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Here’s the entire text of the Q&A from Agere Systems’ (ticker: AGR) Q4 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Q&A

Operator

Thank you.

Operator Instructions

Our first question comes from Srini Pajjuri of Merrill Lynch. Your line is open. You may ask your question.

Q - Srini Pajjuri

Thank you. Good morning. Welcome on board, Rick. Just Rick, you just told us that your target is to achieve $165 million in operating expenses. It looks like in the past the company communicated that your operating margin target is about 15%. So if I put in the numbers, you are clearly assuming growth in revenues in 2006. I don't know if me and the rest of the Street, based on what you delivered today, I believe that the company will grow in 2006. I mean what are you guys modeling internally for 2006, and also where do you think the growth is going to come from in 2006?

A - Rick Clemmer

Well, thank you for the welcome. I think it's premature to talk about 2006 relative to growth. We clearly have said the objective is associated with operating expenses, which obviously means that we will have to be very focused in our decisions about where we're spending that money based on the level that we just ran as you make those adjustments in the bonus accrual. But as far as expectations for 2006, we're not prepared to talk about the specifics of that.

Q - Srini Pajjuri

Okay. Fair enough. But just again, you've been with the Board for 2 years and I'm sure you know the company fairly well. And I'm also guessing you did your due diligence. As you look into different divisions, my concern is that you have storage business which is probably going to decline next year, and where you are investing in 3G, wireless and also in small drives, that's what's probably is going to drive growth if there is growth in Agere and also in Ethernet. And I am not sure how much cost-cutting we can do in, in those divisions. So, I'm assuming that the other divisions are fairly lean. Could you give us some idea? You told us what the gross margins are for different businesses. Could you give us an idea which businesses are making money today, and where do you see the opportunities to cut costs?

A - Peter Kelly

Srini, its Peter Kelly. You know that we don't actually give any profit level will allow Agere in the segments of telecom and everything else. And in terms of growth for 2006, right now, we are not prepared to give guidance for the full year. But we have said and I think I've covered in part of my speech. We do have significant parts of the storage business that are growing, right now. Mobility is growing, right now. And we have parts of telecom. So I could understand how you could model these things different ways, but we certainly think we have parts of our business that are beginning to show some real strength. And it comes from the investments we have made in the last few years.

A - Rick Clemmer

Yes. If I could just add to that, I think, that we're excited about the opportunities we see, especially in the 3G space. I think that our technology position in our product platform is really what we're counting on there, and we are excited about the opportunities that are there. And in the storage business, we have made significant progress. And as we look at a ramp-up in preamp, that business, it represents an opportunity for us. So I don't think we can necessarily draw the conclusions that are relative to our overall storage business.

Q - Srini Pajjuri

Okay. And then just to moving on to the share buyback, you are still paying about 6 million or 7 million in, then interest expenses looks like, Peter what's behind buying shares as opposed to retiring some of the convertible debts on the balance sheet?

A - Peter Kelly

Well, I think, there is two things. You're right, the interest expense, fully round about now is completely offset by interest-type income. But we do believe, our stock is significantly in the value, and the best use of the shareholders' funds, right now, is to buyback the stock.

Q - Srini Pajjuri

Okay. And one last question. You talked about the OpEx being lower because of the bonuses and it looks like it's going to increase again. So could you give us some idea of what's changing in the Q4? I mean, are you going back to your old pay scales or is it - why is this a one quarter event as opposed to -?

A - Peter Kelly

I think there is are a couple of thing. Obviously, the way we accrue our bonus is based on, I guess, the same way all other companies do, which is what's your full-year target and how do you achieve against that target on a quarterly basis. And we were doing reasonably well, up until this quarter, and this past quarter we clearly missed our targets. And although, there was an expense level in the fourth quarter, it was significantly reduced over any previous quarters. Now, as we go into 2006, we are assuming that we are going to deliver our programs. So, there is a higher level of bonus in this accrual in the first quarter of 2006 versus the fourth quarter of 2005. On the other hand, I would like to say that we have versus what we said previously, I have lowered the expense level that effectively we have got to do to model, both in the quarter and now, and in the target of $165 million by the fourth quarter. So I think we are making some progress. And obviously with Rick in the coming weeks, we will continue to look at where our investments are best spent.

Q - Srini Pajjuri

Okay. Thank you. Sounds good, good luck

Sujal Shah, Director of Investor Relations

Thank you, Srini. Could we have the next question, please?

Operator

And the next question is from Bill Lewis of JP Morgan. Your line is open You may ask your questions.

Q - Bill Lewis

Great. Thank you. Welcome Rick.

A - Rick Clemmer

Thanks.

Q - Bill Lewis

I guess I have a question for you Rick, given all the caveats that’s you just started, and haven't really dug in, but have been on the board, I guess could you comment is there a mandate that you think you have and what it might be from the board in terms of what is really your charge at this point for the company, you believe?

A - Rick Clemmer

I think the mandate from the board is very clear. We are very focused on shareholder value. I think that we are going to do what's required to drive the growth that is going to spur the shareholder value. I think the company has done a very good job having us establish the correct capital structure It's done a significant job in the cost reductions and restructuring that's required to improve the profitability and actually drive us to a positive earnings. And so, now I think the board has given a clear mandate that we are going to focus on the growth associated with this business, and how we deliver on shareholder value.

Q - Bill Lewis

And I guess that makes sense. Related to that, do you believe that your mandate in that sense to consider further restructurings, more significant changes or is it generally the belief that you have executed on this plan in over the past 12 plus months and now is the time to go drive the top line?

A - Rick Clemmer

Clearly, the focus is driving the top line. When you look at the cost reductions the company has taken in restructuring the fab-wide process, I think we've taken significant steps to put ourselves in the correct cost structure moving forward. I think the key focus for us is how we try the top line, and how we drive the growth of that in a profitable fashion. So we will continue to focus on expenses, and really focus on allocation of resources and expenses. But the focus will be in conjunction with how we drive a stronger top line growth.

Q - Bill Lewis

Okay. And a question or a couple for Peter, if I could. First, I may have missed it, but in terms of the Q1 outlook, did you describe what you thought the storage outlook looks like?

A - Peter Kelly

It was up slightly.

Q - Bill Lewis

Okay.

A - Peter Kelly

5 to 12.

Q - Bill Lewis

$5 million to $12 million?

A - Peter Kelly

Yes.

Q - Bill Lewis

And in terms of interest expense and tax rate for Q1?

A - Peter Kelly

Interest expense, $6 million, income tax, I'd assume about 7.

Q - Bill Lewis

Okay. Great. Thank you.

Operator

Thank you. Our next question is from Allan Mishan of CIBC. Your line is open. You may ask your question.

Q - Allan Mishan

First I'll go with the housekeeping question. Can you tell us what the IP revenue was in the quarter $0.05 a segment like you have given in the past?

A - Peter Kelly

Yes, I posted it on the web. If you got the time do that. We did put it on the web. We just thought it was kind of easier for you guys to see it there.

Q - Allan Mishan

I can track it down then. Question on the mobility guidance in the Q4, you mentioned that demand for EDGE is not quite a strong. Is there further inventory reduction assumed in your guidance or, is it just kind of a demand thing that is driving that weakness?

A - Peter Kelly

It is a mixed thing, really. The things what happened is in terms of our end customers, they probably over ordered on Edge in Q4 sorry our fiscal Q4. And under ordered on GPRS. And what we have seen is a kind of fairly significant switch, so they have reduced EDGE, and are buying a lot more GPRS in this quarter. So, I think it is just how they are managing their inventories really.

Q - Allan Mishan

Okay. And I have a question on the 4 Gigabit Fiber Channel business. If I look over at QLogic's cost of goods is about $35 billion on a quarterly basis. Clearly not all of that is HBAs and that is chips, but can I assume that that is kind of the total revenue opportunity that you guys go after? And then, how long does it take to get to kind of a full run rate with them?

A - Peter Kelly

Actually, I'm going to pass that over to one of my colleagues here.

A - Sujal Shah

Hi. This is Sujal. That yes, we are entering with them at the 4 gigabit node. And typically if you look at the previous cycles, that the switchover happens between 12 to 18 months. So fundamentally what you will see is the 2 gigs moving to 4 gigs. So as they introduced the product in ramp that the majority of the volume will be 4 gig Fiber Channel over this video

Q - Allan Mishan

Okay. And do you have everything in HBA's handle also that they need their switches or, is it only HBAs?

A - Sujal Shah

We are supporting them in multiple areas.

Q - Allan Mishan

Okay. Great. And then one question on the telecom business, recognizing that the wireless infrastructure business was down this quarter, how did the other pieces of business do, and what does it look like for the December quarter?

A - Peter Kelly

It was really a wireless infrastructure business that was down, so the rest of the businesses looked okay. As we go into the first quarter, we are not we couldn't say we'll be seeing any strength in 32:40 wireless infrastructure, but the decline we are seeing is really around some Legacy products.

Q - Allan Mishan

Okay. Great. And one final one on the restructuring. Is exiting any businesses on the table or, is it more tightening up and working on execution at this point?

A - Peter Kelly

There were lots of driven.

A - Rick Clemmer

Yes, I think it's totally premature to make any specific comments. I think the clear position that we have is we are going to focus on what drives growth and how we allocate our resources. So I think it's premature to make significant comments.

A - Peter Kelly

Allen, the numbers on the IP for the quarter ending September, storage was 9, Mobility was 6, G&N was 9, Telecom was 7.

Q - Allan Mishan

Okay. Great. Rick good luck.

A - Rick Clemmer

Thank you. Peter Kelly: Thank you, Allen. Could we have the next question please?

Operator

Our next question is from Mark Edelstone from Morgan Stanley. Your line is open you may ask your question.

Q - Mark Edelstone

First off, best of luck Rick with your new position. Question I guess Peter, in the quarter, the expectation was that as Orlando would shut down you would have some inefficiencies and that would hit gross margins, but gross margins did pretty well. Can you just talk through what happened there and whether another was an impact from Orlando in the quarter?

A - Peter Kelly

Yes, actually there was an impact, Mark, and we kind of estimate that if you exclude that impact, our margins were probably close to between 53.5% and 54%. The reality is the fourth quarter was very strong for a number of reasons, one of them was we did much better in Orlando than we expected, but we had some NRE in the fourth quarter, which helped us from a mix perspective. And certainly, the IP mix was a little bit better than expected. So, I think if you look at our gross margins for that period, so for the fourth quarter, and so I guess the question immediately comes why are you guiding to 48? I would say the mix of NRE was quite strong. It was stronger than we expected. We have the bonus accruals, which probably impact us about half a point. There are some mixes as we go into the Q1, on other products, which will take out about a percent. It really depends on what you assume on our revenue guidance between the 390 and 410 on which end of the 48% and 50% you get to. But yes, Q4 was a really, really good growth on margins. We are very pleased with the progress we've made there, and it gives us lot of confidence for the future.

Q - Mark Edelstone

Can you quantify as to say what the NRE was in Q4 as well as compared to Q3?

A - Peter Kelly

I really wouldn't want to get into that much detail at this point more.

Q - Mark Edelstone

Fair. I guess I'm just surprised a little bit as you become a fabless company. I know you obviously have different margins based on mix, but it would seem like 200 basis points of variability as you effectively become much more of a variable cost business model is fairly meaningful. And I just wonder if that makes sense, and going forward if we'll see more predictability in the gross margin as the business model cruelly changes?

A - Peter Kelly

I think it will be fairly more predictable than it was in the past. But the other side of it, Mark I still do have some fixed costs and leverage in the company to the extent that I do have the assembly and test sites, so the depreciation, and the if you like the engineering and people costs associated with that. And then we also have the costs of product engineering, quality and various other things that we include in our manufacturing costs. So, there is some leverage in our numbers. And depending on the revenue, I would expect a number of 50% plus or minus some things. And the issue for us right now is that at what level is the correct model for 50% given our revenue points.

A - Rick Clemmer

I think the only thing I would add to that Mark is that it's also somewhat dependent on the mix of the businesses in any individual quarter, and how that gets distributed obviously.

A - Peter Kelly

Yes. Good point.

Q - Mark Edelstone

Yes. Great. Thanks a lot. Just one last question on bonuses, you mentioned what the decline was in the Q4, but can you give us the total bonuses were in the quarter?

A - Peter Kelly

No, we don't really actually disclose that.

Q - Mark Edelstone

Okay. But I assume at least there were bonuses that were accrued?

A - Peter Kelly

Yes, there was definitely a bonus expense in the fourth quarter.

Q - Mark Edelstone

Thanks a lot. And best of luck.

A - Rick Clemmer

It was not as high as we would like or expect based on the ability to drive some top line revenue growth.

A - Peter Kelly

Okay. Thank you, Mark. Can we have the next question please?

Operator

Thank you. The next question comes from Charlie Glavin of Needham & Company. Your line is open. You may ask your question.

Q - Charlie Glavin

A couple of housekeeping, and kind of follow-up to Mark, maybe next quantifying the actual NRE, but you did mention you do as far as kind of the impact of the bonus in the mix. What was the impact of the NRE to gross margin?

A - Peter Kelly

Like you say on mix in general, I don't want to get too specific there. You can easily assume three points on NREs and product mix, whether it'd be telecom versus IP versus our other products.

Q - Charlie Glavin

Thanks. The tax rate, if I read it right, it looks like the taxes are up next quarter. Is that going to be ongoing that we're going to see it closer to the 35% range?

A - Peter Kelly

Well, the thing with our taxes really is we have, very significant NOLs. So we're really just talking about interest in the US on some of our provisions and the foreign taxes which are not largely but partly withholding taxes. So we assume about $7 million a quarter. And I think that's about as good an assumption that you can make right now.

Q - Charlie Glavin

Okay. So for fiscal 2006 we should assume that is going to be much higher than sort of the 20% previous rate?

A - Peter Kelly

I guess, I'd have to go back and look at it, but I didn't think it was that significantly different from 2006. I'll go and check that.

Q - Charlie Glavin

And last, housekeeping it looks like the liabilities drop was that taking off the liabilities relative to the pension?

A - Peter Kelly

Yes. Yes. That was the, we had an adjustment. Let me just get the right notes on this. Yes. It's really, it's about, you can see, I think just about a $100 billion or so.

Q - Charlie Glavin

Okay.

A - Peter Kelly

We take through the equity our change in our pension liability, and it was really around the 50 basis decrease in the interest rate from 6 to 5.5%.

Q - Charlie Glavin

Moving on to the actual core business, in terms of the storage in the outlook on that for 2006, as far as the potential of having storage being flat or even some growth, can you give more clarity, right now, in terms of where you are expecting that? You had one of the customers out with the first 160 but obviously, that's going to be offset by Maxtor. And while the guys at Maxtor are saying they are not going to go single storage, but rather dual storage. Could you give a little bit more clarity, is the growth from storage going to come from one of those 5 small point factors kicking in? It is delays within that 160? Or is it actually a pull in S60, I know you guys haven't announced it, but let's just say new design wins coming into '06?

A - Peter Kelly

No. We think our revenue growth for 2006 is pretty broadly based actually. So, I mean, I can't get into the details of specific customers.

Q - Charlie Glavin

But in terms of it is it going to be more within small point factors compensating for the fluid changes within 160 or, is this going to be more of the traditional customers' growth out of it, even assuming that Maxtor starts to kick in here, which looks like it's the case?

A - Peter Kelly

No. I have just said, I think what I said in the call what that I really think we are showing traction now with a broad base of customers. And our strength is not based on the performance of one single organization. I'm not I really do not want to go into any more detail than that. I think it's important for us as a company to actually show you what we've done rather than get into significant promises for the future.

Q - Charlie Glavin

Okay. Last question, Rick, I know you mentioned that its premature to talk about areas of restructuring, but as a board member the last couple of years and taking a look at the OpEx coming down, is Agere open to taking a look at certain lines of business that may not be a strategy and looking to potentially sell or spin those off?

A - Rick Clemmer

I think it's premature to comment on any of that. I think that clearly, the charter is to focus on top line growth, so that we can deliver shareholder value and focusing our resources associated with that. So I wouldn't say that anything is off the table, but I would say it's premature to comment on any of that.

Q - Charlie Glavin

I understand Rick. But in terms of actually taking a look at the synergy and looking at that focus issue, your old, alma mata TI has been rumored to be spinning off parts of its sensor business because it may not be core to their core markets strategic market. In a similar fashion, if there were market segments that Agere had had previous success that may not be as core going forward, again from a management and board perspective, would Agere be looking to potentially for shareholder value be willing to spin or sell those off?

A - Rick Clemmer

So it's premature as I said to comment on any of that. But I can tell that we're very focused on how we drive that shareholder value. So nothing is off limits, but it's premature to comment on any of the specifics of that.

Q - Charlie Glavin

Got it. Thanks.

A - Rick Clemmer

Thank you, Charlie.

Q - Charlie Glavin

Thank you.

Sujal Shah, Director of Investor Relations

Next question, please.

Operator

Thank you. Next question is from Arnab Chanda of Lehman Brothers. Your line is open, you may ask your question.

Q - Arnab Chanda

Thank you. Couple of questions. Rick, you're not necessarily new to company, although you may have not focused on all of the details. But I have the opportunity of following the company in the last since it's public. And it's actually I think it under performed the semiconductor business every single year. In fact, it has actually not even grown I think in a single year in the last 5 years. Can you talk a little bit about what you think has gone wrong with the performance of the company? Why is it losing share? It seems like a lot of key markets and what you can do to fix that? I have a follow-up please.

A - Rick Clemmer

I think, clearly, the company has not performed in the top line, I think the company has gone through a significant transition as you say, since you have followed it, since the IPO, relative to establishing the correct capital structure. Restructuring the business to ensure that we get to breakeven level, and I think the team has done an excellent job in positioning the company to be in position and report on that front. I think if you look at our relationships with customers, it's extremely strong and very positive. And so, the real challenge for us is to focus on those customer relationships and the strong capabilities that we have, the strong product capability that we have and leverage that, so that we can drive the top line growth. And that's what the charter is. That's what the challenge is from the board, is we have to clearly be focused on that, and we are going to ensure that we're doing everything possible to be in a position to drive that to ensure that we're enhancing the shareholder value.

Q - Arnab Chanda

One follow-up regarding your plans about using your cash, there again it seems like historically, you haven't done a great job in generating cash, but you're saying that you want to buyback your stock because this stock is undervalued. Is there something that we're missing in terms of whether you want to improve your capital structure by reducing your debt? Because in the next 4 years generating another 300 million so you don't actually have to do transactions, at least the history of the company doesn't suggest that. So, could you discuss sort of what the reasons for a decision one way or the other? Are you open to that in general and don't want to give a clue to the marketplace?

A - Peter Kelly

I think, first of all, I think we have generated a lot of cash over the last few years. If you remember, we exited Lucent with $2.5 billion of short-term debt. We continue to have very strong EBITDA. We have confidence in our cash flow as we go forward, and that's based upon our history, which is, I think, is strong, not weak on cash. And we think at the moment our stock price is undervalued and this is the best use of shareholder funds well the cash rather, that we can see right now.

A - Rick Clemmer

Okay, thank you, Arnab.

Q - Arnab Chanda

Thank you.

Sujal Shah, Director of Investor Relations

Can we have the next question, please?

Operator

Your next question is from Seogju Lee of Goldman Sachs. Your line is open. You may ask your question.

Q - Seogju Lee

Hi, thanks. Welcome, Peter as well as Rick. Just in terms of first can you outline your depreciation and CapEx outlook for fiscal '06?

A - Peter Kelly

Well, in terms of first quarter, we're seeing depreciation of about $29 million, which is down from the numbers you would have seen historically, because of the exits from Orlando. In terms of capital, I mentioned we are going to spend about 40 million to 45 million. Again, our capital expenditures will probably be in the range of probably in the similar range as to what we have seen in the past.

Q - Seogju Lee

Okay. So I should expect as you go through fiscal '06 that your depreciation will increase?

A - Peter Kelly

No. Why would that be the case?

Q - Seogju Lee

Because you are spending CapEx at a higher rate than your --

A - Peter Kelly

No. You have to look the thing is you would have to go back and look at the quarterly CapEx spend. So, no, I wouldn't assume depreciation is going to increase as we go forward.

Q - Seogju Lee

Okay.

A - Peter Kelly

$29 million is where we are, and plus or minus.

Q - Seogju Lee

Okay. And then, it was mentioned that part of the restructuring charge that you will be taking in the Q1 will be to further reduce expenses going forward. Can you elaborate on that on when we might see the benefits of that?

A - Peter Kelly

I definitely don't want to elaborate on it. But we did say that we're targeting $165 million expense level in the fourth quarter of 2006.

Q - Seogju Lee

And do you see that primarily driven by reductions in bonuses or is it --?

A - Peter Kelly

I hope not.

Q - Seogju Lee

Is it structural issues, like headcount?

A - Peter Kelly

No, well, I definitely hope it's not because of the reductions in bonuses, personally. But, again, I think at this stage, it's kind of premature to go into what the specific details are around doing that.

Q - Seogju Lee

And then, can we talk about the storage business a little bit? You did very well on the preamp side. I think you said it grew 50% sequentially?

A - Peter Kelly

Yes.

Q - Seogju Lee

And can you say what percent of your storage revenues that now represent, and what have been the drivers of that?

A - Rick Clemmer

No, we don't specifically go into what the percentages of the storage business are. I think the driver of preamps is doing well. We have a whole new set of silicon germanium products, which are really very good products, both got fantastic traction in the marketplace. We hear great things about them, it's a great product.

Q - Seogju Lee

Okay, thank you.

Sujal Shah, Director of Investor Relations

Thank you Seogju. Could we have the next question, please?

Operator

Next question is from Ross Seymore of Deutsche Bank. Your line is open. You may ask your question.

Q - Ross Seymore

Thanks guys, and welcome, Rick. Just a quick question on the mobility side of things. If I do the math right, it looks like I get to a number of roughly $73 million for the quarter. That's for the December quarter, that's the lowest mobility revenue in about 3 years. It seems to me that mix and/or the inventory adjustment is that had to be a really big impact for just to be the mix side of things. Is there any sort of share shifting going on, where if they are back to shifting or shipping more GPRS, one of your competitors is gaining more of that share than you?

A - Peter Kelly

Well, I think if you go back over the last 3 years, you really have to take out the first of all, the NEC 3G ASIC, which is not a standard product. And we all know the issues around that particular program. And also, in our mobility business you have the Wi-Fi and digital voice products, which really don't contribute all that much to the revenue anymore. So, I think that the move from Q4 to Q1 certainly for our main customer, we absolutely don't interpret that as a share shift. In fact, it's from a volume perspective. And I guess it just comes back to the mix discussion before. We're really seeing that kind of similar levels of volume. It's a kind of just a tilt and shift we think between EDGE and GPRS. Certainly in other parts, we're, as I mentioned, now, we are beginning to see good performance as well from some of our other customers.

Q - Ross Seymore

So, thinking about roughly a 20% price premium on EDGE versus GPRS is it fair, given the stable units?

A - Peter Kelly

We don't really talk about the difference in our prices.

Q - Ross Seymore

But you did say that units are relatively similar, correct?

A - Peter Kelly

Well, if go to look at it's not that easy to, it's not that simple a calculation. But, yes, I did say in the actual transcript that we expect volume to be around roughly the same.

Q - Ross Seymore

Okay. Moving on a little bit to the cost structure, not to hit the same question too many times that others have hit, but the 165 target down from 175 with the restructuring seems to make sense, but the one thing I'm having a little bit of trouble with is if I remember right, the 165 number was roughly in line with what the long-term target was before, but the revenue progress has been a little bit disappointing. So, on roughly lower revenues, why would 165 still be the right number?

A - Peter Kelly

What source I thought that John, when he spoke I am talking about John Gamble, when we talked previously, he talked about a much higher number than 165. I thought John Gamble had talked about 180 actually.

Q - Ross Seymore

Okay. So 175 to 180 was the prior number?

A - Peter Kelly

I believe so, yes.

A - Rick Clemmer

We would average no higher than $180 million as we move through the fiscal year.

Q - Ross Seymore

Okay. And the last question, again, a little bit of a math one here. If I just take the midpoint of your guidance and then the below the line expenditure guidance that you gave, and I get about 14 million in revenue, excuse me, in net income. That gives me about $0.08. Why the range $0.03 or $0.09, if the midpoint gets me so high? Is it just being conservative or, is there something in the math that I'm missing that could bring you to this $0.03 level?

A - Peter Kelly

I'm not sure what you're looking, you mean Q4 actual to Q1 '06?

Q - Ross Seymore

The guidance you gave for the fiscal first quarter, the December quarter, you just take the midpoint across the board, midpoint of revenues, midpoint of gross margins then everything else you guided to on OpEx, net interest expense, etcetera?

A - Peter Kelly

I guess, I don't get quite to the same number. But it's about roughly one-third on revenue, one-third on safe or and one-third on mix and NRE.

Q - Ross Seymore

Okay. Fair enough. Thank you.

Sujal Shah, Director of Investor Relations

Thank you, Ross. Could we have a next question, please?

Operator

Your next question is from Aalok Shah of Davidson. Your line is open. You may ask your question.

Q - Aalok Shah

Hi. A couple of quick questions. One is can you tell us what the pension obligations could be for the next 2 years? And the second question is, on this call you have mentioned a couple of times that you think the stock is undervalued. Can you give us what kind of metrics are you using, and what things you are looking at to determine why the stock is undervalued?

A - Peter Kelly

Okay. Well, our pensions are fully funded under our result. And in terms of stock evaluations, I probably use the kind of same, sort of, methods that you might do, but other than that, I can't really go into any detail.

A - Rick Clemmer

I think if you look at the product portfolio we have and the opportunities that we see for the company, and the cost structure that we put in place, we believe that the opportunity is there such that, that really confirms the under evaluation. I don't know that you can draw correct correlation from that. But, I think clearly as you compare us to our peer companies, with the inherent technologies, the know how, the customer relationships, the people we have, I think we believe strongly that the stock is undervalued.

Sujal Shah, Director of Investor Relations

Okay. Thank you, Aalok. Could we have the next question, please?

Operator

Our next question is from Kaien Kark (ph) of Colden Capital. Your line is open. You may ask your question.

Q - Raj Venkatraman

Hi. This is actually Raj Venkatraman from Colden. Welcome, Rick.

A - Rick Clemmer

Thank you.

Q - Raj Venkatraman

So you know, when I look at I mean maybe your obviously from an investment perspective as being a disappointment. But this change is excellent. I mean, I think there is new management. The opportunity at Agere is great again, both the technology that you posses from the end market that you serve. Rick, can you talk a little about given on the board, why what drew you to this opportunity? Can you talk about what are your motivations are?

A - Rick Clemmer

My motivations are the significant opportunity that faces the company. You know, when you look at my background and experience it's pretty diversified, but a longtime base at Texas Instruments, then specifically in the Disk Drive Business at Quantum Corporation, and most recently, a couple of years focused on emerging technology with a venture-capital partnership, and the growth companies that we were able to nurture and focus on. When I look at the combination of the emerging technologies and how that plays to the wealth of technology that's positioned at Agere, and the cost structure that we've been able to establish and combining that with the strong customer relationships we have, this is just too significant of an opportunity to try to see what we can do to really maximize the shareholder value and create value. That's really what makes it such an exciting opportunity for me. I think it's certainly very significant, and one that we believe is a very bright. And it's going to require a lot of hard work. It is going to require a lot of focus relative to our strategies. A lot of focus relative to our investments. But the combination of the people, the customers and our technology, and how we deploy that to drive the growth that we know is here, is the key for us.

Q - Raj Venkatraman

Well, we agree. And we welcome the new management change here, and we look forward to working with you. Thanks a lot.

Sujal Shah, Director of Investor Relations

Thank you, Raj. Could we have a next question, please?

Operator

Thank you. The next question is from Jeremy Bunting with Thomas Weisel. Your line is open. You may ask your question.

Q - Jeremy Bunting

Thank you very much. Could you expand on your opportunities in the UMTS space, particularly traction with new customers, and what you believe your competitive positioning in that sector is? And thirdly, if you partner with any specific transceiver players, because I know that you don't have that particular product? Thank you.

A - Sujal Shah

Jeremy, this is Sujal. So we partner with multiple folks on the radio side, but we don't disclose necessarily who we are working with on a particular platform. So, I think in the case of our wedge standard products, I mean, we've made a lot progress we've talked about engagements with Samsung, as well as PC cards with Sony Ericsson. And we also talked in this call about a new engagement with an ODM who supplies to a Tier-1 OEM. So, I think everything continues to progress very well with that product. And we mentioned we are going through IOT testing, we are passing calls. So, the progress is quite good.

Q - Jeremy Bunting

Any comments on specifically what your competitive strength is in that sector? Thank you.

A - Sujal Shah

Well, I think as you know, I mean, it's a combination of base band as well as protocol stack. So, I think one of the things that we offer is that this protocol stack software is built up over generation, and generation of barrier technology. So we have a protocol stack that is working in multiple countries, over multiple networks and it's just proving in the case of our key customers to be a key differentiator. So, I think Samsung is a great proof point of the technology and products we offer in mobility. And the interest that we are seeing from new customers is encouraging as well.

Q - Jeremy Bunting

Thank you.

Sujal Shah, Director of Investor Relations

Thank you, Jeremy. Could we have the next question please? I think this is the last question.

Operator

Yes. The final question will be from Suji DeSilva of Fulcrum. Your line is open. You may ask your question. Actually, his lines just disconnected.

Sujal Shah, Director of Investor Relations

Okay. I believe we have one further question.

Operator

Okay. We have a question from Ambrish Srivastava with Harris Nesbitt. Your line is open. You may ask your question.

Q - Ambrish Srivastava

Yes. Hi. Good morning, guys. Was there a search conducted by the board? Rick, if it was, were there any other external candidates look for this position? Thanks.

A - Rick Clemmer

I don't know that I can talk about the specifics in detail. I think that the board felt like that we have a significant opportunity. We needed to mobilize relative to that. I think that searches for semiconductor CEO companies over the last few years have proven to be fairly prolonged, and we felt like that was at a critical juncture of the company where we needed to take immediate action and move forward. So, there was not an external search done. There was a lot of discussion relative to my background and experience and the vision and the opportunities that I perceived here. And the board is excited about the ability to try to mobilize that and drive towards that. The charter is clear and the focus will be on how we achieve that. But, clearly, is focused on top line growth with no higher priority than driving increased shareholder value.

Q - Ambrish Srivastava

And Rick just to reassure investors, what is your commitment in terms of any targets, timing? And how should we be thinking about it, either in terms of timing or targets? Thank you.

A - Rick Clemmer

It's premature to comment on any specifics. What I talked about in the call is that we will come back in the next earnings call with an update associated with that, and we'll clearly be much more specific at that time.

Sujal Shah, Director of Investor Relations

Thank you, Ambrish. Okay. If there are no more questions, I would like to thank all of you for joining us this morning. If you have additional questions, please call investor relations at Agere Systems. Thank you and have a nice day.

Peter Kelly, EVP and Chief Financial Officer

Thanks a lot.

Rick Clemmer, President and Chief Executive Officer

Thanks.

Operator

Ladies and gentlemen, this conference will be available for replay starting today at 10.00 am, and running through midnight on October 31st. You may access the replay by dialing 1866-419-5478. International participants may dial 203-369-0773. The call is also available via a webcast replay at http://www.agere.com/webcast. That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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