Semtech Corp (SMTC) 2017 Q2 法說會逐字稿

Good afternoon, my name is Christine and I will be your conference operator today. At this time I would like to welcome everyone to the Semtech Corporation's Q2 FY17 earnings release.

(Operator Instructions)

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

Thank you, Christine.

Welcome to Semtech's conference call to discuss our financial results for the second quarter of FY17 ended July 31, 2016. 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 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 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 this today's call are current as of today only. Semtech undertakes no obligation to update the information from 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 our GAAP and non-GAAP results are included in today's press release. I would also like to mention that Semtech will be participating at the Drexel Hamilton's Media and Technology Conference in New York City on September 7.

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 Q2 FY17 net sales increased 4% from the prior quarter to $135.9 million, the third consecutive quarter results above the midpoint of our guidance.

In Q2 shipments into Asia represented 73% of total net sales. North America represented 19% and Europe represented 8%. Total net sales to distribution represented approximately 64% of revenue and direct sales represented approximately 36%.

Bookings in Q2 decreased over the prior quarter's strong performance, but the book-to-bill remained above 1. Turns bookings accounted for approximately 47% of shipments during the quarter.

Gross margin on a GAAP basis for Q2 of FY17 was 60.2%, up 30 basis points sequentially due mainly to favorable product mix. In Q3 of FY17 we expect GAAP gross margin to be down slightly from the prior quarter, as we expect a higher mix of consumer revenue.

Operating expense on a GAAP basis was approximately flat with the prior quarter, as expected. In Q3 of FY17 we expect our operating expense, on a GAAP basis, to decline approximately 41%, reflecting the impact of $26 million of gain from the divestiture of Snowbush. Excluding this gain, operating expense on a GAAP basis is expected slightly lower than the prior quarter.

In Q2 our GAAP tax rate was 37% compared to 39% in Q1. As a result of the valuation of reserves that maintain against our US-based deferred tax assets, our GAAP effective tax rate is subject to assumed volatility during periods when our US operations experienced significant pretax losses in relation to total income from continuing operations, as they did in the first and second quarter of the FY17. In Q3 we expect our GAAP tax rate to be approximately 20%, as the gain from the Snowbush divestiture is expected to benefit from favorable tax rates. For FY17 we expect our full-year GAAP tax rate to be in the 24% to 26% range.

Now I will talk about our non-GAAP results, which exclude the impact of stock-based compensation, the gain from the Snowbush divestiture, amortization of acquired intangibles, acquisition of disposition and other restructuring-related expenses and reserves for certain liabilities not tied to current operations. In Q2 non-GAAP gross margin was 60.4%, up 20 basis points sequentially due to favorable product mix. We expect our Q3 non-GAAP gross margin to be down slightly due to a higher mix of consumer revenue.

Q2 non-GAAP operating expense was $51.6 million, down 1% sequentially due to lower compensation expenses as a result of higher vacation utilization, slightly offset by higher new project spending. In Q3 we expect non-GAAP operating expense to decrease slightly from the prior quarter.

In Q2 cash flow from operations increased 129% sequentially to approximately $32 million, or 23% of revenue. We ended the quarter with $239 million of cash and investments, up from approximately $260 million in Q1. In Q2 approximately 77% of our cash and investments were domiciled in international accounts and 23% was based in the US.

Our debt balance is approximately $248 million. And the balance on the outstanding stock repurchase authorization stands at approximately $62.3 million. The primary use of cash continues to be to pay down our debt, repurchase our shares and make strategic investments.

Accounts receivable increased 16% sequentially as our shipments were higher towards the end of the quarter. Our days of sales outstanding increased by 4 days to 36 days and remains below our target range of 40 to 45 days.

Net inventory in absolute dollar terms in Q2 was flat with the prior quarter and represented 105 days of inventory, just above the target range of 90 to 100 days. In Q3 we expect our net inventory to increase slightly from these levels on an absolute dollar amount and for days of inventory to decline modestly.

In summary, we are pleased with the strong performance in the first half of FY17. Our key growth engines are starting to contribute nicely to the top line. Gross margin is stable at the high end of our 55% to 60% target range.

Our operating expenses are under control and as a result, in the first half of 2017 on a year-over-year basis, we grew our non-GAAP operating profit eight times faster than revenue growth. With continued revenue growth, we are well-positioned to make very good progress towards our non-GAAP operating margin target of 25% to 30%.

I will now hand the call over to Mohan.

Thank you, Emeka, and good afternoon, everyone.

I will discuss our Q2 FY17 performance by end market and by product group, and then provide our outlook for Q3 FY17.

In Q2 of FY17 we achieved net sales of $135.9 million which was an increase of 4% from Q1 of FY17, and an increase of 8% from Q2 of FY16. We experienced higher demand from our high-end consumer and industrial end markets, while demand from our enterprise computing and communication end markets declined from the prior quarter.

For Q2 of FY17 we posted non-GAAP gross margin of 60.4% and non-GAAP diluted earnings per share of $0.35. In Q2 of FY17 net revenues from the industrial end market increased from the prior quarter and represented 27% of total net revenues. Revenue from the high-end consumer end market also increased from the prior quarter and represented 25% of total net revenues. Approximately 19% of the high-end consumer net revenues was attributable to hand-held devices and approximately 6% was attributable to other consumer systems.

The enterprise computing end market revenues decreased from the prior quarter and represented 30% of total net revenues. While demand from the communications end market also decreased from the prior quarter and represented 17% of total net revenues.

I will now discuss the performance of each of our product groups, beginning with our signal integrity product group. In Q2 of FY17 our signal integrity product group declined from the prior quarter's record quarter performance and represented 47% of total net revenues.

Net revenues from the industrial end market increased as our broadcast video products rebounded from a seasonally weak Q1. Net revenues from enterprise computing and communications end markets declined sequentially, as strong demand for our data center optical solutions was offset by softer demand for our PON and wireless base station solutions, as expected.

Our signal integrity product group is currently benefiting from strong demand from the cloud and hyperscale data center markets and high-speed optical connectivity in general. Semtech's leadership position in clock data recovery devices, or CDRs, and physical media devices, or PMD, in 10-gigbit per second, 25 gigabit per second and 100 gigabit per second optical modules are driving the strong growth momentum.

In Q2 our CDR revenues achieved record levels, as shipments of 100 gigabit per second optical modules accelerated. We anticipate that our CDR business will continue to grow nicely, as we see an acceleration of 100 gigabit per second optical deployments. We also expect our CDR business to achieve record revenue levels for the year.

Over the past several quarters we have expanded our optical portfolio by introducing a number of new platforms that includes single and quad 25 gigabit per second CDR platforms with integrated PMD functions targeted at 100 gigabit per second applications. CDRs are being used to deliver the throughput required at higher data rates and Semtech CDR platforms offer best-in-class performance with a lower overall solution cost. The migration to 100 gigabit per second and 400 gigabit per second interconnect data rates also continues to drive strong customer interest for our single lambda 100 gigabit per second PAM-4 platform.

We have won some key 100 gigabit per second and 400 gigabit per second design wins at tier one optical customers. Semtech is very well-positioned to capture early share in the 100 gigabit per second single lambda optical market and the emerging 400 gigabit per second optical market for cloud and hyperscale data center solutions.

We believe we are uniquely positioned to deliver single-channel 10 gigabit per second, single-channel 25 gigabit per second, quad-channel 25 gigabit per second PMD and CDR platforms today, and single lambda 100 gigabit PAM-4 and 400 gigabit per second platforms next year. Our strong optical portfolio positions us very well to continue the strong double-digit growth this business has generated over the last five years.

For Q3 of FY17 we expect net revenues from our signal integrity product group to be approximately flat, as continued strong demand from the data center market is offset by softness from the wireless base station and PON markets. We are expecting the PON and base station markets to begin to recover in late Q3 and return to growth in Q4, resulting in strong annual growth. And we anticipate our signal integrity product group to have another record revenue year.

Moving on to our protection product group, in Q2 of FY17 net revenues from our protection product group increased 16% from the prior quarter and represented 27% of total net revenues. Demand increased across the high-end consumer, enterprise computing and industrial end markets, while our communications end market declined from the prior quarter.

Demand from our largest Korean and China smartphone customers increased from the prior quarter. We expect both our Korean and Chinese smartphone protection businesses to show double-digit growth this fiscal year.

During the quarter our protection product group introduced new platforms targeted at interfaces covering a broad range of applications. We announced the MicroClamp 3381P, a single-line transient voltage device used to protect VBUS and data lines in industrial and consumer applications. This device delivers high-surge power protection, high ESD voltage and low capacitance at 3.3 volts for applications that include optical modules, LCD TVs, tablets, CCTV cameras and instrumentation.

We also announced the MicroClamp 2417P, a seven-line surge-rated 24 volt protection array for broad use in industrial market applications. As more end nodes are being deployed from the explosive growth of IoT, these nodes are being exposed to destructive environments. This protection array is designed to safeguard electronic interfaces from these destructive transient voltage threats that include ESD and lightning surges.

As the electronic industry transitions to smaller, more advanced topographies, the ability to provide on-chip protection continues to diminish. The increased sensitivity of these smaller transistors to ESD events is resulting in poorer quality and less robust mobile devices. Semtech's protection platforms provide the industry's highest performance and smallest packages, delivering the protection solutions required by today's leading high-quality electronic systems.

We believe our strategy of focusing on advanced topography protection and diversifying our protection business is starting to pay off. In Q3 of FY17 we expect our protection business to increase nicely, as we expect further growth from both our Korean and Chinese smartphone customers.

Turning to our wireless and sensing product group, in Q2 net revenues from our wireless and sensing product group increased 34% from the prior quarter and represented 15% of total net revenues. Demand increased across all of our end markets from the prior quarter. In Q2 we had a record quarterly revenues from our LoRa platforms we had record quarterly revenues from our proximity sensing platforms.

We also had record bookings and design wins for our LoRa platforms. During Q2 continue to see increasing demand for LoRa, as global adoption of LoRa for low-power white-area networks used for IoT and end-to-end applications gained momentum.

We are seeing more global mobile network operators, or MNOs, evaluate LoRa for their future IoT technology platform. We are also starting to see more MNOs move from trials to full deployments, which will accelerate the demand for LoRa end nodes.

Some of the most recent major network-related milestones include South Korea Telecom, or SKT, announced the building of a nationwide LoRaWAN network expected to cover 99% of the South Korea population. They are predicting to have over 4 million things connected by the end of 2017. In addition, SKT is working with a number of Asian MNOs to expand its IoT footprint across Asia.

Asia Pacific Telecom, or APT, recently announced a LoRa network roll-out in Taiwan, turning a country of approximately 23 million people into a smart connected island. APT has also announced its intent to expand to other countries in Asia. Unidata SpA, a telecommunication internet company in Italy, announced a LoRaWAN network roll-out and the building of a LoRa lab in Rome, Italy to encourage use of LoRa for IoT applications.

Tele2, a Swedish telecom operator, and Talkpool, an IoT and telecom network specialist, are deploying a LoRa IoT network in Sweden, for a wide range of applications from targeted and improving business efficiencies and increasing public safety. And Nippon Telegraph and Telephone West, or NTT West, announced the roll-out of a trial LoRaWAN network in the Kansai area of Japan to field test a wide range of IoT applications, including smart metering, smart agriculture and smart asset tracking.

These are just a handful of the LoRaWAN networks recently announced or being deployed, but it's becoming clear that the low power, long range and low cost of a LoRaWAN network is a true enabler to IoT applications. We expect that most, if not all, regions of the world will have some form of LoRaWAN network deployed or in the midst of deployment by the end of calendar-year 2017.

Our LoRa ecosystem, enabled by our partners in the LoRa Alliance, now represents almost 400 companies. Many more companies are working in stealth mode, but we expect these companies to make significant announcements in the near future. Some of the recent most significant LoRa-related events include Orange joining the LoRa alliance board, bringing one of the largest mobile network operators in Europe to help direct and drive the global success of the LoRa Alliance.

Murata announced a compact wireless LoRa module, which can support a wide range of sensors for IoT and end-to-end applications. At 12 millimeters by millimeters, it's tiny form factor can drive the deployment of millions of LoRa sensor nodes in a very small area.

And the adoption of LoRa in China is accelerating, as we believe the majority of China metering companies are adopting LoRa for future metering solutions. And several China networking companies are actively testing LoRa for their IoT networks.

In addition to these developments, we formally announced our GPS-free geolocation capability that allows IoT operators to add asset tracking and geolocation to any mobile sensor operating over a LoRaWAN network. We already have four signed geolocation agreements and have another four in the pipeline.

The applications for geolocation capabilities are wide-ranging. And some of the very early solutions that have been introduced include a ski tracker solution to track ski school students at a ski resort and an elderly person tracker at a health care provider.

The additional capabilities and benefits provided by Semtech's geolocation technology increases the number of cloud-based services that can be offered on a LoRaWAN network, resulting in new revenue streams for LoRaWAN operators and service providers. These new opportunities, along with many of those currently in production, contributed to record quarterly LoRa revenues in Q2, giving us further conference that we can achieve $100 million in annual LoRa-enabled revenues in the next three years.

Our proximity sensing platforms also delivered record quarterly revenues, as the point of sensors to manage radio power and mobile devices increased. Semtech continues to expand its market share at existing mobile customers, as well as in new tablet, smartphone and wearable applications, as more high-power radios are deployed. We believe that we have established a strong position in the proximity-sensing market and we expect more future design wins and revenue growth from our proximity-sensing solutions, as we expect more future regulation directed at minimizing human exposure to harmful radio energy.

For Q3 of FY17 we expect net sales from our wireless and sensing product group to increase from Q2 and achieve record revenue levels. We expect both our LoRa business and our proximity-sensing revenues to achieve record revenues again in Q3.

Turning to our power and high-rel product group, in Q2 of FY17 our power and high-reliability product group continued the momentum achieved in the prior quarter and increased 10% sequentially and represents 11% of total net sales. Demand increased from the prior quarter across all of our end markets.

Our power and high-rel business remains focused on delivering platforms for the automotive, home automation and wearable segments. We recently demonstrated the industry's first certified and self-contained tri-mode wireless charging platform at the AirFuel Alliance meeting. This tri-mode transmitter supports both inductive and resonant charging technology, as well as the WPC and Z standards. By supporting these industry standards, we expect our wireless charging platform to help insure inter-operability between infrastructure-based transmitters and a diverse number of mobile devices.

Our programmable wireless charging platforms deliver a range of power options, scalable from 100 miniwatts to over 20 watts, ideal for wearable and infrastructure applications. While the wireless charging market is still in its infancy, the flexibility and versatility offered by Semtech's programmable multi-mode and scalable power platforms has positioned the Company as an early leader in the market. We have a number of design wins with a diverse group of customers in key growth markets that should start to move through production in the next six to nine months.

During the quarter demand also increased for our isolated switch platforms. Customers are looking to replace older mechanical relays with smarter, quieter and more reliable solid-state [demogies]. Semtech's solution is optimized for low voltage switching applications such as smart thermostats, security systems, intelligent sensor control and other home automation systems. We expect this business to continue to grow as more devices transition from older mechanical solutions.

In Q3 of FY17 we expect net sales from our power and high-reliability product group to be approximately flat. In Q2 the total Company distribution POS decreased approximately 2% from the prior quarter. Distributed inventory increased by 2 days from 71 days in Q1 to 73 days in Q2 and remains at the lower end of our targeted range of 70 to 80 days. Our distributor business remains very well balanced, with 53% of the total POS coming from the high-end consumer and enterprise computing end markets and 47% of total POS coming from the industrial and communications end markets.

Moving on to new products and design wins, in Q2 of FY17 we released 18 new products and we achieved 1,857 new design wins.

Now let me discuss our outlook for the third quarter of 2017. Based on the bookings from Q2, we are currently estimating Q3 net sales to be between $134 million and $142 million. To attain the midpoint of our guidance range, or approximately $138 million, we needed net turns orders of approximately 44% at the beginning of Q3.

We expect our Q3 GAAP earnings to be between $0.49 and $0.53 per diluted share which includes the proceeds from the sale of our Snowbush divestiture and our Q3 non-GAAP earnings to be between $0.34 and $0.38 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)

Cody Acree, Drexel Hamilton.

Thanks, guys, for taking my questions and congratulations on the progress. Mohan, can you go back and summarize a bit? Over the last couple of quarters you've had data center that seemed to be pretty strong. You've had quite a bit of volatility in coms infrastructure. Your smartphones are coming up seasonally.

But if you can go and look over the last couple quarters and then look into the third quarter and talk about the transition of some of the major drivers. What of these are seasonal? And what of this is driven by a bit of inventory volatility versus underlying demand?

Yes, let me start with that question, the inventory. I think the base station start in the PON, start was very strong in Q1, weaker in Q2. We're guiding a little bit weaker in Q3. We expect that to come back in Q4. And still for both of those businesses to do well on an annual basis. So that's more inventory seasonal-related.

I think if I look at the data center side, it's driven by -- mostly they're driven by obviously the expansion of the data centers and the hyperscale data centers, driven by the cloud. This is a big theme in the industry. Obviously, more people are going into the cloud, more infrastructure being deployed, more data centers, more service, more connectivity. And so that is clearly driving our optical business very nicely, and I think that will continue. We don't anticipate any slowdown on that, especially because we have such a good position in the 100 gig space and increasing in the 400 gig space there. So that's the data center side.

On the smartphone side, the story is always been how well it is for us, anyway. Historically it's been how well is Samsung going to do with their new phones. While we have made an active -- really actively tried to diversify the portfolio, as you know and the business customer base. And so we have over the last year, done a pretty good job, I think, of penetrating the China smartphones. And so now we are benefiting, both from the Korea smartphone success which is doing better than historically, at least in the last couple of years. And I think the China business is also doing quite well.

And then when we add to that the wireless and sensing business, the LoRa business is on its own, driven by IoT, really separate secular growth engine for us. And then the smart sensing, which is the proximity sensing tied to smartphones, are both doing very well and I think will continue. They're both early-stage industries, really, for us. And so, I think that's the way I would look at it. We're anticipating this year to be a growth year, obviously, and then see continued growth into next year.

What's giving you confidence that the base station and the PON business is likely to come back stronger in Q4?

Just what our customers have told us. I think that towards the end of Q3 we're expecting -- we know if we go to China, that the deployments of fiber is still going on and there's still lead to go out there and put infrastructure in place. So it's been more of inventory correction, I think. And I think that we'll start to see it, if not end of Q3, certainly by beginning of Q4.

And then lastly, you announced the geolocation capability for the LoRa nodes. At the Analyst Day you talked about the potential for maybe some royalty agreements, some service fees associated with those. Said you were in early talks with some of those service providers. Can you give us any update as to how those discussions have gone? Do you expect any revenue from those anytime soon?

Yes, I mentioned on my script, Cody, that we have now signed four agreements. We have another four in the pipeline. All of those agreements come with a modest license fee and then ongoing royalties. Of course the royalties don't come until the networks are deployed and then they have active geolocation tracking going on. So probably it'll be mid year, mid next year, before we start to see the revenues come in from that.

Perfect. Thanks, guys, and congrats on the progress.

Steve Smigie, Raymond James.

Great, thanks a lot, guys, and I'll add my congratulations on all the progress here. Mohan, I was hoping you could comment a little bit on -- as you mentioned, you still feel confident in the $100 million for LoRa. Do you still feel good about the interim targets as well?

Yes. So we said that this year we are anticipating in the $30 million range, next year $50 million to $60 million, and then the following year, $100 million. So to me, the numbers are the result of all the progress. And one of the reasons I had laid out some of the progress is that I think it's pretty good.

It's globally good momentum on the networks being deployed, the public networks being deployed. We have a lot of private companies going out and doing their own thing. And just the technology itself and the LoRa Alliance, if you look at, we're close to 400 members, and some of these members being very, very large corporations, all committing themselves to LoRa deployments of some sort. I think the progress is very good. So we obviously see positive signs at the moment on LoRa.

Okay, great, I appreciate that. And then on the PON, thanks for the color you've given so far. I think there's been some concern that maybe PON would slow post 2016. Latest chatter seems to be it's going to extend further than that. Do you have any color two- three-year timeframe? Is this a -- it's maybe not a lot of growth, it would be a great cash cow-type business. Any thoughts two- three-year-type timeframe?

Actually we're projecting continued growth for a few years. We are seeing that the streets are increasing, so they want to go from, I think, 1 gig, 2.5 gig to maybe 10 gig PON and eventually 25 gig, even. So we're seeing definitely an opportunity to grow in that area. The same thing is true of base stations. We don't see any letdown in either of the segments. As I mentioned, I think we had very strong Q1 from a PON standpoint and I think Q2 was down, and Q3, we're projecting it be fairly weak in the PON side. But as I mentioned in the back end of Q3, or at least in Q4, we expect to start to see that come back again.

Okay. And finally, great progress on the (technical difficulty) Can you talk a little bit about -- or an update on who you're getting a lot of wins with on the Chinese side?

And I apologize to sneak one more in. I think the CapEx is a little bit lower than expected this quarter. Maybe you guided a little bit higher for the coming quarter, is that the right way to think about it? What's driving the CapEx there? Thanks a lot.

Steve, was the question you asked on the smartphones or protection?

Yes, I apologize. The first question was on the smartphones and who are the Chinese guys you are winning with? And the second question was on CapEx and what's driving that.

Okay. In China, we have pretty good -- again, one of the things we're trying to do with our smartphone business in general and certainly with our protection business, is to diversify the business so we have more customers and can't just have Samsung. Obviously Samsung's doing very well for us at the moment so it's actually good. But on top of that we have wins at Huawei, Xiaomi, Vivo, diNovo. We have a broad range of customers and service in China and that's going to continue to be the strategy, try to get some share in all of the guys that we can.

So, Steve, with regards to your question on CapEx, I think the key driver there is just higher volumes. As we go forward, the expectation is especially some of our newer products, is that we're going to need a whole bunch of new handlers and (inaudible) stuff like that.

And also, there's also this factor of where you actually receive the equipment that you place an order. So coming into Q2, I think we would expect CapEx in the range of about $8 million. And we didn't receive most of those, we now expect to get them in the third quarter, fourth quarter.

Okay, great. Thanks a lot, guys, and congrats again.

Mitch Steves, RBC Capital Markets.

Hi, guys, thanks for taking my question. I have two quick ones. First, given the fact there's been so much consolidation in the semi-conductor space, analog space as a whole, how do you guys think of this, about consolidation and potentially driving shareholder value through inter-gaining growth today, buying other companies, either as acquirer or as an acquiree as well?

We've always been big believers in the fact that consolidation is necessary and that driving growth through acquisition is a key part of our [target]. And that's why when we transition the Company over the last 10 years since I've been there, leading the charge here, moving from one or two products segments and one or two application segments to having a much broader range of technologies and platforms and markets and expanding the SAN. You don't expand the SAN unless you come out with new technologies and can disrupt markets.

We've done that incredibly well, I think, with certainly LoRa and some of the things we've done with Gennum, with the Gennum acquisition on the signal integrity front. That continues to be a tool that we use for growth. Having said that, I think there is -- we very much believe, as I mentioned at the Analyst Day, in strategic acquisition. We are not a Company that -- we manage our OpEx very carefully. We manage our resources very carefully; there's not a lot of excess here. So we try to make sure when we acquire a company or we partner with a company, it's really about strategic growth, a 1 plus 1 equals 10 kind of thing.

Got it, thank you. And then secondly, in terms of the revenue comments you guys have made, so you had a recovery in Q3 and growth in Q4. So does that imply that Q4 is above seasonable? Or how do I think about the seasonality in Q4 in general as well?

Yes, we believe Q4 will be above seasonable at the moment. The way the business is looking and the way different product groups are looking and the different markets are behaving, we believe that Q4 will be better than originally anticipated, for sure.

Got it, thank you.

Harsh Kumar, Stephens Inc.

Hi, thanks, guys, congratulations on great guiding quarter. I had a couple of questions. Mohan, when I look at your guidance, most of your growth in the top line is coming from the protection and the wireless and sensing divisions. Can I ask you which one is driving the better product, the growth and the guide on top line?

They both, probably about the same, I would say, Harsh. Yes, both of them are about the same.

Okay, fair enough. And then one for Emeka. Emeka, you mentioned that your goal is 25% to 30% Op margins. Can I ask you to reiterate what revenue level is needed to get there? And if you're still at this point, you feel there's a need for OpEx increases at some point along the way to get there.

I think to get to the lower end of that range, the 25%, we'll probably need to be in the $150 million quarter run rate. And to get to the midpoint and the higher end is probably we need to be at about $175 million a quarter run rate.

The reason we feel good about being able to do that is, as you can see, our gross margins have been pretty stable and that's what we look at. The next wave of revenue growth and where are seeing most of our strength from, there is nothing to indicate that we should be significantly below the gross margin that we are seeing currently.

And then in addition to that, on the operating expense side, as Mohan did indicate, we've done a good job of managing OpEx. We've typically managed our OpEx to about half the rate of revenue growth. But in the near term here, we are still -- we're going to try to manage our operating expenses to lower than that rate. So that is why we feel that to get to the low end of that range, we probably need to be at the $150 million a quarter run rate and to get toward the high end is going to be about $175 million per quarter

Okay. And then -- okay, fair enough. And Mohan, you talked a lot about some of the optical parts and pieces and then you talked for something interesting, the 100 gig single lambda piece. Correct me if I'm wrong, I think you're hinting towards revenues next year. Can you tell us what the timeline to get there is?

In other words, are you sampling with this product now? What's the level of interest? And then, what timeframe next year can we expect some kind of revenue from this product?

The single lambda 100 gig product, we'll start the sample early next year, Harsh. So it's still early for that. This is without partnership with MultiPhy, as we've announced previously. The beauty, though, for us is that we have very strong position with our quad 25 gig modules, 25 gig CDRs in 100 gig modules. And it the same customer base, essentially, that will move over to 100 gig single lambda.

And then we have -- I mentioned two very important strategic wins we have in tier 1 OEMs that are really for the 400 gig and 100 gig. Again, it will be mid to end of next year before revenue, I think, starts to kick in. And really the following year is when we start to see the bigger revenue. So on the PAM4 stuff, I don't think revenue is going to be a significant part driver for next year.

Okay. And then you're also, Mohan, again a question about the mix. You're exposed to data center, you're exposed to PON, you're exposed to wireless. I'm curious, you said PON will probably start recovering later part of Q3, how big are these two relative pieces, the data center piece versus your PON piece? How much is PON -- I assume PON is bigger than data center; I was wondering how much bigger is it?

Harsh, this is Sandy. If you look at base station, that's typically been a high single-digit, and that's where it will probably end up at when we look at the end of the year. PON has typically run in the mid-teens, maybe the high teens. Earlier in the year it ran at the upper end of that range and it will probably exit more at the lower end. And then the data centers have been the low to mid high teens and is operating at the higher end of that range right now.

Okay, thanks, guys. Sorry, go ahead.

Harsh, I think one of your questions was which one was bigger. In the last fiscal year, definitely our PON business was the biggest of the three. But actually because of the very nice growth rates that we're seeing in the data center, our expectation is that at the end of this current fiscal year, the data center revenue is going to be bigger than the PON.

Nice. Great. Thanks, that's it, congratulations, guys.

Craig Ellis, B. Riley & Company.

Yes, thanks for taking the question and congratulations on the quarter and outlook. Just a couple follow-ups here. First, Mohan, it looks like you continue to get good diversification in the protection portfolio and you're seeing growth in numerous customer groups. How do you feel about the sustainable growth of that segment going forward?

Pretty good. You have to look into the details of the whole business unit. Again, we explained this at the Analyst Day, that while we are successful in smartphones and continue to be, it's because of the phone factors that we have. We have such a good advantage there and the performance of our platforms.

But that doesn't mean we're not getting wins in automotive and industrial, in computing and a whole range of different segments. We are; we are doing very well in other segments, they just don't grow as fast or quickly.

I think we'll continue to make sure that we put the emphasis on the diversification aspect for this business. It's important for us. We just can't control, we have no control over how well Samsung does in one quarter and how well the Chinese do in one quarter. But I think if we can continue to diversify the business, I think it's a very healthy growth business for us.

It sounds good. And then since you mentioned Analyst Day, I thought I would cycle back to one of the bigger longer-term points. The Company's objective was to increase its SAN twofold by the 2021 timeframe. It's only been two months but can you give us an update on some of those longer-term parameters? Are they still reasonable for the way you're looking at the business's performance?

Yes, definitely. And I think it starts with LoRa, really. As I mentioned, I think that's probably the biggest one for us in terms of SAN expansion and it is going very well. The IoT space is there, it's real. We see customers deploying smart applications and generating revenue from it. It is small today it but it's growing very fast and we all know about the number of nodes that are projected out there. So certainly LoRa is meeting all of the expectations at the moment.

I think when the signal integrity side, data centers we know about, the hyperscale cloud drive and what's going on there. And then the PON, as I mentioned, I think it will continue to expand. And I think the base stations as well, just because there's more bandwidth required and more -- you have to get more data through the pipe, so it has to come from somewhere.

On the wireless charging side, it's a little bit early. It's still -- we're expecting that market to be big, but I think it's still a little bit early on the power side there. Then on protection, as I mentioned, I think we expect as lithographies continues to get more advanced, that will be more demand for our protection. Electronic systems need to be robust, they need to be high-quality. And if you don't have good protection, when you have advanced lithography devices in your system, you're likely going to have some type of failures. I think that's the -- we view that as a major mega-trend, as we talked about at the Analyst Day.

Thanks, guys.

Rick Schafer, Oppenheimer.

Thanks, guys, and I'll add my congratulations as well. Quick follow-up on the 100 G question. I'm curious what your split is now between 10 G and 100 G. And then maybe a point of clarification, is your dollar content higher in 100 G? Or is it just that attach is so much higher for you guys with 100 G?

If you look at it, it's probably still heavily biased towards the lower speed. The 100 gig is ramping and we are seeing it. And one of the things, like Mohan talked about in his prepared remarks, was we're seeing the use of more CDRs at these higher speeds. So there's a little bit of seeing more of our content in the higher speeds as well as us getting more of the opportunities in some of these emerging designs.

Yes, I should point out also, Rick, that even for base station back-haul and things like that, different areas where you're using a 25 gig link versus a 10 gig link, you may require a CDR. So the CDR deployments are going to increase with bandwidth, and that's an important point to understand.

Do we get to like 100% attach when we're talking 100 gig? Is that what you're talking about?

I think every 100 gig port is using, today, is using a CDR of some sort, yes.

Okay, thanks. And then a question on auto. I don't think anybody's asked about that yet. How big is that business? I think it's pretty small for you guys today, but how big is that business for you guys? Maybe some color where is most of your design win activity is there, maybe how long before that becomes a more material line item for you guys on the top line?

Rick, I think that business today is probably 3% to 5%; it's still small like you mentioned. But I think it is also a real opportunity for us as we continue to think about ramp-up of the wireless trunk-in systems. I think the automotive space is definitely a very attractive space for that.

If when we are working the protection business, protecting all the broad-reach systems in vehicles, it's also one of the areas that we're really looking for when we talk about diversification of our protection work. The auto space is definitely an attractive space for us. So it is pretty small today, but we do believe that over the years it's going to probably become a sizable business for us, probably in the neighborhood of about 10%.

There are also LoRa opportunities in automotive and power -- portfolio power management in addition to wireless charging for displays and other types of infotainment as it goes into the vehicle. So we just see it as a good segment for the type of products we have. And this is really the new automotive vehicle versus the old.

Right. Great, thanks, guys.

There are no further questions at this time. Mr. Mohan Maheswaran, President and CEO, I turn the call back over to you.

Okay. In closing, our focus on high-growth markets such as cloud and hyperscale data centers, optical connectivity and IoT, has contributed to a strong performance in the first half of FY17. We remain focused on making strategic investments in platforms targeted at fast-growing markets, while maintaining our discipline on operational efficiencies which should help leverage earnings growth as our revenues grow. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.