Monolithic Power Systems, Inc. Q3 2007 Earnings Call Transcripts

Oct.30.07 | About: Monolithic Power (MPWR)

Monolithic Power Systems, Inc. (NASDAQ:MPWR)

Q3 2007 Earnings Call

Oct 30, 2007, 05:00 p.m. ET

Executives

Mr. Michael R. Hsing - Founder, Chief Exec. Officer

Mr. C. Richard Neely Jr. - Chief Financial Officer

Analysts

Vernon Essi - Needham & Company

Rick Schafer - CIBC World Markets

Craig Berger –FBR

Steven Park –Wedbush

Ross Seymore - Deutsche Bank Securities

Tori Sanburg - Thomas Weisel Partners

Simona Jankowski - Goldman Sachs

Steven Smigie - Raymond James

Sung Perry - Lieberman

Operator

Good afternoon Ladies and gentlemen, and welcome to the Third Quarter 2007 Monolithic Power Systems, Incorporated Earnings Conference Call.

I would now like to turn the call over to Mr. C. Richard Neely Jr., Chief Financial Officer. Please proceed.

Richard Neely

Good afternoon and welcome to the Third Quarter Fiscal 2007 Monolithic Power Systems Conference Call. Michael Hsing, CEO and Founder of MPS, is with me on today’s call.

In the course of today’s conference call, we will make forward-looking statements and projections that involve risk and uncertainty, for example, our business outlook including our business and financial outlook with the fourth quarter of 2007, projected fourth quarter net revenues and gross margins, our expectations for fourth quarter and litigation, stock compensation and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, continuing market acceptance of our MiniMonster LDO battery charger and other high performance products, plan new product introductions, potential customer acceptance in the various opportunities these present, our process development, design activities and relative competitive position, expected growth or decline in our product lines and geographic markets and finally anticipated outcomes and schedules of our pending litigations.

Forward-looking statements are not historical facts or guarantee of future performance or events and are based on current expectations, estimates, beliefs, assumptions, goals, and objectives and involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results expressed or implied by these statements. Risks, uncertainties and other factors that could cause actual results to differ are identified in SEC Fillings including but not limited to our second quarter Form 10-Q filed on August 1st, 2007, which is accessible through our website, www.monolithicpower.com.

Also please note that during this call, we will discuss net income and operating expense on both a GAAP and a non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation, legal settlement and provision cost and one-time lease write-downs or write-ups and their related tax effects.

We will also discuss our expected non-GAAP research and development and selling general and administrative expense for the fourth quarter of 2007 which excludes our expected charges related to stock-based compensation. A table that outlines the differences between non-GAAP financial measures to GAAP financial measures is included in our earnings with these which we have filled with the SEC. Now we refer investors to this release as well as to the reconciling tables that are posted on our website.

I’d also like 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. We would like to start this call by reviewing our third quarter of 2007 business highlights.

Following this update, I would discuss our financial results then we will conclude by discussing our expectations with the fourth fiscal quarter of 2007. We will then open up the call to your questions.

So let us start with the business highlights.

MPS set a new record for revenue in the third quarter of 2007 as demand for our products was very strong. Our third quarter revenues exceeded our updated guidance as we recorded our best quarter in the company’s history with revenues of $40.2 million and non-GAAP earnings of $0.27 per share.

MPS maintained solid gross margins with 63.5% and closed the quarter with over $101 million in cash and cash equivalence.

For new product introductions, we increased shipment of early production quantities of our new high current, high voltage MiniMonsters product family in the third quarter. We are also seeing good design activity for this product family in multiple key target markets such as large flat panel TV, telecommunication equipment, set-top boxes, high-end desktops, servers and notebooks.

Early revenue levels are meeting our expectations and we continue to be optimistic about the MiniMonster family. We are also seeing good activities in our new LDO and battery charger products in different market segments. We believe these high speed, high precision, low power consumption products will be winners in these markets.

The third quarter also saw a resurgence of growth in the TTFL product area as MPS was able to take advantage of this significant sequential growth in the notebook computer market.

In the manufacturing arena, MPS was able to offset pricing pressures in our older product offerings with greater cost efficiency and maintained our gross margin in the upper end of our target model for the third quarter of 2007 recording a gross margin of 63.5%.

Our inventory days were flat at 98 days as we filled the strong demand from our distributor’s inventory and kept our own stocks intact to the prior quarter.

We continue to grow our cash balances as we increased cash and cash equivalents by $9.5 million in the quarter to $101.8 million as of September 30, 2007.

On the expense side, our non-GAAP operating expenses were $13.9 million down $1.2 million from the second quarter of 2007 as our third quarter litigation spending was $1.5 million as a result of reduced activities in the ’02 micro case and we avoided some trial expense as a result of the settlement with Taiwan’s Sumida.

Now let’s look at the financials in more detail. Turning to the P&L, on the revenue line, third quarter of 2007 net revenues of $40.2 million grew 47% from the third quarter of 2006 and above our guidance going into the quarter and the update given in mid September. This compares to net revenues of $30.8 million in the prior quarter, an increase of 30% sequentially.

Revenue breakdown of our third quarter revenue by product line, DC to DC product sales were $25.6 million up 36% from the $18.8 million recorded in the year ago quarter and up 34% from the second quarter of 2007.

Year-over-year, our DC to DC products grew in the flat panel TV, set-top box, GPS and digital picture frame markets as some examples. We also started to see meaningful sales volumes in some of our newer product areas such as battery chargers and LDOs.

The LCD backlight revenues for the third quarter were $10.9 million, an increase of 47% from the same quarter a year ago and up 21% from the prior quarter. This exceeded our expectations for revenues in this product area as we grew our business with existing customers as the notebook segment saw a good growth in the quarter.

Audio revenues once again hit record levels coming in at $3.7 million up 262% from the $1 million recorded in year ago quarter and up 34% from Q2 2007. This performance reflects the continuing production ramp at several consumer product customers in the LCD TV space.

Let’s move down to the gross margin line. Our third quarter gross margin was 63.5% compared to 65.6% in the same quarter of 2006 and flat to the 63.5% in the prior quarter.

Despite strong ASP pressures in some of our older product offerings, MPS was able to maintain stable gross margins. This was largely due to excellent cost control and efficiencies.

Let us look at our reported expenses on a GAAP basis. On a GAAP operating basis, our expenses were $17 million in the third quarter. This includes $15.5 million in R&D and SG&A expense, which includes $3.1 million for stock compensation expense under FAS 123, our accounting rules and litigation expense of $1.5 million. Compared with the third quarter of 2006, GAAP operating expenses decreased by $1.5 million. This amount comprises of an increase in stock compensation expense of $226,000.00, a decrease in litigation cost of $1.6 million, an increase in R&D spending of $1.6 million, an increase in SG&A spending of $964,000.00 and a decrease in one-time charges of $3 million as we record a legal settlement with Micro in the prior year.

Now I would like to review our non-GAAP operating expenses.

Excluding stock compensation, our non-GAAP operating expenses for the third quarter or $13.9 million compared to $12.7 million in the third quarter of 2006 and $15.2 million in the second quarter of 2007.

The $1.3 million expense decreased from the second quarter of 2007 was due to litigation spending which decreased by $2.6 million from the second quarter of 2007.

Non-GAAP R&D costs were up $687,000.00 as we increased new product introduction and employee bonuses, non-GAAP sales, general and administrative cost increased by $644,000.00 due to higher commissions and employee bonus costs.

Our third quarter GAAP net income was $8.3 million or a profit of $0.23 per fully diluted share. This compares to a net loss of $1.9 million for the third quarter of 2006 or $0.06 per basic share. In the prior quarter, MPS recorded a net loss of $6.4 million or $0.20 per basic share.

On a non-GAAP basis for the third quarter of 2007, we had net income of $9.7 million or $0.27 per fully diluted share which excludes stock comp expense of $3.2 million and a related tax effect of $1.8 million and uses an estimated tax rate of 25%. In comparison for the third quarter of 2006, the non-GAAP net income was $3.9 million or $0.12 per share which included stock comp expense of $3.2 million and included an adjusted tax amount of $207,000.00.

Let’s look at some of the major changes on the balance sheet this quarter. Cash, cash equivalents, current restricted cash and investments were $101.8 million at the end of the third quarter, up from $92.3 million at the end of the second quarter of 2007 and up $27.8 million from the $74 million recorded a year ago.

The increase in cash from June 30, 2007 came from operating cash flow of about $12.6 million in stock option exercises and ESPP purchases which is our employee stock purchase plan of about $6.3 million. This was offset by an increase in inventory and working capital of $7.3 million and capital expenditures of $2.1 million resulting in quarter-over-quarter cash growth of $9.5 million. Accounts receivable into the third quarter of $12.8 million compared with $8 million at the end of Q2 ’07 and up from the $9.6 million at the end of the third quarter of 2006.

Collections continue to be well-managed as our days sales outstanding were 29 days at the end of Q3’2007 compared with 24 days at the end of the second quarter of 2007 and 32 days at the end of the third quarter of 2006.

Our inventories at the end of the quarter were $15.8 million or about 98 days of inventory. This compares with $11.9 million or 96 days of inventory at the end of the prior quarter.

Looking back at the end of the third quarter fiscal of 2006, our inventory totalled $7.4 million or about 72 days of inventory. We kept our internal inventory level higher than normal in the third quarter to offset low distributor channel inventory and meet our October shipment schedules, and we are comfortable with this level of inventory.

I would now like to turn to a discussion of general business conditions.

We had outstanding revenue and booking activity in the third quarter as all three MPS product lines grew in concert. This growth came from a combination of new business penetration as well as general market growth in notebook computers, flat panel TVs and consumer accessories.

Geographically, in the third quarter of 2007, 65% of MPS sales were shipped to Taiwan and China and 35% to other regions with the largest growth in Europe and Korea from the second quarter. US revenues are also showing significant growth in diverse markets with excellent momentum going into 2008.

For the CCFL product line, sales for the third quarter of 2007 did very well. But the legal issues largely behind us, we participated in the strong third quarter growth of the notebook segment of the computation market and we believe we will be able to gain back some market share in the inverter portion in the backlighting market in the near future.

In the new product area, we are very excited about several new product initiatives beyond the well publicized MiniMonster family.

One of the new product families that are getting a lot of design attention is our high-voltage 40 volt DC to DC offering. This is an ideal product for the automotive and industrial markets and our application team has seen very heavy activity. Another product family we are excited about is our next generation battery charger family. We plan to release about five products by end of this year and they will offer features and cost advantages that are unrivalled by any existing competitor.

Finally, we’re seeing growing revenues in our high performance LDO products area. We see all these compelling solutions as very high potential products for MPS in 2008 and 2009.

Now turning to our outlook for the fourth quarter of 2007, our revenue guidance is in the range of $37 to $39 million reflecting normal seasonal patterns for our products in the fourth quarter. Gross margin is expected to continue in upper end of our target range of 60% to 63%. We expect stock based compensation expense in the range of $3.0 to $3.5 million.

We expect non-GAAP research and development and selling, general and administrative expense in the range of $12.5 to $13.5 million. This estimate excludes the stock compensation estimates mentioned above.

Finally, we expect litigation expense in the range of $1.5 to $1.8 million.

In conclusion, we are pleased to report that MPS set record quarterly revenues and stronger in the third quarter of 2007. All three product lines grew sequentially at double digit rates as new applications are beginning to kick in for the existing products and the product introductions. For the past 18 months they are starting to generate noticeable revenues.

We continue to generate significant cash adding over $9 million over the prior quarter figures. We see normal revenue guidance for our heavily consume rated business in the fourth quarter and are optimistic that our many new products including the MiniMonster, battery charger, high performance LDO, and high voltage products that are based on our BCD plus process technology will add substantial revenues for the company in the future.

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

Question-and-Answer Session

Operator

And your first question comes from the line of Vernon Essi with Needham & Company, please proceed.

Vernon Essi - Needham & Company

Thank you, nice numbers there. I was wondering if you could give us a sense of what the market breakouts might look out, I know you don’t normally disclose that, but can we get an understanding of, and it’s obviously broad but is there any specific area you would highlight more than any others that grew stronger quarter on quarter.

Michael Hsing

We had a press release a few weeks ago, but we see the stronger demand from the LCD TVs and the notebook.

Vernon Essi - Needham & Company

I understand but I am sorry Michael, I apologize. I am talking about into the guidance in the fourth quarter.

Michael Hsing

In the fourth quarter, our business is a kind of turn business, but that we expect a strong demand in it from the consumer side like LCD TV.

Richard Neely Jr.

And Vernon by segment, there isn’t any particular guidance, all the segments will probably go down a little bit. That’s sort of the outlook and that’s based on just the seasonal patterns, but there’s no one segment will go down more than the other. We expect them all to decline slightly.

Vernon Essi - Needham & Company

Your next Gen product line especially focusing on battery charger, what’s the power range you are looking at and what application?

Michael Hsing

Battery charger is only one of the products, and we introduced several other ones like high performance, high speed LDOs and high voltage products. To answer the question exactly these are for switching chargers and the linear chargers, so we have few products that were either released or still in line. And those are charging currents are from one, two, three, four amp current

Vernon Essi - Needham & Company

And then finally, just in terms of inventory level that are out there, a lot of companies are seeing pull downs on their inventory levels in the channel, you seem to be holding yourself well. Any thoughts on how that might play out into the end of the year? Do you feel comfortable with where you’re at with your distribution partners?

Richard Neely Jr.

Yes, as we mentioned on the call Vernon, our channel inventory levels are actually a little bit lower than normal so we feel that the channel is well under control and so we are ourselves have reasonable inventories but we’re doing significantly higher revenue and volumes obviously in the second half. So we are keeping the inventory ourselves, but our distributor channels are fairly lean.

Vernon Essi - Needham & Company

Okay, thank you.

Operator:

And your next question comes from the line of Rick Schafer with CIBC, please proceed.

Rick Schafer - CIBC World Markets

Hey guys, just got a couple of questions for you. First, it seems like you guys finished the September quarter very strong, upside even from your pre-announcement. Can you comment and give us any flavor for book to bill, it seems like it is ought to be positive, if I’m off base there, maybe comment a little bit on what turned this quarter compared to the last, and have you actually started to see things, sort of start slowing down seasonally or is this just your kind of basing this on years past kind of normal seasonality.

Richard Neely Jr.

Yes Rick, truth is that, we don’t put out bookings and backlog numbers because we have a heavy component turns like most analog company. We saw good bookings this quarter that will support our Q4 guidance. So, that’s about as far as we can say on the booking.

Bookings were reasonable so that they could support the guidance, so we see it as a normal quarter on booking. Relative to how the market is trending, Michael will chime in on that.

Michael Hsing

Yes, on the bookings, we never can accurately predict it and we don’t have a clear pattern. The market trend is that we are still a small company and we can not accurately predict what the market is. But we do see a strong demand from LCD panels that are related to the business. So, they are going well, and as we see in the third quarter, fourth quarter, we still see the similar trend but we don’t know how long it will continue.

Rick Schafer - CIBC World Markets

Okay, so you haven’t actually seen the start of seasonally sort of soften up yet?

Michael Hsing

No.

Richard Neely Jr.

It is too early. That would be a December situation. I mean, it’s October and November, we can’t tell yet.

Rick Schafer - CIBC World Markets

Okay. But Rick, is it safe to say that turns are pretty similar to this quarter to where you where last quarter?

Richard Neely Jr.

Yes, I would say that is safe to say.

Rick Schafer - CIBC World Markets

Okay, and another question, if you could comment on the sort of success you’re seeing, I know you talked about CCFL and the notebook stuff being up, I think it’s 20% or 21% sequentially, I know you talked about share gains as we look in ‘08, do you think we’re already starting to see some share gains, or is that really something that we are going to rely on next year?

Michael Hsing

Well, the CCFL, clearly the legal risk is behind us, and I can’t really quantify whether it’s from a market share gain or it is from the market itself, the unit volume increased by itself. So, next year, we will feel good about it.

Rick Schafer - CIBC World Markets

Hey Michael, then part of that, are you getting calls from some of your former customers maybe that are thinking about coming back or starting to look at Monolithic parts again or?

Michael Hsing

Yes, absolutely, we started right after the trial, and we’ve seen the increase of activity.

Rick Schafer - CIBC World Markets

Okay.

Richard Neely Jr.

And, we have seen an increase, but you won’t see the revenue because it is nine to 12 months, so you have the spring model, hopefully, will be in some of those that spring a little late, but it is just too early to get anything else.

Rick Schafer - CIBC World Markets

Okay, that’s where I was getting at, Rick, thanks. That was what I was trying to dig for when we might start seeing it on the top line.

And then the last question, if you can give any color on, sort of, you probably would not give the number, but if you do, that’s great, but I’d be curious with the relative profitability of some of your core CCFL business might be, versus let’s say the DC to DC biz and then if you could give us any idea of, is MiniMonster big enough now to be talked about separately. I mean, is it 5% of rev gen or any idea where MiniMonster sits?

Richard Neely Jr.

Okay, first one, our gross margin that we do have, we have a range between all the products at a fairly narrow range, so as we said before, the DC to DC products tend to be a little bit higher and CCFL is more middle of our range, but there isn’t a broad separation, in other words, we do not have 80% product and 40% product. Everything is fairly narrow gross margin range so we do not break it out.

On the MiniMonster side, you have to remember the first product sample shipped a year ago, actually less than that, nine months ago, so nine to 10 months ago. So, the fact we have as much revenue as we have, we’re really excited because that’s the fastest growing product we had, but we’re not releasing numbers because we don’t want to put them out separately. It’s something we look at internally because we look at it as a ramp over 19 to 24 months. Now the fact we’re shipping things in nine months is amazing to us. So that’s really how we see it.

Michael Hsing

But let’s put it that way, that is one of the fastest, if not one the fastest growing product in the history of the company, and other than the initial CCFL product back ten years ago, but the product line grew really well and we’re very excited about it.

Rick Schafer - CIBC World Markets

Within DC to DC and MiniMonsters, I’m assuming.

Richard Neely Jr.

It’s in there.

Rick Schafer - CIBC World Markets

But I’m saying, but its higher margin even within DC to DC, is that safe to guess?

Michael Hsing

Currently, the volume is small, the margins are higher. So by the way, it is better that the volume would be significantly larger. The margins will be in our business model.

Richard Neely Jr.

It would be the same as the old DC parts, I think.

Rick Schafer - CIBC World Markets

Okay, great thanks, guys.

Operator

And your next question comes from the line of Craig Berger with FBR, please proceed.

Craig Berger – FBR

Good afternoon, guys. Nice job. Quick question on the audio, it looks like it’s $3.7 million this quarter, that’s getting to be I guess fairly significant. What are the customers programs that that’s ramping into? Who are the customers and kind of what’s the outlook from here?

Michael Hsing

We can’t release the customer name, but we have a couple of new products, some large TV makers, they designed the thing and the revenue showed up. This is not a typical MPS business. We want to get as many customers as we can, but this audio product line is just our field customers and we try to broaden up, and again this is one of our product line is that we don’t see as a high growth as the MiniMonster product family.

Craig Berger – FBR

Michael, so it’s still a pet project of yours or has it graduated beyond the pet project at this point?

Michael Hsing

What I said is that it went beyond that, and we tried to get more engineers to enhance the engineering capability in our product line.

Craig Berger – FBR

And moving over to the inventories, your inventories went up. You said you’re carrying more because these are carrying so little, can you help us understand what this two weeks of inventory is, maybe what lead time trends have done and how you got comfort around your customer inventory levels?

Richard Neely Jr.

Okay, Craig, on our distributor inventory levels, we typically target for them to have around 30 to 45 days and we’re below that minimum level in to the quarter end and in fact forecasted it in the next quarter, so we know their inventories are lean, we get reports on a continuous basis, we check those and so forth. So our inventories are actually flat Q2 to Q3. Typically, we would drop a little bit in Q3. We’ve kept them flat because we know our channel inventories are lower than normal, so that’s how we’ve been managing it.

Craig Berger – FBR

How do you know or how do you gain comfort that maybe customers aren’t stock piling inventory, the OEMs, how do we gain comfort that we’re not going to wake up on January 2nd and have a big inventory problem?

Richard Neely Jr.

I get that question often and I can tell you we control our inventories, our distributors and their sell through, but there’s multiple, probably five level deep from an analog product to the retail shelf is probably five or six levels and we’re honest, we have no idea if that’s fine or our retail people have inventories or not. We don’t have that kind of visibility. We just try and control our near term customer interfaces that we understand and manage from there. There’s no way we have any of that visibility.

Craig Berger – FBR

How are your lead times or pricing trends with your foundry suppliers in case you needed more upside?

Michael Hsing

We still have room to grow. We can grow there and also we have a lot of inventory too, and we’re not worried about it for our products in near future.

Craig Berger – FDR

Last question for Rick, can you just remind us what normal seasonality looks like in the first quarter and whether you think there are any factors that might cause us to diverge from normal seasonality this year?

Richard Neely Jr.

Okay, Craig, as you know typically Q3 is our biggest quarter and there is a slight drop off to Q4 which is what our guidance shows, and Q1, because almost all of our products are shipped to Asia and all the manufacturing is in Asia and there is a holiday period of ten days or so, we typically see a 10% to 15% reduction in Q1 revenues and as far as we can tell at this moment, but we’re not giving any guidance for Q1 ’08, we see that kind of seasonality is likely. So that’s typically what happens.

Michael Hsing

Our product line and the characteristic of our product hasn’t really changed, so we expect 2008, the trend would be similar to 2007 or 2006 with a lower first half revenue will be lower in the first half and higher on the second half.

Craig Berger – FDR

Thanks a lot guys.

Operator

And your next question comes from the line of Steven Park with Wedbush, please proceed.

Steven Park – Wedbush

Hi, I just had a quick question about kind of the longer term growth rate for the CCFL and the DC to DC business, is that something in the 20% to 25% or is that something better than that?

Richard Neely Jr.

Our target for the company, Steven has to grow around 20% to 25% and trying to break it out by product line is too difficult to call. I think in general, we believe a lot of our new products in introduction have been the DC to DC area. We expect that to grow strongly.

CCFL in general is a more mature product line, however, the notebook has been growing very quickly, so I don’t know, the fact of it is our mature product line right now is being offset by very good notebook growth. As you know a lot of desktops have been replaced by notebooks and this continue to be the trend, so we just look at the general mix and it’s probably 20% to 25% over time. That’s how we target the company part introduction strategy and that’s how we target this company to grow.

Steven Park – Wedbush

The 20% to 25%, does that kind of incorporate the market share potential gains for LCD TVs or is that more just kind of something added later on top?

Richard Neely Jr.

In general, we only have a few markets where we can track our products fairly easily. A lot of our customers, we have 2000 customers spread across 50 different market areas, so the ones that we know we have some concentration in are in notebook computers with the backlighting and a lot of our business in Japan and Korea and in Europe are on TVs, the DC to DC power management, so those are areas we know. But in general, many of our DC products can be used inside different markets, so meaning from a disk drive to a hand held to a TV to a set-top box, so it’s often difficult for us to assign broad market characteristics, what we do is look at the product where we have it and then we try to increase penetration within the market that we’ve gotten a foothold in, that’s more typical MPS strategy.

Steven Park – Wedbush

Okay, just one more question, regarding kind of gross margins in the longer term, a year out or two, do you expect them to kind of maintain at the kind of 62% to 63% level or can we see some potential upside on that in the kind of the out year?

Richard Neely Jr.

We feel fortunate that the upper end of our range, we’ve been able at the higher end of the range, but our goal is not gross margin expansion, it is bottom line margin expansion. So we have a long way to go to get our bottom line margin expansion and we want to grow revenues. Size is more important for us on the revenue side. If our gross margins are in the current range that we’ve talked about will happen, we’re not trying to improve gross margins, but we know if we grow revenue 20% to 25% a year, we will be improving our bottom line.

Michael Hsing

We are really concentrating on the top line and the bottom line and long term business model again is in the higher 50s and low 60s gross margins.

Steven Park – Wedbush

Okay, thank you.

Operator

And your next question from the line of Ross Seymore with Deutsche Bank, please proceed.

Ross Seymore - Deutsche Bank Securities

Thanks, guys and congrats again on a strong quarter, what’s your expectation for your own inventory at the end of the fourth quarter? Would it go down or up sequentially?

Richard Neely Jr.

It would be about the same level. Again, we’re keeping our channel inventories lean so we’ve got a mixture. We have enough because there are a lot of turns, we have a lot of turns in business, so I expect to stay around in the same level.

Ross Seymore - Deutsche Bank Securities

When do you expect the channel inventory to do?

Richard Neely Jr.

About the same as well, that’s our current outlook.

Michael Hsing

Could be a little higher, could be a little lower and so we don’t expect to have a drastic business change.

Ross Seymore - Deutsche Bank Securities

Okay, that makes sense, and then the linearity of orders in the quarter, given that you positively pre-announced and then beat that number. Is it safe to assume strength continues through the very end of the quarter?

Richard Neely Jr.

Yes, we had customer requests that we had to turn, so we even beat our number by a little bit than we thought, so it’s not a huge amount, but enough to push us over the top there.

Ross Seymore - Deutsche Bank Securities

You guys have these products that you’re talking about, whether it be the MiniMonsters, the battery chargers, LDOs, et cetera, what way would you suggest to us to be able to track the progress of those products within your business and the implications be there for revenues, gross margins or both?

Michael Hsing

Because as Rick said earlier, we have so many customers and we have so many products, each product only contributes a little bit on the revenue growth side. And so it’s kind of difficult, but we can talk about it, we can keep talking about our product introductions and our product designing activities, and they are sort of in different markets, and that’s all we can do frankly.

Ross Seymore - Deutsche Bank Securities

So for us, externally we just rely on what you tell us every quarter pretty much?

Michael Hsing

Oh yes. We tell you exactly what we know.

Ross Seymore - Deutsche Bank Securities

Okay, and then the last question for me is in the APEC side of things, how should be we think APECs if your goal is to grow the top line 20% to 25% year-over-year, how scalable is the APEC, how fast do you, how fast do you have to grow that to deliver that sort of sale?

Richard Neely Jr.

To answer your question, Ross, in general, right now, at this stage of the company, we probably can’t grow R&D that fast if we try. It’s difficult to find the skilled people. We’ve grown a lot this year, but I doubt we can keep up with that growth rate in R&D. G&A doesn’t really have to grow that fast, but we get a lot of scaling and leverage at our current size. Probably the one area that in the near term should grow is sales because we have a lot of sales channels to build out in sales and marketing, we would expect to model that growth with sales growth because per GAAP we had only have five or six sales guys in the US right now and similarly in Europe, so there are many areas of the world where we can increase our penetration by increasing our sales and marketing growth.

We’re very careful. Michael and I are very conservative, so we’re not going to overspend, but we would expect sales and marketing to grow with sales and R&D and G&A would be a little bit less just one of the factors, R&D because it’s difficult and G&A because we don’t really need to grow that fast.

Ross Seymore - Deutsche Bank Securities

What percentage roughly of SG&A is the S?

Richard Neely Jr.

I think it’s about 60/40.

Ross Seymore - Deutsche Bank Securities

60/40 sales to G&A or the other way around?

Richard Neely Jr.

Sales and marketing basically.

Ross Seymore - Deutsche Bank Securities

Sales and marketing is 60?

Richard Neely Jr.

The marketing is higher than G&A.

Ross Seymore - Deutsche Bank Securities

Okay. That’s helpful. Thanks and congrats again.

Operator

Your next question comes from the line of Tori Sanburg with Thomas Weisel Partners, please proceed.

Tori Sanburg - Thomas Weisel Partners

Good afternoon, great quarter. A couple of questions, first of all, Mike you mentioned the TV market still seems strong here in October. Have you seen any changes at all in the notebook market so far?

Michael Hsing

Still very similar, and we don’t know how long it will last.

Richard Neely Jr.

We’ve seen market data. Q3 was a big unit quarter and Q4 there’s supposed to be slight growth, so that’s our plan, but we haven’t seen any corroborating evidence there, one way or the other.

Tori Sanburg - Thomas Weisel Partners

Did you run into any supply constraint issues in your markets not necessarily your products but from other component makers?

Michael Hsing

No, we don’t notice that, either for the notebook business or TV business, we are small component shipping for those ODMs or for us it is difficult to know what their constraint was at all.

Tori Sanburg - Thomas Weisel Partners

I know you don’t give booking data, but could you talk qualitatively about forecast from your customers. Are those forecasts getting better same or worse?

Michael Hsing

I think they’re similar and they are very much to hold to seasonality, just like in the last year.

Richard Neely Jr.

In terms of quality, Tori, I can’t recognize any change, better or worse.

Tori Sanburg - Thomas Weisel Partners

Okay. And you mentioned you plan to release five new charger products by the end of the year, what would be some of the main applications for those chargers?

Michael Hsing

I don’t know if the five chargers are out there. We plan to release a number of the LDO products and the chargers and some other high voltage products in the recent quarter.

Tori Sanburg - Thomas Weisel Partners

Okay, and your 40-volt products, when should we expect to see some revenue from those?

Michael Hsing

Any product that we introduce, we expect to see the revenue about 12 to 18 months and that’s almost all of our products will follow that similar pattern, other than our MiniMonster product, we see ramping up a lot faster.

Tori Sanburg - Thomas Weisel Partners

And then just lastly, would you care to break just roughly by end market your revenues? Meaning is notebook half, is it a third, just trying to get a bit of flavor of that?

Michael Hsing

For those new products?

Tori Sanburg - Thomas Weisel Partners

No, your total revenues this quarter.

Michael Hsing

Total revenues, then Rick can answer that.

Richard Neely Jr.

Well, the only one you can reliably do is to look at the CCFL number knowing that most of that are notebook computers and then you can divide that by notebook units, other than that it’s too difficult because, again the same DC power measure chip can be in five different applications and we don’t get that kind of data from our supply chain so it’s more of a guess. The only one that we haven’t really, couldn’t get a handle on is CCFL because it’s a unique part. No one else has one and it only goes one place.

Tori Sanburg - Thomas Weisel Partners

Okay, just one final question, could you give us tax guidance for Q4 and ’08 please?

Richard Neely Jr.

I said the non-GAAP rates for the year will stay at around 25%. Our effective tax rate for the year is about that right now. Quarter by quarter, it’s hard to say, but that’s probably fair for ’07 and if we have any changes for ’08, we’ll let you know in the next call.

Tori Sanburg - Thomas Weisel Partners

Great quarter again, thanks.

Operator

And your next question comes from the line of Simona Jankowski with Goldman Sachs, please proceed.

Simona Jankowski - Goldman Sachs

Hi, thanks very much. Rick, just wanted to clarify one more item on the inventory, so were you basically saying that your channel inventory declined during the quarter?

Richard Neely Jr.

Yes.

Simona Jankowski - Goldman Sachs

So really, your shipments that you kind of look at them on an end market perspective were even higher than what you reported because you’re facing that head wind?

Richard Neely Jr.

We don’t do a resale but I guess.

Michael Hsing

That’s the difference, yes.

Simona Jankowski - Goldman Sachs

Right, but you recognized those, right?

Michael Hsing

Right.

Simona Jankowski - Goldman Sachs

Okay. Why do you think your distributors are reducing inventories of your products when they’re facing such a significant growth?

Michael Hsing

Well, because remember almost two years ago, we had inventories issues from our distributors and so we control very tightly. We tightened the leash since then.

Richard Neely Jr.

Well, we tightened the leash. The other part too is it’s just the basic economics of it or the amount of inventories substantially higher. They have to pay us in 30 days, so if we just look back and I mean, our revenue numbers are 50% higher almost than a year ago, so the distributor just from a cash basis, they are just being a little bit lean as well.

Simona Jankowski - Goldman Sachs

Okay, that’s helpful, and then secondly, I think you had said last quarter that at some point in the quarter it led to your CCFL products for an allocation with your customers, your business grew roughly in line with notebook shipments, so that seems okay, but did you get any sense at all that you might have over shipped end demand? Is that the kind of thing you’d be able to see from where you sit?

Michael Hsing

Well, so far, we ship what our customers buy. And we look at the overall market the same way as you do and then when our Q4 and the Q1 with the notebook, it is a notebook volume.

Simona Jankowski - Goldman Sachs

Okay, and now on the DC to DC business which is up 34% sequentially and that’s I think the second best sequential growth you’ve had in that business ever, what are some of the chunkier items in there you can call out for us just to understand a little bit what drove that significant growth, were there significant designs that ramped or what else can you point to, to help us understand?

Michael Hsing

As I said, actually back a year and a half ago, we said that we will have a lot of design wins in the flat TV area, and this is the result of that, and this year in the third quarter and at this quarter, we’ve seen a significant TV unit growth and MPS is ultimately benefiting from it.

Simona Jankowski - Goldman Sachs

Sure, I know you can’t really distinguish kind of where exactly your chips end up in the end markets, but you have a sense of whether TVs may be close to half of your DC to DC business?

Michael Hsing

Oh no. Not near that. We see that a few percentage of the growth either come from the TV side. That’s how we can identify a clear winner from the rest of the market. Actually, overall, our product applications, we have more applications and all these applications and the units are growing, the units grew in the third quarter.

Simona Jankowski - Goldman Sachs

Okay, and then just lastly, I think Rick was mentioning that there has been some increased traction in some of the broader based markets in the US, is that for your Abnet relationship or are there channels?

Richard Neely Jr.

It’s both. Abnet is doing well. I mean doing per quarter what we did per year, a year ago, so the sales team is pleased because as you recall, when we signed up Abnet last year, they had to start from scratch. They are basically out there to get new design in industrial and smaller markets in the US that we don’t have the sales channel to cover so they have to start from scratch and do that 18 months design cycle just like we would with any product and they’re doing a good job, pretty much 18 months into it they’re starting to get some good traction. The other part of Michael’s comment was more about business that doesn’t show up in the US numbers, but gets transferred to Asia. So the design team and sales team in the US are doing a good job generating a lot of business that ends up being built in Asia, but the design win is done in the US.

Simona Jankowski - Goldman Sachs

Okay, thank you very much.

Operator

And your next question comes from the line of Steve Smigie with Raymond James, please proceed.

Steven Smigie - Raymond James

I was hoping you could talk a little bit about seasonality after Q1 and also it seems like Q2 would be a pretty big ramp and then Q3 even bigger ramp and then Q4 back down a little bit.

Richard Neely Jr.

That’s typically how it happens. Q1 typically goes down 10% to 15%, some of it is just you just take the number of days of the Chinese New Year divided by the number of manufacturing days and you almost come up with that number. Ours are not the kind of products that people backlog. They buy them when they need them and when the factories are running, they don’t buy them but we’re pretty basic products that they expect to have available so they don’t order six months in advance, so that’s why we typically have the Q1 dip. And Q2 goes up, Q3 is our strongest quarter right now because of our strong notebook and consumer mix. Q4 is usually flat to slightly down, that’s our typical Q4, so what you’ll find is the second half is usually, it’s more like a 55/45 spread or whatever. If you take your annual number and it will be much greater in the second half or 60/40, I guess, is more likely.

The second half is significantly higher than the first half. So it does make us a little difficult to model from some of the larger companies where they’re all spread out kind to tend to have incremental quarterly growth and we have surges and decline, but because we’re a smaller company dependent on different markets, we don’t have the broad industrial, medical markets so sort of even it out.

Steven Smigie - Raymond James

Okay, and specifically, what do you expect seasonality to be for Q2 next year?

Richard Neely Jr.

Next year, it’s too early to call that.

Michael Hsing

I think it will just follow as I said earlier, I think it will follow our past.

and Q2 will be stronger than Q1 and the Q1 is the weakest.

Richard Neely Jr.

Q3 is stronger.

Michael Hsing

Q3 is the strongest and much stronger than Q2 and Q4 is flat or a little lower. That is the pattern that we had in the last four or five years.

Steven Smigie - Raymond James

Okay, turning to your operating expenses, touching on a little bit on some questions asked earlier. I was looking at the percentage of revenue in this quarter, it dropped pretty significantly. I understand the way you explained your GAAP and non-GAAP stuff right and I guess partly I would guess that was just because you had such fast revenue growth.

And so, as I look out to this, the quarter you have got in here seems like that percentage should come back up again and then, with that, it kicked back up even a little bit more, Q1 is you have that sort of revenue weakness there but maybe, right now, again as we get into ’08, sort of following up a bit on earlier questions there.

Richard Neely Jr.

Yes, that is correct, and in Q3, I mean our non-GAAP operating income was 29% so it almost hit our model 30. Obviously, Q4 expenses will creep up a little bit as they always do and revenue will flatten out and will go down slightly so, the margins will drop a little bit.

In Q1, they dropped even further and then they go back up so you have to average an amount for the year. Our operating expenses do not fluctuate a lot. So, when you have a big quarter, the only thing that it fluctuated in this quarter was the variable expenses for rep commissions and sales commissions of course and things like that will go up but in general, you grow your business 30% a quarter, you don’t increase your apex that much in a chip company. So that is what you will see, the operating margins will move with the sales movement.

Steven Smigie - Raymond James

Okay, great thank you.

Operator

Your next question comes from the line of Sung Perry with Lieberman. Please proceed.

Sung Perry - Lieberman

Hey guys, great quarter. I just have a couple of questions. First thing, on the CCFL side, did you guys gain any share this quarter or the benefits of that is all really next year.

Michael Hsing

The benefits, benefit from litigation is next year. This year, we don’t know. I don’t think so. Our loyal customers, they have a volume ramp up and our units grew with them.

Sung Perry - Lieberman

So, it is just market trend right there, so if you gained any share from all the litigations that is all next year, that still has to come?

Richard Neely Jr.

Yeah, I guess.

Michael Hsing

I do not think so, they can design that thing that quick.

Richard Neely Jr.

Yeah, it takes nine to 12 months, I think. Many people have used MPS in the past, so we might have a faster design cycle than normal, but even that is a nine to 12 months and no one is going to stop their notebook production line to put it there, they’re going to wait until the next models come out next spring.

Michael Hsing

But it could happen.

Sung Perry - Lieberman

Are you saying next year is too quick, or are you saying this year is too quick?

Richard Neely Jr.

This year.

Michael Hsing

I mean, this year is too quick. Logically, that would be too quick, although, it can happen.

Richard Neely Jr.

Typically, they are not going to stop their production line to replace them unless there is some major reason, but they would look at you for their next set of notebook models with a typical release a new line in the spring, or the next set of notebook models that come out, that’s what we’re competing for.

Sung Perry - Lieberman

So hopefully that helps next year. How big is the Abnet relationship for you guys and what kind of potential if we look a couple of years out kind of what US distribution could do for you guys.

Michael Hsing

Well, the US analog business market is still very, very large. So we don’t separate that reporting on the Abnet revenue now, but

Sung Perry - Lieberman

Is it 10% of revs yet?

Michael Hsing

No, its not 10% now. If its 10%, probably, we would report it. It’s a very lucrative market and we have very high hopes in it.

Sung Perry - Lieberman

As we look longer term, is that something that 10% to 20% of rev in a couple of years out or it is incremental?

Michael Hsing

It is difficult. Abnet business is slow, steady growth. We do not expect to have 20 or more than 20% in the next couple of years.

Richard Neely

Yeah that would be 10%to 20% and actually, yours would be too high, it would be less than that.

Sung Perry - Lieberman

I see, and can you talk about some of the new products that you are introducing. I mean, before you used to talk mostly about, MiniMonsters. Can you go through the MiniMonsters, the LDOs, the battery chargers, just in terms of kind of the time that you are addressing, how much time growth did you get in ’08, in ’09?

Michael Hsing

We do not have a clear, but we now expanded our extent greatly and we don’t have those products, and there are a lot of units out there, a lot of products that we’re getting. So, those are products we would just focus on. The key is we’re focused on broadening our product line and same customers, same design engineers, same system design engineers that we talk to, they can use not only one product, they can use a whole range of a product from MPS. I mean, the efficiency of ourselves will increase as we grow.

Sung Perry - Lieberman

Can you maybe do a high level for some of these products? I mean, are these kind of, the different products you are talking about, are these kind of fifty to a hundred million SIMS, or hundred to five hundred or how should we be thinking about these.

Michael Hsing

All the are new products including MiniMonsters, okay are close to a billion.

Sung Perry - Lieberman

Each of them or all combined.

Michael Hsing

Combined.

Sung Perry - Lieberman

Okay, okay. And what is your current stand right now, you think, before all these new products?

Michael Hsing

Very low.

Sung Perry - Lieberman

No, I mean but is your stand going from 500 to a billion or is it going from 200 to a billion?

Richard Neely, Jr.

Oh, I mean for example, high current or high voltage, until we have the MiniMonsters family, we have zero, we didn’t have any products that served that and same thing, with the battery charger and the LDOs we didn’t have a product. So, Mike will talk to you about the SAM, our SAM is low, we do not sell a lot of them yet.

Sung Perry - Lieberman

Okay, so you are saying that it is kind of like billion dollars of additional market and you know you are hoping to get whatever portion of that basically, okay. And how much do you need to forward spend there, I mean, if you are running at a hundred million dollars a year or slightly more than that and you have an opportunity that is massively greater. How do you need to forward spend a lot, or you can target a lot of that with your existing and the past investment?

Richard Neely, Jr.

Well, our current R&D is that spending. The products that we are making now, that are introduced will produce revenue of 18 to 24 months from now. So, it’s always the case in general of most analogue companies. What you spend on R&D now is your two years forward products so we are spending that money now. That’s why our R&D is growing significantly this year and that we’ve talked a lot about every quarter . All the new product introductions and all the new product costs and the new product maps and all those types of things, we’ve talked about the increases in our R&D this year which have been substantial, but that’s what we’re doing, we’re putting out these products. We should see the revenues going forward.

Michael Hsing

Well the key is that we have settled down but suddenly we will get a wing of our customers, our competitors, very difficult to dig us out and we expand from there.

Sung Perry - Lieberman

Now, in terms of the DC to DC market and all the new products that are coming, I mean, should we expect similar sort of growth in ’08 or does it accelerate, or is it really ’09 where things start to really kick in the high gear again with all the new stuff lining up?

Richard Neely, Jr.

I’ll give you my answer first, as the CFO I am more concerned and I think 20% to 25% is really good in the analog market so I’d be happy with that. I do not know about Michael though.

Michael Hsing

Well, last time we grew 100% and the year after we grew 6% and the Wall Street didn’t give us any credit and you guys are looking at us as we grew 20%. That is what we targeted 20%.

Sung Perry - Lieberman

Okay, so you are hoping to do more but you don’t want to promise anything?

Richard Neely, Jr

That is right.

Sung Perry - Lieberman

Okay, thank you guys.

Operator

Your next question comes from the line of Krishna Shankar with JMP Securities. Please proceed.

Krishna Shankar - JMP Securities

Yes, congratulations on a good quarter also and I have a couple of questions, one, as we look at your exposure to notebooks, is the CCFL part of your revenues pretty much a proxy for notebook or are there products in the other areas we should look at for your notebook exposure?

Richard Neely, Jr

Well CCFL does include, we do have some half bridge and full bridge parts and some going to monitors and TVs but the vast majority goes in the notebooks. They also go into similar size screens. I mean there are products with screens of that size, a notebook type screen that are lit by CCFL by single lamps.

So yeah, generally, it is relatively closed proxy, it’s probably 80% or 85% of the revenue goes in a notebook.

Krishna Shankar - JMP Securities

Okay, and as you ramp out all the new products in both MiniMonster and DC to DC, as you look at ’08 or maybe ’09 can you talk about exposure to other more stable markets which don’t have as much seasonality such as industrial medical, telecom and areas like that.

Richard Neely, Jr

Michael is going to answer but I got one little tidbit that I just got from the sales guy that kind of gives you how long it takes to get in the industrial market, just last week you if you remember we are in 2007.

Last week, our sales guys were very excited, there’s a major industrial guy in the US, we won’t give the name of the equipment maker, that has invited MPS to bid on the Next Generation product which is the 2009 contract which will start taking effect in 2011 and run through 2016.

Okay, so that’s the US industrial market, it takes a long time to get in but once you’re in, you’re in it for a long time.

So the US we’re talking here is excited about getting them a contract, it’s not going to kick in for three years, but industrial designs will turn over in five or seven years in the US.

So, that is the problem with the growth, it’s slow and steady but it takes years to have fast growth. MPS has really been built on the faster growing consumer business side in Asia, so let us turn over the Michael to see some of the current issues.

Michael Hsing

Well, I want to really clarify this, the perception is that growth is not only from the MiniMonsters. All the older products this year grew really well, as in the beginning of the last year; I said we wanted to focus on a different market segments and we did. As a result this year, we grew as we expected.

Krishna Shankar - JMP Securities

Okay great. Can you reiterate you longer term model again for growth and operating margins?

Robert Neely, Jr.

Well, operating margin, our target is to have operating margins with non-GAAP with store comp of 30% to 32% that’s our target, we are pretty much almost there this quarter. So that’s our goal. If you keep growing revenues so we can reach that operating margin.

Krishna Shankar - JMP Securities

Okay, and my final question is, can you talk about the competitive environment whether it is new and used analogue companies or other Asian analog companies. Can you talk about the competitive environment in general?

Michael Hsing

Well, we compete multiple analogue companies in US and the analogue business is still dominated by the US companies, and that we compete with almost all the US companies. Asia companies are still small, but they are growing.

Krishna Shankar - JMP Securities

Okay, thank you.

Michael Hsing

Okay.

Operator

And there are no further questions in queue at this time. I would now like to turn the call over to Mr. Neely for closing remarks.

Robert Neely

Well, thank you everyone for participating on our third quarter conference call. We look forward to a full set of industrial meetings in November which has been announced on our website and we look forward to talking to you for the fourth quarter results next year. Thank you.

Operator

Thank you for your attendance in today’s presentation. This concludes the conference. You may now disconnect. Goodbye.

Robert Neely

Thank you.

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