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Integrated Device Technology, Inc. (NASDAQ:IDTI)

Q3 FY08 Earnings Call

January 24, 2008, 4:30 PM ET

Executives

Clyde Hosein - VP and CFO

Greg Lang - President and CEO

Analysts

Sandy Harrison - Signal Hill Securities

John Barton - Cowen & Co.

Glen Yeung - Citigroup

Kevin Rottinghaus - Cleveland Research

Tayyib Shah - Longbow Research

Suji De Silva - Kaufman Brothers

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter Fiscal Year 2008 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this teleconference is being recorded.

I'd now like to turn the conference over to the CFO of Integrated Device Technology Incorporated, Mr. Clyde Hosein. Please go ahead sir.

Clyde Hosein - Vice President and Chief Financial Officer

Thank you, Joyce, and welcome to our fiscal third quarter of 2008 earnings conference call. I am Clyde Hosein, IDT's Chief Financial Officer. And presenting with me on the call is Greg Lang, our President and Chief Executive Officer. Also in attendance on the call are Chad Taggard, our Vice President of Marketing; Brian White [ph], our Vice President of Finance and Mike Knapp, our Manager of Investor Relations. We will all be available during the Q&A portion of this call.

Our call today will include remarks about future expectations, plans and prospects of IDT, which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable Federal security laws. Actual results may differ materially from our forward-looking statements as a result of various important factors, including certain risks which are detailed in IDT's most recent Annual Report on Form 10-K and quarterly report on Form 10-Q as filed with the SEC. IDT does not intent to update the information provided in today's call and expressly disclaims any such duty except as required by law.

In addition, pursuant to Regulation G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at www.idt.com, including a complete reconciliation to the most directly comparable GAAP measures.

Now I'll turn the call over to Greg, who will report in the overall quarter. And then I'll return to give you more specifics about our December results and our outlook for the March quarter. Greg.

Greg Lang - President and Chief Executive Officer

Thanks Clyde. Today we reported solid results for the third quarter of 2008. We experienced broad strength in sales of timing devices across our computing, consumer and communication end markets. Our PC and consumer timing business remains seasonally strong, and some of our key mixed signal growth drivers for calendar 2008 such as PC Audio and PCI Express switch products grew significantly from the prior quarter. The strength combined with sequential improvement in gross margin allowed us to post EPS that was inline with the mid point of our outlook, despite revenue coming in at the lower end of our projections.

To recap, we finished the quarter at $201.2 million in revenue, non-GAAP EPS of $0.25 per share and non-GAAP gross margins of 52.3%. Please refer to our press release and associated tables for further details.

So now let me give you some more color on our end markets. First, our Consumer and Other segment grew again in the December quarter, as we benefited from strong seasonality of gaming platforms. We saw solid sales for the second consecutive quarter in a number of different gaming platforms, including PS3, Xbox and PS2. As a result, the Consumer and Other segment represented approximately 19% of revenue, up from about 17% in the prior quarter.

Within Computing, sales of PC Clock, PC Audio, and PCI Express switches increased sequentially even after experiencing above seasonal growth in the September quarter. As we projected, we experienced a decline in the advanced memory buffer sales for December quarter, which offsets some of the strength in PCs. As a reminder, this was a result of Qimonda qualifying its own internal device in order to satisfy the bulk of its internal demand. Despite the decline in revenue, we maintained over 60% market share for AMB devices and currently expect to maintain the bulk of the share. We achieved this by demonstrating our technology leadership with the industry's best performing and lowest power devices.

Our Computing end market represented approximately 43% of our total revenue, down from 44% in the prior quarters. As we projected, sales into our communications end market were weaker during the quarter. Growth in our communication clock business was offset by less than expected decline in network search engine revenue, as we worked through the last portion of inventory of our largest customer. And our wireless business remained soft. The communication end market declined to approximately 32% of our total revenue from about 34% in the prior quarter. And so our revenue was also down slightly quarter-to-quarter, but remained about 5% of total revenue.

So now let's look forward to our March quarter. Our serial switching division continues to extend its PCI Express switch leadership position by offering application optimized switching solutions. In November and earlier this week, we introduced a total of seven new PCI Express Generation 2 switching solutions optimized to address the I/O Connectivity and interconnect challenge faced in the server and communication markets. These new devices provide industry leading performance per watt and lowest total power consumption, which is critical for both markets.

These characteristics have allowed us to secure more than two-thirds of the design win opportunities during the second half of 2007. We continue to be the only company offering production quantities of Generation 2 switching solutions and given the strong adoption of PCI Express switches in the server, storage and communications equipment, we are confident that we should see continued revenue growth for PCI Express in the March quarter and the remainder of calendar 2008.

In our audio division, we introduced three new high-definition PC audio codecs in December. The high fidelity codecs are designed to help bring home entertainment level, audio fidelity to next generation desktop and high-end notebook systems, while supporting mobile user capabilities such as advance processing for Voice-over-IP. These new codecs offer unprecedented levels of power efficiency for both desktop and notebook applications. And we've been successful in getting designed in the many leading OEM's next generation platforms. With design wins in hand, we are on track to double our quarterly run rate in PC Audio by the end of this calendar year.

We continue to see strong OEM interest in our AMB products, particularly with our low power devices which are sampling now. In addition to the server platforms, we are continuing to work with AMB to provide timing solutions for its G3MX server platform. We will build a G3MX memory interface device that's placed on the motherboard in addition to the DDR3 PLLs that sit on registered DIMM modules for these new systems. This will essentially be a new market for us.

After the extraordinary demand in September and December quarters, we currently anticipate greater than normal seasonal weakness for the March quarter in Computing, as we believe there is system inventory to work through. In the consumer end market, we experienced two very strong quarters of double-digit sequential growth in the gaming segment as you are aware. The gaming segments very volatile and driven by the holiday season, so as a larger portion of our revenue is exposed to the segment, we should expect some added volatility in this fiscal Q4.

Our current outlook for the fiscal Q4 is a decline of approximately $11 million sequentially for the gaming sub segment. Currently, we model this roughly flat for the June quarter, then strong upside in the September and December quarters.

Now while our Communication segment continues to be soft, we remain optimistic about growth in calendar 2008. As I mentioned earlier, our Enterprise segment will resume growth in the March quarter and we continue to win new designs on almost every major enterprise and carrier networking company with our fourth generation search engine technology. We win these designs for delivering the greatest search performance of any competing solution, in addition to providing world class customer support. We look forward to network search engine growth in calendar year '08 as many of these design wins ramp into production.

In the Wireless Infrastructure segment, we continue our engagement with base station manufactures working with our Pre-processing Switch designed to improve performance and reduce cost for next generation wireless rollouts. We also announced in November a new family of devices called Central Packet Switches, that adjust the interconnect needs of embedded application that utilize DSPs, FPGAs or processors. The Central Packet Switch solutions incorporate our SERDES and Serial Rapid IO core switch technology to provide customers with superior scalability, performance and power consumption at very competitive costs.

Well communication market revenue has been soft for several quarters; we currently project a moderate pickup in the enterprise and wireless revenue in the March quarter. Consequently, we currently anticipate communication revenue to increase as a percentage of total revenue in the March quarter. However, this growth in communications will not offset the seasonal declines in the computing and consumer end market. As a result, in the March quarter, our fiscal Q4 2008, we are projecting that revenues will be approximately $175 million plus or minus $5 million, at the midpoint of this range; this is the $26 million decline from the December quarter.

And to recap the earlier comments, over 40% of this decline is due to the gaming sub segment, about $11 million; and the remaining is due to greater than normal seasonal decline in the computing end market. Clyde will go into more details of financials in a moment.

While our current outlook is more seasonal than we liked, I feel very positive about the prospects for IDT over calendar 2008. We continue to maintain a strong market position... market share position in all of our key areas and our product execution continues to outpace the competition. Our PC and Consumer business segments are hitting seasonal lows in the March quarter and the inventory issues in Communication segments are behind us. Additionally, we have new growth drivers ramping into the next few quarters. For example, we currently anticipate PCI Express to break the $4 million mark this quarter with a growing design win list.

In our PC Audio business, we have major design wins in place around the Intel Montevina launch that is expected to ramp in our production this spring and as they ramp we believe our PC Audio business is in a position to double its run rate by the end of the calendar year.

We also project exciting growth in another serial technology transition in LCD panels, which is called display port. For those of you who attended the CES Conference, you may have noted this new industry standard display interface announcement by VISA. In fact, Dell has announced its first products with display port interfaces. This new interface will replace the old VGA monitor connection with a high speed serial interface. IDT is well positioned to enable this serial transition as we have done with AMB and Serial Switching products in the past. We are already engaged with many of the digital display customers and over the next several months we will introduce optimized display port based interface in timing controller solutions for their next generation digital display panels.

If you consider, there are 170 million standalone monitors and 140 million notebook panels sold each year, you can see the growth prospects are exciting. We believe this transition will start in the middle of the calendar year, giving us another strong revenue growth driver.

So the combination of growth in PCI Express Switching, PC Audio, display port, network timing, network search and the rebound in the PC and gaming segments, we are excited about the prospects for growth in our calendar as well fiscal '09 year coming up, starting in the June quarter.

And finally, you may have noticed that in our earnings release we also announced some changes to our Broad of Directors. Gordon Parnell, he is the VP and CFO at Microchip was added to the Board of Directors as the Chairman of the Audit Committee. And with integration of ICS complete, the Board also voted to reduce the size of the Board. As such John Bolger, John Howard, Ken Kannappan and Hock Tan resigned from the IDT Broad. John Schofield, former CEO, Advanced Fiber Communication was voted in as the new Chairman. I would like to thank each of the departing directors for their dedicated service and valuable contributions as well as welcome Gordon as the new member of the Board.

So with that, I will turn it over to Clyde to expand on the financial results and outlook.

Clyde Hosein - Vice President and Chief Financial Officer

Thanks Greg. Let me start by reviewing the non-GAAP results for fiscal Q3. Revenue of $200.2 million came in within the range of projection we provided during our Q2 earnings call. Fiscal Q3 gross margin was 52.3%, an improvement of 50 basis points sequentially and above the mid point of our previous guidance. We made this significant improvement primarily as a result of increased fab utilization as we reported additional outsource wafers and hubs. Fab utilization for the December quarter was approximately 65%, up from about 60% in the prior quarter, driven primarily by the strength in PC and consumer clock.

Our first slight decline in the March quarter due to seasonal effects related to our PC and consumer clock business. We expect utilization to improve starting in the June quarter. We remain on schedule to achieve our in-house wafer manufacturing target in fiscal '09.

R&D expenses during the fiscal third quarter were about $36 million, up approximately $600,000 of the prior quarter, primarily due to new product development as we tapped out some new exciting products.

Our SG&A expenses were about $25 million, an improvement of 1% from the prior quarter. This resulted in operating margins of 22%, which was flat from last quarter, but remains amongst the highest in our CAGR.

Interest income and other was about $3.4 million, down from $4.4 million in the September quarter, due to lower cash from our share repurchase program and from declining interest rates.

Tax expense or essentially our estimated cash tax for the quarter was about $1.2 million as we continue to offset tax expense for the NOLs accumulated in prior year.

Net income for the December quarter was approximately $46.7 million, or 23% of revenues, while EPS was $0.25, flat from last quarter. Our EPS was inline with the mid point of our projection, primarily due to the increase in gross margin and impact of our share repurchase program, which contributed about a penny.

Now let me summarize our results on a GAAP basis. We are pleased to record GAAP net income of approximately $13.4 million, or $0.07 per share in the December quarter. The difference between our GAAP and non-GAAP results during the December quarter, netted out to about $33.3 million or about $0.18 per share. We recorded acquisition related charges of approximately $25 million or about $0.13 per share, down from about $30 million in the September quarter. These charges are primarily from the amortization of intangible assets recorded in conjunction with merger and acquisition.

In addition, we recorded approximately $9 million or about $0.05 per share in stock-based compensation expenses, down from $0.06 in the prior quarter and about a penny from some restructuring actions. In addition, we received a tax benefit of about one penny resulting from a lower tax rate in one of our jurisdictions and lower projected tax expense for the year. Since both of these related tax benefits related to acquisitions, we excluded this benefit from our non-GAAP P&L.

Further information, including a detailed reconciliation of non-GAAP and GAAP results is provided in the financial tables of today's press release, and can also be found on our website at www.ibt.com.

Now turning to our balance sheet, cash and investment totaled approximately $285 million at the end of the December quarter. We generated approximately $35 million in cash from operations at fiscal Q3. We spent $6 million in CapEx during the quarter, primarily for new product development and our new systems.

In addition, we generated about $5 million from the exercise of employee stock options and $3 million in the share repurchase under the company's ESP program. We are active in our share repurchase program during the December quarter as we purchased approximately $102 million of stock. We currently anticipate that we will continue to be active with our share repurchase program during the March quarter.

Since the merger with ICS, we have repurchased almost 29 million shares or about 14% of spend in stock. We have about a $135 million remaining under current repurchase program. As we projected inventory decreased about $1 million sequentially to $79 million in the December quarter. Days of inventory improved to 75 days from 76 days.

Our trade accounts receivable decreased slightly to about $92 million while DSO decreased to 41 days from 42 days in the September quarter, primarily related to the timing of shipments.

I will now turn to our forecast for the March quarter. As Greg indicated, we currently project revenue from our fourth fiscal quarter 2008 to be in the range of $175 million plus or minus $5 million. On a non-GAAP basis, we currently project gross margin to be in the range of 52% plus or minus 50 basis points, depending primarily on the revenue range and product mix. We anticipate operating expense in the March quarter to be approximately $58 million plus or minus $1 million, a reduction of about 4% from the December quarter. Decreases in operating expense are somewhat offset by the increases due to typical payroll tax reset at the beginning of the calendar year.

We project operating margins to decline to about 19% plus or minus 1 percentage point, primarily dependent on the revenue range. We anticipate interest and other income to be just under $3 million. We expect our taxes during fiscal Q4 to be in the range of 0 million to $1 million as we continue to benefit from NOLs accumulated in previous year.

We anticipate signing an agreement during this quarter to extend our favorable tax position in one of our offshore locations. This will result in a slight credit to our fiscal Q4 tax. We continue to evaluate our long-term tax position and currently plan to provide guidance in our tax rate for fiscal 2009 in our next earnings calls.

We project share count to be about 183 million on a diluted basis, slightly down from the prior quarter reflecting the fourth quarter results of our fiscal Q3 share repurchase activity. We currently project EPS on a non-GAAP basis to be about $0.20 per share plus or minus a penny, depending primarily on the actual revenue range and product mix.

On the balance sheet, we currently expect to generate approximately $50 million in free cash flow during the March quarter, which would result in quarter ending cash balance of approximately $335 million. This projected balance, excludes the impact of any share repurchase or M&A activity.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.18 plus or minus a penny. Most of the difference between GAAP and non-GAAP projections are about $0.13 per share, is related to amortization of intangibles, primarily as a result of ICS merger. We project stock option expenses to be about $0.04 per share in the fiscal fourth quarter and about a penny related to various restructuring actions.

We believe our core mixed signal expertise and investments we made in technology that leverages experience, all put us in a good position to deliver solid revenue growth in calendar 2008. Despite the difficulties we and many others in the space are experiencing this quarter, we remain excited about our mixed signal product line such as PC Audio, PCI Express and display port, and are confident we should see some significant growth from these as well as other product lines in the coming year.

With that summary, I'll turn the call over to Joyce for the Q&A portion of the call. Joyce?

Question And Answer

Operator

Thank you. [Operator Instructions]. And our first question will come from the line of Sandy Harrison from Signal Hill. Please go ahead.

Sandy Harrison - Signal Hill Securities

Thanks for taking my call. Good afternoon, gentlemen.

Greg Lang - President and Chief Executive Officer

Hi, Sandy.

Sandy Harrison - Signal Hill Securities

Couple of quick questions as far as some of the products that you are highlighting as your growth engines, it sounds like as far as PCI Express that's been something we have been talking about now and it's been running I estimate somewhere between $2 million plus or minus a couple of 100K per quarter and if you are looking at going to $4 million in the March quarter that would suggest where the new stair stop. Is that something you think sustainable and is there another stair step coming on top of the four that would get you to a higher level at the second half of calendar year '08?

Greg Lang - President and Chief Executive Officer

I think with the design wins we have in the pipeline in the space, we just going through and doing bottoms up now from that. We can -- it looks like we will pass the $10 million mark in this fiscal year, by the end of fiscal year. So, yes, we're definitely on that growth curve, it's been... the past year, we spend a lot of time getting our portfolio on shape on the design wins in place, we are starting to see the benefits of that... those designs ramping up right now.

Sandy Harrison - Signal Hill Securities

Got you. And then spend a little bit more time if you could on the AMB markets, some of the things that are going on there. You highlighted that Qimonda had gotten their internal qualifications which will split off some of the product. But, what sort of the life cycle of AMB, where do we go from now? Obviously, as you've highlighted the AMB opportunity with what they are doing as an incremental move for the TAM, but what should we be looking for from the industry for AMB fundamentals so we can track?

Greg Lang - President and Chief Executive Officer

Well, throughout the balance of this year, or fiscal year, how you want to look at it, we expect this to be basically the dynamics that are here today to remain today will continue to deliver to drive new technology with our low power device, we have out now. We think we are going to actually pick up some additional share points from the 60% range we are at now. We think we can actually grow that over the course of this next year because the device that we have is for the lowest power device on the market, not a huge issue for servers and if you add up to report out the set of the cost of a server, if you look over the life of that sever, you will spend half again in the cost of that server for electricity and cooling for power and cooling cost. So, how is it great big deal in these platforms, delivering a substantial improvement there is something that we are poised to do here in the next... actually sampling it now and getting it out to customer calls very shortly. So, we think we can pick up share in this space.

I think what you are referring to probably goes out another year or so. The next generation Intel platform which is to my knowledge isn't announced yet, but the anticipation is that they will probably be pursuing a buffer on board type of approach. Again, I don't know if anything like that has been announced, but I know that's been speculated. And then that the change in those dynamics in terms of the attach rate of those buffers and share on those buffers, but that's... for us, that's probably on the order of 15-18 months out before that transition starts to happen. So there is clearly a good runway in front of us, we think actually that next couple of quarters we have a good chance to grow our AMB business after kind of adjusting for the Qimonda revenue loss in last couple of quarters.

Sandy Harrison - Signal Hill Securities

Got you. And just with all the Board changes that you announced with the departures and the add with a new Chairman, Greg, any update on sort of your situation and timing on that?

Greg Lang - President and Chief Executive Officer

There is actually no update on the search for my replacement, I am still obviously acting in this capacity and I might sign up to do that into February and if we can extend it beyond that we will extend it to try to create the smoothest transition we can for the company. So that process is still in place, and there is candidates being interviewed and hopefully we will come to conclusion here in the next several weeks.

Sandy Harrison - Signal Hill Securities

Great, all right, thanks guys.

Greg Lang - President and Chief Executive Officer

Thanks Sandy.

Operator

Thank you. And next we go to the line of John Barton from Cowen. Please go ahead.

John Barton - Cowen & Co.

Thank you. Can you hear me okay?

Greg Lang - President and Chief Executive Officer

Yes.

John Barton - Cowen & Co.

I am sorry. You talked about display port, Dell design win starting etcetera, could you elaborate of what you expect the TAM to be for display port and as I say, its main competitor was I guess, Genesis Microchip, was recently been acquired, and is in bigger hands now. What does that mean from the competitive dynamic perspective?

Greg Lang - President and Chief Executive Officer

Yes, on the TAM front... by the way, I didn't if I implied that there was a design win at Dell, I should not... or clarify that Dell announced display port-based products but the design wins, the customers that we'll work with on this would be the suppliers to Dell. So folks like Samsung, Sharp et cetera. So but, backing up on the general market size, we have if you look at monitor market, what this basically is a new connection to the monitor and that could be on a notebook, which is an internal connection obviously, or could be on the standalone monitor, which is a external connection, the standard VGA connector we've been using for 15 years or so. It's also we expect going to be an internal connection for HDTV, so LCD panels type of thing because LVDS is basically running out of speed.

But if you take the combination of those three different panel markets, if you think of these as just all flat screen panels of different sorts, there is over 300 million of those. Actually saw a forecast yesterday is about 400 million of those sold in '07, so it's in that 300 million or 400 million unit range, that the total market represents today. I believe eventually all of those will move to a display port interface. But it's a question of how long it takes? So that's the big question about modeling this business, is how fast does that transition start, when does it start and then how long does it take? I'll give you my current thinking on how the transition might happen.

I think the notebook market is probably going to be the fastest transition because there is beyond the cost benefit in the notebook space, there is also a big benefit in terms of the cable it goes through the hinch and moving to the serial technology makes that a much simpler proposition. This is one of the big mechanical issues on our notebook design. So there is a couple of very big drivers behind moving that. So the notebook market will start with the Montevina launch, it's the first chipset from Intel that will support display port. I don't know that it's going to... it won't come firing out of the gate soon upfront, but I think by the time that it refreshes to the Montevina platform, end of the year into next year, we are going to see that pick up very aggressively I believe, in the notebook market, because the benefits are very compelling.

So for the notebook space, I think by the time we get 18 months out, I think you will see most of the last generation notebooks moving to this and the new generation notebooks, all of them, on the display port type of interface. So that will be the most aggressive and in two years time you could see a very, very large percentage of that market moving.

Standalone monitors are little different. There is huge cost benefit because you are basically taking a lot of electronics out and driving it from essentially the graphics part if you want to think of it that way. But I think that transition will happen a little bit slower just from normal type of inertia in both the supplies well as reseller channel. What I could see over the course of the next couple of years as this gets incorporated into the chipsets, I could see in a 2 year timeframe, maybe 40%, 50% of that market migrating over as well.

The TV space will be the slowest, it will be the least visible because of internal only connection, it's also the smallest of the three markets. But that will take I think probably in the order of three or four years to get to the 40% and 50% type of penetration. So this is something that will happen over the next several years of time and then really get started it with Montevina generation this summer and I think start to kick in the high gear the early part of next year.

John Barton - Cowen & Co.

And from a competitive perspective, am I correct, Genesis Microchip does it mean with them being acquired who else do you expect to be there?

Greg Lang - President and Chief Executive Officer

Yes, Genesis will certainly I think be the primary competitor, Genesis is and they kind of early start in this space. And so we see them as kind of our number one competition. There is a couple of other smaller companies, a company named Parade, and Analogics is the second one and I think those are probably the two other guys that are closest to Silicon. So those are the... that's the main characters right now. We of course believe we have a very strong position and we will be a very strong competitor with Genesis for the number one, number two position in that space.

John Barton - Cowen & Co.

Greg, you talked about com growing in the March quarter, its looking at the crystal ball for all of '08, what's your best guess, wireless base stations, enterprise networking; how '08 develops, calendar '08?

Greg Lang - President and Chief Executive Officer

Let me put one caveat on it. I think the big caveat is the general economic environment. Like I said, if we really do have some type of meltdown here in the broader economies and there will be an impact to our business. That has been true for semiconductors for a long time; there is a direct correlation there. But barring that, the good news about our com business is one of the big drags on that business for the last couple of quarters as you know, has been working through an inventory bubble at Cisco, our largest customer. We have worked through that, so we believe we are kind of poise, we are sitting kind of at the bottom of that revenue number, we are poised to see some growth from that.

So if you were asking me, give me an idea of what kind of growth. I think that we could see some low single-digit growth this year in our com business, which again given kind of a modest or reposition its been for a while, its actually nice to see it growing, but its still a fairly modest type of growth picture I believe for that business.

John Barton - Cowen & Co.

Okay. And last question if I could Clyde, you alluded to the wafers coming in-house from the ICS products, where are you as far as a percentage of wafers in-house please?

Clyde Hosein - Vice President and Chief Financial Officer

We have a 25% of utilization right now is from the whole ICS wafers. That should increase substantially as we go through ratably, it will decline a little bit in the March quarter because PCI consumers over quarter, but that should increase ratably in the June quarter to probably a quarter of more of a utilization next year. We should hit our targets for wafers as we go through next year.

John Barton - Cowen & Co.

Thank you.

Clyde Hosein - Vice President and Chief Financial Officer

Thanks John.

Operator

We will next go to the line of Glen Yeung from Citi. Please go ahead.

Glen Yeung - Citigroup

Thanks. If I look back two years at your revenue base that would be the last time we saw revenue this lower as you are projecting for the March quarter. At the time you had that, you actually had less AMB than you do now. So I wonder if you could just draw the line for us, what's different in your business today at 175 to where it was two years ago at this time when it was around that level, given that AMB is actually higher now, what's for us.

Greg Lang - President and Chief Executive Officer

Good question, going through in processing or calculating a bit I think that in some places we did a year-over-year compare. We have... we had actually a reasonably in the order of 20% decline in some of our legacy businesses and that's probably the single biggest bucket of decline. And when I say legacy business, I mean some of our classic telecom products, some of our specialty memory products et cetera, so that's probably the single biggest factor.

I think the thing that's really that stands out obviously in this guidance is the gaming segment and as we get more and more exposure there, the volatility particularly in that segment is very, very high towards the Christmas season, which I think everybody is aware of. But it really has actually has a big swing factor on our revenue, both in terms of the build-up to it as well as the softening of it in this first calendar quarter that comes after the holidays.

Glen Yeung - Citigroup

Okay. And then what about gross margins because there are also 400 basis points lower gross margins between that and now, and I wonder really same question with respect to margins?

Clyde Hosein - Vice President and Chief Financial Officer

Yes Glen, it's a similar thing. A lot of what Greg called legacy is, the wireless business, high margin business, so compared to two or three years ago, as you indicated, the big part of it would be the decline primarily in wireless, the margins in those as well in the mid 60s or higher and so the loss of those things have pushed it down. What's grown in that period of time is a lot of the PC type device, which are... computing is probably the mid 40s their products that are higher than that, so it's really the declining in some of the old com business that in the mid 60s offset by the higher growth areas. There are in even between 45% to 55% gross margin.

Glen Yeung - Citigroup

Okay. And if that cash go down a lot I understand there was a big buy back in the quarter. Where is your level of comfort with cash balance and how should we think about buyback looking forward?

Clyde Hosein - Vice President and Chief Financial Officer

Yes, to recap for everyone, we generate about $200 million a year plus in free cash flow, obviously, doesn't have in GAAP. So we are comfortable with the cash balance that $200 million or probably below that obviously, noted in plan we will take it there, but certainly with the profile in profitability the good cash generation that I can see any reasonable person would be comfortable there. So, we've still got a lot of room.

In terms of the second part of your question, I think I indicated earlier that we intend to be aggressive, certainly at these prices. We bought back $100 million last quarter, I think very aggressive and probably couldn't be as aggressive this quarter and so I think we continue to do that while we continue to generate cash.

Glen Yeung - Citigroup

And then lastly, regarding for a healthy decline in revenues but your gross margins look like probably somewhat close to flat and just thoughts on how you maintain that, how much of that is mix? I recognize you don't have as much depreciation as it used to, so you don't suffer that same volatility. So how of it is mix and where do you see the risk that gross margin doesn't meet your guidance?

Clyde Hosein - Vice President and Chief Financial Officer

There is a little bit of mix as Greg indicated, com is improving a little bit. A bigger decline I think is the utilization, which is going to push us down 40 basis points or so. So the risk I think is probably more broad economic if some of the things as Greg indicated earlier, if it's real in revenue, now the current revenues of midpoint of our revenues of 175 I am comfortable with 52 plus or minus 10 basis points, and so I don't think it's going to be materially lower than that given all we know today.

Glen Yeung - Citigroup

Okay.

Clyde Hosein - Vice President and Chief Financial Officer

So I think it's going to be more or a step function down in revenues or even the com market its fallen apart that makes it. Otherwise 52 plus or minus, I am comfortable with.

Glen Yeung - Citigroup

Okay. Thanks.

Operator

Thank you. And we will now go to the line of Tim Luke from Lehman Brothers. Please go ahead.

Unidentified Analyst

Hi, this is Kate for Tim. I was just wondering if you could give a little more color on the PC market outlook? I think you implied that it maybe down, you are expecting it to be down more than seasonal in March? And then there is some color as we move through the year, how you guys see it on the inventory or what do you see there?

Greg Lang - President and Chief Executive Officer

Yes. That is correct, we obviously I think the whole industry has seen a very strong a couple of quarters in the row. And typically, what we would see in kind of a I would call it a normal type of seasonal year in this quarter would be about 8% to 12% decline. And I think what you've seen is people guiding maybe on the higher side of that. We are actually guiding above that. Our declines are probably in the order of 16%ish decline quarter-to-quarter in our Computing segment. And our belief is that basically the last couple of quarters have been very robust, but I think that there is some inventory out there, I think there is some system inventory that needs to get worked through because based on kind of current quarter today type of sales out and order rates, we think that they are digesting some of the inventory from the last quarter.

Oh I am sorry, you said outlook for the year. I mean, there is no... don't think there is any big again short of a big economic growth down there. We haven't seen any major changes in the market demand. I think this is just kind of a small correction for a pretty heavy couple of quarters in the last two quarters.

Unidentified Analyst

Okay. And then if I could just ask one other question on in the Com markets on the pre-processing switch, if you could talk a little bit about that? And I was just wondering when... it sounds like that's going to be kind of a slower and steadier ramp and I'm already thinking about that and when does that start helping I guess com revenues?

Greg Lang - President and Chief Executive Officer

Okay, yes. So let me give you just first a clarification, we have two different switching product families or switching families. One is PCI Expresses for general market, and one that you just asked about was that's targeted specifically at wireless applications adopting this different S-real [ph] standard is, that's what its called. That product we refer to as a PTS product. And while we are getting substantial traction, major traction, we have design wins at most of the major base station guys, these cycles of t this platform has taken a very long time to ramp up so. We expect a couple of million dollar revenue out of that in this calendar year. But it's just starting its ramp towards the end of this calendar year as some of these transitions happen.

The other thing that's a bit of the challenge about this ramp is that it represents actually an architectural shift for these basement cards which always is... takes a little more time, there is more testing, more validation done on a big architectural technology change like that. So that's actually delaying some of the adoption, but we are enthusiastic because we see the design wins in the pipeline and we can count the number base station card that are sold number and the number of devices on the cards and we think this is a good healthy business for us, this is going to take longer to ramp than a typical PC type product.

Unidentified Analyst

All right thanks.

Greg Lang - President and Chief Executive Officer

Thank you.

Operator

Thank you. And next we go to the line of Kevin Rottinghaus from Cleveland Research. Please go ahead.

Kevin Rottinghaus - Cleveland Research

Thank you. On the PC side, are you actually seeing orders being cut now and could you give us any kind of idea on how big you think the inventory issue is? Is it just systems or components?

Greg Lang - President and Chief Executive Officer

We are not really seeing orders cut, it's just placing of new orders, just coming at a slower pace than we would expect or like to see, on kind of a typical seasonal quarter. How big it is? Given that we're not seeing a panic if you will, I have a feeling this is something that kind of gets worked through this quarter and we'll get back into kind of normal business in the next quarter, that's my general sense, I haven't really seen a lot of data. I don't know that people have really kind of been able to sort out what the pipeline looks like, but my sense is just by behavior right now is its... it should be, it shouldn't appear to be a giant issue.

Kevin Rottinghaus - Cleveland Research

Okay. Would you say it's just a notebook and desktop or is it one of the other?

Greg Lang - President and Chief Executive Officer

Notebooks has been the strongest and continue to be the strongest. Actually, I guess, I would... I'll have to say, I don't know that we have a clear picture of whether or not it's happening in both or one or the other.

Kevin Rottinghaus - Cleveland Research

Okay. And could you remind us how big the PC Audio portion is now?

Greg Lang - President and Chief Executive Officer

We don't break that out, but it's basically on a quarterly basis it's a high single-digits in the millions, high single-digit millions a quarter.

Kevin Rottinghaus - Cleveland Research

Okay. And you said you're still comfortable with that doubling by the end of this calendar year?

Greg Lang - President and Chief Executive Officer

Yes, the run rate we believe will double by the end of this year.

Kevin Rottinghaus - Cleveland Research

Okay. And then last one, the consumer decline, is that all gaming and is that how we should kind of expect seasonally for thing to track?

Greg Lang - President and Chief Executive Officer

Yes, it is... the first part of your question is the vast majority is in the gaming segment, yes. And the second part is also a yes, is the gaming segment, I don't know if you've ever seen the slides from Sony or not, its either one they sold on the PS2 history. It's very, very substantial seasonal spikes, revenue spikes have happened in the obviously the holiday selling season. And so the manufacturing plans around that actually look very similar in that as well. So as we have this, that kind of revenue exposure growth we've had in the last year, we have more exposed to that additional volatility if you will in the gaming market.

Kevin Rottinghaus - Cleveland Research

Okay. The telecom clock side, could you maybe kind of talk about I guess, the design win and growth outlook there and how substantial that is at this point?

Greg Lang - President and Chief Executive Officer

Yes, that business is an interesting business because like a lot of the communication markets, the sockets that you go after are relatively small, fragmented and distributed in many, many different places. So there is a lot of little sockets that you have to pursue to win and therefore a lot of individual different types of parts. This is a place when we merge with ICS, if you remember at the same time we also brought in Freescale's Communication Timing business. And between those three businesses we really kind of became the one-stop shop for basically pretty much any communication application and their silicon timing needs for that. And we believed in experiencing very strong synergies with more substantial communication sales force, more substantial product line, some very good design wins.

Now just like we talked about the wireless switch product earlier, this is a communications market, so things move very slowly. But its been five quarters straight now, we've seen a nice steady up tick of revenue growth there and we think that business can grow steadily as long as we continue to execute well in the order of 15% plus a year for us and its... we don't break this one out either. Its south of $100 million and north of $50 million a year type of business today and we believe we can continue to grow at this cliff for as far as we can see.

Kevin Rottinghaus - Cleveland Research

Thanks.

Greg Lang - President and Chief Executive Officer

Thank you.

Operator

We'll now go to the line of Tayyib Shah from Longbow Research; please go ahead.

Tayyib Shah - Longbow Research

Hi guys. You indicated that on the PC side, it's an inventory issue and you would expect that inventory correction to be over by the June quarter. If that's the case, would we expect a snap back in the June quarter which is similar in magnitude to the decline that we are seeing in the March quarter?

Greg Lang - President and Chief Executive Officer

No, not necessarily because the decline there is typically 8% to 12% of the seasonal decline and we are seeing a few percentage points more than that. So it would be the delta between those two if everything else were perfect or equal. And a big part of the June quarter depends on the ramp of new platforms under Intel. If they have a big new product ramp, there tends to be a lot of activity, people getting ready for those if the ramp gets delayed. So can't really know last year day before, but if the ramp gets delayed into the summer then the revenue from those new platforms and the activity gets delayed as well. So one of that will depend on the timing of Montevina and the associated desktop platforms in the spring, but the snap back, if there is a snap back that's the original question, is going to be on the order of a few percentage points, not double-digit percentage points.

Tayyib Shah - Longbow Research

Okay. And did I hear you right that you said the computing business is going down by about 16% in the March quarter?

Greg Lang - President and Chief Executive Officer

Yes, it's 16% to 17% something like that in that range.

Tayyib Shah - Longbow Research

Okay. Clyde, can you give us more color on how much of the decline is on the server memory side and how much is on the rest of the computing business?

Clyde Hosein - Vice President and Chief Financial Officer

I think that the 16% plus or minus Greg is talking about is on the PC side of it, so I think that was computing, it's all computing.

Tayyib Shah - Longbow Research

So I mean within computing, is this mostly a server memory, revenue decline or is this spread out within the computing space?

Greg Lang - President and Chief Executive Officer

No, it's actually all the things, we are seeing lot of the inventory challenges we have are actually in the PC clock side, seeing it also in the server side. A little less in the audio side because we are ramping up some early volume on new design wins, so we are seeing a little offset in the ramping of the new design wins. And PCI Express is actually picking up a little bit as we mentioned earlier as what kind of offsetting the seasonality, but overall, the server side is off in a similar direction as the PC clock side.

Tayyib Shah - Longbow Research

Okay. On the communication side, can you give us an idea of how much visibility you have in that business, how confident are you guys predicting that the search engine business will grow year-over-year and may be if you can talk about the wireless business as well what's your level of visibility in that space?

Greg Lang - President and Chief Executive Officer

Well, the visibility is not great. We... well, we get depending on the quarter and how readily supply is available, we are probably getting in the order of four to eight weeks of visibility in terms of grow backlog beyond forecasts.

The other questions you have specifically about the search engine business, for example, one of the reasons that we feel good that we are going to start to see some growth here in the June, the March and June quarter is that we spent the last couple of quarter burning off some inventory at Cisco and we think that we are actually in a spot where we'll start to see some of that pick back up because the inventory is being consumed, so we'll see that come back as they start to have build more platforms.

Tayyib Shah - Longbow Research

Okay. And finally Greg, can you comment on your share at the major customer in that search engine business, how do you see that in your Gen 4 product?

Greg Lang - President and Chief Executive Officer

I think I know what you are referring to; I think it was our press release that claimed some pretty exotic claims, which I think might have been on the first individual shipment it was made, it was a little bit of timing game. But, we right now believe we have approximately 50% share in the Generation 4 products, in that area and I think our share outside of that large customer is actually greater than that. So we've actually been winning a lot of designs with this generation of product because essentially we were out with it about a year ahead of our competition and we are really the only guys out there with this kind of billion search per second performance level for about a year before the other guys showed up.

Tayyib Shah - Longbow Research

Thank you.

Operator

[Operator Instructions]. And we do have a question from Suji De Silva from Kaufman Brothers. Please go ahead.

Suji De Silva - Kaufman Brothers

Yes, hi Greg, hi Clyde. Just a quick housekeeping question first, on the fiscal '09 tax rate, I know Clyde could you update us, but should we obtain a model something in the 15% to 20% range at this point?

Clyde Hosein - Vice President and Chief Financial Officer

Yes.

Suji De Silva - Kaufman Brothers

Okay, great. And then few more strategic questions, you talked about I guess calendar '09 more qualitatively how the businesses are going to play out amongst some of your segments. How do you think the gross margin will trend as we go through '09 given what you think is going to happen among your segments? I am sorry, calendar '08.

Greg Lang - President and Chief Executive Officer

I think that the gross margin, the mix part of the gross margin, I think is going to remain, I think we are going to stay kind of in the same ballpark that we are now, but the place that we have some potential for upside is on the utilization front. We can potentially get a little bit of upside on the utilization front. I think as Glen had mentioned earlier, all the depreciation has gone out of the fab. So the volatility comes with that is much... certainly much less than it was three or four years ago. We would see huge ups and downs with the depreciation swings, but that's all gone. So, we could see some upsides from outside of that we think the gross margins can stay in the same kind of general ballpark they are right now. We don't see major ships up or major ships down I should say.

Suji De Silva - Kaufman Brothers

Okay, that's helpful. And then I know about the transition in management here, but in terms of the portfolio business that you have now, are you guys comfortable with that, are you seeking acquisition to extend to this point, what's sort of the thought process there or is that on hold perhaps?

Greg Lang - President and Chief Executive Officer

Well, certainly the business is not on hold. I mean, a big part of the reason that I volunteered to stay to the transition is we do actually have a lot of exciting things in the pipeline and part of my goal is, I would like to make sure that the team has the capability to continue to execute and deliver on those things, things like display port products that I mentioned earlier, we have a number of other products in the pipeline around audio business unit et cetera. And I... the general direction of the company to kind of capitalize on our analog capabilities, on our SOC capabilities and become a world leader in analog ASSPs or mixed signal products is very much intact and we are very excited about the prospects in front of us in the expanding market SAM that comes with that.

Suji De Silva - Kaufman Brothers

The more building opportunity to organic than acquisition?

Greg Lang - President and Chief Executive Officer

Yes, certainly we have been invested organically, obviously from the start and have that very good growth success over the past several years from organic growth and we will continue to do that. We will continue to look at places where there need to be some supplemental technology or some other maybe market enablers that we need. So none of that's ruled out and we still have good healthy discussions with the Board or the Directors on those topics. But clearly, our number one focus is on organic growth.

Suji De Silva - Kaufman Brothers

Great. And then just last question, just to Glen's question where you talked about some legacy COM revenues that I heard you even last year. Do you have remaining exposure to like legacy COMs in the few quarters that you would call out?

Greg Lang - President and Chief Executive Officer

Well, I think every company has some legacy revenue and we certainly do and that's how always one of the challenges as you are going to make sure that your new growth... new revenue outpaces your old revenue declines. And the place that actually probably heard us the most is the one that you mentioned, which is last couple of years we've had I mentioned 20%, it was actually 20% in the last year in the wireless space, and probably another 10% or 15% beyond that for the year before.

So that's been the most damaging for us because the revenue has been fairly substantial but also the margin hit. We don't expect a huge further decline in that and we also think by the end of this year, we will start seeing some growth in some new products in that area that offset some of the old legacy pieces that are falling away, that's in particular in the pre-processing switch area and wireless space stations.

Suji De Silva - Kaufman Brothers

Great, thanks guys.

Greg Lang - President and Chief Executive Officer

Thank you.

Operator

Thank you. And gentlemen, we have no additional questions in queue, please continue.

Clyde Hosein - Vice President and Chief Financial Officer

Thank very much for joining us today. We appreciate your interest in IDT and look forward to meeting with you on marketing trips this quarter and on our next call. We'll also be attending the Oppenheimer Conference in Denver [ph] in February and the Citigroup Conference in Las Vegas in March and look forward to seeing you. Goodbye.

Operator

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Source: Integrated Device Technology, Inc. F3Q08 (Qtr. End 12/31/07) Earnings Call Transcript
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