Good afternoon. My name is Jesse and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q1 FY '17 Earnings Release. [Operator Instructions]. Thank you. Sandy Harrison, Director of Business, Finance and Investor Relations, you may begin your conference.

Thank you, operator and welcome to Semtech's conference call to discuss our financial results for the first quarter of FY '17, ended May 1, 2016. I'm Sandy Harrison, Director of Business, Finance and Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results for the quarter was issued after the market closed today and is available on our website at www.semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor Statement included in today's press release as well as the other risk 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 reconciliation between GAAP and non-GAAP results are included in today's press release. I would also like to highlight that Semtech plans to host its analyst day on Wednesday, June 22, in New York City. The formal presentations will be webcast via live audio and accessible under the events calendar section located in the investor relations section of the Company's website at www.semtech.com. 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 FY '17, net sales increased 11% from the prior quarter to $131.1 million. This is the second consecutive quarter of delivering results at the upper end of our guidance range. In Q1, shipments into Asia represented 77% of revenue, North America represented 14% and Europe represented 9% of total revenue. Sales to distribution represented approximately 65% of revenue and direct sales represented approximately 35% of revenue. Bookings in Q1 increased nicely over the prior quarter, resulting in a book-to-bill that was above one. Off bookings accounted for approximately 53% of shipments during the quarter. Gross margin on a GAAP basis for Q1 of FY '17 was 59.9%, up 130 basis points sequentially, due mainly to improved manufacturing efficiencies. In Q2 of FY '17, we expect GAAP gross margin to be sequentially flat as the benefit of higher absorption is offset by a higher mix of high-end consumer revenue. Operating expense on a GAAP basis decreased approximately 2% sequentially. The decrease was mainly driven by the timing of new product spending. In Q2 of FY '17, we expect our operating expense on a GAAP basis to be approximately flat with the prior quarter. As a result of revaluation reserves that we maintain against our U.S.-based deferred tax assets, our GAAP effective tax rate is subject to extreme volatility during the periods when our U.S. operations experience significant losses in relation to total income from continuing operations before taxes as the date in the fourth quarter of FY '17. As the result, in Q1 FY '17, our GAAP tax rate was approximately 39%. In Q2, we expect our GAAP tax rate to be approximately 30%. For FY '17, we expect our full-year GAAP tax rates to be in the 21% to 23% range. Now…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 FY '17 performance by end market and by product group and then provide our outlook for Q2 of FY '17. In Q1 of FY '17, we achieved net sales of $131.1 million which was an increase of 11% from Q4 of FY '16 and an increase of 1% from Q1 of FY '16. We experienced higher demand from our enterprise computing, industrial and communications end markets while demand from our high-end consumer end market declined from the prior quarter. For Q1 FY '17, we posted non-GAAP gross margin of 60.2% and non-GAAP diluted earnings per share of $0.30. In Q1 of FY '17, net sales from the enterprise computing end market increased from the prior quarter and represented 37% of total net revenues. The industrial end market also increased from the prior quarter and represented 23% of total net revenues. The high-end consumer end market decreased from the prior quarter and represented 21% of total net revenues. Approximately 16% of the high-end consumer net revenues was attributable to hand-held devices and approximately 5% was attributable to other consumer systems. Finally, net revenues from the communications end market increased from the prior quarter and represented 19% of total net revenues. I will now discuss the performance of each of our product groups, beginning with our Signal Integrity Product Group. In Q1 of FY '17, our Signal Integrity Product Group delivered a record performance, increasing 21% sequentially and representing 53% of total net revenues. Stronger demand for our data center, PON and wireless base station products contributed to higher enterprise computing and communications end market revenues, offset slightly by lower industrial revenues due to lower seasonal demand for our broadcast video products. Our Signal Integrity Product Group continues to invest in…

[Operator Instructions]. Your first question comes from Ian Ing from MKM Partners. Your line is open.

Mohan, you talked about LoRa most regions having it by the end of calendar 2017. Do you think that will be a lead over some of the other industrial IoT standards, such as narrow band IoT and then, Sigfox, this other carrier? And how do you expect the advantages of LoRa to play out versus the competing standards in the coming years? Thanks.

The way we look at it, Ian, is that LoRa has some unique benefits. Each of the different other standards that are out there have some benefits also, but I think if you compare with the likes of the narrow band IoT LTE-based radios, they're really a complement. We see the higher bandwidth standards out there, really good for high bandwidth requirements, whereas LoRa is really ideal for the lower-power, low-bandwidth, longer-range applications plus the geo-localization. So we think we complement well the narrow band IoT standards and that's supported by the fact that most of the mobile network operators that are deploying LoRa will also have some type of narrow band IoT or some other LTE-based network also.

And for my follow-up, Emeka, you talked about OpEx for the rest of the year being slightly above the target range and service of higher revenues, perhaps some more granularity there. Is this a mix of new revenues that are coming online or is it servicing the ongoing run rate business? And when you say slightly higher than the target range right now, OpEx maybe a $51.5 million, $52 million, I mean is that going to be flat or does that get closer to the $50 million?

Yes, if you do not call a set out the last time that we spoke on the NS call a quarter ago, I did indicate that the guidance of our $48 million to $50 million a quarter in OpEx could see some pressure if we continue to see movement growth in the top line and we're definitely seeing that. We're definitely pleased with how the top line is coming in. We're seeing a lot of growth from a whole lot of our growth drivers, the new product initiatives. There are a lot of opportunities, some very exciting opportunities. But it is an opportunity that needs to be fed and as we've continued to drive those, if you look at some of the expenses that you would typically expect to see accruing with top line things like supplemental compensation for employees as we grow, rate commissions and things like that, we're expecting that, given where we had now see the outlook for the rest of the year, that maybe probably, will probably be more towards above the high end of that range, probably more in the $51 million to $52 million range.

And then last question here, looks like China wireless base stations, PON, fiber to the home, looks like you have two strong quarters with January and April and now looks like a little bit of fall-off after that. What's the status of inventory and how should we think of these deployments? Are they going to be sort of lumpy like this going forward?

It's difficult to say Ian, I think it obviously depends on mostly China and the rollouts there and what's going on in China. We still expect the second half to do quite well and we expect to grow both PON and base stations on an annual basis. So, I don't think there's any risk from an inventory standpoint or any concerned. It's just, it has, as you point out, had a couple of very good strong quarters and now I think it is now just going through maybe a quarter or two of adjustment.

Your next question comes from Cody Acree from Drexel Hamilton. Your line is open.

Maybe if we could just talk about the inventory health across both the distribution channel and maybe at your larger liens.

So Cody, I think obviously with the last quarter, our inventory in the channel was a little low. We've increased the channel inventory modestly. I think it is still at the low end of our range and most of that inventory, as I mentioned, was tied to really the PON and base station markets which are showing a little bit of softness. But in other areas, I think where the demand is quite strong, there is very little inventory and in fact if anything, we're still light. Our internal inventory has been coming down as the demand is going up, so we're not very concerned and from an OEM standpoint, we get a lot of visibility obviously from some of the consumer applications where the products move faster and I think we're in pretty good shape there. I don't have a concern about that side of things. And on the data center side of things, again, if anywhere there's a little bit of concern it's maybe on the PON and base station side, but I think, as I just pointed out, I think that will clear itself out over the next quarter here.

And then Mohan, as with the mix changing so much over the last several quarters, what do you think seasonality looks like? Not just maybe here in the summer months, but as we progress through the year?

It is a tough one to answer, Cody, mostly because we have some secular things going on. Obviously, our LoRa business is going to continue to grow very nicely for us. We're really at the very early stages in the growth of that business and I'm expecting that to continue to grow throughout the year, the same with our power and high-rel business. So those two offsetting. With the smartphone business, it's more consumer, so we expect a stronger, maybe Q2 and Q3 and a softening in Q4. Without SIP business, the data center business has been doing very well for us so far and this year, we expect another strong quarter in Q2 and I think in, even in the second half, mostly again because of the data center ramp that is going on. So much depends on the China PON side of it, but I think that's just one area of our business. We think most of the rest of our businesses are going to do quite well.

Emeka, any help on gross margins further out?

Well so, Cody, for our gross margins, the story is still the same essentially. The two key drivers for our gross margin is the mix of revenue. So as you see a higher mix of our interface computer in our communications and the industrial revenues, that is usually very good for gross margin and the high-end consumer is some sort of a headwind to gross margin. So depending on the mix of the revenue, that would typically for the most part indicate what our gross margins are going to look like, but having said that, I think, like I've said in my prepared remarks, our expectation is that we should still stay around the top, the high-end of our target 55% to 60% range.

Your next question comes from Steven Smigie from Raymond James. Your line is open.

Mohan, I was hoping you could comment a little bit on where you see your product positioning on the 100-gigat at this point in terms of either design wins or interest you are receiving. Do you feel like you are getting more wins, say at maybe like an enterprise level or maybe hyper-scaled data center or maybe connecting one data center to another? Any sense where you're finding you're getting more wins?

Yes, I think it is clearly more data center, Steve. I think data center to data center and also within data centers. I mean, the growth is quite very good actually. And we have, we're seeing the requirements in these data centers going from 10-gigabit connectivity to 25-gigabit connectivity as they are ramping up both the bandwidth side of things and trying to get costs down and so we see the path, the 100-gigabit modules obviously ramping up very quickly. So we see the growth in our 25-gigabit CDRs and we also are very conscious of the fact that as soon as they can go to single LAN 100-gig, they probably will. As I mentioned, we won't the product out until the end of the year, but I think early next year, we should start to see some traction from that area. So it is a pretty nice story, I think, across the board. There are applications outside the data center space, but I think the majority of the growth is coming from the data center. There's some in the metro side as well, but I think it's mostly data center and cloud driven.

And on your concerns about the PON, is that coming from customers saying something or slowing orders or is it like third-party research reports or what's the color in terms of where you are getting a little bit worried there?

It is more that we've had a couple of very good strong quarters of growth and I think even this last quarter was very, very good. But it's mostly driven out of China and China infrastructure and China in general, I think, is showing signs of a little bit of a slowdown. I think it is temporary. Like I said, I don't think it's necessarily a long term thing and we still expect growth this year from our PON business over last year as we do on the base station side. But after one quarter of strong growth here followed after Q4's growth as well, I think Q2 is going to be a little bit softer on the PON and base station side and it may pick up again in Q3, but certainly by the end of the year, I think we're expecting it to ramp back up again.

And if I could sneak one more just on LoRa, can you give us an update of what you think a likely LoRa revenue target is for this year and an update on when you think you can hit that? When you say the three years and the $100 million, what year would you be at $100 million run rate?

Well what we've said, what I've said openly, Steve, is that this year, we're expecting to get closer to $30 million to $40 million of revenue and then next year, $50 million to $60 million and the following year, in the $100 million range. Things are moving very nicely. The mobile network operators are deploying now. We're seeing a lot of new mobile network operators also doing trials which is very good. The global aspect of it is very positive. There's also a lot of private networks who are building their own LoRa network for their own purposes and that's also very encouraging, so all the milestones are being achieved. We have announced the LoRa localization capability, as I mentioned which is a new feature, a new function that really is a pretty interesting capability that I think will further accelerate the deployment of LoRa across the globe. So we're monitoring it is very closely. We're looking at traction on the networking side. We're also looking at traction on the sensor side which is where most of our revenues will come from. And so making sure that as the MNOs build out their network, they have a full set of sensors for smart applications, smart environment applications, smart city applications, smart watering, smart agriculture, smart homes, smart asset tracking and localization, smart metering. All of these require different types of sensors that need to be connected to the LoRa network. So there are some investments required there, but it's moving along very nicely. And as I mentioned, the LoRa Alliance which is 900 members is a very powerful alliance with very significant leadership-type companies in that alliance who are all involved in building out their own LoRa networks or facilitating the deployment of LoRa sensors.

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

So just trying to understand a little better the communications segment, I think this was the first quarter you have seen some year-over-year growth in the segment. What's the run rate expectation or the growth rate we should think about over the next couple years?

The communications for us is mostly our signal integrity products, some protection products on Ethernet ports and some power on high-rel, but mostly driven out of our signal integrity products and most of that is the base station side. On the base station side, we said last quarter that last year was a softer demand year for some specific reasons in China. This year, we expect growth and I think we're going to see that. We've already seen a strong Q1. There's a little bit of a softening I think in Q2 and I think second half should pick up. So we should see, I would think, single-digit, maybe high single-digit growth this fiscal year for [Technical Difficulty].

And if we could return to the gross margin dynamics, so you are basically at 6.2%. Could you maybe help me walk through the 100 basis points increase? What was the mix shift that benefited you? Or do you see some a cost to goods sold saving, as well?

No, it was mostly a mix of the product that we shipped more of in Q1 mix. So during the quarter, we saw a lot of demand for our CDR products going into the data centers and those are just in gross margin. We also have our other revenue contributions from our [indiscernible] as far as the PON and the base station, so it was strictly mostly just driven by the mix of the products. Also, as we get into Q1, there were some low-margin products that we thought was going to be in the revenue mix and those were actually pushed out of the quarter, so that helped as well. If you add up the indent drives on gross margins, it's also just the level of absorption. So as you can imagine, the demand outlook is getting better. We need to put inventory in place and to make sure that we're able to support the high-end levels of demand. And so we saw a lower bid offer benefit as well from absorption during the quarter.

And then just one small since you mentioned the margin push-out, since this lower margin business is kind of being shifted to July, why is the gross margin guide higher Q over Q? Is that just because of the revenue leverage?

So we're continuing to see more absorption, like I said during my prepared remarks. But I did also say that that particular type of absorption is being offset somewhat by a higher mix of lower-margin products.

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

I wanted to ask a couple questions, let me start off with the goal you have of, Emeka, you mentioned 25% to 30% operating margin goal. Would you reiterate for us what's needed to get to that goal on revenue or timeframe?

Well I think to get to that, to the low end of that range, about 25% or so, we need to get to a top-line run rate of $600 million. We need gross margins to remain stable at where they are right now and we'd need to continue to manage operating expenses as tightly as we have been doing in the past. I think the combination of the $600 million run rate and the top-line 60% gross margins and OpEx under control should allow us to get to the lower end of the 25% to 30% range.

And if I can ask on the PON side, there were a couple of questions asked. What do you think is, Mohan, what do you think is going on in China on the PON market. Is it demand pause or is it just inventory build or what's your best interpretation of it?

I think it is demand pause, Harsh. I just think that it is been on a tear, actually, doing very, very well and I think they just, I think China infrastructure in general, we see the same thing on the base station side, is just taking a breather. We don't think it is going to be an issue longer term. We still are projecting growth for the year and I think that means that the second half probably is going to do okay.

So that almost begs the question, Mohan, what makes you think that it will come back in the back half per se?

Well we still have, talking to customers, they are still deploying fiber to the home across the China region and there's still and it's not just China, it's North America, as well. So we see that there's need for higher bandwidth, PON and for more PON deployment. As I mentioned, it has been a couple of quarters of quite good growth and I think we're seeing Q2 a little bit softer. So we think it is demand driven and Q3 may be flat. And then we will pick up again in Q4, is our assessment.

And then if I can ask, I was wondering if you would be able to give me a rough breakdown of PON versus metro versus data center as your business stands today, maybe as a percentage of the business item or just as a percentage of the total company. If you were able to do that, that would be helpful.

Yes, so Harsh, if you look at our PON business, that's typically run in the mid-teens. As Mohan said, it's been running relatively stronger than that here in the last several quarters. Base stations, on the other hand, run in the high single digits and again, are running at the upper end of that. And then finally, on the data center basis, that tends to run at the low-teens and it was a little bit higher than that close to the mid-teens in the most recent quarter.

There are no other questions at this time. I turn the call back to the presenters.

In closing, our positive Q1 results and solid outlook for Q2 indicate a strong start to FY '17 and we expect our key growth engines to continue to contribute to our strong performance as we move through the year. Our strategic investments and disruptive analog mix signal platforms targeted at fast growing markets, along with our ongoing focus on operational efficiencies should help the Company leverage this growth to deliver stronger earnings growth. I continue to believe that Semtech is strategically positioned better than any time in history of the Company. With that, we appreciate your continued support of Semtech and look forward to seeing you all at our analyst day on June 22. Thank you.

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