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Power Integrations, Inc. (NASDAQ:POWI)

Q2 2008 Earnings Call Transcript

July 24, 2008 4:45 pm ET

Executives

Joe Shiffler – Director of IR and Corporate Communications

Balu Balakrishnan – President and CEO

Bill Roeschlein – CFO and Corporate Secretary

Analysts

Ross Seymore – Deutsche Bank

Sumit Dhanda – Banc of America

Auguste Richard – Piper Jaffray

Steve Smigie – Raymond

Operator

Thank you for standing by, and welcome to the second quarter 2008 financial results conference call for Power Integrations. Today’s conference is being recorded. At this time, it’s my pleasure to turn the conference over to Joe Shiffler, Director of Investor Relations and Corporate Communications. Mr. Shiffler, please go ahead.

Joe Shiffler

Thank you, and good afternoon. I’m Joe Shiffler, Director of IR and Corporate Communications for Power Integrations. With me on the call today are Balu Balakrishnan, President and CEO of Power Integrations, and Bill Roeschlein, our Chief Financial Officer. Balu and Bill each have some prepared there marks. After which, we’ll take your questions.

During today’s call we will make reference to certain financial metrics that are not calculated according to generally accepted accounting principles. Please refer to today’s press release for an explanation of our reasons for using such non-GAAP metrics as well as tables reconciling these measures to our GAAP results. I would also like to note that our discussion today, including the Q&A session, will include forward-looking statements reflecting management’s current forecast of certain aspects of the company’s future business. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, anticipate, suggest, project, forecast, and similar expressions that look toward future events or performance.

Forward-looking statements are based on current information that is, by its nature, dynamic and subject to even rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release and under the caption Item 1A, Risk Factors, in our Form 10-K filed with the SEC on March 10th, 2008 and our form 10-Q filed on May 9th, 2008.

Lastly this conference call is the property of Power Integrations, and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of Power Integrations.

With that I’ll turn the call over to Balu.

Balu Balakrishnan

Thanks, Joe, and good afternoon. I’d like to begin by welcoming Bill Roeschlein to Power Integrations as our new Chief Financial Officer. Bill joined us on June 30th from Selectica, where he had been CEO since 2006. He has an outstanding background in finance in the technology sector, including public accounting and investment banking experience as well as corporate financial management experience at Ultra Clean Holdings, Asyst Technology, and Hewlett-Packard. I am delighted to have him on our team and I’m confident that he’ll make a big impact here at Power Integrations.

Turning now to our second quarter results, revenues where up 3% sequentially and 24% year-over-year to a record $53.6 million. That was within our guidance despite the sudden and unexpected bankruptcy of H&T company, which had been the largest supplier of cell phone chargers to Samsung.

As we reported on our Q1 call, we had expected two new designs to ramp up at H&T during the quarter in place of the competing solutions from BCD Semiconductor. Unfortunately, after taking a small pre-production order, H&T closed its doors and cancelled its outstanding orders. We estimate the shutdown cost is about $1 million dollars in revenues for Q2, which could have put us right on our mid point of our guidance.

While this was obviously a disappointing development, our business with another one of Samsung’s subcontractors is on track and should contribute material revenues in the September quarter. In fact, the customer has now awarded us a second design, which should ramp up over the next couple of quarters. While it remains to be seen how Samsung reallocates its charger volumes after the shutdown of H&T because they expect these two designs to reach an annualized run rate of $8 million to $10 million once they reach full production volume.

While Q2 (inaudible) we are otherwise in line with our expectations, we are cautious about the broad demand picture. We observed a broad base slow down in bookings during the later part of the quarter, and orders have remained subdued thus far in July. We also saw weaker than expected distribution sell through for Q2, and exited the quarter with channel inventories higher than our normal range of four to four and a half weeks. These trends strongly suggest that macroeconomic factors have begun to impact end-market demand. The uncertain macro environment limits our visibility even more than usual, making it very difficult to predict the strength of the seasonal ramp.

Accordingly, we are projecting a relatively wide range of $55 million to $60 million in revenue for the September quarter, on an increase of 10% to 20 % year-over-year. Notwithstanding the challenge – challenging macroeconomic environment, our secular growth story is gaining momentum. Energy efficiency standards raising labor costs, higher raw material prices are tilting the economics of power supply industry in favor of higher levels of integration. Pricing of the stiff components has remained firm in recent quarters reflecting the higher cost of raw materials. But the cost of manufacturing power supplies has risen due to higher labor costs in Asia. These trends obviously favor the use of integrated solutions like ours, which use fewer components than the (inaudible) solutions, and are much less labor intensive than manufacturer.

Meanwhile, we have upgraded all of our (inaudible) product lines with higher levels of integration and performance over the past two years putting us in a strong position to capitalize on the changing dynamics of the industry. We are also aggressively targeting the emerging LED lighting opportunity where we now have a pipeline of literally hundreds of design opportunities. And we are on track to expand our addressable markets significantly over the next two years by entering the high power segment of the AC-DC market comprised of applications about 50 watts.

We announced our first four A into the high power markets last week with the new offering for notebook computer market, which I’ll come back to within a moment. Within our poll markets, design activity remains extremely robust, and Q2 was another strong quarter for design wins. Key (inaudible) in the quarter included a high volume set-top box for (inaudible) using TinySwith-III, cordless phone designs for Panasonic and Uniden with LinkSwitch, a new Sony LCD monitor with TopSwitch-HX, and Sony LCD projector also with TopSwitch, and an Electrolux dishwasher with TinySwitch-III.

There are a number of wins in the PC market, including designs for Dell and HP as the last several designs for the (inaudible) market. As you may know, we have an extremely high share of the branded segments of the desktop PC market, thanks to the importance of standby efficiency in that market. The efficiency is also becoming increasingly important in the core market, and we are now beginning to make some headwind there.

Our second quarter design wins also included several high volume programs with LinkSwitch-II, a new product just launched in May. The LinkSwitch-II family is a dramatic step forward in terms of innovation for the power supply industry. Until now, most power suppliers have required complicated and expensive circuitry to send feedback signals from the output side to the power supply, back to the primary side.

LinkSwitch-II eliminates the feedback circuitry by sensing the output through the power supply’s transformer, a technique known as primary side regulation or PSR. PSR is not a new concept. In fact, earlier versions of LinkSwitch already use this technique. However, until now, PSR technology has provided a level of accuracy sufficient only for loosely regulated power supplies typically used to replace linear transformers. LinkSwitch-II on the other hand, senses the output much more accurately making it suitable for higher power levels and a wider range of applications.

The elimination of feedback circuitry takes up as many as 16 components compared to a typical discrete solution, and as many as 9 components compared to one of our TinySwitch main solutions. This way ,it’s not only component cost and design cycle time, but also improved efficiency since the feedback components consume a material amount of power on standby.

LinkSwitch-II is off to a strong start with two high volume design wins at LG’s charger suppliers. The new Samsung design mentioned earlier also utilizes LinkSwitch-II. And we have a promising pipeline of ongoing design activity.

Another recent product that continuous to gain traction is the TopSwitch-HX, which has less (inaudible) the higher end of the current power range. HX is providing – is proving highly competitive in applications like set-top boxes, LCD monitors, and high power external adaptors. TopSwitch-HX has proprietary multi-mode switching technology that automatically selects the most energy efficient mode at any given load level. This enables us to deliver constant efficiency regardless of load, whereas the efficiency of traditional PWM control drops out at lighter load such as a standby mode. This constant efficiency has been a major factor in the acceptance of TinySwitch over the years. And now we are able to offer it at a significantly higher power level with the TopSwitch-HX family.

The multi-mode operation of TopSwitch-HX is one of the several innovations enabling our entry into the notebook computer market, which we announced last week. We are now offering HX in a proprietary new package called the eSIP package. eSIP is a highly cost effective low profile package that stands only two millimeters high, then lays flat on the circuit board.

We combined this low profile chip with the proprietary low profile transformer available only to our customers. This combination enables a thin, lightweight adaptor that costs significantly less than other streamline adaptors on the market today. This is a genuine breakthrough that a great – and a great example of the kind of innovation we give to the power supply market, not just at the chip level, but also at the system level. We believe that this solution for notebook market adds $50 million to $70 million to our addressable market for 2009.

Looking further down the road, we expect to roll out a series of additional high power products targeting high volume application in the 50-Watt to 500-Watt range. I expect the next high power product to launch in the fourth quarter, with additional products to follow next year. This series of new products has the potential to add another $400 million to our (inaudible), increasing it to about $2.1 billion by the end of 2009.

Before I turn the call over to Bill, I’d like to give you a brief update on the latest developments with regard to energy efficiency specifications, which continue to proliferate thanks to growing desire to reduce carbon emissions around the world.

As you know, California implemented tight mandatory standards on virtually all external power supplies effective July 2007. These standards became incrementally tighter on July 1st of this year, and also became effective nationwide as the provision of the Energy Bill passed the Congress last year. The European Union is working toward a virtually identical standard as part of its Euro design directive, while similar standards are also starting to take effect in Australia on December 1st, 2008, and New Zealand on April 1st, 2009.

In addition to these mandatory standards, the Voluntary Code of Conduct (inaudible) for EU will tighten on January 1st of 2009, while more than two of the ENERGY STAR (inaudible) is scheduled to take effect on November 1st of this year. Although ENERGY STAR is long (inaudible) for OEMs, the US government is required to purchase ENERGY STAR products whenever possible, which obviously gives additional weight to these certifications. While external power supplies have received most of the attention over the past couple of years, we continue to see increasing developments relating to applications with (inaudible) power supplies.

On the Q1 call, we outlined some of the efforts being made in developing countries including Brazil, China and India, where the governments are extremely concerned about the growth of energy consumption as the society is modernized. More recently, we have seen a new proposal under the EU that will apply a blanket standard for standby consumptions across a wide range of end products including appliances, consumer electronics, and (inaudible) equipment. The exact details of the program as time lined for recommendation are still to be determined, but this has the potential to be a significant development for the electronic industry as something we’re keeping an eye on going forward.

(inaudible) energy efficiency momentum continues to hold, and we expect that to be (inaudible) for business for many years to come. With that, I’ll turn it over to Bill for the review of Q2 results, Bill.

Bill Roeschlein

Thanks, Balu, and good afternoon. Let me start by saying how incredibly excited I am to join the POWI team. I think this is truly one of the premier stories and in the semiconductor industry with an abundance of secular growth drivers, addressable markets that’s expanding at the high power application and LED lighting, and a strong team in place to execute that strategy. I’m also excited by the high caliber of our investor base, and I plan to spend plenty of time on the road meeting with many of you in the months and years ahead.

Turning to our second quarter results, revenues were (inaudible), up 3% sequentially. The main growth driver was the computer market, which rebounded from a weak first quarter and grew more than 30% sequentially. The strength came mainly from desktop PCs as well as marked phone chargers, which we have historically included in the computing segment.

Industrial revenues grew low single-digit sequentially as is consumer revenues, with growth in consumer electronics largely offset by lower demands in major appliances. We also saw seasonally lower revenues from the air-conditioning market, which we included in the consumer (inaudible).

Communication revenues were down high single-digit sequentially driven by lower revenues from the cell phone market. The main driver of the decline was an inventory overhang at Nokia’s charger suppliers, which was discussed on Q1’s call. We also saw modestly lower sales from LG charger vendors. And as Balu mentioned, we believe we missed out on roughly $1 million of Samsung revenue due to bankruptcy of H&T.

Overall, despite the setback caused by the H&T bankruptcy, our second quarter revenues grew 24% year-over-year despite a $4 million decline in revenues from Samsung compared to the year-ago quarter. Looking at the revenues in a bit more detail, 62% of revenues were through the distribution channel and 33% were direct, unchanged from the prior quarter. As Balu noted, channel inventory was higher than normal as we exited the quarter at about 4.8 weeks, up from 4.5 weeks at the end of March.

Distributors ADNET and ATM were both 10% customers during the quarter comprising 19% and 10% of revenues, respectively. Phihong, a power supply manufacturer that uses our products in a wide variety of designs also accounted for 10% of revenue. Turns orders comprised 59% of revenues during the quarter at an average selling price of $0.33, down from $0.34 from the prior quarter.

Retail and revenue mix by-products and end-market is provided in the text of our press release and in part of the company tables.

Gross margin for the quarter was 53.7% on a GAAP basis, down 50 basis points from the previous quarter, but slightly above the high end of our guidance. For Q3, we expect GAAP gross margin from approximately 53%, plus or minus half a percentage point, including a one point impact of stock-based compensation.

GAAP operating expenses totaled $21.8 million, up $900,000 from the prior quarter. A majority of the increase was driven by the CFO transition as well as severance expenses associated with a handful of other personnel changes, which took place during the quarter.

Litigation expense was $633,000 in the second quarter, well below the $1 million that we had forecast. Although litigation expenses are somewhat difficult to forecast at any given quarter, we continue to believe that $1 million per quarter is a reasonable run rate for at least the remainder of this year.

Other income for the quarter was $2.3 million, up slightly from the first quarter. Interest income was lower as expected due to the declining interest rate environment. However, we also received the benefit from our D&O insurance carrier, which was partially offset by other non-recurring expenses. The net of these two items was a benefit of about $500,000.

Our tax rate for the second quarter was 18% on a GAAP basis, and 19% on a non-GAAP basis. We expect our non-GAAP tax rate to be 20%, plus or minus a percentage point for the remainder of the year. Diluted EPS was $0.23 on a GAAP basis and $0.33 on a non-GAAP basis, which excludes stock-based compensation.

Our balance sheet remains exceptionally strong. We added $24 million in cash during the quarter. And (inaudible) was $238 in cash in investments, or nearly $8 per share. Cash from operations drove the majority of the increase during the quarter, totaling $15.6 million. CapEx during the quarter was $2.2 million.

We repurchased 109,000 shares of our common stock during the quarter using a total of $3.4 million. That leaves $41 million of our $50 million repurchase authorization still for use. We conduct (inaudible) in a predetermined formula that there is – that pays for the program according to stock price. The buyback activity would accelerate on any pullback in the stock price and vice versa.

We ended the quarter with 30 days sales outstanding unchanged from the past quarter. Inventory turns decreased slightly to 4.2, remaining within our target of four to five turns. As volume indicated, we’re taking a cautious view of the third quarter revenue outlook based on recent order trends and distribution sell through rates. We are also providing a wider than normal range reflecting the high level of uncertainty in the current environment.

Our forecast is for Q3 revenues to range between $55 million and $60 million, or up 3% to 12% sequentially. While this range is below current (inaudible) estimates, the mid point would be up about 15% year-over-year in the face of a challenging macro environment, the unexpected bankruptcy of H&T, and a tough comparison that includes the anniversary of the Nokia ramp last year.

Again, we expect the gross margins of 63% on a GAAP basis, plus or minus a half percentage point. Operating expenses are expected to remain approximately flat compared to Q2, with slightly higher litigation expenses offset by lower core operating expenses.

With that, I’ll turn it back over to Joe. Joe.

Joe Shiffler

Thanks, Bill. At this point, we’re ready to take questions, and in order to make sure we get around to everyone, we’d appreciate if you’d limit yourself to one question and a follow-up. And then as time permits, we’d be happy to come back for a second round.

Operator, could you give the Q&A instructions, please.

Question-and-Answer Session

Operator

Very good. (Operator instructions) We’ll pause just a moment. Our first question will come from Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank

Hi, guys. Can you give a little more color on the H&T bankruptcy? When did it happen in that quarter, how that impacts you? You gave us a color on the top line, but what does that do in the bottom line? Did have any impact on your inventory?

Balu Balakrishnan

Well first of all, just to give you how it played out. When we had the conference call, we didn’t know anything this. In fact, we can actually – that small amount already, but the main production shipment that we tried to ship, we found out that the bank would not honor the LC. We’re on an LC basis, and it wasn’t until, I would say, second half of June we knew that they had actually gone bankrupt. They kept postponing the shipment until into June. And then in June, we found out that they actually closed down and was bankrupt. So we didn’t know until then.

And I think, what was the next question about? Was that inventory?

Ross Seymore – Deutsche Bank

Well that was about $1 million that you would have otherwise shipped. And did that not get made up for by other suppliers amongst these power supply guys that help out Samsung?

Balu Balakrishnan

Well we had one other design at a second subcontractor. And that was – is going to production a little bit later, and that is on track. In fact, the log ins on that will be higher because of H&T going away. But in addition to that, we got a second design at this other subcontractor. And we don’t know the exact combined volume, but our estimate is to design and (inaudible) production. The yearly run rate would be between $8 million and $10 million.

Ross Seymore – Deutsche Bank

And then just a follow-up question to that, Balu, is the inventory impact. Did that contribute to inventory going up sequentially since they didn’t take the product? And then is you could just – ballpark, what that meant to your EPS in the quarter?

Balu Balakrishnan

Well I guess you could say that they’re – that they had some impact. But generally, it’s not uncommon for us to have a slightly higher inventory at the end of Q2 because the second half of the year seasonally is stronger part of the year. So we actually build inventory during the first half.

Joe Shiffler

Ross, it’s Joe. On the gross margin or on the EPS impact, I think we did, obviously, (inaudible) gross margin on particular programs. But being that it be a high volume program, the (inaudible) was somewhat below average gross margins. And of course, that’s pretty much all through the bottom line.

Ross Seymore – Deutsche Bank

Okay. Great. Thank you.

Operator

And our next question will come from Sumit Dhanda with Banc of America Securities.

Sumit Dhanda – Banc of America

Yes. Hi, Balu. I just wanted to follow-up on your stamps on soft contractors. But first, the target that you’re suggesting now, $8 million to $10 million on an annualized basis, it seems it’s going to aggregate lower than the $10 million to $15 million that you talked about in the last call. I you could just fill in the blanks in terms of what we’re missing there. Is that the H&T bankruptcy that’s causing this?

Balu Balakrishnan

Yes. If you remember, the last call, we said we had two designs at H&T. Basically, Samsung has two different models that pretty much (inaudible) volume. And we had design wins on both models at H&T. And H&T was the largest supplier to Samsung. They are about 40% of Samsung’s charger volume. And so we were expecting significantly business because of that. And at the same time, we had one of the design wins at the – (inaudible) of contractor. But after H&T went away, we had the second one. So when we gave you $10 to $15 million range, that was based on two designs at H&T and one design at the other subcontractor.

Sumit Dhanda – Banc of America

I see. And who makes up for that lost H&T volume. I mean I’m assuming they’ll meet the supply somehow.

Balu Balakrishnan

Yes. They have about five or six other subcontractors. And we understand from Samsung that they happen to redistribute the volume among other subcontractors. What we don’t know is exactly how it’s going to be redistributed. But based on the feedback of the sales from the second subcontractor, we place it in the $8 million to $10 million run rate at the best that we can calculate at this point.

Sumit Dhanda – Banc of America

And I guess, Balu, who gets that remaining business? Does it stay with BCD? Effectively, even post the redistribution, it seems like you have a smaller piece of the pie.

Balu Balakrishnan

Well it seems to me is they are going away from BCD. Samsung does not want to continue with BCD. But whatever we don’t get, we’ll to discrete solutions, both RCT and controller based solutions.

Sumit Dhanda – Banc of America

Okay. Great. I’ll come back later if there’s time.

Balu Balakrishnan

Okay.

Operator

Our next question then is Auguste Richard with Piper Jaffray.

Auguste Richard – Piper Jaffray

Yes. Thanks for taking my question. Could you talk a little bit about slowdown you see in June and July? And you attributed to specific end-markets or new product – new product portfolio, you said more TopSwitch or Link. Any color there would be helpful.

Balu Balakrishnan

Yes. We have looked quite a bit into it. It looks very broad-based, both in terms of locations, products, and all (inaudible) geography. It really looks like a very broad-based slowdown that started sometime late May or early June.

Auguste Richard – Piper Jaffray

Okay. And so it’s across all regions and customers, and sort of into that – did order rights completely dry out? Or not completely dry out, but you’d expected the June quarter to be month-on-month 40%. Was it more – I’m sorry about 40%, you could (inaudible) it up a little bit, just flatten out? I mean so what is the shape of it? Is this accelerating in terms of slowing down, again, any color?

Balu Balakrishnan

Well the June quarter was about 15% or so less than the – I’m sorry, June month was 15% less than May. And normally, we would expect a price increase in June in preparation for Q3.

Auguste Richard – Piper Jaffray

And is this softness carried into July?

Balu Balakrishnan

Yes. It is continued. The softness is continued to July. It’s not getting worse, but I don’t think – getting any better so far.

Auguste Richard – Piper Jaffray

Okay. All right, all right. Thanks, Balu.

Balu Balakrishnan

You’re welcome.

Operator

(Operator instructions) We’ll go to Sumit Dhanda with Banc of America.

Sumit Dhanda – Banc of America

I didn’t expect to be back this soon. I just want to know, just Bill, if you could tell us, the last quarter you did 59% turns. What’s the implied turns guidance for the midpoint, implied turns number for the midpoint at the end of this quarter?

Bill Roeschlein

It would be in the mid 60s.

Sumit Dhanda – Banc of America

The other question I have for you, Balu, on the notebook product. When can we realistically expect to see volumes of any significance there for you?

Balu Balakrishnan

Like I said, the second half of next year because it’s a pretty established market. So penetrating that market will take some time.

Sumit Dhanda – Banc of America

And you view this in stream notebook adaptors? How do think this will be positioned?

Balu Balakrishnan

Well, our products, if ever we set up three products (inaudible), will not only (inaudible), it is also very cost effective. The regular adaptors are rather chunky adaptors. So we handle, actually, a pretty large portion of the notebook market very cost effectively, and that, I would say, anything below 75-Watts. And the biggest chunk of the volume is in the 65-Watt range. It’s roughly about the lower two-thirds of the notebook volume, so maybe about 70% of the notebook volume. And so we can address that market [Audio Gap].

Sumit Dhanda – Banc of America

– I’m a little surprised because my view or my understanding was that you could actually comprehend it, some kind of a slowdown at Nokia in terms of the impact on their communications business. So this occurred mainly in the second quarter or can you help us fill in the blanks there?

Balu Balakrishnan

Let me answer that question. Yes. We the Nokia reduction in revenue was fully understated and included in our guidance. So this is not a surprise in the Nokia number. It is consistent with the overhang we were aware of at our customers and the run rate.

Sumit Dhanda – Banc of America

And then, one housekeeping question for you, Bill. How should we think about modeling the interest income line going forward given the benefit (inaudible), or the overall other income line?

Bill Roeschlein

Yes. I would look at 530,000 was considered extraordinary, and (inaudible) 0.3 so that would drop that down to 1.8. And given the current interest rate environment, I would look – yes, we’re at a 1.6 to 1.7.

Sumit Dhanda – Banc of America

Okay. Thank you.

Operator

We have three in the queue. And let’s go to Steve Smigie with Raymond.

Steve Smigie – Raymond

Great. Thanks. I’m calling in for Steve Smigie. Did you or can you quantify your LED revenue for the quarter. And perhaps, you can give some color on the back half of 2008 for this market.

Balu Balakrishnan

Yes. the LED revenue in Q2 was approximately flat with Q1.

Steve Smigie – Raymond

Okay. So roughly you have $1 billion then?

Balu Balakrishnan

Yes, yes. Just about $500 billion, or $500 million, not billion, million.

Steve Smigie – Raymond

Yes, million. And do you still see this as roughly a half billion dollar per year market globally? Or has the macro weakness domestically, has that changed at all?

Balu Balakrishnan

Well, we have not given any forecast on the – some information on the Led because it’s such a margin market. We don’t have much information on how quickly it’s going to grow. But in terms of the prospects of that market for us, is extremely positive. There are (inaudible) designs going on in the (inaudible) that the LED will continue to get much stronger going forward.

Steve Smigie – Raymond

Oh great. Thank you very much.

Balu Balakrishnan

You’re welcome.

Operator

Our next question is from Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank

Yes. A quick turnaround for the follow ups here.

Balu Balakrishnan

Okay.

Ross Seymore – Deutsche Bank

Hey, a quick question on the split of the comms business. What was it between (inaudible) –?

Balu Balakrishnan

Thanks, Ross, just under 20% of total revenue. That’s out of the 26% that is in the common market.

Ross Seymore – Deutsche Bank

And just a little bit about the Nokia overhang not being really a surprise in this quarter. What should we look for in that segment inventory wise in the third quarter? Do you still have an overhang to work here or is it all kind of normalized now?

Balu Balakrishnan

Well as far as we know, none of the customers we have, have reported any overhang like they did in Q1. So it should be – it should be normal. But we don’t know how well Nokia is going to do in Q3, and whether they continue the get the same share. So far they’re getting their fare share.

Ross Seymore – Deutsche Bank

Okay. And then one last question on the H&T bankruptcy side, given how late that happened in the quarter that you said it cost you about $1 million in revenues. How should we think about how you otherwise would have expected that business to do in the third quarter even if we net out the business that you picked out at the power supply guy that helped Samsung?

Bill Roeschlein

Well, it’s hard to know for sure. I think, Ross, the best we can tell with the estimate is probably somewhere between $1.5 million and $2 million that we would take out of the third quarter. It’s hard to know again how much our other customer – how much of the slot they might pick up. But $1.5 million to $2 million is probably the best estimate we can come up with.

Ross Seymore – Deutsche Bank

Okay. And then, to the extent we can avoid surprises like that in the future, anybody else, at our year customers, that are teetering on the edge of bankruptcy that you have to worry about?

Balu Balakrishnan

I don’t know. This has actually come as a total surprise for us. I mean I never expected the largest supplier to Samsung to go bankrupt at all. I thought they would be in very good shape, but obviously, these things happen. No. I don’t know of anybody else.

Ross Seymore – Deutsche Bank

Okay. Thank you.

Balu Balakrishnan

You’re welcome.

Operator

Our next question is from Auguste Richard with Piper Jaffray.

Auguste Richard – Piper Jaffray

Yes. (inaudible), in the past you haven’t participated in the notebook market because of thermal issues, which (inaudible) in higher participation. Is the solution you now have for the notebook market, is that a discrete fact or how did you get around that thermal issue?

Balu Balakrishnan

Yes. That’s a very good question. I probably can explain to you more in detail in person. But at a high level, there are really two or three things that enable us to adjust this market. One is our package, we have a proprietary package, which is extremely effective in getting the heat out of the (inaudible) and keeping it cool. It is an integrated (inaudible). It is actually the HX family.

And the second advantage is the energy efficiency requirements, which required that you have an average efficiency of more than 87%. And I think I have talked to you about – before that to maintain that added efficiency with a discrete solution, we have to have much higher efficiency at full load, which requires a much larger (inaudible). So in other words, our technology becomes more cost effective with the multi-mode operation of the TopSwitch-HX family.

The third area where we really benefit a lot if our proprietary design of the transformer, and in some has (inaudible) coupled to the HX because HX operate at a much higher frequency so we can get away with a very simple flat transformer that is proprietary to us. So we allow our customers to use it only with our (inaudible). And what that does is it gives you a very sleek design without the cost associated with the low profile design. Usually, the low profile design costs quite a bit more than the chunky designs. But with our designs that’d be – the difference is very small.

Auguste Richard – Piper Jaffray

Okay. That’s helpful. And then when I look at my model for Link in the quarter, I was thinking it was going to be about $1 million sequential. And it was down about $0.5 million. And I’m assuming that the H&T bankruptcy probably was $1 million of that, and I’m expecting your Nokia businesses probably about down 10% sequential. Is that correct?

Bill Roeschlein

It sticks with the double-digit decline sequentially in the Nokia business. Yes.

Auguste Richard – Piper Jaffray

In or around 10%?

Bill Roeschlein

Well, higher than that. Actually, I think the decline in the LinkSwitch business sequentially was driven by the Nokia decline, which was expected. And then, you’re right. The H&T business was LinkSwitch business as well.

Auguste Richard – Piper Jaffray

Right. Okay. And then I would assume that if you just look at everything else other than Nokia and Samsung, it would appear that the Link effectively down, or actually, technically flat, plus or minus 100,000 or so. Is that about right for Link?

Bill Roeschlein

That sounds roughly right, yes.

Auguste Richard – Piper Jaffray

Okay. And so have you seen any indigenous Chinese cell phone guys start to come back? I know they were weak in Q1. Were they still weak in Q2? And do you expect them to sort of come back to the toss, if you will, in Q3?

Bill Roeschlein

I’d say we saw a slight improvement in the China pocket of the cell phone revenue, but still relatively soft.

Balu Balakrishnan

But I must add there that our LinkSwitch-II product has been received very well by two or three major cell phone chargers manufacturer in China. So we are optimistic in getting some additional share there looking forward.

Auguste Richard – Piper Jaffray

Okay. So that particular (inaudible) I can now (inaudible) a nice sequential claim, maybe normal seasonality?

Balu Balakrishnan

That’s hard to predict, especially with macro environment and also the design in time that takes with the new LinkSwitch-II product.

Auguste Richard – Piper Jaffray

Got it. Okay. Thanks. I’ll open up for somebody else.

Operator

With that, that is our last question in the queue. I’ll turn the call to Joe Shiffler for closing comments.

Joe Schiffler

Okay. Thanks. That concludes the call this afternoon. A replay will be available shortly on the Investor Info section of our Web site, which is investors@powerinc.com. The telephone replay is available for 48 hours by dialing 888-203-1112 from within the US, or 719-457-0820 from outside the US. And the code for the replay is 4025946. Thanks for listening, and good afternoon.

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Source: Power Integrations, Inc. Q2 2008 Earnings Call Transcript
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