Semtech Corp (SMTC) 2005 Q4 法說會逐字稿

Good day, everyone, welcome to the Semtech Corporation fiscal-year 2005 fourth quarter conference call. Today's conference is being recorded and a question-and-answer session will follow the presentation. For additional remarks and introductions, I would like to turn the conference 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 fourth quarter earnings conference call. As the operator just indicated, I'm John Baumann, I'm the Treasurer of the Company and I also manage Investor Relations. We just released results for our fourth quarter that ended January 30, 2005.

For the next 45 minutes or so, Jason Carlson, Semtech's President and Chief Executive Officer, and David Franz, our Chief 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 Principals, commonly referred to as GAAP. The results we just published today in our press release are unaudited. The Company has not yet completed its fiscal-year 2005 financial statements audit, which includes an audit of internal controls of our financial reporting, as such, the financial information presented in this press release is subject to adjustments that may be required upon the audit completion.

Before I turn the call over to David, 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 questions about our future performance or our estimates of future financial results, we will consider them now. 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, computers, cellular phones and automated test equipment, demand for the Company's products, competitors' actions, relations with strategic customers, supply from key third party silicon wafer foundries and assembly contractors, risks associated with the businesses of customers, and other risk factors. Please refer to the risk section of our earnings release in the Company's most recent Form 10-K and 10-Qs as filed with the Securities and Exchange Commission for further information.

Although a replay of this call will be available on Thomson Financial's website and the Investor Relations section of Semtech's website, the Company undertakes no obligation to update or revise forward-looking statements to reflect subsequent events or changed assumptions or circumstances. Any written transcript of this call that may be posted or published is unauthorized by the Company, as is any rebroadcast outside of the ones available on Thomson Financial's website or the Investor Relations section of Semtech.

I will now turn the call over to David Franz, Semtech's Chief Financial Officer.

Thank you, John. Good afternoon, ladies and gentlemen. Fiscal-year 2005 was a very good year for Semtech Corporation. The Company recorded the second highest annual revenues in the Company's history. Revenues for fiscal-year 2005 increased by 32 percent compared to the prior fiscal year. Net income for fiscal-year 2005 increased by 81 percent year-on-year. Operating cash flow for the year was approximately $70 million.

Unfortunately, business slowed in the second half of the year as the entire semiconductor industry experienced the effects of an inventory correction. As a result, lead times have contracted and turns orders have increased toward the higher end of their long-term averages.

On the positive side, the Company generated approximately $15 million of operating cash flow in the fourth quarter. Also, the Company aggressively reduced its inventories by $5 million or 17 percent for the fourth quarter as compared to the third quarter. While this action had an impact on gross margin, the significantly-reduced inventory better positions the Company for fiscal-year 2006.

Starting with orders. Orders in the fourth quarter improved slightly compared to the third quarter. Orders improved in our Protection, Advanced Communications and Human Input Device product line. Within Power Management, we saw a significant improvement in orders for our Networking and Industrial Power Management products. We also saw a substantial increase in design wins for this emerging product line.

Orders for our test and measurement products, as well as our desktop power management products were the weakest in the quarter as compared to the third quarter. The current order patterns are consistent with our expectation that we would see an increase in short lead time orders and reduced visibility, be followed in future quarters by increasing visibility as inventories drain and customer confidence increases.

As we look at the income statement, revenues for the fourth quarter of fiscal 2005 were 58.4 million, a decrease of 10 percent compared to revenues of 65 million for the third quarter of this year. Revenues increased 6 percent compared to revenues of 55.4 million in the fourth quarter of last year. Revenues for all of fiscal-year 2005 increased by 32 percent to 253.6 million as compared to 192 million in the prior year.

Gross margin for the fourth quarter of fiscal 2005 declined to 56.5 percent, compared to 57.3 percent for the third quarter of fiscal 2005. The gross margin percentage for the fourth quarter was slightly lower than forecasted due to a larger-than-forecasted reduction in inventory, as well as slightly lower-than-expected business from higher margin product areas. Gross margin for the prior year fourth quarter was 58.6 percent. For all of fiscal-year 2005, the gross margin percentage was 58.3 percent, which was up compared to the 57.7 percent for the prior year.

Operating margins for fiscal year 2005 improved to 27.6 percent, this was an approximate 500 basis point improvement as compared to fiscal 2004. Net income for the fourth quarter of fiscal 2005 was 12.1 million or $0.16 per diluted share. This represented a sequential decline compared to net income of $0.19 per diluted share for the third quarter.

Looking at the full year, net income did increase 81 percent to 58.9 million, as compared to 32.5 million in the prior year. The Company's net margin increased to approximately 23 percent from 17 percent in the prior year. The prior-year net income included a $6.8 million charge associated with the calling of the Company's convertible, subordinated notes. Net income per diluted share increased to $0.75 per diluted share for fiscal 2005 compared to $0.42 per diluted share in the prior year.

As I previously mentioned, revenues for the fourth quarter declined sequentially by 10 percent from the third quarter. Power Management revenues declined by 15 percent during the quarter, design wins for Industrial and Networking Power Management products were very, very strong and we expect significant growth in this area of Power Management in fiscal 2006.

Protection revenues increased approximately 3 percent during the quarter, due to continued fundamental demand for protection products as part of a long-term trend. Revenues from the Test and Measurement unit declined by 20 percent. Revenues from our Advanced Communications business decreased sequentially by 20 percent as this business suffered a temporary setback due to market conditions and inventory levels in the communications and market. We expect this business to improve sequentially throughout fiscal-year 2006.

Revenues from Semtech's HID or Human Input Devices businesses declined in the quarter. The Company's high reliability aerospace and military businesses increased during the quarter. Revenues for the fourth quarter were derived from the following geographic regions -- 21 percent was derived from customers located in North America. 8 percent from Europe. And 71 percent from Asia. We are beginning to see benefits from the reorganization that we did in our European sales organization about a year ago.

Net turns orders accounted for 40 percent of shipments in the fourth quarter. This compares to 26 percent, 30 percent, and 33 percent in the previous 3 quarters. This increase was consistent with an industry-wide contraction in lead times and more business being placed on shorter lead times.

Revenue by end market changed somewhat. Revenues from cell phone handsets and base stations accounted for 30 percent of revenue. This decline in handset revenue was caused by slower unit growth at certain of our OEMs and lower ASPs.

Desktop computers and servers accounted for 10 percent of revenue. Notebook computers and PDAs accounted for 22 percent of revenue. Test equipment accounted for 7 percent of revenue. Communications infrastructure accounted for 17 percent of revenue. And general, industrial, and military accounted for 12 percent of revenue. Graphics, gaming, systems and other accounted for approximately 2 percent of revenue. Revenues from OEM sales represented 46 percent of total revenues for the fourth quarter, while distribution represented 54 percent of total revenues.

Looking at the outlook for next quarter, we are forecasting that revenues will decline by approximately 5 percent compared to the fourth quarter of fiscal 2005. At this point, based on our fiscal 2006 plan, we forecast that first quarter revenues will be the low point for fiscal 2006. With orders having bottomed in the third quarter of last year.

To obtain the first quarter forecast, net turns orders of 45 percent of revenue are required. The forecasted turns rate is towards the higher end of historical ranges, but consistent with where we are in the semiconductor cycle and the shorter lead times being provided by customers on orders.

Gross margins for the fourth quarter of fiscal 2005 were 56.5 percent. Gross margins were impacted by lower absorption due to the $5 million reduction in inventory. We could have maintained margins at a higher level by building inventory, but our model is to correct inventory levels to expected demand as quickly as possible. The reduced inventory resulted in improved inventory turns and higher operating cash flow.

Gross margins for the fourth quarter were also impacted by the sale of $74,000 of previously written-off inventory. On a year-over-year basis, gross margin has declined by approximately 210 basis points. This was due to the lower percentage of revenues from our Test and Measurement business, as well in a higher percentage of revenues from our desktop business. We expect both of these trends to reverse beginning in the second quarter, with TMD or test and measurement revenues increasing from the level.

We expect revenues from the desktop market to decline over the balance of this year, beginning in the second quarter. We are generally focusing our Power Management R&D budget on business areas that can support 60 percent-plus gross margins prior to any potential impact of stock option expensing. The Company is still confident that gross margins, at the $70 million level of shipment per quarter, should approximate our target model of 60 percent.

Another important, influencing factor for gross margins for fiscal 2006 will be the Company's Industrial and Networking Power Management product line, which had significant acceleration and design wins in the fourth quarter with over $12 million in design wins recorded. For the first quarter, we are forecasting that gross margins will decline by approximately 40 basis points, to approximately 56 percent. As the Company will continue to have a lower margin mix of revenues in the first quarter than what is planned in the operating plan going forward through the remainder of fiscal 2006.

Based on our fiscal 2006 operating plan, the first quarter gross margins are forecasted to represent the low point for the fiscal year. We are currently seeing positive momentum in 2 of our emerging product lines. The SETS or advanced com product line and the Networking and Industrial Power Products product line, both of which should drive favorable improvements in mix in the coming quarters.

At 56 percent of gross margin, while lower than our target model, it still gives us one of the higher gross margin models in the entire semiconductor market, particularly if these represent trough cycle margins. Also, I think it's interesting to compare this Semtech trough gross margin to the previous down cycle, they clearly are substantially higher than the approximate 50 percent gross margin that we achieved in fiscal 2002.

Research and development expenses were 8.3 million for the quarter, which was approximately in line with our forecast. We are forecasting that R&D spending for the first quarter will be approximately flat, as compared to the fourth quarter. This will place R&D spending at approximately 15 percent of revenue, which is within our target range of 14 to 15 percent.

SG&A expenses declined by approximately 300,000 during the quarter. G&A spending was more than we had forecasted for the quarter, due to higher-than-expected legal expenses. Semtech is the plaintiff in a suit to win recovery of $12 million plus interest from our insurers relative to our prior year's settlement. This is a high level -- this high level of legal expense is expected to continue for the next several quarters as the trial date approaches.

The higher legal costs were partially offset by lower supplemental compensation costs and lower salary costs as a result of a 13-week quarter as compared to the third quarter, which was a 14-week quarter. For the first quarter, SG&A is forecasted to be down approximately 600,000 in comparison to fourth quarter levels. This is due primarily to lower commission expense, lower legal expense and lower expenses related to leases. The biggest risk to this forecast is clearly legal expense.

Interest and other income was 1.86 million for the fourth quarter. For the first quarter, we are forecasting interest and other income of approximately $1.8 million. The Company's effective tax rate for fiscal-year 2005 was 22.8 percent. The rate was lower than our estimated effective rate of 24 percent, principally due to the geographical mix of profits and exchange rates.

The Company is projecting that its effective tax rate for the first quarter of fiscal 2006 will be 24 percent. This is based upon the current revenue and earnings forecast. There are clearly several factors which can cause this rate to vary from forecast, either higher or lower. These factors include variations in income, the source of that income, the dollar, Swiss franc exchange rate, transfer pricing assumptions and the geographical mix of revenues, as well as other factors.

The diluted share count increased by approximately $300,000 during the quarter. The share count is forecasted to decrease by approximately 700,000 shares in the coming quarter, due to share buybacks and share price assumptions. Such forecasts can vary based on the average stock price for the quarter. Based upon this guidance, diluted earnings per share for the first quarter are forecasted to be $0.14 per diluted share.

Turning to the balance sheet, Semtech ended the quarter with approximately 302 million of cash and investments on the balance sheet. We have no long-term debt. Operating cash flow for the quarter was a positive 15.2 million. During the quarter, the Company spent approximately 1 million on property, plant and equipment.

Depreciation and amortization for the fourth quarter was approximately 2.7 million. The Company purchased $11 million worth or 550,000 shares of its common stock in the quarter. As of the end of the fourth quarter, the Company had remaining, under its current buyback authorization, approximately 11 million of stock buyback authority.

Operating cash flow significantly for all of 2005, was a positive $70 million. This was almost double the prior-year amount of 35.8 million. Accounts receivables, day sales calculated on a quarterly basis remain low at approximately 35 days for the fourth quarter. As I've previously mentioned, inventory levels decreased substantially in the fourth quarter and days that inventory calculated on a quarterly basis improved to 89 days as of the end of the fourth quarter.

While our guidance for the first quarter shows a sequential reduction in revenue, the operating plan for the year shows slight sequential improvement in the second quarter, followed by improved sequential growth in revenues and profits in the back half of the year. Fiscal-year 2005, overall, was a very good year. We reported revenue growth of 32 percent and net income growth of 81 percent. It also marked the 18th consecutive year of positive operating cash flow for the Semtech Corporation.

As we look towards fiscal 2006, our new product engine is continuing to improve. New product introductions were at their highest level of the year in the fourth quarter with a greater than 50 percent increase in new product introductions as compared to the third quarter. We expect continued strong new product introductions in the first quarter.

In addition, we believe we are beginning to see stabilization in end markets. Based on our operating plan, our new products are expected to drive revenue and margin growth during the next 3 years. Cash flow generation is expected to remain strong in fiscal 2006 and the Company will continue to buy back stock.

I thank you for participating in our fourth quarter of fiscal 2005 conference call. And I will now turn the call over to Semtech's Chief Executive Officer, Jason Carlson.

Thanks, David. Good afternoon, everyone. As David mentioned earlier, despite waning demand in the second half, fiscal-year 2005 was an impressive growth year for Semtech. Net sales grew 32 percent. Net income increased 81 percent. And after-tax margin was 23 percent. Operating cash flow increased 96 percent, and we spent more than 5 times as much on stock buybacks in fiscal-year 2005 than the prior year.

Now I'd like to review design win activity for Q4. The fourth quarter, again, saw a good level of design activity. The Company reported 640 new design wins for a total of more than $85 million. This is slightly up from the previous quarter , and looking by end equipment, cell phones led with more than $25 million in design wins. Followed by notebooks with $14 million. And Networking and Industrial applications with more than $12 million.

While these 3 applications made up over than 50 percent of design win dollars, we also had many small wins in a variety of high-end consumer applications, such as MP3 players, digital video recorders, flat panel TVs and digital still cameras. As we said in the press release, our largest dollar win by product was for a proprietary ESD Protection Product, and that was followed by 5 Portable Power Management Products.

As we look to growth and profit drivers, many of you know, and as I've stated before, growth for Semtech is fueled by our new product development plan and our ability to execute to that plan. In the past year, we've made significant investments in this area. We added design resources throughout the year, including a new design center in Swinden. We upgraded design tools and methodology and we've increased our focus on program management.

The results of these efforts, as David mentioned, are beginning to pay off. In the fourth quarter, we released 24 new products and that is up from the 15 in the previous quarter. I expect this trend to continue and I hope to see us deliver twice the new products in FY '06 that we did in FY '05.

Operationally, FY '05 was also a year of investment for Semtech. We strengthened our management team in operations, in all areas including foundry and technical services, logistics and planning. Additionally, we invested in new tools for supply chain management that will improve our responsiveness to changing market demands.

While most of these changes are not yet apparent, they will become increasingly apparent over the next 2 to 3 quarters. This, combined with aggressive cost reduction programs, negotiated in the fourth quarter with our manufacturing partners, should position us with a base to build gross margins during the year.

As I look forward to FY '06, Q1 looks to be a point from which we can build upon throughout the year. Having reduced inventories by $5 million last quarter, our inventories are now where we think they should be. Sell through and distribution has been strong, so inventories there are also appropriate. Demand has picked up somewhat from the fall, so it appears inventory in the channel has corrected, as well. But at the same time, we don't see a reason for significant increase in demand until the second half of the year.

Looking at the end markets for the coming year, the most opportunity for growth will likely come from the networking and wireline communications market. Notebook computers should also have a good showing for us. The wireless handset segment should have another impressive unit growth year as the proliferation of color screens, camera phones, and other features continue, but they will at the same time be offset by added competition and lower ASPs in this very large market. We continue to increase our product offering in all of these established areas.

Our outlook on the ATE business is still clouded by the current downturn in that market and increased pressure on ATE makers to reduce their cost per pin. We are seeing the move towards more of the smaller niche players in this space and some move away from the very large ATE OEMs. We continue to position ourselves to best address these changes. While the near-term revenue outlook in the ATE market is challenged, it still remains a high margin area for us.

Finally, some of the smaller market segments we serve offer opportunity this year, as well. Our high reliability military business has been growing, as have some of the diverse industrial end markets. And despite their smaller contribution, high-end consumer devices, like flat screen TVs, set-top boxes and handheld audio devices all represent growth opportunities for Semtech.

2 of our emerging product areas, Networking and Industrial Power Management, and our SETS products will continue to grow and will produce noticeable year-over-year growth without relying on increased market demand in the back half of the year.

In summary, FY '05 marks the 18th consecutive year of positive operating cash flow for Semtech and another year of above average revenue and profit growth. We achieved these results in spite of the significantly reduced demand in the back half of the year. FY '06 is likely to be a reverse of the previous year, as the market continues to reduce inventory levels in the first quarter and find a base to build from throughout the year. Continued improvements in product development, operational efficiencies, and diversification of our business will drive improving results in the second half of the year.

This concludes my remarks, and I will now turn the call over to the operator for questions.

(Operator Instructions). We will hear first from Ross Seymore with Deutsche Bank.

Thanks, guys. First, congratulations on bringing down the inventory so much. It's a shame some of your peers don't take some of the same tact. If I remember right on the last call, you talked about that sort of level of inventory reduction being difficult to achieve. So, I wondered what you saw in the quarter that led you to drive to draw down inventory that much and is that an indication on demand in general or just a level of inventory that you plan to operate at on the longer term basis?

Well, Ross, first, from the finance standpoint, I think we had talked about inventory reduction of approximately 3 million, but objectives to reduce it more. So, I think we were being a bit cautious on our ability -- on how rapidly we could contract the supply chain. So, from -- from that standpoint, obviously we were very successful and with some of the improved tools we've had, we were able to adjust the supply chain. I think at the high end of what we thought possible.

And just adding, operationally, I -- I think this was at the high end of the expectations than what the operations group thought they could do and didn't want to sign up for it at the beginning of the quarter, but they did a great job really bringing that down.

So it really wasn't a reflection on any sort of change from the end market, whether it be OEM or distributor?

Absolutely not.

Okay. And on that OEM versus DISD [ph] balance I was a little surprised to see that the OEM appeared to fall as a percentage of sales since most people are assuming that you have DISD inventory being a general problem for semiconductors. Can you discuss a little bit about how that mix shifted in your business?

Well, I think if you look at decline in the cell phone business, some of that was at some specific OEMs where we do things on an OEM basis. Then if you look at our Protection business, which remained very strong, a lot of that is -- is sold through distribution. So, I think that's some of the -- the mix right there, to those 2 factors, which would have impacted the move, and I think as Jason mentioned, our distribution inventories are well under control, and we have seen growth in POS.

Great, thank you.

Next we'll hear from Rick Schaffer with CIBC World Markets.

Hi, this is actually Dan Morris calling in for Rick. I have a couple of questions for you. You mentioned that you expect your bookings and orders to be up sequentially. Should we expect that the 45 percent turns to be a peak?

I would say generally, yes. I mean we don't see it going much further north of that. If you look at our historical range, we've been anywhere at a low of 26, 27, 28 percent, up to a high of like 51, 52. So, if it did increase it would be slightly. But, I think based on our models, the 45 percent kind of looks like a relative peak.

Okay. And in terms of your average lead times, where are they about right now?

Yes, they're definitely shorter than they were, they're probably about an average 2 to 3 weeks.

And is that stable or is it improving?

I would say it's stable. Maybe improving slightly from 4 to 6 weeks ago.

Okay. Great. Thank you.

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

Good afternoon, guys. First question, can you give us the number you usually give us at this point in the conference call about how much turns business you need from this point on or what you already booked in turns so far this quarter?

Yes, I think February trends, in terms of turns business were good. So, the number, I'd say, is approximately around $12 million of turns business still to be booked. So, we've booked, in 4 weeks of the 13-week quarter, we have booked over 50 percent of the turns requirement for the quarter, but that's typically what you would expect. February is going to be a very high turns month, the first month of the quarter.

And then in terms of the general bookings trend, has there been a steady improvement? Can you talk about the impact, if any, from lunar New Year, Chinese New Year that you have seen so far in the quarter?

Yes, the effect going into it from what I could gather, it didn't seem like there was a large pull-in effect that you might have compared to previous years. It's a little short after it to have a sense of -- if there was any inventory in the channel for that. So, it's -- I would say for us it's remained pretty constant through there. You saw a slight dip, the week of the lunar New Year going on.

Okay. And would you say generally the trends have been of month-to-month improvement bookings? Do you think it's been relatively constant on a monthly run rate, the overall bookings?

Yes, I think it's been relatively constant. What we feel good about is the POS's continue to remain strong. I think -- I think the one area of caution is that the customer base is continuing to remain comfortable with lower levels of inventory at this point.

Okay. And then 2 other quick questions. The first, you commented on desktop power management being -- being weak. Any color you can add on notebook power management and then any thoughts on the environment with respect to pricing in general? Thanks.

Yes, with notebook power management, I mean obviously I think this year is going to be an overall growth year for that business. I think in the first calendar quarter, the one question for me is, you're going to be seeing a transition from IMVP-IV to IMVP-IV+ in this year and just the timing of sort of the ramping up of the new generation and the order rate of the older generation is a little bit difficult to predict in this quarter. But I think we will see constant building in that business throughout the year.

Are there any comments on the pricing environment?

I think pretty much across the board is whenever we see these slow periods, it's an opportunity for our customer base to get more aggressive on pricing, and our 2 best defenses there, number 1, are bringing out the new products that get the -- the higher gross margins at the beginning of their life. And then number 2, as I mentioned in the press release, we went back to our supplier base in the last quarter and negotiated some pretty good cost reductions to help offset any pricing pressures we're getting there.

Okay. Thank you.

Next we'll take a question from Jeff Rosenberg with William Blair.

Hi. I wanted to follow up on the pricing and hone in on the power management and the handset area, just given the pricing pressure you specifically mentioned there. I mean are you holding gross margins steady in that particular segment, do you think? And maybe talk a little bit about the competition you mentioned that's increased in that segment?

I think, Jeff, if you look at the gross margins in that area with the price reductions we've negotiated, I think the gross margins there are holding their own and still approximately around the corporate average, and as Jason mentioned, the key thing is we've got a tremendous -- a really good flow of new products in that market space here through the balance of the year, some highly propriety devices, which are going to drive much higher gross margins. So, that's the key thing.

And are those new products expanding your served market, so to speak, in that area, or are they follow-ons to areas like white LED drivers where you've been strong up to now?

Yes, it's a combination of both of those, Jeff. So, on some of the back light areas, what you sort of have is moving to third and fourth generation back light products, where there might be some reasonable business still selling first and second generation, but that feeling, the most ASP pressure. In addition to that, we are expanding the sockets that we're actually addressing and we should see revenue from those sockets in the back half of this year, as well.

Okay. And then I guess the other question I was just looking at in general, the -- the revenue in handsets went down pretty significantly and yet overall protection held up well. So, can you talk at all about the mix these days between protection and power management in the handset area? And maybe give us an update as to how that balance is?

Yes. I mean the -- the protection business is still -- if I look at the -- the HID business, I mean we're still doing a decent amount in protection, but it's still heavily power management. It's probably approximating roughly -- roughly 60 percent power management, 40 percent protection. A lot of this strength in protection also comes from other markets like industrial, computer and significantly where a lot of growth in the quarter came from in protection, which is good from a margin standpoint, was networking.

Okay. Great. Thank you.

Next we'll take a question from Louis Gerhardy with Morgan Stanley.

Good afternoon. I wanted to look at a couple of your larger markets, maybe just notebooks and handsets and step back a little and maybe if you can share with us what the recent revisions to say the 3 to 6-month forecasts have been from the customers and maybe just what does that mean with regards to your perspective on consumption and end-market demand and seasonality? Maybe you can comment on those 2 areas.

Okay. On the notebook, Louis, I can tell you that our -- our most significant customer there feels pretty confident about their year-over-year unit growth being pretty measurable this year. And for us personally, transitioning from IMVP-IV to IMVP-IV+ this year, we feel pretty good about the sockets that we're in. As I said, I mean for me, in the short-term, the biggest wrinkle is just in this quarter, predicting what is the ramp-up rate of these IMVP-IV+ programs, but I'm pretty confident that I think the first half of this year will be higher than the back half of last year in that business.

On the handset, I think it's a little less straight forward for us. We've got a more diverse customer base there, but as you know, you know, Samsung's traditionally been our largest guy there and I think they lost some share in the fourth quarter and so we're responding to that by obviously continuing to support them, but increasing the focus with some of the other players there.

You ask about the 6-month horizon from those guys, I think they're doing a decent job of giving us a 4 to 8-week horizon, but I don't put a lot of confidence in what I'm seeing from them 6 months out right now just because of the rate of change of that plan.

Okay, that helps. Maybe just to ask it slightly differently, I'm trying to understand what makes you believe the second half will be better than the first half and is that more of just a seasonal commentary or is it expecting a more favorable economic environment, also?

Yes, so, I think it's really a combination of 3 things, okay? That the first 2, in my opinion, don't have a lot to do with -- with an uptick in the demand. Just number 1, as I mentioned, one of the best things that we can always do in any markets, and specifically in handsets, is bringing out new products that are going to get attach it at a higher performance point and a higher gross margin in the business. And so I feel good about new products that we brought out both in Q4 and what we're going to be bringing out in Q1 in this space that will address revenue in the back half of the year. So just that one.

Number 2, as I mentioned earlier in the script, I personally believe the market in general right now is very comfortable with noticeably below average inventory levels, both at distribution and at the OEMs. And while you don't need a big recovery or uptick in demand, I think that that's going to start trending up at some point here, not too far off in the future.

And then number 3 is, yes, I think there will be just some normal seasonal demand. If you just look at the industry in general, where Q1 starts off and the growth you've got to have during the year to hit any of the annual numbers people are talking about, you're going to have to see some build in the back half of the year. So, even with that, I think at least 2 of the 3 of those generate some growth in the back half of the year. Does that answer what you're trying to get at?

Yes, that helps definitely. If I could have a follow up with David, just trying to understand what you said about the turns and is it sort of realistic to think that you're starting backlog might be down $1 or $2 million in the April quarter then you can keep it maybe flat in July and start to grow it thereafter or do see things happening more rapidly than that?

No, I would expect, actually, our starting backlog for the -- for the July quarter to be up based on our current -- based on our current forecast.

And April would be down a little bit or flat?

Say that again.

The April quarter, then, your backlog was down, what, maybe 10, 15 percent?

Louis, for us, when you're saying April, do you mean Q1 or Q2?

I'm meaning for the April 2005 quarter, I'm estimating your backlog was down, what, maybe 10, 15 percent?

Yes, somewhere in that range. That's correct.

Yes? Okay. All right, thank you.

We'll move next to Steve Smigie with Raymond James.

Great, thank you. I was hoping you could comment a little bit on your wireline business, which I believe in the past you talked about say 50 percent type annual growth, and it seems maybe that assumption maybe is pulled back a little bit and sort of the past part of the strength there have been coming out of China with some DSL programs and things like that. So I was just wondering if you could give us an update on your thinking on that growth there?

Yes, I think we still remain pretty optimistic in that area, Steve. Maybe just given the general market condition, softening that statement a little bit. But really the reason for the basis of strength there is we're coming off a relatively small base. If you go back a couple of years, the majority of the revenue we had in that space was only protection. The opportunity for protection continues to grow there as you have more and more ports. We've since added power management really in the last year, starting to show up in meaningful revenue and we expect that to happen this year, as well.

And then you've got the addition of some of the SETS products going into things like DSL extender cards, and so for us it's really -- it's the combination of coming off a smaller base and the expansion of the product offering in that space that I think is really going to drive that growth.

Okay. And then my other question is just a general question on the design wins. You've obviously shown some very nice design wins and just wondering how the follow through has been on some of the ones you got in the past, a pretty high completion of say ramp to production.

Yes, Steve, I chuckle because my dying wish before I finish doing what I'm doing is to be able to give you guys a transfer function that says, in this business is takes this amount of time and this percentage and I'm working on doing that. But we -- we aren't there yet and the best thing that I can give you today is we just continue to look at it on a relative basis, where you see businesses that we believe are growing, are those on a relative basis, continuing to trend up in their design wins and then do we see the following trend up in revenues? I think the answer is yes.

If you look at our networking and industrial power of business, that has been growing nicely the last several quarters. This past quarter of Q4 we had $12 million in that area, which is almost double the rate that it's ever been. I think the highest it had been before that was $7 million. And we're -- for our internal operating plan, we're showing pretty good growth with that business this year. So, yes, it looks to all track and I can't really be more scientific than that at this point.

Okay, great. Thank you very much.

I'd like to remind the audience that it is star 1 to ask a question. We'll hear next from William Conroy with Sanders Morris.

Good afternoon. Just a couple of questions. Jason, with the new products that you've got either coming out or that you have introduced, can you comment a little bit about the time to revenue that you're seeing and realizing it may be early, what about the lifespan of these things? Are these multi, multi-year, kind of as we typically think of catalog analog or shorter? Can you just kind of give us a little bit of help on some of those characteristics?

Right, that's a very good question, Bill. I think I, like you guys, I look at my products like it's portfolio management and you want some mixture of products that have quicker time to revenue, but tending to correspond to that is then a shorter revenue life cycle and then a mixture of products that have longer time to revenue, but tend to have a longer product life cycle. So, a great example there is our ATE business, the revenues we've been seeing over the last 3 years there, have really been based on products that the Company probably developed 5-plus years ago.

So, this being one of the longer times to revenue, but then longer product life cycle, now, in a long market like that we have seen a reduction. Even that market is getting quicker in its ability to ramp to revenue from design. And so we're -- we just started introducing some new products there last quarter. We'll be doing it this quarter and I'm pretty positive that we will be doing it each quarter throughout this year.

Time to revenue for that market is probably meaningful, is probably in a 1 to 2-year timeframe, so it's longer. Same sort of with the SETS or Advanced Communication business. Once again, those are products that will run 5 to 10 years, once they're in production. But on average it's probably, you know, one to two years to any kind of meaningful revenue and then maybe kind of 3 years out is where you kind of start really hitting the stride, so to speak.

Kind of at the other end of the spectrum would be the handset, where that business, very often, is probably from the time we're sampling the product to the beginning of revenue could be 2 quarters. You're working with the customer on the design, maybe a year or 5 quarters, 6 quarters in advance. But -- so that can ramp pretty quickly. So, for example, things that we're releasing in Q4 and Q1 -- Q4 of last year and Q1 of this year could be ramping in Q3 and Q4 this year.

And then sort of in between there you would have the networking and industrial power and the notebook, with the notebook still probably being -- well, that one, -- it's really kind of a partnership, where you're working very closely, well before you have silicone, but typically from claim of design win to revenue is still probably a good -- a good year out. But then running a year and a half-type thing on average or something.

And next would be our networking and industrial power management, which anything with the word "industrial" in it tends to have a longer time to revenue, but also, once again, much longer revenue life cycle. So, that can -- it varies by product. That moniker for us means a lot of different end markets and so -- and some places it might be a year, others it might be 2 years to revenue. And that's -- the beauty here in a lot of these businesses, we've been investing in them, in the newer ones, for 3 to 5 years and that's where we're just starting to see some of the traction.

As a quick follow-up to that. Are the new products more heavily-weighted than to some of those areas or do they tend to mirror your end market mix? Or -- the mix of revenue?

Yes, it's probably more towards the emerging products because if you just look at it, you've got to kind of get the critical mass going there in these emerging areas and so in the networking and industrial power group, we had a significant percentage, I think, 6 of the 25 products, so, call it 25 percent in the quarter and clearly that business unit doesn't represent 25 percent of our revenue today. And so that's -- that's kind of how we drive our ongoing shift to newer markets where we can grow faster and get the 60 points or better gross margin.

Great. Thanks very much.

Now we'll take a follow-up question from Louis Gerhardy.

Yes, thanks for the follow-up. Just a quick one on the IMVP transition that you're expecting. Can you just talk about your -- the expectations or the timing of it? And just give us a sense of how you're forecasting this transition to occur?

Yes, so, my sense right now is that production is starting in the April timeframe, Louis? And, going to build from there throughout the year and there are, some IMVP-IV platforms that are going to continue to run for a good while in this year, still. And the reason I say since or have some hesitancy is while April is still4, 6, and 8 weeks out, I just don't see the -- the level of confidence and commitment in putting inventory in the channel and maybe it's just that people are looking for 3 or 4 weeks worth of lead time and just assuming it's going to happen. And I don't know, maybe that's just some sensitivity with the pushouts that there's been on that platform in the chipset, they're just going to be cautious.

Okay. And then --

I guess, maybe what I would say is I think worst case maybe it's a month later.

Okay. And then to get a sense of how quickly you're expecting this might happen, could, say, the crossover of IV versus IV+ be say in the month of December? Or is it something that's likely to occur later than that? Just to get a sense?

Yes, I don't know that I can give you a good answer on that today. Really what we're doing is, we know what IV programs we're in, we know what IV+ programs we're in and we're just kind of managing that and beyond that we're really focused on the IMVP-VI or model year '07 after that, the other marum [ph] chipset.

Okay.

So, I couldn't give you a prediction of the crossover point in the year at this time.

Yes. That's tough. Thanks a lot. That helps.

I'd love to if I could.

Thanks.

Now we'll take a follow-up from William Conroy.

Jason, a quick follow-up on the ATE business and really related to your answer to my previous question. Can you say whether you are currently adding design resources to that area? Or committing more -- whether it's funds or people there? If you have redirected maybe some of the people inside? Or can you give us a sense of the relative waiting of that area specifically?

I can honestly tell you, Bill, that we're not adding resources there. And I think that the ATE business is a good analog/mixed signal business, it's a high gross margin business with barriers to entry. It's not growing as fast on average as the rest of the semiconductor business. But it's a good gross margin business that -- that I think you can maintain some -- some good business in.

The key for us is what is the right level of investment there? And at a minimum, I can tell you today that increasing that investment is not something that we're looking at, we are looking at reapplying some of those resources, but at this point we're still committed to being in that business because I -- I think long-term we've got a lot of IP there and, frankly, we've invested for the last 3 years in a whole new family of products that are just going to be coming out here over the next several quarters. And, I think beyond that, it's not even obvious what would be the requirements of the next generations beyond these new products that we're releasing here in the next couple of quarters. So, it's a good opportunity to look for other areas of diversification. Does that answer your question, Bill?

Yes, that's helpful. Thank you, Jason.

Now we'll move to Kevin Rottinghaus with Midwest Research.

Hey, thanks for taking my questions. First off, I guess you mentioned 2 of the 3 emerging markets showing some good traction here. Could you talk about the third? You talked about -- or give some color on what's going on with HID?

Yes. So, just being real honest with you there, I'm disappointed in our traction. I can tell you that. I think the place where we have the best opportunity is when we are going after a solution where we add some novel value, maybe there's some performance feature that we do better or they can't get from somebody else. But there are times when we, since that business is quite small for us, we'll go after opportunities where maybe the only angle that we've got is we're trying to get somebody another supplier and that's not a compelling proposition and when we've gone down that path, it just hasn't worked as well for us. So, I'm a little frustrated there.

I think we do have some good IP there, but our focus really needs to be on going after opportunities where we can truly differentiate and add some value as opposed to just being a second source supplier, where it just comes down to cost.

Okay.

Is that what you're looking for?

Yes, I think so. You had announced some design wins in that space, in the prior quarter, I believe. Are those still on track? I mean there's certainly still opportunity in those areas?

Yes, definitely.

Okay.

And as I recall, they were sort of -- I mean they were differentiating but they were sort of higher end, high performance, niche or smaller volume things that we'll have to see if those are things that get pushed down into the mainstream or not.

Okay. And second thing, in the consumer applications set-top box displays, other areas, MP3 players, is that the same kind of product mix of protection in power management or is this breaking into other areas, as well?

No, it's the same kind of product mix. I mean, obviously the power management part of it might be a different voltages and things like that, but it's pretty much protection and power management for us.

Okay. And does that fall into the 2 percent, or the other category for the revenue breakout? Or are those in other areas?

In the other category, we principally would have some of like the gaming, TiVo and some other -- other consumer-type products.

Okay. I guess third, could you update us on how big SETS is and how big -- any kind of color on how big that can be towards the end of the year? Or what kind of growth metrics we're looking at for the year.

Yes, it's -- it's getting its way towards just about 4 percent at this point. And, it's -- it's a little hard saying at the end of the year, depending on how all the other businesses grow. But I think that that business is -- is well-positioned to grow in spite of end market changes. Just because of the fact that we've got many end customers that have boxes in production this year. And just continuing to see the sell through of those products should continue to drive growth, so, once again, it depends on what we as an overall corporation do, but I guess in the minimum, I can tell you I expect it to be in an increasing percentage throughout the year.

Okay. And last one, if it I could, if you could quantify at all what the impact of the changeover to IMVP-IV+ means for you, whether it's from a margin or ASP or more content, if you could quantify at all that would be helpful. Thanks.

Yes, I think from an overall point of view, it's worst case, a break-even from sockets, but net, I think it could be actually up for us a little bit, some of it has to do with just the ramp up rate of IMVP-IV+ versus IV going down. As far as margins, I think going back to my earlier comment, I mean being in a softer period, people are being aggressive on pricing, and hopefully throughout the year the cost reduction programs that we negotiated in Q4 will help us to drive those margins north.

Great, thank you.

That does conclude our Q&A session for today. I will turn the conference back over to our speakers for additional or closing remarks.

Right. We just want to thank everyone for participating in our call and look forward to updating you at our next quarterly conference call. Thank you.

That does conclude today's conference. We thank you for your participation and have a great day.