Semtech Corp (SMTC) 2008 Q2 法說會逐字稿

Good afternoon. My name is Dihanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the quarter two fiscal year 2008 Semtech Corporations 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 Corporations fiscal year 2008 second quarter conference call. I'm Todd German, Director of FP&A and Investor Relations and we have just released unaudited results for our second quarter that ended July 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 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 interested parties in accordance with Reg FD. If you have any questions about our future performance our or estimates of future financial results we will consider them now. We are unable to say if there will be another Reg FD compliant opportunity for you to ask questions before the next quarterly conference call. Second, this conference call will include forward-looking statements as defined by SEC rules. Forward-looking statements are statements other than historical information or statements of current condition and related 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, and plan.

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 condition, 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 companies products in particular, competitors actions, supply from key third party silicon wafer foundry and assembly contractors, manufacturing costs and yields, and 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 our annual report on form 10K for the fiscal year ended January 28, 2007, in our other filings with the SEC, and in material incorporated therein by reference. In light of these risks and uncertainties inherent in forecast and revenues and gross margins and in other projected matters, forward-looking statements should not be regarded as representations of the companies objectives or plans will be achieved or that any of its operating expectations or financial forecasts will be realized.

Semtech reports results based on Generally Accepted Accounting Principles, commonly referred to as GAAP. This quarter we have also made reference to certain non-GAAP measures. These non-GAAP items 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 the performance of the business.

As a further reminder, the second quarter results we published today in our press release 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 our website, Semtech assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For those interested learning more about Semtech, we will be attending and presenting at the Citigroup technology conference in New York next week. Mohan Maheswaran, Semtech's President and CEO, will be presenting at the conference on September 5th followed by individual one on one sessions with Mohan, Emeka, and myself. Thanks for your attention to this important preliminary information and I will now turn the call over to Emeka Chukwu, Semtech's

Thank you, Todd, good afternoon, ladies and gentlemen. Let me begin with our Q2 orders. Orders were very strong in Q2, resulting in a book-to-bill credit of one. Revenues for the second quarter of fiscal 2008 were $67 million, a 3% increase from the second quarter last year and a sequential increase from the first quarter of 11%. This strength was due primarily to demand for our computing, handheld, and industrial products.

Revenues for the second quarter were derived from the following geographic regions: 19% came from customers located in North America, 15% from Europe and 66% from Asia. Net terms orders accounted for 44% of shipments within the quarter. 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 accounted for 14% of revenue. Test equipment accounted for approximately 3% of revenue. Communications infrastructure accounted for 15%, industrial accounted for 38%. All the end Markets with the exception of communications infrastructure and test equipment saw sequential growth.

Revenues from OEM sales represented approximately 36% of total revenues for the second quarter, wide distribution represented approximately 64% of total revenues. Non-GAAP gross margin for the second quarter of fiscal 2008 was 55.4%, flat from the first quarter of fiscal 2008. The pressure on gross margin from a higher mix of computing power management revenue was upset by increased absorption from higher volumes and the strength in our protection on projects create businesses. In the third quarter, we expected to strengthen our computing power business to continue its pressure on gross margin. As a result, we expect gross margin in the third quarter of fiscal 2008 to be in the range of 54% to 55%. As a reminder, our gross margin model is 55% to 60%. We still expect to exit fiscal year 2009 at the mid point of the range, driven mostly by revenue from new products.

Non-GAAP research and development expenses were $9.5 million for the quarter. This represents 14.1% of sales compared to 15.3% in the previous quarter. We expect R&D spending to increase by approximately $500 thousand in the third quarter, mostly for expenses associated with new products. Non-GAAP SG&A expenses were $14.4 million for the quarter. This represents 21.5% of sales compared to 24.2% in Q1. We expect SG&A spending in the third quarter to increase by approximately $400 thousand driven by source commissions and higher revenue and the planned additional of [field cells] and application engineers.

Interest and other income rose $3.5 million in the second quarter. This includes a gain of $300 thousand from the sale of equipment. For the third quarter, we expect interest and other income of approximately $3 million. The decrease in interest income in the third quarter reflects a full quarters impact of funding the $150 million accelerated stock buyback. The Company's non-GAAP effective tax rate for the second quarter of fiscal 2008 was approximately 25.6% compared to 24.5% in the first quarter of fiscal 2008. This rate increase reflects the impact of the geographic mix of the compensation expense associated with the equity to employees during the second quarter.

We expect our non-GAAP effective tax rate for the remainder of fiscal 2008 to be 25.1%. These rates can vary from forecast based on geographical mix of our revenue and other factors. The dilutive share count for the second fiscal quarter was 68.8 million shares. The lower share count reflects the impact of the accelerated stock buyback announced by the company during the second quarter. We expect diluted weighted average shares outstanding of 67.5 million shares in the third quarter of fiscal 2008. 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 the impact of stock based compensation, the amortization of acquisition related intangibles, legal expenses related to the SEC investigation , legal expenses are associated with Semtech's ongoing litigation and independent shareholder litigation expenses. Net income was $12.5 million or $0.18 per diluted share for the second quarter. Net income for the same quarter last year was $13.3 million or $0.18 per share. For the first quarter of 2008, net income was $10.6 million or $0.14 per share. We expect non-GAAP earnings in the third quarter of fiscal 2008 to be between $0.21 & $0.22 per diluted share.

For the second quarter, equity compensation was $3.9 million, up from $2.5 million in the first quarter of fiscal 2008 due to options awarded to employees during the quarter. As previously reported, the company had not granted any option awards to employees in the past two years. We expect equity compensation to increase to approximately $5 million in the third quarter of fiscal 2008. This increase reflects the full quarters impact of the options granted in the second quarter. Our GAAP tax rate was 20.9% for the second quarter of 2008. We expect our GAAP tax rate for the remainder of fiscal 2008 to be 22%. Our GAAP net income for the quarter was $9 million or $0.13 per diluted share, up from $8.4 million or $0.11 per share for the same quarter last year and up from net income of $7.9 million or $0.11 per share for the first quarter of 2008. We expect GAAP net income of $0.15 to $0.16 per diluted share in the third quarter.

Turning to the balance sheet, Semtech ended the quarter with approximately $234 million of cash and investments. Excluding the funding of our $150 million accelerated stock buyback, our cash balance grew by $20 million during the quarter. During the second quarter, the company spent approximately $600 thousand on property, plant, and equipment. Depreciation and amortization for the second quarter was approximately $2.8 million, including approximately $275,000 of intangibles amortization.

In the third quarter, we expect capital spending to be approximately $2.7 million and depreciation to be approximately $2.4 million. During the second quarter, the company received 9.8 million shares under the terms of the accelerated share buyback program announced during the quarter. Accounts receivable day sales outstanding improved to 37 days for the second quarter from 38 days in the first quarter.

In absolute dollars, inventory increased by $1.5 million in the second quarter as compared to the first quarter of fiscal 2008 in line with the increased demand for our products, however, our days of inventory decreased to 63 days from 68 days in the first quarter of 2008. In absolute dollars, we expect a slight increase in inventory in the third quarter based on the growing demand for our products. All in all, this was our national performance in the second quarter. I will now hand the call over to

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2008 product group performance and then fiscal year 2008 outlook.

Orders in Q2 were very strong resulting in the highest quarterly orders in the history of Semtech. This marks a significant milestone for the company. Semtech revenues grew sequentially by 10.7% in Q2 to $67 million. We saw improvement in overall demand from the handheld segment, the computing segment, and the industrial and consumer segments. We also saw a distribution POS increase and distributer demand increase in line with the POS.

Now let me discuss the performance of each of our product groups. Our power management business increased revenue sequentially by approximately 27% in Q2. This is the second consecutive sequential increase in this business after almost three years of decline and is again one of the highlights of our Q2 results. The increase in our power business was driven by several segments, including the notebook computing segment, the handheld device segment, and the general consumer systems segment.

Our power management business is executing much better, and in the second half of fiscal year '08 we will start to release a series of new power platforms that will enable Semtech to regain some of the share loss over the last few years. Although there are still significant execution improvements to be made we are making good progress. Given that Q3 is a seasonally strong quarter for computing, handheld, and consumer systems, we expect our power management revenues to increase sequentially again in Q3; however, we do expect that this, that the increased computing power mix will negatively impact our overall gross margin in Q3.

Our protection business increased revenue sequentially by approximately 8% in Q2. This increase was driven by stronger demand for our protection products from the notebook computing, industrial, and handheld segments. We are very encouraged by the design and momentum of that protection products and our strategic customers and across a broad range of markets. Our protection business is very diverse from end market standpoint and the continued strength in this business reflects our leadership position in this growing market. The overall market strength combined with our design momentum leads us to believe that Q3 of fiscal year 2008 will be another fourth quarter for our protection business.

Our test and measurement revenues were down 37% in Q2. As we have discussed in previous conference calls, the overall demand in the ATE segment continues to be quite soft , while think are some small indications that the ATE segment as a whole could be improving modestly, we expect our test & measurement business to decline again in Q3. This decline will also negatively impact our overall gross margins. We still see a lot of customer interest in our new integrated pin driver portable platform and we are seeing solid design wins from this platform; however we do not expect to see meaningful revenue from this platform until fiscal year 2009.

Our power discrete revenues were up approximately 25% sequentially. This business is a supply constrained business driven by the demand for our aerospace, military, and industrial products. Our intense focus on improving our supply execution is resulting in an ability to serve this growing demand from our aerospace, military, and industrial customers. We will continue to see growth in this part of the business. We expect our power discrete revenues to remain solid in Q3 of fiscal year 2008.

Revenue for the advanced communications and sensing business increased by 2%. Strength in our medical and industrial sensing products was somewhat offset by weakness in our communications business. We are pleased at the product initiatives from our advanced comm. and sensing business as we have several new platforms being released over the next few quarters that will enable us to gain further momentum.

Our industrial radio, industrial sensing, consumer and medical/audio and advanced timing platform developments are all on schedule. Solid development execution on these new road maps is critical to the future success of our advanced comm. and sensing business. The business from these new product areas is expected to contribute in fiscal year 2009.

Future strength in our industrial sensing and medical audio products and some modest improvement in the communication segment, we expect revenues from our advanced communications and sensing business to remain solid in Q3. From a distribution POS standpoint, we saw the computing, handheld, and industrial spaces all increase, while the communications and the ATE spaces decreased. In Q3, we anticipate continued POS strength in the computing handheld, and industrial segments, and some modest improvement in the communications space.

Moving on to new products. We released 36 new products in Q2. This was an increase of over 38% from Q1 which was also a strong new product quarter for Semtech and demonstrates that our new product engine is flowing. The quality and the differentiation of our new products is significantly better than some of our historical products and design wins from these new products should start to enhance our new product revenue and overall gross margins from fiscal year 2009.

Turning to design wins, we recorded over 775 new design wins in Q2 which represents another solid design win quarter for the company. The design wins were once again well balanced across several of our product groups and regions. Finally, the change in culture at Semtech is enabling the company to perform at a higher level. While we still have a long way to go, I am comfortable that the execution in the company is improving and will further accelerate as we start to hit critical milestones in the second half of fiscal year 2008.

Now, let me discuss our outlook for next quarter. With the encouraging performance of Q2, including the record orders, and the continued improving execution, and given that Q3 is a seasonally strong quarter for Semtech, we expect Q3 revenues to be up 14% to 16%. To attain the mid range of our third quarter guidance, or up 15%, we needed net terms orders of approximately 36% of revenue at the beginning of Q3. We expect non-GAAP EPS to be between $0.21 and $0.22. The priorities for Q3 are continuing with the execution improvements and the cultural shift in the company, continuing the realignment of our global sales team including hiring some more direct people in specific locations, and starting to release some of the new product platforms that should drive gross margin improvement in fiscal year 2009. I will now hand the call back to the operator and Todd, Emeka, and I would be happy to answer questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Craig Hettenbach of Wachovia Securities.

Yes, thank you. Mohan, within power management and to follow-up on the new product introductions, can you just discuss the pace of new product introductions in power management, some design activity there as well as your visibility into some of the new product ramps into the back half of this year?

The product releases are accelerating. You know, I talked previously about getting the definitions right and getting those product out. We are starting to sample some pretty interesting platforms in the handheld space, I think, and also in the general consumer segment where we haven't historically had a large presence, and there's some powerful platforms I think that we have in the pipeline I want to say that I think should be released this quarter or next that will drive good revenue and margin improvement next year.

And just a follow-up on the consumer piece as a new power management product, any hurdles there to get into that market compared to where you previously played on the notebook and handset space?

Well, we had one of the strengths of Semtech is we do have a very broad portfolio and we have been penetrating a larger number of the consumer customers but not necessarily with power management products so for example, we have protection products in the TV space, you know, high GMI ports and things like that, so we have engagements with consumer companies but our power management business is not historically produced products for that market and we haven't had a lot of penetration, so I think the biggest hurdle for us is just really getting the awareness in those customers both in Japan and in Korea or Taiwan and China, mostly that we have good products for their applications and getting some credibility there.

Okay, and if we can discuss order linearity through the quarter, I know the July quarter started off very strong. Can you just discuss how it played out through the end of the quarter and then how August has looked as well?

Yes, Craig, this is Emeka. Actually the orders have been very strong as we went through the month of July, which is our last month for the quarter, we noted that the orders rates actually picked up and it has stayed very strong in the month of August.

Let me add to that, Craig. I mean, I think the fact that Q2 was a record orders quarter for Semtech would give you some indication of the strength the second half from an order standpoint, it really was quite strong, and it has continued to be strong as we've entered Q3.

Last one if I could. You mention you expect some modest improvement within the comm. market. I know that's an end market that's been undergoing some inventory correction, but anything else out there that you're not seeing greater strength yet or can you talk about when you do see some growth, some of the end applications you expect to drive your comm. business?

Well we think the comm. business coming back a little bit is really just the same customers and the same applications, just a little bit of strengthening in some of the historical applications we've been designed into, and that includes routing routers and some solid infrastructure, so I don't think there's anything too dramatic there, but it's kind of nice to see it come back, obviously communications is one of our higher margin areas, so any strength in that business does help us from a gross margin standpoint. Now, there is some new exciting areas that I think going forward hopefully will stop to accelerate the growth, and I've talked about some of those being, you know, WiMAX, Intercell, 3G Infrastructure but those are still TBD from a revenue standpoint.

Okay, thank you, guys.

Your next question comes from the line of Shawn Webster, JP Morgan.

Good afternoon. Good results, guys.

Thank you.

Can you give us, can you tell us what your lead times have been doing? It sounds like your orders really picked up and have been exceeding your expectations and can you quantify your book-to-bill a little bit for us?

Our lead times have relatively stayed the same at 4 to 8 weeks, and so far, our backlog, I'm not sure that we've previously given out that information.

Okay, but in terms of the double digit revenue growth, you haven't seen lead times for any of your products tick out at all?

Not in really what we're talking about. Nothing out of the ordinary.

Okay, so no capacity constraints, even in the compute side?

Correct. I mean, there's some pockets of tightening, mostly in back end areas, but nothing dramatic, Shawn. I would say that from our standpoint, most of our partners are telling us that our execution improvement in the overall , in some of these segments is clear that it's an industry wide phenomenon but our execution is a little bit, giving us a little bit more performance than most of our

Got you, and in the quarter, did you have any benefit from the sale of that written down inventory?

Nothing really. I mean, I think it's always this misnomered that there's a huge benefit from the sale of written down inventory. The one point that is missed is that for the most part, a lot of these materials were probably in die format and we didn't have to spend a lot of money to get them into finished goods and if we're reselling them we're not reselling them for that much so all in all there isn't really anything significant to talk about with (inaudible) it's contribution to the P&L.

Okay. As far as your gross margin outlook, computing and weighing it down a little bit as we get into Q3, do you think your gross margins will remain compressed, down the 50 basis points or whatever it's down in Q3 in Q4 as well before we start seeing it pick up again in fiscal '09 and what will be the drivers to get it to pick up again in fiscal 09?

Well, as we have talked about repeatedly before, I think we've made no bones about the fact that our gross margin especially is going to come from revenues from our newer products, and at this point, all we're prepared to say is that our gross margin model is 55% to 60% and we fully expect to hit the mid point of that model by the end of fiscal year 2009.

Yes, I guess what I was wondering was how much of that getting from here to there will be mix as opposed to your cost reductions?

Honestly, most of our gross margin improvement is going to be driven by product mix. As we get a higher mix of revenue coming from our newer power management products, getting ATE business to get back to growth and obviously, sustaining the growth that we've seen in our protection business. Those are really going to be the key drivers behind us expanding our gross margins.

Okay, thank you very much.

Your next question comes from the line of Craig Ellis of Citigroup.

Yes, thank you, and congratulations on the results, guys.

Thank you.

First a clarification, just on the strength that you saw in computing and in handset, can you just comment how much of that is really coming from better performing designs that you're getting or maybe demand that was a little better than you expected in the just reported quarter?

I would say that it's a little bit of both, Craig, but mostly it's seasonality related to the notebook power space. There's, you know, some element of the fact that Semtech hasn't really executed very well, I would say on the sales and applications front and we're doing a little bit better job there so there's some new sockets perhaps but this is mostly from the computing side, on the computing power side it's mostly the seasonality. On the handheld side, I would say it's mostly driven by just us kind of regaining momentum in that space.

Okay. That's helpful and then on the gross margin side, the changes as we look at the outlook, is that exclusively driven by mix shift within the mix towards more computing revenue in the quarter or are you seeing something different within computing as we think about pricing or other dynamics on a quarter to quarter basis?

No. It's mostly the fact that as a whole, we have more revenues from the computing segment, and mostly computing power segment, so within that there's nothing surprising. In fact if anything I would say that our strategy of holding not going out specific lower margin sockets, we're actually focusing a little bit on the areas where we can bring some value, I think, is the right strategy for us, so I think it is more just the overall mix of more computing power.

Okay, that's very clear, Mohan and then lastly for me, the new product activity certainly has taken a step function change up. You're seeing better execution in the business. Beyond just the out quarter, how are you thinking about hiring intensity in engineering and field sales as you look out over the next say three to four quarters?

So, I still think we have a lot of areas we can improve upon and on one of them is obviously the sales area and I include field application engineering in that but sales has a total, I'm not yet comfortable with. I think we have pockets of regions which perform very well but I think other regions can do much better and I think the balance from the standpoint of some of the markets we play in, I think we can do a better job there. Just in general, I think there are improvements in the sales infrastructure, some of our operations performance, and definitely hiring more FAEs and specific direct account managers in areas that I think we can get some mileage, our products are very good for any of the regions including China, including Taiwan, including Europe, and including North America and Japan and so my feeling is by adding some resources in those areas, and specifically targeting certain applications and customers, we can get more mileage. So, those are the key things.

That sounds like to me, Mohan, that hiring is going to grow certainly in the near term much slower than top line growth. Is that there? Are we going to see good operating leverage in the model?

That's true.

Okay. Thanks, guys.

Your next question comes from the line of Harsh Kumar, Morgan Keegan.

Hi, guys. First of all congratulations, very nice quarter, very nice guidance. A couple of questions. Mohan, you talked about new products picking up momentum towards the end of the year. Can you give us a hint of what areas you'd be targeting and what kind of products these are supposed to be?

Well, so the different product areas obviously there's protection continues to do very well in our handheld space and consumer space and industrial space and I think we'll continue with that momentum with new products with some new protection platforms, but the power space is really where I think a lot of the attention and the focus is and historically, we've been very strong in the notebook space and the computing space, and really to focus and what you'll see coming out over the next six months here and beyond is more of attention being paid to handhelds and also to the consumer and industrial communication spaces. Some of these products that come out, these platforms will look like general purpose platforms. They won't specifically or necessarily say that it's targeted at a certain market but I think that the important thing from our standpoint is it will be the first time we can take a new product platform into a specific market and get some mileage in a specific application, so that's the focus there and then on the advanced common sensing side, the platforms really will be targeted to that industrial sensing space, which includes pressure and temp sensing, industrial wireless which includes, you know, AMR automated meter reading, home security, home automation, the medical/ consumer audio, and then as I've mentioned on the comp side, 3G Infrastructure, WiMAX, Intercell type of applications.

Got it. And Mohan, as you start, as the company starts to get back into a more normalized growth rate, your operating margin system jumped up to about close to 20% in this recent quart ever. How should we think about your operating margin on a go forward? You just mentioned we should expect to see leverage. Can you give us what you're shooting for?

Well, Harsh, this is Emeka. Our long term operating model already is 25% to 30%, and we have said that we do also expect to hit the mid point of that range as we exit our fiscal year 2009 so obviously for us to do that, we are expecting a lot of operating leverage from the revenue growth.

That's very helpful, guys, and so areas of strength, orders were up pretty strong. Can you talk about what you're seeing outside of computing is there is any other area that stands out where you're seeing a lot of strength?

Well I think it's important to note that the strength came from handhelds. It came from computing and it came from industrial also, so it wasn't just computing. There was certain pockets, I mean, notebook computing was strong for us but handheld was also very strong and I think the consumer applications in industrial was very strong for us also as well so it was just generally quite broad strength for Semtech in Q2.

And Mohan, last question, how much are you booked for the mid point of your guidance?

Harsh, you know, we're not going to talk about specific numbers, but I can tell you that our bookings are strong and we are tracking very nicely to the chance we are required to meet our guidance.

Fair enough. Thank you, guys, again, congratulations.

Thank you.

Your next question comes from the line of Steve Smigie of Raymond James.

Great, thank you, and wanted to add my congratulations too, nice quarter.

Thank you.

So my first question was just you mentioned you're gaining some new success with power in the consumer, so I was hoping you could highlight some of the consumer applications?

Well it's pretty broad, the applications are things like TV's, like set top boxes, there's a very broad range of different applications. And now I should point out that Semtech has really not played in the consumer space historically in a big way, and so small gains for us make a big difference to us, and that's the important part of it, but generally, it's a lot of different applications, where consumer for me is still a very exciting segment. I think there are things in that segment, elements in that segment that play well into the strengths of Semtech which is, you know, we're able to bring leadership technology, integrated technology, combined power and protection, bring wireless capability to the space if we need to, sensing to the space and the consumer markets always change. The consumer applications change. The consumer is such a broad range of different applications that it gives us a lot of opportunity. We've just never focused on it so for some reason Semtech historically has been a very computing centric and industrial centric company and I think a little bit of consumer, it's good for us.

Okay, and anything on the gaming side?

We have opportunities I will say. That's about it.

Okay, you obviously gave very strong guidance here. Is any of that, I mean, maybe a little bit of a pull forward from the next quarter or how should we think as we exit this as you had two great quarters in a row which would seem like it wouldn't continue. Can you continue to grow in the following quarter?

Well I certainly don't think it's pull from Q3. I think what it is, sorry, from Q4. I think what it is is continued strength in computing. I think it's continued strength in handheld, and I think it's continued strength in industrial, so Q3 is seasonally a very strong quarter for Semtech. It's also, if you think about it this way, there's the seasonality aspect of it so we get the benefit of that. There's the execution improvement of Semtech which I think we are getting the benefit of and then I think we are starting to see traction from some of our new product platforms as well so you combine those elements together and you get the kind of guidance that we've offered.

And you think you can grow in Q4?

I don't want to look forward beyond Q3. I'm happy with growing 14% to 16% in Q3. If we can achieve that then we'll talk about Q4 after that.

Fair enough. Last question was just on some of the success you've seen in power. How much of it is sort of say power management on computing applications versus something like for core power management versus is there any service from white LED drivers or what types of products?

Yes, it's a little bit of everything. I would say most of the growth in Q2 was from more the computing side, and some of the consumer side, not so much from handheld, but I think that will change going forward. I think we will see more strengthen the handheld.

Okay, great. Thank you.

Okay.

Your next question comes from the line of Douglas Freedman of American Technology.

Great, thanks for taking my question, guys. Mohan, if you could, you're talking about a lot of strength coming out of the computing segment. What are you hearing as far as the reasons behind that strength other than seasonality and do you think it's above seasonality, is this normal seasonal patterns or how would you characterize it?

I think in the computing side, Doug, just in local computing, I think it's actually pretty typical. The problem that I think we all face is last year, it never happened and so when we see this year, we're kind of everybody is quite pleased to see it but I think it's quite typical, the computing segment in Q3 is typically a stronger quarter, so I think it's some of the other areas that I'm more surprised about, seeing strengthen some of the industrial and handheld for us is a little bit surprising but Q3 is typically strong for us.

I mean, are we talking numbers here are large enough that there's a concern that when we get out of seasonality, are you thinking that your seasonal pattern is taking a shift here or anything you can help us on understanding that reaction and do you think this is all being driven by demand or is there, you know, we're hearing out of other guys that there's some tightness in the supply chain. Are you able to sort of kickoff the best opportunities here since you are pretty much saying these aren't new products that are winning share. It sounds like you're, you know, is it possible you're picking up business at the fringe and as a result, able to really set your price here?

Well, I think there's a couple of things. One is I don't think yet we are in a supply constrained situation. I mean, there's some tightness in pockets but I don't think it's yet to the point where we can do anything like choose our price and stuff like that. That certainly isn't the case. I think as I mentioned, I think when I look at total strength, it's a combination of different things. One is the seasonality, but I think the other aspects of it are our execution and to some extent some of our new products are beginning to get traction. I wouldn't say it's all new products but it's certainly some of it is getting traction, even in the notebook. These are products we've had fairly recent successes with in terms of design wins.

Yes, that's terrific to hear the new products are gaining traction. I've been hearing the same so congratulations on that.

Thank you.

If you could comment on, you know it's been two years since the XEMICS acquisition. Can you tell us what your scorecard on that looks like now?

Okay, so that's a deep question. Let me frame it this way, that I guess when I joined the company, the one thing I noticed the return on R&D was very poor for XEMICS and they were an asic company so customers told us what they wanted and we did it for them. Today, it's a product company, a product business, we are developing road maps. We have some exciting road maps, some very good technology. The technology itself is enabling us and getting us into customers that really are quite surprising. I mean from the standpoint of they're big customers but because the technology is so compelling they are willing to and want to engage with Semtech, so it's today I would say it's a pretty good set of resources we have and capabilities. We still need to get the return on the R&D. That means driving the revenue and the operating margin goals aggressively which is what we're doing, so I'm pretty comfortable with where we are today.

All right, and if you were to, you know, I talked a little bit about the seasonal pattern. Can you talk to us a little bit more about what you're thinking there that it's going to look like?

Seasonality wise, I don't think, I mean for us, Q3 is typically strong, Q4 because we go into January is a little bit unknown, the Chinese New Year versus what happens at Christmas and those type of things, so I don't know that I expect it to be not as strong as Q3, I think, would be the seasonality pattern and then Q1 and Q2 back to normal levels and then Q3 strong again.

And then my last question for you, the ATE business. Is this a case, I mean, we heard from one or two places where the ATE business is starting to pick up. It sounds like it's not yet picking up for you. You're seeing one or two pockets. Was this a case where you think you might have lost some share in the existing platforms and the new platforms are just now launching? Can you help us understand what your expectations are around that ATE business?

Yes, I think if I go back, I think we have definitely lost share. I think it's mostly because the customers we were engaged with have lost share though and you know, there is some improvement. It's modest and some of the areas SOC and Flash perhaps are improving a little bit, but other areas are not so strong, so but when we talk about pick up, I mean it's really, it's quite small. It's not, you know, dramatic, so if they look at our guidance for next quarter of being 14% to 16% and I look at some of the messages I hear from the ATE space is coming back and the numbers that are thrown out, it's very modest.

Okay, terrific, and nice job on the turnaround here and best of luck.

Thank you.

Your next question comes from the line of Cody Acree of Stifel Nicolaus.

Thanks, Mohan. And congratulations. Maybe we could go back just a little bit to the order trend versus consumption. Could you -- we've definitely heard from companies like Intercell and Fairchild that talked about orders outstripping consumption leading to maybe even double bookings. Do you believe you're seeing any of that even if you aren't seeing constraints necessarily, just the need of the channel to rebuild some inventories?

Well, so if I look at our booking strength, clearly in Q2 , the bookings were quite linear with mostly the strength in the second half as we went into Q2 but then I really, you know, we take a look at the terms required at the beginning of the quarter in Q1 going back to Q1, we entered Q1 and we needed 52% turns and in Q2, we entered Q2 and we needed 43% turns to hit the mid point of the guidance, and in Q3, we now need, we've mentioned 36% turns to make the mid point of our guidance, so as we look at that number and we take a look at what turns we need and where the demand is coming from, we're quite confident and we always describe this to some level of detail that there's not much, if any, double bookings, at least none that we can speak

Mohan, even if you don't believe there's necessarily double bookings, do you believe that the channel is going through an effort of restocking some inventories that maybe they got a little bit too conservative on earlier?

Well that's possible but POS is still very strong as I said that the inventory build and the one thing that I look at very closely is how is that tracking to POS? So if the POS was down and inventory was up, then that would be a little bit of a concern, but POS is up and inventory is up in line with it, plus, you know, normally when you see this type of inventory build, you see it in one segment, I mentioned that computing is strong but handheld is strong also and industrial is strong also, and consumer looks like it's quite strong, so Semtech is a pretty broad, we have a pretty broad portfolio and we play in a pretty broad range of markets and so there seems to be general strength in most of the areas we play in but I would say that as I said that there's three aspects I think to our growth, one is, the market itself and the demand and the seasonality and the second is the execution improvement and the third is the new product traction.

Perfect, perfect. Lastly, on the last conference call or maybe even the last couple of conference calls, I asked how you were doing within your wireless business and when we would start to see some real share gains coming back versus just seasonal uptick. Last quarter, you said that the uptick was primarily just recovery in the market. Does it now sound like you're actually regaining traction? Is this when we finally start to see Semtech retaking some share and then what kind of momentum do we expect from here?

When you say wireless, Cody, are you talking about the handheld space or are you talking about our wireless and sensing?

I'm sorry, really talking about the handheld power management which had previously been a problem?

So I'm comfortable in saying that in the handheld power space we're going to start to see us gaining some of our share that we had lost back again, and on the protection side I think we're continuing to hold the share and grow with the market.

If you had to handicap, obviously these things turn over, over multiple of applications, over multiple customers, and throughout the seasonalities, where do you think you are in the process of getting back some normality in that handheld power management business to where we're tracking more along kind of growth lines of the business and are you 20% through or have you seen the bulk of it?

No, very early stages.

Very early stages. All right, perfect, thank you and congrats.

Okay, thank you.

Your next question comes from the line of Jeff Rosenberg, William Blair & Company.

Could you give us the current status of the mix between protection and power management and then any other parts of the business that are material enough to break out?

Well protection is about 45% of the business for Q2 and power is about 28%.

Okay, and when you look at Q3 and think about the relative strength of each, should we expect the same sort of pattern where very high growth in power management and solid but more traditional good growth in protection, same pattern as Q2?

It's difficult to say because it depends on the different end markets. Protection, we have possibly a little bit more driven by handheld and power at this point in time is a little bit more driven by the computing side and the general industrial and consumer side so it's tough to say but I think that's okay to view it that way for a guideline.

And I guess, I mean, you're sort of saying but then sort of not saying in a sense you're expecting better performance going forward but it does seem clear that you're regaining share in power management. That is the case, right? I mean with 27% sequential growth you're clearly seeing some market share recapture, isn't that fair to say?

Yes, I think that's fair to say, but I think you have to look at when I look at market share gain from my standpoint, I look at okay, what are we doing to get that share back from new product road maps versus improved execution versus seasonality that and some design circuits that we happen to win and it's a little bit balanced. We have got some sockets as I said in the computing space and in some other spaces with some of our new products and some of our old product the that demonstrates to me that we're executing in sales a little bit better than we have done historically but the point I'm really making is that our power business, the sustainability of this power business and the growth of the power business going forward in all of the markets we play in is going to be driven by the new power platforms that we bring out and that's the key to our continued success.

All right, so this is kind of a bounce back better execution getting back to places where you've been strong in the past?

Yes.

Within that realm, is there anything you've done differently in terms of pricing strategy? I mean, I know there's a lot of moving pieces the gross margins are a little bit lower than historical levels and as you have won back some of this business, in more mature spaces with more mature products whatever it might be, is there something you're doing strategically that just gets yourself back there pricing wise a little bit different than what was being done previously?

I would say no. I think we are actually trying to stay awake away from some of the lower margin areas, but obviously once you're designed in, you're engaged, you want to keep the relationship and we have new products coming out, this applies both to computing, handheld and consumer. The markets all behave the same way that really when you bring out your new products you want to be able to have a customer there and be engaged with the customer so that you can get those designed in and those will drive the higher margin, so I would say it's more a question of us just being a little bit more aggressive from a sales standpoint and making sure that where we have a good product and we feel like we have a good road map and we have a good opportunity to become a successful partner for the customer that we're aggressive in insuring we get our design wins.

Okay, and is that, are things equally weighted in terms of your coming back in certain areas, desktop and portable or is it really much more weighted towards notebook?

Well, it's pretty balanced. We've got at least for Q2 I would say that notebook, but also industrial consumer has got strength.

I was talking about within computer desktop versus notebook?

Oh, it's notebook. Yes.

Yes. And is it traditional voltage regulators or are there other applications where you're doing well? Is it the core power?

No, it's mostly peripheral.

Okay, so not the core regulator?

Right.

Okay, thanks very much.

Okay, thank you.

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

Hi, guys, nicely done. I had a couple of questions for you, Mohan. First, you know, could you give us a more granular number on what the notebook growth actually was in the quarter? Are we talking something more than the overall segment grew? Was it in line with the power management segment?

In absolute dollars, it was up about roughly 28% to 30%.

Okay, so slightly better than overall power management?

Yes.

Mohan, I think you talked about the handheld platforms in the area where you're going to gain share. Can you give us anymore details on what those platforms really are persay, and are there in addition to that, are there other specific areas where you feel more confident that you're going to gain share going forward?

So I'd rather not at this point, Sumit, I'd rather wait until we've released them, but I'm confident that we'll gain share because we, in some of these areas we have no share today or very very little share, so, you know, part of it is just looking at our portfolio of products and recognizing that the business today that we have in power has largely come from notebook, desktop computing, server computing, and some handheld sockets, and going forward, a lot of the new platforms are going to help us get into new spaces, so that's kind of what drives my confidence level that we'll gain share in some of these other applications.

And then you've talked about the improving mix of the driver for gross margins. If you had to take a stab at it given your initiators in handheld industrial versus consumer here where would you peg the gross margins of that mix of the new product the that you're getting out versus your corporate average? Is it below, is it above or just in line and if it's above, is it materially above, somewhat above?

If we look at it by-product groups, so protection is above our corporate average, I wouldn't say it's significantly above it but it's modestly above our corporate average, power discrete is at our corporate average and test of measurement is above our corporate average, and certainly our comm. business is well above our corporate average and wireless and sensing business is at that corporate average, and our power is well below, and of the power, of course the computing aspect, a portion of that is well below and other parts of the power business are closer to the, and are not so far below let's put it that way of the corporate average so any improvement we get in our power management gross margins through new products I think is going to shift the corporate average.

Okay, thank you very much.

Okay.

Your next question comes from the line of Ross Seymore of Deutsche Bank.

Hi, this is [Bob Guzvardi] for Ross and congratulations, guys, great quarter.

Thank you.

I have a question, I know you don't give an exact bookings number but you mentioned the orders were a record for Semtech. Would it be safe to say your bookings were higher than previous peak in July 06? The July 06 quarter?

Yes, this was the highest quarterly orders for the company so it beats any previous quarter.

And would that be right saying that July 06 was the previous peak?

No, actually it was back in 01.

Oh, okay.

Fiscal year '01.

Wow, okay. Fair enough. Can you guys talk a little bit about the market share gains? Is it pretty broad based or are there certain programs or certain design wins that are starting to ramp for you or that's going to cap in maybe Q3, if you can just talk a little bit about that, or is it broad based or some specific programs?

Well I don't want to talk about share gains on a specific basis. I would say as you look at power and it grew 27%, protection grew 8% and those two areas and our power discrete business are 25%, it is clear that I think that in all of those three areas where either gaining share or certainly keeping our portion of the market as it grows, so those would be my comments, and each of the different subsegments of power, there may be some wins and some losses, but I think in general, we're gaining.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of David Wu, Global Crown Capital.

David, you there?

David, your line is open.

Hello?

Hi, David, go ahead.

Yes, I apologize. Most of the questions have been asked and answered. I just have two quick ones. Number one, historically, when I look at your numbers, when you meant that your fourth fiscal quarter is not as strong as your third fiscal quarter, you're not talking about your talking about total absolute growth as opposed to absolute dollar level, right?

Correct.

The other thing I was wondering is has there been any change in any of your lead times in your products because when I see these 20 odd percent sequential growth order rates, I was wondering whether lead times have gone out which added to the normal seasonal pickup in orders?

No, our supply lead times are in the four to eight week range and they've been that way for some time. There's some tightening as I said in some areas but it's not noticeable and it's not the reason why the demand is so strong.

Okay, thank you.

Your final question comes from the line of Kelly Pan of Pantheon Capital.

Hi, yes, thank you very good nice quarter. You gave the percentages of revenue for power management and protection. How about power discrete?

It's about 9% and AC&S is about 15%, and test and measurement is about 3%.

Three.Thank you very much.

Yes.

There are no further questions at this time.

Okay, so, let me summarize by saying that Q2 was another good quarter for Semtech. We increased revenue sequentially by 10.7% and increased non- GAAP EPS sequentially by a very respectable 29%. We also achieved record orders in the history of the company , and increased our cash balance by $20 million. In addition we saw the second sequential quarterly growth in our power management business after almost three years of decline, and finally we saw four of our five major product groups increase revenue sequentially and saw the new product releases and new product design win momentum from all of our product groups accelerate. I still believe that there is potential upside to our performance from both execution improvement and traction from new product platforms and so I remain very optimistic about the future of Semtech. With that I'd like to thank everyone for participating in our second quarter conference call and look forward to updating you all next

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