Semtech Corporation
Q4 2013 Earnings Call Transcript

Published: 7 Mar 2013

[Operator:]

Good afternoon and good evening. My name is Shirley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Q4 Fiscal Year '13 Earnings Release Conference Call. [Operator Instructions] Ms. Linda Brewton, Senior Manager of Investor Relations, you may begin your conference, ma'am.

[Linda Brewton:]

Thank you, Charlene. Welcome to Semtech's Fiscal Year 2013 Fourth 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 January 27, 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 factors 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 March 18 at 12 p.m. Eastern. The dial-in information will be published in the Events section of our Investor Relations page. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

[Emeka Chukwu:]

Thank you, Linda. Good afternoon, everyone. Consistent with the guidance we provided in our Q3 finance call, Semtech's revenue for the fourth quarter of fiscal year 2013 was $150.6 million, representing a decline of 6% from Q3 and an increase of 45% from Q4 of fiscal year 2012. The quarterly decline in revenue was attributable to the seasonal softness that we typically see in our fiscal Q4. Full year fiscal 2013 revenue was $578.8 million, up approximately 20% from fiscal year 2012. The increase is attributable to our Gennum product group, which we acquired on March 20 of last year. In Q4, 71% of shipments were derived from customers in Asia, 17% from North America and 12% from Europe. Direct sales represented approximately 60% of total revenues, while distribution made up 40%. Bookings were strong throughout the quarter, and our book to bill was above 1. Sales bookings accounted for 41% of shipments during the quarter. Gross margin on a GAAP basis for Q4 was 58.4%, down from 60.2% last quarter. The decline was driven mainly by lower IP licensing revenue compared to Q3. In Q1, we expect GAAP gross margin to be slightly higher due to the benefit of lower impact from the fair value adjustment for acquired inventory, partially offset by a higher mix of higher consumer and enterprise computing revenue. For the full year, GAAP gross margin was 54.4% compared to 59.4% in fiscal year 2012. The decline was primarily attributable to the amortization of the fair value adjustment of the inventory acquired from Gennum. Operating expense on a GAAP basis declined 2% sequentially to $75.5 million, reflecting lower hours worked because of the holidays and lower new product expenses. In Q1, we expect our operating expenses on a GAAP basis to be approximately flat as the impact of increased work hours and new product expenses is offset by lower acquisition and integration expenses. We recorded an expense of $4.4 million in interest and other in Q4 compared to an expense of $5.2 million recorded in Q3. The decrease in the expense amount was driven primarily by lower foreign exchange losses versus the prior quarter. We expect interest and other expense of approximately $4.1 million in Q1. In Q4, we recognized a GAAP net tax benefit of $5.1 million versus a benefit of $2.3 million in Q3. The sequential increase in tax benefit was driven by higher income in lower tax regions, as well as the extension of the federal research and development tax credit in Q4. The lower Q4 tax relative to expectations benefited GAAP earnings by approximately $0.05 per share. We expect our GAAP tax rate for the fiscal year 2014 to be between 0% and 2%. Our GAAP diluted earnings per share for Q4 was $0.19, down 24% sequentially due to the unusually large IP revenue recorded in Q3. For fiscal year 2013, GAAP earnings were $0.62, down 53% from fiscal year 2012 due to expenses associated with the acquisition of Gennum. On a non-GAAP basis, excluding the impact of equity compensation, amortization of acquired intangibles, acquisition-related expenses and other onetime expenses, gross margin for Q4 was 61.6%, down from 63.1% in the prior quarter. We expect Q1 non-GAAP gross margin to be between 61% and 61.5%, reflecting a higher mix of high-end consumer and enterprise computing revenue. Non-GAAP diluted earnings per share for Q4 was $0.49. Our non-GAAP tax benefit for Q4 was $487,000 compared to a non-GAAP tax provision of $2.6 million in Q3. Q4 tax benefited from higher income and lower tax jurisdictions and the renewal of the R&D tax credit. The lower Q4 tax relative to expectation benefited non-GAAP earnings by approximately $0.05 per share. We expect our fiscal year 2013 non-GAAP tax rate to be in the range of 10% to 12%. In Q4, cash flow from operations was approximately $35 million or 23% of revenue. Our cash balance at the end of the quarter was approximately $236 million of cash and investments, up 8% from Q3. In Q4, we paid approximately $8 million in principal and interest on our term loan. During the quarter, we spent $7.5 million to repurchase approximately 263,000 shares. Our total outstanding authorization is now approximately $42.5 million. The primary use for our cash continues to be to pay down our debt. Our modest share repurchase activity is mainly directed at offsetting dilution from equity from employee stock awards. The company spent approximately $5.2 million on property, plant and equipment in the quarter. In Q1, we expect to spend approximately $10 million, primarily to expand manufacturing capacity. Depreciation for Q4 was approximately $5.4 million. In Q1, we expect depreciation to be approximately $5 million. In Q4, accounts receivable declined 5% sequentially. Days sales outstanding grew to 43 days from 42 days in Q3, which remains within our target range of 40 to 45 days. Net inventory in dollar terms was up 1% from Q3 to $74.9 million. On a days basis, it's increased from 100 days in Q3 to 108 days in Q4 as we put inventory in place to support the stronger demand outlook. Our target range for internal inventory is 90 to 100 days. In summary, Q4 was a solid quarter. On a full year basis, we successfully integrated the largest acquisition in the company's history enabling us to achieve record revenues, record gross profit and record cash flow from operations. Our financial growth for fiscal year 2014 are

[Mohan R. Maheswaran:]

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2013 performance by end market and by product group, discuss our fiscal year 2013 performance and then provide our outlook for Q1 fiscal year 2014. In Q4 fiscal year 2013, we achieved net revenue of $150.6 million, which was down 6% from Q3 of fiscal year 2013, reflecting normal seasonality for our fiscal fourth quarter. Compared to Q4 of fiscal year 2012, revenue increased approximately 45%. Our organic business increased more than 9% from Q4 of last year, and the acquisition of Gennum contributed to the additional 36% growth. During the quarter, we posted non-GAAP gross margin of 61.6% and non-GAAP diluted earnings per share of $0.49 per share. In Q4, our communications, high-end consumer and computing markets experienced revenue declines from the prior quarter, while our industrial business increased sequentially. Our revenue by end market was as follows

[Operator:]

[Operator Instructions] Our first question comes from the line of Jim Schneider from Goldman Sachs.

[James Schneider:]

I was wondering if we can maybe talk about the comm infrastructure market and maybe give us some color on what your customers are telling you about the outlook for that, both on the optical side, as well as the base station side and how we think the spending trends are going to play out throughout the year?

[Mohan R. Maheswaran:]

Yes, so it's fairly early days. But generally, I would say that there is a general feeling that in the core infrastructure, there has been an underinvestment in CapEx, and that there's going to have to continue to be infrastructure investments. That's kind of a general comment. And then I would say, specifically in areas, certainly China, we're seeing some urgency to put in more infrastructure. And then that sort of translates also then into base stations and then infrastructure on the access side as well. So a few things driving it

[James Schneider:]

Fair enough. And maybe just to follow up. A clarification and a follow-up, if I could. Specifically, there's been a lot of conflicting data points about whether we're just going to see this CapEx pick up in China or whether it's going to be broad-based, including the U.S. and other developed markets as well. So maybe if you could provide any color on that. And then for Emeka maybe, could you maybe talk about the different moving pieces of gross margin? And clearly, there's been a lot of change in both the company's mix of products, and you've been working on some initiatives to improve margins, I believe, in some of the acquired business as well. So can you maybe talk about what the go-forward target gross margin model would be at this point?

[Mohan R. Maheswaran:]

Yes, let me comment on the globalization aspect. I think that the comments I make on CapEx and what I've heard is it's pretty global. I've heard the U.S. service providers state that between 2013 and over the next few years, there's definitely going to have to be more infrastructure deployed. The thing to remember, and it's the thing we analyze, is the penetration rate of high-bandwidth infrastructure in China. It's a very -- still a very relatively low percentage of ports that -- from a penetration standpoint, so there's a lot of opportunity to put in more infrastructure to get to the people the high-bandwidth connectivity. Whereas in other parts of the world, especially in Europe and North America, that's -- the penetration rate is higher. So that's -- but the comment that I've heard is, in general, that their CapEx has to be deployed in all regions of the world.

[Emeka Chukwu:]

And so with regards to the question on the gross margin, I think what we believe is that our gross margin is going to fluctuate between 61% and 62%. The key driver as to whether or not it is at the high or the mid or the low points of that range is going to be the mix of revenues. So if we continue to see a lot of revenue growth coming from the High-End Consumer and the enterprise computing, that will put some pressure on gross margin and vice versa.

[Operator:]

Our next question comes from the line of Rick Schafer from Oppenheimer & Co.

[Jason Rechel:]

It's Jason Rechel calling in for Rick. I was hoping to start on the consumer protection business, and specifically maybe what you guys are seeing there across different OEMs. And how much of the strength into Q1 is actually driven by your largest customer in that business, Samsung? And how much maybe is some new product launches from historically your largest North American customer?

[Mohan R. Maheswaran:]

Yes, I would say the majority is from Asian customers, not just one, several I think. And I think it's really driven by ramp-up of new platforms, new phones. We will see, I think through the year, some of the other manufacturers pick up as well. But I think at least for currently the strength in the smartphone market is driven by mostly our Korean customers.

[Jason Rechel:]

Okay. And then just on the comms business, could you maybe talk about specifically in 100 gig how much of the market today is captive versus merchant so again? And have you guys seen competitively anybody out there yet on the merchant side or do you think you still have a pretty good position in the long-haul market?

[Mohan R. Maheswaran:]

Yes, we think we have a very strong position in the long haul and ultra-long-haul segments. And we have the share that we had when we acquired Sierra Monolithics. The only change is when captive suppliers and captive OEMs win more business. And that really hasn't changed. The picture hasn't really changed that much. I think there's a couple of captive guys like Sierra that's doing reasonably well, but I think majority of the merchant guys are also doing reasonably well, the ones that we have relationships with, especially outside North America, so that's helping us to maintain our share.

[Operator:]

Our next question comes from the line of Terence Whalen from Citi.

[Terence R. Whalen:]

The first question that I have is regarding the smartphone market. What we've seen in the past year is growing as the top 2, really dominate growth, and that's actually played to your favor in support of the protection business. But my question is looking a little bit longer term, as we think about the next 2 to 3 years, and we see the shift of smartphone growth to Asia from the developed markets, I wanted to understand how you think the amount of protection business and the opportunity in some of the Asian smartphones. And I know that the bias is that the smartphones are low end, but what we're increasingly seeing in Asia is actually very high-end smartphones both by the China white box and the nonbranded. I just want to see what their appetite for better Protection Solutions was.

[Mohan R. Maheswaran:]

Yes, I think that's one of the things that has surprised me in general over the years is that when you look at some of the Asian regions, when they adopt some of the systems, they go straight to the highest performance. They go straight to the smartphones or high-end communication systems. There are some regions of the world, I would say India or maybe some of the South American countries, where they may have a market for some low-end kind of feature phones. But in general, I would say, that these growth markets also drive a lot of demand for smartphones and other high-end systems. So we're actually quite excited by that. I think that's a good thing for a company like Semtech. Obviously, we're not tied to one region. We like working with customers in all regions of the world, and that's a benefit to us, I think.

[Terence R. Whalen:]

Okay. And then my second question is regarding the comment that you made, you saw very good growth opportunity in Gennum for fiscal '14. If we think about -- if we think about the 2 segments, there's video versus enterprise, what are sort of the contextual elements we should be thinking about as we try to determine what are the differences from the growth rate of these 2 businesses? Will it be 5%, 10% or 20%? And how can we have confidence that the video business, in particular, will be a growth business in fiscal '14?

[Mohan R. Maheswaran:]

So the way I look at it, Terence, so we have the -- obviously, the enterprise computing business is doing very well, the Palm area is doing very well, generally the data centers, service routers, storage networking, the backplane products are doing very well. So that I expect that those areas to grow well above the industry rate and be one of our strongest growth areas. On the video side, there's pockets. Certainly, the video surveillance is doing very, very well and growing very fast. And then obviously, the Thunderbolt products, which is more a consumer product, is doing very well. And then there's the general kind of purpose video broadcast product areas, which is the area that has historically been what Gennum would call legacy kind of video business. But what we found is that actually there is a good opportunity to grow that business. Now it won't grow at the rate some of these other segments, but I think we can grow it. I think we can grow it at least at industry rate and maybe we can do a little bit better.

[Terence R. Whalen:]

And then one quick one for Emeka, if I could. Emeka, obviously, the success in acquired businesses has been tremendous with very high growth but, yet high complexity areas. What's the thinking on long-term R&D requirements? Are you going to be able to gain any leverage of R&D or should we be thinking about them R&D investments growing closely to the sales growth rate over the next 2 to 3 years?

[Emeka Chukwu:]

So I think you make a very good point. The acquisitions have gone well. The organic businesses that we have are growing very nicely. But I think we have said this quite a few times that there are certain areas of our businesses where we believe that we can do a whole lot better on leveraging the spending that we have on R&D. So as I look at that environment overall, I think our R&D expenses are probably going to continue to grow, but they will not -- the growth rates over there would not be anything close to how we're growing our top line. So we are -- we do believe that we should drive a lot of leverage at the current levels of R&D spending.

[Operator:]

Our next question comes from the line of Cody Acree from WF Investments.

[Cody G. Acree:]

Mohan, if you could -- maybe if we could just go back a bit and just kind of talk about order linearity through the quarter. It sounds like everybody's trying to get a handle on whether or not we're starting to finally get some legs under this turnaround and it's not from an industry standpoint and just wanted to get your opinion.

[Mohan R. Maheswaran:]

Yes, orders have been quite linear, I would say. As Emeka mentioned, very strong, coming into Q1. And the demand forecast, which is probably the most important metric we look at, is very strong, as I mentioned in my script. So I think it does -- it bodes well for quite a strong year, I think.

[Cody G. Acree:]

If you go back and look at the different end markets, I guess where are you seeing the most strength? Is it geographically concentrated? Is it one segment versus the other?

[Mohan R. Maheswaran:]

Well, so from a product standpoint, as I mentioned, our protection products, we're seeing strength in smartphones and client consumer area. In our Gennum business, both the enterprise computing space and the video space, the industrial space is showing growth. In our advanced comm area, the infrastructure, both -- mostly in China but also in other regions showing a lot of strength. And then I mentioned that the LTE base stations, the Timing & Synchronization requirement is driving some growth -- nice growth there, opportunity there. So in general, I would say, it's fairly broad. I wouldn't say it's one region. I would say it's fairly broad. I think the Asian regions are showing a little bit stronger growth, but I will say, in general, I think it's very positive across the board.

[Cody G. Acree:]

Mohan, we believe that you're seeing this from, I guess, an organic market improvement or do you think that this is more company-specific share gains?

[Mohan R. Maheswaran:]

Well, that's hard to judge. I think we obviously are doing very well with both our organic businesses and our acquisitions. But it's really choosing the right markets. I think there are some markets, I can point to the PC market, obviously the desktop PC market, the notebook market is not doing very well at all. And so if you're overly exposed to that segment of the market, that's going to have an impact on your business. Fortunately for us, we're not overly exposed to any area, and so we get the benefit of some of the faster growth markets. And then we don't have the huge impact of some of the markets that aren't doing so well. Equally, exposure to customers. If you're overly exposed to one customer and then that customer has a difficult quarter or 2, you're going to see the impact of that. I think because of our broader exposure, I think we don't have that issue either.

[Cody G. Acree:]

And then just lastly, the Power Management business looks like it's starting to maybe move in the right direction from this design win activity, just talk about what you're seeing there.

[Mohan R. Maheswaran:]

Yes. Well, we put a new leader in place this year, the last couple of quarters, and we started to get some focus on that business. It's still way off from where we like to be, but I am confident that with the type of technology we have and the kind of customer access we have now and our importance to the customers with the type of portfolio we have, I think we're going to start to a sea change in that business. It's early days. I would give it a couple more quarters, but I think ask me the same question in the Q3 timeframe.

[Operator:]

Our next question comes from the line of Ian Ing from Lazard Capital.

[Ian Ing:]

First question for Mohan on computing, so it was down sequentially in January but a lot of positive commentary for April. So for enterprise computing is -- are these sort of large data center buildouts or some other aspects of deployments and are you exposed there to the Gennum parts going into optics or timing, et cetera?

[Mohan R. Maheswaran:]

Yes, on the enterprise computing side, it's really is the Gennum products. It's a fairly broad range though. We sell into the fiber-to-the-home pawn [ph] and Datacom side and then the routers with our backplane products, storage networking, servers. So it's fairly broad. But I think, in general, we like that market. We see the bottleneck moving into that space now and a lot of bandwidth bottlenecks emerging in that area. So we really like that opportunity.

[Ian Ing:]

So it's sort of general data center, cloud computing type of deployments you think?

[Mohan R. Maheswaran:]

Yes, yes, well, as you get more bandwidth coming through the pipes from the core, you just really need to have the bottlenecks on the access, the metro, the access and the data centers get -- have bigger pipes and you have more just the kind of a broader range of pipes to service the requirements. And it varies from network to network, from data center to data center to region to region. But in general, I would say that the trend is upward and it's doing quite well.

[Ian Ing:]

Great. And what's your view on the industrial markets? Has it sort of bottomed here organically, sort of like some of the other analogue here. It's a bit hard to see given your Gennum acquisition, moving its numbers here.

[Mohan R. Maheswaran:]

Yes, it is difficult to see. It's one of the -- it's probably the toughest segment to call really, because there are some pockets that appear to be doing better. I would say our video business is doing a little bit better. The industrial wireless is starting to pick up. We're starting to see some momentum there. But then there are other parts of the industrial, maybe more than legacy industrial, stuff that isn't doing much at all. So I think there is -- this is a segment where you just have to look and see which markets within the industrial space are growing. Automotive, for example, the new automotive seems to be doing okay, I would say. But there are, as I said, some pockets within industrial that are just not doing anything.

[Ian Ing:]

And my last question for Gennum. In your prepared comments, you talked a lot about video and enterprise, you also talked about Thunderbolt. I mean, is Thunderbolt sort of a decent growth order scale or is it more of a periodic cycle pause, maybe you could talk about that?

[Mohan R. Maheswaran:]

Yes, Thunderbolt is doing well for us. I think it's a relatively small market today, but it's been growing nicely. I think the opportunities there is a good one, and so and we believe we're still the only real provider out there of active cable CDR technology. So I think it's still pretty promising actually.

[Operator:]

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

[Harsh N. Kumar:]

Mohan, as you know, the industry came off of some inventory pressure in the December quarter. I guess looking out, what sort of -- what gives you comfort that this particular bookings pattern has some legs going out?

[Mohan R. Maheswaran:]

Well really, just the demand is strong, Harsh. We look at demand. We look at demand for 6 months. So obviously, we put more emphasis on the quarter that we're just in. And we spend a lot of time, we do detailed analysis of that. And as I look at the demand, it's very strong. So that gives us confidence. The bookings support that. And then when you look at where the strength is, it isn't just one area, it's coming from smartphones and protection, it's coming from our infrastructure in the 40-gig, 100-gig side. It's coming from our enterprise computing products, the Gennum products. Video is -- also seems to be doing quite well. It's fairly broad. So that tells me -- and it's not just one region, although Asia tends to -- is looking a bit stronger. That tells me that it's clearly broad, and we -- I have a level of comfort that demand is going to be quite good.

[Harsh N. Kumar:]

Fair enough. And as a follow-up, if I can ask a question on the financial strategy. In the past, you've always -- Semtech has always been a company that sort of maintained that margin target of 60%. Anything above that would be just to take market share. Now for a couple of quarters, you hovered above that number, 61% and change. Has -- should we be thinking of this as the new number or is the strategy still the same?

[Emeka Chukwu:]

So Harsh, the strategy is still the same. And our strategy is just put here to make sure we grow the top line either by taking share or just by participating in overall market growth. And I think the gross margins that we're seeing right now is just a function of the businesses we have, the applications and the customers that we support. Like I said before, I think at least in the next 12 months or something, I would expect our gross margins to be between 61% and 62%, and the key variable for these fluctuations is going to be the mix of revenue.

[Operator:]

Our next question comes from the line of Steve Smigie from Raymond James.

[Jonathan Steven Smigie:]

Just looking at the wireless and sensing business, given Cycleo and all the other stuff you've got going on there, could you see double-digit growth in that business in fiscal '14, calendar '13?

[Mohan R. Maheswaran:]

Yes, Steve, we do see it. The challenge with the industrial segment is the time to revenue. We have good momentum in this business but it's the time it takes to generate revenue that sometimes is tricky. The Cycleo technology is doing very well being adopted. It's getting us a lot of good insight into how customers think, and then customers are really appreciating the fact that we're bringing real value to them. But when it gets designed in, it just takes time. So I think it's more of a timing thing than anything else. But yes, this business could grow double digits, yes.

[Jonathan Steven Smigie:]

Okay. And then within the 40 and 100, in the past, you've given some framework at the start of the year around what you think that could potentially grow. Do you guys have an update for calendar '13 on sort of the growth rates for 40 and 100 gig?

[Mohan R. Maheswaran:]

Well, we've usually been wrong. I'll tell you that this year, total number of ports is kind of going to be in the, I think, 90,000 to 100,000 -- actually 100,000 ports for 40-gig and about 20,000 100 gig. That was in our fiscal year 2013 and we expect that increase -- the increase to come mostly from 100 gig. So 100 gig is probably going to grow quite very fast, I would say, much faster than we had anticipated in probably any market study will anticipate. And 40-gig is probably going to grow less. So you can kind of work it out from there. Now, fortunately, the 100 gig is where the higher ASPs are so that for us might be a positive.

[Jonathan Steven Smigie:]

Okay. It seems like we're still sort of still in the early stages of this, talk of better infrastructure spending for the second half of the year. Continue to recover. How likely is it that or is there that potential that some of the spending gets accelerated and the numbers could be pretty big all of a sudden. Is that a possibility?

[Mohan R. Maheswaran:]

Yes, I think it is. I mean, I think CapEx -- the problem with CapEx statements, when they say they're going to spend between 2013 and 2015, they're going to accelerate CapEx. The problem is that what's driving it is a need. I mean, there is a real need for it, and that is because everybody's using smartphones and tablets across the world and the content is more video content, for example. You just -- there's this need and so there's some urgency for them to deploy or they're going to find -- they're going to lose business or they're going to struggle with quality of service. I think that's something that's on many of these service provider's minds, as they think about deploying CapEx. And so I really don't think it's a question of if. I think it's just a question of when.

[Jonathan Steven Smigie:]

Okay. And then just looking at your cash flow. It looks like -- let's say you did $100 million of free cash flow. How much of that could be used to pay down debt? I mean, would you use 80% to pay down debt a little bit for stock buyback, a little bit for CapEx? And how should I think about that?

[Emeka Chukwu:]

Yes, so Steve, the $100 million is actually the cash flow from operations, and I think probably up to 50% of that could be available to pay down the debt if we choose to.

[Operator:]

Our next question comes from the line of Liwen Zhang from Blaylock.

[Liwen Zhang:]

I just have some concern about your protection business, look at it and the past fiscal year seems like it's down around 6% or 7%, given the increasing in -- number of ports. So is that because -- was that because of ASP eroding or some share loss? And also what do you think about your outlook for this product line for this fiscal year?

[Mohan R. Maheswaran:]

Yes Liwen, I think I've said on previous calls that our protection business did suffer from a North American customer who really just lost share in the marketplace, and that was a problem for us because we had such a strong position with them. But that kind of reached a trough by thinking in Q3 of last year. I think, if anything now it's going to be more positive. So that's the reason why our protection business essentially declined in FY '13.

[Liwen Zhang:]

Okay. And also, you mentioned the declines that's due to one large customer in North America. But how about your positioning at Samsung? Even though I don't have your Q4 numbers of sales to Samsung, but looking at the first 9 months of the sales to Samsung increased by around the 9%, 10% year-over-year versus the Samsung total sales increase by around 23%, 22% year-over-year. So what do you think is your position at Samsung? Is that a pretty very pricing aggressive or they started to using other resources?

[Mohan R. Maheswaran:]

Well, the first thing to remember is Samsung makes many different products. So they do make also, in addition to smartphones, they make TVs, they make set-top boxes, they make a lot of different products and we have a pretty good relationship with them and position with them in many different areas. Second thing to remember is it's not just Samsung. We have quite a good position in many of the other smartphone manufacturers and tablet manufacturers, et cetera. As it pertains to Samsung, I mean, yes, we have a pretty good position there and pricing is always aggressive. It's like any other consumer product. It's no different to a High-End Consumer product in any other region in the world. You have to fight it out and battle it out. But our products are very differentiated products, and I think that the technology and the capability is really what our customers come to Semtech for. They don't come to Semtech because we give them the lowest price.

[Liwen Zhang:]

Got it. And if I can, my last question will be something regarding the Gennum. Actually, you guided Gennum for Q4 to be up sequentially, and as a result, I think it's down quarter-over-quarter. How is the integration still ongoing or is this below expectation results due to the manufacturing constraints?

[Mohan R. Maheswaran:]

A little bit of everything actually, Liwen. I would say that the major reason why we had anticipated, actually, Q4 Gennum product revenue to be up and it wasn't was that our customers were actually -- the demand moved out into Q1, mostly driven by China actually. But I think that, in general, I would say the integration is largely complete. I don't say it's perfect but I mean, it's largely complete. We have a sales team that is selling the whole portfolio of products now including Gennum products. We have our application support in place to support Gennum products. We have our operations and manufacturing now driving the supply chain. And the point that you made on supply constraints is one that we had to face that, because Gennum historically didn't invest ahead of the demand and we do that, Semtech. So we try to work with our customers and ensuring that we have plenty of capacity to support the demand growth, and that's a change to the strategy. But I think we're in very good shape for this year to be a really a very good year for the Gennum business.

[Operator:]

There are no further questions in queue at this time. I'll turn the call back to the presenters.

[Mohan R. Maheswaran:]

In closing, fiscal year 2013 was a very strong year for Semtech. We achieved many operational and financial records for the year. During the year, we successfully integrated 2 acquisitions and solidified our leadership positions in several of the industry's fastest-growing analogue segments. Our focus for the coming year will be to grow the top line and manage our costs as we strive to achieve our long-term operating model of $1 billion in revenue, 60% gross margin and 30% operating margin. We believe our strategy of diversifying our exposure by product group, end market, geography and customers enables us to take advantage of multiple long-term trends that will drive growth in our industry for many years to come, and continue to return value to our shareholders. With that, we appreciate your continued support of Semtech and look forward to updating you on our next quarter. Thank you.

[Operator:]

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