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Executives

Scott D. Howarth - President and CEO

John Cobb - CFO

Analysts

Jeff Schreiner - Capstone Investments

Andy Ng – Morningstar

Chris Sigala - B. Riley & Company

William Myers – Miller Asset Management

Integrated Silicon Solution, Inc. (ISSI) F1Q2011 (Qtr End 12/31/2010) Earnings Call January 26, 2011 4:30 PM ET

Operator

Good day, everyone, and welcome to the ISSI Fiscal First 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, President and Chief Executive Officer. Please go ahead, sir.

Scott Howarth

Good afternoon and welcome to ISSI’s conference call for the quarter ended December 31, 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 December 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. Over the past few months, we have made significant progress on our key strategic objectives. In fact, we believe the relative strength of our December quarter results doing an inventory end market correction further demonstrates the success of our focus on high quality specialty memory products in more stable end market segments.

During the quarter, we signed an agreement with Micron to become an alternate supplier of RLDRAM 3. We are very pleased that major communications customers have shown a tremendous amount of interest in ISSI as an alternative supplier of high performance RLDRAM 3.

Shortly after the quarter ended, we also announced that we completed the spin-off of our low-margin Giantec, ASSP business, which was then followed by announcement this week to acquire Si En Integration, adding high margin analog and mixed signal products to our portfolio. We believe these collective efforts have better positioned ISSI for sustainable growth in revenue and profit.

With that, let me now discuss our December quarter results and then discuss these recent strategic events in greater detail. Revenue in the December quarter was $66.1 million, which represents a 10.2% of sequential decline and a 30.8% increase over the December 2009 quarter.

As we mentioned on our last earnings call, the sequential decrease in revenue was due to a slowdown in customer orders that began in late summer and extended into December quarter. Also impacting the quarter was an end market inventory correction occurring in electronics markets in Asia as well as in some industrial, telecom and networking markets.

And although both were more wide spread than we originally expected, it appears the inventory correction is nearly complete. This assessment is based on our March quarter beginning backlog, orders that we have received so far in January, combined with forecast from our customers.

We expect our March quarter to be more in line with normal seasonality for our business in target markets and are guiding SRAM and DRAM revenue to be sequentially flat to down 7%. This reflects expectations of our SRAM business to be flat to slightly down and DRAM to be flat to down 8%.

Gross margin in the December quarter was 34% and non-GAAP was $8.3 million, or $0.30 per share. As you may have noticed, we began this quarter providing non-GAAP results in order to better assist investors in assessing ISSI's operational performance as well as our performance against our peers.

Gross margin in the December quarter was lower sequentially primarily due to products' mix shifts as we sold high-density SDRAM combined with some pricing pressure in our DRAM business and higher wafer cost for some devices.

By comparison, many DRAM suppliers incurred declines in revenue of more than 20%, but drastic declines in gross margins and incurred losses. And although our business will be affected by end market demand changes and inventory correction, we believe our focus on high quality specialty product reduces volatility and provides greater potential for growth in revenue and profits as well as margins than could be achieved by other DRAM suppliers.

In addition, the advantages of our fabless business model, combined with stable end markets and support for customers' long-term product lifecycles further contributes

to our sustainable revenue and profits for continued success. Let me now discuss our three strategic events in greater detail.

On Monday we announced a definitive agreement to acquire Si En Integrations Holdings Limited, a privately held fabless provider of high performance analog in mixed signal integrated circuits headquartered in Xiamen, China. This complementary high margin products are sold into mobile communications, digital consumer networking and automotive markets. Si En’s products include audio power amplifiers, LED drivers for backlighting and panel display, voltage converters and temperature censors.

Key customers for Si En, Lenovo, Alcatel/TCL, Sagem/Bird and GTE. This acquisition enables us to sell a broader range of products across our combined customer base while also increasing our presence in China and expanding our addressed market by $4 billion.

The purchase price will be approximately $20 million in cash based on estimated working capital and net of cash required and the acquisition is expected to be completed in the next few weeks. In calendar 2010 Si En had revenue of $22.2 million, a 63% increase over the $13.6 million achieved in calendar 2009. Gross margin of 42.5% and operating profit of $5.2 million. We expect the acquisition to be immediately accretive to earnings per share. After integration at ISSI, we believe Si En’s revenue contribution will be approximately $6 million per quarter and the operating income will approximately be $1.5 million per quarter. In addition their revenue operating income is expected to grow as we leverage our global market -- global customer base in sales channels.

Si En was founded in 2005 by two co-founders with over 20 years experience each in a high tech industry in China as well as US. The current CEO has an MS in Electrical Engineering from San Jose State University and extensive experience at Maxim and National Semiconductor before starting Si En. The other founder and their President has a PhD in Electrical Engineering from the University of Science of Technology of China and has worked at SST, Bell Labs and also for ISSI for many years. Both founders have signed long-term employment agreements and plan to continue to lead this business into the future while leveraging our larger sales organization, efficient operations and strong customer base to grow and expand this business.

On January 4th we announced a completion of the spin-off of Giantec Semiconductor, our lower margin EEPROM and SmartCard business. On December 30th, Giantec received an additional direct investment that reduced our ownership percentage to below 50%. Our balance sheet now shows a long-term investment of $6 million and in the future we record our share of Giantec’s net income or loss as a single line item below operating income, on our income statement.

In the December quarter Giantec had revenue of $6.1 million. This transaction allows ISSI to focus our efforts and resources on further growing our business and further penetrating our target markets. And lastly in November we announced that we are working with Micron Technology to become an alternate supplier of Micron’s third generation reduced latency DRAM or RLDRAM 3. RLDRAM 3 memory will add to ISSI’s growing family of network products and provide a long term solution for high bandwidth, reduced latency memory requirements that are being driven by networking standards such as 100 Gig Ethernet. In addition, we are in the process of designing, what we have previously called, NLDRAM, or network latency DRAM and as a part of our relationship with micron, we will use a trademark RLDRAM 2 naming on our device.

We expect to begin sampling our RLDRAM 2 device in late spring and begin sampling the Micron designed RLDRAM 3 memory in the summer. These products are expected to begin generating revenue in approximately one year and will be incremental to ISSI as it doesn’t have to replace any of our currently shipping products. We believe the combination of our designed RLDRAM 2 device along with Micron’s RLDRAM 3 will create a strong opportunity to gain in the telecom networking markets for years to come.

Now, I would like to briefly review our key markets and products. DRAM represented 58% of our total revenue in the December quarter. It decreased 12% on a sequential basis but increased 39% over the prior year quarter. Our specialty DRAM revenue increased 54% over December 2009 quarter with commodity DRAM declining to only 2% of our total revenue.

In terms of specialty DRAM design wins, we have another strong quarter across all of our end-markets, including numerous large design wins for automotive, infotainment systems, industrial equipment, telecom and networking applications. We also achieved a number of key design wins in the automotive, telecommunications and consumer markets in both, x16 and x32 configurations.

We are experiencing strong design activity for our new DRAM products, including our 256 megabit, 512 megabit and 1 gigabit DDR2, our mobile SDRAM and our 64 megabit and 128 megabit low power SDRAM KGD product. We expect these new devices to contribute to revenue growth in the coming quarters. In addition, our SDRAM and DDR 1 products are seeing more opportunities as some of the larger competitors reach end of life on their equivalent products.

Overall, we continue to see many opportunities for us to expand our market share and grow our specialty DRAM revenue.

In terms of our SRAM business, SRAM revenue represented 33% of our total revenue in the December quarter, decreasing 10% sequentially and increasing 29% from the December 2009 quarter. Our position in synchronous SRAMs continues to strengthen as we have 15% sequential growth for those products. During the quarter, we once again secured strong SRAM design wins in our key markets for various density and number of products, including several large design wins with our 4 megabit, 8 megabit and 16 megabit asynchronous products primarily for industrial, automotive and networking applications.

We also have two large design wins with our 72 megabit quad data rate device for telecom equipment. Earlier this month, we introduced an error correction code 4 megabit high speed asynchronous SRAM. This device has options for copper leadframe and comes in both leaded and lead-free options. This product’s error correction feature is very attractive for many automotive applications, in particular for engine and transmission control, and this provides better reliability than parity code schemes which can detect up errors but not correct them.

With our continued investment in SRAM and competitive SRAM solutions and long term online cycle support we are confident that we will continue our long term growth in the SRAM market.

Before turning the call over to John, let me briefly provide an update on our manufacturing operations during the quarter.

Wafer supply has improved in last few months as foundry utilization has decreased. One of our DRAM foundries stopped producing wafers in an older process that we were using, which required us to buy extra wafers to support our long-term customers.

Lead times in foundry and assembly and test have shortened from a year ago. We have recently purchased testers and have made some advance payments to foundries to help ensure adequate capacity for certain devices and reduce test cost and we'll continue to make strategic investments to ensure adequate supply of our products.

Looking forward to the March quarter, we do not expect wafer or backend capacity to have any significant impact on our business.

Let me now turn it over to John to discuss the numbers and then I will provide some closing comments.

John Cobb

Thank you, Scott. As a reminder, our income statement includes Giantec for the entire December quarter. As Scott mentioned, our revenue for the December quarter was $66.1 million, which was 10.2% lower than the previous quarter, but up 30.8% from the year ago quarter. As expected, our SRAM and specialty DRAM revenues declined from the September quarter due to the end market inventory correction, while Giantec was flat, sequentially.

Our revenue in the December quarter by market was 35% telecom networking, 27% consumer, 25% automotive and 13% industrial, medical and military. Gross margin was 34% in the December quarter, which was within our guidance range. This compares to 37.8% in the September quarter and 39.8% in the year ago quarter. The December and September gross margins included reserve charges that reduced the gross margin by 1.1 percentage point in December and 1 percentage point in September.

In the December 2009 quarter, the gross margin included reserve credit that increased the gross margin by 7.7 percentage points. Operating expenses were $16.1 million in the December quarter and compares to $15.5 million in the September quarter and $12.6 million in the year ago quarter. The December 2010 operating expenses were higher than originally expected due to $300,000 additional one-time expenses by Giantec and $200,000 in legal fees related to our acquisition of Si En.

We achieved operating income of $6.3 million in the December quarter, compared to $12.4 million in the September quarter and $7.5 million in the December quarter a year ago. Interest and other income in the December quarter was $900,000, including $600,000 in gains on sales of investments.

GAAP net income for the quarter was $7.2 million or $0.26 per diluted share. This compares to net income of $11.8 million or $0.43 per share in the September quarter and net income of $7.2 million, or $0.28 per share in the December 2009 quarter.

Non-GAAP net income, which excludes stock-based compensation and the legal fees related to the Si En acquisition was $8.3 million, or $0.30 per share. This compares to non-GAAP net income of $12.6 million or $0.46 per share in the September quarter and non-GAAP net income of $7.7 million, or $0.30 per share in the December 2009 quarter. Please refer to our press release and Form 8-K for a reconciliation and further explanation of our GAAP to non-GAAP results.

Turning to the balance sheet, as a reminder our consolidated balance sheet as of December 31 does not include the assets and liabilities of Giantec since the transaction closed just prior to the quarter end. Our minority investment in Giantec is now stated as a long-term investment on our balance sheet and amounts to $6 million at December 31. We ended the quarter with $81.3 million in cash and short-term investments compared to $85.6 million at the end of September net of Giantec’s cash investment.

We used $4.9 million in cash flow for operations in the December quarter, namely as a result of reducing our accounts payable. However for all of fiscal 2011, we expect to generate cash flow from operation in excess of our net income due to expected reductions and inventory in the last half of the fiscal year. We did not repurchase shares during the quarter.

Our inventories increased by $5.1 million from September, net of Giantec’s inventory. 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. In addition another foundry shut down their 0.11 micron process which we were still using. As a result we made final purchases of additional SMIC inventory and of the 0.11 micron process inventories to help ensure a smooth and a light transition for our customers.

At the end of December, we had $5 million in DRAM inventory purchased from SMIC and $4 million of the 0.11 micron process inventory. We expect to sell the majority of SMIC inventory in the March quarter and the remainder by June and the 0.11 micron inventory throughout 2011. This resulted in inventory turns of 2.7 turns in the December quarter excluding the additional end of life inventory we had 3.5 turns which is healthy for our business.

Our accounts receivable decreased during the quarter by $1.6 million, net of Giantec’s receivables to $37.6 million and the day sales outstanding were 52 days, the same as September. Overall our balance sheet continues to remain very strong. At the end of December, we had $3.09 per share in cash and short-term investments and a book value per share of $7.04.

Before I discuss our outlook for the March quarter, I will provide some additional information on the accounting for Si En. The purchase price is $28 million, subject to adjustments for differences in their working capital at closing. Si En currently has approximately $8 million in cash. So the net cash purchase price will be approximately $20 million. Si En also has in addition to the cash approximately $1.1 million of net assets. Therefore the remaining $19 million will be allocated to intangible assets through purchase accounting. Based on preliminary estimates, we believe that $12.5 million will be allocated to intangibles that would be amortized and the remaining $6.5 million will be allocated to goodwill which is not amortized.

The estimated amortization expense will be approximately $500,000 per quarter. These numbers are preliminary estimates and the actual purchase price allocations could be different. In the future, we will report non-GAAP numbers which will exclude the amortization of these intangibles along with the stock-based compensation.

Let me turn to our guidance for the next quarter. We expect total revenue to range between $59 million and $64 million. This guidance reflects expectations of SRAM and DRAM revenue between $56 million and $60 million which on a comparable basis totaled $60 million in the December 2010 quarter, excluding Giantec.

This guidance is – this is only normal for us and represents a flat to 7% down quarter for March. In addition, we expect Si En’s revenue contribution will range between $3 million and $4 million for the portion of the quarter that we are expecting on Si En or approximately two months.

Gross margins in the March quarter is expected to range between 33% and 36%. We expect DRAM and SRAM pricing to be flat to slightly down. Operating expenses are expected to range between $15 million to $15.5 million and we expect about $300,000 from interest and other income.

So, taken all of this into account, GAAP net income is expected to be between $0.18 to $0.25 per diluted share and non-GAAP net income which excludes stock based compensation, legal fees related to the Si En acquisition and the amortization of intangibles related to Si En to be between $0.22 to $0.29 per diluted share.

Now back to Scott for final comments.

Scott Howarth

Thanks, John. As I mentioned in my opening comments, the past few months have seen good projects on strategic objectives. We demonstrated the benefits of our focus high quality specialty memory, spun off our EEPROM and SmartCard business announced an agreement to supply RLDRAM 3 to networking and telecom customers and signed an agreement to acquire Si En.

In addition, as our customer seek stable supply and long term support, we will see further growth to many new design wins. We continue to work hard to develop products for the future, support our customers and increase profit from operations.

In the months ahead we will focus on our five key objectives which are, number one, to grow our customer base and the 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 and strategic partners. And number five, to remain focused on profitable growth and efficient use of our resources.

In the past few years, the economic environment has been difficult, yet ISSI has improved its gross margins and overall financial results. We believe that if we continue to successfully execute on our objectives we will build an even stronger business. We remain committed to achieving that goal.

We will take your questions now.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Jeff Schreiner from Capstone Investments.

Jeff Schreiner - Capstone Investments

Hey. Good day, guys. Thanks for taking my questions. And congratulations to navigate through some times here recently.

Scott Howarth

Hi, Jeff. Thank you.

Jeff Schreiner - Capstone Investments

Scott, could you help me, and maybe John, you could comment on this, but inventory is near the bottom or the correction that you discussed here. Does placing rebound or does demand simply stabilize? Could you help us with that?

Scott Howarth

Sure. What we're announcing is, that we'll return to normal ordering patterns. So, there as we saw through the inventory correction, effectively a lot of customers just stopped ordering, or they pushed out a number of orders, so we're starting to see what appears to be normal ordering patterns.

In terms of pricing, pricing was stable relative to the overall inventory correction. The only thing that's now impacting pricing is just some of the over supply in the memory industry at this point.

Jeff Schreiner - Capstone Investments

Okay. And then I was just wondering maybe, John, you could help with this. The gross margins obviously have been impacted by some various one-time charges as you went through, but what's maybe the stable gross margin rate for the company? Maybe plus or minus 200 basis points that we should be thinking about here?

John Cobb

Historically, we've talked about our long-term model in the mid-30s, around 35%. That was in the old model with Giantec and now we don't have Giantec and we have Si En. So, frankly, we're still evaluating what that model should be. But I think at a minimum, we would expect it to be at least at that level if not higher, because obviously Si En has a higher gross margin profile than Giantec.

So, I would say at this point, the margin that we did in December was below what we would expect on a longer term basis.

Jeff Schreiner - Capstone Investments

Okay. And then could you help me understand why automotive seem to jump. I mean, I think that's great, but what was maybe driving that? I think automotive typically has been 18% to 20% of revenues, and I think you said it was 25% collectively in this quarter.

Scott Howarth

Yeah. Automotive really continue to be strong. And overall, the weakness that we saw, large inventory correction came in the other market segments. The consumer electronics was certainly the weakest area and with telecom, we also saw some push outs there, so it's somewhat of a combination of automotive continues to be normal in terms of overall revenue, while the others had declined more.

Jeff Schreiner - Capstone Investments

Okay. Just two more questions for me and I'll get back in the queue here. The fab issues you discussed, was there any revenue slippage from those issues in the December quarter or maybe in your March guidance?

Scott Howarth

No, there wasn't.

Jeff Schreiner - Capstone Investments

Okay. And then, finally for me, what I wanted to ask about was about what percentage that as we look at fiscal year '11 and you are looking out here. Real revenue could be from contracts, which could potentially be higher margin as some of the legacy contracts, they've been in place before rolls off.

Scott Howarth

I don't have a specific number, but we're constantly going through new design wins. In each quarter, as we have communicated in the past, we've seen increasing, when we look at, at annualized dollar amount of design wins. So, as we look at new design wins, we're constantly seeing new orders, new design wins coming in and it varies by market activity, where the design wins are obviously much longer term and slower in terms of winning in the automotive and much faster when it comes to some of the consumer electronic area, so it's difficult just to put a number to it.

Jeff Schreiner - Capstone Investments

Okay. Well, congrats.

Scott Howarth

But, as I said, just to continue to grow the dollarized value of our design wins each quarter.

Jeff Schreiner - Capstone Investments

Okay. Thank you for that clarity. Congratulations, guys.

Scott Howarth

Thank you.

Operator

[Operator Instructions] And our next question will come from Daniel Berenbaum from Auriga USA.

Unidentified Analyst

Hi this is [inaudible] speaking for Dan. I had a follow-up question on the automotive segment. Do you have any concerns about slowing automotive sales in China as the government ends subsidies there?

Scott Howarth

So when we look at worldwide sales, I think right now China is I don’t know the exact numbers, but I think in the $12 million or so range relative to about $70 million cars being sold per year and you probably have some of the data, so the China market obviously as we see demand dropping, they will have some small impact, but on the percentage of the whole right now, we don’t see this being that significant for us.

Also in the China market, when you look at a lot of the content per vehicle, the electronics content per vehicle is typically a little bit lower. So that’s having a lesser impact in on some of the opportunities that we would see with infotainment and a lot of the safety features et cetera that you would see in more high end vehicle. Where we are seeing a lot of success and growth continues to be in the Europe market with a lot of the European cars adopting more and more of the safety features in infotainment, into the vehicles and driving the content per vehicle for semiconductors up.

Unidentified Analyst

Great thank you and if could maybe just provide a little bit more of color on the inventory correction and sort of just how did it run its course and just some additional color.

Scott Howarth

Sure so as we mentioned before we really started to see orders slowing down at last September and that continued really slow ordering through the entire December quarter, we started to see a little bit of pick up in December and by a little bit of pick up, we started seeing some customers starting to pull in some orders, we saw small expedites, some of those of types of things that’s indicating customers are reaching bottom of the correction and then in the January quarter, we started to see what looks to be a little bit more normal ordering pattern where customers who had pushed out a lot of demand from the previous quarter now seem to be coming back and starting to order at the levels that we would expect them to be ordering.

Unidentified Analyst

Great, thanks.

Scott Howarth

Thank you.

Operator

And our next question will come from [Jason] from Needham and Company.

Unidentified Analyst

Yes hi guys this is [Jason] in for Raji this afternoon. Thanks for taking my question. Just so that you can talk a little bit more about your gross margin expectations longer term particularly with the auto and telecom segments and then the your relationship with Micron ramping? Thanks.

Scott Howarth

So I think John gave you a little bit of color, as we looked at our gross margins our long-term model is to be able to maintain mid-30s. Taking out Giantec which was the lower margin business, replacing it with Si En essentially the same revenue, but much higher margins we think will also add to our overall margin stability. So looking forward as John mentioned we are giving us our hands around Si En still. So we will be able to update our model here in the near future and provide what we think is long-term guidance, but we fully expect to stay mid 30s and then ideally start growing as we can get to growth going with Si En and even pushing more in the automotive market. Now then your last question. Could you repeat that?

Unidentified Analyst

Yes just wondering kind of how your relationship with Micron, whether that will be accretive or not to gross margins?

John Cobb

So we expect, in that, it’s a bit early to tell but overall that segment of specialty memory is certainly higher margin than a lot of the other areas. Now currently that has margins in about 50%. So we expect it will be at least as good as our current telecom margins if not better. Also, that relationship will put us in a very, very strong number two support as we see this market continuing to grow going forward and so it will really give us the ability to become a strong second source in a fairly large market and we estimate that overall market today is about $300 million and it should be growing to about $400 million to $500 million in the next few years.

Unidentified Analyst

Alright, that’s very helpful. Thanks. And then, I guess, just lastly from me, to follow-up on one of the earlier questions. You talked about orders picking up in December and then strength continuing through January. Just wondering what type of linearity you expect for the current quarter? Do you expect those order rates to continue to pick up here in February and March? Thanks?

John Cobb

Yeah. So this is – this time of year, it is always the difficult one for us. Ideally, I would like to say, yes, we would like to see those continue. But with Lunar New Year, we always see everything basically shut down for two weeks and we really don’t have any visibility for those two weeks and then we see what happens with ordering patterns when it comes back.

Our expectation is that it will resume towards a more normalized ordering pattern for us. That’s what we are expecting and that’s our guidance has that included. But it is still early to see the recovery right now of the inventory correction we went through and how strong we will see the end of line demand again.

Unidentified Analyst

Alright, thank you, guys.

John Cobb

Thank you.

Operator

And next we will go to Andy Ng from Morningstar.

Andy Ng – Morningstar

Hi, thanks for taking my question. I was just wondering more about the Si En acquisition. What are your growth targets for that business and are there any cost synergies between that and your core business?

John Cobb

Yeah. Good questions, Andy. As far as the growth that we are expecting we, to be quite frankly, we really don’t have numbers set at this point. We have been – you saw last year, from 2009 to 2010, it grew 63%. So fairly substantial growth. Clearly, our goal is to continue their growth patterns going forward. As you get larger and larger in size, growth, it gets a little bit more difficult but we believe, as we combine them with our sales strategy, our channels or sales teams, and really be able to take them beyond just the China market where they have their strength today. We think we can really start to leverage and then grow them even faster and that typically that will take about six to nine months to start to see that kind of growth happen.

Now, on the operation synergies, we do have some fabs that we both use or should say, there is one fab we are both using. So in terms of negotiating foundry agreements, we think we will have much higher leverage since we are obviously a much larger company. And then also when it comes to assembly and test, we think we can also help leverage our volume purchases to help them achieve lower cost and then operationally we think our – by combining with our operations we will also see some synergy between both company. But overall, with Si En operating in Xiamen, China, they do have a very low operating cost structure, so we're really not looking at operational synergy, at least on from a cost savings reduction as much as we are looking at it as a way of really expanding their market share and growing their business.

Andy Ng – Morningstar

Okay, and just another question. How much exposure do you guys have to the smart phone market since that's one of the fastest growing areas right now?

Scott Howarth

So, today, in smart phones, we do not play in the main memory that goes into smartphones. Those are typically very high volume contracts. They are typically low-powered DDR or DDR2 that's going into some of those smartphones and is really supported by some of the bigger competitors that have low power high volume types of memory. We do participate in a few of them where we would have some design wins in KGB business that might go into a WiFi module or a camera module in some cellphones. Now, with Si En, that does create an opportunity for us to take a bigger role with some of its analog as well as LED backlight devices for audio as well to be able to get into a bigger penetration in some of the smartphones. So that’s one area that we want to target and focus on as well as trying to target their presence looking at the notebook and portables market.

Andy Ng – Morningstar

Okay. Thank you.

Scott Howarth

Thank you.

Operator

Our next question will come from Chris Sigala from B. Riley & Company.

Chris Sigala - B. Riley & Company

Yes, hi. Thanks for taking my question. How are you doing, guys?

Scott Howarth

Good. How are you?

John Cobb

Hi, Chris.

Chris Sigala - B. Riley & Company

Good. Scott, I believe, a while back you stated that one of the bigger opportunities you see is increasing your shared existing customers. I was wondering if you could provide somewhat of an update on where you stand with that and you've had any success on that front?

Scott Howarth

I don't have the numbers in front of me, but when we look at existing customers, we've actually increased this quarter in terms of the amount of revenue and percent of revenue that we're selling into our strategic accounts. So, that's an ongoing goal, what we call our key account strategy is to grow revenue within our larger strategic customers and become an even stronger partner to them. So, this quarter, we definitely made progress to it, although, I don't have the numbers right in front of me.

Chris Sigala - B. Riley & Company

Okay, great. That's helpful. And then just in general from a product portfolio standpoint, where do you see the portfolio trending towards long-term? Do you yourself moving towards in the higher density products in SRAM market, some of the SYNC and DDR-type products.

Scott Howarth

Yeah. So, on the SRAM side, right now, we do have 72 meg. We expect -- we're designing a new 32 meg DDR, so that we can be a lot more cost effective and increase performance on it. We will redesign our 72 meg and introduce that. So, again, we can have higher performance with it. We've been evaluating 144 meg, but we're still in evaluation mode on it.

Where we have been focusing for -- and as well as increasing our product portfolio on some of the SYNC 8 meg, 9 meg, 18 meg and even looking at 36 meg in the synchronous market for SRAM. Where we have instead been focusing more energy is the RLDRAM, which is really going to take a large percentage of the business that QDR SRAM is supporting today. That is those customers migrate from a QDR SRAM to DRAM technology, utilizing RLDRAM then we'll be prepared to capture and support those customers.

Chris Sigala - B. Riley & Company

Alright thanks a lot, guys.

Scott Howarth

Thank you.

Operator

We have one question left in the queue. [Operator Instructions] And our next question will come from William Myers from Miller Asset Management.

William Myers – Miller Asset Management

Hi, yes. I'd just be interested in what you could tell us about the RLDRAM 3 ramping this year?

Scott Howarth

Sure good question. The RLDRAM 3 we view it as really more of a 2012 revenue. We expect to start sampling in the middle of the year during summer time and normally design cycles for this are in the 9 to 12 month range. So RL3 we think will then start to ramp and this is a new technology that hasn’t even been introduced into the industry.

So the RLDRAM technology that is currently selling to customers which is predominantly being supported by Micron is RLDRAM 2 and that’s the volume that is shipping RLDRAM wants Micron and ISSI introduce it later this year. We will then start ramping up in new designs. The good news with it is we expect those types of designs will have a very, very long life cycle. Anywhere from 5 to 7 to in some cases many as ten years. And that’s one of the strategic values we will bring as we will continue to support RLDRAM for years to come.

William Myers - Miller Asset Management

Okay, good. Would you say there is going to be any significant in R&D costs this year as you prepare for that cycle?

Scott Howarth

Not significant increase this year, no.

William Myers - Miller Asset Management

Okay, thanks.

Scott Howarth

Great thank you.

Operator

[Operator Instructions]. And at this time we have no further questions in the queue. We will turn it back over to our speakers for any additional or closing remarks.

Scott Howarth

Okay well thank you all for participating in this call and have a good evening.

Operator

That does conclude our conference for today. Thank you for your participation.

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