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Semtech (NASDAQ:SMTC)

Q1 2014 Earnings Call

May 22, 2013 5:00 pm ET

Executives

Linda Brewton

Emeka N. Chukwu - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Mohan R. Maheswaran - Chief Executive Officer, President and Director

Analysts

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Craig A. Ellis - B. Riley Caris, Research Division

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Tyler Radke - Lazard Capital Markets LLC, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Operator

Good afternoon. My name is Rachel, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY '14 earnings release call. [Operator Instructions] Linda Brewton, Head of Investor Relations, you may begin your conference.

Linda Brewton

Thank you, Rachel. Welcome to Semtech's Fiscal Year 2014 First Quarter Conference Call. I'm Linda Brewton, Senior Manager of Investor Relations, and speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer.

A press release announcing our unaudited results for the quarter ended April 28, 2013, was issued after the market closed today and is available on our website at www.semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release, as well as the Other Risk Factors section of our most recent periodic reports on Forms 10-Q and 10-K filed with the Securities and Exchange Commission.

As a reminder, comments made on today's call are current as of today only. Semtech undertakes no obligation to update the information in this call should facts or circumstances change. During the call, we may refer to pro forma or other financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the management team considers non-GAAP information useful, along with detailed reconciliations between GAAP and non-GAAP results, are included in today's press release.

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

Emeka N. Chukwu

Thank you, Linda. Good afternoon, everyone. Q1 of fiscal year 2014 was a strong quarter for Semtech, with net revenues of $162.4 million, coming in at the upper end of our guidance range. These represented growth of 8% from the prior quarter and growth of 39% from the first quarter of fiscal year 2013. Recall that the first quarter of fiscal year 2013 contains 6 weeks of revenue from Gennum.

All our end markets grew during the quarter with high-end consumer enterprise computing and communications being particularly strong. In Q1, sales into Asia represented 73% of revenue. North America represented 16% and Europe represented 11% of total revenue. Direct sales represented approximately 61% of total revenues while distribution made up 39%.

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

Operating expenses on a GAAP basis were $77.2 million compared to $75.5 million in the prior quarter. The increase was attributable to higher payroll-related expenses from increased work hours and higher payroll taxes, as well as the timing of new product expenses, partially offset by lower integration expenses. In Q2, we expect our operating expenses on a GAAP basis to decline slightly as the higher variable expenses are associated with higher revenue is offset by lower new product expenses and lower intangible amortization.

We recorded an expense of $4.9 million in interest on order in Q1 versus the expense of $4.4 million in Q4. This slight increase in this expense was attributable to unfavorable currency movements. During the quarter, we refinanced our existing 5-year Term A and Term B loans. The new debt structure consists of a Term A loan plus a revolver with an accordion priced at LIBOR plus 1.75%. The new structure offers greater operational flexibility and carries an interest rate that is substantially lower than the prior debt arrangement.

In Q2, we expect to incur approximately $10.7 million in interest and other expense, of which $8.7 million is related to write-off of capitalized costs associated with the retired loan. In Q1, we recorded a GAAP tax provision of $434,000 versus a tax benefit of $5.1 million in Q4, driven by a less favorable mix of regional income as compared to the prior quarter.

For Q2, we expect our GAAP tax rate to be a benefit of approximately 12%, reflecting the tax benefit of the write-off of capitalized interest costs related to our long-term debt. For modeling purposes, for the remainder of the year, we expect our GAAP tax rate to be a provision between 1% and 5%.

Our GAAP net income for the quarter was $14.8 million or $0.22 per share on a fully diluted basis, up approximately 13% from Q4. The diluted share count for Q1 was 68.6 million shares. We expect a fully diluted share count of approximately 59 million shares in Q2.

On a non-GAAP basis, excluding the impact of equity compensation, amortization of acquired intangibles, acquisition-related expenses and other onetime expenses, gross margin was 61.6%, the same as the prior quarter as higher manufacturing volumes offset the negative impact of a higher mix of consumer and computing revenue as compared to the prior quarter. We expect Q2 non-GAAP gross margin in the range of 61% to 61.5% as higher volumes somewhat offset the less favorable seasonal mix of consumer and computing revenues.

Q1 non-GAAP operating expense was $59.8 million, slightly higher than guidance due to the timing of new product expenses. In Q2, we expect non-GAAP expenses to be approximately flat as higher variable expenses associated with higher revenue are offset by lower new product expenses.

Non-GAAP net income for Q1 was $31.3 million or $0.46 per diluted share. Our non-GAAP effective tax rate for Q1 was 11.6%, up from a tax benefit of 1.5% in Q4. We expect our non-GAAP tax rate for the remainder of the year to be similar to Q1.

Our cash balance at the end of the quarter was approximately $236.4 million of cash and investments, approximately flat from Q4. During the quarter, we paid approximately $9 million in principal and interest on our term loan. Our priority for use of cash remains paying down our debt. We did not repurchase any stock during the quarter. Our total outstanding authorization is approximately $42.5 million.

The company spent approximately $12.8 million on property, plant and equipment in the quarter. In Q2, we expect to spend approximately $12 million primarily for manufacturing equipment and IT infrastructure improvements. Depreciation for Q1 was approximately $5.1 million. In Q2, we expect depreciation to be approximately $5.5 million.

Accounts receivable grew 16% sequentially in Q1, and our days sales outstanding decreased to 42 days from 43 days in Q4. Net inventory in dollar terms was up 2% to $76.6 million in Q1. On a days basis, net inventory was down 2 days to 106 days in Q1. We expect our Q2 inventory to increase slightly in support of higher demand. Our target range for internal inventory is 90 to 100 days.

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

I would now hand the call over to Mohan.

Mohan R. Maheswaran

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2014 performance by end market and by product group and then provide our outlook for Q2 of fiscal year 2014.

In Q1 of fiscal year 2014, we achieved record net revenues of $162.4 million, an increase of 8% from Q4 of fiscal year 2013 and an increase of 39% from Q1 of fiscal year 2013. For the quarter, our non-GAAP gross margin was 61.6%, and our non-GAAP diluted earnings per share was $0.46 per share.

In Q1, revenue from the communications end market increased and represented approximately 28% of Semtech's total revenue. Revenue from the high-end consumer end market increased from the prior quarter and represented 31% of total revenue. Approximately 20% of this revenue was attributable to handheld devices, and approximately 11% was attributable to other consumer systems.

Revenue from the industrial end market increased and represented 25% of total company revenue. Revenue from the enterprise computing end market also increased from the prior quarter and represented 16% of revenue.

I will now discuss the performance of each of our product groups. Q1 was a solid quarter for our protection business, which achieved record revenues, record bookings and record design wins. Protection revenue grew 16% sequentially to represent 35% of total revenues. All end markets in protection grew sequentially, with particular strength in the high-end consumer end market, driven by smartphone applications.

During the quarter, we expanded our RailClamp protection platform, with the introduction of several new devices, including a new automotive-grade protection device for antenna protection. This device offers 15-volt single-line bidirectional ESD protection in an ultrasmall package, which provides customers with design layout flexibility. We also unveiled a RailClamp protection array for protecting leading-edge Ethernet SFI interfaces.

We believe our protection business will continue to grow, driven by proliferation of ports on electronic devices and the increasing performance requirements of those ports. Furthermore, the ongoing transition of advanced processes to next-generation lithography nodes makes them much more vulnerable to electrostatic discharge events.

As an industry leader in high-performance protection platforms, Semtech continues to be positioned very well to benefit from these industry trends. In Q2, we expect our protection business to grow nicely, driven primarily by the high-end consumer market.

Moving on to our Gennum product group. In Q1, revenue grew 9% to represent 25% of total revenues. In Q1, our Gennum product group also achieved record product revenues, record bookings and record design wins. Strength was primarily in the enterprise computing end market, driven by physical media devices and CDR products for data center, storage and backhaul applications.

Demand for our 1-gig, 2.5-gig, 10-gig and 25-gig PMD devices continues to increase, and our 10-gig backplane and 25-gig CDR platforms continues to do well in cloud computing-based routers and servers. In addition, China Mobile deployments of PON and LTE backhaul pipes are also driving an increase in the demand for our Gennum products.

We also saw strength in the industrial end market, driven by video surveillance and video broadcast platforms. During the quarter, we highlighted our 6G ultra-high definition platforms at the National Association of Broadcasters show in Las Vegas. These platforms enable the industry to transport higher-resolution formats, including both ultra-high definition TV and 4K digital cinema formats at twice the density and half the power and competing solutions at a substantially lower cost and with outstanding performance.

The first applications emerging that are driving the higher video bandwidth trends include 3D TV, 4K digital cinema TVs, ultra-high definition projectors and cameras and proprietary high-definition video links in video routers and switches. As an industry leader in high-performance video broadcast platforms, Semtech continues to be well positioned to benefit from these high-definition video trends.

We are also seeing an acceleration in our high-definition CCTV video surveillance business due to the increasing global deployment of HD-CCTV security cameras.

In Q1, we exited the video optical module business. This product line was not strategic to Gennum's core business, and the divestiture enables us to focus resources on our core analog platforms. There is no material financial impact from the exit.

Gennum is now a completely integrated product group within Semtech. In Q2, we expect our Gennum product group revenue to grow nicely and achieve another record product revenue quarter.

Turning to our advanced communications product group. Revenue in Q1 increased 9% sequentially and represented 23% of total revenue. The increase was driven primarily by strength in 100 gigabit per second products and timing synchronization platforms. The 100 gigabit per sec long-haul market is growing rapidly, and the economics of the 100 gigabit per second fiber deployments are starting to become attractive to service providers. We expect the demand for our 100-gig long-haul products to remain strong for the rest of the year, offsetting some weakness in 40 gigabit per second demand.

By region, we expect China and North America to continue to invest in high-bandwidth infrastructure to support the increasing usage of smartphones and other mobile devices, while Europe and emerging geographies are expected to follow more slowly.

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

In addition to our new PLL platforms, our timing synchronization platform momentum continues to do well as LTE wireless base stations, aggregation boxes and carrier-grade small cell boxes increasingly rely on timing synchronization to operate effectively in LTE networks.

In Q1, we experienced solid design win traction for our timing products and achieved our first design wins in the enterprise class small cells. As an industry leader in high-performance SerDes and timing synchronization platforms, Semtech continues to be positioned well to benefit from the increasing bandwidth trend in the industry today. In Q2, we expect revenue from our advanced communication business to be flat to slightly down in Q1 due to seasonality.

Moving on to our Power Management and High Reliability product group. In Q1, revenue for the group decreased sequentially by 8% and represented 9% of revenues. The decrease was driven primarily by lower demand from consumer applications due to seasonality. In Q1, we continue to see design win momentum for our Power Management and High Reliability solutions. During the quarter, we expanded our automotive-qualified suite of Power Management products with the introduction of a high-brightness LED driver for infotainment and navigation display backlighting.

We believe the automotive market offers significant growth potential for us, driven by the convergence of computing and infotainment applications in vehicles, and we are continuing to build our suite of AEC-Q100 qualified -- automotive-qualified power platforms to meet this demand.

Our Power Management and High Rel business is in transition with new developments in the pipeline emerging throughout the rest of FY '14. We anticipate that these new platforms will start to drive growth in our Power and High Rel business and drive a greater contribution to the overall Semtech business.

In Q2, we expect our Power Management and High Reliability business revenue to be flat to slightly down from Q1 due to weaker industrial and computing sales.

Next, we'll turn to the Wireless and Sensing business. In Q1, revenue for Wireless and Sensing declined 10% sequentially to represent 8% of total revenues. The decline was driven primarily by softness in the Industrial end market. In Q1, we posted a record number of design wins for the Wireless and Sensing business, driven by industrial and high-end consumer applications.

On the industrial side, we saw design win momentum from smart lighting, home security, automated metering and remote keyless entry platforms. In consumer, we garnered key design wins for our touch platforms and set-top box LCD television and tablet applications. We are very optimistic with the potential of both our new wireless and our new touch sensing platforms, which are both in the very early stages of design into 2 very exciting future growth markets.

The growth in these markets will be driven by the need for longer-range, low-power wireless connectivity and very low-power, feature-rich smart sensing.

In Q2, we expect sales for our wireless and sensing product group to be flat to slightly up, driven by medical applications.

In Q1, we saw distribution POS increased sequentially by approximately 19% to achieve a record quarterly POS. Distributor inventory decreased 6 days from 69 days in Q4 to 63 days in Q1 and is well below our target model of 70 to 80 days. Our distributor business, much like the overall Semtech business, is very well balanced with 48% of the total POS coming from consumer and computing end markets, and 52% of total POS coming from industrial and communications end markets.

Moving on to new products and design wins. In Q1, we released 18 new products and achieved a record 1,895 new design wins. Semtech's focus on the key trends driving growth for analog semiconductors, along with our breadth of analog product offerings into multiple end markets, positions us well to benefit from growth in our industry. We expect to see a continuation of the strong design win momentum in Q2.

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

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steve Smigie from Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

As I look at the 100-gig and 40-gig businesses, can you talk a little bit about seasonality here? It's clearly down a little bit in the coming quarter, but would I expect that then on a seasonal basis to reaccelerate it into the back half of the year?

Mohan R. Maheswaran

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

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay. And then on the rollout of the PMD, PON products, for example, China Mobile, can you talk a little bit about the timing and how that's taken place here? I know there were potentially some tenders that's supposed to be out around March? Did that happen and have you started to see the deployments pick up?

Mohan R. Maheswaran

You really -- you're talking about the China Mobile deployments?

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Yes, correct.

Mohan R. Maheswaran

Yes. So I think that is occurring now. I think part of the strength we're seeing is because of the deployments in China related to China Mobile. And we see the benefit on both sides actually, both on the core side and infrastructure side, the line side and also on the client side as we see more access deployments and PON deployments and our wireless backhaul deployments.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

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

Mohan R. Maheswaran

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

Operator

Your next question comes from the line of Craig Ellis from B. Riley & Co.

Craig A. Ellis - B. Riley Caris, Research Division

Just following up on the Gennum question there. As you look at the growth in the second quarter in Gennum, can you just walk us through some of the gives and takes? Is it across the board or are there particular parts of the Gennum business that will be particularly strong? And can you give us an update on the Thunderbolt business within that product?

Mohan R. Maheswaran

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

Craig A. Ellis - B. Riley Caris, Research Division

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

Mohan R. Maheswaran

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

Craig A. Ellis - B. Riley Caris, Research Division

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

Emeka N. Chukwu

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

Operator

Your next question comes from the line of Rick Schafer from Oppenheimer.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Just like a quick follow-up on the SerDes. It sounded like 40G orders are tailing off or starting to tail off a little bit just as 100 gig is really starting to ramp. I guess the question is, do you expect this to be a sustained kind of trend going forward? And if you blend those 2 -- those 2 pieces or the 2 parts, 40 and the 100G, if you blend that, is that -- is this still a sort of a roughly a 20% type growth market you think for the next couple of years or for the foreseeable?

Mohan R. Maheswaran

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

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

So at least in revenue terms, it could be bigger than 40G sometime, I don't know, this quarter, next quarter, I mean, sometime soon?

Mohan R. Maheswaran

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

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

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

Mohan R. Maheswaran

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

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

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

Mohan R. Maheswaran

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

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Okay. And then just one quick question on Wireless. I know you mentioned handheld obviously very strong. You expect it to be strong again. I'm curious, with so much strength in the first half and obviously, your largest customer, I mean, you're pretty levered to Samsung. I mean, do you -- it doesn't sound like you've seen any slowdown in that business yet post-launch. But I mean with such a strong first half, I mean, how do you -- I guess how do you look at the balance of the year? I mean do you think that kind of slows down in the second half a little bit? Or are other names, sort of like BlackBerry or some of your other customers there, to maybe surprise you on the upside or pick up some of that -- pick up some of that slack in the second half?

Mohan R. Maheswaran

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

Operator

Your next question comes from the line of Harsh Kumar from Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

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

Mohan R. Maheswaran

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

Harsh N. Kumar - Stephens Inc., Research Division

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

Mohan R. Maheswaran

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

Harsh N. Kumar - Stephens Inc., Research Division

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

Mohan R. Maheswaran

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

Operator

Your next question comes from the line of James Schneider from Goldman Sachs.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

This is Gabriela Borges on behalf of Jim. I was hoping to follow-up on the commentary that you mentioned on distributed POS and inventory. Can you talk a little bit more about trends of distribution and what you're hearing from distributors in terms of their willingness to restock?

Mohan R. Maheswaran

Well POS for us, obviously, was a record POS so -- and channel inventory is low, so we see plenty of willingness to restock. I think the -- and as we're going into our -- we, historically, see as the 2 strongest quarters in the year, I don't think there's any problem there at all. It really is driven by end demand and that's quite -- still, as I said, is looking pretty robust.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

That's helpful. And then as a follow-up, if I could. I was hoping to get some more color on how to think about growth in the Wireless and Sensing business as we go through the year. What are the growth drivers that you would highlight there post -- given guidance you're about to submit [ph] to be flat to up slightly?

Mohan R. Maheswaran

Yes, the Wireless and Sensing is one of the businesses that has a lot of new growth drivers within it. We just haven't seen it materialize yet, a lot of good application areas. We're, obviously, focused on the smart metering side. That tends -- industrial is -- seems a little bit soft at the moment. The whole smart lighting, industrial security, home automation, all those areas are, I would say, so-so. Medical is doing a little bit better for us. And then we have, as I mentioned on the call, 2 specific areas, one is long-range ultralow power wireless, which we believe is a really nice technology and starting to get a lot of momentum. Time to revenue is a little bit longer so I'm not sure it's going to impact the next quarter or 2. But certainly going the longer term, it's going to have an impact. And then finally, on the Touch Sensing side, as I mentioned, we have got some good design wins in consumer applications. And so those could generate upside in the second half of the year for us.

Operator

Your next question comes from the line of Ian Ing from Lazard.

Tyler Radke - Lazard Capital Markets LLC, Research Division

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

Emeka N. Chukwu

Right. So Tyler, with regards to OpEx in the quarter, for the most part, it came in pretty much the way we thought, with the exception of the fact that we do have a very close working relationship with our top customers. And a lot of times, when we develop new products, when we work very closely with them, in some cases, they actually fund the development. So typically, the funding and the spending is usually aligned. And so we don't really have any issue. Actually, the issue we've got in Q1, it was a little bit out of alignment where we spent the money without getting the fund and now we do expect to get that funding in Q2. In terms of the run rate going forward, I think what we've always said is that we do expect the OpEx to pretty much be in line with the top line growth, where OpEx would probably be at about half the rate to further their growth and so that has not really changed at all. The reason that the Q2 OpEx is being guided flat to Q1 is that we do expect to receive that funding in Q2. But obviously, that would be offset by the variable expenses that would be associated with the higher revenues in Q2.

Tyler Radke - Lazard Capital Markets LLC, Research Division

Okay, that's helpful. And then just sticking on the seasonality question. I mean how should we think about -- I mean I know that you guys don't give guidance beyond July, but what are your thoughts just relative to historical seasonality and whether this year is similar or not if you consider all the Gennum business and protection and exposure to those OEMs?

Mohan R. Maheswaran

Yes, I think I don't expect it to be too much different. I think the challenge is computing, if you take out the computing segment, I think PCs, which desktops and notebooks which traditionally have been a strong addition to the reason for the driver in growth in the second half is going to be softer. So consumer, I still think will be relatively strong as it normally is in Q3 and beginning early parts of Q4, and I think comm will be okay in Q3 also. It's difficult to say what industrial's going to do and it's difficult to say what enterprise computing is going to do at this point.

Tyler Radke - Lazard Capital Markets LLC, Research Division

Okay. And then just quickly moving to the Gennum business. What's -- you talked about your CDR product's strong traction of data centers, storage and backhaul applications. I'm just trying to understand here, are these mainly large-scale data deployments maybe by the large OEMs? Are you seeing real demand with the smaller end customers?

Mohan R. Maheswaran

Both really. Obviously, all the big-name guys building servers and big boxes and big routers. And we have good traction with majority of the Tier 1 OEMs in the different segments here, but also there's a range of different smaller guys in Asia and across the globe actually.

Tyler Radke - Lazard Capital Markets LLC, Research Division

Okay. And then last question. You talked about enterprise small sales having some timing exposure. Is there a particular geography that you're seeing the strongest adoption or is this just kind of a broader focus?

Mohan R. Maheswaran

I would say it's anywhere where LTE is being deployed now. And so China, we're seeing some demand there. I would say there's some demand in Europe. Mostly those 2 regions.

Operator

[Operator Instructions] And your next question comes from the line of Terence Whalen from Citi.

Terence R. Whalen - Citigroup Inc, Research Division

This one relates to monthly order linearity. I was wondering what your expectation was looking into July, specifically around the month of July, given that it's a slower summer month in Europe. What's your expectation for sort of order trends month-by-month through the quarter?

Mohan R. Maheswaran

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

Terence R. Whalen - Citigroup Inc, Research Division

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

Mohan R. Maheswaran

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

Terence R. Whalen - Citigroup Inc, Research Division

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

Mohan R. Maheswaran

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

Operator

And there are no further questions at this time. I'll turn the call back to our presenters.

Mohan R. Maheswaran

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

Operator

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

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