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Advanced Analogic Technologies (NASDAQ:AATI)

Q2 2010 Earnings Call

July 28, 2010; 04:30 pm ET

Executives

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

Brian McDonald - Vice President & Chief Financial Officer

Lisa Laukkanen - Investor Relations, The Blueshirt Group

Analysts

Vernon Essi. - Needham & Company

Adeline Lee - Wedbush Securities

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Advanced Analogic Technologies second quarter 2010 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions (Operator Instructions).

I’d now like to turn the conference over to Lisa Laukkanen. Please go ahead.

Lisa Laukkanen

Good afternoon and thank you for joining us on today’s conference call to discuss Analogic Tech’s second quarter results. This call is being broadcast live over the web and can be accessed for 90 days in the investor relations section of the Analogic Tech’s website at analogictech.com.

On today’s call are Richard K. Williams, President, Chief Executive Officer and Chief Technical Officer; and Brian McDonald, VP of Finance and Chief Financial Officer. After the market closed today, Analogic Tech issued a press release discussing the results for its second quarter ended June 30, 2010. The press release is accessible online at the company’s website or you can call The Blueshirt Group at 415-217-4961, and we’ll fax or email you a copy.

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

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

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

Richard Williams

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

Our second quarter results were in line with expectations. Revenue was $23.1 million, which represents a slight year-over-year increase and a 6% sequential increase. Net loss for the quarter was $3.9 million or $0.09 per share on a GAAP basis. On a non-GAAP basis, net loss was $2.7 million or $0.06 per share.

Once again, we experienced the strongest sales increases in Taiwan and China. Sales increased 44% sequentially in Taiwan primarily due to increased shipments of our camera flash products to support Google-Android OS-based phones as well as increased sales to Broadcom Wi-Fi Solutions.

In China, we experienced increased demand for our voltage regulator and interface products for both local handset and major international brands. Sales to Samsung and LG in Q2 represented 28% and 17% of total revenues, respectively.

As anticipated, continued growth in Taiwan and anticipated seasonal declines in Korea handset revenue reduced sales concentration in these two customers. We expect robust growth for our Korea customers to resume in Q3.

Our design win momentum continues across a broad portfolio of handsets of Samsung, including Fascinate, Vibrant, Captivate, Epic 4G and the exciting Galaxy line of smartphones. Our new content includes a dynamic buck regulator for improving the efficiency of 3G RF power amplifiers and an expanding line of high current LED camera flash and backlight drivers.

Additionally, Samsung’s new Galaxy tablet employing varying combinations of Analogic Tech power management solutions including switching voltage regulators, power saving smart switch products to extend battery life, LED backlight drivers, dynamic buck regulators for powering RFPAs and the compact five-channel mini-PMU integrating one switching and four linear regulators used to power the camera module.

At LG, ongoing sales cover a wide range of models including Pop, Chocolate, Remark and Accolade. We received our first orders for charge pump based LMUs integrating LDOs and backlight drive with power saving dynamic brightness control and ambient light compensation. These LMUs are expected to ramp significantly in Q3. We commenced developing a boost-based second generation LMU for driving larger displays.

We continue to gain traction outside of Korea with our products targeted at smart phone applications including high-current LED camera flash, overvoltage protected safety switch products and a protection smart switch for car kit adapters.

We also began sampling our most highly integrated PMIC to date comprising an overvoltage protected switching charger, a USB on the go switching regulator, an LED backlight driver capable of powering a string of up to eight LEDs and a precision monitor for fuel gauging.

We introduced and commenced production of a pioneering 1 ampere second generation PA buck micro switches at a major Japanese cell phone manufacturer, comprising the industry’s first micro inductor designed for high volume manufacturing.

We also received our first order for a 2 amp-switching charger and completed design of a new generation low noise overvoltage protected switching charger.

During the second quarter, our product development momentum continued and we introduced an impressive 25 new products comprising 9 platform and 16 derivatives; 13 of the new products use our Modular BCD technology. In the second quarter, Modular BCD remained a strong percentage of sales at 26%. We currently have 35 Modular BCD products in development including our first product integrating a newly released power shot key dial.

We made significant progress on our diversification in the products for low power computing including tablet computing, notebooks and mobile internet devices, solid state drives, 3G and LTE wireless data cards and wireless LAN applications during the second quarter. In Q2, Wi-Fi business ramped substantially, primarily to support new product launches at our notebook customers.

We expect normal seasonal buying patterns to resume in Q3. We’ve experienced strong growth across Asia for voltage regulation, smart switch products supporting solid-state drive applications. We found rapid demand develop for our proprietary interface products needed to support the e-book in education market.

We’ve confirmed a number of design wins for new 3G and 4G LTE wireless data cards including a super cap charger, smart switch products and switching voltage regulators. We also began sampling a highly integrated 12-channel PMU for 3G data cards earning us recognition as a strategic supplier by a major China-based customer.

We’re currently engaged in development of a new generation PMU to support higher volume models. We are engaged in strategic development for Qualcomms next generation reference design, following the multiple design wins we secured for our latest generation of smart switch products used in also smart phones, MID, UMPC and notebook applications.

We also released production of our first general purpose, 400-milliamp micro-switcher for green power markets and applications, offering the efficiency of a switching regulator with the ease of use of a linear regulator.

Turning to our diversification efforts to large screen LCDs, including high definition televisions, monitors, notebooks and in-dash displays, I am pleased to report that we recently secured our first design win and received our first purchase order from a major TV manufacturer for the LED backlight drive of a 47 inch, high resolution, direct backlit HD TV.

Deliveries to support this model commenced in September and are expected to ramp in Q4. Numerous follow-on projects are currently in design including 42 inch and 55-inch offer. Beyond its revenue potential, the design win represents the first verification and commercial endorsement of Analogic Tech’s technology architecture and system integration capability in large screen LED backlighting.

We expect to leverage this position to further penetrate the HD TV market addressing new customers, platforms, applications and architectures uniquely implemented using our proprietary Modular BCD technology. We released and received our first production order for panel power products supporting in-dash applications for Korean and Japanese customers. We began sampling our first backlight driver targeting 3D HD TV. We also delivered our first samples for energy efficient dynamic edge backlighting solutions. We project that dynamic edge backlighting will capture an increasing portion of the edge backlit TV market.

We continue to actively engage in design and efforts globally, now comprising over 40 display TV and backlight module makers. In summary, we are pleased with the progress we made in broadening our product portfolio to support the diversification of our business expanding our presence in 3G and LTE wireless cards, solid state drives, tablet computing and large screen LCD displays.

Our success is a direct result of our increased engineering investment. In particular, the early technical and commercial acceptance of our TV backlighting and panel power products validates our product strategy and engineering methodologies.

In our handset business, we’ve sustained our leadership in lighting and power management and are well positioned to benefit from the on-going market recovery and the increasing popularity of the Android OS platform. We remain enthusiastic about our growth opportunities in high-value products. However, the design win and revenue ramp cycle time for complex PMUs and TV system solutions are longer than those of handsets.

With our new products and growth drivers in place, we now turn our focus towards possibility. I will now turn the call over to Brian for a detailed financial review.

Brian McDonald

Thank you, Richard. And thank you everyone for attending our conference call. I will review our results for the quarter and then briefly discuss our outlook for the third quarter of fiscal 2010. Please keep in mind that the financial data mentioned within this call will be on a GAAP basis unless otherwise noted. Now, let me outline the details.

Revenue for Q2 of 2010 was $23.1 million compared to $21.9 million in Q1 of 2010 and $22.9 million in Q2 of ’09. Revenue increased by 6% sequentially and increased 1% from Q2 of ’09.

For the quarter, sales in Korea were $10.8 million, Taiwan $6 million, China $5.2 million and all others at $1.1 million. Sales in Taiwan increased 44% sequentially primarily due to growing demand for high-end smart phones and computing products. Distributor inventory levels remained at the low end of our two- to four-month target.

Sales in China increased 17% sequentially primarily due to continued demand in the wireless data card and local handset market. Distributor inventory levels remained at the low end of our two- to four-month target. Sales to Chief Tech were up slightly sequentially and represented 7% of our total revenues.

Sales in Korea decreased sequentially due to lower shipments to Samsung and LG. Sales to Samsung combined with the contract manufacturers accounted for 28% of total revenue as compared to 35% last quarter. Sales to LG represented 17% of our total revenues as compared to 19% last quarter.

Gross margin for the quarter was 45.5%, this compares to 48.4% in the prior quarter and 48.3% in Q2 of 2009. Sequentially, gross margin decreased primarily due to unfavorable product mix and a higher E&O charge.

R&D spending was $7.8 million or 34% of revenue for the quarter, up $0.7 million from the prior quarter and a million from Q2 of ’09. The sequential increase was primarily due to higher engineering mass and wafer expenses and payroll related expenses for new hires. Included in the R&D spending was $0.6 million of stock-based compensation expense.

SG&A spending was approximately $6.1 million or 26% of revenue for the quarter. It decreased slightly from the prior quarter and an increase of $0.2 million from Q2 of 2009. Included in the SG&A spending was $0.6 million of stock-based compensation expense.

Patent litigation expense was $0.2 million for the quarter, as compared to $1.1 million in the prior quarter and $0.4 million in Q2 of ’09. Operating expenses in total were $14.2 million. This compares to $14.3 million in the prior quarter and $13.5 million in Q2 of ’09. Stock-based compensation expense was $1.3 million for the quarter, similar to the prior quarter and a decreased from $1.6 million in Q2 of ’09.

Inclusive of stock compensation expense the operating loss was $3.7 million for the quarter, similar to the prior quarter and an increased from $2.4 million in Q2 of ’09. Tax expense was $0.3 million as compared to $0.5 million last quarter and $0.4 million in Q2 of ’09.

Net loss for the quarter was $3.9 million or $0.09 per share, compared to a net loss of $4.2 million or $0.10 per share in the prior quarter and compared to a net loss of $2.5 million or $0.06 per share in Q2 of 2009.

Moving on to the balance sheet, during the quarter we continued to maintain a solid debt-free balance sheet. Cash and equivalents totaled $93.9 million at the end of the quarter, down $4.6 million from the prior quarter, primarily due to the stock repurchase of approximately $3.6 million.

Net accounts receivable was $12.8 million at the end of the quarter, up $1.3 million from the prior quarter, primarily due to higher sales towards the end of the quarter. DSOs for the quarter was 50 days compare to 48 days in the prior quarter.

Net inventories were $9.6 million at the end of the quarter, up $0.7 million from the prior quarter. Inventory turns for the quarter were 5.3 as compared to 5.1 last quarter. Inventory levels increased the support growing demand.

Now let me comment on Q3 of 2010. We expect Q3 2010 revenues to be in the range $23 million to $26 million; GAAP gross margin between 43% and 45%; R&D expenses in the range of $7.1 million to $7.3 million, exclusive of stock-based compensation expense and a stock comp number of $0.6 million.

SG&A expenses in the range of $5.3 million to $5.5 million, exclusive of stock-based compensation expense, with stock comp of $0.7 million. Patent litigation expense in the range of $0.2 million to $0.4 million; stock-based compensation expense in total of about $1.4 million; a tax expense of about $0.3 million, and a GAAP EPS loss to be between $0.10 and $0.07.

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

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentleman we will now began the question-and-answer session (Operator Instructions) and our first question comes from the line of Vernon Essi with Needham & Company. Please go ahead.

Vernon Essi - Needham & Company

Thank you very much and congratulations on your design win on the back leading front.

Richard Williams

Hey, thanks Vern.

Vernon Essi - Needham & Company

I was just wondering, in terms of looking at the guidance into next quarter and sort of the back half for the year, what sort of contributions should we be looking for from this program and can you give us an understanding just as sort of not too detailed if you don’t want to, but just in terms of understanding how much of this could be in terms of a range contribution at the back half of the year, not a couple follow-on questions beyond that.

Richard Williams

Yeah, this was such a new design that the first persons order just came in. We are still trying to gauge the size of it, because there was actually three different models that we are looking at. The 47 inch is just one of the three and we haven’t got in a full modeling of what is the ramps of the various sizes and what is the timing. So it’s going to take a little bit of time before we get more clearly on that ramp.

But we do believe that this is the beginning of kind of a long-term relationship and a big opportunity, but we are being a little cautious on projecting how big the ramp would be in Q4.

Vernon Essi - Needham & Company

And any other granularity to the profile of its customer?

Brian McDonald

Big.

Vernon Essi - Needham & Company

Okay, I guess we’ll work with that, and in terms of -- and this is going to obviously be on ModularBCD bucket and if you look at that year-over-year it has been sort of a flat dollar contribution to your revenue. I am just wondering if there has been any lagging situation there or it’s just a timing scenario in terms of its contribution, because I noticed that trend line has sort of flattened and why don’t you just give us some more color on that one.

Brian McDonald

Yeah, I think part of that is that some of the older products still continue to get recycled and reused and every time we think that an older product is going to be replaced and go away, it has a new life and it comes back again.

So even we grow old, the revenue, the percentages have stayed relatively constant, but I think when the T.V. product started to ramp and some of the PM use, then that will start to shift again, because then you are talking about ASPs of products in the $0.50 to over $1 range, as opposed to products that are half that ASP if not even lower. So I think there will be some change, but we haven’t model it yet, but I believe its coming. The next step for ModularBCD volume moving up is anticipated.

Vernon Essi - Needham & Company

Okay, and then finally, if you look at your two major handset customers you reliance seems to be lessening, which is encouraging and your revenue is still in somewhat of a growth trajectory here. What would you attribute to the other markets that you think are offsetting this the most? You’ve talked a lot on these core one tablets and notebooks more than prior calls. I am just wondering which pieces of your end market seem to be growing the most going into the back half of the year.

Brian McDonald

So first of all I think there is kind of wind from the iPhone. It turns out when the iPhone was released, it kind of redefined the market and so a lot of companies that were talking about taking features out of the phones and the companies that were going after the ultra low cost and the [mid earphones], suddenly there was this resurgence in this focus to smartphones.

Many times in the past, I think companies who have tried to enter the smartphone markets failed, because they didn’t have a reliable software platform. There were mixed reviews on most of the OSs that people had used for smartphones. The support and the breadth of the applications being developed around the Google and Android OS however is changing that.

So a lot of companies that couldn’t get in to the smartphone business before because of software, now don’t see firmware and software as an impediment, and instead they are able to garner the benefit of their skills in hardware, without being penalized by their weakness in software. So I think China and Taiwan both are benefiting from that, and also Nokia has been slipping some, so that’s being opening up some new opportunities for some of these companies as well.

So if you look at the smartphone mix beyond Apple, you see a number of other companies coming and while some of them are in Korea, there is also definitely a presence outside of Korea that’s taking share. So we see that as opening up more opportunity for us.

Then the other thing is that the tablet. Again, this is kind of the wind from the iPad. The tablet now is being treated as kind of cell phone on steroids. It’s a oversized cell phone that has many of the features of a communication device, but it has a large screen and it has to be very thin, but the power management, the power architecture is very close to that of a cell phone.

So it’s a natural compliment for us to go into the low power computing side by extending our smartphone presence up into the tablet, and that is in direct contrast to the philosophy that you would try to dumb down in notebook, as opposed to scale-up a cell phone, because the notebook has poor power architecture which is designed for performance and they don’t get the kind of battery life that the consumer expects out of a thin tablet.

So we view that as another catalyst and Android is also helping enable that market as well. So it’s quite interesting that market dynamics have change dramatically in the last six months.

Vernon Essi - Needham & Company

Interesting. Alright, so basically to summarize all that, you are saying one of the bigger drivers used essentially, this android based system in both smartphone and tablet is kind of one of…

Richard Williams

It’s enabling.

Vernon Essi - Needham & Company

Yeah enabling.

Richard Williams

It’s enabling for people who weren’t in the game before.

Vernon Essi - Needham & Company

Okay alright. Thanks a lot.

Richard Williams

Sure.

Operator

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

Adeline Lee – Wedbush Securities

Hi can you here me?

Richard Williams

We can.

Adeline Lee – Wedbush Securities

Okay, this is Adeline Lee calling in for Patrick Wang. I have a few questions. I apologize if you’ve answered this one before. Could you tell me what is you target and your percentage of revenue for your ModularBCD?

Brian McDonald

Yeah we talked about what that number was in the current quarter at 26%, which was up from 5% in the first quarter and some additional new products, we would expect that number to grow some, but not significantly over the next quarter. So I think the target is probably in the 30% range by the fourth quarter.

Richard Williams

So what will happen is, just like when we started in handset, so we got one handset design win which became ten, which became a 100 and it gradually grow out as you have derivative products that use the same kinds of platforms. We expect the same kind of revolution occur in the TV. We will get some design wins in high resolution direct and those will start to expand in the new sizes and form factors.

Then we have our first sampling of the dynamic edge product and when we get our first design win there, then that will expand more rapidly in the models and we expect those models to be higher volume than the higher resolution direct. So both of those should be drivers to increase the ModularBCD utilization rate up.

Brian McDonald

Yeah, right. If I said 5%, I meant 25% in Q1.

Adeline Lee – Wedbush Securities

Okay, that’s very helpful. And then my next question is on your backlog coverage, could you help us out with that or could maybe tell us what happened in the beginning of the quarter.

Brian McDonald

Yeah I can tell you that. I can tell you that the backlog coverage as of the call, as of today is roughly 67% of the mid-point of the revenue guidance, which is actually higher than where we were same time last quarter, and the beginning backlog coverage at the very beginning of the quarter was about 37%, which was 2% higher than where we were at the beginning of Q2.

Adeline Lee – Wedbush Securities

Okay.

Brian McDonald

If you wanted to include the pub numbers in there, we’re actually at including the hub forecast from LG, we’re at about 85% coverage.

Adeline Lee – Wedbush Securities

And that’s now. Okay. And I am wondering, what about your TV opportunity and if you could talk a little about your efforts acquiring other customers or maybe when will that TV opportunity becomes a significant part of your revenue, give some sort of guideline?

Richard Williams

So it’s too early to answer the second part of your question, but the first part of your question is, we are engaged with over 40 different customers now and many of those customers have multiple programs. For example, one customer might be doing a high voltage design, a high resolution direct, and either a large tall direct or a dynamic edge design, all at the same time with different groups.

So the number of design opportunities we are working on are really substantial, and that’s why we made an investment in the application support for this market, because we believe that there was a lot of support needed to implement local dimming in any kind of TV, and that’s where you get the energy, efficiency and the contrast enhancement that you don’t get by just a normal LED lightbar or CCFL replacement market.

So we think that in anywhere that there is local dimming we are already well positioned. We will of course back sell product down into the more commoditized, high voltage edge market, but we view that as a market that’s going to be changing anyway, because we believe dynamic edge is going to actually represent the higher growth opportunity in the lower cost TV’s, and I believe the high voltage edge opportunities its going to be really relegated to the lowest cost TV’s in the future.

So we are engaging and we are now sampling products that can support everyone of those possible architectures, and we have multiple design activities and some of them are pretty close to design wins or even getting cost to design wins, but when we have the tree, the revenue tree how it grows, its too early for us to say and we normally don’t like to speculate on how this happens.

We do caution however, that anytime we’re talking about a system architecture, even though you get longer run and as you get a more secure revenue, the revenue ramp takes longer, because they really have to check up the whole system.

If you build the backlight module and the backlight module manufacture gives you the green light. Then he puts it in a TV and the glass manufacturer gives you a green light, you still then have to wait for the TV brand to integrate it with the tuner and to put the final TV through its spaces.

So at least in this market you are talking about a sale to three different customers before you get a purchase order. It’s not like the handset business where one guy can make the entire decision basically right there on the spot. So it does take time and that takes us time to grow our revenue, the advantages, and once you have the revenue, the barrier to entry for competition is higher.

Adeline Lee – Wedbush Securities

I see. That’s helpful. That’s all my questions. Thank you.

Brian McDonald

Thank you.

Operator

Thank you. (Operator Instructions) And I show no further questions at this time. I’d like to turn the conference back to management for closing remarks.

Brian McDonald

Okay, we just like to thank everybody for participating and listening to the call. Thank you very much.

Richard Williams

Thank you.

Operator

Ladies and gentlemen, this concludes the Advanced Analogic Technology’s second quarter 2010 earnings conference call. This conference will be available for replay after 03:30 pacific time today through August 4 at midnight. You may access the replay system at anytime by dialing 1-800-406-7325 or 303-590-3030 and entering the access code of 43115129 followed by the pound sign. Thank you for your participation. You may now disconnect.

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