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Executives

Richard Crowley - Chief Financial Officer

Ted Tewksbury - President and Chief Executive Officer

Brian White - Vice President, Finance

Analysts

Sandy Harrison - Signal Hill

Glen Yeung – Citi

Tim Luke - Barclays Capital

Sukhi Nagesh - Deutsche Bank

John Barton - Cowen

Nicholas Aberle - Caris & Company

Integrated Device Technology Inc. (IDTI) F3Q10 Conference Call January 26, 2010 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Integrated Device Technology, Inc. fiscal third quarter 2010 financial results conference call. With that said, here with opening remarks is Integrated Device Technology Chief Financial Officer, Rick Crowley. Please go ahead, sir.

Richard Crowley

Thank you, Rocco and welcome to our fiscal third quarter 2010 earnings conference call. I'm Rick Crowley, IDT's Chief Financial Officer. Presenting with me on the call today is Ted Tewksbury, our President and Chief Executive Officer. Also in attendance on the call are Brian white, our VP of finance, and Mike Knapp, our manager of Investor Relations. We'll 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 under applicable federal securities laws. Actual results may differ materially from our forward-looking statements as a result of various important factors including certain risks, which are detailed in IDT's most recent annual report on Form 10-K and quarterly report on Form 10-Q as filed with the SEC.

IDT does not intend to update the information provided in today’s call and expressly disclaims any such duty except as required by law. In addition, pursuant to regulation G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at www.idt.com, including a complete reconciliation to the most directly comparable GAAP measures. Also, we have made selected financial information available in webcast slides, which can be found in the Investor Relations section of our website.

Now, I’ll turn the call over to Ted who will provide some highlights on our fiscal third quarter and then I’ll return to give you more specifics on December quarter results and our outlook for March. Ted?

Ted Tewksbury

Thank you, Rick. For the third consecutive quarter we've been able to (02:12) new product ramps and strong operational execution into revenue, gross margin and EPS growth. Our Q3 revenue was $142.5 million. That was at the high end of our prior projections provided on the last earnings call and that was despite roughly $2 million revenue dropped due to the divestiture of our Micro Networks business at mid-quarter.

Revenue from new products grew from 10% of total revenue in the September quarter to 15% in the December quarter as customers continue to adopt our audio, serial switching and display solutions. Non-GAAP gross margin was 51.5And %, up 80 basis points from the prior quarter and above the high end of our prior expectations driven by favorable product mix and increased fab utilization.

In addition, we drove down operating expenses by approximately $2 million sequentially as we continued to realize synergies from the Tundra acquisition and to maintain tight expense controls across the company. All together, these improvements enabled us to deliver non-GAAP EPS of $0.10, which was $0.02 above the mid point of our prior predictions.

Rick is going to elaborate on the financials in just a moment, but first let me highlight some of the trends that we experienced in each of our end markets during the December quarter. In computing, PC-related sales continued to exhibit strength, increasing over 10% sequentially in December, after growing 40% quarter-over-quarter in September.

PC, audio, notebook design wins continued to ramp in December and soiled PC clock sale reflected improved demand for computers over the holiday season. Server related revenue was down about 5% sequentially as PCI Express and DDR3 each grew at 25%, but were offset by a decline in advanced memory buffer revenue.

Overall, revenue from computing products grew approximately 4% and represented about 38% of our total revenue, up from 37% in the September quarter. Total revenue from our communications end market increased approximately 3% sequentially. We saw roughly 10% growth in communications clocks and standard products, which was tempered by a decline in revenue resulting from our Micro Networks divestiture in mid-quarter.

Also as a result of our Tundra acquisition, a Serial RapidIO designing and shipments continued to grow as wireless infrastructure manufactures look for 4G rollout. As you know, leading service providers of worldwide have started announcing launches of fourth generation wireless networks and IDT Serial RapidIO switches are in virtually all of their base stations. As you also know, Serial RapidIO provides the best latency and throughput capability to this data intensive fourth generation networks.

Our communications end market represented 43% of total revenue and that was flat from the prior quarter. Revenue from our consumer end market was approximately flat sequentially. That was better than our prior expectations, as sales into the display segment nearly doubled, driven by growth of timing controllers for HDTV's.

In gaming, sales of timing solutions to our largest consumer customers were down after as expected after tripling in the prior quarter. The consumer end market represented 19% of total revenue in Q3, down 20% from the September quarter. They were down from 20% in the September quarter.

Now, I would just like to take a few minutes to talk about our recent acquisition of Mobius Microsystems, as well as some of our new product introductions and recent design activity and then I'll turn to our outlook for the March quarter.

On January 14 IDT acquired Mobius Microsystems, a leader in precision also like an oscillator technology. As you all know, IDT is the world leader in silicon timing and this technology acquisition extends our leadership into high accuracy crystal oscillator replacements. We estimate that this new technology doubles our served available market for timing from $800 million to approximately $1.5 billion and provides us with power, size, and time to market advantages over competitive offerings.

We plan to bring products to market using our existing worldwide sales and distribution channels and expect customers to rapidly adopt this technology across multiple applications and segments, beginning with consumer and then migrating to computing and communications.

We expect this acquisition to be OpEx neutral as we continue to reallocate R&D resources across the company. New products using Mobius is patented technology of slated for introduction later this year. And we look forward to utilizing this technology across all of our end markets. So I am really excited to have the Mobius team here at IDT. They are an extremely creative group engineers with a disruptive technology that has the potential to revolutionize the crystal oscillator industry. Mobius acquisition follows the model that we successfully (inaudible) as to have us to lead us in silicon optics that is of tucking in innovative new technologies and design talent that can help accelerate our internal developments and do that well carefully managing our overall R&D expense.

So turning to new product introductions. In the December quarter, we extended our signal integrity product line beyond displace with the world's first family of Repeaters optimized for a 6 gig SAS/SATA and also supporting PCI Express Gen2, Serial RapidIO 2.1 and USB3. These devices condition high-speed IO providing signal integrity over extended distances while offering simplified design by elevating board level of constraints. These new solutions are for the industry of blend of top analog performance, low power and system level features to address the challenging signal integrity issues that are encountered in today's computing, storage and communications applications.

IDT is using its expertise in mixed signal design to raise the bar for signal integrity solutions and the initial feedback that we got from customers has been very positive. In Q3, we also announced our new Hollywood Quality Video or HQV benchmark 2.0 DVD. IDT HQV benchmark has become the standard test disk that's used by journalists, reviewers, consumers, and equipment manufacturers for evaluating the picture quality, processing and performance of displays, DVD and Blu-ray players, audio video receivers, projectors and a wide range of video processing boxes. The HQV DVD can also be used by consumers to test-drive a TV and objectively evaluate its quality before they buy.

For design wins, we recently announced that our IDT PureTouch Capacitive Touch Controller has been selected by Gionee Communications, a leading China handset provider for use in its slider-style mobile phone. Gionee selected shortcuts because of its ultra-low power consumption, analog architecture and easy customization.

In addition to cellphones, our touch products are designed into digital photo frames, PCs, notebooks, projectors, many Hi-Fi systems and many other consumer products. Full screen devices and a number of new ASSPs that integrate touch with other functions are in development. So stay tuned.

Also in the December quarter, our (inaudible) solution, the world's first DisplayPort-Based Multi-Monitor controller IC was selected by EDN Magazine for inclusion in its prestigious list of Hot 100 products of 2009. As we’ve discussed, (inaudible) provides the most convenient and cost effective plug and play multi-monitor solution for notebook computers that have a single digital output port.

If you are fortunate enough to visit IDT at CES this year, you will have seen several demos showcasing our new video display and touch products. (inaudible) technology was on display in two modes, one with a panel of six monitors driven from a (inaudible) adapter. And the second showing (inaudible) displays, which is an application that we believe will be widely adopted for digital signage and other applications.

At CES we also showcased our new Vida processor, which was announced earlier in this year. And Vida were shown cleaning up the streaming YouTube video and also scaling up the video download from a hand held device to a 52-inch flat panel with extreme resolution enhancement. And then finally, we’d also showed Vida providing automatic aspect ratios scaling to eliminate the black bars that appear when you're switching between HD and SD formats.

We also demonstrate that a portable Vida powered adaptor can enhance a last generation TV or value TV to the performance level of a much more expensive premium brand TV. It’s validated by HQV 2.0 benchmark. These demos together with our touch products including buttons, sliders, wheels, trackball replacements and proximity devices generated at a great deal of interest from perspective personals.

Also at CES, a leading OEM announced a new line of Calpella based business notebook all with IDT audio inside.

Now, before I turn to guidance, I just like to highlight our press release from yesterday, which I'm sure lot of you have seen. I'm very pleased to announce that Paul Rolls, the former Senior VP of Sales at International Rectifier has joined IDT as our new Senior VP of Worldwide Sales and Marketing. Paul’s stiller credentials and experience in selling analog mixed signal and power management products make him ideally suited to drive the next phase of IDT's revenue growth. In addition, Paul completes our new management line-up and I'm delighted to have him on our team.

So now let me turn to our guidance for the fiscal fourth quarter. In communications, we expect to see continued growth in our clock business, offset by the planned revenue decrease from the divestiture of our Micro Networks business and the Tundra design services density. Overall, we expect the communication’s revenue to be roughly flat on a sequential basis in the March quarter.

In computing, after two consecutive quarters of strong growth, we expect better than seasonal declines of PC clock revenue to be partially offset by continued growth in PC audio. We anticipate the revenue from the enterprise computing segment will be slightly lower quarter-over-quarter as double digit PCI Express growth is tempered by A and B declines. As expected, the crossover between DDR3 and AMB occurred in this December quarter with DDR3 revenue currently running more than times AMB levels.

However, we expect to see a temporary pullback in DDR3 growth in Q4 as one of memory module customers navigated to platform transition and digested some inventory from the prior quarters. For the March quarter, we currently project that revenue from our computing end market will decrease approximately 7% on a sequential basis.

In the consumer end market, we currently project a 10% sequential decline in the March quarter, continued growth in displays, fueled by the initial ramp of our panel port solutions will partially offset typical seasonal declines in consumer clock revenue. So in total for the March quarter of fiscal Q4 of 2010, we project that revenue will be $135 million, plus or minus 3 million.

Keep in mind that March quarter revenue includes no contribution from either our Micro Networks or Tundra design services businesses, which had been running at a combined $4 million quarterly rate prior to Q3. As of today, consensus models have not been updated to reflect this loss of revenue.

So our results for the third quarter provide further evidence that our strategy is working. We continue to grow our mixed signal content in target applications by expanding our core technologies, while adding new growth drivers. We’ve been able to do this while simultaneously controlling our operating costs. Our company has undergone tremendous change over the past year and a half, but I am pleased to say that most of the heavy lifting is now behind us and our top priority going forward is execution.

Our Q3 results exemplify the operating leverage that we can deliver with outstanding execution. Recently, we’ve stated that approximately 20% of our revenue will come from new products by the end of the September 2010 quarter. We are on track to achieve this goal, well at the same time, growing our core businesses. While we expect to experience seasonality in our PC and consumer segments in March, our overall seasonality is less than typical because of the increasing revenue contribution from new products.

Following this less than seasonal weakness in March, we are well positioned to return to growth in fiscal 2011. We remain the leader in our core timing and memory interface markets and we are seeing significant revenue growth in our new audio, serial switching, and display solutions.

In addition, our new product and design end pipelines are fuller than they've ever been, with ASSP's that utilize our new touch, signal integrity, flash controller, temperature sensor, RF, Power Smart and other analog intensive mixed signal technologies. Given these improved prospects, our solid balance sheet and strong cash flows, we have resumed our share buyback program.

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

Richard Crowley

Thank you, Ted. Let me start by going over on our non-GAAP results for fiscal Q3, which are highlighted by continued revenue growth and improvements in our gross and operating margins. While we only received a partial quarter of revenue from our Micro Networks business, which was divested in November, total revenue of $142.5 million was still at the high end of the range we provided in our Q2, 2010 earnings call.

As Ted discussed earlier, the sequential increase was driven largely by double-digit growth in each of our new product category, as well as strength in PCs and communications. Days of inventory in the channel remained roughly flat from September and inline relative to historical standards.

Fiscal Q3 gross margin was 51.1%, an increase of 80 basis points from the prior quarter, driven by a combination of a more favorable product mix and an increase in fab utilization to approximately 90%. Overall operating expenses in Q3 came in below forecast, as we executed our post Tundra cost reduction plan and remained vigilant with respect to core IDT spending.

Total OpEx was $55.6 million, down from $57.7 million in the previous quarter. A portion of the decline in operating expense was due to restructuring efforts during the quarter, including our Micro Networks divestiture and the sale of our Silicon Logic Engineering design services group, which we obtained in the Tundra acquisition. R&D and SG&A expenses during the fiscal third quarter were about $35 million and $21 million respectively, each down about $1 million from the prior quarter.

So far, we have realized approximately $4 million in Tundra related synergy savings. We will reach our original target of $5 million in savings by the end of the March quarter. Our operating profit increased sequentially to $17.2 million from $12.5 million in Q2.

The $4.7 million sequential improvement in operating profit on $3 million higher revenue highlights the success of our restructuring efforts and the leverage in IDT's business model.

Operating margin improved to 12% from 9% in the previous quarter. Interest income and other was about $100,000 net, relatively flat from the prior quarter. For Q3, we reported non-GAAP net income of $17.3 million, or earnings of $0.10 per share. This was $0.02 better than the mid point of our expectations provided in October, due to higher revenue, higher gross margin and lower than expected operating expenses.

Now, let me summarize our results on a GAAP basis. We reported a GAAP net loss of approximately $7.4 million, or a loss of $0.04 per diluted share in the December quarter. The difference between our GAAP and non-GAAP results nets out to about $25 million, or $0.15 per diluted share.

Fiscal third quarter 2010 gap results include $17.3 million in acquisition and divestiture related charges, of which $13.2 million is related to a fair value adjustment to acquired inventory that was sold during the quarter and acquisition related intangibles. GAAP results also include approximately $4 million of stock-based compensation and $3 million in restructuring related charges.

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

Now, I’ll turn to our balance sheet, which strengthened again this quarter. Cash and investments totaled approximately $379 million at the end of the December quarter, a sequential increase of about $20 million. We generated approximately $15 million of cash from operations, received $11 million from the sale of our Micro Networks business and spent about $4 million in capital expenditures. We also resumed our share repurchase program in the second half of the fiscal third quarter, which resulted in a purchase of over $3 million worth of stock in Q3.

We expect aggregate amount of our buyback to increase in the current quarter. Net inventory decreased to $49 million in December, down $15 million sequentially. Days in inventory improved to an impressive 64 days from 85 days in the prior quarter. Trade accounts receivable increased $1 million to $61 million in December, primarily due to higher revenue, while DSO stayed flat at 39 days.

I'll now turn to our forecast for the March quarter. As Ted indicated, we currently project revenue for our fiscal fourth quarter of 2010 will be in the range of $135 million, plus or minus $3 million. Note that our third quarter revenue included approximately $2 million of revenue from the divested Micro Networks and Tundra designed service businesses that will not provide revenue in the fourth quarter.

When comparing the mid-point of our fourth quarter projected revenue to the comparable adjusted Q3 revenue of $140.5 million, sales are projected to decline approximately 4% sequentially. This is better than normal seasonality, which has often resulted in high single digit to low double-digit sequential declines in March quarter revenue. The better than normal seasonality we anticipate is a direct result of new product growth, which we are seeing from our audio, serial switching, and video solutions.

On a non-GAAP basis, we currently project gross margin to grow again and be approximately 52%, plus or minus 50 basis points, depending primarily on the revenue range and product mix in the March quarter. This expected improvement is largely due to improved product mix during the quarter, combined with a favorable impact from the December quarter divestitures.

We anticipate Q4 fab utilization will remain flat at roughly 90%. We currently project operating expenses in the March quarter will be approximately $57.5 million, plus or minus $1 million. R&D is expected to be approximately $36 million and SG&A is forecast to be about $21.5 million. Note that without the reset of payroll taxes and the resumption of our 401(k) match, operating expense would projected to be flat in Q4 as the incremental cost from the Mobius acquisition are offset by further Tundra synergy savings.

We currently anticipate interest and other income to be about $150,000 and we expect our cashes during fiscal Q4 to be about $200,000 as we continue to benefit from tax credits accumulated in previous years. We project Q4 share accounts to be about 167 million share rather on a diluted basis. We currently project EPS on a non-GAAP basis to be about $0.08.

On the balance sheet, we expect to generate approximately 10 to $14 million in cash from operations during the March quarter and we project the cash balance at the end of March will be approximately $370 million, which does not include any impact from share repurchases.

In closing, we’re very pleased with the results for our fiscal third quarter and the solid execution from our employees across the entire company. We’ve made significant improvements to our cost structure and we continue to look for ways to increase our efficiency and deliver operating leverage in the quarters to come.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Sandy Harrison - Signal Hill.

Sandy Harrison - Signal Hill

Hi, thanks good afternoon guys. A couple of quick questions on the products, so it sounds like PC audio, as you talked about with some other ramp of the new laptops, as well as PCI Express. Could you talk a little about PCI Express and where you're seeing your success in what market segments is that more computing communications and just a little bit more color on those markets?

Ted Tewksbury

Yeah, sure, Sandy. When we began our PCI Express switching strategy, we aimed it, initially on the enterprise computing segment as an entry point and then used that to expand our portfolio into communications. So most of the sales that you're seeing today, including over 25% growth that we saw in the December quarter was being driven by servers, it's the enterprise computing. We just recently introduced our first products that expand that portfolio into communications, so you'll start seeing that revenue contributing as we go forward. But I'm very pleased with the growth we've seen in PCI Express. We've had two consecutive quarters of growth and expect to see solid double-digit growth again in the March quarter.

Sandy Harrison - Signal Hill

And then from the Tundra acquisition and the Serial RapidIO, so what are you seeing there as far as demand? What are some of the underlying tenants of those market that you’re seeing was sort of the reasoning behind picking this product up and how close is it knowing to its PCI Express and what you're doing there?

Ted Tewksbury

This is a good question, Sandy. Most of the PCI Express products, as I mentioned go into the enterprise computing applications. RapidIO switches go primarily into communications. We actually picked up Tundra because they had some very important Tier 1 design wins for the fourth generation in LTE base stations. So that really is going to be the secular driver that's going to drive the ramp of our Serial RapidIO revenue. We have seen good growth in RapidIO over the past couple of quarters. We saw growth again this quarter and we expect double-digit growth next quarter. But when you’re really going to see that picking up is when the fourth generation LTE network starts to rollout and if you follow the news, you're hearing a lot from AT&T and Verizon, who are already starting to rollout those networks.

Sandy Harrison - Signal Hill

Got you. And then last question, on utilization, you've got this thing on a pretty hot at 90%. What does it take, I mean do you ever see it being at a 100% or at what point do you start transitioning more aggressively to the other foundries and getting that done?

Richard Crowley

Sandy, this is Rick. If you look at the 90%, about 4% or 5% of that was beginning to do a build in anticipation of the transfer regard to we’re going on to the TSMC. So we get about two thirds of our wafers coming from our fab in Oregon. The other one third outsourced. I think that's sufficient for now and really we don't see starting to ramp for us until second half of the year, but for now, the fab capacity is sufficient for us.

Sandy Harrison - Signal Hill

Got you. Well, thanks for taking my questions, guys.

Operator

Thank you, sir. Our next question comes from the line of Glen Yeung - Citi.

Glen Yeung – Citi

Thanks. Did I hear right that you expect your PC related sales to be worse than seasonal in Q1 or better than seasonal in Q1?

Ted Tewksbury

Better than seasonal.

Glen Yeung – Citi

Okay. And can you talk about -- and if you were just specifically talking about the PC clock business, would you make the same statement?

Richard Crowley

Yeah, we're going to see better than seasonality in March.

Glen Yeung – Citi

And what's your sense of where you are in inventories of PC related components at this point. This has been a concern I think for a lot of investors and just maybe your senses to what you think you're seeing there?

Richard Crowley

Yeah, Glen, overall our -- take Taiwan as a proxy, our inventories are essentially flat in December to March in Taiwan and our guidance takes into account the seasonality of less consumption for PCs in the March quarter and therefore, we have in mind to keep our inventories under control. We think that the days, if you look at the PC components, within the ends of December, was well within the range of normal. So from our standpoint, we don't see that static standing inventory being any issue at the moment.

Glen Yeung – Citi

Okay. I wonder if you could also think a little longer term, I really only mean for the next year or so, but thinking about the potential for a communication cycle, be it wire line, wireless, or enterprise networking. What do you see and you could be specific about yourselves, because obviously you got some product cycles, but even from an industry perspective, what’s the potential that you see for a calm related cycle to show up here assuming the economy doesn't roll over?

Ted Tewksbury

Well, as I mentioned we regarded this major secular trend that we’re going to benefit from the fourth generation wireless infrastructure rollout. We have Serial RapidIO content in virtually all of the base stations that are required to support those networks. So that's going to be the big driver for us towards the back half of FY’11 and FY’12. Beyond that, our communications timing business and our standard products business, which include the Dual-port FIFOs, the specialized memory, LIUs, and various telecom components, those go into a broad and very fragmented array of communications applications, as well as, industrial applications. So if the overall comp business picks up, we will benefit as a result of the clock and standard products, as well.

Glen Yeung – Citi

Just on that point you are making about Serial IO, can you give us a sense as to the dollar opportunity per base station, is that's something you're willing to share?

Ted Tewksbury

It is roughly $50 per base station.

Glen Yeung – Citi

Interesting. Okay. And just last thought here is and I think you said this, but I'm not quite sure I picked it up. You talk about new product growth in 2010. What's the target at the end of the year, I think you said it was 15% this quarter?

Ted Tewksbury

Yeah, we're at roughly 15% of our total revenue this quarter was new products and by new products, we're tracking about the serial switching technologies, which include both RapidIO and PCI Express and we’re also talking about the audio and video products. We expect that to grow to roughly 20% by the end of the September quarter and then continue to grow beyond that. And that is just for that constrained category of new products. We have many other new products that are in develop of which will be introducing over the course of the next year, which will contribute beyond that.

Glen Yeung – Citi

And as we move to that mix, the impact to gross margins?

Richard Crowley

Our target gross margin is still 53 to 54% and as you can see, we're making good progress towards that goal.

Glen Yeung – Citi

Right. Great. Thanks very much.

Operator

Thank you, sir. Our next question comes from the line of Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

Thank you so much, and congratulations on your execution the quarter. Just with respect to the gross margin, it looks like that's going up again. Could you talk about how you see that shaping through the year and also give us some color on how you see the OpEx as you move through the year, sort of looking forward. Thanks?

Richard Crowley

Yeah, with respect to gross margin, the primary driver in the March quarter is mix improvement for us. Obviously our utilization we're predicting to be effectively flat. We would -- quarter-to-quarter we will see probations depending on the consumer and/or PC strength or seasonal weakness as the case may be, but as Ted said, I think we feel that we can make progress, depending really more on the revenue than anything else, when we can reach that 53% to 54% target goal. So where you go from 52 to 53 or 54 is more dependent on revenue than anything else, Tim. So I don't think I can answer your question specifically as kind of quarter-by-quarter. With OpEx, clearly we're getting the seasonal affect of the payroll taxes, resuming here in January 1, as also alluded to, we've added back a modest amount of spend for 401(k) match, which we took away on our temporary cost reductions, but really out that is effectively OpEx to be roughly flat quarter-on-quarter. As we move beyond March, I would anticipate, as we said in the past, we plan to drive both operating leverage, as well as invest for the future with respect to R&D and returning probably the final piece of our temporary cost reductions, which is our incentive compensation plan, looking forward into next year. But, again so it’s related to business conditions and where we are revenue wise, but as looking ahead, I would think that the OpEx would go up slightly in that time frame, just from an investment standpoint in R&D.

Tim Luke - Barclays Capital

Just on your inventory engagement 67 to 49, if I'm not mistaken. Where do you see that going in the coming quarter?

Richard Crowley

With respect to inventory? Probably flattish, maybe up slightly, but we think it looks like because the revenues coming down, but we continuing finally get a chance to ramp for our transfer to TSMC, that the interview is flattish.

Tim Luke - Barclays Capital

And could you just comment on what you see inventory in the channel? I think you said it was flat.

Richard Crowley

Yes, it was December. Yes, we would look to try to keep it pretty consistent with where we are today going out of March.

Tim Luke - Barclays Capital

Okay. Thanks so much, guys.

Operator

Thank you. Our next question comes from the line of Sukhi Nagesh - Deutsche Bank.

Sukhi Nagesh - Deutsche Bank

Thanks for taking my question. Ted, can you talk a little bit about your DDR3 ramp right now, I mean, you said it's about three times your AMD business currently. How do you see that ending up? I mean, is that going to be a sizable, do you see a big ramp up in the April quarter or the June quarter for you guys?

Ted Tewksbury

Yes, Sukhi we're seeing several quarters now of very robust DDR3 unit growth and as I mentioned, December quarter was the crossover point for DDR3 revenue surpassed AMD. And we're very confident in saying that the AMD headwind is finally behind us. That said, we're in the middle of an abrupt platform transition right now and as our customers try to navigate that slope and match their orders on us to end customer demand, there is bound to be a few hiccups and we had one customer who got a little bit ahead of themselves and accumulated a little bit of inventory that needs to be burned off in the March quarter. And that's could be expected whenever you go through a transition of this magnitude, but that's a small hiccup and beyond that we expect that DDR3 will continue to show very good growth and like I said, it's great to have the AMD issue behind us.

Sukhi Nagesh - Deutsche Bank

Okay. And just following up a little bit, if you look at March you're saying is better than typical seasonal and a lot of people are asking this question about how long this better than seasonal trend could continue for most chip companies. What’s your sense at this point and how June could potentially shape up?

Ted Tewksbury

Well, I expect it will return to normal seasonal kinds of growth beyond March and then we've got our new product ramps superimposed upon that.

Sukhi Nagesh - Deutsche Bank

For your core business at least, not excluding the new products, what would the normal seasonality be given so many changes in your product structure?

Ted Tewksbury

Beyond March?

Sukhi Nagesh - Deutsche Bank

Yes, for June.

Richard Crowley

Probably up mid-single digits, typically or 5% I think typically as what we would see.

Sukhi Nagesh - Deutsche Bank

Okay, great thank you.

Richard Crowley

PC business doesn't rebound a lot, consumer stays pretty flat, so it's probably more driven by the comps and the enterprise computing in the June quarter.

Ted Tewksbury

Yeah and it's not until September and December that you see a sizable uplift.

Sukhi Nagesh - Deutsche Bank

So if you would imply in your core business, not excluding your new product ramps, typically grows about 4% on a historical basis, but new product on top first could be higher than that.

Ted Tewksbury

Again, that's not a forecast, but we don't anticipate any abnormal trends.

Sukhi Nagesh - Deutsche Bank

Right. Thank you guy.

Operator

Thank you. Our next question comes from the line of John Barton - Cowen.

John Barton - Cowen

Thank you. Ted, could you update us on your thoughts on M&A. And specifically what I mean is you’d made the comment that the heavy lifting was done, and it's execution from here, and I think you also made the comment look at our past we've made tuck in acquisitions as you go forward does the rate acquisitions slow down or the profile of those acquisitions change at all.

Ted Tewksbury

Our philosophy on acquisitions hasn't changed. We will continue to look at acquisitions that could potentially increase our market share in our core markets, as we did, for example, with Tundra, that acquisition overnight made us number one in rapid IO, and we also look at technology tuck-ins, that can provide technology that we need to accelerate our organic development efforts, or that can expand our available market as for example Mobius did by expanding our stock market by 700 million. My commend with respect to the heavy lifting being behind us, what I meant are generally by that statement is that we have now aligned the structure of our business with our strategy. We have divested the search engine business. We've divested the Micro Networks division, and we've made some acquisitions that get the -- that give us a critical mass in each one of our strategic directions. I anticipate that in the future, you know, we may -- again, we don't have anything planned at this time, but we will continue to look at acquisitions that meet those criteria that I just outlined, and that could give us more than momentum along each one of those strategic directions.

John Barton - Cowen

And in response to the previous question, think what you said was IO content per base station roughly $50. Is there a replication factor meaning on-line cards? Does it have to be a fully populated system? Is it a normal system? Or how do I think about that?

Richard Crowley

Well, every base station is going to be different, but that's kind of an average dollar content per base station.

John Barton - Cowen

Okay. Rick, could you provide some insight going forward from a tax range perspective? I know you gave guidance for March, but how are you thinking about the balance of the year and into the following year?

Richard Crowley

Yeah, good questions. For fiscal 11, I would right now assume that we’re going to continue to be a cash taxpayer, so modest, dollar tax charges per quarter, and then as we guest into fiscal 12, depending on how things go, the valuation allowance could slip out, and that would put us in that 15 to 20% range we've been talking about historically at that point.

John Barton - Cowen

And last question if I could. I believe in your prepared remarks, you talked about the Mobius acquisition being OpEx neutral, and I believe the term you put on it and then I think Rick in your comments you talked about it the OpEx that was coming in Mobius was offset by a synergies being acquired for a previous acquisitions. Could you just clarify those two statements I have right now?

Richard Crowley

I think the way to look at that is obviously we guided OpEx up in the March quarter versus December, modestly. That's really being driven by the onset and resumption of payroll taxes, and to a much lesser extent 401(k) match we've added back in. The incremental spend from the Mobius acquisition, is effectively neutralized by the last step million dollars or so of savings from Tundra that we anticipate will get the full quarter benefit of in March. So, yeah, there's different ways to look at it, but that's, I think, probably the simplest way to characterize the EBITs and flow within the OpEx for the March quarter.

Ted Tewksbury

Operator, we can take the next call.

Operator

Okay. Sure that comes from the line of (inaudible).

Unidentified Analyst

I was wondering if you give us little bit more information about your roll on the next generation Intel platform perhaps elaborating on the change in dollar content that you see there, and giving us a sense of what you're seeing right now in terms of inventories. That is easier timing devices the same pieces, the same parts that we’re used under the previous platform, or do you have an inventory of old parts that needs to disappear before you can start selling the newer part

Richard Crowley

Yes, Joanna, I'll start out of by giving you more of a qualitative description of our content and Rick can cover the rest of us. As far as the content we there's really three component,. there's the timing, the audio, and then there's display port. As far as timing is concerned, we still have plucks that are in every one of those Calpella notebooks, the dollar content is light slightly less than it was in previous generation. I can't tell you exactly how much that is, but that has to do with the fact that Intel integrated clock buffers into their chip set, so there's slightly a lower dollar can tent on the timing. In audio, we provide the high-division audio CODEX, and we have design wins in two out of the three top and we have design wins in two out of the three top notebook OEMs. They're shipping Calpella based notebooks, and we have very good transaction with other tier 1 players. So as far as audio content is concerned, again, I can't -- we're not going to divulge the exact dollar content, but these are our high-end, high-definition audio products. So that's a good chunk of content. And then there are the display port -- the embedded display port timing controllers, which we've talked about many times in the past, which go into the displays for the display port enabled notebook computers. So those are the three primary product categories that we have on Calpella.

Unidentified Analyst

So obviously I can understand why you wouldn’t want to give the details of the content, but perhaps just relative to the MONTAVINA platform, could you give us a sense of the range of increase?

Richard Crowley

I really -- I think Joanne, it's somewhat dependent on the configuration and the penetration of the display port, embedded display port and the panel. So if you look at the notebook that has an embedded display port panel, you probably have, 2X the content. All right? Relative to something with just audio and a clock in it. So, obviously the other aspect of your question, I think that you probably want an answer to is the inventory and the transition, as well. And we go through transitions all the time. Platforms are always changing with clocks and audio, and, and the clocks are almost somewhat custom with respect to their to the platform. So from our perspective, the -- a portion of PC build in March that Calpella is going to be relatively small. So I think we're dealing with inventory management and model changes all the time, so I think that risk is not any greater than any other transition we've seen. It's more of an opportunities as Calpella ramps, to the first question that you asked, which is getting the higher dollar content from the higher penetration.

Ted Tewksbury

So Joanne, maybe it would be helpful simply to state that for a Calpella notebook that is display port enabled, and we think it will start out being 25% EDPA, and then will increase from there, but for one of those EDPNA enabled notebook content will increase in the Calpella generation or the MONTAVINA generation, because we have a high definition audio Kodak which has the higher ASP and it previously did in month and then we have a the display port enabled timing controlled of EDP and that more than offsets any reduction. That we see in the PC clock ASP.

Unidentified Analyst

Okay. That's really helpful. Thanks very much. And then if I could, just one question over on the server side. We're hearing that server ramps are pretty strong this quarter. Are you seeing the same? Is that a big part of what's behind the PCI express strength for this quarter? And, you know, and again do you perceive the inventory situation over on the server side?

Ted Tewksbury

We certainly are hoping that there's going to be an enterprise upgrade cycle this year, this fiscal year on both the server side, on both the server side as well as the business PC side. We are see some of that, and you're seeing that reflected the PCI express growth, and we again expect double digit PCI express switch growth in the March quarter. So we're hoping that's the beginning of a server refresh, and hopefully beyond that there will also be a PC refresh in the enterprise that we'll benefit from.

Unidentified Analyst

So server comes -- so what you're hearing is that server is coming first and you're sort of hoping that PC lines are behind it?

Ted Tewksbury

I would be reluctant to make a definitive statement on the sequencing of those, but we are certainly see something early signs of increased demand for our PCI express business.

Unidentified Analyst

Okay. Thanks very much.

Operator

Thank you. Our next question comes from the line of (inaudible).

Unidentified Analyst

Hi, guys, good afternoon. So you talk about the acquisition strategy, but can you talk about divestitures here. You've been pretty active since you started in terms of divesting toward the backend of that process, or are there still more parts to prune off in the business.

Richard Crowley

Yeah, that's pretty much what I met by the heavy lifting is behind us. We have eliminated those businesses that are not aligned with our strategy, and, the infrastructure is stable at this point.

Unidentified Analyst

Okay. Good. That helps. And on the Mobius acquisition, it seems like that's differentiated in terms of the consumer timing market where silicon is targeted in the high end initially. Could you talk about that difference and then the revenue opportunity for that market as you go forward?

Ted Tewksbury

Yeah. So these are basically all silicon crystal oscillator replacements, and this is very complementary to the clocks that we currently have in our portfolio, and of course we're number one in the world in clocks. But every clock requires a crystal oscillator reference, and so by acquiring Mobius, which gives us these crystal oscillator replacements, it expands our available market by about $700 million into this crystal oscillator segment that we had never participated in before.

The competitors that we're up against in this kind of a market are competitors like Kyocera, or Epson. They are the traditional crystal oscillator manufacturers, so this is a whole new segment, and as a result of this disruptive technology that Mobius brings to IDT, we can now participate in that segment.

Now, to your question about what markets these go into, crystal oscillators go into virtually every electronic product on the planet. That includes consumer, computing, communications, industrial, you name it, these are very broad-based markets. As I mentioned, initially we will enter in the consumer segment, which requires slightly lower frequency precession, and then we will move into the communications and some of these other markets.

The advantages that we will have with this technology are a very small footprint, these are very thin devices, as compared to a traditional crystal oscillator. They're lower power, lower cost, and much faster lead-time. So we think that this has a very aggressive, a very large opportunity for us. As I said, the available market is $700 million. We haven't put a revenue forecast out there yet, and I'm reluctant to do that now, but you can certainly appreciate the size of the opportunity that this has opened up for us.

Unidentified Analyst

Lastly some question of visibility for Rick perhaps. Can you give us the book-to-bill, maybe turns in the guidance, whether it's low to typical when lead times where they've stretched out or stayed stable? Thanks.

Richard Crowley

The lead times are still for us in the four to eight week range depending on the product, and for the March quarter, as is typical for the seasonality, we're starting with a lower beginning backlog than what we would normally start with, say, in the previous quarter in October. But bookings quarters they had have been solid ahead of the Chinese new year, so when you roll all of that up to Q4, terms fields implied in our guidance at the mid-point is in line with our historical March quarter levels when you roll it all up.

Operator

Your next question comes from the line of Nicholas Aberle with Caris & Company.

Nicholas Aberle - Caris & Company

You said you weren't going to give a long term forecast for the contribution of Mobius, but did you say what if that was going to be contributing any revenues in the March quarter specifically?

Unidentified Participant

Nothing in the March quarter.

Nicholas Aberle - Caris & Company

So basically zero?

Unidentified Participant

Yes.

Nicholas Aberle - Caris & Company

And just a follow-up on the question about utilization earlier. So it sounds like you guys start to transaction a fabulous starting in the back half of this year. Can you maybe give us a little color on the time frame of that transition and impact to gross margin and then inventory internally as you guys make that transition?

Unidentified Participant

Sure. So we announced we would be transferring all of the processes and products out of our fab to TSMC in August, and at that time, we said that this would be a two-year project, and we are on track to that schedule. Things are providing very well, and we're working very closely with customers to make sure that they have schedules for receipt of product for characterization and qualifications. So overall, things are very much on track, and I'll let Rick talk about the utilization piece of it.

Richard Crowley

I think as we look forward, at least for the rest of the year, I think can expect to see inventory increase modestly on top of what, you know, normal seasonal trends would be for us. Just from the fact that we have to buffer ourselves for the process and product qualifications, customer qualifications. And as I mentioned earlier I think the ramp of production for the first phase TSMC really doesn't begin until the second half of this year, so, you know, you see slightly elevated inventory levels probably throughout fiscal ‘11 and then start to adjust that as we go into out of the year, into fiscal 12.

Nicholas Aberle - Caris & Company

And is it going to have any effect on gross margin during that transition period?

Richard Crowley

Incrementally? I don't think so. Not from what we're seeing right now.

Nicholas Aberle - Caris & Company

And do you guys plan on building SRAM at TSM, or is that a good opportunity for you guys to phase out of that business?

Richard Crowley

That’s a good question. A lot of our dual port and other products, which are actually high gross margin good products for us, depend on that SRAM technology, and so we are transferring the SRAM technology to TSMC in order to enable those FIFOs and dual ports and other products.

Nicholas Aberle - Caris & Company

Got you. Looking at the new products group, you guys are forecasting some nice growth for that segment, is display port going to be a horse in that segment to drive to most of the growth for fiscal 11 a new products?

Richard Crowley

I think the way to think about it is, we said that by the end of the September quarter, roughly 20% of our revenue would come from new products, and the way that breaks down is that roughly 8% will be from display port and video products, another 7% from the serial switching technologies, which include both PCI Express, and RapidIO, and then 5% from audio products.

Nicholas Aberle - Caris & Company

Okay. Perfect. And then, (Inaudible) Calpella ramp cycle right now, so do you guys have any more clear assumptions on what type of penetration we're going to see? I think you said something about 25%? Does that mean 25% adoption on the first wave of Calpella, and then on the refresh as we go up from there?

Unidentified Participant

We believe that roughly 25% of the initial Calpella boxes shipped will have embedded display ports on them, and then it will increase beyond that.

Nicholas Aberle - Caris & Company

And do you guys have a feel for what type of market share you guys have on that 25% penetration rate?

Unidentified Participant

I would rather not, because market share right now, because it's so is early that it's almost meaningless, but I can tell you that we're comfortably number one.

Nicholas Aberle - Caris & Company

And then also on the audio codec products, you guys said you guys have penetrated two of the top three guys on Calpella there. Are you guys basically taking all of their platforms in their entire business or other, are you guys on certain skews and not other skews?

Unidentified Participant

For those two OEMs, we are the dominant supplier.

Nicholas Aberle - Caris & Company

And then one last question, you guys said you would be stepping up share buyback here in the near term. What type of magnitude are you guys looking to do on the share buyback, and that's it for me. Thank you.

Ted Tewksbury

I think we're not going to give a forecast on our dollar amount other than to say it will increase this quarter from the initial steps we took back in the Q3. But that's about all we're going to say, I think at this points I think on it.

Operator

At this time, there is no further question in the queue.

Ted Tewksbury

Thank you, operator, and thank you all for joining us today. We appreciate your interest in IDT, and we look forward to meeting with you on our marketing trips this quarter and our next earnings conference calling. IDT will also be attending the Morgan Stanley and Wedbush Technologies Conferences in March and look forward to seeing you then. Thank you and good-bye.

Operator

Again ladies and gentlemen, that does concludes you conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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Source: Integrated Device Technology Inc. F3Q10 (Qtr End 12/27/09) Earnings Conference Call
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