Semtech Corp (SMTC) 2014 Q3 法說會逐字稿

Good afternoon. My name is Lee Erin and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q3 FY14 earnings release conference call.

(Operator Instructions)

Sandy Harrison, Director of Investor Relations and Business Development, you may begin your conference.

Thank you, Lee Erin. Welcome to Semtech's fiscal year 2014 third-quarter conference call. I'm 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 October 27, 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 more detailed discussions 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 c all, 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 2013 Raymond James Systems, Semiconductors, Software and Supply Chain Conference on December 9 at 2.30 PM Eastern. A link to the webcast information will be available under the events section on 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. While Q3 of fiscal year 2014 presented its challenges, we delivered results slightly ahead of the midpoint of the guidance range with net revenue of $141 million. This represented a decline of 15% from the prior quarter and a decline of 12% from the third quarter of fiscal 2013.

In Q3, sales into Asia represented 71% of revenue. North America represented 16% and Europe represented 13% of total revenue. Direct sales made up approximately 58% of total revenue, while distribution was 42%. Bookings improved in Q3 resulting in a book-to-bill of just below one.

[Sales] business accounted for approximately 53% of shipments during the quarter. Gross margin on a GAAP basis for Q3 was 59.1%, down from 61% in Q2. The decline was driven by lower IP revenue, a higher mix of lower-margin products and lower manufacturing volumes.

We expect Q4 GAAP gross margin to be in the range of 58.8% to 60%. The slight improvement at the midpoint is driven by a more favorable product mix.

We took up heavily on cost controls during Q3. Leading our [permanent] expenses on a GAAP basis to decline 8% sequentially and we are $70.1 million compared to $76.3 million in the prior quarter. The decrease was attributable to our employee [time-out] program. Anticipated lower payoffs for supplemental compensation and control of discretionary spending.

In Q4 we expect our operating expenses on a GAAP basis to increase slightly due to increase in our position on capitalized intangibles. With a quarterly expense of $2.1 million in interest in order in Q3 versus an expense of $10.8 million in Q2. The decrease in this expense was attributable to a one-time charge that was incurred in Q2 in light of previously capitalized debt cost as result of a debt restructuring that occurred in Q2.

In Q4, we expect to incur approximately $1.8 million in interest on other expense. Our Q3 GAAP tax rate was a benefit of 11.3% compared to a benefit of 39.8% in Q2. We expect our Q4 GAAP tax rate to be a provision of approximately 2% due to a lack of discrete items.

On a non-GAAP basis, excluding the impact of employee equity compensation, amortization of acquired intangibles, acquisition of expenses and other one-time expenses. Gross margin in Q3 was 59.4%. We expect Q4 non-GAAP gross margin to be in the range of 59.2% to 60.2%. The slight sequential improvement at the midpoint is driven by a more favorable product mix.

Q3 non-GAAP operating expense was $55.4 million, down 7% sequentially. We expect non-GAAP operating expenses in Q4 to be flattish to slightly down, due to our continued focus on cost management actions, highlighted earlier in my remarks.

Our non-GAAP effective tax rate for Q3 was 8.4%, down slightly from 8.9% in Q2. We expect our Q4 non-GAAP tax rate to be approximately 13%, due to a lack of discrete items.

Our capital investment balance at the end of the quarter was approximately $242 million, essentially flat with Q2. Despite spending $15 million to buy back approximately 485,000 shares of stock at an average price of $30.92.

We currently have approximately $37.5 million remaining on our buyback program and we expect to purchase more shares this quarter, as we try to offset dilution from employee equity awards. We made approximately $6.3 million in principal interest payments on our debt. Our current debt balance is $296.5 million. Our priority for the use of cash remains paying down our debt.

The Company expects approximately $8.2 million in profit plant and equipment in the quarter. In Q4, we expect to spend approximately $8 million, primarily from manufacturing our new product development equipment.

Depreciation for Q3 was up approximately $5.8 million. In Q4 we expect depreciation to be approximately $6.1 million.

Accounts Receivable declined 8% from Q2 and our days of sales outstanding increased to 50 days in Q3 from 44 days in Q2, primarily due to lower revenue.

Net inventory in dollar cents was down several points 5% in Q3. On a days basis net inventory was up 9 days to 119 in Q3 from 110 in Q2 because of lower revenue. We expect our Q4 inventory to be flat sequentially. We expect to get back to our target range of 90 to 100 days as demand improves.

In summary, while Q3 had its challenges, the Company managed its operating expenses well to mitigate a negative impact from the lower revenue levels on the Company's operating model on profitability. I would now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2014 performance by end market and by product group and then provide our outlook for Q4 fiscal year 2014.

In Q3 of fiscal year 2014, we achieved net revenues of $141 million, a decrease of 15% from Q2 of fiscal year 2014 and a decrease of 12% from Q3 of fiscal year 2013. For the quarter our non-GAAP gross margin was 59.4% and our non-GAAP diluted earnings per share was $0.35 per share.

In Q3, revenue from the communications end market decreased and represented approximately 29% of Semtech's total revenues. Revenue from the high-end consumer end market decreased 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 decreased and represented 24% of total Company revenues. Finally, revenue from the enterprise computing end market decreased from the prior quarter and represented 20% of Company revenues.

I will now discuss the performance of each of our product groups. In Q3, our Protection business declined 16% sequentially. As we had anticipated, several of our smartphone customers experienced softer demand after a relatively strong first half negatively impacting our Protection business in the quarter. On a year-over-year basis, our Protection business was down 12% and represented 32% of total Semtech revenues.

In Q3, we saw a record level of design wins for our protection products and during the quarter we expanded our protection offerings by introducing nine new protection products. In Q3 we released our latest RailClamp platform targeted at USB 3.0 applications. This new platform integrates six protection devices into one package and uses a state-of-the-art proprietary process and packaging technology to eliminate the damaging effects of as ESD transient without sacrificing signal integrity.

In Q4, we expect our Protection business to be flat to down slightly compared to Q3, due to normal seasonality. While the second half of fiscal year 2014 has been challenging for our Protection business, we still expect that Protection business to show full-year growth over fiscal year 2013.

We also continue to believe that the Protection business is a very attractive business for Semtech and a business which will continue to grow well above industry growth rates. We expect that three key trends will continue to drive the need for Semtech protection products.

First the number of ports on electronic devices that require protection is increasing. Second, the ever increasing performance demands for these ports necessitates the need for ultra-low capacitance protection devices. And third, the smaller process geometry is making the most advanced chips much more susceptible to catastrophic ESD events. As the industry leader in high-performance protection platforms, Semtech continues to be well positioned to benefit these ongoing industry trends.

Moving on to our Gennum product group. In Q3, following the record results achieved in Q2, revenue declined 23% driven by seasonal declines in our video business and some modest inventory corrections in both our video and enterprise computing business and lower IP revenue from our Snowbush division.

We remain very pleased with the progress of our Gennum products group. In Q3 our Gennum products group achieved a record number of design wins. In addition, the Gennum business released a record number of new products and is on track to introduce nearly twice the number of new products this year over fiscal year 2013.

In Q3, the Gennum product group added several new devices to our growing portfolio of 6 gigabit per second ultra high-definition video products that offer best-in-class performance at all data rates, helping to facilitate the transition to 6-gigabit per second from the current 3-gigabit per second designs. Our newly released adaptive cable equalizer and 6-gigabit per second cable driver products provide the longest full-speed transmission range for ultra high-definition systems. Design infraction of our new ultra high-definition 6-gig platforms is very promising and we expect this momentum to continue as more systems emerge with ultra high-definition interfaces.

Our Gennum product group continues to see good momentum in the enterprise computing segment, driven by data center and backhaul applications. Semtech's portfolio of high-performance clock data recovery and physical media platforms continues to gain traction in a broad range of end markets where bandwidth expansion at low power and low cost are the critical requirements.

Semtech is very well-positioned in the 1-gigabit per second, 10-gigabits per second, 25-gigabits per second and 100-gigabits per second data center pawn and backhaul segments. Some of our Gennum product group growth is also tied carrier CapEx spending, which we expect to improve in FY15. We expect our Gennum product group business to be flat to slightly up in Q4.

Turning to our Advanced Communications product group, revenue in Q3 decreased 15% sequentially, and represented 22% of total revenues. The decrease was driven by lower demand for our 100-gig products as the timing and release of new tenders primarily for long-haul transmission infrastructure programs remains uncertain. We are not anticipating any new tenders to be announced until early fiscal year 2015.

In general, we continue to see carriers requesting higher bandwidth transmission technology beyond the 100-gigabits per second to 400-gigabits per second and terabit solutions. Semtech remains committed to developing advanced technology to enable higher levels of bandwidth across networks, and expects to release several new exciting platforms in fiscal year 2015 that we believe will drive future growth for Semtech.

The third quarter was a good design win quarter for our Advanced Communications product group driven by our new PLL timing platforms and our new synchronization platforms. Semtech synchronization platforms uniquely address the industry's increasing demand for synchronization accuracy in newer wireless infrastructure markets.

In addition, the Advanced Communication group began sampling our first integrated PLL platform targeted at the communications and networking infrastructure segment. This platform is attracting significant interest from customers requesting very high-speed PLLs with some of the lowest (chip] specs in the market.

We believe that this market opens up a new several hundred million dollar opportunity for Semtech and we expect to introduce many more products targeted at this opportunity in fiscal year 2015. For Q4 we expect revenue for our Advanced Communications group to decline modestly as global infrastructure carrier spending remains muted.

Moving on to our Power Management and High-Reliability product group. In Q3 revenue for the Power and High-Rel business increased 12% sequentially and represented 11% of revenues. The increase was driven primarily by strength in the industrial end market. While our Power Management and High-Reliability business has been in transition over the past few years, we are starting to release new power platforms that are stimulating new design wins across all end markets.

During Q3, the Power Management and High-Reliability group introduced eight new products and also achieved a near record number of quarterly design wins, which is a solid indicator of future revenue growth. We expect to see more new power platforms released over the next several quarters, which we believe will drive sustainable growth in this business for the next few years. In Q4 we expect that Power Management and High-Reliability revenue to be approximately flat to slightly down due to seasonality.

Next we will turn to the Wireless and Sensing business. In Q3, revenue for our Wireless and Sensing business decreased 4% sequentially, to represent 9% of total Semtech revenues. The decrease was driven primarily by softer industrial sales, offset by growth in our Consumer Sensing business.

During the quarter, our Wireless and Sensing product group made several significant announcements related to the emerging internet of things segment. Firstly we introduced Semtech's new long-range LoRa wireless transceiver platform that enables the connection of low-power sensors in private and public networks. Secondly in Q3, we announced and demonstrated a joint solution with IBM that combines IBM's sensor connect software development environment with Semtech's LoRa platform to offer network operators a total Io T solution.

Semtech's wireless platforms enable longer-range, longer battery life and increased interference immunity at lower costs which is ideal for internet of things applications. Our Wireless and Sensing business continues to gain real design win momentum, achieving record levels of design wins in Q3. In Q3 we also started to see initial or orders for our latest proximity sensing platform that is being designed into a number of new tablets and other consumer applications.

In Q4 we expect sales for our Wireless and Sensing product group to be up significantly as we start to see revenue growth from three new growth engines. These growth engines which have all been in development for several years, are our touch sensing platforms in consumer applications, our proximity sensing platforms in consumer applications and our LoRa wireless platforms in industrial wireless applications. We will provide more details on the momentum from these new three growth engines next quarter when the revenue starts to materialize.

In Q3 we saw distribution POS decrease sequentially by approximately 2% from Q2. Distributor inventory decreased 1 day from 74 days in Q2 to 73 days in Q3, and remains within our target model of 70 to 80 days. Our distributor business, much like the overall Semtech business was very well balanced with 50% of total POS coming from consumer and computing end markets and 50% of total POS coming from industrial and communications end markets.

Moving on to new products and design wins. In Q3 we released 30 new products, which is the most new product releases in nearly three years. We also achieved a new quarterly design win record of 2,269 design wins.

Our strategy of focusing on key trends driving growth for analog semiconductors along with our breadth of analog platforms targeted at multiple end markets, positions us well to benefit from new growth drivers in our industry. We expect to see a continuation of the strong design win momentum in Q4.

In Q3, Semtech was named by Forbes as one of America's best small Companies, which tracks revenue growth, earnings growth and return on equity metrics. In addition, Fortune named Semtech in their list of fastest-growing companies for the second consecutive year. We are very proud to be recognized yet again by both Forbes and Fortune.

Now let me discuss our outlook for next quarter. Based on Q3 bookings and our backlog entering the quarter, we are currently estimating Q4 net revenue to be between $132 million and $144 million. To attain the midpoint of our guidance range, or $138 million, we need a net trans orders of approximately 48% at the beginning of Q4.

We expect our Q4 GAAP earnings to be between $0.09 and $0.18 per diluted share and our non-GAAP earnings to be between $0.29 and $0.37 per diluted share. While challenges in several key end markets are weighing on our near-term growth prospects, our record level of design win activity and new product introductions and the emergence of several new the growth drivers are a strong indicator of future growth. I will now hand the call back to the operator and Sandy and Emeka and I will be happy to answer questions. Operator?

(Operator Instructions)

Ian Ing.

Nice jump up in the number of design wins, 2,029 versus 1,790. Any particular applications that that's focused on? Is there any reason to think that these are the same volume and revenue opportunities versus some of the prior design wins? Or would there be some deltas versus prior ones?

First of all, the balance is quite good. The design wins across most of our product areas. Obviously, our Wireless and Sensing business were the three new emerging growth areas that I talked about. It's got a lot of momentum design wins.

The revenue per design win tends to be a little bit smaller in the industrial applications, as you know. The time to revenue tends to be longer. The consumer applications, those design wins can generate revenue quite quickly and can be larger. In general, I would say if fairly broad, no one specific segment is driving the design wins, just a broad range, very positive for us.

Okay. Great. Then, the smartphone protection. I know you've guided that it would be about 8% this quarter. Did it actually come in at that level? What are thoughts on the January quarter?

The smartphone business actually did a little bit better than we had anticipated. I think the consumer, overall consumer, was down a little bit worse. That was driven by the rest of the consumer business. Smartphone seems to done a fraction better than we anticipated.

I think that Q4, which is seasonally down for us, especially our Protection business, we're probably seeing a little bit better than we would normally see. But, a lot of the potential upside depends on how much demand there is in the Q4 timeframe for the high-end smartphones, I think.

Great. If I could fit in one last question, here. Inventory digestion outside of smartphones. Anything remaining in terms of the video business, or data center? That's something you've cited recently also.

No, I think the inventory is fully more balanced out there. I don't think there's a lot of inventory. In the first half of the year we saw demand very strong, lead times quite long. So, that's probably the reason why the inventory was built up a little bit. I think we've threw most of that in Q3. Q4 is a little bit seasoning down. But I think as we go to the new year, I think inventory should be in a very good position.

Okay. Thank you, Mohan.

Doug Freedman.

To start with, I'd like to focus in on your turns. It looks like you are looking for quite a bit of a drop in the amount of turns this quarter. Can you talk about the linearity, given your quarter stretches across the holiday season and into January? How does the shipment profile look to you?

So, typically, in Q4, Doug, it's a little bit tricky because we have the Christmas environment and then we have Chinese New Year. There's Chinese shutdowns in the manufacturing side and things like that. It's a little bit tricky to really lay out what we think will happen.

But, our turns, yes. Typically, what we'll see is in January, for example, we could see a very, very strong turns period. A lot of that depends on what's happening in the high-end smartphone market. What Samsung does at the end of the year, and what they're seeing from a demand standpoint, the pull from Christmas. All those type of things.

Difficult to call it, but I think we've gone with a number that we are comfortable with. We feel we can turn this number and it's based on really the demand and the current bookings.

Bookings also, in the Q4 timeline, tends to be not as linear as other quarters. Like Q3, for example, was very, very linear bookings and fairly linear shipments, I would say. Q4 will probably be a little bit different.

Great. Thanks so much for that color. If I could get your commentary on the other side of the smartphone market, that being the mainstream or low-end.

I know one of your customers go through their inventory adjustment in the fourth quarter calendar year. What are you seeing in that market? What you think will happen as you get into Q1 of calendar year 2014?

We are anticipating good strength next year and starting with Q1, as we go into the consumer hand-held space. It does depend on the recent new phones and how successful they are.

As you know, in the lower-end smartphones, we have a little bit less content than we do in the higher-end smartphones. So, we need the volume to pick up in the lower-end smartphones.

But, we know these customers are very aggressive, especially in the beginning part of the year, in trying to maintain their share. So, we are anticipating that the demand for high-end smartphones and medium-end smartphones will pick up in the early part of FY15.

Great. I will end it there and jump back in the queue, if my questions don't get answered.

Liwen Zhang, Blaylock.

First of all, congratulations on the solid growth on the power and high reliable products. It seems like a long time ago, put these two products in a groups together. Would you please talk about where the majority growth from, in terms of these together group as well as the end market? Thank you.

In the past, in the High-Rel business, obviously, this has been in transition for a while. We have new products coming out. We have the success in Q3 and the current successes mostly coming out of the automotive segment and industrial displays and some networking business also.

Going forward, we do think that that is probably where the three areas that we are going to see most success. Those automotive, general consumer and then the networking space. Obviously, industrial is quite broad. We have a lot of different products that are coming out that will be successful in that space. That's most likely where the successes going to come from.

Thanks. And then my next one and also the last one, is on the call for this type. Your deferred revenue in Q3 increased approximately by $2.1 million. It's higher than your normal. Can you talk about the detail of these deferred revenue increase?

Included in the deferred revenue, sometimes is also some IP revenue that is on build. I think the increase in the deferred revenue of $2.1 million has not been really significant. It's just an inflection of our inventory that is shipped in to the channel. I don't think there is anything of significance with that number.

Okay. Thanks.

Steve Smigie, Raymond James.

I was hoping you could talk a little bit about the 100-g business in 1Q of next year. Obviously, I think you indicated here that you don't expect it to really ramp through the rest of this calendar year. Is it fair to say that orders are coming in and it might be reasonable to think that you could get a 1Q ramp for that business for 100-gigabit?

I think, Steve, it depends on the tenders. When the tenders come out, then the orders will come in and their requests will be for the products to be shipped probably within a quarter or two, quite quickly. That's what we are seeing. The cycle times of these carrier deployments has definitely shrunk.

The problem is, there is no visibility of exactly when those tenders will be placed. We've been saying, I think in Q2 we said Q3. In Q3, we are saying beginning of the year. Until we see it, we don't know.

That's really the only way I can answer the question on when we can expect the orders. When we see the tenders come out, of course we will be expecting orders. We'll get benefit both on the Advanced Comm side and on the Gennum business, generally for deployments once those tenders get placed.

Okay. Whenever that revenue does come back, is it fair to argue that that margin remains above corporate average so we should see return to the more difficult margins you guys have been seeing more recently on the gross margin side?

Yes, margins in our Advanced Comm business typically, as well our Wireless and Sensing business and the Gennum business are at the higher end, as you know. Even within 100-gig, though, we have different types of products. Some have a lower margin than others. In general, the Advanced Comm products are all at the higher end of the gross margin.

Okay. If I could sneak one more in on Gennum. Now that you see it sequentially, can you talk a little bit more about how we should think about that business, in terms of re-ramping? Is this a short-term issue? Should we expect it to ramp back up pretty quickly?

Yes, I think so. To us, we obviously are learning a little bit about the seasonality of this business. Some of the dynamics of the different businesses, like the video business, which is more industrial in nature, longer cycle times on the products as well. The orderly times have to come in within 12 weeks, otherwise we can't ship the product typically in a quarter.

A little bit of dynamic there from the inventory standpoint. And then on the other side of it, the enterprise computing products are, like I said, somewhat similar to our Advance Comm products, can be driven by tenders. There are some aspects of the business that are more customer-specific.

We are learning a little bit about the seasonality and the dynamics of the business. It's very strong -- it's doing very well from a design win standpoint. Obviously, from new product standpoint.

Generally, the markets we're playing in, as I mentioned, the 6-gig video broadcast side is doing very well. We are seeing a lot of demand for the type of products we are coming out with.

On the enterprise computing space, the data center side seems to be doing quite well. Obviously, a lot of bottle-necks in the data centers, so more bandwidth required.

Then, the pawn side, I think, and the wireless backhaul side will pick up with the tenders. The video surveillance business, also, is still growing quite nicely. Sometimes, you have to look at it on an annual basis and you can see the growth. There's no reason why in FY15, we shouldn't be growing with the whole Gennum business at double-digits for sure.

Great, very helpful. Thank you.

Jim Schneider, Goldman Sachs.

I was wondering if I could follow-up for a minute on the optical coms business. You mentioned that maybe the revenue shows up in Q1. Can you maybe talk a little bit about your certainty around seeing the tender instead of the revenue? Do you have a decent amount of confidence that the tender actually occurs in Q1? Or, is it less clear that that's going to happen? Any visibility you have around that would be helpful.

Yes, that's the challenge, Jim, is knowing exactly when those tenders are going to be placed. We don't really have tremendous insight into that. Obviously, we talk to our OEM partners and we talk to the service providers and what their feelings are.

But at the end of the day, until the tenders are placed and the orders are placed by the service providers on the OEMs, we won't see the bookings. We speculate, we talk to them and they tell us, yes, it's coming and here's what we are seeing. But until we see it, we can't build it into our forecast.

That's fair. Understand. As a follow-up on the smartphone side, can you talk about some of your smartphone customers outside of Samsung, your largest customer? Do feel like the inventory levels and their orders are, basically, aligned at this point? Do you see any further inventory reductions? And if not, how long do think it might keep on going?

We think the inventory situation is over. It's hard to say, because we don't know what the demand picture is like for some of the newer phones from LG. Obviously RIM has got different challenges.

Some of the other smartphone manufacturers are fairly small in size, but, growing. Some of the Chinese manufacturers, for example. What's really quite difficult to say, is not so much the inventory. I think the inventory is under control now and is in quite good shape.

It's more a question of what are the demands looking like for the high-end smartphone business. That's really the question. As they bring out new types of phones, are consumers buying the phones? Which type of phones and when is the question.

Thanks. Then, if I could just sneak in one last one. In terms of the OpEx levels you are at, currently, do you feel comfortable that you can hold OpEx at these levels until revenues start to grow materially again? How should we think about when to start to let back some OpEx growth in the model?

Jim, I think that as we guide to the general quarter here, we are seeing the benefit of the shutdowns that most people have during the Christmas holiday and also the benefit of lower payroll taxes and all that stuff. So, the expectation is that it's going to be that as we're going to the April quarter, some of this expense cycling to come back.

I think, overall, just to summarize my OpEx expectations will be maybe the April quarter will see an increase in the 3% to 4% to 5% range. Overall, in terms of fiscal year 2015, I would expect us to try to keep up with as best as flat.

That's very helpful. Thank you.

Harsh Kumar, Stephens Inc.

Mohan, you talked a lot about optical and the inability to forecast that business. Maybe you could take a step back and help us understand what's really going on, particularly in China, which is the bulk of your market. Why is there so much uncertainty on part of Chinese carriers to come in with orders? Have the priorities shifted? Or is the competitive environment different? Any color.

I think, Harsh, it's more that the first half waits a lot and it's really a question of prioritizing. At least that's what I hear. They are still going to do it. There may be some changes in the political environment in some regions, including China, that may caused some delays and changes to things.

It doesn't change, I think, the general -- first of all, the need for more bandwidth is still there. Their drive to get more infrastructure and connect the infrastructure together is still there. As you know, they have, in China, specifically, stated there's going to be optical connectivity to each home and then to enterprises. So that helps mostly our Gennum business as well. So, all those things, the trends are still there. It's really just the timing issue, I think.

Mohan, competitively are you still the only off-the-shelf 140-gig solution?

For the long haul infrastructure, we don't know of any customers who have moved away to Standard Products. Obviously, our biggest competition is internal A SIX and that continues to be our biggest challenge, is what some of the customers go to their own internal solutions. But, we think, as the drive towards 400-gig starts to emerge, that many of those customers will again be looking for time-to-market and potentially looking at Standard Products again.

Great. My last one, Mohan. Historically, the way I have understood our acquisition strategy is, buy a company, get it in order, wait for the cash to build up on the balance sheet. You aren't there yet from a balance sheet perspective, but how is your acquisition appetite at this point in time, given it's almost a year and a half for Gennum now?

Well, two things that we look at, really, are first of all, how are we doing? How are we executing internally, organically? I think we are in generally good shape. There's a couple of areas that we still, obviously, like the Power and High-Rel business, we'd like to do better.

The Wireless and Sensing business, as I mentioned in the call, in my discussion, is doing very well and there's a lot of new opportunities there. As we start to see the market stabilize in some areas here, particularly the smartphone business, I think we are going to start looking at what other building blocks we could add, and how we could further diversify our portfolio and maintain a situation where we can bring in new competences into the Company.

So, I think it's a healthy process we have. We are obviously very diligent and very deliberate about the type of acquisitions we do. There aren't that many companies that fit our high-end portfolio. But, when we find the right one, we will execute on it.

Great, guys. Thank you so much.

Cody Acree, Williams Financial.

I just have one question, Mohan. Maybe just a clarification on a prior question. Dispositioning in the emerging market, I think you and/or Emeka have talked about this being evangelical on the power management side. It sounds like it's still early stages.

You're convincing some of the OEMs to use your type of product or your quality of product. I'd like to get some sense of how far along that is and if we continue to see how you see your market share position?

This is Emeka. We've talked about this in the past. I think it's mostly for our protection products where we've talked about being able to recreate the type of success that we had in Korea, to replicate that success in Asia and China, in particular. We've talked about the need to really evangelize and really show these manufacturers the benefit of having some protection for their products.

Where we are right now, we are doing very well. We are seeing a lot of design wins. We are probably seeing a little bit of those beginning to move in, but I think this is probably going to be more of the second half of next year, where the new ramp opportunity for us. I would say that we are making very good progress.

If you look at the top 10 vendors in China, how would you say that your current design win market share looks?

Design win market, we have the opportunities I talked about before. It looks very good. It looks very good and that is why I have the confidence. I would just like to see a decent amount of revenue in the second half of fiscal 2015.

Very good. Thank you for that.

We can barely hear you. If you have another question, maybe you should get back in line there.

Craig Ellis, B. Riley.

Wanted to follow-up on something that somebody in the communications space mentioned recently. Cisco indicated that they saw a pronounced deceleration in their emerging country orders. I've never associated them as a big Semtech customer. But, one, can you confirm if they are or not a customer? And, two, did you see any unusual trends in the emerging markets part of your business in communications?

Cisco is an important customer for us. Obviously we sell lots of different products to them in different application spaces. I would say though, obviously, two of our biggest customers are in China, as ET and Huawei are big customers for us. I assume those are the emerging -- China has always got the largest emerging region and growing. There are other regions of the world, but I think that probably they referred to China.

As I mentioned, there's a few changes, we want to call it, with some of the tenders being pushed out. Some of the CapEx deployments being pushed out a little bit. Some challenges there. It's going to come back, as I mentioned.

I do think that some of that is related to some of the political environment there and some of the initial spending in the first half of the year and things like that. It's not a question of changing a trend. The trend is going to be continued deployment of more high-bandwidth infrastructure in the region. It's just a timing thing, I think.

Okay. That's helpful, Mohan, thank you. Switching gears to gross margin and thinking about some of the gives and takes for next year. Emeka, the business has in the past, produced a 63% gross margin when it grew to $16 million per quarter. Is that something that's still possible? Or has something changed with mix that we should expect something that would be different from historic and fairly recent levels?

Craig, I think the 63% gross margin quarter reflected when we had an IP revenue of about $8.5 million at 100% margin. So, that was just a one-time event. I think, on a sustained basis, gross margin is driven usually, mostly, by the mix of revenues. When we see more revenues come in from the industrial and the communications end markets, that is very good for our gross margin.

Also, in as much as we don't really have a fab or in-house manufacturing, everything is out-sourced, we still have a decent amount of CapEx, of capital equipment that we own ourselves. We still need a decent amount of revenue to be able to absorb some of the fixed overhead that we have.

I would expect that as we start to see the top line go back up to the normal run rate of about $160 million and above, that will be accretive to gross margin as we should be able to absorb our fixed overhead whole lot better. I think, in summary, the key drivers for gross margin for us, is the mix of revenue and the amount of total revenue that we have.

Thank you for that. The last question for me. You mentioned in prepared comments that that pay-down continues to be a priority for cash generation.

Can you just clarify if you're interested in fully paying down the debt? Or is the Company financially comfortable with that as part of the capital structure? And looking at a different gearing than what it's had up until the recent past, to give you some flexibility for any tuck-in acquisitions that may come along, or maybe doing more with share buyback, which was active in the quarter.

At this point, the intentional plan is to pay down the debt as quickly as we can and also to continue to buy back shares, at least enough to keep pace with our dilution from our employee equity claims.

Thank you, guys.

Andrew Wong, Sterne Agee.

The first question is, can you share with us your expectations for Wireless and Sensing? I think you mentioned three new programs. I'm trying to get a sense of where that could be as a percentage of sales exiting Fiscal 2015.

Andrew, I don't really want to give you numbers regard to a specific business for FY15 at this point. All I can tell you is that this is our fastest growing. It's going to be our fastest-growing business.

It's also going to be one that has, as I mentioned, two parallel prongs. One is the consumer and one is industrial wireless. The consumer, obviously, can grow very fast. It can also come down very fast. It can also be a more challenging business from a modeling standpoint. Those elements are there.

And then the industrial, obviously, takes longer time to revenue. Once it there, it's more sustainable. They both have different challenges. They are all in emerging areas for us.

The proximity sensing is a whole new business for us. We've never been in that before. It's our first portfolio of proximity sensors. We have good traction, as I mentioned, with tablets. I think we're going to see success in other application spaces.

Tough sensing, as I mentioned, we will talk more about in future. We are starting to get some momentum there. That will be also consumer-related. And then the industrial wireless I talked about, significantly, the progress in infrastructure space, specifically. The business, we expect it to grow quite nicely, well above industry rates. I would be surprised if it's not in the high teens to even higher than that next year.

Great. Thank you for that. Then, I just want to clarify one thing. I think there are some commentary on OpEx spending for Fiscal 2015. Should I take that to mean that your OpEx in dollars on a non-GAAP basis should be flattish in 2015 relative to 2014?

Yes, Andrew. My expectation is that it should be flattish to slightly up, FY15.

Okay. Then, just as a follow-on. Can you give us some initial guidance for a tax rate for Fiscal 2015 at this point?

At this point, based on everything that we know, we still expect our tax rate on a non-GAAP basis to remain in the range of 13% to 15%, 16%.

Okay. Thank you very much.

Rick Schafer Oppenheimer and Company.

Hey, Mohan and Emeka, it's Jason Rechel calling in for Rick. On your Consumer Protection business, and thinking out over the next 12 months or so, could you walk us through some of the puts and takes positively in terms of what it would take for you guys to grow that business back to the peak, which I think was in FY13? Is that going to be growth within Samsung or ramping new customers? How do you expect to get back there? Thanks.

We have, obviously, the trends I mentioned are all going in our favor. It's really driven by the end application.

If I think about consumer, we do need the smartphone business to be a growing business. For us, that means high-end smartphones or medium-range low-end smartphones, but not feature phones.

If the market goes towards more low-end phones, cell phones and feature phones, then we don't see that much benefit. So, we need some growth in the smartphone business.

The general consumer space has been relatively weak. TVs, set-up boxes, all those areas are relatively weak, have been relatively weak. A pickup in that area would also drive growth for us. So, that's the consumer space.

The computing space, as you know, PCs, notebooks, ultrabooks are not doing as well as everyone would like. That area would also drive growth for us now, because of the ethernet ports, USB ports, that sort of stuff.

Communications, we look at the ethernet space, wireless land, voice over IP, anything with lightning protection, all of those areas to be potential growth areas for us. In industrial, it's automotive, it's a general industrial revenues, ethernet ports and USB protection.

So, it's very typical to look at it and say, hey, if this segment does well, then we will grow. It's really broad. Clearly, the bigger markets are the consumer market and the computing market. Our anticipation is if they come back next year, our protection business will continue to grow well above industry average, which it has done over the last 10 years.

It's a really good business and its driven by the trends I mentioned. Just more ports, the higher bandwidth per port, and particularly, most of the systems using advanced photographies for their processes and microcontrollers. They will need to be protected. That trend, if the system is not protected, it's a leading edge processor, they just have more returns and more quality issues. It becomes a challenge for them.

Okay. Thanks. Then, the last one for me. On pricing in the SerDes business, have you guys seen -- you've talked now for a couple of quarters, about pricing pressure in the 40-gig business. Has that continued or accelerated, now that we are waiting for 100-gig tenders to come back? How do you expect 100-gig pricing to play out over the next 12 months or so?

40-gig pricing is actually quite stable. It's more the 100-gig pricing now, because what happens is, it's really a cost per bit game. The OEMs and service providers are looking to try to come up with the systems that allow their 100-gig deployments to be cost-effective relative to 10-gig and 40-gig deployments. I expect there to be more pressure on the 100-gig side.

Having said that, we have a portfolio of products on the 100-gig side and some are priced higher, some are priced lower. It depends on which system and which region in the world, et cetera. But, that is what we expect to see. We'll expect to see 100-great pricing pressure now for the next few years and then a transition to 400-gig. When that happens you will see less price pressure and 100-gig will stabilize.

Got it. Thanks, guys.

Terence Whalen, Citi.

The first one is, can you just retrace for us the performance of the protection business versus, I believe what you had said last quarter, was that you had expected a significant decline, $20 million to $25 million below your expectation for October. Can you just let us know at what point in the quarter, things seem to actually stabilize and improve versus that expectation? Thanks.

The business actually performed mostly to expectation, Terence. I would say, it was a little bit better than we had anticipated, somewhat offset by a lot of poorer consumer business. If I look at smartphones, in general, I think the business did a little bit better than we anticipated. That was offset by a poorer consumer business.

I don't think there was anything from a linearity standpoint. It was generally what we had anticipated. Although, we were hoping for a little bit more pick up because of Christmas. We were anticipating that there was going to be more orders and a little bit more of a comeback from some of the new phones and things that were being released.

But, we haven't seen that. Obviously, that's part of the reason why Q4 is, we are still anticipating a muted performance in the smartphone consumer area.

Okay. Thanks for that retracement. The following question is about 10% customers. I think last quarter, you had one 11% and one 9% customer in the July quarter. Wanted to understand whether when you report your Q4 October quarter there were any 10% customers? Thank you.

Yes, Terry, we had two. We had obviously Samsung and then Huawei was a 10% customer this quarter.

Terrific. Thank you.

Harsh Kumar.

I just wanted to follow-up on a couple of things. Emeka, you talked about a flattish OpEx range for the foreseeable future, call it next year. That range being, I think, $55 million to $60 million first of all, if that is correct. And what revenue level can you sustain with that sort of an OpEx range? Let's say business spikes up again, everything changes. Is that the assumption?

Yes. Everything doesn't always have to change. I think if revenues come back, we should probably be back to our model of OpEx about half the rate of revenue growth.

Okay. So, narrowing in. I think you were able to comfortably do about $165 million the last couple of quarters and stay in that range. Are you going to at least get back to that and manage the OpEx within a $5 million swing, correct?

Yes.

Okay. And then, Mohan, this is way out there. 400-gigabit per second, SerDes products. When are we talking in terms of the market opening up for that? Is it several years out? Or is it let's say, next year, two years from now? How is your positioning or your R&D allocation towards that sort of trend?

Well, I think we're well-positioned. The timing is never easy on these type of things. It's very early. I do think there's still this insatiable need for more bandwidth, both in the long haul and emerging in the metro and access space and data centers.

So, I think it will be faster than people think. It's just a question of when the technology is ready and the cost of the deployments. Depending on which segment, power consumption also will become a critical factor. I would say two years from now you will start to see the first 400-gig deployments.

Got it guys. Thank you so much.

(Operator Instructions)

There are no further questions at this time.

In summary, while Q3 of fiscal year 2014 was a challenging quarter for Semtech, we are on track to deliver another record revenue year and our numerous growth drivers coupled with our balanced portfolio of highly differentiated analog products and balanced end market and geographical exposure, along with a focus on new-product introductions, should enable Semtech 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.

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