Good afternoon. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q2 FY18 Earnings Release Conference Call. 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. At this time, it is my honor to turn the call over to Mr. Sandy Harrison, Director of Finance and Investor Relations. You may begin your conference.

Thank you, Amanda and welcome to Semtech’s conference call to discuss our financial results for the second 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 the Securities and Exchange Commission. As a reminder, comments made on today’s call are current as of today only and Semtech undertakes no obligation to update the information from this call, should facts or circumstances change. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are also included in today’s press release. As a reminder 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 Q2 of fiscal 2018, GAAP net sales were $153.1 million, an increase of 6% sequentially and 13% year-over-year. Q2 GAAP net sales included $3.2 million expense for the Comcast warrant. In Q3, we expect the charge for the Comcast warrant to increase to approximately $6.7 million as Comcast accelerates its rollout of network coverage. We now expect the Comcast warrant expense to come in around $23 million for fiscal year 2018. Q2 GAAP gross margin increased a 110 basis points sequentially to 60.2% due to lower sequential Comcast warrant expense and a more favorable product mix. Q2 GAAP operating expense increased approximately 10% sequentially due to the impact of higher stock price or equity Comcast expenses, higher new product expenses and production related expenses. Q2 GAAP tax rate was 24.6% compared to 24.1% in Q1. For fiscal 2018, we expect our GAAP tax rate to be in the 25% to 29% 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. Q2 net sales were $156.3 million, a 5% sequential increase and 15% increase year-over-year and the seventh consecutive quarter of results above the midpoint of our guidance. In Q2, shipments into Asia represented 73% of total sales, North America represented 19% and Europe represented 8%. Total net sales to distribution represented approximately 65%, and direct net sales represented approximately 35%. Q2 bookings slowed sequentially but increased year-over-year and resulted in a book-to-bill above 1. Those bookings accounted for approximately 47% of shipments during the quarter. Q2 non-GAAP gross margin was 61.2%, an increase of 30 basis points sequentially due to more favorable mix. We expect our Q3 non-GAAP gross margin to be…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2018 performance by end-market and by product group and then provide our outlook for Q3 of fiscal year 2018. In Q2 of fiscal year 2018, we achieved non-GAAP net revenue of $156.3 million, an increase of 5% sequentially and 15% over the same period a year ago. We posted non-GAAP gross margin of 61.2% and non-GAAP earnings per diluted share of $0.48. In Q2 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 increased from the prior quarter and represented 29% of total net revenues. Approximately 23% of high-end consumer net revenue was attributable to handheld devices and approximately 6% was attributable to other consumer systems. Demand from the industrial end-market increased over the prior quarter and represented 25% of total revenues. Finally, demand from the communications market declined sequentially and represented 12% 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 2018, net revenue from our Signal Integrity Product Group declined slightly from the prior quarter and represented 43% of total net revenues. During the quarter, our data center business once again delivered record quarterly results. Demand for our ClearEdge 100-gigabit per second CDR platform remained strong, driven by the increased demand for 100-gigabit per second links in cloud and mega data center markets and the higher penetration of our CDRs in the 100-gigabit per second modules. We recently announced our first 100-gigabit per second PAM4 PMD platform named FiberEdge [ph] which includes our first 100-gigabit per second linear driver and our first 100-gigabit per second TIA. Our…

Certainly, thank you sir. [Operator Instructions] Your first question comes from the line of Cody Acree from Drexel Hamilton. Your line is open.

Thanks guys for taking my question. Mohan, if we could just talk about the guidance for a bit. So, you’ve been growing very nicely annually and sequentially, you’re guiding now about flat to the mid-point. I guess, what areas may be surprised you during the quarter and are leading to this flat guidance?

Yes. I think, Cody, the China situation with China PON base station and handsets is just little bit weaker. Q3 is typically stronger for smartphones, and China smartphones is a little bit weak. And then, what we’re seeing on the PON side and infrastructure side in China is also a little bit weaker than we had anticipated. We thought some of it would come back in Q3 and it just looks like it’s going to be another few quarters before that picks back up again. So, I guess, those are the main areas that we see a little bit softer than we anticipated. It’s not a huge amount but it was enough to surprise us a little bit.

Sure. And are you getting any visibility to the end of the softness, is it a matter of Chinese inventory burn and smartphone market or PON deployment projects, what is your level of visibility?

Yes. On the smartphone side, there are indications that Q4 will be -- we’ll see a little bit of a pickup in the China handset market. I would say in general, my comments on China smartphone are that they’re still learning the business and the share participation between the different manufacturers in China is still being worked out a little bit. So, some of that saw inventory levels pass a little bit higher in Q2 and Q3, but will start to I think improve in Q4. On the PON side, we see 10-giga is doing quite well, I think in general and we expect that to grow but the 2.5-gig and below seems to be weak, should start to see a pickup in Q1 for sure, maybe a little bit pickup in Q4. But base station, China base station, looks like it’s going to be very soft at least most of this year and we think some of the -- first half of next year for sure.

And then lastly, you briefly -- you’ve made a brief mention of new protection win with a major North American smartphone player that I don’t think has necessarily been considered. So, can you may be talk about what’s changed with that customer or that opportunity that had not been there in the past, and then how pervasive might this be for you?

Well, we’ve always said that we think our protection products are the best in the industry and that we have a unique differentiation for a small form factor, high performance, high bandwidth kind of interfaces. And as the industry moves to more advanced lithographies, we’ve always said that the market will come to us to some extent in those segments and that’s what’s happening. And I think we have opportunities in all regions and all manufacturers. And we have some nice design wins that I think will start to grab in Q3 and really will start to see and benefit in Q4 next year. We are anticipating between $3 million and $5 million quarter run rate, if everything plays out well starting in Q4.

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

Hey. So, I think an appropriate topic is to follow up on the previous question with the large North American customer. What exactly -- I guess, is the functionality of some of the products, Mohan, if you can possibly address that?

Well, I can’t give any details obviously, Harsh, but it’s the same protection products that we use in other smartphone -- with our other smartphone manufacturers. We protect interfaces, high speed interfaces, as you know, and it’s really no different. Obviously, the smaller form factor of our Z-Platform is a critical differentiator for us. Also, the ability to protect against advanced lithography in those is also another key differentiator for us and then the high speed interface also. So, it’s -- as I’ve said, we believe we are the leader in this space and it’s the reason why we are doing so well, not only in handheld but anywhere where there is advanced lithographies and high speed interfaces and the small form factor requirement. And so, the market’s going to come to us. And as I’ve said, it doesn’t happen in this generation, happen in next one. So, it’s starting to -- our success in Korea, and China has now been very -- we’ve been very successful in those regions, and it’s nice to see some progress in North America also.

Understood, Mohan. Thanks for the color. If I can ask you on -- I noticed that your turns requirement for this current quarter is 46%. It seems to be a little bit higher than history. May be Emeka you could help me understand how I should think about this or what kind of level of visibility you have on those turns? I mean, they are turns but whatever color you can give me?

Well, Harsh, the only thing I can add is, actually if you go back to a year ago, the turns requirement for Q3 was probably something in the same range. So, I think this is just very seasonal; it’s typical for us to have a higher level of turns in the quarter, because of the mix of revenues in the third quarter of the year we typically have the stronger customer business and the lead times probably are little bit shorter than what we have in our other product market…

Understood. Sorry to go back and forth. Mohan, I wanted to ask, there is one, at least one manufacturer of data center optical pods parts that talked about a transition or some issues going from 40-gig to 100-gig. They echoed your sentiment that 100-gig is strong but the 40-gig piece was falling apart a little bit for them. I was curious if you could tell me or maybe qualitatively discuss how much exposure you have on the 40 versus the 100, and if this is an issue for you?

I don’t think we have that much exposure on the 40-gig side, Harsh; we do have on the 10-gig side and but our 100-gig strength is mostly on CDRs and we haven’t the penetration of CDRs and the less than 100-gig market hasn’t been that great for us historically. And so one of those points we’ve always stated about the 100-gig market is that most of those applications will need CDRs whereas the lower speed interfaces didn’t necessarily need CDRs. So, most of our success in data centers is coming from our CDR platform. So, we don’t have a lot of exposure to the 40-gig. Strength in data center is very good and is doing quite well.

Understood. And my last one and I’ll jump in line. So, LoRa goes from handful of cities 2 or 3, 3 to I think 12 now, are you expecting a pretty seamless pickup in orders from -- associated with that expansion are would there possibly be a kind of a pause as they try to ramp up for this large step-up?

Well, so, first thing is they are going to rollout to 15 cities, so they started with 3 and they added additional 12, so 15 cities is the stated number. And then, the rollout of course, you put the network in place, you put the gateways in place and then that will drive some revenue, but the most of the revenue will come from the sensors that are connected to those gateways. So, it will be a kind of a follow-on effect. But, I will say that Comcast is moving extremely quickly. They are doing -- adding a lot of specific verticals to these -- the markets, wherever they see opportunity within the cities. So, I think as I’ve mentioned, obviously, our metrics, our number of gateways, number of sensors connected to those gateways, and as I’ve said, this year, we should do between $40 million and $50 million of LoRa revenue and then next year between 80 and 100, and that’s still the game plan I think.

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

I’ll just stick with the topic of LoRa. Mohan, in your comments away from the Comcast agreement, you provided a very long list of activity that’s occurring globally. Can you just summarize by helping us understand what that all means for the Company’s objective to take the business to a $100 million in annual sales and where you see the business intercepting that revenue level?

Yes. So, Craig, the reason why we talk about the different milestones and activities, because there are certainly bottlenecks in the industry to achieving our goals. And so, we set out goals in terms of the revenue goals for this year; we want to get to $40 million to $50 million of revenue and next year $80 million to $100 million. And then, I think if we get to that point, we will see a path to potentially $0.5 billion to $1 billion of revenue for LoRa. So, that’s the reason why, we set those milestones up. And it’s really driven by how many gateways in each country and how many sensors connected to those gateways. And so, we’re monitoring. And I will articulate on every earnings call, how many gateways and what our expectations is for the year, and then what drive, what is driven by that. One of the key things about LoRa of course, it’s targeted at the IoT space and low-power WAN and it is an emerging space. Some of these are very emerging new applications. There are some very exciting high-volume ones and there are some, which are called more traditional kind of end-to-end connectivity or in spaces whether volumes may not be high, but there are certainly cloud services and other values that the ecosystem can drive from that. So, it just -- kind of the overarching theme is that LoRa in general is now starting to become adopted across the globe as one of the key drivers of the LoRaWAN or the LPWAN market and the IoT space. And the types of companies that are involved of course with Comcast and Orange and SKT and ZTE and companies like that, Tata, you have significant influences in those regions driving LoRa. So, it’s a very exciting business for us.

Indeed. And if I could follow up. In the past, the Company’s talked about a licensing and royalty opportunity that relates to the business. As it relates to geolocation and any licensing activity with the business now at the midpoint of the year, what’s your visibility into material licensing revenues for LoRa?

We have some good visibility, but I would say it’s small today, Craig. I think, to me, the key thing is still, as we get more coverage, more gateways out there, then our service providers and our partners can start to really see some vertical applications that need geolocation and could use geolocation more effectively. And that’s going to happen. I would say, as we talked about on our Analyst Day, we’ll start to see that starting to ramp up, I think next year. Early next year or maybe mid-next year we’ll start to comment a little bit on some of the applications and some of the revenues, licensing revenues that we would expect from that type of application.

[Operator Instructions] Your next question comes from the line of Tristan Gerra from Robert W. Baird & Company.

Could you talk about the opportunities that you see for proximity sensing? And what’s the environment that could push in various countries in the world for increased adoption for proximity sensing in smartphones?

Yes. Tristan, proximity sensing is actually doing very, very well for us. We have a good penetration of Korea smartphones and starting to get penetration in the China smartphones. And it’s essentially where -- wherever those phones are shipping into, where the regions of the world are starting to recognize that excessive RF emissions can be a health issue for humans, so they are starting to put in regulations and that drives the smartphone manufacturers to put in some sensing to sense the difference between the human body and materials like a table or something so. And so, we’re seeing that now start to pick up across the globe and that really drives the smartphone manufacturers to look for solutions. And we think we have a very robust, a very differentiated and very good solution. And so that business is really growing quite well for us. We’re anticipating probably in the -- it’ll grow probably 40 to 50% this year over last year. Last year was a record; this year will be another record for sure. So, yes, it’s going very well.

Great, and then quick follow up on LoRa. I’m assuming that the average node per gateway is below a 1,000, so that’s well underutilized from a network standpoint. When do you -- how should we look at the [indiscernible] curve of nodes per gateway over the next year or so?

So, the capacity is about 5,000 nodes per gateway. And it really depends on the network provider or the customers who are maybe the private networks who are putting them in place. And how quickly they want to roll out their sensors, it’s difficult to say. I think some will push quickly to get as many sensors as they can connected. Remember, the key thing here is trying to get data. And you only get data if you connect the sensors and that’s the value of the network and the value of the end to end solution. So, that’s why we feel so confident that once the network is in place, the sensors -- it’s just a matter of time whether it’s six months, 12 months, 24 months. And then, customers will just add more gateways as they need it. So, I think that’s the way to think about it that over the next two or three years we would expect all of those sensors -- or the capacity the full capacity of those 65,000 gateways to be in place.

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

Hey, guys. Thanks for taking my question. I have just one quick first one and then a follow-up. So, first kind of on the long-term target. It sounds like the LoRa is growing faster than you guys expected and the mix is improving. So, is there any sort of adjustment you guys need to make to kind of that 63-32 [ph] target you had back in Analyst Day?

At this point, I think it is still too soon, just to make any adjustments. Definitely, we are very pleased with how things are shaping up with regards to the targets that we reset about a year ago. But, I think at this point, it’s still too early. Some point, I’m sure we’re going to have those conversation, but it’s early at this time.

Got it. And then, secondly kind of a Comcast, is there any way to kind of quantify the acceleration and what you guys expected growing to what’s happening now in terms of the rollout by city?

Well, the only thing I can say, Mitch, is that you know we had anticipated the end of this year that they would make a decision and roll out to the first 12 additional cities, and they’ve already done it. So, I would say, they’re six months ahead of what we had anticipated. And that is very encouraging from that standpoint because it really means that their trials proved to them and to us what we had anticipated but they were going to be really good -- LoRa is going to be a right, good solution for them, and it was going to give them the type of benefit that they were anticipating. Otherwise they wouldn’t have rolled it out in additional 12 cities. So, that’s the first encouraging thing. And then, the second thing which is really also encouraging, as I mentioned on my script, isn’t just about rolling out the network, it’s about identifying use cases. And the ones that are potentially game changing and the ones that are very good ones from a business standpoint and can generate cloud services et cetera. And Comcast is very aggressive on that front. So, I think on all fronts, I would say, it’s going much better than we had anticipated.

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

In closing, I am pleased with our strong performance for the first half of fiscal year 2018. We are benefiting from a number of secular demand drivers that are enabling us to deliver strong year-on-year growth. Our leadership positions in high growth markets including data centers, IoT and mobile systems should help enable the Company to deliver record financial results this year as strong margins and spending discipline have enabled us to leverage our earnings growth well in excess of our revenue growth. 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.