Semtech Corp (SMTC) 2013 Q4 法說會逐字稿

Good afternoon and good evening. My name is Charlene and I will be your conference operator today. At this time I would like to welcome everyone to the Semtech Q4 fiscal year '13 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you. Ms. Linda Brewton, Senior Manager of Investor Relations, you may begin your conference, ma'am.

Thank you, Charlene. Welcome to Semtech's fiscal year 2013 fourth-quarter conference call. I'm Linda Brewton, Senior Manager of Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer.

A press release announcing our unaudited results for the quarter ended January 27, 2013 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 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 participating on the Williams Financial Group Management Discussion series teleconference on March 18 at 12.00 PM Eastern. The dial-in information will be published in the events section of our investor relations page.

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

Thank you, Linda. Good afternoon, everyone.

Consistent with the guidance we provided in our Q3 earnings call, Semtech's revenue for the fourth quarter of fiscal year 2013 was $150.6 million, representing a decline of 6% from Q3 and an increase of 45% from Q4 of fiscal year 2012. The quarterly decline in revenue was attributable to the seasonal softness that we typically see in our fiscal Q4.

Full-year fiscal 2013 revenue was $578.8 million, up approximately 20% from fiscal year 2012. The increase is attributable to our Gennum Product Group, which we acquired on March 20 of last year.

In Q4, 71% of shipments were derived from customers in Asia, 17% from North America, and 12% from Europe. Direct sales represented approximately 60% of total revenue, while distribution made up 40%. Bookings were strong throughout the quarter and our book-to-bill was above 1. Total bookings accounted for 41% of shipments during the quarter.

Gross margin on a GAAP basis for Q4 was 58.4%, down from 60.2% last quarter. The decline was driven mainly by lower IP licensing revenue compared to Q3. In Q1 we expect GAAP gross margin to be slightly higher due to the benefit of lower impact from the fair value adjustment for acquired inventory, partially offset by a higher mix of higher consumer and enterprise computing revenue. For the full year, GAAP gross margin was 54.4% compared to 59.4% in fiscal year 2012. The decline was primarily attributable to the amortization on the fair value adjustment of the inventory acquired from Gennum.

Operating expense on a GAAP basis declined 2% sequentially to $75.5 million, reflecting lower hours worked because of the holidays and lower new product expenses. In Q1 we expect our operating expenses on a GAAP basis to be approximately flat as the impact of increased work hours and new product expenses is offset by lower acquisition and integration expenses. We recorded an expense of $4.4 million in interest in Other in Q4, compared to an expense of $5.2 million recorded in Q3. The decrease in the expense amount was driven primarily by lower foreign exchange losses versus the prior quarter. We expect interest and other expense of approximately $4.1 million in Q1.

In Q4, we recognized a GAAP net tax benefit of $5.1 million, versus the benefit of $2.3 million in Q3. The sequential increase in tax benefit was driven by a higher income in lower tax regions, as well as the extension of the federal Research and Development tax credit in Q4. The lower Q4 tax relative to expectation benefited GAAP earnings by approximately $0.05 per share. We expect our GAAP tax rate for the fiscal year 2014 to be between 0% and 2%.

Our GAAP diluted earnings per share for Q4 was $0.19, down 24% sequentially due to the unusually large IP revenue recorded in Q3. For fiscal year 2013, GAAP earnings were $0.62, down 53% from fiscal year 2012 due to expenses associated with the acquisition of Gennum.

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 for Q4 was 61.6%, down from 63.1% in the prior quarter. We expect Q1 non-GAAP gross margin to be between 61% and 61.5%, reflecting a higher mix of high-end consumer and enterprise computing revenue.

Non-GAAP diluted earnings per share for Q4 was $0.49. Our non-GAAP tax benefit for Q4 was $487,000, compared to a non-GAAP tax provision of $2.6 million in Q3. Q4 tax benefited from higher income in lower tax jurisdictions, and the renewal of the R&D tax credit. The lower Q4 tax relative to expectations benefited non-GAAP earnings by approximately $0.05 per share. We expect our fiscal-year 2013 non-GAAP tax rate to be in the range of 10% to 12%.

In Q4 cash flow from operations was approximately $35 million, or 23% of revenue. Our cash balance at the end of the quarter was approximately $236 million of cash and investments, up 8% from Q3. In Q4 we paid approximately $8 million in principal and interest on our term loan. During the quarter we spent $7.5 million to repurchase approximately 263,000 shares. Our total outstanding authorization is now approximately $42.5 million. The primary use for our cash continues to be to pay down our debts. Our modest share repurchase activity is mainly directed at offsetting dilution from equity from employee stock awards.

The Company spent approximately $5.2 million on property, plant, and equipment in the quarter. In Q1 we expect to spend approximately $10 million, primarily to expand manufacturing capacity. Depreciation for Q4 was approximately $5.4 million. In Q1 we expect depreciation to be approximately $5 million. In Q4, accounts receivable declined 5% sequentially. Days sales outstanding grew to 43 days from 42 days in Q3, which remains within our target range of 40 to 45 days.

Net inventory in dollar terms was up 1% from Q3 to $74.9 million. On a days basis, it increased from 100 days in Q3 to 108 days in Q4 as we put inventory in place to support the stronger demand outlook. Our target range for internal inventory is 90 to 100 days.

In summary, Q4 was a solid quarter. On a full-year basis we successfully integrated the largest acquisition in the Company's history, and [nebually] achieved record revenues, record gross profits, and record cash flow from operations. Our financial goals for fiscal year 2014 are -- one, grow revenue faster than the industry; two, drive our non-GAAP operating margin towards the midpoint of our target range of 25% to 30%; three, generate free cash flow at the lower end of our target range of 20% to 25% of revenue; four, pay down our debt.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone.

I will discuss our Q4 fiscal-year 2013 performance by end market and by product group, discuss our fiscal-year 2013 performance, and then provide our outlook for Q1 of fiscal year 2014.

In Q4 of fiscal year 2013 we achieved net revenue of $150.6 million, which was down 6% from Q3 of fiscal year 2013, reflecting normal seasonality for our fiscal fourth quarter. Compared to Q4 of fiscal year 2012, revenue increased approximately 45%, our organic business increased more than 9% from Q4 of last year, and the acquisition of Gennum contributed to the additional 36% growth.

During the quarter we posted non-GAAP gross margin of 61.6% and non-GAAP diluted earnings per share of $0.49 per share. In Q4, our communications, high-end consumer, and computing markets experienced revenue declines from the prior quarter; while our industrial business increased sequentially. Our revenue by end market was as follows -- communications represented approximately 30% of total revenues; high end consumer represented 29% of total revenues; approximately 18% of this revenue was attributable to handheld devices, and approximately 11% was attributable to other consumer systems. Revenue from the industrial end market represented 26% of revenues, and revenue from the enterprise computing end market represented 15% of revenues.

Now let me discuss the performance of each of our product groups. In Q4, our Protection business declined 4% sequentially and represented 33% of Semtech's total revenue. The decline was driven by seasonal softness in high-end consumer and computing applications, while the communications and industrial end markets were flat to the prior quarter.

Our Protection business continues to benefit from the ongoing trend towards smaller and more portable electronic systems using high speed interfaces that need protection. In addition, the shrinking geometry of leading-edge ICs reduces the available real estate for on-chip protection. Semtech's industry-leading protection technology, distinguished by best-in-class clamping voltage, low capacitance, and low leakage, combined with proven application support, makes us our customers' first choice for protecting highly sensitive electronics. We believe the continued growth in the number of ports requiring protection, the proliferation in demand for faster interface speeds, and the increasing sensitivity of electronic devices to electrostatic discharge events, will provide growth opportunities for Semtech for many years to come.

Q4 was another record design win quarter for our Protection business. We saw strength from all segments in North America and Asia. During the quarter, we expanded our line of AEC-Q100 qualified ESD Protection platforms for automotive applications; our newest platform features fast response time, low operating voltage, and low clamping voltage, and is ideally suited for space-constrained automotive applications. In addition we expanded our RailClamp family with a device offering ultra low capacitance for high-speed interfaces and housed in a package that offers design layout flexibility. This device is targeted for use in USB 3.0, HDMI, and other high-speed interfaces.

In Q1, we expect our Protection business to increase significantly from Q4, driven primarily by growth in smartphone applications in the high-end consumer market, as new smartphones ramp; and also by growth in communications, driven by an increase in global infrastructure deployments.

Turning to our Advanced Communications Product Group. Revenue in Q4 declined 1% sequentially and represented 23% of total revenues. The decrease was the result of overall market softness as anticipated, which resulted in lower 40 gigabit per second SerDes, and lower timing synchronization revenues. These were partially offset by growth in our 100 gigabit per second SerDes business.

From a regional perspective, communications revenue in Asia and Europe declined in the quarter, while revenue from Japan increased slightly. The demand for high performance SerDes products continues to increase as the demand for more bandwidth accelerates, driven by the proliferation of smartphones, tablets, and other mobile devices.

In FY '14 we expect to maintain our leadership SerDes position in 40 gigabits per second and 100 gigabits per second long haul and ultra long haul applications, and to have another strong year. In addition, with the increased deployment of wireless LTE base stations requiring precision timing, we expect the demand for our timing sync platforms to grow nicely in the year ahead. We also expect to see modest revenues from our microwave platforms and driver platforms in FY 2014, and then accelerate in FY 2015. In Q1, we expect our Advanced Communication business to increase nicely from Q4 due to overall demand improvements.

Turning to our Power Management and High Reliability Product Group. In Q4 revenue decreased sequentially by 3% and represented 11% of total revenues. The decrease was driven primarily by softness in computing applications, partially offset by growth in high-end consumer applications for LCD TVs and set top boxes, and automotive applications in the industrial end market. Power Management revenue from the communications end market was flat to the prior quarter.

In Q4, we experienced solid design win traction for Power Management products. During the quarter we launched two new devices in our high-brightness LED driver platform. The SC5014 and SC5014A enabled designers to reduce the thickness of mid-sized consumer and industrial LED displays. In addition to their smaller form factor, these devices offer high output power and extensive control features, providing a high degree of flexibility to designers. With only one inductor, one External FET, and no external compensation components, these devices also enable reduced bill of materials costs. In Q1 we expect our Power Management and High Reliability revenue to be slightly down from Q4 due to normal seasonality.

In Q4, revenue from our Wireless and Sensing Product Group grew 7% sequentially to represent 9% of total revenues. The growth in revenue was driven by strength in our medical business. In Q4 we expanded our RFIC transceiver platform with the addition of a fully integrated, high-performance, low-current, sub 1 gigahertz RF transceiver that received the highest compliance rating for European regulations required for safety critical wireless applications such as social alarm and healthcare monitoring. Historically, these systems have had to be serviced with larger, more expensive discrete solutions. Semtech's compact integrated SX1235 transceiver reduces development time and cost and can be tailored to multiple products targeted at serving the needs of a rising aging population.

Also during the quarter, our SX9300 capacitive proximity sensor was named to EDN Magazine's list of 100 Hot Products for 2012. The SX9300 is the market's first smart proximity-sensing solution with a built in specific absorption rate engine for human body detection. This technology enables the device to accurately distinguish between a human body and inert materials, and is used to enhance user experience for tablets, smartphones, gaming devices, and mobile hotspots. In Q1 we expect sales for our Wireless and Sensing Product Group to be approximately flat.

In Q4, revenue for our Gennum Product Group declined 18% sequentially to represent 25% of total revenues. The decline was mainly attributable to an unusually large contribution of IP licensing revenue in Q3. Excluding IP revenue, Gennum's revenue was down 2% quarter over quarter from a record Q3. Gennum's revenue by end of market for the quarter was approximately 46% from enterprise computing, 40% from industrial, 9% from high-end consumer, and 5% from communications. Design win activity for Gennum was strong in Q4, with traction in the enterprise computing and high-end consumer applications.

Gennum's enterprise computing products, which include its physical media and CDR platforms, are highly differentiated and are designed into many high-growth segments, including Fiber-to-the-Home, storage area networking, and high bandwidth backplane applications for high-end routers, servers, and base stations. In addition, our Thunderbolt revenues and video surveillance revenues continue to grow nicely. We expect all of these segments to grow in fiscal year 2014.

Looking ahead to Q1, we expect Gennum revenue to increase significantly from Q4, driven by both the enterprise computing and industrial segments, and we expect to achieve another record product revenue quarter for this business.

In Q4 we saw distribution POS decrease by 8.5%. Distributer inventory increased 5 days from 64 days in Q3 to 69 days in Q4. This is slightly below our 70 to 80 days channel inventory model, but is in line with the current strong demand outlook. Our distributer business, much like the overall Semtech business, is very well balanced with 49% of the total POS coming from consumer and computing end markets, and 51% of total POS coming from industrial and communications end markets.

Moving on to new products and design wins. In Q4 we released 16 new products and achieved a record 1,405 new design wins. These design wins came from a broad range of products, from Wireless and Sensing platforms, Protection platforms, Power Management platforms, and Gennum's optical and video platforms.

Now let me comment on our fiscal-year 2013 performance. Fiscal year 2013 represented yet another record revenue year for Semtech as we grew revenues annually by 20% to $579 million, and continued our journey as one of the fastest growing, diversified analog IC platform suppliers in the industry. In addition to record revenues, on a non-GAAP basis we generated record gross margin dollars, record operating income dollars, record bookings, and we generated record levels of cash from operations, ending the year with $236 million of cash. In addition, we generated a record number of design wins from both our organic business and the Gennum business, positioning both our organic growth engines and our Gennum business to grow as the overall market demand strengthens.

The Gennum business continues to perform to the very high expectations we had set, and validates the very strong strategic fit anticipated prior to the acquisition. Semtech today is in a very strong position to deliver the highest performance, lowest power, and broadest range of 1 gigabit per second, 10 gigabit per second, 40 gigabit per second, and 100 gigabit per second, SerDes, CDRs, and PMD platforms to both the core infrastructure long haul telecom market, and to the shorter reach, metro, and access datacom and enterprise computing markets.

In addition, Semtech is now a leader in delivering high-definition video platforms to the video broadcast and surveillance markets. In FY '13, we also closed the acquisition of Cycleo, which enhances the value proposition of our ultra low-power wireless platforms, and we are now sampling wireless platforms, which include the Cycleo IP.

Other notable achievements in FY '13 were the release of our first 100 gigabit per second Mux, our products for ultra long haul applications, the surpassing of 1 million network elements deploying our ToPSync timing platform, Product of the Year award by EnGenius for our SC5010 boost LED driver platform, and several new releases of our miniature protection platforms.

Now let me discuss our outlook for next quarter. Based on recent bookings trends, and our backlog entering the quarter, and a very strong demand forecast, we are currently estimating Q1 net revenue to be between $154 million and $162 million. To attain the mid point of our guidance range, or approximately $158 million, we needed net terms orders of approximately 42% at the beginning of Q1. We expect our Q1 GAAP earnings to be between $0.17 and $0.24 per diluted share and our Q1 non-GAAP earnings to be between $0.43 and $0.49 per diluted share.

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

(Operator Instructions)

Jim Schneider, Goldman Sachs.

Congratulations on the strong results. I was wondering if we could talk about the com infrastructure market and give us some color on what your customers are telling you about the outlook for that, both on the optical side as well as the base station side, and how we think the spending trends are going to play out throughout the year?

Yes, so it's fairly early days but generally I would say that there's a general feeling that in the core infrastructure, there has been an under-investment in CapEx, and that there is going to have to continue to be infrastructure investments. That's a general comment. And then I would say specifically in areas certainly China, we're seeing some urgency to put in more infrastructure. And then that translates also then into base stations and then infrastructure on the access side as well, so a few things driving it. Obviously more devices so there's more bandwidth required through the core infrastructure. Some element of network traffic patterns changing the type of infrastructure required, thus my comment on the requirement for wireless LTE base stations, and that require timing synchronization for example, so that is being driven by more video content and more synchronization of packets required across the network. So that certainly is going to benefit us also. And then on the enterprise computing side, it's just generally getting fiber into the homes and getting the bandwidth into the access points. I think certainly the China government has stated that in 2013, all newly built residences will be equipped with fiber connections, so when you see whole regions drive to that type of strategy, that definitely is going to drive more demand as well.

Fair enough, and maybe just to follow-up. A clarification and a follow-up if I could. Specifically there's been a lot of conflicting data points about whether we're going to see this CapEx pick up in China or whether it's going to broad-based, including the US and other developed markets as well. So maybe if you could provide any color on that. And then for Emeka maybe, could you talk about the different moving pieces of gross margin? And clearly there's been a lot of change in both the Company's mix of products, and you've been working on some initiatives to improve margins, I believe, in some of the acquired businesses as well. So can you talk about what the go forward target gross margin model would be at this point?

So yes, let me comment on the globalization aspect. I think the comments I make on CapEx and what I've heard is it's pretty global. I've heard the US service providers state that between 2013 and over the next few years there's definitely going to have to be more infrastructure deployed. The thing to remember is, the thing we analyze is the penetration rate of high bandwidth infrastructure in China, it's still a very -- relatively low percentage of our ports that from a penetration standpoint, so there's a lot of opportunity to put in more infrastructure to get to the people with the bandwidth connectivity. Whereas in other parts of the world, especially in Europe and North America, that's the penetration rate is higher. So by the comment that I've heard is in general that the CapEx has to be deployed in all regions of the world.

And so with regards to the question on the gross margin, I think what we believe is that our gross margin size is going to fluctuate between 61% and 62%. The key driver as to whether or not it is at the high or the mid or lower points of that range is going to be the mix of revenues, so if we continue to see a lot of revenue growth come in from the high end consumer and the enterprise computing, that will put some pressure on gross margin and vice versa.

Thanks so much.

Rick Schafer, Oppenheimer & Company.

It's Jason Rechel calling in for Rick. Let me extend my congratulations on the nice quarter and outlook as well. Was hoping to start on the consumer protection business, and specifically maybe what you guys are seeing there across different OEMs, and how much of the strength into Q1 is actually driven by your largest customer in that business, Samsung? And how much is some new product launches from historically, your largest North American customer? Thanks.

Yes, I would say the majority is from Asian customers, not just one, several I think, and I think it's really driven by ramp up of new platforms, new phones. We will see, I think, through the year some of the other manufacturers pick up as well, but I think at least for currently the strength in the smartphone market is driven by mostly our Korean customers.

Okay, thanks. And then just on the coms business, can you maybe talk about specifically in 100 gig, how much of the market today is captive versus merchant? So again, and have you guys seen competitively anybody out there yet on the merchant side or do you think you still have a pretty good position in the long haul market? Thanks.

Yes, we think we should have a very strong position in the long haul and ultra long haul segments, and we have the share that we had when we acquired Sierra Monolithics. The only change is when captive suppliers, captive OEMs win more business, so that really hasn't changed. The picture hasn't really changed that much. I think there's a couple of captive guys like Ciena that are doing reasonably well, but I think a majority of the merchant guys are also doing reasonably well, the ones that we have good relationships with, especially outside North America, and so that's helping us to maintain our share.

Okay, thanks guys.

Terence Whalen, Citi.

The first question that I have is regarding the smartphone market. What we've seen in the past years, one, is the top two really dominate growth and that's actually quite to your favor in support of the Protection business. But my question is looking a little bit longer term, as we think about the next two to three years and we see the shift of smartphone growth go to Asia from the developed market, I wanted to understand how you're thinking about the protection business and the opportunity in some of the not Asian smartphones. And I know that the bias is that these smartphones are low end, but what we're increasingly seeing in Asia is actually very high end smartphones both by the China white box and the non-branded. I just want to see what their appetite for better protection solutions was, thanks.

Yes, that's one of the things that has surprised me in general over the years is that when you look at some of the Asian regions when they adopt some of the systems, they go straight to the highest performance. They go straight to the smartphones or high end communication systems. There are some regions of the world, I would say India or some of the South American countries where they may have a market for some low end feature phones. But in general I would say that these growth markets also drive a lot of demand for smartphones and other high end systems, so we're actually quite excited by that. I think it's a good thing for a company like Semtech. Obviously we're not tied to one region. We would like working with customers in all regions of the world and that's a benefit to us I think.

Okay, thanks, Mohan. And then my second question is regarding the comment that you made; you've got good growth opportunity in Gennum for fiscal '14. If we think about the two segments in the [ves] business, video versus enterprise, what are the contextual elements we should be thinking about as we try to determine what a differential in the growth rate of those two businesses? Will it be 5%, 10%, or 20%? And how can we have confidence that the video business in particular will be a growth business in fiscal '14? Thanks.

So the way I look at it, Terence, so we have the -- obviously the enterprise computing business is doing very well. The PON area is doing very well. Generally the data centers, servers, routers, storage networking, the backplane products are doing very well, so I expect that those areas to grow well above the industry rate and be one of our strongest growth areas. On the video side, there's pockets, certainly the video surveillance is doing very, very well and growing very fast. And then the Thunderbolt products, which is more of a consumer product is doing very well. But then there's the general purpose video broadcast product areas, which is the area that has historically been what Gennum would call legacy video business. But what we found is that actually, there is a good opportunity to grow that business, and it won't grow at the rate of some of these other segments, but I think we can grow it. I think we can grow it at least at industry rate and maybe we can do a little bit better.

And then one quick one for Emeka if I could. Emeka, obviously, the success in the acquired businesses has been tremendous. Very high growth but yet high complexity areas. What's the thinking on long-term R&D requirements? Are you going to be able to gain any leverage at R&D, or should we be thinking about the R&D investments growing close to the sales growth rate over the next two to three years? Thanks.

So I think you make a very good point, the acquisitions have gone well, the organic businesses that we have are growing very nicely. But I think we have said this publicly that there are certain areas of our business where we believe that we can do a whole lot better on leverage and the spending that we have in R&D, so as I look at that environment overall, I think our R&D expenses are probably going to continue to grow, but they will not -- the growth rates over there would not be anything closer to how we're growing our top line, so we do believe that we should drive a lot of leverage at the current levels of R&D spending.

Okay, thank you. Congrats and best of luck, thanks.

Cody Acree, WF Investments.

My congratulations. Mohan, if you could go back a bit and talk about the order linearity through the quarter, sounds like everybody is trying to get a handle on whether or not we're starting to finally get some legs underneath this turnaround and [it's not] from an industry standpoint and if I could get your opinion?

Yes, orders have been quite linear. I would say as Emeka mentioned, very strong coming into Q1, and the demand forecast which is probably the most important metric we look at is very strong, as I mentioned in my script. So I think it does, it bodes well for quite a strong year, I think.

And if you go back and look at the different end markets, I guess where are you seeing the most strength? Is it geographically concentrated? Is it one segment versus the other?

Well, from a product standpoint, as I mentioned our Protection products we're seeing strength in smartphones and high end consumer area. In the Gennum business both the enterprise computing space and the video space, the industrial space is showing growth in our Advanced Com area, the infrastructure both mostly in China, but also in other regions showing a lot of strength. And then I mentioned that the LTE base stations, the timing synchronization requirement is driving some nice growth there, opportunity there. So in general I would say it's fairly broad. I wouldn't say it's one region. I would say it's fairly broad. I think the Asian regions are showing a little bit stronger growth, but I would say, in general, I think it's fairly positive across the board.

And Mohan, you believe that you're seeing this from an organic market improvement or do you think that this is more Company specific share gain?

Well, that's hard to judge. I think we obviously are doing very well with both our organic businesses and our acquisitions, but it's really choosing the right markets. I think there are some markets I can point to the PC market, obviously the desktop PC market, the notebook market is not doing very well at all. And so if you're overly exposed to that segment of the market that's going to have an impact on your business. Fortunately for us we're not overly exposed to any area, and so we get the benefit of some of the faster growth markets, and then we don't have the huge impact of some of the markets that aren't doing so well. Equally exposure to customers. If you're overly exposed to one customer and then that customer has a difficult quarter or two, you're going to see the impact of that. I think because of our broader exposure, I think we don't have that issue either.

And then lastly, the Power Management business looks like it's starting to move in the right direction from the design-win activity. Just can you talk about what you're seeing there?

Yes, well we put a new leader in place this year. Last couple of quarters, and we started to get some focus on that business. It's still way off from where we want it to be, but I am confident that with the type of technology we have and the kind of customer access we have now and our importance to the customers with the type of portfolio we have, I think we're going to start to see a change to that business. It's early days. I would give it a couple more quarters, but I think ask me the same question in a Q3 time frame.

Perfect. Thank you guys.

Ian Ing, Lazard Capital.

First question for Mohan on computing, so it was down sequentially in January but a lot of positive commentary for April. So for enterprise computing is -- are these sort of large data center buildouts or some other aspects of deployments and are you exposed there through the Gennum parts going into optics, or timing, et cetera? Thanks.

Yes, on the enterprise computing side it's really the Gennum products. It's a fairly broad range though, we sell into the Fiber-to-the Home, PON datacom side, and then the routers with our backplane products, storage networking servers, so it's fairly broad. But I think in general, we like that market. We see the bottleneck moving into that space now, and a lot of bandwidth bottlenecks emerging in that area, so we really like that opportunity.

So it's general data center computing type of deployments you think?

Yes. Well as you get more bandwidth coming through the pipes or from the core, you really need to have the bottlenecks on the access, the metro, and the access and the data centers have bigger pipes, and you have more of a broader range of pipes to service the requirements. And it varies from network to network, from data center to data center, from region to region, but in general, I would say that the trend is upward and it's doing quite well.

Great, and what's your view on the industrial market? Has it bottomed here organically like some of the other analog tiers? It's a bit hard to see given your Gennum acquisition with the numbers here.

Yes, it is difficult to see. And it's one of the -- it's probably the toughest segment to call, really, because there are some pockets that appear to be doing better. I would say our video business is doing a little bit better. The industrial wireless is starting to pick up and starting to see some momentum there. But then there are other parts of the industrial maybe more the legacy industrial stuff that just isn't doing much at all. So I think there, this is a segment where you just have to look and see which markets within the industrial space are growing. Automotive for example, the new automotive seems to be doing okay I would say, but there are, as I said, some pockets within industrial that are just not doing anything.

And my last question for Gennum, in your prepared comments you talked a lot about video and enterprise. You talked a lot about Thunderbolt. I mean is Thunderbolt a decent growth (inaudible) or is it more in a product cycle pause? Maybe you could talk more about that.

Thunderbolt is doing well for us. I think it's a relatively small market today, but it's been growing nicely. I think the opportunity there is a good one, and so believe we're still the only real provider out there of the active cable CDR technology, so I think it's still pretty promising, actually.

Great, congratulations on the results. Thanks.

Harsh Kumar, Stephens.

Congratulations on a great quarter. Mohan, as you know the industry came off of some inventory pressure in the December quarter. I guess looking out, what gives you comfort that this particular bookings pattern has some legs going out?

Well really just that demand is strong, Harsh. We look at demand, we look at demand for six months, so obviously we put more emphasis on the quarter that we just were in, and we spent a lot of time, we do detailed analysis of that, and as I look at the demand it's very strong, so that gives us confidence. The bookings support that. And then, when you look at where the strength is, it isn't just one area, it's coming from smartphones and Protection, it's coming from our infrastructure in the 40 gig/100 gig side. It's coming from our enterprise computing products, the Gennum products, video is also seems to be doing quite well. It's fairly broad, so that tells me -- and it's not just one region, although Asia is looking a bit stronger. That tells me that it's fairly broad and I have a level of comfort that demand is going to be quite good.

Fair enough. And as a follow-up, if I can ask a question on some financial strategy. In the past, you always -- Semtech has always been a Company that maintained that margin target for 60%. Anything above that would be just to take market share. Now for a couple quarters, you hovered above that number, 61% and change. Should we be thinking of this as the new number or is the strategy still the same?

So Harsh, the strategy is still the same. Our strategy is to continue to make sure we grow the top line, either by taking share or by participating in overall market growth. And I think the gross margins that we're seeing right now, is just a function of the businesses that we have, the applications and the customers that we support. But like I said before, I think in the next 12 months or something I would expect our gross margins to be between 61% and 62%, and the key driver for any fluctuations is going to be the mix of revenue.

Great. Congratulations again guys, thank you.

Steve Smigie, Raymond James.

I'll add my congratulations as well. Just looking at the Wireless and Sensing business, given Cycleo and all of the other stuff you've got going on there, could you see double-digit growth in that business in fiscal '14 or calendar '13?

Yes, Steve. We do see it. The challenge with the industrial segment is the time to revenue. We have good momentum in this business but it's the time it takes to generate revenue that sometimes is tricky. The Cycleo technology is doing very well being adopted. It's getting us a lot of good insight know how customers think, and customers are really appreciating the fact that we're bringing real value to them, but when it gets designed in, it just takes time. So I think it's more of a timing thing than anything else, but yes, this business could grow double digits, yes.

Okay, and then within the 40 and 100, in the past you've given some framework the start of the year around what you think that could potentially grow. Do you guys have an update for calendar '13 on the growth rates for 40 and 100 gig?

Well we've usually been wrong. I'll tell you that this year, total number of ports is going to be in the I think 90,000 to 100,000, actually 100,000 ports for 40 gig, and about 20,000 for 100 gig. That was in our fiscal year 2013. And we expect that increase, the increase to come mostly from 100 gig, so 100 gig is probably going to grow quite very fast, I would say much faster than we had anticipated and probably any market study will anticipate. And 40 gig is probably going to grow less, so you can work it out from there. Now fortunately the 100 gig is where the higher ASPs are and so that for us might be a positive.

Okay, and it seems like we're still sort of -- still in the early stages of this talk of better com infrastructure spending for the second half of the year. If the economy continues to recover, how likely is it or is there that potential that the spending gets accelerated and the numbers could be pretty big all of a sudden. Is that a possibility?

Yes, I think it is. The problem with CapEx statements, when they say they are going to spend between 2013 and 2015, they're going to accelerate CapEx. The problem is that what's driving it is a need. There is a real need for it, and that is because everybody is using smartphones and tablets across the world, and content is more video content for example, there's this need, so there's some urgency for them to deploy, or they are going to find they're going to lose business or they are going to struggle with quality of service. And I think that's something that's on many of these service providers' minds as they think about deploying CapEx, and so I really don't think it's a question of if. I think it's just a question of when.

Okay. And just looking at your cash flow, it looks like let's say you did $100 million of free cash flow. How much of that could be used to pay down debt? Would you use 80% to pay down debt, a little bit for stock buyback, a little bit for CapEx? How should I think about that?

Yes, so Steve, the $100 million is actually the cash flow from operations.

Yes.

And I think probably up to 50% of that could be available to pay down the debt if we choose to.

Okay. All right. Great. Thanks a lot.

Liwen Zhang, Blaylock.

Congratulations as well. I do have some concern about your Protection business, looked at the past fiscal year seems like it was down around 6% or 7%, given the increase in number of ports, so is that because of ASP erosion or some share loss? And also what do you think about your outlook for this product line for this fiscal year?

Yes Liwen, I think I said on previous calls that our Protection business did suffer from a North American customer who really just lost share in the marketplace, and that was a problem for us because we had such a strong position with them. But that kind of reached a trough I think in Q3 of last year, and I think if anything now it's going to be more positive. So but that's the reason why our Protection business essentially declined in FY '13.

Okay, thank you. And also, you mentioned that because due to not one largest customer in North America, but how about your position at Samsung, even though I don't have your Q4 number sales to Samsung, but looking at the first nine months above the sales to Samsung increased by around the 9%, 10% year over year, versus the Samsung total sales increased by around 23%, 22% year over year. So what do you think of your position at Samsung, is that they are very pricing aggressive or they started to using other resources?

Well first thing to remember is Samsung makes many different products, so they do make also in addition to smartphones they make TVs, they make set-top boxes, they make a lot of different products, and we have a pretty good relationship with them and position with them in many different areas. Second thing to remember is it's not just Samsung. We have quite a good position in many of the other smartphone manufactures and tablet manufactures, et cetera. As it pertains to Samsung, yes, we have a pretty good position there, and pricing is always aggressive, it's like any other consumer product. It's no different to high end consumer product in any other region of the world. You have to fight it out and battle it out, but our products are very differentiated products and I think that the, the technology and the capability is really what our customers come to Semtech for. They don't come to Semtech because we give them the lowest price.

Got it. And if I can, my last question would be something regarding the Gennum. Actually you guided Gennum for Q4 is to be up sequentially, and as a result, I think it's down quarter over quarter. How is the integration still ongoing or is this below expectation results due to the manufacturer constraints?

A little bit of everything, actually. I would say that the major reason why we had anticipated actually Q4 Gennum product revenue to be up, and it wasn't, it was that our customers -- actually the demand moved out into Q1, mostly driven by China, actually. But I think that in general, I would say the integration is largely complete. I don't say that it's perfect but it's largely complete. We have a sales team that is selling the whole portfolio of products now, including Gennum products. We have our application support in place to support Gennum products. We have our operations and manufacturing now driving the supply chain, and to the point that you made on supply constraints is one that we had to face that because Gennum historically didn't invest ahead of the demand and we do that at Semtech. So we try to work with our customers in ensuring that we have plenty of capacity to support their demand growth, and that's a change to the strategy. But I think we're in very good shape for this year to be really a very good year for the Gennum business.

Thank you and congratulations again.

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

In closing, fiscal year 2013 was a very strong year for Semtech. We achieved many operational and financial records for the year. During the year we successfully integrated two acquisitions and solidified our leadership positions in several of the industry's fastest growing analog segments. Our focus for the coming year will be to grow the top line and manage our costs as we strive to achieve our long-term operating model of $1 billion in revenue, 60% gross margin, and 30% operating margin. We believe our strategy of diversifying our exposure by product group, end market, geography, and customers enables us to take advantage of multiple long-term trends that will drive growth in our industry for many years to come, and continue to return value to our shareholders. With that, we appreciate 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.