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Vitesse Semiconductor (NASDAQ:VTSS)

Q3 2014 Earnings Call

August 05, 2014 4:30 pm ET

Executives

Ronda Grech -

Christopher R. Gardner - Chief Executive Officer and Director

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

Analysts

Gary Wade Mobley - The Benchmark Company, LLC, Research Division

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

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

Operator

Good day, and welcome to the Vitesse Semiconductor Third Quarter 2014 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ronda Grech, Vice President of Communications. Ms. Grech?

Ronda Grech

Good afternoon, and thank you for joining us for Vitesse Semiconductor Corporation's Third Quarter Fiscal Year 2014 Conference Call. With us from management today are Chris Gardner, Chief Executive Officer; and Marty McDermut, Chief Financial Officer.

Our fiscal third quarter ended on June 30, 2014. Results were reported in our press release issued this afternoon. We also filed our June 30 2014, quarterly report on Form 10-Q with the SEC today. The press release, along with the complete financial information for the quarter and year-to-date, are available on our website at vitesse.com.

I'd like to point out that during the course of this conference call, we will make various remarks about future expectations, plans and prospects for the company that constitute forward-looking statements for purposes of the Safe Harbor provisions under Section 21E of the Security (sic) [Securities] Exchange Act of 1934. Actual results may differ materially from those indicated by these forward-looking statements as a result of various risks and uncertainties, including those that are detailed in the company's SEC filing.

For further information about these risks and uncertainties, please read the company's SEC filings included in our annual report on Form 10-K for the year ended September 30, 2013.

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

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

Christopher R. Gardner

Thank you, Ronda. Good afternoon. Welcome, everyone. Thanks for joining us today. In Q3, we hit a major milestone as we continue to progress through our company transition. New product revenues now represent greater than 50% of total revenues. With 21% sequential growth on top of the 29% growth last quarter, our new product portfolio is in an annual run rate exceeding $55 million and growing at 79% on an annual basis. Driven by this solid performance, we've reached an inflection point as new revenue outgrows the decline in our legacy business. As a result, our total revenues of $27.2 million were up 6% sequentially and 3% on an annual basis.

The continued growth in our new product revenue gives us increasing confidence in our business model, which is supported by the strategy to address the growing market requirements for Ethernet networking. Today, Ethernet is virtually everywhere, creating opportunities for Vitesse to expand our market presence in the new segments like gigabit Wi-Fi, IoT, storage and even automotive. Because our new Ethernet product portfolio can easily serve these markets today, we continue to increase our opportunities and design wins at both new and existing customers.

Design wins continued to be very strong. Thus far, in 2014, design wins are up over 45% compared with 2013. Many of these design wins are coming from new customers. With 90 new customers added so far this year, we're on track to beat the nearly 100 new customers added in 2013. Our focus in IoT is supporting this growth as it now accounts for about 30% of our new wins.

Along with revenue and market growth, we demonstrated good controls over expenses, improving the leverage in our financial model. We reduced our non-GAAP operating loss by over $1.8 million compared with Q2, but we missed the goal I set at the beginning of the year to reach breakeven in the third quarter. We remain cognizant with a drive towards profitability, and we're balancing that with the strategic investments in R&D, marketing and sales required to fully address our new opportunities. In support of these goals, we achieved another major milestone in the quarter by raising $26.6 million in June. This provides us strong working capital position to retire all of our short-term debt and the resources to drive long-term growth and profitability.

With that, let me turn it over to Marty for details on the quarter.

Martin S. McDermut

Thank you, Chris, and good afternoon, everyone. I'll start with a review of our third quarter fiscal 2014 financial results, follow with comments on our balance sheet and conclude with our fourth quarter fiscal 2014 guidance. For the third quarter of fiscal 2014, revenues totaled $27.2 million, within our guidance and up 6% compared to the second quarter. IP revenue totaled $1.1 million, increasing from $700,000 in the second quarter. Product revenues totaled $26 million, up from the $24.9 million in the second quarter. New product revenues reached $13.9 million, up 21% compared to the $11.5 million in the second quarter. New products represent 53% of the total product revenues, increased -- increasing from 46% in the second quarter and reflects a combination of higher new product revenue and declining end-of-life and mature product revenues.

Our top 10 end customers contributed 39% of our total product revenues, demonstrating our diversified customer base in our targeted Carrier and Enterprise networking markets. There were no 10% direct customers. Chris will go into more detail on the market breakdown of the revenue in the next portion of the call.

Product margin for the quarter was 52.9%. Year-to-date, product margin was 55.2%. Total gross margin for the quarter was 54.9%. And year-to-date, total gross margin was 57.5%. The variation from product margin guidance is due primarily -- due to higher than anticipated revenues from legacy, single-port Copper PHYs and 5- and 8-port Ethernet switches. These are commodity products that carry lower margins and whose impact will be minimal going forward.

As we go through our product transition, forecasting product mix and margin is challenging and complicated by the fast growth of our new product, onboarding new customers and the runoff of our legacy products. We continue to make improvements to dial-in our calculations. And even with our best efforts, factors such as customer ramp and slight shifts in product mix can result in variability. But I'll point out that our guidance for Q4 2014, up about 5 percentage points from Q4 2013, is in line with the long-term estimates we gave at the beginning of the year.

Operating expenses totaled $17.4 million, down 8% from the $19 million in both the second quarter and the year-ago quarter. Our R&D investment totaled $10 million, down 8% compared to the $19 million in the second quarter and down 15% compared to the $11.7 million in the year-ago quarter. The lower year-over-year amount was primarily due to lower mask investments, partially offset by increased R&D activities and headcount, including our increased investment in internal software development. SG&A expenses totaled $7.3 million, down 8% compared to $8 million in the second quarter and flat compared to the year-ago quarter.

On a non-GAAP basis, operating expenses totaled $16 million, down 9% compared to $17.5 million in the second quarter and down 11% compared with $18 million in the year-ago quarter. Depreciation expense totaled $400,000, and we expect it to be about the same in the fiscal fourth quarter of 2014.

Total stock compensation expense included in cost of goods sold and in operating expense -- expenses totaled $1.6 million. We expect it to be about the same in the fiscal fourth quarter. Our reported GAAP operating loss was $2.5 million. Our non-GAAP operating loss was $900,000, a reduction of 68% compared to the $2.7 million in the second quarter and $3.1 million in the prior year quarter.

Our GAAP net loss was $4.4 million or $0.07 per basic and fully diluted share. And on a non-GAAP basis, we had a net loss of $2.7 million or $0.04 per basic and fully diluted share.

Moving on to the balance sheet. At the end of the third quarter, we had cash and restricted cash balance of $71.6 million compared to the $48.2 million at the end of the second quarter. In the third quarter, cash used by operations totaled $3 million. And excluding changes in working capital, operations used $1.8 million, nearly 1/2 of what we used in the prior quarter.

Investing activities, net, including capital expenditures and payment for IP licenses, totaled $500,000. We expect it to total about $300,000 to $400,000 in the fiscal fourth quarter. Accounts receivable totaled $10.1 million, and day sales outstanding was 34 days, comparable to $9.9 million and 35 days at the end of the second quarter.

Inventory totaled $11.2 million, slightly less than the $11.3 million at the end of the second quarter. Inventory turns in the quarter were over 4. Accounts payable and accrued liabilities totaled $19.8 million, down slightly from the $20.3 million at the end of the second quarter. Working capital totaled $14 million as compared to $15.6 million at the end of the second quarter.

As Chris mentioned, during the quarter, we completed a secondary offering netting $26.6 million. Combined with the cash on hand, we have more than adequate cash to repay the $32.8 million convertible debt maturing this calendar year and to drive the business forward. We will repay our 2014 debentures on or before the maturity in October. Repayment of the debentures will eliminate another $1 million per quarter of interest expense. And combined with the debt repaid in the first quarter, this would be a total interest reduction of $6 million on an annual basis.

And next, I'll turn to our outlook for the fourth quarter of fiscal 2014. These are estimates based on our current knowledge and are subject to change. As such, it's covered under our Safe Harbor statement. We estimate fourth quarter fiscal 2014 revenue will range from $26.5 million to $29 million. Product margins are expected to be between 56% and 58%. We project total revenue gross margins could be 1 to 3 points higher. While our margins have fluctuated during the transition of our business, the fourth quarter guidance on margins is consistent with the long-term trends discussed at the beginning of the year.

GAAP operating expenses, including R&D and SG&A, are expected to range between $11.5 million and $19.5 million -- sorry, $18.5 million and $19.5 million and, to arrive at non-GAAP operating expenses, back out $1.5 million for stock compensation and amortization expenses. And I just had 1 correction when I talked about our R&D expenses, a total of $11 million in the quarter like compared -- it should be compared to $10.9 million in the second quarter.

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

Christopher R. Gardner

All right. Thanks, Marty. So I'm going to start today with a review of revenue by market, and then I'll give you some analysis on our products, customers and design wins. I'll start with Carrier networking. So I said in the past that our primary growth vector in Carrier will be our new Carrier Ethernet products ramping as customers transition away from SONET to Ethernet. We're now starting to see that in the revenue numbers. In Q3, Carrier business was $12 million, which is 46% of total product revenues. Carrier is up 2% sequentially, down 16% from the year-ago quarter. It's the first growth in our total Carrier business in well over a year, and it's supported exclusively by new product growth. New products in Carrier were up $1.2 million, 22% sequentially and 74% from third quarter last year. This growth is driven primarily by our Carrier Ethernet Switch portfolio, which was up over 50% sequentially.

As part of Carrier, I'd like to make a few comments on China, which has gotten a lot of press in the past several quarters and, particularly, over the last several weeks. The 4G/LTE build-out that's been talked about in China for the last, probably, 6 or 8 quarters or so finally helped a few of the IT suppliers in last quarter, but it already seems to be slowing down here as we enter Q4. As we noted last quarter, we expected only a modest impact to Vitesse and indeed saw that, as we are really in -- not in the existing base stations, but in the supporting infrastructure equipment that connects those base stations. Overall, as a result, our revenue in China was actually down slightly, mostly due to declines in EOL revenue.

More globally, though, 4G and LTE build-outs worldwide are still at very early stages. I've seen estimates that suggest there are now approximately 300 4G networks deployed worldwide to date compared with over 3,000 networks deployed for 3G technology. And actually, the 4G subscriber rate is still substantially below that 10% number. So long term, 4G build-outs will be a driver for our business. Part of that is related to both macro and small cell deployments based on new systems that we expect to see ramping in the first half of 2015.

Moving onto Enterprise networking. Enterprise was $13.9 million in the quarter, which is 54% total product revenue. Enterprise increased 8% sequentially and 22% from the year-ago quarter. New products in Enterprise grew 20% sequentially and are up 84% on an annual basis. Growth coming from a variety of areas, including many new customers in SME and industrial applications, including some new customers in China.

IP revenue was $1.1 million in Q3 compared to $0.7 million in Q2. For the longer term, we continue in our guide at 68% of revenue on an annualized basis, although, obviously, we're performing at the lower end of that guidance recently.

We continue to transition our revenue base from older legacy products to our new product portfolio. We talk about the vintages of our products to give investors a view of that. Oldest products have been going through an end-of-life process that started in early 2012. In Q3 2014, EOL was just 1% of our product revenue at $0.3 million, down from $1.3 million in Q2. Going forward, we may see some customers come back for some of our EOL product. But generally, we expect the end-of-life EOL revenue to be small.

In Q1 2014, we guided our mature products would be flat through 2014 and then begin to decline. Since then, the business has been a little bit softer than that, due primarily to weak market conditions. The last quarter, we highlighted the decline in these products may start earlier than we had originally expected at the beginning of the year.

In Q3, our mature product portfolio was $11.8 million, remaining flat from Q2. As we see it now, mature should drop a little more in Q4 and then decline more materially starting in Q1. In particular, both our PMD products that sell in the optical module markets and our commodity low port count Enterprise switches will decline substantially starting in Q1. We intentionally exited these areas and have not invested in these 2 product portfolios in nearly a decade. We now believe the overall impact will happen faster than we estimated at the beginning of the year with the decline of about 30% to 40% of the total mature revenue in the first half of fiscal year 2015. We then expect the decline to slow materially to about 10% to 20% per year, reflecting the portion of our mature products that are designed into systems that we'll ship for many more years.

Total new product revenue in Q3 was $13.9 million, up 29 -- excuse me, up 21% sequentially and 79% year-over-year. This represents an accelerated growth rate with our new portfolio of products shipping in a run rate exceeding $55 million on an annual basis. Notably, new product revenue is well diversified across our product lines. Our switch products are now generating most of the growth, both in Enterprise and Carrier, adding to the growth in our PHY products. This is important as our switch products provide a deeper level of traction and can often pull through other products.

We also have good customer diversification, generating new product growth. About 50% of the revenue comes from our top 10 customers with Cisco, the largest, at about 12% of the total. Our growth is still being driven materially by design wins from 2011 and 2012. In fact, one of our fastest growth customers in Carrier is a Tier 1 that we engaged with our new switch products from 2010 and claimed a design win in early 2011. As I predicted last quarter, we started to see our Carrier customers begin their production ramps. Last quarter, Carrier new products grew 45% on an annual basis. This quarter, we're up 75%. Because of this extended time-to-market for our products and customers, design wins remain a solid leading indicator for our future revenue growth.

Number of new design wins and new opportunities both remained very strong. Q3 was up from Q2, and performance year-to-date in 2014 is up over 45% from the year-ago period. We're seeing solid performance across-the-board, but our Ethernet Switch engines, particularly for Carrier and IoT applications, have the strongest growth. Our design wins for products selling into these markets are up over 100% year-to-date compared with 2013, and we're adding tremendous number of new customers in these segments. Year-to-date, we have wins at over 50 new customers and have identified opportunities at 100 new customers so far.

There are a number of reasons for this. First, our switch products have now been in the market for a few years. Customers had the time to evaluate them, develop systems and deploy them. You can see that in the revenue growth. These customers are coming back for our next-generation design cycles. Second, we've completed a very substantial deployment of software for both Enterprise and Carrier applications. We're delivering full solutions today, in some cases, providing a complete turnkey capability through an ODM that enables effectively a new white box model in both Enterprise and Carrier applications. As customers deploy these solutions, we're developing an incumbency in critical markets built on both our hardware and software capabilities. Providing this level of solution is adding value to our switch portfolio. Gross margin from these products has increased steadily over the last 3 to 4 years, and we expect this to continue well into the future. Margins on new switch designs are at record levels in 2014, up 20 percentage points in the last 12 quarters.

And finally, we've introduced multiple generations of switch products that provide state-of-the-art features. These products address both our core markets, Carrier and Enterprise, but also some very fast-growing adjacencies, such as IoT and IP storage. Generally, we can address these new markets with little or no incremental investment in R&D. As the markets evolve towards Ethernet as the primary communications protocol, we're well positioned to serve our products into these new segments.

So every new generation of network, whether Enterprise, Carrier, IoT, storage or anything else, provides us with an opportunity to gain market share. As an example, we're currently sampling our new SparX-IV switch family into Enterprise applications, including Wi-Fi access. The SparX-IV product is targeted at the rollout of next-generation access points using the new 802.11ac technology, which boosts the speed required for aggregation of all these access points. This creates demand for new switch technology, where we believe we're very well positioned. So our expectation, that we can increase our market share in Enterprise and cloud access, some of our primary segments, as these products are developed over the next 12 months.

Going forward, we continue to see strong growth in this portfolio of products that will provide a solid foundation for the sale of our entire product portfolio.

So in summary, we're excited by the continued growth of our new product portfolio. Markets are clearly validating our long-term strategy. Our business is building on a growing base of markets and customers. Our performance in Q3 demonstrates a clear trend of growth for our new products, and our design win performance suggests we continue on this trajectory. Our transition period is not done, but reaching the goal of greater than 50% of revenue from new products is a critical milestone that supports the view that as our new product revenue grows from a larger base and our mature product revenue declines from a smaller base, we will accelerate our long-term growth. We have positioned the company in front of some great markets with great technology and products. We have demonstrated that we can turn design wins into revenue, and we've created an efficient high-leverage operating model that will scale as our revenue grows. Based on this, we are increasingly confident in the long-term business model, and we're committed to drive revenue and profitability growth in the future.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Gary Mobley with Benchmark.

Gary Wade Mobley - The Benchmark Company, LLC, Research Division

I had a question on your prospective revenue mix for the fourth quarter between Carrier and Enterprise, new product and mature. And I guess, specifically, I'm curious to know what's going to drive that product gross margin improvement on a sequential basis.

Christopher R. Gardner

Yes. So I can touch on all of those, I guess. So the mix between Carrier and Enterprise, we don't expect to change too dramatically, and that is actually a little difficult for us to forecast because we have some customers that are both Carrier and Enterprise. So for example, Cisco, where we sell into service provider networks, we also sell into the cloud access portion of their business, which we consider Enterprise. So until we actually sell through, it's a little difficult to forecast markets. But based on what we see today, we don't expect a huge difference. What is driving a large proportion of the margin change is not as much a mix between Carrier and Enterprise as it is a mix within those product portfolios. As Marty explained, we had a pretty high lift in some of our older Ethernet products that sell in really into commodity segments of the Enterprise markets. Those are being replaced materially by higher-end products selling into higher-end portions of Enterprise. Our new switches, as I mentioned, we've seen a pretty substantial and steady increase in margins. What you're seeing here is really a mix change between the old legacy stuff that was selling into very low-end to higher-end Enterprise applications by cloud access and even into some of the IoT applications that carry substantially better margins.

Gary Wade Mobley - The Benchmark Company, LLC, Research Division

Okay. Also, in your prepared remarks, you talked about the rate of decline for your mature product. You mentioned some percentage rate decline for the first half of 2015, and I think it was 30% or 40%. Is that a decline on the year-over-year basis that you were quoting?

Christopher R. Gardner

That's a decline on our quarterly run rate. So we expect the quarterly run rate -- exiting 2014, we expect about a 30% to 40% decline in the first half on a quarterly basis.

Gary Wade Mobley - The Benchmark Company, LLC, Research Division

Okay. And you obviously didn't hit your goal of hitting operating breakeven at an operating profit basis during the third quarter, and it doesn't appear as though you're going to get there in the fourth quarter. In fact, OpEx is expected to increase quite a bit, substantially, more so than revenue, if I'm not mistaken. I'm just curious to hear what the debate is internally going on at Vitesse between new product development and maintaining that OpEx discipline that you've shown at least for the mid-part of this fiscal year and also in the context of now having a better balance sheet.

Christopher R. Gardner

Yes. And I think the real question is the trade-off between, as you mentioned, the short-term and the long-term strategic focus. So we are focused today on ensuring that we can drive our long-term revenue growth and long-term profitability. We think that's really where our attention has got to be placed. Now having said that, we're very cognizant of watching the expenses while we do that and trying to generate a model that has as much leverage as possible. So if you actually look at guidance, again, similar to last quarter, higher end of guidance gets us into that breakeven, above breakeven. Lower end of guidance keeps us somewhat below that. So we're continuing to keep that operational focus, but we are making sure that we can make the strategic investments that are going to drive the longer-term revenue. And I think the big change that you've seen maybe over the last 3 to 4 quarters in terms of that focus is just the larger base of opportunities that we're seeing in the market. All right. As we've entered into IoT and some of these adjacencies, you can tell by the number of customers that we're talking to, the number of design wins that they're claiming and even with the revenue growth here that's been accelerating in the last couple of quarters, that we're just getting more and more confident, that we're making the right investments, and those investments will pay off for us long-term.

Operator

Your next question will come from Quinn Bolton with Needham & Company.

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

Chris, just wanted to start on new product sort of implicit in the guidance for September. If I heard you, I think you said that the mature products would be relatively stable in the September quarter before seeing that more accelerated revenue decline in the first half of next year. If I look at the numbers, it kind of seems like you might be seeing some pause then in the quarterly revenue growth on new products to kind of bring you in towards around the midpoint of the revenue guidance. And so can you talk to us a little bit about what your expectations are for new product revs in the September quarter?

Christopher R. Gardner

Yes. Sure, Quinn. So if you actually look at the numbers, one of the big variables this quarter, we do have some IT revenue in there. And so that's a variable. If you look at new product revenue, we are expecting double-digit growth. You asked me this exact question last time, can we repeat 29%? And I think I said something to the order that I doubt we can do 29%, but we'll be in the mid-double digits. And we came in, I think, pretty close to your expectations. Going forward here, can we repeat Q3? Not quite, probably. If we do, we'll be at the high end of the guidance, but we expect to be a little slower yet in double-digit growth.

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

Okay, okay. Great. And then just wanted to come back to the older Ethernet products that you talked about. I think there were some gigabit Copper PHYs and some of the 5- and 8-port switches. Are those included in the mature products? Or is that part of EOL revenue?

Christopher R. Gardner

For the most part, most of those are included in mature products. And so they were actually fairly strong in the quarter as people sort of buy the last versions of those that they want. As I said, most of that stuff is moving on to other suppliers and has been -- that trend has been going on for a number of years now as we really haven't done anything in that segment, probably since 2006 or 2007.

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

Okay. And then just a related question on the margin. I think, last quarter, you talked about potentially some impact from the move of your test facility. I was wondering if that did impact the June quarter gross margin and whether that transfer has now been completed. And so it shouldn't have any impact going forward?

Martin S. McDermut

Yes. No, we -- it wasn't mentioned because the impact, there was a little bit of cost and very minimal. We really incurred those costs earlier in the year, and now we're done with the move.

Christopher R. Gardner

Yes. The one asterisk I'd put on that, Quinn, is we are probably taking a point or 2 in yield penalty still. In our new facility, we haven't quite got that test floor up and running to the same level that we had our Singapore test floor. So it's probably another -- in fact, maybe one of the points of margin increase here in Q4 is just getting that facility up and running to expectation.

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

Okay. And then just lastly, Chris, I think, on the last call, you talked about the design win pace that you're currently running at would support probably something around the order of 50% to 75% year-on-year growth in new products in fiscal '15. Are you still feeling pretty comfortable with that kind of range as you look out into next year for new product revs?

Christopher R. Gardner

Yes. And that's -- we generate that from a design win model that's been accurate to about 10% so far, and we -- as we look at the design win growth and we look at how people have actually come onto revenue versus what we've modeled, we are feeling pretty good about that 50% to 75% number.

Operator

[Operator Instructions] And next, from Craig-Hallum, we'll move to Christian Schwab.

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

Just so we're all on the same page in our models tomorrow morning, I just want to make sure I understood that mature product line correctly. So if we do $11 million and change in September, is it down 30% to 40% in December and down another 30% to 40% in March? Or is it take a ladder step-down, 30% to 40%, right away in December?

Christopher R. Gardner

Yes. We don't expect it to take it down 2 quarters sequentially at 30% to 40%. We expect -- you said $11 million and change, think about 30% to 40% off that, probably, mostly in the first quarter.

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

Mostly in the first quarter and then a little bit less in the second quarter?

Christopher R. Gardner

Right around and then move down from there.

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

And then start a slow continued gradually decline around it?

Christopher R. Gardner

Right. And as we get out in time, as we look into the middle of '15 and to the end of '15, we see that flattening, almost flat. Right? Because, again, a lot of the -- if you're not in these systems that are going away, and it seems to be very specific to a couple of our product portfolios, we see a pretty good stability in that product portfolio still.

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

Okay. Yes. That makes a ton of sense. If I do the back of the envelope maths, which I just did very quickly in my head, in September, it appears that revenues for new products will be like close to $50 million, a little bit more, at the midpoint of your guidance, which should be about 75% year-over-year growth, which is spectacular after 82% growth the year before. What would -- what is the appropriate expectation for year-over-year growth in '15?

Christopher R. Gardner

Well, we just talked about that a little bit. Based on the model, and obviously, it's a little tough to guide out 18 months. Right? But based on our model, we're looking at north of 50%. We talked about 50% to 70-ish percent growth rates, so we're feeling pretty good about that given where we are today. Now it's not a straight line, or we don't expect it to be a straight line. We can't guide quarter-by-quarter. Last -- in fact, the last 2 years, we've seen the first quarter take a pause. I'm not sure if that's because of fiscal end of year with our customers or whatever. But right now, we think, on an annual basis, we can still do that 50% to 70-plus percent.

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

Okay. And then obviously, a bit long term, after we pay off the debt, then what -- how should we be thinking about the interest expense line?

Martin S. McDermut

The interest expense should go down to about $450,000 after that -- after the pay-down of the converts.

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

A year or a quarter?

Martin S. McDermut

A quarter. Sorry, a quarter.

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

Perfect. And then I assume for the share count, we'll have -- all fully diluted shares in September would be roughly 8.6 million shares raised in June for the share count. That's the safe assumption. There isn't any other changes in that share count we should be aware of?

Martin S. McDermut

Well, at a -- at August 1, we had an ESPP stock issuance. The total outstanding shares were 67 million, 697,000, 535,000, and then there's nothing on top of that.

Operator

And that does conclude our question-and-answer session today. I'd like to turn things back over to Mr. Chris Gardner for any additional or closing remarks.

Christopher R. Gardner

All right. Thanks, Greg. Well, I'd like to thank everyone, certainly, for attending our call. I'll make a note that we are attending Christian's conference, Craig-Hallum, on September 18. So hopefully, we'll see you there. Again, we're very -- we're already pleased about our transition. Getting over this milestone is a big target we've had for over a year. We're pleased to get there a quarter early, and we look forward to seeing you at Craig-Hallum or somewhere in-between. Thanks very much.

Operator

Once again, that does conclude today's teleconference. We thank you for your participation.

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