Semtech Corp (SMTC) 2015 Q2 法說會逐字稿

Good afternoon. My name is Caitlin and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q2 FY15 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Sandy Harrison, Director of Business, Finance and Investor Relations, you may begin your conference.

Thank you, Caitlin, and welcome to Semtech's conference call to discuss our financial results for the second quarter ended July 27, 2014. I'm Sandy Harrison, Director of Business, Finance and Investor Relations. Speakers for today's call will be Mohan Mahewsaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter 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 risk 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 Form 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's 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 presenting at the Citi 2014 Global Technology Conference on Wednesday, September 3, at 2 PM Eastern time. The link to the webcast will be available under the Events section of our Investor Relations web page. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. Q2 of FY15 was another solid quarter for Semtech, with net sales of $145.7 million, coming in at the upper end of our guidance range. This represented growth of 10% from the prior quarter and a decline of 12% from the second quarter of FY14. Continued strength in the enterprise computing and communications end markets from infrastructure build outs and strength from industrial end markets for alternative energy applications contributed to the favorable results. In Q2, sales into Asia represented 77% of net sales, North America represented 13%, and Europe represented 10% of total net sales. Sales to distribution again increased as a percentage of overall revenues and represented 60% of total net sales, while direct sales represented approximately 40% of total net sales.

Bookings were solid in Q2 of FY15, resulting in a book-to-bill greater than 1. [Gross] bookings accounted for approximately 42% of shipments during the quarter. Gross margin on a GAAP basis for Q2 of FY15 was 60.5%, which was an increase of 170 basis points from 58.8% in Q1 of FY15. The improvement was driven largely by a higher mix of our Signal Integrity product group revenue, higher manufacturing volumes, and the non-recurrence of the restructuring charges recorded in Q1. In Q3 of FY15, we expect GAAP gross margin to be approximately flat sequentially and remain above the high end of our targeted 55% to 60% range, as the unfavorable impact of a higher mix of Protection, Power and High-Reliability group revenue will be offset by higher manufacturing volumes.

Operating expense on a GAAP basis decreased approximately 1%, to $66.2 million, compared to the prior quarter. The decrease was mostly attributable to lower equity stock-based compensation and restructuring expenses, somewhat offset by higher compensation expenses. In Q3 of FY15, we expect our operating expenses on a GAAP basis to be up approximately 2% on higher equity stock-based compensation and new product development expenses, somewhat offset by lower supplemental compensation. In Q2, we recorded a GAAP tax provision of 11% versus a tax provision of 17% in Q1 of FY15. The decrease was driven mostly by a shift in regional mix of income. For the remainder of FY15, we expect our GAAP effective tax rate to be between 11% and 13%.

In Q2, on a non-GAAP basis, excluding the impact of equity stock-based compensation, amortization of acquired intangibles, acquisition-related expenses, and other one-time expenses, gross margin was 60.8%, up 100 basis points from Q1, due to a higher mix of Signal Integrity product group revenue and higher volumes. At the midpoint of guidance, we expect Q3 non-GAAP gross margin to be approximately flat sequentially, as the impact of the unfavorable higher mix of Protection, Power and High-Reliability product group revenue will be offset by higher manufacturing volumes.

Q2 non-GAAP operating expense was $53.4 million, up approximately 2% sequentially, reflecting increases in compensation expenses. In Q3, we expect non-GAAP operating expense to be down approximately 1% to 3% sequentially, driven by lower supplemental compensation expenses, somewhat offset by higher new product development expenses. In Q2, our non-GAAP effective tax rate was approximately 15%, same as in Q1. We expect the tax rate for the remainder of the fiscal year to range between 14% and 16%.

In Q2, due to the strong growth in income and good management of working capital, cash flow from operations grew 69% sequentially. We paid $30 million on our debt and repurchased approximately 377,000 shares of our stock for $10 million. As a result, our cash and investment balance at the end of the quarter was approximately $239 million, down about 2% from Q1 of FY15. The current balance on our debt is approximately $258 million, and we have $42.5 million remaining on our stock repurchase authorization. Our priority for the use of cash remains buying back our stock opportunistically, given our current stock price and paying down our debt.

The Company acquired approximately $6 million of property, plant and equipment in the quarter. In Q3, we expect to spend approximately $10 million, primarily for manufacturing equipment as a result of increased demand and for information technology infrastructure improvements. Depreciation for Q2 was approximately $5.1 million. In Q3, we expect depreciation to be approximately $5.3 million.

Accounts receivable increased 11% sequentially in Q2 and our days of sales outstanding improved 3 days, to 41 days in Q2, and is within our target range of 40 or 45 days. Net inventory in dollar terms declined approximately 1% sequentially in Q2 of FY15. On a days basis, net inventory was down 9 days, to 87 days in Q2, below our target range of 90 to 100 days.

We expect our Q3 inventory to increase, as we put inventory in place to respond to short lead time opportunities. In summary, Q2 was another solid quarter. We continue to demonstrate leverage in our balanced and diversified business model by growing non-GAAP operating profit three times faster than revenue. We maintained gross margin at the high end of our target range and kept operating expenses under control, while making our property investments in our future growth. In addition, through good management of working capital, our cash generation remained strong and, as a result, we expect to achieve record level of cash flow from operations for the second consecutive year in FY15.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 FY15 performance by end market and by product group and then provide our outlook for Q3 of FY15.

In Q2 of FY15, we achieved net revenues of $145.7 million, an increase of 10% from Q1 of FY15, and a decrease of 12% from Q2 of FY14. For the quarter, our non-GAAP gross margin was 60.8% and our non-GAAP diluted earnings per share was $0.42 per share. Our focus on managing operating expenses in line with revenues contributed to the operating leverage that delivered significantly higher sequential operating income growth.

In Q2 of FY15, revenue from the high end consumer market increased from the prior quarter and represented 29% of total revenues. Approximately 21% of this revenue was attributable to hand-held devices and approximately 8% was attributable to other consumer systems. Revenue from the enterprise computing end market increased from the prior quarter and represented 22% of revenues. Revenue from the industrial end market increased and represented 25% of total Company revenues. Revenue from the communications end market increased and represented approximately 24% of Semtech's total revenue.

I will now discuss the performance of each of our product groups. Q2 of FY15 was a solid quarter for our Protection, Power and High Reliability product group, which grew 5% sequentially and represented 45% of total revenues. We experienced particular strength from the industrial end market, driven by alternative energy and automotive applications, offset by a modest decline in the high end consumer market, due to lower smartphone demand. Our Protection business was approximately flat for the quarter, as demand from all markets remained strong, with the exception of the hand-held segment, which declined sequentially.

Our Protection business continues to perform very well and benefit from several key trends that are driving demand for our unique devices. These include more high speed interfaces per system, higher bandwidth requirements on these interfaces, and the increasing adoption of advanced CMOS process lithographies, all of which contribute to the increasing demand for Semtech's high performance protection platforms in both established and emerging markets. In addition, Semtech's strong presence in Asia is resulting in rapid growth in new emerging Asian consumer customers, such as Xiaomi, Huawei and Lenovo.

During the quarter, we introduced the RClamp1255P, the newest member of our rail clamp family. This product combines low capacitance for high speed interfaces, such as USB, while also providing the high energy surge protection needed by many of today's new smartphones that use increasingly sensitive advanced CMOS technologies. The RClamp1255P offers reduced component count over discrete solutions, has no signal attenuation on high speed interfaces, and offers some of the most robust protection on the market for USB ports.

Our Power Management and High Rel business increased sequentially in Q2 by 23%, driven by growth across all our end markets. The industrial and high end consumer end markets grew particularly well in Q2 of FY15, led by strong emerging demand from alternative energy applications and increased demand from printer and set top box applications. Our Power Management and High Rel business also experienced very strong bookings during the quarter.

We expect to continue to reach more new platforms in the next few quarters that will drive both revenue growth and gross margin expansion for the Power business, and we remain encouraged that our improved execution will continue to drive growth for this business in FY15. In Q3 of FY15, we expect revenue from our Protection, Power and High Reliability product group to increase nicely, driven by increased demand from all our end markets, with particular strength from the hand-held segment.

Moving on to our Signal Integrity product group. In Q2 of FY15, revenue increased 16% sequentially and represented 42% of total revenues. Our Gennum business increased 26% sequentially and set a new quarterly revenue record, while our long-haul [security] business declined by 30%, as we had anticipated. The communications end market revenue increased during the quarter, driven by the continued build out of 4G-LTE wireless infrastructure in China.

The enterprise computing end market revenue also increased nicely for the quarter and was driven by data center, cloud computing and PON applications, where our portfolio of physical media devices and club data recovery platforms continued to gain market share and design momentum in 1-gigabit, 10-gigabit and 100-gigabit system applications, due to their outstanding performance and features at the lowest power. It is our expectation that the roll-out of new 4G-LTE based equipment will continue in China for several years, and the data center and cloud driven bandwidth increases will also continue for many years, enabling Semtech's Signal Integrity business in the enterprise computing and communications businesses to continue to grow significantly.

In Q2, we also saw our video broadcast business increase, driven by increasing deployments from the emerging ultra high definition video broadcast market. Semtech's leadership in the video broadcast market for high definition equipment positions us well as the market transitions to ultra high definition. The ultra high definition broadcast market is at an inflection point, as more 4K TV systems emerge and with the increased availability of ultra high definition content from service providers like Netflix, that recently introduced a 4K streaming service. We expect sales of our video broadcast products to contribute nicely to our growth over the next few years. In addition, the need for high definition video surveillance continues to increase, and we have a number of developments in the pipeline that we believe will enable Semtech to continue to lead in this rapidly growing segment.

In Q2, we released a portfolio of new trans impedance amplifiers, targeted at 1-gigabit, 2.5-gigabit, and 10-gigabit optical modules. These amplifiers complement our already substantial portfolio of best-in-class physical media devices. WE also released a new 3G SDI video combo cable driver and equalizer to add to our strong video portfolio. We are very pleased with the new product execution from our Signal Integrity product group and anticipate that FY15 will be another very strong new product release year. In Q3 of FY15, we expect our Signal Integrity product revenue to be down, as we expect a pause in the China infrastructure build out.

Turning to our Wireless Sensing and Timing product group. Revenue in Q2 of FY15 increased 8% sequentially and represented 14% of total revenues. Wireless Sensing and Timing revenue was primarily driven by growth in the high end consumer market, driven by the ramp of our proximity sensors and prototype volumes of our 3D touch sensing platform. In Q2 of FY15, our Wireless & Sensing business grew 9% sequentially. In the sensing market, we continue to see strong interest in our proximity sensing solutions, with strong design win momentum at tier one OEMs in the tablet and smart sensing segment. During the quarter, we also saw our proximity sensor bookings increase significantly, further validating our beliefs that we should expect strong growth for our proximity sensing solutions in FY15 and beyond.

We're also encouraged to see an increase in the potential use of our proximity sensors for other mobile consumer and medical applications, where sensing a human interface is a critical requirement. Semtech's unique ability to accurately sense and differentiate a human interface versus an inert material offers customers a compelling capability for today's emerging mobile and wearable systems. During the quarter, we shipped prototype quantities of our 3D touch sensing platform that generated approximately $3.4 million in revenue.

As a reminder, we developed this 3D touch sensor platform for a specific customer. However, this customer has recently informed us that they do not expect to go to market with their current 3D touch smartphone, and so we do not expect to see additional revenues associated with this specific opportunity going forward. We continue to work with this customer on other platforms that could potentially use our innovative touch sensing solutions, and we will provide details if and when it is appropriate, but no future revenues are currently forecasted for this platform at this point.

On the Wireless front, we are seeing tremendous momentum for our LoRa wireless platform, as customers and partners move rapidly to deploy Internet of Things and machine-to-machine related network infrastructure and devices. The LoRa ecosystem now includes partnerships with industry systems and module leaders, as well as service providers and component providers. Currently, we have two service providers in formal trials and another four service providers evaluating the LoRa technology for potential trials.

In addition, the interest from IOT and M2M companies wishing to create their own private network using LoRa technology is growing at a very rapid rate in several regions of the world. Many of these IOT market opportunities are still in the early stages, but are expected to move to broader deployments and drive a steady increase in demand for longer range, low power, battery driven wireless connectivity that is at the core of the Semtech solution. LoRa devices are now shipping in volume to market leaders in the smart metering markets, and as newer applications markets emerge, we believe LoRa device are the ideal solution for long range, low power sensing applications.

We remain excited about the strong growth potential over the next few years from the increasing deployment of LoRa-based platforms by both private and public network providers used in the Internet of Things and machine-to-machine markets. In Q2, we also announced our new SX1238 platform, which is ideal for smart metering and other smart industrial applications that need to run on batteries for a long time. This platform is the first to integrate Semtech's RF transceiver and front-end modules into a single package.

During Q2 of FY15, our Timing business grew 5% sequentially, as demand increased nicely from packet-based communication systems that rely on timing and synchronization technology to operate next generation wired and wireless networks. We continue to expect to see modest revenue growth in FY15 from our Timing business. In Q3 of FY15 we expect revenue from our Wireless Sensing and Timing product group to be approximately flat. We expect that the loss of our 3D touch sensing revenue will be offset by significant growth from our proximity sensing platforms.

In Q2, our Systems Innovation group announced the availability of new high performance IP blocks that are critical building blocks for emerging high bandwidth communications and enterprise computing systems. Our Systems Innovation group combined analog mixed signal design competencies from our Sierra Monolithics and Gennum acquisitions, and is charted with developing innovative analog mixed signal IP for emerging systems. We believe this IP will form a critical part of our future IP and product road map. These new IP blocks include our new ultra low power, ultra low latency PCI express 3.0 PHY IP platform and a new ultra low power hybrid memory cube compliant by IP, targeted at the emerging standard for ultra fast next generation memory interfaces.

We also started sampling our low power 28-gigabits per second CMOS [security] IP, 100-gigabits per second and 400-gigabit per second enterprise computing systems. All of these IP cores are targeted at the data center, cloud computing and storage networking markets, complement our rapidly growing library of analog mixed signal IP cores based on TSMC's 28-nanometer CMOS process that have been developed over several years by our Snowbush IP team. We also have advanced developments in data converter IP at the 32-nanometer CMOS and 14-nanometer CMOS nodes that are targeted at high performance radar and digital microwave systems. We are already engaged with strategic customers with all our major IP developments and expect to discuss these developments in more detail in the near future.

In Q2, our distribution POS increased sequentially by approximately 7%, to achieve a new quarterly POS record. Distributor inventory increased 12 days, from 57 days in Q1 to 69 days at the end of Q2 of FY15, and is now close to our target channel inventory model of 70 to 80 days. Similar to our direct business, 46% of the total POS came from the consumer and computing end markets, and 54% of total POS came from the industrial and communications end markets.

Moving on to new products and design wins. In Q2, we released 19 new products and achieved 2,068 new design wins. We continue to focus on diversifying our customer base and end market exposure by delivering uniquely differentiated analog mixed signal platforms into emerging fast growing markets.

Now let me discuss our outlook for next quarter. Based on recent bookings trends and our backlog entering the quarter, we are currently estimating Q3 net revenue to be between $142 million and $152 million. To attain the midpoint of our guidance range, or approximately $147 million, we need a net turns orders of approximately 42% at the beginning of Q3. We expect our Q3 GAAP earnings to be between $0.22 and $0.30 per diluted share and non-GAAP earnings to be between $0.42 and $0.48 per diluted share.

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

(Operator Instructions)

Your first question comes from the line of Craig Ellis from B Riley & Company. Your line is open.

Thanks for taking the question, guys, and good job on the execution in the quarter.

Emeka, I wanted to follow up on one of the comments you made around free cash flow generation and use. Good debt paydown in the quarter. With the guidance being flat sequentially, there should be another good quarter of free cash flow generation. How should we think about the priorities for that free cash flow, both in the current quarter and in the near term?

I think with regards to free cash flow, what I've said in my prepared remarks is that the priorities right now will probably be buying back our stock, especially given the current levels of the stock price, and to continue to make payments on our debt.

Okay.

And then questions for Mohan, more on the product group side.

First, within Signal Integrity, you mentioned some headwinds in the China part of that business and you expect that business to be down sequentially, but you expect longer term growth. When would you expect that business to hand back to sequential growth?

Do you see the pause being a one quarter event, or is it multi-quarter?

We think it's probably one quarter and perhaps some of Q4. It's tough to say, Craig. These things can change very quickly. They have done in the past.

But as of now, we're anticipating kind of the back end of Q4 to start to see the pickup.

And another product group question for you, Mohan.

Clearly, the proximity sensing business is getting good traction. Can you talk a little bit more about the design wins you're seeing, both on the high volume side and maybe on the lower margin -- or excuse me, the lower volume side that might be higher margin type design wins for that business.

The sensing devices are doing very well. They're very differentiated, a number of different areas. And what we're seeing is anywhere -- any application where the application needs some -- has some RF integration into the system, there is definitely a value-add to our proximity sensing.

Also, when there's sensitivity required on the proximities, you need a very highly sensitive device, that also is where we're seeing some good penetration. So there's a lot of new applications emerging on the wearable side and on the mobile side that are really looking at how to sense hand and human interface, and so we're starting to see a lot more design wins in those areas.

But clearly, the tablets is today where we have the majority of the design wins.

And then last one and I'll bounce this back to Emeka before getting back in the queue.

With the guidance for OpEx being down 1% to 3% quarter on quarter, is that then going to be the trough, if you will, in OpEx, Emeka, or is there potential, given whatever you might be doing with efficiencies in the business, discoveries with the product group integration, that there might be further reductions as we look out to the fiscal fourth quarter?

So Craig, I think two quarters ago, I did guide to OpEx for this current fiscal year to range between $50 million and $53 million a quarter, depending on the levels of revenue. It's kind of hard to say if this is a trough or if there are any additional upsides to the OpEx number. But I think the guidance that I gave about two quarters ago is still pretty much in play for the current fiscal year, and that is about $50 million or $53 million a quarter.

Thanks, guys.

Your next question comes from the line of Doug Freedman from RBC Capital Markets. Your line is open.

Great. Thanks for taking my question, guys. And I'd like to thank Craig for leaving a few for me to ask. (laughter)

If I could start off with, could you talk a little bit about where you stand now with customer concentration? It sounds like in the protection business, that market has broadened.

Can you give us an update of where you're at with maybe what percentage of sales Samsung is today, and any other product categories that may be more concentrated than others? Is there anything that we should be aware of?

Sandy, do you have the Samsung?

I'll take that, Mohan.

So Doug, with regards to Samsung, in the Q2 quarter, the total percentage of revenue was about 11% in terms of the overall business that we do with them. Do remember that with Samsung, we do have a very broad business with them, with cell phone management into the computing applications and other devices, as well. So it's about 11%.

Within that, the Samsung hand-held revenue is about 7% of our total revenues. And that compares -- the overall revenue, which is 11%, was 14% in Q1, and the hand-held revenue, which is 7% now, was, I think, 9% in Q1. So that's the information right there.

Great. And then if you could maybe dig in --

And with regards to if we have -- with regards to other customers, I'm not sure that we have any other customer at this point that is greater than 10% of our total revenues.

All right. Great. I didn't think so, but just wanted to check.

In terms of what's going on in the comes business, you said that that ramped down, as expected, about 30%. Is there any expectation of any bounce back in that business, and can you maybe bring us up to speed on where you stand in terms of the inventory that was written down when you restructured that business? Is there any written down inventory left in the pipe or have you executed all of what you expect to be able to do there?

Let me discuss the market and then Emeka can comment on the inventory.

From a planning standpoint, Doug, we're not planning on the revenue coming back. We believe that we've kind of reached a trough in the $4 million to $5 million a quarter range.

Much depends on the long haul infrastructure or investments; and if CapEx is more deployed in the long haul side, we may see some of that come back. But we're not planning on it and I wouldn't anticipate that to be the case.

So we're really planning on now most of the investment's going on to the other side of the networks. We're seeing the benefit on that in the base station side and the data center side. But in the long haul, we're not anticipating any more.

And with regards to the TDC, there's the 40-gig, 100-gig inventory, Doug, I think we saw some that probably was previously reserved and we're finding additional stuff, as you would imagine, that we're reserving. Overall, though, the net impact to the financials has been pretty much even.

Great. Thanks, guys, and congrats on the strong results.

Thank you.

Your next question comes from the line of Ian Ing from MKM Partners. Your line is open.

Yes, thanks for taking my questions. This 3D touch smartphone that's going to market, how much of a hole is that in Q3 revenues, given, I assume you shipped some prototype volumes earlier. And does that also help drive some of the tighter gross margin range you're guiding, 50 basis points versus the historical closer to 100 basis points?

I didn't quite get the early part of your question.

Sure. The 3D touch smartphone not coming to market, how much of a hole is that in Q3 revenues, given you've shipped some prototype volumes earlier, I assume?

So let me take that part, Emeka, and then you can talk about the other section of it.

We shipped about $3.4 million of revenue in Q2, which were all prototype volumes, to the customer. And there's no need for any more shipments to them of this device for that specific platform. So essentially, that's the hole that we have in Q3 now, at this point.

And gross margin range being tighter, what's driving that?

What's driving that is, like I said in my prepared remarks, it was essentially a higher mix of our Signal Integrity product group revenues, which have gross margins that are nicely above our target range, and also just the benefit of higher manufacturing volumes.

Okay. Great.

And there's been this uptick in consolidation activity in semiconductors, some distracting headlines today. Could you remind us how much you see yourself as an acquirer or acquiree of (Inaudible)?

We continue to believe that external growth for us is a critical part of our strategy going forward. We've done it before and that's what we've done over the last seven, eight years, to continue to grow, as well as driving our organic machine the right way. We believe that we have to have diversification of analog platforms, and that diversification and those competencies allow us to enable new markets and grow further.

So we'll continue with that strategy. Obviously, things are happening in the marketplace and some of them are out of our control. And when somebody comes knocking, of course, that's a different story for us.

Okay.

And then lastly, as you look at your design win pipeline, do you get a sense of how much you can outgrow overall analytic semiconductors or GDP? The benchmark is probably low-single digits. I think you've given some ranges in the past.

We've always said that we'll outgrow at the analog industry by about 3 percentage points. We continue to believe we can do that. If you look at some of our fast growing markets today, which are quite small, they are going to grow in high-double digits, I think, high teens and beyond.

Certainly, if you look at the video market and some of the ultra high definition video surveillance market and then all of the data center cloud computing focus there, those markets are growing significantly faster than your average analog industry growth. And then you add onto that the sensors and the wireless connectivity, the IOT market and some of what's happening with our power management, which is kind of unique to us, in that we're now starting to go back and attack that very large SAM that we've always believed is there and we just need to have the right product set.

So in general, I'm very confident that our growth is going to get back to what we have been growing in the past, and we should see that across all of our businesses.

Okay. Thanks, Mohan. Thanks, Emeka.

Your next question comes from the line of Rick Schafer from Oppenheimer and Company. Your line is open.

Hello. Thanks. And I'll add my congratulations on a nice quarter, guys.

I had one clarification question on the cancelled 3D touch platform. I'm assuming it was the same customer that I think you had talked about it being roughly a $20 million second-half opportunity. As a first, is that the right kind of number, if you look at the opportunity, the hole, I guess, that you're filling for the second half, Mohan.

And then secondly, is there any color on why they cancelled it? And are you -- because they cancelled it, are you sort of -- are you going to be able to pursue other customers for this 3D touch opportunity, or are you still underneath that exclusivity agreement with them?

So let me touch on that first. It was, the customer paid for the development. And so we have a -- do have an exclusive arrangement with the customer and a partner that we developed the technology with.

And so we are in negotiations and discussions with them, and I think it will take another quarter or so to work that out and figure out if we can take the technology to other customers. So that's the first thing.

The second thing is that, yes, we did expect the second half to be in the $20 million range, originally. That started to come down as the customer's expectations came down; and then, of course, when they cancelled it, that did leave us a hole.

Obviously, we didn't have the revenue. It was new revenue for us. So our anticipation that we were going to see that growing, that growth due to that revenue has gone away and we have to offset it with some other things. But I think we have enough other growth engines going on that we can do that.

And then the other aspect of the question is we believe that this customer will still use the technology in some shape or form. They have told us that they're still evaluating the technology for different platforms. And it's a sizable customer, as you can imagine. So we still have hope that there will be something. But there's no current plan in the -- it's not in our revenue plans at this point in time.

And Mohan, to be clear, I think originally it was a 12-month exclusivity agreement. Is that -- assuming you're not able to renegotiate anything, worse case it sounds like by the middle of next year you would be able to pursue other customers with this product, or am I understanding that correctly?

We're hoping that by the end of this year we'll be able to clarify that situation. So hopefully by maybe the next earnings call. But if not, the one after that we'll be able to certainly give you more information.

Got it. Thanks.

And then since we're talking about the sensor business, can you compare the touch dollar opportunity for Semtech versus the proximity opportunity, and are you going to be able to use those established, existing proximity relationships and business that you have to pull in some new touch customers, once this stuff we just talked about is sorted out?

Possibly. But I would say that the main difference is that the touch sensing device was a really new platform, really new technology. We were looking at $1 to $2 for each device, and there's two devices on each platform. And so that was driving the higher revenue amount, versus the proximity sensor, which is close to the $0.50 and typically one sensor per device. So it's a little bit different, from that standpoint. So one's not replacing the other.

However, the proximity sensing devices have a longer -- a much bigger SAM. In other words, there's a bigger opportunity out there, many more different applications, the volume is certainly higher, and the longevity, I think, of the technology, as well, is longer.

So we'll see. It's early days. And as we get penetration of the proximity sensing and then we clarify the situation on the touch sensing, I think we'll be able to communicate that.

Got it.

My last question is, I know you guys talked about increasing some of your exposure to China, white box, mobile devices. Does that in any way change the gross margin profile of your protection business, or is it sort of -- is there any -- I guess, is there any discernable difference really in the margin profile of the white box protection business versus your existing?

I would say, no. We are also getting more success with, even in Samsung's and LGE's lower, mid-range phones, we are getting more penetration in those phones now as they start to make those a little bit more focused and, of course, the Asian manufacturers, also.

The difference is the content is a little bit lower. So we have less devices in a lower, mid-range phone than we do in a high end phone. I would say that the pricing is there across all of the high end phones.

We don't play in the very low end commodity phones, typically. But nowadays, they define as a medium, kind of low end, medium phone is a pretty good smartphone, actually. So those devices need protection devices. It's just the content may not be as much as the real high end ones.

Got it. Thanks.

(Operator Instructions)

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

Great. Thanks a lot.

Just to follow up on that last question. Can you talk about how big the China handset guys might be as a percentage of revenue as we look out to Q3 versus what they were before? So just kind of trying to get a sense of magnitude of growth there.

And similarly, to follow up on the earlier Samsung question, what would Samsung potentially be in this quarter?

Sandy, do you have you the --

So if you look at the China handset versus what we're looking at for the second half, to your question, Steve, we expect it to be up, depending upon what the sell-through on some of these platforms that we're in on, but the expectation would be to see it up quarter over quarter.

Okay.

And would Samsung drop quarter over quarter, probably?

No, I think quarter over quarter, because of some anticipated launch of new platforms by Samsung, we are expecting that their revenues will be up sequentially in the October quarter.

So remember, Steve, that Q2 was a relatively weak quarter for our hand-held business. And so as Samsung releases new phones and there's a little bit more uptake from some of the China manufacturers, we expect Q3 hand-held strength to be there across the board.

Okay. Great.

And then I know you guys only guide one quarter, but as we think about the January quarter, given what we've seen here in Samsung recently, would we expect more muted seasonality in the January quarter?

Obviously, Samsung typically does that inventory adjustment. Would that be muted, or should I just assume more normal seasonality still for that January quarter?

Tough question, because we don't really know how these new phones and devices that Samsung releases in Q3 are going to do. But I would assume that it's going to be the same inventory bring down and the same seasonality as we always see with Samsung.

Okay. Great.

And it seems like the power business is getting its legs now. Can you go into a little bit more detail about how that should ramp and what's really driving that over the next six months to a year?

I expect double-digit growth. My sense is that now we're starting to get new products out for the first time for a while, very good products, and we're starting to kind of regain some of the momentum that we've lost over many years.

And we're seeing it across the board. It's not one segment of the market. It's not one customer.

So we're seeing it in alternative energy, some solar power applications there. We're seeing it in industrial, the automotive side, automotive displays are doing very well. We're seeing it in some consumer applications, also.

So the bookings were strong, as we mentioned, and so we're anticipating growth in Q3. And this is a business, once we start getting momentum behind it, I think it's going to be very good for us.

Okay.

If I could sneak one more in, just on gross margin. You guys obviously doing good job there, operating above the top of the range. It seems like the data center business has got a lot of opportunity going forward.

How long can we sustain this pretty good margin profile?

Go ahead, Emeka.

I think, at least in the short term, in the next two or three quarters here, we will probably expect to stay at the high end or a little bit above that. I think, just like you pointed out, our Signal Integrity product group, the base station business is expected to continue to do very nicely over the next several quarters.

Also, in addition, with the growth of revenues that we're seeing from our power management business, the other good news is also that they're expanding their gross margins, as well. So a combination of that with higher manufacturing volumes gives me the confidence that we should be able to stay at the high end of the target range.

Okay. Great. Thanks, guys.

Your next question comes from the line of Harsh Kumar from Stephens, Incorporated. Your line is open.

Hello, guys. Apologize. I joined late. If this has been asked, I apologize.

Real quickly, Mohan, as you look at the portfolio of technologies and businesses you had, if I was to ask you how would I think about your long-term growth, let's say a 3 to 5 year growth horizon CAGR, what would be the correct number to think about with everything you've got?

Well, I think it's the same story line, Harsh. You take the analog growth; and let's say the analog industry grows at 5%, my anticipation is we'll grow at least at 8%. There is obviously some dependency on the existing platforms not to come down from -- not to decline and to have a more modest growth.

But we have so many growth engines at the moment that are really starting to pick up steam. And my sense is that, over the next few years, we're going to get back to the type of growth we had -- we've had over the last nine years, since I've been the CEO, which has been pretty good.

So I do think that the mix of markets helps us tremendously, as we've talked about, having that balance. When hand-held doesn't do so well and data center does really well, you see that enabling us to come off a 10% sequential quarter, even though our hand-held business was fairly weak. And I think that's the key for us going forward, also.

And maybe another one, if I can sneak, along the same lines. And I should expect your EPS to grow faster than whatever your top line is doing, is that the correct assumption?

Yes.

Okay.

And then if I can sneak one more in. In that horizon of 3 to 5 years, what would you say, in your opinion, would be your fastest growing product line?

Well, that one is also a tough question. Obviously, our wireless business, while the time to revenue is longer, once it picks up and we get momentum, I think that's going to be probably the fastest growing business.

Today, I would say it's the sensing business, along with our Gennum product portfolio, both on the PMD side, which are really targeted at the enterprise computing space, and the wireless base stations and on the video side.

But that would be the order that I would probably say is going to be the fastest growing.

Got it, guys. Thank you very much.

Your next question comes from the line of Craig Ellis from B Riley & Company. Your line is open.

Thanks for allowing me to jump back in.

Mohan, I just wanted to take a higher level look at Gennum. The business, according to my model, which may not with perfect, obviously, looks like it was double digits year on year, so you're getting very good growth there. And while it tends to be a lumpy business, the question is really, to what extent is the growth that you're seeing really a change inside of the product portfolio at Gennum versus something that may be happening with Gennum's end markets over that time?

And as you look ahead and look at the intermediate term outlook for that business, how do you think about the growth rate of Gennum?

So it's a little bit of both, to be honest with you, Craig. I think it is both the internal portfolio alignment and investing in the right businesses and the right product areas, but also the execution machine of Semtech and Semtech's sales team and the customer relationships and then the market on top of that.

So the Gennum business grew very nicely this quarter, as I mentioned and as you talked about, and I think maintaining a kind of mid-teens type of growth on an annual basis, I think, is something that's very doable, especially if the video business continues to expand the way we expect it to expand, because of this ultra high definition and high definition surveillance markets emerging.

Obviously, Gennum has a brand recognition in that space. We have a tremendous respect by the customers in that space. So when we bring out the products, they're immediately the first choice to be designed in.

And previously, when we acquired Gennum, it was a question as to whether Gennum was investing in this business. So that's what's changed now. And the customers are much more in tune with the road map and the strategy, and we are investing and we like the space and I believe that the video, high definition video space and ultra high definition video space and the high definition surveillance spaces are all going to be very good spaces to be in for many years to come.

So to answer your question, I think those are the critical components. Obviously, we know about the data center growth and we know about the cloud growth and we know about the base station growth. But if we can combine the video growth with those, then I think Gennum business is going to do very well.

Thanks, Mohan.

There are no further questions at this time. I turn the call back over to the presenters.

So in summary, Q2 represented another very strong performance for Semtech. Despite several headwinds, our focus on delivering solid financial performance resulted in delivering the second highest free cash flow quarter in the Company's history. Our innovative new product introductions and continued design win momentum are positive drivers of our future growth.

We remain confident that our position in the key markets where we compete, our balanced portfolio of differentiated products, and our influential partnerships with our diversified customer base will enable us 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.