Semtech Corp (SMTC) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Semtech fiscal 2007 first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Baumann, you may begin your conference.

Great. Thank you, operator. Good afternoon, ladies and gentlemen and welcome to Semtech Corporation's fiscal year 2007 first quarter earnings conference call. I'm John Baumann, I'm the Treasurer of the Company and I also handle Investor Relations. We've just released results for our first quarter that ended April 30, 2006, for the next 45 minutes or so, Mohan Maheswaran, Semtech's President and Chief Executive Officer; and David Franz our Chief Financial Officer will be discussing those results with you and answering your questions.

A reminder that Semtech reports results based on generally accepted accounting principles commonly referred to as GAAP. This quarter we've also made reference to certain non-GAAP measurements. These non-GAAP items are provided to enhance the users overall understanding of the companies comparable financial performance between periods. In addition the Company's management generally excludes such items in managing and evaluating the performance of the business. A further reminder that the first quarter results we published today in our press release are unaudited. Before I turn the call over to Mohan, I want 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 conference call will include forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements or 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, and our plans, objectives, and expectations. Some forward-looking statements may be identified by the use of such terms as expects, anticipates, intends, estimates, believes, projects, should, will, plans, and similar words.

Forward-looking statements involve risks and uncertainties that cause actual results to differ materially from those projected. These risks 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 particular, 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 risk 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 10-K for the fiscal year ended January 29, 2006. In the Company's other filings with the SEC, and in material incorporated therein by reference. In light of the risks and uncertainties inherent in forecast of revenue and gross margin and in 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 it's operating expectations or financial forecasts will be realized.

Although a replay of this call will be available in the Investor Relations section of Semtech's website, the Company assumes no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. I will now turn the call over to Mohan Maheswaran, Semtech 's President and CEO.

Thank you, John. Good afternoon. As many of you know, I assumed the CEO position on April the 3rd. In the past 60 days, I have been diligently reviewing the Semtech strategy, understanding our product and market strategies, reviewing our policies and procedures, reengineering our management processes, and evaluating our people. I believe that there are significant improvements to be made in some of these areas, specifically in the areas of strategic focus, clarity of thinking, product development execution, and business execution. I think that we can and will do a better job in these areas.

We are in the process of hiring some key people into critical positions to enhance our product definition capability in the Company and to enhance our process technology road maps. We are also in the process of introducing some checkpoints into our development process which will result in better products, faster time to market, and a more robust product strategy. In addition to enhancements to our management processes, we are reinspecting our major expenses and product costs. I believe that we can improve efficiencies and cost in some areas. Consolidation of some of our subcons and foundries will also bring us some benefit. The net effect of these improvements will be improved execution in several of our businesses. While these improvements to our processes, methodologies, and approaches will enhance our ability to execute in a more timely fashion, the biggest and most exciting opportunity is on the strategy front.

Semtech has a portfolio of highly differentiated platforms that give us numerous degrees of freedom. I believe that making the right strategic choices now will put the Company back on a growth track. These platforms are across several of our product groups. I believe the differentiation is large enough to potentially allow us to take a lead position in some very exciting emerging markets. I am very encouraged by the engineering talent in the Company. Design engineering, applications engineering, test engineering, and field applications engineering are amongst the most talented engineers that I have come across. Once we improve our execution and bring clarity to our strategies, we will be able to more effectively utilize the talent we have. The results will be an acceleration in the creation of value into targeted market segments. I will discuss progress on this front in further conference calls -- in future conference calls.

Now I will discuss Q1 performance. New orders for the quarter increased 4% from the fourth quarter. Revenues increased by 2% in the first quarter. The Company's book-to-bill ratio was above 1 for the quarter. Revenues from protection products increased slightly in the first quarter while Q1 is typically a soft quarter for our protection business, the continued strength in this business reflects the diversity of segments we have now penetrated, such segments include cell phones, PDAs, GPS systems, networking equipment, digital TV, video, and broadband modems to name just a few.

Our ability to bring leading edge protection products to a diverse set of end markets demonstrates a capability and flexibility that is best-in-class. Revenues from advanced communications products increased nicely in the quarter. The increase is due to seasonal strength and a broadening acceptance for our timing products. It also reflects the increasing confidence that our customers are beginning to exhibit due to our exciting road map in this area. Revenues from wireless and sensing products increased over Q4. This increase is driven by strength in both our wireless products and our sensor products into our established customer base. We are excited by the increasing acceptance of both our high end RF products and our sensor products in new market segments, in both the industrial and the consumer space.

Power management product revenues declined from Q4; however, bookings increased in Q1 compared to Q4 which was encouraging and which resulted in a positive book-to-bill for the product line. The decline in our power management shipments was due to two main factors. Firstly, weakness in our computing power business due to seasonal softness in the desktop and notebook markets and secondly, weakness in our handheld business due to continued price pressure. On the positive side, we believe that Semtech power products are a good fit for many applications that we have traditionally ignored. We are putting more emphasis on these applications now.

Test and measurement revenues were approximately flat. Our test and measurement business is quite healthy. If semiconductor demand continues to outstrip supply this year as expected there will be increasing demand for test equipment and therefore we expect demand for our test and measurement products to continue to be healthy in Q2. Finally, the legacy power discrete business, while a small percentage of sales grew nicely in the first quarter.

Q1 non-GAAP gross margins increased by 130 basis points to 57.8%. The increase in gross margins was due to three factors. Firstly, a larger number of new higher margin products that offer more value to our customers. Secondly, favorable absorption variance due to higher volumes. And thirdly, cost reduction efforts in selected areas. With a continued cost reduction focus and improved design win execution of new products we expect that gross margin expansion will continue. This gross margin expansion demonstrates Semtech's ability to bring innovative, highly differentiated analog products to the market. As a result of the increased sales and higher gross margins , non-GAAP operating income for the first quarter increased to just under $16 million, or about 24% compared to the fourth quarter which was $15.3 million. Q1 non-GAAP EPS was $0.20.

The Company generated nearly $16.4 million of operating cash for the quarter, and we repurchased $14.2 million or 791,000 shares of common stock. We also announced today a new $50 million authorization for future buybacks. David will go into more details on balance sheet items.

Moving on to new products, we released 13 new products in Q1. Our power management and protection businesses both released a range of high quality differentiated new products. The protection products group is building on it's leadership position by introducing protection products for a number of new application spaces. Our power management business has started to reassess all development programs to ensure the strategically we are well positioned in our target markets. While we have had to restart some programs, we are progressing well on most and I expect that we will see some leading products hit the market in the second half of '06.

Our test and measurement product group is sampling a new platform of integrated pin driver products that provides our customers with unparalleled performance for their test equipment. We expect to see design wins for this platform in Q2 and pre-production shipments in the second half of '06. While in recent years we have been struggling to increase revenues in this somewhat cyclical segment, our new high performance platform offers a significant performance and cost advantage over competitive solutions and we are confident that we will regain momentum in the next 6 to 18 months. In wireless and sensing products we are beginning to see better product execution. The new products from this group will generate design wins in the second half of '06. As we take these platforms to market, I expect there will be an opportunity to cross-sell more of our power management and protection products into the same account base.

Our advanced communications group is close to first silicon on a new timing controlled platform that will position Semtech in the emerging triple play based wired and wireless packet-based infrastructure. This platform will enable high speed delivery of video, data , and voice packets across the network. Preliminary testing on wired service provider networks such as Verizon, Sprint, and British Telecom and wireless networks operated by Nokia, Ericsson, Motorola, and Alcatel are very positive. We believe that the opportunity for this platform could expand to cover the access space also where the volumes could be greater and the time to revenue could be much shorter.

Turning to design wins. The Company's design win activity continues to be very strong across all segments. This is especially true in protection, power management, and wireless and sensing. In total, we recorded over 600 design wins in the quarter. The design wins across the Company are fairly diverse, covering numerous applications in different regions.

Now, let me talk about our outlook. Q2 is typically a seasonally soft quarter for Semtech. We currently expect revenues to be flat to up 2% in the second quarter. Non-GAAP EPS should be in the $0.19 to $0.20 per share range. Operating cash flow for Q2 is expected to be up compared to Q1's solid performance. This concludes my opening remarks. I'll now turn the call over to David Franz who will provide a more detailed financial update after which I shall conclude the call with some closing remarks.

Thank you, Mohan. Good afternoon, ladies and gentlemen. Starting with orders, orders increased sequentially by 4% in the first quarter of fiscal 2007. The Company increased backlog during the quarter, starting backlog for the second quarter is slightly ahead of starting backlog for the first quarter of fiscal 2007. As we look at the income statement revenues for the first quarter of fiscal 2007 were 65.9 million, an increase of 2% compared to revenues of 64.4 million for the fourth quarter of fiscal 2006. This was in the middle of the 1 to 3% range we had forecasted. On a year-over-year basis revenues for the first quarter increased by 17%. This latter comparison was favorably impacted by our acquisition of last fiscal year.

Non-GAAP gross margin for the first quarter of fiscal 2007 increased to 57.8%, an increase of 130 basis points which was substantially ahead of our forecast. As Mohan stated the Company benefited from product mix, favorable absorption, and continued cost control. As we move forward, we anticipate further gross margin improvement. GAAP net income for the first quarter of fiscal 2007 was $12 million or $0.16 per diluted share. These results include the forecasted negative impact of $0.01 per diluted share from the write-off of intangibles associated with last years acquisition as well as legal costs related to our litigation against one of our insurers. The results were also impacted by the adoption of FAS 123R which resulted in expenses for stock options of $3.5 million being booked to the statement of operations for the first quarter of fiscal 2007. Net income was favorably impacted by the higher than forecasted gross margins as well as the higher than forecasted other income.

Non-GAAP net income per share was $0.20 per diluted share for the first quarter. Our press release includes a detailed reconciliation of all non-GAAP financial data. Revenues for the first quarter were derived from the following geographic regions. 22% was derived from customers located in North America, 16% from customers in Europe, and 62% from customers in Asia. Net turns orders for the quarter accounted for 39% of shipments. This compares to 38%, 48%, and 47% in the previous three quarters. Revenues by end market changed somewhat. Revenues from cell phone, handset market accounted for 24% of revenue. Desktop, computers, servers, and graphics accounted for 9% of revenue. Notebook computers, PDA's, and other portables accounted for 15% of revenue, test equipment accounted for approximately 7% of revenue, communications infrastructure accounted for 17%, and general industrial, which includes medical and military and other accounted for 28% of revenue. All of the end markets generated some growth in the desk market with the exception of the desktop market to notebook market, cell phone market. The general industrial, medical, and military market was very strong during the quarter.

Revenues from OEM games represented approximately 40% of total revenues for the first quarter, while distribution represented approximately 60% of total revenues. Looking at the outlook for next quarter we are forecasting that revenue will be flat to up 2% for the second quarter of fiscal 2007. To attain the second quarter forecast we need net turns orders of approximately 40% of revenue which is the same level as was achieved in the first quarter of this fiscal year. GAAP research and development expenses were $10.5 million for the quarter, this was an increase of approximately $1 million compared to the fourth quarter of the prior year. The majority of the this increase related to the expensing of stock options. Other R&D items increased total R&D spending by approximately 100 K which was lower than forecasted. We are forecasting that R&D spending will be up by approximately 100 K for the second quarter. R D expenses associated with FAS 123R are expected to be approximately flat with the first quarter.

GAAP, SG&A expenses were 15.1 million for the quarter. This was an increase of approximately $3.3 million compared to the fourth quarter of fiscal 2006, the majority or 2.5 million of this increase related to the expensing of stock options, other SG&A expenses increased total SG&A spending by approximately 800 K which was ahead of our forecast. Certain variable items such as audit, legal, recruitment, and relocation were higher than forecasted. We are forecasting that SG&A related to stock option expensing will increase slightly as compared to the first quarter. We forecast stock option expenses as a percentage of revenue should decline over time due to reductions in average grants per head and forecasted revenue growth. In the second quarter of fiscal 2007, other SG&A items should be in a range of down 200 K to flat as compared to the first quarter. This forecast varies based on the revenue level achieved which impacts certain variable expenditures.

As we have discussed for the last several quarters we are still pursuing one insurer for approximately $10 million which includes interest. There is a mediation date scheduled in June. We are forecasting to incur approximately 150 to 200 K of legal cost during the second quarter in pursuing this additional recovery. At this point we cannot estimate the amount or timing of any recovery nor can we be sure we will recover anything in this suit; however, we believe that the ultimate resolution of this will be favorable to the Company and it's shareholders. We have excluded this item from our non-GAAP net income so as not to distort period to period trends and due to the non-operating nature of this item, particularly given the size of the prior year second quarter settlement with two insurers and the potential for a significant recovery in the suit still in litigation.

In the second quarter of fiscal 2007 we will also record amortization of intangibles associated with last years acquisition in the amount of approximately 275 K. This is also excluded from our non-GAAP net income. Interest and other income was $3 million for the first quarter. This was considerably ahead of our forecast. This amount was higher due to higher returns on our cash and marketable securities, plus some unforecasted foreign currency gain of approximately 500,000. For the second quarter, we are forecasting interest and other income of approximately $2.4 million. Risks to this forecast are principally foreign exchange rate related and just as we had certain unforecasted income in the first quarter, there always is the possibility we could have some unforecasted loss in a future period.

The Company's effective tax rate for the first quarter of fiscal year 2007 was approximately 20%. The Company is projecting that it's GAAP effective tax rate for fiscal 2007 will be in the range of 21%. The calculated tax rate on non-GAAP earnings is higher than the above referenced GAAP amounts, and this tax rate can vary from forecast based upon the geographical mix of revenues as well as other factors. These other factors include variations in the dollar, Swiss franc exchange rate, transfer pricing assumptions, tax audits or reviews, changes in tax laws, the timing of any settlement, and our insurance recovery suit. Certain of these factors could have significant period to period impacts on tax rate which can cause the actual rate to vary from forecast. The non-GAAP diluted share count decreased by approximately 250,000 shares during the quarter to 75.1 million shares which was slightly lower than the forecasted diluted share count. The share count is forecasted to decrease by approximately 700,000 shares during the second quarter. Such forecasts can vary based on the average stock price for the quarter, stock option exercises, and the level of stock buybacks. Based upon this guidance, diluted GAAP earnings per share are forecast the to be approximately $0.15 or $0.16 per diluted share and non-GAAP earnings forecasted to be approximately $0.19 or $0.20 per diluted share.

Turning to the balance sheet. Semtech ended the quarter with approximately 284 million of cash and investments on the balance sheet. Operating cash flow for the quarter was a positive 16.4 million as Mohan mentioned. Operating cash flow should increase in the second quarter as compared to the first quarter. During the first quarter the Company spent approximately 900,000 on property, plant, and equipment, depreciation and amortization for the first quarter was approximately 3.2 million which includes the 400 K of intangibles amortization and the Company purchased approximately $14.2 million or or 791,000 shares of it's common stock in the quarter. As we discussed today in a separate press release, our Board of Directors has authorized the additional repurchase of up to $50 million of common stock.

Accounts receivables, day sales outstanding calculated on a quarterly basis continue to remain at a low level, declining to approximately 39 days for the first quarter. As forecasted, inventory levels did increase during the quarter by $1.9 million as compared to the fourth quarter. This includes approximately 400 K of cost capitalized into inventory during the quarter related to stock option cost. Non-GAAP inventory turns are at approximately 4.4 turns. The inventory build in the quarter was focused on reducing lead times on many of our high demand products, particularly those addressing broader end markets and a more diverse customer base.

I think guidance for the second quarter again shows Semtech delivering strong operating results. On the operating side, we have many initiatives to drive growth and cost efficiencies. In the second quarter, we continue to forecast strong operating cash flow. As I mentioned, we plan to continue buying back stock. Looking past the second quarter there is tremendous focus on reinvigorating growth in our power management product line. There is also significant activity ongoing towards the achievement of this objective. As always, we will maintain our focus on controlling spending and improving our return on investment on our R&D dollars. I thank you for participating in our first quarter fiscal 2007 conference call. And I will now turn the call back over to Mohan for some final comments.

Thank you, David. In summary, I believe that Semtech's portfolio is well balanced and we have strong positions in a number of different end market applications. Some of the systems in these markets have longer life cycles such as networking, telecom infrastructure, industrial, and military. Other systems have shorter life cycles such as cell phones, computer equipment, and consumer devices. The balance enables Semtech to benefit from the very stable, profitable revenue base while introducing new technologies to penetrate emerging application segments in some of the faster growing, but more volatile segments of the market.

Semtech is a highly differentiated analog mix signal company with a truly solid operating model with a renewed focus on innovative platform execution, design wins, global sales of all Semtech products, and strategy execution. I believe that Semtech can drive profitable growth well above the industry average for many years to come. I will now hand the call back to the operator for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Romit Shah with Lehman Brothers.

Hi, thanks for taking my question. The gross margins were better than I was expecting, but your sales guidance is a little below what I was forecasting. Just curious, does this reflect a strategy by the Company to be more disciplined with pricing and mix on certain programs?

Romit it's Mohan. On the gross margin improvement, what we're really focused on is making sure that the product mix, we continue to bring out in all of our families across the product groups is generating value. So as you know in the power management space there are some segments which are more price competitive than others and we have -- participate in some segments, but have chosen not to participate in others and that's going to be our general strategy going forward. We want to play in segments that we believe we can generate profitable growth.

So is it fair to say that your first priority is boosting the gross margins and second would be then driving the sales growth?

No. I'm really looking at product portfolios and making sure that the products we bring to marketplace have real value to our customers. The measure of that is obviously our customer is prepared to pay for those products and we are able to generate the gross margin improvement, but our gross margin improvement came from not only mix but improved absorption variance and cost reductions also. So we just are continuing to hammer on all of those fronts.

Okay. It sounds like bookings and backlog improved in the quarter. Could you give us a feel for trends activity thus far in the July quarter?

Well, I think if we look at May, I think May has come in at or above forecast and if you look at generally, I'll just answer the question since it typically gets asked is if you look at the amount of turns activity that we need for the rest of the quarter I would say that it's comparable to requirement last quarter so I would say at this point trending and the bill to backlog looks good for the second quarter.

Okay. Thank you.

Your next question comes from Craig Hettenbach with Wachovia Securities.

Thank you. Mohan, first, congratulations on the new role of CEO. Coming from Intersil, can you talk about some of the things that might differentiate Semtech from some of the other analog peers, particularly as it relates to the protection business?

Well, so the differentiated platforms that Semtech has are really differentiated across-the-board. When I look at protection, we have a really interesting portfolio of products. We have very differentiated processes, we have very good people and talent that know how to utilize those processes, so we built protection products that I think are very leading edge protection products. The same is true of advanced com, in our advanced com business. We have some timing platforms that are way out there. They really are differentiated, very, very much driven by systems knowledge and the know how of how timing needs to happen in the com infrastructure. The same is true of our test and measurement area, and I could go on? The differentiation that we have is based on some very good competencies across the Company. If there's really a danger to play devils advocate, it's what don't we do? There are so many areas, so many degrees of freedom that we have. It's really a question of making sure that we're focused enough to drive growth in the targeted markets.

Okay and then as a follow-up, you mentioned within the release that portable electronics, com, and industrial led growth into Q1. How about as you look into Q2? What areas are you looking for to lead or be more healthy than others?

Well, I well I mean if at the market mix, I mean we'll see -- obviously we'll see some improvement in the notebook market. We'll see the ATE business will remain solid, but the military and industrial business, if you had to pick one segment will continue to do well. We're doing well in that segment which we call the military, industrial, and other area so I think that should be, that segment should continue relatively strong. So I don't know to really pick out one segment that would be a leadership segment. I think all of the segments in terms of market segments should perform reasonably well in the first quarter. I mean in the second quarter. We continue just in the desktop area, as part of our plan to de-emphasize that somewhat, but other than that, I think we look pretty good in all of the other end market segments.

Okay and then lastly if I could, you mentioned a little increase in inventory to manage lead times. Could you just remind us where your lead times have been trending at?

If you look at our lead times, I mean there's a big variability between all of our various products. I think the -- what we have focused strategically on in the Company and put some new processes in place here in the last six months or so is to make sure that we're getting all the inputs from the field so that we can strategically build inventory in certain areas and understand where the growths going to be coming from so that we can keep our lead times short. So I think that's where we've been focused is trying to build that inventory in the key strategic areas and keep our lead times short.

Great. Thank you.

Your next question comes from Rick Shafer with CIBC.

Hi, thanks, guys, congrats on a good quarter. I just had a couple questions. First, just to Mohan, you built and ran a pretty big consumer businesses at his former employer and I know you mentioned taking emerging, taking advantage of emerging market opportunities and that's where you're taking Semtech. Should we assume that a goal of Semtech is to refocus -- refocus business here and if so can you give us any specific ideas, what some of those target markets might be on the consumer side?

Well, I think Semtech is already playing in consumer markets so we have a heavy presence obviously in the cell phone business, PDAs, GPS systems, and our protection business, across-the-board in power management we do play also in the consumer space but when I talk about emerging applications, for example, our advanced com business, we've largely been focused on infrastructure in that area. It's my sense that we can take the same technology and apply it to the access space which is more consumer oriented and as I said in my comments that the time to revenue can be faster, the volumes can be faster, the standards don't necessarily have to play a role in preventing the rapid growth of the revenue so in my opinion, there is is some opportunities like that. When I look at the wireless and sensing products that we have, there are some new emerging applications, again whether they be in consumer or whether they be in some of the industrial or medical spaces, they still can be very nice emerging applications that we will utilize that technology very quickly and so the time to revenue can be faster. So I view it across-the-board that there are opportunities for us to just do things somewhat differently and perhaps in some of those applications, not only sell the products that were designed for those applications but then also cross-sell power management and protection also. Okay and then you mentioned, if I heard you right, you mentioned the book-to-bill on handset was positive? I think that's right. If it is, could you give us an update on that business, maybe has that business stabilized now and maybe an update on the number of sockets, maybe the dollar content per device in terms of potential versus what you guys addressed today?

Yes, Rick, we don't break out per se the book-to-bill by that detail of end market segment. I think what you might have picked up is I think Mohan referred to the fact that in overall power management, we did have a positive book-to-bill.

Okay. But can you say if bookings were up in that business or is that, I guess that's -- wouldn't necessarily mean book-to-bill.

Yes, I mean in power management, yes, bookings were up and we did have a positive book-to-bill in that particular product line.

Okay and so do you feel like -- are you comfortable saying handset has sort of stabilized or?

I think if you look at it and I'll see if Mohan has a comment on this afterwards, but I think if you look at the handset area, we've got tremendous efforts under way on a whole host of new products particularly in the power management area that we think is going to drive a turnaround of that business in the second half. And I think driving better -- better cost scale, better performance and good levels of integration, so I think we're pretty optimistic about our handset power management business as we start getting into the second half of the year.

Okay. Can you just give us an idea, sort of your dollar content today versus what it could be or where you think it's going?

Today, we sell broad range of products into the handheld space. We have protection devices, we have charge pump devices, we have switching regulators, we're beginning to sell some of the wireless sensing products into the handheld space also, so, I think that it's increasing content. It's more focused on high end handheld devices, like smart phones, PDAs, 3G and CDMA-type of phones, but that's the game plan.

Okay, thanks a lot.

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

Hi, this is Han Li for David Wu. Thanks for taking my questions. First of all, you mentioned that for your gross margin, it increases due to higher margin products, higher volume, and cost reduction, so could you please kind of break down which one you getting the most benefit of?

Well, I mean we didn't break that down for purposes of the call. I think they're all-important factors. I mean I think the mix was an important factor. We're clearly getting some improved volumes due to the growth in some of our businesses, and looking forward, I think longer term obviously the one that we want to be the primary driver of that is obviously the mix and that's, I think where a lot of Mohan's strategies come into play in terms of making sure that we're focusing on those leadership-type areas.

Okay, so say for the second quarter and second half of this fiscal year, the amount of gross margin expansion that we should expect from cost reduction is pretty minimal compared to the mix or?

I think if you look at the remainder of the year I think that it's primarily product mix that should drive the gross margins, but I mean we'll continue to have some increased volumes with the revenue growth, particularly in the second half of the year and we continue to push on cost reductions as well and we're pushing some new advanced processes which certainly will benefit us from a cost standpoint.

Okay, just one more thing on the gross margin. It sounds like you guys are focusing a lot on the consumer side of the business, such as cell phones, Bluetooth, and stuff and those products generally have slightly lower margins, so could you please comment on that?

Yes, I don't know that that's a true statement. If you look at Semtech's portfolio and the markets we play in, we do have a large number of products that go into communications infrastructure, we have a large number of products that go both into the telecom infrastructure and the datacom infrastructure, we have a large number of products that are going into the military and industrial space. We have a very large presence in the industrial space and a number of different applications and then also the computing space. As you know we play in the notebook space and the desktop computing space so we are very balanced from the standpoint of markets, as I said in my statements.

Oh, okay just one final question. Mohan could you please talk about what's your vision for the Company and where the Company is going to head like overall in the long run?

Well, it's still early days for me, but I think -- I'm very comfortable that we are going to be a -- continue to be a high performance analog player with very differentiated products and my sense is and my feeling is that we can become a leader in some of the markets that we play in, but it's early for me to really throw out a vision statement to you.

Okay, thank you very much.

Your next question comes from William Lewis with JP Morgan.

Great, thank you. Last quarter, you guys talked about an opportunity to maybe raise pricing a little bit in some custom areas. Could you just give us an update on that, if you were able to do that, and if that's still part of the strategy?

I think if you look at the follow through, some of that, we're certainly in our power discrete or military business and I think we did have good follow through on that, we saw some improvement in gross margin in that business and while we may have made conservative assumptions going forward regarding future gross margin improvements on that business, I think that the real follow through from some of those actions that we took is really going to come through in Q2, Q3, and Q4. So yes, I think there is -- it's a small portion of our business, but I think we did have good follow through in that area.

Okay. And then in the power management business, I guess I'd be interested in if you could share some thoughts on some of the changes that you had made in the prior couple quarters in the power management business that Jack had talked about at least on an interim basis versus changes, Mohan, that you see making going forward now. Will the second half benefits kind of be more the prior changes that were made and then at what point do you expect that your new strategies will begin to bear fruit?

Well, so what Jack primarily did was to integrate our power management businesses into one so we have one executive who runs the whole combined power management business and we have marketing folks underneath him to drive each of the different segments, whereas previously we had two different businesses. So that's primarily what Jack has done. What I'm primarily focused on is making sure that the products we define, products we come out with and the design win momentum is areas where we have enough differentiation to sustain our position in those markets and primarily, that's by ensuring that we have very well thought out strategies as we define and develop products. So this is across the board by the way. It's not just in power management.

I would say one of the things that we've lacked in power is being a lack of execution. We haven't hit market windows when we needed to hit market windows. We've come out with products that are perhaps a little bit behind where some of our competitors have been. We are perhaps not anticipating enough where some of our competitors are going and so some of those things are just good discipline and execution and I think that we're going to change some of that.

Great. Thank you and lastly, if I could, you talked about hiring in product development maybe on the process side as well. Can you talk about the timing of how quickly you expect to get the right people in place?

I would expect to have the right people in place probably by the Q3, end of Q3, something in that line, timeline.

Okay, thank you.

Your next question comes from Harsh Kumar with Morgan Keegan.

Yes, hi, guys. A couple of questions. First of all it looks like orders bookings were all good. I'm a little surprised by your guidance. Would it be fair to assume that you're being somewhat conservative, or are you just calling it like you see it?

I guess if you look at the flat to 2%, I guess on the range of guidance that we could have selected, I'd say it's -- if you put that as a linear range, I would say it's on the conservative side, but I mean we want to be prudent considering all of the factors and I think if you look at our guidance, we're always reasonably conservative, but yes, we were encouraged by the 4% increase in orders and the favorable book-to-bill, so as I said, I think we're well positioned for this quarter and the key thing is probably really is to just to try to continue that momentum in terms of backlog build so that we're well positioned going into the seasonally stronger third quarter.

Got it. That's helpful. Thank you for that clarification. Mohan, I think you mentioned your focusing on a mix of value-added products. Is it fair to assume that you might have lift left some revenue behind by cutting out some of the products?

Well, I don't know. I mean that's a tough one to answer because we do have products and I have seen products over the last few months that have come out and I don't know that they are necessarily going to generate a lot of revenue so by carrying the products in advance of really spending the R&D dollars, you're really making sure that the thinking is going into the system ahead of time. So I think that it's a combination, Harsh, I would hate to say that we're leaving revenue on the table. I think it's more a question of making sure we're getting good return on our R&D dollars.

Got it. And I guess maybe you guys can share with us some of the things that you're seeing that make you confident about second half growth and maybe tied in with that question is your strategy for turn around of your power management business?

So let me take the power management business first. I think the power management business, we have now started to really look at the different product mix and the different products we're bringing out in each of the different applications segments and I'm confident that some of the products we have by coming out will generate design wins and probably in Q3 time frame will start to generate revenue for us and start to reinvigorate that business. But in addition to that, I think it's also taking the product portfolio we have and applying those products to other markets where we haven't historically focused. For example, DSL applications. There are some cell phones, new cell phones, smart phones and things like that which we haven't spent a lot of time on that we are starting to put a little bit of effort into so that's the power management turnaround. On the second half, I think it's because really we are predominantly computing, consumer driven. That's where most of our revenues are coming from and that's where we probably are going to see most of the growth.

Okay. And then lastly, I guess nobody has brought it up, but this is in reference to the letter from the SEC about the options grant. Can you take me through the process that's involved or maybe just help us understand the scope of it?

Well, I mean, I think the scope of it is, as you probably are aware, Harsh, the third party report, identified a number of different companies in this report and then it just triggered I guess this informal inquiry from the SEC and I think it's as straightforward as that and they requested some data from us and we'll be providing them that data in a pretty timely manner and I don't know that there's a lot more to say than that.

Got it, thank you.

Your next question comes from Joseph Osha with Merrill Lynch.

Hi, Mohan.

Hi, Joe.

Hi. Could you talk about if you look at the operating cost structure for this company and how you have redeployed it, do you think that you'll be able to scale the revenues for this business; old products, new products without having to add that much operating cost at this point? What's your vision there?

Yes, I think the answer to that is yes, Joe. There may be a few areas where we have to rebalance the expenses a little bit, but one of the reasons why I say that is if I look at our sales process, for example, we go into accounts today and we don't do a very good job of cross-selling. So, as an example, wireless and sensing products gets very little share of mind in the field shale sales force and I think that we're going to be able to change that quite quickly. On some of the product platform sides, it's taking IP it's developed in one product group and reusing it in another one. We don't have that today. We just don't do it and so by getting that we use ability across the Company, I think we're going to find again that we're getting maximum return for the R&D dollars we spend.

Okay, thank you. And then sort of a strategic question, certainly in your previous employer, it's a great deal of success in terms of refocusing on High Performance Analog and National and a couple other companies before that, but let's face it, this we're a high performance analog company mantra is becoming pretty common. What do you bring to the table that actually differentiates you from the Three Horsemen or any of these numerous other companies that now seem to have embraced a very similar strategy?

Yes. I think first of all, I think Semtech is already a high performance analog company. Many of the products that we have today are very differentiated so there's not a turn around in a sense of anything that I need to do differently, but I think in some areas I take advanced com testing measurements as examples of that, but protection is also one of them where the products are really really different. I mean they are highly differentiated in process, they are highly differentiated in systems, in some cases, there's systems knowledge that I don't think you can even get from some of our customers. For example, you take a look at the timing devices we have introduced into the advanced com area and some of the new products we're bringing out there. They really are game changes for the segment, so I think we're slightly more systems driven here, it seems that way to me anyway. There's a little bit higher up on the food chain in terms of system on chip than some of the other analog players would be my sense of that.

Very well. Thank you very much.

Your next question comes from Steve Smigie with Raymond James.

Great. Thank you. I know you talked a little bit about power management. Could you go over IMDP strategy? Just notebook power?

Yes, well what specifically did you need?

Well, again, in terms of differentiating yourself to just continue focusing on notebook, I think at some point my feeling that maybe you were going to back off it a little bit. Do you continue to build that out?

So we still see notebooks as a good market for us, it's an attractive market if we want to participate in. We have good technology and know how, we have good customer relationships, and we've missed some timing in terms of execution and missed the window in some areas, but I think it's still a market that we feel we can bring good technology to. As I mentioned again in my opening comments that while we have kind of focused on notebooks and desktops and handhelds, we've kind of missed some of the other segments and now the thinking is well, we'll bring technology out which we can go attack other markets in addition to markets like the notebook market, but I think that we'll still be -- continue to be a force in notebooks.

Okay. And I'm not sure if this one was asked. I don't think so, but just in inventory in the channel and what that looks like for you?

I would say it's in line with consumption. I mean I don't think there's anything unusual to point out, so I mean I would say it's in line with the consumption or the increased consumption in some areas of our products.

Okay and just last another housekeeping if you could just talk a little bit about linearity in the quarter?

Oh, I think this past quarter was linear and this next quarter will be very linear. Our business is linear. We don't rely on, there's no big push to push a lot of stuff out the door right at the end per se. We have a very linear business.

Great. Thank you very much.

Your next question comes from Sumit Dhanda with Banc of America Securities.

Yes, hi. A couple of questions. First off, within handsets, Dave, could you tell us what percentage of the revenue is now from protection?

We didn't per se break that out, but it's obviously a big portion of that overall end market. I think at least two thirds of the revenue in the handset market is protection, at least that number, maybe even slightly more but around there.

Mohan your comments on the advanced communication market and the fact that you have an exciting road map heading into the back half of the year. Anything specific you can share on that front with us in terms of what protects you're most excited about or which end markets you're most excited about, applications you're most excited about?

Yes, I think as I mentioned in my comments, I think the packet based infrastructure and the -- where specifically timing is really important where you have video, voice, and data, I think is an exciting opportunity for us. We have some very high end product capability in that marketplace that's kind of going into infrastructure today but as I said, I think that there are some opportunities for us to take that same capability and apply it to a higher volume, faster time to revenue set of spaces.

Okay, and then I guess a similar question. I know this has been asked a few times on the call on handset power management, clearly optimistic about how the segment might shape up here, but I guss I didn't get the sense there was something specific you could point to other than a better strategy and a more focused strategy going forward so again is there any specific application you could point to that would help revenues within this segment?

Well, the handset power strategy is important though. I mean I think you can look at it and say well, why did we stumble in this space and it's because we haven't focused on really bringing enough differentiation to the marketplace, so what's important for us is making sure that when we bring out the devices and we are bringing out devices now that have more integration. They have more features, they are more focused on phones at the high end like as I said, 3G CDMA phones and smart phones and Voice over IP phones, then I think that that's kind of our way of getting back into the space.

Okay and then just a quick one for you, Dave. The share count decline, fairly substantial heading into Q2. Do we expect that phase to continue or moderate going forward?

Well, there's obviously a big impact in terms of the average share price, but I think with our cash flow, we'll continue to target buybacks at least at the relative level that they were this last quarter, so all other things being equal, that should continue to have an impact and in some cases meaningful impact on the share count so.

Okay, thank you very much.

Your next question comes from Michael Bertz with WR Hambrecht.

Good afternoon gentlemen, welcome aboard Mohan.

Thank you.

Just a couple quick things here. One, I know in the past you guys have talked with a little more granular detail on the quarter to quarter growth on the different business lines, product lines anyway. I know you talked about slightly up, slightly down. Can you give us any more detail on what that is for those lines? Plus 2%, plus 3?

So are you talking about in the end markets?

Well, like sort of in terms of power management, protection, testing measurement?

Right. So if you look at the power management business was down approximately 8, 9%. The protection business was up slightly so that was around 1%, just rounding up to 1%. Our advanced com business was up around 22%. Our wireless and sensing business was up around 22% also, and the test and measurement business was approximately flat as I believe Mohan mentioned.

Okay, great and then the other question in terms of longer terms as you look at the wireless and sensing group and sort of where that could go for the rest of the fiscal year, any sense on, sort of what contribution we might see coming from that? Obviously you've got some new products that are coming out that we should get some wins for, but for the balance of this fiscal year, contribution from that line and also sort of gross margin profile if that's improving and what we could see from that group?

Well, I think if you look at the gross margin profile today, it's probably slightly lower than the average company, but over time, I think with the product road maps, I mean clearly that should intersect with the targeted gross margins of the Company in say the 58 to 62% range so I mean we should be able to push higher gross margins in that product line over time as we execute our product road maps there. The growth for the rest of the year, obviously we're not projecting growth in that business at the same rate as we did in Q1. There should continue to be some level of improvement that we -- it would be more moderate and then obviously as we get into next year and we start to execute on some of these new product road maps, I mean that's where you would envision this business growing faster than the overall company.

Okay and then lastly again, coming out of this group, I know in the past you talked about, or Semtech has talked about utilizing some of the low power architecture there and sort of seeing it percolate or cross pollinate in some of the other business lines. Do we still see that happening and what time frame might that be under?

So yes it's happening it's happening now. It will take some time to get platforms out, but it will happen and not only in the ultra low power, also in the wireless and some of the sensing devices as well. So as I said, again in my opening statements, there are a lot of degrees of freedom that we have to bring power protection, wireless sensing applications kind of differentiation to the marketplace, the question is what do we really go focus on?

Okay, great. Thanks, guys.

Your next question comes from Louis Gerhardy with Morgan Stanley.

Good afternoon. I got most of my questions, but just a follow-up in terms of the OEM business can you remind us what percent of your revenue that was in the January quarter and then if we just think about the indirect channels and the type of products, the product lines that run through there? I know it's a lot of protection but, is there wireless and sensing in there? Is that a large component and any other product areas?

If you compare it to the fourth quarter, Louis, it was pretty comparable. It was about the same 40/60 split. In terms of businesses that run through the OEM channel obviously our TMD products, our power management, excuse me, test and measurement products are heavily OEM and you picked it up right protection, there's a substantial amount of that that goes through distribution and some of that is sold directly to some of the OEMs, particularly in the handset area. Power management is a -- goes a lot through distribution, particularly in Asia. Advanced com is probably a mix and wireless and sensing today is probably a little bit more heavily OEM given some of their older products, but there's a distribution play there. Clearly in addressing some of those products using our channels into broader end markets than wireless and sensing traditionally has marketed those products into.

Okay. And then just on some of the major product areas, can you talk about the lead time trends? I apologize if you already said it. I didn't catch it though.

I don't know that the -- clearly in all of the product lines as I mentioned earlier, I think we've really focused on triangulating more between our business people, our sales people, to try to build strategic inventory so that we can respond to upsides in the marketplace and I think generally we've done a good job of that and are trying to bring down lead times more so that we can handle upsides from our customer base. So the lead times really vary by-product lines, so I don't know that I want to give a specific lead time because they really vary substantially based on the actual business unit.

Okay, overall though would you say you've been successful in bringing lead times down or is that to come?

Yes. I think we've been reasonably successful. There's still some areas where the demand, has outstripped supply here in the short-term but I think we're doing a much better job in operations here over the last three to six months.

Great. That's all I had. Thank you.

Sure.

Your next question comes from Jeff Rosenberg with William Blair.

Hi can you hear me okay? I'm having some trouble with my phone line.

Yes, we can hear you, Jeff.

Okay. I guess I just wanted to ask -- I don't know if you went through this, but on the industrial side, can you talk a little bit about exactly what products or maybe it's better to talk about applications are really helping? It seems like that grew about 20% sequentially so if that's right maybe some just additional color there?

I think if you look, it's a pretty broad segment. I mean we not only have industrial in there, but we have military, we have medical, and basically, all of the other consumer which doesn't get picked up in the other various market segments. So I think it was really in all of those areas. We've got good plays into the medical area. We're seeing broader adoption of some of our products in the industrial market, protection products even and certainly the consumer segment, some of the other consumer that's not picked up in the other segments such as some of the TVs, some of the flat panel TVs and other areas which probably end up in that segment we've been doing quite well in.

All right so given it's so broad, it seems like maybe it's surprising to see such an inflection there from your prior share of your revenue. Anything in particular you call your attention to that was -- like you said it is a very diversified area. Anything in particular that was a real stand out there in terms of the--?

I think you'd be able to cite principally three things. We had good billings into the military market this quarter. We had good billings once again into the medical and industrial area coming out of WSP and then I'd say also in the protection area on a lot of the different port protection we do in a variety of what I'd call other consumer devices, we did very well there too, so probably those three separate factors combined to yield us that higher growth rate in that broad segment.

Thanks that helps.

Your next question comes from William Conroy with Sanders, Morris and Harris.

Good afternoon. Kind of a follow-on to the previous question, David could you talk a little bit to the sustainability that you see really I think more on the military side and the medical industrial side with the broader industrial area?

I mean I think in the military area, we've called it our legacy business but I mean I think there's certainly opportunity to sustain that business where it is and there may even be based on some refocus, there may be some better growth opportunities than we've realized. The industrial area, there we're focused on bringing all of our products and selling the whole market basket of our products into those segments and as Mohan mentioned doing a better job of cross-selling so I think there is sustainability there, certainly some of the products in the WSP area wireless and sensing give us a good play into both industrial and medical and medical is a market just separately that really most of the products today are coming out of wireless and sensing and now we need to focus on how we can cross sell some of the power management and protection into those end markets to sustain the growth there. And then finally if you look at other consumer, I think there's a very large opportunity for us there as well and I think one thing we'll mention and we have mentioned is that other consumer piece, and consumer piece is becoming a more meaningful piece of business, so I think maybe not next quarter, but certainly in the future at some point, that portion is going to be broken out separately I think.

So the strength that we're seeing and really if we look back not just versus the prior quarter, but maybe over the last year and even stripping out the impacts of Xemics, no blue birds that you've just managed to grab hold of? It's really kind of this broad increase across-the-board within the industrial area?

I agree with that statement.

And second question and it's a follow-on to an earlier one, and it may be too early to answer this, any -- would you anticipate any delay in filing your 10-Q or at this point you anticipate it should be on time?

No. I mean, Bill, I already commented. I mean this is just an informal inquiry so as I mentioned we're going to be providing them with the data we requested so that's -- really I don't know if that's an appropriate question even. It's just an informal inquiry.

Got it. Thanks.

Your next question comes from Ross Seymore with Deutsche Bank.

Thanks, guys. Most of my questions are answered. I think most of them have focused on what you're doing looking internally so flipping it around and looking externally, Mohan, just looking at current business conditions clearly the market is nervous about an inventory build and the cyclical peak potentially in the semi market. What are you seeing as far as either lead times, pockets of inventory, any slowdown from the consumer, any sort of trigger points like that that you're noticing?

Well, I really haven't noticed anything that s unusual, Ross, and Q2 as I mentioned is somewhat softer, is a typically soft quarter for us so I think once we get into Q3, we don't really know how the second half is going to transpire which is probably the best measure for some of your questions. I look at it a little bit differently from some of the businesses obviously because I'm new to this, to Semtech. I'm looking at some of the opportunities we have to go and do some things differently and I look at for example, protection I'm looking at what new problems are going to be out there in the marketplace that require protection devices, so where can we get more design wins from that standpoint and how is that going to drive our business independent of the market?

Fair enough and then also a strategic question on the cost side of things. If you're looking at where you could lever your current cost structure with future revenue growth do you think that more of the leverage can appear on the COGS line as you see it now or on the OpEx line as you have it?

That's a good question. At the moment I wouldn't say -- I would say there's areas in both to improve, but I don't know specifically whether I could say that one is going to be greater than the other. I think that there are opportunities as I mentioned to consolidate in some of the subcon areas, do a better job of managing our costs from the COGS standpoint, but also below the line, I mean, in the OpEx side I'm looking at how can we get better return on some of the R&D dollars we're spending as we go forward, so that's a tough one for me to answer.

Okay, thanks and congrats on the CEO role.

Thank you.

At this time, there are no further questions.

That concludes the call from the Semtech side. We look forward to updating you on our second quarter performance at our next scheduled conference call. Thank you for joining us today.

Thank you for participating in today's Semtech fiscal 2007 first quarter earnings conference call. You may now disconnect.