Good afternoon. My name is Leanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q3 FY '14 Earnings Release Conference Call. [Operator Instructions] Sandy Harrison, Director of Investor Relations and Business Development, you may begin your conference..

Thank you, Leanne, and welcome to Semtech's fiscal year 2014 third quarter conference call. I'm Sandy Harrison, Director of Investor Relations and Business Development. 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 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 Factor 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.

I would also like to mention that Semtech will be participating in the 2013 Raymond James Systems, Semiconductors, Software and Supply Chain Conference on December 9 at 2:30 p.m. Eastern. A link to the webcast information will be available under the Events section on our Investor Relations page.

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

Thank you, Sandy. Good afternoon, everyone. While Q3 of fiscal year 2014 presented its challenges, we delivered results slightly ahead of the midpoint of the guidance range, with net revenue of $141 million. This represented a decline of 15% from the prior quarter and a decline of 12% from the third quarter of fiscal year 2013.

In Q3, sales into Asia represented 71% of revenue, North America represented 16% and Europe represented 13% of total revenue. Direct sales made up approximately 58% of total revenues, while distribution was 42%. Bookings improved in Q3, resulting in book-to-bill of just below 1.

Sales [ph] business accounted for approximately 53% of shipments during the quarter. Gross margin on a GAAP basis for Q3 was 59.1%, down from 61% in Q2. The decline was driven by lower IP revenue, a higher mix of lower margin products and lower manufacturing volumes. We expect Q4 GAAP gross margin to be in the range of 58.8% to 60%.

The slight improvement at the midpoint is driven by a more favorable product mix. We forecast heavily on cost controls during Q3, leaving our operating expenses on a GAAP basis to decline 8% sequentially, and we are $70.1 million compared to $76.3 million in the prior quarter.

The decrease was attributed to our employee time off program, anticipated lower payouts for supplemental compensation and control of discretionary spending. In Q4, we expect our operating expenses on a GAAP basis to increase slightly due to increase in amortization of capitalized intangibles.

We recorded an expense of $2.1 million in interest and other in Q3, versus an expense of $10.8 million in Q2. The decrease in this expense was attributable to a onetime charge that was incurred in Q2 to write-off previously capitalized debt costs as a result of a debt restructuring that occurred in Q2.

In Q4, we expect to incur approximately $1.8 million in interest and other expense. Our Q3 GAAP tax rate was a benefit of 11.3% compared to a benefit of 39.8% in Q2. We expect our Q4 GAAP tax rate to be a provision of approximately 2% due to a lack of discrete items.

On a non-GAAP basis, excluding the impact of equity compensation, amortization of acquired intangibles, acquisition-related expenses and other onetime expenses, gross margin in Q3 was 59.4%. We expect Q4 non-GAAP gross margin to be in the range of 59.2% to 60.2%.

The slight sequential improvement at the midpoint is driven by a more favorable product mix. Q3 non-GAAP operating expense was $55.4 million, down 7% sequentially. We expect non-GAAP operating expenses in Q4 to be flattish to slightly down due to our continued focus on cost management actions highlighted earlier in my remarks.

Our non-GAAP effective tax rate for Q3 was 8.4%, down slightly from 8.9% in Q2. We expect our Q4 non-GAAP tax rate to be approximately 13% due to a lack of discrete items.

Our cash and investment balance at the end of the quarter was approximately $242 million, essentially flat with Q2 despite spending $15 million to buy back approximately 485,000 shares of stock at an average price of $30.92.

We currently have approximately $77.5 million remaining in our buyback program, and we expect to report just more shares this quarter as we try to offset dilution from employee equity awards. We made approximately $6.3 million in principle and interest payments on our debt. Our current debt balance is $296.5 million.

Our priority for the use of cash remains paying down our debt. The company spent approximately $8.2 million in property, plant and equipment in the quarter. In Q4, we expect to spend approximately $8 million, primarily for manufacturing and new product development equipment. Depreciation for Q3 was approximately $5.8 million.

In Q4, we expect depreciation to be approximately $6.1 million. Accounts receivable declined 8% from Q2, and our days of sales outstanding increased to 50 days in Q3 from 44 days in Q2, primarily due to lower revenue. Net inventory in dollar terms was down 7.5% in Q3.

On a days basis, net inventory was up 9 days to 119 in Q3 from 110 in Q2 because of lower revenue. We expect our Q4 inventory to be flat, sequentially. We expect to get back to our target range of 90 to 100 days as demand improves.

In summary, while Q3 had its challenges, the company managed its operating expenses well to mitigate the near-term impact from the lower revenue levels on the company's operating model and profitability. I will now hand the call over to Mohan..

first, the number of ports on electronic devices that require protection is increasing; second, the ever-increasing performance demands for these ports necessitates the need for ultralow capacitance protection devices; and third, the smaller process geometries making the most advanced chips much more susceptible to catastrophic ESD events.

As the industry leader in high-performance protection platforms, Semtech continues to be well positioned to benefit from these ongoing industry trends. Moving on to our Gennum product group.

In Q3, following the record results achieved in Q2, revenue declined 23%, driven by seasonal declines in our video business and some modest inventory corrections in both our video and enterprise computing business and the lower IP revenue from our Snowbush division. We remain very pleased with the progress of our Gennum products group.

In Q3, our Gennum products group achieved a record number of design wins. In addition, the Gennum business released a record number of new products and is on track to introduce nearly twice the number of new products this year over fiscal year 2013.

In Q3, the Gennum product group added several new devices to our growing portfolio of 6 gigabit per second ultra-high definition video products that offer best-in-class performance at all data rates, helping to facilitate the transition to 6 gigabit per second from the current 3 gigabit per second designs.

Our newly released adaptive cable equalizer and 6 gigabit per second cable driver products provide the longest full speed transmission range for ultra-high definition systems.

Design win traction of our new ultra-high definition 6 GB platforms is very promising, and we expect this momentum to continue as more systems emerge with ultra-high definition interfaces. Our Gennum product group continues to see good momentum in the enterprise computing segment driven by data center and backhaul applications.

Semtech's portfolio of high-performance clock data recovery and physical media platforms continues to gain traction in a broad range of end markets where bandwidth expansion and low power and low cost are the critical requirements.

Semtech is very well positioned in the 1 gigabit per second, 10 gigabit per second, 25 gigabit per second and 100 gigabit per second data center, PON and backhaul segments. Some of our Gennum product group growth is also tied to carrier CapEx spending, which we expect to improve in FY '15.

We expect the Gennum product group business to be flat to slightly up in Q4. Turning to our Advanced Communications product group. Revenue in Q3 decreased 15% sequentially and represented 22% of total revenues.

The decrease was driven by lower demand for our 100 GB products as the timing and the release of new tenders, primarily for long-haul transmission infrastructure programs, remains uncertain. We are not anticipating any new tenders to be announced until early fiscal year 2015.

In general, we continue to see carriers requesting higher-bandwidth transmission technology beyond the 100 gigabits per second to 400 gigabits per second and terabit solutions.

Semtech remains committed to developing advanced technology to enable high levels of bandwidth across networks and expects to release several new exciting platforms in fiscal year 2015 that we believe will drive future growth for Semtech.

The third quarter was a good design win quarter for our Advanced Communications product group, driven by our new PLL timing platforms and our new synchronization platforms. Semtech's synchronization platforms uniquely address the industry's increasing demand for synchronization accuracy in newer wireless infrastructure market.

In addition, the Advanced Communications group began sampling our first integrated PLL platform targeted at the communications and networking infrastructure segment. This platform is attracting significant interest from customers requesting very high speed PLLs with some of the lowest specs in the market.

We believe that this market opens up a new several hundred million dollar opportunity for Semtech, and we expect to introduce many more products targeted at this opportunity in the fiscal year 2015. For Q4, we expect revenue for Advanced Communications group to decline modestly as global infrastructure carrier spending remains muted.

Moving on to our Power Management and High Reliability product group. In Q3, revenue for the Power and High Rel business increased 12% sequentially and represented 11% of revenues. The increase was driven primarily by strength in the industrial end market.

While our Power Management and High Reliability business has been in transition over the past few years, we are starting to release new power platforms that are stimulating new design wins across all end markets.

During Q3, the Power Management and High Reliability group introduced 8 new products and also achieved a near record number of quarterly design wins, which is a solid indicator of future revenue growth.

We expect to see more new power platforms released over the next several quarters, which we believe will drive sustainable growth in this business for the next few years. In Q4, we expect our Power Management and High Reliability revenue to be approximately flat to slightly down due to seasonality.

Next, we'll turn to the Wireless and Sensing business. In Q3, revenue for our Wireless and Sensing business decreased 4% sequentially to represent 9% of total Semtech revenues. The decrease was driven primarily by softer industrial sales, offset by growth in our consumer sensing business.

During the quarter, our Wireless and Sensing product group made several significant announcements related to the emerging Internet of Things segment. Firstly, we introduced Semtech's new long-range LoRa wireless transceiver platform that enables the connection of low-power sensors in private and public networks.

Secondly, in Q3, we announced and demonstrated a joint solution with IBM that combines IBM's sensor connect software development environment with Semtech's LoRa platform to offer network operators a total IoT solution.

Semtech's wireless platforms enable longer-range, longer battery life and increased interference immunity at lower costs, which is ideal for Internet of Things applications. Our Wireless and Sensing business continues to gain real design win momentum, achieving record levels of design wins in Q3.

In Q3, we also have started to see initial orders for our latest proximity sensing platform that is being designed into a number of new tablets and other consumer applications. In Q4, we expect sales for our Wireless and Sensing product group to be up significantly as we start to see revenue growth from 3 new growth engines.

These growth engines, which will have -- which have all been in development for several years, are our touch sensing platforms in consumer applications, our proximity sensing platforms in consumer applications and our LoRa wireless platforms in industrial wireless applications.

We will provide more details on the momentum from these new 3 growth engines next quarter when the revenue starts to materialize. In Q3, we saw distribution POS decrease sequentially by approximately 2% from Q2. Distributor inventory decreased 1 day from 74 days in Q2 to 73 days in Q3, and remains within our target model of 70 to 80 days.

Our distributor business, much like the overall Semtech business, is very well balanced, with 50% of the total POS coming from consumer and computing end markets and 50% of total POS coming from industrial and communications end markets. Moving on to new products and design wins.

In Q3, we released 30 new products, which is the most new product releases in nearly 3 years. We also achieved a new quarterly design win record of 2,269 design wins.

Our strategy of focusing on key trends driving growth for analog semiconductors, along with our breadth of analog platforms targeted at multiple end markets, positions us well to benefit from new growth drivers in our industry. We expect to see a continuation of the strong design win momentum in Q4.

In Q3, Semtech was named by Forbes as one of America's Best Small Companies, which tracks revenue growth, earnings growth and return on equity metrics. In addition, Fortune named Semtech in their list of Fastest Growing Companies for the second consecutive year. We are very proud to be recognized yet again by both Forbes and Fortune.

Now let me discuss our outlook for next quarter. Based on Q3 bookings and our backlog entering the quarter, we are currently estimating Q4 net revenue to be between $132 million and $144 million. To attain the midpoint of our guidance range, or $138 million, we needed net turns orders of approximately 48% at the beginning of Q4.

We expect our Q4 GAAP earnings to be between $0.09 and $0.18 per diluted share, and our non-GAAP earnings to be between $0.29 and $0.37 per diluted share.

While challenges in several key end markets are weighing on our near-term growth prospects, our record level of design win activity and new product introductions and the emergence of several new growth drivers are a strong indicator of future growth.

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

Operator?.

[Operator Instructions] Your first question comes from the line of Ian Ing..

Nice jump up in the number of design wins 2,029 (sic) [2,269] versus 1,790.

Any particular applications that that's focused on? And is there any reason to think that these are sort of the same volume and revenue opportunities versus some of the prior design wins, or would there be some deltas versus prior ones?.

First of all, the balance is quite good. It's design wins across most of our product areas. Obviously, our Wireless and Sensing business, with the 3 new emerging growth areas I talked about, has got a lot of momentum in design wins.

The revenue per design win tends to be a little bit smaller in the industrial applications, as you know, and the time to revenue tends to be longer. But in the consumer applications, those design wins can generate revenue quite quickly and are fairly larger -- can be larger.

But in general, I would say it's fairly broad, no one specific segment is driving the design wins. Just a broad range, very positive for us..

Okay. Great. And then the smartphone protection, I know you've sort of guided that it will be about 8% this quarter.

Did it actually come in at that level? And what are your thoughts on the January quarter?.

Yes, the smartphone business actually did a little bit better than we had anticipated. I think the consumer -- overall consumer was down a little bit worse, but that was driven by the rest of the consumer business. Smartphone seems to have done just a fraction better than we had anticipated.

And I think that Q4, which is seasonally down for us, especially our Protection business, we're probably going to see a little bit better than we had -- we would normally see. But a lot of the potential upside depends on how much demand there is in the Q4 time frame for the high-end smartphones, I think..

Great. If I could fit in one last question here, inventory digestion outside of smartphones, anything in terms of -- remaining in terms of the video business or data center? That's something you've cited recently, also..

No, I think the inventory is fairly well balanced out there. I don't think it's -- there's a lot of inventory. In the first half of the year, we saw demand very strong. Our lead times were quite long. So that's probably the reason why the inventory was built up a little bit. But I think we are through most of that in Q3.

Q4 is a little bit seasonally down. But I think as we go into the new year, I think inventory should be very well in a very good position..

Your next question comes from the line of Doug Freedman..

I guess to start with, I'd like to focus in on your turns. It looks like you're looking for quite a bit of a drop in the amount of turns this quarter.

Can you sort of talk about the linearity given your quarter stretches across the holiday season and into January? How did -- how does the shipment profile look to you?.

So typically, in Q4, Doug, it's a little bit tricky because we have the Christmas environment and then we have Chinese New Year, and there's Chinese shutdowns in the manufacturing side, and things like that. And so it's a little bit tricky to really lay out what we think will happen.

But our turns, yes -- typically, what we'll see is in January, for example, we could see a very, very strong period, turns period. A lot of that depends on what's happening in the science -- smartphone market, what Samsung does at the end of the year and what they're seeing from a demand standpoint, the pull from Christmas, all those type of things.

So difficult to call it, but I think we've gone with a number that we're comfortable with. We know we can -- we feel we can turn this number, and it's based on really the demand in the current bookings. Bookings also in the Q4 timeline tends to be not as linear as other quarters.

Like Q3, for example, was very, very linear bookings and fairly linear shipments, I would say. Q4 will probably be a little bit different..

Great. If I could get your commentary on the other side of this smartphone market, being the mainstream or low end, I know one of your customers goes through their inventory adjustment in the fourth quarter calendar year.

What are you seeing in that market, and what do you think will happen as you get into Q1 of calendar year '14?.

So we're anticipating good trends next year and starting in Q1, I think, as we go into the consumer handheld space. But it does depend on the release of new phones and how successful they are. As you know, in the lower-end smartphones, we have a little bit less content than we do in the higher-end smartphones.

So we need the volume to pick up in the lower-end smartphones. But we know these customers are very aggressive, especially at the beginning part of the year in trying to maintain their share. And so we are anticipating that the demand for high-end smartphones and medium-end smartphones will be -- pick up in the early part of FY '15..

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

Semtech a long time ago put these 2 products in a group together.

Would you please talk about where the majority growth from in terms of these 2 product groups as well as end market?.

Yes, so in the Power and High Rel business, obviously this has been in transition for a while. We have new products coming out. We have -- the success in Q3 and the current success is mostly coming out of the automotive segment in industrial, displays and some networking business also.

Going forward, we do think that, that kind is probably where the 3 areas that we're going to see most success was automotive, general consumer and then the networking space. Obviously, industrial is quite broad. We have a lot of different products that are coming out that will be successful in that space.

But that's most likely where the success is going to come from..

Okay. And then my next one and also the last one is on the call -- for this call is your deferred revenue in Q3 increased approximately by $2.1 million, and it's kind of higher than your normal.

And can you talk about detail this deferred revenue increase?.

So Liwen, included in the deferred revenue sometimes is also some IP revenue that is in some deals. But I think the increase in our deferred revenue of $2.1 million has not been really significant. It's just a reflection of our inventory that is shifting through the channel. So I don't think there is anything else significant with that number..

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

I was hoping you could talk a little bit about the 100 g business in 1Q of next year. I mean, obviously I think you indicated here that you don't expect it to really ramp for the rest of this calendar year.

But is it fair to say that orders are coming in and it's quite reasonable to think that you could get a 1Q ramp for that, that business, the 30 to 100 gigabit?.

I think, Steve, it depends on the tenders. When the tenders are -- come out, then the orders will come in and the request will be for the products to be shipped probably within a quarter or 2, quite quickly. That's what we're seeing, the cycle times of these carrier deployments has definitely shrunk.

The problem is that there's no visibility of exactly when those tenders will be placed. And we've been saying I think in Q2, we said in Q3. In Q3, we're saying beginning of the year. Until we see it, we don't know. So that's really the only way I can answer the question on when we can expect the orders.

When we see the tenders come out, of course, we'll be expecting orders. And we'll get benefit both on the Advanced Comms side and on the Gennum business generally for deployments once those tenders get placed..

Okay.

And whenever that revenue does come back, is it fair to argue that, that margins remains above corporate average, that we should see return to the more typical margins you guys have been seeing more recently on the gross margin side?.

Yes, margins in our Advanced Comm business typically, as well as our Wireless and Sensing business and the Gennum business are at the higher end, as you know. Even within 100 GB though, we have different types of products. Some have a lower margin than others.

But in general, yes, the Advanced Comm products are all above the higher end of our gross margin..

Okay. If I could sneak one more in on Gennum.

Down adjacent, but sequentially, can you talk a little bit more about how we should think about that business in terms of re-ramping? Is this sort of a short-term issue? Or should we expect it to ramp back up pretty quickly?.

Yes, I think so. I mean, to us, we obviously are learning a little bit about the seasonality of this business. And some of the dynamics of the different businesses like the video business, which is more industrial in nature, longer cycle times in the products, as well.

So the order lead times have to come in within 12 weeks, otherwise we can't ship the product typically in a quarter. So a little bit of dynamic there from the inventory standpoint. And then on the other side of it, the enterprise computing products are, like I said, somewhat similar to our Advanced Comm products, can be driven by tenders.

And there are some aspects of the business that are more customer-specific. So, we're kind of learning a little bit about the seasonality and the dynamics of the business. But it's a very strong -- it's doing very well from a design win standpoint, obviously from new product standpoint.

And generally, the markets we're playing in, as I mentioned, the 6 GB video broadcast side is doing very well from -- we're seeing a lot of demand for the type our products we're coming out with.

And then on the enterprise computing space, the data center side seems to be doing quite well as obviously a lot of bottlenecks in the data centers, so more bandwidth required. And then the PON side, I think, will -- and the wireless backhaul side will pick up with the tenders.

So -- and then the video surveillance business also is still growing quite nicely. Some of the -- sometimes you have to look at it on an annual basis, and you can see the growth. And there's no reason why in FY '15, we shouldn't be growing at, with the whole Gennum business, at double digits for sure..

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

I was wondering if I could follow up for a minute on the optical comms business. You mentioned that may be the revenue shows up in Q1.

Can you maybe talk a little bit about your certainty around seeing the tender instead of the revenue? Do you have a decent amount of confidence that the tender actually occurs in Q1, or is it less clear that that's going to happen? Or do you -- I mean, just any visibility you have around that will be helpful..

Yes, that's the challenge, Jim, is knowing exactly when those tenders are going to be placed. We don't really have tremendous insight into that. I mean, obviously we talk to our OEM partners, and we talk to the service providers and what their feelings are.

But at the end of the day, until the tenders are placed and the orders are placed by the service providers on the OEMs, we won't see the bookings. So we speculate and we talk to them, and they tell us, "Yes, it's coming, and it's -- here's what we're seeing." But until we see it, we just -- we can't build it into our forecast..

That's fair, I understand.

And then maybe as a follow-up on the smartphone side, can you maybe talk about some of your smartphone customers outside of Samsung, your largest customer? Do you feel like the inventory levels and their orders are basically aligned at this point? Do you see any further inventory reductions? And if not, how long do you think it might keep on going?.

Yes, we think the inventory situation is kind of over. I -- it's hard to say because we don't know what the demand picture is like for some of the newer phones from LG. And obviously, RIM has got different challenges. Some of the other smartphone manufacturers are fairly small in size, but growing, some of the Chinese manufacturers, for example.

But what's really quite difficult to say is not so much to the inventory. I think the inventory is under control now and is in quite good shape. It's more a question of what is the demand looking like for the high-end smartphone business. That's really the question.

As they bring out new types of phones, are consumers buying the phones and which type of phones and when is the question..

And then if I could just sneak in one last one, in terms of the OpEx levels you're at currently, do you feel comfortable that you can hold OpEx at these levels until revenues start to grow materially again? Or how should we think about when you would start to lead back some OpEx growth in the model?.

Well, so Jim, I think as we guide to the general quarter here, we are seeing the benefit of the shutdowns that most people have during the Christmas holidays and also the benefits of lower payroll taxes and all that stuff. So the expectation is it's going to be that as we're going to the April quarter, some of these expenses are going to come back.

I think overall, just to summarize, my OpEx expectations will be that maybe the April quarter we'll see an increase in the 3% to 4%, 5% range. But overall, in terms of fiscal year 2015, I would expect us to try to keep up when expense is flat..

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

Mohan, you talked a lot about optical and the inability to forecast that business. Maybe if you could take a step back and help us understand what's really going on, particularly in China, which is the bulk of your market.

Why is there so much uncertainty on part of Chinese carriers to come in with orders? Have the priorities shifted, or is the competitive environment different? Just any color..

I think, Harsh, it's more that the first half they deployed a lot, and it's really just a question of prioritizing. At least that's what I hear. They are still going to do it. There may be some changes in the political environment in some regions, including China, that may have caused some delays and changes to things.

But it doesn't change, I think, the general -- first of all, the need for more bandwidth is still there. Their drive to get more infrastructure and connect the infrastructure together is still there. As you know, they have, in China specifically, stated that there's going to be optical connectivity to each home and then to enterprises.

And so that helps mostly our Gennum business as well. So all of those things, the trends are still there. It's really just a timing issue, I think..

And Mohan, competitively, are you still the only off-the-shelf 140 GB solution?.

For the long-haul infrastructure, we don't know of any customers who have moved away to standard products. Obviously, our biggest competition is internal ASICs, and that continues to be our biggest challenge as some of the customers go to their own internal solutions.

But we think as the drive towards 400 GB starts to emerge, that many of those customers will again be looking for time-to-market and potentially looking at standard products again..

Great. And then my last one, Mohan. Historically, the way I've understood your acquisition strategy is buy a company, sort of get it in order, wait for the cash to build up on the balance sheet. You aren't there yet from a balance sheet perspective.

But how is your acquisition appetite at this point in time given that Gennum -- it's been almost 1.5 years for Gennum now?.

Well, the 2 things that we look at really are first of all, how are we doing, how are we executing internally, organically. And I think we're in, generally, a good shape. And there's a couple of areas that we still obviously, like the Power and High Rel business, would like to do better.

The Wireless and Sensing business, as I mentioned on the call, in the script, my discussion, has been very well, and there's a lot of new opportunities there.

So as we start to see the market stabilize in some areas here, particularly the smartphone business, I think we're going to start looking at what other building blocks we could add, and how we could further diversify our portfolio and maintain a situation where we can bring in new competencies into the company.

So I think it's a healthy process we have. We're obviously very diligent and very deliberate about the type of acquisitions we do, and there aren't that many companies that fit our kind of high-end portfolio. But when we find the right one, we'll execute on it..

Your next question comes from the line of Cody Acree with Williams Financial..

Just maybe -- I just have one question, Mohan, and maybe just a clarification on a prior question. Just positioning in the emerging market, I think you and/or Emeka have talked about this being kind of evangelical on the Power Management side.

It sounds like it's still early stages of convincing some of those OEMs to use your type of product or your quality of products.

And I guess like -- just like to get some sense as to how far along that is and if we continue to see kind of growth rates there, how do you see your market share position?.

Yes, so this is Emeka. I think, yes, we've talked about this in the past, and I think it's mostly for our protection products where we've talked about being able to replicate the type of success that we had in Korea, to replicate that success in Asia and in China in particular.

And we've talked about the need to really evangelize and reassure these manufacturers the benefit of having some proposed protection for their products. Now I think where we are right now, we are doing very well. We are seeing a lot of design wins. And we have probably seen a little bit of those beginning to move into revenue.

And in fact, I think this is probably going to be more of a second half of next year revenue ramp opportunity for us. But I would say that we're making very good progress..

And then against the top 10 vendors in China, how would you say that your current design win market share looks?.

Design win market with the opportunity that I talked about before, it looks....

Yes, just with....

It looks very good. It looks very good, and that is why I have the confidence that we should start to see a decent amount of revenue in the second half of fiscal 2015..

Cody, we can barely hear you. If you have another question, maybe you should get back in line there..

Your next question comes from Craig Ellis with B. Riley..

I just wanted to follow up on something that somebody in the communications space mentioned, recently. Cisco indicated that they saw a pronounced deceleration in their emerging country orders.

So I've never associated them as a big Semtech customer, but one, can you confirm if they are or not a customer? And two, did you see any unusual trends in the emerging markets part of your business in communications?.

Well, Cisco is an important customer for us. Obviously, we sell lots of different products to them in different applications spaces. I would say, though, obviously one of our biggest -- 2 of our biggest customers are in China, ZTE and Huawei are big customers for us.

And so -- and I assume those are emerging -- China's always the largest emerging region and the fastest-growing. There are other regions of the world, but I think that probably, they're referring to China.

And as I mentioned, there's a few, kind of, changes, we want to call it, with some of the tenders being pushed out, some of the CapEx deployments being pushed out a little bit. So there are some challenges there, but it's going to come back.

As I mentioned, I do think that some of that is related to some of the political environment there and some of the initial spending in the first half of the year and things like that. But it's not a question of changing a trend. The trend is going to be continued deployment of more high-bandwidth infrastructure in the region.

It's just a timing thing, I think..

Okay. That's helpful, Mohan. Switching gears to gross margin and thinking about some of the gives and takes for next year. Emeka, the business has in the past produced a 63% gross margin, when it grew to $160 million per quarter.

Is that something that's still possible or has something changed with the mix that we should expect something that would be different from historic and fairly recent levels?.

So Craig, I think the 63% gross margin quarter reflected when we had an IP revenue of about $8.5 million at 100% margin. So that was just a onetime event. But I think on a sustained basis, our gross margin is driven usually -- or mostly by the mix of revenues.

So when we see more revenues coming from the industrial and the communications end markets, that is very good for our gross margin. Also, in as much as we've done -- really have a fab or in-house manufacturing, everything is outsourced. We still have a decent amount of CapEx, of capital equipment that we own ourselves.

So we still need a certain amount of revenue to be able to absorb somewhat the fixed overhead that we have. So I would expect that as we start to see the top line grow back up to the normal run rate of about $160 million and above, that would be accretive to gross margin as we should be able to absorb our fixed overhead a whole lot better.

So I think in summary, the key drivers for gross margin for us is the mix of revenue and just the amount of total revenue that we have..

And then the last question for me, you mentioned in prepared comments that, that pay-down continues to be a priority for cash generation.

Can you just clarify if you're interested in fully paying down the debt? Or is the company potentially comfortable with debt as part of the capital structure and looking at a different gearing than what it's had up until the recent past to give you some flexibility for any tuck-in acquisitions that may come along, or maybe doing more with share buyback, which was active in the quarter?.

So at this point, the intention and plan is to pay down the debt as quickly as we can and also to continue to buy back shares at least enough to keep the pace with dilution from our employee equity grants..

Your next question comes from the line of Andrew Huang with Sterne Agee..

I guess the first question is, can you share with us your expectations for Wireless and Sensing? Because I think you mentioned 3 new programs. So, I'm trying to get a sense of where that can be as a percentage of sales exiting fiscal '15..

one, is the consumer; one, is industrial wireless. The consumer, obviously, it can grow very fast. It can also come down very fast. It can also be a more challenging business from a margin standpoint. Those elements are there. And then the industrial, obviously, takes longer time to revenue. But once it's there, it's more sustainable.

So they both have different challenges. But they're both -- they're all emerging regions -- emerging areas for us. So the proximity sensing is a whole new business for us. We've never been in that before. It's our first portfolio of proximity sensors.

We have good traction, as I mentioned, with the tablets, and I think it's going to go -- we're going to see success in other applications spaces. Touch sensing, as I mentioned, we'll talk more about in the future. But we're starting to get some momentum there, and that will be also consumer-related.

And then the industrial wireless, I talked about significantly the progress in the infrastructure space specifically. So -- but the business, we expect it to grow quite nicely, well above industry rates. And I would be surprised it's not in the high teens to even higher than that next year..

Great. And then I just wanted to clarify one thing. I think there are some commentary on OpEx spending for fiscal '15.

Should I take that to mean that your OpEx in dollars on a non-GAAP basis should be kind of flattish in '15 relative to '14?.

Yes, Andrew, my expectation is that it should be flattish to slightly up for FY '15..

Yes..

Okay.

And then just as a follow-on, can you give us some initial guidance for a tax rate for fiscal '15 at this point?.

At this point, based on everything that we know, we still expect our tax rate on a non-GAAP basis to remain in the range of 13% to 15%, 16%..

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

It's Jason Rechel calling in for Rick.

I guess just on the consumer protection business, and thinking out over the next 12 months or so, could you walk us through maybe some of the puts and takes positively in terms of what it would take for you guys to grow that business back to the peak, which I think was in FY '13? Is that going to be growth within Samsung or ramping new customers? How you'd expect to get back there?.

So we have -- obviously the trends, as I mentioned, are all going in our favor, but it does drives -- it's really driven by the end application. So, if I think about consumer, we do need the smartphone business to be a growing business. For us, that means high-end smartphones or kind of medium-range, lower-end smartphones but not feature phones.

If the market goes towards more low-end phones, cell phones and feature phones, then we don't see that much benefit. So we need some growth in the smartphone business. The general consumer space has been relatively weak. TVs, set-top boxes, all those areas are relatively weak, have been relatively weak.

A pickup in that area would also drive growth for us. So that's the consumer space. If I look at the computing space, as you know, PCs, notebooks, ultra-books are kind of not doing as well as everyone would like. And then that area would also drive growth for us because of the Ethernet ports, USB ports, that sort of stuff.

Communications, we look at the Ethernet space, wireless LAN, Voice over IP, anything with lightning protection, all of those areas to be potential growth areas for us. And industrial, it's automotive, it's general industrial, wherever there's Ethernet ports and USB protection.

So it's very difficult to kind of look at it and say, "Hey, if this segment does well then we'll grow." It's really broad. But clearly, the bigger markets are the consumer market and the computing market.

And our anticipation is if they come back next year, then our Protection business will continue to grow well above industry average, which it has done over the last 10 years. I mean, it's a really good business. And it's driven by the trends I mentioned, the higher -- just more ports, the higher bandwidth per port.

And particularly, most of the systems going to -- using advanced lithographies for their processors and micro-controllers, they will need to be protected. And that trend, if they don't -- if the system house does not protect its leading-edge processor, they just have more returns and more quality issues and it becomes a challenge for them..

Okay. And then I guess just the last one for me on pricing in the SerDes business, have you guys seen -- you've done now for a couple of quarters about pricing pressure in the 40 GB business.

Has that continued or accelerated now that we're kind of waiting for 100 GB tenders to come back? And how do you expect 100 GB pricing to play out over the next 12 months or so?.

Yes, 40 GB pricing is actually quite stable. It's more of a 100 GB pricing now, because what happens is it's really a cost per bit game, and the OEMs and service providers are looking to try to come out with the systems that allow their 100 GB deployments to be cost effective relative to 10 GB and 40 GB deployments.

And so I expect there to be more pressure on the 100 GB side. Having said that, we have a portfolio of products in the 100 GB side, and some are priced higher, some are priced lower and then it's -- depends on which system and which region of the world, et cetera. But that is what we expect to see.

We'll expect to see 100 GB pricing pressure now for the next few years, and then a transition to 400 GB. And then when that happens, you'll see less price pressure, and the 100 GB will stabilize..

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

The first one is, can you just retrace for us the performance of the Protection business versus I believe what you had said last quarter was that you expected a significant decline $20 million to $25 million below your expectation for October? Can you just let us know, at what point in the quarter things seem to actually stabilize and improve versus that expectation?.

Well, the business actually performed mostly to expectation, Terence. I would say, it was a little bit better than we had anticipated, somewhat offset by a lot of poorer consumer business.

So, if I look at smartphones in general, I think the business did a little bit better than we anticipated, but that was offset by probably a worse -- a poorer consumer business. And I don't think it was -- there was anything from a linearity standpoint. It was generally what we had anticipated.

Although we were hoping for a little bit more pickup because of Christmas, and we were anticipating that there was going to be maybe more orders and a little bit more of a comeback from some of the new phones and things that were being released.

But we haven't seen that and obviously, that's probably the reason why Q4 is we're still anticipating a kind of a muted performance in the smartphone consumer area..

Okay. And then the following question is about 10% customers. I think last quarter, you had one 11% and one 9% customer in the July quarter. Wanted to understand whether when you report your Q for October quarter there were any 10% customers..

Yes, Terry, we had 2. We had, obviously, Samsung, and then Huawei was a 10% customer this quarter..

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

I just wanted to follow up on a couple of things. Emeka, you talked about a flattish OpEx range for the foreseeable future, call it, next year, the range being, I think, $55 million to $60 million.

First of all, if that is correct, and what revenue level can you sustain with that sort of an OpEx range? Let's say business spikes up again, everything changes, is that the assumption?.

Well, yes. I mean, everything doesn't always have to change. But I think if revenues come back, we should probably be back to our model of OpEx and about half of the rate of revenue growth..

Okay. So just kind of narrowing in, I think you were able to comfortably do about $165 million the last couple of quarters and stay in that range.

So you're going to at least get back to that and sort of manage the OpEx within a $5 million swing, correct?.

Yes..

And then Mohan, I wanted to -- and this is way out there, 400 gigabit per second sort of SerDes products.

When are we talking in terms of the market opening up for that? Is it several years out, or is it let's say next year, 2 years from now? And then how's your positioning or your R&D allocation towards that sort of trend?.

Well, I think we're well positioned. The timing is never easy on these type of things. It's very early. But I do think that there's still this insatiable need for more bandwidth both in the long haul and emerging in the metro and access space and data centers. So I think it will be faster than people think.

It's just a question of when the technology's ready and the cost of the deployments, and depending on which segment power consumption also become a critical factor. I will say 2 years from now, you'll start to see your first 400 GB deployments..

[Operator Instructions] There are no further questions at this time..

Okay. In summary, while Q3 of fiscal year 2014 was a challenging quarter for Semtech, we are on track to deliver another record revenue year.

And our numerous growth drivers, coupled with our balanced portfolio of highly differentiated analog products and balanced end market and geographical exposure along with a focus on new product introductions, should enable Semtech 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..

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