Semtech Corp (SMTC) 2018 Q4 法說會逐字稿

Good afternoon. My name is Sonia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q4 Fiscal Year 2018 Earnings Release Conference Call. (Operator Instructions) .

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

Thank you, operator, and welcome to Semtech's conference call to discuss our financial results for the fourth quarter and fiscal year 2018. 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 was issued after the market close 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 the 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 filed with the Securities and Exchange Commission.

As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change.

During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted.

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

Thank you, Sandy. Good afternoon, everyone. For Q4 fiscal 2018, GAAP net sales were $140.6 million, a 6% sequential decline and flat with the same period a year ago. Q4 GAAP net sales included $1.5 million of expense for the Comcast warrant. Fiscal 2018 GAAP net sales increased 8% over fiscal year 2017 to $587.8 million and included $16.2 million of expense for the Comcast warrant.

Q4 GAAP gross margin increased 120 basis points sequentially to 60.7% due to lower sequential Comcast warrant expense. Q4 GAAP operating expense decreased approximately 1% sequentially due to lower equity compensation expense, driven by lower levels of performance vesting and a lower stock price and lower variable compensation expense offset by higher restructuring expenses.

In Q4, interest and other expense was $3.2 million compared to $800,000 in Q3. The increase reflects foreign exchange losses due to a weaker U.S. dollar and higher net liabilities denominated in foreign currencies. Q4 GAAP tax rate was approximately 112% compared to 19.5% in Q3 due to the transition taxes associated with the U.S. tax reform and revised plans for the use of overseas cash. Apart from the taxes associated with the transition to the new tax laws, we do not, at this time, expect the tax reform to have a significant impact on the results of our operations. For fiscal 2019, we expect our GAAP tax rate to be in 19% to 23% range.

Moving on to non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition or disposition related and other nonrecurring charges not tied to current operations.

Q4 fiscal 2018 net sales of $142.1 million came in at the high end of our guidance and represented a sequential decrease of 9% and flat with the same period a year ago. Fiscal year 2018 net sales were a record $604.1 million, an increase of 10% over the prior year driven by our diversified growth drivers.

In Q4, shipments into Asia represented 75% of total net sales. North America represented 18% and Europe represented 7%. Total net sales to distribution represented approximately 66%, and direct net sales represented approximately 34%.

Q4 bookings increased nicely sequentially and resulted in a book-to-bill solidly above 1. Turns bookings accounted for approximately 46% of shipments during the quarter.

Q4 non-GAAP gross margin was 61.4%, an increase of 10 basis points sequentially due to the seasonal decline in our consumer revenue. We expect our Q1 non-GAAP gross margin to be approximately flat. Q4 non-GAAP operating expense was $51.3 million, down 3% from Q3, driven by lower variable compensation expenses. In Q1, we expect non-GAAP operating expense to be flat to up 4% sequentially as a result of higher variable compensation expenses. As we highlighted in our last earnings call, we expect our non-GAAP operating expenses for fiscal 2019 to be flat to modestly up sequentially and to average approximately $52 million to $54 million per quarter.

In Q4, our non-GAAP tax rate decreased slightly to 12.9% from 14.1% in Q3, reflecting a true-up of regional income assumptions. We expect fiscal 2019 tax rates to be between 16% and 20%.

In Q4, cash flow from operations increased 23% to $33 million or 23% of net sales. In Q4, approximately 69% of our cash and investments were domiciled in international accounts and 31% was based in the U.S. We repurchased 130,000 shares or $4.5 million of our stock during the quarter, and the outstanding stock repurchase authorization stands at approximately $47 million. We expect to use our cash to opportunistically repurchase our shares, pay down debt and make strategic investments.

In Q4, accounts receivable decreased 20% sequentially due to lower net sales on more linear demand and represented 38 days of sales, which is below the target range of 40 to 45 days.

Net inventory in absolute dollar terms was flat sequentially and increased by 8 days to 118 days, above the target range of 90 to 100 days. In Q1, we expect our inventory to decline in both absolute dollars and days.

In summary, we are pleased with our financial performance in fiscal 2018. On a non-GAAP basis, our revenue grew 10% year-over-year, and due to expanding gross margins and diligent operating expense control, we grew our earnings 3x faster. We believe our momentum entering into fiscal 2019, our focus on execution and growth from our differentiated growth engines position us nicely to achieve record results again in fiscal year 2019.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2018 performance by end market and by product group, discuss our fiscal year 2018 performance and then provide our outlook for Q1 of fiscal year 2019.

In Q4 of fiscal year 2018, non-GAAP net revenues decreased 9% over the prior quarter to $142.1 million driven by seasonal inventory reductions at our smartphone customers and softness in the China base station market. We posted non-GAAP gross margin of 61.4% and non-GAAP earnings per diluted share of $0.42.

In Q4 of fiscal year 2018, net revenues from the enterprise computing end market increased over the prior quarter and represented 34% of total net revenues. The high-end consumer end market decreased over the prior quarter due to seasonality and represents 28% of total net revenues. Approximately 19% of high-end consumer net revenues was attributable to mobile devices and approximately 9% was attributable to other consumer systems.

The industrial and communications end markets declined over the prior quarter and represented 27% and 11% of total net revenues, respectively. I will now discuss the performance of each of our product groups.

In Q4 of fiscal year 2018, net revenues from our Signal Integrity Product Group was approximately flat with the prior quarter and represented 45% of total net revenues. Strong 100-gigabit-per-second data center demand and the recovery in our PON demand was offset by ongoing weakness from our wireless base station customers. Demand for our PON products increased sequentially, led by our 2.5G and 10G PON platforms. The stronger Q4 resulted in a record year for our PON business in FY '18. We continue to see strong bookings from the PON segment, suggesting that FY '19 will be a much stronger year for our PON business than previously anticipated and likely to result in another record year for our PON business.

Semtech remains the PMD solutions leader in the 2.5G PON market, and we expect to maintain the same leadership position in the 10G PON market. PON deployments are global, but China remains the strongest end market for PON deployments.

In Q4, our China base station business softened as we had expected. We do not expect this business to show significant growth until 5G deployments begin sometime in the second half of this calendar year. In Q4, our data center business experienced stronger demand for our 100-gig CDR platforms. Semtech's industry-leading ClearEdge CDR platform is enjoying broad-based success in the 100-gig optical modules as the faster data rates drive the need for increased signal integrity. Our latest ClearEdge platform, which integrates our high-performance 25-gigabit-per-second CDRs with enhanced laser drivers and TIAs or SFP28 SR modules and active optical cables, has strong design traction. We expect the increasing use of 100-gigabit-per-second links in new data center deployments to continue to drive growth for our CDR platforms in FY '19.

Our FiberEdge PMD platforms, which include a 100-gigabit-per-second linear driver and TIA and provide a seamless interface to 100-gigabit-per-second PAM4 optics are complementary to our ClearEdge solutions and are experiencing strong interest from customers developing 100-gig, 200-gig and 400-gig PAM4 optical modules.

Last quarter, we announced the availability of the industry's first fully integrated DSP PMD chipset for single-lambda 100-gigabit-per-second PAM4 optical modules. This chipset combined our FiberEdge PMD platform with MultiPhy DSP platform to deliver a fully optimized seamless solution for optical modules targeted at next-generation hyperscale data centers. Customer feedback has been very positive, and we are expecting to see additional interest as our newly introduced optical platforms are being showcased at the optical fiber conference taking place this week. We expect to maintain our leadership position in the 100-gigabit-per-second optical market as some data center customers transition to 100-gigabit-per-second single-lambda PAM4 optical modules next year.

In FY '18, our Signal Integrity Product Group delivered record revenues driven by record revenues from our CDR, PMD and PON platforms, led by strong demand from data centers and PON systems. For Q1 of fiscal year 2019, based on strong bookings and a healthy starting backlog, we expect net revenues from our Signal Integrity Product Group to increase nicely, led by stronger demand from the PON and data center markets.

Moving on to our Protection Product Group. Following 6 consecutive quarters of sequential growth, our protection business declined over the prior quarter and represented 28% of total net revenues. Demand from our smartphone customers declined sequentially as our largest smartphone customer executed on their customary year-end inventory reduction efforts. Semtech continues to be the leading provider of high-performance protection platforms to the mobile device industry. We believe that as device manufacturers use more advanced lithographies, they will increasingly require Semtech protection. Our Protection Product Group has been focused on diversification by expanding our product footprint across a broader range of market segments. Most recently, a growing number of industrial customers are designing in Semtech's protection products. For example, automotive customers are designing in our AEC-Q100 protection parts into automotive infotainment systems, where the hostile environment of a vehicle presents unique protection challenges.

We have also seen very positive traction from some newly released platforms, including the RClamp0561Z for USB 3.1 Type C interfaces and HDMI 2.0 interfaces and the TClamp3312M for high-speed communications interfaces. Our industrial protection business is expected to grow nicely in FY '19 and start to contribute meaningfully.

In FY '18, our Protection Product Group grew 18% over the prior year's results, led by diversification within the smartphone market, increased penetration at our largest smartphone customer and the diversification of our protection business across new vertical market segments. We believe our strategy of focusing on advanced lithography protection and high-speed interfaces across an increasing number of vertical markets is working and should help our Protection Product Group deliver another year of strong growth in FY '19.

In Q1 of fiscal year 2019, we expect our protection business to rebound from the seasonally lower Q4, driven by growth from our smartphone and industrial customers.

Turning to our Wireless and Sensing Product Group. In Q4 of fiscal year 2018, net revenues from our Wireless and Sensing Product Group decreased 19% sequentially but increased 19% over the same period a year ago and represented 18% of total net revenues. Seasonally lower demand from the consumer and industrial markets led to the anticipated sequential decline. In Q4 of fiscal year 2018, demand for our proximity sensing platforms decreased sequentially due to seasonal smartphone softness. Our sensing platforms continue to win new designs in tablets, smartphones and wearables across many different regions as regulations on managing radio energy transmission increase. We expect this secular trend to continue.

In fiscal year 2018, our proximity sensing business achieved record revenues, and we anticipate another record in FY '19.

In FY '18, our LoRa business also achieved record revenues. Interest in our LoRa platform continues to exceed our expectations as we see broad global acceptance of LoRa as the technology of choice for low-power, wide-area network applications. Semtech's LoRa-enabled business achieved $42 million in revenues in fiscal year '18, and we remain on path to deliver between $80 million and $100 million in revenues in FY '19.

FY '18 was another year where Semtech, along with our LoRa Alliance partners, achieved many significant accomplishments and milestones. Here are 10 of the most significant milestones achieved in fiscal year '18: one, the LoRa Alliance membership exceeded 500 companies worldwide with members now addressing all layers of the LoRa value system; two, LoRaWAN network trials or full deployments were announced in more than 50 countries worldwide; three, the number of macro gateways deployed worldwide exceeded 70,000, which supports greater than 350 million end nodes; four, LoRa end nodes deployed now exceeds over 50 million units; five, we currently have over 1,000 proof of concepts in progression and anticipate that this proof of concepts will translate to over $100 million in design wins by year-end; six, the LoRaWAN Academy was launched and is expected to be a key resource to enable the global IoT developer community; seven, Comcast announced its decision to deploy a LoRaWAN network in 30 cities in North America and has now completed the deployment in 5 major cities, with 10 additional cities to be covered by the end of this calendar year. Comcast has also made the decision to deploy dense LoRaWAN networks where needed to support specific use cases. Eight, Semtech announced the industry's first disposable LoRaWAN tag reference design for disposable LPWAN use cases. This tag is currently in development and expected to be available by the end of this year and opens up numerous new applications including smart media, smart packages and smart asset tracking. Nine, Lacuna Space announced the first-ever LoRaWAN transmissions from space as its partnership with the European Space Agency demonstrated the use of a LoRaWAN network using satellites. This space transmission demonstrated a LoRa range capability of over 300 miles. And finally, 10, in FY '18, we signed 5 geolocation license agreements with network operators.

These are just a handful of the key milestones achieved in FY '18. By the end of fiscal year 2019, we anticipate there will be over 200,000 gateways in total deployed, which will include both macro and picocell gateways. This will provide the capacity to support over 1 billion end nodes. In addition, by the end of fiscal year '19, we expect LoRa end nodes deployed to exceed 80 million units.

In FY '19, we also expect to have 10 geolocation license agreements in place and expect to start receiving geolocation royalties towards the end of the year as many new use cases emerge. We believe that Semtech, along with our LoRa Alliance partners, will drive LoRa to become the de facto standard for global LPWAN use cases and what we think could be a multibillion unit industry in the next 5 years.

For Q1 of fiscal year 2019, we expect net revenues from our Wireless and Sensing Product Group to increase significantly, led by record quarterly bookings achieved in Q4.

Turning to our Power and High-Rel Product Group. In Q4 of fiscal year 2018, our Power and High-Reliability Product Group delivered its third consecutive quarter of sequential growth and increased 5% sequentially and represented 9% of total net revenues. As part of the company's ongoing review of its strategic initiatives, I determined that the value of our Power and High-Rel Product Group could be better leveraged by redirecting and focusing its efforts on supporting the exploding number of new initiatives and use cases associated with our LoRa-related ecosystem. These initiatives are broad-reaching and include opportunities in sensing, energy harvesting and rechargeable LoRa tags. As a result, we have reassigned our strategic technology development and marketing resources from our Power and High-Rel Product Group to our Wireless and Sensing Product Group. Going forward, we will report the combined results under our Wireless and Sensing Product Group beginning in Q1 of fiscal year '19.

In Q4, the total company distribution POS achieved a new quarterly record, increasing 6% from the prior quarter. Distributor inventory in Q4 decreased from 75 days in Q3 to 62 days in Q4 of fiscal year 2018, and remains well below our 70 to 80-day channel inventory model. Going forward, all revenues will be recognized on sell in to our distributors versus the hybrid model we used to report. As a result, we are reducing our channel inventory model to 60 to 70 days and will no longer report externally on our channel inventories or our distributor POS.

Our distributor business remains balanced with 60% of the total POS coming from high-end consumer and enterprise computing end markets and 40% of total POS coming from the industrial and communications end markets.

Moving on to new products and design wins. In Q4 of fiscal year 2018, we released 21 new products and achieved 2,391 new design wins.

Now let me comment briefly on our fiscal year 2018 performance. In fiscal year 2018, Semtech delivered a record financial performance, with total non-GAAP net revenues increasing 10% over fiscal year 2017 to $604 million, led by strong momentum from our primary growth engines. Our non-GAAP earnings per diluted share increased 30% over the prior year, which was 3x the rate of our non-GAAP revenue growth over the same period, demonstrating the leverage in our model. In FY '18, we released 90 new product releases and achieved a record 8,694 new design wins.

In FY '18, our Signal Integrity Product Group achieved record net revenues driven by record CDR, record PON and record PMD revenues. Our Wireless and Sensing Product Group grew 43% over FY '17 and also achieved record revenues driven by record LoRa-enabled revenues and record proximity sensing revenues. Finally in FY '18, our Protection Product Group grew 18% to deliver a very strong annual performance.

In FY '18, we also acquired AptoVision, adding over $150 million to our SAM. While it is early days, we have positive indicators that software-defined video over Ethernet will become the standard for connected pro-audiovisual systems, and we believe that Semtech is in a strong position to lead this market. In FY '18, we also executed on a number of smaller strategic minority investments to help position us for future growth in our targeted growth markets.

Our diverse product portfolio, diverse customer base, broad geographical strength and numerous exciting growth engines position Semtech very well to deliver what we believe will be another record financial performance for the company in fiscal year '19.

Now let me discuss our outlook for the first quarter of 2019. Based on the strength of recent bookings trends and our strong backlog entering the quarter, we are currently estimating Q1 non-GAAP net revenues to be between $147 million and $153 million. To attain the midpoint of our non-GAAP guidance range, or approximately $150 million, we needed net terms orders of approximately 33% at the beginning of Q1. We expect that Q1 non-GAAP earnings to be between $0.45 and $0.47 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) Your first question comes from the line of Cody Acree from Drexel Hamilton.

Mohan, with the change in your inventory monitoring, can you just talk about how you're expecting to really keep an eye on the health of your inventory channel with everything going into a sell-in recognition?

Well, we monitor channel inventory, Cody, and it's something we have a model on. As I mentioned, we're bringing it down. We're bringing that model down this quarter, and we continue to monitor it and manage it accordingly. But we just decided because now we're recognizing everything on sell in to the distributors that actually reporting it externally really didn't benefit anybody.

Right. So Cody, just to add to that, we do receive from our distributors both their inventory reports and their POS reports, and we look at that on a weekly basis. So it is something that we definitely have always kept a very keen eye on to make sure that we understand what's going on with the channel.

And then just following up on that, so Samsung goes -- or your largest Korean customer goes through their typical end-of-year rebalancing, but China contributed to a bit of that inventory volatility at the end of last year. Can you just talk about the channel and/or the health of the Chinese protection inventory?

Yes. That's not so much a channel question as it is a smartphone end-of-year question. And I think both, you're right, Korea -- both Korea and China were weaker in Q4 as we had anticipated. Stronger, expecting it to be stronger in Q1 and anticipating the year to be reasonably strong. I would say more so Korea and North America. China is somewhat of an unknown.

And are you expecting to gain share in China? Are you picking up dollar content or you're just expecting unit volumes to drive that growth in China?

I would say it's more the latter, Cody. And I think that's because we're not sure the China smartphone customers themselves will gain share in the marketplace. That's one of the questions related to when you see why they actually have not been doing so well in recent quarters, it's more because they've been losing share and nothing to do with us losing share.

Your next question comes from the line of Craig Ellis from B. Riley.

This is Plamen calling in for Craig. First I wanted to circle back to your segment commentary and possibly get some additional insight into the Signal Integrity side of the business. With respect to the strength that you guys are seeing in data center and China infrastructure and the kind of the base station push out, if I could call it that way, can you -- how confident are you that the data center and the China infrastructure side of the business is going to offset the base station weakness that you're seeing? Any color there would be helpful.

Yes. So we had anticipated Q4 to be weak for China base station and for PON actually. It turned out that PON was stronger than we had anticipated, and I think that's true of Q1 as well. We anticipate that this year, for fiscal year '19, PON was going to be a little bit weaker, but it turns out it's stronger so -- starting off strong anyway. So it gives us a little bit of confidence about the whole year being a better year for PON. We're also hearing generally that China is putting a lot more emphasis on bandwidth, high bandwidth connectivity to the home and enterprise, so that kind of validates the strength as well. The base station side continues to be weak. It has been for most of -- for second half of FY '18. And we anticipate, as I said on the prepared remarks, that we don't expect any kind of come back until the second half of FY '19. And data center, 100-gig data center continues to be very strong, continues to grow and all data points point to that business continuing to grow.

That's very helpful. And then just on the protection side, when you look at the China smartphone market, are you seeing continued weakness there? Is there any stabilization or any signs of a better market than you expected?

China smartphone, I would say, is still relatively weak. We don't see much strength there. The overall smartphone market, of course, Q1 is typically stronger than Q4, and that's what we're seeing. So no surprise there. We expect our Korean smartphone customers and North America smartphone customers to do better in Q1 than Q4. But China is still looking relatively soft.

And then just one last on the modeling question. On the OpEx trajectory, I know you mentioned a flat to slightly up for fiscal year '19. But is there in terms of Q1 versus -- the first half versus the second half, is there any more color that you could provide there on the OpEx trajectory?

Yes. I think what I'll probably add is that I'll give a range of $52 million to $54 million per quarter. I think the first half will probably be more towards the lower end of that range, and the second half will probably be more towards the higher end of that range. That will be the expectation at this time, yes.

Your next question comes from the line of Harsh Kumar from Piper Jaffray.

I had a couple of questions. Mohan, in your data center end market, could you tell us about may be the linearity in the quarter you just finished and reported? And also how do you see the linearity of the business, specifically to data centers for the upcoming quarter -- or for the quarter we're in, which is April?

For Q4, I would say the linearity was strong in the first period, Harsh, and then strong in the last period. We had Chinese New Year in the middle of it there, towards the end of it there. So that kind of always has a little bit of weakness, but then it picks up again towards the back-end of January. And so that's kind of the way I would look at it. And I think the feeling is that PON is definitely coming back, had stronger Q4 and is looking much stronger for Q1. And we would expect that to be fairly linear through this quarter. Certainly, it's been strong up to date, and the same with data centers. So the only segment that I would say is weak, as I mentioned, is base station continues to be a little bit weaker than we had thought.

Okay, now that's fair. And then, Mohan, I think you gave LoRa as a percentage of business for the year if I'm not mistaken. Would you be able to disclose for us how much LoRa was as a run rate of business exiting the fiscal year?

Exiting the fiscal year, what does that mean?

Exiting the fiscal year, Harsh, I think LoRa was definitely on a run rate that was very close to the low end of the range that we have given for fiscal year 2019. It wasn't within the range, but it was close to the lower end of that range.

So let me understand this, close to the lower end of basically $80 million to $100 million, is that correct?

Yes, yes.

Okay, fair enough. And then, Mohan, so strong tone of business. You just, I think, said that turns were 46% of business but you only need 33%. How should I reconcile your guidance and then sort of the room you have or the commentary on turns relative to what you're saying?

Well, we base on demand forecast, Harsh, and we look at all the data points. The turns looks reasonable for us, obviously, to achieve the numbers. But there are still question marks on China, and there are still question marks on smartphones. So some turns need to happen there. I would say, in general, we're feeling pretty good about the first half of fiscal year '19, for sure. Yes.

Got it. And I promise my last question. So PAM4 is happening now. You're demoing it, I guess, and I expect it to happen at the end of the year. You do have a relationship with MultiPhy. I believe, if I'm not mistaken, you have the right of first refusal to buy them. How do you -- would you be willing to answer on this call or to this specific question, how do you see this playing out, this relationship and that right of first refusal playing out?

Well, we -- our plan is to acquire them. We've made that clear and the option comes in June of this year, and we have to make a decision at that point on the acquisition. At this point in time, everything is looking pretty good. Obviously, the revenues are pushed out. The whole 100-gig market and the whole PAM4 transition has moved out. But from a technology standpoint, we think the DSP is a really good fit for us, and the partnership is a very positive one. So yes, everything's looking quite positive on that front.

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

I guess I just have a couple of questions. First is just on PON. It sounds like that's really a pleasant surprise in the quarter and heading into 1Q. Can you give a sense maybe of where the strength may be? Was it a little more 2.5G? Was it a little more 10G that's been -- that upgrades been finally kind of kicking in? And then maybe as part of your answer, it has proven to be a really lumpy business for the last 2 or 3 years. I mean, can you give us a sense of what sort of level of visibility you have there now? And is there anything that you're sort of able to do to forecast that business maybe a little better?

Well, I think, Rick, so let me comment. First of all, I think it's -- the whole PON market is doing better because China is putting a little bit more emphasis on bandwidth into the home and enterprise as I mentioned. So that's just a data point we have. We ask the same question why is this doing better than we had anticipated, and that's the answer. The transition to 10 gig is clearly happening. I mean, that's -- and I would say accelerating, which is good news, I think in general. With regard to the lumpiness, it's, I think, the same kind of issue with any type of infrastructure. You get a lot of infrastructure being deployed, and then you'll have a break and then more CapEx being put in place. And so it's tough to call it. The one thing I would say is that we have, on the PON business and the base station business in China, we are being a lot more conservative in how we forecast the demand. And so we won't be as aggressive going forward. We have learned also from that experience, I think.

Has anything changed -- particularly in 10G PON, has anything changed on the competitive front?

No, I think same set of competitors we're up against. There are some Asian competitors entering the marketplace. But I think they're more of the 2.5 gig and 1 gig space. 10 gig, we still feel that we have a very strong position.

And then maybe just another question on protection this time. I mean, you guys obviously have several structural growth drivers there that we see anyway for the foreseeable. But as automotive and industrial, those opportunities contribute more to mix over time as we move forward, is there -- could you maybe talk about the gross margin profile of that business today? And as those become a bigger piece of the mix, I mean, can we actually see the protection business kind of come up to maybe a corporate average type gross margin? Or any color you could give there?

Yes. I think -- so first of all, the consumer protection is definitely at the lower end of our gross margin range, and industrial protection is well above the high end actually, so -- but the volumes are smaller. But we do anticipate over the next few years that industrial is going to become a bigger percentage of the protection business versus -- relative to the consumer business. So that's the expectation. That's the strategy. That's why we're developing products that are targeted at different markets outside the smartphone space. But it just takes longer. The good news, as I said on my remarks, we've got good traction there, and I think there are some segments like the automotive segment where our protection products really fit well with the type of things that are going on in the vehicle, such as infotainment applications and high-speed connectivity applications within the vehicle that really do need our type of protection. So yes, I think it's going to play out nicely, and we expect the gross margins in the business to gradually increase.

And then just maybe one last question. On LoRa, I know you've talked about $80 million to $100 million is sort of the forecast for this year. I mean, this is obviously a big year for LoRa. Maybe could you walk us through a couple of milestones or what we should be watching this year to basically -- and I'm curious what has to happen to sort of hit the high end of that range, I guess?

Yes. Well, the key things -- so I kind of talked about a lot of the milestones we achieved for FY '18, and some of those, I think, are key milestones for FY '19 also, particularly the gateway deployments and then the number of end nodes. But I also mentioned we have over 1,000 POCs that are currently in play. And so it's now conversion of those POCs to real deployment. A proof of concept is essentially testing to see how the technology works, how to use case runs, are the customers ready to buy. And then once the POC converts to a natural use case in deployment, then we start to see revenues. And so conversion of those POCs is the key thing now. So we will spend time, every time we announce, we will talk about the number of gateways, the number of end nodes that are being employed and the conversion of POCs into real use cases.

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

Just had a quick question on LoRa. It sounds like that's run rating close to $20 million a quarter. Is there any seasonality in that business to be aware of? Or should we think that now that you guys at the endpoint [deployed], that the revenues could continue to accelerate sequentially?

Yes. We think it shouldn't have much seasonality. I would say, if there's going to be seasonality, it will probably be Q4-ish more because of Chinese New Year and some of those Christmas things and people just not spending the time to convert POCs into networks. So -- but I would say, in general, I wouldn't expect a lot of seasonality. Now there are some segments, LoRa is very broad, then some of the application spaces are consumer-ish, and others are more industrial-ish. But I think in general, I would say very little seasonality at this point in time expected.

Okay, got it. And then secondly, on the PON business. It sounds like you guys are becoming much more positive on that at least for FY '19. Exactly what changed in terms of the demand there? What kind of difference are we talking about in terms of percentage basis relative to your original expectations?

Well, for this fiscal year, for fiscal year '19 -- fiscal year '18 was a record year for our PON business. And then we had anticipated for fiscal year '19, the business to be flat to down, down 5% actually, maybe even more than that. And now we're anticipating for the year that we're expecting PON to be flat to up. I don't know how much up, but that's a significant change in direction. And as I said, it's mostly driven by confidence in China deployments increasing and the transition to 10-gig PON where we have a pretty unique position.

Your next question comes from the line of Tristan Gerra from Baird.

Questions on Comcast in relation to your LoRa revenue ramp. So the warrant shares that Comcast is getting are contingent on the infrastructure ramp and you've mentioned 5 cities ramping. So is it fair to assume that there is a seamless transition? My understanding is that the existing agreement with Comcast in terms of the warrant shares was ending sometime this coming quarter, that this contract would be renewed as they continue to add cities to the network?

So, Tristan, no, actually, I think I just need to correct what you said. The Comcast -- the vest on Comcast warrants is supposed to probably end about a year from now, in Q2 of fiscal year 2020. So it's not this current quarter, next quarter. We still have about a year and 3 months to go.

Okay. And then what happens next? Do they continue to ramp? Or is the expectation they're going to reach 30 cities by then? And perhaps if you could give us some color as how big Comcast is as a percent of your LoRa revenue currently?

So the goal, Tristan, is for them to -- at the end of that period to have deployed across 30 cities in North America. Of course, for Comcast the critical thing -- a critical element of this network rollout is to identify the use cases that can generate revenue for them and for them to establish a footprint in North America on IoT. And so we've given ourselves time, and they've given themselves time to roll out the network. And in some cases, in some cities, they may decide to do what we call dense networks, which are requiring more gateways and more coverage. And in others, they may decide to do less, depending on the use case and the demand. So that is the strategy in terms of how they're thinking about this. And what was the second part of your question, Tristan?

Yes. Just to kind of get a sense of how, what percentage of your total LoRa revenue is coming from Comcast currently?

Yes. Currently, we don't have any revenue coming from the Comcast business directly. Obviously, they're still rolling out the networks. And so the anticipation is once the networks are available, they will make that available to enterprises, to consumers and that will start to generate revenue for us.

Okay. And then you talked about your expectation of a 5G-related rebound later this year in base station. How do we quantify this? And how do you see that rebound medium term notably into calendar '19? Is this going to be fairly gradual? Or do you see a big initial ramp as carriers put MIMO-based 5G antennas? How should we look at this in terms of an inflection point over the next 1.5 years?

Yes. Well, I think I would say our expectations are very modest, Tristan, at least from our perspective. Our plan is that FY '19 will be a down year for base station business, and it will just start to pick up a little bit in Q4 of this year and then start to increase in FY '20. I will say that the feedback I'm hearing at the moment is that there's starting to be a little bit more confidence in the second of this fiscal year. Obviously, this week is Optical Fiber Conference, and so we're getting realtime feedback. And there is a little bit more confidence about the second half. But I don't think it's going to be massive, I think it's going to be modest this year.

Your next question comes from the line of Hamed Khorsand from BWS Financial.

Just a couple of questions. As far as LoRa is concerned, how fast are you seeing the rollout can go to actually end nodes, what carriers? Or is it all these gateways that you're guiding to about 200,000 for this fiscal year, is that all just still in development kind of phase?

Hamed, I think it's a combination of both. So the operators, the mobile operators, network operators typically are rolling out more macro gateways. And then when they roll out the macro gateways, which is the vast majority of the gateways this year, then they have connectivity and then they start to drive use cases, and then the end nodes get connected. But then there's a segment of the market which is more private networks, and those networks tend to deploy both macro and picocells. And they drive faster time to deployment of end nodes. And so there's tend to be enterprises and consumer type of applications, smaller -- small business type of applications, and that's moving fast as well. But I would say that once the operators are -- have networks deployed, like Comcast, then their ability to ramp up their connectivity is exponentially much faster than any other approach. And so that's what we're hoping now that Comcast is rolling out here in Orange in Europe and Tata in India and SoftBank. As they start to roll out their networks and make the use cases available, we'll start to see a lot more acceleration in the end node connectivity.

What percentage of the 58 carriers that are deploying LoRa are in that phase, in that Comcast-like phase right now?

Of the 50, I would say probably about 40 of them are in the kind of deployment phase. I would say half -- 5 to 6 are fully deployed and now driving use cases, and probably 4 are somewhere in between.

Okay. And my last question is on protection. We're seeing a little bit more traction on OLED side for smartphones. How much of that are you seeing come up as far as your protection revenues are concerned?

Yes. We are seeing more adoption of OLED, and that's beneficial to us. So that's a good thing. We just have to see how it plays out. Obviously, each smartphone manufacturer has their own transition to OLED, and some are using more for high-end phones and some less for medium end phones and things like that. But I think eventually, most of the market will move to OLED, that's our hope and our thinking as well.

Your next question comes from the line of Quinn Bolton from Needham & Company.

Well, I just wanted to come back to your milestones for LoRa in fiscal '19. I think you talked about gateways increasing from 70,000 plus to over 200,000, so nearly a tripling in gateways. But I think you said end user of ICs would go from 50 million to 80 million, so only about 60% growth. Is that just a lag effect that obviously you have to have the base stations before you see the endpoints? And I guess a second question is, if you are seeing that's the case, do you expect an acceleration in the endpoint devices as you look into calendar '19 and beyond?

Yes. So let me answer this way, Quinn. First of all, the 50 million units is a cumulative number. So it's what we've deployed over the last 4, 5 years. So the increase this year, we're expecting an additional 30 million units. That's quite a substantial increase. But remember, forecasting end node deployment is incredibly difficult because it depends on the use case. You can have one use case that could drive tens of millions of end nodes, right? So we are forecasting based on what we are hearing for that customer and the timing of when their proof of concept is transitioning over to full deployment. And that's why I was saying that's really difficult to call that timing. But we have over 1,000 POCs in running now, and we estimate a certain percentage of those are going to go to full deployment. And if they do in a timely fashion, then we'll see it in FY '19. If not, it will be FY '20.

Okay. Second question just many of us probably (inaudible) you talked about the single-lambda PAM platform. Can you just sort of talk to us where are you in terms of sampling both the 400-gig platform as well as the single-channel 100-gig platform beyond your lead customers?

100 gig is sampling now. I mean, we are obviously sampling and talking to customers about 100 gig both the MultiPhy platform and our own FiberEdge PMD products. On the 400 gig, we are tied to some strategic partnerships that we are executing on, and we won't talk openly about that until that's completed, and we have established how we want to communicate to the market. But I would say the one thing to be cautious of in this whole market is that really, it is a timing question of when the market is going to transition over to 100 gig and 400 gig and what that means for the industry. Our sense is that's still probably 1 year away, maybe even 1.5 years, 2 years away. But I think we're in pretty good shape in terms of delivering solutions to the customers.

Great. And then just last question for Emeka. It sounds like -- and I think Harsh picked up on this, you only need about 33% turns to hit the guidance, which I think is a better starting backlog than you might normally have. Wondering first, is that right? Is it a better starting backlog? If so, does that tend to be a seasonal pattern? Or are you just -- is that backlog better than normal?

Yes, it's a little bit of everything, Quinn. It's definitely a very nice starting backlog relative to where we have been in the last few quarters. There's also a certain amount of seasonality to it because typically as we've exited the fourth quarter going into the first quarter, our booking, especially in the optical business, has been very strong. And so we're seeing that effect again, but it is definitely a much nicer position to be in.

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

In closing, fiscal year 2018 was an exciting year for Semtech as we delivered a record financial performance. We are off to a solid start in FY '19, and we are expecting several of our product groups to again achieve record results in FY '19 and help advance the company along its path of getting to $1 billion in net revenues.

With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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