Good day, ladies and gentlemen, and welcome to the Semtech Corporation Third Quarter Fiscal 2018 Earnings Release. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the floor over to Sandy Harrison, Director of Business Finance and Investor Relations. Please go ahead.

Thank you, Karen, and welcome to Semtech's conference call to discuss our financial results for the third quarter of fiscal year 2018. 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 was issued after the market closed today and is available on our website at 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 filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are also included in today’s press release. All references to financial results in Mohan’s and Emeka’s formal presentations on this call refer to non-GAAP measures unless otherwise noted. With that, I will turn the call over to Semtech’s Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal 2018, GAAP net sales were $150.3 million, a 2% sequential decline and an increase of 10% year-over-year. Q3 GAAP net sales included $6.2 million of expense for the Comcast Warrant. Q3 GAAP gross margin decreased 74 basis points sequentially to 59.5%, due to the higher sequential Comcast Warrant expense, slightly offset by lower inventory adjustments. Q3 GAAP operating expense decreased approximately 2% sequentially, due to lower shared based compensation. In Q3, interest and other expense was $800,000 compared to $2.2 million in Q2. The decrease reflects the benefit of foreign exchange gains realized from a stronger dollar under lower net liabilities denominated in foreign currency. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition or disposition related and other non-recurring charges not tied to current operations. Q3 fiscal 2018 net sales were $156.6 million, flat sequentially and an increase of 11% over the prior year. In Q3, shipments into Asia represented 75% of total net sales. North America represented 17% and Europe represented 8%. Total net sales to distribution represented approximately 66%, and direct sales represented approximately 34%. Q3 bookings increased sequentially and resulted in a book-to-bill of approximately 1. Those bookings accounted for approximately 50% of shipments during the quarter. Q3 non-GAAP gross margin was 61.3%, an increase of 10 basis points sequentially or lower inventory adjustments offset by less favorable product mix. We expect our Q4 non-GAAP gross margin to increase slightly sequentially due to more favorable mix. Q3 non-GAAP operating expense was $53.2 million, up slightly from Q2. In Q4, we expect non-GAAP operating expense to decline between 4% and 8% sequentially as a result of lower watt hours and lower variable compensation expenses. For modeling purposes, we expect…

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2018 performance by end market and by product group, and then provide our outlook for Q4 fiscal year 2018. In Q3 of fiscal year 2018, we reported non-GAAP net revenues of $156.6 million, which was flat sequentially, and up 11% over the same period a year ago. We posted non-GAAP gross margin of 61.3%, and achieved a record non-GAAP earnings per diluted share of $0.54. In Q3 of fiscal year 2018, demand from the high-end consumer market increased over the prior quarter and represented 30% of total net revenues. Approximately 23% of high-end consumer net revenues were attributable to mobile devices, and approximately 7% were attributable to other consumer systems. Demand from the industrial market also increased over the prior quarter and represented 28% of total net revenues. Demand from the enterprise computing and communications end markets both decreased over the prior quarter and represented 31% and 11% of total net revenues respectively. I will now discuss the performance of each of our product groups, beginning with our Signal Integrity Product Group. In Q3 of fiscal year 2018, net revenues from our Signal Integrity Product Group declined over the prior quarter as expected, but declined over the quarter as expected, but increased 6% over the same period a year ago and represented 41% of total net revenues. Demand from China infrastructure remained relatively soft through the quarter as we had expected. We anticipate this weakness to continue into Q4. Weakness in the 2.5 gig PON market was somewhat upset by strengthen the 10-gig PON market. Despite the current softness in the PON market, Semtech’s PON business has experienced year-on-year growth through the first nine months of FY 2018. In Q3, our base station business driven mostly by…

[Operator Instructions] Our first question comes from the line of Craig Ellis with B. Riley FBR.

The first question I had is just digging into some of the gives and takes across the fiscal fourth quarter. So, if I heard you correctly Mohan, it sounds like power management will be up the other segments down. Guys, I'm wondering, if you can just give us some color on the relative declines for some of the segments whether it’d be signal integrity, protection, et cetera as we look at the dynamics at play as we close out the year.

Yes. So, Craig from the signal integrity standpoint, it's more continuation of the China weakness, mostly China infrastructure, so both PON and base station. Q4 is typically a little bit stronger I would say for that business, but it's quite weak. We are anticipating in Q1, it will start to pick up again, but for Q4 it's weaker than normal because of the China weakness. On the protection side, I would say, it's more seasonal. This is historically a down quarter for our protection business driven by the smartphone customers in Korea bringing down their inventory. It's perhaps a little bit weaker than we would normally anticipate again because of China smartphones being a little bit weak. So, I would say those are the two main factors. Obviously, our Wireless and Sensing business, we have growing sensing -- proximity sensing business which has some exposure now to smartphones, so that is seeing some weakness in Q4 also.

And following up on the LoRa business Mohan, clearly there’s been a number of announcements recently that show that the inflection towards endpoints is starting to gain traction and you talked about some new products that could really accelerate that given form factors and power characteristics and that kind of thing. Can you talk a little bit more specifically about how you see the evolution of the LoRa revenue mix over 2018 and into 2019 as we moved from what I think could fairly be characterized as a hub-centric year in the year that's about to wrap up to what maybe a more balanced year next year or if not in 2019. How do we think about those broader parameters?

I think so now the infrastructure is starting to get deployed. Clearly, now it's the opportunity to connect sensors to those gateways and that's what we're seeing and that's why a report on the number of gateways is being deployed. And obviously, you've noticed that it's increased to 70,000, so we're ahead of schedule there. And now that each one of those has the capacity for a number of sensors, and so we believe there's like 350 and enough capacity now 350 million sensors which will start to -- over the next few years start to get implemented. So that's a really good progress for us. One of the reasons I pointed out the tag release and we announced the tag is it’s kind of a really opens up a new IoT segment for the industry actually and also for Semtech, and so the disposable tag, it’s really a concept of connecting this tag to these gateways or micro picocell gateways and being able to trigger a connectivity response based on an event, and so it's really an exciting development for us. So we are obviously still early in this plan here, but I think it can really open up the revenue starting towards the second half of next year.

And then the last one until I jump back in the queue, excuse for Emeka. Emeka it seems like you've got some good near-term mix dynamics going on the gross margin line, as we think about calendar 2018. Can you just identify some of the pluses and negative – pluses and minuses as we look at the gross margin line. What's a tailwind as we go through the year and are there any headwinds that we should be aware of?

So Greg, as you know, our gross margin is really driven primarily by the mix of the revenue. So as I look out into our fiscal 2019, I see continued growth strong growth from a lot of product groups and that should be a tailwind for gross margin. We do believe that our datacenter business, which this year is great at about 20% to 30% and it continues to grow very aggressively next year as well. That should be good for our gross margins. I think on the headwind side, if you will, the smartphone that there is a growth driver for us as well. Even though we’re expecting to continue to see gross margin expansion within our protection business going into the smartphone. But because that has an overall gross margins that is lower than the corporate average debt it would be something that could put pressure on the gross margins if we see some really strong growth from our smartphone business.

And our next question comes from the line of Rick Schafer with Oppenheimer.

I have a couple of questions. I guess the first one is, could you able to give a sense of just how big PON and base station are now – on a combined basis as a percent of sales and just rough idea. And is it - are they to combined or they below 10% as we look forward or just kind of give us a sense there?

So, we've talked about is base station has been sort of in that mid-single-digit range with PON sort of the high-single low-double digit, so the two of those together and sort of you know mid-teens percentage of revenue when you roll the two together.

And then just a quick update on the CDR business sort of when do you guys expect or what's the latest in terms of your guys expectation on the move to single-lambda 100-G, look, maybe, you know Mohan, what has to happen to spark that move to single-lambda, I mean, do we have to hit a certain cost or price point, is it something else that the industry is waiting for?

Well, I think the industry will move when the cost point is there, but the products have to be there, and the solutions have to be there. And I – so from our standpoint, we will be sampling end of this year single-lambda solution. And you know our expectation is probably by mid next year, end of next year, we start to see some form of ramp with some module customers. And I think it will be the following year before we see material revenue. But I think it's important from our standpoint that you know we have solutions that are there today with our ClearEdge family, our CDR family and our fiber edge family coming out also. So, you know, regardless we have an analog solution today and then a combined solution when the customers switch over. The switch is going to be driven by the price per gigabit and that's a function of getting the optics the right price point and making sure that the solution is a cost effective solution. And I expect that some of the current technologies will also be reducing in price. So it will put a little bit of pressure on the transition, but I think we're in very good shape to normally write this current success of growth of the 100 gig solutions, QSFP28 type solutions and then when they do move over to the PAM4 single-lambda solutions, I think we will be in good shape to transition with them.

And then if I could sneak just one more in, I mean, could you give any color or discuss the trends in discrete protection attach rates as we move to 10-nanometer and below. What do you see your protection SAM doing and maybe give a sense of what kind of – maybe what kind of growth rates that could drive for your protection business?

That's a good question Rick. I think the definitely the SAM will increase, that's how our belief as the industry is going to come more to us as the processes, these advanced processes go to a more advanced topographies. As I mentioned on the - on my script the transitions continue to occur.

And our next question comes from the line of Cody Acree with Drexel Hamilton.

Mohan, if we could go back to the Signal Integrity guidance weaker here in Q4 but you’re giving some indications of some improvement expected in the first half I guess, what's giving you that indication and maybe your level of visibility or confidence there?

I would say Cody, it's more a question that Q4 is - and Q3 relatively soft for our China business and infrastructure business. There are indications that it's going to be a little bit better next year. But I would say that we have no real evidence of that yet, but there are indications from our customers that there is going to be some improvement. I would say on the data center side, we continue to see strength. And so, my sense is Q1 is typically a very strong quarter for our CDR business. And you know that's our expectation this year - this next year or so.

Are you seeing orders in hand or is there’s just an anecdotal comment from your customers?

I would say on the data center side, we have a little bit better visibility on the infrastructure side. It's still relatively soft.

And as you tried to parse out what's going on with the softness in handsets, China versus the kind of typical inventory correction at your large green customer. Is that inventory correction in Korea larger than you would have expected, or is it more heavily weighted, I guess just softer guidance into what's going on track?

I would say is the inventory correction is about normal, Cody. Perhaps you, we had a very strong year so far in this business, the smartphone business both protection and our proximity sensing. So, you know some of that might be inventory you know runoff in Q4. But I think the China smartphone issue is more indicative of China smartphone manufacturers not doing as well as they had anticipated and that hopefully will change next year.

And just lastly I guess, just any visibility into what your expectations are for the first half of 2018 just seasonally?

We're still - we're anticipating that the next year is going to be another strong record year for us, whether it plays out the way it did this year which is a very strong first half a record first half and then actually a record of first nine months and then weaker Q4. I don't know, that's our anticipation, and I think we'll have a strong first half again next year.

And our next question comes from the line of Tristan Gerra with Robert W. Baird.

Back to the China Infrastructure business, what's sequential decline should we expect in the coming quarter and also how does the inventory situation look like in that business in China currently?

I think that if we look at the business, we're looking at seeing additional declines for both the base station and PON, although offset by some of the growth in the data center market and that really will be what drives that business, those two dynamics.

And any color in terms of inventories, I mean, when do you expect stabilization in that business?

I would say, Tristan, it’s - in that business, it's not so much about inventory as so much it is as it is CapEx and infrastructure spending in China. PON is not as bad, but the base station side of it seems to have certainly weakened and as I said on my script that I don't think it's going to come back until – to grow significantly until the 5G deployment start to occur, which is probably going to be closer to the end of next year or in early 2019.

And then in your LoRa business, outside of HT Micro and Microchip, are you engaged or are you seeing other chip companies interested in licensing your technology?

The answer to that is yes. But we're not focused on that. Our focus is on growing the -- growing the end nodes and growing the use cases. And as opportunities are in front of us, we look at them on a case-by-case basis and certainly if there are other chip companies that complement our capabilities SD Micro and Microchip are both microcontroller companies and there are others that complement us then we will continue to work with them.

And our final question for today comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

First off, how much more can you see ramping as from your proximity sensors, if you’re looking at your - the other design wins that you have in your other product lines?

Proximity sensing is doing very well for us, it’s targeted obviously at the smartphones, where you have the RF radios, the emissions from that and managing the radio power control and it’s doing very well. Obviously, we have strong penetration of the Korean smartphone manufacturers that we're starting to get traction at the Chinese smartphone manufacturers also. One of the thing that is clearly happening is that, there are regulations around the world that are expanding to ensure that there are some controls on the RF emissions and the power for - to prevent any issues associated with the human body. And so that's a good trend, and so, yes we expect it to continue to grow next year.

And then in the LoRa aspect, I heard you say, it's now at 70,000 as far as your expectations for gateways that's higher than your - the last numbers you had been indicating. Is this because there is capacity in the gateways that have been installed or is this more of a footprint of the network being expanded?

Yes, that's more a statement of more gateways being installed. So we set ourselves a target that we look at and I had said that we were - at the end of this year, we would expect 65,000, that's what we were hearing from one of our partners. 65,000 macro gateways were going to be deployed. We're now saying 70,000 macro gateways, each one of those gateways connects to about 5,000 has the capacity to support about 5,000 sensors. So that gives you an idea of the 70,000 gateways out there, there's a capacity out there for 350 million sensors. And so that indicates - gives you an indication of - if we were to have full utilization of those gateways then there would be 350 million end nodes out there. Our goal of course is to double, triple, quadruple the number of gateways, the number of sensors out there and then start to really drive the use cases and that's one of the - as I mentioned a couple of times the LoRaWAN tag that I mentioned on the - on my script is really an important aspect to our strategy because it drives a whole set of new used cases that I believe will drive the need for many more gateways as well.

And then the final question is just so, we have a greater understanding of what you're talking about from the seasonal aspect. What's different this time around from the seasonal perspective that you're seeing versus what was going on in Q1 of this year, Q4 of last year? I mean, it seems like, you were in the same marketplace with the same product lines, but you weren't really seeing any seasonal differences, so what's going on at the customer level for you?

Well, I think, you know, let's take away the China phenomenon for a second and just talk about the seasonality of the business. And you know we typically do see our Q4 come down for our protection business that's typically associated with smartphones and we see inventory management by Samsung and some of the other guys and so we do typically bring down their build plans in Q4. So that's normal I think for our protection business and our sensing business. Anomaly this Q4 is really in our SIP business and our Signal Integrity Product business which normally I think we would anticipate to have been stronger and there as I mentioned it's mostly China driven, the China infrastructure seems to have you know become even softer. And so that's really what's driving that, I wouldn't say that's necessarily a seasonal factor.

And that concludes our question-and-answer session for today. I'd like to turn the floor back over to Semtech for any closing comments.

In closing, while we were expecting a more seasonal pattern for our Q4 results, I am pleased with our solid performance for the first three quarters of fiscal year 2018, which should enable the company to deliver record financial results this fiscal year and provide a strong platform for further growth next year. We expect our key growth engines should continue to benefit from a number of secular demand drivers. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.