Executives
Mike Burns – Chief Financial Officer
Jeffrey Staszak – President and Chief Executive Officer
Analysts
Alex Gauna - JMP Securities
Joanne Feeney - FTN Capital Markets
Vernon Essi - Needham & Company
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
Arnab Chanda - Roth Capital Partners
Christopher Longiaru - Sidoti and Company
Nick Aberle - Caris & Company
Ramesh Misra - Brigantine Advisors LLC
Evan Wang for Tore Svanberg - Thomas Weisel Partners
John Vinh - Collins Stewart LLC
Gus Richard - Piper Jaffray & Co.
Volterra Semiconductor Corporation (VLTR) Q3 2009 Earnings Call October 19, 2009 5:30 PM ET
Operator
Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Volterra third quarter earnings conference call. (Operator Instructions) This conference is being recorded today Monday, October 19, 2009.
At this time I would like to turn the conference over to Mike Burns, Chief Financial Officer. Please go ahead sir.
Mike Burns
Thanks and welcome everyone to Volterra’s third quarter 2009 conference call. Joining me today is Volterra President and CEO, Jeff Staszak.
We issued a press release today with our financial results, which is available on the Investor section of our website at Volterra.com.
On this call, we’re going to discuss certain non-GAAP financial measures which exclude the effect of stock-based compensation expense net of tax. We’ve provided a GAAP to non-GAAP reconciliation that’s also available on the Investor section of our website. Unless we specifically state otherwise, our guidance refers to non-GAAP.
Our remarks will contain forward-looking statements that are based on the company’s current views and expectations that are subject to several risks and uncertainties. Please refer to today’s press release, our annual report 10-K filed with the SEC on March 4, 2009 and our most recent 10-Q filed with the SEC on August 4 for specific risk factors that may cause actual results to differ materially from the forward-looking statements. Volterra undertakes no obligation to update or to revise the forward-looking statements.
With that I’ll turn the call over to Jeff to provide an overview of the business and our results.
Jeffrey Staszak
Thanks Mike. Good afternoon and thanks for joining us today. First I’ll provide a short recap of the Q3 ’09 financials. I’ll then give a short update on our four focused markets, and following this I’ll talk about Q4 ’09 and provide guidance for the quarter. Finally I’ll hand it over to Mike to review the details of our financial performance for the quarter, and then we will open it up for any additional questions you may have.
In Q3 ’09 revenue came in at the high end of our revised guidance at $29.7 million versus $30.6 million in Q3 ’08 and $22.8 million in Q2 ’09. Non-GAAP EPS was $0.19 versus $0.25 in Q3 ’08 and $0.10 in Q2 ’09. Non-GAAP gross margins were up from 59.1% in Q2 to 59.7% in Q3. Margins continued to improve due to product mix, heavy emphasis on company-wide yield improvement activities and cost reductions with all of our suppliers.
As I mentioned in our last call, we expected growth in the second half ’09 as new product cycles and customer launches kicked in, specifically in our server, storage and graphics markets. We are continuing to get very good visibility from our customers and are receiving orders to reflect reality in the current economic environment. I continue to be optimistic that we will see growth in Q4 and in 2010 as new products and customer platforms continue to launch and the economy continues to recover.
Now I’d like to talk about our four focused markets and our current and future business opportunities within those markets. The current macroeconomic situation appears to be improving and should have an additional positive impact on our business. And our long term growth and profitability prospects remain very strong as we stick to our proven strategy of gaining market share, adding new customers and further penetrating our existing base of customers as new products and platforms are launched in these four target markets.
In server and storage we indicated in our last call that our revenue would be up in servers and storage in Q3. Revenue was up 18% from Q3 ’09 due to the continuation of the Intel Thurley platform ramp and the new AMD six core Opteron Refresh. We expect to see continued growth in servers and storage in Q4 as our customers continue to launch new products based on these two platforms.
Our fifth generation products for the Intel Thurley and AMD based platforms have been well received because our customers increased their total system efficiency demands and added more memory on these new servers to support the latest multi-core processors. This new generation of products enable us to provide the highest efficiency requirements in the industry while saving considerable board area.
At the last Q2 earnings call I explained how we expanded our position on HP servers with the launch of their new G6 server platforms where we are providing integrated power solutions. Many new rack and blade server based models launched in the first half ’09 using Volterra power management solutions. These high-volume, high-density server models at HP allowed us to expand our server market share at the two largest enterprise server companies, delivering the best energy savings in the industry to their customers.
In Q3 we continued this expansion with HP’s launch of their new G6 AMD Opteron brand of servers. HP launched five of these new servers, all powered with Volterra integrated power solutions.
We have started heavy design activity with all OEMs on the next generation Intel server platform called Romley. Design decisions should be complete by the end of the first half 2010 and we expect again to grow market share and expand business with our existing OEM customers as we begin to ship product in the second half 2011 when the new platforms are scheduled to launch.
In the notebook market, our notebook revenue was flat in Q3 as our customers continued ordering product for Montevina platforms at a normalized rate under the current economic conditions. In the second half ’08 we introduced our third generation of notebook products for the new Calpella platform, which will launch in Q1 2010 and have seen even stronger acceptance of these products from our customers as they use more silicon in more programs than the Montevina programs that are currently in production. This new product family gave us another significant improvement in our cost performance metric and provided our customers increased battery life, component reduction and space savings through our integrated power solutions.
In 2010 we are very excited about our notebook growth opportunities as our integrated solution gains momentum with the launch of the new Intel Calpella platform. Near term, we expect to see notebook revenue slightly up in Q4 from Q3 as we have received customer orders for Calpella product for ship dates in December.
As with our server business, significant design activity has started with our existing and new customers for the launch of Intel’s next generation notebook platform named Huron River, scheduled for the first half of 2011.
In the communication market, our communication revenue was flat in Q3. Currently we [audio impairment] in the high end metropolitan class equipment at both Cisco and Juniper Networks and have moved into some higher volume, enterprise class equipment the first half of this year. In Q4 we expect our revenue to be flat to slightly up from Q3.
In the graphics market, our graphics revenue was significantly higher in Q3 at $5.7 million, up from $1.5 million in Q2 as several new 40 nanometer card launches took place with our graphics customers. Our Gen 5 products have been well accepted in the graphics market as the power delivery requirements continue to become more demanding.
We had design wins with our customers on various platforms which include higher volume, low end performance and mainstream programs in addition to the high end performance and enthusiast programs like we have participated on in the past. We expect graphics revenue in Q4 to be slightly down as the channel pipeline begins to fill, which is a normal pattern for discrete graphics card launches.
Also, as with our server and notebook business, design activity has escalated with our graphics customers for new 40 nanometer refresh and 32 nanometer next generation cards, expected to come out in the spring and summer timeframe of 2010.
Guidance. Finally, I’d like to talk about the business outlook for Q4 ’09. As I mentioned earlier at our analyst day we revised our Q3 guidance upward and indicated that we expected to see some growth in Q4 as visibility with our customers has been very good. We are now anticipating Q4 revenue to be in the range of $31 million to $33 million, which will be a record for the company.
Non-GAAP EPS will be in the range from $0.18 to $0.22. We expect our non-GAAP gross margins to be in the 58% to 59% range.
At this point I’ll turn the call over to our CFO Mike Burns for a closer review of the financials.
Mike Burns
Thanks Jeff. I’ll start with revenue. Third quarter revenue was up 30% sequentially to $29.7 million. This is down just 3% from the same quarter a year ago.
Our server and storage business had an all-time record revenue quarter and contributed 62% of overall revenue. Sales in this segment were up year-on-year, primarily due to Volterra’s market share gains. Within this segment, revenue from the [Halon] based server programs cropped over during the quarter to comprise the majority of our server revenue.
Our desktop and workstation segment, which is primarily graphics, surged to 19% of sales, providing upside revenue in line with recent customer product launches.
Our portable and consumer revenue, primarily selling into enterprise notebook programs, remained stable as expected and was 10% of revenue.
Our networking and communications business remained relatively steady again and was 9% of revenue.
Looking next to gross margin, we achieved non-GAAP gross margin of 59.7%. This includes a 1.8% positive impact from the sale of products previously considered excess inventory and a 0.5% positive impact from release of inventory reserves. Third quarter gross margin without these inventory benefits would have been approximately 57.4% as expected.
Just as a reminder, the second quarter’s non-GAAP growth margin of 59.1% included a 1.8% positive impact from the sale of products previously considered excess inventory. So on a comparable basis, we kept our growth margins relatively flat with the prior quarter despite the challenges of product mix and inventory reduction.
Let’s move now to expenses. Overall we increased non-GAAP spending 16% sequentially, primarily for increased litigation work and higher profit dependent accruals, but also for our annual merit raises and selective hiring activity. Total spending was somewhat higher than originally expected but in line with the financial update we provided at our analyst day. Year-on-year, total operating expenses were up 13% but if you exclude litigation expense they’re about flat.
R&D was up 9% sequentially for higher wages and profit dependent accruals. SG&A was up 24% sequentially for increased litigation expense as well as for higher profit dependent accruals in line with significantly improved profit and growth. Within that SG&A line item, litigation expense specifically was $1.7 million or the equivalent of approximately $0.07 per share.
During the quarter we filed a motion for a preliminary injunction against Infineon Primarion, which the court indicated it has granted. We’re awaiting the final order detailing the specific terms of the injunction. Generally a preliminary injunction prevents companies from marketing and selling the products that are claimed to infringe while the case is ongoing. We believe the court’s favorable ruling is based on the strong likelihood of Volterra’s success and the merits of our case and validates the strength of our intellectual property position. We’ll continue to aggressively protect our patents and other intellectual property rights. Although no trial date has been set, we currently expect our case against Infineon Primarion to go to trial next year.
The bottom line on the quarter is that we expanded our GAAP net income sequentially, which includes $1.4 million of stock-based compensation expense to $3.4 million or $0.15 per share basic and $0.14 per share on a diluted basis. On a non-GAAP basis we expanded our net margin sequentially to 16%, we doubled our net income to $4.8 million and we are $0.19 per share diluted.
Just a note, without the $1.7 million litigation expense, non-GAAP net income would have been approximately $0.26 per share. Again this information is available on our website.
Looking now at the balance sheet, we generated a very strong $11 million in cash, ending the quarter with $72 million in cash and investments and no debt. We also decreased our inventory to a relatively lean 64 days. Inventory at our stocking reps was relatively lean as well.
Accounts receivable days sales outstanding was 44 days. In total assets and total liability and equity ended the quarter at $101.7 million.
A few other cash flow related items [inaudible] the quarter. Cash inflow from stock option exercises was a relatively high $3.6 million. Depreciation expense was $441,000 and capital expenditures were $328,000.
Looking forward, based on our strong order coverage entering the fourth quarter we expect to post a record high revenue quarter for Volterra. We’re planning for sequential growth of 4% to 11% or quarterly revenue of $31 to $33 million. The midpoint of this range would be up 46% from an unusually low fourth quarter a year ago.
We also expect to achieve non-GAAP growth margin in the approximately 58 to 59% range due to cost reductions, higher production levels and more favorable mix. We do not anticipate any major impact from the sale of previously reserved parts or from inventory reserves.
We’re planning to increase spending in the fourth quarter, primarily in R&D due to a quarterly spike in new product development expense. We’re currently expecting growth in our other areas of spending to be more moderate sequentially, with somewhat higher wages being offset by more normalized profit dependent accruals.
Litigation expense is very difficult to forecast but for the fourth quarter we’re currently expecting it to be approximately flat sequentially in the $1.7 million range.
We expect interest income to remain low and we expect our tax expense to be low as well. And if we achieve our goals on revenue, on margins and spending we’d expect to earn non-GAAP EPS of $0.18 to $0.22.
We plan to next update our financial results and guidance at our fourth quarter conference call, which is tentatively scheduled for Monday January 25, 2010. We’ll put out a press release to formally announce and schedule the call when we get closer to that date.
During the quarter we plan to participate in a number of investor relations events. On November 11, Jeff will be in southern California with Roth Capital. On November 17 and 18 we’ll be in Boston and New York with Thomas Weisel Partners. On November 19, we’ll host a group of investors in Fremont as part of the Caris and Company Semiconductor Bus Tour. And finally on December 7 I’ll be marketing in the San Francisco Bay area with Brigantine Advisors.
In addition to these events, we’ll continue our bimonthly virtual visit programs. We hold Virtual Visit 101 sessions for investors who are either new to Volterra or have not had contact with us in the past 12 to 18 months. And we hold the Virtual Visit 201 sessions for investors that are more familiar with Volterra but want to get caught up on more current topics and industry issues. Please contact Heidi Flannery, Investor Relations at 510-743-1718 if you’d like to participate in any of these events.
That’s it for our prepared remarks. Before we begin the Q&A, in the interest of time we’d ask that each analyst please limit themselves to two questions and if time allows at the end we’ll go back to anyone that may have a follow up question. So with that, we’ll now turn the call over to questions.
Question-and-Answer Session
Operator
Thank you sir. (Operator Instructions) Your first question comes from Alex Gauna - JMP Securities.
Alex Gauna - JMP Securities
I was wondering if you could start by giving some color on recent trends. Obviously your guidance is pretty explanatory but we’ve got a pretty big launch here around Windows 7. There’s been a lot of product transitions with the six core Opterons now. Recently what has been the trajectory of business coming into the current quarter, if you can give some color around that?
Jeffrey Staszak
Well it’s pretty much as we estimated and you know we talked about this at our analyst day. We have the Thurley platform that is continuing to launch or I should say ramp. We have the new AMD Opteron Refresh that kicked in in third quarter. You know part of the reason for our uptick in server and storage was due to that. And in Q4, Q1 and Q2 we’ve got the 32 nanometer two way Intel processors coming out and then we have the Stoutland four and eight-way servers coming out in the first half of next year. And in addition to that, you’ve got the I believe it’s a 12 core AMD next generation processor that’s coming out as well. So all those new processors and refresh platforms coming out I mean should be positive I think for the business.
Mike Burns
And just in general in terms of general trends, our outlook now for Q4 is a little bit higher than how it looked to us on September 10 when we did our analyst day when we indicated we’d be up about 5%. So in general since September 10 things are looking a little bit better overall. So things feel pretty good here right now.
Alex Gauna - JMP Securities
And then obviously you’ve had some favorable developments on the litigation front. Can you give some color in terms of maybe the magnitude of business that’s being infringed upon? And if you get this injunction in place, do those customers or those infringing parts, is there a Volterra replacement that can come in? Is there a business opportunity on this, or is it just going to be damages at the end of the tunnel here?
Mike Burns
Well, it’s virtually impossible to say how these things are going to end up. I mean we’re still waiting for the final detailed ruling or report. That takes some time for that to get together. So I can’t say too much in terms of the specifics on that. But you know in terms of the way we’re looking at it right now, I mean we are expecting this case to go to trial next year and we’re planning to you know continue to have significant litigation expense this quarter and into next year as well. And we’re just going to kind of have to take it as it goes. These things always have lots of twists and turns. But it’s a very important case to us. We’re very pleased that the court indicated they were going to issue this injunction and you know we think it’s a very good start to the case for us.
Operator
Your next question comes from Joanne Feeney - FTN Capital Markets.
Joanne Feeney - FTN Capital Markets
So if I can just ask a question about the notebook side. So you know you’re waiting obviously for the new design wins to kick in on the Calpella platform. Can you give us a sense overall of how that might develop over the course of 2010? Or do you see 2010 coming in relative to ’09 in your notebook market?
Jeffrey Staszak
Yes, well from a notebook standpoint with respect to ’09 I mean you know with the input that I just gave, I mean we’re going to kind of be in the you know a little bit north of where we were this quarter, which was around $3 million for notebook business. That puts us kind of in the $11 million range or so for the year, $11 to $12 million. And we said that we expected over the course of 2010 to double that business as we add more customers. We expand our business with our existing customers and we expect the ramp to start with some of our customers you know in Q1. And that’ll continue into Q2 and probably even into Q3 to some extent. And we believe that’s all happening as a result of the orders that we’re starting to receive for December shipments, which is what we indicated in the analyst day that we basically had forecast. And those forecasts are starting to turn into orders now.
Mike Burns
We’re on about 11 programs now I believe on the Montevina and we’ve indicated that we expect to be on more than 20 different notebook platforms, primarily the enterprise notebook platforms, Calpella, and that appears to be on track for early next year.
Joanne Feeney - FTN Capital Markets
So it sounds like being on the enterprise track is still something that is supportive of a very good margin, if I remember correctly what you said earlier. So if I could, a follow up on the graphics side. You remarked about some new design competition beginning to take place for some additional 40 nanometer and then 32 nanometer products. Can you give me a sense of where you see things developing in terms of your exposure to the two unnamed competitors out there? Do you see things moving back to a more balanced exposure for you guys? Or still primarily relying on one of the two graphics suppliers out there?
Jeffrey Staszak
Well I mean from a design standpoint I’d say that we’re, you know we’re going to try and are attempting to be equally balanced at both of them. Right? But it all depends upon how well they do as far as hitting their schedules and milestones as well. And I mean from a readiness standpoint this past quarter, I mean one we did a little bit better with one customer than the other because they came out with some new, you know 40 nanometer cards. That basically was announced by AMD on the 5850s and the 5870s, which were all over those cards. And you know so again from a design win standpoint, we’re going at both of them equally aggressive I would say. And then it depends upon which one or how well they do in the marketplace. It depends on how we do with the individual customers.
Joanne Feeney - FTN Capital Markets
So it’s fair to say you have still exposure to the aggregate you know developments in the graphic side and it just doesn’t matter to you which of these guys do well. You’re still fairly balanced in your design win efforts there.
Jeffrey Staszak
Yes.
Operator
Your next question comes from Vernon Essi - Needham & Company.
Vernon Essi - Needham & Company
I’m wondering if we might just dive in a little bit on the operating expense side of things and just sort of look at your SG&A and try to rinse out the litigation. It seems to be moving in line with sales in sort of the mid-teens range. Should we expect that to happen in sort of the next quarter, that same sort of behavior, so it would be up modestly sequentially in dollar terms?
Mike Burns
Yes. That’s a good way to think about it. Yes. We’ve got a big line item within that SG&A line item now, so I think for Q4 it will probably be in line with Q3 for litigation and for non-litigation SG&A. Really the significant increase in Q4 is going to be this product development type expense. And then I think for next year the way to think about it for R&D is our model is 18 to 22% of revenue, somewhere in the middle of that. For SG&A, excluding litigation you know our model there is 12 to 15%, probably the top end of that at 15% excluding litigation. But then you have to put in a significant number at this point in time for litigation which is currently running at about $1.7 million a quarter for us and we don’t see that abating any time immediately, so I would put in a significant number for that as well.
Vernon Essi - Needham & Company
And just to switch gears over the balance sheet, internal inventory was very low in a nice range. I’m just wondering in the past it’s had no indication as to your future shipment range and what not. I’m just wondering if you could discuss any reasons behind it or if you feel like that’s a little too lean going into your.
Jeffrey Staszak
Sure. It is a little lean, Vernon. Actually I wouldn’t mind having a little bit more at the end of the quarter. It’s on the low end versus where we’ve been in the past several years. You know we had way too much at the end of last year so we really focused on getting it down to the best of our ability. And now I think it’s down and next quarter it may go up a little bit in dollars and days. Give us a little more comfort heading into Q1.
Vernon Essi - Needham & Company
So this isn’t a range we’d expect to see ongoing?
Jeffrey Staszak
This is probably the lower end of the range. Probably a little bit higher than this typically.
Operator
Your next question comes from [Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
For 4Q, what type of coverage do you have right now and what’s the terms requirement?
Mike Burns
The terms requirement’s about a little less than 20%, you know which is about where we’ve averaged the past four quarters. This last quarter in Q3 we ended up a little bit above 20%. That’s a little bit better than originally expected. Our assumptions for Q4 are a little bit lower than that but in line with our average over the past year. Order coverage as Jeff indicated, I mean bookings were pretty strong in Q3.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
And how should linearity turn throughout the quarter?
Mike Burns
Actually pretty linear. Yes.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
Not really front-end loaded before the holidays?
Mike Burns
No. Not particularly. No.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
Is it fair to say visibility at this point is pretty much through mid-December?
Mike Burns
It’s very good through December and we’re starting to get decent visibility into early Q1 as well in terms of our customers placing orders for January.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
For the inventory write-down you said it’s pretty much gone this quarter?
Mike Burns
Yes. The last three quarters we’ve had some sales of parts we reserved last year and we don’t see much if any of that left for Q4. Maybe a tiny bit. And you know we’re not expecting any releases or new reserves in Q4 either, but you know we’ll see. But our assumptions in the forecast are that we have no net impact from either of those.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
And you guys guided to 58 to 59, and if you X it out from last quarter it was 57.4 so the benefit margins is pretty much mixed based?
Mike Burns
It’s partially mixed because graphics is going to be down a little bit and it’s partially production levels will be up a little bit. And we’re expecting to grow inventory a little bit, so that helps it as well. And then also some of the cost reductions and [inaudible] improvements that Jeff referred to will be kicking in in Q4. So it’s going up about a point at the midpoint and it’s kind of a combination of all three of those things.
[Unidentified Analyst] for Patrick Wang - Wedbush Morgan Securities
It seems like GP revenues are going to start declining here but notebooks are going to start ramping. Is it fair to say that the notebook would pretty much offset the GPU decline? Or do you think there will be more or less magnitude?
Mike Burns
If you’re talking about Q1 specifically next year, we’ll see. It will depend exactly on the timing launch. But in a general statement, you know the notebook revenue is much preferred to the GPU revenue because it tends to be more sustainable and much longer product cycles. And so you know I’ll take that over the GPU revenue in terms of sustainability any time.
Operator
Your next question comes from Arnab Chanda - Roth Capital Partners.
Arnab Chanda - Roth Capital Partners
If you look at your server business at the beginning of the year, it seems like you’re actually outperforming the decline. You know you’re doing much better than what the overall market units are doing. You know if the market comes back, is it possible to do significantly better than the market? I’m just curious as to what you can see you know based on your design wins that you think could happen for 2010.
Mike Burns
Yes. I mean we expected to do better than the market this year because we got significantly more dollar content and more programs that were on on these Thurley and Halon based servers and expecting that would continue, although maybe not as dramatically in 2010. But you know we would certainly hope to beat the market again in 2010 in servers.
Arnab Chanda - Roth Capital Partners
One question on graphics. You know if you look at your graphics business it’s also down very significantly for 2008 and the graphics market seems like it actually is coming back. You know is there a reason to expect that these levels are kind of a peak level? Or do you think you know in 2010 you could actually grow you know revenues from here, especially with the launches?
Mike Burns
No, we’re not planning that next year. If that happens that’d be wonderful. You know Q3 was quite a good quarter for graphics. There was close to you know the all time highs that we would have had a year or a year-and-a-half ago. So Q3 was pretty good for graphics. You know it was better than we thought heading into it, that’s for sure. And I think Q4 will be okay although it could be down a little bit. But we just have very limited visibility on graphics for next year so it’s tough to say at this point.
Arnab Chanda - Roth Capital Partners
And then last question on margins. You know if you leave off things like mix and other kinds of things that are not really product costs, have you already gotten the flow of activity for cost reduction or does it just have to cycle through in inventory? Or do you think that this is sort of as good as it gets you know on that side? Thank you.
Mike Burns
Sure. I’m not sure I fully understand kind of what you’re looking for there, but I mean I can tell you the cost reduction efforts that we really focused on this year are going to be maintained next year. And we’re building that into our assumptions to try and keep our margins up at least in the middle to upper part of our corporate range, which is 55 to 60 points. You know it’ll move around quarter-to-quarter depending on mix and production levels and so on and so forth. But we’re very happy where they are right now for Q4 and I think heading into next year if we could maintain that overall for the year, that would be wonderful.
Arnab Chanda - Roth Capital Partners
What I meant to say or what I was trying to ask is, the cost reduction yield improvements you’ve gotten, are all those chips already in production, which means that you’re not going to get incremental benefit from that? Or is that still to come?
Mike Burns
We’ve got reductions on ones in production and we’ve also gotten reductions on ones that will be in production next year.
Operator
Your next question comes from Christopher Longiaru - Sidoti and Company.
Christopher Longiaru - Sidoti and Company
My question really has to do with you have you know Romley, Calpella and Huron River on the horizon. What does that do to your content specifically? I mean market share gains aside and just with the existing customers that you have.
Jeffrey Staszak
Well a notebook example, Huron River with the existing customers that we have we expect to again get on more platforms and again with each platform have more silicon content. But we also expect to add additional customers you know with that next launch as well.
Christopher Longiaru - Sidoti and Company
And just on a content side, what is the content increase or the silicon increase look like for you?
Jeffrey Staszak
The opportunity’s still around $10 or so you know. And in some cases we have, you know there’s several notebooks on Montevina right now that are out, that entire $10 of silicon content where we have all five or six regulators, we expect that to continue to happen on an increased number of models the next go round. But then there’ll be other platforms where we have you know just one or two regulators. So it’s kind of a mix and match.
Christopher Longiaru - Sidoti and Company
And what would you say would be the average content that you have on some of the Montevina based?
Jeffrey Staszak
I don’t know. Kind of a hard.
Mike Burns
Yes, it’s tough to say. We really don’t disclose the average but I’d say we cover that full range from the least amount that we could have to the full opportunity.
Jeffrey Staszak
A couple of bucks up to $10 or so.
Operator
Your next question comes from Nick Aberle - Caris & Company.
Nick Aberle - Caris & Company
So you basically said that your backlog coverage is pretty solid. You’ve tightened up the reins on the guidance. Looking at graphics, you guys have that down slightly in your forecast. Given some of the constraints that it sounds like are going on there on 40 nanometer currently, I mean are you guys actually being relatively conservative on GPU? What type of coverage do you have there in that segment specifically?
Mike Burns
I’d say we’re being conservative on GPU long term but for this quarter I wouldn’t say we’re being overly conservative. I think we have a pretty good forecast from our customers and we’ve got pretty decent order coverage on that already at this point in time. But we do need some orders to go to reach our goals for the quarter. So I don’t know. Jeff, do you have anything?
Jeffrey Staszak
Yes. I mean you know I listened and read the AMD script, right, and it said that they expected their discrete graphics business to be down slightly this quarter which is seasonal. And you know they indicated they launched several new products, those are in the channel now. They’ve got a couple more coming out but you know their graphics revenue was going to be down slightly. And I think our graphics revenue is going to reflect that as well.
Nick Aberle - Caris & Company
On a relative basis would you say your visibility within graphics going into Q4 is better than it normally is though?
Mike Burns
Not much. Maybe slightly. And our visibility for next year is really low, so you know again we take it very conservatively graphics going forward for next year and manage it as upside.
Jeffrey Staszak
And we were on a lot more platforms this time so we did get better visibility from our customers as these new products launched. And I think we have reasonably good visibility for this quarter and order coverage you know from a graphics standpoint.
Nick Aberle - Caris & Company
You guys have been talking about moving down the pricing stack into some more kind of high-end mainstream stuff. Will that stuff ship during Q4?
Jeffrey Staszak
Yes.
Mike Burns
And that shipped some in Q3 as well.
Jeffrey Staszak
No. The high-end performances, those cards haven’t been launched yet. It’s my understanding they’ll be here within the next month.
Nick Aberle - Caris & Company
And then with respect to notebook, we’re seeing a little bit of growth in the notebook segment in Q4. Is the assumption there that the legacy notebook business just kind of stays flat and the incremental growth comes from the new Calpella ramp?
Jeffrey Staszak
Yes.
Nick Aberle - Caris & Company
You guys are going to have spare shipments to some customers. Are those existing customers or have you guys actually started shipping to new customers starting in Q4?
Jeffrey Staszak
In Q4 it’s an existing, one or two existing customers and then in Q1 you know roughly in the Q1 timeframe that will be with a new customer or customers.
Nick Aberle - Caris & Company
One last question is on servers, kind of looking at your guidance from a bottoms up standpoint it looks like the majority of the growth is going to be driven by the server segment. You know, are we getting close to peak run rates on the server business? And given that you guys have started to cross over on Thurley now is there some underlying improvement in the kind of existing run rate legacy stuff on the server front?
Jeffrey Staszak
Well, I don’t know how to answer that. I would say that it’s, you know in Q4 right now it looks like it’s going to continue to grow for us as you know the AMD refresh stuff continues to come out and you know the ramp for Thurley should peak somewhat this quarter. And then again you know we should start getting some orders again for some of the refresh stuff for the first half of next year. You know the first quarter’s customarily down in server storage. We’ll have to see how that looks. But overall for Q4 you know you had indicated that that was going to be the main growth driver, I mean we said we’d be flat to slightly up in notebooks, we’d be flat to slightly up in communications and we’d be up in server storage. So we’ve got three of our business segments that are going to be up and one’s going to be down. And the one that’s going to be down, you know the other three are going to make up for it. I think we’ve got three businesses that we’re going to continue to see some gains this quarter.
Operator
Your next question comes from Ramesh Misra - Brigantine Advisors LLC.
Ramesh Misra - Brigantine Advisors LLC
Sorry I might have missed some of your early comments but Mike can you just reiterate what your Q4 guidance was?
Mike Burns
Sure. In the script revenue guidance is $31 to $33 million, EPS non-GAAP of $0.18 to $0.22.
Ramesh Misra - Brigantine Advisors LLC
In regards to the recent court injunction related to your patent infringement lawsuit, has there been any tangible impact from it on your business so far, Jeff?
Jeffrey Staszak
I’ll let Mike cover it.
Mike Burns
Well we don’t want to get too into the specifics in terms of the impact on the business at this point in time. You know I can tell you you know overall in terms of our approach to it we view it as a very, very serious matter. And that’s why we filed the lawsuit and that’s why we’re trying to go after this fairly aggressively to try to nip this what we view as a sort of infringement in the bud. So we do view it as a serious matter and you know we expect to continue to do a lot of work on this and to continue to spend money on it next year and go forward and hope to have the trial at some point next year.
Ramesh Misra - Brigantine Advisors LLC
In regards to the PC space and notebook space, there has been a little bit of concern of an over build ahead of the Windows 7 launch and I wanted to get your take on it, especially as it relates to your laptop business.
Jeffrey Staszak
I don’t believe so. I mean the Montevina is you know kind of in the last quarter. It will continue to ship for the month. The [Vina] platform that’s in production now this quarter and next quarter, but Calpella will start to launch and I don’t think there’s any over build situation there.
Mike Burns
Yes. We haven’t seen any data points that suggest that. Our notebook business has been very stable the past few quarters. It should be stable again this quarter and then as we started in Q1 there’ll be that transition going on. So we haven’t seen that. No.
Operator
Your next question comes from Evan Wang for Tore Svanberg - Thomas Weisel Partners.
Evan Wang for Tore Svanberg - Thomas Weisel Partners
I was just wondering if you could elaborate a little bit more on your graphics? Which segment was driving the growth this past quarter? Is it the Enthusiast or is it the Mainstream? And if you could also talk a little bit about the margin difference between the two and the proportional [referentation] right now.
Jeffrey Staszak
Well in the past quarter, if you take a look at some of the models that were launched they were primarily performance cards. And you know what’s been talked about is is that some high-end Mainstream and some Enthusiast class of discrete cards are going to be launched in the fourth quarter of this year. With respect to margins, you know maybe I’m going to let you comment on.
Mike Burns
That is one of our two lower margin segments but we were able to maintain our margins and that. You know the key there is with graphics is an upside business so there’s not a lot of fixed costs associated with that. And typically our operating margins tend to spike in those quarters when the graphics surges. So it’s all very manageable in terms of the impact on margins.
Operator
Your next question comes from John Vinh - Collins Stewart LLC.
John Vinh - Collins Stewart LLC
I have just a follow up question on the ramp of Calpella. Obviously there’s been a lot of discussion on the pent up demand from the launch of Windows 7 and obviously it looks like a lot of your growth in 2010’s going to come from the enterprise side. Can you give us a sense of how does that change the ramp of or the growth in your PC notebook market 2010? Is it going to be a little bit more front-end loaded with the launch of Windows 7? What’s your visibility into that at this point in time?
Jeffrey Staszak
I don’t know what impact Windows 7 is going to have on it. I just know what the forecasts are that we’re getting from our customers and there’ll be some customers that launch in Q1 and there’ll be other customers that launch towards the end of Q1 and Q2. And there’s probably even going to be some late models coming out the end of Q2 or early Q3 timeframe. And it’s primarily as the Montevina models phase out and they start to deplete their inventories, then of course they’ll be bringing up the new Calpella platform. So its you know more of customers business on how they, one of the models goes down and then the new models ramp.
John Vinh - Collins Stewart LLC
Does that ramp look fairly linear to you, Jeff?
Jeffrey Staszak
Fairly linear? No it’s never linear. I mean the launch is usually, its kind of a 10% type of a deal. Maybe 15%. And then it pops up to 30, 40% and you know so the second and third quarters of the launch are usually the two strongest quarters from a gross standpoint.
John Vinh - Collins Stewart LLC
And you had mentioned that you are going to be going from 11 platforms in Montevina to 20 platforms on Calpella. The incremental kind of 9 platforms, or roughly the doubling of your platforms, is most of that increase in the number of platforms, is that coming from existing customers? Or is that mostly coming from new customers?
Jeffrey Staszak
Well, we said it was north of 20. So its 20 plus. And the answer is some of those are with new customers and some of those are with existing. We plan on talking more about that in Q1 and Q2 as these start to launch. And you know we indicated in the analyst day we have a lot of stuff going on and we’d like to be able to talk about it but can’t do it until these new models launch in that timeframe.
John Vinh - Collins Stewart LLC
And then last question for you guys on the litigation. Any sense on when you expect to go to trial? I’m just trying to get a sense of you know how far forward into 2010 we should be modeling these litigation expenses.
Mike Burns
Really hard to say John. It’s extremely hard to forecast and it’s not really totally up to us. It’s up to the court and the other side. So for right now I think it’s probably best to think about it, this going on, throughout the course of next year. You know when the specific date for the trial is we just don’t know yet.
Operator
Your next question comes from Gus Richard - Piper Jaffray & Co.
Gus Richard - Piper Jaffray & Co.
Just on a competitive landscape with Intel coming out with VRM 11, there’s been a couple of companies that have been a little more aggressive with integrated set drivers, monolithic power [renasis] and Fairchild. I was wondering if you were seeing those guys in the market.
Jeffrey Staszak
No.
Gus Richard - Piper Jaffray & Co.
On your guidance you talk about product development costs coming in and upping the R&D. Talk a little bit about the split between R&D and SG&A for the increased OpEx.
Mike Burns
Sure. It’s almost all R&D and what’s happening there is you know we indicated on prior calls that our goal for the year was to keep our R&D spend for 2009 about flat to 2008 but get out more products. And we’ve got people working very hard to try to reach that goal. I think we’ll come in about flat year-on-year non-GAAP spending and trying to get out more products than we did the prior year. So that came in a little bit under, less than expected in Q3 and its popping back up now. Some of that’s spilled over into Q4 and you know that’s just the way things work.
Gus Richard - Piper Jaffray & Co.
And then the last one I had on the notebook market it looks like it was flat sequentially, which is a little bit different than most other folks in Q3. I was wondering if you’d sort of talk about how your traction is going there and sort of the reason for the flatness in the revenue.
Mike Burns
Sure. It’s primarily on enterprise notebooks which I think is probably not the area that others are maybe seeing more growth on the consumer side. And you know basically we’re on the programs that we’re on. It’s just a matter of how well those sell. And then it’s going to be Q1 before we start to see the step up from the Calpella notebooks. I’m not sure what you see from others that you’re referring to, but for us it’s been very stable.
Gus Richard - Piper Jaffray & Co.
I mean Intel, AMD, kind of results. But let me try this this way. What’s the average selling price of the notebooks that you design into? Do you have just a rough idea?
Jeffrey Staszak
With Calpella it’s anywhere from you know $600 on up to $800 on up to $1,900 models.
Gus Richard - Piper Jaffray & Co.
What’s the lower end of the price point on the current notebooks you’re in?
Jeffrey Staszak
Oh, I don’t know.
Mike Burns
It’s about the $900 range.
Jeffrey Staszak
Hey, Gus, I didn’t mean to cut you off when you asked about you know the competitive landscape. You mentioned monolithic power and Fairchild. We don’t see those guys in the server competitive environment that we participate in. They may be in desktops or you know things that we don’t participate in but you know I’m aware they’re trying to come up with some integrated solutions and probably actually have some to some extent. But we don’t see them in our landscape.
Gus Richard - Piper Jaffray & Co.
How about Renasis?
Jeffrey Staszak
No.
Gus Richard - Piper Jaffray & Co.
You know I think they’re early on on the products. I was just wondering if they had showed up yet.
Jeffrey Staszak
No.
Operator
Thank you and gentlemen at this time we have no further questions. Please continue.
Mike Burns
Good. Thanks. Thanks to all of you for your questions and interest in Volterra. We’ll post a webcast of today’s call on our website until Monday November 16, 2009. Thanks for joining us today.
Operator
Thank you ladies and gentlemen. If you’d like to listen to a replay of today’s conference please dial 1-800-406-7325 or 303-590-3030 using the access code of 4169900 followed by the pound key. This does conclude the Volterra third quarter earnings conference call. Thank you very much for your participation. You may now disconnect.
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