Advanced Analogic Technologies Inc. Q2 2008 Earnings Call Transcript

| About: Advanced Analogic (AATI)

Advanced Analogic Technologies Inc. (NASDAQ:AATI)

Q2 2008 Earnings Call Transcript

July 28, 2008 4:30 pm ET

Executives

Lisa Laukkanen – IR, Blueshirt Group

Richard Williams – President, CEO and CTO

Brian McDonald – VP, Finance and CFO

Analysts

Tore Svanberg – Thomas Weisel Partners

John Lau – Jefferies & Co.

Anthony Stoss – Craig-Hallum

Ryan Goodman – Merrill Lynch

Vernon Essi – Needham & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Analogic Tech second quarter 2008 earnings conference call. During today’s presentation, all parties will be in listen-only mode. Following today’s presentation, the conference will be opened for questions. (Operator instructions) As a reminder this conference is being recorded today, Monday July 28th, 2008. I'd like to turn the conference over to 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 the AnalogicTech's second quarter 2008 results. This call is being broadcast live over the web and can be accessed for 90 days in the investor relation section of the AnalogicTech's website at analogictech.com.

On today's call are Richard Williams, President, Chief Executive Officer, and Chief Technical Officer; and Brian McDonald, VP of Finance and Chief Financial Officer. After the market close today, AnalogicTech issued a press release discussing the results for its second quarter, ended June 30, 2008. The press release is accessible online at the company's website or you can call the Blueshirt Group at 415-217-4961 and we will e-mail a copy to you.

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

With that said, I would 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 second quarter 2008 results. During the call, I will provide a brief recap of the financial results and business highlights for the quarter, I will then turn the call over to Brian for detailed financial review of the second quarter followed by guidance for the third quarter. We will then open up the call to your questions.

The second quarter proved to be more challenging than expected. As we noted in our preannouncement, results were impacted by prolonged weakness in China handset sales, delays in the roll out new high-profile handsets by our customers and general softness in its end markets. Consistent with our preannouncement, revenue for the second quarter of 2008 was $21.2 million down 15.6% sequentially and down 18.1% year-over-year.

Net loss on a GAAP basis was $3.8 million or $0.08 per diluted share. A decline in sales of LG’s low-end models, delays in the launch [ph] of Samsung’s full handset, combined with model transition in Broadcom 802.11 Wi-Fi chipset constituted the majority of the Q2 shortfall compared to our original guidance.

Full sales in China persisted throughout the quarter as Chip-Tech continued to burn off its inventory. Despite the ongoing challenges in the macroeconomic environment and in the end markets to which we serve, we continue to demonstrate progress on a number of funds.

We are encouraged by the strong design-win traction we’ve experienced across multiple product lines during the first half. A particular note are design wins in new high-profile handsets which have higher expected dollar content than our historical levels. We believe our robust design win activities speak to new business opportunities we are developing with our recently released proprietary and higher ASP products. The introduction of our first high voltage and highly integrated multifunction products also addressed new markets outside of our traditional concentration in handsets. Additional highlights of the second quarter are as follows

We experienced the strong resurgence in revenue from Samsung during the second quarter, growing sales sequentially which accounted for approximately 37% of total revenue. We are pleased to capture new design wins in Samsung’s high-end camera phones using ModularBCD technology for a unique high current LED flash capability.

We remain excited about the broad base of design wins we have secured to date, spanning the full range of Samsung's handsets from their entry-level modern line to their high-end to premium line of models such as Sole, Instinct, Omnia, and Touch Wiz. Sales to LG accounted for 28% of total revenue during the second quarter. We experienced the decline in sales to LG during the quarter in part due to slowing shipments of their entry-level models and a few models nearing end of life.

Balancing this, we also experienced strong design-win traction of our high current channel flash products in a number of LGs high-end camera phones. Recent design wins include models such as Dare, Secret, and Omega. Our business is continuing in their Viewty, Chocolate, and Venus models.

Our business with Sony Ericsson has remained steady as sales continued for the existing production phone models, and we prepared ramp shipments in the third quarter for new models Yin and Yang. We continue to be encouraged by the long-term prospect for expanding our relationship directly with Sony Ericsson and through their ODM Sagem.

The temporary slowdown in higher margin Broadcom related revenue and the resulting mix adversely impacted our aggregate gross margins in the second quarter. Current bookings indicate that Broadcom related business is recovering in the third quarter as models transition to their new generation chipsets contributing to Q3 margin improvement.

The migration to our low cost, higher margin LED drivers for mass market phones is proceeding slower than planned. While we are currently booking and shipping orders for our 2-channel part in new models, the volume of older models using 4-channel solutions remain high. The migration of existing models to our lower cost products is expected to favorably affect gross margins in the October and November timeframe.

Overall, 60% of revenues were from lighting and display products, 19% from voltage regulation and DC-to-DC converter products, and 21% from other power management products, including port protection and battery management. Switching regulator revenue used in a lighting solution is reported in the lighting and display category.

In the second quarter, we remained focused on product development activities. We introduced a total of 18 new products including 6 new platform and 12 derivative products. During the second quarter, our proprietary modular BCD-based products accounted for 15% of total revenue with gross margins exceeding 60%. We secured our first design win for our one chip multi-voltage power SOC for digital still cameras at a major OEM expected to ramp in the fourth quarter with mass production in the first quarter of 2009.

We also began initial shipments to Parrot of our PMU for Bluetooth hands-free car kits during the second quarter. The ramp of our battery over-voltage protection products have been delayed by the 3G rollout in China. To date, we have released 46 modular BCD-based products into production and have 36 new products currently in development.

In 2008, we launched our first development efforts of products targeting in-markets outside of handhelds. Our non-handset diversification strategy includes power management products for set-top boxes, televisions, monitors, routers, and the notebook computers. Our first switching regulators targeting datacom applications are on track for an August production release. We are also pleased to report that our first high-voltage LED backlight driver for notebook computers has completed fabrication and has been evaluated, successfully powering 80 LEDs from a single chip.

In Q2 AnalogicTech required Elite Micro Devices, a privately held Shanghai, China-based audio company for approximately $1 million in cash in the second quarter. Elite’s high performance, Class D audio amplifier and CODEC products are ideal for audio amplification and audio processing in handsets, personal media players, Bluetooth hands-free car kits, and high definition televisions. We have already begun integrating this technology into our modular BCD-based PMUs and power SOCs. Derivative audio products based on Elite’s technology expand our served [ph] available markets and further support our non-handset diversification strategy.

In Q2, AnalogicTech continued to innovate new circuit topologies for switching voltage regulation specifically addressing the needs of large-screen LED backlighting, active matrix all LED displays, voltage regulation for 3GPAs and DC-to-DC converted for new lithium ion battery chemistry.

So far in 2008, we filed 26 new United States patent applications and currently have more than 180 U.S. and foreign patent applications pending with more than 50 patents issued reflecting our continued commitment to development of fundamental innovations in power management circuit device and processed technology.

We are pleased to announce today the addition of Ed Lam [ph] as Vice President of Marketing and Engineering. Ed has extensive engineering and marketing experience in power management semiconductors for a broad range of applications including notebooks, set top boxes, servers, datacom, industrial systems and gaming. We are excited to have some of Ed’s qualifications champion our product development and the non-handset diversification efforts.

We are also pleased to announce we have signed Future Electronics of Montreal, Canada as our worldwide distributor. They are trained in demand creation for industrial datacom (inaudible) and infrastructure further supports our non-handset diversification strategy.

In conclusion, the challenge of the second quarter underscores our provision as a leading power management supplier of handsets and handheld devices and our corresponding susceptibility to consumer market dynamics.

While we continue to serve this rapidly expanding and volatile market segment with more highly-integrated and a higher ASP products using our proprietary modular VCD technology, we are concurrently deploying a non-handset diversification strategy comprising

Higher voltage products using modular VCD, product serving industrial datacom, set top box, notebook and television markets, staffing about sales applications and marketing expertise outside of handsets, the acquisition of new IT and engineering talents in audio and display electronics and the continued commitment to technological innovation and (inaudible) in every market we addressed.

While the transition will be slow, our technological leadership, quality reputation and customer base gives us a uniquely strong position to serve the global electronics market with total power management solutions. I will now turn the call over to Brian for a detailed financial review.

Brian McDonald

Thank you, Richard, and thank you everyone for attending our conference call.

I will review our results for the quarter and then briefly discuss our outlook for the third quarter of fiscal '08. Please keep in mind that the financial data mentioned within this call will be on a GAAP basis unless otherwise noted.

Now, let me outline the details. Revenue for Q2 of '08 was $21.2 million compared to $25.1 million in Q1 of ’08 and $25.8 million in Q2 of ’07. Revenue decreased by 16% sequentially and 18% from Q2 of ’07.

Sales in Korea, were $13.8 million, China $2.2 million, Taiwan $2.9 million, Japan $1.2 million and all others at $1.1 million. Including transfer business to Japan, Korea sales were flat sequentially. Sales in Japan excluding transfer business which was about 800 K and in Europe and North America were up slightly, sequentially.

Sales in China continued to be slow throughout the quarter as distributors worked through their inventory build up from prior quarters resulting in a 54% dropped in net revenue sequentially. Overall, distributor inventory levels in China dropped significantly to about 3-1/2 months. Sales in China are expected to regain momentum in the third quarter as we have seen increased and costumer demand.

Sales to Chip-Tech, our largest China, represented 1% of our total revenues compared to 10% in Q1 of '08, reflecting our efforts to limit shipments and reduced their inventory levels.

Sales in Taiwan were down 36% sequentially, primarily, due to lower Broadcom-related shipments. Overall distributor inventory in Taiwan improved to about two months.

Direct sales to Samsung accounted for 19% of total revenue as compared to 12% in Q1 of '08. Sales to Samsung combined with its contract manufacturers accounted for 37% of total revenue as compared to 25% in Q1 of '08. We expect continued revenue growth from Samsung in the second half due to the forecasted ramp of higher content phone models.

Sales to LG represented 28% of our total revenues, compared to 29% in Q1 of '08. We expect to see softness in the LG business as a result of their anticipated business trans primarily in their emerging market handset business.

GAAP gross margin was 47.3% for the quarter. This compares to 54.7 in the prior quarter and 55.1 in Q2 of '07. Non-GAAP gross margin was 48.9% compared to 56% last quarter and 56.2% in Q2 of 2007.

Sequentially, gross margin decreased 4.9% due to a higher than normal excess inventory charge and 2.2% due to unfavorable product mix. The higher excess inventory charge is the result of lower than originally projected revenues for the quarter.

Margin mix was unfavorably impacted by lower sales in China and Taiwan. Furthermore the migration of our low-cost, higher-margin, LED drivers for mass market phones is proceeding slower than planned and is now expected to favorably affect gross margins no sooner than the fourth quarter.

R&D spending was 7.8 million or 37% of revenue for the quarter, an increase of 0.1 million from the prior quarter and an increase of 0.2 million from Q2 of '07. The sequential increase in R&D expenses was a result of IPR&D charge of 0.3 million related to the purchase of Elite Micro Devices, and an increased NRE-related expense of 0.2 million offset by a 0.4 million reduction of personnel-related expenses. Included in the R&D spending was 0.8 million of stock-based compensation expense.

SG&A spending was approximately 6.2 million or 29% of revenue for the quarter, this represents a decrease of 0.2 million from the prior quarter and a decrease of 0.4 million from Q2 of ’07. The sequential decrease was primarily attributable to lower personnel-related expenses. Included in the SG&A spending was $1 million of stock-based compensation.

The litigation cost was $0.5 million for Q2 of '08 as compared to 0.3 million in the prior quarter and 1.5 million in Q2 of ’07. Operating expenses in total were 14.5 million, this compares to 14.4 million in the prior quarter and 15.7 million in Q2 of '07.

Stock-based compensation expense was 1.9 million for Q2 of '08, compared to 1.7 million in the prior quarter and prior year. Operating loss was 4.4 million for the quarter as compared to an operating loss of 0.6 million in the prior quarter and operating loss of 1.4 million in Q2 of '07.

Other income net was 0.8 million or 3% of revenue for the quarter, this compares to 1.1 million in the prior quarter and 1.4 million in Q2 of '07. The sequential decrease was primarily result of lower interest income.

Tax expense was 0.1 million as compared to 0.1 million last quarter. Net loss for Q2 of '08 was 3.8 million or $0.08 per diluted share compared to a net income of 0.4 million or $0.01 per share in the prior quarter and compared to net loss of 0.9 million or $0.02 [ph] per share in Q2 of '07.

Moving on to the balance sheet, cash, cash equivalents and short-term investments totaled to 110 million at the end of the quarter, down by 1 million from the prior quarter and 4 million from the end of last year. The decrease from last year was primarily attributable to the reclassification of certain short-term investments to long-term and the purchase of Elite Micro Devices.

Net accounts receivable was 11.3 million at the end of the quarter down by 2.6 million from the prior quarter, and 3.2 million from last year end, primarily due to the lower sales. The average day sales outstanding for the quarter were at 48 days compared to 50 days in Q1 and 41 days at year end. Net inventories were $13.7 million at the end of the quarter down $0.3 million from the prior quarter and up $1.5 million from last year end. Inventory turns for the quarter were 3.2 as compared to 3.2 in Q1 and 5.0 last year.

Now on the business outlook. Comments for Q3 of 2008 are as follows

We expect Q3 ‘08 revenues to be in the range of $24 million to $26 million. GAAP gross margin between 50% and 52%. R&D expenses in the range of $7 million to 7.2 million exclusive of stock-based compensation expense with stock-comp within $0.8 million to $0.9 million. SG&A expenses in the range of $5 million to $5.2 million exclusive of stock-based compensation expense with stock-comp in $1 million to $1.1 million range.

Litigation expenses in a range of $0.2 million to $0.4 million. Stock-based compensation expense in the range of $1.9 million to $2.1 million, other income in the range of $0.5 million to $0.7 million, amortization of intangible assets to be approximately $0.3 million, tax expense in the range of $0.1 million to $0.3 million, non-GAAP tax expense to be in the range of $0.6 million to $0.8 million and a GAAP EPS loss to be between $0.03 and $0.01.

That now concludes my remarks now I would like to open a line for questions, operator.

Question-and-Answer Session

Operator

We will now begin the question and answer session. (Operator instructions) Our first question is from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes, thank you. A couple of questions. First of all, you gave a pretty good growth guidance here in Q3. Could you just follow through about your visibility you have towards that number and can you maybe just highlight two of the three main growth programs other than that you’ve already mentioned?

Richard Williams

Let me just hit on visibility real quick, Tore. To give you an idea, the backlog coverage we had as of the end the last week was about 60%. That’s actually running a little ahead of what we have been on the last few quarters. So we feel pretty good about the orders and the way that they are lying in. And I think, we have pretty good visibility from Samsung, which what you mean when you are talking about some of the larger programs.

Brian McDonald

Yes, so what’s been happening in Samsung – we’ve been getting a lot of design wins with the higher content solutions and this is especially true whenever there’s a higher current camera flash involve. So that’s giving us a better average content. So what we really need if that happens is just some of these models to ramp and as you know, the first half of all the models were delayed, but what we’re beginning to see now is a strong evidence that they are, in fact, beginning to prepare for building a ramp in Q3 and through the second half. So we see that it looks like that it is already hit the bottom in the Samsung portion of the business and that will help drive it. That is offset by some softness that were seeing right now at LG, of course overall, Korea will probably grow but there is some offsetting effects, maybe one supplier takes market from the other market share from the other one. Then also, there’s a natural recovery going on with the Broadcom. Broadcom seems to be now moving into their next chipset and so were starting to see orders firm up which pretty much evaporated in Q2 when they were going through the transition. And this is something that we have experienced before with Broadcom and again we’re seeing evidence that were ready to start to ramp.

Tore Svanberg – Thomas Weisel Partners

(inaudible) if we look at growth margins next quarter it’s going to come back nightly, can you just quantify what benefit you get from mixed versus the non-inventory charge?

Richard Williams

Yes, there’s benefits of the matches is the downside that we saw last quarter in China and in Taiwan, actually had about a 2.5% to 3% negative effect on the gross margin. We see both those pieces of business picking up nicely and we’d expect to see that the margins pick up by that amount after you normalize out the one-time charge, so that does get you up in the 51%, 52% range.

Brian McDonald

But then to get all the way up to the higher percentages we need to get the low cost charge pump ramped and this has been an incredibly long process. For the last year, we’ve been gradually looking at this conversion and every time we think that the new models are starting to ramp, they’ve extended the life of the old models which is good from a revenue point of view but bad from a margin point of view; however we do believe that it’s very likely that in Q4 a lot of the higher volume models with that higher cost charge pumps will finally end of life and then we’ll get a favorable mix shift which should help us, and we’re also of course not stopping there. We’re doing more cost reductions on multiple products throughout our portfolio.

Tore Svanberg – Thomas Weisel Partners

Great. And as that product line ramps, are we done talking about a 100 basis points over left or could it be as much as 200 to 400 hundred basis points?

Brian McDonald

I’d say about 2 – 2.5 basis points, not quite 4.

Tore Svanberg – Thomas Weisel Partners

Very good, and then just lastly – just as we start tracking the diversification efforts, you’re talking about some programs going into production in Q4, but how exactly are you going to be reporting them so that we could quantify your success rate there? And when do you think the non-hands on revenue becomes meaningful (inaudible) for tracking it? Thanks.

Brian McDonald

Yes, what first which were doing now Tore, is we are reporting the modular VCD sales separately and as Richard hit on it, it was about 15%. I think the other thing we could start doing –

Richard Williams

– it was over a 60% margin –

Brian McDonald

With over a 60% margin, and then we can actually start also reporting as the segment of that, maybe the PMU and the high voltage content of the sales at that time.

Richard Williams

Yes, we’re still trying to figure out how the – to track at our sales because some of it will – you can’t do it by customer because if we sell in the Samsung displays then they would be also a handset manufacturer, so that doesn’t help. So we’ll have to break it out by some kind of applications tracking because we have voltage regulation and lighting and battery management in all those various segments, so we’re still working on exactly how we’re going to break that out for you. So give us a little time.

Tore Svanberg – Thomas Weisel Partners

Great, just one last question, you mentioned some samples in the LED backlighting for notebook, when should you expect to see some revenues from that area?

Richard Williams

Well I don’t know, the display is working, you’re welcome to stop by and see it. But giving the design in your notebook would be on a notebook cycle there, so I would guess that you would see pre-production at the end of the first half and production ramps in the second half.

Brian McDonald

'09.

Richard Williams

'09.

Tore Svanberg – Thomas Weisel Partners

Great, thank you very much.

Brian McDonald

Thank you, Tore.

Operator

Thank you. Our next question comes from the line of John Lau with Jefferies & Company. Please go ahead.

John Lau – Jefferies & Co.

Great, thank you very much. You gave us a little bit of visibility with regards to your commentary on how strong the backlog is. Can you just spin it around out that picture with regards to the order patterns you’ve seen in the just last couple of weeks and if there has been a continued recovery on that front, can I have a follow up. Thank you.

Brian McDonald

Yes, John that’s a good question. I would say one with – I’ve been watching the bookings closely. The bookings in July have actually to date which was even through Friday, which it would have been a little over three weeks, had exceeded the prior six months – every month in the prior six months. So the July bookings have been running significantly ahead of where they’ve been over the last six months. In addition to that we’ve been looking at the Chip-Tech POS point of sales and their number in July was up significantly over the run rate in the second quarter. So we’re seeing the Chip-Tech POS sales have been up and our bookings were up significantly over the last six months and well over one-to-one in July.

John Lau – Jefferies & Co.

Okay, so that – it seems like the pattern has been strengthening as we finally pass this China issue, is that correct?

Brian McDonald

Yes, that’s correct.

Richard Williams

And Broadcom recovering –

Brian McDonald

And Broadcom recovering.

Richard Williams

– which is driving the Taiwan number.

John Lau – Jefferies & Co.

Okay, and then to round out that picture, you do mention that there’s been a lot of talk about the inventory adjustments or the inventory change over on the Korean customers, have you seen – is that mostly past us now?

Richard Williams

We were talking about the over inventory build.

Brian McDonald

That is behind us John. We've seen – Samsung has basically cleared the channel. We did see – one of the things you'll notice in Japan, we had picked up – we got a bump-in revenues about 800,000 of that was attributable to Samsung business that had shifted to Japan that contributed to the over inventory hang in Q1 of last – of this year, and that now has all shifted back to Korea and there was no inventory buildup, no delay. So we've seen the Samsung inventory channels cleared up almost completely if not completely.

John Lau – Jefferies & Co.

That sounds great. Thank you very much.

Brian McDonald

Thank you, John.

Operator

Thank you. Our next question's from the line of Vernon Essi with Needham and Company. Please go ahead.

Vernon Essi – Needham & Co.

Thank you. Just looking for a little more color in some of the things that you were talking about, Richard. First up on the high-current camera flashes, what's that super cap product you've been talking about in the past?

Richard Williams

No. This is what we wouldn't – other people call it high current. In that context it would be a medium current. So we're talking about 1 amp to 1.5 amps where the super cap would be 2 amps and up. So we're still discounting that revenue from the super cap but (inaudible) course it could be quite substantial. Yes. This would be in the 1 amp to 1.5 amps category.

Vernon Essi – Needham & Co.

Okay. And you talked about a transition to future on the distributor side. How is that going to shape out? Can you give us more detail on where we’re standing [ph] –?

Richard Williams

No, I think what that is – is that as we bring up our industrial and Datacom-related products, we will drive the direct sales portion of that with our own field applications engineering and then we will devote resources into training their sales team so that they can go after the smaller customers and that's a longer process. That's the kind of business that you have many, many smaller customers that they pay higher prices and drive higher margins, and now that we're starting to roll these products out, it makes sense to engage a company to go through that distribution business. Before, we wouldn't have had the right products to offer so we couldn't really have engaged in any meaningful way with that kind of a distribution model. So it's the start of a process. I won't see it's quick but it starts with the first step and future and we have sat down and discussed the whole process and you committed to it and so are we.

Vernon Essi – Needham & Co.

That should be something that would take several quarters in other words.

Brian McDonald

This would take several quarters. That's right.

Richard Williams

I mean in the big picture it takes several years, but it's a continuous process.

Brian McDonald

And wherein the plan wouldn't be the transition over, for example, the large distributors we're using the support, the Broadcom business, and the large pieces of business, not the future at this point in time.

Richard Williams

Those –

Brian McDonald

That's separate [ph].

Richard Williams

The future businesses with more new business. It won't be cannibalizing any of our existing accounts or taking over any of the major direct accounts. We're looking for demand creation-type relationship.

Vernon Essi – Needham & Co.

Okay. And just two quick numbers questions here, Brian. On the Broadcom you didn't give a number on top for the quarter. Was the revenue nominal this quarter or is it meaningful at all?

Brian McDonald

No. Well, I'll give you the number. The number was about 800,000, over 4% and we had forecasted this to be down some. It was about 2.5 million the quarter before and it was down a little more than we anticipated due to the transition that Richard had mentioned.

Vernon Essi – Needham & Co.

Okay. And then –

Brian McDonald

– it looks like it's over.

Richard Williams

Yes.

Vernon Essi – Needham & Co.

Okay. And then the Modular BCD we just saw have an actual sample (inaudible). What did you report for that in the first quarter?

Brian McDonald

That was like 4% versus 15%.

Vernon Essi – Needham & Co.

Okay.

Richard Williams

So we had anticipated breaking 10% by the end of the year but we've already done it within the second quarter.

Vernon Essi – Needham & Co.

All right. That's a good wrap there. Okay, all right. Thank you.

Brian McDonald

Thank you, Vernon.

Operator

Thank you. Our next question's from the line of Srini Pajuri [ph] with Merrill Lynch. Please go ahead.

Ryan Goodman – Merrill Lynch

Okay. This is Ryan Goodman for Srini.

Brian McDonald

Hey Ryan.

Ryan Goodman – Merrill Lynch

Hey. I had a question on the Q3 China business. Just – if you could add a little bit of color there. Obviously the (inaudible) down quite a bit and I just want to know how their inventory level's now and if you're really counting on a snap back there like in the inventory replenishment to hit those gross margin target or more just to return to the normal ordering better?

Richard Williams

I think there'll be a little – well, first of all to give you an idea the inventory. I indicated that the overall China distributor inventory turns had dropped from something over 4.5 to around 3 – 3.5 this quarter. Actually Chip-Tech came down to a little over four turns at the end of June and the other distributors were all around two, okay, so all the other distributors outside of Chip-Tech had come down within our target range. Chip-Tech is still about a month out of line. But based on the POS that we've seen in July, we do expect that we'll get some shipments from them this quarter. It certainly won't approach what they were back in the fourth quarter, but we expect to see some sequential increase getting up north of a $1 million in the third quarter, which is above the 200,000 that we saw this last quarter and then all the other distribution should go back to a normal pattern.

Ryan Goodman – Merrill Lynch

Okay. So for Chip-Tech it – they're not even close really to a replenishment, they're sort of tracking closer to an order pattern this quarter and maybe back to normal in Q4?

Brian McDonald

And back to normal probably by the end of Q3. It is the way we see it now.

Ryan Goodman – Merrill Lynch

Okay. Great. And then one more thing, this time on the internal inventories. I'd like to ask, this quarter just about the quality of the inventory you had. I know last quarter was mostly we have some unfinished biz from the ramping products and you still had a bit of a charge this quarter, what type and shape is the inventory this time? I know it's down a bit in dollars and still kind of high in days. Do you think we're at risk of another write down in the coming quarters if the revenue doesn't track particularly well?

Brian McDonald

I would say if the revenues are within any reasonably range of the outcome of the forecast, we won't see a significant inventory. And I feel pretty confident that the mix is pretty solid in the inventory. Basically what we took was an excess reserve, which doesn't necessarily mean the inventory is bad, it just means it's excess of our policy, so I would not foresee another big inventory charge in the 2nd half of the year. We've taken a start down, so we're tracking to the demand pretty closely.

Richard Williams

But normally we have to start ramping in advance to support the second half and so some of that you have to shoot ahead when the business actually develops.

Ryan Goodman – Merrill Lynch

Just from housekeeping sir, can you give us the operating cash flow and CapEx?

Richard Williams

The CapEx was about $0.5 million and the operating cash flow was – depreciation was $800,000 and CapEx is $500,000.

Ryan Goodman – Merrill Lynch

Thanks a lot.

Operator

Thank you. (Operator instructions) And our next question is from the line of Anthony Stoss with Craig-Hallum. Please go ahead.

Anthony Stoss – Craig-Hallum

Hi guys! Richard if you don't mind commenting, tell us a little bit more about the LED market, how quickly you think that it turns into a decent market place for you guys? Also comment about pricing environment if it's stable, et cetera. And any thoughts you'd have outside of China just kind of overall inventory levels outside of China? Thanks.

Richard Williams

Okay, so let's start with the LED market the. So the LED market has a number of elements in it. So if there's a – if you look at non-handset there's a range of products between, let's say 4 to maybe 8 inches as one class or maybe 4 to 10 inches as one class of display. This gets in to the personal media players and some of the portable DVD players like you might see people watching on airplanes. And then the next class up you get in to the monitor area and above the monitor then you have the televisions and the TVs running anywhere from 30 inches – 25 inches all the way up to 80 inches or more. So the number of LEDs that would be in a back lighting application for a large TV can be very substantial. In between there, you also have the notebook and the notebook market is a little bit different. It's quite a performance-oriented market. So there's a lot of things going on just to preserve power and to control the current of different clusters of LEDs, and like we said we just submitted – just measured and fabricated this and evaluated this first driver which steps the input voltage up to – a high voltage and then drives strings of LEDs – many parallel strings of LEDs, so 80 LEDs just for one notebook computer and that one we believe will have a higher value in the market place for the monitor.

In every case, we see them as being good margin opportunities and in the television case it’s getting quite sophisticated, so there may even be localized dimming to try to control the total power dissipation basically where ever a display is going to be dim instead of having the backlight on fully. They're just going to locally dim it.

We don’t believe that that future will be as common in the monitor business and as a result that we think the product sale will be a little bit more commoditized but still be good margin business. So it’s a wide range. With that also there’s a number of opportunities for power (inaudible) in the technology [ph] itself not the backlight but the front of the panel and we’ve been making strategic investments in engineering activities (inaudible) talk about that portion, the panel (inaudible) portion at a future date but we think there’s a lot opportunity there in the LED drive and this is the – excluding – when I’m excluding (inaudible) and we have some unique technology that we’re developing there.

There is residential and commercial lighting which is a high voltage market and we have capability there but it's premature to address that market. And finally, there is signage which is something we’re still looking at and that’s also another market. So all of those are LEDs but in different forms and in different flavors. Some of them low voltage, some of them high voltage and we pretty much have positioned ourselves at IT and technology to address any and all of them but as you know we're very careful not to try to do too many things at one time.

So we'll pick a few markets and focus on them first and then we’ll expand our portfolio and our application support as we find success in the markets that we’re going after. What’s the next question?

Anthony Stoss – Craig-Hallum

Pricing environment.

Richard Williams

Which one?

Anthony Stoss – Craig-Hallum

(inaudible)

Richard Williams

The pricing environment is – depends on the function. I would say battery chargers were seen and we have a lot of new battery chargers that have a lot of features that nobody else has and the pricing pressure is not too great there. I’d say on the high-end multifunction and high-current charge pumps and LED drivers some of which are boost-engine derived as well. Those also don’t have that much pricing pressure. There’s still not that many people who can actually do it. The pricing pressure is greatest on the low end of the charge pump business but we’ve actually architected the low-cost solution to be very competitive there. But just to give you an idea not only is our competitors having a hard time designing their low-cost LED drivers into those low-end applications but even we are having a hard time converting our costumers to our low-cost LED drivers because once they get a model that’s running they tend to run it as long as they can and minimize their engineering costs on those low-end models. So it’s not easy for people to break in even though there’s a lot of pressure – pricing pressure. We still see that we’re able to command a fair – very strong presence across the full spectrum of LED drives.

For DC-to-DC converters, it just depends on the current and the frequency. Low-frequency DC-to-DC converters and low voltage are less valuable and they’re commoditized. The higher currents are high transient or low noise but the switching regulators have – those switching regulators have much more strict specs and not many companies can do a good job at it. And also, the companies who have light load operation still risk litigation or with familiar technology, we have worked through that with our lawsuits and we believe we are in a much better position there not only on our existing products but on two new generations beyond that. So we think that we can compete in that area very effectively because there are fewer players in the market. So that’s kind of a broad range and then in the newest area, audio is new for us.

We have this new Class D amplifier and at lower power we’ve already got very high levels of integration and at higher power since we have our own trenched DMOS discreet devices, we believe we can do multi-chip solutions that fits to a much higher power level than Texas’ instrument scan for the same footprint and so we’ve perceived them as one of the leaders in the market. So we believe that that opens up a lot of new market opportunities too – so I don’t think pricing pressure per se is the main thing driving it, although as you saw in the quarter when we have a slowdown in the revenue of any high-margin products, it does affect our overall mix and it can cause a temporary glitch in our margins.

Anthony Stoss – Craig-Hallum

And one last quickie follow-up question. You’ve don’t a good job letting – some high profile handset makers, can you bring us up to speed on any progress you’re making at landing any additional new customers either kind of Tier one or even Tier two?

Richard Williams

Okay. Well, let’s see. So, we have a renewed focus on China because we believe that the delay in the roll out of the 3G handsets in China is eventually going to work its way out. And so then at that time, we think China will have somewhat of a recovery and we’re working very hard to strengthen our position in those handsets when that happens. We are working closely with Sony Erickson and Sagem to try to expand our footprint in the new models there. Of course, Nokia is still something that will take time. We’re doing some R&D projects that we hope could yield some benefits but we’re not – we’re still discounting Nokia as a major revenue driver.

And then or the other thing we see is that there’s a lot of future integration opportunities where we could sell our mini-PMUs to support GPS function or digital multimedia broadcasting function. And that just gives us more content in the existing models, so with the same customer list, we could get new applications and finally then, along that line, audio is a product, that now that we have our Class-D amplifiers and also we have CODEC technology, that we’ll be able to integrate those and deploy those across the entire portfolio of power management for portable electronics.

Anthony Stoss – Craig-Hallum

Okay. Thank you.

Richard Williams

Thank you Tony.

Operator

Thank you. Our next question is a follow-up from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes Richard, maybe on the last topic and especially the acquisition of the Elite. Is Class-D now, increasingly a requirement from the customers as far as – your part of the road map and integration is concerned?

Richard Williams

No, I think, the thing is, is that, in the past, Tore, the Class AB was a stand-alone chip and the converging to Class D broadly as a stand-alone market, I think is going to be slow. I think the opportunity is that you’re already providing the complete power management solution then adding Class D into the chip is a much easier sell than trying to just sell it as a stand-alone product. And it is persistently, I believe, PC companies like (inaudible) trying to get into power management because it is hard to penetrate the Class D into a handset, if that’s all you have to come to the game with. So, we believe that it’s a benefit to them and they will accept it but they will accept it more in the context of a total power management solution and not nearly as motivated to do if it is just a stand-alone solution.

Tore Svanberg – Thomas Weisel Partners

Fair enough. And then finally, that’s the new future relationship, when shall we expect to see that, having an impact on the overall business? And does that first Datacom customer you have – is that a result of that?

Richard Williams

The first question is difficult to tell, how the relationship will go and how the customers will ramp. Ed Lam who just came on board will get involved with our sales and we will work to support future and figure out how that's going to develop. So it’s a little premature for me to answer that one but the first datacom opportunities are not because of that relationship, that’s the demand creation that we’re doing on our own.

Tore Svanberg – Thomas Weisel Partners

And is that in the U.S. or international? And what type of program is this?

Richard Williams

Okay, so there’s a number of different opportunities. Some of them are routers. Sometimes they’re U.S. companies manufacturing in Asia that’s a U.S. design win, the transfers to Asia. Some of them are follow-on programs to those that transfer to Asia and some of them are actually local Asia-based design. So there’s all three categories. The only category that we don’t see substantial volume in at this time is U.S. design wins manufactured in Asia, although the newspaper now reports that America – I mean in America – manufactured in America, but the newspaper now reports that America is becoming a low-cost manufacturing location with the currency, the way it is. So who knows?

Tore Svanberg – Thomas Weisel Partners

Great. Thank you very much.

Operator

Thank you. At this time there are no further questions. I’d like to turn you back to management for any closing remarks.

Richard Williams

Now I think that concludes the call. We thank everybody for the participation and we look forward to talking to you on the next call.

Brian McDonald

Thank you very much.

Richard Williams

Thank you.

Operator

Thank you, ladies and gentlemen. This thus concludes the AnalogicTech second quarter 2008 earnings conference call. We’d like to thank you for your participation and for using ACT Teleconferencing. You may now disconnect.

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