Semtech Corp (SMTC) 2016 Q4 法說會逐字稿

Good evening. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 FY16 Semtech Corporation earning release conference call.

(Operator Instructions)

Sandy Harrison, you may begin your conference.

Thank you, Nicole and welcome to Semtech's conference call to discuss our financial results for the fourth quarter and FY16 that ended January 31, 2016. 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 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 only. Semtech undertakes no obligation to update this information, 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. For Q4 FY16, we reported net sales of $118.6 million, which was at the upper end of our guidance range. These results represented an increase of 2% from the prior quarter and a decrease of 9% from the fourth quarter of FY15.

Demand was higher in our enterprise computing and communication end markets. Demand for our positive optical network and wireless infrastructure solutions increased nicely. Demand for our industrial and high-end consumer end markets declined in the quarter.

Our Korean smart phone business remained very stable during the quarter, reinforcing our belief that the worst is behind us. Net sales for the full FY16 were $490.2 million, down approximately 12% from FY15. The decrease was mainly attributable to the declines from our Korean handset customers, and further declines from long haul optical communications.

In Q4, shipments into Asia represented 75% of revenue. North America was 17%, and Europe was 8% of total revenue. Sales to distributors represented approximately 54% of revenue, and direct sales represented approximately 46% of revenue.

Bookings in Q4 increased significantly over the prior quarter, resulting in a book to bill well above one. Turns bookings accounted for approximately 60% of shipments during the quarter.

Gross margin on a GAAP basis for Q4 of FY16 was 58.6%, down 150 basis points sequentially due to a higher mix of lower-margin optical products and lower absorption from our continued inventory reduction efforts. In Q1 of FY17, we expect GAAP gross margin to increase slightly from improved manufacturing efficiencies and manufacturing cost reductions.

Operating expense on a GAAP basis increased approximately 31% sequentially as expected. The increase was mainly driven by the $14 million benefit from the re-measurement of Triune Systems earn-out liability in Q3 and higher supplemental compensation in Q4. In Q1 of FY17, we expect our operating expense on a GAAP basis to decrease approximately 3%, driven by lower supplemental compensation.

In FY16, our GAAP tax rate was approximately 44%, significantly higher than historical rates due to higher income and higher tax jurisdictions and some unfavorable discrete events. In FY17, we expect our GAAP tax rate to be in the 24% to 30% range.

In Q4 of FY16, on a non-GAAP basis, excluding the impact of stock-based compensation, amortization of acquired intangibles, acquisition related expenses and other restructuring related expenses, gross margin was 59%, or down 120 basis points sequentially due to unfavorable mix and lower absorption. We expect Q1 non-GAAP gross margin to increase slightly due to improved manufacturing efficiencies and manufacturing cost reductions.

Q4 non-GAAP operating expense was $54 million, up 9% sequentially, due mostly to higher supplemental compensation. In Q1, we expect non-GAAP operating expense to decrease approximately 8% sequentially. For modeling purposes, as we highlighted during our last call, we continue to expect our non-GAAP operating expense for FY17 to average between $48 million and $50 million a quarter.

In FY16, our non-GAAP tax rate was approximately 20%, up from approximately 14% in FY15, due to higher income and higher tax jurisdictions. In FY17, we expect our non-GAAP tax rates to be in the 19% to 23% range.

In Q4, cash flow from operations was approximately $35 million, or 29% of revenue. In FY16, our cash flow from operations was $102 million, or 21% of revenue. We expensed $59 million for acquisitions and strategic investments in startup companies to gain access to competencies and technologies to drive our future growth, and we also repurchased $57 million of stock. The outstanding stock repurchase authorization is approximately $63 million. The primary use of cash continues to be to pay down our debt, to repurchase our shares, and to make strategic investments.

The extra week in Q4 and the stronger demand drove better shipment linearity in the quarter, and as a result, accounts receivable decreased 20% sequentially in Q4. Our days of sales outstanding decreased by eight days to 38 days, just below the target range of 40 to 45 days.

Net inventory in absolute dollar terms decreased approximately 11% sequentially in Q4 and represented 126 days of inventory, above the target range of 90 to 100 days. In Q1, we expect our inventory to decline on both an absolute dollar amount and days of inventory.

In summary, despite the challenges in FY16, led by the significant decline in our Korean handheld business, we had some highlights that we believe will help us grow our earnings faster in 2017 and beyond. First, our growth engines grew very nicely in FY16. Second, our gross margin remained very stable at the high end of our 55% to 60% target range. Third, we reduced operating expenses by approximately $6 million a quarter. Fourth, we successfully implemented our new ERP system that will enable us to scale effectively. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 FY16 performance by end market and by product group, discuss our FY16 performance, and then provide our outlook for Q1 of FY17.

In Q4 of FY16, we achieved net sales of $118.6 million, which was an increase of 2% from Q3 of FY16, and a decrease of approximately 9% from Q4 of FY15. We experienced higher demand from our communications and enterprise computing end markets, while demand from our high-end consumer and industrial end markets declined from the prior quarter.

For Q4 FY16, we posted non-GAAP gross margin of 59% and non-GAAP diluted earnings per share of $0.17. In Q4 of FY16, revenues from the enterprise computing end market increased from the prior quarter and represented 32% of total revenues. The industrial end market decreased from the prior quarter and represented 24% of total revenues.

The high-end consumer end market also decreased from the prior quarter and represented 23% of total revenues. Approximately 18% of high-end consumer revenues was attributable to handheld devices, and approximately 5% was attributable to other consumer systems. Finally, revenues from the communications end market increased from the prior quarter and represented 20% of total revenues.

I will now discuss the performance of each of our product groups. In Q4 of FY16, our Signal Integrity Product Group increased 11% sequentially and represented 49% of total revenues. Stronger demand for our wireless base station and PON products contributed to higher communications and enterprise computing revenues.

The industrial end market declined due to lower seasonal demand for our broadcast video products. Our signal integrity product group was particularly active with new product releases this quarter, releasing a broad range of CDR platforms and physical media device platforms targeted at the fast-growing PON data center and wireless infrastructure segments.

During the quarter, our Signal Integrity Product Group announced a strategic investment in MultiPhy to jointly bring to market a complete chipset solution for 100 gigabit per second single wave length optical module solutions based on PAM-4 technology. This product is a natural extension to Semtech's leadership position in quad 25 gigabit per second NRZ-based multi wave length CDR solutions.

The Semtech MultiPhy solution should help module suppliers reduce the number of components used in 100-gig optical modules and drive significant cost reductions for data centers using 100-gig interconnects. We believe we are uniquely positioned to capture early share in the 100 gigabit per second single lambda market starting later this year and should contribute to continued growth for our Signal Integrity Product group over the next several years.

Semtech's leadership position in the PON, Data center and wireless infrastructure markets is a result of our continued focus and investment in new platforms that deliver the highest performance, highest integration, and lowest power consumption in the industry. We believe we have a unique portfolio position with the ability to deliver leading single-channel 10 gigabit per second, single-channel 25 gigabit per second, quad channel 25 gigabit per second, physical media device and CDR platforms today, and single lambda 100 gig PAM-4 platforms by the end of this fiscal year.

We also released a number of new video platforms targeted at the emerging ultra high-definition broadcast video segment. Our cable equalizer and reclocker platforms provide high bandwidth and long reach at the industry's lowest power consumption. We are seeing significant interest and design activity from applications that require fast and seamless conversion between multiple high-definition interfaces and next generation ultra high-definition interfaces.

We recently announced a design win with Nevion for use in next generation media converters and are working with a number of other customers that are in various stages of design and development of similar systems. We expect the pace of the transition from high-def to ultra high-def video broadcasting to pick up this year as our South Korean customers deploy ultra high-definition video systems for the 2018 winter Olympics and our Japanese customers do the same for the 2020 summer Olympic games.

We believe our Signal Integrity Product Group should directly benefit from both of these events. For Q1 of FY17, we expect net sales from our Signal Integrity Product Group to increase nicely, as bookings from the data center, wireless infrastructure, and PON markets have been very strong.

Moving on to our Protection Product Group, in Q4 of FY16, net sales from our Protection Product Group was approximately flat with the prior quarter, as higher demand from our enterprise computing, communications and industrial end markets was offset by lower demand from our high-end consumer end market. Handheld demand at our Korean smart phone customers declined slightly, as customers further reduced their inventories. Demand from our China smart phone customers remained solid, posting strong year-over-year growth for both Q4 and FY16.

Our Protection Product Group remains focused on developing new high-performance protection platforms that address the increasing demand for high-speed interfaces in a broadening array of applications. We recently announced the RClamp0524PQ, a four-line integrated transient voltage suppression array, targeted at protecting high-speed data lines in automotive applications. This AEC-Q100 qualified ultra-low capacitance device is able to reside on high-speed data lines without compromising signal performance in a harsh vehicle environment.

Our Protection Product Group also introduced the RClamp1851ZA, targeted at protecting in near field communications and RF interfaces in mobile systems. With the increased adoption of our electronic payment systems on mobile devices, the need to protect the interfaces to ensure reliable operation has become even more critical, and we believe our protection platforms are a very good fit for this application.

Finally, our Protection Product Group also announced the expansion of our micro clamp platform, targeted at small form factor systems, with the release of the ultra small microclamp3321ZA. This device has been designed specifically for audio and other low-voltage interfaces, such as microsim and microSD interfaces. As more systems move toward smaller form factors, using increasingly advanced lithographies, the inability to build on-chip protection and the increased sensitivity of advanced lithography transistors to ESD events drive new opportunities for Semtech's advanced protection platforms. Additionally, the growth and diversity in the number of ports requiring protection and the increasing speeds of these ports further increase the number of growth opportunities for our Protection Product Group. In Q1 of FY17, we expect our protection business to increase as we expect modest growth from both our Korean and Chinese smart phone customers, as new signature smart phones are released in the first half of the year.

Turning to our Wireless Sensing and Timing Product Group, in Q4 FY16, net revenues from our Wireless Sensing and Timing Product Group decreased 5% sequentially and represented 13% of total revenues. Demand from the high-end consumer end market was stable with the prior quarter's results, while demand from the industrial and communications end markets declined from the prior quarter.

The global adoption of our LoRa wireless technology continues to exceed our expectations, as more global IOT service providers start to deploy LoRaWAN sensor networks. These LoRaWAN networks are being deployed to support IOT infrastructure for smart city, smart agriculture, and smart enterprise initiatives which can then be expanded to potentially help address emerging climate change issues.

Today, there are LoRa networks being deployed or in trials in most European countries, in China, Taiwan, Korea, Japan, Russia, India and North America. And through the LoRa Alliance, we expect the most regions of the world will have some form of LoRaWAN network deployed by the end of calendar year 2017.

The LoRa Alliance membership continues to expand and now exceeds over 200 paying members worldwide, with numerous potential new members currently evaluating the technology. Our LoRa technology has recently been on display, along with Alliance members at a number of important and highly visible industry events, including Mobile World Congress, the Consumer Electronics Show, DistribuTECH 2016 and Embedded World 2016.

A few of our Alliance partners also made LoRa announcements in Q4, including Schneider Electric, a worldwide leader and global specialist in energy management and automation, selected LoRa for use in building monitoring solutions, electrical load switching devices, monitoring systems and predictive maintenance tools.

Digimondo of Germany announced plans to launch a LoRaWAN network to enable IOT applications such as smart metering, pollution measurement and public transportation system tracking.

STMicroelectronics announced that it will develop LoRa-based reference designs and platforms using their leadership micro controller solutions. These platforms will target a variety of LoRa-based IOT applications. ARM announced the introduction of its mbed LoRaWAN platform for developers to develop IOT applications using LoRa.

We also announced the availability of our next generation LoRaWAN gateway reference design for European gateways. This gateway also enables a number of additional features, including GPS free geo localization for IOT devices. This new capability that is in early stages of development and is being tested with a number of alpha customers enables an IOT operator to add asset tracking and localization to any mobile sensor without using GPS.

The fully released localization capability should be available later this year and is expected to dramatically increase the value of LoRa-based networks. We continue to believe that LoRaWAN-based networks will become the technology of choice for all future long-rage low-power IOT sensor networks.

In FY16, our LoRa related revenue nearly tripled from the prior year to approximately $15 million, and we expect it to approximately double in FY17. The recent positive activity in conjunction with our LoRa Alliance partners is driving over $300 million in future revenue value in our opportunity pipeline and contributing to our confidence in the overall success of LoRa. We expect our LoRa-related revenues to achieve $100 million within the next three years.

Our Wireless Sensing and Timing Product Group also continues to see new opportunities for our proximity sensing platforms across multiple consumer systems, including tablets, smart phones and wearables. As more countries adopt stricter regulations to reduce human body exposure to increasing mobile device radio energy, interest in our proximity sensing solutions will continue to increase. We believe we have the majority share of systems today that deploy a proximity sensor to control and reduce radio energy.

In Q4, we decided to reduce our investments in the timing sync area. We believe that the market opportunity for our timing products today is too small, and so we made the decision to refocus these R&D investments on our wireless and sensing platforms where we believe the opportunity is much larger and our strategic position is much stronger.

We expect our timing sync revenues to remain at approximately $1 million per quarter throughout FY17. For Q1 of FY17, we expect net sales from our Wireless and Sensing product group to increase on the strength of our LoRa wireless business.

Turning to our Power and High Rel Product Group, in Q4 of FY16, our Power and High Reliability Product Group declined 16% sequentially and represented 10% of total net sales. Demand from our enterprise computing and communications end markets increased while demand from our high-end consumer and industrial end markets decreased.

Our Power and High Rel business is primarily focused on the automotive, home automation and wearable segments. Customer interest and design wins for our wireless charging solutions remains strong. Our wireless charging portfolio continues to grow nicely, and we now offer a broad range of programmable charging solutions that operate at a range of different power levels.

During the quarter, we announced the addition of our dual mode wireless power platform and our medium power 15-watt capable portfolio of wireless charging solutions. This capability allows our customers to wirelessly quick charge mobile devices such as smart phones, tablets and wearables that have increased battery capacity.

The demand for wireless charging capability is expected to increase significantly over the next five years, as larger, feature-rich and power-hungry mobile systems will need to be charged several times per day in different locations at different times without the need for cables. We believe we are well positioned to grow in this attractive market with our portfolio of programmable wireless charging platforms.

We are also seeing interest in our recently announced isolated power switch platform from home automation customers. This platform has been optimized for low voltage switch applications, such as smart thermostats, security systems, intelligent sensor control and other home automation systems.

Our solution allows customers to replace designs using older mechanical relays with smarter solid state technologies. The addition of the wireless charging and isolated switch platforms has complemented nicely our existing portfolio of power management platforms, which includes load switches, switching regulators, LED drivers, controllers, references and high reliability platforms. In Q1 of FY17, we expect our Power and High Reliability Product Group to increase following the seasonal decline in Q4.

In Q4, the total company distribution POS increased 17% from the prior quarter, achieving another quarterly record. Distributor inventory decreased by 22 days from 79 days in Q3 to 57 days in Q4 and is well below our 70- to 80-day channel inventory model. Our distributor business remains 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 on to new products and design wins, in Q4 of FY16, we released 24 new products. We also achieved 2085 new design wins. Both of these were an increase over the prior-quarter levels.

Now let me briefly comment on our FY16 performance. In FY16, net sales decreased 12% from FY15, driven primarily by the deterioration in our Korean smart phone business, as our Korean customers lost market share.

We responded to the lower revenues by reducing our operating expenses to protect our earnings during this challenging time for the Company. Despite these challenges, we had significant achievements in FY16, including stable non-GAAP gross margins above 60%, 8362 design wins, 88 new product releases.

We generated $102 million in cash from operations, or 21% of revenues and continued the diversification of our portfolio with the integration of Triune and EnVerv while also divesting or downsizing nonstrategic assets such as our microwave business and timing sync business. We also initiated the LoRa Alliance and facilitated the global acceleration of LoRa networks.

Finally, we implemented our global ERP system after several years of development, as well as other IT infrastructure systems to ensure we can scale effectively in the future. We believe that we are well positioned to drive revenue growth with a diversified product portfolio, balanced end markets, and balanced geographical exposure and believe we will return to outperforming the industry in FY17.

Now let me discuss our outlook for the first quarter of 2017. Based on the strength of recent bookings and our backlog entering the quarter, we are currently estimating Q1 net sales to be between $124 million and $132 million. To attain the midpoint of our guidance range, or approximately $128 million, we needed net turns orders of approximately 47% at the beginning of Q1.

We expect our Q1 GAAP earnings to be between $0.09 and $0.13 per diluted share and Q1 non-GAAP earnings to be between $0.26 and $0.30 per diluted share. I will now hand the call back to the operator, and Sandy and Emeka and I will be happy to answer any questions. Operator?

(Operator Instructions)

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

Yes, that's B. Reilly. Thanks for taking the question, guys. And congratulations on the quarterly execution.

Mohan, I want to start with a near-term question on one of the segments. Looks like Gennum is seeing very strong dynamics in its business.

Can you talk a little bit about where you think we are with respect to the communications cycle? Is what you're seeing seasonal, or is it really something that looks more secular to you?

So the communications, it's really the base stations for us, the wireless base stations. As you know, Craig, last year was a little bit of a softer year. There were some things going on in China that constrained demand I think.

So it was pent-up demand that I think is going to be visible this calendar year. So I expect that to continue to be quite strong.

On the enterprise computing side where we have PON and data center, I expect both of those also to be quite strong, certainly in the first half of the year. We will see how the second half plays out. At least in the first half, I think it's going to continue to be very strong.

Okay. And then the follow-up is on a segment basis is on power management. Within that, you've got the wireless charging business.

Is that going to be classic analog business where it's slow, steady growth? And if so, when do we get to a level of materiality, or could it have attributes that look a little bit more like what LoRa is shaping up to be, where you've got more dramatic growth and driven more by secular dynamics?

I think it's difficult to say, Craig. I think there's two aspects to our business.

One is more infrastructure, so getting the charging transmitters into automotive vehicles, into furniture, industrial equipment, which is probably more likely to be the longer time to revenue aspect. But then we also have some penetration on some wearable devices and some other what I will call faster time to revenue segments that I think could drive good growth certainly in the second half of this year.

The one thing about wireless charging is it's a new space. The adoption is clearly there, but it's when that acceleration occurs is difficult to call. But it's going to happen.

Lastly, then following up on a press release comment where I believe you indicated you expect to return to outgrowing the industry this year, certainly lots of precedent for that earlier this decade. But as you look at the specific drivers to that, Mohan, what are the things that are going to drive the excess growth in the model for Semtech in FY17?

Well, we will start with our Signal Integrity Products. We do think that all the areas in that business, specifically the base station, we talked about the PON products and the data center products are all fast-growing markets that are probably growing faster than the industry at the moment.

And then we expect a little bit of a rebound in our video business, which had a poor year last year. That was mostly a timing thing, I think, as I mentioned, a lot of events coming up in the wall that will drive more video. Signal integrity products I expect to have a good year.

Our Wireless and Sensing business, both the wireless component and the sensing component, the wireless driven by LoRa is doing very, very well, and we expect that to double this year at least. And expect our sensing business also to do quite well this year.

And as we talked about protection for last year, the deterioration in the Protection Product Group because of the Korean smart phone this year, but I think our businesses are stabilized and now it's really a question of are the Korean smart phones going to come back and that could help us. But I think we have enough going on in the broader protection business that that could see modest growth from last year. And then our Power and High Rel business also because of the wireless charging should do quite well.

Thanks for that.

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

Thank you. Just a clarification. Lot of strength in certain end markets, like coms and enterprise computing, but industrial looks like it went to 24% of sales from 27%.

So is that broad macro issues, or is that perhaps lumpiness in logo? Thank you.

A little bit of both, Ian. I think Q4 industrial for us had a couple of infrastructural aspects to it that I think we're not as strong, so more seasonal I think. And then some macro in there.

We are seeing some of the industrial coming back in Q1 though. So I would say it was a single quarter event.

Okay, great. And then could you talk more about this next generation reference design, gateway reference design in LoRa? Looks like maybe some of the new features tracking without GPS. And what applications would you go after first, like smart cities or utilities?

So the beauty about LoRa is once we have the network and you have this type of capability, you can turn any mobile node into a trackable mode, so an asset that can be tracked, so a bicycle for tracking and localizing where it is and things like that without GPS. So I mentioned it's probably likely to be toward the end of the year before we have the full capability, but the reference design that we've released in Europe is capable of doing that now. So it's a pretty unique feature for us.

Great. And lastly, could you talk about expectations for China OEMs this year for the protection business? I know you've got surge protection there, lower ASPs, but higher margins than ESD. Can that China business perhaps cross over the ESD business?

Yes, we expect it to continue to grow. We are anticipating a little bit of recovery in our Korean smart phone business also. But I think the China smart phones will continue to do well. They do protect most of their interfaces. And so that's the anticipation, that at some point it will cross over.

Okay. Thanks, Mohan.

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

Hi, guys. Great quarter. Congratulations, Mohan and Emeka and the team. I had a quick question.

I don't have the benefit of being in front of a computer, but I know you guided OpEx down quite substantially. I'm trying to understand the longer-term goal here with respect to operating margins. What is it that you hope to get to by the end of the year or the next 24 months with this OpEx reduction?

So, Harsh, if you recall on our last call, we did say we expected our Q4 OpEx to be higher because of higher than usual supplemental compensation that we were planning to do for retention. So the decline in this quarter is just that the bonuses are going to come down to a more normalized level. But as we go forward in the year, we are staying with the guidance that we've given a few quarters ago with the expectation that by the end of the year, the operating expenses should have ranged between $48 million to $50 million a quarter.

Thanks, Emeka. Is there a goal that Semtech has in terms of an operating margin that as a company you want to get to?

Oh, definitely. Operating margins has been the goal that we've had for several years, that we've obtained before, but we've gotten away from that expectation. Everything we're doing internally is to try to get back to 25% to 30% operating margin on a non-GAAP basis.

We think probably we start to get to that range in the $150 million, $160 million a quarter run rate, something like that. And I think we get that definitely as we start to see the rebound in the top-line growth, with all the growth drivers that we're talking about, the fact that gross margins really staying very stable. I think as we get top-line growth, we should see an acceleration of earnings leverage.

And a question for Mohan. Mohan, somebody earlier, I think Craig Ellis asked about the optical cycle in effect. I think 100-gig is just getting started. You announced something associated with the data center.

Curious where you think we are in this inning for this optical 100-gig cycle. Are we very early? Are we at the midpoint? Are we towards the end?

Just curious as a player where you think we are. Then secondly, if you could clarify what exactly the MultiPhy investment is and how it's structured and what it gets you in terms of an end market.

Let me start with the market. The 100-gig is still early. There are different elements to it. One is the 100-gig modules that are using quad 25 gig lanes and then single 100-gig. The MultiPhy announcement is all about the single 100-gig channel, so I will come back to that.

But the quad 25 gig is starting to take off. I think it's relatively small compared to the 10 and 25-gig, but it is obviously because of the smaller size it's starting to grow, and so it has a faster growth rate. We think it will be probably another two years before it's at the same level, though. Still a ways to go.

We got to the 100-single lambda, which is why we announced the investment in MultiPhy. We announced essentially we are going to enter the PAM-4 space, single lambda 100-gig pace. We don't have the DSP technology, so we made investment in MultiPhy, we are partnering with them and essentially that's the game plan.

So we have a portfolio of products all the way from our 10-gig, 25-gig, single-channel CDRs and PMD devices, and then we go up to the quad 25 gig, then we will have a single lambda approach. Obviously, they are a startup company, but we've structured the deal so that we have the right of first refusal if things go well.

Great. Mohan, just wanted to clarify one thing. So you will take their products and put it into your module, or will you sell them products and they will put it into their module? Whose product will be the final product?

Yes. So they are a chip company and an IT company. So essentially what we will do is we will provide these components to our customers. Our customers are building the modules. So we won't build modules.

We will take our physical media devices, combined development program with MultiPhy to develop a single-chip DSP PAM-4 component to those same module customers. That's the way it will work.

Thanks, Mohan. And congratulations, guys, again. Great execution. I will get back in line.

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

Hi, guys. Corey Grady on for Rick. I have a question about your Korean smart phone OEM.

Do you expect that customer to increase as a percent of sales this year? And how do you see the growth rate for them relative to the rest of the business?

So the Korean smart phone guys, mainly our largest one, Samsung, most recent quarter was about 6%. As Mohan talked about, we think that that could start to see some recovery or at least no longer see the declines we saw this year. But as our revenues grow, it will probably either be flattish or a smaller percentage of overall revenue.

Great. And then in terms of M&A, I guess how big would you be willing to go? And where would you be willing to look in terms of end markets or products or IP?

Well, we are always looking for our strategic assets that can help us accelerate our position in the markets we're in. I don't think we need to do much now to get to a billion dollars. I think we're in pretty good shape with the market, Sam, we've expanded in each of our market, product groups now.

But if there's something that we feel could help us get there faster or is a really good added component to the diversified analog portfolio we have, then we would look at it. And historically we've done small and big.

Great. Thanks.

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

Great. Thanks a lot, guys. And nice job on the raise here. Just a real quick question on the -- going back to some stuff Harsh was asking about.

As we look at your CDR, TIA portfolio relationship with MultiPhy, can you talk about -- do you think the greatest growth from that business will, this year will still be like 10 or 40 G? And as we get halfway through the year is when you will really start to see the 100 G stuff take off? That's just on the -- more talking about the CDR TIA versus MultiPhy with that question.

If we look at 100 gig today, it's going to be quad 25 gig. We look at it from the perspective of 10 and 25 gig channels. By far, the thing that's done very well for us is the PON business, which is a 10 gig and continues to do very well. And on the base station side, most of that is 10 gig also, maybe going to 25 gig.

The data center is where we probably expect the higher, faster bandwidth need, and that's probably where the larger, the faster growing aspect of the 100-gig business will be. That again will be quad 25 gig and single lambda by the end of the year.

Can you talk about the single lambda opportunity in terms of how close are you going to be to the laser there or the laser device? Are you going to try to add that capability laser, or would you just stay electronic side of that? And how do you see single lambda versus multiple light waves? Thanks.

We won't do lasers. We will stay away from that. We think that's where our customers add value, module customers.

We will help them with that. We won't do that ourselves. And I think the only advantage of the single lambda is really cost.

I mean, that's what happens, is you drive the module cost down significantly, and that enables -- end power, and that enables more density and just a whole data center to change the way they do things. It's all about connectivity and high bandwidth connectivity.

I think there's a transition, though. I think there's still a lot of barriers, optical barriers to overcome and things like that. It's going to happen. It's just a question of time.

Okay. Okay, great. Thanks. And I just -- in general, it seems like your book to bill sounds really good. Your inventory dropped a lot.

What changed there? Is that that you guys specifically just -- you've been working on a bunch of stuff for a while. Seems like you've got a lot of great products coming out right now. Is it just a whole bunch of uptick of that, or is it also some broader macro improvement?

Well, I think it's a bit of both. We had a whole lot of downtick, if you recall.

Yes, I know.

It's time for us to have some uptick. But I think, yes, a few things happening at the same time. But I do think the overall strength and demand is better than most have been anticipating.

Okay, great. Thanks a lot.

Your next question comes from the line of Mitch Steves from RBC Capital Markets. Your line is open.

Hi, guys. Great quarter. I just had a quick question regarding your comment in the Q1 guide.

You said you had basically 47% booked essentially. I just had a tough time understanding if that's from the computing side and the com side or if that's related to the Samsung out there.

Usually, Mitch, what happens is in our business, the higher turns requirement is from the more consumer-oriented businesses. So particularly -- specifically protection, for example, typically has to turn more in the quarter than our communications or computing products. The lead times, supply lead times are typically longer with some of those products.

And so we have -- we don't have the ability to book and ship in the same quarter. So we need the visibility earlier. So really the answer to your question is most of the turns we need are a combination of our Signal Integrity Product and our Protection business, but most of it will be driven by protection.

Got it. That makes sense. Secondly, for the January quarter, you noted essentially mix impacted gross margins a bit. Is that more because the industrial side has higher margins, or is that just that the computing piece had lower margins on a relative basis?

I would say both of those elements, Mitch. Lower industrial contributed to the lower gross margin, and just the mix within the computing and enterprise computing and communications was a little bit weaker for us.

Got it. One last to clarify. You guys are guiding to essentially $48 million to $50 million as a OpEx run rate. Is that essentially for the April quarter, going to be right smack in the middle of the lane, or are we going to see an increase throughout the year?

Like I said before, I think what we expect to see is that by the end of the year, the OpEx would be somewhere between $48 million and $50 million. I think what we're driving to the higher end of that range will probably be that we continue to see the growth that we're seeing on the top line, which hopefully drops off to the bottom line. Some of the expenses that you would expect to vary with higher revenues may be the things that would drive OpEx to the higher end of the $48 million to $50 million range.

Got it. So for April quarter, that implies you're going to be in the low $50 millions roughly?

I think for the April quarter, when you have a chance to walk through the guidance, you will see that it's coming around $50 million at the midpoint. And the key reason for that is typically at the start of the year, you do have some expenses that come out of line, like higher work hours in the quarter, higher payroll taxes and all of that stuff. But as we go through the rest of the year, we would expect to see the operating expenses coming down to levels of average between $48 million to $50 million for the year.

Got it. That makes sense.

Your next question comes from the line of Cody Acree from Drexel Hamilton. Your line is open.

Thanks, guys, for taking my questions. And congratulations on the progress. Emeka, could you walk through some of the margin drivers through the year? You've got a lot of moving parts with a lot of growth from smaller products and maybe as you see those kick in, how does that impact gross margins?

So Cody, as you know, most of our gross margin, the key driver is really in the mix of the products that we're shipping and the mix of the end markets that we're shipping into. So right now, the two key things that are driving the gross margins in the 59% or 60% range is higher mix of some lower margin products within enterprise computing.

But also in addition, so you can see from the financials we've been bringing down our inventory. And so we are not able to fully absorb the manufacturing infrastructure that we have. So my expectation would be that as we go through the rest of the year, where we get to where we start to review our inventory, especially if our demand continues to be as strong as we are seeing it right now, then I will probably expect some benefit from higher absorptions to gross margin, maybe something in the range of about 50 basis points.

Okay, great. Thank you for that. And Mohan, maybe you went earlier through some of the growth drivers, some of the myriad of products and end markets that are ramping. Could you rank order some of the near-term opportunities and how those play out through 2017?

Yes, from a revenue standpoint, I would say the enterprise computing, the data center stuff, elements that were part of the reason for the strong guide in Q1, data centers related to cloud computing and the wireless back haul, base station, I think are definitely doing well. And the PON business for us, as more fiber gets deployed to the home around the world, I think those are three areas in the enterprise computing and communications spaces.

And then in the consumer wearables and smart phones this year, there is a little bit of a question mark, but I think it could be for us still a good growth year, given that last year was such a down year for us in that area. And then on the industrial, we are seeing a number of different areas obviously tied to LoRa, the Internet of Things has many different aspects to it, including M2M and some of the smart grid applications and things like that. But that's starting to pick up quite nicely for us.

And then video, broadcast video, we think will start to pick up this year. It had a bad year last year, and there's no reason why it shouldn't do better this year. I could go on. There's a whole bunch of different areas, but I think those are the ones that I expect to see to have a revenue impact this year.

Perfect. Thanks. And then lastly, on the PON side, a lot of this it seems to be tied, and correct me if I'm wrong, seems to be tied to deployments in China and maybe the government's mandates of consumer connectivity.

How long do you expect that to be a driver? Does that play out in 2016? And I guess what are your expectations for the length of that being a contributor?

Yes, it is mostly China. There's also other parts of Asia and also North America. And I do expect that it will continue to grow this year and next year.

And then a lot depends on what happens in the in general because at the moment, it's10-gig PON, there is talk and discussion about higher bandwidth PON both for enterprise and for consumer. So it may surprise us and go on for quite a few years. At least for the next two years, for sure.

Thanks, guys. Congrats.

Thank you. Operator?

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

Thanks for taking the question. And it's a follow-up on the protection business, Mohan. I think you mentioned that ePayments would be a further catalyst for protection there.

The question is, does that help sustain the level of content that you have now? Or when you're seeing protection be implemented along with ePayments, is that adding content for you, and if so, how much?

It really varies from phone to phone, Craig, and application to application, if it's a high end smart phone or midrange smart phone. I would say the answer to the question is yes, it does add more content. It's probably on the order of just $0.05 or something like that because we have protection that's across the whole device.

So we will have a number of devices in each of -- a number of protection devices in each of the systems. So I would say it's per application, I think it's quite small. It's about $0.05, I would say.

Okay, but it is incremental. And then the follow-up question is for Emeka. Emeka, there's been a number of very constructive changes in the business.

You've got the emergence of at least three powerful growth drivers. Your customer concentration is significantly diminished. And you've got some businesses that are high margin that are growing.

The question is, relative to the last few years, how would you advise investors to look at the seasonality of the business now, given its construct and as it evolves, beyond the current fiscal first quarter? How do you look at seasonality for the business 2Q through 4Q?

Right. So Craig, this is something that we also are looking at because the business, as you mentioned, the profile of the business is probably changed somewhat in the last year or two. But based on what we've seen, given the content of our revenues right now, a lot of it is coming from your data centers, your wireless back hauler stuff.

What we have seen seasonality look like, it looks like we are much stronger now in the first half in terms of percentage growth than we are in the second half. But we will have to see how that plays out.

I think one of the things that we still have to see how it develops, we do have a whole lot of new embryonic growth drivers that could somewhat impact the seasonality -- the normal seasonality. But I think the way I look at it right now is first half is going to be really strong for us and the second half maybe flattish or slightly up.

Thank you.

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

Hi, thank you. Guys, Mohan, question on the base station business. I think you mentioned -- I think the exact words is maybe there's some pent-up demand.

I'm curious if you see strength beyond the pent-up demand. In other words, do you see a normal cycle, or do you think this is just like a pickup from what happened last year and then it tapers off?

Well, I think the pent-up demand is more a comment on the fact that last year the shipments were, shipments were not in line with demand because everybody was holding back, China specifically, was holding back on deploying. But I think that now is gone, and we are starting to see the acceleration of that.

But I would say that even last year we were expecting it to grow. And then we were expecting it to grow this year. So I don't think it's going to taper off.

My sense is that is going to be quite strong. It's definitely going to be strong in the first half. We will have to wait and see.

Emeka talked about the seasonality, about how the second half is going to look like. But I expect it to be a strong year for wireless base station.

Thanks, Mohan. Thanks, guys. Congratulations, again.

There are no further questions at this time.

In closing, FY16 had its challenges, and we faced our second sequential annual decline. However, this did not impact our strategic focus or continued investments in core analog mixed signal platforms in fast-growing market segments. We managed our operations prudently with strict OpEx control and maintained our non-GAAP gross margin at the high end of our 55% to 60% target range and added key infrastructure components to enable us to scale effectively.

I am confident Semtech is strategically better positioned than at any other time in the history of the Company. With that, we appreciate your continued support of Semtech, and we look forward to updating you all next quarter. Thank you.

This concludes today's conference. You may now disconnect.