NetLogic Microsystems Q1 2009 Earnings Call Transcript

Apr.30.09 | About: NetLogic Microsystems, (NETL)

NetLogic Microsystems, Inc. (NASDAQ:NETL)

Q1 2009 Earnings Call

April 30, 2009 5:00 PM ET

Executives

Leslie Green - Investor Relations, Green Communications Consulting, LLC

Michael T. Tate - Vice President and Chief Financial Officer

Ron Jankov - President and Chief Executive Officer

Analysts

Adam Benjamin - Jefferies & Co.

Nick Aberle - Caris & Co.

Gary Mobley - Noble Financial Group

Romit Shah - Barclays Capital

Blake Harper - Signal Hill

David Wu - Global Crown Research

Leo Choi - Wedbush Morgan Securities

Hans Mosesmann - Raymond James

Cody Acree - Stifel Nicolaus

Kevin Cassidy - Thomas Weisel Partners

Dan Morris - Oppenheimer & Co.

Operator

Good afternoon, and welcome to NetLogic Microsystems First Quarter 2009 and Financial Results Conference Call. Leading the call today are Ron Jankov, President and Chief Executive Officer; Mike Tate, Vice President and Chief Financial Officer. My name is Erika, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Leslie Green, Investor Relations for NetLogic Microsystems. You may proceed ma'am.

Leslie Green

(Technical Difficulty) end results were disseminated by Business Wire after market close today, and a copy of the release can be downloaded from our website at www.netlogicmicro.com.

Before we get started with our financial results for the fourth quarter, I'd like to point out that during the course of this conference call we will be making forward-looking statements that are based on certain assumptions and expectations of future events that are subject to a number of risks and uncertainties and actual results may differ materially. For a discussion of such risks and uncertainties, please see today's earnings release, the risk factors in our Form 10-K filed on March 4, 2009, as well as other reports the company files from time to time with the SEC.

All forward-looking statements are qualified in their entirety by this cautionary statement and the company undertakes no obligation to publicly update forward-looking statements for any reason except as required by law even as new information becomes available or other events occur in the future.

Also on the call we'll be making reference to non-GAAP financial measures. A reconciliation of non-GAAP to GAAP financial information is in today's earnings release. The reconciling items between GAAP and non-GAAP are stock-based compensation, amortization of intangible assets, a fair value adjustment for inventory required and a deferred tax asset valuation allowance. These items have been removed from the cost of revenue, operating expenses and income taxes for non-GAAP reporting.

I will now turn the call over to Mike to discuss our first quarter 2009 results. Mike?

Michael T. Tate

Thank you, Leslie. Good afternoon, everyone. Today, we reported net revenues for the first quarter of 2009 was $30.4 million, which compares favorably to our previous guidance of $30.2 million.

Revenue from Cisco Systems, our largest customer, was $9.7 million or 32% of our total revenue, compared with $9.8 million or 32% of our total revenues for Q4, 2008. The flat revenues were little less than expected as we continued to see some softness in the enterprise markets as well as what appeared to be a further reduction of inventories in the latter part of the quarter, which largely offset growth from new design revenues.

Revenues from Alcatel-Lucent were 16% of revenues in Q1. And revenues from Huawei were 13% of revenues. Huawei's strong sequential revenue growth was driven by growth in shipments related to China 3G, the initial ramp of our NL6000 for China and emerging market IPTV, and the initial ramp of our MetLife products for entry level enterprise switches. We do not have any other customers above the 10% level in the first quarter.

Our non-GAAP gross margins for the first quarter was 65.8%, which excluded stock-based compensation expense and the amortization of intangible assets. There is a complete reconciliation between GAAP and non-GAAP gross margins in today's earnings release.

Q1 non-GAAP gross margins were favorable to our guidance of 65%, mainly due to better than expected product and customer mix during the quarter. Q1 GAAP operating expenses were $19 million, which included $4.1 million of stock-based compensation and $300,000 for the amortization of intangible assets. This compares with GAAP operating expenses of $20.1 million for the fourth quarter 2008, which included approximately 4.7 million for stock-based compensation and $300,000 for the amortization of intangible assets.

Total non-GAAP operating expenses for Q1 were $14.5 million, compared with $15 million for Q4 2008. Non-GAAP R&D expenses were 10 million for Q1 as compared with 10.5 million for Q4 2008. Non-GAAP SG&A expenses were 4.5 million for Q1 as compared with 4.5 million for Q4 2008.

Operating expenses came in the lower expectations and decrease in the last two quarters given a continued focused on controlling discretionary spending and managing costs.

Q1 interest another income was a little less than $2,000 consistent with our guidance. Our Q1 GAAP tax provision was an expense of $1.9 million. During the quarter, California legislature enacted laws that allowed companies to let new apportionate factor after 2010. This new law will reduce the amount of our income tax in California in future years.

Based on anticipated election of this new apportionment, we determine the need to establish evaluation allowance to certain deferred tax assets, totaling $3 million which resulted in a Q1 charge. We excluded this $3 million charge from our non-GAAP Q1 results. The resulting non-GAAP tax benefit for the quarter is reflected over current levels of income and our taxable jurisdictions.

On a GAAP basis, our Q1 net loss was $3.9 million or $0.18 per diluted share, compared with a net loss of 1.1 million or $0.05 per share for Q4 2008. Non-GAAP net income for Q1 was $6.7 million or $0.29 per share, compared with 7.2 million or $0.31 per share for Q4 2008. We had fully diluted shares of 21.8 million on a GAAP basis and 23.4 million on a non-GAAP basis.

With respect to the balance sheet cash, cash equivalents and investments decreased by $7.6 million in Q1 to end the quarter at $88.9 million, compared with 96.5 million at the end of the prior quarter. The decrease in cash reflects the $15.5 million earn out payment that was made to the shareholders of Aleros during the quarter.

Excluding this payout we had another strong quarter of positive cash flows with over $8 million in free cash flows. Our accounts receivables was $8.3 million, and represented a 25 days. The low DSOs were the result available sales linearity coupled with strong collections. Our ongoing target of DSOs remains at 35 days.

First quarter net inventory decreased by $2.8 million and was at $10.9 million, compared with $13.7 million at the end of Q4.

This concludes my review of the quarterly results. And now, I would like to turn the call over to Ron.

Ron Jankov

Thank you, Mike. Our first quarter was another solid quarter for us. Our products and technology roadmap continues to take significant steps forward as a result of remarkable engineering achievement across our product lines.

Due to our migration to 55 nanometer process technology and our broad portfolio of industry leading knowledge processors and physical layer solutions, we have created a class of advanced product that have widely distinguished us from competing solutions and opened up TAM opportunities in markets that are just now beginning to utilize the benefits of knowledge based processors for the first time.

Many of these new markets require performance levels and future set that only we can offer, which has enabled us to win increasing numbers of strategically exciting designs. The importance of which will unfold over the next several years as we designs ramp to volume production.

This expansion of our TAM has allowed us to win a record number of designs in Q1 because more than 25 design wins including multiple designs at our largest customer Cisco, Huawei, Alcatel-Lucent, Juniper, Brocade and ZTE. At Cisco, we won four designs across multiple switch and radar divisions, bringing our total number of advanced technology designs to 31, only seven of which have launched to-date. This gives us the best pipeline of design to Cisco in our company's history.

The worldwide growth in rich media network traffic continues to drive new opportunities for our industry leading knowledge based processor family. What is particularly exciting is that many of these represents brand new TAM for our knowledge based processors as our market expands from traditional enterprise networking to new opportunities in internet based voice, data and video applications.

One such opportunity is the mobile wireless infrastructure market, which is expected to be a solid growth driver for us over the next several years. The world growth wide upgrade of carrier networks to 3G has begun to accelerate in order to support strong sales of video and smart phones, and continued projected growth in data subscribers.

We continued to experience very strong design activity in this area, particularly with our most valuable NL7000 and NL9000 families of products. Built on industry leading process technologies, the NL7000 and NL9000 offer special instruction set to manage complex IPv6 addresses and advance processing capability to support the most tactically challenging search processing environment for 3G converge networks.

We hold an impressive collection of design wins from customers such as Alcatel-Lucent Cisco, Nortel, Ericsson, Fujitsu, Huawei, Juniper, NEC, Nokia Siemens, Tellabs and ZTE, with most yet to rent a volume production. We're also excited to see that our second largest customer Alcatel-Lucent, which recently awarded $1.7 billion in contracts for the 3G infrastructure build out in China. And we will be heavily represented in equipment provided under those contracts.

We believe that the mobile wireless infrastructure market will provide a gradually increasing stream of opportunities for us over the next several years as the industry moves through various stages of development. The early benefit will come from the initial build out of base stations and 3G enabled carrier network equipment. These s systems will be minimally populated with knowledge based processors initially, and will become increasingly content heady as more subscribers purchase and utilize 3G phones.

Then, as more 3G subscribers upgrade the more balance intensive smart phones, additional network balance will be required by telecom carriers in order to provide a competitive customer experience.

And finally, the explosion of new applications for the smart phone, many of which are very down with intensive, will continue to further drive both carriers and enterprises to enhancer ability support growing data in video traffic over mobile networks, with each of these steps requiring further increases in the content of knowledge base processors.

Similarly, the increase in rich media content is also driving the worldwide wireline market build out as cable and IPTV providers compete for triple play customers. While legacy voice and services spend and continues to decline, service providers around the world, particularly in the U.S. and in China have an out plans for CapEx expenditures for converged networks, which offer them the opportunity to expand their revenue potential for video and data services.

Here again, we have broad based exposure to this market and have a massive and impressive list of design wins from customers such as ALAXALA, Alcatel-Lucent, Aleros, Cisco, Ericsson, Huawei, Juniper, Motorola and Tellabs.

Like the wireless infrastructure market, the wireline market represents brand new TAM in our industry, only a fraction of which is in volume production.

We are already seeing exciting example of this content expansion in newer designs. For example, Cisco's new ASR9000 gives us four to eight of our most valuable NL7000 knowledge based processors on each line card. Also its AXR12000 high end edge router which will begin its initial ramps for us in Q3, we use 12 of our newest 55 nanometer devices per line card.

At Alcatel-Lucent, the ongoing evolution of its 7450 and 7750 Ethernet aggregation and edge routers to terabit speed has driven steadily increasing content and knowledge-based processing in each successive generation, upgrading from our legacy network search engines to our most advanced products the NL71024 XT. All four of these we designs are great examples of how next generation equipment is requiring higher levels of content and performance of our technology to hand over the increasing speeds and complexity of internet traffic. Result is that within a few year we believe knowledge-based processing will represent one of the largest semiconductor dollar content in many of the key nodes enabling next generation internet.

Turning to the enterprise market. Although, demand continues to be soft and is expected to remain so to the second quarter, we believe that inventory is now at its lowest level in quite sometime. As we move at the back half of the year, we expect to see our enterprise revenues grow, driven by increased contributions from new design launches with user NL7000, NL8000 and NL9000 products at a broad range of customers including Brocade, Cisco, Huawei and Juniper.

Also, we believe that the recent announcement between IBM and Brocade, in which IBM will distribute Brocade's networking products, should be very positive for our business with Brocade, given IBM's extensive distribution network and our very high content in Brocade's enterprise switching equipment.

Further, our MetLife processor family continues to experience strong design activity and as entry level desktop switches continued their move towards using knowledge based processors for a broader range of price points. This is driven by IP phones and the need for high quality video delivered to desktop computers and notebooks.

We saw initial production volumes as the first of these boxes hit the market in the first quarter, we expect steadily increasing business from this sector for the foreseeable future, with stronger growth occurring as the larger OEMs prepared their launched later this year.

In addition to our immediate momentum with our design wins and knowledge-based processors, we also continued to drive our technology roadmap to further expand our TAM for years to come. As a great example of this, earlier this month we announced a truly revolutionary new product the NLS2008, Layer 7 knowledge-based processor for our NETL 7 product family. This product is a significant step forward from conventional and competitive content processors in the market. It is the first and only product that performs Layer 7 functions deterministically and can operation at 120 gigabits per second. This breakthrough in performance allowed our Layer 7 technology to be design in directly on the data plane of the switch and router line cards, will be able to infect every bit of our packet of wire speed.

The data plane design opportunities represented significant step-up in volume versus today's Layer 7 designs on a control plan. Interest in this product thus far has been very strong as customers are facing exponential growth in both security threats such as malware and intrusions as well as bandwidth requirements for managing increasing video peer-to-peer and virtualization applications.

Going to our physical layer products. In another example of market leading innovation, we demonstrated the industry's first 100 Gigabit Ethernet PHY solution at the OFC Conference in San Diego. The worldwide growth in rich media content such as video downloads and predecessor communication is creating bottlenecks in the carrier core, metro and datacenter networks.

By offering customers 100 Gigabit technology for the first time, we will push these bottlenecks closer to the edge of the network, which result in increasing opportunities for our knowledge-based processors and 10 gigabit PHY in a growing number of applications.

We're the first and only company to demonstrate and deliver such a critical network component. And we've already book design wins with five Tier-1 OEMs for near term delivery and we are engaged with additional 10 to 15 large companies.

Before we close, I also want to comment on our announcement today that we are acquiring a network search engine assets from IDT. We are very excited about this transaction as it gives the opportunity to further support our largest customer Cisco, and expand and strengthen our relationship with other important customers.

In addition to a large number of designs at Cisco, IDT's products successfully penetrated quarters of the internet that we have not yet targeted. These design wins further expand our TAM. Many of these non-Cisco designs have not yet ramped, providing growth opportunities for this expansion of our product line.

Additionally, this transaction improves over 75 patterns in other very important IT.

In conclusion, this is a very interesting time for us. Despite the challenging economic backdrop, design activity in all of our markets continues to be very strong, demonstrating the importance of our knowledge-based processor and physical layer products and next generation networking and communications equipment.

It is particularly exciting to us that our addressable market is expending as explosion of video and virtualization applications and services drive the need for more advanced system interfaces and pushes the demand for knowledge-based processing to nearly every corner of the internet.

Our design win activity and interest in our products are positive indicators that are market is poised to grow significantly over time so we'll become increasingly diverse in nature.

Further, our deep customer relationships and strong competitive positioning give us confidence that we are in the early stages of the lengthy and positive technology cycle that will fuel our growth for years to come.

At this point, I will turn the call back over to Mike to discuss guidance for the second quarter. Then, we'll open up the call for your questions. Mike?

Michael T. Tate

Thanks Ron. As we look into Q2, we believe most of our customers' inventories are back to regional levels, given the current demand environment.

As Ron mentioned, we believe the enterprise markets are soft, and will continue to be so in Q2. However, we are encouraged by the demand level supporting the build outs of 3G, IPTV and cable networks. Also, we believe our 10 gigabit physical layer products should resume growth.

Based on these factors, we believe our Q2 revenues will increase to approximately $32 million or a 5.4% sequential increase from Q1. This guidance reflects full backlog coverage, plus an expectation for some additional rescheduling of backlog into Q3, which we believe is prudent given the current macro economic environment.

We expect non-GAAP gross margins to be 66%. The increase in gross margins is due to continued strong operational execution. We expect non-GAAP operating expenses to increase to $15.3 million, non-GAAP R&D expenses to be approximately $10.7 million and non-GAAP SG&A to be approximately $4.6 million. The increase in non-GAAP R&D reflects increase NRE and product development costs as we advanced our product portfolios.

Also in Q2, we expect interest and other income to be approximately $150,000. We expect our tax provision to be close to $0, given our current levels of U.S. in foreign profitability.

We expect non-GAAP EPS for the second quarter to be $0.25 per share. We expect our GAAP EPS for the second quarter to be a loss of $0.15 per share. This includes an estimated $5.8 million of FAS 123R, stock-based compensation and 3.3 million in the amortization of intangible assets. However, we expect our GAAP share account to be approximately 22.6 million and our non-GAAP share account to be approximately 23.9 million in Q2.

This guidance does not include today's announced purchase of IDT's Network Search Engine Assets, which we acquired for $90 million plus the cost of inventory on hand at close.

We expect the transaction to close sometime in Q3, following customary closing and regulatory filings. Upon closing of the transaction, at our auction we may pay the entire purchase price upfront or we will pay IDT's $60 million plus to cost of inventory and we'll issue to IDT a $30 million promissory note payable on two installments of $15 million each from the first and second anniversaries of the closing.

This concludes our prepared remarks for the call. And now we'll happy to turn the call over to the operator for questions. Thanks

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question comes from the line of Adam Benjamin from Jefferies. You may proceed.

Adam Benjamin - Jefferies & Co.

Hey, thanks guys. Couple of questions here. First on the overall markets, Ron. You gave a lot of detail in terms of the markets you're addressing. Is there any way you can kind of quantify where you're at in terms of design ramp and in terms of where you are in terms of penetration of those end markets just so people can get a better idea of where you think you are today and where you can be in the next call it three to five years?

Ron Jankov

Yeah, I think, well, if you take the two carrier networks, wireline and wireless, I'll take about those first. In the case of wireline, I think it's still the majority of wireline connections out there are with the legacy networks that are not IP based. As all around the world everyone starts to rollout IP based versions to support things like IPTV, video phones and other things like that. So we're probably maybe 20% of the way into that cycle, so we survived 80% of that to go.

And also, we've only ramped with the couple of customers on wireline; Huawei and Alcatel. We still have Ericsson, Tellabs, ZTE, Nokia and others to ramp. So, it could even be less than that 20% number.

Wireless were even earlier. Really Q1 was our first significant wireless quarter. So we're just at the very, very tip of beginning there, just starting. And I think over time if you look at five years out, I think this wireless infrastructure market could be our single largest market.

NETLite, just go down the left, another market really Q1 was first significant revenue quarter for these new products. And Layer 7, this year will be the first significant year, but really 2010 is when that thing is going to ramp significantly. So, we're really... it's really early in all the markets. Enterprise networking is really the only market where we've already achieved a significant level of penetration.

Adam Benjamin - Jefferies & Co.

Got it. That's helpful. And just some details on the IDTI acquisition. Obviously, it's been talked about that there were some employees like though months back. Can you guys give some more details in terms of how many employees you're acquiring with that acquisition and then just the current run rate of the business? Obviously had to come down given the economic environment, but giving some sense of the cost structure and revenue associate that will helpful.

Michael Tate

Sure. We can't really specifically comment on the revenue levels until the deal closes, which we anticipate will close in Q3. We do plan on taking some operating expense along with the revenues. But some of the amounts in the details of that have quite been firmed up yet. So, we'll update to you guys once it gets closer to closing.

Adam Benjamin - Jefferies & Co.

Okay. Maybe, is only as more helpful Mike, on the gross margin, do you expect these products to have equivalent gross margin to where you're at today?

Michael Tate

What I would say is, adding these into the mix that we still do a very accountable with our model, a 65% in achieving that or above.

Adam Benjamin - Jefferies & Co.

Okay. Got it. That's all I have. Nice job.

Michael Tate

Thanks.

Ron Jankov

Thank you.

Operator

Your next question comes from the line of Nicholas Aberle from Caris & Company. You may proceed.

Nick Aberle - Caris & Co.

Hey guys. Just a follow up on that IDTI. I think, it doesn't sound like you guys gave too many specific details. But Ron, you did talk about some different products going into some new markets and new applications and an increase in TAM associated with those products and end-market. So, is it, would it be possible to qualitatively talk about some of those opportunities?

Ron Jankov

Yes. We've talked about in the past that we felt that we were winning 65 to 75% of this new way of designs and wirelesses and wireline infrastructure. Well, that leaves a nice big chunk of 25 to 35% that IDT was winning. So, and that includes... they had followed a particular focus on Ethernet access and that's a much more broadly expressed face customer base. And so, we think we're going to again a TAM in a big expansion of our Ethernet access customer base. But in general, a bigger expansion into wireline and wireless infrastructure.

Nick Aberle - Caris & Co.

Got you. And then, will it be possible to clarify the expanded TAM earn out ?

Ron Jankov

Well, I think, I agree with Mike that we'd like to do that on the call following the closings. So, we'll have a lot more detail for you at that time.

Nick Aberle - Caris & Co.

Perfect. It's been a long time coming on the NETLite stuff, good to see that start to ramp. Any incremental color there on which customers is specifically, if there is somebody outside of Huawei, that you are shipping to and then maybe what type of revenue run rate you saw on that business for Q1?

Ron Jankov

Well, Huawei was the, kind of the first initial ramp customer. And they represented a significant piece of Q1. We're very excited about this. I think the important thing is the fact that one customer was able to ramp is that the silicon is solid, both from our sales and from our partners and software as well. There is some customers look much bigger quantities. They are going to be ramping later in the year. Guys like Extreme and Alcatel and other very, very large entry level switch customers that haven't yet announced their plans in this area. So, we're very excited about this. I think if any thing, this thing is going to be bigger than our expectations. Just took a little longer to get here, but now that's here, its coming at a nice time.

Nick Aberle - Caris & Co.

And then on... so looks Cisco and Alcatel-Lucent both were down sequentially in Q1. I think you guys anticipated Alcatel being down, Cisco you thought were going to be flat to up. So that was basically just more inventory rationalization going on there. And looking into Q2 what would you kind of gauge those customers to be up with the rest of the year business?

Ron Jankov

Well, Cisco has been taking the inventory down to levels that we've never seen before. So, at some point we're going to start purchasing to demand, because their inventory is very, very lean. Through the channel, we have insight into their width and work in progress and well our inventory is well at the CMs. So, it is at a low point for sure on the last actually just like the other.

So, just system consuming to demand should be an uptick for us, as well as we have a couple of new switches that is one going to ramp late in Q2 and other ones going to ramp in Q3. So we feel we're going to see some solid growth on the enterprise side of Cisco. But also in Q3 we got the ramp up this XR 12000 that uses 12 of our chips per cards. So that's going to be a real nice boost for us in Q3.

So I feel still pretty get about Cisco in general in the next couple of quarters. Our Alcatel should grow together with the rest of our business in Q2. And they have also given the strong indications on Q3 as well.

Nick Aberle - Caris & Co.

Go you. And any update on your kind of businesses in Japan in Korea?

Ron Jankov

Well, Japan has coming back a little bit here in Q2, not dramatic but I think some other companies have talk about NTT continuing with the next phase of the NGN build out. So we are seeing a little bit of recovery in Japan, not dramatic but it's up a little bit in Q2.

Nick Aberle - Caris & Co.

Perfect. I'll hop back in queue. Thanks guys.

Michael Tate

Thanks.

Operator

Your next question comes from the line of Gary Mobley from Noble Financial Group.

Gary Mobley - Noble Financial Group

Hi guys. I was curious to begin to your thought process regarding this acquisition of IDT's Network Search Engine business. I think it's widely known that it takes a let of memo early in March that they are going strongly lead of the revenue from this division and no longer investing it from minority standpoint. So, I'm just curious why you felt you had to buy it versus just letting that business die into buying? Is it more a function of, if this a positive net present value investment or do you think you can get good deal technology out of it?

Ron Jankov

Well, I mean there was many for us to do this. Certainly, wasn't necessary but we saw many opportunities here. Certainly IDT is been in this business even longer than us. They were the first guy in this business. So there is lot of fundamental patterns and so fundamental IP that we wanted to control basically 75 patterns is a lot, there is another 20 or 25 or also unfilled. So, this is a significant amount of IP that's quote our business.

And the other thing about it, if you the Cypress business more than three years go and that business is still growing for us. So, it's just show you have... we haven't invested any money into it, not at dime just show you how long these designs cycles are and how long that tails our. We expect this Cyprus business to be for another five years. So, there is a significant amount of revenue and earnings potential available to us.

As it is also mentioned on the call maybe because of their broader, their bigger company broader sales force, they have reached some corners in the internet that we haven't yet been able to get to. We're picking up some new customers, picking up some new TAM and also, of course, solidifying our position with customers that we're already doing business with. So there is a lot of reasons for us to do this. We feel very strongly as positive for us. And it's just going to forward our momentum and allow us to... gives this even larger critical mass for investing in new generations of products and to diversifying our TAM into other products.

Gary Mobley - Noble Financial Group

Okay. And one additional follow-up question on the acquisition. Now I'm sure you've had discussion with Cisco, reconsidering this purchase. What did Cisco have to say and what sort of terms negotiations do you think you've to go through with the Cisco as a function of this acquisition?

Ron Jankov

With Cisco, generally is very positive about this deal. And only important things is we'll be picking up some products where the competition is Renaissance. And because IDT was not continued to invest in this business, I think with a little bit concern that there were some exposure from Cisco. There is some lots of turmoil at Renaissance these days as well that maybe these sockets, some of which are very important like in the CAS 6-K (ph) for example, would not have an, we'd call an active supporting supplier. So the feedback from Cisco has been very positive and they are happy that there is an active supplier that's going to be supporting some of these key boxes.

Gary Mobley - Noble Financial Group

Okay. Where are you guys going to get the money for that acquisition, assuming you had to pay, you're not paying for the entire amounts at closings?

Ron Jankov

Well, we didn't pay for this fair amount of closing, we would take out a line of credit. But we have a very, very strong cash-flow. It's been very strong and consistent. This is just going to add to that. So we feel very comfortable to make these loan payments.

Gary Mobley - Noble Financial Group

Got you. Thanks guys.

Michael Tate

Thanks.

Operator

Your next question comes from the line of Romit Shah from Barclays Capital. You may proceed.

Romit Shah - Barclays Capital

Hi guys. Thanks for taking my question. Ron, I was wondering if you could provide some color on the segment data? You mentioned wireless infrastructure has been very strong coming out of China. So what percent of revenues that derived from that? And then the next part is maybe it's too early, but looking into LTE, what kind of interaction are you seeing there and what kind of opportunities that are opening out? Thanks.

Ron Jankov

Well, I think certainly the China 3G is exciting because it's the thing that's growing the fastest right now. But if you look at Huawei was 13% of our business, and maybe a third of that is wireless, just kind of just starting. So, maybe that's 4%, maybe 20% of Alcatel business likewise. So, it's not... it's less than 10% of our total business right now would be my guess. But I expect that percentage to grow quite steadily over the next five years. And maybe even to accelerate in the timeframe of LTE, and clearly in the case of LTE, because of the stronger bandwidth requirements, I mean more quality of service needed, more access control, more security, and it's also going to be exclusively using V6 packets, which is four times more of the processing power from our chip. So, we expect to really benefit when LTE starts to ramp.

Romit Shah - Barclays Capital

Any designs you are working on?

Ron Jankov

We are engaged with 100% of the LTE equipment manufacturers.

Romit Shah - Barclays Capital

Okay. Thank you.

Operator

Your next question comes from the line of Sandy Harrison from Signal Hill. You may proceed.

Blake Harper - Signal Hill

Hi. This is Blake Harper for Sandy. I wanted to ask just to expand on the China again. I think maybe you had indicated before that you expect to be participating a little bit later than some of the earlier guys. And you seem to experience some uptick from this business pretty early. Would you say that you got it earlier than you thought or is there still a lot more to come in the second half or how do you see this trending from here compared to what you expected?

Ron Jankov

Well, we still have the same belief that it's going to be steady rollout for us. Because this initial ramps, they get the base stations out there. But they don't necessarily populate all of the line cards for the edge routers until subscribers actually come online, which will start to happen till Q3.

The reason our Huawei business was strong really for three reasons, only one of which was wireless. The initial rollouts of also a new IPTV based wireline thing in China. So we got first business for that in Q, and also, with their first ramp of there NETLite enterprise switch. So, Huawei was strong just across the board for us, not just driven by wireless. We think the wireless will steadily increase there. And also, of course, we add layer on Alcatel and ZTE and Ericsson later in the year, wireless should continue to have a steady growth for us, not just a blip her and there in the first half of the year.

Blake Harper - Signal Hill

Okay, thanks. And then where else outside of China do you see some of the bigger mobile wireless infrastructure applications for you? Where do you, what are the countries and regions do you see the biggest opportunity for you?

Ron Jankov

Well, I think ELAS is the other place that's surprisingly strong. Apple keeps selling record numbers of iPhones and RIM is selling record numbers of Blackberry's et cetera. And that essentially straining the infrastructure, the 3G infrastructure in the U.S. So we're seeing pretty steady rollouts of wireless infrastructure here in the U.S.

I know that AT&T and Verizon's CapEx budgets are under strain, but not for this, we'll call it high end 3G and IT backbone stuff. They are still increasing their CapEx in those areas. So, U.S. is actually pretty strong for us right now.

Blake Harper - Signal Hill

Okay. Thanks for taking my questions.

Michael Tate

Thanks.

Operator

Your next question comes from the line of David Wu from Global Crown Research. You may proceed.

David Wu - Global Crown Research

Yes, good afternoon. I was just wondering about two things. First one, release on the IDT deal. Were there any competing deal in this situation and can you talk about, do you have any concern that the regulators might look at this as too high market share after you finished the deal? Then third, are there any plans to sort of migrate the product family to a more.... to future roadmap that is more map to your core NetLogic Search Engine business?

Michael Tate

Okay, David. I'll take the first two and then, Ron, I guess take the second and the third. No, we're not aware of any other active bidders in the process. But, we're never certain about that.

In regards to the regulatory filings, we will make our filings, we believe we file a good case for approval, but that's part of process as to file the documents and then run that to the course. And that's why we are saying the closer, probably sometime in the third quarter, and that's the timing of that.

Ron Jankov

What we find with our customers is that nobody wants to change the design once it's done. So my expectation is that we'll be supporting these IDT products for the next 10 years. However, for brand new designs, we would work with the customers to migrate to the NetLogic base. And of course, this is another reason why to feel like this is good, because we can migrate these customers much soon than we could under normal circumstances.

David Wu - Global Crown Research

I see. Ron, is there a risk that essentially while CISCO likes stable or committed suppliers, they look at the space and say, Gee. I'm buying all these things from one vendor. What is the policy towards multi-vendor and would they trust the NSC business really on the shoulders on only one company?

Ron Jankov

Well, for the last 12 months, Renaissance has been by far the largest supplier to Cisco. And even close to this transaction we probably be about equal. So, I think in the case of Cisco, they don't have that concern.

David Wu - Global Crown Research

I see. Thank you.

Michael Tate

Thanks.

Operator

Your next question comes from the line of Matt Robinson from Wedbush Morgan Securities. You may proceed?

Leo Choi - Wedbush Morgan Securities

Hi, this is Lee Choi for Matt. Just a quick question. I know you guys aren't giving a lot of details on IDT. But I was wondering if you guys are leaning towards thing paying the forecast amount or paying to 60 million loan warranty, and I was wondering what kind of rates are we looking at or should we look at for the loan payments?

Michael Tate

Sure. We do expect to you know incur debt financing either through IDT in the note or more traditional forms. The terms of what form that will take it ultimately hasn't quite been finalize yet. So, but the market's interest rates for that type of the debt, we're looking at.

Leo Choi - Wedbush Morgan Securities

Okay. Thank you. And just a couple of housekeeping questions. Can you give the operating cash flow and capital expansion number if you can guys?

Michael Tate

Yes. The operating cash flow was $8.6 million, and we had $300,000 of property purchases.

Leo Choi - Wedbush Morgan Securities

Okay. Thanks a lot guys.

Michael Tate

Thanks.

Operator

Your next question comes from the line of Hans Mosesmann from Raymond James. You may proceed.

Hans Mosesmann - Raymond James

Thanks. Just a clarification on the IDT to going back once again there. Are you going to deal with this business like you did or are doing with the Cyprus business? You're not going to really invest a dime there, you're just going to milk it and kind of have take it eventually these designs to the NetLogic designs. Is that what are you going to do?

Ron Jankov

Well, I think the exception there will be that we'll continue to drive that yield. Some of these are new products, particularly some of the non-Cisco design wins. It's kind of a brand new product from IDT. And we'll invest in reducing the cost of that and increasing its gross margins. But that will be the main area we'll invest. So, it won't be a large amount of R&D expense to us to maintain these products and improvements.

Hans Mosesmann - Raymond James

Okay. And then as a follow-up, do you share the same foundries by chance?

Ron Jankov

Most of the product will come from TSMC. So, yeah, that's the same one as our foundry.

Hans Mosesmann - Raymond James

Okay, good. Thanks.

Operator

Your next question comes from the line of Cody Acree from Stifel Nicolaus. You may proceed.

Cody Acree - Stifel Nicolaus

Thanks guys. On the gross margin front with NETLite finally starting to come about, of Mike, maybe can you comment a little bit as we get into the second half, as NETLite starts to come at little more meaningful. Does that start to have any impact to the gross margin trends or is that a longer term issue?

Ron Jankov

Well, I'm going to take that instead of Mike. Mike, can add some color to it. But, because of the delay in NETLite, it actually gave us the opportunity to migrate that chip down to 55 nanometer technology. It's a very small dime. And the yield on 55 are really been ahead of our expectation.

So, I mean NETLite is at least our corporate average and may actually creep above it.

Cody Acree - Stifel Nicolaus

Great.

Ron Jankov

So, it's not going to have a negative impact.

Cody Acree - Stifel Nicolaus

Perfect. OpEx, as you head into the second half lots of constraints, lots of controls, but starting to return to little of growth. So, what kind of trends should we expect for the second half?

Michael Tate

We're still focus on driving on towards our long-term mile 25%, we're still operating quite a bit below given the revenue coming down in Q4 and Q1. So we'll see expenses trend up as we continue to invest in our product lines, but at a rate slower than our revenue growth.

Cody Acree - Stifel Nicolaus

Great, great. And then lastly, the enterprise business still be a bit soft, I guess what's giving you some encouragement that that business is likely troughing in the second quarter or does that extend on into Q3 before we start to see your recovery?

Ron Jankov

Well, I think the run rate business we think could be relatively moderate for the whole year. The reason we're confident that we're going to see some growth there in the second half is because we were ramping it quite and bit of new enterprise switches, both in Cisco and outside of Cisco. So it's the ramp of the new programs should give us growth even with the very, very weak backdrop for end-demand.

Operator

And your next question comes from the line of Kevin Cassidy from Thomas Weisel Partners. You may proceed.

Kevin Cassidy - Thomas Weisel Partners

Thank you for taking my call. May if we could turn to the 10 Gigabit PHY business, can you say some of the dynamic happened there? You say that you expect that to start growing again?

Ron Jankov

Yeah, there was a severe inventory correction in that market, particularly in the March of that part of that market in Q4, and Q1, and throughout Q1 for that to stabilize. But we do see it table and we see Q2 upticking from Q1, as verification of that inventories may clean down.

Kevin Cassidy - Thomas Weisel Partners

So, you think it's mostly just same inventory demand, isn't' actually picking up much different than what does it had been?

Ron Jankov

Well, we think that the demand is taking up a little bit as well. I think total ports is not going up, but 10 gig as a percentage of ports is going out. So, we do think there will be some port increase on 10 gig this year.

Kevin Cassidy - Thomas Weisel Partners

Can you just, maybe just say what might be driving that? Is it price or the need for higher bandwidth or both?

Ron Jankov

Well, certainly the fact that the price for 10 gig is now kind of meet that classic class over point where it makes more sense to put some 10 gig on it and many one gig. So that's part of it. But more important than that is all this internet video that's going around. I mean these data centers, clock computing, these high-end servers and also that the backbone for both wireline and wireless. Just kind of everywhere in the network need for bandwidth is there, which is driving the upgraded 10 gig.

Kevin Cassidy - Thomas Weisel Partners

Okay, great. One thing if I go back to Renaissance, there is been an announcement I believe them merging with NEC. Do you see that changing their business strategy at all when it comes to the Cisco and the network security processes?

Ron Jankov

We have no idea of how that's going to effect it. Hopefully, a little bit of confusion over there will be to our advantage. But other than that we don't know.

Kevin Cassidy - Thomas Weisel Partners

Okay. Thank you.

Michael Tate

Thanks.

Operator

Your next question comes from the line of Alec Shah (ph) from Dot Davidson (ph). You may proceed.

Unidentified Analyst

Hi guys. Thanks for taking my questions. Just the first one, maybe just if you can go into a little more detail about how you think the wireless revenue will kind of shake out for the rest of this year, especially with the build out in China. I know you saw a pretty good order uptick in Q1. But I'm trying to get a sense of how you think that's going to be kind of progressing through the year.

Michael Tate

Yeah, I mean, clearly, we saw China pick up pretty strongly in Q1 and we see that continuing in Q2, and specifically with Huawei and Alcatel. We think about wireless and 3G, there has been a lot of focus on China, but we think it is a worldwide deployment that's playing out here and the U.S. is going to be strong and the rest of the world.

So, for us, we're coming to up very strong Q1, Q2 in China. We're going to take out a kind of a moderate view on how the back half plays specifically to China. But even with that view we still feel good about wireless revenue growth; one, because it's worldwide. And then also because we have new customers coming into the mix as we play into back half of '09 and into 2010 like Ericsson and ZTE and the customers we talked about.

Unidentified Analyst

And just a follow-up on that. So then, would wireless be one of the end markets as you mostly said about for the rest of this year or is there something else that we should be paying attention to? And then also on a geographical basis, is there a specific area that you guys are targeting more at this point?

Ron Jankov

Well, in terms of the market, where wireline is strong or us well. So we think that will be the case throughout this year because there is some very new deployments. Again China is very underserved with the IPTV at this point and so is most of the rest of the emerging markets which are going directly to the IPTV model that are not having cable or some other way to getting video to homes and to businesses. So that's a strong market for us.

NETLite, it's brand new market. It looks to be, should be up every quarter this year and likewise into 2010. Layer 7 is just getting started, should have been more significant in the second half as another major customer launches. So, there is quite a few markets that look good for us this year.

In terms of geographic, I think we mentioned China and the U.S. But, I think also, just across the board, when you look at some of the CapEx deployments, whether it's an emerging markets or year up or whatever, even though CapEx budgets are under strain, what they are doing is almost eliminating legacy CapEx and focusing what dollar they are spending on to this new IP backbones.

So even in this tough CapEx environment, we see that the business is pretty stable around the world for trying to put IP backbone into both wireless and wireline infrastructure.

Unidentified Analyst

Okay great. And if I can just one more quick question on. IDT business, is there a specific technology that you're going to picking up as well from this so you didn't kind of already address at this point?

Ron Jankov

It's not a specific technology. I think it's just picking up new customers and new designs in our existing customer based. And then also again some additional TAM, some areas of the internet that we hadn't really targeted or had chance to penetrate yet. So, not that we didn't have the technology to go to those markets, we just we're too focused elsewhere.

Unidentified Analyst

And so the places that you haven't address yet, would they be kind of higher end markets or would they be kind of more consumers lest wholesale markets?

Ron Jankov

I wouldn't say either one. I just say that in general similar products to ours, but just again reaching customers, we didn't reach and TAM and sockets we didn't reach, but not like dramatically lower in ASP or gross margin or anything like that.

Unidentified Analyst

Okay, great. Thank you very much.

Michael Tate

Thanks.

Operator

: Your next question comes form the line of Dan Morris from Oppenheimer. You may proceed.

Dan Morris - Oppenheimer & Co.

Hey guys. This is Carl Strange (ph) on Dan's behalf. Just a first question for you Mike. What was turn's requirement to guidance, are you still looking at zero returns full coverage in the backlog?

Michael Tate

Yeah. We have more than full book coverage just like we had in Q1, where just given the macro economic situation we're continuing to work with customers if they have any needs for rescheduling will factor that in. So, it's actually we're guiding to negative turns again.

Unidentified Analyst

Great. Okay, thanks. And Ron, could you talk a little bit about the competitive landscape within the NETLite market? Who are you guys going up against at this point, if anybody?

Ron Jankov

Well, really in NETLite we're going up. The legacy is internally designed solution that didn't use knowledge-based processors. So, we're essentially stealing TAM from internal solutions. There was no IDT or Cypress that whoever was not into this market, basically it was in-house basics.

Unidentified Analyst

Cool. All right, thanks. And then any color on expectations for pricing in the 10 gig market in the back half of the year, when things do come back and inventories are replenished?

Ron Jankov

Well, we've seen the pricing in the 10 gig market to be normal. The big price drops in 10 gig happened a couple of year ago. And they've been relatively stable for the last several quarters and we expect that for the next several quarters.

The 10 gig designs are very sticky, similar to KBP designs or others. These are very, very difficult parts to design with and there is a lot of design work and software and everything between these different size in terms of switching from one vendor to another, which tends to make prices relatively stable.

Unidentified Analyst

Great. All right, thanks guys.

Michael Tate

Thanks.

Ron Jankov

Thank you.

Operator

And now we no further questions in queue. I will now like to hand it over to Ron Jankov for closing remarks.

Ron Jankov

Well, thank you. And thanks to everyone for joining us today. During the second quarter, we will presenting a several conferences around the country. We thank you for your continued interest in our NetLogic Microsystems. And we look forward to speaking with you in the near future. Bye-Bye.

Michael Tate

Thanks

Operator

Thank you for your participation in today s conference. This concludes the presentation. You may now disconnect. And have wonderful day.

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