Semtech Corp (SMTC) 2006 Q4 法說會逐字稿

At this time would like to welcome everyone to the Semtech Fiscal 2006 Fourth Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS] Thank you, now turn the call over to Mr. Baumann.

Thank you, operator. Good afternoon ladies and gentlemen, welcome to Semtech Corporation fiscal year 2006 fourth quarter earnings conference call. As the operator indicated I'm John Baumann, I'm the Treasurer of the Company and oversee Investor Relations. We have just released the results for our fourth quarter that ended January 29, 2006. For the next 45 minutes or so, John Poe, Semtech's Chairman and acting CEO and David Franz our Chief Financial Officer will be discussing those results with you and answering you questions.

A reminder that Semtech reports results based on generally accepted accounting principals commonly referred to as GAAP. Also, a reminder the fourth quarter results we published today are unaudited.

Before I turn the call over to Jack for his opening comments, I would 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 of estimates of future financial results we will consider them now. We will 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 forward-looking statements within the means of Section 27-A, of the Securities and Exchange Act of 1933, as amended and Section 21-E, of the Securities and Exchange Act of 1934 as amended. Forward-looking statements are statements other than historical information or statements of current conditions and relate to matters such as future financial performance, future operational performance, the anticipated impact of specific items on future earnings or plans objectives and expectations.

Some forward-looking statements may be identified by the use of terms such as expects, anticipates, intends, estimates, believes projections, should, will, plans, and similar words. Forward-looking statements involve risks and uncertainty that could cause actual results to differ materially from those projected. These risks and uncertainly include worldwide economic and political conditions, the timing and duration of semiconductor market upturns or downturns, demand for cellar phones, personal computers and automated test equipment.

Demand for semiconductor devices in general. Demand for the Company's products in particulars. Competitors actions, supply from key third-party Silicon wafer foundry and assembly contractors, manufacturing costs and yields relations with strategic customers and risks associated with the businesses of major customers. In addition to considering these risks and uncertainties, forward-looking statements should be considered in conjunction with the cautionary statements contained in the risk factor section and elsewhere on the Company's annual report on form K, for the fiscal year ended January 30, 2005 and the Company's other filings with the SEC and the material incorporated therein by reference.

In light of the risks and uncertainties inherent in forecasts of revenues and gross margin and other projected matters, forward-looking statements should not be regarded as representations by the Company that it's 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 Investors Relations section on Semtech website, the Company assumes no obligation to update or revise any forward-looking statements whether the result of new information, future events or otherwise.

Having said that I will now turn the call over to Jack Poe, Semtech Chairman and acting CEO.

Thanks, John. Good afternoon ladies and gentlemen. I would first like to update you on our CEO search process. As I mentioned in the call last quarter, the nominating committee initiated a permanent CEO search with a prominent independent search firm late in the third quarter. With the participation of the entire board of directs, this effort has involved a very broad search within the entire semi conductor industry, to produce a list if highly qualified candidates. The committee and other board members conducted extensive interviews and the Company is in the final selection process. We expect to announce the hiring of a new CEO in the next few weeks.

I will provide some overlap with a new CEO on a full-time basis to begin with and move to a part-time basis thereafter, before resuming my position as Nonexecutive Chairman. As we move to the operating results, new orders for the quarter decreased about 2% from the third quarter.

However, the Company's book-to-bill ratio was still above one for the quarter. About half of the decline in orders from Q3 to Q4 were cancellations of very low margin orders in legacy military discrete products, that we have elected not to support at those prices. Protection orders increased be the fourth quarter by 7%, they were offset by slightly lower-- by slightly low orders in test and management products and power management products. Although power management orders were slightly lower than third quarter, bookings for newer products increased substantially.

These new products may not quit offset decline in older products for the next quarter or so, however, I think the traction that we are gaining should be a net positive for the second half. Margins on these new products should be better and should provide further second half margin expansion. Shipments increased by about 6% in the fourth quarter, protection products shipments increased 18% over the third quarter. Test and measurement product shipments increased by about 45% from the third quarter.

Prior management shipments declined by about 6% from the third quarter, wireless and sensing product shipments declined by about 10% from the third quarter, communications products declined about 8% in the quarter and power discrete shipments declined about 3% in the third quarter. The protection products group continues to turn in outstanding results. While part of the strength in this business clearly reflects seasonal trends in cell phones and notebook computers, other end market segments like networking equipment and industrial controls have steadily increased.

More importantly, the strength of the protection business reflects the success of introduction of new leading edge products over the past several quarters. Test and measurement products bounce back from lows earlier in the year, both in terms of revenue and operating margins. The decline of power management is disappointing, but as I stated in terms of orders we are getting some traction on new products, and I'll talk about designs as we get to it and these products will produce higher gross margins and revenue growth for the second half.

We stopped development of several parts during the quarter that we simply weren't confident, would produce the kinds of average-- corporate average gross margins from their outset. We will continue to be somewhat opportunistic in the next quarter or two but we have a number of leading-edge designs in development that will help turn around the results in power management. Communication products revenues were impacted more by timing of orders than by any other fundamental change in the business. Orders increased late in the fourth quarter, but we were not-- those orders weren't turned into shipments until early February.

The decline in wireless and sensing shipment were also disappointing, because it was really due to our own delays and execution, at the manufacturing level. Some high-margin shipments for wireless and sensing were moved into February, as a result of the misses in execution. Gross margin increased by about 20 basis points in the third quarter. Gross margins would have expanded faster had we not increased inventory reserves for some slow-moving parts primarily in power management. I have refocused the efforts of the Company to both increase revenues and control costs at the gross margin and operating levels.

We should make more substantial improvements in fiscal the 2007, as older inventories are burned off and cost controls improve. Operating expenses decreased by about $457,000 from the third quarter. Most of this decline is attributable to reductions of masks and prototype Silicon costs for R&D projects terminated in power management.

Again, these projects were not expected to meet corporate gross margin objectives and we have taken these design resources and we have moved them on to newly defined products. Operating income for the fourth quarter increased to 15.2 million or about 20% compared to the third quarter to about 23.6% of sales. While we are clearly not back to peek operating profit margins above 30% of revenues, we have made significant improvements over the past 2 quarters. Our balance sheet focus continues to be the generation of cash and an improved current ratio. The Company generated nearly $20.5 million of operating cash for the quarter and we repurchased $13.9 million of common stock or nearly 1% of fully diluted shares. The current ratio increased to 9.3 and inventory turns reached an all-time high of 4.8 turns.

As we look at some new products and new designs, the Company released 26 new products for the fourth quarter, an increase from 19 in the third quarter and 13 in the second quarter. Power management and protection products both did a great job in improving productivity and research and development. Test and measurement, taped out a new generation of [ inaudible] electronic devices, that we expect to achieve industry leading price performance points. First Silicon is expected this week on those parts and we expect to begin shipping production Silicon in the second half of this year.

Design activity, excluding one large design win that we had there the third quarter for wireless and sensing products was about flat compared to the third quarter. Protection was about flat with the third quarter but that was flat at an all-time high level which carried over into the fourth quarter. Design wins for power management products increased slightly over all for the first time in more than a year. We're working on several large designs in wireless and sensing, advanced communications and test and measurement products that we hope to close over the next quarter or two.

Although, the new designs still tend to be dominated by end markets like cell phones at 30% of total designs and computers, which included servers, at also about 30% of total, we are seeing a broadening of end market applications. Networking and the telecom infrastructure equipment accounted for nearly 19% of designs wins. Medical, industrial, and A TE design wins, were about 11% of total, and flat panel TVs, DVR's other consumer end markets made up the final 10% of design wins. As we move towards the outlook, we expect revenues to increase between 1 and 3% for the first quarter, which tends to be a seasonally low quarter for Semtech. NonGAAP net income should be in the 18 to $0.19 per share area.

And David will discuss more of the specific of the outlook for the first quarter in his talk. At this moment, I feel pretty comfortable that we have sufficient backlog and that turns orders will fill in the balance of the quarters. Capacity has certainly tightened in the last couple of months and the turns order and delivery of Silicon that may occur late in the quarter will certainly represent a challenge for quarterly turns.

Looking a little more towards our entire FY '07 growth, last quarter I discussed some of the drivers for 2007, and I would like to again, talk a little bit more about some of those prospects. The protection products group occupies a tremendous leadership position across broad market segments. I think this group has the strategies and products to build on that leadership position. New products and design wins over the past two quarters should be the biggest drivers for FY '07 growth. Seasonality in areas like cell phones will have some impact throughout the year and probably will make the year a little more back end loaded, as a result of that seasonality. The test and measurement group has totally remade their product line and has a compelling price performance position for each market segment.

We expect to achieve good design wins and some revenue growth on new products in the second half. Test capacity in the industry, the utilization remains very high and this should spur capital purchases in the broad semi conductor test marketplace. Wireless and sensing products had a good lineup of traditional products and several new, more broad market entries in the areas of blue tooth, industrial control and automatic meter reading, as examples. We have targeted a few nonmain stream designs that are perhaps more opportunistic in blue tooth. If we win early designs, small revenues will start in the third quarter but the larger programs will not start until the fourth quarter and build throughout next year. We have decided to avoid the main stream, blue tooth, single chip, transceiver market market place.

We view this as a blood bath in the waiting that will be fought by the larger more digitally focused integrates, who's model are more likely to accept gross margins at 45% and below. We'll instead use the core expertise of our wireless and sensing group to build products for a few vertical markets in sensing that include RF circuitry , such as automated meter readings, security and industrial control. We will also build a broader base of core building block products, to enhance our customer base in the consumers markets, some of these products will combine power management elements.

The advance communications products or SETS , will continue to increase and add revenues from new phase walk [luke] products such as broadband communication continues it's expansion towards the edge. By midyear, we will unveil product positioning that will allow Semtech to participate in new wired and wireless infrastructure build out. We are tapping out Silicon for a new type of timing control for high-speed delivery and back haul of video, data, and voice services over enthernet, that should be introduced sometime in the third quarter. Originally, we thought revenues would most likely start next year.

However, it appears that with some of the advance testing we have conducted on this new product at service providers such as Verizon, Sprint, and British Telecom on their net works, that revenues may be possible this year. On the wireless side we have very good test results with Nokia, Erikkison, Motorola, Alcatel and Okia, for base station and node B traffic aggregation. Power management will benefit from the changes I have outlined and begin to grow. We are streamlining the development process and upgrading product definition resources. As I mentioned, the fourth quarter improved for both products released and design wins.

However, it will probably take until sometime in the third quarter for these new growth products to offset some of the pricing and market share loss we experienced in the past year. Legacy power discrete product revenues will grow minimally, but profitability will increase for FY '07. DOD purchases should increase to replace some of the $55 billion of equipment that is expected to be left in Afghanistan and Iraq. That concludes my remarks, I'll turn the call over to David Franz.

Thank you, Jack. Good afternoon ladies and gentlemen. Starting with the orders, orders declined slightly in the fourth quarter but were still above a one-to-one book-to-bill. As Jack mentioned, orders were again at record levels for our protection products which continue to experience strong demand.

As we look at the income statement, revenues for the fourth quarter of fiscal 2006 were $64.4 million an increase of 6% compared to revenues of 60.9 million for the third quarter of fiscal 2006. This was at the high-end of our 4 to 6% revenue growth forecast for the quarter. Gross margin for the fourth quarter of fiscal 2006 increased to 56.5%. The gross margin was benefited by mix but negatively impacted by higher than forecasted inventory reserve charges. As we moved into fiscal 2007, gross margins should continue to be favorable impacted by mix. GAAP net income for the fourth quarter of fiscal 2006, was 13.3 million, or $0.18 per diluted share.

These results included the forecasted net negative impact of $0.01 per share from the write out of intangibles associated with XEMICS and legal costs related to our litigation against one of our insurers. These results were favorably impacted by approximately $0.01 per share by a lower than forecasted tax provision in a foreign jurisdiction due to a favorable tax ruling. Revenues for the fourth quarter were derived from the following geographic region. 16% was derived from customers located in North America, 15% from Europe, and 69% from Asia. Net turns orders accounting for 38% of shipments in the fourth quarter.

This compares to 48%, 47%, 46%, in the previous three quarters. This decrease was due to improved starting backlog and some extension in lead times consistent with the overall market conditions. Revenues by end market changed some what, revenues from the cell phone, handset, and base station market accounted for 25% of revenue, desktop computers, servers and graphics accounted for 10% of revenue. Notebook computers, and PDAs, accounted for 17% of revenue. Test equipment accounted for 6% of revenue.

Communication infrastructure accounted for 18% of revenue, and general industrial, which included medical and military and other, accounted for 23% of revenue, and there was 1%, which related to other markets. All the of the end markets generated growth in the fourth quarter, accept for the desktop market. Revenues from OEM sales represented 41% of total revenues for the fourth quarter while distribution represented 59% of total revenues. Looking at the outlook for next quarter we are forecasting that revenue will increase sequentially by approximately 1 to 3% for the first quarter of fiscal 2007. To attain the first quarter net turns order of 38 to 39% of revenue are required. Gross margin for the fourth quarter of fiscal 2006 was 56.5%, a sequential improvement of approximately 20 basis points. The improvement was driven by mix.

For the first quarter, we are forecasting that gross margins will improve by approximately 30 to 50 basis points. This forecast excludes the impact of FAS 123-R. Research and development expenses were 9.4 million for the quarter which was lower than forecasted due principally to reductions in expense in the portable power management group as well as lower outside services in some of the other areas. We are forecasting that R&D spend will be approximately 400 K higher for the first quarter. This forecast once again excluding the impact of FAS 123-R.

And SG&A expenses were 11.8 million during the quarter which was in line with our forecast. We were forecasting SG&A spend willing be up by approximately 3 to 400 K, for the first quarter, and this is primarily due to higher variable compensation accruals, higher selling costs on some of the increased sales, as well as some cost associated with any new CEO hiring. This forecast excludes the impact of FAS 123-R. As we discussed last quarter, we are still pursuing one insurer for approximately $ 10 million which does include interest. The trial date was pushed out again. We are forecasting to occur approximately 3 to 400 K of legal cost during the first quarter. In pursuing this additional recovery. At this point we cannot estimate the amount or timing of any recovery and we continue to believe the ultimate resolution of this will be favorable to our financial position. In the first quarter of fiscal 2007, we will report amortization of intangibles associated with our acquisition of XEMICS in the amount of approximately 365 K, there is no associated tax benefit with the item.

After the first quarter, for the following four and three quarter years, we will have intangible amortization expense per quarter of 275 K, with no associated tax benefit. Interest in other income was $2 million for the fourth quarter. For the first quarter we are forecasting, interest and other income of approximately 2.1 to $2.2 million. Risks to this forecast are principally foreign-exchange related. The Company's effective tax rate for the fourth quarter of fiscal year 2006 was approximately 19%. The Company is projecting that it's effective tax rate for fiscal 2007 will be 21%, though the geographical mix and other factors could cause actuals to vary from forecast. The impact of FAS-123R does not factor into these forecasted tax rate provisions. In addition, there are several factors, which can cause the rate of tax to be higher or lower.

These factors include variation in income and the source of that income, the dollar Swiss franc exchange rate, transfer pricing assumptions, the geographical mix of revenues, tax audits or reviews, reviews the timing of any settle in our insurance recovery, suits, as well as other factors. Certain of these factors can have significant period-to-period impacts on the tax rate, which can have the actual rate to vary from forecast.. The diluted share count decreased by approximately 100,000 shares during the quarter to 75.4 million. The share count is forecasted to decrease slightly during the first quarter. Such forecast can very based on the average stock price for the quarter. Stock option exercises and the level of stock buy-backs.

Based upon this guidance, diluted GAAP earnings per share, which includes the impact of approximately $0.01 negative net impact from intangible amortization and spending on the lawsuit against an insurer, as well an estimated negative impact of net of tax of $0.04 per share from recording stock-option compensation expense are forecasted to result in our GAAP earnings for the first quarter being either 13 or $0.14 per diluted share. We also expect in the first quarter, to report our results on a pro forma basis. Such nonGAAP earnings for the first quarter, are forecasted to be 18 or $0.19 per diluted share. Turning to the balance sheet. Semtech ended the quarter with approximately 278 million of cash and investments on the balance sheet. Operating cash flow for the fourth quarter was a positive 20.5 million, during the fourth quarter the Company spent approximately 1.5 million on property plant and equipment, depreciation and amortization for the fourth quarter was approximately $3.2 million, which included the, approximately, 400 K of intangible amortization.

The Company purchased approximately 13.9 million or 724,000 shares of its common stock in the quarter and as of the end of the fourth quarter the Company had remaining under its current buy-back authorization of approximately 14.5 million of stock buy-back authorities. Accounts receivable day sales calculated on a quarterly basis remain low declining slightly to approximately 40 days for the fourth quarter as Jack mentioned inventory levels decreased by approximately 3.4 million in the fourth quarter as compared to the third quarter and our turns increased to approximately 4.8. We would expect to build some inventory in the first quarter. Guidance for the first quarter, again, shows Semtech delivering growth.

We continue to institute actions to improve our operating model, new product introductions continued at a high level with a total of 81 new products introduced during fiscal 2006, in the first quarter we are forecasting continuing strong operating cash flow and improvement in our sales and gross margin. We will continue to buy back stock, looking past the first quarter, we plan to continue to focus on driving revenue growth, controlling operating spending, and improving our ROI on R&D. All of which is forecasted to drive growth and earnings prior to stock option expensing.

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

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Romit Shah with Lehman Brothers.

Thank you. Historically April has been a flattish quarter. Is it better than seasonal guidance largely a function of some of these shipments related to the timing and execution spilling into this quarter? Or are you seeing better end market demand? And if it's the latter could you highlight which segments in particular?

I think it's not really relate toed a couple of the execution issues that we had, although that certainly will add into the first quarter. I think that we're starting with a pretty good backlog here. Demand continues to look pretty healthy, and the turns activity so far in the quarter has been on track. So guess it's just this year's business compared to other years.

Okay. It sounds like your notebook business is coming back, can you just help me understand why the general weakness in the the market has that translated or spilled into your business? It is the market share?

We had a good quarter in terms of design wins in notebooks for sure. And that's based on products again, that we have only had out in the marketplace over the last three or 4 months. The revenues from those; however, is going to go into models that probably won't kick off until late in the second quarter or early third but the main stream of those will probably take off in a quarter or two. I think I would say we have seen some slowness, however, for existing business in the noted book marketplace, but, again, notebooks for us as a percent, are not at historical levels, so the impact on us is probably not as great as it is on some of the other people.

Okay. Jack, would you expect this to be a fairly linear quarter for Semtech in terms of the new orders?

Yes, I think if you look at this quarter, I think this quarter is going to be a fair rate linear quarter both from a shipment and a booking standpoint largely.

Thank you.

Your next question comes from the shrine of Craig Hettenbach with Wachovia.

Yes, thank you. If we look at the area of protection IC's in addition to hand sets and networking equipment can you talk about your penetration in areas such as digital TVs or consumer electronic products in your outlook for those type of products?

Anything that has a high-speed communications line or high-speed digital line is a target market, and of course talking about all of the flat panel TVs for high definition, it's clearly an area that we have had some growth in, and we expect to continue to be able to increase our penetration into these marketplaces, but the protection products, generally are, a very broad-based product in terms of the end markets so they are virtually everywhere. We have a tremendous customer base for those products.

Okay. Within SETS, if you look another what is going to drive growth this year, is it more of products that you had design wins over the last couple of years and those products are starting to rollout and ramp, or are you seeing new design activity as well, within SETS for newer products.

The assumption for revenue this year is based 90 some percent, I would say on design wins from previous years. We will get some designs, obviously we're working on new designs every quarter. The timing revenue of those is a little shorter than what we had seen last year, but a couple of the areas is really see revenue growth is really in the IPD slams, and there's a couple of major customers there, that will drive revenue growth in SETS.

Got it. Thanks.

Your next question comes from the line of Ross Seymore with Deutsche Bank.

If you could just answer a little bit about the channel inventory situation and It looks like the [disty] business was strong this quarter, that's kind of seasonally normal. But can you give us an idea of what the channel inventory is looking like from your perspective.

I think we finished can channel inventories up slightly, but no major change over previous quarters. It's probably looking at previous years, I would say very healthy.

And what is healthy number? Just from a week's perspective and how does that compare today versus historical levels.

It really depends country by country. We probably have more channel inventory in a market like Japan where they are very concerned on making-- ensuring continuity of supply, and I would say Japan we might see, oh, I don't know six or eight weeks maybe even somewhat if it's a very critical program even sometimes more. If you take a look at China, Taiwan, some of the other major Asian markets, I would say you probably see more of four weeks to six weeks worth of inventory.

And none of those pockets are abnormal right now?

I don't think so. Probably more importantly if you take a look at the number of change orders, cancellations, push outs, and stuff like that that you normally see after the fourth quarter it's been very localized, and there's been a few but they are generally quite small.

Great. And moving on to the product types on the power management side I think in the last conference call you talked about that business being relatively flat for the first half of this year. I noticed in this last quarter it dropped by about 6%, I think you said. When should we expect to see that start of stabilize from here forward or do we have another quarter of adjustments.

I don't think there will be a major change in first l first and second quarter compared to fourth. I think it will probable likely though that it will be third quarter before some of these new designs really start showing growth.

Okay. The last question on the OpEx side of things, as you are doing a good job getting the operating margin up, how should be expect most of the operating margin to occur mainly revenue-growth driven or should we expect to see the OpEx in absolute dollars change a bit.

I think from where we were in the fourth quarter I think most of that is going to be driven by revenue growth.

Great. Thank you.

Your next come comes from the line of Richard Shafer with CIBC World Market.

Thanks, just a couple of questions it seems like both your handset and notebook business have been up the last couple of quarters, do you guys get the sense or you comfortable saying that in general both those businesses are sort of turned, the corner and are doing better now?

I think you got to look at the mix within there certainly in both of those business, the impact, I think, of our product strategies and power management hurt us last year. I think certainly in the area of notebooks, we are getting some traction there, and I think that is probably turned. We're going to need some of the new products that we just brought out here in the handset market for power, I think to have some impact and it probable not going to have some impact on handsets in the power side of things until the third quarter. If you look at the other portion of our cell phone business, and our notebook business of protection, I think we are didn't continuing to have a steady climb both in our penetration and absolute dollars for those, as we have seen throughout third and fourth quarter. Now there's some seasonality I think for handsets that you'll see a little bit of that growth slow just because I don't think they're going to make as many handsets here in Q1 and Q2, at least they won't be expanding at the rate they were in Q3 and Q4.

Okay. And just to keep it on the wireless scene for a second, can you guys talk about the pricing environment now, sort of in-- particularly in the [White LE] driver space, but just any other kind of color you can give us on whats going on in the handset business, in terms of competition, whatever, and then just a follow-up to that, what is your average content now in dollars per handset what do you think the potential is for you guys?

Let's start with the pricing. I think pricing is absolutely very competitive in [white] LED drivers and hand sets I think at last count there were almost 20 suppliers of drivers in that marketplace. We're not expecting to return to any kind of numbers like we had before and certainly some of the new products that we are targeting new methods of back lighting. I think in terms of the content, if you take a look at power and protection together, owe, I would guess we still probably have-- from a low-end model we probably have 2.5 to $3 in some of the higher end markets, maybe 4, maybe 4.5.

Okay. Okay. And then, I guess just-- can you delete or talk about the exposure you guys have now to the-- sort of the Korean handset OEMs. You talked about a lot of new designs wins, can you talk about how that in the second half for what you forecast for exposure, to the guys in Korea or can you talk about the new customers you have ramping or give us an idea of how that will break out?

Korea is a very important market for news handsets. I'm sure we have literally hundreds of designs that are shipping today, and they continue to be very important as we look at the design wins we have had for the last quarter or two. How that impacts second half, I mean I-- I think that will be a key driver in-- certainly what we have in the protection marketplace and to some extent in power because with the relationships we have there, those would be place we are looking to get some growth back into our power management business.

Okay. Thanks.

Your next question comes from the line of Craig Ellis with Smith Barney Citigroup.

Thank you. Good afternoon guys. Jack, can you comment further around the area of front-end utilization and the potential for tightness to really exist in the latter half of the quarter.

I think generally throughout the quarter we have seen a tightening of supplies of Silicon. It really depends on how specialized it is, but I-- I think the lead times are probably more strictly enforced than they were previously, and so we have to be very vigilant in our planning for Silicon to make sure we are looking far enough out and the difficulty is always on new programs how quickly some of these programs can ramp and that's-- that's really more my concern as we look at our ability to service turns orders this quarter is did we-- did we gauge the mix correctly? And you know, prior to, I think, where we are here now, we always had a chance to get back and put through lobes through pretty quickly, but you don't have as much flexibility in the marketplace to get some lobes through toward the end of the quarter so we got to be more accurate in terms of our planning, and it's tight.

Okay. How-- how broadly could that potentially effect the business is that pretty narrow across a few end markets or a few product segments?

I think it's move a cross-- power management protection have the two largest businesses and they would be effected most.

Okay. And then just with regards to a desire to build a little inventory in the quarter, how should we think about an increase there, is that low to mid single digits in terms of a percentage increase from where we ended this quarter.

Yes, I think we might of got a little carried away in terms of our inventory management, and certainly we have room to build back stock, and that's one of the things that we're focused on, but I think if you look at-- for us building back 1 million to $2 million worth of inventory that would be the right ball.

Okay. Thanks, guys.

Your next question comes from the line of Steve Smigie with Raymond James and Associates.

Great. Thank you. Could you talk a little bit of where your protection product is a percentage of revenue now and maybe what market share you guys think you have overall in the market?

In terms of market share.

Well what is protection as a percentage of your revenue now?

When you talk market share you got to talk I think a specific market because there's many portions of the TDS marketplace in which we don't participate. In terms of our served available markets, and we would exclude a number of things, I would say we would have market share anywhere-- in some of our products we would have market share maybe from 12 to 15% on the low to certain products where I would think we have 35 to 40% of market. Again that is a narrowly defined term for serve market, and we don't really break out our percentage of revenues for protection but it is one of our top product lines for sure.

Okay. And would you say that the packaging is probably one of the element that's leading you to pick up so much business, or are there other design factors?

This business is a combination of circuit design, process and packaging, and it takes all three to create a leading edge product portfolio and I can't say one is more important than the other. Packaging is certainly a key consideration. If you look at the size of some of these consumer items, they are getting very very small. Our packaging road map absolutely has to mirror what those end products are doing.

Okay. Last question-- I know it's pretty broad based, but any sense to what you think you might see as annual growth rate over the next year for that protection product category?

It will certainly-- it will certainly be at the upper end of our corporate average and probably above. It's going to be one of the better-growing product lines for FY '07. The other thing I would like to point out, is we're going to get good growth, I think in '07 out of some of our smaller product lines, so the wireless and sensing group we expect growth. The test and measurement group we will get growth. Even things like the legacy power discrete, we're going to get growth this year where we hadn't seen a lot before. So we're expecting growth across the board for everyone of our product lines this year.

Okay. Thank you very much.

Your next question comes from the line of Bill Lewis with J.P. Morgan securities.

Thank you. I think on the last call, Jack, you talked and pricing trends and opportunities to raise pricing in select areas. Maybe that's a bit of what you did in the legacy discrete but could you just kind of give an update on your success there.

Well, and I mentioned in my talk earlier, we-- we certainly got rid of some backlog was that was not very good prices, and it impacted the order intake but we have been examining our cost much more carefully and found areas where accept simply don't have the price structure to support some of those price levels. So we have raised some prices. Whether or not we continue to be able to rise prices in the future, I can't say, but right now we certainly are rising some prices primarily in your custom area. I think a lot of those pricing moves will take effect, but we probably will not see some of that until we get out of-- oh, midway into second quarter maybe into third quarter.

Great. That's very helpful thank you. Secondly on the test and measurement business, it grew significantly. It looks to be, maybe kind of half of the level in dollar terms it was a couple years ago, at its peak, as it trends higher, I guess I'll really asking how much higher do you think it can go? Can it approach prior peak levels or is there some structural reasons why it won't quite get there?

I think we're comfortable if the test and measurement business stays in the 5 to 10% of total revenues. We would not like to see it revert back to it's peak revenues when it was 20 some percent.

Okay. And lastly if I could, do you have a view on what you think bookings and backlog will do in the first quarter.

Yes I think bookings-- we look to have a positive book-to-bill ratio in the quarter.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Sumit Dhanda with Banc of America Securities.

I had a question of your long-term gross margin target. It clearly seems like your turning ir around a little bit from a product perspective and a lot of these new products that you are ramping seem to be positive contributors to margins. Last cycle all of your margins peaked just under 60%, any reason why we can't get back or exceed that level structurally given the way you have positioned the company here lately, or how should we think about it?

Gross margins for us are dependent primarily on mix and I think shooting for a corporate gross margin of around 60 points at peek is still our goal here. It really will depend on how the mix of products turns out and wireless and sensing was not at corporate gross margin average as-- during the acquisition, we were really concentrating with wireless and sensing to make sure that there are at least at corporate gross margin averages now as we work toward the next three or four quarters.

Okay. I had a follow-up question on notebooks you indicated some of the strength you are seeing is Semtech specific in terms of design. Any particular competitors you would highlight against whom you are gaining some traction here recently?

I mean I this shall-- I don't think the competition has-- has varied too much. I think you have got Maximum and [Intertill] a little bit out of [Linerertech] some Texas Instruments for sure. I have not seen a lot of new[inaudible] ADI's got some there for sure but I haven't seen a lot of new [entrance] in the notebook arena.

No one in particular?

I don't think so.

All right. Thank you very much.

Your next question comes from the line of William Conroy with Sanders Morris Harris.

Jack, could you give us a little bit of a sense of how you see R&D playing out. You have reassigned some folks there, you pulled down the mask and prototyping expenses, when those guys are back on the verge of introducing products, do we see the expenses start ticking back up?

I think for this year, the strategy is improvement in our productivity in R&D, so as revenues increase, I think you'll see R&D decline slightly. I think we're get through the next two or three quarters before we start adding absolutely dollars to much to R&D. It depends on how good our productivity is, because that drives mass cost prototype Silicon. If our productivity improves and we're turning more design that's an area of spending you could see increase. Our view is the absolute dollars of R&D spending for most of this year shouldn't-- should not increase hugely, and I think as a percent of revenues as we get out into the second half it will probably falsely.

Can you say whether the effected individual were reassigned or did you make a head count reduction?

By enlarge, we have taken those people and put them on to new product definitions. One of the real issues we had was the product definitions especially in power I-- we're just not good. And so that's where I said we killed several parts that we didn't think were going to make corporate average. Corporate gross margin averages at the outset. So we have killed those products and moved them on to other things that we have had in the hopper that we need to work on.

To change gears with the performance that the protection business has put up, really over the last couple of years, has that started to attract any more attention competitively?

I have not seen any new people start up in the protection business, but certainly there's plenty of people in it already, and again, I just think that we run the protection business perhaps a little differently than some of our competitors, and you know that business is all for us driven on our ability to create new proprietary products ahead of the marketplace, and really I'm focused on that-- or the company is focused on that, probably a little less so that looking in the rear-view-mirror of who is coming up behind us.

That's helpful thanks very much.

Your next question comes from the line of Doug Freedman with American Technology Research.

Thanks for taking my call. First off, nice job on the execution on the operating expenses. If you could sort of touch on what you are doing to try to work -- worry-- are you concerned about continuity in bringing in a new CEO and the direction that he may want to take the Company in your accept search efforts.

First of all, my job really has been, one, to make sure that we've-- we're getting good fall through on the top-line revenue increases, and if you look at this quarter we have a 6% revenue increase and operating profits went up 20, so my attempts first of all is to get the ship righted, a new CEO coming in here is probably going to have his own idea of where he wants to take things. I want to give him these best opportunity in terms of the profitability in the P&L and the balance sheet to do that. I think that we have some good businesses here, but I would not be surprised if somebody else comes in and is going to want a-- is going to have much different perspective than what I have on this business and is going to want to do some new things. I just want to put the Company in the best position to be able to execute if those strategies begin to change.

I'm trying to get a chance of how well-- could you give us sort of your score cord on the wireless and sensing integration effort. I know you talked about getting the gross margins up to corporate average.There was talk of further integration efforts down the road where you are at with that and sort of a little longer-term out look on that business, if you might.

I think if you take a look at the top line revenue-- top line revenue is probably below what we thought we really could. In terms of the profitability and margins I would say we're kind of on track of what we think we could do out of this business, two quarters after the acquisition or so. As we look forward, I think a couple of challenges that we have one, is to take a business that was primarily a private enterprise, and make sure that the-- the targets in terms of kind of gross margins, the kinds of products that we development for our markets, work with what we have a s a public Company and the rest of the product line and I think that's be a challenge. Second thing, I think has been just the operating disciplines of a public company to make sure that the linearity of revenues, the reporting guidelines that we have, the timeliness of what we do, that-- that all has to be improved and I wouldn't say it's been an stellar execution on our part as well. I think we could have done things better, and 6,000 miles of geographic distance has probably hampered that but I think all things considered I would say we're on top of it and we have done a pretty dog gone good job now understanding where we want to take this business in the future from a products view point and I think that was probable not as well defined going into it as we hoped but you find out something about a market to a couple of quarters down the road too and I think any market that changes a lot such as blue tooth, is a good example. The blue tooth market we had hopes we would be able to do things on a border basis, I think our efforts in blue tooth are going to be very targeted,yes we have some good opportunities, but they are not probably main stream and they are probably more two to three years sort of horizons rather than a five-year kind of horizon. I think we're sort of on track again, what-- at the top line revenue area or not-- maybe not at the topline revenue but as an operating margin level but certainly the there's plenty of room to improve in that whole area of wireless and sensing.

Should I take to mean that the risk of continued payout on the earn out is not part of the feature equation?

I would say that any additional payout is very remote at this point in time. Never say 100%, but I would say at this point based on the forecast, we don't believe they are going to hit any of the strike levels, which were fairly accessive to begin with.

I remember they were in indeed.

They are not going to attain that, so .

Terrific thanks again, guys.

Your next question comes from the line of Michael Bertz with WR Hambrect and Companies.

I just have one thing I want to follow-up on the notebook business. You talked about get traction fundamentally for Semtech. We you seeing someplace where you have a little more competitive pricing or you have seen better products?

I think the traction that we have gained is that we have much better price performance points on these new products that we bought out over the last three, four, five months.

Okay. Great. Thanks, guy.

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

Go ahead afternoon. I apologize for getting late. I missed some of the early part comment that you made, Jack, can you give us an update or have you mentioned about how soon you are going to have the new CEO in? And I was also wondering-- you mentioned something about wireless assessing business, getting to corporate average operating margin or gross margin? The next four quarters, because I remember this business was not as profitable, quite a bit below those kind of numbers that you were looking for, for the total Company when you bought it. Are going to do anything in the advanced communications area, since that's a fairly limited product and there seems to be some consolidation going on in things like clocks, would you make acquisition to expand your product portfolio in that segment?

Let me start with the CEO update. As I said in my opening remarks, we're in the final stages of this succession plan. We think we will have an an announce here in the next few weeks. In terms of the wireless and sensing, I talked about trying to get the gross margins in this business up to corporate gross average over the next three to four quarters, that's one of our key objectives. In terms of the the advanced communication products the revenue growth for this year I would say is 90% plus, based on the designs that we had up until this year One of the key statements I made in this area, is we have a new-- we have a new product line that we will introduce about midyear, which is a-- which is a timing control system used for some of the next generation wired and wireless infrastructure equipment that is both for delivery and back haul over traffic over enthernet. And we original thought that would not be any revenue growth that we would include in this year, but some of the testing that we have done on networks, places like Verizon, Sprint, British Telecom gives us some indication now that we may in fact have revenue growth possible from those new products this year, but we're not even releasing Silicon to customers until probably somewhere midyear maybe early third quarter.

Uh-huh. I see.

Gentlemen, I am showing there are no further questions at this time.

I'll go ahead. Operator you can put it back to me. This is John Baumann I would just like to thank everyone for participating in today's call, and we look forward to updating you at the end of our next fiscal quarter. Thank you.

This concludes today's conference. You may disconnect.