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Integrated Device Technology, Inc. (NASDAQ:IDTI)

F4Q09 (Qtr End 03/31/09) Earnings Call Transcript

April 30, 2009 4:30 pm ET

Executives

Rick Crowley – CFO

Ted Tewksbury – President and CEO

Analysts

Glen Yeung – Citi

Tim Luke – Barclays Capital

Sukhi Nagesh – Deutsche Bank

Sandy Harrison – Signal Hill

John Barton – Cowen

JoAnne Feeney – FTN Equity

Operator

Good afternoon and welcome to the Integrated Device Technology Incorporated Fiscal Fourth Quarter and Year End 2009 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. (Operator instructions) And as a reminder, this conference is being recorded.

With that said, here with opening remarks is Integrated Device Technology's Chief Financial Officer, Rick Crowley. Please go ahead, sir.

Rick Crowley

Thank you, Karen, and welcome to our fiscal fourth quarter and year end 2009 earnings conference call. I am Rick Crowley, IDT's Chief Financial Officer. Presenting with me on the call today is Ted Tewksbury, our President and Chief Executive Officer. Also in attendance on the call are Bran White, our Vice President of Finance, Chad Taggard, our Vice President of Marketing, and Mike Knapp, our Manager of Investor Relations. We will all be available during the Q&A portion of this call.

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

In addition, pursuant to Regulation G, any non GAAP financial measures referenced during today's conference call can be found in a press release posted on our website at www.idt.com, including a complete reconciliation to the most directly comparable GAAP measures. Please note, we have made selected financial information available in webcast slides which can be found on the investor relations section of our website.

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

Ted Tewksbury

Thanks Rick. We finished our six fiscal fourth quarter of 2009 with $107.4 million in revenue which was in line with our revised expectations. The sequential decline resulted in a combination of weak end demand, excess channel inventory, and normal seasonality in our computing and consumer end markets. However, exiting the quarter, we saw significant improvement in our customers' order book and the strength in bookings has continued into April. Rick will cover this in greater detail in just a moment.

First of all, let me walk you through some of the trends we experienced in each of our end markets during Q4. Consumer related revenue lagged sales in other in markets as anticipated in our original guidance provided in January. Weaker than usual demand related to macro economic factors exacerbated typical seasonal weakness while sales into gaming platforms were slightly better than planned. The result was a sequential decline in consumer related revenue of approximately 50%.

The consumer end market represented 14% of total revenue in Q4 down from 16% in the prior quarter. In computing, sales were lower than originally anticipated as we highlighted in our revised guidance in late March. Reductions in PC related channel inventory had a greater than expected impact on our shipments in the quarter. In addition, we experienced lower demand for our server memory interface products. Part of this decline was due to DRAM suppliers facing financial difficulties and part of it was due to inventory drains as DIM manufacturers started to take down AMB inventories in anticipation of Intel's transition to Core i7 or Nehalem based servers using DDR3 memory.

Sales of PCI Express switches declined but performed better than our overall computing business. Overall, our revenue from computing products declined over 40% sequentially and represented about 36% of our total revenue, down from 42% in the prior quarter. Total revenue from our communications end market decreased approximately 20% sequentially as originally expected. Sales to the wireline segment declined in line with peers while enterprise performed slightly worse due to inventory drains at our largest customer. Our wireless segment performed slightly better due to strength in China as 3G infrastructure buildouts continued to benefit our business. Our communications end market represented 50% of total revenue up from 42% in the prior quarter.

Now, I will provide some more detail on new product introductions and design wins in the March quarter, as well as our outlook for June. Let me start with the consumer segment where we continued to see strong design activity from our customers focused on the display market. Our video and display business unit has been deeply engaged with key customers working on designs with announced products like PanelPort which is our display port timing controller and receiver solution, as well as numerous other new products that we will be announcing during the course of this calendar year.

While some of these design wins won't contribute significantly in the June quarter, we do expect them to ramp in the second half of calendar 2009. We're currently projecting that the consumer end market will grow approximately 10% in the June quarter, tracking demand from our largest consumer customers and normal seasonal patterns.

Within communications, we are seeing excellent traction with our products focused on the wireless and wireline markets like our serial RapidIO switches and our next generation communication clocks. During the quarter, we extended our leadership in the wireless infrastructure market by announcing a new product in our family of central packets switches that provides our customers with an optimized mix of port count performance and power consumption. In addition, our infrastructure customers are looking to IDT as a supplier of choice as they review the financial stability of their other vendors. Our resilient model and strong balance sheet are viewed as an asset especially during times of economic uncertainty.

While visibility remains limited for communications, we are seeing signs of stabilization in each of our comm segments. We expect wireline to be up slightly and wireless to be relatively flat. Altogether for communications, we expect revenue to increase about 5% sequentially in our first quarter first fiscal quarter of 2010.

Let me now turn to computing which includes both servers and PCs. As I mentioned earlier, we are beginning to see signs of the transition to Core i7 or Nehalem based servers. As a leader in memory interface products, we stand to see significant growth in the DDR 3 related revenue over the next several quarters but that will be offset by declines in AMB revenue. Given this continued transition, we expect revenue from memory interface products to be down the June quarter. We expect revenue from PCI Express switches to also be down quarter over quarter as we work up inventory and await the ramp of new design was.

We continue to win the bulk of the designs in the PCI Express market as evidenced by our recent announcement that H3C selected IDT's PCI Express switching solutions for its high-end security systems. We also look forward to the ramp of several gen II PCI Express design wins for embedded communications and storage platform applications in the second half of this fiscal year.

In PCs, we expect to see over 20% sequential growth as shipments of PC clock and PC audio products rebound to more closely match end consumption. This growth appears to be consistent with comments and expectations from other PC component suppliers in the food chain. Overall, for the June quarter, we currently project our computing end market to remain relatively flat on a sequential basis as strong PC related sales are offset by server related weakness. In total, in the June quarter, our fiscal Q1 of 2010, we're projecting that revenues will increase to approximately $111 million plus or minus $4 million.

I will now turn the call over to Rick to provide some more detail on our financials.

Rick Crowley

Thanks Ted. Let me start by reviewing the non-GAAP results for fiscal Q4. Revenue of $107.4 million was within the range we provided in our revised guidance released March 31, 2009. As Ted indicated, the sequential decline in revenue was the result of weaker demand in each of our end markets, inventory reduction at our end customers and distributors, and typical seasonal weakness, particularly in our computing and consumer end markets. We continue to see distribution channel inventory decrease quarter to quarter in absolute dollars despite weaker end demand and we were pleased to see signs of bookings improvement late in the quarter.

Fiscal Q4 gross margin was 45.7% down from 50.4% in Q3. The decline was driven primarily by lower revenue, decreased factory utilization, and additions to inventory reserves. Our fab utilization declined to approximately 50% from 70% in the prior quarter. Overall operating expenses in Q4 decreased to $52.6 million from $53.4 million in the previous quarter as we continued to focus on cutting costs. R&D expenses during the fiscal fourth quarter were about $32 million relatively flat from the prior quarter as lower labor costs were offset by an increase in payroll taxes. SG& expenses were about $21 million down about $1 million from the prior quarter on lower commissions and tight cost controls. It should be noted that third quarter operating expenses contained a $1.6 million reduction due to our deferred compensation program. In the fourth quarter, the impact from the deferred compensation plan on operating expense was negligible.

Interest income and other increased $1.8 million to $600,000 from a net loss of $1.2 million in the third quarter primarily driven by decreases in losses on the company's investment portfolio related to our deferred comp program. We recorded a tax benefit of $67,000 in the March quarter. For the fourth quarter, we reported a net loss of $2.8 million or $0.02 per share. This was a penny better than our revised expectations due to lower operating expenses.

For the full fiscal year of 2009, our revenue was about $663 million. Gross margin was 50.8% and operating margins was 16.3%. We earned $110 million or $0.65 per share and generated about $127 million in free cash flow which is about 19% of revenue. Overall these were solid results, especially in light of the dramatic downturn we experienced in the second half of the year.

Now let me summarize our results on a GAAP basis. We reported a GAAP loss of approximately $719 million or $4.37 per share in the March quarter. The difference between our GAAP and non-GAAP results nets out to about $716 million or about $4.34 per diluted share. As a result of the current economic environment and decline in the market value of the company, we conducted an annual impairment analysis of good will and intangible assets, which resulted in a non-cash charge of $687 million for the quarter.

Fiscal fourth-quarter 2009 GAAP results also include $18.3 million in amortization of acquisition related intangibles, $6.6 million of stock-based compensation, and $5.4 million of restructuring related charges. For further information including a detailed reconciliation of non-GAAP and GAAP results is provided in the financial tables of today's press release and can also be found on our website at www.idt.com.

Now turning to our balance sheet. Cash and investments totaled approximately $296 million at the end of the March quarter. The change in cash and investments from the prior quarter is primarily attributable to net loss for the quarter and a significant reduction in accounts payable balance driven by lower purchasing activity during the quarter. In addition, we spent approximately $3.7 million on capital expenditures. Partially offsetting these amounts was $2.4 million generated from the company's employee share purchase program. Net inventory decreased about $6 million to $71 million in the March quarter from $77 million at the end of December.

Days of inventory increased to 112 days from 85 days in the prior quarter driven by lower COGS on lower net inventory. Our trade accounts receivable decreased $10 million to $55 million in March primarily due to lower revenue in the quarter. DSO increased to 47 days from 36 days in the prior quarter due to a more backend loaded shipment pattern in the March quarter.

I will now turn to our forecast for the June quarter. As Ted indicated, we currently project revenue for our fiscal first quarter of 2010 will be in the range of $111 million plus or minus $4 million. We experienced a significant pickup in bookings toward the end of the March quarter which did result in the book to bill ratio above one. We entered fiscal Q1 with approximately $8 million more in direct backlog than we had entering Q4. To hit the midpoint of our forecasted revenue range, our turns to go requirement is at the low-end of historical ranges for this point in the quarter.

While lead times remain short, and visibility is still limited, we are encouraged by bookings so far in April which continue to be solid. However it remains difficult to differentiate between inventory true ups and actual end demand. We did see channel decrease in the March quarter. Channel inventory days were still above historical norms at the end of March due to lower resales or sell through in the first half of the March quarter. Resales improved substantially in March however after low January and February levels and continued solid so far in April on track to our projections. Channel inventories have continued to drop in April which leads us to believe the overall level of channel inventory will decline further in the June quarter and days of channel inventory will continue to drop.

On a non-GAAP basis, we currently project gross margin to be in the range of 47% plus or minus 50 basis points depending primarily on the revenue range and product mix. We anticipate Q1 fab utilization to remain at approximately 50%. We currently project operating expenses in the June quarter to be approximately $52 million plus or minus $1 million as the benefits of our cost-cutting measures begin to be realized. R&D is expected to be approximately $32 million and SG&A is projected to be approximately $20 million. We currently anticipate interest and other income to be about 700,000 and expect our taxes during fiscal Q1 to be approximately $400,000 as we continue to benefit from tax credits accumulated in previous years.

We project our share counts to be about 166 million shares on a diluted basis and we currently project EPS on a non-GAAP basis to be about breakeven, plus or minus a penny, depending primarily on the actual revenue range and product mix. On the balance sheet, we currently expect to generate approximately $6 million in cash during the June quarter and project a quarter ending rather cash balance of approximately $302 million. We currently project our GAAP EPS to be lower than our non-GAAP EPS by about $.10 plus or minus a penny. Also the difference between GAAP and non-GAAP projections or about $0.06 per share is related to the amortization of intangibles primarily as a result of the ICS merger. We currently project stock options expenses to be about $0.04 per share in the fiscal quarter.

With a difficult fiscal 2009 year behind us, we believe we have entered into fiscal 2010 with channel inventories that are better aligned with end market consumption, a leaner and more competitive cost structure, and a growing new product pipeline to fuel future growth. We also continue to look for ways to control costs and improve profitability. We have implemented a number of cost-cutting measures over the past two quarters. In addition to layoffs and restructurings, we have also cut bonus payments for the second half of fiscal 2009, frozen salaries for fiscal 2010, suspended the company match for the 401(k) plan and require time and manufacturing shutdowns in the June quarter.

These actions helped fortify our already resilient operating model and lower the breakeven point to approximately $110 million for non-GAAP EPS and $105 million for cash flow. Despite limited visibility in the end market demand, we remain focused on the things we can control by developing innovative new products, controlling costs, and strengthening relationships with customers to provide application-specific solutions that enable them to be more competitive. Like Ted, I believe we enter this new fiscal year with the most challenging times behind us. I also think our new platform for growth and upcoming product cycles combined with our streamlined cost structure places us in an excellent position to grow earnings and increase value for our shareholders.

Now let me turn the call over to Ted to provide some additional details on a few recent announcements we have made and then we will take questions. Ted?

Ted Tewksbury

Thanks Rick. While we are pleased to see bottoming revenue trends, we do have a lot of work to do to return to sustained growth and profitability. We have recently announced certain several steps towards this goal, and these measures reflect our balanced approach to increasing long-term shareholder value to both organic and inorganic initiatives.

The first announcement illustrates our focus on organic growth with the introduction of our new Power Smart technology. This technology will initially be embedded into the company's ASSPs cases for consumer applications providing IDT customers with a wide variety of design advantages like prolonged battery life, improved power consumption and increased design flexibility. By co-designing programmable power management together with core silicon functionality at the system level, the company provides customers with application optimized solutions that address their specific needs. This enables IDT to optimize the entire system to reduce redundancy, increase system reliability and improve overall performance.

To fully embrace this corporate wide focus on power efficiency, IDT has hired an experienced analog design team led by Paul Brokaw, one of the industry's premier analog IC experts. He has the mission of incorporating power management into highly integrated ASSPs for consumer multimedia products. I had the privilege to work with Paul at Analog Devices where he was a senior fellow. I worked for Analog Devices back two decades ago, and Paul inspired, mentored and taught an entire generation of analog IC designers. So it is a real honor to have Paul here at IDT. Of course analog and power management are cornerstones of our strategy and as you can see, we are putting together a team of top talent to make it happen. So we're very excited to have the new capabilities and growth prospects that this team brings to IDT.

The second announcement that we recently made demonstrates our focus on using acquisitions to accelerate organic growth. We were pleased to announce earlier today that we have entered into a definitive acquisition agreement for IDT to acquire Tundra Semiconductor for $6.25 Canadian per share for an aggregate purchase price of approximately $120.8 million Canadian. We will be able to answer more questions and provide additional information regarding this transaction once the deal closes.

Tundra has multiple product lines that are strategically aligned with IDT. First of all, in serial RapidIO, Tundra's products and design wins in version 1.3 augment IDT's momentum in version 2.0 to give the combined company the most comprehensive RapidIO product portfolio in the industry. Second, in PCI Express, Tundra's bridges complement IDT's switches to expand the breadth of our product offering.

Finally, Tundra's VME bus and PowerPC host bridge businesses dovetail very nicely with our existing broad line customer base. Collectively, these capabilities enhance IDT's leadership in serial switching and interconnect solutions for communications and embedded applications. By providing consolidation in the PCI Express and RapidIO segments, this acquisition will enhance IDT's value to our customers by providing a comprehensive solutions portfolio with a clear future product roadmap.

Our third and most recent announcement indicates our continued focus on realigning our business units to better address larger, mixed signal growth opportunities, and increase the return on our investments. Today, we announced that we have signed a definitive agreement to divest our network search engine business to NetLogic for approximately $100 million. We expect this transaction to close within 60 days subject to normal and customary closing conditions. This strategic decision provides IDT and its shareholders with two primary advantages. First, it provides incremental sources of funds for IDT to make further investments in future growth opportunities for the company. Second, it sharpens management's focus on the development of highly integrated ASSPs for consumer video, displays and multimedia. Network search engines have been a great asset for IDT but the future market potential is projected to be small and is no longer consistent with the company's focus on large growing markets.

A year ago I shared with you IDT's vision of mixed-signal solutions from processing, transporting and delivering digital media. While the world has changed dramatically since then, this has only served to strengthen our value proposition as electronics manufacturers worldwide seek to consolidate and downsize their suppliers to those who can provide comprehensive application optimized solutions that maximize their overall system performance while simultaneously lowering the total power consumption and bill of materials. Over the past year, we have intensified our focus on expanding the silicon content in our core communications, infrastructure and advanced computing and consumer multimedia markets. In order to achieve this, we have augmented IDT's digitally intensive mixed signal heritage with industry-leading analog designers, product definers and applications experts. We have consolidated, reorganized and streamlined our business units, rationalized our R&D and put in place rigorous new processes and metrics for product selection, definition and development.

We also acquired Silicon Optix to expand our capabilities and product roadmap for flat panel displays and video processors. As a result of these measures, we now have a robust new product pipeline that is stronger than I have ever seen it. Organic growth takes time, but we have made rapid progress and are on track to introduce IDT's first highly integrated analog intensive ASSPs in this fiscal year.

The macro economic downturn has been financially challenging but as you can see, we have embraced this once-in-a-lifetime disruptive opportunity to reinvent the company. I'm confident that if we continue to innovate and execute at the current pace, IDT will emerge from this downturn as an even more vital extension of our customers' development teams with the ability to outperform the market and consistently generate profitable revenue growth.

Karen, with that, we will turn it over to you for questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from Glen Yeung with Citi.

Glen Yeung – Citi

Thanks, can you guys give us a sense of what the revenues you're giving up in the search engine or maybe give us a feel for what fiscal 2009 revenues were for the business of perhaps what it was in the quarter?

Rick Crowley

Hi Glenn. This is Rick. I think in the near term looking at about a $10 million a quarter type of revenue decline.

Glen Yeung – Citi

Okay, all right. That is good to know. That is helpful. So then Tundra is running at about 12 million US a quarter, it sounds like, is that approximately right?

Ted Tewksbury

That is about right.

Rick Crowley

Yes.

Glen Yeung – Citi

Okay. The other thing I wanted to ask you about was thinking about the 3G wireless business and I think I heard you say that you expect that to be flat in calendar Q2, any sense from you, what you think it might be in calendar Q3, and the reason I ask is, there is some talk that it is going down in that quarter, I just want to get your sense of what you think it might be?

Ted Tewksbury

Glen, you know we don't look at that far. We don't – well we look at that far, but we can't guide that far.

Glen Yeung – Citi

Okay, all right. And then the last thing I wanted to ask you is just again your sense of this idea of inventory restocking as supposed to continued de-stocking in the second quarter, and I think you made the point on PC that you still think there is de-stocking going on, but anywhere you get a sense that you're actually building, not you, but the channel is building inventories in Q2?

Rick Crowley

Glen, it is Rick. As I said in the prepared remarks, it is difficult at this point to distinguish between real end compensation and changes in inventory. But we believe from our standpoint that the – for our process strictly in the PC market, we don't see it as restocking, we still see it as a channel trying to bring their inventories down at least for the June quarter.

Glen Yeung – Citi

Okay. Actually one last quick one for me, you talked about still winning a lot in PCI Express, give us a sense as to what proportion you think you're winning, and if you think you're winning at a greater or lesser rate i.e. in terms of market share?

Ted Tewksbury

The question was –

Glen Yeung – Citi

Do you think you are still gaining share in PCI Express?

Ted Tewksbury

Very much so. Yes, we're still capturing about three quarters of the new designs that become available, so yes we're very definitely winning market share. I think you'll see that in a very material way in the second half.

Glen Yeung – Citi

Okay great. Thanks.

Operator

Next, we go to the line of Tim Luke with Barclays.

Tim Luke – Barclays

Thanks so much. I was just curious with respect to the turns that you're looking for if you had a range that you might be able to share with us, just with the turn level maybe for the current guidance? And then separately, could you just remind us of the timeline that we should be looking for the network search engine revenue to come out of the model and for us to add in the Tundra model, the Tundra revenue?

Rick Crowley

Yes. Let me start with the last question first, Tim. The timing of the deal roughly is they could wind up about the end of part fiscal quarter, about the end of June or early July. So we don't see any material impact, much material impact on a revenue basis in our first fiscal. We tend to see that in the second fiscal quarter. With respect to turns failure, we don't give out the particulars of the kind of the turns to go, but it is certainly a lower percentage and lower dollars than we had experienced for the last two or three quarters, which is good. So we feel a little bit more comfortable I guess with respect to where we sit today and where we were in January at this point I guess.

Tim Luke – Barclays

And could you also just give us a feel for some of the metrics we should be looking at associated with the gross margin and how you might see that trending as we move through the fiscal year? Similarly with the OpEx, you provided some pretty clear guidance for June, could you give us a feel for how you are anticipating that that might trend as you move through the fiscal year?

Rick Crowley

Yes. Well I think that is a modeling question that – we are not going to give you guidance perhaps the initial quarter here, but obviously our gross margin in general is heavily dependent on a revenue level and our factory loading as you know. So depending how our revenue trends, I think there goes our margin. We're seeing it predicting a modest improvement here in the June quarter relative to March, primarily because of some of the one-time hits we took in inventory charges and so forth that we are projecting to recur in June but really our fab utilization is about the same quarter on quarter.

Tim Luke – Barclays

And expenses just directionally how should we think about that?

Ted Tewksbury

Tim, this is Ted. If I could just make one further comment on the gross margin question, with respect to how the divestiture and acquisition impact that, the search engine product are actually the lowest gross margin product within our communications segment. The new products that we are acquiring from Tundra are substantially higher than the search engine product that we divested. So you should see gross margins increase as a result of that mix change.

Tim Luke – Barclays

On the expenses, do you have any color, just how you should you think about that Ted? And maybe Ted just lastly just the PC was being up 20% sequentially, what are some of the key trends within that market that you're observing and how's the visibility there, thank you.

Ted Tewksbury

Well, one of the key trends is the growth of the network segment which really got very good presence in those sockets. That is driving a lot of the growth.

Rick Crowley

Tim, relative to expenses, I guess that what I can say to you is that the Q1 guidance does take into account the full effect of the cost reductions we've been talking about and have announced. So you're seeing pretty much the run rate expense level that we have seen in the near term in the Q1 guidance.

Tim Luke – Barclays

Thank you guys very much.

Operator

Next we go to Sukhi Nagesh with Deutsche Bank.

Sukhi Nagesh – Deutsche Bank

Yes thank you. Nice show on the OpEx front guys. A couple of questions here on the end markets here, you said your competing business will be flat in the June quarter with decline in memory interfaces offset somewhat by the PC clock business, how much do you think the memory interfaces segment will be down this year, year-over-year, how should we look at that?

Ted Tewksbury

Well Sukhi, I think the numbers that we had put out earlier was that we expect that FY10 to be 20 million to 30 million lower than FY09 as a result of the Tylersburg transition and the transition of AMB to DDR3. What's changed is that we actually saw higher revenue in FY09 than we had originally forecasted, so relative to that higher base, the delta might be slightly bigger. But in terms of the absolute dollar value of forecasted AMB sales in FY10, it really hasn't changed. I don't know if we have ever put an actual numbers out there whether we want to do that for the year.

Sukhi Nagesh – Deutsche Bank

What I was trying to get at Ted was I mean some of the customers like Qimonda are having difficulty, are you seeing an increased pace of production in that business or not?

Ted Tewksbury

Increased pace of production?

Sukhi Nagesh – Deutsche Bank

Reduction in sales? Sorry.

Ted Tewksbury

Yes, we are seeing a temporary reduction due to the financial troubles that some of the customers are having and then superposed on top of that you have got the Tylersburg transition going on and then the whole macroeconomic malaise and nobody is buying service today anyway. So those three factors convolved to give us a pretty nasty demand situation.

Sukhi Nagesh – Deutsche Bank

Okay. Switching gears a little bit to the consumer segment here, you said thinking (inaudible) last quarter you talked about how your gaming customers have pretty much stopped ordering and now you are guiding for 10% sequential growth there. How should we look at gaming in particular I guess for you guys moving forward? Are you seeing any competition there, do you still have majority of market share, do you see normal seasonality off of a lower base obviously?

Ted Tewksbury

I mean there is always competition there but we still have the dominant share at Sony and so our revenues pretty much kind of tracks Sony's demand and Q1 as you pointed out we expect to be up roughly 10% based on that demand from Sony.

Sukhi Nagesh – Deutsche Bank

Okay, thank you.

Operator

Next we will go to the line of Sandy Harrison from Signal Hill.

Sandy Harrison – Signal Hill

Yes, good afternoon everyone.

Ted Tewksbury

Hi Sandy.

Sandy Harrison – Signal Hill

So I think that – a couple of questions earlier, we were trying to get at sort of what the model looks like beyond the current quarter, and I know you guys don't want to comment now, but it just sounds as though it is almost a swap out 100 million in the US form NetLogic, 120 which I think converts the US 200, sounds like the revenues are really the same and so gross margins could be a little higher Tundra versus the NFEs, but how about OpEx? I mean do we really see a whole lot of change to the model partly over the next several quarters or sort of what we see now is just the flavor of it changing?

Ted Tewksbury

Well, Sandy, obviously it is very early days. I just signed two agreements this morning. So we kind of have to let the dust settle here and complete the integration of Tundra. Rick can work with you in the coming days as details unfold to iron out some of those items but right now we are – we cannot offer a lot of detail.

Sandy Harrison – Signal Hill

I got you. That is fair. I just wanted to see if there's anything that we should be thinking about right now but obviously over time. So the other question I had was you have introduced a number of organic related products, you highlighted them in some of your prepared remarks, and with all the changes you have gone from simply a memory house several years ago to mixed signal and several others, I'm from a broad perspective, Ted, if you could maybe paint a picture for us of kind of what the IDT looks like at the end of your fiscal year this year, kind of what your drivers are, what the markets driving the products are, and sort of which your product participation, that would be very helpful to help kind of position us?

Ted Tewksbury

Yes. The biggest drivers, Sandy, we are going to see in FY10 is video and display products that we have launched over the past year or two. We have got very good design win traction of our display port devices, our PanelPort family of products, which are displayed port receivers plus timing controllers, those are designed in to all of the major flat-panel manufacturers over in Asia. And those panel manufacturers have sampled the notebook OEMs with our products in fact and they are in qualification now. A lot of those products, the ramps are of course tied to Calcula [ph] which is a Q3, a Q4 fiscal 2010 phenomena. But as soon as Calcula starts to ramp, we expect to see some sizable revenue from those display port products that we have been talking about a lot in the past.

Also in FY10 we expect to see some good growth in the second half of the year from our PCI Express switches, many of which have been designed into high-end Tylersburg servers as well as some communications and embedded applications. So those design wins will start to ramp in the second half of the year. It should also be a good year for PC audio. We expect to see some of those new products start to ramp up and then DDR3 will ramp up. So those are really the four major growth drivers in FY 10; display port, PCI Express, audio and then DDR3.

Now in addition to that, over the past year, we have been developing a number of new products that integrate a lot of the IP that we have got in the company; audio, clocking, power management, these are some of the projects that Paul Brokow's team will be working on. Those products will start to kick in probably in FY11 but you should be aware that you will be seeing a lot of more highly integrated ASSPs that combine fairly sizable amounts of the analog together with digital in the coming years. So that is kind of the landscape for FY10 and FY 11.

Sandy Harrison – Signal Hill

Great. Thanks for doing that and thanks for taking the question guys.

Operator

And next we go to John Barton with Cowen.

John Barton – Cowen

Thank you very much. Rick, if I could go back to one of the early questions you asked about inventory drawdown versus inventory build at your customers, you highlighted in your response that you believe that PCs are still an inventory drawdown phenomena, and then you kind of referenced your prepared statements. And if I remember your prepared statements correctly, when you are talking about consumer, you're talking about – and I think the words you used were a truing up of inventory, I'm curious what you meant by that? Do you perceive that customers are building inventory in anticipation of future demand or is it that your sales are going to grow to better match their true consumption rates because they were depressed last quarter as those customers true down inventory?

Rick Crowley

More of the latter, John. Basically we still the channel de-stocking in the June quarter. And customers may be at consumption rates today, but I think we are seeing the last vestiges of the drawdown, so it is – I think we try to avoid the word restocking because we don't see restocking going on or inventory build going on at this point.

John Barton – Cowen

Understood, thank you. Ted, the sale of the network search engines, just curious what that means from a relationship with Cisco perspective. I assume now it is going to be something less than a 10% customer if you could help us kind of hone in on where that might be. With that business not in the umbrella does it impact any of your other business that they may have been giving you to help augment your support of search engines? And then post the Tundra acquisition, will there be any incremental greater than 10% customers?

Ted Tewksbury

Good questions John. Obviously Cisco was paramount in all of the discussions regarding the search engine business, and I and the general manager responsible for the search engine business was very closely engage with Cisco throughout this entire strategic discussion because keeping them all and making sure that they had continuity of supply was extremely important. So the relationship with Cisco is outstanding as it always has been. We of course sell many products to Cisco other than just search engines, we sell networking products and a number of other types of products (inaudible) and so forth. So they will remain a very important customer. In terms of post-divestiture of the search engine business who will be our biggest customer, do we have that information? I could take a guess.

Rick Crowley

Probably going to be Samsung.

Ted Tewksbury

That was my guess.

John Barton – Cowen

And would you care to wager a guess on the percentage of sales for that relationship?

Ted Tewksbury

Sub 10.

John Barton – Cowen

So you won't have any greater than 10 percentage customers post the divestiture?

Ted Tewksbury

As those display port products start to ramp up, I would expect a slight increase.

John Barton – Cowen

Okay. And then maybe Ted if you could, just your overall thought process on M&A? You have announced two major transactions today which are basically cash neutral to your balance sheet…

Rick Crowley

I'm not sure, wait a second, it is not cash neutral. Tundra has approximately $15 million of cash US on their balance sheet.

John Barton – Cowen

I stand corrected, thank you. As you go forward, how aggressive can we expect you to be on the M&A front, and what are your thoughts on issuing stock versus cash, what are you willing to take your cash balance down to et cetera?

Ted Tewksbury

I don't want to get into a lot of those details John. What I can tell you is that, we are looking at two kinds of M&A, one is what I would characterize as strategic increasing our available market by adding new capabilities that we don't presently have, and Silicon Optix fit that category, although it didn't add much in the way of immediate revenue, small potential revenue. But we're looking at other larger companies that fit into category off an expansion of our available market. And anything that we did along those lines first would have to be aligned with the target market that we are focused on, which are fundamentally wireless infrastructure within the communication segment, multimedia, video and displays within the consumer segment, or enterprise computing within the computing segment. Those are really the target areas for those strategic acquisitions.

There are also the second category of acquisitions would be those which increase our market share within the existing market that we are already in. And Tundra obviously satisfies those criteria, they are a consolidation play. So over the past year, we have spent a lot of time looking at all of our businesses, trying to get focused. And the businesses that are not aligned with our long-term strategy, we have either harvested on in the case of the search engine divested, and then those businesses that remain, our goal is to be number one or number two in each one of those markets and so we are looking at consolidation acquisition opportunities in order to achieve that and that is what Tundra was.

John Barton – Cowen

Thank you.

Operator

(Operator instructions) And next we go to JoAnne Feeney with FTN Equity.

JoAnne Feeney – FTN Equity

Thanks folks. Just a question if we could go back to the capacity utilization point you are making like it would be flat quarter of quarter and I'm just wondering since it sounds like you're going to be under shipping demand less this quarter than last quarter, why is that we are not seeing capacity utilization rise?

Rick Crowley

We still have 112 days of inventory, so our inventory buffer we feel is a sufficient, in line with the current lead time environment. Until such time as we see stronger momentum, momentum is reasonable on our booking right now, but until we see stronger momentum in there, we will keep the fab at the steady-state is the current plan.

JoAnne Feeney – FTN Equity

Do you have a target level of inventory that you would want to get to before you turn those fabs back up again?

Rick Crowley

Well I think it really depends on the lead time and the momentum in that vein but if you look right now I think we are comfortable in that 100 to 115 day range. If it gets down probably below 90 days, we would – I'm sure that manufacturing guys would be clamoring to put a few more wafers in the fab.

JoAnne Feeney – FTN Equity

Okay. It is more you have got the buffer, you are not seeing the pace of demand that really justifies getting these people back to work than the inventory level itself?

Rick Crowley

Yes.

JoAnne Feeney – FTN Equity

Okay. And then on the acquisition and divestiture, that takes some – I mean I'm not – I don't remember where this stuff was made, does that take some out of your fabs by selling off the NFEs? The search engine business?

Rick Crowley

Very small and not in the near term.

JoAnne Feeney – FTN Equity

Okay. When you say not in the near term because it is going to take a lot to close the deal or do you have an arrangement to continue to produce the stuff for longer than the dealer will take to close it?

Rick Crowley

There is – associated with the deals should it close would be a service agreement, supply agreement.

JoAnne Feeney – FTN Equity

And you would pre-arrange some gross margin associated with that supply agreement?

Ted Tewksbury

I don't think we want to get into the details of the deal.

JoAnne Feeney – FTN Equity

Okay. And then bringing in Tundra, that would presumably come in house and also when that close and re-qualify parts, would you have to re-qualify parts to bring them in, or would you continue to use another facility for those parts?

Ted Tewksbury

Tundra parts all go to the foundry and they would continue to go to foundry…

JoAnne Feeney – FTN Equity

Okay. So it would be a fairly seamless takeover then, you wouldn't have to re-qualify anything?

Ted Tewksbury

Correct.

JoAnne Feeney – FTN Equity

Okay. Terrific. That is all for me, thanks a lot.

Ted Tewksbury

Thank you.

Operator

And there are no further questions. Please continue.

Rick Crowley

Okay. Thank you very much for joining us today. We appreciate your interest in IDT and look forward to meeting with you on our marketing trips this quarter and our next earnings conference call. We will also be attending the Cowen and Barclay's conferences in May and look forward to seeing you there. Thank you and have a good day.

Operator

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Source: Integrated Device Technology, Inc. F4Q09 (Qtr End 03/31/09) Earnings Call Transcript
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