Semtech Corp (SMTC) 2012 Q3 法說會逐字稿

Hello. My name is Shannon and I will be your conference operator. At this time I would like to welcome everyone to the Q3 FY2012 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)

I would now like to turn the call over to Ms. Linda Brewton. Ma'am, you may begin.

Thank you, Shannon. Welcome to Semtech's Fiscal Year 2012 third 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 un-audited results for the quarter ended October 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 of our most recent periodic reports on Forms 10Q and 10K 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 on 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 on the Williams Financial Group and Management discussion series teleconference on Monday, December 12 at 10.00 a.m. Pacific, 1.00 p.m. Eastern. The dial-in information will be posted on the Investor Relations section of our website. With that, I would now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone. Semtech executed well in our Fiscal 2012 third quarter, considering the macroeconomic headwinds we faced as well as the natural disaster that impacted Thailand this quarter.

We posted revenue in line with our prior guidance of $123.9 million representing a decline of 5% from Q2 and an increase of 1% from Q3 of Fiscal Year 2011. In Q3, 63% of our shipments were derived from customers in Asia, 22% from North America, and 15% from Europe. Sales in Asia declined 3%. Europe grew 4% driven primarily by modest growth in our medical business. Revenue in North America declined 15% sequentially.

Sales in all regions were generally negatively impacted by the overall macroeconomic uncertainty. Direct sales represented approximately 55% of total revenues, while distribution made up 45%. Our book-to-bill was less than one as bookings were relatively soft during the quarter.

[Toss] bookings accounted for 45% of shipments during the quarter compared to 31% last quarter and the year ago. Gross margin on a GAAP basis for Q3 was 59.2%, down from 60.4% last quarter. The decline was driven mainly by less favorable product mix and lower manufacturing volumes.

In Q4, we expect gross margin to be down approximately 100 to 240 basis points primarily due to product mix and low manufacturing volumes resulting from a combination of weaker demand and the impact of the Thailand flood. We expect our gross margin to rebound towards the high end of our 55% to 60% debit range in Q1 as we expect a higher mix of communications and industrial revenue and higher volumes.

Operating expenses on a GAAP basis were higher than expected, rising 7.2% sequentially to $50.2 million. This increase was attributable to one-time expenses associated with the reorganization, transaction expenses incurred in evaluating a potential acquisition target, and the impairment of acquired intangible assets.

This increases were partially offset by lower overhead expense due to headcount reductions and the time off program and lower variable expenses resulting from lower revenue. In Q4, we expect our operating expenses on a GAAP basis to be down about 10% or 11% due to the elimination of the one-time expenses as mentioned above and our continue efforts to closely manage our expenses in line with a softer revenue outlook.

GAAP operating profit was $23.2 million, or 18.7% of sales, down from 24.5% in Q2. We recorded a gain of $729,000 in interest and other in Q3 versus a loss of $117,000 in Q2. The increase was driven primarily by foreign currency gains resulting from a strengthening dollar.

We expect interest from operating income of approximately $200,000 in Q4. In Q3, we recognized a GAAP tax benefit of 12.6%, this was a tax provision of 14.6% in Q2. This benefit was driven by the [review] of order reserves for certain tax positions. We expect our GAAP tax rate for the remainder of the year to be between 9% and 11%.

The dilutive share count for Q3 was 67.3 million shares. We expect the fully diluted share count of approximately 67 million shares in Q4. Our GAAP net income for the quarter was a record $27 million, or $0.40 per share on a fully diluted basis, approximately flat to $27.1 million, or $0.48 per share in Q2.

Our non-GAAP results exclude the impact of equity compensation, amortization of acquired intangibles, stock option investigation relating to asbestos, and other one-time expenses. On a non-GAAP basis, gross margin was 59.4%, down from 60.6% last quarter. We expect Q4 non-GAAP gross margin to be down 100 to 240 basis points.

Non-GAAP net income for Q3 grew 5.5% sequentially to $35 million or $0.52 per diluted share. Our non-GAAP reflective tax rate for Q3 was 4%, down from 13.9% in Q2. The unusually low effective tax rate contributed approximately $0.05 to our non-GAAP earnings per share. We expect our Q4 non-GAAP tax rate to be between 13% and 15%.

In Q3, cash flow from operations was approximately $33 million or 27% of revenue. Our cash finance at the end of the quarter was approximately $318 million of cash and investments, up 1% from Q2. This is net of the $30 million we spent this quarter to repurchase 1.4 million shares.

Our Board of Directors recently added another $50 million to our repurchase authorization bringing our total outstanding authorization to $70 million. The company spent approximately $3 million on property, plant, and equipment in the quarter. In Q4 we expect to spend approximately $5 million primarily for manufacturing, equipment and IT infrastructure upgrades.

Depreciation for Q3 was approximately $2.6 million. In Q4 we expect the depreciation to be approximately $2.9 million. Due to our shortened order lead times, a greater percentage of our shipments occurred towards the end of the quarter. And, as a result, Accounts Receivables grew 17% sequentially in Q3 and our days sales outstanding grew to 41 days from 36 days in Q2.

This is within our target range of 40 to 45 days. Net inventory declined 4% sequentially in line with the softer revenue outlook. Inventory days decreased to 87 days from 88 days in Q2. We expect our Q4 inventory to increase modestly as we manage our overall inventory to minimize the impact of supply rates due to the Thailand flood and foundry [subco] down time due to Chinese New Year.

In summary, we acted swiftly to align our operating expenses with revenue expectations to protect our earnings. We will continue to manage the companies operating expenses in line with overall demand as we enter our seasonally weakest quarter. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 Fiscal Year 2012 performance by end market and by product group, comment on our company reorganization, and then comment on our outlook for Q4 Fiscal Year 2012.

In Q3 of Fiscal Year 2012 we achieved net revenues of $124 million in line with our prior guidance. This was down 5% from Q2 of Fiscal Year 2012 and up 1% from Q3 of Fiscal Year 2011. For the quarter, our non-GAAP gross margin was 59.4% and our non-GAAP diluted earnings per share increased to a record $0.52 per share.

In Q3, revenue from the high end consumer end market was approximately flat from Q2 levels and represented 37% of total revenues. Approximately 23% of this revenue was attributable to hand-held devices and approximately 14% was attributable to other consumer systems. Revenue from the communications end market declined sequentially and represented approximately 37% of total revenues.

Revenue from the industrial end market declined sequentially and represented 17% of revenues. Revenue from the computing end market increased modestly from the prior quarter and represented 9% of revenues. Now, let me discuss the performance of each of our product groups.

In Q3, revenue from our protection business declined 2% sequentially and represented 45% of Semtech revenues. The decline was driven primarily by softness in the Smartphone market relative to Q2. Our protection business remains very healthy due to the increasing number of high performance ports on electronics devices.

In addition, advanced processes are continuing to transition to Next Generation lithography nodes making them even more susceptible to catastrophic ESD events. As the acknowledged leader in high performance ESD protection, Semtech stands to benefit from these industry trends.

During the quarter we posted a record level of design wins for our protection products. In Q3 we also expanded our family of automotive qualified protection solutions with two new devices. These new devices are targeted at a range of different interfaces emerging in automotive applications, including ethernet ports and display touch interfaces.

In Q4, we expect our protection business to be down from Q3 due to seasonal softness in the consumer and computing segment. Turning to our advanced communications and sensing business. Revenue in Q3 decreased 10% sequentially and represented 37% of total revenues.

The decrease was driven primarily by softness in the communications end market. We believe we maintain our leadership positions in both 40 gigabit per second and 100 gigabit per second long haul SerDes applications. But, there does appear to be a temporary pause in the deployment of higher bandwidth optical transport systems due mostly to macroeconomic concerns.

However, we do expect both the 40 gigabit per second and the 100 gigabit per second segments to return to growth as the macro environment improves. We expect to see a return to increasing deployments in early Fiscal Year 2013 as bandwidth expansion continues to be a critical infrastructure investment for future global growth.

In Q3, we again saw strong design win traction for our optical communications, industrial wireless, and our touch sensing platforms. During the quarter, we expanded our new 4D touch platform with the addition of pinch and stretch gesture recognition capabilities. This solution improves the user experience in applications such as hand-held devices, tablets, printers, and automotive touch applications while consuming less power and offering the highest level of ESD protection in the industry.

In Q4, we expect revenue from our advanced communication and sensing business to be down due to lower revenues from both the industrial and communications businesses, and a significant impact from the recent Thailand flooding. In Q3, our Power Management revenue increased sequentially by 15% and represented 12% of revenues.

The increase was driven by strength from mostly consumer and computing end markets. Specifically, we saw strength in high end set top box, display, and notebook applications. In Q3, we hired a new General Manager to lead our Power Management business.

David Schie has been involved in the Power Management field for around 20 years and is a great addition to the Semtech Management team. In Q3 we experienced strong design win traction for our Power Management solutions. During the quarter we expanded our Power Management product offerings with the launch of our first eight channel, face shifted boost LED driver.

This device enables LCD display dimming capability in extremely thin computing devices through the use of very low profile inductors. The device is ideal for ultra book and mid size display applications such as tablets. In Q4, we expect our Power Management revenue to decrease significantly driven by all segments.

In Q3, our microwave and high reliability revenue declined 23% sequentially to represent 6% of total revenues. The decrease was attributable mainly to weakness in our military and aerospace business. Specifically, our sales of transceivers into the predator reduced in Q3.

However, our new integrated microwave platforms that we started to sample last quarter are progressing well. And, we are receiving very positive feedback from a number of lead customers and we do expect to announce our first design wins in the first half of Fiscal Year 2013. In Q4, we expect sales for our microwave and high reliability product group to be approximately flat.

In Q3, we saw distribution POS decline by approximately 5% as we saw POS softness in most regions. Our distributer business, much like the overall Semtech business, is very well balanced with 54% of the total POS coming from consumer and computing end markets and 46% of total POS coming from industrial and communications end markets.

Distributer inventory increased by four days from 62 days in Q2 to 66 days in Q3. We believe that our channel inventory is in line with normal seasonal patterns and below our 70 to 80 day model. Moving on to new products and design wins. In Q3, we released 25 new products and achieved a record 1,041 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 Q4. Now, let me discuss our company-wide reorganization. We have reorganized the company into four new product groups.

The first product group will be our advanced communications product group. Due to the continued design win momentum we are seeing in our communications business, and due to customer and IP synergies across several new communications platforms in development, we have decided to bring all of our communications product groups together into one advanced communications group.

This product group will now include our microwave platforms, our optical transport platforms, and our timing synchronization platforms. This group will be headed up by Sameer Vuyyuru. Sameer has been recently running our optical transport business and will now lead the advanced communications product group for Semtech.

Our second product group is a new wireless and sensing product group which will include all of our industrial wireless platforms and our touch sensing platforms. This group will focus largely on industrial and consumer products. It will be headed up by Alain Dantec. Alain previously ran our advanced communications and sensing business.

Our third product group is our Power Management and high reliability product group which will include all of Semtech's Power Management platforms and all of our high reliability platforms. All Semtech's power related platforms will be driven by this product group and lead by our new General Manager, David Schie.

Finally, our protection products group will remain as a single product group and continue to be lead by its current General Manager Jeff Holman. We believe that this reorganization will better position all four of our product groups to execute more effectively and take more advantage of exciting future growth opportunities.

We will report on our new product group starting with Q4 of this Fiscal Year. Now, let me discuss our outlook for next quarter. Historically, our Fiscal fourth quarter has been a down quarter for Semtech. In addition to this seasonal softness, we anticipate continued weakness in the macroeconomic environment as well as a significant impact from the recent flooding that occurred in Thailand.

While Semtech was not directly impacted by the flooding, two of our suppliers have been impacted resulting in an inability to supply to demand. In addition, several of our optical and consumer customers have been impacted resulting in lower demand expectations in Q4. Based on our backlog entering the quarter, we are currently estimating Q4 net revenue to be between $102 million and $108 million.

To attain the mid point of our guidance range, or approximately $105 million, we needed net turns orders of approximately 40% at the beginning of Q4. We have built in approximately $2 million of supply side risk and approximately $5 million of demand side risk due to the impact of the Thailand floods into our Q4 guidance.

We expect non-GAAP earnings to be between $0.27 and $0.33 per diluted share and GAAP earnings to be between $0.18 and $0.24 per diluted share. Despite the current uncertainty in demand, Semtech continues to be extremely well positioned to drive future revenue growth due to our unique positioning with differentiated platforms in many secular markets.

These platforms include our 40 gigabit per second SerDes and driver platforms for 40 gigabit per second non-coherent optical applications, 100 gigabit per second SerDes and driver platforms targeted at 100 gigabit per second long haul coherent and non-coherent optical transport network applications, integrated microwave platforms from 12 gigaHertz to 24 gigaHertz in the first half of Fiscal Year '13 and up to 70 gigaHertz in the second half of Fiscal Year '13 targeted at point to point and E-ban microwave applications.

Next Generation timing synchronization platforms targeted at IP backhaul and LTE infrastructure applications, miniature protection platforms targeted at Smartphone, tablet, and other high performance mobile applications, ultra low power sub-1 gigaHertz wireless platforms targeted at metering and energy harvesting applications, touch sensing platforms targeted at high end industrial and consumer touch applications, and miniature buck regulator and boost regulator platforms targeted at a range of mobile electronics applications.

In addition to these new growth drivers and others that will be announced in the next few quarters, Semtech has several new platforms in our innovation pipeline that we believe will expand our stamp further in the next few years. We will discuss these new platforms when we start to sample them to customers. I will now hand the call back to the operator and Linda, Emeka, and I would be happy to answer questions. Operator?

(Operator Instructions)

James Schneider, Goldman Sachs.

Thanks for taking my question. This is Gabriella Borges on behalf of Jim. I wanted to touch on your guidance for volumes to be higher in the first quarter driven by communications and industrial. Could you talk a little bit about the factors that we each believe these two segments will attract higher in early 2012?

We didn't say we know they are going to track higher. I think what we said in Q1 that if the mix goes in our favor in terms of more comm and industrial then we expect our gross margins to be back up at the high end of our model.

Got it, so driven by mix rather than any kind of recovery?

Yes.

Got it, and then, also looking out a little further ahead when we think about the consumer business, how should we think about the impact of the Lunar New Year and your sales in Asia?

On the -- say that again?

Of the Chinese New Year?

Okay, well I think the consumer business is more going to be driven by how well -- what type of Christmas we have. Obviously, one is expecting, at this moment in time due to the macro uncertainty, a little bit of softer consumer business. And, typically, in this second half of the year, the consumer and computing business is very strong.

I do think that what we have seen this year is a little bit of pull-ins into the first half due to the Japan tsunami effect. And so, the second half has been weaker due to that. And so, there is some feeling that as we go into next year we're going to be back to more normal seasonal patterns. But, Q1 is typically not as strong for consumer either. So, I would think consumer would be better -- stronger in the second half.

Great. Thank you, very much. That's helpful.

Craig Ellis, Caris & Company.

Thanks, very much, for taking the question. Mohan, you mentioned the Thailand flood impact and its helpful to get that detail. What indications are you getting from your suppliers? Is that something that could linger into the first fiscal quarter or do you expect that to be resolved in the fourth fiscal quarter?

I think the supply side risk I mentioned is about $2 million, and I think about half of that may go on a little bit longer than Q4 maybe into Q1. Some of these manufacturing facilities are still under water in Thailand. So, you have to look at alternative approaches. And so, that may take a little bit longer.

The demand side, most of the customers I think have got alternative manufacturing lines. They just have to maybe bring them up running or increasing capacity in other areas. So, I think it's more supply side. I would say that we do expect maybe in Q1 things to be better and then Q2 even better and the situation is improving every day there.

Okay, as a follow-up on the protection business, it sounds like that business is continuing to do well but we're seeing a lot of share volatility out there with Tier 1 handset OEMs. Can you just remind us where you stand with your penetration across Tier 1s and with low end Smartphones being very popular in China now from Lenovo, CTE, and Huawei and others, how are you positioned with those vendors?

Well, we play mostly in the high end, Craig. We play more on the Smartphone side and where there are higher bandwidth ports, where the signal speeds are faster and they have more interfaces and they're using more advanced processor technologies, those are typically where we play. Also where the screens are more advanced and those type of things.

And, we're quite well positioned I would say with most of the Tier 1 Smartphone manufactures. There are some that we're not positioned well in and if they gain share, then that goes against us. But, I would say in every region we have strength. So, my expectation is we'll continue to do quite well there and maintain a pretty good position.

The other thing is our protection business is fairly broad. I know that the hand-held stuff tends to drive a lot of the growth there. But, we have done very well in consumer in general. We have very good position in most of the TVs and set top boxes, very well in the computing space and also in the comm space. So, it's pretty broad and I think pretty well balanced.

Okay, that's helpful. Lastly, and then I'll jump back in the queue, Emeka, there was a disclosure in the release about some expense related to perspective M & A activity. You do have the incremental bump on the share buyback authorization. Can you just help us understand where the priorities are as we look ahead over the next two to four quarters with excess cash redeployment?

So, the priorities are, (inaudible) we had over the past few months and that is how to get our top line growth going much faster than what we're currently seeing. And, then by way of doing acquisitions, so number one priority is acquisitions and then the number two is buying back shares.

Thanks, guys.

Harsh Kumar, Morgan Keegan.

Yes, Mohan, I wanted to understand your language about the risk of $5 million and $2 million. Should I understand this to be the categorization of your impact from Thailand or should I think this is an extra haircut you've given to the guidance over and above what you're seeing in your business?

Well, we've taken -- the thing that's difficult to separate is when customers bring down their demand, how much of that is real demand and how much of that is because they're having some issues in their chain and building product. Now, most of these customers have had inventory. So, they are just choosing to bring down their inventory because of the situation. But, we do know that customers in the optical space have brought down some of their demand due to this issue and same in the consumer space.

And, we break down the $5 million of demand, about $2 million of that we think is from consumer customers and about $3 million is optical customers. If you put that demand, that $5 million due to the Thailand flood and the $2 million supply risk back into the guidance, you'll see we're probably in line with most of that peer group. I think, with the Thailand flood impact we're probably a little bit lower. That's the way we look at it.

Okay, fair enough, thanks, Mohan, for the clarity. And then, a couple of your peers are calling the bottom. You've got what I'd describe as cautiously optimistic commentary on your gross margin going forward. Are you seeing something specific, Mohan or Emeka, in your business in the industrial and comm section which make you more excited in the earlier part of next year?

Well, the comm business we know there are some data points which suggests that some of our customers have told us they have won some business in certain service contracts and they are going to go start deploying them. So, we are expecting that to be picked up in -- see it pick up in Q1. But, what this is like, Harsh, it's the whole macroeconomic uncertainty that is going to drive confidence and customers to want to build ahead.

And, that's too early to call. Frankly, we just -- until we get the bookings and the visibility, I don't think we can say that Q4 is going to be the bottom and Q1 is going to be up. At this point, as we look at it, demand for Q1 is looking like it's going to be up from Q4, but it is really too early to say.

Thanks, Mohan, I'll get back in the queue. Thanks, guys.

Rick Schafer, Oppenheimer securities.

Thanks, guys. A couple questions. First one just on gross margins, digging a little deeper there. Could you maybe pars out, Emeka, maybe in percent terms how much of the gross margin hit is mix related versus volume versus are there one-time charges or anything like that in there?

So Rick, let's use Q2, the July quarter as a baseline. In that quarter we reported 60.6% on a non-GAAP basis. If you use the mid point of our guidance for Q4 which will be 57.7%, 40% of the decline is due to mix, 30% is due to volume and 30% is the impact of the Thailand flood.

Got it. Okay, so, as we move into 1Q, I'm just trying to figure out how much are we depending on mix to improve and drive the 1Q rebound to get you back to the high 50%s, something close to 60%. It sounds like mix will be about a little more than a third of that. Am I thinking of it the right way?

I think you're thinking about it the right way. Like I said, the mix is about 40%, and if you really look at it, it's probably about 40% of the decline. Going back from Q2 though.

Okay, and then, on the wireless business, just to be clear I guess, if I look at your guidance, I think you assume wireless is going to be down in Q4. Can you say is that -- is there any customer specific issues in there or is it all just macro related or seasonality related?

You said wireless, Rick? You're referring to the overall comm business?

Well, yes, I was really thinking more about your handset business, your hand-held --.

Okay. So no, it is definitely just market issue. Maybe there are some share transitions from some of the customers we have where we have very strong positions, maybe losing a little bit to other guys. But, I don't think there's a lot of that. I think it is mostly market.

It isn't just hand-helds as well. I look at the consumer business in general, TVs, set top boxes, other type of consumer equipment just not forecasted to do very well in Q4. And, we may see a rebound after Christmas, we'll see, but at this point, I think consumer is, as it's computing, predicted to be fairly soft in Q4.

Okay, and you guys are pretty diverse in your hand-held business. You've got exposure to most of the large Tier 1 OEMs.

That's right, exactly, and it's a pretty consistent story we're seeing. There are a few guys doing a little bit better than others. But, in general, I would say it's a little bit softer at this point anyway.

In any of the design win activity you talked about, is any of that in the handset space? I can think of one major customer that you don't have for handset right now, Apple, you do sell to them for the iPad. Would you be able to leverage or do you expect to be able to leverage that in the handset business?

We have opportunities at all of the hand-held guys, I would say, and our business is pretty diverse. We've got a lot of design wins in most of the Smartphones out there. We have design wins in most of the tablets out there.

The guidance in the consumer business today just looks to be pretty soft at the moment, at least in terms of bookings. One would see maybe in Q4 as things -- towards the end of Q4, our Fiscal Q4 anyway, that maybe things are going to come back a little bit. But, at least to this point, there's no real evidence of that.

Okay, great. Thanks, guys.

Steve Smigie, Raymond James.

Great, thanks. Just taking a look at operating expenses as we get into Fiscal '13. As we go through particularly the first couple quarters, should we assume dollars are flat from here meaning is this probably a bottom in terms of how much you can cut OpEx given revenue drop? Or do you think you can work OpEx down a little bit more in the first half of the year as we're still recovering?

So, Steve, to answer the question let me just take you back to the July quarter where our operating expenses was at $14 million. And, if you look at the mid point of the guidance for this quarter, it is $37 million. So, that's a decline of $3 million, or 9%. 30% of that was from headcount reduction of about $1 million. And, that is getting to be a permanent reduction.

And, the balance of it came from some time off programs and also some reductions in variable expenses. As we go back to Q1 this is something that we just have to evaluate for when we see the demand environment for Q1, whether or not we continue with the time off program.

But, there we would expect to have reset of some payroll taxes which we have some reset of our bonus payment expectations. So, my thinking is that we should see an increase in operating expenses in the next quarter. The extent of the increase is something that we have to decide upon as we see what the top line revenue is doing.

And, let me add to that, Steve. We've built the Company on $125 million a quarter run rate, so $500 million business. If we see in the out quarters that demand is not looking like what it's going to be the ongoing run rate, then we are going to address OpEx more aggressively on a consistent basis.

And, that's why Emeka is alluding to go back and look at a few quarters ago and what we were at and what we brought the OpEx down to. And, if this is an ongoing, this macro environment continues to be going into the Q2 time frame, then I think we have to look at bringing OpEx down more aggressively.

Okay, great. Thank you, and then if I look at the tax rate, it was 10%, or you're guiding to 10% for January, I believe, January quarter. Looking forward, should we expect to go back to the 14% type level?

I'm sorry?

As we get into Fiscal '13, would that be more back to the 14% level?

So, at this point, Steve, what we're expecting is based on the current mix of revenue where our income is coming from, on a GAAP basis, we're expecting 2013 to be between 10% and 12%. On a non-GAAP basis we're expecting it to be between 13% and 15%.

Okay, and then, just to hit on this April quarter one more time. If I look last April you guys were up 5% sequentially, so it seems to me that's maybe looking at some seasonality in the recent quarter for you guys. If I wanted to build in seasonality, and I assumed that the 5% sequential was a seasonal growth there, would it make sense to do that and then add back some fraction of the $7 million from Thailand. So, 5% sequential growth plus $4 million or $5 million to get to an April number if I wanted to -- is that the right way to look at it?

If you believe that Q4 is the bottom, Steve, and then that the macro is down I think that's a reasonable way to look at it. The Thai flood recovery impact is very unclear. I don't really, I can't really give you an answer on that one. But, I think your rationale on the sequential growth is reasonable.

And, just on the 40 and 100 gigabit per second business I think you've given us some comment on how we can apply back into this, but what would you say it was as a percentage of revenue in the October quarter?

Well we don't break it out that way, Steve, but do you have anything? Your question, Steve, was on specifically the 40 gig and 100 gig SerDes business as a percentage?

Correct.

No, we don't break it out that way. The only break out we have is the comm business.

Communications overall was 37%.

Okay.

Steve, what we've typically said is that the optical business is about 60% of our communications business.

Okay.

And, you can think about that as being -- majority of that as being the 40 gig and 100 gig and then the timing sync stuff, the microwave is very small today.

Okay, thank you. And then, I apologize, just one last question. Just in the past, Mohan, you gave us some color on what you were thinking about maybe on an annual growth rate for that 40 and 100 gig business unit wise and what your customers were thinking. I realize we had this Thailand situation, but looking beyond that just generally any sense, Fiscal '13, what that unit growth might be generally speaking. So, what you were thinking?

Yes, we've projected somewhere in the high probably 80,000 to 100,000 ports deployment this year. That was at the beginning of the year. I think with the softness in the back end here it's going to be closer to the 80,000 ports.

This includes 40 gig and 100 gig all long reach applications. And, I think it's still going to be a pretty good growth year if we look at it from 2010 to 2011. And, I expect that 2012 is also going to be a pretty good growth year if the deployments start to increase in the, I would say, Q2 time frame with Q1 starting to see orders from customers and then Q2 starting to see those deployments.

We're hearing a lot of good things about the 100 gig space. We are continuing to hear good things about the 40 gig space. And, as I mentioned in my discussion that global infrastructure improvements is a critical -- the bandwidth expansion is a critical part of that global infrastructure improvement across the globe.

And, we have to anticipate that there's going to be continued deployments in 40 gig and 100 gig long haul applications. And, that's what we're hearing from our customers. So, there's no shortage of requests for more products and more information and new platforms and all of that stuff. So, we are very positive about it.

Great. Okay, thanks a lot.

Code Acree, WSG Investments.

Thank you, very much. Let me go back to an earlier question and I'll start with inventories. Can you just give a bit of a view of where you believe component and maybe finished goods inventories are sitting as far as the health line?

In terms of our customers or channel?

Well, channel inventories from a component level but also from a finished goods and impact from your OEMs.

So, I would say inventory levels are pretty light is the feeling we have, both internal, channel, and even at our customers. I don't think that there's a lot of inventory there. I think the question is really more of a demand one. And, when confidence is going to come back. And, how we're going to start seeing more risk being taken by our customers in terms of building more.

I do think there was an impact and a bit of a pull in into the first half of the year where -- due to the Japanese situation. And so, the second half was somewhat weaker. But, now that that's kind of done, I think most of our customers are sitting on pretty modest levels of inventories. I'm not hearing about any excess anywhere.

And, Mohan, with the last few days with the Black Friday numbers, some of the retail numbers being a little bit better than expected. If inventories are lean and we hit a holiday period where expectations were very muted but maybe we get a little better than expected sell-through, what would you expect that to translate to, maybe, atypical seasonality as you head into next quarter and the end of this period?

Then I would expect to see a very strong January. So, that would be one of the data points that we'll obviously be looking for is after the Christmas season if things have gone very well and we go into Chinese New Year, I would anticipate that we would start to see an increase in bookings and more visibility. And, obviously, a lot of confidence levels starting to increase across-the-board. At the moment everybody -- that's what everybody is hoping and anticipating. But, there really is no evidence of that today, right?

But, it sounds like customers were really girding for what might be an abysmal holiday period.

Yes. I would agree with that.

Maybe on the Smartphone side, the weakness this quarter. Can you maybe talk about a macro issue of in consumption demand versus maybe a lot of players out there trying to get into the Smartphone market. And, everybody assuming a bigger share, maybe a bit of excess inventory in handsets that from players just not getting the share they thought they would get.

Well so, for us, Q2 was a record quarter in terms of some of the Smartphone business and protection business going into some of these markets. It was obviously a record revenue quarter for us. So, we shipped a lot. And, I think coming off that there's Q3 which is seasonally our strongest quarter -- typically our strongest quarter to see consumer coming down, that suggested two things to me.

One is that there was more pull in into the first half as I mentioned due to probably the Japan tsunami situation and also the fact now that there is this macro uncertainty that there's just general softness in the second half. And so, that was why I think we saw our consumer business down. It was pretty consistent.

We saw all product areas coming down. And, specifically on the Smartphone things, as I mentioned earlier in the call, we're pretty diversified. We have products in many different Smartphones out there. So, to see it across-the-board I think tells you something more about the sector than it does our specific situation.

And then, lastly, Emeka, you gave a pretty wide guidance, obviously, for gross margins. But, it's factored on a lot of things that don't seem to be all that fluid, all that changing, it doesn't look like mix is going to shift dramatically this quarter, at least with what's going on right now and Thailand doesn't improve overnight. So, I guess, can you maybe talk about why the wide range? And, what goes into getting to one end or the other?

Well, I think if you just look at the guidance for this quarter, a key driver for that is the Thailand flooding. And then, with the mix issue, we don't really know at the end of the day what it is going to be.

Let's say, for instance, in January, if we do see much stronger performance on the customer side, as you probably know consumer strength in customer that is a gross margin headwind. So, definitely there is a lot of uncertainty as to where the final revenue level is going to come in for the quarter and that is reflected in the gross margin guidance.

Great. Thanks guys, good luck.

Terence Whalen, Citigroup.

Hi, thanks for taking my question. This is Dean speaking for Terence. I would like to follow-up a little bit on the advanced communications sensing. I know you don't break out the 40 gig and 100 gig business. But, this business has been relatively strong for the past five quarters.

Do you see the strength continuing this quarter compared to the rest of the ACS part? And, also if you can comment on the long term growth prospect on the 40 gig or 100 gig, that would be great.

Well, the long term growth prospects are very, very good. We see continued interest in higher bandwidth infrastructure. Some of the challenges of 40 gig have now been overcome. That's starting to just accelerate based on deployments and qualified products over the last few years.

So, we're very positive about growth in that business. 100 gig is just starting to emerge, a lot of our customers are moving in that direction now. And, we see good momentum there. So, we're very positive about the growth in that business both in the 40 gig and the 100 gig side.

As it pertains to Q4, as I mentioned, we expect comm to be down again in Q4. There's no indication, at this point in time, that it's going to be any different. I think it will be Fiscal Year '13 and the beginning part of Fiscal Year '13 where we'll start to see in creased orders on some of these products for 40 gig and 100 gig deployment.

I'd say that's true of our timing sync products as well. So, it's pretty broad. I wouldn't say it's one segment of the marketplace. I would say generally the comm infrastructure space is a little bit weak. That's the general comment there.

Okay, that's very helpful. And, how much is 100 gig account for the total CRM business?

We don't break it out but it's small to date.

Okay.

It's growing very fast.

A quick follow-up. Can you talk -- do you see any pricing pressure in the protection business, especially in the Tier 1 customer given all the weak economics?

Well, we see pricing pressure in all the consumer businesses. Obviously, Smartphones, because the volume, we do see the price pressure, it's pretty consistent there. At this point in time, even if you lower the price, you don't get necessarily any more orders.

It doesn't translate into more orders, the demand just isn't there. So, what you typically see is the comm consumer business drives about a 20% price erosion a year, at least, and that's true of the hand-held business as well as some of the other businesses, if there's more volume you can see a little bit more than that.

We play in the high end Smartphones, we don't typically go down into the very high volume cell phone type of space on protection. But, to answer your question, yes, we do see price pressure but that's nothing abnormal there.

Got it. Very helpful, thank you.

Li-Wen Zhang, Pacific Crest Securities.

Thank you for taking my question. Mohan, as Semtech is the leader in the service area. Have you seen any trends for the OEMs to internally develop more towards to internal, to auto seeing versus internal development?

I wouldn't say it's a trend, Li-Wen, I would say that's been a consistent theme. Ever since we acquired [Sierra Montechs] we knew that was part of the -- you find some customers who like to develop their own solutions and want to use that as a differentiator in their systems and don't want to go and use off the shelf components.

There are some, but on the other hand, the majority I would say find the time to market is critical and that using our off the shelf products, maybe with some modifications here and there, gives them a time to market advantage. And, they can generate more profit doing that, so it's a combination. I wouldn't say there's any trend one way or the other.

On 100 gig, probably there's a little bit more. Typically with the newer more advanced technology nodes, the customers try to do themselves first, the first generation themselves, and then go to outsource. But, because we already have a lot of technology in that area, we already have good design wins in the 100 gig space.

Okay, thanks. And, in Q3, the protection business actually came in a little bit weaker than your original expectations. Is this more ASP erosion driven or more weaker units driven?

Probably, it's both. But, I would say that more revenue unit driven. I think there's Smartphone hand-held space in Q3. Q3 is typically our strongest quarter for consumer and computing markets. So, if you go back and look at every year, Q3 is always our record year for us.

And, it's driven by consumer and computing. And, typically protection and consumer does very, very well in Q3. This quarter, it wasn't the case. Q3 of Fiscal Year '12 it wasn't the case. Protection was down in Q3, consumer was down.

Very unusual for us. And, as I mentioned earlier, I think partly that's because the pull-in into the first half due to the tsunami, Japan tsunami, just spooking everybody and customers building more in the first half, I think. I don't have any data point that really I can point you to, but I think that's the situation.

And then, my last one is in terms of the next calendar year in the 02 and -- what's your view about the whole semiconductor industry and for Semtech specifically? Can you give us a list of drivers for revenue growth from largest to least?

Yes, so, I think from our standpoint, we -- obviously this year will be another record revenue year for us. I anticipate Fiscal Year 2013 will be another record revenue year for the company. We have so many secular growth drivers, as I mentioned on my call -- on the call earlier, that I'm confident that we can continue to grow.

Obviously, our 40 gig and 100 gig platforms, we have new microwave platforms coming out. The timing synchronization platforms are starting to get more interest because of some of the IP deployments, the LTE infrastructure deployments. We have a lot more protection products coming out that still are doing very well. But, from the Smartphones and the tablets and other consumer applications as well as communications applications.

The sub 1 gigaHertz wireless industrial platforms are starting to do well. A lot of design wins there and energy harvesting and metering applications. The touch sensing platforms which we are really just starting on I think are starting to do well as well. And, as I mentioned also on the call, we just hired a new General Manager for our Power Management business.

And, I'm pretty confident we're going to start to see some momentum in our power business very soon. So, all in all I would say that we're confident about our growth. Is the industry going to grow next year? Obviously, I've heard about some of the recent forecasts and showing pretty modest growth for next year.

A lot will depend I think on some of these factors we talked about. The impact of Thailand, is that going to have a bigger impact than we anticipate? And then, the comm infrastructure and consumer confidence as we come out of Christmas and into the New Year I think is going to play a big role in whether next years semiconductor industry is going to grow.

Okay, thanks. If I can, I'm sorry, may I have one more?

Go ahead.

I know Semtech has a mix, revenue mix goal half from industry and communication and half from computing and consumer. And, when should we see this happen? At the end of next year or what?

Well actually, we kind of like our mix. It's nice to be able to have a little bit more communication than industrial, maybe 55% to 60% of our business comm and industrial because that drives the higher gross margin, obviously. But, the reason why we like the mix is that the consumer and computing business grows faster typically.

So, we like where we are at. The reason why we don't move our gross margin model around is so we can have that room to be in our model range but still drive growth. And so, this is why we're confident in saying we'll outgrow the industry again next year and we'll outperform our peers in terms of revenue growth. And, if the mix comes in our favor then we'll drive higher gross margins.

Okay, thank you.

Craig Ellis, Caris & Company.

Thanks for taking the follow-up question. Mohan, I always think it's significant when a company does an internal reorganization. So, can you just provide us some context around the move that you're making and announcing today.

And, as you look at the four segments that you communicated, the communication segment, wireless and sensing, power and high reliability and protection, how should we think about the relative growth potential of those different segments as we look to 2012 and beyond?

Yes, so, I think the reorganization makes a lot of sense. I think it's going to make it actually easier for all of us to communicate to you and for you to understand exactly where the different pieces are and how they're growing. The wireless and sensing will be mostly industrial business.

There will be consumer because of the touch sensing in there but mostly industrial. So, maybe that doesn't grow quite as fast as the other businesses. I would say advanced communications, I expect it to grow very fast because we are in a secular segments with the microwave and the 40 gig and 100 gig businesses.

And, we have a lot of new different platforms copping out there. So, that should do very, very well. Obviously, our protection business which is our largest business today, but is more consumer computing can grow very fast but can also come down very fast. So, a little bit more volatile.

But, I think should still drive a lot of growth for us with the SAM as being -- really the very, very large SAM that's growing and emerging there as customers replace more discrete functions with some of the advanced protection. And then, Power Management is a huge SAM as you know which this is really an area where we haven't executed well and I think could become a very fast growing business for us.

So, without giving you numbers, Craig, I would say that, in general, I would expect all of our business to grow. That's the reason why we've reorganized this way. We have a new General Manager in one business, another General Manager that we promoted internally in another business. So, we've got some exciting leadership in these areas also, so, yes.

That qualitative color is helpful. Just a follow-up to that for you, Emeka. Are you going to be providing us with historical revenue mix for the different segments so that we can put reported numbers or the numbers that you give us on the conference call into longer term context?

Yes, we will. Starting with Q4, we will.

Okay, thanks guys.

Okay, let me summarize by saying that the third quarter of Fiscal Year 2012 was a solid quarter for Semtech. We reduced our expenses to accommodate our lower revenues, demonstrating the flexibility in our operating model. Our gross margin remained at the high end of our operating model on both the GAAP and non-GAAP basis and we delivered solid EPS performance to our shareholders.

In Q3 we generated $33 million of cash from operations, or 27% of revenues, after returning $30 million to shareholders in the form of stock repurchases. We ended the quarter with $318 million in cash. Despite the current uncertainty in the global economic environment we remain confident in the long term growth opportunities for Semtech.

And, we believe our end market and regional balance will ensure that Semtech remains profitable and continues to generate cash. We also expect Fiscal Year 2012 to be another record revenue year for Semtech and to generate record profits. In Q3, the Pacific Coast Business Times named Semtech to its list of fastest growing companies.

We believe our broad based exposure to the fastest growing segments in the industry combined with our product innovation, overall execution, and Fiscal discipline will enable us to continue to outperform our peers and return value to our shareholders. With that, I would like to thank you for your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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