Semtech Corp (SMTC) 2008 Q4 法說會逐字稿

Good afternoon. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 fiscal year 2008 Semtech Corporation earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

Mr. German, you may begin your conference.

Good afternoon, ladies and gentlemen, and welcome to Semtech Corporation's fiscal year 2008 fourth quarter conference call. I'm Todd German, Director of [FP&A] and Investor Relations. We have just released unaudited results for our fourth quarter that ended January 27th, 2008, and 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 to you 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. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include worldwide economic and political conditions, the timing and duration of semi-conductor market upturns or downturns, demand for electronics in general, demand for the company's products in particular, and supply chain and manufacturing risks.

In addition to considering these risks and uncertainties, forward-looking statements should be considered in conjunction with the cautionary statements contained in the Risk Factors section and elsewhere in our annual report on Form 10-K for the fiscal year ended January 28, 2007 and our other filings with the SEC, and in material incorporated therein by reference. In light of the risks and uncertainties inherent in revenue and gross margin, and in other projected matters, forward-looking statements should not be recorded as representations that the company's objectives or plans will be achieved, or that any of its operating expectations or financial forecasts will be realized.

Semtech reports quarterly 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 certain items in managing and evaluating the performance of the business. The results announced today are preliminary, as the annual audit by the company's independent registered public accounting firm is still underway. As such, these results are subject to revision until the audit is completed, and the company files its annual report on Form 10-K.

Although a replay of this call will be available on the Investor Relations section of 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. For those interested in learning more about Semtech, CFO Emeka Chukwu will be presenting at the Citigroup Small & Midcap Conference in Las Vegas on March 18.

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

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

Before we get to the financials, I would like to provide you with an important update on previously disclosed federal and state derivative litigation brought with respect to the company's past stock option practices. We are pleased to announce that during the fourth quarter we reached a tentative settlement. To cover the monetary components of the proposed settlement, the company accrued $1.625 million net of anticipated insurance proceeds, resulting in an unfavorable $0.02 impact on our fourth quarter fully diluted GAAP earnings per share. Although the settlement had a negative impact on our fourth quarter earnings, we are pleased to put this matter behind us. We are working to document the settlement, which is subject to court approval.

Now moving on to our Q4 financial performance. Revenues for the fourth quarter fiscal 2008 were $78.6 million dollars, a 35% increase from the same quarter last year and sequentially flat. The increase in year-over-year revenue was driven by strength in the sales of our power management product within the computing space, strength in handheld revenues and the resurgence in sales of our power discrete products. For the year overall, revenues closed up 13%.

During the fourth quarter, 65% of our revenues were derived from customers in Asia. 21% came from North America and 14% from Europe. Revenues from handhelds accounted for 21% of revenue during the quarter. Wire computing accounted for 21%. Test equipment accounted for approximately 2% of revenue. Communications infrastructure accounted for 19% and industrial accounted for 37%. As expected, we saw a sequential decline in our computing and handheld revenue, due to seasonality.

Revenues from OEM sales represented approximately 35% of total revenues for the fourth quarter, while distribution represented approximately 65% of total revenues. Orders in Q4 were softer because of seasonality, resulting in a book to bill less than 1. Strength in orders for our industrial and military products was not enough to offset the softness in the computing of the hand held segments. Net [first] orders accounted for 32% of shipments during the quarter. Non-GAAP gross margin for the fourth quarter of fiscal 2008 was 55.5%, a 50 basis point increase from the third quarter of fiscal 2008. This increase was due to a greater mix of higher margin revenue.

Our target for fiscal year '09 remains to exit the year in the mid-point of our 55 to 60% gross margin model range, driven mostly by revenue from new products. That, as you know, will be a substantial improvement over where we were a year ago. We do expect gross margins during the first quarter of fiscal 2009 to be in the range of 55% to 55.5% because of lower manufacturing volumes. But again, we remain committed to hitting our year-end target.

Non-GAAP research and development expenses were $10.1 million for the quarter. This represents 12.9% of sales compared to 13% in the previous quarter. We expect R&D spending to remain relatively flat at $10 million in the first quarter of fiscal year 2009, though we do expect to be getting more out of our R&D expenditures because of productivity gains. Non-GAAP SG&A expenses were $15.1 million for the quarter, an increase of $800,000 for the third quarter. This represents 19.2% of sales compared to 18.3% in Q3. This increase reflects the impact of upgrading the quality of our sales force and several one-time expenses. We expect SG&A spending in the first quarter of fiscal year 2009 to be slightly down compared to the fourth quarter. Interest on other income was $2.8 million in the fourth quarter. For the first quarter of fiscal year 2009, we expect interest and other income of approximately $2 million. The decrease would be due to lower average interest rates on lower cash balances.

The company's non-GAAP effective tax rate for the fourth quarter of fiscal year 2008 was approximately 20.7%, compared to 10.8% in the third quarter of fiscal 2008. If you recall, our Q3 rate was favorably impacted by the favorable tax treatment in a foreign jurisdiction for all realized currency exchange activity associated with the weaker dollar. In addition, in Q4 we wrote down our state's deferred tax asset as a result of lower apportionment factors in high tax jurisdictions. We expect our non-GAAP effective tax rate for the fourth quarter of fiscal 2009 to be approximately 24.5%, because we are not projecting to see any benefits from foreign exchange fluctuations. 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 fourth fiscal quarter was 63.5 million shares. The lower share count reflects the impact of any completion of stock buyback program, and the completion of another $50 million regular stock buyback in the fourth quarter. We expect diluted weighted average shares outstanding of 63 million shares in the first quarter of 2009. This forecast can vary, based on the average stock price for the quarter, stock option exercises, and the actual level of stock buybacks under the $50 million buyback program announced today.

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 associated with Semtech's now settled insurance litigation, and independent shareholder litigation expenses, net income was $16.8 million or $0.26 per diluted share for the fourth quarter. Net income for the same quarter last year was $9.8 million or $0.13 per share. For the third quarter of 2008, net income was $19.4 million or $0.29 per share. We expect non-GAAP earnings in the first quarter of fiscal 2009 to be between $0.20 and $0..22 cents per diluted share.

For the fourth quarter, equity compensation was $4.3 million or 5.5% of revenue. This is an increase of $300,000 from the third quarter of fiscal 2009. Our Q3 expense benefited from a true-up of forfeitures. We expect equity compensation of approximately $4.9 million in the first quarter of fiscal 2009. The increase is due to our lining the timing of executive grants with our planning cycle.

Our GAAP tax rate in the fourth quarter was 26.8%, compared to 1.7% for the third quarter of 2008. As discussed earlier, our third quarter tax rate benefited from a favorable tax treatment in a foreign jurisdiction related to the weakening U.S. dollar. In addition, in Q4 we wrote down our [state] deferred tax assets as a result of lower apportionment 5,000-high tax jurisdiction. We expect our GAAP tax rate for the first fiscal quarter of 2009 to be approximately 23.5% based on projected regional mix of income.

Our GAAP net income for the quarter was $14.9 million dollars or $0.23 per diluted share, up from $4.6 million or $0.06 per share for the same quarter last year, and down from net income of $60 million or $0.24 per share for the third quarter of 2008. We expect GAAP net income of $0.13 to $0.15 per diluted share in the first quarter of fiscal 2009.

Now turning to the balance sheet. Our balance sheet remains very strong. Semtech ended the quarter with approximately $213 million of cash and investments on the balance sheet, a decrease of $52 million from the third quarter. The decrease is because we spent $17 million on share repurchases and to settle the completion of the accelerated stock repurchase program during the fourth quarter.

During the fourth quarter, the company spent approximately $1.4 million on property, plant and equipment. Depreciation and amortization for the fourth quarter was approximately $2.2 million, including approximately $[375,000] of intangibles amortization. In the first quarter, we expect capital spending to be approximately $4 million. This increase in capital spending is to support the expected production ramp of newer product platforms in our core management and advanced communications and sensing businesses, and to support the increased supply ramp of our power discrete products. We expect depreciation and amortization to be approximately $2.2 million in the first quarter of fiscal 2009.

The day's sales outstanding in accounts receivable was 38 days in the fourth quarter, up slightly from 35 days in the third quarter. In absolute dollars, net inventory increased by $4.7 million in the fourth quarter as compared to the third quarter fiscal 2008, and the days of inventory increased to 68 days from 60 days in the third quarter of 2008. This increase in inventory is to enable us to support our strategic customers better. Inventory at our distribution partners was up from Q3 levels, as is typically the case in the fourth quarter for us.

In summary, fiscal year 2008 was a solid year for us. We demonstrated the leverage in our business model by growing earnings faster than revenue. We grew revenues 13% and grew non-GAAP earnings per share by 24%. GAAP earnings per share also grew by 69%. Our strong cash generation from operations, in addition to existing cash balances, allowed us to repurchase $12.9 million shares or approximately 18% of the shares outstanding at the beginning of the fiscal year, resulting in higher return on investment for our shareholders.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone.

I will discuss our Q4 fiscal year 2008 product group performance, our fiscal year 2008 company performance, and then discuss our Q1 fiscal year 2009 outlook. Q4 of fiscal year 2008 was another exceptional quarter for Semtech. Once again, we achieved the highest revenues than in any single quarter in the company's 47-year history. Semtech achieved $78.6 million in revenues, flat versus Q3 and represents a 36% increase versus Q4 of fiscal year 2007. Non-GAAP gross margins increased 55.5% and non-GAAP EPS grew on an annual basis by 100%, to $0.26 per diluted share. We are very pleased with both our revenue and EPS performance in Q4. Demand for our protection products and our power discrete products remained relatively strong in the quarter, driven mostly by the communications and industrial segments.

Now, let me discuss the performance of each of our product groups in Q4. In Q4, our power management revenues declined by 5% on a sequential basis. On an annual basis, power management revenues increased by approximately 60%. Our power management business continues to make a steady return to growth. The demand in Q4 was driven mostly by the communication end market. Our power management business unit is beginning to release newer, more differentiated power platforms, and we expect that fiscal year '09 will be another good year for our power business.

In addition to various miniature L.E.D. driver and [upwards] converter products, in Q4 Semtech introduced a new family of battery chargers to the market targeted at handheld battery operated systems. This is the first battery charger family based on a new platform architecture released by Semtech in over five years. This new family of miniature, high-input voltage, lithium [iron] charger products is now released. We will start to win designs in the first half of fiscal year '09.

In the next two quarters, we expect to release several more power management platforms that will enable Semtech to expand its [brand]. The focus of these new platforms will be the handheld, consumer and the industrial segments. We are confident the momentum from our now power products will drive further revenue growth and margin expansion in the years ahead. Given that our fiscal Q1 is a seasonally softer quarter for computing, handheld and consumer systems, we expect our power management revenues to be down sequentially in Q1.

In Q4, our protection revenues were in line with Q3 revenues. On an annual basis, protection revenues increased by 53%. Demand for our protection products remained strong in the quarter, driven by the industrial and the communication markets. The increase in demand for our protection devices is being driven by the increase in the number of ports requiring protection, and the increase in system returns our customers are facing due to unprotected systems. Our protection business unit continues to execute quite superbly. Strategically, we are very encouraged by the design win momentum of our protection products across all of our target markets, and both strategic accounts and tier 2 and tier 3 accounts.

Due to Q1 being a seasonally softer quarter for consumer and computing systems, we expect our protection revenues to be down sequentially in Q1. Our power discrete revenues were up approximately 9% sequentially in Q4, and again achieved another revenue record. On an annual basis, our power discrete revenues increased by 42%. We are delighted with the execution within this product group, and our customers continue to award us increasing opportunities as we support their 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 this market segment. One of the highlights in this business is the recent [Janeff] certification of our manufacturing facility, which will enable us to start to develop and ship space-level power discrete product. Our first space-level product has already been approved an certified, and we expect to start taking orders on this product in Q2 of fiscal year '09. As I am sure you are aware, the typical ASPs for space-level certified products are significantly higher. In fiscal year '09, we expect to increase our share within the power discrete space market and overall power discrete market. We will continue to see growth in our power discrete business, and in Q1 we expect our power discrete revenues to increase.

Revenue for the advanced communications and sensing business decreased 4% sequentially in Q4. On an annual basis, our advanced common sensing business was down 1%. We are pleased at the product initiatives from our advanced common sensing business, as we have recently introduced several new platforms targeted at the industrial wireless and the industrial sensing markets. These new platforms include a family of ultraversatile high-performance sensor interface devices targeted at pressure, temperature and magnetic sensors, and a family of low-cost flexible sensor interface devices for portable applications. We have many more platforms in the pipeline that would increase the opportunity for Semtech, and change our future market mix. Solid development execution on our new road map is critical to the future success of our advanced common sensing business, as we expect these new platforms to positively accelerate top line and drive further operating leverage.

The business from these new platforms is expected to start to contribute in the second half of fiscal year 2009. In Q1, we expect revenues from our advanced communications and sensing business to increase modestly. Our tested measurement revenues were up 142% in Q4. The demand in the ATE segment continues to be very soft, and we do not see any short-term improvement in this segment. While we do believe that our new, integrated cobalt platform is the best integrated pin driver platform on the market, the lack of market growth in this segment has led me to drive further organizational change within the company. Our test and measurement business, which was formerly the acquired company known as Edge, has now being integrated into our advanced common sensing business unit. I believe that there is a very good strategic opportunity to marry the competencies of pin driver electronics with our industrial sensing competencies to introduce new product platforms targeted at consumer and industrial segments.

Semtech now has four product groups - power management, protection, advanced communications and sensing, and power discrete. In the future, we will no longer report on our test and measurement business or break out ATE as an end market. From a distribution POS standpoint, in Q4 fiscal year '08 we saw a total POS decrease. The POS decrease was driven by all regions and all segments. Distributor inventory increased in the quarter as expected. We believe that our channel inventory is now at the levels necessary to appropriately support our customers.

Moving on to new products. We released 22 new products in Q4. This is a 29% increase over Q3. Our new product development machine continues to flow well in all of our businesses. This is still an area where we can do better, but I am confident we will start to see noticeable results this year. Design wins from these new products will start to enhance our new product revenue and overall gross margin in fiscal year 2009.

Turning to design wins, we recorded over 800 new design wins in Q4, 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. 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 comment briefly on our fiscal year 2008 performance. Fiscal year 2008 was a record revenue year for Semtech. We achieved $285 million in revenues and grew 13% from fiscal year 2007. On a non-GAAP basis, we also maintained 55% gross margins for the year, and grew non-GAAP EPS by 24% over fiscal year 2007. We grew our design wins by 23% versus fiscal year '07, and we grew our new products by 40% versus fiscal year 2007. This was achieved in a year when we completed a financial restatement, and was still in a year of transitioning the culture of the company and improving the execution of the company.

Also in fiscal year 2008, our protection and power discrete revenues achieved record levels, and our power management rev news increased for the first time in three years. We also created our advanced common sensing group, which is the integration of three previously acquired companies, [Demix], Acapella and Edge. In addition, we put in place a new management team, hired many talented people into the company and added several new management processes into the company. We also repurchased $220 million of our stock, settled our insurance litigation, and sold off our San Diego land.

Finally, the culture at Semtech is changing, and I am confident that the new Semtech, which now has over 4,500 customers and 1,400 products, is going to continue to perform at a higher level. Fiscal year 2008 was a very good year for the company, and one that we are very proud of.

Now let me discuss our outlook for next quarter. While Q4 was another record for Semtech, our book to bill in the quarter was less than 1. Despite a modest increase in our recent orders, given that Q1 is a seasonally softer quarter for the computing and consumer markets, we expect Q1 revenues to be between $70 million and $74 million dollars. If we achieve the midpoint of guidance, Q1 of fiscal year '09 would be a record Q1 for the company and represent a 19% growth versus Q1 of fiscal year '08. To attain the midrange of our Q1 guidance, or $72 million, we need net turns orders of approximately 39% at the beginning of Q1. The priorities for Q1 are reviewing our new product release machine, to ensure that our new platforms are released on time, and start to review other attractive emerging applications that could be a good fit for Semtech's new platforms. 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 Ellis with Citi.

Thanks, guys. Congratulations on the quarter and on the fiscal year. First is a clarification off of comments that were on the last quarter's call. You had talked about order softness that you had observed in the mid-November timeframe. Can you just walk us through the linearity that you saw in the quarter on the order side?

In Q4, Craig, bookings were soft throughout the quarter. Bookings improved modestly in January, and strengthened in recent weeks I would say. Not unexpected, as we look at December being Christmas, on expect a little bit of softness there. Then February, early February because of Chinese New Year, softness is expected there. So what's encouraging is that, you know, the bookings are starting to get a little bit stronger and March and April are, at least for us, expected to be stronger bookings periods.

Okay. That's helpful, Mohan. Then a follow-up on the gross margin guidance for the fiscal first quarter. You talked about it being down sequentially. Is that purely utilization or is there any mix component or any pricing component in there?

Craig this is Emeka.

Hi, Emeka.

Hi. It is mostly because of utilization. We do expect volumes for manufacturing, volumes will be down in Q1 relative to the fourth quarter.

Okay. And then lastly, staying on gross margin and thinking about the objective of getting to the mid-point of the target range by the end of the year, should we think about the company's goal as being one that's pretty linear as you go through the year or is it really more back-end weighted, and dependant upon some of the new product activity that you had talked about in your prepared remarks, Mohan?

Yes. I think it's probably going to be more back end, Craig, mostly because we are depending on the new product platforms. You know, we expect the new charger platforms, some of the new advanced common sensing platforms start to gain traction. Those are what are really going to drive the increase in the gross margins in the second half.

Thanks, guys.

Your next question comes from the line of Doug Freedman with AmTech Research.

Thanks for taking my questions. If you look forward, Mohan, the design wins that you're seeing, how is it going to change the company's exposure to by end market going forward, and is there any sort of geographic change in your outlook?

I think the key change is, going forward, if I look at advanced common sensing becoming a bigger component, those platforms really take off, and I would expect industrial communications and consumer to perhaps be a little bit stronger for us. And power management, I think, a little bit more consumer, also. From a regional standpoint, you know, it probably won't change that much. A consumer is usually driven out of Asia or Japan, we'll maybe see more Japan than Taiwan, but I think the mix is going to be roughly the same as what we have.

And in the markets where you saw sort of the weakness in the quarter as far as bookings, you reported that it sounds like things are firming up a little bit. Is the firming that you're seeing in the same customers that were showing the weakness or it that you're seeing the emergence of maybe new products or other things happening in other markets that have you more encouraged about the recent booking patterns?

I would say the bookings is more related to existing customers. New products and the traction we have with new products, we're not seeing a significant increase in the demand from these yet.

Okay. And then - so I mean, I just want to make sure I understand you, so the customers that saw weakness, are they back-ordering now? Have they sort of worked through their inventories?

Let me give you an example, Doug. I think handheld, for example in Q4 was very soft, and I think it's starting to get a little bit stronger.

Okay. Very good. Great. Thank you. Nice job on the execution here.

Thank you.

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

Hey guys, congrats on the solid quarter. Mohan, you just mentioned about the handsets coming back, and you talked a little bit about the linearity of orders. Would you characterize them in total as being normal seasonally, worse than normal? Everybody's trying to reconcile to more of a macro view. Anything you can provide versus normal seasonality, or however you want to peg it, would be helpful.

I think, Doug, it's -- Ross, as - it's kind of seasonal. It's pretty normal for this type of - period of the year. I would say it's probably a little bit softer than one would expect, but given, you know what I talked about December being Christmas and one wouldn't expect strong bookings during that period. Then the Chinese New Year, there is -- one does look for a bit of a pickup after that. I think it's quite normal. I don't think there's anything there that I see that surprises me yet about, you know, versus other years.

Okay. I don't know if I missed it, but did you mention what the lead times were? Did those change at all from the 8 to 12 weeks you talked about last quarter?

The order lead times?

Correct.

Order lead times are probably coming a little bit shorter now, I would say. Getting a little bit more visibility but not much more.

Okay. Then you mentioned about some of the new product traction, and it seems like the word consumer came up a couple times in both power management and protection. Does that in any way impact your gross margin, as far as being a headwind from the kind of stereotypical view that consumer products tend to not have as high gross margins as industrial?

Two things. One is that the biggest kind of problem we have in gross margins is really our power management business, and specifically the computing element of that, which is very much lower than our corporate average, and it's my belief, and I'm very confident about this, that as we get many of our power products and new platforms into the consumer space, we can drive a higher gross margin than the computing space. Is it as high as industrial or communications or some of those other segments? The answer's no, but I think as a company, having the balance all very good industrial base from power discrete and advanced common sensing driving the communications sector, I think it's good for the company to have the balance of consumer as well. It's an area that we typically or traditionally haven't really targeted. I think it's a good space for us to be in.

The last question for me, with the four new segments that you're going to report going forward, could you give us any rough idea of either the hierarchy of the gross margin between those or the range around the corporate average of gross margins? Whatever might help us model the mix component with a little more granularity?

Yes. Power discrete protection and advanced common sensing are at or above the corporate average. Our model is 55 to 60%. So that'll give you some idea of where they are, and then power is significantly below.

Okay. Great. Thank you.

All right. Thanks.

Your next question comes from the line of Shawn Webster with J.P. Morgan.

Thank you for taking my question. Circling back to the lead time question, can you quantify for us what your order lead times are?

Typically, six to eight weeks.

Six to eight weeks is typical?

Yes.

They're like in the 10 to 12-week range last quarter?

I can't recall exactly. I think they were probably in eight to ten-week.

Eight to ten, okay, thanks. And then, how's the pricing environment for Q4 and how does it look going into Q1?

It varies by segment and product line. I think, you know, typically, the most price-sensitive areas for us are obviously in the computing space and in the handheld space. You know in those two areas it continues to remain very price-sensitive, very competitive areas both in power and in the protection area. And I think, you know, we plan on price erosion on a pretty consistent basis throughout the quarter, and there's no surprise there, Shawn. I have to say, it's pretty consistent with what we've seen before.

Okay. So nobody's getting overly aggressive there yet or beyond normal?

Nothing beyond normal.

On the power management side, it sounds like your defocusing a little bit away from the computing area in the coming year. You have a lot of design wins, I think you mentioned something like 800. What's the composition of the design wins in terms of end market, can you - you mentioned there's a couple of different areas that you're picking up a number of design wins. Can you highlight those areas for us?

The areas - we are still getting design wins in computing, so you know the message in computing is very simple, that in the power management space, where we have traditionally played in the core regulators and some of the peripherals, where the margins get to a point where the customer's only real request is lower price, we have chosen to kind of stay away from that game. That's not where Semtech differentiates. But in all of the other markets, we participate in quite aggressively. I would say that, you know, that continues to be, you know, our strategy. The -- what was the question?

The 800 design wins, composition?

The design wins, the 800 design wins is across the board. I would say we get them in handheld and protection, a lot of the design wins are coming from computing space, handheld, communications being, you know, ethernet ports and USB ports and the handheld space on the industrial front. We get a lot of design wins from advanced common sensing platform and industrial protection requirements. On the comm side, it's more again ethernet-driven voice-over IP, and [G-Pon]. We are getting design wins in the consumer space, in LCD TVs, in set-top boxes, in DVR, both where there are HDMI ports, where there's some power requirements, et cetera.

Great. One final one. Did you have any 10% customers in the quarter?

No, we did not.

Okay. Thank you very much.

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

Thanks, guys. Mohan, maybe can you talk about gross margin drivers. You gave some stratification of end markets and the importance to gross margins, but what do you expect over the next several quarters to be the things that drive you to your target margins?

Well, I think the main thing that we - move us is moving our power management margins from being where they are today to a higher point. They won't be, you know, where - we want them to be longer term, but I think looking at a 12-month horizon moving our power management margins from being well below the corporate average to closer is one of the keys. I think our advanced common sensing business, which can generate higher gross margins, becoming a bigger portion of company, I think will be important to drive gross margin expansion, and then our power discrete business also becoming a - continuing to grow and becoming a bigger part of the company, all expand gross margins.

Then in the power management specific, lots of designs [wins] over the last several quarters. Where do you expect or where do you see your market [share], say specifically maybe in the handhelds?

Did you say market share, Cody?

Market share, driving some of those margin improvements?

Our market share in handheld power is very small today so no, that isn't going to - that isn't significantly impacting our margins in power. The biggest chunk of power that drives the lower gross margins is the computing power space. As we shift that to more consumer, and more handheld, frankly, we can demand higher gross margin in the handheld space than we can in the computing space, just because that market is moving and we have some innovative products. So for example, the battery chargers that I just talked about, I believe that that alone will move the margins up as we start to get revenue from that.

So fiscal '09, a lot of work has been [made] to describe market share In the handheld spaces specifically. Do you expect that to start to come to [fruition]?

Yes, I think in the second half of fiscal year '09 we'll start to see the benefit of some of the design wins that - obviously we depend on our very robust economy and customers, you know, moving ahead with the platforms that they designed products into. But let's assume that we have a reasonable second half. Then I do think that we'll get that benefit.

Lastly, guidance for next quarter, to what extent did economic influence have on that guidance of - versus normal seasonality?

Well, you know, it's one of those things when you talk to customers and they're very nervous about shipments into North America or the number of TVs they're going to ship for example, and things like that, that's really what gets you thinking about it. I would say we're comfortable with the guidance we've given. It obviously will be a record Q1 for us if we achieve it, so it's an aggressive - still represents the, you know, the kind of growth that we want to see and puts us in good shape for fiscal year '09 growth. So I don't think we're uncomfortable with it. But I think, to be honest and answer your question, I think it has been influenced by, you know, the kind of information we're getting from our customers about their own nervousness.

All right. Great. Thanks, guys.

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

First of all, Mohan, it's a good quarter. A couple of questions. Looking at your seasonality or your guidance for the April quarter, down about call it 8, 8.5% at the mid-point, is that how we should be thinking about your company as having a seasonal norm, or is that a little bit worse, given what you're seeing, or are you simply being cautious?

I would say that our profile, the company profile has changed somewhat, Harsh. We are becoming more of a second-half company. The first halfs are going to be a little bit softer. That's mostly driven by the strength of our protection business, particularly its strength in handheld and computing. So that's one thing. But then I think as I said in the last discussion, there is a little bit of concern about the state of the economy and the health of the markets, and so there's a little bit of cautiousness in there.

Fair enough. And then, you know, I think at some point in your script, you talked about being comfortable with the 55 to 60% gross margin. Are you still comfortable with operating margins of 25 to 30% achieved in the next four months or so?

Yes, Harsh, this is Emeka. Yes, very comfortable with that because like we have said in the past, we expect operating expenses to increase very modestly. So if we're able to drive the gross margin expansion that we feel very good about, we should see a lot of top line growth drop into the bottom line.

I think you said to that, you said it'd be mostly a second half, sorry, to that, the gross margin expansion?

Yes. The gross margin expansion is mostly for the second half, but we still expect to exit our fiscal year 2009 of the mid-point of our operating income, operating margin model, which is 25 to 30%. So we do expect to exit somewhere between 25 to 27%.

Got it.

A question for Mohan. Mohan, you said I think the industrial business was pretty strong. Between handhelds - between, I'm sorry, consumer and computing, was there any one sector that was particularly weak, weaker than you would have thought?

You know, handhelds is probably, if it was a surprise in Q4, I thought, I mean, computing one does expect it to be down and handheld to be honest with you, but if there's one area of surprise probably handhelds are a little bit softer. But then that's where we're seeing a slight uptick in the booking now. So I think that's expected.

That's very helpful. A lot of talk about consumers. Are you seeing, you know, are you seeing anything funny going on with the consumer in terms of just outside of general nervousness that you mentioned? Are you seeing any hard data points that make you concerned with what you're seeing in the market space?

Well, I believe that nervousness, Harsh, I mean we have spoken to customers, and customers have said that they are nervous about the consumer demand in North America, and you know there's no surprise to that, really. So, you know --

Just one question for Emeka. Emeka, in your portfolio, do you have any auction rate securities at this point in time?

No, we do not have any at this point in time. The last few ones that we had, we actually - we got out of those a few months ago.

So that was probably a very good move, Emeka. That's it. -I'll come back and follow up. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

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

Good afternoon. Can you talk a little bit about the - two things. Seasonal -- if we have a normal seasonal year, would the July quarter be your low point for the year and then you build in the second half ,or is July seasonally about the same as the January quarter on an ongoing basis? The other one, to follow-up actually, is also on the power management side. You know, you've been to a company that was very big in desktop power management as well. I was wondering where did that business, it's becoming such a commodity business, so our friends from Taiwan that in fact, you know, if you sort of don't compete for that business anymore, how would that affect your power management business overall?

Okay, David, so the first question's on seasonality and the shape of the company. I expect Q2 and Q3 to be in the future probably our strongest quarters. Q2 because of the buildup of product for Christmas and then Q3, you know, the handheld computing and consumer products being stronger. So historically, Semtech, I think, has had a stronger - you can go back and look at the data, stronger Q1. So this is kind of the shaping of the business as protection, specifically in the hands of the computing spaces, is doing very well. As advanced common sensing starts to really ramp up, particularly with our new strategies in that space, I think that will also exaggerate the mix in terms of being more consumer. So Q4 for us, remember, goes into January. So January is a little bit softer.

Then your question on power management. It's no surprise. As I came into Semtech, I said look power management desktop and notebook computing for us, unless the customers are willing to and understand and want differentiated products, you know, we're not going to be able to win that battle, and we talked about that, and shaped the R&D into different areas. Having said that, some of our customers, both in the service space and notebook space, are willing to pay and they are willing to pay a little bit more for the differentiation. Those cases, we'll continue to service them. So I think we can still have a pretty reasonably-sized computing power and computing business for the company. It's just that it won't be as big and growing as much as, I think, you know, historically. And I think we'll trade that off for more consumer, industrial and communications power.

Thank you.

Thank you.

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

Thank you. In terms of the sort of positive outlook you have for advanced common sensing business, it more heavily loaded on the [Zemex] business versus the advanced com or vice versa?

Steve, the way to think about it is remember that we've now integrated three companies together, so it was [Emex] - it was Acapella, which is the advanced communications product,s and now also the test and measurement products from the Edge acquisition. So then I look at AC&S now, our advanced common sensing business, it really has those three components to them. The growth - the real growth is going to come from actually what I call integrated platforms. It isn't platforms that either one single company had, it's more integration of some of those platforms, which I think can be very disruptive in the marketplace. So they are in definition now, they're in the pipeline now. They're being developed, and as they come out, I think, you know, there's going to be some interest.

In the past, when this stuff was sort of separated, it had pretty - it was sort of a difficult sale, I believe, and showed a lot of promise but was a little bit shower getting going. Is there something that's different now the way you integrated the platforms, or have you already been out there in field that lets you believe the design wins are going to likely come in the back half?

That's a very good question. I mean, basically it's very simple because when you tack a communications platform and you develop a communications platform for the communications market, it takes a long time to develop the platform, and it takes a long time to generate revenue from that platform. If you take the same capability and you combine it with, you know ,some consumer type of application and you target the consumer space, you get a much shorter time to - the platform being out released and you get a shorter time for revenue. But basically, you're using the same core technology as you had, you know, in a different - focused on a different area. So I think there are some things that we have done, and I think we continue to do those things that I think will generate a little bit more opportunity for us to generate the type of revenue growth that I think that Semtech can achieve.

Then you have sort of in your classified as industrial [focused] military business, been roughly a third of the revenue or so. How much of that would be industrial versus, say, aerospace or other military-type applications?

Actually, military is, I think it's probably - the industrial, military, do you have that?

Power discrete, the military section of that is about 9% of total Semtech revenue.

The rest of it is high-end medical. It's high-end industrial, and aerospace being engines and that type of thing. So it's fairly broad. Then the other component of industrial, Steve, was historically the [Demex] [ASIC] business, which is a very solid business. A very solid business, but goes into a broad range of industrial customers.

Great. My final question is just on the new space products you're talking about, is that - are those primarily diodes, or what type of product is that?

Yes, diodes and assemblies, yes.

Thank you very much.

Our next question comes from the line of [Menage Medconi] from [Tripp Investor Group].

Hi. Congratulations on solid reverse in the volatile market environment.

Thank you.

Most of my questions have been answered. Just one quick question. What was the cash flow from operations?

During the quarter?

For the January quarter.

The cash flow from operations was approximately 17 to $18 million.

Okay. What are your expectations in the current quarter?

Well, I haven't modeled that out yet but I could say because we really did a very good job generating cash, we have typically modeled something in the range of 22 to 25% of revenues.

Okay. All right. Thank you.

Thank you.

Your next question comes from the line of Nicolas Aberle with Caris.

Thanks, guys. Just a quick question on visibility. You guys are guiding to a 39% turns rate to hit the mid-point for Q1. Assuming the backlog was down materially coming moo the quarter, and given your conservatism, just what gives you the confidence that you can hit that higher turns rate? It looks like over the last like four or five quarters, it's been more like a 35% turns rate?

The question was what makes us confident that you can hit the 39%?

Looks a little higher than the last couple quarters?

Actually, historically, we have -- we have achieved much higher turns in the last two years than the 39% on average each, every quarter, so that's the reason. If I look back two years ago we actually achieved 45% and 40%, so we averaged about 45% turns. And so that's kind of the reason, yes.

And then in addition to that, just some of the recent pickup and through your business lines, also, maybe contributing to that as well?

Well, the orders strengthening has obviously - has helped. We do look at that, and look at it very closely, and I knew coming out of Chinese New Year, you know, that watching how the orders were coming in, and which segments and which products, that was going to be a metric for us. I think it's something we've continued to keep a eye on. I wouldn't say the orders have, you know, are so good that I'm, you know, going out and celebrating. I think it's just modest improvement. I think we'll take that for now.

Perfect. Last question, just, you know, with respect to inventories and the [challenge], there's a slight uptick there, but you guys still feel comfortable. Is the take there that they were just too low coming into the quarter and now they're more normalized?

Yes, exactly, that's the point. Because back in Q3, we felt that inventory in China was very low at 65 days, and now is up to about 68, 69 day,s and I think that is more Ideal. We actually would prefer to have inventory somewhere between 70 and 75 days.

So have you guys seen any difference in bookings or demand levels, you know, from OEM customers relative to distribution customers?

Not really, no.

Okay. Thanks, guys.

Thank you.

Your next question is a follow-up from the line of Doug Freedman with AmTech Research.

Thanks for taking my follow-up. Question for you, you've been adding to the sales force. When do you think we'll start to see sort of any impact from that, and where are you targeting that effort at?

Well, the target is across all regions. I don't think Semtech had a great sales team on a global basis. I think there was some improvement to be made across the board, but obviously China is an area where we are focused. I think, you know, we continued to do quite a good job in Korea and Japan, but I think some strengthening there could help us even further. And to be honest with you, North America is more of an upgrade than adding resources. Then the one thing that I would mention is field application engineers to sell the type of products that we need. As you know, you know, they're already critical. I think that's probably the key area that we've spent some investment on across the board. I would I say it's across all regions.

Terrific. Lastly, there's been a bunch of changes in the analog market in terms of distribution coverage in relationships. Any noticeable impacts to your business or anything that you're seeing from a distributor interest in giving you [mind share]?

I think actually anything that happens is good for us because we don't get a lot of mind share today in most regions. So I think it's actually some changing dynamics there, aligning with distributors that recognized Semtech has a great future ahead of it I think is a good thing for us. We'll see how that plays out.

All right. Great. Thanks again for taking my question.

Operator, how many more questions do we have on the line?

We have two questions.

Okay.

Your next question is a follow-up from the line of Harsh Kumar with Morgan Keegan.

Hi, guys. Thanks for taking my question. I missed the first couple minutes of the call. The $0.02 for the settlement of the lawsuit, is that included in the $0.26 or not included in the $0.26?

The settlement of the lawsuit from Q4?

Correct.

It is included in the GAAP, and is $0.23. It is not included in the non- GAAP of $0.26.

Got it. One quick follow-up for Mohan. When you think about areas like LCD TVs and mp3 players, traditionally Semtech's not been very strong in it. You've got a couple of products coming out. Could you tell me how much percentage of revenues you get from those non-handhelds, but what I would call [hardcore] consumer areas? Do you see that as a growth opportunity?

Today it's fairly small, Harsh. I would say it's growing nicely, and it is a target market for us. When we talk about handhelds, people typically think of cell phones, but we look at everything, you know, media players, cameras, the whole portfolio of handheld devices. That clearly is a target for us.

Thanks. Congratulations. Very nice results.

Thank you. Last question, operator?

Your last question comes from the line of Craig Ellis with Citi.

Thanks for sneaking me in. Just on the new buyback and capital structure, how should we think about your intent in using the $50 million program? You want to take the cash balance to a lower level, or should we think about you just using your cash generation capability to work down shares through the year?

I think we're going to finance this - just more out of our cash from operations. So it's something that we tend to do gradually.

Thanks, Emeka.

Let me summarize by saying that fiscal year 2008 was a very strong and memorable year for Semtech. We increased annual revenues sequentially by 13% to achieve a company revenue record in our 47-year history, and increased non-GAAP EPS by an outstanding 24%. We also achieved record orders in the history of the company. In addition, we sold four of our five businesses, and increased revenues, and saw strong continued design momentum in all regions. Finally, we repurchased 12.9 million shares to reorganize the company into four product groups. There was a lot of potential upside to our performance from manual platform execution of these new product platforms. It is clear to me that fiscal year 2008 is just the beginning of the journey for the new Semtech.

With that, would I like to thank everyone for participating in our fourth quarter conference call. I look forward to updating you all next quarter. Thank you.

This concludes today's Q4 fiscal year 2008 Semtech Corporation earnings release conference call. Thank you for your participation. You may now disconnect.