Semtech Corp (SMTC) 2011 Q4 法說會逐字稿

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-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). Thank you. Ms. Linda Brewton, Senior Manager of Investor Relations, you may begin your conference.

Thank you, Melissa. Welcome to Semtech's fiscal year 2011 fourth-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 January 30, 2011 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 in 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 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 the Roth 23rd annual Growth Stock Conference in Dana Point, California on March 14 at 3.30 PM Pacific. 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. On December 5, 2010, 4 days after our Q3 earnings announcement, we reached an agreement to settle the class-action lawsuit for $20 million. As a result of this subsequent event, we recorded an additional charge of $10 million to reflect a full settlement amount in our Form 10-Q for the third quarter of fiscal 2011. This charge was recorded after our earnings call on December 1. As a reminder, we had previously recorded $10 million in our financial results in the fourth quarter of fiscal 2010. We expect to pay the full settlement amount in the first or second quarter of fiscal 2012. Now, moving on to our Q4 fiscal 2011 results.

Consistent with our seasonal revenue patterns, revenue for the fourth quarter of fiscal 2011 was sequentially down approximately 6%, to $116.3 million, but was up 37% from the same quarter last year. The sequential decline in Q4 revenue was the result of the anticipated softness in demand for our products using Smart phones and other consumer devices, partially offset by the continued strong demand for our communications products deployed in optical networking equipment. We ended fiscal year '11 with record revenues of $455 million, up 59% from fiscal year 2010. In Q4, 59% of shipments were derived from customers in Asia; 25% from North America; and 16% from Europe.

Sales in Europe grew 4%, and North America grew 1%, driven by demand for our Communication products. Sales in Asia declined 10% sequentially due to softness in our high-end consumer business. Direct sales represented approximately 59% of total revenues, while distribution made up 41%. Bookings increased during the quarter from strong quarters for our communications and high-end consumer products. Our book-to-bill was well over 1 for the quarter. Net [total] orders accounted for 38% of shipments during the quarter. Gross margin on a GAAP basis for the fourth quarter was a record 60.2%, up 20 basis points sequentially. This increase was due to the higher mix of communications revenue in the quarter.

In Q1, we expect gross margin to be approximately flat, as the headwind from a higher mix of consumer and computing revenue is offset by higher production volume. Operating expenses on a GAAP basis were $44.5 million, down 21% sequentially. The decrease was primarily driven by the $10 million charge recorded in Q3, related to the agreement to settle our class-action lawsuit and lower equity compensation. We expect Q1 fiscal year 2012 operating expenses to be higher, due to higher payroll-related expenses from increased work hours and higher payroll taxes, increase in new product and process development expenses and increases in available expenses associated with higher revenue. GAAP operating profits were $25.5 million, or 22% of sales, up from 14.2% in Q3.

Interest and other income were negligible in Q4, as interest income was offset by foreign exchange losses due to a weaker dollar. We expect interest and other income of approximately $200,000 in Q1, as interest risks remain low. The Q4 GAAP tax rate was a benefit of 1.5%, down from a provision of 8.1% in Q3, reflecting benefit from the renewal of the federal research tax credit and the [related] original mix of income driven, primarily by the agreement to settle our class-action litigation. The lower-than-expected tax rate contributed approximately $0.07 to our GAAP EPS in Q4. We expect our GAAP tax rate to be between 13% to 15% in fiscal year 2012. The diluted share count for Q4 was 66.2 million shares. We expect a fully-diluted share count of approximately 66.8 million shares in Q1, reflecting the dilutive impact of a stronger share price.

Our GAAP net income for the quarter was a record $26 million, or $0.39 per share, up from $0.25 in Q3. 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 60.5%, up 30 basis points sequentially. We expect Q1 gross margin to be approximately flat. Net income for Q4 was sequentially flat at $31 million, or $0.47 per diluted share. Our non-GAAP effective tax rate for Q4 was 9.7%, down from 19.8% in Q3. The lower-than-expected tax rate contributed approximately $0.04 to our non-GAAP EPS in Q4. We expect our non-GAAP tax rate to be between 16% to 18% in fiscal year 2012.

Now, moving on to the balance sheet. We ended the quarter with approximately $258 million of cash and investments, an increase of $29 million from Q3. We did not buy back any shares during the quarter. We have approximately $14 million remaining on our buyback program. The Company spent approximately $7.5 million on property, plant and equipment in the quarter. In Q1, we expect to spend $10 million approximately to support the ramp of new process and packaging technologies, and the [release] to production and ramp-up of new 40G and 100 devices. Depreciation for Q4 was approximately $1.9 million. In Q1, we expect depreciation to be approximately $2.3 million.

Accounts Receivable went down 14% in Q4, reflecting lower sales, and our days sales outstanding increased to 43 days, from 40 days in Q3. Net inventory increased 10% sequentially to support our stronger revenue outlook. Inventory days increased to 89 days from 74 in Q4, slightly up over our target range of 75 to 85 days. Our distribution sell-through was up 1% in the quarter, and our channel inventory in absolute dollars was down 8%. Channel inventory days decreased to 59 days from 65 in Q3. In summary, this was a successful quarter and a great year for Semtech. In fiscal year 2011, we grew revenues 59%, and grew operating profit 155% on a GAAP basis, and 118% on a non-GAAP basis, demonstrating the strong leverage in our model. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2011 product group performance, our fiscal year 2011 Company performance, and then comment on our Q1 fiscal year 2012 outlook. Q4 fiscal year 2011 was a solid quarter for Semtech. We achieved net revenues of $116 million, seasonally down 6% from Q3 of fiscal year 2011, and up 37% from Q4 of fiscal year 2010. For the quarter, our non-GAAP gross margin grew to 60.5%, exceeding high end of our target model. And our non-GAAP earnings per share increased to $0.47 per diluted share. In Q4, revenue from the communications end-market increased, and represented approximately 40% of total revenues.

As we had anticipated on our last earnings call, revenue from the high-end consumer end-market was softer than usual, and declined in the quarter, representing 31% of revenues. Approximately 21% of this consumer revenue was from handhelds and approximately 10% from other consumer systems. Also as expected, industrial and computing revenues declined seasonally, and represented approximately 20% and 9% of revenues respectively. Now, let me discuss the performance of each of our product groups. Revenue for our Advanced Communications and Sensing business increased 9% sequentially to achieve a new revenue record and making it our largest business, comprising 42% of Q4 sales.

Revenue growth for this business was driven by strength in the industrial and communications end-markets. In Q4, we saw very good design win activity for our communications, wireless, and our touch sensing platforms. We also introduced the world's most sensitive capacity-touch sensor platform, with a proximity sensing range of 10-centimeters that targets LCD TV and industrial applications. This platform complements our low-power, multi-touch resistive-touch platforms that are already gaining momentum in some handheld and tablet applications. The combination of our 10-centimeter proximity sensing, our ultra-low power and multi-touch capability is enabling us to win in targeted applications.

Our ACS Consumer business is growing nicely, and we expect significant growth in fiscal year 2012 from this business. Our Communications business was very strong in Q4, and we expect it to remain very strong in fiscal year 2012, as we see the continued need for more bandwidth across global networks. Our timing-sync solutions for both wired and the wireless packet-based systems are for customers [with] a complete timing synchronization platform for passive optical networks, DSLAMs, space stations and core [and] aggregation systems. This week, we also announced that we have started to sample our 100-gigabit-per-second [faces service] device for short-haul applications in data and telecommunications infrastructure systems.

Semtech is now shipping 100-gigabit-per-second [serdes] devices into both long-haul and short-reach optical transport network applications. In addition, we announced this that JDS Uniphase has successfully integrated our 40-gigabit-per-second serdes platform into their 40-gigabit-per-second DWDM transponder modules. Semtech is currently shipping 40-gigabit-per-second and 100-gigabit-per-second serdes devices to many of the major OEMs and module vendors in the world. 40-gigabit-per-second port deployments are expected to increase by 300% this year. While still small, the 100-gigabit-per-second market is also starting to grow rapidly, and it will be a meaningful revenue contributor for Semtech in fiscal year 2012.

In addition to our very strong Wired Communications momentum, our ultra-low power industrial wireless platforms are starting to generate revenues from the energy harvesting and smart-[liking] applications, as well as a broad number of our other applications, including remote keyless entry, home automation and remote controls. Our Advanced Communications and Sensing business continues to do very well from a design win, bookings, and new platform execution standpoint, and is benefiting from the long-term trends that are driving growth in the analog semiconductor space. In Q1, we expect revenue from our Advanced Communications and Sensing business to increase and achieve another net revenue record.

In Q4, revenue for our Protection business decreased sequentially by 11% due to short-term softness in the demand for high-end consumer applications as well as for computing applications. In Q4, Protection revenues represented approximately 40% of sales. Overall, our Protection business continues to benefit from secular trends, driving demand for circuit protection of highly-sensitive electronic equipment. As electronic systems become smaller, as interface bandwidths increase, and as the number of ports per system continues to increase, the need for advanced protection will continue to escalate. In addition, reducing [lithographies] are becoming an increasingly complex challenge for systems designers.

Semtech's ability to provide ESD protection at lower-signal voltages without compromising device performance [all sides], continues to set us apart in the industry. In Q4, we introduced a number of new protection platforms, and also expanded our successful RailClamp platform with a protection array that doubles the level of protection from networking transceivers. This device impresses the needs of global telecommunications carriers by offering best-in-class protection against electro-static discharge, cable discharge and lightening surges. In Q1, we expect our Protection revenue to increase significantly as a result of new model design wins and an increase in demand from Smart phones, tablets, computing systems, and from the telecommunications infrastructure segment.

In Q4, our Power Management revenues decreased sequentially by 25%, due to softer demand from all segments. Power Management represents a 12% of Q4 sales. Our strategy of capturing higher-margin revenue is starting to gain momentum, as evidenced by strong new product platform releases and new design win traction across a variety of applications. In Q4, we announced a low-power LED backlighting platform that automatically adjusts the brightness of display lighting in handheld devices, creating uniform lighting and dimming. We also expanded our EcoSpeed family with a 3-amp high-input voltage regulator. Our EcoSpeed family of products now supports applications that require regulated output currents from 3 amps to 30 amps.

Our EcoSpeed platform is starting to get designed into GPON, base station, and other communications applications, as well as computer peripheral systems and consumer applications. We also announced the expansion of our point-of-load buck regulator platform with a tiny 4-amp regulated device with programmable soft-start, enabling customers to meet green compliance needs. Semtech now offers one of the broadest range of point-of-load regulators in the industry, able to accommodate loads of 0.5 amps to 4 amps and beyond. In Q1, we expect our Power Management revenues to increase slightly, driven by computing peripherals, automotive lightning displays and other consumer applications.

In Q4, our Microwave and High-Reliability revenues declined 7% sequentially, due to weakness in our High-Rel business, which was impacted by reduced spending on traditional avionics systems. Our Microwave and High-Reliability product revenues represented approximately 7% of Q4 sales. Within the Microwave and High-Rel business, the demand for unmanned air vehicles continued to grow nicely. The goal in our Microwave and High-Reliability business is to expand our microwave SAM by entering the commercial microwave market. In Q4, we [staked] out our first integrated silicon-germanium microwave platform for communications infrastructure applications. We expect to start sampling this new platform in the second half of fiscal year 2012.

In Q4 , we also announced a strategic technology development partnership with IBM on a new 3D package. This new package allows unparalleled systems integration of high-performance chips in the same package we use in instrumentation, communications infrastructure and radar applications. Over the coming quarters, we hope to announce several exciting new microwave platforms that will leverage our expertise in high-performance microwave communications as well as our competencies in high-temperature, high-voltage, high-efficiency and high-reliability solutions. In Q1, we expect sales for our Microwave and High-Reliability business to be approximately flat.

From a distribution POS standpoint in Q4, we saw total POS increase by approximately 1%, driven by Asia and Europe. Our distributer 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. Distributer inventory declined to 59 days in Q4, from 65 days in Q3. We believe that our channel inventory is low, given the current demand environment we are in. Moving on to new products and design wins. In Q4, we released 19 new products and recorded over 703 new design wins, which were both solid results for the Company.

We believe that we are uniquely positioned to benefit from long-term growth trends in our industry, and we expect to see a continuation of the strong design win momentum in Q1, as more new innovative platforms are released. Let me comment briefly on our fiscal year 2011 performance. Annual revenues for 2011 grew 59% from fiscal year 2010 levels, to a record $455 million. We believe that we have outperformed our peer groups for the fourth consecutive year, and we remain one of the fastest-growing, diversified analog Companies in the industry. In addition to record revenues, we expanded non-GAAP gross margins to 59.9% and increased our non-GAAP diluted earnings per share to $1.71, from $0.90 in fiscal year 2010.

This is a 90% increase in earnings per share, and demonstrates the impressive leverage in our business model. In addition, our new product releases in 2011 were triple the number of products released in 2010, which is an indication that our new-product-development engine is working very well. In fiscal year 2011, our Advanced Communications and Sensing business grew 183% year over year, achieving record revenue levels. Our Protection business also posted record revenues, and grew 33% over the prior year. Our Microwave and High-Reliability business grew 28% year over year, despite a tough market for avionics applications. Fiscal year 2011 was also a double-digit growth year for our Power Management business, which grew revenue by 14% while improving its gross margin profile.

Semtech continues to be one of the very best cash generators in the analog sector. At the end of the fiscal year 2011, our net cash per share was approximately $3.90, an increase of 50% from the end of fiscal year 2010. Fiscal year 2011 was a remarkable year for Semtech, and one in which we achieved additional important milestones. First, we successfully integrated the largest acquisition in Company history and dramatically improved its operating performance. In addition, we reached an agreement in principle to settle the class-action lawsuit related to historical stock option accounting practices. Semtech's culture continues to emphasize superb operating performance and delivering great results.

Every action by our employees to listen to our customers, create innovative solutions and improve the way we do business contributed to an exceptionally strong year that we are all very proud of. Now, let me discuss our outlook for next quarter. When we gave our original guidance for Q4, we had indicated that the weakness in the consumer and computing segments would be shallow and short-lived. Indeed, this is exactly what played out. Going into Q1, the demand forecast for the consumer and computing end-markets is better than seasonal. And demand for communications product continues to be very strong, while industrial demand appears relatively soft.

We entered Q1 with a better-than-seasonal backlog, and the current demand environment across all our product groups is quite strong. We currently expect Q1 net revenues to be between $117 million and $121 million in revenues. To attain the mid-range of our Q1 guidance, or approximately $119 million, we needed net terms orders of approximately 34% at the beginning of Q1. We expect GAAP earnings per share to be between $0.31 and $0.34 per diluted share. I will now hand the call back to the operator, where Linda, Emeka and I would be happy to answer questions.

(Operator Instructions). Your first question comes from the line of Steve Smigie from Raymond James. Your line is now open.

Great. Thanks a lot. Congratulations on some nice numbers here. I guess the first question is -- I wonder if you could characterize the sequential growth in the 40- and 100-gigabit-per-second SerDes products, sequential growth there?

Yes, the growth is across-the-board. A lot of company service providers are moving 10-gig infrastructure to 40-gig. So, 40-gig port deployment is growing, both in the long haul, and we're starting to see it emerge in the enterprise and metro networks as well, the short-reach side. So, it's to be expected. The port count is increasing quite dramatically, and I expect it to continue. The increase for this year is expected to grow, as I mentioned, 300%. So, it's just the nature of being the only guy out there really who has off-the-shelf SerDes products. We are in most of the modules out there, we're in most of the OEMs out there, and we're getting the benefit of that. And 100-gig is starting to just trickle into deployments now, and we are seeing some benefit from that also.

Okay. For that 300% growth you mentioned, is that what I should expect that portion of your business to grow? Or, is it only a segment of the 40-, 100-gig business that you have? Could you comment on that. And then, second was -- I guess Finisar commented on some China weakness. Would that affect you guys at all?

Let me comment on the growth in ports, first of all. We don't have all the ports. Obviously, there's internal designs, and we estimate that our approximate port count penetration in 2010 was roughly about 60,000 ports. We expect that to go to about 100,000 ports, so we expect about 100,000 ports to be our share, if you like, in 2011. That includes 40-gig and 100-gig deployments. And then on the China commentary, obviously our biggest customer is in China, or at least one of our biggest customers is in China. And they deploy across the world, in Europe and in Asia and South America. And so, I think you have to separate the softness maybe in the China region versus customers who ship into the rest of the world. We are not seeing any weakness in our 40-gig or our 100-gig demand.

Okay, great. Thank you very much.

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

Mohan and Emeka, let me add my congratulations as well. Some really good numbers here. Let me touch on the previous question a little bit more. I think one of the issues with this company that reported yesterday, was that they just simply didn't have very much of an idea that there was inventory being built and they cited that as one of the reasons, If, and I'm not saying that's the case with you guys, what kind of processes do you have to understand that maybe there is not an excessive inventory build in the optical space for you guys? And then I've got one more follow-up.

There's a couple things, Harsh. First of all, we keep very close ties with the OEMs themselves, so we're not just shipping into module manufacturers. We have a pretty good presence in all of the OEMs as well as the module guys, so we see the kind of global picture out there. But I think probably a more important perspective from our standpoint is that we aren't a player in the 10-gig or any of the mature markets. We are only playing in the emerging 40-gig and 100-gig markets, and those are very fast-growing. They're emerging applications.

There's good reasons why 40-gig deployments are happening now, fundamentally because you can get more bandwidth in the same type of fiber, right. So, it's a cost advantage for service providers essentially once they get 40-gig systems out there. And that's the fundamental premise of driving this business. So, I think from a quarter-to-quarter standpoint, demand is going to be up and down. But I think in the whole, what we're seeing is a lot of strength in the 40-gig market and continued strength in the 100-gig market. And I don't expect fiscal year '12 will be a softer year at all. I think it's going to be very strong.

Got it. Very helpful, Mohan. And then, if I can ask, you were clearly one of the early guys in with the 40-gig solution. Do you see a pretty big competitive change when you start sampling or start shipping the 100-gig products? Does the competitive landscape change for you at all?

Well, we aren't the only off-the-shelf guy. Obviously, a lot of our customers have their own internal custom ASIC solutions and things like that. We can't prevent them going down that path if they choose to do so. Our goal is to bring competitive products to the marketplace and hope that the time-to-market advantages they get by having our leadership products, forces them down to use our products. We do have the lead in 40-gig. We have the lead in 100-gig. We have a very good strategy, a very good technology road map. And to this point, I'm fairly comfortable that we'll continue to maintain our momentum for at least a couple years here.

Got it, and my last one, if I can sneak that in. Industrial should typically be up in this timeframe. I think your commentary, Mohan, cited a little bit of softness, at least as you expected. Just curious if that's military or something else going on there?

The military is soft. We're not seeing any pick-up there. And the rest of the industrial, nothing really dramatic. I would just say it's not as strong as the other businesses. I mean, we're seeing -- consumer is definitely stronger, computing is stronger, obviously Com is strong. And industrial just seems to be so-so.

Got it. Great numbers. Congratulations again.

Thank you.

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

This is Sean Simons calling in for Rick. Congrats on the quarter. I guess just going back to the optic stuff real quick, could you guys possibly comment on what you expect that business to do this year? I think you had mentioned previously that you expect it to grow about 20% to 30%. Is that somewhere we're looking for this year?

I think that's a reasonable forecast. Current demand suggests it's going to be stronger than that, but I would go with the 20% to 30%. I think that's a reasonable growth.

Okay, great. And then you'd mentioned your one largest customer in China. Who else are you levered to in that optic space? Who are maybe the next two or three customers?

Actually, all of the customers in this space are customers of ours in some shape or form. Either they buy 40-gig products from us or 100-gig products from us, or some combination of 40-gig and 100-gig products from us. Some buy long haul, some buy the short-reach stuff. It's every OEM out there in this space. Almost every OEM out there in every region is a customer of ours.

Okay, great. And then switching gears to the consumer side of your business. Obviously, smart phones are going to be strong for you next quarter. Looking at tablets, how big can that business be this year overall? And how many design wins and current customers are you ramping in?

We have a lot of design wins, a lot of different customers. We are in the big-volume tablet PCs. How big can it be? I don't know. Last year, it obviously grew very nicely, and I think it will continue to grow nicely this year. We have some penetration in the computing space as well as the tablet space, and some of the part of the question is, are tablets cannibalizing some of the notebook space? So, do you win over here and lose some over here kind of thing. But, I think in general, I do expect that tablet business to grow quite nicely along with smart phones. Also, in consumer, LCD TVs is starting to come back, and I think that's a good sign too.

Okay, great. Congrats on the quarter. Thanks, guys.

Thank you.

Your next question comes from the line of Doug Freedman from Gleacher & Company. Your line is now open.

Great. Thanks for taking my question. If I could just dig in a little bit on the Protection side of the business, can you talk a little bit about what really is driving Protection for you? Are we seeing a lot of increase in HDMI ports? Is that what's doing it? And, how diversified is that business? If you can just give us a sense of your competitive positioning there.

The good thing about the Protection business, there are a lot of kind of unique drivers for it. One is more ports. One is the signal speeds on those ports are increasing. The third is reducing lithographies is giving, as I mentioned in the script, system designs are having to really change the way they architect their design to make sure that they don't blow up their 65-nanometer devices. And that's helping the Protection business. Lower voltages in terms of signal voltages is helping, because that's specifically what we do. A lot of system returns for OEMs, driving profit leakage is a problem, so that's driving more protection. And then, when you look at it by systems, what are the applications?

Obviously, smart phones gets a lot of people handling them, your fingers are all over them, all touch screen activity, anything with a touch screen, anything with a USB port, HDMI port, ethernet port, antennas, display port. So, set top boxes, for example, netbooks, and then communications infrastructure, obviously, with ethernet ports and power over ethernet. If you're shipping systems into high-humidity regions, they're increasingly susceptibile to more lightning strikes, so that drives more protection. Many of the system OEMs are reducing PCB layers. That drives more susceptibility to ESD. So, we think we have a really good position in a market that's growing very nicely. A lot of different trends driving the need for high-end protection. And we have a lot of competitors who are more lower-end players. So, when it comes to the higher performance and you need the form factor, you need the performance, you need the lower leakage, that's why we think we shine.

Excellent. If I could, you touched on it -- for my follow-up, two topics I'd just like to touch on. One is the PC market. You made a comment that that is coming back. Can you offer any more clarity on what you're seeing there? And then, as far as inventories, it does sound like your [DISD] inventory went down quite nicely, but your internal went up. Can you tell us how you expect that to track maybe over the year? Are distributors going to want to start carrying some more inventory? Or, are you guys going to need to keep your inventories elevated to support short lead times. Thanks so much. That's my last one.

Let me touch on the PC comment, and then Emeka, you can touch on the inventory. We definitely have seen the demand at the moment for Q1. Notebooks has come back a little bit. It was a little bit softer in Q4 than we anticipated. It's come back in Q1. Nothing overly dramatic, Doug, but just it's nice to see it percolate up. And that in parallel with tablet PCs going up. I think is a good sign for the computing and consumer space. And then LCD TVs also are doing quite nicely, I think is a good sign.

Doug, with regards to the inventory situation, in terms of the channel, we think the channel inventory is somewhat low at this point. And we'd probably like to see that go up a little bit just to be able to respond to short lead-time opportunities like you mentioned. On the internal side, I think what you can expect with regards to internal inventory is that if the subsequent quarters, if we are anticipating a lot of growth we would expect the internal inventory to continue to go up. And maybe in the quarters where we anticipate a decline, then inventory should be flat to down. I think that is the best way to pick up (inaudible) right now. But overall though, we're very happy with how our inventory is positioned at this point in total.

Terrific. And congratulations on the strong results.

Thank you.

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

Great. Thanks for taking my questions. This is [Brett Piira] for Craig. I know last quarter you had some lingering supply constraints. Has that worked itself out now? And how do you feel about for the rest of the calendar year meeting supply?

The supply constraints now for the majority of our business are really non-existent. The one area of our business, which is our 40-gig and 100-gig area, we still have some delinquencies in that business, and those are more internal-driven. We don't have enough capacity. Yields aren't quite what they need to be, or we can't get enough material from our fab. But it's more driven by the strength in the demand, I would say, than anything else. And there is really about $5 million there of delinquency that we need to catch up with.

And then, just touching on your target model a little bit, you're obviously above on the gross margin. Should we think about that coming down as your mix changes? Or, how should we think about in the long run, your target model?

I think that's the way you should think about it. As Consumer and Computing becomes a higher percentage of the Company, then there will be some pressure on the gross margin. I think if Communications and Industrial continues to remain the majority of the business, or 60% of the business and above, then gross margins are probably going to be at the high end or even higher.

Perfect. Thanks. Congratulations.

Thank you.

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

Good afternoon. Thanks for taking my question, and congratulations on the results. Mohan, last quarter you talked about smart phones seeing a bit of a correction. It sounds like that was very shallow. But more recently, there's been some data points that maybe there's some mixed messages out there in terms of customer inventories. Can you talk about your view on your smart phone customers' inventories at this stage? Whether they are still very lean, or whether they maybe have too much in some areas? And whether that's customer-specific?

I think it's more customer-specific. I don't think that there's a huge amount of system inventory out there. We don't get as much visibility of that as maybe some other folks do. But we're fairly well balanced in that we supply to many different guys. And in some cases, it's clear that there's share gains, and others are having to react to that. So, I would say in general though, that the market has come back a little bit and that's a good sign, as we mentioned. Is it as strong as we had expected it to be? No, and I think that is probably a good sign for Q2 and Q3, which is where we'd expect it to be very strong.

Thanks, that's very helpful. And then, as a follow-up, can you just help us refresh our memory on what your July quarter seasonality would typically look like, given your new mix of business at this point?

The new expectation for us, and obviously this is still a new phenomenon that we're trying to really understand, but we do expect that the July quarter should be slightly up, probably in the 5% range or something like that. And then, we would expect that our October quarter should be our strongest sequential quarter in terms of our revenue growth. The expectation would also be that our January quarter would be flat to slightly down.

Great. That's very helpful. Thanks so much.

Thank you.

Your next question comes from the line of Cody Acree from Williams Financial. Your line is now open.

Thanks, guys, and congrats. Back to the smart phone [question], obviously the size of that market is so substantial. Can you talk about your design positioning there, some of your dollar content opportunities? And then, just how large could that grow for you? If we could get the kind of numbers that are projected?

Smart phones for us is a key target application. We believe that our products that we make fit well into the market, and there's really three areas. One, is our Protection devices that, as I mentioned, do very well because of the number of ports. Typically, those ports are higher bandwidth ports, smaller form factor which is one of our strengths. And the advancement of -- advanced lithography is driving the need for better protection. So, we think our Protection business does very well there. We have a pretty good penetration within that space.

There are some customers that we'd like to get to drive our business up significantly, and we're working on that. But in addition to Protection, our Power Management strategy is also to penetrate smart phones, and we have some good lighting products. And we do have some new technologies coming out in that space also. And then, very recently, the touch-sensing products I mentioned, the multi-touch products, we've had some success there also in the smart phones. So, it's really those three areas, and I think it's a market that we continue to like because it just keeps moving. And the small form factor is one of our strengths, so that helps us a lot.

What are the potential bill of materials there?

It varies. Some smart phones have 10, 15 protection devices. Others have three. But in general, I would say it can go from $0.10, $0.20, all the way up to $1, $1.50.

And then lastly, on the operating expense side, good control last quarter. What would you expect that to trend like throughout the rest of the year?

In terms of the expenses, I think if you listened to my script here, we are guiding that the expenses are going to be up in this first quarter, driven mostly by the fact that obviously Q4, you have the holidays, and so there were fewer work days in the quarter. Your payroll taxes are starting to kick in again at the start of this year. And we'll continue to make all these investments that Mohan talked about, especially with regards to the investments we're making in the commercial microwave space. So, we do expect operating expenses to tick up in Q1. I think on a quarterly run rate basis, what we have said is that at the quarterly revenue of $125 million, we should be able to hit the high end of our non-GAAP gross-margin model, which is 25% to 30%. And that we should be at the mid-point of the GAAP operating margin model. And that is 22.5%. So, in terms of your modeling exercises, I think that is probably something that you can be looking at.

Thanks.

Thank you.

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

Hey, guys. Mohan, last night I think TI had their mid-quarter update. They talked about 93% type utilization numbers in the industry. You're obviously growing pretty well. Do you see any concern in terms of being able to secure capacity? Just some thoughts would be appreciated.

At this point, no, Harsh, I think we're okay. I think if we're going to see those constraints, they'll start to emerge in Q2, beginning of Q3 when demand really for consumer products and computing products, if they come back and are very strong. And then tablets are strong and then everything else is strong as well, then we will start to see some constraints. In our business today, our volumes are not huge. We don't make or break our foundry partners' utilization typically, so I don't envision any problems for us. We have a lot of diversification in our business. We are taking some steps. One of the reasons why our CapEx is a little bit higher this quarter, is we are taking some steps to try to bring on multiple foundries in some areas, multiple partners in some areas just to mitigate against that, should that happen.

Got it. And then a question for Emeka. Emeka, I think I might have missed your non-GAAP tax rate. Was that 16% to 18%?

16% to 18%, non-GAAP, and 13% to 15% on GAAP.

Got it. So, that's a little bit lower. Is that a function of just the geographical shift of revenues? Or, is there a tax strategy in play here?

It's just a function of the mix of income. We're getting more of our income coming from our international sources.

Thanks, guys, and great numbers again. Thank you. Congratulations.

Thank you.

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

Let me summarize by saying that fiscal year 2011 was a record-breaking year for Semtech. Our annual revenues of $455 million was a Company record, and we expanded non-GAAP earnings per share by a phenomenal 90%. Our non-GAAP gross margin for the year was 59.9%, and non-GAAP operating margin was 29.3%. We successfully integrated SMI seamlessly into our business, establishing ourselves as a clear leader in the 40-gig and 100-gig SerDes market. In addition, we affirmed our innovation and technological leadership by launching best-in-class touch-sensing, Protection and Power Management platforms. Our strong financial position and track record of excellence provide us the solid foundation for continuing to build value for shareholders. We appreciate your continued support of Semtech, and look forward to updating you on our progress next quarter. Thank you.

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