Semtech Corp (SMTC) 2011 Q2 法說會逐字稿

Good afternoon, my name is Caroline and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter FY 2011 Semtech Corporation earnings release. 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. Linda Brewton you may begin your conference.

Thank you, Caroline. Welcome to Semtech's fiscal year 2011 second quarter conference call. I'm Linda Brewton, Senior Manager of Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter ended August 1, 2010, was issued after the market closed today, and is available on our website at www.Semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release, as well as the other risk factors section of our most recent periodic reports on Forms 10-Q and 10-K filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only. Semtech undertakes no obligation to update this information in this call, should facts or circumstances change.

During the call, we may refer to pro forma or other financial measures that are not prepared in accordance with generally accepted accounting principles. A discussion of why the management team considers non-GAAP information useful, along with detailed reconciliations between GAAP and non-GAAP results are included in today's press release. I would also like to mention that Semtech will be presenting at Citi's 2010 Global Technology conference in New York City on September 7, at 3.20 PM Eastern. A webcast link to the presentation will be available at the Investor Relations section of Semtech's corporate website. With that I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone. Our improved execution and strategic focus and the demand for higher bandwidth and more efficient smaller devices enabled us to achieve our best ever record in our 50-year history. In Q2, revenue, gross margin, operating profit and earnings per share were all records. Revenues for the second quarter of fiscal 2011 were a record $113 million, up 11% sequentially, and up 71% from the same quarter last year. We saw strong sequential growth in our communications, consumer and industrial end markets.

In Q2, 60% of our revenues were derived from customers in Asia. 24% from North America, and 16% from Europe. Sales in Asia grew 15% sequentially, driven mostly by shipments of products for communications infrastructure and high end consumer applications. Europe grew 11% and North America grew 3%, driven by industrial applications. Direct sales represented approximately 53% of total revenues, while distribution made up 47%. Bookings were up slightly in the quarter, and book-to-bill was well above 1 for the quarter. Net turns orders accounted for 40% of shipments during the quarter.

Gross margin on a GAAP basis for the second quarter was a record 59.6%, up 360 basis points sequentially. This increase was due to a slightly higher mix of communications revenue, higher mix of power management new product revenues, higher manufacturing volumes and the full amortization of the fair value of inventory acquired from SMI in Q1. In Q3, we expect gross margin to be approximately flat, as the headwind from the seasonally higher mix of computer consumer is offset by higher volume. Operating expenses on a GAAP basis were $44.7 million, up 1.5% sequentially.

Increases in new product expenses and selling costs were partially offset by lower equity compensation and litigation costs. We expect Q3 operating expenses to be higher due to increased investment in new product platforms, new process technologies and increases in variable expenses, such as commissions and incentive compensations, due to higher revenues. GAAP operating profits were a record $22.7 million or 20.1% of sales, up 740 basis points sequentially, reflecting the type of leverage that we expect from our model, as expenses grow at a much lower rate than revenue. We are now well positioned to push toward the high end of our 20% to 25% target range.

Interest and other income was $300,000 in Q2. We expect interest and other income to stay at this level in Q3, as interest rates remain low. The Q2 GAAP tax rate was 14.6%, down from 18.1% in Q1, due to a $1.1 million discrete item associated with anticipated higher tax benefits from equity compensation. The tax rate for the rest of the year is expected at approximately 19%, based on the forecasted regional mix of income. The diluted share count for Q2 was 63.6 million shares. We expect fully diluted share count of approximately 64 million shares in Q3.

Our GAAP net income for the quarter was a record $19.7 million, or $0.31 per share, up 82% sequentially. On a non-GAAP basis excluding the impact of equity compensation, amortization of acquired intangibles and stock option related legal expenses, gross margin was a record 60.1%, sequentially up 130 basis points to the high end of our target model. We expect Q3 gross margin to be approximately flat. Net income for Q2 was up 21% sequentially to a record $26.7 million or $0.42 per diluted share. Once again, our earnings grew much faster than revenue, providing further evidence of the strong leverage in our model. Our non-GAAP effective tax rate for Q2 was 20.7%, approximately flat from Q1. We expect the non-GAAP tax rate for the remainder of fiscal year 2011 to be approximately 21%.

Now, turning to the balance sheet. We ended the quarter with approximately $193 million of cash and investments, an increase of $22 million from Q1. We did not buy back any shares during the quarter. We still have $15 million remaining on the program previously authorized by the Board. The Company spent approximately $6 million on property, plant and equipment in Q2. In Q3, we expect to spend $9 million to support stronger demand, new product platforms and new process technologies.

Depreciation for Q2 was approximately $1.6 million. In Q3, we expect depreciation to be approximately $2 million. Accounts receivable was up 23% in Q2, reflecting higher sales and our days outstanding increased to 36 days from 32 days in Q1. In line with strong demand, net inventory increased 11% and days increased to 70 days from 68 days in Q1. Our distribution sell-through was up 11% in the quarter and our channel inventory in absolute dollars was also up 11% in response to stronger demand. The inventory days remained flat at 64 days.

In summary, this was an excellent quarter. We grew revenue much faster than operating expenses, allowing us to achieve record revenues, record gross margins and record earnings.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2011 performance by end market, and by product group and then discuss our Q3 fiscal year 2011 outlook. Q2 of fiscal year 2011 was yet another record revenue quarter for Semtech and without question the best quarter in the Company's history as the Company beat many of its historical financial records. We achieved $113 million in net revenue. This is above the high end of our revenue guidance and represents 11% sequential increase, versus Q1 of fiscal year 2011 and a 71% increase versus Q2 of fiscal year 2010.

Q2 represented the fifth consecutive quarter of double-digit revenue growth for Semtech. We also increased our GAAP gross margins to a record 59.6%, and our GAAP earnings per share to a record $0.31 per diluted share. Our Q2 revenue, gross margin and earnings per share were the highest in the history of the Company. In Q2, revenues from communications increased and represented approximately 36% of revenues. High end consumer revenues increased and represented 34% of revenues. Approximately 22% of this revenue was from handhelds and approximately 12% from other consumer systems.

Industrial revenues increased and represented approximately 20% of revenues. Computing revenues were approximately flat, and represented approximately 10% of revenues. As we anticipated, while all segments were relatively strong, we saw stronger demand from the communications, industrial, and consumer markets. Specifically, revenues from the optical transport network segment, from the energy harvesting segment, from the SmartPhone segment, and from the tablet PC segment were very strong, and demand from these segments continues to look strong for Q3. Our end market revenue mix is well-balanced with approximately 56% of our revenues coming from the communications and industrial end markets, and approximately 44% of our revenues coming from the consumer and computing end markets.

Now let me discuss the performance of each of our product groups in Q2. In Q2, our power management revenues decreased by 1%. The decrease in our power management business was driven by a modest decline in revenues from the computing segment. Overall, we are pleased with the progress in our power management business, as new product revenues with higher gross margins move our power management gross margins towards our corporate gross margin model. Revenue contributions within our power management business are now from a broader set of market segments, that garner higher gross margins.

Power management revenues from the computing segment now represent less than 5% of our total revenues. We do expect to see further improvement in our power management gross and operating margins over the next two years as more new platforms are released into the market. Our power management business continues to release new, innovative product platforms, targeted at Energy Star driven applications. And these new platforms are gaining traction at many customers in all geographies.

We recently expanded our EcoSpeed DC-to-DC converter platform with our first digital power product targeted at computer peripheral and consumer systems. This platform uses Semtech's patented adaptive on-time architecture to bring high efficiency and numerous features to system customers striving to meet Energy Star requirements. We also recently introduced the world's smallest low input voltage boost regulator platform. This new feature-rich platform is very easy to use and has a tiny and green footprint. This platform is targeted at handheld devices, touch-interface systems, cable and DSL modems and set top boxes.

Our power management product group also released its first ultra-small and ultra-thin 10 channel white LED driver capable of driving up to 120 LEDs. This platform is targeted specifically at high-definition LCD TVs, notebooks and other LCD driven applications. In Q3, we expect our power management revenues to be approximately flat.

In Q2, our protection revenues increased sequentially by 8% to achieve another quarterly net revenue record. Demand for our protection products remained strong in the quarter, driven mostly by the high end consumer and communications infrastructure segments. Bookings for our protection products also reached a new record. The increase in demand for our protection devices is being driven by the increase in the number of ports requiring protection, increasing bandwidth requirements of these ports, and the increasing use of leading edge silicon lithographies such as 90-nanometer and 65-nanometer that are more susceptible to transient voltage spikes. Our protection business unit is executing superbly well and we remain very encouraged by the design win momentum of our protection products across all of our target end markets in all regions.

In Q2, we introduced our latest ultra small low voltage protection platform targeted at handheld systems where space is limited. This platform uses our latest proprietary process technology, and our latest proprietary packaging technology. We also released new protection devices for high speed interfaces such as DSL, ethernet and USB. In Q3, we expect our protection revenues to increase significantly again, driven by high end SmartPhones, tablet PCs and LCD TVs, and we expect to achieve yet another revenue record.

In Q2, our microwave and high reliability products decreased 10%. Demand for our high-rel products softened as spending at our military customers appeared to weaken. We believe that this weakness continues to pose some challenges for overall demand for our high reliability products, and we expect this weakness to continue in the second half. However, the demand for our microwave products in unmanned air vehicles remained healthy in Q2, and we expect this demand to remain healthy in the second half.

In Q2, we announced a new family of high reliability voltage regulators for space applications. The space segment is a target market for us because of the higher gross margins that can be realized in this segment. While we do see current weakness in our historical power discrete business, we see a tremendous opportunity in the communications and industrial microwave segment, and this is where we are investing our R&D dollars in this business. In Q3, we are anticipating that our microwave and high reliability business will be approximately flat.

Revenues for the advanced communications and sensing business increased 5% sequentially, to achieve a new quarterly net revenue record. Strength in this business was driven by both the industrial segment and the communications segment. Specifically, revenues from our advanced medical products, and our ultra low power wireless products for energy harvesting applications, increased. In addition, revenues from our timing synchronization platform remained healthy, as Tier 1 infrastructure OEMs deployed new backhaul solutions for 3G, 4G and LTE applications.

In addition, our new ultra low power touch sensing platforms are gaining good design win momentum in the consumer and industrial segment, and we remain excited about the momentum of these new platforms as they drive a whole new SAM for Semtech. Our advanced communications and sensing business is executing well from a new platform and design win standpoint and bookings in Q2 achieved another record level. In Q2, we announced an ultra-low power fully integrated resistant touch sensing platform targeted at industrial, consumer and handheld systems. We also announced a strategic partnership to deliver a reference design for wireless remote keyless entry system and another strategic partnership to deliver a wireless mesh network solution for smart lighting applications. As in previous quarters, the roll-out of leadership platforms, primarily advanced communications and sensing business continues to be impressive. In Q3, we expect revenues from our advanced communications and sensing business to increase again and achieve another record.

Our transport and datacom business net revenues increased 75% sequentially to achieve a new quarterly net revenue record. Demand in this business is driven primarily by 40 gigabit per second and 100 gigabit per second optical transport network equipment and this demand remains very strong. This business has experienced significant growth over the past few years, fueled by rapid growth in traffic over both wired and wireless data networks, and we expect this market to continue to grow rapidly as bandwidth expansion continues. Market growth drivers include growing video traffic over the Internet, emergence of data centers, cloud computing and wireless data services.

Semtech has a leadership position in both the 40 gigabit per second and 100 gigabit per second markets, and we are investing aggressively to ensure that we remain in this position. 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 flows, manufacturing efficiencies and our new product delivery commitments to customers. In Q3, we expect our transport and datacom revenues to increase again and achieve another record quarter.

From a distribution POS standpoint in Q2, we saw total POS increase by approximately 11%, to hit a new POS record for the Company, driven by all regions. Our distributed business, much like the overall Semtech business, is very well balanced, with 54% of the total POS coming from consumer and computing end markets, and 46% of the total POS coming from industrial and communications end markets. Distributor inventory days were flat in Q2 at 64 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 Q2, we released 62 new products. And recorded over 677 new design wins, which were both very good results for the Company. We believe that we are uniquely positioned to benefit from many fast growing market segments, and we expect to see a continuation of the strong design win momentum within these segments, as we bring out more new leadership platforms in Q3.

Now, let me briefly discuss an organizational change that we are making today, to further enhance Semtech's execution to drive enhanced revenue synergies and to enable a clearer and more differentiated communications platform roadmap. We are merging our advanced communications and sensing product group and our transport and datacom product group. The combined business will be called the advanced communications and sensing product group. This reorganization will assist our penetration of Tier 1 customers, as we attempt to cross-sell all our communications products to these customers. This combined entity will be led by, Alain Dantec, who is running our advanced communications and sensing business today. The current general manager for our transport and datacom business, Javed Patel, will remain on in a consulting role and then leave Semtech at the end of October. We will no longer report on our transport and datacom business as a standalone product group.

Now let me discuss our outlook for Q3. The current demand environment across all our businesses is very strong. We enter Q3 with a record backlog and record demand forecast and the demand appears to be stable and well-balanced across all end markets, all geographies and across all product groups. This broad strength suggests that we are benefiting from both the overall market recovery as well as specific product and market cycles, as Semtech has invested in many new emerging applications and many new technology platforms. The first few weeks of bookings in Q3 have continued to be strong.

Visibility continues to improve, and given our channel inventory is also very low, we are very optimistic that Q3 will be another record quarter for Semtech. We currently expect Q3 net revenues to increase by 6% to 10%. To attain the mid range of our Q3 guidance or approximately $122 million, we needed net turns orders of approximately 31% at the beginning of Q3. We expect GAAP earnings per share will be between $0.33 and $0.35 per share.

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

(Operator Instructions). We'll pause just a moment to compile the Q&A roster. Your first question comes from Harsh Kumar from Morgan Keegan. Your line is open.

Hey, guys. Congratulations. Great job once again. Quick question on gross margin, Mohan. Very nice increases here. First of all, what's the bigger driver here? Is it revenues versus mix? And then secondly, did you get any benefit from the last few remaining parts and pieces from Sierra Monolithics, did they help you at all in any case or is that behind you. And what's kind of -- how should we think about gross margins going forward and I've got one more.

Harsh, this is Emeka, thank you very much. Our gross margin expansion in this quarter was driven primarily from a slightly better mix of communications and industrial revenue, the improvement that we've seen, we continue to see our power management new products gaining a lot of traction in the marketplace and that continues to grow very nicely, and also just we saw the benefits of higher manufacturing volumes. And if I was to look at the expansion, I would probably say it was equally spread out amongst those three drivers. Obviously as I mentioned in my prepared remarks, part of the expansion also came from the fact that in Q1 we fully amortized the fair value of the inventory that we acquired from SMI. Going forward, it's always difficult to say but based on the mix of revenues that we expect to have going forward, given the strength that we continue to see in our communications revenue, and the industrial revenue, my expectation is that we should be able to maintain these levels of gross margin.

Let me add, Harsh, that power management gross margins, we expect to continue to trend higher as the new product platforms keep coming out. The overall margins in that business are still well below our corporate average so that is a -- will be a driver for increased gross margins for us.

And my follow-up, if you will. Mohan, you've got a pretty nice mix, your computing business is going down or at least staying flat, which is kind of what you wanted to begin with. Should we even consider seasonality to be a big factor for you guys, given that you're mostly industrial and comm and so on and so forth. Let me rephrase the question. How should we think of seasonality for your -- for your--?

I think consumer is still a large piece of our business. We are -- have large dependency on what's going on in the tablet PCs, with SmartPhones, with LCD TVs. We still have business in the computers, computer peripherals and some of the notebook and desktop markets. So we will see some of that and specifically I think to your previous question, if consumer and computing becomes a higher percentage of the mix, that will hurt gross margins. But I think the key thing for us now is that we have a little bit more balance. It's not going to be as dramatic a seasonal shift as it was historically.

Great job, guys. Congratulations.

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

Great. Thank you. Add my congratulations on the nice numbers. My first question is within the protection business, it seems like you had some pretty nice success on a high end consumer space. I think some of that definitely goes into TV products. Been hearing about some TV weakness out there. So my question is your strength there just because you overcame the weakness or did you not see the weakness and will you see any negative impact in the coming quarter? Or is it just there's so many ports you're gaining or something that you're offsetting that? Any color there would be helpful.

Well, specific to TVs, Steve, I don't have any data points that suggest it's dramatically weaker. I would say that our protection business is driven by four or five segments, one of which is SmartPhones, which is doing very well. Tablet PCs has become a very big driver for our protection business. LCD TVs, including HDMI ports, but other ports on that are emerging as some of these systems change. But then equally for protection, we're equally as strong in the computing space. On the ethernet side, also on the communications space on the ethernet side and so it's a fairly mixed bag. I doubt one segment is going to shift our protection business that much, even if it softens a bit.

Okay. And similarly, on the computing, I think you mentioned maybe a little bit of computing weakness in power management. Is that more just the general softness we've seen out there or just you guys still working on maybe the last bits of some computing revenue you didn't want?

I think it's both. I think our percentage has clearly come down because we have specifically exited some of those spaces that we were in historically but I think equally computing in this time of the year one would expect it to have been stronger and I don't think it's as strong as maybe it's historically been. So apart of that I really believe that some of it is the SmartPhones and tablet PCs maybe taking some of the market share away from historical computing devices.

Okay. Last question, just transport datacom, I think you said up 75% sequentially. That's pretty amazing. How should we think about growth rate for that business, 2011, because I think you guys originally talked about maybe a 30% growth rate for that business, I guess for all of Sierra Monolithic. Obviously you guys got to be a lot bigger than that. Just any color on how we should be thinking about that next year?

Next year, I think 20% growth rate is -- 20% to 30% growth rate is reasonable. It's hard to call it, because obviously the market's growing very fast at the moment for bandwidth expansion. I don't expect that to change. The need for more bandwidth is going to continue to increase, 40 gig and 100 gig deployments are going to continue to increase next year. But I think that a large part of what's been going on in the last couple of years is more subsidies going into infrastructure and things like that. I'm not sure that it can last for that long. It will continue to increase. I think it's definitely double-digit rates, maybe 20% is more reasonable.

Thanks very much.

Your next question comes from Rick Schafer from Oppenheimer. Your line is now open.

Hey, guys. Let me add my congratulations on the great quarter. I just had a couple follow-ups here. Can you describe your computing mix now? I know you talked about it, but can you kind of break down how much is sort of server, peripheral, panel, that kind of thing, versus some of your older legacy kind of core regs kind of business and also as part of that, what's your exposure to tablets now.

Tablet PCs is just starting to ramp for us. We put that into our consumer business, so it wouldn't show up in the computing numbers.

Okay.

From a computing mix standpoint, it's a combination of peripherals, more printers and servers and graphics drivers and things like that versus core reg. It's also a combination, historically it's been mostly power in our computing business, but now we have a lot more protection, ethernet ports, USB ports, and we're starting to also get our advanced com sensing, touch sensing products are starting to penetrate the computing space. It's small today though. Today I would say that the majority of it is broken out between power and protection and mostly the growth drivers are in the peripheral area.

Okay. Okay. So but is it safe to say you're down to a couple percent exposure to maybe the less desirable kind of power.

Yes.

Okay. And then a second question, the quarter sounded great everywhere pretty much except for sort of your legacy power and discrete, basically on the military side. Can you provide maybe a little bit more color on what's going on there? Did the channel just get overstuffed or filled, or was there any share loss you think on Semtech's part or what do you think is going on there.

As we explore that, Rick, I think it's more to do with the customers, not continuing the same types of systems that they have historically built. Maybe it's a funding issue. Maybe it's just they're focusing on some other application spaces but we've definitely seen our customers really weakness in the marketplace versus share loss. We don't believe we're losing any share. We don't believe -- I mean, there is still some channel inventory out there from past years, but I think it's more to do -- the major softness is to do with the fact that the customer's really funding has come down for them.

Okay. And then just if I could sneak one last quick one in. Do you guys have any lingering constraints anywhere for you guys right now?

On the supply side?

Supply side, yes.

We are supply constrained both on the silicon side and on the packaging side. It's not going to affect our growth here now. Obviously our guidance takes all that into consideration. Supply is tight. Some of our products, specifically for our transport and datacom business, our microwave business and even our advanced com and sensing business the lead times are stretching out a bit and they're in their 12 to 16 week lead times so we have to get good visibility, and to be fair we are. I think it's tight but manageable.

Would you say -- you say tight not constrained. Would your 6 to 10 number for 3Q be a different number if it wasn't for the constraints?

We are -- we are definitely -- our revenue is constrained by our inability to supply. It was in Q2 and it will be in Q3.

Okay. Can you say what the number might have been if it wasn't for the constraints?

We probably had an additional $10 million of potential ability to ship in Q2 if we could have supplied it.

Okay. That's good color. Thanks, Mohan. Congrats again.

(Operator Instructions). Your next question comes from Doug Freedman from Gleacher & Company. Your line is now open.

Great, guys. I offer congratulations there. Mohan, focusing in on those lead times, looks like the -- if I heard you correctly, turns are going down from 40% into the low 30%s. Is that a result of the lead times that you just mentioned going out and if so, can you offer -- what type of visibility are you getting and is it starting to stretch into the fourth quarter? And what is that shaping up to look like?

Well, we look at things from a demand forecast standpoint, looks relatively strong, obviously seasonally, that will be down for us but it's still looking fairly healthy. From a supply standpoint, lead time standpoint, it's really -- the lead times are longer in some of our product areas, like our transport and datacom business and microwave, high reliability business where the lead times have historically been 12, 16 weeks, and now some of those suppliers have been a bit constrained. We have to get good visibility there, and we have been. We have visibility pretty much, we booked in for the quarter in some areas there. So we got pretty good visibility now of what's going on in this market. As I mentioned, 31% turns at the beginning of the quarter is about right for us and that's -- if we look back historically I think we've either achieved that or done better.

I actually think that number is probably going to be one of the better numbers across the peer group. If I could move on, looking at the SMI acquisition, can you give us some targets that you might be looking to achieve as far as synergies and what we can expect on the OpEx there going forward?

On the OpEx side or on the--?

On the OpEx side or anywhere else that you might want to highlight.

Doug, this is Emeka. I think as we have said in the past, the opportunities that the SMI acquisition presents to us is more on the top line, the revenue side, and we are very pleased with what we're seeing. It's also been very accretive to our gross margin, so we're very pleased. We've never really expected to get a lot of synergies on the operating expense side. If you recall, SMI was a privately held Company that didn't spend a lot of money in SG&A. Most of the OpEx was in R&D and that remains an area where we actually continue to invest. We think the microwave business from SMI is a very good opportunity for the Company going forward and that is one of the key areas of investment for us going forward. So we're not expecting any operating expense.

Thank you.

One of the reasons why we're integrating our advanced communications sensing business with the transport and data com business is exactly to try and get more revenue synergies. The revenue's gone very well in that business, but I think we can do even better as we build out the road map there with the combined timing synchronization (inaudible) type of road map.

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

Great. Thank you for taking the question and congratulations on the results. Two quick ones. One is, were there any 10% customers or distributors in the quarter, and if you could potentially give us a size of those, thanks.

Go ahead.

I think it's the same two guys. It is Samsung and I think Samsung was about 12% to 13% of revenues and then the distributor that was over 10% was Frontech and about 12% to 13% of revenues.

Okay. Great. That's helpful. And then I believe some other companies who had exposure to the handset area saw some pause in inventory digestion in some of their handset customers in the quarter, particularly Koreans. But that seems to be coming back up and recovering nicely into the outquarter. I was wondering, could you talk a little bit about the order rates that you've seen in your handset business, do you expect them to strengthen and was there any weakness in the July quarter? Thank you.

It's been strong, it continues to be strong. Our mix of customers is fairly diverse, Terence. We have obviously the Korean customers are big customers for us, as you know, Samsung is our number one customer. But we also are exposed to most of the other SmartPhone guys. So with SmartPhones, it's difficult to say because there's a lot of share changes in the market going on, and then we see continued strength in Q3 and then probably beyond that as well.

Great. And then the last question I have is regarding profitability. Can you remind us where you are versus your target model. Obviously there's been a lot of movement recently, mainly because of the improvement in the power product mix but also helped by SMI. Can you remind us on a two to three year period, what you expect sort of your margins to come out on both on the gross and operating margin side. Thank you.

Yes. So, Terence, that definitely was one of the highlights of Q2 was that on a GAAP basis, the model that we have talked about is that we expect gross margins to be in the 55% to 60% range on both a GAAP and non-GAAP basis, and I think the results we posted is 59.6% on a GAAP basis and 60.1% on a non-GAAP basis. So we're definitely very pleased with that fact and we do expect to continue to operate at that level, at the high end of our target model with regards to gross margin. On the operating margin line, the model is 20% to 25% on a GAAP basis and 25% to 30% on a non-GAAP basis. I think we achieved the low end of our GAAP model, which is 20%.

I think we are really very nicely positioned now to really make a run to the high end of that range. Given the fact that we expect our top line to continue to grow, gross margin will continue to hopefully see some slight expansion in that but more importantly, our operating expenses should grow at less than half the rate of our revenue growth. So we're really very hopeful that, with that 25% target for GAAP that we should be there very soon, hopefully in the next year, as long as we continue to see the top line growth.

Thanks for the commentary and best of luck.

Your next question comes from Li-Wen Zhang from Pacific Crest Securities. Your line is now open.

Congratulations again. Would you please update the competitive landscape for the protection industry, especially after All Semi bought California Micro Devices.

Yes, I mean, both California Micro Devices as well as NXP, as well as a whole bunch of other guys were competitors for us in protection and still are. It hasn't really changed the landscape that much. We see on -- specifically we're in some of the very high volume sockets, where they go very aggressive on the pricing. Our strategy is always to continue to differentiate our products, so we tend to focus on some application spaces, where the requirements are very tough, and that puts pressure on our competitors to continue to invest similarly and that's where we beat them typically on the voltage levels or the size, the form factor or the ESD performance itself. So no real change there, I wouldn't say.

Okay. Thanks. And also, I believe some foundries raised wafer prices recently and how does that impact your gross margin?

Well, we work very closely with all of our foundry partners. Many of our products again are very proprietary products. Our customers recognize that if we have issues then we go to them, we discuss with them potential changes to the pricing structure. We have to pass on a lot of the costs to our customers, and we're able to do that because of the proprietary nature of our products. Having said that, it depends on the application space. I think if you're in a space where the volumes are increasing and the customer's expectation is that as volumes increase they get some price break then it makes it more challenging. But it's one of those things that we just have to monitor a day by day basis. We haven't had the wafer price increases across the board that some of our other competitors have had.

I see. If I can, can I ask what was the revenue contribution from SMI for the second quarter?

I don't have the actual revenue number, Li, but I can tell you this much. Out of our 11% growth--.

Yes.

--7% of that was from the SMI acquisition and 4% was from the organic businesses.

Great. Thank you congratulations again.

Thank you.

There are no further questions at this time so I'll turn the call back over to the presenters.

Let me summarize by saying that Q2 fiscal year 2011 was another really strong quarter for Semtech. Revenues increased sequentially by 11%. We were able to increase our cash and investments balance by approximately $22 million, to $193 million or $3.04 per diluted share. 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 a very resilient profit and cash generation model we have. In addition, three of our five businesses achieved record revenues and we saw strong continued design win momentum in all regions and across all product lines.

Finally, we achieved a record $23 million of GAAP operating profit and a record $0.31 of GAAP EPS and remain one of the fastest growing diversified analog semiconductor companies in the industry. With that I would like to thank everyone for participating in our second quarter conference call. And look forward to updating you all next quarter. Thank you.

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