Volterra Semiconductor Corporation Q2 2008 Earnings Call Transcript

Volterra Semiconductor Corporation (VLTR)

Q2 2008 Earnings Call

July 21, 2008 5:30 pm ET

Executives

Jeffrey Staszak – President and Chief Executive Officer

Mike Burns – Vice President and Chief Financial Officer

Analysts

Tore Svanbert - Thomas Weisel Partners

Vernon Essi, Jr. – Needham & Company

Jeff Rosenberg – William Blair & Company

Patrick Wang – Wedbush Morgan Securities

JoAnne Feeney – FTN Midwest

Nicholas Aberle – Caris & Company

Craig Hettenbach – Goldman Sachs

Gus Richard – Piper Jaffray & Companies

Rick Schafer – Oppenheimer & Co.

Ramesh Misra – Collins Steward (Unterberg)

Presentation

Operator

Welcome to the Volterra second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mike Burns, CFO.

Mike Burns

Welcome everyone to today’s conference call. With me to review our second quarter 2008 results is Volterra President and CEO, Jeff Staszak. As we begin 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 filings with the SEC, including the form 10-Q filed on April 30, 2008 for a detailed discussion of the risk factors that could cause actual results to differ materially from the 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

First I’ll provide a short recap of Q2 2008 and then I’ll talk about our four focus markets. Following this, I’ll talk about Q3 2008 and how the rest of 2008 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 another strong and successful quarter. Revenue for Q2 2008 came in at the high end of our range at $28.7 million versus $18.5 million in Q2 2007 and $23 million in Q1 2008, or 55% year-to-year and 25% quarter-to-quarter increase, respectively.

Non-GAAP EPS was $0.25 versus a $0.07 loss in Q2 2007 and up from $0.13 last quarter. Non-GAAP gross margins increased to 56.5% from 56.1% in Q1.

Bookings came in strong for the quarter, and as a result we are well positioned, from a backlog standpoint, going into Q3. Our inventory increased, but at a slower rate than Q4 2007 to Q1 2008 as our Q2 2008 to Q3 2008 revenue growth becomes more normalized.

As discussed in our April call, we expected growth in Q2 in all four market segments, with modest growth in server and networking and communications, while revenue would double in both mobile computing and graphics. We also expected our margins to remain in the 55% range and to grow our net profit percentage. I am pleased to announce that we met all of our market segment revenue growth expectations, and exceeded our profit expectations through our cost reduction initiatives, spending controls and yield improvements.

As a result, we had an upside to our gross margins, and we fell within all our target ranges on our financial model for the first time in the history of the company. So, we had a record quarter from a revenue, operating margin, and earnings perspective. Again, Mike will cover all these in detail in his financial analysis for you.

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

Server and storage. 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 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 latest 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 in the server and storage market. We are anticipating a Q1 2009 Thurley platform launch and expect to see server growth continuing in 2009 from all our new design activity on this new Intel platform. In the short term we expect our server and storage business to be flat to slightly up this quarter.

Notebook. Our Montevina notebook business design wins 6 to 9 months ago exceeded expectations and are a direct result of our second generation of products for this market that we introduced in the early 2007 time frame. This new product family has given us another significant improvement in our cost performance metric and is providing our customers increased battery life, lower weight, and space savings through our integrated power solutions. We’ve 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 both the chipsets and memory functions. As a result, we expect to see significant market share expansion through this additional content along with the addition of new customers on the Montevina platform. After the launch of this new Intel notebook platform by our customers, later this quarter and next, 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 solutions gains momentum in this large and fast growing market. We received orders early in Q2 and started shipping product as some of our customers began to build their Montevina platforms towards the end of the quarter for mid Q3 shipments. We expect to double our revenue again this quarter in notebooks and see this business growing over the next two quarters as the Montevina continues to ramp through the end of this year and into the next.

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, and later this year we’re moving into some higher volume enterprise-class equipment. Contrary to market sentiment we saw growth from Q1 to Q2 and expect to see moderate revenue growth again in this market for Q3.

Graphics. Our Gen-5 products were also well accepted in the graphics market as the power delivery requirements continue to become more demanding for these high-performance graphics card applications. We had design wins with both AMD and NVIDIA on their enthusiast refresh graphics cards. As mentioned earlier last quarter, we received orders and shipped product in Q1, which continued some into Q2, for AMD’s 3870X2 and NVIDIA’s Geforce 9800GX2 dual GPU cards.

In addition to these cards, we won a follow on enthusiast card in several performance category designs on the next generation GPUs which launched in the spring and early timeframe, as expected. These wins were all single GPU designs with initial street prices ranging from about $299 - $599. We were awarded these wins very early in the first quarter and started receiving orders in late in Q1 for the prelaunch bills in the second quarter. The enthusiast card was NVIDIA’s GTX280 and the performance cards were the GTX260 and AMD’s Radeon 4870 cards. Overall, we are quite pleased with our ability to capture these design wins on the next generation single GPU cards at both customers. Now that these cards have launched, we will be watching for the market and consumer acceptance, with our present expectations that revenue will be flat to slightly down in graphics for Q3.

Guidance. Finally I would like to talk about the business outlook for Q3 2008. Growth in Q3 will come primarily from notebooks, with moderate growth in server and storage and networking and communication applications, while we expect graphics to be slightly down. As a result, Q3 revenue is expected to be up from Q2 in the range of $29 million to $31 million with non-GAAP fully-diluted earnings from $0.22-$0.26 per share. As we discussed at the last call, we expect more normalized growth quarter to quarter for the second half 2008 as the graphics business flattened out with most of the growth coming from our notebook business as the Montevina platform ramps. We expect our non-GAAP gross margins to be in the 56% range.

So, in summary, our primary growth drive in the first half of this year came from graphics, while in the second half of this year growth will come mainly from notebook wins as the Montevina platform ramps. Going into the first half of next year, we expect to see our growth continue from the Thurley platform launch sometime in the first quarter, followed by the additional growth at the end of 2009 coming from the new notebook launch, as we continue to gain market share and grow our content on this new Intel based platform.

I would also like to mention that we will have our first analyst day on Thursday, September 18 from 8:00 am until 12:00 noon at the Grand Hyatt New York. Mike will give a few more details on this in a minute.

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

Mike Burns

Volterra reached a significant financial milestone this quarter. With 55% year on year revenue growth, the company reached the scale to expand non-GAAP operating margins sequentially from 13% to 22%. At the same time, the company received bookings from its broadening customer base to support an outlook for continued growth led by a ramp in notebooks.

The company’s record quarterly sales of $28.7 million were once again based on strong growth across our four market segments. Server and storage, our largest revenue segment, grew 21% year on year, and contributed 59% of company sales. Networking and communications, our steadiest and highest margin segment, grew 23% year on year, and contributed 10% of company sales. Portable and consumer, primarily notebook, our largest market opportunity going forward, grew 118% year on year, and contributed 6% of company sales. Finally, the desktop and workstation, primarily adding graphics cards, grew almost 400% year on year, and contributed 26% of sales.

It is worth noting that the company now has the most diversified revenue base in its history, both in terms of market segment, and also, within each of those market segments among its customers.

Non-GAAP gross margins expanded 40 basis points sequentially to 56.5% for the quarter, as our cost reduction activities offset the product mix impact from growth and graphics and notebook, our two lower margin segments.

GAAP operating expenses for the first quarter totaled $10.9 million, as stock based compensation expense returned to a more normalized run rate after two quarters of being relatively low. Non-GAAP operating expenses totaled $9.8 million. This was up16% year on year, but down 2% sequentially due to lower spending on post-design development activity, offset somewhat by higher employee related expenses. Non-GAAP R&D expense was 19.7% of sales, and non-GAAP SG&A expense was 14.4% of sales.

GAAP operating income for the second quarter was $5.3 million. As a result of the company’s strong revenue growth, margin expansion, and significant operating leverage in the second quarter, on a non-GAAP basis, we earned $6.4 million operating income and expanded our quarterly operating margin to 22.4% of revenue.

GAAP income tax expense for the second quarter was $217,000. On a non-GAAP basis the effective tax rate was 3.2%.

The bottom line on the second quarter is that the company delivered GAAP net income of $5.3 million with basic EPS of $0.22 and diluted earnings per share of $0.21. We earned non-GAAP net income of $6.5 million or 22.5% of sales. Non-GAAP diluted earnings per share for the quarter was $0.25.

Let’s move now to the balance sheet. First of all, we continue to be pleased with our working capital metrics, particularly given the investment in working capital required to scale the business during the quarter. On accounts receivable, day sales outstanding was 49 days. This is down 30 days from a year ago due to our improved collection efforts and payment terms.

On inventory. Days inventory was 79 days, down 7 days from the prior quarter, and up $1.3 million. We feel this is a more comfortable inventory level to support our customer requirements in the third quarter. Days payable returned to a more normalized 41 days, down from the prior quarter which was unusually high due to timing.

The company generated $1.8 million net cash during the quarter and ended with $51.9 million cash and short term investments. There was no stock repurchase activity during the quarter.

In all respects the financial data shows another quarter of strong execution by Volterra, as we scaled to support our customer base and greatly expanded our products.

Let’s move now to the outlook for the third quarter. In the third quarter we expect revenues to grow sequentially, and be within the range of approximately $29 million - $31 million. The midpoint of this range would represent approximately 59% growth in revenue from the third quarter of 2007. This revenue outlook is based primarily on our strong backlog entering the quarter.

We aim to keep our gross margin and spending within our long term model in the third quarter. We expect to maintain quarterly gross margin in approximately 56% range by using cost reduction initiatives to offset this year’s growth in notebook and graphics. We are planning to increase spending sequentially, for additional post design development activity, for recent hiring activity, and for our annual merit raises. As a reminder, for gross margins our long term model is 55% – 60%. For non-GAAP R&D spending, the long term model is 18% - 22% of revenue and for non-GAAP SG&A spending, the long term model is 12% - 15% of revenue.

We expect our international operating structure to continue to produce an effective tax rate in the range of approximately 5% of non-GAAP pre-tax income for the third quarter. Our long term model for taxes is 15% - 20%. With achievement of our goals for revenue, margin, and spending, we would expect non-GAAP earnings per fully-diluted share of between $0.22 and $0.26 for the third quarter. The midpoint of this range would be three times our quarterly earnings per share from a year ago.

We expect to next update our financial results and guidance at our conference call to discuss third quarter results, which is tentatively schedule for Monday, October 20, 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 would now like to turn over the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tore Svanbert - Thomas Weisel Partners.

Tore Svanbert - Thomas Weisel Partners

First of all, you talked about your backlog being pretty solid going into Q3. Can you just elaborate a little on that, especially in reference to where it was last quarter?

Jeffrey Staszak

Yes, we typically don’t give out a backlog number. I can tell you on turns – our turns ended up being a little less than 20% last quarter. This quarter, going forward, it’s going to hit the midpoint. It’s going to be at about that 20% range again. A little more turns that we’re building into the guidance this quarter, and mainly that’s due to -- we've got a little bit better position from our inventory to meet the quarter. Last quarter, as you recall, was a pretty steep ramp, so that was factored in. So, we think turns for Q3 will be in the 20% range.

Tore Svanbert - Thomas Weisel Partners

Good, and if we look at your guidance of 29-31, what are some of the variables there? Is it the turns business and the graphics business? I’m just trying to understand what would get you to the high end versus the low end?

Jeffrey Staszak

Yes, that’s one factor, the turns business and graphics. And that’s expected, that’s the business where we get the least amount of order coverage. So, the turns and graphics business is going to be, certainly, one factor for that.

Tore Svanbert - Thomas Weisel Partners

And then, on the notebook business, I understand that it started ramping this quarter and you expect more next quarter. How about Q4 I’m just trying to understand in which inning we are here this year with the ramps of your notebook business.

Jeffrey Staszak

We would still anticipate the ramp to be occurring in Q4 as well as going into Q1 now, since it did start a little later.

Operator

Your next question comes from Vernon Essi - Needham & Company.

Vernon Essi, Jr. - Needham & Company

You said that you would see the ramp in the fourth quarter on notebooks – you’re expecting that?

Jeffrey Staszak

Yes. We said we’ll double revenue from Q2 this quarter, and we would expect also to see revenue growth in Q4 and going into Q1.

Vernon Essi, Jr. - Needham & Company

Your market segments, I want to make sure I had the percentages right. When I add them up I get 101. I don’t know if you want to give out hard numbers there, or if I missed something there. Would you mind going over the market segments again?

Jeffrey Staszak

Server and storage is about 59%, network coms is about 10%, graphics was 25% to 26%, and consumer portable was 6%.

Vernon Essi, Jr. - Needham & Company

Tax rate, I know in the past you’ve discussed getting back towards that 15% in 2009. Should we still be modeling high single digits in 2008?

Jeffrey Staszak

Yes, for 2008, for Q3, we’re looking at approximately a 5% rate and we would hope to keep that through Q4 as well. But looking into 2009, our long term model is 15% - 20%, and probably the lower end of that is a good place to be.

Vernon Essi, Jr. - Needham & Company

Okay. And then just in terms of -- in the past, Jeff, I know sometimes you’ve talked about -- and I hear subtle hints of this, but I don’t think it seems to be happening. But, how is the pricing environment on this? Especially on the graphics side, you had said, I think, prior, that you were seeing a little bit of possible pressure out there. I assume that’s mitigated given the success of this quarter. How is the business and backlog looking on a pricing business?

Mike Burns

Well, again, most of the pricing is completed when we win the design. And most of that occurred several quarters ago – at the beginning of this year, right? So, now, there are some quarter to quarter price breaks that are built in, but the pricing pressure we experienced every time we go compete for a new design.

Vernon Essi, Jr. - Needham & Company

Okay, so stable?

Jeffrey Staszak

Yes, it’s relatively stable. There is pricing pressure out there when we’re going after new designs and then, as I said, for some customers we have quarterly price breaks already into the equation.

Vernon Essi, Jr. - Needham & Company

Okay, and just finally on the network and com – should we be looking for -- it sounds like you’ve got a little but of business back there for the fourth quarter. Should we be looking for a lift there that’s material? I know it’s a small number where it is, but do you expect it to be stable for the rest of the year?

Jeffrey Staszak

We’re growing a couple hundred thousand dollars a quarter and I don’t think that’s out of line.

Operator

Your next question comes from Jeff Rosenberg - William Blair & Company.

Jeff Rosenberg - William Blair & Company

Wanted to ask, on the graphics side, if you could give us some delineation about -- if you look at the ramp you saw this quarter, how much of it was the result of the movement towards the performance line instead of just the enthusiast. Can you give us a feel for how much your growth was expanding the market, as opposed to just ramping with the new products, and the enthusiast?

Jeffrey Staszak

I would say that a large chunk of the revenue was all due to the launch of these performance based cards.

Jeff Rosenberg - William Blair & Company

So, flipping that around, was there good growth? I mean, I assume you’ve seen some substantial growth from where you were a couple quarters ago in the enthusiast too, is it 50/50 at this point, is it still 75/25 in favor of the enthusiast? How does that break down?

Jeffrey Staszak

I don’t really have a breakdown for you. Last quarter we did $3.4 million or $3.5 million – that was primarily all enthusiast. I would say that the majority of this quarter’s growth was all performance. So, I don’t know, 60/40 – however you want to break it down. But, we don’t have it broken down. We ship the same product to the performance cards, as well as the enthusiast cards.

Jeff Rosenberg - William Blair & Company

Okay, that’s helpful – what you just said. And then, in the past you’ve always characterized this as the segment where you have the least amount of visibility into what’s happening out there from customer inventory. Are you doing anything differently to try to be able to get a feel for what the sale is like and just how much might be building up out there? Or what assumptions are you making relative to the way you’re guiding for the flattish type guidance?

Jeffrey Staszak

Well we have a larger staff now in Taiwan, as well as account managers for both NVIDIA and AMD. So, those individuals, we get our forecast from AMD and NVIDIA and then we’re going and our Taiwanese guys are very close with the contract manufacturers in Taiwan, to try to understand what their build rates and forecast are. So, I would say we have a little – a better handle than we had in the past. And also, this is just a larger dollar opportunity for both customers with respect to their revenue opportunities, so they’re giving us better forecasts and more information than we’ve had in the past.

Jeff Rosenberg - William Blair & Company

Last question I’ll ask is, when we think about the timing of the thirdly ramp for the servers, is that something that you would expect would contribute towards the end of Q4, or is to early to really get that granular in terms of understanding when you’re going to start to ship products on front of that launch.

Jeffrey Staszak

Oh, I don’t know. If it ramps in the February time frame, we would expect to get orders towards the very end of Q4 and certainly early in Q1 so that they can get boards built up, and the server platforms ready to launch. So, end of Q4, Q1 if it happens in February. And all indications are that that looks like that’s going to occur in that time frame.

Jeff Rosenberg - William Blair & Company

So, orders at the end of Q4 or you might start making shipments at the end of Q4?

Jeffrey Staszak

We could start making shipments at the end of Q4, but we’d probably get orders for early Q1 shipments.

Operator

Your next question comes from Patrick Wang - Wedbush Morgan Securities.

Patrick Wang – Wedbush Morgan Securities

On notebooks, sounds like you have an Intel doing Montevina. I’m hearing that the channel really is in the position to quickly transition away from Santa Rosa right now. Ramped Montevina created quickly. Can you talk about how much of this trend is really impacting your trajectory here in Q2 that you saw and in Q3 that you’re expecting? Anything outside of what you were previously expecting?

Jeffrey Staszak

No, I think we’re pretty well on track. I mean, the forecasts that we’ve received from our customers have been relatively accurate, I would say. Therefore, we’ve been able to give more focused revenue numbers for you. So, I don’t think there’s going to be any big swings or anything that’s out of the ordinary. It’s pretty much coming as we expected, and that’s forecast by our customers.

Patrick Wang – Wedbush Morgan Securities

And then, in the past you’ve always characterized this as the segment where you have the least amount of visibility into what’s happening out there from customer inventory. Are you doing anything differently to try to be able to get a feel for what the sale is like and just how much might be building up out there? Or what assumptions are you making relative to the way you’re guiding for the flattish type guidance?

Jeffrey Staszak

Well we have a larger staff now in Taiwan, as well as account managers for both NVIDIA and AMD. So, those individuals, we get our forecast from AMD and NVIDIA and then we’re going and our Taiwanese guys are very close with the contract manufacturers in Taiwan, to try to understand what their build rates and forecast are. So, I would say we have a little – a better handle than we had in the past. And also, this is just a larger dollar opportunity for both customers with respect to their revenue opportunities, so they’re giving us better forecasts and more information than we’ve had in the past.

Patrick Wang – Wedbush Morgan Securities

Second, on the graphics. Given lead times on graphics design can you talk about what you’re seeing in the pipeline there? I know you’re guiding us down in Q3 sequentially, but is there any sense you can give us in terms of when we see some growth here again?

Jeffrey Staszak

See some growth. In graphics?

Patrick Wang – Wedbush Morgan Securities

Yes, in graphics.

Jeffrey Staszak

Well, I mean, I think what we said last quarter is that we expect that these cards are going to launch in Q2, which they did. And you can see that we doubled our business in graphics in Q2. And then we said in Q3, we’re going to see how the market and consumer acceptance is our there and we’ll see. So there still could be some growth but we’re telling everyone to just assume relatively flat sales in Q3 and Q4 and our growth would pick up in notebooks. Let’s see how things materialize first.

Patrick Wang – Wedbush Morgan Securities

So, what you’re trying to guide us to is a more conservative view on the market in terms of softness in unit shipments there?

Jeffrey Staszak

Well, I don’t know if softness is accurate. We don’t know. We’re going to wait and see how things go. The orders have come in pretty much as we expected, we’re shipping products the last 3 weeks to these guys, but we’re going to wait and see how things happen towards the second half of this quarter and going in to next quarter, with the Christmas season coming on.

Patrick Wang – Wedbush Morgan Securities

What I was trying to get to was market share there. Is market share something that you feel comfortable with on graphics going forward?

Jeffrey Staszak

Increasing market share?

Patrick Wang – Wedbush Morgan Securities

Well, you know, just flat. Stable market shares.

Jeffrey Staszak

Yes. We’re not planning on losing any of the business we have, if that’s what you’re asking.

Patrick Wang – Wedbush Morgan Securities

And then, quickly on OPEX here. Q2 was a lot lower than I previously modeled. Is there any particular reason that we can point to for lower R&D, and should we see just modest dollar increases going forward?

Jeffrey Staszak

There was one primary reason why R&D was down Q1 to Q2. This post design activity where we’ve got the product design, and then there’s some post design work with our suppliers to qualify the product, and that was down. That’s a variable component of our OPEX – that was relatively high the last couple quarters and it was down in Q2. We expected it to be down a little but it ended up being down more than we had forecast. That’s the primary driver there.

Patrick Wang – Wedbush Morgan Securities

Given the variable cost here, we can conservatively model that off a couple hundred thou –

Jeffrey Staszak

Yes, some of that that we didn’t spend this quarter, in Q2, spills over into Q3. So, it’s going to be back up again in Q3. If you run the numbers in terms of our guidance there, we’re looking at spending – both SG&A and R&D spending – to be back up again. It was up 15% year in year last quarter. It will probably be in the 20% range next quarter.

Patrick Wang – Wedbush Morgan Securities

You had really good gross margins this quarter. Can you talk about what was difference than you had previously expected when you guided about a 55% non-GAAP gross margin?

Jeffrey Staszak

Yes, sure. I’m very pleased with our gross margins this quarter. Very pleased. We knew at the beginning of this year we had a challenge for our margins because our growth was coming from our two lower margin segments. It wasn’t any one primary thing this quarter; it was a lot of little things. We’ve got teams working on various cost reduction issues on supplier cost, we’ve got teams on yield improvement, teams on test time reductions. We’re really going after everything we’ve got. There are a lot of little things that added up, so we’re very pleased with that this quarter.

Patrick Wang – Wedbush Morgan Securities

Sanders has talked about looking to raise wafer pricing. Is this something that you have seen, and how does this potentially affect your longer term gross margin? Thank you.

Jeffrey Staszak

The answer is no. We’re in 0.358 inch, and if you read a few reports that have come out on TSMC and Charter, there’s extra capacity available in 8 inch. So, I don’t think that we’ll be getting heavy pressure for wafer price increases. In fact, we just recently, this part quarter, had the benefit of price reductions because of volume. So, we don’t anticipate that, at least through the balance of this year, anything happening to us.

Operator

Your next question comes from Analyst for JoAnne Feeney - FTN Midwest.

Analyst for JoAnne Feeney - FTN Midwest

Hi. This is Analyst for JoAnne Feeney calling in for Joanne. I want to get back to notebooks. Can you describe whether you are gaining any tractions within notebooks, in terms of moving towards performance versus just thin and light?

Jeffrey Staszak

Yes, we’re in thin and light and high performance notebooks, and that’s driving -- we're in a number of Montevina based platforms that are coming out shortly and that’s what’s driving our revenue growth there. We said that our notebook revenue doubled last quarter, and we expect it to double again in the third quarter.

Analyst for JoAnne Feeney - FTN Midwest

Are you seeing any pricing pressure? I believe on our last conference call you were talking about how, in the notebook space, the competition is a little but more intense than you expected.

Jeffrey Staszak

Yes, I think there’s always pricing pressure, particularly in that segment. We have a specific product family aimed at that segment with lower cost and lower prices, and we’re finding our product is pretty competitive.

Analyst for JoAnne Feeney - FTN Midwest

What about the AMD platform? Are you playing on that at all?

Jeffrey Staszak

Most of our growth in notebook, we’ve indicated, is on the Intel platform. They have a new platform, the Centrino 2; code name is Montevina that was just launched recently. So, that’s where the bulk of our notebook revenue is, in the Intel based platforms.

Analyst for JoAnne Feeney - FTN Midwest

Can you and maybe you can’t talk about this yet, what about Catella?

Jeffrey Staszak

Yes, we’re working on those design wins now so we should have more to say on that in the future.

Operator

Your next question comes from Nicholas Aberle - Caris & Company.

Nicholas Aberle - Caris & Company

How many customers in total will you be shipping into in the back half of the tier on notebooks?

Jeffrey Staszak

Well, I think we can safely say – unfortunately we were hoping to talk more about that, but because of the push out some of our customers’ launches are going to be occurring here over the next couple of weeks. So we hope to be able to have a show and tell at the analyst review in September. But, we can say 4.

Nicholas Aberle - Caris & Company

Perfect. Just a little but more on gross margin. Nice upside surprise there. Do we think 56% is sustainable for the balance of this year, and then moves higher as Gen 5 starts to ramp into 2009? Is that the way to think about it?

Mike Burns

Yes, right now we’re thinking about 56% for Q3, and we would like to maintain that in Q4, but it’s a little too early for us to give any guidance on that, at that point. But, a quarter ago we were thinking 55% for the back half of the year, but now we’re looking at 56% at least for Q3, and hoping to keep that up. And then, you’re right, next year we’re hoping with the Thurley platform launch that that should help margins somewhat, so we’ll see where that goes.

Nicholas Aberle - Caris & Company

Server and storage actually grew a little bit better than I was forecasting – nice quarter from that segment. Maybe a little more color on the drivers there, sequentially. And you also said the design cycle for Thurley is largely complete. Can you say anything about potentially bringing on Dell as a customer at this point?

Jeffrey Staszak

No, we can’t talk about that. But what we can say in server and storage – the reason why it grew last quarter was, our normal HP, IBM, Fujitsu Siemens business came in pretty much as expected. The upside was more around a once or twice per year business opportunity what we have with Cray. Cray came in with some orders, which caused some growth there. However, that’s a one shot deal and that’s slowly going away – or is gone. But we’re talking about some growth in server in storage and that’s going to be based around the IBM, HP business, because their server and storage business still appears pretty strong.

Nicholas Aberle - Caris & Company

Got you. So, you would expect HP and IBM to offset that sequential, and even maybe outpace that.

Jeffrey Staszak

Maybe, a little bit.

Nicholas Aberle - Caris & Company

Got you. And then very lastly. Just looking at the guidance again. Just assuming that everything ex-GPU is flat; to get to the low end of guidance you actually have to model in a relatively steep drop in the GPU business. Is that in the cards? Could we see GPU get back down to the $5 million or $6 million run rate, or are you just being conservative there at the low end?

Mike Burns

I’m not sure how you get to those numbers, but yes, we think graphics could be down. It could be up as well, but it’s more natural -- Q2 we had these big product launches with both of our customers. It’s natural that the follow on quarter would naturally be down somewhat from that. So, it should be down a little bit, but you know, -

Jeffrey Staszak

It’s a wait and see, I mean, we don’t know. Like I said, orders are coming in, we’re shipping product and we’ll see how the back half of the quarter goes.

Nicholas Aberle - Caris & Company

Perfect. Just one last quick one. Outside of notebook, in the consumer bucket, is there anything in there that’s worth talking about at this point?

Jeffrey Staszak

Not really. We’ve got some small opportunities that we’ve engaged with that aren’t worth bringing up because you get all excited and we want you to keep your focus on server and storage and notebook and communications. There’s some incremental business there, but it’s just that the digital IC power requirements are not at the level -- I mean, you can get a lot of the lower performance DC switching regulators to do the job.

Operator

Your next question comes from Craig Hettenbach - Goldman Sachs.

Craig Hettenbach - Goldman Sachs

Jeff, follow up on the server market with the design win activity and place it thoroughly. Can you just talk about, directionally, your market share and then also dollar content trends in that next generation platform?

Jeffrey Staszak

Yes, we’ve talked about this in the past. We believe we’re currently in the low 20s market share. We think that with the launch of Thurley we’ll be able to get in the high 20s, maybe potentially low 30s. And dollar content – with the additional memory that’s required on a two processor board – in the past we’ve had a $35 - $40 type of opportunity from a silicon content standpoint. With the Thurley platform it’s more of a $45 - $50 type of opportunity with the additional memory requirements.

Craig Hettenbach - Goldman Sachs

Mike, just a follow up on the gross margin. You noted that Thurley will give you a little bit of a lift, potentially, in 2009. How do you go about balancing that gross margin mix versus growth, in terms of potentially being more aggressive in notebooks or graphics? Or what should we expect in the intermediate term in terms of gross margin verse revenue?

Mike Burns

Well, on average we target 55 – 60, but each of those markets we price things according to what it takes to win. But we have in mind always keeping it in that 55 – 60 range and growing a top line as fast as we can, while keeping within that range. So, some of our segments are a little bit above that, some are a little bit below that, and that’s where we’re playing that at the moment. It’s working. Very strong revenue growth this year, and we’re keeping our margins in the range.

Jeffrey Staszak

Yes, I think our sales and marketing guys are making the right calls. We’re going to grow 50% plus, and we have very good margins. I think they’re going after the right opportunities, and making the right calls when it comes to business opportunities versus margin calls.

Operator

Your next question comes from Gus Richard - Piper Jaffray.

Gus Richard - Piper Jaffray & Companies

On the notebook side of things, do you expect Q4 to be seasonal for you, or would you expect, given the design win momentum, to be a little bit better than that?

Jeffrey Staszak

A little bit better – well, it’s a little too early to tell exactly how much it’s going to grow from Q3 to Q4, but I would say that it’s -- I don’t know what seasonality, that impact, is going to have on the business. It’s just a matter of, these are the new products, they’re ramping, and they’re models that have been out – previous platforms, Santa Rosa, Napa platform, so we have an idea of what the run rates are. So I don’t think there’s going to be any huge upside, nor do I think there’s going to be a lot of downside.

Gus Richard - Piper Jaffray & Companies

Okay, and then on the Thurley ramp. Given past server ramps for you is it reasonable to assume that you would start to see some initial ordering for the preproduction for Thurley in Q4?

Jeffrey Staszak

Well, yes, we could get orders, I would say, towards the end of Q4 for delivery in the early Q1 timeframe, and then continued into Q1 as far as orders go.

Gus Richard - Piper Jaffray & Companies

But no revenue in Q4 for Thurley, or very minimal amounts?

Jeffrey Staszak

Right now, Gus, I would say probably minimal amounts.

Gus Richard - Piper Jaffray & Companies

In terms of the gross margin – just to go back to that one more time – the components of the upside in gross margin, was it primarily cost reductions, or just a positive volume variance that drove that higher than expected. If you could, do an attribution analysis that would be helpful.

Mike Burns

Yes, it was mostly cost reduction. Some of it was yields, though. Some of it was test time reductions – a number of little things that just added up. They were all in our favor, everything went very smoothly this quarter and we ended up doing a little better than we thought.

Gus Richard - Piper Jaffray & Companies

In terms of yield versus test time or other cost reductions?

Mike Burns

The largest one would be the vendor cost reductions. And then there were a bunch of other little things after that.

Gus Richard - Piper Jaffray & Companies

And, was that on the back end, I’m assuming?

Mike Burns

Some on the back end, some on the front as well.

Operator

Your next question comes from Rick Schafer - Oppenheimer.

Rick Schafer - Oppenheimer & Co.

Can you give us any more color on what you’ve seen order wise in graphic. As particular as you can be with NVIDIA, I’d be interested in what happened there after -- we’ve all of seen what happened with their numbers a couple weeks ago. Has there been any marked change in the last few weeks, or last month or so, in what you’ve seen in the graphics business order wise?

Jeffrey Staszak

Not for us, we had a pretty strong launch in Q2. We have a solid base of orders in Q3 that we’re shipping. We still need to get some turns this quarter to meet the forecast that we have, but we haven’t seen anything that would – a lot of that stuff, if you read it, was chipsets, it was other stuff. It wasn’t a lot of the new discreet cards coming out.

Rick Schafer - Oppenheimer & Co.

Right, so really, no -- rough little thump for the third quarter would be a 50/50 mix between the two graphics people?

Jeffrey Staszak

We haven’t disclosed that.

Mike Burns

We disclosed the programs and we’ve got different dollar content on different programs. We don’t break it out that grand here. We’ve got a pretty well covered, as Jeff said, in terms of the programs that we’re on and we’re in with both customers.

Rick Schafer - Oppenheimer & Co.

Right. And then just a quick follow up on that vein. You talked in the past about maybe trying to get some more mainstream sockets. I know we talked a lot about enthusiast and performance. Anything you can talk about in terms of future success with some of the more mainstream stuff.

Jeffrey Staszak

Well, I don’t know. There are still some areas in the performance segment, I think, that’s going to get the majority of our attention. We’re certainly going after some of the mainstream graphics opportunities. At some point in time we’re going to hit the jackpot there, but there’s still some market share, some growth opportunities for us to hit in the performance segment where our products make a little bit more sense. So I think that’s where our intent is to maintain our base and then pick up some more of those performance sockets.

Rick Schafer - Oppenheimer & Co.

Is there any more difference for you people, margin wise, as you move down the list a little bit?

Mike Burns

There could be. There could be. We’ll see what it takes to get the high volume units in there, so it could be. But it’s already our lowest margin segment, so we’ll have to watch that.

Jeffrey Staszak

And as we bring out our new products, we’ve got new products that are coming out that will be addressing some of these higher volume applications, and we factor that in to account in the design. So, hopefully we’re coming out with a more performance chip that’s lower cost that does the job in these lower performance and higher end mainstream segments and we still maintain our margin targets.

Rick Schafer - Oppenheimer & Co.

Well, you did a good job here in the second quarter with graphics really jumping on you, so that’s great. And just a final question. I know, Mike, you talked about not buying any stock back in the second quarter. I know you bought a bunch back in Q1. Anything you can tell us about potential future buybacks?

Mike Burns

No, we did a lot over the past year, concentrated in three quarters. Our cash is about where we want it right now, and the stock is up twice what it was six months ago, so we’ll see how much, if any, we do going forward here.

Operator

Your next question comes from Ramesh Misra - Collins Stewart.

Ramesh Misra - Collins Stewart

I know you have been providing gross margin guidance on the four different areas, but very roughly. Is graphics and notebooks, on the average, 500 basis points lower, or is it less than that versus the overall average?

Mike Burns

We don’t disclose margins by segment or get into that – that moves around. None of them are too far out of the ballpark of our range. On average, we try to keep it 55% - 60%.

Ramesh Misra - Collins Stewart

In regards to the receivables. That went up meaningfully this quarter, in part due to the revenue growth. But, was most of the growth driven due to expense in graphics?

Mike Burns

Yes, receivables went up proportionally with sales, so receivable dollar balance was up 28% and sales were up 25%. So, our DSO is about the same – 48-49 quarter on quarter. So, no, sequentially there’s no real story there on the accounts receivable. It’s all pretty healthy balances. We did scale up, so dollar wise AR went up, inventory went up, and accounts payable went down. So, we did have to put some cash into working capital this quarter.

Ramesh Misra – Collins Stewart

In regards to the expansion of your notebook customer base. I think this is the first time that you’ve said you’ve had more than 2, is that correct Jeff?

Jeffrey Staszak

Yes.

Ramesh Misra - Collins Stewart

So, can you say if these are top tier accounts, or are these more of the more mainstream OEMs?

Jeffrey Staszak

They’re two large OEMs. And hopefully by the analyst day they’ll have their products out and we can have show and tell. But, until then we can’t really disclose nor even talk about the models that are existing – two existing customers – that are coming out that we’re on.

Ramesh Misra - Collins Stewart

That obviously is a good endorsement of your solution. And then, very roughly, in terms of the ASP differential between your solutions and the mainstream, traditional discreet analog solutions, can you give us a sense of where that is? Are customers still paying a premium for your more integrated solutions, or actually, at this point, cost is not much of an issue for many customers?

Jeffrey Staszak

No, we’re at cost parody.

Ramesh Misra - Collins Stewart

Okay, across the four segments?

Jeffrey Staszak

Yes, pretty much so. I mean, that’s enabled us to get in to expand market share in graphics, expand market share in servers, expand market share in notebooks. So I would say that, yes, it’s across all segments. We’re getting very competitive.

Ramesh Misra - Collins Stewart

In regards to any 10% plus end customers, are you willing to provide a little clarity over there?

Mike Burns

No, nothing beyond what we normally do. We’ve got pretty good diversification amongst our segments and then, I indicated, very good balance within each of those segments. But beyond that we don’t disclose customer percentage each quarter, or anything like that.

Ramesh Misra - Collins Stewart

In regards to the two parts, server and storage. Are there any differences in the trends between the storage and the server side, or is it both of them going hand in hand?

Jeffrey Staszak

It’s difficult to tell because the same products that we ship to our customers, they use them in servers and storage. We get the best information from our account people, as well as from our customers, and saying that both server and storage business is strong. I mean, in IBM’s call, they said their server and storage business – their server business is very strong, in X series, with respect to blade servers and high end servers where we participate, and then also in the P servers is strong, and they said the storage business is very strong.

Operator

Your next question comes from Patrick Wang - Wedbush Morgan Securities.

Patrick Wang – Wedbush Morgan Securities

We take a look at visibility you people have on Q4. Can you talk about how that compares this year versus last couple years?

Jeffrey Staszak

For Q4?

Patrick Wang – Wedbush Morgan Securities

Yes. Not the out quarter, but two quarters out. I think a lot of times in the past we’ve gotten a lot – sometimes these design cycles and order cycles are coming in giving you some visibility or partial visibility into Q4 as well. Is that something that really isn’t there this time?

Jeffrey Staszak

No, I mean, we’re getting orders already for Q4 and I don’t see anything out of the ordinary. It looks pretty normal to me.

Patrick Wang – Wedbush Morgan Securities

Can you give us the depreciation, cap-ex and cash flow from operations last quarter?

Mike Burns

I don’t have that in front of me. Our depreciation is pretty moderate, as well as cap-ex. We have outsourced suppliers that do all that. Once in a while we’ll buy some test equipment, but it doesn’t cost very much. Cash from ops, I don’t have that in front of me either, but that would have been down from Q1 because when we scaled up the business a lot of the cash went into working capital, both for inventory and A/R.

And then also, we had this timing issue last quarter with accounts payable, so our days payable went down quite a bit this time as well. So, it’s up for income, up for stock option exercises, and then down for the working capital investments. Cash from ops is up a couple million, I think.

Operator

We have no further questions at this time.

Mike Burns

Yes. I would like to thank all of you for your questions and interest in Volterra today. Each quarter Volterra management participates in a number of investor relations events. On August 19 and 20, we’re planning a non-deal roadshow in California with Caris and Company. We will be in New York on September 3 to present at the Kaufman Brothers Conference, and on September 4 to market with Sidoti & Company. On September 18, we’ll hold our first analyst day in New York at the Grand Hyatt from 8:00am until 12:00 noon. All of our Senior Management Team will be present for this event.

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

A web cast of today’s call will be available on the company’s web site until Monday, August 18, 2008.

Thanks for joining us today.

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