Semtech Corp (SMTC) 2019 Q3 法說會逐字稿

Good afternoon. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q3 FY '19 Semtech Corporation Evening's Release. (Operator Instructions) Thank you.

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

Okay. Thank you, Jessie, and welcome to Semtech's conference call to discuss our financial results for the third quarter of fiscal year 2019. 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 these risks and uncertainties, please review the safe harbor statement included in today's press release and in 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. A 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 Q3 fiscal 2019, net sales were $173.5 million, a 6% sequential increase and a 15% increase from the same period a year ago. In Q3, shipments into Asia represented 77% of net sales, North America represented 16% and Europe represented 7%. Total direct sales represented approximately 31%, and sales to distribution represented approximately 69%.

Our distribution business remains balanced, with 59% of the total POS coming from the high-end consumer and enterprise computing end markets and 41% of total POS coming from the industrial and communications end markets.

Q3 bookings softened from the record levels of the previous 2 quarters and resulted in a book-to-bill below 1. Turns bookings accounted for approximately 37% of shipments during the quarter.

Q3 GAAP gross margin came in as expected at 61.4%, and Q3 GAAP operating expense decreased 4% sequentially, mostly driven by a reduction in the fair value of contingent earnout obligations. In Q4, we expect our GAAP operating expense to increase between 7% to 10% due to the non-recurrence of the favorable one-time items in Q3.

In Q3, GAAP interest and other expense was $31.2 million compared to $1.7 million in Q2, reflecting the impairment of the investment in Multiphy. During the quarter, due to changing market expectations and changes in the competitive landscape, we concluded that the fair value of the equity in Multiphy did not support the book value. As a result, we wrote down the entire $30 million book value of the investment.

In Q3, GAAP tax benefit was 13.6%, driven by discrete benefits from transition taxes associated with the Tax Reform Act. For Q4 of 2019, we expect our GAAP tax provision to return to the normalized range of 19% to 23%. For modeling purposes, we expect our fiscal year 2020 tax rate to be in the same range.

Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related and other nonrecurring charges not tied to current operations. Note that as previously disclosed in our first quarter, we will no longer adjust net sales for the impact of the Comcast Warrant for any comparable historical periods presented. Instead, we have provided a separate disclosure of the impact of the Comcast Warrant on the financial statements in our Form 8-K filing and our press release.

Q3 fiscal 2019 non-GAAP gross margin increased 20 basis points sequentially to 61.7%, as expected, and we expect Q4 non-GAAP gross margin to increase by approximately 30 basis points to 62%, at the midpoint of our guidance, due to a more favorable product mix. In fiscal 2020, we expect our gross margin to remain stable with an upward bias, driven mostly by end-market mix.

Q3 non-GAAP operating expense increased 2% sequentially to $54.3 million, in line with expectations. In Q4, we expect our non-GAAP operating expense to decline between 2% and 6% due to lower compensation expense, partially offset by higher project spending. For modeling purposes, we expect our non-GAAP operating expenses to grow at approximately half the rate of revenue growth in fiscal year 2020.

In Q3, our non-GAAP tax rate was 16.5%, in line with expectations, and we expect our Q4 non-GAAP tax rate to be between 16% and 20%. We expect our fiscal year 2020 tax rate to be in the same range.

In Q3, cash flow from operations increased 94% from the same period a year ago to $52 million or 30% of net sales. Free cash flow was 28% of net sales, and in line with our upwardly revised target range of 25% to 30%. Our cash and investments was $312 million, and our debt balance was approximately $216 million, resulting in a net cash position of $96 million. We repurchased approximately $30 million of our stock during the quarter. Our stock repurchase authorization now stands at approximately $217 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down our debt.

In Q3, accounts receivable increased 7% sequentially, driven by higher net sales and represented 43 days of sales, which is within our target range of 40 to 45 days.

Net inventory in absolute dollar terms increased 4% sequentially, and days of inventory decreased by 8 days to 82 days, which is well below our target range of 90 to 100 days. In Q4, we expect net inventory to be slightly up in absolute dollars and days as we plan for the typical seasonal growth that we expect in the first half of fiscal year 2020.

In summary, despite the macro headwinds, our growth drivers remain robust, and the operating model is demonstrating the leverage that is expected to drive cash flow generation to record levels in fiscal 2019.

We believe our focus on execution positions us nicely to continue our record financial performance in fiscal year 2020. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2019 performance by end market and by product group and then provide our outlook for Q4 of fiscal year 2019.

In Q3 of fiscal year 2019, net revenues increased 6% over the prior quarter to represent a new quarterly record of $173.5 million, driven by growth from the IoT, data center and mobile markets. We posted non-GAAP gross margin of 61.7% and a record non-GAAP earnings per diluted share of $0.63. In Q3 of fiscal year 2019, net revenues from the industrial end market increased over the prior quarter and represented 30% of net revenues. The enterprise computing end market increased over the prior quarter and represented 30% of total net revenues. The high-end consumer end market increased over the prior quarter and represented 29% of total net revenues. Approximately 20% of high-end consumer net revenue was attributable to mobile devices and approximately 9% was attributable to other consumer systems. The communications end market also increased over the prior quarter and represented 11% of total net revenues.

I will now discuss the performance of each of our product groups. In Q3 of fiscal year 2019, net revenues from our Signal Integrity Product Group increased 2% over the prior quarter and represented 40% of total net revenues. Continued strength in data center and stronger demand from the base station market contributed to growth and a new quarterly revenue record. Our data center business continued its strength in Q3, led by demand for our industry-leading ClearEdge CDR platforms for 100-gig NRZ optical modules. These ClearEdge CDR platforms are used in high performance optical modules and active optical cables from 25-gigabit per second to 400-gigabit per second. This quarter, we will sample our recently announced Tri-Edge CDR platform for PAM4 interfaces. This new low-power and low-cost CDR platform is targeted at 200-gig and 400-gig PAM4 data center interconnects, which are expected to ramp in calendar year 2020. Our FiberEdge PMD platform, which is targeting 100-gig, 200-gig and 400-gig optical modules, is also sampling and also expected to ramp in calendar year 2020. Semtech continues to benefit from its leadership position in the optical connectivity market. We expect to sustain this leadership position as our new innovative optical platforms are well positioned in the fastest-growing segments of the data center market.

In Q3, our PON business declined sequentially following a strong Q2 performance. ZTE continues to recover and reestablish its position in the PON market, and we expect them to perform better in calendar year 2019. In addition, our leading 10-gig PON solutions for both the OLT and ONU are expected to grow as more PON deployments transition to higher bandwidth connectivity over the next few years. Our PON business continues to perform better than we had anticipated this year, and we still expect FY '19 to be a record year for our PON business.

In Q3 of fiscal year 2019, demand for our wireless base station solutions from both 4G and 5G systems increased. We continue to see support for 4G deployments and are pleased to see the early demand for 5G solutions. We expect 5G deployments to ramp throughout calendar year 2019 with high volume deployments taking place in calendar year 2020. Our current expectation is that 5G base station volumes will be significantly higher than 4G. Semtech's ClearEdge, Tri-Edge and FiberEdge solutions are well positioned to benefit from the 5G ramp as they offer best-in-class performance and power consumption for the rigorous demands of higher-speed 5G wireless connectivity.

For Q4 of fiscal year 2019, we expect net revenues from our Signal Integrity Product Group to be approximately flat.

Moving on to our Protection Product Group. In Q3 of fiscal year 2019, net revenues from our Protection Product Group increased 15% over the prior quarter and represented 31% of total net revenues. The strong growth in Q3 was driven by strength from the consumer and industrial segments. In Q3, demand for our protection products from our Korean, Chinese and North American smartphone customers all increased over the prior quarter. During the quarter, the consumer markets saw noticeable growth in the proliferation of USB 3.1 Type C and HDMI 2.0 protection across multiple end applications. In addition, our broad market protection business, which includes industrial, communications and automotive applications, grew nicely and achieved a new record. Our non-handheld protection business now represents approximately 45% of our total protection business. Semtech's advanced protection platforms address the most demanding system needs by providing robust protection for sensitive, advanced lithography devices with high-speed interfaces.

Longer term, we expect the diversification of our protection business to continue to drive a more balanced end market mix with lower handheld revenues offset by higher industrial and communications revenues, which should result in higher gross margins for our Protection Product Group in the future.

In Q4 of fiscal year 2019, we expect our Protection business to experience a stronger-than-seasonal decline as our smartphone customers are all experiencing a softer demand environment. In addition, we expect several of our largest handheld customers to reduce their inventory as is customary for their year-end activity.

Turning to our Wireless and Sensing Product Group. In Q3 of fiscal year 2019, net revenues from our Wireless and Sensing Product Group increased 4% sequentially and achieved a new quarterly revenue record and represented 29% of total net revenues. Our LoRa-enabled revenues increased over the prior quarter and once again achieved a new quarterly record. For FY '19, our LoRa-enabled revenues are currently tracking to the lower end of our $80 million to $100 million target range, which will represent approximately 90% year-on-year revenue growth. LoRa's rapid global acceptance as the best technology for low-power IoT networks and the increasing number of IoT use cases using LoRa is contributing to the record revenues. We expect this momentum to continue for the next few years as the LPWAN industry starts to transition from its embryonic state today to one of the largest segments within the IoT sector.

During Q3, we announced the beta release of our first cloud-based LoRa geolocation service. This is Semtech's first LoRa cloud microservice, and will be an important test for us to demonstrate our ability to monetize LoRa microservices in the future. Our commercial cloud-based geolocation service will be launched publicly in the second half of calendar year 2019 and will be followed with other microservices offerings. We believe our LoRa cloud geolocation service will further enhance LoRa's position in the IoT market by providing system developers the critical building blocks, tools and services needed to develop and quickly deliver compelling and more accurate LoRa-based geolocation solutions to the end customers.

Also in Q3 of FY '19, we announced a strategic partnership with Alibaba. At the recent Alibaba Cloud Computing Conference, Alibaba announced its goal to have every enterprise adopt LoRa technology, which should significantly expand the LoRa technology footprint in the China market. Initial target use cases include smart logistics and asset tracking, air quality monitoring, food safety compliance and public safety applications. In conjunction with the conference, Alibaba demonstrated the extensive capabilities of LoRa technology using the industry's first LoRa airship balloon, which connected sensors anywhere from 20 meters underground to 40,000 meters above ground. We expect more LoRa-related announcements from Alibaba, Tencent and other alliance members in the near future.

We also recently announced several real use cases and initiatives with our LoRa Alliance partners. These include the following. SK Telecom in Korea announced the availability of LiveCare, a LoRa-based biocapsule that allows the monitoring of animal health in real time. Sensoterra announced a LoRa-based real-time soil moisture measurement system for commercial farms with the goal of reducing water usage by 30%. Green Stream, an environmental technologies firm helping to build safer communities, used LoRa to develop its autonomous flood sensor system for use in monitoring water levels in coastal cities prone to floods. Apana, a technology company focused on smart water utility systems, incorporated LoRa technology into Costco's distribution centers and anticipate saving Costco millions in water usage costs. Kaifa Metering, a China-based IoT solution developer, incorporated LoRa technology into its smart utility metering products, enabling the optimization of energy usage resulting in significant cost savings. Hex Safety, a smartfire prevention company in Taiwan incorporated LoRa technology into its dynamic evacuation system, which helps people navigate through hazardous environments in real-time. These are just a few examples where LoRa technology is being used to deliver unique value in global use cases. We continue to see many new LoRa use cases emerging as the excitement around LoRa continues to grow. As a result, our pipeline of LoRa opportunities continues to exceed $400 million. We anticipate that our conversion rates will exceed 50% as these opportunities transition to design wins and then revenue. We also believe we are on track to achieve or beat the key LoRa milestones we established for FY '19. These include: one, the deployments of public LoRa line networks in 70 countries; two, the global deployment of 200,000 gateways, which include both macro and picocell gateways that will provide the capacity to support over 1 billion end nodes. We now believe we will end the year with at least 220,000 gateways deployed. And three, the deployment of over 80 million LoRa end nodes, which represents a 60% increase from approximately 50 million end nodes deployed at the end of the last fiscal year. We are very pleased with the progress of LoRa and believe we are well underway to establishing LoRa as the de facto standard for LPWAN connectivity.

In Q3 of fiscal year 2019, our proximity sensing business delivered near record revenues. Our proximity sensing platforms are benefiting from the increasing number of high-powered radios being integrated into handheld and wearable devices and increasing regulations on radio energy transmission. We expect our proximity sensing business to continue to grow over the next several years, driven by these 2 trends. In Q4 of fiscal year 2019, we expect net sales from our Wireless and Sensing Product Group to decrease slightly as lower seasonal demand from our proximity sensing business is expected to offset continued growth in our LoRa business.

Moving on to new products and design wins. In Q3 of fiscal year 2019, we released 21 new products and achieved 2,292 design wins. In Q3, we also achieved a record POS.

Now let me discuss our outlook for the fourth quarter of fiscal year 2019. Based on current bookings trends, normal seasonality, along with a softer smartphone demand environment, we are currently estimating Q4 net revenues to be between $155 million and $165 million. To obtain the midpoint of our guidance range or approximately $160 million, we needed net turn orders of approximately 42% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.53 and $0.57 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 Tore Svanberg with Stifel.

So more on -- first question, you talked about some weakness in smartphones. I was just wondering if you have any more visibility as to how long this weakness is. Does this feel like a 1-quarter inventory adjustment? Or do you have any visibility beyond that?

Tore, we only have, really, visibility for Q4, I would say. The thing that is noticeable is that it's across all regions, so we are seeing weakness in China smartphones, Korea smartphones, North America smartphones. So it's pretty much an industry-wide smartphone weakness, I would say. Typically, we do see Q4 as a softer quarter for smartphones and then we see a bounce back in Q1. Given that it's pretty global, I would probably suggest it's going to be a little bit longer time line before we see smartphone come back, but I'll be speculating.

That's very helpful. And as my follow-up question, you talked about LoRa cloudservices going into production second half of next calendar year. Could you maybe add some color on how material some of these contributions could be? Are we talking about minor? Or could this be some pretty big programs that you generate revenues in for the second half?

Yes, it's a little bit unknown, actually, to be honest with you, Tore. I think the key thing is that we want to prove the value of the cloud services in terms of getting accurate geolocation, the ability to use different technologies to create that accuracy, so LoRa plus other technologies. And then as we demonstrate that value, then it's a question of what are the use cases and how big they could be. As you know, we have an ambition to grow our LoRa business to $500 million then $1 billion, and my hope is certainly that our cloudservices business will contribute to that significantly, some 20%, 30% of those revenues. But that will take time. We're looking at about 5 years out from here.

Your next question comes from Craig Ellis with B. Riley FBR.

Mohan, I wanted to follow up on some of LoRa commentary. So nice to see that a lot of the metrics or really all of the metrics are on track for this year. But with regard to the funnel opportunity at $400 million, given what we're seeing on the macro, I'm wondering if you can help us just understand how some of the dynamics are playing out with the funnel. For example, have you seen any change in pacing with opportunities coming into the funnel? It seems like the conversion rate is still about as you'd expected, about 50% is that, so -- and as you see some of those funnel opportunities move into conversion, can you help us understand what some of the endpoint size ranges are? More classic analog or are some of these turning into, from what you can see, high runner opportunities?

Yes. So quick, first of all, I would say we haven't seen any real change. LoRa and LPWAN is relatively new. It's emerging industry. And so it's a lot of new use cases, a lot of new applications. And a lot of them are actually use cases that result in cost savings or efficiency improvements or optimization enhancements of energy, for example. So we -- I think and my sense is that regardless of the macro environment, the adoption of LoRa will continue to grow nicely. Having said that, I think there are definitely 2 camps. There's the camps of the kind of industrial applications, like metering and environmental and agriculture, that typically do take a longer time from opportunity to generating revenue. The nice thing about LoRa today is that we are starting to see use cases, such as Smart Home, tags, asset tracking, security, cold chain, that are more -- I would say, they're not consumer, but they're more consumer-ish in the sense that they could ramp the volume quite quickly, and they could generate volumes quite quickly. And again, these are fairly new use cases and fairly new applications of the new technology. So I wouldn't anticipate any loss of momentum given the current environment.

That's really helpful. I'll ask my next question to Emeka. Emeka, with regards to the gross margin outlook for the fiscal fourth quarter, very strong. Are there any special onetime items in there? And if it's just mix, what specifically is happening either on inter or intra-segment mix that's giving you some nice uplift in the quarter?

Craig, it's essentially what I said in my prepared remarks. It is the end-market mix. So if you look at the fourth quarter, we do have a lower mix of the handheld revenue, if you will, and as we go into the future years, we expect the continued growth from LoRa, now a core business, doing very well for us. And so the end-market mix definitely, when you look at it in terms of where we expect our growth, it's supposed to come from the higher gross margin businesses that we have.

That's helpful. And then my last question. I think there was a reference in the inventory commentary to building some inventory for the first half of the fiscal year. Can you help us understand to what extent is that just an expectation based on the historic seasonality of the business? Or is there order visibility or customer visibility that lends confidence that there can be more of a seasonal recovery off of what was clearly a cyclical dynamic that's impacting industry? I'm not looking for guidance, but just for any qualitative or quantitative color you can provide.

Yes. So our expectation, despite all the macro headwinds, everything that the industry is experiencing right now, is that we still expect to see some type of seasonal growth in the first half. Again, the issue is going to be how much, how strong is that growth going to be. So we have to prepare for that from our indications, from our channel partners, I think that will -- they're telling us as well is that they expect to see some level of rebound to the business in the first half. If you look at everything that we've talked about, the LoRa business that we expect to continue to grow, our optical business is usually very strong in the first half of the year, and there is nothing so far to indicate that, that shouldn't be the case. I think our confidence is very strong. Base station looks like is bouncing back. The data center business continues to be quite robust. So there is nothing despite the current environment that would suggest that we shouldn't see some uplift in the first half of the year.

Your next question comes from Harsh Kumar with Piper Jaffray.

Mohan, I think a quarter ago, in the last call, you had talked about the China data center opportunity. I'm curious how that may be developing with all that's going on politically.

Well, China, continues to be a good opportunity for us, and we continue to look for ways to partner and design in our products. We tend to -- as you know, all of our products are kind of high end, very high performance analog products. They're not easy to copy. They're not easy to replicate. So we've had Chinese competitors and other competitors trying to do the same thing for all of our product lines for a long time now. But we keep moving. As long as the market keeps moving, I think we'll be fine. And then the question becomes is how important are we to those customers. And I think in China, from a data center side, the midsized data centers, not so much the really big hyperscale data centers like Google, Amazon and Facebook, but more the midsized data centers, Alibaba, Tencent, Baidu. I think our products are a really good fit and timely. We have very good products that are available now to them. We have very good sales channel in the China region, so my sense is that it will continue to do quite nicely over the next few years.

And as my follow-up, Mohan, you mentioned LoRa did record in October and then again, you're looking for pretty good growth in January. Sounds like -- I'm curious how are your CDR products faring from October to the January time frame. Is that an area that you're expecting to see growth overall? Or is that something that's caught up in the softness part?

I think -- and so we're coming off a record quarter, remember, Harsh. So I think Q4, we're expecting it to be a similar type of quarter. But our CDR products are doing extremely well, I would say the 100-gig, more the higher bandwidth products. But as I mentioned, one of the nice things that even for -- as we see, base stations now are probably going to deploy some of the interfaces will require CDR functionality. Clearly, the higher bandwidth connectivity within the data center, more of those modules use CDR. So our CDR business continues to do quite nicely. There's some clear advantages we have with our technology in our view. And both our ClearEdge and Tri-Edge families, which I mentioned, which is sampling now the PAM4 products, we believe, will be very successful.

Your next question comes from Mitch Steves with RBC Capital Markets.

So I just wanted to start kind of on a high-level full year commentary. I realize you guys can't give specific guidance, but if I look at 2020, can you maybe guys help us in terms of is the growth rate going to be similar to what we saw in '19? Or should we take down the expectation given that the first half we've seen some consumer softness?

That's a question that's tough to answer at this point in time, Mitch, because we just haven't got any visibility into the next four quarters beyond Q4. I will say that we would expect LoRa obviously, to continue to do very well and grow in very good rates. As Emeka mentioned, our optical business, we'd expect that to continue to grow very nicely. I think PON, we had a record year this year given some of the dynamics there from ZTE going to be stronger next year and 10-gig ramping up. There's no reason why our PON business couldn't have a record year again. Base stations has been relatively weak this year, and as I mentioned, we're starting to see a little bit of pick up there. So maybe base station will do better next year. The unknown is really smartphones, the mobility sector and how that's going to play out. This year has not been a good year. And as I mentioned, with all regions of the world, all smartphones from all regions being relatively weak. It's difficult to call what next year is going to be. I would suggest it's probably going to be at best, probably flat from this year. And so that's the challenge. But if you factor that in, I still think that for Semtech at least, we've got so many author growth drivers that we should see a good growth here.

That's very helpful. And then secondly, just on the LoRa business. Historically, you guys have talked about these coming years, being FY '20, being similar growth rates. Since you guys are expecting to grow 90% this year, should we expect this kind of $80 million to grow 90% next year as well? Or has anything changed?

Nothing's changed. My expectation is it's going to grow very fast. It's going to grow very well. We have the opportunities, so we just have to convert the opportunities into revenues. I'll give probably guidance for FY '20 next year -- next quarter and give you an idea of where we think we'll end up. It's a dynamic market, things are changing. And as I mentioned, we got so many use cases that could move the needle quickly, but some of them are more industrial in nature and some of them are more consumer-ish. And so the key thing for us on our -- with our LoRa business is to continue to grow the deployment gateways, continue to grow the deployments of end nodes, continue to deploy the number of people covered and the countries covered and to continue to have the LoRa Alliance drive the LoRa technology across all the use cases in all these countries. And I think the revenues are just a result of all of that activity, which is all positive at the moment.

Perfect. And then just one small one, on the operating margin. Is it fair to assume that exiting '20, FY '20, you're margins will be up compared to this year? Is that a fair assumption given the mix changes?

I think that is a fair assumption given that we're expecting to continue to grow. We're expecting our gross margins to be flat to up. We're expecting operating expenses to grow at a very reasonable rate. And so if all those happen, then yes, the operating margin should expand.

Your next question comes from Cody Acree of Loop Capital.

Mohan, if we could just go back to the -- your comments about broader demand weakness. It sounds like that has been relegated just to wireless. Are you seeing any pressures in your other segments, whether they're tariff-related? And maybe how are you factoring that into your thinking?

Yes, I would say it's smartphones, for sure, Cody. And I would say the broader market. When you have half of the legacy business and our mature products being a little bit softer, that tells me that there's broad market weakness. But in parallel with that, we have areas of strength, and so that's kind of the way I would look at it. From a tariff standpoint, this -- from this -- at this moment, I don't think there's any real impact to us. I mean, there's a lot of nervousness, uncertainty, customers not sure about things and those type of uncertainties, which is there in any type of uncertain environment. But in terms of a direct impact, at this point, I don't think I can point to anything that's specific -- specifically impacting our business. That could change, but at this point in time, I think it's probably in the group of peers' high performance analog space that have limited impact.

And I guess just my follow-up just on that same thought, are you seeing -- or in your discussions with customers, are you seeing any change in their buying patterns, whether it be distributors or direct players, that are holding in? Or is business continuing as normal given the uncertainties that we're seeing?

At this point in time, I couldn't call -- I couldn't connect any type of behavioral change due to tariffs. I think if there is behavioral change, it's because of the uncertainty in the demand environment, uncertainty with the Christmas coming up and Chinese New Year coming up, and those type of things, end of year inventory. As I mentioned, smartphones across the board, all regions are fairly weak so I don't think that's really related to tariffs or anything like that. So yes, I couldn't point to any type of behavioral change due to tariffs at this point.

You're next question comes from Stan Gerra with Baird.

A quick follow-up question. You talked about a little bit softness in some of your legacy or mature products. Any color you could provide on the composition of those products and exposure as a percent of total revenue?

It's relatively small, the legacy side. Let me see if I can get you a number here. I would say probably in the order of 4% -- 4% to 6% -- 5% -- probably 6% down on the legacy side. [Does that answer your question?]

Is that a 5% of total revenue? Or is that the percent decline that you're seeing year-over-year?

So from an annual standpoint, I would say our legacy business is probably -- decline, probably it's going to be down about 18% this year.

It's about 9% of total revenues.

It's about 9% of total revenues.

Okay, great. That's very use of color. And then on the base station side, and sorry I missed the first few minutes of the call, are you able to tell us type of year-over-year growth you're seeing and whether you expect an acceleration of that growth next year from current level? I know base station was weak earlier this year, but if you could provide a little bit more color on that and the colors that you see.

Yes, so base station for the year will be down from last year, Tristan. And that's what we had anticipated. Actually, we had projected beginning of the year, base station will be down about 5% and that's kind of where we're expecting the year to end. Next year, we're expecting to start to see a pick up. And as I mentioned, it was driven by 5G, but we're also seeing 4G starting to pick up a little bit. So we'll get a little bit of visibility on that in Q4, and then I think probably in the first half of FY '20, we should start to see that pick up momentum.

Okay. And last question, was base station down year-over-year in the just reported quarter as well?

No, base station was up year-over-year.

Your next question comes from Hamed Khorsand with BWS Financial.

So first off, you said that LoRa is tracking towards the lower end of your $80 million to $100 million expectation. Is that driven by the customer? Or is that a service provider that didn't match up to your initial expectations on this goal?

No. I would say it's more just the transition of the opportunities to revenue. We have our opportunity pipeline convert -- kind of figuring out and forecasting exactly how that converts into revenue is difficult. If you go back 3 years ago, I projected the $80 million to $100 million 3 years ago, and now we're here to get to $80 million, I'm actually very pleased that we're at the lower end here and projecting -- and that's a 90% growth from last year. So I think it's a phenomenal growth, I don't think you should get hung up on the $80 million to $100 million, I think you should focus on what's going to happen next year and beyond with the momentum we have.

Okay. And then that was going to be my follow-up question, is that given that you're suggesting gateways are still growing at a pretty nice clip, is this -- are you pretty much reliant on service providers to push the end nodes higher for you? Is that what you're expecting to happen in calendar '19 to drive growth for LoRa?

Well, so remember, LoRa doesn't rely only on service operators, right? So the gateways can be private networks, enterprise networks, in addition to the global operators. So anyone who builds up a network and then provides end nodes or connects end nodes to those gateways will drive demand for us. So I think it's a combination, I mean, I don't think it's one way or the other. I think, in fact, we know of a fairly sizable deployment that's going on in Europe now. Quite a large number of gateways and I wouldn't call it an operator, it's more of an enterprise play.

Your next question comes from Scott Searle with ROTH Capital.

Hey, Mohan, just to revisit your comments earlier related to protection, I just wanted to clarify a couple of things, and then I had some follow-ups. I thought you indicated 45% of the protection mix was related to nonmobile, industrial, auto, et cetera, is that correct? And then also in terms of your comments in your outlook for fiscal '20, it sounds like modest expectations on the smartphone front but want to dissect that, is that purely for protection or you're throwing proximity into that mix? And your assumptions then related to nonmobile protection and how that looks for fiscal '20.

Yes. So our smartphone business consists of protection and proximity sensing. And so if you combine the 2, the 2 of them combined, it's about 21% of our total revenues. And so that's -- and those -- and that is impacted by the softness, both of them, the protection and the proximity sensing impacted by the softness in global smartphone sales. Now within protection, our protection business, handheld, which is mostly smartphone, is about 55% of the business, and about 45% is non-handheld. And so a significant impact on the protection business due to smartphones. The non-handheld piece, especially the ITA piece, which we call -- which is really industrial, telecom, automotive, is growing quite nicely. It, as I mentioned, had a record quarter, probably grow 20% annually and is the reason why the gross margins are also expanding. So that is kind of a summary, Scott.

Okay, great. Very helpful. And then just to revisit LoRa, you had some comments related to some geographic issues looking forward to calendar '19, really focused on better geographic coverage. I just wondered if you could provide a little bit of color in terms of what the geographic mix looks like today. I know China's been a big component. Does that continue? And really, from a geographic standpoint, in 2019, what is the most important area that we need to have more coverage? Is it North America, U.S.? Or is it Europe? You've had some big announcements there recently in terms of geographic coverage starting to roll out. What's going to be most important in terms of driving that growth in calendar '19 and beyond?

Yes. So there's really 2 aspects to this, Scott. One is the -- what price the revenue. I think we have enough coverage now. We have enough networks. We have enough gateways out there to generate enough use cases and drive enough end sensor connectivity to drive the revenue profile. But then the question is okay, what drives the billion-dollar plan, and that requires us to continue to have network deployment, both public and private, in all of the big regions of the world. And I would say that China is doing very well. North America is starting to catch up. Europe has been doing well, but it's fragmented. Some countries still we have to penetrate. And then we're starting to see now for the first time, I would say, other regions like India, South America, starting to get really knowledgeable on LoRa and deploy real use cases. And so that's, for me, I think one of the most important things for us to monitor over the next 12 months is how much traction we're getting in other regions of the world, like South America and India. But from a revenue standpoint, I think the momentum is already there. I don't think we need to focus on countries. I mean, we've got, I think, 70 countries now, or very close to 70 countries, and 100 network operators in those 70 countries. So to me, I think we have enough momentum there. Now it's a question of getting them connected, drive the use cases.

Your next question comes from Quinn Bolton with Needham & Company.

Mohan, just wanted to circle back to the LoRa business. It sounds like the pipeline continues to build. If anything, it sounds like your conversion rate, you now expect it to be over 50%, so both of those moving in the right direction. Is the -- should we be thinking about a roughly 2-year conversion period for that pipeline into revenue? Or is that where you see perhaps a bigger standard deviation or just greater volatility in terms of the timing of when that pipeline converts? And then I've got a follow-up.

Yes. I think 2 years is about the right time line, Quinn. I think -- I thought we're just using data, right? We look at the data, and that's what we see. There are some use cases, in my opinion, that can convert faster, 12 to 18 months, and there are others that will take 24 to 36 months. The more industrial use cases take a little bit longer. The more consumer-ish or industrial but high volume tend to be faster. We are going to see, as I mentioned, I think the beginnings of this year, starting with the CES show, starting to see use cases related to the home and use cases related to very high-volume tags and things like that. So that's going to happen in this calendar year, and I think that could really drive a different acceleration of the time to revenue, but we have to prove that.

Got it, great. And then the second question, with you guys writing down the book value of Multiphy, is that partnership effectively now dead? Or if not, can you give us an update on your kind of efforts in data center market to partner up with the PAM4 DSP providers for your FiberEdge family of products? Should we be thinking that you're still partner with Multiphy, you just wrote down the value of that investment or might you consider now partnering with other DSP providers with the FiberEdge family?

Well, the answer to that question is we will partner with other and we are partnering with other DSP providers, so we've never -- since the relationship has now gone in different paths. Multiphy is an independent company and driving its own strategy. We are an equity owner in the company. But from our standpoint, the reason why we decided not to continue with the investment and the acquisition was we felt that the architectural solution that we have is better and more suited for the next 3 to 5 years in terms of what we believe the 100-gig, 200-gig and 400-gig solutions are going to need in the market within the data center. So that was the reason, so yes, that was -- we don't really have any development plans with Multiphy at this point in time other than if they would choose -- like to use our components on their reference design, we'd be happy to help them.

Your next question comes from Harsh Kumar with Piper Jaffray.

Mohan, I was hoping you could help us out here. I went back and looked at the April seasonality given your comments about uptick in the first half. And in each of the last 2 years, there's one or the other segment that spikes up, but there wasn't any correlation from year to year. I'm curious based on what you see today which of the areas are you most optimistic about, just not the January quarter, but just about the first half? You don't have to give us numbers, but just where you might be more excited than other areas.

Well, I think I'll take each of the product lines. I mean SIP, the Signal Integrity Product Group, for us, we are excited to see the kind of reemergence of base station and some of the 5G momentum there. I think that's good, and that looks like it could be a good driver for us. The PON business, obviously, I mentioned, 10-gig PON deployments in ZTE, who had a very unusual year obviously, this year coming back, I think, is going to provide a little bit more momentum. So in general, I would say Signal Integrity continues to be one area. And then, of course, LoRa is obviously very exciting for us regardless of the time line you choose just because the momentum and the things that are going on there. So those are the key ones. Obviously, the smartphone area is strictly the core, as I mentioned, and I don't think we are really that concerned about it, to be honest with you. I think it's more a question of okay, if that doesn't materialize and come back, we get the other growth engines, what is it going to do for our margins and how is that going to help us. And that's kind of the focus we have at the moment just because there are so many unknowns around smartphone business, I think.

There are no further questions at this time.

Okay. In closing, we are very pleased with the record Q3 performance, led by growth from the IoT, data center and mobile markets. Our record revenue, record operating income, record earnings and record POS performance, along with our strong strategic positions in the IoT, data center and mobile segments, demonstrate that Semtech is uniquely positioned to outperform the market in FY '19 and in FY '20. In addition, LoRa's global adoption and momentum uniquely positions Semtech in the overall technology industry.

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.