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Executives

Scott Howarth - President & CEO

John Cobb - VP, Finance and Administration & CFO

Analysts

Daniel Berenbaum - MKM Partners

Chris Sigala - B. Riley & Company

Jeff Schreiner - Capstone Investments

Raj Gill - Needham & Company

Austin Hopper - AWH Capital

Integrated Silicon Solution, Inc (ISSI) F4Q2011 (Qtr End 09/30/2011) Earnings Call October 26, 2011 4:30 AM ET

Operator

Good day everyone and welcome to the ISSI Fiscal Q4 2011 Quarterly Earnings Conference. As a reminder, today’s call is being recorded.

At this time, I would now 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 2011 fourth quarter and fiscal year ended September 30, 2011. 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, availability of [adequate] capacity or adverse developments in the global economy.

We refer you to the document ISSI files from time-to-time with the SEC, specifically our most recent Form 10-K filed in December 2010 and our most recent Form 10-Q filed in August. 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 with our overall performance of the quarter and year in which we achieved solid profits and cash flow. We achieved strong demand across our target markets as we continued to increase our design and momentum and gain market share with our expanded product offerings. We believe these financial results once again demonstrate the strength of our high-quality specialty memory focus and long-term consistent supply relationships with customers.

Revenue in the September quarter was $71.3 million, which was at the high end of our guidance range. Our GAAP net income was $34.9 million or $1.23 per share. This includes a $28.1 million income tax benefit which John will discuss in more detail shortly.

Our non-GAAP net income was $8.2 million or $0.29 per share. Our non-GAAP results exclude the income tax benefit, stock compensation and the amortization of Si En intangibles. We also achieved $11 million in cash flow from operations.

For fiscal 2011, revenue was a record $270.5 million increasing 7.1% from the prior year. GAAP net income was $56 million and non-GAAP net income was $33.4 million or $1.18 per share. On top of this solid net income numbers, we generated $30.6 million in cash flow from operations during the fiscal year.

SRAM and DRAM revenue in the fourth quarter increased 1.1% sequentially to $60 million which was within our guidance of relatively flat sequentially. DRAM revenue grew 6% sequentially driven mainly by demand from our automotive communications customers. SRAM revenue decreased 9% sequentially as a result of weaker demand in the industrial markets primarily in Europe.

We also continue to successfully execute our strategy to gain share on our key markets. Automotive revenue grew 2% from the June quarter and 33% from the year-ago quarter. We also achieved strong sequential growth in the communications market with 8% revenue growth. However, our communications market revenue decreased 40% on the year-over-year basis due to overall end market weakness.

The industrial, medical and military revenue decreased 15% sequentially as Europe demand was weaker during the quarter, but increased 41% from the year-ago quarter. We believe there are large and growing opportunities for ISSI in these markets where customers value our high quality products, [deteriorating] capability in long-life cycle report.

Now, I will briefly review our key markets and products, including DRAM, SRAM and analog.

During the September quarter Specialty DRAM represented 62% of our total revenues and increased 7% on a sequential basis, while commodity DRAM represented less than 1% of our total revenue giving ISSI almost no exposure to this volatile memory market.

For the year, DRAM revenue increased 13% over fiscal 2010. In terms of Specialty DRAM design wins, we had another strong quarter across all of our end markets including several large DDR2 design wins for automotive, communications and industrial applications. We also achieved a number of key design wins for both BI16 and BI32 configurations in the automotive, telecom and consumer markets.

We also have strong design activity for our new DRAM products including our 256 megabit, 512 Megabit, 1 Gigabit and 2 Gigabit DDR2, our Mobile SDRAM and our 64 Megabit and 128 Megabit low power SDRAM KHD product. We expect these new devices to contribute to revenue growth in the coming quarters and further expand our market share. In addition, our SD RAM and DDR1 products are seeing increased share opportunities as some of the larger customers reach end-of-life on their equivalent products.

In August, we announced that we had began sampling a new 2 Gigabit DDR2 device. This 1.8 Volt device operates at speeds up to 332 Megahertz. By using this more advanced technology, we’re able to provide long-term product support required for long life cycle applications in automotive, communications and industrial memory markets.

Additionally, we continue making progress with RLDRAM memory. We’ve sampled our RLDRAM-II memory to over a dozen customers who are currently evaluating and designing our part. We expect to begin shipping revenue in the second half of calendar 2012.

We plan to begin sampling our RLDRAM-III late this quarter and have over 10 customers who have expressed interest and plan to design it in the next year. We expect to begin ship our RLDRAM-III in the second half of calendar 2012. Overall, we continue to see increased opportunities to expand our market share and grow our specialty DRAM revenue.

Turning to our SRAM revenue, SRAM represented 30% of our total revenue in the September quarter decreasing 8% sequentially and 11% from the year ago quarter. The decrease in our SRAM revenue was primarily the result of weaker demand in Europe in the industrial markets as customers became very cautious and delayed orders.

For fiscal 2011, SRAM increased 6% compared to fiscal quarter 2010 as we benefitted from our investment to expand our SRAM offerings and increasing our market share. During the quarter we continued to secure strong SRAM design wins in our key markets for various densities of our products including several large design wins with our 4 Megabit,8 Megabit and 16 Megabit asynchronous products, primarily for automotive, industrial and communication applications and with our synchronous products in communication applications.

We also had several large design wins for our current 36 Megabit QUAD SRAM with a leading communications company. We have began sampling our new higher performance 65 nanometer, 36 Megabit QUADP synchronous SRAM and we will begin sampling our new 65 nanometer, 72 Megabit high performance QUADP SRAM, I think SRAM later this quarter.

Recent reports from our customers indicate that Samsung will exit the synchronous SRAM market by the end of 2012. We believe Samsung’s exit from the synchronous SRAM market will create significant opportunity for ISSI to gain share and it’s advantageous of its timing as we are rolling out new advanced 36 Megabit and 72 Megabit high performance synchronous SRAMs in time to replace those designs vacated by Samsung. As we look into 2012, we plan to expand our SRAM product line with even higher performance, 28 nanometer synchronous SRAM that will provide us with leading edge SRAM memories to support our growth.

With our continued investment in providing competitive SRAM solutions and long lifecycle support, we are confident that we will continue our long term growth in the SRAM market. And finally our analogue revenue from Si En was $5.3 million for the September quarter, which was near the high end of our expected range of $4.5 million to $5.5 million. Si En’s revenue grew 19% sequentially as a non-branded cell phone market rebounded from June quarter’s weakness.

As a reminder, Si En’s products include audio power amplifiers and LED drivers for back lighting and panel display, plus some voltage converters and temperature sensors. Nearly all of Si En’s revenue is from China and its higher margin products are sold into the mobile communications, digital consumer and networking market. Si En has strong design wins in China during the September quarter across all its product lines.

As I highlight to the strong quarter, we also secured a large design win in India for Si En’s fun light, LED driver analog device. This is a first major design win for Si En’s products that was obtained by leveraging ISSI’s sales force. We see many similar opportunities for Si En’s products in India and other locations throughout the world and we’re very excited about opportunities for growth in the analog market.

Looking at our guidance for the first fiscal quarter of 2012, we expect total revenue to be in the range of $65 million to $72 million. Seasonal expectations for our first fiscal quarter would be a growth quarter but with a current economy uncertainty slowing semiconductor growth in lower starting backlog compared to the September quarter, we believe growth this quarter will be challenging. So we’ve expanded our revenue range and are forecasting revenue to be flat to slightly down sequentially.

We continue to see some weakness in our European market and also in the communications market. As we look forward into 2012, we see strong growth opportunities in our target markets for SRAM, DRAM and our analog products.

In summary, we’re very pleased with our financial performance in the September quarter in which our revenue was at the high end of our expected range and much better than other companies that participate in the DRAM market and even a broader semiconductor market as a whole. We believe our focus on high-quality specialty memory products reduces volatility and provides greater potential for growth in revenue and profit as well as higher and more sustainable margins that can be achieved by other similar memory companies.

The advantages of our fabulous business model combined with stable end market and support for our customer’s long product life cycles further contributes to our opportunity to grow revenue and profits in the future.

One last comment before I turn the call over to John. As we’ve previously discussed one of our foundries SMIC, decided to exit the DRAM market last year and another foundry shutdown their 0.11 micron process. In addition to transitioning customers to other foundries we made final purchases of SMIC inventory and 0.11 micron process inventory to help ensure a smooth, end-of-life transition for our customers.

We’ve now sold nearly all of the DRAM inventory purchase from SMIC. At the end of September we had $4.1 million of the 0.11 micron process inventory and we expect to sell that inventory during the fiscal year. From a planning standpoint, lead times and foundry and assembly and test have shortened from a year ago as foundry utilization rates and pricing have fallen.

We have purchased testers and made advanced payments to foundries to help ensure adequate capacity for certain devices and reduce test costs, and we will continue to evaluate and make strategic investments to secure adequate supply for our products. In addition, we don’t have any contract manufacturing in Thailand and are non-affected by the recent floods there.

Looking forward to December quarter, we do not expect wafer or backend capacity to have a significant impact on our business. Now let me turn it over to John to discuss the numbers, and I will then provide some closing remarks.

John Cobb

Thank you, Scott. As Scott mentioned, our revenue for the September quarter was $71.3 million, at the high end of our guidance range of $68 million to $73 million. SRAM and DRAM revenue was $66 million and analog revenue from Si-En was $5.3 million. The SRAM and DRAM revenue increased 1% from $65.3 million in the June quarter and decreased 2.2% from the year-ago quarter which was ISSI’s highest revenue quarter.

Revenue in fiscal 2011, was a record $270.5 million compared to $252.5 million in fiscal 2010, an increase of 7.1%. In fiscal 2011 our SRAM and specialty DRAM revenue grew 14.7% over the fiscal 2010. Our revenue in fiscal 2011 by market was 31% communications, 26% automotive, 18% industrial and medical and military, 20% consumer memory and 5% consumer analog.

Gross margin was 33.4% in the September quarter which was in middle of our guidance range of 33% to 34%. This compares to 33.2% in the June quarter and 37.8% in the year-ago quarter.

In fiscal 2011 our gross margin was 33.4% compared to 38.2% in fiscal year 2010. Operating expenses were $70 million in the September quarter compared to $15.6 million in the June quarter and $15.5 million in the year-ago quarter. The September quarter operating expenses were above our guidance of $16 million to $16.5 million due to two factors. First we had an unexpected bad debt write-off of $400,000.

Second we incurred $400,000 in expense for product mass that were originally expected to be incurred in later quarters. As we’ve previously stated, our product mass expense will fluctuate from quarter to quarter based on our product development schedules.

Even with these slightly higher expenses, we achieved GAAP operating income of $6.8 million in the September quarter compared to $7.5 million in the June quarter and $12.4 million in the year-ago quarter. Our non-GAAP operating income in the September quarter was $8.3 million which excludes stock-based compensation and amortization of intangibles related to the acquisition of Si En compared to $9.1 million in the June quarter and $13.2 million in the year ago quarter.

Interest and other income in the September quarter was $800,000 compared to $700,000 in the June quarter and $100,000 in the year ago quarter. We had no gains on sales of investment during the quarter. In the September quarter we had an income tax benefit of $27.5 million which includes a $28.1 million income tax benefit from releasing a portion of evaluation allowance under deferred tax assets. The company has deferred tax assets resulting from net operating loss carry forwards, tax credit carry forwards and other book and tax timing differences related to federal, state and foreign tax jurisdictions.

Previously the company provided a full evaluation allowance against these deferred tax assets due to the assumption that it was more likely than not that the assets would not be realized. Based on our increased operating profits and expectations of continued profitability, the company has now determined that it is no longer necessary to fully reserve these deferred tax assets and as a result the company recorded net deferred tax assets resulting in a $28.1 million income tax benefit in the September quarter.

GAAP net income for the quarter was $34.9 million including the $28.1 million income tax benefit or $1.23 per diluted shares. This compares to GAAP net income of $8.1 million or $0.28 per share in the June quarter and GAAP net income of $11.8 million or $0.43 per share in the year-ago quarter. Non-GAAP net income was $8.2 million or $0.29 per share. This compares to non-GAAP net income of $9.6 million or $0.34 per share in the June quarter and non-GAAP net income of $12.6 million or $0.46 per share in the year ago quarter.

For fiscal 2011, the company had GAAP net income of $56 million or $1.98 per share compared to $42.2 million or $1.56 per share in fiscal 2010. Our non-GAAP net income in fiscal 2011 was $33.4 million or $1.18 per share compared to $44.7 million or $1.65 per share in fiscal 2010. Please refer to our press release and Form-8K for a reconciliation and further explanation of our GAAP to non-GAAP results.

On the balance sheet, we ended the quarter with $95.4 million in cash and short-term investments which is an increase of $5.8 million in June. We generated $11 million in cash flow from operations in the September quarter and used $4 million to repurchase 500,000 shares. In fiscal 2011, we generated a total of $30.6 million in cash flow from operations. At the end of September, we had $3.61 per share in cash and short-term investments.

Our inventory decreased $4.2 million from June. Inventory turns were 3.4 in the September quarter. Excluding the additional end-of-life inventory that Scott mentioned, we had 3.6 turns, which is below our goal of four turns, but still healthy for our business in the current environment. Our accounts receivable increased during the quarter by $1 million and the days sales outstanding were 50 days compared to 49 days in June.

We continue to demonstrate the strength of our fabless business model. Our book value per share has increased 79% in the last two years from $4.96 in September 2009 to $8.89 at the end of September 2011. In addition, our return on equity was 14.5% in fiscal 2011 excluding the impact of the deferred tax asset which is higher than many semiconductor companies and we continue to generate strong operating cash flow.

Let me turn to our guidance for the December quarter. We expect that overall demand trends in the December quarter will be below typical seasonality due to the high degree of uncertainty in the global economy and slowing semiconductor demand. As such, we expect total revenue to range between $55 million and $72 million.

This guidance reflects expectations of SRAM and DRAM revenue between $60.5 million and $66.5 million in Si En’s revenue between $4.5 million and $5.5 million.

Gross margin for the December quarter is expected to range between 33% and 34%. We expect DRAM and SRAM pricing to be flat to slightly down sequentially.

Operating expenses are expected to range between $15.7 million and $17.4 million. Including a higher product mask cost compared to the September quarter. As we previously stated, our product mask cost will fluctuate from quarter-to-quarter.

We also expect about $300,000 from interest in other income.

We expect that our effective tax rate will be approximately 25% including non-cash deferred tax expense from the reduction of deferred tax assets. Excluding the non-cash deferred tax expense the effective tax rate is expected to be 5%.

So this taking these factors of the December quarter all into account, the company expects GAAP net income to be between $0.15 and $0.22 per share and non-GAAP net income which excludes tax expense related to the reduction of deferred assets, stock-based compensation and the amortization of intangibles related to the acquisition of Si En to be between $0.22 and $0.29 per diluted share.

Now back to Scott for final comments.

Scott Howarth

Thanks John. Overall, fiscal 2011 was a very good year for ISSI. Our results demonstrated the financial benefits of our high-quality specialty memory focus. We achieved record revenue, had strong profit and cash flows, strengthened the balance sheet and added Si En’s analog products. We continue to gain share in our target markets through expanded product offerings, design win traction and long-term support.

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 and strategic partners and number five, to remain focused on profitable growth and efficient use of our resources.

We believe we are poised for growth in future quarters as the global economic conditions improve. In 2011, we grew our total revenue by 7% while the semiconductor industry growth was flat and we grew our specialty DRAM and SRAM by more than 14% while those two memory markets declined from 2010 to 2011.

We believe these results show the value of our specialty memory strategy as we continue to successfully execute on our objectives, we believe we will continue to gain market share and build an even stronger business. We remain committed to achieving that goal. We will take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Daniel Berenbaum of MKM Partners.

Daniel Berenbaum - MKM Partners

Scott, I am actually eager to something you just talked about which is growing your revenue despite the market shrinking, and if I look at where other semiconductor companies are broadly guiding December quarter revenue, everything seems to be going back to sort of Q4 ’09 or Q1 ’10 levels, and you are well above that.

So can you talk about what exactly has been driving that revenue growth? Is it because you have folks like Samsung exiting the market or is it other factors? And then along those same lines, can you talk about in SRAM what percent market share does Samsung have right now? So how much potential market share is there for you to gain over the course of next few years?

Scott Howarth

Yeah, so let me answer the first question. When you look at our revenue overall, it’s a combination both from the end markets that we are supporting as well as the products that we keep introducing, and the combination there when you look at the -- really the segregation there, the segmentation of our markets, we are really focused on four different markets, each which have their own cycle.

So we are not subject to any one particular market and each of those are about a quarter of our revenue or so. We are seeing strength in the comp space overall with -- certainly with the build-out of increased wireless communications. Automotive continues to do well, those end markets especially with the increase in the amount of technology that's going into vehicles and then our IMM market continues to do well, also.

So balancing those with the fact that we’ve rolled out so many new products and particular really build out our DDR and DDR2 product lines, as we mentioned, we just introduce a 2 gig DDR2 and we really started to see a lot of traction in these new products now. So it’s a combination of where we are gaining share that is really driving it.

So, we think even though the semiconductor revenue looking forward is still guided to be, I think, estimates are in the 5% range or so, we still think we’ll be able to continue to outgrow the overall semi industry.

Now on the SRAM side, the exiting of Samsung hasn’t really impacted any of our short-term revenue. We think it will start to have an impact in really late 2012 and 2013.

We’ve estimated their revenue to be anywhere from about 15% to maybe as much as 20% of the overall market, which had put it somewhere around 150, maybe as high as $200 million. So, as we look forward, we think we’re well-positioned to start getting those design wins and picking up a fairly significant share of that market which we will probably see again revenue wise towards the more the back end of 2012 going into 2013.

Daniel Berenbaum - MKM Partners

Okay. Great. Thanks. That’s helpful and then John, just real quick, if you without the deferred tax asset what your tax rate have been in this quarter, and then more importantly how many more – what else do you have off balance sheet in terms of NOLs and deferred tax assets?

John Cobb

The tax rate this quarter would have been about 8% without the 8% expense -- without deferred tax assets and we still have about $23 million in deferred tax assets that are fully reserved.

Operator

And we’ll go next Chris Sigala of B. Riley & Company.

Chris Sigala - B. Riley & Company

Hey, thanks a lot. Just following up on your last comment about the Samsung exit. If you could peg down what your market share is today in the portion of the SRAM market that you cited Samsung as about 15$ to 20% share or what would you say that is today?

Scott Howarth

Our share, we estimate is probably 8% to 9% of the SRAM market and this is excluding pseudo SRAM.

Chris Sigala - B. Riley & Company

Okay. And is there any sort of general guidance as far as where you see that share going to, you know, as we go into 2013?

Scott Howarth

No, we haven’t really figured out whether our guidance should be. Clearly we expect to gain, you know, a significant portion of Samsung’s synchronous SRAM market they are leaving behind. So, right now we don’t have numbers in terms of product – projections, but we do expect to with the product line that we’ll have 65 nanometer will be very competitive and then as we discussed or designing down to 28 nanometer which will give us very, very competitive synchronous devices, high performance they will be able to be quite competitive in that marketplace.

Chris Sigala - B. Riley & Company

Okay. Great. Thanks a lot. And then last question just on the design win at Si En in India which was good to see, I guess what can you say as far as -- when we can expect revenue contribution from that, kind of how that affects your general outlook for Si En going forward?

Scott Howarth

We think that will be within two quarters, three quarters at the most we’ll see revenue from that particular design win and we’re still working with – in India we’re looking at two other design wins that we think we should be able to secure this quarter that also will be you know significant revenue going forward.

So the pitches of Si En where they continue to be very strong is in the audio amplifier market, but that market is fairly competitive, so while we are shipping 50 plus million units of order its pricing there you know its in the units of $0.04 or $0.05 and still a competitive environment. So we continue to add new features, add new devices and we think we’ll continue to see new design wins with it.

The place that we’re more excited is what we call our funlight LED backlight and what this is its basically its LED lighting drivers that will go into cell phones so it will be on the back side of the cell phone or in some cases even in notebook or trying to work into light goods like refrigerators that would provide LED lighting that can be programmed to have different displays, that can read out phone numbers that somebody is calling or you know in one case where we may even have the logo of a particular company.

So it’s a variety of things that we can do in terms of LED drivers that we think create a pretty unique opportunity for us and as far as we could see the marketplace, we’re the only ones that are offering a similar product.

Operator

And we will go next to Jeff Schreiner of Capstone Investments

Jeff Schreiner - Capstone Investments

John, starting with you, can you talk about the 25% tax rate; is that a GAAP number and you are offset I know you said to get to a non-GAAP of 5% and is it going to be 25% for the entire fiscal year ’12?

John Cobb

Yeah the 25% is the estimated effective tax rate and that is a GAAP number. But included in that 25% is once we set up the deferred tax asset then we utilize that deferred tax asset and so it comes to as an expense and that of the 25% that will represent about 20%. So on what I would call the cash tax expense is about 5%. So its our expectation that when we report our non-GAAP results for the first quarter and thereafter, we will take out the 20% of the non-cash item, just as we took out the deferred tax credit that we got in the September quarter.

Jeff Schreiner - Capstone Investments

Okay, that was very helpful. That's what I was trying to kind of get around to see if there was going to be a tax offset in the non-GAAP number. So when you look at the amount of high density revenues for SRAM today, can you kind of give us an idea of maybe where ISSI is and may be what's their projection for fiscal 2012; but also just trying to get an idea about what's the difference you know the amount of contribution that you could grow in ASPs that ISSI may receive between a low-density, low-speed type SRAM product and a high-speed high-density product such as some of the quad products you’ve talked about today?

Scott Howarth

So, today as I have mentioned in the past are high performance products both 36 as well as 72 meg just have not been competitive. They are at 0.11 micron and we just haven't been able to really get much traction in terms of revenue with those. So we've been designing new devices of 65 nanometer and even starting to look at going eventually migrating those down to 28 nanometer as well.

So from a revenue contribution standpoint right now, we’re sampling our 36 meg, we’ll be sampling a 72 meg later this quarter in which there in the 20 plus even $30 to $40 product price range for some of these memories where we think we’ll be able to start getting significant contribution more towards the second half of 2012.

And looking forward, I mean the segment, the high performance QDR, DDR segment, we estimate to be $400 million to $500 million segment. So this is where a lot of the opportunity will come from.

Jeff Schreiner - Capstone Investments

Okay. And then may be Scott or John may be either one of you can may be talk about kind of where the end demand is right now in SRAM may be versus inventory that’s hitting the customers. Kind of where – how are you guys shipping to end demand right now in SRAM and how is that market looking, is it seasonal or is it a little bit softer going into the December quarter, any color you can give there?

Scott Howarth

Yeah, SRAM is a little bit soft. You can see even this last quarter our SRAM revenue was down, that was primarily for us caused by European slowness more in the industrial space and then also a little bit in some of the communication space. And so we see from revenue this quarter, it seems to be a little bit weak as well based on some of the feedback we’re getting from customers.

Jeff Schreiner - Capstone Investments

Okay. And you know how heavy Scott is Micron playing in the legacy DRAM market and what opportunity would there be for ISSI if Micron was not participating as extensively let’s say a legal case sets them back to where they really have to pull out the legacy DRAM market in anyway. What would be the opportunities and how much is Micron putting their hands back in kind of backwards into that legacy market right now?

Scott Howarth

On the size of it, they are clearly the leader I would say in the specialty memory market. So if they were to vacate or for some reason, they didn’t participate the market opportunity would in the hundreds of millions per quarter type of range and I don’t have the exact numbers, but it would be you know quite significant.

We have seen Micron be a little bit more aggressive in some of the more legacy I would call it markets. We do see them being price competitive in some areas. They recently announced a 10 year supply guaranteed program of which if customers pay a premium price they will get 10 years of guaranteed supply. When you compare that to our solution we don’t offer, we don’t request premium price, but we will also have and we’ve always had the same guarantees to our customers.

So I think it’s a little bit of a marketing program they are trying on some select products while you know to guarantee long-term supply well you know that’s ISSI’s overall strategy in what our customers look for when they design us in. So we believe as we look at the market share overall, we are gaining share and there continues to be some constraint supply overall depending on you know the individual devices that customers are looking for.

Jeff Schreiner - Capstone Investments

Okay. One last question I appreciate, let me get these questions in and then John coming back to you. I didn’t hear any commentary about the possible listing of Taiwanese dollar and some of the headwinds there, obviously for more than half to quarter it’s being well above 30 in terms of the exchange with the US dollar, just wondering what the negative impact was in this quarter, the gross margin from the Taiwanese dollar and maybe what if any you are implying in the gross margin guidance for December.

John Cobb

Actually the US dollar strengthened versus the Taiwan dollar at the end of here in the month of September. So in terms of a balance sheet impact, we are actually down below the line, we got some foreign exchange gains, the couple of $100, 000. In terms of gross margin it sequentially it didn’t really much impact on our gross margin compared to the June quarter mainly because the strengthening of the US dollar happened at the end of the quarter, so to the extent there was any benefit it was left in inventory, it should help us going into the December quarter if the exchange rate stays where it is and overall it’s now where it was a year ago. So we went through a dip and then came back up pretty significantly in the month of September, but we haven’t seen at least in the gross margin that pick up yet, but it will be a positive factor in the December quarter and it’s already being factored into our guidance.

Jeff Schreiner - Capstone Investments

And would you expect it again I know we are getting a little thought here and I don’t want to put anything into more just about the impact of a positive may be tailwind turning from a headwind to a tailwind here. It sounds like it may be still doesn’t have that much impact in December, but if it was to stay constant for a full quarter may be like December would we get to see a little bit more of it by March as you run through a full quarter of that or is that a better way to look at things?

John Cobb

I would think that we would see most of it in the December quarter, assuming the exchange rate doesn’t move much from where it is now but as I said that’s already been factored into our guidance.

Scott Howarth

But I think the key there to Jeff is that you know with the volatility that we have seen, we are playing very cautious in terms of what we expect the dollar maybe doing.

Operator

(Operator Instructions) We will go next to Raj Gill of Needham & Company.

Raj Gill - Needham & Company

Could you maybe describe a little bit about the competitive landscape in SRAM as well as in specialty DRAM market. Any market share shift you saw in SRAM and may be characterize your positioning in the specialty DRAM that would be helpful.

Scott Howarth

Sure, I would say overall in the SRAM market we do see Cypress continuing to be fairly aggressive in the market. We've seen customers looking for alternative supply based on the current legal battle that's occurring between both GSI and Cypress. So we see opportunity there in the future as well.

And then with Samsung evocating, we think that's going to create a fairly significant opportunity for us to be able to gain share in that segment. As I mentioned we are introducing, we do have a very good synchronous product line, but we are also introducing new cloud performance synchronous SRAM, both 36 as well as 72 meg which will really give us a very, very competitive solution.

So we think that will really get us into a position to start gaining share overall in the synchronous high performance memory market. On the DRAM side, it continues to be what I consider as a constant competitive environment, some of the smaller density devices we’re seeing competitors are really not feeling some of those sockets, so that’s been an opportunity for us to gain share.

Many of our customers that need long-term supply continue to turn for us, so we continue to get design and we continue to pickup opportunities for growth. And there I’d say we’re seeing different competitors, Micron principally is our primary competitor in specialty memory and they have been a little bit more aggressive lately. I think they’re losing margin in the primary PC memory supplies, so they’re looking for other areas to try to pickup revenue.

Raj Gill - Needham & Company

What do you think your overall market share is in specialty DRAM and where do you think your market share is in the automotive and communication DRAM sectors?

Scott Howarth

In overall specialty, we’re probably still in the 5%-6% range. Based on what we estimate, we estimate the overall specialty may be about a $5 billion market. In terms of automotive and comp, I am trying to remember the exact numbers, yeah we’re running about 10% for automotive and comp is very large, so we’re in the single digit still.

Raj Gill - Needham & Company

And just kind of drilling down on the Samsung opportunity, 150 million to 200 million of their share, how much of that do you think are kind of last time buys Tier 1 networking equipment suppliers that will have less multiple years. And so how much do you think is reasonable that’s going to be up for grabs and of that amount, how much do you think Cypress will get and just trying to quantify the overall in terms of opportunity in a more realistic fashion?

Scott Howarth

Good question. So few things that we haven’t really I can clarity on with Samsung is if this is related to all customers or they are going to support key customers. If they support you know probably a few of the you know big specialty telecom customers longer-term that’s probably you know $50 million to as much as $70 million just for you know two or three big customers there that they could be supporting, so it could as much as a third to half of the overall opportunity.

So if you subtract that out let’s say it’s a $150 million you know $50 million to $70 million of it they continue you as key accounts that would put – leave any where from $70 million to $100 million remaining. My guess is probably in the market right now GSI is the leader in terms of SRAM performance, but overall Cypress I think has the largest share in terms of SRAM today. So between the three of us, I definitely think we’ll all get a fairly substantial part of it.

Operator

(Operator Instructions) We have one more question from Austin Hopper of AWH Capital.

Austin Hopper - AWH Capital

Hi, guys thanks for taking my question. You talked about changing market share in SRAM and you mentioned the legal situation between Cypress and GSI. It sounds like GSI is kind of beaten Cypress in the marketplace and so Cypress are suing them. Would you be concerned that they will sue you as well if you gain share?

Scott Howarth

It’s always something that we need to be concerned about and it’s possible you know and unfortunately in the U.S. right now in such a litigious environment that you know any type of law suites are quite common. We think we have a very, very good patent portfolio. We have been in the SRAM businesses since 1995; that was our original core industry. So we believe we’ve had a number of patents, SRAM and DRAM we have over 70 patents. We think we have a very strong protection, and I don’t know the details of the legal battle but overall our technology has been developed internally and so we really don’t have any overall worry in terms of somebody else containing that we may be using their technology. But in this environment any body can sue anybody.

Operator

And there are no further questions remaining at this time.

Scott Howarth

Thank you for participating in this call. We plan to participate in two upcoming investor conferences. We will present at the TechAmerica Classic Conference in San Diego on November 7th and at the R.W. Baird Technology Conference in San Francisco on 29th. We hope to see you at these events. Have a good evening.

Operator

And this does conclude today’s conference call. We thank you for your participation and have a wonderful day.

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