Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 FY2019 Semtech Corporation Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Sandy Harrison, Director of Business Finance and Investor Relations. You may begin your conference.

Thank you, Mike. And welcome to Semtech's conference call to discuss our financial results for the second 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 to the Safe Harbor statements 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. With that, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q2 fiscal 2019, GAAP net sales were $163.2 million, a 25% sequential increase and a 7% increase from the same period a year-ago and at the upper end of our guidance. In Q2, shipments into Asia represented 75% of net sales, North America represented 18%, and Europe represented 6%. Total direct net sales represented approximately 32%, and net sales to distribution represented approximately 68%. Our distributor business remains very balanced, with 57% of the total POS coming from the high-end consumer and enterprise computing end markets, and 43% of total POS coming from the industrial and communications end markets. Q2 bookings remained strong, including Q1 fiscal 2019 record bookings and resulted in a book-to-bill solidly above one. [Sales] [ph] bookings accounted for approximately 39% of shipments during the quarter. Q2 fiscal 2019 GAAP gross margin increased 650 basis points sequentially to 61.3% due to the non-recurrence of the Comcast Warrant. Q2 fiscal 2019 GAAP operating expense decreased 10% sequentially due to the favorable impact from the $6.6 million initial payment we received from the HiLight settlement and lower supplemental compensation expenses partially offset by higher new product development expenses. In Q3 of fiscal 2019, we expect our GAAP operating expense to increase between 8% to 11% due to no benefit expected from the HiLight settlement in Q3 and HiLight compensation expense driven by the TrackNet acquisition. In Q2 fiscal 2019, GAAP tax rate was 19.4% in line with expectations. For the rest of fiscal 2019, we expect our GAAP tax rate to remain in the range of 19% to 21%. 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. Please note that as previously disclosed…

Thank you, Emeka. Good afternoon, everyone. I’ll discuss our Q2 fiscal year 2019 performance by end market and my product group, and then provide our outlook for Q3 of fiscal year 2019. In Q2 of fiscal year 2019, net revenues increased over the prior quarter to $163.2 million, driven by growth from the IoT, data center and mobile markets. We posted non-GAAP gross margin of 61.5% and a record non-GAAP earnings per diluted share of $0.55. In Q2, our bookings matched the prior quarter’s record levels and we entered Q3 with record backlog. In Q2 of fiscal year 2019, net revenues from the enterprise computing end market increased over the prior quarter and represented 31% of total net revenues. The industrial end market increased over the prior quarter and represented 30% of net revenues. The high-end consumer end market increased over the prior quarter and represented 27% of total net revenues. Approximately 20% of high-end consumer net revenue was attributable to mobile devices, and approximately 7% was attributable to other consumer systems. The communications end market increased over the prior quarter and represented 12% of total net revenues. I will now discuss the performance of each of our Product Groups. In Q2 of fiscal year 2019, net revenues from our Signal Integrity Product Group increased 5% over the prior quarter and represented 42% of total net revenues. Continued strength in data center demand and increases from the PON, base station, and video markets, all contributed to growth. In Q2 of fiscal year 2019, our Signal Integrity Product Group benefited from the ongoing build-out of Cloud and Hyperscale Data Center deployments. The high speed optical links used in these data center deployments require the increased use of CDRs, contributing to high demand for our ClearEdge CDR platforms. These CDR platforms are…

[Operator Instructions] Your first question comes from Craig Ellis from B. Riley FBR.

Thanks for taking the question and congratulations on the very strong execution in the quarter. Mohan, I wanted to start just by following up on two points you made on China. I think – and talking about Signal Integrity, the potential for a data center ramp to help that business in 2019. And then I think in the base station commentary around the same segment Signal Integrity, we have potential for 5G to start impacting sales. Can you go into a little more color on exactly what you're seeing there and the timing of the inflection that those two might drive? Thank you.

Yes, Craig. We’re starting to see early revenue from both of these areas. One is 5G and the base station. Obviously, there's been some talk about 5G base stations and China seems to be ahead. And we’re starting to see that. I think that realistically, it's going to be next year before we really see a ramp in that business, but we are seeing it. And then the same is true of the data centers. We've seen activity from a design end standpoint from the China data center guys and now we're starting to see revenues. But again, I think the large ramp will be next year when it becomes really meaningful.

And the follow-up question also on revenue would be on LoRa. It seems like there's been an absolute flurry of new deployment activity that we've seen in press releases and different use cases. As we stand here at mid-year and as you look at the full-year target, can you provide some color on whether you think we're tracking more towards the midpoint of the fiscal 2019 range or more towards the lower end or the higher end of that range?

Well, I think we’re tracking to the range, Craig, is what I would say. I think it's difficult to look at it from a quarter-to-quarter standpoint. We see lots of activity, and the question is how quickly those POCs transition into design wins and then revenue. But the momentum is very, very strong. It’s across all regions that I mentioned. As you point out, lots of use cases. Some of them are more consumer-ish and can ramp very quickly, others are more industrial in nature and will take some time. So I think we're very confident about the growth and the continued goal to continue to double the revenues every year and get to $1 billion LoRa revenue. If I look at most of the revenue today, it's generated from more industrial kind of application, smart metering, smart grid, smart cities, smart building, smart environment, smart water, but we are seeing now – we're starting to see some smart home applications, smart kind of tracking and logistics applications starting to emerge, and those are generating a little bit fast time to revenue. So I think we're still on track. We will just monitor it and see.

Thank you. And then the last question is for Emeka. Emeka, with regard to the OpEx guidance for the fiscal third quarter, did you include something for TrackNet in there? Or does that exclude incremental expenses for TrackNet? And either way, how material could they be if the deal closed in the October timeframe?

So yes, the OpEx guidance for Q3 does include some expenses for the TrackNet’s acquisition. I think if you look at the 8-K that we filed, when we signed the agreement, even though the deal has not actually closed we have actually brought on those employees. About 14 of those employees are actually now working for us. So we do expect, we do know that the expenses that they bring on to us is about $0.5 million to $1 million per quarter.

Thanks, guys.

Thank you.

Your next question comes from Harsh Kumar from Piper Jaffray.

Yes. Hey guys, congratulation, strong numbers. Mohan, a couple of quarters ago, you actually gave us the range for LoRa run rate. I was curious if you could indulge and give us that number. And also, if you could tell us how much of that LoRa business today is base station versus client? And I’ve got a couple of other questions.

So as I said, Harsh, we’re still on the $80 million to $100 million run rate. I mean that's our range that I don't want to go into more detail than that. I think we're on track to achieve somewhere in that range. Most of the revenues are end node revenues, as I’ve mentioned, that by the end of this year, the goal is to have about 80 million units deployed. We have 50 million at the end of last fiscal year, so most of the revenue is going to come from end nodes, but base station is a significant portion as well and growing, so but I would say most of it is end nodes.

Okay. So just to clarify most of the growth this year will be end nodes, correct?

Yes, that’s correct.

Okay. And then TrackNet company, does it have any revenues associated with it? And how will you – if it does have any revenues associated with it, will it go into the LoRa bucket or will it go into some other bucket?

So Harsh at this point, there isn’t any significant revenue associated with it. As Mohan did allude to this is just a very strategic acquisition that should allow us to really accelerate the solutions that we're bringing into the LoRa ecosystem. So if we – when we start to see revenues that are being driven by the activities of the TrackNet and the resulting IP, that would all be part of the LoRa-enabled revenue.

Got it. Okay. And then the last one and then I'll get back in line. Your protection business, Mohan, is up 13% year-over-year. That's a pretty significant bump up. I was curious if you could list some of the big factors that drove that kind of a good solid growth number there?

Yes. I mean the big factor is the diversification of the business really both in within smartphone and outside smartphone. So within smartphone, obviously our China momentum is good and North America is good. And I would say as I mentioned on the script that Korea is weak actually, Samsung weakness is there, and yet we still had a very strong quarter. So that's good news. But that the other real nice thing is that the diversification of our smartphone into the industrial and automotive business is doing very well. As we talked about during the Analyst Day there's more high-speed interfaces going into some of those other segments now and Semtech is doing very well in those areas. So the more we see that, the more opportunity there is, and I think obviously the high gross margin – we get the benefit of the higher gross margin from those segments as well. So all in all protection is doing very well, yes.

Congratulations guys. Thank you.

Your next question comes from Rich Schafer from Oppenheimer.

Yes, thanks. And I’ll add my congratulations guys. Nice quarter. Couple questions, maybe the first one is kind of a clarification Mohan. If you look at the $400 million LoRa funnel that you’ve talked about – I think you’ve called it in the past a two-year revenue funnel. What’s that mix look like, hardware – thinking of it in the hardware versus licensing revenue terms because I know the longer-term you guys have talked about that being more of a licensing model in LoRa?

Yes. The pipeline Rick is all hardware related. There's not much licensing or IP in that $400 million pipeline. That's mostly to do with proof-of-concepts that are going on and customers doing – testing use cases and that type of things. So and as I mentioned a lot of it is coming from more industrial kind of smart metering, smart grid, smart city, smart buildings, smart environment, smart watering, and those type of applications. And so as they transition into design wins then they transition into revenue. They typically take a little bit longer, but two years is the timeframe we're seeing from POC and from opportunity to turning into revenue. There are some segments, I would say the more smart home related, some logistics, maybe some of the more safety, emergency kind of things that can transition faster into revenue. But still I would say 18 months is probably a reasonable timeframe.

And Mohan to be clear, I think you’ve talked in the past about potentially doubling LoRa revenues again next year. So I think I'm hearing you correctly really that whatever happens with LoRa growth next year is going to be primarily hardware driven?

Yes. That's right. I think that's correct, yes. So I mean we've got – now the way to think about it is the LoRa cloud services, some of the IP licensing and things like that will probably start to contribute towards the back end of next year and then really start to pick up after that.

Okay. Thanks. And then another follow-up on the 5G and the base station. I'm just curious; I think you've talked in the past a little bit about a content story there? Can you quantify what that looks like as we move and start deploying 5G base station versus sort of what’s your content looks like today in 4G?

Yes, mostly today it's PMD. Its amplifiers drivers, those type of things. We do believe that there will be more CDRs going into the segment. So as with data centers as the speeds go up, the need for Signal Integrity goes up and so there will be some applications where we believe we'll have a CDR play as well. But it is an interesting opportunity for us. We’re quite excited about it. But with the 5G story, now base station story, which is mostly driven out of China today. I think we have to wait and see how the tenders play out and how the volumes ramp up next year.

Got it, and then just one last follow-up, there I guess are potentially two new North American flagship OLED, smartphones supposedly coming this fall. Can you talk about Semtech's potential share in those phones and content maybe there? Thanks.

Yes, display is still a good space for us. I mean, I mentioned the smartphones we're doing quite well in outside Korea obviously historically we've done very, very well in Korea. We're now starting to do very well in China and also North America and now we feel good about that. But yes, OLED and displays has been a pretty good segment for us and our position is very strong and we hope that that will continue to be the case.

Okay. Thanks.

Your next question comes from Mitch Steves from RBC Capital Markets.

Hey guys. Thanks for taking my questions. Two for me, first is kind of actually on kind of talking about January. So I realize you guys have record bookings, and the January quarter has historically been very volatile anywhere from flat sequentially to kind of down 10%. So really, as you guys can't really give us numbers presented, anyway to help in terms of relative to seasonality, how it should look?

So Mitch, we can't really look that far ahead. But I will tell you the things that we would continue to expect to see positively obviously LoRa Signal Integrity Product business typically is quite strong. The unknown really is on the more consumer side, and particularly Samsung and how the other smartphone manufacturers do and that's kind of it's a little bit early to call that. So I would say those are the kind of dynamics to look for?

Okay, got it. And secondly on the margin front, it looks like you guys are continuously taking up both the gross and operating margins going forward. So if we look out a few quarters, we assume that the same kind of cadence continues? Or is there going to be additional volatility in the next couple quarters?

Well, so Mitch if you look at the key drivers of our gross margin is the mix of our revenue that we have. So as we continue to see LoRa doing very well driving up the industrial revenues as we continue to see the industrial and automotive revenue contribution from our protection doing very well, our expectation is that we should continue to see flattish to slightly up gross margin expectations are up. And with regard to the operating margin, as you know we've done a very good job of keeping our operating margin in line with how the topline is doing and we expect that to continue going forward.

Got it. Thank you.

Your next question comes from Quinn Bolton with Needham & Company.

Hi, guys. Congratulations on the nice results network. I just wanted to come back to the PON market, clearly have been strong here in the first half of the fiscal year. Wondering if you look into the second half? Do you see it sort of continuing to run about similar quarterly levels or do you anticipate some seasonal decline in that business in the second half of fiscal year and I guess for the year overall is that still on track to be flat to up slightly on a year-over-year basis?

Yes, Quinn, the answer is, we expect it to be slightly up for the year. Now we expect the second half to be a kind of similar to the first half, which was a surprise in the sense of how strong it has been. So we are expecting as I mentioned 10-gig to continue to accelerate and then 2.5-gig to just kind of continue the way it's been doing. The ZTE factor was a little bit of a quirk in the way that the quarter shape up, but I think in the second half, as you point out, it's likely to be similar to the first half.

Great. And then just the data center business, it seems like at least one of your historical competitors, increasingly seems to be focused on lasers and complete sort of module reference design. Wondering if you're seeing any change in the competitive landscape as you look at the clock data recovery and PMD segments of the market, whether there's been any change there and sort of how you see the competition?

We see largely the same competitors. This is a space that requires a lot of kind of interfacing with the module manufacturers and the end customers and so it's unlikely we'll see new entrants coming into the space and do well. I think – but the players that are currently in it. I think they'll continue to try to figure out ways to differentiate and our game plan as you know is to focus very much on the analog side and to focus on bringing value, which in the form of lower power and lower cost and trying to get products to our customers that allow them to build the best modules. So we're not trying to do everything in the module. And we tend to – like to partner with them and figure out how to get to the end customers the best solution at the lowest price point and the highest performance and that continues to be our strategy. So we know some of our competitors have slightly different strategies, but we kind of believe our approach of the moment is doing quite well.

Great. And then the last question if I look at the Wireless and Sensing business that's now almost a $50 million per quarter business and I think more than half of that is probably LoRa and proximity sensors. But they're still probably roughly 40% better that are other products. Do you have any – can you give us any general sense how the non-LoRa, non-proximity sensor business within Wireless and Sensing trends over the next several quarters? Is that kind of a stable business? Is it up? Is it down? Thanks.

Yes, it's fairly stable, Quinn. I think some of it is more mature products, older products, we don't expect any large shifts may be one quarter, it’s down. Next quarter, it’s kind of up and that type of thing. But in general, I don't expect that to be able to shift or to offset any growth – the growth that we get from LoRa and proximity sensing.

Perfect. Thank you.

[Operator Instructions] And your next question is from the line of Cody Acree from Loop. Your line is open.

Thanks for taking my question and congrats on the progress. Mohan, just on the data center side, are you seeing deployment activity or is it primarily upgrade driven the strength that you’ve been seeing?

I would say it suppose Cody, I think as I mentioned in China its new kind of activity, but most of the data center activity here is just more 100-gig connectivity, more data centers also still demand. I think therefore more data centers. So we see more data centers. We see more 100-gig links within the data centers and all of that's driving the need for more CDRs. If you recall from our Analyst Day, we explained that as the bandwidth increases more of the optical connections were required CDRs and that's the one of the key practice in our growth.

But Greenfield data center, I guess of that that activity are you seeing that as a key driver or is that more ancillary?

I would say that's also a key driver. I would say both.

Okay. And then just on your comments around LoRa. You've obviously talked about geolocate as a potential driver longer-term, but that seems to be something that maybe has been emphasized a bit, and just kind of speak to that?

Yes, not at all at the emphasized. It is longer-term, I would say we'll start to see – expect to start to see revenues from that maybe towards the second half of next year. But one of the things that we mentioned at the Analyst Day is we really are focused on our cloud services aspect and that will include geolocation and so to me that's really the strategy now is to focus on that area and that's one of the reasons why we did the TrackNet acquisition just to kind of help us accelerate that ability to provide our customers with location information.

And then lastly, just Emeka on capital allocation, you're buying back shares, you've got a great balance sheet. So what are your thoughts on capital allocation going forward?

So Cody, like we've said, to put it on a market situation, we’re going to be out there in the market buying back our shares. And as we did report, we will continue to make some strategic investments in order to TrackNet acquisition and a few other investments in startup companies, in our companies that are trying to take advantage of this phenom that we are refer to as LoRa. We will continue to make those investments and then just continue to paydown the debt regularly. So there is definitely a whole lot of opportunities to use all the cash that we are generating.

Great. Thank you, guys.

And your next question comes from the line of Craig Ellis from B. Riley FBR.

Thanks for taking the follow-up. Just a clarification and sorry if I missed it, but there's been a lot of movement with respect to chip company shipments and then adjustments around shipment prohibitions with ZTE. Can you talk about what happened with ZTE and the program, what the expectation is for ZTE and the outlook?

Craig, so in the quarter, I don’t think we didn't really have a significant impact from ZTE, and in the coming quarters, we just expect it to be back to normal run rates, nothing out of the ordinary.

For us Craig, it was very much balanced equation. We couldn’t ship the ZTE, when we couldn’t ship the ZTE, I think because we have such a strong position, other customers just picked up the slack and we shipped more to them. And now the ZTE is back, and all those other customers slack off and we ship more ZTEs. So from a net standpoint, we don't really think there was any impact.

Got it. Thanks guys. End of Q&A

And that was our last question. At this time, I will turn the call back over to the presenters.

In closing, we are pleased with our strong first half performance led by the robustness and sustainability of our key growth engines. We believe our diverse product offering and diverse global customer base positions us well to continue to outperform the market and deliver what we believe will be a 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. Thank you.

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