Integrated Device Technology (IDTI) Gregory L. Waters on Q3 2016 Results - Earnings Call Transcript

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Integrated Device Technology, Inc. (NASDAQ:IDTI)

Q3 2016 Earnings Call

February 01, 2016 4:30 pm ET

Executives

Brian C. White - Chief Financial Officer & Vice President

Gregory L. Waters - President, Chief Executive Officer & Director

Analysts

Vivek Arya - Bank of America Merrill Lynch

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

Marc Estigarribia - Chardan Capital Markets LLC

Charlie Lowell Anderson - Dougherty & Co. LLC

Hans Chung - KeyBanc Capital Markets, Inc.

Edward F. Snyder - Charter Equity Research, Inc.

Blayne Curtis - Barclays Capital, Inc.

Chris J. Longiaru - Sidoti & Co. LLC

Harsh V. Kumar - Stephens, Inc.

Operator

Good day everyone, and welcome to the Integrated Device Technology Q3 Fiscal Year 2016 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn things over to Brian White. Please go ahead, sir.

Brian C. White - Chief Financial Officer & Vice President

Thank you, and welcome to our fiscal third quarter 2016 financial results conference call. I'm Brian White, IDT's Chief Financial Officer. And presenting with me on the call today is Greg Waters, our CEO.

Our call today will include remarks about future expectations, plans, and prospects for IDT which constitute forward-looking statements for the purposes of the Safe Harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include statements regarding demand for company products, anticipated trends in company sales, expenses, and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review in detail the risks and uncertainties in the company's SEC filings, including but not limited to the annual report on Form 10-K for fiscal year ended March 29, 2015, and periodic reports filed from time to time with the SEC. All forward-looking statements are made as of the date of this call and IDT disclaims any duty to update such statements.

In addition, pursuant to Regulation G, any non-GAAP financial measures referenced during today's conference call can be found in our press release and posted on our website at idt.com including a complete reconciliation to the most directly comparable GAAP measures.

All financial references will be non-GAAP on a continuing operations basis unless otherwise indicated. Also, we have made selected financial information available on webcast slides which can be found in the investor relations section of our website.

Now,, I'll turn the call over to Greg, who will provide third quarter highlights, and I'll return to give you more specifics on our results for the quarter. After that I will elaborate on our outlook for the March quarter. Greg?

Gregory L. Waters - President, Chief Executive Officer & Director

Thank you, Brian, and welcome to everyone on today's call. We're pleased to report the third quarter fiscal 2016 financial performance was strong, and that we're continuing to deliver on our commitment of above-market revenue growth with superior earnings leverage.

We achieved our ninth consecutive quarter of year-over-year revenue growth and delivered 29.4% operating margin with a record 30% free cash flow margin on trailing four-quarter basis. In addition, we completed a number of important business objectives in the quarter, including the successful closing of our acquisition of ZMDI and a $374 million convertible note offering which was done in conjunction with an accelerated share buyback.

The integration of ZMDI is progressing very well and we are already seeing the benefits of combining our product portfolios with numerous cross-selling opportunities. This is an extremely positive combination at a product, customer, and technology level and immediately positions IDT in the growth markets of automotive and advanced sensors.

Additionally, as operating synergies are realized over this year, we expect our new automotive and industrial business unit to contribute both increasing revenue and earnings per share accretion that support our target operating model for the company.

Total revenue for the third fiscal quarter was $177.6 million of which ZMDI contributed $3.4 million. This represents an increase of 17.5% compared with the year-ago quarter and is up by approximately 5% sequentially. On a non-GAAP basis, our gross margin was 62.6%, operating margin was 29.4%, and earnings per share totaled $0.35 per share, up from $0.25 per share in the year-ago period.

Turning first to our communications infrastructure business, revenue grew by 18% from the prior quarter and represented approximately 48% of total sales. In addition to ongoing strength in S-RIO products, our RF portfolio is gaining share, driven by new product introductions and our recently announced expanded distribution channel partnerships. The December quarter strength was also driven by a higher last-time-buy related sales of a legacy telecom product that is nearing the end of its life. The associated fiscal Q3 upside for this product was approximately $3.3 million versus our original guidance forecast. We expect revenue from this product to step back down in the March quarter.

We've now had two quarters of strong performance in communications infrastructure that returns us to revenue levels close to those that we achieved before the industry pullback. We believe that this end market is stabilized in the near term and we are encouraged by our customers' current forecast going forward.

Turning to our high-performance computing or data center end market, revenue declined 6% from the prior quarter and represented 39% of total company sales. In the quarter we saw overall enterprise computing demand moderate across each of our many product lines that are sold into this segment. Additionally, despite increased volume and revenue from DDR4 register sales, we saw a downtick in the mix of LRDIMM, which caused overall DDR4 revenue to decline from the prior quarter.

We're encouraged at the potential for incremental DDR4 adoption tied to Intel's upcoming Broadwell platform launch. However, we expect overall enterprise computing end market growth to remain muted in the near term and to decline with normal seasonality in the March quarter.

In our consumer end market, revenue declined by approximately 13% from the prior quarter and represented about 12% of our fiscal third quarter revenue. As a reminder, we had mentioned in our prior guidance that this segment would be down due to the timing of customer ramps and wireless charging products. We continue to see growing adoption across the wide range of applications for wireless power, and project revenue to be up in the March quarter.

In our new business segment of automotive and industrial, we closed the acquisition of ZMDI as planned on December 7, and integration is moving ahead very smoothly with positive results. Core ZMDI customers such as Continental, Sensata, Hyundai, Kia Motors, General Electric, Murata, TDK, Honeywell, and many others have responded to this acquisition very positively, and cross-selling opportunities are already in full motion. In particular, we are seeing an acceleration of IDT product design-ins to automotive infotainment applications, and also in our ability to leverage ZMDI advanced sensor technology into new consumer applications.

And now, let me move to our fiscal Q4 guidance. For our fourth quarter of fiscal 2016, we expect revenue to come in at approximately $187 million, plus or minus $5 million. Revenue in our communications end market is expected to decline by 8.5%. This is consistent with normal seasonality in the March quarter, adjusted for the higher legacy product sales that we mentioned previously in fiscal Q3.

We expect revenue in our computing end market to be down approximately 4.5%, in line with historical seasonality.

For the consumer end market, we expect March quarter revenue to increase by approximately 38%, driven by wireless power customer product ramps and combined with the addition of our new mobile sensing business.

Our automotive and industrial segment is expected to be approximately $14 million and represents a new revenue stream and market segment that we believe will grow throughout 2016.

In summary, we had a strong quarter and finished a transformational calendar year in 2015. Looking forward, since the equity markets and global demand environment have been very volatile since the beginning of this calendar year, I'd like to finish with a few words about the macro environment and how this affects our business trajectory.

The first is that we are not exposed to market segments in China that we expect to undergo a significant slowdown. Our business in China is elastic to communications infrastructure, as you know, and we see demand there normalizing to slightly less than the peak levels seen in late calendar 2014. The data center market is healthy but customer growth rates for this quarter and next have slowed slightly, and in particular for the higher-end equipment that would consume our LRDIMM devices. We remain very confident in this market segment and are on track to capture meaningful content gains in new areas such as power management and non-volatile memory interface later in this year.

In consumer, we're already engaged with the strongest new product design win pipeline that we had in the history of the company but expect some lumpiness in this segment as customer smartphone shipment volatility has increased, as widely reported.

Putting this all together, here's where we believe we are. We have executed on our target model of 30% operating income and 30% free cash flow well ahead of schedule and we'll continue to realize further gains as synergies with ZMDI are realized. Market growth in our core segments has softened slightly with the start of the new year and we believe this to be market-related since we see this across nearly all customers.

We remain very confident in our ability to achieve our target of two times the growth rate of the overall semiconductor market this year but would say that our growth outlook for the next two quarters has softened slightly. Importantly, our new product and design-in funnel is easily in the best position of perhaps the last decade. The new products from ZMDI will accelerate this further, giving us confidence in our long-term growth opportunities and ability to continue outgrowing the overall semiconductor industry.

I'll now turn it back to Brian for further detail on our company financials.

Brian C. White - Chief Financial Officer & Vice President

Thanks, Greg.

As Greg mentioned, revenue for fiscal Q3 was $177.6 million, including $3.4 million from the acquisition of ZMDI. Strength in our communications business offset somewhat lower sales in computing and consumer.

December quarter book-to-bill ratio was slightly below 1. However, order patterns in the month of January have been strong, and the direct turns-fill required to hit the midpoint of our fiscal Q4 guidance is within the norm of historical ranges.

Q3 non-GAAP gross margin of 62.6% was 40 basis points below the midpoint of our guidance range. Approximately half of that delta was attributable to the addition of ZMDI and its revenue mix in the quarter.

Non-GAAP operating expense was $58.8 million or 33.1% of revenue. Of that, R&D expense was $33.8 million and SG&A was $25.1 million. Non-GAAP operating expense included approximately $2.8 million attributable to ZMDI. Operating expense before the addition of ZMDI was $600,000 below the midpoint of our guidance range on continued spending management.

Q3 non-GAAP operating margin was 30.6% before the addition of ZMDI, and 29.4% after its inclusion. Non-GAAP net interest and other income was approximately $500,000 and the non-GAAP tax rate was 1%. For fiscal Q3, we reported non-GAAP net income of $52.2 million or $0.35 per diluted share.

Next, I'll summarize our results on a GAAP basis. We reported GAAP net income of $32.5 million or $0.22 per diluted share. The difference between our GAAP and non-GAAP results nets out to about $19.7 million or $0.13 per diluted share. Fiscal third quarter GAAP results include $9.5 million in stock-based compensation, $6.1 million in severance costs, $3.5 million in acquisition-related charges, $2.7 million in amortization of acquisition-related intangibles, and $2.2 million in non-cash interest expense, partially offset by $4.5 million in related tax effects.

Further information including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's press release, and can also be found on our website at idt.com.

Now, I'll turn to our balance sheet and cash flow. Cash and short-term investment totaled approximately $352 million at the end of the December quarter, down approximately $207 million from September. The quarter-to-quarter decline was driven primarily by the purchase of ZMDI for $307 million. This was partially offset by free cash flow, convertible debt proceeds in excess of the associated share repurchase program, and cash received from employee stock transactions.

Free cash flow contributed $64 million in the quarter and reached 30% of revenue on a trailing four-quarter basis. Excess convertible debt proceeds were approximately $26 million and we received approximately $7 million from employee stock transactions.

During fiscal Q3, we announced that the board increased our share repurchase authorization by $300 million and that this incremental authorization would be executed on an accelerated pace. Of this $300 million, $255 million was executed in fiscal Q3 to repurchase 10.1 million shares. In addition, we spent $12.2 million to repurchase approximately 570,000 shares early in the quarter before the $300 million program began.

Total cash spent on share repurchases in fiscal Q3 was approximately $267.2 million for 10.7 million shares. At the end of the quarter, there was $45 million remaining on the incremental $300 million authorization; and that $45 million was executed in January of fiscal Q4, completing that program and leaving approximately $264 million of total remaining authorization.

We continued to tightly manage working capital and reduced inventory by $10 million before the addition of ZMDI. On a combined basis, inventory was up approximately $11 million, which included a $9.4 million write-up of ZMDI inventoried at fair market value as part of the purchase accounting.

Accounts receivable declined approximately $6 million before ZMDI and was up approximately $3 million on a combined basis.

Now, let me expand on our forecast for the March quarter. Greg noted earlier that we currently project revenue for our fiscal fourth quarter to be between $182 million and $192 million, or $187 million at the midpoint. This is up approximately 5% sequentially and up 18% on a year-over-year basis. The March quarter outlook includes $19 million related to the ZMDI acquisition.

For fiscal Q4, we project gross margin to be approximately 61.4%, plus or minus 50 basis points, on a non-GAAP basis. We project non-GAAP operating expenses will be approximately $66.6 million plus or minus $1 million. R&D is expected to be approximately $37.6 million and SG&A spending approximately $29 million. Non-GAAP operating margin is estimated to be approximately 25.8% at the midpoint of our guidance range with ZMDI-related business at a slightly positive level. Our target is to drive total company operating margin back up to the 30% level as we restructure our combined operations over calendar 2016.

We currently anticipate interest and other expense will be about $200,000 and the non-GAAP tax rate to be approximately 1%. We estimate Q4 share count will be about 144 million shares on a fully diluted basis. Based on our revenue guidance range, we project non-GAAP EPS for the March quarter to be between $0.32 and $0.34 per share.

In summary, we delivered another strong quarter of revenue growth, profitability, and free cash flow. The acquisition of ZMDI is accelerating our growth strategy and combined with our capital restructuring leverage, provides additional fuel to drive further value creation for our stakeholders.

With that, I'll turn the call over to the operator for the Q&A portion of the call.

Question-and-Answer Session

Operator

Thank you. We'll hear first from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch

Thank you for taking my question. Greg, was wondering if you could comment on your market share in memory products. Do you see your competitors catching up? And how do you see the growth opportunity and your share evolution during this year? I understand that there's perhaps a pause ahead of the Broadwell server launch but when do you expect to see the benefits from that? And just overall comments on just growth and share evolution this year.

Gregory L. Waters - President, Chief Executive Officer & Director

Yes. Thank you, Vivek. We do expect an uptick with the Broadwell launch, and even more so looking out at the Skylake launch following that. And you can layer in on that, I'd say, more towards the back half of this year and early next some addition increases with the new area in non-volatile and power management. So we remain very bullish in the market. I think that just fundamentally, compute performance is being limited by memories right now, so I don't think this is – I do think this is a long-term run in advanced memory.

Now, with respect to share, we obviously talked about that a lot candidly internally. Is this – have we given up some share or not? And as best as we can tell at this time, we don't think so. And the data points behind that would be as follows, one of which is that if you take a look at our product lines – we talk about it like RDIMMs and LRDIMMs – we have dozens of products, temp sensors, many others that go into this market. And they're all incrementally down on this. And that's just not consistent with I would say the concept of a share loss in this quarter. I think as more data comes out, I think it was just a weak quarter in the enterprise space. So at this point in time, we remain confident on our share position, and I don't see why that would degrade going forward.

Vivek Arya - Bank of America Merrill Lynch

Got it. And as a follow-up, I wasn't sure what you mentioned about the ZMDI contribution in Q1. Is it $14 million or $19 million? I thought I heard two different numbers. And then whatever it is, how does that compare with sort of the $80 million or so run rate, the annual run rate that they were on before? Is it in line with your expectations? And how do you see these acquisitions deliver during the rest of the year?

Brian C. White - Chief Financial Officer & Vice President

Sure. First, to clarify the revenue for ZMDI, the total revenue outlook in our guidance for the March quarter is $19 million for the ZMDI-related business. The $14 million related to the auto and industrial portion of that $19 million. There's also mobile sensing products that make up the balance that would go into consumer.

Vivek Arya - Bank of America Merrill Lynch

Good. And then just how it compares with how they did last year? I think they were doing about $80 million and I would have thought that generally Q1 tends to be somewhat seasonally stronger for automotive-related segments. Just how do you see them for the rest of the year?

Gregory L. Waters - President, Chief Executive Officer & Director

We see them layering in with growth. So what they did last year, which we have not disclosed, was well under – well under an $80 million run rate. So the current difference – it's $19 million – represents growth in that quarter. So in fact that business has actually been marginally growing for the past two years, and we expect it to continue to.

With respect to what we're seeing in the March quarter, yeah, it's about as we had called it. We said that this business would begin at roughly a $20 million-a-quarter run rate. It's slightly softer than that in the March quarter, and we expect that to grow into the June quarter and for the rest of the year.

Vivek Arya - Bank of America Merrill Lynch

Yeah. Thank you.

Operator

We'll take our next question today from Anthony Stoss with Craig-Hallum.

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

Hey, guys. Brian, maybe can you talk a little bit more about OpEx going forward, what you see, and also kind of just the cost synergies you expect to extract from ZMDI? And then, Greg, if you wouldn't mind sharing with us your expectations on ZMDI and the mobile opportunity? Thanks.

Brian C. White - Chief Financial Officer & Vice President

If we look at where we are today, ZMDI is slightly positive from a profit perspective; and that's consistent with the expectations that we set when we announced the transaction. And our objectives going forward are to obviously drive synergies in the combined company to bring our operating margins back to our target model of 30%. So in the March quarter of 25.8% OI guide, obviously that's a step down from where we've been. We have some work to do in terms of driving those synergies through. They'll be a little bit more back-end loaded.

But what you should see, I think, over the course of the next year is gross margins that are in the 60% to 62% range total company, probably more towards 61%-plus range if we look out over the next year. And then you'll see an improvement in OpEx that will take that 25.8% level up to 30% by the end of this next year. And you should see some gradual improvement over the course of the next two quarters, but again, I think it's going to kick in more towards the second half of this next year.

Gregory L. Waters - President, Chief Executive Officer & Director

And to your second question – Tony, this is Greg. Here's the opportunity. The bulk of ZMDI business is automotive. We call it automotive and industrial, but the bulk of that number in the guide is automotive. And the customer response from automotive customers has just been profoundly strong.

Now, with respect to the mobile area, and we haven't talked a lot about that, they do have technologies particularly in the sensor area that already have some traction in the mobile area. And obviously, our brand helps accelerate some of those, we think, quite a bit. So while it's not relevant to the near-term financial performance, in terms of growth, you can expect to see and hear about further announcements (25:23) from us in the consumer and mobile space about rarified optical sensing, different ways to combine thermal sensing, and in particular our timing devices for instance, very specialized gas and environmental sensing, et cetera.

So when you take a look at the sensing technology, we actually think that adding – combining their sensor technology and what we have under the hood at IDT actually is good not only for the mobile area but for the mobile area, for the consumer mass market, for the industrial, and for the automotive area.

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

If I could squeeze in one more question, I didn't hear much in your prepared remarks about the distributed power opportunity. If I'm not mistaken, I think you talked about two new customers launching in the March quarter. Is that still expected? Thanks.

Gregory L. Waters - President, Chief Executive Officer & Director

Yes. In fact it is expected. You didn't hear much about it because it doesn't contribute much in the way of revenue at this time. But that is in progress and happening as we speak.

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

Thanks, Greg.

Gregory L. Waters - President, Chief Executive Officer & Director

Yep.

Operator

Moving on, we'll go to Marc Estigarribia with Chardan Capital Markets.

Marc Estigarribia - Chardan Capital Markets LLC

Hi, there. Thank you very much. Can you please just comment on the seasonality comment we're expecting softness in the next two quarters in enterprise? And just getting back on track with the regular seasonality, should we expect – can you just give a little outlook as to what that seasonality is?

Gregory L. Waters - President, Chief Executive Officer & Director

We'd see, at least for the time being, it seems to be normal. If you take a look at – certainly, communications right now is back in a return to growth period, particularly in China. So I say that's this countercyclical. But typically, in comms as well as in enterprise spending, March is a seasonably down quarter and has been for some time. If you look at what we've seen thus far for announcements in the industry, I think there was widespread moderation of growth and some weakness in the overall enterprise spend, and I think that's where we are now. We are cautiously optimistic but see no reason that can't return to a better growth inflection as we move through the year. I believe that's also been the opinion of several more prominent companies and data centers than us too.

Marc Estigarribia - Chardan Capital Markets LLC

Appreciate that. And with regards to the automotive outlook, what is – so, just taking a step back, this new revenue segment from ZMDI, which is very positive, but where should we look towards going forward? Will we see IDTI actually outperform the market with regards to automotive?

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah. We're not going to – that would be basically guiding past the guide, if you will. The automotive business is already growing. It has been growing for more than the past year, and we expect it to continue to grow in the future. So, basically, what you've got is the automotive design cycle is so long that even though the customer response is quite positive on us, the revenue growth you're looking at in automotive is really simply realizing the design funnel that was there. And that we – one of the reasons we bought the company is we think that is profoundly strong.

Marc Estigarribia - Chardan Capital Markets LLC

Okay. Thank you.

Gregory L. Waters - President, Chief Executive Officer & Director

We do expect growth in this segment and more to come.

Marc Estigarribia - Chardan Capital Markets LLC

Thank you.

Operator

And we'll take our next question from Charlie Anderson with Dougherty and Company.

Charlie Lowell Anderson - Dougherty & Co. LLC

Yeah, thank you for taking my questions. You mentioned LRDIMM was a little bit lighter than you were hoping. I wondered if you could maybe quantify that. And then in the quarters you're looking out ahead, it sounds like that will be soft as well. So what type of LRDIMM attach rate are we looking for?

Gregory L. Waters - President, Chief Executive Officer & Director

We're not sure LRDIMM attach will be softer in the future quarters, Charlie, to be honest with you. It was softer in the December quarter, clear. And it was softer in enough different places. We think that is more of a market statement. But in terms of the attach rate of LRDIMM, which has been on an up and to the right curve for some time, we don't see any reason that would stop. We do see it – that it took a step back in the December quarter.

Charlie Lowell Anderson - Dougherty & Co. LLC

Great. And then on consumer, I think if we take the $5 million out from ZMDI, you're still up sequentially. Can you just talk to us about what's going on there and the progression the rest of the year with consumer and some of the wireless charging design wins you may have?

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah, but the – thank you, Charlie. It's very consistent to what we said last quarter. We are now realizing the revenue impact of some extremely strong wireless charging wins that are hitting the production cycle. So we expect to continue to benefit from those.

And I think even more encouraging as you look out for the rest of the year, we do expect to see additional small and other entrants embrace a wireless charging ecosystem. So I think it will continue to be a positive trend for the industry and also for us in wireless charging.

Charlie Lowell Anderson - Dougherty & Co. LLC

Great. Thanks so much.

Operator

Next we'll hear from Hans Chung with Pacific Crest Securities.

Hans Chung - KeyBanc Capital Markets, Inc.

Hi. Thank you for taking my questions. So my first one is regarding the wireless charging. It seems there is more competition in resonance type of technology than inductive one. So how is your provision in resonance wireless charging in terms of the technology, product availability or expected market share in the smartphone market? And when do you think this technology to be adopted in a smartphone? And I will have a follow-up.

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah, the last – I'll answer your questions in reverse order. In terms of when it's adopted in the smartphone, we're not going to comment on that simply because it would be – our customers would not appreciate that too much. But with respect to our position in near-field magnetic resonance technology, we think that we are the leader in this technology. We've had this in-house for a very long time. We have the unique ability to combine that technology with our products that now represent a significant majority of the total wireless installed base, including Qi solutions. And that remains a unique advantage.

One thing you'll see in the next few weeks, Hans, is that we will release some market data with respect to our cumulative shipments into the wireless charging market. And I think the percent of the installed base that now is occupied by IDT will be a surprise. We now essentially are the installed base. And most customers and most smartphone vendors are going to want to be able to be backwards compatible with that.

And with respect to the competitive environment, notwithstanding there's been many, many headlines over the last couple of years, in fact that's not new on that. We still don't see people actually fielding real products that ship. So we think our competitive position moving into resonance is actually stronger.

Hans Chung - KeyBanc Capital Markets, Inc.

Okay. Thank you. And then my follow-up is the enterprise in the December quarter is weak. So is that referring to the data center, or traditional enterprise, or both?

Gregory L. Waters - President, Chief Executive Officer & Director

Both.

Hans Chung - KeyBanc Capital Markets, Inc.

Okay. Thank you.

Operator

We'll take our next question from Edward Snyder with Charter Equity.

Edward F. Snyder - Charter Equity Research, Inc.

Thanks a lot. So, Greg, going back to the PMIC DPU, you said it's going to be hopefully a small contributor in March. What do you feel about the growth rate for this product? Is that kind of a different segment for you? And the (32:47) same different segment – products that opens a new avenue that you haven't had before. But surely, given enterprise is weak to begin with, should we expect it to be really very modest in the growth rate? Or are you expecting bigger things in the next 12 months?

Gregory L. Waters - President, Chief Executive Officer & Director

Modest in the near-term, Ed, near-term meaning the next quarter to two, but we remain very bullish in this class of technology. I mean, first of all, if you abstract us from the equation, there simply is one of those unmet needs, that power management needs to get much more intelligent and sophisticated in memory sub-systems, is there. We happen to occupy I think a very differentiated spot on that. So we have already begun shipments as we previously discussed. Furthermore, we have already concluded I think our second major tier 1 design win over this class of technology, which is not shipping yet.

So I think from an investor perspective, I think this is a terrific growth opportunity for us and as a company. I do think it is more back half of the calendar year revenue-impacting, and a lot of that is simply the timing of when our major customers decide to feel high-volume SKUs. And there's – that in the enterprise market, they don't necessarily need to follow consumer products' market introduction cycle, and there's some variability in the exact timing in that. But I think we are going to finish the year being very happy about our position and our investment in this market segment.

Edward F. Snyder - Charter Equity Research, Inc.

Is it just that new products in the enterprise have to infiltrate their product line in the production volume, or are they're sampling it in a few and seeing how it works out? Is this something that they are going to offer as a standard product in the future? (34:23) is unit volumes? Is it a content issue with the enterprise guys?

Gregory L. Waters - President, Chief Executive Officer & Director

I think different customers are at different positions on that. So I think the lead customer had done that kind of sampling and sending out trial balloons last year. So I think for that particular customer is done, and it's more of a matter of when did the high volume SKUs actually hit. I think other tier 1 memory suppliers we mentioned we have now secured a second are a little behind that, sort of in the same phase. But everybody needs to do something different over time in how they approach intelligent, programmable power management in this segment.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. And then wireless charging, obviously, because you've been on a bit up on wins now, it sounds like this is seeing wider adoption. On a unit volume basis, do you favor the receiver more than the transmitter? Or can you break it out that way (35:09)?

Gregory L. Waters - President, Chief Executive Officer & Director

It's kind of moved back and forth, Ed. Certainly, I would say the bulk of our volume is receivers for sure on this. But our market share in transmitters has been creeping up very high rates as of the last 12 months too. It's not a one-to-one attach. You'll see some phone operators that actually do ship the transmitter with the phone. Others go for the after-market. But the great majority of our volume for the foreseeable future will be receivers.

Edward F. Snyder - Charter Equity Research, Inc.

All right. For the receiver in the smartphone application, you're shipping a receiver with the phone, usually, and then the transmitter's in aftermarket, right?

Gregory L. Waters - President, Chief Executive Officer & Director

It depends on the market. This stuff is global now. So if you're referring to the United States, yes. Some different countries, it's different. It's completely – that's not even up to the phone manufacturer. That's up to the operator.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. And then on the memory part – go ahead.

Gregory L. Waters - President, Chief Executive Officer & Director

And we're just, Ed – I'm sorry, Ed. Just one last comment. I do think you'll also see that when we introduced PowerShare last year, we do ship – and our receiver chip, it also is a low-power transmitter. So even the boundaries of receiver and transmitter are starting to blur a little bit.

Edward F. Snyder - Charter Equity Research, Inc.

And then on the memory products, historically you follow Intel's tick-tock cycle, but mostly, it looks like the growth is when they release a new microarchitecture, which is in the year they don't release a new node. But as we know, they're stretching that entire cycle this year. You don't see any of the impact of that business as part of the extension of their tick-tock cycle and the fact that they won't release – the microarchitecture will take one year longer than normal to show up? It's just that it's mostly economic?

Gregory L. Waters - President, Chief Executive Officer & Director

No, I do. I do. I think if you take – I think, no, I do. I think that is certainly a factor. So if you take a look at the evolution of high-performance memory growth and therefore high-performance memory interface, it definitely does follow a tick-tock cycle. So for instance, the next big microarchitecture would be the Skylake architecture, which we believe, as that goes, is a huge step up for us in the industry.

Now, in the meantime, if you take a look at the tock, if you will, which is happening this year, that will contribute to growth, albeit slower growth than what we're seeing in the future. But you've also got a few large data center customers, not many that had held back and not adopted DDR4 at all. And I think you're going to see some of those players get into the game as well. But that is one reason why we think that for the next quarter plus one, memory remains a very nice place to be, and we're proud of our position there. But we do believe that the growth mates (37:40) will be a little bit muted.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. And then final question. I know that that's the target or the general assumption of wireless charging is about 45% gross margin. But now that you've got more volumes, has that improved a bit? Or is price pressure starting to increase with higher volumes so it's a little bit lower?

Gregory L. Waters - President, Chief Executive Officer & Director

I would say nothing's changed. I think the modeling assumption of what we've given you is a good one to stick with. I think if you take a look at our top line gross margins, Ed, and the fact that the wireless charging is an increasing share of that, I think the operations and business unit teams are doing a very good job containing costs and also managing that inventory. One of the things we are proud of is you take a look at our turns of inventory; if they're not at record levels in the history of the company they're probably close at this point.

Edward F. Snyder - Charter Equity Research, Inc.

Great. Thanks, guys.

Gregory L. Waters - President, Chief Executive Officer & Director

You bet.

Operator

And from Barclays, we'll hear next from Blayne Curtis.

Blayne Curtis - Barclays Capital, Inc.

Hey, guys. Thanks for taking my question. Just wanted to follow up on a prior question on the memory interface business. You talked about it slowing down in the December quarter. But the business has – came off of a strong growth, and over the last four quarters the growth has been a lot more moderate. I just wondered if you could talk to why that's been. And then specifically, as you look into this year and beyond, where do you see the growth coming from? Is it just a continuation of DDR4? Or do you see the LRDIMM attach rates stepping back up?

Gregory L. Waters - President, Chief Executive Officer & Director

I think a couple things, Blayne. If you take a look at LRDIMM attach rates, this is the first quarter, last quarter, it actually went down first time in a long time, at least two years, if not more than that. We think it will come back up, but I think there is – obviously, until that happens, there's some uncertainty about that. But I don't see why it wouldn't. With respect to the growth rate of memory overall, the reason why I believe, and I think we're going to continue to believe that high-performance memory interface will remain a growth market is that memory is what's limiting instructions per second in high-performance data centers. It's not processor speed, it's not Ethernet, and it's not backplane speed. It's memory. So I think for people that value a lot of transaction per second like banks, for instance, on that, this trend towards high-performance memory, we think, is going to continue for a long time.

Blayne Curtis - Barclays Capital, Inc.

Thanks. And then when you look at the ramp in consumer, you obviously have a big platform that you're ramping into that's kind of counter-seasonal. How do you think of the contribution in March? Is that getting to a fully ramped level? And I know you don't want to guide June, but is there – should we think about that then falling back off as that customer seasonality does happen to decline in the second half?

Gregory L. Waters - President, Chief Executive Officer & Director

It's a good question, Blayne, and I'll answer you very openly in this. It's not a whole-in quarter. Right? So it would not normally be a full quarter yet. If you take a look at smartphone sell-through volumes just in every corner of the industry, the trend and the type of guidance that's been given by those customers this quarter has obviously been down. So I would say in a normal year, it would be – we would expect more strength of that into the next quarter, and I think right now we're also going to be looking towards what is the actual sell-through of some of these high-volume smartphones that we're in.

One thing I will say about wireless charging is that it's hard for us to imagine the industry evolving towards a technology area or position that isn't incrementally good for us as we go forward, albeit as we mentioned there may be some lumpiness in future quarters.

Blayne Curtis - Barclays Capital, Inc.

Thanks, Greg.

Operator

We'll move next to Christopher Longiaru with Sidoti and Company.

Chris J. Longiaru - Sidoti & Co. LLC

Hey, guys. Thanks for taking my question. I didn't hear any comments around C-RAN and it was a pretty bare (41:47) opportunity that you had alluded to. Can you talk a little bit about how that's progressing and what your expectations are for that business?

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah. Let me start and see if Brian has anything to add on that. The C-RAN opportunity that we had actually – we do think that is going to continue to be a modest but incremental growth opportunity for us. We are shipping into C-RAN right now, and the major customer consuming those C-RAN products is actually NTT DOCOMO. And I would say, beyond that, which is already into – it's been up and down a little bit over the last couple of quarters' revenue stream, is alive and well. We do get reports from other major network equipment companies that they intend to increase deployment of more intelligent edge-of-the-network type areas. But I'd say that also is going to be probably more relevant when people upgrade the next level of upgrade towards what is popularly being called 4.5G. Just the net click in LTE, I think, will be more relevant then.

Chris J. Longiaru - Sidoti & Co. LLC

Okay. And just in terms of your opportunity on the gross margin side to negotiate wafer pricing and things like that with ZMDI, I mean, when you talk about your expectations for what the company looks like four quarters after the integration, can you give us a little bit more granularity on basically how much is coming from that in terms of the cost of goods sold line?

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah. No, we won't give you that level of granularity, but I can break it down for you. We have cost savings in almost everything you can think of, from CapEx to OpEx to just cost of goods sold. So, for instance, one thing that's very nice about the ZMD technologies is they happen to be on the identical process flow that is our workhorse process at IDT. So there are, I would say straightforward, just pure purchasing opportunities, some of which are already being implemented, and most will filter into the P&L over the next quarter or two. There are obvious synergies in spending that we've talked about that we expect to achieve in the company. And most exciting, actually, is the future growth opportunities we get out of the combined product and customer area.

When you think about it, Chris, we're going from what we had mentioned was roughly a $20 million-a-quarter run rate at mid-50%s to 57% gross margins that we mentioned that is essentially zero-OI. And if you look at that, we're talking about taking that in 12 months more or less and turning that into a 30%-OI business. So the synergies are well-defined, already under way, and we're very confident we'll deliver those in that period.

Chris J. Longiaru - Sidoti & Co. LLC

Okay. Great. I'll jump out. Thank you, guys.

Gregory L. Waters - President, Chief Executive Officer & Director

Thanks.

Operator

We'll hear next from Harsh Kumar with Stephens.

Harsh V. Kumar - Stephens, Inc.

Hey, Greg, I just wanted to clarify on something you said on the call and also something you brought up in the last answer. Did you say that ZMDI profitability is better than where your corporate goal is for March, and that the goal is to take the overall company to 30%? And if that's the case, what's the biggest lever that you have? Is it revenue growth simply? Are there OpEx cuts possible, and where?

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah, Harsh, actually, in the March quarter it's way, way worse profitability than the rest of IDT. So basically, the starting point, take $19 million or $20 million per quarter of revenue, is where we are kind of now, mid-50%s gross margin, and 0% operating income. That's basically where we are. By the end of the year, it looks like the rest of IDT in pretty much all dimensions, margin as well as operating income. And the biggest levers will be spending, it will be cost of goods sold, it will be yield if you look at the operational machine of IDT behind some of these good products, and it will be I think innovative new products, mainly next year's revenue stream that we're already starting to capitalize on.

Harsh V. Kumar - Stephens, Inc.

Greg, anything possible on the OpEx line at all? Or are you pretty happy with where that's at?

Gregory L. Waters - President, Chief Executive Officer & Director

Well, we're not happy with it, Harsh, and never will be. But if you take a look at kind of where we're running now, the model of the company which we said is 60% gross margin, which we've been above for a little while, 30% is OpEx and therefore 30% OI. So if you take a look at kind of where we are as a company, OpEx is a little above that, but we remain very dedicated to funding all of the key R&D projects we need to grow this place.

So we do expect – to your question on OpEx, are we happy with it? Not yet. But we think we're spending in the right areas and remain very committed to getting the right products and growing this business. You'll see OpEx trend down as a period of time, just like it has for the past two years, for instance.

Harsh V. Kumar - Stephens, Inc.

Got it. And a similar set of questions. I think there was a statement in your commentary about next two quarters, your outlook softened slightly. I was curious if you're referring specifically to enterprise and that business, or is that a general statement of your end markets.

Gregory L. Waters - President, Chief Executive Officer & Director

It's a general statement. And I think we attempt to be very transparent with how we see our business. I think if you look at the overall industry and certainly the other announcements that have been out since the beginning of the year, there's not a whole lot of joy in any market segment that I can see right now, with the possible exception of automotive. So I think customers are slightly down on a very broad basis. I think you see this and we see this in the competitive circle. And we expect to outperform the market in any market environment.

Harsh V. Kumar - Stephens, Inc.

Understood. Thank you for that clarity. And then last one and then I'll jump back in. You bought a ton of stock back, but you still have a fair bit of money that's left for buyback commitment. What is your criteria? What are the parameters that you're looking for for that trigger?

Brian C. White - Chief Financial Officer & Vice President

Harsh, this is Brian. It's the same requirements that we've used in the past. Obviously we're conscious about offsetting the dilution of employee equity programs, so you should see us at least be active enough to accomplish that. And beyond that, it's we look at the stock as an investment and relative to other potential uses of cash, and let that drive our direction. So I think what you've seen in the past is a pretty disciplined approach to buybacks and return of the cash. We did something obviously much more aggressive in this last quarter. We felt it was the right time to look at the structure of the balance sheet and create more leverage on our earnings for shareholders. And we took that action; we were able to get extremely favorable terms on that associated debt.

But moving forward, we still have a strong cash position. We still have a large authorization in place. And as I said, we'll continue to be active in a prudent way in approaching share buybacks in the future.

Harsh V. Kumar - Stephens, Inc.

And...

Gregory L. Waters - President, Chief Executive Officer & Director

Sorry, Harsh.

Harsh V. Kumar - Stephens, Inc.

Yeah.

Gregory L. Waters - President, Chief Executive Officer & Director

Put it another way, look at the ASR. That's a big move, and we're glad we did it, by the way. We haven't stopped buying back our own stock for the past two and a half years. We've – we're very committed to using that great free cash flow we've got and returning that to shareholders. And we think we returned a lot of that cash to shareholders but we're not done yet.

Harsh V. Kumar - Stephens, Inc.

Understood. Thanks, guys.

Gregory L. Waters - President, Chief Executive Officer & Director

Yeah. I think with that, we are going to conclude the call. We appreciate the great question and answers. I would say that we look forward to this year with a lot of optimism around new product and our commitment to outperform the market this year in terms of growth. We look forward to seeing many of you out on the road over the course of the next quarter. And thank you all for participating in the call today. Thanks.

Operator

Ladies and gentlemen, again that does conclude today's conference. We thank you all for your participation.

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