Semtech Corp (SMTC) 2003 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone. Thank you for holding and welcome to the fourth quarter fiscal year 2003 results conference call. Today's call is being recorded. The 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, John.

Thank you, operator. Good afternoon, ladies and gentlemen and welcome to Semtech Corporation's fiscal year 2003 fourth quarter earnings conference call. I'm John Baumann, Treasurer and Manager of Investor Relations. We have just released the results for our fourth quarter ended January 26, 2003. For the next hour or so, Jack Poe, Semtech's Chairman and CEO, Jason Carlson, Semtech's Chief Operating Officer and David Franz, our Chief Financial Office, 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 Reg. FD. If you have any questions about our future performance or our estimates of future financial results, we'll consider them now. We are unable to say if there will be another Reg. FD-compliant opportunity for to you ask questions before the next quarterly conference call.

SEC, this conference call will include projections and other forward-looking statements which involve risk and uncertainty as highlighted in the press release risks included but are not limited to overall economic and geopolitical conditions, the timing and duration of semiconductor market upturns or down turns, demand for communications infrastructure equipment, computers, cellular phones and automated test equipment; demand for the Company's products; competitors' actions, relations with large strategic customers; risks associated with the businesses of major customers and other risk factors. Please refer to the risk section of our earnings release and the Company's most recent Form 10-K and 10Qs as filed with the Securities and Exchange Commission for further information. Although a replay of this call will be available on First Call's website until March 27, 2003, the Company undertakes no obligation to update or revise forward-looking statements to reflect subsequent events or changed assumptions or 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 that call via the Internet or otherwise after March 27, 2003.

I will now turn the call over to Jack Poe, chairman and Chief Executive Officer of Semtech.

Thanks, John. We reported our fourth quarter and year end fiscal 2003 results in the press release issued in the past half hour. Over the next 30 minutes or so, David Franz, Jason Carlson and I would like to review those results with you and discuss our outlook for the first quarter of fiscal year 2004.

First, I will deal with orders. Fourth quarter orders increased about 3 percent from third quarter to about $43 million. Tests and measurement orders fell by 46 percent in the fourth quarter after nearly a 50 percent reduction in the third quarter. So clearly business in test and measurement is very weak and mirrors the comments made by some of the larger suppliers of test equipment over the past few weeks. Orders for all other product lines increased 8 percent compared to the third quarter and the book-to-bill ratio for these products was about 1.08 for the fourth quarter. Our management orders increased about 5 percent. Portable power management orders for cell phone handsets and notebook computers continued to be very robust. Telecom and industrial power management orders increased slightly. Desktop and server orders decreased as we expected due to lower orders on Xbox. Protection products orders increased about 8 percent. Orders for advanced communication products, human input devices and power discrete products all increased substantially in the fourth quarter. We have seen some early positive signs that design work done over the past few quarters is beginning to improve the outlook for new orders. And I'll discuss this in more detail in the outlook section.

Revenues for the fourth quarter decreased about 5.6 percent sequentially from the third quarter as we had projected. Test and measurement revenues decreased 27 percent due to the weakness in orders that I have already noted, which accounted for the majority of the overall reduction in revenues. Desktop and server power management revenues were also weaker, but offset by increases in portable power management. Almost all the reduction in revenues for desk top and server power management was due to lower shipments to Microsoft for Xbox. Protection products revenues and power discreet revenues increased slightly from the third quarter. All other product line revenues were flat or slightly down from third quarter revenues.

Turns orders were at an all-time high of 48 percent of total revenues. Order and shipment patterns for large ticket items such as testers and communications equipment have begun to look like all the rest of the segments with low visibility and high turns order rates. We expect turns orders for our test and measurement products and advanced communication product lines to be at least 60 percent in the first quarter. Semtech's net inventories decreased $3.7 million, or 19 percent in the fourth quarter, from the third quarter. We do not anticipate further reductions of this magnitude and we have explained to the customers that lead times would likely increase in the coming quarters. Revenues by end market have changed throughout fiscal 2003.

For the fourth quarter revenues by end markets were split approximately as follows. Telephone handsets, 24 percent. Desktop computers and notebooks, 21 percent. Notebook PCs and PDAs, 20 percent. Test equipment, 13 percent. Communications infrastructure equipment, 8 percent. General industrial/military, 6 percent. Graphics, 4 percent. Gaming, 4 percent.

Turning to the rest of the P&L, the Company reported GAAP EPS of 11 cents in the fourth quarter compared to 17 cents in the third quarter. Most of the reduction in EPS from the third quarter was a result of lower gains from the repurchase of convertible debentures in the fourth quarter. Operating profits in the fourth quarter were approximately $700,000 lower than third quarter and that's after subtracting about 1.2 million in one-time charges that we had recorded in the third quarter. David will share some additional detail with you on gross margins for the fourth quarter. But they were up slightly as a percentage of revenues. Although we experienced lower sales in some of the higher gross margin products in the fourth quarter, the Company was able to offset some of the lower revenues with cost reductions which minimized the impact on our overall gross margin percent. ASPs continued to decline in the fourth quarter with desktop power management and standard protection products under the most price pressure. Cost reductions in other product areas kept pace with ASP Degradays and sales of new products helped mitigate gross margin impact from pricing competition in the two areas that I mentioned. And we're continuing to reduce manufacturing costs and increase sales of new higher gross margin products to offset expected price competition in the coming quarters. When revenues increase, we expect to leverage our lower overhead costs to expand gross margin percentages closer to our long-term goal of 60 percent or better.

All production was completed in the Corpus Christi Wafer Fabrication Plant by the end of the quarter as we had expected. And Semtech is now 100 percent fabless for all nonmilitary products. Operating expenses were about $655,000 lower in the fourth quarter than the third quarter after adjusting the third quarter for the one-time charges I mentioned above. Most of this reduction was in variable compensation.

Looking at design activity, in the fourth quarter, the Company reported a total of about 510 new design wins that are expected to generate more than $65 million of new annual business. Product line design win dollars were again led by portable power management, protection, and desktop power management products. Cell phone handset wins were especially robust as the Company's color screen drivers, charging circuits, and TVS protection devices continued to gain traction. Notebook and desktop computer design wins also gained sockets. Cell phones accounted for about 31 percent of new design dollars, notebook computers about 17 percent of total, and desktop computers accounted for about 20 percent of new design dollars. Communications and networking accounted for about 12 percent of new design dollars, and new customers accounted for about 25 percent of new design wins and about 13 percent of the design win dollars. A number of important new design wins we reported for Semtech's color screen drivers for digital still cameras and also for industrial and Telecom power. We are beginning to see the impact of platform selling whereby we have been successful in selling several product lines into the same end equipment. At Cisco, for example, we reported about $2.8 million of new design wins that included timing chips, protection devices, and isolated and non-isolated power management devices.

Geographically, Asia and Japan reported 61 percent of total new design win dollars. Europe reported 4 percent. And North America represented 35 percent of total designs. Europe was especially weak during this quarter, but is expected to improve substantially in the first quarter.

The top 10 customers for new DOE sign win dollars included Dell, ECS, Samsung, Apple, HPQ, Lucky Goldstar, Cisco, Sanyo, Sendo and Intel. Semtech's proprietary Combi-Sense power management devices continue to be well accepted by desktop computer customers. At Intel we have some content on all new Springdale boards and 100 percent content on some of the new boards n Taiwan we have made good progress in design wins for both ODM boards destined for HPQ and Dell. We have won designs on a significant number of channel boards from the major players and second tire suppliers. We have increased our silicon production to support increased shipments, which should at the end of Q1 and continue throughout the balance of the year for these devices.

New products, the Company released 15 new product families in the third quarter which is somewhat lower than we had planned. In the fourth quarter we implemented some new procedures for tracking and improving design productivity that have initially impacted new product releases. In the coming quarters the numbers of new products will increase and the quality of the software materials and application notes will improve as these new procedures are implemented. The Company continued to hire experienced design and application engineers during the quarter and expects to increase its hiring rate somewhat in the FY '04 time frame. Turnover of the professional staff remains very low.

Turning to the outlook for Q1, overall we expect revenues to be flat to up 2 percent. There will be growth in new platforms and products offset by some seasonal weakness in gaming. Tests and measurement revenues and advanced communication revenues are far more turns-dependent that I had indicated previously than anytime that we have seen in previous quarters. Thus far, in the first quarter, we are on track to meet expectations for revenues as nearly all orders in these two areas have been requested within the quarter. However, we still think the test measurement probably has a little bit of exposure for q1. We expect fully diluted EPS to be flat at about 11cents and the visibility should improve somewhat by the end of the first quarter because we'll be further along in some of the new product ramps with our customers. As I mentioned earlier we believe that the Company's made great strides in developing new proprietary products and obtaining design wins for these products. These efforts are paramount for increasing revenues in a low-growth market. For the entire 2004 fiscal year, some of the most significant potential revenue growth for the Company should come from, first, color screen drivers, charging circuits and protection devices for cell phones, PDAs, digital still cameras and other portable devices. Second would be the expansion of our power management products touch screen and pointing devices, including protection, for notebook computers, PDAs, including increased penetration in this market. Third is recapturing some market share in desktop computers and notebooks with our Combi-Sense product offer. Fourth some new proprietary flip chip combination protection and filtering devices for cell phones. Five is the communications and industrial isolated and non-isolated power management DC to DC converters and hot swap devices, these are some of the new devices that we have brought out now in the last six to nine months that are just finally gaining some traction. And then finally in the advanced communication sets product revenue where we're finally seeing some of the retrofit designs, some of the new designs moving towards contract manufacturers beginning to ramp up production.

To summarize, fiscal 2003 was yet another challenging year in our industry. The first half of the year appeared to be a solid upturn for our business. However, the second half of the year returned to slow growth and was a pretty tough competitive market. In the end, Semtech revenues increased only 1 percent year on year. Operating profits increased by 59 percent and PAT increased by 62 percent, but that included changes from year on year one-time charges and increased gains on the repurchase of convertible debentures. On the surface, it was really a mediocre year. However, I think there is more to our story. First, the Company remains solidly profitable all year. The manufacturing model was improved and we successfully converted to be 100 percent fabless by year end. End markets and customers for our products have been further diversified. New products have helped position the Company for growth. Technical resources and management depth have been added. The balance sheet was strengthened. Net cash increased by 69 million to $248 million, long term debt was reduced by $12 3 million. Inventories were reduced by $6.4 million and receivables were reduced by $1.5 million. As we begin fiscal 2004, the Company is positioned to grow despite continued difficult market conditions. If market conditions improve slightly the Company should be able to execute quickly to take advantage of that upturn.

This concludes my remarks. I'd like to turn the call now over to Jason Carlson.

Thank you, Jack. I have been with the Company for just over a quarter now, and would like to comment on my assessment of our position today and what I see for the year ahead. From a geographic and sales perspective, Asia-Pacific is our number one region at 64 percent of sales in the previous quarter. Taiwan and Korea are well aligned with our handset, notebook and desktop markets. Our local organizations provide superior local support and have strong customer relations. Japan offers the significantly larger opportunity than we are presently capturing and I am confident with recent changes in distribution as well as increased investment in the coming year we will see improvements there. China is clearly an important growth market. Over the past year we have increased investment there and will continue to do so in the coming year. The opportunities in China are well aligned with the majority of our products today. And the fact that we can fab, assemble, test and ship within China today is an important advantage to that customer base. The domestic organization is on track with expectation at 30 percent of sales.

With increasing use of ODMs in Asia, we'll focus on broadening the domestic customer base and supporting design win activity at the major OEMs. At 5.4 percent of sales, I am disappointed with our sales in Europe. Once again, with the movement of products to Asia, I do not see this region being above 20 percent. However, with our product offerings in handset, advanced communications, power and protection, it should be significantly larger than it is today. We will be making changes in the coming quarters to improve this situation.

Looking at our product lines, today we have five major product lines supported by five business units. All of these product lines focus on our strengths in analog and mix the signal design. I expect that we will expand the business by adding two to three new product lines over the next two to three years. This will be an exciting year for our portable products group. Our offerings in LED battery charging, human input devices, MicroBuddy, power and protection, are well suited to current trends in the industry.

As next generation products are released in the handset, notebook, PDA and digital still camera markets, our products are addressing key needs in the conversion to color displays, lower power consumption, smaller size, as well as added features. We have expanded our product offerings and now address $6 of available content per handset and $8 per notebook. I recently met with our major desktop customers in Taiwan and the US and I am confident we will see growth in this area in the coming year. $12.7 million of design wins were recorded in the quarter for power management products used in desktop, notebook and graphic applications. Semtech's Combi-Sense multiphase power management strategy continues to be well received in the desktop marketplace. The trend for our protection products looks favorable. As speeds continue to increase, geometries shrink and the number of ports per product grow. The number of sockets and the need for these products increase as shown by the 14 million in Q4 design wins. We will continue to focus on developing highly targeted products for specific applications as new opportunities emerge.

The ATE market remains soft and visibility is unclear. Most notable has been the increase in the percentage of churns to above 50 percent. We have continued to invest in this market and will be releasing several new products in the coming year. We are working to broaden our customer base and should be well positioned to benefit from any market growth. Our advanced communication group continues to broaden its product offering for timing and synchronization. The performance of our products in this area is unmatched and the value proposition to the customer is very compelling. For new product development this market typically has very long design cycles and we should be announcing various programs going into production throughout the coming year.

Looking at our operations, our fabless model will allow the flexibility to offer the best technology for a given solution, improve management's focus on end markets, reduce capital investment, and provide long-term cost advantages. Today we have a very competitive operations structure and we will continue to drive cost reductions further, throughout the year. This will be achieved through continued package cost reductions, the move to more competitive packages, and silicon shrinks. Across all market segment, we continue to see the trend of turns being an increasing percentage of the business. Customer expectations on lead time remain challenging and inventory levels are low. Therefore, we have identified and are implementing en terrible programs that will improve our ability to respond to these demands. We will focus on improving forecast accuracy, logistics managements, and more proactively driving exit programs. Improved performance in this area should result in increased opportunities.

In summary, I believe we are positioned for growth above the market this year and look forward to the opportunity to meeting more of you. Now I would like to turn the call over to David Franz.

Thank you, Jason. Good afternoon, ladies and gentlemen. The fourth quarter operating performance slightly exceeded the midrange of our expectations for the quarter. Cash flow continued very strong during the quarter exceeding 20 million. The Company exceed its operating cash flow forecasts for the quarter by approximately 3 million. Total operating cash flow for all of fiscal year 2003 was approximately 63 million. Revenues for the fourth quarter fiscal 2003 were 44.5 million, a decrease of 6 percent compared to revenues of 47.2 million for the third quarter of this fiscal year. The fourth quarter revenues decreased 4 percent compared to revenues of 46.4 million for the prior year fourth quarter. Revenues for all of fiscal 2003 were 193 million, an increase of approximately 1 percent compared to the 191 million for the prior fiscal year. Gross margins for the fourth quarter fiscal 2003 were approximately 56 percent. The gross margin percentage improved slightly in comparison to the third quarter. Gross margins also improved slightly in comparison to the fourth quarter of the prior year. As sequential revenue growth returns this year, we expect to see improvement in our gross margin, particularly in the second half of fiscal 2004. Our target is to achieve gross margins of 60 percent when our revenue hits the 65 to $70 million level per quarter.

Net income for the fourth quarter of fiscal 2003 was 8 million, or 11 cents per diluted share. Net income for fiscal 2003, the entire year, was 42 million, or 54 cents per diluted share. That compares to net income of 26 million, or 33 cents per diluted share for fiscal year 2002. The fiscal year 2003 results include pre-tax one-time costs totaling 1.2 million while the prior year includes one-time pre-tax costs totaling 16.7 million, primarily for the write-down of inventory. Revenues for the fourth quarter were derived from the following geographic regions. 31 percent was derived from customers located in North America, 5 percent from Europe, and 64 percent from Asia. Net orders, as Jack mentioned, accounted for 48 percent of shipments in the fourth quarter. This compares to 43 percent, 32 percent and 34 percent during the previous three quarters. The vast majority of all new bookings are for delivery within a 60-day window. The three big end market, computer, communications and industrial, represented 97 percent of total sales combined, revenues from cellular handsets accounted for 24 percent, desktop computers and notebooks accounted for 21 percent, notebook computers and PDAs accounted for 20 percent, test equipment accounted for 13 percent, communications infrastructure accounted for 8 percent, general industrial and military accounted for 6 percent, graphics cards accounted for 4 percent and gaming systems also accounted for 4 percent. Revenues from OEM sales represented approximately 53 percent of total revenues for the quarter, while distribution represented 47 percent of total rev news.

As Jack discussed, we are forecasting that revenue for the first quarter of fiscal 2004 will be between flat up to 2 percent as compared to the fourth quarter of fiscal 2003. Growth in revenues for Q1 is forecasted in spite of continued weakness of in the capital equipment markets and a significant rampdown in production at one of our gaming system customers. To attain the midpoint of the first quarter forecast, net turns orders of 53 percent of revenue are required. This turns rate is reflective of the short lead times upon which customers are ordering product and the book-ship arrangements that we have with certain customers. While we have visibility into our customers' forecasted requirements for the quarter, customers are managing their inventory by having component vendors like Semtech hold the inventory until close to the date of use. The increased turns requirement for the quarter relates to a higher percentage of our ATE business coming from turns during the quarter. With the exception of increased firms this market, the amount of turns required for the balance of our product lines are actually down slightly in Q1 as compared to Q4. To support a more turns-orient model in the industrial segment, we have entered into a Die bank agreement with one of our major ATE accounts which allows us to respond to a more turns-oriented business model with that customer. Based on bookings so far this quarter, we need approximately $12 million of turns over the remainder of the quarter to achieve the midpoint of our Q1 revenue forecast.

Looking at gross margin, as I previously mentioned, gross margins for the fourth quarter of fiscal 2003 improved slightly to approximately 56 percent. Gross margins were negatively impacted by lower production rates during the quarter and some additional charges for excess and obsolete inventory. Gross margins for the fourth quarter were favorably impacted by the sale of 442,000 of previously written-off inventory. On a year-over-year basis, margins improved slightly as compared to the fourth quarter of fiscal 2002, as well as the entire fiscal year. For the first quarter we are forecasting the gross margins will be approximately at the same level as they were in the fourth quarter.

Research and development expenses were 7.6 million for the quarter, which was down approximately 300,000 compared with the third quarter. The decrease in R&D spending was principally due to a reduction in variable compensation costs and other expenses. We are forecasting that R&D will increase by approximately 200,000 on a sequential basis for the first quarter, and this is due principally to an increase in the rate of product introductions in some of our product groups, particularly industrial and telecom power management.

SG&A expenses declined approximately 400,000 during the quarter due to a redux variable SG&A spending and for the first quarter SG&A is forecasted to increase by approximately 200,000 to 250,000 compared to fourth quarter levels. Interest and other income was approximately 1.8 million for the fourth quarter the. During the quarter, we repurchased 15.4 million face value of our convertible subordinated debentures at a total cost including the write-off of deferred bond issuance costs of 13.9 million. For the year, we repurchased 122.8 million face value of our did I debentures, a total cost of $110.1 million and for the first quarter we are forecasting that interest and other income will be approximately 2.4, $2.5 million.

Turning to taxes, the Company's effective tax rate for the fourth quarter was 25 percent. The Company is projecting that its effective tax rate for fiscal 2004 will be 25 percent, based upon the current revenue and earnings forecast. The Company's effective rate can vary based on variations in income and the source of that income. The diluted share count decreased during the quarter to 76.2 million. The share count is expected to be approximately flat to up slightly in the coming quarter. During the fourth quarter, the Company repurchased 111,900 shares of its common stock at an average price of $11.32 per share. Based upon this guidance, diluted earnings per share for the first quarter forecasting at approximately 11 cents per share.

Finally turning to the balance sheet, Semtech ended the quarter with approximately 489 million of cash and investments on the balance sheet. Operating cash flow for the quarter, as I previously mentioned was approximately 20 million and operating cash flow for the year-to-date was approximately 63 million which was higher than the 60 million we have forecasted last conference call. During the fourth quarter, the Company spent approximately $1.5 million on property, plant and equipment. Depreciation and amortization for the fourth quarter was approximately 2.3 million. And as always, operating cash flow is forecasted to remain positive for the foreseeable future. During the fourth quarter, the Company spent approximately $13.6 million of cash on the repurchase of convertible subordinated debentures and 1.3 million of cash on the repurchase of its common stock. Subsequent to the end of the quarter, the Company repurchased an additional 53.5 million base value of its convertible subordinated debentures. The Company has a remaining balance of 42.5 million under the existing buy back plan. Despite these uses of cash during the quarter the Company was still able to grow its net cash by 21 million to 248 million as of the end of the quarter. Accounts receive day sales outstanding calculated on a quarterly basis was approximately 36 days for the fourth quarter and inventory levels were down 3.7 million during the fourth quarter. Inventory declined significantly due to the cessation of production at the Company's Corpus Christi wafer fab. The shipment of finished goods inventory for the ATE market and a general shift towards minutely savings finished goods inventory and higher levels of die inventory. Days of inventory calculated on a quarterly basis as a result declined to 76 days in the fourth quarter as we turn to fiscal year 2004.

Now Q&A.

And if anyone does have a question today, you may ask it by press the star key followed by the digit one on your telephone keypad. We will pause for a moment to assemble the roster. First we'll move to Woody with Midwest Research.

Good afternoon, gentlemen. My first question is, on the cell phones at 24 percent of revenue, that seems significantly above what it's been in the past. Is that market share gains or increased content? Can you talk a little bit about the upside that you saw there?

I think, Woody, one of the opportunities that we've had in the whole cell phone market, we have had a good business in protection all along. Some of the standard power management devices. But we have gotten increased share, I think in the charging chips and also most importantly is probably the color screen drivers. And the opportunity there is to grow within the market itself because more of the phones are converting to color screens, you know, from the black and white. So,, I think it's just increased content and moving more to color phones has been the increase in the handset business. We expect it to stay about 24 percent of revenue here in, you know, then again notebooks about 20 percent, desktops 21 percent as well, the activity was pretty robust in this quarter for handsets so you could see some increased position I would think for the handset as a percentage of our total revenues over the next quarter or two.

Okay. Do you see any slowing in that market?

You know, we were kind of, cognizant of all the comments being made in terms of excess inventories, and we've paid pretty close attention to examine the channels. We don't see a huge amount of inventory out there. We haven't seen a change in order patterns that would indicate there is excess inventory. So so far, it looks fine.

Okay. And then Jack, a question. Thank you know, your deferred revenues count is down. Your turns have to be up. This quarter and you need 12 million right now and at this point last quarter you needed 10 million. What gives you the sense of confidence that you can see that, you know, increased turns business this quarter given, you know, everything that's going on.

Well, so far the rate turns orders that we have seen in February supports what we expected in terms of higher content. If you take a look at, unfortunately, the test equipment and advanced communications, for instance, as a couple of components that go into large-ticket items, virtually 80 percent of what I think booked in test and almost 100 percent of what booked in advance com was for this quarter. So I mean it's just turned into a low visibility, high turns business mold in those two areas. That's different than what we had seen in any previous quarter.

Okay. One more and I'll let others go. In Taiwan you guys have done a nice job with DOE sign wins but in the past there's been some issues with some of the local analog guys getting some business after the design wins due to support. What have you guys done to beef up the support staff in the Taiwanese market?

We have a pretty sizable group of people in Taiwan and we have hired some additional this quarter. I think we probably have, you know, as large a local applications and support staff as any of our competitors over there. And by and large, the local Taiwanese companies play more at the trailing end of things. They are not playing too much in leading edge. So it's more the mod at the end pro.products I haven't seen a huge amount of competition from them on today's designs.

Okay. Thank you for your time.

Now we'll go to David Woo with Web Bush Market Securities.

Can you elaborate on two things? Number one, Jack, the Xbox business is skill ramping down. Do you have an idea, you know, how big a decline because the Microsoft -- the numbers from Microsoft for the first haft calendar '03 is fairly steep drop-off from the last thing. And you know, do you anticipate an end of this inventory adjustment by the end of the first quarter? Second question I have is really regarding, , can you remind us what the design win dollars were in Q3 versus the 65 million we saw in Q2?

Let me take that one first. I think Q3 design win dollars were 62 or $63 million.

Okay.

In terms of Microsoft and the Xbox, yeah, there was a significant rampdown in Q4's indicated from Q3. Our channel checks of inventory out there show that there's still a substantial amount of inventory for Xbox and components so I don't -- you know, we have adjusted our Q1 numbers to account for that. Whether or not they have their inventories in a in alignment by the end of Q1, I'm a bit skeptical. I think it might be longer than 1.

How big is the Xbox business for you to --.

Well, about 4 percent of total revenues in fourth quarter as we indicated.

Really, that's even if it goes away completely it's not that much?

Yeah it's not going to go away completely but, there, you know, they are ramping up the XBlade. They are taking some components for that but at a far lower rate than they were manufacturing back in Q3.

Jack, what about the PC marketplace and the desktop? I know there's some market share issues here. But generally, has the PC market so far in Q1, you know, do you see numbers through the good part of February have -- are we seeing the usual seasonal decline or less than usual seasonal decline so far this year?

I don't know about other people. If I look at our desktop numbers, we are relatively flat -- forecasted to be flat Q1 over Q4.

I see. Okay. Thank you.

Our next one from Joe Osha of Merrill Lynch.

Thank you. This is Matt for Joe Osha. Just quick question, very curious to hear what you are seeing at your distribution customers in terms of inventory at distribution.

Distribution inventories for the most part, US, Taiwan, were flat or down in Q4.

You think they have managed it down to levels that they find normal at this point, or do you think they are still working down inventory?

I would say fairly normal.

Great. My second question is, in regards to Combi-Sense, your strategy to regain desktop market shear, can you give us an update there? Are you seeing market share in the desktop space stabilize or even see Semtech starting to regain some of that market share.

Well, I that I I thought I had made that pretty clear in the call but I would say we're regaining market share and as we said we're ramping up production on these new devices for some shipments that will start late in the first quarter and continue on throughout the year. So I would say we're -- we feel pretty positive we're making good progress.

That's great, Jack. My last question is, uhm, I believe you mentioned earlier that we saw some ASP pressure during the quarter. Is that partly a mix story, perhaps because desktop ASPs are higher than notebook ASPs.

Desktop ASPs are not higher than notebook ASPs. That's one issue. But I would say most of the ASP pressure has been in the desktop marketplace and we have been able to count their with some pretty significant cost reductions and, you know, we think that we will be able to do reasonably well at desktop power management even at these lower ASPs. However, some mix shifts from our other products hurt us a little bit in Q4 but we were able to find cost reductions for that. I think as you see new devices now beginning to ship in Q1 and Q2, that will give us a little bit more buffer for ASP degradation, which is likely to happen for the next couple of quarters or so.

Thanks for the correction on this. Thank you, gentlemen.

Jeff Rosenburg, William Blair.

Hi. First of all, could you give us an update on how much protection represents as a percentage of overall sales?

Protection as overall, probably represents, uhm, what, 22 percent? I guess it was Q4 number, right? About 22 percent.

Okay, thanks. And then, uhm, on the cell phone LED display drives, could you talk a little bit about the competitive environment there, who are your major competitors you see in those design competitions?

Oh, I think everybody, now, it's in the analog mixed-signal business. It has some kind of offering. National, maxim, micro, l it. So everybody has some kind of offering. I think that, you know, we continue to do pretty weather. We feel that we have a reasonably good market share there. Everybody is -- has got some focus on it. But one of the things that we did do this quarter I think that is going to bring us big dividends is we are -- we captured a design win that will include development of some advanced technology for one of the large display manufacturers that will take us on to the next general [INAUDIBLE] I think that will pay big dividends down the road.

So you are talking about working with the displays, working downstream so to speak from the cell phone OEM?

I don't want to say too much more than that about it, Jeff, but that's, you know, that was one of the fronts to the strategy in the fourth quarter.

Okay. And then the last thing, I just wanted to ask is kind of the timing of the design season so 10-to-speak for this year's desktop PCs. I mean, are we mostly through pretty good sense of where you are going to be with desktop with the year or is there still a lot of design activity left to come for the designs for the year?

I think there's a -- quite a bit of design activity left to go. As you know, every one of these companies might run 12, 15 boards for various platforms between AMD , Intel platforms. But also, there is a spring refresh period here for springDale that's coming up. We have a lot of significant activity going on there and then you will have stuff in the fall more for early next year.

So the 12.7 million, how does that compare to what you would have hoped to have accumulated at this point of the cycle?

I think it's on track but, you know, I would be happier if it were a lot more and, you know, plan on making it more.

Does that represent the sort of market share that you've been targeting, the 12.7 million, is that something that you can sort of tie back to market share?

Uhm... I -- I would say it's probably up slightly from where we were in Q3 and Q4, but I think we have a lot more room to grow.

Okay. Great. Thanks a lot.

We'll move to Brad Michael with Ampack Capital.

Hi, good afternoon. Just wanted to get back to question about the litigation that you announced back in August. You never really followed up on that what's the current status? And what are the steps from here?

The current status is that we continue to have dialogue. We hope to solve this between the two companies, but there is no update that we have made public.

Okay. And so that was a desktop customer or motherboard customer?

We didn't say.

Okay. This customer also --

I'm not going to answer any more questions on that one. Let's move on. Operator??

Uhm... I had a follow-up.

Fine. If the follow-up is not related to that, ask it. (Pause)

I don't want to beat the bush too much on the desktop but can you just quantify what you think your market share is in desktop now and do you have a target for what you're hoping for, for, you know, say by the end of the July quarter or the October quarter?

We're probably in about the 17 percent range on desktop and that's where we were in the third quarter. So our target is to get back to nearly a 30 percent market share.

And how much, you know, how much progress have you made so far as, you know, the wins in getting back to 30 percent? Would you say you're halfway there or --

No. I'd say we have more room to go.

And we'll move to Doug Lee with Bank of America.

First of all, nice quarter. Uhm... with respect to some of the outlook comments, the first question to David, David, I think in the preamble you mentioned that you thought gross margins would get to 60 percent at 65 to 70 million in revenue. Is that accurate?

That's correct.

Is that a change from the past? I thought the ramp might have been a little steeper. I just wanted to check on that.

No. I mean, I think what we've always said is that as actually if anything, we have probably brought the comment down to 65 million because go back -- as our comment has always been that our target is to get to 60 percent gross margin when we get back to our previous historical highs in revenue, which was like 69 million.

Okay.

You know, and obviously, depending on the mix of revenues, there probably is the potential to get there faster. But I think the 65 to 70 million, I think, is a pretty safe type target for the Company.

Okay. So the way to model it as revenues reaccelerate, it's probably just, you know, tens of basis points a quarter of increase and ramp it sort of linear from --

I mean I think the one thing is that in the back half of the year if we comment on kind of our internal plan, the back half of the year we're expecting to see I think -- without going through each individual product line, quite a bit more growth driven by what I would call products which have margins in the top 25 percent or so of our overall product line so I think, you know, the possibility for gross margin improvement in Q3 and Q4 is clearly more significant, you know, than the -- what we would see in Q1 and Q2. And we're pretty optimistic about the margins. You know, environment we're likely to see for Q3 and Q4.

Okay, terrific. And then, uhm, just a question to Jack. Jack, you mentioned also in your comments that you thought lead times might start to creep up. I understand turns obviously super high right now. Looking at your inventory, you guys did a great job of managing that down. Sur expectation that lead times might stretch out simply because at this point, customers aren't giving you any backlog and you'll be forced to push them out or is there some other dynamic on this thing?

No, I think that's primarily it, Doug. If you take a look at how much we squeezed inventories, you know, we're kind of -- I think we've sort of run against the wall to some extent of how much more fat we can take out of the system. And, you know, my view of the industry right now is I think a lot of other people are running similar models. Nobody wants to get stuck with any excess inventories. So -- and when a lack of visibility, you doesn't want to run any excess stuff right now. Where we are and we've squeezed the heck out of our inventories to make sure we're responsive but, you know, I think it all has to go back to -- if nobody wants to commit anything, it all has to go back to lead time.

I think we're calculating you guys are near a seven-year low. Where are the lead times right now, four to six weeks?

I would say yeah, most of the stuff is in that range but I would say we have some stuff that's 8, 10 weeks, 12 weeks maybe.

Okay, great. And then, uhm, last question, and I don't ask this of a lot of companies but you guys tend to do a good job of bottoms up forecasting. You mentioned that would you expect to see some growth in calendar '04 or fiscal '04. I mean, uhm, care to give a range on what that might look like as you're planning for the year?

How much is the overall analog mix the signal market going to grow? And then I'll give you an estimate.

If I say 5 to 10 percent?

Oh, I would say if you say 5 to 10 percent, I would believe that, you know, we could be maybe 5, 6, 7 points better than that.

Okay. Terrific. Thank you so much.

Louis Morgan Stanley.

Good afternoon. A question on PCs and have a cell phone question, also. But if I recall correctly in the late spring, early summer, that's one. Toughest periods for your PC related business. Taking a look at some of your advanced forecasts from your customers, especially the00 ones and considering some of the product cycles, Jack, how do you believe about the next six months relative to say where were you a year ago?

I feel better because of the design activity, Louis, that we have completed over the last 90 to 120 days. The question always becomes in one of these transitions, uhm, you know, does Intel and the rest of the industry execute on time in these things or not? So that, you know, that's the one factor that one caveat that I would have. But, you know, we could use some help, obviously, you know, on [INAUDIBLE]. But generally, I feel pretty reasonable. We have had some upside to our numbers in Q4, even, with some older programs that people thought were going to die off and have continued to be produced throughout the quarter. So, you know, the upside usually is if you -- if your new stuff doesn't ramp it usually means that some of the old systems are still around, people are still going to need to have product on the shelf. So I means there is some risk, buy think that there is still enough upside to cover -- but I think there is still enough upside to cover some slipages in the forecast or some slipages in the execution, you know, maybe by Intel.

Yeah, okay. Then my cell phone question is, is that area -- as that area gets more important here, can you give us a sense of your exposure maybe by air interface in some other regions, the handsets are selling into? And also, maybe give us an idea of the revenue mix of power versus the protection and other devices you are selling into the phones?

Well, I would say -- if I take a look at it power probably represents two-thirds of the value, something like that, and protection and some of the human input devices on the high end phones, obviously human input device content could be high but it's usually on the top 20 percent of the market. Something like that. Geographically, a lot of the stuff is produced in Asia, so you know, a lot of the cell phone business there is Japan, Korea, Taiwan, China , uhm, some in Europe, and but, you know, most of that stuff is all moved to Asia now for manufacturing. So from a design viewpoint, though, US is still pretty important. Europe has got some key stuff. And then, you know, the emerging market I would say Taiwan and China are probably faster growing markets these days than Japan and Korea.

By air interface, would you say you're split equally between GSM and CDMA or how does that look?

You know, most of our stuff is really not dependent on the technology. Probably maybe a little bit more in CDMA-based stuff to some extent, I guess, though. But it's close. I don't think there is a mainly difference.

Okay. And then quick question for David. Your gross margin guidance for next quarter, does that assume any zero cost or reduced cost of inventory sold?

Probably assumes a bit maybe, uhm, couple hundred grand.

Yeah. Okay. Thanks. Thanks a lot.

And the next question comes from Steve with Raymond James.

Good afternoon, gentlemen. My first question comes on the Combi-Sense technology. I guess in the last call, you discussed how the fact that it's a universal solution has been pretty positive news to your customers. And if you could -- I was hoping you could comment a little bit more on what benefit you are seeing with your customers based on that fact and how it's penetrating into, say, Intel versus AMD, thanks.

I think where it helps us most is in Taiwan where you have boards built on an ODM basis for the OEMs as well as channel boards and it really helps the whole inventory management. It helps those companies to leverage their power management resources because they don't have to replicate the power design. They have already got a learning curve and it will work across both platforms. So I think that is a message as Jason indicated has resonated very well from our visit over there and the design activity that we've seep here now in the last 90 to 120 days.

Could you give any specific color on maybe customers where you have had particular success?

I already indicated, you know, some of that in the call but certainly there are some design wins for Intel, for Dell, for Compaq, as well as channel designs by some of the major guys in Taiwan.

Okay. And then, uhm, related to the non core technology in the desktops you said you had had in your last call pretty strong market share position with regards to products where you compete against more discreet solutions and I was just hoping you could comment further on your market share position there and how pricing in discreets has affected that.

Well, I think some of the peripheral stuff on the boards we have always done reason ply well. We have a good offering out there right now that has been picked up not only here by the OEMs but by a lot of companies in Taiwan, probably more than what we have seen in previous generations.

Okay. Thank you very much.

Richard Shaffer, CIBC World Markets.

This is Daniel in Rick's stead. I was wondering if you could clarify or shed some color on the notebook market and maybe even the graphics [INAUDIBLE] I have heard some talk from one of your competitors that the graphics market is becoming a base that's moving beyond standard linear regulators.

The graphics market has within well beyond linear regulators for the last year and a half or two. And we don't supply that much in terms of linear regulators into that market. Virtually everything that we supply into graphics is a single switcher, dual switcher combination device.

And as far as the notebook market, can you just shed some light on your competitive positioning in that market?

I think we -- with the design wins that we have noted, with the increase in revenues, that we have noted in the fourth quarter I think that's a pretty good indication of increased penetration and us having broadened our product offering. And I think we'll do quite well again as we look into Q1 both in design wins and on revenues.

And beyond that, with -- going into Combi-Sense and the desktop, I was wondering, beyond the higher integration of your product, beyond the fact that it's a universal solution, what other competitive benefits do you have relative to your competitors? Is it cost -- is your solution a -- basically the same cost, is there parity of cost better, better, uhm, more accurate power distribution?

Well, I think look together from a cost angle, I think that the costs of our bomb is probably on parity with one of the guys. I think we probably have an advantage over one of the other competitors. I think our costs of manufacture is probably as low as anybody's out there. So, you know, I think we're in a pretty good position, if it's going to be a pricey marketplace, if it's going to be a very cost-competitive marketplace, we're in as good a position as anybody to participate and take a reasonable market share.

Okay. Uhm, thank you very much, and congratulations on an excellent quarter.

William Conroy, Sanders Morris.

Good afternoon. Just a couple of clarification, I think. Firms, David, in your comments about guidance, does the EPS number include the gain that you will record on the repurchase of the convert.

Yes, it does.

And secondly, how should we think about the trend in operating expenses going forward, both the R&D line and the SG&A line?

Well, I mean, I think the, uhm, we'll continue to see leverage on operating expenses as a percentage of revenue, and you know, obviously, today, because of the lower revenue levels, it's quite high. But I think we should expect to see particularly as we see higher rates of growth, you know, in Q2, Q3 and Q4, that we start to see that percentage, you know, come down gradually. And, you know, we look for incremental operating expending on the higher revenues, you know, to be, you know, considerably, you know, a fair amount lower than where the actual percentage is today. I don't know whether that number is 20 percent or 22 percent. But -- or 18 percent. But the -- you know, the incremental spending operating wise is definitely less on that revenue than where we are today, and that's how we get our leverage. If that answers your question.

It does. If I could follow up on that point, is there any discernible trend and mindful that the leverage -- I think what you're talking about leverage will win out in the end, but there is still any discernible trend that as you're rolling out these more advanced products that they require either a heavier sort of relative R&D investment or a heavier support investment that might show up on the -- really I guess it's on the S of the SG&A?

I think if anything, you maybe -- well, Jack has a comment on that?

Yeah. I think it true that the trend, if you take a look at the complexity of the products, the complexity continues to grow pretty substantially. But also the potential of revenue for each of these products grows with it. So you might bring out fewer products and they might take more -- I mean, there might be software in some of the mixed-signal stuff, for instance, so the amount of work -- the amount of R&D on a single product might increase but the revenue potential of those products also goes up. So, you know, as a percent of revenue, I think R&D still will maintain, you know, start to fall but maintain a long-term range, you know, that we've given you over a whole cycle.

Great. Thanks very much.

Chip , a private investor.

Good afternoon. You have many design wins in the portable power management. If revenue contribution from this segment increases in fiscal 2004, how will that change growth margins and operating margins?

I would say generally, the new -- any of the new products that we bring out have higher gross margins. Certainly, we have concentrated a [INAUDIBLE] sign efforts to produce more products for the portable marketplace. We think it's growing fares. We think the ability to differentiate ourselves in those markets is greater. So as those products come out, and become an increasing portion of our overall revenue it will help us to fight off some of the ASP reductions you get across the board and over time as revenues increase, I think it will help increase gross margins to our long-term goal of more like 60 points.

Okay. And secondly, can you give us an update on MicroBuddy, how you are doing with sales and design wins?

We had a number of design wins this quarter. I think the one thing that we have found out now being in the street for the last quarter or two is there's probably a bifurcated market for this device. There's sort of a high end, full-featured device and then there is a subset of features that maybe indicates there is going to be a family of MicroBuddy devices, and that's the avenue that we're taking right now is to separate those markets and not try to sell more features than the market really needs. So you will see a family of products that we'll end up with over the next year for MicroBuddy aimed at different markets. But you know, I think the acceptance of the product continues to be very good. We have a lot of dialogue going on and we find out that, you know, there's other analog content that we can attach to a MicroBuddy socket.

Thank you.

And our final question in the queue today comes from J.D. Pageant, Ford Asset Management.

Yeah, hi, good quarter, guys. I had a couple questions one on the gross margin front you talked about benefit from selling some previously written down inventory but you also talked about charges that negatively impact the gross margin?

Well, I think we'll -- no charges. We just talked about when -- you know, we brought down inventories pretty substantially in the quarter. Had some lower production rates, I think we'll see higher production rates in Q1 because we won't see the similar type of reduction in inventory so we probably had some negative impact on margins relative to absorption in the quarter.

But no one-time charges.

No. No one time no items which we would identify as a one-time charge.

Okay.

Just some recurring excess and obsolete charges that are more part of a kind of a normal model.

Okay. And then the test business for -- you quantified this quarter was 13 percent of rev. What was that looking back to the October -- quarter?

Uhm... I would say it must have been 16, 17 percent.

Okay. And that obviously will continue to drift down as a percent average revenue, then?

I think in this market it probably will. But longer term, you know, I -- I think if -- if it stays in a 10, 15 percent of overall revenues, that's probably -- that's probably reasonable.

Okay. And the last question, uhm, I think you mentioned that you're reducing your internal inventories which, you know, I guess is going to have the effect of making your customers give you a little bit greater lead time but thin also mentioned on the ATE side moving to a die bank type relationship which would kind of indicate a willingness to be a bit more flexible there so just wanted to kind of understand those two dynamics.

Well, I think each market segment kind of has its own different flavor for managing the channel inventories. I think in the case of ATE, everybody understand that these products -- they're not custom, but there are not that many different sockets for those products. And these are longer lead time items, which means you've got to have some inventory in the channel to help customers be able to respond to short lead time kinds of orders. So in this case, the cheapest place to put it is in die bank. And whereas we carried some finished goods before, I think we've managed to get our cycle time down the back end of the point to where I don't think any customers are too nervous with just supporting them from an inventory position out of Die bank. Of course, we want them to buy into it. We don't want to put a backup. Of Die there that, you know, they are not going it take in the end.

That's what makes that arrangement somewhat unique is that there is a financial obligation for them to take that Die bank should they not use it within some period of time.

Okay. And then on the other front, just reducing your own inventories supporting the channel, does that create some risk if other vendors out there are more willing to take on some of that burden and have inventory levels to respond to, uhm, a quick ramp? -- if some of your competitors are going to, you know, have more buffer inventory in place?

Well, so far we're not losing any business. We're going to manage our inventories as tightly as we can, and try to make sure they are strategically located so that we're carrying of it at the lowest cost we can.

Okay, thank you.

There are no further questions at this point. Do any of our speakers have any additional comments.

I think that's it, Operator. Thank you very much.

Ladies and gentlemen, that completes the conference call. Thank you very much.

And that will conclude the audio portion of today's call. Again, we do thank everyone for their participation.