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Executives

Ajay Bhatia -

John H. Kispert - Chief Executive Officer, President and Director

Randy W. Furr - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Joe Moore

Unknown Analyst

Spansion (CODE) Q1 2012 Earnings Call April 26, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Spansion Inc. Earnings Conference Call. My name is Larry, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Ajay Bhatia, Director of Investor Relations. Please proceed.

Ajay Bhatia

Thanks, Larry. Good afternoon, and thank you to everyone for joining us on today's earnings conference call to discuss Spansion's First Quarter 2012 Financial Results. We hope you saw our earnings release issued today and posted to our website. I wanted to let you know about our upcoming speaking engagements in the second quarter. In May, we will present at the Jefferies Global TMT Conference on the 9th and the Barclays Global Conference TMT on May 23rd, both in New York. We hope to see many of you in the coming months.

With me today are John Kispert, Chief Executive Officer; and Randy Furr, Executive Vice President and Chief Financial Officer.

Before we begin, please note the Safe Harbor Statement on Slide 2 of today's materials. During the course of this meeting, we may make forward-looking statements regarding future events or the financial performance of the company. Such statements are based on assumptions as of the current date, and you're cautioned that these forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those statements. We urge you to review in detail the risks and uncertainties discussed in our Securities and Exchange Commission filings, including our annual report on Form 10-K for the fiscal year 2011 and the Forms 10-Q for the second, third and fourth quarters of 2011. The company disclaims any duty to update forward-looking statements.

Our agenda for the call today is as follows: John Kispert will discuss key highlights from the quarter, then Randy Furr will review the quarter from a financial perspective and provide the forward-looking guidance. Our Q&A session will follow and audio replay of this call will be available for one month by accessing the Investor Relations page at spansion.com or by dialing 1 (888) 286-8010 and using the passcode 99512782.

Now I would like to introduce John Kispert, CEO of Spansion.

John H. Kispert

Thank you, Ajay. Good afternoon and welcome to our First Quarter 2012 Earnings Conference Call. At a high-level, we met our profitability and revenue target in Q1, achieving record design wins and increasing our market share. With our product innovation and strategic partnerships formed in Q1, we are well-positioned to execute, delivering new NOR and NAND products and driving revenue and earnings growth throughout the year.

My comments today will be organized as follows: first, I will recap our financial results. I will then update you on what we are seeing in the market and the latest developments across our various businesses. And then finally, I will review our design win progress.

Randy will then give you the first quarter financial details and the outlook for the second quarter. After which, we'll field your questions.

So for the first quarter of 2012, we achieved revenue of $219 million at the midpoint of our guidance. Non-GAAP gross margin was 30.7%. Non-GAAP adjusted operating income was $14 million and adjusted net income was $4 million. Randy will go into more detail in the financials, but at a high-level, I was pleased with the financial results in Q1.

As for our markets, during the first quarter, we maintained our leadership position in the embedded market with continued momentum across all of our segments. We saw an increase in our market share with consumer applications after seeing challenges in this segment in the second half of 2011. This improvement is directly linked to our new Serial products. With widespread adoption of connected graphics-rich and more intelligent embedded devices continuing to increase across consumer industrial segments, systems are becoming more complex and require a high performance and reliable memory. As a result of this trend, we are generating positive momentum and seen interest from customers from our parallel NOR, new serial NAND and programmable system solutions.

As discussed in the last quarter's call, our strategy to generate cash and to continue to improve profitability is centered on 5 key areas: First, maintaining leadership in parallel NOR, second, growing serial NOR with our new platforms; third, delivering NAND; fourth, expanding licensing; and finally fifth, developing and introducing a new category of products that integrate Flash and logic. This new category of products embed our MirrorBit technology in logic for memory-intensive processing applications, what we call here programmable system solutions. We made significant progress in each of these areas in Q1. In parallel NOR we remain the market leader and continue to see new design wins across all of our market segments, which I will cover shortly. In the area of serial Flash, we went into production with our 512-megabit device and continued to broaden our portfolio at lower density. We also expanded our R&D efforts in Asia by adding a dedicated design and product development team and a new design center for low-density serial products. With this new R&D team joining our existing Asian team of software and systems engineers, we will expand our resources focused on the development of cost competitive serial Flash solutions to meet specific requirements in greater China and globally, thus strengthening our ability to grow serial NOR. We are on track to introduce several more low-density serial products next month.

With regard to our NAND offerings, we signed a strategic alliance with SK Hynix which will result in Spansion offering 4x nanometer 1-gigabit, 2-gigabit and 4-gigabit SLC floating-gate NAND this quarter. It's targeted for embedded applications in automotive, a number of industry segments and, of course, telecommunications. We also plan to sample 3x nanometer NANDS in the third quarter.

As with our NOR products, we will apply our stringent processes for NAND, qualifying, testing, extending the temperature support and packaging across all the NAND products, as well as our longevity of support in which our embedded customers have come to rely on Spansion for.

In addition to these floating-gate products, we continue to develop our CT NAND technology, our demonstration of 43 nanometer shows the capability of our technology for plane or scale of our NAND technology at the 1X node, as well as for 3D where floating-gate technology faces challenges.

In the area of licensing, we continue to engage in negotiations and expect to announce a MirrorBit technology license later this year. Lastly, in an effort to embed our MirrorBit technology and logic chips, Spansion is developing programmable systems solutions that leverage our nonvolatile memory technology to improve the speed and accuracy of reading data for systems that are memory, processing and MIPS intensive, such as voice-recognition. In Q1, we announced the partnership with Nuance, where we are combining their software with our technology to enhance the responsiveness and quality of voice-recognition for embedded solutions in automotive, gaming and consumer electronics applications. Major car manufacturers are currently evaluating the Spansion and Nuance's combined technology capabilities on a demo platform. Increased processing and memory are critical for in-car entertainment, connectivity, navigation and safety technologies. We will continue to make announcements as we progress in this area.

Turning to our design wins and future demands. We had another quarter of strong design wins and momentum across all of our embedded segments. In gaming, we continue to secure wins for high-density NOR where customers value the fast read and interactivity for rich graphics and data. Games are becoming much more immersive wherein the future players will become actors within the narrative and respond to player's tone of voice and body stance. Voice, image and gesture recognition will require fast access to data, richer interactivity and high-end graphics and sound. Memory intensive systems are going to be a key enabler for next-generation gaming and we are well-positioned with our NOR and programmable system solutions approach. In automotive, we secured over 30 new design wins primarily for infotainment and applications. Thin film transistor displays for instrument clusters and, of course, advanced driver assistance systems. Additionally, we are starting to see more opportunities in auto emerge in China and India. Our Flash products continue to power all of major car brands on the road. In industrial, we secured a total of 100 design wins driven by automation and robotics, smart energy, security and surveillance cameras, of course, medical and machine-in-machine applications also grow. We expect demand to continue consumer as the internet of consumer things transitions to the industrial internet where human machine interfaces and graphics are being proliferated across a range of applications and require high performance memory.

In communications, we secured over 80 designs, primarily for base stations and infrastructure to support 4G LTE networks. In consumer electronics, we maintained our leadership position in the mid-to high density range in the consumer market with approximately 180 wins overall driven by set-top box design, digital cameras, home gateways and camera modules for tablets. With new products for low density and NAND available this quarter, we expect continued growth and momentum for our parallel NOR, serial and NAND products in consumer applications.

In terms of translating design wins into revenue, consumer and gaming design wins will translate into revenue generally in the next few quarters whereas automotive, communications and industrial will take longer, up to about 15 months.

So in summary, we are focused on executing against our strategy and continuing to deepen our relationships with our embedded customers. With our strong and growing product portfolio, strategic partners and customer relationships, we are confident about our ability to continue driving revenue and earnings growth throughout the year.

And with that, I'll turn the call over to Randy.

Randy W. Furr

Thanks, John. Let me start with a summary of our fiscal Q1 2012 operating results, which as John indicated earlier, we are pleased to report we're in line with the guidance provided during our Q4 earnings call. On a non-GAAP basis, sales were $219 million. Gross margin was 30.7%, adjusted operating income was $14 million equating to an operating margin of 6.2%. Adjusted EBITDA was $32 million and non-GAAP EPS came in at the high-end of our guidance at $0.07.

As I discuss the financial results in more detail, I will be referring to the presentation we have posted to the Investor Relations section of our website. On Slide 4 of that presentation, you will see a breakdown of our sales by end market and geography. As you can see, our Asia-Pacific region bounced back nicely in Q1 driven by the strength in our consumer business. Sales in our EU region also remained stable due to the strength in automotive and industrial and is supported by the design activity. You may recall that last quarter, we reported significant growth in our gaming business, almost 40% and for Q1, we are seeing more of a quarter-to-quarter variance based on end market or final system shipments. We do expect to see a strong gaming sector showing in Q2.

Total net sales declined less than 1% from the prior quarter, and when you consider that fiscal Q1 each year is historically down in the 10% to 12% range, being essentially flat translates to a relatively strong Q1.

Turning to Slide 5. We will review the income statement highlights. Overall, the income statement was within guidance. Non-GAAP gross margin driven by an improvement in capacity utilization at our Austin, Texas wafer fabrication facility, improved from 24.2% in Q4 to 30.7% in Q1. We improved from less than 70% utilization in Q4 to close to 75% in Q1. Our goal is to target at least 90% utilization in Q2.

Also here, I will briefly comment on our restructuring efforts announced back on our Q3 earnings call. We did incur approximately $5 million in restructuring related charges in Q1. As our principal restructuring effort, that being the consolidation of our Kuala Lumpur final manufacturing operation into our Bangkok facility is proceeding according to plan. And by the end of Q1, we ceased all production at the Kuala Lumpur site. Although we did see some lower cost-benefit in Q1, we will see substantial incremental improvement in Q2 with all the benefit from this restructuring realized by the beginning of Q3. Also, we've entered into an agreement to sell the land, building and certain surplus equipment and we expect to see the majority of the proceeds from that sale later in Q2. Moving to operating expenses. R&D expenses ticked up a bit in Q1 as we accelerated our new product development efforts. SG&A also was up as we accrued for incentive plan expense for our employee base. Total operating expenses of $54 million translated to a non-GAAP operating income of $14 million compared to last quarter's $3 million and last year's Q1 of $43 million. We incurred $6 million in interest and other non-operating items, and our income taxes in Q2 -- or excuse me, Q1 were $3 million. Again, we have significant U.S. and California NOLs and all of the $3 million represents foreign taxes. Adjusted EBITDA was $32 million or 14.8% as a percent of sales. And again, our non-GAAP basic and diluted EPS was $0.07 in Q1. Still on Slide 5, Column 5 takes the GAAP results listed in Column 1 and nets for the non-GAAP adjustments to get non-GAAP results for Q1. The Q1 results listed in column 5 here, relate to the financials depicted on Slide 6 which we've included to show a quarterly apples-to-apples comparison going back to Q1 of 2011.

I would like to now turn the conversation to the balance sheet. Please refer to Slide 7, and I will start with cash. We ended the quarter with cash and cash equivalents and short-term investments of $261 million. During the quarter, we paid $14 million as repayment of our debt, $9 million for capital purchases and we paid $7 million for the final installment to our partner, SMIC, for our previously-announced partner agreement. With respect to working capital, trade accounts receivables was $113 million, DSO was up 1 day to 47 days, inventory for Q1 was down quarter-over-quarter to $160 million and we ended with 91 days of inventory. Accounts payable was $62 million at the end of Q1 and this equated to 30 days.

I would now like to turn the discussion to guidance for Q2. Please refer to Slide 9. As we show in our earnings release, the expected range for Q2 net sales is $220 million to $235 million. This is up about 4% at the midpoint from Q1. We are guiding GAAP diluted net gain per share to be in the range of $0.34 to $0.43. Included in this guidance, as outlined in Column 4 on Slide 9, our restructuring gains anticipated to range from $28 million to $32 million. Again, this is related to and associated with the restructuring activities announced in October. Included in this gain is the sale of the Kuala Lumpur final manufacturing operation's land, building and surplus equipment equating to an approximate $34 million gain. This is partially offset with approximately $3 million to $5 million in additional restructuring costs. Q2 is the last quarter we expect to incur any significant cost related to this restructuring. Without the restructuring gain, stock-based equity compensation and fresh start adjustments, we expect non-GAAP gross margin to be in the 34% to 37% range translating to a diluted EPS in the range of $0.15 to $0.21. This is a nice quarter-over-quarter improvement in profitability and we expect to achieve this by increasing our revenues, further increasing our internal operations capacity utilization and by realizing increasing benefits from our restructuring activities. With all of these favorably impacting the gross margin line. At this time, I'd like to take the opportunity to re-emphasize key components of our long-term financial model. Shortly, you will see this information presented in an update factsheet to be posted on our website. When a percentage of sales basis over a warm horizon, we expect annual gross margin to be in the 37% to 40% range, annual R&D and SG&A to be in the 11% to 12% range for each and annual capital expenditures to be in the $50 million to $60 million range. It is important to note that due to our existing NOLs, we expect annual taxes to be in the $15 million to $16 million range, rather as a percentage of taxable income.

Slide 10 lists our Q2 2012 focused areas, which include growing our core embedded business, staying on track with our new product roadmap, continuing to improve internal loading, lowering our operating costs and finally, continuing to generate interest and licensing Spansion's intellectual property.

Slide 13 is presented to help in reconciling historical GAAP to non-GAAP.

With that I'd like to thank you for your time today and turn the call back to Larry for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Daniel Berenbaum of MKM Partners.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Randy, when -- you walked through the guidance, can you give us a little bit more specifics on where OpEx and taxes might be for next quarter just to kind of make sure we have everything flowing through correctly?

Randy W. Furr

Sure. So in terms of operating expenses, we expect R&D to be in the neighborhood of $29 million, SG&A to be approximately $30 million, maybe somewhere between $30 million, say, $30.5 million, and taxes, I really think for the next -- we've had some favorable things both in the operating income line in Q1 and in the tax line in Q1. I think taxes will be somewhere between $3.5 million and $4 million and the non-operating items will probably go up from about $6 million to about $8 million.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

And then do you expect that the $15 million to $16 million taxes that you mentioned to kind of full year -- would you there to be $15 million to $16 million in 2012 as well, so -- and a higher taxes in Q3, Q4?

Randy W. Furr

Yes, I would. I do. It's probably going to -- we're going to be consistent somewhere between $3.5 million and $4 million a quarter going out into the future. And I don't see it changing a lot from that number.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Okay. And then John, moving over to the MirrorBit licensing. I think you mentioned you expect to sign another MirrorBit license later this year. Can you sort of help us narrow down what later this year means? And for next quarter, should I only be modeling the $6.25 million in Samsung royalties? And when should I be thinking about royalties coming on and at what magnitude will they be?

John H. Kispert

Yes, Dan I certainly appreciate the question. It's going to be hard to comment to deep to be helpful. I think you for everybody, the company is on a 2-part strategy. One is the licensed technology like we did with the Samsung settlement. The second part is to license our technology to those that want to use our technology in the embedded markets or system chip kind of market. I can tell you we're working on both and both are coming along. The industry slowed down over say the last 9 months slower -- have certainly hampered the efforts here just -- kind of trying to size the economic benefits on either one of those kinds of deals. But beyond that, Dan it's difficult for me to -- and I do appreciate the question to actually say, hey it's going to be this quarter or next quarter. The key here for Spansion is to make sure that we are creating the value that we -- that MirrorBit investment over the last 20 years is -- should get and so we're being patient with that. We feel good -- sometime over the next 3, 6 months we'll have 1 of the 2, if not both.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Okay. And then sort of related to that, just as part of Hynix agreement. Does that agreement remove the potential for any royalties from Hynix -- the cross-licensing agreement as part of your founder agreement with them?

John H. Kispert

Yes, I think so. I think that's probably not going to -- it's not high on the list of things we're talking about at this point.

Operator

Our next question comes from the line of Raji Gill of Needham & Company.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

On those lines, what's kind of your thought process on the margin profile, I guess in the next couple of quarters? The longer-term margin, I think, you had talked about 37% to 40%. I don't know if you're saying that was within 2012 or if that was a longer-term target? Maybe you just clarify that.

Randy W. Furr

Yes. So -- Raj a good question. When I awarded that, I really said that's a longer-term, certainly past the quarter we just guided too. And it's more of a longer-term model for you to think and value Spansion over the longer-term. With that said, in terms of gross margin, I think a lot of it's kind of -- the short-term, is tied to utilization. And first, we've done a good job at working down inventory. In the September quarter we had about $211 million of inventory. It was down to $174 million in December and back down to $160 million in March. And as you know, we major our revenue on a sell-through basis, so we're starting a pretty low inventory in the channel so to speak from Spansion's point of view. Secondly, we've executed well on transitioning what used to be products or wafers produced at our foundry partner to our internal fab. Third, we've also performed well on our restructuring in terms of consolidating our KL FMO into our Bangkok operation. And then fourth, in terms of our wafer fabrication or sort, our final manufacturing operations are all performing very well with respect to process yields, efficiency, quality, on-time delivery metrics. And the net of this is our capacity utilization is increasing and our overall cost structure is decreasing, which obviously results in improvement of gross margin. And so -- to drive the point home, just to keep going, we hope to be back at a capacity utilization of about 100% by Q3, a number that we saw last in Q3 of last year. But we'll achieve that number spending approximately $60 million to $65 million less in total costs. We were below 70% capacity utilization in December as I said -- around 75% in the March quarter and we expect to be north of 90% in the June quarter. And I think that will push gross margin up in the 35%, 36% range for the June quarter. So, I hope that answers your questions.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Yes. And just along those lines, as volume ramps and you're running more wafers through that internal fab, you should start to see an incremental uptick in the margins going into the back half of next year. Obviously, not the -- at the same cadence as you had in the first half, but maybe you can give me some color on kind of -- if you can, visibilities in the third and fourth quarter in terms of seasonal patterns, in terms of the top-line and if those seasonal patterns hold on the top-line, kind of like where you were in September of last year, then the margin should -- we should see a margin improvement also in the third and fourth quarter on top of what we saw in the second quarter. Is that correct?

Randy W. Furr

That is correct. I -- we only guide one quarter at a time, but clearly, September is a stronger quarter than the June quarter and December for us usually is an uptick as well. So, we're certainly expecting that the September quarter will be up above June and the December quarter will be up above September. I think that will give some boost to the gross margin line as well. It will certainly get us into that longer-term model with the a boost there. And as I just pointed out, with getting close to 100% capacity utilization in September quarter, that's a boost. And we're really focused on additional cost reductions in our operation with the big one being -- we're still shipping a lot of 110 products, but as John pointed out in the huge amount of design wins, we're doing very well and our 65-nanometer products being designed in and we see those growing. In fact, we see about a doubling of the amount of 65-nanometer products in the June quarter than we had in March. And another almost doubling by the time we get to September and December. And that alone is going to be tailwinds for the gross margins to increase.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

And just last question again. The $15 million to $16 million taxes in that range. Is that the range we also assume in 2013? Or could it go higher?

Randy W. Furr

No. I think that's the range that you could just model out for a pretty long period of time. If you modeled somewhere between say around $4 million rounding up for a long period of time, you'd be pretty safe with taxes.

Operator

Our next question comes from the line of Krishna Shankar of Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Can you give us some sense for how quickly the embedded SoC NAND could ramp up based on this SK Hynix agreement? And are you still confident about sort of the longer-term revenue growth potential of maybe 8% to 10% outperforming the Embedded Flash market growing at 3% to 5%?

John H. Kispert

I think -- Krishna, it's John. Certainly, in your last comment, yes we're still confident it is growing particularly with the design wins. And now -- I think to Raj's question also, our lower-density SPI products are coming out now and we're getting great success there and they are more profitable -- far more profitable. Obviously, the company had much older technology out there. And we're winning in -- that will help -- as Randy said in the margins in the second half here, but it certainly going to help with market share and penetration into markets that the company had in the past struggled on. To the first part of your question with NAND, we are all geared up and so is our partner for June. It's a 1-gigabit, 3-volt product, a 2-gigabit 3-volt product, a 4-gigabit 3-volt product and an 8-gigabit. So that's been the plan now for about 6 months. We've been working with them for quite a time -- quite a while on this. And so I think in the June, July timeframe, we'll be sampling and get that in front of customers.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Great. And then what were types of products which led consumer going from 26% to 35% of revenues in the first quarter, and you said that gaming could have a pretty significant uptick in Q2. Can you talk about what types of products will drive that growth in gaming?

John H. Kispert

Yes. So the gaming is our 4-gigabit NOR, it's doing really well across the board for us, performance-wise, cost layer and performance-wise and a number of different businesses. But right now, is an uptick in the gaming space. Gaming -- the thing I would caution you about gaming is what I like to call a lumpy business, there will be quarters in which it's very, very strong and other quarters, it's more of a digestion quarter. But it looks clear to us that Q2 was a much, much stronger quarter in gaming. And we'll see as we get into it more. As far as consumer, I think there's 2 stories there. Krishna one is set-top boxes start to pick up for us particularly at the end of March moving into April. So kind of starting into this quarter, hard to see how big it gets, but across the board, the typical camera business for us has done better. I think as a generality, for Q1, it was a challenging environment. But most of our customers started to show -- no longer we're showing sequentially declining, that will be flattened out, now we're seeing things in March and April start to get better. But most of our games in consumer were at the lower density where we now have these newer products out. In fact the profitability question -- that's going to help a lot there -- we're just much more competitive. And those were across many different businesses in the consumer space, but 16-megabit, 8-megabit kind of businesses, we're doing much, much better in.

Operator

Our next question comes from the line of Joe Moore of Morgan Stanley.

Joe Moore

With the SoC NAND ramp. Can you talk about how that business transitions from Elpida -- do you still get some development wafers from them? And -- or is the first revenue that you get purely from the Hynix arrangements?

John H. Kispert

Joe, can you kind of -- you broke up there a little bit. Can you repeat the question please?

Joe Moore

Sure, sorry, On the SoC NAND ramp, do you still get development wafers from Elpida this quarter and does any of that turn to revenue or is the revenue purely coming from the Hynix item?

John H. Kispert

Yes. Good question, Joe. So look at -- 2 separate programs. We'll continue to run the program -- that's actually being run in Hiroshima with our folks and some folks from around the world. The focus there now is on ramping and in scaling it it's charge trapping NAND. Scaling is -- will be the interesting piece, it's a -- obviously I think the Hiroshima team has done a tremendous job over the last year, but -- can we count on scaling there has been the question. We're focused on that, we're talking to other folks where we could probably scale that business. Separate to that is this floating-gate NAND that's coming to market, as we just discussed here, in June. And -- so just a separate program completed in a different technology node. Allows us to get to customers at volume much, much quicker at the right cost. We can add our packaging, our software, our socket knowledge to that NAND and get to the market much -- as quicker and high volume. And that was the thinking behind it.

Randy W. Furr

Neither one of those are included in our guidance for Q2.

Operator

Our next question comes from the line of Amy [ph] of Pilot.

Unknown Analyst

Can you talk -- I mean you had a lot of great design wins, and can you be a little bit more specific and say what the actual numbers mean of the number of wins and how do we quantify that in revenue and kind of bridge the gap and talk a little bit about what you're seeing with regard to competition when you're going out and winning these designs?

John H. Kispert

Yes, Amy the first part is really difficult because there's a number of -- there's a wide range of wins in there. In the case of -- in the automotive wins, it could be very, very high revenue, but generally, they are 15, 18 months away from us before they start to ramp. In essence you see those cars hit the market. I'd say the same is in the communications kind of space where it's 15 -- 12, 15 months away. And typically those are high revenue drivers for us. We certainly track it, but it's difficult to pull from what data we have given you. On gaming and consumer and a little bit in the industrial, it's much quicker, within the next 6 to 9 months, we'll see, and those are a little bit more hit and miss as you can imagine. Our gaming is pretty solid, but consumer -- you don't know which products are going to be super successful from a volume standpoint. So difficult to answer. And what was that second part of your question?

Unknown Analyst

Just what you're seeing from the competitive landscape. So -- I mean if you're winning this versus competition, and what are you seeing when you're going in? What the competition is offering?

John H. Kispert

Yes. Typically in the design phase we have a very nice lead. I mean that's what we focus on, that's what we've been focused. So I think in the design, it's safe to say we see less, less competition. Where we see competition is after the design win and then products go into production and there's a second source and a third source. And that's where these newer products are going to help us a lot more because the cost is 2/3 of what it used to be or 1/2 of what it used to be and it allows us to be far more flexible when we get into high-volume production. As to Randy's comments on gross margin out in time, we are now in a much, much better position to be able to compete at high-volume manufacturing with these newer products and with the asset model that we've put together.

Operator

[Operator Instructions] And our next question comes from the line of Daniel Berenbaum of MKM Partners.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Just a quick follow-up on gross margin and royalties, the new longer-term gross margin model 37% to 40%. Does that assume that royalty stay at current levels and you're just growing product gross margin? Or does it assume that you have some further royalty or licensing income in there?

Randy W. Furr

Well, if you notice, there's a range there. And I think -- one would expect us, if there's no more royalties there to maybe being at the lower end of that range. But if we're successful on our licensing strategy and efforts, hopefully we'll be at the higher end of that range.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Okay great. That's helpful. And I think you said this, but I didn't catch it. How many -- what's the amount of off-balance-sheet NOLs and tax credits? And when might you expect those to come back on to the balance sheet.

Randy W. Furr

Well, I'm trying to answer the question the way you asked it, there's no NOLs on the balance sheet per se. We're not taking...

Daniel A. Berenbaum - MKM Partners LLC, Research Division

The off-balance-sheet, you have some amount off-balance sheet.

Randy W. Furr

Right, exactly. So we have about $800 million of total NOLs. About half of those are roughly what we call unfettered or first dollar of loss. You can use them up. The others are restricted to be used up over about a 20-year period. But in total, there's about $800 million of NOLs.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

So would I expect some of those to come back on to the balance sheet once your auditors are satisfied that you're sustainably profitable?

Randy W. Furr

Good question. I doubt it. I haven't been in a situation where our auditors had required that before. But the real answer is, I doubt it, but I don't really know for sure.

Operator

With no further questions, I would like to turn the call back over to Mr. Randy Furr for closing remarks.

Randy W. Furr

Thanks, Larry. So look, we've gotten off to a great start in 2012 and we're well-positioned to execute, delivering new NOR and NAND products and driving revenue and earnings growth throughout the year. We hope to see many of you on the road and to conferences that Ajay mentioned earlier. Again, I want to thank you for your continued support, and for joining us today. So with that, Larry, we're done.

John H. Kispert

Thanks, everybody.

Operator

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.

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