Good evening, my name is Matthew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Semtech Q3 Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Ms. Linda Brewton. Ms. Brewton, you may begin.

Thank you, Matthew. Welcome to Semtech's Fiscal Year 2013 Third Quarter Conference Call. I'm Linda Brewton, Senior Manager of Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter ended October 28, 2012, 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 on this call should facts or circumstances change. During the call, we may refer to pro forma or other financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the management team considers non-GAAP information useful, along with detailed reconciliations between GAAP and non-GAAP results, are included in today's press release. I would also like to mention that Semtech will be participating on the Williams Financial Group Management Discussion Series teleconference on December 10 at 1:00 p.m. Eastern. The dial-in information will be published on the Events section of our Investor Relations webpage. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone. Semtech's third quarter of fiscal year 2013 was a record quarter with revenues of $160.9 million, up 7% sequentially and up 30% from the same quarter last year. Q3 revenue included $8.1 million from IP licensing compared to $400,000 in Q2. Including the IP licensing revenue, Gennum contributed approximately $45.3 million in revenue for the quarter. In Q3, sales into Asia represented 68% of revenue. North America represented 20% and Europe represented 12% of total revenue. Direct sales represented approximately 64% of total revenue while distribution made up 36%. In Q3, the company achieved record bookings, driving book-to-bill for the quarter to well over 1. Bookings were fairly linear throughout the quarter. Bookings grew across all end markets. Total bookings accounted for approximately 46% of shipments during the quarter. Gross margin on a GAAP basis for Q3 was 60.2%, an increase of 1,070 basis points from the 49.5% posted in Q2. The increase in gross margin was driven primarily by a lower amortization of the fair value inventory adjustment related to the Gennum acquisition versus the prior quarter. In addition, the higher level of IP licensing revenue received in Q3 benefited GAAP gross margin by approximately 200 basis points. For Q4, we expect GAAP gross margin in the range of 58.3% to 58.9%. Included in this estimate is approximately 300 basis points from the $4.4 million in amortization of the fair value adjustment in inventory from the Gennum acquisition. We expect this fair value adjustment to be fully amortized in Q1 of fiscal year 2014. Operating expenses on a GAAP basis were $77.2 million, up 8% from the prior quarter due to higher variable compensation expense resulting from higher revenue, in addition, would result $2.5 million for environmental monitoring and remediation at the former…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2013 performance by end market and by product group, and then provide our outlook for Q4 fiscal year 2013. In Q3 of fiscal year 2013, we achieved record net revenues of $160.9 million, an increase of 7% from Q2 of fiscal year 2013 and an increase of approximately 30% from Q3 of fiscal year 2012. Our non-GAAP gross margin was a record 63.1% and our non-GAAP diluted earnings per share was a record $0.53 per share. In Q3, our consumer, computing and industrial end markets grew, while communications declined as previously anticipated. Our revenue by end market was as follows: Communications represented approximately 29% of total revenues. High-end consumer represented 28% of total revenues; approximately 17% of this revenue was attributable to handheld devices and approximately 11% was attributable to other consumer systems. Revenue from the industrial end market represented 23% of revenues. And revenue from the enterprise computing end market represented 20% of revenues. Now let me discuss the performance of each of our product groups. In Q2, our Protection business grew 5% sequentially and represented 32% of total Semtech revenues. Growth was driven primarily by high-end consumer applications, including smartphone sales into Asia and North America. Protection sales into the industrial end market were steady, while computing and communications were relatively soft. Our Protection business will continue to benefit from several key trends driving the need for more protection in electronic equipment. Firstly, the number and types of electronic devices that require port protection continue to increase. High-performance ports have become ubiquitous beyond smartphone devices and can now be found in tablets, set-top boxes, TVs, laptops, enterprise computing and automotive systems. Secondly, the signal bandwidth of each of these ports is increasing as end users…

[Operator Instructions] And your first question comes from the line of James Schneider.

On the outlook, clearly, if I strip out the IP revenues from your Q3 results, you're guiding a little bit stronger than most of your peers in the space. So I was wondering if you could comment on the level of conservatism in your guidance. I think you guided to 40% turns versus 43% last quarter. Maybe you just give us a sense on the environment, what you're seeing in terms of customer order trends? You talked about some higher bookings levels and if you can give us a sense of how much of that is in longer days of bookings versus bookings for the current quarter?

So yes, Jim. We -- obviously, we mentioned we had record bookings in Q3. Bookings have softened as we came into Q4, and so that gives us a little bit of a pause in terms of the guidance. I would say also that just general macro nervousness and concern at customers about how the Christmas is going to play out and the holiday season, how strong it's going to be from a consumer standpoint gives us some concerns as well. But I would say, generally, as we mentioned on the call that the backlog is fairly robust and we believe that 40% turns is an achievable number.

That's helpful. And then just a follow-up on the Optical and Communications Infrastructure business. Can you talk to us about what trends you're seeing there in Q4? And specifically, what are customers telling you about their levels of inventory, whether they plan to reduce those or increase them from current levels?

So in our business, it's largely 2 areas, it's the 40-gig, 100-gig SerDes devices and our ToPSync timing platforms. We don't think the inventory is high in any of those areas, and we know that there are new service provider contracts that are being implemented now that will drive reasonable demand, which is why we are forecasting that our comm business will be up in Q4. We also, on the enterprise computing side, a lot of that is PON-driven by similar type of contracts. I think we'll ensure that the enterprise computing side is fairly robust. In general, the overall comm space, I would say, is still fairly, outside those -- kind of some segments of the marketplace, is fairly weak. I wouldn't say it's strong at all, but I think in specific areas, especially where there's expansion of bandwidth, I think the demand is okay.

And just lastly, quick clarification, we talked about the Gennum business being up in Q4 that means the entire business. So if I just looked at the product revenues within Gennum that would be up quite substantially. Is that correct?

Yes, exactly. So the Gennum product business, if you take out the IP licensing even from Q3, was up significantly and will be up significantly again in Q4. And it's driven by really 3 main areas. One is our Thunderbolt products that I mentioned in the consumer space, and the second area is driven by the enterprise computing side, the data center side and the PON side. And then the third is really our backplane products also. So we expect all of them to do quite well in Q4.

And your next question comes from the line of Terence Whalen with Citi.

The first question is a little bit of a higher-level question. Mohan, you've pursued a strategy of growing through acquisition and done so quite successfully. More recently, as we've seen semi growth decelerate over the past several years, we see more CEOs perhaps more inclined to pursue similar strategies. Can you just sort of evaluate where you are with regard to the digestion of Gennum and also sort of your imperative to proceed onto the next acquisition to continue growing top line?

So with about Gennum, I think we're in very good shape. We feel that the integration has gone quite well. Clearly, from a sales standpoint, we are now really, have one sales team that's selling the Gennum products and the Semtech products. There's a lot of sale synergies there in terms of customers, et cetera. From a strategy standpoint there's alignment, I would say, on the functional side, a lot of the integration of systems, et cetera, has gone very well. So I'm very, very pleased with how the Gennum acquisition and integration has gone. And that's clearly demonstrated in the results. The results are not an accident. The fact that we are generating record product revenues and record overall revenues and very good traction there I think is part of the reason why I'm comfortable saying that the acquisition integration has gone well. As it pertains to going forward, we've always had a strategy of growth and we look at organic and we look at external growth, and when the opportunity is there, we'll go look at that very carefully. I would say, though, and this is why we've been successful with acquisitions, is we focus a lot of attention on execution. And until we are comfortable that we're executing superbly well on all fronts, we won't pursue anything else. And so that's a key part of the overall strategy. The other aspect of acquisition is also the balance. We want to maintain the balance both from an end market standpoint and a product standpoint and a geographical standpoint. So that's also a critical piece of it. And then also the financial model. As you know, we have a very rigid financial model. We expect very good gross margins, very good operating margins. And at the moment, with the Gennum acquisition, we are not at the operating margins that we need to be, so we have some work to go there. So, yes, I think we will continue to look at acquisition, but it's not one of those things that I think we have to go do immediately. We can balance it with the growth of the market.

Okay, very helpful. And then the second follow-up question I have is regarding your larger customer who typically destocks inventory in the calendar fourth quarter and your fiscal fourth quarter. I was wondering if you could give us an update on the trends that you're seeing at that customer, how much of a headwind destocking might be in F 4Q versus perhaps some new opportunities with new models?

Well, we build that into our guidance and our thinking, Terence, it happens every year. It's not something that's a surprise to us. Obviously, we get the benefit of a January pickup also and we also have Chinese New Year, so there's a little bit of pull-ahead in terms of what's going on there. So it really balances out, I think, for us because of the way our quarter shapes up. And so I don't expect any major changes. We are seeing, obviously, there's a lot of battles and competing out there in the handheld market, but that's going to play out, I think, over the next few years, and we expect Samsung at least to have -- to be a continued player in that market.

And your next question comes from the line of Rick Schafer with Oppenheimer & Co.

A couple of questions, first is just kind of back on the Gennum thing. Have you guys realized really most or all of the cost savings or synergies associated with Gennum? And maybe even a broader question there is when do you think you'll get to target operating expense levels as a percent of revenues or maybe just -- if you can't put a timeline on it, maybe just give us a hint of what that revenue level would be.

So yes, Rick, this is Emeka. I think we've done a very good job, as Mohan indicated before, with integrating the acquisition and being able to achieve the level of service that we anticipated. I think, on our operating expense side, we have really moved along very nicely and have already baked in most of those. Where we still have some room to grow is on the manufacturing cost side of things. We've done a very good job already, but we still have some runway there. So we look forward to really achieving most of that by the first half of next year. With regards to the spending levels, I think the way to address your question is to say that we do expect that at revenues of $700 million to $800 million, annual revenues of $700 million to $800 million, we should be around the midpoint of our target range of 25% to 30% on a non-GAAP basis.

Great. That's really helpful. And then second question, just back on the SerDes business, can you give us an update on the breakdown now between how that revenue splits out between 40- and 100-gig now? And do you guys think we'll see the crossover next year or is it further out?

Well, we're seeing the crossover start to occur now, Rick. I think that the unit growth in 100-gig is quite large versus 40-gig, and the ASPs, obviously, are coming down a little bit faster in 40-gig than 100-gig. So you see a little bit more balance on the revenue side versus -- on 100-gig versus 40-gig versus the unit side. So on the unit side, it's more like an 80-20, 80% being 40-gig, 20% 100-gig. On the revenue side, it's more of a 60-40 kind of split.

Great, that's really helpful. And the pricing you're talking about, I mean are you guys finally starting to see any competition there, either at 40- or 100-gig?

Well, there is competition. There has been a competition. I think the most important thing to remember is a lot of the competition, when they talk 100-gig and 40-gig and things like that, they're normally talking on the client side. Most of our business is on the line side where we mostly compete on the -- against ASICs and internal guys. We're seeing a little bit more competition there as the market grows. But it's a challenging area when companies bring out products to the marketplace, the time it takes them to get that designed in, to get the customers to qualify and for the service providers to qualify in their systems, and that to generate revenue is quite some time. So I would say today, still the biggest threat to us and the biggest risk for us that we look at is the internal customers who are not using off-the-shelf components and their growth in the marketplace. In other words, if they happen to do well in the marketplace and our customers who buy our products lose share essentially, then that hurts us.

Right. And on the line side, then where do we sit today in terms of captive versus merchant?

I would say it's probably 70-30, merchant versus captive.

And your next question comes from the line of Ian Ing with Lazard Capital.

For Gennum, the strength in video broadcast, just could you talk a bit about that? Is that a result of some ramps of before the acquisition -- or design wins before acquisition or some more recent initiatives? You talked about in the past about creating some new opportunities in this business perhaps exploring demand elasticity.

Yes, actually, Ian, the strength in the Gennum business was more on the Thunderbolt CDR products, which goes in the consumer space, and the -- all the, what I'll call enterprise computing data comm slight kind of products like amplifiers and CDR products that go into the PON data center space. That's where the majority of the strength has been and it was in Q3, and we expect that to be most of the strength in Q4. I alluded to the video broadcast products as being a fairly new initiative on the 4K side, and we're hopeful that we'll be leaders in driving that transition in the marketplace. But that's not where the revenue growth is going to come from in the next year.

I see. And for telecom, the China OEMs, do you think they're still focused on these 40-gig deployments or is there some transition to 100-gig coherence?

The 100-gig transition is occurring. I would say that we still expect 40-gig to continue to do quite well for the next few years, but 100-gig is definitely transitioning and we're seeing that, and that's a -- we get the benefit of higher ASPs on that. So that's good.

Okay. And my last question is you've had exposure to a North American smartphone OEM, been a bit of a headwind in recent quarters. Perhaps, has that -- is it fair to say that's stabilized or what are your thoughts on that going forward?

Yes, that's fair to say it's stabilized and it's kind of bottomed out.

[Operator Instructions] And your next question comes from the line of Elizabeth Howell with the Raymond James Company.

I'm calling in for Steve Smigie. Could you give an update on your Thunderbolt business, where you see this market growing to and perhaps what percent of revenue this is currently?

It's small percentage of revenues. I don't want to give a number out there, but it's very small today. It's not significant, I wouldn't say. Potentially it's a sizable market. It's really driven by very, very high bandwidth cables into hard drives, into storage systems, into video systems, into displays. And you can look at many of the issues out there today in the consumer space and it's all about getting a lot of bandwidth from A to B. So Thunderbolt is essentially a strategy to kind of fix that bottleneck and we are -- we happen to be the only real supplier out there today. And so we're confident that as that market grows, we'll do quite well. Our customers talk about continued increase in the demand and we'll ride that curve with it. It's a relatively small market today, though. I want to be sure that you don't interpret it as a huge market today. It's a relatively small market, I would say in the $5 million to $10 million range, and probably growing to twice that next year.

Okay, great. And then are you seeing any increased competition there or is it primarily just you guys?

Today, I think it's just us. We hear about other competitors, but as far as we know, we're the only providers to our customers, at least the ones we service anyway.

Okay. And then my last one, just if you could talk a bit about your lead times and how they've been trending over the past couple of months.

On the order lead times have pretty much stabilized, I would say. In the consumer space and the enterprise computing space, we get very little visibility, I mean the visibility is not great. And in the comm area and industrial, it's a little bit longer but not great. So lead times are short, which reflects in the turns number. We have a higher percentage of turns than in an environment where demand is really, really strong. But it's not so bad. I think it's somewhat balanced there.

And you do have a follow-up question from the line of Terence Whalen with the Citi Corporation.

The first follow-up is regarding the wireline business. And as we look at the mix of SerDes move more toward 100G from 40G, I just wanted to understand whether there was any effect on gross margin as we see that transition emerge next year?

No, Terence, I think the gross margin should be pretty much in line with what we see at the moment. Our 100-gig products will generate higher gross margin but will see offset. That will be offset I think somewhat by the 40-gig prices, which will probably generate a little bit lower gross margins. So on the balance, I think the gross margins for the business should stay about the same.

And then maybe more broadly, if we take a look at gross margin, you are above your target gross margin level here of 60%. Can you talk a little bit about the thinking that goes behind the decision to not raise target gross margin? In other words, what flexibility do you need in gross margin to pursue other growth opportunities? And how do you think about that versus actually raising the gross margin target?

Yes, so Terence, I think you've captured the issue very well, and that is the fact that we're a company that is really very much focused on growing the top line. And it is, I believe, that with market exposures that we have, the consumer content, the computing content that we have in our revenue, that for us to continue to really outperform our peers in the industry in terms of the top line growth, we want to make sure that we have the right balance between growth and gross margin. And that is why despite the fact that we're seeing gross margins much higher than our 55% to 60% range, we think that in the long term, we're expecting a lot of growth to come from the consumer segment, the Thunderbolts, the smartphones and the communication side. So we do believe that on the long run, 60% -- 55% to 60% is the gross margin range that should allow us to continue to outperform in terms of top line growth.

And then perhaps, Emeka, if I could press you a little further, to preserve that flexibility, what sort of top line growth do you envision in your target model based on having that flexibility, relative to market growth perhaps?

Well, Terence, you know what we have always said, is that we expect to grow at least 3 points faster than the industry growth rates. And that it is also true that we have actually done much better than that, and hopefully, that will continue. But I don't know that I'm going to be able to give you a number except to just refer you to the previous guidance of industry plus 3.

[Operator Instructions] And it looks as if there are no further audio questions at this time.

Okay. Let me summarize by saying that Q3 of fiscal year 2013 was another very strong quarter for Semtech. We posted record revenues, record bookings, record non-GAAP gross margin, record non-GAAP operating income and record non-GAAP earnings per share. In addition, we generated $47.5 million in free cash flow and effectively managed our working capital. Semtech's strategy of balance and analog diversification across product groups, end markets, geographies and customers has enabled us to outperform our peer group in various market conditions. And we believe our ability to identify and capitalize on the long-term growth trends that will shape our industry for many years to come is fundamental to how we create lasting value for shareholders. With that, we thank you for your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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