Good afternoon. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY 2016 Semtech Corporation 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. Thank you. Mr. Sandy Harrison, Director of Business Finance and Investor Relations, you may begin your conference.

Thank you, Crystal. Welcome to Semtech's conference call to discuss our financial results for the first quarter of fiscal year 2016 ended April 26, 2015. 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 close 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 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. Also 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 financial 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. For Q1 fiscal 2016, we reported net sales of $130.1 million, which was at the low end of our guidance range. These results were flat with the prior quarter and a decrease of 2% from the first quarter of fiscal 2015. Strength in the communications and enterprise computing end markets were offset by weaker industrial and high-end customer end markets. Our demand from our Korean smartphone customers was weaker than expected. In Q1, shipment into Asia represented 74% of net sales. North America represented 17% and Europe represented 9% of total net sales. Sales through distribution increased as a percentage of overall net sales and represented approximately 57% of total net sales while direct sales represented approximately 43% of total net sales. Bookings increased sequentially in Q1, resulting in a book-to-bill above 1. Turns bookings accounted for approximately 58% of shipments during the quarter. Gross profit margin on a GAAP basis for Q1 of fiscal 2016 was 60.3%, which was an increase of 420 basis points from 56.1% in Q4 of fiscal 2015. The improvement was driven by non-recurring special charges during Q4 of 2015 and the favorable product mix from higher Signal Integrity Product Groups and Wireless, Sensing and Timing Product Group revenues. In Q2 of fiscal 2016, we expect GAAP gross profit margin to be down approximately 30 basis points to 70 basis points sequentially due to less favorable product mix. Operating expense on a GAAP basis decreased approximately 15% to $73.5 million, compared to the prior quarter. The decrease was attributable to the non-recurrence of the special charges taken in Q4 and lower equity compensation expense offset by higher payroll related expenses associated with the new fiscal year. Support expenses for our ERP implementation and the additional environmental reserves for the…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2016 performance by end market then by product group and then provide our outlook for Q2 of fiscal year 2016. In Q1 of fiscal year 2016, we achieved net revenues of $130.1 million flat with Q4 of fiscal year 2015. Demand increased from the enterprise computing and communications end markets, while the high performance consumer and industrial end markets decreased from the prior quarter. For Q1 fiscal year 2016, we posted non-GAAP gross margin of 60.8% and non-GAAP diluted earnings per share of $0.27 per share. In Q1 of fiscal year 2016, net revenue from the enterprise computing end market increased from the prior quarter and represented 27% of net revenues. Net revenue from the communications end market also increased and represented approximately 20% of Semtech's total net revenues. The industrial end market decreased from the prior quarter and represented 26% of total revenues. Finally, net revenue from the high-end consumer end market decreased from the prior quarter and represented 27% of total net revenues. Approximately 20% of the high-end consumer revenue was attributable to handheld devices and approximately 7% was attributable to other consumer systems. In Q1, we also completed the spin-off of our defense module and microwave business, completed the integration of Triune Systems and EnVerv and completed the global implementation of our new SAP ERP system. I will now discuss the performance of each of our product groups. In Q1 of fiscal year 2016, our Signal Integrity Product Group had a strong quarter with net revenue increasing 8% sequentially and representing 43% of total revenues. Strong demand from the enterprise computing and communications end markets was offset slightly by lower demand from the industrial end market. We saw strength from both the PON and…

Your first question comes from Steve Smigie from Raymond James. Your line is open.

Great. Thanks a lot guys for letting me ask the questions. Emeka, I just wanted to touch a little bit on the data center business, we're seeing some pretty good trends overall data center I think for most companies. Do you think you would be able to achieve your double-digit growth in that business this year?

Yeah. Steve, this is Mohan. The data center business is doing very well. Obviously with our Signal Integrity Products, we have a range of CDRs and PMD devices that go into that space and that business is doing well. The margin is strong and I think it will continue to be strong for the rest of the year.

Okay. And then, for PON, I think you look at Infonetics, it's just been something like 20% compounding the growth in China for that, is that where that you're largely getting your business in China and is that (25:55)?

Yes, Steve. That's correct. It's largely China, it continues to grow nicely for us and deployments are expected to continue to grow for the rest of the year also.

Okay. And then, on the Triune acquisition, I think you guys had talked about that potentially being – I think it was like $10 million to $20 million roughly for 2015. I was just curious if that's still roughly on track and what potential you see for that for 2016?

Yeah, Steve. The range was $10 million to $20 million. I think it's probably going to be in the lower end of that range, but we are anticipating that still to be the case for this year and then doubling next year.

Okay. If I could just sneak one more in. You talked about Korean and Chinese guys or at least the Korean guys looking a little bit softer in this quarter. Any sense yet, if that picks up in the second half of the year as maybe they are (26:53) and you get like a (26:57) products rolling out?

Yeah. It's tough to call. Steve, obviously, they've reduced their build plans and this is both the Korean – the largest Korean smartphone manufacturers have reduced build plans. They've clearly lost share in Asia. They had some excess inventory. And so, I think it's difficult to call whether that is expected to grow in second half. They are anticipating growth, but we are being fairly conservative about our view on it until we see the demand.

Okay. Great. Thanks, guys.

Your next question comes from Craig Ellis from B. Riley. Your line is open.

Yeah. Thanks for taking the question guys. And I'll just follow up on Steve's last one. With respect to Protection, if my model is right, it looks like the business is down 25% to 30% year-on-year. One, are there other things at play just besides the potential share shift of your customers, there are different competitive dynamic for protection at that customer? And when do you see that business getting back to a level where year-on-year growth is possible?

So, Craig, let me give you a little bit of color on the – first of all, we don't think that there is any competitive dynamics. We believe that specifically Samsung, but also LG have just reduced their build plans. So they are clearly not building as many phones as they had anticipated. And their demand has come down, and they had some excess inventory also. I would say that they are being a little bit more cautious and being more aggressive in trying to get their bill of materials down on their phones and that in some cases mean that they don't put protection on some of their phones, protection is somewhat of an insurance for the phone. And maybe they in some cases have decided not to add that insurance in. So that's a challenge. Now, offsetting the Korean decline is good growth in China. So we have the China smartphone manufacturers all having pretty much put Semtech Protection on their phones and we're seeing the growth rates of that China Protection business is much faster than the decline in the Korean business coming down, it's just smaller. So it will take some time for that to grow to the same type of level. And the Protection business in general across all other markets including automotive, industrial, the enterprise space is doing quite well. It's really just the Korea phenomenon. And I think that, we've lived through this before when we were in RIM and we lost substantial amount of RIM business and Motorola and we've seen this before. We expect Samsung and LG to continue to be aggressive, but I think for this year it's going to be challenging for us and I think we'd expect to start growing again next year.

Understood, Mohan. And then switching gears to another segment and something that's much, much earlier on the ramp timeframe for you. Can you help us understand the visibility that's driving your confidence that the LoRa business can increase 300% year-on-year and then what gives you the confidence in a notorious low visibility industry like semiconductors that it's a $100 million business three years down the road?

Well it's just that there is a lot of momentum. There's very few industry sectors I would say that are growing as fast in the semiconductor space and clearly the Internet of Things is one of them. Projections suggest that there is going to be 25 billion low power devices connected over a long range by 2022, which is a huge amount and it's not that far away. So, we're already seeing a lot of our customers and partners and cities really starting to think about how do they become smarter, in some cases it's a need, smart watering, in other cases, its efficiency, smart parking and smart waste management and we're seeing smart agriculture and smart buildings, and asset tracking and smart metering and many, many different applications. So, it's clear that there is the pull from the marketplace for low power long-range highly efficient low cost devices and LoRa is really a good fit for that. So the other thing that's important in this play is it's not just North America or Europe, it's China, it's South Africa or it's India or it's Brazil, these are geographies that really need this kind of emerging technology. So, we see a lot of pulls, so there is a lot of growth drivers and that's the reason why we are quite confident. We've got a lot of design wins obviously and with the LoRa Alliance being formed and the momentum there, I think we stand a very good chance of growing at the rate that I've laid out here.

That's helpful. And then the last one for Emeka. The company has done a good job over the last 12 months being very responsive to changes in customer programs and market requirements and is restructured. Emeka, with the lower revenues that you're now looking at going forward near-term, is there a potential to do something further with operating expense or is it now at the lowest possible levels that it can be relative to the costs you've already taken out.

So, Craig, well, in terms of opportunities to drive leverage, I think a key driver for us is going to be top-line growth. Having said that though, in our last earnings call, I did guide to quarterly operating expenses on a non-GAAP basis of $54 million to $56 million. And I think right now with the current demand outlook, I would expect us to be at the low-end of that range in the full year.

Let me add one thing to that Craig, because I think it's important, we've mentioned on the call of the SAP implementation and our infrastructure and our investment in that infrastructure and we think that we are in a really good shape now to do further acquisitions and integrate them in a way that will move us forward quickly. And that's been a key part of our growth as you see in the industry a lot of acquisition related activity that we believe we can continue to be a driver in that space and that investment was necessary, unfortunately it hurts OpEx. But I think we'll be well placed for the future growth of Semtech.

And on that point is the expectation that there is still $1 million of incremental savings beyond this quarter from lower ERP implementation expenses?

Yes, correct. That's the expectation.

Thanks guys.

Your next question comes from Rick Schafer from Oppenheimer. Your line is open.

Hey guys. Just had a couple of follow ups on the wireless business, I guess could you give us an idea how big China is for you guys now as a percent of revs? And do you think the success there will be enough to drive either second half uptick in your handset business, your wireless business or at least find some kind of a stable – maybe stability in the second half?

So, Rick, when you say wireless, you're talking about protection in smartphone specifically, right?

Yes, yes, sir.

So, the China business is growing very fast for us. I mentioned it's probably growing in the order of 50%, 60%. But it's small relative to our Korea business. And so could it grow in the second half? I think in order for our Protection business to grow, we're going to need Korea to come back somewhat. But I think it's growing at a rate that, obviously depends on the share and the space, but I think by early FY 2017 I think China is going to have as much an impact on our Protection smartphone business as Korea.

Okay. And then what kind of role do you expect content to play in all this for handset for you guys this year. I mean I'm thinking of proximity sensor, for instance you mentioned it in your remarks. I mean can you comment on the success of winning SKUs there sort of outside of the Samsung tablet wins that you've talked about? Could that be a boost to your sort of Wireless segment or your Handheld segment in the second half?

Yeah. Well, that is going to be, and it is already actually, it is growing well. Unfortunately, our first wins in that space were at the same customers that were having issues.

Got it.

So – but I think we have enough momentum there across the board that I do think that that's going to be a growth driver for us in the second half despite what happens in Protection.

And how soon do you think some of the proximity – I assume you're getting proximity traction in China as well and if that's right, I mean, when do we start to see the impact of that?

Yeah. I expect that in second half.

In China as well, okay.

Yeah.

And then, just another question on base station. Is it still kind of in that 10% of sales range and are you guys seeing anything different than what some of your peers have talked about over this last earnings season in terms of order patterns? It seems like you called out comms as actually something that was relatively strong. Are you seeing anything different within the base station piece?

The base station is – the strength is really on the PON side. Rick, I think base stations is still kind of at – in this lull period waiting for a little bit of a pickup in China. So, that's kind of what we see, I think.

Right. And as a percentage of revenue, it is still in the 9% to 10% range, Rick.

Okay, got it. Thanks, guys.

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

Yeah, hey. Mohan, a question for you. As you look towards the back half, what would be some of the swing factors that could be either largely positive or largely negative from where you are today?

Well, I don't think there is many more headwinds for us. I mean, we've hit quite a few of them in Samsung obviously and LG in Korea are the biggest ones for us and they're big blows for us, so that's disappointing. But, I think from a growth standpoint, we see, as I mentioned, the IoT related LoRa activity very, very strong. We think that there is good growth there. The automotive continues to grow for us across both wireless charging now and proximity sensing and display drivers in power. Video surveillance, I think, in the second half is going to do better for us, and we should start to see generally in the wireless base stations, a little bit of a pickup there. And we're not anticipating the PON or data center is going to get much weaker. So, we think that they will be as strong in the second half as they were in the first half. The consumer side is more tricky to discuss. I think the smartphones, obviously, we're seeing progress in China. Korea is weak for us. So, it's going to be more challenging to determine what's going to happen in the second half as I mentioned. But I think the other spaces, that we're in, variables, we're getting good traction there, and then on the tablets are doing quite well. And then comm, I mentioned PON, PON is doing well. So, we're still well balanced, but I think we've invested, as I mentioned, in the infrastructure and I think the future growth has got a lot of these new application spaces, especially around the IoT segment as good drivers for us.

And Mohan, I think, in your prepared commentary, you said that bookings overall were up. And I'm just looking at the guidance, which is slightly down just around the edges. I'm curious what the balance is? Is this stuff some of the bookings not shipping in the next quarter, is that simply it or is there a level of cautiousness here, just any color?

So, what we're anticipating as we look at the quarter, Harsh is, we have 49% terms, we mentioned as we came into the quarter and some of those terms are in our Korea smartphone customers. So we're anticipating in our guidance a little bit more weakness there and won't (39:35) necessarily – China is strong as we had expected. So, yes it's a balanced guidance from us.

And then last one for me, as you look into the second half I know that Korea has been probably a little bit of a disappointment so far, but seasonally the second half has almost always been sequentially strong, I mean second half has always been stronger than the first half in handsets, Korea, China, all included. Is that more or less what we think will happen again this year based on what you've been so far telling us (40:05)?

That's what we're hoping. That's what we think will happen, but it's difficult to say, if you look at what's happened with Samsung and LG they've reduced their build plans for the first half. They did have excess inventory, they have lost share clearly in Asia and so they have to rebound in the second half. Now as I mentioned, we're seeing China grow quite nicely and we will get the benefit of that so, but from a Korea standpoint specifically we're hoping that they do have a stronger second half.

Thanks, Mohan.

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

Yes. Thank you. Just a clarification on seeing reduced Korea build plans for Protection, is that across the customer lineup or is that specific to flagships? I think you're talking about protection not showing up at some phones as there is some inventory repurposing going on at customers relative to flagships?

I can only speak to the smartphones that we participate in Ian. I can't talk about their whole build plan because we're not in some of the low-end phones, but certainly what's happened in the last couple of quarters here is that they had much higher expectations, especially in the smartphones – in the high-end smartphones, in the kind of mid range smartphones. And then they have – it's been a continuous reduction in their demand to us. So, they're definitely building less. And then obviously that has resulted also in them having excess inventory which they've had to bleed off. We think at the end of Q2 though, they will be through most of that. And so, as I said, the second half hopefully will recover.

And then protection not in some phones is that mid-tier and high-tier or is just mid-tier would you say?

Mid-tier. Yeah, I think most of the high-end phones that we're in and the mid-range phones we're in, their choice of when to put protection and when not to put protection in is largely a bill of materials reduction so they're trying to reduce the cost of their phones. And so, in some cases, in these mid-range phones, they've decided to take out protection altogether and that is a challenge for us. But hopefully, they'll reverse that decision once their phones start to get returned.

Okay, great. And then Signal Integrity, really nice growth there, 43% of sales. Could you rank order the applications at this point, whether it's datacenter, video broadcast or PON telecom applications or Wireless? Thanks.

I'd say PON, datacenter – datacenter is tied to cloud computing and server connectivity. And then, that's on the datacom side. And then on the industrial side, the video, broadcast video and video surveillance. The wireless backhaul has been weak in the first half I think base station side and that could also be stronger in the second half, so. But for the first half for sure, PON and datacenters.

Great. And then lastly for your wireless charging opportunities, could you highlight your differentiation, I know you're going after more of the industrial and smart grid market. It does seem like it's a crowded market now, you got – IDC had their Analyst Day today, you got TI and XP and others in that space?

Yeah, so on the wireless charging specifically, the Triune acquisition, the value of what we have is really dual-mode and tri-mode devices. So we're really focused on the transmitter side, not so much on the receiver side and it's all about offering a multi-mode transmitter platform. So customers can put in our devices and not worry about standards in the future, pretty much full proof from and support of any receiver that technology that emerges over the next few years. So I think that's the value and that's what we're seeing. So that's on the transmitter side, route for the high-power technologies and the lower power technologies, we just have a very good efficient solution for transmitters for wearable. So those are the two areas. And the differentiation is one of just being able to have programmability and flexibility in our platforms which we built-in, and having a knowledge of power, having real power experts on this technology, which is a power management problem, I think is part of our advantage here.

If I could fit one last in here, given it's in the headline so much now, could you talk about your framework for approaching M&A at the moment, either as an acquirer or as a potential target? Thanks.

Well, obviously, there's growth in the industry, has to come from both organic and external growth and many companies have now recognized that we have been one of the early leaders in that process. So we were acquirers from day one, and as I've mentioned we've put an infrastructure to support further acquisitions. I think we're well-positioned to do more deals. So we're also obviously a very attractive company because of the diversification and all the growth drivers we have. So we play both sides of it, the goal at the moment is to continue to find new emerging technologies that complement that portfolio and can help us get back to our growth that we've had in the last decade.

Thank you, Mohan.

Your next question comes from Gabriela Borges from Goldman Sachs. Your line is open.

Great. Thank you for taking my question. Mohan, a high-level question on how you think about the percentage of mix that's coming from consumer. You mentioned the RIM charges in the past and clearly the space is one that's dominated by large customers, so maybe as you look forward to the diversification opportunity for the company, how do you think about the ideal percentage of mix that should come from the consumer goods? Thank you.

Well, so I look at balance across the company, across different end-markets and we try to have 50% of the company operating in fast lifecycle kind of markets that are more volatile, and a little bit more price sensitive maybe that can drive higher volumes, can drive growth quickly. And then 50% of the company focused on little bit more longer lifecycles, a little bit more stable environment, and the reason why we do that is simply that customers and markets behave differently all the time, and if you're exposed to anyone of these spaces too much, I think it's a risk factor for the company. So having the balance of industrial, enterprise computing, consumer and communication, I think allows us the ability to drive continued growth and be aggressive in exploiting consumer growth, but equally investing in industrial and enterprise computing gives us the balance and stability in gross margin expansion that we need. Within consumer, it is a challenging space because segments can get competitive and get commoditized quite quickly and you have to be willing to move quite quickly from one area to another, which we are and you have to be innovative and clearly Semtech is not a – we're not a leader on price, so we have to continue to differentiate within that and if we can't, then we have to find another space. The beauty is at the moment I think that there are a number of new segments like the Internet of Things, which is industrial marketplace, but actually can drive quite quick growth for us and I think that's going to be one of the differences as we go forward here.

Appreciate the color. As a follow up if I may, to the extent, you're willing to comment on the gross margin structure within that full Protection business, any color on how that's changed over the past three years, and then could the mix shift impact that you're seeing right now towards the more fragmented China customer base could actually be a positive for gross margin? Thank you.

Well, the answer to that is, yes. I think the mix (48:41) moving to China are actually because they're new in the space and emerging, and they realize that they have to have good quality image out there. They are putting more protection and they're more thoughtful about where the protection needs to go, so that's definitely a gross margin help for us. With regard to gross margin protection in general, yeah, you know the consumer market protection ASPs continue to come down, that's an expectation that they will come down every quarter, and it's nothing different than any other consumer business, but what you have to do is you have to bring out new products and get them designed in, into the next platforms, and if you miss that opportunity then you get a little bit more pressure on your pricing and gross margins than you'll ordinarily have. We tend to do a pretty good job of bringing out new products and getting them designed in, and that helps us maintain a reasonable gross margin balance in each of the businesses.

Thanks for the color. Best of luck.

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

In closing, Q1 of fiscal year 2016 had its challenges. We maintained our non-GAAP gross margin above the high-end of our 55% to 60% target range, while we integrated our recent acquisitions and completed the implementation of that global ERP system. We believe that with our diversified product portfolio and customer base, our balanced end market and geographical exposure, as well as our increasing commitment and participation in the fastest growing markets, we are well positioned for future growth. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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