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Applied Micro Circuits Corporation (NASDAQ:AMCC)

F1Q 2013 Earnings Conference Call

July 25, 2012 17:00 ET

Executives

Bob Gargus – Senior Vice President and Chief Financial Officer

Dr. Paramesh Gopi – President and Chief Executive Officer

Analysts

Ambrish Srivastava – Bank of Montreal

Jason Reckel – Oppenheimer & Company

Vijay Rakesh – Sterne Agee

Patrick Wang – Evercore partners

Sandy Harrison – Wunderlich

Brian Thonn – Kingdom Ridge Capital

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Applied Micro Circuits Corporation Earnings Conference Call. My name is (Kolbe) and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) And as a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Bob Gargus, Senior Vice President and Chief Financial Officer. Please proceed sir.

Bob Gargus

Good afternoon, everyone and thank you for joining today’s conference call. On the call with me is Dr. Paramesh Gopi, our President and CEO.

Before turning the call over to Paramesh, I want to remind you that forward-looking statements discussed on this call, including guidance we will provide on revenue, non-GAAP gross margin, non-GAAP operating expense, and certain other financial targets are based on the limited information available to us today. That information is likely to change. There are numerous risks and uncertainties that affect our business and may affect these forward-looking statements, risks such as product development and introductions, design wins, manufacturing and supply availability, product demand and mix, the impact of personnel reductions and departures, employee relations and the integration of new or moved operations, risk resulting from macroeconomic conditions and markets, and other risks as set forth in our SEC filings, including our Form 10-K for the year ended March 31, 2012.

Our actual results may differ materially from these forward-looking statements. Applied Micro assumes no obligation to update forward-looking statements made on this call. I also want to point out that Applied Micro has several analysts to cover our stock and this creates a range of variability relative to the Street financial models. When we say Street estimates, we mean the consensus of the major analyst models and not necessarily the guidance that was given by the company.

With that, I am going to turn the call over to Paramesh. Paramesh?

Dr. Paramesh Gopi

Thanks, Bob, and good afternoon everyone. We will cover the details of the quarter ending June 30, 2012 which is the first quarter of our fiscal year 2013 as well as provide guidance going forward. Our June quarter revenues were $41.3 million and were a $1 million higher than the midpoint Street estimates of $40.3 million.

Before I go into a detailed analysis of these results, let me give you a high-level overview of our vision and update you on the execution of our company’s transformation currently underway. Two years ago, we foresaw a disruptive trend emerging in the form of warehouse scale data center innovation leading up to fundamental changes by parts of enterprise networking and information technology were progressively moving into the cloud. This is evidenced by the fact today that by the end of calendar year 2012 up to 20% of businesses worldwide will own virtually no ID assets on premise according to Gartner.

These trends continue to fuel the need for low cost, low total cost of ownership to have our platforms with low energy consumption and high manageability resulting in a high growth cloud server market. I am happy to say that we made significant strides in establishing ourselves as a key enabler and a market category leader providing category leader providing innovative, highly integrated, server solutions. While we continue to stay focused on our base business, we made a strategic move towards leveraging our asset base to enable and lead this new high growth large time cloud computing and connectivity marketplace. This forms the momentum required to move up from a small cap telecom semiconductor supplier to a madcap high growth company.

During this call, we will highlight significant proof points of our progress to-date. Our product strategy is anchored around X-Gene, the world’s 64-bit ARM server platform delivering unparallel performance of the lowest total cost of ownership or TCO along with our entire portfolio of data center interconnect technologies that spans servers, racks and backlinks. Consequently our addressable market has almost quadrupled to approximately $7.5 billion and can be broken down as follows.

Number one, cloud servers projected to be $3.1 billion in 2016 with a four year CAGR of 31%. I’m excited to note that we’ve now achieved critical mass to bring APM’s X-Gene 64-bit ARM server on a chip to serve this high growth market. To contextualize while the software infrastructure which consists of Linux, Apache MySQL, PHP and Internet scripting language and Hadoop a distributed file system has come to become the defector standard for almost all internet infrastructure. The hardware has more recently come under a similar trend via the OCP, the Open Compute Project Initiative led by companies such as Facebook.

The cloud server category is distinguished by its total cost of ownership requirements which are dominated by operating power or energy consumption and session density. Data centers today consume an estimated 2% of the world’s electricity and this is doubling every five years. Open Compute represents the lowest common denominator of these requirements and for the first time in the history of the server market Open is the server architecture domain to ARM their by fueling this market.

Number two, data center interconnect projected to be $1.9 billion in 2016 with a CAGR of 12%. Today’s entire cloud infrastructure depends on high density, low power packet optical interconnect. From the links that ties server chips to the optics that span racks of servers to the packet optical routers and modules that connect data centers. High performance, low power connectivity and 10, 100 and 400 gigabits per second along with digital signal processing are an absolute requirement for the hyper-exponential growth of data traffic. Rounding out our addressable market is an additional $2.5 billion of computing in the embedded processor space covering a multitude of markets ranging from routers, to NAS boxes, to Dopa Forax switches and wireless access points among others.

Having defined our target markets I would like to take through the list of our products and describe how they fit into our addressable markets. Number one, X-Gene our ARM 64 bit server platform comprises the world’s first 64 bit server plus multi-core, multi-gigahertz ARM processor server on chip integrating low power, high performance networking and connectivity interfaces along with our custom built revolutionary 64-bit ARM core and our own scalable terabit fabric. Madeira, the world’s first CMOS 100 gig coherent transmitter silicon platform, our break through technology will power the world’s interest data center packet routers and switches enabling cloud service to talk to each other across high speed low latency links.

Gearbox, the world’s first 28 and 32 gig CMOS backlink translation devices which connects server chips and racks together seamlessly allowing unprecedented densities for cloud servers within the data center. Number four, PQX family the world’s first OTN and Ethernet platform and the industry’s leading converged any port, any protocol chipset that connects enterprise private clouds to service provider telecom networks.

Number five, Packet Pro family, our embedded processor products that combine power and ARM processor architectures and serve as the foundation for enterprise and cloud gear including top of the rack switches and wireless access points. All of our investments have portions that will be leveraged into the X-Gene platform and along with Tier 1 strategic basic developments will contribute an estimated $150 million to $200 million excluding X-Gene to our top line over the next 18 to 24 months.

Before I turn the call over Bob I’d like to talk to you about the most exciting part of our computing business X-Gene. Let me start with the review of our customer traction and set expectations as to events that will transpire between now and silicon sampling. First, I would like to remind all of you that X-Gene was conceived as a result of deep conversations applied micro has had over the past few years with the world’s top tier cloud service providers and server OEMs. We have been laser focused on building a platform that will ultimately provide a breakthrough low PCO points for the growing cloud infrastructure.

Today I’m extremely happy to state that we have now established a substantial customer partnership with one of the world’s leading server OEMs and are on track to deliver a full fledged platform solution in the form of a blade as well as a self-contained micro-server chassis node for their cloud data center applications. This represents a critical step forward for Applied Micro and the entire ARM server market.

I would like to remind you that the cloud server category based on ARM has now been fully validated by various OEMs. In addition, this has been corroborated by industry analyst and at least one of the leading analyst research reports has created a new ARM server category and has designed Applied Micro as a leader in this category. We expect to make several public announcements around these and other OEM platforms between now and the end of our calendar year.

Given the advance nature of our engagements on the customer front, I would like to spend a few minutes talking about the ARM ecosystem and it’s readiness for the server space. For starters, I would like to note that we have five FPGA platforms being actively used in networks by ecosystem and Tier 1 OEM partners. These have proven invaluable in paving the way for creating a full fledged software tool chain and ecosystem for 64-bit ARM servers.

The principle components of the ecosystem are BIOS, example, when those would include AMI and Phoenix, the compiler tool chain originated by APM, ARM, and the open source community and an operating system provided by company such as Red Hat. We are pleased to report that as of last week, we have secured full support for the world’s first 64-bit ARM server platform based on our silicon from Tier 1 vendors in each one of these categories.

Please note that as with our customers, you would expect to see public announcements regarding our partnerships in each of these areas between now and the end of the calendar year. Finally, I would like to update you on our silicon development. We are fully on tract to had silicon in customers hand by the end of our fiscal year or early Q1 fiscal 2014.

Please note that the customer designs using our silicon have already commenced meaning that we expect simultaneous end systems and chassis bring up and beta testing to be coherent with our own internal silicon validation. This is a critical step forward toward establishing our sales as the category leader in the cloud server space.

With that, let me turn the call over to Bob. Bob?

Bob Gargus

Thanks, Paramesh. First quarter revenues were $41.3 million, down $7.5 million or 15% compared to the prior quarter and down 32% compared to the same quarter a year ago. The $41.3 million was approximately a million dollars above the street consensus. Computing revenues were $22.4 million and decreased by $0.4 million or 2%. Connectivity revenues were $17.4 million and decreased by $7.6 million or 30% and licensing revenues were $1.4 million and increased by $0.4 million or 40%. The product only revenues were $39.9 million and were down 17% sequentially from last quarter.

Sales in North America accounted for products only 39% of total revenues, sales to Europe contributed 17% and sales to Asia contributed 43%. Wintec, a global vendor accounted for approximately 18% of June quarter revenues. There were also 18% in the March quarter and there was one distributor that was more than 10% and that was worldwide Avnet, which accounted for 28%, up from the March quarter of 22%.

Distributed revenues for the last quarter were approximately $26.9 million compared to $30.9 million for the prior quarter. Inventory in the channel based on sell through numbers decreased to 66 days compared to 82 days for the March quarter. If we exclude the impact of non-cancelable, non-returnable product, this metric was 53 days compared to approximately 64 days last quarter. Overall as expected, we saw the inventory levels in the channel decline and we expect this metric without NCNR to approximate 60 days going forward.

Turning to the P&L, our first quarter non-GAAP net loss was $0.01 or one penny better than the street consensus, a $11.4 million or minus $0.18 per share compared to the non-GAAP net loss of $6.2 million or $0.10 per share for the prior quarter. Our non-GAAP operating margin was a negative 30.2% of revenue and decreased 15.8 points from the negative 14.4% achieved in the last quarter.

Our non-GAAP EBITDA for the quarter was a negative $9.6 million or 23.4% of revenues compared to $4.2 million or 8.7% of revenues for the prior quarter. First quarter non-GAAP gross margins including licensing was 57.8% compared to 58.7% for the March quarter. This is a little bit lower than our guidance of 59% plus or minus half a point. The delta was primarily due to product mix with our compute products being a slightly higher portion of our overall revenues relative to our internal estimates going into the quarter.

Looking forward to the September quarter, we are expecting licensing revenues to be approximately $1 million and we are expecting overall gross margins for the September quarter, this is including licensing, to be approximately 57% plus or minus half a point. Non-GAAP operating expenses were $36.3 million compared to our guidance of approximately $37 million. The operating expenses were lower than our guidance mainly due to certain OpEx control measures as well as the timing of certain R&D expenses moving into the next quarter.

For the September quarter, we expect our operating expenses to be in the range of $37 million plus or minus to $0.5 million. Our non-GAAP interest and other income was $0.7 million. Interest income is expected to be approximately $0.7 million for the September quarter and we expect our tax rate to continue at the 3% rate for the next several quarters. The share count for EPS purposes was $62.4 million shares. During the quarter, we bought back 125,000 shares and in connection with the Veloce acquisition, we issued approximately 2.5 million shares towards the end of the quarter.

Looking forward at the September quarter, we expect the share count to be approximately $65 million. The increase is primarily due to the full quarter impact of the 2.5 million shares we issued for the Veloce acquisition plus the impact of additional shares we will issue for the quarterly Veloce payments and for our internal ESPP programs. Although the actual shares that will be issued for the ESPP plan is not known at this time and will depend on our stock price at the time of issuance, we expect that in total this will approximate about 1 million shares.

Turning to the balance sheet, our cash and investments totaled $96.1 million or approximately $1.49 per share at the end of the first quarter, a decrease of approximately $17.7 million from the March quarter. The decrease results primarily from the following four items. One, net cash outflows from operation of approximately $20.5 million including a cash payout of $12.8 million related to the initial consideration for the Veloce acquisition. Two, proceeds from the sale of a strategic equity investment that was a favorable $7.1 million. Three, proceeds from common stock issuance of a positive $3.3 million and outflows for other miscellaneous items of $2.0 million. And four, $5.6 million investments in CapEx, most of this was capitalized new product mess-ups.

Our working capital is approximately $114.1 million compared to March, which was a $118.6 million and we have no long-term debt. Our DSO at the end of December was at 36 days and I think at the end of June, it was 36 days and we expect to be in the range of 30 to 42 days going forward. Our overall inventories at the end of June were $22.6 million and decreased by approximately $0.7 million compared to the $23.2 million at the end of the March quarter.

Our inventory turns for the December quarter were 3.1. This decrease is consistent with lower revenues last quarter. Our inventory levels are adequate in light of inventory that we hold that is in high demand and we expect to get back to a turns number close to 4.5 as the general macro conditions improved.

Turning to GAAP. As you know, our non-GAAP financials excludes certain items required by GAAP such as amortization of purchased intangibles, items related to other than temporary impairment charges on our investment portfolio, Veloce acquisition considerations, acquisition-related expenses or recoveries, stock-based compensation expense, impairments and gains on strategic equity investments, and non-cash tax adjustments. The timing, occurrence and magnitude of such items can be difficult or impossible to estimate for future periods.

Our net loss on a GAAP basis was $23.4 million versus a net loss of $67.6 million last quarter. The difference in our first quarter GAAP net loss of $23.4 million and our first quarter non-GAAP net loss of $11.4 million is a delta of $12.0 million. The $12 million is primarily comprised of the following: a) $2.3 million for the acquisition of Veloce, b) $8.5 million of stock-based compensation, and c) $1.3 million of amortization of purchase intangibles.

Looking forward to the September quarter, we expect certain known GAAP charges, such as stock-based compensation and amortization of purchased intangibles to continue. A complete reconciliation between GAAP and non-GAAP financials can be found in our earnings release, which can be found in the Investor Relations section of our website. Please note that there is no reconciliation for forward-looking non-GAAP measures.

That concludes my remarks. And let me turn the call back over to Paramesh. Paramesh?

Dr. Paramesh Gopi

Thanks, Bob. Bob already provided you with the September quarter guidance for the OpEx and gross margins and several other P&L items. We expect our revenues to be up 8% to 12% from the June quarter. Here we have seen our opening backlog for the current quarter grow from $26 million last quarter to $38.6 million this quarter and we saw orders improve such that we had a book-to-bill of approximately $1.2 million for the quarter, which means that approximately 87% of our September quarter guidance was already on the books at the start of the quarter.

We will expect to do approximately 13% or roughly $5.9 million in turns to achieve our projected September product revenues of approximately $44.5 million. I will also remind everyone that we did this while reducing inventory in the channel. We are pleased with this performance and are tracking ahead of our prior guidance. That said, the macro climate and short lead times limit visibility into the March and December quarters. We remain cautious particularly as it relates to the second half of our fiscal year barring delays due to macroeconomic conditions we feel we are very well-positioned to deliver in accordance with our plan.

Before I turn the call over to Bob, let me summarize the catalysts that I see forming the basis for our confidence and attaining the goals we have previously made out. Our internal target is to oblige the business to be breakeven exiting our fourth fiscal quarter. In order for us to achieve breakeven, we need to be at a revenue run rate of between $55 million and $60 million per quarter combined with some reduction in operating expense. So, why do we believe we can get there from the $41 million in revenue we did this last quarter.

Let me summarize these growth vectors. In the computing business, the key revenue vectors are number one, enterprise ASICs, several key design wins, single source and placed around. Number two, our leadership position in wireless access processors enables us to lead and take advantage of the transition from 802.11n to 802.11ac. Number three, our leadership position in top of the rack switches and enterprise and cloud switch platforms with our packet for embedded processors will further expand with a continued growth of 10 gigabit per second uplinks for cloud data centers.

In the connectivity business, the key growth vectors are number one, data center packet edge drivers, number two, data center 100-gig service provider of telecom to packet edge switching, or PQX products. And number three, 100-gig optical backlinks and modules, our Gearbox and Madeira products. We are at the cost of all of our hard work over the last couple of years finally bearing their due financial rewards. Again, to reiterate, we are cautiously optimistic on the revenue ramp in the second half of our fiscal year unless there is an unexpected macro meltdown. With that, I will conclude my remarks and turn it to Bob for the Q&A session. Bob?

Bob Gargus

Thank you, Paramesh. Just before going to Q&A, let me specifically recap our guidance for the September quarter, one, total revenues to be up 8% to 12% sequentially with the midpoint of $45.5 million, two, total gross margins of 57% plus or minus half a point, three, OpEx roughly $37.0 million plus or minus $0.5 million, interest income of $0.7 million, and finally a tax rate of 3%.

That concludes our formal remarks. Operator, please provide instructions to our listeners for the Q&A process.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ambrish Srivastava with Bank of Montreal. Please proceed.

Ambrish Srivastava – Bank of Montreal

Thank you guys, good to see some stability on the top-line here, a couple of questions on the top-line just staying with that as well as the gross margin, Paramesh. Within the sequential increase, how much of the increase is due to just business bouncing back and although, we all know the business not only bouncing back because it’s a whole bunch of mixed data points out there, but how much of that is new products versus kind of what’s your core is coming back to some normal level. And then on the gross margin front, when do we comeback to the kind of the 59% model and then I have one more follow-up.

Bob Gargus

This is Bob. Coming back to the 59%, we require as to get back to a more even mix like we used to have between the process there and the transport business because as you know, there is about 30 points difference in the gross margin or the transport type for connectivity products and there is for the process of products. So that’s going to take a little bit of time particularly given some of the announcements that we have seen out there that our mix relative to the Telco and carriers and provide a service provider kind of environment.

On the processor side, part of what’s dragging down a little bit is we do have some design winds and some shipments that are occurring more in the consumer or SMB market and we previously telegraphed that those are actually closer to around 30% gross margin. So, that will be good long-term because they add to the volume, short-term. Until the rest of the business picks up, there are little bit of a drag on the overall gross margin.

In terms of what percent is the business rebounding, we did mention last quarter that we had a transition going on. We have some of our vendors switching from old products to new where we had the burn off some inventory and we said that would take between one and two quarters. So, I think we are still sticking with that so, I think we will see that finish burning off this quarter and as a result of that may be a couple of million dollars as well as this quarter and I think the number last quarter were closer to four to five when we went down in the 40. So, Ambrish, I think just to add some color to got into address the question that you asked in terms of new products. The lift that you are seeing this quarter is already a result of us cannibalizing our sales are just to be clear on that we indicated last quarter that we had an unusual alignment of circumstances relative to our key customers going through their own product transitions.

The lift that you are seeing is also driven by the fact that the new products are starting to take whole. The lift that you will see in the future quarters are in terms of the percentage of revenue that they will contribute would be a lot greater. But we are in a very, I’m very encouraged by the fact that I will say that the business has rebounded from the macro climate rebounding to the extent that we needed to see a rebound to get this lift. I don’t know whether that I answered your question.

Ambrish Srivastava – Bank of Montreal

No, you did and it’s good to see that you guys laid out a plan and you are executing to that here. Longer term and may be related to your longer term and what’s going on in the marketplace that 32-bit private company, because it has put out a barrage of press releases on their ARM server effort. So, Paramesh to the extent that you can please help educate us as to what they are doing versus what the 64-bit vision that you guys have and that’s it from me, I’ll go after that.

Dr. Paramesh Gopi

Great, well, I think it’s a really good question. Let me start by saying that we will love ARM be exceeded into the ecosystem. So, for us than ever we see a company with private or public talking about low PC or servers, it goes one step further in validating a market that is in I call it at the tipping point of transition. I have a feeling that the stick is already dipped more than 45 degrees. So, I think the efforts are lauded from our perspective, from a market perspective. I think it just goes to show that when we – if you look at where open stack is or where (indiscernible) are investing their calories. They are all investing their calories to solve a major industry problem.

I think what we’re saying is that is totally legitimate however if you look at the market in terms of today’s code I keep telling back to it right? We’re not looking for a – we don’t want to show or something that unnatural into a market especially if you are talking about Tier 1 server OEMs we’re talking about Tier 1 ecosystem OEMs. I want to highlight to you once again what I said on the call this is the most exciting call for us because they finally how they publish it that we can announce over the next x month that will come on publicly and tell you where we are from a ecosystem perspective, from a customer perspective, from a real chassis perspective, because I think what we’re doing is taking the - I’ll call it, the seeding of an ecosystem to the next level to their products and a real market will move off into dealing with real ARM servers right? So, I think great two point open stock as you probably know is used by a almost very, very, very tiny portion of the enterprise and very tiny portion of the large scale data centers. But once again I want to say that given the fact that we showed in a FPGA platform running LAN and given the fact that we are today announcing a Tier 1 server OEM partnership on this call you should – where we feel very, very optimistic and we’re very encouraged by the fact that we’ve now moved beyond open stack to real stack into a real server OEM into our real platform so very, very good stuff.

Ambrish Srivastava – Bank of Montreal

Thanks. Good luck.

Bob Gargus

Ambrish, this is Bob, one other data point. If you went back a year ago to last September and you look at what percent of our revenues came from products introduced in fiscal year ‘09 or after at that point in time there was only about 7% of the revenues. And today for this quarter its over 15% I mean June quarter just completed. So, I might give you little example of how its improvement.

Ambrish Srivastava – Bank of Montreal

Yeah, that’s helpful. Thanks.

Operator

Your next question comes from the line of Rick Schafer with Oppenheimer & Company. Please proceed.

Jason Reckel – Oppenheimer & Company

Hey guys this is Jason Reckel calling in for Rick. Just a follow up on some of your comments earlier, the traction you guys are having at the OEM level with X-Gene, just one of this see maybe the traction you guys are getting at the ODM level and whether you’re engaged all at that level? And then secondly you’ve talked about kind of maintaining a year lead over a year 64-bit on competitors I’m just wondering if you see though you still got that your lead and kind of where you stick competitively against the other 64 bit vendors? Thanks.

Bob Gargus

So, I want to say two things answer your question directly I referred to open compute if you go back to the transcript I can confidently say that we are at the front of the open compute not leadership in terms of dealing with a standard lowest common denominators of the platform in terms of being able to run real server locals and the real server platform that will be fundamentally and ODM platform. So you should probably assume that we think Tier 1 server OEM, Tier 1 server OEMs are Tier 1 server OEM and open compute is the ODM right? So is the ODM platform so to speak completely fully engaged with all of the other ODM top Tier 1 and also remember one other thing in terms of 64 bit ARM I think there is a lot of there is one thing we want to say is that we were the first architecture licensee we build our own core our own fabric from scratch we didn’t license anything from except set of documents. So we still believe that from our performance perspective and the server class metrics perspective where we had and that year still holds in larger month.

Jason Reckel – Oppenheimer & Company

Okay got it thanks for the clarification. And then kind of maybe moving to the breakeven point I think it looks like you maybe lowered it in terms of the revenue line maybe 5 million somewhere we talked about last quarter I’m just wondering where that’s going to come out of OpEx I mean what’s the plan to get you down to that breakeven level?

Bob Gargus

The plan is simple we’ll find ways to reduce our OpEx, and those will happen probably in the second half of this year but I don’t know that we’re in a position where we want to get into a lot of detail of those just yet.

Jason Reckel – Oppenheimer & Company

Okay. And then Bob, I think you mentioned some additional quarterly Veloce payments going forward. Just wondering you said in the past that those would be split kind of 50% stock, 50% cash is that kind of consistent with your thinking now. Just how do we think about those Veloce payments over the next can have 12 months or so.

Bob Gargus

So for the next 12 months, they will be split 50-50 because there are the continuation of the $60 something million or so that we signed up for eventually though get to another tranche of milestones and if we pay on those milestones can be paid in a cash and stock ratio that can be said at that time. Okay, so we haven’t determined what those will be, but the milestones at the same time have not yet been met.

Jason Reckel – Oppenheimer & Company

Okay, that’s it from me, thanks guys.

Operator

Your next question comes from the line Vijay Rakesh with Sterne Agee. Please proceed.

Vijay Rakesh – Sterne Agee

Yeah. Hi guys, just going back to what Paramesh saying about the one OEM seller design that you guys have. I was wondering is that the general availability and when do you see that be announcing. Do you see revenues from that second half year or in first half of next year?

Dr. Paramesh Gopi

I want reiterate one thing right, we are category leader, creating market, driving the brand new technology and an ecosystem. Being a small company if you want to make sure that we had the right amount of call it financial reality to that. If I want to tell you what the forecasts are, I would probably be sharp by Bob because it’s amazing we see an amazing incredible market penetration from the Tier 1 person that were partnered within a clear backed revenues. However, the timeliness of that revenue is a function of their datacenter investments, their fundamental view on what applications in the cloud build the first transition to this type of platform. So, I think we want to maintain what we have always mentioned in terms of the ARM revenue. And I’ll leave Bob to kind of give you the color on that.

Bob Gargus

When the announcement comes out, it will carry with it a lot of way, a lot of brand recognition, but the revenue for this will not happen until late next calendar year at the earliest and probably calendar year ‘14 in the first part of it to have any meaningful revenue.

Vijay Rakesh – Sterne Agee

Got it. Again when you look at the pipeline for that do you see additional rents with Tier 1 guidance this year?

Bob Gargus

We could see more than just as one partnership happening in the next few quarters.

Vijay Rakesh – Sterne Agee

Okay. Last question is I mean, you mentioned on the new products margins are slightly lower. When you see that mix and margin improving back to kind of the high 50s kind have level, I don’t license – when do you see the product margins improved there?

Bob Gargus

So can you forecast for me the CapEx for the service providers in the carriers if you think give me that number with accuracy I can tell you?

Vijay Rakesh – Sterne, Agee

Okay, okay, got it. Thanks.

Bob Gargus

Okay.

Operator

Your next question comes from the line of Patrick Wang with Evercore Partners. Please proceed.

Patrick Wang – Evercore Partners

Hi guys, just a couple of quick ones to start off, Bob, can you go over, I want you to quickly go over the recovery portion in terms of the guys of the September quarter because you said that expected to be a bit of resumption post inventory burn. How much of that?

Bob Gargus

Couple million.

Patrick Wang – Evercore Partners

Okay.

Bob Gargus

Remember we mentioned before that the transition because of the – all the products dropping often the new we said that was probably in the five to seven range. And I think about $2 million be a quarter and half. So, I think there is about $2 million more to comeback this quarter.

Patrick Wang – Evercore Partners

Okay, got it. And then on the Veloce R&D expense, I don’t know if missed it, but can you remind us kind of what the Veloce expense of this quarter and how to think about that for the full year.

Bob Gargus

Yes, well. I don’t think it’s change, but also I wouldn’t refer to it is Veloce, what we refer to as the ARM spending and that was right around $12 million for the June quarter.

Patrick Wang – Evercore Partners

Okay, got you. And the full year target is still about $50 million?

Bob Gargus

Yeah, close to $50 million.

Patrick Wang – Evercore Partners

Close to $50 million, okay, got you. And then you talked about some pretty good booking trends and backlog coverage. Can you go into a little bit more detail about that – it sounds like a pretty healthy number, it sounds like you guys are being somewhat conservative here, but to some color please?

Dr. Paramesh Gopi

So our intent is to be conservative because the lead time for placing orders is flow and so there is not a lot of visibility into the December quarter, I mean, being blunt, okay and at the same time that’s going on, there is a number of negative points coming out in the marketplace, a couple involving our top five customers whether it’s CTE or ALU as an example. And so it’s hard right now to make a judgment what that might mean for the December quarter.

So from our perspective, we are giving you guys a September number that’s above, what’s your current expectation is and anything above that given the lack of visibility for December and March, you can call it conservative call whatever you want. But we are going to display at that way. So, Patrick one other very important thing to note and it kind of lays with what Bob said, the biggest thing as we’ve noticed as we run checks after last quarter in terms of an entire vendor service provider ecosystem and us is that the planning horizons, I think you probably read the reports that carrier CapEx has loosened up. It’s been about 2% to 2.5% been released into the system over the last four to six months depending on big geography look at.

But the amazing part about it is a planning horizons are all now being more one to two quarters so if you go back to operators, they are not – they are buying horizon in less than – it used to be a year. Now, it’s two quarters to one quarter depending on which operator, which is something that we’ve never seen into the business probably over the last I would say and I got here in 2009, right so, it’s very different. So that’s the other thing that we’ve noticed and things are tightened up and as things have most in terms of data plans for mobile devices as well as the wired backhaul capacity constrains. We’ve seen all the major service providers shortened their planning horizon a lot.

Okay and the range of forecast out there, I mean, some of the “experts” guide the forecast is would say seasonally that the amount of CapEx increases in the second half and some of one which what I miss up from that roughly 2.5% in the first half of the year to almost 5% in the second half and then I can turn around and find another guide that’s forecasting it to be 0.8% and so, it’s almost literally like a dart board or you could throw a dart at it right now if there is so many variety of opinions out there and they are not anywhere inside of one standard deviation.

Patrick Wang – Evercore Partners

Got it, the recent commentary referred from AT&T and Verizon is that give you any more confidence in terms of trends over the next couple of quarters.

Bob Gargus

For North America, but not beyond that.

Paramesh Gopi

Yeah.

Patrick Wang – Evercore Partners

Got it. Okay, then I want to kind of move over to real quickly, congrats on announcing that Tier 1 server partnership, I think that’s kind of a big deal and you also talked about the open computer also now opening itself to ARM. Can you talk about some of the implications there is a lot of folks I know datacenter guys are looking at that and really embracing with open arms, but what’s the implication in terms of getting you in those types of – I guess open source hardware designs?

Dr. Paramesh Gopi

Yeah so one thing to talk about right, the world is always talked about open stack and that’s the type of stock that is software is always been I call it open source so to speak. I think Facebook took a really major lead forward last year when they decided to go out there and for lack of a better were open source of hardware server platform, which means you essentially get a consortium of companies together be a good – starting with ODM community, all the way to the guys, the cloud service provider like the Facebook to the world and now the banks, I believe even Goldman Sachs if I’m not mistaken as cheering one of the key committees in the open compute project so, the open compute project has two things, it actually open sources the hardware design of cloud servers and to a large extent, it’s been architecture agnostic. In other words whether its instruction (indiscernible) it’s pretty much architecture agnostic.

Obviously, the first generation of all the open compute hardware was all x86. But given the fact that we’ve led the 64-bit kind of ARM contingent and we are going to be out there for the first level of open hardware. It essentially does two things, it changes the access – the hardware access design point. In other words you can now go off the web and download a design for an open source ARM 64-bit cloud server with our components end-to-end. And then graft things like Hadoop and LAMP Stack on top of it. So, think about this is very powerful, right. You now have a multi-OEM, multi-ODM, multi-service provider body that is not counts by an IEED or that is not encumbered by any regulatory organization or SIG. But is parliament to Open Source and change the value point for servers, which has never happened in the history of the server industry, right. So, we will – our target is to be the number one ARM 64-bit Open Compute Platform of reference that any Tier 2, any ODM or any OEM who wishes to build a cloud server can just cut and paste our hardware into their infrastructure.

Patrick Wang – Evercore Partners

Have they announced this reference design yet?

Dr. Paramesh Gopi

They will announce reference design once we basically have our silicon on a platform, but you should assume that I mean we are fully participants so we actually members of the entire Open Compute community and we are the drivers for the ARM 64-bit platform.

Patrick Wang – Evercore Partners

Got you. That’s great news. And then last question for me. You guys said I guess a little better than expected cash flow last quarter what do you think you guys do this quarter based on point of guide?

Bob Gargus

Do you have another question you can ask while I have to look at that up a second.

Patrick Wang – Evercore Partners

No, we can follow-up afterwards, that’s it for me. I appreciate it. Good job guys.

Dr. Paramesh Gopi

Thanks Patrick. I told it won’t take me a lot of time. I have it here. I think you will probably see the cash go down probably $10 million to $15 million from the $96 million and remember we stated that we probably get down to about $70 million roughly by the end of the fiscal year.

Bob Gargus

Yeah, but I think I would just to be clear Patrick I want to make sure that there is cognition on everybody's part that we are talking about a massive market expansion strategy that is underway. So and we are talking about a breakeven commitment that we made to the financial community by the end of the year. Suffice to that I think we are doing the most I’ll call it significant job leveraging what we need to leverage with the least cash burn to go after a big market. I don’t think of any small company our size that is doing look for doing.

Patrick Wang – Evercore Partners

Totally understand. I appreciate it.

Operator

(Operator Instructions) Your next question comes from the line of Sandy Harrison with Wunderlich. Please proceed.

Sandy Harrison – Wunderlich

Great thanks. Paramesh in your prepared remarks you talked about several of your products or the newer products you have they’re ultimately going be $150 million to $200 million in the next 18 months, you gave some qualitative points on there. Is there anyway you can give some quantitative points about which ones you think will be out in front the most which ones you think have the greatest opportunity to drive the growth in the close of many times. Just trying to hang some numbers to that so we can figure out the way to sort of measure your progress outside of interesting?

Dr. Paramesh Gopi

Sure, so I think the right way to do let me refer back to the prepared comments and you'll feel sort of a little bit of pink-pong effect. Remember that I look at it as two ways right. Our margin line will be determined by a lot of the data center carrier interface products like PQX family that’s already ramping this quarter and is going be the key – I'm sorry the key frame of five integrated parts that will be in almost every leading packet optical platform in the world. The second part of – so that will be the think that is the margins bell weathers so to speak.

In terms of the top line bell weathers there is we've spent over 2.5 years developing six different products from the power architecture space three which have power architecture and then ARM processor on there. And they are all essentially set to RAM these are all TSMC parts. And I think I mentioned I would anchor things around in terms of pneumatics. We are talking about enterprise ASICs for imaging and for enterprise networking, we have been out them in the past, you could actually go back to our transcripts and look at how much NRE dollars we received. Those have not even ramped to 5% or where we want them to be. They are all going to ramp over the next two years, 18 months right. And then in terms of access points you already know that we enjoy a very nice market share in enterprise access point gear for Wi-Fi. You should – with the new DSMC product, we will be driving a completely different cost and performance point that we combined ARM and Power Architecture for all of the first generation and second generation new Wi-Fi 11ac standard, right. So there is at least four major design wins there that we can quantify for you when we get sometime in the future and we should see announcements coming out relative to that.

We have also kind of been very targeted in telling you that if you look at the volume platforms that we ship into and we are slated to ship into anything that ships over a million units in the enterprise or in the datacenter as either Wi-Fi or top-of-the-rack switches. So, you should also assume that the other ASSP that developed are all going into the top tier, top of that switches from the leading networking OEMs in the world, right. So this should give you where that comes from and I think in our prepared remarks last time, we mentioned that it’s nice roughly a 50, I’m sorry, it’s a roughly a 65, 35 mix in terms of revenue between processor and the connectivity pieces, but the margin being exactly the opposite, right, kind of deal.

Now on the connectivity part which is what is really exciting as well, all of the packed hedge rather we talked about. The other cool thing is that if the – if you look at what we announced today – earlier today, we have done something truly phenomenal. We actually built a 100-gig coherent transmitter IC, which by the way were subsidized by two of our lead customers – OEM customers and essentially is the world’s first CMOS 100-gig transmitter IC.

Now that is going to be conceivably the top 50% of the market will use that and in fact, I would say the top 30% of the market pay for. So that’s a huge substantiation of our value there. And finally all of the backlogs with our gear box, we are going gang busters over the number of people that want to use our CMOS products in the back line space. I believe that our traction and our overall revenue over the next 18 to 24 months on that piece of it alone is going to be if you look at that $150 million to $200 million were in double digit percentages for each one of the mix significant part. So, I hope I give you some contacts.

Sandy Harrison – Wunderlich

Great, thanks for doing that. And Bob a quick one from you, you kind of mentioned in your prepared remarks about I think the $7 million or a little bit more than a $7 million payment for something any protocol on that and do you have any other things like that that you could see pop up in the next couple of quarters to keep your – keep the cash levels where they are.

Bob Gargus

First I see nothing like that popping up in the next couple of quarters. I wish I did.

Sandy Harrison – Wunderlich

I guess sort to say here (one of that).

Bob Gargus

And what it really was is we have an investment in light wire, which was acquired by Cisco and so that acuity investment we had in the result is getting about $7 payment.

Sandy Harrison – Wunderlich

Got it, okay. Thanks guys.

Operator

Your next question comes from the line of Brian Thonn with Kingdom Ridge Capital. Please proceed.

Brian Thonn – Kingdom Ridge Capital

Hi, guys, two quick questions for you. First half, Bob when you are talking about visibility going into Q4, well, I guess calendar Q4 and calendar Q1. You talked about or you don’t have the visibility in booking here, but do you have program that will be ramping that will give you some confidence how our revenues are going there?

Bob Gargus

We have design winds and we have stuff that should rent, but we also have some calendar data points relative to the ALU and CPE and some other announcements. And so to be honest, it’s a little confusing right now and being the mean nasty (ph) CFO, I just take the simple approach to no matter what the sales guys tell me, I’m not going to believe until some orders are placed.

Brian Thonn – Kingdom Ridge Capital

Got it, then moving on the earlier about the 32-bit versus 64-bit for X-Gene. Paramesh, could you just I guess kind of go back and may be we explain again the 32-bit market versus the 64-bit market in terms of kind of market size, why you show 64, who aren’t you participating in 32.

Dr. Paramesh Gopi

Okay. So, let me recap. The server market today, Brian is 100% 64-bit and there is only today several markets whether its cloud or any other enterprise is all 64-bit all of the software whether its open source or non-open source is 64-bit. So, why do we choose 64-bit because the $15 billion silicon server market is 64-bit? That one can run 32-bit ARM to show a very tiny fraction of web workloads in a very low power footprint shows that well the ARM architecture is definitely a valid choice for I will call it try ballooning datacenter tasks. However, it is going to be a really – it’s going to be really a hard for people who are running production 64-bit code to go back and rewrite their code so, let me first say that today’s server market is basically all 64-bit and the cloud server market, which is over the next four to six years is going to grow more than $5 billion is all 64-bit. So that’s the reason we shows the ARM 64-bit architecture to do this right? So, our 32-bit market in our estimation is very small because it’s basically doesn’t know production call today around the 32-bit. Does that answer your question?

Brian Thonn – Kingdom Ridge Capital

Yeah, that’s it.

Dr. Paramesh Gopi

Okay.

Brian Thonn – Kingdom Ridge Capital

Thank you very much.

Dr. Paramesh Gopi

Thanks.

Operator

At this time, there are no further questions in queue. So, I will return the call to Mr. Bob Gargus for closing remarks.

Bob Gargus – Chief Financial Officer

Thank you. We’d like to thank all of you for your participation today. There will be an audio replay of this call available on the Investor Relations section of our website. You can also access the audio replay of this conference call by calling 888-286-8010 and entering the reservation number 137-184-24. We will also file copy of this script in an 8-K with the SEC in the next few days. Please feel free to contact me or call me if you have any additional questions. Again thank you for your participation on the call today and have a nice evening.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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