Semtech Corp (SMTC) 2004 Q1 法說會逐字稿

Good day, everyone. Welcome to the first quarter 2004 results conference call. Today's call is being recorded, and a question-and-answer session will follow after today's presentation. For additional remarks and introductions, I will now turn the call over to Mr. John Bauman, Treasurer and Manager of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to Semtech Corporation's fiscal year 2004 first quarter earnings conference call. I am John Bauman, Treasurer and Manager of Investor Relations.

We've just released results for our first quarter ended April 27th, 2003. For the next 45 minutes or so, Jack Poe, Semtech's Chairman and CEO, Jason Carlson, Semtech's Chief Operating Officer, and David Franz, our Chief Financial Officer, will be discussing the results with you and answering your questions.

Before I turn the call over to Jack Poe, 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 estimates of future financial results, we will consider them now. We are unable to say if there will be another reg FD 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. As highlighted in the press release, risks include but are not limited to overall economic and geopolitical conditions; the timing and duration of semi-conductor market upturns and downturns; 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 business of major customers; and other risk factors. Please refer to the risk section of our earnings release and the company's most recently filed form 10-K and 10-Q's as filed with the Securities & Exchange Commission for further information.

Although a replay of this call will be available on First Call's website until June 26th, 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 published or posted is unauthorized by the company as is any replay or broadcast of this call via the Internet or otherwise after June 26, 2003.

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

Thanks, John.

As John stated, we reported our results here in the last half an hour or so. David Franz, Jason Carlson and I would like to review those with you and discuss our outlook for the second quarter fiscal year 2004.

Starting off with orders, first quarter orders increased 2% from the fourth quarter to about $44 million. Desktop power management orders were about $2 million lower than fourth quarter orders, and about half that decline was due to lower orders in Xbox as we had forecasted on the last call.

Microsoft carried over large inventories of components from Q4 largely depleted in Q1. We expect orders and shipments on Xbox to increase into second quarter. The remaining impact on desktop power management was due to delays in some new Intel Spring Dale platforms and ASP decline.

First quarter orders for portable power management protection, advance com, test and measurement, human input devices, and power discretes all increased from the fourth quarter. The first quarter order trends continued to support our belief that market conditions are on the mend, as orders and shipments reached parity for the first time in four quarters.

Turning to revenues, revenues for the first quarter decreased about 1% sequentially from the fourth quarter. We previously estimated revenues would be flat to perhaps up 2%. The company experienced a larger than normal shift of product mix in the first quarter. While test of measurement revenues decreased 29%, orders for test and measurement products did increase substantially in Q1. Bookings and billings in test and measurement products will probably reach parity in the second quarter.

Desktop power management revenues for the first quarter were 21% lower than fourth quarter due to the lower shipments to Xbox, some delayed starts in Springdale and again, as I mentioned, some ASP degradation Compared to the fourth quarter, portable power revenues increased 11%, telecom and industrial power management products increased 13%, protection products increased 9%, advanced communication products increased 27%, and power discretes increased 10%. Portable electronics continues to be an area of considerable strength for the company's power protection and human input devices.

As we indicated last quarter, demand is returning in support of the larger capital equipment business. As I mentioned previously, test and measurement orders improved and should reach parity with shipments in the second quarter.

In the communications sector, orders and shipments again improved in the first quarter. Several major programs and customers such as Alcatel, Nortel, Tellabs, and Cisco have begun pilot production, and we expect to see increases on these programs in the second half of fiscal 2004. China is also showing a marked improvement for advanced communications products.

Turns to orders for the first quarter were at an all-time high of 53% of total revenues. Some product lines are experiencing turns rates of more than 80%. Turns orders for the second quarter are expected to remain at Q1 levels or higher. Second quarter starting backlog is about 2% higher than the starting backlog for Q1.

Revenues by end market changed somewhat in the first quarter. In major end markets, computer applications accounted for 41% of total sales and communications accounted for 39% of our total business. Industrial accounted for about 15% of total business and military and aerospace was about 5% of total.

Within the computer segment, notebook computers and PDAs accounted for about 21% of all corporate sales, with desktop servers gaining in graphics accounting for the other 20% of total sales. In communications, cell phones and bay stations accounted for nearly 26% of total sales and networking in telecom accounted for about 13% of total sales. Test and measurement was about 10% of total corporate sales.

Turning to profits and operating efficiency. The company reported GAAP EPS of 11 cents in the first quarter compared to 11 cents in the fourth quarter. And the fourth quarter was prior to the $12 million settlement charge that we took for the customer dispute that was settled in the first quarter but actually recorded in the fourth per GAAP. David will share some additional detail with you on gross margin percentages and other income and expenses for the first quarter, both of which improved quarter on quarter.

ASP has declined somewhat in the first quarter, with desktop power management products under the most price pressure. Cost reductions and other product areas kept pace with ASP degradation. Sales of new products helped mitigate gross margin impact from pricing competition. We are 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 overhead cost to expand gross margin percentages closer to our long-term goal of 60% or better.

Design activity in the fourth quarter, the company reported a total of about 539 new design wins that are expected to generate more than $68 million of new annual business at full production. Product line design win dollars were again led by all three power management groups, protection, and advanced communication products. Cell phone handset wins were especially robust as the company's caller 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 26% of new design win dollars, desktop computers and servers, 23% of all new design dollars, and notebook computers and PDAs accounted for about 23% of new design win dollars as well.

Communications and networking accounted for about 14% of new design dollars. Looking at new customers, new customers accounted for about 22% of new design wins and about 14% of the design win dollars. Geographically Asia and Japan reported 50% of new design win dollars, Europe was 4% of new design wins, and North America represented 46% of total design wins. Europe designs were relatively weak again this quarter. The company is taking some steps to boost our design activity in Europe.

The top ten customers for new design win dollars included Dell, ECS, Samsung, Systec, Apple, Quantum, HPQ, Lucky Gold Star, Cisco and Kyocera. Semtech's proprietary combisense power management device continued to be well accepted in desktop computer customers.

Two of the highest running new parts for design wins in the first quarter are for desktop and servers. In Taiwan we've made good progress in design wins for ODM boards, destined for HPQ and Dell. We've won designs on a significant number of channel boards from major players and some of the second tiers of players as well. We've increased silicon production to support increased shipments, which should begin at the end of Q2 and continue through the balance of the year for these devices.

Designs for notebook computers increased again in Q1. In addition to the power management sockets and protection sockets, we've made good progress for our touch pad, pointing stick, and dual pointing devices. We have serious design activity under way at all top five manufacturers that should result in shipments beginning late Q2 and again increase over the balance of the second half into next year. More importantly we're now in a position to help customers early on for rearchitecting a number of key analog mixed signal functions that bring value both to Semtech and our customers.

In advanced communications we have made very good progress in retrofitting functions into existing production programs. I mentioned we received orders and made shipments in the first quarter on several programs. Our theories on timing architecture are beginning to get more traction at all major communications companies. And the road maps that we have now will take us closer to the edge of networks, where volumes increase tremendously. After three years of continued investment, we believe our advanced communications products business will turn profitable in the second half of this year.

New products, the company released 12 new product families in the first quarter. The company continues to invest in tracking systems software to improve productivity from our R&D groups. The company continues to hire experienced design and applications engineers during the quarter and expects to increase its hiring rates somewhat throughout FY 04. Turnover of professional staff remains low.

Turning to fiscal 2004 Q2 outlook. I'd like to discuss that outlook at this point. Overall, we expect revenues to be flat up about 2%, as I mentioned previously our starting backlog is up about 2% from the first quarter. Customer forecast continued to show higher expectations than what we were using internally for our projections; however, we believe that seasonal trends and other macroeconomic conditions may yet impact the quarter.

Turning to some of those issues, first, the second quarter is a traditionally transitional quarter for new computer designs, much more in desktop than in notebook. Intel Springdale was launched about two months later than planned. Hammer program from AMD was moved out somewhat as well for the desktop marketplace, looking more like September at this point.

Second, the quarter is usually impacted in cell phones in our Korean market as the government sorts out subsidies for local manufactures, and we think this is likely to occur again this year. Third, SARS, which we do not believe has had much impact on our business yet, may reach its pinnacle in the third quarter. It appears under control in China, but outbreaks in Taiwan threaten production there. At a minimum, direct communications with customers in either country is affecting planning and design activities. China is also rumored to have excess inventory both in cell phones and computers due to sluggish demand related to SARS. Fourth, I think the test and measurement business is improving, but it's going to probably take at least one more quarter before we see that activity solidly ramp.

Overall for the second quarter, I think we wish to take a prudent approach to forecasting the quarter, build some inventories across several products in support of the new designs that we expect to ramp in the second half and adjust our forecast if we think we've been too conservative. We believe that economic conditions have improved and will continue to strengthen throughout the second half. There's expectations for improvements across virtually all of our product lines on the back of the design wins and the new product introductions that we've had over the past two quarters. The designs and products will improve the mix toward higher gross margins and better profitable. This concludes my remarks. I will now turn the call over to David Franz.

Thank you, Jack. Good afternoon, ladies and gentlemen. The first quarter operating performance met our expectations even though revenue was slightly lower than forecasted. Net cash continued to increase during the quarter and now stands at approximately $248 million. Revenues for the first quarter of fiscal 2004 were $44 million. A decrease of 1% compared to the revenues of 44.5 million for the fourth quarter of last year. First quarter revenues declined 10% compared to the revenues of $49.2 million for the prior year first quarter.

Gross margins for the first quarter fiscal year 2004 were approximately 56.5%. The gross margin percentage improved in comparison to the fourth quarter. Gross margins for the prior year for first quarter were approximately 57%.

As sequential revenue growth returns this year, we expect to see improvement in our gross margin, particularly in the second half of fiscal 2004. And our target is to achieve gross margins of at least 60% when our revenue hits the 65 to $70 million per quarter.

Net income for first quarter of fiscal 2004 was 8.3 million or 11 cents per diluted share, which is the same as net income for the fourth quarter of fiscal 2003 prior to the $12 million charge for the customer settlement. Net income for the first quarter of fiscal year 2003 was $10 million or 13 cents per diluted share.

Revenues for the first quarter were derived from the following geographic regions: 32% was derived from customers located in North America, 8% from customers in Europe and 60% from customers in Asia.

Net turns orders were at an all-time high and accounted for 53% of shipments in the first quarter. This compares to 48%, 43% and 32% in the prior three-quarters. The vast majority of all new bookings are for delivery within a 60-day window.

As Jack mentioned, the three big end market segments, computer, communications and industrial, represented 95% of total sales. Revenues from cellular phone hand sets and bay stations accounted for 26% of revenues. Desktop computers and servers were 15% of revenues. Notebook computers and PDAs were 21% of revenues. Test equipment and measurement devices going into that market accounted for 10% of revenue. Networking and telecom accounted for 13% of revenues. General industrial and military accounted for 10%. Graphic cards accounted for 4% and gaming systems counted for 1%.

Power management revenues for the first quarter were principally affected by a sharp decline in shipment of power management devices into gaming systems. The power management business prior to the impact of the decline in revenues in the gaming system segment actually increased 2% sequentially.

Revenues from OEM sales represented 45% of total revenues for the first quarter, while distribution represented 55% of total revenues. The amount going through distribution increased due to mixed shifts in our power management business and lower test and measurement revenues.

As Jack discussed we are forecasting the revenue for the second quarter fiscal 2004 will be between flat to up 2% as compared to the first quarter of fiscal 2004. To attain the midpoint of the second quarter forecast, net turns orders of 51% of revenue are required. The turns rate is reflective of the short lead times on which customers are ordering product. While we have visibility into our customer's forecasted requirements for the quarter, customers are managing their inventory by having component vendors like Semtech hold inventory until close to the date of use.

Gross margins for the first quarter of fiscal 2004 improved slightly to approximately 56.5%. Gross margins were negatively impacted by some additional charges for excess and obsolete inventory. Gross margins for first quarter were favorably impacted by sale of 484,000 of previously written off inventory and further negatively impacted by low volumes in our industrial segment. On a year-over-year basis, margins declined slightly from the fiscal 2003 first quarter due principally to reductions in our industrial business.

Gross margins at this level are sustainable and continued growth in gross margins is forecasted for the coming quarters. Gross margins are forecasted to move toward our long-term goal of 60% over the next 18 months. For the second quarter, we are forecasting that gross margins will improve by between 20 to 40 basis points compared to the first quarter.

Research and development expenses were $7.8 million for the quarter, which was up approximately 200,000 compared with the fourth quarter as we had forecasted. We are forecasting that R&D spending for the second quarter will be approximately flat with that for the first quarter. SG&A expenses increased approximately $500,000 during the quarter due to an increase in certain variable compensation cost and higher than planned legal expenses. For the second quarter, SG&A is forecasted to be flat to slightly up in comparison to the first quarter levels.

Interest and other income was approximately $2.8 million for the first quarter. We repurchased $59.5 million face value of our convertible subordinated debentures during the first quarter for a total cost including the writeoff of differed bond issuance cost of 56.7 million. For the second quarter we're forecasting that interest and other income will come in in a range of 400,000 to a million, depending on the amount of debt we are able to retire.

The company's effective tax rate for the first quarter was 24%. The company is projecting its effective tax rate for fiscal year 2004 will be 24%. This is based on current revenue and earnings forecast. The company's effective rate declined due to lower than forecasted other income for the year. Other income is principally U.S. source income. The company's effective rate is impacted by variations in income and the source of that income as well as other factors.

The diluted share count decreased -- actually increased during the quarter to 76.5 million. The share count is expected to be approximately flat in the coming quarter.

Based upon this guidance, operating income is forecasted to increase in the second quarter by between 2 to 8%. That's at the revenue guidance range that we gave earlier. And as we achieve higher rates of revenue growth, we will achieve good fall through on incremental revenues and thus higher rates of operating income growth. Diluted earnings per share for the second quarter, due to the drop in other income, is forecasted at approximately 9 to 10 cents per share.

Turning to the balance sheet, Semtech ended the quarter with approximately $430 million of cash and investments on the balance sheet. Operating cash flow for the quarter was a negative $2.8 million, due principally to the $6 million payment made to the customer, an interest payment on the debentures, payment of fiscal year 2003 supplemental compensation and an increase in receivables. Operating cash flow will be positive for the second quarter and for the remainder of the year.

During the first quarter the company spent approximately $1.4 million on property, plant, and equipment. Depreciation and amortization for the first quarter was approximately $2.3 million. During the first quarter, the company spent approximately $55.7 million on the re- purchase of its convertible subordinated debentures, and subsequent to the end of the quarter, the company re-purchased an additional $12.1 million face value of it's convertible subordinated debentures. The company has a remaining balance of $25.1 million under its existing buyback plan.

Despite all these uses of cash during the quarter, the company was still able to grow its net cash by approximately $1 million during the quarter to $248 million as of the end of the quarter, and we would expect to increase our net cash by quite a bit more in the coming quarters.

Accounts receivables, the day's sales outstanding calculated on a quarterly basis was approximately 44 days for the first quarter. Inventory levels were down approximately $1.7 million for the first quarter. Inventory declined significantly due to the cessation of production of the company's Corpus Christi wafer fab, shipment of finished goods inventory for the ATE market and general shift towards minimization of finished goods inventories and higher levels of dye inventory. Days of inventory calculated on a quarterly basis declined to 70 days as of the end of the first quarter.

In conclusion, the opportunities continue to be significant for Semtech in fiscal 2004 and beyond. The short -term performance did not reflect the broad-based momentum building within the company, including a return to sequential growth for our desktop and ATE businesses in the second half of the year. This should manifest itself in improved growth rates in the second half of the year, and I thank you for participating in our first quarter fiscal 2004 conference call, and I will now turn the call back over to the operator for questions.

Thank you, sir. Today's question-and-answer session will be conducted electronically. If anyone does have a question out there, please signal us by pressing star one. If you're using a speakerphone, please release the mute function before pressing star one. We move first to Richard Schafer with CIBC World Markets.

Hi. Thanks, guys. I have a couple of questions. I guess the first one is talking about design activity and I guess what happened this quarter. I guess first do you design win activity as sustainable in the 500 unit range in a quarter? And I guess, then, secondly, are you seeing, you know, orders I guess from your last big design quarter, October quarter, are you seeing those turn into production orders yet? More specifically I'm really trying to find out do you feel like you're still taking share in the desktop and notebook and handset markets?

Well, if I look at the overall numbers for design wins, we had a couple of pretty good quarters here in a row. I would say we continue to see design wins building and have been pretty encouraged by the activity in most markets. Europe was an exception, as I pointed out. We're kind of disappointed with what we had seen coming out of our European group. The desktop area is one, again, I talk about, I think, two of the largest running devices we have in terms of designs for the quarter came out of the desktop marketplace. I feel pretty encouraged with that. It's a little slow on the uptick with the Springdale ramp, but that should accelerate later in this quarter. So we're going to know pretty quick on these desktop designs what the real value is that we've gotten here now in the last couple of quarters and continue to work on. I think we're holding our own in the notebook area, continuing to grow. Hand sets activity, again, was very good this quarter. A little bit more broad-based now coming out of some of the local manufacturers in China. Taiwan, I think the activity from a design view was pretty good this quarter. So I think the design activity we are feeling pretty good on at this point.

Okay. So, Jack, you guys have in the past, the last couple of couple of quarters given a turns number from today, you gave 51% from the beginning of the quarter. Where are you at today?

Rick, this is David. We're at a comparable level to last quarter and around $13 million of turns.

So ballpark 27% again, something like that? I guess I could do the math.

$13 million.

Okay. Okay. Just a question on white box market, I was just curious what percentage of your sales are attached to that market and what visibility you have in there? What visibility do you see in there?

White box for us is fairly small piece. I would guess it's probably just a few percents, single -- low single digits.

Okay. Very last question, and I'll get off, I promise. You talked a little about the Xbox, it was weak in this quarter as expected. Some other suppliers into Microsoft for that product have been surprised on the upside this last quarter, or where they were going into this quarter, I should say. Are you guys seeing the similar kind of surprise uptick or have you guys seen abnormal positive uptick there? Is it going to be 10% any time again.

I doubt it's going to be 10% of sales any time soon. It was probably 1% of revenues in Q1. It's probably going to increase some in Q2. But I mean maybe a couple percent of revenue or something like that.

Thanks, guys.

Next we go to Joe Osha with Merrill Lynch.

Thanks, guys. A couple of questions. For starters in the July quarter, is there any residual writtendown inventory sell through, or are we pretty much done with that?

They are still in our protection product line as demand picks back up in the networking and telecom area for our protection products. I mean, there still is some potential of seeing some sell through of that inventory. It should from here get fairly reduced each quarter going forward.

And I should assume from the standpoint of trying to understand what the X sold through, writtendown inventory sell through was that that $484,000 in revenue had essentially been written down to 0 from the standpoint of cost?

That's correct.

Okay. Second, just kind of a math question, as I obviously, you know, Springdale really, you know, beginning to get some tractions here, coming into the July quarter, your notebook business, obviously, CENTRINO going pretty well, hand sets going okay. Where is it we're seeing the decline in the July quarter such that revenues overall are only flattish?

Well, I think, Joe, you're going to see the desktop marketplace flat. Probably if there's any exposure to it it's got to be in desktop for Q2. If you see any of the market numbers, the unit volume expected in desktop is probably going to be lower. And that's on the older design. This is a transitional quarter. The old designs usually ramp down, people clear out inventory and they start ramping up the new models late in the quarter. I would say it if there's any downside, it's probably there.

Do I take it from your comments on book to bill, test equipment in the July quarter, we could expect revenue in that business to decline again and then begin recovering in October? Is that kind of how I should see it?

I see test probably flat in revenues in this quarter, bookings at parity, they were obviously below parity in Q1.

All right. Getting to parity but revenues pretty much behind.

I think so.

Finally. This is the last one. I apologize for being stupid. You're retiring debt and the outcome is to take your sort of quarterly not operating income run rate from about $2.8 million down to -- David, what did you say, couple of hundred thousand.

Somewhere between $400,000 and a million.

So the decline is between $2.7 to -- and $400,000 and a million.

We will have gains on debentures this quarter, some of the stuff we re-purchased in the quarter.

I guess my question is why do it, then, if you're making more on money in the bank than you're paying on debt, why do it, if the impact is to take the earnings per share down?

No, Joe. I guess let me clarify. Of the $2.8 million we earned last quarter, a substantial amount was gained on re-purchase of the debentures.

Okay.

Actually. re-purchasing the debentures actually helps because we're earning on our portfolio around 2.3% kind of weighted over the whole portfolio right now on all our money and we're paying 4.5% cash coupon on that debt and 5%, including amortization of the deferred bond cost. So re-purchasing the debt actually improves the interest income.

Okay. Sorry, I was not clear on that. Thank you very much.

Next we move to Louis Gerhardy with Morgan Stanley.

Question on desktop power. Sounds like revenues will bottom in the second fiscal quarter. Can you talk about your share in some of the old desktop platforms, and looking at some of the Springdale based ones what you think your share could be there. Are you expecting a step type function increase in market share?

I would say, as I look at desktop at this point in time, probably in the old designs, with some of those now having gone out of production, or rapidly going out of production, I would say we probably -- desktop was probably 12, 13% market share, 14%, I would say looking at the new designs, I would say probably in the 22, 23%.

Okay. And some of the delays you mentioned on Springdale, do you see those all being worked out?

Yeah, I think it's not so much our delay, just how many units, you know, have been -- how many have been shipped in the marketplace. We have a handle on where the units are actually going. It started. It's not as robust as we thought it was going to be when we first looked at it last quarter.

Then in notebook and in the cell phones, the color displays, I know you sell a number of parts there. Can you give us a sense of what your overall market share would be in those two areas, notebook and color display cell phones. It wasn't clear to me, you went through it pretty quickly, what are you expecting from those two areas next quarter?

I would say right now on notebooks that we're probably, oh, 27, 28% maybe market share for total power of what we can sell to them. And I would say in the colored screen drivers, maybe somewhat similar, maybe touching 30%.

Okay. Then your expectations for those two areas next quarter?

I would say, you know, not a big change either up or down. I think that, you know, they will probably be within a percent or two. I think you're probably going to see more in the second half with some of our new stuff. Whenever we get ramped up I think we'll do a little bit better and probably have a chance to capture a couple% of market share.

When you said not much change you're referring to market share or your revenue?

I thought you asked about market share, so I was talking about market share.

Okay.

But I think both -- I think we expect to increase total revenue there somewhat in those areas in the second quarter.

Great. Thank you.

Thank you, sir. Next we move to David Wu with Wedbush Morgan Securities.

I need clarification on two things. Number one, when I look at your customers, the LTX's the Agilents and the [INAUDIBLE], their bookings this past quarter has been extremely strong. And I was wondering what -- why would your -- why would you not be looking for a very strong shipment in your July quarter? Does it mean that these guys have a very large inventory of our existing products? Second question is, can you clarify one other thing for me? You said about the products that you sold out of inventory that were previously written down, what was the exact amount for that? And lastly on the cash position of the company, given that we have passed a 15% tax rate on dividends, what is the company's position on paying out a small dividend at this point?

All right. Why don't we take -- let's go to the inventory question first, David. Give him the number.

His first question was ATE.

Take the inventory one.

On the inventory one, we sold inventory -- $484,000 of inventory, which, you know, basically was sold at -- that inventory was sold at a 0 cost, consistent with what we reported on in prior quarters.

Dave if I take this $484,000 off your revenue line and your cost of goods sold line, I assume that's how I get the real quote unquote gross margin of the company? Is that how it works?

You wouldn't take anything, David, off of the revenue line. What you could do is you could add those $484,000 of costs back to the costs of goods sold line. On the other side of it, during the quarter, in terms of our ongoing need for reserves, we actually booked, I think, additional reserves slightly in excess of that 484. So the overall reserve position for the company in the quarter actually net net increased slightly. So the way I look at it is movements in the inventory reserve actually didn't really boost margins as such in the quarter. But if you were totally -- strictly to look at the 484, to do it mathematically would be to add those costs back in, costs of goods sold. In terms of the dividend, I don't know if you want to cover that, Jack.

Let's talk about ATE, you were curious, David, why we're not seeing more of a pickup in the ATE business after you've seen pickup out of some of the guys for testers. We did see a pretty good increase in orders in Q1 over Q4. As we mentioned we expect to get parity in terms of orders and shipments in the second quarter. And I think what you're seeing is just a result of some inventories that are in the channel. But I can tell you right now there's a bit of confusion as well going on to exactly what inventories are at what customers, and the forecasts are a little muddled at this point in time. We just want to make sure we're conservative, cautious on projecting any increase in ATE at this point.

I see. What was ATE book to bill ratio in the first quarter.

Q1 it was about 0.7 something, I would say, 0.75 maybe.

I see.

It is something that we have considered for quite some time, but we were trying to wait and see what the tax policy was it a certain extent, see what was going to be the long-term position. And we continue to look at dividends, paying dividends as something that might benefit the company and shareholders in the long run. So although we've discussed nothing at this point in time, it's something that we're continuing to pay attention to, and I think that we will probably address sometime here this year.

Okay. Thank you.

Thank you, sir. Next we move to Jeff Rosenberg with William Blair.

Hi. Another clarifying question. I have you down last quarter as saying that desktop, and I guess including gaming and things like that, was 21% and I thought I heard you say that's what it was this quarter all in, is that right? Or was it down this quarter as a percent of sales.

I think we said 20, all combined, which was graphics, desktop, servers, and gaming. I think it was 20.

Notebooks and PDAs was 21%.

If you lost 3% or so in terms of percentage of sales in gaming but you're also saying desktop was weak during the quarter, I guess I -- I haven't gone through the granularity and math, I thought that category would have dropped off more if you're saying that's where all of the weakness in sales was in the quarter.

I guess it's a little confusing. When I sometimes talk about desktop and servers, I'm talking as a broader category, because those products what we have under one of our product groups. The majority of that decline was in the gaming, Jeff.

Okay. That helps. Then in terms of overall operating expenses, they were roughly are at the level they were a couple of quarters ago and then you have negative operating relative to sales, then. Were expenses low last quarter and just were expecting them to rise? I'm trying to remember what you told us in terms of what you thought expenses were going to do this quarter, because I wasn't looking for the degree of expense increase sequential you saw. If you could go through that again, David.

On R&D we had expected them to go up a couple of hundred, 2 or 300,000. I can't remember the specific number we guided to. Something in the range of 2 to 300,000. In SG&A we had expected to go up a couple of hundred thousand dollars as well. That went up a little bit faster than we had anticipated, due to, I'd say, principally some costs in the G&A area and some unplanned legal expenses.

Okay. Jack, on your overall comments when you talked about all the things that might be going wrong, whether it be inventories in the cell phone market or issues in Korea, on and on with various different issues, are you saying you're seeing some of those things today? Sounds like you're characterizing them as things you're hearing about but they really aren't evident in terms of what you're seeing from order patterns with customers today.

It goes back to last year, Jeff, when we got started up in the first part of the year and we thought conditions were going to continue to improve. I think we're going to be a little more cautious this year, waiting to see your way through and see what really happens. Some of the things related to SARS, I'm not here to say, again, we really see any impact on our business that we could attribute to SARS. But it's kind of like last week you hear from QUANTA, they are putting up tents in parking lot and that's where you're doing your engineering meetings. It's getting to the point it's a lot harder to do business, and with that kind of cautionary rhetoric coming out of Taiwan, I'm a little concerned there is eventually going to be some impact. The rumors on PC inventory and handset inventory in China due to sluggish demand, I don't have any way to really truly identify if that's the case or not. It's a concern more than actual evidence at this point.

But you can't really tell whether you're building inventory with your customers at this point? It's just speculation as to what might be happening.

I don't see a lot of inventory build. We're trying to build some inventory as a company in the second quarter getting ready for the second half of next year. So, you know, that's -- you know, that's an ongoing program for us. I don't really see a lot of inventory builds in -- out through our distributor channels. There might have been a little bit of stuff at the end of the quarter where we're cleaning up some delinquencies, things like that, I don't see a lot of inventory build so far.

Last thing on ASPs if there's any quantifications you can do on the erosion during the quarter. Do you expect that to be different once the mix shifts towards the design wins, how do you expect the ASP circumstances to be over the next several quarters?

As I mentioned, I think most of the ASP pressure or probably the majority has been in the desktop marketplace. There's ongoing price pressure in the semi-conductor market. Usually we're able to deal with it through cost reductions. I think the desktop marketplace is going to remain very competitive. I don't see prices probably coming back up there any time in the near future. In fact, they are probably going to continue to decline. That's going to be a brutal market for some time to come. And but I think, you know, this is where you pivot and shift and come out with some of the other products, you take those resources and move into adjacent markets, and that's quite frankly what we're doing in the telecom and portable area.

Any comment on the percent per quarter you're seeing now?

I would say, overall, you're probably looking at, I'd say, 8% a quarter, something like that, 7, 8% a quarter. Maybe in desktop it's been higher than that.

When you say 7 or 8 per quarter, that's overall power management?

Overall as a company. I would say desktop power is probably above that.

Great. That helps. Thanks.

Thank you, sir. Next we move to Auguste Richard with First Albany Corp.

Good afternoon, guys. Real quick, I didn't catch the booking number at the beginning of the call.

44 million.

44 million. And then what was the one-time gain from the bond in the quarter, was that 2.4.

It was about $2.8 million in the quarter.

For the one-time gain. Okay. And then very quickly, on CENTRINO, how is that going? There's going to be a significant ramp for that in the third quarter? I was wondering how you were doing on that notebook.

I think we've done much better on the peripheral side than V core.

In the next generation CENTRINO, there's some power management, are you working on that?

We haven't done much in that area, Gus.

I've heard of some notebook folks or at least rumors they are looking at single phase designs for notebooks now. Is that something you've run across or is that just speculation.

I would say most of CENTRINO is single phase.

I was thinking P4.

I would say most of the design activity that we've seen is dual phase for IMVP 4 1/2.

Okay. Then, see, just looking at the dollar content of CENTRINO relative to P4 and next generation CENTRINO, can you just sort of trend that for me? Is it coming down to CENTRINO and coming back up to next generation CENTRINO.

I doubt it. I think when if comes down, it says down until you get some breakthrough power in there. It's probably -- my gut would be mid fours for power, 4 1/2, maybe.

Okay. I'll let somebody else go. Thanks.

Thank you, sir. Next we move to Steve Smigie [INAUDIBLE] with Raymond James.

Good afternoon. Question as to some of the design wins you're seeing out there. I've heard a number of people had some difficulty tracking their performance after the design wins because a lot of sales going to the EMS and ODMs end up where those particular manufacturers change the parts even though they are in the reference design. I was wondering if you had experienced any of this as well.

I think that's always a concern any time you're into the contract manufacturing phase. It is a task just following all the design activity into those end sockets. We have we have systems in place. We force our contract guy to tell us what program this is coming on, the unit volume associated with that. As far as having people actually cross sockets once we're in the contract phase, it happens some. For most of the propriety products, it does not happen that often, because it's usually a pretty major re-design. And the OEMs probably don't have the resources to support that redesign effort that far into the cycle.

Okay. Last quarter you talked about some savings you had going completely fab-less. I wonder if you could quantify that after you've had a full quarter.

I'd say we continue to get some benefits from having -- incremental benefits from having shut down the fab, in terms of quantification, probably somewhere between a half and a percent positive impact during the quarter.

I was just wondering now that you're fabless, are you still having a lot of ability to get concessions on wafer pricing, I guess in an upturn what protection is there for you to not get squeezed going the other way?

Well, I think it's still pretty competitive in the silicon end of the market, so pricing remains favorable at this point. We will obviously continue to look at qualifying other silicon partners as we move forward over the next year or two. So I think we are into the sweet spot of the market where we do not need that much leading edge capability, so there's a constant flow that is available for our kinds of products, and that should help keep the prices quite competitive for silicon.

Okay. My last question, maybe covered this already. If you could just talk briefly about how lead times were during the quarter.

I don't remember a lot of changes in lead times. I think pretty competitive. I would think mostly times are still in the, oh, probably two to four week up to maybe six to eight weeks.

Okay. Thanks a lot of.

Thank you, sir. Next we move to Tinach Netkurni with [INAUDIBLE].

Good afternoon. You use a foundry operation in China for sizeable production. Have you felt any impact of SARS there?

Only -- I think the overall impact of SARS on us has just been one of communication more than anything. I think if you take a look at either demand for our products or production interruptions, I don't think that we really have seen any significant impacts at all so far.

Okay. And can you please give us more color on the telecom end market? You showed good improvement there in the April quarter.

Yeah, across the board, I would say we see customers coming back in the communications marketplace. In a couple of areas, obvious areas for us. In the advance communication stuff for sets devices, we are seeing some of the designs for retrofits for sets that are going into boxes that have been in production at these customers for quite sometime. Our parts are getting put in new revisions of those. That activity has been quite robust, and we think that's going to continue on to the second half. I would say a more secondary improvement in the overall communications telecom marketplace has been for our protection products and frankly that was some of the inventory that we had written off not thinking that we were likely to see a lot of sales in some of that stuff. So that was a bit surprising that some of those customers came back and purchased some inventory. We're seeing more activity on the infrastructure equipment generally and it also is having a favorable impact, I think, on some of the power management devices going in there. So I think there's just a general improvement going on in the communications sector and I think that will continue to be a positive aspect of the business here in the second half and into next year.

And does that help you in improving overall ASPs?

Most of the things we sell into communications infrastructure across all of our product lines are probably at above -- maybe well above corporate average margins in some cases.

Good. Thank you.

Thank you, sir. Next we move to Woody Calleri with Midwest Research.

Good afternoon, guys. The one area we haven't touched on is success in the MicroBuddy part of the market here. Could you talk a little about where you see that heading and if you're having a little bit better interest now that you're breaking it into a couple different aspects.

Woody, it's still slow. We're splitting the product line out into a couple of different areas for I would say the lower ASP stuff and more full featured products. Actually in that whole area we're having a lot more success in the pointing devices than I would say we are in getting the uptick of MicroBuddy. It's a little discouraging, quite frankly. I thought we would be a lot further along than where we are right now. We certainly haven't given up on getting some stuff to ramp here, you know, in the coming quarters.

Okay. And then on the cell phones with the color phones. If I remember correctly you guys do the display drivers for the color phones but that will also see increased revenue content with cameras with the flash. Could you kind of give us an update on what the revenue content you can achieve on a cell phone is and if I'm right about the flash for cameras.

You are right on flash. It was an application that came up here a couple of quarters ago. It's very similar technology to what we're supplying for the color screens. But that product road map may be a little bit more divergent going forward. But certainly as flashes are attached to more of the cameras, that's going to help the content. I would say if we look at our overall content for cell phones, we're probably in somewhere about the 4, 4 1/2 dollar range if we could get it all in.

You talked a little bit about second half improvement here. Is that more market share gains and increased revenue content? Is that depending on an economic improvement at all?

I think there's some seasonality to the cell phone business. And of course for us where we have a pretty significant portion in Korea, we always go through the second quarter subsidy issue. I think the second half is a combination of that seasonality, plus market share gains we have for some new products that usually are launched in third quarter. So I think there's a combination of two things there.

Okay. And then as I think about the second half, are you going to see an impact from the weaker dollar? Will that be positive or negative to you guys?

We sell most of our products in dollars. I would say probably 90% plus of our revenues are denominated in dollars. So that probably doesn't have too much of an impact. Costs are pretty much for our subcontracts pretty much denominated in dollars as well. You know, quite frankly, I think you'd have to have still a pretty substantial change in the dollar before it had some impact. I mean, we do have some foreign currency purchases. It could hurt a little bit. But it's nothing that I'm staying up at night worrying about right now.

Since you denominate in dollars, your products will look cheaper in some of the foreign markets.

Yeah.

Okay.

I think business kind of worldwide is done so much denominated in dollars, I think everybody kind of works in dollars.

Fair enough. Thank you for your time.

Thank you and next we move to Joe Osha with Merrill Lynch.

Sorry, can you hear me.

Yeah. Go ahead, Joe.

Just a follow-up. Did I hear correctly that there was another roughly $480,000 of additional inventory reserve taken this quarter? I was listening to the answer to that question and something caught my attention there.

Joe, what I was saying is while we did sell $484,000 of inventory at cost that had been previously reserved via that one-time charge, I also said that new inventory reserves booked during the quarter, just based on our agings of inventory and policy and reports, just happened to approximate that amount. So if I look as I look at it, the net impact of reserves on the quarter, it was kind kind of neutral versus being positive in my way.

That process of aging is something that occurs every quarter, yes?

Exactly. That's why I said to David by strict letter you would add that back to the costs of goods sold.

The only reason I ask is I am trying to figure out what the real organic gross margin here is, I mean all other things being equal, should we think of you guys starting off a 55 percent base here or thais fair.

I think you'll see the amount from this kind of amount we did in Q4 of $484,000, which is the highest it's been in the last five quarters. It was $442,000 in Q4 just as a point of reference. We definitely see that trending down. By the end of the year, you know, it would presumably, you know, be to 0. But even considering that, you know, we believe off this 56.5 type gross margin , that regardless of the impact of this previously written off inventory we ought to be able to grow gross margins off that base in Q2 and going forward into Q3 and Q4.

You did indicate to get to that 60% number required 60, 65 million dollar top line?

Yeah, we've projected for a while that as we get back at some point, hopefully sooner versus later, to our all-time high in revenues, that 65 to $70 million rate, that our gross margin will be even higher at 60% or greater. Frankly we think the mix of revenues we'll have by 70 million dollars will be much more propriety, we'll have a big contribution from our sets product line, which is a very high gross margin product. We think our gross margin profile, you know, should be higher when we reached that 65 to 70 million level, and it was two or three years ago.

That begs the question, this is my last one, I promise, what does this business look like then making some reasonable assumptions about mix at, say, a $50 million per quarter run rate, what kind of gross margin would be appropriate for us to think about in.

At a $50 million type run rate, we'll be obviously north of 57, I think I can safely say that, maybe even 57.2 or 57.4, depending on the mix of -- you know, depending on the mix of products.

Okay. Thank you very much.

Thank you, sir. Next we move to J. D Pageant with Founders Asset Management

One quick question with respect to the interest income. If we take out a gain of $2.8 million in the last quarter, kind of imply the underlying interest income was 0?

Well, we had some other items in that category, some miscellaneous items of a couple of hundred. Any small losses we might have taken on some investments was maybe around 100 K, 200 K for the quarter. The fact we retired some of the debt in Q1 and some early in Q2, that helps the profile in terms of the interest profile, because we eliminate kind of the 2.7% gap between the payment on the note and what we're making on the note. That's where some of the benefit that kind of gets us to a 400, 500k type interest rate earning based in Q2.

You think looking to Q3 if there's no additional debt repo activity that net interest and other income would kind of be in that range going forward?

Yeah. It could be in that range or, you know, declined slightly, if we don't retire any additional debt.

So kind of thinking about 2 to $300,000 on kind of a recurring basis.

Yeah, I mean -- yeah, with no other debt retirements, that's not an unreasonable assumption.

Okay. And the other question had to within your cell phone business you mentioned a good chunk of the exposure there is to Korea. Is there a way to break that out geographically or maybe by customer?

I'm not sure we've got the splits for Korea. In total, I would guess, if I were to look at the handset business, Korea could be as much as half, I would think. Of course Samsung is probably the largest, Lucky Gold Star is probably number two. Then there's another four or five guys in Korea to make up the balance.

Okay. And then fair to think that because of the particular products, I guess, mostly just with the color display drivers, you'd be more on the high end phones that perhaps would be less susceptible to some of the inventory issues if they exist in China?

I would say they are pretty well across the spectrum of high end and low end stuff. You've got power, protection devices in there as well. So, you know, I think we have exposure to all segments of the marketplace.

Okay. That's kind of what you're trying to bake into the guidance here a little bit?

Yeah.

Okay. Great. Thank you.

Thank you, sir. And sir, it appears there are no further questions at this time. I'll now turn the conference back to you for any further or closing comments you have.

I think that completes all our comments today. I appreciate everyone attending the call. We look forward to talking to you by next quarter for sure. Okay. Thanks.

That does conclude today's conference. Thank you all for your participation. You may now disconnect