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Integrated Device Technology Inc. (NASDAQ:IDTI)

F2Q10 (Qtr End 09/27/09) Conference Call

October 27, 2009 04:30 PM ET

Executives

Richard D. Crowley - Chief Financial Officer

Ted Tewksbury, Ph.D - President and Chief Executive Officer

Brian White - Vice President, Finance

Analysts

Glen Yeung - Citigroup

Sandy Harrison - Signal Hill Securities

Sukhi Nagesh - Deutsche Bank

John Barton - Cowen & Co.

Tim Luke - Barclays Capital

David Wu - Global Crown Capital

Nick Aberle - Caris & Co.

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to Integrated Device Technology Incorporated Fiscal Second Quarter 2010 Financial Results Conference Call. At this time all participant are in a listen-only mode. Later there will be an opportunity for your questions with instruction to be given at that time. (Operator Instructions). And also as a reminder, today's teleconference is being recorded.

And 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, Johnny. And welcome to our fiscal second quarter 2010 earnings conference call. I am Rich Crowley, IDT's Chief Financial Officer. Presenting with me on the call today is Ted Tewksbury, our President and Chief Executive Officer. Also attendants on the call are Brian White, our VP of finance; Chad Taggard, our VP of Marketing and Mike Knapp, our manager of Investor Relations.

We will all be available during the Q&A portion of this call. Our call today will include remarks about future expectations, plans and prospects for IDT, which constitute forward-looking statements for purposes of the Safe Harbor provisions and their applicable federal securities laws. Actual results may differ materially from our forward-looking statements as a result of various important factors, including certain risks which are detailed in IDT's most recent Annual Report on form 10-K and quarterly report on form 10-Q as filed with the SEC. IDT does not intend to update the information provided in today's call and expressly disclaims any such duty, except as required by law.

In addition, pursuant to regulation G, any non-GAAP financial measures reference during today's conference call can be found in our press release posted on our website at the www.idt.com, including a complete reconciliation to the most directly comparable GAAP measures.

Please note that we have made an immaterial change to our non-GAAP reconciliation to account for fluctuations and our deferred compensation plan. Also we have made selective financial information available in the webcast slides, which can be found in the Investor Relations section of our website.

Now I'll turn over the call over to Ted, who will report on the overall quarter and then I will return to give you more specifics about our September quarter results and our outlook for December. Ted?

Ted Tewksbury, Ph.D

Thanks, Rick. I'm happy to report that we had very strong fiscal second quarter of 2010. Our revenue, gross margins and EPS were all at the high end of our prior projections provided on our last earnings call. We posted a 20% sequential increase in revenue driven by strong demand for new and existing products across all three of our end markets; consumer, computing and communications.

Non-GAAP gross margin increase by 4% sequentially to over 50% driven by higher revenue, improved product mix and increased fab utilization. These improvements, combined with accelerated synergies from our recent Tundra Semiconductor acquisition, enabled us to deliver non-GAAP EPS of $0.07, $0.05 above the midpoint of our prior projections.

Overall, this quarter demonstrates that IDT's strategy of expanding our core strength while layering our new growth opportunities and rightsizing our cost structure is producing positive results and considerable operating leverage.

Rick will provide details on our financials in just a movement.

But first, let me highlight some of the trends we experienced in each of our end markets during the September quarter. Revenue from our consumer end market was up approximately 75% sequentially, well above our prior expectations. This is largely due to strong sales into the game and display segment. In gaming, sales of timing solution to our largest consumer customers more than tripled. We experience significant growth in our video and display business unit revenues increasing significantly from the prior quarter, boosted by timing controllers for high definition TV panels.

We believe we are seeing the early ramp of an extended growth cycle for our display products. The consumer end market, due to 20% of total revenue in Q3, up from 13% in the prior quarter. In computing, to the PC segment were better than we originally anticipated with revenue up approximately 40% sequentially. PC clocks sales grew due to seasonal strength and market share gains. In addition, PC audio design wins continued to ramp in September particularly in the notebook segment.

The strong growth in PC revenues was driven by higher consumption during the quarter, as evidenced by flat channel inventory for our PC related products from June to September. Sooner or later revenue grew more than 5% quarter-over-quarter with PCI Express revenue up 60% sequentially across multiple customers.

In our memory interface business, robust DDR 3 related sales offset declines in advanced memory buffer revenue. Overall, revenue from computing products grew approximately 20% sequentially and represented about 37% of our total revenue, the same proportion as in the June quarter.

Total revenue from our communications and ... increased approximately 3% sequentially. We experienced a broad-based increase in revenue across many customers in our wire line segment is due to improving end demand in our communications clock business. In wireless, sales of our Serial RapidIO products grew significantly as customers began to deploy new play stations, requiring high speed serial switching.

Our communications end market represented 43% of total revenue, down from 50% in the prior quarter has robust growth in consumer and computing outpaced the increases that we saw in communications.

As I mentioned earlier, our strategy consists of growing our mixed signal content in our targeted applications by expanding our core strengths while adding new growth opportunities particularly in the analog domain; at the same time we remain focused on maximizing the returns of our R&D investments through a disciplined product selection and cost controls.

I would like to take a few minutes to talk about some specific examples that illustrate the success we're seeing with this new strategy, including an update on our Tundra integration as well as new products and design win traction. Then I'll turn to our outlook for the December quarter. I am please to report that the Tundra integration is proceeding ahead of plan. I noted earlier that we were able to accelerate some synergies, which improves call through to the bottom line.

In addition, the Tundra team is now fully engaged in new product developments that are expanding our leadership of RapidIO and PCI Express switches and bridges as well as win new designs in military and industrial applications.

The benefits of our industry leading serial switching portfolio are being well received by customers. We recently announced that our CPS-10-Q, Serial RapidIO switch has been selected by Freescale semiconductor for selecting three multi-core digital signal processors and its advanced memory card development platform.

Our Serial RapidIO IP has also been selected by Texas Instrument for using its wireless optimized DSPs. The combination of IDT Serial RapidIO products with APIs next generation DSPs, provide the turnkey solution with industry leading performance and interpretability for 3.5G and 4G wireless platform.

IDT has secured a number of key design wins for just real 2.0 switches in lTE play station designs from leading infrastructure manufactures. In computing and consumer, we recently announced to new family of low power audio codecs that are designed to serve the needs of today's portable platforms. These new devices in the Power Smart technology to cut power consumption in half relative to alternative solutions making them ideal for using mobile devices. In Q2, we also announced three industry-first in our video and display business unit. Two of these we touched on during our last earnings call.

The Vida processor, for cleaning of streaming compressed video and our Power Smart enabled display port timing controller with integrated LED backlight for notebook LCD panels. We also announced LinkXtend, our first signal integrity product that provides DisplayPort cable extension for PCs and mobile computers to connect to monitors and projectors.

We have been very pleased with the adoption of our PanelPort and HQV for Hollywood Quality Video products for the display market. Consumer products using our new video processor, our new data processor and our recently announced ViewXpand, multi monitor controller, will appear in stores with holiday season.

Production for DisplayPort products for using Smart Power notebooks have began, indicating the early stage of the volume ramp to began in the first calendar quarter of 2010.

We continue to invest in the innovative new display products, which will expand our early leadership in notebook and HDTV panels. During the quarter, we introduced the newest members of the IDT pure touch family of lower power capacity of touch controllers, which are the first devices announced since IDT acquired this technology in June.

These devices have 15% lower power consumption than their predecessors and integrate LED drivers to simplify customers designs. This solutions target computing, right goods and portable devices and can be implemented through button, slider and scroll options.

Our development pipeline is full of the innovative new products that serve all three of our end markets. We are now focused on selecting, defining and development projects with highest internal design time, the highest gross margin and the highest revenue potential for the company.

The recent state of new product announcements confirm that we are on the way on path and serves as the leading indicator of future revenue growth.

Now let me turn to our guidance for the fiscal third quarter. In Communications, we expect the improvements we saw in our wire line business to continuing to the December quarter, while sales into the wireless segment will be approximately flat. The growth in wire line revenue will be offset by a decline in network search engine revenue as a result of the divestiture of this business in the second quarter, as a result of the divestiture of that business to ... during the second quarter,

Overall, for Communications, we expect revenue to be roughly flat a sequential basis in the December quarter.

In Computing, we expect to see another quarter of sequential growth for sales of PC related products. The above market grow trend we experienced in September, will continue into December, albeit at a slower pace.

Currently we anticipate approximately 10% sequential growth in the PC related revenue for the December quarter.

We expect revenue in the enterprise computing segment to remain flat. We also believe that the December quarter will mark the crossover point when revenue from DDR 3 related products will surpass that from AMB. For the December quarter we currently project revenue from our computing end market will increase approximately 5% on a sequential basis.

In the consumer end market, we currently project about our 5% sequential decline in the December quarter. Continued strong growth in displays will partially offset a pullback in gaming related revenue, following a very strong September quarter in which vendors build ahead for their holiday selling season.

In total, for the December quarter, our fiscal Q3 of 2010, we project the revenues will be a $140 million plus or minus 3 million.

I mentioned on our July earnings call that revenues from new product categories represented approximately 5% of our total revenue. As of the end of September, revenues from these new product line represented over 10% of total revenue. We expect this trend to continue as growth in new product outpaces growth in our core business.

Overall, these upcoming new products ramps together with expand in share in our core business gives us increased confidence in our growth prospects for calendar 2010.

The headwind we faced in the first half of the year due to the decline of our core AMB and search engine businesses are largely behind this now. And the step we've taken to realign our business is around new growth drivers have been successful, as this quarter has demonstrated.

We are emerging from this economic downturn as a leaner, more efficient company and we are more focused than ever.

Putting it all together, we are confident that our strategy is working and that we are taking all the very actions to drive shareholder value for IDT in the near future.

With that I'll turn the call over to Rick to expand on our financial results and outlook.

Richard D. Crowley

Thanks Ted. Let me start by going over our non-GAAP results for fiscal Q2. It reflects not only the positive trends we are seeing in our end markets, which Ted touched on earlier, but also for strong operating leverage we have built into IDT's model.

Revenue of $139.5 million was above the high-end of the range we provided in our Q1, 2010 earnings call. As Ted mentioned, the 20% sequential increase in revenue was the result of stronger demand across all three of our end markets. As we projected in our July conference call, September ending channel inventory measured in absolute dollars remained flat to June levels. And days of inventory in the channel are now down to similar levels we've seen in prior years as a results of higher sale through during the quarter.

Fiscal Q2 gross margin was 15.3%, an increase of 390 basis point from the prior quarter. Two-thirds of this improvement was from higher fab utilization and one-third was due to more favorable product mix.

Fab utilization exceeded 75% in the second quarter. We also saw improved gross margin from revenues to the communications end market at higher margins, Tundra switch products replace lower margin network search engine sales.

In addition, shipments of communication clocks during the quarter were greater than expected.

Overall operating expenses in Q2 came in below forecast as Tundra related synergies were realized ahead of our prior expectations. Total OpEx was $57.7 million, up from $51 million in the previous quarter, primarily attributable to the Tundra and Leadis Touch Technology acquisitions.

This was however our almost $2 million better than our projection for total operating expense provided last quarter. R&D expenses during the fiscal second quarter were about $36 million, which was up a little less than $4 million from the prior quarter.

SG&A expenses were approximately $22 million, up about $3 million from the prior quarter. Despite the acquisition related increase and operating expense in the second fiscal quarter, operating profit increased sequentially to $12.5 million from $2.9 million in Q1.

Operating margin improved to 9% from 2% in the previous quarter. Interest income and other decreased about 500,000 to 200,000 due primarily to currency fluctuations.

For the second quarter, we reported net income of $12.2 million or earnings of $0.07 per share. This was $0.05 better than the mid point of our expectations provided in July due to higher revenue, higher gross margin and lower than expected operating expenses.

This fall through shows that our growth strategy, combined with disciplined cost controls can create solid bottom line results for our investors

Now let me summarize our result on a GAAP basis. We reported GAAP net income of approximately $61 million or $0.36 per diluted share in the September quarter.

The difference between our GAAP and non-GAAP results about $48 million or $0.29 per diluted share. Fiscal second quarter 2010 GAAP results included an $83 million gain from the sale of our network search engine business, $14 million in restructuring related charges, $14 million in acquisition related charges, of which $6 million is related to the amortization of intangibles.

GAAP results also included approximately $4 million of stock-based compensation and $2 million in tax adjustments. Further information including a detailed reconciliation of GAAP to non-GAAP results is provided in our financial table in today's press release and can also be found on our website at www.idt.com.

Now turning to our balance sheet, which continued to strengthen in Q2. Cash and investments totaled approximately $359 million at the end of the September quarter, a sequential increase of about 53 million.

We received $100 million from the sale of our network search engine business and generated approximately $12 million of cash from operations. We spent about $3 million in capital expenditures and paid a net $58 million to acquire Tundra.

Net inventory increased slightly to $65 million in September, primarily due to purchase accounting treatment for Tundra inventory. Our days of inventory improved to 85 days from 92 days in the prior quarter due to higher cost of goods sold from increased revenue.

Our trade account receivable increased $9 million to $16 million in September primarily due to higher revenue. Despite the 20% increase in revenue the, DSO decreased to 39 days from 40 days in the prior quarter.

I'll now turn to our forecast for the December quarter. As Ted indicated, we currently project revenue for our fiscal third quarter of 2010 will be in the range of $140 million plus or minus 3 million, excluding approximately $3 million of non-recurring network search engine revenue recorded in the second quarter, our projected range for third quarter revenue is flat to up 5%.

As I mentioned earlier, we experienced strong booking trends throughout the second quarter, which resulted in a book-to-bill ratio above one.

We entered fiscal Q3 with approximately $13 million more in direct backlog than we had entering Q2. December is typically a lower ... quarter with front-end loaded customer demand and issue has now exception. To get to mid point of our forecasted revenue range, are turns to go requirement is within that historical range for this point in the quarter. Day times are about six to eight weeks and visibility is relatively limited.

December tends to be front-end loaded quarter and seasonal holiday sell through can still have a significant impact. Bookings in October have moderated slightly from September quarter levels but our book-to-bill remains one-to-one.

We believe that our channel inventories will remain relatively flat in the December quarter. On a non-GAAP basis, we currently project gross margin to be in the range of 50.5% plus or minus 50 basis points, depending primarily on the revenue range and product mix.

We anticipate Q2 fab utilization will increase to approximately 80%. We currently project operating expenses in the December quarter will be approximately $56.6 million plus and minus in $1 million, a quarter-to-quarter reduction of about 1 million.

R&D is expected to be approximately $35.7 million and SG&A is projected to be about $21 million. We are continuing to maintain spending discipline in an effort to produce incremental operating margin. We currently anticipate interest and other income to be about $500,000. And we expect our tax doing fiscal Q3 to about $400,000 as we continue to benefit from tax credits accumulated in previous years.

We project Q3 share count to be about 167 million shares on a diluted basis. We currently project EPS on a non-GAAP basis to be about $0.08 plus or minus a penny, depending primarily on the actual revenue range and product mix.

On the balance sheet, we expect to generate approximately 10 million to $14 million in cash from operations during the December quarter. And we project the cash balance at the end of December will be approximately $370.

While our first half in the calendar year was extremely challenging, we took advantage of the economic downturn to accelerate the transformation of IDT through strategic M&A and cost reductions, while at the same time adding additional recourses and capabilities to our strongest growth initiatives. We are now beginning to reap the benefits of the measures we took earlier in the year.

While the macro environment is still uncertain, we have emerged from the downturn a much more focused company. In addition, new growth products that will ramp in the near future, give us increased confidence that we can outgrow the semiconductor sector in calendar 2010.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Glen Yeung with Citi.

Glen Yeung - Citigroup

Thanks. Can you give us a bit more color on your bookings. When I heard what you said that October bookings are down, is that normal account and something that's going on there?

Richard Crowley

Well, I think it always moderates a bit. At this point, what you look at the seasonality in the December quarter Glen, I think with respect to the front-end loading and the heavy demand for bills in the September-October timeframe.

So I don't think we're really not surprised about it. And we had pretty good visibility going into -- of 90 days ago in the July time period. But I think, as I mentioned slowdown in our booking is kind of a one-to-one ratio at this point. So they are booked off a little bit.

Glen Yeung - Citigroup

And there is no sort of inflection, is that the way you can say like we poll in for doing have a launcher for golden for any abnormalities in your booking strength that would account for that or do you really attribute this just to normal seasonal pattern?

Richard Crowley

I think it's much more normal seasonal pattern. I think there was some effect originally in the summer set, with the gold we have been right at the beginning of our October there. So I think it affected maybe shipments more than bookings.

Glen Yeung - Citigroup

Okay. And then you need to point that you expect your PC related business to be up in the quarter, do you get the sense that there is any channel inventory, that I know it aggregate you expect inventories to be flat. I think more broadly to add, when do you think that channel inventories in aggregate may actually start to go back up again, or else at all.

Ted Tewksbury, Ph.D

We saw channel inventories actually went down in days quarter-over-quarter. And we don't see evidence with if they are going back up.

Glen Yeung - Citigroup

And so no indications from your channel partners that they want to rate them at this point?

Richard Crowley

No, not really. I think they are comfortable within the kind of the normal range and their targeted range. I think I already -- also whether to see what the sell through is in the PC space to see what production level now we continue to the back half of the quarter and into the March quarter.

Glen Yeung - Citigroup

Okay. Is it fair to say that their expectations are for a normal quarter or do you guys sense that their banking are being exceptionally good or exceptionally weak?

Richard Crowley

We don't see any --

Glen Yeung - Citigroup

Okay. Fair enough. Last question, you make the point that you think IDT is -- industry in 2010, what's the bogie that you are using when you're thinking about industry growth for that year?

Richard Crowley

Well, I think it will be pretty interesting given how depressed the front half of this year was, right?

Glen Yeung - Citigroup

Yeah.

Richard Crowley

So I think that if you looking at the different prognostications, in range from anywhere I think from the high single digits to 20%. But I think that -- and we think that we can -- our growth initiatives, we've got growing new product pipeline there.

Our core business should grow with the industry in a way on top of that, new products initiatives we have; that's what gives us to be a view and the confidence, so we'd be able to outgrow the industry regardless of whatever that number.

Glen Yeung - Citigroup

Thanks Rick.

Ted Tewksbury, Ph.D

And due to market share. And it's -- it almost doesn't matter what the overall available market is there as we've taken market share in virtually every market we play.

Glen Yeung - Citigroup

Kind of that's great. Thanks guys.

Richard Crowley

Thanks, Glen.

Operator

Thank you. Our next question in queue that will come from the line of Sandy Harrison with Signal Hill. And your line is open.

Sandy Harrison - Signal Hill Securities

Great. Thanks. Good afternoon guys.

Ted Tewksbury, Ph.D

Good afternoon, Sandy.

Sandy Harrison - Signal Hill Securities

Could you spend a quick second kind of looking at -- and you just targeted on the prior question. But looking at some of your business from both the seasonal level as well as secured level. So Ted, you talked about taking some share. And if you look at -- in your prepared remark Rick, I think you talked about first half was a recovery, second half was reaping a little bit of the benefits of your investments. So Ted, if you could kind of talk a little bit about what you think Q4 from a product perspective growth looks like a little beyond in your remarks and then what you see next year, given a lot of the changes you got on the business, so it would be help to understand sort of how you see them falling from this prospective?

Ted Tewksbury, Ph.D

Sure. We've got some new growth drivers in every one of our three target market consumer communications and computing. The big story that of course you've all been tuned into for the past several quarters has been the consumer video, where our DisplayPort products and our new processors like the Vida that I mentioned, are ramping up quickly. Many of those design wins are driven by sockets in Calpella notebook computers, which of course we expect to see ramping up this quarter and first calendar quarter of 2010.

So we expect DisplayPort and the associated panel port and HDTV products to be very important drivers both in the fourth calendar quarter of 2009 as well as 2010.

In the computing segment, I mentioned that we are gaining market share, we actually moved PCI market share and PC clocks display. We also expect to be increasing our share PC audio products as well as audio products system into consumers applications. And then on the enterprise side, we continue to capture the majority of new sockets for PCI Express. So that continues to grow. I mentioned that we had a very robust 60% sequential growth in PCI express this quarter. And we expect to see a healthy double-digit growth in PCI Express in the fourth calendar quarter as well.

In addition, we've got new products for enterprise computing. We talked last quarter a little bit about the enterprise flash control, which is a joint development that we're doing with Micron Technology and as we enter the ASSP market, we expect that to be a good growth driver for us as well.

In Communications, the regulatory and communication products continues to be a very stable growth drivers for us. And then looking forward towards the back half of 2010, when the LTE and fourth generation play stations really start to rollout in volume and going into 2011, that will be a longer-terms growth driver for our RapidIO switches and bridges. And of course we are -- after the acquisition of Tundra, by far the market share leader in that area, so a lot going on in each one of our three target markets.

In addition to our legacy businesses, we've got new startup growth drivers in each one of them.

Sandy Harrison - Signal Hill Securities

Got you. Thanks for doing that. And then following on the -- with the rollout of these new products to some of these new markets, Rick, are we going to be looking at it on a new model unfolding here some changes in our assumptions, tape outs or anything like that that we should be looking out for our long range modeling purposes?

Richard Crowley

No, Sandy, we're holding to our similar financial model.

Sandy Harrison - Signal Hill Securities

Got you. And then finally, if you look at your balance sheet and almost 400 million in cash, have you guys thought about, what you want to do with that, or is there some market that you want to enter or is there some other market share you want to gain through acquisition and then what sort of your mind set is on 400 million generating 15 to 20 million in cash for the quarter?

Richard Crowley

Right. Well, we continue to evaluate the cash position and the utilization of that, since it is our largest asset. At this time, we have decided not to initiate buyback, reinstate that yet. I think the outlook is still a little bit uncertain as to where we're headed over the next three to six months. And of course we continue to evaluate strategic opportunities all the time and just never know when and how they may occur. So that's obviously one potential use of cash and one of the reasons why we keep a reasonably larger cash and short-term investment balance on hand.

Sandy Harrison - Signal Hill Securities

All right. Thanks for taking my questions guys.

Richard Crowley

You're welcome.

Ted Tewksbury, Ph.D

Thanks Sandy.

Operator

Thank you. Our next question in queue that will come from Sukhi Nagesh with Deutsche Bank. And your line is open.

Sukhi Nagesh - Deutsche Bank

Thanks. Congratulations on good quarter guys. I have a couple of questions. Rick, can you give an update on how we should be looking at gross margin beyond the December quarter given all the restructuring you've done so for and maybe also give as an update on how we should be looking at the OpEx in a quarterly run rate basis please?

Richard Crowley

Sure. Well, I think we're really pleased to be back at about 50% gross margin here this quarter, and continue to guide to stay above that. Our longer-term target is still to given the 53, 54% level, also you need higher utilization, higher revenue levels going forward to get that. So our model have really changed from -- if you look at the at the OpEx, clearly we're trying to deliver incremental operating margin moving forward, we're very focused on that leverage in the model. And part of the OpEx to work on right now obviously is the Tundra synergies. And that's going well.

We anticipate that if you go back, in last call we said that we'd probably get about a $1 million from that at in the December quarter, and fairly consistent with our guidance right now. Looking into the March quarter, we anticipate getting kind of the final portion of the Tundra synergies will enable us to basically cut the original Tundra OpEx in half as we get into the March quarter.

We also have some seasonal costs coming in at that point, payroll taxes and so forth the kick in January. So our view into -- for OpEx into March, as we sit here today is in relatively flattish in March versus December, is kind of what it looks like right now given those puts and takes. But beyond that as you look at from a modeling standpoint, our goal is 9% operating margin on non-GAAP basis today, to drive that into the low double-digits as we get into the 150 to 160 million range in revenue.

Sukhi Nagesh - Deutsche Bank

Great. Thank you. One follow-up, I mean, feeling that we have a continued improvement in macro conditions here, as we look back at your prior results, I think fiscal 2008, you did about 96 in earnings, is there any reason for us to think that you cannot get back to that almost $1 dollar in earnings that your last time?

Richard Crowley

No, I don't think there is any reason to think they shouldn't.

Sukhi Nagesh - Deutsche Bank

Okay. Great. Thank you.

Operator

Thank you. And our next question in queue that will be come from the line of John Barton with Cowen. And your line is open.

John Barton - Cowen & Co.

Well, thank you. Ted, you highlighted the capacity touch product launch in the post after the Leadis acquisition, could you elaborate on kind of future plans in that area, how quickly would we expect to see their product line expand and how much of the driver you think it could be going forward?

Ted Tewksbury, Ph.D

Yeah. Good question. There are basically three problem to our strategy as far as the capacity of touch solutions are concerned. What we have right now is 11 products in the market which are primarily buttons, sliders and scroll. And despite all the glamour in the life insurance full screen touch, there is a very large market for buttons in down good, rights goods, all of electronic equipment. There is basically any device that's got a button on it uses of these kinds of products. We have a number of design wins, many of them in China right now, equivalent to cell phones and various touch electronic equipment. So the product that I've just talk about on this earnings call, the second generation. Although our first generation, the Leadis first generation button which actually the lowest power capacity sensor in the market for that application.

The other thing we're working on of course as is everybody else is the full screen touch. And we expect to carry a lot of the same advantages that we achieved in the buttons, over into the full screen. And those advantages derive from the several way of IPO technology that we have. IPO versus Indian -- which is the transparent conductive layers that's using this capacity sensors. Our devices use one layer as opposed to most of the competition which used too.

The other distinguishing characteristics of our technology is that it does not a microprocessor. So loose two aspects of our technology, create very low power solution, which is very highly configurable customizable by the end customers. So we expect to get the same kind of advantages into our full screen touch.

The third problem in the strategy is integration. And we're currently working on integrating these text ventures together with our IO power management and other functions into dedicated ASSPs for a number of types of electronic equipment. So that's the strategic overview. In terms of the revenue contribution, we have it devolves that I don't really want to disclose details on that right now. But you will be hearing a lot more about our touch technologies on future earnings call.

John Barton - Cowen & Co.

Thanks. Rick, I believe you commented that lead times are sitting around the six to eight week timeframe which is not drastically changes I believe from where they were. As you look forward, any anticipation of changes to lead times, any issues as you trying to get wafers, starts and foundries et cetera?

Richard Crowley

Well, I think that foundries on certain product is still little tight, particularly some of the products that have ramped for us. But we don't anticipate a big change in lead times. If you look at it, customers we believe are still getting sufficient quantities of products to do the ability to know in certain market segment comfortable in August, September timeframe. But I think that lead time is to stand relatively stable right now, seasonally then actually come in a little bit in some of the more consumer centric areas?

Last question if I could, you made reference to the fact that demand from there gaming market will kind of roll off a little bit in December quarter of the seasonal basis, PC continues to show some strength. And than in responsive a previous question, I think Ted, you said you're not seeing anything abnormal as far as the latest supply chain is preparing for seasonal strength at year-end. Do you have any good read or good feel from the supply chain of exactly what type of holiday purchasing patterns to preparing to such as the year-on-year comparison et cetera? And if you like you've done from the supply chain there?

Ted Tewksbury, Ph.D

I think what we're seeing is largely typical seasonality. But to be bullish on that, there is some new platform. John, you have Windows 7 which may have changed more than patterns and caused a little bit of advanced ordering in the third calendar quarter. And then PlayStaion 3 side, you have the pin chassis that Sony introduced that may have caused little bit of extra ordering in the third quarter in anticipation or those builds.

John Barton - Cowen & Co.

And any read on what they are thinking Christmas spending will be on a year-on-year basis?

Ted Tewksbury, Ph.D

I don't have a lot of detail.

John Barton - Cowen & Co.

All right. Great. Thank you very much.

Ted Tewksbury, Ph.D

Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Tim Luke with Barclays Capital. And your line is open.

Tim Luke - Barclays Capital

Thanks so much. With just couple of quick clarifications, you mentioned that your targeted I think 80% utilization in the coming quarter, was it in the September period? And with six their eight tones, what was that up from in the prior period?

Richard Crowley

Yeah, we did a little over 75% fab utilization in the September quarter Tim, and then it was 52% in the June quarter.

Tim Luke - Barclays Capital

And the lead time, is it unchanged or --

Richard Crowley

It's about the same.

Tim Luke - Barclays Capital

And how you -- how do you feel we should find broad expectations to seasonality in the March period or maybe get us a refer to what it might historically have been of the you have a very strong third quarter and you're guiding for flattish December. How should we trend sort of March?

Richard Crowley

I mean, historically it's been down in March for the company that the high single-digit or something like that, may be double-digit in certain years. And now, I think this year obviously we've got two ... forces. One is, reluctant consumer potentially. I think on the plus side as Ted indicated, we've got some secular or end market trends that could help us, the Window 7 launch both in the consumer, we can debate when it may impact the enterprise for us at the beginning of 2010 or early in 2010. But the whole got follow launch for IDT is positive and that we are well positioned with design wins and our clocking and timing products, audio products and our display products. So, potentially it could help us in the March quarter. But as I said here, with the current lead times in backlog, it's still pretty hazy and -- so I guess is that -- we're hopeful that we could do better than normal seasonality. But it's a bit early to tell.

Tim Luke - Barclays Capital

And then can you -- abnormal seasonality again 5 to 10, is that right?

Richard Crowley

Yeah.

Tim Luke - Barclays Capital

And just in the quarter that you just reported, I know you still make on the gross margin line, BU inventory, FMV amortization is around 7.6 million, what is that and is that written down in three perhaps that might be included in the gross margin calculation or is that excluded from the gross margin calculation for September?

Brian White

Tim it's Brian, correct me if I'm mistaken, is that the Tundra fair market value adjustment. So if the value of their inventory at fair market value and then amortize that as we turn that inventory and sell it, see that at the right, it's sell price to replace the inventory value initially and try to bleed out that inventory. For non-GAAP purposes we took out the impact of that in the non-GAAP gross margin, so you see a well reflective operating margin that isn't stored by the write-off of the Tundra inventory during the acquisition.

Tim Luke - Barclays Capital

Okay. Great. So, that's 50.5, but these guys doing a 50.3 in the prior quarter to include any inventory, any of that FMV?

Richard Crowley

Correct.

Tim Luke - Barclays Capital

That's very helpful. Thank you. That's all. Thank you.

Richard Crowley

Welcome.

Operator

Thank you. Our next question in queue that will comes from line of David Wu with GC Research. And your line is open.

David Wu - Global Crown Capital

Yes. Good afternoon, just kind of a little bit of a clarification on Q4 and Q1, what's the trends requirements for Q4 you hit that 140 million and I've got a follow-up too in addition.

Richard Crowley

We don't give out the specific trends, but I can tell you that somewhere in what we said in the -- it's really consistent with kind of the average trends we've seen in prior years for the third quarter.

David Wu - Global Crown Capital

I see. Okay. The other thing I was wondering is, I guess the biggest variable to your 140 is the consumer electronics business. Do you -- when do you think you have a good read or your customers have a good read of how the fourth quarter is going for them and if they should have a good or bad Thanksgiving sell through, is it in time to order components from you?

Ted Tewksbury, Ph.D

Well, I guess I would take issue with consumers electronic being a major wild card here given the lower alternatives that's required within our types.

Richard Crowley

Yeah, I think that probably the bigger aspect is more of broad based in communications and ongoing enterprise, because the consumers side and the PC side seems more front-end loaded. We have most of the backlog therein by lower transfer requirement in that segment. And that's where -- depending on average on sell through, maybe there's upside there that they came in and then also probably it picks up. We're not guiding to that, we're not projecting that. But I think they generally build and they ship the product there, it's in the channel, it's going to sell or not sell. So we think that the probably the PC in the consumer spaces is pretty well picked in, in the other end markets that we serve.

Ted Tewksbury, Ph.D

David, really the wild card is actually communications.

Richard Crowley

Yeah, for the communications and enterprise.

David Wu - Global Crown Capital

Okay. Thank you.

Operator

[Operator Instructions ]. And the next question in queue will come from Nicholas Aberle with Caris & Co. And your line is open.

Nick Aberle - Caris & Co.

Thanks for take my question. Just I wanted to start off with gross margin, you guys did a great job in gross margin in fiscal Q2, you guided it roughly flat into the December quarter. It looks like the mix overall probably gets a little worse for you guys in the December quarter or so. So, what -- can you just give us kind of what the leverage are there to -- that are just driving the sustainability of the gross margin?

Richard Crowley

Yeah, Nick, you're right, the mix is a little bit worse. But the factory utilization is projected to be higher that helps to absorb somewhere to fix cost and kind of keeps us slightly higher than where we were in September.

Nick Aberle - Caris & Co.

Okay. So that's the positive then as we look into maybe just the first time of next calendar year, you can see some recovery in enterprise communications, then may we have any base level amount for gross margin we can grow upon that base level?

Richard Crowley

Yes, --

Nick Aberle - Caris & Co.

So you guys were increasing utilization, you guys talked a little bit about bookings slowing in the month of October, seasonality starts to work again, is there a reason why utilization need to go up here and until the end of the seasonally weak first half of 2010?

Richard Crowley

Right. But you still have some growth in the PC space is when noted at as part of our outlook. Also our fab transfer that we began to TSMC, so we've some extra activity related to that as well.

Nick Aberle - Caris & Co.

So just on that topic, I can see that that doesn't make sense, you guys have built in some extra product ahead of that transition. What's the time line for the transition for fabless? And -- I mean, you guys continue to increase utilization then for the next couple of quarters to prepare for that or is the new kind of run rate?

Ted Tewksbury, Ph.D

Yes. So that has been announced, so roughly a two year project to transfer all about process is in fabless growing into TSMC. And during that period, we do expect the utilization give and that will back a little changes in demand, expecting utilization to remain roughly flat.

Nick Aberle - Caris & Co.

Is that around 80% plus or minus, depending on what the end markets are doing.

Ted Tewksbury, Ph.D

Yeah, the end markets go up -- trend up. We'll have to increase the utilization, because we know we still have right on top of that some of the buffer builds just to -- for it to transfer. So there is a potential high level But it's really more I think -- and demand driven as opposed to transfer driven.

Nick Aberle - Caris & Co.

Got you. You guys talked about lead time is being about six to eight weeks, are they meaningfully higher or inline with respect to the PC clocks business specifically in the corporate average?

Ted Tewksbury, Ph.D

Corporate average, still it's not right. In the clocks, of course we have some -- clocks are driven from options. We have a technology that uses the base design win. We develop options from there, which can be done in very short lead time. So the average is a little bit misleading, but I think it's pretty much inline with what we're seeing for.

Nick Aberle - Caris & Co.

Got you. So, basically PC clocks lead time is about six to eight weeks, is that --

Ted Tewksbury, Ph.D

PC clocks lead time tends to be a little bit shorter than that.

Nick Aberle - Caris & Co.

Got you. You guys have been pretty conservative last couple of quarters on the guidance for the server business and it's presently coming better last couple of quarters than you had thought, any commentary around what you guys are seeing in that end market that we -- flattish guide you are going through the end to the year?

Ted Tewksbury, Ph.D

As I mentioned in the prepared remarks, we expect that the December quarter will be the first quarter in which DDR3 revenue comes up to the level of AMB, and AMB ramps down. So that's going to be the crossover point.

We have been pleased with the DDR3 ramp. We actually doubled the revenue quarter-over-quarter. So going forward if you look at the combination of DDR3 plus AMB, we expect that to remain relatively flat. And on top of that we've got new products coming out in the next calendar year. For instance, there was a game project, which is we do expand capacity in speed from operational DDR3, then that will add on top of that. So we're very optimistic about what we're seeing in the server business. And I think as all of us know; where there is an imminent upgrade cycle we expect to happen, it's just a question of when. And that will be driven by the need to upgrade the older install base and the availability new CPUs like the Inhelem (ph). Depending on where that's going to happen, I thing there is upside on the enterprise segment for us.

Nick Aberle - Caris & Co.

Perfect. Thanks and good luck for December quarter.

Ted Tewksbury, Ph.D

Thank you.

Operator

Thank you. At this time there is no additional questions in queue. Please continue.

Richard Crowley

Okay. Well, thank you very much for joining us today. We appreciate your interest in IDT and look forward to meeting with you on marketing crisps quarter and on our next call. We'll also be attending the Barclays Conference in December and we hope to see you then. Thank you and Good bye.

Operator

Thank you, ladies and gentlemen. This conference call will be available for replay today, after 3:30 PM Eastern Time, running through November 3rd, 2009 at midnight. You may access the AT&T Telecom's replay system at any time by dialing 1800-475-6701 and entering the access code of 117387. International parties may dial 320-365-3844. Once again, those telephone numbers are 1800-475-6701 and 320-365-3844 using the access code of 117387. That does conclude your call for today. We thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Integrated Device Technology F2Q10 (Qtr End 09/27/09) Earnings Call Transcript
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