Semtech Corp (SMTC) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Semtech Corporation fiscal year 2005 second 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 gentleman, and welcome to our second quarter conference call for fiscal 2005. As the operator indicated I'm John Baumann, I'm the Treasurer of the Company and handle Investor Relations as well. We have just released the results for our second quarter that ended July 25, 2004. In a moment here, Jason Carlson, our President and Chief Executive Officer, and David Franz, our CFO will be discussing those results with you and answering any questions you have. I would like to remind everyone that Semtech reports results based on generally accepted accounting principles, commonly referred to as GAAP.

Before I turn the call over to Jason for his opening comments, I want to remind everyone of the following 2 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 enable 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 and computers, and 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 assemblies subcontractors; risks associated with the businesses of major customers, and other risk factors. Please refer to the section of our earnings release and the Company's most recent form 10-K and 10-Qs as filed with the Securities and Exchange Commission for further information.

Although a replay of this call is available via Thomson Financial's website or the Investor Relations section of our Semtech's website, the Company undertakes no obligation to update or revise forward-looking statements to reflect subsequent events or change assumptions or circumstances. Any written transcript of the call that maybe posted or published is unauthorized by the Company, as is any rebroadcast outside of the one available at Thomson Financial's website or the Investor Relations section of Semtech's website. I now turn the call over to Jason Carlson, Semtech's President and Chief Executive Officer.

Thanks, John. Good afternoon, everyone. I am pleased to have this opportunity today to discuss with you our FY '05 Q2 results, as well as our outlook for Q3. With all the uncertainty around the semiconductor market and overhanging macro issues, I am proud to say that Semtech is continuing to deliver record company results. These results were reported in our Press Release that was issued in the past half hour, and David Franz and I will review those results with you. First, let's review the financial highlights for the quarter. Revenue increased sequentially 10% to 68.3 million, achieving the top-end of our guidance of 7 to 10%. This represents the third consecutive quarter of double-digit sequential growth, as well as 53% year-over-year growth. Gross margin again improved to 59.8%, marking a new high for the Company. Operating margin was 31%, and net income represented a 25.5% after-tax return. Earnings per diluted share were 22 cents, ahead of our previous guidance of 21 cents. Operating cash flow was a positive 21.4 million, and we spent 13 million to buy 619,000 shares under our buyback program. David will review our financial performance in more detail following my comments.

New orders exceeded shipments resulting in a book-to-bill of greater than 1 during the quarter. With new orders being approximately flat compared to the previous quarter and up 52% for the same period in the prior year. This will again position us with a low 30ish [sic] percentage requirement for Q3 in line with our expectations. While there has been many industry discussions around order patterns and cancellations during the quarter, our order rates were roughly linear, and we did not experience an increase in cancellations. The rate of order growth slowed almost as would be expected after 3 quarters of double-digit increases, and distributors finally achieved in their desired stocking levels. The second quarter again saw a good level of design activity. The Company reported more than 550 new design wins for a total of more than $80 million. That is equivalent in total dollars to the previous quarter, but up in total dollars per design win. If we look at total dollars by product line, portable Power Management products led the way, followed by Protection products, and if we were to look at total dollars by region, Taiwan led the way, followed by North America and Korea. Now, turning to a review of the business by market segment.

Orders for our notebook business started the quarter softer as Q1 inventories were worked-down, and orders strengthened later in the second quarter. These [inaudible] for notebook Power Management were $16 million, driven by wins from a broadening customer-base in Japan and Taiwan, as well as System Controller wins at multiple customers. [Design wins] for wireless products were $34 million. The trend towards more feature-rich phones is ongoing, and increased unit volume, as well as content per phone, continues to create significant opportunities for Semtech. We continue to broaden our product offering for Power Management with products for charging, backlighting, camera flash, and switchers for processor power. Our Protection products are used in cell phones to protect or filter sim cards, color displays, USB ports, key pads, and microphone and speaker ports. Also our HID products are beginning to see increased design activity in high-end smart-phone applications. The Protection product group saw a slight decrease in orders during the quarter. I believe this was due to distributors who increased demand to achieve adequate stocking levels in Q1, then slowed as they reached those goals in Q2. Demand for products in handset, flat panel displays, and networking equipment were strong during the quarter. The move towards digital content in all types of products is increasing and the demand for DVI and HDMI ports in lap tops, and set-top box, and flat panel TVs is growing, and Semtech has the best product offering in the market for protecting these applications.

The Automated Test Equipment Group saw orders drop about 500,000 in the quarter and orders were below shipments. At this point we think the test market is taking a mid-cycle pause after several quarters of heated growth. Specific to Semtech, we are seeing increased design activity from a broader base of new customers, and several of them are located throughout Asia. Fortunately, we have continued to diversify our customer-base in this market and reduce the percentage of overall sales ATE represents to the combined company therefore, minimizing the impact of [centricallities] [inaudible] in the ATE markets. Those factors combined with the ongoing release of the new family of industry-leading products will continue to make ATE a very profitable, yet manageable-sized business. Desk top products saw orders increase slightly in the quarter with a slower than expected ramp of PCI Express. We have seen some growth in graphics and expect to see more throughout the year as PCI Express gains momentum. We have continued to focus resources in this group on the volume server market, peripherals, and even gaming, and have recorded design wins with major OEMs. Now, I'll move on to our emerging markets of SETS, HID, networking, and Industrial Power Management.

Our SETS products once again saw significant increases in orders with 31% sequential growth. Let me remind you that this only represents about 3% of our business today. However, the long-term importance of this business is significant. These products are delivering and enabling industry-leading performance in a variety of applications throughout the communications industry. The growth so far this year has been driven by the fact that we entered the year with 3 customers releasing products to the market. In the second quarter, we added a fourth to that list, as Cisco released their CRS-1. This is the largest router Cisco has ever built and it has achieved stratum-3 performance. Our SETS products are used for both master and slave synchronization circuits, as well as line card clock protection on every line card. We began working on this program 2 1/2 years ago with Cisco, and we are proud to be a part of this industry-leading platform. I expect that we will continue to see 1 or 2 programs per quarter come to market utilizing Semtech's SET technology based on the design wins we have claimed over the past several years.

Our HID, or human input devices group also saw another quarter of increased orders, growing 12% sequentially. Like SETS, this group only represents about 3% of revenues. As I mentioned earlier, we are seeing increased interest in these products for handsets, and we are increasing shipments into notebooks and touch-screen applications. Within our HID group is our MicroBuddy product line which has a wide applicability across many micro controller-based products. I am pleased to announce that after changing our focus to large vertical markets we are now shipping MicroBuddy into our first major consumer electronics product. Yesterday we announced in the Press Release that MicroBuddy is designed in and shipping into next-generation digital video recorders for TiVo. TiVo, being a pioneer in the DVR space, has been a great customer to partner with and we look forward to supporting the rapidly growing DVR market with them. Networking and Industrial Power Management, which also represents about 3% of our business, saw orders decline somewhat in the in quarter. The best indicator of the momentum in this emerging product line though is the fact that design wins were again over $5 million in the quarter. We sampled 6 new products in the quarter and achieved new design wins in set-top box, network printers, as well as a reference design for VDSL.

Now, I would like to comment on some market dynamics that I know are top of mind with many of you. First, let's talk about handset inventory in China. There has been some build of products for local consumption not unlike what we saw last summer. However, one difference we see is even in China, the move to feature-rich phones is growing rapidly, and it seems that local manufacturers are struggling to compete with the larger multi-national companies. So while inventory is burned-off it may be worse for the local companies in the coming quarters. I would like to remind everyone that our present sales into China represent a relatively small piece of our overall sales. We still believe worldwide second-half numbers will increase from the first half of the year. Second, notebook growth. As you may recall, we did not forecast much of an uptick for Q2. But in the end, we did see more growth than expected. This growth came more from the expansion of our customer-base than from increased market demand. Today, I am not seeing what I would call a significant back-to-school affect, but I do still believe that we will see an increase in the second half over the first half that may begin late September and carry through the Chinese New Year.

Third, inventories. As I stated earlier, the distribution portion of the food chain had been working to build their inventories over the last several quarters. Many of these distributors appear to have been caught offguard by the timing and strength of the initial recovery and demand late last year and into the first half of this year. In the end, distributors finally seem to have reached their desired stocking levels during the second quarter. And looking at the OEMs and ODMs, I don't believe they have any meaningful amount of excess inventories, and the key in all of these cases is the end-markets that consume these products all seems to remain healthy. Specific to Semtech's internal inventory, we had been very vocal in the last 6 months about our goal to build some added inventory going into the second half of the year. Particularly with respect to our portable Power Management products, as well as our Protection products. We desired this for 2 reasons. First, many of these strategic products were at historical low-levels in the channel, and second, we wanted to have buffer inventories in certain products to be able to capitalize on the expected seasonality that normally occurs during the second half of the year.

Now on to our outlook for Q3. Q2 represented the third quarter in a row of double-digit sequential growth and we expect revenues to be up again in Q3. In consideration of the significant growth we have already achieved this year, and the general uncertainties in the markets, we are guiding revenues to be up 3 to 5% sequentially. With this guidance, we are again estimating a 32% turns rate for the quarter. Given present market conditions we think this turns rate is appropriate. In summary, we achieved record financial performance on every metric this quarter with the exception of total revenue, and with the guidance given today we expect to achieve record revenues this quarter. We have continued to strengthen our business by offering a broader product portfolio, as well as end-market diversification. This has resulted in our ability to deliver continued growth despite individual market dynamics, and as long as we keep executing to our plan, we will continue to grow even with individual market fluctuations. At 1% market share of the total analog mixed signal market, we are not limited by market growth, but instead by our own execution.

Our focus on high-performance proprietary products across diverse end-markets is what's fueling this growth, and our combination of revenue and margin growth has resulted in nearly a 140% increase in operating profit compared to Q2 of FY '04. While there is a tone of uncertainty in the market I am certain of one thing, the high-performance analog mixed-signal model delivers superior financial results, and our performance over the past year shows that Semtech is one of the best in this category. That combined with our seemingly unlimited growth potential in this large and growing market will create significant upside potential at Semtech for years to come. This concludes my remarks, and I will now turn the call over to David.

Thank you, Jason. Good afternoon, ladies and gentlemen. The second quarter was a very good quarter for the Semtech Corporation. We have now grown revenues in the last 3 quarters at the sequential rates of 10%, 12%, and 15%. Our operating performance exceeded our earnings forecast. Our book-to-bill was positive for the 5th consecutive quarter. Our operating margin expanded to approximately 31% which is approaching an all-time high for Semtech. During the quarter, we further increased our manufacturing capacity and added another design and engineering location. As we look at the income statement, revenues for the second quarter of fiscal 2005 were 68.3 million. This was an increase of 10.4% compared to revenues of 61.9 million for the first quarter of this year. Revenues increased 53% compared to the second quarter of last year. Gross margins for the second quarter of fiscal 2005 were a record 59.8%. Gross margin percentage improved by approximately 40 basis points in comparison to the first quarter, this was ahead of our forecast of 20 to 30 basis points. Gross margins for the prior year second quarter were 57.3%.

Earnings for the quarter exceeded our forecast. Net income for the second quarter of fiscal 2005 was 17.4 million, or 22 cents per diluted share. This compares to our previous forecast of 21 cents per diluted share. This represented an 18% sequential increase in net income, and a 3 cents per diluted share increase in earnings as compared to the first quarter. On a year-over-year basis, quarterly net income increased by 622%. The prior year second quarter included costs for early retirement of convertible subordinated debentures. As I previously mentioned, revenues for the second quarter increased by 10% sequentially from the first quarter. Our management revenues increased by approximately 16% during the quarter. This increase was due to strong growth of shipments into the notebook, industrial, handset, and communications markets. Protection revenues increased by approximately 4% during the quarter. This was due to improvement in sales into the communications end-market, and a high-level of continuing design wins for this product line over the last several years.

Revenues from the test and measurement unit declined by 5%. Revenues from our advanced communication business, principally our SETS product line, increased sequentially by 29% in the second quarter with further increases forecasted for the back half of the year. Revenues from Semtech's HID, or Human Input Devices product line increased sequentially by 60% in the quarter. The Company's industrial and Networking Power Management Business and our Legacy Businesses also increased during the quarter. Revenues for the second quarter were derived from the following geographic regions; 29% from customers located in North America; 8% from customers in Europe; and 63% from customers in Asia. That turns orders accounted for 30% of shipments in the second quarter, this compares to 33%, 39%, and 53% in the previous 3 quarters. Revenues by end-market changed somewhat with the most significant growth coming from the industrial, communications, notebook, and handset markets.

Revenues from cell phone handsets and base stations accounted for 32% of revenue. The growth in handset was driven by strong unit volumes, particularly at several of our Korean customers. Desktop computers and servers accounted for 8% of revenue, notebook computers and PDAs accounted for 20% of revenue, test equipment accounted for approximately 12% of revenue, communications infrastructure accounted for 15% of revenue, and general industrial and military accounted for 9%. Graphics, gaming systems, and other accounted for 4% of revenue. Revenues from OEM sales represented 51% of total revenues for the second quarter, while distribution represented 49% of total revenues. As Jason discussed, we are forecasting that revenue will increase between 3 to 5% over the third quarter of fiscal 2005, this will translate into year-over-year quarterly growth of approximately 48%. To attain the third quarter's forecast net turns orders of 32% of revenue are required. Forecasted turns rate is still low, compared to historical levels of turns. Consistent with our fiscal calendar there are 14 weeks in the third quarter.

Gross margin for the second quarter of fiscal 2005 improved to a record 59.8%. Gross margins were favorably impacted by contributions from new proprietary products, improved manufacturing yields, and costs. Gross margins for the second quarter were also impacted by the sale of $79,000 of previously written-off inventory. The Company's incremental gross margin in the quarter was approximately 63%. Excluding the lower sales of previously written-off inventory, the incremental gross margin was approximately 67%. On a year-over-year basis, quarterly gross margins increased by 250 basis points. Gross margins are moving towards our near-term goal of 60%. One of the expected drivers of this margin growth has been and is the emerging product lines of Semtech, which have gross margins which exceed the corporate average, some by a substantial amount. For the third quarter we are forecasting that gross margins will improve by approximately 10 to 20 basis points compared to the second quarter. Research and development expenses were 8.4 million for the quarter, which was up from the prior quarter, and in line with our forecast. We are forecasting that R&D spending for the third quarter will increase by approximately 300,000 compared to the second quarter. We are adding R&D resources and Power Management Protection and Advanced Communications, while our long-term model for R&D is 14%, in the short-term we will be below this target. During the quarter, the Company hired a Senior Design Executive will who head a new design center plan for Swindon, England. Expenditures from this design center will ramp gradually over time in line with our overall business model and 3-year plan.

SG&A expenses increased by approximately $1 million during the quarter. This was higher than forecasted, due to a number of different factors, including increased expenditures for commissions, advertising, 404 compliance, performance-based compensation, and lease termination costs. For the third quarter, SG&A is forecasted to be up approximately 300- to 400,000, in comparison to the second quarter levels. Interest and other income was approximately 1.3 million for the second quarter. For the third quarter we are forecasting interest and other income for approximately 1.3 million. The Company's effective tax rate for the second quarter was approximately 22%. The rate was lower in the second quarter due to the recognition of a permanent adjustment related to currency translation which significantly reduced taxable income for our Swiss subsidiary. The Company is projecting that its effective tax rate for the third and fourth quarter will be 24% based upon the current revenue and earnings forecast. 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 declined by approximately 150,000 shares during the quarter to 78.66 million. The share count is forecasted to decrease by approximately 750,000 shares in the coming quarter due to share buybacks and based upon stock price assumptions. Such forecast can vary based on the average stock price for the quarter. Based upon this guidance operating income is forecasted to increase at a rate, which is slightly faster than the revenue during the quarter, diluted earnings per share for the third quarter are forecasted to increase to 23 cents per diluted share.

Turning to the balance sheet. Semtech ended the quarter with approximately 283 million of cash and investments on the balance sheet, we have no long-term debt. Operating cash flow for the quarter was a positive 21.4 million. During the second quarter, the Company spent approximately 6.4 million on property, plant, and equipment. Depreciation and amortization for the second quarter was approximately 2.5 million. The Company purchased approximately 13 million or 619,000 shares of its common stock in the quarter. After the end of the second quarter the Company had remaining under its current buyback authorization approximately 34 million of stock buyback authority. Accounts receivables. Day sales outstanding calculated on a quarterly basis remained at an outstanding 33 days for the second quarter. Inventory levels increased in the second quarter and as Jason discussed, a support forecasted ramps and shipments. Days of inventory calculated on a quarterly basis thus, increased to 97 days as of the end of the second quarter, and while the inventory growth in the quarter was significant, it was very specific and strategic in nature. $2.9 million of the inventory growth that was in our Protection products where we were able to achieve targeted inventory levels by many of these products. This will support future growth and allow us to better respond to short-term orders, which are common in this business. The balance of the growth was primarily in our Portable Power Business unit which has been growing at rates in excess of 80% year-on-year. The inventory built was to support forecasted growth for the back half of the year.

Our guidance for the third quarter is again above our operating plan. The growth forecasted for the third quarter is on top of sequential growth of 10%, 12%, and 15% in the prior 3 quarters. The ability to forecast growth in the third quarter in the face of some inventory build in the handset channel, particularly in China, as well as what appears to be a modest back-to-school season, speaks to the improved diversity in our business, and the positioning of our products into segments of the market which are growing. Based on current projections, it looks like we will significantly outperform the market and deliver exceptional year-on-year growth in fiscal 2005. Thank you for participating in our second quarter of fiscal 2005 conference call, and I'll now turn the call over to the operator for questions.

And today's question-and-answer will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll go to our first question today. We'll go to David Wu with Wedbush Morgan Securities.

Yes. Good afternoon, a very good quarter. I was curious about 2 things. Number one, the fact that you have a 14-week quarter as opposed to 13 weeks, what does that -- on a run rate basis, with only 3 to 5% sequential growth on the revenue guidance, what you're really telling us is that the revenue per week is going down. Is that based on weak distributor orders, or any cancellations that have recently come in, or how do you reconcile that with a 3 to 5% growth forecast? And on the distribution side, have you seen any backlog adjustment from your distributors as you exit your second quarter, and enter the third quarter?

David, this is David, I'll take the first part of that question. You know, per our fiscal calendar, our quarters end the last Sunday of April and July, October, and January, and so this 14-week quarter happens about once every 6 or 7 years, and historically, we look upon it as just a normal quarter. I know our sales and manufacturing personnel do, and really the main differential to us is that we have an extra week of expenses. And then on the question on distributor backlog adjustment?

Yeah, what I would say there, David, is that while we've seen some increase in their inventory levels, at the same time we've seen healthy increases in the POS. And so once again, as we said earlier, they came off some pretty low historical inventory levels, and we feel pretty good about where they're at today.

So I should think that the third quarter we should see both distributors and OEM business go up on both channels?

Yeah, I would say so.

Okay. Thank you.

Our next question today we will go to Ross Seymore with Deutsche Bank.

Hi, guys, just one follow-up to the prior question. On the revenue side of things with the 14-week quarter, does that mean that looking into the January quarter there won't be any sort of impact to guidance there, as far as a tougher comp?

No, I think like David said is, we just look at it as a normal quarter, we don't really look at it as a weekly run-rate type of thing.

Okay. Then what did lead times do in the quarter?

They probably came in a little bit.

Okay. And as you talk to your customers, it appears with your bookings being flat quarter-over-quarter, and the turns being about flat, but your guidance being more conservative than last quarter, is that sort of changed just because of what you're seeing in the end-market, or did backlog pull back? Just a little more color on that would be helpful, please.

Yeah, I think the order patterns are a little bit different, where we're kind of seeing a combination now of shorter lead time orders, and then maybe a little bit longer than average lead time orders, with kind of a gap in the middle. It almost, you know, to us kind of points towards are we going to see those longer lead time ones getting pulled in as we get in here, a little further into the quarter.

Gotcha. And then one last quick one. Inventories. Do you expect them to rise again in this quarter?

We do not.

Great. Thank you.

Our next question will from Rick Schafer with CIBC.

Hi. Thanks, guys. I've got a couple of questions. First of all, I was a little surprised I guess by the strength of your 3Q guidance, given what seems to be a slower start to notebook. I'm just curious where the confidence -- just drilling in a little bit more just kind of seeing where the confidence is coming from. Is it -- I mean I know SETS and HID were stronger, but they're pretty small still. I mean is it notebooks? Have they really begun to rebound that much in the last couple of weeks, or is it more functional of wireless being that much stronger? Is there just a little more color we can get there?

Yeah, I think it's really the broad-base, Rick. I mean if you look at each one of our emerging groups are doing pretty well. The wireless we've done well in, in spite of what's going on with China, which is probably reflective of the fact that a lot of our end-customers aren't in China there. And notebook, even though as I said earlier, we haven't really seen a back-to-school effect, we have seen an effect of a broader customer-base and broader sockets that we're addressing.

So you see notebook, is it fair to say in the last couple of weeks notebook has gotten better, or has it just been more linear? I guess.

I would say slightly better, just slightly. I mean, like I said, it's not what we would call a normal back-to-school effect, but it has improved a little bit, yes.

Okay. And then on the wireless side, just -- I know you mentioned that you have a small exposure to China there. I mean can you ballpark it? Is it more than 10%, more than 20% kind of ballpark -- the wireless exposure you have there to China, and then within your wireless business. And then have you seen specifically any cancellations or any change in the lead times or cancellations or anything there?

Yeah, so China would definitely be sub-10%, more accurate than that I can't give it to you off the top of my head today.

Okay.

And then as far as cancellations, I wouldn't say that we have seen anything more than the normal rate that we were seeing the first half of the year. You might have the odd one here or there.

Is sub-10% over all sales, or sub-10% of your wireless business?

Sub-10%overall.

Okay. And then one last question just on the semi-test business, you were talking about longer lead times I think with last -- with Ross' question. I guess I'm just curious. Has there been any change in the lead times in that business, or any increase in cancellations there? I mean is that kind of what you were alluding to when you were talking about longer lead times kind of maybe coming in?

Uh, not really. I mean in that business, as I have said before, the order pattern tends to be a little lumpier, and so from a quarter-to-quarter point of view it's kind of hard to have a nice smooth curve there. As I mentioned, I mean just on average there seems to be this effect of, you know, request for really short lead time, and then slightly longer lead time with a little bit of pull-ins coming off that stuff.

Okay. All right. Thanks a lot, guys.

Thanks, Rick.

Your next question comes from Jeff Rosenberg with William Blair & Company.

Hi. First, if I'm looking quickly right at this, it seems like the strongest portion of the business was the notebook PDA, because it went up as a percentage of sales. Is that already at the benefits of the broadening that you talked about, and is that broadening more a function of more customers, or is it more content per device and those sorts of things?

Yeah, so I agree with your assumption. I mean it's growing faster than the rest of the Company last quarter. And I really think to answer your second question, it's really both, in that we've broadened our customer-base, and as I've talked about system controller in the past, that's a socket that's starting to get some revenue for us. So it's really a combination of customer-base and overall product offering.

Okay. So -- and should we expect that to also be in effect, growing faster than guidance in the upcoming quarter because of these things continuing?

Yeah, assuming that we get, I would say, a good seasonal sect in notebook in the second half of the year, which I believe we will, yes.

And Protection, are you expecting that to grow at all this quarter, or what -- how should we think about what is happening in that segment?

Yeah, probably at the rate of guidance.

Okay. So despite the softer bookings, you feel okay about the trends there, and I would imagine there you have got the most exposure to inventory and phones and things like that, but you still feel like you can grow that?

Yeah. I mean that business definitely has a component of extremely short lead time orderings sometimes.

Okay. So this is just adjusting to the breaking of lead times?

Right.

Okay. And then last question I had, as you grow a little bit more slowly, it seems like the relative importance of things like HID and SETS increases. I mean, are those segments growing 30% a quarter again? And if so, I would think that maybe each one alone would add maybe a percent sequentially to the overall total. Am I thinking about that right? I mean, they would give you a good chunk of your expected growth just from those smaller segments if they're growing that fast?

Yeah, I would say that's generally possible. I mean, I think you're probably thinking about that right.

Okay. So we can expect another given the bookings growth you talked about, we can expect another sort of 30% tech growth out of each of those -- those 3% segments?

Yeah, I would maybe down to 20, but I mean definitely well above the corporate average growth. Right?

Right. Thanks.

Okay, Jeff.

And we'll go next to Louis Gerhardy with Morgan Stanley.

Good afternoon. Jason, just on the systems controller, I know it's a small number, but can you just give us a sense of what you think your market share is there now? And do you have some goals you can share with us, what you would like it to be in a year?

Boy, I can't give you a number off the top of my head, Louis. I would tell you, in what's actually shipped so far, it's a very small percentage, and so we're coming off a base of almost zero here. As far as looking out a year, you know, probably something in the 20 to 30 type percentage share is what I would be targeting.

But it sounds like less than 10% today then?

Oh, definitely.

Yeah.

In what has shipped so far.

Yeah. Okay. And then just in terms of some of the new HID programs that are going to come on-line here, especially in the handset area and PDAs, but also notebooks. Is there a way to just give us a sense maybe for the next 6 months of what you see starting to ramp, and the type of programs they're in, whether it's a consumer, or it's an industrial? Just trying to get a sense of the potential magnitude of the ramps here.

Yeah, I mean, on the consumer, obviously we mentioned the TiVo platform, and based on historicals, I think we'll probably see some good end-of-year growth with TiVo. In the notebook, we've been having some success with some of the customers in the touch pads there. I think we're going to see above corporate average growth for that business, but not any type of doubling over the next quarter or two type of growth. Some of the higher end handset or PDAs, while we're getting good traction, I think the volume in those products at this point in time are still pretty small.

Okay. Is the touch pad or the pointing stick more of an opportunity? Which one is more significant for you?

Well, the combination is really the best opportunity for us, you know, of the touch pad or pointing stick, or touch pad pointing stick combo. And so we're continuing to work that, but we've probably had better traction with the individual ones, as far as shipping in the products lately.

Okay. And then just last question, just on what I would call your traditional distribution business, that would be mostly North American and European. I know you said 49% of your total business is distribution, but if you just look at that definition of traditional, North American and European, what percent of your total business would that be?

Probably 30, 35%.

30 to 35?

Yeah.

Okay.

I mean because as you know, most of the Asian distribution business is really for a specific, large OEM/ODM type relationships.

Yeah. Okay. Well, thank you.

Okay.

We'll go next to Sumit Dhanda with Banc of America Securities.

Good afternoon, guys. I wanted to know if you could give us a number that you typically give out on the calls, what percentage of turns are remaining for you to make in sort of the mid-point of your guidance at this point?

If you look at it really as of probably last Friday, as of today, we, over the next 9 to 10 weeks needed about 10 million in turns.

Okay.

Um --

Kind of in line with Jason's comment, we are seeing more short-term orders than we have been in the past. So our orders are tracking definitely to hit that number right now.

Okay. And then you talked a little bit about the inventory issue in the China handset market. Any slow down at all in your Korean customer-base that is of significance here yet, or do you expect a normal seasonal bills from the component perspective in that market?

Yeah, I think, looking back at the year that's a business that Q2 would typically be a little bit slower time. And we saw quite a bit of strength in that business in the beginning of Q2, maybe softening a little bit in the end of Q2, and probably being a little softer from as heated as it was at the peak of the springtime. I think we'll still see some increases again in that business throughout the remainder of the year. Does that answer your question, Sumit?

Yes, it does. So if I was just to put you on the spot here. If you were to be more bullish about one business versus the other, your handset versus your notebook business, and make your best assumptions on seasonality, where would you be more bullishly going forward?

Through the remainder of the year kind of question?

Yes, through the remainder of the year. Yes.

Probably notebook.

Okay. That's all. Thank you.

Our next question today comes from Steve Smigie with Raymond James.

Great. Thank you. I was hoping you might be able to comment a little bit on what you're seeing on the competitive front for SETS and HID. Is there anything happening there that might threaten the growth rates that you guys have been experiencing, both on orders and in sales?

Well, on HID, clearly there is incumbents there that have a larger position than us. So we're coming from the smaller base there. I think the competition is the guys who have been the incumbents, and that really hasn't changed. We haven't necessarily seen any new entrance. On the SETS, I think it's sort of the normal cast of clocker timing related guys, but quite frankly, these products are really sort of unprecedented in that space, and that really hasn't been an issue for us. We're really seeing SETS gain more and more traction with the customers.

Okay. And on the ATE product, can you talk a little bit about any thoughts that a few months down the road that you might see further strength there? Is it just lumpiness right now in terms of the orders and revenue growth?

I mean, that's always, I would say the hardest business for us to predict probably because of that lumpiness. I -- it may be possible. I'm not real bullish on it. I think we're seeing some changes in the end-market there -- that's a market where we've seen some new entrance throughout Asia over the course of the last year, and it's going to be interesting to see how that plays out.

Okay. Last question. Just any thoughts on calendar 2005 type of growth rates? Thanks.

Well, my personal opinion is that everyone I talk to, overall units is going to be up, analog attached to digital, there's no reason why it should decrease, and so as long as we keep executing to our plan, I think we should be above market growth. As far as giving you an actual percentage at this point, I really don't know in this climate that I'm comfortable doing that, but I feel pretty bullish about our ability to grow the business next year.

Okay. Great. Thank you very much.

We'll go next to William Conroy with Sanders Morris.

Good afternoon. First, a quick one, I think, for David. David, can you give us any sense of what you anticipate built into the guidance is coming from the sales of written-off inventory?

Very minimal amount, if anything, for the current quarter.

Are we kind of winding that down given the level that we just saw in July?

Correct.

Okay. Secondly, Jason, can you give us a little bit more detail on the competitive situation within the notebook business?

Well, it's probably pretty similar to what I've said before. It's prior to Semtech getting into this business, I think Maxim was clearly the incumbent, and Semtech's got a pretty decent share today. We've seen a lot of activity and interest from many other players being Intersil, Fairchild, on sort of that group. But to be quite honest, it's more just fearing about that I think at the end of the day, the main guy we're competing with against those sockets is Maxim.

Great. And can you give us a sense of foundry availability and pricing?

Foundry availability has definitely improved today from what it was 3 years or 6 months ago, I would say without a doubt. And pricing, I mean as I've stated before, both in the tight times and the lean times, we really try to manage long-term relationships with these guys. And so we're just constantly working towards a model that helps us achieve our cost reduction goals that our customers are looking for from us year-in and year-out.

Great. Thank you very much.

And our next question today comes from Jack Romaine with SG Cowen.

Could you guys give us a little bit more insight into your cancellation policy? For instance, when you're talking Maxim, they have a very strict policy, whereas a few of the other companies like Texas Instruments, National Semiconductor are a little more lenient in allowing customers to cancel. Can you talk about how you fit into that spectrum?

I don't think we have an iron-clad policy. I think generally within 15 days of when we're going to ship something that's pretty much in our contract negotiations going to be kind of a "no change," somewhere between 15 and 30 days. But clearly we don't want to put inventory out there that's not going to be consumed. So we tend probably to work with customers, I would say, a little bit more than the couple of examples that you cited in terms of maybe Linear and Maxim's policy.

Okay. And could you give us any kind of idea in the percentage increase in dollar content in some of the new notebook and handset models that we're seeing this year? Specifically that you guys address?

Well, I mean, a system controller socket is generally around a dollar these days. The HID socket, you know, depending on if it's a combined -- if it's a touch pad and pointing stick, would be several dollars for us. And half of that, or 60% of that, if it's just one of those. And I guess, also as notebooks are moving to having DVI ports, we'll have some increased opportunities there with protection that are once again sockets below a dollar.

Okay. And finally, longer term looking at your gross margin, can you talk about an updated model?

Well, I think our -- as you can probably see from guidance, we're just right about on the 60% level based on guidance. You know, kind of going forward, we really haven't talked about anything much north of 60%. It really depends on our relative success in some of these high-gross margin areas like SETS, and our ability next year to ramp our Networking and Industrial Power Management product line. And certain parts of our HID product line to see how much above the 60% level we can get.

Okay. Thank you very much.

We'll go now to Carl Richter with FAC Capital.

Hi. I hope you can help me with, I guess, a quick question around the book-to-bill math. I think you guys had said that total new orders were flat sequentially, and you've reported sales up 10% sequentially, so what am I missing, I guess, between those 2 numbers, and how you get to a book-to-bill above 1?

Well, last quarter, we had an enormous -- I can't remember the exact ratio, but an extremely positive book-to-bill. What was it? 1.14, something like that; 1.15. So, 1.14, 1.15; something like that. So, in other words, we booked more than 70 million last quarter. We booked more than 70 million -- 71 million, 72 million this quarter, as well, so -- okay?

So on the booking side, it's just some remaining from last quarter that's still shiftable in the current quarter? Is that the idea?

No, we probably would have shipped everything that we booked last quarter, so --

Okay. I'm not sure I still understand it. But I'll call you about it later, thanks.

(OPERATOR INSTRUCTIONS) We'll go now to Gus Richard with First Albany Corp.

Hey, guys. Nice quarter.

Thanks, Gus.

Just real quick, what percentage of your desk top Power Management Business is AMD processors at this point?

You know, I should know that one, but, you know, with the percentage of our business that represents today, I probably haven't been following it's as closely. I mean, from a design win point of view, Gus, it's more than 50% of our business, I would say. But I'm not sure what the traction of shipments in the market that that would absolutely corelate today. We would have to look into that.

Okay. I'm sort of assuming that that's one of the things that's driving the desktop Power Management Business at this point up 10% sequentially is kind of an anomaly.

Right. But it is coming off a pretty small base.

Granted. And again, just to get to the question, is most of that being driven by AMD at this point?

Well, like I said, I mean from a design win point of view, I know that's the case, and I just didn't look at last quarter if the shipments correlated directly to that.

Okay. Thanks.

And, gentlemen, that does conclude our question-and-answer session for today. I'll turn the conference back to our speakers for closing remarks.

We would like to thank everyone for joining our conference call today, and look forward to updating you at the end of our next quarter. Thanks again for tuning in today. Bye-bye.

And we do appreciate your participation. This does conclude our conference call. You may disconnect at this time.