Semtech Corp (SMTC) 2004 Q2 法說會逐字稿

Good day, everyone. Welcome to the Semtech Corporation fiscal year 2004 second quarter results. Today's call is being recorded. A question-and-answer session will follow after the presentation. For additional remarks and introductions, I will now turn a call over to Mr. John Baumann, the 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 second-quarter earnings conference call. I'm John Baumann, Treasurer and Manager of Investor Relations. We've just released the results for our second quarter that ended July 27, 2003. Over the next 45 minutes, Jason Carlson, Semtech's President and Chief Operating Officer, David Franz, our Chief Financial Officer, and Jack Poe, Semtech's Chairman and CEO, will be discussing those results with you and answering your questions.

Before I turn the call over to Jason, 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 will consider them now. We're 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 semiconductor market upturns or downturns, demand for communications infrastructure equipment, computers, cellular phones and automated test equipment, demands 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 end to 10-Q's 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, 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 rebroadcast outside of the one available at First Call's website. I will now turn the call over to Jason Carlson, President and Chief Operating Officer of Semtech.

Thinks, John. We reported our second-quarter fiscal 2004 results in the press release issued in the past half-hour. Over the next 30 minutes or so, David Franz and I would like to review those results with you and discuss our outlook for the third quarter of fiscal year 2004. For those of you have not yet had a chance to read our press release, I will start by reviewing our results compared to the guidance we gave on our May 27 conference call.

Revenue was at 44.6 million, an increase of 1 percent sequentially. This was at the midpoint of our guidance of flat to up 2 percent. Gross margin improved to 57.3 percent, up from 56.5 percent in the first quarter. Earnings per diluted share were 3 cents on a GAAP basis, and GAAP net income was reduced by the seven-cent after-tax charge for calling our convertible debenture. David will review our financial performance in more detail following my comments.

Now let's move on to orders. Second-quarter orders increased 7 percent from the first quarter. Portable power management orders grew slightly, while desktop power management orders were seasonally lower in the second quarter. With Intel's launch of the Springdale chipset at the end of June and AMD's launch of the hammer chipset currently set for September, new designs that employ our CombiSense technology are ramping slower than we have anticipated. Test and measurement orders more than doubled from the first quarter, after having dropped roughly 50 percent from the fourth quarter. It appears as though the first quarter marked a bottom for this market, and we are now seeing growth across the customer base in the areas of system on a chip and more recently for flash memory testers.

Our advanced communications product line saw approximately a 38 percent increase in orders. This resulted in a reduction of turns required from 83 percent for Q2 to 69 percent for Q3, advanced communications shipment. While overall revenue in this product line will be up more than 50 percent quarter on quarter, several customer programs launching in the quarter are responsible for this change. Projection has small reductions in orders compared to the first quarter. Overall, second quarter order trends continue to support our forecast of continued growth in the second half of the year.

Looking towards design activity, in the second quarter, the company reported 487 new design wins that are expected to generate more than $69 million of new annual business. Product line design-win dollars were led by portable power management, protection and desktop power management, respectively. Cell phone handset wins grew to roughly 27 percent of design-win dollars as the Company's color screen drivers, charging circuits and TVS protection devices continue to win sockets (ph).

Yesterday, we announced a key design win with Samsung SDI to support their newly released ultra-fine field sequential LCD technology. This technology represents an exciting development in Next Generation performance for small displays in both cell phone and hand-held product offering. These displays will feature the world's highest level of definition, with 205 pixels per inch for a 2.3 two-inch panel. We are very proud to partner with a leading display manufacturer like Samsung SDI to bring this new technology to market, and this is a great validation of our design leadership.

Power management for notebooks represented 18 percent of the design-win dollars. We continue to have success with leading manufacturers. Our product offering has expanded in the notebook market, further strengthening our position to offer re-architected solutions that may provide benefits to our customers, such as reduced component count or size, performance, cost and power consumption.

Our Advanced Communications Business represented about 9 percent of design-win dollars. More significantly, two customers are bringing new products to market in the coming quarter. They are the Alcatel 7300 DSLAM in the Nortel Viking and OPTera (ph) program. Design wins that were completed in the past two years are just now ramping into production. We have wins at SIENNA, Siemens, Cisco and Tellabs that will be going into production before year end, and we will announce those specific programs in subsequent quarters.

Our Protection business recorded about 21 percent of design-win dollars. We also achieved nine reference designs on applications such as Ethernet, xDSL and telecom equipment. Our new flip chip devices that protect color displays and handsets continue to drive significant design-win activity. Desktops accounted for 13 percent of design-win dollars as we continue to record wins on Vcore solutions for Springdale platforms.

Power Management for networking and industrial applications accounted for 5 percent of design wins across a new and diverse customer base. While still less than 5 percent, human input device designs were up 25 percent from Q1. One design is ramping for Q3, and we will be announcing further design wins in the coming quarter.

New customers accounted for about 22 percent of new design wins and about 16 percent of design-win dollars. Geographically, Asia and Japan recorded approximately 59 percent of total design-win dollars. Europe recorded almost 6 percent of new design win the design wins, and North America represented about 35 percent of design wins. Europe improved somewhat in the quarter and is expected to continue doing so as we have recently strengthened staffing there. Top customers for new design-win dollars included Dell, Samsung, HP-Q, Cisco, Motorola, Huasiden (ph)-Seiko, Tellabs, Nortel, Mitsubishi, Quanta and Matsushita.

I would like to take this opportunity to discuss our outlook for this third quarter. Overall, we expect revenues to be up 4 to 6 percent. Starting backlog is approximately up 6 percent from the second quarter. Our growth in the third and fourth quarter is supported by the following six areas. First, the growth of our Portable Power Management business has been significant. For the first six months of the year, sales increased 105 percent compared to the previous year. In notebooks, we have leveraged our strength in Vcore and expanded into peripheral products and system power. Touchpad and pointing-stick solutions are on track to further expand our content. For hand-helds, we continue to broaden our product offering for improving advanced display technology as the move to color displays accelerates. New handsets have increased performance requirements, and demands for our protection and battery charging products have accelerated.

Second, our Advanced Communications business will benefit from several programs going to production in the third and fourth quarter. We believe conditions in this market are steadily improving. These changes should ensure this business unit reaches profitability in the third quarter. We continue to identify and win new opportunities for our sets products, and remain confident about the long-term potential for these products.

Third, the opportunities for our protection business continue to grow, as data rates increase and silicon geometries decrease. A good example is our new flip chip products that protect new color displays in handsets. Our Protection Products serve a wide variety of end markets such as computer, communication, industrial and commercial; and the product line generally benefits from improved market conditions.

Fourth, our desktop business is focused on a select group of products to regain share accordingly. We continue to record design wins with our Comp-sense products, and as the new chipsets from Intel and AMD ramp in volume, we expect improvements in market share. Our current products support Vcore, peripherals and graphics, and should benefit from seasonal trends as well as any increase in corporate spending.

Fifth, our ATE business seems to have found a bottom in the first quarter and looks to be improving. The overall increase of semiconductor units has created strength in system-on-a-chip devices and flash memory segments of the ATE market. The demand from the ATE key market is more broad-based than what we saw last year at this time.

Sixth, in our emerging areas of human input devices and telecom and industrial power, we continue to gain traction at key customers. Both of these product groups have recorded key design wins and will be growing revenues in the coming quarters. Finally, the diversity of our products, key customer relationships and the strength of our balance sheet positions Semtech for continued growth. This concludes my remarks, and I will now turn the call over to David.

Thank you, Jason. Good afternoon, ladies and gentlemen. The second-quarter operating performance met our revenue expectations and achieved the high end of our earnings forecasts due to higher than forecasted gross margin expansion. Also, as Jason mentioned, we built backlog as orders exceeded revenue for the first time in several quarters.

Revenues for the second quarter of fiscal 2004 were 44.6 million, an increase of 1 percent compared to revenues of 44.0 million for the first quarter of this fiscal year. Gross margins for the second quarter of fiscal 2004 were approximately 57.3 percent. The gross margin percentage improved by 80 basis points in comparison to the first quarter. Gross margins for the prior-year second quarter were approximately 58.3 percent. We expect further improvement in gross margins in the second half of this year and in fiscal 2005.

Earnings for the quarter were at the high end of our previously announced forecast. GAAP net income for the second quarter of fiscal 2004 was 2.4 million or 3 cents per diluted share. The GAAP net income was reduced by a seven-cent after-tax charge for calling our convertible debentures. As I previously mentioned, revenues for the second quarter did increase slightly more than 1 percent sequentially as compared to the first quarter. We had previously estimated that revenues would be flat to up 2 percent.

As we look by product line, Portable Power Management revenues increased 15 percent in the second quarter, due to continued strong growth in notebooks, handsets, PDAs and other portable devices. In the second quarter, test and measurement revenues increased by 30 percent, returning to a more normal revenue level after having declined 29 percent sequentially in the first quarter. Desktop power management revenues were 6 percent lower than the first quarter, due to lower shipments into the graphics market and the delays in the Springdale chipset ramp up. Protection revenues declined 11 percent. Protection revenues declined principally due to the well-documented second-quarter inventory correction in the cell phone market. It appears that this correction was largely completed during the second quarter, and our protection business is positioned for growth.

Revenues from Semtech's three emerging product lines, HID or human input devices, advanced communication products and telecom and industrial power management, were somewhat lower in the quarter. All three of these product lines are positioned very well to begin generating sequential revenue and profit growth on a consistent basis starting in the third quarter. The Company's legacy business declined about 9 percent in the quarter.

Revenues for the second quarter were derived from the following geographic regions. Thirty-one percent was derived from customers located in North America, 9 percent from Europe and 60 percent from Asia. Net turns orders accounted for 52 percent of shipments in the second quarter. This compares to 53, 48 and 43 percent in the previous four quarters. The vast majority of all new bookings are for delivery within a 60-day window.

Revenues by end market changed somewhat, with the most significant growth coming from the notebook and PDA markets as well as the test equipment market. Our three big end markets of computer communications and industrial represented approximately 97 percent of total sales combined. Revenues from the cell phone market and base station market accounted for 24 percent of revenue. While cell phones were flat as a percentage of revenue, the company continued to achieve significant growth with its white LED products and battery charging products which are designed into higher-end new model phones. Desktop computers and servers accounted for 14 percent of revenue; notebook computers and PDAs accounted for 23 percent of revenue; test equipment accounted for 12 percent of revenue; communications infrastructure accounted for 12 percent of revenue; general, industrial and military accounted for nine percent; graphics cards accounted for 3 percent; and gaming systems accounted for 3 percent. Revenues from OEM sales represented 46 percent of total revenues for the second quarter, while distribution represented 54 percent of total revenues.

As Jason discussed, we are forecasting that revenue for the third quarter of fiscal 2004 will increase between 4 and 6 percent as compared to the second quarter of fiscal 204. To obtain the midpoint of the third-quarter forecast, net turns orders of 52 percent of revenue are required.

Gross margins for the second quarter of fiscal 2004 improved to approximately 57.3 percent. Gross margins were favorably impacted by improved mix and contributions from new proprietary products. Gross margins for the second quarter were also impacted by the sale of 308,000 of previously written-off inventory. The amount of previously written-off inventory sold in the quarter dropped in comparison to the $484,000 level in the first quarter. On a year-over-year basis, margins declined slightly from fiscal 2003 in the second quarter due to lower industrial market business. Gross margins are forecasted to continue growing in the coming quarters. Gross margins are forecasted to move toward our long-term goal of 60 percent over the next 18 months. One of the expected drivers of this growth are Semtech's emerging product lines, which have gross margins which exceed the corporate average, some by a substantial amount. For the third quarter, we are forecasting that gross margins will improve by 20 basis points compared to the second quarter.

Research and development spending was 7.4 million for the quarter, which was down approximately $350,000. This decrease was due principally to lower spending on supplies, salaries and tooling. We are forecasting that R&D spending for the third quarter will increase 200,000 compared to the second quarter. SG&A expenses increased approximately 300,000 during the quarter, due to an increase in insurance costs, some relocation expenses, and some rent accruals related to our corporate facility. For the third quarter, SG&A is forecasted to be up slightly in comparison to the second-quarter levels. Interest and other expense was a loss of approximately 5.7 million for the second quarter. As we mentioned earlier, the Company retired the remainder of its outstanding convertible debentures, which resulted in a pre-tax charge of 6.8 million, or 7 cents per diluted share of stock on an after-tax basis. Before the third quarter, we are forecasting that interest and other income will be a positive $1 million for the Company.

The Company's effective tax rate for the second quarter was 24 percent. The Company is projecting that its effective tax rate for all of fiscal 2004 will be 24 percent, based upon current revenue and earnings forecasts. 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 increased during the quarter to approximately 77 million. The share count is expected to increase by approximately 250,000 shares in the coming quarter. Based upon this guidance, operating income is forecasted to increase 9 to 15 percent at the stated revenue guidance range. As you can see, operating income is expected to grow at quite a bit faster rate than revenue, as we are forecasting good fall-through on incremental revenues. Diluted earnings per share for the third quarter are thus forecasted to increase to 11 cents per diluted share.

Turning to the balance sheet, Semtech ended the quarter with approximately 246 million of cash and investments on the balance sheet. Operating cash flow for the quarter was a positive 4.3 million. Cash flow was negatively impacted by the inventory build to support the projected third-quarter growth of our portable power management products, as well as the payment of a prior-year tax liability, as well as an increase in receivables. Operating cash flow is forecasted to be positive for the third quarter and the remainder of the year, and we are expecting operating cash flow to improve significantly in the second half of the year in comparison to the first half of the year.

During the second quarter, the Company spent approximately $1.8 million on property, plant and equipment. Depreciation and amortization for the second quarter was 2.2 million. And during the second quarter, the Company spent approximately $186 million to retire the remainder of its convertible subordinated debentures. The Company also purchased approximately $1 million of its common stock in the quarter. And the Company currently has a remaining balance of $19.2 million under its existing authorized buyback plan.

Accounts Receivable's day sales outstanding, calculated on a quarterly basis, were approximately 47 days for the second quarter were. Inventory levels increased in the second quarter, and this is principally to support forecasted ramps in shipments of the Company's portable power management products for the wireless, notebook and PDA markets. Days of inventory calculated on a quarterly basis were 88 days as of the end of the second quarter.

The company has opportunities for growth in its main and emerging product lines over the next 18 months. Based on bookings to date in August, we are optimistic about achieving the high end of our stated revenue guidance range and thus generating year-over-year revenue growth in the third quarter. We would expect the rate of year-over-year growth to accelerate in the coming few quarters.

Thank you for participating in our second quarter of fiscal 2004 conference call, and I will now turn the call over to Jack Poe.

Thanks, David. I would like to make just a few comments before we turn the call over for questions. We also announced today that, effective October 6, 2003, Jason Carlson has been promoted to President and Chief Executive Officer. Jason will also become a member of Semtech's Board of Directors. I will remain as Chairman of the Board after October 6. Just to take you back a little bit, Jason was hired as President and COO of Semtech in November of 2002. He has nearly 20 years of semiconductor experience, including several senior positions in the audio and visual market segments. Over the past year, Jason has demonstrated his vision for Semtech and he has shown the ability to achieve that vision. I am pleased that Jason and his team have now repositioned our product lines to create an exciting lineup of leading proprietary product families that will drive the company's future growth. Over the next few quarters, I think shareholders will begin to see not only the positive impact that these products will have for the Company, but in many cases, these products will redefine system approach and architecture in computing, communications and industrial applications.

My role at Semtech after October 6 will be to work with Jason and the management team in strategy development, and to work with the Board to ensure that management has the resources to execute the Company's strategic plans and to create long-term shareholder value. I sincerely appreciate the support of shareholders, management, employees and directors in my 18 years as CEO, and I look forward to contributing to the Company's future success in my new role. We will now turn the call back over to the operator for questions.

Thank you. (OPERATOR INSTRUCTIONS). Steve Smithy (ph) with Raymond James.

Yes. There's something you might be able to comment a little bit more on what happened in terms of the breakout of design wins within the 400-plus that you mentioned in the quarter, in terms of end markets.

As I said in the call, Portable Power Management led the overall design wins, and Protection was second, and Desktop Power Management was third. Really, our design wins in Portable Power management have been in Vcore and peripheral products. Additionally, we have had some good design wins for HID and touchpad and pointing stick in that area. In protection, our design wins have been primarily in handsets, as I mentioned, protecting color displays in that area.

Okay. Would you care to comment a little bit on your market share in terms of both the desktop and in terms of the notebook, please?

Yes. In desktop market share, today, I would say that we are roughly 10 percent, maybe a little bit more. But we see it growing to about 20 percent as we have an opportunity to reengage with the Springdale and hammer chipsets. And in notebooks today, we're probably in the low 20s, and that is growing as well, and probably will be into the high 20s.

Louis Gerhardy with Morgan Stanley.

Good afternoon. Congrats to both Jason and Jack. I just wanted to ask you about the turns (ph) requirement for the upturning quarter. It looks like it's going to be about the same percent turns. Maybe, David, if you could just mention to us, you know, with the three weeks into the quarter, how far along you are in terms of satisfying that. Maybe you could compare it with the prior quarter?

I would say, generally, Louis, we had a strong August. And if you look at the turns requirement, we, as of today, are, let's just say, slightly sub-ten million, in terms of the remaining turns. If I had to characterize it, in terms of the turns, I'd say we are relatively ahead of where we were last quarter in achieving the same relative amount of turns. And that's probably why I made the comment I did about the expectation for the 4 to 6 percent range and hoping to get to the high end of that range. Turns have been very strong, I think, through August, particularly coming out of the portables sector of our business. And drilling down even a little bit more, particularly strong out of the notebook area as new design wins ramp in that area.

Okay, great. And on wireless, you had mentioned, I think it was 24 percent, of your revenue was base stations and handsets. Can you give us a little bit more color on what percent is handsets? And then you mentioned wide LEDs and the battery chargers and some protection devices. Can you give us a sense of the waiting of those products, and anything else that you're currently selling into handsets?

You know, as you look at it, Louis, most of our cell phone business is the handset business. The base station business is relatively a small percentage; we don't break it out. I'll just say, it's mostly handset. In terms of the waiting, we have a strong presence with our Protection Products as well as a growing presence with our Power Products. We generally haven't broken down that business further by segment. But if I -- just generally weighting it, I would say that the Power Business has now become, you know, relatively, compared to the Protection Business. The Protection Business historically was our biggest business, in cell phones. But with our rapid growth that we've had over the last nine or twelve months from the wide LED drivers and the battery charging products, that is now, I would say, over half the business, at least. So that's as much as we'll break that down, for competitive reasons; but I think that kind of gives you a flavor.

Yeah, that helps. Last question -- did you have any 10-percent customers? Can you mention who they might have been?

We didn't have any specific 10-percent customers. And, Louis, just to clarify on that, I mean, we do have some customers in distributions and distributors which we sell to, which are, say, in the 10, 11, 12, 13, 14-percent range. But those get spread into so many different end customers, we disclose that in our 10-Q. But we really don't think of them as per se, 10-percent customers.

Our next question comes from Jeff Rosenberg from William Blair.

Just to maybe try and clarify one more thing on the handset break down -- I guess, should we assume that the power portion of that grew sequentially during the quarter, and offset the -- somewhat offset the protection, so that's why handsets overall were only down slightly? Is that the right way to look at that?

Absolutely.

Okay. And then on the desktop and then the portables, it relates to PCs -- I guess, first of all, I think you guys had talked about seeing strong orders from a couple of the Taiwanese motherboard guys -- expectations of that -- and the July timeframe and then into August. So we should assume that that has just been continued to be pushed out? Or could you maybe just refresh us a little bit on some of the chipsets that you are waiting to come out, and more granularity on what sort of has to happen to get that ramping the way that you're expecting?

Right. The introduction and ramp of the Springdale chipsets from Intel, which was released in the end of June, and the K-ATE or hammered chipset from AMD that's targeted for a September release -- that really provides our opportunity to gain some share back in this market. And it seems like that ramp is probably happening one to two months later than we had anticipated.

And that's incrementally later? I think you had a similar sort of scenario that you talked about three months ago. I think you talked about Asustech and ESS's customers that were going to be ramping. And are those specifically ones you're still waiting on?

No. Asus, as an example, we think, is actually starting now. But if you go back a few months, both of these programs were scheduled to be released earlier than the dates that I just gave you.

And then perhaps you could compare a little bit sort of your breakdown of core power versus other applications in the desktop versus the notebook. Are you more weighted away from core power and the notebook, or is it a similar sort of exposure there, comparison there?

If you go back to the notebook market, we did a good job by getting to Vcore stock and expanding from there. But today, it's probably close to 50-50 between Vcore and peripheral.

And how does it look today on the desktop?

In the desktop today, it's probably a little bit more Vcore.

Okay, great. And then my last question is, you've talked about some HID opportunities, pointing device-type opportunities that were pretty significant. The one that's ramping in the third quarter -- is that the larger one you were hoping for? Or maybe an update on sort of some of the bigger opportunities in that segment?

It's one of several that we've been working on. I wouldn't say it's the largest of the opportunities. And as those programs come out in production, we'll be making specific announcements.

Okay. Thanks.

Our next question comes from Joseph Osha with Merrill Lynch.

Hi, guys. My congratulations as well to both Jason and Jack. Let me start on the inventory side. Given the extent to which it moved, David, you indicated why. But are we going to continue, if things work out this quarter to see that inventory number move further up? And if you do have to hold that number back a bit, is there any kind of impact on utilization?

I think what you really had in the quarter were some key products where demand had accelerated; we were really rebuilding some of our buffer stock. So I think if you look at the second quarter inventory level, we've probably got some of our levels pulled down, you know, below the levels which we would like to have on that. And I think the other part of it is, if you look at the notebook market, some of these markets have fairly large upside provisions with some of our larger customers. So we're having to stock accordingly, now that we've designed into a lot of major programs. And further, as revenue grows, I would expect in the coming quarters to see inventory growth from here -- you know, I would say, approximating sales growth. So that no; I think the inventory levels -- that we're very well-positioned for the range of growth that we could see in the third and fourth quarter.

Okay. Thanks. Next question -- looking at sort of the design-win dollars metric that you are discussing, can you maybe help me understand exactly what that is? How that's calculated?

What we do is we record design wins on a quarterly basis, tally the total amount of dollars. And the dollars really represent annual expectation for that particular design win.

So when you say $26 million in design wins for X, that's a 12-month forward cumulative expectation for that particular area?

Correct. But that does represent sort of the peak volume run rate of that program. So, depending on the time window that it begins production on how it ramps, for example, obviously in the PC space, it's going to ramp much quicker than it would in the advanced com space.

So we should not really try to correlate those too aggressively to revenues?

I think it would be difficult.

Okay. Final question. You had indicated to me at one point that you kind of felt that you were maybe disinvesting in your future product development efforts for desktop a little bit. That's not, perhaps, quite what I'm hearing today. Can do help me understand what your level of commitment is to future product development for desktop power?

Yeah. Our desktop shares, I think what we said when we talked to you last time, has not done as well as we would have liked. (indiscernible) we are committed to running a profitable business unit there. I think, overall, if you look at the growth of the desktop market versus other end markets that we're addressing, what we have said is that we're reallocating more of those resources to the higher-growth markets, such as notebook, as it continues to cannibalize overall desktop share and handsets.

And then one housekeeping question; I apologize. David, you indicated what the test and measurement was as a percentage of total revenues, and I missed that.

Twelve percent, Joe.

Twelve percent?

Yes, 12 percent.

And that's revenue, not design win dollars? That's revenue?

Correct.

Our next question comes from Rick Schafer from CIBC World Markets.

Hi, thanks, guys. A couple of quick questions. I guess, first, just an update on competition in notebook and desktop markets. And, I guess, in particular, what the pricing environment is looking like in both of those relative markets. And just a clarifying question -- do you guys think you are about 20 percent now of desktop design wins for Power Management? And then I've got one more quick follow-up.

First, addressing the pricing, I think that we have probably seen a slow down from the aggressive price reduction that we were seeing earlier in the year, specifically in desktop. And I think we are in line with the competitors in the notebook space. What was your follow-on question, Rick?

I was just curious what you guys thought your desktop design-win percent was now. If you look at the, let's say, Springdale design wins out there, what percent share do you guys think you have there?

You know, as I said, I think we are currently a 10 or around 10. And I can see it growing probably not higher than 20 as Springdale and hammer ramp in volume.

You said the pricing environment, you said, kind of stabilizing or at least cooling off somewhat on the desktop side. Is that more of a function of you guys getting an increasing percent of your sales from peripherals? Or is that Vcore pricing actually starting to just to abate somewhat, or what is that exactly?

Some of it was desktop, may have to do with the fact that we're finally seeing some new products being introduced -- new platforms with the Springdale and K-ATE. But we will be as aggressive as we need to be there.

And just one other question on -- it's, I guess, kind of a housekeeping question for me. But if you look at desktop and then notebook and even in the handset space, sort of how do you think of your silicon content, I guess in each of the three markets, on a relative basis? Or if you could give us dollars, that would be great.

From a notebook point of view, it's probably roughly about $5 today, maybe 5 to 6, not including HID. And as we ramp those products, we will have an opportunity to add to that. I think in the handset space, it's probably 2.5 to $4, depending on the type of phone. And in the desktop space, we are probably $1.50 to $2.50.

Our next question comes from David Wu with Wedbush Morgan Securities.

Yes, I was curious about one thing. So much of your business is tied to the PC business, and with T&M (ph) coming back at this point, what is the -- I was trying to correlate what you're saying and what Intel's fully mid quarter update is, which is double-digit sequential growth. And I was wondering, in the PC side of the business, why won't we see numbers higher than -- I'm sorry. Why won't we see double-digit growth as well? Is there a tight correlation between the microprocessor shipment and your products into that market?

I'll answer that one, David. I think one thing I want to correct is, if you look at our desktop business, the current quarter was only around 14 percent of our revenue. So in terms of markets, the notebook market at 23 percent, the cell phone market at 24 percent, are much higher than the desktop market. And frankly, the thing that's impacting us in desktop right now is, as we wait for some of these new platforms to ramp, like Springdale, and as those ramp and we get our share back up, I think that's when you'll see our performance in that sector, then -- you're more -- the overall market, in the desktop area, specifically.

Right. But the conference call said both desktop and notebook were equally strong, or roughly equally strong around the world. And I was wondering, won't that give you the one-to-one relationship? I understand market share is still another story. Also, are there any -- can you give any color on this so-called Asian-flu related cell phone inventory in China? Has that receded, or are we still working from that excess inventory in China?

To answer the first part of your question, I think that notebooks will do better than desktop because we've got more programs running in production there, and we're not relying as much on the new introduction to ramp.

Um, hum. I see.

So I think we will see more of the benefit there. Regarding your Asian flu comment, I think in the month of June, we actually did see some impact of that. But in July and in August, I think it has recovered and it seems to be behind us now.

Thank you.

Our next question comes from Woody Calleri with Midwest Research.

Good afternoon, gentlemen. The first question I had concerned the test business. You saw a nice increase in orders there. Should we expect a similar increase in the next quarter, or should that kind of flatten out here for a quarter or two?

Yeah, Woody. The market still seems to have a pretty short-term horizon, so I think it's difficult to make longer-term projections there. Leadtimes are still relatively short. And so all I can say is that, long-term, we continue to bring out leading-edge products that our customers are adopting.

Okay.

And bookings will probably be somewhat lower than -- and shipments will probably be up some.

So, I should expect orders kind of down in the next quarter, but shipments up in the next quarter?

Possibly, yes.

And you guys said remarket (ph) pricing is abating a little bit. As you look to the next quarter, I would expect your notebook business to be up, which tends to be higher gross margin, and some of your cell phone business to be up, which tends to be higher gross margin. And the revenues, it seems, from the test business to be up a little bit. Why wouldn't gross margins be up more than 20 basis points?

Well, there's, I think, if you look at our gross margin clearly, if we execute, there's clearly the ability to see gross margins potentially rise slightly faster, depending on the mix of business. I mean, as always, I think we are pretty cautious about the forecast in terms of knowing at what gross margin percentage the turns business is going to come in. So the only way I would characterize that, Woody, is I think we feel pretty good about our ability to achieve -- at least achieve -- that 20-basis points increase.

Okay. Would further improvement be more a question of mix or a question of the pricing being relatively benign here?

I think longer term, clearly what's going to drive our gross margin is a continued improvement in mix, and (indiscernible) some of these emerging products, like our SETS (ph) product that's going into the telecom market. Products like that have margins which are considerably higher than the average gross margin of the company; and that can drive us to this kind of 16-percent gross margin model, longer-term and, hopefully possibly even slightly better. But that's our target, is first to get our margins to 16 percent, kind of within the 18-month window.

Okay. And in the press release, you had noted some improvement in the industrial market. Is that mostly the test business? Or are you seeing better trends in that market? And if so, could you kind of give us a little more detail on that?

Yes. From an overall revenue, it's mostly in the test. But we are seeing some increase in power in the industrial business as well.

Any particular end markets, or just broad-based with the improvement in power?

I would say broad-based.

And then on the last conference call, you guys had talked that you're a little bit disappointed with some of the Centrine wins to-date. I was wondering if you could give us an update within the notebooks, how Centrine is going and how that affects the overall notebook business for you guys.

Yeah, you know, if we look at the last quarter, I think in notebook, particularly, both from a design win and revenue growth point of view for us, it was a very good quarter. So we're very pleased with our performance in notebook, and look forward to continued growth here in the coming quarters.

Woody, I think Jack was just disappointed we didn't win absolutely -- everything versus us being disappointed with how we were doing in Centrine.

Is that why you're booting Jack up to the chairman spot?

Something like that.

No comment.

One last clarification. A couple of callers back, they had talked about utilization rates. I just wanted to make sure you guys are still 100 percent fabless?

We're still 100 percent fabless.

All right. Thanks, a lot, guys.

Our next question comes from John Lopez with Minell (ph) Capital.

Hey, guys. Two quick ones. First, on the R&D side, I think last quarter you had guided R&D to be flattish, and it was down a couple hundred thousand bucks, not meaningfully. But what drove it down? And can you remind me -- October -- just what you had guided to, and what drives it back up?

Off the top of my head, I think we had guided it to be approximately flat. If you look at it, in terms of number of designers, I mean, we are still, if anything, have a bias towards growing our headcount there. And if anything, at that kind of $350,000 type level, you're just talking timing, maybe, on purchases of one or two development (inaudible) SETS and stuff like that. So it's -- no change in the strategy or the velocity of our R&D efforts.

In October, did you say to expect in the 8 million-ish range?

In October?

Yes, for the coming quarter?

Yeah. I said it would be up a few hundred thousand dollars; correct.

Okay. Secondly, can you just remind us for your -- I know you're not giving guidance. But just for your fiscal fourth quarter, what is the seasonality, typically, there? And realizing your mix is changing somewhat, what are typically the drivers from a mix perspective?

You know, I think we're going to see a continued increase here. We've got several factors. One is we'll be seeing a broader conversion to the Springdale and hammer chipsets, and desktop. I think we should see continued strength in the cell phone handset business. We've got new platforms in HID for our touchpad and pointing stick, that are going to be ramping in that timeframe, as well as our coms, our advanced communications SETS programs, coming to production.

Okay. So it sounds like about half of that is sort of existing markets coming back, and half of that, loosely, is new product ramps for you guys. Is that a fair way to characterize it?

I think that's roughly accurate. You know, fourth quarter -- it may actually be more, based on new product introduction, new product growth -- (inaudible) more heavily weighted.

And the last one -- I apologize to make you cover it again. But the timing issue that you're discussing, you are bringing up again for hammer and Springdale -- I think the wording -- and one of the other guys referenced this -- the wording was almost identical in the last conference call to what you are citing today, and we are three months later. So what specifically, from a product introduction perspective, do you guys need to see for that business to start realizing that 90 days has kind of passed between when most of those platforms were introduced?

I think one of the things that we were most surprised by there was the SIS chipset, which, you know, much of Taiwan will be adopting -- had some delays in the quarter that we did not anticipate. And then, that combined with just predicting what is the rate at which the Taiwan motherboard manufacturers are going to convert to the new chipset as it's released.

Okay. And you're feeling is that this -- in the October quarter, you'll begin to see most of that stuff ramp?

Yeah, we'll begin to see it ramp up. Once again, it's not going to go from zero to 100 percent in the quarter. There is going to be a changeover period that's probably going to take us well into the fourth quarter.

Okay, great, congratulations.

Manage Nedcarni (ph) with Chip Investor (ph).

Good afternoon. Regarding the third-quarter outlook, among the six factors that you described, can you please summarize which will be the most significant ones that will help you?

Probably, from an overall revenue point of view, continued growth in the Portable Power Management area, both in notebook and handsets and with HID programs starting to ramp there as well.

All right. Thank you.

And we have a follow-up from Louis Gerhardy with Morgan Stanley.

I forgot to ask you about your hub business in the quarter. Can you give us a sense of what percent of your business it was? And maybe just comment on the accuracy of these hub arrangements in the last 60 days. Have they been under or over-estimating what they've ultimately consumed?

Louis, what did you say, our house business?

Hub.

You know, I don't have a specific percentage on that. But I would just say the relative volumes didn't change dramatically from the prior quarter -- no big deal delta there. And this coming quarter, I can think of a couple of programs where maybe it could be up a percent or two in terms of that type activity; but nothing that's a meaningful trend.

How has your forecasting been in this area, though? Have they been forecasting accurately what they end up drawing down, or has it been above or below? Any color on that?

Yes. I think it depends on the quarter, and it depends on the customer. But I think this recent quarter, if anything, we had -- you know, in the cell phone area -- customers that actually missed their forecasts compared to the beginning of the quarter, what we had expected them to do. But I guess, one thing -- thinking about that on the positive side, on some of those customers -- and one of the things, it gives us confidence about a lot of the inventory having been moved through the cell phone chain -- I'm thinking specifically of one customer and their hub arrangement. We have actually seen them back-pulling inventory at a very high rate, again. So that's just one of the factors that gives us confidence about some of the inventory corrections in the cell phone market, being complete, as we are seeing some better pull-through on a few customers, on products here in the August timeframe.

And we have a follow-up from Joseph Osha with Merrill Lynch.

Oh, hi. Thanks, guys. Back to the communications business for a minute. Can you talk about how much of that was DSLAM (ph) driven versus other components of demand there?

Yeah, probably 25 to 30 percent.

Now, I've heard some other folks characterize DSLAM, you know, related demand here during the last quarter, quarter and a half, as kind of spiky almost, by key, almost. There there has been a pretty dramatic uptick there. Has that been the main source of growth for your communications-related demand, or are there some other areas as well?

Joe, I think for us, you know, our revenue in that space has been small enough that it would be hard to see any spikiness in the business. We are really kind of at the beginning of a pretty good revenue growth plan there.

What are the other drivers, then? Perhaps I should ask the question that way.

As I mentioned, there's some new access boxes that are coming out -- Ethernet over fiber.

All right. So I should not think of this all as a function of what Alcatel has been doing in DSLAMS, then?

That's just one of many factors, I would say.

And we will move onto William Conroy with Sanders Morris & Harris.

A couple of questions. One, I think, is probably best directed David's way. David, last quarter, as you did this quarter, you told us what you'd sold that had been previously written down. In the quarter just reported, did you reserve a more or less identical amount? Or that was, I think, an answer to a question last quarter that you gave us.

I would just characterize it that our inventory reserves booked in the quarter were at least 308,000. So in terms of replacing those reserves, if you think about it that way, yes, we probably added new reserves of at least that amount.

And had that reserve level been fairly typical, if we look back over history? Or how would that compare?

Well, I mean, obviously, in times where business is turning down, you're probably going to be booking more reserves than when business is going up. But I think, you look at our inventory reserve in practice and how we drive that, it lends itself to kind of a consistent and constant evaluation of inventory, and thus, I would say quarterly booking of inventory reserves. It can vary a bit by quarter. But you know, in the last 12 months, not dramatically quarter to quarter, that it's impacting the trends. And so I guess what you're getting to in terms of your next question is, you know, as this previously written-off inventory starts to dwindle out in terms of selling it, which should happen pretty completely over the next six to nine months, you're not going to have some whole in gross margins. I see very healthy trending for our gross margins, going forward, based on the forecasted mix.

Right. You asked the question better than I did; thanks. The follow-up to the last question, maybe for Jason -- over the last couple of years, as we've talked about the SETS product, we've talked about the retrofit programs going on at some of the OEMs -- is that coming into play here with some of the ramp that you see on the comp side?

Yes, definitely. If I had to guess, it's probably 50-50 retrofits and new products. So it's definitely kicking in.

Great. Thanks, very much.

And we have a follow-up from John Lopez with Minell Capital.

Hey, guys. Just on your August business, you mentioned that you've seen fairly strong bookings in the month of August. Could you just compare that, maybe, to last year or to a typical August? And to the best of your ability, do you fee like you're pulling anything in from the month of September, based on activity you've seen?

No. I don't know that we're -- we're not pulling anything in from the month of September. If anything, I would say, though, that we are seeing some level of acceleration in demand in some of our specific end markets. And I think I pointed to it earlier; if you look at the notebook market, that would be one market where I think we have seen some slight acceleration in demand. And the only other thing I would say is we are seeing, from a bookings pattern, if anything, we are seeing customers book things out to leadtimes and then, two or three weeks later, pulling it in, to kind of an immediate requirement. That's been more of a trend than pushing things out, as -- by a long shot -- is pulling in requirements pretty shortly after they book it.

And that's applicable kind of across your end markets?

You know, I would say, generally. But if I had to pick one end market where it's applicable, it would be, number one, notebook, and then maybe number two, cell phones.

Great. Thanks for the clarification.

There are no further questions in our queue at this time. I'll turn the conference back over to Mr. Baumann for closing comments.

Great. I just want to thank everyone for joining us on the conference call today, and we will look forward to talking to you next quarter. Thank you.

And that does conclude today's conference. We thank you for your participation.