Integrated Device Technology (IDTI) Gregory L. Waters on Q1 2017 Results - Earnings Call Transcript

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Integrated Device Technology, Inc. (NASDAQ:IDTI)

Q1 2017 Earnings Call

August 01, 2016 4:30 pm ET

Executives

Brian C. White - Chief Financial Officer & Vice President

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

Analysts

Harsh V. Kumar - Stephens, Inc.

Quinn Bolton - Needham & Co. LLC

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

Christopher J. Longiaru - Sidoti & Co. LLC

Charlie Lowell Anderson - Dougherty & Co. LLC

Vivek Arya - Bank of America Merrill Lynch

Edward F. Snyder - Charter Equity Research, Inc.

Blayne Curtis - Barclays Capital, Inc.

Liwen Zhang - Summit Redstone Partners

Operator

Good day, and welcome to the Integrated Device Technology's Fiscal First Quarter 2017 Earnings Conference Call.

At this time, I'd like to turn the conference over to Mr. Brian White, CFO. Please go ahead, sir.

Brian C. White - Chief Financial Officer & Vice President

Thank you, and welcome to our fiscal first quarter 2017 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 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 the fiscal year ended April 3, 2016, 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 first quarter highlights, and then I'll return to give you more specifics on the results for the quarter. After that, I'll elaborate on our outlook for the September 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 a strong start to our fiscal 2017 with our 11th consecutive quarter of year-over-year revenue growth. Total revenue for the first quarter grew by more than 19% year over year, driven by broad strength across our consumer, communications, automotive and industrial end markets.

On a non-GAAP basis, our gross margin was 61.3%, operating margin at 27%, and free cash flow margin on a trailing fourth quarter basis was a very healthy 26%. In our Communications Infrastructure segment, revenue was essentially flat compared to last quarter, with strengthened sales of RF and timing, offsetting lower SRIO sales.

Total Comms Infrastructure revenue represented 41% of total company sales in the quarter. Notable achievements in this area include our RF product revenue reaching another new record and multiple new products commencing production shipments in both RF and advanced timing.

Turning to our high-performance computing or data center end market, revenue declined by 5% from the prior quarter and represented 30% of total company sales. The softness at enterprise computing customers that we first reported on our February call has now bottomed and is gradually starting to improve.

Our memory interface business remains firmly in a leadership position, with consistently strong market share that will remain robust, if not strengthened. Our next-generation devices for Skylake and future Intel micro architectures are extremely well positioned, and we enjoy a unique industry position with brand new technologies for next-generation non-volatile memory interface and power management.

We've also made important progress leveraging our RapidIO technology into high-performance data center applications, highlighted by recent announcements with BAE Systems, the European high-performance computing labs at CERN, and Chinese high-performance computing leader, Sugon. While it's still early to extract meaningful revenue from these efforts, we're very encouraged by the uptake in interest for our solutions from the high-performance data center community. Social media application demands are clearly driving a trend towards low latency interconnect where we excel.

In our consumer end market, results were very strong. Revenue increased by almost 19% from the prior quarter and represented 20% of total company sales. Wireless charging revenue increased to another record level, growing by 12% to reach approximately $21 million in the quarter.

We're pleased to announce that Samsung has selected our Wireless PowerShare architecture for their Note 7 smartphone and Gear 3 smartwatch platforms, plus several new Chinese smartwatch providers, and also our recent selection by iHome to provide wireless charging to major hotel chains.

And, lastly, we're very pleased to announce for the first time that we are now entering mobile customer design cycles with new and highly differentiated environmental sensors such as optical, thermopile, and gas sensing. Major customer interest in these products is exceptionally strong. And we believe that environmental sensing now represents a new growth category for us that we expect to be even larger than wireless charging. While this business will just begin ramping this fiscal year, design win activity for next year is already extremely robust and well ahead of our earlier expectations.

In our automotive and industrial end market, sales were up slightly to reach 8% of total company revenue. We continue to see strong engagement from multiple automotive Tier 1 customers and expect this business to continue to grow nicely going forward.

Our operational integration of ZMDI is proceeding very well. We're on target with all of our previously announced objectives, and new design opportunities are exceeding our expectations. In fact, we have already secured our first major customer design wins for advanced power management products in automotive infotainment systems, which represents another new growth area for us.

And lastly, we're very proud to announce a major achievement for our automotive and operations teams which is the independent quality certification of both our Dresden, Germany and Penang, Malaysia, manufacturing and test facilities in June. This is the ISO 16949 and AEC-Q100 recertification of Dresden, and full certification for the first time of our high volume operation in Penang.

We are now a fully integrated and compliant automotive supplier, with the ability to second source between our two major production facilities. The speed by which this was done is probably without comparison in the industry, and I'd like to congratulate our IDT employees for their great achievement.

And now, moving to our Q2 fiscal 2017 guidance, for the second quarter of fiscal 2017, we expect revenue to come in at approximately $184 million plus or minus $5 million. Revenue in our communications end market is expected to be down by approximately $11 million or 14%, due to one customer and one product transition which I'll discuss in detail shortly. We expect revenue in computing to increase by approximately 4% and for consumer to be essentially flat from the prior quarter. Our Automotive and Industrial segment is expected to grow by 6% to approximately $17 million.

Now, returning to our Communications segment, late in the first quarter, we learned of an event that will reduce revenue in the guide by approximately $11 million per quarter beginning in the September quarter and $12 million per quarter thereafter. This is isolated to a single customer and single product, which is SRIO, in Huawei's 4G base station.

Since this is a new event, and frankly one that surprised us with the timing of the transition, I'd like to provide additional detail and context for you. While we continue to enjoy a very broad and strong customer adoption in both current generation and next-generation SRIO, this represents a transition that Huawei is making to an internally-designed ASIC solution and will replace the majority of our SRIO volume there, starting in the current fiscal second quarter.

While disappointing to us, this event is isolated to one product at one customer and the rest of the IDT market share growth, entry to new product segments, and continued increase to our already strong business model, not only remain intact, but are progressing ahead of plan. As a result, we reiterate our operating income margin target of 30% in the March quarter even with reduced revenue.

In summary, our IDT teams are executing exceptionally well and we are now clearly beginning a new growth phase in new areas such as mobile sensing and automotive products. Our addressable TAM has more than tripled with the products we are delivering today versus those that we had a year ago.

I'm also pleased to announce that we will be holding an Analyst Day this coming February in New York City. More details will be shared in weeks to come, and we believe this will include some exciting new announcements.

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

Brian C. White - Chief Financial Officer & Vice President

Thanks, Greg. As Greg mentioned, revenue for fiscal Q1 was $192.1 million, up 1.5% sequentially and up 19.4% year-over-year. Fiscal Q1 bookings declined from the prior quarter driven by the Serial RapidIO development. However, the direct turns-fill required to hit the midpoint of our fiscal Q2 guidance is within the range of our normal historical trends.

Q1 non-GAAP gross margin of 61.3% was right in line with the midpoint of our prior guidance range. Non-GAAP operating expense was $66.1 million or 34.4% of revenue. Of that, R&D expense was approximately $37.7 million and SG&A was $28.3 million. Operating expense was approximately $1.2 million higher than the midpoint of our guidance due to the timing of new product development expenses.

Q1 non-GAAP operating margin was 27%. Non-GAAP net interest and other income was approximately $400,000, while our non-GAAP tax provision was $1 million or approximately 2% of pre-tax income. For fiscal Q1, we reported non-GAAP net income of $51.2 million or $0.36 per diluted share.

Next, I'll summarize our results on a GAAP basis. We reported fiscal Q1 GAAP net income of $20.9 million or $0.15 per diluted share. The difference between our GAAP and non-GAAP results nets out to about $30.3 million or $0.21 per diluted share. Fiscal Q1 GAAP results included $10.5 million in stock-based compensation, $21 million in acquisition and restructuring charges, $3.3 million in non-cash interest expense and $4.5 million in tax benefits.

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 investments decreased approximately $4 million to $351 million. Free cash flow for the quarter was approximately $23 million, and free cash flow as a percent of revenue was 26% on a trailing four-quarter basis. We spent $30.6 million to repurchase 1.5 million shares at an average price of $20.90.

Continued focus on working capital management drove inventory down significantly to approximately $45 million from $54 million the prior quarter, while days of inventory declined from 68 to 55. DSO was 38 days.

Now, I'll expand on our forecast for the September quarter. Greg noted that we currently project revenue for our fiscal 2017 second quarter to be approximately $184 million plus or minus $5 million.

We project non-GAAP gross margin to be approximately 61% plus or minus 50 basis points driven by change in product mix. We project non-GAAP operating expense will decline to approximately $64.5 million plus or minus $1 million. R&D is expected to be approximately $36.2 million and SG&A spending approximately $28.3 million.

Fiscal Q2 non-GAAP operating margin is estimated to be approximately 26% at the mid-point of our guidance range. Although more challenging due to the reduction in SRIO revenue at Huawei, our objective remains to return to our target model 30% operating margin by the end of our current fiscal year.

We currently anticipate fiscal Q2 interest and other will be at about $300,000 expense and the non-GAAP tax rate to be approximately 2%. We estimate Q2 share count will be about 140 million shares on a fully diluted basis. Based on the midpoint of our guidance range, we project non-GAAP EPS for the September quarter to be approximately $0.33.

In summary, we delivered another strong quarter of revenue growth, profitability and free cash flow. The progress and performance of our ZMDI acquisition is ahead of target, and we remain optimistic in our ability to deliver improving and outstanding financial results throughout the year.

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. Our first question will come from Harsh Kumar with Stephens.

Harsh V. Kumar - Stephens, Inc.

Greg, couple questions for you. First of all, you made some comments around the memory interface business bottoming out, could you talk about maybe what you're seeing Greg there that makes you encouraged about it and maybe share that with us?

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

Yes, I will, Harsh. The reason we're more encouraged about the trend in memory interface, and I believe this is a gradual recovery not a step function, is simply the backlog and demand is going in better. So it's visible to us as to – customer demand does recovering. We see this at least is the first step towards, I think, a return to demand, particularly in the enterprise market. And we would expect that to continue for the foreseeable future.

Harsh V. Kumar - Stephens, Inc.

And then I had one or two more, Greg. I wanted to ask you a question about the Huawei news. First of all comm, I think you mentioned was 40% of revenues. I'm sure – is all of that Serial RapidIO, or is there a portion of it? Perhaps you could split that out.

And then secondly, we always thought that it wouldn't make any economical sense for anybody to try to make this product because the market isn't big enough given the R&D effort that has to be put in. Could you maybe talk about why they want to do this at all?

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

Yeah, I think that's more of a question for them, Harsh. I will say transparency means being transparent with bad news as well as good. The speed of this did surprise us. So I don't want to sugarcoat that or talk past it. In fact, they were heavily expediting us on this type of a device for the past two quarters to begin with. So certainly it is not a device performance related area. We just sampled our next-generation SRIO devices, the ones that will be a generation beyond Huawei is using about three months ago, nor do I detect this to be a broad market trend.

But I think those are questions that's for Huawei, why they made that shift. The rest of the Comms business is SRIO, obviously, but there's a significant portion of the very diversified network timing business – as well as the RF business is all in the comms bucket.

Harsh V. Kumar - Stephens, Inc.

Could you give us that breakdown of Serial RapidIO versus the rest?

Brian C. White - Chief Financial Officer & Vice President

Yeah, Harsh, this is Brian. Serial RapidIO was $25 million out of the total comms which was $79 million.

Harsh V. Kumar - Stephens, Inc.

Got it. And then as my last one, a lot of stuff about sensor design wins, right now you get a bunch of your revenues, Greg, from handset, and I think that's what you mentioned on the call, but if I read some of the types of sensors you're making, they're heavy duty industrial sensors and we know that's a very vibrant market. I am curious which direction does IDTI or yourself want to go in the future down the line?

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

We will be very selective with how we play smartphones. So when you say we get a bunch of revenue from smartphones, we actually don't, Harsh. It's only the wireless charging component which we said was $21 million. That's the entirety of our smart phone exposure.

The way to think about sensors is this, a great deal of the ZMDI core competence is around automotive sensors. So we're already in the automotive application space with a variety of different sensors, and that's really where this business started. And that is already growing and we're winning new designs there.

Now the next stop from that is just as you mentioned, there's direct applicability of the same sensor technology into a broad array of applications in industrial. We're capturing those, and we expect to capture them in the Mobile segment as well.

Harsh V. Kumar - Stephens, Inc.

Okay, understood. Thanks for the color. I'll get back in line. Thanks, guys.

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

I will. And just one follow-up question, although it's kind of a follow-on to the breakout of SRIO, let me point out one thing that while the reduction in Huawei SRIO is disappointing and without question a step backwards in that area, I'd also like to point out and give some more color on the makeup of SRIO business going forward. So, for instance, if we take a look at the SRIO business minus Huawei, it is already become a very diversified business. So if we were to look at, for instance, the December quarter, and not the September, but December, we would expect our SRIO business to run between about $14 million to $17 million, post Huawei.

Now, over a third of that is already diversified into non-base station customers, such as Siemens Medical, GE Medical, Lockheed Martin, General Dynamics, Prodrive, Rockwell Collins and a variety of others. So while it is definitely not a positive event for us, it also permanently deleverage us, IDT, against the revenue concentration we had in 4G base stations which was a concern to some investors.

Harsh V. Kumar - Stephens, Inc.

And, Greg, can I ask just one more? We saw this with another company that we cover where a part got insourced and they basically took that particular business with that particular customer to zero going forward. Is that how you guys are thinking about having us model and perhaps internal modeling for a Serial RapidIO with that customer in China?

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

Yes, it probably won't be zero, Harsh, but the way to model it and the way we think about it is that business goes to essentially zero.

Harsh V. Kumar - Stephens, Inc.

Got it. Thanks.

Operator

And our next question will come from Quinn Bolton with Needham.

Quinn Bolton - Needham & Co. LLC

Hi guys. Just wanted to follow-up on the questions around Huawei, clearly, if I heard the comments, it sounds like you're sort of losing about $12 million a quarter, almost $50 million a year, just wanted to make sure I heard that right.

And then second, if that's right, Greg, you talked about some of these mobile sensing applications potentially being bigger than wireless charging even. Just wondering how quickly do you think you might be able to replace that SRIO business with revenue from mobile sensing? Is that a couple year outlook or could you do something even faster than that?

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

I think it's less than two years. First of all your questions, you did hear correctly, it's about a $12 million per quarter that we'll be fully in by the December quarter. So you did hear correctly. I give it to you in several different ways, Quinn, is that even without the new growth potential of mobile sensors, we still believe we are a growth company. We have got revenue strength coming in from multiple areas right now.

Memory interface is getting some legs back under it. We think we're uniquely positioned in non-volatile and some of the new emerging trends that go along with some of the more advanced non-volatile memories. We have new and unannounced products in networking beyond SRIO, that it add to that. And automotive and industrial is already growing and we expect to accelerate. So, there is many different avenues of growth that we think remain intact, in fact all of them remain intact with the exception of near-term SRIO. Now with mobile sensing, I'm not going to put a specific parameter on how big that business becomes how quickly, but that business will definitely start to make a material impact in less than two years. And in fact the first of those design-ins that would leverage that are already rolling. So more on that in the near future.

Quinn Bolton - Needham & Co. LLC

Great. And then just coming back to the memory interface business, any comments as you start to see a gradual recovery in that business, is that just more unit driven or are you seeing better attach rates now again on the LRDIMM as part of the Broadwell ramp? And then last question for me, you mentioned another record in the RFIC business. I know you've set a sort of two year goal to hit sort of $70 million-ish or so run rate, just wondering if you could tell us has that business now reached the double-digit per quarter run rate, or are we still below that threshold?

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

We're just about at double-digit, tickling double-digits in that business. The progress, we said $70 million in three years and we said that a year ago, we're a little ahead of that, in terms of how quickly we would achieve that. And with respect to your question in memory interface, most of the increase or the sequential increase, like, nearly all of that, Quinn, is unit driven. There may be an attach rate increase towards later in the year, but too early to call that right now.

Quinn Bolton - Needham & Co. LLC

Great. Thank you, Greg.

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

You bet.

Operator

And next will be Anthony Stoss with Craig-Hallum.

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

Hi, guys. In light of Huawei, can you help us out on your expectations on OpEx, maybe September and December, kind of even in the March quarter as well to get you to that 30% operating margin, so OpEx? And then secondly, I didn't hear a lot of mention about the PMIC side, Greg, and the SSD, I'd love to get whatever new update you have on that? Thanks.

Brian C. White - Chief Financial Officer & Vice President

This is Brian. I'll take the OpEx question. So we guided to $64.5 million of OpEx for the September quarter. Our target is to take another $1 million out for the December quarter that will be primarily driven by SG&A. And then going into the March quarter, our fiscal Q4, we'd be looking for another $1 million to $1.5 million incremental coming out primarily in the area of R&D.

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

And the second question, Tony, on PMIC. Let me give you a little bit more granular breakdown, PMIC is starting to get some more legs. So what we talked about last year at Analyst Day was a new class of PMIC that was highly programmable, included 32-bit microcontrollers and was going to take next-generation high-end enterprise SSDs and it did. We have won decisively in that category. However, the unit shipments by the lead customer on that are a little less than we had anticipated. So, while that business has been growing year-to-date, it's been kind of muted. The numbers are – we've got the designs. Revenue is okay.

Now what's happened in addition to that is largely tied to Intel's Atom processor and IoT applications. We are also picking up new and increased design traction around "mass market" or IoT designs tied to the Atom processor.

The third area which is by far the largest opportunity, by far from a TAM perspective is we are now talking for the first time in this call that we have secured major, major Tier 1 automotive power designs that will go in automotive infotainment. And while infotainment design cycle is much shorter than, for instance, the classical automotive engine or chassis design, those are designs also that we would expect to roll into the revenue stream as early as late next year, but these are very secure and actually very large design wins that we've now taken.

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

And then last question aside from Huawei, do you have further visibility in commerce comms still classified as stable. Again, excluding Huawei?

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

I think our comms outlook is stable. I think it's actually, in fact derisked from concerns around exposure around SRIO. I'd say that comms broadly is stable, but somewhat lackluster at an industry level. I think listening to the call this quarter we would seem to me that we are faring that a little better than most, but I'd say stable, but not growing.

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

All right. Thank you.

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

You bet.

Operator

And your next question comes from Christopher Longiaru with Sidoti & Company.

Christopher J. Longiaru - Sidoti & Co. LLC

Hey guys, thanks for taking my question. Can you just give us a little bit more granularity about what the profile is for some of the new mobile sensor products? I mean, historically you've had some lower margins on the consumer stuff which is typical right. But I mean are those going to be higher margin products than, say, wireless charging or can you give us something directionally?

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

Yes, I sure will, Chris. And listen, I know this is an interesting topic we're going to come forward with a more precise model than that, in probably two quarters. But here's why it's so exciting, the margin profile of the advanced sensors that we plan, and we're not going broadly in this, but really our environmental sensors, advanced optical, thermopile, which is remote temperature sensing and very rarefied forms of gas sensing, those margins approximate our company average. They may be slightly lower than that, but they are meaningfully higher than, for instance, what we've telegraphed in the past on wireless charging. The ASPs are higher.

And unlike wireless charging, which we are very excited about, that's a new use case, and it goes back to a question that was asked earlier in this call. One thing that's very nice about the sensor market is, while there's many, many new applications available for sensing, the sensor TAM is already there; it's already large, and it's already very established.

So our sensor traction will come from really two different ways, one of which will be displacing older, much bigger, more cumbersome sensing solution, and that's the bulk of the Automotive and the Industrial business we'll be taking. And the second area will be application of those sensors into brand-new application spaces where they're not using sensing today.

Christopher J. Longiaru - Sidoti & Co. LLC

Great. And then the only other question I had was just in terms of the qualification of the Penang test facility, how does that change your operational flexibility? And what does it do in terms of cost management of that process? Can you give us an idea of how it affects going forward?

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

Yes, very good question. I'll give it to you in several different ways. The first of which is that the integration and bring up of the Penang facility to full automotive certification, alongside with our very capable Dresden, Germany, facility, does several things for us immediately.

The first of which is it gives us the ability for additional manufacturing and loading flexibility between the two sites that is a huge, huge plus for our customers.

The second is it catapults IDT as a corporation, not just to have an Automotive business unit, if you will, but to be a fully fledged deep automotive supplier. So this is also part of what causes Tier 1 automotive customers to take us deadly seriously right now as a committed automotive supplier.

And the third thing is, it has lowered operating costs already. So, for instance, if you take a look at what we had previously telegraphed, was that we would be bringing ZMDI business in, in, say, the March quarter at a little less than $20 million per quarter. We said it was 55% – mid-50s% gross margin but essentially zero operating income. This is also a major part of why that business continues to grow but also turns into approximating our overall company business model by the end of the March quarter.

So it is a win every which way. And I have to say, I am so proud of our employees for pulling this off. I am personally not aware that there has been any company that has brought up a copy exact manufacturing and test flow for automotive and done it from a standing start in seven months.

Christopher J. Longiaru - Sidoti & Co. LLC

That's really helpful. And then, the last thing, just on the LRDIMM attach rates. Can you just give us kind of – I don't know if you have said this already, I don't know if I missed it. What was the attach rate in this past quarter?

Brian C. White - Chief Financial Officer & Vice President

We didn't say but it was similar to what we have seen in the last couple of quarters, which is high single digit percentage attach rate.

Christopher J. Longiaru - Sidoti & Co. LLC

All right. That's all I have, guys. Thank you very much.

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

Thanks, Chris.

Operator

And next will be Charlie Anderson with Dougherty & Company.

Charlie Lowell Anderson - Dougherty & Co. LLC

Yeah, thanks for taking my questions. I want to start first with consumer. You guys had a nice upside relative to your guidance. I wonder if you could speak to whether that was wireless charging or some of the other pieces in there. And then just broadly on wireless charging, Greg, any updated thoughts on penetration rates for that technology and flagship smartphones, mid-tier smartphones over the next 12 months or so?

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

Yes, we'll do, Charlie. Let me start and I'll turn it over to Brian to fill in if he's got additional commentary. Wireless charging in terms of the way it's progressed, we're extremely pleased and extremely proud of it. So we continue to win, as far as we can see, pretty major socket that we want to participate in out there right now. I think there will be an additional wave of new entrants into wireless charging that we're not putting a specific timeframe on.

But what is interesting that's changed in the mentality of the people that haven't yet launched wireless charging is almost without exception, the major Tier 1s who have yet to field the wireless charging product have all pretty much completed a wireless charging design. So when they make the business decision that it's the right time for them to actually enter the market with wireless charging, I think those design cycles could go very, very fast. Now, whether that actually begins to contribute this calendar year or more like in the first half of next calendar year, too early to call, but it's coming.

The second thing you had asked for is additional color around consumer. And what I'd also say is that, while the bulk of that revenue is, in fact, wireless charging at this point, there is also a consumer timing business there. That one of the additional encouraging thing is that business, which had been a little bit, frankly, of a sleepy business going back couple of years ago, has been recently revitalized and for the first time is starting to get some growth legs underneath it. So, consumer timing is alive and well, and I think is, while it is not going to pick up sharply and I wouldn't encourage you to model that way, it is definitely helping now and will continue to help in the future.

Charlie Lowell Anderson - Dougherty & Co. LLC

Great. And then a follow-up from me on Huawei. They do have a chip division. I wonder if you anticipate that they may sell this merchant at some point, or if there was any third party help they got, or there's maybe another competitor on that...(35:04)

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

You know, that is certainly a question we can't answer they could, Charlie. But we have asked that question in multiple different directions at many different levels of management, and they have assured us that that is not their intention at all.

In fact, if you think about the likely customers of that, they would be direct competitors of Huawei Systems business, and it's, frankly, kind of hard to imagine that they would be too successful in that.

Charlie Lowell Anderson - Dougherty & Co. LLC

Great. And then just one more for me. I wonder if you could speak to the gross margin on the business going out. And then, as I think about your 30% operating margin targets, you do have a lot of moving pieces, losing that business and then a few others that are going to be growing nicely. How should we think about the long-term gross margin target for you, guys?

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

Unchanged on that. That revenue comes out at roughly – company gross margin. It's not a good event, Charlie. But it is what it is. Our company, margin model, operating model, actually any model, there's no change.

Charlie Lowell Anderson - Dougherty & Co. LLC

Perfect. Thanks so much.

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

Thanks.

Operator

And the next question comes from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch

Thank you for taking my question. Just one last one on this Huawei transition, just to sort of nail it down. I think, Greg, you gave us the $50 million impact on sales. Can you also help us sort of gauge the incremental hit to EPS? And then, more importantly, how quickly do you think you can fill this gap with growth than some of the other areas you outlined?

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

Vivek, let's try to do as best we can on that. We don't give a long-range forecast on EPS on that. We've given you revenue. You know our OpEx. We just reiterated our commitment towards 30% operating margin in the March quarter, unchanged, albeit with lower revenue. So one comment is, there's obviously some resilience to the business model, but we can still be talking about 30% in March quarter, even, let's say, $12 million less revenue. So, that is one indicator.

How quickly we fill it I think is kind of up to us in future guides. But I will tell you, I'm not at all put off that we will fill it and quite a bit more on the basis of the products we've talked about already in the call today.

Vivek Arya - Bank of America Merrill Lynch

Got it. And then, what gives you the visibility that they're replacing it with an internal ASIC, or could there also be some additional competition from somebody else (37:36)...

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

No. It's definitely an internal ASIC, and they've told us that directly across multiple layers of management. As you can imagine, this was quite a hot topic on our end. I flew there myself. I talked to people as well as other inputs, but this is definitely not displacement by an external vendor. This is an internal high silicon ASIC.

Vivek Arya - Bank of America Merrill Lynch

Got it. And then just the last one, Greg, on your memory business. As we look out in the back half, there are a few moving pieces. So, Intel has obviously started shipping Broadwell. They have expressed a lot of confidence in their growth in the back half after sort of a soft first half, and you also had Inphi exiting the business. So just, overall, how should we think about your memory business in the back half?

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

It gets stronger. I think, since as we'd mentioned in our February call, had started to see a decline in broad demand to enterprise customers back to last December. I wouldn't say the demand situation is sharply improving, but it is definitely improving, and this is the first time we've seen this on a broad industry basis since late last December. So those remarks, I think, would roughly mirror, what I think Intel and others have been calling out in the industry.

From a competitive perspective, we have never been so well positioned from a competitive basis. The customer attachment to IDT solutions is extremely high. We think our competitive position has improved as of recently, and we are at or ahead of the best technical qualification for next-generation product families such as Skylake than we've ever been.

Vivek Arya - Bank of America Merrill Lynch

Okay. Thank you.

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

Thank you.

Operator

And next will be Ted Snyder (sic) [Ed Snyder] (39:25) with Charter Equity Research.

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

That's Ed in for Ted (39:30). Hey, Brian, you're fabless and SRIO is probably at or slightly lower than the corporate GM, while your RF, which is probably one of your highest GM products...

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

Ed, we can barely hear you.

Edward F. Snyder - Charter Equity Research, Inc.

Check. Any better?

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

Yes, much. Thank you.

Edward F. Snyder - Charter Equity Research, Inc.

So the question is that, you were fables, you are fabless, and SRIO is at slightly at or a little bit lower than gross margin for the corporate average, while RF is probably one of your best GM parts and it's growing. I would expect maybe a slightly better GM for the out quarter. Is there some change in specifically the RF business that's kind of changed the gross margin profile of that, or is it just mix overall?

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

You're technically correct. I mean, listen, everything you said is true. It's just the algebra of – it's a lot of SRIO revenue – and RF is coming up. So that will improve a little bit. I just don't think it's enough to change the model. One point you do make, which is very accurate is the lack of SRIO since it's all fabless does not hurt any absorption, right. So there's no negative impact for loss of that revenue to our gross margin average. And, as you mentioned, our gross margins outlook with RF and others remains quite healthy.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. And then, what impact does Intel's ramp of the 3D XPoint memory – they've been talking about that on their call ramping in the second half of the year, cost goes up. What impact does that have on your memory business?

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

It's a good question, Ed, because it's difficult to impossible for us to predict anything with 3D XPoint, and it's not our business anyway, it's very difficult for you or the analyst community or anybody to get a precise model about that. What we have said and will say is that, to the degree, that new solutions such as 3D XPoint or any other type of advanced non-volatile memory solution begin to ship, that is a greenfield new TAM for us that would basically be TAM expansion. And we believe, we would be exceptionally well positioned in those markets should they start to ship.

Edward F. Snyder - Charter Equity Research, Inc.

So this is a whole new memory. So is it going to follow the same track that you've seen with the existing memory products where you do buffers and registers to third-parties, or is there a completely different set-up?

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

Architecturally different but not a bad way to think about it. Think about it this way, Ed. The reason people are using tricked out forms of non-volatile memory such as XPoint is to get access times. So you preserve the cost and density of a non-volatile solution but they're too slow so you want to make them faster. To make them faster, you have to play every trick in the book from a memory interface, process technology, packaging, you name it, to dramatically increase those cycle times.

So, if anything, you could look for a content attach rate that's higher than what we see in DRAM. But I think this is, to me, if you get into calendar 2017, for instance, this is one of the "lottery tickets" that we talk about with IDT, as that market starts to roll, it's a lot of dollars of attach for us, and we are exceptionally well positioned for that.

Edward F. Snyder - Charter Equity Research, Inc.

So to that point, is it mostly an attach rate play for you, or, if we were just to do apples-to-apples and then look at the same attach rates, would you expect your content – that might be a little bit early for this – but your content would be higher in 3D XPoint, or do you expect that to be a wash and this is all attach rate?

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

Content could be higher.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. And then, we still have one (42:55) Huawei here. I know you guys ship it to all the 4G base station players. Can we expect kind of a similar impact? If tomorrow Nokia woke up and they decided to return to their roots as a forest (43:07) product company, would you expect a similar kind of impact to your SRIO business, or...?

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

No. That's a very good question, Ed. No. And let me give you some parameters as to why. Huawei was by far the largest SRIO customer, and there is no close second to that. So, for instance, if you took the next biggest 4G base station player out, which we don't see by the way, most of them have already designed in or actively evaluating our next-generation SRIO. But supposed I'm wrong and they do take it out, the impact to us would be small enough that I doubt you'd even notice it in the model. It's much, much, much less, I mean, like a quarter less, for instance, just to put it into perspective, a third to a quarter what Huawei was for our next biggest in-line SRIO set of customers. So I do not expect a continued volatility, for any reason, out of the SRIO line after this.

Edward F. Snyder - Charter Equity Research, Inc.

But the base station channel is also where you're selling most all your RF componentry, too. Is that evenly spread across most of your OEMs, or do you find them heavily attached to (44:10)...

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

No. That is a share gain game. We started that RF business, really in earnest, only about two years ago. We continue to gain a lot of share, and in fact, it's the opposite story. We're only shipping in volume to say one and a half major base station players with a lot more land to grab.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. Final question, I mean, you guys announced a few wireless charging wins on the quarter. Greg, we've talked about this before. Are you concentrating more on the, say, the base station, the CPE side of things versus the handset? I mean, you've got less volatility, and probably your pricing is a little bit better. And then secondarily, any new competitors in that business?

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

This is wireless charging only, Ed, correct?

Edward F. Snyder - Charter Equity Research, Inc.

Correct.

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

No. To your first question, we really concentrate on where the application is whether that be a handset whether it be, for instance, a transmitter pad or something like that, we do both. And you'll see IDT solutions overwhelmingly in both. I do think that wireless charging, while everybody envisions that being part of a smartwatch or a smartphone and there's a lot of growth left in those, there's a lot of other application play in wireless charging. And I think one of the next frontiers you'll be seeing IDT showing up in with wireless charging is in automotive.

Edward F. Snyder - Charter Equity Research, Inc.

You've said in the past – I mean, we know there is a difference in profile in margin, depending on where you're selling into that and you've said in the past that you're not really interested in just revenue for revenue's sake. It has to be value added. You can't be designed out that sort of thing. First of all, can we assume that with a new Note coming out of here, there's some value-added aspect to it rather than just what's a commodity charger or something designed... (45:51)

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

Yes, you can and thank you. And if that's the nature of your question, I understand completely. I have said that I remain deeply committed that we only go after sockets where there is a real value and some defensible hurdles for IDT. So for instance, if you look at every single socket we're in, in wireless charging without exception, it's our intellectual property. It's a very proprietary algorithms running on that, it's proprietary features that are above and beyond the standards that are trading that value and we are in fact unique in those solutions.

The type of business that I've indicated in the past that I would walk away from and without hesitation is for instance high-volume customer defined ASICs that might be going into smartphones for instance and those businesses which is not interested in at all.

Edward F. Snyder - Charter Equity Research, Inc.

Great. Thanks, guys.

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

You bet.

Operator

And next will be Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Inc.

Hey, guys. Thanks for taking my question. Greg, your consumer business is up 19%, you said wireless charging up 12%. I think you said consumer timing was strong. I was wondering what else was strong. Was it just timing, or were sensors strong as well? What drove the outperformance in consumer?

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

Yes. We're looking it up as we speak, Blayne. Just give us a second, and we can give you some more color on that. But timing was up, and in fact, there is a small part of mobile sensors already in that revenue stream, which I believe was up slightly.

Brian C. White - Chief Financial Officer & Vice President

Mobile sensing was also stronger than originally expected. So it's all three of those areas.

Blayne Curtis - Barclays Capital, Inc.

Okay. And then, what's the right seasonality – you talked about getting the Note design win. I think you're already in the current iteration. As you look into December, what's the right way to think of seasonality? And then, as you add in this consumer timing, what types of products are those, and do those also have some seasonality?

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

The right way to think about the timing, Blayne, is that there is no reason why timing couldn't continue to be slightly up, for instance, in the December quarter. Now, we have got to go deliver that.

Wireless charging could be a range of possibilities of slightly up, flattish, or even slightly down. And the way I think that I would encourage people to model wireless charging in the December quarter is probably along this line is that – is flattish to maybe even slightly down.

Blayne Curtis - Barclays Capital, Inc.

Got you. And then, sorry for one more Huawei question. I just want to understand, I mean, you talked about $25 million a quarter business, and then it's $11 million to $12 million headwind. If you back out some of the non-base station, that is the majority of the revenue there. Was that just an architectural difference that you had said that they had been expediting? Is that $11 million to $12 million, that's the ongoing rate we should think about, not only for December, but even beyond that?

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

Yes. Yes, correct.

Blayne Curtis - Barclays Capital, Inc.

Thanks, guys.

Operator

And next will be Lena Zhang with Summit Redstone Partners.

Liwen Zhang - Summit Redstone Partners

Hi. Thank you for taking my question. First one is about your Automotive business. It was a little bit lighter than guided? And can you comment on the demand situation in different regions (49:07)? Thank you

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

Yeah, thanks, Lena. Automotive demand is strong, and I don't believe it was lighter than guided. No, it was not lighter than guided, Lena. It's real right in the money, I believe for what we said for automotive versus that.

Let me give you – in fact, let me make sure there is no confusion about that. If we didn't own this business a year ago, obviously, but the year-on-year compares of that specific business what we acquired from ZMDI (49:33) is up significantly from last year, so that business is growing well. It continues to do so and – so year-on-year compares are up quarter-on-quarter. It's up. And we believe based on design wins that they already have, which would be filtered in these production that the long-term outlook for that core Automotive business even outside things like infotainment is extremely strong.

Liwen Zhang - Summit Redstone Partners

I see. Thank you. And some more question on the balance sheet. And I noticed that inventory was down significantly in the June quarter, also I noticed that there was an additional item called held for sale asset. Can you give us some details on what happened, like some supply constraint, or what you held for sale?

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

Let me start, Brian can jump in. It's simply a small accounting invention. I don't have the exact number, but at least a tiny number on the balance sheet, I think it is there. We have had in the past nonessential items that are really rounding error from the overall company perspective, mainly they had to do with a non-semiconductor product line, which was our crystal business that was acquired some time ago where we continue to promote that business, but we have in fact added times, people interested in the disposition of acquiring some of those line, so that's a good eyes for picking that out. It's small enough a number. I'm not even sure what it is but that's the nature of that background on the balance sheet.

Liwen Zhang - Summit Redstone Partners

Okay. And if I could lastly about your – last question is about Huawei. So I noticed that you have revenue – Serial RapidIO revenue in the last June quarter, I mean not this year, 2015, is around about $13 million, pretty significantly down – and Huawei started a internal development early last year and that they kind of, not – wasn't that successful at the beginning and they are now they fully confident about their own product, so it hit your, give you hiccup?

Brian C. White - Chief Financial Officer & Vice President

Lena, I don't think that there would be anything related to Huawei in that year-over-year comparison. So you're right, if we go back to the year ago June period, we did about $13 million of SRIO revenue versus $25 million that we did this past June. But if you go back a year ago that was when the entire comms end market hold back significantly, right. And that had a very large impact on all suppliers that sold into that space, IDT included. And since that time, that end market has recovered but during that entire timeframe, we were the sole provider to Huawei. So there is nothing related to that trend and this new development.

Liwen Zhang - Summit Redstone Partners

Thank you.

Operator

Moving on to Quinn Bolton with Needham.

Quinn Bolton - Needham & Co. LLC

Hey guys. I just wanted to ask a quick follow-up about the 30% op margin target. Brian, if I take your $64.5 million OpEx guide for September you gave us some general sense where you thought it would trend in December and March probably gets you down about then about $62 million, $62.5 million. I assume you hit a 30% op margin on that OpEx, it would imply your revenues are probably in the range of $205 million, $206 million by March. Obviously, you kind of face, I think some weaker seasonality between now and the March quarter and with the Huawei sort of whole – I guess, I'm just struggling to see how you might get to a 30% op margin? Can help us out with just – do you think it requires further OpEx cuts, or do you think $205 million, $206 million kind of revenue target is realistic to get you to that 30% op margin?

Brian C. White - Chief Financial Officer & Vice President

I think we can get there on less revenue. First of all, you got look at gross margin. So we're continuing to work on the restructuring of ZMDI and getting their margin structure up. As Greg mentioned, when we took them over, they're in the mid 50s%. We stated our objective of getting them up to our corporate averages. So that work is ongoing. And the example, the Penang test facility receiving automotive qualification is one significant milestone toward that. So we're working the gross margin side of the equation, so there could be some opportunity between now and March associated with that. And we'll continue to look at OpEx. I provided you some ranges moving forward that I think is clearly within our line of sight. We'll continue to look at opportunities beyond that. So I think there's a path to 30% at a revenue number less than what you mentioned.

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

And Quinn, it's Greg, just to give you a little bit of a credibility guide to that, recall the previous to ZMDI, we hit 30%, we hit 31% on revenue, much less than that. So, we've done this in the past as well.

Quinn Bolton - Needham & Co. LLC

Got it. Thank you.

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

You bet.

Operator

And moving on to Harsh Kumar with Stephens.

Harsh V. Kumar - Stephens, Inc.

Yeah, hey guys. Thanks for opportunity for a follow-up. In your press release, Greg, you talked about collaboration with Cavium and data centers. I'm curious if you could shed some light on what you guys are working on there with Cavium?

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

Well, that specific announcement which was the topic of a previous press release, so there is another press release you would be able to find easily out there was specific to advanced memory interface. So, that was really DDR4 related cooperation with Cavium and others.

But I would say that while we often and at times fairly are held up against Cavium as a competitor, we actually don't compete with Cavium in most of the places that most of the companies work in. And so, we continue to look towards Cavium as more of a collaborator than a competitor. And I think you'll see other areas as well that may be interesting between the two companies.

Harsh V. Kumar - Stephens, Inc.

Hey, Greg. And I just wanted to go back to an answer you gave to one of the previous question. I think you mentioned that in December it's okay to think about a $14-ish-and-change million, $14 million to $17 million run rate for Serial RapidIO. And then you also mentioned – I want to make sure this is correct – that a third of that $14 million to $17 million will be non-base station business. Is that accurate?

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

Yes, except let me double check on the first, but I did say about a third of that is already diversified into the non-base station customers. In fact, to just read them again. Siemens Medical, GE Medical, Lockheed Martin, General Dynamics, Prodrive, Rockwell Collins, Mercury Computers, et cetera.

Harsh V. Kumar - Stephens, Inc.

Cool, thanks, guys.

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

You bet. Okay...

Operator

I'm sorry. Go ahead.

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

I think we're concluded with today's questions. We appreciate everybody for the good question, the attention. I would like to thank everybody. And we look forward to seeing many of you around this quarter. Thank you.

Operator

Well, thank you. And that does conclude today's conference call. We do thank you for your participation today.

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