Semtech Corp (SMTC) 2010 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 fiscal year 2010 Semtech Corporation earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. It is my pleasure to turn the call over to Mr. Chris Rogers, Director of Investor Relations.

Thank you, operator. Good afternoon. Welcome to Semtech Corporation's fiscal year 2010 first quarter conference call. I am Chris Rogers, Director of FD&A and Investor Relations. We have just issued our press release announcing our unaudited results for first quarter ending april 26, 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 want 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 included in today's press release as well as other risk factors noted 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 our sole forum to respond to questions and our estimated financial performance going forward. Should you have any questions on our financial matters for the upcoming quarter, this is the time we are able to respond to these questions.

Also, during this call we may refer to pro forma or other financial measures that are not prepared according to Generally Accepted Accounting Principles. In conjunction we have provided supplemental information in our press release to help readers understand the company's comparable financial performance between periods. A replay of this call will be available on the Investor Relations section of our website through June 20th. I would also like to mention we'll be attending the RBC Capital Markets Technology, Communications and Media Conference in San Francisco June 9 & 10. Thanks for your attention to this important preliminary information.

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

Thank you, Chris. Just as a reminder, starting this quarter we are no longer reporting 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 first quarter of fiscal 2010 were $60.1 million, a 4% sequential decline, and down 19% from the same quarter last year. On a year-over-year basis, revenues declined across all end markets. In the first quarter, 53% of our revenues were derived from customers in Asia, 27% from North America, and 20% from Europe. Direct sales represented approximately 54% of total revenues, while distribution represented 46% of total revenues. Although bookings were up sequentially in Q1, our book-to-bill was less than 1. Strength in orders for our communications products was somewhat offset by softness in orders for our industrial products. Net orders accounted for 41% of shipments during the quarter. Our GAAP net income for the quarter was $4.9 million or $0.08 per diluted share, down from $8.1 million or $0.13 per share for the same quarter last year and down from net income of $6.3 million or $0.10 per share for the fourth quarter of 2009. In the second quarter of fiscal 2010, we expect GAAP net income of $0.09 to $0.11 per diluted share.

In the first quarter, expenses related to equity based compensation were $4.8 million or 8% of revenue. This is an increase of approximately $2.1 million from the fourth quarter of fiscal 2009. This Q over Q increase was driven by two factors. First, in the fourth quarter of fiscal 2009, we had a one-time benefit from the reversal of compensation expenses associated with stock option awards granted under the company's executive long term incentive plan as the probability of the pay outs under that plan was determined to be low; second, in Q1 of fiscal 2010, we had an accelerated vestment of a separate performance based equity award which amounted to $800,000. We expect equity compensation expense to be approximately $4 million in the second quarter of fiscal 2010 breaking down as follows: $350,000 in manufacturing, $2.6 million in SG&A, and $1 million in R & D.

GAAP gross margin for the first quarter of fiscal 2010 was 54.5% up 130 basis points from the fourth quarter of fiscal 2009 as a result of higher mix of industrial and communications revenue and the lower mix of Power Management computing revenue. We expect GAAP gross margin during the second quarter of fiscal 2010 to be sequentially flat due to projected revenue mix. During the first quarter, we continued the cost reduction initiatives that we initiated in the fourth quarter of fiscal 2009, including mandatory time off and tight monitoring of discretionary spending. These cost reduction initiatives will be continued in the second quarter.

GAAP SG&A expenses were $17.3 million for the quarter or 28.7% of revenue, an increase of $1.1 million from the fourth quarter of fiscal 2009. The increase was due to higher equity compensation as previously planned. We expect GAAP SG&A expenses of $16.6 million in the second quarter of fiscal 2010, a sequential decrease of $700,000, due to lower equity compensation costs. GAAP research and development expenses were $10.1 million for the quarter, or 16.8% of revenue, up $300,000 from $9.8 million in Q4 due to higher new product development expenses. We expect GAAP R & D expenses to increase to $10.7 million in the second quarter of fiscal 2010 as we maintain our investments in new products. For the first quarter, expenses related to ongoing offshore related matters was $409,000, down from the $491,000 in Q4. We expect offshore related expenses of $500,000 in the second quarter of fiscal 2010.

Interest and other income was $1.3 million in the first quarter compared to $403,000 in the fourth quarter of fiscal 2009. This increase is due to foreign exchange gain resulting from a stronger dollar. For the Second Quarter of Fiscal Year 2010 we expect interest and other income of approximately $500,000. Our GAAP tax rate in the first quarter was 20%, and we expect the same rate for the second quarter of fiscal 2010. The diluted share count for the first fiscal quarter was 60.6 million shares. We expect diluted weighted average shares outstanding of 61.2 million shares in the second quarter of fiscal 2010.

Now moving on to the balance sheet. In the first quarter, we generated approximately $15.8 million in cash from operations, which is approximately 26% of revenue, and ended the quarter with approximately $270 million of cash and investments. During the quarter, we rebought shares approximately $1.4 million or 104,000 shares of our Common Stock under a program previously authorized by the Board of Directors. We have approximately $15 million left under the program.

The Company spent approximately $1.4 million on property, plant and equipment in Q1. Depreciation and amortization for the first quarter was approximately $1.9 million, including approximately $303,000 of intangible amortization. In the second quarter of fiscal 2010, we expect capital spending to be approximately $5 million to support the ramp up of new products and various new process and package developments. We expect depreciation to be approximately $1.8 million and our amortization of intangibles to be approximately $300,000 in the second quarter of fiscal 2010.

Accounts Receivable declined by 11% from the last quarter due to lower sales and day sales outstanding decreased to 39 days from 46 days last quarter. Net inventory decreased by $1.8 million or 7% in the first quarter as compared to Q4, and the days of inventory decreased to 90 days from 94 days in the fourth quarter. Inventory at our distribution partners declined $4.3 million or 12%. Channel days of inventory declined to 92 days from 104 days in Q4. We believe that both our internal and channel inventory are well positioned to respond to short lead time orders.

In summary, we are pleased with the company's financial performance in the first quarter, despite very difficult circumstances. Although revenues were lower sequentially, we remained profitable, expanded gross margin, lower internal channel inventories, reduce our day sales outstanding and grew cash and investments. I will now hand the call over to Mohan.

Good afternoon, everyone. I will discuss our Q1 fiscal year 2010 performance by end market and by product group and then discuss our Q2 fiscal year 2010 outlook.

Q1 of fiscal year 2010 was a very good quarter for Semtech, despite very tough economic conditions, we achieved net revenues of $60.1 million. This is above the high end of our revenue guidance and represents a 4% decline versus Q4 of fiscal year 2009. We also increased our GAAP gross margins to 54.5% and GAAP EPS declined to $0.08 per diluted share. In Q1, revenues from communications increased and represented approximately 18% of revenues. High end consumer revenues were down slightly and represented 36% of revenues. Industrial, market revenues were approximately flat, and represent a 31% of revenues while computing revenues declined and represented approximately 14% of revenues. As we anticipated, we saw a seasonal decline in our computing business, while there was relative strength from the communications segment.

Now let me discuss the performance of each of our product groups in Q1. In Q1, as expected, our power management revenues declined by 27%. Our Power Management business demand softness in Q1 was driven by the computing and high end consumer Markets. The softness in the end markets in Q1 was anticipated as we saw demand for computing systems and for consumer systems decline in the back drop of a recessionary environment.

Our power management business is becoming more diverse with revenue contributions from all major market segments. New power platforms released in the last 12 months are now gaining traction and we do expect our Power Management business to increase significantly in Q2 driven by demand from high end consumer and communications systems and a modest recovery in the computing segment. As the overall market improves and our new Power Management platform releases and design wins accelerate, we expect that our Power Management business will evolve into a more balanced business for Semtech.

In Q1, our protection revenues increased sequentially by 5%. Demand for our protection products remain strong in the quarter, driven mostly by the communications infrastructure segment and the high end consumer segment. The increase in demand for our protection devices is being driven by the increase in the number of ports requiring protection. Increasing performance requirements of these ports and the increase in system returns our customers are facing due to unprotected systems. Our protection business unit is executing quite superbly, and strategically we are very encouraged by the design win momentum of our protection products across all our target end markets. In Q1 we released an ultrathin protection device for memory card interfaces on smart phones and 3G USB modems. This new device allows customers to replace multi-part discrete solutions with a single integrated device. In Q2, we expect our protection revenues to increase again, driven by strength from all market segments.

Our Power Discrete revenues were up approximately 7% sequentially in Q1, driven by strength from the high end medical and high end industrial segments. We are pleased with the execution from our Power Discrete product group. Our Power Discrete business is driven by demand from the aerospace, military, industrial and high end medical markets. In Q1, we started shipping our first Jans products. This is a major milestone for us and bodes well for the future of our Power Discrete business. We expect that our Jans shipments will increase in future quarters.

Our focus on improving our supply throughput is driving an ability to service demand across all our target market segments but there is still much room for improvement in both our supply chain and the development of new products. While we have done a truly outstanding job of getting our fab back to normal operations, after last year's fire, we are still having some post-fire yield related ramp up issues in the fab that prevent us from increasing share at a higher rate. We do expect to resolve these issues and to release more new products in the next few quarters which will expose us to approximately an additional $50 million of SAM. In Q2 we expect our Power Discrete revenues to be approximately flat.

Revenue for the advanced communications and sensing business decreased 5% sequentially. Softness in the industrial segment due to the overall macroeconomic conditions was noticeable in Q1. Despite the macroeconomic softness, our advanced communications the macroeconomic softness our advanced communications and sensing business continues to do quite well from a new platform execution and design win standpoint, and our momentum with new platforms and the energy harvesting segment and the WiMAX 3G, 4G infrastructure segment is very encouraging.

In Q1 we announced the completely integrated small form factor low phase noise RF frequency synthesizer targeted at the OG harvesting segment. We also announced a strategic customer relationship in China with our Top Sync Timing synchronization platform that we believe is validation of the performance capability of this new technology platform. In Q2, we expect revenues from our advanced communications and sensing business to be approximately flat. From a distribution POS standpoint in Q1 of fiscal year 2010, we saw total POS decrease very slightly due mostly to weakness in North America and European distributors. Distributer inventory was down significantly as expected. We believe that our channel inventory is at the levels necessary to appropriately support our customers as we enter Q2 with a stronger demand outlook.

Moving on to new products and design wins. In Q1 we released 12 new products and recorded 648 new design wins which represents another good new product release and design win quarter for the Company. The design wins were once again well balanced across our product groups and across all target markets and regions. Many of the design wins recorded were in fast growing market segments such as smart phones, WiMAX systems, voice-over-IP systems, netbooks, advanced medical systems, and automated meter reading systems. We believe that we are uniquely positioned to benefit from these fast growing segments and we do expect to see a continuation of the strong design win momentum as we bring out more new platforms in Q2.

Now let me discuss our outlook for Q2. Bookings toward the end of Q1 and into Q2 have strengthened and visibility has improved; however, we remain somewhat cautious given the overall challenging macroeconomic environment. In Q2, we expect revenues to increase sequentially between 4 and 8%, to obtain the mid point of our Q2 guidance, or up 6%, we needed net terms orders of approximately 33% at the beginning of Q2.

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

(Operator Instructions). Your first question comes from the line of James Schneider with Goldman Sachs. Your line is open.

Good afternoon. Thanks for taking my question. I guess first of all could you comment a little bit about where you think you are relative to distribution right now and whether you think there are any end markets where you're still undershipping end consumption levels and if you could tie that back to your commentary about bookings, that would be great.

Yes. I would say specifically in North America and Europe, distribution activity is very weak, so more industrial markets and the core markets in those areas I think are relatively weak. Asia, I would say, is quite strong and so really you look at Asia, I think the communications infrastructure market in Asia, some of the consumer sub segments within Asia I think are definitely stronger, so that's kind of a quick summary of that and from a bookings standpoint, it's fairly, the strength is fairly well balanced.

We've seen strength from communications infrastructure. I would say consumer, both Handheld and some of the other segments within consumer have started to improve. Computing clearly is probably the one segment that was perhaps a little bit overdone in the last two quarters and is seeing some pick up as we go into Q2 but I think Q1 definitely was softer than the other segments.

Great and maybe just to follow-up on that, I think there's been a lot of discussion out there among your competitors about industrial customers remaining relatively weak and not really expected to recover much in the next couple quarters. Do you agree with that assessment or is there any areas where you would differ from that?

In general I agree. I think North America and Europe distribution was weak and continues to be fairly weak, but I think there are pockets of strength and I think you have to break down industrial as a big sector and you have to break it down. Medical is reasonably strong. I think automotive tends to be okay, I would say that some of the high end industrial products for our Power Discrete business is okay. The energy harvesting segment automated meter reading and areas like that are also okay, so I think you have to break it down but I think in general, that's definitely industrial is the sector that is the weakest.

Maybe last one for Emeka. How should we think about R & D spending going forward? Should we expect that to continue to increment up every quarter as long as you grow revenues and then at what point do you think we would see the end of the temporary cost reductions like the unpaid leave, et cetera?

So with regards to the first question on R & D, it's really driven a lot by the volume of new product activities and so my expectation is it should probably stay at this level but if we do have plans or if we have a bunch of new products in the pipeline, it might go up a little bit from this, but you shouldn't really be huge increases going forward.

Now, with regards to the spending reduction initiative, our viewpoint from here is that we are optimistic about the future and we expect that a second half hopefully there should be more recovery in the economy so at this point, we haven't really made any conclusions but we are definitely trying to do a very very good job of managing operating expenses in line with revenue growth and given that we expect our revenues will hopefully do better in the second half, my expectations at this point is that we should start to really reduce the pressure and basically bring back some of the spendings that we have cut back on in the second half.

Great. Thanks very much.

Your next question comes from the line of Craig Ellis with Caris & Company. Your line is open.

Thanks for taking the questions guys and good job. The first question is just a question on the outlook, Mohan, you mentioned that you expect high end consumer strength and Power Management. Can you just go into some detail on the applications you're getting to sign into there?

That's more Handheld, Craig. I would say some also strengthening of the TV display markets which we've got some traction in, and then set top boxes and picture frames is doing reasonably well also so it's fairly spread but I would say Handheld is the one driving most of it.

Okay that's helpful and in the computing area, I know that's an application where you're looking to make some changes in terms of the structure of the portfolio, perhaps mix out some PC power. How should we think about the timing with which that would occur over the course of the year?

So in the computing space, we've largely certainly from a desktop and notebook computing power space we've largely kind of extracted ourself from that. Now, our strength in computing is mostly driven out of design wins for both power and protection by the way, protection is in the ethernet ports, HDMI ports, USB ports and then the power we are seeing more wins and opportunity in the display, the panels for notebooks and desktops I think in the server space and the printers and peripherals so more periphery rather than the core regulator stuff but I think so for Q2, My anticipation is just because of the market was so, it's come down so much in Q4 and Q1 that we'll see some kind of overall pick up in computing and then I think we are starting to do a little bit better in the space than historically where we've been trying to get out because of the low margins.

Okay, that's helpful and then maybe just one longer term question, Mohan, this may be for Emeka, I not sure how you want to handle it, but thinking about the target financial model coming off the downturn we've had how should you think about target financial model parameters for you now?

We have not really changed our target financial models. We're still talking about 55 to 60% gross margins, operating margins on a GAAP basis of 20 to 25%, and we've always said in the past that we expect to be somewhere closer to the $19 million of order run rate in revenues for us to hit the mid point of these ranges, so we're not changing the target model at all but obviously we'll need a recovery in the top line to achieve the mid point of these ranges.

The other way to look at it Craig is we've always said that we need to get to 85 to $90 million type of run rate to be in the model, the mid point of the model and that's kind of the strategy here.

Okay, thank you, guys.

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

Hi, guys, this is Carl Lestrange on Rick's behalf. Just a couple of questions. First, what are lead times looking like at present? Are we still seeing a decent percentage orders in that rush order type of structure or have lead times lengthened out as we've come into the second quarter here?

Visibility I would say is better. Bookings in the back end of the quarter were definitely stronger and it's continued through May, so visibility is better, but I would say that we really, lead times vary from segment to segment and definitely in the Handheld and computing space and consumer space, order lead times and the visibility associated with those segments is relatively low compared to what historically one has seen, but I think it's improving I think is the way I would characterize it.

Great. And then on the gross margins, as we go out through the remainder of the year here, how should we look at the way gross margin will be trending, with the Power Discrete business coming back online, and what type of boost may that provide to gross margins and then on top of that, if you could touch on the pricing environment that you're seeing currently and do you expect any pricing pressure and if you do, are there certain areas over others where you think that might be an issue in the back half of the year?

Let me touch on the pricing and then I'll let Emeka talk about gross margins. The pricing really in the segments that we play in, if you look at the high end consumer, the computing space, there's always price pressure in those segments, usually because of the competitive nature of those businesses and the volumes, but also because customer strategies involve them driving pricing down to get more volume and stimulate demand, so that's anticipated.

I would say it's no, there's nothing unusual going on there. I would say it's quite normal behavior and the other markets i think industrial and communications tend to be a little bit more stable, so we aren't really seeing price pressure there and I don't anticipate any dramatic changes in this year from a pricing standpoint.

So going to your question on gross margins, our expectation here is that if you probably recall our gross margin is highly dependent on the makeup of our revenue and our expectation is that in the second half, we should see our gross margins sort of flat to slightly up, driven mostly by the mix of revenues, by the amount of revenue we're getting from new products and just by overall revenues being higher so that we can absorb our expenses a little bit more so that's just the way to think about gross margins is as long as we get into revenue mix that we've been projecting and we're seeing success with our new products, we should expect to continue to increase our gross margins modestly.

Now, just to add-on to that, if industrial comes back and is much stronger in the second half and communications continues to remain strong and computing remains weak, we could see a larger increase in our gross margins but really in the second half one does also expect in Q2 and Q3 that computing and consumer will start to pick up a little bit.

Right, of course. Okay, and on the Power Discrete factory coming back online and the share gains attached to that, could you go into a little more detail on the timeline you guys are thinking about when you could start to see some significant share gains there?

Well, we have done already and we continue to do that. I mean our strategy in Power Discrete is not really to have dramatic share gains because I don't view it as a business I'll invest dramatically in but I think it's continuous bringing out new products, attacking new SAM and just continue to gain modest share gains and the biggest barrier to doing that has been our supply, has been the fab and the operations. We didn't invest in it for many years, we've now invested in it. We had the unfortunate incident last year with a fire but we're back on normal operations now and I think as we get the yields up and start to flow material through that fab, I think we have a very good opportunity to just pick new products, attack some spaces like Jans, in the space sector that we haven't really participated in and just gradually increase our share. It's not like I said, it's going to be a dramatic increase I think just modest increases is what we need.

Great. And then one last one. Within industrial, the satellite business that you guys have started to enter into, can you quantify your expectations for the size of that, for you guys as we sit here today?

The size of the business of the opportunity is probably in the I'd say $50 million to $100 million SAM. It's a huge margin, gross margin for the Company. Gross margins in that space are very good, the challenge of course is time to revenue and the product call cycles are much longer so this isn't something that you see one quarter to the next dramatically increase but I think as we've now started to ship our first Jans products we start to gain credibility, we start to talk to customers, we start to get more orders, we start to get more comfortable with the flows and I think that's the strategy we're on.

Excellent. That does it for me guys. Thank you very much.

Thank you.

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

Great. Thanks. I was hoping you could talk a little bit about your current thoughts on how advanced common sensing, particularly the COM and Top Sync products looking through the back half of the year and into 2010 and if you could size what you think that market could ultimately be. Thanks.

Yes, tough to call the market size, Steve, just because really when you look at 3G, IP backhaul, WiMAX, some of those segments, they are really just emerging applications, and it's just tough to call it. We've heard some volumes that are several hundred thousand units for infrastructure and we've heard volumes that are much lower than that and you take all of the customers, some of them feel that if the market comes back, the volumes could be significantly higher, and the one thing that I will say is that our platform and our design wins are with the top tier customers, so I think if the markets do take off and do quite well, then we will benefit from them. As to the timing of them, second half of this year, we expect to start to see initial production volumes and then I think the next few years here.

Great. And then turning to protection, can you talk about competitive advantages you see there? You guys seem to be doing fairly well there, must be gaining some decent share. Just curious of your thoughts on your share position and competitive advantages there.

Well the good thing about the protection market is that it's an evolving market so a large part of the way that the market is serviced today is not through protection devices like our own, so as I've mentioned for example, the new product we just released, the one I talked about, it's replacing discrete protection kind of devices with an integrated device and you getting better protection on higher performance signal ports and there are more of those ports, so that's really why I think we're doing quite well. We focused in on very specific high performance requirements. We focused on applications that have a need for improving in terms of form factor and lower power and higher speeds, and those are all going in our favor, the whole green initiative of driving to smaller semiconductors and lower power semiconductors I think is helping us also.

Okay, and then I guess finally if you could just talk about some of the other products in advanced common sensing outside of COM, just a quick update there? Thanks.

Yes, I'm pleased with the product platforms in our advanced common sensing business, just giving the wireless side, we've got some very good wireless products, very good design wins, the time to revenue is longer, it's somewhat longer than the consumer space or computing space, but that's okay. We can, as soon as we see in time those materialize, I think it's good for us. Sensing business also, I think we have some very good traction there. The medical continues to be quite a good space for us, and then I think in general, the consumer analog business is one that we've just got platforms that are in the pipeline and I think I mentioned in the second half we expect those to come out and be released and then really benefit us in the back end of this year and next year.

Great. Thank you.

Your next question comes from Terence Whalen with Citi. Your line is open.

Thank you. The first question is on operating cash flow. Next quarter do you expect operating cash flow to be down a little bit? I see you probably benefited from working capital in April quarter, wanted to understand if next quarter you thought per cash flow for operations if that would increase or decrease? Thanks.

Well, Terrence, as you rightly pointed out, we're expecting our revenues to be up per our guidance and so there's probably going to be a little bit of working capital to finance that. My expectations at this point will be that we should do very well again in terms of cash flow from operations. In terms of whether it is going to be up or down, I have not really sat down and modeled that but I would expect us to do very well with regards to operating cash flow.

Okay, that's helpful, Emeka. The other question I had was regarding, you made a comment about distributer inventory, I think you put a number decline perhaps about $4 million. Can you revisit that comment and help me understand, was that specifically in areas where you recognize sell in? So in other words how much was your revenue suppressed because of destocking?

So the decline in the distribution revenue was $4.3 million and most of that decline came from Asia where we recognized revenue upon selling.

Okay, so I guess going forward, the commentary seems to be inventory is in pretty decent shape. I guess my question is does your revenue outlook incorporate any expectation for an increase in the inventory in the distribution channel or alternatively if we saw Asian distributer inventory increase would that be upside to the outlook? Thank you.

Well, actually, at this point our revenue guidance does anticipate that at the minimum inventory should be flattish to slightly down in the channel next quarter so there's a huge inventory in the channel that would probably represent an upside to the plan but we're not anticipating that at this point.

Okay, great. Thank you.

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

Hi, guys. First of all congratulations. Great numbers, great guidance. A couple of basic questions. Mohan and Emeka, did you see any benefit from Reynosa opening up at all in this current quarter in your gross margins?

Harsh, yes, yes we did obviously with Reynosa coming up really nicely it sort of helped industrial revenue which as you know is much higher gross margin so we did see some benefit from Reynosa being back online for a time.

Okay and would you characterize, I mean a couple of, would you be able to give us a range that was meaningful at all to your bump or was it almost your revenue absorption?

At this point, I think it was pretty diverse, it came from the gross margin expansion came from better revenues from communications, it came from higher revenues from industrial but also it came from the fact that our computing revenue wasn't as big so it was pretty broad based. I don't have an exact number as to how much to attribute to the Reynosa factor but it did have a positive contribution to gross margin expansion. Got it, and then next question Emeka, at the mid point of the guidance range, how booked are you at this point in time, and sort of subsequent to that the follow-up question to that almost is when we think of your turns historically, should we be thinking in the 40% range or should we be thinking in the low to mid 30% range?

Let me answer that Harsh. The guidance we gave was 4% to 8% up and I mentioned that to achieve 6% we needed 34% turns at the beginning of the quarter, so that for us is if you go back and look right in the ballpark. We've done obviously achieved more than that last quarter, but 34%, 35% turns beginning of the quarter is a good number for us and I did mention also that bookings have continued to be strong up until the call today, but we don't want to give you an updated terms number.

Got it. Okay. And then would we be correct in thinking, Mohan, that outside of basic things like Commissions, et cetera, if revenues go up we shouldn't really anticipate too much of a big increase in operating expenses going forward for the rest of the year. Would that be a correct assumption?

Yes.

And then last, uses of cash. You've got a pile of cash there. Could you maybe talk about what your intentions are as that interest rate in the banks is not up to snuff?

Well at this point, I don't know that we are out of the woods yet with regards to everybody really getting conservative and worrying about safety with regards to the principal, so Harsh, as you know, we continue to look at our opportunities in terms of being able to add to our Company and improve our chances for really achieving our growth objectives, but beyond that, we're not really doing anything with cash. We're basically just being receptive first at this point.

As you know Harsh, let me add one comment to that. We have put in place the SG&A infrastructure to scale the Company from a top line standpoint and we still believe very strongly that we can add top line revenue and have fairly minimal infrastructural increase in OpEx.

That's great. Thanks guys, again congratulations.

Thank you.

Your next question comes from Doug Freedman with Broadpoint. Your line is open.

Great. Thanks for taking my questions guys. If you could comment a little bit, Mohan, on your computing share and what exposure you happen to have because your commentary sounds a little bit more negative than what we've heard out of other guys providing components into that market.

Well the computing space for us, so there's two components that we sell, we sell the Power Management obviously products, core regulators as well as peripheral regulators and broad range of products into that space and then we sell the protection devices. As you know, Doug, historically Semtech has had a very strong position in desktop and notebook computing and we historically also said since I joined the Company that that was a space we felt wasn't the right space for us to be in so we tried to gradually reduce our exposure to that space, and I think we've done that and I am pleased with that position, so when I talk about the computing space coming back now, I think it is going to come back in Q2, definitely there's going to be a little bit of a strengthening in computing, but it's more balanced for us.

It will be a little bit of peripheral. It will be some print stuff, some service stuff, it will be some desktop stuff and notebook stuff also but then it will be power protection also in ethernet ports and USB ports and HDMI ports so my commentary wasn't negative. It was more just a more balanced portfolio going into that space across multiple subsegments versus historically where we had strengthen desktop and notebook core regulators.

Great. Understood. Can you possibly also comment on what percentage of your total business do you guys feel like you're presently shipping to end demand and how much of the market is still sort of working down inventory, if you could just put a percentage on that, it would be great.

I think a very high percentage now is going to end demand. We have brought down channel inventory, we brought down our own internal inventory and we've done that in line with our end demand forecast which as you know Doug we look out six months and you see the OEM percentage of our business being more OEM now versus distribution.

A large part of that is because we are spending time with our customers trying to understand really what is driving the demand and if you look at the balance, if you really look at the balance of the business, the communications infrastructure of being 18% of the Company now, industrial 31%, consumer 36% of which that's broken out to Handhelds and a bunch of sub segments in the consumer space and computing 14%, there's no one sector that I think is driving the demand, so I think that's a good position to be in and if we had a concern, it would be computing and it would be some of the consumer segments and I think this at least this point I think we're in pretty good shape in those segments.

Terrific. Mohan, would you be able, sorry, Emeka would you be able to help us with you made a comment on not achieving target yields in the discrete business. How much of an impact was lower than expected yields on GM in the quarter?

That was a statement really that I made, Doug, about to where we are today with post-fire and I don't know if we have a number on that. We don't really have a number associated with it but I just made the point that the fab operations in Reynosa post-fire back to normal but it's kind of got some hiccups and process yields and stuff like that as we ramp up back to volumes so that we can gain share, so it's more of an inability to increase share at a faster rate comment.

Okay, I was just trying to figure out if there was some sort of benefit we would get when it started hitting target yields.

Well I hope that will be the case.

Hopefully.

And then I guess sort of on the same topic, any progress being made on recovering the damages there? I know there was, you've got insurance there. Is there any expected timeline and any recovery there?

Doug, what we've done actually in Q1, we did get some slight recovery from the insurance company but we still have a bigger portion of the claim is still outstanding and we got it out there. They might come in in Q2 or Q3, I don't know but it is not correctly factored into my guidance so if we do get them in Q2 or Q3 that should be an upside to the numbers.

Can you remind us how much you're seeking?

Honestly I don't have that information with me here.

All right, that's fine. I can follow-up with you. Great and congratulations on the strong results.

Thank you.

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

Hi guys. Thanks for the question. Following up on the part I assume computing mix and maybe more balance toward periphery, how is that impacting the gross margin that if this demand continues to improve, does it have an impact on gross margin that's noticeable or is it just something that's more a target?

So the Power Management rebalancing, if you like, is one of the biggest gross margin opportunities for the Company, for sure, it will have, if computing comes up and the balance is more non-core regulator stuff, that will have a large impact for us, Cody, and that's always been the strategy.

And then can you talk about a timeline, about a time frame as this comes, I guess is it a lumpy improvement given the mix shift or is it more parsed out as we go over the next quarter?

Yes, it's going to be more gradual, A) because first of all we still have some low margin core power stuff that we still are seeking to kind of replace but I think the other part of it is that some of these design wins and new platforms we have just have to take time and will materialize more likely in Q3, maybe Q4, maybe it's depending on the marketplace, it may be early next year. We'll just have to wait and see. I don't expect it to be a dramatic one quarter kind of thing.

Okay, very good and then lastly, maybe just your high level view and this has been asked a few different ways, but we're obviously seeing kind of as the year progresses one data point after the other about lead times either sending or orders improving or production improving. You said you're shipping back toward demand but I guess what comfort or what's giving you comfort that we're or when do you start to question exactly what's going on, are we shipping just toward that demand level or is there a level of restock that maybe is a bit artificial?

Yes. So there's several things that we look at and obviously it varies from Company to Company and business model to business model but as we look at it, first of all it is the coming from one segment, is it compute being, consumer, across-the-board, do we see multiple segments all moving the same direction, so that's one data point and the second data point is a six-month outlook versus just the quarter outlook, obviously I'm not going to tell you what our six-month outlook is but we look at it as a reference point, and then I think obviously the channel inventory, what's that doing and how is that moving versus the demand, so I think all of those and then the turns required in the quarter, in the booking strength I think are all things that you look at as part of the equation and then just try to get a general feel from end customers about their own, what they'vere saying and clearly if you look at industrial, it's clearly weaker at this point in time, if you look at COM infrastructure there are some pockets of strength, if you look at consumer and you break it out into sub segments there's some segments doing better than others and if you look at computing that's the same and if you look at industrial and break it out there's some segments within industrial doing quite well so I think you just have to look at it on a case-by-case basis Cody but I think the thing from a Semtech standpoint is we are quite balanced well and I think that really helps us understand what we think is going on in the marketplace and it's not dramatic.

There's not going to be any dramatic recovery here that people are still, consumers are -- clearly there's a lack of confidence kind of an emotional fortitude thing about whether there's going to be money in their pockets in the second half and corporate environments are still definitely a lack of confidence there in terms of IT spending. What is the robustness of any second half demand and what are the drivers for that, North America and Europe, I made the comment on those two segments being fairly muted, but on the other side of that, there's definitely some stimulus drivers in certain regions of the world, I think the energy segment and the harvesting segment as I mentioned is doing quite well. Smart phones is definitely doing quite well and some of these stimulus packages are also accelerating new technologies and they could actually help in some areas like the cone area so it's a long winded answer to your question but it kind of summarizes the way we think.

Well I appreciate it. Thank you and good luck.

Thank you.

Your last question comes from the line of David Wu, with Global Crown Research. Your line is open.

Well, thank you for taking my question. Can you help me with one quick item. The products segment that you described can you give us roughly the order of magnitude of size of these businesses during Q1?

Yes, so from an end market standpoint consumers 36%--

I was thinking about product.

Product sample, yes. Protection business is about 50% of the Company, Power Management 18%, advanced common sensing 19% and Power Discrete is 13%.

Okay. The other thing I was wondering is if I were to think about your industrial business, what would be since nobody really knows what's going to happen, what macro indicator would be the best thing that you look at and say well if that turns, that would lead or coincidental indicate to our industrial business at a pass?

Probably POS distribution POS in North America and Europe because it's so broad. Those would be the things that would be at least a good sign. If they came back strong, because there's so many multiple sub segments--

So if I were to think about industrial capital spending, so to speak, that's probably the best correlation with your industrial business across many segments?

Yes. Now our industrial business, obviously we include in addition to advanced common sensing and our broader distribution business, we have our Power Discrete business and our Power Discrete business is somewhat unique in the sense that like I said the market can do nothing and the goal is to gain share for us, so I think we can still continue to grow modestly that segment.

The last question I have is regarding the temporary I guess from these temporary cost control measures that companies have taken. I don't know whether you have the same kind of policy where people are taking X number of weeks off a quarter, either on paid or unpaid vacation and if so what level of revenue should I expect those temporary measures to be eliminated?

David? This is Emeka. So yes, we do have those in place and we have had them in place since the fourth quarter of 2009 and the way we look at this stuff is that we're just trying to manage the OpEx in line with the revenue growth. Our hope and expectation is that the top line should see some modest improvements in the second half and we would expect to start to bring back some of these expenses.

We haven't really, we don't really have a set revenue number at which point we're going to bring everything back but we have to keep our eyes upon the fact that these shut downs actually are fab operations and given that we think we are really highly primed for revenue growth and everything, all our strategies and everything to where we think about it over here is to prepare ourselves for this economy rebounding. We need to be very careful that we aren't really taking steps that affects how we execute the execution of the Company so at this point our expectation going forward is that the top line is going to rebound modestly and that we should expect to bring some of these expenses back in line.

So the second half, third or fourth quarterish?

Yes, and it's a quarter to quarter discussion, David. Hopefully, Q3 revenues are going to be great and we won't have to have this discussion again.

Thank you.

This concludes the question and answer portion of today's call. I will now turn the call back to the speakers for any closing remarks.

Let me summarize by saying that Q1 of fiscal year 2010 was a very good quarter for Semtech. Our revenues decreased sequentially by 4%. We were able to increase gross margins, maintain positive free cash flow, remain very profitable and maintain a healthy balance sheet with zero debt and $270 million of cash, approximately $4.46 per share.

In Q1, we believe we out performed the market again as our end market balance, our broad portfolio and broad customer penetration and balanced geographical presence enabled us to protect against negative macro forces. We believe we are one of the most stable and balanced analog companies and with new platforms recently released and many more in the pipeline we are well positioned to benefit from any improvement in the economy in terms of top line growth and accelerated earnings leverage. With that, I'd 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 your conference call for today. You may now disconnect.