Oct 25, 2008
Executives
Rick Neely – CFO and Treasurer Michael Hsing – President and CEO
Analysts
Ryan Goodman – Merrill Lynch Rick Schafer – Oppenheimer Ross Seymore – Deutsche Bank Patrick Wang – Wedbush Morgan Securities Tore Svanberg – Thomas Weisel Partners Vernon Essi – Needham & Company Gus Richard – Piper Jaffray Ian Yen [ph] – Goldman Sachs Doug Freedman – American Technology Research Steven Smigie – Raymond James & Associates, Inc.
Operator
Good day, ladies and gentlemen, and welcome to the quarter three 2008 Monolithic Power Systems Inc. earnings conference call.
My name is Ms. Allen, I will be your operator for today.
(Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr.
Rick Neely, CFO and Mr. Michael Hsing, CEO.
Please proceed sir.
Rick Neely
Good afternoon and welcome to the third 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 forward-looking statements and projections that involve risks and uncertainties, for example, our business outlook including our business and financial outlook for the fourth quarter of 2008 projected fourth quarter revenues and gross margins, our expectations for fourth quarter litigations, stock-based compensation, and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, our fourth quarter projected business activity level, our projected average tax rate for 2008, our belief that MPS is well positioned for future growth, new product introductions, potential customer acceptance and the various opportunities these present including their impact on revenue growth rate, expected growth or declines in our product line, end market applications, geographic markets including opportunities in non greater China markets, and finally, inventory levels and projected changes in inventory levels. Forward-looking 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 not limited to, our Form 10Q filed on July 31, 2008, which is accessible through our Web site, 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 non-GAAP basis. These non-GAAP financial measures exclude charges related to stock-based compensation, legal settlement, and a reversal of our lease write-offs that were recorded previously and the related tax effects.
We will also discuss our expected non-GAAP research and development and selling, general, and administrative expense for the fourth quarter of 2008, which excluded our expected charges related to stock-based compensation. A table that outlines the reconciliation between the non-GAAP 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 Web site. 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 Web site for one year, along with the earnings release filed with the SEC earlier today.
We would like to start this call by reviewing our third fiscal quarter 2008 business highlights. Following this update, I will discuss our operating results.
We will conclude by discussing our expectations for the fourth fiscal quarter 2008. We will then open up the call to your questions.
Let's start with the business highlights. MPS is pleased to report another all-time record sales quarter as we recorded revenues of $48.9 million, an increase of 22% over the third quarter of 2007 and up 18% sequentially.
We have introduced a tremendous number of new products over the past 24 months expanding our footprint into market segments previously unserved. To illustrate the scope of our expansion, at the end of 2006, MPS offered 71 products across 11 product families.
Now, as of the end of the third quarter of 2008, MPS is able to ship 151 products in 16 different product families, a more than doubling of our product footprint in the market. We are accelerating our growth particularly in the US and Europe, non-greater China revenues increased to 41% of MPS revenues year to date in comparison to 35% for the first nine months of 2007.
We see a lot more opportunities in these new areas in the coming years. In the manufacturing area, we continued to operate in the upper end of our target model in the third quarter recording a gross margin of 62.8%.
Our inventories dropped to 112 days in Q3. On the expense side, non-GAAP operating expenses were $16.8 million, down $1.8 million from the second quarter of 2008 when we incurred significant legal costs in patent litigations.
Bottom line non-GAAP net income was a record $12.1 million or $0.33 per fully diluted share. Now, let’s look at the financials in more detail.
On the profit and loss statement, third quarter 2008 net revenues of $48.9 million grew 22% in the third quarter of 2007 and were up sequentially 18% from the $41.5 million recorded in the prior quarter. Let me break down our third quarter revenue by product line.
DC to DC product sales were $34.1 million up 33% from the $25.6 million recorded in the year-ago quarter and up $5.6 million or 20% from the second quarter of 2008. The majority of this growth came in the wireless communications storage set-top box, and general consumer markets.
LCD backlight revenues for the third quarter were $10.3 million, a decrease of 6% from the same quarter a year ago but up 9% from the prior quarter. As we saw last quarter, MPS unit shipments for the notebook computer portion of this segment increased about 11% year over year but CCFL unit shipment into multimedia applications such as portable DVD players and digital picture frames declined significantly from the prior year.
The net effect of these two trends along with normal ASP declines account for the flat revenue trend in our backlight business. Audio revenues came in at $4.4 million up 21% from the $3.7 million recorded in the year-ago quarter and up 28% from the second quarter of 2008.
This result reflects our continuing success with several major consumer product customers in the LCD TV space. Let’s move down to the gross margin line.
Our third quarter gross margin was 62.8% compared to 63.5% in the same quarter of 2007 and 53% in the prior quarter. We are very pleased with our abilities to manage our expanding production activities while maintaining strong cost controls despite the negative environment for higher factory cost and competition from lower price Asian companies.
Looking at reported expenses and operating margin, our GAAP operating expenses were $20.1 million in the third quarter. This includes $19 million in R&D and SG&A expense which has a component of $3.3 million for stock compensation expense, and litigation expense of $1.1 million.
Compared with the third quarter of 2007, GAAP operating expenses increased by $3.1 million, this amount is comprised of a decrease in litigation cost of $362,000, an increase in R&D spend of $1.9 million, an increase in SG&A spend of $1.5 million. Our GAAP operating margin was 22% in the third quarter up from 21% in the prior year.
I would now like to review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the third quarter of 2008 were $16.8 million compared to $13.9 million in the third quarter of 2007, and $18.6 million in the second quarter of 2008.
The $1.8 million expense decrease from the second quarter of 2008 was primarily due to lower legal spending of our jury trial within our technology earlier this year. Non-GAAP R&D cost showed a sequential increase of $743, 000 as we continued our aggressive schedule of new product introduction and hiring.
Sales, G&A spending grew by $680,000 primarily in the sales and marketing arena as we grew our field sales and application teams worldwide to sell our bounty of new products. Our non-GAAP operating margin was 28% which nearly matches our achievement of 29% in the year-ago quarter.
On the net income basis, our GAAP net income for the third quarter was $10.5 million or $0.29 per fully diluted share, a new record for MPL. This compares favorably with the net income of $9 million recorded a year ago or $0.25 per fully diluted share.
The third quarter non-GAAP net income on a non-GAAP basis, our Q3 ’08 net income was $12.1 million or $0.33 per share. This result is computed with a non-GAAP tax rate of 15%, our expected average tax rate for 2008.
Compared to the prior year, MPS increased its non-GAAP net income by $2.4 million or 25% year over year. Finally, we bought back about $6.1 million of our stock in the third quarter as part of our authorized $25 million share repurchase plan.
As of this conference call, we have now completed the share buyback program which retired 1.4 million shares at an average price of $17.31 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 and investments were $128.8 million at the end of the third quarter up from $101.8 million at the end of the third quarter of 2007. In Q3 MPS had operating cash flow of about $3.4 million and stock issuances of $5.8 million.
This was offset by capital spending of $1.1 million and a stock buyback of $6.1 million. Accounts receivable end of the third quarter were $18.8 million compared with $13 million at the end of Q2 ’08 and $12.8 million at the end of third quarter of 2007 reflecting the record revenues that MPS achieved.
Days sales outstanding remained at normal levels for MPS coming in at 35 days for the third quarter of 2008, this is up somewhat from the 29 days recorded at the end of the prior quarter. Our inventories at the end of the third quarter were $22.3 million or about 112 days of inventory.
This compares with $24.1 million or 143 days at the end of the prior quarter. Looking back, at the end of the third quarter of fiscal 2007, our inventories totaled $15.8 million or about 98 days of inventory.
As we expected in our last quarter conference call, our overall inventory position did return to normal ranges in the third quarter following a buildup in die banks in the prior quarter to position MPS for second half growth. Inventories in our distribution channel remained on the leader side as inventory ended up at the lower end of our target range of 30 to 45 days at the end of the quarter.
I would now like to turn to a discussion of general business conditions. We saw record revenues for the third quarter of 2008, our seasonally best quarter.
We continued to introduce new products and product families that are doing very well in applications and market segments we have not served before. Geographically in the first nine months of 2008, 59% of MPS sales were shipped to Taiwan and China and 41% to other regions.
This compares favorably to the first nine months of 2007 when MPS had 65% of our sales in Taiwan and China. In addition to our strategy to improve our regional strength, MPS is becoming a new product machine as we mentioned at the beginning of this call.
We have leveraged our design team in the past two years by using our cutting edge BCD plus process technology to create ever more innovative designs. Our line card [ph] has expanded significantly growing from 71 products at the end of 2006 to 89 by the second half of 2007 and all those 151 products available on our line card in the second half of 2008.
We have also added three new product families this year all of which contain multiple new products. This allows MPS to call our larger customers who have always liked our technical performance but wanted a broader selection of power management products before committing to major programs with MPS.
Now, our expanded range of products and product families has positioned MPS to be able to serve these larger customers. In the new product area, some of our new product families are ranged with the automotive segment and e-fuse [ph] for general application.
We are introducing a new 15A DC to DC in the MiniMonster family and a series of the world’s smallest 12 volts 2A-4A synchronous box. Our MiniMonster product line produced record shipments in Q3 spread among the notebook, power, flat panel TV, printer, graphics gaming, and wireless communication segments.
All of these efforts plus many more new products should help MPS maintain our above-average industry revenue growth rates in the future. While MPS has been doing well and we continue to deliver innovative products, we recognize that the last few weeks has seen a deterioration in general demand for electronic products as a result of the worldwide financial crisis and associated macroeconomic slowdown.
With this in mind, we turn to our outlook for the fourth quarter of 2008. Despite excellent execution, MPS is affected by the current economic crisis.
For the fourth quarter of 2008, our normal seasonality in the consumer segment typically means that the fourth quarter is somewhat down sequentially from the third quarter. We have noticed some cancellations and delays in new projects.
On the other hand we also see many of our new products starting to ramp up to volume production. Therefore, our Q4 revenue is very uncertain compared with prior years.
Our Q4 revenue guidance is in a wider range of $39 million to $43 million. Gross margin is expected to be in the mid-to-upper end of our target range of 60% to 63%.
We expect stock-based compensation expense in the range of $3.4 million to $3.8 million. We expect non-GAAP research and development and selling, general and administrative expense in the range of $15.2 million to $15.8 million.
This estimate excludes the stock compensation expense estimates as mentioned above. Finally, we expect litigation expense in the range of $700,000 to $1 million.
In conclusion, we are pleased to report that overall we are happy with our recent progress. MPS had a record third quarter.
We grew faster than the overall analog market with 22% year-over-year revenue growth. More importantly, we became a more diversified company both in our current revenue stream and our product portfolio.
We grew our US, Europe, Korea and Japan revenue and introduced record numbers of new products and product families. In these uncertain times, MPS is very well positioned for future growth; Now, we would like to open the microphone and take your questions.
Operator
(Operator instructions) Your first question comes from the line of Srini Pajjuri with Merrill Lynch. Please proceed.
Ryan Goodman – Merrill Lynch
Hi guys, this is Ryan Goodman for Srini. I just wanted to touch on the OpEx again, it looks like R&D has stepped up this quarter which I think we knew was going to happen with the new product developments and SG&A stepped up a bit too but given what we are seeing going on in the macro environment, I see you are now in kind of that top of that 14% to 16% range, how should we think about that going forward?
It looks like it is flattening out a bit in Q4. Are you going to be operating more towards an absolute dollar target to keep the product developments going or is it possible you would have to pull that down maybe if the environment does not improve?
Rick Neely
Financially we are in good shape. This company is an engineering driven company, we expect to continue to develop a lot of products and put our muzzle behind the engineering which is what we are doing.
At the same time, you have to sell the products, so sales and marketing will continue to grow. We are cognizant of the overall economic environment and we always control our expenses to that but as Michael will say, we’ll let him chip in, the typical answer is you find good R&D guys in the area.
Michael Hsing
We see huge opportunity both geographically or in the product market site. Geographically we see Europe, US and at Japan that we have a huge opportunity.
Even at greater China we see we need other products to grow the revenue. So, we have a huge opportunity ahead of us.
We don’t manage these numbers quarter by quarter, everything what we do effect two years later. So, our future is bright, we keep the investment.
Ryan Goodman – Merrill Lynch
Okay and then just a follow-up kind of on a different topic, just with the CCFL space, I know you have been talking for some time now, now that that two (inaudible) drivers are going to be primarily in the desktop monitor space, we are getting close I just wanted to touch on that, have you really made any progress in that space so far, I know you have kind of been in the product development area and you had a product coming up, are you getting any revenue from that yet and just how is that looking for early ’09?
Michael Hsing
Yes, we do. We haven’t really broke out that number yet but we see a very good shipment in the LCD monitor now.
Ryan Goodman – Merrill Lynch
Okay, guys, thanks a lot.
Operator
Your next question comes from the line of Rick Schafer with Oppenheimer. Please proceed.
Rick Schafer – Oppenheimer
Hi guys, got a couple of questions. I guess the first is, I guess you just talked about sort of the impact on the current market conditions on your outlook, I am curious how much impact you guys are seeing on the ramp of some of your new design wins, especially some of your higher current, higher volt stuff in the DC to DC side of the business?
Michael Hsing
We at this time like any other company particularly in MPS because we are in the ramping stage and our customers will not give us a very clear picture. For them, they do not know either.
For what I am saying is we design it in, we are ready to have a good shipment, a good steep ramp and we don’t know now. That is the reason why we give a wider than normal guidance.
Rick Schafer – Oppenheimer
Okay but it sounded like the turns number was pretty comparable to past quarters I guess, is that fair to say Rick or Mike?
Rick Neely
Actually, the problem with this quarter is we don’t think it is going to behave like historical patterns. The bookings are pretty good but the turns are the concern because everything seems to be slowing down.
So, there is nothing wrong with the backlog but we do rely as usual on a good amount of turns and we are just not sure what is going to happen later in the quarter.
Rick Schafer – Oppenheimer
Okay and then second question Rick, we know you are fabless, what kind of gross margin impact are we likely to see, let’s say (inaudible) let’s say worst case flattish type revenue growth next year for you guys, what kind of impact would that have on your gross margins?
Rick Neely
As you said, the advantage of being a fabless company is that it does not really impact us. Our facility in Chengdu does tests only and doesn’t have that much of an impact one way or the other.
So, it is really down to pricing and product mix not capacity.
Rick Schafer – Oppenheimer
Then just part of that question, if you look at your OpEx line, I know you maybe touched on that earlier question, how much control – if we assumed a flattish type revenue environment next year, how much control do you guys have over OpEx and would you be able to just sort of keep that in line with your top line growth rate or how realistic would that be?
Michael Hsing
First of all I don’t think we should react to anything now. As I said earlier, our near future is uncertain and we have huge design wins across the entire spectrum of the analog power management market and so we expect to ramp, but given the current conditions, we are concerned, we will react very quickly as always MPS is but we don’t do anything now.
Rick Neely
Yes, I think Michael has a good point, the part just like many companies, we pay healthy bonuses and we have sales commissions, those are the variable parts that change when revenue changes. So obviously those would vary.
That tends to happen and that is a part that is built into our expense structure so that will vary the rest of it as I said we don’t need to jump right now. I think Michael has made a good point.
Rick Schafer – Oppenheimer
Okay, thanks guys.
Operator
Your next question comes from the line of Ross Seymore from Deutsche Bank. Please proceed.
Ross Seymore – Deutsche Bank
Hi guys. Can you give any granularity into the assumption on our guidance, you talked a little bit about the backlog being good but the bookings being weak, are you kind of assuming that the high end of your range assumes something that continues on what you are seeing now on bookings or gets worse, so any granularity on that would be helpful.
Rick Neely
Yes, you are asking your own question Ross. These are the wider range if things go pretty good, it could be the higher end if things go worse, it could be the lower end.
That’s kind of how to go about it.
Michael Hsing
We are going in the quarter, it felt like a normal quarter then the world turned upside down. We talked to – I was in Asia, I came back on Sunday and I was in that part of the world, I talked to our customers, our sales guys and their input is as certain as our financial world.
One day 1000 points up and the other day 1000 points down but our pocket is not as bad as that.
Ross Seymore – Deutsche Bank
So, I guess the high end of your revenue range assumes business condition stay the same as what you have seen in kind of the last three weeks, is that what you are saying, in the low as if they continue to worsen?
Michael Hsing
Yes, we won’t put it (inaudible) and frankly okay, we can’t tell in a very clear way which customer project pushed out. We see porting too.
So, all new products ramp that is where the uncertainty is on.
Ross Seymore – Deutsche Bank
I guess one final quick one, what do you think your channel inventory did quarter over quarter and what do you expect it to do given your guidance?
Rick Neely
I know it is buried probably somewhere in the call Ross but again, our distributors at the lower end at the 30-day to 45-day target, they are at the lower end of that, low 30s. So our distributor channels leaned and as you can see our own inventories dropped where we wanted them to be, so we have kept our inventories where we want them, we kept the channel inventories lean.
So, basically, what you are seeing in our results Q3 and Q4 is simply in demand. We pretty much reflect that now because our channel inventories are lean, Q3 people built a lot of products in Q4 they look like they are building less and that is pretty much what you are seeing.
It’s now inventory is lean, our projecting inventory is Q4 will be in the same level. So, you are pretty much watching end demand happen is what we see.
Operator
Your next question comes from the line of Patrick Wang with Wedbush Morgan Securities. Please proceed.
Patrick Wang – Wedbush Morgan Securities
Hi guys. Nice numbers by the way for the third quarter.
Just wanted to talk real quick on cancellations and delays you guys talked about, I was just hoping you guys could maybe kind of help quantify kind of what you are seeing out there just in terms of cancellations and pull-ins also what kind of parts that the movement with orders are involved with, is it DC to DC if it is particularly in monitors, what is happening there?
Michael Hsing
Your voice is very low. I believe your question is you wanted more color on the uncertainty, right?
Rick Neely
And if you see any cancellations, what are they and –
Patrick Wang – Wedbush Morgan Securities
Moving parts –
Michael Hsing
Yes, okay. Cancellations are more related to the consumer side.
Some new projects and particularly in new projects we expected to ramp and didn’t happen. So, we got a feedback from our customers that the projects are delayed or they have some inventory issues but on the other hand, we see the other projects did ramp up as we expected.
Patrick Wang – Wedbush Morgan Securities
Okay, in terms of the pull-ins, was there a particular type of product, particular end market that was getting pulled in or was it pretty mixture?
Michael Hsing
Across the board some of them end consumer, other ones are in the industrial type of applications.
Operator
Your next question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please proceed.
Tore Svanberg – Thomas Weisel Partners
Yes, thank you a couple of questions. First of all, you now have more than 150 products in the product family, so could you talk a little bit about the percentage of those products that are contributing to revenue today and what is behind the question is obviously trying to understand how far you are in this pretty impressive ramp in the products that you have?
Rick Neely
Yes I will start with – on the numbers wise, some of the new product families we just introduced this year and therefore there is very little revenue today. That is typical of the three new product families like the USB protection devices and things like that and power over Ethernet controllers they are just entered the market.
But some of the ones we have introduced in the last year, MiniMonsters had record sales and that is again up to the point and not quite 10% of the revenues but it is a good number. Battery chargers are getting up to good numbers as well.
So we are continuing to see those but what we are really talking about in the call was this year we have introduced a whole bunch more products and therefore you typically get almost just sample revenues in your first year. So, that’s not going to leveraged next year for most of the new product families, but the ones we introduced last year, the MiniMonsters and battery chargers are really starting to have good contributions.
Tore Svanberg – Thomas Weisel Partners
So, is it safe to say that not even half of the 151 products are contributing revenues at this point?
Rick Neely
This year, if you do the math, we introduced about 60 some this year.
Michael Hsing
We don’t actually have a clear breakdown now.
Rick Neely
Most of them would not be.
Michael Hsing
It is okay. Most of them – we don’t have the data now but somewhere in the company we do have it.
We can talk to you after the conference call.
Rick Neely
But typically if we introduce things in Q1 we might be in a little revenue things introduced in the last six months, no, you just don’t technically. You don’t get the production volumes that quickly.
Michael Hsing
Usually all the new products will have any meaningful revenue about 12 to 18 months later.
Operator
Your next question comes from the line of Vernon Essi with Needham & Company. Please proceed.
Vernon Essi – Needham & Company
Thank you. You guys are not going to escape this without me asking about audio.
Very solid performance there and we attribute that delta to the television market to the most part.
Michael Hsing
Yes. You know it is not my favorite topic.
Vernon Essi – Needham & Company
No, I am waiting for you to take effect in the DC to DC so we don’t have to talk about it anymore.
Michael Hsing
Yes, the audio, there are no changes in its story. It is the lowest margin across our product family.
So, and also it is concentrated in the TV market and some other applications too but mostly TV. So, that is not what we want to be, we want to diversify.
Vernon Essi – Needham & Company
Sure. I understand it is sort of a Trojan horse question here but on that market did you see the same sort of growth delta in the DC to DC side for televisions?
Michael Hsing
DC to DC yes. I think DC to DC side we have a more diverse and a lot more sockets depending on the customers and depending on the TV design and so we shipped different products to different customers.
For the audio side, it is very simple there are a couple of products for the entire need. So, it is very concentrated and that is not what we want to be.
Rick Neely
You are right Vernon some of the DC growth TVs, flat panel TVs are a good market for our chips and they grew in Q3.
Operator
Your next question comes from the line of Gus Richard from Piper Jaffray. Please proceed.
Gus Richard – Piper Jaffray
Thanks for taking my question. Just on the balance sheet that it is still low but the accounts receivables have popped up a bit in terms of days and I was wondering if there was any particular explanation for that.
Rick Neely
No, I answered your question. It did up pop up, our shipping patterns are a little bit different than normal.
That was all – it’s really just the timing, we’ve already collected most of the cash, so it is just a timing issue, it will straighten itself out next quarter.
Gus Richard – Piper Jaffray
Okay, got it. Then, you have already touched on a couple of new products, how is it the traction in the new high performance LDLs going?
Are you guys getting some design momentum there?
Michael Hsing
Yes, we are ramping up but the number is too small but the ramp rate, we really like that. Few customers have accepted the product and they have proven, they are successful and we will have more products in that area.
Operator
Your next question comes from the line of Craig Hettenbach with Goldman Sachs. Please proceed.
Ian Yen – Goldman Sachs
Hi guys, this is Ian Yen [ph] for Craig. Just a question on order strength by end market, did you happen to notice any differences in the order patterns, say LCD TV stronger than consumers, stronger than set top or was the weakness all pretty much the same?
Michael Hsing
Yes, until a few weeks ago everything to us looked normal and I talked to our customers and everything is like our financial market, crashed.
Rick Neely
It is a little bit like this, I don’t think there is any sector that is unaffected, the industrial, etc. everything consumer seems to be down.
I mean, there are other companies that reported before us that have a much higher industrial component have seen the same thing. So, I think it is a general contraction, there is not any one market that is doing well, actually.
Ian Yen – Goldman Sachs
Okay, similarly looking forward, I guess by your real product families are you expecting them all to be sort of be around the average or do you anticipate a divergence of maybe one of those (inaudible) or you DC to DC converters?
Michael Hsing
The divergence, we have a different product family. In Rick’s script we said we introduced a few product families, these are the things we didn’t have before, like the easy-to-use electronic fuse and that is a big opportunity for us as a general application.
Lot of products needs that, we just replace the electronic fuse – we replace the mechanical fuse. So, that is only an example but we have other products, high voltage products, automotives and other things the LDLs and we do a lot of things now.
Operator
Your next question comes from the line of Doug Freedman from American Technology Research. Please proceed.
Doug Freedman – American Technology Research
Hi guys, thanks for taking my question, hopefully it is not something that has been asked. I am jumping on different conference calls here.
Can you talk a little bit about your fab transfer activities? I know you presently over rode [ph] ASMC and have plans to add a second one, how is that progressing?
Michael Hsing
Yes, they are progressing well. Our customers qualify them and the volume is still in the ramping period.
Doug Freedman – American Technology Research
Rick, can you give us any color that it may or may not have on the gross margins or the structure of the business?
Rick Neely
I don’t think there will be changes one way or the other. What it does is spread our risk which is good.
We will have two sources. Again we are putting that, the easiest thing to do at a new fab is put newer products so you qualify the new customer on a new fab and you don’t have to requalify old guys.
So, that’s why it is ramping. It is putting new things into the 8 inch, so we are very good at getting competitive prices any way so I don’t think it will impact our margins.
It just gives us a better risk profile and choices between suppliers.
Operator
(Operator instructions) Your next question comes from the line of Patrick Wang from Wedbush Morgan Securities. Please proceed.
Patrick Wang – Wedbush Morgan Securities
Just a quick follow-up here. First one, in the third quarter it looks like your revenues in China had slowed down a bit, anything going on there?
Rick Neely
You are talking about the –
Patrick Wang – Wedbush Morgan Securities
Just the geographic distribution there, I saw that Korea had grown nicely, Taiwan grew nicely, a lot of points grew nicely China actually declined just slightly.
Rick Neely
As you know, China represents where the product are built. So, tracing back as we talked about in the call, we are really happy with our results in Japan, Korea, Europe and US and so China is really a matter of mix with some projects we used to be in, we don’t have any more, we talked about some of the consumer devices that were not in any more.
At the same time we are gaining a lot of meat projects in Japan, Korea and the US. So, that’s been the mix, a lot of the consumer devices that we were hot last year, remember we were talking about digital picture frame, that’s a big decrease this year and things like that.
Patrick Wang – Wedbush Morgan Securities
Okay, and then on the inventory side, I saw that (inaudible) came down a bit here. What do you think inventory does just in terms of your balance sheet next quarter here?
Rick Neely
I don’t want to spend a lot of time forecasting inventory. We talked last quarter where we want to operate, we want to operate about where we are, is about where we want to be.
Michael Hsing
The company will react skillfully but I don’t really think wherever we need to build, we build it. The company has a lot of cash and also the product has a very long life cycle.
So, depending on any given period of time and depending on our customers and depending on our product ramp, we will stop the inventory but we don’t use that as our measurement.
Rick Neely
We typically want to keep things on die form. The other thing which we found is it is better for us to keep our distributors at a lean amount that keeps our finger on the demand.
So, we will keep the distributors at the lower end of the ranges and we will keep the inventory ourselves. We are going to stick with that strategy, it seems to be working.
Operator
Your next question comes from the line of Steven Smigie of Raymond James & Associates, Inc. Please proceed.
Steven Smigie – Raymond James & Associates, Inc.
Typically your Q1 is down about 10% to 15% sequentially, do you think that normal seasonality plays out or do you think given the decline, is it a model for Q4 that will probably be less than that?
Michael Hsing
At this time, no. I really can’t tell you that.
If you asked me the same question last year this time, I would have said we believe it will be normal Q1 and our revenue patterns follow the seasonality, but this year I really don’t know.
Steven Smigie – Raymond James & Associates, Inc.
I think you guys said you have included your buybacks, would you start another one?
Michael Hsing
At this time though, we are still studying it, we don’t have any plans yet.
Operator
At this time, there are no additional questions in queue. I would now like to turn the call over to Rick Neely, CFO for any closing remarks.
Rick Neely
Alright. Thank you for listening into our third quarter call and we look forward to chatting with you next year when we cover the fiscal year.
Thanks a lot.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
Good day.