Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation's Q2 FY 2017 earnings release. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Sandy Harrison, Director of Business, Finance and Investor Relations, you may begin your conference.

Thank you Christine. Welcome to Semtech's conference call to discuss our financial results for the second quarter of fiscal year 2017, ended July 31, 2016. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter was issued after the market closed today and is available on our website at semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor Statement included in today's press release as well as other risk factors section of our most recent periodic reports on Form 10-K filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only. Semtech undertakes no obligation to update the information on this call should facts or circumstances change. During the call, we may refer to pro forma or other financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the management team considers non-GAAP information useful, along with detailed reconciliations between our GAAP and non-GAAP results are included in today's press release. I would also like to mention that Semtech will be participating at the Drexel Hamilton Telecom, Media and Technology Conference in New York City on September 7. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you Sandy. Good afternoon everyone. For Q2 fiscal 2017, net sales increased 4% from the prior quarter to $135.9 million, the third consecutive quarter of results above the midpoint of our guidance. In Q2, shipments into Asia represented 73% of total net sales, North America represented 19% and Europe represented 8%. Total net sales to distribution represented approximately 64% of revenue and direct sales represented approximately 36%. Bookings in Q2 decreased over the prior quarter's strong performance, but the book-to-bill remained above one. Turns bookings accounted for approximately 47% of shipments during the quarter. Gross margin on a GAAP basis for Q2 of fiscal 2017 was 60.2%, up 30 basis points sequentially, due mainly to favorable product mix. In Q3 of fiscal 2017, we expect GAAP gross margin to be down slightly from the prior quarter as we expect a higher mix of consumer revenue. Operating expense on a GAAP basis was approximately flat with the prior quarter, as expected. In Q3 of fiscal 2017, we expect our operating expense on a GAAP basis to decline approximately 41% reflecting the impact of the $26 million of gain from the divestiture of Snowbush. Excluding this gain, operating expense on a GAAP basis is expected slightly lower than the prior quarter. In Q2 our GAAP tax rate was 37% compared to 39% in Q1 as a result of evaluation reserves that we maintain against our U.S. based deferred tax assets. Our GAAP effective tax rate is subject to extreme volatility during periods when our U.S. operations experience significant pretax losses in relation to total income from continuing operations as they did in the first and second quarter of the fiscal year 2017. In Q3, we expect our GAAP tax rates to be approximately 20% as the gain from the Snowbush divestiture…

Thank you Emeka. Good afternoon everyone. I will discuss our Q2 fiscal year 2017 performance by end market and by product group and then provide our outlook for Q3 of fiscal year 2017. In Q2 of fiscal year 2017, we achieved net sales of $135.9 million, which was an increase of 4% from Q1 of fiscal year 2017 and an increase of 8% from Q2 of fiscal year 2016. We experienced higher demand from our high-end consumer and industrial end markets while demand from our enterprise computing and communication end markets declined from the prior quarter. For Q2 of fiscal year 2017, we posted non-GAAP gross margin of 60.4% and non-GAAP diluted earnings per share of $0.35. In Q2 of fiscal year 2017, net revenues from the industrial end market increased from the prior quarter and represented 27% of total net revenues. Revenue from the high-end consumer end market also increased from the prior quarter and represented 25% of total net revenues. Approximately 19% of the high-end consumer net revenues was attributable to handheld devices and approximately 6% was attributable to other consumer systems. The enterprise computing end market revenues decreased from the prior quarter and represented 30% of total net revenues while demand from the communications end market also decreased from the prior quarter and represented 17% of total net revenues. I will now discuss the performance of each of our product groups, beginning with our signal integrity product group. In Q2 of fiscal year 2017, our signal integrity product group declined from the prior quarter's record quarter performance and represented 47% of total net revenues. Net revenues from the industrial end market increased as our broadcast video products rebounded from a seasonally weak Q1. Net revenues from the enterprise computing and communications end markets declined sequentially as strong…

[Operator Instructions]. Your first question comes from the line of Cody Acree from Drexel Hamilton. Your line is open.

Thanks guys for taking my questions and congratulations on the progress. Mohan, can you maybe just go back and summarize a bit? Over the last couple of quarters, you have had data center that seemed to be pretty strong, you had quite a bit of volatility in comms infrastructure, your smartphones are coming up seasonally, but maybe if you can just go and look over the last couple of quarters and then maybe look into the third quarter and just kind of talk about the transition of some of the major drivers and what of these are seasonal and maybe what of this is driven by a bit of inventory volatility versus maybe underlying demand?

So let me start with that question. The inventory, I think the base station stuff and the PON stuff is very strong in Q1, weaker in Q2. We are guiding a little bit weaker in Q3. We expect that to come back in Q4 and still for both of those businesses do well on an annual basis. So that's more inventory seasonal related. I think if I look at the data center side, it's just mostly driven by, obviously the expansion of the data centers in the hyperscale, data centers driven by the cloud. This is kind of a big theme in the industry, obviously more people going into the cloud, more infrastructure being deployed, more data centers, more service, more connectivity and so that is clearly driving our optical business very nicely and I think that will continue. We don't anticipate any slowdown on that, especially because we have such a good position in the 100 gig space and increasing in the 400 gig space there. So that's the data center side. On the smartphone side, the story has always been, well, how well it is for us anyway. And historically, it's been how well is Samsung going to do with their new phones. Well, we have made an active, really actively tried to diversify the portfolio, as you know, the business, the customer base. And so we have, over the last year, done a pretty good job, I think, of penetrating the China smartphones. And so now we are benefiting both from Korea smartphone success, which is doing better than historically, at least in the last couple of years and I think the China business is also doing quite well. And then when we add to that the wireless and sensing business, the LoRa business is kind of on its own driven by IoT really a separate secular growth engine for us. And then the smart sensing, which is proximity sensing tied to smartphones are both doing very well and I think will continue. They are both early stage industries really for us. And so I think that's the way I would look at it. So we are anticipating this year to be a growth year obviously and then we see continued growth into next year.

And I guess, what's giving you confidence that the base station and PON business is likely to come back stronger in Q4?

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

And then lastly, you announced the geolocation capability for the LoRa nodes. At the Analyst Day, you talked about the potential for maybe some royalty agreements, some service fees associated with those. You said you were in early talks with some of those service providers. I guess, can you give us any update as to how those discussions have gone and maybe do you expect any revenues from those any time soon?

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

Perfect. Thanks guys and congrats on the progress.

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

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

Yes. So we said that this year, we are anticipating in the $30 million range, next year $50 million to $60 million and then following year $100 million. So to me, the numbers are the result of all the progress and one of the reason I had laid out some of the progress is that I think it's pretty good, it's globally good momentum on the networks being deployed. The public networks are being deployed. We have a lot of private companies going out and doing their own thing. And just the technology itself and then the LoRa Alliance, if you look at close to 400 members and some of these members being very, very large corporations, all committing themselves to LoRa deployment of some sort. I think the progress is very good. So we only see positive signs at the moment on LoRa.

Okay. Great. I appreciate that. And then on the PON, thanks for the clarity you have given so far, I think there's been some concern that maybe PON would slow post-2016. Latest chatter seems to be it's going to extend further than that. Do you have any color sort of two, three year time frame, just kind of, I don't know, it may not be a lot of growth, it could be a great cash cow type business. Any thoughts two, three year type time frame?

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

Okay. And finally, great progress on the [indiscernible]. Can you just talk a little bit about or an update on who you are getting a lot of wins with on Chinese side? And I apologize, I sneak one more in. I think the CapEx maybe is a little bit lower than expected this quarter? Maybe you have guided a little bit higher for the coming quarter? Is that the right way to think about it? And what's sort of driving the CapEx there? Thanks a lot.

Steve. Was the question you asked on smartphones or potential?

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

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

So Steve, with regards to your question on the CapEx. I think the key driver there is just the higher volumes. As we go forward, the expectation is that especially some of our newer products is that we are going to need a whole bunch of new handlers and sales staff. And also there is also this factor of where you actually receive the equipment that you place an order. So coming into Q2, I think we are expecting CapEx in the range of about $8 million and we didn't receive most of those. So we now expect to get them in the third quarter or the fourth quarter.

Okay. Great. Thanks a lot guys and congrats again.

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

Hi guys. Thanks for taking my question. I have two quick ones. So first, just given that there's been so much consolidation, I guess, in the semiconductor space and the analog space as a whole, how are you guys thinking about consolidation in the space and potentially driving shareholder value through integrating growth, say buying other companies either as an acquirer or as an acquiree as well?

Well, we have always been big believers in the fact that consolidation is necessary and driving growth through acquisitions is a key part of our toolkit. And that's why when we have transitioned the company over the last 10 years, we have been leading the charge here, moving from one or two product segments and one or two application segments to having a much broader range of technologies and platforms and markets and expanding the SAM. You don't expand the SAM unless you come out with new technologies and disrupt markets. And we have done that incredibly well, I think, with certainly LoRa and some of the things we have done, with Gennum acquisition on the signal integrity front. So that continues to be a tool that we use for growth. Having said that, we very much believe, as I mentioned at the Analyst Day, in strategic acquisition. We are not a company that -- we manage our OpEx very carefully. We manage our resources very carefully. There's not a lot of excess here. And so we try to make sure only to acquire a company or we partner with a company, it's really about strategic growth, one plus one equal 10 kind of thing.

Got it. Thank you. And then secondly, just in terms of revenue comment you guys have made. So looking at a recovery in Q3 and kind of growth in Q4, so does that imply kind of Q4 is above seasonal? Or how do I think about the seasonality in Q4 in general as well?

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

Got it. Thank you.

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

Yes. Hi. Thanks guys. Congratulations on great guide in the quarter. I had a couple of questions. Mohan, when I look at your guidance, most of your growth on the topline is coming from the protection and the wireless and sensing divisions. Can I ask you which one is driving the better part of the growth in the guide on topline?

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

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

So I think to get to the low end of that range, the 25%, we will probably need to be in the $150 million quarter run rate. And to get to the midpoint and the higher end, it's probably we need to be at about $175 million quarter run rate. The reason we feel good about being able to do that is, as you can see, our gross margins have been pretty stable and as we look at the next wave of revenue growth and where we have seen most of our strength from, there is nothing to indicate that we should be significantly below the gross margin that we are seeing currently. And then addition to that on the operating expense side, as Mohan did indicate, we have done a good job of managing OpEx. We have typically managed our OpEx to about half the rate of revenue growth but in the near term here, we are still, we are going to try to manage our operating expenses to lower than that rate. That is why we feel that to get to that low end of that range, we probably need to be at the $150 million a quarter run rate than to get towards higher end, is going to be about $175 million per quarter.

Okay. Fair enough. And Mohan, you talked a lot about some of the optical parts and pieces and then you talked about something more interesting, the 100 gig single-lambda piece. Correct me if I am wrong, I think you are hinting towards revenues next year. Can you tell us what the time line to get there? In other words are you sampling with this product now? What's the level of interest? And then what time frame next year can we expect some kind revenue from this product?

So the single-lambda 100 gig product will start to sample early next year, Harsh. So it's still early for that, but with our partnership with MultiPhy, as we have announced previously, the beauty though for us is that we have a very strong position with that quad 25 gig modules and 25 gig CDRs on 100 gig modules and it's the same customer base essentially that will move over to 100 gig single-lambda. And then we have, I mentioned two very important strategic wins we have in Tier 1 OEMs that are really for the 400 gig and 100 gig. Again, it will be mid to end of next year before revenue, I think, starts to kick in and really the following year is when we start to see the bigger revenue. So on the PAM4 stuff, I don't think revenue is going to be significant driver for next year.

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

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

Okay. Thanks guys. Yes. Sorry. Go ahead.

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

Nice. Great. Thanks. That's it. Congratulations guys.

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

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

Pretty good. You have to look into the details of the whole business unit. Again as we explained this at the Analyst Day that while we are successful in smartphones and continued to be, it's because of the form factors that we have. We have such a good advantage there and the performance of our platforms. But that doesn't mean we are not getting wins in automotive, in industrial, in computing and a whole range of different segments. We are. We are doing well in other segments. They just don't grow as fast or quickly. And so I think we will continue to make sure that we put the emphasis on the diversification aspect for this business. It's certainly important for us. We just can't control and we have no control over how well Samsung does in one quarter and how well the Chinese do in one quarter. But I think if we can continue to diversify the business, I think it's a very healthy growth business for us.

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

Yes. Definitely. I think it starts with LoRa really helped, as I mentioned, I think that's probably the biggest one for us in terms of SAM expansion and it is going very well. The IoT space is there, it's real. We see customers deploying smart applications and generating revenue from it. It is small today but it's growing very fast and we all know about the number of nodes that are projected out there. So certainly LoRa is meeting all of the expectations at the moment. I think on the signal integrity side, data centers we know about, the hyperscale, cloud drive and what's going on there. And then the PON, as I mentioned, I think it will continue to expand and I think the base stations as well just because there's more bandwidth required and you have to get more data through the pipes. So it has to come from somewhere. On the wireless charging side, it's a little bit early. We are expecting that market to be big but I think it's still a little bit early on the power side there. And then on protection, as I mentioned, I think we expect as lithographies continue to get more advanced, that there will be more demand for our protection. Electronic systems need to be robust. They need to be high quality and if you don't have good protection when you have advanced lithography devices in your system, you are likely going to have some type of failures and I think we view that as a major megatrend as we talked about at the Analyst Day.

Thanks guys.

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

Thanks guys. And I will add my congratulations as well. A quick follow up on the 100G question. I am curious what your split is now between 10G and 100G? And maybe a point of clarification, just is your dollar content higher in 100G or is it just that attach is so much higher with you guys with 100G?

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

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

Do we get to like 100% kind of attach when we are talking 100 gig? Is that kind of what you are talking about? Or?

I think every 100 gig port today is using CDR of some sort. Yes.

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

So Rick, I think that business today is probably 3% to 5%. It's too small, as you mentioned. But I think it is also an area of opportunity for us as we continue to think about ramp-up of the wireless charging systems. I think the automotives space is definitely a very attractive space for that. Even with protection business, particularly in our broad reach systems in vehicles is also one of the areas that we are really looking for when we talk about diversification of our protection and auto space is definitely an attractive space for us. So it is pretty small today but we do believe that over the years, it is going to probably become a sizable business for us, probably in the neighborhood of about 10%.

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

Right. Well, great. Thanks guys.

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

Okay. In closing, our focus on high growth markets such as cloud and hyperscale data centers, optical connectivity and IoT has contributed to a strong performance in the first half of FY 2017. We remain focused on making strategic investments in platforms targeted at fast growing markets while maintaining our discipline on operational efficiencies which should help leverage earnings growth as our revenues grow. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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