Semtech Corporation (SMTC) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech First Quarter of Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] Ms. Linda Brewton, Senior Manager of Investor Relations, you may begin your conference.

Thank you, Jay. Welcome to Semtech's Fiscal Year 2013 First Quarter Conference Call. I'm Linda Brewton, Senior Manager of Investor Relations, and speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter ended April 29, 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 like to mention that Semtech will be presenting at the Stephens Spring Investment Conference in New York City on Tuesday, June 5 at 1:30 p.m. Eastern. A link to the webcast will be available under 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.

Thank you, Linda. Good afternoon, everyone. Let me start by apologizing to all of you who are inconvenienced by our decision yesterday to reschedule our earnings call on such short notice. Unfortunately, it took us longer than anticipated to conclude on certain purchase accounting determinations related to our acquisition of Gennum Corporation. On March 20, 2012, we closed the acquisition of Gennum Corporation. Our first quarter results include Gennum's financial performance from March 28 through April 29 of 2012. Before I get into the Q1 results, I would like to advice of 4 primary differences between the Gennum and Semtech methods of accounting for certain items. First, Gennum recognize revenue upon shipment to distributors with return privileges, while Semtech recognizes revenue upon sell-through by those distributors. Second, Gennum historically recorded IP sales as revenue. Semtech typically records this type of activity as a credit to R&D expense. As a result, their gross margin going forward will be lower than those historically reported, but gross margin should still be above Semtech's corporate average. Third, some research and development expenses that Gennum historically capitalized and amortized to cost of sales will now be incurred as -- will now be expensed as incurred under Semtech, resulting in a negative impact to R&D expense but positive impact to gross margins. Fourth, Gennum recorded the Canadian equivalent of the research tax credit as a credit to R&D expense. Under U.S. GAAP, Semtech will record this as tax provision. I wanted to highlight these differences to help you better reconcile Gennum's historically reported numbers with what we will disclose here today, as well as with the pro forma financials we expect to file with the SEC by the first week of June. Now moving on to our Q1 results. Revenue for the first quarter of fiscal year 2013 was $116.6 million, including approximately $12 million of revenue from Gennum. Excluding Gennum, our revenues of $104.6 million were in line with our expectations. Please note that as a result of the transition to sell-through revenue recognition, we deferred revenue of approximately $4.6 million of shipment of Gennum's products to certain distributors during the quarter. In Q1, sales into Asia represented 65% of revenue, North America represented 19% and Europe represented 16% of total revenue. Direct sales represented approximately 53% of total revenues, while distribution made up 37%. We are encouraged by a rebound in bookings in Q1, resulting in a book-to-bill of greater than 1. Our current bookings for the core business accounted for approximately 42% of shipments during the quarter. Gross margin from a GAAP basis for Q1 was 47.4%, down from 57.4% last quarter. The decline was driven primarily by a $12.9 million fair value adjustment related to inventory acquired in the Gennum transaction. In Q2, we expect GAAP gross margin to be up between 80 and 230 basis points as a result of higher revenue and favorable product mix, offset by an increase in amortization of fair value adjustment for acquired inventory. For modeling purposes, we estimate that the amortization of the acquired inventory fair value adjustment will be $17.7 million in Q2, falling to approximately $5 million in Q3 and $5 million in Q4. Operating expenses on a GAAP basis were $74.5 million compared to $47.7 million in the prior quarter. This increase was attributable to the addition of Gennum for 6 weeks in the quarter, acquisition-related transaction expenses and amortization of the intangibles acquired in the Gennum transaction. In Q2, we expect the operating expenses on a GAAP basis to decline by approximately 7% due to the elimination of onetime transaction expenses, partially offset by increased intangibles amortization and increased expenses from having Gennum on board for a full quarter. We recorded an expense of $1.6 million in interest and other in Q1 versus income of $421,000 in Q4. The expense was attributable primarily to interest expense on term loans. We expect interest expense of approximately $3.8 million in Q2. In Q1, we recognized a GAAP tax benefit of $23 million versus a benefit of $46,000 in Q4. This benefit was driven primarily by the release of prior accrued taxes on foreign earnings triggered by the Gennum acquisition. We expect our GAAP tax rates for the remainder of the year to be a benefit of approximately 3%. Our GAAP net income for the quarter was $2.2 million or $0.03 per share on a fully diluted basis, down from $2.4 million -- down from $12.4 million or $0.19 per share in Q4. The diluted share count for Q1 was 57.2 million shares. We expect a fully diluted share count of approximately 67.2 million shares in Q2. On a non-GAAP basis, excluding the impact of equity, compensation, amortization of acquired intangibles, acquisition-related expenses and other onetime expenses, gross margin was 58.5%, up from 57.6% last quarter. The increase was due primarily to the inclusion of Gennum's high-margin revenue. We expect Q2 Non-GAAP gross margin to be up 210 to 290 basis points, as the result of higher revenue levels and more favorable product mix with the inclusion of a full quarter's worth of Gennum revenue. Non-GAAP net income for Q1 was $17.9 million or $0.27 per diluted share. Our non-GAAP effective tax rate for Q1 was 13.9%, up from 7.1% in Q4. We expect our Q2 non-GAAP tax rate to be between 14% and 16%. Our cash balance at the end of the quarter was approximately $161 million of cash and investments, down from $328 million in Q4. The decline in cash was primarily attributable to the funding the Gennum and Cycleo acquisitions, as well as the transaction-related expenses and debt issuance costs. During the quarter, we also raised $350 million of 5-year term loans for acquisition purposes. Our top priority for cash usage going forward would be to pay down our debt. The company spent approximately $6 million in property, plant and equipment in the quarter. In Q2, we expect to spend approximately $8 million primarily for manufacturing equipment, facility relocation and upgrades and IT infrastructure improvements. Depreciation for Q1 was approximately $3.5 million. In Q2, we expect the depreciation to be approximately $5 million, reflecting a full quarter of Gennum. Accounts receivable grew 30% sequentially in Q1, and our days sales outstanding decreased to 44 days from 48 days in Q4. Net inventory in dollar terms doubled in the quarter, primarily due to a fair value adjustment of inventory acquired in the Gennum transaction. On a day basis, net inventory increased from 97 days in Q4 to 106 days in Q1. We expect our Q2 inventory to decrease due to amortization of the fair value adjustment of the acquired Gennum inventory. In summary, our Q1 results were in line with our expectations. Our forecast for the next several quarters will be to ensure a smooth integration of Gennum and to work towards realizing our cost synergies. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I would discuss our Q1 fiscal year 2013 performance by end market and by product group, including a brief update on our progress integrating our 2 recent acquisitions, and then provide our outlook for Q2 fiscal year 2013. In Q1 of fiscal year 2013, we achieved net revenues of $116.6 million, an increase of 12% from Q4 of fiscal year 2012 and down approximately 5% from Q1 of fiscal year 2012. For the quarter, our non-GAAP gross margin was 58.5% and our non-GAAP diluted earnings per share was $0.27 per share. In Q1, revenue from the communications end market increased sequentially and represented approximately 36% of total revenues. Revenue from the high-end consumer end market increased from the prior quarter and represented 33% of total revenues. Approximately 20% of this revenue was attributable to handheld devices and approximately 13% was attributable to other consumer systems. Revenue from the industrial end market increased and represented 19% of revenues. Revenue from the computing end market also increased from the prior quarter and represented 12% of revenues. The growth in our industrial and computing businesses is mostly attributable to approximately 6 weeks of revenue from Gennum. Excluding Gennum, all end markets, except for computing, increased modestly. Now let me discuss the performance of each of our product groups. In Q1, our protection business grew 4% sequentially and represented 41% of Semtech revenues. While all end markets in protection grew sequentially, we saw particular strength in communications and consumer applications. We expect demand for our protection platforms to continue to grow for the foreseeable future as electronic device manufacturers increase the number of high-performance cores in their systems. In addition, advanced microprocessors continue to transition to next-generation lithography nodes, making them much more susceptible to catastrophic ESP events. As processes move to the 28-nanometer and below nodes, protecting these highly sensitive and expensive devices becomes even more challenging, and we do expect this will further fuel the demand for our high-end protection products. Our industry-leading technology in high-performance protection platforms enables Semtech to benefit from these industry trends. Q1 was another strong design win quarter for our protection business, including major design wins in smartphone, TV and video applications. During the quarter, we launched several automotive qualified protection solutions, including a 2.5 volt 4 line protection solution for automotive Ethernet interfaces, as well as a solution for protecting automotive, can bus and antenna applications. In Q2, we expect our protection business to increase nicely from Q1, driven primarily by a strengthening in demand from the high-end consumer market. Turning to our advanced communications product group. Revenue in Q1 decreased 2% sequentially and represented 25% of total revenues. The decrease was driven primarily by softness in both the core and access infrastructure segments as we saw lower revenues from both our timing, sync products and the 40 gigabit per second SerDes products, partially offset by higher revenue from our 100-gigabit per second platforms for both Asia and Europe. In Q1, we experienced solid design win traction for many of our advanced communications platforms. During the quarter, we announced the availability of our 51-gigabit per second multiplexer and demultiplexer platforms for submarine and ultra-long-haul optical links. This leading technology platform offers highly reliable, high-performance links at lower cost. In addition to our 40-gigabit per second and 100-gigabit per second long-haul SerDes platforms, we continued to make good progress on several new advanced technology platforms for the communications market, including our new microwave platforms, our new driver platforms and our next-generation 100-gigabit per second coherent transceiver platform. In Q2, we expect revenue from our advanced communications business to grow significantly from Q1. Driven by our optical transport business, fueled by the build-out of communications infrastructure worldwide. Moving on to our power management and high reliability product group. In Q1, revenue for the group decreased sequentially by 6% and represented 14% of revenues. The decrease was driven primarily by a seasonal decline in computing revenue partially offset by growth in automotive displays and set-top box applications. In Q1, we saw good design win momentum for our power management and high reliability solutions. During the quarter, we launched the first device in our platform of innovative high-frequency 20 megahertz switching regulators, which enable designers to draw their own inductors directly on the PC board and improve the EMI performance of chip inductors. This product is targeted for use in set-top box, HDTV, automotive and industrial power management applications. We are making solid progress with the evolution of our power management and high reliability strategy, and I expect to see meaningful results by the end of this fiscal year. In Q2, we expect our power management and high reliability revenues to increase, driven by strength in the high-end consumer and computing end markets. Next, we'll turn to the wireless and sensing business. In Q1, revenue for wireless and sensing grew 4% sequentially to represent 10% of total revenues, driven primarily by the resumption of business previously impacted by the Thailand floods, as well as strength in automated meter reading. In Q1, we saw solid design win traction for our touch sensing platforms and industrial wireless platforms in television, set-top box and automated metering applications. We recently announced a new low-cost, low-power radio transmitter platform targeted at consumer remote control systems, remote keyless entry systems and garage door openers. In Q1, we also closed the acquisition of Cycleo, a startup IP company specializing in long-range wireless systems IP. We expect this business to be neutral to non-GAAP earnings in fiscal year 2013 and accretive in fiscal year 2014. The integration of Cycleo is largely complete, and we are now in the process of building our first wireless technology platforms based on the Cycleo IP, which is targeted at the automated metering market. We expect the first platform to be sampling in Q1 of the fiscal year 2014. We believe that this platform will enable us to gain a leadership position in the long-range segment of the metering market within a few years. In Q2, we expect sales for our wireless and sensing product group to grow modestly, driven by industrial and medical applications. Now let me comment on our Gennum acquisition and our newest product group. In Q1, we closed the acquisition of Gennum, the largest acquisition in Semtech's history. Semtech's leadership position in providing solutions to 40-gigabit per second and 100-gigabit per second-line-of-sight infrastructure applications is now complemented by a portfolio of 1-gigabit per second to 25-gigabit per second physical media and CDR devices targeted at the metro, access and enterprise computing markets where there are tremendous number of bandwidth bottlenecks emerging on the client side. Gennum is very well positioned at strategic accounts in the storage networking, fiber to the home and enterprise computing markets. We believe that the market for 40-gigabit per second and 100-gigabit per second devices will continue to grow at a rapid rate, as both public and private networks look to increase their bandwidths to accommodate more voice, video and data traffic in both long-haul and short-reach applications. Semtech is now a key technology supplier to many of the leading communication systems companies in the world. In Q1, we recognized approximately $12 million of revenue from Gennum. The revenue was driven by the enterprise computing, datacom and industrial end markets. We saw healthy design win activity for Gennum video products in a range of video applications, including Blu-ray DVD recorders, video monitors and video surveillance equipment and solid design wins in the enterprise computing segments with Gennum's physical media devices. In addition to the design win momentum of Gennum's best-in-class physical media devices, we are seeing very good design win traction with Gennum's 10-gigabit per second to 25-gigabit per second CDR platforms and Gennum's Thunderbolt CDR platforms. We believe that these platforms are the highest performing CDR platforms in the industry today, which is validated by both the design win momentum and the pull from customers for these products in data center applications. In Q1, Semtech also exhibited at the 2012 North America broadcast show, which is the premier industry event for the video broadcast market. During the event, we demonstrated the latest Gennum broadcast video products, including our 3-gigabit per second SDI crosspoint and advanced 3-gigabit per second video optical modules. The integration of Gennum is proceeding very well. We are on track to achieve the cost synergies we previously forecasted, and we believe that the revenue synergies in fiscal year '14 and fiscal year 2015 are greater than we had originally anticipated. In Q2, we expect the Gennum product revenue to grow significantly and achieve a quarterly revenue record. In Q1, we saw distribution POS increase by approximately 19%. Excluding Gennum, distribution POS increased by approximately 4%. The increase was driven mainly by the high-end consumer and the industrial end market, as well as the impact from Gennum. Our distributor business, much like the overall Semtech business, is very well balanced, with 52% of the total POS coming from consumer and computing end markets and 48% total POS coming from industrial and communications end markets. Distributor inventory decreased by 12 days from 78 days in Q4 to 66 days in Q1. We believe that our channel inventory is in line with normal seasonal patterns and below our 70- to 80-day channel inventory models. Moving on to new products and design wins. In Q1, we released 17 new products and achieved 1,170 new design wins, another company record. We believe that we are uniquely positioned to benefit from long-term trends driving growth for our industry and expect to see a continuation of the strong design win momentum in Q2. Now let me discuss our outlook for next quarter. Based on recent booking trends and our backlog entering the quarter, we are currently estimating Q2 net revenue to be between $146 million and $154 million. To attain the midpoint of our guidance range or approximately $150 million, we needed net terms orders of approximately 40% at the beginning Q2. We expect our Q2 non-GAAP earnings to be between $0.37 and $0.45 per diluted share and GAAP earnings to be between minus $0.04 and plus $0.04 per diluted share. We believe that the overall demand continues to improve, albeit at a measured pace and are encouraged by the growth in bookings in Q1 and continued booking strength so far in Q2. While there are clearly still some macroeconomic concerns, we are excited by the new opportunities for secular growth that the Gennum and Cycleo acquisition brings to Semtech. And our effort is well underway to ensure we meet our cost synergy targets as we integrate these acquisitions. With that, I'd like to hand it back over to the operator for questions.

Jay, can you please poll the audience for questions.

[Operator Instructions] The first question comes from Harsh Kumar of Stephens.

Congratulations on closing the deal. Mohan, it seems like Gennum is on a run rate of roughly $35 million, $36 million a quarter. Do you anticipate keeping all of that revenue? Or are there parts and pieces you will shut down? Can you just comment on that? And I've got a couple of follow-ups.

At this point, Harsh, we have no -- there is no thinking about shutting down any of the revenue -- any of the product lines. The video business is -- looks like it's very healthy business, very -- lots of opportunities in the broadcast side, on the surveillance side and also some emerging spaces within the broader video market. And then I think on the datacom side, obviously, they're a very good fit with what we do, both on the physical media devices and also on the CDR devices. So I think that's very healthy. The IP division is a very, very talented group of people that was under the name of Snowbush. Historically, we also have looked at that -- the people and the capability there, and we believe that, that's going to be a very good asset for the company going forward also. So at this point in time, there's no ideas of divesting anything.

And then, Mohan, you mentioned that communication is starting to come back, you specifically mentioned that optical is looking a little bit healthier now. I'm wondering if you would give us some color between 40-gig orders that you're seeing and the 100-gig orders that you're seeing. In other words, is the one doing better than the other or are both coming back?

They're both coming back. 100 gig is very small today so when we see a small pickup in that, it's nice to see that growing, but that will continue to grow obviously. 40 gig is a little bit larger and a little bit more mature than 100 gig, so that's going to be a little bit more up and down. But in general, I would say we expect core count for both 40 gig and 100 gig to increase on an annual basis. And for sure, we're seeing demand pickup in both 40 gig and 100 gig on a sequential basis here.

Got it. And my last question, and I'll jump back in the queue, are there any intention of taking any steps to increase the gross margin of Gennum products? I know they are very healthy already, but maybe there are steps. And then secondly, when would you start taking steps on the SG&A side? Or maybe you could provide us an update of that.

Well, in the SG&A side, we already have started to take some steps. The Gennum management team has largely been reduced there. We've made some significant changes there. We have started to integrate a large portion of the sales infrastructure and align some of the channel elements there. So I think that's progressing quite well. I think on the gross margin side, I mean, as a company we do that. We don't look at product line and say, "Hey, you have great gross margin" and therefore, we don't need to do anything with it. We continue to look at costs. We continue to look at new products in the area to get higher ASP and things like that. So yes, we will continue. I think there is some opportunity, obviously, clearly with the supply chain integration. There's opportunities to bring down the cost. Some of the philosophies we have in terms of how we attack cost, I think, we can apply to the Gennum business. So yes, we'll continue to look at that.

The next question comes from James Schneider of Goldman Sachs.

This is Gabriela Borges on behalf of Jim. Just a follow up on the comm space. Could you provide some color on trends by geography and any visibility you might have in the trends broadly in the second half of the year?

So by geography, Asia is starting to pick up and I think, Europe also. So those are the 2 where we're seeing the booking strength. Second half of the year, difficult to call, but we are seeing -- our view is that the comm space is starting to pick up quite nicely, specifically in some of the higher bandwidth. There is -- clearly, there is a need for more bandwidth, and then I think that's going to continue to drive some of the infrastructure deployments. So we have seen a pickup both on the long haul side and some of the short reach space as well. So that's -- it's a difficult to call the second half. I would say that we're going in our strongest period here. In general, Q2 and Q3 for Semtech are quite strong periods, and so my expectation is that comm, both Q2 and Q3, will be quite strong.

That's helpful. And then just a follow up, if I may, on the port protection side. Some of the data points we're seeing from the smartphone space has been mixed. What are you hearing from your smartphone customers? And how do you expect your smartphone revenue to trend this quarter relative to normal seasonality?

I think it is a bit mixed. It's not as great as one would've liked as you go into the strongest period of the year. But it is significantly stronger than what we've had in the last couple of quarters. So my expectation is, again, we'll see, as I mentioned, an uptick in Q2 and then some more uptick in Q3. But perhaps not as much as we would like to see it. And that tells you something about the consumer space in general. I think there's been a lack of confidence in the macro environment and things like that. But I think it's going to be okay.

The next question is from Steve Smigie of Raymond James.

I just want to clarify. I think you said that with the Gennum acquisition, there was about $4.6 million of revenue that you would've had if it were not for accounting issues. So I guess if I look at your $116 million change in the quarter, so you would've been north of the $120 million that the Street was at if you'd had the same sort of similar accounting policies. Is that how we should be thinking about that?

Yes, that's correct, Steve.

Okay, great. And then I know you probably won't give us too much going forward. But just because we're in the transition period, can you indicate how much of Gennum is in the revenue for the guided quarter?

Yes, it's about $35 million. So if you take the midpoint of $150 million, $35 million of that is Gennum and the $115 million is our organic business.

Okay, great. And then, just a couple of product updates. Can you talk about timing of revenue ramp for the microwave products or at least give certain milestone color? And similarly, on the Thunderbolt product, can you talk a little bit about your market share and how you see that market evolving? I think Intersil recently was talking about a new product where they think they've got a lower cost out there and think they're going to capture some substantial amounts of shares. So just if you could talk about these theories.

Yes, so microwave, I'm expecting that we will have revenue probably Q4 time frame, maybe Q3. A lot depends on our execution. We have a product that's taken out and sampled. We're going through next -- next rev of silicon on that, and I think that should generate revenue, so Q3, Q4. Once we have initial revenue on that, I expect that to ramp quite nicely. Then on Thunderbolt, we already have revenue there. We already have some nice business there. I think the main thing to remember in Thunderbolt it's still a relatively small market. I mean, it's a very, very small today. A lot of promise about where it could go, and we have, I think, a very good position. Our strength is the performance of our products. We don't claim to be the lowest costs or any of that sort of stuff, but the performance is really quite good, and customers validated that. So I think within an emerging market like this, that is -- now it's going to be mostly about performance. And then later on, we'll figure out how to be play in the consumer space which we know how to do by bringing down the cost. But I think that over the next couple of years, it's more about trying to get the market acceptance of Thunderbolt itself.

The next question comes from the Rick Schafer of Oppenheimer.

This is Shawn Simmons calling in for Rick. Just a couple of questions here. Can you, I guess, just talk about a little bit about your Timing & Sync business? What exactly drives that growth? Is it just -- does it simply scale with data rates over time? Or how should we think about that? And then can you talk about your share in that space?

The Timing & Synchronization business is different than our 40 gig, 100 gig kind of infrastructure business in the sense that it's more about multi-standard base stations, so you try to bring networks together that need IP interfaces. So wherever you have either an existing infrastructure and you want to connect it to an IP network, you would need a base station that does that. And that's when timing synchronization is important, for example. There are other networks -- any IP network will need a timing sync kind of base station as well. And so those are the areas that we play in our timing sync. We tend to be high-performance, high-end player. We don't play in the kind of what I'll call commodity timing area, and we believe we're the leaders in that space and have very good products in that space. I wouldn't want to comment on our share just because I think it's quite fragmented and it's more driven. The majority of our customers that don't use our platform, we believe, have their own internal captive solution they use. So it's difficult to say exactly how much share we have.

Okay. And then just I guess a quick follow-up to that. You guys said that business was down last quarter. Would you expect that the rebound here in the next quarter or in the second half?

Yes, we do expect some rebound probably in the second half. This one is more kind of tied to the overall comm space, I think, whereas with our 40-gig and 100-gig SerDes devices, they're somewhat separate from the rest of the comm space in the sense that the whole comm space may not go -- grow that nicely. But I think our 40-gig and 100-gig devices will still grow. I think the top sync and timing platform is more in line with the rest of the comm space.

Okay, great. And then I guess just switching gears to that 40-gig and 100-gig business. Do you see any other merchant guys out there in the market today sampling 40 gig or 100 gig? And then also, can you quantify how much of the market is captive versus merchant?

We think about -- so you have to separate long haul versus the kind of access short-reach side. We focus mostly on the long haul side. That's where most of our focus is, and we think we have about 70% share there. 30% of the market goes to captive suppliers. So that's kind of the way we look at it. We have maintained that share. We still are doing a pretty good job, I think, with the customers that we've had for quite some time. We're bringing out new products and maintaining that position. And I think both the 40-gig market and the 100-gig market are going to continue to grow nicely, as I mentioned, so there's plenty of room for us.

The next question comes from Ian Ing of Lazard.

First question on some of these 100-gig deployments, what's your exposure to some of these headlines such as Verizon deploying coherent 100 gig, moving that to the metro level? Do you think -- when would you start seeing that? And would AT&T do something similar?

Yes, I think we are exposed to it, and I think it's just a question of timing. With the 100 gig, one has to remember, it's relatively early days. I think there's still -- typically, when you look at the deployments of these core infrastructure systems from our standpoint, first of all, it's a large investment, it's a long time to establish the network and to test the network and qualify all the components of the network, make sure there's no technical issues with all the fiber-related issues that as you go to a higher bandwidth. So those are the challenges of rolling out a new 100-gig network. So we understand when we bring out products into that marketplace, it just takes time. But we will benefit from it for sure.

Okay. So it's a multi-quarter qualification and then deployment, it sounds like?

Yes.

And then could you remind us what sort of content we're looking at in these systems? I mean, obviously, it's a function of the number of PMDs but I guess you have some top sync products on the line card also and maybe just the range of content we should expect.

Yes, it really does vary, Ian. I mean, it's a module that can be anything from a few hundred dollars to a few thousand dollars depending on the type of product and where it's being used and the number of ports and then how many devices they're using. In general, our strategy, of course, is to try to get as many of the ports that are on the line card or on a system to add our timing synchronization to a line card where it's being used, to use our power management and our system wherever we can, to add our protection to every single of the Ethernet ports. And now with the Gennum products, it's to also try to get on the other side, the client side and get our CDRs and PMD devices on all of those ports. That's what our strategy is and that's what we're trying to do. But it's very difficult to tell exactly unless we look at each system. Every single system and every single customer is different.

Great. And then for Emeka, thanks for stepping through those items on Canadian versus U.S. accounting. Is there a way to perhaps summarize, as you move to U.S. accounting, the impact on the prior Gennum operating model? I mean, we've been assuming gross margin in the low 70s, OpEx about 50% more. I mean, anything that sort of moves the needle there?

Well, I think, from what I've said, on the IP revenue moving from revenues to OpEx, so it would have the impact of bringing down the gross margins. Typically, historically, I think, the IP revenue has benefited their gross margins to about 300 basis points. But with regards to the full impact of some of these accounting adjustments, when we file the report with the SEC, which is due in the first week of June, that would have a detailed listing of all the adjustments. The ones that I just went through were the 4 primary ones that I think would affect your modeling.

The next question is from Li-Wen Zhang of Pacific Crest.

First one, last quarter, you mentioned about Thailand impact both on the supply chain and demand side. Would you please give us update on that as well?

Yes, I think from a demand side standpoint, I think that will clear through this quarter. I don't think we can say that there's any more demand-related issues due to the Thailand flood after Q2. On the supply side, there's probably about -- I would say, about $0.5 million to $1 million that might go into Q3. But most of it should be cleared out in Q2.

Okay. And then my next one is, since you have a new manager coming -- came to the board for the power group -- power product group, have you -- would you please give us any details on any changes since he came on to the board and the growth strategies for the future?

Yes, so the new general manager came onboard. He's been with us now, I think, roughly 6 to 9 months. And he really understands the space and understands the market, and I think he has put together a very nice strategy for us. And fundamentally, the difference is going to be, that we're going to go after some higher volume spaces with some more differentiated technology. And I think we should see some revenue growth acceleration there once we start to get those products out. As I mentioned, I think we'll start to see that around Q4 of this year. That's when -- my expectation is we'll start to see the revenue starting to accelerate again.

The next question is from Harsh Kumar of Stephens.

A couple of questions. I think you said, I believe, it's 40% turns needed. Where were the turns in this current quarter that you just reported?

For the quarter that we just reported, Harsh, if you look at the core business, the turns was 42%, which was the same thing that we expected as we came into the quarter.

Okay. Fair enough. And then Mohan, there's a lot of turmoil in Europe, and I'm wondering if you could just maybe take us back in and just talk about any kind of disruptions or order trends that you might point towards Europe's economic conditions. Are you seeing anything special or different from that part of the world?

I would say, yes, it's the first time I've really seen the industrial segment in Europe is very, very soft and unusually, so I think, versus the rest of the world. So that's something to watch out for. For us, it's not a huge amount of that business anyway. But it is something that we look at and say, there is something unusual going on there. But other than that, I think the comm side of it is okay. But that -- a lot of the comm companies maybe shipping into other regions. So I would point to the industrial area is the one that is a concerning area.

There are no further questions at this time. I'd turn the call back over to Mohan Maheswaran.

Let me summarize by saying the Q1 of fiscal year 2013 was a solid quarter for Semtech. The acceleration in our bookings and design wins is a positive indicator that the industry and overall economy are returning to more normal conditions. Semtech's leading portfolio of innovative products targeted at the industries fastest-growing markets positions us to benefit from the resumption of growth, as we enter our seasonally strongest periods. In addition, the successful closing of the Gennum and Cycleo acquisitions enables us to enter exciting new growth areas while providing stability through a more balanced exposure among our end markets. We believe more than ever that now is the right time to be part of the Semtech story. With that, we thank you for 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.