Semtech Corp (SMTC) 2015 Q3 法說會逐字稿

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q3 FY15 earnings release conference call.

(Operator Instructions)

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

Thank you, Erica. And welcome to Semtech's conference call to discuss our financial results for the third quarter ended October 26, 2014. I'm Sandy Harrison, Director of Business, Finance and Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited releases 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 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 refer to the Safe Harbor statement included in today's press release, as well as 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 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.

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

Thank you, Sandy. Good afternoon, everyone. Q3 FY15 results were slightly ahead of expectations, with net sales of $148.9 million, coming in just above the midpoint of our guidance range. This represented growth of 2% from the prior quarter and an increase of 6% from the third quarter of FY14. Continued strength from the industrial end market and broad-based growth across the high-end consumer end market helped offset headwinds in the communications and enterprise computing end markets.

During the quarter, we concluded a contract settlement discussion with our 3D touch sensing customer, resulting in $4.1 million of revenue for cancellation charges for materials procured. The gross margin on this revenue was approximately 29.3%.

In Q3, net sales into Asia represented 70% of net sales, North America represented 18%, and Europe represented 10% of total net sales. Sales to distribution decreased as a percentage of overall net sales, and represented approximately 54% of total net sales, while direct net sales represented approximately 46% of total net sales. Bookings were relatively linear in Q3 of FY15, but below the Q2 of FY15 levels, resulting in a book-to-bill below 1. Total bookings accounted for approximately 47% of shipments during the quarter.

Gross margin on a GAAP basis for Q3 of FY15 was 60%, a decrease of 50 basis points from 60.5% in Q2 of FY15. The decline was driven by the impact of the contract settlement with our 3D touch sensing customer. In Q4 of FY15, we expect GAAP gross margin to be 60%, or flat with Q3 levels, and remain at a high-end of our targeted 55% to 60% range, as the benefit of the nonrecurring customer termination impact is offset by lower mix of our Signal Integrity product group revenue.

Operating expense on a GAAP basis increased approximately 1% to $66.5 million compared to the prior quarter. The slight increase was mainly attributable to higher equity stock-based compensation, mostly offset by a lower compensation expenses. In Q4 of FY15, we expect our operating expense on a GAAP basis to decline approximately 2% on lower compensation expenses, driven by the holiday shutdown and the expected lower payouts on annual bonus programs.

In Q3 we recorded a GAAP tax provision of 18% versus a tax provision of 11% in Q2 of FY15. The benefit of a true-up of regional mix of income for the year was offset by a higher valuation allowances. For the remainder of FY15, we expect our GAAP effective tax rate to be between 11% and 13%.

In Q3 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 60.3%; down 50 basis points from Q2, due to the impact of the contract settlement with our 3D touch sensing customer. At the midpoint of guidance, we expect Q4 non-GAAP gross margin to increase modestly from Q3, as the benefit of the nonrecurring customer settlement that negatively impacted Q3, should be offset by a lower mix of our Signal Integrity product group revenue.

Q3 non-GAAP operating expense was $53 million, down approximately 1% sequentially, reflecting lower compensation expenses. In Q4 we expect non-GAAP operating expense to decrease approximately 2% to 6% sequentially, driven by lower compensation expenses due to the holiday shutdown and expected lower payouts on annual bonus programs.

In Q3 our non-GAAP effective tax rate was approximately 13%, which was 2% below the 15% in Q2, driven by the true-up of regional mix of income expected for the year. We expect our Q4 tax rate to be in the 14% to 15% range. In Q3, cash flow from operations increased 15% from the same period a year ago.

We repurchased approximately 818,000 shares of our stock for $21 million, and paid approximately $5 million on our debt. As a result, our cash and investment balance at the end of the quarter was approximately $233 million, down about 3% from Q2 of FY15. The current balance on our debt is approximately $254 million.

In November 2014, our Board of Directors approved an increase in our stock repurchase authorization to $50 million. Our priority for use of cash is buying back our stock opportunistically given our current stock price, paying down our debt acquisitions and strategic equity investments in start-up companies.

The Company acquired approximately $13 million of property, plant and equipment in the third quarter. In Q4, we expect to spend approximately $8 million, primarily for manufacturing and test equipment for our new product platforms and for information technology infrastructure improvements.

Depreciation for Q3 was approximately $5.3 million. In Q4 we expect depreciation to be approximately $5.5 million. Accounts receivables increased 14% sequentially in Q3, as a result of higher shipments in the last five weeks of the quarter than in Q2.

Our days of sales outstanding increased 4 days to 45 days in Q3, and are at the upper end of the target range of 40 to 45 days. Net inventory in dollar terms increased approximately 11% sequentially in Q3 of FY15. On a days basis, net inventory increased [8 days] to 88 days in Q3, and remains just below the target range of 90 to 100 days. We expect our Q4 inventory to increase as we put inventory in place to respond to short order lead time opportunities and tight foundry capacity.

In summary, Q3 was another solid quarter of steady execution. Despite the near-term revenue headwinds, we expect that revenue growth from our new and exciting product platforms, targeted at high-growth markets, our stable gross margin, good operating expense control, and our strong cash flow generation will continue to demonstrate deleverage in our business model. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 FY15 performance by end market and by product group, and then provide our outlook for Q4 of FY15. In Q3 of FY15, we achieved net revenues of $148.9 million, an increase of 2% from Q2 of FY15, and an increase of 6% from Q3 of FY14. For the quarter, our non-GAAP gross margin was 60.3%, and our non-GAAP diluted earnings per share was $0.46 per share.

In Q3 of FY15, revenues from the high-end consumer market increased from the prior quarter, and represented 34% of total net revenues. Approximately 24% of the high-end consumer revenue was attributable to hand-held devices, and approximately 10% was attributable to other consumer systems.

Net revenues from the industrial end market increased, and represented 27% of total revenues. Revenues from the enterprise computing end market decreased from the prior quarter, and represented 20% of net revenues. Finally, revenues from the communications end market also decreased, and represented approximately 19% of Semtech's total revenues.

I will now discuss the performance of each of our product groups. Q3 of FY15 was a solid quarter for our Protection, Power, and High Reliability product group, which grew 6% sequentially and represented 47% of total revenues. Broad strength across the high-end consumer end market and stable demand from the industrial end market offset weaker demand from the computing and communications end markets.

Our Protection business increased 8% sequentially, as demand from the high-end consumer end market increased nicely. We saw strength from all sub-segments of the consumer market, with particular strength from the hand-held market. Semtech's strong hand-held position in Korea is now complemented by our increasing hand-held presence in China with Asian smartphone manufacturers such as Huawei, Lenovo and Xiaomi.

Our Protection position in other high-end consumer applications such as displays, TVs and the emerging wearable market also remains strong. Our Protection business continues to introduce new products that address an increasing variety of applications. We recently introduced our RClamp 7534P, a low-capacitance multi-line device targeted at bolstering our position in HDMI applications, where the high speed video and data signals demand minimal capacitance. Additionally, our new miniature micro clamp 3601P is specifically targeted at mobile sensing applications that require the smallest possible components. Semtech is uniquely positioned to provide best-in-class ESP protection technology at very small form factors.

Our Protection business continues to benefit strategically from several key industry trends. The increasing number of high speed interfaces per system, the higher bandwidth requirements on these interfaces, and increasing adoption of advanced CMOS process lithographies are all contributing to the long-term demand for Semtech's protection platforms, which we believe will continue to grow on an annual basis.

Following the strong growth we saw in Q2, our power management and high rel business was flat in Q3. Our communications power revenue was slightly lower, but was offset by stronger industrial and consumer power revenues. Specifically, demand from alternative energy, automotive and set-top box applications were modestly stronger in Q3.

In Q4, and FY16, we expect to release additional new power and high rel platforms that will continue to drive revenue growth and gross margin expansion in this business. In Q4 of FY15, we expect revenues from our Protection, Power, and High Reliability product group to decline significantly due to softer demand from our Korean smartphone customers as they reduce their end-of-year inventories below average seasonal amounts.

Moving on to our Signal Integrity product group. In Q3 of FY15, net revenues decreased 6% sequentially and represented 38% of total revenues. Demand from the high-end consumer and industrial end markets increased in Q3, while demand from the enterprise computing and communications end markets declined modestly.

The build-out of 4G LTE wireless infrastructure in China slowed from the higher first half levels, but was offset slightly by solid demand from the PON market. In addition, our video business and our fundable consumer business both had a solid quarter.

While we anticipate continued communications weakness in Q4, we do expect a return to growth in Q1, as the roll-out of 4G LTE-based equipment continues across China. In addition, we expect the increasing bandwidth requirements across the enterprise computing space to enable Semtech's Signal Integrity business to show significant growth over the next several years.

During the quarter, our Signal Integrity product group introduced several new high performance clock data recovery and physical media device platforms that allow us to further strengthen our position in the fast-growing enterprise computing segment. At the 2014 European Conference on Optical Communications, we demonstrated a line of high performance CDR products for 100-gigabits-per-second optical module and 10-gigabit-per-second back plane applications. Our core 25-gigabit-per-second CDR and 10-gigabit per second back plane platforms are key new platforms that demonstrate the full lineup of Semtech technology optimized for high bandwidth system applications.

In addition to our CDR platforms, we now have a portfolio of 10-gigabit-per-second, 40-gigabit-per-second and 100-gigabit-per-second PMD platforms that are gaining traction. We also have active engagements with the key mega-data center OEMs and strategic module manufacturers, driving the use of new technologies into the market, to increase performance, reduce power, and reduce overall cost. We expect to see rapid annual growth in our enterprise computing business over the next few years.

In Q3 our video business increased sequentially, driven by the increasing deployments of ultra high definition video broadcast equipment. We expect sales of our video broadcast products to contribute nicely to our growth over the next few years, as the ultra high definition standard becomes more mainstream. This year we anticipate that over 14 million ultra high definition TVs will be shipped, stimulating the demand for more ultra high definition content and more ultra high definition infrastructure to be deployed.

At the recent China Security Conference in Beijing, we also demonstrated our new low cost, high definition video surveillance chip sets used for security surveillance applications. The high level of cable reach bandwidth and integration at lower cost points provided by our new video surveillance platforms represent the beginning of a comprehensive high definition video surveillance road map for Semtech.

These new chip sets utilize high definition VLC technology to enable both 720P and 1080P high definition video to be transmitted at lower rates over longer distances using conventional CTPV coax cable. We continue to be at the forefront of innovation in the emerging ultra high definition video broadcast and high definition surveillance markets by enabling customers to deliver new levels of quality and performance, and we expect that video business to grow nicely over the next few years.

We are very pleased with the new product execution from our Signal Integrity product group, and anticipate that FY16 should be another very strong new product-rich year. In Q4 of FY15, we expect our Signal Integrity product group net revenues to be down slightly, as we expect further softness in the China infrastructure build-out.

Turning to our Wireless Sensing and Timing product group. Revenues in Q3 increased 15% sequentially and represented 15% of total revenues. Wireless Sensing and Timing growth was primarily driven by strength in the high-end consumer and industrial end markets. In Q3 of FY15, our Wireless & Sensing business grew 33% sequentially, led by strong growth from our proximity sensing products, which increased significantly. Excluding the one-time Nokia Microsoft revenues from both Q2 and Q3, our Wireless & Sensing business grew 38%.

This solid growth is driven by the increasing use of proximity sensing devices in mobile systems. We continue to see strong design win momentum at Tier 1 OEMs for our proximity sensing solutions in the tablet market, consumer wearable market, medical market; and recently we gained our first design win in the smartphone market. We expect to see strong growth in our proximity sensing business for FY16 and beyond.

During the quarter we concluded the relationship with our lead 3D touch sensing customer, Nokia Microsoft, that resulted in approximately $4.1 million in net revenue to Semtech in Q3. We are still evaluating the opportunities for our innovative 3D touch sensing platform at other customers and applications, and we will provide details in the future if and when it is appropriate.

On the wireless front we are seeing tremendous momentum building for our LoRa wireless platform, as customers and partners are rapidly moving to deploy Internet of Things and machine-to-machine related network infrastructure and devices. The LoRa ecosystem continues to expand, and now includes partnership with industry systems and module leaders, as well as service provider and component partners.

Our Wireless & Sensing business recently achieved several significant milestones in the IOT arena. We announced that FastNet, a leading M2M operator in South Africa, has selected LoRa for use in its IOT applications. In their specific application, LoRa transceivers will be integrated into existing infrastructure to enable long-range wireless control of energy usage.

This is just one example of how our LoRa technology can be used in systems where long battery life, long range and low costs are demanded. This is our first service provider win and announcement, and we are presently in trials with three other global service providers. In addition, another three service providers are currently evaluating the LoRa technology for use in their networks.

At the recent Electronic of 2014 event in Munich, along with several of our LoRa ecosystem partners, we demonstrated the capability and potential of our technology by deploying a live LoRa low power wide area network, or LP WAN, over Munich so potential customers could evaluate the capability and potential of the LoRa technology. Also in Q3, we announced that our LoRa technology has been integrated into Cisco's new industrial IOT gateway that enables sensor connectivity to the cloud.

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, and we now have design wins in the public network, private network, and consumer network segments. We believe the SAM for these low power, long range wireless networks is growing rapidly, and will expand into a $500 million-plus opportunity for Semtech over the next few years.

During Q3 of FY15 our timing business declined sequentially, as excess inventory build in the first half was worked down during Q3. We have seen bookings recover in Q4, and expect demand for our timing platforms from packet-based communications systems to grow modestly in Q4. In Q4 of FY15, we expect net sales from our Wireless Sensing and Timing product group to decline, as the 3D touch sensing revenues will not be repeated.

In Q3 our distribution POS increased slightly to deliver another record POS quarter. Distributor inventory increased 2 days from 69 days in Q2 to 71 days at the end of Q3, and is aligned with the low end of our target channel inventory model of 70 to 80 days. Similar to our direct business, 51% of the total POS came from the consumer and computing end markets and 49% of total POS came from the industrial and communications end markets.

Moving on to new products and design wins. In Q3 we released 17 new products and achieved 2,156 new design wins. We continue to focus our R&D efforts on new growth opportunities, diversifying our customer base, and driving end market balance by developing and delivering differentiated analogue mix signal solutions to emerging and fast-growing markets.

Now let me discuss our outlook for next quarter. Based on recent bookings trends and lower backlog entering our seasonally softest quarter, and due to continuing negative signals from our two major Korean smartphone customers and expected weakness from the China infrastructure market, we are currently estimating Q4 net sales to be between $128 million and $132 million. To attain the midpoint of our guidance range, or approximately $130 million, we needed net turns orders of approximately 49% at the beginning of Q4. We expect our Q4 GAAP earnings to be between $0.14 and $0.16 per diluted share, and non-GAAP earnings to be between $0.32 and $0.34 per diluted share.

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

(Operator Instructions)

You have a question coming from the line of Gabriela Borges from Goldman Sachs. Your line is open.

Good afternoon, and thanks so much for taking the question.

I wanted to follow up on the prepared remarks on the communications infrastructure market in 4Q and the comments as well that it might be up in the first quarter. So maybe you could talk a little bit about what you're seeing there in terms of demand from (inaudible) end customers and any early indications on 2015? Thank you.

The real drivers, Gabriela, of this is China, and specifically the LTE base station deployments. We are expecting that the LTE FDD licenses to be released sometime in 2015. And we think it's going to happen in Q1, and that will drive China Telecom to deploy more base stations and we'll see an impact from that.

So that's the expectation. And if that doesn't occur, it will be some -- we think there will be some comeback from the China mobile deployments, but we really are expecting -- I think the largest growth will come from the FDD deployments.

Understood. Thank you. Just a follow-up.

The commentary on short order lead time opportunities and potential building inventory in the quarter to address those opportunities, any indications that you may see some more of that short lead time business in the quarter than normal? And just on the tight foundry capacity too, what you're hearing from your foundry suppliers? Thank you.

Let me start with that first. The foundries are still fairly tight, which I think is a relatively good sign. Most of our partners are telling us that they have -- don't have a lot of extra capacity. And so indicated that demand is not too far away.

On the order side, the thing that we look at is really where -- because we have January in our quarter, what happens at Christmas, and then as we go into Chinese New Year, what the demand is going to look like. And we have to be ready for that, especially on our consumer-related businesses where the lead times can be four weeks, two to four weeks in some cases, the order lead times. And the supply lead times might be eight weeks or greater. So that's really the challenge.

That's helpful. One last one, if I could.

You mentioned a number of design wins on the LoRa wireless platform. Maybe you could help us quantify how big that business opportunity could be next year, based on the visibility that you have today? Thanks very much.

Well, it's really -- it's difficult to say because it's industrial, and the time to revenue on industrial tends to be a little bit longer. But it is growing very fast for us and the opportunities are very broad. So that's the encouraging thing.

As I mentioned in my prepared remarks and you can see a number of press releases we've done, we are seeing opportunity in energy control, in the smart grid networks, in metering, in security, in asset tracking, in monitoring and sensing of networks, and it just is very broad. And I think every time we talk about the technology with customers, we see more and more opportunity.

The other nice thing about this opportunity for us is, is it's kind of got a life of its own because the service providers themselves are deploying and trying different applications, as well as private networks as well. So we're seeing more and more opportunities. It's going to be for sure a very fast-growing business for us.

To quantify it, it's tough other than to say I think we have a $500 million SAM, and we obviously want to try and gain as much of that penetration of that, as much of that opportunity as possible over the next three to five years.

Great. Thanks so much for the details.

You have another question coming from the line of Steve Smigie from Raymond James. Your line is open.

Great. Thanks a lot, guys.

Obviously some softness on the guide in the expected areas of Samsung and the China infrastructure stuff. But it sounds like you have some good visibility on some nice design wins into next year across a whole bunch of different areas. So as we think about the return to sequential growth next year, should we think a relatively healthy recovery into April and July quarters?

Yes, Steve. I think that's correct. Obviously Q2 and Q3 we would expect to be our stronger quarters next year, but a lot depends on these design wins. Some of them are in consumer applications that could ramp quite quickly, and some of them are in more industrial applications that will probably take a little bit longer.

But on the whole, we're looking at a, we believe, a strong FY16.

Okay. And you guys are running at the high end of your gross margin range, obviously that's -- some of that has to do with a little bit weaker consumer going into January, but it seems like you've got some higher margin stuff ramping, too. So as we think about that gross margin into next year, do you think it bounces around that higher level there on the gross margin?

Steve, as you know, our gross margin is mostly driven by the mix of revenue. And our thinking right now is that as long as we continue to see the strength from our Gennum business, continue to see the LoRa business ramp the revenues, and also more importantly, our [port] management business is growing, and in addition expanding their gross margins.

And I think that gives us the confidence that we should continue to operate at the current levels of gross margin, which is above 60%.

Okay. Great.

Last question was just as I look at operating expense, obviously the January quarter is the holiday stuff. As we get into early next year, the revenue levels, at least the April probably still a little bit low. Do you again maybe pay a little bit less on bonuses because the revenue level's low? Or maybe do a little bit of pruning on the cost structure early next year?

I think we've really done a very good job of managing our operating expenses, both in line with the top line but also in line with our -- the investments that we have to make for our future growth. But looking ahead into next year, I still see operating expenses on a quarterly basis coming in somewhere between $52 million and $54 million a quarter.

Obviously, there's going to be some quarterly volatility driven by the timing of certain expenses. But I think on the average for the year, we would expect OpEx on a non-GAAP basis to be between $52 million to $54 million.

Okay, great. Thanks, guys.

You have another question coming from the line of Doug Freedman from RBC Capital Markets. Your line is open.

Hi, guys. Thanks for taking my question.

I'm sorry if I'm misunderstanding something, but I just want to make sure I understand what occurred with the settlement that you executed with Microsoft Nokia on this 3D touch. Were you expecting that settlement to contribute to revenue in the October quarter just reported, or was that a source of upside to the numbers?

Yes. So Doug, I think if you -- I don't know, you probably don't remember, but in our call, in our Q2 call, we did indicate at that point that we were involved in settlement discussions with the customer. And we weren't sure when those discussions were going to be concluded. So we did not factor that into our guidance back then. And then the discussions were concluded in late October, and we had to recognize the revenue associated with the cancellation charges.

So just for ongoing purposes, if I wanted to consider, I would have removed that $4 million -- did I hear correctly, it was $4.1 million? I would remove that from the October quarter to sort of get an ongoing run rate of business and to get a sequential decline.

The reason I'm asking is, the 12% down to the midpoint of your guidance, or 13% down, is pretty severe and worse than we've heard from peers. So I'm trying to understand how that all constitutes itself, given, I believe last quarter you had said your Samsung handset exposure was down to about 7% of sales.

So yes, I think you can definitely make that adjustment because that's just a one-time revenue [tick]-up in the October quarter.

Can you give us an update on where you're at with -- what percent of sales your key customers in Korea were in the just reported quarter?

In the most recent quarter, Samsung overall was 10% of revs. That was up from 9% in Q2. Of that, about 8% was handsets. That's up from 7% of handsets in Q2, Doug.

Do you have some sort of an outlook that you can share with us? How much is that impacting your guide going forward? You did highlight it as part of the source of the revenue decline.

A significant part of it, of the decline, Doug. I don't think we have -- want to give out the detail.

Okay. But safe to say that the percent exposure would be dropping in the January quarter you're guiding to?

Yes.

Okay. I'll leave it there and jump back in the queue if I have any further. Thank you, guys.

You have a question coming from the line of Chris Hsuan from MKM Partners. Your line is open.

This is Chris Hsuan in for Ian Ing.

Could you guys give us some more details on the FY16 opportunities in emerging markets? Perhaps consumer devices or industrial applications? Talk about the relative gross margins in serving emerging markets.

For FY16, we look at -- we still believe tablets for us because of the proximate sensing has pretty much penetrated most of the tablets out there with LTE radios. We think that's a really good opportunity for us. Obviously smartphones is interesting because, while we have challenges in Korea, we have really good penetration in China, and that seems to be offsetting some of the Korea line there. So we still view that as an opportunity for us.

Plus I mentioned on the call that we do have our first proximity sensing design win in a smartphone. So that's an opportunity. We think the wearable market also in the consumer space is a growing market that we are exposed to, both with sensing and our protection technology.

And then on the enterprise computing side, we still believe data centers and the whole cloud computing arena for us is a very good growth driver for our products, our Signal Integrity products, both CDRs and PMD devices, plus Protection products. Then the PON market also seems to be growing quite nicely. So we think that's a good growth market for us.

Then on the industrial side, as I mentioned this whole Internet of Things arena is growing nicely for us. And machine-to-machine connectivity, we think that market is also going to generate some good growth for us. Video surveillance market, the high definition video surveillance market, and then the ultra high definition video broadcast market are all good opportunities for us. And the automotive space is becoming more of an application space for our products as well.

So a number of different growth markets that we think we're going to be able to participate in for next year.

(Inaudible) Did you mention what the relative gross margins were in the emerging markets?

Typically consumer space is kind of 50% to 55%. And then we view the computing space kind of in that range, and communication industrial tends to be at the higher end, the 60% and above range.

So it varies from application to application. Obviously some of the higher volume spaces, like smartphones, would be the lower end. But in total, because of the balance of markets, we think 55% to 60% is really where most of these spaces will end up averaging to.

Sure. And a follow-up.

I'm not sure if I missed in the call, but did you guys mention how many design wins you had in the quarter? And also, are there any trends in the volume opportunity, gross margins and program risk in the new wins? Thank you.

We said 2,156 new design wins. With design wins, the way we quantify design wins there's fairly minimal risk. It's mostly customer risk. If a customer places an order or gives us a forecast, and then they ramp up and they realize maybe they don't have as much growth as they anticipated, maybe we wouldn't get the revenues associated with the design win.

But we're fairly conservative in how we measure our design wins. We measure it because it really tells us how we're positioned for future growth, and we feel good about where we are with our design wins.

Great. Thank you.

You have another question from Rick Shaffer from Oppenheimer and Company. Your line is open.

Hey, guys. This is Shawn Simmons calling in for Rick. I just had a couple of quick questions.

Mohan, I think you just mentioned your first proximity [something] win in the smartphone market. I guess when would you expect that design win to ramp next year? And can you kind of frame out, I guess, what's the differentiating quality of that product and how could it ultimately penetrate more into the smartphone market longer term?

Well, we do hope that the proximity sensing platform we have and the number of sensors we have will penetrate not only the smartphone market but other application spaces in the consumer segment, as well as industrial. That is the goal. I think it will probably -- we're expecting Q2 to Q3 to be the majority of when we see -- we start to see the revenue from this design win. So it could be fairly quick.

Smartphones can generate very fast time to revenue, which is one of the advantages of being in the consumer space, of course. The advantages we have, it's a number of different technology advantages. Obviously, the power is very important, the ultra low power. We have very high ESD protection on the device. And there's a bunch of other kind of tricks that are included in the sensing devices we have that give us that -- bring that value to the customers.

And that's -- it is a challenging market. It's a competitive market. But it's combined with our protection products and other products we now are starting to bring to the space. I think we have a good chance of this being a good business for us for several years.

Okay. Great.

And then Emeka, going to the increased buyback opportunity. It looks like you guys are going to be buying some shares back here over the next couple quarters, as your stock price has been a little low. But have you guys had any discussions with the Board about potentially initiating a dividend, and how you see that playing a part of your capital allocation strategy longer term?

Yes, Shawn. I think the Board and the management team, we periodically discuss our -- what our dividend policy is going to be. But every time we've had that discussion, we've basically come down on the side that when we do initiate a dividend policy, that we want it to be sizable and we want it to be sustainable.

We do think that at this point in the Company's history, it is probably more important to dedicate a lot of our resources right now to driving the top-line growth and driving the earnings growth. So we think as we get to our $1 billion top-line goal, that will probably be the right time to really think about and initiate a dividend plan.

Okay. Great. Thanks, guys.

You have another question coming from Liwen Zhang from Blaylock. Your line is open.

Thank you for taking my questions.

I have one question about your LoRa. Can you talk about the competitive landscape and what advantage Semtech can bring to the customers? Thank you.

Well, the competition in the space is really for us Texas Instruments, Silicon Labs, and I guess there's a few other entrants coming into the space. But really, the value that we bring is longer range, lower power, and then just kind of a number of different application value, I would say, for each individual space that we are targeting. So that includes kind of more of a systems solution in some of these application spaces.

But that's really the answer. I think it's more low power and range is the key.

Okay. Thank you. That's all I have.

You have another question coming from the line of Harsh Kumar from Stephens, Inc. Your line is open.

This is Richard in for Harsh.

Looking at the 3D Gesture opportunity, I know that the breakup's behind you now. Are you able to sell that product right away to other customers? And then can you talk about any type of feedback that you've been getting from other customers that you're sampling with?

The answer is no, we haven't been talking to other customers, simply because we, by contract, are not allowed to. And we are in negotiation to see if we can get that opportunity.

Okay. Thanks for that color.

And then looking at Gennum, can you talk about kind of the competitive landscape on that product, specifically on the data center side? And then are you seeing any customers start to in-source that product, develop it themselves?

Well, in that space there are some customers that do have their own internal module manufacturing, and they do typically in-source and out-source. So we have to work with our module partners and other companies that sell into the OEM, and make sure that we bring a competitive solution to the marketplace. That's an ongoing story.

On the competitive landscape, I think it's the same competitors. It's typically TI, Maxim, Inphi are the main competitors we come across. We have a broad portfolio of CDR products and PMD products that we bring to the table. And we believe that most of our products are highly differentiated, and we tend to do quite well.

Great. Thanks, guys. Good luck.

Thank you.

(Operator Instructions)

You have another question coming from the line of Craig Ellis from B Riley. Your line is open.

Thanks for taking the question, guys. Just two quick ones.

First, Emeka, following up Doug's question. What was the earnings impact of the $4.1 million settlement revenue benefit in the quarter?

Well, I don't know that I have the earnings impact, but I do know that the impact on our gross margins was about 80 basis points.

Eight-zero?

Yes.

Okay. Thank you.

And then the follow-up is to you, Mohan. Thanks for all the color as you look out over next year and look at how the segments and the sub-segments are tracking relative to design wins and growth. Can you just rank the opportunities that you're seeing, order of magnitude basis? What are the biggest growers as you look out over next year, and what follows that up? Just so we understand kind of where you think the biggest incremental growth is coming from in the business over the next year or so.

For the next year, for sure proximity sensing for us, because we already have wins and we can see markets that we're in there typically drive faster revenues. So definitely proximity sensing. The wireless story for us is a very nice one. The time to revenue is always a question, but there are so many things going on in that space, I would say that the wireless is probably number two. So the proximity sensing, then the wireless.

And then third is all of the products coming out of the Gennum business. The video products, the video surveillance products and the video broadcast products, and then the data com products coming out of the Gennum business that are driving into some fast-growing markets, data centers and cloud computing driven. I would rank those three.

The Power Management business is still kind of a turnaround business for us. It's coming back. But as Emeka said, it's a huge SAM. And a few wins there are going to move the needle significantly for us and the gross margin's going to be much higher also. So I would rank that up there. But I think the top three are probably proximity sensing, the wireless, and then the data com and Signal Integrity products (technical difficulties).

Mohan and Emeka, thank you.

There are no further questions at this time. I turn the call over to Mr. Maheswaran.

In summary, we delivered another solid performance in Q3, further demonstrating the leverage in our operating model. A number of our exciting new products in fast-growing emerging markets are moving into production, while design win momentum remains strong and should help deliver strong growth in FY16.

Our balanced portfolio of innovative, highly differentiated platforms and our focus on building long-term, strategic customer relationships will enable us to continue moving towards our goal of becoming a billion dollar company.

With that, we thank you all 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.