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Integrated Device Technology Inc (NASDAQ:IDTI)

Q1 2014 Earnings Call

July 25, 2013 4:30 pm ET

Executives

Richard D. Crowley - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Theodore L. Tewksbury - Chief Executive Officer, President and Director

Analysts

Harsh N. Kumar - Stephens Inc., Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Christopher Hemmelgarn - Barclays Capital, Research Division

JoAnne Feeney

JoAnne Feeney - Longbow Research LLC

Delos Elder

Betsy Van Hees - Wedbush Securities Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Integrated Device Technology, Inc. Fiscal First Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. With that said, here with opening remarks is Integrated Device Technology's Chief Financial Officer, Rick Crowley. Please go ahead, sir.

Richard D. Crowley

Thank you, operator, and welcome to our fiscal first quarter 2014 earnings call. I'm Rick Crowley, IDT's Chief Financial Officer, and presenting with me on the call today is Ted Tewksbury, our President and CEO.

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.

Forward-looking statements in this call will include statements regarding demand for company products, anticipated trends in company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review in detail the risks and uncertainties in the company's SEC filings including, but not limited to, the annual report on Form 10-K for the fiscal year ended March 31, 2013, and periodic reports filed from time to time with the SEC. All forward-looking statements are made as of this date, and IDT disclaims any duty to update such statements.

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 idt.com, including a complete reconciliation to the most directly comparable GAAP measures.

All financial references will be non-GAAP on a continuing operations basis, unless otherwise indicated.

Also, we have made selected financial information available on 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 provide some first quarter highlights, and then I'll return to give you more specifics on our results for the quarter. After that, I'll elaborate on our outlook for the September quarter. Ted?

Theodore L. Tewksbury

Thanks, Rick, and thanks to all of you joining us today.

To briefly recap, we reported fiscal Q1 results with revenue of $118 million, non-GAAP gross margin of 58.8% and non-GAAP EPS of $0.05.

Q1 revenue was up 9% sequentially, and we delivered results that were ahead of our prior projections.

Revenue from RapidIO solutions, serving our 4G/LTE base station customers, hit record levels and sales from our core timing and memory interface product lines improved significantly from the prior quarter.

We also expanded operating margins through continued improvements in gross margin and persistent focus on cost controls.

Let me now provide a brief overview of the trends we saw in our 3 end markets, including new products and design activity, followed by our guidance for Q2.

In our communications end market, revenue increased about 9% quarter-over-quarter, with record sales of RapidIO switches and significant improvement in communications timing revenue driving most of this growth.

Revenue from communications comprised about 58% of total sales, flat from the prior quarter.

The worldwide 4G rollout continues, and wireless infrastructure deployments are driving strong sales of our base station solutions.

Revenue from our RapidIO switches, which are used in all 4G base stations, grew more than 20% sequentially and over 80% year-over-year to record levels.

In addition, we experienced 12% sequential sales growth in silicon timing solutions for wireless and wireline equipment.

During the quarter, we expanded our industry-leading communications timing portfolio with 3 new offerings. The first is a low-noise timing chip set specifically designed for wireless base station radio cards. The second is the world's lowest jitter, single-chip Synchronous Ethernet timing solution, meeting the stringent performance requirements of 10-gig and 40-gigabit Ethernet. The third is an innovative timing technology, enabling the world's lowest phase noise voltage-controlled oscillators and fractional dividers.

These 3 new product families enable engineers to achieve superior system-level performance and reinforce IDT's timing technology leadership.

We expect continued growth in our communications end market in fiscal 2014, as deployments of 4G/LTE infrastructure carry on, driven largely by the U.S. and China. Our customers are beginning to place orders in anticipation of China's TD/LTE rollouts, and we expect to see revenue related to these builds starting this quarter.

China Mobile's Chairman recently indicated that the company has already deployed 22,000 4G base stations in 15 cities and intends to deploy about 200,000 by the end of this year.

This should be an additional growth catalyst for our communications business in the second half of this fiscal year.

In the communicating -- in the computing end market, we experienced a 9% sequential revenue increase as server and PC-related sales recovered strongly from March levels.

Overall, computing represented about 29% of revenue, flat from the prior quarter.

Server-related revenue represented about 80% of our computing sales in Q1, as we continue to steer the product mix away from PCs toward enterprise applications.

We maintained our leadership position in the memory interface segment, with over 20% sequential growth. This recovery was driven by shipments for DDR3 RDIMM following 2 quarters of inventory correction, as well as initial shipments for DDR4 RDIMM and LRDIMM.

The strength in memory interfaces was partially offset by a temporary decline in PCI Express switch revenue, due to a slowdown at our largest non-x86 server customer. We expect the PCI Express switch business to return to growth in Q2.

In May, we announced the planned divestiture of our enterprise flash controller business to PMC-Sierra. I'm pleased to announce that that sale is now complete.

This transaction with PMC-Sierra is a win for both our companies, our employees and our customers. PMC has the capacity to invest in the product roadmap and provides an ideal home for our employees.

For IDT, the transaction enables us to capture the future value of the business, providing a compelling return on our investment, while enabling us to focus on product categories where we have the scale to win.

This enhanced focus will accelerate operating margin expansion while sustaining long-term revenue growth. Rick will provide details on the financial implications of this divestiture in a moment.

I'd like to thank all the employees who contributed to the success of this business, and I wish the team continued success at PMC.

Turning now to our consumer end market, revenue increased 9% sequentially off the seasonally weak March quarter. This was driven primarily by sales of timing solutions for new gaming consoles.

Overall, consumer sales represented 13% of total revenue, unchanged from the prior quarter. We expect continued growth in our consumer business next quarter as sales of timing solutions grow seasonally, driven by gaming consoles, infotainment platforms and other consumer devices.

We expect this growth to be augmented in the back half of the fiscal year with the first wireless power ramps.

The wireless charging ecosystem continued to mature during the quarter, with Intel throwing its weight behind the alliance for wireless power or the A4WP standard.

This is an important development because now 2 industry leaders, Qualcomm and Intel, are aligned behind a common standard with IDT being the silicon partner for both.

Customer interest in our new dual-mode receiver has been overwhelming, and we recently extended our technology leadership with the industry's most integrated WPC 1.1 Qi-Certified Wireless Power Transmitters.

These products offer wireless charger manufacturers the smallest application footprint and build materials of any solution on the market today.

As we mentioned last quarter, our magnetic induction products are designed into several handsets, as well as over a dozen charging pads, sleeves and accessories.

Just this week, we announced that TYLT chose IDT for their VÜ wireless charging platform, which will be offered for sale by both TYLT and Verizon.

While virtually all major handset manufacturers are adopting wireless charging technology, the exact timing of customer ramps remains uncertain.

That said, transmitters are beginning to ship now, and we expect meaningful receiver volumes in the March quarter.

In addition to wireless power, we recently announced that our cross-platform power management IC has been system-validated by Intel for their Atom, Xeon and Core processors. IDT's patented distributed power solution offers unprecedented flexibility for point-of-load regulation, circuit board routing and thermal distribution.

Finally, let me summarize our industry-leading timing business, which serves all 3 of our end markets.

In our first quarter, timing overall grew more than 10% sequentially to 45% of IDT's total revenue. Roughly 30% of that was in communications, 10% in consumer and 5% in computing.

Timing revenue grew in all 3 end markets in Q1, and we continue to experience robust design activity.

With that, let me turn to our Q2 guidance. While bookings trends have improved, lead times continue to be short and visibility limited. For our second quarter of fiscal 2014, we expect revenue to increase to about $125 million at the mid-point, plus or minus $3 million.

We currently expect sales from the consumer end market to increase by approximately 18%, communications to be up approximately 6% and computing to be roughly flat quarter-over-quarter.

We're off to a strong start for fiscal 2014, with non-GAAP operating margins expected to get back to double digits by the September quarter. We believe that 20% non-GAAP operating margins are attainable in Q4 through a combination of revenue growth and cost reductions.

On the revenue side, our base business is up, order trends in our core business have improved, and we expect this momentum to continue as we move through the year.

As a result of the strength in our base and 15% sequential growth in our core businesses, new product revenue represented 19% of total revenue in Q1, down slightly from the prior quarter.

We anticipate an acceleration of new product growth in Q2 and beyond, but as always, this is subject to the timing of new product ramps, especially wireless power.

Against this backdrop, we have a detailed plan to reduce OpEx over the next few quarters. We are pleased with the progress we've made so far and remain committed to increasing operating margins to meet our 20% target.

With that, I'll turn it over to Rick to expand on our financial results and our guidance for the September quarter. Rick?

Richard D. Crowley

Thanks, Ted. As Ted mentioned earlier, revenue for fiscal Q1 increased 9% sequentially to $118 million, above the mid-point of the range we projected on our April earnings call.

Bookings were up sequentially across all sales channels and most product areas, resulting in a book-to-bill ratio greater than 1 for the June quarter.

Aggregate channel inventory declined again during the June quarter on slightly higher sell-through, and is lean relative to historical trends.

Fiscal Q1 non-GAAP gross margin of 58.8% was slightly better than expected due to improved product mix. We remain confident that gross margins can continue to expand to the 60% level over the next several quarters, provided product mix remains relatively stable and revenue levels continue to improve.

Non-GAAP operating expense in Q1 was $60.8 million, in line with our prior projections, and was $3.6 million lower than the year ago period.

Non-GAAP R&D spending during the fiscal first quarter was $37.3 million, while non-GAAP SG&A expenses were $23.5 million.

R&D came in slightly better than expected, but SG&A was slightly higher as we accrued for higher incentive plan payments given the improving profit trends in our business.

Our non-GAAP operating margin improved to 7% in the June quarter, as we benefited from creating operating leverage from our model.

Q1 interest and other income was $200,000. The effective tax rate was about 7% in the fiscal first quarter, slightly better than the 10% rate we projected.

For Q1, we reported non-GAAP net income of $8.2 million or $0.05 per diluted share, which was $0.01 better than the mid-point of our April projections.

Now let me summarize our results on a GAAP basis. We reported a GAAP net loss of approximately $2.3 million in the June quarter. The difference between our GAAP and non-GAAP results nets out to about $11 million or $0.07 per diluted share.

Fiscal first quarter 2014 GAAP results includes $6 million in acquisition and restructuring-related charges, $5 million in stock-based compensation and about $800,000 from related tax effects.

Further information, including a detailed reconciliation of GAAP to non-GAAP results, is provided in the financial tables of today's press release and can also be found on our website at idt.com.

Now I'll turn to our balance sheet. Cash and investments totaled $310 million at the end of the June quarter. We generated about $11 million in cash from operations during the quarter and received about $8 million in employee stock transactions.

Capital expenditures for the quarter were approximately $4 million. Net inventory was approximately $57 million in June, flat from the prior quarter, while days of inventory declined to 106 days.

Our trade accounts receivable was up from the prior quarter to $66 million, while DSO was 51 days.

Let me explain a bit on our forecast for the September quarter. Bookings through the first 3 weeks of July have remained solid, lead times have normalized in the 4- to 6-week range, but customers continued to minimize inventory accumulation. The higher-beginning backlog and broad-based improvement in order rates are encouraging, but the turns failed to achieve our September quarter revenue guidance, while down from the last several quarters, remained high compared to historical standards.

Ted noted earlier that we currently project revenue for our fiscal second quarter of 2014 to be approximately $125 million, plus or minus $3 million.

We project gross margin to be 59%, plus or minus 50 basis points on a non-GAAP basis. The actual change in gross margin should be primarily dependent on the ultimate revenue range and product mix for the quarter.

We project non-GAAP operating expenses will be in the range of $59.8 million, plus or minus $1 million, as we begin to benefit from the savings related to the enterprise flash controller divestiture.

We expect the divestiture, which closed in mid-July, will result in savings of under $3 million in the September quarter. This compares to our projected run rate savings of $3.5 million per quarter, which should be fully realized in the December quarter.

The savings from the flash controller sale in Q2 are projected to be partially offset by higher sales commission payments due to increased revenues, higher incentive bonus expense as a result of improved profitability, and increased mass costs for new product tape-outs.

R&D is projected to be approximately $36.1 million, while SG&A spending of about $23.7 million.

We currently anticipate Q2 interest and other income will be about $200,000. We estimate the effective tax rate for Q2 will remain at 7%. The tax rate should be approximately 7% for fiscal year 2014 and beyond, subject to future changes in the U.S. tax code.

We estimate Q2 share count will be about 156 million shares on a diluted basis. Based on our revenue guidance range, we project non-GAAP earnings per share for the September quarter to be between $0.08 and $0.09 per share.

On the balance sheet, we expect cash flow from operations to be approximately $14 million during the June quarter. Net inventory is expected to be roughly flat, and days of inventory is projected to decrease to about 100 days.

Day sales outstanding is projected to be about 50 in the September quarter. Cash and short-term investment balances are expected to be approximately $420 million at the end of September, which includes the $96 million proceeds from the sale of our enterprise flash controller business.

We are encouraged by the broad-based strength in demand we experienced in the June quarter, which allowed us to deliver higher-than-expected improvements in both sales and profitability. Our financial results are beginning to demonstrate the improved operating leverage of our model.

We anticipate that this improved operating leverage, combined with the revenue growth drivers Ted discussed earlier, will enable us to reach our 20% operating margin targets and drive increased shareholder value.

With that summary, I'll turn the call over to the operator for the Q&A portion of the call. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

Ted, I had a question, maybe I misheard this, but did you just say that through fiscal '14, you expect improvement in your communication business? I know there's a lot of positive stuff going on there, but I'm curious if you can maybe validate that, that we expect to see continued growth for the next couple of quarters? And then secondly, if you can give us a sense of serial RapidIO size, and if you can maintain your 100% share in the foreseeable future there?

Theodore L. Tewksbury

Okay, thanks. Thanks, Harsh. As you know, we don't give guidance more than a quarter out, so I need to be cautious in making statements about the second half of the year, particularly in view of the short visibility that we have as a consequence of where lead times are. But right now, we're seeing a lot of strength in RapidIO. It is exceeding our expectations and it's well ahead, probably several quarters ahead in its ramp of where we expected it to be at this time. And that's all being driven by the 4G build outs, primarily in North America. But as I mentioned in the prepared remarks, China is starting to layer on, and I know there's been a lot of talk about China Mobile and when they're going start placing orders for these 200,000 base stations for TD/LTE. And as I mentioned, we are starting to see early orders placed by our customers, and we expect that to continue through our fiscal Q2 and Q3 and into the end of the year. So right now, we're feeling really good about communications. And then we expect to see continuing growth with 4G/LTE in other regions of the world, like Japan and Brazil, and in other regions besides the U.S. and China. So that's all feeling very good. As far as the size of the market is concerned, we did about $40 million in RapidIO revenue in fiscal 2013, where in fiscal 2014, it will be in the zip code of $60 million-ish.

Harsh N. Kumar - Stephens Inc., Research Division

That's great. And then I have one for Rick. You got a goal of kind of 20% up margin, let's call it roughly, March 2014. The sale of flash certainly helps, and you chalked out, I think you said $3 million in September or $3 million in the December quarter in savings. But I think to get there, you've got to have a little bit more than that, to the extent that you can talk about what other things are possible in the public forum. Maybe tell us about what's possible on the cost side to take out some more cost.

Richard D. Crowley

Well, Harsh, you're right. I mean, that's our goal and absolutely. And on the cost-reduction side, we have a well defined plan to take down OpEx over the next several quarters. I can't really talk about how we're going to do that and we'll let you know as we make those achievements to reduce cost, and we'll give you more color at that time. But at this point, all we can say is that we plan to execute on our plans and reduce the cost to drive operating leverage as we move forward over the next couple of quarters.

Harsh N. Kumar - Stephens Inc., Research Division

Fair enough. If I can squeeze in one more and then I'll get back in queue. Wireless charging, Ted, you sound very optimistic about what's going on there. How do you see that business? And clearly, you've got a bunch of design wins, but how do you see the trajectory of that business in the second half? Do you see an extremely kind of a, sort of a hockey stick kind of a ramp here in the near future?

Theodore L. Tewksbury

If there's going to be a hockey stick, Harsh, that hockey stick is going to be in the FY '15 year, but we are going to see the early ramp at the end of FY '14. Virtually, all of the handset OEMs right now have programs to implement wireless charging in their products, and IDT is engaged with all of them. We sampled the top 10 wireless handset manufacturers with our products. We're designed into several of them. We've talked about that in the past. We're on the reference designs of industry leaders like Intel and Qualcomm, and we're making very good progress on getting additional wins. And we are, by far -- we have, by far, the most advanced technology of any other company out there. And we're the only company that can support all of the standards, the PMA, WPC, the A4WP. So we are, by far, in the best position to win when the ramps happen. As I mentioned in the prepared remarks, we don't know exactly when that's going to take place. We are shipping transmitters now. The receiver volumes we expect to start in our fiscal third quarter, and then start to accelerate in our fourth quarter. It's a bit of a chicken-and-egg problem, frankly. We've got the best transmitter on the market and as I mentioned, that's shipping now. But people aren't going to go out and buy charging pads until they have a phone that's enabled for wireless charging, and the OEMs are working on those right now. So once those receiver volumes start to grow in the second half of the fiscal year, that's going to pull more volume for the transmitters, and things should start to really happen in early fiscal 2015.

Operator

And next, we'll go to the line of Anthony Stoss with Craig-Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

A 3-part question. First part, pertaining also to wireless charging. Ted, what do you think is really slowing the lift-off of some of the handset guys launching in time for Christmas? I think there was a lot of expectations for wireless charging on the -- with mats heading into Christmas. Is there -- I'd love to hear your thoughts as to why it's kind of more in the March quarter. Secondly, timing on resonance. You've been way ahead of the game on the resonance side. I'd love to hear an update when you think that will become a reality. And lastly, maybe more for Rick. A huge cash balance, I know you guys have had a share buyback kind of in-park. When can you renew your share buyback?

Theodore L. Tewksbury

Great questions, Tony. So as far as what's slowing down the ramp of wireless charging, first of all, I think you got to look at it in perspective relative to ramps of other new technologies, whether it's Wi-Fi or Bluetooth or others. And I think wireless charging is actually happening relatively quickly when you look at it compared to previous technologies. One of the things that was slowing things down is the proliferation of standards. You've got -- well, you got 2 technologies. You've got magnetic induction, which is governed by 2 primary standards, PMA and WPCG standard, and then you've got magnetic resonance, which is governed primarily by A4WP, but also some proprietary standards. So you've got the OEMs trying to figure out do they go with magnetic induction? And if so, which standard do they choose? Or do they wait and go with magnetic resonance, which promises a more satisfying user experience because you do away with the pad? Now IDT has got -- has mitigated some of those obstacles by coming out with the first dual-mode PMA and WPC receiver. And so, I mentioned in the prepared remarks that that's receiving overwhelming response from customers because they no longer have to make that decision between WPC and PMA. So that helps. And then, there's the opportunity to further consolidate standards by bringing A4WP into the mix and we're working on that right now. As far as the timing of A4WP, it is really more of an FY '15 event, and we've been pretty consistent in saying that from the beginning. I think there's going to be a good, healthy ramp for magnetic induction using WPC and PMA, which will benefit us based on the products that we've got. And then A4WP will kick in in the second half of FY '15. Qualcomm has said that they'll have their reference design for A4WP by the December quarter. Intel hasn't been quite so specific, but basically, the timing of the revenue for IDT is unchanged based on what we've said in the past.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Okay. And then share buyback?

Richard D. Crowley

Sure. So we have $80 million remaining on our share repurchase authorization. The Board approved back in 2010. And just to remind everybody, we have about $90 million of cash in the U.S. out of the $320 million at the -- or $310 million at the end of the June quarter. And at this point, we'll resume the share repurchase based on this, our assessment of market value versus stock, cash flow levels and economic conditions. It's about all we can say at this point.

Operator

And our next question comes from the line of Blayne Curtis with Barclays.

Christopher Hemmelgarn - Barclays Capital, Research Division

This is Chris Hemmelgarn on for Blayne. Just a quick follow-up to that last question you got, where will cash end up from the flash sale? Is that going to be domestic or abroad?

Richard D. Crowley

It will end up in probably a similar split to the current balance. Just because the -- of the buying of R&D from our offshore entities, we'll have to be -- when we pursue the R&D, we'll have to be repaid by the U.S. to the offshore entities when we settle out from the proceeds. So we expect maybe we'll get another $10 million or so out of the proceeds will be added to that U.S. cash balance.

Christopher Hemmelgarn - Barclays Capital, Research Division

Helpful. Then turning to the memory interface, could you just kind of quantify growth rates, sort of the size of that business this quarter? And also, what-- how are LRDIMM attach rates looking?

Theodore L. Tewksbury

Well, memory interfaces grew in excess of 20% this quarter as we got beyond that inventory correction that occurred in the September and December quarters and started shipping for DDR3, as well as early shipments for DDR4. In the next quarter, well -- I'm sorry, the quarter that we're in, we expect to see flat to maybe slightly down memory interface. We're seeing unit growth, but that's being slightly offset by some of the planned price reductions that we give our major customers in this market. Right now, we're at the tail end of the DDR3 generation where we see increased pricing pressure, but that will be alleviated as we enter 2014 and the first DDR4-enabled servers start to ship. At which point, we see a pop in the ASP. And we expect in the steady state, a doubling of our memory interface revenue. As far as the attach rates on LRDIMM, we've -- as we've said before and then we turned out to be right, the DDR3 Sandy Bridge generation, the attach rates are relatively low: 1% to 2% or 3% for Sandy Bridge, and then increasing to 3% to 5% for Ivy Bridge, which launches in the fall. For DDR4, that LRDIMM attach rates start to go up, and that's where you see attach rates in the 5% to 8% range. And in DDR4, LRDIMM becomes more important for us from a revenue perspective because it's really a winner-take-all game. The OEMs require their RDIMM suppliers to provide LRDIMM, as well as RDIMM together as a set. So there's additional pull for LRDIMM in the DDR4 generation. So it's about a 5% to 8% attach rate there.

Operator

And next, we'll go to the line of JoAnne Feeney with ABR Investment Strategy.

JoAnne Feeney

Maybe we could follow up with that last topic on the server size. So for DDR4, are you expecting this to give you guys some traction with the high-end server platform, the brick-wind [ph] platform, or are you waiting for the next 2P generation to come out after that?

Theodore L. Tewksbury

Well, the opportunity for us is Haswell for DDR4 that we're looking at.

JoAnne Feeney - Longbow Research LLC

Okay, perfect. And then, remind us again if you could, what the price difference is that you expect for the registered DIMM for DDR4 systems versus registered DIMM today, and then perhaps also the price difference on the LRDIMM versus registered DIMM.

Richard D. Crowley

JoAnne, I think the -- usually, you see a pretty good reset between generations. So I'm sure we'll start out at some multiple recurrent price, and then proceed down a multi-year price curve on those registers. And the LRDIMM, it's a little different architecture, I believe. Ted, you can correct me if I'm wrong, on the LRDIMM for DDR4, but it has a...

Theodore L. Tewksbury

Significantly higher...

Richard D. Crowley

It starts off significantly higher and probably ends up kind of where LRDIMM is today for DDR3 in volume.

JoAnne Feeney - Longbow Research LLC

Okay, so the view that the memory interface revenues could double next year comes largely from price increases, and then what are you assuming on the unit side?

Theodore L. Tewksbury

JoAnne, I didn't say next year. But overall, if you look at the size of the available market, once DDR4 kicks in, it's about a doubling.

JoAnne Feeney - Longbow Research LLC

Okay, sorry about that. And is that mostly a price increase phenomenon, Ted, or is it that you'll see the units expanding because servers are likely to use more memory at that point and perhaps you'd pick up in total demand?

Theodore L. Tewksbury

It's primarily due to the pricing effect.

JoAnne Feeney - Longbow Research LLC

Okay. Great. On the communication side, and perhaps just a core business side, should we view the timing numbers you gave out, the 10% increase, as a pretty good proxy for what your core business is doing as opposed to your new products businesses?

Theodore L. Tewksbury

In terms of growth?

JoAnne Feeney - Longbow Research LLC

Yes, in terms of -- if I wanted to sort of break the company up into core business and then new products. You quoted timing is growing 10% sequentially. Is that a decent proxy for the core business?

Theodore L. Tewksbury

The way I would think about it, JoAnne, is that usually the way we think about the core business is that, on a long-term average trend, it tends to grow with the overall market, the overall semiconductor market. And our new products, we expect to grow 30% to 40% in FY '14 to roughly $110 million to $120 million kind of a range. And then over the long haul, we've always modeled our base business as declining mid single-digits to -- up to 10%. But as we just talked about, this quarter we actually saw growth, low single-digit growth. So even in a base which we model as declining, we go through periods such as right now where communications is doing well and that business grows. But generally, the core we model has grown with the overall semi market.

Richard D. Crowley

Yes, and I think the timing business, JoAnne, is the best proxy for our overall core business. It's the biggest portion of that business. This quarter, we actually grew 15% sequentially in the core after a down March quarter. Obviously, as you noted, good strength in timing up 10%, but we had a rebound in both memory interface as well as our PC audio business after inventory corrections in those respective product lines and with our customers over the last couple of quarters. So that helped get us from the 10% to 15% growth in the core, just to give you little more color there.

JoAnne Feeney - Longbow Research LLC

Great, that's really helpful. Because obviously, we're looking at that cyclical recovery potential there. And then sort of on the same lines, on the communication equipment side, obviously sRIO doing quite well, can you state more broadly to what you're seeing in communication equipment demand beyond the wireless base station side, perhaps on the network or wireline side?

Theodore L. Tewksbury

Well, and again, back to timing, I think communications timing is probably the best proxy for the overall communications exposure that we have since that goes into wireline applications, as well as base stations, switches and routers and just a -- in a broad range of telecom and datacom. And so 15% -- I'm sorry -- 10% -- 12% growth in communications timing is more or less representative of strength across a broader base of communications applications.

Richard D. Crowley

Yes, I think that the base products stabilizing and growing a bit, they go all over the place in communications infrastructure, both networking and military aerospace and wireless communications. So I think that's another good proxy for the health...

Theodore L. Tewksbury

Right, absolutely. So think about RapidIO as being a good metric to measure the wireless infrastructure, and then the base standard products that Rick talked about in our communications timing is being a good proxy for the rest of communications.

JoAnne Feeney - Longbow Research LLC

That's really helpful. Okay, and then if I could sneak in one more question. On the consumer side, you're seeing a lift here as we expected from the Ps4 ramp, obviously, that's continuing this quarter. Is that something -- can you tell if that's going to continue through the end of the year, or should we expect the usual tail off in the consumer business in the December quarter?

Theodore L. Tewksbury

It's hard to say, but we do anticipate growth in the September and December quarters. I'm not sure whether December will be above or below September, though I don't have that level of visibility.

Operator

We'll go to the line of Glen Yeung with Citigroup.

Delos Elder

This is Delos coming out for Glen. I just wanted to ask again about the slowdown of your largest non-exiting fixed customer. Is there any more detail you can offer around what's going on there?

Theodore L. Tewksbury

Unfortunately, not without disclosing information about the customer, which should be relatively easy for you to triangulate on. We -- our Gen3 PCI Express switch, the main switch that we sell was designed specifically for a large U.S. x86-based server OEM -- I'm sorry, non-x86 server OEM. And the particular platform that that product is going into is ramping, it's actually in customer qualifications right now, but ramping a little bit more slowly than was anticipated, and we fully expect and our customer fully expects that volume to come back in the current quarter.

Delos Elder

So you're guiding for that business to grow -- for that customer to grow in the coming quarter -- this quarter?

Theodore L. Tewksbury

Yes.

Richard D. Crowley

Yes.

Delos Elder

Okay. And then can you just talk a little bit about what Fox Electronics has done since you made the acquisition? What's the health of their sales?

Theodore L. Tewksbury

Pretty good. This quarter -- I'm sorry, in the first quarter, they grew low single-digits, they'll grow single-digits again in the current quarter, and probably double-digit for the year. So meeting expectations.

Richard D. Crowley

The product portfolio has improved in their XpressO products and mix is a bit better on gross margin than when they came into IDT. So, it's going well.

Delos Elder

Okay. And then, as far as the China base station deployments, where are you in the order process for these? Just asking -- just how early do you see orders for RapidIO going into these base stations compared to other parts of the supply chain?

Theodore L. Tewksbury

Well, in some cases, we're receiving orders from base station OEMs even though they have not yet received orders from China Mobile. So they anticipate those orders coming and have confidence high enough that they're willing to start building equipment.

Delos Elder

And can you just -- how much of your sales can you attribute to China base stations?

Theodore L. Tewksbury

That's a good question.

Richard D. Crowley

It's not a lot right now. That can be a big growth driver for us, I think in our comm business, if that kicks in.

Theodore L. Tewksbury

We're already selling RapidIO switches Gen2 and Gen1 RapidIO switches, into base stations at the 2 leading China wireless infrastructure OEMs, but it's not for 4G TD/LTE. So that 4G volume is still ahead of us. And as I mentioned, it's starting this quarter, and we'll continue -- we expect it to continue through the remainder of the year. But that's all upside.

Delos Elder

Okay. And on that volume, kind of segues to my next question, as far as the magnitude to the deployments, obviously, you've got about 200,000 coming from China Mobile. Do have any visibility into the follow-on from China Telecom and China Unicom?

Theodore L. Tewksbury

Not at this time, no.

Delos Elder

Okay. Do you have less content in TD/LTE base stations than LTE base stations?

Richard D. Crowley

Now it's actually more...

Theodore L. Tewksbury

It's actually more. Yes, it's actually more. And in addition to RapidIO switches, we also are winning a lot of sockets for RF data convertors, timing and some of our standard products as well.

Delos Elder

So in terms of just the relative sizing of content between TD/LTE base stations and LTE base stations, is there a sense you can give us?

Richard D. Crowley

I think we've talked about growing our content for a base station, what, 18 months ago at $50. And now our sense is about $75, and our goal is well above $100. And we give that kind of macro content. We factor in kind of the growth in the market and how China would play into that to achieve that over the course of the year. So I would take it up a level from a specific TD/LTE, to just the overarching objective and what we believe would be a manifestation of our strategy to drive the content per base station, on average, up to well above $100.

Theodore L. Tewksbury

There is increasing content, but it's not so much a result of differences between China TD/LTE and other base stations. It's just a question of we have more products that go into the sockets in those base stations today than we did back in 3G or previous generations. So our content is increasing in TD/LTE for China, but it's also increasing at our major European base station customers. Today, we have anywhere from 7 to 15 sockets when you take into account the RapidIO switches, the timing, the RF, and the ADCs and the DACs.

Delos Elder

Okay, so roughly over time, you expect about the same amount of content in any base station around the world?

Theodore L. Tewksbury

Correct. And it's increasing across the board.

Delos Elder

Okay. The last question I had was, as far as the timing solutions that are going into the gaming console, can you talk about how that differs in the previous generation, and what's the content differential between the 2 generations?

Theodore L. Tewksbury

Dollar content is slightly less in PlayStation 4 than it was in PlayStation 3, somewhat less than $1.

Delos Elder

Okay, got you. I just had one maybe bigger strategy question. As far as the concerns around the practicality of wireless charging goes, obviously there's some engineering issues, standard issues, but what you think is going to take for it to really get traction? I mean, today, we carry charging cables around because it's convenient to take it where you need it. So is a mat necessarily the ideal way for consumers to address this need?

Theodore L. Tewksbury

So that's a great question. Yes, so first of all, I don't think there's really any issues around practicality, and I don't think it's a question of if this technology will be adopted, but simply when. It's a dynamic landscape, as we just talked about, because of the proliferation of standards, but we just talked about Intel and Qualcomm both getting behind A4WP, so that helps. It gives critical mass to one standard for the magnetic resonance technology. And then you got IDT basically bridging WPC and PMA and providing one chip to get around that issue. So this is happening. As I mentioned, all of the major consumer and handset OEMs are working on this technology, not just for handsets, by the way, but also for battery charging and industrial applications and toys and automobiles and so forth. So this is happening now. There's no question about that.

Operator

And our next question comes from the line of Betsy Van Hees with Wedbush Securities.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Ted, I wanted to ask a question on wireless charging, and I'm sorry if I missed this and I apologize. But last quarter you talked about the top 10 smartphone manufacturers, saying that you sampled them all and then you said that you had design ins at 3 of them, and you said you had planned directly to go in production. I was wondering if you could update us on how that's going with those 3, and then if there's any new design wins that you could talk about.

Theodore L. Tewksbury

So the 3 that we talked about are going very well. They are on schedule and of course, they're within that set of top 10 that we're working with. As I mentioned, all of those top 10 has been sampled on our dual-mode receiver. They're very excited about it and most of them are either evaluating it or in the process of designing it in. So I hope to have more news for you next quarter. I can tell you that we've had additional design wins. But we're certainly working on a number of projects with a number of different customers.

Betsy Van Hees - Wedbush Securities Inc., Research Division

And so with the 3 design wins that you have, there's the production plan. Is that looking more to be in fiscal -- I mean, I'm sorry, in the March quarter versus in the December quarter? Or is it going to be beyond that?

Theodore L. Tewksbury

It's really late December quarter or early March quarter.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Okay. That's helpful. And then Rick, I was wondering if you could remind us what your turns rate is normally for this quarter? And then my last question would be, I know you guys don't want to give forward guidance, but I was wondering if you could help us with what would be standard seasonality for your December quarter -- how we should be looking at that? And if you could kind of give us the seasonality by the different business segments that you have.

Richard D. Crowley

Okay, Betsy. Yes, usually we don't give out specifics of our direct turns business. And again in particular, as communication grows more and more, that is actually consignment. So the direct turns actually has become a little less meaningful. But I said, as I mentioned in my prepared remarks to give you some color, we hit record peaks in direct customer turns fill in the December and March quarters and I think we've come down reasonably well from that in our guidance here for September, but it's still a reasonable portion of the revenue has to be booked with -- in turn with the quarter, which I think is very consistent with the kind of 4- to 6-week lead times that we talked about. With respect to seasonality, if you go back over time, you can try to compute what our seasonality is, but I think now with our shift in product mix and a lower, much lower PC mix today, and an evolving and a ramping consumer in both the gaming business, as Ted talked about in the previous questions, and the potential for wireless power to lay on there, I think that typically, we've seen low to mid single-digit type of growth. Sometimes in bad quarters, it's been flat, or if there's an inventory correction, it's been down like last year. So it's usually flat to up single-digit to mid single-digits type of December quarter.

Operator

[Operator Instructions] And I have no further questions in queue. Please continue.

Richard D. Crowley

As always, we appreciate your interest in IDT and look forward to meeting with you on our marketing trips this quarter and on our next earnings call. Thank you, and goodbye.

Operator

And ladies and gentlemen, this call will be available for replay after 3:30 p.m. Pacific daylight time today through Thursday, August 1 at midnight. You may access the AT&T playback service at any time by dialing 1(800) 475-6701, and entering the access code, 298311. International participants, dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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