Semtech Corp (SMTC) 2010 Q4 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 Semtech Q4 FY10 earnings release. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions).

Mr. Rogers, Director of Financial Planning and Analysis and Investor Relations, you may begin your conference.

Thank you, Chrissie and welcome to our fiscal year 2010 fourth quarter conference call. We have just issued our press release announcing our unaudited results for our fourth quarter ending January 31st, 2010. A copy of our press release is available on our web site, www.Semtech.com, as well as national news and financial market wires. A replay of this call will be available on the investor relations section of our web site through April 10th. 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.

Our call today will include forward-looking statements that include risks and uncertainties that could cause actual results to differ from materially from those made during this call. We encourage you to review the Safe Harbor statements included in today's press release, as well as other risk actors noted in Semtech's most recent periodic reporting documents on Forms 10-K and 10-Q filed with the SEC for a more detailed discussion. Also during this call we may refer to pro forma or other financial measures that are not prepared according to General Accepted Accounting Principles. In conjunction, we have provided supplemental information in our fourth quarter results press release to help readers understand the Company's comparable financial performance between periods. 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. Good afternoon, everyone. On December 9, 2009, we closed the acquisition of Sierra Monolithics, SMI. The fourth quarter includes the SMI financial performance from December 10, 2009, through January 31, 2010. Revenues for the fourth quarter of fiscal 2010 were a record $85 million. A 13% sequential increase, and up 36% from the same quarter last year. As expected, our communications, consumer and industrial end markets saw sequential growth, while our computing revenue declined. Semtech's organic businesses contributed approximately $79 million, representing a sequential growth of 5%, and SMI contributed approximately $6 million. We ended fiscal year '10 with approximately $287 million in revenue. A decrease of 3% from fiscal year 2009.

In the fourth quarter, 57% of our revenues were derived from customers in Asia, 27% from North America, and 16% from Europe. Sales in Asia grew by 5% sequentially, driven mostly by protection on power management products for consumer applications, and communications equipment, and by accelerating adoption of our ToPSync timing products AP backhaul equipment. North America grew 29%, driven mostly by protection products for LCD high definition display interfaces, and advanced communications and sensing products for wireless and optical communication infrastructure. Europe grew 20%, driven mostly by advanced communication and sensing products for industrial and medical applications. And protection products for consumer and communications product interfaces. Direct sales represented approximately 51% of total revenues. While distribution made up 49% of total revenues, unchanged from last quarter. Bookings were up 12% sequentially in Q4, driving the book-to-bill to approximately 1 for the quarter. We saw increases in all end markets with the exception of the computer segments. Net sales orders accounted for 46% of shipments during the quarter.

Our GAAP net income for the quarter was $9.5 million, or $0.15 per share, up from net income of $6.3 million or $0.10 per share for the same quarter last year and a net loss of $20.9 million or $0.34 per share for the third quarter of 2010. It is important to remember that our GAAP net loss for Q3 incorporated a one-time tax expense of $43 million related to a change in management's assertion that a portion of the foreign earnings is permanently reinvested offshore. This change in assertion was directly related to the acquisition of SMI. In the first quarter of fiscal 2011, we expect GAAP net income of $0.13 to $0.16 per diluted share.

In the fourth quarter, expenses related to equity-based compensation were $6.1 million, or 7% of revenue. This is an increase of approximately $2 million from the third quarter of fiscal 2010, reflecting the impact of inducement and replacement awards to SMI employees. In Q1 of fiscal '11, equity compensation is expected to be approximately $6.5 million broken down as follows. $250,000 in manufacturing, $4.1 million in SG&A, and $2.1 million in R&D. In Q4, we recorded a net expense of $2.2 million for stock-option related matters compared to $1.1 million in Q3. The Q4 expense included a $10 million charge related to a settlement offer that was extended to the plaintiffs in the class action lawsuit and legal expenses of $900,000, offset by an $8.7 million insurance recovery of legal expenses. We do not expect any more payments from our insurance policies on these matters. We expect stock option related legal expenses of approximately $1 million in the first quarter of fiscal 2011.

GAAP gross margin for the fourth quarter of fiscal 2010 was sequentially down by 120 basis points to 53.9%. The mix benefit of higher revenue from our advanced communication assessment product group and revenue from new power management product platforms were offset by a $2.1 million amortization of fair value adjustment related to acquired SMI inventory. In Q1 of fiscal year 2011, this adjustment will be fully amortized with another charge of $2.2 million. We expect our Q1 GAAP gross margin to be flat to up 50 basis points, reflecting the continued strength in our communications revenue and the rebound of our industrial revenue. GAAP SG&A expenses were $25.2 million for the quarter, or 30% of revenue, an increase of $6.7 million from Q3 of fiscal year 2010. This increase was driven by one-time acquisition related expenses, higher equity compensation expense primarily from inducements or replacements of awards made to SMI employees, in part from the extra week in the fourth quarter, higher (inaudible) and higher class action related expenses, as previously mentioned. These expenses were somewhat offset by a business interruption insurance recovery related to the Reynosa fire in 2008. We have now settled all insurance claims for the Reynosa fire.

In Q1 of fiscal year '11, we expect GAAP SG&A of approximately $22.8 million, a decrease of $2.4 million, reflecting the absence of the one-time expenses incurred in Q4. GAAP research and development expenses were $13.7 million for the quarter, or 16% of revenue, up $3.2 million from $10.5 million in Q3, due to higher equity compensation expense, primarily from inducement of replacement awards to SMI employees, and the impact of the extra week in Q4. GAAP R&D expenses of approximately $14.1 million are expected in Q1, driven by new product expenses. Interest and other income was $300,000 in the fourth quarter, compared to $1.1 million in the third quarter of fiscal 2010. Q3 reflected the receipt of approximately $800,000 Reynosa fire property insurance settlement. In Q1 of 2011, we expect interest and other income of approximately $200,000 as interest rates remain very low.

Our GAAP tax rate in the fourth quarter was a benefit of 64% compared to a provision of 258% in Q3. The Q4 tax rate reflected the benefit of foreign exchange losses in our Swiss operations, the release of reserves for uncertain tax positions and other discrete items. The EPS impact of these items is approximately $0.03 per diluted share. We expect our GAAP tax rate to be back to the normal levels at 18% to 21% in fiscal year '11. The diluted share count for the fourth fiscal quarter was 62.5 million shares. We expect fully diluted weighted average shares outstanding of 63 million to 64 million shares in Q1. The increase reflects the full quarter impact of the inducement or replacement awards issued to SMI employees.

During this call and in future calls, in order to facilitate a complete understanding of comparable financial performance between periods, we will discuss our non-GAAP financial performance which will exclude any one-time items and certain other items recorded in the quarter. The following items have been excluded from our non GAAP results for this quarter. Stock-based compensation expense, amortization of acquisition-related intangible assets, expenses related to class action litigation, and other stock option related matters net of insurance recoveries. Transaction and integration-related expenses. Fair value inventory adjustments. Certain restructuring expenses. And insurance recovery associated with the business interruption claim for the 2008 fire at the Reynosa facility.

On a non-GAAP basis, net income was $18.9 million or $0.30 per diluted share for the fourth quarter of fiscal 2010. Net income for the same quarter last year was $8.3 million or $0.14 per diluted share. For the third quarter of 2010, net income was $16.2 million or $0.26 per diluted share. Our Q4 non-GAAP net income benefited from an unusually low tax rate during the quarter. The tax benefit from foreign exchange losses in our Swiss operations, and the release of (inaudible) for certain tax positions contributed approximately $0.03 to our Q4 non-GAAP and diluted share. In fiscal year '10 our non-GAAP earnings per share increased 6% to $0.90, despite revenue decline by 3%. We expect Q1 non-GAAP net income of $0.27 to $0.30 per diluted share. Non-GAAP gross margin for the fourth quarter of fiscal 2010 was 56.6%, a 120 basis point improvement from the third quarter of fiscal year 2010, and a 310 basis point improvement from the fourth quarter of fiscal year 2009.

Fiscal year 2010 non-GAAP gross margin was 55.6%, a 100 basis point improvement from fiscal year 2009. We expect non-GAAP gross margin in Q1 on fiscal year 2011 to be flat to up 50 basis points. Non-GAAP SG&A expenses were $16.9 million for the quarter, or 19.9% of revenue. An increase of $2.3 million from the third quarter of fiscal 2010. The increase in SG&A was primarily due to the impact of the extra week in the quarter and the addition of SMI. We expect Q1 non-GAAP SG&A to be up across approximately $800,000 to $1.1 million, reflecting a full quarter impact of SMI expenses. Non-GAAP research and development expenses were $11.8 million for the quarter, or 14.9% of revenue. An increase of $2.5 million from the $9.3 million reported in Q3. The increase was due to the impact of the extra week and the addition of SMI.

We expect Q1 non-GAAP R&D to be up approximately $800,000 to $1.2 million reflecting the impact of a full quarter of SMI's expenses. The Company's non-GAAP effective tax rate for the fourth quarter of fiscal year 2010 was 4.5%, down from the 13.4% in Q3 of fiscal year '10. The decrease was due to the tax impact of foreign exchange losses in our Swiss operations, the release of reserves for certain tax positions and other discrete items. We expect our non-GAAP tax rate to be back to a normal range of 22% to 25% in fiscal year '11.

Moving on to the balance sheet, in the fourth quarter, we generated approximately $25 million in cash from operations, which is 29% of revenue, and ended the quarter with approximately $162 million of cash and investments which was down from $316 million at the end of the third quarter of fiscal year 2010. The decrease was due to the payment of $180 million to acquire SMI. In the fourth quarter of fiscal year 2010, no repurchases were made under the 2008 stock repurchase program. We have $15 million left on the program. The Company spent approximately $1.4 million on property, plant and equipment in Q4. Depreciation and amortization for the fourth quarter was approximately $2.9 million, including $1.4 million of intangibles amortization. In Q1 of fiscal year 2011 we expect capital spending to be approximately $6 million to support the ramp up of new products, and bring us new process and package developments. Depreciation should be approximately $1.9 million and amortization of acquired intangibles will be $2.4 million in Q1.

Accounts receivable grew to $31.2 million from $25.5 million reflecting accounts receivable from SMI. Day sales outstanding decreased to 31 days from 31 last quarter. Net inventory was $33.8 million, an increase of $8.4 million from Q3, due to inventory acquired from SMI. This amount includes $2.2 million of (inaudible) adjustments for the SMI acquired inventories. These adjustments will be fully amortized in Q1 of fiscal year 2011. The days inventory is 69 days, down a day from last quarter. We expect the inventory to increase in Q1 in response to higher demand. Our (inventory) in absolute dollars was approximately flat in Q4 and the days declined to 69 days from 72 days in Q3. In Q1, we expect an increase in channel inventory in response to stronger demand.

In summary, we had an excellent Q4. We grew revenue 13% sequentially. We expanded non-GAAP gross margin 120 basis points. We generated cash from operations of $25 million or 29% of revenue. We are very pleased with the strong performance of our organic businesses in a typically down quarter and excited about our future growth prospects with the addition of SMI.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2010 product group performance, our fiscal 2010 Company performance, provide an update on the integration of Sierra Monolithics and then comment on our Q1 fiscal year 2011 outlook.

Q4 fiscal year 2010 was a record revenue quarter for Semtech. We achieved net revenues of $85 million. This is above the high end of our revenue guidance and represents a 13% sequential increase versus Q3 of fiscal years 2010, and a 36% increase versus Q4 of fiscal year 2009. We also increased our non-GAAP gross margins to 56.6%, and our non-GAAP earnings per share to $0.30 per diluted share. In Q4, revenues from communications increased and represented approximately 30% of revenues. High end consumer revenues increased and represented 39% of revenues. Approximately 24% of this revenue was from handhelds and approximately 15% from other consumer systems.

Industrial revenues increased and represented approximately 19% of revenues, while computing revenues decreased and represented approximately 12% of revenues. As we anticipated, we saw strength from the communications, consumer, and industrial markets.

Now, let me discuss the performance of each of our product groups in Q4. In Q4, our power management revenues increased sequentially by 2%. The increase in our power management business was driven mostly by the communications and consumer segments. We are very pleased with the progress in our power management business. We now have less than 26% of our power management business derived from the computing segment which includes desktops, notebooks, servers and peripherals. Revenue contributions within our power business are now generated from a broader set of market segments that garner higher gross margins. While gross margins in our power business are still significantly lower than our target range, we are making good progress, and I do expect that we will see a significant improvement in our power gross margins over the next two years, as new platforms continue to gain traction.

We have started to release new product platforms targeted at Energy Star driven applications and these new platforms are gaining traction at many customers in all geographies. We recently announced a new tiny, high efficiency, feature-rich, DC to DC converter platform targeted at applications where minimizing board space is critical and higher efficiency is required to meet the international Energy Star requirements. We also recently announced a new family of LED backlighting devices that includes an integrated PWM dimming interface on handheld applications where battery life is a critical requirement. We expect both of these platforms to do very well for us. In Q1, we expect our power management revenues to increase modestly.

In Q4, our protection revenues increased sequentially by 5%, to achieve a new quarterly revenue record. Demand for our protection products remained strong in the quarter, driven mostly by the high-end consumer and communications infrastructure segments. The increase in demand for our protection devices is being driven by the increases 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 continues to execute superbly and we are really encouraged by the design momentum of our protection products across all of our target end markets in all regions. In Q4, we extended our high performance protection platform, targeted at 2.5 volt ethernet systems. In Q4, we also started to ramp shipments of products using our proprietary advanced high-end protection process technology. This new process enables us to design and build ultra small form factor protection devices with extremely low capcitants and extremely low leakage. In Q1, we expect our protection revenues to increase again, and achieve another record revenue quarter.

In Q4, our power discrete revenues were down approximately 6% sequentially. Demand for our power discrete products remained week as the military and aerospace segments continued to remain relatively soft. However, we do believe that Q4 was the bottom and this business should start to see growth going forward. Our high reliability business is driven by demand from the aerospace, military, industrial, and high-end medical markets. We have recently announced that our high reliability transient voltage suppression devices have been JANS approved and can now be used in aerospace and satellite applications. This certification essentially allows us to introduce 150 new space products to the market immediately and this increases our SAM in our power discretes business significantly. In Q1, we are anticipating that our high reliability, power discretes revenues will increase.

Revenue for the advanced communications and sensing business increased 11% sequentially, to achieve a new revenue record. On an annual basis, the advanced calm and sensing business was up 28%, versus Q4 of fiscal year '09. Strength in this business was driven by both the communications segment and the industrial segment. Specifically, revenues from our new ToPSync timing synchronization platform reached a new record again, as many of the (inaudible) infrastructure OEMs have started to deploy new IP backhaul and multi standard access bay station solutions. We are also seeing deployment of ToPSync in aggregation switches and access and edge switches where new packet based networks meet traditional SONET SGH based networks.

Also in Q4 we saw very good design win traction of our new RF platforms in the energy harvesting, security and home automation sub segments, as our ultra low power technologies begin to accelerate with the increase in demand for green-friendly technology. We also achieved our first revenues from our new ultra low power touch sensing platforms. We are very excited about the momentum of this new platform and expect a meaningful contribution this fiscal year.

Our advanced communications and sensing business continues to do very well from a new platform execution, design win and booking standpoint. In Q4, bookings of our advanced communications and sensing products achieved yet another record high, driven by momentum in the 3Q, 4Q, LTE infrastructure segments and the emerging energy harvesting segment. In Q1, we expect revenues from our advanced communications and sensing business to increase and achieve another record. From a distribution POS standpoint in Q4, we saw total POS increase by approximately 12%, driven mostly by Asia and Europe. Our distributor business, much like the overall Semtech business, is very well balanced with 55% of the total POS coming from consumer and computing end markets, and 45% of total POS coming from industrial and communications end markets. Distributor inventory was down again in Q4 from 72 days to 69 days. We believe that our channel inventory is relatively low given the current demand environment we are in.

Moving on to new products and design wins. In Q4, we released 17 new products and recorded over 680 new design wins which were both solid results for the Company. We believe that we are uniquely positioned to benefit from many fast-growing segments and we do expect to see a continuation of the strong design win momentum within these segments as we bring out more new leadership platforms in Q1.

Let me comment briefly on our fiscal year 2010 performance. Fiscal year 2010 revenues were down 3%, versus fiscal year 2009. Excluding the acquisition of SMI, fiscal year 2010 revenues were down 5%. We believe that this solid performance enabled us to out perform the industry and our peer group for the third consecutive year. On a non-GAAP basis, we also maintained approximately 55.6% gross margins for the year, grew our non-GAAP diluted EPS from 6% to $0.90, and we grew our design wins by 6% versus fiscal year '09. We also released 56 new products during the year.

Also in fiscal year 2010, our protection business achieved record revenues, and grew approximately 1%. And our advanced communications and sensing revenues achieved record revenues and grew approximately 4%. These are significant achievements given the environment in the first half of the year. Our advanced communications and sensing business released a number of new platforms across the communications, industrial and consumer segments that are gaining traction and this should make FY11 a breakout year for this business. Our protection product group released a new advanced process technology and is sampling a new packaging technology that will enable us to continue the great momentum we have in this business. And we expect that fiscal year 2011 will be another record year for our protection business.

Our power management business has finally turned the corner after several years of deemphasizing low gross margin businesses and refocusing efforts on new platforms and markets where our value is greater. We now have the correct product and market focus and our power management gross margins should expand going forward. We believe that fiscal year 2011 will also be a good growth year for our power management business.

In FY10, we also generated approximately $75 million in free cash flow and closed the largest acquisition in the Company's history. At the end of fiscal year 2010, our net cash per share was approximately $2.60 and our free cash flow per share was approximately $1.21. We believe that we will continue to be one of the very best cash generators in the analog sector. The culture at Semtech has evolved 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 has improved dramatically across all areas of the Company and I'm very confident that we can continue to build on the current momentum. Fiscal year 2010 was a very memorable year for the company and one that we are very proud of.

Now let me comment on the integration of Sierra Monolithics. The integration of Sierra Monolithics has gone extremely well. We outlined a set of objectives to achieve in the first 90 days and we have made very good progress on achieving these objectives. The integration of Sierra is almost complete and the outstanding integration items are not going to prevent us from improving the execution of Sierra Monolithics over the next six months.

We have created two new product groups within Semtech. The first product group we call our transport and datacom product group and essentially includes all Sierra Monolithics (inaudible) products and any associated products that target the 40 gigabits per second and 100 gigabit per second optical infrastructure markets. Java Patel, the former CEO of Sierra Monolithics, is running this product group. We will report on this product group on a quarterly basis starting next quarter. This business has experienced significant growth over the past few years fueled by rapid growth in traffic, over both wired and wireless telecom networks. Future market growth drivers include growing video traffic over the Internet, competition between cable operators and telecom carriers, emergence of data centers, cloud computing and wireless data services. Improving the execution in our transport and datacom product group is a critical goal for us in fiscal year 2011 as we try to improve our operational flow, manufacturing efficiencies and our product delivery commitments to customers.

The second new product group we call our microwave and high reliability product group. This group is a combination of Sierra Monolithics' microwave business and Semtech's high reliability power discrete business. The rationale for combining these two businesses is largely based on customer opportunity. We will no longer report on our power discrete business as a separate product group. The Sierra Monolithics microwave business has two key components to it. The foundation of the business is its frequency transceiver designs for unmanned air vehicles and other defense applications. This business has been growing steadily and we expect it to continue to grow over the next few years.

The second component of the business is driven by our microwave standard products roadmap which is an embryonic business for us. As we make progressing hitting future milestones in both these areas, we will disclose more details related to our overall microwave and high reliability products.

Now let me discuss our outlook for next quarter. The current demand environment across all our businesses is very encouraging. We entered Q1 with a very strong backlog, and demand forecast, and the demand appears to be stable and well balanced. The first few weeks of bookings in Q1 were the strongest bookings in our history. Visibility has improved significantly, and given our channel inventories wer also very low, we are very optimistic that Q1 will be another record quarter for Semtech. We currently expect Q1 net revenues to increase by 7% to 13%. To attain the mid range of our Q1 guidance, or approximately $94 million we needed net turns orders of approximately 38% at the beginning of Q1.

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 Rick Schafer from Oppenheimer. Your line is now open.

Yes, hi, nice quarter, guys. I just had a couple of questions. The first one is just on power discrete business. Mohan mentioned you expect the business to be up in the first quarter. Can you talk a little bit about what you see in that military channel? Has it started to clear up? Have orders started to uptick and what do utilizations and yields look like at the Mexico facility?

Yes, the orders are picking up. I would say the inventory has cleared up. It's beginning to get better. There's more noise from customers on systems and having the budgets to go spend money. And from our standpoint, the fab is doing much better. The yields are up. We do have consistency in the material coming out now. So we're quite confident that this business is going to grow for us.

One of the key things for us from a strategy standpoint is we have released now, for the first time, quite a few space JANS space products and we have a few other product announcements in the pipeline that will expand our SAM. So I'm pretty confident that we are going to be able to grow this business. The other thing we have done is taken the SMI microwave business, specifically the transceivers for unmanned air vehicles and some of the other technology that they have and together with our power discretes business we are working with customers to see what other types of products we can bring to market there.

And Mohan, I think you mentioned, this part of that certification, 150 or so new parts that are basically for sale, is that now? And how fast can that business ramp for you guys? Is there any way to put a dollar figure on that new market opportunity for you guys?

The products are available now. It means we can go into customers and basically get them designed in now, but the time to revenue in space systems is not fast, so I wouldn't expect an immediate ramp. I think it's gradual. Some will be faster than others, but I think you will start to see a gradual pickup and it should help our gross margins also.

But does it help you this year or is it really more of calendar '11?

Yes, I would say it's a second half and then a calendar year '11, yes.

And one quick follow-up. Can you talk about any change in order patterns post Chinese New Year, particularly in China, like 3G bay station and give us an idea what your exposure is there now.

Very strong bookings. Orders have been very strong. Very linear. Fairly lineal, which is encouraging. And our exposure is quite good across the board. We have protection devices that go into a lot of the communications systems in China. We have power management products that go into the China infrastructure, and bay stations. Our timing and synchronization products are going into the customers out there for some of the deployments in China. And, of course, with SMI, we have both 40 gig and 100 gig exposure to the China market, as well. So in general, I would say we have good exposure, and booked orders and the strength is quite good.

Great. Thanks a lot, guys.

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

First of call, great job on the acquisition. It looks like it's really working for you, so congratulations. I missed a part of the call. Maybe you did this, Mohan, but can you talk about what areas of your businesses are you most excited about? Is it com industrial, as you look out maybe three to nine to 12 months out? And then I have a follow-up.

At this point in time, I would say, first of all all, our advanced common sensing business is doing extremely well. We have invested in this business for a number of years. We have been waiting for the breakout and there's really three drivers. The com area, the packet based networks really starting to deploy in greenfield sites and existing infrastructure, and so that's exciting for us with our timing synchronization products. The industrial drivers in that business also with our ultra low power wireless technologies, starting to really hit home now with green tech rally getting some momentum and I think that's a good thing for us. And then also on the consumer analog side, associated with this business, I think that's encouraging as we have some new platforms there.

And then on the power management side, the beauty of this business for us is we have been for the last few years really trying to get out of markets and reinvent ourselves. I think we have reinvented ourselves and we will start to see the uptick in that business with green technology, Energy Star kind of requirements, so higher efficiency type of products. And then our protection business just continues to do really well. There's so many drivers of that business, more ports, higher signal bandwidth, processing technology nodes coming down, lower voltages, system returns at OEMs, smartphones continue to do very well. Touch screens emerging, obviously, gives more ESD issues, ethernet expanding. So just in general I would say that we're pretty excited about those three areas. And now with the SMi acquisition, we have some opportunities to also attack some other markets that we have not participated in before, although that's early days in that area.

Okay, Mohan, if I can ask a follow-up. Obviously, SMI, my belief was it had higher gross margins, plus you, I think, were primed for about $90 million in revenues at your shop and growing organically. Can you paint a picture for us as to what's possible with your gross margin model, as well as maybe how we should think about your financial model on a longer term basis after SMI's integrated with your business?

Harsh, this is Emeka. With respect to the gross margin story, typically what we would expect based on the end market mix of our revenue is that our Q4 and our Q1 should be the strongest gross margin quarters and that our Q2 and Q3 should be somewhat okay, probably kind of flattish. With the addition of SMI, what that does for us obviously is increase our communications content in the revenue and that should be helpful for gross margin expansion. So for this year, what we expect is that Q1 should see some sort of gross margin expansion. We said we will be flat to 50 basis up, and Q2 and Q3 we would expect it to be flattish to maybe 20 or 30 basis points up and then in Q4, we would also expect to see Q4 of fiscal year '11 to be really very nicely up based also, once again, on the end market mix, the high content of communications and the industrial.

Another thing tied to that is, as we model our business, we have said that if we get to $100 million, $105 million a quarter and the mix comes in our favor, so more com, more industrial, we should be able to get close to the high end of our model.

And I think you had a question on the financial model after SMI is fully integrated. We at this point do not believe there's any reason to change the models that we have out there, which is that on the top line, we should grow at least three points faster than the industry, and on gross margins we should be between 55% and 60%. And operating margins on a non-GAAP basis should be between 25% and 30%.

Got it. Emeka, can I ask a clarification on one of your replies here? Are you expecting any leverage whatsoever from SMI at all?

Yes, we are, because we are expecting our revenue growth will be definitely supplemented by the SMI addition. They are definitely going to help with the gross margin accretion, and so I do expect that we should start to see some leverage. Maybe as we go into the second half of next year. But obviously what we have said with regards to the acquisition is that it should be accretive to our non-GAAP EPS and also accretive to EPS if you exclude the value of our (inaudible) intangibles.

Thanks, guys. Thanks, Mohan, and Emeka. I will get back in queue.

Your next question comes from James Snyder of Goldman Sachs. Your line is now open.

Good afternoon. Thanks for taking my question. Just a clarification on the SMI part of the business. I think you did $6 million in the fourth quarter. Can you give us an update on what you expect in the first quarter of fiscal '11. And then how should we think about the profile or the run rate of that business going forward and maybe any update you have on what you talked about at the time of the acquisition was announced of 20% or 30% calendar year growth for 2010.

Okay. So with regards to the revenue for Q1, I think what we should expect is that the revenue contribution to the guidance we just gave will probably be in the neighborhood of about 12% to 13% in Q1. And then in terms of a run rate for the rest of the year, what we talked about when we announced the acquisition was we expected them to grow somewhere in the neighborhood of 20% to 30%. And there is no reason to believe at this point that that would not be the case.

Thanks. That's helpful. And then maybe just a follow-up. I think you have talked about a number of R&D initiatives and new products. Do you feel that you will be able to finance that close to the current R&D run rates or do you expect that you may have to moderately bump up R&D as we move through the year? How should we think about the R&D spend required?

Yes, I think R&D expenses should naturally be expected to go up a little bit. We just acquired SMI, that is R&D intensive. They're designing very process technologies, the cost for those technologies are very expensive. So our expectation is that as we go through the year, with the new product developments coming out of SMI and our advanced communications, that our R&D expenses should go up in absolute dollars and also maybe pick up gradually in terms of our percentage of revenue. Remember, our model internally for R&D is to be in the 14% to 16% of revenue, and right now we are around the 14% level. So we would expect that as we go through the year, with all of these new product initiatives and the fact that the cost automatically goes up, it's a little bit more expensive than what we are seeing now. We should expect that to go up slightly into the 14% to 16% range.

Maybe if I could sneak one last one in. You talked about your inventory levels at distributors being lower than what you like. Maybe you could help us out an on absolute dollar basis, how would you like to increase them to get back to a more comfortable space? Could you remind us what the comfort zone is?

In absolute dollars and I'm talking about internal inventory right now, it's hard to say. It's always going to depend on how strong the demand is and right now we are definitely seeing very strong demand. So the natural expectation is that in absolute dollars the inventory will go up. What I think is probably going to happen is that the days will probably stay -- our inventory days target is about 75 to 85 days. We just finished a quarter, Q4, at 69 days. I think probably at the end of Q1, we should probably come much closer to the low end of our 75 to 85 day range.

Perfect. Thanks very much.

Your next question comes from Terence Whalen from CitiGroup. Your line is now open.

Hi, thanks for taking my question. This one relates to the protection business. I was hoping to understand perhaps from a gross margin perspective what kind of improvements have been made in that business as you have gradually lowered your core computing exposure there. Perhaps gross margin change one year from now, versus one year ago to give us an understanding of how that's affecting overall gross margin. Thanks.

I think you are referring to our power management business, Terence. That's really where we have been focused on the gross margin kind of transition. The power business has historically been focused on the computing space and gross margins, as you know, are significantly below our target range. And what we have done over the last few years is reinvent ourselves, come up with new platforms, targeted the new markets. We expect that probably by the end of this year, we'll be close to the low end of our range, on a GAAP basis of 50% type of gross margins. That's where we are hoping to be.

Okay. Great. And then my follow-up question would be a little bit of a higher level question for you, Mohan. You have been at Semtech for four years. A lot of your time there initially was spent improving some of the basic processes and doing some tuck-in acquisitions and now doing the Sierra Monolithics acquisition. If we look ahead the next few years what are some of the changes in your job as you adapt to being at the Company a little bit longer?

The Company is executing really well. Also now we are focused on more strategic growth and SMI is an example of that. I think we still have a very strong balance sheet, and we'll continue to generate more cash. We have a very strong management team. So it's my belief now we can do a lot of different things. The Company is focused on a lot of fast growing markets. SmartPhones and energy harvesting and 40 gig and 100 gig and switching and aggregation and the power packet based network and space apps, LCD TVs, et cetera, et cetera, so we have a lot of good focus in the markets. I think we are very balanced geographically, we're very balanced from an end market standpoint, we're quite well balanced from a product standpoint. We out performed the industry for the last three years. I think all of our businesses are doing well and starting to grow again. That's good.

We are expanding our SAM. So that's a healthy sign. And I think the end market trends that we have been focused on are in our favor. So, really to answer your question, it's doing more of the same, it's execution of now SMI. We have a lot of degrees of freedom with the SMI acquisition. We have a lot of IP, a lot of technologies that we can go address new markets. I think we can come up with some more disruptive platforms in new application spaces. I'm excited by that. The goal is really to try to get to $500 million as fast as possible and then we'll worry about billing.

And one last question if I could. Thanks for those thoughts. Typically in your SEC documents, you provide the trend of your largest customer. I was wondering if you could give us a percentage number in the quarter, at least give us an understanding of if revenue at your largest customer was flat or up or down. Thank you.

Terence, we haven't quite completed that analysis yet, but I think it would safe to assume that it's going to be the same cast of characters, Samsung and (inaudible).

Samsung is typically our largest customer, Terence. But to give you some flavor of typically the number of businesses we sell to within Samsung, typically computing is about 14% of the business, communications about 13%, consumer handheld is about 34%, consumer other than handheld is about 39% within Samsung. So we are very well balanced within Samsung. And then if you take a look at the products we sell into Samsung, it's also power management. It's protection. It's our advanced common sensing products. So a very broad range of products. So the exposure to one customer, one application really is not so high as one you would maybe get from just Samsung being the number one customer.

Helpful color. Thanks and nice job.

(Operator Instructions). Your next question comes from Douglas Freedman from Broadpoint. Your line is now open.

Hi, it's Ian Ing in for Doug Freedman. Question on the long-term opportunity for your 40 gig and 100 gig Certes applications can we get a sense of that both in terms of proprietary applications as well as open standards. When I look at the road maps out there, like for FPGAs, they go up to 28 gig right now for supporting something like the optical standards like CDI..

Our 40 gig and 100 gig certes devices are doing quite well, obviously it's from the SMI acquisition. We are seeing momentum really driven by a number of the drivers that I mentioned, specifically video traffic in the networks and video conferencing, cloud computing, et cetera. We think there's a $50 million, $60 million SAM. So it's a fairly small SAM today, but it's growing very fast. Obviously our advantage is we were there first. SMI was and are the leaders in that space, and we work with the module manufacturers and the end OEMs to provide a range of different solutions. It's pretty much a customer by customer basis as we are the only provider of an openly available product in the market today.

I see. So a lot of proprietary applications. Great. And then your organic growth, your organic revenues of $79 million, pretty much nearly at your prior peak. So could you give us a sense if there's any end markets that have yet to return to their prior run rate levels, such as certain sections of industrial or communications, for example?

The balance has shifted. Historically, if you go back to our previous record quarter, which I think was Q3 of FY '09, the mix was more computing. We didn't have as much communications. So it was really computing and consumer which was driving it. This quarter, as I mentioned, communications was very strong. Consumer was strong and industrial was strong. And all these figures are gross margin benefit. So in addition, I think the nice thing about that is that, we have been investing in the communications and industrial spaces now for a few years and haven't really seen the benefit of that. So what we see is common industrial growing and, of course, those segments tend to be a little bit more stable in terms of the revenue profile. They don't have the volatility as much as consumer and computing which is why we like that balance. Hopefully I answered your question.

Yes, great. And then last question, just a housekeeping one. Q1 gross margins, I believe you are guiding to a write-down of acquired inventory of $2.2 million. How should we think about write-downs throughout the rest of the year?

I think I did report that it's $2.2 million that we are going to amortize in Q1.

And then in future quarters that goes away?

That goes away after Q1, yes.

Okay. Great. Thank you.

(Operator Instructions). Your last questions from Steve Smigie from Raymond James. Your line is now open.

Great. Thanks, guys. I was wondering if you could comment a little bit more on the competitive environment in protection. You are obviously doing a very solid job there, but as that space has been doing well, I'm just wondering if that's attracting more competition and what you see as your competitive advantage in the space.

The competition is the name set of competitors, we don't see any new competitors there, and they're all very aggressive in this marketplace, as they have been. I would say the good thing about the market is there are a lot of drivers for more protection and those drivers, specifically new applications, require much more complex and more difficult products which is why I put a lot of emphasis on the new process technology, the new packaging technology we've released which I think will give us another two or three years of opportunities to do some exciting things for customers. Remember, some of the drivers -- so there's more ports. They're higher bandwidth ports so more signal speeds on each of those ports, process of technology nodes going down. The voltages are reducing. We are seeing a lot of different application spaces emerge, different types of interfaces. Some regions of the world have higher humidity regions requiring different types of protection. So there's a lot of drivers. And the market is still fairly large. And then there's this replacement market going on as well, where traditional historical discrete protection devices being replaced with higher performance devices. And I would consider our advantage to be process and package and application and really the understanding of this business. We have been in this business for a long time.

Great. Last question is just on the ToPSync product. Can you talk about how the drivers look there over the next 18 to 24 months? You've got WiMAX getting rolled out pretty aggressively, some 4G networks stuff being done here outside of WiMAX, like LTEs here in the US but also over in China. 3G stuff. Can you talk about how that will impact you guys in the next couple of years here.

Yes, that's one of the most exciting areas for us. We are doing very well in this area. The drivers are the fact that the networks are finally moving to packet-based networks and where there are greenfield sites they are deploying packet-based boxes and so there's requirements for IP backhaul and things like. But in existing infrastructure, you have to connect to the SONET SDH networks and you bring a packet-based network and you basically need an aggregation switch or access switch to connect the two and that's where we also are seeing demand for our timing sync product. So I think the carriers are starting to deploy now more aggressively and with the growth in voice, video and data, I do think this is a very good area for us. Obviously we have developed this platform over many years. Again, it's packaging and design and software and everything is a differentiator for us there. But I think the main differentiator is just the applications know-how and the ability to work with customers. And these are tier one customers we have very good traction with.

Great. Thanks and congratulations on the good news.

There are no further questions at this time. I turn the call back over to you.

Okay. Let me summarize by saying that Q4 fiscal year 2010 was a very good quarter for Semtech. Revenues increased sequentially by 13%. We were able to generate approximately 28% of revenues in free cash flow and increase our cash and investments balance by $26 million to $162 million or $2.60 per diluted share after adjusting for the cash outlay associated with the SMI purchase. Our end market balance and traction from our new product platforms in all end markets is enabling us to continue to outperform our peer group and maintain the very resilient profit and cash generation model we have.

Fiscal year 2010 was a solid year for Semtech. While revenues declined by 3% to $287 million, we achieved approximately $61 million of non-GAAP operating income. This achievement was against a backdrop of a decline in both the semiconductor industry and the analog sector. In addition, two of our four businesses achieved revenue records and we saw strong continued design win momentum in all regions and across all product lines. Finally, we closed the largest acquisition of the Company's history and added a broad range of new competencies to the Company that we will benefit from for many years to come. Fiscal year 2011 is Semtech's 50th year anniversary and we expect it to be a very exciting and memorable year for the Company. 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. Thank you.

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