Semtech Corporation (SMTC) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Kyle and I'll be a conference operator today. At this time, I'd like to welcome everyone to the Q3 Fiscal Year 2016 Semtech Corporation 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. [Operator Instructions] Thank you. Mr. Harrison, you may begin your conference.

Thank you, Kyle, and welcome to Semtech's conference call to discuss our financial results for the third quarter of fiscal year 2016 ended October 25, 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 close - after the market closed today, and it 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 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 Q3 fiscal 2016 we reported net revenues of $115.8 million, which was just above the midpoint of our guidance range. These results represented a decline of 8% from the prior quarter and a decrease of 22% from the third quarter of fiscal 2015. Demand was lower across all our end markets as our passive optical network customer bundled [ph] inventory and wireless infrastructure demand remained muted. However, we saw our Samsung business stabilize during the quarter. In Q3 shipments into Asia represented 70% of revenue. North America represented 20% and Europe represented 10% of total revenue. Sales through distribution represented approximately 56% of revenue and direct sales represented approximately 44% of revenue. Bookings decreased sequentially in Q3 resulting in book-to-bill slightly below one. Sales bookings accounted for approximately 55% of shipments during the quarter. Gross margin on a GAAP basis for Q3 of fiscal 2016 was 60.1%, sequentially flat from Q2 of fiscal 2016 asset spread base. In Q4 of fiscal 2016 we expect GAAP gross margin to decline approximately 100 basis points, mostly due to lower absorption as we reduced inventory levels further. Operating expense on a GAAP basis decreased approximately 40% compared to the prior quarter. The decrease was mainly driven by the $14.2 million of benefit from the sales value re-measurement of the Triune Systems liability. In addition, we saw lot of expenses as a result of last quarter's cost reduction actions, lower restructuring related expenses and lower support expenses for our ERP implementation. In Q4 of fiscal 2016, we expect our operating expense on a GAAP basis to increase approximately 35% driven by the non-recurrence of the fair value re-measurement benefit. The impact of the strong week in Q4, higher supplemental compensation and higher number of new product tape outs. In Q3 of fiscal 2015 on a non-GAAP basis excluding the impact of equity-based compensation, amortization of acquired intangibles, acquisition of related expenses and other restructuring related expense, gross margin was 60.3% or flat sequentially as expected. We expect Q4 non-GAAP gross margin to decrease approximately 80 basis points due mostly to lower absorption from our inventory reduction efforts. Q3 non-GAAP operating expense was $49.6 million, down 11% sequentially benefiting from the impact of the cost reduction actions during Q2 and lower support expense for ERP implementation. In Q4, we expect non-GAAP operating expense to increase approximately 9% sequentially due to the impact of the 14-week quarter higher supplemental compensation and higher number of new product tape outs. In fiscal year 2017, we expect our non-GAAP operating expenses to average $48 million to $50 million a quarter. In Q3, we updated our full-year projections related to our regional mix of income. This updated forecast reflected a higher mix of income from high tax jurisdictions which resulted in the discrete impact to our Q3 non-GAAP tax rate. After a result, our Q3 non-GAAP tax rate of 33.1% was significantly higher than the expectation of 16.5%. The higher tax rate unfavorably impacted our non-GAAP EPS per share by approximately $0.05. In Q4, we expect our non-GAAP tax rate to be in the 21% to 23% range. For modeling purposes, in fiscal year 2017 we expect our rates to be in this 16% to 22% range as results were more normalized regional mix of income. In Q3, cash flow from operations was 60% of revenue. We paid down our debt by approximately $17 million and repurchased approximately 491,000 shares of our stock for $7.5 million. And as a result ended the quarter with $192 million of cash and investments down from $213 million in Q2 our debt balance is now $262 million and the balance of share repurchase program is $62.7 million. Turning to capital allocation, I priority for the use of cash remains buying back our stock opportunistically, paying down our debt, acquisitions and strategic equity investments in smaller or start-up companies. Accounts receivable decreased 11% sequentially in Q3 due to the lower announced revenue. Our days sales outstanding decreased by seven days to 46 days just above the target range of 40 to 45 days. Net inventory in absolute dollar terms decreased approximately 11% sequentially in Q3 and represented 150 days of inventory, well above the target range of 90 to 100 days. In Q4, we expect our inventory in both on absolute dollar amounts and days of inventory to decrease. In summary, our profession business seems to have stabilized. Our gross margin is holding at the high-end of our target range of 55% of 60%. And we have successfully lowered our operating expenses. This will help us drive stronger earnings as our new product platforms drive future revenue growth. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2016 performance by end market and by product group and then provide our outlook for Q4 of fiscal year 2016. In Q3 of fiscal year 2016, we achieved net sales of $115.8 million, a decline of 8% from Q2 of fiscal year 2016. Demand from all four of our end markets decreased from the prior quarter. For Q3 fiscal year 2016, we posted non-GAAP gross margin of 60.3% and non-GAAP diluted earnings per share of $0.19 per share. In Q3 of fiscal year 2016, net revenues from the enterprise computing end market declined from the prior quarter and represented 30% of total net revenues. Net revenues from the industrial end market decreased from the prior quarter and represented 27% of total net revenues. The high-end consumer market decreased slightly from the prior quarter and represented 26% of total net revenues. 19% of the high-end consumer revenues were attributable to handheld devices while 7% of the high-end consumer revenues came from other consumer systems. Finally, net revenues from the communications end market decreased and represented approximately 17% of Semtech's total net revenues. I will now discuss the performance of each of our product groups. In Q3 of fiscal year 2016, our Signal Integrity Product Group declined 11% sequentially and represented 45% of total net revenues. Lower demand for our PON products following a record first half along with continued delays in China wireless infrastructure spending contributed lower enterprise computing and communications demand in Q3. However, demand from the industrial end market improved as sales of video products increased modestly from the prior quarter. During the quarter, demand from our datacenter customers increased as they continue to expand their cloud operations and service offerings. Semtech's datacenter products include physical media device platforms and Clock and Data Recovery platforms that deliver some of the industry's highest performance and lowest power across a broad spectrum of bandwidths, making them ideal for applications in the dense datacenter environment. Our leadership position in 10-gigabit per second is now complemented by our new 25 gigabit per second platforms that continue to see a high degree of interest and design wins from our customers developing 100-gig solutions in communications and enterprise computing applications. The China wireless base station market remained soft as expected in Q3. We are expecting a gradual recovery in China base station demand starting early Q1 of fiscal year 2017 or sooner. In Q3 demand increased for video broadcast products. The demand increase was driven by a modest increase in both our high-definition TV and ultra high-definition TV products. During the quarter, as Signal Integrity Product Group several new 6-gig multi-rate video re-clockers. These products expand our family of video broadcast products. We also demonstrated the interoperability of our 12-gig ultra high-definition SDI portfolio of products at several industry events during the quarter. Our 6-gig and 12-gig video broadcast platforms will enable us to maintain our leadership position in the broadcast industry as it transitions from high-definition to ultra high-definition systems. Following a strong first-half results from our Signal Integrity Product Group, and some inventory rebalancing in Q3, we expect net revenues from our Signal Integrity Product Group to be approximately flat in Q4. Moving onto our Protection Product Group. In Q3 of fiscal year 2016 our Protection Product Group declined 5% sequentially and represented 29% of total net revenues. All end markets declined sequentially except for the communications end market which was flat with the prior quarter. Our handheld protection business stabilized as our smartphone protection demand appears to have reached its trough. We expect our Q4 smartphone protection demand to be approximately flat and increase modestly in Q1. Our China protection business continues to do well and we expect to achieve record revenues this fiscal year and continue to grow next year offsetting the weaker demand from Korea. In Q3 demand for protection products from other consumer systems declined due to overall market softness. Our Protection Product Group, recently introduce the MicroClamp 6514P; this is the latest addition to the high-voltage VBUS protection platform. As the form factor of consumer systems decreased, the need for smaller packages that enable the flexibility to replace multiple single-line devices to save board space is increasing. These new devices are designed to protect against high current surges on high-speed interfaces in consumer and industrial systems. Our Protection Product Group also introduced a number of new single and multi-line protection devices targeting opportunities in the industrial and communications end-markets. While our protection business has faced significant demand reductions from our Korean customers this year, we continue to view protection as a growth business as the underlying industry growth drivers remain intact. These drivers include A, the increasing number of high-bandwidth ports requiring high end protection that are now expanding across multiple end markets including the automotive, enterprise computing, and communications markets; and B, the increasing sensitivity of advance lithography IC devices to ESD events. Both these trends will continue to drive demand for Semtech's high-end protection platforms. In Q4 of fiscal year 2016, we expect to have protection business to be flat reflecting a stabilization of the business after four quarters of decline. Turning to our Wireless, Sensing and Timing Product Group, net revenues increased 7% sequentially and represented 14% of total net revenues. Demand from the high-end consumer and industrial end markets increased while the communications market declined from the prior quarter. The activity associated with our LoRa wireless platform continues to garner significant momentum. The LoRa alliance now has more than 150 members worldwide and is expected to reach 200 or more by early next year. Along with our alliance partners, recent LoRa announcements included the following trials or deployments of IoT networks based on LoRa. Bouygues Telecom, a French mobile network operator or MNO in conjunction with technology partners such as Sagemcom have announced plans to build a network across several French urban and rural areas in the first half of 2016. Orange and International Telecommunications Operator plans to offer a LoRa network across France in 2016 and then to potentially rollout similar networks across its global footprint which includes over 30 countries. The Lace Company another global MNO expects to deploy a LoRa network covering more than a dozen major cities in Russia including Moscow and St. Petersburg. The network is targeted to cover a population of more than 30 million people across 9,000 square kilometers. Tata Communications announced it is building the first LoRa IoT network in India. The initial network will feature coverage in Mumbai, Delhi and Bangalore and other cities. Tata estimates that the first phase of this - of its network build will build out will cover over 400 million people. Swisscom, Proximus and KPN all announced LoRa network deployments in Switzerland, Belgium, Luxembourg and the Netherlands. The outstanding global momentum we have for LoRa is being driven by the emerging IoT market. LoRa is a complementary technology to short-range connectivity technology such as Bluetooth and Wi-Fi and is also a complementary technology to long-range, but power-hungry high-bandwidth connectivity technologies such as cell phones, radios and GPS. LoRa enables a low-power secure wide-area network of sensors to be connected at low cost to a network with backend data analytics reporting and control. This capability enables cities across the globe to implement smarter systems such as smart agriculture systems, smart water systems, smart building systems and other smart city initiatives as well as provide solutions to other emerging global issues such as climate change, pollution, security, energy management, asset tracking, and disaster prevention in a much more cost-effective and practical manner than current solutions. We believe that the low-power when IoT industry is going to be a multi-billion dollar industry within five years. We continue to anticipate that our LoRa-based wireless revenues could nearly triple this year from a baseline of $5 million last year and should achieve $100 million in revenues within three years. The recent activity in conjunction with other LoRa Alliance members is driving over $300 million in future revenue value in our opportunity pipeline and contributing to our high confidence that our LoRa platform will become the de facto standard for long-range IoT industrial wireless sensor connectivity. In our Wireless, Sensing and Timing Product Group, we also continue to see increase in activity including design wins for our powerline to medication products. We recently announced the collaboration with Wasion Group, a leading provider of energy metering equipment and energy-saving solutions in China. Semtech's multimode powerline communications platform will be used in the rollout of the Advanced Metering Infrastructure in residential, commercial, and industrial smart meters in the China Southern Power Grid. We have a number of additional global initiatives in the works that should drive significant growth for our PLC platforms over the next few years. Demand for our proximity sensors increased nicely during the quarter. Our highly differentiated proximity sensing platforms enable our customers to architect their consumer systems to cost-reduce existing functionality or to enhance future functionality. While our platforms have been designed primarily for high-end consumer applications, such as smartphones and tablets, we are starting to see the use of our sensors in notebooks and industrial computing equipment also. We recently announced the SX9306 sensing platform that enables a system to distinguish the human body from other objects and control the RF radiation from assisting device. This is a critical requirement as consumer and industrial systems start to implement high-powered radios that are potentially damaging to the health of the human body. Stricter regulations are driving consumer systems manufacturers to reduce the radio energy when the system is close to the human body and Semtech's proximity platforms provide a unique capability to help achieve this goal. We expect our sensing business to show solid growth in FY 2017 as new design wins at Tier 1 OEMs move to production. We are excited about the number of growth opportunities from our Wireless, Sensing and Timing Product Group and expect these opportunities to contribute significantly to our growth prospects in FY 2017 and beyond. For Q4 of fiscal year 2016, we expect revenues from our Wireless, Sensing and Timing Group to be approximately flat due to seasonality. Moving to our Power and High-Reliability Product Group. In Q3 of Power and High-Reliability business decreased 60% sequentially and represented 12% of total net revenues. Demand for our Power & High-Rel business was lower across all four of our end markets and regions as a softer overall market impacted the business. During Q3 fiscal year 2016 our High-Rel product group achieved several significant product milestones. During the quarter we announced the launch of the industry's first Tri-Mode Wireless Charging Platform. Semtech's programmable wireless charging solution offers customers the flexibility to rapidly update their solutions as the industry charging standards evolve. Our wireless charging platform also offers a broad range of power levels from 0.1 volts up to 40 watts, enabling high-efficiency charging for both the low-power wearable market as well as the high-power industrial and automotive segments of the market. These capabilities are critical for the success of charging platforms going to consumer, industrial and infrastructure markets. We also announced this quarter that our wireless charging chipset has won several designs at Tier 1 computing peripherals systems, automotive systems and wearable systems. This week we also announced expansion of our new Isolated Power Switch Platform. The TS13101 is optimized for low-voltage switch applications such as smart thermostats, security systems, intelligent sensor control and other home automation systems. We are receiving a lot of interest in our Isolated Switch Platform from industrial and home automation customers as they look to update and replace designs from mechanical relays with smarter solid-state technologies. In Q4 of fiscal year 2016 we expect net sales from our Power and High-Rel product group to increase modestly as are wireless power revenues increased due to customer product ramps. The ramps are at the early stages of what we anticipate to be a secular multiyear growth industry. In Q3, the total company distribution POS increased 4% from the prior quarter to $79.4 million and represented a new quarterly record. Additionally, distributor inventory decreased by four days from 83 days in Q2 of fiscal year 2016 to 79 days in Q3 and is at the upper end of our 70 to 80 days channel inventory model. We expect reduce to reduce our channel inventory levels further in Q4. Our distributor business remained very well balanced with 54% of the total POS coming from consumer and enterprise computing end markets, and 46% of total POS coming from industrial and communications end markets. Moving onto new products and design wins. In Q3 of fiscal year 2016, we released 16 new products. We also achieved 2073 new design wins. Now let me discuss our outlook for the fourth quarter of 2016, based on recent bookings trends and our backlog entering the quarter, we are currently estimating Q4 net revenue to be between $113 million and $119 million. To attain the midpoint of our guidance range or approximately $116 million, we needed net turns orders of approximately 52% at the beginning of Q3. We expect our Q4 GAAP earnings to be a loss of between $0.01 and $0.03 per diluted share and our Q4 non-GAAP earnings to be between $0.14 and $0.18 per diluted share. I will now hand the call back to the Operator and Sandy and Emeka and I will be happy to answer any questions.

Operator?

[Operator Instructions] Your first question comes from the line of Craig Ellis from B. Riley. Your line is open.

Thanks for taking the question. First just to clarify the assumptions around the extra week in the fiscal fourth quarter, what's the specific exception Emeka in OpEx and what's the assumption for the extra week contribution on the top line as well?

So with regard to the OpEx I think if you look at the increase from the third quarter I listed out three key drivers for the increase in the OpEx. It is the extra week, it is supplemental compensation to help us with vacation and it's also due to a higher number of new products that passed in the quarter. And I think those sort of breakout evenly the 9% increase breaks out evenly among those three categories. And with regards to the top line, I think as you know Craig typically in the fourth quarter we're seasonally down 5% to 10% and I think the five that we are gaining to a sequentially flattish kind of quarter. I think that GAAP is made up by the extra week.

Okay. So the extra week is 5% to 6% of sales, or 5% to 6% of incremental sales? Okay. Switching gears to the inventory commentary. You've clearly given the gross margin guidance plan to be monitoring or controlling your production. Where do you expect to be with inventory cleanup by the end of the quarter, is it all behind you or just some of that linger into the fiscal first quarter?

You know, I think at the current revenue levels I think if we continue to stay at those levels we probably might see a little bit more of it in the first quarter but hopefully by the end of the January quarter. Hopefully most of that will be behind us and as we go into the next fiscal year, hopefully with the increase in the topline that we may start to get back to normal manufacturing volumes.

And then lastly then I'll hand it over. Historically, the fiscal first quarter is a quarter where you would see growth, but it sounds like there some inventory risk to the quarter. How are you thinking about the seasonality in the first quarter? And what are some of the gives and takes beyond inventory that investors should be aware of? As you look at historically has been the first quarter of seasonal growth for the company?

The first quarter for us - a lot depends on I think what goes on in China and with our Signal Integrity Products, we expect that most of the inventory rebalancing from that to be completed in the second half. So, we should see a little pickup in that in Q1. I would say the handheld smartphone consumer business is again second half has been fairly weak, so should start to pick up in Q1. Certainly in Q2 would expect that to ramp up. And then in general the industrial business as I think should be okay in Q1, so in general, I would anticipate that Q1 to be slightly stronger than Q4.

Okay. And then if I can I could just follow-up on that, but really extend the outlook a little bit, Mohan. You mentioned Wireless, Sensing was expected to be one of the bigger contributors to growth next year. Can you round out the view for some of the growth gives and takes next year, what are the bigger tailwinds as you see them and what do the headwinds that investors should be aware of as they look out to fiscal 2017?

Well, we see - so we obviously have a lot of tailwinds. We've had our fair share of the headwinds of this year. Next year I think is going to be a different year for us. I think the wireless products are doing very, very well and certainly we start to - we should start to see a material revenue increase in the second half. The sensing the same. We have good design wins there, good momentum there, so I expect to see good strong second-half from that business. I mentioned the wireless charging product lines, again, we have good activity, good design wins. The time to revenue takes a little bit longer but good momentum on those. The smartphone business, although, was down and this year I think China is going to start to increase its contribution next year and hopefully Korea can stabilize and maintain the level it's at and that should be contributive for us. The datacenter, the PON products and PMD products and the CDR products, as we transition to - from 10-gig to 25-gig to 100-gig I think we're going to see more momentum there. We have very good position at 10-gig obviously and we've been doing very well in the 100-gig modules also. So I think we're going to see that business ramp up whether that's Q2, Q3 type of event is the question. So, we have quite a few things going on. I also mentioned the Powerline Communication products, I think, again, that's starting to kick in for us. So lots of tailwinds. The headwind is going to be - continue to be really what happens with Samsung and the handheld or protection business. We think it's stabilized now. As I mentioned, we see Q3 as kind of a trough, Q4 will be flat and then we start to - hopefully, start to see it pick up a little bit

Thank you, guys.

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

Hi. Thanks for taking my question. So smartphone stabilization protection, I mean, Samsung what percent of sales was it this quarter? I know Qualcomm talked about seeing an uptick at low to medium tiers at that customer, was that something similar you saw?

So if you look at our Samsung total sales was about 7% this quarter, up slightly from 6% last quarter.

So in general - Ian, I would say the key thing is that as we move forward here, the protection handheld business in general for us, I think, has been on decline for quite some time, several quarters, and now it's started to stabilize. So we feel good about the fact that we've troughed out and hopefully we'll expand here. A lot depends on how well their phones do next year. I mean, if they released new phones, the demand for those new phones have got to at least maintain the current share that they have and so that's little bit unknown. But we feel pretty good that we've baked in the trough here and we should see some growth going forward.

Okay, great. And then moving onto LoRa, looks like you've got some really interesting wins in front of you, especially second half of next year. I mean, can you rank order the near-term growth opportunities? It seems there's a bucket here for the design wins at the utilities? And then you've also got carriers who are building IOT networks, you've got a lot of different use cases. Could you perhaps talk about some rank ordering here?

Yes, it is a challenging to break it down into detail, because the biggest opportunity is when the carriers roll out their network they cover a very large range and they cover a very large number of potential nodes, so that's the beauty. So that's kind of a long-term infrastructure investment that now on the other end of that is going to need LoRa devices. So it's more of a long-term opportunity, but a very significant one. We have a quarter of the world's population covered, so at this point in time with all of the current networks that are being deployed. So the short-term opportunity is more the private networks that are putting in LoRa related systems and connectivity and that's going quite well also. LoRa is such a powerful technology for IoT that I think it's just generally got a very good application space and smart buildings and smart cities and those type of environments. I would say that the opportunity also is as we start to look at how to deploy, how LoRa is deployed across the globe we're seeing more and more opportunities for what I'll call a little bit shorter time to revenue opportunity, which is why we've gone out and said that in three years in we think this will be $100 million business for us because we can see those wins translating to revenue faster.

Thanks. And then lastly, can you talk about where we are in terms of the cost and benefits to the ERP implementation? I know, you are building up some safety stock of inventory ahead of that, and is some of the over inventory right now perhaps due to some safety stock also?

So, Ian, I think the ERP implementation is really something that has really worked out very well for us. We are now really enjoying a whole lot of benefits that we originally anticipated with regards to the inventory reduction that was the key reason why our inventory levels were at a lower level in the first half of this year, and because of the maturity of the system where we are right now is also the reason why we are bringing inventory write-down. So, the way we think about this internally is that ERP implementation is already behind us and we are just enjoying the benefits of it.

Yeah, I would add to that that when we build the inventory we had planned on some issues associated with the ERP implementation because we had heard that many companies have those types of issues. The reality is the system integration and implementation went very, very well for us. And so we really enhance that we probably didn't need as much inventory as we built out but that's lead through mostly now.

Okay, thank you.

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

Hey, guys, Joe Zaccaria on for Rick. Thanks for taking the questions. My first question relates to the PON business you said that it was lower in the quarter, wondering if you could talk a little bit about the puts and takes there and how you see that business trending through the first half of next year? Thanks.

Yeah, we had a very strong first half in PON. So I would say that what we're seeing now is just a little bit of an inventory balancing both in the channel and our customers. We expect it to start to trickle back up again I think starting Q1 than have a stronger either a first half. It's looking like a stronger first half again. The seasonality on PON for us is difficult to call mostly of its China and a lot of it is driven by the China economy but that's plus what we would expect is probably Q1 may be Q2 to start picking up again.

Okay, great. And then a higher level question, when you think about the data center in the 10, 25, 100-gig rollouts, you know, where do you think we are in the 25-gig rollout and how would you compare it from a steady-state and how it ramps up compared to 10 and 100? Thanks.

Well, the 25 usually - you're usually using four 25 lanes to create 100-gig. And that's the predominant 100-gig implementation today. And I would say it's starting to accelerate for sure, but it's still small relative to the 10-gig side of it. Certainly next year and year after probably by calendar year 2017, you're going to see the 100-gig side of it is going to be closer to the 10-gig market opportunity. So, it's still a few years out.

Okay. And then my last question is on the China handset business. It sounds like that's been tracking well for you, in line with expectations. Maybe if not a little bit ahead. Could you talk about how you see that business is relative to your Korean handset business? And when you think you might cross-pair there and how you view it over time? Thanks.

Yeah, so I think at the end of this fiscal year, China - our China business will be about 50% to 60% of our Korea business and next year, we expect it to be kind of a similar amount. So, I'm talking about really all the combined China handset guys and all the Korean handset guys in total. So by - in FY 2017, part of it is because the Korea business come down, but China going up that I think in FY 2017 - by the end of the FY 2017 China Korea should probably be about the same. So, that's pretty positive really for us given obviously Samsung and LG have been struggling, but to see the China manufacturers doing better and our contribution there doing well, then that's kind of been a good story for us.

Thanks so much, guys.

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

Great. Thanks a lot. Just wanted to follow-up on a couple questions from earlier. Just going back to looking at April quarter, so it sounds like the business is going to pick up there. I think you indicated, across a number of groups, but again because you had the 14-week quarter, so that sort of suggests that you're may be flattish revenue wise into the April quarter over January?

So, Steve, I think if you look at it that way in terms of the numbers and the number of weeks, I guess, you - why you think that. But I think historically we have been up in the April quarter and as we look at the health of most of our businesses right now, the design wins and the opportunities that we're expecting and the pickup in our typically - the protection business is up in the fourth quarter because of strength out of Korea and as Mohan did say, if we received that new product platform for Samsung, that could be a good thing. If we start to see the rebound of the China Wireless infrastructure business, that could be a good thing. So I think overall, I probably expect to see our April quarter probably slightly up from the current quarter even though it is a 14-week quarter.

Okay, great. And then just to follow-up on the PON business. I think big driver of that had been that China was going to - or has been requiring maybe 150 million connections into households that had to be connected by the end of calendar 2016. Been hearing a little bit that some of that might extend into calendar 2017. I was curious if you have any clarity on if that's the program that's really been driving some of your nice growth there and is there some potential here that this extends into calendar year 2017?

Yeah. That is the program that's mostly been driving our business, Steve, and yeah, we do expect it go into calendar year 2017. At that point it may start to level off a little bit, but that's the impression we have at this point, yeah.

Okay, great. On the handset, it sounds like the Chinese overall catches up to the Korean, but have you also been adding some additional Chinese and other customers? You in past calls listed several Chinese guys, just curious if there's been any new penetration to other customers or if you are just trying to go deeper into existing Chinese guys?

No, we are getting progress with the other Chinese manufacturers. I would say that there is one or two that stand out in terms of their volumes relative to the whole space. So there's a lot of smaller guys that don't really contribute as much. So - but we are getting progress. And my commentary on the handheld is largely tied to protection. Obviously, we have proximity sensing that's starting to do well also in the smartphone space.

Okay, great. And I think you addressed this some, and obviously can't catch all of it, but it seems like the plan for that proximity sensor business is to start taking in hold bunch of other applications, is that sort of a quick summary of what you are thinking?

Well, what's happening is we designed the platform for tablets essentially to meet the SAR standards and so this is essentially what I'd said in the script that as radio power increases it becomes health hazard for these devices and so one has to - these customers, these new regulations, the customers have to sense and reduce the radio power. And our proximity sensing is really very powerful for that application, so we're starting to see it emerge in any kind of applications that are mobile applications where you have human body contact, so that's what we are seeing. So, we are seeing some of the Ultrabooks and some of the industrial applications emerge for proximity sensing, but the volume drivers though are still the smartphones and tablets.

Okay, great. Thanks, guys.

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

You are on mute.

Mitch?

Hello?

Yep. Go ahead.

Can you provide just from value what happened in the quarter on a sequentially or year-over-year basis, because remember last quarter, you saw some sharp decline in the Korean smartphone's, but it looks like it's now up while the protection business is down, I'm just trying to get understanding of the dynamics there?

Steve, could you repeat the question, I didn't quite get it.

Yeah. So, last quarter you talked about a sharp decline in proximity sensors due to Korean smartphone weakness. And now it looks like you're seeing flip or are you seeing an increase in wireless. So, I'm just wondering what happened with the proximity business this quarter, and then as you ramp up when you return to essentially 20 million in quarterly run rate?

Proximity business was - last quarter the issue really again was right to our Korean smartphone manufacturers and that just their overall demand coming down, and so we were left with excess inventory both at Semtech and in the channel, and our customers and that's bleeding through that. But outside the Korean smartphone manufacturers we've got very good momentum of the proximity sensing, so that starting to pick up again. And I think as we get into Q1 certainly Q2 we have a number of new platforms coming online with customers that I think are going to ramp up and that's what the expectation is for FY 2017 to be a very good growth year for the proximity sensing business.

Got it. And one second let me flip over to the gross margin side, can you just help me understand what's driving the 100 basis points decrease sequentially, is it more of a mix issue or just the extra week or what's driving the decrease there?

So the 100 basis points decrease was for GAAP gross margin only. So that was a combination of lower absorption and with GAAP we also have the equity compensation, we expect the equity compensation to be higher. But if we just focus only on the non-GAAP side, we're expecting to come down about 80 basis points at the midpoint. Most of that is because of our lower absorption. There may be a little bit of a slight mix issue but as we look ahead what we anticipate is that as we start to see the top line revenue growth may be getting back to about $125 million per quarter on rate that allows us to start getting back to normal levels of utilization in our manufacturing facilities and that should allow us to get back to the high-end of our 55% to 60% range.

Got it, thank you.

There are no further questions at this time.

In closing, Semtech delivered Q3 fiscal year 2016 operating results consistent with our guidance. We maintained our non-GAAP gross margin above the high-end of our 55% to 60% target range. We realize the benefit of lower OpEx as a result of the actions taken last quarter. While the high-end non-GAAP tax rate impacted our non-GAAP EPS, lower operating expenses should help deliver stronger earnings growth as revenue growth accelerates next year. We believe that Semtech SAM expansion over the last few years combined with our infrastructure investments over the same period positions us in the best strategic and operational position in history of the company and we now have a clear roadmap to enable us to drive towards our billion-dollar revenue target. With that, we appreciate your continued support of Semtech and look forward to updating you on next quarter. Thank you.

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