Semtech Corp (SMTC) 2007 Q2 法說會逐字稿

Good evening, my name is [Sharika] and I will be your conference operator today. At this time, I would like to welcome everyone to the second-quarter earning results conference call. [OPERATOR INSTRUCTIONS].

Thank you. Mr. Baumann, you may begin your conference.

Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to Semtech Corporation's fiscal year 2007 second-quarter conference call. I'm John Baumann, I'm the Treasurer of the Company and Manager of Investor relations. We've released selected unaudited results for our second quarter that ended July 20, 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 the results with you and answering your questions. Before I turn the call over to David for his opening remarks, I want to remind everyone of the following notices. They're fairly lengthy but extremely important.

First, this call is open to interested parties in accordance with reg FD. If you have questions about our future performance or our estimates of future financial results we will consider them now. We 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, as previously reported, we have been engaged in an internal review of our stock option practices in light of an informal SEC inquiry and federal Grand Jury subpoena. On July 20, 2006, we announced that although the investigation was ongoing, we had concluded that accounting measurement dates for certain stock option grants differ from measurement dates used previously for such awards.

As a result, new accounting measurement dates will apply to the effective options granted. Consequently we expect to report additional non-cash compensation expense and expect the amount of such additional expense to be immaterial. The tax consequences that may result from these matters have not yet been determined.

As a result of these adjustments, we expect to restate our financial statements for fiscal year -- excuse me 2002 through 2006. These restatements will affect financial statements of earlier fiscal years and adjustments for those earlier years will be reflected as part of the opening balances in the financial statements for the restatement period. Because of the pending restatement of the historical financial statements, one additional results for the second quarter of fiscal year will not -- second quarter will not be available until the restated financial statements have been filed with the SEC. Two, we will be unable to file our quarterly report on form 10-K for the period ended July 30, 2006, by the date required by the SEC. And three, all financial numbers presented during this call should be considered estimates. For additional information regarding the pending restatement, see the Company's report on form 8-K with the SEC dated July 20, 2006.

The third notice, 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 are statements other than historical information or statements of current condition and relate to matters such as future financial performance, future operational performance, the anticipated impact of specific items on future earnings, and our plans, objectives, and expectations. Some forward-looking statements may be identified by the use of terms such as expects, anticipates, intends, estimates, believes, projects, should, will, plans, and similar words.

Forward-looking statements involve risks and uncertainties that could 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, 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 foundries and assembly subcontractors, 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 10-K for the fiscal year ended January 29, 2006. And in other filings with the SEC. And material incorporated in light thereby within.

In light of the risk and uncertainties inherent in forecasts of revenue and gross margin and other projected matters, forward-looking statements should not be regarded as representations of the Company, that its objectives or plans should be achieved or that any of its operating expectations or financial forecasts will be realized. In addition there are a number of risks associated with matters relating to the Company's historical stock option practices. We cannot predict whether the internal investigation or restatement will be completed, and there will be negative -- and there may be negative tax or other implications for the Company's -- resulting from the accounting adjustment. We cannot predict the outcome of the SEC inquiry, the internal investigation, or any other lawsuits or other proceedings related to the Company's stock option practices.

There can be no assurance that we will remain on our NASDAQ listing. We could also be subject to other lawsuits and could become the subject of other regulatory investigations in addition to those now underway, dealing with matters related to historical stock option practices could divert Management's attention from operations and expenses arising from Management's review. The special committees investigation, the restatement, related litigation, and other associated activities are expected to continue and to be significant. Our current and former employees, officers, and directors, could seek indemnification or advancement or reimbursement of expenses from us including attorneys' fees with relation to stock option practices. These event could adversely affect our businesses and price of common stock.

Although a replay this call will be available on the investor Relations section of Semtech's web site, the Company assumes no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. We will not take any questions on the stock option investigation, the restatement, or related matters during this conference call today.

Thank you for your attention with these important preliminary information. And I'll turn the call over to David Franz, Semtech's CFO.

Thank you very much, John. Good afternoon, ladies and gentlemen.

Before we get started, I'd like to share some good news we received today from NASDAQ. As previously announced, our stock is subject to de-listing from the NASDAQ global market because we haven't yet filed our 10-Q for the first quarter. On August 3, the Company attended a hearing before a NASDAQ listing qualifications panel and presented our plan to regain compliance. This morning, we received the panel's decision. The panel has granted our request for additional time to regain compliance and set November 10, 2006, as the date by which we must file all required restatements and the first-quarter form 10-Q. We also expect to file the second-quarter form 10-Q by the November 10 deadline. So as to be in compliance with NASDAQ listing standards.

As we stated in our press release, we are limited in the amount of financial results we will be able to discuss until the special committee of our Board of Directors completes its review of the Company's historical stock option practices and restated financial statements have been filed with the SEC. Now turning to the limited results.

Starting with orders. Orders increased slightly in the second quarter of fiscal 2007 as compared to the first quarter of fiscal 2007. Starting backlog for the third quarter is slightly ahead of starting backlog for the second quarter of fiscal 2007. Revenues for the second quarter were $64.9 million, which was slightly below our guidance range. Our power management products sold into the handset market performed below expectations.

On a year-over-year basis, revenues for the second quarter increased by 12%. This comparison was benefited by the fact that XEMICS was acquired during the second quarter of the prior year. On a year-over-year basis, all of our product lines are performing to expectations, with the principal exception being sales of power management products sold into the handset and other portable device market. Various initiatives, which Mohan will discuss, have been put in place to improve the performance.

While we cannot provide detailed numbers on gross margin and operating expenses, we will make some general comments. Gross margins for the second quarter were impacted by higher charges for excess and obsolete inventory, principally for products sold into the handset market. Excluding the impact of these charges, our gross margins prior to the impact of any stock option-related expenses tracked to our prior forecast.

Operating spending is being controlled and was as expected. Once again, excluding all items related to stock options. And as we mentioned in our press release, we did incur $2.3 million of expenses related to the SEC inquiry and special committee investigation during the quarter. Revenues for the second quarter were derived from the following geographic regions: 24% was derived from customers located in North America, 13% from Europe, and 63% from Asia. Net turns orders accounted for 38% of shipments in the second quarter. This compares to 39%, 38%, and 48% in the previous three quarters.

Revenues by end market changed somewhat. Revenues from the cell phone handset and bay station markets accounted for 21% of revenue. Desktop computers, servers, and graphics accounted for 9% of revenue, notebook computers, PDAs, and other portables accounted for 15% of revenue. Test equipment accounted for 7% of revenue, communications infrastructure accounted for 17% of revenue, and general industrial, which includes medical, military, and other accounted for 31% of revenue. Revenue from OEM sales represented approximately 34% of total revenues for the second quarter, while distribution represented approximately 66% of total revenues.

Looking at the outlook for next quarter, we are forecasting that revenue will be flat to down 2% for the third quarter of fiscal 2007. To attain the mid point of the third quarter forecast, we need net turns orders of approximately 36% of revenue.

Our balance sheet remains strong. Semtech ended the quarter with approximately $307 million of cash and investments. This was an increase of approximately $23 million from last quarter. Cash flow was benefited by lower capital spending, as well as an increase in payables and accruals. Additionally, a portion of the cash balance is maintained in marketable securities. These are securities with maturities in excess of one year, which are classified as long-term assets on our balance sheet.

Accounts receivables, day sales calculated on a quarterly basis increased slightly to 42 days. This compares to 39 days for the first quarter of fiscal 2007. And now I will turn the call back to or turn the call to Mohan for comments on business strategies and outlook.

Thank you, David. Good afternoon, everyone.

First let me state that I am personally committed to ensuring that we successfully restated our financials in as timely a fashion as possible so that everyone can focus on the Company's operational performance going forward. I believe we are making good progress toward this goal. Now let me add some color to our Q2 performance. Our Q3 guidance, and then discuss the progress we are making on both the strategic and tactical improvements in the Company.

First let me start with our protection business. Our protection business continues to execute very well and deliver results to expectation. It is clear that the opportunity to sell protection products into the high-performance electronic sector is expanding as OEMs recognize the true value of designing in high-quality protection products. Good examples of this are the notebooks, in notebooks, LCD TVs, and cell phones, with a return rate of systems due to electrical failures is increasing. The strength in this business reflects the diversity of segments we have now penetrated and the high-performing protection products we are able to bring to market.

Our power management business continues to struggle. In Q2, our desktop power and notebook power and our handheld power revenues were disappointing. In the computing segment, while some seasonal softness was expected, the business was weaker than we had anticipated. Also our performance in this area has also been weak. While we believe that we can still participate in the computing segment with power products, the continued ASP declines in some segments lead us to believe that our future participation will be more selective.

The story in our handheld power business is similar. Where we have lost some shares due to poor execution and lack of strategic thinking. However, this is still an attractive segment for us, and our product roadmap is a good fit for this market. On a positive note, the demand within industrial, medical, and communications is healthy. In addition, our power group has reassessed and redefined its strategy, and we have a detailed comprehension of the reasons for our failure to execute. The next step is to ensure that we regain our position in the markets that we target and do not repeat past mistakes.

Our advanced com business, our products group, performed as expected in Q2. The momentum remains solid with design wins at some major OEMs with both our synchronous timing products and our advanced timing platform. The product execution in our advanced com business is truly superb, and I'm confident that as more service providers move to packet-based networks, Semtech's advanced communications business will grow nicely.

Revenues from wireless sensing products were in line with expectations. This follows a strong Q1 and reflects the continuing strength in both our wireless and our sensing products at existing customers, related to the medical, industrial, and high-end consumer markets. Our WSP product group is successfully transitioning from a custom development research-oriented business to a product-driven standards product business. This design win momentum in our WSP business is picking up nicely. Sorry, This design win momentum in our WSP business is picking up nicely as our sales team in all regions and our channel partners begin to comprehend our true product differentiation.

Test and measurement revenues were also in line with expectations. This business is quite healthy with contribution from new and existing customers. In addition to our current products that are generating revenue, we received our first orders on our latest high-performance integrated pin driver platform, targeted at next-generation ATB systems. We expect that design wins on this platform will start to increase in Q3 and Q4, and then really gain momentum next year.

Finally, our power discrete business which serves mostly the military and aerospace end markets continues to show gradual improvements as our supply execution enables us to service customers that have historically used competitive products. We expect that this improvement will also continue for some time.

Moving on to new products. We released 21 new products in Q2. This is up significantly over Q1. Both our power management and protection businesses released some impressive proprietary new products this quarter. We are putting in place systems and procedures to ensure that the flow of new products is more consistent and increases gradually over time.

Turning to design wins, the Company's design win activity was down from the previous quarter due to seasonal softness in the computing segment and poor execution on the notebook power and handheld power road maps. We expect design win traction to regain momentum in Q3. In total, we recorded over 560 design wins in Q2. The design wins across the company are fairly diverse, covering numerous applications in different regions.

Now let me talk about our outlook. Q3 is typically a seasonally soft quarter for Semtech. However, sorry -- it's typically a seasonally strong quarter for Semtech. However, given the lingering seasonal softness in the computing sector entering Q3, and increased inventory in the channel related to both notebooks and handheld, we expect revenues to be flat to down 2% for the quarter. This guidance also reflects the general concerns our global customers are exhibiting related to macroeconomic issues that exist.

The priorities for Q3 are, A, to continue our efforts to finalize our restatement so we can put the current accounting issues behind us. B, continue with the strategic realignment and focus of the company. And C, improve the execution engine of Semtech. Let me now discuss our overall strategy and improvements to the company's future performance and execution. After five months as CEO, I continue to find that there are improvements to be made across the company. I have introduced several new management processes into the company, and these are beginning to generate some improvements. We have had two global sales reviews, and while we generally have capable salespeople, some of the sales processes are weak, and some sales regions are not delivering the results that I would expect.

In addition, we can do a better job of cross selling. We have recently appointed an applications director, formerly employed at a leading analog supplier, who will help us in this area. I believe we will start to see gradual improvement in our sales execution in the near future. We have had six deep-dive business strategy reviews that have yielded a lot of actions across the Company. These actions include defining more robust strategies, carrying out more critical analysis prior to developing products, ensuring the balance exists across the business, ensuring that a product is released with the collateral and technical information in to win in the field, and finally making it easier for customers to do business with Semtech.

Specifically in our power management and wireless and sensing business. Some of these actions will result in better execution and enable a return to growth in some more attractive segment. On the people side, we have recently hired a new product definition director out of a major competitor to help us define more competitive power management products and we are in the process of bringing in top-notch marketing talent across several businesses to further enhance our capacity to execute. In the operations area, we have hired a new Vice President that I have worked with in the past, who is reviewing our complete supply chain, and our operational processes. And recommending areas of improvement across the Company.

I am convinced that there are improvements to be made in our operations, and we have already started to actively work on these improvements. We will continue to hire key people into other critical positions where execution is weak or where we believe that we need to improve performance. In summary, we are putting in place the processes, people, and systems to help us become a better company. While Q2 was a disappointing revenue quarter for us, we were still able to generate $23 million in cash. We believe as we start to see momentum in our new strategy that both our top-line growth and cash generating engine will pick up pace.

I will now hand the call back to the operator for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Craig Hettenbach.

Thank you. Last week you announced two new power management product for Intel's Centrino dual platform. Can you discuss when you expect those products to really ramp in volume and what you think in terms of market share for those type of products as we ramp?

Craig, I can't speak to the share or really what -- which platforms we expect to be successful at Intel. But I will tell you that the ramp is expected to be quite rapid. Certainly Q4 possibility, and certainly into Q1, Q2 timeframe.

Okay. And then looking at the common market, that end market for Semtech has steadily increased. it was about 12% of revenue couple years ago. It's 17% today. Can you talk about the products between the sets, timing devices, as well as protection and how you envision com in the next one or two years and how big of a market that can be for you.

So I think com is going to become a big opportunity for Semtech. First of all, protection is fighting its way into a lot of ethernet switching products. Gigabit ethernet and also 10 gigabit ethernet is emerging, which requires more protection. Then on the sets com side, what we are finding is the whole network infrastructure moves to more packet-based infrastructure, the requirement for timing becomes more prevalent. And so we expect that the sets products as well as products based on an advance timing platform will start to generate good revenue for us.

Okay. Then lastly if I could, on the buy-back activity, is that on hold until the investigation is done, or how should we look at stock buy-backs in here?

Yeah. I -- our buy-back activities are currently on hold, and we'll readdress that with the board when we address that after we get current on all our filings.

Okay. Thanks, David.

Your next question comes from Rick Schafer.

Hi, thanks, guys. A couple of questions. First, if you guys could just kind of describe maybe the linearity of the July quarter, and discuss whether visibility has improved a little since the end of the July quarter in terms of your top line.

Yes. The quarter I think was relatively linear. Most of our quarters are relatively linear, Rich. And I think if you look at the backlog coming into the quarter as I mentioned, it's up about approximately $1 million. It's up slightly. And the amount of churns needed is around 36%. So I think we have -- we have pretty fair visibility, and, as we looked at the churns assumptions by product line, I'd say they're pretty much in line with the prior quarters' churn assumptions.

David, just PC and handsets that are going to be down, and the October quarter, I mean, are the other businesses basically going to be up? I know Mohan mentioned some channel inventory, I think if I heard you correctly. I guess where do you see that inventory mostly, and when do you think it will kind of clear up?

Yeah, I think if you look at some of the other businesses, protection we're forecasting to continue growth. There are certain areas within power, some of the new product areas within power, which are growing and doing quite well. So I'd say the areas that are principally impacted are handsets, which as we've mentioned is related to some of our product execution, our past product execution, on new products and product selection. And the notebook area which will be impacted a little bit by some channel inventory over the quarter. Overall all the product areas are doing quite well.

Our HID product line is ramping down a bit as you might remember. We did some last-time buys there. So we'll see that gradually ramp down. And our desktop power business, not to get too specific, but that continues to ramp down a bit. But that's part of an overall strategic decision to, de-emphasize some of the design efforts in that area and move it into areas where we think we can take a leadership position in power, in some of the broader markets of industrial and consumer, for example.

Mohan, I don't know if you --

So then just to be clear, I guess it sounds like notebook is really the only space you see some inventory to channel. It sound like maybe by the end of this October quarter, it won't be an issue? Is that what you're thinking?

Yeah. I think Notebook is the one that has the primary channel inventory issue. Perhaps some in handheld also.

Okay. To follow up quick on handheld, on handset, is there any sign -- maybe it's too soon. Obviously I guess it's still maybe down a little bit in this coming quarter. In terms of stabilization, I guess, what should we be looking at for that business over the next couple of quarters? I mean, do we see a light at the end of the tunnel there?

Yes, I think in terms of what the current business is, I -- I don't have a lot of optimism about the return from that standpoint. I think with new products, new design wins, I see a lot of hope. So I would -- I would think, though, it's going to be Q1, Q2 before we really start to see a turnaround in terms of revenues from our handheld business. Our handheld power business.

Right. Great. That helps. And just one last question for David. I just -- I know you guys don't want to talk about the options thing. I'm curious, it said that you had roughly $2.3 million in the July quarter related to, expenses related to options investigation. Is that a decent run rate type number to use for October numbers for us?

We didn't forecast anything on that, and I think it's difficult for us with the special committee activities for us to forecast that, with any level of precision. So I'd be hesitant to put a forecast out there.

Okay, all right. Thanks, guys.

Your next question comes from Romit Shah.

Thank you. Hi, Mohan, how are you?

Hi, Romit, good.

Can you elaborate a little bit more on the inventories in the channel? If you could perhaps just quantify the increase in terms of days or weeks, that would be helpful.

Well, really what I will say about it is that we expected Q3 and Q4 to be really stronger from a notebook and handheld standpoint to I think, our channel distributors also felt the same way. And we built and -- have supplied them with product anticipating a stronger Q3 demand. And it doesn't at this point -- a stronger beginning of Q3 demand. And it doesn't look at this point as if that's going to materialize. So therein lies our concern about some of the inventory. I can't really quantify it. I don't know, David, if you have any --

Yes. I -- I can't quantify it really per number of weeks. But it's something as we talked to earlier that we would anticipate would be worked through in the current quarter.

Yes.

Some of the new platforms ramping to Q4.

But it's primarily notebook and handheld. The reasons why -- what areas why are contributing to a lower turns requirement in the third quarter.

Yeah. I would say that's -- that's probably a true statement, lower turn in the portable area, and we've tried to be, reasonably conservative, particularly in the portable power area about the level of turns that we're going to get. So --

Are there any discernible differences between your OEM business and your -- and your other business? Is one segment stronger than the other?

Not really, Romit. I think both are behaving equally at this point.

Okay. And last question, if it sounds like industrial didn't see much summer seasonality, and you're expecting that business to remain healthy in the third quarter. Can you comment on -- on any specific segments that you think are doing well, and any comments on visibility there?

Well at the moment the medical, the general industrial where we have some kind of high-end equipment and the military product areas are all still showing some strength. Even in the Q3 timeframe, I think we see that so specifically, in the medical area, where we have our wireless and sensing products going into the medical arena, we still see strength in that area. Military business, power discrete business are still showing some strength. And protection which is -- has a large percentage of the business into distribution and industrial is continuing to give us good feeling about, its performance in the second half of the year.

Okay. Thank you.

Your next question comes from Doug Freedman.

Okay. Thank you. Mohan, a lot of my questions have been asked. If we could take a step back a bit and look at what's going on in the broader analog market, we're seeing companies really struggle for revenue growth. And can you comment on what you're seeing as far the market conditions? Are we seeing anybody react to the shortfall in revenue with aggressive pricing looking for near-term turns orders or things of that sort? And just if you could give us a little bit of color on sort of what you're seeing for market condition and competitiveness.

Yeah. I think, Doug, it does vary from segment to segment. Certainly notebooks, the pricing has become very aggressive, and, as I mentioned in my commentary that -- that's an area where, the pricing and the competitors are going up against potentially are -- are gaining share by driving the pricing down. So it's not a game we're going to play. In the handheld, it's quite competitive also.

In those two segments, I think they're the ones that I would say are the most price sensitive. A lot of our other products in our other businesses, we -- we play in, our products are so highly differentiated, and there are so few competitors really in those other spaces that I don't know that, price -- we see much pricing competition.

In the notebook market, if you could, is this the incumbents that are getting aggressive with pricing or are these new entrants into the markets that you're seeing that have larger margin thresholds than maybe the incumbents might have had?

We see it from the incumbents.

Okay. So they're -- they're doing it by cutting price, you believe they're holding onto the share that they've had?

Yeah. Or, there are quite a few incumbents that are going on competing against each other. So, it's really a question of maybe the softer market really driving some of the competitors to want to price more aggressively to see if they can gain some share.

And I guess moving on. You mentioned the handsets market and having good opportunities for you with some of your newer products or things that are still on the drawing board. Can you give us an idea of where you see that opportunity? Is it sort of in the high end of the market, the low end, maybe geographically, as well? Given the fact that we're seeing tier one OEMs take share in the marketplace, are you guys targeting those tier ones, or is it more of a tier two story?

Our real strategy is to focus on the high end. Semtech is not a player that really can play in the commodity space, and we don't do that well. Where we play well is going in, winning in phones and handsets that really need to differentiate products, both in protection and our power portfolios. So where I see the opportunity is that many of these segments, and I -- I include kind of a mid to high end handhelds, they are changing the functionality of the phone and, therefore, we see an opportunity there. Many of the handsets also many of our customers, the tier-one customers, who have a mixed portfolio, also have quite high-end phones and medium end phones, that, they -- they just can't afford to have returns on those phones. So they build in protection up-front. That's where we see an opportunity.

All right. And then just one last question, David. Just somewhat of a clarification on the legal expenses that you highlighted, the $2.3 million this quarter. Were there any legal expenses in last quarter? So how much should we think of this being incremental for this quarter?

Well, that was -- that $2.3 million was all incremental in Q2, as it pertains to the SEC inquiry.

All right. Terrific. Thank you.

Your next question comes from Bill Lewis.

Great. Thank you. First if I could on margins, you probably can't quantify, but is there any outlook in terms of spending and any trends you're seeing in term of pricing or mix that might affect gross margins?

I would just say generally that the long-term outlook that we had given for margins, I think, is still, very much intact. I mean, any impact from stock options. But our -- our belief is that we still have the -- the mix of products coming out of design to be able to drive toward our longer term margin goals. And so -- and the mix if anything, we're benefiting generally I think across most of the product lines, from improved -- improved mix, as well.

Okay. Thanks. And then a second question if I could, maybe for Mohan. If you could just maybe give us a progress report on the new strategy. I mean, how far in you think you are. You gave us one view, say, a quarter ago. When should we expect to see what you might expect to be material improvement based on the changes you've made, and maybe also where we should look first to see some of the improvement. It sounds like power management, maybe notebooks would be first. Anything you could talk about in terms of where you think we are and where we're going.

So I think the improvement will come in kind of three flavors. The first flavor will be just generally improved processes and execution on our sales front. And I expect that we'll start to see some improvement by Q1, in that area. The second improvement will be the flow of products that come out of our different businesses. We'll hit the market and gain revenue, I think, design wins and revenue traction faster than some of the products we have historically brought out to marketplace.

Then the third will be overall strategic thinking in terms of, where we can create more of an opportunity for ourselves given the core value we have in our -- in the company and across the business. That will be slightly longer term, probably second half of next year. But I -- I think you'll see a gradual improvement. This is not, just a one-quarter phenomenon. It's not going to be, a 12-month phenomenon.

This is going to be a structural reenergizing of a company that has great core values and very good core competencies that we need to kind of align and make sure we target the right markets and ensure that we bring differentiation to bear to our customers that we -- that is sustainable. So I view it as a kind of a long-term commitment, but I think you're going to see gradual improvements.

And a followup to that if I could. What do you see -- I mean, there's been a lot of change at Semtech recently. What is it that you would describe as those core values, core capabilities that maybe exist today, and where you think there's something incremental that you need that doesn't really exist?

Well, in the core competencies of the company, if I look at power management, it's no secret that we have a great team of engineering in our power management business. And we have been very successful in the past. We have been able to achieve great positions in very competitive markets against a really competitive set of -- good competitors. So it's going back, looking at what it is we do well, taking that and regaining our positions in those markets that we think are attractive.

So that's one area. when I look at some other areas like communications, our advanced com business, it's really a small today, it's not really that significant in terms of the contribution it's making to the company overall. And what I want to try and do is to make that a much more significant piece of our business, which I think the opportunity exists to do if we think a little bit bigger. So that's kind of the game plan.

Okay. Thank you very much.

Your next question comes from Louis Gerhardy.

Good afternoon. Just wanted to follow up on the power management questions and I mean if we get a little more specific and talk about LDOs, charge pumps, dc to dc, can you just give a little bit more color and, which areas you have the most work to do or which areas you might exit if you've made that decision yet. Just further color maybe from a functional perspective.

From a functional perspective, where we will focus on the areas that are complex, high voltage, typically higher voltage, typically higher performance in terms of the currents and some of the speeds required, in terms of switching frequency, so I -- I would say that, we look at any application where there are very high performance power requirements, and that's where we will focus because that's what we're good at doing.

So you may keep all of those competencies, but just redefine products differently then?

That's correct. Or redefine markets the way we feel we can bring disruption, too, by taking those competencies to the marketplace and then changing something fundamentally about how things are done in that market.

Okay. And you mentioned tough pricing in this area. Is it coming from US companies, Asian companies, from Japan, and is it worse in any of those functional areas?

I would say it's US and Asia, and it's really -- pricing is really more aggressive in kind of the low end phone and low end notebooks and that kind of thing, it's not in the high end.

I see. And then just in terms of your -- I know some of your customers give you six-month forecasts. Have they revised them much yet, or is your guidance sort of your preemptive move in anticipation of that? Just interested in how these six-month forecasts are moving around here in the last couple of months.

Well, we don't get many six-month forecasts, so I would say we typically get, at best a -- a quarter look and then a feel for where they're going. But, I think our guidance is a combination of things as I mentioned. It is that a channel has some inventory. It's that we don't hear, there's a lot of macro economic things that are going on that makes some of our customers nervous.

And clearly we are, in a little bit of a transition in some of these product areas where we haven't executed greatly, and we're trying to turn that around. And even with great products and good design win momentum, it takes a while so that the traction can turn into revenue.

Yeah. Okay. Then just last question. On -- in the July quarter, when did you first start to see, the pushouts or cancellations or maybe was it just, a a lack of turn business coming? When did that first start to impact the quarter?

Well, I mean -- I think you got to look at, Louis, where we were only off of our range of revenue by 1%. So we're not looking at a terribly material impact overall to the quarter. I think it's hard to pinpoint a time when they that would have occurred.

It's clear that when we got into the Q3 timeframe, the -- as I mentioned, we had anticipated that notebooks perhaps would start to ramp and become a little bit stronger. And that didn't materialize. It may still materialize, but it certainly hasn't up to this point.

Great. Thank you very much.

Your next question comes from David Wu.

Mohan, welcome. I got three questions. Number one is, can you talk a little about protection. How big is a piece of the business right now?

Second thing is, you talking about timing and sets and com infrastructure. What is the primary competitor? Is it people like IDT Technology? And lastly on the power management side, well -- your last company we went through a major change, and a power management portfolio of that also. And how do you compare and contrast between the situation here, Semtech and 18 months ago the situation in Intersil.

Let me take the communication one first. The communication on the sets area, yes, it's IDT, it's Zarlink, those are the two major competitors in that area. On the power management turnaround, my philosophy on any strategy is you have to look at what are you good at and what you are doing wrong. And when I look at Semtech and what it's good at doing and what it's been doing wrong, I think it is a very different story than what we had in my previous company.

We have had very good positions and some good markets, and kind of lost the -- just missed -- had some missteps in terms of execution of products, in terms of execution of market windows, hitting the right market windows, and certainly we've probably not recognized that in some of these areas, which are more consumer-like, you have to keep bringing out products in a timely fashion to stay ahead. So I think it's -- it's become quite a few things like that. A little bit different than I think we had in -- in my previous company.

Now David, do you want to take the first one on protection?

Sure. Protection, Dave, is around 40%, 39%, around 40%. 39%, 40%.

I see, that big.

Yeah.

Could you remind me a year ago. I don't think it was anywhere close to that number.

I don't have the data right in front of me. But it's trended up gradually. it was probably 1/3 of our business, yeah. 35% of our business maybe a year ago.

Okay. Great. Thank you very much.

Your next question comes from Joseph Osha.

Hi, Mohan.

Hey, Joe.

Hi. You kind of addressed the question already, but if I look at what Rich accomplished at Intersil or what happened at National Semiconductor, typically, getting sort of the new product flywheel cranked up again, getting the sales force back to where it needs to be, and then having that all flow through in terms of the impact on the market and then dumping the old product line, it's about an 18-month process. And that -- I've seen that a couple of times. You seem to think that you can -- you can accomplish these changes at Semtech more quickly. I'm just wondering why -- why you think that is.

So let me -- let me break that again into two buckets, Joe. I think there's -- there's some poor execution things that I think we can do quickly to improve the performance.

And I'll take power management as an example. The power management product line that we have is still capable of generating good products, and is coming out with good products. And we can bring good products out to marketplace. But if you don't get them designed in and -- and generate revenue from them, then, it doesn't help you. So part of it is a sales execution issue that I think we can fix quickly. Also the definition side, I think we can execute quickly.

The second is the more strategic aspect, and that takes a longer timeline, I think. And in some cases, you have to go and look at what you don't have in the company, bring on the right people, put in the right process, and things like that. Yeah, I think for us that is going to be 18 months. But I'll take an example in our communications business and our test and measurement business. Both these areas have very good platforms to work on. I mean, as a baseline. It's not that we don't have anything.

I mean, we have a very, very good set of differentiated platforms. It's my belief that if we can take those platforms and build the right product sets on those platforms that we will be able to achieve the -- I wouldn't call it turnaround but the strategic growth quicker than one would normally expect.

Okay. As a follow-on, I think I can make an educated guess. What sort of business do you think you're shifting into harvest mode on, obviously continuing to sell but not perhaps investing in new product development.

Well, I think the desktop power has been in that category for a while. I wouldn't say we're in harvest mode on any other category. I would say in notebook power, as I mentioned, that we are perhaps more selective in the markets we're going to participate in. And the customers we're going to participate with.

What about HID?

HID is in harvest mode also.

Yeah, all right. Thank you very much, Mohan.

Right.

Your next question comes from Steve Smigie.

Great. Thank you. I was hoping you could comment a little bit more on what direction you're going with the new products for the protection. Is it -- what elements there make the new products exciting and help you keep the growth at market share there.

Well, the good thing about protection, if you look at the markets, all of the markets are continuing to move. Ethernet as an example, going 100 to gigabit, the giga bit protection requirements are far more difficult to achieve, then you go to 10 giga bit ethernet, again, it's a step function increase in the capability required by the protection devices. We see good opportunities there. We see good opportunities in many of the different interfaces required like HDMI. We see anywhere where there is increased speed and lower voltage we see requirement for protection. I could go on. Notebook ESD, cell phone ESD, all of these areas require more and more stringent protection. You probably can see, a lot of the news that's out there, systems going back, being returned for failures or bad thing happening. I think this is increasingly happening in the sector in general. If you take a look at a lot of consumer equipment that go back, much of the reason is because of electrical issues, and that's where protection is -- has an opportunity to grow.

Okay. Great. Could you comment a little bit on what lead times look like during the quarter?

I think generally, Steve, if you look across our product lines it does vary across the product lines. But probably in the range of four to eight weeks.

Okay. Pulled in a little bit?

Yes. I'd say they've pulled in. Pulled in slightly.

Okay. Great. Thank you very much.

Your next question comes from Sumit Dhanda.

A couple of questions. First on the turns business, Dave, you're suggesting slightly lower turn. Could you tell us quarter-to-date, Dave, how they've tracked. How much turns dollars is required to hit your guidance versus the same point last quarter.

It's a very similar amount. We're in I would say approximately the same range as we were last quarter. To hit our guidance. And from kind of a gross number of turns, it's in similar range that we've been in at this point in time, around $10 million to $12 million approximately.

Okay. All right. Mohan, question for you. I thought the last quarterly conference call you sounded more optimistic about your power portfolio -- revamping your portfolio bearing some fruit in the second half this year. But now it seems like it's more a Q1, Q2 phenomenon. Has something changed there in terms of your evaluation of where the portfolio and the design wins are at, or am I misinterpreting?

Well, that conference call his one month, I now have five months. The only thing that's really changed from my perspective is that the new products that we have coming out, are getting designed in. But it will take time to ramp on the strategy side. I think the -- the power management group is starting to really hone in on what it is that's going to make us become a much stronger and more sustainable business versus just the quarter-to-quarter trends.

And do you expect that by Q1 or Q2 you'll start to see meaningful contributions from these products, our do you think they'll still be in their infancy in terms --

No, I expect to see Q1 and Q2 next year, I expect to see meaningful design wins of new products that are highly differentiated.

Okay. Second question I had was on your protection line of products, roughly 40% of the business, now it's clearly done very well. Help us understand what are really the barriers to entry here? I understand the opportunity which you just highlighted a couple of minutes ago, but what prevents others from really encroaching on this turf, which clearly has offered, a little safe haven to you and good margins in the process.

Well instruct many ways it is the same barriers to entry, the high-end analog products. And that is that it's a limited group of people, an industry that can design the type of products we design. It's based on proprietary process, it's based on proprietary package, it's based on a very good understanding of applications. It's based on a unique set of customer issues that we -- with our applications team have been able to understand and build kind of a core competence around.

So, it's a combination of things. And the good thing about the protection business, it's quite diverse. It's not one segment, . It's not one marketplace that drives the business. It's many different markets, in consumer, it's in industrial, it's in medical, it's in com, it's across the board.

Okay. All right, great. And Dave, one final question for you. It seems like versus historical averages, disto being two-thirds of your business is on the high side. Anything that really changed there, or is changing there from a mix perspective?

No, I don't think so. I mean, I think there were a few pieces of business that went through distribution that might not normally -- we had a little bit higher shipment of our test and measurement line, product line that went through distribution in the quarter. And that was a little bit of an anomaly. And just the strength in the broader based industrial and military markets, more of that business does go through distribution.

Okay. Thank you very much.

Your next question comes from William Conroy.

Hi, good afternoon. A couple of questions. David, I'm not sure if you can go into any detail on this. I was hoping you could, number one, quantify the excess in obsolete. And was that a write-down or a writeoff?

It was a -- a write-down, so to the extent we would be able to move any of that inventory in the future although it's suspect now, we would potentially be able to recover that. The increase in reserves for our power management area, yes, I can go ahead and give you that quarter on quarter. It was about $1.4 million higher or $1.5 million higher in that range.

That helps. Thanks. And only one more question. I was hoping, Mohan, you could give us some more detail on what's going on in the wireless business. To the extent that you're seeing weakness, is all of that on the power side, are there broader market issues at work here, or share shifts, either, for the sockets that you're fighting for or among your customers? Your customers and the guys who are not your customers?

Okay, so I think you're referring specifically to the power -- power and handheld. yeah, it's a couple of things. I think one is that we haven't executed well on our handheld power business, as I said. So there is clearly a loss of share there. But I think in general it's also that the handheld market may not be as -- as -- we probably had anticipated a stronger entry into Q3 on the handheld business end than we've seen.

Okay. Thank you very much.

Your next question comes from Gus Richard.

Yes. Just looking at your growth of the classic Semtech business and trying to cancel out XEMICS, is growth roughly 5% for the classic Semtech business?

I think actually it's around 6% or 7%, Gus. Probably around 6% if you back out the impact of last year, we just had a partial quarter.

Right. And then it -- and XEMICS is fully in the upcoming quarter as far as the year-on-year comp?

That's correct.

One more followup on the writeoff. Was that charge pumps, LDOs, LED white LED drivers, or a combination thereof?

I would say it was a combination, pretty broad based.

Pretty broad. And comprehensive of those products as pertaining to portable?

That's correct.

Got it. Thank you.

[OPERATOR INSTRUCTIONS]. And your next question comes from Craig Ellis.

Thanks, good afternoon, Mohan. Just a followup question. One, lead times remarked is coming in a little bit. You think we're in an environment given the distributor inventories we're seeing where lead times will firm up and elongate in the current quarter, or do you think they'll continue to pull in?

I think -- we worked real hard to keep our lead times low, and, we're trying to ship more, keep our die banks in place so we can keep lead times relatively short in the four to eight-week range. So I -- I don't see lead times, changing dramatically in the quarter.

Okay. Thanks, David. Then secondly, Mohan, you talked about adding a lot of capability, whether it be in sales or in some cases, design and elsewhere. Are we looking at a -- at a flat net staffing environment, or should we be thinking about some increased staffing intensity in areas like sales and R&D?

I think it's more of a shifting of expense rather than, growing expense. So we have been fairly weak in some areas, where I think it has an impact on the overall business. And I'll take product definition as an example of that in the marketing front. And that's an area where I think it's very person to have the right people. So we will add there where necessary. We're probably a little bit heavy in some other areas. And so it -- I think it's more of a rebalancing.

Okay. Perfect. And then lastly, with regards to all the portfolio commentary, it sounds like the intent here is to prune some select areas, desktop power, et cetera, and really work what you have rather than add new component. Is that a fair summary?

I'm not sure what -- what you mean by that, but let me just give you a little bit of flavor on the thinking. And that is that, where we feel we bring value to the marketplace, we'll go very aggressively and develop products for that market using that capability. Where we don't think we bring value or where -- where we think it's not sustainable, then it will be my intention and I think the business units, the product groups that are developing the products, to put more emphasis on the areas where we do bring value versus the areas where we think that there may be just a huge opportunity, but we don't necessarily bring so much value.

That's helpful. Thanks, Mohan.

Okay.

There are no further questions at this time.

Great. Would just like to thank everyone for participating in our second-quarter conference call. And look forward to updating you at our next scheduled conference call. Thank you for joining us today.

This concludes today's conference. You may disconnect at this time.