Exar Corporation (NASDAQ:EXAR)
Q1 2017 Earnings Conference Call
August 3, 2016 4:45 PM ET
Ryan Benton - Chief Executive Officer
Keith Tainsky - Chief Financial Officer
James Lougheed - SVP, Sales and Marketing
Tore Svanberg - Stifel
Karl Ackerman - Cowen and Company
Pete Lukas - CJS Securities
Craig Ellis - B. Riley
Christopher Longiaru - Sidoti & Company
Ladies and gentlemen, thank you for standing by. And welcome to Exar Corporation's Fiscal Year 2016 First Quarter Financial Results Conference Call. At this time, phone lines are in a listen-only mode. Later on, we will have an opportunity for a question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded.
I will now turn the conference over to Exar's CFO, Keith Tainsky. Please go ahead, sir.
Thank you, operator. Good afternoon, everyone. Thank you for joining us for Exar Corporation's fiscal 2016 first quarter financial results conference call.
As noted in our press release, we have issued a set of prepared financial remarks in advance of this call. You can download them from our website at exar.com.
Before we begin, I remind everyone that the during the course of this conference call we will be making forward looking statements that involve a number of risks and uncertainties and are not guarantees of future performance or results. You are encouraged to review the Safe Harbor statement contained in today's press release as well as the other risks detailed from time to time in the company's SEC filings.
Also the company reports financial results in accordance with GAAP. However, for the periods presented today, we are disclosing various non-GAAP measures. The company believes that non-GAAP measures are useful to the performance of financial analysis. Reconciliation from non-GAAP to GAAP can be found in today's financial results release or in the company's applicable SEC filings. Unless otherwise stated, when speaking of operating results, the company is referring to non-GAAP results.
In addition, we previously entered into a definitive agreement to sell our iML Display business. As such results from the iML Display business are presented as discontinued operations. Unless otherwise indicated, financial results discussed during this call exclude the discontinued operation.
We will utilize today's time with a presentation hosted by Ryan Benton, our CEO; James Lougheed, our Senior Vice President of Worldwide Sales and Marketing; and myself, followed by question-and-answer session.
And with that I'd like to turn the call over to our CEO, Ryan Benton. Ryan?
Thank you. About a year ago we had a vision of a better
Exar. We became determined to transform Exar into that vision. The first part of the transformation was the recognition that we needed to define with extraordinary precision, our areas of competence and redeploy assets that either did not fit that vision or were under utilized. Of course, we have done this most notably when we announced the sale of the iML Consumer Display business. Although the business has been and continues to be profitable, a consumer business of this nature did not fit our strategy. This transaction is under regulatory review and we believe it’s still on track to be closed by the end of the calendar year. As I said previously, the biggest challenge to this transaction is that Exar loses and the buyer gains an incredibly talented team. Over the last few months, we've started hiring in earnest in order to fill the gaps this transaction will create.
During the quarter, we also closed the sale leaseback of our Fremont campus netting $24.1 million in cash. Our total cash balance grew $30 million during the first quarter to $85 million and reached over $88 million a little over a week ago. The second area of transformation has been the reinvention of the supply chain in China where we have found that costs are lower. I've said many times that this is the equivalent of discovering that water is wet or the sky is blue. My point is that this is pretty obvious stuff. What we have done though most notably is execute extremely well. Keith will expand on the success that we are having and how this continues to exceed our expectations.
The third area of transformation has been in sales and marketing where we concluded that if we wanted to realize our vision we needed to do something different. Fortunately for us, industry consolidation cracked the door open for a company like Exar to reinvent ourselves. Rather than the build it and hope they will come strategy, we saw an opening to leverage our team capabilities to be responsive to Tier 1 customers who are increasingly frustrated with the lack of competition and whose requirements are increasingly ignored.
So we didn’t have to change our go-to-market strategy to focus our resources on winning quality sockets for Tier 1 customers. We have limited resources so we've had to make smart choices. We are now winning socket that can be replicated with other Tier 1 accounts and can be leveraged into our horizontal channel. In sales and marketing we also recognized that we simply had to execute better. Since James took over sales, we have attracted seasoned top talent to augment to core employee, provide a sales incentive plan and implemented improved systems and processes.
Yes, we are the beneficiary [indiscernible] with the industry consolidation, however the real story is that the sales team has evolved to where they go into Tier 1 accounts and expect to win. And the sales team is supported by a technology team that is answering the bell and turning some impressive silicon in a short deadline. James will talk in a few minutes about this evolution.
And finally, we are transforming Exar by changing the culture. We are installing a culture that is responsive to the customer and has a passion for winning. We are becoming an Exar where internally we expect to win and externally when we do hopefully people aren't surprised.
This takes me to Slide 7. Exar's core business and the iML business which we are divesting both performed extremely well this quarter. The combined $7.3 million from non-GAAP operating income was a company record which is significant for a company that was founded in 1971. This is an achievement that the team should take considerable pride in. It's also worth noting that this translated to $0.15 non-GAAP EPS. A few quarters ago $0.15 EPS was our target model including iML. We won't break an arm [indiscernible] ourselves but it is nice to be able to say that we hit the target.
The most important part of the slide though is that it highlights how the $4 million in non-GAAP operating income from Exar's continuing operation for Q1 stacks up from a wide [indiscernible]. They teams stayed focused and did a fantastic job executing this quarter. Although there are plenty of challenges and plenty of work left to do, we have transformed the company into a sustainable, analog mixed signal company with the solid foundation that we can build upon. When we announced the sale of our iML I think it raised more than a few eyebrows when we maintained the target model of $0.15 EPS without iML. As James and Keith provide further color, I think you'll start to understand why we are optimistic about our prospects to hit the target model.
I'll now hand the presentation over to Keith to discuss the first quarter financial results in greater detail as well as guidance for the second quarter, followed by James to give a more in-depth sales and marketing and general business update. In the end, I'll give few final thoughts and in doing so strive to improve on a whole gravity thing. Keith?
Thank you, Ryan. Our Q1 revenue was at the high end of the guidance range at $27.1 million. I'll discuss that in more detail on the next slide. On this slide we are simply trying to give the demographics of the revenue from continuing operations as these figures now exclude the iML Display business which is being divested. The iML business is largely in China so continuing operations now has more geographic diversity. Asia is now 70%, Americas 18% and Europe 12%. We will continue to leverage our broad horizontal channel. However, one benefit of our Tier 1 strategy is that we'll have the opportunity to take more business direct when it makes sense to do so.
Now let's turn to the full financial highlights. In summary, it was an excellent quarter. As the last slide showed, revenue was up 7% sequentially at the high end of our guidance range. This increase was driven by three main factors. The additional 14th week, increasing advance product sales and a seasonal rebound from Chinese New Year. As Ryan has highlighted, increased sales were offset by an inventory burn in the channel as we simply allowed distributors to follow normal ordering patterns.
From a top line perspective, we are also encouraged by the strengthening demand for our products as evidenced by over $1 million of total backlog in the quarter. And most encouraging metric I can see though is that the sell-through on a per week basis which normalizes for the 14th week is up for the third consecutive quarter and we see momentum heading into Q2.
In addition to the revenue being at the high end of the range, gross margin came in at 51.8%. This was above the high end of the 49% to 51% range, and 188 basis points higher than last quarter and also now clearly within reach of our target model of 55%. The margin improvement was a combination of better mix of advanced product sales, as well as continued progress in our cost of goods reductions, both of which we will cover in greater detail on later slides.
As for operating expenses, there was 10% decrease which was positively impacted by restructuring that was completed in April. The net result of $4 million operating income and earning per share of $0.08 were both towards the high end of our guidance. As a point of reference it is noteworthy that through increased sales, expanding margins and lower OpEx, the $0.08 we posted this quarter for Exar's continuing operations is equivalent to the previous quarter results including iML.
For the second quarter, we expect revenue to be flat to up 3% or between $27.1 million to $27.9 million. Although we have the headwind of comparing against 14 weeks next quarter in addition to a leaner channel, we see sell through per week growing sufficiently such that we still expect to have modest growth. As for margin, we expect the margin to stay in the 51% to 53% range. Operating expenses are expected to be slightly higher next quarter. While there is a natural reduction from 14 to 13 weeks, this is offset as a result of higher salaries and wages attributable to our annual merit process as well as expenses related to new hires. Net-net, we see earnings per diluted share of $0.07 to $0.09.
Now let's look at the cost of goods reductions and the impact advanced part sales are having on our margin trajectory. Simply put our margin trajectory showed the result of lot of focused effort and the results of our strategy to create an operational center of excellence in China. By the end of our September quarter we should have a fully staffed, high quality team in Shanghai in a new office and with a new logistics hub to improve cycle time and lower cost even more. This is a never ending improvement process; however, the team has now reached a clear point of sustainability.
That being said, the result of cost savings to date continues to exceed our expectations. In Q3, 2016 we said we had a target to get to $1 million per quarter out of our cost to goods solid within fiscal 2017. We achieved that mark within one quarter. Last quarter, we laid out an additional goal of incremental $1 million per quarter in targeted savings to also be realized by March 2017.
I am pleased to report that in one quarter end we are already close to realizing that goal as well, having achieving another $700,000 during Q1. It is becoming pretty apparent in next quarter we all need to publish a new goal. Cost of goods reductions are only part of the margin story. Focus and progress on advanced product scales will be other part. James will elaborate but the funnel's quality design win is growing and as a result the visible impact on margin is becoming clear. In Q1, 2017 we saw a substantial increase in sales of advanced products which carry higher than corporate average gross margin. Advanced product sales increased sequentially by $2.5 million to $6.1 million in Q1. This is a tremendous achievement by the sales and marketing teams.
And with that I want to turn it over to James. James?
All right. Thanks, Keith. So as mentioned our total sales grew 7% quarter-on-quarter in line with their longer-term goal of hitting $40 million by Q4 of fiscal year 2018. The growth was driven by our industrial business growing 16% quarter-on-quarter. The main drivers of that growth were advanced product sales for our new power and interface products. And as mentioned by Keith, we also had tier win from the 14th week and the Chinese New Year rebound. This was somewhat offset by continued inventory burn in the channel. Infrastructure was slightly down impacted by heavy decline in some legacy telecom product sales, but largely offset by heavy growth in our DCS inscription and compression products. With the focus on continued operations and therefore move away from consumer, we wanted to showcase two more end markets that we feel will make sense to give more visibility on. Both of these markets have different product requirements and the different customer culture to that of the main industrial customer base. Firstly, audio/video. This includes a video processor business as well as a broad range of power interface and analog products that we sell into applications such as video surveillance, teleconferencing systems, digital homes, wireless microphone systems, professional audio and broadcast. This business represents about 7% of our revenue was down moderately quarter-on-quarter. Due to the nature of the video processor business, revenue in this end market tends to be quite lumpy.
And secondly, automotive. Exar has played in the automotive after market space for many years. Today, it makes up 3% of our total business selling into applications such as bluetooth audio systems, infotainment, off road vehicles, black box systems and automotive diagnostic equipment. The automotive market is a great fit for our new strategy of serving Tier 1 accounts currently being underserved by competitors. We have various technologies that can be leveraged in this space. Our first AEC-Q100 family of products should complete qualification by the end of this year.
We expect this end market to grow for us considerably over the next few years. As I mentioned on previous calls about a year ago, we redirected our sales force to focus on what we call advanced products. These are world class analog mixed-signal products that generate margins significantly north of the company of average. These are products designed in recent years and what are new product engine is laser focused on.
I don’t think it's coincidence that our sales organization knew that in fiscal year 2017 the size of their paycheck is going to be directly related to how much advanced product sales were achieved. So this slide I like to call cause an effect. This is the result of advanced product designed wins at Tier 1 customers as they start to ramp. These are the wins I have been alluding to on previous calls. Now this large growth in advanced product sales comes from multiple areas. Our lighting business grew nicely quarter-on-quarter as we now take a leadership position in the download market. Our digital power universal PMIC family saw a record quarter with growth in Tier 1 teleconferencing and point of sale systems. Our USB UR products continue to grow in the switch and router market. And our PCI Express UARTs and multi protocol transceivers grew strongly with Tier 1 in the industrial PC and IIT getaway space. Now on a previous call I mentioned a shift of focus for our DCS inscription and compression products, away from the secondary hard disk drive storage market and towards the primary solid state drive storage market where our low lengthy solutions are much better fit. In Q1, our Tier 1 design win grew significantly in this space. And as you can see by the margin outlined, this increase has directly contributed to the gross margin increase as Ryan and Keith previously pointed out.
Now I'll give flavor some new mostly advanced product released during the first quarter. The XR34350 is a multi- protocol transceiver with the industries widest output swing design for multiple Tier 1 in the PC and IOT gateways space. The XR33180 is a high speed RS-422/485 transceiver with the industries lowest power down shut down mode designed specifically for a Tier 1 networking customers. The SP3232 is a standard RS-232 serial transceiver customized in a small package for a Tier 1 point of sales customers. This is a great example of showing our responsiveness to the needs of Tier 1. The XR79103/06 are 22 volt, 3 and 6 amp power modules with market leading efficiency designed for a Tier 1 infrastructure customers as well as multiple joint customers. The XR79203/06 are 40 volt, 3 and 6 amp power modules with market leading power density and designed for a Tier 1 industrial and Tier 1 automotive customers. The XR77103 is a our first monolithic PMIC leveraging expertise brought in by the iML acquisition and designed for multiple Tier 1 industrial customers and a Tier 1 automotive customers for an ADAS application. The XR14911 is a custom force touch AFE for a Tier 1 smartphone customers and the 18910 is an eight channel version of award winning 16 channel force touch AFE currently under design at multiple smartphone customers.
These are world class products serving Tier 1 customers that will help drive our business toward our long-term goals.
And with that let me turn the call back over to Ryan for his concluding remarks.
Thanks, James. Thanks, Keith. Before we turn to questions let me simply lead you with our new mission statement. We have committed our self to remain singly focused to our core competencies and be decisive in all areas that impact them. We will continue to deliver exceptional value through focus on excellence and reliability. And for those who you don't know that's what the Exar name stands for. As we create multiple centers of excellences in different parts of the world, we will work as one global team with the passion for winning. We will strive to be the most responsive analog and mixed-signal provider by nimbly leveraging our broad portfolio, experience in IP, to enable the world leading electronic manufacturers to connect and to power the next generation products.
Now we will be happy to take your questions. Operator?
Our first question comes from the lines of Tore Svanberg with Stifel.
Yes, thank you. And congratulation on the results. A few questions. You talked about the inventory adjustments in the channel obviously improving in the quarter. But I was hoping you could also share with us sort of where we stand on the correction? What do you think we would be completely done with at this quarter or we still have a little bit of overhang there?
So, Tore, this is James. Yes, we had some inventory -- channel inventory reduction over the past couple of quarters as we’ve talked about. I think what we see is -- we still may have some more of that play out. We do have one large distributor who is looking to bring down their inventory. We are happy with where the inventory levels are. However, if distributors want to increase with the health of that inventory as we go through this mix shift to more advanced products and less percentage of commodity. And we got the growth to handle that and it's not something we are actively changing or orchestrating.
Yes. Tore, let me kind of add to that. I referenced on the last call going into the 14th week that quite frankly we didn't know how it was going to play out. And we just let people naturally continue to place the same order patterns and it ended being a significant burn but of course and as you can see from the number of the sell through was strong and actually continue to get stronger throughout the quarter. So we are happy to see -- we’re happy to see a leaner channel.
Good. I had a question on the advanced product. So obviously grew tremendously in the quarter. Some of this Tier 1 design wins is now ramping. I mean was there something unusual about this quarter? I guess what I am trying to get is should we expect these types of step ups every quarter and is that primarily what gives you the conviction that you can obviously go from $27 million to $40 million a quarter here fairly soon?
Well to answer the second question first, yes, I mean that's obviously what's being giving us the confidence that we've been able to see these coming down the pipeline, thus giving us the confidence to put these numbers out there like $40 million by end of fiscal year 2018. Was there anything, the question was there anything different in this particular quarter. Not really, there was -- we are working on multiple of these designs. This is not, as I went through the different product areas, you can see this is not from one customer, this is multiple customers, is multiple product lines. So it is sort of what we've been seeing in terms of us winning -- tend to winning more design wins at our customers. And those design wins tending to be larger. But there is a double edged sword with the Tier 1 where it can be a little more lumpy. So we have some customers who will go to market build some product. They might see how the market reacts to that product and they might go away and come back a little bit later. So and then we have new products coming in that might fill that gap as well. So it's really this is the confidence level or this is the - it’s these design wins that are sort of behind the confidence level that we have to be able to show continued growth.
Just one last question. Could you also maybe elaborate a little bit more on your intentions in the automotive market? Obviously, you are breaking it out now as a separate end market that's still very small but you did mention you got a lot of technologies you can leverage there. So maybe you could just add a little bit more color on where should we expect that start to play and in the car or whether it's going to be in for payment or other parts of electronics in the car?
Right. So what we tend to do as we look at, engage with a lot of the customers that we've already engaged with and a lot of those customers who may be playing in the after market space, they also play in the OEM space. So our first target that we discussed and giving us the confidence to enter into this market has really been around the engagements that we’ve had for some time and we’ve started to look at how we can then really address our products from an AEC-Q100 qualification standpoint and move across into more of the OEM type product. So we've taken a lot of the existing -- some of the existing products that we have and put them on the qual program to have them qualified by I think I mentioned end of this year. And that will mostly be I think in the beginning we are talking about infotainment is one of the biggest areas. But very quickly we are also getting sucked into some of the fast growing areas within automotive, I mentioned that ADAS. Some of the power solutions that we have funnily enough some of the constant on time control architecture that we designed for HP, is very interesting as we put that across to a high voltage process and take it into the automotive space. So I think ADAS and infotainment are probably the areas that we would be looking at. And that's where our engagements are starting right now.
Great. Very nice quarter guys and Ryan thanks for reminding us what Exar stands for. Great quarter guys, thank you.
Our next question comes from the line of Timothy Arcuri with Cowen.
Hi, gentlemen. This is Karl Ackerman on for Timothy. First question if I -- I had two questions. First question if I may, relative to the cost savings opportunity you see from shifting your supply chain to China, what inning if you will, are we in for that process helping drive improving gross margins? And I guess similar to that you have articulated in the past that the company can achieve 50% gross margins without any revenue growth, so I guess how do we bridge the gap between your results and guidance today versus your long term gross margin goal of 55%? Is it really all from volume leverage or is it more from the savings opportunity that you talked about in China?
This is Keith here. I'll take that one. So at a high level I think the path to the target model is really a combination of continued advanced product sales and cost reductions in our supply chain. With respect to cost reductions in our supply chain, I'd say we are still on the relatively early innings. We had the data up on the chart there that last quarter Exar continue operations we were about 20% of our volume in China on the backend and our goal is to get to 70% by the end of the year, fiscal year. So --
Yes. So this is Ryan. I'd add as well, when we started the process of transferring to China, at the time of course we - combined entity Exar and iML was really started to focus on the iML business first because that really was the lowest hanging fruit and so a lot of the savings that we really got in the first quarter, the bulk of saving actually came from the iML side of the business. But to be clear, the number Keith quoted on his slide in his speech did not include the iML savings, it was only continuing operation and so I echo Keith's comment who [indiscernible] baseball fan so it's softball question, early innings in that process.
Got it, understood. If I may just try and put a finer point on your design wins in the second half of calendar 2016. I appreciate the color on the slide deck on the so called advanced product sales but again looking at your revenue outlook, can you quantify how much of the incremental revenue in September is from new design wins and similarly you have talked about in the past how power management opportunity in the server market is expected to ramp in December. Of course I know you don't want to probably give a full quarter outlook for December but maybe if you could help us frame the sequential contribution from your design wins as they ramp from the June quarter into the back half of 2016 would be helpful? Thanks.
Okay. This is James. So we don't really -- we are not really breaking it out per se in terms of what percentage is coming from our advanced product sales but I think the way to look at it is, a majority of the growth that we are getting is going to be coming from the events product sales. So you can sort of do the math there, what we are talking about right now in terms of 0% to 3% next quarter. You find that a lot of that would be driven from the events product sales. I think that if you asked me the question a year ago, I might tell you that it has to be more than to grow. But Keith has been doing such a good job of bringing the cost down, it enabled us to keep healthier margins on the standard commodity business that we are in no rush to turn faucet off on that one. We are going to continue our business as well. So I think you will see -- I'd look at any of the growth moving forward really becoming from the advanced products. And I am not really baseball fan, I am more of cricket guy so but I have a shot at it in terms of advanced I would say that we just came out of the dugout.
Our next question comes from the line of Jon Tanwanteng for CJS Securities.
Yes. Hi, congratulation on the quarter. It's actually Pete Lukas for Jon. I just had a question if you could discuss your plans for share repurchase. Do you think that it takes place using the funds from the sale leaseback or will you wait until the close of iML to give more on that?
Yes. Thanks for the question. This is Ryan. So as I said in the past, capital allocation is always an important conversation that the Board will have at every quarter and again we will continue to look at every quarter. I think our focus right of course has been in terms of improving Exar's operations. We will obviously look at everything that we have available whether be buyback or dividend, we said on the last call we don't see large acquisitions in our future and anywhere in the near time. But again in terms of buyback and dividends we will look at those options. But yes I think the big decision will really have will be after we close the iML transactions which I referenced earlier which we anticipate that to be by the end of the calendar year. And I got asked dozen and dozen of time what we are going to do with the money and I'll keep repeating the first thing that we are going to do is cash the check. So I think it's largely a question that we will be planning and preparing for. But we have to make that decision when we close iML.
Great, thanks. And another question on the data compression business. And what kind of run rate that can get on a revenue basis?
This is James here, Pete. So we are not looking right now, we've got a couple of design wins, we are not looking right now at a target for that business per se. But it has -- it tends to have a bit of step function as we win different models. You can see those bit of step function it was decent portion of the growth from advanced sales. So we have a couple more design wins that are coming. But I haven't got really have a run rate that I am looking at. But we are not really going to break that out at this point.
Great, thanks. And last one for me. You gave us a pretty clear path, how you get maybe half way to the target model revenue rate of $40 million on the last call. And just to be get update on your progress and filling in that gap since then.
Yes. So like I said I think I remember on last call I talked about that we have a lot of design win in sight of the lot of the Tier 1, where I say already on boards on that we have visibility of we can get away to at the time we were 26 and how we would get half of our way or 25 and how we would get half the way to the $40 million target of about 32. So we still diligently just working on a lot of Tier 1 design wins when it tends to happen or when you win some big wins then people come knocking and people come asking. And those Tier 1 customers tend to ask you to design more products for them if you do a good job. So we are on target, doing well. We have obviously a good quarter this quarter even with the week difference for Q2. We are confident to edge our growth as well. So very much on target to those plans.
Our next question comes from the line of Craig Ellis with B. Riley and Co.
Thanks for taking the questions and not only congratulation to you guys for getting started well as a team but to the entire Exar team for what it is record operating income performance in the quarter. First just a little clean up on the reported quarter, gross margins were up strongly 150 basis points, can you breakout how much of that would have been due to the back end self help initiatives that are in progress versus the product mix dynamics that are also helping gross margins?
Yes. I mean I think it's fair to say that we had the analysis internally here and it kind of depends on whether you look at would we have back fill that business with other business but I'll say rough math 50:50.
Okay, that's helpful. And then looking ahead at the second quarter guidance the sequential growth make sense especially in light of what was say an extra week quarter and strong growth. But can you talk about some of the gives and takes in the business such it relates to part of the business you would expect to grow sequentially and, are there any headwinds that you are facing in any of the product groups.
Hi, Craig. This is James. So, yes, I think in the infrastructure business I did mention in my remarks that we did had some legacy telecom business come down and it was largely offset by the datacom compression. Well, that telecom business will probably drop down a little bit further. So I'd say that the infrastructure business will probably have the biggest headwind within the quarter. I think our audio/video was a little light last quarter and that will probably bounce back little bit. And industrial should have probably a normal run rate growth that we probably had -- obviously the Chinese New Year rebound. We had pretty good return in that business, part of it from the Chinese New Year rebound. So but if you look at the advanced products that are coming through, the lot industrial but there is also lot in the infrastructure space. It's hard to really say how it's going to -- how these T1 programs going to ramp.
That's helpful. And then just a follow up is related to a comment that you made in discussing that new segments you got to that have strong affinity industrial infrastructure, you got three others that are more similar audio/video, automotive and other. Can you talk about intermediate to long term growth rate of those different businesses which are your faster grower, which might be slower grower or steadier and are there any segment there that would have particular makes out challenges that we wanted to be aware as we look out over the next few years and think about the businesses potential to get to the revenue target that you have.
Right. I think the easy way to look at this is automotive and the infrastructures are going to be the two areas that we will get the most growth out of. We will get some pretty strong out of industrial as we leverage a lot of the products we make in the infrastructure. But lot of the large Tier 1s they consolidated in automotive and infrastructure. And so they are the two product areas that I think what you are going to see from us, they are the two areas that we will probably grow the most over the next, let's call it 18 months towards the $40 million goal.
Okay, that's helpful. And then lastly just thinking about the comments that you gentlemen have conveyed so far and the strength in the advanced product groups. Is it fair to think that as we close the gap between here and target sales that if the advanced products are about 28% of the mix now that by the time we get to target levels they could be close to 50% of total sales?
I would say that my modeling has that somewhere around 40% to 50%. I brought it down, I think we had about 50% but to the comment I made before we did have plan to grow in advanced and probably turn off a little bit on the commodity devices but as Keith continually finds businesses that yesterday were not healthy, today are and in the future will be more healthy. We are probably going to hold on to some that little bit more. So I think the percentage is probably now look more like 40% to 50% coming from advanced.
And Craig, it is Ryan. So I think I mean that's been one of the -- more interesting and fun things is that the operation team has certainly made it competitive an area that's really kind of been nice surprise so that potential where we have some upside growth and some areas that not so long ago we were thinking about exiting.
Yes. So the improved health comments that James made a really lot more about you getting your cost structure down and having a better margin opportunity on specific products than it is about a change in demand that you are seeing for some of those products. Is that right Ryan?
Yes. There is elasticity there in some of those products. And so when you talk about percentages of the business again I think originally we would think the number of advanced would be higher but some of the other parts of the business are going to their best to keep pace.
Our next question comes from the line Christopher Longiaru with Sidoti & Company.
Hey, guys. I'll add my congratulation, nice quarter. So my question is to do with the operating cost structure here. So you have all these opportunities, can you give us kind of look at how you are -- what you are thinking about doing just in terms of operations, where your plans are for adding additional talent and just kind of a long term way to think about that?
Yes. So I mean look I made a couple of important reference where because of the divesture of the iML business, leaves us with the few holes that we are in the process of filling. So we are -- we have -- we are hiring sign out in the couple of key areas which is we are adding to our technology team particularly in Taiwan and in Fremont. And then in terms of the sales and marketing team, we've been really out to attract top talent in sales and marketing are for over a year now we are going to continue to add that team. So from a dollars perspective I'd expect that R&D would grow a bit from here as we look at fiscal year. We try and keep the SG&A kind of similar -- at similar level but it's clear that what we are finding is somewhat of embarrassment of riches of opportunities and we have to make sure that we have the ability to kind of match that.
And just how the visibility changed with your business mode changing? I mean I know that lot of sales go through 50 but just I mean have you essentially elongated your visibility so and what are your turns requirements for your guidance for the quarter?
Well, this is -- Christopher this is James here. So I'd expecting to get a lot more visibility out of the Tier 1 engagements because there will be more direct, we will get lot more line of site into --they ramp and et cetera but I think what we've learned is that sometimes this easy visibility and understanding 25,000 customers and just by market area would by market trend which way it's going to go. We are seeing that some of the Tier 1 ramps, they can ramp a lot faster than they thought or lot slower than they thought. And sometimes they didn't even know exactly when these things are going to ramp. So I don't think we are there yet. I think as -- I think as lot of the program ramp and they are in full production. I think then we will have a much better idea and made visibility into what our businesses are going to look like over the longer term but I wouldn't say that unnecessarily there yet.
Okay, that makes sense. And just what are the turns expectations for hitting the midpoint of the guide?
Well, we don't really look at the turns because we got the two pieces of business in terms of we got our sell through business and we got our commodity type business. So the commodity business is only a small or getting the smaller percentage to -- smaller percentage of our total business. What I can say though is that the booking that we have right now well ahead of where they were last quarter. So much less turns needed to hit the pop side of the business or the broken cost channel side of the business. Those turns needed less.
Yes. This is Ryan. I'd like add -- I'll add to that which is -- this -- the quarter we just closed I think everyone from inside would kind describe it as drama -free kind of close of the quarter. So that's what we were talking gone this far.
And then just in terms of that booking being well ahead, do you think that's because the inventory the channel correction is nearing an end and there is less inventory in the channel or do you think that it is because of the product that are being ordered? Can you just give us an idea of how you -- why you think those bookings are well ahead of last quarter?
I think that some of that has to do with the operations that we put in place where we have certain work week that we wanted to close down all the orders by. So to Ryan's point we are not rushing around at the last week of the quarter. So we are getting a lot of those orders in a lot earlier. We've also pre negotiate with our distributors when we think that their inventories should be. And I think that as when on incentivizing our distributors to take more inventories with lower prices, they tending to put orders on the books for a longer period of time knowing that the ASPs they are not going to be drop to incentivize.
There appeared to be no further questions at this time. I'd like to turn the call back over to Ryan Benton for any additional or closing remark.
Thanks, operator. On the behalf of the Exar Board of Directors and our entire team, I'd like to thank you for your interest and continued support of the company. We are very excited about the path that we are on and look forward to updating you on our progress when we announced the Q2 financial results. Operator that concludes the call.
Thank you. This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!