Semtech Corporation F4Q09 (Qtr End 01/25/09) Earnings Call Transcript

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 |  About: Semtech Corporation (SMTC)
by: SA Transcripts

Semtech Corporation (NASDAQ:SMTC)

F4Q09 Earnings Call

March 4, 2009 5:00 pm ET

Executives

Chris Rogers – Director of FP&A, Investor Relations

Emeka Chukwu – Chief Financial Officer and Vice President

Mohan Maheswaran – President and Chief Executive Officer

Analysts

Craig Hettenbach - Goldman Sachs

Steven Smigie - Raymond James

Harsh Kumar – Morgan, Keegan & Co.

Doug Freedman – [Growthpoint]

David Wu - Global Crown Capital

Analyst for Rick Schafer - Oppenheimer & Co.

Sumit Dhanda – Merrill Lynch

Operator

Welcome everyone to the Q4 fiscal year 2009 Semtech Corporation earnings release conference call. (Operator Instructions)

Now I would like to turn the call over to Mr. Emeka Chukwu. Your conference is open.

Emeka Chukwu

Good afternoon ladies and gentlemen. Before we go into our prepared remarks I would like to introduce Chris Rogers as our new Director of Financial Planning and Analysis and Investor Relations. Chris has been with us for over a month now and we are excited to have him as part of our team.

Chris?

Chris Rogers

Thank you Emeka. Good afternoon. Welcome to Semtech Corporation's fiscal year 2009 fourth quarter conference call. I am Chris Rogers, Director of FP&A and Investor Relations.

We have just issued our press release announcing our unaudited results for our fourth quarter ending January 25, 2009. A copy of our press release is available on our website at www.Semtech.com as well as national news and financial market wires.

During this call Mohan Maheswaran, Semtech's President and Chief Executive Officer and Emeka Chukwu, our Chief Financial Officer, will be discussing our results and answering your questions. Before I turn the call over to Emeka, I want to remind everyone of the following important information:

Our call today will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from those made during this call. We encourage you to review the Safe Harbor statement included in today’s press release as well as in Semtech’s most recent periodic reporting documents on Forms 10Q and 10K filed with the SEC for a more detailed discussion. Our press release and this conference call are our sole forum to respond to questions on our estimated financial performance going forward. Should you have any questions on our financial matters for the upcoming quarter this is the time when we are able to respond to these questions.

Also during this call we may refer to pro forma and other financial measures that are not prepared according to generally accepted accounting principles. You can find a reconciliation of non-GAAP to comparable GAAP measures on the Investor Relations section of our website. A replay of this call will be available on the Investor Relations section of our website through April 3.

Thanks for your attention to this important preliminary information. I will now turn the call over to Emeka Chukwu, Semtech's CFO.

Emeka Chukwu

Thank you Chris. I would like to start off by making a few comments about GAAP and non-GAAP reporting. Beginning with the first quarter of our fiscal 2010 we will no longer report our financial results on a non-GAAP basis. However, we will continue to provide additional relevant financial information to help investors better understand our financial performance.

Revenues for the fourth quarter of fiscal 2009 were $62.7 million, a 21% sequential decline and down 20% from the same quarter last year. Revenues decreased sequentially due to weakness in demand across all end markets as the result of the challenging macro economic conditions.

During the fourth quarter 54% of our revenues were derived from customers in Asia, 28% from North America and 18% from Europe. For the fourth quarter direct sales represented approximately 49% of total revenues while distribution represented approximately 51% of total revenues. Orders were down sequentially in Q4 resulting in a book to bill of less than one. Net direct orders accounted for 29% of shipments during the quarter.

Our GAAP net income for the quarter was $6.3 million or $0.10 per diluted share, down from $14.9 million or $0.23 per share for the same quarter last year and down from net income of $11.5 million or $0.19 per share for the third quarter of 2009. In the first quarter of fiscal 2010 we expect GAAP net income of $0.02 to $0.07 per diluted share. For the fourth quarter expenses related to equity based compensation were $2.6 million or 4% of revenue. This is a decrease of approximately $1.2 million from the third quarter of fiscal 2009. The decrease was primarily due to the reversal of compensation expenses associated with stock awards granted under the company’s executive long-term incentive plan as the probability of a payout under this plan was determined to be low.

This resulted in a favorable EPS impact of $0.02. We expect equity compensation expense to return to normal levels of approximately $4.5 million in the first quarter of 2010.

GAAP gross margin for the fourth quarter of fiscal 2009 was 53.2%, down 30 basis points from the third quarter of fiscal 2009 as a result of lower manufacturing volumes. We expect GAAP gross margin during the first quarter of fiscal 2010 to be flat to up 50 basis points depending on revenue mix and overall revenue. GAAP SG&A expenses were $16.1 million for the fourth quarter or 25.7% of revenue, a decrease of $3.2 million from the third quarter of fiscal 2009. The decrease in SG&A was primarily due to savings from the company’s shut down during the quarter, the one time reversal of equity compensation expenses and the benefit associated with the impact of the stronger U.S. dollar.

We expect GAAP SG&A expenses to be essentially flat at $16.1 million in the first quarter of fiscal 2010. Increase in equity compensation expense will be offset by savings from the various cost reduction initiatives implemented by the company including a two week shut down and reduced accruals for incentive compensation.

GAAP research and development expenses were $9.8 million in the quarter or 15.6% of revenue, down $300,000 from $10.1 million in Q3. The reduction was due to savings from the company’s Q4 shut down and the favorable impact of a stronger U.S. dollar. These benefits were offset by increases in spending on new products. We expect GAAP R&D expenses to increase to $10.5 million in the first quarter of fiscal 2010 due to higher new product development expenses.

For the fourth quarter expenses related to the now completed stock option investigation and expenses related to ongoing off-shore related matters were $491,000, down from the $611,000 in Q3. We expect off-shore related expenses of $500,000 in the first quarter of fiscal 2010.

Interest and other income was $430,000 in the fourth quarter compared to $904,000 in Q3 as interest rates continue to decline. For the first quarter of 2010 we expect interest and other income of approximately $700,000. Our GAAP tax rate in the fourth quarter of fiscal 2009 was 17.3% compared to 16.6% for the third quarter of 2009. We expect our GAAP tax rate for fiscal 2010 to be approximately 20% based on projected regional mix of income.

The non-GAAP numbers I shall be discussing today exclude the impact of stock based compensation, amortization of acquisition related intangibles, expenses in the recovery associated with the now settled insurance litigation, certain restructuring expenses, expenses related to the now completed stock option investigation and expenses related to ongoing off-shore related matters.

On a non-GAAP basis net income was $8.8 million or $0.15 per diluted share for the fourth quarter of fiscal 2009. Net income for the same quarter last year was $16.8 million or $0.26 per share. For the third quarter of fiscal 2009 net income was $14.9 million or $0.24 per share. Non-GAAP gross margin for the fourth quarter of fiscal 2009 was 53.5% which was at the low end of our gross margin guidance for Q4. This 50 basis point decline from the 54% reported in Q3 was due to lower manufacturing volumes.

Non-GAAP SG&A expenses were $14.1 million for the quarter or 22.5% of revenue, a decrease of $2.2 million from the third quarter of fiscal 2009. The decrease in SG&A was primarily due to savings from the company’s shut down during the quarter and the benefit associated with the impact of a stronger U.S. dollar.

Non-GAAP research and development expenses were $8.9 million for the quarter or 14.2% of revenue, a decrease of $200,000 from the $9.1 million reported in Q3. The reduction was due to savings from the company’s Q4 shut down and the favorable impact of a stronger dollar. These benefits were offset by increases in spending on new products.

The company’s non-GAAP effective tax rate for the fourth quarter fiscal 2009 was approximately 19.5% compared to 19.8% in the third quarter of fiscal 2009. The diluted share count for the fourth fiscal quarter was 60.6 million shares. We expect that diluted weighted average shares outstanding of 60.5 million shares in the first quarter of fiscal 2010. This forecast can vary based on the average stock price for the quarter and the level of stock option exercises and stock buy backs.

Now moving on to the balance sheet, our balance sheet remains very strong. In the fourth quarter we generated $15 million in free cash flow which is approximately 23% of revenue and ended the quarter with approximately $259 million of cash and investments. During the quarter we repurchased approximately $3.4 million or 319,000 shares of our common stock under a program previously authorized by the board of directors. We currently have $16 million left under this previously authorized program.

During the fourth quarter the company spent approximately $1.9 million on property plans and equipment. Depreciation and amortization for the fourth quarter was approximately $2.3 million including approximately $273,000 of intangible amortization.

In the first quarter of fiscal 2010 we expect capital spending to be approximately $4 million to support various new process developments and a ramp up of new products. We expect depreciation to be approximately $1.8 million and amortization to be approximately $273,000 in the first quarter of fiscal 2010.

Accounts receivable declined by 23% from the last quarter due to lower sales and our DSO’s increased to 46 days from 42 last quarter. In absolute dollars net inventory decreased by $4.4 million in the fourth quarter as compared to Q3 as we reacted quickly to softening demand but the days of inventory increased to 94 days from 83 days in the third quarter. Inventory at our distribution partners grew to 104 days from 70 days in Q3 as POS declined in all regions except for Europe.

We believe that both our internal and channel inventory are very well positioned to respond to shortly timed orders.

In summary we are pleased with the company’s financial performance in the fourth quarter despite the difficult circumstances. Although revenues were lower we remained profitable and grew cash and investments through very good management of operating expenses and working capital. On a sequential basis we reduced non-GAAP operating expenses by 10%, accounts receivable by 23% and inventory by 14%.

We believe that our strong balance sheet and operating leverage will not only see us through these uncertain times but will also allow us to emerge as one of the best performing companies. I will now hand the call over to Mohan.

Mohan Maheswaran

Thank you Emeka. Good afternoon everyone. I will discuss our Q4 fiscal year 2009 product group performance and fiscal year 2009 company performance and then our Q1 fiscal year 2010 outlook.

Q4 of fiscal year 2009 was a challenging quarter for Semtech. Demand softness across all regions and segments led to a decline in revenues. Semtech’s Q4 revenues were down sequentially 21% to $62.7 million. Non-GAAP gross margins were 53.5% and non-GAAP EPS was $0.15 per diluted share.

Although our revenues and EPS were down sequentially in Q4 of fiscal year 2009 we believe that Semtech’s end of market balance, broad portfolio, broad customer penetration and balanced geographic presence enabled us to out perform in the market again. Now let me discuss the performance of each of our current groups in Q4.

In Q4 our power management revenues declined by 23% on a sequential basis. The demand softness in Q4 was across all segments but noticeably weaker in the consumer and computing end markets. In Q4 Semtech’s power management product group acquired the high frequency switching regulator IP assets of [Leadis] Corporation. We believe that this addition will help us to produce a more differentiated portfolio of power management, switching related products to the market over the next 12-24 months.

In addition to the IP we acquired we also added a couple of very experienced power management designers who will supplement an already strong team. The expenses associated with this acquisition are built into our Q1 guidance.

Our power management product group continues to release new power management platforms that enable us to expand our SAN. The focus of these new platforms will be the handheld, consumer and the industrial segments. We are confident the momentum from our new power products will drive further revenue growth and margin expansion in the second half of fiscal year 2010. Given that our fiscal Q1 is a seasonally softer quarter for our power management business and given the current overall softness in demand we expect our power management revenues to be down sequentially in Q1.

In Q4 our protection revenues declined by 23% on an annual basis as demand from all segments softened. Our protection business unit continues to execute quite superbly and strategically we are very encouraged by the design win momentum of our protection products across all our target markets in both strategic accounts, tier two and tier three accounts. In Q4 we announced a new family of low capacitance protection devices with a high attenuation and low clamping voltage needed for high resolution color LCD interfaces in GSM and CDMA based 3G handsets. This family of new products further strengthens and extends Semtech’s protection portfolio in the Smart phone and broader handheld segment.

While Q1 has historically been a seasonally softer quarter for our protection business driven mostly by lower consumer and computing demand this year we do expect our protection revenues to be flat to slightly up in Q1. This expectation is driven by stronger recent orders from Asian infrastructure manufacturers and backlog pulling requests from high end handheld manufacturers.

Our power discrete revenues increased on an annual basis in Q4 by 8%. We are delighted with the execution within this product. This business is driven by demand from the aerospace, military, industrial and high end medical markets. Our focus is on continuing to improve our supply throughput and consistency of supply. We are also selectively developing new products targeted at increasing market share. We believe that our power discrete operations are now back to healthy levels following the fall out in Q3 FY09. This is a tremendous achievement by our power discrete product group and we can now continue on our journey of gaining share in this market. In Q1 we expect our power discrete business to grow modestly as we continue to increase share.

Revenue for the advanced communications and sensing business decreased 4% sequentially. Excluding our custom measurement revenues our advanced communications and sensing business would have increased both sequentially and on an annual basis. The focus of this business continues to be developing and releasing new platforms that enable us to expand our SAN. Our advanced comm and sensing product group recently announced a high performance, ultra low power integrated ISM band transmitter using Semtech’s True RF technology that integrates all radio components into a single dye and enables the bill of materials in a transmitter to be reduced by 40%. This new platform is already gaining traction in several industrial applications.

In Q1 we expect revenues from our advanced communications and sensing business to be approximately flat to slightly down. From a distribution POS standpoint in Q4 FY 09 we saw a total POS decrease. The POS decrease were driven by all regions except for Europe and in all segments. Distributor inventory increased in the quarter. The sharpest increase was driven by Japan where we have some new design wins with new products that we do expect to ramp to volume in fiscal year 2010.

Moving on to new products, we released 60 new products in Q4. This is a 33% increase over Q3. Our new product development machine continues to flow well in all of our businesses. This is still an area where we can do better but I am confident we will start to see even better results this year. Design wins from these new products will start to enhance our new product revenue and our overall gross margin in the second half of this year.

Turning to design wins, we reported over 650 new design wins in Q4 which represents another solid design win quarter for the company. The design wins were once again well balanced across several of our product groups and regions. With the new platforms we have recently announced we expect to see a continuation of the strong design win momentum in the future.

Let me comment briefly on our fiscal year 2009 performance. Yesterday marked my three-year anniversary with Semtech. I am delighted with the progress the company has made over the last three years. I am confident that the next three are going to be even more memorable. Fiscal year 2009 was a record revenue year for Semtech. We achieved $295 million in revenues and grew 3.5% from fiscal year 2008. This represents yet another milestone for Semtech.

Fiscal year 2009 was our second consecutive annual revenue record and our third consecutive year of sequential revenue growth. On a non-GAAP basis we also maintained approximately 55% gross margins for the year, generating $0.85 per share and we grew our design revenue dollars by 6% versus fiscal year 2008.

Also in fiscal year 2009 our protection business achieved record revenues and grew approximately 9% and our power discrete business achieved record revenues and grew approximately 29% and shipped its first products in to base customers. Our advanced comm and sensing business reached a number of new platforms that are gaining traction and will make fiscal year 2010 a growth year for this business.

We hired a new Vice President and General Manager for our power management business and acquired some new switching regulator IP assets. We also hired a new General Counsel.

I now believe that Semtech’s management team is complete and this will be the team that takes Semtech to the next level. In addition we are using the tough environment to hire the best people throughout our organization and our future results will demonstrate that our people are our difference makers for us.

When we reflect on our FY09 performance we cannot forget the fire that impacted our power discrete business in Q3. Our ability to recover from the fire, rebuild our operation and regain momentum in just two quarters was a major accomplishment for us and is another example of the tremendous execution improvements in the company.

In fiscal year 2009 we also reduced net inventories, repurchased $34 million of our stock and replenished our cash balance to end fiscal year 2009 with $259 million in cash and a very strong balance sheet. In fiscal year 2009 our free cash flow as a percentage of revenue was over 23%, our net cash per share was just under $4.00 and our free cash flow per share was approximately $1.14. We believe that all these metrics place us amongst the best cash generators in the semiconductor industry and amongst the very best in the analog sector.

Furthermore, we have steadily increased our free cash flow per share and our net cash flow per share over the last three years. The culture at Semtech is evolving into a high performance, results oriented culture and the core values within Semtech have helped us shape our behaviors both internally and externally and made us into a better company. Our execution is dramatically improved across all areas of the company and I am very confident we can continue to build on the current momentum.

Despite the challenging end to the year, fiscal year 2009 was a very memorable year for the company and one that we are very proud of. Now let me discuss our outlook for next quarter.

The current macro economic continues to give us all cause for concern. While bookings have been stronger so far in Q1 and there have been some areas of strength and some pull ins there is still a lot of uncertainty and visibility remains very poor. We currently expect Q1 revenues to be between $52-58 million. To attain the mid range of our Q1 guidance of $55 million we need net terms orders of approximately 37% at the beginning of Q1.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Craig Hettenbach - Goldman Sachs.

Craig Hettenbach - Goldman Sachs

Mohan, Semtech hasn’t cut as deep as some of the other companies in the space. Can you just talk about some of the areas you are utilizing through this downturn to actually kind of try to build and what areas you see as we come out of this downturn you are able to invest in that some competitors may not?

Mohan Maheswaran

The main focus for us is still continuing to bring out new product platforms in our power management area. We also, as I mentioned on the call, acquired a new platform there. Our ACS platforms both on the communications side, the wireless sensing side, the industrial areas and industrial wireless and industrial sensing and the consumer analog products are all platform areas I believe will give us new SAN expansion for the company. I think it is really important for us in the next three years that we continue to drive that SAN expansion. In addition we continue to invest in new process development for our protection area and also for power management.

In a sense, our ability to maintain OpEx but keep the R&D machine of the company going I think is a critical part of this strategy.

Craig Hettenbach - Goldman Sachs

If I could touch on the stock buyback, you bought back a little stock. Most companies again in this environment have halted buybacks. Can you just give us a feel for your appetite of future buybacks versus potential M&A?

Emeka Chukwu

We currently have a program that has about $16 million left on that program and what we have said in the past is we will continue to fund our buyback with cash flow from operations. That is what we are going to continue to do. With regard to the second half of your question on acquisitions we are definitely very actively looking around to see what would make sense for the company but I don’t think we look at it as either/or. It is something we are doing at the same time.

Operator

The next question comes from Steven Smigie - Raymond James.

Steven Smigie - Raymond James

Looking at the advanced comm and sensing business I know you have a set of new timing products out there set up to perform fairly well as we have a roll out of base stations coming up and I was curious how that stands for LTE platforms? Are you going to get some 3G benefit from that over the coming quarters and year?

Mohan Maheswaran

We already have 2G, 3G base station design wins. We are getting IP back haul design wins, LTE as well though that is probably a little bit further out. They are all tier one customers. These are major opportunities. Also, WiMax I would say the real critical question is how fast those guys ramp up. The encouraging news I would say at this point in its early days is where I am beginning to see more investment dollars going on in different regional areas is more in infrastructure, communications infrastructure and infrastructure to accelerate some of these new emerging technologies. I get some good feeling about the second half of this year but it is early days I would say.

Steven Smigie - Raymond James

In terms of the product you have out there for stuff that is ramping closer in, how much benefit are you getting say in some of the development happening over in China?

Mohan Maheswaran

We are seeing some benefit from that. Not so much from the new timing synch stuff because that is all in design win mode but more from our existing product technologies in protection, power management and also some of the existing ATS products.

Steven Smigie - Raymond James

On the power discrete business I think you mentioned you continue to gain share but I’m not sure if you indicated whether you thought that would be up sequentially in the coming quarter?

Mohan Maheswaran

We expect it to be up modestly. Even though we are gaining share I would say even in this marketplace the industrial, high end medical and military is also softer than one would have liked. I think we will continue to see progress there.

Steven Smigie - Raymond James

On the military part of that business, does the new administration sort of change your outlook of potential of that business over the coming year?

Mohan Maheswaran

Not really. I think part of the reason is because our approach is taking share so we know who the big gorilla is and we know exactly what we need to do to grow despite what happens in the marketplace. Obviously a large part of our power discrete business is also aerospace, space which is a new segment for us, the high end industrial medical so military is just one portion of it.

Operator

The next question comes from Harsh Kumar – Morgan, Keegan & Co.

Harsh Kumar – Morgan, Keegan & Co.

Gross margins were pretty impressive given how much revenues have declined. The first question is what is working there? Secondly, in terms of the up tick you are seeing is that primarily coming from Reynosa that are coming back on line?

Emeka Chukwu

What is really working for us is the mix. In terms of our guidance for Q1 the mix is going to be the key driver and also we expect our Reynosa business to start getting back to full health after the fire and also our advanced communication and sensing new line of sensing products really getting a lot of traction and doing quite well. On the downside or the one thing that would really limit the gross margin expansion we would want is what we are seeing from a February revenue mix is that Q1 volumes are still going to be low compared to our normal run rates.

Harsh Kumar – Morgan, Keegan & Co.

If I can ask you about the linearity in the quarter, did things get progressively better as what we are hearing from a lot of companies? I’m wondering what you saw in the quarter?

Mohan Maheswaran

I think November and December were very, very soft. January was stronger. We continued, as I mentioned, to see an improvement in bookings, orders and just general more positive feeling from customers and a couple of bright areas as well are I think Smart phones and handhelds and the Asian infrastructure I think are actually doing quite well. In general I would say bookings has been modestly up.

Harsh Kumar – Morgan, Keegan & Co.

If I heard you correctly both your base station business as well as your cell phone business would be up sequentially. Is that a correct assessment?

Mohan Maheswaran

What I talked about was that protection business is likely to be flat to slightly up and that is unusual for us in Q1 and that is driven by the infrastructure and the Smart phone business, yes.

Harsh Kumar – Morgan, Keegan & Co.

So delving into that, is that something that just Semtech in your opinion is seeing because of design wins or is that happening across the board?

Mohan Maheswaran

I would say it is probably both. If you are a participant in the Asian infrastructure market then I think you are going to see some up side with that. We have a fair amount of balance in our business as you know and I think in our protection business we sell into the comm market, lightning protection, Ethernet 10 gig and gigabit Ethernet protection and we sell into the high end handheld mini-USB, micro-USB, mini HDMI ports so we get a little bit of benefit if either of those markets come back.

Harsh Kumar – Morgan, Keegan & Co.

I take it that you are planning on a shut down for another two weeks or so this quarter?

Mohan Maheswaran

That is the game plan. Yes.

Operator

The next question comes from Doug Freedman – [Growthpoint].

Doug Freedman – [Growthpoint]

If you could, the top line guidance definitely you are holding up better than the peer group peak to trough. If you could go into a little detail on why you are looking for a 37% turn? That number actually would reflect a lower turn’s ratio than I would say a lot of your competitors. Are there certain reasons why you are unable to respond to a higher turn’s environment if there was one? Anything you can offer on how you settled into that number?

Mohan Maheswaran

I think probably that is just we look at the run rate, the turns ratio over the last couple of years, and if I go back the last four quarters it has been 35%, 34%, 34% and 39% in Q1 of FY09 is what we turned so 37% is kind of in the range. We can respond to a larger turns. We have put in place the right inventory portfolio to respond to fast turns from clients if we need to. As you know we have a system. We look at the demand forecast system and that forecast tells us what we think is going to be required in that quarter and that drives in large part our guidance.

As things improve we will see. That obviously could help us but we think our guidance is probably the right guidance for this quarter.

Doug Freedman – [Growthpoint]

I just wanted to sort of understand what you were looking at and how you were arriving at that…so it seemed like the turns environment is increasing. Can you help us understand a little bit of how much of the expenses right now are sort of being temporarily restrained? If you weren’t to have sort of shut downs or temporary actions what is sort of the more normalized OpEx spending you are targeting and at what run rate of revenues do you sort of back off on the controls so we can model the recovery properly?

Emeka Chukwu

If you go back a few quarters, maybe back to Q3 when we got almost $18 million of revenue. Total OpEx was up $25 million. That is what I would consider the normal run rate for us but given where we are right now we are implementing various activities like a company wide shut down, reducing the percentage we are expecting to pay out on our supplemental compensation, we are dialing back on traveling, pushing out new headcount and doing everything one would expect us to do in this environment but from a normal run rate perspective our operating expenses have basically been used to support an $85-95 million per quarter run rate.

Doug Freedman – [Growthpoint]

Looking into my model going out a little ways there were some actions you were attempting to take to recover some costs associated with the Reynosa fire. Can you give us an update on some of the expectation of a few of the one-time charges and what the outlook is for some of those?

Emeka Chukwu

I think most of the expenses associated with bringing Reynosa back on line are mostly behind us. We are probably still going to have some little things here and there like $100,000 or $200,000 a quarter. We are still working with our insurance companies to start getting some reimbursement of the money we have spent. We have not really expanded a lot of that into the guidance because as you know with insurance companies you can never really count on what you are going to get from them. In terms of the actual spending we are behind most of the initial expenses.

Mohan Maheswaran

There are two components to the insurance recovery. One is the actual cost of replacing equipment and then there is the business loss as well.

Emeka Chukwu

The business interruption.

Doug Freedman – [Growthpoint]

I just wanted to make sure that was still potentially in front of us because I know you had said in your opening comments that a few of the insurance recovery issues were resolved but I didn’t believe they were related to Reynosa so I just wanted to clarify. That potential is still in front of us. Great. I had trouble hearing on your interest expense how much interest income you expect. Was that several or seven?

Mohan Maheswaran

$700,000.

Operator

The next question comes from David Wu - Global Crown Capital.

David Wu - Global Crown Capital

I was curious about one thing and that is nobody really knows how long this recession is going to last or how deep it is going to go, beyond the kind of measures you have done so far what other things could you be looking at and depending on how much the second half up lift potentially is for you? I was curious about that. Do you have a sense of how much below consumption have your shipments been in the fourth of last year and the first quarter of this year? Do you have a guess how much below end market consumption you really are shipping and if there are any guesses on how much of a bounce would you get if we finish inventory with liquidation?

Mohan Maheswaran

Let me take the latter part of the question and then I’ll ask Emeka to talk about managing through a further recessionary timeline. The way we look at it and the way we manage our business is we look at the demand forecast for two quarters. So we look at, for example in this quarter, we look at Q1 and we look at Q2. That is how we manage how we determine our own inventory and determine what type of a bounce back there could be and how we could respond to that if necessary.

Consumption versus what we have been shipping is tough to call because I think our customers are going through some things in terms of determining what is the end demand out there and clearly it is different for computing and consumer. They are struggling in a little bit deeper fashion than some of the infrastructural aspects where infrastructure you get very good insight into what infrastructure is going on because governments have to put money well in ahead of deployment of the infrastructure to make it happen. So you get a little bit more insight into that.

I think from a consumer standpoint and a computing standpoint I think it is very difficult to call and I wouldn’t want to give you a guess as to where we are but I would say that our Q1 guidance gives you a little bit of insight as to where we think the demand is for Q1 and hopefully that will be the bottom.

Emeka Chukwu

As regard to the operating expenses, the way we think about this situation here is that this situation is going to come to an end at some point. We don’t know when. If you recall, fiscal year 2009 in Q2 of fiscal year 2009 we took some actions to reduce our spending even before the rest of the industry started to look at it. We believe that the various list of options we have available to us right now that we have actually employed in Q4 and will be employing in Q1 should be enough really to allow us to continue to bring our expenses down if we need to. We have additional activities like for instance in Q1 we are still planning on some level of pay out with regards to our supplemental compensation. If things get worse we will probably have to dial that back to zero.

There are still some replacement headcounts that we are doing that are very critical. If things get really worse we may just have to eliminate that completely. There is a suite of options we have available to us to really dial down the operating expenses further if things continue to get worse. You just need to be aware that we kind of look at this differently with this company. We think more on a strategic level that we need to continue to make the investments that we need to allow us to be really successful when the economy bounces back.

Mohan Maheswaran

I still believe that the people for us at Semtech are really our biggest asset. We have spent the last few years rebuilding the infrastructure and rebuilding our team and making sure we put in place the growth platforms so we can take share and gain share even if the market doesn’t come back. At the same time if we do that and we start to let go of those key people then I think that is the wrong thing for the company.

David Wu - Global Crown Capital

So hopefully you are right and [inaudible] is the bottom. Back to school starts in the July quarter for you right?

Mohan Maheswaran

Right.

Operator

The next question comes from Steven Smigie - Raymond James.

Steven Smigie - Raymond James

I was hoping you could give me some sense of what the option expense might fall out to in various categories so I can try to get to my non-GAAP numbers?

Emeka Chukwu

I think I’ve got it at $4.5 million and I think the break down is manufacturing about $400,000, research and development is about $1 million, the balance is SG&A.

Steven Smigie - Raymond James

That is for the coming quarter or the guided quarter?

Emeka Chukwu

Yes.

Steven Smigie - Raymond James

I was hoping you could talk a little bit about power management portfolio. You obviously did an acquisition there and you have been investing quite a lot in that area. It was off this quarter and I guess obviously the industry has been pretty bad. What does that look like over the coming year? You put in a lot of design wins do you grow faster than the markets because of all the investment you have made? How are those design wins gaining traction and are there any specific quarters where you expect there to be maybe a step function up or anything like that?

Mohan Maheswaran

So the power management business at Semtech we have been kind of going through a little bit of a transition over the years. As you know we were very strong in the computing platform for the core regulators and that sort of stuff. When I came aboard I felt the margins weren’t really what we needed as a company and we needed to kind of change that transition so we really started to focus more on some other areas. This last year we brought in UGM to the business and I think for the first time I feel really quite good about the type of platforms we have coming out. They are very innovative. They are different. They are targeted to a whole range of different applications including TV’s and displays and some notebooks, set top boxes, medical equipment, infrastructure, automotive and handhelds as well, different types of functionality and I think with the acquisition we are looking at some other types of IP acquisitions as well. I think we just changed the portfolio.

We are getting design wins. The design wins are coming. I think the real benefit for us is not only on the revenue traction but the gross margin expansion we will get from that business. I expect in fiscal year 2010 near the second half you will see that.

Steven Smigie - Raymond James

On inventory, what do you think that looks like in the coming quarter? How much does that get worked down or not? Even into the following quarter. I’m just trying to get some sense of obviously it spiked on a day’s basis partly with the inventory you put in place but how does that look over the next couple of quarters?

Emeka Chukwu

For Q1 at least our expectations are internal inventory is going to be somewhat flattish. The final numbers are going to depend really on what we are seeing happening in demand with regards to Q2. As you know, our inventory build is to a very large extent dictated by how we see future demand. At this point internal inventory we expect is going to be somewhat flattish. Our expectation is that channel inventory is going to come down somewhat.

Steven Smigie - Raymond James

You sort of addressed this a little bit but looking out to the July quarter it sounds like you think that might be up. Is that starting a return to normal seasonality since visibility is pretty weak at this point? Based on your products and what you understand of the end markets is that a pretty decent quarter? Any sense you can give on that now without specifically giving guidance?

Mohan Maheswaran

I think our hope is that Q1 is the bottom and as I said because of the strengthening in a couple of areas like Smart phones and some of the infrastructure areas my sense is that Q1 will be the bottom. One can never say for sure but given that is seasonally the softest quarter for us that would be my expectation but one never knows.

Operator

The next question comes from Rick Schafer - Oppenheimer & Co.

Analyst for Rick Schafer - Oppenheimer & Co.

Can I just follow up on your earlier comment on power management and basically you have been I guess getting a little bit away from the computing products you had before there but it sounds like computing is still one of those challenged end markets but how much exposure do you have to the computing market? I would think it would be relatively low now compared to historically.

Mohan Maheswaran

It is relatively low. We do have several components that go into the computing sector including protection goes into USB ports and Ethernet ports, gigabit Ethernet ports, etc. so we still have exposure there and obviously we still have power management that goes into the computing sector but it is a much lower number now and I’m comfortable with where we are. I think with our new platforms we still expect to get some design wins in the computing sector it just won’t be as much as we had before.

Analyst for Rick Schafer - Oppenheimer & Co.

Is there any kind of range you can put on that? Maybe less than a quarter of the revenues? Less than 20%?

Mohan Maheswaran

It is definitely less than 20%.

Emeka Chukwu

Of total computing?

Analyst for Rick Schafer - Oppenheimer & Co.

No, just of your total revenues. Computing.

Emeka Chukwu

Computing in Q4 was 18% of total revenues.

Mohan Maheswaran

Actually let me give you those numbers. I don’t think I said them on the call. High end consumer for us was 35% of revenues, communications was 17%, industrial was 13% of revenues and computing was 18% of revenues roughly.

Analyst for Rick Schafer - Oppenheimer & Co.

With respect to the inventory levels obviously you worked it down pretty well on an absolute basis but days are still pretty high. Are you expecting any impact on the pricing environment from the inventory situation?

Mohan Maheswaran

The pricing environment is going to be there in the computing and consumer segments as one would expect. There are a lot of competitors trying very, very desperately to grow revenues and get some pick up in their demand obviously try to use pricing as a vehicle. It doesn’t necessarily yield that result and if anything I think it leads to lower profitability for many of those companies who are struggling anyway. My sense is that it is not going to be abnormal. Nothing abnormal. I think we will just continue to see pricing ASP erosion in the consumer and computing market when the demand comes back the rest I think is fairly stable.

Operator

The next question comes from Sumit Dhanda – Merrill Lynch.

Sumit Dhanda – Merrill Lynch

The one question I had, in terms of the product build you talked about in the channel for design wins with Japanese customers can you talk to the vertical market you are addressing or just provide more color around both the timing of the sell through associated with those products and the character of those products?

Mohan Maheswaran

The character of the products is they are integrated DC to DC platforms for a variety of different types of products there. [Buck] regulators mostly and the platforms themselves, the verticals are more the computer peripherals I would say. Also some infrastructural areas, communications infrastructure as well. It is a mixed bag. There is not one area. A couple of handheld areas as well.

Sumit Dhanda – Merrill Lynch

You think you have very good visibility these products are indeed going to ramp?

Mohan Maheswaran

Yes, they are designed in and Japan as you know the ramp may take a little bit longer than normal but the distributors are expected to respond to very short lead times in Japan.

Sumit Dhanda – Merrill Lynch

The other question I had, you went through your advanced communications and where you expect to see traction. Can you talk a little more on the sensing side when you think your efforts there are going to show up in actual product revenues here? Is it the second half of calendar 2009 phenomenon? Just a little more along those lines.

Mohan Maheswaran

We are starting to see on the sensing and on the wireless side some of these new applications are starting to ramp up but very slowly. In terms of material revenue I think second half of this year is probably a good schedule to give you.

Sumit Dhanda – Merrill Lynch

You think the ramp within the sensing sub segment is going to be meaningful? Could you talk a little bit about the applications where you expect to see more traction?

Mohan Maheswaran

Let me talk about the wireless and sensing because they are kind of inter linked. AMR is one of those segments, home automation, remote keyless entry sensing areas are all kind of good design wins, fairly good traction, meaningful revenue I would say towards the end of this year and into next year. It is tough to call because some of these applications in a normal environment I would have said are going to start to ramp in the next couple of quarters here. But with the macro environment I would say they are pushed out at least a quarter.

Emeka Chukwu

I just wanted to add something to your question on the Japanese distributor. I just wanted to clarify that we do not recognize revenue on those shipments until they actually sell through.

Sumit Dhanda – Merrill Lynch

I guess then that begs the question. Never mind. I will follow-up offline.

Operator

The next question comes from David Wu - Global Crown Capital.

David Wu - Global Crown Capital

Can you help remind me of roughly I remember by product categories that the big categories are protection, power management and then the event common sensing and the smallest piece is power discrete. Do I have that order roughly right? If you can help me with some round number percentages that would be great. Can you talk about how big these different pieces are?

Mohan Maheswaran

For Q4?

David Wu - Global Crown Capital

Yes.

Chris Rogers

Our largest is protection at 46%, power management is 23%, AC&S business at 19% and power discrete is 12%.

Operator

The final question is a follow-up question from Harsh Kumar – Morgan, Keegan & Co.

Harsh Kumar – Morgan, Keegan & Co.

Your recent acquisitions I am curious how much you paid for it, if you can disclose that. Is there any revenue associated or is that a purely an IP deal? Also I am curious about the acquisition in the future that you talk about. What are your criteria? Is it technology, product, accretive or non-accretive? Any color would be helpful.

Mohan Maheswaran

On the latest acquisition it was $2.3 million and it was purely IP and some people was the cost of the acquisition. No revenue. This is a portfolio of IP and we already have started to integrate into our own platforms and we hope to have product out in the next 12 months here. It is not going to generate any revenue or meaningful revenue in fiscal year 2010.

Going forward when we look at acquisitions yes we want them to be accretive. They have to fit our gross margin level. We are looking for technology like this one that enables us to bring some innovative platform to the marketplace and really drives some type of IP synergy with the platforms we have either in protection, power or our advanced comm and sensing areas.

Operator

At this time we have no further questions.

Mohan Maheswaran

Let me summarize by saying that fiscal year 2009 was an excellent year for Semtech. We increased annual revenue sequentially by 3.5% to $295 million to achieve a company revenue record in our 48-year history. This achievement was against a backdrop of a decline in both the semiconductor industry and the analog sector. In addition, two of our core businesses achieved record revenues and we saw strong continued design win momentum in all regions and across all product lines. Finally, we replenished our cash balance and maintain a very strong balance sheet.

Our journey will continue through fiscal year 2010. With that I would like to thank everyone participating in our fourth quarter conference call and we look forward to updating you all next quarter.

Operator

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

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