Exar's (EXAR) CEO Louis DiNardo on Q4 2014 Results - Earnings Call Transcript

May. 5.14 | About: Exar Corporation (EXAR)

Exar Corp. (NYSE:EXAR)

Q4 2014 Earnings Conference Call

May 5, 2014 10:30 AM ET

Executives

Laura J. Guerrant-Oiye – Investor Relations-Guerrant Associates

Ryan A. Benton – Senior Vice President and Chief Financial Officer

Louis DiNardo – President and Chief Executive Officer

Analysts

Jon E. Tanwanteng – CJS Securities, Inc.

Craig A. Ellis – B. Riley & Co. LLC

Erik P. Rasmussen – Stifel, Nicolaus & Co., Inc.

Timothy M. Arcuri – Cowen & Co. LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Exar Corporation's Fiscal Year 2014 Fourth Quarter Year-End Financial Results Conference Call. At this time, phone lines are in listen-only mode. Later on, we will have an opportunity for a question-and-answer session. (Operator Instructions) Today’s conference is being recorded. I will now turn the conference over to Exar's Investor Relations, Laura Guerrant. Please go ahead ma’am.

Laura J. Guerrant-Oiye

Thank you, Fred and good morning everyone. Thank you for joining us for Exar Corporation's fiscal 2014 fourth quarter financial results conference call. With us today are Louis DiNardo, President and Chief Executive Officer; and Ryan Benton, Chief Financial Officer.

Before we begin, I would like to remind you that we provide our investors, financial analysts and the general public with a business and financial update each quarter in the financial results, news release and conference call. Please note that the fiscal 2014 fourth quarter results released was disseminated this morning before the market open and can be viewed on the Company's website.

After Mr. Benton's prepared remarks, Mr. DiNardo will be presenting from a live webcast. You can view the live webcast on the company's website at ir.exar.com in the upcoming earnings event section.

Exar will not provide any further updates on the Company's performance during the quarter unless it is as a news release or other manner that is compliant with Reg FD and Reg G, as the case may be and other applicable regulations.

The Company's guidance and remarks are based on current information and expectations as of today, May 5, 2014, and we undertake no duty to update such statements. The Company reports financial results in accordance with GAAP. However, for the periods presented today, we are disclosing various non-GAAP measures.

The Company believes that non-GAAP measures are useful to the performance of financial analysis. The reconciliation from non-GAAP to GAAP financials for the most recent or prior periods or events that may be discussed today can be found in today's financial results release or the Company's applicable SEC filings.

And lastly, during the course of this conference call, we will be making forward-looking statements that involve a number of risks and uncertainties and are not guarantees of future performance. You are encouraged to review the Safe Harbor statement contained in today's press release as well as the other risks detailed from time to time in the Company's SEC filings.

And with that, I'll now turn the call over to Ryan Benton. Ryan?

Ryan A. Benton

Thanks Laura. Let me start by reviewing highlights of the fourth quarter and the fiscal 2014 full year results. Fourth quarter net sales of $28 million were consistent with our updated guidance provided April 2.

Fourth quarter net sales were down approximately $3 million, both sequentially and on a year-over-year basis. The networking market continued to be weak as expected, and delays in high reliability program and technology license revenue contributed to a softer than expected month of March.

On a full-year basis, however, fiscal 2014 net sales of $125.3 million represented an increase of 3% as compared to a year-ago. Fourth quarter non-GAAP gross margin was 45.9%, lower sequentially as a result of lower networking sales. Fiscal 2014 non-GAAP gross margin was 49.9%, up from 48.9% in the same period last year.

For the fourth quarter, additional cost control measures and lower variable compensation expense resulted in positive non-GAAP earnings per share of $0.01, marking this our eight consecutive quarter of profitability. For the full-year 2014, non-GAAP earnings was $0.25 per diluted share compared to $0.28 per diluted share in fiscal 2013.

As we look at sales by end market, Q4 industrial and embedded system sales of $19.6 million were up 6% when compared with the $18.4 million reported last quarter and up 28% from the $15.3 million reported for the same period last year with the increase coming principally from our new product line, high performance analog and processor products.

For the full fiscal year 2014, industrial sales were 14% or $9.1 million to $72.5 million. Industrial accounted for 70% of our fourth quarter sales and 58% of the full-year sales. Within the Exar legacy product lines, we are excited about the new products that have been released over the last couple of quarters. These products are getting a warm reception by customers, and we expect them to have a material impact on our fiscal 2015 sales.

As anticipated, networking sales declined sequentially. Fourth quarter sales decreased to $3.3 million or 12% of our fourth quarter sales. This represent a decrease of $3.8 million from the $7.1 million reported last quarter. For the full-year, networking sales were $30.6 million, down 7% from the $32.7 million reported last fiscal year.

Communication sales, at $5 million or 18% of our fourth quarter sales were essentially flat to the $5.1 million reported last quarter and down $1.2 million compared with the $6.2 million reported in the same quarter a year ago. This year-over-year decline was primarily as a result of the expected decline of the traditional SONET business.

In Other, which includes consumer, accounted for less than 1% of our net sales for the fourth quarter. This is probably the appropriate spot to mention our recent announcement. In the deal front last week, we announced an agreement to acquire all the outstanding shares of Integrated Memory Logic through a tender offer and merger. IML presents a unique opportunity to acquire world class analog power management and mixed-signal products while providing diversification of end market and customers and getting Exar to much needed scale.

At a tender price of TWD91 per share, this represents the cost of approximately $94 million net of acquired cash. For calendar year 2013, IML did $57 million is sales with a 53% gross margin and 21% operating margin. By acquiring a profitable company for all cash, we anticipate that the acquisition once closed will be significantly accretive on a non-GAAP basis.

Lou will speak more about IML during his presentation. On a non-GAAP basis, fourth quarter gross margin was 45.9% compared with the third quarter gross margin of 48.6% and 52.7% in the same quarter a year ago. This equates to a gross profit of $12.8 million for the fourth quarter compared with $14.9 million for the third quarter and $16.4 million a year ago. As discussed, the gross margin decline was the result of lower networking sales, specifically within our data compression product line.

Fourth quarter non-GAAP operating expenses were $12.7 million, compared with $13.2 million reported in the third quarter. These non-GAAP amounts exclude certain charges such as stock-based compensation, the amortization impairment of acquired intangibles, M&A costs, restructuring charges, and changes in the fair value of contingent consideration. Q4 operating expenses were significantly lower than our previous estimate of $13.5 million to $14.5 million. By expense category, fourth quarter non-GAAP R&D expenses were $6.2 million, down from the $6.4 million reported in third quarter, while non-GAAP SG&A expenses were $6.5 million, down from the $6.8 million reported last quarter.

The [adored] (ph) operating expenses associated with the Stretch acquisition were offset by further cost reductions on the Exar legacy side and lower costs associated with reduced variable compensation expense. Next quarter, I would expect operating expenses to be at the bottom-end of the aforementioned range .

Non-GAAP operating income for the fourth quarter was $166,000 compared with $1.7 million in the third quarter and $4.3 million reported a year ago. Fourth quarter non-GAAP net income was $676,000 compared with $2 million for the third quarter and $4.8 million in the same quarter a year ago.

Fourth quarter non-GAAP earnings per fully diluted share was $0.01 compared with $0.04 reported last quarter and $0.10 reported in the same quarter a year ago. The number of shares used in the fourth quarter calculation of non-GAAP results decreased to 50.2 million shares. In the fourth quarter, we purchased 446,000 shares of stock as part of our buyback program bringing the total to 755,000 shares for the fiscal year.

On a GAAP basis, fourth-quarter gross margin was 30% compared with the third quarter gross margin of 42%, and 49% in the same quarter last year. The decrease is due to higher purchased intangible amortization and an intangible impairment charge associated with the prior acquisition. The impact of the impairment charge on net income was offset by a larger reduction in the liability for contingent consideration. GAAP operating expenses for the fourth quarter were $8.7 million compared with the $16.1 million reported last quarter.

As I just mentioned, this quarter’s operating expenses were impacted by reductions in the liabilities associated with deal-related earn-outs. A $3.25 million reduction related to the expected earn-out of the Cadeka acquisition, and a $4.77 million reduction related to the expected payout of the Altior acquisition. Fourth quarter GAAP net income was $147,000 compared with a $1.6 million GAAP net loss for the third quarter and a GAAP net income of $1.7 million in the same quarter a year ago.

These results translate to a GAAP break-even for the fourth quarter compared with a GAAP loss per share of $0.03 per share in the third quarter and an income per fully diluted share of $0.04 in the same quarter a year ago.

Turning to the balance sheet, as anticipated, fourth quarter accounts receivable decreased substantially to $18.3 million from $23.4 million in the third quarter. At year-end, over 84% of our AR was current, which was in line with historical norms. Debt inventory increased to $29 million compared with $25 million last quarter. The majority of this increase was attributable to two factors.

First, we completed the high performance analog product line, inventory build associated with a boundary partner line maintenance outage, accounting for approximately $2 million of the increase. Secondly, $2 million of inventory increase arose from the Stretch acquisition. Excluding the impact of a transaction such as IML, I would anticipate the inventory to decrease slightly in the next quarter. Now a few cash flow majors.

For the fourth quarter, total depreciation and amortization was $4.1 million of which $1.6 million was included in the non-GAAP results. This translates to a non-GAAP EBITDA of $1.7 million for the fourth quarter making the eighth consecutive positive quarter. Non-GAAP EBITDA for the full year was a respectable $17.3 million. We ended the fourth quarter with $157 million in cash and short-term investments down $9 million from the quarter ago.

Cash was impacted by the Stretch acquisition by approximately $9 million for the repayment of debt and assumes liabilities and the utilization of working capital. Cash was also impacted by the $5 million paid towards the share buyback program. That ends my prepared remarks, and I’ll now turn the call over to Lou for his presentation. Lou?

Louis DiNardo

Thank you, Ryan. Thanks for joining us, everyone. I'm going to be very quick, and move through a few slides, and then I'll open it up for questions and answers. I believe you should be on a pie chart, which represents our fiscal year 2014 by end market pie chart. So you will see 58% in Industrial, essentially 0% in Consumer products, Communications at 17%, and 25% in Networking & Storage.

We've talked kind of at length during the course of this last quarter, and certainly on last quarter's earnings call, about the struggles in the networking business. And I think we have great expectations for the balance of the year that is the second half of the year to see nice rebound in the networking business. And as a result you’ll see a 58% in the industrial space, which I think represents really the strong hold we have in many end markets.

If you move to the second slide, here we are going to touch a little bit on IML. The integration of IML and Exar really gives us the fourth – I think the fourth leg of the stool. We have been strong in the networking business, we’ve been strong in the communications and industrial space, what we’ve lacked frankly is the high end consumer space.

When we talk about IML, I think it’s important to recognize that it is high end consumer. It’s the business that represents 53% gross margin in the LCD space. I guess last quarter was 53% the last published quarter. 53% gross margin, 20% operating margin that represents a true position in the high end consumer space. Display solutions, optical sensors and LED lighting our emerging markets or emerging product lines for IML.

So, when you look at the combination, we’ll have industrial, we’ll have networking, we’ll have communications, and now we’ll have high end consumer.

At the bottom of the slide, you’ll see companies like GE, Siemens, Teradata, HP, IBM and now we add Samsung, LG, Sharp and China Star with respect to the consumer products in the high end of the display market. So the diversity that comes with this, the scale that comes with putting these two companies together.

If you flip to the next slide, you’ll see that we’ve got this great balance between high end consumer at 35%, industrial and embedded systems at 38%. And the balance made up of networking and communications infrastructure.

At scale here $192 million on a trailing basis, it’s a broader portfolio, it’s a broader set of end markets, it really gives us the balance to weather the storms in networking with the growth in consumer or the ups and downs of any particular market, when we have the kind of diversity that’s shown with the consumer products high end consumer products added to our portfolio.

Maybe most important on the next slide, we’ve talked many, many times about our target model. We had internally or organically plan that was $45 million for Exar proper, that is still well within our reach we see kind of line of sight with networking coming back in the second half of the year, our continued presence in the industrial market and communications infrastructure market.

And now you add IML with $20 million to $25 million per quarter horizon and which end up with this company that is $65 million to $75 million approximately in quarterly sales. If you do take gross margin of 53% for IML last quarter, when our networking business rebounces we expect in the second half of the year. Exar proper businesses can achieve the levels of gross margin that we enjoyed fourth quarter and first quarter 2014, fourth quarter 2013, first quarter of 2014.

So we are looking at a 53% to 55% target model, operating expenses in the 32% to 34% range, which gives us about $15 million to $16 million of operating income or $0.30 to maybe $0.33 as a range of earnings per share. So when you take – you take IML at the high end consumer business with the kind of gross margins and operating income that the company delivers; put it together with Exar as we hit our stride in the networking business. Industrial remaining a very strong part of our portfolio, end up with company that can deliver 22% to 23% operating margin.

So very quickly we are off through a few slides, we’ll open it up for questions and provide answers. So Laura you want to entertain questions?

Laura J. Guerrant-Oiye

Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, at this time we’ll begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Jon Tanwanteng with CJS securities.

Jon E. Tanwanteng – CJS Securities, Inc.

Good morning, guys.

Louis DiNardo

Good morning

Jon E. Tanwanteng – CJS Securities, Inc.

In the past, you've spoken about, I guess, your purposeful lack of exposure to customers like Apple, who can switch suppliers in and out pretty quickly. How does the acquisition of IML change that?

Louis DiNardo

It’s an important question, one, frankly we've been asked a number of times since we made the announcement. There are different segments within the consumer electronic business, and when we speak to a high-end consumer, we’re talking about a business as I just mentioned, represents 53% gross margin and over 20% operating margin. It is a very stable business, consistently month in and month out, and given that this was a Taiwanese listed company, you can go back and check monthly revenue as it is reported in Taiwan.

So, I’ve actually had questions about my disdain for the consumer part of the business, and here we are in the high end of the consumer products business with a company that does flat panel displays, emerging LED lighting business, so I’m comfortable that what we have here is something that is additive to our profitability, additive to our scale, and doesn’t see the wild swings that the low end or middle of the consumer business might otherwise have.

Jon E. Tanwanteng – CJS Securities, Inc.

Okay. Thanks. And then, given four acquisitions in a relatively short timeframe, do you expect to undergo more of a consolidation period in the near future or are you still going to be active in acquiring assets and technologies?

Ryan A. Benton

I think this is the first meaningful acquisition with respect to scale. When we acquired Altior, it was really a technology play. We brought a great software team on board. Cadeka brought us high performance analog, and Stretch brought us the video processor business. With respect to scale, this is the first meaningful acquisition. This is going to take us time to integrate. So, I think you can see us probably keep our head down and work to get IML integrated, first we have to close the tender.

I mean, we’ve a tender offer out there, so we need to complete the tender offer to close the merger, which we expect to happen probably sometime in the September quarter, but yes, it's now time to kind of hunker down, hit this target model, and start to deliver the kind of top line growth as well as the EPS performance that’s modeled in the target as we’ve shown .

Jon E. Tanwanteng – CJS Securities, Inc.

Okay, great. And then Lou, just any details on items that didn't make it into the quarter? Did you expect that business to come back in this quarter?

Ryan A. Benton

I’m sorry, so you are talking about the end of last quarter with respect to those things that slip quarter-to-quarter.

Jon E. Tanwanteng – CJS Securities, Inc.

That’s correct.

Ryan A. Benton

We’ve seen some of the technology licenses have already occurred. We spoke to a high reliability business which has kind of gone sideways with respect to when do those contracts get awarded, so we haven’t seen those contracts come in, but they're imminent. We expect them hopefully yet this quarter, and there were some leftover backlog that we shift literally within the first week of closing out last quarter and entering this quarter. So all in, I’d say we are seeing progress on all fronts.

Jon E. Tanwanteng – CJS Securities, Inc.

Okay, great, thank you very much.

Louis DiNardo

Thanks John.

Operator

And our next question does come from the line of Craig Ellis with B. Riley.

Craig A. Ellis – B. Riley & Co. LLC

Thanks for taking the question, good morning guys. I'll start it with a couple of short-term questions. Lou, can you just comment on the dynamics that you see in your outlook from a quarter-on-quarter growth standpoint? Where do you see strength, whether it's Industrial or Communications, and what end markets have headwinds in them?

Louis DiNardo

Yes, it’s – Craig, not much has changed from last quarter. Industrial continues to be our stronghold at 58% of our trailing 12-month business. We see growth. I expect those product lines that serve the industrial space are our connectivity business, our power management business particularly, and kind of an up and coming presence with our high performance analog products to grow in the industrial space. We still see a little headwind in the networking business. We know it's centered around one or two customers in the big data space, but inventories are starting to bleed off.

During the second half of the year, we expect to kind of get back to the normal levels we enjoyed in the networking business and the gross margin that comes with it as well. So industrial remains strong. Networking, I think it's customer specific, but it's starting to work through.

Craig A. Ellis – B. Riley & Co. LLC

And then more of an intermediate-term question. I think something that's aligned with the second half of your comments there, Lou. What specifically are you seeing that really gives you confidence that the networking and compression business will ramp in the back half of the year? Is it product sampling and product roadmap that you have, and the way that's being received by your customers? Or is it simply just inventory levels that are now at such a low level, where the revenue just really has to come back in the back half of the year for you?

Louis DiNardo

Let’s say you’ve hit on both of the strong points as we enter the second half of the year. Inventory is coming down. I think we still will see a bleed off throughout this quarter and maybe you’ve been frankly into the first month of next quarter, but those inventories are bleeding off and really represent for us what should be a very strong second half of the year.

But maybe more importantly, given that those are – that's business that we've enjoyed historically, and you’ve seen that represented in the fourth quarter of last year and the first quarter of this year, you could see in the gross margin as well as the revenue line but really with respect to new products traction, Panther II which we now have released 9200 or the DX family of cards, the 2000 series of cards, Panther I or the 8200 Series IC, and the DX 1845 series cards with Altior software running on it has got great legs left.

We're seeing proof-of-concepts going on at major players, all of the large data warehouse customers that you might name are evaluating and in many cases are moving through to that kind of preproduction phase with the 1845 and Panther II has been well received as well. So we've got nice design wins, nice design in traction. So I'd say on both fronts, inventories are bleeding off. New products are being well received, and, again, the Panther I 1845 is not an old product. It was just released a couple of years ago. Two years ago or so and it's still got significant life left in it.

Craig A. Ellis – B. Riley & Co. LLC

Thanks for that. And then the final question before I hop back in the queue is more longer-term, and it relates to the target model. As we look at the updated target model, and it's got impressive earnings power, is the change from the prior exclusively IML? Or as you revisited the target model with IML, were there any changes due to what you're seeing with either Cadeka, Stretch or other changes inside of the portfolio that you've made with the management team over the last two to four quarters?

Louis DiNardo

I think the leverage in the model that we showed today is really is IML. We’ve targeted organically at $45 million kind of quarter representing what you’ve previously seen in the target model, and there’s really nothing that’s changed on that front. We have great expectations and we’re seeing lots of progress with Cadeka now called our high performance IML business the Stretch integration is complete and it’s really nice space for us to surveillance business generally is a nice space, the high growth market we’ve lots of solutions, whether it’s from our high-performance analog business or from the Stretch proper business and the video processor. So, I think by and large, what you see here is the incremental earnings leverage that comes from the integration of IML.

Craig A. Ellis – B. Riley & Co. LLC

Thanks guys.

Operator

And our next question does come from the line of Tore Svanberg with Stifel.

Erik P. Rasmussen – Stifel, Nicolaus & Co., Inc.

This is Eric calling in for Tore. Just wanted to circle back on your long-term target. Can you just give us maybe a time frame of when you might reach that, or what you're thinking about that target?

Louis DiNardo

I think we’re susceptible to the swings of what goes on in the marketplace, but when you look at the integration of IML take us nominally a $30 million business and we add IML at nominally a $15 million a quarter business, you’ve got $45 million as a combined entity, over the course of maybe 12, 15, 18 months, as expected we could achieve something that’s within that target range that we’ve laid out there. So yes, you’re probably talking about a year to 18 months, but immediately when you put the two companies together, we have scale.

We have increased profitability, and frankly we have more diversity with respect to end-markets served. So, I think we come out of the September as a combined entity much stronger with respective against scale and profitability and growing to that target model pretty quickly.

Erik P. Rasmussen – Stifel, Nicolaus & Co., Inc.

Thank you for that. And just one more on that, and then I have another question. When do you think you're going to close a transaction sometime in the September quarter? By then, how long – what do you think the integration plans are, specifically in areas where maybe you might be able to kind of rationale some of the expenses? And is there any rationalization of the top line with respect to IML?

Louis DiNardo

That’s a complicated question, I mean, address the closing first. It’s somewhat of a learning experience. We have a U.S. company buying a Taiwanese-listed company through a tender offer. So we expect to close the tender by, I think May 29 is the final day of the tender beyond that depending on what percentage of shares have been tendered we can go long-term or short-term for closing the merger in either case would be within what we believe is the September quarter.

So could it be July, August or September it could be July, it could be August or September, we’ll know that when we see how many shares, what percentage of outstanding shares are tendered. With respect to integration, IML is an extremely well run company, I mean you look at a company that – nominally you get $15 million quarter, $67 million in historical sales, or a $60 million to $65 million company with 53%, 52% gross margin pumping out 20% operating margin.

You can tell it’s a well-run company, so we’re not going to mess with success. It’s a different market. The sales force that, calls on Samsung, LG, China Star, a handle full of customers or more that, frankly we’ve had no participation in, because we haven’t been a consumer play up until this point, and this high-end consumer product line that they serve, they do a very fine job.

There will be the immediate synergies of you’ve got the accounting costs, you’ve got legal fees, you’ve got two Boards of Directors. I mean there are obvious redundancies that come out immediately. But by and large, this is the company that’s well managed, it is going to continue to run as it currently runs.

Erik P. Rasmussen – Stifel, Nicolaus & Co., Inc.

Thanks and maybe just one more – just on kind of how things have picked up. You mentioned March, things slowed down. Have things picked up since then or are you seeing order activity improve somewhat? Maybe just a little bit of insight there? And thank you.

Laura J. Guerrant-Oiye

Yes, sure. I think the softness in March was really not about kind of the general broad line account base that we serve, 10,000 to 12,000, 13,000 customers. We have a couple of technology licenses which kind of slipped over into the new quarter. We had a high reliability order that we expected late in the quarter, and then we have table backlog, what we call table backlog export licenses that in the way of shipments.

So I don’t think there was really general softness in March as much as a few very specific things that caught up with us late in the quarter. So the industrial markets feel strong, continues to perform well. And I think we will see that represented in our power management connectivity numbers for the quarter as we move forward. The surveillance business as we’ve integrated stretch, it’s really – it’s a vibrant business. Lots of new customers to us and opportunities to kind of coast on what it is that we – as Exar proper as in the way of offering with the presence that stretch has.

So generally, as I think the industrial market is it’s strong, but frankly it wasn’t really a weakness in the March quarter as much of the couple of things went sideways.

Erik P. Rasmussen – Stifel, Nicolaus & Co., Inc.

Thanks so much.

Operator

(Operator instructions) And our next question does come from the line of Timothy Arcuri with Cowen & Company.

Timothy M. Arcuri – Cowen & Co. LLC

Hi guys, thanks a lot. A couple things. First of all, Ryan, the $1.5 million sequential increase in June, at the midpoint of guidance, how much of that is coming in networking?

Ryan A. Benton

Sorry, the million-five sort of the top line revenue.

Timothy M. Arcuri – Cowen & Co. LLC

By mid-point.

Ryan A. Benton

That’s – yes it’s difficult that will be difficult to quantify at this point. We expect our industrial business to grow a bit somewhat of a rebound in networking. But frankly, we are still in kind of in the bleed mode of inventory. But you’ve probably figured it about $1 million of the incremental revenue.

Timothy M. Arcuri – Cowen & Co. LLC

Okay. Great. And then Ryan, just a question on margins. Can you give us a sense of what margins were by segment for March? And maybe what you expect them to be for June? It seems like industrial is – the margins there are a little bit lower than I would think, and is there something happening there? Thanks.

Ryan A. Benton

We don’t report margin by segment. We’ve got to be really – we don’t report by product line either. And that’s really where you kind of the road with respect to margin that may. Certainly the industrial business is at or about where our corporate average is. I mean it’s such a dominant piece at 58% of our revenue. It kind of carries the day. And I think you can see also the networking, when networking is down because of the exceptional gross margins we enjoyed – we suffer on the downsize and frankly we really enjoy when that business is in its growth mode which we expect in the second half of the year.

So generally you could look at networking as well above the corporate average, the industrial business at or above the corporate average. And frankly, the communications and infrastructure business is at or about the corporate average, as well, and doesn't really move the needle that much.

Timothy M. Arcuri – Cowen & Co. LLC

Okay. And then I guess last thing, Ryan, did I hear you correctly that OpEx, you think is going to be about $13.5 million for June? Is that right, non-GAAP?

Ryan A. Benton

That’s what I said.

Timothy Arcuri – Cowen and Company

Okay, thanks a lot.

Operator

And our next question does come from the line of Craig Ellis with B. Riley.

Craig A. Ellis – B. Riley & Co. LLC

Thanks for taking the follow-up, and it's a follow-up to Tim's last question. Ryan, as you look at OpEx into the back half of the year, and setting aside IML. How should we think about the spending levels for the business? Are you going to be able to hold expenses as flat as you are in the first half? Or is there going to be some upward pressure? And if so, where is it coming from?

Ryan A. Benton

Yes, I think we’ll able to hold that relatively flat or small increases. Obviously we've got a pretty nice kind of pipeline of new products that are starting to come through and some of the traditional product lines such as connectivity and power, so whenever we have those – whenever any of those happen, those takeouts and hundreds of thousands of dollars can kind of pop into the quarter.

So we'll see a little bit of an uptick of R&D, but we won't see any large spikes. I mean obviously I think this quarter it kind of demonstrates that we're ever vigilant on operating expenses and we are constantly looking for ways to kind of safe cost.

Craig A. Ellis – B. Riley & Co. LLC

Thanks for that, and then on the cash balance side. In the past, the company has explored the sale and lease-back of one of the two headquarters buildings. Where do we stand with that now? And how should investors think about the potential for executing on that this calendar year?

Louis DiNardo

Yes, that's a great question. Given that we're going to spend some cash to do the IML acquisition, which we think is highly accretive and a really frankly a very good deal for us to make at this point. The buildings we're in negotiation as we speak. We’ve got a marketplace frankly, Fremont California doesn't see, wild swings. The market never goes up big and never goes down big. It's been a relatively stable market, but some things that have occurred in the local market, mass transit brought into south Fremont, have given us a little bit of an uptick in the market so within the calendar year certainly, I think there's a high likelihood there will have a transaction done.

We will sell and then lease back what we called building to which we should be name building one. But it has enough square footage to house all of the existing extra headcount in Fremont, as well as moving IML team in. So by end of year certainly.

Craig A. Ellis – B. Riley & Co. LLC

Thanks.

Ryan A. Benton

Yes, this is Ryan, I’ll just add to that, I certainly share Lou's comments in terms of the market. The kind of delay we've had in that process actually it turned out to be pretty favorable outcome because certainly the market has picked up, and really the only thing that lacking is management team kind of bandwidth the focus on it. We've obviously been working on some other things.

Craig A. Ellis – B. Riley & Co. LLC

Thanks guys.

Operator

(Operator Instructions) And at this I’m not showing any further questions, I would now like to turn the call back over to Lou DiNardo for any closing comments.

Louis DiNardo

Well, thank you for joining us, again we’ll talk again this time next quarter, it’s going to be very busy quarter for us. Some of the questions and answers indicated our industrial business is feeling strong. We do expect a return to growth in our networking business and networking business and we are in the midst of the tender offer and I hope close that out in the later part of May, and work toward a merger certainly within the September quarter.

So we will be happy to talk again in about 90 days from now. Thank you.

Operator

Thank you. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.

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Exar (EXAR): FQ4 EPS of $0.01 beats by $0.02. Revenue of $27.98M (-10.2% Y/Y) misses by $0.52M.