Good evening. My name is Nicole, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 FY '16 Semtech Corporation earning release conference call. [Operator Instructions] Thank you. Sandy Harrison, you may begin your conference.

Thank you, Nicole, and welcome to Semtech's conference call to discuss our financial results for the fourth quarter and fiscal year 2016 that ended January 31, 2016. I'm Sandy Harrison, Director of Business Finance and Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter was issued after the market closed today, and is available on our website at www.semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release as well as the other risk factor section of our most recent periodic reports on Form 10-K filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only. Semtech undertakes no obligation to update the information in this call should facts or circumstances change. During the call, we may refer to pro forma or other financial measures that are not prepared in accordance with generally accepted accounting principles. A discussion of why the management team considers non-GAAP information useful, along with detailed reconciliations between GAAP and non-GAAP results are included in today's press release. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q4 fiscal 2016 we reported net sales of $118.6 million, which was at the upper end of our guidance range. These results represented an increase of 2% from the prior quarter and a decrease of 9% from the fourth quarter of fiscal 2015. Demand was high, again, in our enterprise computing and communication end-markets, as demand for our Passive Optical Network and wireless infrastructure solutions increased nicely. Demand for our industrial and high-end consumer end-markets declined in the quarter. Our Korean smartphone business remained very stable during the quarter, reinforcing our belief that the worst is behind us. Net sales for the full fiscal 2016 were $490.2 million, down approximately 12% from fiscal year 2015. The decrease was mainly attributable to the declines from our Korean handset customers and further declines from long-haul optical communications. In Q4, shipments into Asia represented 75% of revenue, North America was 17% and Europe was 8% of total revenue. Sales through distribution represented approximately 54% of revenue and direct sales represented approximately 46% of revenue. Bookings in Q4 increased significantly over the prior quarter, resulting in a book-to-bill well above 1. Sales bookings accounted for approximately 60% of shipments during the quarter. Gross margin on a GAAP basis for Q4 of fiscal 2016 was 58.6%, down 150 basis points sequentially due to a higher mix of lower-margin optical products and lower absorption from our continued inventory reduction efforts. In Q1 of fiscal 2017, we expect GAAP gross margin to increase slightly from improved manufacturing efficiencies and manufacturing cost reductions. Operating expense on a GAAP basis increased approximately 31% sequentially as expected. The increase was mainly driven by the $14 million benefit from the remeasurement of Triune Systems earnout liability in Q3 and higher supplemental compensation in Q4.…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2016 performance by end-market and by product group, discuss our fiscal year 2016 performance, and then provide our outlook for Q1 of fiscal year 2017. In Q4 of fiscal year 2016, we achieved net sales of $118.6 million, which was an increase of 2% from Q3 of fiscal year 2016 and a decrease of approximately 9% from Q4 fiscal year 2015. We experienced higher demand from our communications and enterprise computing end-markets, while demand from our high-end consumer and industrial end-markets declined from the prior quarter. For Q4 fiscal year 2016, we posted non-GAAP gross margin of 59% and non-GAAP diluted earnings per share of $0.17. In Q4 of fiscal year 2016, revenues from the enterprise computing end-market increased from the prior quarter and represented 32% of total revenues. The industrial end-market decreased from the prior quarter and represented 24% of total revenues. The high-end consumer end-market also decreased from the prior quarter and represented 23% of total revenues. Approximately 18% of high-end consumer revenues was attributable to handheld devices and approximately 5% was attributable to other consumer systems. Finally, revenues from the communications end-market increased from the prior quarter and represented 20% of total revenues. I will now discuss the performance of each of our product groups. In Q4 of fiscal year 2016, our Signal Integrity Product Group increased 11% sequentially, and represented 49% of total revenues. Stronger demand for our wireless base station and PON products contributed to higher communications and enterprise computing revenues. The industrial end-market declined, due to lower seasonal demand for our broadcast video products. Our Signal Integrity Product Group was particularly active with new product releases this quarter. Releasing a broad range of CDR platforms and physical media device platforms, targeted…

[Operator Instructions] Your first question comes from the line of Craig Ellis from B. Riley & Co.

Mohan, I want to start with a near-term question on one of the segments. Looks like Gennum is seeing very strong dynamics in its business. Can you talk a little bit about where you think we are with respect to the communications cycle? Is what you're seeing seasonal or is it really something that looks more secular to you than that?

So the communications, it's really the base station for us, the wireless base stations. As you know, Craig, last year it was a little bit of a softer year. There were some things going on in China that constraint demand I think. And so there is kind of pent-up demand that I think is going to be visible this calendar year. So I expect that to continue to be quite strong on the enterprise computing side, where we have PON and datacenter. I expect both of those also to be quite strong. And certainly in the first half of the year, we'll see how the second half plays out. But at least in the first half I think it's going to continue to be very strong.

And then the follow-up is on a segment basis, it's on power management. Within that you've got the wireless charging business. Is that going to be for Semtech classic analog business, where it's slow steady growth? And if so, when do we get to a level of revenue materiality or could it have attributes that look a little bit more like what LoRa is shaping up to be, where you've got more dramatic growth and driven more by secular dynamics?

I think it's difficult to say. Craig, I think there is two aspects to our business. One is more infrastructure. So getting the charging transmitters into automotive vehicles, into furniture, into industrial equipment, which is probably more likely to be the longer time to revenue aspect. But then we also have some penetration of some wearable devices and some other, I'll call, faster time to revenue segments that I think could drive good growth certainly in the second half of this year. The one thing about wireless charging is it's a new space. The adoption is clearly there. But it's when that acceleration occurs is difficult to call. But it's going to happen.

And then lastly and following-up on a press release comment, where I believe you indicated you expect to return to outgrowing the industry this year. Certainly, lots of precedent for that earlier this decade. But as you look at the specific drivers to that, Mohan, what are the things that are going to drive the excess growth in the model for Semtech in fiscal '17?

Well, so we'll start with our signal integrity products, we do think that all the areas in that business, specifically the base station we talked about, the PON products and the data center products are all fast-growing markets that are probably growing faster than the industry at the moment. And then we expect a little bit of a rebound in our video business, which had a poor year last year. That was mostly a timing thing. I think as I mentioned, there's a lot of kind of events coming up in the world that will drive more video. So signal integrity products, I expect to have a good year. Our wireless and sensing business, both the wireless component and the sensing component, the wireless driven by -- LoRa is doing very, very well and we expect that, as I mentioned, to double this year at least and our sensing business also to do quite well this year. And then we talked about protection for last year, the deterioration in the Protection Product Group because of a Korean smartphone issues. But I think our businesses are stabilized and now it's really a question of are the Korean smartphones going to come back. And that could [technical difficulty] I think we have enough going on in the broader protection business and that could see modest growth from last year. And then our power and high-rel business also, because of the wireless charging should do quite well.

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

Just to clarification, lot of strength in certain end-markets like coms and enterprise computing, but industrial looks like it went to 24% of sales from 27%. So is that broad macro issues or is that perhaps lumpiness in LoRa?

A little bit of both, Ian. I think Q4 industrial for us had a couple of infrastructural aspects to it that I think were not as a strong, it's more seasonal, I think, and then some macro in there. We are seeing some of the industrial coming back in Q1 though. So I would say it was a single quarter event.

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

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

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

We expect it to continue to grow. We are anticipating a little bit of a recovery in our Korean smartphone business also. But I think the China smartphones are going to continue to do well. They do protect most of their interfaces. And so that's the anticipation that at some point it will crossover.

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

I had a quick question. I don't have the benefit of being in front of a computer, but I know you guided OpEx down quite substantially. I'm trying to understand the longer-term goal here with respect to operating margins. What is it that you hope to get to by maybe the end of the year or next 18 or 24 months with this OpEx reduction?

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

Is there a goal that Semtech has in terms of operating margin that as a company you guys want to get to?

Yes, definitely. Operating margins, I think, has been the goal that we've had for several years that we've obtained before, but we have kind of gotten away from that expectation. Everything we are doing internally is to try to get back to 25% to 30% operating margin on a non-GAAP basis. We think probably we'll start to get into that range in the $150 million, $160 million a quarter kind of run rate, something like that. And I think we get that definitely as we start to see the rebound in the topline growth with all the growth drivers that we're talking about, with the fact that our gross margin is really staying very stable. I think as we get a topline growth, we should see an acceleration of earnings leverage.

And a question for Mohan. Mohan, somebody, earlier, I think Craig Ellis asked a question about the optical cycle in effect. I think 100-gig is just getting started. You guys announced something associated with the data center. Curious where you think we are in this innings for this optical 100-gig cycle? Are we very early? Are we at the midpoint? Are we towards the end? Just curious as a player where you think we are? And then secondly, if you could clarify what exactly the MultiPhy investment is and how it's structured and what it gets you in terms of an end product?

Yes. So let me start with the market. The 100-gig, it's still early. There are different elements to it. One is the 100-gig modules that are using quad 25-gig lanes and then single 100-gig. The MultiPhy announcement is all about the single 100-gig channel. So I'll come back to that, but the quad 25-gig is starting to take off. I think it's relatively small compared to the 10-gig and 25-gig, but it is obviously because of the smaller size. It's starting to grow and so it has a faster growth rate. I think it will be probably another two years before it's kind of at the same level though. So still ways to go. With regards to the 100-gig single lambda, which is why we announced the investment in MultiPhy. We announced essentially that we are going to enter the PAM4 space, single lambda 100-gig space. We don't have the DSP technology, so we made investment in MultiPhy. We're partnering with them. And essentially that's the game plan. So we have a portfolio of products all the way from 10-gig, 25-gig, single-channel CDRs and PMD devices and then we go up to the quad 25-gig and then we'll have a single lambda approach. And obviously, they are a startup company, but we've structured the deal, so that we have the right of first refusal if things go well.

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

So they are a chip company and an IT company, so essentially what we will do is we will provide these components to our customers. Our customers are building the modules, so we won't build modules. So we will take our physical media devices in a combined development program with MultiPhy to develop a single-chip DSP PAM4 component to those same module customers, that's the way it will work.

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

Corey Grady on for Rick. I have a question about your Korean smart phone OEM. Do you expect that customer to increase as a percent of sales this year? And how do you see the growth rate for them relative to the rest of the business?

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

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

Well, we are always looking for strategic assets that can help us accelerate our position in the markets we're in. I don't think we need to do much now to get to $1 billion. I think we're in pretty good shape with the market. SAM we've expanded in each of our product groups now. But if there's something that we feel could help us get there faster or is a really good added component to the diversified analog portfolio we have then we would look at it. And historically, we've done small and big.

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

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

Yes. So I think, Steve, if we look at 100 gig today, it's going to be quad 25 gig. So we look at it from the perspective of 10 and 25 gig channels. By far, the thing that's done very well for us is the PON business, which is a 10 gig and continues to do very well. And then on the base station side, most of that is 10 gig also, maybe going to 25 gig. The data center is where we probably expect the faster, higher bandwidth need and that's probably where the larger, the faster growing aspect of the 100 gig business will be. But that again will be quad 25 gig and then single-lambda of maybe by the end of the year.

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

So we won't do laser. So we'll stay away from that. We think that's where our customers add value, our module customers, and so we will help them with that, but we won't do that ourselves. And I think the only advantage really of the single-lambda is really cost, I mean that's the way, what happens as you drive the module cost down significantly and that enables manpower and that enables more density. And just a whole datacenters to kind of change the way we do things. But it's all about connectivity and high bandwidth connectivity. So I think there is a transition though and I think there is still a lot of barriers, I mean, optical barriers to overcome and things like that, but it's going to happen, it's just a question of time.

And I just in general, it seems like your book-to-bill sounds really good. Your inventory dropped a lot. What changed there? Is that that you guys specifically just you've been working on a bunch of stuff for a while. It seems like you've got a whole bunch of great products coming out right now. Is it just a whole bunch of uptick of that or is it also some broader macro improvement?

Well, I think it's a bit of both. I mean, we had a whole a lot of downtick, if we recall out. So it's time for us to have some uptick. But I think, yes, few things happening in the same time, but I do think the overall strength and demand is better than most have been anticipating.

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

I just had a quick question regarding your comment in the Q1 guide. You said you had basically 47% booked essentially. I just had a tough time understanding if that's from the computing side and the com side or if that's related to the Samsung [indiscernible] out there?

Usually, Mitch, what happens is in our business, the higher tons requirement is from the more consumer oriented businesses. So specifically protection, for example, typically has to turn more in the quarter than our communications or computing products, lead times, supply lead times are typically longer with some of those products. And so we now have the ability to book and ship in the same quarter. So we need the visibility earlier. So really the answer to your question is most of the turns we need are a combination of our Signal Integrity Product and our protection business, but most of it will be driven by protection.

And then secondly for the January quarter, you noted that essentially mix impacted gross margins a bit. Is that more because the industrial side has higher margins or is that just that the computing piece have lower margins at a relative basis?

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

And then just one last one to clarify. So you guys are guiding to essentially $48 million to $50 million as a OpEx run rate. So is that essentially for the April quarter, is it going to be right smack in the middle of the lane or are we going to see an increase throughout the year?

Like I said before, I think what we expect to see is that by the end of the year that the OpEx would have been somewhere between $48 million and $50 million. I think what would drive it to the higher end of that range will probably be that we'd continue to see the growth that we're seeing on the topline, which hopefully drops to the bottomline. So some of the expenses that you would expect to vary with higher revenues, may be things that were driving OpEx to the higher end of the $48 million to $50 million range.

And then so for April quarter that kind of implies, you're going to be slightly above or in the low 50s roughly?

No, I think for the April quarter, I feel when you have a chance to walk through the guidance, you will see that it's coming in around $50 million at the midpoint. And the key reason for that is typically at the start of the year, you do have some expenses that come on line like a higher work hours in the quarter, higher payroll taxes and all that stuff. But as we go through the rest of the year, we would expect to see the operating expenses coming down to a level as to average between $48 million to $50 million for year.

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

Emeka, could you maybe walkthrough some of the margin drivers through the year. You've got a lot of moving parts with a lot of growth from smaller products and maybe as you see those kick-in, how does that impact gross margins?

So Cody, as you know, most of our gross margin, the key driver there is really the mix of the products that we're shipping and the mix of the end-markets that we're shipping into. So right now, the two key things that are driving the gross margins into 59% to 60% range is our higher mix of some lower margin products within enterprise computing. But also in addition, so you can see from the financials, we've been bringing down our inventory. And so we are not able to fully absorb the manufacturing infrastructure that we have. So my expectation would be that as we go through the rest of the year where we get to where we start to review our inventory, especially if our demand continues to be as strong as we're seeing it right now, then I'll probably expect some benefit from higher absorptions to gross margin, maybe something in the range of about 50 basis points.

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

Yes. From a revenue standpoint, I would say the enterprise computing, the data center stuff, the elements that were part of the reason for the strong guide in Q1; data centers related to cloud computing and the wireless backhaul, base station, I think are definitely doing well; and the PON business for us, as more fiber gets deployed to the home around the world. I think those are three areas in the enterprise computing and communications spaces. And then in the consumer wearables and smartphones this year is a little bit of a question mark, but I think it could be for us still a good growth year given that last year was still a such a down year for us in that area. And then on the industrial, we are seeing a number of different areas, obviously tied to LoRa. The Internet of Things has many different aspects to it, including M2M and some of the smart grid applications and things like that. But that's starting to pick up quite nicely for us. And then broadcast video, we think we'll start to pick up this year. We had a bad year last year. And there's no reason why we shouldn't do better this year. So I could go on, there's a whole bunch of other areas, but I think those are the ones that I expect to see to have a revenue impact this year.

And then lastly on the PON side. A lot of this seems to be tied, and correct me if I'm wrong, seems to be tied to deployments in China and maybe the government's mandates of consumer connectivity. How long do you expect that to be a driver? Does that play out in '16? And I guess, what are your expectations for the length of that being a contributor?

It is mostly China and it is also other parts of Asia and also North America. And I do expect that it will continue to grow this year and next year. I mean a lot depends on what happens kind of in general, because the moment its 10-gig PON, there are talk and discussion about higher bandwidth PON, both for enterprise and for consumer. So it may surprise us and go on for quite a few years, at least for the next two years for sure.

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

And it's a follow-up on the protection business, Mohan. I think you mentioned that e-payments would be a further catalyst for protection there. The question is does that help sustain the level of content that you have now or when you're seeing protection be implemented along with e-payments, is that adding content for you, and if so, how much?

It really varies from phone-to-phone, Craig, and application-to-application, if it's a high-end smartphone or if it's a mid-range smartphone. But I would say the answer of the question is, yes, it does add more content. It's probably in the order of just $0.05 or something like that, because we have protection that's across the whole device. So we will have a number of devices in each of -- a number of protection devices in each of the system. So I would say, it's per application, I think it's quite small. It's about $0.05 I would say.

But it is incremental. And then the follow-up question is for Emeka. Emeka, there has been a number of very constructive changes in the business. You've got the emergence of at least three powerful growth drivers. Your customer concentration is significantly diminished. And you've got some businesses that are high margin that are growing. The question is, relative to the last few years, how would you advise investors to look at the seasonality of the business now, given its construct and as it evolves, beyond the current fiscal first quarter? How do you look at seasonality for the business 2Q through 4Q?

So Craig, I mean, this is something that we also are looking at because the business, as you mentioned, the profile of the business is broadly changed somewhat in the last year or two. But based on what we've seen, given the content of our revenues right now, and a lot of this coming from your data center, your wireless back hauler stuff. What we have seen, the seasonality, it looks like we are much stronger now in the first half in terms of percentage growth than we are in the second half. But we'll have to see how that plays out. I know, I think one of the things that we still have to see how it develops is, we do have a whole lot of new embryonic growth drivers that could somewhat impact the seasonality, the normal seasonality, but I think the way I look at it right now is that first half is going to be really strong for us and the second half maybe flattish or slightly up.

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

Mohan, question on the base station business. I think you mentioned, I think your exact words is, maybe there's some pent-up demand. I'm curious, if you see strength beyond the pent-up demand. In other words, do you see a normal cycle or do you think this is just like a pickup from what happened last year and then it sort of tapers off?

Well, I think the pent-up demand is more a comment on the fact that last year the shipments were not in line with demand, because of everybody was holding back, I mean China specifically was holding back on deploying. But I think that now is gone and we're starting to see the acceleration of that. But I would say that even last year, we were expecting it to grow and then we were expecting it to grow this year. So I don't think it's going to taper off. My sense is, is that is going to be quite strong. It's definitely going to be strong in the first half. We'll have to wait and see. Emeka just talked about the seasonality, about how the second half is going to look like. But I expect it to be a strong year for wireless base station.

There are no further questions at this time. End of Q&A

In closing, fiscal year 2016 had it challenges and we face that second sequential annual decline. However, this did not impact our strategic focus or continued investments in core analog mix signal platforms in fast growing market segments. We managed our operations prudently with strict OpEx control and maintained our non-GAAP gross margin at the high end of our 55% to 60% target range, and added key infrastructure components to enable us to scale effectively. I am confident that Semtech is strategically better positioned than at anytime in the history of the company. 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. You may now disconnect.