Semtech Corp (SMTC) 2016 Q3 法說會逐字稿

Good afternoon, my name is Kyle and I'll be your conference operator today. At this time I would like to welcome everyone to the Q3 FY16 Semtech Corporation earnings release conference call.

(Operator Instructions)

Thank you. Mr. Harrison, you may begin your conference.

Thank you, Kyle, and welcome to Semtech's conference call to discuss our financial results for the third quarter of FY16, ended October 25, 2015.

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 results for the quarter was issued after the market closed today and it is available on our website at www.semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release as well as the other risk factors section of our most recent periodic reports on Form 10-K, filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today onlySemtech undertakes no obligation to update this 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 the 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 Q3 FY16 we reported net revenues of $115.8 million, which was just above the midpoint of our guidance range. These results represented a decline of 8% from the prior quarter and a decrease of 22% from the third quarter of FY15.

Demand was lower across all our end markets as our passive optical network customers burned off inventory andewireless infrastructure demand remained muted. However, we saw our Samsung business stabilize during the quarter.

In Q3, shipments into Asia represented 70% of revenue, North America represented 20%, and Europe represented 10% of total revenue.

Sales to distribution represented approximately 56% of revenue and direct sales represented approximately 44% of revenue. Bookings decreased sequentially in Q3, resulting in a book-to-bill slightly below 1. Turns bookings accounted for approximately 55% of shipments during the quarter.

Gross margin on a GAAP basis for Q3 of FY16 was 60.1%, sequentially flat from Q2 of FY16, as expected. In Q4 of FY16 we expect GAAP gross margin to decline approximately 100 basis points, mostly due to lower absorption as we reduce inventory levels further. [ Operating expense on a GAAP basis decreased approximately 30% compared to the prior quarter. The decrease was mainly driven by the $14.2 million of benefit from the fair value re-measurement of the Triune Systems earnout liability.

In addition, we saw lower expenses as a result of last quarter's cost reduction actions, lower restructuring related expenses and a lower support expenses for our ERP implementation.

In Q4 of FY16 we expect our operating expense on a GAAP basis to increase approximately 35%, driven by the non-recurrence of the fair value re-measurement benefit,the impact of the extra week in Q4,highersupplemental compensation and higher number of new product tape outs.

In Q3 of FY16, on a non-GAAP basis, excluding the impact of equity-based compensation, amortization of acquired intangibles, acquisition and related expenses and other restructuring related expenses, gross margin was 60.3% flat sequentially as expected. We expect Q4 non-GAAP gross margin to decrease approximately 80 basis points, due mostly to lower absorption from our inventory reduction efforts.

Q3 non-GAAP operating expense was $49.6 million, down 11% sequentially, benefiting from the impact of the cost reduction actions during Q2, and lower support expenses for our ERP implementation. In Q4 we expect non-GAAP operating expense to increase approximately 9% sequentially due to the impact of the 14 week quarter, higher supplemental compensation and higher number of new product tape outs. In FY17 we expect our non-GAAP operating expenses to average $48 million to $50 million a quarter.

In Q3 we updated our full-year projections related to our regional mix of income. This updated forecast reflected a higher mix of income from high tax jurisdictionswhich resulted in a discrete impact to our Q3 non-GAAP tax rate.

As a result, our Q3 non-GAAP tax rate of 33.1% was significantly higher than the expectation of 16.5%. The higher tax rate unfavorably impacted our non-GAAP EPS per share by approximately $0.05. In Q4 we expect our non-GAAP tax rate to be in the 21% to 23% range. For modeling purposes, in FY17 we expect our rate to be in the 16% to 22% range as a result of a more normalized regional mix of income.

In Q3, cash flow from operations was 16% of revenues. We pay down our debt by approximately $17 million and repurchased approximately 491,000 shares of our stock for $7.5 millionand as a result ended the quarter with $192 million of cash and investments down from $213 million in Q2. Our debt balance is now $262 million and the balance on our share repurchase program is $62.7 million.

Turning to capital allocation, our priority for the use of cash remains buying back our stock opportunistically,paying down our debt, acquisitions and strategically equity investments in smaller start up companies.

Accounts receivable decreased 11% sequentially in Q3, due to the lower [net] revenue.Our days sales outstanding decreased by 7 days to 46 days, just above the target range of 40 to 45 days.

Net inventory in absolute dollar terms decreased approximately 11% sequentially in Q3 and represented 150 days of inventory, well above the target range of 90 to 100 days. In Q4 we expect our inventory in both an absolute dollar amount and days of the inventory to decrease.

In summary, our Protection business seems to have stabilized, our gross margin is holding at the high-end of our target range of 55% to 60%, and we have successfully lowered our operating expenses. This will help us drive stronger earnings as our 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 Q3 FY16 performance by end market and by product group. And then provide our outlook for Q4 of FY16.

In Q3 of FY16, we achieved net sales of $115.8 million, a decline of 8% from Q2 of FY16. Demand from all four of our end markets decreased from the prior quarter. For Q3 FY16, we posted non-GAAP gross margin of 60.3% and non-GAAP diluted earnings per share of $0.19 per share.

In Q3 of FY16, net revenues from the enterprise computing end market declined from the prior quarter and represented 30% of total net revenues. Net revenues from the industrial end market decreased from the prior quarter and represented 27% of total net revenues. The high-end consumer market decreased slightly from the prior quarter and represented 26% of total net revenues. 19% of the high-end consumer revenues were attributable to hand-held devices, while 7% of the high-end consumer revenues came from other consumer systems. Finally, net revenues from the communications end market decreased and represented approximately 17% of Semtech's total net revenues.

I will now discuss the performance of each of our product groups. In Q3 of FY16 our Signal Integrity Product group declined 11% sequentially and represented 45% of total net revenues. Lower demand for our PON products following a record first half, along with continued delays in China wireless infrastructure spending, contributed to lower enterprise computing and communications demand in Q3. However, demand from the industrial end market improved as sales of our video products increased modestly from the prior quarter.

During the quarter demand from our data center customers increased as they continue to expand their cloud operations and service offerings. Semtech data center products include physical media device platforms and clock data recovery platforms that deliver some of the industry's highest performance and lowest power across a broad spectrum of bandwidths, making them ideal for applications in the dense data center environment.

Our leadership position in 10 gigabit per second is now complemented by our new 25 gigabit per second platforms, that continue to see a high degree of interest and design wins from our customers developing 100 gigabit solutions in communications and enterprise computing applications. The China wireless base station market remained soft as expected in Q3, we are expecting a gradual recovery in China base station demand starting early Q1 of FY17 or sooner.

In Q3, demand increased for video product broadcast products. The demand increase was driven by a modest increase in both our high-definition TV and ultra high-definition TV products. During the quarter our Signal Integrity Product Group released several new 6 gigabit multi-rate video reclockers. These products expand our family of video broadcast products.

We also demonstrated the interoperability of our 12 gigabit ultra high-definition SDI portfolio products at several industry events during the quarter. Our 6 gigabit and 12 gigabit video broadcast platforms will enable us to maintain our leadership position in the broadcast industry, as it transitions from high-definition to ultra high-definition systems.

Following the strong first-half results from our Signal Integrity Product Group, and some inventory rebalancing in Q3, we expect net revenues from our Signal Integrity Product Group to be approximately flat in Q4.

Moving onto our Protection Product Group. In Q3 of FY16 our Protection Product Group declined 5% sequentially and represented 29% of total net revenues. All end markets declined sequentially, except for the communications end market which was flat with the prior quarter.

Our Handheld Protection business stabilized as our smartphone protection demand appears to have reached its trough. We expect our Q4 smartphone protection demand to be approximately flat and then increase modestly in Q1. Our China Protection business continues to do well and we expect to achieve record revenues this fiscal year and continue to grow next year, offsetting the weaker demand from Korea. In Q3, demand for Protection Products from other consumer systems declined due to overall market softness.

Our Protection Product Group recently introduced the microclamp 6514P. This is the latest addition to the high-voltage VBus protection platform. As the form factor of consumer systems decrease, the need for smaller packages that enable the flexibility to replace multiple single-line devices to save board space is increasing. These new devices are designed to protect against high current surges on high-speed interfaces in consumer and industrial systems. Our Protection Product Group also introduced a number of new single and multiline protection devices targeting opportunities in the industrial and communications end markets.

While our protection business has faced significant demand reductions from our Korean customers this year, we continue to view protection as a growth business as the underlying industry growth drivers remain intact.

These drivers include, A, the increasing number of high-bandwidth ports requiring high end protection that are now expanding across multiple end markets including the automotive, enterprise computing and communications markets, and B, the increasing sensitivity of advanced lithography IC devices to ESD events. Both these trends will continue to drive demand for Semtech's high-end protection platforms.

In Q4 of FY16, we expect our protection business to be flat reflecting a stabilization of the business after four quarters of decline.

Turning to our Wireless, Sensing and Timing Product Group. Net revenues increased 7% sequentially and represented 14% of total net revenues. Demand from the high-end consumer and industrial end markets increased, while the communications market declined from the prior quarter.

The activity associated with our LoRa wireless platform continues to garner significant momentum. The LoRa Alliance now has more than 150 members worldwide and is expected to reach 200 or more by early next year. Along with our Alliance partners, recent LoRa announcements included the following trials or deployments of IoT networks based on LoRa. Bouygues Telecom, a French mobile network operator, or MNO, in conjunction with technology partners such as Sagemcom, have announced plans to build a network across several French urban and rural areas in the first half of 2016.

Orange, an International telecommunications operator, plans to offer a LoRa network across France in 2016 and then to potentially roll out similar networks across its global footprint, which includes over 30 countries.

The Lace Company, another global MNO, expects to deploy a LoRa network covering more than a dozen major cities in Russia, including Moscow and St. Petersburg. The network is targeted to cover a population of more than 30 million people across 9,000 square kilometers.

Tata Communications announced it is building the first LoRa IoT network in India. The initial network will feature coverage in Mumbai, Delhi, and Bangalore and other cities. Tata estimates that the first phase of its network build out will cover over 400 million people.

Swisscom, Proximus and KPN all announced LoRa network deployments in Switzerland, Belgium, Luxembourg and the Netherlands.

The outstanding global momentum we have for LoRa is being driven by the emerging IoT market. LoRa is a complementary technology to short-range connectivity technology such as Bluetooth and Wi-Fi, and is also a complementary technology to long-range but power-hungry high-bandwidth connectivity technologies such as cell phoneradios and GPS.

LoRa enables a low-power secure, wide area network of sensors to be connected at low cost to a network with backend data analytics, reporting and control. This capability enables cities across the globe to implement smarter systems such as smart agriculture systems, smart water systems, smart building systems and other smart city initiatives. As well as provide solutions to other emerging global issues such as climate change, pollution, security, energy management, asset tracking and disaster prevention in a much more cost-effective and practical manner than current solutions.

We believe that the low-power WAN IoT industry is going to be a multi-billion dollar industry within five years. We continue to anticipate that our LoRa-based wireless revenues could nearly triple this year from a baseline of $5 million last year and should achieve $100 million in revenues within three years.

The recent activity in conjunction with other LoRa Alliance members is driving over $300 million in future revenue value in our opportunity pipeline and contributing to our high confidence that our LoRa platform will become the de facto standard for long-range IoT industrial wireless sensor connectivity.

In our Wireless, Sensing and Timing Product Group we also continued to see increase in activity, including design wins for our Power Line Communication Products. We recently announced the collaboration with a Wasion Group, a leading provider of energy metering equipment and energy-saving solutions in China.

Semtech's multi-mode Power Line Communications platform will be used in the rollout of the advanced metering infrastructure in residential, commercial and industrial smart meters in the China Southern power grid. We have a number of additional global initiatives in the works that should drive significant growth for our PLC platforms over the next few years.

Demand for our Proximity Sensors increased nicely during the quarter. Our highly differentiated proximity sensing platforms enable our customers to architect their consumer systems to cost reduce existing functionality, or to enhance feature functionality. While our platforms have been designed primarily for high-end consumer applications, such as smart phones and tablets, we are starting to see the use of our sensors in notebooks and industrial computing equipment also.

We recently announced the SX9306 sensing platform that enables a system to distinguish the human body from other objects, and control the RF radiation from a system device. This is a critical requirement as consumer and industrial systems start to implement high-powered radios that are potentially damaging to the health of the human body.

Stricter regulations are driving consumer systems manufacturers to reduce the radio energy when the system is close to the human body and Semtech's Proximity Platforms provide a unique capability to help achieve this goal. We expect our Sensing business to show solid growth in FY17 as new design wins at tier 1 OEMs move to production.

We are excited about the number of growth opportunities from our Wireless, Sensing and Timing Product Group expect these opportunities to contribute significantly to our growth prospects in FY17 and beyond.

For Q4 of FY16 we expect revenues from our Wireless, Sensing and Timing Group to be approximately flat due to seasonality.

Moving to our Power and High Reliability Product group. In Q3 our Power and High Reliability business decreased 16% sequentially and represented 12% of total net revenues. Demand for our Power and High Rel business was lower across all four of our end markets and regions as a softer overall market impacted the business.

During Q3 FY16 our Power and High Rel Product Group achieved several significant product milestones. During the quarter we announced the launch of the industry's first tri-mode Wireless Charging Platform. Semtech's programmable charging solution offers customers the flexibility to rapidly update their solutions as the industry charging standards evolve.

Our Wireless Charging Platform also offers a broad range of power levels, from 0.1 watts up to 40 watts, enabling high-efficiency charging for both the low-power wearable market as well as the high-power industrial and automotive segments of the market. These capabilities are critical for the success of charging platforms that go into consumer, industrial and infrastructure markets. We also announced this quarter that our Wireless Charging Chipset has won several designs at tier 1 computing peripheral systems, automotive systems and wearable systems.

This week we also announced the expansion of our new isolated power switch platform. The TS13101 is optimized for low voltage switch applications such as smart thermostats, security systems, intelligent sensor control and other home automation systems. We are receiving a lot of interest in our isolated switch platform from industrial and home automation customers, as they look to update and replace designs from mechanical relays with smarter solid-state technologies.

In Q4 of Fy16 we expect net sales from our Power and High Rel Product Group to increase modestly, as our Wireless Power revenues increase due to customer product ramps. The ramps are at the early stages of what we anticipate to be a secular multi-year growth industry.

In Q3, the total Company distribution POS increased 4% from the prior quarter to $79.4 million and represented a new quarterly record. Additionally, distributor inventory decreased by 4 days from 83 days in Q2 of FY16 to 79 days in Q3, and is at the upper end of our 70 to 80 days channel inventory model. We expect to reduce our channel inventory levels further in Q4.

Our Distributor Business remained very well balanced, with 54% of the total POS coming from consumer and enterprise computing end markets and 46% of total POS coming from industrial and communications end markets.

Moving onto new products and design wins. In Q3 of FY16, we released 16 new products. We also achieved 2,073 new design wins.

Now let me discuss our outlook for the fourth quarter of 2016. Based on recent bookings trends and our backlog entering the quarter, we are currently estimating Q4 net revenue to be between $113 million and $119 million. To attain the midpoint of our guidance range or approximately $116 million, we needed net turns orders of approximately 52% at the beginning of Q3. We expect our Q4 GAAP earnings to be a loss of between $0.01 and $0.03 per diluted share, and our Q4 non-GAAP earnings to be between $0.14 and $0.18 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)

Craig Ellis, B. Riley.

Thanks for taking the question. First just to clarify the assumptions around the extra week in the fiscal fourth quarter. What's the specific exception, Emeka, in OpEx and what's the assumption for the extra week's contribution on the top line as well?

So with regard to the OpEx, if you look at the increase from the third quarter I listed out three key drivers for the increase in the OpEx. It is the extra week, it is some supplemental compensation to help us with retention and its also due to a higher number of new product tapeouts in the quarter and I think those sort of break out evenly, the 9% increase breaks out evenly among those three categories. With regards to the top line. I think as you know, Craig, typically in the fourth quarter we are seasonally down 5% to 10%, and I think the fact that we are guiding to a sequentially flattish kind of quarter. I think that gap is made up by the extra week.

Okay, so the extra week is 5% to 6% of sales? Or 5% to 6% of incremental sales? Okay. Switching gears to the inventory commentary. You clearly, given the gross margin guidance, plan to be monitoring or controlling your production. Where do you expect to be with inventory cleanup by the end of the quarter? Is it all behind you or does some of that linger into the fiscal first quarter?

I think at the current revenue levels, I think if we continue to stay at those levels we probably might see a little bit more of it in the first quarter. But hopefully by the end of the [general] quarter, hopefully most of that will be behind us and as we go into the next fiscal year hopefully with the increase in the top line that we may start to get back to normal manufacturing volumes.

Then lastly, then I will hand it over. Historically, the fiscal first quarter is a quarter where you would see growth, but it sounds like there's some inventory risk to the quarter. How are you thinking about the seasonality in the first quarter and what are some of the gives and takes beyond inventory that investors should be aware of? As I look at what historically has been the first quarter of seasonal growth for the Company?

The first quarter for us a lot depends on I think what goes on in China and with our Signal Integrity Products, we expect that most of the inventory rebalancing from that to be completed in the second half, so we should see a little pickup in that in Q1. I would say the handheld smartphone consumer business is again, second half, has been fairly weak so should start to pick up in Q1, certainly in Q2 we'd expect that to ramp up. Then in general the industrial business is I think, should be okay in Q1, so in general I would anticipate the Q1 to be slightly stronger than Q4.

Okay. Then if I could just follow up on that, really extend the outlook a little bit, Mohan. You mentioned that wireless sensing was expected to be one of the bigger contributors to growth next year. Can you round out the view for some of the growth gives and takes next year, what are the bigger tailwinds as you see them and what are the headwinds that investors should be aware of as they look out to FY17?

We obviously have a lot of tailwinds. We've had our fair share of headwinds this year. Next year I think is going to be a different year for us. I think the wireless products are doing very, very well and certainly we should start to see a material revenue increase in the second half, the sensing is the same. We have good design wins there, good momentum there so I expect to see good strong second half from that business.

I mentioned the wireless charging product lines, again we have good activity, good design wins, the time to revenue takes a little bit longer but good momentum on those. The smartphone business although it was down in this year, I think China is going to start to increase its contribution next year and hopefully Korea can stabilize and maintain the level it is at and that should be contributive for us.

The data center, the PON products and the PMD products and the CDR products, as we transition to -- from 10 gig to 25 gig to 100 gig I think we're going to see more momentum there. We have a very good position at 10 gig obviously and we've been doing very well in the 100 gig modules also, so I think we are going to see that business ramp up, whether that's a Q2, Q3 type of event is the question.

We have quite a few things going on, I also mentioned the Power Line Communication products, I think again that's starting to kick in for us, so lots of tailwinds. The headwind is going to continue to be really what happens with Samsung and the handheld protection business. We think it is stabilized now, as I mentioned we see Q3 as kind of a trough, Q4 will be flat and then we start to hopefully start to see it pick up a little bit

Thank you, guys.

Ian Ing, MKM Partners.

Thanks for taking my question. Smartphone stabilization protection, Samsung, what percent of sales was it this quarter? And I know Qualcomm talked about seeing a uptick at low to medium tiers at that customer, was that something similar you saw?

If you look at our Samsung, total sales was about 7% this quarter, up slightly from 6% last quarter.

In general, and I would say the key thing is that as we move forward here the protection handheld business in general for us I think has been on decline for quite some time. Several quarters, and now it is starting to stabilize so we feel good about the fact that we've troughed out and hopefully will expand here.

A lot depends on how well their phones do next year. When they release new phones, the demand for those new phones have got to at least maintain the current share that they have and so that's a little bit of an unknown, but we feel pretty good that we baked in the trough here and we should see some growth going forward.

Okay, great. Then moving onto LoRa, looks like you've got some really interesting wins in front of you especially second half of next year. Can you rank order the near-term growth opportunities? It seems there's a bucket here for the design wins at the utilities and then you've also got carriers who are building IOT networks, you've got a lot of different use cases. Can you perhaps talk about some rank ordering here?

Yes, it is challenging to break it down into the detail because the biggest opportunity is when the carriers roll out their network they cover a very large range and they cover a very large number of potential nodes, so that's the beauty. That's kind of a long time infrastructure investment that now on the other end of that is going to need LoRa devices, so it is more of a long-term opportunity but a very significant one. We have a quarter of the world's population covered,at this point in time with all of the current networks that are being deployed.

So the short term opportunity is more the private networks that are putting in LoRa related systems and connectivity, and that's going quite well also. LoRa is such a powerful technology for IOT that I think it's just generally got a very good application space in smart buildings and smart cities, in those types of environments. I would say that the opportunity also is as we start to look at how to deploy -- how LoRa is deployed across the globe, we are seeing more and more opportunities for what I will call a little bit shorter time to revenue opportunity. Which is why we've gone out and said that in three years we think this will be $100 million business for us because we can see those wins translating to revenue faster.

Thanks and then lastly, can you talk about where we are in terms of the costs and the benefits to the ERP implementation? I know you are building up some safety stock of inventory ahead of that, and is some of the over-inventory right now perhaps due to some safety stock also?

Ian, I think the ERP implementation is really something that's really worked out very well for us. We are now really enjoying a whole lot of the benefits that we originally anticipated. With regards to the inventory that we built up,that was the key reason why our inventory levels were at an elevated level in the first half of this year. And because of the maturity of the system on where we are right now is also the reason why we are bringing inventory down. The way we think about this internally is that ERP implementation is already behind us and we are just enjoying the benefits of it.

I would add to that, that when we built the inventory we had planned on some issues associated with the ERP implementation because we heard many companies have those type of issues. The reality is the system integration and implementation went very, very well for us and so we really, in hindsight, we probably didn't need as much inventory as we'd built up, but that's bled through mostly now.

Okay, thank you.

Rick Schafer, Oppenheimer

Hey, guys, Joe Zaccaria on for Rick. Thanks for taking the questions. My first question relates to the PON business, you said that it was lower in the quarter, wondering if you could talk a little bit about the puts and takes there? And how you see that business trending through the first half of next year? Thanks.

We had a very strong first half in PON, so I would say that's what we're seeing now is just a little bit of an inventory balancing, both in the channel and at our customers. We expect it to start to trickle back up again, I think starting Q1, and then have a stronger either a first half, it is looking like a stronger first half again. The seasonality on PON for us is difficult to call, most of it is China and a lot of it is driven by the China economy, but that's what we'd expect is probably Q1, maybe Q2 to start picking up again.

Okay, great, and then a higher level question, when you think about the data center and the 10, 25, 100 gig rollouts. Where do you think we are in the 25 gig rollout and how would you compare it from a steady-state and how it ramps up compared to 10 and 100? Thanks.

For 25gbps usually it's, you're usually using a 4x25gbps lanes to create the 100 gig. That's the predominant 100 gig implementation today. I would say it is starting to accelerate for sure, but it is still small relative to the 10 gig side of things. Certainly next year and the year after, probably by calendar year 2017, you are going to see that the 100 gig side of it is going to be closer to the 10 gig market opportunity, so it's still a few years out.

Okay then my last question is on the China handset business. Sounds like that's been tracking well for you, in line with expectations. Maybe if not a little bit ahead. Can you talk about how you see that business relative to your Korean handset business and when you think you might cross parity there, and how you view it over time? Thanks.

Yes, I think at the end of this fiscal year China, our China business, will be about 50% to 60% of our Korea business and next year we expect it to be a similar amount. I'm talking about really all the combined China handset guys and all the Korean handset guys in total. So in FY17, part of it is because the Korea business has come down but China is going up so that, I think in FY17, by the end of the FY17 China and Korea probably should be about the same. That's pretty positive really for us given obviously Samsung and LG have been struggling, to see the China manufacturers doing better and our contribution doing well, that's kind of been a good story for us.

Thanks so much, guys.

Steve Smigie, Raymond James.

Great, thanks a lot. Just wanted to follow-up on a couple questions from earlier. Just going back to looking at April quarter, it sounds like the business is going to pick up there, I think you indicated across a number of groups, but again because you had the 14 week quarter does that sort of suggest that we're maybe sort of flattish revenue-wise into the April quarter over January?

Steve, I think if you look at it that way in terms of the numbers and the number of weeks I can see why you think that. But I think historically we have been up in the April quarter and as we look at the health of most of our businesses right now. And the design wins and the opportunities that we're expecting, and the pick up in our protection business in the first quarter because of strength out of Korea. And as Mohan did say, if we see that new product platform from Samsung, that could be a good thing. If we start to see the rebound of the China wireless infrastructure business, that could be a good thing. So I think overall, probably expect to see our April quarter probably slightly up from the current quarter, even though it is a 14 week quarter.

Okay, great. Then just to follow-up on the PON business. I think a big driver of that had been that China was going to -- or has been requiring maybe 150 million connections into households that had to be connected by the end of calendar 2016. Been hearing a little bit that some of that might extend into calendar 2017. I was curious if you have any clarity if that's the program that's really been driving some of your nice growth there and is there some potential here that this extends into calendar year 2017?

That is the program that's mostly been driving our business, Steve, and yes, we do expect it go in to calendar year 2017. At that point it may start to level off a little bit, but that's the impression we have at this point, yes.

Okay, great. On the handset, it sounds like the Chinese overall catches up to the Korean, but have you also been adding some additional Chinese and other customers? You had in past calls listed several Chinese guys, just curious if there's been any new penetration to other customers or if you're just trying to go deeper into existing Chinese guys?

We are getting progress with the other Chinese manufacturers, I would say that there's one or two that stand out in terms of their volumes relative to the whole space, so there's a lot of smaller guys that don't really contribute as much. But we are getting progress and my commentary on the handheld is largely tied to protection. Obviously we have proximity sensing that's starting to do well also in the smartphone space.

Okay, great and I think you addressed this some and I didn't catch all of it. It seems like the plan for that proximity sensor business is to start taking a whole bunch of other applications, is that a quick summary of what you are thinking?

What's happening is we designed the platform for tablets essentially to meet the SAR standards, so this is essentially what I'd said in the script, that as radio power increases it becomes a health hazard for these devices. And so one has to -- these customers, these new regulations, the customers have to sense and reduce the radio power and now proximity sensing is really very powerful for that application. So we are starting to see it emerge in any kind of applications that are mobile applications where you have human body contact, and so that's what we are seeing. We are seeing some of the ultrabooks and some of the industrial applications emerge for proximity sensing. The volume drivers though are still the smartphones and tablets.

Okay, great, thanks, guys.

Mitch Steves, RBC Capital Markets.

You are on mute.

Hello.

Go ahead.

[Can you provide color] on what happened in the quarter on a sequential year-over-year basis? Remember last quarter you saw some sharp declines in the Korean smartphones, but it looks likes it is now up while the protection business is down, I'm just trying to get an understanding of the dynamics there.

Could you repeat the question, I didn't quite get it?

Last quarter you talked about a sharp decline in proximity sensors due to Korean smartphone weakness. Now looks like you are seeing a flip where you're seeing an increase in wireless, so I'm just wondering what happened with the proximity business this quarter? And then as you ramp up when you'd return to a $20 million in quarterly run rate?

Proximity business was, last quarter the issue really again was related to our Korean smartphone manufacturers and just their overall demand coming down. And so we were left with excess inventory both at Semtech and in the channel and our customers, and that's just bleeding through that. But outside the Korean smartphone manufacturers we've got very good momentum of the proximity sensing, so that's starting to pick up again. I think as we get into Q1, certainly Q2, we have a number of new platforms coming online with customers that I think are going to ramp up and that's what the expectation is for FY17 to be very good growth year for the proximity sensing business.

Got it. Second, on the gross margin side, can you just help me understand what's driving the 100 basis points decrease sequentially? Is it more of a mix issue or is it just the extra week or what's driving the decrease there?

So the 100 basis points decrease was for GAAP gross margin only. So that was a combination of lower absorption and with GAAP we also had the equity compensation, we expect the equity compensation to be higher. But if we just focus only on the non-GAAP side, we're expecting it to come down about 80 basis points at the mid point. Most of that is because of lower absorption. There may be a little bit of a slight mix issue. But as we look ahead what we anticipate is that as we start to see the top line revenue growth maybe getting back to about $125 million per quarter run rate, that allows us to start getting back to normal levels of utilization in our manufacturing facilities and that should allow us to get back to the high-end of our 55% to 60% range.

Got it, thank you.

There are no further questions at this time.

In closing, Semtech delivered Q3 FY16 operating results consistent with our guidance. We maintained our non-GAAP gross margin above the high-end of our 55% to 60% target range. We realized the benefit of lower OpEx as a result of the actions taken last quarter. While the high-end non-GAAP tax rate impacted our non-GAAP EPS, lower operating expenses should help deliver stronger earnings growth as revenue growth accelerates next year.

We believe that Semtech's SAM expansion over the last few years, combined with our infrastructure investments over the same period, positions us in the best strategic and operational position in the history of the Company. And we now have a clear roadmap to enable us to drive towards our $1 billion revenue target. 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.