Semtech Corp (SMTC) 2005 Q1 法說會逐字稿

Good day, everyone. Welcome to the Semtech Corporation fiscal year 2005 first quarter conference call. 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, the Treasurer and Manager of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to Semtech Corporation's fiscal year 2005 first quarter earnings conference call. I'm John Baumann, I'm the Treasurer of the company. We have just released results for the first quarter that ended April 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 discuss those results with you and answer 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 opened to all interested party in accordance with Reg FD. If you have any questions about our future performance or our estimates of future financial results, we'll consider them now. We are unable to say if there will be another Reg FD compliant opportunity for you to ask questions before the next quarterly conference call.

Second, this conference call will include projections and other forward-looking statements which involve risk and uncertainty. As highlighted in the press release, risks include but are not limited to overall economic and geopolitical conditions, the timing and duration of semiconductor market upturns or downturns, demand for communications infrastructure equipment, computers cellular phones and automated test equipment, demands for the company's products, competitors' actions, relations with strategic customers, supply from key third-party silicone labor foundries and assembly contractors, risks associated with the businesses of our major customers, and other risk factors. Please refer to the risk section of our earnings release and the company's most recently filed Form 10-K or 10-Qs 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 one available at First Call's website and the company'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 first quarter fiscal year 2005 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 second quarter of fiscal year 2005. Let's start by reviewing our financial performance for the quarter.

Revenue increased 12% sequentially to 61.9 million, exceeding our guidance of 7 to 10%. Gross margin improved to 59.4%, an increase of 80 basis points from the previous quarter. Earnings per diluted share were 19 cents, ahead of our previous guidance of 17 or 18 cents. David will review our financial performance in more detail following my comments.

Now, let's move on to orders. New orders increased 12% sequentially and 65% when compared to the first quarter of FY '04. Our continued increase in backlog will again result in a reduced turns requirement for the second quarter. All product lines except ATE delivered sequential order growth, and while ATE did not sequentially increase orders, we still booked over $8 million in the quarter. Our combined power management businesses once again achieved a record number for starting backlog.

Portable products had a 16% increase in orders in spite of the seasonally down quarter the market observed for notebooks. Activity in the notebook area picked up towards the end of the quarter as inventory levels in the channel reduced. Handset activity remained very strong throughout the quarter.

Protection products delivered a 15% increase in orders. Orders were driven by increased demand for products used in networking, flat panels and handset products. All three of our emerging product groups, Advanced Communications, HID and Networking and Industrial Power, saw significant increases in order activity. Advanced Communications, or what we call our SETS product group, saw orders increase 46% sequentially in the quarter. Increased demand for DSL infrastructure continues to drive growth for these products.

HID, or Human Input Devices, saw orders more than double in the quarter compared to Q4. This emerging product line has reached the milestone of receiving preproduction orders for a couple of mainstream consumer products. Networking and industrial power orders increased 12%, as they continue to gain traction in this large horizontal market. Test and measurement orders were down sequentially after Q4 drove a very significant increase in order activity. But as I mentioned earlier, they still booked more than $8 million of new orders in Q1. Broad demand for FOC, flash and mix signal testers continues and is driving year-over-year growth. Desktop orders increased 27% sequentially as next generation designs are now ramping.

Design wins. The first quarter saw increased design activity. The company reported more than 700 new design wins for a total of more than $80 million. That is up from 600 wins or $70 million in the previous quarter. Looking at total dollars by product line, portable power management products led the way, followed by protection, power management for desktop and servers, networking, industrial power management products, and our SETs product lines.

Looking at design wins geographically, designs originating in North America topped the list. From an end equipment perspective, handset applications were again the leader, with more than $28 million in design wins. With market forecast this year for feature-rich color phones growing to 280 million units, opportunities for our protection devices, backlight products and battery charging in these applications are increasing rapidly. Notebook products represented $19 million of the wins recorded. The ongoing expansion of our product offering and customer base are driving these orders. Our system power products released last year are now gaining traction in the market. We expect growing demand from wireless computing applications to drive volume increases throughout the year. Networking and telecom applications represented 17% of design win dollars across various switch, router, broadband and other communications applications.

Highlights. I would now like to turn what I would consider some of our highlights from the first quarter and their relative importance to our long-term plans. I would like to highlight one area that I think Semtech is doing particularly well. An area that we have been focusing our new product development and our sales and marketing resources in the last few years. Traditionally, Semtech has had less exposure to some of the broad wireline markets such as the networking, broadband and telecom segments. As we pointed out in the press release, the communications infrastructure end market grew more than 25% sequentially for Semtech in the first quarter. Furthermore, wireline represented 17% of our design win dollars in the first quarter and was the second largest end market after portable applications.

Designs are tied from everything from DSL and set top box to more complex multi service provisioning platforms to cellular bay stations and big telecom systems. In the past, our exposure in this area has been primarily from our protection products. While protection products continue to be the most significant reason for our growth in the wireline end markets we have clearly added more content with our power management and SETS products. What is also encouraging is the success we are seeing in wireline going beyond just increased product content but also including developing end markets and namely China. Many people assumed China for Semtech is just a statement about handsets, but the opportunity to sell a variety of infrastructure-related products into the China market is very promising. Our latest internal three-year plan suggests our opportunity for growth in the wireline of communications infrastructure area is 50% per year over the next three years, due in part to us coming off a smaller base. And the products sold into this market tend to have above corporate average gross margin.

Again, this is just one of several exciting trends that are our reason behind our significant growth in the last few quarters. Some additional first quarter highlights, first, clearly very strong financial performance, including record gross margin and a 24% after-tax return on sales. Second, the addition of several key technical people, including the hiring of a Chief Operating Officer, Tony Giraudo, that we announced in April. We continue to find in many cases to upgrade our talent throughout the organization. And third, the successful bookings trend seen in the emerging areas of human input devices, or HID, and SETS products offerings. While both of these are a small percentage of our revenue, they hold potential and should provide top-line growth in margin expansion in upcoming quarters.

Now I would like to move on to our outlook for Q2. Q1 represented the fourth quarter in a row of sequential growth, and we expect Q2 revenues to be up again 7 to 10% sequentially. With this guidance, we are estimating a 30% turns rate for the quarter. Given present lead times we think this turns rate is appropriate. Handsets remain strong as the convergence as more feature-rich phones continue to drive growth. While wins at Samsung, Motorola, Sony Ericsson, and LG are driving significant growth today, many other players such as Kyocera, Bird, PCL and CURTEL are just beginning to ramp.

Our protection products are well-positioned for growth. DVI, and HDMI represent great opportunities as notebooks begin to adopt DVI and flat panel TVs with HDMI. Other applications around new ethernet opportunities also look promising. The notebook market seems to have readjusted inventory levels in Q1 and is poised for growth through the year. As notebooks continue to be a larger percentage of overall computing, Q3 and Q4 should again drive growth. Also, we have successfully broadened our customer base in this market.

The testing measurement business remains strong and continues to increase. We are well-positioned for future growth with the new portfolio of products that we will begin to release in this quarter and throughout the year. These new products will further strengthen our product offering and our position with the broadest product lineup in the ATE market. Next generation graphics based on PCI Express are providing an opportunity for us to gain share in graphics power management solutions and our increased focus on server market is showing promise.

The outlook for our emerging area of human input devices, advanced communications and networking industrial power is increasingly positive. As I mentioned earlier, our HID business has a couple of major programs that should go into production by the end of the quarter. Our advanced communication group continues to find new opportunities for their technology in applications like ethernet in the first mile, video on demand, and 3G bay stations.

In summary, I am very pleased with our progress. We have demonstrated our ability to return to a model of successive top line growth, combined with record gross margin. We have continued to invest in systems to help drive further growth and efficiencies, and we are just starting to see those benefits. The combination of our technical strength in power management, protection, synchronization and timing, HID and pen electronics for ATE, together with our customer relationships with leading customers into these rapidly growing markets position Semtech for above-market growth in the coming year. This concludes my remarks, and I will now turn the call over to David.

Thank you, Jason. Good afternoon, ladies and gentlemen. The first quarter was a great quarter for the Semtech Corporation. Our operating performance exceeded our revenue and earnings forecast. We recorded the second highest quarterly bookings in the company's history. Our operating margin expanded to approximately 30%, the highest level since the fourth quarter of calendar 2000. Book-to-bill exceeded 1.1 to 1, and other key metrics such as DSOs, inventory turnover and design wins also improved. We also increased our manufacturing capacity and expanded one of our key design locations.

As we look first at the income statement, revenues for the first quarter of fiscal 2005 were 61.9 million, an increase of 12% compared to revenues of 55.4 million for the fourth quarter of last fiscal year. Revenues increased 41% compared to the first quarter of last year. Gross margins for the first quarter of fiscal 2005 were a record 59.4%. The gross margin percentage improved by approximately 80 basis points in comparison to the fourth quarter. Gross margins for the prior year first quarter were 56.5%. Gross margins were thus up about 300 basis points in comparison. And we do expect further improvement in gross margin in the second quarter of fiscal year 2005.

Earnings for the quarter exceeded our forecast. Net income for the first quarter of fiscal 2005 was 14.8 million or 19 cents per diluted share. This compares to a forecast that we had delivered at the beginning of the quarter of 17 to 18 cents per share. This also represented an 18% sequential increase in net income and a 3 cents per diluted share increase in earnings as compared to the fourth quarter of last year. On a year-over-year basis, net income increased by 79%.

As I previously mentioned, revenues for the first quarter increased by 12% sequentially from the fourth quarter. Power management revenues increased by approximately 7% during the quarter. This increase was due to strong growth of shipments into the handset, desktop computer, graphics, networking, and industrial markets. This increase was partially offset by declines in our revenue from gaming and notebook. Protection revenues increased approximately 25% during the quarter due to improvement in sales into the communications end market and the high level of continuing design wins for this product line over the last several years. Revenues from test and measurement unit increased by 18%. Revenues from our advanced communications business increased sequentially by 11% in the first quarter with further increases forecasted throughout fiscal year 2005.

Revenues from Semtech's two other emerging product lines, HID or human input devices and networking and industrial power management, remain on track for substantial growth in fiscal 2005. The HID business revenues increased sequentially by about 34% in the quarter with even higher sequential growth in terms of bookings, which included the company's first major production order for Microbuddy. The company's legacy businesses also increased during the quarter as we saw improved order rates from the military and aerospace markets.

Revenues for the first quarter were derived from the following geographic regions. 31% was derived from customers located in North America, 11% from Europe, and 58% from Asia. Net turns orders accounted for 33% of shipments in the first quarter. This compares to 39%, 53%, and 52% in the previous three quarters. Revenues by end market changed somewhat with the most significant growth coming from the handset, communications, industrial and military markets. Revenues from cell phone handsets and bay stations accounted for 32% of revenues. This growth in handset revenue was driven by new designs ramping into production.

Desktop computers and servers accounted for 8% of the revenue. Notebook computers and PDAs accounted for 19% of revenue. Test equipment accounted for approximately 14% of revenue, communications infrastructure accounted for 14% of revenue, general industrial and military accounted for 9% of revenue, and graphics and gaming systems accounted for 4% of revenue. Revenues from OEM sales represented 52% of total revenues for the first quarter, while distribution represented 48% total revenues.

As Jason discussed, we are forecasting that revenue for the second quarter of fiscal 2005 will increase between 7 to 10% as compared to the first quarter of fiscal 2005. This will translate into year-over-year quarterly growth in excess of 50%. To obtain the second quarter forecast, net turns orders of 30% of revenue are required. The forecasted turns rate is lower than the actual first quarter turns rate, customers have been placing backlog with more lead time due to the strength in the certain key end markets and due to their relative confidence regarding demands. The turns forecast is reflective of this improved visibility from our customers.

Gross margins for the first quarter of fiscal 2005 improved to a record 59.4%. Gross margins were favorably impacted by improved mix and contributions from new proprietary products. Gross margins for the first quarter were also impacted by the sale of 297,000 of previously written off inventory. The company's incremental gross margin in the first quarter was thus approximately 66%, and if we exclude the impact of the lower sales of previously written off inventory, the incremental gross margin was approximately 69%.

On a year-over-year basis, quarterly gross margins increased by 300 basis points. Gross margins are moving toward our near-term goal of 60%, which we would expect to attain by at least the third quarter of this fiscal year. One of the expected drivers of this margin growth are Semtech's emerging product lines which had gross margins which exceed the corporate average, some by a substantial amount. For the second quarter we are forecasting that gross margins will improve by approximately 20 to 30 basis points compared to the first quarter. This forecast assumes another drop in sales of previously written off inventory.

Research and development expenses were 7.9 million for the quarter, which was up from the prior quarter. We are forecasting that R&D spending for the second quarter will increase by approximately 300 to $500,000 compared to the the first quarter. We are adding R&D resources in power management, protection and advanced communications. While our long-term model for R&D is 14%, our revenue is growing at a rate faster than we can add technical resources, thus in the short-term, we will continue to get operating leverage on our R&D spending.

SG&A expenses increased by approximately $600,000 during the quarter, and for the second quarter SG&A's forecasted to be up approximately 300 to 500,000 in comparison to first quarter levels. Interest and other income was approximately $900,000 for the first quarter. For the second quarter we are forecasting interest and other income of approximately $1 million. The company's effective tax rate for the first quarter was 24%. The company is projecting that its effective tax rate for fiscal 2005 will be 24%. This is based upon current revenue and earnings forecasts. The company's effective rate is impacted by variations in income and the source of that income as well as other factors.

The diluted share count increased during the quarter to 78.8 million. The share count is forecasted to increase by approximately 300,000 shares in the coming quarter based on stock price assumptions. Such forecasts can vary based on the average stock price during the quarter. So based upon this guidance, operating income is forecasted to increase at a faster rate than revenue during the quarter. This is due to the high flow through on incremental revenues. The operating ratios are thus forecast to improve and diluted earnings per share for the second quarter are forecasted to increase 21 cents per diluted share.

Turning to the balance sheet, Semtech ended the quarter with approximately $279 million of cash and investments on the balance sheet. Operating cash flow for the quarter was a positive 9.3 million. Operating cash flow for the quarter was impacted by the payout of variable compensation for fiscal year 2004 and the second and final payment relative to the customer settlement. During the first quarter, the company spent approximately $4.9 million on property and plant equipment. We significantly increased our assembly and test capacity during the quarter. Depreciation and amortization for the first quarter was 2.2 million. The company did purchase approximately $3.1 million of its common stock in the quarter. And the company has remained under its current buyback authorization approximately $47 million of stock buyback authority.

Accounts receivable, days sales outstanding calculated on a quarterly basis was approximately 33 days for the first quarter. Inventory levels increased in the first quarter to support forecasted ramps in shipments. Days of inventory calculated on a quarterly basis declined to 86 days as of the end of the first quarter. Our guidance for the second quarter is significantly above our operating plan, which should assume normal seasonality for the second quarter. This speaks to the strength of the market, the improved diversity in our business, and the positioning of our products in the segments of the market which are growing rapidly. Based on current projections, it looks like we are on track to significantly outperform the market and deliver exceptional year-on-year growth in fiscal 2005. Thank you for participating in our first quarter fiscal 2005 conference call, and I will now turn the call over to the operator for questions.

Thank you, gentlemen. If anyone would like to ask a question, signal by pressing the star key followed by the digit one. Again that's star one if you would like to ask a question. We'll take as many questions as time permits. The first question comes from David Wu of Wedbush Morgan.

Yes. Congratulations for a very good quarter. I was curious about two things. The first thing is your incremental gross margin is pretty high at 69%. As you go into the seasonally stronger quarters for the -- for your hand held devices, and PC business in the second half, do you anticipate the incremental gross margin to drop from that level, and also when you look at the gross margin, if you already hit 60% by the October quarter, how much more leverage do you have, you know, given your fabulous model, moving beyond that point, assuming top line growth is good and your mix continues to favor the newer products?

Well, David, I will answer the first half. I think if you look at it, most of the new products which we introduced, as we have talked about often, you know, upon introduction typically have gross margins of at least 70%, 65 to 70%. So, you know, based on, as we talked about improving mix and where we anticipate getting growth, you know, I will establish a broad range of incremental gross margin of 60 to 70% as we have talked about in the prior quarter. But, you know the bias, based on what we're seeing on our new products will probably be towards generally the higher end of that range, but, you know, factors on a quarterly basis, you know, can swing that -- swing that a bit.

When your notebook business picks up, which, you know, seasonally October should be a good quarter for PCs in general, should we monitor lower incremental gross margin, since that's your existing legacy business?

It really just depends on the mix of that revenue and I think if you just look at those -- those incremental revenues being in that range of 60 to 70%, I mean, I think within that range those are good assumptions to use and just depends how conservative you want to be.

Can you give us just a general feel about lead times of different products, I guess some are longer than others.

Yes, off obviously different in different markets, David. I think as a whole, you know, looking back a quarter we were saying that probably six to eight weeks was sort of the average we were seeing.

Mm-hmm.

In the past quarter that's probably, you know, the mean of that probably extended a half a week to a week again, I would say.

I see. So the ATE business, I guess that's just a -- just a timing issue, right? I assume that October should be a growth quarter for the ATE business?

Yeah, I mean, you would think so from a demand, you know, capacity demand for things like flash testers and FOC that's going into a lot of these consumer-oriented products that do well in Q3 and Q4, but I must admit, it's hard for me to predict the continuity of that business.

Thank you.

Next we'll take a question from Richard Schafer with CIBC.

Hi, thanks and I will add my congratulations and a good quarter and good guidance. I do have a couple of questions. First is, I guess there have been some rumors out there, maybe some tight supply in notebook power. I don't know if you guys have heard that or seen that. I guess first question is: Is that true and are you guys benefiting in any way from that? And then just overall, kind of what is your expectations are for notebook growth. I guess in the second quarter and in the second half, you guys can kind of quantify that somehow.

Rick, I don't want to go into the specific details but I guess I will share with you that we have heard of similar instances, as well. I think what it is, is just overall capacity with certain suppliers driving shortages and I must say that it's created some positive opportunities for us.

Okay. That's a good answer. Can you talk about your growth expectations for notebook for 2Q second half, is that too granular.

It feels a little premature to tell.

Okay.

I mean clearly we saw the reduction in Q1 as the rest of the industry did and the activity towards the back half of the quarter seemed to definitely be picking up but whether it's the last half of the quarter or the first half of the quarter it's too early to call. But I think it's pretty likely that Q3 is going to be strong.

And then desk top was pretty strong. You know, can you comment on maybe the pricing environment, and maybe more specifically, you know, is the streak you have seen already that related to this coming GRANTFELD launch, or is that going to be felt more in the coming quarter? Or, you know, how much of the launch could to have for you or on you.

Let me remind you it was 8% of the revenue in the quarter.

Right.

I mean this isn't a large impact. I think I said before that I think we've seen the bottom of that business for us. And whether -- I mean, I don't think GRANTSALES is a large driver for us. You know as I said I think we've hit the bottom and we're going to come up a little bit but don't expect this to be 15% of our business.

Okay. Great. Thanks, guys.

Next from William Blair, we'll hear from Jeff Rosenberg.

Hi. First question, I wanted to ask you to make a comment on the utilization levels you are seeing at your major foundry partners and just the broader comment on, you know, wafer availability and that sort of thing.

Yeah. I think things are clearly quite a bit tighter than they were say, six months ago. I think the good news for Semtech is being a pure fabless country. We are a large consumers of wafers and so we have pretty strong relationships with our top foundry partners. And we have contracts in place that assure certain level of capacity. So being really honest, Jeff, I mean we might have some short-term pinches, that you know, you get a quick upside out of somebody and can you respond fast enough? That may be more of an issue of cycle time than overall capacity. I think relative to our overall capacity demands for the year, even with the growth we're seeing we think we're in pretty good shape.

And how about pricing to you and its effect on your gross margins and if you look out a couple of quarters if the trend continues with the steep ramp in demand and the ability to put on capacity.

Yeah so once again we try to build long-term partnerships with these guys. We're not going out looking for spot opportunity wafer pricing. And I think with that -- so, you know, they can expect a commitment out of us but at the same time the commitment we expect out of them is, you know, all of our customers expect price reductions and regardless of the market, you know, at a minimum we expect flat, if not ongoing price reductions and I think I said this before that we saw some as recently as December of last year and so price increases are not an issue for us at this time.

Okay. And just to talk for a minute about the protection and what looks like -- if I do my math quickly -- that you saw real strong -- I'm assuming a lot of the protection growth was weighted towards the communications infrastructure. Is that a share gain situation or just a real strong ramp up that you are seeing in that -- those equipment categories maybe a little color on the strength you are seeing there.

He I think it's a combination of a couple of things. One is just, you know a revival of some of those applications and then number two is, you know, new technology opportunities driving these markets for us. You're right it's clearly driving in the communications space which is a higher gross margin, better opportunity for us.

When you say new technology, you mean in the equipment or in terms of what you are bringing to market in terms of your products?

I would say some of the equipment applications, you know, just, you know he, you've got the combination, like I said, of older products being revived or coming on stronger and some newer products coming out to the market from our end customer base.

But more protection content in these new opportunities?

Absolutely.

Okay. Thank you.

Yep.

Next we'll hear from Steve Smidgey with Raymond James.

Great. Thank you. I wanted to add my congratulations on the quarter as well. I was wondering you could talk about inventory, and there seems to be an inventory blip in the channel. I wonder how much of your revenue growth might be attributable to inventory build versus end market demand, thanks.

Thanks, Steve. We really don't see that. I mean obviously we're monitoring that very closely. I think the biggest proof point that I could give you is when you look at the reaction of any of your customer base, if you miss a shipment by one or two days the demand -- the pressure is unrelenting there. And so both in looking at our distribution inventory, and just interaction with our customer -- our customers we don't feel that's a real factor for us at this point.

Okay. Could you give us some sense of what -- how many weeks of distribution -- of inventory you might have in the distribution channel and where it should be?

Yeah, that's something that we don't really talk about. I mean if I had to guess off the top of my head I would say it's something like three weeks, you know in that kind of ballpark.

Okay. Great. And my last question is: In previous cycles could you talk about, you know maybe inventory tightened up and then there's some build of inventory in the channel and maybe demand slowdown a little bit, did you see any sort of snap back in lead times or would you expect those to shorten or continue to extend.

You are asking that question, saying historically have we seen that effect?

Correct.

Probably a little bit. I think that's fairly classic, that people go without much inventory and sort of overreact and you get a little bit of that. I don't think we've seen any of that at this point, but historically, sure.

Okay. Great. Congratulations again.

Thank you.

Once again I would like to remind our audience it is star one if you would like to ask a question. Next we'll hear from Louis Gerhardy with Morgan Stanley.

Good afternoon, nice job. Just as a follow-up to the last question, didn't you say, Jason, that notebook inventory decreased during the quarter?

Our belief is -- what I was commenting on is in the channel.

Yeah.

Yeah. I mean, you know, you guys probably watched that just as closely as we do, isn't that your perception as well.

Yeah, I would say so. My questions were on research and development and David's comments about a 14% target. I know it's a challenge to hit that goal with revenue growing so fast, but should we be thinking about R&D increasing, you know, half a million a quarter or do you think you will be able to pick up the hiring and sort of catch up to the revenue growth?

Yeah, I mean, realistically, Louis, we're probably not going to get anywhere near, you know, 14% for the balance of this year. Just given the rate of revenue growth. So I'm more stating that as kind of a long-term model.

Yeah. Okay. And then on the human interface device, can you talk about what type of customers -- what type of products are currently going into preproduction now containing your products.

Hey, Louis, I would love to, as I said, they are what I would consider mainstream consumer applications, unfortunately they are just not at the point where we're publicly disclosing them. But all I can say is sort of mainstream consumer applications, and they're the kind that if I gave you any more clues than that, you would probably figure it out.

Okay. When you look at the ramp of this business, is it being driven more by Microbuddy or is it more the pointing stick or other products? Can you give me a sense of that?

Yeah. It -- it feels like both, to be honest. I don't think I could call one a clear leader at this point.

Okay. So they both look good then.

Yep.

Okay. Great job. Thanks a lot.

Thank you, Louis.

Next we'll take a question from Sumit Dhanda of Banc of America Securities.

Hi, guys. Great job on the quarter. I just had one quick question. On the balance sheet, the deferred revenue increase was fairly significant. Was that mainly a bit of a build in terms of shipments or distributors or how should we interpret that.

Yeah, I mean that was primarily some of the markets where we have to defer revenue because of the return rights. Because of some higher projected demand in those markets in the second quarter in advance of that, they did build up a little bit of inventory because of the expected higher demand.

Okay. Great. Thank you.

Next we'll hear from William Conroy with Sanders Morris.

Good afternoon. A couple of questions. First on the desktop business, can you give us a little bit more detail on what you saw, I guess in the April quarter and specifically any trends in pricing or is it some of these other applications outside of the desktop, server -- like I say what drove the business in the quarter?

Yeah, you know, I don't know that anything was a significant driver for us, once again at 8% of revenue, but probably the most significant thing we saw in Q1 was the whole Prescott TEHAS thing, which the way we look at that, what that means is the life of Prescott is going to be a little bit longer. There will probably be, you know, greater unit volume there but to be honest, a little more pricing pressure because it will be in the socket that much longer and then at the same time, the VRD-11 spec which would be the follow on power spec, our sense is that we'll probably get pulled in a little bit, which could be a good thing for us I think from a power point of view. As far as pricing, it feels to me like it is roughly stabilized in this area over the last quarter. So -- and I think we said that the quarter before, so our sense is maybe for two quarters in a row, it's actually stabilized somewhat.

And I may have missed this and I apologize, David, I didn't catch your comments on incremental gross margin with and without the written off -- the sales of the written off inventory. Can you just give those numbers again? And can you tell us what you put up in reserve in the quarter or whether it was greater or less than what you sold as the written off inventory ?

The incremental gross margin was 66%. And then backing out the impact of the previously written off inventory, it was 69%. And the incremental reserves that we would have booked in the quarter -- which we typically just view that as kind of normal operations and that's why I wouldn't even highlight it in, you know, in my comments but that amount was -- was higher than the 292,000 of previously written off inventory.

Great. Thank you very much.

And I would like to give our audience one final reminder, that is star one if you would like to ask a question. Our next question comes will come from Ross Seymore with Deutsche Bank.

Congratulations on a strong quarter it looks like the revenue guidance is the same as last quarter and the gross margin is the same even though you guys had a nicer incremental improvement going up the 80 basis points instead of the the 20 do 30. Is there anything we should read into that?

Well, I -- I think as I commented in my prepared remarks, we're, you know, being pretty conservative on the assumptions for the amount of -- once again I hate to talk about it too much but the previously written off inventory. I have a very low assumption into our forecast in terms of the amount of that that we'll sell during this coming quarter. So, you know, ignoring that factor the incremental gross margin baked into my forecast is still up in the 65 to 70% range.

Got you. And then you talked a little bit about on the R&D side of things some longer-term targets and the difficulties in reaching those because of hiring people. Do you have any sort of target term target on the SG&A side for us to think about?

You know, I think as you look at it longer term, you know we can still get quite a bit of leverage from here, and, you know, I think attaining something like 14% of revenue, you know, as a combined is probably not too irrational. And, you know, potentially we can move it lower but I wouldn't want to put anything out there much lower than that 14% and then if we would happen to exceed that some day in the future that would, you know -- that would be -- that would be good, but 14% kind of is a very long-term target.

Gotcha, then the last question with demand being a little bit stronger than we had expected, are you guys planning to build any inventory quarter over quarter as you enter into the seasonally stronger period for both notebooks and handsets?

Sure. I mean, if you look, you know, historically Q3 and Q4 are pretty strong end markets for many of our products and I think we need to be prepared for that. So you will most likely see us doing exactly as said.

Great. Thank you.

Thank you.

And our next question will come from Joe Osha with Merrill Lynch.

Hi, this is Sidney in for Joe. Looking at the notebook end mark and your revenue decline in Q1, it seemed like your Inventory is now at normal levels. Is it safe to say you see normal seasonality in Q2 and going forward?

I think that would be my best guest at this point.

Great. And then looking at your orders and design wins how is that split between like the IMVP and the [INAUDIBLE].

Oh, boy, I haven't broken it out that way. I think I would just be guessing if I gave you anything. Clearly we are seeing IMVP 6 activity right now but what percentage is which I couldn't tell you at in the point.

I guess a follow-up with that is that can we infer from your orders or design wins how quickly it will ramp? As I recall it went back to October, November time frame. And what are your thoughts right now.

I mean so we're looking at that being a calendar Q4, you know, fiscal Q3 effect. And, you know, starting there and then converting over at some rate Officer -- over the next, three, four, five quarters. Until the old platform goes down and the new one ramps up.

Thank you.

And gentlemen, there appear to be no further questions. I will hand the conference back to you for any closing comments you might have.

We would like to thank everybody for participating in the first quarter conference call and look forward to talking to you next quarter.

That concludes our conference. We thank you for participating in our conference. You may now disconnect.

Thanks.