Semtech Corp (SMTC) 2009 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Q4 fiscal year '09 Semtech Corporation earning release conference call. All lines been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. And I would like to turn the call over to Mr. Emeka Chukwu, your conference is open.

Thank you, very much, operator. Good afternoon, ladies and gentlemen. Before we go into our prepared remarks, I would like to introduce Chris Rogers, as our new Director of Financial Planning and Analysis and Investor Relations. Chris has been with us for over a month now and we are excited to have him as part of our team. Chris?

Thank you, Emeka. Good afternoon. Welcome to Semtech Corporation's fiscal year 2009 fourth quarter conference call. I'm Chris Rogers, Director of FP&A and Investor Relations. We just issued our Press Release announcing our unaudited results for our fourth quarter ending January 25th, 2009. A copy of our Press Release is available on our website, www.semtech.com as well as national news and financial market wires.

During this call, Mohan Maheswaran, Semtech's President and Chief Executive Officer and Emeka Chukwu our Chief Financial Officer will be discussing our results and answering your questions. Before I turn the call over to Emeka, I would like to remind everyone of the following important information. Our call today will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from those made during this call. We encourage you to review the Safe Harbor statement including in today's Press Release as well as in Semtech's most recent periodic reporting documents on forms 10-Q and 10-K filed with the SEC for more detailed discussions. Our Press Release and this conference call are a sole forum to respond to questions on our estimated financial performance going forward. Should you have any questions on our financial matters for the upcoming quarter, this is the time when we are able to respond to these questions.

Also, during this call, you may refer to pro forma and other financial measures that are not prepared according to Generally Accepted Accounting Principles. You can find a reconciliation of non-GAAP to comparable GAAP measures on the Investor Relations section of our website. A replay of this call will be available on the Investor Relations section of our website through April 3rd. Thanks for your attention to this important preliminary information.

I will now turn the call over to Emeka Chukwu, Semtech's CFO.

Thank you, Chris. I would like to start off by making a few comments about GAAP and non-GAAP reporting. Beginning with the fourth quarter of our fiscal 2010, we will no longer report our financial results on a non-GAAP basis. However, we will continue to provide additional relevant financial information to help investors better understand our financial performance.

Revenues for the fourth quarter of fiscal 2009 were $62.7 million, a 21% sequential decline and down 20% from the same quarter last year. Revenues decreased sequentially due to weakness in demand across all end markets as a result of challenging macroeconomic conditions. During the fourth quarter, 54% of our revenues were derived from customers in Asia, 28% from North America, and 18% from Europe. For the fourth quarter, direct sales represented approximately 49% of total revenues while distribution represented approximately 51% of total revenues.

Orders went down sequentially in Q4 resulting in a book to bill of less than one. Net sales orders accounted for 29% of shipments during the quarter. Our GAAP net income for the quarter was $6.3 million or $0.10 per diluted share. Down from $14.9 million or $0.23 per share for the same quarter last year and down from net income of $11.5 million or $0.19 per share for the third quarter of 2009. In the first quarter of fiscal 2010, we expect GAAP net income of $0.02 to $0.07 per diluted share.

For the fourth quarter, expenses related to equity-based compensation were $2.6 million or 4% of revenue. This is a decrease of approximately $1.2 million from the third quarter of fiscal 2009. The decrease was primarily due to the reversal of compensation expenses associated with stock awards, granted under the Company's executive long-term incentive plan as the probability of a payout under this plan was determined to be low. This resulted in a February EPS impact of $0.02. We expect equity compensation expense to return to normal levels at approximately $4.5 million in the first quarter of fiscal 2010.

GAAP gross margin for the fourth quarter of fiscal 2009 was 53.2%, down 30 basis points from the third quarter of fiscal 2009 as a result of lower manufacturing volumes. We expect GAAP gross margin during the first quarter of fiscal 2010 to be flat to up 50 basis points, depending on revenue mix and overall revenues. GAAP SG&A expenses were $16.1 million for the fourth quarter, or 25.7% of revenue, a decrease of $3.2 million from the third quarter of fiscal 2009. The decrease in SG&A was primarily due to savings from the Company's shut down during the quarter, the one-time reversal of equity compensation expenses and the benefit associated with the impact of the stronger US dollar. We expect GAAP SG&A expenses to be sequentially flat at $16.1 million in the first quarter of fiscal 2010.

Increase in equity compensation expense will be offset by savings the various cost reduction initiatives implemented by the Company, including a two-week shutdown and reduced accruals for incentive compensation. GAAP research and development expenses were $9.8 million for the quarter or 15.6% of revenue, down $300,000 from $10.1 million in Q3. The reduction was due to savings from the Company's Q4 shutdown and the favorable impact of a stronger US dollar. These benefits were offset by increases in spending on new products. We expect GAAP R&D expenses to increase to $10.5 million in the first quarter of fiscal 2010 due to higher new product development expenses.

For the fourth quarter, expenses related to the now completed stock option investigation and expenses related to ongoing off shore related matters were $491,000, down from the $611,000 in Q3. We expect off-shore related expenses of $500,000 in the first quarter of fiscal 2010. Interest and other income was $403,000 in the fourth quarter, compared to $904,000 in Q3 as interest rates continued to decline. For the first quarter of 2010, we expect interest and other income of approximately several hundred thousand dollars. Our GAAP tax rate in the fourth quarter of fiscal 2009 was 17.3% compared to 16.6% for the third quarter of 2009. We expect our GAAP tax rate for fiscal 2010 to be approximately 20% based on projected regional mix of income.

The non-GAAP numbers I shall be discussing today exclude the impact of stock-based compensation, amortization of acquisition-related intangibles, expenses and the recovery associated with a now settled insurance litigation, certain restructuring expenses, expenses related to now completed stock option investigation, and expenses related to ongoing off shore related matters. On a non-GAAP basis, net income was $8.8 million or $0.15 per diluted share for the fourth quarter of fiscal 2009. Net income for the same quarter last year was $16.8 million or $0.26 per share. For the third quarter of fiscal 2009, net income was $14.9 million or $0.24 per share.

Non-GAAP gross margin for the fourth quarter of fiscal 2009 was 53.5%, which was at the low end of our gross margin guidance for Q4. This 50 basis points decline from the 54% reported in Q3 was due to lower manufacturing volumes. Non-GAAP SG&A expenses were $14.1 million for the quarter or 22.5% of revenue. A decrease of $2.2 million from the third quarter of fiscal 2009. The decrease in SG&A was primarily due to savings from the Company's shutdown during the quarter and the benefit associated with the impact of a stronger US dollar.

Non-GAAP research and development expenses were $8.9 million for the quarter or 14.2% of revenue, a decrease of $200,000 from the $9.1 million reported in Q3. The reduction was due to savings from the Company's Q4 shutdown and the favorable impact of the stronger dollar. These benefits were offset by increases in spending on new products. The Company's non-GAAP effective tax rate for the fourth quarter of fiscal year 2009 was approximately 19.5% compared to 19.8% in the third quarter of fiscal 2009. The diluted share count for the fourth fiscal quarter was 60.6 million shares. We expect diluted weighted average shares outstanding of 60.5 million shares in the first quarter of fiscal 2010. This forecast can vary based on the average stock price for the quarter and the level of stock option exercises or stock buybacks.

Moving onto the balance sheet, our balance sheet remains very strong. In the fourth quarter, we generated $15 million in free cash flow, which is approximately 23% of revenue and ended the quarter with approximately $259 million of cash and investments. During the quarter, we repurchased approximately $3.4 million or 319,000 shares of our common stock. Under a program previously authorized by the Board of Directors. We currently have $60 million left under this previously-authorized program.

During the fourth quarter, the Company spent approximately $1.9 million on property, plant and equipment. Depreciation and amortization for the fourth quarter was approximately $2.3 million, including approximately $273,000 of intangibles amortization. In the first quarter the fiscal 2010, we expect capital spending to approximately $4 million to support various new process developments and a ramp up of new products. We expect depreciation to be approximately $1.8 million and amortization to be approximately $273,000 in the first quarter of fiscal 2010.

Accounts receivable declined by 23% from the last quarter, due to lower sales, and our DSOs increased to 46 days from 42 last quarter. In absolute dollars, net inventory decreased by $4.4 million in the fourth quarter as compared to Q3. As we reacted quickly to softening demand, but the days of inventory increased to 94 days from 83 days in the third quarter. Inventory at our distribution partner grew 104 days from 70 days in Q3 as POS declined in all regions except for Europe. We believe that both our internal and channel inventory are very well positioned to respond to short lead time orders.

In summary, we are pleased with the Company's financial performance in the fourth quarter despite very difficult circumstances. Although revenues were lower, we remained profitable and grew cash and investments through very good management of operating expense and working capital. On a sequential basis we reduced non-GAAP operating expenses by 10%, accounts receivable by 23% and inventory by 14%. We believe that our strong balance sheet and operating leverage will not only see us through these uncertain times, but will also allow us to emerge as one of the best-performing companies.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, I will discuss our Q4 fiscal year 2009 product group performance, our fiscal year 2009 Company performance and then our Q1 fiscal year 2010 outlook.

Q4 fiscal year 2009 was a challenging quarter for Semtech. Demand softness across all regions and segments led to a decline in revenues. Semtech Q4 revenues were down sequentially 21% to $62.7 million. Non-GAAP gross margins were 53.5% and non-GAAP EPS was $0.15 per diluted share. Although our revenues and EPS were down sequentially in Q4 of fiscal year '09 we believe that Semtech's end of market balance, broad portfolio, broad customer penetration, and balanced geographical presence enabled us to outperform the market again.

Now let me discuss the performance of each of our current groups in Q4. In Q4 our Power Management revenues declined by 23% on a sequential basis. The demand softness in Q4 was across all segments, but noticeably weaker in the consumer and computing end markets. In Q4, Semtech's Power Management product group acquired the high frequency switching regulator IP assets of [Leadis] Corporation. They believe this addition will help us introduce more differentiated portfolio of Power Management switching regulator products to the market over the next 12 to 24 months. In addition to the IP we acquired, we also added a very couple experienced Power Management designers who will supplement an already strong team. The expenses associated with this acquisition are built into our Q1 guidance.

Our Power Management product group continues to release new product Power Management platforms that enable us to expand our SAM. The focus of these new platforms will be the hand-held,consumer and the industrial segments. We are confident the momentum from our new power products will drive further revenue growth and margin expansion in the second half of fiscal year 2010. Given that our fiscal Q1 is a seasonally softer quarter for our Power Management business and given the current overall softness in demand we expect our Power Management revenues to be down sequentially in Q1.

In Q4, our protection revenues declined by 23% on an annual as demand from all segments softened. Our protection business unit continues to execute quite superbly and strategically we all very encouraged by the design win momentum of our protection products across all of our target markets at both strategic accounts and tier two and three accounts. In Q4, we announced a new family of low capacitants filter protection devices with the high [anitnuation] and low clamping voltage needed for high resolution color LCD interfaces in GSM and CDMA-based 3G hand sets in. This family of new products further strengthens and extends Semtech's protection portfolio in the smart phone and broader hand held segments.

While Q1 historically has been a seasonally softer quarter for our protection business driven mostly by lower consumer and computing demand, this year we do expect our protection revenues to be flat to slightly up in Q1. This expectation is driven by stronger recent orders from Asian infrastructure manufacturers and backlog pull in requests from high end hand held manufacturers.

Our Power Discrete revenues increased on an annual basis in Q4 by 8%. We're delighted with the execution within of this product. This business is driven by demand from the aerospace, military, industrial and high-end medical markets. Our focus is on continuing to improve our supply throughput and consistency of supply. We are also selectively developing new products targeted at increasing market share. We believe that our Power Discrete operations are now back to healthy levels following the fire in Q4 of FY '09. This is a tremendous achievement by our Power Discrete product group and we can now continue on our journey of gaining share in this market. In Q1, we expect our Power Discrete business to grow modestly as we continue to increase share.

Revenue for the Advanced Communications and Sensing business decreased 4% sequentially. Excluding our test and measurement revenues, our Advanced Communications and Sensing business would have increased both sequentially and on an annual basis. The focus of this business continues to be developing and releasing new platforms that enable us to expand our SAM. Our advanced common sensing product group recently announced a high performance ultra low power integrated ISM band transmitter using Semtech's true RF technology that integrates all radio components into a single dye and enables the bill of materials in a transmitter to be reduced by 40%. This new platform is already gaining traction in several industrial applications.

In Q1, we expect revenues from our Advanced Communications and Sensing business to be approximately flat to slightly down. From a distribution POS standpoint in Q4 of FY '09 we saw a total POS decrease. The POS was driven by all regions except for Europe and all segments. Distribution inventory increased in quarter. The sharpest was driven by Japan where we have some new design wins with new products that we do expect to ramp to volume in fiscal year 2010.

Moving on to new products, we released 16 new products in Q4. This is a 33% increase over Q3. And 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'm confident we will start to even better result this year. Design wins from these new products will start to enhance our new product revenue and overall gross margin in the second half of this year.

Turning to design wins. We recorded over 650 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 a new platforms we've are recently announce wed expect to see a continuation of the strong design win momentum in the future.

Let me comment briefly on our fiscal year 2009 performance. Yesterday marked my three-year anniversary with Semtech. I am delighted with the progress the Company has made over the last three years and I'm confident that next three will be even more memorable. Fiscal year 2009 was a record revenue year for Semtech. We achieved $295 million in revenues and grew 3.5% from fiscal year 2008. This represents yet another milestone for Semtech. Fiscal year 2009 was our second consecutive annual revenue record and our third consecutive year of sequential revenue growth.

On a non-GAAP basis, we also maintained approximately 55% gross margins for the year, generated $0.85 earnings per share and we grew our design win revenue dollars by 6% versus fiscal year '08. Also in fiscal year 2009 our protection business achieved record revenues and grew approximately 9%, and our Power Discrete business achieved record revenues, grew approximately 29%, and shipped its first products into space customers. Our advance comm and sensing business released a number of new platforms that are gaining traction and will make fiscal year '10 a growth year for this business.

We hired a new Vice President and General Manager for our Power Management business and required switching regulator IP assets. We also hired a new general counsel. I now believe that the Semtech management team is complete and this will be the team that takes Semtech to the next level. In addition we're using the tough environment to hire the best people throughout our organization and our future results will demonstrate that. Our people are difference makers for us.

Let me reflect on our FY '09 performance we cannot forget the fire that impacted our Power Discrete business in Q3. Our ability to recover from the fire, rebuild our operation, and regain momentum in two quarters was a major accomplishment for us and is another example of the tremendous execution improvement in the Company. In fiscal year '09 we also reduced net inventories, repurchased $34 million of our stock, and replenished our cash balance to end fiscal year '09 with $259 million in cash and a very strong balance sheet. In fiscal year '09 our free cash flow as a percentage of revenue was over 23%. Our net cash per share was just under $4 and our free cash flow per share was $1.14. We believe all of of these metrics place us amongst the best cash generators in the semiconductor industry and amongst the very best in the analog sector.

Further more we have steadily increased our free cash flow per share and our net cash per share over the last three years. The culture at Semtech is evolving into a high performance, results-oriented culture and the core values within Semtech have helped us shape our behaviors both internally and externally and made us into a better Company. Our execution is dramatically improved across all of areas of the Company and I'm very confident we can continue to build on the current momentum. Despite a challenging end to the year, fiscal year 2009 was a very memorable year for the Company, and one that we are very proud of.

Now let me discuss our outlook for next quarter. The current macroeconomic environment continues to give us all cause for concern. While bookings have been stronger so far in Q1, and there have been some areas of strength and some pull ins, there is still a lot of uncertainty and visibility remains very poor. We currently expect Q1 revenues to be between $52 million and $58 million. To attain the mid range of Q1 guidance or $55 million, we needed net terms orders of approximately 37% at the beginning of Q1.

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

(Operator Instructions) Your first question comes from the line of Craig Hettenbach from Goldman Sachs. Your line is open.

Great, thank you. Mohan, Semtech hasn't cut as deep as some of the other companies in the space. Can you just talk about some of the areas that you are utilizing through this downturn to actually kind of try to build and what areas you see as we come out of this downturn that you're able to invest in that some competitors may not?

Yes, the main focus for us is still continuing to bring out new product platforms in our Power Management area. We've also, as I mentioned on the call, acquired a new platform there. Our ACS platforms both on the communications side, the wireless and sensing side, the industrial areas, the industrial wires, the industrial sensing and the consumer analog products they are all platform areas I believe will give us new SAM expansion for the Company.

And I think it's really important for us for the next three years that we continue to drive that SAM expansion. In addition we continued to invest in new process development for our protection areas and also for Power Management. So in a sense, our ability to maintain opex, but keep the R&D machine of the Company going I think is a critical part of the strategy.

Great and if I could touch on the stock buyback, you bought back a little bit of a stock. Most companies again in this environment have halted buybacks. Can you just give us a feel for your appetite of future buybacks versus potential M&A?

Craig, this is Emeka. So we currently have a program that -- and it's about $60 million left on that program and what we've said in the past is is that we'll continue to fund our buyback with cash flow from operations. So that's what we're going to continue to do. With regards to the second half of your question on acquisitions, we are definitely very actively looking around to see what would make sense for the Company, but I don't think we look at it as either or. It's something that we're doing at the same time.

Great. Thank you.

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

Great. Thank you. Just looking at the advanced common sensing business. I know you have a set of new timing products out there that's set up to perform fairly well as we have a rollout of base stations coming up. And I was just curious how that stands that more LT platforms. Are you going to get some 3G benefit from that in the coming quarters and year?

So, yes, we already have 2G, 3G base station design wins. We are getting back haul, IP back haul design wins, LT as well although that's probably a little further out. They are all tier one customers. These are major opportunities. Also WiMAX I would say. The real critical question is how fast those guys ramp up.

The encouraging news I would say at this point and in its early days is there where I'm beginning to see more investment dollars going on in different regional areas is more in infrastructure. Communications infrastructure and infrastructure to accelerate some of these new emerging technologies. So that gives us some good feeling about the second half of this year, but it's early days I would say, Steve?

Okay, in terms of the products you have out there for stuff ramping closer in. How much benefit are you getting say in some of the build out happing over in China?

We're seeing some benefit of that. Not so much from the new timing synch stuff because that's all in design win and design win mode, but more from our existing product technologies in protection and Power Management and also in some of the existing ACS products.

Okay. And then on the Power Discrete business, I think you mentioned you thought you continued to gain share but not sure if you indicated whether you thought that would be up sequentially in the coming quarter?

We expect it to be up modestly. Even though we're gaining share, I would say even in this marketplace, the industrial high-end medical and the military is also softer than one would have liked. But I think we'll continue to see progress there.

Last question is just on the military part of that business, does the new administrations change your outlook about the potential of that business over the the coming year?

Not really. I think part of the reason is because of our approaches to gaining share. So we know who the big gorilla and is we know what we need to grow despite what happens in the marketplace. And obviously a large part of our Power Discrete business is also aerospace, space which is a new segment for us. The high-end industrial and medical and so military is just one portion of it.

Okay. Great, thank you very much.

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

Hi, Mohan and Emeka a question for you. Gross margins were pretty impressive given how much revenues have declined. I guess first question is what is working there and secondly in terms of the uptick that you're seeing is that primarily coming from Reynosa coming back on line?

Yes, what is really working for us is the mix. In terms of our guidance for Q1 the mix is going to be the key driver and that is we expect our Reynosa business to start getting back to full health after the fire. And also our Advanced Communications and Sensing and new lines of sensing products are really getting a lot of traction. They're doing quite well. On the downside. The one thing that would really limit the gross margin expansion that one would have ordinarily seen from a favorable revenue mix is that Q1 volumes going to be lower compared to our normal run rate.

Sure and then secondly, guys if I can ask you about the linearity in the quarter, did things get progressively better as what we're hearing from a lot of companies. Wondering you what guys saw in the quarter?

I think November and December were very, very soft and so January was stronger. We continued as I mentioned to see an improvement in bookings and orders and just general more positive feeling from customers, and a couple of bright areas as well. I think smart phones and hand helds and the Asian infrastructure. I think are actually doing quite well. So in general I would say the bookings as being modestly up.

Okay. Fair enough. And last question for me. I guess if I heard you correctly, both your base station business as was as your cell phone business was up sequentially. Is that a correct assessment?

I talked about what that protection business is likely to be be flat to slightly up and that's unusual for us in Q1. And that's driven by the infrastructure and the smart phone business, yes.

Okay, and so kind of drilling into that. Is that something that just Semtech, in your opinion is seeing because of design wins or is that something that's happening across the board?

I would say it's probably both , Harsh. I think if you are a participant in the Asian infrastructure market then I think you're going to see some upside with that. We have a fair amount of balance in our business as you know and I think our protection business we sell into the comm market, lightning protection, Ethernet 10-gig and gigabit Ethernet protection and we sell into the high end hand held. USB, mini USB, micro USB, mini HDMI. The MDMI port and so we've got a little bit of benefits if either of those markets

And I guess last question if I can squeeze one more in. I take it that you are planning a shutdown for another two weeks or so in this quarter?

That is the game plan, yes.

Thanks.

Thank you.

Your next question comes from the line of Doug Freedman from Growth Point Gleacher. Your line is open.

Hi, gus. Thanks for taking my question. Our name does keep changing in case you're wondering. Anyway, if you could the top line guidance, definitely you guys are holding up better than the peer group peak to trough. If you can go into a little detail on why you're looking for a 37% turns? That number actually would reflect a lower turns ratio than I would say a lot of your competitors. Are there certain reasons why you're unable to respond to a higher turns environment if there was one? Anything you can offer on how you guys settled in on that number?

I think probably that's -- we look at the run rate, the turns ratio over the last couple of years. Doug, if I go back, last four quarters it's been 35%, 34%, 34%, 39%, Q1 of FY '09 is where we turned. So, 37% is kind of in the range. We can respond to a larger turns. We have put in place the right inventory portfolio to respond to faster turns requirements if we need to. But we, as you know, we have a system.

We look at a demand forecast system and that demand forecast tells us what we think is going to be required in that quarter and that drives -- in large part our guidance. As things improve, we'll see. That obviously could help us, but we think our guidance is probably the right guidance for this quarter.

All right, I just wanted to sort of understand what you were looking at and how you were arriving at that given -- it does seem like the turns environment is increasing. Could you help us understand a little bit about how much of the expenses right now are sort of being temporarily restrained? If you weren't to have sort of shutdowns Emeka, or the temporary actions, what is sort of the more normalized OpEx spending that you're targeting and what would it take -- at what run rate of revenues do you sort of back off on the controls? So that we can model the recovery properly.

So Doug, if you go back a few quarters, may be you go back to Q3 when we were almost at $80 million of revenue, total OpEx was up $25 million. That's what I would consider the normal run rate for us. So but given where we are right now we are implementing various activities like a Company-wide shutdown. We're reducing the percentage that we're expecting to pay out on our supplemental compensation. We're dialing back on traveling. We're pushing out new headcount additions. We're basically doing everything that one would expect us to do in this environment. But from a normal run rate prospective, our operating expenses is basically been built to support an $85 million to $95 million per quarter run rate.

Okay. And then, I also, looking into my model going out a little ways, there were some actions that you were attempting to take possibly to recover some costs associated with the Reynosa fire. Can you give us an update on may be the expectation of a few of the one-time charge and what the outlook is for some of those?

Well, I think most of the expenses associated with bringing Reynosa back online are mostly behind us. We're probably still going to have some here or there, about $100,000 or $200K per quarter. We are still working with our insurance companies. To start getting some reimbursement of the money we have spent. We have not really factored a lot of that into the guidance because as you know with the insurance companies you can never really count on what you're going to get from them. So, but in terms of the actual spending, we are behind most of the initial expenses.

And then there's two components to the insurance recovery. One is the actual cost of replacing equipment and then there is business loss as well.

It's a business interruption.

Correct. I just wanted to make sure that that was still potentially in front of us because I know you had said in your opening comments that a few insurance recovery issues were resolved but I didn't believe they were related to Reynosa. So I just wanted to clarify.

Yes.

That that potential is still in front of us, great. And just one thing I had trouble hearing on your interest expense how much interest income you expect. Was that several or seven?

$700,000.

$700,000. Great. Thank you so much.

Your next question comes from the line of David Wu from Global Crown. Your line is open.

Yes. Hi, I was curious about one thing and that since nobody knows how long this recession is going to last or how deep it's going to go. Beyond the kind of measures you've done so far, what other things could you be looking at, depending on how much the second half uplift potentially is for you? I was curious about that, and do you have a sense of how much below consumption have your shipments been in the fourth quarter of last year and the first quarter of this year. Do you have a guess of how much below your end market consumption you really are shipping , and therefore any guess how much of a balance would you get if we finish inventory liquidation sometime

Let me take the latter part of the question and ask Emeka to talk about managing through the recessionary time line. The way we look at it, the way we manage our business is we look at the demand forecast for two quarters. So we look at, for an example, this quarter, Q1, and then we look at Q2 and that's how with manage kind of the whole channel inventory, our own inventory and determine what kind of a bounce back there could be and how we could respond to that if necessary.

Consumption versus what we've been shipping is tough to call because I think our customers are going through some pains in terms of determining what is the end mind out there. And clearly it's different for computing and consumer. They are struggling I think in a little bit deeper fashion than some of the infrastructural aspects where infrastructure you get very good insight into what infrastructures going on because governments have on to put money well in ahead really of the deployments of the infrastructure to make it happen. So you get a little bit more insight into that.

But I think from a consumer standpoint , it can be computing standpoint, I think it's very difficult to call and I wouldn't want to state -- give you a guess as to where we are. But I a would say that our Q1 guidance gives you a little bit of insight as to where we think the demand is for Q1 and hopefully that will be

And, David, with regard to the operating expenses, the way we think about this situation here is that this situation is going to come to an end at some point. We don't know when. If you will recall, in our fiscal year 2009, our Q2 of fiscal year 2009, we took some actions to reduce our spending even before the rest of the industry started to look at it. We believe that the various list of options that we have available to us right now that we've actually employed in Q4, we planning in Q1, should be enough really to allow us to continue to bring our primary expenses down if we need to.

We have additional activities like, for instance in Q1 we are still planning on some level of payout with regard to our supplemental compensation. If things get worse, then we'll probably have to dial that back to zero. There are still some replacement headcounts that we're doing that are very critical. If things get really worse we might have to eliminate that completely. So there are a suite of options that we have available to us to really dial down our operating expenses further, if this continues to get worse. But you just need to be aware that we cannot look at this thing differently. In this Company we think more on a strategic level that we need to continue to make the investments that we need to allow us to be really successful when the economy bounces back.

And I still believe, David, the people for us at Semtech really are our biggest asset. I mean we have spent the last few years rebuilding the infrastructure and rebuilding our team, and making sure we put in place the growth platforms so we can take share and gain share even if the market doesn't come back. So at the same time if we do that and we start to let go of those real key people then I think that's the wrong thing for the Company.

I see. So hopefully you guys are right and the April quarter is the bottom.

We hope so.

Back to school starts in July quarter for you; right?

July, yes.

Okay. Great, thank you.

Yes.

(Operator Instructions) You have a follow-up question coming from the line of Steve Smigie from Raymond James. Your line is open.

Great, thanks. I was hoping you could give me some sense of what the option expense might fall out to in various categories so I can try to get to my non-GAAP numbers?

I think I got it to $4.5 million and I think the breakdown is manufacturing is about $400,000. Research and development is about $1 million, and the balance is SG&A.

Okay and that's for the coming quarter or the -- guiding quarter.

Yes.

Okay, cool. And then was hoping you could talk a little bit more about tar management portfolio. You obviously did an acquisition there and you've been investing quite a lot in that area. It was off this quarter. I guess obviously the industry was pretty bad, but what does that look like over the coming year? I mean you've put in a lot of design wins in. Do you grow faster than the markets because of all of the investment you have made? How are the design wins get traction and are there specific quarters where you expect there to be a step function up or anything like that?

Yes. The Power Management business at Semtech we've been going through a little bit over the transition years. As you know we were very strong in the computing platform. Core regulators and that sort of stuff. And when I came on board I felt the margins weren't really what we need as a Company and we needed to kind of change that transition so we really started to focus more on some other areas.,

And this last year we brought in a UGM into the business. And I think for the first time I feel really quite good about the type of platforms we've got coming out. They are very innovative, they're different. They're targeted at a whole range of different applications including TVs and displays and some notebooks, set-top boxes, medical equipment, infrastructure in, even automotive and hand-held as well.

Different types of functionality and I think with the acquisition and we're looking at some other types of IP acquisitions as well, I think we just changed the portfolio. We are getting good design wins. I mean design wins are coming. I think the real benefit for us is not only the revenue traction, but the gross margin expansion that we will get this business. So I expect in fiscal year 2010, the second half you'll see that.

Okay. And the last question was just on inventory. What you think that looks like in the coming quarter? How much does that get worked down or not and even into the following quarter? Just trying to get some sense of obviously it's spiked on a days basis and partly inventory you put in place. But, how does that work over the next couple of quarters?

So for Q1 at least, expectation that our internal inventory is going to be somewhat flattish. But the final numbers are going to depend really on what we see happening in demand with regards to Q2. So I mean as you know, Steve, our inventory build is to a very large extent dictated by how we see future events. So at this point, internal inventory, we expect is going to be somewhat flattish. Our expectation is that channel inventory is going to come down somewhat.

Okay and last question was just you sort of addressed this a little bit but looking out to July quarter. Sounds like maybe you think that might be up. Is that starting to return to normal seasonality? You said I know visibility is pretty weak at this point, but based on your products and what you can understand end markets, is that a pretty decent quarter or any sense you can give that now, without specifically giving guidance? Thanks.

I think our hope is that Q1 is the bottom, Steve. And as I said, because of the strengthening in a couple areas like smart phones and some of the infrastructure areas, my sense is that Q1 will be the bottom. One can never say that for sure, but given that is seasonally the softest quarter for us, that would be my expectation, but one never knows.

Okay, thanks a lot.

And your next question comes from the line of Rick Schafer from Oppenheimer. Your line is open.

Hi, guys this is Dan Morris calling in for Rick. If I could just follow-up on your earlier comment on Power Management and basically you've been getting, I guess getting a little bit away from some of the computing products that you had before there. But it sounds like computing is still is one of those challenged end markets right now but how much exposure do you have in a computing market? I would think it would be relatively low now compared to historically.

Yes, it is relatively low. I mean we do have several components that go into the computing sector including protection which goes into USB ports and Ethernet ports, gigabit Ethernet ports, et cetera. So, we still have exposure there and obviously we still have Power Management that goes into the computing sector but is a much lower number now . And I'm comfortable with where we're and I think with our new platform, we still expect to get some design wins into the computing sector. Just won't be as much as we

Is there any kind of range you could put on, I mean are we less than a quarter of your revenues now, or less than 20% or something like that?

Well it's definitely less than 20%.

Of total computing ?

No, of just your total revenues, yes, computing.

Computing in Q4 is 18% of total revenues.

Okay.

Okay, actually let me give you those numbers. I don't think I said them on the call. High-end consumer for us was 35% of revenues, communications were 17% of revenues, industrial was 30% of revenues and computing was 18% of revenues. All right for Q4?

Great.

Okay.

That's very helpful and then with respect to the inventory levels, obviously you worked it down pretty well on an absolute basis but days are still pretty high. Are you expecting any impact on the pricing environment from the inventory situation?

The pricing environment is going to be there in the computing and consumer segments as one would expect. There are a lot of competitors who are trying very, very desperately to grow revenues and get some pickup in their demand and obviously trying to use pricing as a vehicle. It doesn't necessarily yield that result. And if anything I think it leads to lower profitability for many of those companies who are are struggling anyway. So, my sense is that it's not going to be abnormal. Nothing abnormal. I think we just continued pricing ESP erosion in the consumer and computing market when the demand comes back the rest I think is fairly stable.

Great, thank you very much.

Your next question comes from the line of Sumit Dhanda from Merrill Lynch. Your line is open.

Hi, guys, apologize for any background noise here. One question I had, Mohan or Emeka, in terms of the product build that you talked about in the channel for design wins with Japanese customers, could you talk to the vertical market that you're addressing or just provide any more color around both the timing of the sell through associated with the products and the character of those products?

Well the character of the products are there. They're integrated DC to DC platforms. They're a variety of different product there. Buck Regulators mostly and the platforms themselves verticals are more the computer peripherals. I would say also some infrastructural areas communications, infrastructure as well, so it's a mixed bag. Sumit, there is not one area. A couple hand held as well. A couple of hand-held areas.

Okay and you think you have very good visibility that these products are indeed going to ramp?

The design in Japan, the ramp may take a little bit longer than normal, but distributors are expected to respond to very short lead times in Japan.

Okay. The other question I had, you went through your advanced communication and where you expect to to be see traction. Could you talk a little bit more on the sensing side? Where you think -- when you think your effort there's are going to show up in terms of actual product revenues here? Is it a second half of calendar '09 phenomenon? And just a little more along those lines.

Yes. We're starting to see on the sensing and on the wireless side, some of these new applications are starting to ramp up, but very slowly. So in terms of material revenue, I think second half of this year is probably a good schedule to give you.

Okay, but do you think the ramp within sensing sub segment is going to be meaningful? Could you talk a little bit about the applications where you expect to see more traction?

Yes, I mean we're getting -- let me talk about the wireless and sensing because they're kind of interlinked. AMR is one of those segments, home automation, remote keyless entry, [temp tensing] areas are all kind of good design wins, fairly good traction. Meaningful revenue, I would say towards the end of this year and into next year. It's tough to call because some of these applications in a normal macro environment I would have said are going to start to ramp the next couple of quarters here. But with the macro environment I would say that they're pushed out at least a quarter.

Okay, thank you very much.

Sumit, this is Emeka. I just wanted to add something to your question on the Japanese distributor. I just want to clarify we do not recognize revenue on those shipments until they actually sell through.

I guess then okay, I guess then that begs the question, okay, never mind. I'll follow-up off line. Thank you very much.

You have a follow-up question from the line of David Wu from Global Crown. Your line is open.

Yes, can you help me, remind me of -- roughly I remember by product categories, that the big categories -- sorry, protection, and then Power Management and then the advanced comm and Sensing and the smallest piece is the Power Discretes. Am, I got that order roughly right? And if you could help me with some round number percentages that would be great. I forgot about how different these pieces are.

For Q4?

Yes.

Contribution.. So our largest is Protection, followed by -- 46%.

46% of protection.

Power Management at 23%.

Yes, and AC&S business at 19% and Power Discrete at 12, the remainder. Okay, great. Wasn't very far off. Thank you very much.

Your last question and it is a follow-up question from the line of Harsh Kumar from Morgan Keegan. Your line is open.

Yes, hi, guys, your recent acquisitions, curious how much you guys paid for it if you can disclose that? Is there any revenue associated or is that purely and IP deal? And also I'm curious about the acquisition in the future that you talk about. What's your criteria is it a technology product, accretive, non accretive? Any color would be helpful.

So on the Leadis acquisition, it was $2.3 million and it was purely IP and some know how and some people was the cost of the acquisition. No revenue. This is a portfolio of IP that we will and we already have started to integrate into our own platforms and we hope to have product out within the next 12 months here. So it's not going to generate any revenue I think -- meaningful revenue in fiscal year 2010.

Going forward, as we look at acquisitions, yes, we want them to be accretive, they have to fit our gross margin model. We're looking for technology like this one that we acquired from Leadis that enables us to bring some innovative platform to the marketplace and really drives some type of IP synergy with the platforms we've have either in protectional power or our advanced common sensing areas.

Fair enough, buys. That's helpful. Thanks.

At this time we have no further questions.

Okay, let summarize by saying that fiscal year '09 was an excellent year for Semtech. We increased annual revenue sequentially by 3.5% to $295 million to achieve a Company revenue record in our 48-year history. This achievement was against the back drop of a decline in both the semiconductor industry and the analog sector. In addition, two of our four businesses achieved record revenues and we saw strong continued design win momentum in all regions and across all product lines. Finally, we replenished our cash balance and maintain a very strong balance sheet. Our journey will continue through fiscal year 2010.

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

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