Good afternoon. My name is Sonia and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q4 Fiscal Year 2018 Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Sandy Harrison, Director of Business Finance and Investor Relations, you may begin your conference.

Thank you, operator and welcome to Semtech's conference call to discuss our financial results for the fourth quarter and 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 close today and is available on our website at semtech.com. Today’s call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of the 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. A discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today’s press release. All references to financial results in Mohan’s and Emeka’s formal presentations on this call refer to non-GAAP measures unless otherwise noted. With that, I will turn the call over to Semtech’s Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q4 fiscal 2018, GAAP net sales were $140.6 million, a 6% sequential decline and flat to the same period a year ago. Q4 GAAP net sales included $1.5 million of expense for the Comcast warrant. Fiscal 2018 GAAP net sales increased 8% over fiscal year 2017 to $587.8 million and included $16.2 million of expense for the Comcast warrant. Q4 GAAP gross margin increased 120 basis points sequentially to 60.7% due to lower sequential Comcast warrant expense. Q4 GAAP operating expense decreased approximately 1% sequentially due to lower equity compensation expense driven by lower levels of performance [indiscernible] and the lower stock price and lower variable compensation expense, offset by higher restructuring expenses. In Q4, interest and other expense was $3.2 million compared to $800,000 in Q3. The increase reflects foreign exchange losses due to a weaker US dollar and higher net liabilities denominated in foreign currencies. Q4 GAAP tax rate was approximately 112% compared to 19.5% in Q3, due to the transition taxes [ph] associated with the US tax reform and revised plans for the use of overseas cash. Apart from the taxes associated with the transition to the new tax law, we do not, at this time, expect the tax reform to have a significant impact on the results of our operations. For fiscal 2019, we expect our GAAP tax rate to be in the 19% to 23% 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. Q4 fiscal 2018 net sales of $142.1 million came in at the high end of our guidance and represented a sequential decrease of 9% and flat with the same period a year…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2018 performance by end market and my product group, discuss our fiscal year 2018 performance and then provide our outlook for Q1 of fiscal year 2019. In Q4 of fiscal year 2018, non-GAAP net revenues decreased 9% over the prior quarter to $142.1 million, driven by seasonal inventory reductions at our smartphone customers and softness in the China base station market. We posted non-GAAP gross margin of 61.4% and non-GAAP earnings per diluted share of $0.42. In Q4 of fiscal year 2018, net revenues from the enterprise computing end market increased over the prior quarter and represented 34% of total net revenues. The high end consumer end market decreased over the prior quarter due to seasonality and represents a 28% of total net revenues. Approximately 19% of high end consumer net revenues was attributable to mobile devices and approximately 9% was attributable to other consumer systems. The industrial and communications end markets declined over the prior quarter and represented 27% and 11% of total net revenues respectively. I will now discuss the performance of each of our product groups. In Q4 of fiscal year 2018, net revenues from our signal integrity products group was approximately flat with the prior quarter and represented 45% of total net revenues. Strong 100-gigabit per second data center demand and the recovery in our PON demand was offset by ongoing weakness from our wireless base station customs. Demand for our PON products increased sequentially, led by our 2.5G and 10G PON platforms. The stronger Q4 resulted in a record year for our PON business in FY18. We continue to see strong bookings from the PON segment, suggesting that FY19 will be a much stronger year for our PON business than previously anticipated…

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

Mohan, with the change in your inventory monitoring, can you just talk about how you're expecting to really keep an eye on the health of your inventory channel, with everything going into a sell-in recognition.

Well, we monitor channel inventory, Cody. It is something we have a model on. As I mentioned, we’re bringing it down, we’re bringing that model down this quarter and we continue to monitor it and manage it accordingly, but we just decided because now we're recognizing everything on sell-in to the disturbances that are actually reporting it externally, really didn't benefit anybody.

Right. So Cody, just to add to that, we do receive from our distributors, both their inventory report and their TOS report and we look at that on a weekly basis. So it is something that we definitely have always kept a very keen eye on to make sure that we understand what's going on with the channel.

And then just following up on that, so Samsung goes or -- your largest Korean customer goes through their typical end of year rebalancing, but China contributed to a bit of that inventory volatility at the end of last year. Can you just talk about the channel and/or the health of the Chinese protection inventory?

Yeah. That's not so much a channel question as it is a smartphone end of year question, and I think both -- you're right, both Korea and China were weaker in Q4 as we had anticipated. Stronger -- expecting it to be stronger in Q1 and anticipating the year to be reasonably stronger, I would say more so Korea, North America, China is somewhat of an unknown.

And are you expecting to gain share in China or are you picking up dollar content or are you just expecting unit volumes to drive that growth in China?

I would say it's more of the latter, Cody, and I think that's because we're not sure at the China, the smartphone customers themselves will gain share in the marketplace. That's one of the questions related to when you see why they actually have not been doing so well in recent quarters, it's more because they've been losing share, not nothing to do with us losing share.

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

This is [indiscernible] calling in for Craig. First, I wanted to circle back to your segment commentary and possibly get some additional insight into the signal integrity side of the business. With respect to the strength that you guys are seeing in data center and China infrastructure and the kind of the base station pushout, I used to call that way, how confident are you that the data center in the China infrastructure side of the business is going to offset the base station weakness that you're seeing. Any color there would be helpful.

Yeah. So, we had anticipated Q4 to be weak for China base station and for PON actually. It turns out that PON was stronger than we had anticipated and I think that's true of Q1 as well. We anticipate that this year, for fiscal year 19, PON was going to be a little bit weaker, but in terms of average, it’s stronger. So starting off strong anyway. So, it gives us a little bit of confidence about the whole year being a better year for PON. We're also hearing generally that China is putting a lot more emphasis on high bandwidth connectivity to the home than enterprise. So that kind of validates the strength as well. The base station side continues to be weak. It has been for most of – for second half of FY18 and we anticipate, as I said on the prepared remarks that we don't expect any kind of comeback until the second half of FY19. On data center, 10-gig data center continues to be very strong, as it continues to grow and all data points point to that business continuing to grow.

And then just on the protection side, when you look at the China smartphone market, are you seeing continued weakness there? Is there any stabilization or any signs of a better market than you expected?

China smartphones I would say is still relatively weak and we don't see much strength there. Overall, smartphone market of course, Q1 is typically stronger than Q4 and that's what we're seeing. So no surprise there. We expect our Korean smartphone customers and North America smartphone customers to do better in Q1 than Q4, but China is still looking relatively soft.

And then just one last on the -- modeling question on the OpEx trajectory. I know, you mentioned flat to slightly up for the fiscal year 19, but is there, in terms of Q1 versus the -- first half versus the second half, is there any more color that you can provide there on the OpEx trajectory?

Yeah. I think what I'll probably add is that I give a range of $52 million to $54 million per quarter. I think at the first half, we will probably be more towards the lower end of that rage and the second half, we will probably be more towards the higher end of that range. That would be the expectation at this time.

Your next question comes from the line of Harsh Kumar from Piper Jaffray.

I had a couple of questions. Mohan, in your data center end market, could you tell us about maybe the linearity in the quarter you just finished and reported and also how do you see the linearity of the business, specifically to data center for the upcoming -- for the quarter in April?

For Q4, I would say the linearity was strong in the first period, Harsh and then strong in the last period. We had Chinese New Year in the middle of there, towards the end of it there. So that kind of always has a little bit of weakness, but then it picks up again towards the back end of January. And so that's kind of the way I would look at it and I think the feeling is that PON is definitely coming back as -- had stronger Q4 and it's looking much stronger for Q1. And we would expect that to be fairly linear through this quarter. Certainly, it’s been strong up to date. And the same with data centers. So the only segment that I would say is weak as I mention is base station continues to be a little weaker than we had thought.

And then Mohan, I think you gave LoRa as a percentage of business for the year if I‘m not mistaken. Would you be able to disclose for us how much LoRa was as a run rate of business exiting the fiscal year?

Exiting the fiscal year was –

Exiting the fiscal year, Harsh, I think LoRa was definitely on a run rate, that was very close to the low end of our -- the range that we have given for fiscal year 2019. It wasn’t within the range, but it was closer to lower end of that range.

So let me understand this, close to the lower end of basically 80 million to 100 million. Is that?

Yes.

And then Mohan, so strong tone of business, you just, I think said that turns were 46% of business, but you only need 33%. How should I reconcile your guidance and then sort of the room you have or the commentary on turns relative to what you're saying.

Well, we based on demand forecast, Harsh and we look at all the data points that turns looks reasonable for us obviously to achieve the numbers, but there's still question marks on China and there are still question marks on smartphones. So, some turns need to happen there. I would say, in general, we’re feeling pretty good about the first half of fiscal year ’19 for sure.

And I promise my last question, so PAM4 is happening now, you’re demoing it I guess and expected to happen at the end of the year, you do have a relationship with Multiphy. I believe if I'm not mistaken, you have the right of first refusal to buy them. How do you -- would you be willing to answer on this call or to the specific question, how do you see this playing out, this relationship in the right of first refusal playing out?

Well, our plan is to acquire them. We've made that clear and the option comes in June of this year and we have to make a decision at that point on the acquisition. Just at the point in time, everything's looking pretty good. Obviously, the revenues are pushed out, the whole 100-gig market and the whole PAM4 transition has moved out, but from a technology standpoint, we think the DSP is a really good fit for us and the partnership is very positive one. So yeah, everything's looking quite positive on that front.

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

I guess I just have a couple of questions. First is just on PON, it sounds like that was really a pleasant surprise in the quarter and heading into 1Q. Can you give it the sense maybe of where the strength, maybe, was it a little more 2.5G, was it a little more 10G, that upgrade spend finally kind of kicking in. And then maybe as part of your answer, and that's proven to be a really lumpy business for the last two or three years. I mean, can you give us a sense of what sort of level of visibility you have there now and is there anything that you’re sort of able to do to forecast that business maybe a little better.

Well, I think Rick, so let me comment first of all, I think, it's -- the whole PON market is doing better because China is putting a little bit more emphasis on bandwidth into the home and enterprise as I mentioned. So that's just a data point we have. We ask the same question why is this doing better than we had anticipated and that's the answer. The transition to 10-gig is clearly happening. I mean, that's the -- and I would say accelerating, which is good news I think in general. With regards to the lumpiness, it's, I think, the same kind of issue with any type of infrastructure, you get a lot of infrastructure being deployed and then you will have a break and then more CapEx being put in place and so it's tough to call it. The one thing I would say is that we have, on the PON business and the base station business in China, we are being a lot more conservative in how we forecast the demand. And so, we would -- we won't be as aggressive going forward, we have learned also from that experience I think.

And has anything changed, particularly on 10G PON. Has anything changed on the competitive front?

No. I think it’s the same set of competitors we’re up against. There are some Asian competitors entering the marketplace, but I think the more the 2.5-gig and 1-gig space, 10-gig, we still feel that we have a very strong position.

And maybe just another question on protection this time, I mean, you guys obviously have several structural growth drivers there that we see anyway for the foreseeable, but as automotive and industrial, those opportunities contribute more to mix over time, as we move forward, could you maybe talk about the gross margin profile of that business today and if those become a bigger piece of the mix, I mean, can we actually see the protection business kind of come up to maybe a corporate average type gross margin or any color you could give there.

Yeah. I think, so, first of all, the consumer protection is definitely at the lower end of our gross margin range and industrial protection is well above the high end actually. But the volumes are smaller. But we do anticipate over the next few years that industrial is going to become a bigger percentage of the protection business versus -- relative to the consumer business. So, that's the expectation, that's the strategy, that's why we're developing products that are targeted at different markets outside the smartphone space, but it just takes longer. The good news, as I said on the -- in my remarks, we've got good traction there and I think there are some segments like the automotive segment where our protection products really fit well with the type of things that are going on in the vehicle, such as infotainment applications and high speed connectivity applications within the vehicle that really do need our type of protection. So, yeah, I think it's going to play out nicely and we expect the gross margins in the business to gradually increase.

And then just maybe one last question on LoRa, I know you've talked about 80 to 100 as sort of the forecast for this year and this is obviously a big year for LoRa. Maybe could you walk us through a couple of the milestones or what we should be watching this year to basically and I'm curious what has to happen to sort of hit the high end of that range I guess?

Yeah. Well, the key thing -- so I kind of talked about a lot of the milestones we achieved for FY18 and some of those I think are key milestones for FY19, particularly the gateway deployments and then the number of end nodes, but I also mentioned, we have over 1,000 POCs that are currently in play and so it's now conversion of those POCs to real deployments, a proof of concept is essentially testing to see how the technology works, how they use case runs, are the customers ready to buy? And then once the POC converts to an actual use case and deployment, then we start to see revenues. And so, it's conversion of those POCs is the key thing now. So, we will spend time, every time we announce we will talk about the number gateways, the number of end nodes that are being deployed and the conversion of POCs into real use cases.

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

Just had a question on LoRa. It sounds like that’s run rating close to 20 million a quarter. Is there any seasonality in that business that you’re aware we should think that now that you guys are at the endpoint support that the revenues could continue to accelerate sequentially?

We think it shouldn’t have much seasonality. I would say, if there is going to be seasonality, it will probably be Q4-ish more because of Chinese New Year and some of those Christmas things and people just not spending the time to convert POCs into network. So, but I would say in general, I wouldn't expect a lot of the seasonality. Now, there are some segments. LoRa is very broad than some of the application spaces are consumer-ish and others are more industrial-ish. But I think in general, I would say very little seasonality at this point in time expected.

And then secondly on the PON business, sounds like you guys were going much more positive on that, at least for FY19, exactly what changed in terms of the demand there and what kind of difference are we talking about in terms of a percentage basis relative to your original expectations?

Well, for this fiscal year, for fiscal year ’19, fiscal year ’18 was a record year for our PON business and then we had anticipated for fiscal year ’19, f the business to be flat to down 5% actually, maybe even more than that and now we're anticipating for the year that we're expecting PON to be flat to up. I don't know how much up, but that's a significant change in direction. And as I said, it's mostly driven by confidence in China deployments increasing and the transition to 10-gig PON where we have a pretty unique position.

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

Questions on Comcast in relation to your LoRa revenue WAN. So the warrant shares that Comcast is getting are contingent on the infrastructure ramp, and you’ve mentioned five cities ramping. So is it fair to assume that there is a seamless transition and my understanding is that the existing agreement with Comcast in terms of the warrant shares was ending sometime this coming quarter that this contract would be renewed as they continue to add cities to the network.

So, Tristan, no, actually, I think you just need to correct what you said. The Comcast warrants are supposed to probably end about a year from now in Q2 of fiscal year 2020. So it’s not this current quarter, that quarter. We still have about a year on that.

Okay. And then what happens next, do they continue to ramp or is the expectation that they are going to reach 30 cities by then and perhaps if you could give us some color as to how big Comcast is as a percent of your lower revenue currently?

So, the goal Tristan is for them to, at the end of that period, to have deployed across 30 cities in North America. Of course, for Comcast, the critical element of this network rollout is to identify the use cases that can generate revenue for them and for them to establish a footprint in North America and IoT. And so, we’ve given ourselves time and they've given themselves time to roll out the network and in some cases, in some cities, they may decide to do what we call dense networks, which are requiring more gateways and more coverage and in others they may decide to do less, depending on the use case and the demand. So that is the strategy in terms of how they’re thinking about this. And what was the second part of your question, Tristan.

Yes. Just to kind of getting a sense of how -- what percentage of your total lower revenue is coming from Comcast currently?

Yeah. Currently, we don’t have any revenue coming from the Comcast business directly. Obviously, they're still rolling out the networks and so the anticipation is once the networks are available, they will make that available to enterprises, to consumers and that will start to generate revenue for us.

And then you talked about your expectation of say 5G related rebound later this year, in base station, how do we quantify this and how do you see that rebound medium term, notably in to calendar ’19, is this going to be fairly gradual or do you see big initial ramp as Korea has put more based 5G antennas. How should we look at this in terms of an inflection point to the next year and half?

I think I would say our expectations are very modest, Tristan, at least from our perspective. Our plan is that FY19 will be a down year for our base station business and it will just start to pick up a little bit in Q4 of this year and then start to increase in FY20. I will say that the feedback I'm hearing at the moment is that there's starting to be a little bit more confidence in the second half of this fiscal year. Obviously, this week is optical fiber conference and so we're getting real time feedback and there is a little bit more confidence about the second half, but I don't think it's going to be massive. I think it's going to be modest this year.

Your next question comes from the line of Hamed Khorsand from BWS Financial.

As far as LoRa is concerned, how fast are you seeing the rollout go to actually end nodes with carriers or is it all these gateways that you’re guiding to about 200,000 for this fiscal year? Is that all this still in development kind of phase?

Hamed, I think it's a combination of both, I mean so the operators, the mobile operators, network operators typically are rolling out more macro gateways and then when they roll out the macro gateways, which is the vast majority of the gateways this year, then they have connectivity and then they start to drive use cases and then the end nodes get connected. But then there's a segment of the market which is more private networks and those networks tend to deploy both macro and picocells and they drive faster time to deployment of end nodes and so those tend to be enterprises and consumer type of applications, small business type of applications and that's moving fast as well. But I would say that once the operators are -- have networks deployed like Comcast, then their ability to ramp up their own kind of connectivity is exponentially much faster than any other approach. And so that's what we're hoping now that Comcast is rolling out here in Orange in Europe and Tata in India and Softbank as they start to roll out their networks and make the use cases available, we’ll start to see a lot more acceleration in the end node connectivity.

What percentage of the 58 carriers they're deploying LoRa are in that phase, not in that Comcast like phase right now?

Of the fifty, I would say probably about 40 of them are in the kind of deployment phase, I would say, 5 to 6 are fully deployed and now driving use cases and probably 4 are somewhere in between.

Okay. And my last question is on protection, we’re seeing a little bit more traction on OLED side of for smartphones, how much of that are you seeing coming as far as your protection revenue is concerned?

We are seeing more adoption of OLED and that’s beneficial to us. So that's a good thing. We just have to see how it plays out. Obviously, each smartphone manufacturer has their own transition to OLED and some are using more for high end phones and some for less for medium end phones and things like that, but I think eventually most of the market will move to OLED, that’s our hope and our thinking as well.

Your next question comes from the line of Quinn Bolton from Needham.

Mohan, just wanted to come back to your milestones for LoRa in fiscal ’19. I think, you talked about gateways increasing from 70,000 plus to over 200,000, so nearly a tripling in gateways, but I think you said end user devices would go from 50 million to 80 million, so only about 60% growth. Is that just a lag effect that obviously you have to have the base station before you see the endpoints? And I guess a second question is, if you're seeing – if that's the case, do you expect an acceleration in the end point devices as you look into calendar ’19 and beyond.

Yes. So let me answer this way, Quinn. First of all, the 50 million units is a cumulative number. So it's what we've deployed over the last four or five years. So, the increase this year we're expecting an additional 30 million units will -- that's quite a substantial increase, but remember forecasting end node deployments is incredibly difficult, because it depends on the use case. You can have one use case that could be driving tens of millions of end nodes, right. So we are forecasting based on what we are hearing from our customers and the timing of when that proof of concept is transitioning over to full deployment and that's what I was saying. That's really difficult to call that timing, but we have over 1000 POCs running now and we estimate that certain percentage of those is going to go to full deployment and if they do in a timely fashion and we'll see it in FY19, if not it will be FY20.

Second question, just many of us probably were at the OFC show, you talked about the single lambda TAM platform, can you just talk to us where are you in terms of sampling both the 400-gig platform as well as single channel 100-gig platform beyond your lead customers?

100-gig is sampling now. We see something and talking to customers about the 100-gig, both the MultiPhy platform and our own fiber edge PMD products. The 400-gig, we are tied to some strategic partnerships that we are executing on and we won't talk openly about that until that's completed and we have established how we want to communicate to the market. But I would say the one thing to be cautious also in this whole market is that really it is a timing question is when the market is going to transition over to 100-gig and 400-gig and what that means for the industry. Our sense is that’s still probably away, maybe even a year and a half, two years away, but I think we're in pretty good shape in terms of delivering solutions to the customers.

Then just last question for Emeka, it sounds like, I think, Harsh picked up on this. You only need about 33% turns to hit the guidance, which I think is a better starting backlog than you might normally have. Wondering first, is that rate -- is it a better starting backlog. If so, does that tend to be a seasonal pattern or are you just -- is that backlog better than normal?

Yeah. It’s a little bit of everything, Quinn. It’s definitely a very nice starting backlog relative to where we have been in the last few quarters. There's also a certain amount of seasonality to it because typically as we've exited the fourth quarter, going into the first quarter, our bookings, especially in the optical business, has been very strong and so we're seeing that effect again, but it is definitely a much nicer position to be in.

There are no further questions at this time. I’ll turn the call back over to the presenters.

In closing, fiscal year 2018 was an exciting year for Semtech, as we delivered a record financial performance. We are off to a solid start in FY19 and we are expecting several of our product groups to again achieve record results in FY19 and help revamp the company along its path of getting to $1 billion in net revenues. 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.