Semtech Corp (SMTC) 2008 Q3 法說會逐字稿

Good afternoon. My name is Deketria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech fiscal year 2008 third quarter results 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 third quarter conference call. I'm Todd German, Director of [FP&A] and Investor Relations and we have just released unaudited results for our third quarter that ended October 28, 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 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, and plans. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include: worldwide economical and political conditions, the timing and duration of semiconductor market upturns or downturns, demand for cellular phones, personal computers, automated test equipment, demand for semiconductor devices in general, demand for the companies products in particular, competitors actions, apply from key third party silicon wafer foundries and assembly contractors, manufacturing costs, relations with strategic customers and risks associated with the businesses of major customers.

In addition to considering these risks and uncertainties, forward-looking statements should be considered in conjunction with the cautionary statements contained in the risk factor session and elsewhere in our annual report on Form 10K for the fiscal year ended January 2000 -- January 28, 2007, and our other filings with the SEC And in material incorporated therein by reference. In light of the risks inherent of forecast and revenue and gross margin and in other projected matters, forward-looking statements should not be regarded as representations that 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 nonGAAP measures. These nonGAAP items are provided to enhance your overall understanding of our comparable financial performance between periods.

In addition Management generally excluding certain items in managing and evaluating the performance of the business. As a further reminder, the third quarter results we published today in our press release are subject to customary quarterly review by our independent auditor and should be considered preliminary until we file our quarterly report on Form 10Q. Although a replay of this call will be available on the investor relations section of our website, we assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Thanks for your attention to this important preliminary information, and I will now turn the call over Emeka Chukwu, Semtech's CFO.

Thank you, Todd. Good afternoon, ladies and gentlemen. Today, we announced that we have reached settlement with the last of the three insurance companies we sued to recover amounts we paid in fiscal year 2004 to resolve a customer dispute. The insurance company has agreed to pay us the sum of $6.5 million in two installments fiscal year 2009. We expect to recognize the entire amount in income in our first fiscal quarter of 2008. We expect the recognition of the recovery net of related legal expenses to contribute approximately $0.07 to our fully diluted GAAP earnings per share in the fourth quarter. Please refer to the Form 8K filed earlier today for the full details of the settlement.

Now, moving on to our Q3 financial performance. Let me begin with our Q3 orders. Orders were very strong in Q3, resulting in a book-to-bill greater than one. The strength was broad-based driven by all our target segments with the exception of the computing segment. Revenues for the third quarter of fiscal 2008 were $78.6 million, a 23% increase from the same quarter last year and an increase of 17% from the second quarter. This strength was due primarily to demand for our computing, handheld, industrial, and consumer-related products. Revenues for the third quarter were derived from the following geographic regions: 21% came from customers located in North America, 13% from Europe, and 66% from Asia. Net (cost) orders accounted for 35% of shipments during the quarter.

Revenues by end markets were as follows: revenues from handhelds accounted for 27% of revenue. Computing accounted for 24% of revenue, test equipment accounted for approximately 1%, communications infrastructure accounted for 15% and industrial accounted for 33%. Our revenue growth was broad-based. All the end markets with the exception of test equipment saw sequential growth. Revenues from OEM sales represented approximately 38% of total revenues for the third quarter, wide distribution represented approximately 52% of total revenues. NonGAAP gross margin for the third quarter of fiscal 2008 was 55%, which was at the high end of our guidance. It was down 40 basis points from the second quarter of fiscal 2008. This decline was due to a higher mix of computing power management revenue. In the fourth quarter, we expect an increase in our gross margin in the range of 55.5% to 56%, as revenue mix shifts to products with higher margins. As a reminder, our gross margin model is 55% to 60%. We still expect to exit fiscal year 2009 at the mid point of this range driven mostly by revenue from new products.

NonGAAP research and development expenses were at $10.2 million for the quarter. This represents 13% of sales, compared to 14.1% in the previous quarter. We expect R&D spending to increase by approximately $300,000 in the fourth quarter, mostly for expenses associated with new products. NonGAAP SG&A expenses were $14.4 million for the quarter, flat from last quarter. This represents 18.3% of sales compared to 21.5% in Q2. We expect SG&A spending in the fourth quarter to increase by approximately $200,000 driven by the addition of sales and application engineers. Interest and other income was $3.1 million in the third quarter. For the fourth quarter, we expect interest and other income of approximately $3.1 million.

The companies nonGAAP effective tax rate for the third quarter of fiscal year 2008 was approximately 10.8% compared to 25.6% in the second quarter of fiscal 2008. This rate was lower than expected due to the impact of favorable regional revenue mix, favorable tax treatment in a foreign jurisdiction for all realized currency exchange activity associated with the weaker dollar. Relative to our guidance going into the third quarter, this -- these factors contributed approximately $0.05 to both GAAP and nonGAAP fully diluted earnings per share. Obviously on a go-forward basis, given the one-time nature of some of these factors, we do not expect our tax rate to remain at such low levels. We expect our nonGAAP effective tax rate for the fourth quarter of fiscal 2008 to be 20.8%. As a reminder, the actual rate can vary from the forecast based upon geographical mix of our income and other factors, such as those previously mentioned.

The diluted share count for the third fiscal quarter was 66.3 million shares. The lowest share count reflected 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 fourth 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 stock buyback program.

On a nonGAAP basis, excluding the impact of stock-based compensation, the amortization of acquisition-related intangibles, legal expenses related to the SBC investigation, legal expenses associated with Semtech's now settled insurance litigation, and independent shareholder litigation expenses, net income was $19.4 million or $0.29 per diluted share for the third quarter. Net income for the same quarter last year was $14.1 million or $0.19 per share. For the second quarter of 2008, net income was $12.5 million or $0.18 per share. We expect nonGAAP earnings in the fourth quarter of fiscal 2008 to be between $0.24 and $0.25 per diluted share. For the third quarter, equity compensation was lower than expected at $4 million, flat from the second quarter of fiscal 2008. This quarter's lower than expected amount reflects a high level of forfeitures than originally anticipated. We expect equity compensation to return to a normalized amount of approximately $4.7 million in the fourth quarter of fiscal 2008.

Our GAAP tax rate was 1.7% for the third quarter of 2008. As discussed earlier, our third quarter tax rate benefited from a favorable mix of regional income, favorable tax treatment in Switzerland related to the weakening U.S. dollar. We expect our GAAP tax rate for the fourth fiscal quarter of 2008 to be 15.7%. Our GAAP net income for the quarter was $16 million or $0.24 per diluted share, up from $6.3 million or $0.09 per share for the same quarter last year, and up from the net income of $9 million or $0.13 per share for the second quarter of 2008. Including the favorable impact of the settlement of our insurance litigation, we expect GAAP net income of $0.25 to $0.26 per diluted share in the fourth quarter.

Turning to the balance sheet. Semtech ended the quarter with approximately $266 million of cash and investments on the balance sheet. Our cash and investments grew by approximately $31 million during the quarter. During the third quarter, the Company spent approximately $700,000 on property, plant and equipment. Depreciation and amortization for the third quarter was approximately $2.5 million, including approximately $275,000 of intangibles amortization.

In the fourth quarter, we expect capital spending to be approximately $2 million. This increase in capital spending is to support the expected production ramp of newer platform products in our power management and communication businesses, and to support the increased supply ramp up of our power discrete products. We expect depreciation and amortization to be approximately $2.5 million in the fourth quarter. The day sales outstanding and accounts receivable improved to 35 days in the third quarter from 37 days in the second quarter. In absolute dollars, net inventory increased by $2.5 million in the third quarter as compared to the second quarter of fiscal 2008, in line with the increased demand for our products. However, our days of inventory decreased to 60 days from 63 days in the second quarter of 2008. In absolute dollars, we are expecting inventory in the fourth quarter to be flat to slightly up. In summary, this was a very solid financial performance in the third quarter. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2008 product group performance and then our Q4 fiscal year 2008 outlook. Q3 of fiscal year 2008 was an exceptional quarter for Semtech. We achieved the highest orders and the highest revenues in any single quarter in the company's 47 year history. Both these achievements mark significant milestones for the Company. Semtech revenues grew sequentially by 17% to $78.6 million, and on an annual basis, Q3 of fiscal year '08 grew 23% versus Q3 of fiscal year '07. NonGAAP EPS grew sequentially by 61% and grew 53% on an annual basis to $0.29 per diluted share. We are very pleased with both our revenue growth and our EPS growth in Q3. Four of our five businesses grew sequentially and two of our businesses also achieved record high revenues. We saw improvements in overall demand from the handheld, computing, industrial and consumer segments. Overall nonGAAP gross margins came in at [65%], which was at the high end of guidance and was at the low end of our gross margin model. Now let me discuss the performance of each of our product groups.

Our Power Management business increased revenue sequentially by approximately 26% in Q3. This is the third consecutive sequential increase in this business after almost three years of decline and is again one of the highlights of our Q3 results. The increase in our Power Management revenues was driven by the computing segment and the general consumer systems segment. Our Power Management business is executing much better and we are starting to see the results of this improved execution. In Q3, we introduced several new Power Management platforms that are already gaining traction in the market with several design wins. These new platforms include our latest [white] LED-driver platforms for notebook LCD panels, LCD TVs and smaller-size LCD panels used in handheld devices.

In Q4 and in the early part of fiscal year 2009, we expect to release several more new Power Management platforms that will enable Semtech to participate in a much larger area. The focus of the new platforms will be the handheld, the consumer, and the industrial segments. Although there are still some execution improvements to be made, we are making good progress in our Power Management business. We are confident the momentum from our new products will drive further revenue growth and margin expansion in fiscal year 2009. Given that our fiscal Q4 is a seasonally softer quarter for computing, handheld and consumer systems, we expect our Power Management revenues to be approximately flat to slightly down in Q4.

Our Protection business increased revenue sequentially by approximately 23% in Q3. Q3 was another record revenue quarter for our Protection business. This increase was driven by stronger demand for our Protection products from the handheld, computing and industrial segments. This increase in demand for our Protection devices is being driven by the increase in the number of ports requiring protection and the increase in ESP protection requirement, across a broad range of end markets. In addition to the very strong revenue growth, we also released product expansions to our new protection platform targeted at the high speed I/O ports for cell phones, GPS systems, notebook computers and other portable systems, and we also released the industry's first 2.5 volt protection device designed for lightning surge protection on ethernet and other high speed interfaces. Our Protection business unit continues to execute quite superbly, and strategically we are investing to insure that we can continue to grow from the strong position we have today. We are very encouraged by the design win momentum of our Protection products across all our target markets. Due to our Q4 being a seasonally flat quarter for handhelds and computing, we expect our Protection revenue to be approximately flat sequentially in Q4.

Our Power Discrete revenues were up approximately 4% sequentially in Q3, and again achieved another revenue record. We are delighted with the execution within this business unit and our customers continue to award us increasing opportunities as we support their already supply constrained demand. This business is driven by demand from the aerospace, military, industrial, and high-end medical markets. Our focus on improving our supply throughput is driving an ability to service unfulfilled demand in these market segments. We will continue to see growth in this part of the business and expect our Power Discrete revenues to increase in Q4.

Revenue for the Advanced Com and Sensing business increased sequentially to 7%. The strengthen this part of our business is driven by increasing demand for our Advanced Communications products. We are pleased that the product initiatives from our Advanced Com and Sensing business, as we have recently introduced several new platforms targeted at the industrial wireless and the industrial sensing markets. These platforms include our: SX1211, RF transceiver platform for very low power wireless sensor systems and RSX8724, ultra small sensing platform targeted at pressure sensing, temperature sensing and magnetic sensing applications. We also have several new platforms in the pipeline that will further our position in the advanced timing segment and consumer analog segments. Solid development execution on our new road maps is critical to the future success of our Advanced Com and Sensing business, as we expect these new platforms to positively accelerate the top line and drive further operating leverage.

The business from these new platforms is expected to contribute in the second half of fiscal year 2009. In Q4 we expect revenues from our Advanced Communications and Sensing business to be approximately flat. Our Test and Measurement revenues were down 60% in Q3. The demand in the AT segment continues to be very soft. The recent decline in our Test and Measurement business has negatively impacted our gross margins, but we do expect the Test and Measurement business to increase modestly in Q4. We also continue to see tier one customer interest in our new integrated pin driver cobalt platform; however we do not expect to see meaningful revenue from this platform until the second half of fiscal year 2009. From a distribution POS standpoint in Q3 of fiscal year '08, we saw total POS increase nicely. The POS increase was driven by all segments with the exception of the ATE space. Distributer inventory declined modestly in Q3.

Moving on to new products. We released 17 new products in Q3, and new product development machine continues to flow well in all of our businesses; however this is still an area where our execution can be further improved and we are focused on making these improvements. The quality and differentiation of our new products is significantly better than some of our historical products. Design wins from these new products should start to enhance our new product revenue and overall gross margin in fiscal year 2009. Turning to design wins, we recorded over 789 new design wins in Q3, which represents another solid win -- design win quarter for the Company. The design wins will once again well balanced across several of our product groups and regions. With the new platforms we have recently announced we expect to see a continuation of the strong design win momentum in the future.

Let me now comment briefly on the settlement of our insurance litigation that we announced earlier today. The settlement of this lawsuit which has been ongoing for several years is another major milestone for the Company. The settlement ends a chapter that can only be described as a nonvalue-added-but-necessary distraction for Semtech Management. With this chapter now closed and the distraction gone, Semtech Management can focus more auto tension on other matters, such as further execution improvement. We are very pleased with this closure. Finally, the change in culture at Semtech is enabling the Company to perform at a much higher level. I'm quite comfortable the execution in the Company will continue to improve and will further accelerate as we hit critical milestones in Q4 of fiscal year '08 and Q1 of fiscal year '09.

Now, let me discuss our outlook for next quarter. While Q3 was a spectacular quarter for Semtech, including record orders, record revenues, and a [51%] sequential growth in nonGAAP earnings per share, or 33% sequential earnings per share growth without the one-time tax benefit, we have seen a modest slowdown in orders in November. The orders are still very healthy, but there's slight softening gives us some cause for concern in growth in Q4. We are there for guiding Q4 revenues to be flat to down 4%. To attain the mid range of our Q4 guidance, or down 2%, we needed net terms orders of approximately 31% of revenue at the beginning of Q4. We expect nonGAAP EPS to be between $0.24 and $0.25.

The priorities for Q4 are: continuing to drive our new product release machine, to insure that our new platforms are released on time, continue the realignment of our global sales team including hiring more direct people in specific locations, and starting to focus on gross margin expansion in the Company through the introduction and design of new platforms. I will now hand the call back to the Operator, and Todd, Emeka and I would be happy to answer any questions. Operator?

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from a Rick Schafer with CIBC World Markets.

Hi, guys, this is Dan Morris calling in for Rick. Nice quarter. Just looking at the gross margins, it looks like it did come in a little bit higher -- at the high end of your expectations as you mentioned. Could you just talk a little bit about maybe why that was so?

This is Emeka. It's actually very simple, as we have tried to state previously, gross margin is highly dependent on the mix of revenue for us. What we saw going into the quarter, we didn't expect our protection business and our communications business to be as -- to come in as strong as they actually did, so that was the key driver for us coming at the high end of the guidance.

Okay, and in terms of maybe looking at the PC segment which obviously was pretty strong. And talking about any of the incremental share gains you're getting there, how much of that was related to maybe some of those supply constraints that people have been talking about, or --

Well, our computing business is quite broad. I mean, it's not just Power Management, it's protection, as Emeka pointed out, our protection business is doing very well in the computing space, and in the power space, we tend to play really on -- in peripheral areas. We aren't going off to some of the kind of more commodity areas which I think are the major kind of supply constraint areas, so I think most of our business in the power space is really quite robust and driven more by end demand versus other suppliers not being able to supply.

Okay, great. And lastly, could you talk a little bit about the order strength that you saw, if it's continued into Q4, maybe how it's tracking compared to your expectations and seasonality?

Well, Q3 was an incredibly strong quarter, obviously we had record orders and record revenues, so continue -- expecting it to continue at that rate was probably unrealistic, so I would say Q4, the orders have softened a little bit. Some of the lead times are a little bit longer than in Q3, but still fairly healthy and that's why as we guided flat to down 4%, the terms percentage required is fairly reasonable.

And could you quantify what those terms are?

We said 31% at the beginning of the quarter, so we came into Q4 we needed 31% to hit the mid point of our guidance.

Alright. Thank you.

Your next question comes from Doug Freedman with AmTech Research.

Hi, guys, thanks for taking my question. Nice results on the quarter, but clearly I think the focus is going to be on what you guys are seeing going forward. With the order slowdown that you've seen thus far in the quarter, Mohan, can you give us a little bit more color on where -- if you would characterize it as seasonal, or is this something that you think is more of a demand-related issue with your customer base?

Yes, I would characterize it more as seasonal, Doug. I mean, from my perspective, we had a very strong Q3 and come into Q4 towards the -- November, end of November and into December timeline, most of our customers are kind of waiting to see what is going to happen at Christmas, I think, and Christmas is good, we may see a pick up in the orders in January. So I -- this is not really abnormal from my perspective. I've seen this in the consumer space. I've seen it in the computing space. I've seen it in the handheld space, so it could change very quickly, and because we had very strong orders in Q3, just I still think the orders are very healthy still. It's just a little bit of softening and a little bit of more lead time on the orders there.

Speaking of lead times, where do they run, and how did they track in the quarter?

Lead times right now are roughly eight to 12 weeks and that's not too far off from what they were last quarter.

Okay, so pretty stable. And are you seeing any cancellations?

No.

And with your 31% turns required to make the quarter that was at the beginning of the quarter, with four weeks to go, how much of the turns were you able to achieve, or are you still looking for sort of turns -- with an eight to 12 week lead time, I'm thinking new order turns are going to be half to line up with the available inventory?

Yes, we don't give that number out, Doug, so all I can say is that the record quarter we had in Q3, and the guidance we've given in Q4, we feel it's still a pretty strong quarter for us.

Alright. Moving on just real quickly, you mentioned strong design wins. Can you highlight whether those design wins if there's any change in the weighting of the design wins, if it's more skewed say towards the handset market, consumer, industrial?

Yes, the one thing I can say about that is we are getting more design wins now in the handheld in power, which we've had a little bit of a time where we haven't had a lot of success there. And from our protection business, I'd say it's fairly broad. The design wins continue to do quite well in handheld and consumer and communications and industrial, and one of the pleasing areas is advanced com and sensing area, we're starting to get very attractive design wins in the industrial sensing and industrial space as well.

All right, terrific. And my last question, are you -- clearly the world is worried about macro recession coming across and hitting the U.S., possibly spreading to other markets. Are you seeing signs of that show up in your customer base and the way they're behaving? Are we seeing sort of changes in new product introduction schedules or urgency for product deliveries, or sampling? Anything that you can give us as far as what you might be seeing as sort of early indications of sort of a softening environment out there?

Well, the only thing is what I said is on the orders being a little bit softer than Q3. Everything else still seems to be very robust. The design win momentum seems to be robust and the demand forecast that we have is very robust for Q4. And as we look at it, we look at it pretty much every week and it still seems very healthy, customers are fairly bullish about the handheld computing space, the consumer space and what's going to happen during the Christmas period. So I think it's just those macroeconomic factors kind of put everybody on the nervous end, but we don't really see that from our customers.

Terrific. Thanks so much, guys, and a congratulations on a strong quarter.

Thank you.

Your next question comes from Harsh Kumar with Morgan Keegan.

Hi, guys. A couple of questions. Kind of continuing along the same lines, Mohan, when did you start seeing signs of -- you described the environment and orders to be modestly slow. When did you first start seeing that?

I would say probably second week of November.

Okay. Fair enough. And then on computing, guys, you said your computing would be off a little bit in the January quarter, Mohan. Is -- do you think that's just a broad market, or are you guys strategically moving out of computing? Can you help us with any insight to what's going on there?

Well the computing sector, I think in December one would expect it to be softer a little bit, and our computing power space, when we look at the Q4 timeline, we expect it to be flat to slightly down from seasonality standpoint. The question is what happens after that and what happens in January, and it may come back strong as I talked about in a given, what happens -- depending on what happens at Christmas time, so I think it's seasonality driven. I don't think that it's anything specific to us or what we've talked about, although computing isn't -- computer power isn't a strategic focus for us. Obviously the protection business is doing well in computing as well, so as we look at that marketplace, we have to track very carefully what it's doing from a seasonality standpoint.

Got it, Mohan. That's helpful. Also, a couple of detailed kind of housekeeping type questions. Did you give what Power Management is as a percentage of revenue, Mohan?

It's actually 30%.

30%?

Yes.

Okay and that's where you're seeing it be flattish to slightly down in the June quarter, I think. And then what was, would you be in a position to give us what your new platforms or your new product revenues are, the areas that you are getting ready to enter into, Mohan, in perhaps the late part of this year?

Well, I've talked about some of the new platforms that we come out with. I would say that those are our platforms that put us into the same space that we've been in. Some of the new platforms we have coming out, we haven't released them yet, Harsh, so I don't want to talk about them yet, but they will take us into new [sand], so new opportunities that we haven't historically played in or it's been a long time since we played in them in an effective way. So I think those are the most exciting areas, but I'll talk about them when we release them.

Fair enough. And last question, legal expenses right at $1 million. What should we be thinking about legal expenses for the January quarter?

Oh, you're thinking about delivery expenses for the SEC investigations?

Correct.

I think we should still expect it to be at the $1 million level.

Right at that level. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Jeff Rosenberg with William Blair & Company.

Good afternoon. Did you say whether or not the weakness that you're seeing is broad-based or any specific areas that are notably weak?

I would say it's fairly broad-based, mostly computing and handheld, more so than industrial and com, but I would say that it's fairly broad.

And I guess the seasonality for the Company as a whole has been pretty inconsistent over the years, and so do you -- are you concerned at all that perhaps there's been some inventory accumulation that you're now working through given how strong business has been the last couple quarters? I mean how do you feel about that and the concern of whether or not your lead times, if they come in at all, whether you would take a little longer to work through this, is it hard to predict how long it would be, or what do you feel about that?

Yes, I don't feel concerned at all about inventory. When I look at the channel inventory for example, POS is very strong in Q3, inventory came down in Q3, channel inventory came down, so to me, I think that is maybe an indication of end of year clean up and things like that. I expect, my expectation is if Christmas is robust that January will come back, and we'll see the demand pick up again.

Are the segments that you're talking about are handheld and computing? Aren't those more direct as opposed to through the channel?

No, that business also goes through distribution.

Okay. And then just a couple of other detailed questions. Just given the way the tax rate is looking in Q4, is that a tax rate we should look to for '09, or is it more back up in the mid 20%?

Well, I would expect a number for '09 to be slightly up from the Q4 tax rate, because we're not going to see the benefits that we're seeing this quarter and next quarter, so I'd probably expect something in the range of 22% to 23% for '09.

Okay. And then also, you talked about your ability to grow the business with limited growth in operating expenses and you're executing to that, but there is some growth there. I mean, if we look at the kind of the estimate I have of low double-digit revenue growth year for '09, what sort of operating expense growth do you think you can manage to in that sort of an environment?

Well our goal is always usually to limit our operating expense growth to less than half of our revenue growth, but as we have said before, we still believe that we can achieve our '09 plans without increasing our operating expenses significantly.

So even less than that half is attainable in the next year?

Yes, that's possible.

Okay, thanks a lot.

Thank you.

Your next question comes from Ross Seymore with Deutsche Bank.

Hi, this is Bob Gujavarty for Ross Seymore. Good quarter, guys, just a couple of quick questions. Do you see any difference in how OEMs are acting relative to [distris], or are they both kind of a little bit cautious?

Yes. I would say they're both a little bit cautious. We don't see the OEM as much being cautious and when you see distribution you look at the metrics, and for example, the POS increase going up and inventory not going up in line with that gives you a little bit of concern that, are they seeing something out there that is not clear from a demand standpoint with the OEMs, but I would say it's pretty even.

Okay. And then your current guidance, the31%, is that pretty normal with a calendar fourth quarter with the holidays and stuff or -- it seems a little low, I mean, it seems a bit conservative given the previous quarters.

Yes. So previous last quarter we needed 36% to hit the mid point, in Q2, I think we needed about 43%, so, yes, it's a little bit lower. And as I pointed out it's mostly because of this little bit of softening in the bookings just giving us a little bit of concern about whether December is going to be as healthy as we would like it to be an need it to be, and January depending on what Christmas is like, how that's going to play out. So it's a little bit on the conservative side, but I think it's the right guidance for us.

Okay. Thanks, guys.

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

Great. Thank you. You guys hear me okay? I apologize. I missed a little bit of the call. I was hoping to hear a little bit about what you may have said about transient (inaudible) during quarter, how are you thinking about that next quarter, and also, to a certain extent, it's become a significant portion of your business, how do you think about managing that going forward? Is it just, do you just allow that to grow as fast as it will, or do you have to do something to keep it from such a big percentage of the overall revenue?

Well, first of all so Q3 was another record for our protection business and then we believe that it will be flat in Q4, mostly because it's driven by handhelds and computing, mostly, but it's fairly broad-based business. We have a lot of end roads into the consumer space and LCD TVs and set-top boxes and the communication space and the ethernet side and voice-over-IP and [GPON], and then industrial side insecurity and industrial. So in addition to handhelds and computing, it's a pretty broad based business, and the key to that business for us is just continuing to execute very well. We've done very well in terms of bringing out new products and making sure that our customers understand the benefit of Semtech protection versus everybody else's protection out there. This is a business that's taken us -- in our 47-year history it has taken us many years to grow and develop the type of value that we bring to the market, so we just continue to do that, I think we'll be fine.

Okay, and I was hoping you could talk a little bit about the overall size of that market where you see your market share as a percentage of that market. And then, obviously, competitors can get access to this call, but to the extent that you're willing, what do you think has allowed you to be so successful in this market? What's your competitive advantage?

Well the protection [com] is huge. That's one of the key things. There's a very large commodity piece of that, so I think what we have done successfully and we will continue to do successfully is as the market transitions and the requirements change, so some of the different voltage requirements or [lightning] protection or different ports, for example, for different interfaces changes, we're able to bring out protection devices that meet the needs of our customers. And it's really a question of how do we grow into that very large [tab] and keep making sure that we have an increasing piece of it, so relatively in the scheme of things we have a very small percentage of share.

Okay. And I guess can you -- are you willing to comment on your competitive advantage, or is that --

Well the competitive advantage, when you look at Semtech 's history and the core value that we have as a Company, we grew up doing these very discrete diodes. If you look at our power discrete business, for example, you ask the question why are there only two competitors in that space and it's because it's very, very tough stuff to do. It takes a long long time to develop the recipe and it's one of those things that you can have a competitor come in and try to replicate over many, many years, and it may take them a long time and a lot of investment, and it may not be worth their return, so that's really the reason why we're so successful in protection.

Great. Thanks a lot. I appreciate it.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Kelly Pan with Pantheon Capital.

Hi, yes. There's been some question about slowness in Interscope's Power Management products and I just wondered, could you talk about market shares and some of your -- by business line?

Well, we don't talk about market share by business line. Obviously, in the power space which is really what you're referring to in the computing space, our share is very small. We don't really view that as a strategic market for us as I've talked about before, the computing power space is the lowest margin part of our business and it's the one business that really brings our margins down as a Company, so I've talked quite openly about how we are trying to move away from that space. We continue to plan it. We have good products in that space, and where we have the opportunity to bring that differentiation to the market, then we will do that, but that's --

Maybe I could ask it a different way. Of your Power Management and your Protection businesses, how much are competitive bids versus where you're designed in?

Well, every single one of our products is a design win type of product. We don't, I mean, very rarely do we go in and win a piece of business just by quoting a price. That's just not Semtech's game. We can't win on price. I mean, when we play -- when we go participate against TI and [RichTech] and other guys out there who have fabs or are willing to take lower margin then we know we're going to lose that business, so we have to bring value to the table and that's the game we play.

Well can you just give some color as far as overall, whether the tenor of the market by the different product lines?

Sorry, say that again, Kelly?

The strength or weaknesses that you're seeing by product line, because you did mention that the ATE seems to be very weak, but --

Yes, so all of our product lines, I mean are showing strength. Four of our five product lines grew sequentially, so our Power Management business grew sequentially, our Protection business grew sequentially, our Advanced Com and Sensing business grew sequentially and our Power Discrete business grew sequentially in Q3. So all of those four areas driven by the computing segment, by the handheld segment, and by consumer and some industrial is the reason why those four business product lines grew so nicely. TMB, test & measurement business, really declined, it was the one area of disappointment driven by the ATE softness in Q3.

How about the advanced communication?

The Advanced Com business grew 7% -- our Advanced Com and Sensing business grew 7% in Q3, driven mostly by strengthen the advanced com space. We are seeing nice business there from our historical sets product line and we are starting to get good traction in the industrial sensing and industry all wireless space also.

Thank you.

We have a follow-up question from Harsh Kumar with Morgan Keegan.

Hi, guys, just real quick. A couple other companies have mentioned that they suffered because of a power outage at one of the foundries, [ASMC]. Curious if that was a factor, if at all for your company, Mohan?

Not really. One of the things that we were fortunate with is that it happened in the first week of our fiscal Q4, so -- and the Company recovered very nicely and went back on track, so no real impact for us.

Okay. Great, thanks.

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

I'm sorry to -- I'm late at getting on, but the way you talked about your outlook for the -- for your next quarter, which is essentially flat to slightly down, and I was wondering, other than seasonal effect, what would lead to that guidance?

Well, it's mostly seasonal, David, but I think the reason why we guided that way is that we have seen a little bit of softness in bookings, and the softness has come in the form of orders -- order lead times being a little bit longer than in Q3. Now, I've said and I want to be clear about this, the bookings are still very healthy and we're comparing with Q3, which was a record revenue, a record revenue and a record bookings quarter for us, so it is still very healthy but I think the guidance, given guidance flat to down 4% is the proven thing for us to do.

I see, okay. Have the lead times come in or stayed out?

The lead times -- you mean the order lead times?

Yes.

Order lead times have moved out slightly.

Oh, I see. And your delivery lead times, have they gone out?

No. They remain pretty much the same.

Okay, thank you.

Okay.

You have a follow-up question from Kelly Pan with Pantheon Capital.

Yes, I'm sorry. You had talked about the number of shares because of the accelerated buyback program. What will it be for next quarter? I didn't catch that.

Well, the guidance is for it to come in at 67.5 million shares.

And is that a sequential increase from Q3?

Yes. Q3 came in at 66.3 million shares.

And can you talk about what that's from?

What's driving it? We have to make a lot of assumptions in coming up with the guidance, we make assumptions on where the stock price is going to be. We make assumptions on what the level of the stock buyback is going to be, and so after looking at the assumptions, it just shows that we expect the share count to increase in Q4.

I see, even with the buyback?

Yes, even with the buyback. You'll recall that with the accelerated stock buyback, we get all the shares were given to us and they were retired, they were already reflected in our share count as of the end of Q2 and Q3.

Thank you.

And there are no further questions at this time. Mohan, do you have any closing remarks?

Yes. Let me summarize by saying that Q3 was a really strong and memorable quarter for Semtech. We increased revenue sequentially by 17% to achieve a Company record and increased nonGAAP EPS sequentially by an outstanding 61%. We also achieved record orders in the history of the Company and increased that cash balance by $31 million. In addition we saw four of our five businesses increase revenue sequentially and saw strong continued design win momentum. I still believe that there is potential upside to our performance from both execution improvement and strategic positioning of our new product platforms, so I remain very optimistic about the future of Semtech. With that I would like to thank everyone for participating in our third quarter conference call and look forward to updating you all next quarter.

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