Monolithic Power Systems, Inc. Fourth-Quarter and Fiscal Year 2006 Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Incorporated, fourth quarter and fiscal year 2006 earnings conference call. My name is [Mike], and I'll be your operator today. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to our host for today's call. Please proceed.

RICK NEELY, CFO, MONOLITHIC POWER SYSTEMS: Good afternoon, and welcome to the fourth quarter and fiscal year 2006 Monolithic Power Systems conference call. Michael Hsing, CEO and founder of MPS, is with me on today's call. In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty.

For example, our business outlook, including our business and financial outlook for the first quarter of 2007, projected first quarter net revenues and gross margins, our expectations for first quarter litigation and non-GAAP operating expenses, our target operating model range for gross margins and operating expenses, planned new product introductions, potential customer acceptance, and the various opportunities these present, our process development, design activities and relative competitive position, expected growth or declines in our product lines in geographic markets and anticipated outcomes of our pending litigations.

Forward-looking statements are not historical facts or guarantees of future performance or events and are based on current expectations, 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 third quarter 2006 Form 10-Q, filed on November 6, 2006, which is accessible through our website, and our 2006 Form 10-K, to be filed on or before March 16, 2007.

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

We will also discuss our expected non-GAAP research and development and selling, general and administrative expense for the first quarter of 2007, which excludes our expected charges related to stock-based compensation.

A table that outlines the differences between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which is filed with the SEC. I will refer investors to this release, as well as to the reconciling tables that are posted on our website at www.monolithicpower.com.

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.

We would like to start this call by reviewing our fourth quarter fiscal year 2006 business highlights. Following this update, I will discuss our financial results. We will conclude by discussing our current expectations for the first fiscal quarter of 2007. We will then open up the call to your questions.

So let's start with the business highlights. The general analog market for the fourth quarter of 2006 was not strong, but MPS performed relatively well. Results for MPS met our expectations as we reached revenues of $26.4 million, delivered solid gross margin of 63.9%, achieved our first design wins for our new high-current MiniMonster products and ended the year with $78.5 million in cash and cash equivalents.

Our third-generation process technology, BCD Plus, continues to deliver excellent early results. In the first quarter of 2006, we released the BCD Plus process technology and said our first products would come out in the third quarter, and we met that target.

Our first two products in this family, which are nicknamed the MiniMonsters, are the MP8666 and the MP8668. These products were sampled in the third quarter of 2006, and we are pleased to announce that our first production orders have been received for shipment in the first half of 2007.

The initial application is for a high-end desktop PC, but we are seeing a lot of design activity in our other target vertical markets, such as power modules for laptops, large LCD TVs, communication equipment, low to mid-range ODM-supplied graphics cards, servers and other similar markets that can utilize the high-current, high-voltage, high-efficiency and very small form factor of our MiniMonster chips.

MPS is very excited about achieving design wins for our new high-current products from the initial sample runs. Recent customer visits have shown enthusiastic interest in these innovative products. We have more products in the pipeline, and we expect to open up new market applications and revenue opportunities for MPS as we continue to execute on our new technology and product line.

In the manufacturing arena, MPS continued to deliver excellent performance, as we met our gross margin expectations for the fourth quarter, recording a gross margin of 63.9%. We continued to watch our inventories closely, keeping our days of inventory at a modest 68 days. We are steadily growing our cash balances as we increase cash and cash equivalents by $4.5 million in the quarter to $78.5 million as of December 31, 2006.

Year-over-year, cash and cash equivalents has increased by $11.6 million. On the expense side, our non-GAAP operating expenses were down quarter-over-quarter, as litigation spending of $1.9 million was well below our expectations as our trial preparation took a breather until the first quarter of 2007.

We moved to a new headquarters building in December 2006, and as a result we recorded a one-time charge of $1.2 million to write off the lease of our old building in the fourth quarter.

Now let's look at the financials in more detail. On the profit and loss statement, starting at the revenue line, fourth fiscal quarter net revenues were $26.4 million, a decrease of 19% from the fourth quarter of 2005. This compares to net revenues of $27.3 million in the prior quarter, a slight decrease of 3%, sequentially. For the fiscal year, revenue was $105 million, up 6% from 2005 revenue of $99 million.

Let me break down our fourth quarter revenue by product line. DC to DC product sales were $17.3 million, down 8% from $18.8 million recorded in the year-ago quarter and down the same amount from our third quarter 2006 figure of $18.8 million.

For fiscal 2006, total DC to DC product sales were approximately $71.7 million, compared to $57.8 million in 2005, which is a growth rate of 24%. Year-over-year, our core DC to DC products actually grew about 30%, while the white LED driver segment suffered from difficult market conditions. It was down about 7% year-over-year.

LCD backlight revenues for the fourth quarter were $7.4 million, a decline of 42% from the same quarter a year ago. This result was consistent with our expectations of essentially flat revenues quarter-over-quarter in this product area, as our third quarter 2006 backlight revenues were also $7.4 million. For fiscal 2006, total CCFL product revenues were $29.2 million, versus $38.1 million in fiscal 2005, a decline of 23%.

Just to remind our listeners, the big drop in revenue year-over-year in the CCFL area was due to several factors. First, we had order cancellations related to the [senior limit] litigation and end customer buying decisions that were impacted by ongoing litigation. …