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Executives

Scott Howarth – President and Chief Executive Officer

John Cobb - Chief Financial Officer

Analysts

Jeff Schreiner – Capstone Investments

Rajivindra Gill – Needham & Company

Christopher Longiaru – Sidoti & Company

Ada Menaker – MKM Partners

Chris Sigala – B. Riley & Company

Richard Shannon – Craig-Hallum Capital

Integrated Silicon Solution, Inc. (ISSI) F1Q 2012 Earnings Conference Call January 25, 2012 4:30 PM ET

Operator

Please standby we are about to begin. Good day everyone and welcome to the ISSI fiscal quarter one 2012 quarterly earnings conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the proceedings over to Mr. Scott Howarth, Chief Executive Officer. Please go ahead, sir.

Scott Howarth

Good afternoon and welcome to ISSI's conference call for the first fiscal quarter ended December 31, 2011. I am Scott Howarth, President and Chief Executive Officer and with me is John Cobb, our Chief Financial Officer. Before we proceed, I've 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 want 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 foundry capacity, 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 2011.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. Results for this quarter reflects two major themes with our memory business doing very well and performing as expected while our smaller analog business dropped significantly caused by the weak Chinese feature phone market. For our memory business, our first quarter results reflect solid performance even during a period of weaker demand in a couple of our end-markets.

We achieved record sales especially DRAM, primarily due to increased demand from our automotive and industrial medical and military customers while we continue to achieve strong demand in design win traction. These DRAM results reflect the diversity of our business across four large and differentiated end-markets and the continued success of our focus on high-quality specialty memory products.

Our new product execution is on track as we continue to introduce new products and we are also seeing increased opportunities to gain market share as some of the largest competitors reach end of life on certain DRAM and SRAM products.

In the communications market we experienced a higher level of weakness as our customers demand for base stations and networking equipments flows impacting our SRAM business. In regards to our analog products, revenue in December quarter declined significantly due to decreased sales of feature phones in the Chinese market. As a transition in demand from feature phones to smart phones accelerates in China, this trend will adversely impact our analog business in the short term.

We are working to broaden our analog market opportunity inside and outside the China and in new product areas that we will expand our addressable market. Now let me discuss our results for the December quarter in more detail. Revenue was $66.2 million, which was within our guidance range. Our GAAP net income was $3.8 million or $0.13 per share.

Our non-GAAP net income was $6.3 million or $0.22 per share. Our non-GAAP results exclude stock compensation, the amortization of Si En intangibles and the non-cash tax expense from utilizing net deferred tax assets.

We also achieved $7.6 million in cash flow from operations. Combined SRAM and DRAM revenue in the December quarter decreased 3.4% sequentially to $63.8 million which was at the mid-point of our guidance range and represented an increase of 6% over the prior year quarter.

DRAM revenue grew 1% sequentially as we benefited from strength in the automotive market coupled with greater product diversity, long life cycle design wins and solid supply relationships with our customers.

As I mentioned previously, SRAM revenue decreased due to weakness in the communications market and was down 12% sequentially and our analog revenue in the December quarter was 55% or $2.9 million lower than the September quarter. We also continued to – because we execute our strategy to gain share in our key markets, automotive revenue grew 24% from the September quarter and 44% from the year ago quarter.

We also achieved strong growth, in the industry, industrial, medical, and military markets with 5% sequential growth and 60% revenue growth over the prior year quarter. Overall, our communications market revenue decreased 24% sequentially and 28% on a year-over-year basis due to overall end-market weakness.

We believe there are large and growing opportunities for ISSI in these markets where customers value our high-quality products, strong engineering capability and long life cycle support.

Now I will briefly review our key markets and products including DRAM, SRAM and analog. During December quarter, especially DRAM represented 67% of our total revenue and increased 1% 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.

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 by 15 and by 32 configurations in the automotive, telecommunications and consumer market.

We also have strong design activity for our new DRAM products including our 256-megabit, 512-megabit, one-gigabit and two-gigabit DDR2, our mobile SDRAM and our 64-megabit and 128-megabit low=power SDRAM KGD products. We expect these new devices to contribute to revenue growth in the coming quarters and further expand our market share.

Our SDRAM and DDR1 products are seeing increased share opportunities as some of the larger competitors reached end of life on their equivalent products both Samsung and Hynix have recently informed their customers that they are exiting the SDRAM and DDR1 markets in 2012 which should provide share gains for ISSI as customers seek stable alternative suppliers to be continuing market demand for these products.

Additionally, we continue to make progress with RLDRAM memory. This positions ISSI to not only sort of legacy memory markets but also become a source for newer technologies for newer designs. We have sampled our RLDRAM2 memory to over a dozen customers who are currently evaluating and designing in our part. We expect to begin shipments in the second half of calendar 2012.

We have started sampling of our RLDRAM3 this quarter and expect our first small revenue by the end of March. Today, more than ten customers have expressed interest and plan to design it in. We expect to begin volume shipment of RLDRAM3 in the second half of calendar 2012. Overall we continue to see increasing opportunities to expand our market share and grow our specialty DRAM revenue.

Turning to our SRAM revenue, SRAM represented 29% of our total revenue in the December quarter, decreasing 12% sequentially and 14% from the year-ago quarter. The decrease in SRAM revenue was primarily the result of continuing softness in the communications market.

During the quarter, we continued to secure strong SRAM design wins in our key markets for various densities of our products. These included several large design wins for our four-megabit, eight-megabit and 16-megabit asynchronous products primarily for automotive, industrial and communication applications and with our synchronous products and communication applications.

We also had several large design wins for our current 36-megabit and 72-megabit quad SRAMs with leading communications company.

We have begun sampling our new higher performance 65-nanometer 36-megabit and 72-megabit quad P synchronous SRAMs. As previously discussed, Samsung has announced it will exit the synchronous SRAM market by the end of 2012 which will create significant opportunities for SSI to gain share.

This is very timely as we are rolling out our new advanced 36-megabit and 72-megabit high-performance synchronous SRAMS in time to replace those designs being vacated by Samsung.

As we look into 2012, we will be expanding our SRAM product lines with additional 65-nanometer devices and even higher performance 28-nanometer synchronous SRAM that will provide us with leading edge SRAM memory to support our growth.

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

And finally, our analog revenue from Si En was $2.4 million for the December quarter, which was below our expected range of $4.5 million to $5.5 million. As I discussed in my opening remarks, demand in the Chinese cell phone market shifted dramatically from feature phones to smart phones causing an inventory surge of feature phones and significant reduction in demand from our customers. Since the majority of Si En's revenue is currently from products in feature phones its revenue was negatively impacted by this shift.

As the move to smart phone continues, we will be working with our customers to secure both audio amplifier and LED driver designs in the new smart phones. This will likely take one to two quarters, so we believe this will only be a short term effect until our new design wins in China and India start shipping in volumes. We believe these design wins should drive revenue rebound later in the year and remain excited about our opportunities for growth in the analog market.

Looking at our guidance for our March quarter, we expect total revenue to be in the range of $62 million to $66 million which is flat to slightly down sequentially reflecting normal seasonality in the current economic uncertainty affecting some of our end-markets. Also we started this quarter with lower backlog compared to our December quarter as many customers remained cautious and hold up placing orders, we were seeing a stronger pick up in new orders and design wins that makes us believe the March quarter will be the low point for the year similar to what we saw in 2011.

As we look further into 2012, we see strong growth opportunities in our target markets and for increased share gains as we continue to introduce new SRAM, DRAM, and analog products.

In summary, we were pleased with our financial performance in the memory market in the December quarter in which our revenue was at the mid-point of our expected range.

This is much better than many of the companies that participate in the DRAM market and our gross margin improved despite a shift in product mix from higher margin SRAM to lower margin DRAM products.

We believe our focus on high quality specialty products were due to the volatility and provide greater potential for growth in revenue and profit as well as higher and more sustainable margins and can be achieved by other similar memory suppliers.

The advantages of our fabulous business model combined with stable end-markets and support for our customers long product life cycle further contributes to our opportunity to grow revenue and profits in the future. We also remain confident in the long term revenue and profit growth for analog business.

From a planning standpoint, lead times in 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 of our products.

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

John Cobb

Thank you, Scott. As Scott mentioned, our revenue for the December quarter was $66.2 million, within our guidance range of $65 million to $72 million. SRAM and DRAM revenue was $63.8 million, and analog revenue from Si En was $2.4 million. The SRAM and DRAM revenue decreased 3.4% from $66 million in the September quarter and increased 6.3% from the year-ago quarter.

Our revenue in the December quarter by markets was 36% automotive, 25% communications, 21% industrial, medical and military, 14% consumer memory and 4% consumer analog. Automotive revenue showed the largest growth as that increased nine percentage points from 27% of our revenue in the September quarter.

Gross margin was 33.5% in the December quarter, which was also in our guidance range of 33% to 34%.This compares to 33.4% in the September quarter and 34% in the year-ago quarter. We are pleased that our gross margin improved slightly despite lower analog revenue and our product mix shift on higher margin SRAM to DRAM.

Operating expenses were $17.1 million in the December quarter, within our guidance range of $16.7 million to $17.4 million and compares to $17 million in the September quarter and $16.1 million in the year-ago quarter. As we have previously stated, our product mask expense will fluctuate from quarter-to-quarter, based on our product development schedules.

We achieved GAAP operating income of $5.1 million in the December quarter, compared to $6.8 million in the September quarter and $6.3 million in the year-ago quarter. Our non-GAAP operating income in the December quarter was $6.7 million which excludes stock-based compensation and amortization of intangibles related to the acquisition of Si En, compared to $8.3 million in the September quarter and $7.5 million in the year-ago quarter.

Interest and other income in the December quarter was $200,000 compared to $800,000 in the September quarter and $900,000 in the year-ago quarter. We had no gains on sales of investments during the quarter.

In the December quarter we had GAAP income tax expense of $1.5 million which represents an effective tax rate of 29%. In the September quarter, the company had an income tax benefit of $27.5 million which included a $28.1 million income tax benefit from releasing a portion of the valuation allowance on our deferred tax assets. In the year-ago quarter, the company had $1000 in income tax expense.

On a non-GAAP basis, which excludes the non-cash tax expense related to the utilization of the previously recorded net deferred tax assets. The company had $600,000 of income tax expense in the December quarter for an effective tax rate of 9%. In the September quarter, the non-GAAP tax expense of $700,000 and in the year-ago quarter the non-GAAP tax expense was $1000.

GAAP net income for the quarter was $3.8 million or $0.13 per diluted share. This compares to GAAP net income of $34.9 million or including the $28.1 million income tax benefit or $1. (inaudible) per share in the September quarter and GAAP net income of $7.2 million or $0.26 per share in the year-ago quarter.

Non-GAAP net income was $6.3 million or $0.22 per share. This compares to non-GAAP net income of $8.2 million or $0.29 per share in the September quarter and non-GAAP net income of $8.3 million or $0.30 per share in the year-ago quarter. Please refer to our press release and Form 8-K for a reconciliation and further explanation of our GAAP to non-GAAP results.

On the balance sheet, inventory decreased to $5.7 million for September as we attempt to manage inventory more efficiently. Inventory turns were 3.4 in the December quarter. We expect that our inventory will increase further in the September quarter, I’m sorry the March quarter.

Our accounts receivable decreased during the quarter by $4.1 million and the days sales outstanding were 49 days compared to 59 days in September. We ended the quarter with a $102.2 million in cash and short term investments which is an increase of $6.8 million from September. We generated $7.6 million in cash flow from operations in the December quarter.

At the end of December we had $3.82 per share in cash and short term investments. Our total book value per share has increased 69% in the last two years from $5.33 in the December of 2009 to $9.3 at the end of December 2011and we continue to generate strong operating cash flow to further enhance this value.

Let me turn to our guidance for the March quarter. As Scott mentioned, we expect that our overall demand trends in the March quarter will be mostly seasonal and flat to slightly down. We remain cautious with a high degree of uncertainty in the global economy and the weakness in both the communications and Chinese feature cell phone markets.

However recent ordering trends and design activity gives us indication that business will stabilize and pick up in the near term. As such, we expect total revenue to range between $62 million and $66 million. This guidance reflects expectations of SRAM and DRAM revenue between $60 million and $63 million and Si En’s revenue between $2 million and $3 million. Gross margin for the March quarter is expected to range between 33% and 35%.

We expect DRAM and SRAM pricing to be flat to slightly down sequentially. Operating expenses are expected to range between $16.5 million and $17 million and we also expect about $300,000 from interest and other income. We expect that our GAAP effective income tax rate will be approximately 30% including the non-cash deferred tax expense from utilization of net deferred tax assets.

Excluding the non-cash deferred tax expense; the effective tax rate is expected to be 10%. So taking these factors for the March quarter all into account, the company expects GAAP net income to be between $0.12 and $0.16 per diluted share and non-GAAP net income which excludes non-cash tax expense related to utilization and net deferred tax assets, stock compensation and the amortization of intangibles related to the acquisition of Si En to be between $0.22 and $0.26 per diluted share.

Now back to Scott for final comments.

Scott Howarth

Thanks, John. Overall, we believe our accomplishments during the December quarter demonstrates the financial benefits of our high quality specialty memory focus. We achieved record DRAM revenue and had strong gross margins in cash flows and further strengthened the balance sheet.

We believe we continue to gain share in our target markets through expanded product offerings, design win traction and long term support while we see short term seasonality and ongoing macro instability we believe we are poised for revenue growth in future quarters as the macro environmental factors in our end-markets improve.

Our results show the value of our specialty product strategy as we continue to successfully execute on our objectives, we believe we will continue to gain market share and 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) We’ll take our first question from Jeff Schreiner, with Capstone Investments.

Jeff Schreiner –Capstone Investments

Yes, good day gentlemen. Thank you very much for taking my questions.

Scott Howarth

Hi, Jeff.

Jeff Schreiner –Capstone Investments

Scott or John, whichever one might want to answer this question. I guess just to start off given the magnitude of the drop at Si En is there any inventory risk that we should be concerned about associated with that Chinese business?

John Cobb

Actually no, they did a very good job managing their inventory. They have fairly short lead times with the foundries and the back-end. And so their inventory was flat quarter-over-quarter.

Jeff Schreiner –Capstone Investments

Okay. Thank you very much. And then, what visibility do you have regarding how quickly you said maybe by the second half you’d expect to maybe start seeing some benefit from the smart phone but what is displacement is it really all units?

Is there a certain guy you are going to have to go work with to get in their reference design for smart phones now versus who you are working with previously as feature phones? Just what visibility do you have in terms of how quickly you think you can get this market kind of reinvigorated?

Scott Howarth

Good question. I mean, the reality is there is quite a few moving parts in the China cell phone markets but basically as we see it for the customers that we have which are more of the kind of second tier, third tier non-branded feature phone customers, none of them have prepared for or started to transition to smart phones. Instead a lot of the China conversions has been led by more by the bigger brands as well as the like-for-like Huawei and ZTE and we haven’t been designed into Huawei or ZTE. So as we look going forward, we expect our customers and we’ll start seeing progress in their smart phone designs and then we will be working with them in terms of implementing a few different both analog audio products as well as some fun lighting products as well.

So we see, initially it will be a little bit of a delay until we can start getting some of those design wins particularly in the audio amplifier the first round of smart phones integrated, but we think we can get a discreet design win where also have a chip that drives ear buds that we think we’ve already had one design win and we think we’ll start to see traction on that and also getting in with some additional fun lighting.

So overall, our belief is that’s going to take a couple of quarters and we’ll start to see them migration in that direction that will start to show rebound in our revenues. The other place as we mentioned before we started to get design into some India feature phones and we expect that will start shipping somewhere around March, maybe into the April quarter, which will then help our revenue start to grow as well in the analog market segment.

Jeff Schreiner –Capstone Investments

And how big, I mean just in a sense I guess, the business was running I believe 4, 5 million just on what I believe was only China, Scott. What’s the magnitude of potential opportunity here? Is this something that could move the needle within Si En at least in terms of India?

Scott Howarth

So, the answer is yes, there is one customer that we are working with right now has five different platforms each one is roughly about five million units a year. The market, the opportunities that we are getting into with them is more LED driver products which is closer to $1 per phone. So that compares to audio amplifier products that are $0.10 and below.

So the market opportunity now is growing for us but the difference is, we are essentially selling a feature that’s is a differentiator and it’s really more of a cosmetic feature and that’s what we are continuing to try to drive and we believe as soon as we get one design start getting that into the market, then we’ll get into other phones in the India market as well and start to see success there.

Also we have some platforms where we have demonstrated our fun lighting LED lighting applications and backlighting in some smart phones that we think again will start gaining some traction here in the near term.

Jeff Schreiner –Capstone Investments

Okay.

Scott Howarth

So, overall we do still consider it to be a large market opportunity, but fortunately we are going through a little bit of a technology transition.

Jeff Schreiner –Capstone Investments

Let me just stay with analog, we got this and one more quick question. But you just talked about now made the Si En acquisition and you kind of got rid of the – you disposed of the other analog business previously that was operated under ISSI, what are you doing currently with this large cash balance or strategically in terms of looking, is analog the main focus for you now in terms of trying to bring something onboard or do something?

And how do you add to this analog revenue? Is it going to take more than just Si En or is that something you can grow organically and get the levels that you are looking for the analog business?

Scott Howarth

So good questions. So strategically, use of cash as I’ve mentioned before and we still using cash to grow internally and ensuring that we have foundry capacities et cetera. But we are looking for additional acquisitions analog is a primary target for us right now trying to add additional technology into that space.

So that we can grow our revenue and create a bigger presence. But we still look at additional technologies including additional memory technologies that could be a fit for us. So, we do continue to look for strategic options to grow our business while also making the smaller investments that we need to continue to grow.

And as we mentioned some of those have been with foundries, they’ve also been with higher mask cost. So that we can drive implementation, new products et cetera. So, we’ll continue to work both organic try to drive both organic as well as strategic growth.

Jeff Schreiner –Capstone Investments

Okay, and lastly for me I think there is a lots of talk about but I’ll step off here and I’m just wondering given that you have a lower backlog, where are lead times for DRAM and SRAM markets right now and could you put that in context sort of historically maybe where are lead times today versus where they were in our prior downturn in kind of the ’08, ’09 timeframe?

Scott Howarth

Well our lead times really haven’t changed, we are giving our customers. But customers are being a little bit more cautious. We start clearly I think going to ending the year ending our fiscal year trying to be conservative on the inventory. So I think that’s kind of been across the board.

Lead times for our foundries and back end, right now is very short. So, we typically even in tight times we don’t adjust our lead times to our customers. As you’ve seen in the past we have increased inventory to support them to work through it but overall we maintain pretty standard lead times. Our OEMs are giving us shorter lead times, we can see we’ve been able to bring our inventory down as well.

Jeff Schreiner –Capstone Investments

Okay, thank you very much for your time gentlemen.

Scott Howarth

Great. Thanks, Jeff.

Operator

We’ll take your next question from Raji Gill with Needham & Company.

Rajivindra Gill – Needham & Company

Yes. Thanks for taking my questions. I just have a follow-up on the Si En acquisition. I know in the past you have said there was a higher gross margin business and with that falling off some uncertainty whether that could recover? Do you see any margin impact in the future?

Scott Howarth

Well as we talked on the call, even with the reduction of Si En this quarter, we were still able to maintain margins. So, we keep trying to work and improve mix across the board I think our automotive margins are little bit higher which also benefited us. So long-term we expect to see this business recovers, so we don’t think it will be a margin impact and so far in the short term we have been able to manage the mix as well as trying to drive cost reductions to be able to maintain margin.

John Cobb

In fact, Raji, note that the guidance that we gave for gross margin for the March quarter was 33% to 35% where the guidance we gave previously for the December quarter was 33% to 34%. So, despite the near term weakness in Si En, we have some upward momentum in the gross margin.

Rajivindra Gill – Needham & Company

Yeah and that’s just mostly driven by mix shift and automotive and other areas

John Cobb

Well it’s driven by mix shift to automotive, but also cost reduction. Frankly our operations people have done a very good job working with the foundries to get cost reductions. So, there is positive mix or negative mix shift away from SRAM and analog but despite that because of the cost reductions and then the mix shift towards automotive we’ve been able to improve the gross margin.

Rajivindra Gill – Needham & Company

And on the communication end vertical, there has been some negative data points in that space mostly related to kind of weakness in the wireless infrastructure spending and you SD erection that just recently talked about lower numbers. Where do you think, what makes you confident that that vertical will start to recover after the first quarter?

I know you had mentioned some orders, you are seeing an order rebound, is that coming from specifically the com vertical that you are seeing that and what’s kind of your take on that vertical towards the end of – throughout this year? How do you think you are going to be positioned on the SRAM side for that any color there will be good?

Scott Howarth

Sure, so I think there is probably a couple of questions in there. So let me kind of break it down. In the short term clearly we are seeing weaker base stations and some of our customers have told us that they have excess inventory and clearly seeing lower revenues.

We’ve also seen, gotten some feedback from our different networking customers that the networking has been a bit slower also because of some of the government spending programs have been reduced. But I think there is probably some government asperity that slow down some networking as well.

So looking forward though, we believe there is going to be long term growth in base stations. I think the AT&T, T-Mobile marry that didn’t happen had slowed down some CapEx and as we look around the world we think there is clearly going to be continue to build out in base stations as well as we’ll see networking recovery.

I think it’s just a matter of time until we see that. And then secondly, as we look out into the second half, the SRAM space and also from a DRAM standpoint our quad data rate SRAMs that we’re introducing now we think are really going to be driving design ins and strong growth opportunities along with our RLDRAM, RLDRAM2 and RLDRAM3. So we see, our ability to really penetrate a bigger share of that market is going to grow substantially.

Rajivindra Gill – Needham & Company

Just on a tangential question, the lawsuit that’s going on the pending lawsuit which is going on between GSIT and Cyprus are related to quad core, their sigma quad do you, are you seeing there is an opportunity maybe to take some share away from GSIT or is that really non-event for you?

Scott Howarth

Well, all of our customers continue to remain concerned about having stable supply. So, we’ve gotten quite a few requests for sampling and second sourcing request to make certain that our customers have stable supply and those that are using both Cyprus as well as GSI are seeking what they consider to be stable alternative solutions. So we have seen design win activity there that we think will benefit from long term.

Rajivindra Gill – Needham & Company

And on the automotive end vertical, maybe you can characterize some of the growth drivers that you are seeing in the second half and how do you think we should look at that, do you think will that represent a larger percentage of your sales going forward?

Scott Howarth

Well, it jumped significantly this quarter. But that was a combination of weaker communications revenue very strong growth in automotive revenue. The automotive segment looks to continue to be very, very strong. I think what’s critical there is, we’ve introduced a lot of new devices, particularly the DDR2 in the last year year-and-a-half which will start to ship in end of this year we’ll start to see some growth but into 2013 and ’14.

So the revenue there and those are devices as high as two-gig right now is a much higher ASP revenue device and a great opportunity for growth. One of the key drivers that we continue to see and the design wins we are getting is in back-up cameras. We are seeing a tremendous number of car manufacturers now that are designing in. The US government is going to require back-up cameras in all cars by 2014. And we are seeing some of our customers targeting as many as eight cameras per vehicle. Each one requires memory and solutions we are providing today we think are going to be tremendous growth drivers in the future.

So, overall in automotive just the variety of new design wins we continue to see I think we have the right products, right now. We are well positioned and we’ll continue to see nice growth through the automotive market for the foreseeable future.

Rajivindra Gill – Needham & Company

Great. Thank you.

Scott Howarth

Thank you, Raji.

Operator

Our next question comes from Christopher Longiaru with Sidoti & Company.

John Cobb

Hi, Chris.

Christopher Longiaru – Sidoti & Company

Hello.

Scott Howarth

Hi, Chris.

John Cobb

Hi, Chris.

Christopher Longiaru – Sidoti & Company

Yeah, hi I’m having a little phone trouble over here. How are you?

John Cobb

Great.

Scott Howarth

Good, how are you doing?

Christopher Longiaru – Sidoti & Company

Very well. So, congratulations on the growth in memory. I wanted ask first is, as you are seeing, can you give us any indication of as these larger players are exiting this market and it leaves kind of stock, what the interest level is in terms of designing you in and what the timing tends to be and how that is progressing at this point?

Scott Howarth

Well, the two specific areas right now is, Samsung SRAM that I think that’s now been reported by us as well as others or I think now this is the second or third quarter. There is a significant amount of interest in terms of designing that standard and it just depends on our relationship with customers. We continue to cross parts so basically we have, our customers are giving us the list of what they’ve been buying from Samsung and we’ll process and we’ll start to sample.

So we’ve gotten tremendous interest, tremendous design win opportunity. As I’ve mentioned in the past, we have not been strong in the high performance synchronous SRAM market which is 36-meg, 72-meg but with the recent devices that we have started sampling it really is a perfect timing for us. So we expect to start seeing traction there that will lead to revenue growth toward the end of this year.

On the DRAM side, we recently have heard both Samsung and Hynix are getting out of SDRAM as well as DDR and our customers that have been buying from both Hynix as well as Samsung have already started to ask us across and look at getting designed in. So,

Christopher Longiaru – Sidoti & Company

What’s the timeframe between when that starts and when you start to see revenues typically?

Scott Howarth

Well they announced that they’ll be exiting end of lighting those products by the end of 2012. So essentially what that means is 2012 and we’ve already started sampling will be designing period and then most likely customers will probably buy through the year and then we’ll start to see traction there going into 2013.

Christopher Longiaru – Sidoti & Company

Great. That’s helpful. Thanks. And the other question I have was just in terms of, can you just refresh my memory on what Si En’s gross margins are and what the pull back there? How it affected your overall company gross margins?

Scott Howarth

The gross margin we reported before have been in the mid to low 40s and I don’t know the exact percentage of pull back. It’s probably fairly minor just given they are only about 5%, 6% of our revenues.

Christopher Longiaru – Sidoti & Company

But the anticipation there would be as that becomes a bigger part of your business where do you think your gross margin profile ends up?

John Cobb

So to give you a more specific answer to your first question, the shortfall in Si En’s revenue reduced our overall corporate gross margin by about a half a point. So we would have been, if they had met the midpoint of the guidance that we have previously given our gross margin would have been about 34%.

Christopher Longiaru – Sidoti & Company

Got it. Okay.

John Cobb

And as I mentioned on the earlier questions the guidance that we gave for the March quarter is 33 to 35. So because of the mix shift to automotive and the cost reductions that I’ve mentioned before, we have some positive momentum in our gross margin despite the weakness that we have from Si En.

Christopher Longiaru – Sidoti & Company

Right. Okay, that’s helpful. I mean on the last question is little bit of an easy one, just is it 29% tax rate and the 30% GAAP tax rate where does that level off and what should we be modeling going forward?

John Cobb

Well, for this fiscal year, I think those, as you probably know the quarterly number that you used is based on what you expect for the year. So, that’s what we expect for the year the 30% GAAP and the 10% non-GAAP as I think I’ve mentioned previously, we expect to do some legal entity restructuring hopefully which will impact our next fiscal year. So fiscal 2013 and beyond and I would expect that our GAAP tax rate as a result of that then would drop below 20%.

Christopher Longiaru – Sidoti & Company

Got it. That’s helpful guys. I’ll jump out. Thank you.

Scott Howarth

Great, thanks Chris.

Operator

We’ll take our next question from Daniel Berenbaum with MKM Partners.

Ada Menaker – MKM Partners

Hey this is Ada in for Dan thanks for taking my question. You said that you think business will stabilize in the March quarter which kind of that goes some of what other companies have said this, can you provide little more color on order trends in the Si En activity?

Scott Howarth

Sure. When we look at, as we mentioned earlier, the quarter actually started little bit weaker but recent ordering makes us believe that we might actually see this quarter performing very much like we did last year and if you just to give you a reference, last year we saw similar drop from an inventory correction this is 2011.

We dropped to $66 million in revenues and for the March quarter we dropped to $63 million in revenues that was a bottom and then we turned around and grew back over $70 million. It’s feeling very similar to that from an overall business standpoint and the recent bookings that we have seen look to be a little bit stronger than we would normally expect.

So that’s giving us more confidence that we think we’ll see a similar trend as we saw in 2011 which is it’s really more seasonal at this point and then from there we expect to start seeing recovery in some of our end markets like the com market. The only one that we think will take more than a quarter to recover is in the analog business particularly in the cell phone market.

Ada Menaker – MKM Partners

Okay, and in terms of the RLDRAM3 trajectory how are you viewing that at this point?

Scott Howarth

So RL3 will be a gradual trend. The focus right now is just getting design wins. It’s a very, very complex memory and as we’ve discussed before, we are one of only two suppliers of RLDRAM3. We have seen significant interest. We have just started our first samples. We expect to have small shipments by the end of this quarter.

And when I say small in the few hundred unit type range and then really the growth for that will start toward the end of the year. We expect to see small volumes probably in the September quarter, little bit more December quarter and then start ramping into 2013 and beyond.

Ada Menaker – MKM Partners

Great, thank you.

Scott Howarth

Thank you.

Operator

Our next question comes from Chris Sigala with B. Riley.

Chris Sigala – B. Riley & Company

Yeah, thanks for taking my questions. John I guess you guys can both answer this question. How should we look at operating expenses going through the rest of the year? I know that you guys have a lot of product introductions onboard and should we think of operating expenses staying within this kind of $16.5 million and $17 million range or product mask cost or and alike kind of pump that up in the second half?

John Cobb

So as we mentioned in the last call our operating expenses fluctuate quite significantly on our product mask cost and we spent more than average in the December quarter and March is still above average. So actually the second half of the year all things being equal, I would expect the operating expenses to be equal to or lower than the guidance that we gave for March.

Chris Sigala – B. Riley & Company

Okay, thank you. And then I was curious if you can provide what the revenue contribution from Europe was in the quarter?

John Cobb

Our revenue from Europe during the quarter was about 17% which was as a percent of revenue was down from September. So Europe on a relative basis was our weakest region.

Chris Sigala – B. Riley & Company

Okay and can you talk just a little bit more about what you are seeing there as far as just general demand softness and kind of the implications for the rest of the year?

Scott Howarth

Well we think it’s with Europe, right now, it definitely seems to be a little bit softer given just the continued debt crisis that they have there. Going forward we do think that it will recover, we will start to see the industrial market and automotive market growth particularly will continue from a total revenue standpoint.

But we really don’t have specific numbers on it just to, from what we can see and talking to some of our customers we think it will – we will see future growth but as you know Europe is still a little bit unstable from an overall economic standpoint and today I just read it there is now prediction that even Great Britain might fall into recession.

Chris Sigala – B. Riley & Company

Okay, thanks and then it was helpful to hear that you expect inventories to further decline in March. I guess is there anything further that you can add or is optimal inventory level for the rest of the year?

John Cobb

Well I think we’ve mentioned previously our targets turns is around four. So, with March we should get the decline in March we should get close to four and then probably try to stay around that turns level the rest of the year.

Chris Sigala – B. Riley & Company

Okay, thanks a lot guys.

Scott Howarth

Okay, thanks Chris.

Operator

(Operator instructions) We’ll take our next question from Richard Shannon with Craig-Hallum.

Richard Shannon – Craig-Hallum Capital

Hi guys how are you?

Scott Howarth

Hi, Richard.

Richard Shannon – Craig-Hallum Capital

Just my first question I want to follow up on RLDRAM. Scott I think you mentioned you’ve got a 12 customers you are working with or even designed in and then I think you mentioned especially the RLDRAM2 like what percentage of the total customer you are basically trying to target with RLDRAM? Does that represent and is that’s something you are making good progress towards on RLDRAM3 as well?

Scott Howarth

So, first off, and as you know in the com space, it’s really a few big players and then a few smaller ones. So, targeting twelve customers right is now really hitting the major players in the telecommunications market and in networking area as well. So we are essentially sampling both RLDRAM2 as well as RLDRAM3 with both sets of customers.

The RL2 is actually more of a replacement device more currently what’s being shipped and Micron is a principal supplier there whereas RL3 is getting into brand new design win. So we see the opportunity with RL3 that will grow as those particular networking routing boxes start to ship and then in RL2 we are essentially trying to get designed in now as a long term second source.

So it’s a little bit slower in terms of getting designed in and starting to gain traction there whereas RL3 we are seeing definite design wins already and as those boxes ship, we will definitely be shipping along with it.

Richard Shannon – Craig-Hallum Capital

Okay. Care to take a gander at what kind of revenue level you might exit this calendar with the RLDRAM in total?

Scott Howarth

I think on a quarterly run rate it will still be fairly small in the $2 million to $3 million a quarter kind of rate would be ideal and then as we start looking into 2013 and ’14 I see potential to grow that towards $10 million a quarter.

Richard Shannon – Craig-Hallum Capital

Great. Second question for me, automotive looked very strong in the quarter here, curious so what’s driving this particularly from a region geographical basis? And also is there any risk of an inventory build there, soft or strong growth there, little bit of an ordering?

Scott Howarth

We haven’t seen over ordering, so we are not seeing and inventory build and typically our customers are quite conservative when it comes to buying. Geographically, I mean most of our geographies are quite strong, I would say this quarter we saw at Japan it was probably the strongest across automotive and that’s just as we continue to basically gain share and traction in some of the Japan markets, where we are seeing continued success.

Europe as we talked about was probably just to slightly lower, slightly weaker I think US was probably little bit stronger this quarter and China and Korea still seem to be about the same as they’ve been in the past.

Richard Shannon – Craig-Hallum Capital

Okay. Great, last question, regarding the Samsung and Hynix end of lives on SDR and DDR1, any guess on how much market is available as it exists today, it’s just probably a flattish to maybe slightly declining markets that will change over time, but as you see today how much of a turn are you addressing with those two guys eventually leaving this part of the market alone?

Scott Howarth

Yeah, that’s a great question and I need somebody was going to ask it today. And I really don’t know. I mean all I could do is try to venture a guess maybe it’s $50 million to $100 million, but I really don’t have any data. I do think it’s substantial enough that it’s something that we are definitely interested and we will target and try to drive design in to replace those sockets.

Richard Shannon – Craig-Hallum Capital

Okay. Great, I think that’s all my questions for me guys, thank you.

Scott Howarth

Great, thanks, Richard.

Operator

It appears there are no further questions at this time. I’d like to turn the conference back to our speakers for any additional or closing remarks.

Scott Howarth

Thank you for participating in this call. We plan to participate in two upcoming investor conferences. We will attend the UBS SMID One-on-One Symposium in Boston on February 28 and present at the Sidoti’s 14th Annual Emerging Growth Research Conference in New York on March 20. We hope to see you at these events. Have a good evening.

Operator

That concludes today’s conference. Thank you for your participation.

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