Semtech Corp (SMTC) 2008 Q1 法說會逐字稿

Good afternoon. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY '08 Semtech Corporation 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. German, you may begin your conference.

Thank you, operator.

Good afternoon, ladies and gentlemen, and welcome to Semtech Corporation's fiscal year 2008 first quarter conference call. I'm Todd German, Director of FDA and Investor Relations and we have just released unaudited results for our first quarter that ended April 29, 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 want to remind everyone of the following notices. First, this call is open to all 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 before the next quarterly conference call.

Second, this conference call will include forward-looking statements as defined by SEC rules. 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 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 and downturns, demand for cellular phones, personal computers and automated test equipment, demand for semiconductor devices in general, demand for the Company's products in particular, competitors actions, supply from key third party silicon wafer foundries and assembly contractors, manufacturing costs and yields, relation to its strategic customers and risks associated with the businesses of our 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 factors section and elsewhere in our annual report on Form 10-K for the fiscal year ended January 28, 2007, and our other filings with the SEC and in material incorporated therein by reference. In light of the risks and uncertainties inherent in forecasting revenue and gross margin and in other projected matters, forward-looking statements should not be regarded as representations by the Company and its objectives or plans will be achieved or that any of its operating expectations or financial forecasts will be realized.

We remind you that Semtech reports results based on Generally Accepted Accounting Principals, commonly referred to as GAAP. This quarter we have also made reference to certain non-GAAP measures. These non-GAAP measures are provided to enhance your overall understanding of our comparable financial performance between periods.

In addition, management generally excludes such items in managing and evaluating the performance of the business. As a further reminder, the first quarter results are published today on our press release and are unaudited and should be considered preliminary until we file our quarterly report on Form 10-Q.

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 statements whether as a result of new information, future events or otherwise.

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

Thank you, Todd. Good afternoon, ladies and gentlemen.

Before I discuss our Q1 fiscal year 2008 performance, let me briefly mention the accelerated stock buyback we announced earlier today. The Semtech board of directors has approved a $150 million accelerated stock buyback In connection with this stock repurchase program, the Company will enter into a privately negotiated transaction to repurchase $150 million of its common stock based on Semtech's closing price on May 29, 2007.

The $150 million share repurchase authorization represents approximately 14% of the Company's total market capitalization. Semtech will pay $150 million and will receive a substantial majority of its shares to be delivered under the agreement within approximately three days after signing the agreement. For complete details of the transaction please refer to the full press release issued earlier today.

Now moving on to our first quarter financial performance. Let me start with our Q1 orders. Orders increased sequentially by 7% to $63.2 million from the fourth quarter of fiscal year 2007, and down 7% as compared to Q1 of fiscal year 2007. Book-to-bill for the quarter was just over one.

Revenues for the first quarter of fiscal 2008 were $60.6 million, an increase of 4.5% compared to revenues of $58 million for the fourth quarter of fiscal 2007. On a year-over-year basis revenues for the first quarter declined by 8%. Revenues for the first quarter were derived from the following geographic regions: 22% came from customers located in North America, 14% from Europe and 64% from Asia.

Net turns orders accounted for 38% of shipment in the first quarter. This compares to 35%, 37% and 41% in the previous three quarters.

Revenues by end market were as follows: revenues from cell phone handsets and base stations accounted for 21% of revenue. Desktop computers, servers and graphics accounted for 9% of revenue.

Portables, which is notebook computers and PDAs accounted for 11% of revenue. Test equipment accounted for approximately 5% of revenue. Communications infrastructure accounted for 21%, and industrial accounted for 33%.

All the end markets with the exception of portables and test equipment saw sequential growth. Revenues from OEM sales represented approximately 37% of total revenues for the first quarter, (wi) distribution represented approximately 63% of total revenues.

Non-GAAP gross margin for the first quarter of 2008 increased to 55.4%, an increase of 400 basis points from the fourth quarter of fiscal 2007. The Company benefited from higher absorption as we saw our power management and protection businesses return to growth.

Our gross margin also benefited from lower inventory write-downs due to improved inventory control. We expect gross margin in the second quarter of fiscal 2008 to be flat sequentially due to the higher mix of computing power.

Non-GAAP research and development expenses were $9.3 million for the quarter. This was an increase of approximately $200,000 compared to the fourth quarter of fiscal 2007. We are forecasting that research and development spending will be approximately $300,000 higher for the second quarter mostly for expenses associated with new products.

Non-GAAP SG&A expenses were $14.7 million for the quarter. This was an increase of approximately $2.2 million compared to the fourth quarter of fiscal 2007. The major reason for this increase is that we are assuming a full payout on our incentive plan in fiscal 2008 compared with partial payout in fiscal 2007.

The other key contributor to the increase was a write-down in receivables for amounts owed by one of our North American distributors who fight for bankruptcy protection. We expect that SG&A spending in the second quarter will be sequentially flat.

Interest and other income was $4.4 million in the first quarter. These higher amounts was achieved due to higher returns on our cash and marketable securities.

For the second quarter we are forecasting interest and other income of approximately $2.8 million. This decrease is driven by the funding of the $150 million accelerated stock buyback.

The Company's non-GAAP effective tax rate for the first quarter of fiscal year 2008 was approximately 24.5%. We expect our non-GAAP effective tax rate for fiscal 2008 to remain at 24.5%. This range can vary from the forecast based upon geographical mix of our revenue and other factors.

The diluted share count decreased by approximately 700,000 shares during the quarter to 73.6 million shares. The weighted average shares outstanding is forecasted to decrease by approximately 6 million shares during the second quarter as a direct impact of the accelerated stock buyback announced today by the Company.

The impact of the buyback would be offset somewhat by the dilutive effect of stock option awards to employees. We expect fully diluted weighted average shares outstanding of [70] million shares in the second quarter. This forecast can vary based on the average stock price for the quarter, stock option exercises and the actual level of stock buybacks on the accelerated buyback program.

On a non-GAAP basis, excluding impact of stock-based compensation, the amortization of our acquisition related intangibles, legal expenses related to the SEC investigation, legal expenses associated with Semtech's ongoing insurance litigation and independent shareholder litigation expenses, the gain on sale of land, net income was $10.6 million, or $0.14 per diluted share, down from $14.8 million, or $0.20 per share from the same quarter last year and up from the $9.2 million, or $0.12 per share from the fourth quarter of fiscal 2007. We are forecasting non-GAAP earnings in the second quarter of fiscal 2008 to be between $0.14 and $0.15 per diluted share.

Equity compensation was $2.5 million in the first quarter, down from $3 million in the fourth quarter of fiscal 2007. For the second quarter of fiscal 2008 we expect equity compensation to be approximately $4.2 million.

Due to the stock options investigation and the related restatement of its financials, the Company did not grant its annual stock awards to continuing employees and some new employees in fiscal 2007. The Company intends to award those options in the second quarter and the forecasted increase in equity compensation reflects the impact of these contemplated awards. We expect equity compensation to be in the range of approximately $3.8 million to $4.4 million per quarter for the rest of fiscal 2008.

Our GAAP tax rate was 23.2% for the first quarter of 2008. We expect our tax rate for fiscal 2008 to be 23%.

Our GAAP net income for the quarter was $7.9 million, or $0.11 per diluted share down from $11.8 million, or $0.16 per share for the same quarter last year and up from net income of $4.6 million, or $0.06 per share for the fourth quarter of 2007.

GAAP net income for the first quarter includes a one-time gain of $1.3 million from the sale of land. We expect GAAP net income of $0.09 to $0.10 per diluted share in the second quarter.

Turning to the balance sheet, Semtech ended the quarter with approximately $364 million of cash and investments on the balance sheet. Our cash balance grew by $23 million during the quarter.

During the first quarter the Company spent approximately $700,000 on property, plant and equipment. Depreciation and amortization for the first quarter was approximately $2.8 million including approximately $300,000 of intangibles amortization.

In the second quarter we expect capital spending to be approximately $1 million and depreciation to be approximately $2.6 million. The Company did not repurchase any of its common stock during the quarter.

Accounts receivable days sales outstanding calculated on a quarterly basis improved to 38 days for the first quarter from 40 days last quarter. Inventory levels remained flat in the first quarter as compared to the fourth quarter. This included approximately $200,000 of cost capitalizing to inventory during the quarter related to stock option expenses.

Our days of inventory decreased to 68 days from 70 days in the fourth quarter of 2007. In absolute dollars, we expect a slight increase in inventory in support of our rebound in power management business.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone.

I will discuss our Q1 fiscal year 2008 product performance and then our Q2 fiscal year 2008 outlook. Overall orders and demand for our products increased nicely in Q1. As a result we grew revenues and orders sequentially.

We saw improvements in overall demand from handheld segment and the communications segment and modest improvements in demand in the industrial and computing segment. We also saw our distribution POS increase and distributor inventories increase in line with the POS.

Our protection business increased revenue sequentially by 15% in Q1. This increase was driven by stronger demand for our protection products from the handheld segment. We also saw an increase in the demand for high-end protection platforms in the communications segment.

We are very encouraged by the design win momentum of our protection products in our strategic customers. Our protection business is very diverse from an end market standpoint and the return to growth in this business reflects our leadership position in this growing market. The overall market strength combined with our own design win momentum leads us to believe that Q2 of fiscal year 2008 will be another solid quarter for our protection business.

Our power management business increased revenues sequentially by 5% in Q1. This is the first sequential increase in this business for almost three years and is one of the highlights of our Q1 results.

The components that led to this turnaround are improvement in the demand for our (inaudible) power and communications power products and the overall demand improved modestly, improvement in our power management product development and marketing execution, improvement in our overall sales and operations execution.

We feel that our power management business is now starting to execute well. And this improvement in execution will further improve this year as newer, more differentiated products are brought to market and we re-engage with customers who had moved away from Semtech to competitors over the last few years.

As I have stated previously, the second half of fiscal year '08 will be the real measure of the improved execution in our power management business but we are encouraged with the current traction we have.

Our test and measurement revenues were down 27% in Q1. As we had discussed in our last conference call, the overall demand in the HE segment appears to be quite soft. In Q1 customers have been revising slightly downwards their demand forecasts for pin driver electronics.

We saw this in Q4 and it continued into Q1 and we expect the softness in the ATE space to also continue into Q2. However, we still see a lot of customer interest in our new integrated pin driver cobalt platform and we already have a number of solid design wins with this platform. We expect the design wins to further accelerate throughout this year but with minimal revenue impact in fiscal year 2008.

Our power discrete revenues were flat versus Q4, however, orders increased 38% from new and existing customers. With improved supply execution we will continue to see growth in this part of that business and expect that this business will remain solid in Q2 of fiscal year 2008.

Revenue for the advanced communications and sensing business decreased by 6%. As a reminder, the advanced communications and sensing product group incorporates our advanced communications business and our wireless and sensing businesses.

In the advanced communications business, revenues were up slightly versus Q4. While the contribution from our advanced communications business is still very modest, there is a lot of interest in our latest advanced timing platform which we believe gives us a system performance advantage in WiMAX, (inaudible) cell and 3G infrastructure applications, however, we still need to improve our execution in this area to support the broad and increasing customer interest and this is now an area of focus for us.

Our wireless and sensing products group revenue was down 12% versus Q4. This decrease is more of a reflection of the strength we saw in Q4 and some minor supply constraints in Q1.

The industrial radio part of that business continued to increase nicely as customers in the security and metering segments increased their demand for Semtech products. New product road maps are now in place in the industrial wireless, industrial timing and the industrial sensing segments.

Solid development execution on these road maps is critical to the future success of our wireless and sensing business. The business from the new product areas is expected to contribute in fiscal year 2009. We expect revenues from our advanced communications and sensing business to increase modestly in Q2.

Overall from a POS standpoint we saw the handheld, industrial and communications infrastructure spaces increase while the computing and ATE spaces decrease. In Q2 we anticipate continued strength in the handheld and industrial space and some improvement in the computing space.

Moving on to new products. We released 26 new products in Q1. This is an increase of over 50% from Q4 and demonstrates that our new product engine is beginning to warm up.

The quality and the differentiation of our new products are significantly better than some of our historical products and design wins from these new products should start to enhance our new product revenue in fiscal year 2008 and really make a meaningful revenue contribution in fiscal year 2009.

Turning to design wins. The Company's design win activity was higher than in Q4. We recorded over 800 new design wins which is up 7% from Q4. The design wins are once again well balanced cross several of our product groups and regions.

Finally, the overall change in culture at Semtech is beginning to take place and the Company's transformation into a competitive business that can compete in today's environment is picking up pace. We still have a long way to go but I am comfortable that the execution in the Company is improving and will further accelerate as we start to hit critical milestones.

Now let me discuss our outlook for next quarter. With the encouraging performance of Q1, and the overall improved execution we are seeing, we expect Q2 revenues to be up 3 to 5%.

To attain the mid-range of our second quarter guidance, or up 4%, we needed net turns orders of approximately 40% of revenue at the beginning of Q2. We expect non-GAAP EPS to be between 14 and $0.15.

The priorities for Q2 are continue with the execution improvement and cultural shift in the Company, continue the realignment of our global sales team and continue to accelerate the design win momentum in the Company.

Also in Q2 we expect to add more world-class talent across the Company. We'll also start to fine-tune some of the operational and business processes we've put in place and refine some of our strategies in our product groups.

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) Our first question comes from Mr. Wu.

Good afternoon. I have a couple questions fairly quickly.

The, can you talk about the, how much of the inventory write-down you did in Q4, which is obviously helping your gross margin in Q1 on a comparison basis, how much of the, if I look at the total improvement in gross margin sequentially, how much did the absence of write-off help that portion?

The other thing I have really related to, this quarter, obviously instead of down it's up, which is good but where did the major surprise come from? I guess power management is one but I was wondering whether there were other things that contributed to it?

And the last question is about the accelerated stock buyback program. Can you describe just briefly why you choose this methodology as opposed to just basically a simple buyback with an accelerated portion or something like maybe a (inaudible) they borrow money but forget about the borrowing money part, they did a fairly regular buyback, this is a special buyback program that you kind of (inaudible). Can you explain why you want to do this, do it this way as opposed to the regular way?

Okay, David. This is Emeka. Hopefully I will remember all your questions.

Going back to how much of the gross margin improvement came from the absence of inventory write-down, I think you are probably say about 50% of it, of the gross margin improvement came from that. And we expect that going forward it is just a one-time benefit to our gross margin that we saw in this quarter.

To your second point as to why we saw the upside in revenue. I think most of that demand came from very nice surprises from our protection businesses and also from our power management business. I will probably venture to say that we were pleasantly surprised by the demand that we saw in the computing space.

Going back, going on to your last question of why we are doing the accelerated stock buyback, you know, we really wanted to go in there and complete this transaction quickly. If you do a regular stock buyback it takes you a long time, as you know, probably more than 12 months to bring all the shares back in. We wanted to get that over with and do it as soon as possible.

Also, we just wanted to show a commitment that we were really committed to bringing the shares back in. And after reviewing all the options available to us, including using debt to buy it back or doing a Dutch tender offer, we decided that the accelerated stock buyback provided us the better balance of getting the shares back in quickly and also because we have a call out feature to the program it does give us a little bit of protection, I guess, the stock price appreciation, so after considering all those factors we felt more comfortable (inaudible) with that program.

Okay. Thank you.

Your next question comes from Craig Hettenbach.

Yes, thank you.

Mohan, nice snap back in the handset business. Can you provide a little color on the trends of power management (first) protection within handsets and is it all existing customers? Are you starting to see any penetration for new customers in some wireless handsets?

Yes, Craig, it's a combination of existing and new customers and many of the existing customers and strategic customers have lots of different platforms when it comes to handhelds.

Our protections devices are finding their way to both high-end handheld devices and low-end and we've now started to also get some power management products into the space as well. We have a lot of new power products targeted to that space. Traction is beginning to happen there as well.

Okay. Thanks.

And on the notebook market can you just talk about order trends there and have you seen any impact from the launch of Santa Rosa or when would you expect to see some order flow from that launch?

Well certainly, we're seeing improvement from our distributors and the sense is that we're going to see some improvement due to Santa Rosa in Q2 from the pickup in that platform. I would say it's modest at this point in time but I think there is a sense that that's coming back in Q2.

Okay. And then last question if I could.

On the SG&A front, still looks relatively high as a percentage of sales. Can you talk about will you improve the margins through revenue growth or is there any opportunities to kind of tighten up or how will we get some margin expansion on the SG&A line?

Hi, Craig, this is Emeka.

At this point we really expect to improve the percentage through the top line. We still have a lot of things that we are trying to fix with regards to the infrastructure. For instance, Mohan talked about the realignment of our sales force which we need to bring on some more (inaudible). So at this point I think we are just going to grow to our way out of it.

Got it. Thank you.

Our next question comes from Steve [Magee].

Great. Thank you.

It's nice to see the snap back here in the transient multi-(inaudible) business. Just curious. You seem to have some encouraging words about design wins in that space. Does that mean we should see continued acceleration in that for Q3 and Q4 as well?

Well, that's the hope. Certainly, without design wins there's no chance that you're going to see that. The intent with our products is to get them designed in to as many accounts, as many platforms as we possibly can and then as the market picks up we'll see the momentum from that.

One of the things that I had mentioned in previous calls is that Semtech historically has released a lot of products but those products haven't necessarily gained traction in the marketplace. And so one of the encouraging signs for me is that the products that are coming out now are more differentiated and are getting designed into the right platforms and that is a positive sign for us.

Can you talk a little bit about what your wafer pricing and packaging costs are looking like right now?

Our costs are in line with the industry. I don't think there's anything dramatic to report there.

I guess just sort of directionally indicate where you think they might go over the next few quarters?

I think every indication that we have is that we do expect to continue to get some pricing reductions. As to where exactly we think it's going to be we don't know but we expect we always driving our manufacturing costs hard when we expect to keep getting reductions to stay in line with ASP erosions.

And also I think with our business we tend to have more leverage when the volumes increase and as we see both the power management and the protection business volumes start to get back on track, we should be able to have more leverage there to drive the costs down.

Congratulations on a nice quarter. Thanks.

Thank you.

Our next question comes from Craig Ellis.

Thanks. And, guys, congratulations on the turn of the business. Mohan, first more of a high level question for you.

For the year that you've been at Semtech you've been very focused on improving the execution of the business, sales, field engineering, product definition, design, et cetera. Where are we in terms of where you want the business to be? Are we two-thirds of the way there, a third of the way there, can you add some color on that?

Well, so let me take it a step at a time. I mean, I think we have now business processes in the Company that I'm comfortable with. I think we have new products that are being defined very well (inaudible), they're coming out more effectively in a timely fashion in line with market windows so that's encouraging.

I think there's a better sense of urgency in the Company which is important for this type of business. I think that (only) the new people are brought in and the management team is starting to really make an impact.

We've made some improvements in our infrastructure, clearly, and we kind of run through all of the strategies and all of the product lines and I think have vastly improved there. So I'm comfortable from that standpoint.

I think where we have still some room to improve is that the new products that come out need to be designed in at a faster rate and a more broader fashion and that's where I talk about improving our sales force and some of the cultural aspects there. I think we have some breakthrough capabilities in the Company, some breakthrough platforms that I talk about in terms of advanced common timing and our cobalt platform and some of the new power platforms that I think we have to do better with there.

So there's still a lot of improvements to be made, there's still refinements to our strategy but I would say I'm much more comfortable now that I can step back and say we're starting to execute like a company in the semiconductor industry (needs) to execute to be competitive.

Okay. That's helpful.

And switching to the gross margin line, is the business still one that you think should be operating near a 58 to 60% gross margin?

Yes, I think our model is 55 to 60%. I think if you look at our portfolio of products the advanced communications products, the test and measurement products we deliver to the marketplace, our protection products, our discrete products are all above the corporate average we should be able to sustain that type of margin.

Our power management is a little bit less than that but I think with the new products, with the momentum we have and that kind of a re-engineering the differentiation factor, in other words, creating more value, I think we should be able to generate those type of margin.

Okay. And then lastly for me a question on the earnings guidance, I don't know if this is better for you or Emeka.

When I look at sequential revenue growth of 3 to 5%, flattish gross margins and then the absence of $2 million of options timing inquiry expenses along with sharply reduced share count, I understand that interest income is going to be down but it seems like there might be a little bit more earnings leverage in the model. Is there something I'm overlooking elsewhere in the income statement?

No, you're not and I'm thinking, just to be sure, are you referring to GAAP or to non-GAAP?

The non-GAAP.

Yes, I mean you do look at the guidance I think we're saying we're saying we're going to be 14 to $0.15 for fully we end up at the high-end of that range. But the reason that we're not really guiding to a much higher growth is because we do expect our gross margins to be flat sequentially.

Okay. All right. Thanks, guys.

Our next question comes from Harsh Kumar.

Hi, guys. Congratulations on a great quarter.

Just kind of looking back at the quarter you just reported, how much of the growth do you say came from, would you say came from kind of good demand environment versus your new product momentum?

I would say, Harsh, that most of it still is more industry related and improvement in execution in the Company versus new products. New products are starting to get out, come out now that I like and I think we're going to get some (good) traction there but the revenue in the quarter really is about industry improvements and our own execution from an operation standpoint, a sales standpoint and delivering to the customers as per their expectation.

Fair enough. That's helpful, Mohan. And then maybe a question for yourself or Emeka, again.

You kind of alluded to 55 to 60% gross margin goal longer term. Can you remind us what your financial goal is for the operating line items maybe R&D and SG&A, where you would like to see them shake out longer term?

Let's do this. Right now we are expecting, I haven't really developed a model along the lines of R&D and SG&A. However, in terms of total operating expenses we're expecting it to be somewhere in the range of 30%, 35%.

30 to 35%?

Maybe a better way of giving you that information is that operating margin, our model calls for long-term to be in the range of 25 to 30%.

I got you, Emeka. Thank you. And then -- okay, that's fair.

In terms of your new products, Mohan, what would you say, you said you were kind of getting there very close to where you would like it to be. What would you say are the critical pieces that are left before you feel really comfortable saying you've gotten to the point where there's no reason not to have steady growth?

Well, I'm not sure I've never ever going to be happy until everything's going great guns but if I look at our power business we've gone from having products that come out of the pipeline that (inaudible) average products to having product that are truly differentiated. What I like to see now is us being able to sustain that and for those products (get) designed in every way.

The same applies to our wireless (inaudible) platforms. As I talked about the road maps there we've introduced new road maps, we have products being designed, I'd like to see those get out into the marketplace and designed in and really start to see the traction.

So I'm comfortable that we're now, you know, when I first came on board and I talked about execution issues, definition was one of those issues, marketing was one of those issues. The ability to bring our products in a timely fashion was an issue.

I think all of those are largely fixed now in the Company. We still have a few areas of improvement but largely fixed and now what we've got is a situation where we're getting great products out, we now have to go make sure we get those designed in and effectively support the customers with the applications materials, the marketing materials to make sure that all their questions are answered and all that type of thing. So it's more of a back end, more of a sales force and that's where a lot of my attention is now going to.

Okay. And then last question for me, Mohan and Emeka,

What price would you say, what stock price would you say your buyback is accretive of?

(Inaudible) accretive?

What stock price is the buyback accretive up to? Like is it 19, $20, over 20?

Well it's kind of really hard to pinpoint exactly but I think from the modeling exercise that we did, I can tell you that at $20 we believe that a buyback is accretive. We didn't go beyond that because we didn't really want to get too excited about possibilities but at $20 it was still accretive.

Fair enough. Thanks. That's very helpful, guys. Great quarter, great guidance. Thank you.

Your next question comes from Jeff Rosenberg.

Good afternoon.

I was wondering if you'd willing to give us kind of a base line of how to think about the breakdown of the business by protection power management, advanced communication sensing, just to sort of think about going forward how you, where we're starting from?

Well, from Q1, you can look at the business unit as a total, test and measurement was about 5%, power as a total was about 23%, protection was about 46%, our AC&S group was about 16%.

Great. That's very helpful.

And then looking at protection and maybe I heard you wrong but was that a source of upside? I mean the 15% sequential growth I assume was stronger than you were looking for.

Can you talk a little bit about whether that was inventory replenishment or whether you're seeing some real positive trends there in terms of either market share or content in the devices that you've got good penetration in, maybe some color there?

Yes, I think first of all, it was a little bit of positive upside for us in the second half of the quarter, clearly, things picked up after Chinese New Year and we definitely saw momentum there.

Our protection business, if I look at it as a whole it's kind of several segments. One is the handheld segment. In the handheld segment there are a lot of different areas where protection is required, the interfaces, the displays, the keypad, et cetera.

So as handhelds emerge and grow then we find our protection devices going to many different handheld systems but then there's LCD PBs, set top boxes, DVRs, consumer equipment where there are a lot of interfaces also. Protection is, protection devices and high-end protection devices are going into many of those systems.

And then there's the communications and industrial protection, Ethernet ports and GPON and security in areas like that, again, where the protection devices get designed in. The protection devices are very broad. It's a massive market type of business which is a great business for us because it's so broad and very diverse so that, you know, to see that type of growth coming from that is healthy.

And when you look at the growth rate in the market, I mean, should we think about it as one where there's strong growth because of the increased content in all the devices where you're in or is this really a question of you executing better and getting yourself marketing well in terms of being able to reach more of these new applications that perhaps you weren't in the past?

Well, I think it's a little bit of both. I mean the applications are emerging, and emerging applications like HDM (ion) in the consumer space, some of the new ports on communications like Voice over IP ports and Ethernet ports and (inaudible) ports and things like that. So there's a little bit of new market opportunity there.

That's one of the nice things about this space is there are a lot of different application spaces that are emerging. But on top of that, our product execution and our marketing execution in this business is really quite super and I think we find ways to bring out products that are very differentiated in a very timely fashion and we surprise many of our customers by the quality and the capability of our products.

Okay. Great.

And then last thing I wanted to ask you is if you could comment on your engineering team over the year that you've been there, what sort of changes there have been there? Have you seen growth in the overall number of circuit designers, maybe some commentary on what's happened there?

Well, one of the beauties of Semtech when I first joined that I commented was that the engineering team was a very strong, very deep engineering team, very balanced. We have the ability to design complex analog, simple analog, complex mixed signal, complex digital in the Company which is very encouraging. So we have a very (inaudible) balance and it's very deep and I continue to be encouraged by it.

I think if I look at our R&D expense, one of the big issues I've had was always the return on those R&D dollars is not what I'd like it to be. I believe as we start to execute better and we start to get products out we'll be able to demonstrate and improve our return on our R&D dollars.

But to answer your question on the engineering team it's largely been untouched. It's been focused a little bit more, strategies have been refined but it's in good shape.

Your next question comes from Sumit Dhanda.

Hi, guys. A couple questions.

Emeka, first on the gross margin guidance I just want to make sure I got this right because you said that about half the benefit to gross margins in the April quarter was from the sale of written down inventory. And you're guiding flat sequentially so ex the write-downs does it means that your margins are still moving up and how does that square with your comment on the mix changed which is adverse heading into the July quarter? Well just a little correction.

I think the 50% that I said referred to the fact that we didn't do the same amount of write-down that we did in Q4 in the January quarter. So because we didn't have that we saw an improvement in our gross margins.

Going forward in the July quarter, the reason that we got into a flat gross margin is that we do expect that we're going to have a higher mix of computing power revenue and that usually comes in at below the corporate average, however, on the positive side that would drive a whole lot of (inaudible) option.

I guess I'm still confused. How should I look at it on an apples-to-apples basis ex any write-downs or including any write-down is in an improvement in gross margins or no?

Yes, there is an improvement in gross margins that is driven from the higher volumes, higher revenue from our protection and our power management business.

I guess the way to look at it is if you go back to the general (inaudible) if we did not have the write-down in inventory our gross margins obviously would have been higher. Probably instead of being a non-GAAP gross margin of 51.4%, it probably would have been something in the range of 53 or 54% gross margins back in the January quarter. So I think that's the better way to look at it.

And the other question I have for you, probably Mohan, I guess two questions.

First, it seems like there's a change in the level of confidence that you have regarding the future business prospects. I guess the question is, what really drove the inflection point this quarter? Was it just that your revenue saw an improvement and it seems like a lot of that was related with the pickup in the industry or is it just you're seeing much more concrete signs of improvement in execution?

And then the second question I have, as it relates to, call it your resurgent the power business, really what are the new customers and applications that you could highlight that you're getting into and if not new customers and applications, really how are you differentiating your products versus what the competition has out there in existing customers and applications?

Let me take that question first. I mean Semtech has always had a pretty strong power management capability in my opinion. When you look at the competence within the Company, we've got ability to do many different power types of products for communications, for industrial, for computing, for consumer products, you know, we've had handhelds, we just have the capability in the Company, we have the processes, we have the IP, we have the know how.

So that's, in my opinion, it was really about poor execution, poor understanding of market, poor understanding of timing of new products and not really staying on the ball there. I think we've improved in many of those areas. I wouldn't say it's there yet.

I mentioned I think we still have a lot of improvement to go, but I'm encouraged by the fact that we have improved our definition, our products are better, we are starting to get back engaged with customers that were historically Semtech customers that went away. So that gives me a good feeling.

On the second part, or your first question which was on how much was execution, how much was improvement in the overall industry, as I said to a previous question I think most of it was more industry but I can tell you for sure that had we not had the improvement in the execution of the Company we would not have had the 4.5% sequential revenue growth. Execution comes in many forms and one of those is improvement of knowing where your customers are and what they need and driving hard to get products into those customers.

And so I would say that it's kind of a little bit of both but I'm encouraged by the fact that we now have a greater sense of urgency. We are starting to bring out new products that are differentiated in my opinion and our customers are looking at those products and are starting to really re-engage Semtech the way I think we historically have been engaged with them.

Your next question comes from Louis Gerhardy.

Good afternoon.

Just wanted to follow-up on the fiscal Q2 gross margin guidance. Would there be any inventory charge in the flattish type of number you're guiding to?

Well, at this time we're not modeling anything extraordinary. It would just be the normal, typical inventory charge that would you expect in a given quarter.

And that would be, what, around $1 million or something?

No, not any of that range, probably much lower than that. I don't have an exact number.

Okay.

And then could you just, if we could just hone in on the handset market, what you're seeing both power management but also protection and other devices you plan to sell into that. Can you just comment on what you saw in this most recent quarter, the next quarter and then kind of the secular outlook there for Semtech?

We definitely saw improvement in the handheld business. It was definitely strong. It seemed like the market picked up and also our own momentum both in protection and in the power space was a little bit better.

But I would say that this is a space that still, it's changing all the time, there's new types of equipment that's coming out in the space so it gives us the opportunity as the features and the functions of those devices change, to get more of our products into the system.

So as an example, I mentioned already handhelds tend to have many different interfaces, the display, the keypad and each one of those need protection so we tend to see quite good momentum of our protection devices. In our power space a lot of new products we have coming out are targeted to that space and the same customers that use our protection devices can also use our power.

Okay. Thanks for that.

And then if we think about the third quarter with the increase in the stock-based compensation and then with the accelerated buyback at the same time, can you give us a sense for interest income and then also share count in the fiscal third quarter, what the trend would be versus the July quarter?

Okay.

Let me take, in terms of interest income I think we've guided to $2.8 million this quarter. Maybe we'll see a special increase of about $200,000 or $300,000. (Inaudible) obviously, as you know, this is going to depend on what interest rates are doing.

Moving on to the share count, I would expect because what's going to happen this quarter is that we're not going to see the full impact of the buyback because they would only be outstanding for two months (inaudible). So we would expect to see a full impact of that, obviously, of (inaudible) by the additional stock option that we should award.

So probably modeling something like in the tune of about 68 million shares outstanding by Q3. But I haven't looked at that number in greater detail but I would probably say 67 to 68 million shares outstanding by the end of Q3.

Thank you.

Our next question comes from Tore Svanberg.

Thank you. This is Kevin Cassidy for Tore.

On the ASPs for this quarter, what was pressure like? Was it normal or, I guess, can you comment on the ASPs?

The types of markets we participate in, especially with some of the higher volume products like the handsets, are always, there's always ASP pressure. It's like consumer space, you always expect to see every quarter some more ASP pressure and that's not a surprise there. I don't have a number that I can give you.

Okay.

How about also for the, were the bookings increasing, were they scheduled out longer going into the third quarter or are the order rate scheduling longer?

This is Emeka.

The order rates I think they're pretty, coming in consistently based on what we have seen before. We (have only) seen any orders being scheduled way out than we would, than we are used to.

The order patterns are, you know, similar to what we've seen. I would say that in Q1 after the Chinese New Year we saw an increase in the orders and the turns rate was quite strong there. I would say that demand is quite strong for Q2. So I don't think there's anything different about our order patterns.

Okay. I was just, so it was a 48% turns in first quarter and then you're expecting 40%?

40%.

It was 38 in Q (inaudible).

Oh, 38. Okay. I misunderstood that then, sorry.

How about on design wins, out of the 800 design wins, how many were WiMAX related?

I don't think we have WiMAX related design wins yet. As I talked about in the advanced (common) space we have a lot of interest and we're starting to get a lot of traction there but no design wins in the advanced (common) space. We have WiMAX design wins opportunity across power and protection as well that I can't comment on specifically how many.

Okay. Thank you.

Our next question comes from Doug Freedman.

Hi, guys, thanks for taking my question.

Just to focus in on the prediction of higher turns, Mohan, your number was 38% last quarter and this quarter you're forecasting 40%, we've got four weeks into the quarter. Can you give us the turns left to make the number or to make the midpoint?

Doug, this is Emeka. At this point we need [17]% in turns to made the midpoint.

So a very good first month of the quarter. If people were to ask if you thought that this was a one or a two quarter snap back and where do you think you are versus demand, what's your feeling towards the second half at this time?

Well, I think, Doug, for us I've always pointed to the second half as the half that I'll be able to look back and say, has our execution really improved, because our new products that we started to define six, nine months ago, are coming out now and they're getting designed in, we'll really start to generate revenue in the second half and then (inaudible) 2009. So it's a big measurement from my standpoint.

What the industry's going to do and how it's going to behave and where it's going to be, I don't know. I think that the, certainly from the signs, current signs of Q2 and the orders and demand increase in the second half of Q1 it kind of bodes well but we saw this also in FY '07 so I can't tell you for sure.

Are you seeing any sort of stronger than expected summer seasonal pattern? I mean the turns ratio of 40% for the start of the summer quarter, is that what the Company has seen traditionally or can you help just calibrate me on what that means to you and whether we should make anything of it?

No, I don't think you can. I think it's about the same. I think it's in line to where we've been historically.

And then one last one.

On your exposure to the PC space you mentioned that the power management in the computing space could recover a little bit if I heard you correctly. Where do you see your market share breakdown AMD versus Intel platform? Which one's a better proxy?

Our share is majority Intel.

Okay.

And has that, I mean, if I'm correct that changed a little bit in that you previously, the Company had been supporting AMD platforms, I believe, is that correct? Is there any thought that you can gain some share back by diversifying?

We still, I think we still have platforms for AMD. Products for the AMD platform I think, though, that the majority of our revenues come from the Intel platform and the increase is largely a function of when the Santa Rosa platform ramps.

All right. Very good.

Our next question comes from Ross Seymour.

Hi, guys.

Just looking at the (disty) strength you saw on the quarter, looking back ADI is obviously a different company, some different trends, but they seem to see a big (disty) snap back and then somehow that petered out on them one quarter later. Have you guys seen any signs of the (disty) side slowing down whether it's kind of this quarter to date or any way you want to look at it?

Actually, Ross, I see slightly the opposite of that. The last quarter what I saw was while POS was quite strong, I saw the (disty's) not willing to put product on their shelves for whatever reason. And that indicated to me that end consumption was not necessarily that great even though their POS was relatively healthy.

This quarter what I've seen as I look at the numbers is that the POS and the (disty), the inventory is in line. So it tells me that there's a little bit more, maybe they just went, so they just didn't build up enough inventory in previous quarters and felt that they had to do this quarter but I think it's in line with POS. So my sense is that they are a little bit more bullish about the end consumption improvement.

Do they typically have lead times that have short enough that they can increase it in line with POS ahead of something like normal seasonality or do they have to, at some point, get ahead of the curve a bit?

Most of our products with a four to eight-week lead-time they have time, I think, to have it in line with POS in most cases. Some product lines have longer lead times like our powered suite business, obviously.

And then one for Emeka.

On the gross margin and while it's remaining flat with revenues growing because of the mix side of the equation, as we go into the second half of the year, is that mix side of the equation likely to continue to be a bit of a headwind given the end markets that you would typically see growth in or will some of the new products offset that?

Yes, our expectation here and our hope is that the new products will help to drive higher, a better mix in terms of gross margins so, and obviously with the volumes, too, that we're expecting to get we would expect to start seeing an improvement in the gross margins.

Okay.

Then the last question on that gross margin. Rather than looking at it at how much of the stuff you didn't write-off, how many charges you didn't take this quarter, did you sell any of the products that were formerly written off and get any benefit from that?

Yes, we did. We did sell some of the previously written down products and we did see some benefit of that. However, I need to caution that on the other side of this we sold those things at a very low selling price and so on the average inasmuch as it did benefit our gross margins, it didn't really benefit it that much.

But going forward, the key thing for us as a company is to make sure that we don't get into the pattern of having to write-down inventory that we have previously built up. Now given that that is just a normal part of doing business, but we just want to make sure that we control our inventory build a whole lot better.

Okay. Great. Thank you.

Our last question comes from Cody Acree.

Thanks for fitting me in here, guys. I'd like to add my congratulations.

Mohan, you obviously talked a lot about part of this upside surprise and (inaudible) the continuing strength of the recovery of the industry, where do you feel we're shipping to consumption levels now? Are we getting a snap back where we were shipping some fraction of consumption, we're still shipping a fraction but maybe a larger fraction of consumption or do you believe that we're getting back toward (inaudible)?

I think we're largely shipping at consumption levels. I don't see a lot of inventory build up in that channel, certainly, and I think our inventory's going in the right direction also internally. So my sense is it's more end consumption which is encouraging.

So you think this recovery in orders maybe if you can dig into that just a bit. So when we talked last quarter a lot of the new products were not likely to give you much real impact until the second half. It still sounds like maybe that's the case.

One, I guess first question is, are some of those products coming in a little earlier than you would have anticipated particularly in the wireless power management side? And then, two, in the industry side, is it just a resumption of orders to consumption levels or do you believe we're really seeing end market growth?

Well, so, let me answer the first one. You know, our power management products, the new power management products, they're starting to get traction but we won't really is see the benefit until the second half and beyond. We also obviously have a lot of protection products that go into the wireless space and the handheld space so, I mean you shouldn't look at it just at the power management turnaround, it's the protection of products are doing incredibly well in that space.

But coming back to the question on the overall demand I think it is a combination of improvement in our execution. As I mentioned, when you look at, when you bring out a product and get it designed in and then you have two or three competitors going up against the same socket, it takes as much in terms of sales execution to remain in the socket and generate the revenue as it does to get it designed in. So that's an important part of execution that shouldn't be forgotten.

But I think in addition to that, I think the industry for us impact a little bit we had definitely after the Chinese New Year an improvement in orders and sales momentum and it's continued into this quarter.

Very good. Thanks for fitting me in.

Okay.

With that, let me summarize by saying that Q1 was a good quarter for Semtech. We increased revenues sequentially by 4.5%, increased non-GAAP gross margin sequentially by 4%, increased non-GAAP EPS sequentially by 17% and increased our cash balance by $24 million.

In addition, we saw the first sequential growth in our power management business for almost three years. Returned to growth in our protection business, increased our new product releases by over 50%, increased design wins by 7% and continued to improve our overall execution. I still believe that there is 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 first quarter conference call, and look forward to updating you all next quarter. Thank you.

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