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NetLogic Microsystems, Inc. (NASDAQ:NETL)

Q4 2009 Earnings Call Transcript

February 2, 2010 4:30 pm ET

Executives

Leslie Green – IR

Mike Tate – VP and CFO

Ron Jankov – President and CEO

Behrooz Abdi – EVP and GM

Analysts

Allan Mishan – Brigantine Advisors

Adam Benjamin – Jefferies

Sukhi Nagesh – Deutsche Bank

Dan Morris – Oppenheimer

Ruben Roy – Pacific Crest Securities

Nicholas Aberle – Caris & Company

Suji De Silva – Kaufman Bros.

Sandy Harrison – Signal Hill

Steve Eliscu – UBS

Hans Mosesmann – Raymond James

Vijay Rakesh – ThinkEquity

Mark Heller – CLSA

Kevin Cassidy – Thomas Weisel Partners

Anil Doradla – William Blair & Company

David Wu – GC Research

Alex Gauna – JMP Securities

Gus Richard – Piper Jaffray

Operator

Good afternoon and welcome to the NetLogic Microsystems’ fourth quarter and fiscal year 2009 financial results conference call.

Leading the call today are Ron Jankov, President and Chief Executive Officer; Mike Tate, Vice President and Chief Financial Officer; and Behrooz Abdi, Executive Vice President.

My name is Amelia and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions)

I would like to turn the call over to Leslie Green, Investor Relations for NetLogic Microsystems. Please proceed.

Leslie Green

Thank you, Amelia, and good afternoon everyone. Please note that our fourth quarter and fiscal 2009 results were disseminated by Business Wire after market close today, and a copy of the release can be downloaded from our website at netlogicmicro.com.

Before we get started with our financial results for the fourth quarter and fiscal year, I would like to point out that during the course of this conference call, we will be making forward-looking statements that are based on certain assumptions and expectations of future events that are subject to a number of risks and uncertainties and actual results may differ materially.

For a discussion of such risks and uncertainties, please see today’s earnings release, the Risk Factors in our Form 10-K filed with the SEC on March 4, 2009, our Form 10-Q filed with the SEC on November 9, August 5, May 5, as well as the proxy statement filed on September 30, and other reports the company files from time to time with the SEC.

Additionally, we will be making specific forward-looking statements and financial guidance regarding our first quarter 2010 and fiscal year 2010 operating results. All forward-looking statements are qualified in their entirety by this cautionary statement and the company undertakes no obligation to publicly update forward-looking statements for any reason except as required by law, even as new information becomes available or other events occur in the future.

Also on the call, we will be making reference to non-GAAP financial measures. A reconciliation of non-GAAP to GAAP financial information is in today’s earnings release. The reconciling items between GAAP and non-GAAP are stock-based compensation and related taxes, changes in contingent earn-out liability, amortization of intangible assets, fair-value adjustments related to acquired inventory, acquisition-related costs, debt issuance costs written off, interest income on a bridge loan to RMI Corporation, tax effect of inventory fair value adjustments, adjustment charges related to certain tax reserves relating to an inter-company license agreement, and the establishment of deferred tax asset valuation allowance. These items have been removed from the cost of revenue, operating expenses, interest income, and income taxes for non-GAAP reporting.

I will now turn the call over to Mike to discuss our fourth quarter and fiscal 2009 results. Mike?

Mike Tate

Thank you, Leslie. Good afternoon, everyone. Today, we reported that revenues for the fourth quarter of 2009 was $69.5 million, and represented a sequential increase of 64% from the prior quarter. This compares favorably with our previous guidance of $61.5 million, and reflects the strong performance from our core revenues, as well as revenues from our recent acquisitions of RMI Corporation, and IDT’s network search engine business.

On October 30, we closed the merger with RMI, which contributed $14.5 million in revenues during the fourth quarter. Revenue from the sale of IDT network search engine products contributed $9.6 million, which was an increase from our previous guidance of $8 million and upfront, the $6.6 million in Q3 2009. Excluding revenues from these two acquisitions, NetLogic revenues increased 27% sequentially to $45.4 million from $35.7 million for Q3, ahead of our guidance of $39.5 million. Our strong revenue growth in the quarter was due in a large part to the early ramps of a number of exciting programs.

For the NetLogic core products, we are starting to ramp several new enterprise solutions at Cisco and Juniper and numerous new telecommunications infrastructure programs at Alcatel-Lucent, Ericsson, Motorola, and ZTE. We also are starting new ramps of our new IDT network search engine products at Huawei and Tellabs. The 10-Gigabit PHY market was also very strong, as we begin initial production of new data center programs at Arista, Blade Networks, and Voltaire, as well as benefiting from the accelerating replacement of the impact with X2 modules selling into Cisco and HP. We have very little exposure to legacy XENPAK and we have the leading position in X2, given our industry-leading low power CMOS technology.

In Multi-Core processors, new ramps are starting at Dell, Huawei, HVC, Juniper, Symantec, and ZTE, expanding high-growth applications including IP backhaul for wireline and wireless networks, WiMAX, CDMA, WCDMA, and TD-SCDMA base stations and radio network controllers, advanced storage networks, wireline switches and routers, and Layer 7 security appliances.

Q4 revenues from Cisco Systems, our largest customer, were $24.1 million or 35% of our total revenues, compared with $16.8 million or 40% of our total revenue for Q3, 2009. Revenue from Cisco grew nicely, given the combination of improving end market demand for enterprise equipment, new product ramps of our new design wins, and increased revenues from the sale of products from our acquisitions from IDT and RMI. Revenue from Cisco for our core products were up $6.1 million to $18.7 million.

Revenue from Huawei was $7.4 million or 11% of our total revenue for the fourth quarter as a result of solid contributions from the sale of our knowledge-based processors, network search engines, and initial revenue contributions from Multi-Core processors. Revenue from Alcatel-Lucent grew to $6.6 million or 10% of our revenue. There were no other customers that exceeded 10% of our revenues during the quarter.

Our non-GAAP gross margins for the fourth quarter were 65.7%, which excludes stock-based compensation expense, the amortization of intangible assets, and the fair value adjustment related to acquired inventory. Our 65.7% gross margins were slightly better than our guided gross margins of 65%, reflecting strong operational execution.

Q4 GAAP operating expenses were $57.9 million, which included $24.2 million of stock-based compensation and related taxes, $2.7 million in acquisition-related costs for the IDT and RMI, $2 million for an increase in our contingent earn-out liability to the RMI shareholders, and $700,000 for the amortization of intangible assets.

Total non-GAAP operating expenses for Q4 were $28.3 million, compared with $17.2 million for Q3 2009. Non-GAAP R&D expenses were $18.8 million and non-GAAP SG&A expenses were $9.5 million for Q4. Q4 non-GAAP operating expenses were above our guidance of $27 million due to higher variable expenses on higher revenues, as well as continued aggressive investments in our 40 nm product development.

Q4 interest expense was approximately $900,000 on a GAAP basis. Our non-GAAP interest expense was approximately $500,000 and excluded $524,000 for a charge related to the write-off of our debt issuance costs, and $125,000 related to interest income recognized on a $15 million bridge loan we provided to RMI in June. In Q4, we settled the bridge loan with RMI as an inter-company transaction following the merger and we also paid off all outstanding debt on our term loan. Our Q4 GAAP tax provision was a benefit of $2.3 million. Excluding the tax effect of the fair value adjustment on acquired inventory and a charge related to a tax reserve related to an inter-company license agreement, our Q4 non-GAAP tax provision was a benefit of $500,000.

On a GAAP basis, our Q4 net loss was $37.2 million or $1.43 per diluted share. Non-GAAP net income for Q4 was $17.5 million or $0.59 per share compared with $11 million or $0.45 per share for Q3 2009.

For Q4, our stock-based compensation was $24.4 million, as compared to $6.5 million for Q3 2009. The large increase in stock-based compensation includes $9.3 million related to the issuance of fully diluted shares to certain employees of RMI as a result of the merger. Additionally, the higher amount reflects the ongoing increase in our stock-based compensation for all the new employees that joined us from RMI. The merger effectively doubled our headcount, which ended the year at 560 employees worldwide.

For Q4, we had fully diluted shares of 26.1 million on a GAAP basis and 29.4 million on a non-GAAP basis. With respect to our balance sheet, our cash balance totaled $44.3 million at the end of the quarter. We continue to have very strong cash flow from operations, with over $16 million generated in Q4. Also during the quarter, we issued 700,000 shares of common stock at a price of $42.45 per share as part of a registered direct equity financing that provided us with $29.7 million in net proceeds. We also paid the shareholders of RMI $12.6 million as part of the merger consideration.

Our accounts receivable was $25.1 million, and represented 32 days. Our ongoing target DSOs remains at 35 days. The inventory ended the quarter at $45.1 million. This amount included $15.9 million in our fair value adjustments for the acquired inventory from IDT and RMI, recorded as part of purchase accounting. Excluding the fair value adjustment, inventory at the end of the quarter was $29.2 million and represents approximately 100 days, after adjusting for a partial quarter of RMI operations in Q4. The 100 days is consistent with our targeted number of days.

This concludes my review of the quarterly results. And now, I would like to turn the call over to Ron. Ron?

Ron Jankov

Thank you, Mike. 2009 was a truly transformative year for NetLogic. Outstanding engineering achievements in our knowledge-based processor and physical layered solution allowed us to achieve record numbers of design wins, unprecedented competitive positioning, and a further extension of our technology leadership.

During the year, we successfully completed the transition of our knowledge-based processor product line to 55 nm process technology and established a leadership position in the aggressive migration of our entire product portfolio to 40 nm. This has created significant barriers to entry for competing solutions, and is enabling a whole new level of performance capabilities for our customers.

In addition, 2009 marked a major step in the growth of NetLogic with our successful merger with RMI, a technology leader and true innovator in the rapidly emerging high-end Multi-Core processor market and the ultra low-power embedded market. The combination of our two companies is allowing us to leverage remarkable synergies to create new opportunities for high growth in high-speed data plane and control plane processing. Our combination comes at an ideal time, when the capabilities of both companies’ advanced products are aligning perfectly, with the exponential growth in converged IP traffic and rigorous processing demands in security, storage, telecommunications, data center, and enterprise networking.

The integration of NetLogic and RMI is proceeding very smoothly. Our team has come together in such a seamless way that it feels as though we have been one company for many years. Our worldwide operations team is now fully unified and we are further strengthening our operations in Taiwan, which has lower costs and closer to our suppliers, enabling us to support strong revenue growth across all of our product lines. We have made significant progress in streamlining the manufacturing flow for RMI products, with the XLR and XLS products on 90 nm technology and the Alchemy products on 80 nm. Both are ramping very smoothly and we will see a gradually increasing contribution of the benefits of our unified operations flow over the course of this year.

In addition, we have been successfully transitioning the network search engine business that we acquired from IDT to our manufacturing flow and we expect the majority of these products to be qualified on our manufacturing flow by the middle of 2010. This will provide significant benefits in terms of yield improvements and cost efficiencies.

Also, through our merger with RMI, we have expanded our sales and applications team to over 80 people worldwide, all of whom have now been cross-trained to represent our full product line. We believe that our record numbers of design wins demonstrate both the strong transport the adoption of Multi-Core processing technology, as well as our success in effectively cross-selling our product portfolio. Further, we believe that RMI customers are awarding us a higher percentage of design than they would have prior to our merger. That is a result of the combined company’s strong business model and long-term support capability.

Turning to our markets, 2009 was a very important year for the emerging Layer 7 market, as customers are facing dramatic increases in both security threats, such as malware and intrusion, as well as bandwidth requirements for managing increasing video, peer-to-peer, and virtualization applications. As a result, design activity for both our knowledge-based processors and Multi-Core processor for the Layer 7 applications grew in intensity throughout the year and continues to gain momentum.

We expect several of these designs to begin to contribute to revenue this year. For example, we closed our first two NETL7 knowledge-based processor design wins at Cisco in 2009 and both of these projects are expected to ramp in the second half of 2010. Also, for our Multi-Core processor family, one of our most exciting new design wins is a high-end security appliance application from another Tier 1 customer that uses multiple XLR processors with the highest performance configuration. This one design win is expected to approach a $10 million annual run rate in the second half of this year, and is an indication of the enormous value we bring to this native market.

Turning to the enterprise market, in the fourth quarter, we continued to see that the demand environment is improving, with strong revenues from all of our customers. Throughout the downturn in this market, design activity continued to increase as customers such as Brocade, Cisco, Huawei, and Juniper, and this activity is now translating into launch of the new products with enhanced performance, such as faster speed and increased quality of service and security. These launches position us well for strong revenue growth in 2010. Examples of this are the new multi 10-Gigabit LAN cards from Juniper and Brocade, that use our most advanced knowledge-based processors and 10-Gigabit PHYs to deliver greater performance level over previous generations. Further, new product launches in mainstream switching and an increase of enterprise demand continues to drive growth in our revenues from Cisco, which increased by $7.3 million in Q4 over the prior quarter, exceeding our expectations.

Our NetLife revenue grew meaningfully in 2009, as OEMs are increasingly designing in these processors to accommodate high-quality video and the additional functionality of IP phones. This family of products had a record number of design wins in 2009, as well as an increasing number of designs each quarter throughout the year. With the substantial design win portfolio, we should see stellar growth in 2010 as additional designs at several major customers ramp to volume production.

We are also seeing renewed strength in the market for our physical layer solutions, fuelled by rising demand for 10-Gigabit Ethernet as well as our continued success during 2009 in delivering on our aggressive roadmap of product and roadmap technology. The market adoption of 10-Gigabit Ethernet is approaching an inflection point, as worldwide growth in broadband services, cloud computing, virtualization and rich media content creates greater bandwidth demands on carrier core, metro, and data center networks. As a result, we are now beginning to see 10-Gigabit Ethernet switches announced with as many as 96 ports, up from just 24 ports a short time ago.

This dramatic increase has fueled strong design activity from our physical layer products, particularly our dual and quad core 10-Gigabit Ethernet PHY devices, which we announced in 2009 and began shipping later in the year. With aggressive engineering execution, we have clear technological leadership with the first production quad core devices manufactured in the advanced 40 nm process, allowing us to deliver the highest performance and lowest power consumption for next-generation networking and communications equipment. We believe that our leadership in 10, 40 and 100 Gigabit PHY solutions, coupled with the increasing market adoption of this technology, will drive our revenue for these products in 2010 and beyond.

Turning to the communications market, 2009 was a year of strong growth for us, as initial design wins in wireless IP infrastructure began ramping to volume production. In 3G wireless infrastructure, we saw a major initiative by carriers around the world to upgrade and expand their networks as the rapid adoption of smart phones and the proliferation of bandwidth-intensive applications for these devices puts a significant strain on network performance.

To deal with this increased traffic in 2010, AT&T, (inaudible), T-Mobile, Telstra, Vodafone and others will begin to deploy HSPA+ networks, the next generation of 3G wireless infrastructure that gives you speeds of up to 21 mega bits per second, and significantly more IPv6 capability. HSPA+ networks utilize an even heavier content of our most advanced Multi-Core Multi-Threaded processors and knowledge-based processors. We have amassed a very impressive portfolio of design wins in enhanced packet core as routing radio network controllers and advanced common platform base stations for customers such as Alcatel-Lucent, Cisco, Ericsson, Huawei, Nokia, Siemens, and ZTE, that will begin to ramp later this year.

Even as the second generation 3G deployments are occurring, more than 120 carriers around the world are also developing 4G networks to keep pace with the continued exponential growth in bandwidth requirements. We have brought exposure through every major OEM to the LTE network infrastructure that will incorporate approximately 10 times the capability of HSPA+ and will have utilized an even heavier content of our most advanced solutions for faster speeds and greater bandwidth. We expect that this market will be a significant growth driver for us for many years to come.

Similarly, in wireline infrastructure, rich media services such as video-on-demand, interactive gaming and 3-D content, as well as the proliferation of high-definition channels are driving tremendous growth in bandwidth requirements. This is positive news for us as it fuels the need for our Multi-Core and knowledge-based processors. We are seeing strong design activity in this area from customers such as Alcatel-Lucent, Cisco, Ericsson, Huawei, Juniper, and Motorola. Every one of these customers has new boxes reaching volume production in 2010 that incorporate a much higher content of our products than the previous generation.

To build on this design momentum, yesterday, we announced our sixth generation knowledge-based processor, which is the industry's first knowledge-based processor with high-speed serial interface. This new knowledge-based processor shows the synergy of our product portfolio as this chip combines our aggressive design leadership in 40 nm 10-Gigabit PHY technology with our new capability in 40 nm knowledge-based processor technology. The competitive barrier is now twice as high for alternative solutions, which will need to duplicate our innovations, engineering execution, and years of investment in both of these technologies. Our integration of high-speed serial interface more than triples the chip-to-chip interconnect bandwidth, enabling unprecedented system performance with lower system costs. We believe that this capability is a critical factor, enabling richer services for LTE, IPTV, and IPv6.

Turning to Multi-Core processing, the need to deliver rich services for LTE, IPTV and IPv6 is driving a significant change in the architecture of the data plane. We are seeing a growing sense of urgency to dramatically increase packet processing performance at virtually every customer in all of our target markets. The design activity occurring at our customers right now, Multi-Core processing is replacing Single-Core processing at an increasingly rapid rate, the extent of which will become more visible to the general market over the next several years as product cycles play out. As a result, we continue to build a very valuable portfolio design that will drive our future growth as they begin ramping to volume production.

In the fourth quarter, we won nearly double the number of designs from the prior quarter for our XLR and XLS processors. These products, as well as the truly revolutionary XLP processor, are coming into the market at the exact time when the technology demands of networking and communications are beginning to require their advanced performance. Our XLR and XLS Multi-Core processor business grew 26% in Q4 over Q3, and we expect a similar strong rate of growth in Q1. This is particularly exciting, because we are so early in the ramp of the XLR and XLS. Our growing number of design wins in IP wireline, 3G and HSPA+, LTE, storage, switching, routing, Layer 7 security and data center applications are feeding an increasing pipeline of designs which have yet to begin their revenue contribution to our results.

The adoption of Multi-Core processing is a key technological dislocation that is just beginning to play out. We are in a prime position to be a significant beneficiary of this trend, resulting in a major design cycle that will provide tremendous growth for us for many years to come.

In closing, I would like to express my gratitude to all of our employees for their continued dedication, enthusiasm, and commitment to excellence. Their efforts made 2009 a very successful year. I would also like to thank our valued customers and investors for their continued support and interest in our company.

At this point, I will turn the call back over to Mike to discuss our guidance for the first quarter. Then, we will open up the call for your questions. Mike?

Mike Tate

Thanks, Ron. As we look into Q1, we are very encouraged by the continued broad strength of our business, driven by the strong secular trends in our end markets and our increasing ramp of new customer programs.

For Q1, we believe our revenues will be approximately $85 million or up 22% sequentially from Q4 2009. We expect revenue growth for our knowledge-based processors, 10-Gigabit PHYs and Multi-Core processors. We have more than full backlog to meet this guidance.

We expect our non-GAAP gross margins to be approximately 65%. We expect our non-GAAP operating expenses to increase to approximately $35.5 million, non-GAAP R&D expenses to be approximately $24.5 million, and non-GAAP SG&A to be approximately $11 million.

We estimate interest and other income to be near zero dollars. We expect our income tax to be approximately 5% of our non-GAAP income before taxes. We expect our non-GAAP EPS for the first quarter to be $0.56 per share. We expect our GAAP EPS for the first quarter to be a loss of $0.63 per share. This includes an estimated $12 million for FAS 123R stock-based compensation, $15.9 million for fair value adjustments on acquired inventory, and $10.5 million in the amortization of intangible assets. We expect our non-GAAP share count to be approximately 33.3 million and our GAAP share count to be approximately 31 million shares.

Finally, I would like to update our full-year guidance for 2010. On our Q4 2009 earnings conference call last October, we guided our 2010 revenues to be at $295 million and our 2010 non-GAAP EPS to be $1.75. Given continued strength in all of our businesses, we now believe that our 2010 revenues will be approximately $350 million and our 2010 non-GAAP EPS to be approximately $2.30. Our 2010 non-GAAP EPS excludes approximately $48 million of stock-based compensation and related taxes, $41.8 million of the amortization of intangible assets, $15.9 million of fair value adjustments on inventory. Including these items, our GAAP EPS for 2010 would be a loss of approximately $0.86.

This concludes our prepared remarks for the call, and now we are happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Allan Mishan with Brigantine Advisors. Please proceed.

Allan Mishan – Brigantine Advisors

Hey, guys. Really nice job. First question is on RMI. About how much was the company’s revenue for the entire Q4 and what was kind of the rough slit between Multi-Core and ultra-low power?

Mike Tate

Yes, because of the purchase accounting, we did lose sell-through from the disties [ph], just to reset. In Q3, RMI did about $20.8 million and for the two months, we did $14.5 million, so it kind of applies that the missing month was about $7 million, $7.5 million. On the Multi-Core, we continue to see very strong growth, as Ron talked about on the call, there is now up to 25% sequential growth for the Alchemy business. We are seeing good growth in that business, but it looks like to be below 10% of our total revenues.

Allan Mishan – Brigantine Advisors

Okay. Do you think that Alchemy will grow 2010 versus 2009?

Mike Tate

Yes, we believe so. It will probably have a little seasonality in Q1, but it should grow year-over-year. You know, we just refreshed the product line in the summer and we are getting good traction and good designs with that. So we will see if those ramp up during the course of the year.

Allan Mishan – Brigantine Advisors

Okay, thank you very much. Nice job.

Operator

And the next question comes from the line of Adam Benjamin with Jefferies. Please proceed.

Adam Benjamin – Jefferies

Hey, guys. Just a couple of questions here. Breaking down the guidance, Mike, the 350, can you give a little sense as to the components of that, maybe breaking it down between the core net or the RMI and possibly the IDT?

Mike Tate

Yes, I mean, we see good solid contribution from pretty much all our products. Obviously, the Optical PHYs are a big percentage but a lower dollar amount. But we see that playing out very nicely during the year. You know, we are not going to precisely break out all the components, but we see very strong contribution from Multi-Core as well as the knowledge-based processors in that number. You know, all things being equal does not very largely balance right now.

Adam Benjamin – Jefferies

And then clearly, a lot of people are talking about a recovery on the infrastructure side and you guys are benefiting there, but you also have a lot of new designs that have been ramping or you had for a while that have taken a long time to ramp. Is there any way you could quantify just in terms of some percentages in terms of the business that you are seeing as you look out into 2010, how much of this growth is really coming from some recovery and how much of it is from that secular design win ramp that you have talked about for some time that seems like it is finally kicking in?

Ron Jankov

Well, the biggest part is going to be the second ramp of the new products. For example, we talk about 55 nm on the call and really, what we are seeing in 2010 is win all of our new 55 nm products that we announced a couple of years ago, but have now had that two year design cycle and are kicking into production. So we see 55 nm being the big upside growth driver for us in the case of knowledge-based processors.

In the case of Multi-Core, it is basically the newest designs particularly for the 8-core XLR that are kicking in, particularly in wireless infrastructure and IP backhaul, et cetera. So these are all brand-new designs that are kicking in for the first time. Of course, the general run rate of the business has recovered some as well, but the bulk of this growth is coming from new products and new design wins.

Adam Benjamin – Jefferies

So like a 70-30, 80-20, Ron?

Ron Jankov

I am not sure we are going to cut it out that finally, but it is clearly well over half.

Adam Benjamin – Jefferies

Okay, fair enough. And then last question, on the 350, Mike, implied within that, how does that impact the RMI earn-out? Does that take into consideration you kicking in at least some portion of that earn-out?

Mike Tate

Yes, on the balance sheet, we are carrying an $11 million liability, so that is on a lower percentage payout. To extend the achievable earn-out, the maximum amount is 1.6 million additional shares and $15.9 million in cash. The extent, we are definitely going to pay on the earn-out the shares will show up in our EPS shares before payout and the payout should be paid in the month of December.

Adam Benjamin – Jefferies

Okay, so it is fair to say that the 350 design includes the full earn-out?

Mike Tate

Yes, it is approximate earn-out, yes.

Adam Benjamin – Jefferies

Of course. Got you. All right, guys, that's all I have, thanks a lot.

Operator

And the next question comes from the line of Sukhi Nagesh with Deutsche Bank. Please proceed.

Sukhi Nagesh – Deutsche Bank

Thanks, guys. Can you hear me?

Mike Tate

Yes.

Sukhi Nagesh – Deutsche Bank

I have a couple of questions. Mike, I think last quarter, you had mentioned that inventory levels, especially the enterprise customers were kind of low. Can you give us an update as to where you think the inventory lows now stand, especially the enterprise customers.

Mike Tate

We continue to try to monitor that very closely and we think although inventories have come up a little bit, they will come up in line with the growth of their businesses, we think inventories are at pretty reasonable levels. Beyond getting some data from our customers, we also kind of watch how they book and all the bookings and backlog and also the level of expedites that we see, we believe the inventories are in reasonable shape.

Sukhi Nagesh – Deutsche Bank

So your 36% increase in core inventory is taking out the fair value amount, you don’t see as anything unusual?

Mike Tate

Yes, for our inventory, we like to carry about 100 days, that has statistically been our run rate, you know, we think given that we are still sourced in a lot of our designs, our customers look to carry that level of inventory. So that is pretty consistent. So the pickup of quarter to quarter obviously is the growth in the business coming on the heels of the two acquisitions.

But also, another reason why our inventory gains tends to be a little higher than other companies is because we target a reverse linear shipping where we are – our largest shipping month is the first month of every quarter and our smaller shipping month is the last month of every quarter and we do that by design, so we can have more predictable results. So we are following that pattern again in Q1 so that again it tends to make the Q4 ending inventory a little higher as we prepare to have a big January.

Sukhi Nagesh – Deutsche Bank

Thank you. And one last question, if I may. On the product road map side, Ron, I mean, you have talked about integration and how you want to integrate RMI with your knowledge-based processors. In that context itself, can you maybe give us an idea of how you see the competitive design wins moving forward manifest itself, especially as it relates to one of your competitors, say Cavium?

Ron Jankov

Well, clearly, Layer 7 is one of the hot new markets, and one of the places we are seeing the greatest amount of design activity, and fortunately, we are coming at it from two angles, we are coming at it from our knowledge-based processor, dedicated Layer 7 processors as well as on the RMI side, XLR in particular, the high end Multi-Core, where there is millions of lines of Layer 7 code written on those processors. So combining those two is a natural evolution for the company, something that we are actively working with the customers on exactly which product to combine and what level of capability. Our first product that combines these technologies came out this year. Is there anything else? As we see the market growing, you know in the eight core and quad core especially, we do see quite a bit of need for DPI as we go to the next generation technology from 40 nm to 20 nm, there is going to be more room to add more components and more accelerators and the Layer 7 is one of the hottest items that we talk to customers about and we have quite a bit of capability in integrating that into our Multi-Core going forward.

Sukhi Nagesh – Deutsche Bank

Thank you.

Operator

And the next question comes from the line of Dan Morris with Oppenheimer. Please proceed.

Dan Morris – Oppenheimer

Hey, guys, nice job in the quarter. I just wanted to ask a little bit about the results in the upside you saw. I think Mike you kind of characterized it as early ramps of new programs. I wanted to just find out, were that fold ins or was that expectations can you give a little more insight as to what it was that caused the customers to flip that switch a little early.

Mike Tate

Well, I mean, you know, whenever a new program is ramping, you take a conservative view on how they ramp. We try not to get ahead of ourselves, but we actually had a number play out positively during the course of the quarter and the good thing is it built momentum into next year as well, because typically the design ramps are a number of quarters, usually five to eight quarters long and we are in kind of the early innings of some of these ramps.

Ron Jankov

Yes, I think it is also indicative of just how much the bandwidth is stressing the networks, particularly in the wireless area, but just across the board. Also, you know, we are very highly represented in the IP backhaul, which is the place where we are seeing strong upsides kind of across our customer base right now, as people tried to deal with the increased smart phone traffic.

Dan Morris – Oppenheimer

Okay, great. And just as a follow-up; when you talk about a five to eight quarter type of ramp, it is more of a gradual ramp of these new programs that you are talking about as opposed to say an upfront inventory build ahead of product launches?

Ron Jankov

You kind of see it different by applications on the enterprise and given the more of the customer base, it is more of a linear ramp on the carrier class. It can go through different phases as tested by the end carriers. So it is a mix of those. So, the good thing is, we have a number of different designs kind of layering in on top of these other right now. So it kind of ultimately helps smooth out the total impact.

Mike Tate

We see that in general the rate of design wins going to production to be at a relatively steady rate in throughout 2010 so it is not like they are here in Q4 and now there is no more in the first half for second half of this year. We see the numbers, the layering on this year to be similar to what layered on in the second half of last year.

Dan Morris – Oppenheimer

Okay, great. Thanks, guys.

Operator

And the next question comes from the line of Ruben Roy with Pacific Crest Securities. Please proceed.

Ruben Roy – Pacific Crest Securities

Thank you. Ron, I would like to follow up on that last thought of yours if we could. Just around the early ramps of some programs compared – you are comparing this first half to second half last year and I was just wondering around your relatively new customers, Ericsson, Motorola, ZTE, et cetera, are some of those customers ramping a little bit ahead of what you have planned?

Ron Jankov

I would say in general that the ramps are, I think what Mike said ramping ahead of plan, they are actually ramping on plan and we put a lot of conservatism into our guidance in terms of when they would ramp. So they are actually ramping when the customer said and I just think that shows the stress of the market to get in the generation products out. You know, we are being conservative again in the first half of 2010 in terms of how many will ramp. So if they continue to ramp on schedule, we will do better than expected.

Ruben Roy – Pacific Crest Securities

Okay, thanks. And then, on the XLR, XLS design activity that you mentioned, new design activity, and the strength there, are these designs increasingly being done at areas where you think you have a bundling opportunity, are they going into existing customers where you are already selling, can you just tell me a little better on that?

Behrooz Abdi

This is Behrooz. Let me shed some light on that. It is actually both, we had a record number of design wins in Q4 and this is partially a result of the PHY sales force and our sales force being cross-trained and the strength in numbers, as well as the penetration of the sales force and the knowledge that they have with the product. But also there is just a rapid transition from Single-Core to Multi-Core. We have a lot of customers that – both new and existing that have to move to Multi-Core, they are really under a lot of stress to get – increase the bandwidth and the performance and also the DPI capability that they need. So that's really accelerating the rate of the design wins.

Ruben Roy – Pacific Crest Securities

Great. And just – one last for Ron. The LTE commentary that you had as being a growth driver for years to come, it sounded like you are talking about potentially having some shipments today to some OEMs. Is that the case?

Ron Jankov

Well, we are certainly shipping pre-production to all those customers we listed today. And there will be some early rollout of LTE late this year, particularly for dongles into notebooks and netbooks and things like that and where we will participate is in the backhaul of that. But 2010 will be – in terms of gross revenue, will be much more driven by HSPA Plus and LTE will more layer on in 2011 and forward.

Ruben Roy – Pacific Crest Securities

Got it. Okay. Thank you, Ron.

Operator

And the next question comes from the line of Nicholas Aberle with Caris & Company. Please proceed.

Nicholas Aberle – Caris & Company

Thanks, guys. Just wanted to ask another question on Cisco specifically, probably – I'm sure you guys won't give us as much granularity as we probably all want, but the number is huge and I just wanted to see if you could give us a little bit more color as to what the incremental contributions were from IDTI, what you guys think is – and if it's more demand-driven from a Cisco standpoint or is it new platform ramps? If you could just help, give a little more color on what's driving the Cisco number?

Mike Tate

Well, I mean, we are seeing increased contribution from the IDT products given it's a full quarter versus a partial quarter. We are also seeing run rate programs continue to perform better as enterprise recovers, but we have a lot of new designs that are ramping. Some – this might be – not be quarter one, but it is still growth in ramping in the programs and these are in mainstream switching and DSR programs, the Nexus family, across a number of platforms as we've been articulating over the last number of quarters, we've built up a very nice design win portfolio and now, we are starting to see these kind of roll into production and getting the benefits and revenue growth.

Nicholas Aberle – Caris & Company

Got you. And did I hear you guys correctly that there were some RMI-based Cisco business as well during the quarter?

Mike Tate

Yes. RMI does have some legacy designs that are shipping into Cisco as well. They contributed to the dollar growth.

Nicholas Aberle – Caris & Company

Got you. And then hub inventory at Cisco, could you just touch on what that looks like specifically?

Mike Tate

Well, we look at the hub inventory, but even more importantly, we look through into the CMs and kind of digest all that data, and although inventory has come up with the growth in the business, it still seems at pretty reasonable levels and given – across our customers, as we monitor bookings and forecast and the amount of shorter-term bookings and expedites, we feel that the inventory levels across the board are in pretty reasonable balance right now.

Nicholas Aberle – Caris & Company

Perfect. And then assuming RMI is going to kind of ramp up to kind of a $21 million, $22 million run rate, I'm wondering if that's the right number to think about for RMI and then – so backing that out, I mean, that basically means that the core business is growing what 15% to 20% sequentially? Is that – is my math right there?

Mike Tate

Yes, given that the RMI is a full quarter versus the partial quarter, they both have very good growth characteristics to it. So they are both – it's reasonably equal to each other.

Nicholas Aberle – Caris & Company

Perfect.

Ron Jankov

The dynamic in the – on the RMI side is the Multi-Core business is going to be very strong, but the Alchemy business, it's a little bit of seasonality in Q1. So it just emphasizes just how strong the Multi-Core side of that is right now.

Nicholas Aberle – Caris & Company

Got you. And it sounds like the core business is still running at a pretty significant run rate.

Ron Jankov

Absolutely. And again, that's – it's driven by these new programs, particularly the 55nm programs that are starting to ramp.

Nicholas Aberle – Caris & Company

Got you. And then just one last question. The Ericsson account obviously has been one that we have been waiting for to start to ramp here for the last couple of years. It sounds like you are starting to get some contribution here in the near term. How big was that in Q4 and could you give us some color as to how big you think it could be exiting this year? Thank you.

Mike Tate

Yes, for customers that are below 10%, we don't like to give precise data on it. But clearly, Ericsson and ZTE are two customers that in tandem ramping on the knowledge-based processor side right now. So it did a little better than we expected and we see very good contribution during the course of next year. Also with ZTE, we are excited that they are very strong with the Multi-Core as well. So it will contribute both knowledge-based processor and Multi-Core revenue growth for us in 2010.

Nicholas Aberle – Caris & Company

Perfect. Good luck, guys. Thanks.

Mike Tate

Thanks.

Operator

And the next question comes from the line of Suji De Silva with Kaufman Bros. Please proceed.

Suji De Silva – Kaufman Bros.

Hi, guys. Nice job on the quarter. So you talked about certainly the demand pull from the wireless world to increase the bandwidth. But did you see, Ron, the snapback this quarter versus the pause we saw end of last year in wireless infrastructure and can you describe it geographically how it played out?

Ron Jankov

I don't think we saw a snapback. I think what we are seeing is a relatively steady increase. If you look at our Alcatel business, it just grew again. I think it's like the fifth straight quarter of growth, I don't know the exact number. But – and that's driven as much by the change in the content as it is by how many boxes they are shipping. For example, Alcatel is starting to ramp with the – our third generation of products into them which is our NL7000, 80nm products and that's replacing the 130nm products that are shipping today and we ship a lot higher dollar content in there.

So I think it wasn't so much a snapback as increased content – dollar content as they are trying to support richer applications on the Smartphones and I think that was true across the board. We also didn’t see – again, the China business was not a snapback, it was a steady increase layering on the good Multi-Core business that RMI had with Huawei, as well as the continued growth in the knowledge-based processor business and a new IDT program that's ramping there as well. So it was – it wasn't so much a snapback of the businesses as new product ramps.

Suji De Silva – Kaufman Bros.

Great. That color helps. And so then you guys seem like – seems like RMI's design wins are tracking better than expected. Which one do you expect to grow faster in 2010, even accounting for Alchemy, RMI or NetLogic Core?

Mike Tate

The good thing, the both look strong and both are in front of some very strong secular trends. But given that a lot of the growth is because of new product ramps, it's always hard to predict which products will ramp quicker and these types of things. So I – right now it's a horse race and we are happy with both – the performance of both.

Suji De Silva – Kaufman Bros.

That sounds like a close race, that's good. And lastly, you've given in the past Cisco designs ahead of even the numbers are ramping. Can you update us on those numbers? Thanks.

Mike Tate

We stopped breaking out specifically for individual customers. We did close out more designs in the quarter and continue to have a very nice pipeline of designs that hasn't ramped at Cisco.

Suji De Silva – Kaufman Bros.

Okay. Thanks, guys.

Mike Tate

Thank you.

Operator

And the next question comes from the line of Sandy Harrison with Signal Hill. Please proceed.

Sandy Harrison – Signal Hill

Thanks. Just a couple of quick questions on the 10-Gig market. Have you seen, Ron, the mix change? I mean, if you look at the XENPAK, it was principally, unless I'm wrong, sort of Cisco and does X2 move to more of the data center guys like Google or themselves internally? What does the mix look like at sort of the newer products versus the older products?

Ron Jankov

Well, clearly, the XENPAK is on a decline. I would say both the X2 modules, particularly at Cisco and HP, but also now SFP. SFP Plus is starting to ramp, particularly in the data center. So we mentioned those three big data center designs, as well as a couple that we didn't mention. Those are being driven by the SFP Plus module. So the big growth is X2 and SFP Plus.

Sandy Harrison – Signal Hill

And how do you expect with those two to be broken out on your growth? Is it a 50-50, is it going to be 72-25, switching quarterly, or how do you see that sort of layering in?

Ron Jankov

Well, that – that's a good question. That's a hard one to predict because it's basically the growth of data center versus enterprise. So they are both looking to have a strong year in 10-Gig. So it will be a horse race. Probably, the SFP Plus will be a little bit higher growth percentage, just because it's coming off a smaller number. But in absolute dollars, X2 will probably be the biggest driver.

Sandy Harrison – Signal Hill

Got you. And then there has been a lot of questions revolving around sort of Multi-Core and what you are seeing. I mean, when we – when you throw around Multi-Core, there is multiple versions of it, there is ARM, there is MIPS, there is PowerPC. Your comments on seeing Multi-Core replacing Single-Core, is that across sort of across the board or across all technologies or is it more specific to the technology you guys are involved with?

Ron Jankov

Well, we are referring more to the market where – markets where we are involved, which is really high-speed data playing packet processing. This is where the RMI products have the unique capability of all the different 30 accelerators for supporting networking security, Layer 7, and other things, as well as Multi-Core and that's where we are seeing the big change.

And data playing, that applies to wireless infrastructure, wireline infrastructure, enterprise data center, storage across the board, any place where you are moving packets at wire speed. That's where we are seeing the biggest trend. And we don't see ARM really playing in that market. So it's really the two MIPS guys that are getting the biggest benefit from this move towards Multi-Core.

Sandy Harrison – Signal Hill

Got you. And then lastly, as you look at the Multi-Core, what are the biggest hurdles that the customers are facing in the transition and how do you address that or is most of that addressed with the products and the solutions you are providing?

Behrooz Abdi

This is Behrooz. It's really – some of the biggest transitions are the software and also just the architectural changes because we integrate a lot of the functionality that used to sit outside of the multiple Single-Core processors. We've integrated all that and added a lot of the accelerators as Ron mentioned, added a lot of the I/O. So architecturally, it's been a disruption to where customers have been going to, but obviously they see the performance benefits, the cost performance, and power benefits on that.

So, software is key and that's where we work very, very closely with customers and more importantly, with third party. We've really created a very vibrant third party ecosystem that customers can work with to – with their tools, with their engineering services, and with their Linux distribution and all the software work that they support to get to the next level.

Sandy Harrison – Signal Hill

Yes, that's a great question that reminds me with sort of Intel owning Wind River and Montevista, now part of Cavium, is there a big move of foot by folks such as yourself to foster the ecosystem to get neutral parties move involved here?

Behrooz Abdi

They are actually – we've been working with the third parties for quite a long time and these acquisitions for us has been really a non-issue at our customer base because a lot of our customers, a lot of Tier 1s, they actually have many choices already, third party Linux support, tools and they really want the best of breeds, and it's a fragmented market. So we work with all these third parties to support the customers because their – and we just feel that that gives us a broader reach rather than having that in-house.

We do a lot of Linux work ourselves already. So no matter what, you have to do a lot of the work yourself and that – we've had our own software engineers; actually in the last couple of years, we've probably hired more software engineers than hardware. But the distribution of the Linux and the engineering services and tools, we enable a lot of the third parties.

Ron Jankov

I think that's an important thing that Behrooz brought up is enabling our customers to design, develop their own software on our Multi-Core processors. And we did a little bit of a survey just to kind of getting to know our customers better and we were surprised to find out that there is thousands of engineers out there, literally in the three-digit – four digits, who are designing software to NetLogic Multi-Core processors and that's a much broader footprint than any one Linux production provider can provide and for us to support and leverage the ability to have many, many engineers like that designing to Multi-Core, that's the biggest leverage for us.

Sandy Harrison – Signal Hill

Got you. All right, thanks for taking the questions, guys.

Behrooz Abdi

Thanks.

Operator

And the next question comes from the line of Mr. Steve Eliscu with the UBS. Please proceed.

Steve Eliscu – UBS

Thank you. First question is on gross margin. You guided 65%, yet in your prepared comments you talked about some tailwinds for both RMI and IDT search engines. Can you talk about potentially where gross margin can go? I mean, can it get to 66%, 67% in Q1, especially as you don't have a lot of Alchemy business and where do you think it can go long term?

Mike Tate

Yes, I mean all the efficiencies and scale that we are getting out of the RMI merger will clearly help our ability to further lower cost. We look at these as opportunities to help us maintain the margins at 65% or above. You can see over the last two years we've done a very good job of keeping it in a pretty tight range and we'll have periods based on mix where we will move around a little bit and given the increased adoption of Multi-Core and what's going on in the Telco for the analysis processors who might have a slight bias to the upside, but I think for modeling purposes, keeping the models at 65% is probably the best way to look at us going forward.

Steve Eliscu – UBS

Okay, great. Next question on XLP. Can you give us a status update on that product?

Behrooz Abdi

Sure. The release is actually going very well. We've already begun to deliver design environment, board layout specs, hardware design, sort of hardware design simulation models, and as well as the early code for software design. So the customer feedback is very positive and we have a number of key alpha customers that have already started laying out their boards, getting their software and starting to work with the software. So it's going really well.

Steve Eliscu – UBS

So you should have samples sometime this quarter?

Behrooz Abdi

As we had talked about before, we expect to have collateral to customers the first half of this year and we are on track for that.

Steve Eliscu – UBS

Okay, great. And just one last question here. Just going back to the wireless markets, you talked about LTE as a future opportunity with richer content. Can you at least give us a – can you try to quantify what the multiplier in terms of silicon content of LTE versus HSPA might be? I mean, is it 1.5x, 2x?

Ron Jankov

It’s probably two to three times, in that range. I'll let Behrooz comment –

Behrooz Abdi

Yes, if you look at the data rate itself as – for LTE, it is anywhere from 40 Megabits, 50 Megabits to 100 Megabits. Download is really to the spec and then as – and if you add more bandwidth, you can – or spectrum, you can get up to 300 megabits and LTE Enhanced takes you to a Gig and that's compared with HSPA, HSPA Plus, which is about 20 Meg to 30 Meg. So the type of numbers is very similar to what Ron just mentioned. It could be as high as 5x to 6x in terms of the bandwidth.

Now, with that extra bandwidth, you have a lot more processing and 2x to 3x in terms of content makes sense for the bandwidth alone and then on top of that, you got to make a lot more decisions. And what's happening is the spectrum is getting a lot more precious. So what the infrastructure guys want to do is do a lot of bandwidth management, make sure that the data that's going through the base station is the data that they want to see and the data that brings value to them.

So there is a lot of that work and a lot of that decision that's going to happen at the base station. So that's going to take the content and inspection higher at the base station, as well as the core. So that really drives the Multi-Core, as well as the knowledge-based processing towards a base station, which is great for us because that’s where the volumes just really shoot up.

Steve Eliscu – UBS

Great. Thank you.

Behrooz Abdi

Thanks.

Operator

Next question comes from the line of Mr. Hans Mosesmann with Raymond James. Please proceed.

Hans Mosesmann – Raymond James

Thanks and congratulations on the quarter, guys. Most of my questions have been answered, but can you comment on wafer availability and supply? You are going to have a pretty significant ramp at 55nm and things look pretty tight out there and also at 40nm, can you give us some commentary or flavor on that? Thanks.

Ron Jankov

Yes. Well, there is no doubt that the wafer capacity is short. We've taken a great deal of time and effort to nurture our relationship with TSMC, and in fact our VP of Manufacturing is in Taiwan right now. So we feel confident that we can get all the wafers that we need, even with the rapid ramp that we are on and so far TSMC has been coming through with what we need. So I feel good about that. 55nm actually, interestingly enough, reduces our need for wafers because our 55nm parts are less than half the die side of our 90nm parts, which they replace. So it actually decreases how many wafers we need and release that pressure a little bit, as well as the cost pressure.

On 40nm, we feel really good about 40nm. The nature of our business, being communications with the long design cycles, from when we prototype devices like our sixth-generation product here shortly to when we need high-volume production is about two years. And during that time frame, the graphics suppliers in particular tend to drive tens of millions of units and drive the yield to a very high level before we need high-volume production.

I think that a good example of that is 55nm, right where NVIDIA and AMD have driven the yields on that to a very, very high rate. So now, as we ramp in 2010, we are benefitting from those high yields that have already been established. So we are confident by the time we need high volumes of 40nm, the yields will be very strong.

Hans Mosesmann – Raymond James

Great, very helpful. Thanks.

Operator

And the next question comes from the line of Vijay Rakesh with ThinkEquity. Please proceed.

Vijay Rakesh – ThinkEquity

Yes. Hi, guys. Just looking at the 55nm ramp and the 28nm ramp on the – on Layer 7 – between KBPs and Layer 7, can you give us an idea of how that is ramping through the year?

Ron Jankov

Well, the 2010 is going to ramp pretty steadily throughout – I mean, the 55nm will ramp pretty steadily throughout 2010 and continue to ramp for another five years after that. The 40nm, we will be sampling – we already are sampling on multiple product lines already and we will be sampling all of our product lines within the year. And that will tend to ramp more like 2012, kind of two years offset and we'd see again delivering 28nm silicon next year and then ramping that in 2013 and 2014.

Vijay Rakesh – ThinkEquity

Okay. And on this – on the KBP side with the 55nm, do you think almost exiting 2010 more than 50% would be on 55nm?

Ron Jankov

It doesn't change that fast. It's just that a lot of the new programs that are ramping are on 55nm. But the legacy programs tend to go on for five, six years. So it won't approach anywhere near that percentage, but – I mean, it's more than 50% of our growth, not 50% of the total.

Vijay Rakesh – ThinkEquity

All right, okay. And on the RMI side, it looks like growing very nicely here. How are the margins there versus the core NetLogic side given that obviously it's probably scalable, so probably better ASPs there?

Mike Tate

Yes. So RMI before the merger had seen their margins kind of trend up in the high-50s to the low-60s and a lot of that was due to the increasing contribution from the Multi-Core processors and even though we still see growth in Alchemy and are excited about that, we do see that mix continuing to improve and with that we are seeing the margins continuing to improve with the business coming in line with the NetLogic business.

Vijay Rakesh – ThinkEquity

Okay, great. Thanks.

Mike Tate

Thanks.

Operator

And the next question comes from the line of Mr. Mark Heller with CLSA. Please proceed.

Mark Heller – CLSA

Yes. Hi, guys. Excellent quarter and outlook. Ron, I guess looking at the quarter guidance and the year, just sort of backing into what the quarters would do, it looks like you are looking at low-single digit type of growth for the rest of the year, but given what you were talking about, all these program ramps, I mean, are you saying that – or are we thinking you're being overly conservative here for the fiscal year?

Ron Jankov

Well, historically, we haven't given out full-year guidance and because we did it – because of the RMI merger, we decided we better continue to have that guidance out there. I would say that we are not giving the same clarity and visibility on the rest of the year as we are giving to Q1. So I would say it's kind of a placeholder at this point, that's something we are very, very confident in, but we would certainly hope to do better.

Mike Tate

Right.

Mark Heller – CLSA

And I guess just to clarify for the quarter Q1, I assume that we can expect Cisco to grow again in Q1. And then on Huawei, it looks like revenues more than doubled in Q4. Was that just because of RMI?

Ron Jankov

It was across the board. I mean, it was NetLogic knowledge-based processors, IDT search engines, and the biggest contributor was Multi-Core from RMI.

Mark Heller – CLSA

Okay. And again, we can expect Cisco, I would assume to grow in Q1 as well?

Mike Tate

Yes, we see broad contribution, Cisco will grow, and we see growth in knowledge-based processors and 10-Gigabit Optical PHYs and Multi-Core during the course of the quarter.

Mark Heller – CLSA

And one more question if I can. Mike, what can we expect for, I guess, OpEx going forward in terms of growth?

Mike Tate

Yes, so the guidance for Q1 was $35.5 million, to hit the full-year guidance, it implies about $600,000 increases each quarter.

Mark Heller – CLSA

Okay, great. Thanks.

Mike Tate

Thanks.

Operator

And the next question comes from the line of Kevin Cassidy with Thomas Weisel Partners. Please proceed.

Kevin Cassidy – Thomas Weisel Partners

Thanks for taking my question and congratulations on the quarter and outlook. Amazing numbers. Maybe the – with Alchemy going to – are there any plans of moving Alchemy to 40nm?

Ron Jankov

Yes. We plan on migrating the entire NetLogic portfolio to 40 nm and that would include Alchemy.

Kevin Cassidy – Thomas Weisel Partners

Okay. And maybe just on the tax rate for the year, what will that be for 2010, any changes there?

Mike Tate

Yes. We are looking at a 5% tax rate on our pro forma non-GAAP profit before taxes.

Kevin Cassidy – Thomas Weisel Partners

Okay. All right. Thanks. All my other questions were answered. Thanks.

Operator

And the next question comes from the line of Anil Doradla with William Blair & Company. Please proceed.

Anil Doradla – William Blair & Company

Yes, guys. Thanks a lot for taking my questions. So coming back to the content in the wireless infrastructure, I know it is tough to quantify it, but if I look at a base station tower, like in the CPA, are we talking about $100 per base station or $100 for channel card? Is there some way to quantify it? I know you have given out some metrics on megabits per second throughput, it all depends on that, but is there some way of looking at it like that? And then I have a follow-up.

Mike Tate

Well, it varies widely by how the customer implements it and some of our more forward-looking customers are using Multi-Core to a greater extent and so therefore using a higher dollar content and some have not made the full transition yet from Single-Core to Multi-Core and they are still relying on v6 or other things to do it, so there is a pretty wide range but there is also wide range from exactly where in the network it is.

For example, as you move towards the packet core from the RNC, to the edge, to the packet core, our content steadily increases there. So not trying to be evasive on the question but it is very, very big variety of both of the base stations as well as throughout the core.

Ron Jankov

Yes, exactly. It is a question that we always try to nail down internally as we talk to customers because of the architectures being different. Also the size of the stations; the macro station or is it a micro station or pico station, which obviously if it's smaller it's going to a denser population that volume goes up, so it is a difficult question to answer and it could be for the Multi-Core it could be in the tens of dollars to hundreds of dollars, literally.

Anil Doradla – William Blair & Company

Okay. Great. Now, if you look at the wireless world and the wireline world, the need for dedicated KBP versus kind of integrated functionality in the main core, do you see any adoption curves, because we are still in the initial stages and the wireless world appears to have been an adopting dedicating KBP? So, do you see that being integrated in the main core processor and the adoption of KBP perhaps slower going forward in the wireless world, in comparison to wireline world?

Ron Jankov

Actually, we see just the opposite. What's happening, for example, what wireless is driving is the need to go to version 6 protocol of IP. It's been talked about for 10 years but with the broad deployment of IP addresses to smart phones, we are seeing that v4 addresses are being depleted at a rapid rate right now. So in the next, really our customers today, right now, designing for a need for a dramatic increase in v6 traffic and so that means they're actually going to more dedicated KBPs versus less, so we see that trend going in our direction, actually strongly right now.

Anil Doradla – William Blair & Company

Very good. And finally the design cycles on the wireless side, are we talking about 12 to 24 month period or are we talking about more like a 24 to 36 month design cycle?

Behrooz Abdi

It depends, if they already are familiar with your software, it's anywhere from 18 months to 24 months. If it's a brand-new customer, then it's a little bit north of 24 months; 24 to 36 months sounds reasonable.

Anil Doradla – William Blair & Company

So it doesn't depend whether it's a packet core or a wireless tower? It's just probably depends upon how familiar the customers are with your solutions?

Ron Jankov

Familiarity with the solution as well as the amount of software that they got to bring in and the complexity of the system, yes.

Anil Doradla – William Blair & Company

All right. Thank you very much guys and congratulations.

Ron Jankov

When you're talking about LTE, these base stations are pretty darn complex, so it's not like they're simple designs where the customers complain.

Anil Doradla – William Blair & Company

Sure. Thanks. Bye.

Operator

And the next question comes from the line of Mr. David Wu with GC Research. Please proceed.

David Wu – GC Research

Good afternoon. Maybe, I just wanted to make sure I heard this thing correctly, that there are thousands of programmers at your customers that are designing Multi-Core RMI processors, right?

Mike Tate

That's correct, with the recording software and optimizing software.

David Wu – GC Research

Hello.

Mike Tate

We were surprised by the number as well and maybe I shouldn't say thousands, its well over 1000, so let me make that clear.

David Wu – GC Research

Okay. Well, that's very good, thanks. I was wondering two things. Are there any software tools or any mechanism that you are developing either internally or in cooperation of third parties to make writing Multi-Threaded, Multi-Core applications easier? I know you get over a thousand customers dedicated to that task but I was thinking, to expand your customer base anything you're doing special that will make it easier for somebody who hasn't got the investment to also adopt Multi-Core?

Mike Tate

Well, that's an excellent question. We actually work with a lot of the third parties. We do develop a lot of the Linux software internally ourselves, also we have a lot of reference software stacks. One thing to keep in mind with the Multi-Core in the networking space is that you can, it's easier to repartition the pieces of software because they are not always very much as connected to each other as let's say Microsoft Windows.

It's not monolithic piece of software, so you can separate those out and run it in multiple cores and multiple threads, so we do a lot of that ourselves and then we work with third parties with tool vendors that have tools and compilers and also with third parties who develop applications, third party applications and we put this, we actually do a reference design that has a hardware and a software, base software on that and we deliver that to the third parties and these third parties then go work with our customers. And as we said before, customers have their preferences in terms of who third parties would be that's why we want to enable so many of them because they'll then go off and, it's like a sales channel for us in the market and they'll support our customers with engineering services, with software tools and with the base Linux distribution. So those are the things we are doing, that we have been doing that and it really resonates with the customers.

Behrooz Abdi

The other thing we are doing is very greatly expanding the training for our customers to bring them up to speed to bring more and more engineers every month up to speed on how to write code to our Multi-Core processors because once you get a customer designing code to your processors that's the tightest arrangement you can have with a customer and have the strongest traction over the long-term.

David Wu – GC Research

One thing else I want to clarify on that there are now about 80 application engineers and sales application engineers for a wide you, right? Right. What was the number like before the RMI merger? Did it double or go up from 50 to 80?

Mike Tate

It's well more than double. I don't have the exact numbers at my fingertips but it's well more than double.

Behrooz Abdi

So we picked up quite a few applications engineers as well as the drug sales force and the applications are very important to help get our customers up and running.

David Wu – GC Research

So it's more than 2X what it was before?

Behrooz Abdi

Yes.

David Wu – GC Research

So these people are still fairly early in terms of sales productivity curve on the new stuff they learn?

Mike Tate

We can leverage this even further going forward, yes, to answer your question.

David Wu – GC Research

Okay. Of the $600,000 of OpEx increase this quarter-on-quarter should I think half goes to R&D and the other half goes to SG&A or is it more tilted towards R&D?

Mike Tate

Heavily weighted towards R&D.

David Wu – GC Research

I see. When I run the numbers, its – so we assume for the full year, the second half will grow sequentially faster than the first half or about the same?

Mike Tate

We are modeling a consistent rate of growth after Q1.

David Wu – GC Research

Okay. Great, thank you.

Operator

The next question comes from the line of Alex Gauna with JMP Securities. Please proceed.

Alex Gauna – JMP Securities

Thanks very much. You've answered a lot of questions on wireless infrastructure but I was wondering with regard to HSPA+, where are we exactly do you believe in people spending on that and are there any geographies that are ahead or behind and what is that product cycle look like for you, is it a three quarter or a six quarter or what are we talking about there?

Ron Jankov

We are very early in that cycle. I think that it's just starting mainly in the developed countries. The cycle for that should be quite long because it will rollout first in the developed countries and then it will be followed by the emerging countries. They're still putting in their first generation 3G equipment right now. So I think HSPA+ is a less expensive way to upgrade infrastructure than going all the way to LTE. So I think across the world, around the world people are going to use that as an intermediate step and it’s going to last for several years, even in – even once people start rolling out LTE, they'll continue to rollout HSPA+ in rural areas for example, versus big cities.

Alex Gauna – JMP Securities

Given that it's early stages, early days, are you feeling pretty confident the sell in of your chips into equipment right now for that has demand on the other side or does it build on the hope the demand will come?

Mike Tate

Well, there's quite a bit of trials going on right now. We are both in HSPA, HSPA+ in 3G, TD-SCDMA and LTE. So for us quite frankly, we are not as sensitive to that demand as long as the 2G to 3G transition has happened, which is happening quite a bit right now. So for example, in China, TD-SCDMA we are in the midst of that ramp and build out, so for us – that's 3G.

So for HSPA, HSPA+, as Ron mentioned, that transition is going to happen, because that is the lowest cost and least painful way for the operators to transition to the next generation. LTE happens when it happens. We'll be ready for that. LTE is not going to replace HSPA+. It's not a very efficient protocol for voice, so it's mostly data only, so it's something that they will need eventually but we are not necessarily just dependent on that.

We've been participating – our Multi-Core has been participating in a lot of the LTE trials around the world. So we are excited about that and we know that it's going to happen at some point, but we are not as sensitive to that in terms of our growth plan.

Alex Gauna – JMP Securities

Okay. My understanding and I might be wrong in this, is that with regard to some of your tremendous Cisco success here, they're refreshing quite a few product lines. Is that an accurate or is there any risk that we've got a pipeline filled that abates here once we get through it?

Ron Jankov

Well, in Q4 and even in Q1, the demand was held back somewhat by the supply chain, not so much from us because of our good relationship with the foundries, but from bringing the total system together. So I would say that the normal cycle of pipelines being filled in this kind of environment is less so happening right now, because the pipeline chain has been constrained and so there for, people haven't been able to build up inventory.

Alex Gauna – JMP Securities

I see what you're saying. If there's pent-up demand what's the pull through on that? Is it two quarters, three quarters, do you think or does it happen faster than that?

Ron Jankov

Right now, Alex. We have a lot of new designs ramping, so it's just hard to measure it that way. We still have more to ramp than has ramped over the last four quarters. So we feel good about our continued growth prospects at Cisco.

Alex Gauna – JMP Securities

Okay. Thanks very much. Congratulations on a great quarter.

Operator

And the next question comes from the line of Mr. Gus Richard with Piper Jaffray. Please proceed.

Gus Richard – Piper Jaffray

Thanks for taking my question. You just exceeded your prior peak in your core NetLogic business and if I were pessimistic, I'd look at this and go okay. The acceleration is just catch-up from a pause we had due to the recession, if I was an optimist I'd look at this and go – these guys are getting designed in more boxes and increasing content and growth is going to accelerate going forward. I was hoping you could just talk a little bit about how you see the dynamics going forward against those two things and I have a follow-on?

Mike Tate

But if you look at NetLogic historically, our knowledge-based processors were heavily weighted towards high-end enterprise switching and routing. And it was just in the end of 2008 that we started getting into the wireless and we are seeing that transformation of the adoption of knowledge-based processor and wireless really hit its stride in 2009. But we really feel it's just starting. We just started to ramp into Ericsson and ZTE and we still have a number of new programs with new customers like Nokia had started to go out next year, as well, so we are seeing to benefits of that and feel we are very early in this process. And on top of that for NetLogic, we also have the 10-Gigabit Optical PHYs that are starting to really inflect up as the market transitions to 10-gigabit.

We are seeing in a lot of our line cards that we have the knowledge-based processors are now 10-gigabit and multi-port 10 gigabit, they're going to like 96 ports. So we are just seeing all that start to transition as well. So we feel we are very fresh in the product cycle within the core products.

Gus Richard – Piper Jaffray

Okay. And then…

Ron Jankov

And Mike's comment there, that's a very key one is that – the high-end boxes used to be 48 by one gig ports, with a few 10-gig uplinks and now you have cards that are 8 and 16, 10-gig ports, which is 3X the bandwidth. And at the same time, it's 3X the bandwidth you're also seeing a lot higher packet touch, they're doing more quality of service, they're doing more security.

So these new cards have a lot higher content of knowledge-based processor, whether it's a Cisco enterprise card or it's an IPTV card for Verizon or AT&T or if it's an HSPA Plus Card for Vodafone or whoever. So in all of these categories for both multi-core and knowledge-based processing, the new designs that replace old designs with higher content of our processors. That's the biggest dynamic.

Gus Richard – Piper Jaffray

All right. And then just one follow-on. If you think about your legacy enterprise business at this point in the cycle and what you see going forward, is that a tailwind because it's just not growing quite as fast or I'm sorry, a headwind or a tailwind just because it's starting to come back and ramp as well?

Ron Jankov

Well, it's certainly not going to grow as fast as the new business, so if that makes it a tailwind. But it continues to be strong and doesn't – it's not going to tail off fast enough to be enough of a headwind to slowdown the new ramps.

Gus Richard – Piper Jaffray

Great. Thank you very much and nice quarter.

Operator

Ladies and gentlemen, this concludes the question and answer session for today's call. I would now like to hand the call over to Mr. Ron Jankov for any closing remarks.

Ron Jankov

Okay. Thank you and thanks to everyone for joining us today. During the first quarter we'll be presenting at several conferences around the country. We thank you for your continued interest in NetLogic Microsystems and we look forward to speaking with you in the near future. Bye.

Mike Tate

Thank you.

Operator

Ladies and gentlemen, this concludes today's presentation. You may now disconnect.

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Source: NetLogic Microsystems, Inc. Q4 2009 Earnings Call Transcript
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