Semtech Corp (SMTC) 2016 Q1 法說會逐字稿

Good afternoon. My name is Crystal, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q1 FY16 Semtech Corporation earnings release conference call.

(Operator Instructions)

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

Thank you, Crystal. Welcome to Semtech's conference call to discuss our financial results for the first quarter of FY16 ended April 26, 2015.

I'm Sandy Harrison, Director of Business Finance and Investor Relations. The 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 was issued after the market closed today, and is available on our website at www.semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release, as well as the other Risk Factor section of our most recent periodic reports on 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. Also during the call, we may refer to pro forma or other financial measures that are not prepared in accordance with the generally accepted accounting principles. A discussion of why the management team considers non-GAAP financial 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.

For Q1 FY16, we reported net sales of $130.1 million, which was at the low end of our guidance range. These results were flat with the prior quarter, and a decrease of 2% from the first quarter of FY15. Strength in the communications and enterprise computing end markets were offset by weaker industrial and higher consumer end marketsas demand from our Korean smartphone customers was weaker than expected. In Q1, shipment into Asia represented 74% of net sales. North America represented 17%, and Europe represented 9% of total net sales.

Sales to distribution increased as a percentage of overall net sales and represented approximately 57% of total net sales, while direct sales represented approximately 43% of total net sales. Bookings increased sequentially in Q1, resulting in a book-to-bill above 1. Turnsbookings accounted for approximately 58% of shipments during the quarter.

Gross profit margin on a GAAP basis for Q1 of FY16 was 60.3%, which was an increase of 420 basis points from 56.1% in Q4 of FY15. The improvement was driven by non-recurring special charges incurred during Q4 of 2015, and the favorable product mix from higher Signal Integrity Product group and Wireless Sensing and Timing product group revenues. In Q2 of FY16, we expect GAAP gross profit margin to be down approximately 30 to 70 basis points sequentially, due to less favorable product mix.

Operating expense on a GAAP basis decreased approximately 15% to $73.5 million compared to the prior quarter. The decrease was attributable to non-recurrence of the special charges taken in Q4, and lower equity compensation expense, offset by higher payroll-related expenses associated with the new fiscal year. Support expenses for our ERP implementation, and the additional environmental reserves for the cleanup of our former facility in Newberry Park in California.

Q2 of FY16, we expect our operating expenses on a GAAP basis to decline approximately 4%. And lower supported expenses associated with our ERP implementation, lower transaction expenses and the non-recurrence of environmental reserves, slightly offset by higher equity compensation expense.

We recorded an expense of $2.3 million of interest on other in Q1 of FY16, compared to an expense of $918,000 recorded in Q4 of FY15. The increase in the expense amount was driven primarily by higher foreign exchange losses from the revaluation of assets denominated in foreign currencies. We expect to record an interest and other expense of approximately $1.8 million in Q2 of FY16.

In Q1, our GAAP tax rate was 106%, versus 5% in Q4 of FY15. The Q1 tax provision reflects a distortion resulting from the timing of earningsby region. For the remainder of the year, we expect our GAAP effective tax rate to be between 16% and 20%.

In Q1 of FY16, on a non-GAAP basis excluding the impact of equity compensation, amortization of acquired intangibles, acquisition-related expenses, environmental reerves and other restructuring-related expenses. Gross profit margin was 60.8%, up 70 basis points sequentially.

The higher gross profit margin resulted from higher Signal Integrity and Wireless, Sensing and Timing product group's revenue. We expect Q2 non-GAAP gross margin to decrease approximately 40 to 80 basis points from Q1, due to less favorable product mix.

Q1 non-GAAP operating expense was $56 million, up 9% sequentially, due to the higher payroll-related expenses associated with the new fiscal year,additional expenses from our recent acquisitions and support expenses for our ERP implementation. In Q2, we expect non-GAAP operating expense to be flat to down 4% sequentially, due to lower SAP-related spending offset by higher new product development expenses.

In Q1 of FY16, our non-GAAP effective tax rate was approximately 13.6%. And we expect the Q2 tax rate to be in the 14% to 16% range.

In Q1, cash flow from operations increased 26% sequentially. We repurchased approximately 735,000 shares of our stock for $20 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 $312 million, down about 8% from Q4 of FY15.

The current balance on our debt increased to approximately $284 million, as we drew on our line of credit to fund the acquisition of Triune Systems. In May of 2015, our Board of Directors approved an increase in our stock repurchase authorization to $100 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 smaller or startup companies.

The Company acquired approximately $3.2 million of property plant and equipment in the first quarter of FY16. In Q2, we expect to spend approximately $5 million, primarily for manufacturing and test equipment for our new product platforms.

Depreciation for Q1 of FY16 was approximately $5.5 million. In Q2, we expect depreciation to be approximately $5.8 million.

Accounts receivable increased 24% sequentially in Q1 as we saw higher shipments in the second half of the quarter than in Q4, due to the higher turns requirements and the measured ramp-up of our ERP implementation.

Our days sales outstanding increased 2 days to 54 days, and is above the target range of 40 to 45 days. Net inventory in dollar terms increased approximately 2% sequentially in Q1, representing 132 days of inventory, and remains above the target range of 90 to 100 days. We expect our Q2 inventory to decrease slightly as we unwind the inventory that we've built up in preparation for our ERP implementation.

In summary, despite the near-term headwinds from our Korean handset customers, we believe that our stable gross margin at the high end of our target range and the successful ERP implementation will help us drive leverage as our strong design win momentum and new product platforms drive future revenue growth.

I will now hand the call over to Mohan.

Thank you, Emeka, good afternoon, everyone. I will discuss our Q1 FY16 performance by end market, then by product group, and then provide our outlook for Q2 of FY16.

In Q1 of FY16, we achieved net revenues of $130.1 million, flat with Q4 of FY15. Demand increased from the enterprise computing and communications end markets, while the high-performance consumer and industrial end markets decreased from the prior quarter.

For Q1 FY16, we posted non-GAAP gross margin of 60.8%, and non-GAAP diluted earnings-per-share of $0.27 per share. In Q1 of FY16, net revenue from the enterprise computing end market increased from the prior quarter, and represented 27% of net revenues. Net revenue from the communications end market also increased, and represented approximately 20% of Semtech's total net revenues.

The industrial end market decreased from the prior quarter, and represented 26% of total revenues. Finally, net revenue from the high-end consumer end market decreased from the prior quarter, and represented 27% of total net revenues. Approximately 20% of the high-end consumer revenue was attributable to handheld devices, and approximately 7% was attributable to other consumer systems.

In Q1, we also completed the spinoff of our defense module and microwave business, completed the integration of Triune Systems and EnVerv, and completed the global implementation of our new SAP ERP system. I will now discuss the performance of each of our product groups.

In Q1 of FY16, our Signal Integrity Product Group had a strong quarter, with net revenue increasing 8% sequentially, and representing 43% of total revenues. Strong demand from the enterprise computing and communications end markets was offset slightly by lower demand from the industrial end market.

We saw strength from both the PON and data center markets. Solid share gains in thePON market over the past several quarters has positioned our Signal Integrity Product Group as the clear leader in this market. We expect the PON market to continue to remain strong for the rest of this year.

Our Signal Integrity Product Group introduced several new datacom and video broadcast products during Q1 of FY16. At the recently held Optical Fiber Conference in Los Angeles, the Signal Integrity Product Group announced the availability of the industry's first integrated 100 gigabit per second quad CDR and EML driver platform. This new platform is targeted at 100 gigabit per second data center applications, and complements Semtech's increasing portfolio of high-performance clock data recovery and physical media device platforms.

Also in Q1, we debuted our latest ultra low power high performance 25 gigabit per second bi-directional CDR platforms for use in next-generation SFP28 optical modules, targeted at data centers.Semtech platforms for datacom applications include CDRs, laser drivers and TIA devices, which operate across a broad range of speeds from 2.5 gigabits per second to 100 gigabits per second, and address the ever-increasing demand for lower power higher-performance solutions.

Additionally, at the National Association of Broadcasters, or NAB, conference in April our Signal Integrity Product Group introduced several 12G and 6G broadcast video platforms that enable the industry to transition to ultra high definition. These new platforms include a 6G ultra low power ultra high definition cable equalizer, and a 6G low-power multi-rate ultra high definition cable driver.

We also introduced our first 12G products, which include a high-performance low-power equalizer and cable driver. Our leadership position in broadcast video enables the Company to participate in the strong growth expected as the industry transitions from high definition to ultra high definition.

In addition, our new high definition video surveillance platforms will start sampling in Q3, and we expect to see rapid growth in this market, as current long-range CCTV surveillance solutions transition to HD surveillance solutions. We believe our leadership position in the data center, PON, wireless base station and video infrastructure markets are the result of our focus on introducing new products that continue to deliver the highest performance, highest integration and lowest power in the industry.

Bookings for the Signal Integrity Product Group were also strong during the quarter, and represented a new quarterly record. For Q2 of FY16, we expect revenue from our Signal Integrity Product Group to be approximately flat.

Moving on to our Protection Product Group, Q1 of FY16 was a challenging quarter for our Protection Product Group, which declined 9% sequentially and represented 29% of total net revenues. While we experienced growth in the industrial end market driven by strength from the automotive segment, declines in the high-end consumer market, particularly in the smartphone segment, contributed to disappointing results for the quarter.

Our Protection business declined from the prior quarter, driven primarily by lower demand from our Korean smartphone customers. Demand for smartphone protection products was significantly weaker than originally anticipated, as both of our major Korean smartphone customers cut back their overall build plans for the first half.

This was offset slightly by continued growth from our leading China smartphone customers. Semtech's increasing presence with the Chinese smartphone manufacturers such as Huawei, Lenovo and Xiaomi should continue to be a major contributor to our handheld protection business. However, we're not anticipating any significant recovery from our Korean smartphone customers in Q2.

Our protection business introduced several new products during the quarter. We recently introduced our RClamp 0552T, a five volt protection array designed to protect high-speed differential lines in portable applications, such as mobile phones, fitness bands and other wearable devices. This small form factor low capacitance device protects common high-speed interfaces such as USB 3.0 and HDMI 1.4. We also introduced several other new protection platforms providing ultra low capacitance, fast response times and with small form factors that target space constrained applications in industrial applications.

While our protection business has been challenged by the headwinds faced by our largest smartphone customer. The fundamentals behind our protection business that include growth in the number of ports requiring protection, the increasing speeds of these ports and the increasing sensitivity of advanced lithography devices to ESD events, will continue to provide growth opportunities for Semtech's leading protection platforms across several end markets. In Q2 of FY16, we expect our protection business to be down slightlyas we are anticipating more weakness from our Korean smartphone customers.

Moving to our Power and High Reliability Product Group. Following the relatively strong performance in Q4 of FY15, in Q1 of FY16, our Power and High Reliability business declined 22% sequentially, and represented 11% of total net revenues. While down from the prior quarter, the business increased nicely over the same period a year ago, highlighting the ongoing long-term recovery we've been seeing from this business.

Demand for our Power and High-Rel business was lower across all end markets. As seasonality and slower demand from our computer peripheral and consumer customers weighed on results. Our Power and High-Rel Product Group continues to focus on developing and introducing innovative new products, and remained active in Q1.

During the quarter, we announced our two-amp reverse blocking load switching platform for applications demanding extended battery life such as cameras, wearables and tablets. With the integration of the Triune acquisition into our Power and High-Rel Product Group, we have added wireless charging platforms and isolated switch platforms to our portfolio of load switches, switching regulators, LED drivers, controllers and references.

Customer reception and interest for our dual-mode and tri-mode wireless charging platforms has been outstanding. Our wireless charging platform support all major standards, and provides future upgradability, which is an important feature, given the evolving nature of the current wireless charging standards.

We're seeing tremendous interest from customers designing wearable systems, including smartwatches and medical devices, automotive systems, computing peripherals and a broad range of industrial applications. Our wireless charging platform offers a range of power levels from 0.1 watt up to 20 watts, enabling high-efficiency charging for the emerging low power wearable market, as well the high-power industrial and automotive segments of the market. We anticipate that our wireless charging business to be a very fast growing business for us starting in Q4 of this fiscal year.

We are also seeing very high interest in our isolated switch platform. This platform is seen as a mechanical relay replacement in small form factor, power sensitive applications. We're already in production with this platform in a smart thermostat application, and we are seeing a lot of interest from many industrial smart automation customers as they replace their current relays with smarter solid-state technologies.

In addition, the combination of Semtech's LoRa platforms and isolated switch platforms offer our customers a compelling, highly differentiated industrial control solution for smart automation applications. In Q2 of FY16, we expect revenues from our power and high reliability product group to increase nicely.

Turning to our Wireless Sensing and Timing Product Group, revenues in Q1 increased 15% sequentially, and represented 18% of total net revenues. Revenue from the high-end consumer end market increased considerably, while revenues from the industrial end market decreased from the prior quarter.

In Q1, we saw strong growth from our proximity sensing platform, driven by smartphone and tablet customers moving to production during the quarter. While most of the designs and revenue to this point for our proximity sensing devices have come from the tablet segment, we're pleased to see handset customers start to move to production.

We're also seeing increasing design interest from other consumer applications, such as wearables. The increasing use of high-powered radios and increased focus on personal safety regulations connected with these high-powered radios is driving the increased demand for our proximity sensing platforms.

In addition to the current LTE-based-radio sensing platforms, we now have design wins for Wi-Fi-based proximity sensing platforms. As this trend continues, we expect to grow our proximity business nicely.

In Q1, we also saw continued outstanding momentum for our LoRa wireless platform. At the Mobile World Congress in February, the LoRa Alliance was officially announced. This alliance was formed by an international group of IOT industry participants, including endpoint providers, Gateway base station providers, data analytics solutions providers and networking service providers, creating one of the largest and most powerful consolidated efforts to enable the Internet of Things.

Also this quarter, several significant LoRa related announcements were made by our LoRa partners. These included Actility, with its ThingPark wireless gateway platform, announced it has been selected by four global operators to deploy gateways based on the LoRa platform. Bouygues Telecom, one of France's leading telecom service providers, announced the launch of France's first Internet of Things public network based on LoRa. Bouygues anticipates that over 500 towns and cities will be connected to their IOT network by the end of the year.

Senate, an emerging IOT leader in North America, announced its North American LoRa network rollout for solutions that address the IOT and M2M marketplace. And IBM also announced their IOT partnership with Semtech, and their participation in the LoRa Alliance.

Our LoRa platforms continue to be evaluated by an increasing number of global service providers and should continue to gain momentum, and establish Semtech as an influential player in the exciting IOT and M2M markets. In Q1, we had record LoRa bookings, and we anticipate that our LoRa-based wireless revenues should increase by over 300% this year from a baseline of $5 million last year, and achieve over $100 million in annual revenues within three years. For Q2 of FY16, we expect revenue from our Wireless Sensing and Timing Product Group to decrease, as our leading smartphone customer reduces their build plans.

In Q1, the total Company distribution POS increased modestly from the prior quarter, and represented a new quarterly POS record. Distributor inventory increased by a day from 74 days in Q4 of FY15 to 75 days in Q1, and remains within our 70 to 80 days channel inventory model.

Our distributor business, like our direct business, remains very well-balanced, with 49% of the total POS coming from consumer and enterprise computing end markets, and 51% of total POS coming from industrial and communications end markets.

Moving on to new products and design wins, in Q1 of FY16, we released 20 new products. We also achieved 2,242 new design wins, a modest increase over the prior-quarter levels.

Now let me discuss our outlook for the second quarter of 2016. Based on recent bookings trends and our backlog entering the quarter, we are currently estimating Q2 net revenue to be between $120 million and $130 million. To attain the midpoint of our guidance range, or approximately $125 million, we needed net turns orders of approximately 49% at the beginning of Q2.

We expect our Q2 GAAP earnings to be between zero and $0.06 per diluted share. And our Q2 non-GAAP earnings to be between $0.21 and $0.26 per diluted share.

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

(Operator Instructions)

Steve Smigie, Raymond James.

Great, thanks a lot for letting me ask the questions.

Emeka, I just wanted to touch a little bit on the data center business. You've seen some pretty good trends overall in data center I think to most companies. Do you think you would be able to achieve your double-digit growth in that business this year?

The data center business, Steve, this is Mohan. The data center business is doing very well. Obviously, over our signal integrity products we have a range of CDRs and PMD devices that go into that space, and that business is doing well. The demand is strong, and I think it will continue to be strong for the rest of the year.

Okay. And then for PON, I think if you look at Infonetics, it's suggesting something like 20% compounding your growth in China for that. Is that where that you are likely getting the business in China, and is that (multiple speakers)?

Yes, Steve, that's correct. It's largely China, it continues to grow nicely for us and deployments are expected to continue to grow for the rest of the year also.

Okay. And then on the Triune acquisition, I think you had talked about that potentially being I think it was $10 million to $20 million, roughly, for 2015. I was just curious if that's still roughly on track, and what potential you see for it after 2016?

Steve, the range was $10 million to $20 million. I think it's going to probably be in the lower end of that range. But we're anticipating that to still be the case for this year and then doubling next year.

Okay. If I could just sneak one more in. You talked about Korean and Chinese guys, or at least the Korean guys looking a little bit softer in this quarter. Any sense yet if that picks up in the second half of the year as pricing is fixed and you get the Galaxy Note products rolling out?

It's tough to call, Steve. Obviously, they have reduced their build plans, and this is both the Korean -- the largest Korean smartphone manufacturers have reduced build plans. They've clearly lost share in Asia. They had some excess inventory, and so I think it's difficult to call whether it's expected to grow in the second half. They are anticipating growth, but we are being fairly conservative about our view on it until we see the demand.

Okay. Great, thanks.

Craig Ellis, B. Riley.

Thanks for taking the question. And I will just follow-up on Steve's last one. With respect to protection, if my model is right, it looks like the business is down 25% to 30% year on year.

One, are there other things at play just besides the potential share shift of your customers? Is there a different competitive dynamic for protection at the customer? And when do you see that business getting back to a level where year-on year-growth is possible?

So, Craig, let me give you a little bit of color. First of all, we don't think that there is any competitive dynamics. We believe that specifically, Samsung but also LG, have just reduced their build plans. So they are clearly not building as many phones as they had anticipated.

And their demand has come down, so they have some excess inventory also. I would say that they are being a little bit more cautious and being more aggressive in trying to get their bill of materials down on their phones. And that may, in some cases, mean that they don't put protection on some of their phones.

Protection is somewhat of an insurance for the phone. And maybe they, in some cases, have decided not to add that insurance in. So that's a challenge.

Now offsetting the Korean decline is good growth in China. So we have the China smartphone manufacturers all having pretty much put Semtech protection on their phones. And we're seeing the growth rates of that China protection business is much faster than the decline in the Korean business coming down. And it's just smaller, so it will take some time for that to grow to the same type of level.

And the protection business in general across all other markets, including automotive, industrial, the enterprise space is doing quite well. It's really just the Korea phenomenon. And I think that we've lived through this before when we were in RIM, and we lost a substantial amount of RIM business, and Motorola.

And we've seen this before. We expect Samsung and LG to continue to be aggressive, but I think for this year it's going to be challenging for us. And I think we'd expect to start growing again next year.

Understood, Mohan. And then switching gears to another segment, and something that's much, much earlier on the ramp timeframe for you.

Can you help us understand the visability that is driving your confidence that the LoRa business can increase 300% year on year? And then, what gives you the confidence in a notorious low visibility industry like semi conductors that it's a $100 million business three years down the road?

Well, it's just that there's a lot of momentum. There's very few industry sectors, I would say, that are growing as fast in the semi conductor space. And clearly, the Internet of Things is one of them.

Projections suggest that there's going to be 25 billion low-power devices connected over a long range by 2022, which is a huge amount. And it's not that far away.

So we are already seeing a lot of our customers and partners and cities really starting to think about how do they become smarter. In some cases, it's a neat, smart watering, and in other cases it's efficiency, smart parking and smart waste management. And we're seeing smart agriculture, and smart buildings, and asset tracking, and smart metering and many, many different applications.

So it's clear that there's the pull from the marketplace for low-power long-range highly efficient low-cost devices. And LoRa is a really a good fit for that. So the other thing that's important in this play is it's not just North America or Europe, it's China, it's South Africa, it's India, it's Brazil. These are geographies that really need this kind of emerging technology.

So we see a lot of pull, so there's a lot of growth drivers. And that's the reason why we're quite confident, we've got a lot of design wins, obviously. And with the LoRa Alliance being formed and the momentum there, I think we stand a very good chance of growing at the rates that I have laid out here.

That's helpful.

And then the last one for Emeka. The Company has done a good job over the last 12 months being very responsive to changes in customer programs and market requirements and it's restructured.

Emeka, with the lower revenues that you're now looking at going forward near term. Is there potential to do something further with operating expense, or is it now at the lowest possible levels that it can be relative to the costs you've already taken out?

So, Craig, in terms of opportunities to drive leverage, I think the key driver for us is going to be top line growth. Having said that though, in our last earnings call, I did guide to quarterly operating expenses on a non-GAAP basis of $54 million to $56 million. And I think right now with the current demand outlook, I would expect us to be at the low end of that range in the full year.

Let me add one thing to that, Craig. Because I think it's important we've mentioned on the call the SAP implementation and our infrastructure and our investment in that infrastructure. And we think that we're in really good shape now to do further acquisitions, and integrate them in a way that will move us forward quickly.

And that's been a key part of that growth. As you see in the industry, a lot of acquisition related activity that we believe we can continue to be a driver in that space. And that investment was necessary, unfortunately it hurts OpEx, but I think we'll be well-placed for the future growth of Semtech.

And on that point, is the expectation that there is still $1 million of incremental savings beyond this quarter from lower ERP implementation expenses?

Yes, Craig, that is the expectation.

Thanks.

Rick Schafer, Oppenheimer.

Hello. Just a couple follow-ups on the wireless business. I guess could you give us an idea how big China is for you now as a percent of revs? And do you think that success there will be enough to drive either a second half uptick in your handset business or your wireless business, or at least find some stability in the second half?

Rick, when you say wireless, you're talking about protection in smartphones specifically. Right?

Yes.

So the China business is growing very fast for us. I mentioned it's probably growing in the order of 50% to 60%, but it's small relative to our Korea business. And so could it grow in the second half?

I think in order for our protection business to grow, we're going to need Korea to come back somewhat. But I think it's growing at a rate that obviously depends on the share in the space. But I think by early FY17, I think China is going to have as much an impact on our protection smartphone business as Korea.

Okay. And then what role do you expect content to play in all this for handset for you this year? I'm thinking a proximity sensor, for instance. You mentioned on your remarks.

Can you comment on the success of winning SKUs there outside of the Samsung tablet wins that you have talked about? And could that be a boost to your wireless segment or your handset handheld segment in the second half?

That is going to be, it is already actually, it's growing well. Unfortunately, our first wins in that space were at the same customers that were having issues. But I think we have enough momentum there across the board that I do think that that's going to be a growth driver for us in the second half, despite what happens in protection.

And how soon do you think some of the proximity, I assume you're getting proximity traction in China, as well? And if that's right, when do we start to see the impact of that?

Yes, I expect that in the second half.

In China as well. Okay. And then just another question on base station. Is it still in that 10% of sales range?

And are you guys seeing anything different than what some of your peers have talked about over this last earnings season in terms of order patterns? It seems like you called out comms as actually something that was relatively strong. Are you seeing anything different within the base station piece?

The base station, the strength is really on the PON side, Rick. I think base stations is still in this lull period waiting for a little bit of a pickup in China. So that's what we see I think.

And as a percentage of revenue, it is still the 9% to 10% range, Rick.

Okay, got it. Thanks.

Harsh Kumar, Stephens.

Mohan, question for you. As you look towards the back half, what would be some of the swing factors that could be either vastly positive are vastly negative from where you are today?

Well, I don't think there's many more headwinds for us. We've hit quite a few of them in Samsung, obviously, and LG in Korea are the biggest ones for us, and they are big blows for us. So that's disappointing.

But I think from a growth standpoint, we see, as I mentioned, the IOT-related LoRa activity very, very strong. And we think that there is good growth there. The automotive continues to grow for us, across both wireless charging now, and proximity sensing, and display drivers and power video surveillance.

I think in the second half is going to do better for us. And we should start to see generally in the wireless base stations a little bit of a pickup there. And we're not anticipating that PON or data center is going to get much weaker, so we think that they will be as strong in the second half as they were in the first half.

The consumer side is more tricky to discuss. I think the smartphones, obviously, we're seeing progress in China, Korea is weak for us. So it's going to be more challenging to determine what's going to happen in the second half, as I mentioned.

But I think the other spaces that we are in, wearables, we're getting good traction there. And then on the tablets, we're doing quite well, and then comm I mentioned PON is doing well.

So we're still will balanced. I think we've invested, as I mentioned, in the infrastructure. And I think the future growth has got a lot of these new application spaces, especially around the IOT segment as good drivers for us.

And, Mohan, I think in your prepared comments you said that bookings overall were up. And I'm just looking at the guidance, which is slightly down just around the edges. I'm curious what the balance is.

Is this stuff some of the bookings not shipping in the next quarter? Is that simply it, or is there a level of cautiousness here? Just any color.

So what we are anticipating as we look at the quarter, Harsh, is we have 49%, we mentioned, as we came into the quarter. And some of those terms are in our Korea smartphone customers, so we are anticipating in our guidance a little bit more weakness there that wouldn't necessarily turn as strong as we had expected. So yes, it's a balanced guidance from us.

And then last one for me. As you look into the second half, I know that Korea has been probably a little bit of a disappointment so far. But seasonally, the second half has almost always been sequentially -- the second half has always been stronger than the first half in handsets, Korea, China, all included. Is that more or less what we think will happen again this year based on what you have been so far tell?

That's what we are hoping, that we think will happen, but it's difficult to say. If you look at what's happened with Samsung and LG, they have reduced their build plans for the first half. They did have excess inventory, they have lost share, clearly, in Asia, and so they have to rebound in the second half.

Now I mentioned, we're seeing China grow quite nicely and we will get the benefit of that. But from a Korea standpoint, specifically, we're hoping that they do have a stronger second half.

Thanks, Mohan.

Ian Ing, MKM Partners.

Thank you. Just a clarification on seeing reduced Korea build plans for protection. Is that across the customer line-up, or is that specific to flagships? I know you're talking about protection not showing up at some phones, is there some inventory repurposing going on at customers owed to the flagships?

I can only speak to the smartphones that we participate in, Ian. I can't talk about their whole build plan, because we're not in some of the low-end phones.

But certainly what's happened in the last couple of quarters here is that they had much higher expectations, especially in the smartphones -- the high-end smartphones and the midrange smartphones. And then it's been a continuous reduction in their demand to us.

So they definitely building less. And then obviously that has resulted also in them having access inventory, which they have had to bleed off. We think at the end of Q2 though, they will be through most of that, and as I said, the second half hopefully will recover.

And then protection net in some phone, is that mid tier and high tier, or just mid tier would you say?

Mid tier. I think most of the high-end phones that we are in and the midrange phones we are in, their choice of when to put protection in and when not to put protection is largely a bill of materials reduction.

So they are trying to reduce the cost of their phones. So in some cases, in these midrange phones, they decided to take out protection altogether. And that's a challenge for us, but hopefully they will reverse that position once their phones start to get returned.

Okay, great. And then Signal Integrity, really nice growth here of 43% of sales. Could you rank order the applications at this point, whether it's data center, video broadcast or PON telecom applications or wireless? Thanks.

I would say PON data center, data center is tighter cloud computing, and server connectivity, and then that's on the datacom side. And then on the industrial side there, broadcast video and video surveillance. The wireless backhaul has been weak in the first half, I think the base station side, and that could also be stronger in the second half. But for the first up for sure, PON and data centers.

Great. And then lastly for your wireless charging opportunities, could you highlight your differentiation? I know you're going after more of the industrial and smart grid market, but it does seem like it's a crowded market now. You have got, IDT had their analyst day today, you have got TI and XP and others in that space.

So on the wireless charging specifically, the Triune acquisition, the value of what we have is really dual mode and tri-mode devices. So we're really focused on the transmitter side, not so much on the receiver side. And it's all about offering a multi-mode transmitter platform, so customers can put in our devices and not worry about standards in the future pretty much foolproof and in support of any receiver technology that emerges over the next few years.

So I think that's the value, and that's what we're seeing. So that's on the transmitter side. Route for the high power technologies.

And the lower power technologies, we just have a very good efficient solution for transmitters for wearables. So those are the two areas.

And the differentiation is one of just being able to have programmability and flexibility in our platforms, which we've built in. And having a knowledge of power. Having real experts on this technology, which is a power management problem, I think, is part of our advantage here.

If I can fit one last in here, given it's so much in the headlines so much now. Could you talk about your framework for approaching M&A at the moment, either as an acquirer or as a potential target? Thanks.

Well, obviously, there's growth in the industry, has to come from both organic and external growth and many companies have now recognized that. We have been one of the early leaders in that process, so we were acquirers from day one.

As I've mentioned we've put in infrastructure to support further acquisitions. I think we are well-positioned to do more deals.

We're also, obviously, a very attractive company because of the diversification, and all the growth drivers we have. So we play both sides of it. The goal at the moment is to continue to find new emerging technologies that complement our portfolio, and can help us get back to our growth that we've had in the last decade.

Thank you, Mohan.

(Operator Instructions).

Gabriela Borges, Goldman Sachs.

Great, thank you for taking my question.

Mohan, a higher level question on how you think about the percentage of mix that's coming from consumer. And you mentioned the RIM challenges in the past, including the space of one that's dominated by a large competitor. Maybe if you look forward to the diversification opportunities for the Company, how do you think about the ideal percentage of mix that should come from the consumer? Thank you.

Well we look at -- so I look at balance across the Company across different end markets. And we try to have 50% of the Company operating in fast life cycle markets that are more volatile, and a little bit more price-sensitive maybe. But can drive higher volumes, can drive growth quickly.

And then the 50% of the Company focused on a little bit more longer life cycles, a little bit more about stable environment. And the reason why we do that is simply that customers in markets behave differently all the time. And if you are exposed to any one of these spaces too much, I think it's a risk factor for the Company.

So having the balance of industrial, enterprise, computing, consumer and communications I think allows us the ability to drive continued growth. And be aggressive in exploiting the consumer growth, but equally investing in industrial and enterprise computing gives us the balance and the stability in gross margin expansion that we need.

Within consumer, it is a challenging space. Because segments can get competitive and get commoditized quite quickly, and you have to be willing to move quite quickly from one area to another, which we are. And you have to be innovative, and clearly Semtech is not a winner or leader on price.

So we have to continue to differentiate within that, and if we can't, then we have to find another space. The beauty is at the moment I think that there are a number of new segments, like the Internet of Things, which is industrial marketplace. But actually can drive quite quick growth for us, and I think that's going to be one of the differences as we go forward here.

I appreciate the color. And as a follow-up if, I may. Since you're willing to comment on the gross margin structure within the full protection business, any color how that's changed over the past three years? And then could the mix shift impact that you are seeing right now towards the more fragmented China customer base, could that actually be a positive for the gross margin? Thank you.

The answer to that is yes. I think they're moving to China actually. Because they are new in the space and emerging, and they realize that they have to have good quality image out there they are putting more protection and they are more thoughtful about where the production needs to go. So that's definitely a gross margin help for us.

With regard to gross margin protection in general. Yes, the consumer market protection ASPs that continue to come down, there's an expectation that they will come down every quarter. And it's nothing different than any other consumer business.

But what you have to do is you have to bring out new products, and get them designed into the next platforms. And if you miss that opportunity, then you get a little bit more pressure on your pricing and gross margins than you ordinarily have. We tend to do a pretty good job of bringing out new products and getting them designed in, and that helps us maintain a reasonable gross margin balance in each of the businesses.

Thanks for the color. Best of luck.

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

In closing, Q1 of FY16 had its challenges. We maintained our non-GAAP gross margin above the high end of our 55% to 60% target range, while we integrated our recent acquisitions and completed the implication of our global ERP system.

We believe that with our diversified product portfolio and customer base, our balanced end market and geographical exposure, as well as our increasing commitment and participation in the fastest-growing markets, we are well-positioned for future growth.

With that, we appreciate 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.