Volterra Semiconductor Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.22.13 | About: Volterra Semiconductor (VLTR)

Volterra Semiconductor (NASDAQ:VLTR)

Q1 2013 Earnings Call

April 22, 2013 5:30 pm ET

Executives

Mike Burns - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, Treasurer and Member of Non-Officer Equity Committee

Jeffrey Staszak - Chief Executive Officer, President, Executive Director and Member of Non-Officer Equity Committee

Analysts

Vernon P. Essi - Needham & Company, LLC, Research Division

Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division

John Vinh - Pacific Crest Securities, Inc., Research Division

Brett Piira

Alex Gauna - JMP Securities LLC, Research Division

Bobby Gujavarty - Deutsche Bank AG, Research Division

Michael C. Lucarelli - Evercore Partners Inc., Research Division

Christopher J. Longiaru - Sidoti & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Volterra Q1 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Monday, April 22, 2013. And I would now like to turn the conference over to Mike Burns, Chief Financial Officer. Please go ahead.

Mike Burns

Thanks, and welcome to Volterra's first quarter 2013 conference call. Joining me is Volterra President and CEO, Jef Staszak.

Earlier today, we issued a press release with our financial results. It's posted on the Investors section of our website at volterra.com. On this call, we're going to discuss non-GAAP financial measures which exclude the effect of stock-based compensation expense. There's a GAAP to non-GAAP reconciliation in our press release and on our website. Unless we specifically state otherwise, our guidance will refer to non-GAAP. We're also going to make forward-looking statements. We will base these statements on the company's current views and expectations, but specific risk factors may cause actual results to differ materially from the forward-looking statements. Please refer to today's press release and our annual report 10-K filed with the SEC on March 5, 2013, for these risk factors. Volterra undertakes no obligation to update or to revise the forward-looking statements. With that, I'll turn the call over to Jef, to provide an overview of the business and our results.

Jeffrey Staszak

Thanks, Mike. Good afternoon, and thank you for joining us today. I'd like to start by providing a short recap of the Q1 2013 financials, provide an update on our focused markets and provide guidance for Q2 2013, then I'll hand it over to Mike to review the details of our financial performance for the quarter, and then we'll open it up for any additional questions you may have.

Revenue came in at the midpoint of guidance at $39.9 million versus $40.2 million in Q4 2012. Non-GAAP EPS was at $0.22 and non-GAAP gross margins were approximately 57.3%, slightly lower than guidance due to lower-than-expected fab process yields. I'd like to talk now about our focused markets by reviewing both our current and future business opportunities.

Server and storage. As previously mentioned in our last earnings call, we expected our Q1 server storage business to be flat to slightly up, due to the continuation of the ramp of Intel Romley platforms by our customers. Server storage revenue came in relatively flat at $26.5 million from $26.7 million in Q4 2012. Both of our major customers' server product orders came in slightly below forecast. However, for the first quarter of the year, which is normally seasonally down, we are relatively pleased with the outcome.

Q2 is the sixth quarter of the Romley ramp. We expect to be shipping nearly 100% of Romley product to our customers this quarter. We are now powering 2 of the 3 of HP's highest volume rack and blade servers and are in their high-density hyperscale family of servers and the majority of IBM's xSeries and PowerPC servers. We expect incremental growth through the balance of the year, from design wins that we were awarded on the Intel Brickland multiprocessor platforms, which are scheduled to launch in the second half 2013, and as the economy recovers and hardware spending increases. Customer evaluations are progressing on the Grantley platform, which is a 2-processor follow-on platform to Romley. This new platform is expected to launch in second half 2014. Both the Brickland and the Grantley platforms will be using our new 0.18-micron CMOS Gen 7 products, which have a considerable performance advantage over the competition, and we have been getting very favorable feedback from our customers during the evaluation process. In addition, we have redirected deployment resources -- development resources towards products for cloud computing on the Grantley platform for additional 2014 and 2015 revenue opportunities. We expect design win decisions for Grantley to be complete in the Q3 time frame. Based on recent customer feedback, I'm even more confident on Grantley now than I was 3 months ago.

Longer term, we expect the technical requirements for Pearly [ph], the next major server platform after Grantley, to be very favorable for Volterra in terms of dollar content and the need for our highly differentiated solution. We also have development resources for products to address lower-power servers, as that market develops -- or begins to develop in the 2015 time frame. In Q2 2013, we expect server storage revenue to be flat to slightly up from Q1.

Notebook. We expected our notebook business to be slightly up in Q1. However, our notebook business was flat in Q1 at $11 million versus Q4 2012, as orders did not materialize per our customers' earlier forecasts. In our January earnings call, we indicated that we thought at the time that our 2013 notebook annual revenue would be in the mid-$40 million range. However, the last -- however, over the last few months, our customers have been revising forecasts downward from a declining PC business, less than enthusiastic response to the new Ultrabook platforms and the Windows 8 launch. As a result, we are now estimating our 2013 annual notebook revenue to be in the range of $30 million to $35 million.

As many of you recall at our Analyst Day in September, during our notebook business review, we were cautious in our outlook awaiting customer feedback on direction for the product roadmaps, as Intel pushed hard towards very low-power processors in consumer and commercial notebooks. Therefore, we reduced our investment directed at lower-power notebooks, where the revenue opportunity is relatively small and required margin profile is below our targets and shifted certain resources to higher-margin revenue opportunities in cloud computing, Atom and lower-power data transfer servers in our server storage business and higher-growth communication applications in our communications business and in our energy business. Over time, this will increase our gross margins as we focus on a richer mix of revenue, reflecting a sharper focus on growth in our server storage, communications and energy products, and slower growth in notebooks. In Q2 2013, we expect notebook revenue to be down sharply.

As stated at the last earnings call, our communications business in Q1 was expected to be flat. Actual results came in as expected at $2.4 million versus $2.5 million in Q4. We have stepped up our investment in both product and business development efforts in this market segment and, as a result, we are starting to address an array of new design opportunities. This effort is helping us open up new applications and opportunities with large new communication customers such as Huawei, ZTE and in HP's ProCurve line of products. These new products and customers will help drive incremental growth in the second half 2013 and beyond. For Q2, we expect the communication business to be flat to slightly up.

In our new energy business, our plans are on track for incremental revenue in the second half 2013 from our new solar products. These products are embedded in a solar panel and isolate each cell, which increases the energy output up to 20% more than a conventional solar panel. Customer activity is progressing nicely, with a heavy interest level in the new technology.

Guidance. Finally, I'd like to summarize our business outlook for Q2 2013. We expect revenue to be in the range of $34 million to $37 million, as a result of lower-than-expected notebook revenue. Non-GAAP EPS will be in the range from $0.13 to $0.19, and non-GAAP gross margins to be in the range of 58% to 58.5%, as we recover from the process yield issues experienced in Q2 or in Q2 -- in Q1, and move towards a richer mix of server storage and communication products through the balance of the year. Although our decision to deemphasize our notebook activities was a difficult one, we believe this -- the strategic change we have made is a right one, as we focus our resources on future growth opportunities in cloud computing and servers, new communication equipment applications and energy.

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

Mike Burns

Thanks, Jef. Turning now to Q1 results. Our revenue mix was similar to the prior quarter, with 66% server and storage, 28% portable and consumer and 6% networking and communications. Our turns orders were approximately 20%.

In terms of annual growth in our strategic segments, we grew our server revenue 8% from a year ago and we grew our communications revenue 5% from a year ago. Gross margin was 57.3%. This is somewhat lower than expected, primarily due to lower fab process yields on a couple high-volume parts. We expect to bring yields back to normal levels over the next couple quarters.

We contained total non-GAAP spending to $16.9 million, less than our guidance of $17.1 million. Within our spending, R&D of $10.4 million was unusually high this quarter due to some accelerated new product output, but we will drop that back down in Q2. We kept SG&A expense below budget at $5.7 million, primarily by lowering profit-dependent accruals. We kept litigation expense under budget as well at $0.8 million. Together, we delivered 15% operating and net margin, $5.8 million net income and $0.22 EPS non-GAAP.

Looking at the balance sheet. We have $152 million in cash or $6 per share. During the quarter, we generated $8 million cash from operations, paid $4 million cash out for our Q4 acquisition of Element Energy, we repurchased approximately $2 million of stock and we invested $1 million in capital expenditures. By maintaining moderate production levels, we reduced inventory days by 4 to 96 days. With improved customer collections, we reduced days receivable by 7, 49 days.

Turning to our Q2 outlook. We are seeing a more-rapid-than-expected decline in the notebook market and the supply chain actively reducing inventory levels of current-generation notebooks. As a result, we are prudently forecasting Q2 revenue in the $34 million to $37 million range. We plan to expand gross margin sequentially to be approximately 58% to 58.5% range, as our richer revenue mix and our gradual yield improvement more than offset our lower production.

We're reducing expenses in Q2 to $16.4 million total, down sequentially and year-on-year. We're budgeting $9.7 million R&D, $5.7 million SG&A and $1 million litigation. With the drop in notebook revenue, moderate gross margin expansion and reduced expenses, we expect to earn $0.13 to $0.19 per share non-GAAP. We have $7 million remaining in stock buyback authorization and are continuing to repurchase more stock.

A couple of comments for modeling the second half of 2013. Our gross margins should expand gradually through the year, as our yields normalize and we benefit from our richer mix of revenue. Our R&D should naturally glide down a bit, as we wrap up product development for notebook and focus our investments on markets that are growing. We currently expect SG&A and litigation to remain approximately flat in Q2. We're forecasting a non-GAAP tax rate of approximately 2% to 3%.

I'd also like to add one additional note on our financials as we transition the company this year and next. The rapid decline in the notebook market justifies our strategic decision to reduce our dependence on and our investment in that market. We have now proactively repositioned the company and reallocated investment towards higher-margin growing markets, such as cloud server, communications and energy.

As our revenue mix transitions over the next couple of years, we are committed to deliver expanding gross margins, healthy operating margins and continued cash generation. In addition to today's call, we'll be participating in several upcoming Investor Relations events. I'll present at the Jefferies conference in New York on May 7. I'll meet with investors in the mid-Atlantic on May 8 and 9 with Evercore, and I'll present at the JMP conference in San Francisco on May 14. Jef will present at the B. Riley conference in Santa Monica on May 21. We'll also continue our regular virtual visit program. Please contact Heidi Flannery, investor relations, at (510) 743-1718, if you'd like to participate in any of these events. We plan to next update our financial results and guidance at our second quarter conference call, tentatively scheduled for Monday, July 22, 2013.

Before we begin the Q&A, in the interest of time, we ask that each analyst please limit themselves to 2 questions. And then as time allows, at the end, we'll go back to anyone who has a follow-up question. With that, we'll now turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from the line of Vernon Essi from Needham & Company.

Vernon P. Essi - Needham & Company, LLC, Research Division

I was wondering, Jef, if you could address probably one of the bigger situations happening in the server market, and that's the persistent story that IBM is going to sell their x86 server units to Lenovo? How do you think that would impact your business if that were to occur? And can you discuss any implications that it might have?

Jeffrey Staszak

Well, I -- well, we really can't comment on what IBM is going to do, but if they were to sell to Lenovo, like they did the notebook business, it would be very good opportunity for us. We have a very good relationship with Lenovo, so if that does materialize, it's only a plus for us.

Vernon P. Essi - Needham & Company, LLC, Research Division

Okay. And so, I mean, just the design teams and everything would remain intact, so to speak, and that's probably what happened when the notebook business was out -- sold?

Jeffrey Staszak

Yes. We can't really comment on any of that, Vernon. We don't have insight to that just yet.

Vernon P. Essi - Needham & Company, LLC, Research Division

All right, can't hurt to try. And then next big question here. As you sort of embark upon your cloud-based strategy and we move through 2013, what sort of milestones you'll be looking at to gauge your success? I'm hearing mixed things out there in terms of how you're penetrating some of those opportunities. What should we really be looking for? And how will we know that you've got some critical wins in that space?

Jeffrey Staszak

I think, as I indicated in the script, in the Q3 time frame we'll basically know where we're at. And I think in November, we're planning on having our Analyst Day and investor tour, so at that point in time we'd have pretty good idea where we're at. Up until then, I mean, right now, we're still in the design win stages and starting to do some quoting on some business, so it'll be the end of Q2, early Q3 time frame before we can get a pretty good handle on that.

Vernon P. Essi - Needham & Company, LLC, Research Division

And these would obviously be wins, not -- I mean, design wins per se? Not necessarily production revenue, correct?

Jeffrey Staszak

That's correct.

Mike Burns

Yes, Grantley is not expected to launch I think until late 2014.

Jeffrey Staszak

Yes.

Vernon P. Essi - Needham & Company, LLC, Research Division

Right. And one final question, to sneak one in. Just a clarification. Mike, you had said R&D -- through 2013, should we expect that to trend lower? Was that what you said in your comments?

Mike Burns

Yes. It will naturally come down a bit, Vern, as we -- we're wrapping up some investment, product development investment in the notebook side of things, and that will come down naturally, pretty gradually in the second half. So you should expect the second half this year will probably be a little bit lower than the second half of last year.

Operator

And our next question comes from the line of Tore Svanberg from Stifel Nicolaus.

Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division

This is Evan Wang calling in for Tore. About the yield issue that you mentioned, is that with your Gen 7 product?

Mike Burns

No. This is -- no, this is one of our Gen 6 products, and it's a very manageable issue, and we'll have that cleaned up next couple quarters here.

Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I was wondering if you could -- and you think, without this yield issue, what would your gross margin have been?

Mike Burns

It would have been within their guidance range. So we had guided for Q1 in 58% to 59% range and we came in about a point below that.

Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And so, again -- so what would be -- you said that this would recover gradually over the next couple of quarters, is that right?

Mike Burns

Right. Right.

Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Great. My second question is about your energy business. So you mentioned that everything is sort of on track, right? For first revenue in second half?

Jeffrey Staszak

Yes.

Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division

And is this going to be the third quarter? Can you give us a little more detail on that?

Mike Burns

It's a little too early for that, but it is on track. I wouldn't say it's sort of on track, it's definitely on track here for the second half. We indicated, I think, on our last earnings call, to have pretty moderate expectations. It's just going to be a start and important milestone for us to booking that first revenue in the second half and then it'll -- we currently expect that'll continue to ramp into 2014, '15 and beyond.

Operator

And our next question comes from the line of John Vinh from Pacific Crest Securities.

John Vinh - Pacific Crest Securities, Inc., Research Division

First question I had was the sharp decline in Q2. Can you clarify how much of that is your customers cutting forecast in anticipation to the Haswell ramp versus your decision to start pulling back from the notebook industry and maybe in certain cases where their gross margin levels are maybe below your corporate expectations?

Mike Burns

Sure. Yes, I mean, a couple of things to note for the guidance. We expect -- in terms of our growth segments, server and comms, we expect those to be flat to slightly up. The decline -- the sharp decline in Q2 is all notebook related and what we're seeing is clearly weakless -- weakness in the notebook market. We're also seeing customers reducing their inventory of the current generation of notebooks in anticipation of the new notebooks coming out, and so we're getting impacted by that. So that decline in the notebook is faster than we had previously expected.

John Vinh - Pacific Crest Securities, Inc., Research Division

Okay. And then normally, the offset of that is you'll start to see some initial builds for Shark Bay in the second half? Are you just -- is this a point where you're just starting to pull back from some of those opportunities? Is that what's going on there?

Mike Burns

Yes. I think there's some of that. There'll be -- I'm sure there will be some replenishment there. I mean, we won't participate to the full extent on the replenishment, as we did on the prior generation. We think some of that replenishment, for us, will be mostly commercial models and it's going to be mostly a second-half event. So we're here in this, facing a Q2 here where we're expecting a pretty drop -- sharp drop in the older models, we'll get a little bit from the new models but it's going to be second half before some of that comes back. And as Jef mentioned in his prepared remarks, we're thinking now, for the year, for notebook, roughly, we'll be in that low 30s type of range.

John Vinh - Pacific Crest Securities, Inc., Research Division

Okay. And then my last question is just can you give us a little bit more color on what the tail beyond 2013 looks like, given that you guys have obviously made a strategic decision here to kind of deemphasize notebooks going forward?

Mike Burns

Yes. It's a good question. I think there will be a tail through end of -- through '14 and into 2015 as well, where some of the product development we're doing now on Crescent Bay. Some of our customers want our products for that, so we've got some spins we're doing for that, and that'll launch in -- sometime next year and run into 2015. So we expect the tail to -- we have visibility at this point through 2015, along with that continued growth in server, growth in comms, first growth in energy, all richer gross margin segments for us. So we expect our gross margin mix to continue to improve as we go through the next couple of years.

Operator

And our next question comes from the line of Craig Ellis with B. Riley & Co.

Brett Piira

This is Brett Piira here for Craig. Most of my questions have been answered, but maybe if we could just go back and touch on the low-power server market. You mentioned calendar '15 you think you'll be participating in that. Can you just give more detail? I think we've heard more stuff out of Intel with Atom base and then we'll have 64-bit ARM next year, I think. So just -- can you talk about your timing and positioning in a little more detail?

Mike Burns

Yes. Our timing and positioning will reflect the market, really, so it's -- there's a lot of speculation that there's not much market there at the current point in time. So it's just our current view of when that market materializes, we'll have the products for it.

Brett Piira

Okay. So you don't see any design -- when do you think design wins will happen [indiscernible]?

Jeffrey Staszak

Oh, it's probably in the 2014 time frame. I mean, I think there's one guy that's kind of out in front developing a 64-bit -- a processor that has a 64-bit capability. The others will be coming out through, I think, the beginning of next year, in the 2014 time frame, and then it's about a year or so of development. So, I mean, that's why we just kind of stated the 2015 time frame that as that market develops, we'll start to see some revenue from that. But right now, I think, most of the ARM or the low-power processors are more advanced research types of opportunities.

Operator

And our next question comes from the line of Alex Gauna with JMP Securities.

Alex Gauna - JMP Securities LLC, Research Division

I wonder if I could follow up on the PC market. In getting back to $30 million, $35 million, it implies that we could have at least a reasonably strong snapback at some point. Are you looking towards Q3 or more Q4 for some of the Haswell to ramp? And is it Haswell a contributor or some of the refreshes that are still going on in Ivy Bridge that can cause some of the snapback?

Mike Burns

Yes. I don't think we're calling for a snapback. I think we're calling for a continuation at this low Q2 level that the Q2 guidance implies. Q2 is quite low so it may be a little bit better than that. And it's going to be a combination of business on for us on Haswell and business on the current generation of notebooks, and so it's going to be a real combination. But I think as we go through the year and as we exit the year, it will probably be primarily Haswell.

Alex Gauna - JMP Securities LLC, Research Division

Okay. And then looking out into 2014 then, can you give us some bounding of what the opportunity might be? I know you're talking about a tail, but is it a $10 million tail for the year? Is it more than that? Any help would be appreciated.

Mike Burns

I think it will be more than that, but the market is in flux quite a bit right now, so I'd be a little hesitant here in April to put out a number for next year, but it's likely to be down. We didn't pick up share on Haswell, so next year it's going to be mostly Haswell, versus this year is going to be a combo of the current generation and Haswell.

Alex Gauna - JMP Securities LLC, Research Division

Okay. And then one more on servers, if I could. I'm wondering what your sense is on the mix that you're facing towards enterprise or maybe systems selling into Fortune 500-type of companies versus cloud? And is there a content per box headwind you're facing as cloud grows faster than enterprise?

Jeffrey Staszak

It's definitely the revenue content is less headwind. I don't know if I'd call it a headwind. We're -- we've got a full-court press on and with respect to design wins and additional customers that we're trying to work with, but it's a little bit too early to tell as to what we're going to do in that segment, so I'd be -- I don't really...

Mike Burns

If you wanted to compare on average, the dollar content per box is going to be less, but the box -- the units are going to be growing nicely, so we'll have the right products for that and we'll participate that -- in that segment of the market.

Alex Gauna - JMP Securities LLC, Research Division

So if I'm understanding you correctly, you're characterizing it as an accretive or incremental opportunity that layers on to enterprise versus something that's taking away from that opportunity?

Mike Burns

Yes. It's an opportunity that we're not really participating in much right now. And so we've got the right products. We're the market leader in the server area so we should be participating and we expect to, going forward.

Operator

And our next question comes from the line of Bob Gujavarty from Deutsche Bank.

Bobby Gujavarty - Deutsche Bank AG, Research Division

Yes. Just had a question on your inventory situation. I mean, do you foresee some pretty rapid drop-off in the consumer and portable section? Is there going to be any scrapping of product or anything like that, that might be a headwind to margins going forward? Or -- just curious.

Mike Burns

Well, there's -- so lower -- we've lowered our production very significantly in the notebook, and that's a headwind right now in terms of -- you look at our production, what it's going to be in Q2 versus what it was Q2 a year ago, it's down quite significantly. So we're reacting quickly in terms of our wafer starts in our production, and we'll see how we go here. Right now the forecast indicates that we'll be fine on that, but it's clearly something that we need to significantly moderate our production on the notebook side, and we've done that.

Bobby Gujavarty - Deutsche Bank AG, Research Division

Got it. And then maybe a second question related to that. I mean, obviously, the gross margin percentage is lower longer-term, but, I mean, will you manage that business for cash flow in that when there's opportunities that -- for you to generate gross profit dollars that it makes sense? Or is that not how you're going to manage the business?

Mike Burns

Yes. No, we will. That's what we're doing now on Crescent Bay. There's some incremental spins and derivatives of products that we can develop that will be a good match for Crescent Bay, and that makes sense from a financial point of view. And we have a history of doing that. I mean, if you look at our guidance for Q2, we're now less than 20% notebook. If you go years back, our graphics or desktop business was 20% of revenue and that came down over time. And -- but we still have a little bit of revenue today from that segment. So to the extent it makes financial sense, we will, but in terms of where we're putting the bulk of our resources, it's into server and communications and energy.

Operator

And our next question comes from the line of Patrick Wang from Evercore Partners.

Michael C. Lucarelli - Evercore Partners Inc., Research Division

It's actually Mike on for Patrick. Could you guys talk a little bit about the cloud, comms and solar? And when each of those becomes a meaningful percent of revenue for you guys?

Jeffrey Staszak

Well, it would be with Grantley. So, I mean, Grantley, I would say, would be in full production until the 2015 time frame. Assuming Grantley launches in the second half of 2014, we'd start to see some revenue there, launch, if there's a launch in Q3, and then the ramp in Q4. And that would continue for a couple of quarters if it was to follow normal ramps like the Thurley and the Bensley ramps, not like this last Romley ramp, which was a -- more of a 6-quarter exception.

Mike Burns

Then on the communication side, we do expect net growth in 2014 and beyond. Solar first revenue this year, growing in 2014, growing in 2015. But we're clearly in a transition period right now, where the notebook business is dropping off and we're doing all the right things for the other growth areas and those will layer in here as we go through the next couple of years.

Michael C. Lucarelli - Evercore Partners Inc., Research Division

Got that. Definitely transition period. Last question. On gross margins, before, on old calls [indiscernible] we always talked about them being at the high end of the range, maybe raising it, and the past 2 times have missed. What has changed between now and then?

Mike Burns

I'm not sure what you're specifically recalling to, but the last 2 -- this quarter we had a yield issue that impacted our margins. And in Q4 we had a specific issue with bump, which is a process after fab. That was a one-time -- that was a charge that we took. What we have right now is lower yields, which ends up impacting our COGS and impacted our gross margin by about a point this quarter. 2 different issues there. The bump charge in Q4 was a one-timer; the yield issue, we have a plan in place to clear it up as we go through the rest of this year. So there are 2 different issues there. And then we've also -- our productions, we've brought it way down because we don't know if we'll have any excess parts here, so that's a bit of a headwind on gross margin at the moment as well.

Operator

[Operator Instructions] Our next question comes from the line of Christopher Longiaru from Sidoti & Company.

Christopher J. Longiaru - Sidoti & Company, LLC

Just a review. Can you give us the difference in revenue contribution once Grantley does come out? Is there a higher content on the Grantley platform?

Mike Burns

Yes. For us there will be. On the Grantley platform, there's more memory, particularly more dollar content for us on the memory side, we're also selling our new protection and distribution ICs into Grantley. And then on the CPU side, it's a little bit less. But overall, we've been running in that $50 kind of range for a 2-processor server on the Romley platform, for Grantley we think it will be a little bit above $50 range. And then Jef mentioned it briefly in his remarks for the follow-on after Grantley, Pearly [ph], initial look at that looks very favorable for us in terms of dollar content across the board, particularly on the CPU side. So that looks like a very good opportunity for us long term here as well.

Christopher J. Longiaru - Sidoti & Company, LLC

And just on the energy business, has there been any changes in that progression? Do you still expect some solar applications to be the first major contribution from that? Or can you give us an update there?

Mike Burns

Yes. We expect first revenue in energy, in our solar segment, later this year. That's progressing nicely. We've indicated last time that there -- several customers are testing our product, and that's ongoing and going well. And we expect there's 2 customers that we expected -- expect to ship products to later as we go through the year. The market there is quite large and our value proposition is very compelling. I think there's something like 30 billion watts of solar panels installed. Each panel is typically 250 watts. So if you break that down into number of panels, that gets you to about 120 million panel equivalent units, and our dollar content there is $12 to $25 or $0.05 to $0.10 per watt. So it's a very significant opportunity for us, nobody else is doing this. We can enable extraction up to 20% more energy. And then we would also reduce the balance of the system costs. We eliminate a junction box, and with our next generation of products we'll reduce the cabling, reduce the combiner box, enable a low-cost inverter, so it's going to offer both upfront cost savings and then more energy extraction as well. So long term, we think it's a real hit, we're getting a lot of interest from customers. It just takes a little while to get it up to the testing and get to the revenue stage.

Christopher J. Longiaru - Sidoti & Company, LLC

And that's a -- that product is higher than corporate average gross margin as well, right?

Mike Burns

That's right. That's right. Everything we're targeting now is above average and it's above our notebook business.

Operator

And our next question is a follow-up question from the line of Vernon Essi from Needham & Company.

Vernon P. Essi - Needham & Company, LLC, Research Division

I was wondering if you could give us an update on your share repurchase plan and sort of the long-term thinking there? And if there's any new thoughts with the stock where it is right now?

Mike Burns

No new thoughts. I mean, we've been quite active with our share repurchase the last 5 years. We've purchased $68 million or 5 million shares' worth, I think we did about 2 million in Q2, we have $7 million left under our current authorization, which would get us to $75 million. And so when we finish that up, we would likely go back to the board and discuss doing some more at that point. We're not quite there yet, but we're definitely continuing into Q2, probably do some more in Q2 than we did in Q1, and we'll take it from there. I mean, we have $6 a share in cash, half of that -- roughly half of that is considered offshore so not immediately available for domestic repurchase, but we have plenty domestic here as well, so that's available. But we also did a small acquisition that we paid for this quarter as well.

Vernon P. Essi - Needham & Company, LLC, Research Division

Okay. And I know you can't disclose too much about this, but it just sounds so then -- on a near-term basis your repurchases are probably outpacing your options at this point, so -- at least in the next quarter, is that a fair statement?

Mike Burns

I'm not sure precisely what you mean by outpacing options but...

Vernon P. Essi - Needham & Company, LLC, Research Division

In other words, share count should be expected to probably decline a little in the June quarter.

Mike Burns

Our diluted share count, yes, has come down quite a bit, quite a bit. It's down about 1 million shares from Q1 2012 to Q1 2013. I wouldn't model any dramatic change, up or down, in that here in the next short while.

Vernon P. Essi - Needham & Company, LLC, Research Division

Okay. And then -- and I'm sorry to still have the spotlight here on the Q&A. Just one last question. On litigation, longer term, can you tell us sort of how you see that shaping up? Would you continue to this sort of model a little bit going forward and sort of...

Mike Burns

Yes. I think it's prudent to model about $1 million a quarter like we guided for Q2. I would just model that going out and we'll see how things go. We've got the damages trial in November of this year. That'll be the next milestone there and we'll take it from there.

Operator

Our next question comes from the line of Joanne Feeney [ph] from High Peaks Analytics [ph].

Unknown Analyst

I wanted to perhaps get some additional information on the communication equipment side. Can you compare that to your server opportunity in terms, perhaps, of dollar content, maybe the size of the market opportunity, whether you're doing both power management and protection products? And I guess, also, maybe the length of the product cycle? So maybe frame for us how quickly this could grow and maybe how big it could be?

Jeffrey Staszak

Well, it typically takes about 3 years from the time we start doing the design activities to the time we start to see revenue. We started a couple of years ago, that's why we've indicated that we expect to see some incremental revenue from some of these new design wins towards the second half of this year, and then going into 2014 and, specifically, 2015 should be a pretty good growth year for us in the comm area. As far as trying to put a dollar per board or revenue opportunity per board, it's very difficult because these boards vary in size, they vary in complexity, they vary in component count, I mean they can be from a couple of dollars up to several hundred dollars for a board. So it's pretty hard to put a number on it or figure on it.

Mike Burns

Yes. In terms of our SAM, last year we estimated about $300 million in communications running to about $400 million in 2017. If you compare that to server, that was about $400 million last year going about $500 million in 2017. But comparable to that, a little bit smaller than our server market, it's longer cycles, it's higher margins, but a lot of good uptake there, the power densities there, and the power levels, overall, are going up quite a bit. That's part of why R&D, in fact, Q1, was up as we got some key products out there in the communications segment that some customers were keen to get their hands on there for some decisions coming in Q2. So a lot of good things happening in that segment. It's a sizable market and that's why we're continuing to invest in it.

Unknown Analyst

And similar to server, though, you'd be sitting on boards next to an Intel CPU?

Jeffrey Staszak

Well, it's an Intel CPU, it's a -- it could be Broadcom or a Cavium network processor, memory, field-programmable gate arrays. That power content is going up significantly on FPGAs so it's those types of more complex digital ICs.

Unknown Analyst

It sounds like, though, that these boxes last longer. They don't -- it's not something where product cycle is changing every 2 years, is that right?

Mike Burns

Oh, yes. These are out in the field for years and years, average 7 years, sometimes 10 years.

Jeffrey Staszak

Yes. 7 years, I would say on an average. Sorry, Joanne [ph], I forgot to answer your question around that, but yes, around 7 years on average.

Operator

And we have a follow-up question from the line of Alex Gauna from JMP Securities.

Alex Gauna - JMP Securities LLC, Research Division

Mike, you mentioned the damages trial in November. Shouldn't we be assuming some sort of increased litigation expense in association with that?

Mike Burns

Well, we've got a -- we're expecting about $1 million a quarter right now. I think we're making good progress in terms of our preparation for that, so we're on track. I mean, as we get closer to that November time frame, we would give an update, but right now, I think, on average, we're running actually a little less than $1 million. So we'll see, it's just a little too early to say with any more specificness than that.

Alex Gauna - JMP Securities LLC, Research Division

Okay. And then also is there any sort of break point here in terms of PCs that they get materially worse that you would rethink your OpEx structure? Or do you think you've got things where they need to be, regardless of what top line does here?

Mike Burns

Well, I think, we've certainly rethought where we're allocating our investment. And it was a tough decision, but we made that some months ago. And we're moving in that direction already. So what you're going to see is our R&D gliding down here as we go through the year and wrap up some of these incremental notebook investment. And we've got people working on communications, we've got them working on cloud server, we've got them working on -- in the solar side of things, also, developing first products for the acquisition that we did, Element Energy, which has got some very interesting technology to -- related to large battery packs, and it's a very large add to our SAM there of about 1.5 billion, half auto, half stationary. So a lot of good things we're investing in, but for the -- in terms of modeling R&D for the rest of the year, I would have a gentle glide down here in the second half.

Operator

And at this time, I'm showing no further questions in my queue. I'd like to turn the conference back over to management for closing comments.

Mike Burns

Great. Thanks to all of you for your questions, and thanks for joining us today.

Operator

Ladies and gentlemen, this does conclude our conference for today. This conference will be available for replay until April 29 at midnight. You may access the replay system at any time by dialing (303) 590-3030 or 1 (800) 406-7325 and entering the access code of 4610994#. We thank you for your participation, and at this time you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!