Semtech Corp (SMTC) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the Semtech Corporation fiscal year 2006 first-quarter conference call. [OPERATOR INSTRUCTIONS] 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.

I am simply just the Treasurer, Thank you operator. Good afternoon, ladies and gentlemen. Welcome to Semtech Corporation's fiscal year 2006 first-quarter earnings conference call. I am John Baumann, Treasurer of the Company. I also handle Investor Relations. We've just released the results for our first quarter that ended May 1, 2005. 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, and that our first-quarter results that we published today in our press release are unaudited.

Before I turn the call over to David, I want to remind everyone of the following two notices. First this call is open to all interested parties in accordance with Reg FD. If you have any questions about our future performance or our estimates of future financial results, we will consider them now. We are unable to say if there will be another Reg FD compliant opportunity for you to ask questions before the next quarterly conference call. Second, this conference call will include projections and other forward-looking statements, which involve risk and uncertainty as highlighted in our press release. Risks include but are not limited to overall economic and geopolitical conditions, the timing and duration of semiconductor market upturns or downturns. Demand for communications infrastructure equipment, computers, cellular phones, and automated test equipment. Demands for the Company's products, competitors' actions, relations with strategic customers, supply from key third-party silicon wafer foundries and assembly subcontractors, risks associated with the businesses of major customers and other risk factors. Please prefer 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 web site 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 one available at Thomson's website and our Investor Relations section of Semtech's website. I will now turn the call over to David Franz, Semtech's Chief Financial Officer.

Thank you, John. Good afternoon, ladies and gentlemen. Semtech Corporation's revenue and gross margin came in ahead of guidance for the first-quarter of fiscal year 2006. Business appears to have stabilized and we are optimistic about the second half of the year, particularly the fourth quarter. In addition, our increased rate of new product introductions should generate growth.

Starting with orders. Orders in the first quarter improved by 3% compared to the fourth quarter. Orders were at record levels in our Protection, Advanced Communications or SETS product line, as well as our Networking and industrial Power Management product lines. Over the last two years, the Company has introduced over 30 products within -- within what we refer to as our industrial and Networking Power Management product line. We expect continued growth from this product line for the next several years. Orders for our test and measurement products and Portable Power Management products weakened in the quarter. Our notebook and cell phone Power Management products were impacted by seasonal conditions, as well as some ASP pressure. The current order patterns are consistent with our expectation of short lead time orders and reduced visibility to be followed in future quarters by increasing visibilities as inventories drain and customer confidence increases.

As we look at the income statement, revenues for the first quarter of fiscal 2006 were 56.2 million. This represented a decrease of 4% compared to revenues of 58.4 million for the fourth quarter of fiscal 2005. Revenues declined by 9% compared to revenues of 61.9 million in the first quarter of last year. Gross margin for the first quarter of fiscal 2006 declined slightly to 56.4% compared to 56.6% for the fourth quarter of fiscal 2005. This was slightly ahead of our guidance that we had given last quarter. The gross margin percentage for the first quarter was slightly higher than forecasted due to price reductions negotiated with assembly partners, as well as improved throughput in yields as compared to the fourth quarter of last year. Gross margin for the prior year first quarter were 59.4%. Gross margins for the prior year reflected higher shipments of our test and measurement product line as well as greater pricing power in certain sectors. With the dramatic increase in new product introductions, we expect to see such positive dynamics in our business again. Our business model still supports our targeted gross margin of 60%.

Operating margins for the first quarter of 2006 were 21.2%. Net income for the first quarter of fiscal 2006 was 10.8 million or $0.14 per diluted share. The Company's net margin was approximately 19%. As I previously mentioned, revenues for the first quarter declined sequentially by 4% from the fourth quarter. Power Management revenues were approximately flat during the quarter as compared to the fourth quarter of last fiscal year. Momentum as I mentioned is very strong in our industrial and networking Power Management products. For fiscal year 2006, we are expecting significant growth in this area of Power Management.

Protection revenues increased approximately 6% during the quarter due to increased demand from handset customers and in networking applications for these products, as well as new product introductions. Revenues from the test and measurement unit declined by 70% as compared to the fourth quarter. Based on forecasts, this represents a cyclical bottom for our test revenues. We expect some improvement in the coming quarters with further improvement forecasted in fiscal 2007 and 2008 based on new products and new design wins as well as end market improvement.

Revenues from our Advanced Communications or SETS business increased sequentially by 19%. We expect this business to continue to grow throughout fiscal year 2006. Revenues from Semtech's HID or Human Input Devices business declined in the quarter. The Company's high reliability aerospace and military businesses also declined slightly during the quarter.

Revenues for the first quarter were derived from the following geographic regions: 18% was derived from customers located in North America; 8% from Europe; and 74% from Asia. Net turns orders accounted for 46% of shipments in the first quarter. This compares to 40, 26, and 30% in the previous three quarters. This increase was consistent with our forecast and an industry-wide contraction in lead times. Revenues by end market changed somewhat. Revenues from the cell phone, handset, and bay station markets accounted for 32% of revenue. Desktop computers and servers accounted for 11% of revenue. Notebook computers, PDAs, and other portables accounted for 20% of revenue. Test equipment accounted for approximately 2% of revenue. Communications infrastructure accounted for 19% of revenue. General industrial, military, and other accounted for 15% of revenue, and graphics accounted for 1% of revenue. Revenues from OEM sales represented 42% of total revenues for the first quarter while distribution represented 58% of total revenues.

Looking at the outlook for next quarter, we are forecasting that revenue will be approximately flat as compared to the first quarter of fiscal 2006. Industry data would seem to indicate that conditions should strengthen in the back half of this year. To obtain the second-quarter's forecast, net turns orders of 48% 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 short lead times being provided by customers on orders.

Gross margin for the first quarter of fiscal 2006 was 56.4%. Gross margins were slightly lower than the fourth quarter but ahead of our forecast. Gross margins were favorably impacted by the improvements in our cost structure, higher yields, and better throughput. Gross margins for the first quarter were also impacted favorably by the sale of $18,000 of previously written-off inventory. On a year-over-year basis, first-quarter gross margins declined by approximately 300 basis points. This was due to the lower percentage of revenues being generated by our test and measurement business, as well as a higher percentage of revenues coming from our desktop business. The new products we are introducing are forecasted to drive gross margin improvement. We are generally focusing our Power Management R&D budget on business areas that can support 60%-plus gross margins prior to any potential impact of stock option expensing.

For the second quarter, we are forecasting that gross margins will be approximately flat with that achieved in the first quarter. We have negotiated reductions in cost at virtually all of our assembly subcontractors. We have also impacted our silicon cost through cost reductions, yields, and dye shrinks. We are working on several technology initiatives which should continue to drive our cost structure. The significant rate of new product introductions should also drive improvements in our revenue mix in future quarters and years. We are continuing to see positive momentum in two of our emerging product lines, SETS or Advanced Communications product line and the Networking and Industrial Power Products, both of which should drive favorable improvements in mix in the coming quarters. At 56% gross margins, while lower than our targeted model, it still gives us one of the higher gross margin models in the semiconductor market, particularly if these represent traunch cycle margins. Improvement in gross margin is forecasted for the second half of the year.

Research and development spending was 8.6 million for the quarter, which was slightly higher than forecasted. The higher spending related principally to the higher-than-forecasted 23 new product introductions. We are forecasting that R&D spending for the second quarter -- excuse me, will be approximately flat to slightly up compared to the first quarter. The Company's Swindon Design Center is now fully operational and new products from this design center are expected later this year, while R&D spending is slightly higher than our targeted model of 14 to 15%. We believe this will come back to the targeted levels as revenue growth resumes.

SG&A expenses declined by approximately $200,000 during the quarter. G&A spending was more than we had forecasted for the quarter due to higher than expected legal expenses. As we had mentioned last quarter, Semtech is the plaintiff in a suit to win a recovery of $12 million plus interest from our insurers relative to a prior-year settlement. This high level of legal expenses is expected to continue through the third quarter. At this point, we cannot estimate the amount or timing of any recovery. For the second quarter, SG&A is forecasted to be approximately flat in comparison to first-quarter levels. The biggest risk factor to this forecast remains legal expenses.

Interest and other income was 1.93 million for the quarter. For the second quarter we are forecasting interest and other income of approximately 1.95 million. The Company's effective tax rate for the first quarter of fiscal 2006 was 21.8%. The rate was lower than our estimated effective rate of 24% due to the geographical mix of revenues and profits. Specifically, the lower revenue from our test business favorably impacted the test rate -- the tax rate. The Company is projecting that its effective tax rate for the second quarter of 2006 will be 22%. This is based upon current revenue and earnings forecast.

There are several factors which can cause this tax 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, the geographical mix of revenues, as well as other factors. Certain of these factors can have significant period to period impacts on the tax rate which can cause the actual rate to vary from forecast. The diluted share count decreased by approximately 1 million shares during the quarter, to 76.7 million shares. This was less than the number of shares outstanding that we had forecasted and this was primarily due to a lower-than-assumed average share price for the quarter. The share count is forecasted to decrease slightly in the coming quarter due to continued share buybacks. Such forecasts can vary based on the average stock price for the quarter, stock option exercises, as well as the level of stock buybacks. Based upon this guidance, diluted earnings per share for the second quarter are forecasted to be $0.14 per diluted share.

Turning to the balance sheet, Semtech ended the quarter with approximately 303 million of cash and investments on the balance sheet, and we had no long-term debt. Operating cash flow for the quarter was a positive 13.4 million. During the first quarter, the Company spent approximately $5.5 million on property plant and equipment. Most of this spending was committed to in the prior year and relates to capacity agreements at one of our third-party wafer foundries. Capital spending for the balance of the year should be significantly less than this on a quarterly basis.

Depreciation and amortization for the first quarter was approximately $2.7 million. The Company also purchased approximately $8.7 million worth of stock or 475,000 shares as part of its ongoing buyback during the first quarter. As of the end of the first quarter, the Company has remaining under its current buyback authorization approximately $2.3 million of stock buyback authority. Accounts receivable to days sales outstanding calculated on a quarterly basis remained very low at approximately 38 days for the first quarter. Inventory levels increased by about 2% in the first quarter as compared to the fourth quarter. Days of inventory calculated on a quarterly basis increased to 94 days as of the end of the first quarter.

Guidance for the second quarter, as I mentioned, shows revenues flat with the first quarter instead of slightly improved due to the fact that revenues in the first quarter slightly exceeded forecast. We are still forecasting sequential growth in revenues and profits in the back half of the year. New product introductions the last two quarters have been at very high levels with a total of 47 new products introduced in these two quarters. This is almost two times the amount of products which were introduced in the comparable periods one year ago. We expect continued strong new product introductions for the balance of the year.

We continue to see stabilization in end markets. The reduction industry within our inventories and strong sell-through is also a positive trend. Based on our operating plan, our new products are expected to drive revenue and margin growth. Cash flow generation is expected to remain strong in fiscal 2006, and the Company will continue to buy back stock. Thank you for participating in our first-quarter fiscal 2006 conference call. And I will now turn the call over to Semtech's Chief Executive Officer, Jason Carlson.

Thanks, David. Good afternoon, everyone. Q1 was basically as we expected with bookings slightly improving quarter over quarter and the amount of turns business increasing as lead times remain short. Sell through at our distributors was very strong and inventories in the channel appear to be lower than historic norms. Gross margins were slightly better than forecasted as a result of our cost reduction efforts and product mix.

Looking at design win data for the first quarter, the first quarter, again, saw a good level of design activity. The Company reported more than 750 new design wins worth about $78 million of expected future revenue. This is up from 640 wins in Q4; however, total dollars are down from Q4. This change reflects increased design win activity for our Protection products that typically have an ASP below many of our other product lines. From an end equipment perspective, cell phones led with 25 million in design wins followed by notebooks which increased to $16 million. In telecom, networking applications with more than $13 million.

Our efforts to further diversify our business continue as we saw wins into more consumer-type products such as DVR, set-top box, flat panel, TVs, MP3 players grow to a combined 7%. From a regional perspective, design wins in Japan increased noticeably, partially due to increased focus on high-performance consumer electronics products.

Turning to new products and what we expect to be growth and profit drivers. While market conditions continue to be sluggish, the focus for Semtech has remained on bringing out new products. This quarter, we introduced 23 new products, including 9 in the area of portable power and 8 out our Protection product group. Last quarter, the fourth quarter, we introduced 24 new products, including 7 in the area of Networking and Industrial Power Management and several out of our test and measurement group. These new product rollouts represent a significant increase from one year ago when we averaged closer to 14 new products in the quarter. Excuse me.

Several things to note about our acceleration of new products. First, it seems to be as a direct result of added focus in the area of new product introduction, due in part to efforts to better define the process of developing the products. While the time it takes to develop new products has not declined significantly for us yet, the production ramp of new products is improving with many of the recent new product developments resulting in fully functional silicon at Rev.0 and full production at Rev.1. Regarding the time to develop new products, I fully expect that we will begin to compress those further as efficiencies in our new product development process kick in. Going back a few years, engineering resources were consumed with transition to becoming a fabulous company; however, in the past two years, we have settled into working with our key foundry partners and have been able to put more resources back towards the product development, rather than the process transfers and definitions.

The second thing to note about new product introduction, they are our best response to lower average selling prices in certain vertical markets. Our new products continue to integrate more functionality. They also look to address additional content available within the application. Cell phones are a good example of an application where our new products are providing significant integration and are also addressing new sockets, including those tied to higher performance phones, where features like camera flash, MP3, and for TV and streaming video.

Third, many of our new product introductions are targeted at broad-end applications and markets like the networking, industrial, and high-end consumer markets. We have talked a lot about wanting to balance our exposure to vertical markets like notebooks, cell phones, and tests with more vertical markets such as these. We are starting to see this in our end-market mix, such as the wire line end market which includes networking and telecom which was estimated to be 19% of net sales in the quarter. And the industrial end market, not including anything related to ATE, combined with a small but growing amount of high-end consumer-related sales, including things like HDTV was about 15% of net sales in the fourth -- in the first quarter.

Finally, regarding new products. In the area of test and measurement, an area that for us has been impacted by both a strong downturn in the ATE end market and some market share loss, a recent family of new products should help reverse some of these trends. Prior to this new family of products targeted in electronics and ATE, we had not had a new suite of TMD products since 1998. While the long-term predictions for the total TAM of the semiconductors into the ATE market is likely declining, we expect to see good acceptance of these products. We have a lot of IP in this space with a history of industry-leading products. Our new product introductions and broader customer focus are creating opportunities to grow the revenue in this business over the next 24 months. I will continue to update you on our product development efforts each quarter.

Let me close by not only reflecting back on Q1, but also by looking out at Q2 and beyond. With bookings and turns orders increasing in Q1, and a forecast for both to increase again in Q2, this typical -- this pattern is typical of what we have seen in previous cycles, where turns orders keep increasing to 50% before they start going the other way. Certain product lines, namely our protection, sets and Networking and Industrial Power Management product lines all saw record bookings in Q1 which is very encouraging.

As we noted in the press release, our Asian distributors had a record POS quarter in the first quarter. Likewise, we feel good about the inventory in the channel, knowing that it is very lean. We also feel good about our own internal inventory levels that are positioned well to support the current low visibility environment. Q2 is historically a softer quarter for the Company. As Q3 and Q4 are typically the strongest. We continue to believe that the historical season ramp that normally occurs in the second half is likely to occur, due in part to very low channel inventories and things like back to school and eventually holiday bills. To what degree remains to be seen. Booking rates will need to pick up noticeably in the coming 4 to 6 weeks. Aside from end market, most importantly, we have continued to strengthen our business, focusing on new product development that should drive increasing revenues. Also, the broadening of our piped offering into more horizontal markets, and investing in opportunities that expand our overall technology capabilities. This concludes my remarks and I will now turn the call over to the operator for questions.

[OPERATOR INSTRUCTIONS] We will go first to Romit Shah with Lehman Brothers.

Thanks. Guys could you just comment on lead times, where they ended up for the quarter, and perhaps how you see lead times trending through the -- through the July period?

Yes, Romit, this is Jason. First of all for everybody, I woke up with a bit of a cold this morning, so I apologize for the coughing here but -- I think lead times in the beginning of the quarter, we were probably seeing three to four weeks, relatively short visibility, and I think they pretty much stayed there throughout the quarter and into today as I mentioned on the script. The customer base seems to be pretty comfortable with this amount of visibility at this time.

Okay. And then you mentioned that pricing was a little weaker during the quarter. Could you just give us some more color on -- on perhaps product segments or applications?

I just think that when you get in these periods of a softer time or a demand is not quite as great, the purchasing of the world spends all their energy on cost reductions rather than trying to make sure they've got plenty of product. So it is just a much more common topic today. I don't know that it is anything out of the norm for where we would be at this part -- at this point in the cycle.

Okay. Just final question is on your computing strategy. National and Maxim have both said recently that they plan to reduce their exposure to the notebook space, and I was just wondering, do you view that as an opportunity for Semtech? Or are you also re-evaluating how much exposure you have to this space?

Yes, I -- I think it's an interesting comment. Obviously what people have talked, there is just the general trend in computing continues to be pretty difficult from an ASP point of view. In the short term, that may create some upside for us. I wouldn't say that I am counting on that at this point, but our longer term I think what they did was the appropriate thing. We need to constantly re-evaluate every market that we are in. We don't have any plans beyond that at this point.

Okay. Thanks, guys

Next is Ross Seymore with Deutsche Bank.

Thanks, guys. Just a question on your comments on the second half of this year. Do you expect to return to normal seasonality given the short lead times and what you see right here? Or something either higher or lower than that for the quarterly revenue growth?

Yes, Ross. As I said in the script, I mean, I think this stage is well set for that, meaning that the industry as a whole has had a relatively soft first half. Inventories in the channel, and now inventories at suppliers both seem to be quite lean. But, yes, we have got an overall GDP that seems to be decent. And so all of that to me sets the stage for it. The one caveat that I would give you there is I think in this kind of market condition, your sales guys aren't going to forecast it. I mean, it is just -- they are going to forecast it the day the orders come in, and we are not going to see a change in the buying patterns or the booking patterns of the customer base until they start getting answers that say they can't get parts in that amount of lead time.

Do you get any sense that we have the potential for a bit of a panic by the channel? It always works out that those guys when they hold the control want the lead times very short but as soon as they need the parts, of course, then -- then the power changes to your side of things. Do you expect that sort of transition to happen? Or is the fact that you guys hold so much inventory in aggregate on the chip side that you can probably supply all the demand at least for this calendar year.

Yes, I don't -- first of all, I don't think there is so much inventory in the channel. I mean, I think, you look back at us. A quarter ago we brought it down 17%. I know many of our peers did similar type things bringing their inventories down quite a bit. Really the key is having the absolute right mix. I think there could be an opportunity for -- I don't know if panic is the right word, but maybe a shift in where some of that power lies.

Okay. And then the final question. In both the flat guidance for the July quarter and then maybe a little bit in the second half as well, is there any end market color in the segments that you guys break it out by that would be either outliers, one segment way above the flap and others way below the flap that we could use in our models?

Yes. I don't know that there is any particular end market that because of its end market health is noticeably stronger than another end market. I think what we at Semtech are seeing is the results of some of our emerging product areas, just the fact that -- excuse me, we've been investing in them for three or four years, and as a result, what's happening now is when you take, say, like a Nortel or an Alcatel for our Advanced Comm. Their business might not be a lot better today than it was a year ago but they are shipping a different mix of products than they were a year ago, right? So products that we might have got designed into a year or two ago for that business are now actually shipping. Similarly with our Networking and Industrial Power Management, for us that is really a statement of growing into a new Power Management market as opposed to that market being noticeably up.

Great, thank you.

Okay

Next with Wachovia Securities, we have Craig Hettenbach.

If you look at your Networking and Industrial Power Management business, what is the typical time frame from design win to when you guys start to see revenues?

I think that is -- of all of our Power Management businesses, that would be the most diversified from an end application point of view. So it really depends on the particular end application. If I had to give you kind of an aggregate, my guess would be about 12 months. I think the fastest we probably ever see in that business is more like 6 months. And some of them may be longer. But in aggregate it's probably around 12 months.

Okay. And then if you look at some of the efforts you had to de-emphasize on desktop. Can you talk of any success in terms of reallocating those resources into areas such as Networking and Industrial Power Management or how you are making progress there.

Yes. First of all, it is taking Power Management resources right and just focusing them on a different end application. I think server is one of the most obvious ones where it has been pretty easy to transition some of those resources into higher-end server where we have had some wins. Secondarily, it just -- the Power Management in general may be going into things like set-top boxes or things -- along the wireless kind of -- or wireline networking type of product.

Okay. Thank you.

Next we have Rick Schafer with CIBC.

Hi, guys. Just a couple of quick questions. First, I guess, is it fair to say that bookings this quarter are tracking roughly in line with last quarter?

Yes, I would say tracking roughly in line to slightly -- slightly up. But, yes, I would say that's a fair statement.

Okay. And then in turns, you sounded like it was 40% from the beginning of the quarter. Sometimes you give us a heads up on what it is now that we are sort of a month into the quarter.

As we sit today we are probably in the -- in terms of gross amount of turns in the 14 million to $15 million range and that's a little -- maybe slightly up on -- but we are seeing, I think -- what's interesting is we look at the month of May and a lot of our product lines we are seeing just more short-term -- more short-term bookings.

Is April -- do you have a typical sort of the slowest month of the year. Is that April? Is that May? When do you sort of start seeing that inflexion every year?

I'd say the inflexion really comes more in the July time frame, probably mid-July. Oh, Rick, were you referring inflexion in terms of when we see the inflexion for the greatest seasonal strength in the year?

Exactly, yes.

I would say it's mid-July transitioning into -- setting up Q3 and Q4.

Okay. A quick question on the ATE business. If I heard you right it was down 70%, down about 2% of sales. Is that -- going forward, should we be thinking of that -- I guess how important is that business going to be going forward? Is it going to be a 2 or 3 or 4% chunk of change now or where do you see that business longer term?

Yes, I think the way to think of it, first of all, is that I think we can call Q1 a bottom for that business. Both relative to our own position and the market in general. If you go back the quarter before that, you were seeing no new order activity. Now there at least is some new order activity going on. So I think you are going to see that somewhat improving during the year. Secondarily as I said in the script, we really built that business on industry-leading -- but really hadn't come out with a new family of products there for several years until the last calendar quarter of last year and have begun releasing those products now. I think over time with the IP we have there it's a good gross margin business. Just the downside is the cyclicality of that business. I would think about it as like a 5% business for us.

Okay. Perfect. Then just one last question. Kind of tied to that, I know a couple of guys have hit on it, but when you talk about diversifying the top line and if you kind of think about the last couple of years how handsets really been really kind of the engine or one of the key engines anyway for top-line growth for you guys. Where should we expect the next sort of handset-like growth to come from? I mean, is it going to be HID or SETS? Can you identify? Is it going to be industrial? I know you talked a lot about industrial. What sort of do you guys think is the next engine. And that's it, thanks.

First of all, I think handset still has a lot of opportunity for us there. But I think the Networking and Industrial Power Management which is really as I said earlier the broadest from an end application Power Management for us and then probably secondarily our Advanced Communication or SETS business, those both are continuing to get nice traction and we are seeing it in the results just a consistent uptick.

Okay. Thanks, guys.

Next is Terence Whalen with Smith Barney.

Hello?

My question has been asked, thanks

Moving on to David Wu with Global Crown Capital.

Yes, can you please elaborate on the Industrial Networking Power Management. What percentage of revenue was it in Q1? I think I sort of missed it. And as far as pricing pressure is concerned, I assume you must be referring to things like Desktop Power Management. Is that an even meaningful percentage of your -- of your PC business anymore? Desktop and server was only 11% of revenue. I assume the pricing pressure came from desktops.

Yes, I am going to answer your latter question while David is looking for the answer to your first question there. I mean, you are absolutely right. Desktop Power Management continues to see pretty fierce pricing pressure. The good news is it is a smaller part of our business. I think just Power Management in general being at a softer point in the market continues to see some pricing pressure. That's probably it.

In terms of the Networking and Telecom Power, we don't break that out separately from Power Management. As I mentioned Power Management was approximately flat for the quarter.

And what percentage of revenue was it?

We -- we don't -- we break out the end markets. If you look at the industrial market, military industrial and other, that was around.

15%, right?

-- revenue. Obviously the power portion of that is a relatively small percent still today. The only way I would characterize it is that Networking Industrial Power Management, it did grow very rapidly. It has been growing for the last few quarters, overall has grown during that time frame. We expect growth going forward there, offsetting some of the declines obviously in the overall in the desktop and portable power area coming back to kind of a flat result overall in Power Management.

Okay. I assume that that's probably well under 10% of revenues at this point?

Well, I would think of it kind of as a mid single-digit type of revenue source today, but it is probably the type thing that is going to trend here over the next several quarters to get closer to double digits, if not get into double-digit-type revenues. That is the kind of range of growth or amount -- extent of growth we are seeing from that product area.

Okay. The reason why you are more optimistic about ATE businesses is basically there were no orders to speak of in the first quarter, and so far in the second quarter, you have seen some.

Right.

Is that the way I should take it.

I think that is pretty accurate, David.

Okay. Great, thank you.

[OPERATOR INSTRUCTIONS] Next we move to Bill Lewis with J.P. Morgan.

Great. Just a clarification first and then a question. You were talking about the bookings or the turns left to do. You said 14 to $15 million. I just want to make sure. Was that the amount of net trends that you've booked so far or is that the amount you had left to do in the quarter.

That is the amount we have left to do over the next nine weeks.

Okay. And then, I guess, could you maybe just talk a little bit about your relative performance, particularly, I guess, maybe in notebooks and handsets. It would seem with your results this quarter and then flat guidance for July, it is slightly below what I think some of your other high performance analog peers are talking about. Certainly I imagine you have compared yourself to what some of the other companies are doing and what they're doing year-over-year and sequentially. Just some thoughts about why you might be slightly behind them, and then particularly I guess relative to notebook and handsets where I would have thought you might start to see some of the seasonal pickup in those businesses.

Yes, I think with handset particularly, if you go back to Q4, what historically last year Samsung being our biggest customer, in Q4, we were down as they were down, and in Q1, you saw a little bit of strength coming on there, and we -- we've seen a little improvement. I guess, relative to your comment about looking at our other peers with this, I think it is a little difficult in that most of the guys in our peer group probably don't have the percentage size of notebook enhanced. That is a percentage of their overall business that we have. So, I mean, maybe you are closer to it, Bill, but it is not quite as clear to me. So I am not sure how to draw the correlation there.

I am just -- I guess more than anything curious if you think you are kind of holding your own in this downturn or if you are seeing some specific areas of weakness over the near term. Maybe -- certainly in the test to measurement that's going to have a disproportionate impact on your business. More just kind of, how do you think you are fairing on a relative basis?

Yes, I think on a relative basis, relative to sockets. I think we are holding our own there. Like I said, just being a smaller guy and having it -- our pie split up between fewer things. I think we see slightly higher highs in the good times and slightly lower lows in the softer time.

Okay. One last clarification, just on the test Networking and Industrial Power where you were kind of saying a single digit. Is that a quarterly revenue number you are talking about or is it percent of sales.

No, I am talking as percent of sales.

Okay. Great, thank you.

Next we have Steve Smigie with Raymond James.

Great, thank you. I was hoping you could elaborate a little bit more on the type of growth you have seen in the back half. Is it sort of like 5% sequential growth in the third and fourth quarter respectively? You also mentioned fourth quarter might be a little bit stronger.

Well, I mean, Steve, I think it's a little early to put out a specific range. I don't know that you can find many of our peers probably putting out a specific range quite yet. I think some of the industry data and some of the design win data and the new products do give us quite a bit of encouragement. The fact that the test business has bottomed and we do expect even though it's small, some amount of growth in the coming quarters. I think it is a little early to put a range on that. I guess we would kind of think of Q4 as being a little bit stronger potentially than Q3, but we -- if the notebook market and other markets which are typically seasonally strong in the third quarter are strong, I mean, we should see an improvement in our business, not just in revenue, but, also in gross margin, and we are also -- shouldn't see the same rate of spending increases maybe that you normally might see with that revenue growth. So we will try to work on the follow through as well to try to drive EPS.

Okay. My other question was, you had mentioned you plan to continue to buy back some shares. Would we expect to see another stock buyback program announced (indiscernible) almost at the end of this one? That seemed to be an implication. Just wanted to make sure I --.

That is a fair point, Steve. While we only have 2 to $3 million of authorization left and while we don't have forward authorization today to announce any extension, yes, we -- I am sure the Board would definitely examine that once we see this current buyback expire or get fully utilized.

Great. Thanks a lot.

Next with William Blair we have (INAUDIBLE).

Actually Jeff Rosenberg. How are you. Can you hear me?

Yes.

Okay. Good. Jason last quarter you talked about the importance of the transition from IMVP to IMVP plus for the notebook business. Can you give us an update there? You said that really you didn't have a good sense at that point. Has that gone more slowly than you expected or in general was the notebook business a little bit weaker than you thought it would be coming into the quarter?

Yes, I think it was -- as you pointed out, I was a little concerned at the beginning of the quarter on that call. I think it was a little more back-end weighted, and the transition has definitely occurred. I guess the most positive light that I could point to is, Jeff, the record POS that we saw with our Asian Discses (ph) So I feel pretty good about that. However, it would be really nice if you would have offsetting or greater than offsetting replacement orders. And that's where, as I said, the industry just seems to be pretty comfortable with a pretty lean amount of inventory right now.

And into those channels you book revenue shipment into the channel, right?

Exactly.

So they have lowered their inventories?

That's what I'm saying. Us having record POS in the quarter in those areas I think is a pretty good sign on the sell through, the taking of the inventory into that channel. But like I said, they still seem to be pretty comfortable with pretty lean inventories.

You were pretty comfortable that whatever was happening there your market share was strong, your socket position was good. As some things have unfolded and you look to the second half, anything that's caused you to think otherwise there?

No, I don't think so at this point.

Okay. And on the cell phone side. It was stronger than I expected to be in terms of increasing as a percentage of revenue. Should we attribute all that to Protection or was there better-than-expected performance on the Power Management side on cell phones.

Jeff, in terms of characterizing that, I think the Protection product line performed very well in handsets in the quarter.

And so was that kind of moving to more of a 50/50 mix between Protection and Power Management? Or still dominated by Power Management?

Still dominated by Power Management, but probably moving, instead of a two-thirds, one-third, probably moving at least up to a 60/40 if not even, Protection being slightly greater than -- just slightly greater than 40% of the total there.

And when you look to your new products that you have introduced into the handset area, I mean, how have you done in terms of -- it sounds like your design wins have been good. You've talked about good numbers for two quarters in a row there. Jason, I think one of your concerns has been whether or not the right products would ramp to give you the cover from the increased price pressure where you have been before. Any update on how you feel about whether or not you are going to -- I guess I am getting specific as to whether or not the gross margin improvement from new product introduction you expect in the second half is specifically something you have got visibility into from handsets.

Yes, as I said, from a gross margin point of view, new products is our -- is our best offense to an aggressive pricing market. We have done well on the design wins. We have done well in getting the products out. The one thing that we never controlled that's a little bit frustrating is just what is the take off of that feature, what is the ramp rate of that feature in the marketplace. So, for example, the adoption of watching television on your cell phone is going to drive a need for higher performance screens, which for us is going to help drive a next level of back light drivers. And so the interest level is very high. We have the wins. It looks like there is an opportunity there. We will just have to see the orders come through.

Okay. And one last question on the gross margin. The cost reduction efforts. David, I think you've specified a little bit more that it was at your assembly partners where you have really seen the cost reductions. I guess I have taken away from last quarter that you also were seeing some improved pricing from the foundries as well. Is it more? Should we think of it as where you've gotten better pricing on the back end or has it really been both sides of things that you have seen improvement?

I think -- Jason here. I think probably the reason why we said that is on the assembly guys, it tends to be more across the board, across a certain package type or broader ranging whereas on some of the foundry stuff we can do some very specific kind of high-volume opportunity type things with some of those guys; it's just not as across the board. We have done both.

Any comments on how pricing is on the wafer side. Has it been helping you there too?

Yes.

Great, thanks.

Next we have Dhanda Sumit with Banc of America Securities.

Good afternoon, guys. Couple of questions. First, I don't know if you mentioned this Dave, but you noted that the inventory on a day's basis that crept up, what was the rationale or what -- why did that occur and what is the expectation heading into the July quarter?

I think the rationale was some of these shorter lead time orders and positioning, the inventory and product line such as Protection to be able to respond to those shorter lead time orders across the -- across the mix that we see in that product line. Going into next quarter, I think once again, probably a pretty narrow range while we don't expect at this point to build any inventory. I could see us maybe bringing down inventory a bit. That's certainly our objective, but a lot of that as we get into July is going to depend on the relative ramp that we are looking at for Q3. So that's really what will affect it say within a -- I'd say a 5% band either way, up or down, around where we are today.

So is it fair to assume then that the build was concentrated in Protection products or at least in products where you demonstrated better momentum last quarter?

Yes, I think absolutely.

The other question I had related to the legal expenses. You noted that they will persist at least until Q3. Is there any way or form you can offer more visibility on what needs to occur for the expenses to drop off. Is there a time line we need to think about in terms of the legal issues.

We have a trial date just to point out. We are the plaintiff. So we are going after some upside, some cash here for our balance sheet basically to make that clear. So I mean there is a scenario where they could probably drop off and end this quarter but I think just to be conservative and hedge, I mean, we are projecting that to extend through the end of Q3, and obviously if we are successful, I mean, we are going after $12 million plus interest in this suit. But it is hard to project. The insurance companies have a tendency of right before a trial date of tending to settle things, so that would obviously be the good outcome, but, there is just no way to estimate or predict. The only thing we can predict for sure is that we will continue to have relatively high legal expenses this quarter. But, once this issue is resolved, we hope to have -- to generate some cash and to see the legal expenses relative to this go to zero. Other than that, I don't know if there is a lot I can say.

Could you quantify what the absolute level of legal expenses are right now.

We've spent in the current quarter around 700,000. 650,000 to 700,000 pursuing this because we are getting up near the -- near the trial date. And obviously we are spending that money because we believe at least that we are going to be successful in getting this reimbursement. So if we didn't have that legal spending you could see how that would have aided our financial model.

Could you remind us again what the trial date is?

Sometime around the end of this current quarter.

Okay. Thank you very much.

Next with Morgan Stanley, we have Louis Gerhardy.

Good afternoon. I just wanted to ask you on the demand situation and understand what your customers are saying, because I agree with you that global GDP looks okay and you said that your lead times are not contracting further, so when your customers explain just the sluggish environment the tech malaise here to you. What are they saying?

I just think there's a real aversion to them building any inventory, Louis. And they just seem to have a pretty high degree of confidence in their ability to get parts in these lead times that they are asking for. I mean, relative to demand, they seem to be relatively positive.

And you think it is the same whether it is handsets or notebooks or desktop. They are all in the same mind-set?

Yes, pretty much. I couldn't say there is a distinguishable difference there.

Okay. And I am trying to think for Semtech, as well as all of your peers, for that matter, how you guys are setting yourself up for Q3. Do you believe that you will be able to grow your backlog sequentially in the July quarter?

Yes, I mean I think we will either -- I think the turns level next quarter will probably be a similar level but clearly that would be the target to try to grow that backlog number.

Yes. But you think your turns -- you said it earlier in the call. They will probably go back up to your peak before this process is all over with. I think the peak is in, what, the low 50s?

Yes.

Yes. Okay. And then --.

With that, if -- if this really ended up being the quarter -- I mean you could see that right where the backlog ends up building in the quarter.

Yes. Okay. And then in your press release, you had mentioned something about seeing diversity into broader-end markets, including high-end consumer products. You might have mentioned it on the call, but I didn't catch -- what are some of those products that you are now getting into? And what type of devices are you selling into them?

So flat-panel televisions, for example. There, we are selling products now from two different product lines, both our Protection business and as I said some of these Networking and Industrial Power Management products on their way into some flat-panel TV applications. A little bit into some MP3 players, which is Power Management and some back lighting around Power Management as well. Then DVRs will also be Power Management related.

Louis, just to clarify, I think the turns environment is still, as Jason mentioned, and the lead times are so short, it makes, frankly, growing the backlog pretty challenging. I think with certainty. Pretty fair certain we can say as we get into Q3 and we do see seasonal pickup, I mean I think definitely based on forecasts as you get into Q3, you definitely start building some backlog then as lead times hopefully extend a bit, but lead times are just so short right now and with some customers frankly, with that one major handset customer convert over to more of a what I would call a depot arrangement where everything is a booking and a billing when they pull it. All these things are just ratcheting up the turns.

David on that thought, what percent of your business would be these hub or depot type of arrangements? Are you 10 or 20% yet?

We don't break that out, but clearly the trend this next quarter with -- particularly with this one handset customer should increase -- increase quite a bit in the second quarter.

Great, thank you.

Next we have William Conroy with Sanders Morris.

Bill?

Mr. Conroy your line is open, sir.

Sorry about that, can you hear me?

Yes, Bill.

Just one question, Jason, and I think it is probably relative to some of the others that have already been asked. Have you started to see any acceleration in the uptake of your new products? And I guess concomitantly, are the products you are designing going into markets that have quicker ramps than -- than the traditional Semtech applications that we thought of, say, three and five years ago?

I mean compared to three and five years ago, probably the one with the quickest uptake there would be the handset market for both Power Management and Protection products. I think if you look back that same amount of time across the other product lines, I don't know that there is anything that's necessarily quicker. I think some of it is just as I said, the Networking and Industrial Power and Advanced Comm. are two areas that we have been investing in for quite a number of years, that we are now seeing things that were design wins several years ago, beginning to ramp into production and ramp in revenue today. I guess some of the consumer electronics things, I guess, on the other note, those are probably quicker time to revenue as well.

Great, thank you.

Next we have Gus Richard with First Albany Capital. Excuse me.

Thanks for taking my question. The last couple of quarters, your cell phone and notebook business has been down year-on-year, and the comps in the coming two quarters, those two markets look really tough, and I was trying to understand, was that weakness in revenue in those two lines ASP pressure, is it market share. Can you sort of help me understand this a little better?

Yes, I think it's a little bit of a combination of both. If you are looking at the year-on-year -- a year-ago right now. Samsung was absolutely taking share, and we as a big guy and Samsung were doing pretty well. Whereas it seems like Motorola and Nokia are doing a bit better today and as you know we haven't had a presence in Nokia and we have had a presence in Motorola, it just hasn't been as big. Combined with -- I am sure, Gus, you have heard about the amount of competition there is these days in the overall backlight. And our strategy there has been to try and continue to go up the performance curve and driving displays that are higher performance for motion video type applications or a higher degree of integration. And so there is some pricing pressure there on the lower end stuff that maybe a year ago looked like better business but today is not as attractive.

And then same question on the notebook side.

Yes, on the notebook side, it -- like I said earlier, I think the fact that we had the record POS in Asia last quarter is a good sign and the stage seems to be set for an opportunity for increase this year. We are just not seeing a lot of visibility there.

Can you talk a little bit about how you are doing in design wins for Sonoma versus the -- Sonoma versus the prior platform?

It doesn't seem markedly different when we talk internally here. I think probably the biggest difference compared to a year ago is I think we have done a little bit better job diversifying that customer base a bit more. So there should be some opportunities there. But at the same time, you do have more entrance in that market today than you did a year or two ago.

Okay, great, thanks.

Next we have Doug Freedman with Amtech Research.

Thanks for taking my call, guys. I will try to make it quick. Jason you mentioned the low channel inventories out there. Are you concerned at all about the low level of inventories given the fact that some handy (ph) orders need to be filled on almost immediate shipment?

Am I concerned about that?

Yes, I mean are you doing -- taking any actions to try to get your distributor to carry higher levels of inventory?

No, not really. I mean we -- we want to manage that as closely as we have the capacity to do so, and so, as David said earlier, there are some key areas where we built a little bit of inventory in the quarter after draining it so much in the previous quarter, just to respond to that, but that's on our balance sheet. I think for now if the Discses is comfortable in being that low, we would rather that they don't carry the inventory because otherwise I think that's just a potential long-term problem. So I think we are just going to do our best to respond to these changes as they come along.

And then just a follow-up on a comment that you made last quarter regarding the HID business and a little bit of a disappointment there with some of the new products or how that product line was going. Can you give us an update on a little bit more detail on any actions that may have been taken? How that is progressing?

Yes. I am I guess pretty close to what we are doing there. Six months ago, we hired a new marketing lead there, and they are really going back and doing a good job of re-evaluating their plan and re-evaluating their focus and at this point, I guess I don't think there is a lot more to say -- that we can say about that business than that.

All right. So you are comfortable that it is going to be back in track soon or just --?

Yes, yes.

All right. Thank you.

Gentlemen, there are no further questions at this time. I will turn the conference back over to you for any additional or concluding comments you may have today.

Great. Excuse me, great. I want to thank everyone for participating on our first-quarter call and look forward to updating you when we report second-quarter earnings later this year. Thank you.

Once again everyone this will conclude this Semtech Corporation fiscal year 2006 first-quarter conference call. Thank you all for dialing in today.