Semtech Corporation (SMTC) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q3 FY ‘15 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. Director of Business Finance and Investor Relations, Sandy Harrison, you may begin your conference.

Thank you, Erica and welcome to Semtech’s conference call to discuss our financial results for the third quarter ended October 26, 2014. I am 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 refer to the Safe Harbor Statement included in today’s press release, as well as Other Risk Factors 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. With that, I will now turn the call over to Semtech’s Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. Q3 fiscal 2015 results were slightly ahead of expectations with net sales up $148.9 million coming in just above the midpoint of our guidance range. This represented growth of 2% from the prior quarter and an increase of 6% from the third quarter of fiscal 2014. Continued strength from the industrial end market and broad-based growth across the high-end consumer end markets help offset headwinds in the communications and enterprise computing end markets. During the quarter, we concluded contract settlement discussions with our 3D touch sensing customer resulting in $4.1 million of revenue for transmission charges for materials procured. The gross margin on this revenue was approximately 29.3%. In Q3, net sales into Asia represented 72% of net sales, North America represented 18% and Europe represented 10% of total net sales. Sales to distribution decreased as a percentage of overall net sales and represented approximately 54% of total net sales, while direct net sales represented approximately 46% of total net sales. Bookings were relatively linear in Q3 of fiscal 2015, but below the Q2 of fiscal 2015 levels resulting in a book to bill of below one. Sales bookings accounted for approximately 47% of shipments during the quarter. Gross margin on a GAAP basis for Q3 of fiscal 2015 was 50%, a decrease of 50 basis points from 60.5% in Q2 of fiscal 2015. The decline was driven by the impact of a contract settlement with our 3D touch sensing customer. In Q4 of fiscal 2015, we expect GAAP gross margin to be 60% or flat with the Q3 levels and remain at a high-end of our targeted 55% to 60% range. The benefit of the non-recurring customer termination impact is offset by lower mix of our Signal Integrity product group revenue. Operating expense on a GAAP basis increased approximately 1% to $66.5 million compared to the prior quarter. The slight increase was mainly attributable to higher equity stock based compensation, mostly offset by lower compensation expenses. In Q4 of fiscal 2015, we expect our operating expense on a GAAP basis to decline approximately 2% on lower compensation expenses driven by the holiday shutdown and expected lower payouts on annual bonus programs. In Q3, we recorded a GAAP tax provision of 18% versus a tax provision of 11% in Q2 of fiscal 2015. The benefit of a true up of regional mix of income for the year was offset by higher valuation allowances. For the remainder of fiscal 2015 we expect our GAAP effective tax rate to be between 11% and 13%. In Q3 on a non-GAAP basis excluding the impact of equity stock based compensation, amortization of acquired intangibles, acquisition related expenses and other one-time expenses gross margin was 60.3%, down 50 basis points from Q2 due to the impact of a contract settlement with our 3D touch sensing customer. At the midpoint of guidance we expect Q4 non-GAAP gross margin to increase modestly from Q3 as the benefit of a non-recurring customer settlement that negatively impacted Q3 should be offset by a lower mix of our Signal Integrity product group revenue. Q3 non-GAAP operating expense was $53 million, down approximately 1% sequentially reflecting lower compensation expenses. In Q4 we expect non-GAAP operating expense to decrease approximately 2% to 6% sequentially driven by lower compensation expenses due to the holiday shutdown and expected lower payouts on annual bonus programs. In Q3 our non-GAAP effective tax rate was approximately 13% which was 2% below the 15% in Q2 driven by the true up of regional mix of income expected for the year. We expect our Q4 tax rate to be in the 14% to 15% range. In Q3 cash flow from operations increased 15% from the same period a year ago. We repurchased approximately 818,000 shares of our stock for $21 million and paid approximately $5 million on our debt. As a result, our cash and investments balance at the end of the quarter was approximately $233 million, down about 3% from Q2 of fiscal 2015. The current balance on our debt is approximately $254 million. In November 2014, our Board of Directors approved an increase in our stock repurchase authorization to $50 million. Our priority for use of cash is buying back our stock opportunistically, given our current stock price, paying down our debt, acquisitions and strategic equity investments in start-up companies. The company acquired approximately $13 million of property, plant and equipment in the third quarter. In Q4, we expect to spend approximately $8 million, primarily for manufacturing and test equipment for our new product platforms, and for information technology infrastructure improvements. Depreciation for Q3 was approximately $5.3 million. In Q4, we expect depreciation to be approximately $5.5 million. Accounts receivables increased 14% sequentially in Q3, as we saw higher shipments in the last five weeks of the quarter than in Q2. Our days of sales outstanding increased 4 days to 45 days in Q3 and are at the upper end of the target range of 40 days to 45 days. Net inventory in dollar terms increased approximately 11% sequentially in Q3 of fiscal 2015. On the day basis, net inventory increased to 88 days in Q3, and remains just below the target range of 90 days to 100 days. We expect our Q4 inventory to increase as we put inventory in place to respond to short order lead time opportunities and tight foundry capacity. In summary, Q3 was another solid quarter of steady execution. Despite the near term revenue headwinds, we expect that revenue growth from our new and exciting product platforms, targeted at high growth market, our stable gross margin, good operating expense control, and our strong cash flow generation will continue to demonstrate the leverage in our business model. I’ll now hand the call over to Mohan.

Thank you, Emeka. Good afternoon everyone. I will discuss our Q3 fiscal year 2015 performance by end market and by product group and then provide our outlook for Q4 of fiscal year 2015. In Q3 of fiscal year 2015, we achieved net revenues of $148.9 million, an increase of 2% from Q2 of fiscal year 2015, and an increase of 6% from Q3 of fiscal year 2014. For the quarter, our non-GAAP gross margin was 60.3% and our non-GAAP diluted earnings per share was $0.46 per share. In Q3 of fiscal year 2015, revenues from the high-end consumer market increased from the prior quarter and represented 34% of total net revenues. Approximately 24% of the high-end consumer revenue was attributable to hand-held devices and approximately 10% was attributable to other consumer systems. Net revenues from the industrial end market increased and represented 27% of total revenues. Revenues from the enterprise computing end market decreased from the prior quarter, and represented 20% of net revenues. Finally, revenues from the communications end market also decreased and represented approximately 19% of Semtech’s total revenues. I will now discuss the performance of each of our product groups. Q3 of fiscal year 2015 was a solid quarter for our Protection, Power and High-Reliability product group, which grew 6% sequentially and represented 47% of total revenues. Broad strength across the high-end consumer end market and stable demand from the industrial end market offset weaker demand from the computing and communications end markets. Our Protection business increased 8% sequentially, as demand from the high-end consumer end market increased nicely. We saw strength from all sub segments of the consumer market with particular strength from the hand-held market. Semtech’s strong handheld position in Korea is now complemented by our increasing hand-held presence in China with Asian smartphone manufacturers, such as Huawei, Lenovo, and Xiaomi. Our Protection position in other high-end consumer applications such as displays, TVs, and the emerging wearable market also remain strong. Our Protection business continues to introduce new products that address an increasing variety of applications. We recently introduced our RClamp7534P, a low capacitance multiline device targeted at bolstering our position in HDMI applications, where the high speed video and data signals demand minimal capacitance. Additionally, our new miniature µClamp3601P is specifically targeted at mobile sensing applications that require the smallest possible components. Semtech is uniquely positioned to provide best-in-class ESP protection technology at very small form factors. Our Protection business continues to benefit strategically from several key industry trends. The increasing number of high-speed interfaces per system, the higher bandwidth requirements on these interfaces, and the increasing adoption of advanced CMOS process lithographies are all contributing to the long-term demand for Semtech’s protection platforms, which we believe will continue to grow on an annual basis. Following the strong growth we saw in Q2, our Power Management and High-Rel business was flat in Q3. Our communications power revenue was slightly lower, but was offset by stronger industrial and consumer power revenues. Specifically, demand from alternative energy, automotive and set-top-box applications were modestly stronger in Q3. In Q4 and FY ‘16, we expect to release additional new power in High-Rel platforms that will continue to drive revenue growth and gross margin expansion in this business. In Q4 of fiscal year 2015, we expect revenues from our Protection, Power and High-Reliability product group to decline significantly due to softer demand from our Korean smartphone customers that they reduce their end-of-year inventories below average seasonal amounts. Moving on to our Signal Integrity Product Group, in Q3 of fiscal year 2015, net revenues decreased 6% sequentially and represented 38% of total revenues. Demand from the high-end consumer and industrial end markets increased in Q3, while demand from the enterprise computing and communications end markets declined modestly. The build-out of 4G LTE wireless infrastructure in China slowed from the higher first half levels, but was offset slightly by solid demand from the PON market. In addition, our video business and our fundable consumer business both had a solid quarter. While we anticipate continued communications weakness in Q4, we do expect a return to growth in Q1 as the rollout of 4G LTE-based equipment continues across China. In addition, we expect the increasing bandwidth requirements across the enterprise computing space to enable Semtech’s Signal Integrity business to show significant growth over the next several years. During the quarter, our Signal Integrity product group introduced several new high-performance clock data recovery and physical media device platforms that allow us to further strengthen our position in the fast growing enterprise computing segment. At the 2014 European Conference on Optical Communications, we demonstrated a line of high-performance CDR products for 100 gigabits per second optical module and 10 gigabit per second back plane applications. Our core 25 gigabit per second CDR and 10 gigabit per second back plane platforms are key new platforms that demonstrate the full lineup of Semtech technology optimized for high bandwidth system applications. In addition to our CDR platforms, we now have a portfolio of 10 gigabit per second, 40 gigabit per second and 100 gigabit per second PMD platforms that are gaining traction. We also have active engagements with the key mega data center OEMs and strategic module manufacturers, driving the use of new technologies into the market to increase performance, reduce power and reduce overall cost. We expect to see rapid annual growth in our enterprise computing business for the next few years. In Q3, our video business increased sequentially driven by the increasing deployment of ultra high-definition video broadcast equipment. We expect sales of our video broadcast products to contribute nicely to our growth over the next few years as the ultra high-definition standard becomes more mainstream. This year, we anticipate that over 14 million ultra high-definition TVs will be shipped stimulating the demand for more ultra high-definition content and more ultra high-definition infrastructure to be deployed. At the recent China Security Conference in Beijing, we also demonstrated our new low-cost high-definition video surveillance chipsets used for security surveillance applications. The high level of cable reach, bandwidth and integration at lower cost points provided by our new video surveillance platforms represents the beginning of a comprehensive high-definition video surveillance roadmap for Semtech. These new chipsets utilize high-definition VLC technology to enable both 720P and 1080P high-definition video to be transmitted at lower rates over longer distances using conventional CCTV coax cable. We continue to be at the forefront of innovation in the emerging ultra high-definition video broadcast and high-definition surveillance markets by enabling customers to deliver new levels of quality and performance. And we expect that video business to grow nicely over the next few years. We are very pleased with the new product execution from our Signal Integrity product group, and anticipate that FY 2016 should be another very strong new product this year. In Q4 of fiscal year 2015, we expect that Signal Integrity product net revenues to be down slightly as we expect further softness in the China infrastructure build out. Turning to our wireless sensing and timing product group, revenues in Q3 increased 15% sequentially and represented 15% of total revenues. Wireless sensing and timing growth was primarily driven by strength in the high-end consumer and industrial end markets. In Q3 of fiscal year 2015, our wireless and sensing business grew 33% sequentially led by strong growth from our proximity sensing products, which increased significantly. Excluding the one-time Nokia-Microsoft revenues from both Q2 and Q3 our wireless and sensing business grew 38%. This solid growth is driven by the increasing use of proximity sensing devices in mobile systems. We continue to see strong design win momentum at Tier 1 OEMs for our proximity sensing solutions in the tablet market, consumer wearable market, medical market, and recently we gained our first design win in the smartphone market. We expect to see strong growth at proximity sensing business for FY 2016 and beyond. During the quarter, we concluded the relationship with our lead 3D touch sensing customer Nokia-Microsoft that resulted in approximately $4.1 million in net revenues to Semtech in Q3. We are still evaluating the opportunities for our innovative 3D touch sensing platform at other customers and applications, and we will provide details in the future if and when it is appropriate. On the wireless front, we are seeing tremendous momentum building for our LoRa wireless platform as customers and partners are rapidly moving to deploy Internet-of-Things and machine-to-machine related network infrastructure and devices. The LoRa ecosystem continues to expand and now includes partnership with industry systems and module leaders as well as service provider and component partners. Our wireless and sensing business recently achieved several significant milestones in the IoT arena. We announced that FastNet, a leading M2M operator in South Africa have selected LoRa for use in it’s IoT applications, in this specific application, LoRa transceivers will be integrated into existing infrastructure to enable long-range wireless control of energy usage. This is just one example of how LoRa technology can be used in systems, when long battery life, long-range and low-costs are demanded. This is our first service provider win and announcement and we are presently in trials with three other global service providers. In addition, another three service providers are currently evaluating the LoRa technology for use in their networks. At the recent Electronica 2014 event in Munich along with several of our LoRa ecosystem partners, we demonstrated the capability and potential of that technology by deploying a live LoRa low-power wide area network or LP WAN over Munich so potential customers could evaluate the capability and potential of the LoRa technology. Also, in Q3, we announced that our LoRa technology has been integrated into Cisco’s new industrial IoT gateway that enables Semtech’s connectivity to the cloud. These IoT market opportunities are still in the early stages, but are expected to move to broader deployments and drive a steady increase in demand for longer range, low power battery driven wireless connectivity that is at the core of the Semtech solution. LoRa devices are now shipping in volume and we now have design wins in the public network, private network and consumer network segments, we believe the SAM for these low-power long-range wireless networks is growing rapidly and will expand into a $500 million plus opportunity for Semtech over the next few years. During Q3 of fiscal year 2015, our timing business declined sequentially as excess inventory builds in the first half was worked down during Q3. We have seen bookings recover in Q4 and expect demand for our timing platforms from packet-based communication systems to grow modestly in Q4. In Q4 of fiscal year 2015, we expect net sales from our wireless sensing and timing product group to decline as the 3D touch sensing revenues will not be repeated. In Q3, our distribution POS increased slightly to deliver another record POS quarter. Distributor inventory increased two days from 69 days in Q2 to 71 days at the end of Q3, and is aligned with the low-end of our target channel inventory model of 70 days to 80 days. Similar to our direct business, 51% of the total POS came from the consumer and computing end markets and 49% of total POS came from the industrial and communications end markets. Moving on to new products and design wins, in Q3 we released 17 new products and achieved 2,156 new design wins. We continued to focus our R&D efforts on new growth opportunities diversifying our customer base and driving end market balance by developing and delivering differentiated analog mixed signal solutions to emerging and fast growing markets. Now, let me discuss our outlook for next quarter. Based on recent bookings trends and lower backlog entering our seasonally softest quarter and due to continuing negative signals from our two major Korean smartphone customers and expected weakness from the China infrastructure market, we are currently estimating Q4 net sales to be between $128 million and $132 million. To attain the midpoint of that guidance range or approximately $130 million, we needed net turns orders of approximately 49% at the beginning of Q4. We expect that Q4 GAAP earnings to be between $0.14 and $0.16 per diluted share and non-GAAP earnings to be between $0.32 and $0.34 per diluted share. I will now hand the call back to the operator and Sandy, Emeka and I will be happy to answer questions. Operator?

[Operator Instructions] You have a question coming from the line of Gabriela Borges from Goldman Sachs. Your line is open.

Good afternoon and thanks so much for taking the question. I wanted to follow-up on the prepared remarks on the communications infrastructure market in 4Q and the comments as well that it might be up in the first quarter, so maybe you could talk a little bit about what you are seeing there in terms of demand from OEM [ph] customers and any early indications on 2015? Thank you.

Yes. The real drivers Gabriela of this is China and specifically the LTE base station deployments. We are expecting that the LTE FDD licenses to be released sometime in 2015. And we think it’s going to happen in Q1 and will drive China Telecom to deploy more base stations and we will seen an impact from that. So that’s the expectation and if that doesn’t occur, it will be some – we think there will be some come back from just the China mobile deployments. But we really are expecting I think the largest growth will come from FDD deployments.

Understood. Thank you. And just the follow-up, the commentary on short order lead time opportunities and potentially building inventory in the quarter to address those opportunities, any indications that you may see some more of that short lead time business in the quarter than normal. And just on tight foundry capacity too what you are hearing form your foundry suppliers? Thank you.

Well, so let me start with that first the foundries are still fairly tight which is I think a relatively good sign. Most of our partners are telling us that they have – don’t have lot of extra capacity and so indicates that demand is not too far away. On the orders side, the thing that we look at is really where – because we have January in that quarter, what happens at Christmas and then as we go into Chinese New Year what the demand is going to look like and we have to be ready for that especially on our consumer related businesses where the lead times can be four weeks – two to four weeks. In some cases the order lead times and the supply lead times might be eight weeks or greater. So that’s really the challenge.

That’s helpful. One last one if I could, you mentioned a number of design wins on the LoRa wireless platform maybe you can help us quantify how big that business opportunity could be next year based on the visibility that you have today? Thanks very much.

Well, it’s really – it’s difficult to say because it’s industrial and the time to revenue on industrial tends to be a little bit longer, but it is growing very fast for us and the opportunities are very broad. So that’s the encouraging thing. As I mentioned in my prepared remarks and you can see a number of press releases we have done we are seeing opportunity in energy control, in the smart grid networks, in metering, in security, in asset tracking, in monitoring and sensing of networks and it just is very broad. And I think every time we talk about the technology with customers, we see more and more opportunity. The other nice thing about this opportunity for us is it’s kind of at a life of its own, because the service providers themselves are deploying and trying different applications as well as private networks as well. So we are seeing more and more opportunities. So it’s going to be for sure a very fast growing business for us. To quantify it, it’s tough other than to say that I think we have a $500 million SAM and we obviously want to try and gain as much of that – penetration of that – much of that opportunity as possible over the next 3 years to 5 years.

Great. Thanks so much for the detail.

You have another question coming from the line of Steve Smigie from Raymond James. Your line is open.

Hey, thanks a lot guys. Obviously, some soft guide in the expected areas of Samsung and the China infrastructure stuff, but it sounds like you have some good visibility and some nice design wins in the next year, across a whole bunch of different areas. So as we think about the return to sequential growth next year, should we think relatively healthy recovery into April and July quarters?

Yes, Steve. I think that’s correct. I mean obviously Q2 and Q3, we would expect to be as stronger quarters next year, but a lot depends on these design wins, some of them are in consumer applications that could run quite quickly, and some of them are in more industrial applications that will probably take a little bit longer, but on the whole we are looking at a – we believe a strong FY 2016.

Okay. And you guys are running at the high-end of your gross margin range. Obviously that's – some of that has to do with your little bit weaker consumer going into January. But it seems like you got some higher margins stuff ramping in Q. So as we think about that gross margin into next year, you think it bounced around that higher level there on the gross margin?

Yes, so Steve as you know our gross margin is mostly driven by the mix of revenue. And our thinking right now is that as long as we continue to see the strength from our Gennum business, continue to see the LoRa business ramp through revenues, and also more importantly our power management business is growing and in addition expanding their gross margins. And I think that gives us the confidence that we should continue to upright the product levels of gross margin, which is above 60%.

Okay, great. And last question was just as I look at operating expense, obviously for the January quarter, this is the holiday stuff. As we get into early next year, the revenue levels at least the April, probably still a little bit low. Do you again may be pay a little bit less in bonuses, because the revenue level is low and may be do a little bit of pruning on the cost structure early next year?

So I think we’ve done a very good job of managing our – putting expenses both in line with the top line, but also in line with the investments that we have to make for our future growth. But looking ahead into next year as you see operating expenses on a quarterly basis coming in somewhere between $52 million or $54 million a quarter. Obviously, there’s going to be some quarterly volatility driven by the timing of certain expenses, but I think on the average for the year, we would expect OpEx on a non-GAAP basis to be between $52 million to $54 million.

Okay, great. Thanks guys.

And you have another question coming from the line of Doug Freedman from RBC Capital Markets. Your line is open.

Hi guys, thanks for taking my question. I’m sorry if I’m misunderstanding something, but I just want to make sure I understand what occurred with the settlement that you executed with Microsoft-Nokia on this 3D touch? Were you expecting that settlement to contribute to revenue in the October quarter just reported or was that a source of upside to the numbers?

Yes, so Doug, I think if you – I don’t know, you probably don’t remember, but in our call, in our Q2 call period we did indicated that point that we will involve in settlement discussions with the customer and we weren’t sure when those discussions were going to be concluded. So we did not factor that into our guidance back then. And then the discussions were concluded in late October and we have to recognize the revenue associated with the calculation charges.

So just for ongoing purposes, if I wanted to consider, I would have removed that $4 million – did I hear correctly was $4.1 million, I would remove that from the October quarter to sort of get ongoing run rate of business and to get a sequential decline. The reason I’m asking is, the 12% down to the midpoint of your guidance or 13% down is pretty severe and worse than we've heard from peers. So I'm trying to understand how that all constitutes itself given I believe last quarter you had said your Samsung handset exposure was down to about 7% of sales?

So, yes, I think you can definitely make that adjustment, because that’s just a one-time revenue pickup in the October quarter.

Can you give us an update on where you are at with how – what percent of sales your key customers in Korea were in the just reported quarter?

Yes. So, in the most recent quarter, Samsung overall was 10% of reps, that was up from 9% in Q2, of that about 8% was handsets, that’s up from 7% of handsets in Q2, Doug.

And do you have some sort of an outlook that you can share with us, how much is that impacting your guide going forward you did highlighted as part of the source of the revenue decline?

A significant part of it, of the decline, Doug, I don’t think we have – we want to give out the detail.

Okay, but safe to say that the percent exposure would be dropping in the January quarter you are guiding to?

Yes.

Okay. I will leave it there and jump back in the queue if I have any further. Thank you, guys.

You have a question coming from the line of Chris Swan [ph] from MKM Partners. Your line is open.

Hi, this is Chris Swan in for Ian Ing. Could you guys give us some more details on the FY ‘16 opportunities in emerging markets as consumer devices or industrial applications and talk about the relative gross margins in serving emerging markets?

Yes. So for FY ‘16 we look at – we still believe tablets for us because of the proximity sensing has pretty much penetrated most of the tablets out there with LTE radios. We think that’s a really good opportunity for us. Obviously, smartphones is interesting, because while we have the challenges in Korea, we have very good penetration in China and that seems to be offsetting some of the Korea line there. So, we still view that as an opportunity for us. Plus I mentioned on the call that we do have our first proximity sensing design win in a smartphone. So, that’s an opportunity. We think the variable market also in the consumer space is a growing market that we are exposed to both with sensing and our protection technology. And then on the enterprise computing side, we still believe data centers and the whole cloud computing arena for us is a very good growth driver for our products, our Signal Integrity products, both CDRs and PMD devices plus protection products. And then the PON market also seems to be growing quite nicely. So, we think that’s a good growth market for us. And then on the industrial side, as I mentioned this whole internet of things arena is growing nicely for us and machine-to-machine connectivity we think that market is also going to generate some good growth for us, the video surveillance market, the high-definition video surveillance market and then the ultra-high definition video broadcast market are all good opportunities for us and the automotive space is becoming more of an application space for our products as well. So, number of different growth markets that we think we are going to be able to participate into next year.

Sure. And did you mention what the relative gross margins were serving growth in the emerging markets?

Typically, consumer space is kind of 50% to 55%. And then we view the computing space kind of in that range and communication industrial tends to be at the higher end of 60% and above the range. So, it varies from application to application, obviously some of the higher volume spaces like smartphones would be the lower end, but in total, because of the balance of markets we think were 55% to 60% is really where most of these spaces will end up averaging to.

Sure. As a follow-up, I am not sure if I missed in the call, but do you guys mentioned how many design wins you had in the quarter? And also are there any trends in the volume opportunity gross margin and program risk in the new wins? Thank you.

We said the 2,156 new design wins. With design wins, the way we quantify design wins, there is fairly minimal risk. It’s mostly customer risk. So, if a customer places an order or gives us a forecast and then they ramp up and they realize maybe they don’t have as much growth as they anticipated, maybe we wouldn’t get the revenues associated with design win, but we are fairly conservative in how we measure our design wins. So, we measure it, because it really tells us how we are positioned for future growth and we quite feel good about where we are with our design wins.

Great, thank you.

You have another question from Rick Schafer from Oppenheimer & Company. Your line is open. Shawn Simmons-Oppenheimer & Company: Hey, guys. This is Shawn Simmons calling in for Rick. I just had a couple of quick questions. Mohan, I think you just mentioned your first proximity sensing when in the smartphone market, I guess, when would you expect that design win to ramp next year and can you kind of frame out I guess what’s the differentiating quality of that product and how could it ultimately penetrate more into the smartphone market longer term?

Well, we do hope that the proximity sensing platform we have and the number of sensors we have will penetrate not only the smartphone market, but other application spaces in the consumer segment as well as industrial. That is the goal. I think, it will probably – we are expecting Q2 to Q3 to be the majority of when we see – we stop to see the revenue from this design win. So, it could be fairly quick. I mean, smartphones can generate very fast time to revenue, which is one of the advantages of being in the consumer space of course. The advantages we have, I mean, it’s a number of different technology advantages obviously the power, it’s very important, the ultra low power. We have very high ESP protection on the device. And there is a bunch of other kind of tricks that are included in the sensing devices we have that give us that – bring that value to the customers and that’s it is a challenging market, it’s competitive market, but it’s combined with our protection products and other products we now are starting to bring to the space. I think we have a good chance of this being a good business for us for several years. Shawn Simmons-Oppenheimer & Company: Okay, great. And then Emeka going to the increased buyback opportunity, it looks like you guys are going to be buying some shares back here over the next couple of quarters as your stock price has been a little low, but have you guys had any discussions with the board about potentially initiating a dividend and how you see that playing a part of your capital allocation strategy longer term?

Yes, Shawn. I think the Board and the management team we periodically discuss what our dividend policy is going to be, but every time we have had that discussion, we basically come down and decide that when we do initiate their dividend policy that we want it to be sizable, we want it to be sustainable. We do think that at this point in the company’s history, it is probably more important to dedicate a lot of our resources right now to driving the top line growth and driving the earnings growth. So, we think as we get to $1 billion top line goal that will probably be the right time to really think about and initiate a dividend plan. Shawn Simmons-Oppenheimer & Company: Okay, great. Thank guys.

You have another question coming from Liwen Zhang from Blaylock. Your line is open.

Thank you for taking my questions. I have one question about your LoRa. Can you talk about the competitive landscape and what advantage Semtech can bring to the customers? Thank you.

Well, the competition in this space is really for us, Texas Instruments, Silicon Labs and I guess there is a few other entrants coming into the space, but really the value for – that we bring is longer range, lower power and then just a kind of a number of different application value, I would say for each individual space that we are targeting. So, that includes kind of more of a systems solution in some of these application spaces, but that’s really the answer. I think it’s more low power and range is the key.

Okay, thank you. That’s all I have.

You have another question coming from the line of Harsh Kumar from Stephens Inc. Your line is open.

Yes, guys. Thanks for taking my question. This is Richard in for Harsh. Looking at the 3D gesture opportunity, I know the breakups behind you now are you able to sell that product right away to other customers and then can you talk about any type of feedback that you have been getting from other customers that you are sampling with?

The answer is no, we haven’t been talking to other customers simply because we by contract are not allowed to and we are in negotiation to see if we can get that opportunity.

Okay, thanks for that color. And then looking at Gennum, can you can you talk about kind of the competitive landscape on that product, specifically on the data center side? And then are you seeing any customers start to in-source that product, develop it themselves?

Well, in that space, there are some customers that do have their own internal module manufacturing and they do it typically in-source and outsource. So, we have to work with our module partners and other companies that sell into the OEM and make sure that we bring our competitive solution to the marketplace. So, that’s an ongoing story. On the competitive landscape, I think it’s the same competitors. It’s typically TI, Maxim and PHY are the competitors we come across. And we have a portfolio of CDR products and PMD products that we bring to the table and we believe that most of our products are highly differentiated and we tend to do quite well.

Great. Thanks guys. Good luck.

Thank you.

[Operator Instructions] You have another question coming from the line of Craig A. Ellis from B. Riley. Your line is open.

Thanks for taking the question guys. Just two quick ones. First, Emeka, following up Doug’s question, what was the earnings impact of the $4.1 million settlement revenue benefit in the quarter?

Well, I don’t know that I have the earnings impact, but I do note that the impact on our gross margins was about 80 basis points.

80?

Yes.

Okay, thank you. And then the follow-up is to you Mohan and thanks for all the color as you look out over next year and look at how the segments and the sub-segments are tracking relative to design wins in growth? But can you just rank the opportunities that you are seeing order of magnitude basis, what are the biggest growers if you look out over next year and what follows that up, just so we understand kind of where you think the biggest incremental growth is coming from in the business over the next year or so?

Yes. For the next year, for sure, proximity sensing for us, because we already have wins and we can see markets that were in there typically drive cost of revenue. So, definitely proximity sensing, the wireless story for us is a very nice one. The time to revenue is always a question, but there are so many things going on in that space. I would say that the wireless is probably number two. So, the sense – proximity sensing and the wireless and then third is all of the products coming out of the Gennum business, the video products, the video surveillance products and the video broadcast products and then the data com products coming out of the Gennum business that are driving into some fast growing markets, data centers and cloud computing driven. So, I would rank those three. The Power Management business is still kind of a turnaround business for us, it’s coming back, but as Emeka said, it’s a huge SAM and a few wins there are going to move the needle significantly for us and the gross margin is going to be much higher also. So, I would rank that out there, but I think the top three are probably proximity sensing, the wireless and then the data com and Signal Integrity products.

Mohan, Emeka, thank you.

There are no further questions at this time. I turn the call over to Mr. Maheswaran.

Thank you. In summary, we delivered another solid performance in Q3 further demonstrating the leverage in our operating model. A number of our exciting new products in fast growing emerging markets are moving into production, while design win momentum remains strong and should help deliver strong growth in FY ‘16. Our balanced portfolio of innovative highly differentiated platforms and our focus on building long-term strategic customer relationships will enable us to continue moving towards that goal of becoming a $1 billion company. With that, we thank you all for 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.