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Executives

Ray Zinn – Chairman, President and CEO

Ray Wallin – CFO and VP of Finance

David Schie – VP of Analog Engineering and R&D

Mark Lunsford – VP of Worldwide Sales

Analysts

Tore Svanberg – Thomas Weisel Partners

Doug Freedman – Broadpoint AmTech

Scott Hurlman – Robert W. Baird

Micrel, Incorporated (MCRL) Q1 2009 Earnings Call Transcript April 23, 2009 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Micrel Incorporated 2009 first quarter results conference call. For today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

This conference call is being recorded today, Thursday, April 23, 2009.

I would now like to turn the conference over to Ray Zinn, President and CEO of Micrel. Please go ahead, sir.

Ray Zinn

Well, thank you and thanks for joining us for our Q1 2009 conference call. With me today is Ray Wallin, our CFO and Vice President of Finance; also David Schie, the Vice President of the Analog business unit; and Mark Lunsford, our Vice President of Sales; we will be hearing and those two after the prepared remarks from Ray Wallin.

So, at this time, I would like to turn the time over to Ray Wallin for the prepared remarks. Go ahead, Ray.

Ray Wallin

Thanks, Ray. In conjunction with this conference call, a number of supplemental charts will be made available on Micrel's website during the following prepared remarks. To access these charts, go to www.micrel.com and click on the link to the first quarter 2009 conference call slides.

We will begin today's call with the legal disclaimers. All material contained in the webcast is the sole property and copyright of Micrel, with all rights reserved.

Certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability and future customer demand. Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements.

Some of the factors that could affect the company results have been set forth in our press release dated April 23, 2009, and also described in detail in the company's SEC filings, included but not limited to our annual report on Form 10-K for the year ended December 31, 2008. Listeners who do not have a copy of our first quarter earnings press release may view the press release on the company's website at www.micrel.com.

We will review the financial results for the first quarter ending March 31, 2009 and then discuss our outlook for the second quarter of 2009. Our prepared remarks will then be followed by a question-and-answer session with the financial community.

Now, let us begin with Micrel's first quarter financial results. The worldwide macroeconomic recession continued to impact demand in the first quarter of 2009 and resulted in our customers maintaining lean inventory levels. Despite the difficult environment, our financial performance was solid and results were within our expected guidance ranges for the key metrics of sales and net income. We were pleased by the first quarter bookings, which rebounded significantly compared to the fourth quarter and we achieved a quarterly book to bill ratio above 1 for both OEM and distribution. We view this as good news as our OEM bookings were stronger than our POS distribution bookings and we do not attribute to distribution bookings as mainly restocking.

In Asia, we experienced an increase in bookings in the quarter that was related to the China 3G network build-outs. Bookings in Europe were down from the prior quarter, as the channel continued to adjust inventories and demand was weaker. North America orders were up for the quarter. Globally, we saw expansion in our market share in digital television and automotives. Conversely, we did experience weakness in the handset market in the first quarter, primarily due to a mix shift from high end to low end handsets. However, Q2 bookings have substantially improved, and we see this market recovering.

In addition to the solid financial performance, we continue to make progress in enhancing shareholder value with a stock buyback programme and we also maintained our quarterly $0.035 per share dividend.

Micrel's first quarter revenues were $47.0 million, compared to $55.2 million in the fourth quarter of 2008, and $66.1 million in the year-ago period. First quarter sales were impacted by the continued reduction in overall demand from customers in nearly all geographies. Standard product sales accounted for 97% of total first quarter revenues, with custom and foundry sales comprising 3%.

The first quarter sales mix by product area was analog, 70%; high-bandwidth, 15%; Ethernet, 14%; and foundry, 1%. OEM turns filled for the quarter was approximately 55% compared to 37% in the fourth quarter of 2008 and 59% in the year-ago quarter. Micrel's sales remain widely diversified with our top ten direct customers accounting for 23% of sales in the most recent quarter compared to 22% of fourth quarter 2008 sales.

Our first quarter revenue by end market was as follows: wireline communications, 30%, compared to 24% in the fourth quarter; wireless handsets, 16%, compared to 19% in the prior quarter; computing, 13% compared to 18% in the fourth quarter; industrial, 37%, compared to 37% in the fourth quarter; military and other, 4%, compared to 2% in the fourth quarter.

Sales by region were as follows

North America, 27%, compared to 25% last quarter; Asia, 59%, which was the same as the fourth quarter; and Europe, 14%, compared to 16% in the fourth quarter.

First quarter gross margin was 50.3% compared to 52.0% in the prior quarter. The decrease in gross margin was primarily a result of underutilization of fab capacity. First quarter wafer fab utilization was down 9 percentage points, compared to the fourth quarter of 2008 as Micrel continued to control its inventory levels.

Research and development spending increased slightly quarter to quarter to $12.5 million or 26.6% of first quarter sales, from $12.2 million or 22.2% of fourth quarter sales. The first quarter was a very productive and cost-efficient quarter with respect to new product development for Micrel.

In the analog product lines, we released a number of key products, including both a 600 KHz and 1 MHz synchronous buck controller for the set top box, routers, networking equipment, and server markets. We also rolled out a wide input range synchronous controller for high input networking equipment such as routers, servers, and industrial applications. We released two general purpose power distribution switches, which include Micrel's patented KickStart functionality for digital TVs, set top boxes, and other high volume consumer applications. Finally, we released a high efficiency LED driver for consumer applications.

In our high bandwidth product line, we released a combined burst mode laser driver and post amp transceiver chip that will reduce cost and simplify designs for fibre to the home GPON ONU optical modules. We also expanded our ultra low power CML clock distribution product family with the addition of two additional load jitter fan-out buffers.

The Ethernet Product group introduced a family of highly integrated three port switch on chip ICs, operating the industry's smallest footprint, featuring low power consumption, advanced power management, and sophisticated quality of service features. They are designed to enable a new generation of switch systems for home entertainment, automotive, and industrial applications.

First quarter SG&A spending was $8.9 million, down from $9.6 million in the fourth quarter. First quarter operating income was $2.3 million, or 4.8% of sales. This compares to operating income of $5.8 million or 10.4% of sales in the fourth quarter and $11.6 million or 17.6% of sales in the year-ago period.

Other income; net was $0.3 million, down from $0.5 million in the fourth quarter, due to lower interest income. The effective tax rate in the quarter was 41%. The first quarter includes a $240,000 income tax provision as a result of changes in California tax laws.

First quarter GAAP net income was $1.5 million or $0.02 per basic and diluted share. This compares with fourth quarter 2008 GAAP net income of $4.9 million or $0.07 per diluted and basic share and GAAP net income of $8.3 million or $0.12 per basic and diluted share in the year-ago period.

Because Micrel was very scrupulous in controlling those expenses, its balance sheet remains strong. Cash and short-term investments were $58.2 million at the end of March, a decrease of $16 million from the end of December 2008. During the first quarter, the company was neutral in cash flow from operations. The company repurchased approximately 1.95 million shares of Micrel common stock for $12.4 million.

Capital expenditures totaled $1.2 million in the first quarter, compared to $2 million in the previous quarter and $3.4 million in the year-ago period.

During the first quarter, the company also paid a dividend of $2.3 million, or $0.035 per share. Accounts receivable balances increased slightly on a sequential basis by $0.8 million in the first quarter to $21.5 million. Day sales outstanding were 41 days at the end of the first quarter compared to 34 days at the end of the fourth quarter, an increase of six days due to the skewing of shipments to the back half of the quarter.

Net inventory decreased by $1.5 million during the first quarter to $35.9 million, reflecting solid execution in controlling inventories. First quarter days of inventory increased to 138 days from 130 days in the fourth quarter, due primarily to lower sales in the quarter. Inventories in the sell-through distribution channel represent approximately 13 weeks of inventory, about the same as the fourth quarter.

First quarter depreciation and amortization, excluding the amortization of stock-based compensation was $4.4 million, down slightly from $4.7 million from the prior quarter.

As we indicated in the press release, the Company’s Board of Directors has authorized a quarterly dividend of $0.035 per share to be paid on May 27, 2009 to shareholders of record as of May 13, 2009.

Now, turning the outlook for Micrel and the rest of the semiconductor industry. Let's look at slide number one, which depicts Micrel's semiconductor barometer. As we mentioned in our fourth quarter conference call, we believe that the bottom would occur in the first quarter of 2009, with bookings growth resuming no earlier than February and no later than May. As it turned out, we did see bookings resuming in earnest in the latter end of February, and bookings strengthened in March, but the book to bill in March exceeding the February level. This is encouraging, when one considers that the industry is still dealing with extremely short lead times. Some of our major OEM customers have reduced their lead times to less than four weeks.

The strongest areas of growth came out of China, primarily due to the stimulus package generated by the Chinese government, which supports wireline infrastructure. We are yet to see the impact of the other governments' global stimulus packages, so the effect going forward is still unclear. This makes it more difficult to predict what the effects will be on the semiconductor industry in the second half of 2009. Based on the actions thus far in these countries, other than China, we do not anticipate much stimulus for the semiconductor industry for the second half.

Therefore, we are predicting that growth going forward for the balance of 2009 will be more seasonally typical. This will result in second quarter revenue growth slightly up compared to the first quarter, with the third quarter being slightly stronger, and then flat to down in the fourth quarter of 2009. In our view, we believe the semiconductor industry is (inaudible) in the first quarter, and while we do not see a robust recovery, we do see modest growth going forward.

Now, let us turn to slide number two, which is our semiconductor industry cycle chart. Over the past six months, the three month average unit volumes dropped 40%, eclipsing a unit drop of 19% experienced in the dotcom downturn during the same period in 2001-2002, often referred to as the perfect storm. If that period was referred to as the perfect storm, this period has to be referred to as the perfect disaster, since it doubles what occurred during the perfect storm. Our belief is that unit volumes will increase in line with the unit volume experienced in 2002, or approximately 5% per month. Based on the foregoing conclusion, we anticipate that the overall industry decline in 2009 will be a minus 15%.

Now, turning to the outlook for Micrel for the second quarter of 2009, we are excited about prospects for our new products, which are gaining wide acceptance by our customers. This results in continued strength in our design wins, with penetration into new markets. For example, Micrel was just awarded a large opportunity with a 3G base station in China with its patented HEL [ph] product. The HEL is near and dear to our President's heart, since this is his patent. Our new gigabit five is receiving wide acceptance with numerous design win opportunities. This new gigabit five is very easy to use, very low powered, with a small package size. While the overall world economic picture still remains clouded and gloomy, we at Micrel are optimistic and enthusiastic with respect to growth opportunities, even under these difficult circumstances.

So to that end, Micrel estimates that revenues will increase between plus 1% to 6% on a sequential basis. Micrel would therefore require turns in a range of 53% to hit the midpoint of the guidance, less than that required for Q1. Gross profit margin is expected to be in the 50% range, with inventories increasing as the company continues to experience extremely short lead times and low visibility. We anticipate total operating expenses will be approximately flat on a sequential basis in the second quarter.

Other income is projected to be about $0.2 million and diluted shares outstanding are estimated to be 65.4 million shares for the second quarter. We estimate that FAS 123R will result in approximately $0.7 million of pre-tax stock compensation expense in the second quarter. We anticipate the 2009 effective tax rate will be approximately 35% on a GAAP basis. Based on these aforementioned projections, we believe second quarter 2009 GAAP diluted earnings per share will be approximately $0.02 to $0.03 per share.

In conclusion, I would like to summarize some of the key financial and operational highlights from this past quarter.

First, Micrel's scrupulous control of its expenses allowed the company to be profitable in the first quarter, despite a 29% year over year drop in revenue. Second, even in the face of a really challenging economic environment, our operational results were solid and within expectations. Third, bookings was on a sequential quarterly basis and are indicative that we may have reached the bottom of this current economic cycle. Fourth, we continue to be pleased with our design win momentum, which remains strong even in the face of all this economic gloom. We're encouraged by both the magnitude and the adoption rate of our new products.

And fifth, we continue to sharply focus on driving shareholder value as evidenced where we continued to pay a common stock dividend and repurchase shares. Sixth, Micrel's ability to predict industry economics accurately allows it to better manage its business. Finally, the company remains very healthy and we believe that we are poised to grow when the economic climate stabilizes.

So thank you very much, but before going to our question and answer session, I would like to turn it over to just for a few minutes to David Schie, David is the VP of our Analog Group and to Mark Lunsford, the VP of Sales for the company for some additional comments on the quarter.

David Schie

Thank you, Ray. Hello, everyone. I thought that would bring you up to date on some of the product families we have talked about in the past, which you may be interested in.

We are doing very well with the consumer LDOs we have told you about. For example, one member of the family has gone from 19.3 million units to 30 million units just from Q1 to Q2. So we're seeing a lot of design wins triumph, a lot of popularity there.

The high the BT family, which we have talked a lot about is getting some great acceptance and we are penetrating new markets like base stations and servers in sockets we just couldn't play in before. So we're excited about that line and the power density and benefits it brings to customers.

Our new controller family has released. This is letting us address green power; there is a lot of regulatory requirements at the moment that require a low power consumption during various modes of operation. We can address that and the new controller family addresses numerous voltage notes such as 12 volts and 40 volts that we couldn't address before. So it is making a great family expansion story.

Additionally in consumer, we are seeing a lot of TV traction, especially in tuners, traditional switches such as USB and emerging LED lighting products. In terms of technology, we spent a lot of effort over the last couple of years on path element optimization. Those programs are bearing fruit, where we have new technologies, there is 5 volt, 12 volt, 28 volt, and 40 volt, which are allowing us to produce new products that expand our span with existing customers. In terms of our sort and test, we have been doing a lot of work to reduce costs, including new post package spring technology, which lets us eliminate sort on various products and also lets us more quickly respond to customer options such as voltage or features, which previously required some fab spending.

We also worked hard on layer count optimization reducing our actual cost. Overall, in terms of our focus in the analog business unit, cost reduction is a big thing. We are working on design optimization, silicon optimization, new cast methods as I mentioned, new packages as well as programs to do the migration on existing products to improve their margins.

We continue to use our patented technology for controllers and regulators, which is resulting in reductions verses our competitors, as well as the green power efficiency, so that is a big focus area and SAM expansion is one of the big stories. We have a lot of brave relationships with existing customers for bringing out new voltage and current options and new features to allow the existing customer base to use more and more of our products and that is going very well.

So with that, I will turn over to Mark Lunsford, thank you.

Mark Lunsford

This is Mark. Most of all, I wouldn't just like to add that the base of accounts for we have preferred gender status continues to grow and you do sockets, you do products, you do open new sockets with that account base that allow us to grow in those accounts and kind of bigger player for those customers. And ultimately, despite the economic downturn, the design win activity has been substantial in the last couple of quarters. We are still seeing a lot of activity as customers are pulling in new projects and trying to get ahead of the downturn so they can offer something new on the shelf sooner. So we're still seeing a lot of activity from the design win perspective. Also, I will add that our military focus is being re-emphasized right now, we are putting a lot more effort there and with the introduction of the Ethernet for the automotive business, we are structuring a little bit now to start getting more access to the automotive industry as well. So, from a design win perspective and from an accounting perspective, there is still a lot of activity and as I said, we are penetrating deeper into the accounts that we already have preferred status as we release new products.

Ray Zinn

Okay, now we would like to turn the time over to you for the Q&A and again, thanks Mark and David for your comments.

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes. Thank you and congratulations on the results. A few questions, first of all, Ray could you comment a little bit more about booking momentum so far this quarter, seems like March was a strong month for you, but just trying to get a sense of how the momentum has continued into the June quarter?

Ray Zinn

So I will let Mark answer that one, go ahead Mark.

Mark Lunsford

Our bookings continued very strong Tore. We are still seeing good activity on all of the channels. As a matter of fact, we are ahead of what I would say is my plan for this quarter right now. So I think some of that is due to some of the lead times availability, but I think really people – the business is still there.

Ray Zinn

In fact, the turns are much higher than we need right now for – to hit our number of midpoint, that you know, the 1 to 6. So turns are a good indication of the strength of the momentum of these bookings.

Tore Svanberg – Thomas Weisel Partners

Very good, and I think Ray Wallin, I think you mentioned that, inventories would be up sequentially, and I'm just wondering, does that mean utilization will be up next quarter, and if so, why shouldn't we expect the gross margins to start to increasing already in Q2?

Ray Wallin

So our utilization will be up slightly in Q2. We have given our lead time situation here, and some say we are producing kind of a difference, some customers were producing some inventory, (inaudible) they had some long-term demand on, and some that were (inaudible) inventories that got quite a demand, and we expected that we would be growing our inventory slightly, we would have a little bit higher utilization. On the other side of the coin, we have changed slightly the way we look at and how we account for our utilization in the FASB, and there is FASB called 151, we had to account for higher facility cost, and so in the quarter we made some adjustments relative to that, and we expect that to continue also in Q2, where we are operating still below where we would see our normal operating range for the plan.

Tore Svanberg – Thomas Weisel Partners

Great. And I know that some of the companies talked last night about 3G in China maybe potentially slowing down later on in the year. It might be a company specification, but just what is your take on that and how has that business trended for you into the June quarter?

Ray Zinn

Mark, answer that one.

Mark Lunsford

Yes, we saw real strong demand as the 3G came online in Q1. We think that will continue pretty well through Q2. We're not sure how the phase over to the second phase of that build out will happen. We understand that there might be a slight lull in the – through the summer months, but it should be back up in the latter part of the year.

Ray Zinn

So there is some concern about the second half on that very issue you mentioned Tore, but going back to the comment about the gross margin, remember we mentioned in the prepared remarks that bookings have increased in the handset business, which typically carries a lot of margins. So we just had it in the 50% range, until we can see how the inventory and the idle capacity and all that affects overall gross margin.

Tore Svanberg – Thomas Weisel Partners

(inaudible) and last question for David. David, you mentioned a lot of new design wins, how is Micrel winning, if you can maybe give us one or two sort of main aspects of your products right now, which is causing an increase in wins at this point?

David Schie

Sure. So, the (inaudible) to the DC family is a good example. So the way we are winning is really getting a power density that beats a lot of the competitors. So instead of having to put external MOSFETs and try to create a solution, we provide an integrated MOSFET solution that is easy for customers to use that drops into a smaller area from what a lot of our competitors do. That'll be one example. In terms of the controllers that we are introducing, we have control algorithms that require less output capacitance for example, and that helps customers to try them by cost. Additionally, new LED technologies are allowing some of our LED drivers to replace some of the charge pump solutions that used to be required. So, there is a combination of industry trends, another trend I mentioned is the green power. Regulators are requiring equipment like set-top boxes and printers and other equipment, and it is forecasting to require more equipment to have a green power mode when it is not used. A lot of the existing technologies are products for DC to DC converters don't have a green power mode. So, they come to loss when the redesign occurs. So those are just a few examples that are helping drive our design wins.

Ray Zinn

(inaudible) as was mentioned in the prepared remarks. We did a get significant design win with the path that I came up with called the (inaudible), and that is really – had taken off really pretty well Tore. So it is a combination I think of what David said plus just the fact that we were focusing on additional markets that helped the company grow outside of these traditional markets.

Ray Wallin

Actually, (inaudible), I will go a step further. One of the things that is happening out there as there are fewer and fewer true power supply designers that these major networking, and set-top box and other type of companies. So products like LDO [ph], make it much, much easier for designers to utilize products that have higher efficiencies. So where they use LDOs were the ones really efficient, and didn’t go to DC to DC converters because of worries about EMI [ph] or worries about design complexity. They can just drop a solution like that in without having to think about it, and it is at the level of digital designers can deal with. And so, several of our new product families, include internal compensation, internal MOSFETs, combined LDO and DC to DC capabilities like the LDO -- so by making it easier for customers to who are helping design it more quickly.

Tore Svanberg – Thomas Weisel Partners

Great, thanks. And congratulations on the quarter. Thank you.

Ray Zinn

Thanks, Tore.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Doug Freedman of Broadpoint AmTech. Please go ahead.

Doug Freedman – Broadpoint AmTech

Great. Thanks guys for taking my questions. You know, focusing a little bit more on sort of the gross margins on what we can look forward to, before I can do that though can you comment if there were any inventory write-downs in the present quarter?

Ray Zinn

Not outside of the normal that we normally see as we close the quarter.

Doug Freedman – Broadpoint AmTech

All right, and then going forward, how should we think about the recovery back to your gross margin range, which has historically been 50% or 57% to 59%. You know, is that – you used to provide a chart for revenue versus gross margins. Can you give us an idea of what that might look like if you were to provide that again?

Ray Zinn

It would look like what you saw before Doug, it is exactly the same chart. So you can just go back to that if you have that chart. We have it here of course. But, remember we kind of indicated that for every million dollars you lose 0.25% in gross margins, so you can scale it. You just go back to that chart you have of ours, and or you just do the math. If you look at where we are at 70 million, and now where we're at 47 million, you can see there is a 13 million of revenue drop times 0.25, and I guess hard to get there.

Doug Freedman – Broadpoint AmTech

Terrific, I will refer to the chart that you provided in the past. I just wanted to see if there was anything new structurally that was going on in the cost structure in the (inaudible). Similar question sort of on the OpEx point, is there anything, you know, structurally I know you guys have been, you know, streamlining the organization for lack of a better word. Are there things that are going on now that are temporary actions that we should think about getting on round and out, so –

Ray Zinn

Well, the temporary action of course is time off and something like that that we are using to control expenses. So, you know, rather than having layoffs, you know, we're doing work hour reduction or week reductions. You know, but back to the gross margin, I don’t remember – I don’t know if you remember raised comments, Wallin’s comments regarding the FAS 155 changes on our capacity, and that is a pretty interesting change. So rather than to modulate the inventory, we actually have to take an inventory, I mean, an idle capacity or write down. So, inventories will remain pretty consistent. So, you won’t see the fluctuation. Otherwise, if you build inventory, it is not going to help you or if you lower inventory, it is not going to help you. So, you know, you can, you know, you're just going to write off any idle capacity that way rather than build it either into inventory or take it out of inventory.

Doug Freedman – Broadpoint AmTech

Understood.

Ray Zinn

Okay, so any other OpEx questions you want answer Ray.

Ray Wallin

No, I think you covered it Ray. I think the only real unusual item in the financial results sector, we are taking time off when the quarter happened, and as the recovery continues in the business, we should see that coming off. So that would be somewhat of an increase to our operating expenses on that basis.

Doug Freedman – Broadpoint AmTech

All right. And can you talk a little bit about what you are seeing in the market place from the standpoint of ASPs. I know, you know on our last cycle recovery we saw we have impact ASPs, which have elongated the recovery process as your chart clearly shows. Can you talk about what you are expecting now and what you are seeing presently in the market place on the ASP curve?

Ray Zinn

I am going to let Mark talk a little bit about that, but first before I do, you go back to that slide number 2, which actually shows our ASP cycle forecast, and you’ll see it pretty well emulates what we saw in the past cycles. So we do see, you know, and the barometer also shows what we think price is going to do so. And (inaudible), we think that’s going to be relatively flat on (inaudible) or on our ASP pricing impact.

Ray Wallin

That’s what we are seeing. It’s not any worse pricing pressure than we normally see. There are a guys out there that tie off their – they maybe doing some crazy things, but it is not an across the board issue.

Doug Freedman – Broadpoint AmTech

All right. It’s perfect. Thank you.

Ray Zinn

You’re welcome.

Operator

Thank you. Our next question comes from the line of Scott Hurlman with Robert W. Baird. Please go ahead.

Scott Hurlman – Robert W. Baird

Hi. This is Scott calling in for Christen [ph]. Thanks for taking my questions. I was wondering if you could walk through your assumptions for 2Q for the growth by end markets. If we can get a better sense of, you know, where the growth is coming from and where, what markets might be a little bit weak.

Ray Zinn

Well industrial will probably be, say you have to go back to the numbers for me Ray on this one. I don’t remember the exact numbers, but just now maybe down a little bit and that should be up some, and communications will be basically about the same

Scott Hurlman – Robert W. Baird

And on the handset side of things, I mean, are you seeing overall handset bookings increasing across the board, or is there a mix shift, where you said high end was weak. Is that coming back, or you know, how are you thinking about that for 2Q?

Ray Zinn

I think we’ll see both. I think we’ll see the low-end handsets continue to grow, and I think we’ll see the high ends coming back.

Scott Hurlman – Robert W. Baird

At the same rate? I guess there is an across-the-board increase or there is the high-end comes back more because there is actually a mix shift?

Ray Zinn

I don’t think – I think the high end will come back gently, and I think the low-end will continue to grow for us.

Scott Hurlman – Robert W. Baird

Okay. And then, one last question on the communication side. You know, what are your thoughts on, you know, there is obviously the big strength from the China 3G, but Broadcom said that IT spending in general has been pretty weak from an enterprise side. What are you guys seeing out there from that side? Are you seeing the same dynamic, and you know is that kind of causing any kind of mix shift within that market, or do you have kind of similar gross margins for the wire line side versus the kind of enterprise side?

Ray Zinn

There is a mix shift occurring. Our margins are similar between those two sides. We are seeing the enterprise a little bit slower for sure.

Scott Hurlman – Robert W. Baird

And that continues in the 2Q.

Ray Zinn

Yes.

Scott Hurlman – Robert W. Baird

Okay. Thank you.

Operator

Thank you. (Operator instructions) I think there are no further questions. I'll turn the call back over to you for closing comments.

Ray Zinn

Well, thank you. I appreciate you joining us on our call today. I know there is lot of calls happening same time as ours, so I know a lot of you are jumping on and off of these various calls to pick them up. So anyway, thanks for joining us and I look forward to being with you in July. Thank you and have a wonderful day.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s teleconference. If you will like to listen to a replay of today’s conference, please dial into 303-590-3000 or 1-800-405-2236 and enter the access code of 11-13-0422 followed by the pound sign. Thank you again for your participation. And at this time, you may disconnect.

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