Semtech Corporation (SMTC) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY '20 Semtech Corporation Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Sandy Harrison, Director of Business Finance and Investor Relations, you may begin your conference.

Thank you, Erica, and welcome to Semtech's conference call today to discuss our financial results for the first quarter of fiscal year '20. 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 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. Discussions 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 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 Q1 fiscal 2020, net sales as expected decreased 18% sequentially to $131.4 million. In Q1, shipments into Asia represented 78% of net sales. North America represented 12%, and Europe represented 10%. Total direct sales represented approximately 38%, and sales to distribution represented approximately 62%. Our distribution business remains balanced with 54% of the total POS coming from high-end consumer and enterprise computing end markets and 46% of total POS coming from the industrial and communications end markets. Q1 bookings improved nicely Q-over-Q and resulted in a book-to-bill above 1. Accounts bookings accounted for approximately 47% of shipments during the quarter. As expected, Q1 fiscal 2020 GAAP gross margin increased 10 basis points sequentially to 61.9%, while Q1 GAAP operating expenses declined 5% sequentially due to the onetime benefit from the reduction in the fair value of contingent earnout obligations and lower intangible amortization expense. In Q1, GAAP interest and other expense was $1.4 million, an increase from the $548,000 in Q4 that had benefited from a $1.3 million gain on the sale of an investment. Q1 GAAP tax benefit of approximately 20.3% was driven by the discrete tax benefit from Comcast exercising its remaining warrants. We expect our GAAP tax rate for the rest of fiscal year 2020 to be in the range of 15% to 19%. Our GAAP tax rate forecast excludes consideration of any impact from discrete items, including excess tax benefit or deficiency from exercise of stock options. Moving onto the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related or other nonrecurring charges. In Q1, non-GAAP gross margin increased 10 basis points sequentially to 62.2% as expected, and we expect Q2 non-GAAP gross margin to remain flat. In fiscal year 2020, we expect our gross margin to remain stable driven mostly by end market mix. Q1 non-GAAP operating expense was $53.1 million, flat with Q4, as higher payroll expense was offset by lower new product spending due to timing. In Q2, we expect non-GAAP operating expense to be flat or decline 4% sequentially because of lower variable compensation expenses driven by lower revenue expectations. While maintaining our investments in our key growth drivers, we expect our non-GAAP operating expenses for fiscal year 2020 to be approximately flat or only moderately higher with the prior year. We expect our fiscal 2020 non-GAAP tax rate to remain in the 15% to 17% range. In Q1, cash flow from operations decreased sequentially due to lower net revenue and annual disbursements for supplemental compensation. Our stock repurchase authorization stands at approximately $181 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down the debt. In Q1, accounts receivable decreased 15% sequentially due to lower net sales and represented 50 days of sales, which is above our target range of 40 to 45 days. In Q2, we expect accounts receivables to increase but for days of sales to return within our target range. Net inventory in absolute dollar terms increased 15% sequentially, and days of inventory increased to 125 days, which is above our target range of 90 to 100 days. In Q2, we expect our net inventory to be up in absolute dollars and days to be flat due to the export restrictions on a key customer and expectations for higher sales in the second half of the year. In summary, we were able to achieve our Q1 expectations in a difficult macro environment. Bookings grew strongly sequentially as we have seen any signs of inventory levels in several markets beginning to normalize. While there we sense geopolitical challenges from the export restriction are contributing to near-term customer uncertainty and impacting our revenue, we will continue to forecast an execution and believe the long-term secular nature of our growth engines position us for a stronger second half of fiscal 2020. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 FY '20 performance by end market and by product group and then provide our outlook for Q2 of fiscal year '20. In Q1 of fiscal year '20, net revenues decreased 18% over the prior quarter to $131.4 million. Weaker overall global demand environment in all our end markets contributed to the decline. We posted non-GAAP gross margin of 62.2% and non-GAAP earnings per diluted share of $0.34. In Q1 of fiscal year '20, net revenues from the industrial market declined and represented 30% of net revenues. Net revenues from the enterprise computing end market declined and represented 27% of revenues. Net revenues from the communications end market declined over the prior quarter and represented 10% of total net revenues. Finally, net revenues from the high-end consumer market increased 13% over the prior quarter and represented 33% of total net revenues. Approximately 25% of high-end consumer net revenue was attributable to mobile devices and approximately 8% was attributable to other consumer systems. Our Q1 high-end consumer revenues were impacted positively, as expected, by Huawei's increase in demand, which we believe was a result of them increasing their chip inventories in anticipation of a potential ban. I will now discuss the performance of each of our product groups. In Q1 of fiscal year '20, net revenues from our Signal Integrity Product Group decreased 30% over the prior quarter's record results and represented 38% of total net revenues. As expected, demand decreased across all of our target market segments, including the data center, PON and wireless base station markets. In Q1 of fiscal year '20, data center demand declined as cloud and hyperscale data center providers further reduced inventory levels. Our ClearEdge CDRs continue to do very well in new 25 gig to 100 gig NRZ-based optical modules and active optical cables. We believe customer inventory levels are returning to more normalized levels and demand forecasts from our data center customers and bookings have started to improve. In fact, our Signal Integrity Products Group recently received the largest ever single order for our ClearEdge CDRs for a North American mega data center customer. During Q1, our initial Tri-Edge PAM4 CDR samples experienced strong customer interest as its low-cost, low-power and low latency characteristics are ideal for 50 gigabit per second, 100 gigabit per second, 200 gigabit per second and 400 gigabit per second PAM4 applications. We recently announced our participation in the formation of the Open Eye multi-source agreement. The Open Eye MSA launched with 19 initial member companies, targets low-cost, low-power and low latency PAM4 optical modules using analog PAM4 CDRs such as Semtech's Tri-Edge platform. We expect to see our first Tri-Edge PAM4 revenues starting in Q4 this year. Our FiberEdge PMD platform, which complements our Tri-Edge and ClearEdge CDR platforms, continue to be qualified at key module customers where we have collaborated with the leading DSP providers for use in next-generation 100 gig, 200 gig and 400 gig PAM4 optical module solutions. Our FiberEdge platforms have garnered strong design win traction, and we are seeing initial modest revenues from 100 gig PAM4 modules and from 400 gig PAM4 modules. We expect these modules to begin to ramp to volume beginning in FY '21. In Q1 of FY '20, PON demand declined sequentially as expected. Our PON demand is largely driven by China where demand has softened over the last 2 quarters. Semtech continues to be the PON PMD market leader providing highly integrated solutions for 1 gig, 2.5 gig and 10 gig PON ONU and OLT platforms. We currently expect stronger second half PON demand as PON tenders for this year in China indicate unit volumes similar to calendar year '18 volumes. However, the medium-term impact of the Huawei ban on our PON demand will not be clear for another quarter. Our wireless base station demand was also weak in Q1, and we expect this business to also be negatively impacted in Q2 due to the Huawei ban. For FY '20, we expect to see further spending on 4G deployments as well as the ongoing ramp of 5G platforms throughout the year with stronger growth expected in FY '21. We remain excited about our market opportunity for 5G base stations, which we believe could more than double from 4G due to the larger volumes and additional content as we expect most optical links to require CDRs. Despite the current challenges faced by our Signal Integrity Product Group in this fiscal year, we remain very confident in our strategy and expect our SIP product group to grow nicely over the next few years driven by the ongoing expansion of cloud and hyperscale data centers, the global transition to 5G base stations and the acceleration of 10 gig PON deployments. For Q2 of fiscal year '20, we expect net revenues from our Signal Integrity Product Group to be approximately flat. Moving on to our Protection Product Group. In Q1 of fiscal year '20, net revenues from our Protection Product group declined 8% over the prior quarter and represented 30% of total net revenues. Demand from all end markets remained relatively weak in Q1. Our automotive protection business gained momentum in Q1 and reflects the need for high-performance protection used in advanced driver assistance systems. Semtech's superior protection performance, including that of our recently announced RClamp 3552TQ, enables our customers to offer enhanced robustness for infotainment systems incorporating ADAS functions. Additionally, newer high-speed interfaces such as USB 3.1 type C, 10 gig Ethernet and HDMI 2.1 are rapidly proliferating across all end markets and applications. As a result, we see growing demand for our high-performance protection platforms that address these interfaces. Our Protection Product Group remains focused on diversifying from the high-end consumer market to the broader industrial markets where there is an increasing usage of more advanced lithography devices. We believe our investments in these broader markets will enable us to diversify our business over the next few years. In Q2 of fiscal year '20, we expect our protection business to increase as demand from the broad-based industrial end market is expected to recover. Turning to our Wireless and Sensing Product Group. In Q1 of fiscal year '20, net revenues from our Wireless and Sensing Product Group decreased 9% sequentially and represented 32% of total net revenues. Weaker demand from the industrial end markets contributed to the decline. Despite the recent softness in our wireless and sensing business due to a weak China demand environment, we do expect to see improving demand throughout the rest of the year. Our LoRa momentum continues to build, and we are seeing very exciting momentum across the globe, underlined by some of the key LoRa metrics we track. These include the number of public or private LoRa network operators increased in Q1 to approximately 113 from 100 at the end of fiscal year '19. We now expect 130 LoRa network operators by the end of fiscal year '20. The number of countries with LoRa networks grew to more than 74 countries. By the end of fiscal year '20, we expect over 90 countries to have LoRa networks. The estimated number of LoRa gateways deployed increased to more than 300,000. These gateways will support approximately 1.5 billion connected end nodes. We expect the number of LoRa gateways deployed to exceed 500,000 by the end of fiscal year '20 supporting a LoRa end node capacity of over 2 billion end nodes. The estimated cumulative number of LoRa end nodes deployed increased to approximately 97 million. We expect this number to exceed 140 million by the end of fiscal year '20. The LoRa opportunity pipeline increased to over $450 million of LoRa-enabled opportunities in our pipeline with an additional $200 million of leads feeding the opportunity pipeline. We anticipate that, on average, 40% to 50% of this pipeline will eventually convert to full deployment over a 24-month time line. In addition to the strong performance on our LoRa metrics, we also began to see a number of new exciting use cases and new ecosystem partners. Some examples of these are: Target announced its use of LoRa to improve retail operations and retail guest experience at the IoTFuse Conference in Minneapolis; SAP recently announced the integration of LoRa into its Leonardo IoT platform to support LPWAN industrial IoT use cases globally; MachineMax, a revolutionary wireless telematics company, announced its LoRa-based machine sensing system for construction and mining systems, enabling significant fleet management and efficiency improvements; Ineo Sense, an emerging leader in wireless industrial sensing applications, announced its LoRa-based sensing system to monitor and track manufacturing assets in facilities exceeding 100,000 square feet; and Sonova, a leader in advanced hearing aid technology and solutions, announced its latest IoT-connected hearing aid, which uses LoRa to deliver best-in-class wireless performance. Our pipeline of opportunities includes many new use cases, which include very high volume and very disruptive use cases on numerous industry segments. We will discuss these use cases in future earnings calls as they move from opportunities to proof of concepts and design wins. We recently announced the release of our first cloud-based LoRa microservice. Our first microservice is a LoRa-based geolocation service that is available to our partners and customers to track and locate their LoRaWAN devices using the cloud. The interest in the service has been very high, and we are starting to demonstrate the unique value of a LoRaWAN-based asset tracking system to our global ecosystem. We believe that we will start to have customers transition from testing the service to full qualification and commercialization of their services by Q4 of this fiscal year. We expect our LoRa microservices to grow to between $80 million and $100 million in revenues within the next 5 years. Our Wireless and Sensing Product Group continues to focus on developing ways to enable the faster proliferation of LoRa. Specifically in Q1, we started to offer a full suite of hardware reference designs, software building blocks and a suite of development tools and services that will enable solutions providers and system integrators to move from concept phase to end deployment more rapidly. In addition to these new platform development tools, we have also accelerated our LoRa design partner program and our LoRaWAN Academy program. Both of these programs have been specifically designed to simplify the development and deployment of LoRa-based solutions and accelerate the time to market of total IoT solutions based on LoRa. Both programs already have large global interest from the developer and academic communities. In FY '20, despite the broader macro concerns and soft demand from China, we still expect our LoRa-enabled revenues to be between $100 million and $140 million and we continue to expect LoRa to become the de facto standard for LPWAN use cases over the next few years in what we expect to be a multibillion unit industry. In Q1 of fiscal year '20, demand for our proximity sensing platforms increased and delivered record quarterly revenues due to strong demand from Huawei and increasingly stringent global SAR regulations. We believe our proximity sensing business should continue to expand as we see solid design win progress in new customers and regions as global regulations drive an increase in the need for radio energy management on smartphones and other mobile devices. In addition, as 5G smartphones start to enter the market during the year, we expect to see an increased number of high-performance radios, which drives higher proximity sensing content in these devices. For Q2 of fiscal year '20, we expect net revenues from our Wireless and Sensing Product Group to be approximately flat. Moving on to new products and design wins. In Q1 of fiscal year '20, we released 11 new products and achieved a record 2,884 new design wins. Now let me discuss our outlook for the second quarter of fiscal year '20. Despite the strong improvement in our recent bookings, based on the near-term geopolitical uncertainty and the recent ban on shipments to Huawei, we are currently estimating Q2 net revenues to be between $128 million and $142 million. To attain the midpoint of our guidance range or approximately $135 million, we needed net turns orders of approximately 34% at the beginning of Q2. This Q2 guidance reflects a reduction of approximately $7 million due to anticipated reduced shipments and associated reduced demand related to the Huawei ban. We expect our Q2 non-GAAP earnings to be between $0.32 and $0.40 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 Karl Ackerman with Cowen.

Emeka or Mohan, perhaps to start off with, I'd like to focus on your LoRa business. What percent of your LoRa business today is from your own chip sales versus licensing or royalty revenue from third-party chip sales by your analog and mixed-signal partners? And I guess, as we contemplate your revenue funnel ramping from here, what's the right way to think about the mix of royalty revenue versus your own chip sales and the, of course, commensurate impact on your margin goals?

So Karl, pretty much most of the revenue is going to come from our chip sales for the next couple of years and chips for both end nodes and for gateways. And then I think as the -- from a licensing standpoint, the licensing royalties from partners will start to pick up over the next few years. I would say it still will take another couple of years. And then microservices revenues will start to increase next year. And as I said, it'll take, I think, a few years for that to really become material. But initially, at least for next couple of years, I think it's still predominantly chip sales, both end nodes and gateway sales.

I appreciate that. If I could ask one more question. Clearly, the revenue headwind from Huawei and the inventory overhang at some of your customers is impacting your margins near term. However, you've spoken on this call about a recovery in the second half. So how should we think about the progression toward your long-term 34% operating margin target? I guess, is there any certain revenue level we need to achieve that? Or are there certain efficiency programs and product mix that should help us attain that goal?

So Karl, thank you. I think we've said it before that a lot of the path to the midpoint of the revised operating margin range is going to be driven by top line growth. We've done really a very good job of managing our operating expenses and our gross margins are really very stable. We've also indicated in the past that we'll expect to see about $750 million to $800 million of annual revenue for us to get to that midpoint of that range. So that is how we look at it at this point. But clearly, the top line growth is going to be the key driver in that leverage expansion.

And Karl, if you look back at Q3 of FY '19, we had essentially 30% operating margins. So that's kind of the range of revenue that we need to get to.

And your next question comes from the line of Harsh Kumar with Piper Jaffray.

First of all, very good execution and very good commentary in light of all this macro weakness. Mohan, I'm going to put you on the spot. In the last earnings call, I think you mentioned you're looking for a pretty kind of a steep hockey stick like. You might not have used that term, but a pretty steep ramp in the second half. I'm curious with another quarter under your belt and given what all you're seeing in China in macro level, what would be your best guess if you want to just give some color around how you expect the second half to go.

Yes. Harsh, I think if absent the Huawei ban, I would still be suggesting that. Bookings are strong. We have seen China weak for a couple of quarters now, but demand is picking up. Our LoRa business is going great. We see data center demand starting to -- inventory levels, as I mentioned on the call, starting to become more in line and we started seeing a pickup in orders on data center side. So if I look across the different end markets and product lines, I think the second half is still looking quite strong. For us, obviously, the Huawei ban puts a little bit of a spanner in that to work, so we have to work through that, both the direct impact and also the indirect impact. But absent that, I would suggest that the second half is still looking to be quite strong relative to the first half for sure, anyway.

Very good. And then, Mohan, if I can ask you, there's Huawei, which is one animal that you don't have control over. But I'm still curious. I mean your bookings sound really good. I was curious if you could differentiate or comment on bookings out of China, ex Huawei or outside of Huawei and provide us any color. Are you still seeing ebbing or flatness there? Or are you seeing a flatter ramp ex Huawei in China?

Well, including Huawei, which is obviously it's a big part of the China demand, but excluding Huawei, I would say the China demand has been soft for the last couple of quarters, and we're starting to see some improvements in that area. So that's kind of promising, of course, with all of the uncertainty associated with the tariffs and now Huawei. How long that can be sustained, I don't know. But at least, from our perspective, that's what we've been seeing, a little bit of a pickup in the rest of the China demand like in China industrial and some of those other use cases.

One last quick one. The $450 million funnel to LoRa, is that including the $100 million you expect from services or excluding that?

We don't have any services at the moment in there, Harsh. The way we look at opportunities and the way we have -- measure our pipeline, these are real proof of concepts and real opportunities that our customers are working on. Now with the geolocation, we've just announced that service. So we now have customers who are starting to look at that. I would say that, that is in addition to the $450 million plus $200 million pipeline.

And your next question comes from Quinn Bolton with Needham & Company.

Wanted to first ask on the Huawei exposure. Can you give us some sense sort of where you're exposed across signal integrity, protection, wireless and sensing? And specifically, is there any exposure to Huawei on the LoRa business? And then I've got a follow-up on the data center side of the business.

So first of all, on the LoRa business, there's no exposure to Huawei. Huawei is actually one of the key proponents of the NB-IoT, so it's really a competitor to the LoRa solution. Most of our exposure, Quinn, is on the Signal Integrity Product side, I would say on the PON base station side, those 2 areas. And then there's some exposure on the protection side for smartphones for Huawei. That's predominantly where the exposure is. We don't see much exposure anywhere else. And there's both a direct and an indirect exposure, so the direct exposure is what we ship directly to Huawei through HiSilicon. And then the indirect is really through our other modules, module companies and also when Huawei can't get components to build its system, which we learned from the ZTE band a year ago, that could have a negative impact on us so that we've try to quantify that as best we can. Obviously, they're all estimates and approximations as -- until we really see what happens through the quarter, but it gives you an idea.

And then I know you're not guiding beyond the July quarter, but if I just look at the ban that went into effect May 21, you might have been able to ship approximately 3 weeks before Huawei went to a ban. And so if we're trying to think about what the Huawei impact for future quarters might be if there's no resolution, would a full quarter effect be more likely in the, say, $8 million to $9 million range? Is that a good ballpark for a full quarter basis?

Yes. We think between $6 million and $10 million is a good range. That's what we see today. Obviously, we'll learn a lot over the next quarter, but it's kind of what we're projecting.

Great. And then on the data center business, in the script, you mentioned receiving the largest order in the company's history for the ClearEdge 25 gig CDRs from a North American data center customer. Just wondering if you could provide a little bit more color on that application. I assume that's probably for a CWDM4 100 gig module type application. But just wondered if you could give us a little bit more color on that design win or that order.

Well, other than the 100 gig, CWDM4 and that is a North American data center customer, that pretty much nails it, right? Quinn, I think I can't really give you a lot more color other than this is a customer that has been looking at PAM4 solution and other solutions and decided some of the optics weren't ready and concluded that it's going to stick with NRZ module for now.

And your next question is from Gary Mobley with Wells Fargo Securities.

Great to be on the call for the first time. A question about Huawei. I appreciate the fact that, certainly, a shock to the supply chain, a shock to Semtech and certainly takes, what, $7 million of revenue away from the second quarter. But presumably at some point, somebody is going to pick up the slack of Huawei can't ship and somebody on the Android smartphone front will pick up the slack, somebody on the 5G base station infrastructure might pick up the slack. And then ZTE perhaps on the PON side might pick up some share. So how are you positioned with the alternatives to Huawei? And how do you see sort of the shock Huawei going away and transition to other customers?

Yes, that's a good question, Gary. I think first of all, we are well positioned with most of the other players in these segments, but until we see the orders, until we see the demand, it's very difficult to anticipate what will happen. We -- in ZTE's case, so we used example where they initially thought that they were going to be able to build a system. Then they realized they couldn't build a system, and then it wasn't until they started to realize that, hey, they're short of some components or some part of the system that their customers started to look at alternative solution providers, and then we started to see orders being picked up from other places. So I think we're in good shape, but we just don't know. And until we see that material orders coming in, we just can't make that assumption, right?

Okay. So your OpEx guidance for the second quarter appears to be flat to down slightly and flat for the overall year. It appears as though you're managing OpEx by just simply having less bonus accruals perhaps and maybe some other items. But is there any consideration to maybe being a little more streamlined on some R&D activities, maybe making some deeper cuts to OpEx to get back to the target operating margin level? Or is this just going to be top line recovery story?

So Gary, I think it's just going to be a top line recovery story. You're new to the story, so you haven't been here in the past when we had much higher levels of operating expenses. We've already done a lot of the things that you've talked about. We've pruned a lot of our expenses. We've already forecasted our strategies in some areas and making sure that we're focusing on product areas that are very high levels of return on investment. So having said that, we know about 20% of our product expense is still variable, but like you did say, a lot of that is tied on the supplemental compensation. So we do have some room in terms of what we can do. But clearly, the runway that we used to have in the past is no longer as much as what we used to have. So...

The other point I'd add to that is that most of our investments are platform type of investments, so we're investing for the next-generation of LoRa platform, the next-generation 400 gig optical platforms for next-generation of protection platforms. So they're not investments that are short term in nature. Most of our investments are much more strategic.

And your next question comes from Mitch Steves with RBC Capital Markets.

I had 2. So first on the kind of focus on the gross margin line. Since Huawei doesn't really have the high-end LoRa product, does that assume that -- or should we assume that gross margins improve sequentially starting in July to October to January?

Huawei doesn't have a lot of revenues at all. So trying to understand the connection between Huawei and LoRa and gross margins.

So if you have no Huawei...

No, Mitch, so most of our Huawei business is PON base station and smartphone related.

No, No. Yes, yes, so that's my point, right? So basically, we know that there's no high-end, high-margin business there. So doesn't that mean the gross margins go up October to January?

Well, I think we just have to see how everything comes into mix. What we've said in the past is that we expect our gross margins to be stable. We expected to have a little bit of an upward bias, but we have to see how everything comes in before we know exactly what happens with gross margin. But the expectation here is that our gross margins will be stable going forward.

Okay. Yes. And the second question just kind of on the time exposures. So we kind of get the Huawei number kind of 6%, right? But if I look at the China exposure to Asia, you're showing like 70%, but that's a ship to number. Is there any way to at least give us qualitatively what the actual official sell to, to China is versus just the 78% Asia-Pacific number you gave out?

Yes. So what we've said Mitch is that our shipments to China overall, about the 50%-55% type range. And we've said on prior calls that if you look at that as to what's actually probably consumed in China, it's probably closer to the mid-30%, upper 30% range.

And your next question comes from Craig Ellis with B. Riley FBR.

Mohan, I wanted to ask you a longer-term question, and I know it's an environment where we've got limited visibility. By the question's intent is really understanding better some of the company-specific drivers that exist in the portfolio. So Harsh asked you about the second half. My question really ties back to some of your comments on signal integrity, data center business and the business more broadly. So it sounds like there's a PAM4 and a PMD product ramp coming as we head into calendar '20, fiscal '21. The question beyond that is what do you see in the rest of the business that you're excited about that's driving Semtech's growth as we look beyond what is clearly a cyclical and trade dispute characterized year this year.

Well, I think, Craig, first of all, just on the SIP business on the Signal Integrity Product business, obviously, we have the 100 gig to 400 gig growth. We also have the AptoVision, Pro AV video over IP technology that we have -- believe that that's got good future growth. And then outside the Signal Integrity Product Group growth engines, of course, we have LoRa, which is really doing quite well, continues to grow and I think will largely continue to grow regardless of the type of geographical issues we're seeing because it's really tied to IoT, which is really tied to efficiency improvements and just broader cost reductions and things like that, just the whole growth of IoTs driving that. So we think that that's going to continue for many years. Obviously, that's very exciting for us. The proximity sensing is tied to regulatory -- global regulatory requirements for managing radio power and devices, so we think that will continue to grow. And as I mentioned, in protection, our business of industrial kind of driven strategy now versus the -- just fuel consumer and consumer-driven strategy, I think is really quite exciting because we see more advanced lithography devices going into more systems outside just smartphones and then handhelds and consumer devices and so into automotive, into communications equipment, into IoT, and those require the kind of high-end protection that we deliver. So we have a number of different growth drivers that are really independent of whatever's going on in China, independent of the Huawei ban that I think are going to continue to allow us to drive good growth in the future.

That's helpful. And the follow-up question is just on LoRa. If my tally was correct, as you walked through the different milestones, it seems like the business is performing to all 5 milestones that you just talked about on the last call. One of the things you pointed to was an increase in LoRa's business mix outside of China this year. One, is that still the expectation? And two, any further color on just milestones and how you're thinking about the company's progress?

Yes. Also, first of all, it is the expectation that we will start to get a little bit more balanced geographically, but I will tell you, our China LoRa business is going very, very well. So it's a question of can the other regions continue to outgrow what's happening in China. And so I think that we have good momentum. Now we look at all these metrics not just for the purpose of our -- do we -- is the business going in the right direction but what things we need to do in the business to accelerate in certain areas, certain bottlenecks, and that's one of the reasons I pointed out that we made the conscious decision to invest in and enhance the ability for our customers to accelerate their time to market from going from a proof of concept to actually having deployment. That means more software, more design tools, more reference designs, having availability of partners, developer platforms and things like that. And so we put a lot of emphasis on that. I think we'll continue to see that this year. And I think that the momentum, as I said, is the opportunity pipeline has increased still further, which is great news for us, and I think if we can start to move some of that pipeline to revenue over the next year or 1.5 years, I think we'll be in very good shape.

And our next question comes from Tore Svanberg with Stifel.

First of all, a question back to Huawei. So sounds like $6 million to $10 million, if I look at your 10 -- your last Q, it says it's about $21 million. So should we just assume that half of that was kind of just inventory build? And it's more the run rate that's going to be $6 million to $10 million going forward?

Yes, that's correct, Tore. It was clear that -- I mentioned it on my script that Huawei built inventory mostly for the smartphone business in Q1, which definitely inflated that Q1 number. They may even have built up some inventory from Q3 or Q4 of last year more tied to the PON base station business. But yes, I definitely think that the run rate number -- you should look at it as a run rate number, the $10 million.

Yes. Thanks for clarifying that. As a follow-up, you guided the wireless and sensing business to be flat sequentially. So I assume that means maybe some of the smartphone business is going to be down, so LoRa will actually grow sequentially.

That's correct. Yes, yes, the proximity sensing was one of the areas that we believe Huawei has built inventories in Q1, so that will be down in Q2, and LoRa is expected to have very good growth in Q2.

Great. Just one last question. You said data center bookings are improving, and you talked about that one win. But is this broad based enough now where maybe data center could actually grow sequentially in the July quarter?

Data center is probably -- I think it's possible. I think it's probably likely to be flat and then maybe start to increase in the second half. But we are seeing some good data points and some good bookings in this area.

Because that feels like that business has indeed bottomed here in the last 2 quarters.

Yes, it's starting to feel that way.

And your next question comes from Rich Schafer with Oppenheimer.

I just had a couple of questions. I think I'd start first on maybe a follow-up on LoRa. Mohan, I think you've talked in the past I think about LoRa potentially being a $1 billion type revenue stream looking forward 3 to 5 years. I guess is that still a realistic target in your mind? And then as part of that answer, I'm curious when you see revenue cross over, you talked earlier about licensing versus chip sales. But sort of when do we see that kind of -- that seesaw kind of cross over?

Well, I think let's take that one first, Rick. I think next couple of years, still it will be mostly chip revenues I think. I would expect it's probably 3 years from now the royalties both from chip licensing and from services to start to kick in nicely. And then I expect those to accelerate quite quickly, especially on the services side. And then coming back to the volume, the size of this business and how can it scale, one of the reasons I talk about these metrics and I point out, for example, the end of this fiscal year, we expect to have 500,000 gateways out there, is because each 1 of those gateways supports certain number of sensors and therefore, the capacity to support 2 billion end nodes, and the 2 billion end nodes, if you translate even at $0.50 an end node is a $1 billion, right? So to me, I think it's a question of once the infrastructure is deployed, once the use cases are in place, so once there's enough of a smooth runway from proof of concept to deployment, which is one of the things we're working on now, I just think it's a matter of time. And then a question of how many use cases and can some of them be very high volume, which I believe they can. I think we're starting to see a lot more use cases now that are potentially very high volume. Before, it was more industrial in nature, and so now we're seeing more smart home, more smart enterprise and smart consumer kind of things emerge as IoT potential LoRa targets.

And then just as another follow-up on data center. Can you remind us what CDR attach or just what overall attach, whether we're talking about CDR, PMD attach, looks like at single Lambda 100G versus 25G? And maybe part of that answer, just give us a sense of what Semtech content can do.

For CDRs, I mean for 100 gig, I think, and above, pretty much all of the modules will require some type of CDR functionality. And that's also true of base stations. We see base stations now starting to deploy faster optical links. We think most of those will also require CDR functions. So that's been our thesis for a while, and we are definitely seeing that happen.

Okay. Can you talk about dollar content and maybe a sense of...

Yes, it varies. It varies, $5 to $10, I think on average, Rick, depending on the type of module, PAM4 versus NRZ versus different reaches. So it really varies, but I think typically, $5 to $10 is the ASP.

And your next question comes from Christopher Rolland with Susquehanna.

On inventories, if Huawei doesn't come back, will these be fairly easy to ship to other customers? I mean you mentioned proximity sensing. Is there good demand from other customers? And when might inventories normalize?

Yes. So most of our products are standard products. Some of them are application-specific, but they're not customer-specific in general. There may be a couple of million dollars of inventory that may be targeted specifically for Huawei. But in general, I would say that they're for broader set of customers.

Yes. Chris, I mean in terms of when inventory normalizes, our expectation is that beginning with Q2 we should start to see the days of inventory coming down. And in the next -- by Q3, especially if we see the uptick in revenue in the top line that we'd expect and we should expect to see inventories come back down to our normal levels.

Great. And then on the signal integrity side for base station in particular, can you guys talk about your exposure to the various OEMs outside of Huawei? Is it all Huawei? What percentage of shipments here are not Huawei? And how do you expect that to ramp through the year?

We have good exposure to other customers. But the majority of the volume for us anyway so far has been driven by out of China. And so obviously, Huawei is the big guy there for us. And we have exposure to other Chinese base station manufacturers and of course, some of the European. But I would say the volume is driven mostly -- is, for us, mostly out of Huawei.

And your next question is from Tristan Gerra with Baird.

Question on LoRa. So obviously, you guys have very good traction in industrial applications. That's including smart metering. What does it take for LoRa to gain momentum in the IoT U.S. market? I mean we see a lot of WiFi and DAC 6 technology in IoT. Is there kind of a catalyst that will create an inflection point for us to see more LoRa-based IoT devices sort of into the U.S. mass market?

It's a good question, Tristan. I would say that a lot of opportunities we have are in North America, and some of them are high volume. So it is starting to emerge. I think the home is an important battleground for LoRa in the smart home. And I think that's one that we've just started to really spend some calories on and understanding what it's going to take there, but some of our partners are helping us in that area. I think the other thing in the U.S. is U.S. has a large enterprise space in terms of smart buildings and smart asset tracking and logistics type of systems. And we are starting to learn more about how some of those systems and those verticals are going to use LoRa and how LoRa can really transform the way that those industries work and operate. And that's kind of part of what I said about how it's important for us to understand the -- how these opportunities translate to full proof of concepts and then how that proof of concepts move through to design wins and then through to revenue and understanding where the friction and where the bottlenecks are and removing those. And some of those are software, for example, and some of those are applications. So we're learning more about that, and I think that's part of the reason why seeing a lot of emphasis from us on the tools we're bringing to market to allow our customers to move faster through that process. And I think you're going to see North America over the next couple of years really become a very nice revenue driver for LoRa.

Okay. And then as a quick follow-up, so you've talked about LoRa revenue increasing sequentially in your guidance and you've also talked about, in general for your whole business, about your initial expectation for the second half. So is it -- regarding LoRa specifically, would you say that for now revenue's tracking about in line with normal seasonality? Or is the reiteration of your full year guidance embedding an expectation that your second half is going to need to be seasonally stronger than it's been in the past?

Definitely the latter, Tristan. But I think if you'll recall, it's partly what I've been saying about China. LoRa has been doing extremely well in China, and we started to see that softness in Q4. It's nothing related to IoT or LoRa. It's really just a, in China, demand softness issue for us. But we are starting to see signs that that's now picking up. And then I think second half, we do expect it to be strong based on the metrics, I mean based on opportunities and design wins and real momentum we see. Now how strong it's going to be, whether it's as strong as we're expecting or whether it's going to push out to the following fiscal year, to me, it really doesn't matter that much. I think it's more a question of the fact that once we have this momentum, there is going to be a catalyst at some point that takes this from being a $20 million, $30 million, $40 million a quarter run rate to $100 million a quarter run rate.

And your next question comes from Scott Searle with Roth Capital.

Just, Mohan, to follow up on the LoRa front. I just wanted to clarify. I'm not sure if I heard it. Were LoRa revenues up sequentially? And then the mix, it sounds like China was a little seasonally weaker. Is China less than 50% of the mix? And as part of that, looking out to the year, you're maintaining the guidance for the year of $100 million to $140 million. The metrics all seem like they're in line in terms of what you articulated a couple of months ago. So things seem like they're tracking. It's still a pretty wide variance, so considering that we've got 8 months to go in the fiscal year. So I'm kind of wondering what the potential big swing factors are that gets you to the higher end of the range versus lower end of the range because it basically implies that revenues are doubling probably from where you were in the current April quarter.

Yes. So I think that's correct assessment, Scott. To me, the way to look at it is that these opportunities we have in the pipeline, it's really a question of calling when they're going to translate into revenues and how fast. And we don't have exact data, right? We just look at it and say, okay, these design wins are ramping now and they're going to full deployments. And so we can see that they're going to materialize in the second half, and we're expecting stronger revenue from that. And it's a very broad range of use cases, and it's a very more balanced regional flavor as well. Coming back to your question in China, yes, I mean so China has been I think over 50%. I don't know the current number exactly, the number of LoRa business. But clearly, it's been a significant contributor to our LoRa revenue. And so with the China softness, that has impacted our LoRa-enabled revenue. But as I mentioned, we have enough pipeline. As long as it -- those opportunities convert, then we'll still be able to achieve our goal this year, which was a reduced goal to $100 million to $140 million. It's still early on in the fiscal year, so we'll see how that plays out. And we're starting to see some good momentum now both on the revenue front and also on the conversion rate from opportunities to revenue.

Lastly, if I could follow up, Mohan, that doesn't include any Tags. There's no expectation for Tags kicking in this year, right. That's more fiscal '21 and beyond.

That's correct. Yes.

And your next question comes from Hamed Khorsand with BWS.

Just 2 here. First off, with data center stabilizing, would you expect to regain some pricing control? Or are you just happy managing the business for gross margin?

Well, I think, Hamed, we don't look at it as -- there are so many different use cases, and the way this works typically is we're selling into module manufacturers. The module manufacturers have to reach a certain cost per gigabit that they're trying to achieve for the end customers. And so one of the advantages, of course, we have with our ClearEdge family in the NRZ modules and the components and the optics related to those are much cheaper. And so we are probably being as aggressive as we need to be there. On the PAM4 stuff, we probably don't need to be as aggressive, and so it's really -- it's dependent on each situation.

Okay. And my other question was on the automotive side. With the new models coming out, do you have any design wins on DAC as we get into the second half of the year when you've gone -- all start shipping to some of the auto manufacturers?

I know we have a lot of design wins on the protection side. We have some on the LoRa side. I don't know exactly the timing of those. To be honest with you, I think they typically take longer than 12 months for qualification. But we have good momentum with that protection business and the automotive space.

So is it -- the revenue that you're reporting from automotive, is that all just trial-based then on commercial?

No, the revenue on protection -- the revenue that we are talking about is it is revenue. I mean on the numbers we talk about -- we talk about automotive numbers. It's real revenue and talking about the ramp of other additional automotive opportunities.

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

Mohan, I just wanted to follow up the company's got a real nice $100 million net cash balance, and you certainly got the flexibility to repurchase shares. Does the uncertain macro cause you to think any differently strategically about how you deploy that cash? Do detect tuck-ins or other deals looks any more appealing in this environment?

No, Craig. I know that we're not thinking differently about that at all. And the reason we don't think differently is because we still have very high expectations for the future. We still believe very much in the secular nature of the growth drivers that we have a lot of platform. We believe that the due date of the hyperscale data centers is going to continue. We believe that the PON deployment's transition into 10 gig is going to continue, and these are all markets where we're nicely positioned. So despite the current macro headwinds that everybody is seeing right now, we still very much believe the future and what we have to deliver. So we're not thinking about it any differently. Having said that, we always remain to look to be really opportunistic with our buyback. We have the $181 million authorized. So if the opportunity is there, we will continue to buy back our stock but also continue to make the strategic investment that will continue to ensure our future.

And there are no further questions at this time. Your closing remarks, please.

In closing, despite the near-term uncertainty driven by the macro and geopolitical environment, we remain confident in the underlying strength of the secular drivers behind our growth engines, which we believe are clearly intact. We see early indications from our customers that suggest a stronger second half fiscal year '20 despite the slow start to the year. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.