Q2 2020 Earnings Call
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I would now like to turn the conference over to your host Sandy Harrison Director of Investor Relations. Thank you you may begin.
Thank you David and welcome to <unk> Conference call to discuss our financial results for the second quarter fiscal year twice speakers for today's call where are you on my house warm stack, President Chief Executive Officer, and I'm not sure Kelly, our Chief Financial Officer.
A press release announcing our unaudited unaudited results was issued after the market closed today.
And is available on our website at <unk> Dot 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 factor section of our most recent pure luck reports filed with the Securities Exchange Commission.
As a reminder comments made on today's call are current as of today only.
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 discussion of why the management team considers such non-GAAP financial measure is 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 and Mohan said Americas Boral presentations on this call refer to non-GAAP measures unless otherwise noted.
With that I will turn the call over to Semtechs, Chief Financial Officer, My Country America.
Thank you Sandy good afternoon, everyone.
For Q2 fiscal 2020.
Net sales increased 4% sequentially to $147.1 million well above the midpoint of our guidance.
In Q2 shipments into Asia represented 74% of net fellas.
North America represented 16% that Europe represent that perfect perfect total direct sales represented approximately 28% I'm sorry, the distribution represented approximately 72%.
Our distribution business remains bother.
52% of the total Pos coming from the higher consumer and enterprise computing end markets and 48% of total Pos coming from the industrial and communications end markets.
Bookings grew suppress surely have resulted in a book to bill up overall.
Tos bookings to account for approximately 41% of shipments during the quarter Oh I've expected Q2, GAAP gross margin was flat sequentially at 61.9%.
You have to go towards the GAAP tax rate was 63.4%.
And reflects a description $50.5 million tax provision impact, resulting from kind of life.
What's right regulation of Gullit, Deputy Twentys promoting U.S. rubbish attacks.
We are spread though a GAAP tax rate for the rest of fiscal year 2020 to be in the range of 13% to 17%.
Moving on to the non-GAAP results, which exclude the impact of share based compensation amortization of acquired intangibles acquisition related to an older noted coating Chargers.
Q2, non-GAAP gross margin was flat. So your question, 62.2% I suspect that.
Oh, we expect our Q3 non-GAAP gross margin to decline 20 to 80 basis points due to lower absorption of manufacturing overhead Josh will walk to bring inventory down to target levels.
In fiscal year 2021.
Respect to non-GAAP gross margin to return to normal levels as overall demand.
Strength is driven by our higher margin growth engine.
Q2, non-GAAP operating expense was $53.8 million slightly higher than Q1 and in line with expectations.
In Q3, respectively.
non-GAAP operating expenses to be flat to down 3%, you're pretty sharply higher new product has passed is offset by lower supplement to a compression of spreads.
While maintaining our investments in our key growth drivers where spreads are non-GAAP property has pressed for fiscal year 2020 to be approximately flat only modestly higher compared to the prior year.
We expect fiscal 2020, non-GAAP tax rate to remain in the 14% to a 10% range.
In Q2 cash flow from operations increased to I'll return to more normalized levels that 24% of net sales compared to 5% of net sales in Q War I feel reminder, Q1 includes a annual disbursements for supplemental compensation.
We repurchased approximately 446000 shares for approximately $20 million during the quarter on our stock repurchase authorization now stands at approximately $161 million.
With respect to go to use our cash to opportunistically repurchase our shares and make strategic investments and paved pay down our debt.
In Q2 accounts receivable decreased 12% sequentially due to improved shipment linearity represented 42 days Upsells, which is within our target range of 40 to 45 days.
Net inventory in absolute dollars increased 2% sequentially and days of inventory increased to 129 days, which is above our target range of 90 to 100 days.
In Q3, we expect net embedded throw to decline in both absolute dollars and days out we want to get inventories back in line with your target range.
In summary were very pleased with our execution in Q2, despite this difficult macro environment.
Our gross margin was stable operating expenses were under control and cash flow generation was.
Strong why do a reset to draw political challenges continues to contribute to need but the near term cost certainty. We believe our diversified customer base on end markets along with the secular nature of our growth engine is positioning us well for the future growth.
I will now hand, the call over to more.
Thank you Mike Good afternoon, everyone I will discuss our Q2 fiscal year 20 performance by end market and by product group and then provide our outlook for Q3 of fiscal year 20.
In Q2 fiscal year 20, net revenues increased 4% over the prior quarter $237.1 million, we posted non-GAAP gross margin of 62.2% non-GAAP earnings per diluted share of 38 cents.
In Q2 of fiscal year 20, net revenues from the industrial end market increased 24% sequentially led by very strong growth from our Lora business and represented 36% of revenues.
Net revenues from the enterprise computing end market increased 4% and represented 27% of revenues.
Net revenues from the communications end market increased 10% over the prior quarter and represented 10% of total.
End consumer net revenue was attributable to mobile devices and approximately 11% was attributable to other consumer systems.
I will now discuss the performance of each of our product groups.
In Q2 of fiscal year 20, net revenues from our signal integrity product group increased 10% over the prior quarter and represented 40% of total net revenues.
As expected demand increased sequentially across the data center and the wireless base station markets, while the PON market remains soft.
In Q2 of fiscal year 20.
Data center demand rebounded as customer inventory levels have reduced over the last two quarters and demand from cloud and Hyperscale data center providers appears to have stabilized.
In Q2, we saw strong bookings for our Claridge Cdrs used in 100 gigabit per second NRG optical modules.
We expect demand for our Claridge CDR is to continue to increase driven by global cloud and Mega data Center deployments.
In Q2, we are pleased with the progress of our triage Pamfour CDR platforms that we are now sampling to datacenter customers.
We expect our first triage revenues in Q4 of this fiscal year with growth accelerating in the second half of next year.
Our triage platform delivers low cost low power and low latency performance ideal for Pamfour based optical modules.
In September Semtech will be part of the open and opened I must say interrupt demonstration for 10 kilometer 50 gigabit per second Pamfour links the open I must say, which consists of 19 companies builds on key performance advancements of Pamfour, CDR and optics to enable lower cost and lower power Pamfour optical modules.
Our fiber edge Pmdi platform, which complements our triage encourage CDR platforms also continues to gain momentum with key datacenter Pamfour module customers, where we have collaborated with DSP partners targeting pamfour optical modules.
We expect to see our fiber rich Pam four revenues also ramp in Fytwenty one.
In Q2 of fiscal year 20 demand from the wireless base station market increased.
Semtechs market opportunity from Fiveg deployments is expected to triple compared to Fourg due to the higher fiveg volumes and additional CDR content.
For the rest of Fytwenty, we expect Fourg and Fiveg deployments to increased increased modestly with much stronger growth from fiveg platforms expected in flight 21.
In Q2 of our Fytwenty, our PON business, which is largely driven by China remained soft due to lower China government investment in PON and the impact of the hallway ban.
We expect this weakness to continue through the second half due mostly to the waterway ban.
Over the next few years, we do expect the PON market demand to increase driven by 10 gig PON deployments Semtech remains the PON market leader, providing highly integrated solutions for one gig 2.5 gig and 10 gig PON platforms.
The greater demand for higher optical data rates at the lowest power and cost is driving greater demand for Semtechs claridge try edge and fiber rich platforms. We expect this trend to continue driven by the global expansion of cloud and Hyperscale data centers, the global transition to Fiveg base stations and the acceleration of 10 gig PON.
And we expect our Sip product group to benefit from these global trends over the next few years.
Our broadcast video business has been very stable for the last few years.
And with the acquisition of AP provision, we are finally, starting to see an opportunity to drive significant growth in this business.
As a reminder, we are focused on transitioning the pro audio video industry from expensive proprietary equipment to standard IP based solutions through the adoption of software defined video of refinancing.
The primary market focus has been healthcare enterprise industrial and entertainment recently, we received first silicon of our SDVE OE platform, which appears to be functional and we now expect to have production silicon by the end of this year.
We believe this will be a significant catalyst in the adoption of STB OE for all pro HD applications as customers realize the benefits of delivering uncompressed ultra high definition Fourk TV content over a standard 10 gig Ethernet network.
We will update you on the progress of our up to vision platform on future earnings calls.
For Q3 of Fytwenty, we expect net revenues from our signal integrity product group to be flat to up modestly as global demand increases will be offset by the wall way ban.
Moving on to our protection product group.
In Q2 of fiscal year 20, net revenues from our protection product group grew 4% over the prior quarter and represented 29% of total net revenues.
Our protection business growth was driven by increases in broad based demand from the industrial automotive and consumer markets.
In particular, we saw nice increases from our North American smartphone business and and from our automotive business.
These were somewhat offset by lower Korea, and China smartphone demand several of our newly released parts such as the art clamp three three to four P deliver higher performance protection for the most advanced HMI Ethernet and USPI interfaces.
The increasing proliferation of these high speed interfaces across multiple market sectors is driving our growth in demand.
In particular, the rapid adoption of these high speed interfaces in automotive systems, such as infotainment in vehicle communication and advanced driver assistance systems is contributing to the growing demand for Semtechs high performance protection products.
In Q3 of fiscal year 20, we expect our protection business to increase due to continued strength from the automotive and industrial segments and stronger smartphone demand from North America and from Korea.
Turning to our wireless and sensing product group.
In Q2 of fiscal year 20.
Net revenues from our wireless and sensing product group were approximately flat from the prior quarter and represented 30% of total net revenues.
Very strong sequential growth from our lower business was offset by very weak demand for our proximity sensing products due to the wawa ban.
In Q2, our lower enable business grew nicely.
The momentum and interest in Lora is very strong and we are seeing more and more io to use cases emerge every day.
Laura is rapidly becoming acknowledged as a critical technology for low power Iot sensor networks.
We expect to see lower emerge as the defacto standard for low power wide area networks over the next few years.
Some of the more recent noteworthy use cases include Comcast announced its it has partnered with Universal parks and resorts to deploy Lorawan networks and its parks to increase operational efficiency in the past.
Lora sensors will be used to monitor the temperature monitor energy consumption and track Esa assets across the parks.
So look set a leading European aiotv provider has developed a lora smart meter and cloud platform to enable their customers to closely monitor energy usage real time.
Customers using silex, it get insight into their energy usage and consumption patterns, enabling a reduction in energy waste and reduction in energy cost that enables a more sustainable energy grid worldwide.
Exynos, a European it solutions integrator added lora into its smart refrigeration solutions used to track food temperature, helping customers reduce food wastage and ensuring food safety.
Skyfence Turkish provider of OTI solutions is deploying 10000, Lora based sensors and its smart asset tracking solution at Stendal Airport.
Conserve a leading Iot solutions provider for art and museum applications has developed a smart conservation solution based on Lora that neutralizes low power sensors to provide museums with accurate efficient and simple art health metrics in real time.
Oil zone, and Aiotv solution provider for environmental applications is leveraging lora using Tata communications Lorawan infrastructure in India to deploy smart agriculture solutions, enabling farmers to optimize their water usage and create smarter and more efficient farms.
Unlike crooner space in Europe announced that it has completed its first phase of testing in its mission to provide complete satellite owed by OTI global coverage for Lora sensors anywhere in the world. However, remote.
The qunars demonstration lower constellation will be completed by the end of this year.
The Qunar also demonstrated a connectivity range of over 300 miles. These are just a handful of examples of new use cases emerging in the Lora ecosystem.
Interest in our recently announced cloud based floral services, which includes our Lora based geolocation services has been very high as we start to demonstrate the unique value of a lorawan based geolocation service offerings.
We believe that customers will begin transitioning from testing our geolocation services to qualification and commercialization early next year.
Based on our anticipated growth in lower census, and the assumed attach rates of sensor geolocation asset tracking and other services, we expect our Lora cloud services to grow to $100 million in recurring revenues within the next five years.
Although our momentum continues to build nicely and we are seeing very exciting momentum across the globe underscored by the key Lora metrics we track.
Our key metric our key metrics update includes the number of public or private Lora network operators increased in Q2 to approximately 120 from 100 at the end of 2019.
We expect a 130 lower network operators and by the end of fiscal year 2000.
The number of countries with lower networks grew to more than 82 countries by the end of Fytwenty, we expect over 90 countries to have lower networks.
The estimated number of lower gateways deployed increased to more than $350000. These gateways will support approximately 1.5 billion connected and nodes.
We expect the number of lower gateways deployed to exceed 500000 by the end of Fytwenty supporting a lower end node capacity of over $2 billion and nodes.
The cumulative number of lower end nodes deployed increased to $105 million.
We now expect this number to reach $130 million by the end of Fytwenty.
The lower opportunity pipeline is now over $475 million with an additional $200 million of leads feeding the opportunity pipeline.
We anticipate that on average 40% to 50% of this pipeline will convert to full deployment over a 24 month timeline.
Our pipeline of opportunities is geographically well balanced and also includes a growing number of consumer use cases, where the volumes could be significantly higher.
We will continue to provide lora metric updates on future earnings calls.
In Fytwenty, given the slower than expected start to the year driven by extremely soft demand from China.
We are now expecting our lora enabled revenues to come in between $80 million and $100 million, we expect to exit the year at a quarterly run rate closer to the high end of this updated range.
We still anticipate a 40% each year over the next five years and we continue to expect Laura to become the de facto standard for LP wind use cases over the next few years in what we expect to be a multibillion unit industry.
In Q2 of fiscal year 20 demand for our proximity sensing platforms decreased as expected driven by lower China smartphone demand due to the Wawa ban.
While our Wally smartphone business will continue to be a challenge we believe our proximity sensing business will benefit from increasingly stringent global Saar regulations as governments recognize the health risks associated with increasingly powerful fiveg radios.
Over the next few years, we expect the majority of smartphones and wearable devices to have saw senses included in their system designs.
For Q3 of fiscal year 20, we expect net revenues from our wireless and sensing product group to increase due to stronger Lora enabled demand.
Moving on to new products and design wins.
In Q2 of fiscal year 20, we released 12, new products and achieved a record 2460, new design wins.
Now, let me discuss our outlook for the third quarter of fiscal year 2000.
We are currently estimating Q3 net revenues to be between $135 million and $145 million.
To attain the midpoint of our guidance range or approximately $140 million, we needed net turns orders of approximately 36% at the beginning of Q3.
We expect our Q3 non-GAAP earnings to be between 38 cents and 42 cents per diluted share.
Our Q3 guidance assumes no further direct shipments to wawa in this fiscal quarter.
I will now hand, the call back to the operator, and sandy and macro and I will be happy to answer any questions.
Operator.
Thank you at this time, we'll be conducting a question and answer session. If you would like tax question. Please press star one on your telephone keypad a confirmation. So indicate your line is in the question queue. You May perspective, you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.
[laughter].
Cody Your line is live.
Thank you very much for taking my question.
Just a clarification on that last point, Oh, you're not shipping to walk away. This quarter. Any further this quarter are you zeroing out your way expectations going forward.
Right and are you shipping as many other companies are any portion of your prior revenue.
Yes.
We are shipping as.
While they request us to ship at the end of course, if we're allowed to ship.
The comment is that.
We don't plan and our guidance to ship anything more even though we have backlog to walk away and that's really related to them.
There is an indirect impact as I've mentioned on previous.
Calls, where we may be able to ship a product, but if they can't get the component from a another key component from another manufacturer then they can't ship the system anyway, and so part of that is.
Our.
Kind of approaches assuming that they are going to have difficulty in assembling all the components they need to build a systems.
And then just to the Chinese versus the wall way implications.
How have you seen the ban or the trade conflicts.
Impact your broader Chinese activity, particularly in the smartphone market not necessarily <expletive> , but just broadly are you seeing any hesitation or are you seeing any share shifts that might give you encouragement. It's just good.
See trying to grow even if one way is not.
Yeah, I don't think the.
Tariff situation is so much an impact for us I think the China demand softness is obviously.
An issue for everybody and that is more.
He has been what was going on before tariff situation.
The tariff situation is compounded I think the uncertainty and there's some some elements of that but I don't think those really are the major impact for us I think the Wally ban is it's clearly a direct impact and thats up.
Really the major impact to outside that I think we still have.
Pretty high expectations of growth in China.
Great. Thank you guys.
Our next stop our next question comes on line of tore Svanberg with Stifel.
Please proceed with your question.
Yes. Thank you.
First of all so just to close the loop on always so is about 5% of your revenues last quarter right. So roughly 7 million and Thats going to go away in the October quarter is that the math.
We've estimated about $10 million impact this quarter.
Tori ads on the direct standpoint, there may be additional.
Indirect impact again, we're not aware of but the direct impact for us is about $10 million.
Very good that's helpful. And then as we sort of look at outside of China and walk away I know last quarter, you talked about backlog kind of firming.
Inventories were pretty low as you mentioned in the data center market.
As we know are here 90 days later would you say that outside of China. The environment is still.
Relatively healthy.
Yeah, I think I think Thats fair to say I mean, I think the smartphone.
You know market is.
A little bit skewed because of walling, who always an ability to ship. So you don't really know if someone else is going to pick that up with picking that up and we see a pickup there so outside that though I do think that the rest of the markets datacenter for sure I O T for sure.
Our.
Doing doing reasonably okay.
So its very segment specific and I don't see any other regional issues.
Very good just last question Laura as cloud services start contributing to revenues, perhaps early next year.
Is this going to be a separate line item.
Are you kind of going to talk a lot about.
Perhaps where you're seeing the geographic implementation there.
Yeah, we will we will start to give more color as we start to get the revenues from the geolocation services and as it becomes a material number of course, we'll we'll break it out.
Great. Thank you very much.
Our next question comes online of Rich Schafer with Oppenheimer. Please proceed with your question.
Yes. Thanks.
Maybe my first question Mohan is on more just kind of going back to that.
Yeah, obviously that business continues to show really solid growth, but I think probably slower than maybe you expected or we expected.
Sort of starting last year. So I don't know if you could spend a second just kind of what's been the biggest surprise there versus your expectation, even two or three years ago.
And maybe it's as simple as just like you said, maybe it's just China.
Slowing down kind of surprisingly here and then the second part of that question is I'm just curious what we should watch for what kind of milestones.
On lower revenue as we track toward I know you guys have talked about 500 million to a billion in the next three to five years.
Yeah that that's certainly implies a pretty good hockey stick at some point in the future to hit that kind of run rate so sort of any color there.
Maybe next year that big hockey stick year, or just just if you could frame some of that that'd be helpful. Thank you.
Yes, so I think some key points as you know we've been growing at 60% to year.
From a revenue standpoint, and this year, our expectation was no different obviously, we started the year very soft with China, China is still 60% of revenue for Lora has generated out of China.
Well one of the key things to really look at.
Is the opportunity pipeline the opportunity pipeline is more balanced I think it's going to be well geographically balanced theres lot more different types of use cases. Thank thats one thing to look out for as I project said in the.
In my remarks that whip.
Still anticipating 40% CHG all going forward for the next five years you layer on top of that cloud services, I'd, probably generate something like a 50% see Asia.
And so the I think the key things to look out for now still the opportunity pipeline the conversion rate.
The number of gate, we deployed which indicates you know really what the what type of in no capacity. We can support the end no deployments themselves and then just general momentum you know and as you said we are expecting.
In this pipeline of opportunity we have some very.
Very good very potentially high.
More consumer ish more smart smart building smart home kind of use cases that we think could be a real catalyst and once.
Once we see that momentum go I think it's going to be.
Clearly obvious to everybody that Laurel will become the de facto standard for LP. When obviously, we're still working hard at those use cases, and so the way to go but we're fairly optimistic about in them.
Thanks, and just a quick follow up on the on shifting gears to bass Division I think it's around sort of a mid single digit kind of contributor to revenues.
You know and I know you talked about that business growing modestly in the back half and I assume that's without walk away.
So is that really just a function of the higher content as you mentioned in your prepared remarks.
Is that is that share gains for you guys at the sort of the non Chinese.
Wireless Oems like to Nokia's Ericsson Samsung so any color there would be great. If you guys. Obviously have a great relationship with Samsung for instance on the handset side. So I didn't know if that was a bad opportunity for you guys.
Yes, it's been a bit of everything you mentioned, Rick I think we are generally seeing a pickup in demand because of fiveg deployments.
I wouldn't say, it's huge I would say, it's very modest but it is a pickup.
Obviously Wally is.
A bit of up.
A headwind for us on that but I think.
As with smartphones, we do expect over time someone else to pick up the.
The demand so while we can't ship so.
You will see how that plays out but thats our expectation.
Thanks.
Our next question comes from the line of Craig Ellis with B. Riley FBR.
Please proceed with your question.
Yes, thanks for taking the question and just to make sure I am clear on the Y way effect are you, saying that there was 10 million a far way our revenue in the in the fiscal second quarter, but you don't expect there to be any so thats that $10 million sequential headwind.
Yeah, we've shipped so we've shipped.
Some already Craig, but we're not expecting to ship any more onto the total impact is about $10 million for us.
Got it.
And then following up on some of the Laura Laura questions Mohan. So it seems as I look at the performance of the business versus target you're actually tracking.
In network operators in countries potentially to exceed the targets that you had.
Set at the beginning of the year and yet we did reduce the anode target from 140 to 130 million I believe and then you updated the revenue target but.
But if I look at that data it would seem to suggest that the business is getting good traction outside of China, but maybe not getting the Ed no deployments as fast as we had thought.
Perhaps three and six months ago is that a fair depiction or is there really something else going on.
No I think that's a fair depiction Craig I think the only thing to remember is that predicting end node deployments is really predicting how fast the opportunities turn into.
On the proof of concepts turn into revenue I mean, the actual deployments and so it really is a guesstimate right now as we look at it.
At the moment Lora is still a small business and it's still a sub wonderment at all business and so.
A small change like China softness in smart metering for example, Ken can impact to that but I think as the business starts to scale and gets larger and as I mentioned in the opportunity pipeline being more balanced than those small changes I think won't have such a significant impact on that so when we look at the opportunity pipeline being so large if we can convert those.
We're going to we're going to see the 40% or more CPG all that we're projecting.
Okay. That's helpful and then switching over to signal integrity. So it seems like the Companys pleased with the momentum it has with a clear edge parts and and the triage Pam four parts you I think were specific that we'd start to see revenues for some of those Pam four parts in the fourth quarter, but then really more again in the second half of calendar 20 is the point there that.
Seasonally we would expect the business to be softer in the first half of the year, just given enterprise and data center spending.
Or is there something else going on and should we expect a similar.
Revenue in demand profile for your clear rich parts.
Yes, I think it's more related to when the market is ready for Pam four I think we see customers interested we see design in activity.
But revenue I think is still towards the back end of next year.
And we are working very closely with them obviously.
As we bring out our products and we see momentum that may change, maybe maybe a first half phenomenon, but I think at this point in time, we project more second half of next year revenue.
Okay. That's helpful last ones from Mecca, Mac I haven't haven't forgotten about you.
The guidance.
On gross margin was helpful. As it relates to the fiscal 21 color on pricing back towards more normal levels. The question is.
What is quote unquote normal would that be.
The 61% to 62% range or is that 62% plus and I take it thats driven by valuation, but would there be any microservices revenue included in that guidance. Thank you.
I think the normal lowers them.
Responding to if you look at for the last several quarters, where we've been above 60 throughput at an above so that's what I sort of closer to us than normal for US now I would expect that as we go into the next fiscal year.
As we look at where we expect to get on growth from where we are getting.
Growth from Laura getting growth from a Hyperscale data center getting growth from approval and feed products from the industrial output fission products. These are all.
End markets that we know come with a much higher gross margin expectation so.
That is why I do have to believe that as we get into next fiscal year, and especially also demand overall strength in fs faster come back to normal levels, we can get back to Sam levels of manufacturing activity.
So those are the reasons why I do believe that we should get back to normalized levels of 62% than above.
Thank you for the color.
Our next question comes from the line of Christian Girl with Baird.
Please proceed with your question.
Hi, good afternoon.
When you mention fiveg content opportunity to treat both.
Could you give us some color on how does that translate in dollars in terms of Fiveg content per base station and also the pace. So the increase that you expect for next year.
Yes, Justin I think it's difficult to say everybodys.
It depends on the architecture.
How many fronthaul backhaul middle links are are each up.
System deployment.
What we are seeing obviously is that there's more demand CDR. So that increase in content is obviously beneficial to US also fiveg architecture in general requires more base stations and so we are just seeing.
At least our customers are telling us that thats likely to be the case. So it will be more base stations different types of base stations and more cdrs and so that drives the content.
We are already starting to see modest pickup as I mentioned I think next year.
Again, we'll see if it plays out in the first off I think it's more like in the second half but.
There was definitely a pull from the market. So I think the.
The need is there. It's just now a question of whether the technology is ready and whether the customers are ready to.
Service providers are willing to put the money in so I think it's going to happen starting next year.
Okay and then.
Moving on to the impact of Fiveg EBIT to sign on the consumer side does your protection business potentially benefit from the wisest fiveg phones.
All day.
Any changes that you expect in the regulatory environment. So.
Hi, the Nada power. He found that would have any impact on your content per cell phone.
Yes, the main.
Shift would be on what we expect that proximity sensing as I mentioned.
In the call that.
Notified you radios are pretty powerful and as you have more fiveg radios.
Because of the range you need to have an increase in power to get to more distance as you have a high bandwidth there.
Typically those radios are going to be more powerful and therefore, I think potentially more dangerous and I think one of the things. We expect is most phones, whereas the attach rate today of proximity sensing for saw functionality is fairly.
So so high I think for Fiveg phones, it's going to be much higher and so thats really a good opportunity for us. In addition for protection. So thats for proximity sensing and put to from a protection standpoint, we see the same type of.
Improvements required high speed interfaces more advanced processors, you know different displays.
Requiring protection and that just.
More challenging environment as everything is faster and more has more advanced lithography. So.
More advanced displays so again protection and proximity sensing, we expect to do quite well going forward due to Fiveg also.
Great and then last one.
In terms of the growth for lower that that you see for this year, how should we model in China I saw China would have.
Decline as a percentage of total loans 11 years.
Do you actually expect China to be flat to up year over year. This year or is that new target emanating, China to be down year over year.
I would think that China would be.
Maybe slightly up year over year.
Tristan, but I think we did had anticipate it would be a much.
Much higher growth this year.
To be fair, that's as we planned the year a lot of the growth we did expect from China.
But I make the comment on the new opportunities being more balanced just for that reason, we just don't know where this whole tower thing is going to lead to and those type of things and one of the things we pride ourselves on is having geographical balance and then market balance and.
This is one of the reasons, it's that we can't predict what's going to happen regionally. All we know is we have very good momentum also mold in North America, we have very good momentum in Europe .
But yes for this year the projection was that China would be growing faster and I think it's going to be fairly muted growth.
Okay quake very soon thank you.
Our next question comes the line of Karl Ackerman with Cowen and company. Please proceed with your question.
Hey, good afternoon.
Anchor Mohan.
Your comments on China upon demand largely echo peers, who have reported already.
But I think you sound a little bit more optimistic on 100 gig optical components than peers. So what are you seeing here in terms of bookings for 100 gig for the second half of year and.
How should we think about the opportunity for your PON business as Fiveg ramps later this year.
Well I think yeah, so separate <expletive> from datacenter. So theres really two markets. We play in PON is the one Thats majority, China, mostly China, driven mostly today 2.5 gig and one gig on.
We are seeing growth in 10 gig deployments.
The challenge for US with PON is that Wally is really being one of the key drivers of that business in China, and obviously with the Wally band that puts some challenges.
Around that business. In addition to that China is being the thought.
The main region full PON deployments there are other regions deploying but China has been by far the highest volume and so you combine the.
Slightly modest investments in.
Reduction investments by the China government in PON, and then combine that with while E band that puts us really.
Headwind on the PON business.
Now separate that from the data center business. The data center business, we've talked about inventory builds in Q4 and Q1.
We started to see that free up now in Q2 start to get more balanced and we expect to the rest of this year to be little bit better for datacenter and most of those 100 gig.
Four by 25 gig NRG optical module deployments and so that's where we see the benefit there on our Ceos.
Understood.
For my last question if I may.
Could you elaborate on what you expect from the proximity sensing business for the back for the back half of calendar 2019.
I understand that was always an overhang.
But I guess I was under the impression that business outside of smartphone should grow at kind of a high teens.
Plus or minus clip.
So let me elaborate a bit more on what you're seeing in that market outside of walkaway slash smartphone that would be helpful. Thank you.
Yes, the proximity sensing business is doing quite well outside China. It's also obviously Korea. So it's mostly today, it's mostly smartphones, even though we're getting design wins in Wearables and other.
Areas, where the radio is touching the human body.
But I think today the majority of the volume is still smartphones and obviously as you know the big smartphone manufacturers that the major volume drivers are in career and.
Handful in North America and.
And then China, and we've done a really actually a phenomenal job of diversifying this business it used to be all Korea driven.
But China this year, obviously because of walk away, we who were the main drivers of our proximity sensing business in China have had challenges and so now in the back half.
We are expecting something to pick up a little bit.
Hello, I haven't had a strong year to date I think there's indications that we may do better.
And as I mentioned that I think it's likely that if while we can't ship phones outside China.
That someone will pick up that demand.
Clear, who it will be but.
We do expect that demand to benefit us in some shape or form and.
In the proximity sensing world.
Thank you.
Our next question comes online of harsh Kumar with Piper Jaffray. Please proceed with your question.
Yeah, Hey, guys couple of questions you guys called out Mohan and America, you called out Laura and data center for growth.
Laura historically, it's been highly China, I know, but you saw some pretty pretty strong growth in this July quarter you reported.
Im curious if theres growth that just came in in the July quarter did it come from China or did it come from other places and then on data Center I was curious similar sort of geographic base question.
Are you seeing growth from data centers in us and Europe and not from China.
And further maybe you could clarify between cloud enterprise or Hyperscale.
Yes, So let me start with that first question and the last question first the harsh so data center is clearly being driven today, mostly out of North America.
The shipments might be we might be shipping into China, because the supply chain is there, but the end demand is to service.
North America. So that's without question is the answer to that and it's mostly hyperscale datacenters today, I would say mix of cloud as well, but mostly hyperscale data centers.
And then on the lower side. It is China I would say a large chunk of that is growth in China, but it's also the rest of the world.
As you know Q1, we had pretty weak.
Lora business and that was driven mostly by China's softness and I think we saw a little bit of a pickup from that in Q2, and but I would say, it's more balanced but still yet a lot of the growth is driven by China.
Got it and then would you say that some of the other companies that have reported actually a lot of them already reported the June numbers than anyone July .
Most of them have said that China has bottomed out X Y way of course.
Would you say that you would share that gentleman for your business.
Yes, I would say, that's probably true harsh, although who always a fair.
Significant influence or in the region and so I think if you if you.
Exclude them. Then then you have to look at the whole ecosystem around them, but I think outside that yes, I do think that China seems to be doing better now.
As I mentioned.
There there are some indications that.
The China demand as a total is now starting to do better outside the tariff uncertainty, which doesn't really impact our demand. So much I think it's just the uncertainty of it.
Kind of creeps up.
Nova shattering shadowing nervousness, but I think outside that I think China demand seems to be doing better.
Great. Thanks, Thats all I had.
Our next question comes the line of Gary Mobley with Wells Fargo. Please proceed with your question.
Hi, guys.
To start with a quick question for America on the Opex. So your Q3, Opex guide plies, a $2 million year over year decrease.
And.
Just to get to the question of sustainability for that lower level is there anything more than just lower bonus accruals or putting a cap on any sort of travel expenses whatnot.
No there is not much more to it I think as you can imagine now coming into the year, we actually have much better expeditions for the current year. So our bonus programs were very much alive to those.
But unfortunately, we're not seeing those I guess are we done a spec programs to pay out as much as we had anticipated.
And overall you know managing operating expenses is something that we do very well, we probably have about 20% to 25% of our premise branches are variable. So those are opportunities for us to keep this in.
Control, but there isn't anything in our very fast Rod noted that we are doing.
In order to manage operating expenses.
Okay.
Kind of a kind of an odd question.
So one thing this is why we shouldnt band in the us trying to trade.
Issue has taught China companies is try to.
Accelerate there and reduce your dependence on western chip companies. So as you.
Here today, driving 35% of revenue from China have you seen any sort of anti U.S. sentiment as it relates to design win activity or maybe even adoption of what lower which may be viewed as the U.S. based technology.
Yeah actually that's a really good question I think we have seen that.
I think thats nothing unusual I mean that was that was going on before.
He tariff situation the the.
Chinese have been driving.
Hole.
Kind of vision of having more components suppliers.
In the in the region.
Fortunately for US most of the stuff, we do is really high and stuff and I think.
The challenge I mean that in the companies that are challenged to do.
Kind of.
Achieve the levels of performance, we achieved now that said because of some of the situations. We have like the wall. We ban we may drive the customers the end customers to actually change their specifications to accommodate.
Poor performing devices and so yes, we have to face be faced with that I think thats just one of the.
So outside the challenges we have to deal with in addition to being faced with Chinese competition is customers may be changing their specs to accommodate.
Lower performing devices.
That said I think that for us we have enough opportunity.
Cross.
Both China and the rest of Asia and other regions of the Walters still expand our Sam and hour and our opportunity.
Okay I appreciate it thanks guys.
Our next question comes on line of Quinn Bolton with Needham and company. Please proceed with your question.
Hi, guys wanted to ask first on the data center business with a nice uptick that you saw in the second quarter and the guidance for continued growth into the second half of the calendar year. Do you think you are now sort of through all of the inventory correction or do you think even in the second half you may still be shipping under and consumption of optical modules in the data centers.
Quinn, we think most of the inventory is now.
I've been through I mean, I think it's been two quarters, now, where we've seen softness and data centers.
Difficult to call. It it's not a huge increase we're seeing but we are seeing modest increase and so our feeling is yet in the second half is going to be a little bit stronger. So I think the assumption from that is that.
Inventory mostly is.
Is reduced.
Okay, Great and then just a question on the smartphone business I know historically the company said very high share in the OLED display protection market I think certainly that was the case with the Korean manufacturers, but as you see China Chinese manufacturers ramping.
OLED displays do you have the same market share with some of the newer Chinese OLED manufacturers on the protection side that you did with the Korean OLED manufacturers.
Yes, I think so first of all you know the lot of the Korean.
One of the China phones are still using I think Korean displays and we'll we'll do so for quite some time I think can so but yes, we have a reasonable position I wouldn't say, it's as good as the Korean smartphone area, but.
We sell our relationship with Samsung has always been very strong and our relationship in China is emerging I would say on the display side, but.
We still believe that we have a pretty good share across the globe.
Got it and then my last question is just on the lower business.
You sort of discuss that it was a little bit of a slower start this year and the new revenue target for.
Fiscal 20 sort of implies a low single digit maybe a mid 20.
<unk> percent year on year increase of below that 40% kind of CAGR that you expect for the next five years.
Should we think that it takes that we get into.
You know it better economic environment in 2020 that you could rebound above that 40% level for a year or would you sort of encourage us to think that the best way to think about that that Lord businesses is that the growth rate is going to be much closer to that 40% kind of off the the fiscal 20 basis that you just given us.
Yes, the way I would think about ocwen. So we have been growing 60% right. So.
That was our expectation coming into this year and so we've kind of reset that to a 40% CGM, but as I mentioned one of things I'd mention is that we are expecting.
A major catalyst or two.
Over the next 12 18 months here that I think will drive much faster growth and obviously when that happens then we can talk about what that does for the numbers but.
It's still a ways off we still have to execute on it we still need our customers to go through the PRC process and demonstrate the value and then.
Indicate to us that thats, something that they're going to do and that's going to.
Drive a lot of volume so for now I think the 40% is a is a good number to model in.
Great. Thank you Mohan.
Our next question comes the line of Scott, Sir with Roth Capital. Please proceed with your question.
Hey, good afternoon, Thanks for taking my question.
Quick clarification on the guidance just want to make sure I was clear our proximity sensors, you're expecting to be down sequentially, but overall, the wireless and sensing group is expected to increase.
Into the third quarter is that correct.
That's correct. Okay. So just to follow up Samsung has historically been a slightly larger customer for you I think it lesser quarters have been running $10 million to $14 million was a little bit softer this quarter. It sounds like proximity sensing was part of the issue there but is there something else going on is there share loss or something else. We're just clearing some inventory here before you expect that demand to come back to a more normalized level, you're talking about you're referring to Samsung Samsung.
Yes, yes, I'm, sorry assumption just hasn't been as strong for us in the first half I think.
I think we're anticipating a little bit stronger Q3 from them.
But in the first half.
Yes, they've told us that demand hasn't been.
Strong as they have anticipated and I think thats a.
Part of the thing we're looking at is whether they're going to be able to pick up some of the China smartphone demand from wawa, but yes, I think maybe it's been because they have business in China, and Asia, and while we use that to become more aggressive in those regions, but I don't know really the China smartphone Korea, sorry Korea smartphone.
Has been weak for us in.
The first half we are expecting that to come back a little bit in Q3, gotcha and to follow up on a couple of earlier questions around data center, yes, nice snap back in the second quarter sounds like you're continuing to look for a sequential increase into the third quarter Im China had been expected to be a component of internal or domestic demand and consumption for new data centers being built out and.
He's mainland.
Is that still.
Part of your outlook going forward to see that kind of growth in that coming back or is this recovery and sustained recovery still being built from.
North America Hyperscale cloud environments.
I'm not trying to is included in that.
Just not Wally So I think we include other.
China customers.
Okay, and lastly, just to wrap up on lower as as you exit the fourth quarter more than 100 million type run rate on China has been a big component of that what is your expectation.
Of what China is as a component of that 25 million.
In the fourth quarter and then just to follow up on your earlier comment you are expecting a big catalyst on the labor front to drive growth I was wondering if you could expand upon that a little bit give us a little bit of color is that tags is it something else. Thank you.
Yes so.
As we end the.
Exit the year, Scott I still think China will be about 60% of the revenue.
And it's really the pipeline is a lot more.
Balanced, but I think we have to see evidence of that.
The other regions and Laura in those other locations.
Turning into revenue before we can change move the share change the shift in revenue profile geographically and it doesn't usually change that quickly so.
China May go from 60% to 58% at 55% or something like that until we see a big catalyst. The capital is so many I mean, I think theres not one I think there are a lot of consumer ish type use cases tags and.
Things related to devices and also on the smart home, but they just have a higher volume than the industrial smart metering smart cities Smart building kind of use cases, and so thats what were referring to and what that will do really for Laura is move it from being kind of a industrial Io tea.
Senza to being a true I O T for many different.
Segments, including consumer and industrial and enterprise and Thats, what were looking for that type of catalyst.
Great. Thank you.
Our next question comes from the line of how mid course on we'd be Ws financial. Please proceed with your question.
Hi, just a couple of questions here on more outside of China are you seeing pricing pressure, that's creating this issue with revenue not growing as fast.
Offset the weakness in China.
No comment we don't see any pricing pressure really I think it's more just the conversion of Pcs.
We are seeing momentum in other regions, it's up and just.
Foster revenue in China, China, one of the reasons why China has been more rapid.
Adopter of Lora and generating revenue faster is they typically have access to more system integrators software engineers.
Hardware engineers sensor developers in the region and they tend to be very very fast.
Solving bottlenecks and providing a solution to issues that takes a little bit more challenging in Europe , and North America in other regions, but it's starting to starting to get there.
And how much of a factor is the slowdown the automotive industry, playing a role in your protection business.
Not not really impacting our protection business Atoll Hamid I think.
Our protection business is mostly today driven by smartphones and then the automotive is is growing quite nicely for us it's relatively new segment for our protection business as I mentioned in the in my script, we're seeing a lot of infotainment and eight assets and.
New.
Applications emerge in the vehicle that all need very high end protection, because they have advanced lithography in them and so our protection business is growing nicely now in that space. So yes, we see it but it's small it's small for us today.
Okay. Thank you.
Our final question comes from the line of Craig Ellis with B. Riley FBR. Please proceed with your question.
Hi, Thanks for taking the follow up question, Tim I, just wanted to follow up and see if I could ask a question about how you would look at fiscal fourth quarter seasonality in this environment given all of the macro cross currents, it's hard to think of any quarter seasonality, but.
To the extent that you have a view there or can it be share some of the positives and negatives that you would see from this early juncture I appreciate the color. Thank you.
Yeah, it's tough to call Craig.
Mostly because of Wally I would say I think we would expect Samsung to be down obviously in Q4, but they haven't had a great year. So normally when they've had a fairly modest year, sometimes that Q4 is not as.
As extreme downward so that maybe maybe not as weak I think datacenter will continue to be quite strong.
Obviously, we expect Laura Hello tend to be quite strong so it's going to be tough to call. It I think we'll just have to wait and see how China plays out in the while we manage the one thing that.
Obviously does impact us would expect a similar type of impact in Q4. Unfortunately, so we'd have to look at that but my sense is Q4 could be better than.
We normally would see it.
You mean, you mean, just at the margin there is a headwind or you mean, there could be an incremental 10 million dollar headwind in the fiscal fourth quarter.
No I think the 10 million we have this would be included in the in the in the numbers. So if you take Q3 run rate I would anticipate normal seasonality from that standpoint, and then you look at my comments on Korea, So Q4 could be stronger than we have.
Seen in the past in terms of the typically it's down for us at least 5% I would say I would say, probably it's not going to be down as much but.
We'll see.
Got it thank you for that.
We have reached the end of our question and answer session and I would like to turn the call back over to Mohan Maheswaran for any closing remarks.
In closing despite the ongoing uncertainty and geopolitical headwinds that contributed to a slower first half and despite the ongoing Wally ban we are seeing modest signs of recovery in several of our targeted markets. We remain confident in the underlying strength of the secular drivers behind that growth engines in the Io T data center and mobile markets and we remain confident that our overall end market geographical and product balance will enable us to outperform the 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 teleconference. You may now disconnect your lines at this time. Thank you for your participation number wonderful day.