Semtech Corp (SMTC) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Semtech Corporation's fiscal year 2005 third 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. Welcome to Semtech Corporation's fiscal year 2005 third-quarter earnings conference call. As the operator indicated, I'm John Baumann, Treasurer of the Company; and I also handle Investor Relations.

We have just released the results for our third quarter that ended October 31, 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 just want to remind everyone of the following two notices. First, this call is open to all interested parties, in accordance with Reg FD. If you have any questions about our future performance or estimates of future financial results, we will consider them know. We're unable to say if there will be another Reg FD-compliant opportunity for you to ask questions before the next quarterly conference call.

Second, this conference call will include projections and other forward-looking statements which involve risk and uncertainty as highlighted in the press release. Risks include but are not limited to overall economic and geopolitical conditions, the timing and duration of semiconductor market upturns or downturns, demand for communications infrastructure equipment and 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 subcontractors, risks associated with businesses of major customers and other risk factors. Please refer to the risks section of our earnings release and the Company's most recent Form 10-K and 10-Qs has filed with the Securities and Exchange Commission for further information.

Although a replay of his call will be available on Thomson Financial's Web site and the Investor Relations section of Semtech's Web site, 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 through Thomson's Web site and the Investor Relations section of Semtech's web site. I will now turn the call over to Jason Carlson, Semtech's President and Chief Executive Officer.

Thanks, John. Good afternoon, everyone. Today we will discuss with you our FY '05 Q3 results as well as our outlook for Q4. 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 decreased sequentially 5 percent to 65 million, in-line with our revised guidance. While revenue decreased sequentially, revenue is up 35 percent when compared with the same quarter of the prior year. Operating margin was 26 percent, and net income represented a 22-percent after-tax return. Earnings per diluted share were 19 cents, as stated in our revised guidance. Operating cash flow was a positive 24.2 million, and we spent 11.5 million to repurchase shares under our buyback program.

David will review our financial performance in more detail following my comments.

Looking at new orders, reviewing order activity during the quarter -- August was down noticeably from July, as we had anticipated. September was up slightly from August but not as much as expected. And October, being the biggest surprise, was down slightly from September. We had hoped October would be up significantly to support holiday-driven demand, but we did not see a significant increase in cancellations during the quarter but did incur increased requests for push-outs during the latter half of the quarter. Orders were down across all businesses except for our legacy or military business. New orders were below shipments, resulting in a book-to-bill of less than one during the quarter. With new orders being down compared to the previous quarter, this will position us with an increased turns requirement for Q4. This is consistent with our previous experience in a downturn, or the typical pattern starts with a significant drop in order rates followed by an increase in very short leadtime orders and limited visibility and then increasing visibility and lower turns as inventories drain and customer confidence increases.

Orders in November have reflected a noticeable increase in the percentage of turns orders compared to the previous 2 months, most likely as the result of reduced inventories in the channel. We do expect to see some modest growth in orders during Q4, although distribution and OEMs are still trying to reduce their inventories.

Looking at design wins, the third quarter again saw a good level of design activity. The Company reported more than 600 new design wins for a total of more than $85 million. That is an increase in both numbers of wins as well as total dollars of wins compared to the previous quarter. If we look at total dollars by application, Handset led the way with more than $27 million in designs with products from our Protection, Portable Power Management and Human Input Device product lines. Next was Notebook with more than $26 million, followed by Telecom Infrastructure with more than $10 million, PDA and Networking contributed 5 million and 2.5 million, respectively.

Now I would like to make a few comments on each of our business units, starting with our Protection Products group. We introduced 4 new products in the quarter and saw design win activity increased 22 percent. As devices with more ports and faster data rates increases, so increases the opportunities for these products.

Power Management sampled 3 new products for the handset market and 2 new products for the notebook market in the third quarter. We're continuing to grow the notebook business as IMVP-IV designs translation to IMVP-IV+ designs during the first calendar quarter. Design wins based on IMVP-VI will begin (technical difficulty). Handset opportunities are expanding as increased content from features in smart phones, game phones and high-resolution cameras offer additional sockets to support.

The test and measurement business unit declined significantly during the quarter as the AP market has stalled. Orders were down 65 percent in the quarter, and with the present outlook I would not expect orders to improve for at least a couple of quarters. Looking into the future, we did receive first silicon for a new family of test and measurement products and will be releasing 3 to 5 new products per quarter in this space for the next several quarters, significantly increasing the breadth of our offering.

Our power discrete business saw a bookings increase in the quarter and saw overall customer activity increased as well. We continue to be opportunistic with this well-established legacy product line. Our three emerging product lines all continue to strengthen their positions. Networking and industrial power management reported design wins at key customers like UT StarCom, and (technical difficulty) Cocco (ph) in China. The SETS products achieved record revenues, although orders declined as inventory levels were reduced. We continue to win designs for multiservice provisioning platforms, DSLAM, routers and a variety of other applications.

Human input devices or HID had additional pointing stick and touchscreen wins and remains engaged in several other high-volume design opportunities.

Companywide, we launched 15 new products this quarter, and we are well-positioned to be at or above the level for the next several quarters. Improvements in the area of new product development have been a key focus over the past year, and we are now beginning to see the benefits of those efforts. We have made improvements in all phases of the development process, and this is an ongoing effort today. Execution and bringing new products to market is our only limitation for growth. Therefore, our investments to improve in this area will provide tremendous long-term benefits.

Now I would like to comment on some actions that we took during the quarter in response to the downturn in the end markets. First I will talk about inventories. During August, we reduced wafer starts in the assembly of finished goods. This resulted in an under-absorption of overhead and allowed us to keep inventories close to flat on reduced revenues. We have continued to build at this reduced rate and should drain inventory during the fourth quarter, and inventory turns and should improve.

Second, staffing -- on the staffing front, we have taken several measures to keep costs in-line with present business conditions including a 5-percent reduction in force in October. We also slowed hiring to a small number of key positions.

Third, general cost savings -- we have initiated several cost reduction programs across the business in general, and as a result of these actions we are better aligned with the future needs of the business and in a stronger position to drive growth going forward.

Now onto our outlook for Q4. Q3 represented the first quarter of what appears to be a multi-quarter downturn in the semiconductor market. This was preceded by 4 or 5 quarters of sequential growth of what would be historically considered a rather short up cycle. Improved responsiveness throughout the supply chain appears to be causing smaller but more frequent corrections in the semiconductor market. Considering where we are in the cycle with limited visibility and general uncertainties in the market, we are guiding revenues to be $59 million. With this guidance we're estimating a 41-percent turns rate for the quarter. Given order patterns we have seen over the past month and the present market conditions, we think this turns rate is appropriate.

In summary, when you look at our annualized performance with the guidance given today for Q4, that will result in a 32-percent increase in revenues year-over-year and a 65-percent increase in operating income year-over-year. These results are clearly above average over this period and speak to Semtech's ability to gain share and deliver significant increases in profits. We continue to strengthen our business by realigning our resources to respond to changes in the market and focusing on opportunities for increased growth. We continue to invest in the future with focused investments in R&D, such as our new design center in the UK. Our three emerging product lines continue to gain traction in their respective markets and should help to provide above-average growth over the next several years. I would like to remind everyone that our present revenue represents about 1 percent of the analog mixed-signal semiconductor market and therefore our long-term growth should not be limited by the overall market. Our ability to rapidly bring to market new products that offer the proper balance of value and performance is vital to our success. Our continued investment in R&D, improvements in operational performance and strengthening customer relationships will be the foundation for our growth over the next several years.

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

Thank you, Jason. Good afternoon, ladies and gentlemen. The third quarter was a good quarter for the Semtech Corporation. We recorded the fourth-highest quarterly revenues in the Company's history. However, as Jason discussed, we began to experience a sharp inventory correction at many of our OEM customers and distributors. The biggest impact of this during the quarter was a reduction in backlog as customers reduced the number of weeks of backlog which they were willing to place on us. And it is now evident that the concerns about inventory availability in the first half of the year led to some amount of inventory build as well as increased visibility from our customers.

On the positive side, the Company generated approximately 24 million of operating cash flow in the quarter. The Company's supply chain was adjusted to expected demand, and design wins, as Jason mentioned, remained at a very high-level.

If we look at the income statement, revenues for the third quarter of fiscal 2005 were approximately 65 million, a decrease of 4.9 percent compared to revenues of 68.3 million for the second quarter of this year. Revenues increased 35 percent compared to revenues of 48.1 million in the third quarter of last year. Year-to-date revenues have increased 43 percent to 195.2 million compared to 136.7 million in the prior-year nine-month period.

Gross margin for the third quarter fiscal 2005 declined from the record 59.8 percent achieved in the second quarter to approximately 57.3 percent. The gross margin percentage for the third quarter was lower than forecasted, due principally to three factors. First, the turns, which did not occur in the third quarter, were from higher-margin product areas. Second, we significantly reduced outs through assembly and tests to control our inventories, which resulted in lower absorption of fixed overhead associated with our back end operations. And, third, the lower forecast, particularly for our test and measurement business, required the booking of inventory reserves in excess of forecast. Gross margins for the prior-year third quarter were 58 percent.

Net income for the third quarter of fiscal 2005 was 14.6 million or 19 cents per diluted share. This represented a sequential decline compared to net income of $0.22 per diluted share for the second quarter. On a year-over-year basis quarterly net income increased by 57 percent. As I previously mentioned, revenues for the third quarter declined sequentially by 5 percent from the second quarter. Power Management revenues declined by approximately 6 percent during the quarter. Protection revenues increased approximately 5 percent during the quarter, due to continued strong demand for protection products as part of a long-term trend. Revenues from the Test and Measurement unit declined by 32 percent. Revenues from our Advanced Communication business increased sequentially by 19 percent in the third quarter, with further increases forecasted throughout fiscal year 2006.

Revenues from Semtech's HID or Human Input Device business increased sequentially by about 27 percent in the quarter. The Company's Industrial and Networking Power Management business declined in the quarter, due to declines in legacy products within that product line. However, design wins are ramping and we expect growth from this product line in fiscal year '06.

The Company's legacy businesses has also increased during the quarter. Revenues for the third quarter were derived from the following geographic regions -- 22 percent was derived from customers located in North America, 6 percent from Europe and 72 percent was from Asia. Net turns orders accounted for 26 percent of shipments in the third quarter. This compares to 33 percent and 39 percent in te previous 3 quarters.

Revenues by end market changed somewhat. Revenues from the cell phone handsets and base stations market accounted for 35 percent of revenue. The growth in handset revenue was driven by unit volumes as well as new design wins for our protection products, particularly at several of our Korean customers. Desktop computers and servers accounted for 8 percent of revenue. Notebook computers and PDAs accounted for 22 percent of revenue. Test equipment accounted for 8 percent of revenue. Communications infrastructure accounted for 15 percent, and general, industrial and military accounted for 10 percent. Graphics, gaming systems and other accounted for 2 percent.

Revenues from OEM sales represented 50 percent of total revenues for the third quarter, while distribution represented 50 percent of total revenues.

As Jason discussed, we're forecasting that revenue will decline to approximately 59 million or 9 percent for the fourth quarter of fiscal 2005. This will translate into year-over-year quarterly growth of approximately 7 percent. To attain the fourth-quarter forecast, net turns orders of approximately 41 percent of revenue are required. The forecasted turns rate is more towards historical norms than the extremely low turns requirements of the last 2 quarters.

Consistent with our fiscal quarter, there 13 weeks in the fourth quarter compared to the 14 weeks in the third quarter. Gross margin for the third quarter of fiscal 2005 was 57.3 percent and gross margins were impacted by lower-than-expected turns from certain high-margin products as well as higher levels of under-absorbed overhead and higher inventory reserve requirements. Gross margins for the third quarter were also impacted by the sale of $56,000 of previously written-off inventory.

On a year-over-year basis, quarterly gross margin declined by approximately 70 basis points. The Company still forecasts that gross margins at the $70 million level of shipments per quarter should approximate our goal of 60 percent. One of the expected drivers of this margin growth are Semtech's emerging product lines, which have gross margins which exceed the corporate average, some by a substantial amount.

For the fourth quarter we're forecasting that gross margins will decline by approximately 20 to 30 basis points compared to the third quarter as the Company will continue to bring down inventory levels during the quarter.

Research and development spending was 8.8 million for the quarter. This was up from the prior quarter, and in-line with our forecast. We're forecasting that R&D spending for the fourth quarter will decline by approximately $400,000 as compared to the third quarter. This will place R&D spending at approximately 14 percent of revenue, which is within our target range of 14 to 15 percent. SG&A expenses increased by approximately $100,000 during the quarter. This was in spite of the extra week of operations that we had during the quarter. This was lower than forecasted due to a number of different factors including lower expenditures for commissions and performance-based compensation. This was partially offset by higher expenditures associated with 404 compliance and higher legal costs associated with our lawsuit against our insurers.

For the fourth quarter, SG&A is forecasted to be down approximately 600 to $800,000 in comparison to third quarter levels. This will be, once again, due to lower commission expense, lower supplemental compensation costs as well as lower expenses associated with the holiday periods.

Interest and other income was approximately 2.1 million for the third quarter. This was higher than forecasted due to the finalization of a refund from the IRS which included 600,000 of interest income. For the fourth quarter we're forecasting interest and other income of approximately $1.45 million.

The Company's effective tax rate for the third quarter was approximately 23.6 percent. The rate was lower than our estimated rate of 24 percent due to recognition of a permanent adjustment related to currency translation which significantly reduced a taxable income for our Swift subsidiary. Should exchange rates move in the opposite direction, this would have a negative impact on our effective rate. The Company is projecting it's effective tax rate for the fourth quarter of fiscal 2005 will be 24 percent, 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 1.2 million shares during the quarter to 77.49 million shares. The share count is forecasted to decrease by approximately 200,000 shares in the coming quarter due to share buybacks. Such forecasts can vary, based on the average stock price for the quarter.

So, based upon this guidance, diluted earnings per share for the fourth quarter are forecasted to be approximately $0.16 per diluted share.

So, turning to the balance sheet, Semtech ended the quarter with approximately $296 million in cash and investments. I remind investors that our long-term investments is included in this number, as those essentially are marketable securities which we consider like cash. We have no long-term debt.

Operating cash flow for the quarter was a positive 24.2 million. During the third quarter the Company spent approximately 4.4 million on property, plant and equipment. Depreciation and amortization for the third quarter was approximately 2.5 million. The Company repurchased approximately 11.5 million or 612,000 shares of its common stock in the quarter, and as of the end of the third quarter the Company had remaining under its current buyback authorization approximately 22 million of stock buyback authority.

Accounts receivables days sales calculated on a quarterly basis remained very low at approximately 26 days for the third quarter. This was lower than normal, and October shipments approximated the lower projected Q4 monthly run rate for shipments as well as favorable impact of letter-of-credit and cash-in-advance customers. Inventory levels increased slightly in the third quarter but are forecasted to decline -- excuse me, increased slightly in the third quarter but are forecasted to decline in the fourth quarter. And days of inventory, calculated on a quarterly basis, remained relatively constant and approximately 98 days at the end of the third quarter.

While our guidance for the fourth quarter is below our operating plan, our performance for the year has been very strong. Based on our fourth quarter forecast, revenue for all of fiscal 2005 will have grown 32 percent, and operating income will have increased at approximately twice that rate -- at 65 percent. As we look forward to fiscal 2006, our new product engine is improving, as Jason mentioned, and we're projecting acceleration in new product introductions in the first quarter, and our design wins remain strong.

As we move through this inventory correction, or mini downturn, we remain well-positioned to drive long-term growth. In the meantime, cash flow will remain strong and the Company will continue to buyback stock.

Thank you for participating in our third quarter of fiscal 2005 conference call, and I will now turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS). David Wu, Wedbush Morgan Securities.

Can you help me clarifying a few things? And I have a question. The thing I wanted to know is the notebook business, which is in the Power Management side -- did that improve at all in the third quarter of the year? And what is the prognostication for the fourth quarter?

And I have another one, which is, has your revenue declined more in Q4 relative to Q3? It does not seem to be a proportional decline in gross margins. Could you explain why it is that way?

And the last one I have is actually about the kind of things you have seen so far in November, which -- it's almost the end of November. If the turns business had picked up, was there much difference between your different end market segments or geographical segments?

I'll take the first one, David, on the gross margin. I think a couple of things -- one, we were able to, during the October timeframe, take a few actions to align cost. So we are able to reduce costs somewhat on the manufacturing side. Also the rationalization of the forecast -- I don't see us having as big a hit in terms of E&O inventory reserves during the quarter. I think the mix probably will be slightly more favorable in terms of the sources of revenue, as another factor in the fourth quarter, just identifying three reasons real quickly. And I think the other thing is we have continued to drive down some of our costs and improve yields and do some cost reduction efforts on some of our products.

And then John was just mentioning one other thing. I think the Notebook business as you kind of referred to has remained pretty strong. And as you look at our Portable Power Management business, that's probably one of the higher-margin segments. So that's one of things that's probably -- that is driving mix there, within the fourth-quarter business.

When you say the mix would be slightly more favorable, I assume that the ATE business has dropped so far that there is not much to drop. Does that profit reasons (ph), and that there for the inventory reserves also come down.

Well, yeah, the latter is true. But there won't be near as big a decline from Q3 to Q4 ATE. And on the mix side, notebook will just be a -- of our overall Portable Power Management business -- will just be a higher percentage in Q4. And, as I mentioned previously, the notebook business tends to be a little bit higher -- you know, gross margin in some of the other areas within Portable Power Management.

What about the month of November? Since you're dependent on turns, you mentioned turns have gotten better in November. And I was wondering whether you can talk about where that improvement comes from, either by geography or by product lines?

It seems pretty broad-based as far as the geography, David. Obviously, you are not seeing an improvement there in ATE. I mean, Notebook as an end market, seems to be pretty good, and I think we expect that trend to continue. And I think even the handset business is doing fairly well as inventory levels are getting more were they need to be.

Like I said, other than ATE it seems to be pretty broad-based.

Do you think that we might hit the bottom in this inventory cycle by the end of your January quarter?

Yeah, I think it's definitely possible. It's too early to call it. But based on, I think, the pickup in turns that we have seen during the month of November, I think for me, that is a good leading indicator as to kind of where we are in the cycle.

Rick Schafer, CIBC.

First one is just -- with capacity, it seems like it's loosening up, obviously, at the foundries right now. How is pricing looking there for you guys right now? And how does it work in terms of passing those prices or the cost reduction, price reduction on to customers? Like, how is that working? And I'll lead that up into a second question, which is on gross margin.

There is clearly more opportunity today for price negotiations with our foundry partners and there was, say, 6 months ago. And wherever we think there's an opportunity to leverage something there, we're doing that. What was the second half of the question again, Rick?

I was just curious. Is there any way, by the way, Jason, you could quantify? I mean, have prices come down X? Or on your -- in terms of your foundry prices, is there any way to -- or is that a meaningful number?

And then the second part of the question was just, how does it work in terms of passing it on to customers? I'm sure your customers are probably talking to you about pricing now, I would imagine, also.

Right. I wouldn't say that there is an across-the-board, you know, it comes down by X percentage across the board. Some of it is relatively opportunistic, depending on how is that overall fab with its loading and kind of what's their position on the overall topic. Some of them are more flexible than others. I think our ability to pass that on to customers is when that action is driven by the customer in the first place, where the customer is, by the same token, using this slower period to have price negotiations. We have obviously had more ability right now to try and pass those negotiations on to our foundry partners.

And then just, I guess, a follow-up to that then is just, in terms of gross margin -- I know this is like your first, I guess, real stint in terms of a downturn as a truly fabless company. What is the outlook for your trough margins, I guess, internally? I know you talked about being down a little bit in 4Q. But if you look out into the first, second, third quarter next year -- you know, longer-term, I guess, what do you think trough margins would be with the new model? Or could be?

I don't think we have really quantified that. But clearly, as you look at our business, there isn't tremendous additional downside to our gross margins. And that is one of the beauties of the fabless model. If things got much worse than we guess-timate as we sit here today, clearly there would be some impacts if you had to ratchet capacity way down or if forecasts change meaningfully from where we are today, in terms of reserve position. But just kind of on an ongoing basis, if we don't see tremendous deterioration in any of the end markets or situations from here, there is just not tremendous additional downside pressure on our margin. I think, in the last cycle, I don't think our margins -- speaking off the top of my head -- saw much below 56 in terms of kind of a lower trough number in that last cycle.

But to leave it at roughly in the 57-percent range for the next couple of quarters doesn't sound like it's too aggressive?

No, I don't think so, based on what we see right now.

And then just one last question. On the handset side do you guys see -- I guess I'm just picking on one area. But do you see any inventory or any evidence of inventory out there? Has there been any big change in order patterns there? I'm just curious. I know leadtimes have always been pretty short there. Has that changed much recently? Any color on Handset?

I think it's a little bit of a mixed bag, depending on which end customer you are looking at. I think some of the local China guys are still a little bit softer, whereas some of the multinationals are a little bit stronger. So I don't know that there is one broad statement, other than it's just kind of a mixed bag across the group. But generally we see inventories coming down and order patterns for fairly short leadtime deliveries.

And can you say what leadtimes are in Handset right now?

They're probably 4 to 6 weeks, I would say. It's going to vary by customer and by product. But probably in the 4 to 6-week range. It will probably be down a week from the previous quarter. Maybe two.

Ross Seymore, Deutsche Bank.

You gave some color earlier about what was the strongest and weakest in the quarter. Can you do the same for the guidance? Or, another way, just looking at what is going to cause the down 9 percent? If you could give some, that might be a little better or some a little worse than that corporate average?

Obviously, ATE market will be down a bit more, so worse than that corporate average. As I look by product line, and probably Portable Power may be down a little bit more -- you know, slightly more than the corporate average. In terms of better than the corporate average, I think our Protection business is still on very solid footing and looks very good entering into FY '06. So I would put that in the category of better than the corporate average.

And then looking back at this quarter, the handset business seemed to do pretty well. You mentioned that that was because of some new products as well as some existing business with customers. Would you care to give a split between the contribution? Was it more because of some new product ramps, or was it kind of apples-to-apples business continuing to grow?

I think, as I look at it, there was some new design wins in the Protection area which clearly brought up that business, and some of it was continuation of some existing designs in the Power area and then some new designs, obviously, in the Power area. So I'd say it was probably all three of those factors that contributed to its performance for us.

Jeff Rosenberg, William Blair.

With you looking for sales to be down, obviously, and orders up a little bit, do you care to give us a feel for if te book-to-bill is still below one in the January quarter?

It's hard to project at this point. I think it still could be slightly below one, to some degree, in the January quarter. I think, as you look at it, we built a tremendous amount of backlog in the last 4 quarters. And at 41 percent turns, turns have obviously come up a bit from the last quarter. So I think at this point, yeah, it's probably fair to say that we will probably still be consuming some of that backlog that was built in the prior quarters, during the fourth quarter.

And I just want to make sure my numbers are right here in terms of looking at the percentages of revenue in end markets over the last couple -- this quarter versus last quarter. My math shows that notebook, PDA and handsets were both up quarter-on-quarter. Is that right, in terms of absolute dollars?

Notebook PDA was up quarter-on-quarter, slightly, yes.

And handsets as well?

And handsets as well.

Okay. So, with Power Management down and it looks like Desktop was pretty flat -- I'm trying to get a feel for --

Desktop was down a bit, as was -- server was down a bit.

Okay. But I get that as kind of a small part. I guess what I'm trying to understand is the 6-percent decline in power management, where that really hit. And I guess it had to be a big swing, I guess, between Protection and Power Management within handsets. Maybe some color there or an update on sort of the percentage of revenues from Protection would help me kind of piece all that together.

Yeah, I mean, we don't, per se, break out the handset business like that. But clearly the Protection growth in handsets was strong during the quarter. And the other factor that we really didn't talk about is the graphics card business. It did decline a bit in the quarter. Once again, that's not a tremendous number. But there was a decent level of decline in the combined Desktop and Graphics business. So yeah, the Protection business going into handsets in the quarter was very strong, and that partially contributed to the growth in the Protection business, which was about 5 percent quarter-on-quarter from the revenue -- from a revenue standpoint.

So, then, to follow up on the prior question -- but you are at this point, even though those numbers had a little bit of a positive move this quarter, you are expecting that to be more down broadly as you look into Q4? You have seen it -- in other words, the uneven trends by end market is really a more -- in concert, everything is down in the January quarter?

Yeah. I think in the handset market specifically, Jeff, what you saw was there was still some strength in the month of August continuing with the trend that September and October has been a little softer, and so we are probably not seeing something equivalent to that in the fourth quarter.

Joe Osha, Merrill Lynch.

Two questions. First, can you talk about what you think an appropriate level of inventory for you might be, say, at a 60 to $65 million run rate? I'm trying to get a sense of how long it is going to take you to normalize the inventories that you've got on your own balance sheet?

I think it's largely a fourth-quarter event, Joe. It began -- the engine was running, I'd say, pretty hard into the month of August and then was -- we shut down that machine and started bringing inventories in-line in the September and October time-frame. We have continued -- we have brought down, just as a point of reference, inventories, I think done a pretty good job in November, bringing them further into line.

So I think that's primarily a -- kind of a Q4 type event.

So the idea, then -- if I go back and look, you guys in the April '04 quarter -- netted about 61 -- 62 million in inventory. And you had about -- excuse, 62 million in revenue and you had about 23.8 million in inventory. The idea is that you are going to drop 5 or $6 million off of that inventory number here in the January quarter?

I would not say that we are going to drop that much inventory in the January quarter. I think, if you go back to that period, demand was accelerating quite a bid, and we were doing all we could. So I think, from some standpoint, some of our product lines were probably undersupported in terms of inventory in that time period. But when we talk about bringing inventories into line, we're obviously talking about several millions of dollars.

Second question -- if you can just help me understand -- you mentioned IMVP-IV+ and IMVP VI. Which of those -- sorry, this is a silly question -- which of those would correlate to Intel's Sonoma platform? Is that IMVP-IV+?

You said Sonoma, Joe?

Yes, Sonoma being, obviously, Dothon (ph) and Alviso (ph)?

Right. There would be IV+.

That's IV+?

Correct.

You mentioned designs for VI going out -- or being awarded in the first half of next year?

I think, during this coming quarter we're going to see designs beginning to be awarded.

And finally, just to -- again, you're talking about sort of a truncated downturn here. That would mean what, that the business, your business resumes growth again in the April quarter?

Yes. I think that's very likely. I think it's a little early to call that with complete confidence today, but that's what it would feel like right now, yes.

Okay. Just -- I guess the question would be, then, does that mean we are now in an environment where revenues grow sequentially 5 or 6 quarters and then just drop 1 or 2?

As I said earlier, I just think that we have gotten to a point where the communication line between the OEM, the ODM and the supplier has gotten quicker, to the point where when things do get a little overheated, inventory can gets built in the channel. But not as much as maybe we saw in previous down cycles in the industry. And so, hopefully, when that happens it's just a 1 or 2-quarter type effect.

Louis Gerhardy, Morgan Stanley.

Just a couple questions. First, for David, you had mentioned some inventory reserves. Can you mention the amounts? Maybe how much you had in the prior quarter and if you expect to have more in the January quarter?

Well, yeah. I mean, we book just as a standard practice, and based on our policies and procedures and calculations, inventory reserves every quarter. I think, in looking at the impact on gross margin, it was probably about 50 basis points, which would be around 300, $325,000.

So that's about normal, then?

Well, no. The total reserves booked for the quarter, off the top of my head were 850 to 900K in the quarter. And in our forecast, I guess what I was saying is we probably have built in 500 or 550. And the primary delta was the change in forecast that we saw out of the TMB business unit.

And then, Jason, you had mentioned the -- in the correction process for the industry. And I'm just thinking about that comment, relative to your historical high turns in the past, which I think has been about 53 percent. How many quarters do you think it will take to get up to 53 percent turns? Or maybe you don't think we will get there. Can you comment on that?

You know, I think it could maybe be one. As I said, turns for the month of November already have been significantly higher than the previous 2 months. It's just I wouldn't call one month a pattern, you know. But it's just one quarter.

William Conroy, Sanders Morris Harris.

Jason, do you have a sense of whether consumption of your products in the end markets is running ahead or less than either your orders in the last quarter or the revenues?

It appears that consumption is greater than both orders and revenue. And I would say that based on the fact that we are seeing disti (ph) inventories drop -- or inventories at OEM's drop at a rate faster than we are seeing replacement orders for those same products.

That's helpful. And can you give us any update on the competitive landscape? I guess, specifically, I'm thinking of either ATE -- is that all end market decline, or is there anything going on competitively there? And also in the Power space?

From an ATE point of view, there is pretty broad market decline, as I think everybody is aware of. But in addition to that, we have got a platform at Agilant that has been ramping down in volume somewhat, that might make it a little bit greater for us than the average for that market. And then, the other market you had asked was Power Management. I mean, there we're continuing to do really well with design wins and gaining traction across many customers. So I guess I feel much more bullish on our position in Power Management today.

Steven Smigie, Raymond James.

Following up a little bit on the last issue of Power Management, I was wondering if you could comment on some of the design wins that you mentioned on the notebook, if they were related to say VRM 10.X standard products and also if you have any VRM 10.X wins, say, on servers and if the notebook businesses going back at all as well -- or, excuse me, the desktop business.

We really are focusing efforts on new design wins for desktops, Steve. The (R) 4 server. And we have had some server opportunities that I think we have recently won. But desktop isn't really an ongoing area for new business development for us.

I thought maybe you had just been picking some up there incrementally, despite not making the effort.

Yeah, I mean, there may be some. But it's small -- it's not a large percentage of the business, I guess.

And the server wins you're having -- are you having those across multiple OEMs, or is there just one that you're primarily picking up in?

There is one OEM in particular that I feel pretty good about today. And we are getting some pretty good traction at others. But there is really one that I am the most excited about right now.

And then, in terms of design wins on the handset, are any of those coming from White (ph) LEDs? I'm just wondering if you could talk a little bit more about how that businesses is developing.

Well, we sell those products into a variety of applications there. You know, White LED backlight display drivers, keypad lighting, subdisplay drivers, even some for OLED subdisplays, some switching regulator products, some battery charging products. So we have got a pretty broad portfolio there, and we're continuing to increase. There are some new products I expect in the first half that will add to a couple more sockets for us to be addressing in that space.

And my last question was on the wireline business. You had mentioned, I think, some of those products you expect to continue to do pretty well. A couple of quarters ago, you had talked about 50 percent type growth over the next couple of years. I was just wondering if that same sort of ramp still seems feasible, or where we stand with regards to that?

Yeah, I think it does. That's a very large installed market, and we're coming off a relatively small base. And the combination of our protection products, our SETS or advanced communication products and our power management products, all 3 product lines in that space gives us, I think, a pretty sizable opportunity there going forward.

(OPERATOR INSTRUCTIONS). Sumit Dhanda, Banc of America.

A question on the turns. In the past you have given us a number at this point in the quarter, how much you need in dollar terms to hit your guidance. If you could give us that number?

Yeah, I mean, if you look at it kind of consistent with the higher overall level of churn, it's not too surprising that that number is probably slightly higher -- it's around 12 million -- you know, 12.3 million.

About 12 million from this point on out?

Right. (multiple speakers)

And then, generally speaking, at least historically, how has the quarter typically shaped up? Is November the strong month, or is January the stronger month?

Our months are usually fairly linear. This last quarter, obviously, August was the strongest month of the quarter, as we spoke of already. Obviously, you get some impact during some of the holiday periods. You have the Chinese New Year in January. And then you have, obviously, some Christmas type shutdowns in the US. But I think, generally fairly linear.

And then it seems like you guys are doing a good job with the cost control here. Can you give us any kind of feel here, in the event that you don't really see a recovery by the April quarter, can you hold the operating margins close to the low to the mid-20s like you are doing right now? And what, if anything, could help you do that?

If you look at the Company, one of the things, I think, that separated us is, in tough times, we've been able to control costs, and we have a highly-variable manufacturing model. So I don't know that I want to put a number out there. But I think we'll be able to -- if things stay tough -- we will be able to keep our operating margins what are still considered very good operating margins for any business, and generally pretty high and at least -- at least, with a 2 in front of it would be, as always, our target is to never have that operating margin fall below. (Multiple Speakers) I'm talking, if things did get truly, really tough.

And then it seems like Asia was a significant jump as a percentage of revenues. Anything we should read into that?

No. I think if you look at a lot of the ATE business goes into the US. Some of that swing down was related to that. So, no, I wouldn't -- other than that, I wouldn't read anything significant into that.

And then one last one. Any price pressure that you have seen in any of your parts yet?

Well, I think what you do see, Sumit, is that every time there is one of these cycles, it's an opportunity for procurement on the other side to push back on you. You have just got to manage through that as the opportunities for orders and business are really there. It's clearly more top-of-mind topic with them today than it was six months ago. But I wouldn't say that we're seeing anything truly out of the ordinary. Maybe, except, as I mentioned earlier, with Desktop. That's a market that just continues to find new lows as far as ASP is going.

(OPERATOR INSTRUCTIONS). Todd Cooper, Stephens Inc.

Jason, you talked about how you slowed down the fabs early in the quarter, and this helped the inventory but it hurt the gross margin. Regarding the gross margin, help me understand how this hurts it, given the fact that you are fabless. And there fixed cost type payments in your fab contracts?

No. I think what we were pointing to, Todd, was more trying to cut back a bit on the assembly outs and the test outs, because we had built up quite a bit of finished goods early in the quarter. So most of the -- there is some overhead associated with managing our outside fabs. I wouldn't say that that's a significant amount of the overall overhead pool. But clearly, we cut assembly rates and test rates back, particularly in the September-October time-frame. And that's were the absorption impact came from.

So the fab costs are 90 percent plus variable?

That's correct.

Correct.

And are you seeing any difference geographically for demand for the telecom products like the SET-to-IC?

I don't think so.

The guys at Electronica -- of course, they are more of the European salespeople -- seem pretty bullish on sales in Europe for that type products and some of your power products into telecom. But you're not seeing it, so far?

No. Overall, this was a pretty good quarter for that business -- for the SETS part of that business. And so we saw some good strength out of some of the European guys like Alcatel and Siemens. But I don't know that it's noticeably stronger than we have seen out of some of the Asian counterparts.

I understand. I'd just like to congratulate John Baumann on his new addition. Thanks a lot.

Can you see my red eyes from there Todd?

No, but I have got a 9-month-old, so I can feel them.

(OPERATOR INSTRUCTIONS). David Wu.

Gentleman, can you tell me where on earth did the 5 percent headcount reduction take place, so I have a better idea for where the operating expenses go?

It wasn't exclusively in one area. But if you had to look by business unit, the majority of it would have been in our desktop area.

That, I assume, is both marketing and engineering?

Correct.

There's not much to cut on the manufacturing side, correct?

That's correct.

Do you own those family of tests or they outsource also to Asia, correct? Am I --?

The assembly and test facilities that we use are at subcontractors. We may have some personnel there, but it's subcontractors' assembly and test force in Asia.

So, really, the headcount reduction I should think about is mostly R&D-related?

David, I wouldn't say just R&D-related. I mean, it was just, as I said earlier, just really better aligning the resources going forward. So, if we had a seller or designer that was in a business unit that wasn't doing as well, we would be more likely to move them over than to let them go. Really, it was just aligning those resources with the outlook for the business. And Desktop continuing to not be the same area of focus for us. That had a higher percentage of the overall heads affected.

And Mr. Baumann there appears to be no further questions. At this time, I like to turn the call back over to you for any additional comments or closing remarks.

Great. We just want to thank everyone for being on our third-order conference call and look forward to talking to you at the end of our fourth quarter. Thank you. Have a good day.

And this does include today's conference call. At this time you may disconnect.