思佳訊 (SWKS) 2003 Q3 法說會逐字稿

Good Afternoon ladies and gentlemen.

We would now like to welcome you to the Skyworks Third Quarter Earnings Conference Call.

I would now like to introduce Mr. Thomas Schiller, Executive Director Investor relations of Skyworks who would chair this afternoon's conference.

Mr. Schiller.

Thank you operator.

Good afternoon everyone and welcome to Skyworks third quarter 2003 conference call.

With me today are David Aldrich, our President and Chief Executive Officer; and Paul Vincent, our Chief Financial Officer.

Dave will begin today's call with a review of our third quarter business highlights followed by Paul's financial overview and outlook.

We will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including but not limited to those noted in our earnings release and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results we will discuss today are from our pro-forma income statements, before special items consistent with the format we've used in the past.

Please refer to our press release within the investor relations area of our company website for a full reconciliation to GAAP results.

I will now turn the call over to Dave for his quarterly review.

Thank you Tom.

Welcome everyone.

The Skyworks team once again delivered to guidance in spite of a weak wireless market environment that was impacted by several events.

CDMA handsets subsidy reductions in Korea, reduced end demand resulting from roaming difficulties across India's cellular networks, and the economic disruption from SARS in China into our ODM customers.

These events created obviously a well-publicized excess channel inventory; these inventories are now being burnt as we speak.

During the quarter our relative strength was driven by the launch of new products, particularly as handset OEM's, ODM's, and contract manufacturers increasingly demand higher levels of semiconductor and software integration.

This trend is absolutely coming at the industry like a freight train and it is best evidenced by the fact that we ship a record number of both RF direct conversion transceivers and complete cellular systems solutions.

Aggregate revenues for the third quarter were $150m up 10% year-over-year and down 5% sequentially; this is within the range of expectations we set 90 days ago.

Meanwhile gross margins were 41% when excluding assembly and test service activity to Conexant or 37% overall.

And with lower operating expenses, we were able to deliver albeit modest operating income for the fourth quarter in a row.

I am pleased to announce that subsequent to the quarter Paul Vincent and his team strengthened our balance sheet with the addition of 50m-credit facility from Wachovia bank.

This instrument provides for low cost of capital without dilution to our shareholders as we prepare for a stronger second half of the year and beyond.

I would like to now review some drivers behind that outlook, and I'll characterize our business along four strategic product areas and I will comment briefly on each.

First front end modules encompassing our power amplifiers and switch products; second RF subsystems, which include our direct conversion receiver DCR, the world's most highly integrated RF solution; and our complete cellular systems business where we offer the industry's most comprehensive GPRS system incorporating our base band processor and mixed signal device, our RF subsystem, and our software protocol stack, which has now been approved on 70 networks and in 50 countries; and finally, our cellular infrastructure and wireless data business.

This recently formed business unit is focused on delivering base station components in our emerging 802.11 RF solutions, and again I will comment on the four briefly.

First, within our front-end module business area, which represents roughly 45% of our revenues, we felt the markets impact most intensely were most broad-based here.

Nevertheless, as recognized in Dataquest PA market study delivered last month, Skyworks is the PA module leader; and to further ourselves in the path this quarter, we gained significant new product traction that will begin to manifest itself by the December quarter moving into '04.

For instance at Nokia, we are now supporting a wave of new CDMA 1x phones with both power amplifiers and RF ICs, and at Motorola, we are power amplifiers and switches directly to Motorola as well as on an ODM basis and we're from GPRS and IDM phones to now addressing CDMA 1x; that's a new event for our company.

At Samsung, we are participating across their entire portfolio of CDMA 1x handsets for several new GPRS phones as part of our own system solution, and we are now in designs based upon competing base bands as well.

At Seimens our presence is expanding from our initial engagement in their TDMA gate phones to now mainstream GPRS handsets sold directly as well as through ODM partners.

And finally at Sony Ericsson we are supporting their P800, their T300, and their T600 series of high-volume GPRS color screen phones.

In addition Skyworks PA modules can also be found in the flagship camera phones offered by the world leading CDMA carriers.

At Sprint we are supporting Sanyo's 8100 series; this is one of sprint's top sellers, while at Verizon we're in the LG VX6000, a recent addition to the Verizon line up.

We believe these two models in particular stand to benefit enormously from the growing consumer demand for camera-based phones, especially as we approach the back-to-school and Christmas selling season.

Now a special note -- I'm delighted to report that we recently captured a significant GPRS front-end module design with a tier-one handset OEM.

This exciting win leverages a long-standing relationship we've had with this 10% customer and takes advantage of our unparalleled level of RF integration where we combine our leadership power amplifier switch and in-house MCM capabilities to create a complete RF front-end at a form factor that is 40% smaller than existing implementations.

Quite simply this particular win represents a tremendous volume opportunity for our company on the orders of tens of millions of units next year as we will support a large number of their new handsets slated for production later this year and into next.

Second it demonstrates the compelling cost and side advantages of our advanced front-end module technology, and it expands our addressable content in serviceable market at this tier-one OEM as we made it our leading edge front-end technology with their base band architecture.

Okay turning now to our RF subsystems business.

GPRS single-chip direct DCR's were up again more than 20% sequentially as Banque, [Chimay], LG, Panasonic, Quantum, Sagem, and Siemens among others introduced new models based on our RF solutions.

The trajectory of our DCR ramp is indeed impressive at this stage because last year we were in roughly 10 phones, where today we are in over 40 platforms in counting, a trend that clearly underscores our market share gains.

Building on this success, earlier this week we launched a complete RF sub-system for quad-band edge applications.

This highly integrated chipset includes our single-chip DCR housed in an 8/8 package, our power amplifier modules or PA controller -- all optimized to save handset designer's significant space cost and design cycle time.

At the heart of this solution is our patent pending Polar Loop transmit modulation architecture, which minimizes the number of external components required to build the mobile handset and can interface to virtually any E-GPRS base band solution currently on the market.

Now I'd like to give just a brief status update on our Single Package Radio.

You may recall this particular product was just a concept at the time of our company launch a year ago.

And it represents a fusion of Skyworks core capabilities including leadership components, processed technologies, and package techniques.

And again, these encompass our PHEMT switches, detectors, and filters, Gas HBT PAs, BiCMOS DCR, and packaging and testing at our Mexicali module manufacturing operations.

I am pleased to report that the SPR is on schedule to move into production in support of our initial set of ODMs' customers this year.

Okay now within our cellular systems business, complete chipset solution units grew sequentially to a record level for us driven by multiple phone launches.

For example, we supported the ramp of the Samsung C100 GPRS platform, which is being sold across Europe, including Austria, France, Germany, Italy, Portugal, Hungary, Sweden, and the Netherlands as well as in South Africa.

And this launch is significant from two perspectives -- first it represents the completion of a major product transition from GSM to GPRS models at our lead systems customer, and second, it will enable us to gain GPRS share as we move from a single handset today to multiple SKUs, ultimately 10 platforms in fact with this one customer by year-end.

Meanwhile we also ramped product our complete system solution at the Telcom Mobile within their GPRS TSM3, TSM4, and TSM5 models, which are targeting Telefonica subscribers in Europe and Latin America.

Both of these ramps more than offset the weakness at our Chinese ODM cellular systems customers who were severely impacted by the economic disruption from SARS.

As inventory in the Far East clears and traditional build patterns resume, we anticipate a strong resumption of order flow from these ODMs later this year.

And finally within our cellular infrastructure and wireless data business.

Last quarter we brought on Gregory Waters as our Vice President and General Manager to lead this new business unit comprising discreet and passive semiconductors, gas switches, ceramic products, and multi-chip modules supporting base station and wireless LAN markets.

Greg came to us from Agere systems where he was their Senior Vice-President of strategy and business development and previously Vice-President of their wireless business.

Prior to his Agere experience, he spent 15 years at TI.

We are especially pleased to have him on Board as he has a long track record of success in our business and our industry.

Greg's mission and the team's mission is to leverage the core capabilities of the Company in infrastructure and wireless LAN to dramatically increase both revenues and profitability.

To that end during this quarter, we introduced the industry's first fully integrated 802.11 b/g wireless LAN front-end module.

Much like our integrate -- integration strategy within the handset, here we are combining our industry leading PAs, switches, and filters into a single low cost 8/10 millimeter package.

Given our early participation on virtually all high volume 802.11 reference designs with stand-alone components, we see tremendous opportunity to capture additional RF semiconductor content and look forward to this particular product driving significant volumes early next year.

Okay, let's recap.

First front-end products -- we are expanding output print against multiple top-tier [inaudible] accounts and we are launching our front-end module at a tier-one.

Our direct conversion transceivers units were up 20% sequentially.

Our Single Package Radio is translating early design wins now going into production.

And in cellular system business we are ramping at Samsung GPRS and at the Telcom.

And with our wireless LAN business, we are releasing innovative wireless LAN technology with ramps expected late this year and into next year.

Okay I will now turn call over to Paul for his comments.

Paul.

Thanks Dave.

Revenue for the third fiscal quarter were $150m up 10% from combined company year ago levels and down 5% sequentially within the range of our expectation we established entering the quarter.

Revenues from our wireless business were $137m with assembling and test services revenues from the Conexant of $13m.

Gross margin for the quarters were 41% excluding Mexicali assembling and test service activities; on an aggregate basis gross margins were $56m or 37%.

The sequential margin contraction is attributable to lower factory utilization and a shift -- this shifting product mix.

Research and development decreased from $40m to $35m sequentially as the previously -- previous quarter levels was enormously high given accelerated math sets in preparation of various product launches and field testing of our GRPS solutions in multiple geographies.

With SG&A expenses essentially flat quarter-to-quarter, we delivered $200,000 of operating income as compared to the combine loss of $19m in the same period last year and $4m of operating income last quarter.

Interest expense for the quarter was $5m offset by interest income as well as other income of roughly $300,000.

Provision for taxes was $300,000 relating to foreign income.

Accordingly our net loss was $5m or 3 cents per share, a penny ahead of the first call consensus estimate.

Now turning to the balance sheet, we exited the quarter with cash and cash equivalents of $65m.

The net loss for the quarter was offset by depreciation of $10m exceeding CAPEX of $6m and a $2m reduction in intangible assets.

Therefore the sequential change in cash balance was driven by $14m increase in accounts receivables and a $6m increase in inventories.

Both the accounts receivable and inventory levels reflect a changing mix during the quarter, as CDMA PA customers and Chinese ODM burnt excess inventory resulting in a backend loaded nature of the quarter.

As channel inventories clear and normal bill patterns resume, we expect linearity to in turn improve, enabling us to generate cash flow from operations this quarter.

Additionally, as Dave mentioned earlier, we have recently added a $50m credit facility to support working capital needs as we grow the Company.

Clearly this is an inexpensive means to access cash without creating shareholder dilution.

Looking forward to the fourth fiscal quarter, we believe we've reached the turning point within wireless end markets, particularly at the uncertainties relating to the soft winds and as our customers deplete their handset inventories.

We are in constant contact with our customers.

They are purchasing at a much slower rate than the handsets are being shipped.

This occurrence is most evident within the CDMA and the Chinese ODM markets.

Recognizing that the inventory correction in Asia will continue throughout much of the quarter, we are forecasting wireless revenues for our fourth fiscal quarter to be up slightly on a sequential basis to $138m.

Based on the Conexant outsourcing needs, we anticipate that the revenue of our assembly and test operation will be down from $13m last quarter to approximately, $9m in the September quarter.

From a cost standpoint, our expenses will be higher than normal as this is a 14-week quarterly period versus the normal 13-week timeframe, a schedule which occurs every 7 years as our fourth fiscal quarter began June 28th and ends October 3.

This anomaly represents $6m in additional costs within the quarter.

Given this temporary cost occurrence, we expect gross margins to be 35% with operating expense of roughly $59m.

Below the line, net interest expense and other should be approximately $5m based on the outstanding debt, with taxes of $500,000 relating to foreign income, all against approximately 140m shares.

Finally given lower working capital needs this quarter, we intend to generate positive cash flow from operations.

I will now turn call back to Dave for his closing comments.

Thank you Paul.

Well I am once again quite pleased with our team's performance given the challenging market environment we're facing.

Based on our discussion today, we continue to demonstrate strong execution across our key accounts and product areas and I'm most excited about our recent front-end module design with our tier-one OEM.

But that said, with constant contact with our customer base it makes it prudent to guide revenues slightly up within our wireless business unit this quarter.

Looking forward, the onset of traditional seasonality and the burn off of handset inventories coupled with our new product pipeline set the stage for particularly strong December quarter and 2004.

This wraps up our prepared comments.

Operator why don't we open the line up for questions?

At this time we'll open the floor for questions.

If you'd like to ask a question please press the "*" key followed by the "1" key on your touchtone phone.

Please limit your questions to two only.

Questions will be taken in the order in which they are received.

If at any time you would like to remove yourself from the questioning queue please press "*" followed by "2".

Our first question comes from Joseph To with Lehman Brothers.

Hi guys a couple of questions.

You gave the percentage break up for RFs and your front end systems.

But you didn't give it out for RF subsystems or for cellular systems, could you give us that break out please?

Yeah it's about 45% in our RF businesses; 40% in our system and subsystem businesses, those are silicon-based products, that's our complete cellular system and our DCR product area or RF subsystem; and 15% in infrastructure and data.

Okay and then in terms of the product mix do you guys have a mix in terms of area interface -- GSM versus CDMA?

Well GSM versus CDMA is typically we're at about -- we're at the inventory of about two-thirds, one-third -- two-third GSM, one-third CDMA.

However this last quarter we saw the area interface shift slightly where we had a bit more GSM, perhaps fourth-fifths, I am sorry about 75% and CDMA at about 20%.

I think Joe that really is a function of the inventory burn that is happening most dramatically among our CDMA OEM's than any long term trend.

Okay and then just one last question for Paul or for you.

As you guys begin to ship more of these full system solutions, have you started to see sort of a pick up in your ASPs given the increasing mix from these products?

Yes as we ship, you know, further integration, obviously the ASP overall doesn't increase.

Our next question will come from Cody Acree with Legg Mason.

Thanks guys, couple of things.

First off what was the order linearity through the quarter?

Some of your peers who have preceded you here in your conference calls and have talked about things progressing, actually quiet nicely in just the last few weeks, have you seen a similar order pattern?

Yes it's almost, you know, a tale of two cities here.

At the beginning of the quarter, we saw a mix shift away from some of the -- as we said CDMA products and away from some of our China ODM customers towards some of the newer product launches, and that's where -- that's how we were able to maintain a $150m guidance on a somewhat different mix, and it was more back-end loaded.

However as we got into mid-June, late June and now we are seeing a pick up in order flow, so, I would meager that sentiment Cody.

Any granularity there as far as the pick up to order flow?

No other than to say that we've seen both in terms of unit volumes and the number of customers who have been clearly back-end loaded.

We did see a pick up in general, particularly among those compounding customers who were going quiet at the beginning of the quarter.

Our next question will come from Kalpesh Kapadia with C.E.

Unterberg Towbin.

Good Afternoon, guys.

Hi.

Paul you know the expenses are increasing, it's kind of a surprise that we didn't know about that calendar changing, could you throw some light on gross margins without these incremental cost, what would have been a steady state gross margins, and I have a follow up?

I didn't hear what the question was -- you are coming in faint to us, can you try it again?

Sure I kind of surprised by the expenses increasing, you know, with the calendar change, could you throw some light on gross margins what would that they have been in steady state without this incremental cost?

If in fact we were to take out the anomaly of the 14th week, which contributed the $6m then the margins at the revenues that we're projecting of a 147m, the wireless would have been approximately 40%, and given the utilization of factory we will lose about 1.6m, approximately.

And what are the terms on the Wachovia credit facility?

What are the--?

Terms on the Wachovia credit facility?

There the terms are essentially, that they are secured by our receivables and essentially it is a LIBOR base, which would reflect at currently somewhere around 2%, so very inexpensive, and the amounts of covenants are very limited; the details we'll be filing with our 10-Q.

Thank you very much.

Thank you.

Our next question comes from Chris Caso with Soundview Tech.

Hi good afternoon, I want if you could give some more granularity on cellular systems business, and you know what kind of sequential growth you saw in that business in Q2 and what your expectations are in Q3, given new platforms that that are going to be ramping for you there?

Well we are not -- we really don't segment to that level of granularity, but let me give you a flavor.

We have been running just north of 50% RF, that business is now 45%.

We have seen a disproportionate amount of our growth or the growth in fact in this last quarter as the components -- some of the more mature components CDMA in particular when we saw the inventory burn, it was a shift more towards these cellular systems customers.

In the case of Samsung, you may recall we had a strong GSM business a bit more than the year ago and few quarters ago, and the GPRS take up by Samsung we really weren't participating at all, and now that take up with the C100 series is really -- I mean the current uptake and the forecast going forward is quite a dramatic increase, and we are now back to where we had always expected to be, which is a significant player of base band and system product to Samsung.

And to Telcom -- Telefonica, that business in Europe and Latin America is also up sequentially.

So we are beginning to see as we would have -- if we were to get -- take out the anomaly of the inventory burn this quarter, we expect to see growth in our compounded business but measurably higher growth rate in those cellular systems and RF subsystem businesses.

Okay.

What -- is it possible just so we get some indication of where you think you are going to be for the December quarter, either giving some idea of where you think potentially your PA and switch business would be right now if the inventory burn weren't happening?

I'm not sure I understood exactly the question, but let me try to answer what I've heard.

My expectation is that in December, the power amplifier and the switch business would be benefited by two factors.

One is, we do believe and we've seen evidence through our customer's MRP schedules production plans that the component inventory will have been largely if not completely burned by September.

And of course with the traditional seasonality, we have seen in the past and each and every past year, we've seen a pickup in the December quarter.

So we'll have two positive events in that base -- in that broad-based RF component business.

And we expect ongoing growth and traction in our DCR, our CDMA, RFICs and our complete cellular system solutions.

So we are expecting -- we view the September quarter inventory burnt to advent an anomaly where we fortunately had enough top line growth form new products to offset the inventory burn that I think was more dramatic than anybody expected.

When we get to December, I think the inventory burn is behind us, and you're going to see pure growth from new products.

Our next question comes from Blaine Carol (ph.) with Adams, Harkness, & Hill.

Yes.

Thank you.

Dave maybe we can switch over to a couple of the other businesses.

First of all in the wireless LAN and the 802.11, could you talk about the pricing trends in there; and I guess more importantly units -- how were units sequentially this quarter versus last quarter -- you know, up, down, flat?

Let me talk about the pricing because it's an interesting dynamic and it almost mirrors exactly what we're seeing in our business, where someone else would ask the question what's happening to ASP.

The blended ASP for our company is increasing as we ship more -- a * disproportionate number or highly integrated products.

As the case of 802.11, you may remember when we talked about this a quarter ago, we were, I don't know, north of $12m whereabouts quarterly run rate of switch units, but these are mostly switches and discreet control devices.

The new products that Greg Waters and his team have introduced and that we're looking at traction later this year are actually very similar to the front-end module of a phone; it uses our Mexicali assembly and test operation, our HBT, our PHEMT switch technology filtering and passives integrated into, let's call, a couple of dollar front-end module that is very cheap for OEM customers to implement.

It saves them a lot of complexity in cost, and it's uniquely, we think, advantageous to our company because of our vertical integration of package and our passive switch and amplifier technology.

So this hits the sweet spot of what we are good at.

Unit volumes were roughly similar, but the ASP is going -- which has been trending down in 802.11 for the discreet components, no surprise there -- is going to take as little bit of a step function pop as we replace switches with complete front end modules.

Okay and then on another business.

On the cellular infrastructure, you know, the tone seems to be improving somewhat there; you know, Ericsson for the first time in a -- probably a number of years spoke a little bit more positively some of the rather OEM's and component providers talking favorably on the infrastructure, you had a big contract with Lucent yesterday with Sprint PCS.

Any commentary around your infra structure business -- is it stabilizing, beginning to get increased activity -- things like that?

You know it's been bouncing around at the bottom for a long time, and quite frankly we, like the rest of the market watchers here for infrastructure trying to get our arms around this, have not seen a cause for a tremendous amount of optimism in the infrastructure business; we see pockets of strengths here and there, but I must say that we have been in this -- embroiled in this infrastructure downturn for so long that we don't plan for any growth in our infrastructure business.

Having said that there are pockets of growth in both infrastructure data of LANS where we see a real differential advantage for the capability of our company, and the announcement of bringing Greg and focusing his team on those opportunities is we believe we can opportunistically cherry pick from product areas that leverage what we are very good at, throw up superior margins and cash as we enter those markets in a more -- I think a more conservative and more focused manner.

But I don't view growth from infrastructure to be part of our business strategy.

Our next question comes from Dale Pfau with CIBC World Markets.

Yes good afternoon.

If we can just talk a little bit about order trends and your visibility right now as we head into the third quarter and beyond and what your schedule share is telling you -- you're giving us relatively modest outlook for the wireless business, are there areas which are remaining depressed and could actually shrink relative to the June quarter levels; or will we see growth across all product lines?

Are you seeing any comeback in the CDMA area, give us a little bit of granularity here please?

Okay, I think -- I appreciate your center behind that question, because the fact is in the September quarter we are seeing an uptake in some of these newer product areas we discussed earlier in the call where we see ongoing softness and in the case of China ODM's the lack of visibility is among primarily some of our cellular system customers in China where we have a very high team, we are designed in.

But the inventory level there leads us to believe as well as our own channel checks and discussion with our customers that it's unlikely we will see a return or an increase in that order flow until very late this quarter and into next quarter in China.

Also with respect to CDMA, you know, we've had quite a bit of time here to look at this and dissect it.

We've got a pretty good handle on the inventory position as out there, and we have been watching and observing and discussing with our customers their production run-rate today, which is significantly less than their sale through and their purchasing components that are significantly less than their production run-rate.

So we see inventory being burned among those customers both at the finished phone level and component level and our -- our forecast -- our estimate is that won't -- that trend will not reverse itself until very late in this quarter.

So I think those are the areas.

On a positive side we are seeing great strength from our customers who are incorporating our product in their camera phones.

We begun to even see, Dale, some up tick in India Reliance, which was a big deal for us or a big expectation for you until the roaming agreements and those problems, set in.

And we are beginning to see some cause for optimism that is still -- there is still inventory but they are burning through it more quickly and our customers are in the sweet spot of that Reliance network rollout.

What kind of visibility do you currently have there?

If I take -- if I look at our customer -- our customers' forecast for pulling down the hubs and consignment inventories as low as our backlog, we are above where we were in the last couple of quarter which is, lets call, it 90% booked going into the quarter with about 10% turns assumption.

our next question comes from Satya Chillara with WR Hambrecht.

Hello Dave.

Couple of questions here, the DPR shipments grew nicely -- 20% what's the sense on DCR for the year at this point; what kind of growth can we expect for the calendar 2003?

Well we were -- we shipped roughly 6m DCR's last quarter

Right.

If you were to go back to -- let's go back to June of a year ago when we first launched our company, it was about 0.5m units so those kind of a data point [inaudible] 0.5m to 6m over the course of a year, so that -- that's pretty exciting.

You know if you -- if you walked into a cellular phone store today, you see significantly more than half of the phones on the shelf would have a super-header or [even] more discrete design versus the DCR.

Yet every customer we engage with -- not most but every customer we engage with is laying -- is designing radios around a direct conversion architecture.

So, I think we are going to see ongoing growth.

We expect to be number one or an absolute top player in DCR technology, and we expect DCRs are going to significantly displace discreet designs over the course of the next year or 18 months.

So you should expect to see ongoing sequential continued growth in our DCR business.

Okay, Second question, Dave -- EDGE, couple of your competitors including Singular -- Singular Wireless, everybody is talking about EDGE, and we have seen an EDGE RF subsystem from you, what about the complete EDGE base band plus RF; where are you on that and design wins you have in the EDGE solution?

Well our EDGE solution is as you correctly stated, what we have EDGE front-end, EDGE radio and so those products are out there and they are being designed in.

Our customers who are listening to the same data points that you are it sounds like, and our customers are obviously to varying degrees looking at EDGE as a competing technology to 1x in the States, and its ability to add capacity to the operators in many networks.

But there is really of quite a bit of debate as to how quickly it rolls out; some are very, very bullish about it.

I happen to personally believe that EDGE is going to be a major driver late in '04 and into '05 you will see EDGE product earlier than that, and we are orienting our cellular system product roadmap that is the base band and stack that will surround obviously our RF front-end that we already have introduced during that period of time to hit the sweet spot of that introduction.

It's my belief that you are not going to see volumes from EDGE in '04 in a very meaningful way, but you will see a steep ramp towards the end of '04 and '05.

That's my view; there are some contrary approaches out there though that it maybe a little bit less and a little later.

Our next question comes from Sandy Harrison with Pacific Growth Equities.

Thanks good afternoon guys.

Hi.

Just some -- couple of questions.

Dave you talked a little bit earlier about visibility and sort of *consignment, what percentage of your business currently now do you believe is consignments?

And sort of along that lines with the change and -- some of the disruption you said during the quarter due to inventories, have your 10% customers changed very much early, pretty much in line of foot they were in last quarter?

Sandy, you know, it's somewhere between 20-30% depending on where, but I don't think the profile has changed greatly in terms of those 10% customers in terms of how they draw from those.

Remember what goes into the hubs tend to be the high runner activities and so they, you know, they are still performing.

It might have decreased slightly as an overall just, you know, in the natural sense, but it's somewhere in that range.

And a quick follow up, you talked about significant wins that you would be able to do to front end with a number of different base band suppliers.

Do you see your customer that you are -- that you talked a little bit about Dave, working with -- you know, one base band supplier typically or using a number of base band suppliers; or in other words, you know, are you working with a number of base band guys at that customer or is it principally just one?

Well this is -- this is a top ten customer so let's be clear.

This is very high volume.

We are using -- they are using a single base band architectural approach, and this is a pretty significant increase in our serviceable market by getting design into that complete front-end.

We are really thrilled with this design win because it's tens of millions of units.

Its ASP is quite a bit higher than a power amplifier, and it was a difficult specification but it is pretty uniquely centered in what we believe we are good at, which is that front-end transmit chain, switch filtering, amplification module technology.

So it is a top 10% OEM, it is a significant volume, it is a difficult speck, and it is going to be a big revenue generator for us in '04.

Great, thanks.

You are welcome.

Our next question comes from Chris Versace with Friedman Billing and Ramsey.

Good afternoon gentlemen, just two quick questions.

First one is for Paul.

What's the impact of that 14th week going to be in terms of the December quarter, just in terms, is that going to reduce our expectations for the expenses in that quarter?

In terms of the December quarter that -- you know this is a one-time event and so that $6m essentially evaporates, and so would be in a normal basis, and so we'd be back to the normal run rate.

So it wouldn't step down by $6m though sequentially?

Yes, it will.

It will come down by the 6m, that's a one-time event.

One in 7 year event into an extra week of cost.

Okay and then just another quick question.

What was the revenue out of the wireless business by ODM in aggregate in the quarter?

20-25%, pretty consistent.

The -- so it's a pretty consistent and that's predominantly been in lot of the front-end products and in Taiwan, Korea, little bit in China.

When I was referring to the ODM, we were quite frankly expecting and will achieve overtime a dramatic increase in the ODM complete cellular system revenue.

And that took a bit of pause as those many ODMs who were poising themselves or positioning themselves to take share were delayed and took a step back due to the impact of this economic disruption in China over the last few months.

We'll call it SARS, but in fact it is the case that inventory build and unit sell through drop in China for GSM, and that's where we have several customers with our product designed in they have gone through FDA approval, they are ready to ramp, but they didn't this quarter.

Our next question comes from Cody Acree with Legg Mason.

Yes let me just follow up on the expense line again of the 6m on the added week, don't you also have in the added week some revenue -- I am not sure exactly how much translates to an absolute lower gross margin?

You know, we forecast on the monthly demand increments and quite frankly our customers don't provide forecast to precision in 3 months.

So again it's on a monthly basis, so you know, that has the effect of lowering our overall revenue relative to what our expense profile is.

Okay so you are giving us really just the expense side of the equation -- are you factoring in the longer quarter in the revenue guidance as well?

Again, as I said you know, we are forecasting based on our demands that we get from our customers that are really on monthly increments and like I said 3 months out from now which is where that added week comes into they don't give us that granularity at this point.

Our next question comes from Jeremy Bunting with Thomas Weisel Partners.

Thank you very much.

Dave I am sorry if is missed this, but did you give a total number of complete system platforms which you hope to begin by the end of the year and the same for the DCR and I have additional questions?

I am sorry what -- you are looking for the DCR or--

For the complete system I think--

I am sorry.

I guess that you had said that you are hopeful of being in 40 platforms?

That's right.

40 platforms by the end of the year, is that still the case?

Yeah I think and I think we'll in fact do a bit more than that, perhaps closer to 50 and some of that has been the impact in general uptake of our GPRS solution within our top customer.

So we are in one, going into two and three as we speak, we will be in ten by the end of the year, so I think the number will be 40-50.

And in our RF business, by the end of the year we are in about 50 phones today with our RF products and that will move too close to 80 by the end of the year given the current -- the design traction on wins that are going through various levels of pre-production and so on today.

So we will be roughly 80 in our DCR and RF subsystem product line and 40-50 in our cellular systems product line and the primary driver between those two numbers is the positive uptake of new Samsung phones.

Right, just to be clear on that does the 80 or so RF platform includes the 40-50 -- [count these] systems?

It's not a bad thought, but no, they do not.

So you are saying that between you count the -- DRC you count the DRC when sell a complete system and you count a separate list of DCR when it sells with another platform?

That's exactly right, we don't double count.

Okay, if I could count that I'd ask you one question and move on to another?

Thanks gentlemen.

Gross margin trends -- I am just kind to reflexing on what the gross margin profile could be as we move into more and more systems and of course front-end modules and SPR, could you just give us a sense to what the spread of gross margins are -- I don't think you -- sort of SCR on the lower end with transceivers and complete systems at the higher end, I was wondering if you could comment on that?

Thank you.

You know the way we predominantly look at this and have consistently is that we'd look at the contribution margin and that really is the key driver in all of our products include the full system as well as the components have very high contribution margins, on average it's in the mid 60 range.

And so really the impact as to whether or not we have a gross profit margin goes, it is really due to the utilization of the factory that fixed cost.

You know in our PA's, which are integrated into the overall system has very high margins.

So the contribution margins remain, you know, consistently high and the fact -- the real driving factor is covering that fixed cost.

Our next question comes from James Faucette with Pacific Crest Securities.

Hi, this is Steve Clamant (ph.) for James.

Just hoping you could describe what kind of handset inventory you are seeing right now in Asia; can we assume that predominantly lower end handsets or what do you think there?

Well it was almost by nature, much of it is low to low mid-tier in China, so I think that's true -- that's the case that it will be low to low mid-tier.

And I think on the CDMA front it really covers the watershed of low mid and high-tier.

So I guess from a dollar standpoint if you look at the ASP of our complete cellular system, I would say it's more low end in China.

Okay thank you.

Our next question comes from Pierre Maccagno Needham and Associates.

Hi could you comment on the -- on your fab utilization at this point?

Pierre the utilization is somewhere around 65-70% at this point.

Okay so that really hadn't being changing all that much?

No it was down a little bit obviously as things depleted, especially as those products -- the CDMA PA's which as you know are vertically integrated go through to fab were the ones that declined this quarter, so it is probably close or more than the 65.

And then your expectations for transition to 6 inch?

At this particular time, no we don't.

You know we have the capacity available that meets our needs; also as we move forward into these more integrated solutions with silicon as the base that is outsourced predominantly -- that is outsourced and that we believe are not fab, the silicon base.

So I don't see a need to actually expand the Gas capability or our fab capability at this point.

In fact yes to the contrary review increasing utilization as a path towards gross margin and we are focused very intensely on increasing yield and dramatically through new material profiles reducing the size of the device.

So as we do that -- our 3/3 module for example -- 3/3 module for CDMA PA's has dramatically less Gas real estate, and so for us its simply a matter of capacity, and at this point we don't see the need for capacity at 6 inches.

Our next question comes from Samuel May with US Bancorp Piper Jaffray.

Hi Dave and Paul.

First question Dave, Motorola SPF can you talk about the trend there with SPS and what the type of product you guys are delivering to them?

Well you know we compete with SPS for the [effections] of and the share from the Motorola, and we have always been in a position that we think to do that quite effectively; we complement each other in terms of what we are good at in a pretty meaningful way, but we do provide components into SPS in their primarily switches.

So that -- you are not providing anything other than switches into SPS at the current time?

No we are providing a lot more than switches to Motorola OEM in their complete -- in their thoughts.

And then second question is for Paul the debt with Conexant, are you looking to do anything with that during this quarter or next quarter; what are the opportunities for you to reduce that expense?

Well that actually has a mandatory convert that's out 18 months from now, and so essentially at this point in time we are not considering reducing it during the current quarter.

Our next question comes from Kalpesh Kapadia with CE Unterberg and Towbin.

Hi guys.

Just a follow-up on the expenses for 14 weeks, so is it possible that you could have one extra week worth of revenue or 7% higher -- I wasn't clear on that?

I thought it's possible -- you know if you look at it, we get the granularity that we get on our customers revenue forecast or customer shipments forecast are when you get very close in there is a great deal of precision; when you get out 3 months, which is we're almost talking out 3 months, we don't have a great deal of precision.

However given the fact that we are shipping, you know, that will keep the quarter open until October 3rd given this 14 week anomaly.

We don't see our customers coming and looking for a meaningful amount of October's demand shipped in those first few days.

So I don't except it to be an up tick in revenue -- at least not in any meaningful way.

And, you know, lastly is there any plan to kind of re shore the balance sheet somewhere around the financing?

But -- at this particular point of time having the $65m, I mean the excess of $50m of [inaudible] should be adequate to meet our operating needs.

Kalpesh this issue of the receivables up and inventory Paul explained it, and the fact is we don't see an ongoing trend at this level of inventory trends.

Our inventory turns in this company -- we are going to get them back up to 10 over time.

The dramatics are significantly lower than that, but our cycle times are coming down; we are dealing with this mix issue, I don't view that happening again.

So our inventories are going to drop and our receivable DSO's are also going to drop.

So we are going to pick up] cash in that regard and we have the $65m and w have access to another $50m.

Mr. Aldrich we have time for one final question sir.

Thank you.

And our final question will be from Jeremy Bunting with Thomas Weisel Partners .

Thank you very much.

Real briefly, you mentioned Dave [inaudible] new Sony Ericsson platform, so I was wondering what product that is or product type?

It's a power amplifier Jeremy.

Thanks very much.

You're welcome.

Operator.

Yes sir.

We are out of time I think.

Yes sir we are.

Okay in wrap up, I'd like to thank everyone for joining us today and we look forward to updating you in another quarter.

Thank you very much for listening.

We would like to thank you for participating in today's conference you may now disconnect.