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Vitesse Semiconductor (NASDAQ:VTSS)

Q4 2013 Earnings Call

December 05, 2013 4:30 pm ET

Executives

Ronda Grech

Christopher R. Gardner - Chief Executive Officer, President and Director

Martin S. McDermut - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Analysts

N. Quinn Bolton - Needham & Company, LLC, Research Division

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Operator

Good day, and welcome to the Vitesse Semiconductor Fourth Quarter Fiscal Year 2013 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ronda Grech, Vice President of Communications. You may begin.

Ronda Grech

Good afternoon, and thank you for joining us for Vitesse Semiconductor Corporation's Fourth Quarter and Fiscal Year 2013 Conference Call. With us from management today are Chris Gardner, Chief Executive Officer; and Marty McDermut, Chief Financial Officer. Our fiscal year ended on September 30, 2013. Results were reported in our press release issued this afternoon. We also filed our annual report on Form 10-K with the SEC today. The press release, along with complete financial information for the quarter and fiscal year, are available on our website at vitesse.com.

I'd like to point out that during the course of this conference call, we'll make various comments about future expectations, plans and prospects for the company that constitute forward-looking statements for purposes of the Safe Harbor provisions under Section 21E of the Security Exchange Act of 1934. Actual results may differ materially from those indicated by these forward-looking statements as a result of various risks and uncertainties, including those that are detailed in the company's SEC filings. For further information about these risks and uncertainties, please read the company's SEC filings, including our annual report on Form 10-K for the year ended September 30, 2013.

I also note that in today's press release, we disclosed non-GAAP financial measures, including non-GAAP income or loss from operations and non-GAAP income or loss, which we will also discuss during this call. Please refer to today's press release for discussion of these non-GAAP financial measures and reconciliation of these measures to the most comparable GAAP measure.

It is now my pleasure to introduce our CEO, Chris Gardner.

Christopher R. Gardner

Thank you, Ronda. Good afternoon, everyone, and welcome, and thanks for joining us today. So our fourth quarter results came in within our expectations. We grew revenue in the quarter, supported primarily by growth in new products, which were up 14% sequentially. They now represent about 1/3 of our total revenues. We again managed expenses carefully, and we continue to work within a difficult market environment. We had another solid quarter for design wins, concluding a record-setting year in 2013, and we continue to see accelerating traction within the market. Overall, we are pleased with our quarter.

As this marks the end of our fiscal year, I'd like to take a moment to review our accomplishments for the year. 2013 was a critical transition year for the company. We operated within a muted market environment for the entire year, yet we're able to achieve most of the 4 major goals that I set forth in October 2012.

First, even against the backdrop of the challenging market, we grew our new product revenue to nearly $29 million from just over $15 million last year. While shy of our $30 million goal, this was up 82% from 2012, establishing our new product portfolio within diversified customer base in our target markets. I'll remind you that it typically takes our customers 2 years to ramp into initial production and up to 5 years to ramp into full production, suggesting that our 2013 new product revenue comes from designs won primarily in 2011 and 2012. Revenue from these designs will continue to grow for several more years. Our record design wins in 2013 will drive further revenue growth in the second half of 2014 and beyond.

Second, we continued to improve the operational efficiency and our financial leverage. We kept expenses in check, while we continued to support our critical R&D programs. We expect future savings in 2014 as we consolidate a few buildings. As revenues increase, these actions will improve product margins, as well as the bottom line.

Third, we strengthened our future with continued investment in our product roadmaps. Our engineering focus is Carrier and Enterprise roadmaps -- excuse me, networks. Within these 2 large and emerging markets, we're now a leading supplier of Ethernet ICs for 4G/LTE mobile and cloud access. In 2013, we introduced next-generation products across all of our product lines. These investments address our core markets and extend our portfolio into multiple adjacent markets.

Finally, we set a goal to address our debt obligations. We did so by raising $53.4 million in 2 oversubscribed secondary offerings. I'm pleased to say that Vitesse is in a net cash position for the first time in many years. In addition, we reached an agreement to extend the maturity date of the $17.2 million senior debt to 2016 and to repurchase of $13.7 million related indebtedness. This transaction strengthened our long-term working capital position.

Overall, we achieved the majority of our goals. In retrospect, 2013 was a validation of our ability to execute our long-term strategy that will drive growth and profitability.

Let me turn it over to Marty now, and he'll review the details for the quarter.

Martin S. McDermut

Thank you, Chris. Good afternoon, everyone. I'm going to review our fourth quarter fiscal 2013 financial results, followed with comments on the balance sheet and cash flows, then conclude with our first quarter fiscal 2014 guidance.

For the fourth quarter of fiscal 2013, revenue was $26.9 million, up $500,000 from the $26.4 million in the third quarter and is in the middle of our guidance. And to provide more color on the revenue split, IP revenue was $420,000, up slightly from the $133,000 in the third quarter. Product revenue was $26.5 million, again, up slightly from the $26.3 million in the third quarter. New product revenue accounted for $8.9 million, a 14% sequential increase over the third quarter. New product revenue is now more than 33% of product revenues, exceeding the goal that we've set at the beginning of the year. Excluding our distributors, our top 10 end customers in the fourth quarter contributed approximately 49% of our product revenue. And for the fourth quarter, we had one 10% direct customer.

Our geographical sales contribution was 69% from Asia Pacific, 18% from the United States and 13% from other areas. Chris will provide details on the market breakdown on the revenue in the next portion of the call.

In the fourth quarter, gross margin with IP was 52.5%, and product margin was 51.8%. The fourth quarter product gross margin was slightly lower than expected, primarily due to a shift in product mix and customers.

Operating expenses in the fourth quarter were $17.6 million, down from $19 million in the third quarter. Our R&D investment in the fourth quarter was $9.9 million, lower than the $11.7 million in the third quarter and primarily due to the timing of masks and other R&D investments. SG&A expenses for the fourth quarter were $7.6 million, comparable to the $7.3 million in the third quarter. On a non-GAAP basis, fourth quarter operating expenses were $16.4 million as compared to $17.8 million in the third quarter.

As I mentioned during our last call, the lease on our current Camarillo facility is over at the end of January 2014, and we are moving into an adjacent building. This will add some short-term cost to SG&A. We'll see the effect of lower facility and relocation costs late in the second quarter of fiscal 2014 after we complete the move. We expect to reinvest those savings into R&D. Overall, we expect operating expenses to increase incrementally from 2013 to 2014.

Depreciation expense for the fourth quarter was about $400,000, and stock compensation expense was about $1.1 million. We expect both expenses to be about the same in the first quarter of fiscal 2014.

During the fourth quarter, we reported GAAP operating loss of $3.5 million and non-GAAP operating loss of $2.3 million. Non-GAAP operating loss excludes the amortization of intangibles and stock-based compensation expenses. For the fourth quarter, our GAAP net loss was $5.8 million or $0.10 per basic and fully diluted share, and on a non-GAAP basis, we had a net loss of $4.6 million or $0.08 per basic and fully diluted share.

Moving on to the balance sheet. At the end of the fourth quarter, we had a cash balance of $68.9 million compared to $71.3 million at the end of the third quarter. Cash used by operations was $2.4 million. Capital expenditures were $731,000. We expect it to be about $500,000 in the first quarter of fiscal 2014. At the end of the fourth quarter, accounts receivable was $9.8 million, and day sales outstanding was 34, down from the $10.4 million and 36 days at the end of the third quarter, respectively. Inventory was $10.7 million, down $1.2 million from the prior quarter. Including inventory in our distributors, inventory this past year -- inventory turn this past year were more than 4. Accounts payable and accrued liabilities is $19.7 million, down from the prior quarter.

And then Chris talked about how we've taken care of the October 2014 debenture obligation, as well as how we've recently extended the due dates of a term debt to August 2016 and locking in working capital to grow the company. In November, we repurchased $13.7 million of the 2014 debentures. The remaining $32.8 million principal of the 2014 debentures is due in October of 2014 and is expected to be paid off with our cash on hand. Although we do not have a prepayment right on the remaining debentures, we will look at opportunistically repurchasing additional debentures ahead of their maturity.

Next, I'll turn to our outlook for the first quarter of fiscal 2014. These are estimates based on our current knowledge and are subject to change, and as such, is covered under our Safe Harbor statement. For the first quarter of fiscal 2014, we estimate revenues will range from $25 million to $27 million. Product margins are expected to be between 53% and 54%. We expect product margins to increase, on average, about 1% per quarter for the rest of the year as we improve cost on new products. Total gross margins could be 1 to 3 points higher. GAAP operating expenses, including R&D and SG&A, are expected to range from $18.5 million to $19.5 million. To arrive at non-GAAP operating expenses, back out $1.2 million for stock compensation and amortization expenses.

And finally, tomorrow, we'll be filing a new S-3 universal shelf for $75 million to replace the current S-3 on file. Similar to the one on file, it provides for the registration of different types of equity and debt securities. At this time, we have no plans to use it. The S-3 on file was almost exhausted. And to ensure that we always have maximum flexibility to raise capital in the best possible term, if the need arises, we're filing a new one. The S-3 currently on fire will be withdrawn once the new S-3 goes effective.

And with that, I'll turn the call back to Chris.

Christopher R. Gardner

Okay, thanks, Marty. So I'll start with the detailed review of revenue by market and then look at some analysis for products and for customers.

Our Carrier business was $14.8 million in Q4, which is 56% of total product revenues, up 3% sequentially and up 3% from the year-ago quarter. The markets in Carrier continue to be challenging. In some respects, weaker than we've seen in prior quarters. China particularly continues to be frustrating the forecast. After a nice growth last quarter, our top 2 customers in China were down over 30% sequentially. Despite this environment, new products in Carrier grew much as expected to $4.3 million, up 13% sequentially and now represent 29% of Carrier revenues. We continued our growth in new 5 products for Carrier applications and customers -- as customers replace incumbents with our SynchroPHY products that include 1588 timing capabilities. Our new switch products, however, were down slightly as some of our customers were going through some protracted quals and trials. We continue to increase design wins for our switch products, which more than doubled in 2013 compared to 2012. So we're very bullish on the long-term growth prospects for these products.

Enterprise revenue was $11.5 million in Q4, which is 44% of total product revenue and up 1% sequentially but down 10% from the year-ago quarter. We again had solid growth in our new generation of switches and PHYs for applications in SME in cloud networking, which offset declines in the older products. Both Cisco, Meraki and HP were up in the quarter. We saw some weakness in storage applications where we sell some of our older signal integrity products. New products in Enterprise grew 15% sequentially to $4.5 million. Interestingly, we saw a nice growth in China on the Enterprise side, where we had several Tier 2 customers that were up over 50% sequentially as they started to ramp new programs.

IP revenue was $420,000 in Q4 compared to $133,000 in Q3. Our deal pipeline remains strong with opportunities for Ethernet PHY and switch core in consumer industrial and even automotive applications. For the year, we missed our long-term target for IP revenue, so we're adjusting it slightly to 6% to 8% of revenues on an annualized basis.

We continue to transit -- transition our revenue base from older legacy products to our new product portfolio. Each quarter, we provide a breakdown of our revenue vintage to highlight the progress of this transition. This quarter, we exceeded our 2013 target of 30% of total revenue from new products. Some of our oldest products, about 10% of our SKUs are going through an end-of-life process, which started in early 2012. In Q4, revenue from these EOL products is $3.5 million, which is down $100,000 from Q3. We expect these EOL revenues to decline in average rate of $600,000 to $700,000 per quarter for the next several quarters.

In Q4, our matured product portfolio, which combines hundreds of SKUs, was down about $0.9 million, about 6% sequentially, almost entirely due to the weakness in the Carrier market in China. The weak market environment impacts this portion of our business, and we expect some softness in Q1. As the market environment improves, we expect that our mature products will trend around flat through 2014.

In Q4, new product revenue grew nicely to $8.9 million, up 14% sequentially. On an annual basis, new product revenue is up 82%. New product growth this quarter was from both our Carrier and Enterprise products, each up over $0.5 million sequentially. On an annual basis, our new Enterprise products grew 45% from 2012, while our Carrier products were up 151%. As I mentioned earlier, our $29 million in new product revenue in 2013 comes primarily from designs won in 2011 and 2012, at a time when Vitesse faced considerable financial challenges that made some customer engagements difficult. Most of these wins are still in the early stages of their production ramps. We estimate that we've realized less than 20% of the total lifetime revenue of these design wins.

As our financial situation has improved dramatically, we are now accelerating our momentum in the market. 2013 was a record year for new product design wins, which were up over 40% from 2012. Strength was across the board. In our primary markets, IP Edge was up over 30%, and Enterprise was up over 80%, driven by new designs at new customers in Taiwan, China and Europe.

We've been fairly good at modeling how customers ramp from design wins to production. Over the last 3 years, we've grown our new product revenue with an average rate of nearly 100%, within 5% to 10% of our long-term forecasts. We proven that design wins are good leading indicator of our future revenue growth, so we remain focused on this aspect of our business. We can grow the company in 2 ways: by winning more designs at existing customers, what we call same-store sales, and by winning everywhere else. Today, we're successfully doing both. We are clearly becoming more important to the market and to our customers.

In 2013, we increased the value of our Tier 1 design wins by over 60% compared with 2012. As an example, Vitesse now has over 30 design wins at one of the largest networking OEMs and platforms ranging from cell site and aggregation routers to cloud access to platforms for industrial switching and routing. Based on these design wins, revenue from this single customer will increase from nearly 0 in 2012 to a $10 million annual run rate by the end of 2014.

In Q4, we closed several more designs at this OEM, including a large win for a Network Interface Device, or NID, based on Serval switch engine and SynchroPHY products. We're providing both silicon and software and developing this product in conjunction with the customer and an ODM. While we just closed this design in September, we expect it to begin initial volume production in the first half of 2014. In full production, this design can contribute $3 million to $5 million in annual revenue.

At the same time, 2013 was a breakthrough year for identifying and adding new customers. We identified new opportunities that is first opportunities at over 150 new customers. And we won first designs at over 100 customers in the year, a substantial increase in our market footprint. Many of these designs are in Asia and Europe, in our focused segments within Carrier, IP Edge and Enterprise. And many are in adjacent markets that are just now starting to adopt Ethernet technology.

A good example is what has traditionally been called industrial Ethernet and now is commonly referred to as the Internet of Things, or IoT. Machines and equipment of all types are becoming more intelligent and require more and faster network connectivity. The networks for industrial process control, smart grid energy distribution, transportation and automotive applications are all undergoing rapid and massive growth and transformation. As a result, these networks, just like the Carrier networks before them, are beginning to migrate to Ethernet, specifically Gigabit Ethernet, where we can play.

Many of the capabilities that we've developed for Carrier network, including deterministic service delivery, accurate time synchronization, security and low power are all key features within these a broad-based industrial applications. Similar to Carrier networks, this transition is just beginning and will occur over many years. We started to deliver low-power, high-availability, secure switch and PHY solutions into this emerging market. There is tremendous synergy in terms of R&D between our IoT and our traditional Carrier and Enterprise markets. For small incremental investments, we can expand our served market by well over $100 million. While this is a new market and a new customer base for us, we have an ideal product and technology set.

With very minimal effort, we have started to accumulate design wins in IoT network equipment, including wins at several of the leading players. We will make IoT our third major market segment and grow it substantially in 2014. I think it can be 20% of our business within 3 years.

In closing, let me summarize our primary goals for 2014. One, drive perpetual new product revenue growth. Our new product revenue ramp will accelerate, particularly in the second half of 2014. Our goal is to reach $55 million for the year, nearly doubling from 2013. We will generate more than 50% of revenue from the new product portfolio by the fourth quarter. Two, return to profitability. Based on our expected revenue growth, we will obtain operating income profitability in the third quarter. Three, expand to adjacent markets. IoT represents a clear opportunity to expand our served markets. In 2013, we made headwind in this market with more than 10% of our design wins attributed to this segment. The goal is to more than double wins in this market in 2014. And finally, successful execution of our strategy will continue to be the driving force for how we manage the company. We will invest wisely in our product roadmap to ensure and to amplify our market success.

I'd like to end by thanking all of our employees for their continued efforts and acknowledge our shareholders for their ongoing interest and ongoing support. With that, I'm pleased to turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Quinn Bolton with Needham & Company.

N. Quinn Bolton - Needham & Company, LLC, Research Division

I just wanted to start off first, Chris, perhaps -- you talked about the design wins in 2013, up about 40% year-on-year, but it sounded like it was more skewed to the Enterprise. Do you think that, that sort of then -- would say that the Enterprise business actually continues to grow at a faster clip over the next couple of years? It seemed that Carrier might ultimately be the bigger market given some of the new product focus, but certainly, it sounds like you continue do well on Enterprise.

Christopher R. Gardner

Yes, we do -- I think the answer is it comes in waves, right? So actually, if you look at 2012, the design wins in '12 in Enterprise slowed down a little bit just because we had a big push at the end of '11. And these deployments of different technologies and systems just come in waves. They come in waves with things like introduction of EEE, Energy Efficient Ethernet, which drove a lot of stuff at the end of '11. So I wouldn't say our design win rate over a 2-year period is much different between Carrier and Enterprise. We continue to get most of our design wins coming out of our -- really our focus market, which is the IP Edge segment. I guess the other comment I'd have on the Enterprise side is that we did really open up a brand-new geographical segment this year. And that is parts of China, large parts of China. So we did see a number, probably on the order of half a dozen new Tier 2s that have entered the business and where we've been able to go off and capture designs.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Okay, great. And just sort of shifting over to the Carrier markets. It sounds like that continues to be fairly sluggish and you said perhaps even weaker than you thought or weaker than past quarters here and the fourth quarter. Do you have any sense when that might improve? Or is the visibility still fairly low in that segment?

Christopher R. Gardner

Yes, the visibility is fairly low. I mean, you know that I have not been an aggressive predictor of the turnaround of the Carrier market. So I've said very consistently that we don't see any substantial uptick. I've been saying that for the last 18 months. I'm actually getting a little more bullish, to be honest. While we're kind at a low point right now, I think, in my opinion, 2014 will definitely be a stronger year than we've seen in 2012 and 2013. Now one element that makes a big impact there is the fact that our new products are now 30% going to 50% of our total revenue. And as you can see from the results, we can grow that portion of our business to 80% even in a down year. So that really helps us disconnect from how good or bad the market is.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Okay, great. And then just lastly, can you give us any outlook just sort of on the IP Edge, specifically some of the LTE and small cell deployments. Are you seeing better momentum on some of the IEEE 1588 technologies as we come into 2014?

Christopher R. Gardner

Yes, we're definitely seeing the 1588 stuff start to go into what I would say is more reasonable levels of shipment. And that has taken probably 6 to 12 months longer than we anticipated 3 years ago. On the small cell side, again, that's been an incremental part of our business. We're definitely successful designing into those boxes and. Again, I've always said that, that would be a 2014 production start. I'd say that's still accurate, that we're seeing some customers start to move a little bit of product. But it's like all things Carrier. It will not be a hockey stick ramp, right? It will be a slow ramp that occurs over a couple of years. So we continue to think that's a good business. It will start more materially for us towards the second half of this year, but it's not going to be 50% of our business at any point. It will probably grow to be 10% to 15% of our overall business tied to small cell specifically.

Operator

And we'll take our next question from Christian Schwab with Craig-Hallum Capital Group.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

6% to 8% of revenue this year, we expect from IP revenue. Did I hear that right?

Christopher R. Gardner

That's correct.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

So we're expecting a pretty material improvement in IP revenue this year?

Christopher R. Gardner

Yes. Certainly from the last 3 or 4 quarters, right? So we had a pretty good 2012, particularly the last couple of quarters, that gave us some encouragement to kind of move up our target a little bit. And I think all we've done now is we probably got a little rich on that and we brought it down just a point or 2.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Right. But that should recover from -- it should almost -- it should more than double in '14 versus '13, right? My math is right?

Christopher R. Gardner

That's correct.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay. Did I hear you correctly, that you expect to return to operating income profit in the June quarter?

Christopher R. Gardner

That's correct.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay. So...

Christopher R. Gardner

On a non-GAAP basis. That's when you guys look at.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Right, right. So if I do some back-of-the-envelope quick math, and I have to do it quickly here, that would suggest that you would expect revenues probably to recover into the low 30s, right?

Christopher R. Gardner

I don't -- that's about right. But remember, we're also going to get some lift on the margin side from where we are today. So...

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay, okay. So a combination -- obviously, the IP is going to kick in. And kind of like we mentioned that our absolute gross margins could be 1 to 3 points higher than our product gross margins. So I guess it would appear to me, correct me if I'm wrong, Chris, that you have line of sight to a pretty material uptake in intellectual property revenue in the June quarter?

Christopher R. Gardner

Well again, we're not guiding on the quarter-by-quarter basis. We do -- we've been saying for a couple of quarters, we have a pretty nice funnel in the automotive segment, few other places. But there are some things -- definitely some things we think we can get closed in the year on the IP side.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

All right. Let me ask the question in a different way. So we're all on the same page as far as analysts and investors. Can you give us a little bit of range as far as revenue and gross margins? I mean, we can do the math ourselves, but what is your assumption? I know you're only guiding for December, but you actually guided for Q3, saying you're going to be profitable. So just to make sure that we're all on the same page on how that looks, how does that look?

Christopher R. Gardner

Well again, we set a goal to get to profitability, non-GAAP profitability, in the June quarter, right? You're right that if you go through the numbers, that probably means we need to be in the 30 and a little above from a revenue perspective. That's probably all I'm going to say. We have given you the estimate on where we think margins are going go, where we think IP is going to go for an annual number. But that's our -- what we've got to accomplish.

Operator

At this time, we have no further questions in the queue. [Operator Instructions] And we'll take a follow-up question from Quinn Bolton.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Chris, I just wanted to come back. You sort of said in the December quarter, it sounds like the mature products take a step down and I think reflecting some of that softness you talked about in China in the Carrier market but that you thought overall, Carrier -- I'm sorry, mature products would then sort of run flat. I wasn't sure, was that flat kind of off to Q1 base? Or is it really more flat on a year-over-year that would suggest perhaps a little bit of a recovery in mature products later in the year?

Christopher R. Gardner

Yes, I'd probably tell you, Quinn, split the baby on that one. We are -- it's a little -- that one is obviously market driven. If we get that market recovery that I do feel if we are going to see some recovery in '14, and I've been very careful about not saying that in the past, but it feels to me like things are tightening up and we're going to see some help. If we get that, I think we'll recover to where we were. If we don't get that, we'll probably stay where we are.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Okay. So down in Q1 and then sort of flat to up depending on just overall Carrier environment over the balance of the year?

Christopher R. Gardner

Exactly.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Got it. Great. And then just I was probably too slow to write down some of the applications in the IoT, but could you just go again and give some of the design wins, what types of boxes you're going into for the Internet of Things?

Christopher R. Gardner

Yes. Probably the easiest one to understand is generally what they call industrial Ethernet switching. And these are Ethernet Switches just like you'd see in an Enterprise application, a 4 or 5, 8, 16, 24-port faster Gigabit Ethernet switch, but they're ruggedized typically for industrial apps. So maybe they fit in a power station or they fit in an aircraft carrier or a Humvee or whatever. So whether they're industrial or crossover to the military side, it's similar kinds of switching. However, most of these types of switching also use the 1588 timing specification. That's -- industrial is actually where that was created. We haven't typically played in this segment for 2 reasons. One, it's never been a Gigabit Ethernet play. It's always been fast Ethernet, and we don't have a broad, fast Ethernet portfolio to compete with the big guys who have been doing it for a lot longer than us. And some of those players are the big traditional Broadcoms and Marvells, but in a lot of cases, they're guys like SMSC, now part of Microchip, I think, guys like Micrel, et cetera, who are not our traditional competitors. So as that market moves into Gigabit, it comes into play for us and it comes into play in almost an ideal way in that we provide best-in-class deterministic capability in the switching technology, best-in-class timing capability. And very important for a lot of these application is low power because they go into boxes that don't want to have fans in them. They go into embedded applications where they're are very small size, very low power. So we're finding an ideal, literally, an ideal match for our portfolio in some of these apps. So that's industrial and military switching and networking. But then you get to all kinds of smart grid metering. You get into all sorts of piece of equipment now that are just having an Ethernet PHY or a very small Ethernet switch. We won a design recently in a security gate for parking lots. I mean, who would imagine there will be an Ethernet switch in there, but now there is. And so we're literally collecting hundreds or more customers in this space, guys we don't know yet that we have been coming to us over the last year. We've identified this as an area where we now have the wherewithal to go to focus on. And that was really the second reason we haven't played here, is we've been focused on being successful where we are. We now feel we have a strong enough market position in the Carrier and Enterprise that we can take a few resources incrementally, and we'll focus on this market and see how fast we can grow it.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Got it. So it does sound like some of the broader Internet of Things, application of the metering, you said the security gate, I don't know if you have any home control applications, but that wired Ethernet, especially Gigabit Ethernet, is starting to get integrated in some of those designs and that's what you're going after in that segment and then obviously, you've got the Industrial segment that you gave a lot of detail about?

Christopher R. Gardner

Right. A good example. I just saw a name a few days ago. I can't even repeat it for you. It begins with an H and it's a Chinese meter company, one of the largest in China. They designed in our Carrier [ph] switch into one of their meters. We've never heard of them. We don't know who they are. But they're going to sell a hell lot of meters. And so we're really just starting to scratch the surface on this, but the fact that 10%, 12%, 13% of our designs last year were in this segment and we haven't materially attacked this segment yet, I think, tells you a little bit about how good our products fit into that segment.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Is -- I guess I might imagine, although correct me if I'm wrong, that you -- the Internet of Things ultimately could be a very large number of smaller volume running design wins. And if that's the case, it sounds like that might be margin beneficial to you, almost more like a catalog product business rather than a high-volume to a couple of big OEMs that are going to try and beat you up on price day after day. Is that a fair description of how that market developed for you?

Christopher R. Gardner

That is very fair. And if you look at our margin profile right now, yes, it's probably 10 points higher than company. And that is a couple of reasons. One, as you say, it is a lot of Tier 3s. And other reason is that they need industrial-capable products, which means high reliability, high temperature range. And that's one -- that's another differentiator between us and some of the bigger suppliers, Broadcom, Marvell, is that virtually all of our products are shipped in industrial temperature range products. So we have -- again, we have a very good combination of products to go into the segment.

N. Quinn Bolton - Needham & Company, LLC, Research Division

Great. And just last question on the IoT. I know you said you thought it could be up to, I think, 20% of revenue out 3 years. Do some of those designs start to ship in fiscal '14 or is that really more of a fiscal '15, fiscal '16 ramp for those products?

Christopher R. Gardner

It will be very much like what you saw on the Carrier side, right? So I went and looked at last year, we got about 13% or so of our design wins in IoT. The year before, it was about 3% or 4%. The year before that, it was 1%. So we're kind of going up that ramp. And so we'll start to see revenue towards the end of 2014. And then in that ramp, we'll just continue to build into '15, '16 and beyond. And I don't think 20% necessarily is the limit. It's just you can't -- these guys aren't real fast movers either in a lot of applications, and it just a little difficult to predict how quickly it will turn on.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Chris Gardner, CEO, for any additional or closing remarks.

Christopher R. Gardner

Well, I'd like to thank everyone certainly for joining us today. I would remind folks that we are going to be at the Benchmark Capital conference on December 11, and that is in Chicago. So if you happen to be in the windy city, please come and visit us. And I'll wish everyone a happy holiday and talk to you next time. Thank you.

Operator

And again, this does concludes today's Vitesse Semiconductor Fourth Quarter Fiscal Year 2013 Earnings Results Conference Call. We thank you again for your participation.

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