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Integrated Silicon Solution, Inc. (NASDAQ:ISSI)

F4Q10 Earnings Conference Call

October 27, 2010 4:30 PM ET

Executives

Scott Howarth – President and CEO

John Cobb – VP, Finance and Administration and CFO

Analysts

Jeff Schreiner – Capstone Investments

Jie Liu – Auriga USA

Raji Gill – Needham & Company

Shawn Boyd – Westcliff Capital Management

Chris Sigala – B. Riley & Company

Andy Ng – Morningstar

Madhu Kodali – Yaksha Capital

Operator

Good day, everyone, and welcome to the ISSI Fiscal Fourth Quarter 2010 Quarterly Earnings Conference Call. As a reminder, today’s conference is being recorded. At this time, I would like to turn the proceedings over to Mr. Scott Howarth, Chief Executive Officer. Please go ahead, sir.

Scott Howarth

Good afternoon and welcome to ISSI’s conference call for the quarter and fiscal year ended September 30th, 2010. I am Scott Howarth, President and Chief Executive Officer, and with me is John Cobb, our Chief Financial Officer.

Before we proceed, I have asked John to comment on the nature of this call and any forward-looking comments that may be made.

John Cobb

Thanks Scott and good afternoon. During the course of this conference call, we will provide financial guidance make projections, comments and other forward-looking statements regarding future market developments, the future financial performance of the company, new products or other matters.

We wish to caution you that such statements are just predictions or opinions, and that actual events or results may differ materially due to fluctuations in the marketplace, delays in developing new products, changes in demand or supply, or adverse developments in the global economy.

We refer you to the documents ISSI files from time-to-time with the SEC, specifically our most recent Form 10-K filed in September 2009 and our Form 10-Q filed in August 2010. These documents contain and identify important factors that could cause our actual future results to differ materially from those contained in our financial guidance, projections, comments or other forward-looking statements.

Scott Howarth

Thank you, John. We are pleased that we achieved record revenue in both the September quarter and in our fiscal year and that we achieved a record for annual net income. Demand growth and market share gains continued this quarter and pushed ISSI revenue to a new record for the company. Revenue growth was 3.4% from the previous quarter and 58.6% higher than the same quarter last year.

Our growth has been driven by secular growth in our key markets such as networking, telecommunications, industrial and automotive, coupled with market share gains in these same segments as customers seek stable long-term supply.

Pricing remains stable as other memory suppliers continue to deemphasize legacy and lower density segments of the memory industry. We believe this pricing environment reflects a healthy balance between market supply and demand. Overall, we expect these trends to continue for the rest of 2010 and into 2011.

We achieved a record level of revenue in the automotive market which grew by 16.4% from the previous quarter. Had another strong quarter of design wins and continue to see a high level of customer design activity in both DRAM and SRAM. However, customer orders began slowing in the middle of the quarter and was slower than expected through September. This weakness occurred primarily in our commodity DRAM, E2PROM, and some baseline DRAM as we saw slower demand in consumer electronics markets in Asia and also what appears to be an end-market inventory correction in some industrial telecom and networking markets. As a result of this slower demand, our September quarter revenue was just short of our revenue guidance range.

Looking at the December quarter, this demand softness has continued and we started the quarter with lower backlog than the September quarter, and we are expecting our December quarter revenue to be slightly down sequentially. We believe this slowness will be temporary and that we will see continued growth through 2011.

I will now discuss the results of this recent quarter. Our revenue in the September quarter was $73.6 million, which is the highest quarterly revenue in the company’s 22-year history. This compares to $71.2 million in the June quarter and $46.4 million in the September 2009 quarter. Our beginning backlog in July orders were strong. However, customer demand slowed in August and the market weaknesses continued through September and into October.

For all of fiscal 2010, we achieved record revenue of $252.5 million, compared to $154.3 million in fiscal 2009. This represents a 63.7% in year-over-year revenue.

Our gross margin was also a highlight for the quarter as we achieved gross margin of 37.8% in the September quarter. This margin includes a 1 percentage point net charge for inventory reserves. This compares to the 38.4% gross margin in the June quarter, which included a 1.7% benefit from the utilization of reserves.

Our gross margin was above our revenue range as pricing was stronger than we had anticipated. However, our operating expenses were higher than we expected due to primarily through product mass costs. Overall, our net income in the September quarter was $11.8 million.

We are very proud of the fact that we’ve been able to come out recession so strong and have demonstrated the strength of our business strategy to deliver profitable results for five consecutive quarters.

Looking ahead, end-market demand has softened and visibility has become more limited. There continues to be a lot of economic uncertainty in the US and other countries. However, we believe that our strategy is sound and we have the right products for our key markets, a very strong customer base, and we remain focused on long-term revenue and profit growth.

In the past two years, we focused on strengthening the company and growing market share with our customers. We now have delivered five consecutive quarters of strong profitability. In addition, we have added engineering teams, improved productivity and quality, gained market share, and strength our position with key customers. We are very optimistic about our long-term growth prospects and we’ll work hard to build a stronger company.

ISSI is a leader in high-quality special memory products and our goal is to continue to extend our products in the new applications in markets that require high-quality and long-term support. In the past few years, we’ve transitioned our business to be a supplier of high-quality special memory and in doing so have steadily improved our gross margin. We continue to manage our business carefully, control the areas we can, and reduce our exposure to risky commodity memory markets.

We believe our financial results show clear evidence of this success of our strategic direction, the strength of our end markets and the hard work of our employees. We believe we have established an excellent foundation to continue to drive our strategy and penetration into our markets.

Our strategy is to focus on key applications and markets that can provide sustainable revenue and profit growth. Our strategy is designed to leverage our strengths and target those markets where we believe we can add value through engineering, quality, service, and long-term support. Our broad product portfolio, customer service, long-term support and high-quality products provide a competitive solution that we believe will help further our growth in our focus market segments.

The key markets we are focused on include automotive, networking, telecommunications, industrial, and specific consumer and peripheral markets. Our goal is to use our strengths to further penetrate these markets and to also expand our addressable markets with new products.

Let me give you an example of this in one of our largest markets, the networking and telecom market. Specialty memories in base stations, routers and switches require broader temperature range to support outdoor equipment or indoor equipment with constrained airflow. This market also requires some of the highest quality memory. Any loss of data is unacceptable. In addition, many applications to this market have lifecycle of more than five years. These are all attributes of a market that fits well with our strategy of providing high value memory products.

We have been focused on this important market for several years and have leveraged our engineering expertise to develop specific SRAM and DRAM products to serve this market opportunity. As a result of our focus, our networking and telecom revenue had experienced strong growth in the past year and we continued to gain significant new design wins.

Networking and telecom revenue represented 34% of our total revenue in fiscal 2010. We intend to increase our market share in our key target markets through strong execution and high-quality product support. Overall, we feel a combination of focus on strategic markets, breadth of product offering, long-term support and low-cost model will drive our continued success.

Now, I will turn to our key markets and products. The DRAM market was strong in the first half of the September quarter, but demand weakened in the second half. Our total DRAM revenue increased 2% on a sequential basis and our DRAM gross margin was flat sequentially. DRAM represented 59% of our total revenue in the September quarter.

Our focus DRAM business represented 56% of total revenue, while the commodity DRAM business represented only 3%. Customer order rates slowed in the second half of the September quarter and October orders have been slower than seasonal norms.

However many of our customers are still experiencing shortages from other suppliers in SDRAM and DDR and we’ve been actively supporting these customers in gaining many new design wins. We expect this trend to continue and to gain share in our DRAM market segments. For the December quarter, we expect that our overall DRAM revenue will decrease in the range of 5% to 10% sequentially.

During the September quarter, demand for our focus DRAM remain strong in all of our markets with particular strength in the US, China, and Southeast Asia. We also had another strong quarter in design wins as the number of new design wins exceeded those in the June quarter. Some examples included numerous large DRAM design wins for the automotive infotainment systems, industrial equipment, and telecom and networking applications.

We also achieved numerous key design wins in the automotive, telecommunications and consumer markets in both by byte 16 and byte 32 configurations. In addition, we are experiencing strong design activity for our new DRAMs, our 256 megabit, 512 megabit, and 1 gigabit DDR2, our mobile SDRAM, and our 64 megabit low-power SDRAM KGD product. We expect these new devices to contribute to revenue growth in the coming quarters. Overall, we continue to see many opportunities for us to expand our market share and grow our focus DRAM revenue.

Our commodity DRAM declined in the September quarter and is just 3% of total revenue as following prices caused us to walk away from some commodity business. Overall, commodity DRAM remains weak and we expect to further reduce revenue in this market segment, and we’ll use the inventory for our focus DRAM business instead.

Let me now turn to our SRAM business, which was quite strong in the September quarter. SRAM ASPs were generally flat to slightly down this quarter due to competition. And our SRAM gross margin declined slightly from the June quarter. Demand in most end markets and geographies improved.

The SRAM markets in Europe, Southeast Asia, and Japan and the strongest demand this quarter were markets in US, China, and Taiwan were relatively flat. Our SRAM revenue increased 10% from the June quarter and was approximately 33% of our total revenue. We saw strength in our ASYNC and also synchronous SRAMs.

During the quarter, we again increased the amount of SRAM designs, design wins in our key markets for various densities of our products, and the number of new design wins exceeded the previous quarter.

As an example, we had several large design wins with our 4 megabit, 8 megabit and 16 megabit asynchronous products mainly in automotive and networking applications. We also had other large design wins for networking equipment, industrial, in automotive applications.

In addition, earlier this month, we announced a 64 megabit and 32 megabit pseudo SRAMs targeted at wireless, industrial, embedded in automotive applications. These devices provide designers with a variety of high-density, cost-effective, low-power memory solutions.

With our continued investment in SRAM, competitive SRAM solutions, and long-term support, we are confident that we’ll continue our long-term growth in the SRAM market. We expect SRAM revenue in the December quarter to be flat-to-down slightly from the September quarter.

Our Giantec business unit which includes E2PROM and smart card had a sequential revenue decrease of 10% from the June quarter and it represented 8% of our total revenue in the September quarter. Giantec’s gross margin declined from the June quarter. End market demand for E2PROM and smart card was weaker this quarter. We expect Giantec revenue in the December quarter to be relatively flat sequentially.

As we have previously mentioned, we expect additional third-party investment into Giantec within the next few months, which would reduce our ownership percentage to below 50%. After the new investment, we will no longer consolidate the financial results of Giantec and would only report our share of Giantec’s profit or loss.

Let me now turn to our manufacturing operations during the quarter. Wafer supply has improved in the last few months as foundry utilization has decreased. Lead times in foundry and assembly and test have shortened from earlier in the year. We purchased several testers in the September quarter to help ensure adequate capacity for certain devices and reduce test costs and will continue to make strategic investments in the backend operations to ensure supply of our products.

Looking forward to the December quarter, we do not expect wafer or backend capacity constraints to have a significant impact on our business. We also continue to make progress in product cost reduction programs and improvements in our operational efficiency and effectiveness.

I’ll make some closing remarks in a moment. But first, let me ask John to discuss the numbers.

John Cobb

Thank you, Scott. As Scott mentioned, our revenue for the September quarter was $73.6 million which was 3.4% higher than the previous quarter. Compared to the same quarter a year-ago, this revenue was an increase of 58.6%. Our SRAM and focus DRAM revenues grew from the June quarter, but our revenue from Giantec and commodity DRAM were sequentially lower.

Revenue in fiscal 2010 totaled a record $252.5 million compared to a $154.3 million in fiscal 2009, an increase of 63.7%. Gross margin was 37.8% in the September quarter, which was above the high end of our guidance range of 34% to 37%. This compares to 38.4% in the June quarter and 36.5% in the year-ago quarter. The September gross margin included reserve charges which reduced the gross margin by 1 percentage point. In the June quarter, the gross margin included reserve credits which increased the gross margin by 1.7 percentage points.

Overall, we achieve a 38.2% gross margin in fiscal 2010, compared to a 26.5% gross margin in fiscal 2009. In fiscal 2010, we achieved our fifth consecutive year of gross margin improvement.

Operating expenses were $15.5 million in the September quarter, which was above our guidance range. This compares to $14 million in the June quarter and $12.2 million in the year-ago quarter. The September 2010 operating expenses were higher than originally expected due primarily to higher product mass [ph] cost as we were able to accelerate the tape out of new products.

For fiscal 2010, we incurred $56.6 million in operating expenses compared to $47 million in 2009. We achieved operating income of $12.4 million in the September quarter compared to $13.3 million in the June quarter and $4.7 million in the September quarter a year-ago. In fiscal 2010, the company had operating income of $40 million compared to an operating loss of $6.1 million in fiscal 2009.

Interest and other income in the September quarter was $36,000. We had no sales of investments during the quarter. We had originally expected to report a gain of $500,000 during the September quarter. However, the investment sale and related gains was delayed until October.

Net income for the quarter was $11.8 million or $0.43 per share, which was within our guidance range of $0.42 to $0.52 per share. This compares to net income of $16 million or $0.57 per share in the June quarter, which included a $2.6 million or $0.09 per share of gain on investments and net income of $4.8 million or $0.19 per share in the September 2009 quarter. For all of fiscal 2010, we’re really excited with our net income as the company achieved record annual net income.

The company had net income of $42.2 million or $1.56 per share. This compares to a net loss in fiscal 2009 of $5.1 million or $0.20 per share.

Moving to the balance sheet, we ended the quarter with $91.6 million in cash and short-term investments, compared to $90 million at the end of June. Our inventories increased by $9.2 million in June as we have previously discussed one of our foundries, SMIC decided to exit the DRAM market and we are transitioning our customers to other foundries over the next several quarters. As a result, we made final purchases of additional SMIC inventory to help insure a smooth end of life transition for our customers.

At the end of September, we had $10.2 million of DRAM inventory purchased from SMIC. We currently have customer orders on approximately 85 – 80% of the SMIC inventory and expect to have order on the remaining inventory within the quarter. We expect to sell the majority of this inventory by March 2011 and the remainder by June 2011.

Our inventory turns were 3.4 turns in the September quarter, excluding the additional SMIC inventory, we had 4.1 turns which is healthy for our business. Our accounts receivable increased during the quarter by $1.3 million to $41.1 million and days sales outstanding were 51 days the same of June.

Overall, our balance sheet continues to remain very strong. At the end of September, we had $3.49 per share in cash and short-term investments and a book value per share of $6.78. In order to control future dilution from employee stock options, the company’s Board of Directors authorized an additional $20 million repurchase of the company’s common stock. This authorization in addition to the $3.8 million remaining from the previous authorization allows the company to purchase its common stock on the open market.

The timing and actual amount expended will depend on a variety of factors including the market price of the stock, economic and business conditions and other corporate considerations.

Let me turn to our guidance for the December quarter. All of our comments in this conference call regarding future numbers are forward-looking comments and subject to a number of risks and uncertainties. Our guidance assumes Giantec will be consolidated for the entire quarter.

As Scott previously mentioned, we saw weakness in our end markets in the last half of September quarter which has continued into the current quarter. As such we expect that our December quarter revenue will decline slightly from our September quarter. In total we expect revenue for the December quarter to be in a range from $68 million to $72 million or a sequential decline of 2% to 8%.

We expect DRAM and SRAM pricing to be flat to slightly down. Gross margins would likely be in the 34% to 37% range. Operating expenses should be in the $15 million to $15.8 million range. We expect about $800,000 from interest and other income including a $500,000 gain on sales investment.

So, taken all of this into account, we expect to achieve net income in the range from $8.5 million to $10 million for the December quarter or net income of $0.30 to $0.36 per share. We are not giving guidance for our next fiscal year but as we look at the economy in our business we currently expect our revenue to continue to grow and to be profitable in fiscal 2011.

Now back to Scott for final comments.

Scott Howarth

Thanks John. Overall fiscal 2010 was a very good year for ISSI. We achieved record revenue and profits and improved our balance sheet. In addition as our customer seeks stable supply and long-term support, we’ve been working hard to support many new design winds which is helping our growth.

In recent years, we have taken many actions to strengthen our company. We are working hard to develop products for the future, support our customers and increase profit from operations. From our 2010 results, we clearly see success with our long-term strategy as a specialty memory provider. We are pleased that we’ve been able to achieve this level of success despite the difficult economy.

In the months ahead, we’ll continue to focus on our five key objectives, which are; number one, to grow our customer base and number of design wins; number two, increase our product portfolio while maintaining long-term support in our target markets; number three, to identify and extend our reach into underserved and growing markets; number four, to serve our customers as strategic partners; and number five, remain focused on profitable growth and efficient use of our resources.

In the past few years, the economic environment have been difficult yet ISSI has continued to improve its gross margin in overall financial results. We believe that if we continue to successfully execute on our objectives we’ll build an even stronger business. We remain committed to achieving that goal.

We’ll take your questions now.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). And we’ll take our first question from Jeff Schreiner with Capstone Investments.

Jeff Schreiner – Capstone Investments

Good afternoon gentlemen, thank you very much for taking my question. John, could you maybe dig into the gross margin for us a little bit as to why we’re potentially seeing a step down of maybe somewhere in the range of 200 basis points sequentially. And whether or not this is going to be maybe the normal level going forward if this kind of lowered. I know it’s similar in which you’ve guided, but it seems like it’s going to be at the midpoint lower sequentially than what you reported in September. So I’m just trying to understand if this is the new norm and maybe what are the some of the factors going into the gross margin decline?

John Cobb

Well Jeff, as we mentioned in our prepared remarks, we are expecting some decline in DRAM pricing and SRAM pricing. So little softer pricing environment. We’ve talked to in the past about some wafer price increases which we’ve had some but they haven’t been that significant. But in general I think with the pricing environment, especially as we look out into not only the December quarter but beyond, we’re expecting a little softer pricing and as a result, I think it will have some impact on our gross margin.

Jeff Schreiner – Capstone Investments

Okay, so it’s mostly a factor of pricing at this time?

John Cobb

That’s a primary driver as we’ve mentioned in the past, there has been some higher wafer prices which has had an impact, but that’s less of a factor than is in pricing.

Scott Howarth

But Jeff, I think if you also look at excluding the inventory adjustments that we’ve mentioned, actually our gross margin was higher in the September quarter.

Jeff Schreiner – Capstone Investments

Right. Okay, just moving on, Scott what’s the end market thing, maybe the largest slowdown at this time? Is it automotive, is it networking telecom, I mean is it broad based. You mentioned consumer in Asia but consumers really not where you guys play that much. So maybe what’s some of the largest slowdown that you’re seeing out there?

Scott Howarth

Well the biggest slowdown we’re seeing is coming from Asia in some of the more consumer oriented electronics markets. Taiwan in particular is where we saw the biggest softness and weakness. We also saw some telecom networking customers cutting back on demand this quarter which is what we think is related to an inventory correction. And that was some of the bigger OEMs both in the US and also from Europe.

John Cobb

And Jeff, the consumer markets still represents about 33% of our overall revenue.

Jeff Schreiner – Capstone Investments

Okay, excuse me for thank you John, excuse me for maybe not giving you enough credit. Just to follow-up on that in terms of Asia, was there any slowdown in SRAM spending in China in a significant way?

Scott Howarth

No our SRAM business overall was still healthy. The primary slowdown that we saw came in DRAM, both our focus DRAM as well as KGD and then certainly we saw real softness in the commodity DRAM and pricing fell quite significantly into commodity DRAM as well. But in terms of SRAM as we mentioned earlier, we grew about 10% this quarter. So it continued to remain healthy overall.

Jeff Schreiner – Capstone Investments

Okay, how about as we look out on insurance (ph) Scott, it looks like for our calculations you had a fairly sizable gains in market share this year. Are we going to expect similar gains next year, could it continue in terms of the strength or is there some softness as you look out in the next quarter to due to maybe the seasonality and just overall market softness.

Scott Howarth

As we guided at least short term, we think we’re going to be flat, maybe slightly down in SRAM. But overall we remain positive in the SRAM markets and believe that we’ll continue to gain share. As you I’m sure you’ve known and heard Samsung is getting, transitioning out of the SRAM market as well which is opening up the door for additional design wins and additional market share growth.

Jeff Schreiner – Capstone Investments

Okay, final question from me. Is there any one time charges in the December quarter, John that maybe related to the transition of the ASSP business.

John Cobb

No.

Jeff Schreiner – Capstone Investments

All right, gentlemen thank you very much.

Scott Howarth

Sure, thank you Jeff.

Operator

(Operator Instructions). And moving on we’ll hear from Jie Liu with Auriga USA.

Jie Liu – Auriga USA

Hi good afternoon. Just a couple of questions. The first is on OpEx. How should we think about your OpEx in the fiscal 2011? I noticed that your guidance also kind of implies that your R&D expenses will be kind of a flat quarter-over-quarter. Do you think the R&D expenses will fall back to the $6 million or less level for the next, for the second, third and fourth quarter of fiscal ‘011?

John Cobb

Well based on the guidance that we gave I think our R&D spending will decline from September to December. As we mentioned in the September quarter, we had higher costs for product math and we expect that a bit lower in the December quarter. I don’t think that we’ll get down to the $6 million range, that’s probably lower than what I would expect on a go-forward basis, more in the $6.5 million to $7 million range as we look not just this quarter but beyond.

Jie Liu – Auriga USA

Okay, I see, okay. Perhaps you can give us update on the competitive landscape of the SRAM market and your own positioning right now, I know you just talked about that a little bit. Could you provide us with a bit more color?

Scott Howarth

Well the SRAM market competitiveness really hasn’t changed a great deal from last quarter. We continued to be evidence that Samsung is deemphasizing SRAM. So we continued to get a lot of design win activity in our SRAMs. We also see some competitiveness still from other remaining competitors in various markets depending on where we have strength and they have strength. So the environment, the competitors are declining, yet there still remains some small pricing competition depending on which market.

Jie Liu – Auriga USA

Okay, just a one more question from me. It’s about the – it’s about your view of the DRAM market. Given the softness in the commodity DRAM market, do you foresee some of your larger competitor to switch their focus back to the stuff that you do, like what is the level of threat right now?

Scott Howarth

So that’s a real good question Jie. So we’re not seeing that currently and we don’t expect that the larger competitors will step back into, for example the lower density SDRAM. In fact, instead they continue to end of life lower density 256 meg and below DD – SD DDR and are even some DDR2 now is what we’re hearing. So we continue to see de-emphasis from the larger competitors and not coming back into play in some of the markets that we’re serving.

The place where we did see more competition though is coming in Taiwan principally with some of the smaller DRAM, more commodity DRAM suppliers like Etron and Elite that play principally in the commodity business and I think that had some impact also on business in Taiwan this last quarter.

Jie Liu – Auriga USA

Okay, that’s great. Thank you.

Scott Howarth

Okay, thanks Jie.

Operator

And we have a follow-up question from Jeff Schreiner with Capstone Investments.

Jeff Schreiner – Capstone Investments

Yes John, I just wanted to follow-up really quick on Jie’s question. So if R&D is going to be relatively flat that means SG&A is going to see a pretty big step-up, quite possibly if you’re at the midpoint of your guidance it could equal then somewhere around 13% or higher revenues where historically it’s been somewhat lower and certainly it was lower September. Given you’ve kind of guided somewhat for R&D to stay flat maybe see a step down as we go through the year. Is SG&A going to see a step up and then a similar type of step down as we get through the fiscal year ‘011?

John Cobb

I think the SG&A expenses will be relatively flat throughout, not just sequentially into this quarter, but beyond.

Scott Howarth

As we look at 2011 though, we do expect R&D expenses to grow principally from mask costs because we move into lower geometry going down to 68 nanometer etcetera, 63 mask costs are increasing. So we do expect to see increased mask expense for the year.

Jeff Schreiner – Capstone Investments

How many masks would you be building though this year Scott, would you estimate?

Scott Howarth

We typically like last year we targeted about 12. This year we’ll target about 12 and if we can accelerate growth to as many as 14 to 15.

Jeff Schreiner – Capstone Investments

And would you say it’s about $0.5 million per mask or is it a million now?

Scott Howarth

It varies depending on the technology. 72 nanometer, 80 nanometer is around 400,000 getting down into six – 68 and below it’s over a million.

Jeff Schreiner – Capstone Investments

Okay, and John my final question, thank you very much sharing your free time.

John Cobb

Jeff, let me just add one comment that we haven’t talked. Another factor in our operating expenses was FAS 123R expenses. They were about $200,000 higher in the September quarter than previously and we’re expecting that to continue into this next fiscal year. So that’s also a (inaudible).

Jeff Schreiner – Capstone Investments

Were those FAS charges John well those bottle out $800,000 then would you say for the September quarter?

John Cobb

Yes.

Jeff Schreiner – Capstone Investments

Okay and that’s the level you expect those to stay at?

John Cobb

Yes and it could even be slightly higher, $800,000 to $900,000 in the quarter.

Jeff Schreiner – Capstone Investments

And given that that’s now starting to become greater that would equal something probably in the magnitude of almost two times what you saw in terms of charges from stock compensation 2010. Are you guys looking at maybe reporting a pro forma number as we get into 2011 and adding back in maybe stock comp and amortization of intangibles to give investors may be a better idea of the cash earnings.

John Cobb

We’re not now, but we might at a later date consider doing that.

Jeff Schreiner – Capstone Investments

Okay and then my final question John was the provision for taxes. Is there going to be anything going on there, any step-up or is it going to be fairly the 2% to 3% a quarter that it’s been running?

John Cobb

Through 2011 we expect our tax rate to remain very low in the 2% to 3% kind of range.

Jeff Schreiner – Capstone Investments

Okay, gentlemen thanks again.

Scott Howarth

Thanks Jeff.

Operator

And next we’ll hear from Raji Gill with Needham & Company.

Raji Gill – Needham & Company

Yes, thanks for taking my question. Just to add some comments on – the questions on the DRAM market. How would you kind of characterize the supply demand dynamic in the DRAM markets? Clearly the first half, the capacity was very tight. Are you seeing self the situation reverse itself and do you see that kind of accelerating going into 2011? Is there more risk for continued pricing pressure as more supply comes online particularly in the networking and telecom sector?

Scott Howarth

So I would say overall this quarter and certainly the second half looks to be an increased supply in overall DRAM. As I’m sure you’ve seen heard other people talk into PC area which was slower. So required less overall DDR3 this past quarter. So as that opens up some capacity then into DDR, DDR2, SDRAM areas, there is an opportunity for major players to move back into those markets. But what we’ve seen is they are no longer focused on the lower density. They’re only focused on by 512 meg, 1 gig types of markets even in the networking and telecommunications areas.

And for us that’s still is sweet spot where we’re supporting them the lower density devices and continue to gain share. We’re also offering them 512 meg and one gig in those markets as well and we are gaining shares. Again there have been shortages of supplies. So the major players I would say are still focused primarily in the legacy areas on just some of the key accounts in networking and telecommunications and then the last is not supporting a lot of the lower end.

The only place we’re seeing as I mentioned earlier, competition in our space is in some of the Taiwan players who are also fabless focused on more commodity based SD RAM and DDR which is really a market that we don’t have a very large segment in but definitely drove some of the prices down and increased supply.

Raji Gill – Needham & Company

It seems like the SRAM market seems to be overall fairly healthy, maybe could you talk about the reconciliation between that versus the DRAM clearly lot of your – lot of the customers in the telecom side have been building SRAM for a while now. Do you foresee any particular inventory correction in the SRAM market coming down the pipe?

Scott Howarth

We haven’t yet and overall we think SRAM is going to continue to remain fairly healthy. What we don’t know right now is if there is an inventory correction, whether or not that’s being offset by Samsung vacating this marketplace. So we are getting significant design wins still in SRAM. And I think there is probably a little bit dynamics there playing both sides of it. So we’re really not seeing much of an impact on SRAM. It was more DRAM as where we saw the weakness which is also where we’re seeing the significant – highest growth over the few quarters.

Raji Gill – Needham & Company

So clearly Samsung is exiting out of the market although they haven’t officially said that, do you – there are going to be last time buys in the market from some of the Samsung’s customers. So how would you kind of quantify the overall revenue opportunity in 2011? How much would you quantify it when Samsung leaves the market and how would you derive that number?

Scott Howarth

Well the numbers that we have seen in terms of Samsung’s share was probably something in the $200 million to $300 million. Now as they exit you’re right, I’m sure their strategy is going to be last time buys, they will probably support their key accounts for a longest period of time, but what we’re seeing is those accounts even if they are getting last time buys are now designing in our memory to ensure that they have long-term supply.

So we’re seeing a tremendous amount of design wins still in the products that we overlap with Samsung to be able to start supplying those devices to our customers longer term. So essentially what they’ll do is they will start buying from us to ensure supply, they may continue some last time buy of Samsung and then try to manage an easy transition over the next year or so or however long Samsung transitions.

Raji Gill – Needham & Company

So are you starting to see orders from Samsung’s customers?

Scott Howarth

Yes, we are seeing designing activity and we have for the last couple of quarters we’ve been getting incremental design wins. And those typically take almost six to nine months to complete, we’re now starting to see some incremental revenue from that as well.

Raji Gill – Needham & Company

Okay, very good. Thank you.

Scott Howarth

Thank you.

Operator

And next we’ll hear from Shawn Boyd with Westcliff Capital Management.

Shawn Boyd – Westcliff Capital Management

Hi thanks for taking the call. I just wanted to follow-up on the – thinking a little bit beyond the December quarter and I’m not asking the guidance at this time point, but remind us again historic seasonality and I mean we got to go back a couple of years because obviously last year was very good at the upside and the year before that was very good at the downside. So maybe we can think about just a little bit of historic seasonality into March and how the business might have changed since then, so just a factors that might not get up or down?

Scott Howarth

I think good question Shawn, I think looking back you’re right, we haven’t seen a normal year now for a few years. So it’s getting harder and harder to really evaluate. But normally we would look at the January quarter being one of a little bit down probably down in the five percentage range would be normal seasonality. What’s difficult to tell right now is we’re seeing that essentially in the December quarter as we’ve guided. So it’s difficult to see whether we’ve essentially pulled in that weakness into December quarter or what’s going to transpire our next quarter.

Shawn Boyd – Westcliff Capital Management

Right.

Scott Howarth

Normally like I said it would be slightly down but at this point it’s difficult to make a call either direction on it. What we’re trying to do within our markets though in telecom networking, automotive is continue to support their secular growth and if we can do that we think that will really mute then any seasonal effect as well.

Shawn Boyd – Westcliff Capital Management

Okay, very helpful. And if you hit this earlier, I apologize but I am thinking about the lower prices that we’re seeing. Is that triggering any kind of early indications of additional interest in terms of higher content as (inaudible) and think about putting in more on the focus DRAM side.

Scott Howarth

Not specifically, no not like you see with PC boxes. Most of our customers they’ll figure out what memory configuration, memory size they want in advance and then design towards that. So they will basically have predetermined what they need for their application, whether that’s in networking or it’s in telecommunications or even in the automotive area.

Shawn Boyd – Westcliff Capital Management

Got it, okay. And just the last thing in terms of this buyback, you guys did the additional authorization in the quarter, can you talk about how much stock you might have already bought back or just kind of how you look at that as we go forward here?

John Cobb

The authorization was just done recently, so today we haven’t bought any shares back.

Shawn Boyd – Westcliff Capital Management

Okay.

Scott Howarth

But as we look at it long term, I think John mentioned, one of the goal that we have with it is to minimize dilution from our stock option program to overall what we’re – our intent is – is to continue to buy back as many shares as we grant each year to be able to minimize dilution.

Shawn Boyd – Westcliff Capital Management

Got it. Okay. But it is discretionary nature in terms of timing of the purchases?

Scott Howarth

Correct.

Shawn Boyd – Westcliff Capital Management

Great. Well, we’ve got a little opportunity here. Thank you so much.

Scott Howarth

Thanks Shawn.

John Cobb

Thank you.

Operator

And next we’ll hear from Chris Sigala with B. Riley & Company.

Chris Sigala – B. Riley & Company

Yes, good afternoon. Thanks for taking my call. Do you have a timeframe in mind for when you might start receiving revenue for the 64 megabyte, 32 megabyte pseudo SRAM products?

Scott Howarth

The devices right now are going through designing activity. Likely revenue we could see starting in the first quarter 2011. And then they will start ramping in as it goes throughout the year in 2011.

Chris Sigala – B. Riley & Company

Okay. And then just at quarter-end, how much commodity type products were included in inventory?

Scott Howarth

I think our commodity inventory was – it’s less than $2 million. So it’s a very small number.

Chris Sigala – B. Riley & Company

Okay. And then just, hopefully, can you talk a little bit more about what you’re seeing in the high-end SRAM market in particular?

Scott Howarth

So the high-end SRAM, I assume you are probably talking more like 72 meg QDR.

Chris Sigala – B. Riley & Company

Yes.

Scott Howarth

So the high-end market – while we play in it, we’re not a very large player in the 72 meg QDR space. But we continue to see designing activity, we continue to work with our customers, and that remains demand for 72 meg, and we’ve been even seeing customers asking for a 144 meg QDR as well. Now that same market though, many of our customers are going to be transitioning to DRAM technology, more of a network latency and we’re developing a device there, we have taken out this last quarter, we’re going through evaluation, and we will have a product ready for this market in 2011.

Chris Sigala – B. Riley & Company

All right, great. Thanks a lot guys.

Scott Howarth

Thank you.

Operator

And moving on, we’ll hear from Andy Ng with Morningstar.

Andy Ng – Morningstar

Hi, thanks for taking my question. I was wondering are you seeing any end markets that are holding up or strengthening or is the weakness you’re seeing pretty broad based.

Scott Howarth

The weakness where we’re seeing it principally is in consumer electronics. That’s where we’ve seen the overall decline in softness. Beyond that we have seen different customers I think going through inventory correct. For example, we have one design that’s in flat-panel TV. It’s fairly significant revenue for us. And they’ve told us that there is adequate inventories, so they’re holding back on any new orders probably for one quarter.

Andy Ng – Morningstar

Okay. Is – so is your automotive segment holding up or [inaudible] there weakening as well?

Scott Howarth

I’m sorry, what’s that Andy?

Andy Ng – Morningstar

Your automotive segment is that holding up or is that sort of slowing down as well?

John Cobb

Yes, that was one market that did very well. As Scott mentioned in this remarks that we had sequential increase of over 16%, so that market seems to be doing better on a relative basis.

Andy Ng – Morningstar

Okay. And just to touch up on that seasonality question, is the December quarter typically your strongest quarter?

Scott Howarth

Normally yes if you go back over the last five, six years, we typically see December coming in stronger. Now our business though is transitioning more towards industrial, automotive, and telecom, and moving away from some of the consumer electronics areas, which are typically in an up-cycle in December. So the frank answer is, with our current product mix, we really haven’t seen a normal year now for several years.

Andy Ng – Morningstar

Okay.

Scott Howarth

And so our business we think it’s going to transition. And overall, we believe the seasonality will start to become more muted.

Andy Ng – Morningstar

Okay, thank you.

Scott Howarth

Thank you.

Operator

(Operator Instructions). And next we’ll hear from Madhu Kodali with Yaksha Capital.

Madhu Kodali – Yaksha Capital

Hi, one quick question on the cash flow. I was wondering if you can tell me what the – what it is from operations last quarter for the quarter?

John Cobb

Cash flow from operations for the quarter was $3.4 million.

Madhu Kodali – Yaksha Capital

Okay. That’s it. Thank you.

Scott Howarth

Thank you.

Operator

And that is all the questions we have at this time. I’d like to turn conference back over to you sir.

Scott Howarth

Before we close, I would like to mention that both and John will be presenting at the Tech America AeA Conference in San Diego on November 8. We look forward to meeting you if you plan to attend. The presentation will also be webcast, so please check our website for details. Thank you for participating in this call and have a good evening.

Operator

And that concludes today’s conference. We thank you for your participation. You may now disconnect.

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