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Integrated Device Technology Inc. (NASDAQ:IDTI)

Q2 FY09 Earnings Call

October 23, 2008, 4:30 PM ET

Executives

Brian White - VP of Finance

Ted Tewksbury - President and CEO

Richard D. Crowley - CFO

Analysts

John Barton - Cowen and Company

Tim Luke - Barclays Capital

Glen Yeung - Citigroup

Joanne Feeney - FTN Midwest Securities

Suji De Silva - Kaufman Brothers

Sandy Harrison - Signal Hill Securities

David Wu - Global Crown Capital

Srini Pajjuri - Merrill Lynch

Sukhi Nagesh - Deutsche Bank

Operator

Good afternoon, and welcome to the Integrated Device Technology Incorporated Fiscal Second Quarter 2009 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

With that said, here with opening remarks is Integrated Device Technology's Vice President of Finance, Brian White. Please go ahead, sir.

Brian White - Vice President of Finance

Thank you, and welcome to our fiscal second quarter 2009 earnings conference call. I'm Brian White, IDT's VP of Finance. Presenting with me on the call is Ted Tewksbury, our President and Chief Executive Officer. Also in attendance on the call are Rick Crowley, our new CFO; Chad Taggard, our VP of Marketing; and Mike Knapp, our Manager of Investor Relations. We will all be available during the Q&A portion of this call.

Our call today will include remarks about future expectations, plans and prospects for IDT, which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable Federal Securities Laws. Actual results may differ materially from our forward-looking statements, as a result of various important factors, including certain risks which are detailed in IDT's most recent annual report on Form 10-K and quarterly report on 10-Q as filed with the SEC. IDT does not intend to update the information provided in today's call, and expressly disclaims any such duty except as required by law.

In addition, pursuant to Regulation G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at www.idt.com, including the complete reconciliation to the most directly comparable GAAP measures.

Now I will turn the call over to Ted, who will report on the overall quarter, and then I'll return to give you more specifics about our September quarter results and our outlook for the December quarter. Ted?

Ted Tewksbury - President and Chief Executive Officer

Thanks, Brian. I want to start by welcoming our new Chief Financial Officer, Rick Crowley, to IDT. As you know, Rick has over 25 years of financial management experience in the semiconductor industry, as well as an impressive record of improving operations within the companies he has served. Rick joins us after nine years as CFO of Micrel, and we're delighted to have him on the IDT team. Welcome Rick.

Richard D. Crowley - Chief Financial Officer

Thank you, sir.

Ted Tewksbury - President and Chief Executive Officer

I'd also like to thank Brian White for his excellent service as Interim CFO.

Today, we are pleased to report more than 6% sequential revenue growth in our fiscal second quarter of 2009, on top of the 6% we posted in the prior quarter. This growth was largely driven by strength in our computing and consumer end markets. To recap, we finished the quarter with $200.5 million in revenue, and non-GAAP earnings per share of $0.26. Revenue was slightly above the midpoint of our previous expectations, while EPS was at the high end of the range we provided on our Q1 earnings call.

In addition, we generated over $50 million in free cash flow, which represents approximately 25% of our total revenue. Brian will elaborate on the financial results in just a moment, and you can also refer to our press release and associated tables for further details.

Now let me describe some of the trends we experienced in our end markets during Q2. Within computing, PC related sales experienced double digit growth, in line with our previous projections. Revenue from both our PC Audio and PC clock solutions grew double digits sequentially. Within servers, sales of advanced memory buffers grew single digits sequentially in Q2. This was better than we previously anticipated, as we gained market share with the low power version of our AMB device. Our computing end market represented about 45% of our total revenue, up from 44% in the prior quarter.

Our consumer end market was also strong in the September quarter, as we benefited from robust demand in gaming, which was up high double digits sequentially. This was in line with our previous expectations, and reflects greater than seasonal strength in that segment. As a result, the consumer segment represented 18% of total revenue in Q2, up from 16% in the prior quarter.

Total revenue from our communications end market also increased sequentially, as single-digit growth in our communications clock and wireless business offset declines in our enterprise segment. This was the seventh consecutive quarter of growth for our communications clock business, as we continued to gain market share and new design wins ramped to volume production. Our communications end market represented 32% of total revenue, down from 34% the prior quarter. SRAM was down to 5% of total revenue in Q2 from 6% in the prior quarter.

Now I'd like to provide some more detail on new product introductions, and our outlook for the December quarter. Let me begin with computing, which includes both PCs and servers. For PCs, our audio division introduced a new series of high definition codecs that provides improved audio performance and fidelity, as well as design flexibility for multimedia notebooks and enterprise desktops. These devices reduce power consumption and provide fully-integrated headphone and stereo speaker amplifiers.

For the December quarter, we anticipate double digit sequential growth in our PC Audio division, driven by the ramp of a recent OEM design win, offset by a low single-digit decline in our PC clock business following a seasonally strong September quarter.

In servers, we continued to secure the majority of design win opportunities with our PCI Express switching solutions. We also expanded our industry leading family of PCI Express products, by announcing new system interconnect switches that provide higher levels of performance, availability, and resource utilization, optimized for demanding enterprise applications. After a decrease in revenue in Q2, we expect PCI Express to return to double digit growth in our December quarter, as some of our new design wins ramp.

As I mentioned earlier, we continue to see strong interest from OEMs for our low-power AMB-plus devices, which resulted in market share gains in the September quarter. As of today, our AMB-plus product is in production at all the major memory module manufacturers. Coming off a high Q2 base, we anticipate our memory interface product lines to be down low double digits sequentially in the December quarter. Overall for the December quarter, we currently project low single-digit declines in our computing end market.

In the consumer segment, we recently announced that we have purchased video processing technology and related assets from Silicon Optix, which includes the Hollywood Quality Video brand. This sub-$20 million technology asset acquisition is a very important advancement for IDT as we expand our leadership in the video display market, a $1 billion available market opportunity. This segment is undergoing an important transformation as the industry transitions to higher levels of quality and performance. The HQV-enabled products will enable IDT to bring advanced video processing capabilities usually reserved for the highest-end broadcasters to the mainstream television and flat panel display market.

We've also expanded our panel port product family by announcing the availability of our stand-alone display port receiver for LCD TVs, projectors, and high-end monitors. The newly available receiver is fully compliant with the DisplayPort 1.1a standard, and allows IDT customers to connect their multimedia devices to any type and size of monitor with an external display port connection, providing them with greater display options.

In gaming, we expect double digit declines in the December quarter, following an exceptionally strong Q2, and tracking the order patterns of our largest gaming customer. As a result, we are currently projecting double digit declines in our consumer end market in the December quarter.

Trends in the communications market were mixed in September. Sales of communications clocks remained strong for the seventh quarter in a row. In addition, sales of dual ports for wireless handsets increased, driven primarily by demand from Korea. However, our network search engine business was weaker than expected in Q2, the result of a slowdown in enterprise spending late in the quarter. While visibility into the December quarter and beyond remains limited for communications, we currently anticipate single-digit declines in our wireline and wireless segments, and double digit declines for our enterprise segment. We believe these declines are the results of decreased end market demand, as companies tighten spending during this financial crisis. Altogether for communications, we anticipate that revenue will decline double digits sequentially in the December quarter. In total for the December quarter, our fiscal Q3 of 2009, we are projecting that revenues will decline to approximately $180 million plus or minus 5 million. Brian will go into more details on our financials in a moment.

While the fundamentals of our business remain strong, the financial crisis appears to be taking its toll on demand, especially in our consumer and communications end markets. It is also creating a high degree of uncertainty around the next several quarters. That said, we continue to maintain solid market share in our core businesses, and are seeing traction with many of our new products, including our PC Audio codecs and our PCI Express switches. In addition, we look forward to the ramp of our panel port product family for flat panel displays, and pre-processing switches for wireless base stations, in fiscal 2010.

IDT has a very resilient business model. We believe that tight expense controls and significant free cash flow generation will enable us to weather this economic storm, while still delivering strong margins. This flexibility in our model is highlighted by our variable compensation structure and low fixed manufacturing costs, which allow us to dynamically adjust to changing business conditions.

With that, I'll turn call over to Brian to expand on our financial results and outlook.

Brian White - Vice President of Finance

Thanks Ted. Let me start by reviewing the non-GAAP results for fiscal Q2. Revenue of 200.5 million came in slightly above the midpoint of the range we provided during our Q1 earnings call. As Ted indicated, increased demand in our computing and consumer end markets is primarily responsible for driving greater than 6% sequential growth. Fiscal Q2 gross margin was 51.3%, down from 53.5% in Q1. The decline was driven by a onetime charge to inventory reserves taken for an older version of our AMB product that was sole-sourced at one of our high volume customers. Excluding this reserve, gross margin would have been 53.6%.

We benefited from an increase in fab utilization, which reached 79%, up from approximately 70% in the prior quarter. This benefit was partially offset by the effect of product mix, as sales of computing and consumer products grew at a greater rate than sales of higher margin communications products. Overall, operating expenses in Q2 decreased 3.1 million from the previous quarter, primarily due to lower labor related costs.

R&D expenses during the fiscal second quarter were about 36 million, down from approximately 38 million in Q1, while SG&A expenses were about 24 million, down from approximately 25 million in the prior quarter. Interest income and other was about 400,000, down from 1.4 million in the June quarter, driven primarily by declines in the investment portfolios of our deferred compensation program, and currency losses.

Tax expense or essentially our estimated cash tax for the quarter was 194,000, as we continue to offset tax expense with tax credits accumulated in prior years. Net income for the September quarter was 43.3 million or 22% of revenues, while EPS was $0.26, up $0.03 from the prior quarter. Our EPS was at the high end of our prior forecast, primarily due to lower operating expense and taxes.

Now let me summarize our results on a GAAP basis. We reported GAAP net income of approximately $11.7 million or $0.07 per share in the September quarter. The difference between GAAP and non-GAAP results nets out to about 32 million or about $0.18 per share. We recorded merger related charges of approximately 21 million or about $0.12 per share, flat from the prior quarter. These charges are primarily from the amortization of intangible assets recorded in conjunction with our historical merger and acquisitions. In addition, we recorded approximately $9 million or about $0.05 per share in stock-based compensation expense.

Further information, including a detailed reconciliation of non-GAAP and GAAP results, is provided in the financial tables of today's press release, and can also be found at our website at www.idt.com.

Now turning to our balance sheet, cash and investments totaled approximately $308 million at the end of the September quarter. We maintain a very conservative cash management strategy, and invest primarily in high quality government and agency instruments. IDT has no exposure to auction rate securities or CMOs. We generated approximately 52 million in free cash flow, 2 million from the exercise of employee stock options and approximately 2 million from share purchases under our employee stock purchase program.

We were active again in our share repurchase program during Q2, but we were more conservative in anticipation of the upcoming Silicon Optix transaction, and due to the uncertain economic environment. We repurchased approximately 15 million of our common stock during the quarter. Over the past three years, we've purchased over 43 million shares. We currently have about $103 million available for additional repurchases under our existing program.

Net inventory decreased about 2.8 million from the June quarter to approximately $76 million in the September quarter. Days of inventory decreased to 71 days from 82 days in the prior quarter. Our trade accounts receivable increased $5.5 million to $88 million in September, while DSO was flat quarter-to-quarter at 40 days.

Now I'll turn to our forecast for the December quarter. As Ted indicated, we currently project revenue for our fiscal third quarter of 2009 to be in the range of $180 million plus or minus 5 million. On a non-GAAP basis, we currently project gross margin to be in the range of 52.8% plus or minus 50 basis points, depending primarily on the revenue range and product mix.

We currently project operating expenses in the December quarter to be approximately 62 million plus or minus $1 million. R&D and SG&A are each expected to increase approximately $1 million quarter-to-quarter. We currently project operating margins to be about 18.5% plus or minus plus or minus a percentage point, primarily depending on the revenue range.

We currently anticipate interest and other income to be about 1.5 million, up from 400,000 in the September quarter. We expect our taxes during fiscal Q3 to be approximately 700,000, as we continue to benefit from tax credits accumulated in previous years. Exclusive of any additional repurchases under our share repurchase program, we project share count to be about 170 million on a diluted basis. We project EPS on a non-GAAP basis to be about $0.20 per share, plus or minus a penny, depending primarily on the actual revenue range and product mix.

On the balance sheet, we currently expect to generate approximately $45 million in cash during the December quarter. After the effect of the Silicon Optix asset purchase, we project a quarter ending cash balance of approximately $333 million. This projected balance excludes the impacts of any share repurchase or additional M&A activity.

We currently project our GAAP EPS to be lower than our non-GAAP EPS by about $0.17 plus or minus $0.01. Most of the difference between GAAP and non-GAAP projections, or about $0.12 per share, is related to the amortization of intangibles primarily as a result of the ICS merger. We currently project stock option expenses to be about $0.05 per share in the fiscal third quarter.

I'd like to highlight that we expect to continue to maintain solid operating margins, despite the lower revenue guidance in Q3, keeping our cash flow generation strong. This further illustrates the flexibility of our operating model that Ted mentioned earlier, a model that enables us to deliver strong bottom line results for investors, even during difficult macroeconomic environments. For example, approximately $20 million of our annual compensation expense is variable, and adjusts with changing business results.

Additionally, our fixed manufacturing cost is low, since approximately 50% of our wafer manufacturing is performed at foundries, and the remainder is performed in our Oregon fab, which has essentially depreciated. Due to the current uncertainty in global financial markets, we will remain focused on reducing controllable expenses in the second half of the fiscal year to further protect our operating margins.

Aside from this near-term turbulence in the broader market, we believe that our longer-term prospects remain bright. We are maintaining strong market share positions in our core businesses, while seeing excellent traction with customers in many of our new product lines.

With that summary, I'll turn the call back over to the Ernie for the Q&A portion of the call. Ernie?

Question and Answer

Operator

Thank you. [Operator Instructions]. And our first question is coming from John Barton with Cowen. Please go ahead. Your line is open.

John Barton - Cowen and Company

Thank you very much. Ted, as you pointed out, it's very difficult to forecast. Obviously, we're going down below normal seasonality for December, like the whole industry is. What is your best guess as we look at next year and the beginning? Obviously, some seasonal decline in margin is probably the most likely. But do you have any sense for the aggressive inventory correction or containment that we're going through, how much that will help us in March, etcetera?

Ted Tewksbury - President and Chief Executive Officer

John, we have very little visibility at this time, just like everybody else. Things are changing on a weekly, even a daily basis. We entered Q2 with a book-to-bill of over 1. We were sitting around 1.1 and book-to-bill, hovered around 1 for most of the quarter. We exited around 0.98. And then just within the past several weeks, we've seen a dramatic drop-off to around a 0.7 range. This has been a very recent drop, which - we first saw it in consumer, and then we started so see it proliferate into the communications segment. So we have very poor visibility right now.

John Barton - Cowen and Company

And if you could just elaborate on the strategy from an M&A perspective, Silicon Optix, obviously, the deal that you've announced. Now that you've been in that seat for a while, how are you looking about the lever pull, you know, M&A as you go through next year?

Ted Tewksbury - President and Chief Executive Officer

Our strategy for M&A has not changed. Any acquisition that we do has to stand on multiple legs. We look for companies that will augment our internal core competencies and build critical mass in our areas of strategic focus. And of course they also have to be accretive within several quarters, and meet our financial criteria. In the case of Silicon Optix, I think the synergy with our business is pretty obvious, and certainly the company meets those criteria. We have built a leadership position in flat panel displays as a consequence of our panel port product family, and the acquisition of Silicon Optix brings key capabilities, skills, and technologies such as video processing, scaling and so forth, that will unable us to expand our product portfolio for those applications, as well as enable our next-generation product roadmap. So it is a very synergistic acquisition for us, that will enable us to exit this downturn as a real leader in that area.

John Barton - Cowen and Company

Last question, if I could. Brian, you talked about the one-time inventory reserve for AMB hitting gross margins this last quarter. I'm not sure I caught the percentage, but I think you said it would have been 53.6%, if you could confirm that? And also your thoughts on fab loading, I realize it's virtually depreciated, so it is less important, but with the demand what it's doing what are the intents with respect to wafer starts over the next coming months?

Brian White - Vice President of Finance

Yes, that's correct. Our gross margin would have been 53.6% in our September quarter, absent those inventory reserves for AMB. In terms of fab loading, utilization was up in our September quarter from about 70% to 79%, and as we look forward into the December quarter we're expecting that - utilization to drop from the 79% level down closer to about 71%, as a result of the reduced revenue.

John Barton - Cowen and Company

Thank you very much.

Operator

Our next question comes from the line of Tim Luke with Barclays Capital. Please go ahead. Your line is open.

Tim Luke - Barclays Capital

Thanks. I was wondering, if you guys could give some color on how you perceive the gross margin developing? It seems fairly resilient, given that your utilization is going to go lower and so is the revenue line. I was also just wondering if you could remind us of how you have perceived normal seasonality. I think traditionally, March has been a bit lower. So how you see the year developing as you see some of the new products ramp? Thank you.

Ted Tewksbury - President and Chief Executive Officer

Tim, you're right. The March quarter is typically our weakest seasonally. Q2 and Q3 are the strongest. And what we're seeing this year is pretty much in line with that, to the extent that we have any visibility. As far as gross margin is concerned, obviously we had this one-time inventory reserve this quarter. But once we get that behind us, I think we'll be getting back towards our model, percent range.

Tim Luke - Barclays Capital

Could you also just give some color? It sounds like having had your OpEx go lower in September, you expect despite lower revenue for it to be higher in December. Any color there? And then also if you guys could also give some color, it sounded like the enterprise was somewhat softer than the wireless and wireline infrastructure arenas?

Ted Tewksbury - President and Chief Executive Officer

On your OpEx question, Tim, we came down by $3.1 million this quarter sequentially. And yes, we do expect OpEx to go up by a couple of million next quarter, and that's a combination of effects which Brian can talk to in more detail. The Silicon Optix acquisition adds about $2 million of burn, and then there are other puts and takes which contribute to that. This quarter, in Q2 actually, we started to reduce our OpEx in anticipation of the acquisition of the Silicon Optix assets, and we intend to continue to do that in such a way as to make that acquisition EPS-neutral after several additional quarters. I'll let Brian elaborate on the additional reasons for the OpEx.

Tim Luke - Barclays Capital

And then if you have color on the COM [ph] segments, that would be helpful, too.

Brian White - Vice President of Finance

Yes, so on comms, wireless was up low single-digit percentages in the September quarter. There were a couple of reasons for that. We saw strength from Korea on the dual port device that goes into the smart phone. We also saw an increase in sales into China for TD-SCDMA handsets.

Looking forward to the December quarter, we don't have much visibility as I mentioned earlier, but we do anticipate that revenue and wireless will go down mid single-digit percentages. For the wireline sector, as I mentioned we have had seven consecutive quarters of growth. So that's real dependable, predictable growth driver for us. It was up single-digit percentages in the September quarter. Again, we have very little visibility going forward, but we are starting to see weakness in the comms sector, and so we're guiding down for the wireline communications by single-digit percentages.

Tim Luke - Barclays Capital

But the enterprise is particularly weak, is it?

Brian White - Vice President of Finance

The enterprise is where we're seeing the most weakness right now, that is correct. That's the third component of our communications business, which is the enterprise piece, which is predominantly our network search engines, and that's where we're seeing the greatest weakness right now.

Ted Tewksbury - President and Chief Executive Officer

And just following up on expense quarter-to-quarter, in addition to the approximately $2 million that the Silicon Optix acquisition adds, in - as we mentioned, in the September quarter part of the reason why our OpEx was down was the effect of declines in investment values associated with our deferred compensation plan, and that was about $700,000 that reduced OpEx in our Q2. You'll see essentially an offset in our other income and expense, which is why that number was lower. So when you look at expense quarter-to-quarter, September to December, we had that $700,000 benefit in September that we won't get in December. At least we hope we won't, if the market doesn't decline further.

Tim Luke - Barclays Capital

So just to be clear, so the gross margin now you think can do what sort of things going forward? Do you think you can hold this 52.8% level in a lower revenue environment, or what are the metrics there?

Ted Tewksbury - President and Chief Executive Officer

Our target remains 53% to 54%. I think it will be towards the lower end of that range, given you know what revenue [ph] doing.

Tim Luke - Barclays Capital

Thank you, guys. Good luck.

Ted Tewksbury - President and Chief Executive Officer

Thank you.

Operator

We do have a question coming from the line of Glen Yeung with Citi. Please go ahead.

Glen Yeung - Citigroup

Why do I find [ph] that there weren't any revenues from Silicon Optix in the guidance?

Ted Tewksbury - President and Chief Executive Officer

Revenue is relatively minimal. In the third quarter, we're talking less than a million dollars of revenue. Going forward for the product that we acquired, which is the Reon processor, we're talking about $1 million to $3 million a quarter in revenue. The reason for the acquisition was not revenue. The reason for the acquisition was to acquire key technologies we needed to expand our presence in video and flat panel displays and to enable our roadmap.

Glen Yeung - Citigroup

Okay, great. You know, Ted, when we look out at 2009 and really thinking about the core new product for IDT, HDIO [ph], PCI Express, your infrastructure chip, which I guess is bit further, and DisplayPort, are these businesses that you see growth for in 2009? I understand it's tough to see anything, but these things maybe have a bit more secular patterns to them?

Ted Tewksbury - President and Chief Executive Officer

Absolutely. There's a very definite growth here. It's just a question of when it's going to occur. You are already seeing it in the case of PC Audio. PC Audio was up double digit percentages in the September quarter. We expect it up even stronger percentage-wise in the December quarter. So that was one of our key growth initiatives which is starting to pay off.

PCI Express, we anticipated last quarter that we would have a little bit of a lull in the second quarter, as we're waiting for some of the new design wins to take off. Many of those design wins are based on Tylersburg-based servers, and so we are tied to Intel on that one. We expect the PCI Express products to return to double digit growth over the next couple of quarters.

The PPS and CPS switches for base stations, we talked about that on the last earnings call. Those are products that go into LTE and 4G base stations, particularly in China, and those are slated to start ramping towards the end of our next fiscal year. So that's a slightly delayed ramp but still pretty much on track.

The DisplayPort business, obviously we're very bullish on that. We just made an acquisition in order to bulk up in the area of video and flat panel displays, so that's a market we believe in very strongly for future growth. But the real ramp there is tied to Calpella, Intel's Calpella chip set. We've talked about that in the past. That chip set has a DisplayPort transmitter built into it, so once those hooks are available, the manufacturers will start implementing DisplayPort in their products, and the real hockey stick will occur. But yes, those are all still very viable growth businesses.

Glen Yeung - Citigroup

Can you give us a guesstimate as to how much those products made up of your revenues in aggregate now? If you want to break them out, that's great. I assume maybe you don't, but at least give us a ballpark where they are as a percentage of your revenues?

Ted Tewksbury - President and Chief Executive Officer

I can't break that out for you. I can talk in terms of the overall market. Our core products today, which are the AMB, the NSE, the Communications box, our sRIO switches, those products today are about a $1.3 billion SAM, and those will grow to about a $2 billion Served Available Market in calendar 2010.

The other businesses, the growth businesses that I just talked about, PCI Express, PC Audio, DisplayPort, PPS and CPS, will contribute about another $2.6 billion to the Served Available Market in 2010. And then there's about a half a billion due to our legacy businesses. So we're talking about roughly a $5 billion available market that we will participate in 2010.

Glen Yeung - Citigroup

Just a few more quick ones. One is, can you let us know what your expectations are for inventories in the out quarter? And any perspective that you have on what distribution inventories look like at this point?

Ted Tewksbury - President and Chief Executive Officer

I'll let Brian take that one.

Brian White - Vice President of Finance

Our expectation is that our inventory will come down, days of inventory after adjusting for the excess reserves that we took in Q2, we would expect to remain essentially flat. In terms of inventory in the channel, what we have seen is relatively stable inventory levels in the channel thus far. We'll see what happens going forward based on sellout. But so far, we haven't seen any alarming trends relative to channel inventory.

Richard D. Crowley - Chief Financial Officer

This is Rick. I'll add that while we're monitoring that, the inventories actually look pretty lean coming out of Q2 relative to the sell-through in Q2. And as Brian said, it's a matter of what - monitoring the POS as we go through Q4. But the turns and distribution look pretty good right now.

Glen Yeung - Citigroup

Hey, Rick. Welcome aboard. Last question is, anything noticeable in the gaming sub-segment? What are you seeing there? Does it look like that is something that is going to get meaningfully hit in these economic problems that we're seeing?

Ted Tewksbury - President and Chief Executive Officer

From what I've heard and all the reports I've read, Sony is sticking to their 10 million sets for the year forecast. I haven't seen any change to that. What we did see that was a little bit different this year is that the peak in their ordering appeared to occur in the September quarter, whereas last year it was in the December quarter. But that's the only insight I can give you on that.

Glen Yeung - Citigroup

Thanks very much.

Operator

You do have a question coming from the line of Joanne Feeney with FTN. Your line is open. Please go ahead.

Joanne Feeney - FTN Midwest Securities

Yes, thanks. I guess one clarification in the PC segment. Can you give us a sense of the relative importance of the desktop versus the notebook drivers for your products?

Brian White - Vice President of Finance

I don't know as we break that out.

Joanne Feeney - FTN Midwest Securities

Is it roughly equivalent to the market breakdown or are you skewed more towards one or the other?

Ted Tewksbury - President and Chief Executive Officer

It's roughly equivalent to the market.

Joanne Feeney - FTN Midwest Securities

Okay. And then if you could, could you perhaps give us a sense of what some of your largest customers are telling you? How much - is it caution that you are putting into your forecast? How much is it really hard numbers that you're hearing from your customers at this point in time?

Ted Tewksbury - President and Chief Executive Officer

Joanne, I don't know if there are any hard numbers out there. I've certainly asked all the right questions of our customers, but they have very limited visibility as well. So yes, there is some caution in our numbers.

Joanne Feeney - FTN Midwest Securities

Okay. That's fine for me. Thanks a lot.

Operator

We do have a question coming from the line of Suji De Silva with Kaufman Brothers. Please go ahead.

Suji De Silva - Kaufman Brothers

Hi, guys. Following up on the inventory question, at this level of inventory for you guys, if things were to weaken further, would your focus be on further reducing manufacturing to keep the inventories down, or are you comfortable perhaps building a little inventory at this stage?

Ted Tewksbury - President and Chief Executive Officer

As Rick pointed out, I think the inventories are pretty lean right now.

Richard D. Crowley - Chief Financial Officer

The other factor is lead times are very short, too. So I don't think we would want to pull down the inventory too much, and we have to have sufficient inventory to service what is a very high turn sale [ph] environment.

Suji De Silva - Kaufman Brothers

Okay. That color helps. And then on the network search engine business, can you talk about what you think your share, how it's trending at that point, given you're seeing the weakness? And what is your Cisco to non-Cisco mix networks, that trend as well?

Ted Tewksbury - President and Chief Executive Officer

So as far as Cisco, non-Cisco, about 80% of our business is Cisco. The other 20% is merchant business. As far as share, we haven't seen any significant changes in share either at Cisco or in our merchant business. So no real changes.

Suji De Silva - Kaufman Brothers

Last question, any 10% customers this quarter? Thanks.

Ted Tewksbury - President and Chief Executive Officer

Cisco.

Suji De Silva - Kaufman Brothers

Okay, thanks.

Operator

We do have a question coming from the line of Sandy Harrison with Signal Hill. Please go ahead. Your line is open.

Sandy Harrison - Signal Hill Securities

Thanks. Good afternoon, guys. As far as some of the qualification of your new products, it sounds like most of your AMB-plus has been qualified. One of the things you could look at is if things slow down on the broader markets, this could cause some of your customers to actually take the time to either qualify some of the plus parts or even qualify some of the older parts that you've now brought into your fab. Is that a silver lining to be looked here or is it being overstated, do you think?

Ted Tewksbury - President and Chief Executive Officer

That could happen, Sandy. You know, the AMB business continues to be strong. As you pointed out, the AMB-plus has been qualified in all of our customers, and the enterprise computing area, interestingly enough, seems to be the area that's hanging in there better than the other markets that we sell into. It appears that people are continuing to buy compute and storage servers to run their operations, and we haven't seen the kind of roll off in demand for the AMB products as we've seen elsewhere.

Sandy Harrison - Signal Hill Securities

Got you. And then somebody just a second ago asked about market share and the NSEs. Is there any - are you guys sensing if it's not a market share issue, is it a mix issue with your customers, or are your customers, either Cisco or non-Cisco, seeing a mix shift in their products? And depending upon where you participate in those, could that be impacting you? Or just sort of what is your takeaway on that?

Ted Tewksbury - President and Chief Executive Officer

I think it's just general weakness in enterprise switching.

Sandy Harrison - Signal Hill Securities

Got you. Lastly, when you guys look at your leverage from the fab, and the loading and what it could be, ultimately where do your guys see, or where do you think your utilization rates could go before you start to potentially disrupt what your long-term gross margins are? Is it 65%, is it 60%, 50%? What sort of a number that things start to move to the lower end of your long-term model?

Ted Tewksbury - President and Chief Executive Officer

Sandy, we don't divulge that information. But I can tell you that we're well above that right now, and anticipate staying well above that, unless things decline more dramatically than, I think, any of us anticipate.

Sandy Harrison - Signal Hill Securities

Got you. Thanks for the info, guys, appreciate it.

Operator

And we do have a question coming from the line of David Wu with Global Crown Capital. Please go ahead. Your line is open.

David Wu - Global Crown Capital

Yes, I was wondering about… can you give a little bit color on the PC clock business? That historically is tied very well to PC unit volume, and given I guess below seasonal trend, but I don't hear anybody saying that PC units would not be up sequentially from Q3. I was seeing… from the clock side, do you see that one-to-one relationship between the number of clocks you ship and the PC unit volume in Q4?

Ted Tewksbury - President and Chief Executive Officer

Yes. There's a couple of things to keep in mind on the PC clock business. First of all, if you just look at our core PC clock business, it typically is the strongest in the September quarter. So what we're seeing this year doesn't diverge from that. We are seeing more of a… we're forecasting more of a decline for December than we ordinarily would. Ordinarily we would expect it to be roughly flat. This year, we're not seeing that. There are a number of possible explanations for that. One possible explanation is that the microprocessor is typically the last potential that the system integrator installs. So typically, we're ahead of Intel, maybe a month to three months, as far as the ordering patterns of the end customers.

David Wu - Global Crown Capital

Okay. The other thing I was wondering is in terms of the consumer business, the fact that this is… the gaming… the fact that gaming is supposed to be down double digits, a high-margin part of the business, you said that this is because the… Sony decided to do their ordering in Q3 as opposed to Q4. What if they miss their numbers? Do we expect a meaningful fall-off in Q1, I mean your fourth fiscal quarter, rather?

Ted Tewksbury - President and Chief Executive Officer

That's a tough one to answer. We are very tied to that one customer on our PS3 business. Based on everything that I've read, Sony is staying true to their $10 million set forecast for year, and that's the number that we have baked into our forecast. So our guidance is based on that. Should that go up, we'll do better. Should it go down, we would have some revenue exposure. So our guidance was based on that and we have some caution built in.

Now if you look at our consumer business, about 40% of it is gaming and the other 60% is non-gaming, primarily clocks that go into high-end consumer products, like digital still cameras, digital TV and GPS, things like that. We have seen weakness there. Obviously, when consumers stop buying, they stop buying the expensive high-end components first. So tat's where we first started seeing weakness.

We do see slight growth in the December quarter through the holiday season, but given the fact that we were down this quarter, the December season will be down on a year-over-year basis from what we normally see.

David Wu - Global Crown Capital

I see. In terms of the - the description was book-to-bill was roughly running at parity throughout your Q2, and really did that fall off to 0.7 at the end of the September quarter? And where did it fall off the most? I was trying to get the color of that? Obviously, not AMB?

Brian White - Vice President of Finance

Yea, it tracked - the book-to-bill tracked above 1 really right up until the end of September, and we closed the quarter just under 1, as Ted mentioned. And then things have really - what we've really seen the fall-off at the beginning of our December quarter. So the first few weeks of the current quarter have been very weak from a bookings perspective. I'm not sure that we can give a lot of color on how that breaks out by specific lines, though.

David Wu - Global Crown Capital

Okay. Thank you.

Operator

Thank you, Mr. Wu. We do have a question coming from the line of Srini Pajjuri with Merrill Lynch. Please go ahead. Your line is open.

Srini Pajjuri - Merrill Lynch

Thank you. Brian, just a clarification first. On the tax rate as we head into 2009 calendar year, how should we think about it? I believe you told us low to mid-teens. I'm just wondering if we should model that or if it's going to be lower than that?

Brian White - Vice President of Finance

Yes, I think you should think about it in terms of a range to 15 to 20%. Within that range, our expectation is that it would be more toward the low end of that range. Call it maybe closer to 16% if we had to put a stake in the ground.

Srini Pajjuri - Merrill Lynch

Got it. And Ted, on the AMB, you know, it looks like you're forecasting double digit decline in Q4. I'm just wondering if, you know, the fact that Intel is starting to shift their Nehalem has anything to do with it?

Ted Tewksbury - President and Chief Executive Officer

Well, remember, that's a mixed blessing for us, because when Nehalem starts to launch, our DDR3 products to ramp along with it. Also our PCI Express switches. But I don't think that has much to do with it.

Srini Pajjuri - Merrill Lynch

And what do you think is your best… what's your best guess as to when you'll start to see that impact? And how should we think about the magnitude of that impact? Thank you.

Ted Tewksbury - President and Chief Executive Officer

The transition of AMB to DDR3?

Srini Pajjuri - Merrill Lynch

Yes.

Ted Tewksbury - President and Chief Executive Officer

Again, a lot of it depends on when Nehalem actually launches. But right now, I would estimate that by the third quarter of 2009… would probably be the crossover point… the second half of 2009 will be the crossover point for us between DDR3 and AMB.

Srini Pajjuri - Merrill Lynch

Thank you.

Operator

Thank you. We do have a question coming from the line of Sukhi Nagesh with Deutsche Bank. Please go ahead. Your line is open.

Sukhi Nagesh - Deutsche Bank

On the PC clock business, I don't know if you mentioned, how is the ramp, or at least a slower of Montevina, is that having a much more of a negative impact for the December quarter here, and how should we think about that next couple of quarters?

Ted Tewksbury - President and Chief Executive Officer

The Montevina ramp is helping us. A lot of the growth that we talked about in the PC Audio area, which was double digit this quarter and double digit next quarter, was new Montevina design wins that are starting to ramp up, and we're starting to see significant market share gains there. So that ramp is helping us. And it's helping us in the PC clock business as well.

Sukhi Nagesh - Deutsche Bank

Just sticking to the PC clock then, can you remind us what your market share is in each, desktop, notebook and servers, and if you are seeing any pricing pressure at all in any of those areas?

Ted Tewksbury - President and Chief Executive Officer

Overall, our market share in PC clocks is about 80%. We haven't seen any significant changes in market share. We generally don't break it down by notebooks and desktops, or other platforms.

Sukhi Nagesh - Deutsche Bank

Okay. One last question from me. Your outlook for inventory could, both internal as well as the channels, could you maybe talk about what you're seeing out there?

Brian White - Vice President of Finance

I think we talked about our inventory forecast for the inventory that we carry on our books going down quarter-to-quarter, keeping DSO relatively flat. Again after pulling out the effects of the AMB reserves that we took in the September quarter, which dropped our DSO to an unusual level. And again, what we see in the channel is stable and healthy inventory levels. But going forward, how that is going to play out is going to be heavily dependent on how a product sells out of a channel.

Sukhi Nagesh - Deutsche Bank

Thank you.

Operator

Thank you very much. And we do have a follow-up question coming from Joanne Feeney with FTN. Please go ahead. Your line is open.

Joanne Feeney - FTN Midwest Securities

Thanks so much. I just have some housekeeping questions I hope you can answer. You've given revenue by segment in the past, networking, [inaudible] products. Could you give us those numbers again?

Brian White - Vice President of Finance

Yes, for the September quarter networking was 25%. Timing and memory was 59%, and standard products was 16%.

Joanne Feeney - FTN Midwest Securities

16%, okay. And then in your sales channel you have helped us out on the distribution versus OEM versus consignment. Do you happen to have those numbers?

Brian White - Vice President of Finance

In fiscal Q2, direct OEM was 21%. Consignment was 11, and distribution was 68%.

Joanne Feeney - FTN Midwest Securities

Then one final question. You talked about consumer and comms both being down several digits in the December quarter. Could you perhaps rank those? Is consumer likely to be down more than comm or the other way around?

Ted Tewksbury - President and Chief Executive Officer

Joanne, we said consumer would be down double digits. Communications I don't think will be down quite that much. Computing will be down the least, brought it back in single digits for computing.

Joanne Feeney - FTN Midwest Securities

Thanks, that's really helpful.

Operator

You have a follow-up question coming from Suji De Silva with Kaufman Brothers. Go ahead, your line is open.

Suji De Silva - Kaufman Brothers

Hi, guys. A quick follow-up question on the on the OpEx trend after this quarter. Any sense of that or will it depend on how the top line trends?

Brian White - Vice President of Finance

As we talked about, we're going to continue to work our OpEx down. Clearly, we want to offset the burn that we picked up in the Silicon Optix acquisition, and from there based on uncertainty in the economic environment we want to look at all opportunities to reduce expense. So it's hard to put a hard number out there, but we're very focused on it.

Suji De Silva - Kaufman Brothers

Okay. And then the other question, Ted, you talked about areas beyond the display area that you're targeting. Are you comfortable about some of the other opportunities at this point, or is it still something you want to wait to talk about?

Ted Tewksbury - President and Chief Executive Officer

It's something we're not quite ready to talk about yet, for competitive reasons.

Suji De Silva - Kaufman Brothers

Okay, fair enough. Last question. Is there any opportunity for you guys as Adam ramps at Intel? Thanks.

Ted Tewksbury - President and Chief Executive Officer

Yes, we're participating very actively in the netbook devices, UMTCs and the mobile Internet devices that use the Adam processor. It's a relatively small portion of our business right now, but it's ramping pretty quickly.

Suji De Silva - Kaufman Brothers

Great. Thanks.

Operator

Thank you. And we do have a follow-up coming from David Wu with Global Crown Capital. Please go ahead. Your line is open.

David Wu - Global Crown Capital

My question really is on seasonality in the March quarter. When I look back the last couple of years, there's nothing very solid about March quarter, other than it's typically sequentially down, either flat or sequentially down from the December quarter. So if we are in this so called recession, what is a normal seasonality? And if we are in the recession, I assume this is even more pronounced?

Brian White - Vice President of Finance

You're right, David. March is typically our weakest quarter seasonally. I don't know expect that pattern to change this year. But it's very difficult to forecast what additional exacerbating effects the economic situation will have.

David Wu - Global Crown Capital

So if I were to say that if we didn't have a recession, I should model modestly - a modest decline just from seasonality? Whatever the recession effect is, it's sort of on top of that? Is that the way to look at it?

Brian White - Vice President of Finance

I really cannot answer that.

David Wu - Global Crown Capital

Okay. All right.

Operator

Any other questions, Mr. Wu?

David Wu - Global Crown Capital

No, that's it.

Operator

Okay. Thank you very much. Mr. Tewksbury, there are no more further questions in queue.

Ted Tewksbury - President and Chief Executive Officer

Okay. Thank you.

Brian White - Vice President of Finance

Thank you very much for joining us today. We appreciate your interest in IDT and look forward to meeting with you on our marketing trips this quarter and on our next call. We will also be attending the Barclays Conference in December and look forward to seeing you then. Goodbye.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 2:30 p.m. today until October 30, 2008 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 963455. International participants may dial 1-320-365-3844. Again those numbers are 1-800-475-6701, and international participants may dial 1-320-365-3844 using the assess code 963455.

That does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect. .

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