Good afternoon. My name is Caitlin and I will be your conference operator today. At this time I would like to welcome everyone to Semtech Corporation’s Q2 FY ’15 Earnings Call. (Operator Instructions). Thank you. Sandy Harrison, Director of Business Finance and Investor Relations, you may begin your conference

Thank you, Caitlin. And welcome to Semtech’s conference call to discuss our financial results for the second quarter ended July 27, 2014. I’m Sandy Harrison, Director of Business Finance and Investor Relations. Speakers for today’s call will be Mohan Maheswaran, Semtech’s President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter was issued after the market closed today and is available on our website at www.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 Factor section of our most recent periodic reports on Form 10-K filed with the Securities and Exchange Commission. As a reminder, comments made on today’s call are current as of today only. Semtech undertakes no obligation to update the information in this call should facts or circumstances change. During the call we may refer to pro forma or other financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the management team considers non-GAAP information useful, along with detailed reconciliations between GAAP and non-GAAP results, are included in today’s press release. I would also like to mention that Semtech will be presenting at the Citi 2014 Global Technology Conference on Wednesday, September 3rd at 2 p.m. Eastern Time. The links of the webcast will be available under event section of our Investor Relations webpage. With that, I’ll now turn the call over to Semtech’s Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon everyone. Q2 of fiscal 2015 was another solid quarter for Semtech with net sales of $145.7 million coming at the upper end of our guidance range. This represented growth of 10% from the prior quarter and the decline of 12% from the second quarter of fiscal 2014. Continued strength in the enterprise computing and communications end market from infrastructure build outs and strength from industrial and market for alternative energy applications contributed to the favorable results. In Q2, sales into Asia represented 77% of net sales, North America represented 10% and Europe represented 10% of total net sales. Sales and distribution again increased as a percentage of overall revenues and represented 60% of total net sales, while direct sales represented approximately 40% of total net sales. Bookings were solid in Q2 of fiscal 2015 resulted in a book-to-bill greater than one. Sales booking accounted for approximately 42% of shipments during the quarter. Gross margin on a GAAP basis for Q2 of fiscal 2015 was 60.5% which was an increase of 170 basis points from 58.8% in Q1 of fiscal 2015. The improvement was driven largely by a higher mix of our Signal Integrity product revenue, higher manufacturing volumes and the non-recurrence of their restructuring charges recorded in Q1. In Q3 of fiscal 2015 we expect GAAP gross margins to be approximately flat sequentially and remain above the high end of our targeted 55% to 60% range, as the unfavorable impact of a higher mix of Protection, Power and High-Reliability product group revenue will be offset by higher manufacturing volumes. Operating expenses on a GAAP basis decreased approximately 1% to $66.2 million compared to the prior quarter. The decrease was mostly attributable to lower equity stock-based compensation and restructuring expenses, somewhat offset by a higher compensation…

Thank you, Emeka. Good afternoon everyone. I will discuss our Q2 fiscal year 2015 performance by end market and by product group and then provide our outlook for Q3 of fiscal year 2015. In Q2 of fiscal year 2015, we achieved net revenues of $145.7 million, an increase of 10% from Q1 of fiscal year 2015 and a decrease of 12% from Q2 of fiscal year 2014. For the quarter, our non-GAAP gross margin was 60.8% and our non-GAAP diluted earnings per share was $0.42 per share. Our focus on managing operating expenses in line with revenues contributed to the operating leverage that delivered significantly higher sequential operating income growth. In Q2 of fiscal year 2015, revenue from the high-end consumer market increased from the prior quarter and represented 29% of total revenues. Approximately 21% of this revenue was attributable to hand-held devices and approximately 8% was attributable to other consumer systems. Revenue from the enterprise computing end-market increased from the prior quarter and represented 22% of revenues. Revenue from the industrial end-market increased and represented 25% of total company revenues. Revenue from the communications end market increased and represented approximately 24% of Semtech’s total revenue. I will now discuss the performance of each of our product groups. Q2 of fiscal year 2015 was a solid quarter for our Protection, Power and High-Reliability product group which grew 5% sequentially and represented 45% of total revenues. We experienced particular strength from the industrial end markets driven by alternative energy and automotive applications offset by a modest decline in the high-end consumer market due to lower smartphone demand. Our Protection business was approximately flat of the quarter as demand from all markets remained strong with the exception of the hand-held segment which declined sequentially. Our Protection business continues to perform very well…

(Operator Instructions). Your first question comes from the line of Craig Ellis from B Riley and Company.

Thanks for taking the question, guys, and good job on the execution in the quarter. Emeka, I wanted to follow up on one of the comments you made around free cash flow generation and use. Good debt pay down in the quarter. With the guidance being flat sequentially, there should be another good quarter of free cash flow generation. How should we think about the priorities for that free cash flow, both in the current quarter and in the near term?

I think with regards to the free cash flow what I have said in my prepared remarks is that the priorities right now will probably be buying back our stock especially given the current levels of the stock price and to continue to make payments on our debt.

Okay. And then questions for Mohan, more on the product group side. First, within Signal Integrity, you mentioned some headwinds in the China part of that business and you expect that business to be down sequentially, but you expect longer term growth. When would you expect that business to hand back to sequential growth? Do you see the pause being a one quarter event, or is it multi-quarter?

We think it’s probably one quarter and perhaps some of Q4, it’s tough to say, Craig, these things can change very quickly. They have done in the past but as of now we’re anticipating kind of backend of Q4 to start to see the pickup.

And another product group question for you, Mohan. Clearly, the proximity sensing business is getting good traction. Can you talk a little bit more about the design wins you're seeing, both on the high volume side and maybe on the lower margin -- or excuse me, the lower volume side that might be higher margin type design wins for that business.

Yes, the sensing devices are doing very well. They’re very differentiated in number different areas and what we’ve seen is anywhere any application where this application needs some -- has some RF integration into the system, there is definitely as value-add to our proximity sensing. Also when there is sensitivity required on the proximity, you need a very highly sensitive device that also is where we’re seeing some good penetrations. So there is a lot of new applications emerging on the wearable side and on the mobile outside that are really looking at how to sense hand and human interface and so we’re starting to see a lot more design wins in those areas. But clearly, the tablets is today where we have the majority of design wins.

And then last one and I'll bounce this back to Emeka before getting back in the queue. With the guidance for OpEx being down 1% to 3% quarter-on-quarter, is that then going to be the trough, if you will, in OpEx, Emeka, or is there potential, given whatever you might be doing with efficiencies in the business, discoveries with the product group integration, that there might be further reductions as we look out to the fiscal fourth quarter?

So, Craig, I think two quarters ago I did guide to OpEx for this current fiscal year to range between $50 million and $53 million on quarter depending on the levels of the revenue. It’s kind of hard to say this is the trough or if there are any additional upsides in order to the OpEx number, but I think the guidance that I gave about two quarters ago is still pretty much in play for the current fiscal year and there is about $50 million to $53 million a quarter.

Your next question comes from the line of Doug Freedman from RBC Capital Markets. Your line is open.

Great. Thanks for taking my question, guys. And I'd like to thank Craig for leaving a few for me to ask. If I could start off with, could you talk a little bit about where you stand now with customer concentration? It sounds like in the protection business, that market has broadened. Can you give us an update of where you're at with maybe what percentage of sales Samsung is today, and any other product categories that may be more concentrated than others? Is there anything that we should be aware of?

Sandy, do you have the Samsung?

Right, so I’ll take that Mohan. So Doug with regards to Samsung in the Q3 quarter, the total percentage of revenue was about 11% in terms of the overall business that we do with them. Do remember that with Samsung, we do have a very important business with them with Cellcom (Ph) management into the computing applications and other devices as well. So it’s about 11% within that the Samsung handheld revenue is about 7% of our total revenues. And that compares the overall revenue which is 11% with 14% in Q1 and the handheld revenue which is 7% now as I think 9% in Q1 so that’s the information right there.

Great. And then if you could maybe dig in –

And with regards if we have -- with regards to other customer, I am not sure that we have any other customer at this point that is greater than 10% of our total revenues.

All right. Great. I didn't think so, but just wanted to check. In terms of what's going on in the coms business, you said that that ramped down, as expected, about 30%. Is there any expectation of any bounce back in that business, and can you maybe bring us up to speed on where you stand in terms of the inventory that was written down when you restructured that business? Is there any written down inventory left in the pipe or have you executed all of what you expect to be able to do there?

Let me discuss the market and then Emeka can comment on the inventory. From a planning standpoint there we’re not planning on the revenue coming back, we believe that we’ve kind of reached a trough in the $4 million to $5 million quarter range, must depends on the long haul infrastructural investments. And if this CapEx is more deployed in the long haul side, we may see some of that comeback but we’re not planning on it. And I wouldn’t anticipate that to be the case so we’re planning on now most of the investments going on to the other side of the networks and we’re seeing a benefit on that on the base station side and the datacenter side, and the long haul we’re not anticipating anymore.

And with regards to the TDC, the 30 gig, 40 gig, 100 gig inventory. Dough, I think, we saw some that probably was previously reserved and we’re finding additional stuff as you would imagine that where we’re reserving, so overall though the net impact to the financial is being pretty much even.

Your next question comes from the line of Ian Ing from MKM Partners. Your line is open.

Yes, thanks for taking my questions. This 3D touch smartphone that's going to market, how much of a hole is that in Q3 revenues, given, I assume you shipped some prototype volumes earlier. And does that also help drive some of the tighter gross margin range you're guiding, 50 basis points versus the historical closer to 100 basis points?

Yes. I didn’t quite the early part of your question.

Sure. That the 3D touch smartphone is not coming to market and actually a whole of that in Q3 revenues given you, you now show some prototype volumes earlier, I assume?

Yes. So let me take that part Emeka and then you can talk about the other section of it. So, we’ve shipped about $3.4 million of revenue in Q2 with all prototype volumes to the customer. And that now, there’s no need for anymore shipments to them of this device for that specific platform, so essentially that’s the whole that we have in Q3 now at this point.

Okay. And gross margin range in tighter, what’s driving that?

What’s driving that like I said in my prepaid remarks, it was essentially a higher mix of our Signal Integrity product group revenues which have gross margins that are nicely above our target range and also just add the benefit of higher manufacturing volumes.

Okay. Great. And there’s been an uptick in consolidation activity in semiconductors, distracting headlines today. Could you remind us how much you see yourself as an acquirer or [indiscernible]?

Well, we continue to believe that external growth for us is the critical part of our strategy going forward. We’ve done it before and that’s what we have done at the last seven eight years to continue to grow as well as driving our organic machine right way. We believe that we have to have diversification of analog platforms and that diversification, those competencies allow us to enable new markets and grow further. So we’ll continue with that strategy obviously things are happening in the market place, some of them are out of our control and when somebody comes knocking of course that’s a different story for us.

Yes, thanks for taking my questions. This 3D touch smartphone that's going to market, how much of a hole is that in Q3 revenues, given, I assume you shipped some prototype volumes earlier. And does that also help drive some of the tighter gross margin range you're guiding, 50 basis points versus the historical closer to 100 basis points?

Well, if you look, I mean we’ve always said that we will outgrow at the analog industry about 6 percentage points. We continue to believe we can do that. If you look at some of our fast growing markets today which are quite small, they are going to grow in high double digits, I think high teens and beyond. Certainly, if you look at the videos market and some of the ultra high definition video surveillance market and then all of the datacenter cloud computing focus there, those markets are growing significant faster than your average analog industry growth. And then you add onto that the senses and the wireless connectivity the IOT market and somewhat happening with our power management, which is kind of unique to us. And that we’re now starting to go back and attack that very large SAM that we always believe is there and we just need to have the right product set. So in general, I’m very confident that our growth is going to get back to what we have been growing in the past and we should see that across all of our businesses.

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

I had one clarification question on the cancelled 3D touch platform. I'm assuming it was the same customer that I think you had talked about it being roughly a $20 million second-half opportunity. As a first, is that the right kind of number, if you look at the opportunity, the hole, I guess, that you're filling for the second half, Mohan. And then secondly, is there any color on why they cancelled it? And are you -- because they cancelled it, are you sort of -- are you going to be able to pursue other customers for this 3D touch opportunity, or are you still underneath that exclusivity agreement with them?

Yes. So let me touch on that first. It was the customer paid for the development and so we do have an exclusive arrangement with the customer and the partner that we develop the technology with. And so we are in negotiations and discussions with them. And I think we will take another quarter or so to work that out and figure out if we can take the technology to other customer, that’s the first thing. The second thing is that, yes, we did expect the second half to be in the $20 million range originally. I thought it would come down as the customers’ expectations came down and then of course they may cancel it that did leave us a whole. Obviously, we didn’t have the revenue. It was new revenue for us. So our anticipation that we’re going to see that growing, that growth, due to that revenue has gone away and we have to all set some other things, but I think we have enough growth engines going on that we can do that. And then the other aspect of the question is we believe that this customer will still use the technology in some shape or form. They have told us that they are still evaluating the technology for different platforms and it’s a sizeable customer as you can imagine. So we still have hopes that there will be something but there is no current plan in the -- it’s not in our revenue plans at this point in time.

And Mohan, to be clear, I think originally it was a 12-month exclusivity agreement. Is that -- assuming you're not able to renegotiate anything, worse case it sounds like by the middle of next year you would be able to pursue other customers with this product, or am I understanding that correctly?

We are hoping that by the end of this year we will be able to clarify that situation. So hopefully by maybe the next earnings call if not one after that we would be able to certainly give you more information.

Got it. Thanks. And then since we're talking about the sensor business, can you compare the touch dollar opportunity for Semtech versus the proximity opportunity, and are you going to be able to use those established, existing proximity relationships and business that you have to pull in some new touch customers, once this stuff we just talked about is sorted out?

Possibly, but I would say the main difference is that the touch sensing device was a really new platform, really new technology. We were looking at a $1 to $2 reach devices and true devices on each platform. And so that was driving the higher revenue amount versus the proximity sensor which is closer to $0.50 and typically one sensor per device. So it’s a little bit different from that standpoint so one is not replacing the other. However, the proximity sensing devices have a long, much bigger SAM. In other words there is a bigger opportunity out there, many more different applications, the volume is certainly higher and the longevity I think of the technology as well is longer. So we see its early days and as we get penetration of the proximity sensing and then we clarify the situation on the touch sensing, I think we will be able to communicate that.

Got it. My last question is, I know you guys talked about increasing some of your exposure to China, white box, mobile devices. Does that in any way change the gross margin profile of your protection business, or is it sort of -- is there any -- I guess, is there any discernable difference really in the margin profile of the white box protection business versus your existing?

I would say no, I think the so we are also getting most success with even in Samsungs and LGs, lower to mid-range phone, we are getting more penetration in those phones now as they start to make those a little bit more focused and of course the Asian manufacturers also. The difference is that content is a little bit lower. So we have less devices in a lower to mid-range phone than we do in a high-end phone. I would say that the pricing is there in across all of the high-end phones. We don’t play into very low end commodity phones typically. But now days they kind of define as a medium kind of low-end to medium phone is a pretty good smartphone actually. So those devices need protection devices it shifts the content may not be as much as the real high end ones.

(Operator Instructions). Your next question comes from the line of Steve Smigie from Raymond James. Your line is open.

Great. Thanks a lot. Just to follow up on that last question. Can you talk about how big the China handset guys might be as a percentage of revenue as we look out to Q3 versus what they were before? So just kind of trying to get a sense of magnitude of growth there. And similarly, to follow up on the earlier Samsung question, what would Samsung potentially be in this quarter?

Sandy, could you have the…

So if you look at the China handset versus what we are looking at for the second half of your question Steve, we expect it to be up depending upon what the sell through on some of these platforms that we are in on but the expectation would be to see it up quarter-over-quarter.

And would Samsung drop quarter-over-quarter probably?

No I think quarter-over-quarter because of some anticipated launch of new platforms by Samsung, we are expecting that their revenues will be up sequentially in the October quarter.

Yes. So remember Steve that Q2 is a relatively weak quarter for our handheld business. And so Samsung recently, new phones and is a little bit more uptick from some of the China manufacturers we expect Q3 hand held strength to be their across the board.

Okay. Great. And then I know you guys only guide one quarter, but as we think about the January quarter, given what we've seen here in Samsung recently, would we expect more muted seasonality in the January quarter? Obviously, Samsung typically does that inventory adjustment. Would that be muted, or should I just assume more normal seasonality still for that January quarter?

Yes, a tough question because we don’t really know how these new phones and devices that Samsung releases in Q3 are doing to do but I would assume that is going to be the same inventory, bring down in the same seasonality as we always see with Samsung.

Okay. Great. And it seems like the power business is getting its legs now. Can you go into a little bit more detail about how that should ramp and what's really driving that over the next six months to a year?

I expect double digit growth. My sense is that now we starting to get new products out for the first time for a while, very good products and we’re starting to kind to regain some of the momentum that we’ve lost over the many years. And we’re seeing across the Board is not one segment to the market, it’s not one customer, so we’re seeing it in alternative energy, some solar power applications there, we’re seeing in industrial, in automotive side, automotive displays are doing very well. We’re seeing it in some consumer applications also. So the bookings always strong as we mentioned and so we’re anticipating growth in Q3 and this is a business when should we start getting momentum behind it, I think it’s going to be very good for us.

Okay. If I could sneak one more in, just on gross margin. You guys obviously doing good job there, operating above the top of the range. It seems like the datacenter business has got a lot of opportunity going forward. How long can we sustain this pretty good margin profile?

Well, you go ahead Emeka.

So, I think at least in the short term in the next two or three quarters here, we probably expect to stay at the high-end or a little bit above that. I think I let you pointed out our Signal Integrity product group development in the business. The base station business is expected to continue to do very nicely over the next several quarters. Also in addition with the growth of revenues that we’re seeing from our power management business, the other good news is also that we’re expanding the gross margins as well. So a combination of that with higher manufacturing volumes gives me the confidence that we should be able to do stay at the high-end of the target range.

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

Hello, guys. Apologize. I joined late. If this has been asked, I apologize. Real quickly, Mohan, as you look at the portfolio of technologies and businesses you had, if I was to ask you how would I think about your long-term growth, let's say a 3 to 5 year growth horizon CAGR, what would be the correct number to think about with everything you've got?

Well, I think it’s the same storyline Harsh. You take the analogue growth and let’s say the analogue industry grows at 5%. My anticipation is we’ll grow at least at 8%. There is obviously some dependency on the existing platforms not to come down, not to decline and to have modest growth. But we have so many growth engines at the moment that are really starting to pick up steam. My sense is that over the next few years, we’re going to get back to the type of growth we’ve had over the last nine years since I have been the CEO, which has been pretty good. So I do think that the mix of markets helps us tremendously. As we’ve talked about having that balance when handheld doesn’t do so well and datacenter does really well, you see that enabling us to have to come off the 10% sequential quarter even our handheld business was fairly weak. And I think that’s the key for us going forward also.

And maybe another one, if I can sneak, along the same lines. And I should expect your EPS to grow faster than whatever your top line is doing, is that the correct assumption?

Yes.

Okay. And then if I can sneak one more in. In that horizon of 3 to 5 years, what would you say, in your opinion, would be your fastest growing product line?

Well, that one is a sale sort of question. Obviously our wireless business while the time to revenue is longer once it picks up and we get momentum, I think that’s going to be probably fastest growing business. Today I would say it’s a sensing business along with our Gennum product portfolio both on PMD side, which already talked to the enterprise computing space and the wireless space stations and on the video side. But that would be the order that I would probably say is going to be the fastest growing.

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

Thanks for allowing me to jump back in. Mohan, I just wanted to take a higher level look at Gennum. The business, according to my model, which may not with perfect, obviously, looks like it was double digits year on year, so you're getting very good growth there. And while it tends to be a lumpy business, the question is really, to what extent is the growth that you're seeing really a change inside of the product portfolio at Gennum versus something that may be happening with Gennum's end markets over that time? And as you look ahead and look at the intermediate term outlook for that business, how do you think about the growth rate of Gennum?

Yes, so, it’s a little bit of both to be honest with you Craig, I think it is both the internal portfolio alignment and investing in the right businesses and the right product areas, but also the execution machine of Semtech and Semtech’s sales team and the customer relationships and then the market on top of that. So Gennum business grew very, very nicely at this quarters I mentioned and as you talk about and I think maintaining a kind of mid-teens type of growth on an annual basis so I think it’s something that’s very doable especially to video business continues to expand the way we expected to expand because of this ultra high definition and high definition surveillance markets emerging, obviously Gennum has a brand recognition in that space. We have tremendous respect by the customers in that space and so when we bring out the products, they’re immediately the first choice to be designed in. And previously when we acquired that Gennum it was question as to where the Gennum is investing in this business and so that’s what change now. The customers are much more in tune with the roadmap and strategy and where we are investing and we’d like the space and I believe that the video, the high definition video space and ultrahigh definition video space and a high definition surveillance space are all going to be very good spaces to be for many years to come. So to answer your question I think those are the critical components. Obviously, we know that the datacenter growth, we know about the cloud growth and we know about base station growth but if we can combine the video growth with those and I think Gennum business is going to be very well.

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

So in summary Q2 represented another very strong performance for Semtech despite several headwinds our focus on delivering solid financial performance resulted in delivering the second highest free cash flow quarter in the company’s history. Our innovative new product introductions and continued design win momentum are positive drivers of our future growth. We remain confident that our position in the key markets where we complete. Our balance portfolio of differentiated products and our influential partnerships with our diversified customer base will enable us to continue moving towards that goal of $1 billion in revenue. With that we thank you for your continued support with Semtech, we look forward to updating you on our next quarter. Thank you.

This concludes today’s conference call. You may now disconnect.