Semtech Corp (SMTC) 2014 Q2 法說會逐字稿

Good afternoon. My name is Leda and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q2 FY '14 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the presenters' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Sandy Harrison, Director of Investor Relations, you may begin your conference now

Thank you, Leda, and welcome to Semtech's fiscal year 2014 second-quarter conference call. I am Sandy Harrison, Director of Investor Relations and Business Development. 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 July 28, 2013 was issued after the market close 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 in the Citi 2013 Global Technology Conference on September 3, at 11.15 AM 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, Sandy. Good afternoon, everyone.

Q2 of fiscal year 2014 was a solid quarter for Semtech, with record net revenues of $165 million. This represented growth of 2% from the prior quarter, and growth of 9% from the second quarter of fiscal year 2013. Q2 revenue included approximately $2.4 million from IP licensing revenue, which is higher than our typical quarterly run rate for IP revenue and is not expected to be reoccur. In Q2, sales into Asia represented 72% of revenue; North America was 17%; and Europe represented 11% of total revenue. Direct sales made up approximately 56% of total revenues, while distribution was 44%.

Bookings were soft in Q2, resulting in a book-to-bill of less than 1. [Those] bookings accounted for approximately 45.2% of shipments during the quarter. Gross margin on a GAAP basis for Q2 was a record 61%, up from 59.9% last quarter. The improvement was driven by higher volumes, the IP revenue, and the full amortization of the fair value adjustments for acquired inventory. These benefits were offset by a higher mix of lower margin products. In Q3, we expect GAAP gross margins to decline to a range between 58.7% and 59.7%, as a result of [all probable] product mix, lower IP revenue, and lower volume.

[Op] revenue expenses on a GAAP basis were $76.2 million compared to $77.2 million in the prior quarter. The decrease was attributable to lower stock compensation expense, lower acquisition and integration expenses; somewhat offset by higher amortization of capitalized intangibles. In Q3, we expect our operating expenses on a GAAP basis to decline 8% to 10%, driven by actions we've taken in response to the softer revenue outlook. These actions, in addition to lower favorable expenses associated with lower revenue, include encouraging employees to take time off, anticipating a lower payout on our annual bonus programs, and slowing down the rate of new hires. However, we intend to maintain our strategic investments in new product platforms.

We recorded an expense of $10.8 million in interest and other in Q2 versus an expense of $4.9 million in Q1. The increase in this expense was attributable to the $8.8 million of write-off of capitalized expenses associated with the recent restructuring of our debt. In Q3, we expect to incur approximately $2 million in interest and other expenses.

In Q2, we recorded a GAAP tax benefit of $5.4 million. There was a tax provision of $434,000 in the prior quarter. The tax benefit was the result of a discrete benefit associated with the write-off of capitalized interest expenses related to our long-term debt, as well as a more favorable regional mix of income. For modeling purposes, for the remainder of the year, we expect our GAAP tax rate to be a benefit between 2% and 3%.

The diluted share count for Q2 was 69.1 million shares. We expect a fully diluted share count of approximately 69 million shares in Q3. On a non-GAAP basis, excluding the impact of [favorable] compensation, amortization of acquired intangible, acquisition-related expenses, and other one-time expenses, gross margin was 61.3%. We expect Q3 non-GAAP gross margin in the range of 59% to 60%, driven by a less favorable product mix with lower [communications] and industrial revenue and lower volumes. Q2 non-GAAP operating expense was $59.8 million, approximately flat from last quarter. We expect non-GAAP operating expenses in Q3 to decline by 6% to 10% due to the actions outlined earlier in my remarks.

Our non-GAAP effective tax rate for Q2 was 8.9%, down from [11.6%] in Q1. We expect our non-GAAP tax rate for the remainder of the year to be between 9% and 11%. Our free cash flow grew 345% in the quarter and represented 17% of revenue. Our cash and investment balance at the end of the quarter was approximately $242 million, up 2% from Q1, despite making an accelerated payment of $26 million on our debt. During the quarter, we refinanced our long-term debt with a new credit agreement with more flexible financing structure and a significantly lower interest rate. Our current debt balance is $302 million. Our priority for the use of cash remains paying down our debt.

In Q2, we did not repurchase any stock. Our Board of Directors has authorized a $50 million increase in the stock repurchase program to a total of $92.5 million. The Company spent approximately $9 million on property, plant, and equipment in the quarter. In Q3, we expect to spend approximately $10 million, primarily for manufacturing and new product development equipment.

Depreciation for Q2 was approximately $5.4 million. In Q3, we expect depreciation to be approximately $5.8 million. Accounts Receivable was flat from Q1, and our days of sales outstanding increased to 44 days in Q2 from 42 days in Q1. Net inventory in dollar terms was up 2% in Q2. On a days basis, net inventory was up 5 days to 110 in Q2. We expect our Q3 inventory to decrease due to lower demand. Our target range for internal inventory is 90 to 100 days.

In summary, while Q2 was a good quarter for Semtech on a number of fronts, our near-term outlook is clearly disappointing to us. Accordingly, we have taken steps to minimize the earnings impact of the softer revenue outlook. We remain committed to our stated operating targets. Finally, we are focused on deploying our resources efficiently and we will continue to use the appropriate opportunities to pare down our debt and repurchase our stock.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone.

I will discuss our Q2 fiscal year 2014 performance by end market and by product group and then provide our outlook for Q3 of fiscal year 2014. In Q2 of fiscal year 2014, we achieved record net revenues of $165 million, an increase of 2% from Q1 of fiscal year 2014 and an increase of 9% from Q2 of fiscal year 2013. For the quarter, our non-GAAP gross margin was 61.3%, and our non-GAAP diluted earnings per share was $0.52 per share.

In Q2, revenue from the communications end market increased and represented approximately 29% of Semtech's total revenue. Revenue from the high-end consumer end market decreased from the prior quarter, and represented 27% of total revenues. Approximately 17% of this revenue was attributable to hand-held devices, and approximately 10% was attributable to other consumer systems. Revenue from the industrial end market increased and represented 25% of total Company revenues. Revenue from the enterprise computing end market increased from the prior quarter and represented 19% of Company revenues.

I will now discuss the performance of each of our product groups. Q2 was a challenging quarter for our Protection business. In Q2, our Protection business declined 6% sequentially. Several of our largest smartphone customers experienced softer demand than had been anticipated previously. And our Protection business demand reduced significantly towards the end of the quarter. We believe that strong demand and shipments into the smartphone market in both Q4 of fiscal year '13 and Q1 of fiscal year '14 were driven by anticipation of the success of some new smartphone releases, which did not materialize, resulting in a significant demand reduction. The softness in the high-end consumer end market was partially offset by growth in the computing and communications end markets. On a year-over-year basis, our Protection business was up 10% and at the end of Q2, Protection revenues represented 33% of total Semtech revenues.

In Q2, we saw strong design win activity for our Protection products and, during the quarter, we expanded our Protection offerings with new products targeted at the high-speed serial interfaces for mobile applications. Our latest RailClamp product was a low capacitance device designed for high-speed interfaces, including HDMI 1.3 and 1.4, USB, and eSATA interfaces. This device enables designers to replace multiple single-line devices in space-constrained applications with a compact device that protects high-speed interfaces up to 17kV without sacrificing signal integrity. In addition, the latest product in our [Z platform] is an ultra-small, single-line bidirectional protection device, ideally suited for near-field communication lines and FM antennas in smartphones and notebooks. This latest device has a fast response time and ultra-low capacitance.

In Q3, we expect our Protection business to be down significantly, driven by softness in the smartphone market, as key customers continue to bleed off inventory. These customers are releasing new smartphones in the second half that are expected to stimulate new demand, but the timing of this new demand is unclear. Despite this temporary downturn in our Protection business, our long-term thesis for the Protection business remains intact. As manufacturers continue to make electronic devices smaller and more mobile, the number of ports on those devices that require Protection is increasing. The ever-increasing performance demand for these ports and smaller geometries make them much more susceptible to catastrophic ESD events. As the industry leader in high-performance protection platforms, Semtech continues to be positioned very well to benefit from these industry trends.

Moving on to our Gennum Product Group. In Q2, revenue grew 18% to achieve another record revenue quarter for Gennum, driven by strong sequential growth in our enterprise computing, communications, and industrial end markets; and approximately $2.4 million of IP revenue, from our Snowbush Group. We are delighted with the progress of our Gennum Products Group, as most Gennum platforms are gaining momentum in the market. In Q2, we saw strength from our PMD platforms in data center applications, PON applications, and wireless backhaul applications. In addition, our 100 Gig CDR platforms continue to lead the CFP2 optical module space in both the enterprise computing and the communications access segments, where low power and high performance are critical requirements.

On the video side, our high definition surveillance business had a strong Q2 and we anticipate that this business will continue to do well, as the demand for high-definition video surveillance over long distances in HD-CCTV-enabled networks increases. Design infraction of our new ultra-high-definition 6G platforms is also very promising and we expect this to continue as more systems emerge with ultra-high-definition interfaces. Q2 was also a strong quarter for our Gennum Product Group in terms of design wins. In Q3, we expect our Gennum Product Group revenue to decrease due to seasonal softness in industrial applications and delays in China infrastructure orders, which appear to be delayed until later this year. In addition, we are not anticipating the benefit of any IP revenue this quarter.

Turning to our Advanced Communications Product Group, revenue in Q2 increased 1% sequentially and represented 23% of total revenues. The increase was driven primarily by continued ramping of our 100 Gig business, partially offset by lower demand for mature 40 Gig platforms. Q2 was a record design-win quarter for our Advanced Communications Product Group, driven by strength in our 100 Gig platforms. We also saw solid traction from our timing synchronization business. During the quarter, we expanded our TopSync timing platform with an advanced synchronization platform targeted at the emerging 4G LTE small cell markets. Semtech's new synchronization platform uniquely addresses the industry's increasing demand for synchronization accuracy. In Q2, we also introduced a new low phase noise clock synthesizer, which complements our synchronization platforms. This ultra-small device enables frequency selection better than one part per billion on a low phase noise platform with typical RMS jitter below 500 femtoseconds. For Q3, we expect revenue to decline, as CapEx spending across several regions is being delayed. We remain confident we are well-positioned with the key OEMs and optimistic we should see upside in this area once the new build-outs actually begin.

Moving to on our Power Management and High Reliability Product Group. In Q2, revenue for the group decreased sequentially by 11% and represented 8% of revenues. The decrease was driven primarily by lower demand from the industrial end market, offset slightly by growth in the communications market. Our Power Management and High Reliability business has been in transition for the last 12 months and we expect to see many new product platforms released over the next 12 months, which we believe will drive growth in this business for the next few years. The release of these new platforms and their acceptance in the market will mark the beginning of a turnaround in this business. In Q3, we expect our Power Management and High Reliability revenue to grow, driven by the industrial end market.

Next, we'll turn to the Wireless and Sensing business. In Q2, revenue for our Wireless and Sensing business increased 2% sequentially, to represent 8% of total Semtech revenues. The increase was driven primarily by growth in our consumer analog business, partially offset by softer industrial sales. Our Wireless and Sensing business is starting to see real design win momentum, in both the wireless and the sensing segments, and we expect to see material revenue increases from new platforms starting early next year. During the quarter, we introduced the SX1272, which is the first product in a new long-range RFIC platform. This device boosts the transmission range of RF devices up to 15 kilometers. This industry-leading technology is ideally positioned to drive applications in the emerging Internet of Things market, and also machine-to-machine system deployments. In Q3, we expect sales for our Wireless and Sensing Product Group to be approximately flat.

In Q2, we saw Distribution POS decrease sequentially by approximately 2% from the record high levels achieved in Q1. Distributor inventory increased 11 days, from 63 days in Q1 to 74 days in Q2, and is within our target model of 70 to 80 days. Our Distributor 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 Q2, we released 14 new products and achieved 1,790 new design wins. Our strategy of focusing on key trends driving growth for analog semiconductors, along with our breadth of analog product offerings to 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 Q3.

Now let me discuss our outlook for next quarter. Based on Q2 bookings and our backlog entering the quarter, we are currently estimated Q3 net revenue to be between $135 million and $145 million. To attain the midpoint of our guidance range, or $140 million, we needed net turns orders of approximately 49% at the beginning of Q3. Bookings to date in Q3 have been relatively strong. We expect our Q3 GAAP earnings to be between $0.13 and $0.21 per diluted share, and our non GAAP earnings to be between $0.31 and $0.37 per diluted share. The softness in our Q3 guidance is driven by the weakness in our smart phone business, impacting our Protection demand and reduced CapEx spending, impacting our Advanced Communications and Gennum Product Group demand. We expect to see a recovery in both this areas, early next year. While challenges in key end markets are weighing on our near-term growth prospects, our continued design win activity is a strong indicator of future demand for our innovative solutions, targeted at the fastest-growing segments of the analog market.

I will now hand the call back to the operator, and Sandy, Emeka, and I will be happy to answer questions. Operator?

(Operator Instructions)

James Schneider, Goldman Sachs

I was wondering if you could address the smartphone outlook that you're providing for the Protection business? Do you think that your shipments at the current time are well-matched to the smartphone customer demand? Or how long do you expect the inventory reductions to continue? Do you think it is going to last another quarter or do you think it's going to be done this quarter?

Yes, so, we think, Jim, that in the previous two quarters there was probably quite a lot of overshipment. Our customers have -- and specifically one or two of the major ones -- have told us that actually they had anticipated much stronger demand for some of the new phones and demand just didn't come in and we really did overship in those quarters. So how quickly that inventory is going to bleed off -- it will take at least Q3, maybe some of Q4, but offsetting that might be new phone releases and how well they do. And so, that's not really built into that, as I said in my script. We haven't anticipated a strengthening of demand due to those phones because we haven't seen it yet but, that is also -- that is a possibility.

Thanks and then as a follow-up, can you maybe address the commentary on infrastructure spending especially in China? You mentioned that you're seeing some lower CapEx spending in China right now due to some push-out. Can you maybe address the phasing of the infrastructure spending you're seeing on the base station side and then what you see later on the backhaul side? And when you might expect that to resume?

Yes, we are seeing -- base stations are getting a little bit more CapEx now, but the actual infrastructure around that is not and that's being pushed out both in China Mobile and China Telecom and other regions also, so it's really closer to the end of this year and maybe early next year, but that's what we've seen. So, I would separate it -- the base station equipment side is getting the CapEx, but the infrastructure side is not so much around it.

Thank you very much.

Steve Smigie, Raymond James.

Just following up a little bit on the previous questions. So, in terms of how we think about revenue going into the January quarter, you guys obviously indicated continued weakness, so looking at seasonal patterns doesn't really help us there. Clearly, the October quarter sounded like it's going to be a big work-down, but should we potentially expect a decent, big sequential jump back up in January, maybe not to previous levels yet but somewhat of a recovery as you are not working inventory down as much?

So we think Q4 will probably be flattish, Steve. It's difficult to say until we see what the smartphone demand is going to look like in Q4 timeframe. Typically, as you know, some of the smartphone manufacturers in Q4 will use that quarter to bring down their inventory as low as they possibly can, for their end of year. But this year will be maybe an anomaly to that. We just don't know. We will have to wait and see how that plays out.

Okay and then as I think about gross margin, let's say as we got to April or whatever quarter it is, after we're through this [enhanced] inventory work down, should we be thinking that around the 61.5% level again? You did it in the April quarter -- I'm talking non-GAAP -- and you did 61.3% this quarter. Seemed like you had some offsets in July where you have the higher IP revenue but some other mixes took it down. So as we get back to a more normal environment, is that still the right gross margin level?

So, Steve, when you look at a gross margin, as you know, the key [part of it] will be the mix of the revenue. At this point, if we get back to normal, to the levels of revenue that we've seen before, the $160 million and above, I will probably expect the gross margins to stay above the high end of the target, above 60% and maybe up to 61%. But right now is hard to really say until we know exactly what the mix of the revenue is going to be and what the products are going to be, so -- but if we do see this type of levels of revenue that we've seen before and the mix of revenue that we've seen before, we should be up somewhere close to the 61% range

Typically for us, Steve, Advanced Comm and industrial -- the comm and the industrial businesses drive higher gross margins and the consumer and enterprise computing a little bit lower so it really depends on the mix.

Okay. If I could sneak one more in, just on the 40 and 100 Gigabit stuff, obviously you had some push-outs but that aside, it sounds like the 100 maybe equalled or passed the 40 in the quarter and if that's the case, is it still the case that 40 is still growing just not as high of a rate as previous?

Yes, that's correct. The other thing is the 40 Gig ASP erosion is probably a little bit more aggressive than we had built into the plans so that with the 40 Gig transitioning to 100 Gig, obviously that helps us from an ASP standpoint but then you get the offsetting 40 Gig price erosion.

Okay, great, thank you.

Doug Freedman, RBC Capital Markets.

It's good to be back covering you although my timing could be questionable. With that, can you give us a better sense of the difference in magnitude between the declines that you're expecting to see in Protection versus what you're seeing out of Advanced Comms and Gennum? Are we talking Protection down greater than 25%?

It's not that -- as much as that, but it's significantly down. We're expecting it to be down quite a lot in Q3, Doug, and really the bigger question is in terms of what we had originally anticipated the demand to be, I would say we're close to $20 million, $25 million off that mark versus what was originally anticipated to be the Q3 Protection demand, mostly driven by smartphones and so that is hurting us. Gennum and Advanced Comm are nowhere near that. They are expected to be down, but nowhere close to what the smartphone impact is on the Protection business.

And when I look at the Protection businesses, as I model out a big decline, it does look like that number now is going to be well below any number that you've done in the last two years. So it is somewhat safe to say -- is there any ASP erosion that you're seeing in that market that would cause us to think that the recovery back to a north of $50 million a quarter run rate, how long do you think that will take?

Yes, so the dynamic that's an unknown is -- we do well when the new smartphone comes out, the new high-end smartphones come out and they are all protected and we get good content and the growth of those smartphones as well. What's an unknown today is some of the smartphone manufacturers take it down a notch to a lower-end smartphone or even a higher-end feature phone, our content does reduce and the need for as many -- as much protection, the number of units on a phone also reduces, so that trend would hurt us. Having said that, I do think that most of the smartphone manufacturers we talk to, as I mentioned, are bringing out new types of phones, the market is somewhat fragmenting, they're trying different flavors of phones and a lot depends on the success of those phones. That will really depend, drive what happens in the second half for us.

And my last one is just on your lead times, it does seem with the turns ratio you were looking for, your lead times are still in the four to six-week region. What have you seen lately? Are they contracting so our visibility is becoming even harder?

In smartphones, lead times are in four weeks or less timeframe, and that's tough for us and that's one of the issues we have in that specific business. Across the rest of the businesses, it's -- there's not really been a significant change.

Great, thanks, guys.

Harsh Kumar, Stephens Inc.

Just a couple of questions. Mohan, in optical, you do tend to see things early because to some degree you're the only chip guys out there. I'm wondering, what inning of the upgrade cycle do you think you are in the Chinese infrastructure market? And then also, if you could clarify the ASP erosion in 40 Gig. Is there some competitive pressure there? Or you just -- is it a market pressure?

Well let me start with that one. It's not really competitive pressure, it is market pressure. We -- a lot of the service providers are trying to determine, is it cost-effective to implement 40 Gig infrastructure versus 100 Gig infrastructure versus other types of infrastructure and, so there's continuous pressure from the OEMs to try to build more competitive solutions and so, we have to participate in that, and that's really what drives the 40 Gig erosion. The 100 Gig is clearly starting to get adopted. I would say it's very early, across the globe. We're starting to see more and more trials and more and more 100 Gig infrastructure being deployed. But I would say that the deployments, the actual deployments are somewhat questionable in terms of timing. It is being pushed out. We hear China Mobile is pushed out a little bit, China Telecom pushed out a little bit. The AT&T trials are going well but apparently still pushing out so it's a mixed bag but we do think that it's going to grow quite nicely next year.

Fair enough, Mohan, and if I can squeeze in another one. On the handset side, looks like you're going to spend much of the October quarter working down inventory. Is it mostly inventory from one customer that's impacting you? Or are there multiple customers which are of equal magnitude?

I would say it's two or three customers that are affected, but one -- a big one is obviously the most impacted, that's clear, Samsung is our number one customer and so clear when they have inventory issues that is a challenge for us.

Fair enough. And last one, Mohan, if I can squeeze that in, on your stock buyback increase, is that just an opportunistic token increase or do you intend to be pretty aggressive about it at these levels?

Well, we obviously believe that this -- the guidance we've given and the situation we have coming off several quarters of record quarters and if you look at our first half, it's a record first half, and the Company will have a record year, and we'll still -- we still have a lot of, lot of growth drivers. And so our feeling is that there's going to be some short-term opportunity here and we want to take advantage of that.

Thanks, guys. Thank you.

Rick Schafer, Oppenheimer & Company.

It's Jason Rechel calling in for Rick. First, a follow-up on some of the consumer questions and maybe specific to your largest customer, Samsung, that you just talk about. Do you have a sense at this point as to the general run rate or normalized demand run rate that that business is running today? And Mohan, earlier you talked about your Protection content decreasing as we move into more mainstream or mid-end models. Do you see any competitive pressures there in the mainstream market and are you maybe losing some designs in the mainstream that you would have otherwise won at the high-end?

Well, I don't think we lose -- we are losing at the designs but what we are challenged with, we will walk away on price, on some of those feature phones or the low-end phones where we feel that there's not enough differentiation required there or our value is not enough there so -- that's the challenge for us and frankly if the customers are moving in that direction, we would view that as a relatively short-term opportunity for us anyway, even if we got designed in, there would be a lot of pressure on pricing and we'd probably walk away from that at some point. So, that's the challenge with those phones. As it pertains to your question on percentage, the hand-held business for us, for Protection is about 50% of and about 17% of total Semtech business. So, that gives you some idea of the magnitude of the hand-held business. Most of that is smartphones, there are some other cameras, and other things in there, but most of it is smartphone business. So when that business struggles, 50% of our Protection business struggles.

Okay. And then apologize if I missed it earlier but did you guys give the split -- the relative split of the 100 Gig [CRTs] business to 40 Gig at this point? And then maybe just to look at the 100 Gig business, have you seen any competitors or merchant competitors on the long-haul side of things? And then maybe walk us through who and where you're seeing more on the data center side of the 100 Gig business?

Okay, so we didn't give the split but roughly it's moving from a more 50%/50%, 40 Gig, 100 Gig to more of a 70%/30%,100 Gig to 40 Gig and that's revenues, obviously unit volume is probably the opposite of that. But in terms of revenue, due to higher ASPs in the 100 Gig space, the 100 Gig is starting to become the dominant piece of our business. As far as competitors go, if really the challenge for us is the internal ASIC designs by the customers themselves. So, it's proprietary, ASIC is being developed and when the customer goes to more of an internal ASIC solution, then we don't have the opportunity to sell them a standard product. And that's the challenge. And that's mostly the issue on the long-haul side. On the other side of it, the Gennum business is doing very, very well on the 100 Gig applications and the data center on the PON side, on the backhaul side, on the -- really a lot of, all the areas where there is very high-speed interfaces, meaning CDRs or PDM products, Gennum business is doing very well.

Okay, I'll hop back in the queue. Thank you, guys

Craig Ellis, B. Riley.

Just a follow-up to the earlier question on Protection mix. If hand-held is the 50% of Protection now, it seems like in the October quarter, then it will be down to about 35% to 40% and, Mohan, when would you expect hand-held to normalize back to 50% or greater or do you see the evolving mix that you have in Protection being more of a structural change in the Protection business?

Craig, I answered your question. So what we will see is that the Protection hand-held business is likely to come back up to the levels we saw in Q2 and Q1, probably in the first half of next year, starting Q1. But that assumes that the new phones that are coming out are not -- don't see an increase in demand until then. And that's the thing that we're not clear about. Having obviously had this issue where we've built up a lot of inventory, our customers built up a lot of inventory in the first half, and then saw demand drop-off, and that's impacting us in Q3. Obviously, we're a little bit sensitive to doing the same -- making the same mistake again now for Q4 until we see actually what happens.

All right. Well, thanks for that. And then as a follow-up, you had mentioned that so far in the quarter, orders have been relatively strong. Can you provide some more color on that commentary? Is that a reference to the different product groups, geographies, just areas of particular strength or any that are lagging would be helpful?

Yes, it's really across-the-board, including Protection and smartphone but I would say that's coming off a very weak second half of Q2 bookings. So, as Emeka mentioned, our book-to bill in Q2 was less than 1, so we obviously had a very weak second half of the quarter, and then our backlog coming into Q3 wasn't as strong as we had liked and so I make the comment that things are looking a little bit better but, I would still, obviously without guidance, that takes into consideration the fact that we still have 40% at the beginning of the quarter. We needed 49% terms, right.

Yes. And then the last question, Emeka, just looking at the operating expense controls that the Company is implementing and acknowledging you are still going to fund strategic R&D, how will you look at unwinding some of the tactical expense savings that you put in place, as we think about what will happen beyond the October quarter?

So, as Mohan indicated, we are looking at the fourth quarter, maybe assuming at this point that it's going to be flattish. So we're probably going to keep some of this in place and I would expect operating expenses to be in the same guidance range of $55 million, $56 million, and obviously a lot of business are not going to be there forever, but as we do anticipate that we will start to see rebound in the top-line revenue in the first quarter of next year, some of those expenses are going to have to come back.

Thanks, guys.

Terence Whalen, Citi Investment.

Hi this is [Artis] for Terence. Thanks for taking the question. Mohan, I was wondering if you can quantify the growth of the [minimum] Protection [quote] as we move from a high-end smartphones to mid-end smartphones to a low-end smartphone. Or maybe in terms of your [dollar of] content?

Yes, I can't do in terms of the number of ports because every phone is different and we try to aggregate but very roughly a high-end smartphone might be $0.40 of content and a lower-end phone might be $0.25 content, something like that. From a Protection standpoint. Obviously, that's only Protection. If we sell other products into the smartphone then we have greater content.

Okay and, Emeka, was there a 10% customer in the reported quarter?

I didn't quite get your question?

Was there a 10% customer -- 10% sales customer -- in the reported quarter?

As of now, no. The only one that I am aware of is the same customer who has typically been above the 10% and that is Samsung.

Yes, Samsung has always in the last X years been our -- a 10% customer for us. And bear in mind that Samsung makes many different products. We sell into their TVs, into set-top boxes, into their communications infrastructure. So they have many different products but we do sell also into their smartphones.

And what percentage of Samsung has been hand-held in the last three or four quarters?

Do you have that, Sandy?

So, Samsung hand-held in Q1 was about 9% of total Company's revenue and that is -- it was very high because typically it runs in the 5% to 7% range and in Q2, it is approximately 6% of total Company's revenue.

Okay, thanks.

Ian Ing, Lazard.

Could you remind us how fungible your Protection inventory is at hand-set OEMs. Obviously, your top OEM had a disappointing flagship launch but can some of that be repurposed for tablets or wristwatches or some of the second half offerings?

At the customer? Yes, they can be. So that is why I mentioned they are coming out with new variations of their high-end flagship phone and we hope that those same phones will do well. We just don't know but, yes, the Protection inventory that they have can be used for those phones.

Okay, great. And then over into the Gennum business, enterprise computing, could you talk about some of the content increases you're seeing in terms of supporting some of the faster optics rates in the data center, things like your CDR [carts] and PMD, where some of the bigger content increases are occurring?

Yes, so we are seeing, first of on the backplane side, pick-up on the CDR products there. That's ranging from Gigabit to 10 Gigabits type -- some of our flagship CDR backplane products are doing very, very well there. The 25 Gig low-power CDRs and the 100 Gig data center applications, as I mentioned on the call, CFP2 modules, we seem to be doing very well there. Again, it's the low-power, high-performance stuff. And then on the PMD side, all the TIAs, drivers, 1 Gig, 2.5 Gig, 10 Gig, 25 Gig products are all doing very well. I would say that the -- in general the Gennum products across the board are doing really, really well. I'm very pleased with the progress. And then application space is quite broad. It's not just data centers, it's not just servers, is PON, it's fiber-to-the-home, it's the cloud stuff, it's wireless backhaul, it's very broad, so and then also the video side is doing very well, as well.

Okay, thanks. And then for a last question, a lot of the customers of optical modules, they tend to have different selections. It seems like JDSU is doing better in the data center, [OCLO] is struggling a bit. Do you know -- is that a neutral for you or are you overexposed to those customers?

It's fairly neutral for us. We tend to be players in all of the module manufacturers and their success is really driven by specific application or specific customer and some customers have better relationship with some of the module manufacturers than others and sometimes is about price, sometimes it's performance, and it just varies.

Okay, thank you.

Liwen Zhang, Blaylock.

Most of my questions have been answered. And I only had one regarding your Power and High Reliable product line. In this product line, has been (inaudible) year-over-year for the last probably six quarters. So how should we think about that product line will resume growth and what are your strategies there?

Yes, that's a good question we have, from time to time I've looked at this over the years, and tried to figure out whether we should divest this business, whether we shouldn't invest in this business but it's such a large [SAM] for us and the analog space in general, it's such a large SAM, and we have very good competence in this area and I believe that we have a very good technology and capabilities so, we've decided to continue to invest in it, but it is in, as I mentioned, turnaround mode, and the key is bringing out new products, which new products that are really innovative and going to take a foothold and that's the strategy. So what you should do is really look at how this business declined and my -- our goal really is to see if we can start to get back up into the $20 million a quarter type of numbers, which as you rightly point out has been several years since we've achieved that. So, that takes a handful of really good design wins and that's the game plan.

Okay, thank you.

(Operator Instructions)

Steve Smigie, Raymond James.

A couple quick follow-ups. First is on Protection business. At that point in time when we get back to more normalized environment, a few quarters out when we're back to normal handset demand area, how would you look at overall demand growth for Protection? Is the growth going to be more of a function of just what's happening in the end markets or is your growth going to be more driven by new product releases? So for example, you released the Ethernet Protection product, you released the Automotive [Antenna] Solution. Would those solutions, increasing the [TAM], provide more significant growth or is it still going to be more driven by the end markets themselves?

So we should be able to expand our [SAM] and drive growth. The Protection business for us has grown year-over-year, it's done very well, continues to outperform the general industry and it can continue to do that just because of those trends that I mentioned. So, yes, I wouldn't let the current smartphone demand versus supply situation let you think that the Protection business as a whole cannot grow out of the above-market rate that it has been growing. It can continue to do that. Obviously, if we get the smartphone growth, it will grow at a much faster rate but even without that, there's -- most of the LCD TVs, the tablets, set-top boxes, ultrabooks, ethernet, wireless LAN, power-over-ethernet production, automotive, as you mentioned the Antenna Protection, I can just -- there's just so many areas where Protection devices, the high-end Protection devices are being required because of the lithography changes and because of the higher-speed ports and because there's more ports, that this business will continue to grow.

Okay, great and then, you guys had always been somewhat cautious on the Thunderbolt business that you got with Gennum, I was just curious if you could talk about if you guys have been right, that it's been a slow-to-take-off or if you're getting any traction and there's been Thunderbolt 2 people have been working on, is that going to affect your business at all?

Yes, the challenge with Thunderbolt, Steve, is that we don't know that the market is really adopting Thunderbolt since USB 3 has been getting some traction in the marketplace and that's the challenge so we have a very strong position today. We think we have the majority of the share. We have been looking at the next-generation Thunderbolt. The real question there is whether there's a good ROI and whether the market is itself is going to be bigger than what it is today which is today, very, very small.

Okay, and just on the PON business, for Gennum, you touched a little bit on China is looking a little bit better. Some of those tender offers for some of those PON build-outs in China were supposed to come in the March timeframe and it seems like they have finally started to come. Can you talk about if that's the right timeline of what's happened and what's the magnitude of the ramp going forward because it seems we'd be more likely at the start of that kind of roll-out in China?

Yes, so we know that, yes, the PON will be the backhaul and we'll benefit from that. The timing is not clear. It's looking later this year when we start to see the real pick-up in that and that's one of the comments I made. We were hoping Q3 but it's looking like it's going to be more Q4, maybe early next year even.

Okay, great, thank you.

There are no further questions at this time.

Okay, in summary, Q2 of fiscal year 2014 was another record quarter for Semtech and sets the stage for what we believe will be another record year. While the second half promises to be a challenging period for us, our numerous growth drivers coupled with our balanced portfolio of highly-differentiated analog products, and balanced end market exposure, will enable us to continue moving towards our goal of $1 billion in revenue. With that, we thank you all for your continued support of Semtech and look forward to updating you all next quarter.

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