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Advanced Analogic Technologies, Inc. (NASDAQ:AATI)

Q3 2007 Earnings Call

October 29, 2007 16:30 pm ET

Executives

Lisa Laukkanen - IR

Richard Williams - President, CEO and CTO

Brian McDonald - VP, Finance and CFO

Analysts

Tore Svanberg - Thomas Weisel Partners

John Lau - Jefferies & Company

Vernon Essi - Needham & Company

Anthony Stoss - Craig-Hallum

Robert Burleson - ThinkEquity Partners

Krishna Shankar - JMP Securities

Operator

Good afternoon, ladies and gentlemen. Thank you so much for standing by. And welcome to the AnalogicTech Third Quarter 2007 Earnings 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). And I would now like to turn the conference over to Ms. Lisa Laukkanen with the Blueshirt Group. Please go ahead.

Lisa Laukkanen

Good afternoon and thank you for joining us on today's conference call to discuss AnalogicTech's third quarter 2007 results. This call is being broadcast live over the web and can be accessed for 90 days in the investor relation section of AnalogicTech's web site at analogictech.com.

On today's call are Richard K. Williams, President, Chief Executive Officer and Chief Technical Officer and Brian McDonald, VP of Finance and Chief Financial Officer. After the market closed today, AnalogicTech issued a press release discussing the results for its third quarter, ended September 30th, 2007.

The press release is accessible online at the Company's Web site or you can call the Blueshirt group at 415-217-4961 and we'll fax or e-mail you a copy.

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

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

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

Richard Williams

Thank you for joining us today as AnalogicTech reports its third quarter 2007 results. During the call, I will provide a review of business highlights and trends for the quarter. I will then turn the call over to Brian for a detailed financial review of the third quarter, which will be followed by Q&A.

Our third quarter performance exceeded our expectations and was a record for revenue for the Company. During the quarter, we experienced robust end-market demand across a variety of applications and continued our strong pace of product development activities.

Highlights are as follows. For the third quarter of 2007, we reported revenue of $30.6 million, which represents a year-over-year increase of 52%, and a 19% increase over the revenue reported in the second quarter of 2007.

On a GAAP basis, net income for the third quarter was $2.6 million, or $0.05 per diluted share.

As for revenue by geography, Korea remained the largest revenue contributor, reflecting the strong shipment growth of our end customers during the quarter. China was again the second-largest revenue contributor, as we continued to experience strong sales in the region.

We also experienced strong sequential growth in Taiwan, where revenue was driven by diverse end applications, including handsets, GPS, personal media players, multimedia cards and slim DVD drives.

During the third quarter, Samsung was again our number one customer, accounting for 25% of total revenue. We continue to supply Samsung with products to support a full spectrum of cell phones, including high-end smartphones, such as their Ultra Edition product line, and touch screen phones like Serenata, as well as low-cost phones targeting emerging markets.

As Samsung increased shipments of mass-market models, we experienced some adverse impact to our margins. This margin pressure is expected to continue until our new low-cost products begin to ramp.

During the third quarter, sales to LG remained strong and accounted for 22% of total revenue. Our design win activity continues across a broad range of LG product portfolio, where we maintain our leadership share position in ChargePumps. We also are excited to be included in some of LG's new touch screen phones.

As reflected in our strong sales growth in China, we continued to see a significant revenue contribution from Chieftec during the quarter, with their business accounting for 14% of revenues. Sales to Chieftec continue to be driven by strong market share with local handset customers and diverse applications like flash memory and personal media players.

We continue to see new opportunities for 802.11 and wireless LAN, including our Broadcom reference design-based business, which grew approximately 30% sequentially.

Sales to Sony Ericsson remained steady during the quarter. We continue to be encouraged by the long-term prospects for expanding our relationship with Sony Ericsson into new applications. Overall, 58% of revenues were from lighting and display products, 23% from voltage regulation and DC-to-DC converter products and 19% from other power management products, including port protection and battery management.

Also of note during the quarter was the strong sequential revenue growth of our switching regulators, which grew by more than 50% quarter-over-quarter. We continued the strong pace of product development activities, introducing a total of 28 new products during the quarter, including 11 new platforms and 17 derivatives from existing products.

Among those released, AnalogicTech introduced a new generation of low-noise switching regulators, dramatically reducing spectrum noise and output ripple. These low-noise regulators benefit designers of high-speed and noise-sensitive communication products.

We made substantial progress in our design activities in our Shanghai design center, including their migration onto the ModularBCD platform and the development of a complex second-generation power SOC for digital still cameras.

We continue to make progress on worldwide product development activities using our proprietary ModularBCD technology. We recently qualified our 30-volt process module and anticipate the imminent release of our first 30-volt products. We continue to be enthusiastic about the market opportunities AnalogicTech will be able to address with the new higher-voltage products.

To date, we have released 19 ModularBCD-based products into production and have more than 24 new products currently in development. In September, in its final determination, the ITC upheld the favorable ruling for AnalogicTech for its ChargePump and switching regulator product lines.

The ITC left unchanged its earlier determination that AnalogicTech's ChargePumps do not infringe the 531 patent and the 531 patent is invalid. The commission also upheld the opinion of the administrative law judge that a majority of AnalogicTech's switching regulator designs do not infringe Linear's 258 patent. These non-infringing designs include AnalogicTech's newer generations of switching regulators targeting the high-performance and high-efficiency applications.

In one instance, the commission found an older-generation switching regulator design, representing a small fraction of AnalogicTech's switching regulator offerings and revenue infringes the 258 patent. Following normal ITC procedure, the commission issued a limited exclusion order under 337 of the Tariff Act, prohibiting the direct importation of this particular design.

This exclusion order, however, does not prevent AnalogicTech's customers from importing their products into the United States. Linear's request to bar downstream products from importation was denied.

We are pleased to have a favorable outcome and have moved forward with our plans to announce several new generations of switching regulators using novel designs completely unrelated to the claims of the 258 patent. AnalogicTech's lawsuit against Linear in U.S. Federal Court for business interference, trade libel, patent misuse and unfair business practices remains while the ITC appeals process proceeds.

In the third quarter, AnalogicTech filed 15 United States patent applications covering fundamental innovations in switching regulators and DC-to-DC converters.

In conclusion, AnalogicTech experienced a very strong third quarter. We are currently seeing multiple growth drivers for our business, including market share gains by our Korean handset customers; the continued adoption of 802.11n; the rollout of ModularBCD, including 12-volt and 30-volt products; design wins and new customer penetration; new end market applications, such as GPS, PMP, MMC and slim DVD drives; and the introduction of two- and three-channel white LED drivers targeted toward the highly affordable handset market.

We are encouraged by our ability to broaden and diversify our product portfolio. As noted, we have expanded our offering to include higher-voltage products that open new end-market applications to AnalogicTech.

At the same time, we've developed products to address the burgeoning handset opportunities in emerging markets like India, China, Russia and Africa. We believe AnalogicTech is well positioned to address the growing power management needs of consumer communications and computing applications, and gain market share.

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 fourth quarter. 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 some of the details. Revenue for Q3 '07 was a record $30.6 million, compared to $20.1 million in Q3 of '06 and $25.8 million in Q2 of '07. Our Q3 '07 revenue increased by 52% from Q3 of '06 and increased 19% sequentially.

Sales in Korea were $15.5 million; China $8.6 million; Taiwan, $5.2 million; and all others at $1.3 million. For the prior quarter, sales in Korea were $12.8 million; China, $8.4 million; Taiwan, $3.5 million; and all others at $1.1 million.

Sequentially, the sales increase in Korea was driven by increased sales to Samsung and LG, reflecting the strength in handset sales in Korea. Growth in Taiwan was driven by increased sales related to our Broadcom reference designs, ramp in handsets and other non-handset applications such as GPS and notebooks.

Sales in China remained strong as sales to Sony Ericsson and other local handset and non-handset portable consumer applications continued to grow.

Direct sales to Samsung accounted for approximately 8% of total revenue, as compared to 11% in Q3 of '06 and Q2 '07, respectively. Sales to Samsung, combined with its contract manufacturers, accounted for approximately 25% of total revenue, as compared to 20% in Q3 of '06 and 22% in Q2 of '07.

Sales to LG represented approximately 22% of our total revenues, compared to 27% in Q3 of '06 and 21% in Q2 of '07. Sales to Chieftec, our largest China distributor, was slightly up sequentially. GAAP gross margin was 53.6% for the quarter. This compares to 54.7% in Q3 of '06 and 55.1% in Q2 of '07.

The decrease in gross margin from Q2 '07 was primarily attributable to unfavorable product mix as a result of continued strong demand for low-end ChargePumps. The decrease was offset by lower excess and obsolete-related expenses, as sales of previously reserved material increased during the quarter.

We continue to work with our customers to transition them to lower-cost solutions, as well as our subcontractors to improve product yields and reduce costs on high-volume products. In the long run, we expect our margin to improve as we increase the profile of our business toward higher margin products. We expect Q4 gross margin to remain at current levels based on forecasted product mix and demand for low-end ChargePumps.

R&D spending was $7.9 million, or 26% of revenue for the quarter, an increase of $2.6 million from Q3 of '06 and $0.4 million from Q2 of '07. The increase in R&D expense from Q3 '06 was primarily the result of increased headcount associated with the acquisition of AP Semi. Included in the R&D spending was $0.8 million of stock-based compensation expense.

SG&A spending was approximately $6.4 million, or 21% of revenue for the quarter. This represents an increase of $1.2 million from Q3 of '06 and a decrease of $0.2 million from Q2 of '07. The increase from Q3 '06 was attributable to increased personnel related to the acquisition of AP Semi.

Included in the SG&A spending was $0.8 million of stock-based compensation expense. Litigation costs were $0.6 million for Q3 '07, as compared to $3.5 million in Q3 of '06 and $1.5 million the previous quarter.

Litigation expenses decreased significantly from last quarter in anticipation of the ITC's final determination. Operating expenses in total were $14.9 million. This compares to $14 million in Q3 of '06 and $15.7 million in Q2 of '07. The sequential decrease was primarily due to lower litigation expenses.

Stock-based compensation expense was $1.6 million for Q3, '07, compared to $1.5 million in Q3 of '06 and $1.7 million in Q2 of '07. Operating income was $1.5 million for the quarter, as compared to an operating loss of $3 million in Q3 of '06 and $1.4 million loss in Q2 of '07.

Other income net was $1.4 million, or 5% of revenue for the quarter. This compares to $1.6 million in Q3 of '06 and $1.4 million in Q2 of '07. Tax expense was $0.3 million, as compared to zero in Q3 of '06 and $0.8 million in Q2 of '07, in line with our expectations for the quarter.

Net income for Q3 of '07 was $2.6 million, or $0.05 per diluted share, compared to a net loss of $1.5 million, or $0.03 per share in Q3 of '06 and compared to a net loss of $0.9 million, or $0.02 per share, in Q2 of '07.

This quarter marks our return to profitability, our first since the acceleration of litigation expenses in Q2 of '06. Moving on to the balance sheet, cash and cash equivalents and short-term investments totaled $110.7 million at the end of the quarter, up by $3 million from Q4 of '06.

Net accounts receivable was $17.5 million at the end of the quarter, up by $6.5 million from Q4 '06 due to higher sales. The average day’s sales outstanding for the quarter were approximately 52 days. Net inventories were $10.7 million at the end of the quarter, up $2.3 million from Q4 of '06. This increase was necessary to support increased customer demand.

Our inventory turns for the quarter were a record at 5.3, as compared to 4.5 in Q4 of '06. Inventory levels in our distributor channel were below the low end of our target.

On to the business outlook. Let me comment on Q4 '07. We expect Q4 '07 revenues to be flat to up 6% to $32.5 million, gross margin to be within 53% to 54%, based on forecasted product mix and demand for low-end ChargePumps.

R&D expenses are expected to increase to the range of $7.5 million to $7.7 million, exclusive of stock-based compensation expense, reflective of projected new product tape-outs to occur during the quarter. SG&A expenses, in the range of $5.4 million to $5.6 million, exclusive of stock-based compensation expense. Stock comp will be within $0.9 million to $1.0 million on SG&A.

Litigation expense, in the range of $0.5 million to $0.7 million. Stock-based compensation expense in the range of $1.8 million to $2.0 million. Other income in the range of $1.3 million to $1.5 million. Amortization of intangible assets to be approximately $0.3 million. Tax expense in the range of $0.4 million to $0.6 million. GAAP EPS to be between $0.04 and $0.06.

Let me now summarize the Q3 results. Our revenue for the quarter ended September 30, '07, was a record $30.6 million, a 19% increase sequentially and surpassed our previous guidance of $26 million to $28 million. GAAP net income for the quarter was $2.6 million, or $0.05 per share, a $0.07 improvement sequentially, and surpassed our previous guidance of breakeven to $0.02. This also marks the return to profitability.

Gross margins for the quarter were approximately 54%. Litigation expense for the quarter was $0.6 million, as compared to $1.5 million last quarter. Stock-based compensation was $1.6 million for the quarter.

We maintained a strong cash and cash equivalent position of $110.7 million, up $0.8 million, sequentially. Inventory levels remain low. Inventory turns were a record at 5.3, compared to 4.5 in the fourth quarter of '06.

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

Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question is coming from Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg - Thomas Weisel Partners

Yes, thank you, and great quarter. A couple of questions. First of all, your inventory days are pretty low this quarter. Do you feel comfortable with this level, and if not, what are you doing to get to more adequate levels?

Brian McDonald

Yes, I think we're comfortable with the inventory level, Tore. We're watching the fabs closely and we'll adjust start rates based on demand, but we feel comfortable that the fabs can respond in a timely fashion.

Tore Svanberg - Thomas Weisel Partners

Okay, and you mentioned that at your distributors, your inventories are below the low end of what it usually is. Could you maybe add some color on that, please?

Brian McDonald

Yes, we target the distributors to run two months worth of inventory. We did see that number drop to about 1.6 months, 1.8 months, last quarter, and that was driven by high resales on their part. So we would expect to still target 2% turns in the fourth quarter of '07.

Tore Svanberg - Thomas Weisel Partners

And on the gross margin, is there anything in the mix that you can forecast as to when margins will be back in the 55% range? I'm just trying to understand if you have any forecast visibility, any backlog to suggest the mix is going to get better.

Richard Williams

It's still a little early to tell. I think what we're saying is that there still seems to be strong demand for the models that include the low-end ChargePumps, and that the new models, the ones that have our cost reductions already designed in, have not started to ramp.

Now, traditionally, you know that that transition occurs in the first quarter, but we can never be sure how long they will run one of the older models. So, we'll have to wait and see.

Certainly all of the design win activity on switching regulators tends to be indicative of some counter opposing effects that would drive our margins up, but, again, those products are waiting to ramp. So it clearly is a Q1 or Q2 event and it is not a Q4 event.

From what we can see, we don't see any major changes in the mix happening this quarter unless some big orders for some high margin comes in at the last minute.

Tore Svanberg - Thomas Weisel Partners

Great. And, Richard, you mentioned that second generation power SOC for cameras, when should we expect to see some revenues from that product?

Richard Williams

Well, our plan to launch that product is around Chinese New Year's time frame, so we would expect that to be starting in Q4 revenue and then building on in to next year. Of course, we are already servicing some of that market with discrete analog components, so here it's our attempt to just snatch up more of the sockets and more of the functions.

Tore Svanberg - Thomas Weisel Partners

Great and finally, for Brian, Brian, your R&D is growing, however, your SG&A seems to be flat to down. Can you elaborate a little bit on why would you continue to model that to be down, sequentially?

Brian McDonald

I don't know if I would model it down, sequentially, Tore. I would probably moderate the growth on SG&A to maybe a couple hundred K a quarter. We've pretty much hit -- we've got the infrastructure built out pretty much on the SG&A side, so we don't see a lot of headcount additions in that area.

The only thing you'll see are local increases, annual increases and commissions are variable with sales. But you won't see big increases on infrastructure.

Tore Svanberg - Thomas Weisel Partners

Great, thanks. And, again, great quarter.

Brian McDonald

Thanks.

Richard Williams

Thanks.

Operator

All right, thank you. Our next question is from the line of John Lau with Jefferies & Company. Please go ahead.

John Lau - Jefferies & Company

Great, thanks, Richard. I know you mentioned this in your prior comments, but regardless of the transition in Q1 or Q2, I think if you can give us a couple of milestones on the transition to the lower-cost product, you mentioned that they're already designed into key handsets.

And when that goes into transition, Richard, are the costs significantly improved in those new products? Thank you.

Richard Williams

Yes, the costs are significantly lower on the new products for the ChargePumps. Let me just clarify for people who may not have been following the story closely. When the market took off on the low-end handsets, especially for China and India, Africa, South America, those products often only need two or three LEDs in the backlight. And we were selling them ChargePumps that were actually designed for four and six channels, so the chips were much larger -- I won't say a factor of two, but significant difference in size.

And so by moving to the new generation, then we're able to go to a smaller chip and to a lower-cost package so we get a double benefit and that will significantly improve the margins.

I would say that instead of margins in the 30% and 40% range, you'll see them in the 50 percentile range on that high-volume portion of the business. I think the thing that has been a challenge for us is that the incremental upside opportunities that keep coming in are all of this lower-margin business.

So if we're beating our numbers, we're often beating our numbers with extra revenue that is comprising that and representing that low-margin business. And so that's why it's been a little hard for us to pin it down.

Of course, as the switching regulators ramp coming into next year, that will relieve some of the pressure off of the margins overall in the blended aggregate and then, when the customers transition to the new models, we will naturally migrate away from the higher-cost to lower-margin products. We do not control that transition.

John Lau - Jefferies & Company

And, Richard, just as a follow-up, are you comfortable that the new products are now designed into key products so that this is just a short-term issue?

Richard Williams

Yes, we already have design wins. We have a number of design wins and we have even more products coming that are designed in to take advantage of that market. But, at the same time, when a market opens up you have to jump on it and seize those opportunities when they first emerge. Otherwise, if you get designed out, the cost to get designed back in is much, much higher.

John Lau - Jefferies & Company

Great, thank you

Richard Williams

Okay.

Brian McDonald

Thanks, John.

Operator

All right, thank you. Vernon Essi with Needham & Company, please go ahead.

Vernon Essi - Needham & Company

Thank you, nice quarter. I wanted to just ask, I don't know if you discussed this in the prepared comments, but the content of ModularBCD in the overall revenue mix, where was it running at this quarter?

Brian McDonald

We didn't comment about it, but I can give you a number. It was roughly 2% of sales in the third quarter, and we're expecting it to run roughly 5% to 6% of sales or close to $2 million in the fourth quarter.

Vernon Essi - Needham & Company

And then just looking into your guidance a little bit here on a sequential basis, are we to assume that the bulk of the growth is going to come -- I mean, it's a pretty obvious question, but from the handset business? I mean, are you expecting some of these other markets because of seasonality to be somewhat flat and that's how you're getting this incremental delta? Or should we be thinking along different lines there?

Brian McDonald

I think that it's going to be up pretty much across the board.

Richard Williams

Yes, notebook will remain strong in quarter four and the handset number should be strong in October and November and then roll off in December.

Vernon Essi - Needham & Company

Okay, I mean, just looking at the Chieftec number, it's up just a little bit there. I'm wondering if they're running into sort of a seasonal pattern there with like PMP players.

Richard Williams

I think there they had such a big pop of growth that by maintaining and slightly increasing their number from their last one, that is still well up from Q2. So it's just showing you that we're still in a model where we have kind of a first half run rate and a second half run rate and the second half run rate is definitely up from the first half. And I would say that momentum in Taiwan is building, where China kind of picked up the momentum early. Taiwan is still building momentum.

Vernon Essi - Needham & Company

Okay. And is that a function of going up the voltage side and addressing higher, is that where your interest is coming from? Or is there just from the straight parts you've always had on the legacy side?

Richard Williams

This has nothing to do with the high-voltage product. That's all next year's revenue. So this is just the nature of the designs that we're in today in the markets that typically show a different seasonality than the handsets.

Vernon Essi - Needham & Company

Okay, all right, thank you very much.

Operator

All right, thank you. Anthony Stoss with Craig-Hallum, please go ahead with your question.

Anthony Stoss - Craig-Hallum

Hi, guys. Great quarter and good visibility, I guess, into Q4. Could you talk about the first half of '08, if you're seeing any kind of seasonality in Q1, if you'd care to share, with that? Also, if you can help detail a bit more on the ramp that you would expect with Sony Ericsson last but not least, kind of outline timing of when you expect the 12 and 30-volt products to ramp?

Richard Williams

Okay, so the first question was what?

Anthony Stoss - Craig-Hallum

The first half seasonality. Q1 seasonality.

Richard Williams

Because when you go from Q4 to Q1, the handset market often goes through a transition of models. So the new models that were designed in, which include touch screen-type phones are very exciting new phones, but we're not sure exactly how they're going to manage that transition from Q4 into Q1. So it's still a little bit early for us to tell Q1. I think there's a lot of positive factors right now.

We don't see a negative momentum which would give us any signs of storm clouds on the horizon for Q1, but on the other hand, we're not at a point where we could start to get any real indications of what the coverage would be, yet.

Anthony Stoss - Craig-Hallum

Okay, then ramp at Sony Ericsson?

Richard Williams

The Sony Ericsson ramp represented a particular model or a model and its cousins. And that model has kind of reached its peak. And then, where we are now is we're working on new design wins and that's in all regions, in Asia, as well as out of Europe.

And those are going ahead right now, so it will take those new models to ramp for us to drive that revenue up more. We don't see that this other model will necessarily be the platform that would automatically drive a number double that or something that would grow just simply by one design win becoming two, becoming 10.

I think we're still working on getting those basic designs. I might say that we are opening up -- we're talking to them about new applications that relate to more than just the linear regulators or the ChargePumps that we've done business with them thus far. And that's an encouraging sign because those new products also are higher-margin opportunities for us. Okay?

Anthony Stoss - Craig-Hallum

Okay, and then last but not least, the 12 and 30-volt kind of timing on when those products will ramp? Thanks.

Richard Williams

Okay, so the 12-volt -- the first 12-volt products were released. I would expect we'll start to see some business from those in Q2, Q3 of next year. The 30-volt products will likely start with over-voltage protection-type battery chargers and then later we will follow on with switching regulators.

And so those products are to be released imminently and that means that it would be a back end of Q3 or Q4 before we would start to see significant revenue from them. And, then again, it would depend on the end market.

Remember, some of the higher voltage markets ramp slower, but once you ramp they're more stable and show less seasonality than the handset markets, which are mostly five volt and down.

Anthony Stoss - Craig-Hallum

Okay, great. Great job, guys, thanks.

Richard Williams

Thank you.

Operator

All right, thank you. Our next question is from the line of Robert Burleson with ThinkEquity Partners. Please go ahead.

Robert Burleson - ThinkEquity Partners

Good afternoon. Congratulations on a great quarter.

Brian McDonald

Thank you.

Richard Williams

Thanks

Robert Burleson - ThinkEquity Partners

Just a couple of kind of longer-term, big-picture questions. As we look at 2008, can you give us a sense of end markets outside of cell phones that you think are going to become a more meaningful share of your overall mix? And then the second follow-up question is, within cell phones, are there any customers or any regions that you guys are targeting right now that you think will be meaningful to you over the next year or so in terms of top customers?

Richard Williams

Okay, let's start. So, first of all, 802.11n is still a growing market. We would like to continue to grow there and to penetrate new accounts and get new design -- reference design platforms.

Our penetration in the notebook has been largely limited by the fact that we haven't had 12-volt and 30-volt products, so that should open up some new opportunities. And then the higher-voltage boost converter LED drivers not ChargePumps, but boost converter-based LED drivers open up the prospects for monitors, personal media players and into HDTV.

I think that while those design wins will be happening next year, they probably won't represent that large of a portion of '08 revenue. So that would be more of an '09 event. The over-voltage protected battery chargers, however, we do believe can have a meaningful contribution in the second half of '08. And that's because the migration away from a traditional low-voltage input battery charger into one that can prevent damage to the battery, in the case that the wrong adapter is plugged into the unit.

And we think the early adopters will be the cell phones, but then undoubtedly that criteria or safety will roll into the other consumer products as well.

Handset-wise, I think there's a tremendous number of new drivers happening. One, that’s being discussed, is high-brightness LED flash. And it remains to be seen whether or not they actually in the handsets go that way, but what happens is that to do that you have to supply over two amperes for a brief duration to the LED.

And when you do that, the brightness of an LED can be as bright as a xenon flash. So we're talking about real camera flash capability. But to do that you cannot draw that current directly out of the battery. You'll cause the system to glitch.

So, instead you have to have somewhere to store that energy and one storage element that's being considered is the supercapacitor. So if the supercap becomes successful, we already have the products there and ready.

We have the high-current camera flash driver for the LEDs already developed and released, and we also have a charger that charges the supercap without causing too much current spikes when you first start to charge the capacitor.

So we're ready on both of those. Another area in cell phones that's very exciting is to regulate the RF power amplifier. We're working on a number of different design wins right now, both with RF PA manufacturers, as well as handset designers. And I think that will become a new standard in the industry in the future.

And then there's also new display technologies that we're looking at that could contribute into '08 and '09 for handsets, including the active matrix organic LED, AMOLED, displays, which have very, very good color saturation.

Robert Burleson - ThinkEquity Partners

Great, thanks for taking my questions, and congratulations once again.

Richard Williams

Well, thank you.

Brian McDonald

Thank you.

Operator

(Operator Instructions). The next question is coming from the line of Krishna Shankar with JMP Securities. Please go ahead.

Krishna Shankar - JMP Securities

Yes, congratulations on a good quarter. Can you give us some sense of what percent of your revenues were sort of handsets in the quarter and then other portable electronic systems?

Brian McDonald

Yes, just to give you an idea, Krishna, we talked -- the handset revenues -- excuse me -- let me give it to you in a different way. We talked a little bit about display in lighting solutions was roughly 67% of revenue, interface power management was at 26% of revenue, and then DC-to-DC, switching regulators, roughly 7% of revenue in the quarter. I would say the handset piece of that -- so probably about 70%, rough.

Krishna Shankar - JMP Securities

Okay. And how fast do you expect notebook, given your high-voltage products, 12-volt and 30-volt ramping? How fast do you expect your notebook backlight display drivers to start ramping here?

Richard Williams

Well, notebook isn't necessarily display drive, because, still a lot of notebooks still use a CCFL and the LED backlight is still a small percent of the notebook market today. I think there's voltage regulator opportunities and other power management opportunities in the 12-volt and 30-volt area that would come up faster than the backlight drive would for notebook.

So, it's generally our feeling that notebooks will probably transition slower to the white LED than some of the other consumer products. Probably the first one to come up there might be the larger-screen personal media players, which are DVD-based portable television-like type applications. You might see them in airplanes, for example, people watching movies on them.

Krishna Shankar - JMP Securities

Great. And then do you have any other products under development which potentially could have higher margins targeted towards sort of the industrial, telecom and embedded power management-type applications?

Richard Williams

Well, I think you'll see that the 12-volt switching regulators and then later the 30-volt switching regulators naturally do that. They open up into more markets and those markets are slower-growing but very stale. We do need to add, though, that as you address those markets, you do have to go through distribution more than doing it all through what you would call a field applications, engineering-based design-ins.

So it's a little bit of a different business model. You go to market a little bit differently and you need more central application support, more applications notes, how-to guides, so that the customer can design in your product without personal involvement of the Company.

Of course, today, on our high-volume applications, whenever we're finding new opportunities, we send our FAEs right into the customer to work with their design engineers. But in some of the industrial markets, they're simply too many and too small to do that, and then you have to rely more on central applications and distribution to get those design wins.

Krishna Shankar - JMP Securities

Great. My final question, you may have mentioned this before, but who are your foundries, again, both for your standard and also your high-voltage BCD process?

Richard Williams

We do not rely on conventional foundries. We partner with DRAM fabs or XDRAM fabs and as a RAM fabs migrate -- as DRAM companies migrate to their new generation DRAMs, they vacate their last fab and then they backfill it with camera, image sensors and LCD line drivers. We then partner with them, bring our own technologies into those fabs and then have kind of a unique relationship to bring this proprietary technology and the products into the marketplace.

The two major partners that we work with is MagnaChip, which was a spin-off of Hynix. So MagnaChip is one in Korea. And that's both in Chungju and Gumi, Korea. And then also Vanguard, VIS, Vanguard International Semiconductor. So VIS, Vanguard, was a spin-off out of TSMC, and they recently also acquired a number of fabs, I believe from [Windvon].

So we're running both analog CMOS in the 0.5 micron node out of both companies and ModularBCD out of both companies. The ModularBCD has already qualified in a production in MagnaChip. It's imminently qualified in Vanguard.

And we basically believe in multi-sourcing and balancing the lines, but at the same time making sure that we have high volume for all of our partners so their economy of scale is satisfied.

Krishna Shankar - JMP Securities

Perfect. Thank you and congratulations on a good quarter again.

Richard Williams

Thank you.

Brian McDonald

Thank you.

Operator

Thank you. Management, there are no further questions at this time. Please continue with any closing comments.

Brian McDonald

I think that's it. We'd like to thank everybody for joining us on the conference call.

Richard Williams

Thank you very much.

Operator

All right, thank you. Ladies and gentlemen, this does conclude AnalogicTech third quarter 2007 earnings conference call. If you would like to listen to a replay of today's conference in its entirety, you can do so by dialing 1-800-405-2236 or 303-590-3000, input the access code 11099306. Once again, to listen to a replay, please dial 1-800-405-2236 or 303-590-3000, input the access code 11099306.

ACT Conferencing would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.

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Source: Advanced Analogic Technologies Q3 2007 Earnings Call Transcript
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