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Volterra Semiconductor Corporation (NASDAQ:VLTR)

Q4 2008 Earnings Call

January 26, 2009 5:30 pm ET

Executives

Mike Burns - CFO

Jeff Staszak - President and CEO

Analysts

Tore Svanberg - Thomas Weisel Partners

Patrick Wang - Wedbush Morgan Securities

JoAnne Feeney - FTN

Christopher Longiaru - Sidoti & Company

Nicholas Aberle - Caris & Company

Gus Richard - Piper Jaffray

Operator

Welcome to the Volterra Q4 and year end earnings conference call. During today's presentation, all participants will be in a listen-only mode and following the presentation, the conference will be opened for questions.

(Operator Instructions).

As a reminder this conference is being recorded today, Monday, January 26 of 2009.

Now, I'd like to turn the conference over to Mr. Mike Burns, Chief Financial Officer. Please go ahead, sir.

Mike Burns

Thank you. And welcome everyone to today's conference call. With me to review our fourth quarter and fiscal year 2008 results is Volterra President and CEO, Jeff Staszak.

As we begin today's conference call, I'd like to remind everyone of a few important items. First, today's earnings release and financial statements are available on the Investor section of the company's website at volterra.com.

Also, we're going to discuss certain non-GAAP financial measures on this call, and we've provided a reconciliation of the GAAP and non-GAAP financial measures in our press release. The non-GAAP measures exclude the effect of stock-based compensation expense and special items, such as the effect of accounting changes. Unless, we specifically state otherwise, when we give guidance about a financial measure, we mean the non-GAAP financial measure.

Finally, I'd like to caution everyone that today's remarks contain forward-looking statements that are based on the company's current views and expectations. Our actual results or events may differ materially from these forward-looking statements due to a number of risks and uncertainties.

Please review today's press release and our filings with the SEC, including our Annual Report on Form 10-K filed March 5, 2008 and the Form 10-Q filed on October 30, 2008, for detailed discussion of the risk factors that could cause actual results to differ materially from the forward-looking statements.

In addition, please note that the company undertakes no obligation to update or revise these forward-looking statements.

At this point, I'd like to turn the call over to Jeff to provide an overview of the business and our results.

Jeff Staszak

Thanks, Mike. Good afternoon and thank you all for joining us today. First, I'll provide a short recap of our CY '08 and Q4 '08 financials. In addition, I'll talk a little bit about our nine financial achievements in CY '08 as well. I'll then give a short update on our four focused markets and following this, I'll talk about Q1 '09 and provide guidance for the quarter. Finally, I'll hand it over to Mike to review the details of our financial performance for the quarter and then we will open it up for any additional questions you may have.

First, we are pleased to announce that CY '08 was an outstanding year even though Q4 was impacted by macroeconomic factors beyond our control. Revenue grew from $74.7 million in CY '07 to 104.2 million in CY '08, or 39% growth year-over-year.

Non-GAAP earnings per share increased from $0.17 in CY '07 to $0.73 in CY '08. Gross margins increased from 49.5% in CY '07 to 56.8% in CY '08. This was our seventh consecutive year of revenue growth and fifth consecutive year of profitability.

In addition to the outstanding financial achievements in CY '08, we also had some significant non-financial achievements over for the year which I'll talk about shortly. For Q4 '08 revenue came in for our revised guidance at $21.9 million versus $19.8 million in Q4 '07 and $30.6 million in Q3 '08.

Non-GAAP EPS was $0.09 versus $0.09 in Q4 '07 and $0.25 in Q3 '08. Non-GAAP gross margins decreased from 58% in Q3 '08 to 56.4% in Q4. Several of our non-financial achievements in CY '08 were outstanding as well.

First, we achieved world-class product quality levels based on our customer's assembly results achieving a very low defect rate. We said in our Q2 '07 earnings call that it would take sometime, but we would fix our problems and get our quality to world class levels based on our customer's ratings.

Second, we had another record year of total new products that we started sampling to existing and new customers that will generate revenue in '09 and beyond.

Third, all four of our markets, server and storage, notebook, communications, workstation and graphics grew year-over-year.

Fourth, we continued to diversify our customer base and grew the number of customer's, which generate $1 million or more in revenue per year, from 6 in '07 to 18 in '08.

Fifth, we repurchased $9.9 million worth of Volterra stock and exited the year with a very healthy cash position and zero debt which will enable us to weather out this economic storm.

Now, I'd like to share some more details about our business. Although the current macroeconomic situation has had an impact on our short-term business, our long-term growth and profitability prospects remain very strong. In fact, last week after our annual Worldwide Sales Meeting, I came away feeling more bullish than ever.

We plan on sticking to our proven strategy of gaining market share, adding new customers and further penetrating our existing base of customers, as new products and platforms are launched.

The server and storage market, looking specifically at the Thurley Server Designs and Processors, we have concluded our design activity with all major OEM and Taiwanese OEM server manufacturers for these platforms. After further analysis of these results, we expect to continue to gain market share as these programs launch throughout the first half of this year.

Our fifth-generation products for the server market were well received, because all our customers wanted to increase their total system efficiency and add more memory on these new servers to support the latest multi-core processors. This new generation of products has allowed us to offer the highest efficiency and density solution in the industry.

As evidenced by IBM's earnings call, they are still seeing strong growth in their high-end P Series server business and they expect their X Series business to improve in '09 for their highest system efficiency and virtualization products, thereby providing lower energy costs for their customers as they upgrade their existing server farms.

We expect to continue to benefit from these growing market trends. Our server and storage business grew 15% in ’08, and while we expect our server and storage business to be down in Q1, growth will resume following a return to a more normalized economy with Intel’s launch of its early platform in this quarter and AMD's Shanghai launch in the second half of this year.

The Notebook market; our Notebook business grew from approximately $2.7 million in ’07 to $9 million in ’08 or about 238% as the Santa Rosa to Montevina platform transitions occurred and would have been even stronger had it not been for the start of the macro swing in Q4.

Our very strong growth in the Notebook business was a direct result of the acceptance we received on our second generation of notebook products that we introduced in early 2007. This new product family gave us another significant improvement in our cost performance metric and provided our customers increased battery life, component reduction, and space savings through our integrated power solutions.

On the Montevina platform, we’ve seen increase in silicon content as our products are now powering the mobile and graphics processors in addition to both the chipsets and memory. As a result of this additional content, new platforms and the addition of Dell as our fourth customer, we saw significant revenue growth.

In the second half ’08, we introduced our third generation of notebook products for the Calpella platform and see even stronger acceptance of these products from our customers. In the long-term, we are very excited about our growth opportunities in the notebook space as our integrated solution gains momentum in this large and fast growing market.

Intel is expected to delay the Calpella Notebook platform from the second half of CY ’09 until early 2010. Despite this delay, we expect to see notebook revenue growth in the second half of the year as the economy begins to recover. In Q1, we expect our Notebook business to be about flat as compared with Q4.

The Communication market; our Communication business continues to be very stable and has provided moderate growth with above average margins for this portion of our business. Our Communications business grew about 10% in '08, primarily as our Alcatel-Lucent programs started to ramp in production.

Designing activity in this market has been strong for us and it occurs over an 18 to 24-month period. The resulting revenue stream usually lasts for more than three year with stable quarter-to-quarter orders.

As discussed in the past, we participate primarily in the high-end metropolitan class of equipment at both Cisco and Juniper Networks, and we have moved into some higher volume enterprise class equipment. In Q4, this business actually grew slightly, however, we expect this segment of our business to be slightly down this quarter.

The graphics market; our Gen 5 products were also well accepted in the graphics market as the power delivery requirements continue to become more demanding for these high performance graphics card applications.

In '08, we had design wins with both AMD and NVIDIA on their enthusiast refresh cards and new performance cards. These performance wins were all single GPU designs with initial street prices ranging from about $299 to $499. Overall, we are quite pleased with our ability to capture these design wins on the next generation single GPU cards at both customers. These wins enable us to grow from approximately $7 million in '07 to $20.9 million or 201% growth in '08.

We have also had significant design activity on additional refresh cards expected to launch in the first half of '09 with both customers. However, we have little visibility on the design win and revenue opportunities for these programs due to the macroeconomic impacts on these businesses for both customers. As a result, we expect our graphics business to be down in Q1.

Guidance: Finally, I would like to talk about the business outlook for Q1 ’09. We believe that the current macroeconomic situation will have a continued impact on our business. However, it is difficult for us to tell exactly what that impact will be. As a result, we are taking a more conservative position on guidance.

We are now anticipating Q1 revenue to be in the range of $16 million to $19 million, with non-GAAP breakeven in the midpoint of the range. We expect our non-GAAP gross margins to be in the 56% range.

At this point, I’ll turn the call over to our CFO, Mike Burns for a close review of the financials.

Mike Burns

Thanks Jeff. As a result of the challenging economic environment, Volterra experienced a decrease in customer demand during the quarter. Volterra and companies across our supply chain are making the appropriate adjustments for the uncertain economic climate. In response to the rapid change in demand and the limited visibility, Volterra took several actions during the quarter to help our customers and our shareholders during these challenging times.

On the revenue side, we accommodated customer requests to reschedule shipments into the next quarter. Although this had the impact of reducing our fourth quarter revenue and increasing finished goods in our books at year end, it was appreciated by our customers, and it improved Volterra’s backlog position entering the first quarter.

The $21.9 million revenue shipped this quarter was diversified among four market segments; Server and Storage was 59%; Desktop and Workstation, primarily adding graphics cards, was 15%; Networking and Communications increased to 14%; and the Portable and Consumer segment, primarily notebook, was 12%.

This is the first time that each of our four market segments contributed more than 10% of quarterly sales. Despite the lower level of revenue in production, we sustained gross margins within our target range at 56.3%, helped somewhat by more favorable mix of product shift.

Operating expenses were down 9% sequentially, as we took prudent measures during the quarter to trim expenses until visibility improves and growth resumes. Specifically, we froze salaries, closed job postings, eliminated certain positions, implemented shutdown days and cut travel. Offsetting some of these expense reductions, we incurred additional legal expenses to protect and enforce our intellectual property.

Our year end headcount was 184. This is up 12% from last year, but at 6% less than budgeted at the beginning of the quarter. Some of these spending actions are reflected in the fourth quarter financials and some are only start to show in the first quarter. All of them were done, to maintain our competitive edge in our financial flexibility heading into 2009, without sacrificing any of our long-term opportunities.

GAAP income tax expense for the fourth quarter was minimal and on a non-GAAP basis the effective tax rate for the year was approximately 3%. The bottom line on the fourth quarter is that the company delivered GAAP net income of $1.1 million, with basic EPS of $0.05 and diluted EPS of $0.04, with non-GAAP net income of $2.2 million or 10.1% of sales. Non-GAAP diluted earnings per share for the quarter was $0.09.

Let’s move now to the balance sheet. We continue to be pleased with our liquidity and our cash reserves. The company ended the quarter with $57.4 million in cash and short-term investments, invested primarily in US treasuries. The company took advantage of its positive cash flow and ample cash reserves to repurchase almost a million shares or approximately 4% of shares outstanding for $7.5 million under its stock buyback program.

Other cash flow related items to note for this quarter, depreciation expense was $548,000 and the cash outlaid for capital expenditures was minimal at $174,000.

We are fortunate to have a lot of cash and no debt. But these are challenging times for companies to maintain the balance sheet metrics. Our accounts receivable balance decreased 4% sequentially, day sales outstanding was 51 days, up from 38 days in the prior quarter, but about on par with quarters prior to that.

Inventory on Volterra’s books at year end increased 23%, or $2.5 million sequentially ending at $13.7 million or 130 days. This is primarily a result of the $22 million in shipments being significantly less than the $26 million to $30 million originally forecast.

The inventory increase was in finished goods, largely a result of our accommodating customer requests to reschedule December shipments into the first quarter. Although inventory on Volterra’s books at year end was relatively high, total inventory across our supply chain was approximately flat.

Inventory, in line and our foundry partners, was down over 40% as we significantly decreased wafer starts in the middle of the quarter, in response to deteriorating demand.

Our stocking reps reduced their inventory during the quarter as well, as appropriate, to support the current level of customer demand. As we end the year towards reflecting on Volterra’s performance for the year 2008. In the challenging environment, the company grew revenues 39%, while continuing non-GAAP spending growth to 19% and headcount growth to 12%. We expand the gross margins over 700 basis points to 56.8% for the year, an extended non-GAAP net profit margin 1,100 basis points to 17.6%. Volterra crossed the $100 million revenue milestone, quadrupled earnings per share.

Let’s move now to the outlook for the first quarter of 2009. We expect to continue to generate positive cash flow from operations. With limited visibility into a quarter that’s normally seasonally down and given recent experience and ongoing economic uncertainty, we feel its prudent to plan for a first quarter sequential revenue decline of 13% to 27%, a revenue of $16 million to $19 million.

The company had significantly dialed down production orders in order to reduce inventory levels. With its flexible fabric model, currently expects to sustain quarterly non-GAAP gross margin in the approximately 56% range. We expect non-GAAP operating expense to be slightly down sequentially, as a result of ongoing spending controls and lower profit dependent accruals.

We expect interest income to remain low and we expect our tax expense to be low as well. Given the company’s ample cash reserves and historically low stock price levels, we are currently planning to continue stock buyback activity at this quarter, $5 million remains under the current authorization.

During this challenging economic period, if the company reaches the midpoint of its revenue range and achieve its plans through margins and spending, it would be at approximately breakeven level on a non-GAAP basis for the quarter.

It would be a testament to the company’s flexible high margin operating model, if the company could withstand the greater than 40% revenue drop from the third quarter of 2008 and still maintain quarterly non-GAAP profitability.

Although, it’s difficult to predict how 2009 will turn out, Volterra has several positive characteristics to its business that should help mitigate the economic situation. On revenue, we have a significant product cycle catalyst throughout the year in our largest revenue segment.

On gross margins; a relatively low overhead model should allow us to sustain gross margins in the lower end of our target range.

On spending; until revenue growth resumes, we have a plan in place to keep overall spending for the year comparable to 2008, while continuing to develop and protect our intellectual property.

By doing all these things, we’re comfortable that we’ll emerge from the economic downturn in an even stronger competitive and financial position.

We expect to next update our financial results and guidance at our conference call to discuss first quarter results to standardly schedule for Monday, April 20, 2009. We put out a press release to formally announce the schedule to call as we get closer to that date.

This concludes our prepared remarks and we would now like to turn the call over to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions).

And our first question is from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg - Thomas Weisel Partners

Yes. Could you just talk maybe a little bit more quantitatively about what you are expecting from turns this quarter? Are you expecting any turns at all, or, just help us understand a little bit how confident you feel about bookings this quarter?

Mike Burns

Yes, hi Tore, this is Mike. We’re pretty confident. We're expecting turns and we're getting turns. So, we set the midpoint to reset about the 25% turns range and we're getting turns this month. We're on track, even if it be at the bottom of that point right now. You know, the swing factor for us is, just be sure we don’t have major reschedules like we did last quarter. But I think turns are looking okay.

Tore Svanberg - Thomas Weisel Partners

Very good. And on your total inventories, can you just talk a little bit more about how you plan to manage that as we move that much as this quarter, but throughout the year any goals and targets on inventory base?

Mike Burns

Yeah, it seems we have a lot less than we have right now. What we're doing right now is we doubt things way down mid-quarter and the fourth quarter when it became clear that the orders were not there to support what we are building. So, we doubted way down for the second half of the quarter and really all the way down so far this quarter, but we are just getting to the point now to kind of get going again and I think it's going to be placing some more wafer starts for -- particularly for some of the Thurley orders.

So, we're going to try to manage it down over the course of the year. It’s not going to happen right away. But we want to get things back in line, in terms of days, as they were in the middle of 2008.

Tore Svanberg - Thomas Weisel Partners

Great. And then, just, finally on the notebooks side, or maybe, could you talk about the company’s opportunities, in netbooks and maybe from its content perspective how that changes your opportunity over all the notebook market? Thank you.

Mike Burns

What we really are continuing our focus on the thin, light, high performance segment. Again, you know, we haven’t deviated; the whole netbook market is businesses cost sensitive and much less performance sensitive. So, our planned story is, pretty much, to stick to our original plans, and we have a long ways to penetrate the thin, light, high performance, and so, we're going to continue down that path.

Tore Svanberg - Thomas Weisel Partners

Great, thank you very much.

Operator

Thank you. Our next question is from the line of Patrick Wang with Wedbush Morgan Securities. Please go ahead.

Patrick Wang - Wedbush Morgan Securities

Hey, guys, thanks for the questions. So, just first off, can you give us, I guess, anyway Jeff, if you could just give us some color, in terms of what you are seeing in orders out there. I mean, what we've seen out there with a lot of your peers and a lot of your customers. Maybe a little bit more descriptions in terms of what you are seeing; what you are feeling out there?

Jeff Staszak

Well, to be honest with you, it's encouraging, it's definitely down from our highs of Q2 and Q3 of last year, but October-November was pretty bleak, but December orders started to comeback in and have continued through January. So, I will tell you, I am feeling a lot better right now than I was feeling about two months ago.

Patrick Wang - Wedbush Morgan Securities

Okay. And I don’t know if, I might have missed this when you guys just talked about it earlier, but in terms of turns in Q4, and what’s your expectations for Q1, can you go over that again?

Mike Burns

Sure. So, Q4 we had turns about 15%, so less than 20% turn. So we did have some turns. What happened in Q4 was, we had reschedule that pretty much exactly offset the turns that we got, but we did get turns to reach the bottom of our original range in Q4, but the reschedule offset that. For Q1, to reach the mid-point, we'll need turns of about 25% plus any reschedules if we get any.

Patrick Wang - Wedbush Morgan Securities

Okay, and I mean, given that you guys should probably have a good idea of January. How is January tracking so far, just in terms of your planning?

Mike Burns

January is tracking well. The orders are coming in like Jeff referred to. So we're on track. So we're feeling pretty good right now.

Patrick Wang - Wedbush Morgan Securities

Got you. Okay. Also you guys had a nice gross margin here in the fourth quarter. Can you talk about some of the moving parts behind that?

Mike Burns

Sure. So, in the fourth quarter some of it was mix. So our networking and coms, which is our highest margin segment, was actually up in Q4. And our lowest margin segment, which is the graphics, was down quite a bit. So those were kind of the main things in play here. Heading into Q1, our productions going to be way down, so that's going to tend to mute it a little bit, but also graphics is down again. And so, some of that lower margin business is kind of stripped out of there so, that helps a little bit. So we're trying to keep it, our target range is 55 to 60, and we're targeting to keep it in the lower end of that range here going forward.

Patrick Wang - Wedbush Morgan Securities

Okay, got you. And then, just a quick question on Thurley here, I know that you guys talked about plans of getting market share here. Can you talk about where you think your market share on the Bensley platform is today and where it could potentially go with Thurley when it ramps?

Jeff Staszak

Yeah. Well in a normalized situation, we said that we ought to be able to grow it, we believe we're in the low 20s right now, and we ought to be able to grow it to the high 20s, low 30s when the Thurley's in full bore production. When that's actually going to happen is anybody's guess, but we have seen some reasonable order activity at the end of Q4 and into January here for Thurley-based products from us, which we will have shipments this quarter for Thurley. So, we expect Thurley to launch with some customers, some programs, and expect that launch to continue through the end of the first quarter and second quarter.

Patrick Wang - Wedbush Morgan Securities

Okay, and then in your prepared comments, you said that for Shanghai, that’s something you’re planning on the second half of this year. Did I hear that correct?

Jeff Staszak

Yes.

Patrick Wang - Wedbush Morgan Securities

Okay. And then, lastly, just a quick question on the notebook side I think. There has been a lot of commentary about weakness in the notebook supply chain out there. Are you guys seeing this and is this kind of baked into your expectations?

Jeff Staszak

Yeah, we did see some of that weakness. Consumer portable segment is where our notebook business is, and that was down in Q4 and probably about flat into Q1, and those numbers are not at the levels we expected several months ago. So we were definitely seeing some impact in that segment.

Patrick Wang - Wedbush Morgan Securities

Got you. Thanks so much, guys.

Jeff Staszak

Sure.

Operator

Thank you. Our next question is from the line of JoAnne Feeney with FTN. Please go ahead.

JoAnne Feeney - FTN

Yeah thanks guys. I was hoping for a little bit more clarification on the inventory and backlog situation. So, you remarked that some of your orders were pushed out from 4Q into 1Q. I assume, because of the continued uncertainty, you're really not sure that they really are still going to walk them in 1Q. So, has that been again pushed out to 2Q, is that why, if he wants you sequentially down, or is it that orders you had forecast for 1Q have already been pushed out to 2Q?

Jeff Staszak

No, we had several orders that were planned shipments for December of 2008 that were pushed into 2009 and those are predominantly pushed into Q1 ’09 and, as a matter, we’re pretty comfortable with those scheduled shipment dates. It’s just we have a lot of less backlog heading into Q1 than we did in the Q2. Q2; sorry Q4. Q4 we ended up shipping about the same amount of backlog we had at the beginning of the quarter. So, we’re just trying to be conservative here heading into Q1 given the backlog we have given the turns that we are getting in January, this kind of our best guess of where we are going end up for the quarter.

JoAnne Feeney - FTN

And how is the composition of your inventory at this point? There has been a mix shift narrowly in this quarter. Does the composition match up fairly well or is that why you still need to continue to run wafers at your foundries?

Mike Burns

Yes, it matches up pretty well. I mean, it’s a lot more finished goods than it has been. So, usually it weighs a little more to the whip side, this time it’s a lot more finished goods, but we did a pretty clean scrub up at year end to make sure all of it has a home here in the next couple of quarters. So, we dialed production way down and really cut our wafer starts in the middle of Q4 and has been in that status for the past couple of months, and I think, probably next month, we'll start placing some more orders again.

JoAnne Feeney - FTN

Okay. And then just, if I could clarify the Thurley Intel versus AMD based opportunities for you guys. So, Shanghai is already launched but its sounds like you guys have won some opportunities on new platforms that are coming out in the second half of this year. Is that the opportunity that didn’t exist when Shanghai first launched?

Jeff Staszak

No, its just the customers bring them out at different times. And the two customers that we have are coming out in second and third quarter with their programs. So, it really hasn’t changed from in the past.

JoAnne Feeney - FTN

Okay, so that’s really helpful. And then, finally, given the economic situation we are currently facing and the timing of products cycles and graphics, I'm wondering if there has been, from your perspective, a change in timing. Have they pushed out, perhaps refreshed, because there is simply a lack of demand, say at the high-end, or are they proceeding as normal but perhaps doing less of what they had planned?

Mike Burns

I think, I mean, all indications are, proceeding as planed, but from a volume standpoint, it's probably quite a bit down. I mean, you saw both of their earnings reports, and their businesses were down.

JoAnne Feeney - FTN

Okay. And Mike, one detail question on the balance sheet. There was a new entry there; other long-term liabilities. Can you tell us about this?

Mike Burns

Sure. That’s just a re-class, some of our international tax liabilities. It’s been in short-term and we looked at year end and made an assessment that liability may not be due for more than a year, so we re-classed it to long-term liabilities. So, that’s all that is.

JoAnne Feeney - FTN

Great, thanks guys.

Mike Burns

Okay.

Operator

Thank you. Our next question is from the line of Christopher Longiaru with Sidoti & Company. Please go ahead.

Christopher Longiaru - Sidoti & Company

Hi gentlemen, how are you?

Jeff Staszak

Hi, good.

Christopher Longiaru - Sidoti & Company

First, one housekeeping question. I didn’t catch the number of shares you repurchased in all of 2008 in dollar amount, if you could give me that real quick?

Mike Burns

The whole year, I think the dollar amount was $9.9 million, and the number of shares this quarter was just under a million and I don’t have that.

Christopher Longiaru - Sidoti & Company

So, I think it was about 284,000.

Mike Burns

Yes, that’s right. That’s right.

Christopher Longiaru - Sidoti & Company

Yes, all right. So, the other thing is, you talked about some of these design wins turning into more revenue and growth in the notebook segment, and also the server segment, in the second half of this year. Can you talk about how you think that starts to show up and how it progresses from there? I guess your best guess right now, even though we’re not sure how the economy is going to go.

Mike Burns

Yes, I think that’s the answer. We’re not sure how the economy goes. We would think, in the second half, things will start to pickup and we’ll see more of a normal trend with respect to notebook sales. But, like we indicated, we expect our notebook sales for this quarter to be flattish with last quarter, which was down from Q3.

Christopher Longiaru - Sidoti & Company

Right, okay. And also for your guidance, how much are you banking in on the graphic side at this point in your guidance?

Jeff Staszak

Not a lot.

Christopher Longiaru - Sidoti & Company

Not a lot. Okay. Thank you, guys.

Jeff Staszak

Sure.

Operator

Thank you. Our next question is from the line of Nicholas Aberle with Caris & Company. Please go ahead.

Nicholas Aberle - Caris & Company

Good afternoon, guys. How’s it going?

Jeff Staszak

Good.

Nicholas Aberle - Caris & Company

So, on notebooks, a lot to talk about, Calpella being pushed out, I mean, is that change, your, the characteristics of your growth in that segment this year?

Jeff Staszak

Yes, well, that along with the economic environment. Yes, we do expect to see some type of growth in the second half, but I think its still a little bit too early to tell, there is some refresh stuff that's been worked on, we will set to see how that materializes along with how the economy materializes.

Nicholas Aberle - Caris & Company

But at this point on, so some of the Montevina refresh stuff I will be just don't know, how you are going to shake out with market share in that refresh?

Mike Burns

I think that one looks okay. Just the incremental amount is not as large as what we are expecting the Calpella incremental amount to be.

Nicholas Aberle - Caris & Company

Got you, and any early handicap of what, that could be on Calpella, or is that design cycle still, that going to playing out right now?

Jeff Staszak

Yes, it's still playing out.

Nicholas Aberle - Caris & Company

Got you; and therefore graphics, I think it was Q1 of last year, where you guys got the green light from both the graphics guys on the design wins for refresh products there. Is that you guys planning to hear something from them this quarter, with respect to how you guys going to ramp that business or if that get the graphics stuff back on track?

Mike Burns

Yes, I would love to hear some from them, but with NVIDIA coming out with their revenue down 40% to 50% quarter-over-quarter and AMD is way down. I mean, your guess was as good as mine, I mean, like Mike said, we toned our graphics business quite a bit down an anticipation, that there wasn't going to be a lot there, but if it comes, if it turns out to be better, and we expect great, but we are expecting for the worst and hoping for the best or better.

Nicholas Aberle - Caris & Company

And then on to the Thurley platform, I mean, historically, you guys, once you start ramping there, it takes about four quarters to get the peak run rate, so we be modeling, maybe it take a little longer than that, maybe we don’t see peak run rate on Thurley until the middle of next year.

Jeff Staszak

I don’t know exactly when that will occur. If you saw the HP and the IBM information, I mean that, both talking about their portions in areas of their hardware business being down. So, my guess is, they probably got some inventory like everyone else to burn off before they can move into Thurley. So, I don’t know.

Nicholas Aberle - Caris & Company

That makes sense. There has been a better chatter about Cisco entering the market with the blade server product sometime this year. Are you guys doing any work with Cisco and do you expect them to make waves in the server space?

Mike Burns

I can’t comment on that. We can’t comment on our new products that come up before they are introduced, anyway.

Nicholas Aberle - Caris & Company

Got you. And lastly, any way that, can you guys quantify how much business was actually rescheduled from Q4 to Q1.

Jeff Staszak

Yes, it was about the difference that what we shipped and what our bottom of our original range was. That was about 4 million.

Nicholas Aberle - Caris & Company

Got you. Thanks guys.

Jeff Staszak

Sure.

Operator

Thank you. Our next question is from the line of Gus Richard with Piper Jaffray. Please go ahead.

Gus Richard - Piper Jaffray

Yes, thanks for taking my question. When I look at the composition revenue fourth quarter, it looks like notebooks were down and graphics was down even more, and you tend to be married up with the higher end of those two markets. Was that a function of just high-end demand and a mix shift to low end that caused the weakness relative to the overall semiconductor industry?

Mike Burns

I don't think we know.

Jeff Staszak

I don’t know.

Mike Burns

I think we know, it’s clearly a drop-off in demand for our products to go into those high-end products. We don’t have a lot of visibility on the low-end products.

Gus Richard - Piper Jaffray

All right. Let me try another one. What’s your thoughts on the growth or how servers will play out this year? Do you think the market overall is flat, up or down?

Jeff Staszak

Well, I don’t know the overall market, I know for the business that we participate in, I think, in the second half of the year, with more traction from Thurley production, it should be up for us. But, overall across the board, I don’t know.

Gus Richard - Piper Jaffray

Okay. So your expectation is that your server revenue will be up year-on-year?

Jeff Staszak

No, I didn’t say that. What I said was I expected our, that from a Thurley standpoint, we'd expect to see some revenue growth from where our current levels are at in the second half of the year as Thurley launches.

Gus Richard - Piper Jaffray

Okay, got it, got it, all right. And Thurley still clock for the first quarter, correct?

Jeff Staszak

Yes.

Gus Richard - Piper Jaffray

Okay. And then, just something, probably will be easier to answer. Is it fair that to model your R&D expenses is flat year-on-year?

Jeff Staszak

Yeah, we're going to try to do this year, it has been about the same as we did last year, but get out more new products.

Gus Richard - Piper Jaffray

Okay. And then, I should assume, SG&A scales of revenue, more or less?

Jeff Staszak

Yeah, I see they will move around little more with revenue than R&D. That's a good way to look at it. We're going to try to continue that line item this year as well.

Gus Richard - Piper Jaffray

Okay. So, assuming if revenues were down 10%, is that a fair estimate for where your SG&A would go?

Jeff Staszak

No. Well, probably, I don’t think we can get down 10% year-on-year in SG&A. We did add some headcount in '08 and so that would be difficult to do, and we are expecting to have some additional legal expenses in 2009 that we didn't have in 2008. So, down 10% SG&A would be difficult.

Gus Richard - Piper Jaffray

Okay. So yeah, flat to down 5%.

Jeff Staszak

Kind of the right ballpark. Yeah, we’re going to try to keep it flat.

Gus Richard - Piper Jaffray

Okay, got it, got it, all right, very good. Thanks for taking my question.

Jeff Staszak

Sure.

Operator

(Operator Instructions).

And our next question is from the line of Rick Schafer with Oppenheimer. Please go ahead.

Unidentified Analyst

Hey, guys, this is Colin on Rick’s behalf.

Mike Burns

Hi, Colin.

Unidentified Analyst

Just a quick question on a graphics business. Could you give us some color as to the mix in the quarter from the AMD and NVIDIA?

Mike Burns

We don’t break out that specifically. But it will happen as over the course of the last several quarters. Its going to bounce back and forth as to, it’s a pretty equal balance there and in some quarters, it’s going to come in a little bit more than the other, but it has been pretty balanced in the last three or four quarters.

Unidentified Analyst

Okay, great. And some color on where you guys are, beyond the high end on the graphic side, or be it demand, doing what it's doing and what sort of traction you've seen outside the high-end on the graphic side of things?

Mike Burns

What we’re pursuing, you know, we have stated in the past, we are going after additional performance-based platforms and we’re continuing to do that. We’re not planning on losing any of the current platforms that we have. And we are planning on expanding in some of the lower end platforms that we are not participating in now.

Unidentified Analyst

Great. And one last one for me. With Dell, in the quarter, any color on how that ramps quarter-to-quarter? How that ramp is coming along?

Mike Burns

For Dell, right now, our volume is pretty limited, because we’re just in one program, as our first program with them. So, we don’t have a good view or kind of a broad view of the Dell number of programs, if that’s what you are asking.

Unidentified Analyst

Okay, fair enough. Thanks very much, guys.

Mike Burns

Sure

Operator

Thank you and at this time we have no additional questions. Actually we just had a follow-up question pop in from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg - Thomas Weisel Partners

Yes, just maybe, a follow-up question to the last question on Dell. I know you have only platform right now, but should we expect some further penetration maybe for the second half of the year?

Jeff Staszak

Yes.

Tore Svanberg - Thomas Weisel Partners

And is it still high end, or any color on, maybe, potentially more platforms than high end?

Jeff Staszak

No, it’s a thin, light, high performance segment, additional programs.

Tore Svanberg - Thomas Weisel Partners

Great, thank you.

Operator

Thank you, we have no further questions at this time. I would like to turn it back to management for any closing remarks.

Mike Burns

Great, thanks. I would thank all of you for your questions and interest in Volterra. Each quarter Volterra management participates in a number of investor relations events. This quarter we will be marketing with Wedbush Securities in San Francisco on February 3rd, and participating in Thomas Wiesel Partners Tech conference on the 9th. Later that month we will be attending the Oppenheimer Semiconductor conference in Vail, Colorado on the 19th and 20th, and in March, we will be on the east coast for a day of marketing in Boston on the 10th and then in New York for the Wedbush conference on the 11th.

Additionally, we will continue our virtual visit program, which is a bi-monthly conference call for investors new to Volterra. Please contact Heidi Flannery, Investor Relations, at 510-743-1718, if you would like to participate in any of these events. Webcast of today’s call will be available on the company’s website until Monday, February 23, 2009. Thanks for joining us today.

Operator

Thank you, sir. Ladies and gentlemen, if you would like to listen to the replay of today’s conference please dial 1-800-405-2236 or 303-590-3000 you can access the conference with the number 11124844 followed by '#'. That does conclude our conference for today. Thank you very much for your participation, you may now disconnect.

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Source: Volterra Semiconductor Corporation Q4 2008 Earnings Call Transcript
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