Semtech Corp (SMTC) 2013 Q2 法說會逐字稿

Good afternoon. My name is Ethan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech quarter two FY13 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. Linda Brewton, Senior Manager of Investor Relations, you may begin your conference.

Great. Thank you, Ethan. Welcome to Semtech's fiscal year 2013 second-quarter conference call. I'm Linda Brewton, Senior Manager of Investor Relations, and speakers for today's 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 July 29, 2012 was issued after the market closed today and is available on our website at www.semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release, as well as the other risk factors section of our most recent periodic reports on forms 10-Q and 10-K filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only. Semtech undertakes no obligation to update the information in this call should facts or circumstances change. During the call, we may refer to pro forma or other financial measures that are not prepared in accordance with generally accepted accounting principles.

A discussion of why the management team believes non-GAAP information to be useful, along with detailed reconciliations between GAAP and non-GAAP results, are included in today's press release. I would like to mention that Semtech will be presenting at the Citi 2012 Technology Conference in New York City on Tuesday, September 4 at 3.00 PM Eastern. A link to the webcast will be available under the events section of our investor relations webpage. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone. Our second quarter of fiscal year 2013 was a record quarter for Semtech, with revenue growing 29% sequentially to a record $150.7 million, and up 16% from the same quarter last year. Our Q2 results included a full quarter of Gennum revenue. Excluding the $35 million generated by Gennum, our organic business grew 10% from Q1. In Q2, sales into Asia represented 69% of revenue. North America represented 18%, and Europe represented 13% of total revenue. Direct sales represented approximately 59% of total revenues, while distribution made up 41%. Book-to-bill for the quarter was less than one. Bookings were strong in the first half of Q2, weakened in the second half of the quarter, and has been strong so far in Q3. Sales bookings accounted for approximately 40% of shipments during the quarter.

Gross margin on a GAAP basis for Q2 was 49.5%, a 210 basis point increase from the 47.4% in Q1. The increase was attributable to a full quarter of Gennum high gross margin revenue, somewhat offset by a $17.7 million expense representing the amortization of the fair value adjustment for inventory acquired from Gennum. For Q3 and Q4, we estimate the amount of this adjustment will be $4.4 million per quarter. As a result of the lower fair value inventory adjustments, we expect our Q3 GAAP gross margin to increase from Q2 by 810 to 880 basis points.

Operating expenses on a GAAP basis were at $71.8 million, down 4% from the prior quarter. This decrease was attributable primarily to lower transaction and integration expense as compared to the prior quarter, which more than offset the additional operating expenses from having Gennum on board for a full quarter. In Q3, we expect our operating expenses on a GAAP basis to be sequentially flat. We recorded an expense of $4 million in interest and [order] in Q2, compared to an expense of $1.6 million in Q1. The added expense was attributable to a full quarter of interest expense on some loans. We expect interest and further expense of approximately $3.8 million in Q3.

In Q2, we recognized a GAAP tax benefit of $11.3 million, versus a benefit of $23 million in Q1. This benefit was the result of the regional tax impact of purchase accounting adjustments related to the Gennum acquisition. We expect our GAAP tax rate for Q3 to be approximately 1.5% and in Q4 to be approximately 8.5%. On a non-GAAP basis, excluding the impact of equity compensation, amortization of acquired intangibles, acquisition-related expenses, and other one-time expenses, gross margin was a record 61.2%, up from 58.5% last quarter. The increase was driven primarily by the inclusion of Gennum's high-margin revenue. We expect Q3 non-GAAP gross margin to be down 40 to up 20 basis points due to a higher mix of high-end consumer and computing revenues, slightly offset by additional cost synergies from the acquisition.

In Q2, our non-GAAP operating margin increased 420 basis points to 23.5%, due to higher revenue, increased gross margin, and initial synergies from Gennum. We expect to continue driving leverage through higher revenues, modest growth margin expansion, disciplined operating expense control, and higher return on R&D investments, and additional synergies from integration efforts. Our non-GAAP effective tax rate for Q2 was 12.5%, down from 13.9% in Q1. We expect our non-GAAP tax rate to be between 12% and 14% for the rest of the year.

Our cash balance at the end of the quarter was approximately $173 million of cash and investments, up from $161 million in Q1. The increase in cash was primarily attributable to higher net income offset by principal payments on the term loans used to fund the Gennum acquisition. In Q2, we paid approximately $9.2 million in principal and interest. Our top priority for cash usage continues to be to pay down our debt. The Company spent approximately $6 million on property, plant, and equipment in the quarter.

In Q3, we expect to spend approximately $8 million, mainly for manufacturing equipment and IT infrastructure improvements. Depreciation for Q2 was approximately $4.4 million. In Q3, we expect depreciation to be approximately $4.8 million. Accounts receivable grew 20% sequentially in Q2 because of higher sales, and our days outstanding decreased to 43 days from 44 days in Q1. Net inventory in dollar terms was $76 million, a 21% decline from the prior quarter, due to the amortization of the fair value adjustment of the acquired Gennum inventory. On a days basis, net inventory decreased from 106 days in Q1 to 102 days in Q2. We expect our Q3 inventory to decrease due to the continued amortization of the fair value adjustment of the acquired inventory.

In summary, Q2 was a very good quarter for the Company. We saw sequential revenue growth, expanded our gross margin, and grew our earnings per share. Going forward, we will continue to focus on ensuring the successful integration of Gennum, achieving our cost synergy targets, and driving our operating margin to our target range of 25% to 30% on a non-GAAP basis. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2013 performance by end market and by product group, and then provide our outlook for Q3 of fiscal year 2013. In Q2 of fiscal year 2013, we achieved record net revenues of $150.7 million, an increase of 29% from Q1 of fiscal year 2013, and an increase of approximately 16% from Q2 of fiscal year 2012. And non-GAAP gross margin was a record 61.2%, and our non-GAAP diluted earnings per share was $0.41 per share. In Q2, all our end markets grew sequentially, both organically and with the inclusion of Gennum. Including Gennum, our revenue by end market was as follows, communications represented approximately 35% of total revenues. High-end consumer represented 26% of total revenues. Approximately 16% of this revenue was attributable to hand-held devices, and approximately 10% was attributable to other consumer systems. Revenue from the industrial end market represented 22% of revenues, and revenue from the enterprise computing end market represented 17% of revenues. Semtech's business continues to be extremely well balanced, as 43% of our business now comes from the high-end consumer and enterprise computing sectors, and 57% of our business comes from the communications and industrial sectors.

Now let me discuss the performance of each of our product groups. In Q2, our protection business grew 2% sequentially, and represented 33% of Semtech revenues. While all end markets in Protection grew from the prior quarter, we saw particular strength in communications and computing markets. The overall consumer business, excluding hand-helds, was relatively weak in Q2, and our smartphone business was impacted by weakness from one of our North American smartphone customers. Our Protection business continues to benefit from the increase in signal performance of high-performance interfaces, an increasing number of ports per device requiring protection, and a processor transition to next-generation lithography nodes. With our industry-leading, high-performance protection platforms, Semtech is uniquely positioned to benefit from these market dynamics. Recently, we have seen demand for high-end protection products emerge in the automotive segment. We believe the need for increasingly sophisticated ESD protection in the smartphone communications infrastructure and automotive markets is a trend that will fuel growth for our business for the foreseeable future.

In Q2, we saw continued design-win traction for our protection products. During the quarter, we introduced several new protection platforms, featuring ultra-small form factors that are targeted at space-constrained applications, such as portable electronic equipment. We recently released an ultra-thin protection platform targeted at battery interfaces in high-end smartphones. In addition, we also launched a new automotive qualified protection platform that protects antennae and touch screen interfaces in vehicles. Our leading-edge process technology drives excellent clamping voltage performance and provides the superior level of ESD protection demanded by today's Tier 1 and Tier 2 automotive suppliers. In Q3, we expect our Protection business to be roughly flat to Q2.

Turning to our Advanced Communications Product Group, revenue in Q2 increased 28% sequentially and represented 24% of total revenues. The increase was driven primarily by demand for our 100 gigabit per second and 40 gigabit per second SerDes platforms, which achieved record levels in the quarter. We continue to see the deployments of high-bandwidth infrastructure increase across the globe, although timing of the deployments is sometimes difficult to forecast. The vast majority of these deployments are focused on long-haul and ultra-long-haul applications, where Semtech's leading-edge SerDes platforms are highly differentiated.

In Q2, we saw healthy design-win traction for our Advanced Communication Product Group. We also achieved our first design wins for our new point-to-point microwave platform. We expect to start seeing initial revenue for this platform in Q4 and initial volume ramps in Q2 of fiscal year 2014. In addition, the developments of our driver platforms and our next-generation 100 gig platforms continue to progress very well. In Q3, we expect revenue from our Advanced Communication business to be flat to slightly down from Q2. We do expect the Advanced Communication business to strengthen toward the end of the calendar year.

Turning to our Power Management and High Reliability Product Group. In Q2, revenue for the Group increased sequentially by 6% and represented 11% of revenues. The increase was driven primarily by strength in high-reliability platforms in the industrial end market and LED lighting platforms for high-end automotive displays. In Q2, we saw good design-win momentum for our Power Management solutions in most markets, including applications for set-top boxes, office automation equipment, and base stations. Our Power Management and High Reliability business continues to make steady progress by targeting markets and applications ideally suited to our unique competencies while maintaining healthy profitability. In Q2, we did make a leadership change in this Product Group. Jeff Pohlman, who runs Semtech's Protection business, is also now leading our Power Management and High Reliability business. In Q3, we expect our Power Management and High Reliability revenue to be flat to slightly up from Q2.

Revenues in our Wireless and Sensing business grew 5% sequentially, to represent 8% of total revenues. The growth in revenue was driven primarily by strength in the touch-sensing and automated meter-reading markets. In Q2, we saw solid design-win traction for our consumer analog solutions and industrial wireless platforms. In Q2, we launched several new products, leveraging our expertise in long-range, low-power RF transceiver technology. Our latest proximity-sensing platform is the market's first ultra-low power capacitive proximity sensor that has an on-chip specific absorption rate engine for human body detection. This SAR technology enables the device to accurately distinguish between a human body and other material objects. This unique feature enables mobile device manufacturers to comply with SAR product safety regulations in tablets, portable gaming devices, notebooks, mobile phones, and mobile hot spots.

We also expanded our family of integrated high-performance, low-current, sub-gigahertz radio frequency transceivers with a new platform that offers significant advantages in range, factory life, and link robustness. Our new radio frequency platform delivers industry-leading performance while maintaining a current of only 9.3 milliamps, which is the lowest in the industry. This transceiver maintains high performance even in the performance of interference, making it ideally suited for applications such as automated meter-reading, wireless sensor networks, and industrial security systems. In Q3, we expect sales for our Wireless and Sensing Product Group to grow modestly, driven by industrial and medical applications.

Q2 marked the first full quarter of our recently acquired Gennum business. The integration continues to go very well, with good progress being made in cost reductions, strategy alignment, systems integration, and strategic customer alignment. While there is still more work to be done, five months after closing the acquisition, we are very pleased with how the integration is going. In Q2, revenue from our Gennum Products Group was approximately $35 million. The breakdown of Gennum's revenue by end market was approximately 47% from enterprise computing, 43% from industrial, 7% from communications, and the remaining 3% from consumer. These percentages are roughly in line with Gennum's historic breakdown by end market.

Excluding IP revenue, Q2 was a record revenue quarter for Gennum. This is obviously very encouraging, as we managed to maintain very good momentum despite the distractions of integrating Gennum into Semtech. Gennum's enterprise computing and datacom products, which include its physical media and CD-R platforms, are highly differentiated and are designed into many high-growth segments, including GPON, EPON storage area networking, and high-bandwidth backplane applications for high-end routers, servers, and base stations. In addition, our Thunderbolt revenue is increasing nicely. We expect to see this continue, as our customers indicate that there is no competitive solution on the market that matches Semtech's performance. We also saw strong design-win momentum for Gennum products in the quarter. Looking ahead to Q3, we expect Gennum revenues to be approximately flat.

In Q2, we saw distribution POS increase by approximately 13% to achieve peak record POS levels. The increase was driven mainly by having Gennum for a full quarter. Excluding Gennum, distribution POS increased by approximately 1%. Our distributive business, much like the overall Semtech businesses, is very well balanced, with 50% of the total POS coming from consumer and computing end products, and 50% of total POS coming from industrial and communications end markets. Distributor inventory remained flat from Q2 at 66 days, which is below our 70 to 80 days channel inventory model. We believe that our channel inventory is in line with demand.

Moving onto new products and design wins. In Q2, we released 21 new products and achieved 1,384 new design wins, another Company record. We continue to leverage our analog expertise and industry-leading technologies to develop new, innovative analog platforms targeted at the fastest-growing segments of the market, and expect to see strong design-win momentum in Q3.

Now let me discuss our outlook for the next quarter. Based on recent booking trends and our backlog entering the quarter, we are currently estimating Q3 net revenue to be between $148 million and $154 million. To attain the midpoint of our guidance range, or approximately $151 million, we needed net turns orders of approximately 43% at the beginning of Q3. We expect our Q2 non-GAAP earnings to be between $0.41 and $0.45 per diluted share, and GAAP earnings to be between $0.15 and $0.20 per diluted share. We believe that the overall demand environment is healthy but somewhat uncertain due to macro economic concerns. Our visibility remains somewhat limited, but bookings momentum has been very strong so far in Q3. I will now hand the call back to the operator, and Linda, Emeka, and I will be happy to answer questions. Operator?

(Operator Instructions)

Rick Schafer, Oppenheimer & Company.

It's Jason Reckel calling in for Rick. If I could just dig into the SerDes business a little bit first. Could you talk about what the split is there between your 40 gig and 100 gig business? And talk about what are rates in each of those and what you're seeing competitively, both in 40 gig and 100 gig? Thanks.

The majority of the business is still 40 gig. We don't break out the numbers, but the majority of the business -- the revenue is 40 gig. 100 gig is starting to ramp up quite nicely, so the growth is in the 100 gig side, but I think the deployments are both in 40 g and 100 g. When we see -- really, it's regional dependent. There's more 40 gig I think in Asia. 100 gig, some of the newer deployments are more global, and the greenfield sites tend to be more 100 gig from what we see.

Competitive dynamics, we really don't have a lot of competition in the long-haul market other than captive suppliers and where we don't really see an opportunity to win that business. So there is obviously more competition down the shorter-reach side and more on the client side, but on the long-haul side, we really don't see a lot of new competitors there.

Okay, and have you guys seen anyone sampling a port or anyone out there in 100 gig, or are you guys the only ones out there today?

At this point in time, we are the only ones really with the 100-gig SerDes. We know that Broadcom and other guys are talking about products, but we haven't had -- I don't believe we've lost any sockets to any competitors in the long-haul or ultra-long-haul markets.

Okay, and moving into timing and sync. Could you talk about what that business looks like now? We're a year removed from a couple of acquisitions in that space. Have you seen any change over the last couple of months, or have your expectations changed at all?

Which business were you referring to?

Timing and sync. Excuse me.

The timing and sync continues to do quite well. I would say that it's slightly different space. It's more on the access side, more base stations. And at this point in time, I would say it's not as growth-y as the high-bandwidth infrastructure side. It is somewhat lumpy, but at this point in time, I think it's still promising. We think that there is generally a need for more timing synchronization as new sites, new networks with packet-based infrastructure, gets deployed.

So, both the voice video data side needs synchronization across the network, and so we are quite positive about the growth of in the market. But I would say that the more -- the stronger segment is really the high-bandwidth infrastructure on the long-haul side for us.

Okay, lastly, and maybe I missed it, but could you talk about lead times? Have they changed over the last couple of months? And what are lead times today?

Order lead times are roughly the same as last quarter. We haven't seen a huge change. There is a little bit less visibility in some areas like the consumer side, but I would say they're roughly in line with last quarter.

Okay, that's it for me. Thanks, guys.

Steve Smigie, Raymond James.

With regard to the guidance for the your comms business there, I think you indicated you might be down somewhat, flat to down slightly. And we heard some good news out of JDSU [as well as other folks from] 40 and 100 gig. I'm just curious if you could talk a little bit is there some lumpiness there, or is it something else than 40 and 100 gig that's going to be a little bit softer in the coming quarter?

I think it's just timing, Steve. I think that what we know that the 40 gig, 100 gig ports are increasing. We know that most of our customers are talking about increasing their demand, but the timing is more kind of Q4-ish I think than Q3-ish, and that is why we are going modestly down. I don't think it's going to be significant down in the comm business.

Okay. And if you look at some third-party databases, our data sources out there talk about 100% compound annual growth over the next several quarters, excuse me, the next several years, on port count for 40 and 100 gig. And I'm just curious how closely would you guys tie to that port-count growth?

That sounds a bit aggressive. I would say that on the long-haul side, we will do very well. On the client side, on the short-reach side, that's going to be more competitive, I think. And it depends how or where those ports are being deployed. But we see pretty good growth just on the infrastructure side on both 40 gig and 100 gig deployments, at least for the next few years. So, we should see quite good growth.

With regard to your Gennum business, focused on the 1 to 25 gigabit per second business. Can you talk about where you're winning in the data center? There has been some good news out of that market. Curious how you're levered to that, like what specific platforms are you getting on and what you'll be tracking to see your potential success there?

Yes, the areas to look for are the fiber to the home PON space, GPON and EPON. We only have PMD devices, so these are physical layer devices going into these segments, but they are the gigabit 2.5 gig and 10 gig PON segment. So we're very much tied to those, and we are getting good design-win traction and good momentum there.

Also, on the CD-R side, specifically the 10-gig, 16-gig fiber channel, 25-gig CD-R space I think we're doing quite well there. And then on the backplane side, which is more server backplanes, base stations, and those kind of data-center applications driven by cloud computing. It's more the 10-gig backplane CD-Rs that we have done well in and are continuing to do quite well in.

Okay, great. Thank you.

Ian Ing, Lazard.

This is actually Tyler Radke in for Ian. I was wondering if you could dive in a little more onto the gross margin guide and talk about how that might be impacted by the Protection mix or maybe lower utilization rates? Thanks.

I think what we're getting to was that our gross margin was approximately going to be flat at the midpoint. The two key issues there are in the third quarter, we expect to see a much higher mix of our consumer and computing revenue. As you know, those have much lower gross margins than the corporate average, but offsetting to the positive side is the fact that we continue to see the cost synergies that we anticipated from the acquisition of Gennum. We should see that continuing to layer on a whole lot more than what we saw in the second quarter. Those are the two key drivers for the gross margin guidance this quarter.

Okay, great. Going back to your Advanced Comm, thinking about sequential flat or slightly down and then an uptick towards the end of the year. What makes you so confident -- or I guess what do you see out there that you really think is going to provide an uptick in Q4? Is it going to be this uptick in spending by service providers, or what do you think is driving that?

Yes, that's exactly what it is. We know that there are service providers that have indicated that they are going to -- they've already talked about how many ports they're going to deploy. They've decided which customers -- which OEMs they're going to use, and so it's just the timing. And we know it's going to be more back-end than Q3.

So just confirm, you have heard plans specifically from them in terms of orders, or is it more just their budget?

Well, the way it typically works, they put out a tender and then they determine who has the number of ports, who is going to get the number of ports. And we have heard of those customers, we're going to get the ports, and we know that means they're going to put demand on us. And so it's really just a question of timing. Is it going to be early Q4 or late Q4, that type of thing.

Okay, great. Thanks.

Craig Ellis, Caris & Company.

Emeka, I wanted to start following up on your comments that bookings weakened in the latter half of the prior quarter. Was that broad-based, or where do you see that? I suspect it was in Protection, given how the business performed versus seasonality.

Yes, Craig, it was actually pretty much broad-based. But like I also said during my prepared remarks, we are very pleased with the strength that we are seeing so far in Q3, which also is very broad-based as well.

Okay. Then as a follow-up, as we look at the Protection business, how it performed and how you guided, it is definitely sub-seasonal. So, can you talk about some of the different dynamics that are going on there? You clearly have diverging customer issues, but is there anything new in the customer diversification effort, or in the dollar content effort with new customers that can help offset that legacy North American customer?

Craig, I would say there's two things. One is the overall consumer business, including TVs and set-top boxes and those type of products, and they're not doing as well as they would normally do during this period of time. And then the one customer in North America that is struggling is giving us some pain, but obviously, we have exposure to the other smartphone manufacturers. And some of them are doing better as a result of the opportunity in the marketplace. And so, I think there's also opportunity for us.

We are not in all the smartphone manufacturers, and we are working hard to try and penetrate more of the guys that are out there, and there is some opportunity there. And as I mentioned, the automotive space is becoming an opportunity for us as well. So the market will continue to grow. The applications are fairly broad, and I think losing one customer, obviously, it is a disappointment for us that they are not doing better, but that is the nature of the game.

That's helpful. Thanks, Mohan. Looking at the Gennum business, but more on the synergies capture side, the Company originally guided to $0.20 and $0.40 of accretion off of that deal. Is that still the expectation? And I know on the last call, the Company indicated that there may be some upside in terms of the revenue synergies that you thought were possible. Can you give us an update there as well?

Yes, $0.20 to $0.40 is still the goal, Craig, that we think we are on track to achieve those type of accretion numbers.

And revenue synergies, Mohan?

Revenue synergies, it's still difficult to say. I'd say it's still a bit early, but what we're seeing is as I talk about the long-haul strength that Semtech has on the line side and Gennum strength on the client side, a lot of the customers are the same customers. And we are starting to get exposed to the challenges, but also the opportunities, that exist in some of these customers as we bring the different products to the table. So I'm pretty confident about it. I just -- I can't -- we don't have any numbers associated with it.

I think that we are going to see some of our leading customers who have been and continue to be leading customers for us in the 40 gig, 100 gig long-haul side and are potential customers for us on the Gennum side on the backplane products. And on the GPON, EPON fiber to the home area, I think we're going to see some good synergies, there.

Okay, that's helpful. Lastly, Emeka, with the addition of Gennum, which is a substantial business, how do you think about seasonality in the fourth quarter? I know you are not guiding, but how do you think about the way the seasonal dynamics play out with that incremental business?

As you mentioned, this is still new to us. We haven't had the benefit of seeing how everything is going to play out. But with the acquisition of the SMI business and now Gennum driving that increase in [some service] communications and industrial content in our revenue, we're thinking that maybe what we should see going forward is that Q1 should be slightly up, Q2 will be nicely up, and Q3 will be up, and then the Q4, the expectation is that should be flat to down.

All right. Thanks, guys. Good luck with it.

James Schneider, Goldman Sachs.

Mohan, I believe you talked about bookings having strengthened in the month of August, in the first part of this quarter after having weakened in the last part of the past quarter. Can you talk about some of the areas where the booking has strengthened the most and whether you think that is a trend or just an incremental blip?

It's difficult to say if it's a trend or incremental blip, but it looks like it's more of a trend. I would say for us, the Protection business bookings are very strong, and that's a good sign, which is what we would expect in this period in Q3. But also across the board, I think in general, the bookings are fairly broad and have been quite strong, as we said, going -- coming out of Q2, the book-to-bill was less than one. It is encouraging that we're coming into Q3 with very strong bookings and gives us a good feeling about hitting our turns number for the quarter.

Great, and then as a follow-up, I think you also touched on the fact that you would expect to see most of the Gennum synergies -- the financial synergies [from here] being driven by higher revenues. Is there any gross margin or OpEx synergies further that you would expect from this point, or is it all going to be revenue leverage?

Jim, so I think on the synergy side of [adjusted] revenue, synergies [has more that indicate area], a lot of those is still to be quantified, and I think that is probably more of a 2014 fiscal year item. In terms of the cost synergies, on the operating expense side, I think we've seen is significant portion of that. There is probably a few more to go. Most of the synergies that we still expect to see is going to come on the manufacturing cost side, and we would expect to continue to layer that on as we go through the end of the year.

Great, that's helpful. Lastly for me, on the Power Management High Rel business, that has been, as you mentioned, somewhat disappointing. Recently, we're down to the $16.5 million level at this point. Is there any visibility in terms of a rebound in sales on that product? Can you see your way clear to where this could exceed $20 million again in the relatively near future? Or is it we're going to take a few more quarters at this level before we start to see a turnaround?

Yes, there's two elements to it, Jim. I think the Power Management business is actually -- there is an opportunity there for that to grow going forward. We seem to be doing quite well in the white LED side on the display side, particularly in the automotive segment is starting to grow nicely. But the High Rel side, particularly the military area, is still what I would say -- call it very disappointing. It just really isn't doing much, and that doesn't seem like we see any net opportunity to really grow that fast. So I think that's probably going to take longer.

Great, that's helpful. Thanks so much.

Terence Whalen, Citi Investment.

Mohan, as you've had some time to dig more into Gennum, can you talk a little bit about what you see as the most promising growth opportunities in Gennum? And also, could you quantify perhaps a longer-term growth rate for the different parts of the business for the video versus the enterprise? Thank you.

Let me start with that first. The video business is a lot more stable business. It's point products, equalizers, and drivers and SerDes products that go into the broadcast video space. And that's a very stable business. We are looking to reinvent that in some ways and change the dynamics of some of the things we've been doing there. But for now, I think for the foreseeable future, that's just going to be a stable business, and that's what you can view it.

The more exciting growth areas are really what we call the enterprise computing product areas, which is the datacom side. I talked about the GPON devices, the CD-R devices that go into a range of different equipment, including storage networking, and then our backplane CD-Rs, which are all doing very well from a design-win standpoint, and I think they are all good growth markets to be in.

So one of the things that I have always commented on is this high-bandwidth infrastructure bottleneck moving to more the access and the data center side, and I think that's one of the reasons why we acquired Gennum. And I think it puts us in a very good position to take advantage of that bandwidth bottleneck and helping the industry remove those. So that's a good space, and we think that will grow nicely.

And then the Thunderbolt business is doing very nicely also. That's growing fast. It's small today, but it's growing quite nicely as the demand for that increases. So, those are the two areas I would focus on. They're really the datacom enterprise computing products and the Thunderbolt from a growth standpoint.

Okay, thank you. And as my follow-up question, could you put some numbers around the growth expectations, longer term, of the parts of the Gennum business? Also, separately, it sounds like we are at a point with Power Management where that might actually inflect positively and begin growing based on the different design activity that you've focused on over the past year perhaps in '13? Can you touch on that as well? Thank you.

I think the video business, I would say high single-digits depending on the market. I would say the enterprise computing product areas would be in the mid-teens, and Thunderbolt is going to grow at a very fast rate depending on the cable acceptance in the marketplace and the deployments in the marketplace. But that's obviously going to grow at a very fast rate, because it's very small today.

The Power Management, it really does depend on how effective our new products, which we've got coming out now, we started to release, start to get some momentum. Obviously, if we get some momentum with the Power Management project, Semtech has a brand image in the marketplace. We have the customer relationships. We have a lot of potential synergies between our different businesses, and that could grow at a very fast rate. We're not there yet. I will obviously talk more about it if and when we get there, but that potentially could grow very fast at high teens if we get that momentum.

Okay, thanks for the input.

Harsh Kumar, Stephens.

Mohan, could you talk about your commentary on the late calendar pickup in your optical business? Could you put some color around what geographies we're talking? Are we talking North America or some other ones are involved? Also, is it 40 or 100? The second part of the question is if these are telco projects, these typically have longer legs than just one quarter or so. Could you talk about that?

The regions that are really driving it up are Asia and North America, particularly China and North America. And I think it is a combination of both 40-gig and 100-gig deployment. And you are right, these things aren't one-quarter events, but typically you see that they are a little bit lumpy. First half of this year has been quite good, and the anticipation is the second half will be probably good, but more back-end, more Q4-loaded. And on an annual basis, it will grow significantly from last year, and I expect that next year will as well. So, this isn't a one-quarter event. This is an ongoing process.

Fair enough. Thanks for that color, Mohan. I'm trying to put some context around your commentary relative to your guidance. I think you said a strong momentum starting August, and I think you also said 43% of your revenues are turns business. I'm curious why the guidance is sort of flattish, if you will. Why not, since you think this is a trend, why not maybe have a little bit more growth in the guidance?

43% turns is about what we typically see at the beginning of the quarter, Harsh. The other bookings have been strong, but we base our guidance on the demand forecast. We look at the demand that we have in each of our businesses, and we look at what our customers are telling us, and we base our guidance on that. Obviously, if we see the demand increasing and the bookings are strong, we would guide more aggressively. But at this point in time, that's how we came to the number.

Got it, Mohan. Thanks. Mohan, if I was to ask you on Gennum, in terms of what's left to be done, how far -- how much more time is it before you feel like Gennum is up to snuff relative to your expectations?

That's a good question, Harsh, mostly because we have very high expectations on this (technical difficulty). The business is doing well. As you know, it was a record quarter for them. The integration is going well. I think there's a lot of opportunity from a return on [ROD] standpoint. I think there's opportunity on the revenue synergies -- from a revenue synergies standpoint. I think there's opportunities from a supplier consolidation standpoint. I mean there's lots of opportunities there. And so we just got to keep battling all of those areas.

But the thing that I like are that the customers are starting to recognize that Semtech/Gennum has a great portfolio of products for them, and they're starting to see that we can be a very important strategic partner for them. So, that is very good. The engineering team in Gennum is outstanding, both the video and the computing datacom side, really, really talented group of people. And so I think that culture of engineering fits well with Semtech, and we are going to see the benefit of that in the years ahead here.

Great, thanks. Thanks, guys.

[Li-Wen Zhang, Baylock].

I would like to have some updates on your Protection business. The first is how about the gross margin for that product line, and then as well as your future growth strategy for this product? Will you move to more high-performance, high-gross margin applications like communications and away from the lower pricing, lower-gross margin applications like high end of consumers?

Let me start with that, Li-Wen. We already do that. We don't go off the low-end, low-price, commodity-volume-driven [fat-filling] strategy. We tend to stay away from the markets and applications that don't need the high performance. Most of where we see lots of share, for example, is where our customers are losing the share. It is not we are losing against someone. And we already have a presence in communications. We are in most of the ethernet ports, central office systems, comm infrastructure, voice over IP. We are in all of those areas with our ethernet protection. We are in most of the high-end computing systems.

I mentioned automotive as a new space that's emerging because there are starting to be requirements for ethernet and USB protection in the vehicles. So, that is a new opportunity for us. But we continue to be very aggressive on the smartphone business. We think we have great technology for the smartphone business, and we will continue to play in that space.

Gross margins tend to be in the middle of our range. Our range is 55% to 60% on a non-GAAP basis, and Protection sits right the middle there. Some segments of the Protection business are a little bit lower gross margin. Some are a little bit higher, but that is the range.

Okay, thank you. And also, another question about your high-end consumer -- no, I'm sorry, the hand-held devices. So, that line includes tablets and the smartphone, right?

The high-end consumer includes tablets and smartphones and we broke out the -- from a Company standpoint, we break out the number of -- percentage of hand-helds as well.

Yes, so hand-held is mainly smartphone and the tablets. And what main product do you sell to that hand-held devices?

To all the hand-held devices, we sell Protection. We have some Power. We have some touch-sensing products that go into tablets. We've done quite well in tablets. Pretty much all of the tablets out there use our protection. We have some touch-sensing products emerging in some of the tablets, and we have some Power Management also in some of the tablets.

Okay, and my last one is what is your dollar content in the tablets application?

It varies. I would say from $0.30 to $1 depending on the tablet.

Okay, thanks.

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

Let me summarize by saying that Q2 of fiscal year 2013 was another strong quarter for Semtech. We posted record revenue, record non-GAAP gross margin, and record design wins. In addition, we launched several new products that solidify our standing as the leader in analog mixed signal innovation that delivers true value to customers.

We believe our strategy of diversifying our exposure by product group, end market, geography, and customers will enable us to take advantage of multiple long-term trends that will drive growth in our industry for many years to come. With that, we thank you 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.