Semtech Corp (SMTC) 2004 Q3 法說會逐字稿

Good day, everyone and welcome to the Semtech's Corporation fiscal year 2004 third-quarter results conference call. Today's call is being recorded. And the question-and-answer session will be following after the presentation. For additional remarks and introductions, I'd like to turn the conference over to Mr. John Baumann, the Treasurer and Manager of Investors Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, ladies and gentlemen and welcome to Semtech Corporation's fiscal year 2004 third-quarter earnings conference call. I'm John Baumann, Treasurer of the company. We have just released the results for our third-quarter ended October 26, 2003. For the next 45 minutes or so Jason Carlson, Semtech's President and Chief Executive Officer and Dave Franz, our Chief Financial Officer will be discussing those results with you and answering your questions.

A reminder that Semtech reports results based on generally accepted accounting principles commonly referred to as GAAP. 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 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 time and duration of semiconductor market upturns or 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 businesses of major customers and other risk factors. Please refer to the risk section of our earnings release in the company's most recent Form 10-K and 10-Q's as filed with the Security and Exchange Commission for further information.

Although a replay of this call will be available at First Call's website and Semtech'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 and Semtech's website.

I will now turn the call over to Jason Carlson, Semtech's President and Chief Executive Officer.

Thank you, John. Good afternoon, ladies and gentlemen. Our third-quarter fiscal year 2004 results were reported in the press release issued in the past half hour. Over the next 30 minutes David Franz and I will review those results with you and discuss our outlook for the fourth quarter of fiscal year 2004.

Let's start by reviewing our financial performance for the quarter. Revenue increased 8% sequentially to $48.1 million exceeding our guidance of 4 to 6%. Gross margins improved to 58% up from 57.3% in the previous quarter. Earnings per diluted share were 12 cents compared to guidance at 11 cents. David will review our financial performance in more detail following my comments.

Now let's move on to orders. New orders increased 23% in the third quarter. Our backlog increased significantly resulting in a reduced turns requirement for the fourth quarter. The order growth was fueled principally by the handset and notebook market. The move to color displays and the inclusion of cameras and handsets combined with the demand for mobility and wireless connectivity in the computer markets, propelled our portable power management products to a 70% sequential increase in new orders. This growth in new orders was not driven solely by market strength, but also is the result of broadening of these product lines and strong diverse customer relationships in these markets.

Our networking and industrial power products have sequential order growth in excess of 35%. We are beginning to see some of the more than 30 new products introduced in this business over the last couple years going into production. This growth is encouraging as Semtech enters this large existing market. The Advanced Communications group, which is largely our SETS product family, saw a 38% increase in orders for the second quarter in a row. There appears to be a general strengthening in the market served by these products and recognition of our SETS product performance continues to grow. One program using our SETS product at a major OEM went into production in the third quarter. We expect this trend to continue.

Our Protection Products delivered a 25% increase in orders. The Protection Products have the most diverse group of end customers of any of our product lines. These markets include a wide range of end products from telecom, to computing, consumer and others. The end products driving new orders were flat panel televisions, handsets, notebooks, and various networking applications.

Test to measurement orders decreased 23% from the previous quarter after having more than doubled in the second quarter. This order level represents the current run rate for this business in line with market demands. This business has continued to pick up steadily throughout the year and should continue to do so as the industry continues to increase overall unit shipments, chip complexity and principally bit density for flash.

New orders for desktop Power Management products were down for the quarter. With notebook driving the majority of growth in the computing segment we continue to make that our main emphasis within computing. Our product lineup for next generation desktop systems is very strong and technologically superior to that of most of our competitors.

Now moving on to design activity. In the third quarter the company reported 475 new designs for a total of more than $60 million of new annual business. Looking at total dollars, portable Power Management products led the way followed by protection. With portable Power Management, handsets were responsible for more than $20 million worth of design wins. Followed by notebooks with over $13 million. These wins are the result of strong existing customer relationships, as well as a broadening of our customer base.

We continue to extend our product offering in notebooks, and our Human Input Devices group recorded over $2 million worth of design wins and one of these wins was with a leading OEM. Our ongoing efforts to improve performance and drive lower bond costs through rearchitected solutions are delivering results.

Protection Products generated more than $17 million in design wins. Within the communications sector opportunities in fiber to the home, DSLAM, handsets and bay stations top the list. Our desktop Power Management products produced more than $9 million in design wins. Applications for next generation graphics, as well as Power Management were one. Networking and industrial Power Management products are close to $5 million in new design wins as we continue to gain traction in these markets. Top customers for new design-win dollars included Alcatel, Apple, ATI, COMPOW, Curatel [ph], Foxcon, Dell, Invidia, Quanta and Samsung.

Now I'd like to move on to our outlook for Q4. Building upon our 8% revenue growth in Q3 and our 23% increase in orders, we expect revenues to be up 8% to 10% sequentially. Turns of approximately 35% are needed to meet this guidance. Customer lead times and visibility in certain segments have improved somewhat compared to the previous quarter. However, with Thanksgiving, Christmas, New Year's and the Chinese New Year all ahead of us and within our fiscal fourth quarter, it is unclear what these holiday periods will bring.

As I mentioned previously, our portable business is going strong. This strength is driven by new handset technologies, increased unit sales for wireless notebooks, and increasing popularity of PDA's. The outlook is very bright. As the ATE market continues to rebound, we are well positioned to capture that growth. The breadth of our product line for system-on-a-chip, flash and other testers across a diverse customer base is unique.

A general strengthening in numerous markets is driving growth in our Protection Products. These products are doing well in such diverse markets as flat panel TVs and handsets. Next generation graphics will require more sophisticated power management solutions. This combined with increasing Springdale and K-ATE shipments and mother boards should drive some growth for desktop products beginning the first quarter of next year.

The outlook for our emerging areas is also very bright. Our advanced communication business will continue to grow throughout the next year as more key programs and large OEM's go to production. The third quarter marked a turning point for this business as it achieved profitability. With the long product life cycles in this market we are just starting to build a revenue stream that will last for many years. Additionally, improvements in industrial or networking power products will also drive future growth into a more broad-based end market.

In summary, Human Input Devices, networking and industrial power and advanced communications all continue to look bright as we record increased design activity in revenues in each of these segments. Looking out beyond the fourth quarter, Semtech is positioned for growth. Our strength in our existing markets principally handsets, computing and test together with our emerging product lines of advanced communication, networking and industrial power and Human Input Devices these are the forces behind our forecast for growth.

This concludes my remarks. And I will now turn the call over to David.

Thank you, Jason. Good afternoon, ladies and gentlemen. The third quarter operating performance exceeded our revenue in earnings forecast. We also posted a significant increase in backlog as we recorded our highest quarterly book-to-bill ratio in four years and our highest quarterly order volume since the end of fiscal 2001. Revenues for the third quarter of fiscal 2004 were $48.1 million, an increase of 8% compared to revenues of $44.6 million for the second quarter of this fiscal year.

Gross margins for the third quarter of fiscal 2004 were approximately 58%. The gross margin percentage improved by approximately 70 basis points in comparison to the second quarter. Gross margins for the prior year third quarter were approximately 56%. We expect further improvement in gross margin in the fourth quarter of this year and fiscal 2005.

Earnings for the quarter exceeded our forecast. Net income for the third quarter of fiscal 2004 was $9.3 million or 12 cents per diluted share. This compares to a forecast of 11 cents per diluted share. As I previously mentioned, revenues for the third quarter increased by 8% sequentially from the second quarter. We had previously estimated that revenues would be up by 4 to 6%.

Power Management revenues in the quarter increased by approximately 9%. This increase was due to strong growth in our shipments into the notebook, handset, PDA and other portable device market. The increase was partially offset by declines in our revenues from gaming and desktop. Protection revenues were approximately flat in the quarter, but should increase significantly in the fourth quarter based on the increase in bookings that we experienced during the third quarter.

Revenues from our advanced communications business increased by approximately 80% sequentially with another substantial increase forecasted for the fourth quarter. Revenues from Semtech's two other emerging product lines, HID or Human Input Devices and Telecom and Industrial Power Management both increased sequentially by in excess of 20%. The company's Legacy businesses declined slightly during the third quarter.

Revenues for the third quarter were derived from the following geographic regions. 32% was derived from customers located in North America, 8% from Europe, and 60% from Asia. Net turns orders during the quarter accounted for 53% of shipment. This compares to 52%, 53% and 48% in the previous three quarters. Revenues by end market segment did change somewhat with the most significant growth coming from the handset market. The three big end market segments computer, communications and industrial, represented approximately 97% of total sales. Revenues from the cell phone handset market and bay station market accounted for 28% of revenue.

During the quarter the company increased content with current customers, but more importantly, broadened the customer base for its various Power Management products for the handset market. Desktop computer and servers accounted for 12% of revenue compared to 17% in the prior quarter. Notebook computers and PDA's accounted for 23% of revenue, test equipment accounted for 12% of revenue, communications infrastructure accounted for 11% of revenue and general industrial and military accounted for 8% of revenue. Graphics was 4% and gaming systems was 2% and I think I misspoke. I think the prior quarter revenue number on desktop and computer was 14%.

Revenues from OEM sales represented 50% of total revenues for the third quarter, while distribution represented 50% of total revenues. As Jason discussed, we're forecasting that revenue for the fourth quarter of fiscal 2004 will increase between 8 to 10% as compared to the third quarter of fiscal 2004. To attain the midpoint of the fourth quarter forecast, net turns orders of 35% of revenue are required. The turns rate is significantly lower than the third quarter level as customers have begun to place backlog with more lead time due to the strength in certain key end markets.

Bookings in our fiscal November continued strong and our turns forecast appears conservative pending the holiday sell through and what impact that has on January demand levels and customer requirements. Gross margins for the third quarter of fiscal 2004 improved to approximately 58%. Gross margins were favorably impacted by improved mix and contributions from new proprietary products. Gross margins for the third quarter were also impacted by the sale of $157,000 of previously written-off inventory. The amount of previously written-off inventory sold dropped in comparison to the $308,000 level in the second quarter.

The company's incremental gross margin in the quarter was approximately 66% and if you exclude the drop in the sale of previously written-off inventory, the incremental gross margin was approximately 70%. On a year-over-year basis quarterly margins increased by approximately 200 basis points. Gross margins are forecasted to continue to grow in the coming quarters. Gross margins are forecasted to move towards our near-term goal of 60%. One of the expected drivers of this growth are Semtech's emerging product lines which have gross margins that exceed the corporate average some by a substantial amount.

For the fourth quarter we're forecasting that gross margins will improve by 25 basis points compared to the third quarter. Research & Development expenses were $7.5 million for the quarter which was up slightly from the prior quarter. We are forecasting that R&D spending for the fourth quarter will increase $250,000 compared to the third quarter.

SG&A expenses increased slightly during the quarter. For the fourth quarter SG&A is forecasted to be up approximately $300,000 in comparison to the third-quarter levels. Interest and other income was approximately $1.1 million for the third quarter. For the fourth quarter, we are forecasting that interest and other income will be approximately $1.1 to $1.2 million.

The company's special tax rate for the third quarter was 24%. The company is projecting that its effective tax rate for fiscal 2004 will be 24% and this is based on our current revenue and earnings forecast. The company's effective tax rate is impacted by variations in income and the source of that income, as well as other factors. The diluted share counts increased during the quarter to 77.9 million. The share count is forecasted to increase by approximately 500,000 shares in the coming quarter. Such forecasts can vary based on the average stock price for the quarter.

Based upon guidance operating income is forecasted to increase at approximately twice the rate of the revenue growth during the quarter. We will continue to see earnings grow at a faster rate than revenues due to the high level of fall through on incremental revenues, thus diluted earnings-per-share for the fourth quarter are forecasted to increase to 14 cents per diluted share.

Turning to the balance sheet, Semtech ended the quarter with approximately $260 million of cash and investments on the balance sheet. This is an increase of $14.5 million compared to last quarter. Operating cash flow for the quarter was positive $16 million. Operating cash flow will be positive in the fourth quarter and in fiscal year 2005. During the third quarter the Company spent approximately $1.1 million on property planned equipment, this amount will likely increase in the fourth quarter as the company is adding additional test capacity particularly in the area of Power Management.

Depreciation and amortization for the third quarter was approximately $2.2 million. The company purchased approximately $3.1 million of its common stock in the quarter, the company has remaining $16.1 million under its current existing buy-back authorization. Accounts receivables, day sales outstanding calculated on a quarterly basis, declined to approximately 39 days for the third quarter. Inventory levels increased in the third quarter principally to support forecasted ramps and shipments of the Company's Power Management products and wait for deliveries the Company's test and measurement product line. Days of inventory calculated on a quarterly basis were 95 days as the end of the third quarter.

The Company has significant opportunities for growth in its main and emerging product lines in fiscal 2005 based upon continued very strong bookings to date in November, we're optimistic about fiscal 2005 and confident about our fourth quarter guidance. We would expect the rate of year-over-year growth to accelerate in the coming few quarters.

Thank you for participating in our third-quarter fiscal 2004 conference call. And I will now turn the call back to the operator for questions.

Thank you, sir. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speak phone please make sure your mute function is turn off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Once again, please press star 1 to ask a question. And our first question will come from William Conroy of Sanders, Morris.

Good afternoon, guys. Just a real quick one, I think. David, can you give us a sense in terms of the OPEX levels. Kind of what we should be thinking of going forward beyond the fourth-quarter guidance that you gave us in terms of R&D? Are we looking at going into next year any step functions maybe with increases in salary levels or anything like that, anything or should it be more of a level increase as we get beyond that?

I think generally, Bill, it will be more of a level increase. Part of the increase this quarter is we have had a salary freeze on for quite a while and we just have, based on the improved booking activity, we have just recently during this past quarter given out some raises for the first time in quite a while. But I think it should be relatively level. We've kinds of modeled R&D longer term, 14 to 15%, probably closer to 14% depending on the rate of revenue growth. But I think it's going to be relatively even growth if that answers your question.

And if I could ask one more. The order mix to get to the incremental gross margin that you're talking about, is it similar to what we have seen, what we saw last quarter, or is there some sort of a big -- are there any significant variation coming down the pike at us?

Well, I think the only thing that can keep that percentage up or maybe drive it up a little bit, the growth out of some of our new product lines, our emerging product lines and the first one you'd have to talk about there is our SETS product line because as we discussed before, that product line clearly has incremental gross margins or gross margins that are much higher product line.

Great, thanks very much, David.

Our next question will come from Douglas Lee of Seasons Capital.

Congratulations, guys. It's been a while that I asked a question, I'm out of practice, but I wanted to first go over the guidance here. It looks like with 35% turns, seems pretty conservative, I understand the holiday's coming up but even then you guys are doing over 50%. Is there an ability to generate upside to that guidance or are you sort of constrained by lead times?

I don't think, Doug, we're constrained by lead times. Certainly if the level of activity continues in November, into January, after Christmas, there certainly is the potential for that kind of upside that you're speaking of.

Great. So just kind of wait to see what some of the sell through looks like.

Absolutely.

Okay, great. And then secondly, with respect to the gross-margin level, I don't want to push you guys too hard because I realize how difficult it is. Last two quarters ago you had 80% improvement in margin then 70% and now you're going to 25% but it actually sounds like your mix is getting better. Does that number, is that because the last couple quarters had some written off inventory and this doesn't have it or is there some conservatism built into the margin expectation?

I think so. I mean if you look, I think we're guided for incremental gross margins of around 60. We would clear hope to be able to once again exceed this forecast, but there's a lot of unknowns particularly moving into the January time frame.

Great. And then, lastly, on the ATE order I think you commented, I actually might have missed it. I saw the orders were down but the comparison was awfully difficult. Is your expectation that orders will sort of stabilize or sort of increase here on ATE going forward?

Doug, as I mentioned, they were down but that was upon the previous quarter having more than doubled from the quarter before that. So it was a pretty tough follow up, but I think that we've clearly seen the bottom of that market, and we're on a recovery path that, from everything we're seeing right now it should continue growing through the next year.

Okay. Great. And then lastly, I don't know if you have the number in front of you, David, but historically you've at times been able to sort of guesstimate what kind of turns you need today based on the activity you see in November. Do you have a sort of figure like that right now?

I do. I would say as of this time, I'd say it's considerably lower than in prior quarters and I can probably quantify it in the several million dollar range. And if you look, the recent weeks I think as you get closer to Christmas and the holiday period, we get a much higher percentage of our orders booking out into Q1, frankly, because of our lead times on a lot of these devices so that assumes, based on lead times a lot more of this stuff books out into Q1.

Right. That makes sense. Again, congratulations, really solid performance, guys.

Thanks.

Moving now to Don Engsbat [ph] of Bear Stearns.

Hi. I just have a couple quick questions. You mentioned the lead times are extending and I was curious what relief times last quarter relative to what they are now and how you see that moving forward into next quarter.

Yeah, I think you have to really look device by device and across our different product lines. We generally work to keep our lead times by maintaining die bank inventory levels by say in the four to six week type range. Now clearly in some of our markets we've seen some acceleration in demand and so those lead times have stretched out a bit but we have the ability to add incremental test capacity and we have plenty of Silicon capacity that we can bring, we work to keep those lead times as short as possible.

Okay. Then regarding pricing, I guess any signs of pricing firming up and if so, in what particular segments?

Yeah. I think we've definitely seen a little bit of that, and if we look back over the past year, earlier this year, desktop was probably hitting it the hardest followed by portable and protection. And really in each one of those markets I think the focus right now is much more on supply and ramping up production.

Okay. Thank you very much.

Our next question will come from Steve Smigie of Raymond James.

Yes, thank you. Congratulations on a very nice quarter. My first question is with regards to the notebook business and I was wondering if you could discuss both in terms of design wins and orders if you've been capturing any market share there?

Yeah. As you noticed in the call when I mentioned our top 10 design win customers for the quarter, several of those customers were notebook customers. Dell, Quanta, COMPOW and so, from a design win point of view we continue to make very good progress there. I'm sorry, what else did you want me to quantify?

I was just trying to see if you thought you'd been capturing market share versus some of your competitors.

Yeah, definitely. We have continued to extend our product offering there where if you look back we initially entered this market with Vcore solutions and today we're offering the Vcore in addition to System Power and DDR and our HID pointing stick and Touchpad products. So we seem to be in a position of gaining share.

Okay. Then I guess similarly on the desktop with the new products falling out, I wonder if you could into a little bit more detail of your possibilities of recapturing the market share there and how committed you are to that space.

Yeah, as we said before, we're still committed to that space but obviously with the growth in notebook and the total dollar content opportunity for us, that's been our primary focus within Power Management. We continue to develop new products for desktop and as I mentioned in the call with next generation graphics processors requiring more complicated Power Management solutions, we've recorded some pretty good design wins there, and I think even looking out beyond to next generation sockets we're continuing to record design wins. So we remain committed to that business. But don't expect it to ever get to the level of our business that it was historically.

Great. Thank you.

Moving now to he Jeff Rosenberg of William Blair.

Hi. First off, David, I wanted to follow up with what you were talking about with R&D trending to 14 to 15%. I mean, if that's where it sort of trended out to that would be a little bit higher than where it's been historically looking back a couple years. Can you comment on whether or not, the longer term, you expect it to go back into the 11, 12% or what your expectation is there?

Well, I think, what's considered there is a lot of the incremental R&D that we'll be doing will be on more complex, more system-level solutions so over the longer term we may, and likely will end up spending more on R&D. ut I think what that'll be realized in is higher gross margin clearly, because we're doing more system-level solutions and more I would say high-value-add type solutions as I look at just two examples, the HID area and the advanced com area and that's going to drive higher gross margins. So I think any longer term increase in our relative R&D spending compared to prior cycles should be more than made up for with gross margin dollars and there certainly could be if revenue growth were to accelerate a period or two where the R&D percentage dropped down if we were not able to add resources that efficiently or quickly.

And on SG&A is there anything different than historical levels or if you have some nice consistent revenue growth in future quarters should we expect it to trend back down more in the mid-teens as opposed to where it is today over say the next four or six quarters.

I don't think that's an unreasonable assumption.

Okay, great. And then I was looking at, if I've got my numbers right, you had a very strong 25% or so sequential increase in the handset side and yet it looked like protection you said was flat. I was wondering whether there were other areas of protection that were down and that was up in protection or whether or not you really saw that very concentrated in the Power Management side.

Well, I think as we actually looked at that exact thing and as we look at our protection business I think what we have going on is bit of a change in that business where we're doing more and more proprietary or very limited source type products. If you look at some of our flip chip products going to handsets and portable devices, I think if anything, you just have made the less revenues from some of the more commodity devices that we previously sold and increasing revenues from some of the more proprietary chips that we sell in that area, and based on the bookings increase in the third quarter, I think we should see some nice sequential improvement in this business in the fourth quarter.

But in this quarter though you still must have seen very strong growth in the LED drivers and battery chargers and things like that.

Yeah, absolutely.

And I don't know if you may have said this but before I think you've given us a bit of a breakdown within Power Management, how much of it is portable versus desktop graphic. How much of the Power Management business these days is coming from the portable product lines?

I think we quantified the relative growth in Power Management at 9%. The overall Power Management business is around 59% of revenue.

And is about half that these days portable or how's that? I mean, it sounds like you've probably eclipsed the goals you used to give us about how much of your Power Management business you would hope to be portable. I'm curious if it's --

It's right around 40% of the overall revenue is from portable, Jeff, so about two-thirds of our power business now is actually from portable.

Two-thirds is portable. Okay. Thanks.

David Wu of Wedbush Morgan has our next question.

I have a couple questions. First the simple ones. If I look at your profitability, I guess I should be looking at improvement in the next two fiscal years. What kind of tax rates should we be looking at, that was the first one. The second one, I think Jason in a recent webcast on I guess the Morgan Stanley meeting was talking about a target of 30% net margin, and if I back up the numbers it implies 40% pretax operating margin. That seems to require a gross margin of about 70%, not that just 60% to hit that 40% number. And, lastly, just a clarification, when you talk about advanced networking and then you talked about industrial power networking, what's the difference between those two categories and how much is emerging markets as a percentage total revenues in the quarter that ended?

I'll start with the first one, David. Tax rate, we're currently forecasting 24% for this year. As we go through our planning process and look at the mix of revenues next year we'll obviously assess our effective rate for next year. I'm not looking forward to very significantly from the 24% so I would think of it in a band of 23 to 25%. For right now I continue to, say approximately 24%. I mean, we've talked about it, in the previous peak our net after- tax profitability was around 25% of revenue at the last peak.

What we've pretty consistently said is that at kind of next peak and as we get back to peak and above peak revenues we should be up in the, targeting somewhere between anywhere from 27 to 30% of revenue and I think one of the things you're leaving out of your equation, it's not purely operating income. I mean we're expecting that as our cash balances continue to build and some increase in the interest rate environment, we will see some increase and the income we earn on our cash so that clearly has to be factored in. But no, I don't think we have to get to 70% gross margin to achieve high 20s type net margins.

Mm hmm.

And then I think your next question was regarding, could you repeat it on the Power Management?

Yes, I was looking at the advanced networking and you said industrial power and networking. I wonder what's the difference between those two category and if you lump all your emerging markets, those human HID, and I guess advanced networking and I think industrial, I don't know if advanced communications HID and I think industrial power and networking, all these new emerging markets lumped together, what percentage of revenue were they in the quarter that just ended?

I'll answer that one first, that's the easy part and then Jason will answer the second half. It was approximately 11% of revenues so they're still small today. But the growth rate in those businesses is projected to be quite large.

Gross margins are very rich, right?

Yeah, all three of them are above the corporate average. To answer your question on the definition are the way we define segment is, network and industrial Power Management whereas the word advanced, what we use for our SETS product on advanced communications. So just to be real specific there. And so networking and industrial Power Management is really a combination of two things. One is sort of industrial power applications, as well as sort of telecom infrastructure power applications. So 48 volt distributed point of load type products. Whereas the advanced communications is all of our synchronization and timing stuff.

I see, all of that SETS, right?

Yeah. SETS is advanced communications and the other is another end market for Power Management.

Fantastic. Thank you very much.

Thank you, David.

Our next question will come from Louis Gerhardy from Morgan Stanley.

Good afternoon. A follow-up question on the portable Power Management, I think that was the area you said the bookings were up 70% sequentially. What are your lead times in this specific area?

They're probably, it depends on each product and especially with the growth that we're seeing right now, but we're probably in the four to six week kind of time frame. But obviously we saw some uptick coming up here and we've been trying to move as much material as we can into Die Bank to be prepared for this.

Okay. On the human interface design win you mentioned a major PC customer.

Right.

Can you talk about the type of product there and what your dollar content is?

Yeah. That's for our Touchpad pointing stick type of products but unfortunately we can't talk about that until our customer has released that product information. As far as the dollar content, it's north of a couple bucks.

Okay. And 10% customers, did you have any in the quarter?

We had one of our test customers, Louis Agilent which was just slightly, slightly over 10% and that includes all their various subcontractors.

Okay. And then last question, you mentioned expanding breadth in your handset customers. Can you mention names at this stage?

hey tend to be China manufacturers, so people like TCL, Bird, and guys like that are people we're seeing continued growth with and others off the top of my head, I don't recall their name, but it tends to be a pretty large list in China.

Great. Thanks a lot.

Harsh Kumar of Morgan Keegan has your next question.

Congratulations first of all, and couple questions. You talked about pricing for Power Management for laptops firming up. Are you implying or can you clarify that it didn't go down as much as previous quarters or that it actually went up? And then I have a couple follow-ups.

I don't think I said it actually went up, that would be a great day for me, but as far as the rate of decline what we were talking about there, most notably was in desktop earlier in the year. To me, portable really, we haven't seen that much change throughout the past 12-month period in pricing.

Okay. And kind of following up on that, are you seeing a general, this would be industry type information, are you seeing a general constraint on supply for Power Management for desktop and laptops at this point or where do you think the supply and demand stands at this point if you were to take a shot at that?

I mean, by us seeing the constraint, I'm not quite sure what you mean?

I'm looking for industry type comment, not just from your company, just what you're seeing in the marketplace.

I wouldn't say that anything I've seen would allow me that insight at this point.

Okay. And can you give us a sense of, you talked about visibility improving pretty nicely. Can you talk about if you're seeing any bookings for March at this point or April quarter at this point?

Yeah. I mean that's definitely one of the points for me making that statement is, we are seeing some bookings out into that time frame which is definitely a change from say three months ago.

Great, thanks. Thank you. And congratulations again.

Next Ross Seymore of Deutsche Bank has the next question.

Thanks and congratulations on a strong quarter. Just wanted to get a little more color on the desktop Power Management area. David, do you still plan on targeting about 10% of revenues as being kind of the steady state where that should be going forward?

Yeah, I think over the longer term 10 to 15% of revenue.

And the VR 10.1 what's the time frame for that to start ramping up? Is that kind of a first quarter event, second quarter event of '04?

It's probably beginning in Q1 and getting stronger in Q2.

Okay. And then one final question, historically just wondering what's the normal seasonal pattern you see when handset demand and/or PC demand tend to have their seasonal slow down begin. Does it usually begin after Thanksgiving, is it kind of a little bit later than that? Just trying to get a feel for how you see business now versus historically normal numbers?

I think with this downturn we've been in for the last three years, the seasonality thing has been a little different than normal every year but typically, our Q3 and Q4 are both pretty good quarters. And then where you tend to see a little bit of seasonality is into Q1 and a little bit more in Q2 and then once again picking up in Q3 and Q4, but given what we've been going through the last 24, 36 months it's kind of hard to say.

I guess when the downturn's not normal it's not fair to assume a normal up turn. Final question on the handset side, with that 26% growth you had in that business, you mentioned some of the new customers on that list, just ball park, what sort of percentage of that 26% growth came from those Asian customers versus the kind of big OEM's we're used to?

I'm not sure that I easily got that one up in front of me here. If I had to guess, I'd probably say something less than half was the smaller guide and somewhere 50% or maybe a little more than 50% is the top tier guys and the names everybody recognizes.

So pretty good balance, anyway.

Yeah, yeah. I mean, clearly a lot of these smaller indigenous players are picking up some pretty good market share in their local markets.

Great, thank you.

Manage Nedcarni of Chip Investor.com has our next question.

Congratulations on achieving very good results.

Thank you.

You run a fabulous operation. With the improved outlook, do you foresee any fab capacity plans or supply chain issues?

Yeah. I think we've got a couple points there that are really key to our model. Number one is we aren't on the bleeding edge seam loss, so we're not in there TSMC .13 or even at .18, that would represent an extremely small percentage of our business, which to me are the geometries where you are going to see capacity getting full first. Secondly, we've got a relationship with eight or nine different fabs around the world so we at all times try to have a pretty significant upside in the agreements that we have with those guys. So I feel pretty good about our position there.

Okay. And is your growth coming primarily from increased unit sales or better blended ASP's or both?

I think it's a combination of increased unit sales as well as selling a broader list of products into that same platform so more platform sales. If we look at our handset, for example, that a couple years ago is less than $2 of content for us and today in a fully featured phone could be up to $6 of servable content, so we're benefitting from the increased unit sales but at the same time this platform approach is really helping.

Okay. And can you give us some color on where you're seeing strength in terms of end applications for SETS and networking products?

For, you said for SETS products? Is that right?

Yes.

For SETS products, it's a variety of things. It's some DSL application, some of these multiprovisioning boxes. Those are probably the two primary.

Okay. And you are seeing a good design win momentum in those areas?

Yes, we are.

Okay. Thank you. And again congratulations on a solid quarter.

Again, it is star one to ask a question. We'll go to J.D. Paget [ph] of Saunders Asset Management.

Hi, guys. I had a couple quick ones. One, David, I missed the inventory benefit this quarter?

Oh, it was $157,000 which was down and about half from the prior quarter.

Okay. And then the HID win that you talked about, how do those typically roll out? Is that kind of initially designed into the one SKU and then the OEM will kind of evaluate how that goes or can that be rolled out fairly broadly?

It's absolutely as you mentioned because of the fact that those products affect a look and feel of the end product. The OEM's going to tend to be a bit cautious, so typically what they do is roll it out into one product, look at the results that they get and with that, then you'll see it go across many more SKUs.

So that's kind of the stage we're at right now?

Exactly.

I suspect they probably have a lot of pressure to minimize their suppliers and standardize to some extent, right?

Right. That's pretty much a big trend these days.

And final question, just the Power Management for desktop, that was down. Do you think that's more of a pricing thing or just still hangover a bit from past design win position or just hoping to get a better thought as to why that was down?

I think it's a combination of a few things. I mean, obviously unit growth there is still not anything to get that excited about. And next generation products have begun to ramp but maybe not that great of a rate and so as we look forward, just clearly portable at this point has been a much better area to focus those resources from a design win point of view.

Are you seeing pricing at all for the desktop stuff firm up? I know some of the previously aggressive players there have kind of pulled back somewhat but maybe the Taiwanese have stepped in to fill the void or?

Yeah. I don't know that I would go as far as saying firm up. But it definitely seems like it's not falling at the same rate it was earlier in the year.

Now we're waiting for your new parts to ramp with the introduction of the new platforms?

Yeah, yeah.

Okay. Thanks a lot.

Thank you.

And we'll take a follow-up question from Douglas Lee of Season's Capital.

Hey, guys. Just one more. I was looking at from modeling over the longer term, I'm looking at the gross margin line, it looks like you're generating about 58% gross on $48 million in revenues and this is actually near record margins it looks like that you did about 58% back in January of '01 but your revenues were actually $70 million back then, so clearly you have a lot of improvement here in mix. I'm wondering, not necessarily where are margins when you're back at $70 million but where do you kind of see margins stabilizing in your target model?

Well, I mean for right now, Doug, we have talked about 60%. Clearly, based on the mix of business we see today, that's something that's very achievable but as we get up to that $70 million in revenue, whether it's 60 or 62, will clearly depend on the mix. It'll depend on just how fast our advanced com business and some of our other high margin businesses are ramp. But clearly we feel very good about the 60% forecast as you might imagine. And based on some of the things we're doing from a system level, hopefully longer term we can achieve something slightly, even slightly better than 60%.

Great. Thanks again, guys.

Thanks, Doug.

A follow up from David Wu of Wedbush Morgan.

Can you help me two things? The first thing is, in terms of lead times, if you're lead times are, by and large, in the four to six weeks range, why would customers increase their bookings to you and especially on a 26 weeks delivery side? I would think that the ATE guys would want to do that, those on the lead times and SETS are the kind of people that give you long lead times. But beyond those two categories which are small, what is the incentive for the end customers to give you that big jump in orders because I think if you look at end markets they're not going 23% quarter-on-quarter? Can you amplify on that point?

Interestingly enough, David, I think what we're seeing is counter to what you said and counter to what I would have guessed meaning, in the ATE space, because of our Die Bank agreement they really don't have a large motivation for, at this point anyhow, for going out significantly in time. And the SETS at the price levels of those products you would think there would be more of that, but that still seems to be a market that's placing orders for things when they have orders for products themselves. I think really what's driving the increase in lead times that we're seeing is just in the faster growing markets, meaning the portable markets, a general sense out there that things are tightening up and people are getting a bit concerned about it. So while we haven't seen problems with Power Management, we have heard concerns of tightening of supply and other products. So I just think they're responding to that. Where as three to six months ago everybody kind of was of the attitude I should be able to call and just have parts shipped that same day and now they're knowing if they've got a forecast from their OEM it's probably to their benefit to give us a little bit more exposure right now.

So it's the short lead time stuff and the more seasonable stuff like portable market that is causing lead times to go out?

Yeah, we're seeing a little bit of it in the SETS stuff, but at the same time they're still having their share of pretty short lead time of stuff as well.

I see, okay. Thank you very much.

That concludes our question-and-answer session. I'll turn the conference back over to Mr. Carlson for any additional or closing remarks.

I'd like to thank everybody for your time and interest today and we look forward to talking to you on our next call. Thanks.

That does conclude today's conference call. Thank you, everyone, for your participation, and you may now disconnect.