Semtech Corporation (SMTC) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal Year 2019 Semtech Corporation Earnings Release. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Mr. Sandy Harrison, Director of Investor Relations, you may begin your conference.

Thank you, Rob and welcome to Semtech's conference call to discuss our financial results for the first quarter of fiscal year 2019. 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 close 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 the detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are 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. I would also like to highlight that Semtech plans to host its Analyst Day on Wednesday, June 20, in New York City. The formal presentation will be webcast via live audio and will be accessible under the Events section located in the Investor Relations section of the company's website. With that, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q1 fiscal 2019, GAAP net sales were $130.4 million, a 7% sequential decline and a decrease of 9% from the same period a year ago. Q1 GAAP net sales included $21.5 million of expense associated with the Comcast warrant. The warrant is now fully vested and will no longer impact future periods. Q1 GAAP gross margin decreased 590 basis points sequentially to 54.8% due to the higher sequential impact of the Comcast warrant. Q1 GAAP operating expense increased 4% sequentially due to higher variable compensation expenses, particularly stock-based compensation, driven by our higher stock price, partially offset by lower restructuring expenses. In Q1, interest and other expense was $2 million compared to $3.2 million in Q4 due to lower foreign exchange losses from a stronger dollar. In Q1, we recorded a GAAP tax benefit driven by the relief of approximately $16 million of prior reserves that were recorded against our federal U.S. deferred tax assets. These long time benefits contributed $0.23 to Q1 GAAP EPS. For the rest of fiscal 2019, we do expect our GAAP tax rate to be in the normalized range of 18% to 22%. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related and other non-recurring charges not tied to current operations. Q1 fiscal 2019 net sales of $151.9 million came in ahead of the midpoint of guidance and represented a sequential increase of 7%, up 2% higher than the same period a year ago. In Q1, shipments into Asia represented [58%] of net sales, North America represented 23% and Europe represented 9%. Total direct net sales represented approximately 31%, and net sales to distribution represented approximately 69%. Our distributor business remains balanced, with 55% of the total POS coming from the high-end consumer and enterprise computing end markets and 45% of total POS coming in from the industrial and communications end markets. Q1 bookings increased the strongest sequentially and represented a new quarterly record for the company and resulted in a book-to-bill solidly above one. Sales bookings accounted for approximately 39% of shipments during the quarter. Q1 non-GAAP gross margin was sequentially flat at 61.4%, and we expect our Q2 gross margin to be approximately flat. Q1 non-GAAP operating expenses was $52.5 million, a 2% increase from Q4, driven by higher variable compensation expenses. We expect our Q2 operating expense to be sequentially flat. As we highlighted in our last earnings call, we expect our non-GAAP operating expense for fiscal year 2019 to average approximately $52 million to $54 million per quarter and to be flat to modestly up over fiscal year 2018 levels. In Q1, our non-GAAP tax rate was 17.1%, in line with expectations. For the rest of fiscal 2019, we expect our non-GAAP tax rate to be between 16% and 20%. In Q1, cash flow from operations increased 238% from the same period a year ago to $35 million or 23% of non-GAAP net sales. In Q1, approximately 81% of our cash and investments were domiciled in international accounts, and 19% was based in the U.S. We repurchased 645 shares or $25.3 million of our stock during the quarter. The Board has approved a $250 million increase to the stock repurchase authorization, which now stands at approximately $272 million. We expect to use our cash to opportunistically repurchase our shares, paydown debt and make strategic investments. In Q1, accounts receivable increased 23% sequentially, driven mostly by the change in classification of reserves associated with the adoption of the new accounting standard for revenue and represented 36 days of sales, below the target range of 40 to 45 days. Net inventory in absolute dollar terms decreased sequentially and days of inventory decreased by 12 days to 105 days, slightly above the target range of 90 days to 100 days. In Q2, we expect our days of inventory to continue to decline. In summary, we are pleased with the strong Q1 financial performance. Our growth drivers continue to deliver excellent results. Our operating leverage remains solid, and our cash flow generation is strong. We believe this momentum of focus on execution positions us nicely to continue to deliver solid results for fiscal 2019. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2019 performance by end market and my Product Group, and then provide our outlook for Q2 of fiscal year 2019. In Q1 of fiscal year 2019, non-GAAP net revenues increased 7% over the prior quarter to $151.9 million, driven by growth from the IoT, data center and PON markets. We posted non-GAAP gross margin of 61.4% and non-GAAP earnings per diluted share of $0.47. In Q1, we also had a record bookings quarter and entered Q2 with record backlog. In Q1 of fiscal year 2019, net revenues from the enterprise computing end market increased over the prior quarter and represented 32% of total net revenues. The industrial end market increased over the prior quarter and also represented 32% of net revenues. The high-end consumer end market decreased slightly from the prior quarter and represented 25% of total net revenues. Approximately 17% of high-end consumer net revenues is attributable to mobile devices, and approximately 8% was attributable to other consumer systems. The communications end market increased over the prior quarter and represented 11% of total net revenues. I will now discuss the performance of each of our product groups. In Q1 of fiscal year 2019, net revenues from our Signal Integrity Product Group increased approximately 2% over the prior quarter and represented 43% of total net revenues. Continued strength in 100-gigabit-per-second data center demand and seasonally higher spending from both the PON and base station markets contributed to our growth. In Q1 of fiscal year 2019, our data center demand increased led by our 100-gig CDR platforms. Semtech's industry-leading ClearEdge CDR platform is benefiting from broad-based strength in the 100-gigabit-per-second data center applications as more optical links require the use of a CDR. At the most recent Optical Fiber Conference, our Signal Integrity Product Group demonstrated a complete portfolio of CDR and PMD solutions from 1-gigabit/second to 400-gigabit/second data rates, targeted at a broad range of enterprise computing and communications applications that included cloud-based storage systems, fiber distribution networks and mobile communications networks. Semtech's ClearEdge CDR portfolio has established a strong position in the data center market for 25-gigabit-per-second, 50-gigabit-per-second and 100-gigabit-per-second in our Z optical modules. We expect this market to continue to grow nicely for the next few years. Our Signal Integrity Product Group recently announced a new Tri-Edge CDR platform. This new platform complements our ClearEdge CDR family, providing a high-performance analog solution for PAM4 interfaces. Our Tri-Edge CDR platform is expected to deliver the highest performance and lower power needed for 400-gig PAM4 data center applications. We believe that our disruptive Tri-Edge portfolio, which we'll sample end of this year, will offer the most economic and lowest power solution for 100-gig, 200-gig and 400-gig PAM4 data center applications for the next few years. As a result, we have made the strategic decision not to execute on the acquisition of MultiPhy as previously anticipated. In addition to our ClearEdge and Tri-Edge CDR platforms, we are now sampling our first 100-gig PMD products from our FiberEdge family. These products include TIAs and laser drivers and are targeted at 100-gig and 400-gig optical modules. This is a new SAM for us as our historical PMD products targeted sub-10 gigabits per second applications. We expect the increasing use of 100-gigabit-per-second links in many up-to-date, newest data center deployments to continue to drive growth for our ClearEdge, Tri-Edge and FiberEdge platform in FY 2019 and beyond. In Q1, we saw high demand for both our PON business and our wireless base station business. Demand for our PON products increased throughout the quarter. We are seeing growth from the 2.5-gig PON segment due to increasing fiber to the home and enterprise applications, and we are also seeing very strong growth in our 10-gig PON business as Greenfield sites deploy the highest bandwidth optical connections. Semtech remains the PMD solutions leader in both the established 2.5-gig PON market and the emerging 10-gig PON market, and we now expect our PON business to grow in FY 2019. Demand for our wireless base station solutions also improve modestly as it benefited from a seasonal pickup in infrastructure spending. We expect this business to be approximately flat this fiscal year until 5G deployments begin to accelerate towards the end of this calendar year. For Q2 of fiscal year 2019 based on strong bookings and a healthy starting backlog, we expect net revenues from our Signal Integrity Product Group to increase nicely led by stronger demand from the data center market. Moving on to our Protection Product Group, in Q1 of fiscal 2019, our Protection Product Group rebounded from the seasonal decline in Q4 and represented 27% of total net revenues. Demand from the industrial and communications end markets increased over the prior quarter as we see the benefit of our Protection Product Group's ongoing diversification efforts. In Q1, our protection business benefited from the increasing use of protection for 10-gig Ethernet ports in enterprise cloud switches, wireless access points and wireless base stations. Demand for our protection platforms for automotive applications also continued to expand nicely, with growth coming from increasing protection content in automotive infotainment systems. Semtech's broad portfolio of automotive qualified parts now address all the key automotive interfaces. In addition to the increased momentum from the industrial, automotive and communications segments, we continue to see positive design-in momentum from a broader set of mobile device manufacturers. In Q1, our China smartphone protection business increased, offsetting weaker Korean and North American smartphone demand. We expect smartphone demand from all regions to increase in Q2. Semtech is the leading provider of high-performance protection platforms, and our systems manufacturers use more advanced lithographies. We anticipate they will only need Semtech protection on their high-speed interfaces. In Q1, to further enhance our strategic technology road map, we acquired IC Interconnect, a private company based in Colorado. ICI will help accelerate our next-generation Z-Platform, named Z-Ultra, which is currently in development. In Q2 of fiscal year 2019, we expect our protection business to grow nicely, driven by growth from all end markets. Turning to our Wireless and Sensing Product Group. In Q1 of fiscal year 2019, net revenues from our Wireless and Sensing Product Group increased 20% sequentially and 17% over the same period a year ago and represented 30% of total net revenues. This represented a new quarterly revenue record as both our LoRa-enabled revenues and our proximity sensing revenues increased over the prior quarter. In Q1, we had record bookings for both our LoRa business and our proximity sensing business. In Q1, our LoRa-enabled business achieved record revenues as we saw more proof of concepts transition to real deployments and initial production. LoRa's global acceptance and adoption in numerous IoT use cases is driving LoRa towards becoming the de facto standard for global LPWAN deployments. In Q1, several key global milestones were achieved throughout the LoRa ecosystem. These milestones include: Alibaba and China Unicom announced the joint deployment of precommercial IoT services based on LoRa technology in China; Comcast IoT network service, machineQ, announced the completion of the rollout of LoRaWAN networks in 10 U.S. cities, providing extensive and comprehensive network coverage in these markets and establishing a strong foundation for a nationwide LoRaWAN appointment; Anatel, Brazil's national telecommunications agency, released the technical requirements for RF communication devices, enabling the operation of LoRa technology throughout Brazil; IoT.SENSE, an IoT solutions and services company, joined with FACSA, Spain's leading integrated water management company, to accurately track and control water management by integrating LoRa technology into its smart water platform; and KernelSphere Technologies, an India-based IT manufacturer and services company, integrated LoRa technology into its smart grid transformer monitoring solution, enabling it to digitize its infrastructure solutions, including streetlights, parking meters, electricity meters, water meters and waste bin management. These are just a handful of examples of the latest LoRa network deployments and use cases that have recently been announced. In Q1, as a result of Comcast executing on a 10-city rollout of its machine through LoRaWAN network, and our joint conclusion that some use cases will need a denser network in these cities, we made the decision to accelerate the Comcast warrant. This acceleration allowed Comcast to make the necessary deployment decisions based on use cases and customer needs. There are now over 50 countries with public LoRaWAN network deployments. By the end of fiscal year 2019, we anticipate that there will be over 70 countries with public LoRaWAN networks deployed. At the end of Q1, approximately 100,000 gateways have been deployed globally. This includes both macro and picocell gateways. We anticipate that over 200,000 gateways will be deployed globally by the end of fiscal year 2019, providing the capacity to support over 1 billion end nodes. At the end of Q1, approximately 60 million LoRa end nodes have been deployed globally, putting us on track to achieve our 80 million end node target by the end of FY 2019. Our LoRa opportunity funnel, which represents the beginning of our revenue generation funnel, now exceeds over $400 million in opportunity, which is extremely encouraging. We anticipate that 40% to 50% of these opportunities will convert to design wins and, eventually, revenues. We believe that Semtech, along with our LoRa Alliance partners, will continue to deliver exciting new use cases and continue to drive LoRa to become the global de facto standard for LPWAN IoT. In Q1 of fiscal year 2019, demand for our proximity sensing solutions also increased as the adoption of our sensing solutions increased across several new mobile device manufacturers. Our sensing platforms are winning new designs in tablets, smartphones and wearables as carriers across an increasing number of geographic regions, including China, address increasing regulations on radio energy transmission. We expect this secular trend to continue and contribute to growth in this business. In Q2 of fiscal year 2019, driven by record bookings and record backlog, we expect net revenues from our Wireless and Sensing Product Group to increase nicely. Moving on to new products and design wins. In Q1 of fiscal year 2018, we really strong new products and we achieved a record 2,483 design wins. Now let me discuss our outlook for the first quarter of 2019. Based on the strength of recent bookings trends and a strong backlog entering the quarter, we are currently estimating Q2 non-GAAP net revenues to be between $155 million and $167 million. To attain the midpoint of our non-GAAP guidance range or approximately $161 million, we needed net terms orders of approximately 34% at the beginning of Q2. We expect that Q2 non-GAAP earnings to be between $0.50 and $0.58 per diluted share. I will now hand the call back to the operator and Sandy, Emeka, and I will be happy to answer any questions. Operator?

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

Thanks for taking my question and congratulations on the nice exaction. Mohan, continue to appreciate all the data points you're giving us with respect to the LoRa business. With regards to this $400 million funnel, can you characterize the duration with which some of those wins could come in? Is that a business that could potentially be realized over a one-year period? Would the period be longer, multi-year, or even longer than that? Just a duration comment would help us scope how impactful that could be in the near term.

Yes, Craig, it's difficult because there, all the use cases are different. Some of the industrial use cases can take two to three years to generate revenue, some of the smartphone and more kind of consumer applications can be much faster. What I will say is based on the data that we have, and that we're trending all of the information, we're seeing about a 50% conversion rate and I would say about two years of delay from the funnel to the revenue.

That’s helpful. And then I'll switch over to protection. Last quarter, you talked about early signs of success in auto and industrial. It seems like that's coming through. As you look ahead, how would you characterize the growth potential of those two different end markets? Should we expect that either auto or industrial would be larger than the other? Certainly, industrial is the far more diffused end market, but there are a lot of data points that say advanced logic is getting pulled into automotive pretty quickly, so the slope there may be steeper? Thank you.

Yes, I would say Craig, a lot depends on the high-speed interfaces and how they proliferate across those segments. So automotive, as you know, is really growing fast in terms of the amount of electronic content and automotive infotainment content that's going into the cars and, therefore, you need a lot of the high-speed interfaces Ethernet and USB interfaces. So we're seeing that, but I would say in industrial, in particular IoT, there's definitely a very – some segments within the broader industrial market that are growing quite fast, and IoT is one of them. And we're seeing that pick up quite quickly, I think also. So both of those are good growth segments for our protection business and help us continue the diversification strategy that we have.

Lastly, if I could just sneak one more in, congratulations on the strong cash generation in the quarter, and you put some to work repurchasing shares. The 205 million share buyback authorization, can you give us a sense for how you're looking at that? Is that something that you'll be opportunistic on? Or would you expect to execute on that fairly consistently over a certain period of time?

I think, Craig, we're going to be aggressively opportunistic with it.

All right, thanks for that. Good luck guys.

Okay, thank you.

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

Yes, hey guys. Congratulations on strong numbers, strong results. A couple of questions, Emeka, for one thing, your industrial business was up $10 million or so. I suspect that's a lot of LoRa in there that's doing well. Do you control the pace of the Comcast warrant or how they take product from you? Or is it largely in the Comcast hands? And does the difference between the GAAP and the non-GAAP, this arresting amount, have anything – or any reflection on your LoRa business that you do with Comcast?

So Harsh, no. There is no correlation between the warrant expense and the revenue we get from product shipments.

Okay.

I don't know if that answers your questions.

That’s fair. And Mohan, I was wondering if you could talk to us about the enterprise computing segment, particularly how should we view the data center part. And what is your growth rate – with your CDR products and other products that you have in that segment, how do you see that growing the rest of the year or whatever outlook you can give us?

Yes, so data center has been our target segment for a while, and we've done very well there. Obviously, we're the leaders in CDRs in that space, and most of our investments are going into CDR platforms and PMD platforms for that space. The business has done – grown double-digits for us for quite some years and continues to grow double-digits for us. And so we don't see anything slowing that growth down. It's a segment, obviously, that is global. We have data center customers globally now. We also see more and more need for higher-performance bandwidth, connectivity and links within the data centers. So that also drives more use of CDRs and is one of the reasons for the success of our business. So I think it continues to be a really, really strong growth driver for us, and we expect that to be the case for quite a few years.

Thanks, Mohan. And then my last one, I will get back in queue. You mentioned you're at 16 million LoRa end nodes globally. But your target, remind me again, you said was 18 million for basically fiscal 2019? Is that correct? And then why would we not think that you should be able to basically grow past the target, considering you're kind of very close in that ballpark already?

Yes, so let me explain, Harsh. So last year, end of fiscal year 2018, we had 50 million cumulative end nodes, and then we set a target for this year, for the end of this fiscal year, to have 80 million cumulative end nodes. And I'd make a point that at end of Q1, we're already at 60 million cumulative end nodes. So we’re on track to do better than the 80 million, but I think we've set the goal, and we'd be pleased with – we set goals on gateways, we set goals on countries, we've set goals on the funnel and how much revenue we want to come into the funnel opportunity and we've set goals on conversion into revenue and production, and so it's just a goal and we're on track to either achieve or beat that goal.

Can I ask for a clarification, Mohan, and then I'll back away? Is there any particular end market that most of these nodes are more centered on versus others?

No. I would say it's very broad. Obviously, the current more industrial ones are the ones that were more – have been deployed over the last few years, so smart meters, smart agriculture, smart cities, smart buildings. We are increasingly seeing more smart logistics applications and applications that are closer to the home, smartphone applications and more consumer-oriented applications. And so it's very broad. I would say that there's no one segment at the moment. And that's the beauty about IoT, right, it's connecting everything to the Internet.

Thanks, Mohan.

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

Thanks guys. I’ll add my congratulations. I have a couple of questions. I guess, maybe first, I'll follow-up on protection. I mean, you guys have got some pretty solid structural tailwinds as we moved to 10-nanometer and below. And as this segment grows, I guess what I'm curious about is can you get gross margins there up to corporate average or closer to corporate average whether that's through mix? I know you highlighted industrial as continuing, I think it was strong last quarter as well, so I assume it's becoming a greater percentage of that protection mix. Or is there a way to maybe improve cost there? But just any color you could give there on gross margin.

Yes. So I'll start, Rick, and then Emeka can chime in. From my standpoint, yes, I think there is a trend towards closer to the corporate margin. And like the main thing is mix and more industrial automotive, computing, I would say communications, all drive higher gross margins for us. One of the reasons why we acquired ICI was to give us some control over the next generation of advanced protection, which we believe will generate higher gross margins for us as well. So I think it's a combination of those things. And then I think, even within the smartphone segment, just our discipline of walking away from business if it's – the price is too low, or if we feel that it's a commodity segment, I think will help us expand that gross margins.

Okay. Got it. And then the second question, obviously, PON has rebounded nicely for you guys. It has kind of been a notoriously lumpy business the last few years. I guess my question there is, has anything really changed for you guys in terms of – and what has changed there in terms of visibility? I guess I'm curious, you talked about growing the business this year, Mohan. I mean, what's your confidence in the second half? And then maybe as part of that answer, I'd be curious what your split is now between 2.5 and 10G PON.

Yes, it's a good question, Rick. As we came into this year, we were expecting our PON business to be down about 5%. And then as we saw some strengthening, we started to realize that actually it's looking like it's going to be a flat year or potentially even up, and this quarter was strong for us in PON. I would say the key is the 10-gig PON market where we have a very strong position and we're leaders in that by some way, and we're seeing that segment grow very fast. I would say, it's still a small percentage of the overall, I don't know if you had that, it's 20% or something like that? 20%, 25% of the total, and the rest is 2.5-gig and 1-gig PON. So I think – but it's growing. That's the process piece of it. I think on the other side of it as well, the 2.5-gig PON market has expanded a little bit for us. There is some challenges there with China, obviously, as you know. But from that standpoint, I think it's just more optical deployments. And there are some new applications that are requiring PON or optical connectivity closer to the curb or closer to the home, and that's driving more PON deployments in Asia.

Okay. And maybe just my last quick question. On the OLED front for smartphone, obviously, you got a nice socket last year, I think, from a big Tier 1. That Tier 1 is talking about having two phones this year that are OLED phones. I mean can we talk about what that impact might be for you guys on your protection business? And are you guys still kind of really the sort of only game in town for OLED panel, at least on flagship or Tier 1 phones?

Yes, we believe we are, Rick, still have a very strong position in OLED phones. And yes, we think we will benefit from OLED display deployments in high-end smartphones across the globe. So yes, that's – the more OLED displays, the better for us.

Okay. Thanks.

And your next comes from the line of Cody Acree from Drexel Hamilton. Your line is open.

Hey, good afternoon. This is David on for Cody. I guess, kind of continuing on with the handset theme, what are you seeing in China? I know we've had some slowdowns there, but it sounds like things are getting a little bit better there for you. Can you talk maybe a little bit what you're seeing in China specifically in the handset market?

Yes. Well, we saw a significant slowdown in Q4 and so we have seen a pick up and we expecting little bit more stronger Q2 and then actually stronger second half. So China is looking like it's getting better, I would say, but it's coming off a low base from Q4 standpoint, at least for us. And that's relative to protection. And smart proximity sensors for us is doing quite well across the board as well. That's really a new set of opportunities. So if we start to see that ramp up and we see China ramp up on the proximity sensing, that will be positive for us.

Okay. Good. And then And then just maybe on the 5G deployments. I know there's a lot of different discussions about when that will become, I guess, more mainstream. It looks like you're targeting the back end of the year for maybe some 5G-type revenues. Can you talk a little bit about the timeframe there, what you're expecting? And do you think that's a realistic period to be thinking about 5G revenue coming in?

Yes, well, we've said that, at the end of this calendar year, we've been saying that now for at least six months, maybe nine months. So I think that’s looking like to be the case. I mean we may see a little bit earlier revenue, we may see a little bit later revenue, but it's going to be in that timeframe. So I would say end of this year when we should start to see more of a ramp-up in terms of revenue.

Very good. And last one for me is can you talk a little bit about channel inventory and how you're seeing that today? Do you feel it's pretty healthy?

Yes, channel health, we monitor the channel, it seems very healthy to us. And obviously, there's – a lot of our business goes through distribution and we're seeing a healthy pull-through – POS through to the customer base.

Thanks so much.

Your next question comes from the line of Tristan Gerra from Baird & Company. Your line is open.

Hi, good afternoon. In wireless base station you've mentioned, for a couple of quarters, your expectation that an initial ramp in 5G is going to help the segment in 2019. Is that mostly upgrades to existing base station? Or is that also small cell base? And do you feel that's going to be enough to offset continued 4G declines?

That's a good question, Tristan. I don't have enough visibility of that to give you an answer. I would say it's unlikely to be both upgrades to the 4G and then new base stations. My understanding is there'll be a lot more 5G base station required. But I don't have enough visibility from the customers to say one way or the other, whether it will be offsetting so that we can see real growth from that business.

Okay. And then looking at the LoRa market on the node side. Today, it's all discrete LoRa radio. We know that you have a couple of licensees that plan on integrating the LoRa radio with the microcontroller. Other time, let's say a couple of years from now, do you expect the integration of LoRa and microcontroller to be significant as a percentage of your node mix? Or is that expected to remain a very small end market being mostly a discrete type of product?

That’s a good question. I think it will still be mostly discrete, but more because I'm expecting the number of end nodes to exponentially increase, I mean, really increase where we're into the hundreds of millions of nodes and then potentially into the billions of nodes. And so that point, one would expect either more integrated SoCs to be needed in some of those very high-volume applications or, in a sense, a very just a simple radio for not very – even requiring an external microcontroller. So it depends on the application. But I would think that the number of nodes is going to dramatically increase over the next few years.

Great. Thank you very much.

Your next question comes from the line of Hamed Khorsand from BWS Financial. Your line is open.

Hi, could you just talk about, on LoRa, the pace of the gateways that are being deployed? I mean, are we still talking about much of these gateways are in a trial development kind of standpoint? Or much of the increase you've seen in this past quarter? Is that from actual commercial deployments?

Yes, I would say it's both, Hamed. I think obviously Comcast is deploying gateways. Orange is deploying gateways for real applications and real networks. And I mentioned it's 50 countries now. And most of those are deploying Real networks, and so that customers and end use cases can be connected to these networks. But we're also seeing there are a lot of proof-of-concepts going on, more private – in the more private networking areas that are using a sizeable number of gateways as well, particularly in China, I would say and some regions, some other parts of Asia where they don't necessarily want to have a public network but they want to have a private network but there are also quite a large number of gateways being used.

Yes. So either way, it's still driving the end nodes into use. So are you still comfortable with the guidance as far as hitting 80 million to 100 million in revenue by end of this year?

Yes.

Okay. And then as far as the Signal Integrity goes, is there any seasonality that you're concerned about in this business? Or have we skipped over that?

Well, the second half is the one area that we look at all the time as that tends to be a little bit weaker depending on what happens with some of these segments like PON and base station. But I think at the moment, this year, we're looking at a pretty strong second half as well. So it's a little bit, I hate to say, Hamed, but I think we're looking – we feel quite confident about at least the first few quarters in the fiscal year.

And just for clarification, that's because the PON – what's happening there?

Yes, PON and base station tend to have a weaker second half, at least historically, they have had.

Okay, thank you.

Your next question comes from the line of Scott Searle from ROTH and Company. Your line is open.

Hey, good afternoon. Thanks for taking my question. Nice quarter. Hey, Mohan, just to clarify, you talked about the different product segments growing nicely over the course of the year. I just wanted to clarify that we're seeing sequential growth in all those segments. And also, to drive in a little bit on one of the earlier questions on the mobility front, both for protection and OLED, there seems like there's no pause there. Despite what we're seeing more from a macro industry standpoint or other flagship product standpoint, your design win traction and your diversity there is enabling you to, I guess, sidestep any of those SNAFUs?

So you're talking about protection, right?

Yes, correct.

Yes, so protection end business, we – you have to understand that Q4 for us was significantly down. So when we – what we've seen now is all of the segments coming up nicely from that low starting point. I think for Q1, now going forward to Q2. We think all of our end markets for the protection business are going to grow definitely on the smartphone side, specifically as I mentioned, China is coming back stronger. We are seeing a little bit more strength there. Korea, which has come off a pretty soft base in Q4 and even Q1, is starting to pick up. And I think we'll see a stronger Q2 and probably second half from Korea. And then the North American smartphone manufacturers are a little bit weak at the moment. But even there, we should see a little bit of strengthening in the Q2, Q3 timeframe.

Gotcha. And then just a follow-up on some of the earlier questions with LoRa, it sounds like you're well on track for the 80 million to 100 million goal that you'd outlined previously. But if you could give us a little bit more color maybe in terms of the mix between infrastructure and end points. I think it has been getting to about 50/50. How is that trending now? How does it impact our gross margins? And maybe – you've cited some different examples of where you're seeing some strength, but I was wondering if you could give us some geographic color and what you're also seeing – like when do tags start to come into the equation? Is that fiscal 2020? How is the design and the interest level on that front?

Well, let me start with that. So, the tags, we should release by the end of this year, maybe over to Q1. A lot of interest, we're being very careful how we take that to market. We have some helpful customers we're working very closely with. Obviously, it requires dense network, so we are working with our networking partners. But the use cases that we're looking at are very interesting and very high volume, and so – and they're disposable, of course, so that makes it a very attractive segment. But there are some technology barriers there to overcome, so we'll report more on that as we make progress. And with regard to other geographical kind of strength, Asia is doing very well for us at the moment, China, but also regions in Asia where they don't have strong – necessarily strong networking, strong LTE networks or strong cellular networks. So they are looking at LoRa as a way to build out a low-cost, high-performance IoT infrastructure and be able to meet the needs of consumers and enterprises in those regions, which is very interesting for us. So a lot of regions of the world that are emerging and can now connect to the Internet with LoRa, so that's good. We also see, obviously, North America, with Comcast now accelerating its deployments and use cases, particularly, I think is very intriguing for us. So we're seeing a lot of very good use cases. So we now have to convert those use cases into real proof-of-concepts and real deployments and revenue, right. So that's going well. Europe, as always, tends to be a little bit behind. They have a pretty good network coverage, but the use cases just take time. There's a lot more – the time to revenue is a lot more industrial kind of nature, and so it's taking a little bit more time. But I would say it's fairly balanced across the globe. And then in terms of mix, Scott, between infrastructure and end nodes, I mean, most of the revenue is coming from end nodes. I would say it's probably 80-20 end nodes to infrastructure. But of course, you can't deploy end nodes if you don't have infrastructure. So it's important that we continue to drive the infrastructure deployments across the globe.

Okay. And lastly if I could. Just competitively, from a lower standpoint, are your customers wrestling with other technologies out there or really not the case in terms of use cases and where you're going? I'd love to get your color on that. Nice quarter. Thank you.

Yes. The beauty of LoRa is that it really isn't competitive with the other technologies. It really is complementary. If you look at WiFi and Bluetooth and cellular, those are really high-bandwidth technologies, but none of those technologies really service the LPWAN market very well. If you look at some of the use cases and applications that I talked about in terms of smart agriculture or smart metering or smart homes, LoRa is really, really a good fit for the use case. And so what we're seeing is – and so what we anticipated is that most regions of the world and most large enterprises and most networking operators are recognizing that fact now and starting to deploy a combination of LoRa plus cellular or LoRa plus WiFi or something like that, and we expect that to be the case. With regard to other LPWAN technologies, we really don't see any of the other LPWAN technologies that are promoted out there as being very competitive.

Thank you.

Your next question comes from the line of Quinn Bolton from Needham & Company. Your line is open.

Hey, guys, congratulations on the nice results. Just wanted to follow-up on Craig and Scott's questions on LoRa. Did sort of sound like, with 10 million nodes – end node shipped in the first quarter and still some 2%-or-so contrition from infrastructure, you guys are probably getting very close to the low end of that [80 million to 20 million] annual target on a run rate basis here in Q1? Is that a fair assumption?

Yes, Quinn.

Okay. And then as you look forward, given the $400 million pipeline so roughly 50% conversion rate and about two year time to revenue. As we look forward, say, to the end of fiscal 2020, it sounds like the LoRa business could be tracking to about a $50 million per quarter or $200 million annualized run rate out net to your timeframe?

Yes, that’s kind of the same - yes, that's exactly the math that we do. Yes.

Perfect. Thanks for the clarification. And then just question on the signal integrity and maybe I miss something but it sounded like you said data center was up, PON was up, base stations were up. Those are the big buckets within Signal Integrity, yet the business only grew 2% sequentially. Did you see a big step-back in broadcast video? Or was there some other area that didn't allow Signal Integrity to grow faster in Q1?

Yes, broadcast video was down a little bit, Quinn. That's a good observation on your part. And also I think when I said base station and PON were up it was very modest increases for base station. PON was up a little bit more and data center was little bit more.

Got it. Okay great. And then lastly, I don't know if I've heard you had any significant impact from the ZTE shipment ban. And if so, could you quantify what might have been included in your July guidance had that shipment – had you've been able to ship for the full fourth quarter?

Yes, so in Q1 the impact was about $2 million negative. In Q2, we're anticipating about $4 million negative impact, so which is obviously incorporated into our guidance. So as we take out of our assumptions. And obviously, if that clears up, that would be great, but we're assuming that it won't for now.

Great. Okay. Thank you very much.

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

Hey, guys. So apologies if some of these questions were asked before. But the first one is really on the warrant. So with the number being a lot higher than in the past the last couple of quarters, was that kind of baked into your original guidance expectations for a $20 million Comcast adjustment? And then secondly, what is the expected Comcast warrant adjustment for next quarter as well?

Mitch, I think during the quarter, we did put out an announcement that we accelerated the vesting of all the warrants for Comcast. That was not factored into our guidance for Q1. And we've also – in the announcement, we've said that the warrant is now fully vested and, going forward, we no longer expect that to impact our numbers at all.

Got it. So essentially, the Q2 guide, or I guess, for the next quarter guide, you'll have a zero impact, if that assumes that all of the business will have no warrant-related revenue line, is that correct?

Yes. The warrant is fully vested now, so there's no more impact going forward.

Okay. And then was this expected to be a regular kind of warrant for the full year? Or did you guys expect to kind of have a larger impact in one or two quarters. I guess I'm trying to figure out why the sudden change for Q1 versus just kind of pushing it out through the full-year.

Hey, Mitch, let me just back you up a little bit and explain. So when we did the warrants, we had milestones associated with that warrant with Comcast based on deployments. And the agreement was, as they deploy different cities across the U.S., we would vest different percentages of the warrant. What we decided to do though, and I mentioned it in my script, was that because, in some cases, now they've rolled out 10 cities, in fact, there are further announcements in the next quarter here, that some of the use cases require more dense networks. And so Comcast would like to continue to deploy a denser network in some of those cities, and that's what we're going to allow them to do. And that's why we accelerated the warrants so it allows them to make that – those kind of deployment decisions versus just going one city to the next city.

Okay, understood. And the second one is on the LoRa business. It sounds like it's tracking to plan or even – it's actually closer to the high-end if I do the math correctly here. So from a competitive standpoint, who are you guys seeing today that you're competing with? And then secondly, given that it's a much larger piece of your business, who would essentially be a larger competitor to be aware of or be cognitive of in the future?

Well, you have to understand, LoRa is a new technology, and it's really going after the LPWAN space, which is a new segment of the IoT market. And so when we look at competitors that are there today, the competitive technologies that compete with LoRa are really cellular, NB-IoT, LTE-M, kind of cellular-like technologies; and then shorter-range technologies like ZigBee and WiFi and those type of things. So – but really what we see with LoRa is that for the use cases that we're looking at, these other technologies are not very good. They just haven't been designed for long-range, low-power, low-cost kind of LPWAN IoT applications. And that's why we kind of see LoRa as really the only technology or the technology of choice for most of these applications. Now it's complementary, in many ways, [indiscernible] because LoRa doesn't have a high bandwidth, you don't do high-bandwidth connectivity, and so where you need, for example, a high-bandwidth bandwidth connection as well, you'll need also a cellular or a WiFi or something like that. But at this point in time, really, we're going up against the cellular connectivity, and the customers are normally either choosing one or the other or both.

Got it, that’s very helpful. Thank you.

And your next question comes from the line of Harsh Kumar from Piper Jaffray. Your line is open.

Yes, hey Mohan, in the past, you've had a certain seasonality where, for example, January quarter would slow down and the April quarter perhaps might dip down given your consumer business. But maybe with this new model, with LoRa being so strong, could you talk about – I know it's new to you, too, but could you talk about how you see things going forward as we look out multiple quarters?

Yes. What we are thinking at the moment, Harsh, is that, obviously Q2, you see the guidance of – we're projecting a good Q2. And then our thinking is that Q3, because of both consumer and because of LoRa and we expect our Signal Integrity products, data center to be strong as well, will continue to be strong. And then Q4, we get the seasonal drop-off there. So – and smartphones will come down, and then probably Signal Integrity will come down. So that's what our expectation is for this year.

Okay, fair enough. And then one for Emeka, and then I'm done. So you're doing a really good job – you guys are doing a really good job of maintaining OpEx at certain level basically call it flattish versus last year. Is there a point in growth? Or is there a point at a certain revenue level where that math doesn't hold and you have to accelerate the operating expenses? Could we get some color on that?

Yes, Harsh, I think what we've said in the past is that this year, there are some specific reasons for why we've seen OpEx that is relatively flat. We have some one-time spending. Last year, we’ve done a very good job of making sure that we're improving the organization and cost on product areas, the market areas that are actually driving top line and profit. But as we exit this year and start going into the future years, fiscal year 2020 and hence, our expectation and what we still model is that our operating expenses will probably grow about half the rate of revenue growth.

Thanks guys. Thank you, and congrats. End of Q&A

There are no further questions at this time. I would turn the call back over to the presenters for closing remarks.

In closing, FY 2019 is off to a strong start with all our growth engines gaining momentum, and we believe our diverse product portfolio, diverse customer base and broad geographical strength positions Semtech very well to deliver what we believe will be another record financial performance for the Company in FY 2019. With that we appreciate your continued support of Semtech and look forward to updating you all next quarter, and I encourage you all to attend what promises to be a very exciting Analyst Day in New York on June 20. Thank you.

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