Q3 2005 Semtech Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, everyone, and welcome to the Semtech Corporation's fiscal year 2005 third quarter conference call. Today's call is being recorded and a question-and-answer session will follow after the presentation. For additional remarks and introductions I will now turn the call over to Mr. John Baumann, the Treasurer and Manager of Investor Relations. Please go ahead, sir.

JOHN BAUMANN, TREASURER & MANAGER, IR, SEMTECH CORPORATION: Thank you, operator. Good afternoon, ladies and gentlemen. Welcome to Semtech Corporation's fiscal year 2005 third-quarter earnings conference call. As the operator indicated, I'm John Baumann, Treasurer of the Company; and I also handle Investor Relations.

We have just released the results for our third quarter that ended October 31, 2004. For the next 45 minutes or so Jason Carlson, Semtech's President and Chief Executive Officer; and David Franz, our Chief Financial Officer, will be discussing those results with you and answering your questions.

A reminder that Semtech reports results based on Generally Accepted Accounting Principles, commonly referred to as GAAP. Before I turn the call over to Jason I just want to remind everyone of the following two notices. First, this call is open to all interested parties, in accordance with Reg FD. If you have any questions about our future performance or estimates of future financial results, we will consider them know. We're unable to say if there will be another Reg FD-compliant opportunity for you to ask questions before the next quarterly conference call.

Second, this conference call will include projections and other forward-looking statements which involve risk and uncertainty as highlighted in the press release. Risks include but are not limited to overall economic and geopolitical conditions, the timing and duration of semiconductor market upturns or downturns, demand for communications infrastructure equipment and computers, cellular phones and automated test equipment, demand for the Company's products, competitors' actions, relations with strategic customers, supply from key third-party silicon wafer foundries and assembly subcontractors, risks associated with businesses of major customers and other risk factors. Please refer to the risks section of our earnings release and the Company's most recent Form 10-K and 10-Qs has filed with the Securities and Exchange Commission for further information.

Although a replay of his call will be available on Thomson Financial's Web site and the Investor Relations section of Semtech's Web site, the Company undertakes no obligation to update or revise forward-looking statements to reflect subsequent events or changed assumptions or circumstances. Any written transcript of this call that may be posted or published is unauthorized by the Company, as is any rebroadcast outside of the one available through Thomson's Web site and the Investor Relations section of Semtech's web site. I will now turn the call over to Jason Carlson, Semtech's President and Chief Executive Officer.

JASON CARLSON, PRESIDENT & CEO, SEMTECH CORPORATION: Thanks, John. Good afternoon, everyone. Today we will discuss with you our FY '05 Q3 results as well as our outlook for Q4. These results were reported in our press release that was issued in the past half hour, and David Franz and I will review those results with you.

First, let's review the financial highlights for the quarter. Revenue decreased sequentially 5 percent to 65 million, in-line with our revised guidance. While revenue decreased sequentially, revenue is up 35 percent when compared with the same quarter of the prior year. Operating margin was 26 percent, and net income represented a 22-percent after-tax return. Earnings per diluted share were 19 cents, as stated in our revised guidance. Operating cash flow was a positive 24.2 million, and we spent 11.5 million to repurchase shares under our buyback program.

David will review our financial performance in more detail following my comments.

Looking at new orders, reviewing order activity during the quarter -- August was down noticeably from July, as we had anticipated. September was up slightly from August but not as much as expected. And October, being the biggest surprise, was down slightly from September. We had hoped October would be up significantly to support holiday-driven demand, but we did not see a significant increase in cancellations during the quarter but did incur increased requests for push-outs during the latter half of the quarter. Orders were down across all businesses except for our legacy or military business. New orders were below shipments, resulting in a book-to-bill of less than one during the quarter. With new orders being down compared to the previous quarter, this will position us with an increased turns requirement for Q4. This is consistent with our previous experience in a downturn, or the typical pattern starts with a significant drop in order rates followed by an increase in very short leadtime orders and limited visibility and then increasing visibility and lower turns as inventories drain and customer confidence increases.

Orders in November have reflected a noticeable increase in the percentage of turns orders compared to the previous 2 months, most likely as the result of reduced inventories in the channel. We do expect to see some modest growth in orders during Q4, although distribution and OEMs are still trying to reduce their inventories.

Looking at design wins, the third quarter again saw a good level of design activity. The Company reported more than 600 new design wins for a total of more than $85 million. That is an increase in both numbers of wins as well as total dollars of wins compared to the previous quarter. If we look at total dollars by application, Handset led the way with more than $27 million in designs with products from our Protection, Portable Power Management and Human Input Device product lines. Next was Notebook with more than $26 million, followed by Telecom Infrastructure with more than $10 million, PDA and Networking contributed 5 million and 2.5 million, respectively.

Now I would like to make a few comments on each of our business units, starting with our Protection Products group. We introduced 4 new products in the quarter and saw design win activity increased 22 percent. As devices with more ports and faster data rates increases, so increases the opportunities for these products.

Power Management sampled 3 new products for the handset market and 2 new products for the notebook market in the third quarter. We're continuing to grow the notebook business as IMVP-IV designs translation to IMVP-IV+ designs during the first calendar quarter. Design wins based on IMVP-VI will begin (technical difficulty). Handset opportunities are expanding as increased content from features in smart phones, game phones and high-resolution cameras offer additional sockets to support.

The test and measurement business unit declined significantly during the quarter as the AP market has stalled. Orders were down 65 percent in the quarter, and with the present outlook I would not expect orders to improve for at least a couple of quarters. Looking into the future, we did receive first silicon for a new family of test and measurement products and will be releasing 3 to 5 new products per quarter in this space for the next several quarters, significantly increasing the breadth of our offering.

Our power discrete business saw a bookings increase in the quarter and saw overall customer activity increased as well. We continue to be opportunistic with this well-established legacy product line. Our three emerging product lines all continue to strengthen their positions. Networking and industrial power management reported design wins at key customers like UT StarCom, and (technical difficulty) Cocco (ph) in China. The SETS products achieved record revenues, although orders declined as inventory levels were reduced. We continue to win designs for multiservice provisioning platforms, DSLAM, routers and a variety of other applications.

Human input devices or HID had additional pointing stick and touchscreen wins and remains engaged in several …