Semtech Corp (SMTC) 2007 Q4 法說會逐字稿

Good afternoon. My name is Christy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Semtech fourth quarter fiscal year 2007 earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[OPERATOR INSTRUCTIONS]

Thank you. Mr. Todd German, you may begin your conference.

Thank you, operator.

Good afternoon, ladies and gentlemen, and welcome to Semtech Corporation's fiscal year 2007 fourth quarter conference call. I'm Todd German, Director of FP&A and Investor Relations, and we have just released selected unaudited results for our fourth quarter that ended January 28th, 2007.

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 Emeka, I wanted to remind everyone of the following notices.

First, this call is open to to all interested parties in accordance with Reg FD, if you have any 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 about 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. As previously reported, we have been engaged in an internal review of our historical stock option practices in light of an informal SEC inquiry and federal grand jury subpoena and have 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 apply to the affected option grant and we will restate our financial statements for fiscal years 2002 through 2006 to record a material amount of additional non-cash compensation expense. 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 statements for the restatement period.

Because of the pending restatement, additional results for the fourth fiscal quarter will not be available until the restated financial statements have been filed with the SEC. As previously announced, the NASDAQ listings and hearings review counsel has stayed the listing of our securities until it has reviewed our case. If the listing counsel determines it is appropriate, it may grant us a limited period of additional time to regain compliance.

We continue to work diligently to file all required reports with the SEC as quickly as possible and thereby regain compliance with NASDAQ's continued listing standards. For additional information regarding our pending restatement and NASDAQ status see our reports on Form 8-K filed with the SEC on July 20, 2006, and December 19, 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, 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 and automated test equipment, demand for semiconductor devices in general, demand for the Company's products in particular, competitor's actions, supply from key third party silicon wafer foundries, and assembly contractors, manufacturing costs and yields, relations with strategic customers and risks associated with the businesses of major customers.

In addition to considering these risks and uncertainties, forward-looking statements should be considered in conjunction with the cautionary statements contained in the risk factor section and elsewhere in the Company's annual report on Form 10-K for the fiscal year ended January 29, 2006 and in the Company's other filing with the SEC and in material incorporated therein by reference. In light of the risks and uncertainties inherent in forecasts of revenue and gross margins 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 expectations or financial forecasts will be realized.

In addition, there are a number of risks associated with matters related to our historical stock option practices and the previously announced internal investigation, SEC inquiry, and related matters. We can not predict when the restatement will be completed, and there may be negative implications resulting from the restatement. We can not predict the outcome of the SEC inquiry or any lawsuit or other proceeding related to our stock option practices. There could be no assurance that we will remain our NASDAQ listing. We could 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 option practices could divert management attention from our operations. 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.

We have incurred and expect to continue to incur substantial expenses for legal, accounting, tax, and other professional services in conjunction with the restatement and related matters and current and former employees, officers, and directors have sought and will likely continue to seek indemnification or advancement or reimbursement of expenses from us including attorneys 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.

The results announced today are preliminary, as the annual audit by the Company's independent registered public accounting firm is still underway. As such, these results are subject to revision until the audit is completed and the Company files its annual report on Form 10-K.

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

Thank you for your attention to this important preliminary information and I will now turn the call over to Emeka Chukwu, Semtech's CFO.

Thanks, Todd. Good afternoon, ladies and gentlemen.

As we stated in our press release, we are limited in the amount of financial results we will be able to discuss until our restated financial statements have been filed with the Securities and Exchange Commission. We remain committed to insuring 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. We believe we are making good progress towards this goal.

Starting with our Q4 orders. Orders were down 9% to $59 million from the third quarter of fiscal year 2007 and down 9% as compared to Q4 of fiscal year 2006. Book to bill for the quarter was just over one. Revenue for the third quarter was $58 million which was down 9% sequentially. On a year over year basis, revenues for the fourth quarter declined by 10%.

Revenues for the fourth quarter came from the following geographic regions. 23% was derived from customers located in North America, 17% from Europe, and 60% from Asia. Cell phone handsets and [inaudible-heave accent] accounted for 15% of revenue in the fourth quarter. Desktop computers, servers, and graphics accounted for 7% of revenue.

Notebook computers, PDAs and other portables accounted for 15% of revenue. [Inaudible-heavy accent] equipment accounted for approximately 7% of revenue. Communications infrastructure accounted for 22% of revenue. General industrial including medical, military, and other industrial segments accounted for 34%.

Revenues from OEM sales represented approximately 41% of total revenue for the fourth quarter, while distribution represented approximately 59% of total revenues. While we cannot provide detailed numbers on gross margin and operating expenses, we will make some general comments. Gross margins for the fourth quarter were again negatively impacted by charges for excess and obsolete inventory and by reduced absorption due to lower volume soft power management products.

Gross margin for the fourth quarter were down several points compared with the third quarter. Q4 operating expenses were higher than expected due to one time executive service arrangements. Our recruitment fees associated with executive replacements. In addition, expenses associated with new product development came in higher.

Our balance sheet remains strong. Semtech ended the quarter with approximately $342 million of cash, cash equivalents, and investments. This was an increase of approximately $16 million from the previous quarter. Cash flow was benefited by overall profitability, lower capital spending and a reduction in gross inventory. Day sales outstanding was 40 days flat from Q3.

I would now hand the call over to Mohan who will discuss a product group performance details and the first quarter fiscal year 2008 outlook.

Thank you, Emeka. Good afternoon everyone.

Before I talk about Semtech's product group performance, let me briefly discuss two important organizational changes that were made in Q4. In Q4, we announced the appointment of a new worldwide sales Vice President, James Kim.

James has been with Semtech for over 20 years and is intimately familiar with our people, our customers, and our products. Prior to this appointment, James headed up Semtech sales for Japan and Korea. James is looking to reorganize and refocus our global sales team and I am very excited with the energy level and thinking he is injecting into the global sales organization already.

Also in Q4, we merged our advanced communications products group and our wireless and sensing products group into one product group called Advanced Communications and Sensing. The rationale for this reorg was to take advantage of design, operations, and systems engineering synergies that were available and to integrate two remote locations into one entity managed by one executive. There has been no loss of momentum on either the wireless and sensing products or the advanced communications products as a result of this change.

Let me now discuss our Q4 product group performance, our fiscal year 2007 and then our Q1 fiscal year 2008 outlook. Our protection business declined by 11% in Q4. This was the first sequential revenue decline in this business for 13 quarters and reflects the broad industry softness that we experienced in Q4.

Our protection business is very diverse from an end market standpoint, and the overall weakness in notebooks, hand helds and the broader industrial segment all contributed to the decline. We continue to see good design momentum in our protection products in existing and new markets and believe that this business will return to modest growth in Q1 of fiscal year 2008.

Our power management business declined by over 24%. This business is clearly struggling. In Q4, our power management revenues across all sectors was down. This is again an indication of the broad industry softness we experienced in Q4 and the loss of momentum we are facing in our power business due to poor historical execution.

Despite the Q4 weakness, we still feel good about the new leadership power products that we are bringing to the market. We belive that these leadership power products will enable us to regain some of the lost momentum in the power business, which will accelerate growth in this business in the second half of fiscal year 2008.

Our test and measurement revenues were up 35% in Q4. While Q4 was relatively strong the overall demand in the sector is not growing at the rate that we would like and some customers in this segment have been revising slightly downwards their demand forecasts for pen driver electronics. Despite this we continue to see a lot of customer interest in our new integrated pen driver cobalt platform and do expect the design wins for this platform to accelerate this year.

Our power discretes business was up over 20% in Q4 due mostly to superb supply execution. We also had increased orders from new and existing customers which will solidify this part of our business. We expect that the momentum we have in this business will remain solid in fiscal year 2008 as we continue to improve our supply throughput.

Revenue for the combined advanced communications and sensing business was slightly down. On the advanced communications business, revenues were up 30% versus Q3. The momentum in terms of new products and new design wins remains solid in both our synchronous timing products and our latest advanced timing platform.

We believe that our timing technology gives us an advantage in several emerging segments, including WiMax, [inaudible-heavy accent] and 3G. This belief is validated by the continued support and requests we are receiving from global service providers in addition to new design wins. We expect this activity will start to yield meaningful results in the second half of fiscal year 2008.

Our wires and sensing products group revenue was down modestly at 6% versus Q3. This business is still transitioning from a custom products business to an applications specific products business. While we still have a way to go on this journey, we are making good progress and the product road maps we have put in place are exciting. Solid execution and development on these road maps is critical to the success of our wireless and sensing business.

Moving on to new products, we released 17 new products in Q4. This is slightly down from Q3 which was a good quarter for new product releases, however, the quality and the differentiation of our new power products are significantly better and design wins from these new products should start to enhance our new product revenue in fiscal year 2008.

Turning to design wins, the Company's design win activity was higher than in Q3. We recorded over 700 new design wins which is up from 670 in Q3. The design wins were balanced across all the product groups and regions with the majority coming from our protection and power management businesses. One of the tasks of our new global sales VP is to drive this metric harder and to close the loop between new products and new design wins.

Overall our fiscal year 2000 performance was somewhat disappointing. The need for a financial restatement, the decline of our power management business and the poor overall execution were all disappointments. Although we grew revenues nearly 6%, this was below the average growth rate for the industry.

There were, however, many positives in the year We grew our cash balance by $64 million, our protection business business grew 21%. We saw a 34% increase in our test and measurement business, a 57% increase in our advanced communications and sensing business, and a 64% increase in our power discreet business.

In addition, the merger of our two power management businesses into one and the merger of our advanced comm and wireless businesses into one and the introduction of several new management processes into the Company will enhance our ability to execute to our future plans. Finally, the formation of a new Semtech management team, including a new CEO, a new CFO, a new VP of Human Resources, a new VP of Operations and a new VP of Worldwide Sales have put us in a good position to improve our performance going forward.

Now, let me discuss our outlook for next quarter. Q1 is typically a seasonally soft quarter for Semtech. While there appears to be some improvement in our customers' outlook we are still cautious about any widespread recovery and specifically cautious about in demand levels.

We expect Q1 revenues to be flat to down 4%. To attain the mid-range of our first quarter guidance were down 2%, we needed net turns orders of approximately 35% of revenue at the beginning of Q1. The priorities for Q1 are to continue our efforts to finalize our restatement so we can put the current accounting issues behind us, continue with the strategic realignment and focus of the Company and continue to improve the execution engine of Semtech.

April 3rd will be my one year anniversary as the CEO of Semtech. While there certainly have been many disappointments and some surprises I belive that Semtech is going through a cultural shake-up that is going to make us a much better company. We continue to add some world class talent across the Company and will carry on bringing in new people as we see fit. We have put in place more meaningful operational and business metrics and have redefined our strategy in most of our product groups. The execution is beginning to improve, albeit, not at the rate that I would have liked, but nevertheless, I expect to see a marked improvement in execution throughout this year.

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

[OPERATOR INSTRUCTIONS]

Your first question is from Sumit Dhanda from Banc of America.

Yes, hi, I had a couple of questions. Mohan, you mentioned the fact that protection was down 11% sequentially for the first time in 13 quarters. Help us understand why this is just an industry phenomenon and not potentially share losses given that the 13 quarter streak you talked about included a prior downturn why you didn't see a falloff in this business? And then I have a couple of follow-ups.

Yes, so the protection business we have a very broad based business. Large part of it is distribution, industrial, we have some consumer business, we have some computing business, and it wasn't just one area that was down, it was pretty much across the board. So that's why I think it was more industry based.

I suspect we were able to withstand it last time because it was probably a smaller portion of our business, but now it's the largest part of our business I think that clearly a hit for us, but it was just definitely a broader issue and not a specific share loss.

Okay. And I had a question on the gross margins, I think it was mentioned that they were down several points. That sounds like a lot, and so, I guess if you strip out the impact of whatever inventory reserve you had to take, can you help us understand what the base margins are doing, is there any ASP pressure we should be worried about?

Sumit, this is Emeka.

If we strip out the impact of the reserves of the write-downs, we would have still had our gross margin go down just because of what happened in our power management business. As we did indicate the revenue from that business came down sequentially and as a result we were not able to fully absorb most of our manufacturing overhead.

So is it fair to assume that it would have been down "several points" despite--even if we exclude the impact of the reserve or would the decline have been more benign, can you help quantify that?

I don't know that I can really quantify that. I could say that the reduction probably would have been cut in half if you exclude the impact of the reserve write-down.

And then I hate to berate the point, but is several, two or three or is it five? Can you give us a feel of what several means?

Unfortunately, I don't think I can give you any specific number this time.

Okay, and then the turns requirement 35% at the beginning of the quarter how does that compare with what you did last quarter?

That's about in line, I think we were at very similar terms required and we're tracking nicely to that turns requirement.

Okay, and then one final question, Mohan, goes back to that protection question I had. Can you just generally talk about the competitive environment in that business? That business, like you said, has done very well for you, I guess, until the last quarter. Help us understand competitively what is occurring there.

There are a number of competitors. Most of the competitors tend to have products that are more commodity in nature, so depending on the application, and depending on the needs of the customer, we see more pressure in some segments than others, but our focus tends to be on the segments that require the highest protection, in terms ESD of performance or my performance and there we see limited competition.

So--but yes, it's there. I don't want to tell you that it's not competitive, it certainly is and certainly there's pricing pressure, but I would still say that in most of the segments we participate in, nobody has the type of performance that we bring to the table in our protection devices.

Let me just ask one final question. The gross margins, I guess, even after stripping out the inventory reserves, down I suppose in some substantial fashion, how should we--given what's happening with the higher margin businesses, power management being one of them. How should we think about the gross margin model that you're striving for at this point in time? Because it seems like you're probably well below 55 at this point, and so how should we think about it going forward?

I think if you look at our difference businesses, our advanced comm and sensing business, let me break that out, our advanced communication business is significantly above what I'll call our corporate average. Our wireless and sensing is about in line, protection is above, power discretes is above, our test and measurement is above, power is well below and certainly, it's not helping by the fact that we have to keep on taking inventory reserves and we have under absorption, so clearly that's a focus for us.

I don't think it changes our thinking going forward. But it is today an issue for us and that's the way I think you should model it. We expect sequentially to start to improve on that and get back to where we were.

Your next question is from Harsh Kumar with Morgan Keegan.

Hi, just a couple of questions.

Mohan, first of all for you, the inventory situation we're hearing from some companies that we might be done with the worst of it. I'm curious about how you feel and what you're thinking with respect to the excess inventory in channel at your shop and what you're seeing?

Yes, I think that the inventory situation has improved. I would say that the in demand robustness is not so strong that I would be confident in saying that it's gone for good. I think that clearly POS for us is still not as healthy as I would like to see it and there's no indications that there's a dramatic return to growth in some of these application segments.

But yes, I would say that definitely it's better. We are seeing a little bit of strength in some of the bookings in some areas and there's indications that of some pull-ins here and there, but I wouldn't say it's anything dramatic.

Got it, kind of along--that's helpful, by the way. Kind of along the same lines, would it be fair to assume that linearity of orders in the quarter improved as the quarter went by?

Yes, it's been fairly linear, but I would say it's improved very modestly.

And then kind of operational question. Power management platform, I know you're working to fix it. What do you have left still to do?

Well, the main thing now is design wins and getting the new products out and getting them entrenched into the customer base and I think we've got some very good products that have come out now and are beginning to come out from the pipeline.

As I've always said from the moment you define a product through to design win and revenue, it's an 18 month journey at least, and we're still on that journey. I'm confident that we are going to start to get that turned around.

Okay, and just also same lines--what do you think is left in the reorganization of the whole company? Is there any major step that you still feel you still need to take?

Not at this stage. I think I'm fairly comfortable with the management team I have in place, with the structural changes we have made. Some of the process stages we've put in place in the--business processes we've put in place, and so I'm fairly comfortable now. It's about execution.

And last question and I promise to go away after this. Options update, can you refresh us on where exactly you stand on the deadline and what's left to be done?

This is Emeka.

We still have some time on the deadline, I believe it's probably some time in May. But obviously we're hoping that we don't have to use up all that time. We are working very hard on it. We're making good progress. We will let everybody know as soon as we're done.

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

Good afternoon. Mohan, I just wanted to ask, since I just listened to a previous conference call at National, they basically said what Inlock Devices and the Aeroelectronics at World said that the month of January and February, starting in the second week of January onwards their turns orders have picked up, orders from distributors have picked up and generally a better tone to the order picture.

And their quarter ends a month later than you do, but I was wondering what do you attribute the seasonality of your Q1 to, because when I look at your business, the computer business and cell phone business is only about a--well, notebook business as well--is only about a third of your total, 30% or so. And then industrial comm markets tend to be better in the first calendar quarter of the year. So can you refresh my--why is the first quarter a seasonally weak quarter for Semtech?

So let me confirm something there for you David. I think the--that part of the business, the industrial, the communications business is typically stronger for us and should continue to be quite good for us this quarter. It's really the computing side and the hand held side that I think is still questionable how--what level of performance we're going to see in Q1.

I would echo some of the comments you made on--in terms of the January, February improvement. The thing you have to watch out for is how much of that is driven by the Chinese New Year and how much of that is real in demand. And what I am looking for is an increase in POS, and a general bullishness in terms of pull-ins across all segments--across all regions, and that's why I don't see that as strong as I would like, which gives me some reason to be cautious. But that's really what the cautiousness is driven by.

Okay, in terms of distribution, your distribution channel, like everybody else which is pretty lean and really the uncertainty is more concentrated on the OEM segment.

I wouldn't say that, I would say that even in the distribution channel we're looking at POS trends and days of inventory, and while it's perhaps not out of whack, it's certainly not demonstrating that there's going to be some return to massive growth.

Well, and just one clarification. You mentioned about products that have above corporate average gross margin, and advanced communications obviously is one of those, but you mentioned something about the wireless and sensing. Is that above or just at corporate average?

That's slightly just about at corporate and slightly below I would say today, but large part of that is the Company we acquired Zemex, there wasn't a lot of attention paid to the cost side, so my sense is that those products should be at the corporate average in the long run.

So really if I were looking at the leverage on your profit and loss statement, in essence, the key to this is a much better power management because that's execution because that's really what hurt your gross margin--

Yes.

And do you think your need to consolidate your foundries to get better economics or the present arrangement will work for you?

Well consolidation of foundries in the analog business is an easier thing to say, it's a very tough thing to execute on, and especially because a lot of the products have long life cycles, but going forward that is something that we're doing a lot more of, and looking at how do we have one or two or three foundry partners versus 10 foundry partners, but for current today's business, we have to work with the partners that we're in bed with and that--drive down the costs that way.

So really, the bottom line is power management is the key to turning the Company's gross margin around? Because that's well below corporate average at this point, right?

Correct.

Okay. Thank you.

Your next question is from Louis Gerhardy with Morgan Stanley.

Good afternoon. Just want to make sure I got a couple numbers straight. Did you say test and measurement was up 35% sequentially?

Yes.

And advance comm was up 30?

Yes.

That seems to be a very favorable mix and I was just wondering if you could help us on the gross margin front if we take out the write-offs. How would you allocate the decline between pricing pressure and the under utilization of the--the under absorption of the fixed costs?

Most of that should be allocated to under utilization.

Okay, and more--it would be more than 100% of the decline, right, because the mix was very favorable?

The mix was relatively unchanged. The benefit that you got from the increased advance comm business you lost it in--

The absorption, yes, okay.

And then just if we think about the pricing pressure in terms of power management and I think I heard your mention it in protection, correct me if I'm wrong, sort of on a like for like part basis what's it kind of running at on an annual basis?

The erosion?

Yes.

I think we probably are running in power, tell me if you think I'm in the ballpark, Emeka, probably about 20%, so maybe 5% a quarter probably about right. Protection probably a little bit less than that. We've had some recent--more recent price pressure on the protection side. But I think that that's driven by a few very select customers.

I think in power--power is one of the those businesses where it's almost like a consumer business. You have to plan almost for a 5% price erosion and build in a cost infrastructure that allows you to drive the prices down that way. Certainly very, very competitive.

Okay, and then my last question would just be on the test and measurement. Do you have visibility as to the type of tester that drove the strong growth, was it memory or something else?

Yes. I think it was memory.

Okay. Nonvolatile?

That I couldn't tell you.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question is from Craig Hettenbach with Wachovia.

Yes, thank you. Mohan, can you follow up on the comments on the advance comm, it looks like some potential for good design win activity there, just if you can give us a little color in terms of sampling of products and timeline of when you would expect some revenue for some of the new initiatives in 3G or WiMax?

So for the new initiatives, we've really got some good momentum there. I think the question is more really of the timing of the marketplace. So some of the customers who have built systems are telling us that really in the second half of the year they're going to start to place orders for products and we won't see volume until next year.

But particularly in some of the Asian regions they're saying that WiMax will start to emerge as a real market which is encouraging for us and a good thing. Also a new segment called Femtocell which is essentially wireless in the home without the wireless lan infrastructure but using applicable to cell phones and things like that. A new concept that's emerging and we're hearing again from some of our customers that second half potentially later this year and then early next year we're going to start to see that emerging.

On the 3G side we have some good momentum there as well on the infrastructural side. Again, that's probably a market that's been there for a while but hasn't generated any volume and we're seeing that start to come--become more visible to us now as well.

And those products typically have high gross margins, would you expect that your traditional exposure and more routers as you switch over to WiMax and 3G, would it be--do you expect a similar margin profile for the products?

Similar margin profile, more of an access infrastructural place so volumes are not going to be hand set type of volumes. They'll be base station, set top box type volumes, so still pretty good I think and hope. But the main thing is the time to revenue may be a little bit longer than we would like. More infrastructural type of time to revenues.

Got it. And then if you look across all your end markets for fiscal '08, how would you rank them, or what are some of the markets you are more optimistic on that Semtech will drive some growth in fiscal '08?

I'm still bullish on the hand held space, I think we have very good products for the hand held space, both in protection and power. I like the access space, as we just talked about, the infrastructure access space or the things like set top boxes and access devices, wireless lan that side of things. And I think generally, we will see protection devices going into consumer equipment more so than we have done in the past with some of the HDMI interfaces and USB interfaces and things like that.

Great. Thank you.

Okay.

Your next question is from William Conroy with Sanders Morris.

William Conroy, your line is open? If there's no response we will proceed.

Your next question is from Doug Friedman with Am Tech.

Hi, guys, thanks for taking my question.

If I look--Mohan if you look at the markets that you're targeting, when do you think your new products will open up--increase your total available market and how much do you think that market is that you're targeting?

I think the two areas that are kind of emerging and a little bit unknown in terms of the SAM that's available to us, but I think are really good potential for us are the--in the advanced comm space with our timing products and we'll start to see that in the second half of this year. I think that could be definitely a $300, $400 million SAM for us going forward, and then the other area is on the whole wireless and sensing side.

When we acquired Zemex, we acquired the wireless industrial RF products and sensing products and we're only now starting to really drive local standard products from that acquisition. And again, in the second half of this year, I expect that will open up some SAM for us. That's probably closer to a $100 million SAM.

And then the power side, while the hand held, we've also played in I think, some of the other segments that we have not traditionally really gone after we've always been big on the computing side, but not some of the other spaces. I think that probably is going to open up $200, $300 million opportunity for us once the products are out and starting to really get promoted.

Okay, and you mentioned that there's 18 months time to money on some of your new products. Where are we at in that 18 month time frame. Is time zero right now, or is it 9 months and we're three quarters away from seeing revenues?

Time zero was when I joined the company I think, or perhaps the quarter after I joined the Company. Because one of the things that I spent a lot of time doing, and I talked about this on previous conference calls is ensuring that the product definition and the definition of the products and the whole thinking that we were putting into how we were going to go after--how we were going to develop products and what type of products and how we were going after certain markets and customers, but once you start the definition of a product and then you put it into design and then you develop the product and you bring the product out and you qualify the product and get it out there, it takes 18 months.

That's the nature of the beast. Twelve months to really get the product out and another six months to get it qualified and then there's the time--the revenue ramp from once it's designed in to once it generates revenue, so I would say we're--I've always said consistently that the second half of this year is when I'm looking for some of the new products that we have defined to really start to ramp up.

Okay, that sounds great. If you look at sort of your relationships with distribution, can you let us know--have they been changing at all, and do you see anything there that needs to change for better execution? You mentioned I believe, you've got to forgive me, I jumped on to the call a little late here. But I believe there was a statement that you misexecuted a little bit, and is that hurting your relationships with distribution in some of your partners and if so, what are you doing to fix it and how are those relationships?

I think our execution is something that I talked about--or lack of execution is something I've talked about specifically in power for some time now. And I don't think it's tied to our channel strategies, or our channel relationships.

Having said that, I think our distribution relationships are average, I don't think that they are very good. I don't think they are necessarily very weak. We're a small player for many of the distributors--the major distributors, and I don't think we're putting our destiny in their hands. I think we have to drive the execution at the end customers by ourselves and with reps and other partners.

Now it varies from region to region. In some regions I think the distributors are closer to us, we're a more significant player to them, but in others we're a relatively small player for them, so we have to drive our own destiny.

All right. Great. Thanks so much.

Your next question is from Tore Svanberg with Piper Jaffray.

Yes, hi, this is Evan Wang calling in for Tore Svanberg. Thanks for taking my call.

I have a few questions about your new product introduction. You mentioned earlier that this was down from last quarter, I was wondering can you comment on how tightly this newest product introduction is tied to your design win activities and is this--?

Evan, can you speak up a little bit? I can barely hear you.

Is this better?

Yes.

I just have a quick question about your new product introduction. You mentioned that it's the down slightly this quarter. How tightly related is this to your design win activity, and is this just a one quarter event?

Well, new product introductions, you can't really look at it sequentially and make a determination on if there's a small increase or a small decrease, make a determination from that if there's a problem or not a problem, you have to look at it on a more longer term basis because usually we have at any one time we have a whole number of products in development across many different businesses.

So timing exactly when products are going to be released is a tricky thing to do. What I would say, though is that generally I think our new product momentum and the quality of our new products, which is really the critical thing, I think is improving. The thing that is today weak I would say is our ability to take those new products and to get them designed in to customers, and it's one of the reasons I've made the change in our sales team is to ensure that we get the momentum on the new product designs.

Okay. I thank you for that, and also, I was wondering if you can comment on your rationale for what seems to be a more optimistic outlook for your second half '08? Is that timed to the 18 month new product introductions--the new product cycles that was mentioned earlier?

Yes, I think when I say I'm optimistic about second half '08, I think what I'm really saying is that the timing some of the quality of some of the products that are coming out which are of higher quality now, in both our power and our protection and our advanced comm area.

I think we'll be in the second half. And so, we have heard from our customers that they are feeling better about second half than they are about the first half. We're also hearing that some of the markets that we are looking to emerge like WiMax, like Femtocell as an example will emerge in the second half.

And that's the reason for my saying that I think we'll see more momentum in the second half. Also in the power side, the power management which is one of the--obviously the critical turn around for us. A lot of the products are more consumer hand held related and computing related and they typically, in the second half have a higher growth.

Thank you very much.

Your next question is from Cody Acree with Stifel Nicolaus.

Thanks, guys. Mohan, on a very high strategic level you've obviously brought in a lot of fresh blood, a lot of new eyes to look at the organization. There's new products coming out but a lot of this is still focusing on many of the same end markets, same customer basis that Semtech has historically focused on. With all the new views and all the fresh blood into the Company, has there been talk or discussions around differing markets, differing strategies for Semtech going forward?

I would say the answer to that is yes. I'm not a big fan of dramatically changing market focus. Usually because you just don't have the ability to do that.

For example, if I said tomorrow I want us to be an automotive company, yes, but, we have no understanding of the automotive space, we have no understanding of who the customers are, it would be a very difficult thing to do. So while we look at markets, we're looking at the markets that we have some connection with, and can influence in some way. The good thing is that Semtech being around for 46 years--over 46 years, we have developed a lot of customer relationships in many different application segments. There's no shortage of application segments for us.

The challenge is choosing the ones that are growing the fastest and bringing the right product mix to those markets so that we can really win and we've had a tendency in the past to not look at dominating in markets and gaining share in markets but just playing in as many markets as we possibly can and I'm hoping to change some of that. I just call that strategic focus.

I guess maybe along those lines then, maybe something similar to what Semtech did with desktop power management, have there been in the last--maybe with some of the difficulties in power management, has there been some markets that you've been looking at in the last six to 12 months that you just say maybe aren't as attractive, maybe aren't worth the investment, and instead of going into new markets rather, maybe just paring back to older ones?

Yes, well that's definitely happened. I think we looked at the--we have looked at historically power, power management business has been very, very strong in computing, and while we still have very good products for that marketplace, and we like to continue to work with the partners in that marketplace, it's really commodetized very quickly.

Margins are very, very--much lower than we would like and there are a lot of competitors including Asian competitors in that marketplace. We've tended to look at some other segments and find that some of those other segments that require the same type of high quality product that we were able to deliver to computing, but can give us a little bit more opportunity there, I think are better focused markets for us.

And then maybe just real quick, lastly, obviously you've seen a few areas where maybe the end markets where you started to see some better order trends. Can you talk more specifically about which markets you've started, which maybe end applications you've started to feel a little better about older rates?

I think currently the hand held is doing okay. I would say definitely the comm infrastructure looks to be a little bit better. The industrial space is okay, improving a little bit, and that's probably the ones that I would say are the ones that stand out.

Very good. Good luck.

Okay.

You have a follow up question from Sumit Dhanda with Banc of America.

I just wanted to go back again to the gross margin question. In terms of the under absorption that you talked about, help us understand why with the overall mix, there being some offsets in terms of which categories did well and which did poorly. How the fixed cost absorption was as low as it was for a fabless company like yours?

Well, Sumit, although we are fabless, but especially in the back end we do have equipment that we have consigned with our soft comm manufacturers, and obviously we've reported that our revenues were down sequentially and so the volumes were down. It's a one quarter declining revenue, we're not taking out a bunch of people and machines and stuff like that. We have enough materials going through the line.

I understand that. But there are a lot of other fabless companies which have their own back end operations, and while the revenue decline in power management was significant overall it didn't seem like the revenue decline was too different from what other companies within the sector had recorded, so I guess that's where I'm having a tough time resolving the disconnect per se in terms of how significantly it's impacting your gross margins.

Yes, but we've talked about a gross margin being impacted by two key factors. The inventory ride down and the under absorption. So I really don't understand what else you want me to say with regards to that. We didn't have enough volumes going through the line and we had some inventory that we believe we're no longer going to need.

Okay. Thank you very much.

All right.

You have another follow up question from David Wu with Global Crown Capital.

I just want to get some clarification on relative size of the protection business and the power management business in the latest quarter. And also when we get into the second half of this year and probably really next fiscal '09, what are you target margins that you think this company can achieve in let's say fiscal '09?

Let me answer that one first and then Todd if you could talk about the power and protection.

My belief, David, is that with the type of products we do, we should be able to generate in the high 50's to 60% gross margins and generate growth, revenue growth that is above industry, and the reason I say that is that we have--if you look at our products they are fairly high end, everything we do, the advanced comm, the test and measurement, some of the wireless sensing products, our protection products, even the power products which today are well below average, I know are very, very high end products. They're not targeted at commodity spaces.

My feeling is that we should be able to generate that type of volume--that type of margin.

And as far as the business units, protection was just under 40% and power as a total was in the low 20s.

At this time there are no further questions.

Okay. Let me summarize by saying that while Q4 was a disappointing quarter we still increased our cash balance by $16 million. I believe that there's a lot of potential upside to our performance and remain very optimistic about our future. With that, I would like to thank everyone for participating in our fourth quarter conference call, and look forward to updating you all next quarter.

This concludes today's conference call. You may now disconnect.