Semtech Corp (SMTC) 2014 Q1 法說會逐字稿

Good afternoon, my name is Rachel, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Q1 FY '14 earnings release 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)

Linda Brewton, Head of Investor Relations, you may begin your conference.

Thank you, Rachel. Welcome to Semtech's fiscal year 2014 first-quarter conference call. I'm Linda Brewton, Senior Manager of Investor Relations, and 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 April 28, 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. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda, and good afternoon, everyone. Q1 of fiscal year 2014 was a strong quarter for Semtech, with net revenues of $162.4 million, coming in at the upper end of our guidance range. This represented growth of 8% from the prior quarter, and growth of 39% from the first quarter of fiscal year 2013. You recall that the first quarter of fiscal year 2013 contained six weeks of revenue from Gennum. All our end markets grew during the quarter, with high-end consumers, enterprise computing and communications being particularly strong. In Q1, sales into Asia represented 73% of revenue. North America represented 15%, and Europe represented 11% of total revenue.

Direct sales represented approximately 61% of total revenues, while distribution made up 39%. Bookings were strong in Q1, resulting in a book-to-bill of greater than 1. [Those] bookings accounted for approximately 47% of shipments during the quarter. Gross margin on a GAAP basis for Q1 was 59.9%, up from 58.4% last quarter. The improvement was driven by lower amortization of the fair value adjustment for acquired inventory, as well as higher volumes. In Q2, we expect GAAP gross margin to expand significantly, as a result of higher revenue and the full amortization of the impact of fair value in Q1.

Operating expenses on a GAAP basis were $77.2 million, compared to $75.5 million in the prior quarter. The increase was attributable to higher payroll-related expenses from increased work hours, and higher payroll taxes, as well as the timing of new product expenses, partially offset by lower integration expenses. In Q2 we expect our operating expenses on a GAAP basis to decline slightly, as the higher variable expenses associated with higher revenue is offset by lower new product expenses and lower intangible amortization. We recorded an expense of $4.9 million in interest and other in Q1, versus an expense of $4.4 million in Q4. The slight increase in this expense was attributable to unfavorable currency movements.

Within the quarter, we refinanced our existing five-year Term A and Term B loans. The new debt structure consists of a Term A loan plus a revolver and accordion, priced at LIBOR plus 1.75%. The new structure offers greater operational flexibility, and carries an interest rate that is substantially lower than the prior debt arrangement. In Q2 we expect to incur approximately $10.7 million in interest and other expense, of which $8.7 million is related to the write-off of capitalized costs associated with the retired loan. In Q1, we recorded a GAAP tax provision of $434,000 versus a tax benefit of $5.1 million in Q4, driven by a less favorable mix of regional income as compared to the prior quarter. For Q2, we expect our GAAP tax rate to be a benefit of approximately 12%, reflecting the tax benefit of the write-off of capitalized interest costs related to our long-term debt. For modeling purposes, for the remainder of the year we expect our GAAP tax rate to be a provision between 1% and 5%.

Our GAAP net income for the quarter was $14.8 million or $0.22 per share on a fully diluted basis, up approximately 13% from Q4. The diluted share count for Q1 was 68.6 million shares. We expect a fully diluted share count of approximately 69 million shares in Q2. 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 61.6%, the same as the prior quarter. Our higher manufacturing volumes offset the negative impact of the higher mix of consumer and computing revenue as compared to the prior quarter. We expect Q2 non-GAAP gross margin in the range of 61% to 61.5%, as higher volumes somewhat offset the less favorable seasonal mix of consumer and computing revenues.

Q1 non-GAAP operating expense was $59.8 million, slightly higher than guidance, due to the timing of new product expenses. In Q2, we expect non-GAAP expenses to be approximately flat, as higher variable expenses associated with higher revenue are offset by lower new product expenses. Non-GAAP net income for Q1 was $31.3 million or $0.46 per diluted share. Our non-GAAP effective tax rate for Q1 was 11.6%, up from a tax benefit of 1.5% in Q4. We expect our non-GAAP tax rate for the remainder of the year to be similar to Q1.

Our cash balance at the end of the quarter was approximately $236.4 million of cash and investments, approximately flat from Q4. During the quarter, we paid approximately $9 million in principal and interest on our term loan. Our priority for use of cash remains paying down our debt. We did not report yesterday's [comp] in the quarter. Out total outstanding authorization is approximately $42.5 million. The Company spent approximately $12.8 million on property, plant and equipment in the quarter. In Q2, we expect to spend approximately $12 million, primarily for manufacturing equipment and IT infrastructure improvements. Depreciation for Q1 was approximately $5.1 million. In Q2, we expect depreciation to be approximately $5.5 million. Accounts receivable grew 16% sequentially in Q1, and our days sales outstanding decreased to 42 days from 43 days in Q4. Net inventory in dollar terms was up 2% to $76.6 million in Q1. On a days basis, net inventory was down 2 days to 106 days in Q1. We expect our Q2 inventory to increase slightly in support of higher demand. Our target range for internal inventory is 90 to 100 days.

In summary, Q1 was a solid quarter for us. We believe we are well on our way to meeting our objectives for the year, which are to grow our revenue faster than the industry, drive non-GAAP operating margin toward the midpoint of our target range of 25% to 30%, generate free cash flow at the lower end of our target range of 20% to 25%, and pay down our debt. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2014 performance by end market and by product group, and then provide our outlook for Q2 of fiscal year 2014. In Q1 of fiscal year 2014, we achieved record net revenues of $162.4 million, an increase of 8% from Q4 of fiscal year 2013, and an increase of 39% from Q1 of fiscal year 2013. For the quarter our non-GAAP gross margin was 61.6%, and our non-GAAP diluted earnings per share was $0.46 per share.

In Q1, revenue from the communications end market increased, and represented approximately 28% of Semtech's total revenue. Revenue from the high-end consumer end market increased from the prior quarter, and represented 31% of total revenue. Approximately 20% of this revenue was attributable to hand-held devices, and approximately 11% was attributable to other consumer systems. Revenue from the industrial end market increased, and represented 25% of total Company revenue. Revenue from the enterprise computing end market also increased from the prior quarter, and represented 16% of revenue.

I will now discuss the performance of each of our product groups. Q1 was a solid quarter for our Protection business, which achieved record revenues, record bookings and record design wins. Protection revenue grew 16% sequentially, to represent 35% of total revenues. All end markets in Protection grew sequentially, with particular strength in the high-end consumer end market, driven by smartphone applications. During the quarter we expanded our RailClamp protection platform with the introduction several new devices, including a new automotive-grade protection device for antenna protection. This device offers 15-volt single-line bidirectional ESD protection in an ultra-small package, which provides customers with design layout flexibility. We also unveiled a RailClamp protection array for protecting leading-edge ethernet [by] interfaces.

We believe our protection business will continue to grow, driven by proliferation of ports on electronic devices, and the increasing performance requirements of those ports. Furthermore, the ongoing transition of advanced processes to next-generation lithography nodes makes them much more vulnerable to electrostatic discharge events. As an industry leader in high-performance protection platforms, Semtech continues to be positioned very well to benefit from these industry trends. In Q2, we expect our protection business to grow nicely, driven primarily by the high-end consumer market.

Moving on to our Gennum product group. In Q1 revenue grew 9%, to represent 25% of total revenues. In Q1, our Gennum product group also achieved record product revenues, record bookings and record design wins. Strength was primarily in the enterprise computing end market, driven by physical media devices and CDR products for data center, storage and backhaul applications. Demand for our 1-gig, 2.5-gig, 10-gig and 25-gig PMD devices continues to increase, and our 10-gig backplane and 25-gig CDR platforms continue to do well in cloud computing-based routers and servers. In addition, China mobile deployments of PON and LTE backhaul pipes are also driving an increase in the demand for our Gennum products.

We also saw strength in the industrial end market, driven by video surveillance and video broadcast platforms. During the quarter, we highlighted our 6G ultra-high definition platforms at the National Association of Broadcasters Show in Las Vegas. These platforms enable the industry to transport higher resolution formats, including both ultra-high-definition TV and 4K Digital Cinema formats at twice the density and half the power than competing solutions, at a substantially lower cost and with outstanding performance. The first applications emerging that are driving the higher video bandwidth trends include 3D TV, 4K Digital Cinema TVs, ultra-high-definition projectors and cameras, and proprietary high-definition video links in video routers and switches. As an industry leader in high-performance video broadcast platforms, Semtech continues to be well-positioned to benefit from these high-definition video trends. We're also seeing an acceleration in our high-definition CCTV video surveillance business, due to the increasing global deployment of HD CCTV security cameras.

In Q1, we exited the video optical module business. This product line was not strategic to Gennum's core business, and the divestiture enables us to focus resources on our core analog platforms. There is no material financial impact from the exit. Gennum is now a completely integrated product group within Semtech. In Q2 we expect that Gennum Product Group revenue to grow nicely, and achieve another record product revenue quarter.

Turning to our Advanced Communications Product group, revenue in Q1 increased 9% sequentially and represented 23% of total revenue. The increase was driven primarily lead by strength in 100-gigabit per second products and timing synchronization platforms. The 100-gigabit per second long-haul market is growing rapidly, and the economics of the 100-gigabit per second fiber deployments are starting to become attractive to service providers. We expect the demand for our 100-gig long-haul products to remain strong for the rest of the year, offsetting some weakness in 40-gigabit per second demand. By region, we expect China and North America to continue to invest in high-bandwidth infrastructure to support the increasing usage of smartphones and other mobile devices, while Europe and emerging geographies are expected to follow more slowly.

In addition to our high-bandwidth SerDes products, we sampled our first PLL product in a new family of low-jitter, high-performance frequency synthesizer timing platforms, which are currently in development. These new platforms open up a new $150 million SAM for Semtech. These new PLL products complement Semtech's timing synchronization platforms, and are targeted at wireless base stations and high-end telecommunications infrastructure. We believe these new low-jitter PLLs are amongst the smallest, most flexible, and highly-integrated timing products in the industry. We expect to see modest revenue in FY '14 from the initial products, and then accelerating revenue in FY '15 as we introduce more highly differentiated timing platforms in the latter part of FY '14.

In addition to our new PLL platforms, our timing synchronization platform momentum continues to do well, as LTE wireless base stations, aggregation boxes, and carrier-grade small cell boxes increasingly rely on timing synchronization to operate effectively in LTE networks. In Q1, we experienced solid design win traction for our timing products, and achieved our first design wins in the enterprise class small cells. As an industry leader in high-performance SerDes and timing synchronization platforms, Semtech continues to be positioned well to benefit from the increasing bandwidth trend in the industry today. In Q2, we expect revenue from our Advanced Communication business to be flat to slightly down in Q1, due to seasonality.

Moving on to our Power Management and High Reliability product group, in Q1 revenue for the group decreased sequentially by 8%, and represented 9% of revenues. The decrease was driven primarily by lower demand from consumer applications, due to seasonality. In Q1, we continue to see design win momentum for our power management and high reliability solutions. During the quarter we expanded our automotive-qualified suite of power management products, with the introduction of a high-brightness LED driver for infotainment and navigation display back-lighting. We believe the automotive market offers significant growth potential for us, driven by the convergence of computing and infotainment applications in vehicles, and we are continuing to build our suite of AEC-Q100 qualified -- automotive qualified power platforms to meet this demand. Our power management and high rel business is in transition, with new developments in the pipeline emerging throughout the rest of FY '14. We anticipate that these new platforms will start to drive growth in our power and high rel business, and drive a greater contribution to the overall Semtech business. In Q2, we expect our Power Management and High reliability business revenue to be flat to slightly down from Q1, due to weaker industrial and computing sales.

Next, we will turn to the Wireless and Sensing business. In Q1, revenue for Wireless and Sensing decline 10% sequentially, to represent 8% of total revenues. The decline was driven primarily by softness in the industrial end market. In Q1 we posted a record number of design wins for the Wireless and Sensing business, driven by industrial and high-end consumer applications. On the industrial side, we saw design-in momentum from smart lighting, home security, automated metering, and remote keyless entry platforms. In consumer, we garnered key design wins for our touch platforms, and set-top box LCD television and tablet applications. We are very optimistic with the potential of both our new wireless and our new touch sensing platforms, which are both in the very early stages of design, into two very exciting future growth markets. The growth in these markets will be driven by the need for longer-range low-power wireless connectivity, and very low-power, feature-rich, smart sensing. In Q2, we expect sales for our wireless and sensing product group to be flat to slightly up, driven by medical applications.

In Q1, we saw distribution POS increase sequentially by approximately 19%, to achieve a record quarterly POS. Distributor inventory decreased 6 days, from 69 days in Q4 to 63 days in Q1, and is well below our target model of 70 to 80 days. Our distributor business, much like the overall Semtech business, is very well balanced, with 48% of the total POS coming from consumer and computing end markets, and 52% of total POS coming from industrial and communications end markets. Moving onto new products and design wins, in Q1 we released 18 new products, and achieved a record 1,895 new design wins. Semtech's focus on the key trends driving growth for analog semiconductors, along with our breadth of analog product offerings into multiple end markets, positions us well to benefit from growth in our industry. We expect to see a continuation of the strong design win momentum in Q2.

Now let me discuss our outlook for the next quarter. Based on recent bookings trends and our backlog entering the quarter, we are currently estimating Q2 net revenue to be between $164 million and $172 million. To attain the midpoint of our guidance range, or approximately $168 million, we needed net [terms] orders of approximately 39% at the beginning of Q2. We expect our Q2 GAAP earnings to be between $0.21 and $0.29 per diluted share, and non-GAAP earnings to be between $0.50 and $0.56 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)

Steve Smigie from Raymond James.

Great, thanks a lot. Congratulations on the nice numbers here. As I look at the 100-gig and 40-gig businesses, can you talk a little bit about seasonality here? It's going to be down a little bit in the coming quarter, but would I expect that then on a seasonal basis to re-accelerate into the back half of the year?

Yes, Steve, I think so. It tends to be -- as we looked at our data, Q1 and Q3 tend to be a little bit stronger. As you know, it does tend to be lumpy and it's hard to predict. It's much driven by the CapEx deployments, and when the -- at least for us, when the OEMs require the product, for the deployments to occur. But that is currently what we are anticipating, that Q3 will be a little bit stronger, and that's the thinking at the moment. Often -- much depends on the service providers themselves. What we have seen with the 100-gig side -- on the 100-gig side is that the mobile -- the wireless service providers are deploying little bit earlier than the fixed line communications guys, but we expect that to change in the second half.

Okay. And then on the rollout of the KMD PON products for China Mobile, can you talk a little bit about how that is taking place here? I know there were [potential] tenders that are supposed to be out around March. Did that happen, and maybe you started to see the deployments pick up?

You are talking about the China Mobile deployments?

Yes, correct.

Yes, so I think that is occurring now. I think part of the strength we are seeing is because of the deployments in China related to China Mobile, and we see the benefit on both sides actually, both on the core side -- infrastructure side on the line side, and then also on the client side, as we see more access deployments and PON deployments and wireless back-order deployments.

Okay. Last question, if I can sneak one in, it is just on the Gennum business, I was hoping you could give a little bit more color on the success you are seeing there with the clock and data recovery products in the data center. Is it one category there that's getting more traction than others? For example, is it more storage versus servers, or where are you guys getting the traction and how do you explain that?

Yes, it's actually -- it's fairly broad, Steve, which is one of the nice things about the Gennum business. It's not one specific area. We sell a number of different types of products, and it covers -- in different segments. But the strength is mostly driven by the bottleneck moving into the access and to the enterprise, and so we see strength in routers, backplanes that need more high-bandwidth, the PON side, and then the storage side. So I would say it's a range of different application areas, and a range of different products as well, and Gennum just has a very broad range of products. And the higher bandwidth products are obviously starting to get a little bit more traction, and then the lower bandwidth products are starting to tail off a little bit.

Okay, great, thanks a lot.

Craig Ellis, B Riley & Company.

Yes, thanks for taking the question, and nice job on the quarter, guys. Just following up on the Gennum question there, as you look at the growth in the second quarter in Gennum, can you walk us through some of the gives and takes? Is it across-the-board or are there particular parts of the Gennum business that will be particularly strong, and can you give us an update on the Thunderbolt business within that product?

So let me start on that. The consumer area for Gennum was not strong, so the Thunderbolt was relatively weak. But the other areas of the business, both the industrial, which includes the video broadcast and the video surveillance, were quite strong, and then certainly the enterprise computing elements were strong. I would say that the strength mostly is in the PMD devices and the CDR products, which as I just mentioned go into the cloud service storage PON -- you know, fiber-to-the-home kind of applications, and then the video side of it, both the surveillance and broadcast, is doing quite well.

And then as a follow-up to that Mohan, over on the protection side you are getting very good growth there. Can you just help us understand the mix of the protection business now? You've talked about for a number of quarters very good design win activity away from mobile. Help us understand how big the non-mobile business is, and is that primarily consumer now? Is it industrial? How does that part of the business shake out, and what are the growth characteristics of that business relative to the core mobile part of protection?

Actually, yes, the protection business in general has done very well, and I think part of the reason for the growth is the trends are not just only applicable to the smartphone business. Obviously, we're doing very well in that segment of the business, but the same issues of more ports, higher bandwidth, advanced topographies, when you're shipping products into higher humidity regions, the lower voltages, all of those type of issues are also -- are the same issues that you have in communications infrastructure equipment, as you have in computing equipment, as you have in industrial equipment. Now it just so happens that the small form factor element product -- systems like smartphones, it's an even bigger challenge, and that's why we tend to do well there, very well there. But I would say the growth in communications and the growth in the computing is also doing quite well.

Okay, and then lastly, Emeka, I missed the comments on interest expense. Can you just go through how we should be thinking about the interest expense from here?

So if you look at the guidance for this quarter, if you remove the $8.7 million that we are going to write off for the loan debt we retired, we would expect interest expense for this quarter to run in the neighborhood of $2 million. I think that should be the run rate in the next few quarters, about $2 million a quarter.

Okay, thanks guys.

Rick Schafer, Oppenheimer.

Hey thanks, and I will add my congratulations, you guys. Just a quick follow-up on the SerDes. It kind of like 40G orders are tailing off, are starting to tail off little bit, just as 100-gig is really starting to ramp. I guess the question is, do you expect this to be a sustained kind of trend going forward? And if you blend those two pieces or those two parts, 40 to 100G, if you blend that, is this still roughly a 20%-type growth market, you think, for the next couple of years, or for the foreseeable?

Yes, I think in terms of unit shipments, probably so, that is true, Rick. I think the question really is, you know, 100-gig ASPs for us are higher, so there is a benefit to the 100-gig products versus the 40-gig from an ASP standpoint, but the volumes are relatively low. So now the question is, how fast 100-gig ramps up. And 40-gig, there are some regions of the world, like China, where they deployments have occurred more in 40-gig than in 100-gig, and therefore it's more expansion and how much they expand those 40 gig ports versus other regions of the world, which may not have any 40-gig and just decide to go straight to 100-gig. So there's a little bit of blocking and tackling there, depending on how we -- how that shapes up. But I think in general, what we're seeing is the 100-gig is starting to accelerate across-the-board, and where the -- because of the economics, as I mentioned in the call, seemed to be now in favor of 100-gig, I think that's going to just be the predominant application which is deployed.

So at least in revenue terms, it could be bigger than 40G sometime this quarter or next quarter? Sometime soon?

I would say probably in the second half of the year, yes.

And then, Mohan, just a follow-up to that, too, it sounds like you think -- I'm just curious on the competitive landscape. Is it changing at all? Should we be blaming part of the 40G slowdown on the fact that maybe you're seeing more broad come out there? I don't know -- maybe you could just update us on -- a lot of guys talking about 40G and 100G. I mean, what is real? Who do you really see out --?

Yes, again, everything on the advanced com business is really the line side area. I'm not talking about 100-gig deployments in the data centre space so much, but it is really on the line side. And really the competitive landscape hasn't changed that much, it's mostly captive internal developments that are our biggest competitor. We don't have -- for example if I look at [Ciena], Ciena has their own development program, they have their own platform for both -- for 40-gig and 100-gig, and they don't use off-the-shelf components. So if they expand their footprint in the marketplace, then we lose share to that business. On the client side, on the other side of it, we really play with the Gennum products, and I think that's a much better strategy for us. It's always the reason -- it's the reason why we acquired Gennum, and I think that the momentum that one gets in the marketplace, so the 100-gig expanding, is going to be very much seen in our Gennum business.

And this 100-gig, it's got to be tougher to do than 40, right? I would assume -- does that open the door some of these active accounts or potential accounts?

We think so. As I think as the 100-gig coherent architectures change, we think that some of them are going to have to think about how they continue to make money, and how they continue to stay ahead of the game. And we think that is our opportunity to -- as we bring on new architectures in the 100-gig coherent space, which are off-the-shelf components, it allows those captive guys who have not had the same type of R&D investments going in to stay ahead of the game, and so that really would be our hope as well.

Okay. Then one quick question on wireless, I know you mentioned hand-held obviously very strong, expected to be strong again. I'm curious with so much strength in the first half, and obviously your largest customer, you are pretty levered to Samsung, it doesn't sound like you have seen any slowdown in that business yet post-launch, but with such a strong first half, how do you look at the balance of the year? Do you think that slows down in the second half a little bit? Or are other names like BlackBerry or some of your other customers there to maybe surprise you on the upside, or pick up some of that slack in the second half?

So in total, we think that the smartphone business will continue to do very well in the second half. I would say that what we saw with Samsung, specifically, is that the demand was very strong, and then somewhat tailed off a little bit, but it is still quite strong. So I think that expectations for this year were very high, and now they are still high (laughter), so I think its going to be okay.

Great, thanks guys.

Harsh Kumar, Stephens.

Hey guys, a couple of questions. Mohan, I am trying to understand your commentary around seasonality in the optical space. It wouldn't seem really intuitive for me to think that in the middle of an upgrade cycle you would see seasonality. Maybe you could give us some color around that?

We have looked at our historical trends, and Q1 and Q3 tend to be stronger quarters than Q2 to Q4. Now there's a lot of factors that go into that, and really the main thing that drives the business is the CapEx deployments, right, and so -- and when we see those orders from our OEMs, so it's very much driven by the service provider deployments. But I think in general I would just say that Q1 and Q3 tend to be our stronger quarters.

Great, that is helpful. And then I was wondering if you could give us some scope of the total market on the optical side that Gennum plays, just in $1 millions, or $100 millions, and how you see that part of the market perhaps growing? What kind of CAGR should we think about over the next couple of years?

Well, Gennum, when we look at the Gennum business we think it is roughly -- the total market opportunity, this includes -- I include the -- all of their optical products but also their video products. It's about $500 million, and we think we have about 30% share of that marketplace, and it's growing in double digits, double-digit growth. So if you break it out, you take out the video piece of it, which is the slowest growth piece of it, I think the rest of it is the fastest-growing, and that is anticipating to grow about 15% to 20%.

Great, great. And last question, Mohan, if I was still -- I know you said that you will take a little bit of a breather on the optical side, but I was wondering, if you look at your orders, and let's say you stripped out the 100-gig and the 40-gig optical side, but you stripped out, let's say Gennum, I'm trying to get to how are the end markets -- does the normal end market such as consumer and some of the other ones you play in, how are they acting from an order standpoint?

Well, consumer is strong, driven by smartphones. Industrial, I think, is probably the weakest at the moment. If I take out the video -- the video is doing quite well, but if you take out video, I think industrial is probably the weakest segment. Consumer is strong, driven by smartphones and hand-helds. Communications, obviously, is driven by 100-gig synchronization products, and also our protection products in communications is growing nicely. And enterprise computing, which is really all the cloud computing and the access spaces, is growing very nicely, mostly driven by our Gennum products.

Great, thanks Mohan.

James Schneider, Goldman Sachs.

Hi, good afternoon, thanks for taking the question. This is Gabriela Borges on behalf of Jim. I was looking to follow-up on the commentary that you mentioned on distributed POS and inventory. Could you talk a little bit more about trends in distribution, and what you're hearing from distributors in terms of their willingness to restock? Thanks.

POS for us, obviously, was a record POS, and channel inventory is low, so we see plenty of willingness to restock. I think the question -- and as we are going into our -- we historically see as the two strongest quarters in the year, I don't think there's any problem there at all. It really is driven by end demand, and then that's quite still -- as I said, is looking pretty robust.

That's helpful, thanks. And then as a follow-up, if I could, I just wanted to get some more color on how to think about growth in the wireless and sensing business as we go through the year. What are the growth drivers that you would highlight there post -- you know, give the guidance for -- that's means to be flat to up slightly?

Yes, the wireless and sensing is one of the businesses that has a lot of new growth drivers within it. We just haven't seen it materialize yet. A lot of good application areas, obviously focused on the smart metering side, that tends -- industrial seems a little bit soft at the moment. The whole smart lighting, industrial security, home automation, all those areas are, I would say, so-so. Medical is doing a little bit better for us. And then we have, as I have mentioned on the call, two specific areas. One is long-range ultra-low-power wireless, which we believe is really nice technology, and starting to get a lot of momentum. Time to revenue is little bit longer, so I'm not sure it's going to impact the next quarter or two, but certainly here in the longer-term it's going to have an impact. And then finally on the touch sensing side, as I mentioned, we have got some good design wins in consumer applications, and so those could generate upside in the second half of the year for us.

That is very helpful, thanks for the color.

Ian Ing, Lazard.

Hi there, this is Tyler Radke calling in for Ian. Just wanted to touch on your comments on the OpEx here. I think you guys said it was higher, due to some new product expenses. So just trying to understand what the specific product was, and then just how we should think about the OpEx going forward? I mean, it is guided roughly flat. Is this the new run rate, or how should we think about OpEx in the second half of the year relative to historical seasonality?

So Tyler, with regard to OpEx during the quarter, for the most part it came in pretty much the way we thought, with the exception of the fact that we do have a very close working relationship with our customers, and there are times when we develop new products, and we worked very closely with them, and in some cases they actually formed the development. So typically, the funding and the spending is usually aligned, and so we don't really an issue [with it]. The issue we had in Q1, it was a little bit out of alignment where we spent money without getting the funding, and we do expect to get our funding in Q2. In terms of the run rate going forward, I think what we have always said is that we do expect the OpEx to pretty much be in line with the topline growth, where OpEx will probably be at about half the rate for further new growth, so that has not really changed at all. The reason that the Q2 OpEx has been guided flat to Q1 is that we do expect to receive that funding in Q2, then obviously that would be offset by the [degradable] expenses that would be associated with the higher revenues in Q2.

Okay, that is helpful. And then just sticking on the seasonality question, how should we think about -- I know that you guys don't give guidance beyond July, but what are your thoughts just relative to historical seasonality and whether this year is similar or not, if you consider all the Gennum business and protection and exposure to those OEMs? Yes, I think -- I don't expect it to be too much different. I think the challenge is computing -- if you take the computing segment, I think PCs, which are desktops and notebooks, which traditionally have been a strong addition to the reason for the driver and growth in the second half, is going to be softer. So consumer I still think will be relatively strong, as it normally is in Q3 and in early parts of Q4, and I think com will be okay in Q3. Also, is it is difficult to say what industrial's going to do, and difficult to say what enterprise computing is going to do at this point.

Okay, and then just quickly moving to the Gennum business, what -- you talked about your CDR products and [strong fraction] and data center storage and backhaul applications. Just trying to understand, are these mainly large-scale data deployments maybe by the large OEMs? Are you seeing real demand with the smaller end customers?

Both, really. Obviously, all the big-name guys, building service, and big boxes and big routers. We have good traction with the majority of the Tier 1 OEMs in the different segments here. But also there is a range of different smaller guys in Asia and across the globe, actually.

Okay. Then last question, you talked about enterprise small sales having some timing exposure. Is there a particular geography that you are seeing the strongest adoption, or is it just a broader focus?

I would say, it's anywhere where LTE is being deployed now. And so China, we are seeing some demand there. I would say there is some demand in Europe. Most of those two regions.

Okay, thank you.

(Operator Instructions)

Terence Whalen, Citigroup.

Hi, thanks for taking the question. This one relates to monthly order linearity. I was wondering what your expectation was looking into July? Specifically around the month of July, given that it a slower summer month in Europe, what is your expectation for order trends month-by-month through the quarter? Thanks.

Historically, Terence, we have looked at this, June and July are very strong -- typically very strong booking periods for us. So, as you know, Q2 and Q3 tend to be quite strong quarters in the consumer space, and typically -- historically in the computing space, and as I mentioned some of the com stuff as well. So our expectation is July will be strong. It's typical, obviously, now to look out and say exactly what it going to look like, but that's the expectation.

Okay, terrific. And then the second question I had was a follow-up regarding the comment around distributor point-of-sale growing 19% sequentially. Is it, in your judgment, that point-of-sale is currently at, or below or above, consumption rate? Just because it seems like that largest sequential change is probably a little asynchronous with the changes in demand. Just wanted to get your view on where that run rate was, in your view, relative to consumption? Thanks.

I think it's at least the level of consumption, Terence, and the reason I say that is that demand is strong. So as we look at shipments out of the channel -- and remember, we're fairly balanced. Our channel is also very balanced. It's not one -- we're not overly exposed to one segment of the market or one customer, so as we look across-the-board and we see that strength, it's actually quite encouraging. And you always tie it -- also you take a look at channel inventory, which is relatively low, and then you also look at demand, which is quite strong, and I think -- so that bodes well. Now obviously we -- this is the first half. We have to see what happens in the second half, but at the moment things are positive.

And then one last one, if I could, regarding power management. I think you said, Mohan, in the past that power management could be at a point where it could see an inflection and start to grow, and actually offer fairly attractive levels of growth going forward. It seems like we haven't seen that yet. What is required? You said the industrial market is what's weighing that outlook down. What is required really to get power management revenue to start accelerating again? Thanks.

Yes, the main thing is new products. We have a lot of products -- new products in the pipeline that, as I mentioned, will come over the next couple -- few quarters here, and I think we will start to see a little bit of momentum there. But that's basically it. We've had not a great execution on this business over the last few years in terms of new products, and I think that's going to change. As I mentioned last year, we brought in a new general manager, or we put our General Manager who manages our protection business to run our power management business also, and he has already made the right changes here. So I think we will start to see an acceleration of the new products come out, and then I trust that our channel and our sales organization and our -- with our customer relationships, will get the momentum.

Okay, thanks, best of luck.

There are no further questions at this time. I will turn the call back to our presenters.

Thank you. In summary, Q1 fiscal year 2014 was another record quarter for Semtech, and set the stage for what we believe will be another record year. In Q1, we posted record revenue, record gross profit dollars, and record design wins. Our strong design wins, coupled with a strong demand forecast, are positive indicators of continued traction with our customers, and steady improvement in the overall macroeconomic environment. Barring any external factors that may impact the overall economy or our industry, we are confident that our leading position in the key markets where we compete, our balanced portfolio of highly differentiated products, and our long-standing partnerships with diverse customers, will enable us to continue moving towards our goal of $1 billion in revenue. With that, we thank you for your continued support of Semtech, and look forward to updating you all next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.