Semtech Corp (SMTC) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Semtech Corporation fiscal year 2004 fourth-quarter results. Today's call is being recorded, and a question-and-answer session will follow after the presentation.

For additional remarks and introductions, I will now turn the call over to Mr. John Baumann, 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 fourth-quarter earnings conference call. I am John Baumann. We have just released results for our fourth quarter and fiscal year ended January 25th, 2004. For the next 45 minutes or so, Jason Carlson, Semtech's President and Chief Executive Officer, and David 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 our estimates of future financial results, we will consider them now. We are unable to say if there will be another Reg FD-compliant opportunity for you to ask questions before the next quarterly conference call. Second, this conference call will include projections and other forward-looking statements which involve risk and uncertainty. As highlighted in the press release, risks include but are not limited to overall economic and geopolitical conditions; the timing and duration of 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 strategic customers; supply from key third-party silicon wafer foundries and assembly contractors; risks associated with the business of major customers and other risk factors. Please refer to the risks section of our earnings release and the Company's most recently filed Form 10-K and 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 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 ones 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 fourth-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 first quarter of fiscal year 2005.

Let's start by reviewing our financial performance for the quarter. Revenue increased 15 percent sequentially to 55.4 million, exceeding our guidance of 8 to 10 percent. Gross margin improved to 58.6 percent, up from 58 percent in the previous quarter. Earnings per diluted share were 16 cents, 2 cents ahead of our previous guidance of 14 cents. David will review our financial performance in more detail following my comments.

Now, let's move onto orders. New orders increased 11 percent sequentially, and more than 45 percent when compared to the fourth quarter of FY '03. Our continued increase in backlog will again result in a reduced turns requirement for the first quarter. Starting backlog for Q1 achieved our highest level ever for our combined power management products. The strength of our product offering, combined with our expansion of end markets, is working. Once again, portable Power Management topped the list for new orders. The strength in handset orders continued throughout the quarter, while the notebook market peaked in November, reflecting normal seasonality trends.

Protection products delivered an 18 percent increase in orders. As these products have the most diverse group of end customers, general improvements in the market drive diverse growth. Handsets, telecom and computing products led the orders, while flat panel display applications also continued to grow.

Test and measurement orders increased significantly during the quarter. Demand for both system-on-a-chip and Flash testers are responsible for this increase. ATE order activity tends to fluctuate more than shipments. The multi-quarter trend is for continued growth.

New Springdale and K-ATE wins going into production resulted in desktop orders increasing 10 percent in the quarter. Revenues for desktop in the previous quarter were less than 10 percent. Our emerging segment of networking and industrial power products again reported sequential growth. Fourth-quarter orders were up 13 percent on top of the 20 percent growth reported in the previous quarter. These products continue to gain traction in this large horizontal market, as we have increased our focus in this area. Orders for SETS, Human Input Devices and legacy products were roughly flat for the quarter, as all three of these product lines experienced late booking activity around the holiday period.

Now looking at design activity, the fourth quarter saw increased design activity. The Company reported more than 600 new design wins, for a total of more than $70 million. That is up from 475 wins worth $60 million in the previous quarter.

Looking at total dollars, portable products led the way, and desktop and protection were also strong. From an end equipment perspective, handsets were responsible for more than $24 million worth of design wins. The drive for more feature-rich phones continues to increase our content opportunities for both power management and protection products. Notebooks represented $14 million of the wins recorded. The expansion of our product offering and customer base are driving these orders. We continue to extend our product offering in notebooks, releasing solutions for IMVP-IV plus, as well as additional sockets. Our desktop products produced more than 9 million in design wins. Additionally, graphics reported 3 million, driven by a move to PCI Express, and server reported another 2 million.

Our SETS products are gaining momentum in the advanced communication market, as DSL and multiservice provisioning platforms increase. SETS reported $3 million in design wins.

Protection products generated more than 12 million in design wins. Applications for networking, handsets and communications topped the list.

Networking and industrial power products grew about $5 million in new design wins, as we continue to gain traction in these markets. Top customers for new design win dollars across all product lines included Asustech (ph), Compal (ph), Curatel (ph), Dell, ECS, Paunhai (ph), Q-Net (ph), LG, Quanta and Samsung.

Now, I would like to move on to our outlook for Q1. Building upon our 15 percent revenue growth in Q4 and our 11 percent increase in orders, we expect revenues to be up 7 to 10 percent sequentially. Visability has again improved for the second order in a row. Therefore, we are forecasting a 32 percent turns rate for the quarter. Handsets are showing no sign of seasonality. The strength in the market for feature-rich phones and our expanding content are driving growth. The notebook market is experiencing normal seasonality after a strong Q3 and Q4, and looks to be picking up again toward the end of Q1. As notebooks continue to be a larger percentage of overall computing, Q3 and Q4 should again drive growth. IMVP-IV solutions are likely to make up the majority of calendar year '04 shipments, as the move to IMVP-IV seems somewhat delayed.

The cyclical recovery of the test and measurement market is being driven by Flash and system-on-a-chip demand and, as a result, looks strong for FY '05. A general strengthening across numerous markets will provide for growth for our protection products. Increased applications in handsets, continued strength in networking and growth in flat-panel displays will all be drivers throughout the year. Next-generation graphics, based on PCI Express, are providing an opportunity for us to gain share in graphics power management solutions. Due to the normal seasonality of the computing market and the transition to PCI Express, this is likely to be a latter-half effect. Our advanced communication business is entering the year with three customers having products in production. As those products begin to ramp throughout the year, and additional customers move into production, this product line is well positioned for growth. The outlook for our emerging areas of Human Input Devices in telecom and industrial power continue to look bright, and I expect to be announcing some exciting wins during the year for these products.

In summary, our new model is working. Over the past 36 months, we have continue to invest in new end markets. We have expanded the diversity of markets we are serving, and have successfully shifted the focus to markets that are faster growing and have improved margins. This quarter marks the third consecutive quarter of increased growth for Semtech. Our current business in the handset, notebook, ATE and protection markets, combined with our emerging products in networking and industrial power, SETS and Human Input Devices positions Semtech to achieve our goal for above-market growth in FY '05.

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

Thank you, Jason. Good afternoon, ladies and gentlemen. The fourth-quarter operating performance clearly exceeded our revenues and earnings forecast. We also posted, as Jason mentioned, a significant increase in backlog. For the second quarter in a row, the Company posted a book to bill well in excess of 1.1 to 1.

Revenues for the fourth quarter of fiscal 2004 were 55.4 million, an increase of 15 percent compared to revenues of 48.1 million for the third quarter of this fiscal year. Gross margins for the fourth quarter of fiscal 2004 were 58.6 percent. The gross margin improved by approximately 70 basis points, in comparison to the third quarter. Gross margins for the prior-year fourth quarter were 56.2 percent. We do expect further improvement in gross margin in the first quarter of fiscal 2005.

Earnings for the quarter exceeded our forecast. Net income for the fourth quarter of fiscal year 2004 was 12.5 million, or 16 cents per diluted share. This compares to a forecast of 14 cents per diluted share, and this represents a 35 percent sequential increase in net income. And, once again, our net income did grow certainly faster than revenue, and it also represents a 4 cent per diluted share increase in earnings, as compared to the third quarter of this year.

As I previously mentioned, revenues for the fourth quarter did increase by 15 percent sequentially. This represents the largest quarterly sequential increase in revenues for the Semtech Corporation since 1999. Power management revenues increased by approximately 7 percent during the quarter. This increase was due to strong growth in our shipments into the handset, notebook, notebook, PDA and other portable device market. The increase was partially offset by declines in our revenues from gaming and desktops.

Protection revenues increased approximately 40 percent during the quarter. This was due to improvement in sales into the communications end market, and the high level of design wins that this product line has recorded over the last several years, and we have recently seen many of these designs going into production.

Revenues from our advanced communications business also increased during the quarter, with further increases forecasted throughout fiscal year 2005.

Revenues from Semtech's two other emerging product lines, our HID or Human Input Devices and networking industrial power management, remain on track for substantial growth in fiscal 2005. The networking and industrial power management line increased again by in excess of 20 percent sequentially. The HID business declined slightly in the quarter; however, bookings for this product line have accelerated in the first month of the first quarter, so we're optimistic about that business as we move into fiscal year 2005. The Company's legacy businesses increased slightly during the quarter.

Revenues from the fourth quarter were derived from the following geographic regions. 31 percent was derived from customers located in North America, 8 percent from Europe and 61 percent from Asia. Net turns orders accounted for approximately 39 percent of shipments in the fourth quarter. This compares to 53, 52 and 53 percent in the previous three quarters.

Revenues by end market did change somewhat, with the most significant growth coming from the handset, communications and industrial markets. Revenues from cell phone handsets and base stations accounted for 32 percent of revenue in the quarter. The growth in handset revenue, as Jason mentioned, was driven by new designs ramping into production, as well as the strong handset market growth. We also have captured a number of important new designs with China-based cell phone manufacturers. Desktop computers and servers accounted for 8 percent of revenue. Notebook computers and PDAs accounted for 22 percent of revenue. Test equipment accounted for approximately 14 percent of revenue. Communications infrastructure accounted for 12 percent of revenue. General, industrial and military accounted for 8 percent. Graphics was 3 percent, and gaining systems represented 1 percent. Revenues from OEM sales represented 52 percent of total revenues for the fourth quarter, while distribution represented 48 percent of total revenues.

As Jason discussed, we're forecasting that revenue for the first quarter of fiscal 2005 will increase between 7 to 10 percent, as compared to the fourth quarter of fiscal 2004. To obtain the first quarter's forecast, net turns orders of approximately 32 percent of revenue are required. The turns rate is lower than the actual turns rate during the fourth quarter. Customers have been placing backlog with more leadtime, due to the strength in certain key end markets, and due to their relative confidence regarding demand. Bookings in our fiscal February period have continued strong. Our turns forecast is thus reflective of improving visibility from our customers.

Gross margins for the fourth quarter of fiscal 2004 improved to approximately 58.6 percent. Gross margins were favorably impacted by improved mix and contributions from new proprietary products. Gross margins for the fourth quarter were also impacted by the sale of $470,000 of previously written-off inventory. The Company's incremental gross margin in the quarter thus was approximately 63 percent; and, if we exclude the higher sales of previously written-off inventory, the incremental gross margin was approximately 59 percent. We expect that the incremental gross margin in the fourth quarter was impacted by certain one-time items and costs, and thus we expect the incremental gross margins for the first quarter to increase back to the 60 to 70 percent range.

On a year-over-year basis, quarterly gross margins increased by approximately 250 basis points. Gross margins are forecasted to continue to grow in fiscal 2005. Gross margins are moving toward our near-term goal of 60 percent, and one of the expected drivers of this margin growth is clearly Semtech's emerging product lines, which have gross margins that exceed the corporate average, some by a substantial amount.

For the first quarter, we're forecasting that gross margins will improve by approximately 20 to 30 basis points, when compared to the fourth quarter. Research and development spending was approximately 7.5 million for the quarter, which was up just slightly from the prior quarter. We are forecasting that R&D spending for the first quarter will increase by about $600,000 as compared to the fourth quarter. We are adding R&D resources in our power management, projection and advanced communications product line and, as a result, we do plan to see R&D spending increase -- increasing, with the plan calling for R&D spending to increase back to close to the 14 percent level of revenue by the second quarter. And this is due primarily to the addition of resources and increased new product development. Our long-term R&D model has been adjusted to reflect R&D spending as high as 15 percent of revenue, and growth to that level is clearly based on us seeing a strong ramp in our advanced communications products, which carry good gross margins.

SG&A expenses increased by approximately $500,000 during the quarter, and for the first quarter, SG&A is forecasted to be up approximately $200,000 in comparison to fourth-quarter levels.

Interest and other income was approximately $1.3 million for the fourth quarter. For the first quarter, we're forecasting interest and other income of approximately $1 million, and this decrease is due principally to lower expected rates of return on cash and investments.

The Company's effective tax rate for the fourth quarter was 24 percent, and it was 24 percent for all of fiscal 2004. The Company is currently projecting that its effective tax rate for fiscal 2005 will also be 24 percent. And that is based upon 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 count increased during the quarter to 78.75 million. The share count is forecasted to increase by approximately 750,000 shares in the coming quarter, based on stock price assumptions. Such forecasts can vary based on the average stock price for the quarter.

So, based upon all this guidance, operating income is forecasted to increase at a faster rate than revenues during the quarter, due to the high fall-through on incremental revenues. And diluted earnings per share for the first quarter, thus forecasted to increase to 17 to 18 cents per diluted share.

Turning to the balance sheet, Semtech ended the quarter with approximately $275 million of cash and investments on the balance sheet. This was an increase of $15.2 million, compared to last quarter. Operating cash flow for the quarter was a positive 18 million, and during the fourth quarter, the Company spent approximately $2.9 million on property, plant and equipment. The increase was principally for test equipment to provide for significant increases in test capacity, particularly in the area of Power Management.

Depreciation and amortization for the fourth quarter was approximately 2.2 million. The Company also purchased approximately $3 million of its common stock in the quarter, and as the Company announced today, we did authorize a new $50 million stock buyback program, as the previous authorization had lapsed.

Accounts Receivables days sales outstanding, calculated on a quarterly basis, declined to approximately 34 days for the fourth quarter. Inventory levels did increase during the quarter, principally to support forecasted ramps in shipments. However, the days of inventory, calculated on a quarterly basis, did decline to approximately 88 days as of the end of the fourth quarter.

The Company has opportunities for growth in its main and emerging product in fiscal 2005. Our operating plan calls for revenue growth in fiscal 2005 in excess of market rates of growth. The forecasted performance for Q1 is not seasonally typical. We have to go all the way back to calendar 1997 to find the first quarter -- period -- in which we grew at such a level. I think this speaks to the strength of the market, the improved diversity in Semtech's business and the positioning of Semtech's products into segments of the market which are growing rapidly.

Our plan for the balance of the year assumes a traditional seasonal pattern to our business, which reflects better sequential performance in the third and fourth quarter than the second quarter.

Thank you for participating in our fourth-quarter fiscal 2004 conference call, and I will now turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS). Ross Seymore, Deutsche Bank.

Congratulations on a strong quarter. David, one question on the turns assumption being 32 percent. I believe last quarter you assumed 35, and you did 39. Have leadtimes extended out even further, to justify the conservatism that the 32 would otherwise imply?

Yes; I think in some of our product lines, it has. And I think, just as I mentioned in my script, that some of the customers clearly are more confident about their build levels in Q1, and starting to look into Q2, and so I think they're just giving us a better look in terms of backlog.

Is it possible to assign a range to leadtimes that you could give us, or is the delta so wide by product line?

I think it varies a lot per product line, but what we are generally looking at is just the overall distribution, and the trend across them all seems to be extending.

Have you noticed any sort of wafer price increases, or shortages on that side?

We have not. Maybe a little less responsiveness on the extremely quick turnaround stuff that you saw six months ago.

And then a final question, on the notebook business. You mentioned that that was taking a normal seasonal pattern. Could you go into that a little bit more? Was that sort of why the HID business was a little bit weaker, but now bouncing back in February?

I don't think that's really the factor for HID. It's such a small percentage of our business today that just the nominal level there is pretty low. So some minor order patterns can have an impact on that. Relative to the notebook, we were really talking more about power management for the notebooks. And I think we saw what most people saw, and are talking about today, where, from a component point of view, it sort of looked like November was the peak time, and people are talking about January being down 10 or 15 percent from December, depending on who you talk to.

Has that shown any sort of uptick in February, from your point of view?

Well, I think February is a short month, and January had the Chinese New Year's effect. So, if you try to cancel those out -- I don't think it has gone down in February from January; it appears that January was the bottom of that. And really, what we are most focused on is when does the uptick look like, which looks more like a latter half of April kind of thing.

Rick Schafer, CIBC World Markets.

Nice quarter, guys. I just have a couple of questions, I guess. The first one is your release mentions your diversification into some areas of consumer electronics. And you actually labeled -- I guess, rattled off HDTV and set-top. Can you just give us an idea how big your exposure is to consumer right now? I guess, primarily where you are exposed, if you broke out your consumer -- would it be mostly DTV, mostly camera? What kind of products are you selling into consumer?

I think we are growing off a pretty small base there, Rick. If you look at, for example, the TV market traditionally, it didn't have a lot of application for us. But as we moved to flat-panel displays, and you have got the DVI bus, you have got an opportunity for our protection products there. We have got some opportunities in flat-panel displays for power management that we didn't traditionally have, and then sort of the same goes through with digital still cameras, camcorders, seeing are there opportunities there for protection or some display driver products. But really, this is coming off a pretty small base for us.

And my second question -- I know, as Ross kind of was hinting around, is there any way to get -- if you can't give us sort of what bookings did specifically in cell, maybe just give us a little bit more color as to where all the strength came from in the quarter. I mean, you come up to, I think you said, 32 percent of sales in the quarter. Did you add some significant new cell phone OEMs that you did not have before? I know you mentioned design wins, but are there any new customers in there, any other color you can give us there?

We have, I guess, orders in the last quarter that will be shipments for this quarter, some programs ramping with some of the indigenous Chinese manufacturers such as TCL and Bird -- those types of guys that are coming to some reasonable volume now.

Louis Gerhardy, Morgan Stanley.

Good afternoon. Nice job. I wanted to ask you on the AR DSOs -- this is the lowest number I have seen in at least five years. Can you just talk about linearity here, what drove this, and are you creating any delinquencies right now?

Well, I think, Louis, if you look at our quarter, our quarter was extremely linear. And we just put a real focus on keeping our customers, all I can say, at 30 days or less. And I'd just more say it is hats off to, principally, our staff in Switzerland for doing a great job collecting the terms. So I wouldn't read anything else into that, but just a good job of collecting to terms.

And then, of your turns requirement this quarter, maybe around $20 million, can you talk about how much of that you have booked already?

As I mentioned, February continued to be a very -- activity continued to be very strong. We actually started to probably fill more into Q2 than we would traditionally do that early in the quarter, once again pointing to the strength of the market. But I would say kind of to hit the middle of the range, you're just talking several million of turns. So I think we're in a very good position and a very strong position.

And last question, just on the product front for notebook computers. Besides the switching regulator market that we all know, can you talk about some of the other products that you're shipping today or the next quarter into that market?

So we started in that market with Vcore, and we have gotten into the DDR rails and that kind of thing. Last year, we introduced a system power product which really should be ramping into volume this year. And then looking out beyond that will be the Touchpad and pointing stick from our HID group.

And much protection going into notebooks?

A little bit.

Joseph Osha, Merrill Lynch.

Congratulations on a great quarter. I wanted to return to the notebook comments for a minute. I am struck by sort of the presence of seasonality there, as opposed to the relative absence of it elsewhere. Do you think that maybe there was some overshipping going on earlier in the quarter, that we are now compensating for? And I'd also be interested, to the extent possible, in perhaps some color on what is going on in the desktop market.

In the notebook, I am sort of responding to -- first of all, I think Quanta publicly announced a month or so ago that they saw a pretty -- I think, for them, it was a 15 to 20 percent drop, month on month. Whether or not there was inventory in the channel, I'm not sure. We have not really seen it impact as far as any de-bookings or rescheduling; it has just been a slower order activity during that period.

And in desktops, with our current share, I don't know that we are the right guy to give you the finger on the pulse of that market.

Okay, fair enough. And the second question I had, or second issue, just relating to gross margin -- you guys have talked about hitting 60 before, and with SETS, which is real high-margin, ramping it seems like that might be in the cards here even a little sooner. Can you talk about where we might see gross margin headed, say, three or four quarters from now?

Well, I think, Joe, the trend is no change in the trendline there. As we look at our plan for the year, the plan clearly has us continuing to increase gross margin throughout the year. So I don't know that I want to put a specific mark out there. But I think, kind of at a minimum, you could expect to see similar type improvement in gross margin, of the 20 to 30 basis points, kind of as maybe a base assumption here for the next several quarters. So, as you do the math on that, that kind of has it ramping up to pretty darn near the 60 percent level by the fourth quarter.

SETS and test and measurement are definitely additive, though, right?

SETS and test and measurement, if they achieve better than what we are kind of building in, yes; they certainly can accelerate that a bit. But I would rather keep the assumptions conservative, right now.

David Wu, Wedbush Morgan Securities.

Congratulations also on a great quarter. Can you explain a little bit more about one thing, which is the incremental gross margin was 63 percent; and, given how fast your handset grew, I assume that has low gross margin. Is the mix the number-one determinant of your gross margin, your incremental gross margin moving forward? Or is there something else I should look forward to? And does anything stop you from going north of 60 percent for this cycle?

Well, David, there's a lot of things that go into gross margin. Clearly, mix is one of them. Yields in the manufacturing area are one of them. Inventory reserve requirements in a given quarter, based on our formulas, is another one. But I guess, as we look forward, I think there's two principal factors that will drive our margins. Number one clearly is mix. The move of our power management product line more into the portable and telecom and networking area is a favorable fact. Growth in our SETS product is a favorable fact. So mix is the number-one driver, and I think as an organization, from a manufacturing standpoint, we continue to get better in terms of optimizing yield and focusing on the cost side of things. So that's probably second. And I think going north of 60 percent -- I mean, clearly, we will have to be able to hit the kind of growth numbers we should be able to hit in our communications product line. But I would say it's primarily the relative level of success in some of those higher-margin product lines. And I would put at the top of the list there our SETS product line and, say, our telecom and networking power management product line as two of the more important product lines in terms of, longer term, being able to drive that gross margin north of 60 percent.

One quick thing. On the leadtimes across your product line, are we looking at anywhere from six to eight weeks? Or is that the right range to look at?

I think that's a pretty good range, David.

Jeff Rosenberg, William Blair & Co.

I went to go back to the growth in the handsets. It seems comparable on an absolute basis to the third quarter, but was this quarter much more weighted toward the protection products? And I guess I'd go back to the prior question. Is that a major factor, in terms of the mix, with gross margin?

No, I wouldn't say that it was, Jeff.

Okay. But it was up more than 30 percent quarter on quarter, in terms of handset; right?

Yes. I think, Jeff, the biggest driver there was the power management products in that area. Protection maybe drove it a bit, but power management, principally, and cellphones and the growth in the protection product line clearly was more in the com infrastructure area, as you saw that market increase substantially in the quarter, as well.

Did you say, though, that power management as a whole was up 7 percent for the quarter?

That's correct.

And even though the largest segment is handsets, because handsets as a whole were up 30 percent -- I guess I'm just confused because notebooks were up like 10, as well. So just how it was only up 7 percent as a whole, if handsets were as strong as they were, as a category.

Well, if you do the math on the desktop and graphics area, it was down 16 percent quarter on quarter. So that's kind of the offsetting factor that gets you to that 7 percent growth.

And another question. Can you give us some sense, in terms of the total output of new products for the full fiscal year, and sort of what your expectations are for the new fiscal year, and maybe a little bit of color on where we should look for you to be emphasizing your new introductions?

Yes. With our financial strength through the downturn, we have continued to invest pretty heavily. And so I think we're going to have a very good year, as far as new products go, specifically in portable power management. Both for handset, notebook and PDA, we have got new products basically scheduled to come out every quarter throughout the year. ATE, after a long period of development there -- those products tend to have a pretty long design cycle -- is well positioned for new products this year. Protection, as well. With our SETS business, we're bringing to market sort of complementary products to that market. So it should really be a significant improvement from last year, I would say, when we look at new product development releases to production.

It also seemed like there was pretty significant momentum in the ATE business. It looks like that was up about one-third. When we look at the guidance, are you expecting that kind of -- are handsets and ATE really the areas that are going to drive you the most, in terms of what segments grow in the first quarter?

Yes. I think, if you look at the revenue guidance, we continue to grow in the handset area, we continue to grow in communications and we continue to grow in industrial. So yes; I think the same markets which were responsible for driving the growth in the fourth quarter continue to take kind of the leadership there, in terms of growth.

So we should look for the same pattern, where those segments grow above the high end of guidance, to get us to overtaking the seasonality?

Yes; correct.

(OPERATOR INSTRUCTIONS). Steve Smigie, Raymond James.

I was wondering if you could comment a little bit on the desktop business. You, I think, had mentioned in the past that sometime during the summer, you might start to see a pickup in that business again, as some of your new product rolls (ph) sort of took hold. I was wondering if you could comment on that.

As we said in the call, desktop orders were up in the previous quarter -- resultant (ph) shipments this quarter -- and that is really due to some previously won Springdale and K8 base platforms. I'd like to remind you that desktop revenues were only about 8 percent of our revenue in the last quarter. We are not looking for tremendous growth or share there.

But I assume, due to the advances in desktop, you would want to keep on the leading edge there, in terms of doing R&D just to sort of keep your products on the cutting edge, as well?

You are absolutely right. The desktop market definitely pushes the envelope for new power requirements, and staying plugged into those requirements and, I guess, finding opportunities where we think we can really get value for our technological solutions -- we are very interested in doing that.

Turning quickly to the protection devices, I believe that's maybe a lower gross margin area for you. I was just wondering if you could discuss any possible activities there, what you're doing in terms of die shrinks, or anything to maybe try to drive the gross margin up a little bit?

I will let Jason touch on the latter part. But the protection product is not far off of our corporate average, I'll just say that. So there is not a huge disparity, and we do do a lot of proprietary devices in that area. And we do have a leadership role in terms of technology, so I think what you're thinking of is some of the protection products into the handset market are possibly a little bit more commoditized. But clearly, into some of the other segments, it's a lot more proprietary in nature. We do get paid pretty good for the technology we bring to market there.

As David said, we tend to be the technology leader in that market. And so the model that works for us in that market is one of two things. Looking at opportunities to be first to market for a new application, so, for example, if it's protecting the bus between a color display and a processor in a handset, or protecting the DVI bus, being the first to market there affords us a good position.

The second is, with our technology leadership there, which is really a lot of specific process development around those products, the opportunity -- we can have a cost structure that can be lower than the competition's. And so, if we can achieve one of those two things, we are generally in pretty good shape. And ultimately, if a product in the protection market gets pretty commoditized, we will tend to move away from that, and just focus on the new opportunities.

Great quarter. Thank you very much.

J.D. Padgett (ph), Founders Asset Management.

Hi, guys. Great quarter. A couple of quick questions -- one, as you look primarily into '05, is there some expectation for the tax rate maybe moving up to something that would be more normalized?

No. I think, based on the mix of our business being heavily internationally-based, and with the amount of our manufacturing infrastructure and sales infrastructure that is offshore, we have got an optimized structure for tax. At least for the foreseeable future, I think that 24 percent rate is a pretty good rate to build into your model.

For the next couple of years?

Yes.

And then the commentary around gross margins -- you mentioned the 470,000 of inventory benefit. It sounded like you might have had some offsetting charges, as well?

Yes. I think we just run our inventory pretty tightly, and had some incremental reserves that we had to book during the quarter. So nothing out of the ordinary kind of course of things, so that kind of drove down the incremental gross margin outside of kind of the 60 to 70 percent range that we would normally expect. But as we look into Q1, based on our planning and kind of the activity we're seeing so far this quarter, I think an incremental gross margin at least in the 60 to 70 percent range looks very achievable.

That 470,000, though -- was that net of any additional reserves that you might have taken against that? Or was that just up the pure inventory benefit?

That was just pure inventory benefit, in terms of the cost of previously written-off inventory that was sold.

What if you netted the additional reserves into that? It sounds like it wouldn't have been as big a benefit then, right?

Absolutely not.

But still something positive?

Yes. It would have been substantially, substantially lower benefit. I don't have the exact number.

Will you continue to get some inventory benefit going forward?

I think FY '05 should be the last year that we see that benefit, and the principal product area it's coming out of is out of the ATE market, where back three years ago, we were substantially overinventoried. And with the market coming back a bit, we're starting actually to sell some of those product. We would have guessed previously that we never would have. So yes, I think we continue to see some benefit on a quarterly basis from Q1, Q2, Q3 and maybe even into Q4.

And then the R&D comment? Can you truly drive that up as a percentage of revenue, as your revenue grows as fast as it seems like it might be on track to do this year?

I think that's a bit of a goal statement, as well as a forecast. I think we would like to add resources but, pragmatically, it's tough to add resources at that rate, and assimilate resources at that rate.

Okay, but kind of longer term, maybe you drive it to that level?

Yes, longer term. And particularly, the reason I emphasize on our SETS product line, with the gross margins being so strong in that product line, if we are able to achieve our objective there, we should be able to fund, longer term, a higher rate of R&D in the communications market, due to those gross margins.

And the final question is IMVP-IV. Was that around the notebook market, in terms of seeing some of those potential units slipping?

Yes, yes. It has nothing to do with the seasonality that we've talked about, really. It has to do with what is the Dothan chipset moving on to the Iona (ph) chipset, and it has been announced that that is probably seeing about a two-month slip. And so, accordingly, I think the vast majority of platforms shipped in this calendar year are going to be the IMVP-IV platform, just from a timing point of view.

Bill Conroy, Sanders Morris.

A little bit of a tagalong to the previous question, David. I was going to ask about OpEx. What about SG&A? How should we think about that sort of on a longer-term sense, going forward, as revenue comes up? Do you continue to get leverage there? Are there any step function increases kind of looming? Can you talk just a little bit more sort of longer term philosophically on that?

Yes. I don't think there's any step functions. We tend to add resources, I would just say, incrementally. If you look at where we are adding the most, it's primarily in the sales organization. And it's been in expanding our geographical coverage, increasing our field application engineers, which are really our technical salespeople in the field who are so key to the overall selling process and gross margin process, frankly. So yes -- no, I think we continue to get leverage on SG&A. And in terms of a longer-term model, I think kind of a goal statement there would be more along the lines of, longer term, getting it to a 15 percent of sales, where we're looking at like 9 percent selling and maybe 6 percent G&A. Any better than that, given the growth that we will be working for, I think we will continually be investing kind of ahead of growth to develop our infrastructure. So I think 15 percent is kind of a goal statement for the Company.

To switch gears a little bit, back to the desktop. Mindful that the orders did come up, would you be willing to call a bottom in your revenue there?

Yes. I think that's a pretty safe call at this point, Bill.

And what about for future generations going forward, different things coming down from Intel? Does this still hold? Your confidence in the bottom, that is?

Yes, yes. The next thing is going to be the VRD 11, and the trends there are looking good, and that they are continuing to push the power requirement, which I think makes the value proposition a little bit better, therefore.

David Wu, Wedbush Morgan Securities.

I was calling to see if you could add some color to your handset business. How much of that handset are the traditional large OEMs, and how much of that business is related to the sort of ODMs in China and Taiwan? And what happens when all these integrated chipsets come along with one-chip GSM solution? Does it help or hurt you, in terms of your power management business in these, I guess, next generation of integrated chipsets?

David, as far as the breakout, I think, off the top of our head, we don't have that data right in front of us. It seems that a pretty significant percentage is still going to the major OEMs, but you are starting to see just a more diverse customer base emerging for us, which is a good thing. As far as the single-chip GSM or anything like that, we really look at it as the solutions that we are going after are really independent of the actual transmission technology. So, be it GSM or WCDMA or whatever, really what we are driving today is battery charging and backlight display, and these types of things. And so we don't really see that as a negative or a positive, at this point. I think, as long as that market stays in the market of a pretty rapid rate of innovation, that is really what is driving the largest amount of opportunity for us.

So you are basically astandard agnostic (ph)?

Yes.

Joseph Osha, Merrill Lynch.

Hello again, guys. I am wondering if we can go back to that sort of Dothan commentaries, and the related chipset commentaries. You are saying that you don't expect many Dothan platforms to ship this year? Did I mis-hear that?

No; I think you're right, Joe, that if we look at -- Intel announced, I think, there is a slip from their calendar Q1 to their calendar Q2. And based on what we are hearing in the marketplace before the slip, they were sort of looking at a September introduction, as far as actually being in notebook platforms. And if you put a one- to two-month lag on that, you're right in the heat of the build season, with the peak not far behind you. So it's hard to imagine that being a significant percentage of the shipments. Now, the Dothan chip is pretty much a shrink for bond die (ph), and so it is pretty much of a running change, as opposed to an entire platform change. So they can ramp it pretty quickly; but I think, just pragmatically, if you look at that being now October or November instead of September, that really is the main cause for my statement.

How is the chipset roadmap affected by that?

Well, I think the biggest thing is that following Dothan is the Iona. With that goes the Elviso (ph) chipset. And that I have not heard any public statements on, but I would assume that with the Dothan, that has caused some effect.

But there is no major chipset technology change between Banius and Dothan, right?

Right, right.

And that does conclude our question-and-answer session. I will turn things back over to you, Mr. Baumann, for any closing remarks.

I just want to thank everyone for joining us on our conference call today, and we will talk to you next quarter. Thank you for joining us.

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