Semtech Corp (SMTC) 2011 Q3 法說會逐字稿

Good afternoon, good evening. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter fiscal year 2011 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)

Ms. Linda Brewton, you may begin your conference.

Thank you, Simon, and welcome to Semtech's fiscal year 2011 third quarter conference call. I'm Linda Brewton, Senior Manager of Investor Relations. And speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. Our press release announcing our unaudited results for the quarter ended October 31, 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 the 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 accepting accounts 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 financial press release. With that I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone. Secular demand for our communications and industrial products combined with stable and balanced demand across all end markets and product groups allowed us to achieve another record revenue quarter in Q3. For the second consecutive quarter, revenue, gross margin, operating profit and earnings per share were all records. Revenues for the third quarter of fiscal 2011 were a record $123 million, up 9% sequentially and up 64% from the same quarter last year driven by strong sequential growth in our communications, consumer and industrial end markets.

In Q3, 62% of shipments were derived from customers in Asia, 24% from North America and 14% from Europe. Sales in Asia grew 11% sequentially driven mostly by shipments of products for communication infrastructure and higher end consumer applications. North America grew 8% driven by industrial applications while Europe increased 1% driven by strength in the industrial and medical market. Direct sales represented approximately 58% of total revenues, wide distribution net of 42%. Bookings declined in the quarter and book-to-bill was approximately 1 for the quarter. Net sales orders accounted for 31% of shipments during the quarter.

Gross margin on a GAAP basis for the third quarter was a record 60%, up 40 basis points sequentially. This increase was due to the benefit of higher manufacturing volumes and lower equity compensation. In Q4 we expect gross margin to be approximately flat as we benefit from a lower mix of consumer and computing revenue is offset by lower production volume.

Operating expenses on a GAAP basis were at $46.3 million, up 4% sequentially. Increases in new product expenses and selling costs were partially offset by lower class action litigation expenses. We expect Q4 operating expenses to be lower as increased investments in new product platforms and new process technologies are offset by expected vacation utilization during the holidays and decreases in variable expenses associated with lower revenue.

GAAP operating profits were a record $27.5 million or 22.3% of sales, up 229 basis points sequentially. This sequential increase puts us at the midpoint of our target range and reflects our sustained ability to manage the growth in expenses at the rate much lower than revenue growth.

Interest and other income were negligible in Q3 as interest income was offset by foreign exchange losses due to a weaker dollar. We expect interest in other income of approximately $100,000 in Q4 as interest rates remain low and the dollar continues to weaken. The Q3 GAAP tax rate was 14.2%, down from 14.6% in Q2 due to the benefit from the regional mix of income. The tax rate for Q4 is expected to be approximately 16% based on a forecasted regional mix of income.

The diluted share count for Q3 was 64.6 million shares. We expect fully diluted share count of approximately 66.4 million shares in Q4 but reflecting the dilutive impact of the stronger share price. Our GAAP net income for the quarter was a record $23.6 million, or $0.37 per share, up 19% sequentially.

On a non-GAAP basis, excluding the impact of equity compensation, amortization of our acquired intangibles and stock option related legal expenses, gross margin was a record 60.2%, up 10 basis points sequentially. We expect Q4 gross margin to be approximately flat. Net income for Q3 was up 16% sequentially to a record $30.9 million, or $0.48 per diluted share. The earnings growth demonstrates the strength and sustainability of our business model. Our non-GAAP effective tax rate for Q3 was 18.6%, down from 20.7% in Q2. We expect Q4 non-GAAP tax rate to be approximately 18%.

Now turning to the balance sheet. We ended the quarter with approximately $228.7 million of cash and investments, an increase of $35.5 million from Q2. We bought back 75,000 shares during the quarter. We have approximately $14 million remaining on our buyback program. The Company spent approximately $7.6 million on property, plant and equipment in the quarter. In Q4, we expect to spend $10 million to support a ramp of new process technologies, new packaging technologies and a release to production and ramp up of new 40 gig and 100 gig products. Depreciation for Q3 was approximately $2 million. In Q4, we expect depreciation to be approximately $2.5 million.

Accounts receivable were up 20% in Q3 reflecting higher sales. And our day sales outstanding increased to 40 days from 36 days in Q2. Net inventory increased 17% sequentially, driving our inventory days to 74 days from 70 days in Q3, well within our target range of 75 to 85 days. Our expectation is that we'll operate at the lower end of the range in periods of strong demand and at the higher end in periods of softer demand. Our distribution sell through was up 1% in the quarter and our channel inventory in absolute dollars was up 2%. Channel inventory days increased slightly to 65 days from 64 in Q2. This is in line with the demand.

In summary, this was another record quarter for Semtech. We continue to show leverage in our model, growing operating profit much faster than revenue, which allowed us to reach the midpoint of our GAAP operating margin model. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2011 performance by end market and by product group, and then discuss our Q4 fiscal year 2011 outlook. The third quarter of fiscal year 2011 was another record quarter for Semtech as we posted the highest revenue, gross margin, operating profit and diluted earnings per share in the Company's history. Q3 also marked our sixth consecutive quarter of revenue growth. Net revenues increased 9% sequentially from Q2 to $123 million. On an annual basis, net revenues increased 64% from Q3 of fiscal year 2010. We expanded GAAP gross margins to a record 60%, achieving the high end of our long-term gross margin target range. In addition, GAAP operating profit of $28 million surpassed last quarter's record operating profit by 21%. Our GAAP earnings of $0.37 per diluted share also set a new record for the Company.

In Q3, revenue from Communications increased and represented approximately 36% of revenues. High-end consumer revenue increased and represented 35% of revenues. Approximately 25% of this revenue was from handhelds and approximately 10% from other consumer systems. Industrial revenue increased and represented approximately 20% of total revenues while computing revenues were flat and represented 9% of total revenues.

As anticipated, Q3 was seasonally stronger for the Consumer end market driven by demand for smartphones, tablet PCs and other consumer applications. The Communications and Industrial end markets were also strong, driven by demand from 40 gigabit and 100 gigabit optical transport networks and the industrial wireless and medical markets. Our end market revenue mix remains well balanced, with approximately 56% of revenue coming from the Communications and Industrial end markets and approximately 44% of our revenue coming from the Consumer and Computing end markets.

Now let me discuss the performance of each of our product groups in Q3. In Q3, our Protection revenues increased sequentially by 4% to achieve another quarterly net revenue record. Demand for our Protection products remained robust in the quarter driven primarily by strength from high-end smartphones, tablet PCs and relatively stable computing demand. The continued demand for our Protection devices is being driven by the increase in the number of ports on electronic devices, higher bandwidth signals on these ports, and the continuing trend towards smaller device geometries that are increasingly more susceptible to transient voltage spikes.

Our Protection business unit is executing very well and we remain very encouraged by the design win momentum of our Protection products across all target end markets in all geographies. In Q3, we introduced our latest ultra low capacitance miniature protection platform for use in high speed interfaces, including digital/video interfaces, display port interfaces, USB and HDMI applications. This platform offers industry leading protection for next generation consumer products without sacrificing signal integrity. In Q4, we expect our Protection revenues to be seasonally down.

Revenue for the Advanced Communications and Sensing business increased 19% sequentially to achieve yet another quarterly net revenue record. Strength in this business was driven by demand for our 40 gigabit platforms, for optical transport networks. Demand for our ToPSynch time synchronization platform for multi-standard access base stations, demand for our ultra low power wireless solutions for energy harvesting applications and demand for our small form factor medical platforms. Growth in our ACS business is being driven by the continued increase in data and video traffic across wired and wireless networks as well as the demand for energy efficient green technologies and the increasing demand for miniature electronics.

Our Advanced Communications and Sensing business is executing well from a new platform and design win standpoint and bookings in Q3 achieved another record level. In Q3, we announced the world's highest performance, sub 1 gigahertz wireless transceiver platform for smart wireless applications. This platform enables low power wireless transmission of video data in home and building automation systems, security systems, smart metering systems and remote data measurement networks.

We also recently launched an ultra low power capacity of touch sensor IC platform with a proximity sensing range of 10-centimeters. This ultra low power platform enables highly accurate long distance sensing, even through thick overlays. The capabilities of this platform are unmatched by any other device on the market today. We expect this platform to gain penetration in the consumer and industrial applications. In Q4, we expect revenue from our Advanced Communications and Sensing business to increase modestly.

In Q3, our Power Management business grew 4% sequentially. Growth was driven by consumer handheld applications and computing peripherals. Our Power Management business continues to release new high performance ultra small form factor product platforms distinguished by their ease-of-use and energy efficiency. These platforms are seeing increasing traction with a broad range of customers across different geographies in numerous applications including Energy Star driven applications.

In Q3, we introduced the world's smallest Buck controller platform that provides high efficiency, excellent transient response and dynamic voltage transitioning. This device is targeted for use in cable modems, HDTVs, computer peripheral devices, set top boxes and wireless base stations.

We also launched a new switching regulator platform that integrates a DC to DC converter and an inductor in an extremely small low profile package. This platform improves switching efficiency, board layout and cost effectiveness for applications in handheld devices, cable and DSL modems, set top boxes and wireless equipment. In Q4, we expect our Power Management revenues to be seasonally down.

In Q3, our Microwave and High Reliability Products business was flat, as expected, due to continued softness in the military and aerospace markets. We are investing heavily in new microwave platforms that we expect to start sampling in the second half of fiscal year 2012. We expect these new platforms to drive yet another new secular growth engine for Semtech. In Q4, we expect our Microwave and High Reliability Product revenues to decrease modestly.

From a distribution POS standpoint in Q3 we saw total POS increase modestly driven by strength in Japan and North America. Specifically, our Distributor sales into the Consumer and Industrial segments were strong in Q3. Our Distributor business, much like the overall Semtech business, is well balanced with 57% of the total POS coming from Consumer and Computing end markets and 43% of the total POS coming from Industrial and Communications end markets. In Q3, Distributor inventory days increased by 1 day from the prior quarter to 65 days. We believe our channel inventory is currently in line with the current demand environment.

Moving on to new products and design wins. In Q3, we released 23 new products and recorded over 679 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 rollout more new leadership platforms in Q4.

Now let me discuss our outlook for Q4. The current demand environment across all our businesses is in line with historic seasonal patterns. We entered Q4 with a backlog and demand forecast that were both at historically high levels for Q4 but down from Q3. This data suggests that we are beginning to see a return to more seasonal patterns in our traditional end markets. Demand from the Consumer segment appears softer than usual while demand appears to be stable across all other end markets. Our Communications and Industrial businesses continue to benefit from secular growth trends driven by bandwidth expansion and green initiatives.

The first few weeks of bookings in Q4 have been in line with our expectations of lower revenues due to seasonality and a weaker consumer outlook. We currently expect Q4 revenues to be between $110 million and $116 million. To attain the midrange of our Q4 guidance, or approximately $113 million, we needed net turns orders of approximately 35% at the beginning of Q4. We expect GAAP earnings to be between $0.28 and $0.32 per diluted share.

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

(Operator Instructions) And your first question comes from the line of Harsh Kumar with Morgan Keegan. Your line is open.

Sure, hi a couple of quick questions. Mohan, first of all in the quarter that just ended in October, did you have to leave revenues behind in Com or any other place, any other area?

We were constrained a little bit, Harsh, probably $3 million to $5 million I would say but not significant enough and that will be cleared out this quarter.

Okay, and then can you talk about perhaps the linearity of orders and the effect that you're seeing from the timing of the Chinese New Year?

For last quarter, bookings in August and October were strong, September was weak. This quarter, my expectation obviously everybody tries to bring down inventory at the end of the year so December is historically a weaker period and then January, one would expect to be quite strong both because of the, depending on Christmas obviously, but also as we're entering Chinese New Year, so that's the tricky part of it being the end of the year, trying to forecast what's exactly going to happen through Christmas and into the Chinese New Year, but that's typically what would happen.

Good. Got it and last one for me and I'll get back in the queue. Emeka, how should we think about tax rate going forward into the next year?

So into the next year at this point, we're modeling on a GAAP basis 15% to 17% and on a non-GAAP basis 18% to 20%.

Got it. Thanks, guys.

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

Hi, guys. I had a couple questions. I guess the first one just kind of going to the fourth quarter guide a little bit, I know you talked about it sort of being seasonal but am I wrong I mean typically the January quarter is more sort of a flattish quarter for you guys, is that the right way to think of it? I guess if it is a little bit below seasonal, I guess is it-- is all that incremental weakness sort of confined to Consumer?

Q4 is typically down, Rick, I would say in the 4% to 5% range, it seems like it's a little bit weaker this quarter and that is driven by Consumer and a little bit by Computing. Com is still expected to be reasonably strong, I think and Industrial, specifically the secular areas stronger but Consumer is definitely weak. I would say specifically the high-end smartphones, TVs and set top boxes all appear to be a little bit weak. Now we may see strengthening as we come out of December and go into January as I just mentioned, depending on Christmas and I think depending on the Chinese New Year but at this point, it's looking a little bit weaker than one would normally expect.

Okay. And you mentioned smartphones, so even smartphones seeing a little bit of softness?

Yes, yes.

And Mohan your lead times now, I know they've been coming down, are they stabilized and sort of where do they sit now?

The majority of the products now the supply lead times are fairly stable. I think for Com products, still a little bit high on the 20 week, 12 to 20 week lead times a little bit higher than I would like, but for the rest of the business, I think they're stable.

And stable sort of in that single digit sort of eight week kind of range or--?

Yes, eight to 12 weeks.

Eight to 12.

Now it's still not-- the lead times are not where they would be in an environment where you have a lot of supply and not much demand, so I would say that the supply is still fairly tight.

Okay, and then switching gears on to the military and the High Rel defense side of the business, was it safe to say that channel inventories mostly worked through and kind of cleared out now or is there still another quarter or two for that to kind of get worked down?

I think channel inventory is fairly okay now. I don't think there's a lot of channel inventory there. I think it's more a question of just this is a business where you get new design sockets but it just takes a long time to generate revenue and then we don't really see a lot of customers out there with really strong demand. It's fairly constrained, I think, still.

Okay, and then kind of related to that, the Mexico facility I guess is kind of seen its share of struggles the last couple years since the fire. I mean how strategic is that facility for you guys longer term? I mean is there any chance you'd look for a buyer and-- or not? I mean do you need to keep that business?

No, we-- I mean, the Power Discrete business for us, the High Rel business for us, we still think is fairly strategic. I mean I think that as we continue to develop new microwave programs and other programs that could go into the High Rel market, we have some unique competencies in that facility and unique capability for generating different types of products for different markets including alternative energy and maybe the hybrid vehicle market and things like that. So I don't think it's a market, a business or a manufacturing facility that we view as a tactical facility. It's very much more strategic than that.

But it's only, correct me if I'm wrong, this is my last question, but correct me if I'm wrong, but it's only about 5%, 6%, 7% of revenue, is that right today and could you not move that to one of your foundry partners or--?

Well that's correct but from a revenue standpoint but I think that it is very unique in the sense that what we do there is all High Rel stuff so this is not stuff that would logically fit into a foundry partner. It's very specific to the aerospace industry and the High Rel space. It's not to say that it couldn't be done but I think at this point in time, it's probably not the right thing for us.

Okay, got it. Thanks a lot.

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

Great, and good afternoon. Just wanted a little bit of a high level question related to the geographic revenue break out you give. Your revenue has been sort of consistently 60% above Asia/Pacific. If you could take an estimate, what do you think the actual consumption of revenue in that emerging market would be versus the ship to of 60%? Thanks.

That's a tough question, Terence. It's definitely increasing. We are-- obviously our customer base in Asia is increasing specifically in China. Huawei is becoming a much bigger customer for us, for example. But today, still the vast majority of the business is being designed in North America and Europe and other parts of the world, so I don't have the detail behind it but you know we have design in sockets at Apple and Cisco and the likes of most of the North American smartphone manufactures and that is all shipped out of Asia.

Okay, understood, understood. And then the other question I had is you gave an estimate that the transport and data com business from Sierra would grow perhaps 30% or even up to 50% in calendar 2010. Can you give us an update on where you expect that business to come in in calendar 2010? And then also perhaps give us an indication of what that could do in 2011 and remind us what the growth drivers are and what leading indicators we should be thinking about as we kind of think about modeling growth for that portion of Sierra's business?

So Terence, this is Emeka. In calendar 2010, I think the growth for the SMI business is probably going to be more in the 30% range. And on a go forward basis, I think we would also expect that in the next calendar year, we should seeing them growing at about a 20% to 30% range.

Okay, great, that's very helpful. And then my last question was your comment about smartphone being a little bit maybe marginally weaker than normal or perhaps just seasonally weaker. That is a little bit in contrast to what we're hearing from some other suppliers. Could you help us understand maybe what you're seeing specifically in that market and what the outlook maybe for the first half of next year is for that market? Thank you.

Well, the Consumer business, the high-end Consumer business for us in Q4 is looking softer than it has been. I mean Q3 was definitely a very strong quarter for Consumer, so that's not totally unreasonable that Q4 would come down, especially given December and then going into January, we don't know quite what to expect out of January. But it's not specifically just smartphones. I think it's fair to say that TVs and set top boxes and other Consumer equipments are also a little bit softer in Q4. I do expect though in Q1 that to bounce back, both actually all areas of the consumer business, so I think this is a one quarter seasonality kind of thing. This is what one would expect from normal seasonality, I think, and that's what we're seeing.

Okay, that's helpful. I'll requeue, thank you.

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

Great. Thanks for taking my question, guys. If I could focus in a little bit on some of the OpEx controls, it looks like you are able to lower your OpEx in the January quarter. Can you give us a sense of what type of flexibility you have on the OpEx lines for control?

So Doug, in the January quarter, we are expecting employees to take a little bit more time off because of the holidays. And as you probably know, I think I've said this before, 15% to 20% of our OpEx is variable in nature, things like commission, supplemental comp, some times we put restrictions on travel and other stuff. So this is something we've done before, we're basically going back to the certain game plan and hopefully, we're fairly confident that we should be able to hold the OpEx down.

Okay, and if I could focus in a little bit on, I think there's a little bit of a challenge for us to figure out just what your seasonality is going to be given the fact that really the makeup of the Company has changed over the last year, some of the end market exposure has changed, the SMI deal. Could you give us some sense of what you think your seasonal patterns are going to look like, not just for the next quarter but even into next year, is there anything that you can help us understand as far as what your expectations are?

Yes, I think once things settle down with our-- some of our secular drivers here, I do expect we'll kind of see the Com unit-- Consumer and Computing will drive, mostly Consumer, drive the Q2 and Q3 to be stronger growth areas for us and then Q4 and Q1 will be typically driven by Com and Industrial. That's kind of what I'm expecting. What's tricky to say at this point in time is and the reason why it's difficult to really call it is Com infrastructure, specifically the 40 gig and 100 gig is just growing every quarter and continues to do very well as does some of the Industrial wireless for some of the green initiatives that are out there. The rest of the stuff seems to be falling into a more traditional seasonal pattern, I think, and that's what we expect to see.

All right. If I could sort of my last question, a little bit more focused on there was some buyback in the quarter but yet we aren't seeing much of an impact of that to the share count. Is there a point in time where we think we can see share count start to-- is your target to hold it flat? What is your sort of overall driving factor on how much you're going to deploy on the buyback versus the share count?

So, the buyback last quarter was pretty nominal. It was only 75,000 shares and we still have $14 million left on the program that has been authorized by the Board, so we do have that to play with. However, the key driver really behind the share count and the guidance is actually the increase in the stock price, the recent increase in the stock price. So I think we're pretty happy with where the share price is right now that obviously a portion of that that we cannot control but at this point, we continue to revisit that issue every quarter, but I don't have-- we are pretty happy with where the program is right now and there is no plans to go out and do anything significantly big.

All right, great. Thank you.

Your next question comes from the line of James Schneider with Goldman Sachs. Your line is open.

Good afternoon. Thanks for taking my question. Following on on the previous seasonality question, I was wondering if you could maybe be a little more granular on the April quarter seasonality. I mean I think you talked about the idea that Consumer and Computing could bounce back a little bit in that quarter and I know that Industrial and Coms would typically be pretty strong in that quarter as well, so should we be thinking about a pretty substantial increase in the April quarter given that kind of typical seasonality or is that really the wrong way to think about it and there's some offsets there?

Well a lot depends on Chinese New Year. I would expect consumer to come back a little bit, specifically the handhelds. Typically Q1 though is not the strongest period for Consumer or Computing, I think Q2 and Q3 should be stronger so -- but I do think that off a Q4 low that Consumer will probably come back up in Q1, I wouldn't expect it to be dramatically up but slightly up. Computing probably flattish in Q1. Com is quite strong at this point in time because of the 40 gig and 100 gig infrastructure but take that aside, I think probably flat. And then Industrial I think would be slightly up in Q1, would be my expectation, Jim.

Great. That's very helpful, thanks. And then just maybe on a broader capital allocation kind of theme, that seems to be a thing that investors have on their minds these days and I just kind of wanted to ask you, clearly you did -- you've taken a blend of M&A and buybacks is kind of your strategy over last year and clearly the SMI acquisition has turned out very, very well for you. Is your thought to just do a little bit more buyback to offset dilution and then be opportunistic on M&A, or do you have any thoughts of potentially doing a dividend in the future?

Well we always look at the different alternatives and M&A is still something very much on our minds. We like the SMI acquisition. We want to continue to be -- drive the growth on the top line as we have done. We're clearly one of the fastest growing diversified analog companies out there. We're very close to our original target of $500 million that I had set up and now we're trying to pay the costs for how to get to $1 billion and then I think M&A has got to be part of that toolkit, so that's for sure. Buybacks at this point in time, we don't believe that's the primary driver of shareholder value and return to the shareholders. And dividends is also something we think about but we prefer the growth -- to use the cash for growth at this point in time. Emeka, do you have anything to add?

No, I think I'll concur with all those points. Yes.

So that's the way we're currently thinking about it, Jim.

Understand, great. Thanks very much, guys.

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

Yes, thanks for taking the question, guys. Mohan, you mentioned tablets as a driver in high-end Consumer. Can you talk about how material that business is now? And as you look out over the course of next year, how much potential is there for that business to become a bigger part of your revenue mix?

Well, I don't have the details, Craig. I mean obviously, we've got some good designs, design in sockets there at -- in all the tablet PCs. Because it's a new emerging space, obviously the growth is very good. I think that to some extent it's cannibalizing the notebook space and I think that also is a good thing for us because we didn't have a lot of participation in the notebook space since we exited the power core regulator area. So we view it as another growth engine for us along with smartphones and LCD TVs and optical transport networks and IP backhaul and lighting control and medical electronics and all of the other stuff. So I don't think it's the only vector for us but it's an important one and clearly being we're seeing a lot of different manufactures each coming out with their own variance of tablet PCs, so it's good to be participating in this space and I'm sure it's going to be a driver of some of our revenue growth, but I can't tell you exactly how much.

Okay, that's fair. And then following up on Jim's question regarding potential M&A, as you look at what the Company might do, is there any bias at this point given the capital structure for either more tuck in type technology deals or to do something that's more substantial say along the lines of Sierra Monolithics' switch has turned out quite nicely?

We'll look at both. We have the cash obviously and the machine, the profit machine to continue to do acquisitions but we have a very strict model. Obviously, the gross margin targets that we set are very high. We have a very strong strict operating margin model as well. We also are very clear that we only want to do things in the analog domain, that are very complex analog, very difficult to do that have some strategic synergies. Clearly, with the SMI, with the Sierra Monolithics acquisition, we've now opened up a number of new markets and the new SAM for us in many different areas. And being able to now leverage that -- those degrees of freedom for further acquisition I think is quite nice opportunity for us, but we have yet to really explore that and lay it out. And as we see opportunities though, I think the size is not really a question.

Okay, and then just as my last question, but more for Emeka, you mentioned gross margins, Mohan. Emeka, we're at 60% and that's the high end of the target margin range. Is it time to revisit the target margin range or how should we interpret where you are relative to 55% to 60%?

I think we are very comfortable with the gross margin range that we have because when we set that range we actually had the Company's long term growth in our mind. I think the 55% to 60% is the range that would allow us to continue to grow very nicely, outperform and outgrow the market but also continue to grow very profitably. At the end of the process [review] what we want to get to is to get to a nice combination, maybe 50% of our revenues coming from our Communications and Industrial and the other 50% coming from the Consumer and the Computing end markets. Right now the balance is tilted more towards the Industrial and Communication side. So if you look at it, I get excited because I think that that means we do have a nice opportunity to grow much faster if we can get our Consumer and our Computer revenue up to 50% of the total Company. So I think the gross margin range that we have right now is quite ideal for the growth plans that we have especially as we start to really hone in on our plans to get to $1 billion in revenue.

Thanks, guys.

(Operator Instructions) Your next question comes from the line of Harsh Kumar with Morgan Keegan. Your line is open.

Hi guys. On the last call, I think you'd mentioned that there were parts of Sierra Monolithics business that perhaps could provide more leverage given a little bit more CapEx. Are you at a point where you realize all the synergies/benefits from Sierra Monolithics leverage or is there perhaps a little bit more left? Just any kind of commentary would be helpful.

So, Harsh, I think when we did this Sierra acquisition, we always said that the upside, the synergies, if you will, is going to come from the top line and gross margin expansion. And obviously we've seen a lot of the top line growth. We still think that our opportunities there to grow the top line even further as we improve our manufacturing capabilities over there. And on the gross margin line there is also an opportunity to drive further gross margin expansion just by improving the capacity and adjust the yields and all of that stuff. So there is still some benefit that I'm expecting to see as we go into the future quarters here.

The other thing Harsh, let me add to that, that I think that when I just kind of look at it overall at a high level, I still think we have a lot of improvement to be made on the product side and the product road map, the execution there, some of the lead times being too long on the supply side, so I think there's execution improvement near there. Yield predictability is still not very good and I think we can improve there. And I think the real, the main thing that's yet to come is the microwave platforms that as I mentioned in the second half of next year, will start to come out and really will take us into a whole new SAM that we've never participated in before.

Mohan, is that products out for specs or is that revenues in the second half of next year?

I'm expecting us to start sampling in early second half of next year.

Got it. Fair enough. Thanks, guys.

Operator?

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

Okay let me summarize by saying that Q3 of fiscal year 2011 was another very strong quarter for Semtech. Revenue increased sequentially by 9%. We were able to increase our cash and investments balance by approximately $36 million to $229 million, or $3.54 per 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 the very resilient profit and cash generation model we have. In addition, two of our four businesses achieved record revenues and we saw strong continued design win momentum in all regions and across all product lines.

Finally, we achieved a record $28 million of GAAP operating profit and a record $0.37 of GAAP earnings per share 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 third quarter conference call and look forward to updating you all next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.