Volterra Semiconductor Corporation Q1 2008 Earnings Call Transcript

Volterra Semiconductor Corporation (VLTR)

Q1 2008 Earnings Call

April 21, 2008 5:30 pm ET

Executives

Jeffrey Staszak – President and Chief Executive Officer

Mike Burns – Vice President and Chief Financial Officer

Analysts

Evan Lang - Thomas Weisel Partners

Craig Hettenbach – Goldman Sachs

Gus Richard – Piper Jaffray & Companies

Rick Schafer – Oppenheimer & Co.

Vernon Essi, Jr. – Needham & Company

Jeff Rosenberg – William Blair & Company

Robert Burleson – Canaccord Adams

JoAnne Feeney – FTN Midwest

Christopher Longiaru – Sidoti & Company

Nicholas Aberle – Caris & Company

Ramesh Misra – Collins Steward (Unterberg)

Bill Frisch

Presentation

Operator

Good afternoon and welcome to the Volterra First Quarter Earnings Conference Call.

(Operator Instructions)

This conference is being recorded today, Monday, April 21, 2008. I would now like to turn the conference over to Mike Burns, CFO. Please go ahead, sir.

Mike Burns

Thank you, and welcome everyone to today’s conference call. With me to review our first quarter 2008 results is Volterra President and CEO, Jeff Staszak. As we being today’s conference call I would like to remind everyone of a few important items.

First, today’s earnings release and financial statements are available on the Investor section of the company’s web site at www.voltera.com.

Also, we are going to discuss certain non-GAAP financial measures on this call, and have provided a reconciliation of the GAAP and non-GAAP financial measures in our press release. Non-GAAP measures exclude the effect of stock-based compensation expense and special items, such as the effect of accounting changes and restructuring charges net of tax. Unless we specifically state otherwise, when we give guidance about a financial measure we mean the non-GAAP financial measure.

Finally, I would like to caution everyone that today's remarks contain forward-looking statements that are based on the company's current views and expectations. Actual results or events may differ materially from these forward-looking statements due to a number of risks and uncertainties. Please, review today's press release and our most recent Form 10-K filed with the SEC for a detailed discussion of the risk factors that could cause actual results to differ materially from such forward-looking statements. In addition, please note that the company undertakes no obligation to update or revise these forward-looking statements.

At this point I would like to turn the call over to Jeff to provide an overview of the business and our results.

Jeffrey Staszak

Thanks, Mike. Good afternoon, and thank you for joining us today.

First I’ll provide a short recap of Q1 2008 and then I’ll talk about our four focus markets and following this I’ll talk about Q2 2008 and how the second half of the year is starting to shape up. Finally, I’ll hand it over to Mike to review the details of our financial performance for the quarter, and then we will open it up for any additional questions you may have.

First, we are pleased to announce our financial results for revenue and earnings exceeded our guidance. Revenue for Q1 2008 came in at $23 million versus $17.6 million in Q1 2007 and $19.8 million in Q4, or 31% year-to-year and 16% quarter-to-quarter increase, respectively.

Non-GAAP EPS was $0.13 versus $0.07 in Q1 2007 and up from $0.09 last quarter.

Non-GAAP gross margins increased to 56.1% from 55.1% in Q4.

Bookings came in strong for the quarter across all areas and as a result we are well-positioned, from a backlog standpoint, going into Q2. Our inventory increased due to strategic builds we made in anticipation of the ramp in both graphics cards and the Intel Montevina notebook launch for Q2. Mike will talk later in more detail about the financials, including inventory.

As discussed in our January call, we expected our business to grow modestly in Q1 with server and storage down slightly from Q4, networking and communications flat, graphics up with a refresh ramp, and notebook revenue flat. We also expected our margins to remain in the 55% range and to grow our net profits. Our revenue market mix showed server and storage, networking and communications, and graphics business coming in much stronger than expected with notebook revenue flat, getting ready for the platform transition. As a result, we had a great quarter from both a revenue and earnings perspective and our margins came in at the high end.

Over the past several quarters we have been encouraging our investors and analysts to take a very conservative approach with respect to graphics and our financial models based on the ups and downs we have had in the past. You all listened and we appreciated expectations being set low for graphics since it had a high risk associated with the outcome. We had also stated that we are involved in a large number of design opportunities in both enthusiast and performance discrete graphics cards that could materialize into large market share and revenue gains if we are to win a few of the high-volume performance cards.

We are happy to announce that in addition to winning the designs on NVIDIA and AMD’s two GPU enthusiast refresh cards, which have already launched, we have won several high-volume performance card designs that are expected to launch in the late spring and early summer time frame.

As a result of receiving orders for some of these new graphics cards in Q1 for May and June deliveries we began building inventory for these orders in Q1. We have also received better backlog coverage than we have historically because of our sales team’s efforts to get orders placed with longer lead times.

We also received expected pre-production notebook orders for the anticipated Montevina ramp. As a result, we will see a significant revenue increase in Q2, followed by more normalized quarterly growth through the balance of the year. I will talk more about this during the guidance section.

Now I would like to share some more details about our four focus market segments.

The server market. Looking specifically at next-generation server designs and processors we have concluded our design activity with all major OEM and Taiwanese ODM server manufacturers for their next platforms. After further analysis of these results we expect to continue our market share growth on the next wave as these programs launch. Our fifth generation products for the server market received a very warm reception because all of our customers wanted to increase their total system efficiency and add more memory on these new servers to support the latest multi-core processors.

This new generation of products has allowed us to offer the highest efficiency and density solution in the industry. As evidenced by IBM’s very bullish earnings call, they are seeing strong growth in their server and storage business for their high-system-efficiency products, thereby providing lower energy costs for their customers as they upgrade their existing server farms. We expect to continue to benefit from this growing trend going on in the server and storage market. We are now anticipating a Q1 2009 Thurley platform launch and expect to see server growth continuing in 2009 from all our new design activity for this new Intel platform. In the short term we expect our server and storage business to be flat to slightly up in Q2.

Notebook. Our notebook business design wins exceeded expectations and are a direct result of our second generation of products for this market that we introduced in the Q1 2007 time frame. This new product family has given us another significant improvement in our cost performance metric and is providing our customers an increase in battery life and space savings through our integrated power solutions. We have been powering primarily chipset and memory functions on the current Santa Rosa platforms. However, on the Monetvina platform we will see an increase in silicon content, as our products will also power the mobile processor and graphics ICs in addition to the chipsets and memory functions. So we will see significant market share expansion through this additional content along with adding new customers on Montevina. After the launch of this new Intel notebook platform by our customers, we will be able to provide more details to you on these wins.

In the long term we are very excited about our growth opportunities in the notebook space as our integrated solution gains momentum in this large and fast growing market. We received orders as some of our customers will begin to build their Montevina platforms in Q2 so we expect to double our revenue from last quarter in notebooks and we expect to see this business grow over the next three quarters as the Montevina continues to ramp the rest of the year.

Communications. Our communications business continues to be very stable while providing moderate growth with above-average margins for this portion of our business. Designing activity in this market is still strong for us and it occurs over an 18-24 month period. The resulting revenue stream usually lasts for more than three years with stable quarter-to-quarter orders. As discussed in the past, we participate primarily in the high-end metropolitan class of equipment at both Cisco and Juniper Networks but expect this year to move into some higher volume enterprise-class equipment. Contrary to market sentiment we saw growth from Q4 to Q1 and expect to see our normal moderate growth again in Q2 in this market.

Graphics. Our Gen-5 products are also being well accepted in the graphics market as the powered delivery requirements continue to become more demanding for these high-performance graphic card applications. We have design wins with both AMD and NVIDIA on their enthusiast refresh graphics cards. As mentioned earlier, we received orders and shipped product in Q1 for the launch of AMD’s 3870X2 and NVIDIA’s Geforce 9800GX2 dual GPU cards.

In addition to these cards, we have won several performance category designs for the next generation CPUs which are expected to launch in the spring and early summer time frame. These wins are for performance-adding cards with single GPU designs. We were awarded the wins very early in the first quarter and received both forecasts and orders shortly after that for builds starting to ramp in the second quarter. As a result, we began production builds right away and have been in a steep ramp to accommodate the volumes required for these projects. Based on all this new design win activity, we expect to see continued growth in our graphics business for Q2.

Now guidance. Finally I would like to talk about the business outlook for Q2 2008. Growth in Q2 will come from all four market segments, but primarily graphics and notebooks. As a result, we expect Q2 revenue to be up 13%-26% from Q1 in the range of $26 million-$29 million with non-GAAP fully-diluted earnings from $0.15-$0.20 per share. We would expect a more normalized growth rate of 4%-8% per quarter for the second half 2008 and we expect non-GAAP gross margins to be in the 55% range.

I would also like to emphasize that we are focused on flawless execution as the new graphics cards and Montevina notebooks begin to ramp this quarter. We have a clean quality and manufacturing slate and do not anticipate any problems as this ramp occurs.

At this point I will turn the call over to our CFO, Mike Burns, for a closer review of the financials.

Mike Burns

Thanks, Jeff. From a financial point of view the first quarter exceeded expectations. Revenues were up 31% from a year ago and up 16% sequentially. Non-GAAP net income was up 82% from a year ago and up 34% sequentially. In addition, during a period of relative uncertainly, we positioned the company’s backlog in inventory to support another 13%-26% sequential revenue growth in the second quarter.

The company’s record quarterly sales of $23 million were based on diversified strength across our four market segments. The server and storage segment contributed 69% of growth serving 69% of company revenues, the sales the highest they have been in the past six quarters. Desk top and work station, primarily graphics business, contributed 15% of sales, the sales the highest they have been in the past five quarters. Networking and communications also grew nicely during the quarter and contributed 12% of sales. Finally, portable and consumer, primarily notebook, came in as expected during the quarter and contributed 4% of sales.

Non-GAAP gross margins expanded 56.1% for the quarter as we ramped production volumes in response to an upswing and forecasted customer demand.

GAAP operating expenses for the first quarter totaled $10.7 million. Non-GAAP operating expenses totaled $10 million, which was up 12% sequentially.

Fourth quarter spending benefited from a year-end shut down and lower wage-related items such as FICA. There were also additional expenses in the first quarter due to profit-dependent accruals and hiring activity.

GAAP operating income for the first quarter was $2.2 million. As a result of the company’s strong revenue growth, in the first quarter, on a non-GAAP basis we earned $2.9 million operating income and expanded our quarterly operating margin to 12.7% of revenue.

GAAP income tax expense for the first quarter was $77,000. On a non-GAAP basis the effective tax rate was 2.6%.

The bottom line on the first quarter is that the company delivered GAAP net income worth $2.5 million with basic and diluted earnings per share of $0.10. We earned non-GAAP net income of $3.2 million or 14% of sales. Non-GAAP diluted earnings per share for the quarter was $0.13 above our expectations.

Let’s move now to the balance sheet. As indicated during our last conference call, we increased production levels in the first quarter on certain product lines to support potential graphics orders in the second quarter, which had the impact of increasing inventory. That inventory entered the quarter at $9.6 million, up $3.4 million from the prior quarter. Inventory-days was 86, up from 64 days in the prior quarter. We feel the decision to increase inventory this quarter was appropriate and it is now enabling the company to deliver on the surge in forecasted second quarter demand.

During the quarter, a strong sales growth, we were able once again to bring down our accounts receivable balance, improve our day sales outstanding to 48 days by continuing to improve our collection efforts and payment terms.

The company used the first quarter’s strong cash flow from operations to repurchase approximately $2.4 million of its stock at an average cost of $8.59 per share. Together with prior stock repurchases, this brings the total cash returned to Volterra’s shareholders in the past three quarters to $17.4 million. The total number of shares repurchased is approximately 1.5 million shares, or approximately 6% of shares outstanding.

Despite the inventory ramp and stock repurchase, the company generated $2.6 million net cash during the quarter and ended with $50 million cash on the balance sheet. All of it is in cash and liquid money market funds.

In all respects the financial data showed another quarter of very solid execution despite the macro economic environment and auspicious start to 2008 for Volterra.

Let’s move now to the outlook for the second quarter. We entered the second quarter with significant customer demand to fill. I would like to highlight for investors some of the factors underpinning our relatively upbeat financial outlook for the second quarter and our approach to managing and sustaining this new level of revenue and profitability going forward.

In the second quarter we expect revenues to be up 13%-26% sequentially. The midpoint of this range would represent approximately 49% growth in revenue for the second quarter of 2007. This relatively bright revenue outlook is based on our strong backlog entering the quarter. We feel it is prudent, however, to set a broader range of revenue guidance this quarter given the uncertainty inherent in upcoming product launches in the graphics market as well as the potential challenges to our supply chain meeting customer requirements within the quarter.

We expect the quarterly gross margin percentage to return to the approximately 55% range in the second quarter. Gross margin dollars are expected to increase significantly. We plan to, again, deliver operating leverage in the second quarter. While we will continue to manage our spending closely we are mindful of the relatively rapid cycles in graphics. We do intend to add certain employee resources during the quarter, focused on supporting and sustaining our graphics business.

With our current international operating structure we expect an effective tax rate in the range of approximately 5% of non-GAAP pre-tax income for the second quarter. With achievement of the company’s revenue goals and targets for margins and spending we would expect non-GAAP earnings per fully-diluted share of $0.15-$0.20 for the second quarter. The midpoint of this range would be an approximately 35% sequential increase in our quarterly earnings per share.

We expect to next update our financial results and guidance at our conference call to discuss second quarter results, which is tentatively schedule for Monday, July 21, 2008. We will put out a press release to formally announce and schedule the call as we get closer to that date.

This concludes our prepared remarks. We will now turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from Tore Svanbert with Thomas Weisel Partners. Please go ahead.

Evan Lang - Thomas Weisel Partners

Hi, this is Evan Lang calling in for Tore Svanbert. Thank you for taking my call and congratulations on the great quarter. I have a quick question about your graphics business. Given your past reservations about graphics, could you provide us with some additional colors on what is perhaps giving you the current confidence?

Jeffrey Staszak

Backlog. And our sales team has done a great job. You know, we have sat down and met with these two customers, explained, you know, our history—which they’re well aware of—and these new products that we’re getting into are also large revenue generators for them, as well, so it’s important that they ensure that have a good supply of product so that they can meet their shipments—their customer shipments—and revenue plans. And as a result, you know, we—I mentioned it earlier that we had very strong backlog going into the quarter and that goes for graphics as well.

Evan Lang - Thomas Weisel Partners

Great. Thanks. And speaking of backlog, what was the turns business this past quarter?

Mike Burns

A little better than we thought. We had initially thought we would be in the 20% range, somewhere around there. We ended up a little bit better than that and that enables us to meet our guidance.

Evan Lang - Thomas Weisel Partners

Okay. And what level of turns business are you factoring into your Q2 guidance?

Mike Burns

Relatively low this quarter. Probably a little less than that, what we built into last quarter. Like Jeff mentioned, a very strong backlog entering the quarter so it’s not going to be so much depending on turns this quarter, Evan. It’s going to be more, again, getting things through the supply chain and into the hands of our customers.

Evan Lang - Thomas Weisel Partners

Okay, great. And I have a final question about the business that’s ramping up right now. In the early stages of these platform ramps, are you seeing any changes in the competitive landscape? Are you gaining shares in addition to your top dollar [inaudible] increase and what level of competition or even pricing type of pressures are you seeing?

Jeffrey Staszak

It’s basically the same competition we’ve had in the past in graphics. In CPUs and memory, it’s an Intersil based discrete solution and in storage and communications it’s primarily a Linear discrete-based solution and in notebooks it’s basically a Maxima discrete-based solution. So really the competition and the players haven’t changed.

Evan Lang - Thomas Weisel Partners

Have you gained any shares, do you feel? Can you tell from your data?

Jeffrey Staszak

Well, yes. I mean, we’re gaining a nice market share in graphics. We’re gaining share in notebooks. I believe we’re gaining share in communications--not quite as much as graphics and notebooks. And, you know, we’ve indicated in the past, we expect to see a nice market share gain with the launch of the Thurley, that will now take place in mid-Q1 of next year. In server and storage.

Evan Lang - Thomas Weisel Partners

Okay. That’s great. And about your gross margin; you are advising about 55% or so for the remainder of the year and I was wondering is it just prudence on your part, are you being conservative? Why would it not increase?

Mike Burns

That’s a good question. Typically the volumes going up does have the impact of increasing it but, you know, the growth this year is primarily—you know, we’ve got a pretty balanced portfolio in our four segments and server storage and network comms are the two higher margin and notebook and the graphics are the two lower margin businesses, so some of it is product mix and those are about offsetting. So, as of now when we look at it those two things are offsetting and we’re expecting in the 55% range roughly.

Evan Lang - Thomas Weisel Partners

Okay, great. Thank you very much and congratulations, again, on a great quarter.

Operator

Thank you. Our next questions is from Craig Hettenbach with Goldman Sachs. Please go ahead.

Craig Hettenbach - Goldman Sachs

Yes, thank you. In graphics I know you introduced a new package type for one of your customers and by looks of the resulting guidance it looks like you gained some momentum there. I was just hoping you could give us a little feedback and how that package type is received from the customer.

Jeffrey Staszak

Well, I guess the business opportunity speaks for itself, so it’s getting good acceptance from our graphics server storage customers. You know, we’re introducing this package for our other group of products, as well, in addition to our VT 1100 group of products. So it’s getting very good customer acceptance.

Craig Hettenbach - Goldman Sachs

Okay, great. And you mentioned comm equipment that trends had typically stayed there. Any commentary in terms of your view of inventory in that market, because it bounced around a bit for the overall end market? I’m just trying to get a sense of what you’re seeing from inventory versus demand trends with comm equipment.

Jeffrey Staszak

Again, we’ve been participating in the very high end, you know--huge, fast routers and switchers. And we haven’t seen a lot of inventory issues. It’s been pretty steady. You can see probably in the last three or four quarters. It’s not great growth but it’s been steady growth—a couple hundred of thousand, quarter of a million per quarter. And we would expect that to continue through the balance of the year. Nice, slow, steady growth.

Craig Hettenbach - Goldman Sachs

Great. And then last one. Within the notebook market, as you guys see increased exposure to that, can you just talk about how pricing is within the designing state and then from a timing perspective when you might be able to talk about some new customers.

Jeffrey Staszak

Yes. Pricing—and we’ve talked about this in the past—you know, it is more competitive than we thought three years ago when we started to develop products for the market. It’s not out of range in all of the products—the Gen-2, Gen-3, and Gen-4 products, notebook products, are all geared for us hitting our margin model with relatively aggressive advanced or forward pricing in mind. So I think we’ve already taken that into account but it definitely is. I mean, you’ve got some very high-volume products and applications there and as a result you’ve got more competition.

Craig Hettenbach - Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Gus Richard with Piper Jaffrey. Please go ahead.

Gus Richard - Piper Jaffray & Companies

Hi, guys. Just a couple of questions on sort of the projectory of your growth in Q2. In terms of the graphics side, is that where a lot of the growth is coming from in the second quarter? That seems to be the area of the most strength; is that right?

Jeffrey Staszak

Yes. We mentioned that we see some flat to slight growth in server and storage. We expect to see basically double our revenue in notebooks, which has been about $800,000 or so in the last couple of quarters. And in communications it’s going to be slightly up. So the majority of the increase is going to be in graphics; that’s correct. In these new performance-type cards.

Gus Richard - Piper Jaffray & Companies

Okay, is that going to be almost at doubling sequentially? Is that about right?

Mike Burns

Almost, yes.

Jeffrey Staszak

Yes, I would say that’s about right.

Gus Richard - Piper Jaffray & Companies

Okay. That makes sense. And then, just in terms of the two main customers there, are you more weighted towards one versus the other, or is it both coming on equally strong?

Jeffrey Staszak

I would say we’re pretty well balanced. We’re in a much better shape than we were in the last go around. I indicated that we were putting a lot of resources at NVIDIA to try to regain some market share there and that’s materialized. So I would say we’re pretty well balanced at both now.

Gus Richard - Piper Jaffray & Companies

Okay. All right. So the strength in graphics in the first quarter was at one versus the other or was that both?

Jeffrey Staszak

No, that was both. Primarily, they launched both of their refresh cards--one a little bit later than the other; a couple of weeks difference—but it was primarily in those two GPU high-end enthusiast cards.

Gus Richard - Piper Jaffray & Companies

Okay. And just moving on to the margin in the quarter. I’m assuming that the up side was the volume-related, a little bit of pressure coming from the strong graphics, and then going toward sort of the balance point around 55% really is a function of an increasing mix of notebooking graphics, holding down the overall gross margin and at least keeping it from expanding with the volume. Is that a good way of thinking about it?

Mike Burns

Yes, I think you’ve got it. And that’s what’s happening in the short term, and those two things, we’re expecting this to balance out for the next while. And then we’re looking forward to some more margin expansion when the new server platform launches. That’s in one of our richer margin segments and so we should see some expansion at that point in time.

Gus Richard - Piper Jaffray & Companies

Okay. And then, last one for me and then I’ll sort of let it go. In thinking about expenses going forward, you know, I would assume R&D and SG&A kind of scale up but definitely not at the rate that revenue is going up and you should get decent leverage.

Mike Burns

That’s absolutely right. No, I don’t it would be prudent to grow expenses anywhere near revenue growth, certainly not sequentially here. But we will, we’ll go up a little bit this quarter for some hiring that we’re going to do. But, yes, you’re right; it’s going to be much more moderate. So we should see some nice operating leverage and expansion, operating margin and net margin quarter-to-quarter here.

Gus Richard - Piper Jaffray & Companies

Okay. You know, just for the coming quarter, sort of half the revenue growth, in terms of expenses? Is that reasonable?

Mike Burns

Yes. Definitely.

Gus Richard - Piper Jaffray & Companies

All right. Perfect. Thanks so much.

Operator

Thank you. Our next question is from Rick Schafer with Oppenheimer. Please go ahead.

Rick Schafer - Oppenheimer & Co.

Hey, guys. Nice job on the quarter. I’ve got a couple of questions. I guess the first one is just, you talked about expectations for notebook in the second quarter; I’m just curious, your dollar content—can you give us any update there? And your dollar content on Montevina platform versus Santa Rosa? And what are your full-year expectations for notebook now?

Jeffrey Staszak

Well, we haven’t gotten into specifics with what our full-year revenue expectations are because it all depends on customers’ launch dates. But you know, we’ve said that now instead of doing just one or two utility functions on the board, in some cases we’re doing the majority of the utility functions as well as memory and the MPU so, again, the silicon content, or opportunity, is roughly $10 per board and we feel we basically double that on an average with this Montevina launch.

Rick Schafer - Oppenheimer & Co.

Okay. So now your [inaudible] market is roughly about $10, or $20? I just want to be clear.

Jeffrey Staszak

No, it’s still $10. But in the past, you know, like with the Santa Rosa. So, okay, let’s maybe pick a number--$2-$3 per program that we are on. You can take a look at, on an average, we probably ought to double that.

Rick Schafer - Oppenheimer & Co.

Got it. That’s great. Another question. Thurley is still obviously still a big part of your gross story, I guess, for 2009. You mentioned first quarter, I know first quarter of 2009 is a little bit of an official pushout. Are there any major new customers that are contingent on that Thurley ramp?

Jeffrey Staszak

Major new customers?

Rick Schafer - Oppenheimer & Co.

[inaudible] server?

Jeffrey Staszak

Well, no. I mean, obviously we have four of the five big guys and we have one guy in Austin that we’re working on. And we’ve said in the past, when we—if we—hopefully we’re working towards getting some designs there and when Thurley launches and when their programs come out and we’re on them we’re certainly going to be happy to announce that. But until then we can’t really talk about it.

Rick Schafer - Oppenheimer & Co.

Okay. And then just a quick one on graphics. Is there any significant difference in your dollar content, whether it’s video or an [inaudible] product?

Jeffrey Staszak

No, it’s about—there may be a little bit differences because there’s difference in currents for their—you know, each customer’s processors. But not that much.

Rick Schafer - Oppenheimer & Co.

Okay. And then this last question for Mike. Just on tax rate for the rest of the year. Should we be thinking, you know, instead of 10% for the year something more like 5% for the full year?

Mike Burns

Yes. We’re thinking that 5%-10% range and right now as we look at it it’s more toward the lower end of that range. But we’ll give updates on that, quarter by quarter, as we go through the year. But as of now it’s looking more towards the lower end of that range.

Rick Schafer - Oppenheimer & Co.

Okay. Great. Thanks.

Operator

Thank you. Our next question is from the line of Vernon Essi with Needham & Company. Please go ahead.

Vernon Essi, Jr. - Needham & Company

Thank you. Nice quarter. Wanted to go into just another model question here on the share repurchase. I’m sorry if I missed this in your prepared comments, but do you have more to execute in that repurchase or are you close to done?

Mike Burns

Yes. We mentioned that we did $2.4 million worth in Q1. We have some more that’s authorized but we typically don’t, ahead of the quarter, signal how active or not we’re going to be in the quarter. So we’ve done a lot of it already and it will depend both on cash balance, cash generation, and then it’s also going to depend on market conditions and what happens in the market here in the next while.

Vernon Essi, Jr. - Needham & Company

If I remember correctly you had $10 million as of the close of the last quarter?

Mike Burns

Yes. Our board approved a total of $10 million in January, and we did $2.4 million of that in Q1.

Vernon Essi, Jr. - Needham & Company

And just to circle back on the server market, on the line of the last question there. How should we be thinking about this market into the latter part of 2008? Now that Thurley is sort of pushed out a little further than we had originally anticipated. Are we going to see the server revenues sort of flat line here? Or possibly even decline? Or how is that going to look?

Jeffrey Staszak

I think we’ll see, here in the second quarter, we said we’d see flat to slightly up. Our IBM and HP business is still strong. Both their server storage businesses are specifically in blade servers and mid-range storage has been very strong, so that’s good for us. So I would say that it would be—plus the fact that Sun is coming on a little bit stronger than we thought so I would say flat to slightly up through the balance of the year would be an okay estimate.

Vernon Essi, Jr. - Needham & Company

Okay. And then just to revisit one other thing. Sorry to do this to you, but on the OpEx side you had discussed how you thought things were going to be coming up in dollar terms, but less than a percent of sales aspect. Is this going to be sort of a—I know this is a tough thing to answer—but is this more of a temporary response to the ramping graphics or should we be thinking about this as permanent positions that are ongoing?

Mike Burns

Are you talking the revenue or the expense?

Vernon Essi, Jr. - Needham & Company

The expense.

Mike Burns

Yes, we keep a close eye on spending and we’re not going to do anything wild here on spending. I mean, we’re going to keep an eye on the revenue; we have a spending model long term. I think you can sort of keep in mind of spending R&D 18%-22% of revenue and SG&A 12%-15% of revenue. So, I think long term when you think about it we’re certainly planning to achieve this scale at some point here to be within that model and then try to stay within that model. And short term we’ll have some sequential probably kind of high single-digit sequential spending increases for some head count adds and some other things we want to invest.

Vernon Essi, Jr. - Needham & Company

I apologize. Just to rephrase the question here so I understand. Is this more of a head count addition situation or more math sets and tools and things along those lines that are more one-time natured? Or a combination of both?

Mike Burns

For Q1?

Vernon Essi, Jr. - Needham & Company

Going forward for the rest of 2008.

Mike Burns

Could be both. The math, extending and that sort of thing was relatively high in Q1 and that can go up or down quarter to quarter and it will probably do so, but we’re not projecting it to go up much more than it was in Q1. And we are projecting some head count increases over the course of the year to help us sustain our revenue and support this new scale that we have. So some of that as well.

Vernon Essi, Jr. - Needham & Company

Okay. All right. Thank you very much.

Operator

Thank you. Our next question is from the line of Jeff Rosenberg with William Blair & Company. Please go ahead.

Jeff Rosenberg - William Blair & Company

Hi. I guess the first thing I wanted to ask was on the graphics, because we look at your improvement in Q2 from Q1. How much of that is continuing the ramp on the enthusiast versus the contribution from the initial ramp of the performance cards?

Jeffrey Staszak

I really can’t answer that. They’re taking the same product for both, so I really can’t give you a good answer on that.

Jeff Rosenberg - William Blair & Company

Okay. Well, maybe I’ll ask a little bit differently. Looking at your expectations for the second half of the year and the impact we would expect from notebook ramping to volume, should we assume that most of the designs that you have, at least at this point, you’re anticipating whether it’s conservatism or just that the timing of when it will fill out, that most of what you’re expecting in the ramp in graphics is going to take place in Q2 and you’re not really anticipating much growth in the second half? Or how would you look at it that way?

Jeffrey Staszak

No. I think we’re taking a conservative approach. I mentioned we have a pretty strong backlog to support Q2 and then we’re going to see how the business materialized in Q3. So I would say we’re trying to not get snapped in Q2, not get snapped in Q3; we’re trying to manage this and so if anything, I think we’re relatively conservative in Q2. And there could be some potential growth in Q3, for sure, but we’re just going to kind of wait and see.

Jeff Rosenberg - William Blair & Company

Okay. A question on the server growth. I know it looks like about a couple of percent sequentially [inaudible] upside that you’ve seen. Not a huge thing but maybe a comment on how you’re able to avoid the seasonality of this quarter; was it some ramping with some of the customers you’ve been building or what surprised you to the upside in terms of being able to get some growth in servers in Q1?

Jeffrey Staszak

Well, it was primarily—we indicated in the last call that IBM had stated that they were not able to make all of their shipments in Q4 so there is going to be spillage over into Q1. that happened as well as their business continued to be strong and HP’s business continues to be strong and we received some slight upside from Sun as well. And that was basically in deliveries for Q1 and then backlog has come in very nice for those three guys as well this quarter, which would—so we’re relatively comfortable to say that our business in server storage would be flat to slightly up this quarter, as well.

Jeff Rosenberg - William Blair & Company

Okay, great. And then the last one I had was as you began—I see you’re just starting with shipping into some of these other markets—Gen-5 type product. How does that affect gross margin as that begins to become a material part of the mix?

Mike Burns

Well, some of that depends on which segment we’re shipping it into. But you’re right, we are shipping our Gen-5 product now and that’s getting a very good reception. And I think that was the product when I referred to earlier when we expect the ramp in service from the Thurley platform--that’s the product that’s going to be going into that. At that time we do expect a nice bump to margins.

Jeff Rosenberg - William Blair & Company

Is there any thing in terms of the performance line graphics, or I know it’s kind of a different generational look—it’s more of your Gen-2 product and notebook—but are you getting the full benefits of what you were able to do in Gen-5 in either the graphic segment or the notebook segment during the course of the ramp of some of the new designs that ramp up earlier?

Jeffrey Staszak

Yes. I think, if I understand your question correctly, you know it was asked earlier or there was an insinuation that it the reason we got in was more because of packaging. Packaging was one of the features but it was basically space savings. Gen-5 is a much better performance from Gen-4. And overall cost is better. So there are several areas there that lend advantages that have enabled us to get into graphics in a much bigger way than we have been able to get into in the past. As well as to continue to expand market share in servers and storage.

Jeff Rosenberg - William Blair & Company

And I guess what I’m asking is whether or not—and I think that the answer in this is whether or not—I think you’ve described this in the past—the pretty significant generation to generation cost savings and whether or not your leveraging that to be much more price competitive with conventional solutions. And if that’s really—how responsible that is to winning these performance graphics wins. Or perhaps even some of the notebook sockets you’ve been able to get with Montevina.

Jeffrey Staszak

Well, certainly cost is important. And it’s been a reason for us gaining momentum but it’s also just the performance of the product. I mean, each new product that’s come out, whether it be notebook or for server storage—you know, VP 1100 chipset solution—the performance is—you know, we always shoot for a 30% cost performance increase from generation to generation and I think we saw that from Gen-4 to Gen-5 and the performance of the graphics chips is equal to or greater now—I mean the power performance requirements—than in Intel or in AMD CPU.

Jeff Rosenberg - William Blair & Company

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Bobby Burleson with Canaccord Adams. Please go ahead.

Robert Burleson - Canaccord Adams

Hi. Thanks for taking my question. Congratulations on a good quarter and strong outlet. My question has to deal with the server delay. How should we be thinking about second half growth relative to maybe you guys reassessing the server road map? You know, how much is that impacting growth? And also on the gross margin front, how much of this cautious commentary on gross margins is relative to the new expectations around Thurley?

Jeffrey Staszak

Well, let me answer the growth. I mean, this is actually very good for us because what it’s going to enable us to do is we’re expecting to see some revenue growth from servers, to a large extent, with the launch of the Thurley platform in the second half of the year. That got pushed out. So what this means is that we’re going to have very nice server growth in the 2009 time frame and ought to allow us to continue to have a nice growth here in 2009 as well as in 2008.

Robert Burleson - Canaccord Adams

And then on the gross margins, is that based on just mixed issues?

Mike Burns

Yes, in the short term or near term, I would say for this year it’s primarily mixed issues. Mixed issues offset by benefits from higher production volumes.

Jeff Rosenberg - William Blair & Company

And in the past I’ve thought of push outs or delays on the server side of your business as fairly impactful to what’s going on, given the exposure to that segment. Is there something longer term that’s maybe even revenue diversification to the notebook business or something that’s longer term that’s happening in graphics that’s now making that less of a—not catastrophic—but less of a major impact on your top line or . . .

Mike Burns

Yes. We are getting, now, better diversification amongst our different market segments so that helps, in terms of not being so dependent or so getting the swing so much from server timing. So you’re right, that is part of it.

Jeff Rosenberg - William Blair & Company

And it’s not just serendipitous that graphic stuff is coming on so strong but this is more of a sustainable penetration into the performance segment?

Mike Burns

Yes, we think so. It looks that way. There are a few differences from the past. Like Jeff said, we’ve got a nice balance amongst the two major customers in that segment. We’ve got a pretty nice diversification of skews and our Gen-5 project is delivering good performance. So we think there are some distinctions now versus in the past.

Jeff Rosenberg - William Blair & Company

Great. Thanks.

Operator

Thank you. Our next question is from the line of Joanne Feeney with FTN Midwest. Please go ahead.

JoAnne Feeney - FTN Midwest

Hi. I just have a follow up question on the servers. Is there any benefit from AMD you are seeing that you are already baking into your forecast?

Mike Burns

Can you repeat the question?

JoAnne Feeney - FTN Midwest

Sorry. Can you hear me? Is there any benefit on the AMD side that you are seeing for your server revenue?

Mike Burns

From the AMD side?

JoAnne Feeney - FTN Midwest

Yes.

Mike Burns

With respect to AMD from a revenue standpoint pretty much shakes out, I think, with the current market situation between Intel and AMD. Intel’s probably got 85% so probably 85% of our CPU revenue comes from Intel processors and the balance of it from AMD.

JoAnne Feeney - FTN Midwest

I see. So the ramp of Barcelona is that—are you thinking that it will contribute at all to your server revenue in the second half of the year?

Jeffrey Staszak

No, because all indications are there are still issues with the ramp and the production volumes associated with that new product. So no, in the second half of the year—you know, we’ve talked about we expect to be flat to slightly up and I think that’s a continuation of IBM, HP, and Sun business, mostly driven through Intel and Spark-based processor and not a lot of AMD processors.

JoAnne Feeney - FTN Midwest

Can you talk a little bit about the differences in dollar contents for your AMD processors versus Intel platforms or is there any difference?

Jeffrey Staszak

Not that much difference, except maybe a little bit more on Intel.

JoAnne Feeney - FTN Midwest

Okay. Great. Thank you.

Operator

Thank you. Our next question is from the line of Christopher Longiaru with Sidoti & Company. Please go ahead.

Christopher Longiaru - Sidoti & Company

Hi, gentlemen. Congratulations on your quarter.

Christopher Longiaru - Sidoti & Company

Most of my questions have been answered. But could you just remind me—talking about content dollar level, how does your content increase when Thurley gets up and running?

Jeffrey Staszak

Well, for a two processor board, in the past we said that there’s like a $35-$40 opportunity for the current Bensley platform and with the Thurley platform there is a $45-$50 opportunity. And that’s primarily driven more by memory.

Christopher Longiaru - Sidoti & Company

Okay. The only other thing was on the tax rate, Mike, is this tax rate going to continue out or would you envision it jumping up a little bit in 2009?

Mike Burns

In 2009 it could. Yes. We have a pretty good visibility on 2008 based on where we—it’s just dependent—you know, most of our income and sales are in Asia and most of our manufacturing is in Asia—and it’s dependent on which locations we design things and make things. We have pretty good visibility on 2008, to kind of give comfort in that 5%-10% range. Beyond that that could change. But if it does, that’s going to be based on a business decision and there should be some offsets on the cost side.

Christopher Longiaru - Sidoti & Company

Got it. That’s all I have for now. Thanks guys.

Operator

Thank you. Our next question is from Nicholas Aberle with Caris & Company. Please go ahead.

Nicholas Aberle - Caris & Company

Thanks, guys. First question. Just looking at the revenue guidance range, $26 million-$29 million. It’s a pretty big swing number. Is graphics the key driver to that big delta?

Mike Burns

It’s definitely one of the big ones, yes. That’s partly why we set it wider.

Nicholas Aberle - Caris & Company

So, at the low end of that guidance range, does that assume that all the graphics stuff gets pushed out, or what is the assumption there, kind of on a worst case scenario—that guidance range?

Mike Burns

No, not that it all gets pushed out, but to get the low end, it’s dependent on some terms and so not all of it getting pushed out.

Nicholas Aberle - Caris & Company

Got you. And then, with respect to Thurley, on the server front, is the design cycle there, for you guys, finished at this point, and if so, where, in terms of market share, do we think you guys are going to end up shaking out there?

Jeffrey Staszak

I mentioned earlier it’s, for all intents and purposes, done. And we expect to grow and we believe we’re in the low 20s market share with the Bensley platform. And after the Thurley, in volume we expect to be in the high 20s.

Nicholas Aberle - Caris & Company

Got you. You guys have talked about Lenovo and Sony on the notebook front. Are there new customers on the notebook front and will those new customers ramp in the back half of this year?

Jeffrey Staszak

Yes, there are new customers but since they haven’t launched their products—Montevina obviously hasn’t launched yet. When they launch and their products are out, we’re certainly going to talk about them. We’ll talk about them at the following earnings call, whenever that launch occurs.

Nicholas Aberle - Caris & Company

Got you. And then just lastly. Inventory obviously up big, you know, supported by nice bookings, ramp here going into the middle of the year. What are the plans for inventory going forward? Where’s a nice, sustainable level for inventory days over the long term? Thanks.

Mike Burns

It’s going to depend primarily on the next quarter’s projected growth. So right now we’re just building based on our demand and near-term forecast for what we need. And we’re keeping a very close eye on it; we’re not overbuilding anything more than what we think our customers are requiring. So I don’t think it’s going to go down quarter to quarter, based on things we need to do in Q2 and Q3, so I wouldn’t project any downward movement there. But it’s in the range of what I think is appropriate, given the [inaudible] of meeting customer requirements. And then also the trade off is we don’t want to have too much inventory sitting around, either.

Nicholas Aberle - Caris & Company

Thanks, guys.

Operator

Thank you. Our next question is from Ramesh Misra with Collins Steward. Please go ahead.

Ramesh Misra - Collins Steward (Unterberg)

Good afternoon, guys, and congratulations on the numbers on the guidance. My first question is in regards to Gen-5 as a proportion of your product mix right now, and where do you see that going by the end of 2008?

Jeffrey Staszak

I would say it’s relatively low right now. I mean, we’ve been shipping for about a year but our graphics business last year didn’t materialize to the extent we thought it would so the volumes didn’t materialize. But I don’t know, 20%-30%.

Ramesh Misra - Collins Steward (Unterberg)

So, it’s at 20% right now, Jeff, or . . .

Jeffrey Staszak

No. Going out of the year.

Ramesh Misra - Collins Steward (Unterberg)

Got it. And will Gen-5 pervade across your end markets or is it going to be focused predominantly on graphics and then as time progresses into other areas?

Jeffrey Staszak

No, I would say second half of 2009 you will see a cross over between Gen-5 and Gen-4.

Ramesh Misra - Collins Steward (Unterberg)

Okay. So basically all your—your solutions for all end markets will transition over to Gen-5?

Jeffrey Staszak

That’s correct. Over a period of time.

Ramesh Misra - Collins Steward (Unterberg)

Okay. In regards to Sun as a customer last quarter, can you say if it’s approaching 10% right now or is it well below that 10% mark?

Jeffrey Staszak

10% of what?

Ramesh Misra - Collins Steward (Unterberg)

Of total revenues—or of server revenues.

Jeffrey Staszak

Well, no. You know, we’ve stated many times in the past, IBM and HP are our two biggest customers in that arena and we just started shipping to Sun I think second quarter of 2007 and they’ve been—you know, they were first on some platforms that didn’t materialize because of the AMD issues and now they’re staring to ship some of their Spark-based platforms and those seem to have relatively good momentum, so they’re a still a small portion of our overall server storage revenue.

Ramesh Misra - Collins Steward (Unterberg)

Okay. Then finally, in regards to the notebook. With your success recently on the notebook side, does this position you well or are you considering looking into the desk top market as an area of focus.

Jeffrey Staszak

Well, we do participate in some high-end desk top boards that are designed and built by the Taiwanese ODMs but there’s a lot of competition, you don’t need the performs or the space in that environment. Notebooks is definitely a much, much larger market opportunity for us and business opportunity than high-end desk tops.

Ramesh Misra - Collins Steward (Unterberg)

Okay. Great. Thanks very much.

Operator

Thank you. Our next question is from Bill Frisch with [audible]. Please go ahead.

Bill Frisch

Hi. My question is sort of a broad question, which has to do with the fact that now you seem to be performing well on the bookings from the design win front in all of your business areas. What is the core competency that is common to those areas that has causing you to experience these wins?

Jeffrey Staszak

Well, we have the leading power technology.

Bill Frisch

Could you be more specific?

Jeffrey Staszak

It’s an integrated solution versus a conventional discrete solution.

Bill Frisch

And who is your principal competition?

Jeffrey Staszak

We have no competition. No one has a complete integrated solution like we have.

Mike Burns

Typically it’s a more traditional discrete solution.

Jeffrey Staszak

Yes, which I mentioned earlier would be an Intersil. We bump into an Intersil discrete solution, you know, where they use their controller with other discretes. That’s primarily to power CPUs. That’s who we go against. And when we deal with Intel and AMD CPUs the graphics card and memory. And in storage and communications in our single chip line it’s Linear Tech and then in both the lines that we have for notebooks, the chipset and the single chip utility regulators, we bump up against Maxima. And then the other that kind of has dips in all those areas is Texas Instruments.

Bill Frisch

Okay. And is this all [inaudible]

Jeffrey Staszak

No. It’s the standard CMOS.

Bill Frisch

CMOS. Okay. That’s helpful. Thanks very much.

Operator

Thank you. There are no further questions at this time. I’ll turn to back to you for any closing remarks.

Mike Burns

I would like to thank all of you for your questions and interest today and reiterate that Volterra is focused on sustaining our revenue growth and expanding our net income. Each quarter Volterra management participates in a number of investor relations events. During this quarter we will be marketing in San Francisco on May 14. On May 19 we will be presenting at the JMP conference in San Francisco. We will be in Boston marketing with Thomas Weisel Partners on May 20 and presenting at Wedbush Morgan’s MAC Conference on the 21^st. We will be in Europe with Oppenheimer May 28-30. In June we will be marketing in Boston with Piper Jaffray on the 2^nd and presenting at the Sidoti Emerging Growth Conference on the 3^rd, and Oppenheimer’s Communications and Technology Conference on the 4^th.

Additionally, we will continue our virtual visit program, which is a monthly introduction conference call for investors new to Volterra. Please contact Heidi Flannery, Investor Relations for Volterra, if you would like to participate in any of these activities. Heidi can be reached at [phone].

A web cast of today’s call will be available on the company’s web site until Monday, May 9, 2008.

Thanks for joining us today.

Operator

Ladies and gentlemen, this concludes the Volterra First Quarter Earnings Conference Call. If you would like to listen to a replay of today’s conference, please dial [phone] or [phone] and enter pass code 11112136.

Thank you for your participation. You may now disconnect.

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