Monolithic Power Systems, Inc. (MPWR) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Monolithic Power Systems’ Third Quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference may be recorded. I would now like to turn the conference over to today’s host, Meera Rao, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to the third quarter 2012 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. These statements will cover a number of areas concerning our business outlook, including our business and financial outlook for the fourth quarter of 2012, our expectation for fourth quarter litigation, stock-based compensation and GAAP and non-GAAP operating expense. Projected fourth quarter revenues and gross margins, our target operating ranges for gross margins and inventory, our expectation for revenue growth and gross margins beyond 2012, our expectations of revenue ramp from new product, our expectations of percentage of total revenue from various markets, our expected average tax rate for 2012, a belief regarding the outcome of a pending IRS project, our belief that MPS is well-positioned for future growth, the expected seasonality of our business, our expectation for future cost reductions and in-product introductions, potential customer acceptance of our products and opportunities these present and the prospects of diversification and expanding our market share. Forward-looking statements are not historical facts or guarantees of future performance or event and are based on current expectations, estimates, beliefs, assumptions, goals and objectives and involve significant 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 the actual results to differ are identified in our SEC filings, including but not limited to, our Form 10-K filed on March 12, 2012 and 10-Q filed on July 30, 2012 which are 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, net income and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release which we filed with the SEC. I would refer investors to the Q1, Q2, and Q3 2011 and 2012 releases, as well as to their 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 third quarter financial summary, followed by our operating results and expectations for the fourth quarter of 2012. Michael Hsing will conclude with a discussion of our business conditions. We will then open up the call to your questions. Let’s start with our financial summary. The third quarter 2012 net revenue of $56.5 million was at the lower end of our guidance of $56 million to $60 million. Compared with Q2, revenue was down by $2.1 million or 3.6%. Q3 revenue increased $3.5 million or 6.7% from the third quarter 2011. This is the third consecutive quarter of year over year growth in revenue. Despite the low revenue compared with the prior quarter, gross margin of 53.1% was similar to the 53.2% from the previous quarter. Gross margin was higher than the 52.5% in the same quarter from a year ago mostly due to an increase in new higher margin product revenue. Our non-GAAP operating income of $10.5 million was similar to the $10.6 million reported in the prior quarter and higher than the $8.4 million from the same quarter of the prior year. Non-GAAP net income was $9.9 million or $0.27 per fully diluted share compared with $0.28 per share in the previous quarter and $0.23 per share in the prior year. Moving to Q3 revenue by end market, computing sales increased to $10.8 million. Storage revenue showed strong growth despite softness in the PC and graphics card market. The macroeconomic slowdown was also noticeable in the consumer related space where the third quarter is typically stronger. Revenue from consumer market decreased from $26.2 million in the prior quarter to $26 million. Communication revenues of $12.8 million also declined from $14.1 million in the second quarter of 2012. These declines in PC, consumer and communications revenue from the prior quarter can be attributed to 2 reasons. First, lower industry-wide demand and two, some customers responding to the economic slowdown, by delaying rollout of new products that would have paid [ph] in our BCD3-based [indiscernible] products and replaced our BCD2-based products. While Industrial revenue of $6.9 million was lower by $1 million from the prior quarter, this was the second consecutive quarter where revenues from Industrial revenue were greater than 10% of total revenue. Year to date, revenue for 2012 grew $16.5 million or 11.1% from the same period a year ago. Next, moving on to the gross margin line, third quarter gross margin of 53.1% was similar to the 53.2% in the prior quarter, despite lower revenues mostly due to an increase in new higher margin product revenue. Gross margin was higher than the 52.5% in the same quarter from a year ago mostly due to an increase in new product revenue and higher overhead cost absorption. Let’s review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the third quarter of 2012 were $19.6 million, a reduction of $1.1 million from the $20.7 million we spent in the prior quarter. Third quarter non-GAAP R&D and SG&A spending decreased $1.1 million from the prior quarter largely due to expense control. Both Q2 and Q3 included the benefit of $300,000 each quarter under an overall settlement and license agreement totaling $2 million. Non-GAAP operating expenses for Q3 2012 of $19.6 million was essentially flat with what we spent in the third quarter of 2011. Our non-GAAP operating margin was 18.6% in the third quarter of 2012 compared with 18.1% in the prior quarter and 15.9% in the third quarter of 2011. Moving on to our reported expenses and operating margin, our operating GAAP -- our GAAP operating expenses were $23.7 million in the third quarter compared to $24.4 million in the prior quarter and $22.8 million in the same quarter a year ago. Since the only difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense, let’s look at the stock compensation expense. The stock-comp expense was $4.1 million in the third quarter compared to $3.7 million in the prior quarter and $3.3 million in Q3 2011. Our GAAP operating profit was 11.2% in the third quarter of 2012, compared to a GAAP operating profit of 11.6% in the prior quarter and 9.5% in the third quarter of 2011. Switching to the bottom line, on a GAAP basis, our Q3 2012 net income was $5.9 million, or $0.16 per fully diluted share. On a non-GAAP basis, our Q3 2012 net income was $9.9 million, or $0.27 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. We recorded a one-time settlement of $159,000 as other income in the second quarter. Fully diluted shares increased slightly from 36 million shares in the prior quarter to 36.4 million shares in the third quarter of 2012. Now, let’s look at the balance sheet. Cash, cash equivalents and investments were $197.3 million at the end of the third quarter 2012, up from $196.4 million at the end of the prior quarter and $176.6 million we had on the book at the end of the third quarter 2011. In Q3, cash proceeds from employee stock option exercises and ESPP purchases were $5.7 million. MPS had offered in cash also for about $2.2 million mainly due to a reduction in current liability. We spent $2.6 million in the quarter, mainly on capital equipment and also on our headquarter building improvement. Accounts receivable ended the third quarter at $21.6 million compared with $21.4 million at the end of the prior quarter and $16.4 million at the end of the third quarter of 2011. The increase in accounts receivable from Q2 2012 was largely due to differences in timing of revenues between the 2 quarters. Days of sales outstanding were up to 35 days in Q3 2012 from 33 days in Q2, 2012 and up from 28 days in the Q3 2011. Our inventories at the end of the third quarter were $32.6 million or about 112 days of inventory on historical basis, which is just above our inventory model of 100 to 110 days. This compared with $29.5 million or 98 days of inventory at the end of the prior quarter. Inventory in our distribution channels was above the middle of the target range of 30 to 45 days. I would now like to turn to our outlook for the fourth quarter of 2012. Our revenue guidance is in the range of $46 million to $50 million for the fourth quarter of 2012. We expect gross margin to be in the range of 52.5% to 53.5%. We expect stock-based compensation expense in the range of $4 million to $4.5 million. In 2012, we implemented pay-for-performance performance equity compensation program for our key employees. As a result, we are required under the accounting rules to adjust the probability of hitting the performance metrics on a quarterly basis. This will add volatility to stock-comp compared to the straight line approach associated with time-based grants. We expect non-GAAP R&D and SG&A expense to be in the range of $19.5 million to $21 million. This estimate excludes the stock compensation estimate mentioned above. We expect to record a $2.5 million legal judgment as a benefit to fourth quarter litigation expense. I’ll now turn the call over to Michael Hsing, our CEO, for a discussion of the business condition.

Thank you, Meera. Good afternoon to everyone. Now that you have heard the detailed financial results, I would like to talk about business highlight and the strategic directions. Despite the current economic challenges, we executed and delivered 11% year to date growth well above the market performance with 1.5% gross margin expansion. We have grown revenue in each of our targeted market segments, industrial cloud computing and communication in each quarter this year. Industrial is up 100% to $19.6 million, Computing including storage and the server up 43% to $31.2 million and communication up 14% to $38.7 million. These are significant events which set the foundation for our future growth. Like our peers we are experiencing significant weakness in market like the PCs and consumer- related products which account for significant proportion of our revenue. In particular, a majority of our customers delay their production ramp with our cool power product causing a slowdown in the second half of 2012. As you recall from the February 2012 earnings call, the cool power product based on BCD suite technology cost as much as 60% less than BCD 2 products. They are extremely price competitive in high volume markets. These products will recapture and expand or consumer-related market share. The cool power products were widely accepted and designed in by our customer only this year. The delay on the production ramp based on our recent survey is mostly due to current economic condition. And we were informed however by many of our customers that they plan to lend [ph] a cool power product in the first half of 2013. Notwithstanding the near term macroeconomic headwinds, we remain focused on our target markets. The computing and storage -- in the computing and storage space our Q3 design activity was stronger than ever. For example, after Intel pulled MPS solutions the [indiscernible] cloud server platform we spent a surge of design activity in both Tier 1 and up and coming server maintenance for large internet companies. As I mentioned at the past earnings call every percent of improvement in power convergence efficiency equals 3% to 4% in power savings for servers and data centers. This result in key reduction and a significant energy cost savings. Our BCD suite technology provides the highest power density solution combined with the lowest switching loss in the market. Our new Intelli phase products based on this technology can deliver highest efficiency in a most compact solution for server and the data centers. In Mobile, we won many designs in the shop based platforms as Tier 1 mobile makers with our point of a low products based on BCD suite technology. Additionally we won many new [indiscernible] designs with our low standby point of local products which we released prior quarters. These are the only product exceeding the Intel spec AOAC which stands for Always On, Always Connected. We expect these design wins will generate revenue starting in 2013. In our Storage segment, revenue continues to grow, our key mix released in Q2 for SSB application are expected to ramp in Q4. In automobile and industrial segment we continue to penetrate automobile market of products in the design win now kind of diverse application such as all lighting for passive and interiors. Ignition switches, power door, power window and infotainment system. During the third quarter we released the industrial thrust into fully integrated, high voltage, high current, high efficiency synchronized single chip solution which surpasses the performance of all existing display solutions. Because of these cutting edge products, we are growing substantially in this stable market. All AC/DC products including industrial lighting have generated meaningful revenue as of today. We expect a significant growth from this family in 2013. A couple of quarter ago we released Easy Power product family targeting control units and interface panels for small appliances which need a small amount of power from an AC power line ranging from a few tenths of a watt to a few watts. Example of these appliances are rice cooker, espresso machine, refrigerators, oven, low power iron, network systems for home automation such as Vware system, lighting controllers, temperature sensors, motion sensors, fire alarm systems et cetera. All of our competitor in solution today are too large, too complicated and too expensive. MPS with single chip solution solves all these problems. We have strong design activity to help our Easy Power product family in doing this. We expect revenue to raise in 2013. In high volume consumer related market, through the third quarter of this year, we have shipped over 20 million units of our cool power products to set top boxes, PD and other consumer related products. Because cool power products are extremely cost competitive and a better performance, we believe this product family will continue to recapture and gain an additional share in the market segment. As our customers run their new modules into production all business will grow in these segments. In the process of technology development front we are very excited to announce that we have launched our next generation BCD 4 office technology which represents as much as 50% downsize reduction from our BCD suite technology released just a year ago. Our BCD suite technology leads lots of competition and now BCD 4 will extend the lead even further. The first application targets are in networking servers storage where high efficiency converging and small size are valued the most by our customers. In conclusion, despite the current condition, MPS is evolving from a consumer centered company to a diversified company targeting cloud computing, internet appliances, industrial and automotive. The total revenue growth and changes in our revenue mix indicate clearly that we are executing our plan. The current slowdown in our revenue growth in the second half of 2012 was [indiscernible]. With the breadth of our newly released products and our strong pipeline MPS will accelerate its growth in 2013 and the coming years. Now, I will open the microphone for questions.

[Operator Instructions] Our first question comes from Patrick Wang with Evercore Partners.

Hey, I’m just kind of curious about one thing. Take a look at the way that you guided the fourth quarter, just use the midpoint there about 9% year to year growth. Which is well ahead of I think all [indiscernible]. Michael at the very end you said that you think that you’ve got a great pipeline here. It sounds like you have a lot of design activity and that you expect growth to accelerate into 2013. Do you think that based on what you’ve got today and obviously you're not giving guidance for out quarters, but do you feel like you going to be able to deliver 9% to 12% growth next year, year over year?

I only can speak of today. Even with today’s economic condition I will expect that next year we’ll continue to grow and especially on the newly released product from last 4 months. The total revenue will grow as in today.

Okay, got you. And then on the fourth quarter guidance it was especially lower than what most of you had thought, sounds like you got some push outs from fourth quarter into the first half of next year on cool power, can you help us quantify perhaps how much of that business has been pushed out? It didn’t sound like seen any design loses but it’s just customers holding on to bills but can you help us understand the size of that?

Yes, obviously was down by -- some of the -- in the seasonality and which we don’t talk about anymore, we don’t know exactly what is the seasonality anymore, but into some of that is still related. And other one’s I could -- as you know because of shortage in the past years and like 2010 and still affected our current growth which either products are all BCD 2 products and I think last year and end of last year we start to designing BCD suite products, cool power product and some of them to change the existing BCD 2 and also expand in the market share. So the combination with gain and losses and -- or gain and the main slow down on all the products and that you can’t exactly quantify although we try to and -- so you can -- using the past seasonality Q4 is about 5% to 10% down and now this year about 14% to 15% and so extra percent or $4 million or $5 million due to the push out, so that’s best I can to my knowledge I can say.

Okay, so based on Q3 it $4 million or $5 million that is being pushed out mostly into Q1 and maybe some into Q2 of next year, right.

Yes, that’s correct.

Okay, got you. And then just last one and I jump back in queue. You’ve got a lot of new design activity, lots of cool power cycle here, how much of your revenue -- just to help us understand in terms of fourth quarter are from your new designs and how much do you think you expect to see in the first half of next year?

Right now about 30% of our revenue is coming in from all the new products that we have had designed in, so as we draw to next year as more of our new design or new product design grant, we expect to see a higher share as we go into next year.

Okay and then just last one. I know the seasonality is changing but particularly what are you seeing in the first quarter?

For seasonality?

Seasonality, yes.

We don’t know. This year’s seasonality, this year -- okay, Q1 we had a -- we had a growth from the last year and this year and few of our -- more than a few of our customers said that all these projects are pushed out to Q1 and that implies we’ll have a good first quarter, so this -- at least our customer [indiscernible] and the real situation we still can see that very clearly now.

Okay, than from a customer standpoint it feels like you are at the bottom here in the fourth quarter.

That’s how we see it now, yes.

Our next question in queue comes from the line of Aaron Matthew with Megamaid Company.

Thank you very much, I was wondering -- I guess both Michael and Meera if you could elaborate a little bit more on the gross margin and given your guide it seems like you are getting a little bit of positive variance, probably due to some newer product that is you’re -- I guess what I’m trying to understand is you are getting 30% of that from newer products. Is it possible we could be seeing a lot more gross margin life into next year if that continues to grow? And then it sounds like -- in response to the last question you are just sort of working out maybe a sub-par growth year for you, are you possibly going to be getting more gross margin content next year versus revenue growth and are you trading that off in your business module right now?

Well it is okay, let me say first and then I will pass it to Meera. From Q3 to Q4 is a significant revenue of a less than -- revenue less than in Q3 so that gross margin stays about similar, so it’s clearly on, it’s a new product in the revenue stream now and -- but we stayed our allowance and gross margins and we don’t see any headwinds to move the margin upwards and we don’t do long term forecast.

Just to add to that. As we’ve gone on into Q3 and Q4 we see both revenue coming in from newer products which have higher margins, we also see that in fact as our customers move from BCD 2 product to the BCD 3 product which has beneficial impact on our gross margin and we expect both of these structures to continue to play out into next year and just to reaffirm what Michael said, our gross margin module has been 50% to 55% and while we don’t expect any headwinds at this point we are not planning to revise that guidance.

And just so I understand, you -- how should I say this, pruning product lines right now or possibly doing that or are you sort in a situation where you are happy to have revenue even if it’s at sub-par margin at this point.

We don’t know what the -- the reason we don’t revise the long term gross margin module is that there are a couple of components -- okay, couple of reasons. First, we don’t know what the economic conditions are and if it sometimes in the last -- particularly this year, from the beginning of this year, it looking everything good but now it’s not so good and the key is -- the key point is we want below the revenue and so when the down times we were using pricing to grow the revenue slightly and to stabilize the revenue growth and when the new products we ramp then we will not concentrate on the consumer related product market segment. So the growth is that it was very important for MPS.

Okay and just a quick question, maybe you said it in your prepared comments but what’s the proportion of LED revenue you had in the quarter approximately?

Are you talking about D2 to D2 lighting versus LED lighting or are you talking about the LED lighting segment?

Just both, I mean obviously you have to break out a part of it, but what what proportion is LED?

LED lighting revenue right now is in a low single millions and this is one that’s growing and we are expecting it to grow next year based on design wins.

Some of the product also pushed especially for the Europe and in Asia markets.

Okay, so the majority of you lighting controls revenue is the way to look at that.

Yes.

Our next question comes from the line of Steve Smigie with Raymond James.

Can you talk a little bit about how big your SSD business is at this point?

SSD business has been growing very well. It’s about 1/3 of our overall storage revenue and storage is a bigger part of our computing revenue.

What's the percentage? I think 10% -- slightly less than 10% of total revenue for storage.

Okay, with regard to your computing product that you are focused on currently, can you get products and address it also to ARM based solutions. I realize for you intel -- revenue [indiscernible] because it started from nothing, but could you also use that for ARM [indiscernible] since your out there and do that.

Your question is user currently for ARM based?

Your computing solution that you have targeted at grant [indiscernible]. Could you also use it in power architecture, I know that’s Intel specification but can you use basically that similar setup and try to go after ARM processes where it starts to show up in the books.

Absolutely in BCD 3 and the BCD 4 technology install that kind of application and a web developer single chip solutions for ARM based single chip solutions for determining power to ARM based processor.

Okay, good. And then with regard to DC to DC Easy Power business, can you talk a little bit about what kind of growth you could sort of downward levels think you can maybe achieve in that 2013?

Downward levels, I think there will be a high single digit, a mid to high single digit a million dollars in the Easy power.

With regards to the SG&A expense I obviously all of this adjustment you had this year, how should we be thinking about OpEx SG&A as we go to 2013, is that -- should we model that back down or it sort of pop up and you have to account for that or how should we be thinking about OpEx.

Clearly in Q3 and in Q4, we are holding down our OpEx expenses by taking down some of the variable cost and this is in line with revenues being lower, so to the extent that this low demand scenario continues into a portion of 2013, we’ll continue to exercise the same kind of expense control but once we see normal market we will continue to invest in our future.

Our next question comes from Ross Seymore with Deutsche Bank.

Hi guys, this is Beas Mitchell sitting in for Ross, I just had a few housekeeping questions, my line dropped off so I may have missed some of this stuff. Can you just give us the CapEx guidance, the general inventory in dollars, cash from operations and the CapEx sum of these?

Sure, our inventory level was about $32.6 million which was about 112 days of inventory this in internal. Inventory in the channel was in our range of 30 to 45 days, but about the middle of the range. What was the other one that you wanted?

And just in the channel inventory and dollars if you had any color on that?

We had kind of projected this last quarter that our inventory levels were going to be higher. And as the result of key functions, we had -- our inventory levels were running well below our target model, our target model is a 100 to 110 days. So back in Q1 and Q2 when we were closer to 80 days, we had started ramping up our inventory, some of which is also in connection with the new products ramps that we foresee.

Got it. And then what was your tax rate guidance for the next quarter?

Our tax rate guidance continues to be between 5% and 10%.

Okay. And then just the cash from operations in this quarter as well as the CapEx number, I believe, it was $2.9 million, but I just want to make sure?

And just one second. Our CapEx for the quarter was about $2.6 million. Operating cash wise, we had a cash outflow of about $2.2 million and that’s because we paid down some current liabilities that we had on the book.

Got it. And then lastly, just on the revenue guidance, if you could provide some color on what kind of -- is it coming -- the decline is coming more from DC or lighting controls? That will be helpful.

From both. As Michael said, we’ve seen some of the demand slowdown for 2 reasons, one is the general economic condition and the second is as customers have responded to the general economic condition by pushing out some of the production ramps of the peer products based on our BCD3 products.

Our next question comes from Tore Svanberg with Stifel Nicolaus.

Hi, this is Kevin Winning for Tore Svanberg. Thank you for taking the questions. I would like to start with your inventory level. You’ve actually been operating at below your target model of a 100 to 110 days for a quite a number of quarters. So, as you say about the fourth quarter revenue, that is transitory, do you expect your inventory to go back to below your target model, where would you be seeing that going forward?

I think for the near-term, it’s going to stay at this level, because even though a little higher as you ramp up for the new product revenue ramp.

The demand of new -- new product increases, I want inventory typically well increase some and so the difficulty -- is the existing products and we are changing -- we are switching from older product to newer product which has better cost efficiency. And so, the demand is on a best stand, we will stock up more inventory. So, as Meera said, the inventory will go in the same level of slightly high.

I see. And when you talked earlier about your SSD product and you are ramping in the fourth quarter of 2012 and maybe into first quarter of 2013, can you just given an idea of how much grant -- how much of -- how much of it you might start seeing in the fourth quarter versus the first quarter?

We don’t forecast in more than a quarter, say, and then we don’t forecast a particular product, but I can tell and I can tell you, and SSD is a growing market and we have a lot of demand actually. And now, 1/3 of our storage revenue which again -- with the sort of storage, 9%, 11%, 12%.

It’s positive at, I’ll say, 15%.

Storage at 15%.

Yes, so about 5% of our revenues is from SSD.

Okay.

And the other piece number, the SSD have been talking about the last year quarters, we are going to start shipping that product out this quarter, and we expect revenues from the PEMEC to start ramping out in Q1 and the quarters beyond.

Maybe another -- last question is, do you see orders be ramping near the end of the quarter or rather the weakness shifting throughout the quarter?

I think the growth is, we release the product -- we have our first product in early 2011 or late 2010, I don’t remember really, but now we are at about 10% -- 10% is -- it’s about a $10 million business and so it is not explosive growth. So we have a majority of design activities out there.

Okay, great. Well, let me change gears quickly here and ask you a little of the high level question. Year-to-date, can you talk about how many new products you’ve released and maybe what percentage of these products are now ramping or about to ramp in revenue?

We don’t have any -- as in the past earnings calls, we have a capability of develop -- selling new products. And this year -- so I don’t have exactly written the numbers, but we are on track. And each of our products have -- our products, in -- from a released revenue and generally, it’s a meaningful revenue it takes about 18 to 24 months. And some product will -- little faster, other ones were somewhat worse and it depends on the market segment. So it does -- do I answer your...?

Oh yes, oh yes. I’d just like to dig a little deeper here and ask if you’re seeing the revenue -- incremental revenues from these new products more concentrated in a smaller number or do you find it to be very well spread out across all your new products?

Well, obviously is very spread out, and I can -- in the industry long-term, as I mentioned we grow quite a bit -- we grow the 100%. And so that industrial rhythm itself is very -- have a very big, broad applications and then you go down to a smaller with automotives. It takes 36 months to 48 months to generate any revenues. And the other ones referred fall -- falling in between, like storage, notebooks, ultrabooks and I’d say networking system, networking and also the industrial lighting.

Also, Adam, one of our goals had been to diversify our revenue, and particularly to grow revenues in focus market. So you can see some of that already in our revenue year-to-date or do we expect this to play out even next year. So we have introduced products in a lot of different markets and via team design wins that are going to translate into revenue. So it’s not going to be in just one area. I mean, just now we planned it, and we expect to see it across a broader range of markets.

Our next question comes from the line of Cheng-Cheng with Pacific Crest Securities.

Quick question on Q4 guidance. I know it’s impacted heavily. Was wondering if, are you seeing anything on customer inventory front? Is there any movement there that’s affecting Q4 guidance or if you are expecting you are done packing in future quarters as well?

I think the demand just slow down. And they may have some inventory in our customer end. And also, the loss of good story for us is that a new project they delayed; they pushed up. So in -- so the combination of the delay -- the demand and also delayed their ramp and it’s affected us.

Okay. And maybe just thinking in terms of end markets relative to -- in terms of relative strength, should we think about -- you talked about continuing consumer push-out. Is that the end markets we shipping to have been the retails in Q4?

I think in Q4 it’s pretty much the weakness or strongness in consumer and other high volume markets like that in PCs. That’s where we are seeing the bulk of the weakness. We also see some weakness in other markets such as overall the demand. But it’s more amplified I guess in the high volume consumer market because of customer delay in rolling out our DC/DC based full power family products.

Our final question will come from Lena Zhang with Blaylock RV.

And first one is on your top line, the Q3 revenue came in at the low end of your guidance. Would you mind to give us a little bit more detail, see which end market came below your expectation?

Sure. I think it’d be consumer and consumer-like markets that came in lower, again, what it would have taken us to hit the midpoint of our guidance.

Okay. And the next one is just a follow up on inventory. And given the weak macro situation and also your new products being squished out by your customers, but I -- if I remember correctly you mentioned that you probably will continue to build up your inventory. Is this because you have an obligation with your foundry partners to take a minimal amount of inventory per quarter?

Let me correct you, okay? We have a total introduction; we have over 400 products and a high percentage in -- 43% related to consumer-related products. And it’s a high percentage of products in the consumer-related segments. And some of the -- in those segments, some of the new products were pushed out. Not all the product push out. All the product in the networking and industrial lighting, automotive industrials and accessories, notebook, ultrabook, all these are in the servers; all these are -- they are not pushing out. And these are progressing really well. Okay, that’s the message I wanted to make it very clear. Audit inventories, I said we would stay in the same level or slightly higher because all the new products are ramping, including the DC/DC cool power product family. And as our -- many our customer indicated they were ramping in the first half of 2013. So we better have a these products ready.

And just to add to that, we don’t have any minimum wafer-out requirements from -- with our foundry partners, so none of this is because we are forced to meet any minimum purchase requirement.

Okay, thank you. And then my last one is regarding BCD 3 transitioning to BCD 4. Because you are going now BCD 3 -- transitioning to BCD 3 some of them are slowed down by some of the customers. So when should we expect the starting point of BCD 3 transitioning to BCD 4?

Well, I think -- then let me clarify it, okay? We are transitioning from BCD 2 to BCD 3, and as Meera said, about a 1/3 of our products is based on BCD 3. And BCD 4, during the split in the process development front and that technology which is released. And the new product we will release starting the first half of next year. So if you answer your questions correctly it should be -- the transition will be in the 2014 or 2015 from BCD 3 to BCD 4.

Just to clarify, we use BCD 3 both to kind of come out with new products which took advantage of high density power features to go after a newer market in servers, in network, as well as storage. We also use BCD 3 in the high volume market to cannibalize our own BCD 2 products. This is to give us a cost advantage to continue to play in the market. But when we go to BCD 4, our plan initially is to use BCD 4 just to take advantage of even higher power density to go after high value market opportunity. For the plan with BCD 4, at least initially is not to use it in the consumer space. So there is no question of transitioning from BCD 3 to BCD 4. We’ll be using BCD 3 or BCD 4, depending upon the characteristics we need to go after the markets we are targeting.

And again, that does conclude our time for questions. I would like to turn the program back over to management for any additional or closing remark.

We appreciate your joining us on this call and look forward to talking to you again in February next year. Thank you.

Thank you, ma’am. Again, ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. You may now all disconnect.