Semtech Corp (SMTC) 2003 Q2 法說會逐字稿

Good day and welcome to the second quarter fiscal year 2003 results conference call. Today's call is being recorded, and a question and answer session will follow after the presentation. For additional remarks and introductions, I will now turn the call over to Mr. John Bauman, the treasurer and manager of investor relations. Please go ahead, sir.

Thank you, operator. Good afternoon, ladies and gentleman. Welcome to Semtech Corporation's fiscal year 2003 second quarter earnings conference call. I'm John Bauman, treasurer of the company. We have just released the results for our second quarter ended July 28, 2002. For the next 45 minutes or so, Jack Poe, Chairman and Chief Executive Officer and David Franz, Chief Financial Officer will be discussing those results with you and answering your questions.

Before I turn the call over to Jack, I want to remind everyone of the following two notices: First, this call is open to all interested parties in accordance with [Indiscernible]. If you have any questions about our future performance, or estimate of future financial results, we will consider them now. We are unable to say if there will be another [reg] compliant opportunity for you to ask questions before the next quarterly conference call.

Second, this conference call will include projections and other forward-looking statements which involve risk and uncertainty; and as highlighted in the press release, risks include, but not limited to: overall economic conditions, the timing and duration of semiconductor market up turns or downturns, demand for communications infrastructure equipment, demand for computer, cellular phones and automated test equipment, demand for the company's products, competitor's actions, relations with large strategic customers, risks associated with the businesses of major customers, and other risk factors. Please refer to the company's form 10K for the year ended January 27, 2002, as filed with the S.E.C. or the risk section of our earnings release for further information.

Although a replay of this call will be available on V-Call's website until September 26, 2002, the company undertakes no obligation to update or revise forward-looking statements to reflect subsequent events or changes in circumstances. Any written transcript of this call that may be posted or published is unauthorized by the company, as is any replay or broadcast of this call via the internet or otherwise after September 26, 2002.

I'll turn the call over to Jack Poe, Chairman and Chief Executive Officer of Semtech.

Thanks, John. We reported our 2nd quarter 2003 results in the press release issued in the past half-hour. Over the next 30 minutes or so, David Franz and I would like to review those results with you and discuss the outlook of the third quarter of fiscal 2003.

Before we talk about results for the 2nd quarter and our outlook for the 3rd quarter, I would like to make some brief comments regarding the customer dispute that we reported today in a separate release. A customer has reported some failures in parts of two models of its equipment. The IC shipped in the past two years total about $550,000 in revenue for Semtech. Our extensive end-of-life reliability tests show that our parts function reliably, and we have freely shared the data with the customer. Last year, we aided the customer in redesigning its equipment to eliminate an overvoltage condition that well exceeded the data sheet limits on our IC. The customer has indicated it has suffered damages in the range of $4 million and has projected that it may incur damages up to $115 million, but has yet to provide any financial or technical analysis to support these positions. We are continuing to work cooperatively with this customer to resolve the dispute. Shipments to this customer for all devices are expected to represent approximately 1% of total revenues in the 3rd quarter. We disclosed this information out of an abundance of caution in the current environment, but we'll not take any questions on it since discussions and testing are ongoing.

I'd like to turn to orders. Orders increased 41% over the previous year, but decreased about 14% from the first quarter. There were several factors that contributed to the decline from the first quarter rates. The second quarter is traditionally the company's weakest in terms of its seasonal demand, especially in computers and cell phones; however the weakness in orders in the 2nd quarter was somewhat more widespread.

New programs that had been increasing were stretched out a few months. In most previous years, order rates have increased late in July and accelerated in August. Late in the quarter this year, we experienced some pushouts and cancellation, and the weakness in in orders has continued so far through August.

Overall consumer demand appears to have been slowed by release in the financial markets and investor's lack of confidence. In the computer, the HP-Compaq merger has negatively impacted the subcontractor/vendor base, which has, in turn, impacted component suppliers. We've experienced repeated requests from the vendor base to reduce prices to help those vendors remain competitive to be able to retain their portion of the HP-Compaq business, yet little business appears to be placed from all these negotiations either at the systems level or at component level. Comment on new desktop platforms has decreased somewhat for the immediate platforms as the power consumption has been reduced, but the next generation desktop designs we're working on now are expected to increase power consumption by 40 to 50%, which should, again, increase the power management content. Graphics power management content is also increasing due to the increased consumption.

Order rates for test and measurement components were very robust in the quarter. Orders exceeded shipments for the first time in six quarters. Most of these orders are for shipments in the third and fourth quarter.

Looking at revenues, revenues for the 2nd quarter increased about 6% sequentially from the 1st quarter and about 29% over the 2nd quarter of last year. Power management revenues increased 91% from the 2nd quarter of last year, and since the 2nd quarter of last year, desktop and telecom power management revenues have increased by 71%, while portable power management revenues have increased by 148%. Sequentially, power management product shipments decreased about 8% in the 2nd quarter compared to our forecasts of about 5% growth, which reflected the weakness in the order pattern.

Power management revenues from portable applications increased in the 2nd quarter, while revenues in desktop and server applications decreased. As I mentioned, we have traditionally experienced a significant increase in orders starting late in July, but really building momentum in August, especially in the desktop computer area. So far, we've yet to experience that inflection point.

Protection product revenues increased 29% from the 2nd quarter to the 1st quarter, which was well above our guidance of 10 to 15% growth. We began the 2nd quarter with a backlog substantially higher than the beginning of the 1st quarter. Order rates for the 2nd quarter for protection products were about 18% lower than the 1st quarter orders, which, again, reflected seasonal weakness primarily in some of the cell phone and some notebook applications. We're very encouraged with the new design activity for protection products, which we'll talk about in a minute.

Shipments of test and measurement products increased by 51% in the 2nd quarter, which was more than twice our guidance of 15 to 20% growth. Business improved in most segments of the test equipment market, but flash memory test was notably robust. Shipments for advance communications products increased by 19% in the 2nd quarter, slightly ahead of our 10 to 15% guidance. A review of design activity indicates that we have made good progress in getting our timing synchronization devices adopted on the traditional platforms now in production at the major telecom equipment providers. However, the shipment rates of the traditional equipment for the supplier remains depressed, and the new box rollouts are still somewhat unpredictable. Revenues from other product lines were relatively flat in the 2nd quarter compared to the 1st quarter.

Looking at profitability, the company reported EPS of 14 cents per share in the 2nd quarter, compared to 13 cents in the 1st quarter. In the 2nd quarter last year the company reported a net loss of 7 cents a share, which included certain one-time charges. Gross margins increased by about 40 basis points sequentially in the 1st quarter to about 57.5%, which does not include the sale of previously reserved inventories. So the reported gross margins were 58.3%, or about 120 basis points higher, which included the reversal of those inventory reserves. Pricing pressure somewhat slowed the growth of gross margins in the quarter, however our sales mix favorably increased margins, as well. Proprietary products shipments increased again this quarter to more than 80% of total shipments, and we have definitely concentrated our design and marketing efforts much more towards proprietary content.

Sales, marketing, G&A, RND increased from the 1st quarter as hiring increased mostly in technical positions, primarily in design and applications engineering. Operating expenses as a percentage of revenues increased slightly to 32.8% in the 2nd quarter.

Looking at the design activity, in the 2nd quarter, the quarter the company reported a substantial increase in design activity compared to the 1st quarter. A total of 461 new design wins that are expected to generate more than $67 million of annual new business were reported, and that compares to about 377 design wins in the 1st quarter, which represent about $53 million of new annual business.

Product line design wins were lead by portable power management, desktop power management, protection products, and advanced communications. The company reported 43 device design wins in notebook computers and 84 device wins in designs in cell phones. These designs are expected to generate about $30 million in new annual business, which was about 45% of the total design win dollars for these two platforms.

We now have major platform design wins at the top five notebook OEMs. The company's notebook ODM business in Taiwan continues to expand, as well. New customers accounted for about 37% of total new designs. New customers are dominated by manufacturers of communications equipment and portable electronic devices. Protection products represented nearly half of all new customer designs, and we see a wide variety of customers using protection products in their systems for the first time. Geographically, Asia and Japan reported 54% of design win dollars, with Korea itself representing about 29% of total dollars. Europe was especially weak with only about 5% of total design wins. North America represented 43% of design wins.

Looking at new products, the company released 19 new product families in the 2nd quarter, most notably Semtech launched a breakthrough product line called Micro Buddy. Micro Buddy is a fully programmable support IC for micro controllers, which is far more advanced than any other product in the market today, which features that include CPU supervision, clock management, realtime clock support, and auxiliary memory and the serial interface. Response to the Micro Buddy launch has been outstanding thus far. We have identified more than 200 sockets and a small number of design wins through the leads generated by our advertising and PR campaign. We've also generated a number of ideas for future products in this area.

The company introduced a new technology platform of products for the next generation desktop computers, which we call [Combesense], that will again reduce the bill of materials cost and increase power handling capabilities. We received a very positive response to this technology so far, and we expect to launch enhanced versions in the 3rd quarter.

In addition, the company introduced several new power management controllers for graphic applications. Several of these devices were developed in concert with the graphics chips companies and have been adopted for production starting in the 3rd quarter. Next generation, Pentium, IMVP IV, Power management controllers began sampling in the 2nd quarter, and three platform design wins were reported during the 2nd quarter.

Semtech's battery charging devices and LED back light drivers for cell phones and portables continue to sell very well, and enhanced versions were introduced in the 2nd quarter.

Turning to the outlook for Q3, I'd like to take this opportunity to discuss the outlook now. Overall we expect revenues to be flat, or down 5% from the 2nd quarter. The normal seasonal increase in orders in the computer and cell phone markets starting at the end of July and accelerating through August has not yet materialized. Checks on distributor and channel inventories indicate that stocks increased somewhat at the end of the 2nd quarter, and the rates of new orders for the 3rd quarter will depend on these inventories selling through the channels. 3rd quarter revenues are more dependent on orders for the next nine weeks; although we have seen some increases in forecast demand in the past two weeks, we can't predict with certainty that such an increase will continue. In order for -- to be flat, revenues in the 3rd quarter on the 2nd quarter, the company needs to book about $15 million in turns orders before the end of the quarter, and approximately $3 million of these turns orders should be forthcoming from the inventory hub based customers.

Power management revenues should be flat, may be down 7% with, again, portable power increasing in the desktop, gaming and graphics perhaps decreasing. Shipments of advanced communications products will probably be about flat in the 3rd quarter compared to the 2nd quarter. Protection product revenues should be flat to maybe down to 7% in the 3rd quarter. Tests and measurement will probably increase somewhere between 20 and 30%, depending on the continued rate of the increases in tester production, and shipments of all other products are expected to be down somewhat sequentially.

With the forecast given above, it is likely that the company will experience a shift in its product revenue mix again. As a result of a favorable product mix, reductions in both SG&A and RND expenses and increase and other income, we expect profits for the third quarter to be relative flat with the 2nd quarter at roughly 14 cents per share. We are moving selectively to trim costs where appropriate for the short-term; in our advanced communication products, we are reducing head count and cutting costs in an effort to bring about a break-even operating result in the next few quarters. We have focused efforts on shorter term projects that can produce revenues. Progress in our efforts to reduce costs by closing our last wafer fab Corpus Christy, Texas, and we expect that closure to be completed by the end of the year.

To summarize in the past four to six weeks, we've experienced a much more difficult end market. Our customers, again, have become more cautious in their order patterns and inventory management. Whether consumer confidence improves and equates to increase purchases of our customer products, much remains to be seen. But we look to our internal execution for new products and new customers to again drive growth. Semtech operates under conservative model that focuses on profitability and cash generation. Our balance sheet remains strong and we are one of a handful semiconductors companies achieving better than 20% returns on our market. This concludes my remarks, and I will now turn the call over the David.

Thank you, Jack. Good afternoon, ladies and gentlemen. I'll now review in a little more detail Semtech's operating results for the 2nd quarter of fiscal 2003 as well as our outlook for the 3rd quarter of fiscal 2003.

Revenues for the 2nd quarter of fiscal 2003 were 52.1 million, an increase of 6% compared to revenues of 49.2 million for the 1st quarter of the fiscal year. The 2nd quarter revenues increased 29% when compared to the revenues of $40.5 million for the prior year 2nd quarter. Revenues for the six months of fiscal 2003 increased to 101.3 million, compared to 101.1 million for the prior year six-month period. Gross margins for the 2nd quarter were approximately 58%. Gross margins for the 2nd quarter excluding a gain on the sale of previously written off inventory improved sequentially by approximately 40 basis points to 57.5 as compared to 57.1% for the 1st quarter. The improvements in gross margin during the quarter are due to continued improvements in product mix, as certain higher margin products contributed the majority of the quarter's sequential growth.

The company also continued to improve its manufacturing costs and yields during the quarter. Gross margins for 2nd quarter of fiscal 2003 were approximately 320 basis point better than the 2nd quarter of fiscal year 2002 prior to the inventory writeoff recorded the prior year 2nd quarter. Net income for the 2nd quarter excluding once again the sale of the previous written off inventory increased sequentially by 8% to 10.8 million, or 14 cents per diluted share. This compares to net $10 million or 13 cents per diluted share for the 1st quarter of this fiscal year. Net income for the second quarter of fiscal 2003 increased 77% as compared to the 2nd quarter of last year. Once again, prior to the one-time items in the prior year 2nd quarter. Revenues for the 2nd quarter were derived from the following geographic regions: first, from North America, 36%; Europe accounted for 5%; and Asia accounted for 59%.

Shipments into the industrial market improved in the 2nd quarter and are forecasted to grow sequentially during the 3rd quarter of this fiscal year. The percentage of revenues generated from the Asia-Pacific region is reflective of the contribution of our desktop, notebook, and wireless handset business. Net turns orders accounted for 32% of shipments in the quarter, and this compares to 34%, 23%, and 30% in the prior three quarters, and the vast majority of all new bookings are for delivery within a 30 to 60-day window. In addition, as Jack mentioned, we have several large customers for which an order and revenue are recorded; when the customer requisitions inventory from our warehouse and in the 3rd quarter, we have a new design when ramping in this type of business format, accounting for some of the increase in the forecasted turns business.

The three big end markets for Semtech: computer, communications, and industrial represented 97% of total sales. Revenues from the computer market, which includes graphics, notebook computers, gaming, and PDA's represented 57% of total revenues, while the communications market represented 31%, and industrial, 16% of total revenues. Revenues from OEM sales represented 52% of total revenues in the quarter while distribution accounted for 48% of total revenues. The percentage of sale through distribution has increased as a higher percentage of our Asian sales are going through distribution. As Jack discussed, we are forecasting the revenue for the 3rd quarter of fiscal 2003 will be between flat to down 5% sequentially to obtain the midpoint of the third quarter forecast net turns orders of 47% of revenue are required. This is higher than our historic range, but is reflective on the short lead times which customers are ordering products.

Based on bookings to the end of last week, we need $15 million of turns over the next nine weeks to remain flat. As Jack mentioned, 3 million of that is largely accounted for in the book-ship type customers.

Looking at gross margins, as I previously mentioned, gross margins for the 2nd quarter of fiscal 2003 did improve sequentially by approximately 40 basis points to 57.5%; this is due principally to the growth in revenues from our test and measurement products as well as our portable power management products as well as continued improvements in our manufacturing cost structure and yields. On a year over year basis, the margin improvement was quite significant. We improved from a level of 54% gross margin in the prior year 2nd quarter, prior to one-time items. We continue to believe that our margins will move towards our long-term goal of 60%. For the 3rd quarter, we are forecasting that gross margins will stay relatively flat based upon the current revenue forecast.

Research and development expenses were 8.3 million for the quarter. This increased approximately $750,000 as compared to the first quarter. This increase was primarily due to added head count in the RND area as well as expenses associated with the licensing of some technology. Higher income in other areas allowed the company to increase its RND more than had been forecasted.

For the coming 3rd quarter, we are forecasting that RND will be down approximately $400,000 sequentially. This is due principally to the lack of any technology licensing expenses during the 3rd quarter, and a reduction in other variable RND expenses.

SG&A expenses increased approximately $400,000 in the 2nd quarter as compared to the 1st quarter. This increase was primarily due to higher commission expenses, supplemental compensation costs, and legal expenses. For the 3rd quarter, SG&A is forecasted to be down approximately $300,000 compared to the 2nd quarter levels.

Interest and other income was approximately $1.5 million for the 2nd quarter. We continued to benefit from our extension of weighted average maturities of our investments. Included in other income was an approximately $600,000 gain on the repurchase of diventures, and for the 3rd quarter we are forecasting in interest and other income, which includes gains on sales of securities and gains on the diventure repurchases to be flat to up somewhat as compared to 2nd quarter levels. The company's effective tax rate for the 2nd quarter was 25%. The company is projecting that its effective tax rate for fiscal year 2003 will be 25%. The diluted share count decreased during the quarter to 78.6 million. The share count is expected to climb in the coming quarter by approximately two to 400,000 shares. Based upon this guidance, we believe that diluted earnings per share for the 3rd quarter will be approximately 14 cents per share.

Turning to the balance sheet, the company's net cash position improved by $27 million during the quarter. Semtech ended the quarter with approximately $537 million of cash and investments on the balance sheet. Operating cash flow for the quarter was approximately 26 million. During the quarter, the company spent 3.7 million on property plant equipment; depreciation and amortization for the quarter was 2.3 million, and as usual, the company is forecasting that operating cash flow will remain positive for the foreseeable future. During the 2nd quarter, the company spent approximately $31 million on the repurchase of convertible subordinated adventures, and there remains a balance of $46 million under the existing buyback plan, and we plan to continue to buy back company stock and diventures under this authorization. Accounts receivable's day sales outstanding calculated on a quarterly basis improved to approximately 37 days for the 2nd quarter, which reflects the company's improved collection efforts. Inventory levels were approximately flat as compared to the 1st quarter, and the days of inventory calculated on a quarterly basis improved to 86 days in the 2nd quarter as compared to 90 days for the 1st quarter.

In the 2nd quarter, we turned in solid financial results with very strong operating cash flow. Our ability to keep earnings flat in the 3rd quarter in the face of difficult conditions in the PC market points to the strength from the diversity of our end markets and products. As end market and macro conditions improved, our continued design-win momentum is a loading indicator of future growth.

Thank you for participating in our 2nd quarter fiscal 2003 conference call. I'll now turn the call back to the operator, Patty, for questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star followed by the digit one on your touch-tone phone. Well take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question. Our first question today is from Matthew Chan from Merrill Lynch.

Good afternoon. This is Matt Chan for Joe Osha. David, I was wondering if you could comment on the gross margins for Q3. You commented that it should be flat. Are we expecting to be flat with organic gross margins of 7.5%, or the ones that includes the reserves?

I should clarify that. We're planning to be flat with the gross margins prior to the benefit of the -- that inventory reserve reversal we had in the current quarter, so 57.5, maybe slightly better, but approximately 57.5%.

David, could you also comment on how much reserve inventory you have left, perhaps?

I don't have an exact number. What we still do have, I would say a substantial amount of that inventory is on hand that we haven't scrapped, but I think over the next couple of quarters, it will be either scrap the remaining inventory to see what fell through.

I see. Two more questions if I may. You commented earlier that we normally expect a takeoff in desktop power management July into August. Is the trend for notebooks different? I understand that notebooks tend to see some weak is in in August.

We saw some weakness so far in notebooks, but it was more in terms of programs that were ramping up. We've seen those stretched out a bit. The ramp isn't as great as steep. The forecast, looking later into the second half still looks like they're pretty robust, but again, the month of late July, early August, I would say we've seen a bit of a pause in some of those ramps.

Jack, just one final question and then I'll go away. Could you give me a -- perhaps a split of the Power management revenues between notebooks and desktops?

For obvious competitive reasons, we have not been really breaking that out, but still desktops are still larger than the portable business. Whether that's cell phones or notebooks. I will tell you in the portable area, the revenues are roughly split 50/50 between notebooks and cell phones.

Great. Thanks very much, gentlemen.

We'll go next to Lewis Gerhardy with Morgan Stanley.

Good afternoon. Jack, perhaps you could just talk about your long-term forecast from some of the other markets; you just mentioned notebook computers. And also with the higher turns requirement, I'm just interested in your confidence and your ability to hit those higher orders if the demand comes in, given that your inventory was [ Indiscernible ]?

I'll try to answer. I think Lewis's question was -- are you still there?

Yes, I'm here.

Okay, Lewis. I think obviously we need turns, and in this environment, it's hard to give you much of a prediction because I think visibility is pretty limited. It's limited at our accounts because they just don't have the forecast demand, I think, in some areas right now. [ PAUSE ] Lewis, I think we're going to have to move on to somebody else because I think it's impossible for people to hear.

Okay. Thank you.

We'll go next to Doug Lee with Banc of America.

I was interested in Lewis's question. Let me try to rephrase it. I have a follow-up which is rather quick, I think. Jack, the turns, 47% is pretty high for you guys, given you've been doing this kind of 30s and high 20s. It sounds like things deteriorated in July a little bit, but started off a lot worse, and given that you really need to a pickup in turns there, the question is really what kind of confidence do you have in the ability to generate that. Why do you think turns are going to pick up? Are there certain programs that you're getting indications from customers?

Well, turns activity was pretty good the first four weeks, but still we have a long way to go, and it's higher than what our traditional amount of turns is for Q3, but I think that's kind of reflective of the market right now. For a number of reasons that I indicated. The merger that took place certainly has thrown some disruption in it; vendors are not stocking up on things that they don't know they're going to be a participant in that business. One of the customers we talked to here just in the last couple of days said as far as they're concerned, the back to school market really has not happened. I think that is somewhat reflective. We've expressed some caution about the order rates, about the turns rates for the quarter, but I think that there is still a reasonable opportunity to turn in revenue guidance in the range that we have said. Unless we get further deterioration of the end markets, which I don't see any outlook for that right now, but if something happens, we get some stuff in the financial markets, it's been hard to gauge what happens to consumer demand. If that happens, it's going to be tough.

Then some commentary on the -- can you give some sense of how the trend of demand has been and is right now in the cellular phone area as well as consumer electronics?

I've seen a little bit of improvement in the cell phone area in the last few weeks. Some of that new programs that we've been waiting to get ramped up. There are a bunch of power management devices in particular. But I've seen a little bit more of a pickup in that business here just in the last couple of weeks. So I have a little bit better feeling, I guess about the cell phone business, perhaps, than desktop computers right now.

How about the consumer electronics side?

We don't do a huge amount in consumer electronics. Some. Most of the programs we have are quite new, so it's hard for us to gauge the sort of seasonality of those programs.

Lastly, you commented in your remarks that the dollar content on the desktop systems was lower than you were anticipating. Can you talk about why that might be?

The power management on the 845 G, the power management has fallen, the power content -- the consumption has fallen to 40 to 45 amps, so people have gone away from three phase systems in some cases back to two phase so it take one of the drivers. You might have a 25 to 40 cent driver cost in that's come out of that. In addition to the desktop market being pretty slow, the content there has fallen somewhat. But we're looking at what is going to be required for some of the next generations. Again, the power management requirements go up quite substantially.

That's more of a next year phenomenon, though?

Yeah, I don't think you'll see much of that shipped this year.

Great, thank you.

We have a question from Jeff Rosenberg from William Blair.

I want to follow up on the desktop power management question; so you're saying this is not a stagnation of the technology that is led to sort of a pricing curve coming down not moving to the next generation, it's more that the amperage has gone down from where it was. I'm confused. Is that a shift within the mix of processors, or why would that happen?

Well, you're going to the 90 nanometer process in the next generation here. The power consumption on that particular process switch is what is driving down the consumption. But as you go back up and look at future generations, the power consumption goes back up quite substantially. Conservatively, we're looking at 40 to 50% increase again in the power consumption. That's pretty true in the trend graphics, as well. Some of the graphics controllers are looking at sort of 20 amps power consumption, so that's quite a lot higher than what we'd seen in the last year and a half or so.

Okay, and I guess I would ask then what about the -- you talked about increasing competitive environment in the desktop space. It seems like with the requirements at least for the time being coming down that would make that even more open to competition and price competition. Could you talk about what role that is playing in how the market looks right now?

Certainly there's plenty of price competition at this time, and anytime you get some falloff in the volume, price competition is even greater. There's no doubt that some of the pricing pressure we're seeing is in this area, but we've been able to offset it by product mix in other areas by and large. The key thing here is to move on to new generations of technology and add features and do some integration. We have a number of new products we talked about with the Combesense. There's some other products that I don't want to discuss right now, but we are feeling pretty confidence these are going to get adopted quite short term here, but for competitive reasons I'd rather wait a quarter before I talk about those. The long-term trend is still true, Jeff, you'll see power management content still increase over time on these computer systems.

Okay, and something else I was interested in following up on, your comments on protection and the design wins there. It sounds-like you're saying that the use of protection products is proliferating. You've seen a nice step up there. I guess that's a long trend. Are you highlighting that, or is there some change in the adoption of protection technology that you're seeing with this recent spate of design wins?

Maybe one quarter is not enough data to go on, but I was surprised by the number of new design wins. It's not the lower end very competitive kind of mix. It was much higher ASP stuff. As I look throw the customer base on it, it was again, back more on general infrastructure applications, so that's encouraging because it brings more dollar content and it brings better gross margins in those kinds of products.

Am I right in recalling that previously your higher end ASP stuff was more telecom related in the protection area, so this was kind of a broadening of the adoption of this sort of stuff?

It's telecom and networking both.

Thanks.

Just a reminder, if you would like to ask a question today, hit star 1 on your touch-tone phone. We'll go next to David Rue with Webush Morgan Securities.

Can you talk about the seasonality this year? I guess the back to school season hasn't been very promising. Is there any way you can tell whether the usual Christmas season would take place, i.e., the seasonality in your fourth fiscal quarter? The second question I have is on test and measurement. A lot of those automatic test equipment companies have a snap back in orders, but very recently, their orders have seemed to have leveled off and there's some question about how strong those orders looking forward would be. What are your customers telling you, and how much confidence do you have on those orders staying on your books?

Let me address the seasonality. Again, I mentioned the one comment from a fairly significant customer that at least for them, they had not seen much of a back to school increase in orders for their demand. Looking forward, visibility is pretty limited, I think, at the platform level and for us at the component level to be able to predict how much of an increase we are going to see for the Christmas marketplace. I think obviously now the September, October time frame, early November, are the key months for the Christmas season, so we're just going to have to see how things unfold over that time frame. If I look at the test marketplace, we've seen a pretty substantial increase in the test business in a relatively short period of time. Obviously this quarter, the 2nd quarter I'm talking about, revenues were impacted favorably, substantially above what we had projected. But we have not seen customers move too much to change backlog, but obviously in a time of crunch on semiconductors I have to be concerned looking out on the test marketplace as well; if semiconductors do not reflect the sort of growth patterns that we had thought a quarter or two ago, obviously test orders could be impacted, as well. People are not going to buy test capacity if they don't have the semiconductor demand to go with it. So it's an area to be cautious about.

What percentage of revenue would they -- of their total in this Q2?

Well, I think it was about maybe 14% or something like that.

Okay. Thank you.

Our next question is from Woody Kelly from Midwest Research.

Good afternoon, gentlemen. I was wondering if you could do me a little bit of a favor here on the Microbuddy, kind of lay out what the competitive landscape is as you look at, like, Microchip is talking more about getting into the analog, and you guys are getting more into the micro controller market. Could you lay out what you see happening over the next couple of years?

I haven't seen too much out of microchip in terms of the support stuff. I know they're talking about doing some embedded functions on board, and they may have a road map to do more of the supervisory stuff. Maxim is clearly a -- probably the leading competitor in this area. They have a substantial portfolio product primarily through the Dallas acquisition. So I would say Maxim is probably our key competitor. But I think what is important about this product line is this is an area of integration for other functions as you look at any system that has a micro controller in it. It's basically a housekeeping function for all of the kind of analog mixed-signal functions you want to include that are not part of a micro controller. It will be a continual battle in terms of the partitioning on the boards to decide what can be on board with the micro controller, what goes off the side and the supervisor. Obviously people are somewhat reluctant to putting the watchdog functions on to the micro controller because that's what the watchdog is supposed to look at; so putting that on a single chip doesn't necessarily give you the benefit. I think this is an outstanding area for growth for us in the future. I think that this product has gotten very good reviews. We've got some design wins which is always encouraging. It's a few so far, but we have some momentum building here, and we're pretty positive about that product line.

How long do you think it'll be before you can start talking about recognizing significant revenue from that product area?

Oh, as I said last quarter, I doubt if there will be much revenue this year, but we could get some revenue maybe late in the year.

Okay. But the greater portion of it is probably second half next year?

It's certainly into next year. I don't have a feel right now for timing within the next year. That's tough enough to predict a quarter much less two years out.

Could you talk about what you're seeing in bay station trends? Is that part of the wireless market starting to show some improvement?

I would say I have not seen much of an uptake in bay station trends. Maybe about 60 to 90 days ago we had sort of a pickup in bay station components, but it didn't sustain itself, so that was probably more inventory replenishment.

You talked a little bit on cell phones waiting for things to ramp. Is that just people haven't introduced the high end phones as quickly as you had expected, or is that more people pausing and waiting to see if the next generation data services are picked up before ramping to fuller capacity?

I think it's model changes in next generation models. This isn't a jump to 3 G or anything like that. This is next model changes and making sure people have their manufacturing partners set up. The normal sort of ramp up problems. As I talked about some of the slowing, it really looks like to me it's only two to three months kind of time frame right now. Now if that turns out later that it was indicative of something else, I don't know, but right now it looks like it's maybe a two to three-month delay. Those are sort of usual I guess these days in the current market.

Can you talk a little about these new form factors in PCs, these desk notes? Are they becoming a bigger factor here, and could that be part of what we're seeing in terms of weakness?

We have a couple of designs that are -- started to ramp this quarter. On of those got delayed somewhat, but we should see further ramps on those this quarter. What percentage of the marketplace they end up capturing, I really can't predict, but they'll take a little bit of a notebook business, they'll obviously some of the desktop business, as well. I think there's a home for them in certain markets, but I think, again, how successful they're going to be over the long run, it will take us awhile to be able to really see the consumer demand for those.

Just a couple more. Satellite radio, do you have a presence in that?

Not to my knowledge, but, you know, I could be missing something.

Okay. Last then I'll let someone else step up here, have you seen a switch to older products or customers less willing to use some of the higher ASP products that you guys are introducing as they're waiting whether to roll-out the next generation product or just tweak the old stuff and not have to move to some of the products?

I don't see any reluctant to move to the newer technology. We realize that when you bring out new technology, you also have to have a cost position to go to that, so when we bring out new generation stuff, we usually bring a bill of materials of savings for the customer, so that doesn't create any reluctance for them to move. I think, looking at some of the older technology, we've been a little surprised, again, on the life of some of the products that continues -- that some of the product continues to sell well. These products are aged several years at this point in time.

Thanks.

Just a reminder, to ask a question, it's star 1 on your touch-tone phone. We'll go next to Jim Koalgan from Frontier Capital.

I got on the call a real late. Could you tell me on the pending lawsuit here, are you guys insured for this?

I guess you missed the part, I went through a brief statement on it, and said for obvious reasons because we are in discussion on further testing we're not going to take any calls today on it.

Thanks.

That does conclude today's question-and-answers session. At this time I'd like to turn it back over to speakers for any additional or closing remarks.

Thanks for attending. There's no further issues at this point in time, and we'll look forward to updating you guys in the next quarter. Thanks, very much.