Semtech Corp (SMTC) 2009 Q1 法說會逐字稿

Good afternoon. My name is Ally, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY '09 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). 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 2009 first quarter conference call. I'm Todd German, Director of FPNA and Investor Relations, and we have just released unaudited results for our first quarter that ended April 27, 2008.

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 important information. This call is open to all interested parties in accordance with Reg FD. Any question about our performance, operations, plans, or our estimates of future financial results will be considered now. We are unable to say if there will be a another Reg FD compliant opportunity for you to ask questions before the next quarterly conference call.

Semtech reports results based on generally accepted accounting principles, commonly referred to as GAAP. The results announced today are preliminary, as a quarterly review by the Company's independent registered public accounting firm is still underway. As such, these results are subject to revision until the review is completed and the Company files its quarterly report on form 10-Q.

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.

This conference call will include forward-looking statements. 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. Some of these risks are discussed in our most recent filings with the SEC on form 10-K and 10-Q. 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 Oppenheimer Annual Technology Conference in Boston on June 4.

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

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

Revenues for the first quarter of fiscal 2009 were $74.4 million, a 23% increase from the same quarter last year and down 5% sequentially. The increasing year-over-year revenue was driven by strength in sales of our protection products, our power discrete products and our power management products.

As expected, revenues were down sequentially due to seasonal weakness and demand for our computing and non-handheld consumer products. During the first quarter, 60% of our revenues were derived from customers in Asia, 25% came from North America, and 15% from Europe. For the first quarter, revenues from OEM sales represented approximately 43% of total revenues, wide distribution represented approximately 57% of total revenues.

Orders were up sequentially in Q1, resulting in a book-to-bill above one, with strong strength in our consumer and communications end markets, driven by demand for our protection products. Orders for our industrial and military products remain very strong.

In line with seasonality, we saw a sequential decline in orders for our computing products. Net, those orders I counted for 41% of shipments during the quarter.

Our GAAP net income for the quarter was $8.1 million or $0.13 per diluted share, up from $7.9 million or $0.11 per share for the same quarter last year. And down from net income of $14.9 million or $0.23 per share for the fourth quarter of 2008. We expect GAAP net income of $0.16 to $0.18 per diluted share in the second quarter of fiscal 2009.

For the first quarter expenses related to equity based compensation were $4.8 million or 6% of revenue. This is an increase of approximately $500,000 from the fourth quarter of fiscal 2008. The increase was due to the alignment of the timing of the executive grants with the Company's planning cycle. We expect equity compensation expense of approximately $5 million in the second quarter of fiscal 2009.

During the quarter, the Company incurred one time charges, totaling $2.2 million, as it undertook certain activities to enhance overall execution in some of its business units. We expect these actions to realize annual cost savings of approximately $1 million.

Our GAAP tax rate in the first quarter of fiscal 2009 was 22.3%, compared to 26.8% for the fourth quarter of 2008. In the fourth quarter of fiscal 2008, our effective tax rate was impacted by the recovery associated with the now settled insurance litigation. We expect our GAAP tax rate for the second fiscal quarter of 2009 to be approximately 22.3%, based on projected regional mix of income.

The non-GAAP numbers discussed today exclude the impact of stock based compensation, amortization of acquisition related intangibles, expenses and the recovery (inaudible) insurance litigation, the gain of sell off on used real estate, certain restructuring expenses, expenses related to the now completed stock option investigation, and expenses related to ongoing offshore related matters.

On a non-GAAP basis, net income was $13.4 million or $0.22 per diluted share for the first quarter of fiscal 2009. Net income for the same quarter last year was $10.6 million or $0.14 per share. For the fourth quarter of 2008, net income was $16.8 million or $0.26 per share. We expect non-GAAP earnings in the second quarter of fiscal 2009 to be between $0.23 and $0.24 per diluted share.

Non-GAAP gross margin for the first quarter of fiscal 2009 was 55.3%, a 20 basis point decrease from the fourth quarter of fiscal 2008. The benefit from a greater mix of higher marginal revenue was offset by lower manufacturing volumes. We expect non-GAAP gross margins during the second quarter of fiscal 2009 to be sequentially flat to up 30 basis points.

We remain committed to exiting the year at close to the midpoint of our 55 to 60% non-GAAP gross margin model, driven mostly by revenue from new products.

Non-GAAP research and development expenses were $10 million for the quarter. This represents that 10.5% of sales, compared to 12.9% in the previous quarter. Despite the cost benefits from our restructuring activities, we expect R&D spending to remain relatively flat at $10 million in the second quarter of fiscal year 2009, as we accelerate our new product development expenses.

Non-GAAP SG&A expenses were $15.2 million for the quarter, an increase of $100,000 from the fourth quarter of fiscal 2008. This represents 19.2% of sales, same as in the fourth quarter of fiscal 2008. This increase in SG&A spending reflects the impact of upgrading our sales force. We expect SG&A spend in the second quarter of fiscal year 2009 to remain relatively flat at $15.2 million.

Interest and other income was $1.7 million in the first quarter. For the second quarter of fiscal year 2009, we expect interest and other income of approximately $1.5 million. The decrease is due to lower average interest rates.

The Company's non-GAAP effective tax rate for the first quarter of fiscal year 2009 was approximately 24.5%, compared to 20.7% in the fourth quarter of fiscal 2008. The higher tax rate was due to the absence of any benefit from foreign exchange fluctuations in Q1 2009.

If you recall, our fiscal year 2008 tax rate was favorably impacted by the tax treatment in a foreign jurisdiction for all (inaudible) currency exchange activity associated with the weaker dollar. We expect our non-GAAP effective tax rate for the second quarter of fiscal 2009 to be approximately 24.5%. As a reminder, the actual rate can vary from the forecast based upon the geographical mix of our income, fluctuations in currency exchange rates, (inaudible) of deferred tax assets and liabilities.

The diluted share count for the first fiscal quarter was 62.1 million shares. We expect diluted weighted average shares outstanding of 62.5 million shares in the second quarter of fiscal 2009. This forecast can vary based on the average stock price for the quarter, and the level of stock option exercises as stock buy-backs.

Turning to the balance sheet, our balance sheet remains strong. Semtech ended the quarter with approximately $229 million of cash and investments on the balance sheet, an increase of $16 million from the end of fiscal 2008. During the first quarter, the Company spent approximately $2.1 million on property plans and equipment.

Depreciation and amortization for the first quarter was approximately $2.1 million, including approximately $273,000 of intangibles amortization.

In the second quarter, we expect capital spending to be approximately $4.5 million. The higher levels of capital spending is to support the expected production ramp of newer platform products in our power 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 second quarter of fiscal 2009.

The days sales outstanding in accounts receivable was 42 days in the first quarter, up slightly from 38 days in the fourth quarter.

In absolute dollars, net inventory increased by $3.8 million in the first quarter, as compared to the fourth quarter of fiscal 2008. And the days off inventory increased to 84 days from 68 days in the fourth quarter of 2008. Most of the increase was in wafers at (inaudible), as one of our key workflow suppliers had a planned shutdown for the first week of the second quarter, and also to support a stronger Q2 demand.

Inventory at our distribution partners was up from Q4 levels, also in support of higher demand from our end customers. In summary, we are pleased with the Company's financial performance in the first quarter.

I will now hand the call over to Mohan.

Good afternoon, everyone. I will discuss our Q1 fiscal year 2009 performance by end market and by product group, and then discuss our Q2 fiscal year 2009 outlook.

Q1 of fiscal year 2009 was another very good quarter for Semtech. We achieved the highest Q1 revenues in the Company's history. This now represents our fourth consecutive quarter in which we achieve a revenue record for the quarter.

Semtech achieved $74.4 million in revenues in Q1. This is above the high end of our revenue guidance and represents a 23% increase versus Q1 of fiscal year 2008.

Non-GAAP gross margins were 55.3% and non-GAAP EPS grew on an annual basis by 57%, to $0.22 per diluted share.

We are pleased with both our revenue and EPS performance in Q1. Demand for our advanced comm and sensing products, and our power discrete products was relatively strong in the quarter, driven mostly by the high end industrial, high end medical, military and communications segments.

With the changes in our strategy over the last two years, we have seen a change to our market segment mix. And so we have decided to consolidate our market segment reporting going forward, specifically we will start to report on our consumer business, which has recently become a more significant contributor for Semtech.

Starting this quarter, we will provide the revenue broken out by market segment in four broad segments, consumer, industrial, computing and communications. Included in our consumer segment will be market segments such as handhelds, set top boxes, digital TV's, games, digital video recorders, digital still cameras, bluetooth headsets and other consumer equipment.

Included in our industrial segment will be automated meter reading, military and aerospace, medical, automated test equipment, security, automotive, home automation and other industrial equipment.

Included in our computing segment will be desktops, servers, notebooks, graphics, printers and other computer peripherals.

And included in our communications segment will be base stations, passive optical networks, switches and routers, and other networking equipment, wireless lan, voice over IP and other communications infrastructure equipment.

In Q1 of fiscal year '09, revenues from consumer counted for 36% of overall revenue during the quarter, while revenues from computing accounted for 18%. Communications accounted for approximately 19% of revenue and industrial accounted for 27%.

As expected, we saw a sequential seasonal decline in our computing business, while we saw modest strength in consumer driven by handhelds and strength in communications driven by networking and communications infrastructure equipment.

Now let me discuss the performance of each of our product groups in Q1. In Q1, as expected, our power management revenues declined by 20% sequentially but increased on an annual basis by approximately 22%. Our power management business continues to make steady progress. The demand in Q1 was driven mostly by the computing and consumer end markets.

Our power management business unit is becoming more balanced with revenue contributions from all segments. New power platforms that will be released in Q2 and Q3, will drive the balance further and continue to expand our [Sam].

In Q1, Semtech introduced a new family of programmable, high input voltage buck regulators, targeted at a wide range of applications, such as DSL modems, set top boxes, cable modems and digital TV's. This is the first family of high voltage, high performance buck regulators that target such a broad range of market segments to be released in some time. We are already seeing good design wins and orders from this family of products.

As I have discussed in the past, Semtech's strong reputation in integration of power management, delivering extremely high efficiency at very small form factors, continues to serve us well, as customers recognize the architectural power advantages they can realize by using Semtech products.

This quarter we also completed a series of restructuring actions to improve overall execution in two of our product groups. One of the product groups affected was our power management product group. These actions included the closure of several design locations and a reduction in force in all of our power management locations. The impact on our power management business momentum due to these actions is expected to be minimal.

In Q2, we expect our power management business to increase nicely, driven by growth in consumer, communications and computing systems.

In Q1, our protection revenues declined sequentially by 3% but increased 28% on an annual basis. Demand for our protection products remain strong in the quarter, driven by the consumer and the communications 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, and strategically, we are very encouraged by the design win momentum of our protection products across all our target markets.

In Q1, we released an exciting new five volt protection platform to protect display port interfaces from ESD, cable discharge events and latch up. As display core interfaces become more pervasive, we expect these ports to be protected with Semtech protection devices.

In Q2, we expect our protection revenues to increase, driven by continued strength in all our target segments.

Our power discrete revenues were up approximately 16% sequentially in Q1, and up 65% on an annual basis, to once again achieve another revenue record. Once again, we are delighted with the execution within this product group, and our customers continue to award us increasing opportunities as we support their supply constraint 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 our ability to service unfulfilled demand in these market segments. In Q1 we started to take orders for our first space level certified products, and we expect to start shipping these products in Q2. We will continue to see growth in our power discrete business, and in Q2 we expect our power discrete revenues to increase modestly again.

Revenue for the advanced communications and sensing business increased 4% sequentially. On an annual basis, our advanced comm and sensing business was down 2%. However, excluding our test and measurement business, which was down significantly, our advanced comm and sensing business would have been up 15% sequentially, and 20% on an annual basis.

Our advanced communications and sensing business momentum is beginning to accelerate, as we introduce new exciting wireless sensing and consumer analog platforms to the market. Part of our Q1 consolidation actions included some reduction in our advanced comm and sensing product groups, in line with our strategy.

Specifically, we are defocusing slow growing ATE segment in favor of the fast growth consumer segment. Solid development execution on our new road map is critical to the future success of our advanced comm and sensing business, as you expect these new platforms to positively accelerate the top line and drive further operating leverage.

To date, the progress is very good and we continue to monitor the progress very closely to ensure there are no missteps.

In Q1, we released another member of our highly integrated low power sensor interface platform, targeted at the industrial sensing segment. Semtech's unique platform enables customers to use very low power sensor technologies to build high performance, low power sensor systems.

In addition, we began sampling of our first consumer analog platform, targeted at a broad range of consumer applications, and we are already seeing advanced orders. We expect to formally announce this platform once it's fully released. The business from these new platforms is expected to start to contribute modestly in the second half of fiscal year 2009.

In Q2, we expect revenues from our advanced comm and sensing business to increase. From a distribution POS standpoint in Q1 fiscal year '09, as expected, we saw total POS decrease due to seasonality. The POS decrease was driven mostly by Asia across all segments.

Distributed inventory was approximately flat in the quarter, as expected. We believe that our channel inventory is now at the levels necessary to appropriately support our customers as we enter Q2 with a strong outlook.

Moving on to new products. We released eight new products in Q1. In addition to some of the platforms mentioned earlier in the call, we also released some other leading edge protection and power management platforms, including an industry leading integrated (inaudible) platform, and a low profile ESD protection platform that replaces incumbent discrete protection devices.

New product development continues to be an area of focus for us, as we try to change our mix and address new market segments. Design wins from these new products will start to enhance annual product revenue and overall gross margins in the second half of fiscal year 2009.

Turning to design wins. We recorded over 665 new design wins in Q1, which represents another good design win quarter for the Company. The design wins were once again well balanced across several of our product groups and regions, with Asia being somewhat softer. With the new platforms we have recently announced, we expect to see a continuation of the strong design win momentum in the future.

One of the important take-aways on Semtech design wins is that we are penetrating some of the fastest growing segments in the industry. These markets include multimedia handhelds, next generation wireless LAN systems, high end LCD TV's, WiMAX and 3G systems, voice over ip systems, VDSL platforms, ultra-mobile pc's, advanced medical systems and automated meter reading systems. Not only are these some of the most attractive market segments from a growth standpoint but we have multiple opportunities in each segment.

In addition, Semtech's portfolio is being recognized by many of our customers as being truly differentiated in the areas of high performance, low power, highly integrated, highly efficient, small form factor and truly green. We believe that we are uniquely positioned to benefit from these differentiators in the years ahead.

Now let me discuss our outlook for Q2. Our book-to-bill going into Q2 was well above one. Given the current momentum in all four of our product groups, we expect Q2 revenues to be up between 3% and 6% sequentially. If we achieve the low end of guidance or 76.6 million, Q2 revenues would be the highest Q2 in the history of the Company and represent 14% annual growth.

To attain the mid range of our Q2 guidance or $77.7 million, we needed net turns orders of approximately 34% at the beginning of Q2.

I will now hand the call back to the operator, and Todd, Emeka and I will be happy to answer questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question is from Shawn Webster of JPMorgan.

Yes, good afternoon. Thank you for taking my questions. On, just really quickly, on the turns required for your Q2 outlook, they seem a little bit on the low side. Is there anything that's causing you to be a little bit cautious, or how should we think about that, given the high turns you've had over the last several quarters?

Well, the turns are a little bit lower than in previous quarters. I think it's kind of in line, when we look at it by market, Shawn, we think it's a pretty reasonable number, given the backlog and the kind of demand forecast we have for Q2.

Okay. And then, how are your product lead times in the quarter? Was there anything that was going out, coming in, or are they pretty stable?

From a supply standpoint?

In terms of fulfilling orders for customers.

Yes, supply lead times are pretty consistent. We have, it varies from product line to product line. But I would say that 6 to 8 weeks for the majority of our products, and then we have some that are in the 10 to 12 week time frame.

Okay. And how is pricing in your Q1, and what do you expect for the rest of the year?

Pricing, you know, it varies from segment to segment. Obviously in consumer and computing, it continues to be quite challenging. It is a very competitive environment, and we -- it's nothing surprising. It's what we expect and I would expect it to continue throughout the year. Second half will probably be a little bit more challenging than the first half.

Okay. And when you look at your design win progress you're getting to date and what you are expecting in terms of design wins over the next couple quarters, what's the outlook for 2009 in terms of your end markets. Which ones do you think will be the best growing for you?

Well, we have a fairly balanced product portfolio and a fairly balanced end market portfolio. We are putting a little bit more emphasis now on some of the consumer applications and some of the non-desktop and notebook computing applications. I would say, there is hope there that because some of the platforms are targeted at some of those new applications, we'll get some of the design wins there. Of the design wins that we currently have and that are coming through, I would say that they are kind of outside of the normal design win spaces that we have been historically successful in. That's good news for us.

Okay. And then in terms of the restructuring charge, was that a cash charge and do you expect any more in Q2?

Shawn, yes it was a cash charge. In Q2, we're not really expecting that much more. Probably something in the neighborhood of 2 or $300,000.

Okay. Thank you very much.

Thank you.

Your next question is from Steve Smigie of Raymond James.

Congratulations on a nice quarter here.

Thank you.

In terms of the gross margin, you talked about getting to the midpoint of your 55 to 60% gross margin by the end of the year. Do you mean by the end of the fiscal year, as opposed to calendar year? And what would the progression of that look like throughout the course of the year?

Yes, we do mean by the end of the fiscal year, and our fiscal year ends in January of 2009. In terms of the progression, I think we've talked about the fact that we do expect to get to that point mostly from revenues from new products, especially new power management products. I don't know that I could really quantify the progression at this point. But everything that we see currently leads us to believe that we should be able to come close to that target in that time frame.

The two factors that are going to drive the speed in which that gross margin transition occurs, Steve, will be, one, the mix going from less computing to more consumer and other, like communications and industrial. And then I think the other factor will be some of the new product platforms in our advanced comm and sensing business, specifically should generate much higher gross margins for us.

Okay. Can you talk a little bit about what gross margin might look like in the new categories you laid out there? Is it particularly above corporate average and below corporate average, just that general level. If you want to be more precise that's fine, too.

Obviously the protection business is at corporate average, advanced comm and sensing business is slightly above corporate average. Power discrete is above corporate average and power is well below corporate average, from a market segment standpoint one would expect and I think this is probably in line with what we have, although I don't have the details behind it. Communications and industrial will be above corporate average. Consumer will be at corporate average and computing probably well below.

Okay. And just on the strong growth you have seen on the discrete into the aerospace, et cetera, are you guys, have any potential running into capacity constraints there yourselves?

Not really. We still have a lot of upside from the stand-point of improvement in our manufacturing process yields and our bottleneck is not really the capacity itself of the manufacturing flow. It's more some of the peripheral elements. But as we get our yields up and get more consistency in our flow, through our supply chain, I think we will be able to increase the capacity. Obviously, at some point if we continue to grow at this rate, then a year from now we may have to relook at that.

And apologize, if I could just sneak one more in. Power management seems to be very strong on, say, compounding growth rate of next couple of years. Is that 20 to 25% of revenue grower, just generally what that might look like?

The power management business is the business that's going through a little bit of a shift, obviously we are trying to do less computing and little bit more in other areas.

But the good thing about the power business is there is so much opportunity for us. And I think because we have highly efficient, high performance, small film factor, very green products, obviously everybody in the industry, all our customers are looking more and more for those type of products. There is a huge opportunity there for us.

I would say that we will grow above industry average rates there. The challenge obviously, as we try to move the mix to higher margin products is, staying out of some of those low margin areas, how much revenue is lost in those areas.

Thanks a lot.

Okay.

Your next question comes from Craig Ellis of Citigroup.

Craig, you there?

Mr. Ellis, your line is open.

Can you hear me, Mohan?

Yes, go ahead Craig.

Thank you. Nice job tightening the belt in the quarter. The question is how much further opportunity is there to find efficiencies and really add operating leverage through staff production as you look out over the next 12 to 18 months?

I don't think there is a lot of opportunity through start productions. If I look at what we have done really over the last quarter, it's more making sure that we have the R&D in the right places and the whole system working so that execution can be very good.

You know, I have never been a fan of bringing down the R&D, getting rid of designers and things like that. I think the goal is more to just make sure we have an efficient engine.

And our power management business and our advanced comm and sensing business, if I go back when I first joined the Company, we had two different power management businesses and we put them together and what we've really done is now made them into a more efficient business, and our advanced comm and sensing business was three companies that we had acquired. We put them together. We are going through the fine tuning of bringing that to a fast kind of efficient machine.

I think we are largely done. There may be a few things here and there. But I don't think there is much leverage there.

Okay. That's helpful. And then, you've emphasized for the last three or four quarters, that the emphasis you are putting on the consumer end market, how much of that design in strength are we seeing in your guidance versus what would come later in the year in terms of sequential revenue growth?

Most of it will be the second half. So, the consumer side of it is more driven by the handhelds to date. That's where we have some, quite a lot of penetration obviously. Power management is doing very well in consumer.

But the real upside for us is we come out with consumer analog platforms and put a little bit more emphasis on some of the efficiency improvements in the power side. I think we will see that in the second half.

Great, and then lastly, Emeka, on the inventory side, where would you like to finish the quarter with on-hand inventory?

I think we've talked about our model being somewhere between 65 days in times of very high demand, and 75 days. Obviously, we are well above that at this point. It's probably going to take us a while to come down to the 75 days. My expectation will be that we should be somewhat flat to slightly down in terms of days of inventory at the end of this quarter.

Okay, flat to slightly down in terms of days. And then, can you just provide a little bit more color in terms of your comfort with your channel inventories.

Channel inventory is, we are comfortable with it. Going into Q2 with a strong, our outlook for Q2 is obviously quite strong. You can see from our guidance that we believe Q2 is going to be a pretty good quarter for us, also given that many of the customers that we are working with now are starting to order in a slightly shorter lead time. We have pretty good visibility. Backlog is pretty good. And we are quite comfortable.

Thanks, guys.

Your next question is from Harsh Kumar of Morgan Keegan.

Hi guys, first of all, congratulations, great job in the quarter in guidance. Question for Mohan, Mohan, there was one very noticeable thing. There was a complete lack of caution on macro-commentary. Seems you are feeling pretty good about where you are.

Could you talk about maybe at this point in time, how you are seeing the general tone of business? Obviously it's good. But do you feel at this point in time we are passed any concerns on the macro-economy? Is business that good?

Well, to be honest with you Harsh, it's quarter to quarter, right? I think we've come off a very pleasing Q1. Our backlog going into Q2 is quite strong. We like what we see in Q2. We like the fact that some of our new platforms are beginning to come out and get traction. We like the fact that we are getting a little bit of balance, more balance in our portfolio and our market segment mix. All those things are good for Semtech.

I also believe because, of the uniqueness I talked about with Semtech, that even in a recession and I've talked about this before, that Semtech is one of the few companies that, because of the strong balance sheet, because of our balance in markets and products, and the fact that we have very leading edge technologies that can come to the customers and help them bring out really quite innovative and disruptive technologies, that I feel good where we are today.

I also feel that, given the shift in our power strategy that we've had over the last couple of years, we are starting to get some momentum in some new areas there. So, that's the reason why I'm fairly -- feel fairly good about where we are today.

Fair enough. And then Mohan, could you break out for us orders based on your new division of revenues, the four categories that you have, to give us a sense of where orders are really strong or how they track versus the four new segments.

Are you talking about the end markets?

Correct. Computing, industrial, and consumer, and so on and so forth, for specifically, do you expect consumer to be up or were consumer orders up so far in the -- for the June quarter guidance.

So Harsh, going back to the orders that we saw in Q1, communications was very good as we expected, and industrial was okay as we had also expected, consumer was good actually, but that was driven mostly by professional product for handheld applications. So, and computing was actually weak, as would also be expected.

In terms of what would we're expecting in the second quarter, we would expect that the consumer orders would start to pick up more in line for getting ready for the second half of 2009.

Very fair. And last question for you guys, OpEx very good control so far. How should we think about operating expenses? Would you keep a pretty tight handle for the rest of the year? Or should we -- how should we think about, maybe as a percentage of revenue or operating expense? And then also your operating margin goals, are they still pretty valid, the ones you've been talking about the last couple of calls.

Yes Harsh. We are actually really focusing on controlling our operating expenses, as we promised everyone. In absolute dollars, we would expect the operating expenses to be, especially on the SG&A side, to be mostly flat. A little bit of an increase here and there.

In terms of research and development, that is probably where we might be seeing some increases as we could through the year. Mostly, based on new product development.

In terms of meeting operating margin model that we've talked about, yes, we are still very comfortable that we -- if we achieve revenue levels that we've talked about on getting gross margin expansion, that we should exit our current fiscal year at the low to midpoint of the model.

Thanks, guys. Congratulations. Tremendous numbers.

Thank you.

Your next question is from [Sumir Methadanda] of Banc of America Securities.

Hi, a couple of questions. Mohan, perhaps you can answer this. Your gross margin outlook for the second quarter, up 30 basis points sequentially. The rough math is the incremental gross margins are in the low 60s. I'm assuming some of this is being fueled by a little bit of new product growth in the quarter. Is that sort of the trajectory we should be thinking about or is the portfolio products that you release later on in the year even more margin rich relative to what you are seeing in Q2?

Yes, Sumir, this is Emeka, with regards to our gross margin, I think we've actually laid the foundation, the framework that a lot of the expansion in gross margin is going to come from our revenues from new products, especially power management products that are forecast on the consumer end market.

We do expect that revenue ramp to start happening in the second half of this year, and that is when we will expect to see more meaningful gross margin expansion.

Okay, so more than the incremental low 60s type gross margins that you are seeing heading into the second quarter?

Low 60s.

Incremental gross margins, right? If you look at your revenue guidance -- ?

Yes, yes. There should be an acceleration in the pick up of gross margin in the second half.

The second question I have for you, Mohan, was the power discrete segment, doing astonishingly well, up 65% year over year. You mentioned the specific end markets. But is there anything specific that is causing such good growth in this business, if you could just talk to that a little bit?

What it is really, Sumir, and it goes back two years ago when I joined the Company, and we put a renewed emphasis on looking at this business and talking to customers and then customers were telling us, look, we really need Semtech to be in this space and to supply us. And it wasn't -- I would have been very nervous if it was one sub segment that was driving that request but it wasn't. It was industrial, it was high end medical, it was in aerospace, it was military. So we started to look at it more and more, we decided that if we could supply on a consistent basis and keep our customer's happy, they would reward us with more and more opportunity, and that's what we have been doing. And frankly, I think now that we have also entered the space segment, I think we can continue to grow that business.

And you feel that this, obviously the growth rate is sustainable. Are there any competitive dynamics that trouble you or you feel like this is a fairly fragmented market and the competition is not really an issue here?

Well, there are competitors, the main one obviously is Microsemi, is really the driving competitor, leader out there. I would say that this is more our growth and our ability to continue to grow in this market is going to be driven by our customers, and our customers want us, they keep telling us to keep supporting us and I think that is going to be the key thing.

Plus, I think getting into the space segment and then gradual expansion of our supply chain, I think it is going to give us more and more opportunity. I don't think this is a strategic segment for us, five or ten years from now. I view it as a three to five year opportunity for us to do very well in this marketplace. Support our customers when they need us. Keep a very stable foundation for the Company and then use it as leverage to drive some other businesses.

One final question on the inventory side. You said the planned shut down that caused you to build some inventories as you exited Q1. I guess I'm curious as to why you won't see a reversion to a lower inventory level as this instance is behind you when you exit Q2 because you talked about days of inventories just being flat to slightly down.

Sure, sure Sumir. Obviously as you can see from the guidance, we're expecting a very strong Q2. And as is usually the case in periods of high demand, the tendency is that you have to bring in inventory in place to support that demand. And obviously, the second half, if history is to be our guide, we should also expect our second half to be strong. So, the anticipation here is that we will continue to have a need to put inventory in place to support our demand.

I think the key point there Sumir, is that Emeka's assumption and our assumption is that Q3 is also going to be strong.

Okay. And fair to assume that a fair chunk of the buildup in Q1 was a function of this trend, as opposed to just the planned shutdown that you had to account for?

Yes, definitely in my prepared text I said there were two drivers for the increase in inventory. The first one was the shutdown of the foundry and then the second one is the strife that we're seeing in our Q2 demand.

Thank you very much.

Your next question is from Ross Seymour of Deutsche Banc.

This is Bob Gujavarty for Ross. Just a few questions. I think in your breakdown by end market, you used to provide wireless handset as a percentage. I assume that's in the consumer now. Would you mind breaking it out just for historical reasons?

Yes, we can go back. So, in comparison, Q4 for that market segment, consumer and handheld was 29% versus this quarter at 36.

Okay. And I assume that percentage went into the handset business was up q on q?

Correct.

Okay, great. And then just a housekeeping question. Did you repurchase any stock in the quarter or --

No we did not.

Okay. And then, when you think about it, in terms of the inventory, clearly there is some -- is there any risk in terms of the quality of the inventory, in terms of any obsolescence issues or any potential of that for -- in that regard, are you pretty comfortable the stuff is elongated and should be no issues there?

I don't think there should be any issues because most of our inventory growth was in the product line that is pretty broad based. So, the risk of obsolescence is pretty minimal.

Okay. Great. Thanks, guys.

Your next question is from Doug Freedman of American Technology Research.

Hi, guys. Congratulations on a solid quarter. Let's see if I can get a couple questions in here. I noticed that you clearly have gained some traction again back in the handset market. I'm assuming that's with the PMIC. Has that begun to ramp yet?

With the handhelds, it's both in protection and power, protection has done very well in handheld. Our power is charges and also the white LED, integrated white LED drivers. I would say the PMIC, when you look at PMIC and you do find it, it's defined in many different ways, and ours, I wouldn't put it in the category of a fully integrated PMIC at this point. So, we are getting traction in handhelds but it tends to be the non-fully integrated PMIC.

Very good. What is your feeling as far as the success of your customers? One of the pushbacks we have been receiving on the semi side is, hey, orders are great, but if we look at the end markets, where is it going? What is your feeling as far as how well your customer base is doing and how your new products that are ramping, how the products that they are selling in are doing? If you could give us some color on just the health of your supply chain.

That's a good question, Doug. It's difficult to answer for us because we are so diverse. I'm very balanced across regions as well. I would say that obviously there's some North American customers, handheld customers specifically, where you have very good momentum and yet it doesn't necessarily translate into real revenue.

But one of the nice things about Semtech, we do have, if I take the handheld space for example, where we are being in Korea, we have penetration in Taiwan, China, North America and Europe also, and that's true of most of the segments we play in. So we are pretty global. And I put a lot of emphasis on that.

If there's two regions where we are not, it's Europe and China. We could do a lot better in those regions, and that is going to be a focus for us going forward.

I think in general I would say that it's really tough to say which -- how your customers are doing at this point in time. You can do it by segment. Obviously there is some computing customers that are doing a little bit better. I would say HP is doing better, for example, than Dell. But on the whole, it's kind of a tough thing to answer.

All right. Can you give us a little bit of insight into sort of your strategy in the go-to market. You mentioned quite a bit that you're really trying to restaff the sales force and improve the sales execution. What is your thought on what sort of waiting you should have as far as internal sales support versus external, and maybe going with more of a rep focused and where you are with that at this point in time?

We've -- the type of products we have, especially in advanced comm and sensing, and then with our power products, it's really a technical sale and really application sale, and I refer a lot to platforms because they are application platforms that you have to sell in many ways versus a simple product.

And so it doesn't mean we have to have FAEs and technical people and really technically savvy sales people, and that's more our approach. That doesn't mean we don't use reps and distributors but we just need to have our people out there making sure that the knowledge base is transferred.

All right. So you continue to feel strongly that it's important to have the internal people, that's good.

Yes.

You know, just another one, I'm having trouble reconciling two of the things you said. One of them being that lead times remain short. Orders are coming in. Visibility is not -- that orders are coming in with rather short lead times, but yet your turns have gone down so much. Is it that guys this quarter lay in some orders that is going to cause the turns to come down? Or is it just that you want to leave yourself with sort of a situation where we will have very strong growth in the October quarter?

I guess what I said was, visibility is better because our backlog is stronger. I wouldn't say that anything has changed dramatically from the standpoint of order lead times. It's been pretty consistent.

And then, just, I do also, like a few of the other questions have been focused on the incremental gross margin question and how you get the gross margins there. Is there a revenue number at which you need to achieve to get that 57.5% exiting the year?

Well, Doug, obviously we are going to need higher revenues to make sure that we have the volumes. But I think we've talked about the fact that a lot of our gross margin expansion is going to come from new products. So the key for us is to keep our eyes on the percentage of revenue that's coming from the new products.

Okay. Terrific. Thank you again and congrats on a nice quarter.

Thank you.

Your next question is from Jeff Rosenberg of William Blair & Company.

Hi, Todd, could you also give us the sequential comparison of what revenue is, was it a percentage of sales for the computing segment as you're looking at it now, in the fourth quarter?

It didn't change. It was 21% in Q4 and up to 18% in Q1.

Okay. And so I assume that was the predominant driver of the strong decline in power management was, that's where the drop came in computing?

Mostly computing.

And I guess my question is, it seems like if I remember back to the real strong revenue ramp you had in the middle of last year, the reasons the gross margin didn't benefit was there was some opportunity to take on some business that was at a lower gross margin. It feels like, as you get back to comparable levels in Q2, you should have a much richer mix already but yet gross margins are only up slightly. Can you reconcile that a little bit and to why that is not helping and then the new products are layering on top of that?

Well, currently the strength is driven by, the current strength in the last quarter was driven by handhelds. Some networking kind of infrastructure stuff in communications. And industrial, which are -- tend to be higher gross margin than the computing sector.

But Q4 and Q1 I think the computing revenue decline was fairly small. It wasn't massive. I don't think it was substantial enough to move the gross margin needle, and then we had a little bit of offset with the volumes, lower volumes there to give us a lower absorption and that resulted in lower gross margin.

Yes, and I guess I'm looking more at Q2 as things come back up to levels that are more comparable to what they were in the back half of last year, and then just thinking that the -- it felt like the mix should be richer but maybe what you are saying is is it's not all that substantially different in Q2 versus the second half of last fiscal year?

Yes.

Yes.

And then the other question I wanted to ask, could you give us an update, given there was some pretty big sequential moves in the rough breakdown of revenue by product segment?

By business chain you are looking for, so?

Power management. Protection.

Power was 24%, last quarter it was 28. Protection was 48% in Q1 and 47 in Q4. ATNS is 17% in Q1 and 16% in Q4. And power discrete was 11% in Q1 and 9% in Q4.

Thanks a lot.

Sure.

And your next question is from [Zu Methadanda] of Banc of America Securities.

Hi Emeka, I just had a quick follow-up on how we should think about share count. I'm assuming the share count was down in Q1 despite the lack of repurchases, simply because your stock price is so depressed.

Go ahead.

As you look forward, is the idea that you won't be repurchasing stock -- you still have a healthy excess cash balance on your balance sheet?

Yes, the reason it was down in Q1 actually was because we did a $15 million buy-back in Q4 of last year. So we didn't see the full benefit of that in Q4 of last year. But in Q1 we saw the full benefit of it.

As we go forward, as you know, we do have a $15 million program that is currently authorized. My expectation is that we will be active but it is not going to be -- it's not going to be significant. Like I said before, we are going to finance this out of cash from operations. And I don't know exactly how much I'm planning on buying back, but I don't expect it to be anything significant.

Okay. Thank you very much.

Okay.

And you have a question from Steve Smigie of Raymond James.

Thank you. I appreciate the chance for a follow-up. Mohan, you alluded a little bit to obviously expecting a decent Q3 as well. Typically that's a very strong sequential growth quarter for you. Any reason at this point to believe that it wouldn't be sequential?

No reason to believe other than some of the analysts have mentioned macro-economic factors. But other than that I have no reason to believe that Q3 wouldn't be another strong quarter for us.

Great. Thank you very much.

There are no further questions at this time. Mr. Maheswaran, do you have any further remarks?

Let me summarize by saying that Q1 of fiscal year '09 was a very good quarter for Semtech. We increased revenues annually by 23% to achieve a Q1 revenue record in our 48 year history, and increased non-GAAP EPS by an outstanding 57%.

We also achieved a book-to-bill well above one and saw three of our four product groups grow by double digits on an annual basis. Finally, as we continue to fine tune the execution machine within Semtech and continue to nurture a high performance culture, I'm confident that the new Semtech is going to continue to perform at a higher level. With that, I would like to thank everyone for participating in our first quarter conference call and look forward to updating you all next quarter. Thank you.

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