Good afternoon. My name is Vincent, and I'll be your conference operator today. At this time, we would like to welcome everyone to the Semtech Q4 Fiscal Year 2019 Earnings Call. [Operator Instructions] Thank you. I'll now turn the call over to your speaker today, Mr. Sandy Harrison, Director of Finance and Investor Relations. Sir, you may begin.

Thank you, Vincent, and welcome to Semtech's conference call to discuss our financial results for the fourth quarter and fiscal year 2019. 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 these risks and uncertainties, please review the safe harbor statement included in today's press release and in 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 included in today's press release. All references to financial results in Mohan 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 2019, net sales were $160 million, an 8% sequential decline and an increase of 14% from the same period a year ago. Fiscal year 2019 net sales were a record and an increase of 7% over the prior year, driven by our diversified growth drivers in the IoT, data center and mobile markets. In Q4, shipments into Asia represented 74% of net sales. North America represented 18%, and Europe represented 8%. Total direct sales represented approximately 32%, and sales to distribution represented approximately 68%. Our distribution business remains balanced with 53% of the total POS coming from high-end consumer and enterprise computing end markets and 47% of total POS coming from the industrial and communications end markets. Q4 bookings softened Q-over-Q and resulted in a book-to-bill below 1. Those bookings accounted for approximately 45% of shipments during the quarter. Q4 fiscal 2019 GAAP gross margin increased 40 basis points sequentially as expected to 61.8%, while Q4 operating expense increased approximately 11% sequentially due mainly to the nonrecurrence of the onetime benefit from reduction in the fair value of contingent earnout obligations in Q3. In Q4, GAAP interest and other expense was $548,000 and benefited from the $1.3 million gain on the sale of an investment compared to $31.2 million of expense in Q3, which included a $30 million impairment of our MultiPhy investment. Q4 GAAP tax rate was approximately 49%, driven by discrete item related to acquisition-related intangibles. The excess tax benefits of Comcast exercising its remaining warrants will drive our Q1 GAAP tax rate to a benefit in the range of 8% to 12%. We expect that our GAAP tax rate for the rest of fiscal year '20 to be in the range of 20% to 24%. Moving on to…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 2019 performance by end market and by product group, discuss our fiscal year 2019 performance and then provide our outlook for Q1 of fiscal year 2020. In Q4 of fiscal year 2019, net revenues decreased 8% over the prior quarter to $160 million. Seasonal inventory reductions in the high-end consumer end market and a weaker global demand environment contributed to the weakness in Q4. We posted non-GAAP gross margin of 62.1% and non-GAAP earnings per diluted share of $0.55. In Q4 of fiscal year 2019, net revenues from the enterprise computing end market increased over the prior quarter and represented 33% of total net revenues. Revenues from the high-end consumer end market decreased over the prior quarter and represented 24% of total net revenues. Approximately 16% of high-end consumer net revenues was attributable to mobile devices, and approximately 8% was attributable to other consumer systems. The industrial and communications end markets also declined over the prior quarter and represented 32% and 11% of total net revenues, respectively. I will now discuss the performance of each of our product groups. In Q4 of fiscal year 2019, net revenues from our Signal Integrity Product Group increased 2% over the prior quarter and achieved a new quarterly record and represented 45% of total net revenues. Demand increased for our PON products, while demand from the data center and the wireless base station markets were flat with the prior quarter. In Q4, data center demand for our industry-leading ClearEdge CDR platforms used in high-performance 25 gigabit per second to 100 gigabit per second NRZ optical modules and active optical cables remained healthy. We also sampled our first Tri-Edge CDR platform for PAM4 interfaces, targeted at 200 gigabit per second and 400…

[Operator Instructions] We have your first question, comes from the line of Tore Svanberg from Stifel.

And Mohan, can you elaborate a little bit on what you just said about a pretty sharp improvement in orders the last couple of weeks? Is that a broad-based comment? Is it specific to China? And I'm also very interested in -- if it also refers to the data center market.

It's broad based, Tore. I haven't got the details of how much refers to -- is really the data center, but I would say it's broad based. It's across all markets, all businesses, all regions.

Very good. And could you also update us on the LoRa pipeline, what you're expecting for maybe fiscal '20? Obviously, it stood at $400-plus million in fiscal '19. Do you have a number for fiscal '20?

Yes, I expect it to end at $600 million in opportunity. The $200 million of leads, as I mentioned, that are in front of the pipeline, I expect to convert to opportunity. Some of the opportunity, obviously, will become revenue, but we see more and more leads emerging. So I would say, by the end of FY '20, we'll be somewhere between $600 million and $700 million in opportunity.

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

Carlin Lynch here on for Craig. I just wanted to get some more clarity on the data center business, in particular, as you -- how you guys see that playing out in the second half of the year. I know you guys had talked about a bit of an inventory digestion in the first quarter before, and I'm just wondering if you see that kind of moving through and if there'll still be any marginal improvement on , say, a trade resolution.

Yes. So the data center business, our customers tell us by mid to end of Q2 they expect to start -- the orders to start picking up again. They do see inventory there, but they expect that to come back. And we know that there's still pretty big ambitions in terms of hyperscale data center build-outs across the globe. So we do expect that to be a predominantly a first half issue. Obviously, the trade issues give us a lot of concern because of China is a big opportunity for us, both from a demand standpoint but also from the fact that they generate a lot of the build plans for our customers and other regions and so just a lot of angst about placing orders and things like that. So any resolution, for sure, will just free up -- clear up the uncertainty and help customers take more risk, I think, which is important at this time line.

Okay, that's helpful. And if I could just ask a follow-up. You guys talked about shifting mix shift -- a positive mix shift for your guys' margin. I was wondering if you could touch on or give a little more clarity on what's driving that mix and where you guys see kind of margins moving throughout the year even as -- have maybe a bit of a disappointing first quarter?

So with regards to the mix, what we see is our data center revenue rebounding in the second half. We see LoRa continuing to strengthen as we go through the year. We see more contribution to revenue from our video platforms. We see more contribution to revenue from our protection and industrial and automotive design wins. So clearly, we do see a lot of the revenue growth going forward coming from the higher gross margin end market like industrial. And that is why we do believe that we should expect to see gross margins stable but also inching up nicely as we go through the year.

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

Mohan, I had a simple question. If I was to take the $160 million you did in January and try to sort of bridge it up to the guide of, call it, $130 million at the midpoint, how would you characterize that GAAP across your different kind of end markets or product line? And then also, you mentioned that business seems to have stabilized, actually looking up very, very nicely in the last 2 weeks. In terms of ramp continuing through the rest of the year, how do you see the rest of the year? And previously, I think you guys have made a statement that fiscal '20 could be flattish, possibly even up. Does that even -- does that still hold true? And then I've got a follow-up.

Let me start with that first, Harsh. I think it still does. I think it's going to be tight, but I think it's still potentially flat to slightly up. It would depend a lot on the second half. The way we look at the year, currently is Q1 obviously is very soft, Q2 will start to improve, and then we are expecting a stronger second half obviously. And then by mix of business to kind of bridge to the Q4 number, majority of our weakness is in our Signal Integrity Products area, a lot of the weakness in data center, a lot -- weakness in PON and base station also. Also, China across all of our businesses is weak. There's no question about that. As I mentioned, POS is down significantly in China, so that has an impact on all of our businesses. Frankly, wireless, our LoRa business is a significant business in China, China handsets also and then also related to our SIP business. So we do expect -- as that starts to get better, if China improves, obviously, that will be a positive for us. But that's the -- those are the main drivers of the weakness in Q1.

Fair enough. And for my follow-up, Mohan, I wanted to ask about LoRa. I think you mentioned $100 million and -- to $140 million for this year, which is a little bit off from your previous estimates. Now given that they were put out 3 or 4 years ago, we get that. Is that predominantly a function of what's going on in China and what you're seeing here? And also, is your additional $200 million of leads, does that include tags or microservices in it? Or is that just the chips?

Yes. So leads and opportunities are all related to chips, including tags. Tags are chip-related products, so -- but not microservices. That's a different -- goes in a different bucket for us. And then coming back to the range, it does -- it is really significantly impacted by China softness. I mean, we have been -- have seen a deterioration, I guess, midway through Q4 in our China business overall. And as I mentioned, the POS has come down significantly, so that has changed things. And it's 1 of the reasons I mentioned that the opportunity pipeline, 70% of that is outside of China. So the LoRa balance, I think, from a regional standpoint's going to shift nicely, but that's going to take a little bit of time. Now bear in mind, the $100 million to $140 million in FY '20, we achieved the midpoint of that range, would still be up -- LoRa will be up 56% or 54%, something in that range, which is significant in the market environment we're in. So -- and as things improve through the year, I'll obviously keep you updated.

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

I think the kind of the consumer and data center first half part makes sense, but I guess, the first one, I think, that's kind of coming up a lot of in conversations is how you guys get comfortable in the back half of ramping up in terms of a year-over-year basis, if you're seeing slowdowns, particularly in China, especially if there's no resolution in the trade side yet.

Yes. That's a good question, Mitch. I think the China, we have to break it out into where we have business in China, and that -- the China, at the moment, is not really under our control, not much we can do. There is China softness in -- demand softness from the region itself. And then there's the uncertainty around all the geo situation. I think the China demand uncertainty is really the -- the China demand situation is kind of the biggest piece of it at the moment. And we do expect that to start to see some improvements as PON gets deployed and base stations, more base stations get deployed, and our customers are still telling us that they're planning to do that. And so we don't see a change there. Data center is the same. Our customers are still telling -- talking about deploying lots of larger scale data centers, but there is inventory at the moment. So those give us indication that the second half is probably going to be stronger. How much stronger is a good big question. Then if I look at the other businesses, smartphone, for example, we're starting to see a little bit more positive kind of trends there. And as I mentioned, the bookings over the last 2 weeks have strengthened, so that kind of supports some of that. And then LoRa is going to continue to do very well. We're absolutely convinced that, that we have a lot of opportunities and the pipeline is shifting over. And it's just about execution and transition and timing on that.

Okay, yes. Just to follow up there, so I think the LoRaWAN makes sense. Essentially, it's just the timing of what quarter comes in. When I look at the 2 kind of a bigger debate points in the semi spaces and smartphones or data center, so of those 2, within your guidance, you're talking about, call it, flattish for 2020. Which one are you guys more comfortable with in terms of growth, the smartphone side or data center side?

Yes. I would say it's more based on what happened in FY '19, and smartphones was not so strong in FY '19. I think that there's a good chance it'll be stronger, particularly if China and North America do better. But the smartphone business, as you know, is -- can be tricky. Now one of the things that's in our favor in smartphone is we have a little bit more content now but not just protection. We have also proximity sensing. Data center, I do think though is that is an inventory issue. And that's why once the inventory, I think, works its way through in Q1 and maybe some in Q2, we'll start to see that pick up. But at this point, I would say that probably smartphone is going to be a little bit stronger and then data center, depends on the second half.

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

First, a clarification on the LoRa business. Did you say in fiscal '19 that LoRa was probably 40% to 50% China based and the China -- but international or non-China was 70% of the design pipeline. Just want to make sure I got those numbers right.

Yes, in FY '19, that's our last fiscal year, Quinn. About 50% of the revenues is approximation, but about 50% of the revenues was driven out of China. The opportunity pipeline, as we look at it, 70% of that is outside -- driven by outside of China. A large part of that's North America but other regions outside China also. And so as we see that -- those transition into revenue, we should see a little bit more diversification in our geographical revenue balance of LoRa, which I think the only reason I'd point that out, I make a point of that is because China is very weak at the moment.

And then a follow-up, Mohan, on the -- on LoRa. You gave us some very specific guidance for the number of networks, the number of countries, greater than 500,000 gateways, greater than 140 million cumulative end nodes, but the revenue range of $100 million to $140 million is fairly wide. If you hit those metrics on networks, countries, gateways, end nodes, does that kind of put you towards the middle of the $100 million to $140 million? Does that get you to the low end? Does it get to the high end? Just some sense of -- if you're tracking to the milestones you give us, does that kind of put you at the midpoint of the range or better or worse?

Yes. I would say it's better, Quinn. If we hit the milestones, particularly the cumulative end nodes deployed. Gateways and networks and countries doesn't necessarily translate to revenue. It's the conversion of the opportunities into real deployments that translates into revenues because the end nodes are really what drives the revenues. So I would say the cumulative end nodes, though, if we hit 140 million, I think it will take us closer to the high end than the midpoint.

Perfect. And then just lastly, I know we had OFC last week. You guys were in your quiet period. You probably didn't get a chance to see a lot of investors. Any particular highlights you want to share with us, whether it's Tri-Edge or just other products in the optical space?

Well, just really, clarity around our strategy and confirmation that I think we have a very good strategy and execution is key. Most of our customers recognize the value of our current ClearEdge family, and that continues to do well despite the current short-term issues with data center inventory and things like that. And then as we look forward, I think the consistent theme is high performance but the lowest power and lowest cost. And we're having a -- our Tri-Edge family out there now being able to talk to customers as we're sampling for both 200-gig modules, short-reach modules, eventually longer reach modules and then eventually, combined with other platforms to provide, really, a road map for our customers, I think, is very good for the PAM4 plans. And then the FiberEdge family, which, as you know, supports DSP partners, I think is a really good platform and is starting to get design wins also. So in general, we found it a very good show. It's just confirmation of our strategy, and I think we feel good about it. Plus then you add on to that the growth of 10-gig PON and the direction that PON is going in, which is more high bandwidth, which is also good for us. And then the base station side as well, again, confirmation that high-speed links for front haul and backhaul, which will lead CDR functionality, I think is also confirmation. So more of the same. I think also talking to the customers about China and the weakness, I think, confirmation there that the first half is going to be weak in general.

Your next question comes from the line of Tore Svanberg.

Just a few follow-ups. First of all, Mohan, as we think about the data center recovery in the second half, how much -- I know it's hard to quantify, but how much of that is kind of the market coming back versus some of these new programs? And I'm thinking especially the PAM4 CDRs for 200 and 400 because my sense is that's probably more of a fiscal '21 event, but just want to understand sort of [ investments to that ], how much is going to be market.

Yes, that's correct, Tore. Most of the PAM4 stuff is going to be latter part of this year and into next year. So it's all market driven. It's all inventories being used up and some of the hyperscale stuff continuing to build out. And it's pretty global statement, I think, on data centers. I think we've seen China started to pick up. But again, with the China softness, that's muted. But I do think that it's more driven by market dynamics. I don't think it's specific to PAM4.

Okay, very good. And you sound pretty upbeat on more operators globally on LoRa. Any sort of anecdotes that you can share with us there as far as -- because I'm obviously thinking about the comparisons are always made, right, between NB-IoT and LoRa and some of the other WAN technologies out there. So I do know if there's anything you can share with us as our far as anecdotes you've had with or conversations you've had with operators that really want to more -- move more meaningfully with LoRa.

Yes. I think -- and I kind of alluded to some of those on my prepared remarks. But Orange's win with Veolia is a significant milestone for an operator, very significant actually, over a 10-year period, so that's 1. And I'd say -- I made some comments on some new use cases. Comcast with MachineQ's Victor, rat trap or rodent trap connectivity, that one is a very interesting use case that I think has a global application. Obviously, the Amazon Ring discussion on their smart lighting, these are use cases that are really going to drive more demand for some of the operators. And Tata is another one where winning a gas metering LoRaWAN use case in India, it kind of paves the way for them to then win many more similar types of use case wins over this gas metering or water metering or whatever. And that's great for the operators. The operators that have joined the LoRaWAN and have built out LoRaWAN networks, have obviously taken risk. They built out network or put their name behind it and are now looking for use cases and real demand. So that's really a key for us, and that's one of the reasons why I put emphasis on the LoRa cloud service because it's very unique. This is not something many companies can do, and I don't think it's going to be something that you'll see from many chip companies. It's a very unique capability that we're able to bring and add value to our partners, including operators who want to provide highly accurate services with the complement between power and accuracy for geolocation, for tracking of assets and provide that service to customers. So a lot to be done still and a lot to prove, but I think it's a real milestone for us.

That's very helpful. Just one last one for Emeka and then I'll go away. So Emeka, you said inventory days obviously will be up in the quarter. Will it still stay within that 90 to 100 range? Or do you think you'll probably get -- go a bit beyond that?

It might go slightly ahead of the 90 to 100 days, but for the most part, we do expect to manage inventory within those levels.

Next question comes from the line of Harsh Kumar.

Mohan, Emeka, I was looking at my model and I'm trying to figure out -- I know you guys don't guide more than 1 quarter, but I'm going back to your comment about being flattish or possibly even flat to slightly up. So at some point in time, I have [ to building ] kind of a hockey stick ramp upward. Do you think that starts to happen with fiscal 2Q? Or do you think that's mostly a second half phenomena?

Well, I'll start, and then Emeka can finish out if you want. So in Q2, we're expecting to come back, Harsh, in Q2, but realistically, we've been in the semi space for a long time. When you have 1 down quarter, you normally find that the second quarter may come back a little bit, but it doesn't necessarily come back as a hockey stick. But if it comes back, which I do think it will, then I think it paves the way for a much stronger second half. So we'll see. I don't know how strong second half's going to be, but we have enough growth drivers going on and enough unique things going on in the company that I think that we should be able to outperform.

There are no further questions at this time. Please continue, presenters.

Okay. In closing, fiscal year 2019 was an exciting year for Semtech as we delivered a record financial performance. While we are seeing a very slow start to fiscal year '20, we believe the strength of the secular drivers behind our growth engines are clearly intact and expect a stronger second half that should contribute to what we expect to be another solid year. 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.