Integrated Device Technology, Inc. F1Q09 (Qtr. End 06/30/08) Earnings Call

Jul.29.08 | About: Integrated Device (IDTI)

Integrated Device Technology, Inc. (NASDAQ:IDTI)

Q1 FY09 Earnings Call

July 29, 2008, 04:30 PM ET

Executives

Brian White - VP of Finance and Interim CFO

Ted Tewksbury - President and CEO

Analysts

Glen Yeung - Citigroup

John Barton - Cowen & Company

Sandy Harrison - Signal Hill Group LLC

Tim Luke - Lehman Brothers

Allan Mishan - Oppenheimer & Co

Srini Pajjuri - Merrill Lynch

Adaline Lee - FTN Midwest

Kevin Rottinghaus - Cleveland Research

David Wu - Global Crown Capital

Suji De Silva - Kaufman Brothers

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Integrated Device Technology, Inc. Fiscal First Quarter 2009 Financial Results Conference Call. Later, there will be a question and answer opportunity, instructions will be given at that time. [Operator Instructions]. And as a reminder, today's conference is being recorded.

With that being said, here with opening remarks is Integrated Device Technology's Vice President of Finance and Interim Chief Financial Officer, Brian White. Please go ahead sir.

Brian White - Vice President of Finance and Interim Chief Financial Officer

Thank you, Kerry. And welcome to our fiscal first quarter 2009 earnings conference call. I am Brian White, IDTI's VP of Finance and Interim CFO. Presenting with me on the call is Ted Tewksbury, our President and Chief Executive Officer. Also in attendance on the call is Mike Knapp, our Manager of Investor Relations. We will all be available during the Q&A portion of this call.

Our call today will include remarks about future expectations, plans and prospects for IDT, which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable Federal Securities Laws. Actual results may differ materially from our forward-looking statements as a result of the various important factors including certain risks which are detailed in IDT's most recent annual report on Form 10-K, and quarterly report on Form 10-Q, as filed with the SEC.

IDT does not intend to update the information provided in today's call and expressly disclaims any such duty except as required by law. In addition, pursuant to Regulation G any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at www.idt.com, including a complete reconciliation to the most directly comparable GAAP measures.

Now I'll turn the call over to Ted, who'll report on the overall quarter and then I'll return to give you more specifics about our June quarter results and our outlook for the September quarter. Ted?

Ted Tewksbury - President and Chief Executive Officer

Thanks, Brian. Today, we are pleased to report solid results for our first fiscal quarter of 2009, as we experienced strength across our computing, consumer, and communications end markets. Sequential revenue growth of 6% was driven by improved demand for our timing, switching, audio, and interface solutions, as well as strong network search product sales.

To recap, we finished the quarter with $188.2 million in revenue, non-GAAP earnings per share of $0.23 and non-GAAP gross margin of 53.5%. In addition, we generated approximately $46 million in free cash flow. Brian will elaborate on the financial results shortly and you can also refer to our press release and associated tables for further details.

Now, let me give you some more colour on our end markets. Within computing, revenue from advanced memory buffers, PCI express switches, and PC audio codecs, all increased by double-digit percentages in the June quarter. We increased our market share in AMBs from the March quarter, as our low power solution began volume shipments, and our PCI Express switch sales grew, as new design wins in server and storage equipment continued to ramp.

In PCs, sales of our audio solutions grew sequentially while our PC clock business was down slightly as we drained the inventory ahead of the month of inner ramp. Our computing end market represented about 44% of our total revenue, up from 42% in the prior quarter.

Our consumer and other segment returned to growth in the June quarter, as we benefited from stronger demand from our gaming sub-segment. We experienced strong sales in all major gaming platforms. While the consumer and other segment grew sequentially on a dollar basis, it represented a constant percentage of our total revenue, at 16%.

Revenue from our communications end market also increased sequentially. We are experiencing strong adoption of our fourth generation network search products and our largest customer in addition to other customers in Asia-Pacific and Japan.

We also saw continued momentum in our Communications Clocks business, which grew revenue for the sixth consecutive quarter. This growth was partially offset by an anticipated decrease in our wireless business following a strong March quarter. Despite sequential growth, our communications end market declined as a percentage of total revenue to approximately 34% from about 36% in the prior quarter.

SRAM revenue was basically flat over the quarter, remaining about 6% of our total revenue.

Now I will provide some more detail on new product introductions, design wins, and our outlook for the September quarter by market. Let me begin with computing, which includes both servers and PCs. In servers, our serial switching division continues to secure the majority of design win opportunities with its PCI Express switching solutions. The industry's broadest portfolio of application optimized switching products combined with unmatched customer service and industry knowledge make IDT the clear choice for customers in need of serial switching solutions.

Given the strong adoption of PCI Express switches into servers, storage, and communications equipment, we believe that we will continue to see revenue and market share growth from PCI Express in the second half of the fiscal year.

As I mentioned earlier, we continue to see strong interest from OEMs for our low power AMB plus devices, which resulted in market share gains in the June Quarter. AMB remains a very healthy business for us and we continue to focus on introducing new products aimed at the server market.

Recently, we extended our leadership in DDR3 memory interface devices by announcing and sampling the industry's first registered clock driver capable of standard and low voltage operations for high performance service and workstations. The IDT DDR3 Register is designed to help save power and reduce cooling cost in server firms and data centers. The registry utilizes a new lower power architecture that when coupled with the low voltage supply can reduce the register power consumption by nearly 50% versus standard voltage registers.

On the PC side of the business, our audio division introduced a new high definition PC audio codec in Q1. This codec is manufactured in our fab in Hillsboro, Oregon using 0.18 micron process technology to further reduce power consumption. This codec offers the industry increased design flexibility by achieving Windows logo program compatibility in the smallest form factor currently available for a high definition audio codec.

We also announced a family of ultra low power timing devices designed for use in ultra mobile PCs or UMPCs. These ultra low power timing devices minimally require 1.5 volt power supply as opposed to the 3.3 volts for standards timing devices, there by helping to extend the battery life of the UMPC.

Overall, for the September quarter, we currently project high single-growth digit in our computing end market.

In the consumer end market, we remain strongly positioned in gaming platforms in addition to other consumer related devices like set-top boxes and digital television. During the quarter, we announced a new family of real time clock devices designed for use in consumer applications like set-top boxes, GPS devices and MP3 players. These high accuracy clocks are perfect for use in any application that requires a standalone real time clock and they build on IDTI's reputation as a timing leader. We are currently projecting double-digit growth in our consumer end market in the September quarter, in line with typical seasonality.

Trends in the communications markets improved in June. We announced new additions to our family of application optimized search accelerators which offer high performance, low power, packet header processing for enterprise, metro, and carrier class switches and routers. The new devices extend our industry leading search performance to 1.2 billion searches per second, enabling customers to solve complex network challenges at line rates of up to 40 gigabytes per second and beyond.

As a testament to our technology leadership, our search accelerator was selected by Fujitsu as the packet header processing solution of choice for its next generation optical networking platform. Fujitsu and other customers are turning to IDP to help with their next generation network build outs. In particular, we are seeing strong demand coming from media gateway platforms and the edge routers.

In the wireless infrastructure business, visibility remains limited. However, we continue to secure design wins for next generation wireless infrastructure deployment.

During Q1, we announced that ZTE has adopted the IDT Central Packet Switch or CPS for its wide band CDMA base station. Our CPS provides the ZTE the performance and functionality needed to ensure that its customers can choose the flexibility, scalability, and power efficiency along with improved time to market. We currently project communications revenue to be roughly flat in the September quarter.

Altogether in the September quarter, our fiscal Q2 of 2009, we are projecting that revenues should grow another 6% on top of the 6% growth we posted in the first fiscal quarter of 2009. This would result in approximately $200 million in revenue for the quarter, plus or minus $4 million. Brian will go into more details on our financials in a moment.

Aside from the macroeconomic volatility and uncertainty to which the entire industry is exposed, we see promising trends in our core businesses in addition to solid traction with new products. Top line growth for the remainder of FY '09 will be driven predominantly by timing solutions for computing, consumer and communications end markets, fourth generation network search accelerators, PCI Express switches, and PC audio codecs.

In fiscal 2010, we look forward to layering on additional growth from our panel port family of flat panel display products and our PPS and CPS switches for wireless base stations.

We started fiscal 2009 firing on all cylinders and anticipate that this momentum in our core businesses, in addition to new product ramps will fuel continued growth for IDT.

With that, I'll turn the call over to Brian, to expand on our financial results analysis.

Brian White - Vice President of Finance and Interim Chief Financial Officer

Thanks, Ted. Let me start by reviewing the non-GAAP results for Fiscal Q1. Revenue of $188.2 million came in slightly above the high end of the range we provided during our Q4 earnings call. As Ted indicated, increased amount in all three of our end markets threw revenue up 6% sequentially. Fiscal Q1 gross margin was 53.5%, an improvement of 20 basis points sequentially and in line with projections we provided in our Q4 earnings call.

We benefited from an increase in fab utilization, which reached 71%, up 6% from the prior quarter. This was partially offset by the effective product mix as sales of computing products grew and sales of higher margin wireless infrastructure products declined. Our operating expenses increased by $7.6 million from the March quarter, but remained flat from the same period one year ago, and we are within the estimated range we provided in our Q4 call.

Recall that OpEx in the March quarter was abnormally low, due to declines in the investment portfolios of our deferred compensation plan, along with other one-time benefits related to the annual year end true-up of certain expenses.

R&D expenses during fiscal first quarter were about $38 million, up from approximately $33 million, while SG&A expenses were about $25 million, up from approximately $22 million in the prior quarter. Interest income and other was about $1.4 million, down from $2.3 million in the March quarter, driven primarily by lower interest rates.

Tax expense or essentially our estimated cash tax for the quarter was $44,000. We've benefited from a credit of approximately $600,000 related to a tax holiday in a foreign jurisdiction and we continue to offset tax expense with tax credits accumulated in prior years.

Net income for the June quarter was approximately $39.2 million, or 21% of revenues. Our EPS was $0.23, a penny lower than last quarter. Our EPS was above the high end of our prior forecast, primarily due to higher revenue and lower taxes.

Now let me summarize our results on a GAAP basis. We reported GAAP net income of approximately $9.2 million or $0.05 per share in the June quarter. The difference between our GAAP and non-GAAP results, nets out to about $30 million or about $0.18 per share. We recorded merger related charges of approximately $21 million or about $0.12 per share, down from about $25 million in the March quarter.

These charges are primarily from the amortization of intangible assets recorded in conjunction with our historical merger and acquisitions. In addition, we recorded approximately $8 million or about $0.05 per share in stock-based compensation expenses.

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

Now turning to our balance sheet; cash and investments totaled approximately $267 million at the end of the June quarter and we generated approximately $46 million of free cash flow. In addition, we generated $1.2 million from the exercise of employee stock options and $3.4 million from share purchases under our employee share purchase program.

We were active again in our share repurchase program during the June quarter, as we repurchased approximately $22 million of our common stock. Over the past two fiscal years, we have repurchased over 38 million shares or about 19% of our outstanding stock. We currently have about $118 million available for additional repurchases under our existing program.

Net inventory decreased about $800,000 from the March quarter to approximately $79 million in June. Days of inventory decreased to 82 days from 88 days in the prior quarter.

Our trade accounts receivable increased approximately $1 million to $83 million in June, while DSO decreased from 42 days to 40 days.

I will now turn to our forecast for the September quarter. As Ted indicated; we currently project revenue for second fiscal quarter of 2009 to be in the range of $200 million plus or minus $4 million or sequential increase in the range of 4% to 8%.

On a non-GAAP basis, we currently project gross margins to be in the range of 53%, plus or minus 50 basis points depending primarily on the revenue range and product mix.

Our fab utilization is expected to improve to about 75%. However, we anticipate a higher mix of computing products in the September quarter, which accounts for the slight decrease in gross margins quarter-to-quarter. We currently project operating expenses in the September quarter to be approximately $63.5 million plus or minus $1 million, up about $0.5 million from the June quarter, due to increased sales commissions and legal costs related to ongoing litigation.

R&D is expected to remain essentially flat at about $38 million, while SG&A is expected to increase slightly to about $25.5 million. We currently project operating margins to be about 21% plus or minus a percentage point, primarily dependent on the revenue range. This is up from 20% in the June quarter.

We currently anticipate interest and other income to be about $1.5 million, essentially flat from the June quarter. We expect our taxes during fiscal Q2 to be approximately $1 million as we continue to benefit from tax credits accumulated in previous years. Exclusive of any additional repurchases under our share repurchase program, we project share count to be about 171 million on a diluted basis, essentially flat to fiscal Q1.

We currently project EPS on a non-GAAP basis to be about $0.25 per share, plus or minus a penny depending primarily on a actual revenue range and product mix.

On the balance sheet, we currently expect to generate approximately $50 million in cash during the September quarter which would result in a quarter ending cash balance of approximately $317 million. This projected balance excludes the impact of any share repurchase or M&A activity.

We currently project our GAAP EPS to be lower than our non-GAAP EPS by about $0.17 plus or minus a penny. Most of the difference between GAAP and non GAAP projections or about $0.12 per share is related to the amortization of intangibles primarily as a result of the ICS merger. We currently project stock option expenses to be about $0.05 per share in the fiscal second quarter.

Despite broader economic weakness, we are optimistic about a number of encouraging trends in our end markets. These improvements in our core business coupled with some exciting new product ramps should place us in a solid position to deliver top line growth and increase profitability for our shareholders.

With that summary, I will turn the call over to Kerry for the Q&A portion of the call. Kerry?

Question And Answer

Operator

Thank you. [Operator Instructions]. And our first question come comes from Citi, from the line of Glen Yeung. Please go ahead.

Glen Yeung - Citigroup

Thanks and nice quarter for you guys. Ted, maybe just a question for you first on the guidance that you're providing in the computing market. And I'm not sure if I quite got it, but I think you said high single-digits. I just want to get a sense from you as to how that compares to normal seasonality.

Ted Tewksbury - President and Chief Executive Officer

Hi, Glen. Yes, I said high single-digit growth for computing and that is consistent with previous seasonality. The second quarter does tend to be seasonally strong for us, so that's very much in line.

Glen Yeung - Citigroup

And what are your thoughts about the impact of Montevina on the quarter? Do you think that is an opportunity or risk? I'm thinking both in terms of clocks and PCI Express.

Ted Tewksbury - President and Chief Executive Officer

Well as you know, the Montevina was late by about 8 weeks and that did impact our Q1 results. And those shipments will now flow into Q2. So that issue is behind us.

Glen Yeung - Citigroup

And you feel like that it is a neutral effect on the quarter though, or do you think that's helping you? I guess I am trying to reconcile that between seasonal guidance and whether or not the overall end market is a bit weaker than seasonal or not?

Ted Tewksbury - President and Chief Executive Officer

Yeah Glen, I think the Montevina delay basically hurt us in Q1 and it's going to wind up helping us a little bit in Q2.

Glen Yeung - Citigroup

And then just to finish up on this one issue, you announced some UMPC type clocks. What's your sense as to the growth trajectory of those clocks? And do you think that cannibalizing... will have the potential to cannibalize more traditional notebook clocks?

Ted Tewksbury - President and Chief Executive Officer

I think it's a different customer base. I think the UMPCs are going to target the teenagers and the younger users, perhaps even some of the older users who don't use the standard laptops. In my opinion, it's going to layer on top of traditional notebook and laptop computers. It's a completely different value proposition.

Glen Yeung - Citigroup

Okay. Then just one last question. You announced that win at DTE. Do you have any feel for how meaningful that could be next year, any quantification of that?

Ted Tewksbury - President and Chief Executive Officer

Most of our CPS and PPS products are going into LTE, long term evolution, and fourth generation base stations, which we are very tight for those ramps and I really don't believe that we are going to see much of that revenue until our next fiscal year.

Glen Yeung - Citigroup

Okay, thank you.

Operator

Thank you. And our next question comes from Cowen, John Barton. Please go ahead.

John Barton - Cowen & Company

Thank you very much. Ted, if I understood you properly, your products focused on the display port market, you talked about them in the context of really kind of kicking in in calendar 2009. Did I interpret that correctly? And do we start to see any ramp at the end of this calendar year?

Ted Tewksbury - President and Chief Executive Officer

Yes John, we actually do expect to see some early revenue at the end of this fiscal year. We are very tightly engaged right now with all of the major glass panel manufacturers in Taiwan and Korea. And we've got very good design interaction with those products. They will start ramping in the third and the fourth quarter of this fiscal year, but the real hockey stick will occur when Calpella releases because that ships that will have the hooks in it for display port is actually a display port transmitter in the Calpella chipset which is really going to cause this ramp to take off.

So fiscal 2010 will be the major volume ramp but we will see some volume in fiscal 2009 in second half of the year.

John Barton - Cowen & Company

Topic of AMB, you talked about gaining some shares through the ramp of the low power version. Can you give us an idea of how quickly you think your low power version will dominate your revenue stream? What the competitive front look likes with respect to other offerings that would compete directly in the power and below?

Ted Tewksbury - President and Chief Executive Officer

Right. Well right now, we are getting excellent traction with the AMB plus. We are in a validation and qualification with all of the major DIMM manufacturers and qualifications at the OEMs are ongoing. We are... we estimate we're about 3 to 6 months ahead of the competition on that platform. And as a result of the success of AMB plus, we actually picked up 10 to 15 percentage points of market share this quarter in AMB.

So we think it's, the volumes are very rapidly going to flip to AMB plus and we will continue to see a lot of strength in AMB for the remainder of this year.

John Barton - Cowen & Company

General question if I could for you, you obviously have several months kind of digging into IDT there. What are your thoughts from a strategy perspective going forward? I mean can we expect to see anything different in the direction of IDT as compared to before your arrival et cetera?

Ted Tewksbury - President and Chief Executive Officer

Yes, I think the major strategic shift that you'll be seeing is the transformation of IDT from a niche product player to more of an applications focused system solutions provider for our target markets. That's the long-term plan. In the shorter term, I've really got three priorities. Number one is to maintain a leadership in the markets that we're already in. Number two is to execute on the new products that we've got in the development pipeline right now, and number three is to focus new investments on large high value-added applications like multimedia and displays where we can leverage our existing products and our core competencies to provide differentiated solutions and drive growth.

John Barton - Cowen & Company

Brian, quickly just your view on tax rate going forward, please

Brian White - Vice President of Finance and Interim Chief Financial Officer

Yes. We entered fiscal '09 with a substantial amount of NOLs and tax credit. That will benefit us from a cash return perspective, not all of which will flow through to benefit our P&L. This is something that we look at on a quarterly basis. For the September quarter, I think using an assumption of about $1 million for tax provision is reasonable. Going beyond the September quarter, I think tax rate in the neighbourhood is 16% is probably a reasonable assumption to use.

Our long-term forecast is that our tax rate should be in the neighbourhood of 15% to 20%, but again it's something that we have to look at on a quarter-to-quarter basis in terms of evaluating, when we'll flip from a cash tax rate to more of a normalised rate.

John Barton - Cowen & Company

Thank you

Operator

Thank you and our next question comes from Signal Hill from the line of Sandy Harrison. Please go ahead.

Sandy Harrison - Signal Hill Group LLC

Thanks. Good afternoon, guys. Thanks for taking my call.

Ted Tewksbury - President and Chief Executive Officer

Thanks.

Sandy Harrison - Signal Hill Group LLC

From your wireless infrastructure, you had some comments about it's been challenging in you prepared remarks. And as you look sort of forward and you look at the opportunity in the LTE and some of the other areas. Is there any particular geographic area that you think will fall in first and what it is, you guys think from a positioning you are in that market. Is it with the customers, the suppliers, just kind of the relative relationships you guys have in those respective markets?

Ted Tewksbury - President and Chief Executive Officer

Sandy, just a quick answer to your question is Asia. The longer answer is that well, first of all I should put wireless infrastructure a little bit in context. We were down relative to Q4. But keep in mind that we had double-digit growth in Q4. And a lot of that was due to the early rollout of 3G base stations in Japan. So we're down relative to that, but if you look at our wireless revenue this quarter in Q1, it's still higher than any other quarter in FY '08 with the exception of Q4. So, it's still a very healthy business.

Now in terms of which geography is going to roll out first, I think definitely it's going to be in China and Asia-Pacific, as well as Japan where, we've had lot of these design wins for the PPS and CPS products. And again, that's mostly an FY '10 story although we'll see a little bit of that revenue towards the end of this fiscal year as well.

Sandy Harrison - Signal Hill Group LLC

And, as far as on, 10% customers and regional revenue contributions

Ted Tewksbury - President and Chief Executive Officer

In terms of the breakdown by geography?

Sandy Harrison - Signal Hill Group LLC

Yes.

Ted Tewksbury - President and Chief Executive Officer

Brian, you have that?

Brian White - Vice President of Finance and Interim Chief Financial Officer

Hang on, Sandy.

Sandy Harrison - Signal Hill Group LLC

And I guess while you are looking that up, Ted, prior question from another participant. Now that you're been there sometime, you've had a chance to look at what you have. You had some comments about your areas you want to focus on and other markets that you may want to go after with some of your R&D. You're also seeing a pretty interesting environment out there for companies that are cash strapped or who have intellectual property that might help them out or some financial events, meaning is some sort of an acquisition or taking advantage of the market and generating $50 million in free cash. Is that something that you'd be looking to at this point or is there still some work to be done, before you would look to doing any of that?

Ted Tewksbury - President and Chief Executive Officer

Well, the first priority for me here was to align our existing business along our target applications and we just completed a pretty major reorganization of the business units into application focused divisions. And as we start to sharpen up our applications focus, I think we will see opportunities to do some judicious acquisitions to build up our critical mass in those areas. We will continue to use our cash for two purposes; one is acquisition and the other is share buy back

Brian White - Vice President of Finance and Interim Chief Financial Officer

Hey Sandy we might have to circle back with you to get you that data.

Sandy Harrison - Signal Hill Group LLC

No problem. Any of the 10% customers?

Brian White - Vice President of Finance and Interim Chief Financial Officer

Cisco.

Sandy Harrison - Signal Hill Group LLC

Got you.

Ted Tewksbury - President and Chief Executive Officer

Cisco and Samsung.

Sandy Harrison - Signal Hill Group LLC

Samsung?

Ted Tewksbury - President and Chief Executive Officer

No, just Cisco over 10%.

Sandy Harrison - Signal Hill Group LLC

Okay. All right. Thanks guys.

Operator

: Thank you. And our next question comes from Lehman Brothers, Tim Luke. Please go ahead.

Tim Luke - Lehman Brothers

Thanks. Just if you could possibly remind us just about your... how you foresee the com area to do going forward in terms of the different segments of maybe I think you give kind of alluding to some improvement in the wireless area. But maybe give some color on how you see the enterprise area or networking first, and then obviously good job on the quarter and the guidance. Thanks.

Ted Tewksbury - President and Chief Executive Officer

Thank you. So, as you pointed out, we basically play in three areas of communications. Our enterprise business is primarily the search engine business and we saw very good growth there this quarter, double-digit growth quarter-over-quarter. We expect to see revenue in the September quarter to be probably slightly up, flat to slightly up followed by single and mid... probably mid single-digit growth for the remainder of the year.

In the wireline area, that's predominantly clocks, we have a very large family of networking and communications clocks that are comprised of products that are legacy IDT products, combined with the products that we acquired from ICS, plus some assets that we acquired from Freescale. We have been growing our share in the networking and communications clocks. And that's a good solid 10% to 15% a year growth business.

And then the third area is wireless where we offer our PPS and CPS switches sRIO products, bridges and so forth as well as sFIFOs and dual ports and various other standard products. That business with which we already talked about, was slightly down over the fourth quarter, but only because we had a double-digit growth in the fourth quarter. And we see that the bulk of the new growth out of that business coming in the next fiscal year when the 4G and LTE base stations start to ramp up.

Tim Luke - Lehman Brothers

So you see a generally steady pattern in networking for say, enterprise?

Ted Tewksbury - President and Chief Executive Officer

Yes well, as I pointed out, we saw very strong growth this quarter. And that's both at our largest customer as well as at merchant customers that we have got in Asia-Pacific and Japan. You will recall a year ago that we introduced the industry's first Search Accelerator family of products and those products are now going into full production and we are seeing a very nice ramp on those. And that's primarily in Asia.

Tim Luke - Lehman Brothers

Could you give us some color similarly in consumer as to what are some of the... how you see those segments and what are some of the different sections of that where you may see some growth?

Ted Tewksbury - President and Chief Executive Officer

We expect to see very strong growth in the next quarter of Q2, due to the holiday build. That'll probably be... definitely be very strong double-digit growth in consumer clocks as well as computing.

Ted Tewksbury - President and Chief Executive Officer

And that's helped by PS3 or?

Ted Tewksbury - President and Chief Executive Officer

Precisely. We play in predominantly two areas in consumer. One is the gaming sector, which is dominated by Sony's Play Station 1, 2 and 3. We also have consumer products that go into digital camera, set-top boxes, GPS, and so forth, Digital TV. Again, predominantly clocks, and so of those businesses we expect to grow double-digits in the next quarter, yes, actually in the next two quarters.

Tim Luke - Lehman Brothers

Okay and just to be clear, in the computing area, you commented that you see high single in the PC arena, on the service side you also expect to see some growth?

Ted Tewksbury - President and Chief Executive Officer

The AMB business really peaked this quarter.

Tim Luke - Lehman Brothers

Okay.

Ted Tewksbury - President and Chief Executive Officer

So I don't expect to see the kind of growth that we saw. There's probably going to be a slight decline over this quarter. But still very healthy levels compared to last fiscal year.

Tim Luke - Lehman Brothers

Overall, if you see broadly, is it fair to say it's probably normal seasonality. Could you also give some color on where you see lead times in general for the industry and you have any broader comments on how you see sort of the general tone of the inventory management and other aspects of the industry condition?

Brian White - Vice President of Finance and Interim Chief Financial Officer

Well we're managing our inventory down. So, I mean from a supply standpoint in terms of our suppliers, things are... we're not experiencing any constraints. We're actively managing our own inventory down and took that down from 88 to 82 days in the June quarter.

Ted Tewksbury - President and Chief Executive Officer

So we don't see any changes in our lead times.

Tim Luke - Lehman Brothers

Okay. Thanks so much guys. Good luck.

Operator

Thank you. Our next question comes from Oppenheimer, from the line of Allan Mishan. Please go ahead.

Allan Mishan - Oppenheimer & Co

Hey guys, nice shop. Couple of questions. Do you expect that based on seasonality consumer peaks in the September quarter or would it peak in the December quarter?

Ted Tewksbury - President and Chief Executive Officer

I can tell you an answer to that if you give me just a second. Right now, we are looking at a peak in our fiscal third quarter, which is the December quarter.

Allan Mishan - Oppenheimer & Co

For consumer.

Ted Tewksbury - President and Chief Executive Officer

For consumer

Allan Mishan - Oppenheimer & Co

Okay, great. And then you mentioned that AMB should be down, I guess slightly in the September quarter. What are you expecting further out, I guess the early chipset launches probably some time in Q4. Does AMB drop pretty significantly beginning with that quarter and how does DDR3 potentially offset some of that? If you could just discuss sort of server memory, it would be helpful?

Ted Tewksbury - President and Chief Executive Officer

Yes. So Tylersburg and Nehalem will start to ramp in the fourth quarter... toward the fourth calendar quarter of this year. That is only the single socket version. The two and four socket versions will come a quarter or two after that. And since those use Register DIMM instead of fully buffered DIMM, they do not use AMB and so there will be a ramp down of our AMB. However, keep in mind that our AMB will continue to be used in high-end motherboards for sale into the channels. It will also be used for non-Intel platforms.

So, AMB does not go away. So, let me first make that point. Nehalem will use DDR3. So, our DDR3 ramp will offset some of the decline in AMB. And right now, we are the first to market. Actually last quarter... this quarter we announced our DDR3 Register. And as I pointed out, we're about three or six months ahead of the competition. That product is being qualified and validated at all the DIMM manufacturers and qualified at OEMs. So, we're in very good shape with DDR3 and when AMB does start to roll off; that will come in and take its place.

Now in fairness, it's a lower ASP. However, that's partially offset by the fact that there will be more DDR3 ICs used than AMBs. So, we're certainly not looking at a cliff here in revenue.

In terms of timing, with the two and four sockets version of Nehalem kicking in early 2009, I think we're looking at a good three to four quarters of solid AMB revenue. And then let me make one final point, because I think that sometimes we get categorized as an AMB supplier. And you really need to view us as a memory interface supplier, and that the... it's DDR2, it's DDR3, it's AMB. As long as processors have to interface with memory, we are going to be there with solutions. And we're already working with all of the leading manufacturers to make sure that we're on top to the next trend that come after DDR3.

Allan Mishan - Oppenheimer & Co

Okay, great, that's very helpful. And then can you just give us again the percentage of sales from communications and computing and consumer, I think I missed those numbers.

Ted Tewksbury - President and Chief Executive Officer

So communications was 34%, computing is 44%, consumer was 16% and SRAM was 6%.

Allan Mishan - Oppenheimer & Co

Okay, great. And then last one for me is, can you talk about what your targets are for gross margin, little bit longer term, clearly the mix has shifted in a way that it probably won't reverse and in the past IDT has given a few different numbers, what do you think gross margins should be over the longer term of this company?

Ted Tewksbury - President and Chief Executive Officer

Well our target is 53 to 54%. And you should keep in mind that the decline that you're seeing roughly 1% kind of decline, 50 basis points decline that we talked about in next quarter is driven primarily by mix. Q2 is one of our biggest quarters for computing and consumer which happen to be the lowest gross margins in our mix. So you're not seeing anything that's a significant of a trend, so it's more of a seasonality kind of behavior.

Allan Mishan - Oppenheimer & Co

Okay, thanks very much.

Operator

Thank you. And our next question comes from Merrill Lynch, and the line of Srini Pajjuri. Please go ahead.

Srini Pajjuri - Merrill Lynch

Thank you. Ted, a follow up to the previous question, on AMB, could you quantify the business, I am just trying to see how big that business is and also as it trends down, will it have any impact on your gross margins?

Ted Tewksbury - President and Chief Executive Officer

Yes Srini, First of all we don't break down the businesses individually, so I'm afraid I can't tell you the magnitude of the AMB business. As far as gross margins are concerned, I don't see any impact one way or the other. I think 53% to 54% remains our target, and that's where it will be.

Srini Pajjuri - Merrill Lynch

Okay.And in communications, it looks like you have pretty good visibility into the next couple of quarters. I'm just trying to understand if this is, just the market being healthy or if you're seeing, you talked about new product ramps as well, just trying to understand what exactly is driving the growth there? Thank you.

Ted Tewksbury - President and Chief Executive Officer

So, in communications, we're looking at, roughly flat wireline business. We're looking at next quarter, our enterprise will be, probably flattish, and then it starts to come back towards the second half of the year. And that's driven primarily by two factors. One is the fourth generation network search engines that are largest customer and then we've also got the search accelerator products that we are shipping into the Asia Pacific region and Japan which are starting to ramp up nicely. So that's what's driving the enterprise piece of it.

On wireless, as we have already talked about, we don't have a great deal of visibility it's a very lumpy kind of business, but expect that to be roughly flat for the remainder of the year

Srini Pajjuri - Merrill Lynch

Ted, maybe final one just on the enterprise side. Now that you are shipping the fourth generation, have you noticed any changes in competitive dynamics within this? Thank you.

Ted Tewksbury - President and Chief Executive Officer

Yes good question. We always see small puts and takes from quarter-to-quarter, as we negotiate pricing. But we haven't seen any material shifts at our largest customer or other customers in the business. I think we saw a very good growth this quarter, double-digit, quarter-over-quarter growth, no NetLogic was up high single-digits about 7% or so. We basically grew twice as fast as they did this quarter.

I think you need to keep in mind that IDTI is really a leader in search products. We were the first to announce a search accelerator products family; that was a year ahead of our nearest competitor and as I talked about those are just starting to go into full production right now. We are also the first to deliver 1 billion searches per second, we were the first to deliver enhanced error detection and correction, we were the first to enable a broad host of ecosystem partners, we were the leader in designing an 80 bit interface optimized for IPV6 policy lookups.

So we really are a technology leader in this area, and we've got products that are in production now. I know you hear a lot of talk about other companies that are developing products. Our products are in production now. They're ramping up at customers while we're generating our next gen... working on our next generation search accelerator projects.

Srini Pajjuri - Merrill Lynch

Thanks Ted.

Operator

Thank you. Our next question comes from FTN Midwest from the line of JoAnne Feeney. Please go ahead.

Adaline Lee - FTN Midwest

Hello. Can you hear me?

Ted Tewksbury - President and Chief Executive Officer

Yes.

Adaline Lee - FTN Midwest

Hi, this is Adaline for JoAnne Feeney. I just wanted to go back to operating expenses. I don't know if you gave guidance earlier, but I think I heard from the last time it was roughly going to be at the same level as this quarter going forward. Is that still true?

Ted Tewksbury - President and Chief Executive Officer

Yes, we guided to up 0.5 quarter four.

Adaline Lee - FTN Midwest

That's for the next quarter, is that something that's going to happen for the next few quarters too?

Ted Tewksbury - President and Chief Executive Officer

Well, I think one of things that we mentioned in the prepared comments was some increase related to some patent litigation defense. That is driving some of that quarter-to-quarter increase between our June quarter and our September quarter, so that it's hard to forecast exactly when that will wind down. But in the short term, that is driving a little bit of our expense out. That's a piece of it. Commission expenses are also up quarter-over-quarter. Our revenues is higher and also if you look at our split of commissionable revenues based on our product mix in the September quarter, that's also higher. So that's somewhat driven by product mix and the higher revenue and then again we have this patent litigation that will wind down and hopefully sooner than later, but it impacted us in the short term.

Adaline Lee - FTN Midwest

Okay, that's great. Can I just switch back to wireless? I believe you've talked about a handset design win in the past. Is there any update from that?

Ted Tewksbury - President and Chief Executive Officer

There's no update in particular. You're speaking of Smart Phone?

Adaline Lee - FTN Midwest

Yes it's a portable device, yes.

Ted Tewksbury - President and Chief Executive Officer

Yes it's a dual port device that we've got in that Smart phone, which handles the interface between the applications processor and the baseband processor. We saw very good uplift from that net product last quarter, when it went into production. There is a little bit of inventory correction this quarter and then we expect good volume next quarter and for the rest of the year.

Adaline Lee - FTN Midwest

So, in so the seasonal strength for handsets in the second half, that's second half calendar year that's why you're seeing?

Ted Tewksbury - President and Chief Executive Officer

Actually we categorised that product, however or so. Be careful. That used to be included in our wireless revenue. Now we're including that in our consumer.

Adaline Lee - FTN Midwest

I see. So, in addition to the gaming and on the consumer cost?

Ted Tewksbury - President and Chief Executive Officer

Yes

Adaline Lee - FTN Midwest

including that

Ted Tewksbury - President and Chief Executive Officer

Yes

Adaline Lee - FTN Midwest

Okay and that just happened this quarter or?

Ted Tewksbury - President and Chief Executive Officer

That's correct. So, it's contributing to the very strong double-digit growth that we'll see next quarter in consumer.

Adaline Lee - FTN Midwest

Oh that's great. That's my question. Thank you very much.

Ted Tewksbury - President and Chief Executive Officer

Thank you.

Operator

You're next question comes from Cleveland Research from the line of Kevin Rottinghaus. Please go ahead.

Kevin Rottinghaus - Cleveland Research

Thank you very much. On the PC audio business, I think there was a target set last about this time for it to double quarterly. Has that been pushed out maybe to the September quarter now that Montevina has pushed out and then kind of following on that, the share gains have seen Montevina and PC audio, should you... that continue to be I guess a better than market growth driver in December as well?

Ted Tewksbury - President and Chief Executive Officer

Yes exactly, you answered your own question. Yes, that's the PC audio is very much tied to the Montevina ramp and since that was pushed out were seeing more growth in Q2 and less in Q1 although we didn't see pretty healthy growth of this quarter. It was double digit growth this quarter. It will be even stronger double digit growth next quarter.

Kevin Rottinghaus - Cleveland Research

Okay. In the AMP, I'm talking about going down sequentially. Any other offsets in the PC segment in your guidance that... is there anything in the forecasting from the PC OEMs that makes you more cautious in forecasting that segment or is that pretty much seasonal beyond that.

Ted Tewksbury - President and Chief Executive Officer

Yes in the PC area, the offset will come predominately from PC clocks.

Kevin Rottinghaus - Cleveland Research

Even in the September quarter?

Ted Tewksbury - President and Chief Executive Officer

Yes.

Kevin Rottinghaus - Cleveland Research

Is that still an inventory drain or?

Ted Tewksbury - President and Chief Executive Officer

No, I'm saying upside. I thought you were asking for upside.

Kevin Rottinghaus - Cleveland Research

Okay. No, I guess I had expected more of a double-digit type growth in the September quarter and what may temper expectations that you got it for high singles, plus you have the share gains and audio. I guess I had maybe expected that segment may be a little stronger.

Ted Tewksbury - President and Chief Executive Officer

Audio will be up. PC clocks will be up. AMB will be down. Network clocks will be up. Search engines will be roughly flat.

Kevin Rottinghaus - Cleveland Research

Okay.

Ted Tewksbury - President and Chief Executive Officer

So that's the way to think about it. PCI Express will be roughly flat.

Kevin Rottinghaus - Cleveland Research

Okay. In PCI Express, the same question as audio. I think you had outlined some targets on that business, or some targets have been outlined on that business about a year or so ago. Do you still think you are tracking to those as far as wins and things maybe in production?

Ted Tewksbury - President and Chief Executive Officer

I think we are tracking pretty close to what we put out there about a year ago. We were first to market with PCI Express GEN2 products about three quarters ago, and that's resulted in some excellent design win momentum. We've been winning more than three quarters of the new sockets that come available. And I think that is parlaying itself into increased market share as we go forward to the rest of the year. I think you are beginning to see that.

We've also got a number of I guess there we've got new design wins that will be layering on top of the run rate that we are seeing today in Q1. Some of those are for Tylersburg based servers which don't start to ramp until the end of the year. Others are in communications platforms which will start to ramp earlier. Because of delays in some of those platforms, we are seeing a roughly flat run rate in Q2. But as those design winds start to layer on in Q3 and Q4, we will get back to the double-digit growth that we talked about earlier, and I think by the fourth quarter of this year, we'll be close to the target that we put out there earlier.

Kevin Rottinghaus - Cleveland Research

Okay. And then the last one from me, I think it is kind of a lengthy discussion on your commitment to the search engine business, I mean anything else we should read through there. It sounds like there may have been bit a speculation on maybe divestiture there, not being fully committed to that business, I mean anything... any color you can provide there?

Ted Tewksbury - President and Chief Executive Officer

Yes, good question, I am glad you brought that up, because that rumor has been out there, I am not sure where it's coming from, but let me answer very unequivocally. We have no plan at this time to divest our search engine business. I'm very pleased with the double-digit revenue growth that we saw this quarter. I and our Board are very pleased with the design win traction that we've been getting. So, we remain very committed to our search engine and our search accelerator strategy and believe that it will continue to generate value for our shareholders.

Kevin Rottinghaus - Cleveland Research

Thanks for taking my questions.

Ted Tewksbury - President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the Global Crown Capital from the line of David Wu. Please go ahead.

David Wu - Global Crown Capital

Yes. I just want to beat a dead horse one more time, on the search engine business, what is your mix between fiscal and non-fiscal? And when I look at this fiscal business, I remember that was the predominant part of your search engine business being up double-digit, it was pretty much inline with what NetLogic had this past quarter, up about 29% off this fiscal business. Was that about the same as yours?

Ted Tewksbury - President and Chief Executive Officer

Our business splits about 80% fiscal, 20% non-fiscal.

Unidentified Analyst

Okay.

Ted Tewksbury - President and Chief Executive Officer

I really don't want to provide any more details on that on the specifics.

David Wu - Global Crown Capital

All right. Can you help me with one another thing, which is the original goal of the ICS acquisition was that all the wafers from ICS will eventually go through IDT's fabs. How far have we gone in those process and how much room there is to lift your utilization rate and your pro forma gross margin from that?

Ted Tewksbury - President and Chief Executive Officer

The plan on bringing wafers from ICS in-house was expected to take place in the course of two to three years. We're on track. We're headed the schedule that we had laid out. In our June quarter, we brought seven thousand wafers into the fab, and in our September quarter we're forecasted that number will go up appreciably again. So we're executing our plan, we're ahead of schedule if anything and it is contributing to increased utilization increases in the fab.

David Wu - Global Crown Capital

You're talking about 7000 wafers from the clock business or from the all in total?

Ted Tewksbury - President and Chief Executive Officer

Total.

David Wu - Global Crown Capital

Oh, I see. Okay. Last question I have is, if I were to look at your total, with just the DDR3 that DIMM kind of AMB business in fiscal 2010, if I think about it as a flat business with some, obviously shift the wafer from AMB into DDR3. Would that be possibly correct and had any margin implications at a gross level for that?

Ted Tewksbury - President and Chief Executive Officer

Yes, clearly, we'll see a shift from AMB into DDR3 as well as other products, that will be developing for the server market. In terms of gross margins, I don't see any major changes at this time.

David Wu - Global Crown Capital

Okay. Thank you very much.

Operator

Thank you. And our next question comes from Kaufman Bros, Suji De Silva. Please go ahead.

Suji De Silva - Kaufman Brothers

Hi guys, nice job on the quarter. So, can you recap the... your expectations for growth by segments for the September quarter?

Ted Tewksbury - President and Chief Executive Officer

So, gross margin segment, alright so, search engines will be flat to slightly up. PC clocks will be up high single-digits. Networking and communications clocks will be roughly flat. PC audio will be very strong double-digit percentage growth. Consumer will be double-digit growth. And the memory interface products we'll see a slight decline. We are talking about in aggregate 6% quarter-over-quarter revenue growth.

Suji De Silva - Kaufman Brothers

Great, thank you. And that it's a recap and then on the Cisco, non-Cisco mix brand network search engine. Can you talk about where you think that will trend over time or you think the non-Cisco will outgo the Cisco return?

Ted Tewksbury - President and Chief Executive Officer

We think we're seeing very strong growth in the non-Cisco revenue right now we believe that will be an increasing percentage.

Suji De Silva - Kaufman Brothers

Okay great. And then the AMB question, let me ask in a different way. What do you think the run rate for AMB would be relative to where you are today? I guess just trying to get your arms around that may be a year out for example.

Ted Tewksbury - President and Chief Executive Officer

I give you guys points for persistence. I can't break that down by product lines.

Suji De Silva - Kaufman Brothers

o I guess we just want to understand whether AMB's run rate is some thing that is that kind of a headwind for your guys today that you have to make up and I guess that's kind of a the typical question --?

Ted Tewksbury - President and Chief Executive Officer

We see as I said so, I expect healthy AMB for the reminder of this year. It's actually above the run rate for before I speak, you took my numbers. Well so, just suffice it to say that it's going to remain at a healthy level although somewhat lower than it is this quarter.

Suji De Silva - Kaufman Brothers

Okay great. I like color, hopes I appreciate that and last question. I think you talked about having to a review reorganizing a bit in terms of how you look at the businesses. In that review did any of the segments you're in now come up as being less strategic perhaps substantially? Thanks again.

Ted Tewksbury - President and Chief Executive Officer

No, as I said earlier, I want to maintain our leadership in the markets that we're already in and then we will be preferentially focusing new investments on larger, faster growing markets in some strategic segments of consumer where we have existing products or we have existing core competencies that enable us to develop differentiated products and you've seen one example of that in displays where we've got display ports interface integrated with a timing controller and next that gives us an initial to hold the net that application from which we will start to expand.

In terms of the reorganization, we now have five applications focused divisions. There is communication, networking, enterprise computing, multimedia, and displays, so we're going after all five of those applications with a solutions mindset and we'll be expanding our presence in each one of them.

Suji De Silva - Kaufman Brothers

Okay. Thank you

Ted Tewksbury - President and Chief Executive Officer

Thank you

Operator

: Thank you again. [Operator Instructions]. And we have a follow up from Oppenheimer's Allan Mishan. Please go ahead.

Allan Mishan - Oppenheimer & Co

Hi. If I look at the percentage breakdowns you gave the last quarter, it looks like you reclassified some stuff you've mentioned before, that wireless products, what were the reclassifications that you did this past quarter?

Ted Tewksbury - President and Chief Executive Officer

The only classification we did Allan was to move the Smart phone from wireless into consumer.

Allan Mishan - Oppenheimer & Co

Okay. And that was around 2% of sales, if I look at the number, delta correctly?

Ted Tewksbury - President and Chief Executive Officer

Brian, do you?

Brian White - Vice President of Finance and Interim Chief Financial Officer

That sounds about right Allan. But let me just double check that.

Ted Tewksbury - President and Chief Executive Officer

That may be a little more than that Allan, more than 10%.

Allan Mishan - Oppenheimer & Co

Great, thanks very much.

Operator

Thank you. Andwe have a follow up question from Global Crown Capital, David Wu. Please go ahead.

David Wu - Global Crown Capital

Just one quick clarification. On those five application divisions, I assume the amount of equal size, can you give us a rough break down of those and then I have an another question which is, if we look at fiscal 2010 we've a lot of new products coming to fruition in terms of volume. What will give you the possibility of a ten... double-digit full year growth relative to fiscal '09 without counting on any headwinds or tailwinds from global economy?

Ted Tewksbury - President and Chief Executive Officer

Let me take your first question first. The 5 new business units that I outlined are very different in size. One of them for example, the display business, is a start-up whereas the communications division is established and quite large. So they are very different in size. I am afraid we don't break out the details of our business units, so I can't tell you the absolute numbers.

In terms of the 2010, fiscal 2010 growth, it's really coming from a couple of places. The first is display port. We've talked about the display port product that we have, we've talked about the design interaction that we have, we know the major glass panel manufactures in Asia and we talked about how that will start coming on line, driven by Calpella. So we will see strong growth in display port in fiscal 2010.

The second growth driver is PCI Express. We've talked about that in detail. We are winning more than 80% of the sockets that open up and those will be kicking in fiscal 2010.

Number three, there is PC audio and I think you are familiar with that story. We talked in the prepared remarks about a new low power audio codec that we introduced. We are getting good traction with design wins. Montevina design wins are starting to ramp up. We're presently winning new Calpella sockets. So, there is growth from PC audio.

Number four is networking and communication clocks, which is a good solid 10% to 15% per year growth business and we expect that to continue. Our consumer clocks also are good 10% to 15% growth business, which we expect to sustain in the next several years.

And then the fifth category is wireless application that we talked about earlier. These are serial rapid IO based PPS and CPS switches, which are designed into the LTE and fourth generation base stations and those will start to ramp in fiscal 2010. So we've got five solid growth drivers that will give us that kind of year-over-year growth.

David Wu - Global Crown Capital

Okay, thank you.

Ted Tewksbury - President and Chief Executive Officer

Thank you.

Operator

Thank you. We have no more questions in queue. Please continue

Brian White - Vice President of Finance and Interim Chief Financial Officer

Thank you very much for joining us today. We appreciate your interest in IDT and look forward to meeting with you on our marketing trips this quarter in our next call. We will also be attending the Pacific Crest Conference in August and Citigroup and Kauffman Brothers Conferences in September and look forward to seeing you then. Goodbye.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. This call will be available for replay after 8:30 PM Pacific Time tonight through August 12, 2008 at midnight. You may access AT&T play system at anytime by dialing 1800-475-6701 and entering the access code 953722. International participants may dial 320-365-3844. Again those numbers are 1800-475-6701 and 320-365-3844 access code 953722 and that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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