Good afternoon. My name is Blair, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter Fiscal Year 2016 Semtech Corporation's Earning 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. Sandy Harrison, Director of Business and Investor Relations, you may begin your conference.

Thank you, Blair, and welcome to Semtech's conference call to discuss our financial results for the second quarter of fiscal year 2016 which ended July 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 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 other Risk Factors in our 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. And 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 Q2 fiscal 2016, we reported net sales of $125.7 million, which was just above the midpoint of our guidance range. These results represented a decline of 3% from the prior quarter, and the decrease of 14% from the second quarter of fiscal 2015. Strength in the enterprise computing end market led by PON product sales was offset by weaker demand from our high-end consumer end market, driven by our Korean smartphone customers. The industrial and communications end markets also declined sequentially. In Q2, shipments into Asia represented 73% of revenue. North America represented 16% and Europe represented 11% of total revenue. Sales through distribution increased as a percentage of overall revenue, and represented approximately 61% of total revenue, while direct sales represented approximately 39% of total revenue. Bookings decreased sequentially in Q2, but still resulted in a book-to-bill above 1. Sales bookings accounted for approximately 55% of shipments during the quarter. Gross profit margin on a GAAP basis for Q2 of fiscal 2016 was 60.1%, which was a decrease of 20 basis points from 60.3% in Q1 of fiscal 2016. The modest decline was driven by lower manufacturing volumes. In Q3 of fiscal 2016, we expect GAAP gross profit margin to decline slightly as we focus on reducing inventory levels. Operating expense on a GAAP basis decreased approximately 1.4% compared to the prior quarter. The decrease was attributable to lower equity-based compensation expenses, lower environmental accruals offset by higher acquisition and restructuring related expenses. In Q3 of fiscal 2016, we expect our operating expense on a GAAP basis to decline approximately 11% as we benefit from the reduction in force executed in Q2, lower ERP implementation expenses, as well as lower acquisition and restructuring-related expenses. These reductions are somewhat offset by higher equity-based…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2016 performance by end market and by product group, and then provide our outlook for Q3 of fiscal year 2016. In Q2 of fiscal year 2016, we achieved net revenues of $125.7 million, a decline of 3% from Q1 of fiscal year 2016. Demand from the enterprise computing end market increased, while the industrial high-end consumer and communications end markets all decreased from the prior quarter. For Q2 of fiscal year 2016, we posted non-GAAP gross margin of 60.4%, and non-GAAP diluted earnings per share of $0.24 per share. In Q2 of fiscal year 2016, net revenues from the enterprise computing end market increased from the prior quarter, and represented 32% of net revenues. Net revenues from the high-end consumer end market decreased from the prior quarter and represented 24% of total net revenues. Approximately 17% of the high-end consumer net revenue was attributable to handheld devices, and approximately 7% was attributable to other consumer systems. The industrial end market revenues decreased from the prior quarter and represented 26% of total net revenues, while the communications end market revenues also decreased and represented approximately 18% of Semtech's total net revenues. I will now discuss the performance of each of our product groups. In Q2 of fiscal year 2016, our Signal Integrity Product Group delivered another strong quarter, with net revenues increasing 5% sequentially and representing 47% of total net revenues. Strong demand from the enterprise computing end market was offset by lower demand from the communications and industrial end markets. Bookings for the Signal Integrity Product Group were also strong during the quarter. Our Signal Integrity Product Group benefited from continued strength from the PON and datacenter markets, where we are well-positioned to maintain our leadership position…

Your first question comes from the line of Craig Ellis from B. Riley. Your line is open.

Thanks for taking the question. I'll start on Protection. Mohan, you indicated that you think the business can grow in the fourth quarter after the decrease in the third quarter. The question is, given that one of your significant customers would typically see an inventory correction at the end of the year, given that one of the large base band suppliers to the China market is looking at a flattish calendar fourth quarter, what gives you the confidence that that business can grow after admittedly very low third quarter levels?

Yeah, I think that's the main reason Craig, is that Q3 we're seeing that the demand at the Korean customers is starting to stabilize, but unfortunately the inventory is high. So once that's bled off, my sense is that Q4 – it may not be up significantly, but we'll start to see it trending upwards.

And can you talk about the mix of business within protection between your large customer in Korea, and the range of China customers that you talked about when you listed some of the design wins: Huawei, Lenovo, et cetera?

Yeah, the China smartphone business is doing very well for us. It's really growing quite nicely. It's just at a much smaller level than our Korean business. So unfortunately we can't see the China growth offsetting any Korea decline. But the good news is that the Korea business I think is starting to stabilize. We actually have – and anticipating in Q3 slightly stronger demand from Samsung specifically in Q3, and then stabilizing in Q4 I think. And then as the channel inventory comes down, I think Korea will start to pick up. And China, we're expecting to still grow throughout the year.

Okay. And then lastly on the revenue side, before an OpEx question for Emeka. Looking longer term, the Gennum business is something that continues to rack up partner support in the broader ecosystem. But from quarterly revenue levels earlier in the year at $5 million, your target would be an increase of about five fold per quarter, going from $5 million to $25 million. Do you have the visibility on design wins to give us some color on the linearity of that three-year ramp? Will it be linear, will it be more back-end loaded? Any color there would be greatly appreciated.

You're specifically talking about the Wireless business, right Craig?

Yeah. Correct.

Yeah. So the Wireless business, obviously, it's more industrial in nature, the long range Wireless business, but the momentum is very, very good. The opportunity pipeline, as I said, is very good, the conversion rate to wins is very good, which is something we track. And I think the most exciting thing about it is that there is really, really a need in the marketplace for the type of technology we bring, and the problem we're solving. So that's really the confidence level. It's also very diverse. It's across many different – it's application segments as I mentioned from smart energy to smart parking to smart water, all of those different initiatives in the IoT space. And then it's also global. We have interest from Asia, from Europe and North America. So across many different regions of the world. So that's really what's driving the confidence, and we're seeing the growth now coming in. Now, the sensing business is somewhat hiding the growth in the Wireless business because it's a bit more lumpy, it's tied to the – at least for now, it's tied to the smartphone and the tablet business. As I mentioned, we have the same problem with our proximity sensing business as we do with our Protection business in the Korea space, where it's a little bit lumpy and inventory has to be managed according to the demand.

But with respect to LoRa, and the goal to get that to a $100 million a year business, is that in your view, Mohan, something that can be done linearly, or is that more of a classic analog ramp, where it would be more back-end loaded given the gestation period for design wins?

No. I would expect an acceleration in probably FY 2018. I mean, this year, obviously it's going to grow at 200%, somewhere between 200% and 300%, and then next year we're expecting it to grow at probably 100% or something like that, but I would expect it to accelerate as the technology starts to become a de-facto standard.

Thank you. And then lastly Emeka on operating expense, the announced target was $20 million. When will you hit that target, and if the macro stage is uncertain as it's been over the last few months, is there a potential for moves that are more significant than those you've recently announced? Thank you.

So I think the $20 million, if you look at the trajectory of where we were before we announced that, the $20 million will probably suggest $50 million a quarter run rate. What we do expect as we go forward here is that our operating expenses should be in the range of $48 million to $50 million a quarter, at least until we see a significant return to top-line growth. As to other opportunities, of course, we continue to review other opportunities, we continue to review the investments that we're making, looking at our business (29:11) all these investments and making sure that we're seeing the right levels of return on these investments. So right now, Craig, what I can say is definitely we expect to be in the $48 million to $50 million a quarter, but we are looking for opportunities to be able to bring that down further if we can.

Thanks, guys.

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

Yes. Thanks for taking my question. Do you have a sense of your total Korean OEM exposure at the moment, as well as how much smartphones is as a total? I mean, I know in the last filings you had Samsung as an 8% customer.

Yeah. I think it's about a 6% exposure at the moment, something in that range. Obviously, when the Korean handset manufacturers and the rest of their applications don't just do well, obviously some of the channel also struggles, but our exposure from Samsung standpoint is about 6%.

Okay. Great. And then Signal Integrity obviously a very good and big business now. I mean, how should we think of 40 gigabit and 100 gigabit datacenter connectivity in the coming quarters? I mean, is there any specific catalyst to look forward to, like I know Broadcom is coming out with a ton of hot chipsets. How should we think about?

Well, I general I would say, certainly the PON and the datacenter business – remember what we sell into these markets is a broad range of different amplifiers, drivers, integrated CDRs and drivers, PMD products and CDRs, and some optical sub-assemblies and things like that. So it's a broad range of products into different types of modules. Where we are very strong today is between 1 gigabit and 10 gigabit and we have certainly got some good traction in the 25 gigabit and 100 gigabit space which are relatively small compared to the 10 gigabit space. But most of it is all about connectivity and increased bandwidth between servers and datacenters – the datacenter and on the PON side. And as base stations, as I mentioned on the call, comes back, we expect to have that also contribute. So these are I think general trends that we would expect our business, the Signal Integrity business to continue to grow, that's on the datacom side. And then on the video side, I also mentioned that we're seeing this trend to ultra-high definition both 6G and 12G and we have good momentum there. And then really for the first time, it's the first time we've really invested and brought out a unique platform for high definition video surveillance. And so one of the things I mentioned, is that, that's starting to get traction. We're very excited about it, it's early days, but I think that's going to do quite well for us. So the Signal Integrity Product business looks very positive for us.

Great. And two more questions if I could, I mean, Wireless, Sensing down 32%, you cited some concentrated tablet exposure. How fast can the other new tablet ramps make up for the shortfall here?

Well, the shortfall is really an inventory adjustment which I think will be over after Q3, most of that will be through done by Q3. But we are getting good traction on our sensing products in other areas, other tablet manufacturers and other smartphone manufactures. So we'd anticipate that by early next year. We'll start to see those ramping up. I think on the Wireless and Sensing in general, there's two pieces of the business. One is the wireless, the LoRa wireless business and one is the sensing business. The LoRa wireless business is very much an industrial business, but has a much, much bigger SAM associated with it. And then I think the sensing business is really, the proximity sensing is tied to the consumer products which may go up quickly and it may come down, up and down, be a little bit more volatile much like our other consumer business.

Thanks Mohan. And then last question, you had a filing after the close today, it looks like you have a change in employment contract for your Signal Integrity had, just some adjustments, should there be a change in control. Just wondering why there's change in the contract right now, and is it comparable to the other management at this point?

Yes, it is – it's very similar to what the rest of the management team has in place. It was purely a timing issue associated with agreement that we have with our executive. He is located in a different region of the world, he's not in North America. So we had to take into consideration his specific geographical requirements.

Okay. Thank you.

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

Yeah, hey guys, a couple of questions. When I look at the guidance given for the businesses, it seems like some of them are up, some of them are down. Mohan, if I'd ask you, if you didn't have the inventory correction going on in some businesses, would it be possible that you might have been flat or maybe just modestly down as opposed to the guidance?

Yeah, I think that's correct, Harsh. As I mentioned, the Korea smartphone business seems to be stabilizing, which is, I think is the good news. Unfortunately, we do have excess channel and excess inventory the customers have and the channel has. So we have to get rid of – consume that inventory, and then we're expecting Q4 to start to pick up again.

Great. And another question for you Mohan. I think in your comments you said, you're expecting what is the equivalent of, I think the December quarter for most of the companies, that base stations will start to come back and then accelerate. There's a lot of push and pull regarding that topic. What are you guys seeing given that you'll get – you actually get a decent visibility into that area? What are you guys – what gives you the confidence that China is going to come back or maybe it's other areas that are coming back for you?

Well, we just heard that it's starting to pick up again, and we anticipate in Q4. Our current outlook is that, that specific segment of the market will start to pick up again. So obviously because of the disappointing Q3 guidance, we've started to look at what's going to happen in the out quarters here. And, you know what, the good news is, I think, Q4 we see the smartphone business starting to come back, and once the inventory is depleted there, we'll see that growth. But also on the China base station business, we're starting to see a little bit of pick up there.

Can I just throw one more question on that? Do you expect, like a gradual recovery, Mohan, or you expect like a snap-back? Typically, when we've had these sort of, I'll call it a snap-down, you get a pretty big, nice, bumpy, move upward, or are you expecting more of a gradual, slow kind of recovery in the base station market?

I think, base stations will be more slow. I don't think it will be a very rapid snap-back. I think FY 2017 will be more of a growth year for that business. With regard to the other segments, it's difficult to say Harsh, I mean, Korea definitely normally in Q4, they'll bring down their own inventory levels even further, but I think that's something that I think will probably be more stable this year.

Got it. And then one last one for Emeka. Emeka, I missed a part of the call when you talked about $45 million to $50 million OpEx run rate. Should that be something we should be thinking about for the October quarter, or is that something you want to get to through the course of this year?

Yeah, I did say, it was $48 million to $50 million, and for the October quarter, I think, we've guided to $49 million as a midpoint. And so the $48 million to $50 million is what we expect in the near term, like I said, until we start to see a significant return in the top line.

Got it. Thank you guys.

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

Hey, guys. This is Joe Zaccaria on for Rick. I appreciate you taking the question. My question is just a follow up on the China smartphone market. I was wondering if you could talk a little bit about what you're seeing there with respect to that coming back online. I know there has been some chatter about weakness in the white box market. And then in the same vein, I was wondering if you could talk a little bit about your mix or exposure rather with 3G versus 4G. Thanks.

Well, the China smartphone market for us is still doing quite nicely certainly on an annual basis, I mean, there is a little bit of a – it's not growing so as fast on a sequential basis, but we're still expecting this year's business to be significantly up from last year. And we expect it to continue in very good growth for next year. So things are going quite well, it's relatively small as I mentioned compared to the Korean business at the moment for us. So it's not enough to offset any decline there, but it's starting to become a meaningful business for us. And certainly, I think as I mentioned in the last call probably by Q1 or Q2 of next year, the China smartphone business is going to be comparable to our Korean business.

Okay. Great, thanks. And then you talked about your design win on the infrastructure side I think it was – wondering, if you could talk a little bit about how you see the transition to 4K or ultra-high def and how that falls into the model, and what your expectations are there.

Yeah. On the video side, in general, I would say, the ultra-high definition transition is – it takes time. This is infrastructure, obviously it's video infrastructure, but we are seeing customers now starting to design more ultra-high definition systems both 6G and 12G, and there's a lot more interested level, and so we know that they have certain targets that they are trying to achieve in terms of timeline for certain events that are going to go on in the future. So we're definitely seeing a pick up there, at least from the design end standpoint it will – it's more industrial in nature, so it will take a little bit of time to generate revenue. The faster time to revenue is probably on the surveillance side, and that's moving more quickly, as I mentioned on the high definition video surveillance side is doing, is picking up quite quickly.

Okay. Thanks so much.

Your next question comes from the line of Steve Smigie from Raymond James. Your line is open.

Great. Thanks a lot guys. I just had one quick clarification on the OpEx. So the $48 million to $50 million, does that include or exclude options expense?

It excludes option expense. The $48 million to $50 million is on a non-GAAP basis.

All right. Okay. And then just as we think about January quarter, it seems like there are a number of businesses recovering, so it's definitely going to be different from seasonal. I know you guys really only guide one quarter, but are we thinking that could be up a few percent sequentially overall for January?

Well, that's the thinking Steve, obviously, we don't guide that far out. But if you look at the trending, and particularly the key point I made is on channel inventory and our customers' inventory, we're expecting much of that to be depleted this next quarter. So that'll dictate a lot of what happens in Q4.

Okay. And I think even as we get into calendar 2016, there are going to be a lot of moving parts with probably telecom equipment recovering, big ramp in LoRa. How do you think about, maybe as you get to calendar 2017, what – as we return to quote, normal rates, what's your long term growth rate?

Well, FY 2017, obviously we've had some challenges over the last couple of years here, specifically this year with the Korea smartphone manufacturers. But we have a lot of new growth engines as you're aware of, not only the LoRa wireless business, the proximity sensing is relatively new, and I think growing fast, the wireless charging, the isolated switching as I mentioned, we talk about China smartphones coming back, the high definition video surveillance. We think the Signal Integrity products will do well with datacenters and PON and base station. And then we have a number of new emerging areas also which we haven't really talked about in the past. So our expectation is we'll get back to the outperformance next year, and that's the goal.

Okay. Great. And then on gross margin, even back to 2001 you guys have had a pretty amazingly stable gross margin through some downturns, it looks like it's held up reasonably well yet again here. How do we think about that going forward, sort of kind of steady, chugging along around the same rate, same level?

Yeah, obviously, Steve, I think one of the things that has actually worked out very well for us lately has been how stable the gross margins have been. And as you know, our gross margin is driven mostly by the mix of (42:47). We continue to look at our Gennum products, continue to do well and continue to grow. LoRa products are probably, definitely above the high-end of the target range. So our expectation is that our gross margins should stay relatively stable at the high-end of the target range.

Okay. Great. And I know you talked about the wireless charging a little bit earlier, but I know there had been, as we get to the back of this year or early next year, expected a nice ramp in that. How is that tracking at this point?

It's doing quite well, I mean, it's early days, the technology is of great interest to many customers in many different application spaces from variables to automotive, to the industrial, even furniture, computing peripherals. So a lot of interest. It's a new technology. So there's education involved and there's some application issues and challenges that have to be overcome. But I think the general interest is very high. The opportunity pipeline is very high. The conversion now, we're starting to see the conversion to design wins, and we're really starting to see revenue as customers start to ship our true wireless charging products. And so yeah, we're very excited about the future there.

All right. Thanks guys. Appreciate it.

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

Great. Thank you for taking my question. Apologies if I missed it, but if we put aside the excess inventory in smartphones for a moment, are there any other areas that you're seeing excess channel inventory? Maybe you could just talk about the distribution business globally, what you're hearing in terms of distributor (44:33). Thank you.

Gabriela, it was a little bit unclear, your question, but I think I got it, it was more of a distribution and channel question. In general, I would say that it is kind of specific to us, where we have had historically very strong smartphone business, and with several quarters of weakening, Samsung has clearly reduced their demand, their build plans, and with their build plans they've also, I think they've shifted their mix a little bit more to the medium-end and low-end phones. And so some of our content is not so great in those phones. And so there's been a little bit of excess inventory on that front. And then on the enterprise computing side, we've had a very strong first half, a lot of shipment there, and I think it's just a slight, probably a one quarter correction there. So mostly that's what we see. I would say it's more Korea and part of Asia, not so much the rest of the world.

Appreciate the color. And as a follow up if I may, a higher level question on the mix shift of the business. I think having a diverse set of end markets to sell into has always been important for Semtech. With the handset business now down to about less than 20% of sales, maybe you can just give us an update on how you see that end market mix evolving over time. And with things like industrial, LoRa applications ramping, maybe handset business could come down as percentage of sales, either this time, next year or three years from now. Thanks.

Yeah. I mean, that's a correct observation. Obviously, with Wireless business it's more industrial in nature, so that we expect to see the industrial business continue to grow. We have the enterprise computing and communications businesses, which are really driven by Signal Integrity Products. We'll expect to see more growth there. Communications probably will still grow because of the wireless base station piece of it. And consumer, the challenge for us there is we still want to be in that space. We think that it's still a good space to be in, but we just don't want to have so much exposure to one customer. I think we've got to have a little bit more diversification of end customers, but I think it's still a good space to have some participation. You get a lot of pressure and a lot of different behavior from participating in the consumer space, and it cost you to drive the cost down and get efficient manufacturing and things like that. So I think there's value in having a consumer business, just I don't think we want to be so focused on a handful of customers.

That's very helpful. Thank you.

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

Hey. Thanks for taking my question. I just had a quick one, first of all on the Triune Systems acquisition, I think in your last filing you guys had a $16.2 million earn-out baked in, you had a $86 million target. I'm just wondering, if you can give us a quick update on that, and how that's being integrated?

Well, like Mohan did say on the call, we just completed this acquisition about three months or four months ago. So it is definitely early days. The expectation on our part is that the earn-out is going to be paid by the time we get to the end of earn-out period which is three years from now.

Got it.

Yeah, Mitch, this is a long-term earn-out process. So we're looking at the next several years of growth rate.

Got it. Yeah that makes sense. And I mean if I quickly just do the math that on the Triune Systems, if you're doing $15 million a year now as the target, that's roughly $4 million or $5 million. And then if I take Samsung and assume that it's only a 5% customer next quarter, that implies basically $30 million year-over-year decline. And so I'm just wondering, how I split that between the Protection business and in the Wireless and Sensing business which is supposed to be down in the October quarter.

I mean, majority of the decline on an annual basis will be the Protection business tied to the smartphone decline in Korea. The Wireless and Sensing business on an annual basis will likely increase, certainly the wireless piece of that will increase, the sensing piece of it I think also will increase. So I think, it's really the Protection business.

Got it. Thank you.

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

In closing, Semtech delivered Q2 of fiscal year 2016 results consistent with our guidance. We maintained our non-GAAP gross margin above the high end of our 55% to 60% target range. We took actions that lowered our operating expenses to protect our earnings and as our revenue returns to growth we are well positioned to deliver stronger earnings growth. We believe our balanced end market and geographical exposure and our commitment to introduce new analog platforms that address the fastest growing markets, positions us for future earnings 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.