Semtech Corporation (SMTC) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Jessie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q3 FY19 Semtech Corporation Earnings Release. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sandy Harrison, Director of Business Finance and Investor Relations, you may begin your conference.

Thank you, Jessie. And welcome to Semtech's conference call to discuss our financial results for the third 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 statements included in today's press release, and in 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 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 2019, net sales were $173.5 million, a 6% sequential increase and a 15% increase from the same period a year ago. In Q3, shipments into Asia represented 77% of net sales, North America represented 16%, and Europe represented 7%. Total direct sales represented approximately 31%, and sales to distribution represented approximately 69%. Our distributor business remains balanced, with 59% of the total POS coming from the high-end consumer and enterprise computing end markets, and 41% of total POS coming from the industrial and communications end markets. Q3 bookings softened from the record levels of the previous two quarters, and resulted in a book-to-bill below one. Trans [ph] bookings accounted for approximately 37% of shipments during the quarter. Q3 GAAP gross margin came in as expected at 61.4% and Q3 GAAP operating expense decreased 4% sequentially, mostly driven by reduction in deferred value of contingent and obligations. In Q4, we expect our GAAP operating expense to increase between 7% to 10% due to non-recurrence of the favorable onetime items in Q3. In Q3 GAAP interest and other expense was $31.2 million, compared to $1.7 million in Q2 reflecting the impairment of the investments in Multiphy. During the quarter, due to change in market expectations and changes in the competitive landscape, we conclude that the fair value of the output in Multiphy did not support the book value. As a result, we write down the entire $30 million book value of the investment. In Q3, GAAP tax benefit was 13.6% driven by discrete benefits from transition taxes associated with the tax reform act. For Q4 of 2019 and we expect our GAAP tax provision to return to the normal liaising range of 19% to 23%. For modeling purposes, we expect our fiscal year 2020 tax rate to be in the same range. 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. Note, that as previously disclosed in our first quarter, we will no longer adjust net sales for the impact of the Comcast Warrant for any comparable historical periods presented. Instead, we have provided a separate disclosure of the impact of the Comcast Warrant on the financial statements in our Form 8-K filings and our press release. Q3 fiscal 2019 non-GAAP gross margin increased 20 basis points sequentially to 61.7% as expected, and we expect the Q4 non-GAAP gross margin to increase by approximately 30 basis points to 62% at the midpoint of our guidance due to a more favorable product mix. In fiscal 2020, we expect our gross margin to remain stable with an upward by us driven mostly by end-market mix. Q3 non-GAAP operating expense increased 2% sequentially to $54.3 million in line with expectations. In Q4, we expect our non-GAAP operating expense to decline between 2% to 6% due to lower compensation expense especially offset by higher project spending. For modeling purposes, we expect our non-GAAP operating expenses to grow at approximately half the rate of revenue growth in fiscal year 2020. In Q3, our non-GAAP tax rate was 16.5% in line with our expectations. And we expect our Q4 non-GAAP tax rate to be between 16% and 20%. We expect our fiscal year 2020 tax rate to be in the same range. In Q3, cash flow from operations increased 94% from the same period a year ago to $52 million or 30% of net sales. Free cash flow was 28% of net sales, in line with our upwardly revised target range of 25% to 30%. Our cash and investments was $312 million and our debt balance was approximately $216 million, resulting in a net cash position of $96 million. We repurchased approximately $30 million of our stock during the quarter. Our stock repurchase authorization now stands at approximately $217 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down our debt. In Q3, accounts receivable increased 7% sequentially, driven by higher net sales and represented 43 days of sales, which is within our budget range of 40 to 45 days. Net inventory in absolute dollar terms increased 4% sequentially and days of inventory decreased by 8 days to 82 days, which is well below our target range of 90 to 100 days. In Q4, we expect net inventory to be slightly in absolute dollars and days as we plan for the typical seasonal growth that we expect in the first half of fiscal year 2020. In summary, despite the macro headwinds, our growth drivers remain robust and the operating model is the most certain [ph] the leverage that is expected to drive cash flow generation to record levels in fiscal 2019. We believe our focus on execution positions us nicely to continue our record financial performance in fiscal year 2020. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 2019 performance by end market and by product group, and then provide our outlook for Q4 of fiscal year 2019. In Q3 of fiscal year 2019, net revenues increased 6% over the prior quarter to represent a new quarterly record of $173.5 million, driven by growth from the IoT, data center and mobile markets. We posted non-GAAP gross margin of 61.7% and a record non-GAAP earnings per diluted share of $0.63. In Q3 of fiscal year 2019, net revenues from the industrial end market increased over the prior quarter and represented 30% of net revenues. The enterprise computing end market increased over the prior quarter and represented 30% of total net revenues. The high-end consumer end market increased over the prior quarter and represented 29% of total net revenues. Approximately 20% of high-end consumer net revenue was attributable to mobile devices, and approximately 9% was attributable to other consumer systems. The communications end market also 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 Q3 of fiscal year 2019, net revenues from our Signal Integrity Product Group increased 2% over the prior quarter, and represented 40% of total net revenues. Continued strength in data center demand and stronger demand from the base station market contributed to growth and a new quarterly revenue record. Our data center business continued it's strength in Q3 led by demand for our industry leading ClearEdge CDR platforms for 100-gig and NRZ optical modules. These ClearEdge CDR platforms are used in high performance optical modules and active optical cables from 25 gigabit-per-second to 400 gigabit-per-second. This quarter we will sample our recently announced Tri-Edge CDR platform for PAM4 interfaces. This new low power and low cost CDR platform is targeted at 200-gig and 400-gig PAM4 data center interconnects which expected to ramp in calendar year 2020. Our FiberEdge PMD platforms, which is targeting 100-gig, 200-gig and 400-gig optical modules is also sampling and also expected to ramp in calendar year 2020. Semtech continues to benefit from it's leadership position in the optical connectivity market. We expect to sustain this leadership position as our new innovative optical platforms are well positioned in the fastest growing segments of the data center market. In Q3, our PON business declined sequentially following a strong Q2 performance. ZTE continues to recover and re-establish it's position in the PON market and we expect them to perform better in calendar year 2019. In addition, our leading 10-gig PON solutions of both, the OLT and ONU are expected to grow as more PON deployments transition to higher bandwidth connectivity over the next few years. Our PON business continues to perform better and we had anticipated this year, and we still expect FY19 to be a record year for our PON business. In Q3 of fiscal year 2019, demand for our wireless base station solutions from both 4G and 5G systems increased. We continue to see support for 4G deployments and are pleased to see the early demand for 5G solutions. We expect 5G deployments to ramp throughout calendar year 2019 with high volume deployments taking place in calendar year 2020. Our current expectation is that 5G base station volumes will be significantly higher than 4G. Semtech's ClearEdge, Tri-Edge and FiberEdge solutions are well positioned to benefit from the 5G ramp as they offer best-in-class performance and power consumption for the rigorous demands of higher speed 5G wireless connectivity. For Q4 of fiscal year 2019, we expect net revenues from our Signal Integrity Product Group to be approximately flat. Moving on to our Protection Product Group, in Q3 of fiscal year 2019, net revenues from our Protection Product Group increased 15% over the prior quarter and represented 31% of total net revenues. The strong growth in Q3 was driven by strength from the consumer and industrial segments. In Q3, demand for our protection products from our Korean, Chinese and North American smartphone customers all increased over the prior quarter. During the quarter, the consumer market saw noticeable growth in the proliferation of USB 3.1 Type-C, and HDMI 2.0 protection across multiple end applications. In addition, our broad market protection business which includes industrial, communications, and automotive applications grew nicely and achieved a new record. Our non-hand held protection business now represents approximately 45% of our total protection business. Semtech's advanced protection platforms address the most demanding system needs by providing robust protection of sensitive, advanced lithography devices with high speed interfaces. Longer term we expect the diversification of our protection business to continue to drive a more balanced end market mix with a lower handheld revenues offset by higher industrial and communications revenue which should result in higher gross margins for our Protection Product Group in the future. In Q4 of fiscal year 2019, we expect our protection business to experience a stronger than seasonal decline as our smartphone customers are all experiencing a softer demand environment. In addition, we expect several of our largest handheld customers to reduce their inventory as is customary for their year-end activity. Turning to our Wireless and Sensing Product Group. In Q3 of fiscal year 2019, net revenues from our Wireless and Sensing Product Group increased 4% sequentially and achieved a new quarterly revenue record and represented 29% of total net revenues. Our LoRa-enabled revenues increased over the prior quarter and once again, achieved a new quarterly record. For FY19, our LoRa-enabled revenues are currently tracking to the lower end of our $80 million to $100 million target range which would represent approximately 90% year-on-year revenue growth. LoRa's rapid global acceptance as the best technology for low-power IoT networks and the increasing number of IoT used cases using LoRa is contributing to the record revenues. We expect this momentum to continue for the next few years as the LPWAN industry stops to transition from it's embryonic state today to one of the largest segments within the IoT sector. During Q3 we announced the beta release of our first cloud-based LoRa geolocation service. This is Semtech's first LoRa cloud microservice and will be an important test for us to demonstrate our ability to monetize LoRa microservices in the future. Our commercial cloud-based geolocation service will be launched publicly in the second half of calendar year 2019 and will be followed with other microservices offerings. We believe our LoRa cloud geolocation service will further enhance LoRa's position in the IoT market. By providing system developers, the critical building blocks, tools, and services needed to develop and quickly deliver compelling and more accurate LoRa based geolocation solutions to the end customers. Also in Q3 of FY19, we announced a strategic partnership with Alibaba. At the recent Alibaba cloud computing conference, Alibaba announced it's goal to have every enterprise adopt LoRa technology which should significantly expand the LoRa technology footprint in the China market. Initial target used cases include smart logistics and asset tracking, air quality monitoring, food safety compliance and public safety applications. In conjunction with the conference, Alibaba demonstrated the extensive capabilities of LoRa technology using the industry's first LoRa air-shipped balloon which connected senses anywhere from 20-meters on the ground to 40,000 meters above ground. We expect more LoRa related announcements from Alibaba, Tencent and other alliance members in the near future. We also recently announced several real used cases and initiatives with our LoRa alliance partners. These include the following; SK Telecom in Korea announced the availability of Lifecare, a LoRa-based biocapsule that allows the monitoring of animal health in real-time. Sensoterra announced a LoRa-based real-time soil moisture measurement system for commercial farms with the goal of reducing water usage by 30%. Green Stream, an environmental technologies firm, helping to build safer communities use LoRa to develop it's autonomous flood sensor system for using monitoring remote levels in coastal cities prone to floods. Apona [ph], a technology company focused on smart water utility systems incorporated LoRa technology into Cosco's distribution centers and anticipate saving Cosco millions in water usage costs. Kaifa Metering, a China-based IoT solutions developer incorporated LoRa technology into it's smart utility metering products enabling the optimization of energy usage resulting in significant cost savings. HEX Safety, a smart prevention, fire prevention company in Taiwan incorporated LoRa technology into it's dynamic evacuation system which helps people navigate through hazardous environments real-time. These are just a few examples where LoRa technology is being used to deliver unique value in global used cases. We continue to see many new LoRa used cases emerging as the excitement around LoRa continues to grow. As a result, our pipeline of LoRa opportunities continues to exceed $400 million. We anticipate that our conversion rate will exceed 50% as these opportunities transition to design wins and then revenue. We also believe we are on-track to achieve or beat the key LoRa milestones we establish for FY19. These include: 1) the deployments of public LoRa WAN networks in 70 countries; 2) the global deployment of 200,000 gateways which include both macro and pico-cell gateways that will provide the capacity to support over 1 billion end-nodes. We now believe we will end the year with at least 220,000 gateways deployed; and 3) the deployment of over 18 million LoRa end nodes which represents a 60% increase from approximately 15 million end nodes deployed at the end of the last fiscal year. We are very pleased with the progress of LoRa and believe we are well underway to establishing LoRa as the defacto [ph] stand for LPWAN connectivity. In Q3 of fiscal year 2019, our Proximity Sensing business delivered near record revenues. Our proximity sensing platforms are benefiting from the increasing number of high powered radios being integrated into hand-held and wearable devices, and increasing regulations on radio energy transmission. We expect our proximity sensing business to continue to grow over the next several years driven by these two trends. In Q4 of fiscal year 2019, we expect net sales from our Wireless and Sensing Product Group to decrease slightly as lower seasonal demand from our Proximity Sensing business is expect to offset continued growth in our LoRa business. Moving on to new products and design wins; in Q3 of fiscal year 2019, we released 21 new products and achieved 2,292 design wins. In Q3, we also achieved a record POS. Now let me discuss our outlook for the fourth quarter of fiscal year 2019. Based on current bookings trends, normal seasonality, along with a softer smartphone demand environment, we are currently estimating Q4 net revenues to be between $155 million and $165 million. To attain the midpoint of our guidance range or approximately $160 million, we needed net turns orders of approximately 42% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.53 and $0.57 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] Your first question comes from Tori [ph] with Stifel.

Yes, thank you and congratulations on the record results. So Mohan, first question, you talked about some weakness in smartphones; I was just wondering if you have any more visibility as to how long does the weakness will persist [ph], does this feel like a one quarter inventory adjustment or do you have any visibility beyond that?

We only have really visibility for Q4 I would say. The thing that is noticeable is that it's across all region, so we are seeing weakness in China smartphones, Korea smartphones, North America smartphones, so it's pretty much an industry-wide smartphone weakness I would say. Typically, we do see Q4 as a softer quarter for smartphones and then we see a bounce back in Q1, given that it's pretty global, I would probably suggest it's going to be a little bit longer timeline before we see smartphone come back but I will be speculating.

And as my follow-up question; you talked about LoRa cloud services going into production, second half of next calendar year; could you may be add some color on how material some of these contributions could be? Are we talking about minor or could these be some pretty big programs that you generate revenues in for the second half?

Actually, to be honest with you, I think the key thing is that we want to prove the value of the cloud services in terms of getting accurate geolocation, the ability to use different technologies to create that accuracy, so LoRa plus other technologies, and then, as we demonstrate that value, then it's a question of what are the used cases and how big they could be. As you know, we have an ambition to grow our LoRa business to $500 million and $1 billion, and my hope is certainly that our cloud services business will contribute to that significantly some 20%, 30% of those revenues but that will take time, now we're looking at about 5 years out from here.

Your next question comes from Craig Ellis with B. Riley FBR.

Thanks for taking the question and congratulations on the execution in a pretty dynamic environment out there. Mohan, I wanted to follow-up on some of the LoRa commentary, so nice to see that a lot of the metrics are -- really all of the metrics are on-track for this year but with regard to the funnel opportunity at $400 million, given what we're seeing on the macro, I'm wondering if you can help us just understand how some of the dynamics are playing out with the funnel; for example, have you seen any change in pacing with opportunities coming into the funnel? It seems like the conversion rate is still about as you'd expected, about 50%, is that so? And as you see, some of those funnel opportunities move into conversion; can you help us understand what some of the end-point size ranges are, more classic analog or are some of these turning into from what you can see high-runner opportunities?

First I would say, we haven't seen any real change. LoRa and LPWAN is relatively new, so the merging industry and so there are a lot of new used cases and lot of new applications, and a lot of them are actually used cases that would result in cost savings or efficiency improvements or optimization enhancements of energy for example. So I think, my sense is that regardless of the macro environment, the adoption of LoRa will continue to grow nicely. Having said that, I think there are definitely two camps; as the camps of the -- kind of industrial applications like metering, environmental, and agriculture that typically do take a longer time from opportunity to generating revenue. The nice thing about LoRa today is that we are starting to see used cases such as smart home, tags, asset tracking, security, cold chain; that are more -- I would say they are not consumer but they are more consumer-ish in the sense that they could ramp the volume quite quickly, and they could generate volumes quite quickly. And again, these are fairly new used cases and fairly new applications of new technology; so I wouldn't anticipate any loss of momentum given the current environment.

Emeka, with regard to the gross margin outlook for the fiscal fourth quarter, very strong; are there any special one-time items in there? If it's just mix, what specifically is happening either on inter or intra-segment mix that's giving you some nice uplift in the quarter?

Craig, it's essential what I said in my prepared remarks. It is the end market mix, so if you look at the fourth quarter, we do have a lower mix of the handheld revenue if you will, and as we go into the future years, we expect the continued growth from LoRa, the optical business in ordering very well for us. So the end market mix, definitely when you look at it in terms of where we expect our growth is supposed to come from the higher gross margin businesses that we have.

And then my last question, I think there was a reference in the inventory commentary too; building some inventory for the first half of the fiscal year. Can you help us understand to what extent is that just an expectation based on the historic seasonality of the business or is there order visibility or customer visibility that lends it's confidence that there can be more of a seasonal recovery off of what was clearly a cyclical dynamic that's impacting industry? I'm not looking for guidance but just for any qualitative or quantitative color you can provide. Thanks.

Our expectation thus by all the macro headwinds within that the industry is experiencing right now is that we still expect to see some type of seasonal growth in the first half, again, the issue is going to be how much, how strong is that growth going to be. So we have to prepare for that from our indications from our channel partners, I think that will -- they are telling us as well is that they expect to see some level of rebound to the business in the first half. If you look at everything that was talked about the LoRa business that we expect to continue the grow, our optical business is usually very strong in first half of the year and there is nothing so far to indicate that that shouldn't be the case, I think probably theirs is a very strong base station, it looks it's bouncing back, the data center business continues to be quite robust. So there is nothing despite the current environment that would suggest that we should see some uplift in the first half of the year.

Your next question comes from Harsh Kumar with Piper Jaffray.

Congratulations, good execution in a tough environment. Mohan, I think a quarter ago on the last call you had talked about China data center opportunity. I'm curious how that maybe developing with all that's going on politically.

Well, China continues to be a good opportunity for us and we continue to look for ways to partner and design-in our products. We tend to, as you know, all of our products are kind of high-end, very high performance analog products, they are not easy to copy, they are not easy to replicate, so we've had Chinese competitors and other competitors trying to do the same thing for all of our product lines for a long time now but we keep moving as long as the market keeps moving, I think we'll be fine. Then the question becomes how important are we to those customers? And I think in China, on the data center side, the mid-size data centers, not so much the really big, hyperscale data centers like Google, Amazon, and Facebook, but more of the mid-size data centers, Alibaba, Tencent, Baidu; I think our products are a really good fit and timely. We have very good products that are available now to them, we have very good sales channel in the China region, so my sense is that it will continue to do quite nicely over the next few years.

As my follow-up, Mohan, you mentioned LoRa did record in October and then again, you're looking for pretty good growth in January. It sounds like -- I'm curious how are your CDR products faring from October to the January timeframe? Is that an area that you're expecting to see growth overall or is that something that's caught up in the softness spot?

I think as we're coming off a record quarter, remember Harsh; so I think Q4, we're expecting it to be a similar type of quarter. But our CDR products are doing extremely well, I would say, 100-gig, more than higher bandwidth products but as I mentioned, one of the nice things that even for as we see base stations now are probably going to deploy some of the interfaces where we'll require CDR functionality. Clearly, the higher bandwidth connectivity within the data center, more of those modules use CDR. So our CDR business continues to do quite nicely, there are some clear advantages we have with our technology in our view, and both, our ClearEdge and Tri-Edge families, which as I mentioned we're just sampling now the PAM4 products, we believe it will be very successful.

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

So I just wanted to start kind of in the high level full year commentary, I realize you guys can't give specific guidance but when I look at 2020, can you may be help us in terms of as a growth rate can it be similar to what we saw in '19 or should we take down expectations given that the first half has seen some consumer softening?

That's a question that's tough to answer in this point in time Mitch because we just haven't got any visibility into the next four quarters beyond Q4. We'll say that we would expect LoRa, obviously, to continue to do very well and grow at very good rates. As Emeka mentioned, our optical business, we would expect that to grow very nicely. I think PON, we had a record year this year; given some of the dynamics there, with ZTE going to be stronger next year and 10-gig is ramping up, there is no reason why our PON business couldn't have a record year again. Base station has been relatively weak this year, and as I mentioned, we're starting to see a little bit of pickup there, so maybe Base station will do better next year. The unknown is really smartphones, the mobility sector and how that's going to play out; this year has not been a good year and as I mentioned, with all regions of the world, with smartphones from all regions being relatively weak, it's difficult to call what next year is going to be. I would suggest it's probably going to be, at best, probably flat from this year and so that's the challenge. But if you factor that in, I still think that for Semtech, at least, we've got so many other growth drivers that we should see a good growth year.

And then secondly, just on the LoRa business, historically you guys have talked about this coming year, FY20, being similar growth rates since you guys are expecting to grow 90% this year, should we expect kind of $80 million to grow at 90% next year as well or has anything changed?

Nothing has changed. My expectation is it's going to grow very fast, it's going to grow very well, we have opportunity, so we just have to convert the opportunities into revenues. I'll give probably guidance for FY20 next quarter and give you an idea of where we think we'll end up. It's a dynamic market, things are changing, and as I mentioned we've got so many used cases that could move the needle quickly but some of them are more industrial in nature and some of them are more consumer-ish; and so the key thing for us on our -- with our LoRa business is to continue to grow the deployments of gateways, continue to grow the deployments of end nodes, continue to deploy the number of people covered and the countries covered, and to continue to have their LoRa lines drive the LoRa technology across all the used cases in all these countries. I think the revenues are just a result of all of that activity, which is all positive at the moment.

And then just one small on the operating margin; is it fair to assume that exiting FY20 your margins will be up compared to this year? Is that a fair assumption given the mix changes.

I think that is a fair assumption given that we're expecting to continue to grow, we're expecting our gross margins to be flat to up, we're expecting operating expenses to grow at a very reasonable rate; and so if all those happen, then yes, the operating margin should expand.

Your next question comes from Cody Acree of Loop Capital.

Mohan, if we could go back to your comments about broader demand weakness; it sounds like that has been relegated just to wireless. Are you seeing any pressures in your other segments, whether they are tariff-related? And maybe how are you factoring that into your thinking?

Yes, I would say it's smartphones, for sure. And I would say the broader market, when you have parts of the legacy business and our mature products being a little bit softer, that tells me there is broad market weakness. But in parallel with that, we have areas of strength and so that's kind of the way I would look at it. From a tariff standpoint, at this moment I don't think there is any real impact to us. There is a lot of nervousness on certainty, customers not sure of things and those type of uncertainties which is there in any type of uncertain environment, but in terms of a direct impact at this point, I don't think I can point to anything that's specifically impacting our business. That could change, but at this point in time, I think it's -- we're probably in a group of peers in the high-performance analog space that have limited impact.

In your discussions with customers are you seeing any change in their buying patterns, whether it be distributors or direct players that are pulling in or is business continuing as normal given the uncertainties that we're seeing?

At this point in time, I couldn't call, I couldn't connect any type of behavioral change due to tariffs. I think if there is behavioral change, it's because of the uncertainty in the demand environment, and uncertainty with Christmas coming up, and Chinese New Year coming up, and those types of things; end of year inventory. As I mentioned, smartphones across the board all regions is fairly weak, so I don't think that's really related to tariffs or anything like that. So yes, I couldn't point to any type of behavioral change due to tariffs at this point.

Your next question comes from Stan [ph] with Baird.

Quick follow-up question; you talked about a little bit of softness in some of your legacy mature products. Any color you can provide on the composition of those products and exposure as a percent of total revenue?

It's relatively small on the legacy side, let me see if I can get you a number here. I would say probably in the order of 4% to 6% down on the legacy side.

Is that a 5% of total revenue or is that the percent decline that you're seeing year-over-year?

From an annual standpoint, I would say our legacy business is probably declining part is going to be down about 18% this year, it's about 9% of total revenues.

And then, on the base station side -- sorry, I missed the first few minutes of the call; are you able to tell us the type of year-over-year growth you're seeing and whether you expect an acceleration of that growth next year from current level? I know base station was weak earlier this year but if you could provide a bit more color on that and the colors that you seek.

So base station for the year will be down from last year, and that's what we had anticipated. Actually, we had projected beginning of the year base station would be down about 5%, and that's where we're expecting the year to end. Next year, we're expecting to see a pickup and as I mentioned, we're driven by 5G but we're also seeing 4G starting to pick up a little bit. So we'll get a little bit of visibility of that in Q4 and then I think probably in the first half of FY20 we should start to see that pick up momentum.

And last question, was base station down year-over-year in the just reported quarter as well?

No, base station was up year-over-year.

Your next question comes from Hamed Khorsand with BWS Financial.

You said LoRa is tracking towards the lower end of your $80 million to $100 million expectation; is that driven by the customer or is that a service provider that didn't match up to your expectations on this goal?

No, I would say it's more just the transition of the opportunities to revenue. We have our opportunity pipeline convert kind of figuring out some forecasting, exactly how that converts into revenue is difficult. If you go back three years ago, I projected the $80 million to $100 million three years ago and now we're here, to get to $80 million, I'm very pleased that we're at the lower end here and projecting -- and that's a 90% growth from last year. So I think it's a phenomenal growth, I don't think you should get hung up on the $80 million to $100 million, I think you should focus on what's going to happen next year and beyond with the momentum we have.

And given that you're suggesting gateways are still growing at a pretty nice clip, are you pretty much reliant on service providers to push the end notes higher for you? Is that what you're expecting to happen in calendar '19 to drive growth for LoRa?

Well, so remember LoRa doesn't rely only on service operators, so the gateways could be private networks, enterprise networks in addition to the global operators. So anyone who builds up a network and then provides end nodes or connects end notes to those gateways would drive demand for us. So I think it's a combination, I don't think it's one or the other, you know, in fact, we know of a fairly sizeable deployment that's going on in Europe now, quite a large number of gateways and it's -- I wouldn't call it an operator, it's more of an enterprise play.

Your next question comes from Scott [ph] with ROTH Capital.

Mohan, just to revisit your comments earlier related to protection, I just wanted to clarify a couple of things and then had some follow-ups. I thought you indicated 45% of the protection mix was related to non-mobile, industrial, auto, etcetera. Is that correct? And then also, in terms of your comments and your outlook for fiscal '20, it sounds like modest expectations on the smartphone front but I want to dissect that, is that purely for protection or are you throwing proximity into that mix? And your assumptions then related to non-mobile protection and how that looks for fiscal '20?

Our smartphone business consists of protection and proximity sensing. And so if you combine the two -- the two of them combined, it's about 21% of our total revenues. And so that's up, and those -- and that is impacted by the softness, both of them, the protection and the proximity sensing are impacted by the softness in global smartphone sales. Now, within protection -- our protection business, handheld, which is mostly smartphone, is about 55% of the business and 45% is non-handheld. And so, a significant impact on the protection business due to smartphones. The non-handheld piece, especially the ITA piece, which we call -- which is really industrial, telecom, automotive is growing quite nicely. As I mentioned, it had a record quarter, it would probably grow 20% annually and is the reason why the gross margins are also expanding. So that is kind of the summary, Scott.

And then just to revisit LoRa, you had some comments related to geographic issues looking forward to calendar '19, really focused on better geographic coverage. I was wondering if you could provide a little bit of color in terms of what the geographic mix looks like today. I know China has been a big component, does that continue? And really, from a geographic standpoint in 2019, what is the most important area that we need to have more coverage? Is it North America/U.S. or is it Europe, you had some big acccouncements there recently in terms of geographic coverage starting to rollout; what's going to be most important in terms of driving that growth in calendar '19 and beyond? Thanks.

There are really two aspects to this; one is what drives the revenue. I think we have enough coverage now, we have enough networks, we have enough gateways out there to generate enough used cases and drive end sensor connectivity to drive the revenue profile. But then the question is what drives the billion-dollar plan? That requires us to continue to have network deployment, both public and private in all of the big regions of the world and I would say that China is doing very well, North America is starting to catch up, Europe has been doing well but it's fragmented, some countries still we have to penetrate. And then we're starting to see now for the first time I would say other regions like India, South America are starting to get really knowledgeable on LoRa and deploy real used cases. And so that's for me -- I think one of the most important things for us to monitor over the next 12 months is how much traction we're getting in other regions of the world like South America and India. But from a revenue standpoint, I think the momentum is already there. I don't think we need to focus on countries, I mean we've got -- I think 70 countries now or very close to 70 countries. And 100 network operators in those 70 countries, so to me, I think we have enough momentum there. Now, it's a question of getting them connected.

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

Mohan, I just wanted to come back to the LoRa business; it sounds like the pipeline continues to build. If anything, it sounds like your conversion rate, you now expect it to be over 50%. So both of those moving in the right direction. Is the -- should we be thinking about a roughly two-year conversion period for that pipeline into revenue or is that where you see perhaps a bigger standard deviation or just greater volatility in terms of the timing of where that pipeline converts? And then I've got a follow-up.

Yes, I think two years is about the right timeline. I think -- I thought we're -- and we're just using data, right, we look at the data and that's what we see. There are some used cases, in my opinion, that can covert faster, 12 to 18 months, and there are others that will take 24 to 36 months. The more industrial used cases take a little bit longer, the more consumer-ish or industrial but high volume tend to be faster. We are going to see, as I mentioned, I think the beginnings of this year starting with the CES show, starting to see used cases related to the home and used cases related to very high volume tags and things like that. So that's going to happen in this calendar year and I think that could really drive a different acceleration of the time to revenue but we have to prove that.

And then the second question; with you guys writing down the book value of Multiphy, is that partnership effectively now dead or if not, can you give us an update on your efforts in the data center market to partner up with the PAM-DSP providers for your FiberEdge family of products? Should we thinking that you're still partner with Multiphy, you just work on the value of that investment or might you consider now partnering with other DSP providers with the FiberEdge family? Thanks.

The answer to that question is we will partner with others and we are partnering with other DSP providers. So since the relationship has now gone in a different path, Multiphy is an independent company and driving it's own strategy. We are an equity owner in the company but from our standpoint, the reason why we decided not to continue with the investment and the acquisition was we felt the architectural solution that we have is better and more suited for the next 3 or 5 years in terms of what we believe the 100-gig, 200-gig, and 400-gig solutions are going to need in the market within the data center. So that was the reason -- so yes, we don't really have any development plans with Multiphy at this point in time other than if they would like to use our components on their reference design, we'd be happy to help them.

Your next question comes from Harsh Kumar with Piper Jaffray.

Mohan, I was hoping you can help us out here. I went back and looked at the April seasonality given your comments about uptick in the first half. And each of the last two years, there is one or the other segment that spikes up, but there wasn't any correlation from year-to-year. I'm curious based on what you see today, which of the areas are you most optimistic about, just not the January quarter, but just about the first half? You don't have to give us numbers but just where you might be more excited than other areas.

I think each of the product lines; I mean SIP, the signal integrity product group for us, we are excited to see the reemergence of base station and some of the 5G momentum there. I think that's good and that looks like it could be a good driver for us. The PON business, obviously, I mentioned 10-gig PON deployments in ZTE, we had a very unusual year, obviously this year coming back I think is going to provide a little bit more momentum. So, in general, I would say signal integrity continues to be one area. And then of course, LoRa, is obviously very exciting for us regardless of the timeline you choose, just because of the momentum and the things that are going on there. So those -- the key ones, obviously, the smartphone area is tricky to call, as I mentioned and I don't think we are really that concerned about it. To be honest with you, I think it's more a question if that doesn't materialize and come back and we get the other growth engines, what is it going to do for our margins and how is that going to help us and that's kind of the focus we have at the moment just because there are so many unknowns around smartphone business, I think.

There are no further questions at this time.

In closing, we are very pleased with the record Q3 performance led by growth from the IoT, data center, and mobile markets, our record revenue, record operating income, record earnings, and record POS performance, along with our strong, strategic positions in the IoT, data center, and mobile segments demonstrate that Semtech is uniquely positioned to outperform the market in FY19 and in FY20. In addition, LoRa's global adoption and momentum uniquely positions Semtech in the overall technology industry. 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.