Monolithic Power Systems, Inc. Q2 2008 Earnings Call Transcript

Sep.18.08 | About: Monolithic Power (MPWR)

Monolithic Power Systems, Inc. (NASDAQ:MPWR)

Q2 2008 Earnings Call

July 31, 2008 5:00 pm ET

Executives

Rick Neely - Senior Vice President, Chief Financial Officer

Michael R. Hsing - Chief Executive Officer

Analysts

Tore Svanberg – Thomas Weisel

Craig Hettenbach – Goldman Sachs

Rick Schafer – Oppenheimer

Doug Freedman – American Technology Research

Vernon Essi – Needham and Company

Bob Gujavarty – Deutsche Bank

Steve Smigie – Raymond James and Associates

Vijay Rakesh – ThinkPanmure

Michael McConnell – Pacific Crest Securities

Ryan Goodman – Merrill Lynch

Patrick Wang – Wedbush Morgan Securities

Craig Berger – FBR Capital Markets

Gus Richard – Piper Jaffray

Operator

Welcome to the second quarter 2008 Monolithic Power Systems Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Rick Neely, Chief Financial Officer of MPS.

Rick Neely

Welcome to the second quarter fiscal 2008 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 forwardlooking statements and projections that involve risks and uncertainties. For example, our business outlook including our business and financial outlook for the third quarter of 2008 projected third quarter revenues and gross margins; our expectations for third quarter litigation, stockbased compensation, and nonGAAP operating expenses; our target operating model range for gross margins and operating expenses; our third quarter projected bookings; our projected average tax rate for 2008; our feeling that MPS is well positioned for future growth; land and new product introductions; potential customer acceptance and the various opportunities these present; expected growth or declines in our product line; inmarket applications and geographic markets; and, finally, inventory levels and projected changes in inventory levels.

Forwardlooking statements are not historical facts or guarantees 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 our SEC filings, including, but are not limited to, our 2007 form 10K/A filed or March 12, 2008, which is accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call.

We will be discussing operating expense and net income on both a GAAP and a nonGAAP basis. These nonGAAP financial measures exclude charges related to stockbased compensation, legal settlement, and provision costs and their related tax effects. We will also discuss our expected nonGAAP research and development and selling, general, and administrative expense for the third quarter of 2008, which excludes our expected charges related to stockbased compensation.

A table that outlines the differences between the nonGAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to this release as well as to the reconciling tables that are posted on our website.

I'd also like to 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, along with the earnings release filed with the SEC earlier today.

We would like to start this call by reviewing our second fiscal quarter 2008 business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2008. We will then open up the call to your questions. Let's start with the business highlights.

MPS is pleased to report our best sales quarter ever as we recorded revenues of $41.5 million, an increase of 35% over the second quarter of 2007 and above our guidance for the quarter. We have talked extensively about our many new product introductions over the past 1824 months, and these efforts are clearly bearing fruit. Our new highcurrent, highvoltage MiniMonsters product family and our new battery charger product family continue to grow nicely for early stage products.

We are also seeing steady growth in our core DC to DC products, and expansion into a variety of markets such as set-top boxes, and new products requiring greater than 40 volts operating rating. These products are typically used in printers, automotive, and industrial applications.

Regionally, we continue to make very good progress in growing our revenues outside of greater China. In the manufacturing area, we met our expectations, maintaining our gross margin in the upper end of our target model for the second quarter, recording a gross margin of 63%. On the expense side, nonGAAP operating expenses were $18.6 million, up from the first quarter of 2008 as we incurred significant legal costs in our litigation with Linear Technology. We also saw heavy new product introduction expenses that increased our R&D spending. Bottom line, nonGAAP net income was $7.1 million or $0.20 per share.

Now let's look at the financials in more detail. Looking at the P&L, on the revenue line, second quarter 2008 net revenues of $41.5 million grew 35% from the second quarter of 2007 and were up sequentially by 17% from the $35.4 million recorded in the prior quarter. Let me break down our second quarter revenue by product line.

DC to DC product sales were $28.6 million, up 50% from the $19.1 million recorded in the year ago quarter and up $3.1 million or 12% from the first quarter of 2008. The majority of this growth came in the flat panel TV, communications, set-top box, and general consumer markets.

We continue to see increasing sales volumes in our new MiniMonster and battery charger products, as we mentioned before. LCD backlight revenues for the second quarter were $9.5 million, an increase of 5% from the same quarter a year ago and up 31% from the prior quarter. Drilling down into this market segment, MPS saw its unit shipments for the notebook portion increase 35% yearoveryear.

But also saw its CCFL unit shipments into the multimedia applications, such as portable DVD players and digital picture frames, decline by almost 70% from the prior year. The net effect of these two trends, along with normal ASP declines, account for the lowerthanaverage annual revenue growth in our backlight business.

Audio revenues came in at $3.4 million, up 26% from the $2.7 million recorded in the year ago quarter and up 25% from the first quarter of 2008. This product area is growing due to our continued success with several major consumer product customers in the LCD TV space.

Let's move down to the gross margin line. Our second quarter gross margin was 63.0% compared to 63.5% in the same quarter of 2007 and 63.2% in the prior quarter. We are very pleased with our execution in managing our production processes and maintaining strong cost control in spite of the negative environment for higher production costs and lower price Asian competitors.

If you look at our GAAP operating expenses, they were $21.8 million in the second quarter. This includes $17.5 million in R&D and SG&A expense, which includes $3.2 million for stock compensation expense under FAS 123R accounting rule and litigation expense of $4.3 million. Compared with the second quarter of 2007, GAAP operating expenses decreased by $5.1 million.

This amount comprises an increase in litigation costs of $266,000; a decrease in litigation settlement costs of $9.8 million; an increase in R&D spending of $2.2 million; an increase in SG&A spending of $1.8 million; and, finally, we had a onetime lease credit in Q2 2007 that did not reoccur in 2008. And that had a net effect of increasing expenses by $496,000. Our GAAP operating margin was 10% in the second quarter, up significantly from the negative 24% in the prior year.

I would now like to review our nonGAAP operating expenses. Excluding stock compensation, our nonGAAP operating expenses for the second quarter of 2008 were $18.6 million, compared to $15.2 million in the second quarter of 2007 and $14.3 million in the first quarter of 2008.

The $4.3 million expense increase from the first quarter of 2008 was primarily due to our jury trial with Linear Technology in June. Based on the court's ruling that MPS did not breach the 2005 settlement agreement, MPS has the right to seek recovery of its legal fees.

NonGAAP R&D costs showed a sequential increase of $841,000. As we continued an aggressive schedule of new product introduction and hiring, SG&A spending declined by $100,000 as onetime charges for changes in our distribution channel did not reoccur. Our nonGAAP operating margin was 18.5%; but if you exclude legal expense, we had a 29% nonGAAP operating margin.

Looking to the bottom line for Q2, our GAAP net income for the second quarter was $4.6 million or $0.13 per fully diluted share. This compares quite favorably with the GAAP loss of $6.4 million recorded a year ago, which was heavily impacted by a onetime legal settlement of $9.8 million. Our nonGAAP net income in the second quarter on a nonGAAP basis, our Q2 net income was $7.1 million or $0.20 per share. This result is computed with a nonGAAP tax rate of 15%, our expected average tax rate for 2008.

Compared to the prior year, and excluding both stock compensation and the onetime settlement, MPS increased its nonGAAP net income by $2.9 million or 69% yearoveryear. Finally, we bought back about $4.4 million of our stock in the second quarter as part of our authorized $25 million share repurchase plan. We have now purchased a cumulative total of $13.9 million or approximately 775,000 shares at an average price of $17.97 since our buyback program started in the first quarter of this fiscal year.

Now let's look at some of the major changes to the balance sheet. Cash, cash equivalents, restricted cash in investments, were $126.8 million at the end of the second quarter of 2008, up from $92.3 million at the end of the second quarter of 2007 and up $11.2 million from the $115.6 million recorded at the end of Q1 2008.

In Q2, MPS had operating cash flow of about $10.4 million and stock option exercises of $6.6 million. This was offset by capital spending of $1.2 million and the stock buyback of $4.4 million.

Accounts receivable ended the second quarter at $13 million, compared with $11.3 million at the end of Q1 2008 and $8 million at the end of the second quarter of 2007.

Day’s sales outstanding, or DSO, remained at normal levels for MPS coming in at 29 days for the second quarter of 2008. This is flat to the 29 days recorded at the end of the prior quarter.

Our inventories at the end of the second quarter were $24.1 million or about 143 days of inventory. This compares with $16.4 million or 114 days of inventory at the end of the prior quarter. Looking back at the end of the second quarter of fiscal 2007, our inventories totaled $11.9 million or about 96 days of inventory. All of the inventory increase from the first quarter of 2008 was in the die and work-in-process segments. Our finished goods inventory actually declined from Q1 2008 and dropped almost $2 million from the end of December 2007.

Our distribution channel also declined as our days of inventory ended up below our target range of 3045 days at the end of the quarter. Therefore, in order to service our anticipated increased second half demand, MPS will utilize more of our internal inventory stocks. We anticipate that our inventory days will decline to about 100120 days by the end of 2008.

I would now like to turn to a discussion of general business conditions. We saw excellent revenue growth in the second quarter of 2008, achieving record sales for MPS. Our new product families are doing very well in design and market segments we have not served before, and we are pleased with their early revenue contributions as a result.

Geographically, in the first half of 2008, 59% of MPS sales were shipped to Taiwan and China and 41% to other regions. This compares favorably to the first half of 2007 when MPS had 66 percent of our sales in greater China. In addition to our strategy to improve our regional strength, MPS is seeing broad gains in a variety of diverse market segments, what we would like to call the singledigit percentage success model.

This reference to single digits is the fact that many of our innovative, highly integrated parts can be used in a whole host of inmarket applications. No one application is huge, but the cumulative effect of getting two or three or five percent of our sales in a wide variety of segments is part of the fuel behind our extraordinary sales growth record.

For example, we have grown our revenues in the set-top box end market by a factor of four times from Q2 2007. And we now have about five or six percent of our total sales in these products. Our fully integrated synchronous buck converters provide ideal price and performance for this application. This is just one example of the power of a single-digit market model. MPS in general has a very broad market and end application coverage, providing both multiple opportunities for growth but also some buffers should any one segment suffer from poor market dynamics.

In the new product area, we are introducing a new series of highly integrated, very cost effective CCFL controllers from the monitor segment. These products should see production revenues in 2009. Our new 40volt DC to DC converters are being used in laser printers, car accessories, and industrial applications like utility meters. All of these efforts, plus many more new products, should help MPS maintain our well above industry average revenue growth rates in the future.

Now, turning to our outlook for the third quarter of 2008. Our revenue guidance is in the range of $46 million to $49 million, reflecting growing demand for our products in the third quarter of the year. Gross margin is expected to be in the mid to upper end of our target range of 6063%. We expect stockbased compensation expense in the range of $3.2 million to $3.6 million. We expect nonGAAP research and development and selling, general and administrative expense in the range of $15 million to $16 million. This estimate excludes the stock compensation estimates mentioned above. Finally, we expect litigation expense in the range of $1.4 million to $1.8 million.

In conclusion, we are pleased to report that MPS had an excellent second quarter. We grew much faster than the overall analog market with 35% yearoveryear revenue growth. Once again, MPS is proving that its key initiatives of (1) continuing to introduce new, highperformance power management products at a faster rate and (2) continuing to expand both our global market presence and multiple inmarket applications is the right strategy for success. MPS feels very well positioned for future growth. Now we would like to open the microphones and take your questions.

QuestionandAnswer Session

Operator

(Operator Instructions) Your first question comes from Tore Svanberg - Thomas Weisel Partners.

Tore Svanberg Thomas Weisel Partners

First of all, on your guidance and the range there, can you just talk a little about some of the moving parts, what gets you to the lower end, what maybe gets you to the higher end of that range, please.

Rick Neely

Which parts of the guidance?

Tore Svanberg Thomas Weisel Partners

Sorry, the revenue.

Rick Neely

In general, Q3 is our strongest quarter. Everything tends to go up in Q3. That's generally how it works. Michael, I don't know if you have any more to add.

Michael Hsing

We don't have any in the low end or the high end, they all generally move up. All our new products are doing extremely well so that contributes part of it.

Tore Svanberg  Thomas Weisel Partners

Can you also talk a little bit about visibility? What are some of your customers telling you about current demand?

Michael Hsing

Customer current demand is all across the board. We see other companies saying the consumer business weak, and we see it very strong. Again, we're a small company relative to others; there's a lot of opportunity for MPS.

Rick Neely

I would say when you look at our bookings for Q3, we feel our bookings are good and will support our guidance for Q3. That's what we see in near term. We can't comment on other companies' situations, but that's what we see.

Tore Svanberg  Thomas Weisel

Also on the litigation with Linear Technology, can you just elaborate a little bit more on what we should now expect going forward? Both as far as maybe getting some moneys back, but maybe more important, just on your own competitive positioning in the marketplace.

Michael Hsing

We will continue to develop our products, so this lawsuit is not really into the future product, it's in the past, the product we never shipped. We shipped less than $100.

Tore Svanberg  Thomas Weisel

I guess what I am getting to is were you blocked with those products and now you can actually go and win some of those sockets. I guess that's what I am getting to.

Michael Hsing

The product actually would never ship any meaningful amount. So those products, we never intend to sell those products.

Tore Svanberg  Thomas Weisel

And then how about recouping some of the legal expenses?

Rick Neely

On the contract side, our judge's ruling allows us the right to ask for our legal fees; and we definitely intend to ask for our legal fees back. The case actually has not concluded yet. The reason is there's a little bit of spending in Q3 is there's a third section of the case that the judge is going to be hearing later on this fall; and, at that point, he'll issue his final ruling. But the judge has already ruled on the contract side that we did not breach the agreement, and the agreement has a clear clause in there that the loser has to pay the other's legal fees. That's what it says.

Operator

Your next question comes from Craig Hettenbach - Goldman Sachs.

Craig Hettenbach  Goldman Sachs

Rick, on the gross margin front, with guidance of mid to upper end of the range, can you just talk looking out over the next year or so at some point ways that gross margins might settle out or, more importantly, how you've been able to keep the gross margins at that upper end of the range.

Rick Neely

As we said, our guidance actually on gross margin is the same as it's been for probably the last two or three quarters, mid to upper end. In the past year or two, we've been a little bit over the upper end of our range. And we've always said we felt glad, lucky, and happy to be there. Again we expected to grow the company. We expect to maintain our revenue growth in the 25% range by doing the kind of gross margins we're doing. Right now, we're still operating at a good level, mid to upper end.

The factors that come in play are, on the downside, there's lowerpriced Asian competitors. On the upside, our regional growth into areas, particularly like Europe and the U.S., and market applications such as industrial, tend to give you slightly better margins. So that's one factor on the upside.

Another factor on the upside is the new products, which tend to be a little bit higher margin. The balance between those three elements of new regions and applications and new products and then lowerpriced Asian competition, that's what will determine where it's going to go. In terms of us reading the tea leaves, it's difficult to say. Michael, do you have any comments?

Michael Hsing

I don't have any comment, but overall for MPS to become a much bigger company, and the margin pressure is always there. But we try very hard to introduce new products and develop new technology. That's what will give MPS the edge.

Craig Hettenbach  Goldman Sachs

And then if I can have a followup, Rick, on the inventory front. Any more color in terms of on an absolute basis where the inventory might trend in Q3 and into Q4.

Rick Neely

Right now, we're already at 120 days. The way it just worked out. We don't time our inventory purchases, but we bought a lot of die and that's how it ended up at the end of the quarter. We're already at 120. I expect we'll be about that in Q3. We'll probably be more like 100 days by the end of the year. We usually do this, the second half is our big demand period. If we can buy die strategically, we do that. Again, our finished goods declined. We didn't build a lot of packages, we just built up the die bank.

Operator

Your next question comes from Rick Schafer - Oppenheimer.

Rick Schafer  Oppenheimer

Just wanted the follow up on the inventory question. Were there any production issues maybe that you saw in the second quarter, maybe related to the earthquake, the Chengdu back end package and test facility that you have.

Michael Hsing

Actually none at all. We have a capacity for our second year and as you see in the past, we always built our inventory in the first half to meet second half demand. These are not vegetables or bananas. Our products last for seven to ten years. We're not really worried about the high inventory.

Rick Schafer  Oppenheimer

I was interested because it looked like your finished goods really didn't change much but your WIP almost doubled, I think, sequentially.

Rick Neely

Almost doubled, like 7080% up.

Michael Hsing

Compared to the past, we talk about it before, and we ran way too low. Now, we have over 200 products and a lot are new and we have to stock all these inventories and are waiting for all those products for ramping.

Rick Neely

I would have to comment, too, Michael and I are amazed that the company went through a major earthquake in Chengdu. But the team in China did a tremendous job. 24 hours after the earthquake all the IT was up; and 48 hours later we were ready to go and producing parts. It had no impact. We have a brand new factory, very well built apparently. Good news. We managed to get through that with no protobation. As you can see there's no impact on the numbers.

Rick Schafer  Oppenheimer

I think you explained really well what's going on in the second and third quarter with the litigation maybe a little bit higher than I had modeled. If we look forward like into the fourth quarter or even looking into next year, what's sort of a normalized litigation run rate for you guys? Is it million and a quarter or half a million and a quarter?

Rick Neely

It's hard to give the range, but we can say there's no major litigation scheduled at this time. Smaller debts tend to add up, but maybe your range the reasonable.

Michael Hsing

The reason we can't comment is that we don't have any, litigation is an unforeseeable event, and we can't control our Q2 cost. Your model is probably in the range. Our Q2 cost is higher, the litigation cost is higher than they are modeled, too. In future, we can't really tell; but as far as I know, we have no major cases going on anymore.

Rick Schafer  Oppenheimer

Just on the notebook CCFL market. I don't know if there's a way to quantify or talk about maybe some of the shared gains that you've seen there, what you think your share will get back up to in notebook, where do you think it's going, that kind of thing. And maybe as part of that, can you talk about any plans for the LCD TV market in terms of CCFL?

Rick Neely

I'll start with the market. We did look at it because, on a unit basis, as we said, we're doing fine in the notebook market. If we grow our units 35% yearoveryear I think we're maintaining our share in notebooks, and the notebook market is good. Where we saw a slight drop-off was with these smaller portable devices like DVD players and digital picture frames. They were hot in 2007 and then switched to different solutions, and that happens all the time. In our mainstream notebook market, we think we're doing fine in market share. In terms of the other products, Mike?

Michael Hsing

To Rick's point, we saw smaller LCD panels switch to LED and also the trend started in the notebook side, and we all saw that. The unit numbers for smaller panels dropped quite a bit in CCFL shipments. But on the notebook, we gained quite a bit. For the revenue side, we don't grow that much because of the price. The price erosion is pretty bad. We'll still maintain a relatively good margin. As I said in the past, in the last quarter, the CCFLs for notebooks and for small panels, it's a mature market; and we don't see a big growth. Last time we said it was flat to slight growth. For the TV side, we don't have a major shipment for CCFL backlight and have a lot of DC to DC products.

Rick Neely

In backlight, our major CCFL growth driver in the future will be a segment we haven't served, the monitor segment. We have some new products were introducing now. We think we should get some growth on the monitor segment next year. Again, notebooks will probably be maturing. The monitors we should see some growth. TVs, we really don't make backlighting products for that market.

Rick Schafer  Oppenheimer

Michael, just to clarify, when you say pricing is getting kind of rough or worse in CCFL, to you what's rough? Is 20% a year, 15% a year kind of range or is it worse?

Michael Hsing

No, it's because last year we won the lawsuit and we get back in the game. And so we get back to game at a better price, we want the market and want those shares. And these are very profitable for MPS. So the price is worse than previous year that we were in.

Rick Schafer  Oppenheimer

Can you tell us again what terms are this quarter versus last quarter, and that's all I have. Your sales terms for the current quarter versus last quarter. Is it sort of roughly the same as they were last quarter, are they lower? Higher?

Rick Neely

Our bookings were good. The typical bookings for Q3, which is a bigger quarter, so our bookings in Q2 support those.

Michael Hsing

We don't see a surprise.

Rick Neely

It's what we expected for this type of quarter.

Operator

Your next question comes from Doug Freedman - American Technical Research.

Doug Freedman  American Technology Research

Can you talk a little bit about efforts to expand your sales footprint, what's gong on there as far as head count and programs in distribution as you try to broaden your sales reach.

Michael Hsing

I don't have a clear number for you now. We definitely are expanding the U.S. sales team and application teams. You know the sales people and application people, the application engineer is really the person to sell the product, as well as in Europe and Japan. Over the past history, we are always on the conservative side. And the sales grows a lot faster than the [inaudible] grows and the world maintains the same way.

Doug Freedman  American Technology Research

Are you finding a larger percentage of sales coming through the distribution or do you think that it will in the future?

Michael Hsing

We try to do in different regions, and they’re different stories. In Europe, we do a lot of sell by ourselves and use a rep rather than [distributor]. In the U.S. and Japan we must rely on [distributors].

Doug Freedman  American Technology Research

Did you offer the blended ASP in the quarter?

Rick Neely

We don't do that because we have so many different products with so many different price ranges, it doesn't come up with anything.

Michael Hsing

It's difficult for us. Overall product line we're getting a few percentage difference with our average.

Rick Neely

Typically, we don't give a blended ASP because of the breadth of our products.

Doug Freedman  American Technology Research

New products introduced in the quarter and how many you expect to introduce next quarter?

Michael Hsing

I don't have the numbers. We still are on track and, as I said before, we expect about 30 to 40 new products every year. This year, we're better than that.

Rick Neely

We're better than that. I guess I could go the other way. On the R&D side, the reason we're up above maybe some guidance or above last quarter was $400,000 or $500,000 or extra mass costs and all those go to new products. Just on the expense side, we’re spending on a lot of new products. We don't spend a lot of time counting them, but the expenses show up there in the R&D area.

Operator

Your next question comes from Vernon Essi - Needham and Company.

Vernon Essi  Needham and Company

Just wanted to revisit the geographic question and make sure that I understand what you're trying to get at here with the situation with China in terms of revenue coming down. You're obviously increasing your exposure in other regions. First of all, what specific region would you say, if you were to look over the last two quarters, that's grown the most relative to the others? And where do you see most of that growth delta coming from?

Rick Neely

I have the advantage that we just filed our Q today, so I can just look at this past six months versus 2007; and one of the bigger growths, for example, Europe was $3 million in the first six months of 2007 and $5.5 million in first half of 2008. Similarly, same things in Japan; we grew from $4.7 million to $7.7 million. So, again, Japan and Europe are two good examples of much higher than company growth rate in areas where we get good advantages from the technical innovation of our products; and we can get good prices.

Vernon Essi Needham and Company

Both of these, do you expect to have good seasonality into the rest of the year?

Rick Neely

Yes.

Vernon Essi Needham and Company

One other point you talked earlier about, and this is a question on a lot of our minds. You got a lot of mixed results out there from different companies. Some people are seeing a weaker consumer cycle. I am just trying to figure out, and your guidance is great relative to a lot of other companies, and you're not really coming out and saying this, but is it safe to assume that you are seeing increased dollar penetration within same accounts across most of the accounts or do you feel as though you're seeing true organic growth rates at the end market?

Michael Hsing

I think it's everything what you said. This year, a lot of new products, we got into a lot of new accounts where we were not in last year. Also the regional growth and these new accounts. And so the existing accounts and existing products were also doing really well. All of the above. I can't really tell you what's the future. Again, same as last quarter, I said I see the blue skies and I don't know if the horizon is a cliff or not.

Rick Neely

It does go both ways. For example, in set-top boxes, we have always done well in Europe; and now we're starting to get those designs into U.S. as well. Same solution, but these are new customers we hadn't served before. But we're taking that solution to other customers. So that's some of the growth in the set-top box.

For example, markets where we know the customers very well, like notebooks, we're starting to ship some MiniMonster power, power management into notebooks. That increases our dollar content in notebooks. Same thing in TVs. We've done very well in TVs, but the MiniMonsters are coming in and increasing our content in the TVs. It's a combination. Some of our markets, it's an additional, wider customer base like set-top box and, in other markets, it's increasing dollar content as well.

Operator

Your next question comes from Bob Gujavarty - Deutsche Bank.

Bob Gujavarty Deutsche Bank

You mentioned you spent $4.4 million on buybacks. How many shares did you repurchase?

Rick Neely

I would have to look it up.

Michael Hsing

I think the average price was 17 something.

Rick Neely

In the quarter, we repurchased about 220,000 in the quarter.

Bob Gujavarty Deutsche Bank

How much was depreciation in the quarter?

Rick Neely

Depreciation was about $1.5 million.

Bob Gujavarty Deutsche Bank

We talked about this LED CCFL transition, you always comment that LED is still too expensive. Have you seen any further movement to LED? What’s your guess on what the LED penetration in notebooks would be, let's say at the end of this year?

Michael Hsing

I don't know what the percentage. I think I said it before, 2009 is the year and they will have a bigger transition. We expect that.

Rick Neely

The trend is moving the way we thought. I don't know how much the percentage is, but it's definitely going as people expected it.

Michael Hsing

2008 is still smaller numbers. 2009 could be a very meaningful number.

Bob Gujavarty Deutsche Bank

And you will have the product ready for that transition in 2009?

Michael Hsing

We have a product in the pipeline.

Operator

Your next question comes from Steve Smigie - Raymond James.

Steve Smigie  Raymond James

I'm curious on the set-top box wins that you're getting, is that from traditional set-top boxes, HD stuff, are you seeing wins in like IP TV set-top boxes?

Rick Neely

I am using that as a broad category. The IP boxes, converter boxes, cable boxes, sort of similar, some have different functions.

Michael Hsing

In the U.S. and with HDTV, digital TV, that will help us.

Rick Neely

The analog conversion to digital settop box.

Michael Hsing

We try hard not to have a huge impact on MPS revenues. I know it grow much faster than any other category. We maintain 25 percent growth every year.

Steve Smigie  Raymond James

Sometimes you break out MiniMonsters, I think it's a dollar amount revenue, any thoughts on share count for Q3? And interest income for Q3?

Rick Neely

In terms of share count, I think we're about 36 and change. I think that's where we're heading. A lot of it depends on stock price, which will make the fully diluted number different, kind of in the $36 million range is about where we're at. On the MiniMonsters, as I said, we try not to give out exact numbers. We're very pleased that we're at the upper end of our range of our expectations for the year it looks like, on MiniMonsters in terms of dollars. So that's the good news.

Michael Hsing

We're happy with the sales. As we expected, they're in the upper end of our expectations.

Steve Smigie  Raymond James

And the interest income?

Rick Neely

Interest income is down a little bit because interest rates are down across the board. I think everybody is the same, interest rate is down to 2%. I think it's about $800,000 maybe as a forecast. I would have to go back and recalculate.

Operator

Your next question comes from Vijay Rakesh - ThinkPanmure.

Vijay Rakesh  ThinkPanmure

On the gross margin side, what are the levers you are seeing as you go forward on improving that one way or the other?

Rick Neely

The main way an established company improves the gross margin is with new products and new applications which have better pricing, that's the main thrust is selling into new regions where [inaudible] more integration. At the same time, new products. Those things will help us a lot. The things that always push on the downside, which Michael mentioned, as you get larger, there's always more price pressure to take volume deals. There's always low price Asian competitors out there.

So, the balance of those things depends on what happens. We've been very good in the last two years. We stayed at the upper end of our target range for quite some time. We work hard at it and we can't predict exactly what's going on. We are happy with being one of the top gross margin guys in the industry.

Vijay Rakesh  ThinkPanmure

As you look at your notebook side, you mentioned some new [inaudible]. Do you have any new Tier 1 in the notebook side in Q2 you expect in Q3?

Michael Hsing

Tier 1. I don't have answers. We may have, but we certainly ship a lot of volume to it. The MiniMonster products in smaller, small PCs, student PCs, EPC, we ship quite a bit numbers on EPC. For the Tier 1, we're either design or either there's a product shipping. It's progressing every quarter. I don’t know. Certainly, there's a large volume yet.

Vijay Rakesh  ThinkPanmure

The DC to DC converters look like very nice pickup. Any vertical markets, like the set-top box, that you're seeing good growth on the DC to DC converter side you see going forward?

Michael Hsing

Actually, the settop box, is one of our components to our revenue. These revenues are not going to be significant. These are single digit. We have a lot of these TVs and other single digits. Is it noticeable? We have many, many others. Lot are one or two percent of our business. It's really difficult to tell.

Operator

Your next question comes from Michael McConnell - Pacific Crest Securities.

Michael McConnell  Pacific Crest Securities

Rick, just wanted to ask on the inventory front. Obviously being now at 120 days, you've already made considerable progress from how you finished the quarter. I have got to ask, just with the sell in model, how comfortable are you with the amount of inventory you're carrying on the balance sheet, that the distributors don't drop inventories even further than maybe what you are seeing historically. A much bigger competitor had a problem with that this past quarter. Can you just talk about if there's any risk associated with that?

Rick Neely

What we do is we try and manage a range. We like the distributors to carry 30 to 45 days. As I mentioned on the call, they're actually below that. On an average basis, they're below what we want them to take. If they take a little more, we'd be happy. Nearterm, that's not the issue for MPS. We had very low channel inventories at the end of the quarter, so I'm not concerned right now.

Michael McConnell  Pacific Crest Securities

Just looking at the lead times, can you just comment on your lead times, what they were last quarter, what they are currently and what's been the trend over the last couple quarters.

Michael Hsing

In the past, we see about 30 days, about 26 to 30 days. We don't see any significant change this time.

Michael McConnell  Pacific Crest Securities

So you haven't been bringing this down?

Michael Hsing

The lead time is our business, a term business.

Rick Neely

Four to six weeks is what we typically do. That's been working fine. There hasn't been any change in that.

Operator

Your next question comes from Ryan Goodman - Merrill Lynch.

Ryan Goodman  Merrill Lynch

Can you help me understand how you're thinking about R&D and SG&A in terms of getting your [inaudible] model. Are you like specifically with the R&D, are you growing that as a percentage of revenue or is there a fixed dollar amount you're targeting for each year?

Rick Neely

Right now, if you look at it on a nonGAAP basis, our R&D is around 16% to 17% of sales. Our goal is have it between 14% and 16%, so we're at the upper end of our goal. That's not one, we want to spend the money. This year we had a very heavy new product introduction, so I am happy to be at 16%17% in R&D.

At the same time, as we heard in the phone call, sales and marketing have to grow because there's a lot of new regional applications we can get into, but we have to hire the sales and applications teams to do it. The area where we are actually getting leverage, it's not broken out, but G&A is declining as a percentage of sales because you don't need additional people that way. We're getting leverage on G&A. We're probably going to grow sales and marketing.

R&D, we're a technology company, we're an innovative new product company, so that's what we do and we're not going to save money in R&D, that's not the place to do it. I would say this year, if you look at the Q3 guidance, it's about where we will stay. It's a good year to continue to invest in R&D.

Ryan Goodman  Merrill Lynch

I know you get asked this every quarter for an end market break-out and you usually don't give it, but maybe you can help me understand at this point, do you think consumer now is taking up a bigger chunk of your revenue now than notebooks?

Rick Neely

The notebook now, when I did the math, is 16% to 18%. Notebook continues to decline as a key part of our business because we're getting much bigger and the notebook market is mature and flat. It's definitely in the 16% to 18% range.

Ryan Goodman  Merrill Lynch

Is that including the converters going into the notebooks?

Rick Neely

That's just the CCFL. I don't know, the power going in there a still fairly small. Notebooks are well under 20%, that's what I know. What was the other part of your question?

Ryan Goodman  Merrill Lynch

That was it, actually, if the consumer had passed notebooks. I wasn’t sure how much the DC to DC business was actually going into notebooks.

Michael Hsing

It's a small number.

Operator

Your next question comes from Patrick Wang - Wedbush Morgan Securities.

Patrick Wang  Wedbush Morgan Securities

Quick question on CCFL revenues. Looks like revenues snapped back pretty well in Q2 versus Q1. Does a lot of that have to do with the ramp of a customer you recently regained?

Michael Hsing

Yes. We gained a lot of customers, and unit volume grew more spectacularly. The revenue grows slightly. There's a new significant dollar we can make and that's we want these units.

Rick Neely

The other part of it, Q1, as we said in our call last quarter, Q1 CCFL revenue was abnormally low. There was a bit of a, there wasn't a lot of ordering going on across the board, so some of it was more of a seasonal pickup and the rest, as Michael said, was some design.

Patrick Wang  Wedbush Morgan Securities

I know you talked about aggressive pricing recently here. As we think about Q3 and Q4, what are you expecting in terms of ASP erosion on that same market?

Michael Hsing

The price erosion in the last couple of years, or this year, is slightly more than two years ago. We continuously introduce new product and ramping these new product and growing the different regions and also cost cutting, too. That's why we're very lucky. We're still staying in the 63% range.

Patrick Wang  Wedbush Morgan Securities

As I think about OpEx from a dollar perspective, how would I look at SG&A and R&D to grow from Q2 to Q3?

Rick Neely

If you look at the guidance, most of that growth will come in R&D. Twothirds of the growth in the guidance I gave would be R&D and maybe a third would be sales and marketing.

Patrick Wang  Wedbush Morgan Securities

Also in the quarter, you guys had a nice 15% nonGAAP tax rate. How should we be thinking about tax rate next quarter and on a longer-term basis?

Rick Neely

Again, now that I'm halfway through the year, I can forecast the tax rate. Actually, no one can of forecast the tax rate accurately, but it looks like the range is somewhere between 12% and 17% would be the average rate. You kind of hit a 14% or 15% number. That's where the average is likely to be and that's my current view.

Patrick Wang  Wedbush Morgan Securities

Do you have an update on the high voltage and high current products you started sampling?

Michael Hsing

We introduced a 40 volts, and we have a 60 volts and higher voltages, some 100volt products. These are in the telecommunications, automotive applications, and printers, laser printers and picture printers. That's where we are in now.

Operator

Your next question comes from Craig Berger - FBR Capital Markets.

Craig Berger  FBR Capital Markets

Rick, on the taxes, is 15% what we should be dialing in for 2009?

Rick Neely

That's my nonGAAP rates for this year. Next year, that would be good for 2009.

Craig Berger  FBR Capital Markets

On the high voltage stuff, since you talked about it, how much of the R&D is being spent on high voltage or other more advanced products, newer stuff than MiniMonster?

Michael Hsing

I can't really tell because it all into one single technology, which is ECD plus. And we have many design guys and design of other products. There were several products that will go for the telecommunications market.

Craig Berger  FBR Capital Markets

When you said MiniMonster was coming in towards the high end of your range of expectations, what was that range of expectations?

Rick Neely

We try and stay away from the numbers. But we have said before all we needed was $5 million or $10 million in MiniMonsters this year to be very happy. So you can take it at the upper end of that range.

Operator

Your last question comes from Gus Richard - Piper Jaffray.

Gus Richard  Piper Jaffray

First of all, on your inventory internally, do you include die bank and finished goods or is that WIP?

Rick Neely

WIP.

Gus Richard  Piper Jaffray

You generally ship to your customers in two to four weeks if need be, right?

Rick Neely

Our cycle time on the back end, assuming we have everything lined up, that's about it.

Michael Hsing

I don't know if you meant the WIP in the back. Those are not in the inventory. We have a die bank and a finished goods.

Rick Neely

In the 10Q, it will show the work in progress includes the die bank and WIP, and finished goods is where the products with packages are.

Gus Richard  Piper Jaffray

Which I imagine is pretty small.

Rick Neely

As I said, it's down for the yearend and down for the quarter. Finished goods, we built up the die bank and so that we can respond, from die to finished products, it's two to four weeks, depending on what kind of product.

Gus Richard  Piper Jaffray

Are your distributors pulling for more inventory at this point given that you're below the target range or are they comfortable with your ability to deliver what they need?

Michael Hsing

I think the key is we believe we can manage the inventory better than distributors. That's the main reason. They always have, because we're ramping so many new products now and they always complain about the shortage of this product and that product. So we built up a lot of inventory for the new product and they always ask for more.

Rick Neely

I think Michael has got a good point. Our preference is rather than let the distributor guess, if we hold the die bank and can get it to them in two to four weeks, that covers our general lead times. The fact also that we have, the distributors know we have a large die bank and that makes them feel a little better about not having a lot of finished goods.

Operator

There are no further calls.

Rick Neely

Thank you everybody for listening to the call. It's taken over an hour, but I appreciate your questions and look forward to talking to you in about three months at our next call.

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