Semtech Corp (SMTC) 2007 Q3 法說會逐字稿

Good afternoon. My name is Tanya, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year 2007 Third Quarter Financial Results Conference Call. [OPERATORS INSTRUCTIONS] Thank you. Mr. German you may begin your conference.

Thank you, operator. Good afternoon, ladies and gentlemen. Welcome to Semtech Corporation's Fiscal Year 2007 Third Quarter Conference Call. I'm Todd German, Director of FDA and Investor Relations for the Company. We've just released selected unaudited results for our third quarter that ended October 29, 2006.

For the next 45 minutes or so, Mohan Maheswaran, Semtech's President and Chief Executive Officer and Emeka Chukwu our Chief Financial Officer will be discussing those results with you and answering your questions. Before I turn the call over to Mohan, I want to remind everyone of the following notices. They're lengthy but extremely important.

First, this call is open to all interested parties in accordance with the Reg FD. If you have any questions about our future performance or our estimates of future financial results, we'll consider them now. We're unable to say if there will be another Reg FD compliant opportunity 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 the measurement dates previously used for such awards.

As a result, new accounting measurement dates will be applied to the affected option grant. Consequently, we expect to record additional noncash compensation expense and expect the amount of such expense to be material. The tax consequences associated with these matters are currently being reviewed. As a result of these adjustments, we expect to restate the financial statements for fiscal years 2002 through 2006.

The restatement will also affect financial statements for earlier fiscal years and adjustments for those earlier years will be reflected as part of the opening balances in the financial statement for the restatement period. Because of the pending restatement of the historical financial statement, additional results for the third quarter will not be available until the restated financial statements have been filed with the SEC and we will be unable to file our form 10-Q for the third quarter by the date required by the SEC.

All financial numbers presented during the call should be considered estimates. Our securities are subject to delisting from the NASDAQ Global Market because we have not yet filed our 10-Qs for the first and second quarters of FY '06. In response to our request, the NASDAQ listing and hearing review council has stayed any future NASDAQ listing qualification panel determinations to delist our securities until the review process runs its course. If the listing council determines it is appropriate, it may grant us additional time to regain compliance.

We're working diligently to file all required reports with the SEC as quickly as possible and thereby regain compliance with NASDAQ's listing requirements but we can provide no assurances that we'll be able to do so. For additional information requiring the pending restatement and our status with NASDAQ, see the form 8Ks we filed with the SEC on July 20, 2006 and November 21, 2006.

Third, this conference call will include forward-looking statements. Within the meaning of section 27A of the Securities Act of 1933 as amended and section 21E of the Securities 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 use of terms such as expects, anticipates, intends, believes, projects, should, will, plans and similar wording. Forward-looking statements involve risk 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 and automated test equipment, demand for semiconductor devices in general, demand for the Company's product in particular, competitors actions, supply from key third party silicon wafer foundries and assembly contractors, manufacturing yields and costs, 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 in the Company's annual report on form 10-K for the fiscal year ended January 29, 2006 and 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 revenues 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 its operating and expectations or financial forecast 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 when the restatement will be completed and there may be negative tax or other implications for the Company resulting from the accounting adjustments.

We cannot predict the outcome of the SEC inquiry, the internal investigation or any other lawsuit or other proceeding related to the Company's stock option practices. There can be no assurance that we'll maintain our NASDAQ listing. We would also be subjected 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 options, practices could divert management's attention from our operations and expenses arising from management's review, the investigation conducted by a special committee of the board of directors, the restatement related litigation and other associated activities are expected to continue to be significant.

Current and former employees, officers and directors have sought and will likely continue to seek indemnification or advancement of reimbursement of expenses from us including attorney's fees with respect to current or future proceedings related to stock option practices. These events could adversely affect our business and the price of our common stock. Although a replay of 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 statement whether as a result of new information, future events or otherwise.

We will not be taking any questions on the stock option investigation, the restatement or related matters during this conference call. Thanks for your attention to this important preliminary information. And I will now turn the call back over to Mohan, our CEO.

Thank you, Todd. Good afternoon, everyone. First, let me introduce the two executives on the call with me. Todd German is Semtech's Director of Financial Planning, Analysis and Investor Relations. Todd has been with the Company for nine years and has taken over the Investor Relations activities previously managed by John Baumann. Emeka Chukwu is Semtech's new Vice President and Chief Financial Officer. Emeka joined Semtech on November 20, from Intersill, taking over from David Franz. Todd and Emeka will join me on our future conference calls.

This week, we heard from NASDAQ. NASDAQ said they have stayed any decision to delist the Company until the review process runs its course. This is very good news for Semtech. As we stated in our press release, we're limited in the amount of financial results we will be able to discuss until our restated financial statements have been filed with the Securities & Exchange Commission.

I remain personally committed to ensuring that we successfully restate 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're still making good progress toward this goal.

Now, let me discuss our Q3 results. Starting with orders. Q3 orders were down 5% to $65 million from the second quarter of fiscal year 2007. And down 2.5% as compared to Q3 of fiscal year 2006. Book-to-bill for the quarter was just over 1. Revenue for the third quarter was $63.7 million which was down 2% sequentially. On a year-over-year basis, revenues for the third quarter increased by 5%.

Revenues for the third quarter came from the following geographic regions, 22% was derived from customers located in North America, 13% from Europe, and 65% from Asia. Revenues by end market changed somewhat. Cell phone handsets and base stations accounted for 18% of revenue. Desktop computers, servers and graphics accounted for 7% of revenue. Notebook computers, PDAs and other portables accounted for 16% of revenue. Test equipment accounted for approximately 7% of revenue. Communications infrastructure accounted for 15% of revenue. General industrial including military, medical and other industrial segments accounted for 36% of revenue.

Revenues from OEM sales represented approximately 39% of total revenues for the third quarter. While distribution represented approximately 61% of total revenues. While we cannot provide detailed numbers on gross margin and operating expenses, we will make some general comments. While still at a respectable level, gross margins for the third quarter were impacted again by charges for excess and obsolete inventory and by reduced absorption due to lower volumes of hand-held power products.

Gross margins for Q3 FY '07 were down slightly compared with Q2. Q3 operating expenses were in line with expectations. Our balance sheet remains strong. Semtech ended the quarter with approximately $326 million of cash and investment versus $307 million in Q2 FY '07. This was an increase of approximately $19 million from the previous quarter.

Cash flow was benefited by general profitability, lower capital spending and an increase in payables and accruals. Accounts receivables day sales outstanding calculated on a quarterly basis decreased slightly to 37 days compared to 42 days for the second quarter. Now, let me discuss our Q3 product group performance. Our protection business continues to execute very well and deliver results to expectations. In Q3, our protection revenue achieved a record level. This is clearly an indication that Semtech's protection products are the highest performance in the industry. And that OEMs designing and building notebooks, LCD TVs, cell phones and communications equipment recognize the value of designing in high quality protection.

Our power management business is still struggling. In Q3, our desktop tower and notebook tower and our hand-held power revenues were again disappointing. In the computing segment, we continue to feel the impact of losing some customer platforms in previous quarters. However, we are winning designs where our customers need the differentiation that our products deliver. The story in our hand-held power management business is similar. Where we have lost share due to poor execution and a lack of strategic thinking.

However, we have good design win momentum in the segment and our product road map is a good fit for this market. On a more positive note, the revenue from our broader power management business was very healthy. We are in the process of building a new strategy around our overall power competes I and strong customer relationships and I believe that we're making good progress on this front. Our advanced communications product revenue was disappointing in Q3.

Due to lower seasonal demand from one of our major communications customers. The momentum in terms of new products and new design wins remain solid in both our synchrone timing products and our latest advanced timing platform. We believe that the trends in the packet-based infrastructure deployments favor the adoption of our latest technology and these deployments will have a revenue impact in the second half of 2007.

Our wireless and sensing products group achieved record revenues in Q3. This is a significant milestone for this business. And reflects the continuing strength in both our wireless and our sensing products in the medical and industrial segments. This business is successfully transitioning from a custom products business to an application-specific products business. The integration of this business previously to Semtech's Company is now largely complete. Test and measurement revenues were lower in Q3 due to reduced demand of high performance pin driver products used in 18 platforms; however, the book-to-billing segment was strong and we continue to see good design with momentum and designer interest in our new cobalt platform.

Finally, our power discrete business, which serves mostly the military and aerospace end markets had a solid quarter, due to superb supply execution. We also had increased orders from new and existing customers which will solidify this part of our business. Moving on to new products. We released 21 new products in Q3. This is flat with Q2 which was also a good quarter for new product releases. All our business groups released new products this quarter. As discussed on previous conference calls, we are putting in place systems and procedures to ensure that the flow of new products is more consistent across the Company.

Turning to design wins, the Company's design win activity was up significantly in Q3. We recorded over 617 new design wins which is up from 516 in Q2. The design wins were balanced across all of the product groups and regions with the majority coming from our protection and power management businesses.

Now, let me discuss our outlook for next quarter. Q4 is typically a seasonably strong quarter for Semtech. However, given the lingering softness in the computing sector entering Q4 and relatively high entry levels in the channel compared to demand of notebooks and some consumer systems, we expect revenues to be down 6% to 8% for the quarter. To attain the range of our fourth quarter guidance, [or down 7%] we need net terms orders of approximately 35% of revenue.

This guidance is consistent with the outlook from our peer companies and also reflects the general concerns our global customers are exhibiting related to the general and demand softness they're experiencing. The priorities for Q4 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. After eight months as CEO, I believe the foundation for future success at Semtech is beginning to take shape.

Semtech is going through a cultural shake-up that begins with new core values and renewed sense of urgency in the Company. We have added some outstanding new talent in the company and will carry on bringing on new people as we see fit. We've started to put in place more meaningful operational and business metrics and have redefined our strategies in most of our product groups. As we start to execute on the product developments, we have initiated the Company will start to gain more revenue traction.

I will now hand the call back to the operator and Todd and Emeka and I will be happy to answer any questions. Thank you. Operator?

Yes, sir, thank you. [OPERATOR INSTRUCTIONS] We'll pause for a moment to compile the Q&A roster. Your first question comes from Craig Hettenbach with Wachovia.

Thank you. Mohan with the new CFO hire and some new engineers and managers, can you discuss how the culture at Semtech is evolving here in recent months into next year?

Yes, so, the major things that we're starting to see that are different, really, apart from the effect that we've instituted a new set of core values in the Company are really the types of things that I think drive better execution, sense of urgency, new thoroughness in terms of how we ensure that design wins turn into revenue, new thoroughness in terms of how product definitions translate into good products. And in general, the whole flow of ideas coming in to -- from customers into the product lines and out is real products that drive sustainable revenue growth. I think is all improving. So, I would say the culture is moving from one which was certainly when I joined the company somewhat lethargic to I think faster moving. Somewhat focused historically on just maintaining what we had to a cultural of trying to achieve much higher goals so that's the main sense that I have.

Ok. If I could follow up on industry conditions here. Given your good four to five weeks later than your peer group in terms of reporting, can you just discuss how orders trended in October into November and how visibility looks out there?

So, orders are still fairly strong but they're aging further out. So, it tells me that while they're still -- there are still customers throughout purchasing product, I don't think that the consumption, the end consumption is as strong as we would like and certainly for this part of the year, one would expect the computing and consumer segments to be -- and hand-held segments to be much stronger than we're seeing.

Great. The last one, if I could, you mentioned Semtech transforming from custom products to ASSPs, have you seen any initial revs on that front or where is the time line of when you would expect to see more commercialization of the Semtech's product portfolio?

Well, it is happening as we speak. Clearly, the transition, it is a culture within its own in a sense. The Company was very much a custom-driven basic business and so be integrated into Semtech, not only do they have to change the culture to become to understand what Semtech is about but also to change from a custom to an ASSP house, will take some time but we brought in some good people there. I think that is moving quite nicely. Access to a broader set of sales, broader sales channel to the global region versus primarily in Europe I think is helping somewhat. And I would think that you know, six months from now, you'll start to see platforms that are coming out of the wireless and sensing business unit that are lot more like our historical standard products from Semtech.

Thank you.

Your next question is from Cody Acree, Stifel Nicolaus.

Thanks, Mohan, following up on your discussion of the [culturalship], are there major product and in market initiatives that you believe are necessary or is it simply a matter of execution on the market you're in? I guess what would you point us to Semtech looking like over the next few years?

Well, I think it is a little bit of both, really. I think we do have some very good -- we are in some very good product areas in markets that we just haven't executed very well on our road maps. So as an example, handsets is a good example of that where, in that market, it is a very fragmented market with different requirements and you need a very consistent product development machine that brings out products on a consistent time line to hit market windows. We haven't done a good job of that. But I think in addition to that, there are some technology platforms and competencies that we have at Semtech that, it is my belief, that could be really breakthrough areas and help us gain tremendous momentum in some markets and those are the ones that I'm really trying to ensure that the culture of the Company doesn't -- allows those platforms to develop into really good businesses for us.

I guess, if you had to kind of look at a spectrum of execution or a time line, let's say of execution and had to kind of give a percentage spot as to where you believe Semtech is on its transformation on its transition, especially from a product introduction post-development standpoint, where do you think you are? How much more do we have to see before we start to see some real -- how much longer before we see this drop to the bottom line?

I think we're starting to see better execution now. I see products -- the flow of new products coming out into some affected markets is better. I see better product definition going into the pipeline. I see some sense of urgency that I haven't seen since I've been here at Semtech now starting to merge. Clearly bringing in new people. We've got that flow of new people coming in. I see a renewed energy in some areas. There are improvements in our infrastructure that are helping that process in terms of operations. Clearly, Emeka Chukwu will help us in the finance area and so I think by improving in some of the infrastructural areas, we'll also see that parlay into the product groups so that they have what they need to really do a better job.

So, do you think with the products you have now, as we push past this inventory correction and whatever lethargy whatever we have in the end market, do you think Semtech emerges early into '07 and is stabilized?

Yes, I think we'll start to see a real execution improvement, Q2, Q3 of next year and certainly the second half of next year, I expect to see quite good improvements.

Very good. Good luck, guys.

Thank you. Operator?

Yes, sir?

Next question.

Your next question is from Romit Shah from Lehman Brothers.

Hi, Mohan.

Hi, Romit.

Given your backlog appears to be fairly steady, I'm surprised at the magnitude of the sales revision for fiscal Q3. Does this tend to be a front-end loaded quarter with respect to turns and you're just not seeing the seasonal ramp?

You mean the guidance of Q4?

Right. I'm sorry. For Q4.

I think although the bookings are still coming in, Romit, I think they're aging out further. The terms required for Q4 to hit the midpoint of our guidance is about what we have done historically but I would say that the major issue is seen as orders are coming in, they're aging out. That tells us that the demand is not the end consumption, anyway, is not so strong. We have some good signs out there, the POS is very strong. Channel inventory is fairly low but I would still say the end consumption doesn't seem to be as robust and it is fairly broadly spread. It is not just one segment although computing consumer and hand-held seems to be a little bit more given where we are in the year. We expect those to be much stronger at this point. They're fairly weak.

When you say aging out, you mean that the orders are being pushed out?

Right, right. We're seeing, you know, as orders coming in, now, we're seeing some of that come into Q1 next year. Which is an even further out than that. So, it tells me it is not as robust as we would like.

Is this a relatively new trend, say compared to three months ago? You're seeing this push out of orders?

Yes. I would say it's new.

Ok. You know, with respect to the protection business, because it sounds like your share there has held in well, can you just discuss trends in handsets. It seems to be a soft market in the second half for a lot of companies. Are you seeing any signs of stabilization?

Well, protection in handsets is very broad. We have protection devices going in to a whole range of different handsets in different areas. I would say it is soft even in handsets and even though we are doing quite well with new design wins and sockets still very soft. I would say that we continue to expect that to grow though so that would be my expectation.

Ok. And then lastly, in the press release, you mentioned that industrial was relatively healthy. What is your sense for the first half of next year, I mean traditionally, that tends to be a stronger time of year for the industrial market. Do you sense that momentum is starting to pick up?

For us, industrial is doing quite well. Our wireless and sensing business had a record quarter and it is very -- fairly broadly spread industrial equipments, home automation, security, you know, pressure sensorring. There is quite a range of different segments there in the military which we think will continue to grow in Q1 and Q2.

Ok. Thank you.

Ok.

Our next question is from David WU with Global Crown.

This is. Hi, this is Hon Lee For David Wu. First in, how are your lead times doing at this point of the cycle? And a more general question, right now, we're seeing that the semiconductor cycle is not as amplified as before. And you have quite a bit, 40%, 45% of your business involved in the consumer market and the computer market. So, how are you planning to improve your efficiencies in managing the shorter cycles and stuff like this?

Well, our lead times are about four to eight weeks, pretty much the same as last quarter. Our lead times haven't changed. In terms of the segments, the computing segments in the consumer segment, our -- it is a combination of both our ability to execute well in that front as well as market-driven and I think our execution is improving. I expect that our business in it hand-helds and notebooks and other areas there across the board with protection devices and power management devices will improve. Although, I would say that our focus is not going to be on any one specific segment we have wins in the set top box area, TV area in DVR and in home theatre and hand-helds and notebooks. It is really a broader play that we're looking to try and get our success from.

Ok. And one other thing. You mentioned that you have -- your design win has increased from 500 something to 600. So, are we going to see any of those design wins showing up when Intel refreshes its mobile platform early next year?

Yes, some of them. Yes.

Ok. That's it. Thank you for taking my questions.

Your next question is from Ross Seymore with Deutsche Bank.

Hi, this is Ross. Quick question on the revenue growth versus seasonality. I know you guys mentioned the guidance is pretty much in line with what the peer group is seeing but versus your normal seasonality if there is such a thing, it appears to be worsening beyond the pushouts you referred to in answering an earlier question, Mohan, is there anything else going on where there's more inventory than you thought or certain design wins that aren't ramping or share loss? Anything beyond just the push out that you can give us color on?

Well, I think there is some of that, Ross. We have clearly lost some share in the notebook market and the hand-held market against -- due to poor execution. I think there's as much of the pushouts and the softening of the market. I look at the broader distribution market that we play in the industrial market. I see our POS very strong. But I see the end consumption not so strong. It is not replenishing the channel and things like that. It tells me -- [ INAUDIBLE ] Is another area where, for example, we don't have that same loss of share but we see softness. So, I would say it is fairly broad which tells me it is more of an industry issue but we do have some of our own issues there and I alluded to the notebook and the hand-helds specifically.

So, when you're talking about the inventory level, it sounds like they're just trying to keep that as lean as possible which makes sense but especially this time of year. But did you comment at all on the dynamics of how much inventory you really think there is in a channel by either a weeks's basis or however you would choose to quantify it?

We haven't quantified it. I would say it has come down from Q2 to Q3. But my point really that I was making is the POS was very strong. So, them holding down their inventory tells me that what they're hearing from the customers is that you know, the end consumption is not as strong as they would like, especially at this time of the year. I would have expected more of a pull through.

Makes sense. When do you think -- probably have to look deep into the crystal ball on this one -- but when would you expect Semtech to start shipping to consumption again if we assume we're burning off some inventory now?

I think probably Q2. I definitely think we'll be back to normal consumption levels then. Q1 possibly across the industrial segments. It is difficult to say with the computing and the consumer space, I guess it depends on what type of a Christmas it is going to be.

Ok. The final question, you gave some qualitative commentary on the power management and protection segments but given the size of those businesses within your total revenue, could you give us an idea of roughly what percentage of revenues those two segments represent?

About 75% of the business.

Ok. Is it still -- is power management somewhere 30% and 45% in the other?

That's correct.

Ok, great. Thank you.

your next question is from Steve Smigie with Raymond James.

I was hoping you would be able to comment a little bit on some sort of outlook for operating expense. I think you mentioned it came in about as expected this quarter. Is acceleration coming in SG&A or R & D as you're trying to get the organization realigned or anything like that?

No major changes, Steve. I really can't talk about that in many details.

Ok. And then in terms of the military success that you're seeing is, there any particular driver there, any particular program that's helping out or a particular application that's helping?

It is more our own supply ability to supply. We've spent some time re-energizing our supply chain in that area and it is starting to reap some rewards. Some of our competitors are struggling to deliver product in the same space. We're seeing the benefit of that.

Ok. And then one last thing. I know you can't comment in any great detail but gross margin, obviously guiding down in terms of revenue which we should assume that maybe some sort of dip here short term as absorption drops. You know, for revenue to start to recover after that, starts to settle out. Is that generally how to be thinking about that?

We still look at our model of 56% to 60% and say that's the right model for us and the right range for us.

Great. Thank you very much.

Your next question so from Louis Gerhardy with Morgan Stanley.

Good afternoon. Wanted to follow up on your comments on consumption being weak in computing and consuming. How are you able to decipher from weakness from excess inventory versus actual end market consumption being weak and can you give us a little more color in the consumer area about the type of products you're thinking about?

Well, so, in the consumer area, we certainly see some weakness in the TV space, flat panel TV space. It may be that customers built up ahead of the Christmas period in it anticipation that it is going to be a very good Christmas. What we would have expected there to be more demand going into Christmas than we've seen. So, there's been some build-up of inventory there. On the other question, really, again, if you lock at our POS being very strong and yet the distributors not replenishing and the breadth of different markets that are having this -- that have the same issue, that's where the end consumption comment comes from. You know, if it is one segment, it is one segment but if you see it in communications, you see it in computing and you see it in consumer segments, then it starts to tell you that it is pretty broad spread.

Let me just switch gears and ask you about some of the strategic and tactical changes that you're making at the company. If we look at the next 12 months, how impactful can some of the tactical changes you're making be to the existing product lines? Can you give some sort of color on that?

I think it can make significant change because if you think about it in today's environment, product development cycles typically 12 months and once you start definition and you put it into the pipeline and you develop a product and you bring it out, the product misses the market window or misses the specification of the definition, you then have to go back to square one and do it again. So, the key thing in it execution of product development is get the definition right. Second thing is meet the market windows at the right time. And the third thing is get it designed in. And that generates your revenue. So, I think we have weakness in all of those areas that we have had a weakness in all of those areas. I think we're improving in all of those areas so I think you're going to see the flow of new product into those attractive segment which will start to yield better design wins.

The other part of it is of course strategic focus. That takes a little bit longer. If we decide this is not a market that we want to go in but hey, we should be focused on this segment, this is where the most value for our -- this is where we're going to capture the most value for all of the differential we have. That takes somewhat a little bit longer period. I think there is also a platform developments across the company that we can improve upon and I talk about protection and power coming together in some areas and things like that. And so, those take a little bit longer. But I think you're going to see improved execution through the Q2 period then the second half of next year, you should start to see the revenue impact of that.

Thank you.

Your next question is from Craig Ellis with Citigroup.

Thanks. Hi, Mohan.

Hi, Craig.

Just a question on how you envision the structure of the organization. I know you're not commenting on Op Ex per se but do you envision an organization that from an operating -- is similar to the Semtech of the past due or do you envision greater marketing expense or greater R&D relative to the Semtech that we know?

I think it will be similar. I think you know, I've said this it before that it is more of a rebalancing. If I look at our R&D expense in the company today, we have plenty of R&D dollars being spent. We're just not getting the return for the R&D dollars. The revenue for design is slow here. The revenue per number of products we release is low compared to what I would expect for a company like Semtech. So, we have -- there is enough expense going in. We just need to balance things out appropriately so I would call it a rebalancing across the Company. I think the other thing that kind of alluded to is some of the infrastructural expenses being weak. It is lower than I would expect. Operations is a good example of that where if you have a poor operating infrastructure in the Company, you don't deliver products in a timely fashion to customers, customers get dissatisfied. They go somewhere else. Things like that are some areas that we need to make sure that we solidify and fix. But I don't think it is going to change our model much.

Ok. And so we wouldn't need to think about any meaningful leader transition expense if there is new software systems that need to go into place or anything like that. It is really just better executing with the team that you've got, redirecting R&D to more productive areas and executing more crisply in our fulfillment, that type of thing.

That's largely true. There may be some items when we think about our IT infrastructure but I don't think it is going to be that significant.

Ok. Thanks, Mohan.

Your next question is from Michael Davis with Next Generation Equity Research.

Yes, thank you, guys. I had a couple of questions, Mohan. You talked back in the first quarter about looking at the product mix and zeroing in it on some higher margin products. Have you changed your outlook or are you looking at this picture and deciding what needs to be done, outsourcing what you want to incorporate in-house?

We're still very much focused on higher margin products and bringing out products where we think the customer base out there will pay for the value that we have designed into our products. And that's really the key to our strategy. We're not a company that can go in and -- into commodity segments and play on price. So, we have to bring differential to the market place. And the good thing about Semtech is that is what we're good at doing. We have engineers that develop really highly differentiated products. So, no, that continues to be the strategy. We'll continue to execute on that.

Have you changed your -- your focus in terms of the manufacturing and production side of it? Given what we're seeing in the market today?

We've been largely a fabulous -- are you talking about foundry side?

Yes.

Yes, no, we've been fabulous semiconductor company for some time. We'll continue with that approach. We work very closely with partners.

Ok. In looking forward, are there any leading indicators that you would suggest to look at that might give us an indication of where the market might be recovering?

I wish I could. To me, it is, again, that question of when the distribution channel at least for our business which is 61% distribution, starts to really replenish the inventory and you know, in line with the POS there, that would be the only measure that I would suggest.

Ok. If I can have one follow-up. Looking at two end markets in the Telecom space and the automatic meter reading, can you give us a little color on those?

What was the first segment you said?

On Telecom, IPD slam? [INAUDIBLE]

Both of those markets are embryonic. To me, both the whole packet based infrastructure segment is really one of the great opportunities for Semtech in my opinion. We have very good momentum in that space. When the market will go from being just a market that a few customers are using products to one where everybody is using the systems and deploying the systems is going to be really the key to the revenue growth there. On the ARM market, somewhat similar. It will be a little bit longer to materialize but we're seeing momentum in terms of design win so that's a good thing.

All right, thank you, guys.

Ok.

Our next question is from Jeff Rosenberg with William Blair.

Hi, Mohan.

Hi, Jeff.

I wanted to ask on the -- if we look at the portable segments of your business, the cell phone and notebook PDA, that's around a third of the business, can you talk about whether or not from it a design win point of view, you've kept the same proportion of power management versus protection or are we seeing that business skew more toward protection during this this period where you're revamping your product lines?

Yes, it is more protection. Protection is doing very, very well in terms of both design win and revenue. They decline because of loss of share in and mostly the hand-helds but also some notebook but I would say the new products that are coming out are beginning to get us some of the traction back but to answer your question, protection is what's really driving us in that space.

And to be fair, from a design win perspective so you've seen -- are you encouraged by the amount of design wins you've seen from power or is it really at this point, it is the design win activity in portable power is pretty meager?

No, it is pretty reasonable. I would say that compared to what we've seen in the past, it is weak and we know we can do much better there. That's where I come back to the product, the product side. We need to have product development execution engine do better whereas on protection, we're bringing out new products, we're getting the design wins and generating the revenue. However, we've had a hiccup. We're coming back but I think it will take some time.

Ok. Thanks for that.

Thank you.

Doug Friedman with American Technology Research.

Hi, Mohan.

Hi, Doug.

My question involves looking at the free cash flow that you reported this quarter, $19 million. I'm having trouble getting that to tie up especially given the receivables. I know you mentioned that was pushed out. Not the receivables, the payables. Can you help explain how we got to the $19 million number? [ INAUDIBLE ]

This is Emeka Chukwu, [INAUDIBLE]. This is just our straight cash on short-term investment. So, it is not really a free cash flow, we have not released all of the other from the free cash flow.

Ok. It is just that it is so far away from what I would have for pro forma net income or pretax income. I was trying to figure out how we were getting there. Well, moving on, I guess, strategically, if you look at the business, strategically, what percentage right now is the protection business?

Protection is about 40%, 42%, something like that.

Okay. Just looking at things longer-term moving away from the near-term nature of the market. Can you help us understand where you think you might find niches in the market where you won't run into larger competitors that are exerting their force and making it a challenging environment? Are there areas that you're pushing the Company into that they haven't traditionally been in and if so, can you identify some of those with us?

You're talking about across the Company?

Yes, across the Company.

Well, I think in a way, that is the nice thing about Semtech. If you look at it, our platforms are very, very differentiated and they're not -- every single product group and business unit has a different set of competitors so if I take advanced communications, for example, we are largely playing against IDT and [Zawlink] and [maxim]. If I take our measurement business, we're largely going up against ADI and [maxim]. If I take our wireless and sensing business, it is TI. If it I take out power management business, of course, there is a broader range of competitors and if I take up protection business, it is largely on and CMD. First thing is every single product group has a different set of competitors. Second thing is that each one of the segments that we're focused on, we're really focused on the high end. And differentiation there. So, I think that I'm not so concerned about the competitive landscape in each of these. I'm more concerned about how fast the market is going to merge so that we can really start to see significant revenue growth from those segments we're participating in.

Okay. If I could return the conversation to free cash flow, I know that you're not able to give out too many financial details but is there any way that you can help us understand what you think the potential free cash flows are going forward, given the fact that there's this environment out there where acquisitions are taking place, built around the free cash flows of many of the balance sheets that are, cash rich as is Semtech.

Well, I'm not sure that I can give you an idea on what it is going to be going forward but I do expect that the generation of cash has been a very good step for Semtech. We will continue to generate very good cash. I'm not sure that I know how to answer that question. Since we're not talking about our financial statement.

Is it possible you can help us understand what your position will be when you exit the review the options review regarding maybe the institution of a dividend or prefer a stock buyback and what your view on those two vehicles are.

Well, we haven't really concluded by anything related to what happens afterwards, Doug. We did have a -- a stock buyback approved that we put on hold. And that was a $50 million of which we spent. I can't remember how much. About half of that, I think. So, we still have some outstanding there. Of course the board will consider the strategy going forward.

All right. I guess that's it for now. Thank you.

Thanks. Operator?

Yes, sir?

Any other questions?

Yes, sir, you do have a question from Sumit Dhanda with Banc of America Securities.

I know you can't comment on operating expenses for the current quarter but given the fairly decent decline in revenues, is it fair to expect that you'll try to manage operating expenses more aggressively or is the hiring plan or whatever you have in place going to take precedence from that perspective?

Well we're already managing operating expenses quite well actually and I think that going forward, obviously if we see continued revenue erosion, we'll have to continue to manage it. I would say that, as I pointed out in a previous question, with Semtech's case, it is more of a rebalancing and more of a making sure we get the return on the dollars so I think there is a very healthy R&D team in the Company. And a very healthy set of marketing and applications and sales people in the company. I think it is just a question of how do we turn that into a more robust value proposition to the market place.

Ok. And I guess you know, you've been at the job now for about eight or nine months. A couple of quarter ago on the conference call, you sounded fairly enthusiastic about a potential for a turnaround in the power business with introduction to new products in the back half of this year. Overall, it doesn't seem to materialize. Have you been able to identify other than, quote-unquote, missed execution as to what really has been the problem and how specifically do you intend to fix that,so that six to nine months from now we're not having the same discussion again?

Well I wouldn't say we have not got that right. When I came in eight months ago, like I said it takes typically 12 months to develop a product. You can't turn the knob and out come the product-- a new product this thing takes a while to execute on and once you have new product platform getting it designed in and generating revenue takes another six months. Thats just the nature of the semiconductor business, unfortunately, but the nice thing is I think we have some good products that are now beginning to come out and I think they will get traction in the first half of next year and they will generate good revenue in the second half.

I guess let me ask differently. Where do you think the miss execution was because you did specifically mention that in your comments on the call.

Yes, I think it is across the board, Sumit. I think its in product definition, I think it's ion having a sense of urgency in bringing out the new products. I think it is design wins, taking the new products and getting them designed in. I think it is the operating and infrastructure so we want delivering to customers in a timely fashion and we were delinquent and customer were going else where. I think it was in our marketing strategy, so when we put our pricing strategy together we decided at some point in some cases we wouldn't play the game and our customers went away and went to competitors. So I could go on, it is strategic, there was poor strategy thinking across the board. I think it was in general execution across the board was very poor, I think it is better, it is not perfect. We still have lots of room for improvement but it starts with bringing in good people. I think we have started to do and piece by piece you will start to see the return.

Okay. Thank you very much.

At this time there is no further questions.

Okay, operator I will take it from here. With that let me just summarize by saying that, while Q3 was an okay quarter for us. We generated $19 million in cash. I believe that there is a lot potential unsight to our performance. We are beginning to execute better the flow of new products into attractive segments is improving and we have some new break through platforms that can drive sustainable growth for Semtech in the years a head. So I remain very optimistic about our future. With that, I would like to thank everyone for participating in our third quarter conference call and look forward to updating you all next quarter. Thank you.

Thank you for participating in today's teleconference, you may now disconnect.