Wolfson Microelectronics CEO Discusses Q2 2010 Results - Earnings Call Transcript

Wolfson Microelectronics plc (OTC:WLFMF) Q2 2010 Earnings Call August 4, 2010 10:00 AM ET


Mike Hickey - CEO

Mark Cubitt - CFO


Nick James - Panmure

Daniela Ventrone - Piper Jaffray

Anne Crow - W.H. Ireland

Mike Hickey

Good morning and welcome to Wolfson Microelectronics first half 2010 financial results. My name is Mike Hickey. I'm the CEO of Wolfson, and with me is Mark Cubitt who is the company's Chief Financial Officer. Thank you for taking the time to come see us this morning.

Let me show you what we plan to do this morning. I'll give you a brief introduction to the summary of how things progressed for us in the first half of 2010. Mark will then go through the financial results in detail. And then I'll carry on and give a more general business update and give you a view of how things are progressing for us both in the first half and also how we see things looking for the second half of 2010 and beyond.

In terms of the first half 2010, I'm delighted to say that we've turned in a very strong performance. We're very happy with our results in the first half and also that the strong second half step-up in revenues that we've been talking about now since the end of last year as our design-ins turned into revenue. It's actually looking in very good shape. So we're delighted to have that.

In terms of the first half, again delighted to say that the class of 2009 design-ins has transitioned into volume manufacturing, actually at the top end of our expectations. And this has driven a very strong revenue growth in Q2 over Q1 with about 26% sequential growth and also a very strong backlog into Q3 and Q4 of this year, supporting our expectation of a good solid second half from a revenue perspective.

As Mark will explain in his section later on, our business model means that this step-up in topline should translate into a big improvement in underlying and operating earnings and we expect to get back to profitability in Q3 onwards.

In terms of what actually happened in the first half, from a product development perspective, our portfolio refresh and improved performance of product development teams we saw last year has continued into 2010, and we launched 18 new products in the first half of the year.

The other thing which is particularly pleasing is that our design-in performance has accelerated during the first half of the year, and we're actually around 30% up on the 2009 run rate, which was our previous record. And again, pleasing for us, our audio hubs have shown particularly strong traction.

We also continue to win slots in high tier volume consumer applications. For example, we're in Samsung, Wave and Galaxy smartphones, which are a real hit and selling strongly. We're in a wide range of LG phones across their portfolio, and we're also in an innovative new gaming console and in innovative and new accessory.

So we're winning more design-ins, we're launching more products and we're in the products that we think are winning.

I'll talk a little bit more about this later on in the business update, but for now I'll hand over to Mark who would take you through the first half 2010 financials.

Mark Cubitt

Thanks, Mike. So I'll do a quick run through the numbers. So the highlights, where the revenue was up 10.5% to $64.5 million. The gross margin improved to $51.3 versus $50.4 last year. I mean, we have targeted this year, the gross margin will be between 50% and 51% for the full year, and still pretty confident of that number.

The underlying operating loss was $6.1 million, and that was an increased loss from last year. I'll go into more detail in the next slide, but we did increase our R&D and distribution and selling costs. And the underlying EPS loss was $3.7 cents that came through from that. The cash balance ended up at $88.2 million. We are forecasting that cash balance will grow back towards $100 million by the end of the year.

And we do have no debt, as you know. So, headlines, we're already covered the revenue and the gross margin. R&D came in at 34% of revenues at $21.7 million. That compares to $17.7 million last year, or 30%. We have increased our spend there. We have spent significantly in the last 12 months actually on DSP development to go with our hubs, and also associated software.

So there has been quite a big investment on that line, which is really quite critical to the future solutions that we're developing.

In distribution and selling, we have had in the first half of this year a significant ramp cost to support customers, and we are increasing our application support, particularly as the products get the more complex. Therefore, the customers need more support as they are ramping.

We've held, you can actually see, on the admin cost we actually reduced them. So we have been really, really holding costs as tight as we can, but then as you see in R&D and in application support, we recognize that we need to take up our capability there. So that's why that spend is up.

Others noticeable numbers to pull out is the share based compensation, 2.2 versus 1.3. The anomaly is really in Q1 of last year when we actually had a credit in share based compensation and that was for lapsed share based comp charges. So the anomalies were in last year, the financing comes basically because real interest rates are and some non-cash costs that are coming through on pensions and deferred consideration. So that's the highlights in the half year numbers.

Moving on to the cash flow, pretty standard type cash flow. Pulling a few number. Big delta from last year as you can see we've had in the first half of this year, we've had a $2.6 million outflow in working capital, that compared to $10.4 in full last year. As you'll know our revenues fell 40% last year. We're growing again. We're increasing our inventories, we're increasing our data. So actually the fact that we're building working capital again as opposed to this I see. And another balance sheet, you'll see the specifics on the working capital going up.

The other number of flag there is we spent $800,000 on the trust bank shares just to flag that the expectation or the plan is that we're going to acquire another million shares into the trust to cover share awards have already been made and we'll need to buy those million shares probably over the next six months or so. So I anticipate in the second half there is going to be a $2 million to $3 million additional cash outflow on buying shares into the trust. So yes, there was a cash outflow in the first half of the year. Combination of the fact that we didn't make a loss and we are building working capital.

Our expectation for the second half is clearly we are going to move back into profitability, maybe some still modest working capital increase, but we'll look into the cover. The cash position in the second half of the year and looking to end the year with how do say, hopefully back up towards the $100 million of cash.

On the balance sheet, the up arrow; basically the inventories are up, the receivables are up, the trade creditors are up. That's because we're taking a lot more stuff, building a lot more products. the inventories are up 22%, in reality they are up more than that because there's not a lot of finished goods in that inventories number, the 13.8. So in actual unit terms, it's up higher than that.

Receivables are up 43%, $20.2 million. The receivables are very, very clean. So there's no any doubtful debt issue in there whatsoever. Creditors are up, I say that's basically the supply chain cash number, 88.2. So just quickly scanning over the quarterly numbers, see the 51.1% gross margin slightly down on the Q1 number up on the 50.5 that we had last year. The overheads that we indicated in Q1, that was again a good level for the year, slightly up $200,000 to less than 1% up. And mix changed slightly. An important number to flag there is, if you just take of that minus 4%, so we had Q2 was underlying operating loss of minus 4%. So I'm going to come on to that in a couple of slides, so really just flagging that in red and you will see why in the next couple of slides.

Just an anomaly, it says that we had no interest income in the quarter, we did. We also had cash interest income but we had to boot some non-cash pension cost, interest cost and non-cash, discounting deferred consideration costs. So in accounting it was zero, but in real cash terms it was over $150,000 of interest income, that's just the way we've got to report it.

So looking at the revenue split by segment, I mean if you look at all the segments, every segment is up from last year with exception of the mobile phone segment. So we'll then go back into the mobile phone segment. That number last year, half of that number last year was our historical largest customers handset business. And as you all know, we no longer have, so that's old news.

But as the handset, the mobile phone segment is going to grow significantly in the second half and we've already started to see that, if you actually look the Q2 number on the mobile phones was actually 80% up on the Q1 number. So that is effectively the products, things like the Galaxy and the Wave that Mike talked about.

But other products too beginning to ramp and that's going to accelerate as we go through. So we certainly expect to see further growth in the second half there, and the mobile phone segment will definitely be the largest segment by the time we get to the end of the year, there's no doubt about that.

In terms of customers, largest customer accounted for 14% of revenues in the first half. One thing I'd point, the other half of the other is actually eBooks. So we've been doing very well in eBooks, and that's been going quite significantly, and encouragingly, a lot of that is power management as well, so it's good.

So moving on to next slide, one of the things we're trying, I mean, we're all aware of this anyway, but it's just to emphasize the point that the business has high operational gearing. So these are the Q2 actual numbers. So we have 51% gross margin, R&D 30%, distribution and selling 16%, admin 9% and we came up with an underlying operating loss of minus 4%.

If we take the mid point of the Q3 revenue guidance that Mike's going to cover, but you've already seen as $47 million to $53 million. On the basis of what we're seeing and the seeing the overheads are broadly flat, quite frankly you're seeing as the R&D, the selling and distribution, and administration as of percentage of turnover are all dropping significantly with revenue ramp. And so we have $6 million of revenue here in Q2, the mid point there is $50 million effectively. What that's doing is effectively driving the underlying operating profit down to somewhere in the region of 10%.

So that revenue growth has taken us from minus 4% to plus 10%. And just to take it back a quarter, in Q1 when we had revenues of $28 million that was mainly 17%. So given the fixed overhead base, a relatively fixed overhead base of the business, driving that topline has significant rewards on the bottomline. And just underlying, we're ignoring share based compensation, and we're ignoring intangible amortization. So just to make sure that they're all on the same page.

And then basically, to give you some targets that we are realistically aiming at. We obviously are going to be looking to keep increasing the topline. There might be some modest increase in the overheads, and we are looking to drive near term underlying operating profit up to, to an excess of 15%. Consensus for next year, this morning, I think it was $192 million. So a year ago's consensus, actually already had that number at 9%.

So as you see that's a sort of a near-term target that we are aiming to get there, solidly driving the topline, maintaining the gross margin, and keeping hold of the operating cost. So as I said, you're all aware of that, but we just thought it'd be useful just to put it back down there, in blue and white as you see there.

So I'll hand it back to Mike.

Mike Hickey

What I'll do now is really just take you through where the business is, you know what's happened in the business in the first half. I'll give a little bit of a reminder for that. And I know most of you were at Technology Day, where we talked about more long-term things and what our strategy is, talk about the first half in a little bit more color. And then give some view of how we feel things are also panning out going forward.

First of all, just to remind everyone, we're an audio company and that's really where our fundamental focus is. Again, for those as a reminder from the Technology Day and if anyone didn't go, why audio is such a great place to be right now? First of all, there is simply more consumer electronics devices in total, $2.5 billion this year, and we've seen that growing in the next couple of years to roundabout $3 billion.

And more of more of those devices are multimedia, and what that means is that there is video, voice calls, internet, browsing et cetera. And all of those mean more and more audio streams to manage to go along with those multimedia functions. And again, that's where our parts really come into their own.

And as you share content between your TV, your PC, your laptop, your PMP player or your phone, et cetera, or your home hi-fi, your favorite albums, same content, you don't want any degradation in audio quality to go along with that. And we have to invent parts that can make that happen and we are doing so.

And as that multimedia product is becoming more and more cost-effective, flowing down the tiers, there's more and more volume around the audio part.

And then the last thing is everything is hi-definition video now, 3D video, and you need a high-definition audio experience to go along with that video. So funnily enough high-definition video is driving strong demand for our products in high-definition audio.

So our strategy is basically to exploit the very rich environment and demand for high-definition audio, and our aim is to be the leader in high-definition audio for consumer products. And what that means is the ability to listen to your content on any of your devices with hi-fi quality. And what we plan to do there is leverage our best-in-class IP position in high-performance audio.

We are a brand leader in high performance audio. You'll find our parts in all of the real top-end hi-fi equipment, and we've invented ways that we can take that audio IP and put it across all of the consumer electronics devices.

The next thing, as more and more multimedia devices come along, they all need many audio streams to be managed, and we invented audio hubs to do exactly that, manage those audio streams and keep the high fidelity quality as we go through there. Our plan is that we want to make our audio hubs the de facto standard for managing multiple audio streams in consumer electronic products.

Then because these devices are portable and you want to use them in any environment, and that means listen, record, speak when it's noisy, when it's windy, when there's lots of echo, et cetera. And our industry-leading noise canceling technology and our soundware along with our audio hubs enables us to restore that to high fidelity quality audio there. So we want to build on our technology leadership there, and our aim is to run sound processing in consumer electronics products.

And then lastly, but not least, as you add all of our AudioPlus products together with our audio hubs, we're able to offer low-power power management devices, drivers, converters and transducer ICs. So after the portfolio refresh, we can offer a full high-definition audio solution across lots of end-user applications.

For example, there are video cameras that can take high-definition video. There are phones now where you can do 720p HD video as well. And if you're recording a video, you're watching your family recording a video, you want high-definition quality audio to go along with that video. So we're able to provide multiple MEMS mics to capture the sound. We can then do beamforming so we can focus the sounds in the right area. That sound will then go into one of our audio hubs with a DSP where we'll do noise cancellation, we'll do echo cancellation, we'll do sound enhancement. And then from there, it'll go into one of our speaker arms, so you can actually share it with your family et cetera.

So total high-definition audio/video capture solutions all from Wolfson. So with the breadth of our portfolio and the strength of our portfolio, we will be the leader in high-definition audio. And we think it's a big market, and we think we're very well positioned to win there.

So that's just a little reprise on our strategy for those who missed our Technology Day.

Moving forward to where we are in Q1, and the progress since the full year, basically a couple of things which are really pleasing. We got more products out. So our development step-up has continued. The design and performance is really, really satisfying and should set us up well for 2011. I'll talk a little bit about that later. And as you've seen, we stepped up the revenue in the first half significantly, and we expect another significant step-up in revenue in the second-half.

The other thing is from a supply perspective, we've ramped our supply to a new velocity level. We always expected 2010 to be a ramp year for us. And when you ramp a product, supply is always an issue. We've currently been able to ramp up to 70% improvement in supply over the Q4 last year. We're already at the velocity that we need to be for the third quarter. And we continue to try and work that through. So very good result from the supply side.

Moving on, in terms of products, again, first half this year, we did more products than we did in the whole of 2008 and we are on the same trajectory as 2009. We've done actually neat. We refreshed our portfolio. That's carried over a little bit into the first half. We think the right number of products is between 24 and 30 products a year that we need to do. However, a very, very good performance.

And why do those products matter? Well, we think that in the first quarter of 2010 about 10% of our revenue came from products which were from 2009 onwards. But by the end of the year, 50% of our total 2010 revenue will be on 2009 products. So it's all about getting products out there, winning design wins, and then they turn into revenue.

And the other important thing about our product development activities is we've now been able to fill out our portfolio. So we've got all of our technologies working; they're all shipping, and we're able to offer full solutions to customers. And this refreshed product portfolio is gaining design-ins, both with existing and new customers at an increasing rate. So we are very, very pleased with that.

Moving on to design wins, this is what we told you in February, our full year. And since that time we've gained even more design wins. So there is 165 design wins in the first half of 2010. Actually that's roundabout 65% of the total for 2009, and we're getting them early in the year. There is some seasonality by the way around design wins as well because they are linked into the design-in cycles of customers. But the earlier in the year you get them, the better off you are for converting into revenue in the following year.

So we are extremely pleased with that. If you look at that, the rate is about 30% above the 2009 rate. We are winning in the growing segments. So the mobile design-ins grew both in value, and as previously announced we have a new tier one customer in there which we believe is material to (2010) revenue.

And we continue to make good progress in the other growing areas like Netbooks, eBooks, TV and LED TVs, Blu-ray players, etcetera. But not only that and you can see our revenue has grown across most of the application areas. But also, from a design-in perspective, we are winning the game in our traditional markets, and we had a very good performance in the first half of the year in PND, PMPs. Digital still cameras was especially strong, and also gaming and some of the other application market run rates were up.

And then the other thing is we do look our design-ins and assign a two-year value for the products they are in. And we do believe that in the first half of 2010, the value of our design-ins was up as well as the volume. So a really, really good result on design-ins from our perspective in the first half.

In terms of the class of 2009 design-in, what we told you at the full year in February is that about a third of the 2009 design-ins had reached initial volume manufacturing. Where we are now, we think roundabout two-thirds, and obviously that's what's helping translate into our increased revenue guidance. But also, there is still a third more to come in the second half of the year. So the class of 2009 design-ins are really going to the top end of our expectations and obviously supporting the strong backlog we have for the rest of the year.

In terms of products, when the design-ins translate into revenue. So how that's happening is that the 2009 going is very, very well and driving our revenue growth. We did grow sequentially 26% in Q2.

We are forecasting to grow the gain between 30% and 50%, both sequentially and annually in Q3, which is supporting our guidance. And obviously, as Mark explained, our business model means that that will go the bottom-line very quickly and we will return to profitability in Q3 2010. The other thing is the strength of our design-in performance in the first half of the year. This year gives us increasing confidence of further growth in 2011 and beyond.

So obviously what that is, is a very strong recovery. We've had a recovery, our revenues went down in 2009, and we are recovering. We forecasted our design-ins would translate in 2010. We think at this point, the step-up we had for the second half is supported by strong backlog and the customers we're in, and then we think our design-ins are going to help us further grow in 2011.

So that's the growth story. So what this is, is to say, okay, what are the things that could happen to stop that? And the normal barriers to a tech company growing are competition, someone else has got disruptive technology, access to customers at general market, et cetera. So just go through there and see how we're positioned against these risks.

So if you take competition, well, all I can say is our design-ins are at record rates and accelerating. So we think we're very well positioned against our competition.

In terms of disruptive technology, in audio, I think we are influencing architectures for our end customers with our audio hubs. Our customers tell us we have the best noise cancelling technology and we have a unique transducer in our MEMS silicon mics.

In terms of access to customers, well, we're already shipping to the who's who of the electronics industry. We would obviously like to ship all of them. We've already got very good access tool of the top tier electronic companies.

We live in the same environment and obviously the economy has an impact on everything. And whether it's double-dip or L-shaped or no recession or whatever, we're impacted by that. However, what I'd say is we are in the high growth applications. So consumer electronics itself has held up pretty well through the last couple of years and is forecasted to grow.

And within that segment, we are in smart phones, which is growing between 30%, 45% depending on who you listen to. We are in Blu-ray players, which is 60%, 70% growth. We are in LED TVs. We are in e-books. We are in netbooks. So we've got some protection from general economic position, because we are in the areas that are growing.

In terms of addressable market, as we went through in quite a lot of detail in our Technology Day, we are in a $5 billion market and we think that's growing. So we don't think we've got any problem with addressable market.

So everything then comes down to execution. So I can say that I've been very pleased with the team. We're executing. We executed well on products last year and we've continued that. We executed well on design-ins last year and we are accelerating that.

And then from the supply side, we've already ramped 70% increase in capacity. We're planning at the top end of our guidance something like 90% increase in capacity over Q4. So we're executing well in a tight supply environment on our supply ramps.

So moving on to outlook, in 2010 third quarter, we expect revenue to be in the range of $47 million to $53 million, our gross margins to remain around the 50% level and to return to underlying operating profit. Our backlog and billings for the third quarter support strong growth in the second half both sequentially and on year-on-year, and our strong design-in performance increases are confidence of further growing in 2011.

Taking a slightly longer perspective of it and what are we trying to do as a company in the second half and further, our focus, as Mark showed you, topline growth, keep margins intact and keep your expenses under control, falls very quickly to the bottomline. So our focus is on revenue and share growth.

Our second half revenue step up that we've talked about is solidly on track. And then our focus is we want to secure further growth, both in revenue and in market share in 2011 and beyond. So internally in the company the supply side is ship everything we can and then on the sales side get more design-ins, get more orders.

We believe we have the products and we've got the market opportunities to achieve a good share in a growing market. And as Mark pointed out earlier, our high operational leverage means that any successful leads significant financial returns. So that's what we're focused on achieving.

Should we move forward into any questions?

Question-and-Answer Session

Unidentified Analyst

Three quick questions if I may. First of all, I have to say I find it very difficult to model Wolfson, because it seems like it's a shot in the dark. And as we've seen from your results in the past and your competitors' results, your company is as good as the last four or five key design wins. So how can you help us or how should we be looking at modeling the company on a two to three-year basis? That's my first question.

And second, you're talking about having disruptive technology. Do you think that would be enough to go back to your historically largest customer? And finally, can you talk about your exposures in 2011 into the portable PC market?

Mike Hickey

All of our customers are interested in our new technologies. The 2011 portable PC market, we think our audio hubs and other AudioPlus products can give high-definition audio solutions, top notch ones, to all of those application areas. We see that as a good potential market for us.

Mark Cubitt

I think we very much look upon it as these application areas whether it be handsets, whether it be gaming, whether it be home entertainment, are those markets growing, can we increase our market share? But you're absolutely right, to execute that you've got to have the design wins, and the big players in there.

So when we are building our business plans, we're identifying the markets and the slots that we need to go after, and we then obviously announce it as soon as we can to you. But I don't know how that helps for both of us.

Mike Hickey

The way I'll model it, to put pressure on the teams and the sales guys is, we know what our consumer electronics products are; we went through that night in our AmTech day. That's where we can apply our products. We know how many of our parts are applied; we know how good our solutions are against our competitors, and we need to grow share in each of those application areas. And all of us can judge which ones are the growing ones; all of us can judge which customers are the top customers there. And we are targeting share growth, and the issue is a little bit success there. It drives some big numbers there.

Mark Cubitt

What Mike has definitely done with all the product line managers and the engineers is really, I suppose, Wolfson a few years ago was very much, we've got high market share at the high end. Mike has come along and said, a tiny market share did the whole damn thing. So I'd rather have a bigger share across the whole market than just a high share. So what we're doing, and that's why we talk about $5 billion, is saying, you should be designing your products not just to be able to get to that high end, I want products that can attack the middle end, and depending it may be (inaudible) it can go for the low end.

So constantly driving the guys. I wouldn't say it's arrogance, but at Wolfson we're just at the high end. Know, if you want to play where the volume is, and that's what we're trying to do, design your products to be able to play where the volume is. And yes, they've got to be differentiated, otherwise, there's going to be a price war. So let's just expand that area.

Unidentified Analyst

How much of your 2010 revenue do you think is basically, I wouldn't say recurring, but like a business you feel that you will keep into 2011?

Mike Hickey

(inaudible) everything and add to it in 2011.

Mark Cubitt

A lot of the slots typically have to be re-won in 12 to 18 months.

Unidentified Analyst

That's the issue for me.

Mike Hickey

I mean, I think the only thing to say there is that we've gone through a big portfolio refresh. And actually, a lot of the products came out in the second half of 2009. They've been launched in products which are coming out second half of this year really in volume, and those products have a lifetime in the market which is more than six months. So we expect to build on our base.

Mark Cubitt

That means the point you're worried about, all the slots you've got, can you keep them. But the way I look upon it is, there are lots of slots that are coming up that we can win that we don't have or we could re-win. And that's really what we are going to do. And there's always going to be pluses and minuses because you can lose a slot just because they changed the apps process or something changes the realities. You're just a consequence of that. You just keep making sure that you're getting more pluses than minuses and covering as many of the solutions as possible.

Mike Hickey

Well. I mean the other thing is, our aspiration is not just to get back to where we were and then hold it. Well, I think we can look where the architectures are changing in the consumer electronics parts and then where there is a hub expect us to be there, and expect us to be competing hard to win that. And we think we've got the best products.

Where there is a need for a hi-fi quality audio in any of the consumer products, expect us to be in there competing. So we don't see this is a static. I get back to why we have recovered; we are a Tech company, we have to grow. So we'll be chasing, and there's a lot of opportunity there to do that.

Nick James - Panmure

I just had a couple of questions. First was on capacity. I just wanted to clarify because there's some comments on the wires this morning that you've got adequate capacity for the low end of guidance and that your comments in the meeting today seem to suggest you've got capacity up towards the higher end of guidance. So can you just clarify on that?

Mike Hickey

I mean, we have been chasing basically supply ramps since December, because we were expecting some ramps. So we have secure capacity upto the top end of our guidance. However, there is always some risk in that. We think we can ship and we have capacity across our range. We have to execute on that. So a week late, and things can move to Q4 instead of Q3 etcetera.

Nick James - Panmure

And just on this Netbook, portable PC, the definitions are all over the place at the moment. Can you just clarify, are you in any tablet style PCs in this calendar year and in some of the design wins you've been winning for those style of PCs? I'm looking into next year.

Mike Hickey

Well, we can talk about that in Q1 I think. We've been very active in the tablet space.

Daniela Ventrone - Piper Jaffray

Again, on the capacity. I was wondering what kind of allocation or agreement you have with fund raise into Q4? So where can you actually get those in terms of supply?

Mike Hickey

One of the things we tried very hard to avoid is to get into very custom products for specific customers. So in our main run products and market generic products, at the beginning of the year, because we were going to be ramping through, and because we had cash, we did get inventory on those products. And we are moving that through. Obviously, you have to then assemble and test them and go through capacity.

So we think we are secure for our forth quarter capacity. It's a very tight environment and it depends on the mix of the products in the full cost from the customers.

Mark Cubitt

If the forecast comes in on the mix that we've anticipated. We're comfortable if the mix starts changing, you could have started launching the wrong stuff. And that's the key. So the biggest and if you speak to our operations guys, it's not the number it's the mix that's important.

Mike Hickey

And we're helped on that as our products become much more market generic. So we are able to launch wafers with parts that can do multiple customers rather than one customer.

Unidentified Analyst

The first one on the gross margin guidance, it's around 50%. And still 50% but not sort of the 50%, 51% that you talked about in the past. So could you just talk about, is there sort pressing pressures related to capacity? Is the customer asking for sort of premium pricing? Or could you just talk about the puts and takes going on in that gross margin?

Mark Cubitt

We've always commented this year saying it's going to be between 50% and 51% effectively in Q1 and Q2, we've beat that, actually. The gross margin, there's lot of factors in there. The mix is important because we have products that are in 40% and we have products that are in 60%. Also what you've got is we have a higher percentage of new products. So therefore, you haven't necessarily optimized the yield on them. And our ops guys are very, very busy at the moment. So it's very much more about making sure you're getting everything out, maximum out than in quieter times, you could be looking at taking a bit of time off the test time, increasing yield, and stuff like. So there's a lot in that mix there just looking at it that's definitely no doubt that in Q3. I can't see it being a 51%. But I am still comfortable overall with the year that we are in that 50% to 51% zone.

Unidentified Analyst

So you think you will be able to see sequential improvements in the fourth quarter? And is it something you guys are going to be working on?

Mark Cubitt

To be honest, the way things are forecasted at the moment, I think the ops guys are going to be exceptionally busy for the balance of this year to be honest.

Unidentified Analyst

And just a question on the 165 design-ins you've got in the first half. Is that roughly the same sort of split up between the end markets where you have where you've had them? And when you say the value is increasing, is that in terms of you hitting some better volume wins, or are you just getting more parts per board, this strategy of getting more value out of it?

Mark Cubitt

I think it's a mix of all those things. In terms of where they are it's roughly in same markets. We have done actually quite well in digital still cameras, et cetera, where we were traditionally strong, and we're now, we had a nice lot of design wins there et cetera. But we're winning design slots, both in the traditional markets and in the high growth markets and from a value perspective, and mobile is the biggest one. It's obviously got the most units, et cetera.

Anne Crow - W.H. Ireland

Perhaps this question's already been asked, but this is specifically with regard to any pricing pressures you might be getting with capacity constraints. Are any of your suppliers pushing prices up at the moment? There are rumored to be lengthening lead times and some suppliers, some foundries may be pushing prices up for customers who really need to keep the lead time short.

Mike Hickey

I'll answer that because I am close to it and we're having conversations all the time. The only conversation I'm having with suppliers is make sure you ship me what you promised me. So I am not having any pricing conversations with them.

Well thank you very much taking the time to be with us. Thank you.

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