MACOM Technology Solutions Holdings Inc (MTSI) 2010 Q3 法說會逐字稿

Welcome and thank you for joining the Mindspeed Technologies third quarter fiscal year 2010 conference call. All lines will be on a listen-only mode throughout the duration of today's conference. Today's call is being recorded. If you do have any objections, you may disconnect at this time. I'd like to introduce Andrea Williams, Mindspeed's Vice President of Corporate Communications who will chair this afternoon's conference call. Thank you. You may begin.

Thank you and good afternoon to all of you who have joined us for today's call to discuss Mindspeed's fiscal third quarter 2010 financial results. Our press release issued this afternoon detailing these results may be accessed in the Investors section of our website at www.mindspeed.com. Today, our CFO Bret Johnsen will begin the call with a review of the third quarter and the financial results. Our CEO, Raouf Halim, will follow Bret with some perspectives on the quarter, and then we'll end by providing fourth quarter financial guidance.

Before we begin, I want to remind you that our comments today will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, among others, statements regarding our expectations and financial guidance for our fiscal fourth quarter of 2010, the future of our business; operating leverage; industry, business, and product trends and cycles; new products and markets and potential growth opportunities; domestic and foreign economies and markets for our products; our financial and liquidity position and performance; business drivers, design wins, customers and competition; backlog, operating expenses and cost containment; anticipated restructuring charges; expected patent sales; diluted share count; customer demand; supply constraints; and other anticipated future events and results.

Forward-looking statements made during this call are made only as of the date hereof and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may differ materially from those projected in any forward-looking statement as a result of certain risks and uncertainties including but not limited to those noted in our earnings release and on our quarterly report on Form 10-Q for the fiscal quarter ended April 2nd, 2010 and our other filings with the SEC.

During our call today we will be making reference to non-GAAP financial measures, which exclude stock-based compensation expense and related payroll taxes, amortization of intangible assets, asset impairments, employee separation and employee option exchange costs, legal settlement costs, reverse stock split costs, special charges, gain on debt extinguishment, and non-cash interest expense on convertible senior notes. For a reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K furnished to the SEC today. Copies of both documents are available in the Investors section of our website at www.mindspeed.com. We do not provide a reconciliation of the forward-looking non-GAAP measures to GAAP measures because of our inability to project special charges, employee separation costs, and stock-based compensation related expenses.

With that, I would now like to turn the call over to Bret Johnsen, our Chief Financial Officer.

Thank you, Andrea. The fiscal third quarter of 2010 was another strong quarter for Mindspeed. This quarter represented our fifth quarter of sequential revenue growth and improved non-GAAP operating profitability. In Q3, we achieved an important financial milestone for the company -- namely, delivery of our near term target operating model of 15% non-GAAP operating margin. We delivered revenue of $43.3 million, up 8% sequentially and 33% year over year. In addition, we delivered a non-GAAP gross margin of 64.3%, exceeding our guidance of approximately 64% by 30 basis points, and also delivered our fifth quarter of roughly flat operating expenses at a level of $21.5 million.

Now turning to a more detailed review of the financial results for our fiscal third quarter of 2010. Revenue for the third quarter came in at $43.3 million or up approximately 8% sequentially from the prior quarter, with all three of our business units experiencing sequential growth. Revenue mix by business unit was largely unchanged from the prior quarter. Revenue from our newly renamed Communications Convergence Processing business unit or CCP, formerly known as Multi-Service Access, which includes our voice over IP processor solution, contributed 41% of total third quarter product revenue and increased 10% sequentially. Revenue from our high performance analog unit or HPA represented 33% of total third quarter product revenue and increased 6% sequentially. Lastly, our wide area networking unit or WAN revenue contributed the remaining 26% of third quarter product revenue and grew 5% sequentially.

Product revenue for the third quarter was split by geographic region as follows -- Asia-Pacific at 69%, the Americas at 24%, and Europe at 7%. China represented 37% of total third quarter product revenue as compared to 35% of total product revenue in the fiscal second quarter. ZTE was the only end customer in the quarter that represented revenues of 10% or greater.

Now turning to gross margins, non-GAAP gross margin was $27.8 million or 64.3% of revenue, exceeding our guidance of approximately 64%. The improvement in non-GAAP gross margin compared to our guidance was primarily due to the effect of product mix in the quarter. Total non-GAAP operating expenses were $21.5 million, consistent with our guidance. Third quarter non-GAAP operating expenses were comprised of research and development expenses of $12.3 million; and selling, general, and administrative expenses of $9.2 million. The resulting non-GAAP operating income for the third quarter was $6.3 million or a 15% non-GAAP operating margin.

Now finishing the income statement for the third quarter, non-GAAP other income and expenses and the provision for income taxes in the aggregate totaled a net expense of approximately $100,000, primarily consisting of approximately $100,000 for the provision of income taxes. Other items included approximately $300,000 in direct interest expense, which was offset by a favorable foreign exchange gain of approximately $300,000 generated primarily from the strengthening of the dollar against the Euro during the quarter. Additionally, there were two other items of note this quarter in the reconciliation of our GAAP to non-GAAP income statement, including an approximate $200,000 employee separation charge and an approximate $200,000 charge related to a facilities impairment and legal settlement. Non-GAAP net income for the third quarter was $6.2 million and resulted in diluted non-GAAP earnings per share of approximately $0.18, based on approximately 36.1 million weighted average shares outstanding for the quarter.

Looking forward to next quarter, while Raouf will detail our formal guidance in a few minutes, there are a couple of additional items I wanted to point out. First, we expect our non-GAAP other income and expense to be approximately $600,000, including $200,000 for our tax provision. Second, in terms of weighted and average shares outstanding for the fourth quarter, we expect our diluted shares to be between 36.1 million and 36.7 million shares. Additionally, we are announcing a restructuring effort today that consists primarily of a targeted headcount reduction in our WAN organization and in our SG&A functions. As a result of this restructuring, we are anticipating an approximate $1.1 million to $1.5 million restructuring charge in this fourth fiscal quarter. These efforts are consistent with our stated focus on maintaining tight controls over operating expenses in order to continue achieving operating leverage in our business model while increasing funding for our two growth engines CCP and HPA.

Turning now to the balance sheet for the third quarter. During the fiscal third quarter of 2010, the company generated approximately $2.8 million of cash. Cash and cash equivalents totaled $34.1 million at the end of the quarter. Our accounts receivable balance at the end of the quarter was $18.5 million, resulting in net day sales outstanding of 39 days, up from 34 days in the prior quarter. Inventory increased from the prior quarter by approximately $1.9 million to $9.4 million, resulting in inventory turns of 6.6, down from approximately 7.6 in the prior quarter.

Lastly, this morning we issued a press release announcing a $10 million sale of legacy patents, of which $7.5 million should be received and accounted for in the current fiscal fourth quarter and the remaining $2.5 million should be received and accounted for in the December quarter, which is our first fiscal quarter of 2011. Along with this expected patent revenue and consistent with the bonus program that was disclosed in our December 2009 8-K filing with the SEC, 20% of the anticipated proceeds of the fourth quarter patent sale or $1.5 million is expected to be set aside for management compensation and will be considered an additional operating expense in the fourth quarter.

I would now like to turn the call over to Raouf for some perspectives on the third quarter and our outlook.

Thank you, Bret. The fiscal third quarter was another great quarter for Mindspeed as we achieved another quarter of record product revenue. Significantly, we delivered our target operating model of 15% non-GAAP operating margin that we had originally outlined last year. Over the last year we have delivered strong product revenue growth of 39%, fiscal year-to-date, over the same three quarters of fiscal 2009, coupled with significant operating margin expansion.

Looking forward, we are well positioned in a number of key product cycles that we believe will enable us to drive towards our stated long term operating margin target of 20% plus. These include our market leading positions in fiberoptic access, high performance analog switching and signal conditioning for the enterprise, and lastly, our newest initiative into the burgeoning 3G/4G wireless infrastructure market. As we mentioned, all three of our businesses grew in Q3 with the highlight being the significant strengthening in optical, FTTx markets worldwide, driving revenue growth across a broad range of our product portfolio. Our CCP business unit grew strongly at 10% sequentially due to the continued strength worldwide for voice over IP FTTx solutions. Additionally, our analog business continued to execute well with growth of 6% sequentially, highlighted by growth in optical PMDs shipping to the GPON and GEPON Fiber-to-the-Home markets. WAN grew in Q3 by 5% sequentially, due to strength with key Tier 1 customers for wireless backhaul applications.

With that, let's talk briefly about each of our three businesses. Starting with Communications Convergence Processing or CCP, this is the former MSA or Multi-Service Access business that was renamed to better characterize the growth opportunity ahead of us in a broad range of processing solutions optimized for burgeoning suite of convergent communications applications. CCP grew 10% sequentially, and fiscal year-to-date has grown 36% over the same three quarters of fiscal 2009 as we continue to enjoy several significant growth drivers in Q3, specifically voice over IP processors for fiberoptic access and broadband home gateway CPE solutions. In addition to this strength, we also saw strength in wireless media gateways and enterprise applications in the quarter.

In terms of fiberoptic access, the seasonal ordering patterns for the major Chinese customers for FTTx access continued to strengthen in the third quarter as we had anticipated. As we have previously stated, we believe that the long term deployment for FTTx optical access technology remains well on track despite the decrease in overall carrier CapEx being forecasted by Chinese carriers for 2010. Infonetics Research in May wrote -- wireline CapEx in China has become the bright spot in 2010, with major FTTx deployments and major cable broadband upgrades estimated at $25 billion, all [read] by the Chinese government keen to keep telecom momentum up. We have every indication from our customers that this 2010 CapEx growth in FTTx in China is on track. At this point in the calendar year, we are still estimating the growth of FTTx broadband port deployments in China to be in the range of 50% to 100% over 2009, equating to as many as 40 million new ports in 2010. We believe this growth is being driven by a combination of China Telecom, China Unicom, and China Mobile, the latter of which alone we believe may deploy up to 6 million ports this calendar year.

In fiscal Q3, we enjoyed strong ordering patterns from all three of the key OEMs shipping into the three carriers in China, namely ZTE, Huawei and FiberHome. Currently, in fiscal Q4, we are experiencing continued strength in backlog from all three key infrastructure OEMs for FTTx, suggesting that deployment schedules are progressing well. Although historically, the December quarter has been the seasonally slowest quarter for FTTx due to the ordering patterns of the service providers throughout the year, we hear from our customers that this slowdown may be mitigated this year by the introduction of a third service provider into these deployments.

Q3 was also another great quarter for our CCP portfolio of broadband home gateway applications as our Comcerto 100 CPE processor had strong shipments in Hitachi's Fiber-to-the-Home or FTTH deployments to [MDT] in Japan, and our Comcerto 1000 CPE processor started ramping to carriers in a widening sphere of deployments in Korea, Singapore, Russia and throughout Europe. In terms of CCP design wins in Q3, we saw continued very strong momentum for design wins in our Comcerto 300 family of processors for the optical access space as well as traction for the Comcerto 1000 in the broadband home gateway market.

The Comcerto 5000 that we announced last quarter for next generation video and voice convergence processing has also had a terrific design win ramp in the last three months and has garnered significant customer interest with both Tier 1 North American as well as Asian OEMs. What's important about the Comcerto 5000 is that the same powerful Comcerto platform that has been selected by most of the world's top manufacturers of carrier voice over IP gateways has now been evolved to fully support the key current and emerging video processing requirements over the next generation of media processing gateways and carries forward our field proven carrier class voice over IP software suite. Finally Transcede, which is our recently announced processor family for the next generation of 3G/4G LTE wireless base stations has continued to be very well received in the wireless market, and we are actively engaged in design cycles with significant Tier OEMs worldwide.

Moving on to high performance analog, HPA revenue grew 6% sequentially in Q3, and fiscal year to date HPA has grown 38% over the same three quarters of fiscal 2009. We continue to feel extremely optimistic about the multiplicity of strong product cycles driving our broad analog portfolio. In Q3 we saw strong demand for our optical module or PMD portfolio for both GPON and GEPON deployments worldwide. Our significant recent product announcement in high performance analog include the world's first 288 by 288 asynchronous nonblocking crosspoint switch. This switch is ideally suited for telecommunications applications in optical transport networks or OTN and for enterprise applications, particularly in broadcast video. Our 288 by 288 switch has become the fastest analog product to achieve meaningful revenue since launch in the history of our analog portfolio due to the fact that it is the only switch of its kind in the marketplace today.

In addition, we recently launched our full family of Amplif-Eye products, an industry leading line of analog signal conditioners designed specifically for enterprise storage, computing, and networking applications. Mindspeed's new enterprise product family targets the growing market for solutions that enable servers and storage equipment to fully and more easily implement the latest high data rate standards, including PCI Express, SATA/SAS, XAUI, fiber channel, and the Ethernet.

As we stated last quarter, we are delighted with the continued market share capture of our portfolio of optical PMDs for GPON based Fiber-to-the-Home or FTTH. Our customers have continued the volume ramp in the third quarter and we now believe we have a dominant market share in GPON similar to our leading position in GEPON. Our PON PMDs are shipping into systems being deployed by leading carriers worldwide, including Verizon, Entity, Korea Telecom, China Telecom, VSNL and many others.

Due to the competitive strength of our analog portfolio, design win activity was again extremely robust for Q3. HPA design wins overall increased by over 200% on a year-over-year basis, driven by a significant increase in enterprise design wins for server and storage signal conditioning solutions. We continue to feel bullish regarding the opportunities for the enterprise segment at Mindspeed as we push into the broader market with a new class of silicon serving the explosion of data traffic across the back plains of high end server and storage systems.

Now turning to WAN, our WAN business grew sequentially by 5% in Q3 after declining by 8% in Q2. As we discussed with you last quarter, we are continuing to see healthy demand primarily for wireless backhaul applications across key Tier OEMs in Europe and the US. As Bret mentioned, today we have announced the restructuring of our WAN group. We have been shifting our resources over the last two years to our strongest growth drivers of CCP and high performance analog or HPA, and this latest action is a continuation of that process.

And now let's move to a recap of our strategic business drivers. First, the continued ramp of FTTx optical infrastructure worldwide that is driving growth across three product families for Mindspeed, namely our Comcerto processors for fiber to the building, our Comcerto processors for broadband home gateway CPE, as well as our optical PMDs for both GPON and GEPON. Second, within high performance analog, the ramp of crosspoint switch and signal integrity solutions shipping into the telecommunications and enterprise segments. And third, explosion in bandwidth hungry multi-media applications in the mobile communications market that is driving the need for system on a chip solutions such as our Comcerto 5000, next generation video centric media gateways, as well as Transcede, and 3G/4G LTE wireless base stations.

And now turning to our guidance for the fiscal fourth quarter of 2010, we are again experiencing strong backlog levels for this fiscal fourth quarter and are aligned on a low level of turns to achieve our guidance. This quarter, more so than any past quarter, we are experiencing an increasingly constrained supply environment with extended queue times on the front and back end. Consequently, we have customer demand that we cannot fulfill in Q4 and have scheduled into Q1 due to the supply environment. Based on these and other factors, we expect fiscal fourth quarter revenues to grow between 1% and 6% from the fiscal third quarter of 2010 or to a range of approximately $43.7 million to $45.9 million, excluding the $7.5 million in legacy patent sales that Bret discussed. This guidance is based on our expectation of sequential growth in both of our HPA and CCP businesses and our expectation that revenue will be roughly flat to slightly down for our WAN business in Q4 as compared to Q3. We expect Q4 non-GAAP gross margin to be in the range of 63.5% to 64% excluding the aforementioned patent sale. We expect non-GAAP operating expenses to be $21.8 million, excluding the $1.5 million one time compensation charge related to the patent sales as we maintain the disciplined cost containment measures that we have successfully maintained for the last five quarters.

In summary, we believe that at Mindspeed we have reached an important milestone by delivering our near term target operating model of 15% non-GAAP operating margin this quarter, one quarter before we close our fiscal year. We also believe that the future looks bright for Mindspeed as we continue to enjoy a multiplicity of strong growth drivers, including many of the most important product cycles in telecommunications and network infrastructure. I want to thank our employees, our customers, and our stockholders for their continued support. Operator, we are ready to open the lines for questions.

Thank you. (Operator Instructions). Kevin Cassidy from Stifel Nicolaus, your line is open.

Thank you and congratulations on a great quarter. You had mentioned that your supply constraint in the -- well, looking out for the guidance for the fourth quarter. Do you have an estimate of what unconstrained revenue might be?

Yes, Kevin. This is Raouf. We are definitely experiencing a significant increase in lead times from our suppliers. As I mentioned in our prepared comments on both front end and back end, particularly pronounced in the back end with suppliers such as Amcore and ASE. We're seeing lead times extending to around 18 to 24 weeks at this point in time. Regarding your specific questions about how we would estimate demand constrained revenue as opposed to supply constrained revenue, I think at this point it would be fair to say that we would absolutely exceed the high end of our guidance range were it not for supply constraints.

Okay. And are there processes in place to expand capacity, or is it a wait and see each quarter?

You can imagine the supply tightening is a serious issue, so we're working it very hard with our suppliers, Kevin. We're certainly adjusting our term planning strategy accordingly to avoid any impact. As you see, we're in fact able to continue growing in this difficult quarter from a supply perspective, and that has to do with the processes we have in place including getting early forecasts from our customers, enforcing our lead times with our customers so we can plan accordingly, and of course closely monitoring wafer and assembly capacity. We work very hard with our suppliers on an ongoing basis and we hope that over time we can mitigate some significant part of the supply shortage.

Okay. If I could ask one other, inventories did go up. Was that new products or things that I guess aren't as much constrained or are you comfortable with your inventory levels as they are?

Hey, Kevin, this is Bret. As far as inventory levels, we're actually right in line with where we would like to be. Our target inventory turns level is 6 turns and we're actually at 6.6. So really the inventory growth wasn't in one particular area. It was across the board.

Okay, great. Thanks for taking my questions.

Thank you. Christian Schwab from Craig-Hallum, your line is open.

Great, thank you. Just a follow-up on the supply constraints and the bookings comments. Should we assume, then, that the September quarter in essence is 100% booked, so that you're turning away business, like zero turns needed?

So I wouldn't say 100% booked, but what I would say is we are relying on a very low turns level to achieve the quarter, roughly in line with the very low level that we were relying on last quarter.

Okay, great. And then on the Amplif-Eye product ramp, did you ship any of that product in the June quarter? And is it big enough to start breaking out as a dollar amount which may ship in the September or the December quarter?

Yes, Christian, that is Raouf. To answer your question, yes, we did ship some Amplif-Eye product in the June ending quarter, but I think it's fair to say it's very low volume at this point in the game. I would say sample to maybe very early preproduction kinds of volumes. The ramp has not occurred yet, it's fair to say. So it's a little too soon to break it out separately. As we mentioned at our analyst day back in May, we have some very impressive design wins with people like Hitachi, Dell, Quanta, Oracle, Super Micro, Huawei, many others just to name a few. And as I mentioned in our prepared comments, we've had a terrific design win ramp with these Amplif-Eye enterprise equipment solutions, but these design wins, as you may be aware, take several quarters to translate to revenue and I don't think we're at point yet where we would break out Amplif-Eye enterprise revenue separately.

Perfect. Is that something you would anticipate in the December quarter?

Christian, I'm not sure that that would be the right time. It's probably still a little too early, but as you can see, we're pretty excited about it. We think, you know, it's a significant ramp ahead of us for the enterprise segment which is already doing very well for Mindspeed.

Great. Thank you.

Thank you. Quinn Bolton from Needham & Company, your line is open.

Hey, guys, congratulations on hitting the 15% operating margin target. Wanted to ask a question about China Mobile. It sounded like you hadn't seen significant revenue in the first half of the calendar year to China Mobile, but I think your prepared script said that you might see as many as 6 million ports to China Mobile. Just wondering if you could confirm whether or not you've seen meaningful revenue to date from China Mobile, or is that really most of that business ramping in the second half of the calendar year?

Quinn, this is Raouf. As you know, we have a very high market share for FTTB or fiber to the building in China, where the three major equipment suppliers -- namely Huawei, ZTE, and FiberHome -- use Mindspeed across their SKUs to serve voice and data processing requirements for all carriers. Sometimes it's not that easy to figure out whether it's China Mobile, China Unicom, or China Telecom. But from everything we can tell so far from talking to our customers and our customers' customers, we think that China Mobile has actually already been deploying, but we think that the bulk of the deployments are in the second half. That's also true of China Unicom for this year of 2010. We think that the bulk of their deployments as well are ahead of us in the second half of this year as opposed to behind us. So I think it's fair to say that the deployments for 2010 to date have been dominated by China Telecom.

Okay, great. And then just a related question on gross margin, you're guiding for gross margin to decline about 50 basis points, plus or minus 25. Is that really just due to mix shift? I know that the CCP or the old MSA business had in the past carried slightly lower than corporate margins. Or is there some other reason behind this slightly lower gross margin guidance?

Hey Quinn, this is Bret. As far as gross margin, you're exactly right. It's just mix that's impacting it at this point and driving that roughly 50 basis points sequential decline. I think, you know, we've stated that we're going to stay in range between 62% and 65% from an operating model perspective. We still feel that's the case and, in fact, we're still in the upper half of that range. So it's just a mix shift really driving it this quarter.

Great. Then just with the restructuring of the WAN communications group, any longer term outlook? I know that's been a business, I think you've talked about in the past, gains are flat to declining maybe 10% a year. Is that still a good ballpark for modeling purposes with this restructuring?

So absolutely. This is just another result of the fact that WAN has not been an investment area for us. And so at Analyst Day, as you mentioned, I think I did make a point that, you know, probably looking out into the future, having that nose come down roughly 10% or probably low double digit is probably a better way to say it is the right way to look at it. But there's a number of designs in that area that will continue to ship over the long term in a number of transmission technologies. So we feel like we'll be in the WAN space for quite a while to come.

Okay, great. Then just lastly for you, Bret, DSOs have increased here over the past couple of quarters and you guys had done a great job through fiscal 2009 keeping DSOs at a very low number of 20 to 25 days. What's the right target model for us to be thinking about? And perhaps more importantly from a cash flow perspective, looks like if you probably have tied up $5 million or so of cash in funding receivables. Is there a point where you think you can start to collect some of that and put it actually as a cash balance on the balance sheet?

Absolutely. It's not going up because of any bad debt concerns at all, just growing as the growth of the business is driving it. I think we're in the high 30s right now from a DSO perspective, and so modeling us in the mid to high 30s from a DSO perspective is probably in the right range going forward.

Great. Thank you.

Thank you. Sandy Harrison from Signal Hill, your line is open.

Thanks. Good afternoon, everyone.

Hi, Sandy.

Transcede, you guys talked about -- you highlighted a couple things about it at your Analyst Day. As you look at it now versus when you introduced it, what segments do you expect to really drive the growth near term, and then what do you think will be the sustainable driver? Are they one and the same and have you seen those catalysts start to pick up here?

Sandy, this is Raouf. I guess I would say first of all that we remain very excited with the reception of the Transcede product family within the wireless infrastructure space. As I'm sure you're aware, many of the customers for Transcede are exactly the same telecom OEMs that we have been serving for many years. And as they look to the next generation of wireless infrastructure, it's clearly an opportunity that is increasingly going to be served by a distributed network as opposed to a very concentrated macro cell architecture. So we're seeing significant activity and design wins across the range from macrocells to picocells to even enterprise [center] cells, which is the high end of the cell space. I would say right now where we have the best traction is in what people call microcells. These are cells -- next generation 4G/3G cells -- that will support hundreds more, between 100 to maybe as many as 1,000 subscribers, but the same architecture obviously spans up to macros and all way down to femtos.

So, we're seeing a lot of traction across the range, with microcells and picocells being the majority of our design wins to date, and you may remember at our May Analyst Day, we announced that so far we had won three Tier 1 designs. We're very excited about that, because for Tier 1, this is a very important market, and scoring three of them is a big accomplishment for our company. But we've only just begun this journey. We look forward to updating you in quarters to come.

Got you. And then as far as having some capacity thing, how are your customers -- are you the only one on several of these products? How are your customers dealing with you guys pushing products into the forward quarter as far as making deliveries? Are they able to substitute it, or is it more endemic to the total industry and you're just part of the bigger challenge that the industry is facing?

It's very much the latter, Sandy. We're very much part of the same ecosystem as everybody else. We hear from our customers that -- quite often we hear from our customers that they have much bigger issues with suppliers of memory components or processors than they have with us. However, that said we don't like the current state of affairs. We're working hard to mitigate it. We don't want to build too much inventory to buffer the situation. That's not the right answer. Working with our suppliers to expedite and also getting longer term forecasts from our customers is really where the answer lies long term. So we're doing all of the above, and we're hopeful that once we get past the typical Christmas season of build, which is what's happening at this current summer quarter, things will ease up and supply will come back in line with demand. So we're hopeful that in the December quarter, things will stabilize, and that this is just particularly egregious the current quarter given the Christmas season build.

Got you. And then lastly, distribution, how are they managing through all this? Are you seeing demands from them increasing? How's the channel looking for you guys right now?

Channel looks pretty clean, Sandy. We continue to look at inventory in the channel, both distributors where customers are being served by the disty channel, as well as our customers' own inventory where they are on a direct basis. I think it's fair to say that inventory levels are at or below normal levels, which is very consistent with the commentary we provided in prior quarters. And maybe to be a little more specific, Sandy, I'd say that we're looking at certainly under four weeks, in most cases actually averaging below three weeks of inventory, either disty or directly held by our customers -- in other words, channel inventory. So it looks pretty clean at this point. Things could always change, but right now we feel pretty bullish about the degree of inventory in the channel.

Got you. Well, thanks for taking my questions.

Thank you. Kevin Cassidy from Stifel Nicolaus, your line is open.

Okay. Thanks for taking my follow-up question. Just a little more color on the WAN decision, then. I guess this was anticipated or do the products -- any products get discontinued, and how does that affect gross margins if you're having a 10% decline year over year?

Kevin, this is Raouf. No. This is very much a continuation of a process that we started several years ago, in fact, the process of shifting our R&D dollars and our resources away from legacy WAN technology and towards CCP convergence technologies as well as high performance analog, so it's very much a continuation of a long term process here. It is not a reflection of any change in our perspective on the WAN business. As Bret mentioned earlier, as we look forward to our WAN business, we don't see any precipitous dropoff or anything like that. It's probably a gradual decline in the low double digits going forward. That's our best estimate at this point.

Obviously, it's just an estimate, but there's no change in our perspective on the WAN business or on the value of those products long term. We don't really see the need to discontinue any particular devices or products or product lines within WAN. They're all continuing. They're all doing very well. Those products will all be supported going forward, just as they are right now. This is nothing more than a continuation of the ongoing process of shifting our resources where we think they'll provide the highest return for our shareholders.

Okay. Thanks for that clarification.

Thank you. Mr. Halim, that will end the Q&A segment.

Thank you again for joining us for our call. We look forward to speaking with you again soon. Operator, that ends our call for today.

Thank you all for participating. You may now disconnect from the audio portion.