Semtech Corp (SMTC) 2012 Q1 法說會逐字稿

Good afternoon. My name is Destiny and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY 2012 Semtech Corp. earnings release conference call. (Operator Instructions). Thank you. I would now like to turn the call over to Ms. Linda Brewton. Ma'am, you may begin your conference.

Great. Thank you, Destiny.

Welcome to Semtech's fiscal year 2012 first-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 May 1, 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 will 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 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.

With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone.

Our fiscal 2012 is off to a great start with our first-quarter revenue being up approximately 5% sequentially to $122.4 million and up 20% from the same quarter last year. The sequential growth in Q1 revenue was driven by strength in our communications and high-end consumer segments.

In Q1, 60% of our shipments were derived from customers in Asia, 27% from North America, and 13% from Europe. Sales in Asia grew 7%, driven by high-end customers, and North America grew 11%, driven by demand for our communications products. Sales in Europe declined 12% sequentially due to softness in our industrial and medical end markets.

Direct sales represented approximately 58% of total revenues, while distribution made up 42%. Our book to bill was approximately 1. Net sales orders accounted for 36% of shipments during the quarter.

Gross margin on a GAAP basis for the first quarter was a record 60.4%, up 20 basis points sequentially. This increase was due to the higher mix of communications revenue, improved gross margin for our high-end consumer new products, offset by a lower mix of industrial revenue. In Q2, we expect gross margin to be flat to slightly up, reflecting the growth in revenue from the communications and the high-end consumer end markets.

As expected, operating expenses on a GAAP basis were up 6% sequentially to $47.3 million due to higher payroll-related expenses from increased work hours and higher payroll taxes. Increases in variable expenses are associated with higher revenue, favorable impact of a weaker dollar, and the impact of a higher stock price on the equity awards accounted for our liabilities.

It should be noted that a significant portion of our equity awards can be settled in cash, and as a result have to be marked to market based on the stock price at the end of the quarter.

We expect Q2 fiscal year 2012 operating expenses to be higher due to the investments in new product and process development expenses and increases in variable expenses associated with higher revenue. These higher expenses will be somewhat offset by lower equity compensation.

Interest and other was a net expense of $400,000 in Q1 as interest income was offset by foreign exchange losses due to the weaker dollar. We expect interest and other income of approximately $200,000 in Q2.

The Q1 GAAP tax rate was 13.4%, up from a benefit of 1.5% in Q4 fiscal 2011. Our Q4 rate benefit reflected the renewal of the federal research tax credit and the tax benefit of the agreement to settle our class-action litigation. We expect our GAAP tax rate for the remainder of the year to be between 13% to 15%.

The diluted share count for Q1 was 67.1 million shares. We expect a fully diluted share count of approximately 68.3 million shares in Q2, reflecting the dilutive impact of a stronger share price.

Our GAAP net income for the quarter was $22.6 million, or $0.34 per share, down from $0.39 in Q4. As a reminder, as previously reported during our Q4 earnings call in March, our Q4 fiscal year 2011 earnings reflected a tax benefit of $0.07 per share.

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 60.6%, up 10 basis points sequentially. We expect Q2 gross margin to be flat to slightly up.

Net income for Q1 was $30 million, or $0.45 per diluted share. Our non-GAAP effective tax rate for Q1 was 16.3%, up from 9.7% in Q4 fiscal 2011. The lower-than-expected Q4 fiscal 2011 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% for the remainder of fiscal year 2012.

Now moving on to the balance sheet, we ended the quarter with approximately $276 million of cash and investments, up from $258 million in Q4. Semtech continues to be a consistent generator of cash.

Our Q1 cash generation was impacted by a number of previously announced discrete events. In Q1, we made a one-time payment of $20 million to settle class-action litigation. Final court approval of this settlement is expected by the end of June, and we do not expect any further material impairments related to this issue. In addition, annual incentive bonuses for the prior year were paid in Q1.

Even after these two significant cash outflows, we increased our cash and investments by $18 million during the quarter. 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 Q2, we expect to spend approximately $10 million as we continue to the ramp-up of new process and packaging technologies and the release to production of a ramp-up of new 40 GB and 100 GB platforms.

Depreciation for Q1 was approximately $2 million. In Q2, we expect depreciation to be approximately $2.5 million.

Accounts Receivable was approximately flat in Q1 despite higher sales, and our days sales outstanding declined to 38 days from 43 days in Q4. Net inventory increased 5% sequentially, in line with the stronger revenue outlook. Inventory days increased to 92 days from 89 days in Q4.

In summary, this was a very good quarter and a great start for the new fiscal year. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone.

I will discuss our Q1 fiscal-year 2012 performance by end market and by product group, and then comment on our outlook for Q2 fiscal-year 2012.

Q1 of fiscal-year 2012 was another solid revenue quarter for Semtech. We achieved net revenues of $122 million, up 5% from Q4 of fiscal-year 2011 and up 20% from Q1 of fiscal-year 2011. For the quarter, our non-GAAP gross margin grew to a record 60.6% and our non-GAAP earnings per share increased to $0.45 per diluted share.

In Q1, revenue from the communications end market increased and represented approximately 41% of total revenues. Revenue from the high-end consumer end market also increased and represented 34% of revenue. Approximately 21% of revenues was attributable to handheld devices and approximately 13% was attributable to other consumer systems. Revenues from the industrial end market declined sequentially and represented 18% of revenues. Revenue from the computing end market increased from the prior quarter and represented 7% of revenues.

Now, let me discuss the performance of each of our product groups. In Q1, every one of our four product groups grew sequentially versus Q4 of fiscal-year 2011. Revenue for our protection business grew 10% sequentially and represented 42% of revenue. Growth was driven by high-end consumer applications, including LCD TVs, tablets, handheld devices, as well as computing applications.

Our protection business continues to benefit from long-term demand trends, driven by the increased ESD sensitivity of electronic devices as these devices move to more advanced lithography nodes, as well as growth in a number of ports on electronic systems that require protection and ever-increasing performance requirements for these ports.

We experienced strong design win momentum for our protection products across numerous end markets and regions. In Q1, we expanded our protection offerings with the introduction of a very small form factor integrated solution that replaces up to 20 discrete components for micro SD memory card interfaces. In addition, we also introduced a highly improved micro clamp array for protection of ethernet interfaces. This device offers a very high level of protection without compromising the signal integrity of the ethernet traffic.

In Q2, we expect our protection business to increase nicely and achieve another strong revenue quarter, driven by continued strength in handheld applications, other consumer applications, and strength in the communications and notebook markets.

Turning to our advanced communications and sensing business, revenue in Q1 increased 2% sequentially and represented 40% of revenue, resulting in another quarterly revenue record for this business. The increase was driven primarily by demand for our SERDES platforms for optical transport networks, which remained strong as carriers continued to convert lower bandwidth networks to 40 Gb per second and 100 Gb per second infrastructure.

In Q1, we again saw strong design win traction for our wired and wireless communications platforms and our touch-sensing platforms. We recently announced a new capacitive touch-sensing platform for touch-button LCD TV applications. Our solution replaces legacy mechanical button controllers with an analog output touch interface solution that supports audible feedback. This device assumes minimal power, offers proximity sensing of up to 10 cm through thick overlays, and is fully compatible with a diverse range of television designs.

Also in Q1, we announced shipments of our high-bandwidth 100 Gb per second transceiver, which is used in high-speed ethernet applications for both data and telecommunications networks. Semtech is still the only off-the-shelf supplier of MUX and DEMUX platforms for the 100 Gb per second market, supporting both client applications and long-distance transmission.

We also recently announced a 40 Gb modulated driver for long-haul applications. The combination of our modulated drivers with our SERDES devices enables Semtech to offer perfectly-tuned chipsets for the longest reach and greatest bandwidth utilization in the long-haul telecom market. We continue to be very excited about the future opportunities in the 40 Gb per second, 100 Gb per second, and emerging 200 Gb per second segments as we invest in future SERDES platforms, as well as drivers and other devices in these segments.

Our advanced communications and sensing business continues to execute well across a broad range of platforms and markets. In Q2, we expect revenue from our advanced comm and sensing business to increase again, driven by the industrial, communications, and consumer end markets.

In Q1, our power management revenue increased sequentially by 3% and represented 11% of total revenues. The increase was driven primarily by higher demand for communications products.

We continued to leverage our expertise in designing highly-efficient, small form factor power management solutions for a broad range -- broad array of applications. In Q1, we expanded our buck controller platform with a tiny 80 mm squared point of load regulator that can replace LDOs. Our solution saves significant board space in portable equipment and increases power efficiency up to 94%. This device is targeted for use in smartphones, medical and personal navigation devices, POS terminals, digital cameras, and portable gaming consoles.

We also expanded our successful EcoSpeed regulator platform with the introduction of two new buck regulators that offer the same features and functions of our existing devices, but with lower one amp and two amp output currents. These devices are used to efficiently manage standby and power requirements in networking equipment, office automation equipment, and set-top boxes in order to more efficiently manage power usage and reduce energy waste.

Over the past few years, we have been focusing on transforming our power management business by de-emphasizing low-margin, high-volume products in favor of higher-margin differentiated platforms. We believe our power business has largely now made this transition, and we expect our power management revenue to increase again in Q2, driven by consumer, communications, and computer peripheral applications.

In Q1, our microwave and high-reliability products revenue increased 5% sequentially to represent 7% of total revenues. Growth was driven by space and industrial applications in our high-reliability business and by demand from unmanned air vehicles in our microwave business.

In Q1, we received first silicon of our integrated microwave point-to-point platform. The performance of this new platform appears to be very promising, and we expect to sample this new platform this quarter, which is one quarter ahead of schedule, and achieve first design wins in the second half of this year. We are also investing in next-generation microwave technology platforms, as we believe this to be another exciting future growth market that we do not participate in today.

In Q2, we expect sales for our microwave and high-reliability unit to increase modestly, driven by demand in the industrial and aerospace markets.

In Q1, we saw distribution POS increase by approximately 3%, driven by strength in Asian markets to achieve a new POS record. Our distributor business, much like the overall Semtech business, is very well balanced, with 55% of the total POS coming from consumer and computing end markets and 45% of total POS coming from industrial and communications end markets.

Distributor inventory increased by one day from 59 days in Q4 to 60 days in Q1. We believe that our channel inventory remains relatively low, given the current demand environment we are in and the current POS strength.

Moving on to new products and design wins. In Q1, we released 13 new products and recorded over 762 new design wins. We believe that we are uniquely positioned to benefit from long-term trends driving growth for our industry and expect to see a continuation of the strong design win momentum in Q2.

Now let me discuss our outlook for next quarter. The current demand environment is very robust and well balanced across all our business groups and end markets, and we entered Q2 with a record quarterly backlog. We expect all of our product groups to increase revenue sequentially again in Q2.

Currently, we expect Q2 net revenue to be between $127 million and $131 million. To attain the midpoint of our Q2 guidance, or approximately $129 million, which would be yet another quarterly revenue record for Semtech, we needed net terms orders of approximately 31% at the beginning of Q2.

We expect GAAP earnings to be between $0.38 and $0.40 per diluted share.

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

(Operator Instructions). Craig Ellis, Caris & Company.

Thank you, and nice job on the top line, Mohan, in both the quarter and the outlook. I just wanted to follow up on some of the last comments first, to understand to what degree you think there may be any risk in the out-quarter with respect to any downstream production disruption and any -- to any extent that you may have accounted for that in the outlook that you've provided?

Related to Japan, Craig?

Yes. Yes.

At this point in time, we don't really see much of an impact. Certainly direct impact is almost negligible impact. We have looked at the demand picture by customer, by region, and talked to some of our customers about associated products that go into their systems and if there's any issues there. To be real brutally frank, we don't really see much of an impact for Q2.

Okay, so think you've, at least in the near term, side-stepped that. As a follow-up on the comments in the protection business, you mentioned that LCD TV was an area of strength. There have been other indications that LCD TV still remains a little bit weak. So, are you seeing share gain or broader penetration with your solutions on customer platforms where you've already penetrated, or what's happening in that part of the business?

It's a combination of things. One is, as I said, that some of the TVs are coming out with more ports.

Some of them have higher bandwidth ports, and our protection is unique in that regard, so they're having to use our solution. A lot of the TVs are using more advanced lithography chips inside them, and so they're having to protect them a little bit more. It's a little bit of a combination of everything, I would say, so our position in LCD TVs is very strong.

Okay, and then lastly for me, you expect all the businesses to be up sequentially in the second quarter, but can you sort out which would be relatively stronger versus relatively weaker on a sequential basis?

The business -- so it's really driven by end market. We do expect consumer to be quite strong. I mentioned communications will continue to be strong, so really those two segments are probably the strongest in the second -- in the next quarter. Computing also. So that will drive protection specifically, and advanced communications and sensing is probably the two areas that will drive the most growth.

Harsh Kumar, Morgan Keegan.

Spectacular quarter and guidance. First of all, I think you just did about 5% growth. You're guiding to 5.5%. That's a little bit better than what you've done historically in the first half, if I can roughly call it that. How should we think about your seasonality with this new Semtech, with optical being a bigger chunk of revenues? Maybe some thoughts on that first?

Yes, it's a little bit challenging for us to define that clearly, Harsh, because obviously comm now is a larger, much stronger business for us -- segment for us, but we do expect in the second half, computing and consumer, and consumer is also very strong for us, to be stronger.

So, I think it's going to be less volatile in general for our businesses now going forward because we've got that balance where we expect maybe comm and industrial in the first half to be stronger and computing and consumer in the second half to be stronger, but I still think that Q2 and Q3 will be our two strongest quarters.

Okay, so Q2 and Q3. Then Mohan, if I can ask you to split out optical for me, just in terms of either as a percentage of total revenues or raw numbers, millions of dollars. And then, are you concerned that it's getting to be a little bit bigger than what you had probably wanted?

Let me have that first. Comm strength is -- we knew it was going to be strong because of the markets we're participating in.

Obviously, the optical transport network and the whole bandwidth infrastructure thing is going to continue for a while. We are doing very well in that. The IP aggregation box with our timing sink is doing very well. So, we selected areas that are going to do quite well in the comm space for a while. So that's the goodness of it.

I think it does mean that comm industrial as a percentage of revenue increases to the point where we have to do well in consumer to keep the balance, and I think we are. So, it doesn't really concern me because I think it gives us the opportunity to do more in consumer and computing, which we know we can do well. So, that was that part of the question.

On the breakout of optical, we don't break out the numbers. I can tell you, though, that the vast majority of the growth is coming from three areas, the 40 GB and 100 GB optical transport network, and then on the timing sink side on the IP aggregation boxes and base stations.

Then one more, last one for me, Mohan. Can I -- your consumer business, you said the outlook looks pretty good. Should we assume that handsets are turning around for you along with some other design wins that you talked about, LCD TVs and such, but are handsets included in that commentary of being really strong?

Yes, smartphones, tablets, LCD TVs, and set-top boxes are really what drive most of our consumer business.

James Schneider, Goldman Sachs.

Good afternoon, and thanks for taking my question. First of all, on the end market side, just following up on the previous question, can you talk about the relative exposure you have in the handset segment to smartphones versus feature phones? Clearly, you seem to have more exposure to smartphones. I was just wondering whether you're seeing any drag from the feature phone segment at all in the protection business?

James, most of our business is in smartphones and really the high-end smartphones, so the ones that have more ports, the ones that need higher bandwidth ports, the ones that are using more advanced devices in them, 45 nm, 60 nm, 90 nm kind of devices. The ones that are using touch as well as keypads. They just tend to be where most of the protection issues are and the more difficult ones. So that's where, at least for our production business, where we see most of the demand.

Thanks. That's helpful. Then as a follow-up, on the industrial business, you noted that that declined and you noted some -- a little bit of weakness in Europe. Was that industrial decline completely driven by Europe? And what do you expect from that business kind of going forward in the next couple of quarters?

It was Europe, and as I would say also just general industrial demand is not as strong as some of the other segments. Clearly compared to computing, consumer, and communications, industrial is relatively weak.

We did have some weakness in Europe. We expect it to come back a little bit this quarter. Not going to be as weak. Second half typically isn't that strong for industrial, certainly Q3 that we don't expect it to be that strong. So I would think that it's going to be fairly modest growth this year.

Thanks. And then last one, in the past you've talked about the optical business growing at least 20% to 30% for you this year. It sounds like you're on track to at least achieve that. Do you think you can beat the upper end of that range?

I'm not sure. I haven't looked at the numbers, but we are on track.

Steve Smigie, Raymond James.

Great. Thanks a lot, and I'll add my congratulations on the good results. I guess my first question is with regard to -- you gave a broke out -- a breakout of handheld products. Are you including tablets in that handheld or is that separate?

Steve, we take consumer, and in consumer -- in our consumer products, we include smartphones, tablets, LCD TVs, set-top boxes, those type of products. So it's all in our consumer business.

We don't put it into computing. In computing, we have notebooks and desktops and servers and peripherals.

I just mean, I think you said handhelds was like 21%. And I'm asking if tablets is in that, if I heard correctly.

No, tablets is separate to that.

And then, with regard to the new 40 Gb module driver that you guys announced in the quarter, can you talk a little bit about how large that market is and how you see that opportunity over the next 12 months and 24 months?

Every SERDES device we sell essentially has a driver sitting alongside it, and we have none of that revenue today, so we decided that that's a good SAM for us. That's a good opportunity for us, and so we're getting into that space.

Our first product is just kind of a way to get in there and see what our customers really need, and make sure the products fit. I would think it's a SAM of about $20 million to $30 million, and something that we should do quite well in once we've really got to grips with what the issues are and the customers' requirements are.

And then, with regard to the microwave products, can you talk a little bit more about the opportunity there in the ramp of that business?

I've been talking about the microwave opportunity ever since we acquired Sierra Monolithics, and I've made the statement that we're going to spend R&D dollars in this area because I think it's a very good area.

It's a large SAM. Typically -- I would say about a $100 million SAM, potentially, and largely serviced with discrete components today. And my feeling was and our feeling is that if we could integrate a lot of those components into silicon germanium integrated chip, then our customers would be quite excited to use those products. And so, I've been talking about it, and I mentioned that we were planning to have the product out in the second half.

As I just mentioned that the silicon is back and is looking very, very good, and so I'm pretty confident that we'll start sampling this quarter, and we should get design wins in the second half and generate revenue next year. And all of the -- this platform specifically is targeted really at the 1 GHz to 24 GHz range, but we're also investing in the next generation of microwave, millimeter-wave platforms, which would go up to 100 GB. That's going to be also pretty exciting, I think.

(Operator Instructions). Steve Smigie, Raymond James.

Could you talk a little bit about power management and how you see that at this point in the year relative to where you came in? Do you think it's sort of executing where you were hoping it was going to be or are you're doing a little better? Or you'd like to see a little bit more out of that?

It's still early days. I think it's getting much better. I really like the technologies we have now, and I start to see things emerging and platforms we're coming out with are very good and design wins are looking quite good, and I just see the momentum there.

Obviously, this is a huge SAM. I mean, we're talking probably billions of dollars, and our share is tiny, and so we've got a little bit better strategy this time, which isn't to go after high-volume sockets. It's to pick our specific markets that focus on the areas that we're strong in, like communications, like the green areas, and try to pick certain applications and win them. We have some very good products, as I said.

So, our strategy is to take the small form factor, the higher efficiencies, the wider input voltage ranges we have, the higher currents, the areas that need more features, and try to do all that, and I really think we're starting to see some good momentum there. So, I don't want to talk too much about it until we start to see some real revenue growth because obviously over the last couple of years it hasn't been there, so -- but I think we'll start to see it soon.

Okay. It sounds like you probably won't have a repeat of some of the cash uses for the quarter. Does that mean you're likely to start doing a little bit more stock buyback? I know you want to do an acquisition, so I guess talk a little bit about how much cash you'd use for maybe a stock buyback versus keeping -- hoarding it up for an acquisition.

This is Emeka. I think we've been very open about the fact that in our -- part of efforts to get to $1 billion of revenue that we're probably going to need some help with acquisitions. What we've done since we did the last acquisition in our 2009 [FSMI] was to focus on [repeating] our cash, and then eventually to hopefully use that cash in doing some sort of an acquisition.

So, that is the focus at this time. We have not had a change in terms of what we want to do with the cash at this point.

Okay, great. And then, just last question. With regard to the 40 Gb, 100 Gb products you announced, again the modules [around there], are there other products coming in this space in the next six months to a year?

We are looking at other components as well in this space, and there are a number of other devices. Some of them are more logical in terms of the fit with the types of analog products we do, amplifiers and the like. But when we announce them, you'll know that we have something. We're not very big on just talking about stuff that we don't have.

Li-Wen Zhang, Pacific Crest.

Congratulations on the solid quarter. Can you comment on the wireless infrastructure for Q1 and your outlook as well?

Li-Wen, I don't know if it's on your end, but there is a very nasty sound on the phone. Let me see if I got your question. You asked specifically about the wireless infrastructure in handhelds for Q1.

Your comment about what you see in the wireless infrastructure. Sorry about that. We just changed to new phone system, so I'm trying to get used to that.

Okay, so the wireless infrastructure in Q1. Basically what we sell into the infrastructure side on the wireless side is our timing sink products, and that seems to be doing quite well.

Obviously as network providers move to more packet-based infrastructure, that fits quite well with our strategy, and we're seeing more and more of that. I think the forecast for this year is also quite good, and with the 3G, 4G, LTE base stations emerging, I think that only bodes well for this year from that standpoint.

On the optical transport side, most of that is wired infrastructure going into the year, base stations. So, we don't see the benefit there. But I think the other areas are protection, the ethernet ports on some of these base stations, and also power management also we sell into the base stations.

And given your strongest quarter, Q3, is coming, how should we think about the supply constraints which happened there last year?

Li-Wen, if I could ask you to maybe move your phone. Yes.

So the supply constraints last year, I think we feel this year's a little bit better geared up for -- to support the stronger Q3 demand, specifically the areas, the optical area where we had a lot of supply issues and some of the protection area. We think we're in better shape this year to support a stronger second half, if that was to occur, so we don't envisage any issues.

I would say that I don't think there is a huge amount of capacity out there, so if it's tremendously strong, we'll start to see lead times move out. But I think we're in okay shape.

And my last one is, what kind of processing technology for the SERDES products and what do you think about the power consumption for that product line?

With this -- in this area, in the whole 40 Gb and 100 Gb area, it's all about how much bandwidth service providers can get to the consumer at the lowest cost and the lowest power, and you know, that's what the game is about.

We -- the strength that we bring to the table and will continue to bring is we can develop CMOS. We can develop silicon germanium. We can develop many different process technologies. We have the know-how, we have the knowledge, we have the IP. We have the customer base. And as I mentioned, we expand our SAM.

We also have a number of developments in the pipeline that I think are quite -- going to be very disruptive to the marketplace in some areas. So, I think we're pretty confident about the future strategy we have.

Okay, thank you. Sorry about the noise.

Harsh Kumar, Morgan Keegan.

A couple of follow-ups. Mohan, you touched upon your long-term goal. Could you maybe just tell us about the timing of trying to get to that billion-dollar number?

And then, also, what are your expectations of gross margin and operating margin views for that kind of a number? Just some thoughts longer term.

We've set three to five years as our target to try to get to $1 billion, Harsh.

Obviously, we have a plan. We think we can get to $700 million, $750 million organically if we execute well, and potentially we'd have to add one acquisition to help us get to that target.

Our gross margin model isn't going to change. We have 55% to 60% as the model, and our operating margin model on our non-GAAP basis is 25% to 30%, which we believe should be there as well. So, obviously, we're at the high end of all of these things.

I mentioned with the previous discussion that it gives us the opportunity to grow the consumer business, which is typically a fast-growing business if we do the right things there, and also our power management business now, which is at the lower end of our -- actually, it's well below our lower end of that model. If we can move in the right direction there and get design wins in the consumer space with the right products, I think that could be a very good opportunity for us as well.

So, that's the plan. That's the strategy, and we'll see if we can execute to it.

Fair enough. And Mohan, I missed this. You talked about 100 Gb per second high-capacity MUX/DEMUX product. I assume that's an ethernet product. If so, there's pretty significant competitors in that space. How do you win in that space? Is this, again, quality versus the others, or price? Just kind of curious about the strategy and how you plan to play out in that space?

At the moment in the 100 GB space, we're the only off-the-shelf supplier to the marketplace, and my belief is that our strategy has always and will continue to be high performance. Our focus is on the long-haul applications.

We're not really -- we'll take the products into the short-reach data comm side, but our strategy is really to focus on the long haul, and then use their performance to get us into the other applications.

So, and I don't think we're going to see too many competitors in that space. I think it's really, really tough for them to enter. A lot of companies will talk about it, but I think getting into the space and being successful in it is a different ballgame.

Thanks, guys, and again, great job.

Craig Ellis, Caris & Company.

To give Mohan a break a bit and ask one to Emeka. Emeka, the Company is doing a great job growing sequentially in the quarter and the outlook. Operating expense guidance looks pretty flat, but you've got a lot of leverage already built into the model. How should we think about operating expense as we think about the back half of the year? Can you keep it flat, or is there going to be some upward pressure in the business to fund some of the growth initiatives that Mohan has been talking about?

Yes, Craig, I think you've got that exactly right. As we continue to drive the investments in the microwave space and everything, that's going to continue to put a lot of pressure on operating expenses, especially out on the expenses.

But the way that I see operating expenses going forward is at a quarterly run rate of about $130 million of revenue, and in note of that, we're really targeting our [pecks] to be at about 30% of revenue. So, definitely, like you said, there's going to be a lot of pressure on our pecks, especially in R&D, but I think we should be able to offset some of the pressure on R&D with the fact that we do not expect our SG&A expenses to increase as much as the R&D expenses.

Okay, so a shift between those two lines. And then the follow-up would be to you, Mohan, regarding some comments that you made to the earlier questioner. In the last 18 months, you've done an extremely good job really trading lower-margin and what now I think is being seen as lower-growth PC exposure for higher-margin, higher-growth communication infrastructure exposure. So, as we listen to your comments on growing consumer and power management, should we think about another meaningful end market shift around the corner, potentially, or do you think that happens and you do that while still maintaining the end market exposure that we see in the business in the current quarter?

It's difficult to say, Craig, because we don't -- I'm not looking at it that way.

We look at emerging markets as the opportunity. Now if the emerging market happens to be a consumer market, that would be ideal. Tablets kind of fits that category over the last couple of years here.

But if the emerging market happens to be in a microwave space or a wired communications space, then we're going to see more comm. That's the nature of the beast, right? So we are investing, as you know, in the consumer space in smartphones and tablets and LCD TVs and set-top boxes.

We're also investing heavily in the industrial space, in smart lighting, in smart metering, RF remote controls, home automation, those type of areas.

So, it's difficult to call out. I think the reason why we've been outperforming and we continue to outperform is we pick the fastest-growing markets that really need tough problems solved, and we go execute on them. So, you can't really determine where that is. Ideally in the balance of the Company, we'd like to keep 50% of the business on industrial/comm and 50% consumer/computing, and that's still the hope.

There are no further questions in the queue at this time. I would now like to turn the call over to Mr. Mohan Maheswaran.

Thank you.

Let me summarize by saying that the first quarter of fiscal-year 2012 was another strong quarter for Semtech. Revenue increased by 20% year over year. We expanded gross margin to above our 60% target. We doubled our earnings per share from the prior-year quarter, and we grew our cash and investments balance by $18 million to $276 million, or $4.12 per share.

Our strategy of balancing our end market exposure to several of the fastest-growing segments in the analog space, along with our continued design win momentum and focus on innovation and operational excellence, is enabling us to outperform our peer group, maintain our strong financial position, and increase profitability for our shareholders.

With that, I would like to thank you all for your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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