Good afternoon. My name is Mandy and I will be your conference operator for today. At this time, I would like to welcome everyone to the Semtech Corporation Quarter One FY ‘18 Earnings Release Conference Call. [Operator Instructions] Thank you. Sandy Harrison, you may begin your conference.

Thank you, operator and welcome to Semtech’s conference call to discuss our financial results for the first quarter of fiscal year 2018. Speakers for today’s call will be Mohan Maheswaran, Semtech’s President and Chief Executive Officer and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market 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 the other Risk Factors section of our most recent periodic reports filed with Securities and Exchange Commission. As a reminder, comments made on today’s call are current as of today only and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today’s press release. All references to financial results in Mohan’s and Emeka’s formal presentations on this call refer to non-GAAP measures, unless otherwise noted. With that, I will turn the call over to Semtech’s Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q1 of fiscal 2018, GAAP net sales were $143.8 million, an increase of 3% sequentially and 10% year-over-year. Q1 GAAP net sales included $5.3 million expense for the Comcast warrant. Q1 GAAP gross margin decreased 60 basis points sequentially to 59% as the benefit of a more favorable product mix was offset by the impact of the higher sequential Comcast warrant expense. Q1 GAAP operating expense decreased approximately 2% sequentially due mainly to the timing of expenses. Q1 GAAP tax rate was 24.1% compared to 27.1% in Q4. For fiscal 2018, we expect our GAAP tax rate to be in the 22% to 26% range. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition or disposition-related and other non-recurring charges not tied to current operations. Q1 of fiscal 2018 net sales were $149.1 million, a 5% sequential increase on 14% increase year-over-year and represented a sixth consecutive quarter of results above the midpoint of our guidance. In Q1, shipments into Asia represented 75% of total net sales, North America was 18% and Europe was 7%. The total sales to distribution represented approximately 64%, and the net sales represented approximately 36%. Q1 bookings again increased sequentially and year-over-year and resulted in a book-to-bill firmly above 1. Those bookings accounted for approximately 41% of shipments during the quarter. Q1 fiscal 2018 non-GAAP gross margin was 60.9%, an increase of 40 basis points sequentially due to more favorable mix of products. We expect our Q2 fiscal 2018 non-GAAP gross margin to be flattish to slightly higher sequentially. As a reminder, during our last call, we increased our non-GAAP gross margin target range to 58% to 63% versus our prior range of 55% to 60%. We expect much…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2018 performance by end market and by product group and then provide our outlook for Q2 of fiscal year 2018. In Q1 of fiscal year 2018, we achieved non-GAAP net revenues of $149.1 million, an increase of 5% sequentially and 14% over the same period a year ago. We posted non-GAAP gross margin of 60.9% and non-GAAP earnings per diluted share of $0.44. In Q1 of fiscal year 2018, demand from the enterprise computing market increased over the prior quarter and represented 34% of total net revenues. Demand from the high-end consumer market also increased from the prior quarter and represented 29% of total net revenues. Approximately 23% of high-end consumer net revenues was attributable to handheld devices and approximately 6% was attributable to other consumer systems. Demand from the industrial and communications markets declined over the prior quarter and represented 23% and 14% of total net revenues, respectively. I will now discuss the performance of each of our product groups, beginning with our Signal Integrity Product Group. In Q1 of fiscal year 2018, net revenues from our Signal Integrity Product Group increased 5% sequentially, and represented 46% of total net revenues. Demand from the enterprise computing market increased sequentially. Our 100-gigabit per second ClearEdge platforms achieved a new quarterly revenue record, driven by demand from the cloud and hyperscale data center markets. Our 10-gigabit per second PON platforms also achieved a new quarterly revenue record, driven by fiber to the home and enterprise deployments mostly in China. We expect the demand from these segments to continue to increase throughout this fiscal year. Our Signal Integrity Product Group is a leading provider of clock data recovery circuits, or CDRs, and physical media devices, or PMDs, used in…

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

Hi, guys. Thanks for taking my questions and congratulations on the continued progress. Mohan, maybe if you could talk a bit more about the Chinese OEM weakness, what kind of visibility do you have to that recovery? And was it seasonality or inventory excesses, I guess, what do you contribute that to?

Well, the only Chinese weakness we see is in the base station side, mostly. I think it just hasn’t come back. It’s not growing as fast as we’d like it to grow. But I don’t think it’s weak so much as it’s just we haven’t seen any indications that it’s going to grow anytime soon. But that I think is the only area in the infrastructure side that we see the weakness. The PON side, specifically the 10-gig PON, seems to be doing quite well. I would say the low bandwidth PON is kind of slow, but that would be I think all we see. And then on the smartphone side, the China smartphone customers were definitely weaker in Q1. We anticipate probably that will start strengthen at the end of Q2. And then second half, probably, they will be a little bit stronger, but that’s on the smartphone side.

And thank you for that. Emeka, with that broad range of gross margin guidance that you have given, but obviously, a lot of things trending towards the upper end of that, I guess, what kind of scenario would you envision that could put you back into that lower end given what you are seeing in your demand mix trends?

Well, I think, Cody, our gross margin story just continues to remain very simple. It’s mostly driven by the mix of revenues. Our enterprise computing, our industrial and communications revenues do come with much higher gross margins than the high-end consumer. So if at anytime we see a much bigger mix of high-end consumer revenue that could move us more to the lower end. But having said that, what we’re anticipating is that the current mix of businesses that we have now and the end markets that we have right now allows us to stay at the current level, 60% to 61% gross margin, if you will. Then what we expect in the next year to 18 months is that we’ll start to see more revenue contribution from the industrial and the automobile sections for our protection group of products and that we’ll start to see more revenue contributions for our power management from the industrial and our communications end markets as well. So that actually would allow us to continue to move our gross margins forward. We think those are the drivers that would take us about 61% to 62%. And like I said during the call, during my prepared remarks, when we start seeing a significant contribution from LoRa IP and the geolocation revenue, that is actually what takes us to the 62% to 63% gross margin range.

Perfect. Thank you for that. And then lastly, if you just have any comments about the expectations for seasonality for the second half of the year?

Well, that’s tough to call, Cody, at the moment. We are anticipating a strong year. Certainly, our guidance for Q2 suggests a strong Q2. And currently, our thoughts are that the second half is going to be reasonably strong as well. And as we talked about our record year, it kind of indicates that Q3 is probably going to be fairly strong. And then Q4 is too far out to call I think, but seasonally, that’s typically down. But it’s a question of how far down, right?

Alright. Thank you, guys. Congrats.

Thank you.

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

Congratulations, Mohan, Emeka, Sandy. Very good job on execution. I had a couple of questions. Emeka, if I can ask you, every now and then I see these payments to Comcast. I was curious, are they annual or are they goal-based? Could you maybe clarify when we can expect them? And also, how many cities are the gateways by Comcast rolled out in the U.S.?

So, Harsh, yes, this is the expenses that are tied to the warrants that we give to Comcast as they are getting with trying to rollout LoRa platforms across the U.S. The expense is recognized on a quarterly basis and is actually really driven by the amount of work that they have actually done. There are various milestones that are included in the agreement. And based on how much of the milestones they have actually achieved, then that’s how we recognize expenses. So every quarter, there are two things that would drive the amount of the expense. It is the amount of work done and also any change in stock price. So it’s an expense that is recorded every quarter. We anticipate that we are going to be doing this all of fiscal 2018 and 2019. Our expectation for fiscal 2018, based on the agreement and the milestones, is that we are probably going to pickup a total of about $20 million of expense that is related to this Comcast warrant. I think so far, based on the Q1 results and what we have guided to in Q2, we have already recorded $8 million. The expectation is that the remaining amounts which is about $12 million is going to be mostly back end-loaded based on where we expect the milestones to be achieved.

Understood. Thank you, Emeka. And how many cities has this rolled out in yet?

So Harsh, the trials are currently going on in Philadelphia, San Francisco Chicago. And then, assuming those trials go well, then they will roll out into additional 10 cities. And then follow on from then, 10 more, and then end up with 30 cities was the commitment that they made to us.

Understood. Mohan, if I can ask you one more, the data center piece, how large is that bucket? I know you don’t break it out quite like that, but I was curious, is it greater than 10%, mid-teens, or whatever you can throw at me in terms of color? And then also, what is the growth rate that you are seeing in that bucket, if you had a – if I had to make you guess that number?

Well, it’s about mid-teens, Harsh. You are right, we don’t break it out. And we do have various contributors, several of our businesses contributing into that business area. But the fastest growing is, by far, our ClearEdge CDR platforms, which are really doing very well. The quad CDRs in the data center applications, and that is growing. Last year, it was 100%, over 100% growth I think. And this year, it’s going to grow double – very high-end double digits, I think probably in the 20%, 30% kind of growth.

Okay, understood. And I was surprised to see the wireless charging maybe was down – I know it’s not a big part of your business, but I was surprised to see it was down in the April quarter. Any specific reason for that, Mohan? Or was it just the way things shook out?

Yes. The whole power and high-rel business, so it wasn’t just the wireless charging piece of it, I think was more seasonal Harsh. I think some of our power business is more kind of core legacy kind of power business, so tied to the PC market and some of that stuff, the areas that are growing, other wireless charging, the Neo-Iso areas. And so I think it’s nothing to be concerned about. My sense is that it’s going to come back again in Q2.

Got it. And last one, Mohan, when I look at your company, I see several areas that are just in hyper growth such as LoRa and then maybe even the data center piece and several others that are coming back. How should I think of the correct growth rate of your company? I know that you – historically, you said it’s GDP plus something. And then I think the latest take was maybe closer to high single digits. But when I look at these kind of growth sectors’ stable economy, what I should be thinking of as a correct growth rate, more appropriate growth rate for the company?

Well, we have always said, Harsh, the plan has always been, we take industry, plus or minus – plus 3% growth, and that’s kind of what we will target. Obviously, with things going the way they are, we should achieve a record year this year and grow and outperform the industry again, which is good. Certainly, we rely on the data center, Hyperscale and the cloud growth, the mobile market, to continue to do well and then, of course, the IoT space, the 3 key areas of end market growth for us. And that’s what we focus on. And as long as those markets do well, then we should have a very strong year.

Congrats guys.

Thank you.

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

Hi, guys. Thanks for taking my question. So I wanted to kind of turn to Signal Integrity and just talk like kind of the optical side of the business. Can you maybe give us an update? I know you guys said that optical is about 80% of that segment. So what kind of trends are you guys seeing? And how do you think it shakes out for the rest of the year?

Yes. The optical business is doing very well. Our optical business is mostly on the data center side, but we also have, obviously, the 10-gig GPON, which I mentioned is doing very well as well. The base station, not so well, as I mentioned. So I think we expect the data center side to continue to do quite well for the rest of the year. And our expectation is 10-gig PON as well is going to continue to do quite well for the rest of the year. So we are expecting and anticipate the optical business to continue to have a very strong year.

Got it. And then secondly, just kind of circling back into warrants and LoRa, so is that $5 million number essentially all LoRa? And then, are you guys still on track or expected to beat that $100 million target you had out in ‘18 or so?

Well, I will take that question first, and then Emeka can talk about the Comcast warrants. We had set up a path to achieve $100 million of revenues from LoRa. Last couple of years, we have done very well. We grew our LoRa business quite nicely. And last year, we were in the $30 million to $40 million range. This year, we are expecting to be in the $50 million to – $40 million to $50 million range, I think. And next year, hopefully, in the $80 million to $100 million range, which is kind of the goal. The momentum is going very nicely. Obviously, I mentioned, lots more gateways out there, lots more connectivity to those gateways and then lots more use cases. So it’s going, I think, really better than we had anticipated. The growth vector at the moment, it’s also very global. We have over 50 to 60 countries now rolling out LoRa networks. And the Comcast initiative was a very important initiative, which we obviously announced last year, but it’s starting to do quite well for us from the standpoint of the North America market where we do need the connectivity. And so Comcast is a key partner for us there. And so that’s why that’s important. But Emeka, do you want...

Yes. So Steve, the $5 million is entirely due to the Comcast warrant, which is all for the deployment of LoRa in North America.

Perfect. Thank you.

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

I thanks for taking the question and congratulations on the execution. Mohan, I wanted to follow up on a couple of prepared comments and just really focus on some of the longer-term items. So one, with respect to Signal Integrity, you mentioned that you have the opportunity to double your SAM over the next few years. Can you just lay out some of the milestones to SAM expansion of that magnitude?

Yes. It’s really driven by the use of CDRs in high-speed connectivity. When you look at the 10-gig systems, there’s just a lower percentage of CDRs being used. And as you go to 100-gig, the number of CDRs being used, because of the Signal Integrity issues, just increases dramatically. So Signal Integrity just generally becomes a much bigger problem in higher bandwidths. And that’s really the primary reason why the SAM grows, in addition to the fact that the markets are growing quite nicely. And then we are also bringing out new products that are – we haven’t really had in some of these spaces before. So as I mentioned, our first real play in 100-gig, 400-gig PMD products with our TIAs and drivers, these are the first PAM4 products that we have done on the PMD side, so that’s also going to expand our SAM. So the combination of those 3 factors is really what’s driving the SAM expansion.

That’s helpful. And then secondly, with respect to the Protection business, it sounds like the large Korean customer maybe taking protection to parts of the portfolio that they hadn’t, at least last year – I don’t know if we can go back further than that. But are you seeing that there’s broader adoption with that customer? And if so, what does that mean for what you would expect to see with other customers, given their leading edge process technology?

Yes. And so that’s exactly right, Craig, that’s what’s happening. And I think quality has become a very key factor in the smartphone space, quality and robustness and making sure that phones are not returned. And so obviously, protection plays a key role in that. And then, you go to advanced lithographies and they become more sensitive. And so we feel really good about where we are not only with our Korean customers but also our China customers, and other smartphone customers around the world are all starting to recognize, I think the value of having robust protection in their systems.

Lastly, one perhaps for Emeka. With regards to the turns required to meet guidance, I think it was low 30s, 31%, 33%, something like that, that strikes me as a bit lower than normal with more normalized being in the low 40s. Am I correct on that or am I reading that incorrectly?

Yes, I think you are correct. In Q1, the turns achieved, was 41%. And what we need to meet, the midpoint of our guidance, is 33% or so as you indicated, right. But I think that is more due to the fact that we came into the quarter with a very strong backlog, so we don’t need as much turns.

Yes. 31% is the number that – of turns we need for this quarter to meet the midpoint of the guidance, Craig.

Great. Thanks, guys.

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

Hi, good afternoon. Given the decline in your industrial business in the quarter, which was a little bit in contrast with some key areas, is it fair to assume that the decline was driven by the power and high-reliability product, given that industrial was up in the production group? And maybe a little bit more color as to how do you expect that end market to trend in the next quarter and for the rest of the year for you?

Yes. So industrial is doing well for us in general and I think will continue to do quite well, mostly because of IoT, LoRa business is growing and then some other areas. I would just – I would say that in Q1, it was just overall kind of a number of different things. Our video business was slightly down, I think general industrial and power and high-rel, as you already point out, but we are expecting the rest of the year to be pretty robust on the industrial side.

Great. And then, obviously, very good traction in your LoRa business and certainly the positive commentary is echoed by what we are hearing in the channel. How do you look at the initial 5G ecosystem rising in a few years in terms of the LoRa dynamics? Does that change anything in customer strategies using an existing network or it doesn’t matter because the power consumption is much higher? So, if you could just provide some more long-term color on those evolving standards?

Yes. So we believe that they will coexist. The low-power wide area network and any LTE or NB-IoT or 5G kind of cellular infrastructure will coexist. And the reason is very simple we think they are the two very different spaces. One requires very low-power, very low cost kind of infrastructure and connectivity and the other one needs more high bandwidth. And then so LoRa has a place today. And what we are finding is many IoT used cases are totally new used cases. They are just new applications that you cannot use existing kind of approaches, because they don’t make economic sense or they just don’t have the power, the low power required. So we are quite confident and that’s one of the reasons why if we look internationally and look at the different regions of the world that are using LoRa and have started to adopt it, it’s got some very powerful kind of momentum. And these are with – also with companies that will also rollout communications and telecommunication infrastructure. So, I think the market is there, going to be big enough to accommodate multiple different approaches.

Great. Thank you.

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

Hi. This is Josh Buchalter on behalf of Rick. Congrats on the results and thank you for taking my question. I just wanted to dig on the China handset commentary a little more. We have seen some other guys in the space mention a sharp snapback in the second quarter. And would you describe it as more of an inventory issue or is it end demand not picking up until the end of your second quarter?

I would say it’s more that China has had a very strong ramp up in smartphones and is now stabilizing, so their share in the market, the global markets is kind of stabilizing. So they are just trying to figure out what is their real demand. And so I think it’s more of just of a Q2 phenomenon and probably we will start, in the second half, to see China picking backup again.

Okay, thank you. And then I wanted to dig a little on the protection business. I can understand conceptually how moving to advanced lithographies requires more protection, but are there any metrics or either attach rates or ASPs you can give us as we move further down process nodes, like similar to CDR?

Well, it’s difficult because every advanced chip is different and every system is different. But the point to make is that when you have advanced lithographies and the transistor sizes really don’t allow – the chip doesn’t really enable you to put on-chip protection, you need to have it off-chip. So almost every line that’s coming – every signal line that’s coming into the advanced chips will have to be protected outside in some shape or form. And that problem only gets worse as you go to 10-nanometer and 7-nanometer and beyond. And if you don’t protect them, then there is a good chance that your system will fail.

Thank you. It’s very helpful. Congrats again.

Thank you.

No further audio questions at this time.

Okay. Any other questions in the queue, operator?

There are no further audio questions at this time.

Great. Thank you.

In closing, we are pleased that fiscal year 2018 is off to a strong start. We continue to deliver performance at the upper end of our guidance range driven by our strong positions in high-growth markets, including cloud and hyperscale data centers, optical connectivity, mobile devices and IoT. Our increasing margins and continued spending discipline has enabled us to consistently deliver earnings growth well in excess of our revenue growth. We believe that the trends we enjoyed in Q1 are sustainable and should help us to deliver record financial results this year. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

That does conclude today’s conference call. You may now disconnect.