Semtech Corp (SMTC) 2006 Q3 法說會逐字稿

Good afternoon. My name is Bobby, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Semtech fiscal year 2006 third quarter earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn the conference over to John Baumann, Treasurer and -- of Semtech Corporation. Thank you, Mr. Baumann. You may begin your conference.

Thank you, operator. Good afternoon, ladies and gentlemen and welcome to Semtech Corporation's fiscal year 2006 third quarter earnings conference call. I am John Baumann, Treasurer of the Company ,and I also handle Investor Relations. We have just released results from our third quarter that ended October 30th, 2005. For the next 45 minutes or so Jack Poe, Semtech's Chairman and acting CEO, 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 principals commonly referred to as GAAP; the third quarter results we published in our press released are unaudited. Before I turn the call over to Jack I just want to remind everyone of the following two notices: first this call is open to all interested parties in accordance with Reg FD. If you have any questions about our future performance or estimates of future financial results we will consider them 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 call will include forward looking statements which in --- which within the meaning of section 27a of the Securities Act of 1933, as amended in the section 2e of the Securities and Exchange Act of 1934 as amended, forward looking statements are statements other than historical Information or statements of current condition and relate to matters such as future financial performance, future operational performance, the anticipated impact of special items on future earnings, our plans, objective and expectations, some forward looking statements may be identified by the use of terms such expect, anticipate, intends, estimates, believes, projects, should, will, plans, and similar words. Forward looking statements involve risk and uncertainty that could cause actual results to differ materially from those projected. These risk and uncertainties include worldwide economic and political conditions, the timing and duration of semiconductor market upturns or downturns, demand for cellular phones, personal computers and automated test equipment, demand for semiconductor devices in general, demand for the Company's products, in part --- in particular competitor's actions, supply from key third party silicon wafer foundries and assembly sub-contractors, manufacturing costs and yields, relations with strategic customers and risks associated with businesses of major customers. In addition to considering these risk factors and uncertainties, forward looking statements should be considered in conjunction with the cautionary statements contained in the risk factor section and elsewhere in the Company's annual report on form 10K for the fiscal year ended January 30th, 2005 and the Company's other filings with the SEC in a material incorporated there in by reference. In light of the risk and uncertainties inherit In the forecast of revenue and gross margin and other projected matters, forward looking statements should not be regarded as representations by the Company that its objectives or plans will be achieved or that any of the operating expectations or financial forecasts will be realized. Although a replay of this call will be available on the Investor Relations section of Semtech's website, the Company assume no obligation to update or revise any forward looking statements whether results of new information, future events or otherwise. I will now turn the call over to Jack Poe, Semtech's Chairman and acting CEO.

Thanks, John. Good afternoon, ladies and gentlemen. It's been a couple of years since I have addressed many of you. And the first time that I have addressed many others. I will start today by discussing our change in the CEO position that took place in the third quarter.

Since the second quarter of fiscal 2005 which was a peak revenue and profit quarter, the board of directors has monitored both the Company's strategies to deal with the changes to end markets and competition and progress in the execution of those strategies. The conclusion that the board reached in the third quarter was that Semtech was performing well below expectations compared to available opportunities to the Company for some of its chosen markets and products. Additionally the board concluded that the performance of the Company, compared to its peers, was well below both the board's and shareholders' expectations. Performance begins with leadership at the CEO position and the board's decision to change CEO's was strictly based on performance and our lack of confidence in the former CEO's leadership going forward.

I was asked by the board of directors to act as interim CEO until a replacement is found. We have selected a search firm, and we have begun this process. We believe it is likely that we will have identified and selected a candidate by the end of the fourth quarter or early in the first quarter with a start date probably sometime in the first quarter. I expect to provide an overlap of service with a new CEO.

There is one point that I'd like to clearly make. Neith -- neither I nor any member of the board expect that my role during this transition period to be that of a place holder until the new CEO is on board. We have begun to make changes that are aimed at improving the performance of Semtech, and I will speak to some of those changes in a moment.

During the past two months we have gone through a rigorous examination of our business including strategies, tactics and organizations. Within each of our business units we have examined end markets, customers, and how they may change as we move forward. Product road maps have been evaluated thoroughly and reprioritized in some cases to provide the best opportunities for growth with better profitability.

Two significant changes to our business that were made in these past weeks: First, after careful examination of the markets and our products, we have ceased new design and support for our human input device products. Customers have been notified of a last-time buy window for the next six months, and we will ship final products to them within the next year. Most of the resources associated with this business have been eliminated. This business was less than 2% of total revenues, and we expect no material charges to earnings as a result of this decision. We also conducted a thorough review of all power management activities which had previously been carried out in two autonomous business units and four sub-business units. Several weaknesses were identified that had adversely impacted the Company's performance in power management. And we have combined all power management into a single business unit.

Some improvements we expect to achieve with this organization change include: providing clarity of product road maps, better advanced marketing and more innovative designs, shortening design time and improving success of first time Silicon, and return on investment on our design resources, improving communications with our customers, reps and and distributors, and finally, eliminating duplication and overlapping efforts in resources. The changes that we have made and will continue to make in power management will not have a huge benefit to the next quarter or two; however, I am encouraged with the efforts so far and I think we now know what we have to focus upon. Power management has the resources to bring 40 to 50 reasonably complex designs to market per year. Our challenge is to instill the discipline to ensure these products are on target to market needs and timing and that the products are supportive of collateral and field technical resources.

We have identified two new market areas in which leadership and design will be rewarded with better growth and profitability. In the coming quarters, we expect to identify other such emerging markets and we will provide insights on the products from customer engage --- engagements that are already underway. In the past eight weeks, we have begun to focus on other areas of our business model as well. As I previously mentioned, the never ending quest for cost competitiveness across all areas of the Company has been lacking. We have been working with suppliers to align targets for Silicon, packaging and support costs with our new expectations. Cycle times in inventories have begun to improve as David will discuss in his report with inventory turns improving to 3.9 turns for the third quarter. We expect inventory turns to further improve in the fourth quarter. I have begun a review of all operating expenses that will allow Semtech to get back to its long-term model. Pricing is also under review and will include some selective increases.

Turning to operating results, new orders increased by nearly 16% from the second quarter. Without consideration of new wireless and sensing orders which were added with the acquisition of XEMICS in June of this past year, orders from nonwireless in sensing products increased by 10% in the third quarter compared to the second quarter. The Company's book to bill ratio of 1.1 was the first time we had been above 1 in five quarters. New orders were again lead by protection products which increased nearly 24% in the quarter, a third consecutive record quarter. Advanced communications or SETS orders increased by 27% as customers resumed buying after a slow second quarter. Wireless and sensing products had a good quarter as the monthly rates improved over the stub period of the second quarter. Orders for power management and power discreet products increased slightly. Orders for test and measurements products declined by 18% from the second quarter, but sizable last time buys for test, measurement products were included in the second quarter orders.

Shipments increased by about 5% in the third quarter. Most of this increase was due to a full shipment quarter from the wireless and sensing products. Power management products declined by about 9% from the second quarter. These declines were offset by increases in protection shipments of about 7% and increases in advance communications or SETS products of about 13%. Shipments from other product lines combined were about flat with the second quarter.

Gross margins increased by 90 basis points in the third quarter. A decline in power management was more than offset by increases in the advanced communications or SETS products and the protection products. David will talk more about this in detail during his discussion.

Operating expenses increased by about $1.4 million from the second quarter. Most of this increase is attributable to wireless and sensing expenses which are now in the P&L for the full quarter. While David will again discuss the details of operating expenses for the quarter, I wish to reiterate that going forward we will be focused on bringing operating expenses back to our long-term model expectations of below 30% of revenues. Net income for the third quarter increased to 11.5 million or 56% above the second quarter.

Our balance sheet focus continues to be the generation of cash and an improved current ratio. The Company generated nearly $22 million in operating cash for the quarter and we repurchased about $14.6 million of common stock or about 1.2% of fully diluted shares.

Turning to new products and new designs, the Company released 19 new products for the third quarter which was an increase from 13 in the second quarter. Design activity was quite robust, especially in protection of power management for handheld applications was somewhat below expectations, but we have a number of new products that should launch in the next two quarters that should help us win some sockets. Wireless and sensing recorded several significant designs from traditional customers, and we are beginning to engage a larger customer base for wireless and sensing products and finding opportunities to sell some of our power management and protection products as well. Although new designs still tend to be dominated by end markets like cell phones, computers and servers at nearly combined 52% of total, we are seeing a broadening of end market applications. Networking and Telcom infrastructure equipment accounted for nearly 15% of design wins. With the addition of wireless and sensing products, medical design wins were about 11% of total and industrial was about 7% of total. Consumer, including displays, mp3 players, set top boxes, cameras, accessibles, about 9% of total. Test and measurement, printers, and automotive were each about 2% of total design.

Moving to the outlook, we expect growth in revenues of about 4-6% in the fourth quarter and GAAP earnings of around $0.16 a share. David will discuss more specifics in the outlook for the fourth quarter. But I would like to discuss a little bit more of strategies and tactics. While there is little doubt that pricing some markets for power management products continues to be very competitive, I think we have to look to our own lack of execution as a primary factor in our recent performance. With the initiatives discussed previously I think we have begun to address the execution issues. However, I expect revenues from power management to be relatively flat for the next quarter or two.

Although we may not do as many power management designs for some markets compared to others, with the review that we have gone through, there is few end markets from which we have decided to withdraw. Protection products business group continues to execute well. They have done an outstanding job of identifying emerging markets and defining new products with collateral and technical support to capitalize in these areas. Protection products will again lead the way for revenue growth in the fourth quarter. We should see revenue growth in all other product lines during the fourth quarter, excluding the HID products that I discussed that we're discontinuing and they will gradually disappear from revenues over the next year.

Looking at next year's growth; we'll spend some time in the fourth quarter examining business growth for all products looking forward to FY 2007. And without getting into too many of the specific that we will address next quarter, I can point to several positive indicators for long-term business. First, the protection product group occupies a leadership position across broad markets, and I believe this group has the strategies and products to build on that leadership position. The test and measurement group has totally remade their product lines and really has a compelling price performance position that has been recognized by many customers. Wireless and sensing products has a good lineup of traditional products and several new, more broad market entries in the area of blue tooth, industrial controls, automatic meter reading as examples. Advanced communication products or SETS will continue to increase and add revenues from new [phase laws blue] products that we have just introduced. The broadband communication continues in expansion to edge networks. By midyear we will unveil product positioning that will allow Semtech to participate in new wired and wireless infrastructure build out. Power management will benefit from the changes I have outlined and begin to grow.

Ironically, I think one of the areas that should be a good opportunity for growth and power management is cell phone handsets, an area of weakness in the past year. Handsets are still a platform of integration and provide opportunities for innovative analog solutions including power for leading technologies and our product line will be changed substantially to address these opportunities. The legacy power revenues will grow minimally next year, but profitability is expected to increase.

We're beginning to execute long-term end market expansion with some success noted in the design wins. Semtech is a value-based analog mixed signal Company with a fabulous operating model. For the Company to be successful, it's apparent to me that we need to operate primarily in two types of markets. First, the lives of many of our products are quite long. And if defined properly will fit many end market applications. The markets for these products should improve -- should provide secure, relatively slower revenue growth, but higher gross margins with less downside risk over longer economic cycles. It is imperative that we expand our account base worldwide and utilize our sales resources much better in this strategy. The second type of market is higher revenue growth, but carries lower relatively --- relative gross margins because of the competitions --- competition these markets attract. It is imperative in these cases that we have to be early and dominate our chosen spaces with product road maps that intentionally obsolete our own designs. We have had markets like in our past, such as desktop power, lcd backlighting, etc; however in some cases we failed to force our product road maps to move quickly enough to cannibalize our own sockets. To be successful in the future, we will have to be faster to market, more disciplined in product selections and create a blend that continues to provide optimum revenue growth and gross margin expansion.

This concludes my remarks. I'll now turn the call over to David Franz.

Thank you, Jack. Good afternoon, ladies and gentlemen. Starting with orders. Orders as Jack mentioned, improved in the third quarter by thir -- by 16% compared to the second quarter. Orders excluding the impact of XEMICS increased by about 10%. Orders were at record levels for our protection products which continue to experience strong demand. This demand that protection is seeing is driven both by market expansion, new product and strong product marketing efforts as Jack discussed.

Orders for our test and measurement products declined in the quarter as we had some last-time buy activity in the second quarter. However, orders for our test and measurement products were still above shipments as we were seeing stronger, overall activity from the test market. As Jack mentioned, orders for the Company's power management products increased slightly in the quarter. We forecast that the benefit of the structural improvements in power management will begin to be realized by the middle of next year. Product introductions continue to be at high levels at the last several quarters in power management. Orders for our advanced communications, or SETS products increased as forecasted. Orders for our legacy products were as anticipated. Orders for our wireless and sensing business, formerly known as XEMICS, were as expected and resulted in a book to bill in excess of 1 to 1 for that business area.

The current order patterns continue to reflect short lead time orders. As forecasted, we built backlog during the quarter. With starting Q4 backlog increasing by approximately 25% as compared to the third quarter. As we look at the income statement, revenues for the third quarter of fiscal 2006 were 60.9 million, an increase of 5% compared to revenues of 58 million for the second quarter of fiscal 2005. This was ahead of our forecast of 60 million. Third quarter revenues include 13 weeks of XEMICS revenues for the quarter versus slightly more than five weeks in the prior quarter. Excluding the impact of XEMICS revenues from Semtech's base businesses were better than forecasted. Gross margin for the third quarter of fiscal 2006 increased [to] 56.3%. This represented a sequential increase of approximately 90 basis points.

The gross margin percentage for the third quarter was ahead of forecast due to the mix of revenues, higher than forecasted production volumes and lower than forecasted inventory reserves. Research and development expenses were 10.1 million for the quarter which was an increase compared to the second quarter due to the inclusion of a full quarter of the XEMICS operations. SG&A expenses were 11.5 million during the quarter as we had forecasted. Interest and other income was 1.9 million for the third quarter. The income tax provision for the quarter was 16% compared to our forecast of 22%. This lower rate was due to a favorable tax provision in a foreign jurisdiction. The diluted share account increased by about --- excuse me, decreased by approximately 1million shares during the quarter to 75.4 million. This was due to the level of stock buybacks and a drop in the average price per share.

GAAP net income for the third quarter of fiscal 2006 was 11.5 million or $0.15 per diluted share. These results include the writeoff of intangibles associated with XEMICS, legal costs related to our litigation against one of our insurers and the benefit associated with a tax provision in a foreign jurisdiction. The net impact of which did not change diluted EPS for the third quarter. Protection revenues increased 7% sequentially again this quarter; based on strong growth and orders for this product line further sequential growth is forecasted for the fourth quarter. Our management revenues declined approximately 9% during the quarter as compared to the second quarter the fiscal year. And this is forecast,, as Jack mentioned to represent a bottom for the power management business with the forecast -- with the fourth quarter expected to be flat to up slightly.

Revenues from the test and measurement unit declined by 4% compared to the second quarter. The second quarter revenue level was driven by some one time end of life sales and, as I mentioned, overall activity levels continue to be high and there is significant interest in new products being introduced by the test and measurement business unit. Revenues from our advanced communications or SETS business increase by 14% sequentially. Revenues from Semtech's HID, or Human Input Device business, increased in the quarter, but will gradually decline over the next 12 months. The Company's high reliability aerospace and military business declined during the quarter, but is expected to grow in the fourth quarter. And the wireless and sensing business unit performed well during the quarter representing approximately $6.5million of revenue.

Revenues from the third quarter were derived from the following geographic Regions: 18% was derived from customers located in North America, 13% from Europe and 69% from Asia. Net turns orders accounted for 48% of shipments in the third quarter. This compares to 47%, 46% and 40% in the previous three quarters. This increase was consistent with our forecast and an industry wide contraction and lead times. Revenues by end market changed somewhat. Revenues from cell phone handsets and bay stations accounted for 26% of revenue. Desktop computers and servers accounted for 11% of revenue. Notebook computers, pda's and other portables accounted for 17% of revenue. Test equipment accounted for approximately 4% of revenue. Communications infrastructure accounted for 19%. The general industrial, which we include medical, military and other, accounted for 22% of revenue. And finally the graphics end mark accounted for approximately 1% of revenue.

I would mention that the large increase in industrial and other was primarily due to the inclusion of of a full quarter of XEMICS revenues, particularly from the medical area into this consolidated end market. Revenues from oem sales represented 45% of total revenues for the third quarter while distribution represented 55% of total revenues.

Now, as we look at the forecast and outlook for next quarter, as Jack mentioned, we are forecasting that revenue will increase sequentially by approximately 4 to 6% for the fourth quarter of Fiscal 2006. In the fourth quarter we are seeing strength in most business areas. To attain the fourth quarter forecast, net turn orders of approximately 36 to 37% of revenue are required. Gross margin for the fourth quarter is forecasted to improve by approximately 20 basis points. Looking at operating spending, R&D spending is forecasted to be approximately flat to down 200, 000 for the fourth quarter while R&D spending is currently higher than our targeted model of 14 to 15%. We believe this will come back in line as we achieve some revenue growth. We are forecasting that G&A spending -- SG&A spending, excuse me, will be up approximately 200 to 400k for the fourth quarter depending on the final revenue amount. And this increase will be principally due to higher commissions and variable compensation accruals.

As we discussed with you last quarter we are still pursuing one insurer for approximately $10 million which includes interest. The trial date was pushed out by the judge and is now expected to go to trial in February. We are forecasting to incur approximately 350k of legal costs during the fourth quarter in pursuing this additional recovery. At this point we cannot estimate the amount or timing of any recovery.

Also in the fourth quarter of this year and the first quarter of next year, we will record amortization of intangibles in association with the XEMICS acquisition in the amount of approximately 420k per quarter. There is no associated tax benefit with this item. After the first quarter and for the following four-and-three-quarter's years we will have [a tangible] amortization expense per quarter of $275, 000, once again with no associated tax benefit.

For the fourth quarter in terms of interest and other income, we are forecasting that we will receive about $2 million of income associated with interest. Risk to this forecast are principally foreign exchange rate related. The Company is projecting that its effective tax rate for the fourth quarter --- fiscal 2006 will be 23%. This is based upon the current revenue and earnings forecast. There are several factor which can cause the rate to be higher or lower. These factors include variations in income, the source of that income, the dollar, Swiss Franc, exchange rate, transfer pricing assumptions, geographical mix of revenues, effective tax rate calculations in Switzerland, the timing of any settlement in our insurance recovery suit or any other factors. As we've seen 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 share count for the fourth quarter is forecasted to decrease by approximately 400, 000 shares. Such forecast can vary based on the average stock price for the quarter and stock option exercises as well as the level of stock buybacks.

So based upon this guidance, diluted GAAP earnings per share are forecasted to be $0.16 per diluted share for the fourth quarter. This includes the impact of a rounded $0.01 per diluted share, net negative impact from intangible amortization and spending on the lawsuit against an insurer.

Now, as we turn to the balance sheet, Semtech ended the quarter with approximately 268 million of cash and investments on the balance sheet. Operating cash flow for the quarter was strong at a positive 21.6 million. We are forecasting again that operating cash flow will approximate $20 million for the fourth quarter. During the third quarter the Company spent approximately 2.8 million on property plant equipment. Depreciation and amortization for the third quarter was approximately $3.2 million which included approximately 400k of intangibles amortization. The Company purchased approximately 14.6 million or 924,700 shares of its common stock in the quarter. And as of the end of the third quarter the Company had remaining under its current buyback authorization approximately 28.4 million of stock buyback authority.

Accounts receivables, day sales outstanding calculated on a quarterly basis remain low. Declining slightly to approximately 41 days for the third quarter. Inventory levels decreased significantly by approximately $3.6 million in the third quarter as compared to the second quarter. This was in excess of our forecast of $2 to $3 million reduction. Turns increased back towards the four turns of inventory level per year.

So guidance for the fourth quarter is encouraging. We are optimistic about the actions currently underway to improve our operating model. New product introductions continue at a high level with a total of approximately 55 new products introduced in the last three quarters. As Jack mentioned, in the short-term, we are focused on improving overall execution in our power management business and continuing to drive improvements in our operating ratios. As I mentioned in the fourth quarter, we forecast that we will generate operating cash flow of approximately $20million and continue to buy back stock. Working past the fourth quarter, we plan to continue to focus on driving revenue growth, controlling operating spending and improving ROI on our R&D dollars. All of which is forecasted to drive growth in earnings prior to stock option expensing.

Thank you for participating in our third quarter fiscal 2006 conference call. I will now turn the call back to the operator for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from Romit Shah of Lehman Brothers.

Thanks and congratulations on a good quarter. Wondering if you could just expand on the comment you made earlier about seeing better visibility from your customer base. I know your starting backlog is significantly higher. But are you starting to see a backlog build beyond the 13-week level, or are lead times starting to stretch? Can you help us out with that please?

This is Jack. No, I wouldn't say lead times are stretching. In fact, we are trying to pull some lead times down that are maybe longer than we would like to see. But that might be in the 8-week area that we think should be back more like the four weeks. I think the visibility that we're -- I think David referred to it was we're seeing a little bit better look in the current quarter. People are placing business -- still, however in the vast majority in probably a 60-day window.

Okay. And Just a follow-up, it sounds like you had some pretty good design win momentum in medical and industrial. I know it's early, but does this reflect an effort to reposition Semtech outside of portable power? Or do you still view that business as key to growth longer term?

No, I think we talked about the medical design wins which were primarily as a result of some of the work that XEMICS had done even prior to the acquisition. This in no way changes our outlook and our participation in the portable power management business. As I mentioned in my talk I think that really represents one of the best areas for us to grow in power.

Okay. Thank you.

Your next question comes from Ross Seymore of Deutsche Bank.

Thanks and congratulations on getting back on the growth track. A question about the XEMICS side of things. What sort of seasonality should we expect for that business?

I think traditionally if you look at their numbers, Q1 has probably been their weaker quarter. It is kind of hard to understand if you take a look at the end markets in some ways because there should not really be a Q4 to Q1 sort of swing. So it is a little early for us to say that there is -- that they've got the seasonality that we have traditionally seen where Q1, Q2 tend to be weaker quarters, Q3, Q4 tend to be stronger quarters. But they had have some seasonality in their business Most notedly in Q1.

In Q3, did that deliver the amount of revenues you expected? It was a little lighter than I had modeled. Just wondered if that was in line.

I think it was in the range. There were some things -- it could have been better, but I think that most of that revenue will probably end up in the fourth quarter.

Okay. Then, the final question on the op-ex side of things, and getting the op-ex to revenue ratio back to that 30% or under mark; do you expect it to occur mainly because of revenue growth or because of cutting absolute dollars of op-ex spent?

I think certainly we will be looking to revenue growth and really getting some stronger growth out of our new products, out of our R&D efforts for sure. I think as we go out in time, there is no doubt some of these businesses that we have --- the smaller businesses need scale. So getting relatively more growth out of some of the smaller product lines will certainly help. Then it is a matter of making sure we are spending our dollars wisely as we continue to grow.

I guess one final one, with getting the cost down on the manufacturing side of things, are you going to be delivering that through to the margin side so we should expect to see the gross margin show a nice increase? Or are you going to use some of that to be a little bit more aggressive on some of the vertical markets and the more price competitive areas?

Well, I think you're going to see us do a little bit of both. But, we're certainly going to protect the gross margin line, but I think in some areas where pricing is not as aggressive, you're going to see some flow through to the margin line. And, I think in other areas it's going to allow us to participate in some revenue that we have lost or not really participated in in the past. So it's a combination of both.

Okay. Great. Thank you.

Your next question comes from David Wu of Global Crown Capital.

Yes. Good afternoon. Let me ask two questions for clarification. On the protection business, how big a business is that, either as a percentage or total? And also I was wondering, now that you group everything under power under one group, how -- what is the make up of the power management between, I guess, notebook products, cell phone products and industrial -- and other products ?

Well, I mean, David, on the first question, on , you know, protection, protection is probably -- is now around a third of our business, maybe even slightly more than a third. But in kind of that range and around a third of our business. From a revenue --- from a revenue standpoint.

Okay.

What was the second question?

In the power management, I guess is grouped under one roof now; under one business unit. And I was wondering if you can give any color on, you know, what the composition of that power group. I guess in the past you have focused more of your R&D dollars to develop the industrial power management side of the house.

Right. I mean, if you look at the two units we combined, I mean, one of the units was focused on our emerging networking and industrial area and desktop area and we combine that with our portable power group. You know, those are both sizable pieces of business to get --- sizable both head count wise and sizable from a revenue standpoint. So, they're both --- both are large businesses.

Would it be roughly the same size?

Approximately. You know, the portable business probably being at this point in time, slightly bigger. But, you know, approximating the same size.

I think if you look forward at, you know, what we are as business protection and power are probably going to be relatively the same size.

I see. So basically these two businesses would be about two-thirds of your Company?

Yes, longer term.

And ---

You know, to get to there we clearly got to see continued growth out of WSP and growth out of the advanced com businesses at higher rates which we clearly expect.

Okay. Great. Thank you.

Your next question comes from Steve Smigie of Raymond James.

Great. Thank you. I was hoping you might be able to comment directionally in terms of end markets. Specifically, hoping you could discuss plans on how you focus on notebook and on high end consumer.

Well, notebook has got -- if you take a look at it, our primary products in notebook are power and protection. And that's been true now for quite some time. I think that's probably going forward where most of our plays will be. And in terms of -- was it high end displays ?

Consumer.

High end consumer. Which was the area you were talking about?

High end consumer in general.

Across the board in consumer I think we're into things like set top box, digital still cameras, displays. I think in the area of displays, that's certainly one area we believe presents some good opportunities for us.

So you're not going to -- you're not backing off the notebook at all? Say in [inaudible] ---

No, we're not.

Okay. And then, again, you mentioned the display would be the category we expect to see growth within consumer going forward?

It is one of the area that's we certainly got some focus upon.

Great. Thank you.

Your next question comes from Craig Hettenbach of Wachovia securities.

Thank you. You guys sound a little more optimistic about the handset market going into 2006 for an area of growth. Can you talk about whether you think that's just an increased percentage of high end phones that will ship, design wins, market share? Or just have a little more clarity on your expectation for handsets into '06.

Well, as I mentioned I think handsets represents an area of growth for us primarily because it is an integration platform. And, so you start off with some of the high end phones and usually there is a definable analog piece that has to happen for the integration of some of the new digital technologies. I think that is the area we have to play -- one of the areas which we have to play on the leading edge and have those products available. Power is certainly a key part of that integration strategy. I think the lineup of products that we have in power that are coming out this quarter, next quarter which is quite different than what we have had in the past present a real opportunity for us to get some -- get back some market share there.

Excellent. And then just a follow-up on the topic of cash. You guys purchased XEMICS for a very attractive price a couple quarters ago. Do you see any other similar deals out there? Or what do you look to do with your cash going into the next couple years in terms of whether it be some acquisitions or buy backs?

Well, I can tell you my first 8 weeks have been pretty focused on internal stuff. But we'll take a look over the next quarter or two and we want to make sure we have done a good job with the current acquisition. We get everything fully integrated. We get our sales and marketing team up to speed on all the products and I think we will be in a position to look at other opportunities when they present themselves.

Great. Thank you.

Your next question comes from Michael Bertz of WR Hambrecht.

Thank you. Good afternoon and congratulations. Just a couple here. In terms of what we're seeing in the handset market, we have heard some indications that, maybe inventory adjustments that we usually see at the end of the year are maybe not as pronounced as we have in past years. What are you seeing from your point of view and what kind of seasonality can we expect beyond the December time frame?

Are you talking about just in terms of bag log adjustments and pushouts, that kind of thing -- inventories ?

I'm talking more inventory at the oem's themselves. Sometimes they don't build as quite as much right at the end of the year, so we don't end up with a bunch heading into the beginning of next year. I guess from your seat, what you see visibility wise and then is that something that's been toned down some or seasonality should we expect it to drop off a fair amount the first part of next year for you?

It has always been difficult for us to get good inventory numbers at the oem's. But I can tell you in terms of our inventory chains including through our distributors, those inventories contracted ---obviously our inventories went down, the inventories of our distributors went down pretty substantially in the quarter. So that indicates to me -- that portion of the channel is pretty well under control. I haven't heard any indication. We haven't seen pushouts, cancelations, anything like that that would indicate that there would be any excess inventory at the oem. So I think from that angle it probably looks pretty positive.

Okay. Good. And then overall as far as gross margin expectations, you talked about looking to protect margins to some extent. I mean, would we potentially see an offset of some more aggressive pricing in [inaudible] portable power management things you might need to do versus some of the growth in the higher growth sections [inaudible]. Would that be something we can see -- you know, keep it pretty steady over the next couple quarters ?

Certainly we will look at , how do we blend any of the revenues. If we decide to get more aggressive in some of the portable areas, or any market area, we look to figure out where we can blend that with higher gross margin opportunities to protect the overall gross margins, make sure that we are continuing to expand. So, we will be a little opportunistic there, but at least if the cost reductions give us some breathing room and help us to engage at some of the accounts where we lost some sockets.

Okay. Fair enough. And finally, in terms of again a little bit of seasonality, networking and industrial sometimes those segments were --- many companies see a little bit of uptick in the --- like a stronger first half. Is that something we might see from you guys from a seasonality basis, or will do you think growth there will be driven more in terms of product introduction or adoption ramps?

You know, if I look I would think probably more driven by product introductions and new product ramps. Particularly in the power area, for example. So, it is not as -- it is not as big of an end market as some of ours, though it has increased with the inclusion of XEMICS. But I wouldn't look for a big, big seasonal pick up there per say and more the driving factor for us in a lot of those areas is going to be new products.

Okay. Great. Thanks, guys.

Your next question comes from Louis Gerhardy of Morgan Stanley.

Good afternoon. Some of the changes, Jack, that you've described, can you give us maybe just on an interim basis one year out, maybe what you think you can get gross and operating margins too before some of the longer term areas you are going to improve start to kick in?

Well, I obviously have told people internally that we need to get back to sort of the peak revenue numbers and the kind of operating margins , gross margin that we have seen in the past. How quickly we can get to those Louis, really depends on the adoption rate of these new products with better gross margins and increasing top line revenue growth. You can't say your way to prosperity in this business. I'm sure you understand. Some of this has to --- some of the definitely has to come out of growth and new products, but I don't see why with the product road maps that we've got, why we would have gross margins any less than what we targeted in the past. The issue for us has got to be making sure those things are timely to the market.

Okay. And then also on XEMICS, you mentioned some areas where they saw traction was --- I think you described it as traditional customers. I took that as Semtech customers. Can you just talk about what product areas that was in for XEMICS and sort of what inning are we in terms of that opportunity?

What I meant to say when I said traditional, I really meant XEMICS traditional customers. It was some stuff they were working on in the medical area and a couple of industrial items and I would say those were -- those designs were well along before the acquisition and just consummated in the quarter.

Okay. And what's the opportunity to introduce those products to Semtech's customers? How far along in that process are we? Is that fiscal '07 type of event?

I think -- well, in the area of industrial sensing , I'm encouraged to see that we've got some power and some protection opportunities and cross selling in that area is certainly one of our focuses. In the area of -- personal area networks and some of the blue tooth products, I would say that's an area we've got some traction in with these guys. We're really involved in some pretty good discussions and I think That's an area that we really got some focus on. It should drive some revenue growth across our customer base next year.

Okay. And then a follow-up on the visibility you mentioned. The orders are giving you maybe 60-days. The customers are giving you maybe 60-days now. What was that? How does that compare with what it was before? Was it 30 days ?

Yes, maybe -- it's maybe 2 to 4 weeks more or something like that. There are some 90 day bookings in. Generally not much beyond a quarter. But it's maybe moved out 2 to 4 weeks.

Okay. Great. Thank you.

Your next question comes from Doug Freedman of AmTech Research.

Good afternoon, guys. One of the questions I have regards the turns requirement for next quarter dropping down to 36% I think I heard you say, David, down from 48%. Given the fact that I know a bunch of guys have asked already, that lead times really aren't extending dramatically. What do you characterize that reduction in turns to? Or are we looking at the potential that next quarter could be quite a bit stronger than you are forecasting?

Well, I mean, if you look at the increased turns I think in a couple of our business areas, we have -- we've got some better visibility from, you know, a few of our customers. We have --- forecasting our ATE business is going to increase in the quarter and that's, you know, given the nature of those products, that's typically a business that we get better visibility on than some of the other businesses. So I would just say some of it is due to the better visibility and growth we're forecasting out of our ATE business. And some just -- some stronger activity and higher level of confidence from our customers.

Give us some idea of the linearity that you are expecting to see in the December quart --- I mean in the January quarter.

Well, I think it is going to be -- it is going to be extremely Linear. I think actually the better linearity that we've seen, so I'm expecting it to be very linear.

All right. Moving on into the new product it looks like you had pretty nice growth in new products with 19 new products introduced. In the past you talked a little bit about having I believe it was 7 foundry partners in total. There was some efforts underway to try to increase the waiting of those foundry partners or reduce the waiting I should say. Can you give us an idea of where those new products were released? Were they released into your European foundry partner or into your Asian foundry partners ?

I think it is pretty broad based. I don't know that it -- you know, there is any generalization that adds any color. But, I mean, different of our business units design in different fabs, --- because --- getting to one of the reasons why we're fabless is we utilize a pretty diverse group of processes in our business. So, I'd say in --- in a number of different -- a number of the different fabs maybe , you know, i'm just guessing, but maybe mirroring the same percentage of revenue, we're getting today --- approximately. But we are introducing --- have introduced a lot of new products in test and measurement in the last year, more than we had in the last couple of years. And those are going into maybe different fabs than --- where today we are generating a lot of our revenues. So I think a pretty diverse number of fabs.

How would you characterize the pricing environment of your foundry partners, and has it changed at all from last quarter what you've seen recently?

Well, I think I'm pleased by the responses that we have gotten from all of our subcontractors really at this point to help out in terms of the pricing environment. And I know that they face some cost increases on their side and price of oil had an impact. Poly-silicone is going up. So I'm quite pleased that they have recognized the relationship that we have had with them over the years to participate in giving us some cost competitiveness as we move forward here.

Terrific. Thanks so much.

Your next question comes from William Conroy of Sanders Morris.

Good afternoon. Jack, I was hoping you could shed a little bit more light on what we should expect or what you're trying to achieve with what sounds like a consolidation of the power management organization, and I guess specifically are there head count actions that are going to come out of this? Is this driven by the cost side? And how does that translate into stronger revenue growth?

Well, I think I laid it out pretty clearly what we talked about. We want the clarity in our product road maps. You know, a better definition of products where we can use our design to create innovation of the products and be able to reduce the design time so we can be first to market with silicon and improve those -- the ROI on our design resources. But -- and giving you some example, we found ourselves essentially approaching the market place with multiple different product platforms which are overlapping and you sit around and take a look at them and say it doesn't make a lot of sense to have so many products target the same markets, even though we try to separate them somewhat by industry you find that many of these products have applications across market barriers and it was somewhat confusing to customers, to our own people in the field trying to figure out which product they should be promoting to which socket.

So I think improving that communication can eliminate some of the duplicity that we had. We've got the ability to put 40 to 50 very good products into the market place in power and I think there are a lot of companies out there in power management that wish they had that capability.

And following on to that, but more broadly, have you cut the number of designers with what you did in the HID area? What do you anticipate there?

We -- we did eliminate some software people that we did not have a need more in other places in the Company.

Great. Thanks very much.

Your next question comes from Jeff Rosenberg of William Blair.

Hi. When I look at the cell phone revenue as a percentage of sales it didn't go down as much as I expected it, given the decline in power management. I assume that's because of the strength and protection and in confirming that I -- is it right to assume that the protection is now the distinct majority of the cell phone revenue?

Probably correct on both those accounts, Jeff. I mean, clearly we saw some strong growth in the protection area for handsets and protection is now a majority of the revenues. It is larger as Jack just mentioned. It is larger than power --- power, clearly.

Okay. And that's a -- I think probably the largest percentage of business that cell phone protection has been for you relative to history and so, historically, I thought of that as being the more competitive, more difficult part of your protection portfolio. Can you talk about whether or not that's changed much and then in terms of this growing to as large a percentage of the business as it has, is that a result of share gain or can you talk about the trends in terms of protection content in the cell phone area?

Jeff, this is Jack. I think what you see in protection is the beauty of what you have in the analog mixed signal marketplace. And that is, when you have something like a handset that is still an integration platform, as you bring out --- there's a new technology that's introduced into a cell phone, you have the need for power and protection. And quite frankly, the growth that has come in the protection business were from some of these well defined products that were put into the marketplace in advance of other competitors in advance of when our customers knew they needed them. And they have taken off.

So you would say that the quality of that revenue, if you will.

Is better.

Better than it was several years ago?

Absolutely. Absolutely.

And the defensibility of that? Is that an area where, as you discussed, you have to cannibalize your own products and stay ahead and be aggressive to --- how do you feel you can hold that ground in terms of level of business and profitability going forward?

New products.

Okay. Great. And then just a quick follow-up on the HID reduction, does that include the [microbuddy] product line? Was that ---

No.

No it does not.

That will stay in the -- it will stay in the product road map.

Okay. Great. Thank you.

Your next question comes from Cody Acree with Legg Mason.

Thanks, guys. You talked --- in the very beginning, you're statements about some selective price increases. Can you give a little more detail there as to what you are seeing?

It is not going to be a huge number of products, but there are some areas. We took a look at all the pricing and there were some areas with where we felt we were probably below some market prices and we had an opportunity to increase them. But it is a relatively small number, but it can help in terms of improving gross margins, so we can be more competitive in some of the other areas.

It is not necessarily a shift in supply and demand. Just you were below market prices and did some opportunity to make that up?

Yes.

Okay. And secondly, in the power management side on the wireless side, you talked last quarter about some lost share with some major oem's that you hoped to get back with these new product introductions. Are you starting to see that or is that something we will see later on through calendar '06?

I think some of the new products that we're talking about for this quarter, the fourth quarter introduction Q1 will probably have a larger impact.

Okay. So more of an '06 shipment time frame that starts ticking revenues?

FY '07 you mean?

Oh, well, yes. FY '07.

Yes.

Thanks, guys.

At this time we have reached the allotted time for question and answers. Gentlemen, do you have any remarks ?

No. This is John Baumann once again. I just want to thank everyone for participating in our third quarter conference call and we look forward to chatting with you at the time when we have our fourth quarter call.

Thank you for participating in today's conference call. You may now disconnect.