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Executives

Ted Tewksbury – President & Chief Executive Officer

Rick Crowley – Senior Vice President & Chief Financial Officer

Analysts

Anthony Stoss – Craig-Hallum

Blayne Curtis – Barclays Capital

JoAnne Feeney – Longbow Research

[Dee Los] – Citigroup

Christopher Longiaru – Sidoti & Co.

Sandy Harrison – Wunderlich Securities

Betsy Van Hees – Wedbush Securities

Integrated Device Technology, Inc. (IDTI) F3Q 2013 Earnings Call January 28, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Integrated Device Technology, Inc. F3Q 2013 Financial Results Conference Call. (Operator instructions.) And also as a reminder today’s teleconference is being recorded. And with that being said, here with opening remarks is Integrated Device Technology’s Chief Financial Officer Rick Crowley. Please go ahead, sir.

Rick Crowley

Thank you, Tony, and welcome to our F3Q 2013 Earnings Call. I’m Rick Crowley, IDT’s Chief Financial Officer, and presenting with me on the call today is Ted Tewksbury, our President and Chief Executive Officer.

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 Provision under applicable federal securities laws. Forward-looking statements in this call will include statements regarding the demand for the company’s products and anticipated trends in the company’s sales, expenses, and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review in detail the risks and uncertainties in the company’s SEC filings including but not limited to the Annual Report on Form 10(k) for the fiscal year ended April 1, 2012, our Quarterly Report on Form 10(q) for the quarter ended September 30, 2012, and periodic reports filed from time to time with the SEC. All forward-looking statements are made as of this date and IDT disclaims any duty to update such statements.

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 a complete reconciliation to the most directly comparable GAAP measures. All financial references will be non-GAAP on a continuing operations business unless otherwise indicated. Also, we have made selected financial information available in webcast slide which can be found in the “Investor Relations” section of our website.

Now I’ll turn the call over to Ted who will provide some F3Q highlights, and then I’ll return to give you more specifics on our results for the quarter. After that I will elaborate on our outlook for the March quarter. Ted?

Ted Tewksbury

Thank you, Rick, and thanks to all of you joining us today. To briefly recap we report F3Q results with revenue of $115 million, non-GAAP gross margin of 58% and non-GAAP EPS of $0.04.

Despite continued broad-based weakness in demand during the quarter, we delivered revenue within the range of our prior projections. Our bottom line results hit the midpoint of our guidance due to our continued focus in reducing operating expenses and improving product mix. We also generated healthy cash flow from operations during the quarter, underscoring the resilience of our operating model under weak macroeconomic conditions.

Let me now provide a brief overview of the trends we saw in each of our three end markets including new product and design activity followed by our guidance for F4Q. In our communications end market revenue decreased about 5% quarter-over-quarter largely driven by weaker sales of standard products. Revenue from communications products comprised about 56% of total sales compared with 51% in the prior quarter.

Two factors contributed to reduced sales in communications. First, distributors burned off excess inventories during the quarter, resulting in lower sell-in of standard products. Second, we saw a pullback in orders from some of our larger communications customers due to uncertain end market conditions. Visibility remains limited, lead times are short, and customers remained cautious. That said, sales of RapidIO switches into 4G LTE base stations held up better than the rest of the communications sector.

We believe we are still in the early stages of the global LTE build out, and despite short-term demand fluctuations the longer-term trend line for our communications infrastructure business is positive. We remain the only supplier that can provide wireless base station manufacturers with an end-to-end single chain solution, from antenna to DSP. And we continue to add to our arsenal of innovative products.

For example, in F3Q we announced a new glitch-free digital step attenuator for multi-standard base stations as well as industrial applications. IDT’s patented design improves reliability and lower costs by protecting expensive subassemblies such as the power amplifier. We also introduced the first dual 16-bit 1.5 GS/S digital to analog converter using the new industry-standard serial interface. This industry leading DAC delivers best in class dynamic performance and simplifies board routing in multicarrier broadband wireless applications.

Our industry leading base station signal change solutions are being embraced by all of the top wireless infrastructure manufacturers to optimize their system performance and lower their bill of materials cost. We continue to expand our base station content and expect to outgrow the market over the next several years.

In the computing end market we experienced a 29% sequential revenue drop. Timing, memory interface and PC audio sales all fell by over 20% during the quarter. Overall, computing represented about 30% of revenue down from 35% in the prior quarter. As in communications, computing revenue was impacted by both inventory corrections and weaker demand from server and PC OEMs. Although our customers reduced inventory during the December quarter, enterprises remained cautious with IT spending in the face of continued demand uncertainty.

We were disappointed that the government deposed our proposed acquisition of PLX last quarter as the combination would have benefited both companies’ customers and shareholders. Despite the termination of the proposed transaction we remain committed to our strategy of delivering mixed signal solutions that eliminate data transfer bottlenecks and improve performance in cloud computing and enterprise datacenters. We recently introduced new products that outpace the competition in two high-growth areas of enterprise computing.

First, we further enhanced our leadership in memory interface technology with the announcement of the industry’s only complete chipset for DDR4 load reduced dual inline memory modules, or LR-DIMMs. IDT’s three-chip set includes the data buffer, the registered clock driver, and temperature sensor. With DDR4 data rates climbing to 3.2 Gbps and higher the advantages offered by LR-DIMM as a speed-scalable memory technology are expected to drive adoption across a broad array of memory-intensive computing and storage applications.

We expect LR-DIMM attach rates for DDR4 to be in the 10% to 15% range for next generation server platforms in the second half of calendar 2014 timeframe. We’re already seeing excellent customer adoption of our DDR4 register and temperature sensors with initial qualification builds occurring this quarter and next. These products complement our DDR3 LR-DIMM memory buffer which is already shipping to customers and ecosystem partners.

Second, we’re experiencing strong customer traction with our new NVM Express Enterprise Flash Controller family. Our 16- and 32-channel NVMe Flash controllers as well as our 8-channel NVD RAM controller are sampling to tier one customers today. We expect customer products based on IDT’s NVMe controllers to begin sampling next quarter with production ramps in the second half of our next fiscal year. We were also honored to receive a Product of the Year Award from Electronic Products Magazine and the 2012 Best Electronic Design Award from Electronic Design Magazine for our NVM Express Enterprise Flash Controller.

Turning now to our consumer end market, revenue decreased 8% sequentially as our customers experienced softness in consumer end market demand. Overall, consumer sales represented 14% of total revenue, flat from the prior quarter.

Now as most of you are aware, wireless power is one of our most promising new product growth makers and it has the potential to make the consumer segment a much larger piece of our business. We recently returned from the Consumer Electronics Show in Las Vegas where we met with key customers and demonstrated some of our latest products, including the industry’s most highly-integrated wireless power transmitter solutions for the Wireless Power Consortium’s Qi standard. Well, what a difference a year makes. At the 2012 CES wireless power was little more than a curiosity. 2013 was the year that wireless power broke out and made its commercial debut with numerous product exhibits and announcements.

The WPC, which includes 145 member companies in 17 countries and as Qi certified over 130 products demonstrated some of these devices at the show. The Alliance for Wireless Power, or the A4WP, whose 30 members include IDT, Samsung, Qualcomm, and Deutsche Telecom, said it would soon launch products based on its standard; and the Power Matters Alliance, or the PMA, backed by Google, AT&T and Proctor & Gamble announced in Las Vegas the addition of 30 new member firms, including IDT.

The integration of wireless power into consumer devices is happening now and IDT is the company best positioned to benefit from this trend, regardless of which technology or standard prevails. IDT is a leading member of all the major consortiums – the WPC, the A4WP and the PMA – and is working directly with leading consumer electronics OEMs to bring wireless power-enabled products to market. We have won numerous designs and while most of them can’t be publicly disclosed our products are shipping now and revenue will accelerate in the second half of this calendar year.

With that, let me turn to our F4Q guidance. End market demand remains highly uncertain and visibility is poor. Our customers are closely managing inventory and remain cautious in placing new orders. Our beginning backlog is low by historical standards and lead times are short. Against this backdrop, for our F4Q 2013 we expect revenue to be down to about $108 million at the midpoint, plus or minus $4 million. Sales from the communications end market are expected to decline by approximately 4%, consumer by 10%, and in computing we anticipate March quarter revenue to be down about 8% with double-digit declines in the PC segment and roughly flat sequential sales in the enterprise segment.

While weak end market demand weighs heavily on near-term results, recent improvements in bookings bolster our confidence that revenue will return to growth in the June quarter. In addition, design win activity remains strong and we expect top line growth from new product categories to contribute meaningfully in the second half of this calendar year, led by wireless power and enterprise flash controllers.

Having rebuilt the new product pipeline, our top priority is now to bring our costs in line with our revenues. In the past two quarters we made good progress reducing operating expenses but not fast enough or deep enough to overcome the macroeconomic malaise. Although we expect accelerating new product ramps and the resumption of core product growth in F2014, in the current economic environment we must plan for uncertainty. To meet this challenge we have identified and are aggressively implementing additional cost reductions to ensure that we deliver significant operating margin expansion throughout F2014.

With that I’ll turn it over to Rick to expand on our financial results and our guidance for the March quarter. Rick?

Rick Crowley

Thanks, Ted. As Ted mentioned earlier, during F3Q we posted revenue of $115 million which was within the range of our October projections despite continued softness in end demand. Bookings decreased slightly on a sequential basis in the December quarter driven by weakness in the first half of the quarter, however our booked to bill ratio for the quarter was above 1. F3Q non-GAAP gross margin of 58% was in line with our expectations. As a result of moving to a fabless business model and rationalizing our product portfolio, our gross margin remains near record high levels despite lackluster customer demand.

Our efforts to reduce expenses continued to bear fruit in the December quarter. Non-GAAP operating expense in F3Q was $59.4 million, a decrease of about $3.5 million from F2Q and well below our prior projections for the period. The execution of the cost reductions discussed in prior earnings calls resulted in the second consecutive quarter of operating expense decline in F3Q with a large spending decrease putting us about one quarter ahead of schedule.

Non-GAAP R&D spending during [F3Q] was $37.7 million while non-GAAP SG&A expenses were $21.7 million. Our non-GAAP operating margin was approximately 6% in the December quarter. The effective tax rate decreased to 11% in F3Q. The lower than expected rate was driven primarily by the government’s retroactive reinstatement of the R&D tax credit and other lapsed corporate tax statutes. For F3Q we reported non-GAAP net income of $6.2 million or $0.04 per diluted share which was in line with the midpoint of our projections due to solid gross margins and operating expense controls.

Now let me summarize our results on a GAAP basis. We reported a GAAP net loss of approximately $5.2 million in the December quarter. The difference between our GAAP and non-GAAP results nets out to about $11 million or $0.08 per diluted share. F3Q 2013 GAAP results include $9.1 million in acquisition- and restructuring-related charges and $2.8 million in stock based compensation, partially offset by about $600,000 in benefits from tax effects. Further information, including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today’s press release and can also be found on our website at www.idt.com.

Now I’ll turn to our balance sheet. Cash and investments totaled approximately $280 million at the end of the December quarter. We generated about $11 million in cash from operations during the quarter and received about $5 million in proceeds from employee stock transactions, and sent about $5 million on capital expenditures. Net inventory was approximately $60 million in December, down $1.5 million from the prior quarter. Days of inventory increased to 113 days at the end of the December quarter as inventory levels did not decrease as quickly as shipments. Our trade accounts receivable decreased to about $62 million in December while DSO of 49 days was flat on a sequential basis.

Let me expand a bit on our forecast for the March quarter. In the current macroeconomic environment our customers remain focused on controlling inventory. Ongoing inventory corrections combined with demand softness in certain end markets create a very uncertain demand environment. The current low backlog levels and short customer lead times result in poor visibility to true end demand for IDT’s products.

After a period of lower order rates in the first half of the December quarter, bookings increased in the month of December and have continued at this more robust level so far through January. The higher order rates are certainly encouraging but the (inaudible) requirements to achieve our March quarter revenue guidance is high by historical standards.

Ted noted earlier that we currently project revenue for F4Q 2013 to be approximately $108 million plus or minus $4 million. We project gross margins to be 58% plus or minus 50 basis points on a non-GAAP basis. The actual change in gross margin should be primarily dependent on the ultimate revenue range and product mix for the quarter. We project operating expenses will be in the range of $60 million plus or minus $1 million. The modest projected increase in operating expense is due to the annual reset in payroll taxes combined with a high level of new product releases and take outs in the March quarter. We expect operating expenses will resume their decline in the June quarter.

R&D is expected to be approximately $38 million with SG&A spending of about $22.2 million. We currently anticipate interest and other expense will be about $100,000. We estimate the effective tax rate for F4Q will be about 15%, down from previous expectations due to the reinstatement of the R&D tax credit and other US corporate tax provisions.

Looking beyond the current fiscal year, we believe that our tax rate will revert to approximately 10% in F2014 and beyond depending on future changes in the US tax code. This represents the lower end of the range we have previously provided. We estimate F4Q share count to be about 149 million shares on a diluted basis and project non-GAAP EPS from continuing operations to be about $0.01 per share, at the midpoint of our revenue guidance range.

On the balance sheet we expect cash flow from operations to be approximately $5 million during the March quarter. Inventory is expected to decrease modestly and days of inventory are projected to increase slightly. Days sales outstanding are projected to remain steady in the March quarter. Cash and short-term investment balances are expected to be approximately $285 million at the end of March. We have approximately $80 million available for share repurchase under the existing 2010 Board authorization. We will resume the share repurchase based on the evaluation of the market value of our stock, cash flow levels, and economic conditions among other relevant factors.

The current demand environment remains uncertain in many semiconductor end markets. In this situation we are focused on executing our product development strategy while at the same time reducing operating expenses and controlling inventories. We believe that when end demand improves the combination of these actions should produce significant operating leverage for IDT.

Ted discussed many of the revenue growth opportunities we are confident will materialize over the coming year and beyond. We are also keenly committed to improving IDT’s profitability. We will continue to focus on a disciplined approach to reduce operating expenses which should enable us to achieve significant operating margin expansion in F2014. With that summary I’ll turn the call over to the Operator for the Q&A portion of the call. Tony?

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) And our first question will come from Anthony Stoss with Craig-Hallum. Please go ahead.

Anthony Stoss – Craig-Hallum

Hey guys. Rick, if you wouldn’t mind telling us what percentage of revenue came from new products in December; and then Ted, if you could give us a little more color or detail on the wireless charging opportunities. You mentioned you have wins you can’t disclose – can you give us a sense whether or not they’re with handsets, tablets, accessories and just your expectations of the ramp? Thanks.

Rick Crowley

Yeah, Tony, the new product percent of total revenue was 19% in the December quarter.

Ted Tewksbury

Yeah, and on the wireless power question we are engaged with about a couple of dozen leading OEMs where we’ve got design-ins in the pipeline and we’re talking to literally hundreds of other customers who are lower down in the queue. Obviously in a consumer market like this the important customers can be counted on the fingers of one hand, and any of the leading OEMs you can think of we are in discussions with.

The first wave of growth in wireless charging solutions will come from the magnetic induction products, specifically the WPCG-compliant products where we have designs both in transmit solutions as well as in the receivers. So we’re working with OEMs as well as aftermarket equipment manufacturers who develop pads, charging pads, external charging dongles that you can plug into an existing laptop to configure it for wireless charging capabilities as well as sleeves that you can put on existing phones to enable them for wireless charging. That’s what will be fueling the early growth for the next couple of quarters.

Beyond that, there are the integrated receivers which will be integrated into handsets, and we’re working with a number of leading handset OEMs on those solutions. And then looking out beyond the next couple of quarters to the second half of the next fiscal year, that’s when magnetic resonant solutions will start to emerge using the Qualcomm- and the Intel-referenced designs – and as you know, the Intel-referenced design will be going into ultra-books as well as all-in-one PCs for the charger; and then the Qualcomm-referenced design which uses their WiPower technology will be going into receive solutions.

So we’ve got as I mentioned in the prepared remarks a number of design wins in all of the leading technology magnetic induction and magnetic resonance as well as for all of the standards – the WPC, the A4WP and the PMA.

Anthony Stoss – Craig-Hallum

Ted, if I could just follow up on that, on the inductive side you guys have talked about the fact that you’re much smaller and draw less power than other solutions. Is that why you’re winning? Or just give us a sense of how you’re stacking up I guess against more of the incumbents within that space.

Ted Tewksbury

So on the transmitter solution we have a far more highly integrated solution so we can do in one chip what the nearest competitor has to take seven ICs to do. We’re able to reduce the total component count from roughly 90 discreet components down to 30 components on the customer’s board, so that’s a huge benefit for OEMs in terms of reduced cost as well as reduced area. We’re able to reduce the area on the board by about 80%. That’s on the transmit side.

Another advantage on the transmit side is that we have what we call a bilingual solution – it’s a dual mode solution that’s compliant with the WPC Qi standard as well as any other standard including proprietary standards that a customer may want to implement. We have a number of advanced features including foreign object detection and other features that separate us from the competition. On the receive side, our receiver was just introduced this past quarter. It has a number of the same types of features in terms of being able to accommodate multiple standards, and that’s one of the reasons OEMs are turning to IDT.

Anthony Stoss – Craig-Hallum

Okay great, thanks guys.

Operator

Thank you. Our next question in queue will come from Blayne Curtis with Barclays. Please go ahead.

Blayne Curtis – Barclays Capital

Hey, good afternoon guys. Ted, maybe just following up on the wireless charging question: obviously a lot of standards and you can address all of them but maybe, obviously we know the volumes really accelerate when it’s integrated. And do you think the handset OEMs will integrate wireless charging before any sort of standards are kind of worked out across the industry?

Ted Tewksbury

Well, you’re already seeing it for example with the Nokia Lumia phone and others. The customer traction is there. These solutions are being adopted in next generation handsets, and our receiver solution was just introduced this past quarter so it hasn’t made it into some of those handsets but I can assure you that we’re actively working with all the leading consumer electronics handsets OEMs. Anybody that you can think of we’re talking to and making very good progress with.

As far as the standards, when you have multiple standards it can slow down adoption, and what we’re doing to facilitate the adoption is number one we have products today that address every one of the standards that we just talked about, so we’re pretty much agnostic as far as which technology and which standard wins. We’ve got all the bases covered if you will. And then in addition, number two, we’re developing products. We’ve already got products developed that will address multiple standards in one chip, so we can take the standard confusion out of the equation altogether.

Blayne Curtis – Barclays Capital

Gotcha. Your RDIMM business has been down substantially two quarters in a row. I know there’s always inventory to deal with in that kind of channel but then the guidance is flat. Do you see yourself coming out of an inventory correction or has there been any sort of share? Obviously the end market is not strong but it’s not off as much.

Ted Tewksbury

Just to put this in perspective I think it’s important to understand that the memory interface business is a very lumpy business – it always has been. And if you rewind to about a year ago we had just come off several quarters of mid- to high- single digit growth, and then in F2Q 2012 we took a 30% reduction in revenue in that business and then it started to climb back up in the next couple of quarters, and continued to grow pretty strongly for the next several quarters. And now we’re seeing another adjustment where we took a pretty big hit and now we’re flattening out in F4Q and coming back out of it.

We’ve talked about the reasons. Obviously enterprise spending is at depressed levels. If you listen to any of the server manufacturers or server processor manufacturers their unit shipments are down; and then we had the inventory buildup to contend with. Now we have burned off a significant amount of inventory in the memory interface business both at customers and distributors during F3Q and so we believe that inventories are now at a healthy level. And we’ll flatten out in F4Q and we think we’ll return to growth in the June quarter.

Blayne Curtis – Barclays Capital

Thanks, and then just a final question for Rick: you’ve brought down OPEX a little bit. Obviously your profitability metrics are still well below where you would like them to be. You signaled that maybe it would be kind of flat to down going forward – I just wanted to make sure I heard that correct and you weren’t signaling more material cutbacks.

Rick Crowley

In the current quarter it’s flat to slightly up due to the payroll tax reset but we expect to have operating expense decline in the June quarter from March. So we expect as I mentioned to carefully control costs and look to reduce OPEX going forward to improve our operating margin in F2014 considerably over what we’re going to achieve here in F2013.

Blayne Curtis – Barclays Capital

I was just wondering if there was any way you can frame it. I mean are we talking flat to down slightly as we progress through the year or are you looking to look more meaningfully at your OPEX run rate?

Rick Crowley

Well, I think op margin is determined by revenue growth and OPEX but the controllable side is OPEX. So I think we are looking at taking some meaningful actions in OPEX as we go into F2014 and ensure that we get an improved operating profitability in F2014.

Ted Tewksbury

Just to emphasize what Rick said, and as I said in my prepared remarks we have to plan for uncertainty. Obviously we don’t know what the economy holds in F2014 right now. Obviously it’s a little bit soft. And so we have raised the cost reduction effort to a top priority company initiative. It’s an imperative to make sure that regardless of what happens on the top line we can get our costs under it and deliver meaningful operating margin expansion in F2014 and that’s what we’re doing. So we’re doing some rebalancing of our portfolio to focus on the most promising of our new product growth drivers combined with our core most profitable businesses.

Blayne Curtis – Barclays Capital

Okay, thank you.

Operator

Thank you. Our next question in queue will come from JoAnne Feeney with Longbow Research. Please go ahead.

JoAnne Feeney – Longbow Research

Yeah, thank you. A question back on the communications side: you remarked that standard products looked down this quarter with just inventories being taken down further and you’re seeing an order pullback from your larger customers. Can you give us a hint as to which kind of larger customers you’re referring to here? Are these the wireless base station guys and if so in what sense is [growth in] RapidIO still on a positive trend? Is that actually up quarter-over-quarter anticipated for this quarter?

Ted Tewksbury

Great question, JoAnne. The customers that pulled back… Our products in communications really fall into two categories. There’s the 4G LTE which is where we’ve been investing heavily as far as new investments and then there’s everything else. So the pullback really fell into the everything else category, and that’s the wireless base station customers as well as switch and router manufacturers – all other parts of communication where we have a lot of exposure with our standard product business and our business tends to track the overall communications segment.

The bright spot in all of this is 4G LTE and while we were down slightly in our RapidIO sales in F3Q the decline was far less than we saw in the rest of the business; and we do expect to see growth in the RapidIO switch business in F4Q. So that business is strong and healthy and we’re very bullish on the 4G LTE.

JoAnne Feeney – Longbow Research

Okay, and so the base stations decline is something other than the 4G. Is this sort of fill in of other sources base stations? Can you give us a little bit more clarity do you think on that?

Ted Tewksbury

You’ve got the 2G, the 3G and all the other communications really reaching kind of the tail end of their life and dragging our standard products down along with it. The good news in all of that is that the 4G LTE build outs continue strong both in the US as well as in other parts of the world, like Korea, Japan, and China will be rolling out 4G very shortly as well – the TD-LTE standard. So I don’t know if I answered your question…

JoAnne Feeney – Longbow Research

Maybe a follow-up would help. So if I try to think about your dollar content opportunity in 4G versus sort of the older technology, should we then anticipate perhaps a transition period where the older stuff is seeing fewer builds and so overall your opportunity might shrink for the short term but then expand as 4G becomes more prevalently installed around the world?

Ted Tewksbury

That’s well said. As we presented at our Analyst Day last year you should think about our standard products business as declining – well, we said declining at 5% on average. I think what we’ve seen recently is something slightly greater than that but that business bounces around. Sometimes it grows above market, sometimes below. But what we are going to see is that as 4G LTE begins to grow around the rest of the world, that’s where we’re going to see the bulk of our growth coming from.

JoAnne Feeney – Longbow Research

Okay, thanks so much. And then on the computing side if I could squeeze in one more, I’m wondering what your position is in these next generation game consoles. Is it still a good market for your timing products and do you have exposure on just the one where you traditionally have played a role? Or is there an opportunity for you to play a role on the two others as well?

Ted Tewksbury

So what we’ve talked about in the past is mostly focused on Sony’s PlayStation 3 which is starting to reach the tail end of its life, but the good news is that the PlayStation 4 is coming out next calendar year and we’re very well positioned for that. So I didn’t talk a lot about our timing solutions. When we talk about gaming we’re really talking about timing. We’ve got a number of new timing products that are in development, both for consumer as well as for communications that will more than replace the decline of some of those legacy platforms like PlayStation 3. So you’ve got PS Vita, you’ve got PlayStation 4 and others which I can’t disclose at this time but hopefully we’ll be talking about on next quarter’s call or the one after.

JoAnne Feeney – Longbow Research

And then the PC decline that you’re anticipating in double digits, is that just the tail end of the decline of timing opportunities in PCs in general or is that more tied to the overall decline in PC builds?

Rick Crowley

I guess more seasonality and lower builds as opposed to any further decline in PC clock. I think the decline in PC clock for the PC segment has pretty much passed, JoAnne.

JoAnne Feeney – Longbow Research

Okay, great. Thanks so much.

Operator

Thank you. Our next question in queue will come from Glen Young with Citi. Please go ahead.

[Dee Los] – Citigroup

Hi, this is [Dee Los] for Glen. I wanted to ask about which end markets your bookings accelerated in.

Rick Crowley

Hi Dee, this is Rick. I think the strength we’ve seen at least through the first four weeks of January here has generally been led by the communications side. Enterprise computing’s been probably the second beyond that but as you’d expect, consumer and the PC side of the computing market aren’t really showing… They’re not bad but they’re not showing any incremental strength to speak of. So I can’t say it’s broad-based but at least it’s in positive high margin areas for us and areas that have been compressed the last couple quarters. So hopefully that continues but so far so good.

[Dee Los] – Citigroup

Great, thank you. And then on your gross margin outlook we’re holding here at 58%. What other levers do you have to drive that higher?

Rick Crowley

Well, since we’re fabless there’s not a lot of leverage from a standpoint of scale but there’s a little bit. We do have some fixed costs there so the secondary impact would come from that. The primary impact really is mix and product portfolio mix so driving, either reducing lower-margin product lines or them not contributing as much and focusing on getting the higher-margin areas which we have been doing over the past couple years, for instance in communications, to be a higher percentage of the total company mix.

So with that over time and given the way that we have been investing and emphasizing the different parts of the portfolio over time we do see a path to getting to 60% gross margin. I can’t say exactly when that is but I think if you look at where we are today at 58% with this revenue level I think that speaks to the way we’ve been managing the gross margin over the past couple of years.

Ted Tewksbury

This is Ted, just to elaborate on what Rick said. The product mix factor is critical here and is really being driven by a movement away from commodity digital components towards more analog-intensive mixed signal products, solutions. So all of the power, the RF, the data conversion, the high performance communications timing are taking us upmarket towards higher gross margins. Also there’s been a shift away from low gross margin applications in markets like PCs to higher gross margin markets and applications like enterprise computing, so these are definitely starting to contribute to margin expansion in addition to the operational streamlining that we did and going fabless.

[Dee Los] – Citigroup

Great, thanks. And then did you take any inventory reserves during the quarter or do you anticipate you’ll take any?

Rick Crowley

I think the inventory reserves within the quarter were within the normal bounds. Last quarter we had some tailwind from selling previously reserved inventory but I would say that this quarter we were within the normal range of inventory expense as a portion of our COGS.

[Dee Los] – Citigroup

Great, thanks. And finally are there any roadmap or product implications from the PLX [key] transaction?

Ted Tewksbury

No, not really. As I said, we’re disappointed that the FTC did not approve that transaction but since they didn’t we’re returning to our original strategy which is to continue to support our customers on Gen 2 PCI Express switches, to develop Gen 3 products on a built-to-order basis if we have strong customer sponsorship; and then to really focus our PCI Express team on the Enterprise Flash Controller business which is higher gross margin and more promising from an available market perspective and a growth perspective. So no real change in our strategy.

[Dee Los] – Citigroup

Thanks.

Operator

Thank you. Our next question in queue will come from Christopher Longiaru with Sidoti & Company. Please go ahead.

Christopher Longiaru – Sidoti & Co.

Hey guys. My question has to do more on the inventory side because I think you said that the inventories are now down to a normalized level. Can you give us an idea of what that is in weeks and where you expect it to be at the end of next quarter as it comes down to kind of a level where your customers would have to start to order again?

Rick Crowley

Yeah, I think the number of weeks inventory in the different channels really depends on the end market and the customer requirements, but I would say our days of inventory actually went up a little bit in the channel in December even though the aggregate dollars came down just because of the weakness in the consumption and the resales. And of course the March quarter’s not always favorable for the PC and consumer space.

But I think if you look at an area like the enterprise computing, we know our OEM customers drained inventory; our channel inventory has stayed about the same but we would hope that it would come down a couple more weeks from where it is in the March quarter. And that’s part of the reason why we’re projecting it flat because there’s a little bit more inventory to burn off and so we’ll see how the consumption comes off in the server market, for instance in memory interface to use that as kind of a case study.

But I think everything’s kind of normal for this point at the end of December. We looked at the type of days and aggregate dollars relative to our revenue level and it’s in the normal range based on historical standards.

Christopher Longiaru – Sidoti & Co.

And how much further would it have to go for, in your opinion, to become an unhealthy situation where it would be difficult for customers to get products?

Rick Crowley

I think it’d probably have to come down another 25% or so.

Christopher Longiaru – Sidoti & Co.

That’s helpful. And just in terms, I just missed a housekeeping question: what was the gross margin guidance again?

Rick Crowley

58%.

Christopher Longiaru – Sidoti & Co.

Okay, I’ll jump out. Thanks guys.

Operator

And our next question in queue will come from Sandy Harrison of Wunderlich. Please go ahead.

Sandy Harrison – Wunderlich Securities

Thanks. Ted, you talked about a couple of the opportunities in your prepared remarks, one of them was NVMe. We’re starting to hear more about that standard. I think there’s some of the drive guys are talking about some opportunities they’re seeing in that. What’s sort of the catalyst for the timeline that you see as that unfolds, or how should we be thinking about how that unfolds?

Ted Tewksbury

So in terms of the timing, Sandy, as you know we’ve got two products out there. The first was a proprietary solution, it’s really a custom solution that we jointly developed with Micron – that is designed into EMC and Dell and is ramping although not at the level we had expected, and frankly we’re disappointed at the rate at which that’s been ramping, although we’re told that that will improve going forward.

The opportunity that we’re most excited about though is the NVM Express Enterprise Flash Controller which we introduced a couple of quarters ago, and the reason why that one’s interesting is because it is a standard and therefore is not targeted at one customer but it targeted to a multitude of customers in different segments of the ecosystem. So that’s selling. We’ve already got design wins in some of the leading SSD manufacturers and Flash memory manufacturers. We’ve got design wins in the manufacturers of storage systems and then also in their customers who are the enterprise and the cloud datacenters. And more and more we’re seeing those guys developing their own – basically rolling their own solutions which are highly optimized to their particular application.

So it’s a much broader array of customers that that product is selling to and unfortunately I can’t disclose the names to you but the list reads like a who’s who of the storage market – all household names. That ramp will really begin in earnest in the second half of F2014, so we’ve got two staggered ramps: the first one from the proprietary solution and then the second one layering on due to the NVM Express solution in the second half of F2014.

Just to comment on the competition, obviously it is a populated space. There are a lot of companies out there developing Flash SSD solutions and that really is a validation of the size of the market and its importance. The reason we win is really threefold. Number one, we have really the only native PCI Express interface on the market, and by that I mean there’s no intervening bridge from SaaS or SATA to PCI Express which would increase latency and power and size. We have a native PCI Express interface, a million IOPs –and IOPs is the key performance metric and we have the highest performance solution in terms of throughput and latency.

Secondly, our solution uses NVM Express. It’s the only NVM Express solution on the market today. That NVM Express as you know is a standard host controller interface, so an OEM can use a standard Windows driver and use it to drive any NVM Express-compliant drive which is very convenient from their perspective.

And then third and perhaps most importantly is the fact that our solution is programmable. We ship with our product a basic set of firmware to support the NVM Express host controller interface but the end customer can then program that controller with their own firmware, their own secret [sot] to support their own Flash management algorithms or whatever they’re trying to do. And that’s particularly attractive to the cloud and enterprise datacenter guys who are rolling their own customized solutions.

Sandy Harrison – Wunderlich Securities

Got it, and then as we look at a lot of the data points as far as what we’re seeing for F1Q somewhat along seasonal lines you had a couple quarters of outperformance last year and I’d say a quarter of underperformance in this most recent one and guidance seasonal here. Ted, what do you look at this business as a run rate? When you look at the total business and what you think you can produce what’s that number you have either internally or externally and is that something ultimately that you use to determine the right-sizing of your OPEX?

Ted Tewksbury

Sandy, I’d love to be able to tell you that but as you know we don’t disclose the revenue levels for individual businesses. The enterprise Flash controller market is a large one. I think if you look at iSuppli numbers or Dataquest or any of the other analysts that are out there you see that in the F2016 timeframe it’s roughly a $350 million market. So figure then our traditional memory interface market is and we plan to have the dominant share with this Flash controller.

Sandy Harrison – Wunderlich Securities

Got it. And then sort of taking that question a little bit bigger towards the total business when you look at what it is you guys think you should be running at, what you think the business can run at sort of near term, intermediate term and then longer term; and then the follow-on to that question about longer term is are you guys comfortable that you’re on the track to getting to your operating goals that you’ve committed to and whether you think you can continue to move towards that in a timely manner?

Ted Tewksbury

Sandy, that’s a great question. Let me be very clear. Our goal remains 20% operating margin. Obviously that depends to some extent on revenue level but we’re taking very aggressive cost reduction measures as we speak and really focusing our investments on the most promising of our new product. Obviously that’s where the bulk of the spend is and that’s where we don’t have the revenue scale right now, and therefore that’s what’s dragging down our operating margin. So we’re really sharpening our focus on the most promising and the most promising new products are the ones that we talk about all the time on these calls, that you’re familiar with.

The wild card in all of this is the timing of new product ramps, and so this is really a real time exercise where we’re monitoring the growth and we’ll turn the OPEX reduction knob harder to the right if revenue isn’t materializing as we expect. But we’ve got plenty of time now to make reductions to ensure that we expand our operating margins in F2014. The exact timing of which quarter we’re going to achieve that 20% in is somewhat uncertain but we are committed to showing significant operating margin expansion in this next fiscal year regardless of what happens on the top line.

Sandy Harrison – Wunderlich Securities

Got it, okay. Thanks guys.

Operator

Thank you. Our next question in queue will come from Betsy Van Hees with Wedbush Securities. Please go ahead.

Betsy Van Hees – Wedbush Securities

Thanks, good afternoon. Rick, a question for you: I think you mentioned that the turn rate is going to be at a historic high or that would be I guess a low in terms of how much turns you have to do. And I was wondering if you can remind us what your historic turn rate is and how many turns you have to do to get to that midpoint of your revenue number.

Rick Crowley

Hi Betsy. I think the turns rate expressed in percent is kind of misleading depending on where you are. It can be abnormally low at the peak and abnormally high at the bottom. And we look at it from dollar terms as well, and basically our dollar turns fill here this quarter in March is the same as it was the last quarter that we achieved to hit the 115. So it’s basically on a par but given the low beginning backlog the percentage looks high from a historical perspective, but from a dollar turns fill we think it’s doable otherwise we wouldn’t have provided the guidance we did; and it’s a number in the range we’ve achieved in the past. So it just has to do with the math that the turns percentage is high.

Betsy Van Hees – Wedbush Securities

Okay, thanks Rick. And then Ted, you talked about in the press release and then you’ve talked here about the wireless power that’s shipping now and that revenue is going to accelerate in the second half of the year. Can you kind of help us understand how that acceleration is going to look? Can you give us some type of metrics to be looking at? Is it going to be a gradual turn up or some type of a hockey stick effect and are we going to see that play out in calendar Q3, calendar Q4? If you could just help us out a little bit that would be great.

Ted Tewksbury

Betsy, so we’re already seeing early shipments of wireless power into WPC Qi products, primarily the aftermarket products right now. And we should expect to see those increase I would say more or less linearly from the first half of F2014; and then I would expect that toward the second half of the year when the magnetic resonance products for A4WP start to layer in and the Qualcomm- and Intel-referenced designs hit the market and start getting designed in by OEMs hopefully in time for the Christmas season that we would start seeing more of a hockey stick towards the back end of the year.

But it’s very, very difficult to predict the timing of new product ramps. I’ve stuck my head out before and gotten burned so I’m reluctant to do so again. But you should be monitoring us on monotonic revenue growth throughout the next fiscal year on wireless power and I think that’s what you’ll see.

Betsy Van Hees – Wedbush Securities

Okay, thanks guys. That’s it for me.

Operator

Thank you very much. At this time there are no additional questions in queue. Please continue.

Ted Tewksbury

Okay, well thank you very much for joining us today and as always we appreciate your interest in IDT and we look forward to meeting with you on our marketing trips this quarter as well as on our next earnings call. Thank you and good bye.

Operator

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