Integrated Device Technology F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

Oct.24.07 | About: Integrated Device (IDTI)

Integrated Device Technology Inc.(NASDAQ:IDTI)

F2Q08 (Qtr End 9/30/07) Earnings Call

October 24, 2007 4:30 pm ET

Executives

Greg Lang - President & CEO

Clyde Hosein - ChiefFinancial Officer

ChadTaggard - VP, Marketing

Brian White - VP, Finance

Mike Knapp - Manager, Investor Relations

Analysts

Glen Yeung - Citigroup

Tim Luke - Lehman Brother

John Barton - Cowen and Co.

Sandy Harrison - Signal Hill

Srini Pajjuri - Merrill Lynch

Allen Mishan - CIBC World Markets

Joanne Feeney - FTN Midwest

David Wu - Global Crown Capital

Tayyib Shah - Longbow Research

Operator

Good afternoon. Welcome to the Integrated Device TechnologyInc. Fiscal Second Quarter of 2008 Financial Results Conference Call. Now atthis point in and during management's presentation, we do have all of yourphone lines in a listen-only mode. Later there will be opportunities for yourquestions. (Operator Instructions)

As a reminder today’s call is being recorded. With us todaywe have Integrated Device Technology’s Chairman and Chief Executive Officer,Mr. Greg Lang, and here with our opening remarks is Integrated DeviceTechnology’s Chief Financial Officer Mr. Clyde Hosein. Please go ahead sir.

Clyde Hosein

Thank you, Brent and welcome to our fiscal second quarter of2008 Earnings Call. I am Clyde Hosein, IDT’s Chief Financial Officer, andpresent with me on the call is Greg Lang, our President and Chief ExecutiveOfficer. Also in attendance in the call are Chad Taggard, Vice President ofMarketing, Brian White, our Vice President of Finance and Mike Knapp, ourmanager of Investor Relations who will all be available during the Q&Aportion of this call.

Our call today will include remarks about futureexpectations, plans and prospects for IDT, which constitute forward-lookingstatements for purposes of the Safe Harbor provisions underapplicable Federal Securities laws. Actual results may differ materially fromour forward-looking statements, as a result of various important factors,including certain risks, which are detailed in IDT's most recent annual reporton Form 10-K and quarter reports on Form 10-Q as filed with the SEC.

IDT does not intend to update the information provided intoday's call and expressly disclaims any such duty, except as required by law.In addition, pursuant to Regulation G, any non-GAAP financial measuresreferenced during today's conference call can be found in our press releaseposted on our website at www.idt.com, including a complete reconciliation tothe most directly comparable GAAP measures.

Now, I'll turn the call over to Greg who will report on theoverall quarter, and then I'll return to give you some more specifics about ourSeptember results and our outlook for the December quarter. Greg?

Greg Lang

Thanks, Clyde. Today we arepleased to report results for our second fiscal quarter 2008, which showed areturn to sequential growth in revenue, gross margin and earnings per share.Fiscal Q2 ’08 was our seventh quarter out of the last eight that we achievedrevenue growth. Our growth was driven by strong sales into the computing andconsumer end markets, and highlights increased customer demand for a broadrange of our mixed signal technologies.

Revenue and gross margin was within the range of ourguidance provided on the July earnings call, and our non-GAAP EPS was a pennyabove the high end of our expectations. As we maintained tight controls onoverall expenses, it continued to benefit from a lower tax rate. Gross marginalso grew sequentially, despite a lower margin mix, as we more than doubled thenumber of synergy wafers running through our fab..

So to recap, we finished the quarter with $204.1 million inrevenue, non-GAAP EPS of $0.25 per share, and non-GAAP gross margin of 51.8%.We generated about $66 million of cash from operations, and we purchased about$39 million worth of stock. Please refer to our press release and associatedtables for further details.

Now, let me give you some more color on our market segments.Strength in the computing end market continued in fiscal Q2, and representedabout 44% of our total revenue, up 2% from the prior quarter. Within computing,sales of PC Clock, PC Audio, and PCI Express switches collectively grew well inexcess of normal seasonal rates at over 25% quarter-to-quarter.

The computing end market appears very healthy with good sellthrough, no obvious inventory bills or double order. Offsetting the strength inPCs, was a decline in advanced memory buffer sales, as Qimonda qualified itsown device and was able to satisfy some of its demand with their internalcaptive supply.

That said, our AMB business remains very healthy with over60% market share and we continue to be the preferred supplier of server timingsolutions to most of the Tier 1 memory module makers. Our consumer and othersegment also grew in a seasonally strong quarter with double-digit growth. Weexperienced robust sales across the number of different gaming platformsincluding the PS3, PS2 PSP and X-Box. And as a result the consumer in othersegment represented approximately 17% of our total revenue, up from about 16%in the prior quarter.

As we have projected, sales into our communication endmarket were weaker during the quarter. As you heard from our peers andequipment companies, the wireless infrastructure market remains weak. Inaddition, the network search engine business declined quarter-to-quarter, butwas a little better than we had anticipated.

The communication end market declined slightly toapproximately 34% of our total revenue from about 36% in the prior quarter.Then, on a positive note, our communication clock business continues togenerate a number of new design wins and we continue to benefit from theconsolidation of this market. Lastly, SRAM revenue was down slightlyquarter-to-quarter, but remained about 5% of total revenue.

Now let’s look forward to our December outlook. We currentlyanticipate another good quarter for our PC businesses. PC clocks, PC Audio andPC Express are forecasted to grow low single-digit this quarter.

In our PC clock business we secured a substantial new designwin with the only major OEM where our share was below 50%. This win is a greattestimony to the strong position we have maintained and enhanced since themerger with ICS. Our sales and factory teams have done a great job keeping thisbusiness strong.

In audio, our design win momentum continues to build. Wecaptured a major OEM notebook design that we believe will double our share ofOEM notebooks in the next Intel platform cycle called Montevina. We also havesecured the base reference design position at a large OEM for all of their OEMdesk-top designs. These two substantial milestones put us well on pace todouble PC audio business run rate by the end of next year.

Our serial switching division continues to enhance the mostcomprehensive and best performance for our product line. PCI Express which isin the industry. In early September, we announced a new series of low lanecount and low port counts switches, with self connectivity challenges incomputing, consumer and embedded applications.

Additionally, we are sampling the industries first PCIExpress Gen2 switches to enable the highest level of system IO and backplaneperformance. While we have great traction in computing, we're also now seeingstrong interest in the communication applications, with new design wins as fourtop tier equipment providers. We also won three backplane designs which willuse PCI Express in the backplane of chassis based communication applications.

We're optimistic that this indication of increased interestin our PCI Express solutions and several design wins resulted in an inflectionpoint. We currently project sales from these products to nearly double in theDecember quarter.

Our server memory business also remains healthy. Even as thesupply chain settles out after an extraordinary ramp of the Woodcrest platform,we currently anticipate the impact for Qimonda's internal solution to becompleted in this quarter. While we expect to enjoy another year solid AMBdemand, we look forward to announcing a number of new products which shouldhelp us continue to drive growth in memory interface products.

Our partnership with AMD to provide timing solutions for itssocket G3 memory extender technology or G3MX for short, not only expands ourTAM, but also gives us two sources of revenue. First, we will build the G3MXmemory interface device that is placed on the motherboard, and second, we'llalso build the DDR3 PLL that sits on the registered DIMM module to plug intothese systems. All together, we currently project flat revenues in our overallcomputing end markets in the December quarter.

In the consumer end market, we are excited to see continuedstrength in our gaming sub-segment and currently anticipate double-digitsequential growth in the December quarter. The gaming sub-segment continues togrow across multiple platforms including PS3, PS2, PSP and Xbox. We believe thegaming sub-segment will be the highest growing portion of our consumer businessand expect consumer business to increase a couple of points as percentage ofour overall total revenue.

The communication end market continues to be our soft spot.We currently anticipate a down quarter, as our largest customer in theenterprise sub-segment continues to work through excess inventory of thirdgenerations search engines and demand in our wireless subsegment continues tobe weak.

We currently anticipate the impact from this inventorycorrection to bottom out in the December quarter and resume revenue growth inthe March quarter. We remained confident about our ability to maintain ourproduct and market leadership in this business, calendar 2008. Over the pastyear, we have one numerous new designs that nearly every major enterprise andcarrier networking company with our fourth-generation search engine technology.

We led our competition by almost a year with a billionsearches per second performance which has enables us to penetrate the non-CISCOcustomer base beyond any prior generation of products. With our current verymodest penetration in this market segment, most wins are incremental growth forIDT. These new designs should start production in calendar 2008 and help fuelnew growth.

In the wireless infrastructure segment, our future looksbright with three new major design wins with top base station vendors. Thisbrings the total to four of the top eight customers who will design their nextgeneration base stations to run our Pre-Processing Switch. As base stationsvendors migrate to more streamlined, more cost effective and more versatileplatforms based on DSPs and serial switching, we are in a great position tobenefit from this transition.

Overall for the December quarter, our fiscal Q3 2008, we areprojecting revenues for the company to be flat plus or minus 2% compared withour fiscal second quarter. Clyde will go intomore details on the financials in a moment.

So to summarize, we are very pleased to return to sequentialgrowth despite a challenging communication end market environment. Asprojected, we had top and bottom line growth and managed to deliver grossmargin expansion even as sales of lower-margin products increased in our mix.

We also demonstrated another quarter of impressive cashgeneration from operations and applied some of our cash to our stock repurchaseprogram. The past and present quarters are good examples how our investment inmultiple platforms for growth has paid off for IDT.

In a quarter with a large inventory correction and searchengines, and settling of the AMB business, we still achieved growth due tostrength in PC and consumer end markets. We have a very strong market andtechnology leadership position in each of the segments we serve. Lookingforward, we anticipate more growth in 2008, as these corrections pass in ournew growth areas in timing, serial switching, audio and specialty memory rampthe revenue contribution.

So with that, I will turn the call over to Clydeto expand on our financial results and our outlook.

Clyde Hosein

Thanks, Greg. We had a solid second quarter, and are pleasedto report sequential increases in revenue, gross margin and EPS. Our businessmodel continues to be healthy, with strong cash generation and market successin new focus areas. In addition, we continue to invest organically in new andexciting growth platforms to drive future increases in revenue andprofitability.

Our free cash flow yield and non-GAAP operating margin are oneof the best in our field, and we continue to be active in buying back sharesunder our share repurchase program. In my recent visit to Asia,our customers were delighted with our technology offerings, both on ourexisting platforms and in areas where we have invested. They reiterated theirstrengths in the PC and consumer market, and we continue to see this in ourbusiness forecast.

Let me start by reviewing the non-GAAP results for fiscalQ2. Revenues were up 204.1 million, keeping slightly above the midpoint of theprojections we provided during our Q1 earnings call. Fiscal Q2 gross marginswas 51.8%, a 40 basis points improvement sequentially, and while in line withour previous guidance, was pretty impressive given the higher mix of PCproducts. We expanded gross margin in a quarter that showed above- averageseasonal strength in some of our relatively lower-margin product lines, includingPC Clocks and audio codec devices.

This less favorable product mix during fiscal Q2 was offsetby increased fab utilization as we brought more synergy wafers in house. Asmany investors may recall, we expected to see the impact of bringing ICS wafersin house in about two to three years after the merger. So, we are right ontrack with that.

We expect to meet our target of 5000 synergy wafers perquarter during the current PC cycle in this December quarter. Fab utilizationfor the September quarter was just 60%, above our original projections drivenprimarily by strength in PC and consumer clocks.

R&D expenses during the fiscal second quarter were about35 million, down approximately 3 million from the prior quarter, primarily dueto tight expense controls.

Our SG&A expenses were about 25 million, essentiallyflat from the prior quarter. We also generated 22% operating margin, animprovement of 2 points from the 20% in the prior quarter.

Interest income and others was about 4 million, essentially flatfor the June quarter. Tax expenses or essentially our estimated cash tax forthe quarter was about 1.5 million as you we continue to offset tax expenseswith the NOLs accumulated in prior years.

Net income for the September quarter was approximately $48.3million or 24% of revenue, while EPS was $0.25. Our EPS was above the high endof the forecast provided in July primarily due to operating expenses,performance and lower taxes.

Now let me summarize our results on a GAAP basis. We arepleased to record GAAP net income of approximately $5 million or 2 pennies pershare in the September quarter. This was the first time since the ICS mergerthat we were able to offset the intangible amortization with core profits. Thedifference between our GAAP and non-GAAP results during the September quarternets out to about $44 million or about $0.22 per share. We recorded acquisitionrelated charges of approximately $30 million or about $0.15 per share, downfrom about $32 million in the June quarter.

These charges are primarily from the amortization ofintangible assets recorded in conjunction with our mergers and acquisitions. Inaddition, we recorded approximately $12 million or about $0.06 per share stockbased compensation expenses consistent with the June quarter. Furtherinformation included in a detailed reconciliation of non-GAAP and GAAP resultsis provided in the financial tables of today's press release and can also befound on our website at www.idt.com.

Now turning to our balance sheet. Cash and investmentstotaled approximately $350 million at the end of the September quarter. Wegenerated approximately $66 million in cash from operations in Q2. In addition,we generated about $17 million from the exercise of employee stock option and$2.3 million in share purchases under the company's ESPP program.

We were active again in our share repurchase program, duringthe September quarter as we purchased approximately $39 million of stock. Wecurrently anticipate that we will continue to be active in our share repurchaseprogram at current trading level.

Through the calendar 2006 we have repurchased almost 20million shares or about 10% of our outstanding stock. We intend to continuethis activity and our Board has expanded the share repurchase program by an addition$200 million. This will bring the total amount under the existent program to$400 million with about $236 million remaining for repurchases.

We spent $4 million CapEx during the quarter. As expected,inventory decreased about $1 million to $81 million in the September quartercompared with about $82 million in the prior quarter. Days of inventoryimproved to 76 from 77 days. Our trade accounts receivables increased 1%sequentially to about $94 million, while DSO decreased to 42 days in the Septemberquarter, from 43 days in the June quarter, primarily related to the timing ofshipment.

I will now to turn to our forecast for the December quarter.As Greg indicated, we currently project revenue for the third fiscal quarter of2008 to be in the range of $204 million plus or minus $4 million. On a non-GAAPbasis, we currently project gross margin to be range in 52.2% plus or minus 50basis points, depending on the revenue range and product mix. At the mid pointof this range, this should be increase of about 40 basis points from theSeptember quarter. improving in part due to five utilized days.

We anticipate operating expenses in the December quarter tobe approximately $60 million plus or minus $1 million, essentially flat for theSeptember quarter. R&D expenses are expected to be up slightly, offset byreductions in SG&A. We project operating margins to improve by a point toabout 22% plus or minus 1 percentage point primarily dependent on the revenuerate.

We anticipate interest and other income to be about $4million. We expect our taxes to be in the range of $1 million to $2 million, aswe continue to benefit from NOLs accumulated in previous year. After furtherevaluation of our NOLs and our tax position, we are now comfortable that wewill be at our cash tax rate for the rest of this fiscal year.

Exclusive of any additional repurchases under our sharerepurchase program, we project share count to be at about 195 million on adiluted basis, slightly down from the prior quarter, reflecting a full quarterbenefit of our fiscal Q2 share repurchase activity. We currently project EPS ona non-GAAP basis to be about 25% per share plus or minus a penny dependentprimarily under actual revenue range and product mix.

On the balance sheet, we currently expect to generateapproximately $50 million in cash during the December quarter, which willresult in a quarter ending cash balance of approximately $400 million. Thisprojected balance excludes the impact of any share repurchase or M&Aactivity.

We currently expect our GAAP EPS to be lower than ournon-GAAP EPS by about $0.17 plus or minus a penny. Most of the differencebetween GAAP and non-GAAP projections fall by $0.13 per share is related to theamortization of intangibles primarily as a result of the ICS merger. We projectstock option expenses to be about $0.04 in the fiscal quarter.

Again, I want to reiterate that our strategy of investing inmultiple growth platforms is working. This strategy has resulted in number ofnew technologies and products that have not only improved and enhanced ourcustomer’s digital media products, but also contributed to significant top linegrowth. We believe our mixed signal expertise and timings serial switchingaudio and specialty memory will continue to open up many new growthopportunities in the existing adjacent market. We’ll continue to focus onleveraging on this expertise to deliver increased value to our customers andshareholders.

With that summary, I will turn the call over to Greg for abrief announcement. Greg?

Greg Lang

As some of you may have seen we also announced a leadershiptransition today. I will be resigning as President and CEO of IDT when IDThires a replacement CEO. So, one of the questions that logically comes up is,why now? And to put it simply, I feel like I have accomplished the major goalsI set when I joined IDT several years ago, and it’s a natural time for me tolook around for my next challenge.

IDT has successfully transformed from a verticallyintegrated commodity SRAM company to a high-value mixed signal productscompany. We have done a great product pipeline, great management team, strongfinancial results and excellent prospects. I am very proud of what we haveaccomplished over the last several years, and for this reason, I have agreed toassist the company through the transition by continuing as CEO until the Boardfinds a replacement to lead IDT in its next phase of growth.

So, with that I will turn the call back over to the operatorfor the Q&A portion of the call. Brett?

Question-and-AnswerSession

Operator

Yeah indeed, well, thank you very much Mr. Lang. (OperatorInstructions) Our first question in queue, we go to the line of Glen Yeung withCitigroup. Please go ahead, sir.

Glen Yeung -Citigroup

Thanks. Clyde, can you hearme okay?

Clyde Hosein

Yes.

Glen Yeung -Citigroup

Great. I guess, I want to start just by understanding, youknow, cost is going to bottom in the fourth quarter and I know a part of thatis an inventory at issue Cisco, but I just want to get a sense from you why areyou so confident that Q4 represents the bottom?

Clyde Hosein

Pretty much for that reason. We’ve seen the bulk of ourbusiness outside of that inventory correction, has been pretty stable. Weactually think we are going to see a little bit of an increase in some of thatbusiness in this next quarter, and so once we get finished up with thisinventory correction on our Q2, Q3 products, then we will be in a good shape tostart to pickup growth again.

Glen Yeung –Citigroup

Does that include wireless, then, Greg, you think that,that’s the business that’s also showing signs of bottoming?

Clyde Hosein

Yeah. No. Yes it does, I mean, we have been kind of bumpingaround the bottom, I think, for a couple quarters in wireless. So we don’t necessarilyexpect that to bounce off the bottom, but we don’t expect it to get worse inthe following quarters.

Glen Yeung -Citigroup

So, Clyde, given that comis a negative part of the mix, the following question is, what gives you theconfidence you can get margins to slightly improve here?

Clyde Hosein

The wafers and the fab and consumer, Glen, as you may recallis higher than our average right now. So the synergy wafers in the consumergrowth, which is fairly strong in the December quarter, is going to move us up,and it’s another 40 basis points.

Glen Yeung –Citigroup

And then, the other question I had was looking at our OpEx,and thank you for the guidance for Q4, any thoughts you have on 2008 operatingexpenses, anything you see there, that tells me it’s flat up or down? I amtalking of just revenue growth, by the way.

Clyde Hosein

Was that a revenue growth question or?

Glen Yeung -Citigroup

No. I was, I mean, let’s whatever -- relative to revenuegrowth.

Clyde Hosein

Yeah. I think, I would say, well, let’s assume, normalrevenue growth, I would say, expenses should be flattish. You might see someuptake because of normal payroll type increases, but I think we can offset thatto some efficiencies that we think we can do. So I think something in theflattish range, Glen, would be appropriate. If sales has a robust year that maypush it up a little bit but I think we'll all be happy when that happens.

Glen Yeung -Citigroup

So flatter on an absolute basis not on a percentage of salesbasis?

Clyde Hosein

Correct.

Glen Yeung -Citigroup

Okay. And then last question is just on the AMB business.Are now starting to decelerate or decline I guess that's the first question andthe second one is, what percentage is that of your PC business and vendorsacross that go to the other businesses eclipse the decline in the AMB businessor a deceleration?

Greg Lang

So I wouldn't say it’s a deceleration. I think we had --there is a couple of competitive threats that we had. Also this is probably themost meaningful a faith if and when they obviously did Qimonda did get theirpart working. It was most meaningful because they total control just to moveout their whole supply base over to their internal part with the cost advantagethey would get out of doing that and do it internally. So its really not adeceleration in the market, its basically competitive entrant who had a prettyposition to go and take a look at their own business.

The good news is as we think it’s a captive, they are fairlycaptive supplier to themselves. I don't see the other module makers buyingmeaningful volume from them and helping support their competitors. So we thinkthat the entry is limited to what we are going to see this quarter and thenwe'll be back to kind of we'll call normalized rate for that business. So thebusiness remains very healthy, very strong. Our market position with thebalance of the customer base is very, very strong and that business is in goodshape. Its just basically the correction or the adjustment for Qimonda gettingtheir part qualified.

Glen Yeung -Citigroup

So onetime you had in the quarter's impacted the rate ofgrowth, starts to stabilize from then?

Greg Lang

Yeah, we'll see -- its actually partially last quarter wehad a partial quarter with them last quarter and we have -- basically it'llwork its way down to zero basically this quarter, maybe a little bit ofstraggling business with them here and there on certain customers that are onlyqualified on part. So we expect the end of it to be in the quarter that we justguided this December quarter.

And the second part to your question is, we are essentiallyoutgrowing that business I mean last quarter, our computing business was upquarter-to-quarter, that’s where our growth came from even the AMB business wastaking an adjustment. So, I think we are already there in the second part ofyour question.

Glen Yeung -Citigroup

Thank you, guys.

Operator

Thank you, Mr. Young. Next in queue, we go to the line ofTim Luke with Lehman Brothers. Please go ahead sir.

Tim Luke - LehmanBrother

Thanks, good luck Greg and you and others. Clyde, Greg, Iwas wondering if you'd give some color with respect to what you've seen in thePC environment. Generally, you talked about, the fact that you didn’t thinkthere was, general double ordering and if you could just sort of clarify, howyou seeing your sequential growth going forward there in the PC environment?Thank you.

Greg Lang

Thank you first of all, but the PC market that seems to beincluding sell through seems to be fairly robust from the visibility that weget. And the reason I would say that is that, as we sold in, I mean our numberswere up as I mentioned in those three product categories, over 25%quarter-to-quarter, which is actually well above the kind of the normalseasonality that you would expect to see. So, typically when that happens welook for pockets of inventory sitting around and we really don’t see anyinventory grow.

We don’t have great visibility and that's why it could beactual PC OEMs part of their channel in their retail outlets for examples, butas far as we can tell, the builds continue to happen at the OEM end of thespectrum. Our inventory have a distributor in Taiwan and remains very healthy. Weare not seeing a big stock pile landing anywhere. So from what we can see, thebusiness appears very solid and in good shape and don't really see a lot ofdouble ordering.

So, the people might see a little bit more of that due totheir own constraints, but we've been able, even though we've been tight, we'veable to keep up with the demand even though, it's been quite a bit of seasonal.So, we think it is actually in very healthy shape.

Tim Luke - LehmanBrother

What do you think again the PC clock business grows againthis quarter?

Clyde Hosein

This quarter we have basically single-digit growth, this iswhat we are projecting for that business, for all three of those segments ofthe PC business we have.

Tim Luke - LehmanBrother

And then Clyde, in showinga flattish revenue, you think, that your gross margin will nonetheless expand abit, and the operating expenses are basically flat, any color on that?

Clyde Hosein

Yeah, OPEX should be overall flat, I think, I said R&Dis going to grow a little bit offset by SG&A. On the gross margin, Glen wasasking earlier, we expect consumer which is higher than our average right nowto grow fairly well in December quarter.

Tim Luke - LehmanBrother

Yes.

Clyde Hosein

That's going to pull us up a little bit in addition to whichthe wafers and the fab, all synergy wafers and the fab should continue to ramp,just as we had predicted a couple of years ago this is the PC cycle by whichthe new PC is latch on sue our fab and as those continue we'll get improvedwafer so. The combinations of those two things are going to bumper that, eithermidpoint about 40 basis points.

Tim Luke - LehmanBrother

Do you have a framework, Clydeof or how you would expect the shape of revenue to look that you go into theMarch period?

Tim Luke - LehmanBrother

The shape of revenue in terms of…

Tim Luke - LehmanBrother

It sounds like what you are saying is that the compbusiness, its going to start to trend upwards in the March quarter with theDecember period been at bottom, maybe if you color that, and therefore shouldwe expect that to be balanced by a decline in PC [module] or you are likely tosee an overall return to growth in revenue in the March period?

Clyde Hosein

Yeah. I think our revenue will reflect, kind of, I will callit, better than normal end market seasonality that we typically see out in theMarch quarter. That means the PC and consumer business tends to take a breathand see some quarter-to-quarter seasonal downside and the com business sees apickup. So, I think that we will see that the magnitude of those two generalups and downs, I think, we need a little more time to get a sense for how muchthe seasonality will be up or down in all three of those market segments, butwe would expect to have a fairly normal seasonal quarter, next quarter and theMarch quarter.

Tim Luke - LehmanBrother

Thank you.

Operator

Yeah. Thank you very much, Mr. Luke. Next, we have aquestion from John Barton with Cowen. Please go ahead, sir.

John Barton - Cowenand Co.

Thank you. Greg, maybe if you give us a little insight as tothe search for your replacement, is it under way, has it been under way for awhile, when can we expect to see some resolution there to the best of yourabilities anyway?

Greg Lang

The board has started a search for my successor, and it’skind of a normal search process. It probably can take anywhere from two tothree, perhaps as long as six months, it’s really hard to predict. But it’spretty much a normal search for this type of position, I don’t know if there isanything exceptional about this particular search, and it will take the normalperiod of time, I will expect.

John Barton - Cowenand Co.

And then you’ve committed to stay on until it’s found, evenif it’s six months or nine months, whatever the case may be?

Greg Lang

Yeah, there is probably some endpoint, where there is alimit, but yeah, I am committed to see the company through the transition, Imean, the progress that we have made over the several years, I want to see itcontinue. And I believe the smoothest transition from customers, fromemployees, from an investor perspective is for me to help hand this off to thenew person and keep things running as well as they have been going forward.

John Barton - Cowenand Co.

Thanks. On the topic of synergy wafers, I think, Clyde, what I heard you say was 5,000 wafers in theDecember quarter. Just looking out over the next year, how does that numbertrend, and then what does it do the utilization, which I believe, you said, wasjust below 60?

Clyde Hosein

Utilization was 60 that should bump up to about 5 point --additional 5 points in the December quarter. In terms of synergy wafers John,we've said its going to take two or three PC cycles, we are on the second cycleright now to get our targeted amount and so that should increase in theDecember quarter. March and June quarter, its typically down in March andflattish for June, although as Greg indicated earlier, its hard to predicttoday what that's going to be. But the next big bump could be on out here - beunseasonal it would be in the September quarter next year, when the next yearsgeneration of PCs come on and so that's probably the next big bump of wafer,which is right on schedule three years out from merger.

John Barton - Cowenand Co.

Thanks and then last question if I could. Greg you talkedabout design wins in 3G based station for the pre-processing switch. With thatmuch more information under your belt as you look forward, when do you thinkyou'll start to see a revenue ramp, how your size in the market now compared tothe previous expectations?

Greg Lang

The magnitude of this kind of transition is one that meansit takes time because they are basically making pretty fundamentalarchitectural shift to this DSP serial switch type of platform. So for us itsgood that we are kind of in the center of that next generation sort of designsand we do think that we have four of eight of today, and we think we can get atleast to couple of more of the others. But it also means that the transitionwill take some time. So we expect that middle of next year we'll probably startto generate some revenue from that and it'll ramp slowly but steadily at thatpoint in time and it should be very solid, long lasting type of business, onceit goes to new platforms and new architectures start getting deployed.

John Barton - Cowenand Co.

Thank you.

Clyde Hosein

Thanks, John.

Operator

Okay. And thank you very much, Mr. Burton. Next in queue isSandy Harrison representing Signal Hill. Please go ahead.

Sandy Harrison - SignalHill

Thanks, good afternoon guys.

Greg Lang

Hi, Sandy.

Sandy Harrison -Signal Hill

Just a thought, you've covered a lot of ground in yourprepared remarks to some of the early questions about some of the changes inthe business, even little bit better from seasonal side where some of theseasonal and consumer businesses, comps and inventory issues and you got quitethe arsenal of products you are building, for lack of a better term, freeloading the gun, for a strong '08 growth. So, without obviously, you guys notgoing to give guidance outside the quarter. But as you look at '08, how wouldyou layer this in and what would you highlight as probably the three areas thatwe should focus on as the growth engines for the business to get you back to thegrowth rates you enjoyed last year?

Greg Lang

Yeah, that’s a good question. I think this year has been, wehad as you pointed out a great growth with your last year, this year has beenbit digesting as we've gotten into the kind of settling of the AMB businessthat we see in this quarter, some inventory things and the search engine. Butif you look at all the other segments, wherein they've been, they all continuedto be very healthy.

So, going into next year as we kind of bottom out on theseother issues. I think that you will see from us, you will see some growthcoming back in the search engine part of our business, now that we feel like webottomed out. You will see some continued growth. We're starting to ramp tonumbers to get more interesting in the switching part of our business, which wetalked about for a while and they are starting to actually pickup and kick in.In the Montevina generation of PC platforms in the desktop equivalent, we willsee audio business start to pickup. So that’s the Juneish timeframe next year.

And then we have some other new product areas that wehaven't quite announced yet and so another high speed serial transition in thevideo world or the display world that we believe will also start to generatesome revenue growth in the second half of next year. So, we feel like we arepoised very well, across the timing business as we mentioned and for example,communications that are still growing today, as well as, some of these otherareas that I just mentioned to get into the above-industry growth rates, by thetime we hit the middle of next year timeframe.

Sandy Harrison -Signal Hill

And if you look forward, and I think that with you intransition and the management’s search and so forth, it's probably fair tocharacterize acquisitions are pretty much at this point off the play, is that afair assumption? And with that in mind, are there are some areas that you mightbe doing some organic development and that might take you out of some of yourtraditional markets that we might look to see some opportunities in futuremarkets?

Clyde Hosein

Yeah, actually to the first part of your question, I wouldexpect you to see from us business as usual. We are going to continue to focuson the markets that we are in, and we are going to continue to execute, we aregoing to continue win in these businesses and deliver solid result. So, Iwouldn't expect you to see a meaningful difference, and how we run or operatethe business in the middle of this transition that is the reason that I amstaying is I want to have it via seamless and smooth as possible. The secondquestion, part of your question was, what was the second part, I am sorry?

Greg Lang

I think that's pretty much as…

Sandy Harrison -Signal Hill

That was pretty much, yeah, thanks guys.

Operator

And thank you very much Mr. Harris. And next we go to SriniPajjuri with Merrill Lynch. Please go ahead, Srini.

Srini Pajjuri -Merrill Lynch

Thank you. Just a quick question on the consumer side ofthings, I guess, it's going at about in double-digits, I am wondering if thisis just normal seasonality or if you are seeing any product ramp or sharegains, any color what do you see?

Clyde Hosein

Yes, so I think a good part of it is kind of normalseasonality for consumer, but we are also seeing an uptick on the, you know, wehave a decent amount of content in the PS3 platform, and with some of the pricemoves that have been made recently by Sony, we think that is helping drive someadditional demand in that market. So that’s probably the piece that’s kind ofabove normal, if you will, seasonality for us.

Srini Pajjuri -Merrill Lynch

Okay. And then on the network search engine business, Greg,as you look into 2008, that market has been fairly, and growing in the 20%, 25%range, what are your expectations for the market growth in general. And also ifyou can touch upon the competitior dynamics of your largest customer?

Greg Lang

Yeah, so that in the overall market, you are correct. Ithink for several years, it’s been growing in the 20% to 30% range; ourbusiness is kind of being growing at the same cliff for the last several years.I do think it’s getting, the lot of big numbers, means it’s, if the growth rateis probably going to slow to some extent from a percentage standpoint, not froma dollar standpoint. So if we model something in the order of 10% to 15% growthrate, that’s probably in the right ballpark there for that business next year.

The second part of your question about the competitivedynamics, we don’t really see a major change there right now. There are reallythree folks in this market right now, ourselves and NetLogic being kind oftechnology leaders, and [Renaissance] being kind of a volume player in some oflower end sockets. And I think that will continue in time. We mentioned in thescript. We are very positive about this last generation of products and thedesign wins we have generated from that in the non-Cisco part of the market. Itis a part that we haven’t participated as much, and historically, but see withthis latest generation we’ll have a much better footprint in that part of themarket, which will improve both our revenues, as well as, our margin mix.

Srini Pajjuri -Merrill Lynch

Right. Thank you.

Operator

And thank you very much, sir. And next we go to the line ofAllen Mishan with CIBC World Markets. Please go ahead, sir.

Allen Mishan - CIBCWorld Markets

Hey, guys, and Greg, best of luck to you in the future. Justa question on the audio and PC clock additional design wins that you mentioned.When would you expect to see those share gains kick in. Is that second halfnext year or sometime further up in that?

Greg Lang

On the clock front we saw some of that this quarter wherethey had a particularly strong quarter. That was part of it. On the audio sidewe expect that to start to kick in with the Montevina transition next year. Soas you're aware Allen when you win a socket you go, you get basically placed inthat generation of platform and as it ramps up, your revenue ramps up. So asthose new next generation notebook platforms ramp up our revenue growth willstart to grow with that in the audio business.

Allen Mishan - CIBCWorld Markets

Okay. then on the communication clock front every quarteryou sort of mentioned addition design wins. How did the actual revenue progressto that business do? Did they grow in the quarter and what kind of targets canwe expect out of that business for say next year.

Clyde Hosein

Yeah I think you meant the comp clock business we've beenseeing very good design wins Allen from -- we had combined IDT, ICS andFreescale. That business grew mid single-digits, maybe a little bit better inthe September quarter, expect to grow mid single-digit again in the Decemberquarter. And we expect that business to continue to grow similar rates, I'd saylow to mid single-digits sequentially in the foreseeable future as some ofthose design wins come in. So its smaller type number but still very, very goodgrowth in that space.

Allen Mishan - CIBCWorld Markets

Okay. And then last question from me is, in the consumerarea, if you look at the business outside of gaming today, what are the majorcomponents to that business and are there any significant contributors in termsof growth as you look out over the next couple of quarters?

Greg Lang

The second largest piece of that business for us is actuallyin set-top boxes and that business had a nice growth quarter this last quarter.It typically trails off in the December quarter and the outlook for that partof the business we would expect to be normal seasonal. We got very goodpenetration into that business and some older platforms we designed as well assome newer ones we get designed into with, DVR and higher end type of set-topbox type of platform. So, we expect that one to, given the strong penetrationwe already have in that segment, to continue to be more of a seasonal type ofbusiness for us.

Allen Mishan - CIBCWorld Markets

Okay. Thanks, and good luck again.

Allen Mishan - CIBCWorld Markets

Thank you.

Operator

And thank you very much Mr. Mishan. And lets go to FTNMidwest Research in the line of Joanne Feeney. Please go ahead ma'am.

Joanne Feeney - FTN Midwest

Good afternoon folks, just a couple of questions on the,more a bit on the design wins issue. So, if you look at the PCI Expressswitches, you are sampling Gen2, I am wondering what you think about the timingof when those might affect revenues and do you have any design wins you couldtell us about. And then lastly within that same context, how large do you thinkthat market is, and what kind of share do you think you can take over the nextyear or two?

Greg Lang

Okay. So, couple of different questions here. On the PCIExpress Gen2 part of our product line, that's something we started samplingearlier last quarter. We will have those parts in the production in theDecember timeframe this year. And once getting into production doesn'tnecessarily mean that revenue ramps, but we think that there are good socketsthat will start to ramp in that first calendar quarter of next year and thequarter after that. They will begin to ramp up. So, that's when that will startto ramp up.

I think your second question was in general about some ofthe types of design that we won. We're actually, actually I mentioned this alittle bit in the script. We are pretty encouraged by the some of the tractionand some of the interest and momentum we're seeing in the communicationsmarket. I think we've always talked about that as something that wouldeventually happen, as there is more and more end points for PCI Express becauseits just a far more efficient higher performance way to interconnect thesedevices and that's definitely happening right now.

We won several designs for at, four of the top networkequipment guys for example, over the last quarter. And three of those haddifferent designs, I should say, therefore backplane designs, and we are reallythe only guys in the market shipping backplane level switches or backplaneclock switches with PCI Express.So, we think that's an exciting start to a trend and if that continues we willsee some very substantial growth. The overall market size that you are askingabout is in the, we would expect it would be in the, if depends of course onthe timeframe that you are looking at, but in the next, let’s say couple ofyears timeframe, probably in the $150 million to $200 million range for thetotal overall market in PCI Expressswitching.

Joanne Feeney - FTN Midwest

And your hopes in terms of penetrating that market?

Clyde Hosein

Well, we of course hope to be number one in that space. Wedid start about a year behind our other primary competitor there, but I believewith the design wins we have been picking up in the last couple of quarters,that we are definitely on track to catch and pass some. So, that will probablybe out in the fiscal, our next fiscal year timeframe, I suppose to nextquarter, or the quarter after.

Joanne Feeney - FTN Midwest

Okay. And then on the PC side, you are guiding for the PCclock business to grow in single-digits this quarter, is that something thatyou view as in line with seasonality or a bit less or bit more?

Clyde Hosein

Yeah, we actually do see that in line, and I will give you alittle bit more color this might be some of what's behind your question is, ifyou look at just the Intel and AMD CPU sales, you will see that they might havea little bit higher single-digit growth and a low single-digit growth that Imentioned, and that's actually very natural because the way that the buildshappen is not the CPUs are typically the last things put into the board, theyare the most expensive and they can literally plug them in at the end ofmanufacturing process. On products need, the part of what get solid on to theboard early. So, we tend to see a stronger September which we did our PC clockbusiness for example was about double the quarter to quarter growth of whatIntel or AMD announced. And then a slightly less seasonal quarter in theDecember quarter, because a lot of our stuff is then moved in and a littleearlier due to the manufacturing cycle. So, I am sorry. Did that make sense interms of the timing of the manufacturing of those motherboards?

Joanne Feeney - FTN Midwest

That was exactly the question. Yeah.

Clyde Hosein

Okay. Good.

Joanne Feeney - FTN Midwest

And then, finally, if you could just clarify, last quarter,what was your capacity utilization in the fab, and I am wondering how much ofthe gross margin increase from last quarter was due to that. It sounds like atleast all of it, and maybe more than that, because of the adverse mix shift?

Clyde Hosein

Yeah. Joanne, the utilization was about 60% in all fab.

Joanne Feeney - FTN Midwest

I meant in the previous quarter, Clyde?

Clyde Hosein

You mean the June quarter?

Joanne Feeney - FTN Midwest

Yeah.

Clyde Hosein

It was about 50%.

Joanne Feeney - FTN Midwest

Okay. And so, a 10% increase, did that account for all ofthat gross margin increase?

Clyde Hosein

Yeah. At least 40, overall gross margin grew by 40 basispoints. And the fab actually accounted for more than that, obviously, becauseas you would suspect, the mix down would have pushed it up.

Joanne Feeney - FTN Midwest

Okay. Thanks. That’s it.

Clyde Hosein

You are welcome.

Operator

Thank you very much, Ms. Feeney. And next in queue is DavidWu with Global Crown Capital. Please go ahead.

David Wu - GlobalCrown Capital

Yeah. Good afternoon. Just very quickly, Greg, you mentionedabout the non-Cisco business of network switch engine. How should I think aboutyour design wins, and how big would that business be in the fiscal ’09? I guessat this point it’s mostly Cisco, right, the non-Cisco business is probablysmall?

Greg Lang

Yeah. For us, and where we have a lighter penetrationoutside of Cisco’s, but for us, our split is roughly 85-15, 85%. Going forward,I think that can get to a 75:25 type of split. Maybe a 70:30 split in time whenthese designs really ramp into production. So that’s kind of a general mixshift that I could see happening over the next, probably a two-year horizongiven the pace at which this new design or new platforms start to roll out. Wedid just see our first revenue on this latest generation of products this lastquarter. So, its small but at least it’s a sign that it is finally starting togrow. We have these parts sampling for about a year and half now and it reallyjust takes that long to just to get through to production products from ourequipment OEM customers.

David Wu - GlobalCrown Capital

Well I see. The Gen4 happened at Cisco or does it happen atCisco and others?

Greg Lang

I am sorry, will it happen at both?

David Wu - GlobalCrown Capital

No, you said that they were actually having first revenue?

Greg Lang

Yeah. I am just saying its general for this class ofproducts for us. We saw the first real revenue happened our last quarter. And Ithink it was small but it's a good sign that some people are coming toproduction.

David Wu - GlobalCrown Capital

I assume that its not just Cisco right and generate somerevenue?

Greg Lang

Yeah. We'll see revenue from Cisco, as well as a number ofnon-Cisco customers, including a number of new non-Cisco customers.

David Wu - GlobalCrown Capital

But you are satisfied it started at Cisco and the ramp isgoing is forward. You have been sampling that. I think when you announced thisproduct over a year ago, was the product finished by the time when youannounced this thing or did you already have samples when you had the pressrelease on the Gen4 product?

Greg Lang

Our general policy is to announce when we have samples.There are some occasions where we might announce something little earlier or alittle bit later, but in this case we were definitely sampling at the time thatwe announced that part or that product.

David Wu - Global CrownCapital

Okay well, great. Can you talk about one last thing? The AMBbusiness, I assume after this quarter is out of way it'll show seasonalityuntil the AMD business kicks in, should I think about it that way or sort ofsecond half of calendar '08?

Greg Lang

That’s probably a positive way to think about it. We mightsee some uptick from DDR III starting to come in the production, but that’salso happening probably later in the year or next year.

David Wu - GlobalCrown Capital

Okay, thank you very much.

Greg Lang

Thank you.

Operator

And next we go to the line of Tayyib Shah with LongbowResearch. Please go ahead.

Tayyib Shah - LongbowResearch

Hi guys, you just indicated that the search engine Gen4transition, it might be a two year process. Can you just provide more color onwhat you expect will be the base of that transition over the next few quarter?When that transition begins to pick up pace?

Greg Lang

Its, I think as you know is, its very hard to predict thepace of the transition in the comms, communications end market other than slow.It always happens slower than we like, and they always last longer than wethink its going to. So, there is kind of good and the bad of that. So, I wouldexpect a slow ramp over the next several quarters. I don't know that it willend in a two-year time period, because I think we will still have new designsthat are ramping up in that period of time as well. But its, I think and thegood news is, its finally started after almost a year and half of design workand working with our customers.

Tayyib Shah - LongbowResearch

So, I guess we are easily talking about the second half of'08 when some of your market share gains in that non fiscal part of thebusiness begin to show up as meaningful revenue drivers?

Greg Lang

That's probably fair, in terms of a meaningful or measurabletype of shift, that's probably a fair assessment.

Tayyib Shah - LongbowResearch

And then, how do you expect your share at fiscal to track,as that transition progresses. Are you expecting kind of same market sharewhere you are right now or do you expect something of a increase from where itis right now?

Greg Lang

I think our share will be pretty stable at Cisco over thenext several quarters. I don't see major event or major platform or majoranything that will make a material shift in our direction or somebody else'sdirection for that matter.

Tayyib Shah - LongbowResearch

Okay. And then question for Clyde,should we still think that, there is a 200 basis point headroom left in grossmargin from fab utilization increase and if so, what are the chances that youactually achieve that by the end of next calendar year?

Clyde Hosein

So, that 200, we just paid a first installment in that lastquarter, so it's obviously less. I said probably in the 150 basis points maybea little less than that range. And all things being constant I think by theDecember quarter next year, with the synergy wafer loaded in the fab, we've gota better and even chance of getting there.

Tayyib Shah - LongbowResearch

Thank you.

Clyde Hosein

You're welcome.

Operator

Thank you very much, Mr. Shah, Mr. Lang. Mr. Hosein. We dohave a follow-up question, we will go back to Tim Luke with Lehman Brothers.Please go ahead.

Tim Luke - LehmanBrothers

Thanks guys, I just wanted clarity on how you see the taxrate going forward. Obviously, it sounds like its going to be lower than 15%for the December period. What should we be thinking about for the followingfiscal year and does that…

Clyde Hosein

I said on the call, probably $1 million to $2 million toDecember and by the same amount for March. Next fiscal year, taxes, Tim as youknow is very complicated thing to measure, especially we're in that zonebetween using and allows, and going to have full tax rate. So, I think youprobably better off modeling full tax rates somewhere in the 16%, 18% range fornext year and we will update you as we get closer. But for the rest of thisfiscal year, we should be in the $1 million to $2 million a quarter type numbers.

Tim Luke - LehmanBrothers

Thank you. Bye.

Clyde Hosein

You're welcome.

Operator

And thank you very much Mr. Luke. Well, with that Mr. Lang,Mr. Hosein, I'd like to turn the call back to you for any closing remarks, ifthere are no further questions.

Clyde Hosein

Thanks very much for joining us today. We appreciate theinterest in IDT and look forward to meeting with you on our marketing tripsthis quarter and on our next call. We'll also be attending the Lehman conferencein December and look forward to seeing you then. Good bye.

Operator

And thank you, ladies and gentlemen. Mr. Lang is makingtoday's call available digitized replays for one full week, starting at 5:00 PMPacific Daylight Time, October 24, all the way through 11:59 PM, Halloween.Please access AT&T’s executive replay service by dialing 800-475-6701 andat the voice prompt enter today's conference ID 887536.

That does conclude our call for this quarter. Thank you verymuch for your participation, as well as for using AT&T’s executiveteleconference service. You may now disconnect.

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