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Integrated Device Technology Inc. (NASDAQ:IDTI)

F1Q10 Earnings Call

July 28, 2009; 4:30 pm ET

Executives

Ted Tewksbury - President & Chief Executive Officer

Rick Crowley - Chief Financial Officer

Bran White - Vice President of Finance.

Chad Taggard - Vice President of Marketing

Mike Knapp - Manager of Investor Relations

Analysts

Glen Yeung - Citi

John Barton - Cowen & Co.

Sukhi Nagesh - Deutsche Bank

Tim Luke - Barclays Capital

Sandy Harrison - Signal Hill

Joanne Feeney - FTN Equity

Nicholas Aberle - Caris & Co.

Operator

Ladies and gentleman thank you for standing by. Good afternoon and welcome to the Integrated Device Technology Incorporated, fiscal first quarter 2010 financial results conference call. At this time all phone participants are in a listen-only mode. Later there’ll be an opportunity for your questions; instructions will be given at that time. (Operator Instructions)

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

Rick Crowley

Thank you, Gail and welcome to our fiscal first quarter 2010 earnings conference call. I’m Rick Crowley, IDT’s Chief Financial Officer. Presenting with me on the call today is Ted Tewksbury, our President and Chief Executive Officer. Also in attendance on the call are Bran White, our VP of Finance; Chad Taggard, our VP of Marketing; and Mike Knapp, our Manager of Investor Relations. We will all be available during the Q-and-A portion of this call.

Our call today will include remarks about future expectations, plans and prospects for IDT, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws.

Actual results may differ materially from our forward looking statements as a result of various important factors, including certain risks which are detailed in IDT’s most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q as filed with the SEC. IDT does not intend to update the information provided in today’s call and expressly disclaims any such duty, except as required by law.

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

Now I’ll turn the call over to Ted who will report on the overall quarter and then I’ll return to give you more specifics about our June quarter result and our outlook for September. Ted.

Ted Tewksbury

Thanks Rick. We are pleased to report that our fiscal first quarter of 2010, top and bottom line results, were above the high-end of prior projections provided on the last earnings call. Revenue of $116 million was up 8 %, driven by increased demand for products serving our computing, and communications end markets, while we reduced inventory on our balance sheet and in the channel.

This revenue growth, combined with recent cost cutting measures allowed us to deliver non-GAAP EPS of $0.02 for the quarter, which was $0.02 better than the mid point of our guidance, despite a less favorable product mix. We also returned to positive cash flow, generating almost $18 million in cash from operations.

Rick will cover more on the financials in just a moment, but first let me take you through some of the trends we experienced in each of our end markets during the June quarter. In computing, sales for products serving the PC segment were better than we originally anticipated. PC related revenue was up more than 30% sequentially as we grew market share and PC clocks and new PC audio design wins began to ramp.

In servers, sales of memory interface products were flat quarter-over-quarter with better than expected sales of DDR3 products offsetting the expected declines in our advanced memory buffers. Revenue from PCI express switches was down approximately $1 million after growing over 20% sequentially in the prior quarter.

End demand from some server customers remained relatively soft during Q1 due to reduced enterprise spending. Overall our revenue from computing products grew over 10% sequentially and represented about 37% of our total revenue, up from 36% in the prior quarter.

Total revenue from our communications end marketing increased approximately 8% sequentially, slightly better than expected. Revenue from our enterprise and wireline segments both increased, as demand from our largest customer stabilized and strengthened China 3G infrastructure build outs continued to benefit our business.

Our communications end market represented 50% of total revenue flat from the prior quarter. Revenue from our consumer end market was flat sequentially, slightly below prior expectations. This was largely due to flat sales in to the gaming segment as we worked down channel inventory. The consumer end market represented 13% of total revenue in Q1, down from 14% in the prior quarter.

The investments that we’ve been making are beginning to pay off in terms of new products and design wins. I’d like to take a few minutes to discuss some of these new products and provide some details regarding designed traction that we’ve seen recently; then I’ll turn to our outlook for September.

For the communications market, we recently introduced our next generation Femto Clock frequency synthesizers. This new family of clock synthesizers features ultra low phase noise and significantly improved power supply noise rejection, allowing for increased bandwidth when used with serial interfaces.

A number of customers have turned to these fully customizable stand alone solutions, to replace higher cost crystal and SAW oscillators in high performance applications that use 10 Giga bit ethernet, PCI Express, Serial RapidIO, and fiber channel interphases. We are also seeing increased design activity for our Serial RapidIO solutions. Specifically, we recently won SVO 2.0 sockets with two major wireless infrastructure manufacturers in Europe.

For computing, we introduced the world’s first PCI Express switch with an integrated temperature sensor. By combining thermal sensing with IDT’s new power smart technology, this product provides our customers with the critical system level thermal data necessary to enable optimized power management, load balancing and mitigation of thermal related faults and outages. This is just one example of power incorporating analog into our industry leading inter connect solutions, to increase their value and functionality in customers applications.

In PCs, our audio codecs are now designed into all Calpella platforms at the two leading note book OEMs. We also continue to maintain a leadership position in PC clocks, which are designed into the significant majority of Calpella sockets.

Turning to the consumer segment, we also recently announced highly integrated products with increasing analog content. In June we announced the worlds first display port based controller, providing multi-monitor functionality without the need for an additional graphics card.

Our panel port view expands solution can be used inside a notebook, on a docking station, in the stand-alone dongle or on a display port compatible monitor, and allows ODMs the flexibility to customize the multi-monitor experience for their customers. View expand provides ease of use with plug and play capabilities at a fraction of the cost of competing solutions. Our customers are very exited about this product and we already have several design wins with Tier-1 and Tier-2 OEMs.

Lastly, we announced our latest HQV, our Hollywood Quality Video processor for the consumer market. This third generation processor called Vida, enhances the viewing experience provided by the second generation of [V-on] device that we acquired through our Silicon optics asset purchase in October.

The Vida processor performs on the fly clean up of low-quality compressed video, including much of today’s popular internet content. HQV technology improves standard definition content to near high definition quality and makes HD look even better. Vida has already been designed into blue ray, AVR, media adaptors, projectors and other products developed by Tier-1 consumer electronic and PC OEMs.

Just today, we announced a new family of timing and power management ICs for display port based notebook LCD panels. One chip offers the industry’s first display port based timing controller with integrated digital LED backlight driver. A second power management IC employs IDT’s previously announced Power Smart Technology, to satisfy all the power needs of the TFT notebook panel.

Our third chip provides an extra boost switch to generate a high voltage drive for the ultimate image quality. This system level solution reduces power consumption, prolongs battery life and then enables increased design flexibility, such as digital brightness adjustment via the display port interface.

Design activity for our display related products has been robust. Our panel port devices are starting to ship into embedded display port sockets in Calpella notebooks, as well as into monitors and HDTV panels from leading OEMs.

In order to jump start and accelerate organic product developments, we continue to acquire new technologies in order to expand our core competencies. In June, we announced the purchase of the touch sensor assets from Leadis Technology. Touch sensor’s complement our existing audio, video, timing and power management technologies, to enable us to address a broader range of multimedia applications with highly integrated solutions.

Leadis is an innovation leader in advanced touch sensors with its ultra low power, zero latency, single ITO technology. This transaction will enable IDT to provide multimedia OEMs with lower power, higher functionality ASSPs with enhanced user interfaces.

In addition to acquisitions, we are also forming strategic partnerships and alliances with industry leaders, in order to accelerate our entry into new growth areas. Just yesterday, we announced an agreement with Micron Technology, to develop PCI Express, solid state drive technologies for the server, storage and embedded markets. Our two companies will partner to codevelop enterprise flash controllers with the PCI Expressed host interface, optimized from Micron’s flash devices and future generation RealSSD solid state drives.

Finally, we continue to upgrade our analog product development team with the best talent in the industry. This month, we announced that Mansour Izadinia has joined IDT as Vice President. Mansour brings 25 years of experience in analog and mix signal engineering and business development, most recently as Vice President at Maxim Integrated Products. Mansour will be responsible for leading, planning and coordinating new analog technologies and product developments across the company. As you can see, it has been a prolific quarter.

Now, let me turn out to our guidance for the fiscal second quarter. In communications, we are seeing increased design win activity and traction with many of our clock and serial switching products as I mentioned earlier. While we have not yet seen evidence of a broad-based pick up, we remain well positioned to benefit when demand returns to the communications market. Overall for communications we expect revenue to be relatively flat on a sequential basis in our second fiscal quarter of 2010.

In computing, we expect to see another quarter of strong sequential growth for PC related revenue. Share gains for PC clocks and PC audio new product ramps enable solid growth in June and we believe that these trends will continue into September. Currently we anticipate over 30% sequential growth in PC related revenue for the September quarter.

Within severs, Intel recently noted that just one quarter after the launch of its Nehalem platform, its Nehalem EP sever processors is made up of over one-third of all of its dual socket service shipments in June. As a leader in memory interface products, IDT has benefited from this aggressive ramp.

We enjoyed robust growth in DDR3 related revenue in June and expect this growth to continue in the September quarter. As we’ve discussed, we expect growth in DDR3 to be offset by declines in revenue from our AMB devices which we used in the previous Intel platform. This should result in roughly flat sequential sales for memory interface products in our fiscal Q2.

We expect revenues from PCI express products to show strong sequential growth following a relatively weak Q1. For the September quarter, we currently project revenue form our computing end market, to increase approximately 15% on the sequential basis.

After a respite in June, we currently project the consumer end market to grow over 50% in the September quarter, driven largely by sales into the gaming segment. In total, for the September quarter, our fiscal Q2 of 2010, we project that revenues will increase to approximately $130 million, plus or minus $4 million. This represents a 12% increase at the mid point.

Over the past year, we have repositioned IDT to focus on system optimized analog intensive, mixed signal solutions in order to expand our content in customer’s applications. We have taken advantage of the worst recession in our life time to build new analog capabilities, hire some of the industry’s top talent and make strategic acquisitions.

Specifically, we acquired the Silicon Optix video processing assets to differentiate our video offerings and expand our market presence. We hired one of most highly respected and experienced analog design teams in the industry to increase our value in video display products. We closed the sale of our network search engine businesses to sharpen our focus on analog intensive mixed signal solutions.

We announced our Power Smart initiative, which enables the incorporation of power management into our products. We acquired Leadis Technology to enable touch sensors to be integrated with our consumer ASSP’s, and we closed on the acquisition of Tundra Semiconductor to bolster our leadership in rapid I/O, PCI Express and other interconnect solutions.

The seeds that we sowed a year ago are beginning to bear fruit and the recent profusion of new product introductions is evidence that our strategy is working. These new product introductions are a leading indicator of revenue growth to follow. The most exciting part of our story is that the bulk of the growth potential lies ahead.

Most of the growth that we experienced in June and that we are expecting in September, only reflects improvements in our core computing and consumer businesses. We have yet to benefit from additional upside in our communications business, which represents over half of our total revenue.

More importantly, our current results do not include significant contributions from new products that have yet to ramp, like our display port based video solutions and our serial RapidIO switches. In fact, revenue from new products makes up only 5% of the total revenue in the September quarter.

Change can be seen throughout IDT, but there is much more to come. Over the course of fiscal year 2010, we have scheduled to introduce twice as many new products as we did in fiscal 2009. New product introductions drive design wins, which in turn drive revenue growth. We have made excellent progress along all of these fronts and are confident that this solid execution will continue into the second half of the calendar year.

With that, I’ll turn the call over to Rick to expand in our financial results and outlook.

Richard Crowley

Thanks Ted. Let me start by reviewing the non-GAAP results for fiscal Q1. We experienced a healthy increase in bookings in the first quarter, which resulted in a book-to- bill ratio above one for the quarter. Revenue of $116 million was above the high end of the range we provided in our Q4 2009 earnings call.

As Ted indicated, the 8% sequential increase in revenue was a result of stronger demand in our computing and communications end markets. In Q1, we continued to significantly reduce inventory levels, both on our balance sheet and in the channel. Our distribution channel inventory declined sequentially in absolute dollars by more than 10% during the June quarter.

Fiscal Q1 growth margin was 46.4%, up from 44.3% in Q4. The increase was driven primarily by higher revenues, lower inventory reserves and by slightly higher fab utilization than in the prior quarter. However the improvement in gross margin was tempered by a less favorable product mix and a $7 million reduction in inventory.

The strong sales growth we experienced during the June quarter in PC products led overall gross margins to come in 10 basis points below the low end of our previous expectations. Overall operating expenses in Q1 came in as forecast decreasing to $51.8 million from $52.6 million in the previous quarter as we continue to focus on control and costs.

R&D expenses during the fiscal first quarter were about $33 million, which is up about $1 million from the prior quarter, driven by an increased number of new product tape outs. SG&A expenses were about $19 million, down about $2 million from the prior quarter on lower commissions, lower payroll expense and tight cost controls.

Interest income and other increased about $800,000 to $1.4 million and we recorded a tax benefit of $100,000 in the June quarter. For the first quarter, we reported net income of $3.5 million or earnings of $0.02 per share. This was $0.02 better than the mid point of our expectations provided in April due to higher revenue and lower operating expenses.

Now let me summarize our results on a GAAP basis. We reported a GAAP loss of approximately $14 million or $0.09 per share in the June quarter. The difference between our GAAP and non-GAAP results nets out to about $18 million or $0.11 per diluted share.

Fiscal first quarter 2010 GAAP results include a $5.2 million amortization of intangibles, $4.3 million of stock-based compensation, $3.6 million in acquisition related costs, a $2 million asset impairment charge, and $1.5 million of severance related expense. For further information including a detailed reconciliation of non-GAAP and GAAP results is provided in the financial tables of today’s press release. It can also be found on our website at www.idt.com.

Now turning to our balance sheet; cash and investments totaled approximately $306 million at the end of the June quarter, a sequential increase of about $10 million. We generated approximately $18 million of cash from operations. Offsetting this amount we spent approximately $3 million in capital expenditures and paid approximately $6 million to Leadis Technologies to acquire its touch sensor technology and related assets, along with members of its engineering and marketing teams.

Net inventory decreased by about 10% to $63 million in June, from $70 million in the prior quarter. Days of inventory decreased to 92 days from 106 days in the prior quarter, driven by lower net inventory and higher cost of goods sold. Our trade accounts receivable decreased $4 million to $51 million in June, primarily due to collection efforts and the timing of shipments in the quarter. DSO decreased to 40 days from 47 days in the prior quarter.

I’ll now turn to our forecast for September quarter. The following forecast reflects the combined impact of the Tundra acquisition and the networks search engine divestiture, in addition to the recent purchase of the Leadis Touch Technology assets.

As Ted indicated, we currently project revenue for our fiscal second quarter of 2010 to be in the range of $130 million, plus or minus $4 million. As I mentioned earlier, we experienced strong booking trends throughout the first quarter, which resulted in a book-to-bill ratio above one. We entered fiscal Q2 with approximately $20 million more in direct backlog than we had entering Q1.

To hit the mid point of our forecasted revenue range, our terms to go requirement is comfortably within the historical range for this point in the quarter. Lead times remain short, but visibility is slightly better than in the March quarter. So far, we are encouraged by bookings in July, which continued to be solid. We believe that our channel inventories are now generally in balance with demand, due to the significant reduction in inventory level during the June quarter, combined with improving resale rates.

On a non-GAAP basis, we currently project gross margin to be in the range of 48%, plus or minus 50 basis points, depending primarily on the revenue range and product mix. We anticipate second quarter fab utilization to increase to approximately 70%. We currently project operating expenses in the September quarter to be approximately $59.5 million, plus or minus $1 million.

R&D is expected to be roughly $37.5 million and SG&A is projected to be about $22 million. The $7.7 million projected increase in operating expenses at the mid-point, is driven by a $7.3 million increase related to the Tundra acquisition and a $1 million increase related to the Leadis asset purchase.

The impact from acquisitions is partially offset by a projected decline in IDT’s base operating expense in the second quarter, due to ongoing cost reduction efforts and a modest reduction resulting from the sale of our network search engine business. As you may recall, we have restructured our network search engine division back in March. So we have already benefited from the bulk of the cost reductions that occurred in that business.

While Tundra was roughly breakeven prior to the acquisition, there are significant synergy savings that will make the transaction accretive for IDT by our third fiscal quarter which ends in December. Tundra’s operating expense run rate was approximately $9.5 million per quarter on a stand-alone basis. As a combined company, our plan is to cut over 50% of this expense by the fourth fiscal quarter of 2010.

Looking beyond the September quarter, we expect to benefit from an additional $1 million in OpEx synergies in the December quarter, and another $1.5 million in the March quarter or fiscal fourth quarter. We currently anticipate interest and other income to be about $500,000 in the second quarter and we expect our taxes during fiscal Q2 to be about zero, as we continue to benefit from tax credits accumulated in previous years. We project Q2 share count to be about $166 million on a diluted basis.

We currently project EPS on a non-GAAP basis to be about $0.02 plus or minus $0.001, depending primarily on the actual revenue range and product mix in the second quarter. The divestiture of the network search engine business will be dilutive to EPS by approximately $0.02 to $0.03 in the September quarter, while the Tundra transaction will have a neutral impact.

On the balance sheet, we currently expect to generate approximately $5 million to $10 million in cash from operations during the September quarter and anticipate a net cash inflow of $38 million from the proceeds from the network search engine divestiture, less the cash paid for the Tundra acquisition. Currently we project the cash balance at the end of September will be approximately $345 million.

The broad economic downturn in the first half of calendar 2009 enabled us to accelerate change within our organization. We implemented cost cutting measures and reorganized our businesses to better align with Ted’s new mix signal ASSP strategy. In addition, we took advantage of the weak economy by making some strategic acquisitions and hiring some of the industry’s top talent to fuel future growth for the company.

While the global economic environment is still recovering, we are now seeing a number of encouraging trends in some of our end markets. Improvements in our core businesses, together with leverage from our business model, should place us in a solid position to deliver top-line growth and increased profitability for our shareholders in the second half of the year. Beyond that, we believe the investments we have made in key growth platforms will enable our business to grow and outgrow the industry in calendar year 2010.

With that summary, I’ll turn the call over to Gail for the Q-and-A portion of the call.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Glen Yeung - Citi.

Glen Yeung – Citi

Thanks. Can I start just by asking about some of the near term forecasts that you gave. Very strong in gaming, very strong in PC clocks; and maybe a little more detail, a little more color on both those two end markets and what exactly you’re seeing there?

Ted Tewksbury

So Glen, on gaming, our Sony business we were slightly deflated in the last quarter because of burning of inventory. We do expect to recover from that very nicely in this quarter. It’s also was a strong quarter for our seasonally with regard to gaming. So we expect all our platforms to be up.

With respect to PC clocks, same basic commentary; this is a very strong quarter for us seasonally. We did burn off channel inventory last quarter and based on the seasonality that we see and the demand that we see from our end customer, we expect PC clocks to be up well in excess of 30%.

Glen Yeung – Citi

So Ted, when you look into the fourth calendar quarter, what are obviously very strong numbers in Q3. Did you sense then that needs to once again correct downwards or do you think we’re sort of moving up and then obviously less hyper but more stable growth trajectory.

Ted Tewksbury

As you know Glen, we don’t guide more than a quarter out and visibility is still relatively limited due to the macro economic environment. So I’m a little reluctant to speculate on what December is going to look like, but based on all the cockpit controls that we’ve got here, things are looking pretty strong.

Rick already talked about factor that our book-to-bill is greater than one. We entered the September quarter with $20 million more on our backlogs than we did with the prior quarter. Turns to go to hit the mid point of our guidance was within the historical range and bookings are strong. So right now things are looking good, but I’m a little hesitant to speculate on what December is going to look like.

Glen Yeung – Citi

Fair enough, and just one last one which is, Ted I talked to you in the past about the strategy that you have one element of which is accelerating new product introductions. You made a good point of that over the course of your prepared remarks, but I wonder if you could address the cost of doing that.

As we look into 2010 and think about the operating expenses that IDT needs to have to run your business, what should we be thinking that. Is this an expense that can come down or do we need to start thinking it has to go up next year?

Ted Tewksbury

Well I’ll refer to Rick on that one.

Richard Crowley

Glen, I think what we have is a fairly sustainable R&D run rate. I mentioned the fact that we are going to be taking OpEx down in the next couple of quarters as we work through the Tundra synergies. I think we’ve done a good job of holding our OpEx tight here in Q1 and the core of Q2 is actually going to come down further.

With respect to R&D, we have to get the return on investment on R&D and you can see that we are pairing on the side of spending a little bit more there despite the downturn, because it’s leading to the results that you’ve seen and starting to see in the announcements that we put out and summarized in our press release today.

We are getting a lot more momentum on the new products introductions this year, and as that builds, obviously we’ll continue to redeploy those dollars. So I think that we can show the leverage as we get to growth by exerting discipline on our OpEx as the revenue starts to come back.

Ted Tewksbury

Glen I think that the key take away is that the old IDT is behind us and you are seeing the new IDT emerge here and obviously there’s some investment required to make that happen.

If you look at a year ago, 30% of our revenue came from search engines and the advanced memory buffer, both of which were declining businesses and today, based on the product introductions that I talked about, I think you can see that there’s a proliferation of new products that are going to drive growth going forward and that’s where investments have been going over the past year.

Operator

Your next question comes from John Barton – Cowen & Co.

John Barton - Cowen & Co.

Ted you talked about the creation of a new position, the Vice President of Analog Technology and Strategy and you highlighted some of the areas where you are integrating analog technology into the product offering. If you turn the calendar ahead, you pick it, but a year or two years, whatever, is it going to be anything beyond analog integrated in the functionality or do you foresee yourself having your standalone analog product line, inline of a more “traditional analog product line.”

Ted Tewksbury

Good question John. The reason that we are bringing analog into this company is so that we can integrate multi function ASSPs. We’re basically in the business of connecting people to digital media and we are building ASSPs that will do that. You are seeing evidence of that in all the new products that we talked about today.

Now, there may be lawsuits of that activity which are marketable in the form of standalone analog components, but that’s not our primary motivation for bringing analog into the company.

John Barton - Cowen & Co.

On the PC clock side, I think you alluded to a share gain going on there. Can you talk a little bit about the competitive dynamics in that market and how you view that particular market as you go forward. Obviously sometime I think you want to stay in as competitive nature’s leveled out. Is it a good cash carry going forward. How do you think about it?

Ted Tewksbury

Obviously clocks are one of our core competencies in this company and we need to maintain our leadership, both in communications, as well as consumer and computing clocks. Having said that, the latter two are very competitive product categories as you’re aware and for that reason we are focused on developing more highly integrated products that include timing together with other functions.

I’m not going to venture into what exactly those are, except based on the kinds of product that you’ve seen us introduce this quarter and the last quarter, I think you can probably put two and two together and envision what kind of integration we are talking about, but you’ll see those products being introduced over the next couple of quarters. Over the long-term I expect those ASSPs to suppliant the stand-alone consumer and PC clock businesses. We will continue our leadership in those businesses for as long as it’s sustainable.

John Barton - Cowen & Co.

Do I infer from your statements then that the share gains were a result of better product introductions than the competition and not necessarily a de-emphasis by the competition?

Ted Tewksbury

Better quality and better performance.

John Barton - Cowen & Co.

Okay. Could you give us a quick break down, within your revenue guidance for next quarter, the gives and the takes of acquisitions versus divestitures and how they impact the revenue line in September?

Richard Crowley

Hey John, it’s basically neutral. If you take the search engine and Tundra, its basically flat quarter-on-quarter.

Operator

Your next question comes from Sukhi Nagesh - Deutsche Bank

Sukhi Nagesh - Deutsche Bank

Yes, thank you. Very strong results guys, congratulations. A couple of questions I have, mostly on the cost control side. On the gross margin front, 48% is what you’re guiding. Can you help us understand how that would traverse through the rest of this year? Are you going to see a lift up in gross margin related to where we are in September quarter, if communications turns back on and by how much? Then I will follow up.

Ted Tewksbury

Nagesh, I guess I need some clarification certainly, because our guidance 48 is based on our revenue outlook.

Sukhi Nagesh - Deutsche Bank Securities

I’m trying to figure out how much mix is impacting gross margin and how much they could move up as communications or some of the higher margin business came back on later part of this year.

Richard Crowley

I see, okay. Yes, obviously there’s a kind of offsetting effect to two major forces in the September quarter guidance; one is, the bulk of the growth, the big chunk of growth coming from the PC market. So it was putting a little pressure on the average gross margin from a product mix stand point.

However we’re finally as we typically we would see after volume picks up, a quarter delay, seeing a reasonable ramp in the fab which is going to help us absorb the overhead. So that’s allowing us to improve gross margins up to our estimate of 48% for the September quarter.

I think that we certainly believe we can get back to 50% and above 50% with the help of communications. I think that its uncertain when that’s going to be. It really depends on the revenue back to our post September and the mix of communications as you pointed out. So I’m not going to predict when that might be, but certainly the revenue level north of 130, with some help in communications, can get us back to 50%.

Sukhi Nagesh - Deutsche Bank Securities

The reason I asked that Rick was just, I think people are trying to figure out the leverage and the model and honestly if you look at your OpEx now, you said you’re going to be at $59.5 million for the September quarter with your goal to cut 50% of the OpEx from the Tundra. So is it reasonable to assume that goes to like $55 million by the end of this fiscal year.

Richard Crowley

No, what we said is that we’re going to target a 50% cut of the combined Tundra. We’re already getting about $2 million plus here in the second quarter, September and the guidance. We said we’ll take another $1 million out in the December quarter and $1.5 million in March.

Beyond that we’re striving to keep our base OpEx as far as possible, so that we do get leverages revenue improves going forward, but some would think it’s much surprising that with the addition of the OpEx of Tundra and the divestitures search engine business it’s a little bit dilutive here and the impact in the September quarter.

As I alluded earlier, I think the opportunity for us is to really exert a discipline in the OpEx and before we get the synergies from the Tundra acquisition, while we grow the top-line. You can see the effect of getting the fab back up to about 70% utilization, that adding a couple of points worth of benefit to the gross margin outlook in September. So we think there’s more above that also from our manufacturing operation.

Operator

Your next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

I was just wondering if you could clarify, which segments would the Tundra revenue be added to or did the network search engine transaction close? Can you just comment on that?

Richard Crowley

Yes. Tim, the bulk of the Tundra revenue will be reported in the communications end-market, a little bit in the computing, and then with respect to the search engine business, it closed a week ago Friday.

Tim Luke - Barclays Capital

So you have some NSE revenue this quarter. Do you?

Richard Crowley

A little bit, yes. Just a first two weeks.

Tim Luke - Barclays Capital

The comp business has gotten flat, although you’ve got a little bit of a less from including Tundra. Could you just give us some color on which elements within comp, how the different areas of wireless wireline might be expected to perform through September?

Richard Crowley

So Tim, in June we saw the same uplift that everybody else did from China 3G infrastructure. We’re also starting to see that same slowdown that everybody else have seen and so that’s contributing to the flatness that we see in September.

Tim Luke - Barclays Capital

The enterprise networking is flat to up is it or how should we think about that? I guess you don’t have the NSE anymore but.

Richard Crowley

Research is basically going. We need to sell clocks into enterprise equipment. It doesn’t go away entirely. [Inaudible] except for the first three weeks.

Tim Luke - Barclays Capital

Yes. Could you just remind us what the historical range is in terms of the turns for this quarter?

Ted Tewksbury

Generally it’s in the 50% range, if I recall properly.

Tim Luke - Barclays Capital

And you talked about the gross margins being a little lighter than you would have expected. Could you just give some further color on what you saw there and how you see the gross margin trending and what are some of the key point factors there?

Ted Tewksbury

Yes, relative to expectations, not so much quarter-to-quarter, but relative to expectation, there’s a bit of a lighter mix, a less favorable mix than we anticipated. A little stronger in some of the PC related area and a little wider on certain other comps sector within comps. So that’s kind of the nuance, 50 basis points swing roughly from the mid point.

Really to move forward the key driver is kind of what I alluded to earlier. We see a benefit in our outlook for the September quarter, with a ramp in the way for fab utilization. So we hope that continues and then hopefully a pick-up in the communications spending in our investment and chips for the wireless base stations. The Tundra acquisition etc hopefully will lift the comps margins and continue to hold them at well above company average to balance off the growth in PCs.

Tim Luke - Barclays Capital

Do you feel that going forward we should use 0% tax for the next few quarters and this $0.5 million of interest income just for models and what should we eventually move the tax rate to as we move into the following fiscal year. If you could just clarify what the utilization was, what it was in the second quarter, and I think now you think it’s going to move to 70%. Sorry, in the calendar second quarter and the June quarter, I apologies.

Ted Tewksbury

Right, right. 55% in the June quarter is utilization. Yes, I would use the zero tax rate at least for the next two quarters, and 500k for interest, probably a reasonable number given the low yield on cash these days. With respect to the long-term tax rate, we’re still believing 15% to 20% in that range. I think we’ve got it around 17% previously as a point number. That’s still I think a reasonable number to use for your modeling.

Operator

Your next question comes from Sandy Harrison - Signal Hill.

Sandy Harrison - Signal Hill

Ted, building on your comment in your prepared remarks that 5% of your business is currently new products and given a month, you had also mentioned in your prepared remarks, returning or getting ROI on some of your investments here.

What would you say; we’re just sort of eyeballing what you think that new products could be as a percentage of your business six months from now or a year from now. Then Rick, as you quoted already that in your previous comments on gross margins, does that necessarily coincide?

Ted Tewksbury

So Sandy, if you look at the top four new product categories that we’ve been talking about over the past several quarters, its display port, DDR3, PCI Express and IL. I think those four could comprise 20% to 25% of our revenue in the six to 12 month time frame.

Sandy Harrison - Signal Hill

Okay, and then the corresponding impact of gross margin. Rick what are your kind of thoughts on it at this point, and are you able to get leverage by running these through the fab or just greater utilization and greater revenues and how fast through the model.

Richard Crowley

Yes. On some of the products we do have in the fab, I think the factor is we’re also seeing higher margin right now in DDR 3 and AMV. Can’t talk much about that, but we’re seeing we believe a kind of cross over point there and so that actually should be helpful in the near term to our margins to move forward.

So I think there will be a huge lift from the utilization, from the gross margin standpoint for the new products, a little bit, but overall, the higher revenue from the new products helps spread the fixed overhead we have in manufacturing to improve our operating profit and at least hold the gross margin if not improve it slightly.

Sandy Harrison - Signal Hill

Then as far as the anticipation of being able to run any of the either Leadis or Tundra, is there an expectation of running any of that through the fab or is that going to remain fabless. Can there be any leverage by bringing some of the high runners into the facility or what’s your thought on that?

Richard Crowley

It’ll be fabless.

Sandy Harrison - Signal Hill

Okay, and then just my last question; while the revenue as I understand it, the revenue impact of Tundra and SCL is basically neutral, but I’m assuming your customer base break up is going to be a little bit different going forward. So how do you see that unfolding and who are the customers that you think will be say your top five going forward versus the one or two that you had on your NSC side?

Richard Crowley

Well, obviously the big change is that Cisco will fall out of the top position, and there’ll be some changes in the top 10. Samsung and Sony look to get prominent in there. I don’t think that we will have any one customer who is much in excess of 10%, although we may have a couple of that are jocking for the 10% position, but it’ll be a more fragmented customer base than we’ve had in the past, which I view as a good thing.

Operator

(Operator Instructions) Your next question comes from Joanne Feeney - FTN Equity.

Joanne Feeney - FTN Equity

I was hoping you could provide a little bit more description of what you’re hearing or what your customers are hearing regarding the computing segment, in particular PC demand and bills and server demand and bills. You had a strong lift from the Nehalem EP ramp. I’m wondering what you think that’s going to do over the next couple of quarters, that’s sort of leveling out.

On the PC side are your customers sort of restocking or are they speculating on holiday demand being strong. Can you get a sense of what they are assuming that’s driving your PC cost business here?

Ted Tewksbury

Joanne, let me comment on the enterprise side and then I’ll let Rick comment on the PC side. Of course on the server side, Nehalem is ramping and so we are seeing a very strong growth in our DDR3 business right now. We are in a lead position as far as DDR3 products are concerned and that we expect to continue to ramp nicely for the rest of the fiscal year and beyond as Nehalem starts to kick in as a bigger fraction of new servers.

Of course a lot of that depends on what happens to server demand and I guess that’s the wild card. Your guess is as good as mine, but most of the reports that I’ve been seeing are conjecturing that there is going to be a refresh in the first half of 2010 and there will be replacement of enterprise servers as a result of Windows 7, as a result of the new Nehalem processor and an ageing installed base.

So if those prognostications are correct, we expect to see good strong underlying demand for our memory interface products and our PCI Express products. I will let Rick comment on the restocking question.

Richard Crowley

First, let me say that, I think that our view is that we’re looking for September outlook, we believe we’re shipping in-line with demand and consumption. So if you look at the year-over-year change and differences are computing clocks units relative to industry prognostications, it makes sense to us.

We drained a lot of inventory in this past quarter and we expect that we would hold inventory relatively flat in the channel if you roll it from June to September, despite the increased shipments obviously implying a growth in sell out due to higher build rates.

So I guess I’d ask you to define your view or define restocking and I can tell you whether I think it’s restocking, because we don’t see any change and we are not predicting any increase in channel inventory. It’s basically a seasonal up-tick and bouncing back off the bottom.

Joanne Feeney - FTN Equity

I’m actually wondering what you’re hearing about not the restocking of the components that go into PC, but actually the restocking of the PCs and events of holiday. Whether you’re hearing from your customers that what level of end market demand they feel like they are going to see for the second half of the year and whether you can get a sense of whether the builds that are taking place now are stay aggressive relative to seasonal norms or light relative to seasonal norms, that sort of thing?

Richard Crowley

No, I don’t have a good feel for that.

Ted Tewksbury

I don’t think we are seeing anything other than normal seasonality at this point.

Joanne Feeney - FTN Equity Capital Markets

Then if I could, you’ve had a lot of new product introduction, move over to these integrated solutions, and that would tend to suggest higher margins or perhaps greater market share. I’m wondering if you could just give us sort of a more current view of how your margins would tend to differ across your end-market.

You’ve given these new products or how they might differ say a year from now? Is there a fundamental shift here in the margins across that market, because of these new product introductions relative to your historical norms?

Richard Crowley

Well yes, it’s fair to say that as we go to more highly integrated, higher value added ASSPs, that the gross margins will increase; however it’s an evolution. As we go up the food chain, the entry point won’t be top margin, but maybe comparable to our historical margins and then as we start to gain market share and start to increase our levels of integration and value, those gross margins will go up, also as we increase our analog content, those margins will go up, but it won’t be a step function. It will be an evolutionary and I’m reluctant to comment beyond a couple of quarters right now.

Joanne Feeney - FTN Equity

Do you see though, in which direction margins might move and eat your end markets. I mean do you see the new products (a) being stronger in communications relative to computing to restart to think about that being a less of a drag on margins for example. I’m sorry, more of our pull on margins for example.

Richard Crowley

Well I think you’re familiar with the profile of our margins. Communications gross margins are well above the corporate average and they will remain there.

We are continuing to develop new higher performance clock products such as the Femto Clock that we just introduced this quarter. Those types of products are performance driven and they command high margins, because those products are very difficult to design and we have very few competitors in that space. So the communications products will remain in the high margin category and we’ll stay there.

The computing products tend to be at the lower end of the spectrum, sometimes below the corporate average and that’s where, by enhancing the value of our products, by adding more functions to the timing function, whether its power management or other analog functions, that’s where we’ll see some uplift to our gross margin. Since those products haven’t been all introduced yet, I’m reluctant to go out and tell you what they’re going to be, but they will be moving up, more towards the corporate average and above.

The consumer products, the same deal. As we start to integrate more analog content, you can expect to see those gross margins start to increase, but it’s going to an evolution over the next several quarters.

Joanne Feeney - FTN Equity

Sure. So then to summarize, it’s sounds like margins in each of the end-markets are likely to rise. Would you say that the gap or the distance between margins across those end-markets is likely to narrow? That is eventually overtime as new product start to dominate.

Ted Tewksbury

I’m not sure I’m understanding your question Joanne.

Joanne Feeney - FTN Equity

Will margins rise faster in computing and consumer than they do in communications?

Ted Tewksbury

Yes.

Joanne Feeney - FTN Equity

Okay. So the difference of margins across segments will probably get smaller.

Ted Tewksbury

Yes. I mean, the computing margins are more deflated and there’s more upward potential for those products, whereas the communications are already commanding pretty high gross margins. So I think if you look at the distribution of our margins overtime, you’ll see the distribution tightening and the lower end moving up.

Joanne Feeney - FTN Equity

And new products right now are fairly small percentage of revenues. Can you give us some sense of what percentage they might be a year or five years from now?

Ted Tewksbury

Yes, so as I mentioned I think if you look at the display port, DDR 3, PCI Express audio, we’re probably talking about something in the 20% of revenue range, somewhere in the six to 12 month period.

As we start to add more new products and layer on some of the FY’11 products which are Rapid/IO, the more highly integrated consumer timing products and PC timing products that I talked about, and also some of the new video processors and power management products that we talked about today, then that percentage will go up, but I think it’s fair to say that within the next six to 12 months, you can expect to see our new products revenue growing from roughly 5% of revenue up into something like a 20% range.

Operator

Your final question comes from Nicholas Aberle - Caris & Co.

Nicholas Aberle - Caris & Co.

First question was on the server. You said it held up better than you expected in calendar Q2. It sounds like it’s going to hold up again better than you expect in calendar Q3. Is this something at this point where the headwinds that we thought were coming in from the loss of AMB are just not as bad as you thought or is it still ahead of us and we still need to plan for the headwind to come into play over the next several quarters.

Ted Tewksbury

The headwinds for AMB is a reality, right. It’s always been there and we’ve always been talking about it. I just kept telling you guys you’re worrying about it too much, because we’re not just an AMB company, we’re a memory interface company. So we had DDR3 in development and that is now ramping up very nicely as we talked about. We just past the one million units shipment mark in Q1 and we’re seeing a very forecast show, very stable quarter-over-quarter growth for DDR3 and we are very firmly in the number one position right now for DDR3.

In addition, there are new memory interfaces coming along all the time. Genetic just approved a new interface standard called LD DIM, which is load decoupled DIM and that addresses a quarter of the performance and capacity space that is not addressed by the registered DIM, that’s used in DDR 3. We are working on products for that standard as well.

If you look at the available market for AMB, it was roughly $200 million, same a year ago. If you look at the available market for DDR 3, it’s a lower price point, but a slightly higher attach rate, so it’s roughly $150 million same, which of course is lower than AMB, but if add in the additional SAM that opens up as a result of these alternative memory interfaces, that adds another $50 million SAM.

So you‘re right back to the same kind of available market, that you had with AMB. So, if you continue to maintain our number one position in memory interfaces which we are doing and fully intend to do, that business is going to continue to grow for us.

Nicholas Aberle - Caris & Co.

So net-net, assuming that the enterprise environment say somewhat safe stable, I mean are these pretty much tough level then for the server business?

Ted Tewksbury

Yes, yes, that’s a fair statement. So assuming no change in demand for servers, what you’ll see for the remainder of this fiscal year is that AMB will continue to go off in a predictable fashion. AMB is not going to go away, you guys know that, it’s going to continue to sell until white box opportunities and monumental platforms like Spark, after market applications and so on. So it’s not going away, but it will continue to trail off over the fiscal year.

DDR3 will continue to ramp up and if you look at the overall memory interface revenue, it will be roughly flat, maybe even up in a couple of quarters even during this fiscal year.

Nicholas Aberle - Caris & Co.

Then you guys said you got a little better contribution from network search in calendar Q3. I mean is that pretty negligible to the guidance and then also is the contribution of the Leadis acquisition negligible as well?

Ted Tewksbury

I think as I mentioned, the revenue is effectively flat between Tundra and search engine quarter-on-quarter. So the contribution is pretty much the same on the bottom line. Leadis actually adds a bit of burn to R&D, a little bit of expense which I mentioned in the prepared remarks and we’re just beginning to get some revenue out of those products that we purchased.

So, probably this will be the heaviest quarter from a hit from higher expenses from the Leadis in the September quarter and after that, we shall start to have some revenue offsets that R&D.

Nicholas Aberle - Caris & Co.

Then on the manufacturing side Rick, I’m not sure if you have this number available, but do you know what utilization was last year at this time when you guys were running at $200 million a quarter, and then secondly, how do we stand now between fab and fabless as a percentage of total sales.

Richard Crowley

Yes. It was I think 58% internal source wafers in the first quarter and 42% foundries. During the last time, 79% in Q2 of last year when we did $200 million in revenue, and that was the fab utilization.

Nicholas Aberle - Caris & Co.

In terms of linearity, in terms of your expectations for calendar Q3, is it front-end loaded, can that be pretty linear, any expectation there?

Ted Tewksbury

Well, I think it’s going to be pretty normal for Q3. I mean we did have some backlog coming in. So I mean Q3 is always this back end loaded type of quarter, but as I mentioned we had a much better direct backlog than we did in the first fiscal quarter. So I think it looks was pretty normal from a seasonal basis, but probably a little bit back-end half loaded as September usually is.

Nicholas Aberle - Caris & Co.

Then just lastly on the gross margins, it’s good to see that trough and starting to move higher; the improvement that we’re going to see in calendar Q3 on the gross margin line, any way to quantify what portion of that is being driven by the acquisition of Tundra and it’s higher gross margin as a part of the mix and then maybe what core IDTI gross margins would have looked like without it?

Richard Crowley

Well, I don’t think I can break it up, but I’ll give you some flavor. I think that staying in the September quarter is only a slight positive in gross margins from Tundra, relative to the swap out. I think the bigger forces that work in our gross margin in September are the higher factory utilization and then the mix kind of offsetting it, but with the higher revenue and the higher utilization, winning out and being the main driver for the improvement in margin.

Ted Tewksbury

Thank you very much for joining us today. We appreciate your interest in IDT and look forward to meeting with you on our marketing trips this quarter and on our next call. We’ll also be attending the Citigroup and Deutsche Bank conferences in September and look forward to seeing you then. Good bye.

Operator

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