrapped up the ITC case that covered our orders CCFL parts. Our combined R&D and SG&A expenses were flat from the first quarter of 2010. Compared to the second quarter of 2009, non-GAAP R&D costs were up by $1.7 million as we continued to grow our new product offerings and R&D teams.

Non-GAAP SG&A spending was up $1 million from Q2 of the prior year, primarily due to increased headcount and commission. Finally, litigation expense in the second quarter was $2.2 million which was flat compared to second quarter of 2009.

Our non-GAAP operating margin was 22.2% in the second quarter of 2010, compared with 20.5% in the prior quarter of 2010 and 15.8% in the second quarter of 2009, a very nice increase.

Switching to the bottom line, on a GAAP basis, our Q2 2010 net income was $6.4 million or $0.17 per fully diluted share. On a non-GAAP basis, our Q2 2010 net income was $11.7 million or $0.31 per fully diluted share and we achieved a non-GAAP net profit percentage of 21% of sales in the second quarter. This result is computed with a non-GAAP tax rate of 7.5%.

Let’s look at some of the major changes to the balance sheet. Cash, cash equivalents and investments were $209.3 million at the end of the second quarter of 2010, up from $195.1 million at the end of the first quarter of 2010 and up substantially from the $163.8 million we had on the book in the year-ago quarter.

In Q2, MPS had operating cash flow of about $14.1 million. We purchased capital equipment and outfitted our new R&D building in Chengdu, China for a total of about $7.2 million in the second quarter, which was offset by cash proceeds of $7.7 million from option exercises by employees.

Accounts receivables ended the second quarter at $30.3 million, compared with $24.5 million at the end of the first quarter of 2010 and $12.4 million at the end of the second quarter of 2009. The increase in receivables from the prior quarter were a result of our second quarter in a row of record revenues, higher shipments than normal for the third month of the quarter and a mix swing of relatively more shipments to customers with longer payment terms.

Days sales outstanding were 50 days in Q2 2010 as a result of the elements I just described. In Q1 of 2010, our DSOs were 44 days and in Q2 2009 they were 28 days.

Our internal inventories at the end of the second quarter were extremely low at $14.5 million or about 57 days of inventory on a historical basis as a result of the continuation of our record quarterly shipments in the second quarter. This compares with $14.6 million or 63 days of inventory at the end of the first quarter of 2010.

Inventory in our distribution channels grew in dollars to match the Q2 revenue increase, but total days of distributor inventory were at the lower end of our target range of 30 to 45 days for the distribution channel, flat with the past two quarters.

I would now like to turn to a discussion of general business conditions. MPS has had an extremely strong 2010, hitting all-time quarterly revenue records two quarters in a row.

Geographically in the second quarter of 2010, MPS shipped 61% of revenues to Taiwan and China and 39% to other regions, with Korea performing particularly well in Q2. By segment, MPS had excellent growth in the industrial area as our power management products are penetrating the growing smart-meter market in automotive display and increased sales in the communication segment, primarily driven by new router and set-top box business.

Last quarter, we talked about avalanche of new products in the past 18 months and we are now seeing the revenue results. In Q2, almost half of our revenue came from products introduced since the first quarter of 2008, a very significant achievement a good leading indicator of more growth to come.

In the second half of 2010, we expect significant new revenues in white LED drivers for monitors and power devices for panel manufacturers and high-power, high-voltage DC to DC converters including our new Intelli-Phase line for high-end graphics cards used in notebook computers.

Existing markets are running on all cylinders as MPS continues to grow. We estimate that our served available market has increased by $800 million to $1 billion with this new product push and believe this will set the stage for continued strong revenue growth in the future.

I would now like to turn to our outlook for the third quarter of 2010. Q2 2010 was another record revenue quarter for MPS and we continue to see very healthy bookings. Our lead times remain in the range of about 12 weeks to 16 weeks.

Our second quarter revenue was constrained by product supply not customer demand. We made efforts to increase our production capacity aggressively at the beginning of the year and we are paying higher labor prices to a secure and more production volume. However, Q3 revenue will continue to be limited by product supply particularly for the new products released in the last 18 months.

We project third quarter 2010 revenues in the range of $66 million to $70 million with gross margin in the 54% to 56% range. We are running the business to maximize the bottom line, not solely focusing on maximizing gross margin. This year we saw great opportunity to grow our revenues rapidly and feel we are about at the optimum point for trading off revenue and gross margin for the rest of the year.

In the future, we will react to market opportunities which again will determine our gross margins go up or down. Longer term, we would like to operate in the 50% to 55% gross margin range. Going forward, our focus will be on revenue and non-GAAP net profit growth.

For the third quarter 2010, we expect non-GAAP net profit percentage to be at the mid to upper end of our new revised net margin target model of 225 to 27% of sales. We expect stock-based compensation expense in the range of $4.7 million to $5.2 million. This forecast remains higher than historical averages as MPS issued performance grants at beginning of this year towards executive rather than time based grants we had used in the past.

The accounting rules for the performance based grants result in MPS having to record more of the total expense in the first year than under the typical four-year time based grant.

We expect non-GAAP research and development and selling, general and administrative expense to be about flat from Q2 2010 in the range of $18 million to $19 million. This estimate excludes the stock compensation estimate mentioned above. We expect litigation expense to decline to $500,000 to $700,000 due to the completion of our outstanding CCFL litigation. 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 have made continuous investments in R&D and new product innovation in the past two years. It is clear that the new products have translated into significant growth in revenue. We’re delivering a broader product portfolio and it’s dramatically growing revenues and the bottom line. We expect to continue to execute and grow our market share and profits with this approach.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Steve Smigie of Raymond James.

Steve Smigie – Raymond James

Great, thanks very much. Congratulations on the great solid revenue growth here. So, I guess, the first question is on the gross margin. So, is the majority of the sequential drop from the Q2 to Q3, is that based on paying higher to get the extra capacity or there are other factors in there?

Rick Neely

Yes Steve, that’s it. Off the 3 percentage point drop, most of that is just higher wafer prices that we’ll be paying in Q3. We did get the capacity. You can see that in our revenue. But we had to pay higher wafer prices.

Michael Hsing

Okay, go ahead.

Steve Smigie – Raymond James

I was going to ask – so it sounded like your new gross margin range is 50% to 55%. So I guess is that a GAAP 50% to 55%? And is that – I mean is that something that will happen near term? In the past, you sort of said you do have lower stuff and you kept performing better than that. So, I guess, I’m wondering if three quarters out, you get the capacity back or snap back up and then the 50% to 55% is maybe two years out before you really get there.

Michael Hsing

That’s exactly right. And we are – this is a long-term model, an 18 months to 24 months out. In the near – in the near quarters, we expect to remain the same or given the wafer price is getting better and so now we will again improve the gross margin, but I am not forecasting it. And usually when the wafer price is getting – wafer price is getting better, also the market gets more competitive.

Rick Neely

Also, Steve, there’s a very little difference in our GAAP and non-GAAP gross margin, so I really don’t talk about it. It’s the same numbers primarily.

Steve Smigie – Raymond James

Okay, great. If I could just sneak one more in. You guys are obviously benefiting from significant introduction of new products. I think you went from 2007 to 2008, 89 to 151 products and then went from 151 to 230 in 2009. What’s the pace for 2010? Does that 230 jump to 350 or something like that or is the numbers getting big enough that you don’t quite see that significant jumps?

Steve Pratt

Hi Steve, this is Steve Pratt, Marketing Director.

Steve Smigie – Raymond James

Hi Steve.

Steve Pratt

Our plan for 2010 for the year is going to be similar to what we did in 2009. 2009 was a huge step, more than 60%, 70% more new products in ’09 and ’08. In 2010, we are going to be shifting, our products are going to be doing – while the same number of products introduced – in this similar number of products introduced in ’010, in ’09. But when you look at the complexity of the products in 2010, there will be more complicated DC to DC buck converters as opposed to 2009, where we introduced quite a few low dropout linear regulators and current limit switches.

Steve Smigie – Raymond James

Okay, great. Thanks a lot guys.

Operator

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

Vernon Essi – Needham & Company

Thank you very much. I’m wondering if you could discuss a little bit about the lighting market. And, you had said, of course, obviously we’ve got the CCFL legacy business working against you there. Can you give us an understanding of the breakout on the LED versus the CCFL for the quarter?

Rick Neely

Hi Vernon, this is Rick. Yes, basically, this is the crossover quarter and that of our majority of our revenue in lighting control is now white LED. So we did about $4 million of the $7.5 million was white LED. CCFL – the traditional CCFL inverter is down about $1 million and the rest of it is the CCFL controllers. And, Steve, you can comment on the –

Steve Pratt

Yes, so as far as the market, we’re seeing very nice growth ramping in the second half of this year in the white LED backlighting space. And the market drivers there are in the panel manufacturers for notebook computers and for monitors and then a little bit longer term would be the TV space.

Vernon Essi – Needham & Company

Okay. And that that leads me to my other question. Any anecdotal signs out there on the notebook market; there seems to some supply interruptions and what have you. Any thoughts as to how that’s shaping out into the summer months here?

Steve Pratt

It’s too – it’s really early to tell for us. We’re seeing continued backlog buildup and we’re still seeing steady revenue through the second half of the year. There maybe some slight push-outs for other – as the other products catch up. But, overall – and remember that 2010, the second half of this year, we’re still a very – relatively small percentage of the notebook market. So we may not see it as significantly as some of the other players.

Vernon Essi – Needham & Company

No, I understand. I mean your revenue growth trajectory is very robust in this sequential transition, so it’s – you’re sort of an outlier sorts, and obviously I know you’ve got new products coming out and that is my last question, which is on Intelli-Phase, any update there? It sounds like you’ve got some interesting wins possibly there that are coming into the fold in the back half.

Steve Pratt

Yes, Vernon, Intelli-Phase is a long-term selling process. This is a big product going to the CPU core and a new phase for us. And Intelli-Phase is the muscles behind the high-current multi-phase CPU core and power supply. So our emphasis hasn’t changed. It’s – we’re focusing on servers and that’s a longer term stuff.

Michael Hsing

But to answer your question, in the short term, we do see the volumes are ramping up now in a different application. In graphics card as I said earlier and those product lifecycles are much shorter and we expect to ramp up now.

Vernon Essi – Needham & Company

Okay, so you’re primarily – just to be clear, you’re primarily with Intelli-Phase getting traction in graphics more than anywhere else right now?

Steve Pratt

In the short term, yes.

Michael Hsing

Yes.

Vernon Essi – Needham & Company

Okay.

Michael Hsing

And, also that, in some of the notebook in the near term.

Vernon Essi – Needham & Company

Okay.

Michael Hsing

In the midterm.

Vernon Essi – Needham & Company

Is midterm still this year or we’re talking 2011 year obviously?

Steve Pratt

No, 2011.

Vernon Essi – Needham & Company

Okay, very good. All right, thanks a lot.

Operator

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

Ross Seymore – Deutsche Bank

Hi guys, just want to dive into the gross margin side a little bit. Walk us through the availability side of things as you go forward on the wafer side. Is that from bringing on new foundry partners or is your capacity limited to the CapEx increases that would happen at your existing partners?

Rick Neely

Hi Ross, I’ll start off. I mean, basically, we’ve just basically bought from our current partners, so we’ve gotten more capacity from our current partners. And, of course, they’ve taken advantage of the shortages to increase their prices, what they have done with all the other foundry customers, so we’re no different than that. But Michael can tell you about our efforts to expand into other partners.

Michael Hsing

Yes, we are expanding – in a way we are engaging with other foundries to further reduce and minimize all the liabilities. And we take a very conservative approach and which is paying a higher wafer price to secure this year volume and that Q3 revenue is a reflect of that. And we’re expecting catching everything up and catch up most of our customer demand in the Q4.

Ross Seymore – Deutsche Bank

So, I guess, that leads to my next question. So, did you just say you’re kind of – you are going to be caught up in Q3, so Q4 would be kind of normal seasonality or is it going to take you through Q4 to catch up given the extra supply you purchased?

Rick Neely

Yes Ross, we’ve said in the script, we will be still product limited in Q3. We expect to catch up in Q4.

Ross Seymore – Deutsche Bank

So, all is being equal is being up much more than normal seasonal – to the extent normal is even an accurate term these days – being bigger than the normal third quarter, it doesn’t in anyway rob from the fourth quarter I guess is the way to read that?

Michael Hsing

Well, actually you can think as a normal seasonality. Now, we have a – and every quarter is big, every quarter is a record. And I remember in the past – in the third quarter, we jumped some 20% some and we did it again and [inaudible] demand limited and now at this time not the demand, it may even much bigger. We couldn’t deliver those – fulfill our customers’ requirements.

Ross Seymore – Deutsche Bank

So, I guess, the follow-up linking it back to my original gross margin question is, if we’re back to some resemblance of normal seasonality for the fourth and first quarters, those are usually down quarters. I would assume that that allows a little more levy on the demands from your foundries. Is that where you would expect pricing and/or kind of your scale to allow the gross margin to improve as your cost come down there?

Michael Hsing

At this point, we focus our wafer capacity and that’s our main focus to fulfill our customer’s demand. In Q4, we don’t see that clear now. And, although – and the demand is still quite strong for MPS product, but we can nail down the quarter yet.

Ross Seymore – Deutsche Bank

But, I guess, conceptually, if you were down in those quarters and normal seasonal, that would alleviate some of the capacity concerns?

Rick Neely

So, Ross, I will jump in here. I mean, traditionally again, as you said, nothing’s been normal recently. Typically Q3 is our biggest quarter and Q4 is even down. So we would – that’s the normal historical pattern that hasn’t always held reasonably. And the issue I think the other question, the reason Michael and I can’t really answer it is, we’re in a competitive business that if demand goes down, wafer prices might go down or that might not, it’s just it’s unclear yet where that’s going to shakeout. So it’s not up to us of whether that wafer prices go down, you really have to look at the general demand.

Ross Seymore – Deutsche Bank

Okay, thank you.

Operator

Your next question comes from the line of Patrick Wang of Wedbush Securities.

Patrick Wang – Wedbush Securities

Great, thanks, and congrats on the huge revenue guys. I guess, first question I just want to ask you about – about that guidance, when you think about the growth here in the third quarter, can you talk about some of the, I guess, bigger pieces are taking you guys up for such robust growth?

Steve Pratt

Yes, it can. This is Steve again. Patrick, some of the growth drivers, obviously TVs, Blu-ray players are doing quite well and that’s been a consistent theme for MPS, so more of the same. Now looking beyond that, we’re very excited about industrial, automotive. In that segment, we will be closing out 2010 – the revenue contributions from that product family is going to be more than 10%, so we’re really excited about that product family.

In other areas, we have communications, for example, set-top box. More products are going from an LDO to a DC to DC converter to comply to energy starts compliance and European Code of Conduct, so those are really good opportunities for MPS. And another segment, enterprise storage, we’re seeing very good growth in DC to DC power and also load protection solutions in enterprise storage.

And, the last, notebook computing, and in the short term, we’ll see a good second half in that space for DC to DC power. And, in a little bit longer term, moving into servers and gaming opportunities for our DC to DC power solutions.

Patrick Wang – Wedbush Securities

Okay, that’s helpful. And, I guess, another way to look at it was, geographically Korea has become a more and more important part of your business here. Are you guys continuing to see an uptick here in the third quarter? Is there any sort of mix geographically that any trends there that we should keep an eye on?

Steve Pratt

No, I think it’s – Patrick, more the same.

Patrick Wang – Wedbush Securities

Okay, all right, and I appreciate that. And then for my follow-up, I want to ask you a little bit more about gross margins. I don’t want – just want to make sure I understood it correctly. You guys got into a gross margin of 55% here in the quarter. Rick, you talked about a 50% to 55% longer term target. In the midterm, it sounds like when supplies get better, it almost sounds like your margins could improve again for – before coming down again. Did I get that right?

Rick Neely

Yes, what we’re trying to do Patrick is, we think for the rest of this year we’ll be about the range we are right now, 54% to 56%. We wanted to – we’ve always said, we want to communicate where our business opportunities are and where the direction is. And so, we think if you look out in the next 18 months to 24 months, it’s more or likely to be below 55% and above 55%, so we wanted to communicate that.

Michael Hsing

I wanted – whatever it takes, the bottom line is, I want to increase the EPS and whatever it takes.

Patrick Wang – Wedbush Securities

No, I think – I think that makes a lot of sense. And, I guess, just lastly, just on margins here. Again, I completely understand the reasoning behind this. And when we think about the previous target range, 58% to 63%, we think about the new longer term range of 50% to 55%. The delta there, how much of that you think is coming from contributions from higher costs, wafer costs, and how much of that is, you guys are extending your footprint by going to more cost competitive solutions for accelerating top line growth. I’m just kind of –

Michael Hsing

No, in this quarter and into the coming quarters, and the last quarters, and most of – all the gross margin impact is as Rick said it is mostly it’s from the higher wafer cost.

Patrick Wang – Wedbush Securities

Right, yes. No, I understand. But, when we talk about four to six quarters out, when you guys could be in that 50% to 55% range, I’m assuming that the wafer supplies starts to improve and you get that third foundry partner on line. At that point, it’s more about attacking the other sockets on the board, increasing your TAM and growing the top line, is that – is that what’s moving it?

Steve Pratt

Yes.

Patrick Wang – Wedbush Securities

Okay, thank you.

Steve Pratt

That’s exactly – our point is we’re expanding our footprint and so that’s our strategy, that’s going to get us the growth, and it will increase the top line and our net profit.

Patrick Wang – Wedbush Securities

Got you, okay. That makes a lot of sense. Congrats and good luck, guys.

Michael Hsing

Okay, thank you.

Operator

Your next question comes from the line of Steve Smigie of Raymond James.

Steve Smigie – Raymond James

Great, thanks a lot for allowing the follow-ups here. So, I guess, in terms of thinking about revenue growth and gross margin going forward, it sounds like it’s something like a product like an Intelli-Phase or probably other products, you’re starting to get more into stuff like notebooks where – and ultimately I understand what you’re saying about server, but it seems like if you’re getting it more like some sort of computing applications like a notebook that maybe that’s part of the reason why you would be getting lower gross margin, but also you would have higher volumes.

And so, part of the question is it is part of the reason that you’re going down that you’re getting into applications where you’re going to have lower margin. And the second part of the question is, are you prepared to manufacturing wise handle really high – much higher volume orders, since a lot of that orders probably have now or probably not the multi-million dollar unit orders, so I’m just curious if you can talk through that.

Michael Hsing

I think that all of the – but first of all it doesn’t – the way our companies are going down, we’re moving the long-term models to be – the gross margin to be lower and that’s because I see that – if we do that then we will significant increase the EPS, that’s the purpose. And, but it doesn’t mean we don’t – our products is not a competitive anymore, it is a huge market segment.

As Steve just said, in this year, we in the industrial applications and that we can end – we can exit the year as a – to be more than 10% of our revenue. Remember, we just started this segment about three – about three years ago, that’s a phenomenal growth and that these are all high margin business. But, I believe, we can grow the company much faster by lowering the gross margins and that we can be in a more – attack other consumer market.

Rick Neely

Yes, I think that’s – just to add in Steve, if you go back to say a couple of years ago, we were doing 2% or 3% of our revenue in the industrial segment, we’re about 7% or 8% in this quarter. So we’ve significant change already. And, as everybody knows, you can get high volume in the consumer segment and the margins aren’t as high, but they’re very good volume and they definitely add to our bottom line, because I wanted to emphasize that we increased our net margin target model by two points, from 22% to 27%, so we think we can actually do better by going after this volume.

Steve Pratt

And you also asked about the question, are we ready to handle that kind of volume? We absolutely are. And if you just look at the TV space, when you think about having multiple sockets per television or per panel, we’re already running at very high volumes, so we’re well prepared for that growth and moving – expanding into notebooks.

Steve Smigie – Raymond James

Okay. And the next question is, if you look at your SG&A as a percentage of revenue, I think you’re at a record there by quite a bit. And, you’ve introduced so many new products and will introduce more. Does it make sense at this point to meaningfully build up the sales force, maybe spend a little bit money? I mean, you’re getting great margins already. Would that also help drive higher growth?

Michael Hsing

Absolutely. We are talking about our sales force, our marketing teams about more than a couple of quarters. And we absolutely are creating a lot more bigger, stronger teams. And we just recently, we reassembled almost the entire regions. And it’s – we’re about to complete this transition.

Steve Smigie – Raymond James

Okay. And, the last question was just, could you give an update on the general illumination market and not so much the way LED drivers for the monitors, but I know there’s a lot of different end markets there and sort of how do you go to market there, given there that many, that many segments that you’re addressing?

Steve Pratt

Yes, okay. Yes, we can – the lighting illumination market, it’s – it’s a very large potential market, its ramp up is slow, its adoption to white LED is from incandescent or fluorescent bulbs is relatively slow, so it’s – we’re preparing ourselves in the market with new products.

The products we have now serve a very small segment in the lower wattage the MR-16 type bulb replacement, some of the automotive interior decorative lighting. And then, in the long-term, we’ll be moving it to some many offline solutions in higher wattage solutions. So it’s – it’s a moderate size contributor for 2010 and I think much more in 2011. I describe the growth as a moderate.

Michael Hsing

Let me clarify this, can we. We have – we introduced a couple of product that we have like a five, six products in about to release now. And then these are addressing – addresses the halogen replacement, fluorescent tube replacement, and also tree illumination. But the problem is, on the current market, it is limited by the LED supplies. The remote order LED is in shortage now.

Steve Pratt

And the street lighting, Michael pointed out, mentioned street lighting. We’ve some good traction there, where the countries are getting subsidized. Some government subsidies are giving incentive to use LED solutions as alternative.

Steve Smigie – Raymond James

Okay, well, it sounds great. Well, good luck, that’s all. Thank you.

Operator

Your next question comes from the line of Tore Svanberg of Stifel Nicolaus.

Evan Wang – Stifel Nicolaus

Yes, hi, thank you for taking the questions. This is Evan Wang calling in for Tore Svanberg. I was wondering if you could talk a little bit about your ASP trend and how your record new products play into that? And maybe also what impact your gross margin has on the ASP?

Rick Neely

Actually, Evan, we don’t talk about ASP, because it just depends on a product-by-product. And ASPs can actually go down and gross margins may go up. So it’s not a very good indicator, so we never discuss ASPs directly.

Evan Wang – Stifel Nicolaus

Okay, understood. And what about the composition of sales, it looks like that maybe shifting as well. What is the implication on – is there some other metrics that could be meaningful to look at such as the turns business in the quarter or long-term growth rate, not just now, your – when you are penetrating those markets and also what impact it might have on your sales force, et cetera?

Rick Neely

You probably have to repeat the question. If you’re asking how we’re doing in the outside market, well, we’re definitely gaining market share, our revenue is growing faster than the market. Can you be more specific about what you’re looking for?

Evan Wang – Stifel Nicolaus

Maybe you could add some color on the composition of your revenue. In other words, by end markets, what are some of the new markets and what those – what are the characteristics of these new markets that you are entering?

Michael Hsing

Yes, Steve just mentioned it. And we have a router set-top box, the Blu-ray, TVs, and notebooks and – am I missing anything. These are main – [inaudible], anything else, okay. And these are the big items and it probably consisting – consists not more than 60% of the revenue. The rest of the stuff I can’t even count it.

Steve Pratt

And then the product focus has been in the predominantly the DC to DC power where we excel in high voltage and at the highest current densities. And, for backlighting, white LED backlighting, our solutions, white LED solutions, multi-channel, single channel covering a broad range of white LED monitor sizes.

Evan Wang – Stifel Nicolaus

Okay, thank you very much.

Operator

Your next comes from the line of Rick Schafer of Oppenheimer & Co.

Shawn Simmons – Oppenheimer & Co.

Hi guys, this is Shawn Simmons calling in for Rick. Just had a couple of questions for you. I guess, whenever you’re looking at the pricing environment out there, have you seen anything outside of just normally as [inaudible] or is that pricing becoming more competitive?

Michael Hsing

Well, in this high-demand market, in the ASP – I mean, the general requirements from our customer is shipping product not talking – not negotiating shedding on the price.

Steve Pratt

So prices is kind of stable.

Shawn Simmons – Oppenheimer & Co.

Okay, great. And then, you mentioned that you left some revenue on the table this quarter. Could you guys possibly quantify that or and also looking out into 3Q, it sounds like you could leave a little bit on the top line there as well? Any color on that would be great.

Rick Neely

I will. Yes, relatively, I’ll take it as – looking back or looking forward, you’re not able to do that because there’s too many pieces. But we’d estimate in Q2, it’s probably between $5 million and $10 million more we could have done, so that’s 60% to 65% is our general estimate of what Q2 could have been if we had the product. It’s hard to say about Q3, it’s too early to tell.

Shawn Simmons – Oppenheimer & Co.

Okay, great. That’s all from me. Thanks guys.

Operator

Your next question comes from the line of Doug Freedman, Gleacher & Company.

Doug Freedman – Gleacher & Company

Hi guys, thanks for taking my question. Rick, your new net profit margin goal, given the seasonality that the company does see, is that a goal that you think you can keep to even in the down quarters? And, if so, how is that going to be achieved? Is that how much flexibility, is there are any operating lines?

Rick Neely

Hi Doug. Yes, the thing with our target model, that’s where we want to build the company’s product to achieve and we expect to achieve in it the seasonably good quarters. In the weakest quarter of the year, we generally wouldn’t achieve it. But if we average it out, most of the quarters, we should be able to hit it.

Doug Freedman – Gleacher & Company

Okay. And can you talk a little bit – I think what people are really struggling with is the movement in the margins at a time when supply is tight and ASPs are holding up fairly well for your comments. Is there no possibility to be able to pass along the higher cost that you are seeing to your customers or whether in existing designs or even in future designs?

Michael Hsing

Yes, you can do this. Of course, we always can increase the price and keep the margin. And but I see this is an opportunity for MPS. What I would really want is to secure the future volumes, future design wins, because we have a huge number of a product that we’ve released. And [inaudible] these products can turn into our revenue. And that’s why we didn’t have the cost increase as much as we could.

Steve Pratt

We’re more concerned about a long-term relationship with our customers. And so we think the right decision is to, as much as we can, maintain where we are and focus on delivering products.

Doug Freedman – Gleacher & Company

Okay. And, Rick, onto a little bit more of a technical question, with the buyback and with the – you mentioned that there was cash provided this quarter due to share exercises, can you give us a projection of where you think share counts are going to look like and maybe a little bit going forward from there as well?

Rick Neely

Well, my best estimate of the share count for Q3 is maybe 38.8 something like that. Right now, we’re at 38.4, probably it’d go up a little bit on a diluted basis in Q3.

Doug Freedman – Gleacher & Company

Okay. And then going back towards your Intelli-Phase product that marries up to a CPU power management controller. Have you guys had any progress on securing a partner for that or is that something that you’re still looking into doing, any progress you made there?

Steve Pratt

We have relationships with existing controller manufacturers, so we partner with them. And then, we’re continuing to develop that.

Doug Freedman – Gleacher & Company

All right. And given your comments around supply, can you give us some comments about lead times, where you think lead – where are leads times presently in a number and where do you think how long will it be before they come down and what would you call normal?

Steve Pratt

Okay. Doug, so for the first half of the year, our lead times has been extending and there hasn’t been much change at all in general in the lead times between Q1 and Q2, so we’re around 12 weeks to 16 weeks in general for the products that have lead time issues.

Doug Freedman – Gleacher & Company

Any projection on when they’ll come back into is normal 8 weeks to 10 weeks.

Steve Pratt

Yes, normal is 8 weeks to 12 weeks, 8 weeks to 10 weeks. And like we had said earlier, the Q4 timeframe.

Doug Freedman – Gleacher & Company

All right, great. Thanks guys.

Michael Hsing

If the demand does not go up as like in Q3.

Steve Pratt

I mean – and I will do the clarify Doug. We’re continuing to see improvements on individual products as we get – we’ve been able to get more capacity, we’re now shipping products from that increased capacity. So lead times are coming down and improving on individual products.

Michael Hsing

In the Q2 – Q1 conference call, I made a statement that I believe we can catch up in a few suite, but I was wrong, but the demand is even higher. So now I say it’s we believe we can catch up in Q4, that remains to be seen.

Operator

Once again ladies and gentlemen, we ask that all participants please limit yourself to one question. Again that is one question. Your next question comes from the line of Gus Richard from Piper Jaffray.

Gus Richard – Piper Jaffray

Thanks guys for taking my question. Let’s see, I’ve only got one. In the decision between growth and gross margin, what precipitated the thought here and what do you think – it’s a two part question – and what do you think the incremental growth rate is over nominal, can you get like 10%, 15% higher revenue growth because of this two philosophy. If you can just add a little bit of color as to why you did this and sort of what do you think it means for top line?

Michael Hsing

For the top line, we said it, okay? We are a targeting about a 25% to 30% – 30% of the growth. In this year, we see our business, we can do a whole lot more than that. But, unfortunately, we didn’t – last year or the year before, we didn’t prepare for that kind of ramp.

And that during the futures, I see these kind of a – the product way to release in the last 18 months, we can do that. So that’s why we make – we made that kind of a position, the EPS, the way we look at the EPS, we’ll model the EPS and then we increase it dramatically.

Operator

Your next question comes from the line of Mike McConnell of Pacific Crest Securities.

Mike McConnell – Pacific Crest Securities

Thanks. I just had a question – again and not to beat on an old drum here – but just the choice here between, again, growth at the expense of gross margins. We’re looking into next year, I guess, where – are you going to be more aggressive with pricing, why wouldn’t and when we get into a normalized supply environment starts to see gross margins begin to tick back up, is there – or are we just now permanently going to be kind of moving pretty dramatically from your old target of 58% to 62% of – 50% to 55% I guess and you were expecting no improvement now as we move even into the later stages of next year as you start to see some supply improvements?

Michael Hsing

I do whatever – again, okay? I do whatever to get the – to get the every penny out of that, out of any product. So I want to get the EPS up and whatever the gross margin ended up to be higher or lower, let it be. Since you guys want to put in a spreadsheet and you want gross margins, okay, we’ll give you a model number.

Operator

Your next question comes from the line of Tristan Gerra of Robert W. Baird

Tristan Gerra – Robert W. Baird

Hi, I’m going to unfortunately follow-up on the same line of question. In terms of new products or end markets, if you could specify where you feel the need to be more aggressive on the gross margin growth to maintain the growth that you’ve had achieved in the past, if you can just give more specifics on the product line and/or end markets?

Steve Pratt

Well, it’s just expanding our footprints like some of the previous callers that we’ve responded to. So by extending our footprint into other growth markets, that’s going to give us the best return on top line and net profit.

Operator

Ladies and gentlemen, that concludes the Q&A session. I’d now like to turn the call back over to your CFO, Rick Neely.

Rick Neely

Well, thank you, everybody for attending the call and asking the questions. We look forward to speaking with you at the next quarterly conference call. Have a good week.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Monolithic Power Systems Q2 2010 Earnings Call Transcript
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