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Edited Transcript of SMTC earnings conference call or presentation 8-Mar-17 10:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Semtech Corp Earnings Call

Camarillo Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Semtech Corp earnings conference call or presentation Wednesday, March 8, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sandy Harrison

Semtech Corporation - Director of Business Finance and IR

* Emeka Chukwu

Semtech Corporation - CFO

* Mohan Maheswaran

Semtech Corporation - President, CEO

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Conference Call Participants

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* Craig Ellis

B. Riley & Co. - Analyst

* Harsh Kumar

Stephens Inc. - Analyst

* Rick Schafer

Oppenheimer & Co. - Analyst

* Unidentified Participant

- Analyst

* Mitch Steves

RBC Capital Markets - Analyst

* Cody Acree

Drexel Hamilton - Analyst

* Lena Zhang

Summit Redstone - Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semtech Corporation Q4 FY17 earnings release conference call. (Operator Instructions) It is now my pleasure to turn the call over to Mr. Sandy Harrison, Director of Business Finance and Investor Relations. You may begin your conference.

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Sandy Harrison, Semtech Corporation - Director of Business Finance and IR [2]

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Thank you, Heidi. And welcome to Semtech's conference call to discuss our financial results for the fourth quarter and FY17 ended January 29, 2017. Speaker 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 closed today, and is available on our website at Semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor statement included in today's press release, as well as the other risk factor 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. Discussion of why the management team considers such non-GAAP financial measures useful, along with the detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call will 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?

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Emeka Chukwu, Semtech Corporation - CFO [3]

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Thank you, Sandy. Good afternoon, everyone. For Q4 FY17, GAAP net sales were at $140 million, an increase of 2% sequentially and 18% year-over-year. Q4 GAAP net sales included $1.7 million expense for the Comcast Warrant. FY17 GAAP net sales increased 11% over FY16 to $544.3 million, and included a total of $5.4 million from Comcast Warrants. Q4 GAAP gross margin increased 50 basis points sequentially to 59.6%, due to the impact of lower sequential Comcast Warrants expensed under more favorable mix.

Q4 GAAP operating expense increased approximately 63% sequentially, due mainly to the [non-recording] of the gain from the Snowbush divestiture. And the bad debt charge in Q3, slightly offset by the impact of higher stock price on equity compensation. Q4 GAAP tax rate was approximately 27.1% compared to 15.7% in Q3. Q3 benefited from a more favorable tax rate as a result of the Snowbush divestiture. For FY18, we expect our GAAP tax rate to be in the 23% to 27% range.

Moving on to the non-GAAP results, which exclude the impact of equity-based compensation, amortization of acquired intangibles, acquisition of disposition related and other [low recording] charges not tied to current operations. Q4 FY17 net sales were $141.8 million, a 1% sequential increase and 20% increase over Q4 FY16. And represented the fifth consecutive quarter of results above the mid-point of our guidance. FY17 net sales were $549.7 million, an increase of 12% over the prior year.

In Q4, shipments into Asia represented 76% of total sales. North America was 17% and Europe represented 7%. Total net sales to distribution represented approximately 69% and [the rest], sales represented at approximately 31%. Q4 bookings increased sequentially and year-over-year, and resulted in a book-to-bill firmly above one. [Total] bookings accounted for approximately 44% of shipments during the quarter.

Q4 non-GAAP gross margin was 60.5%, an increase of 10 basis points sequentially due to more favorable mix. We expect Q1 FY18 non-GAAP gross margin to be flattish sequentially, as higher absorption due to stronger demand is offset by less favorable mix. Going forward, we expect that higher revenue from our optical transceiver and LoRa products increase absorption from overall revenue growth. And royalty and licensing revenue from LoRa will enable us to sustain and expand our gross margin from current levels. As a result, we are including our non-GAAP gross margin target range to 58% to 63%, versus our prior range of 55% to 60%. We expect most of this increase in gross profit to flow down to earnings as we maintain a very tight control over our [product] expenses.

Accordingly, we are also increasing our non-GAAP operating margin model to 28% to 32% from the current 25% to 30%. We expect to achieve the mid-point of this new range, or 30% of the quarterly revenue run rate of approximately $185 million. Q4 non-GAAP operating expense was $52.2 million, up slightly from Q3 levels due to higher new product expense, offset by the bad debt charge in Q3. In Q1, we expect non-GAAP operating expense to decrease approximately 2% sequentially, mainly from LoRa new product expenses.

For modeling purposes, as we highlighted in our last earnings call, we expect our non-GAAP operating expenses for FY18 to be similar to FY17 levels as we average approximately $52 million a quarter. Q4 FY17 non-GAAP tax rate was approximately 20%. We expect our FY18 non-GAAP tax rate to fall between 20% and 24% due to higher income from high tax jurisdictions. In Q4, cash flow from operations was approximately $33 million.

For FY17, in line with revenue growth, cash flow from operations increased 15% sequentially to $118 million or approximately 22% of revenue. During Q4, we [porgest] our office due to the [important] in Canada for approximately $12 million, and made several small strategic investments in startup companies to gain access to technologies and further develop the LoRa ecosystem. Cash and investments in Q4 were $297 million, and our debt balance at the end of Q4 was approximately $243 million, leaving us in a $54 million positive net cash position. In Q4, approximately 75% of our cash and investments were in [domicile] and international accounts and 25% was based in the US.

We repurchased $500,000 of stock, and the outstanding stock repurchase authorization is approximately $62 million. The primary use of cash continues to be to pay down our debt, repurchase our shares and make strategic investments. In Q4, accounts receivable decreased 14% sequentially due to better shipments linearity and higher mix of shipments to distributors. Our days of sales outstanding decreased 2 days to 36 days, and remains below the target range of 40 days to 45 days. Net inventory in absolute dollar terms increased approximately 5% sequentially, and represented 104 days of inventory, slightly above the target range of 90 days to 100 days. In Q1, we expect our inventory to increase on both an absolute dollar amount and days of inventory to address increase in demand.

In summary, FY17 was a great year for Semtech. We returned to growth as all of our businesses performed well. We maintained our gross margin above our target range, which we believe is sustainable going forward. Our spending discipline allowed us to grow [MNs] five times faster than revenue. With our growth engines expected to gain further momentum, and leveraging the new operating model, we believe the Company is poised to deliver a record financial performance in FY18. I will now hand the call over to Mohan.

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Mohan Maheswaran, Semtech Corporation - President, CEO [4]

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Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 FY17 performance by end market, and by product -- discuss our FY17 performance, and then provide our outlook for Q1 of FY18. In Q4 of FY17, we achieved non-GAAP net revenues of $141.8 million, an increase of 1% sequentially and an increase of 20% over Q4 of FY16. End of market demand increased from the enterprise computing, communications and industrial end markets, and decreased from the high-end consumer end market.

For Q4 of FY17, we posted non-GAAP gross margin of 60.5% and non-GAAP earnings per diluted share of $0.37. In Q4 of FY17, net sales from the enterprise computing end market increased nicely over the prior quarter, and represented 30% of total net revenues. The industrial end market also increased over the prior quarter and represented 26% of total net revenues. The high-end consumer end market decreased from the prior quarter, and represented 26% of total net revenues. Approximately 20% of high-end consumer net revenues were attributable to mobile devices, and approximately 6% were attributable to other consumer systems. Finally, net revenues from the communications end market increased over the prior quarter and represented 18% of total net revenues.

I will now discuss the performance of each of our product groups. In Q4 of FY17, our signal integrity product group delivered strong results, increasing 7% sequentially and 12% over the same period a year ago and represented 46% of total net revenues. Enterprise computing and communications end market demand grew sequentially, led by record quarterly demand from our cloud and Hyperscale data center customers and the expected recovery from our PON and Wireless Base Station customers. Revenues from the industrial end market remained flat.

Semtech's industry-leading clock data recovery platforms or CDRs, and physical media devices or PMDs, are used in a wide range of optical modules, from 1 gigabit per second to 100 gigabit per second. They are going to the data center, PON and wireless space station markets. We expect these three markets to continue to grow over the next few years, and move to higher data rates. These higher data rates drive the need for increased signal integrity, resulting in the increased adoption of Semtech's leadership CDRs. Use of CDRs in higher speed, 100-gbps optical modules being deployed in cloud and Hyperscale data centers, is resulting in very strong growth for Semtech's single channel and quad-channel 25-gbps CDR platforms.

Our CDR business achieved a record performance in FY17. We expect the trend to higher data rates to continue and result in another record revenue performance from our CDR platforms in FY18. We also made further progress toward the introduction of our high-performance, single-lambda 100-gbps PAM4 platform expected to sample this year. This platform, which incorporates the DSP solutions from our investment in MultiPhy is progressing well and feedback from our Tier 1 strategic engagements continues to be very positive. With the rollout of this solution, we expect to gain a strong position in the emerging 100-gbps single-lambda optical market and the 400-gbsp optical market for cloud and Hyperscale data centers data center solutions, which are expected to ramp in FY19.

In FY17, we also saw record revenues for our PMD platforms, which include TIAs and laser drivers used in PON systems and Base Stations. Strong demand for our new 10-gbps PON products is enabling our customers to upgrade their PON systems from 2.5-G PON to 10-G PON. Our Base Station customers are also increasing the [back core] data rates, and we expect this trend, as well as the PON data rate increase, to contribute to further growth from our PMD business in FY18.

Semtech's leadership position in the optical connectivity market is a result of our continued focus in investment in new platforms that deliver the highest performance, and integration at the lowest power consumption in the industry. We believe these attributes position our Signal Integrity Product Group to continue its double-digit revenue growth, which it has produced over the last five years and follow its record FY17 with another record year in FY18. For Q1 of FY18, we expect net revenues from our Signal Integrity Product Group to increase nicely led by continued growth in demand from the data center, wireless Base Station and PON markets.

Moving onto our Protection Product Group. Our Protection Product Group delivered solid results, growing 3% sequentially and 25% over the same period a year ago, and represented 29% of total net revenues. Stronger demand from our communications and industrial end markets offset seasonally lower demand from our high-end consumer market. Q4 results marked the third consecutive quarter of sequential growth for our Protection Product Group. Increasing diversification of our protection business is very encouraging, as we expand our footprint into a broader range of end markets and we penetrate a broader set of mobile customers.

In Q4 of FY17, demand from our China smartphone customers increased sequentially and exceeded the quarterly net revenues from our Korean smartphone customers for the first time in our history. Demand of our Korean smartphone customers declined sequentially due to customary and year-end inventory reduction efforts and the cancellation of Samsung's Note7 platform that was previously announced. Our Protection Product Group has focused on developing solutions to address an increasingly diverse array of applications and vertical markets. During Q4, we expanded our Z portfolio with the RClamp0561Z, targeted as ultra-high-speed data interfaces including USB 3.1 and 10-gbps ethernet using next-generation mobile and computing systems. In FY17, our Protection Product Group grew 8% over the prior year, as we saw our penetration of China smartphones increase and our penetration of [mon] smartphone markets also increase.

Our Protection business continues to diversify nicely as we see increasing opportunities for advanced protection from the automotive, IoT and communication infrastructure segments. The advanced lithographies used in leading systems today require the most advanced protection platforms, and Semtech continues to deliver the industry's highest performance protection platforms. We believe our strategy of focusing on advanced lithography protection and high-speed interfaces across multiple vertical markets should continue to pay off and help drive our Protection Product Group to another growth year in FY18. In Q1 of FY18, we expect our Protection business to increase driven by growth in demand from the high-end consumer market.

Turning to our Wireless and Sensing Product Group. In Q4 of FY17, net revenues from our Wireless and Sensing Product Group decreased 12% sequentially, but increased 34% over the same period a year ago and represented 15% of total net revenues. Higher demand from the industrial end market led by our LoRa-related platforms was offset by seasonally lower demand for our proximity sensing platforms from the high-end consumer market. LoRa continues to exceed our high expectations and is rapidly emerging as the Low Power Wide Area Network, or LPWAN technology of choice in the industry.

LoRa enables the rapid build-out of low-cost, low-power, secure wide area networks that provide IoT data for cloud-based data analytics, reporting and control. LoRa enables many IoT applications to be transformed from a concept to a reality, due to the long-range, low-power and low-cost of a LoRa sensor node. In FY17, our Wireless and Sensing Product Group achieved record revenues. Semtech's LoRa related revenue nearly doubled from the prior year to achieve record levels, and we expect it to double again in FY18 and represent $100 million of revenue within the next two years.

In FY17, Semtech, along with its LoRa Alliance partners, announced many significant LoRa related accomplishments and milestones. Some of the more significant milestones in FY17 included LoRaWAN network trials were announced or in some stage of deployment in more than 50 countries worldwide. Including China, Japan, Korea, Taiwan, United States, India, France Belgium, New Zealand and Ireland, with large globally recognized service providers that include Comcast, Softbank, SKT, NKT, Orange, [Boyt] and Taka. We continue to expect that most, if not all major regions of the world will have some form of LoRaWAN network deployed or in the midst of deployment by the end of calendar year 2017. LoRa Alliance membership more than doubled from the end of FY16, and now exceeds over 450 members worldwide. And includes companies addressing all areas of the LoRa ecosystem, from sensors, gateways and network operators, to cloud-based analytics and software companies.

Semtech's GPS-free LoRa geo location capability was successfully launched, and we have signed four agreements with several in the pipeline. Our GPS-free geo location capability allows IoT operators to add asset tracking and geo location of any LoRaWAN sensor operating over a LoRaWAN network, creating additional revenue opportunities for service providers and Semtech. Semtech introduced and demonstrated at CES in January, its LoRaWAN picocell gateway reference design. This platform enables consumers and small enterprises to create their own private LoRaWAN network at very low cost, making it perfect for smart building, smart enterprise and smart campus environments. The LoRa picocell opens up numerous new applications that require low-cost, long-range, low-power and dense connectivity.

Finally, in FY17, we signed a strategic deal with Comcast to partner with them to trial LoRaWAN networks in the USA. The agreement provides Comcast with the Semtech Warrant that vests based on the rollout of the Comcast LoRaWAN network. Currently, Comcast trial is on schedule with LoRaWAN coverage in two major cities and a number of verticals declined to form the basis of their POC. Comcast also announced their MachineQ IoT platform to enable customers to build IoT strategies utilizing Comcast's LoRaWAN network and services.

It is still early, but we believe that the progress to date since the signing of our agreement has been very positive. We expect that by the end of this fiscal year, that three of the five milestones will be completed, which will provide the LoRaWAN coverage in 10 major cities in the US. We also believe that Semtech and our LoRa Alliance partners are beginning to establish LoRa is the de facto standard for global LPWAN IoT deployments and what we think could be a multi-billion dollar industry within five years.

In Q4 of FY17, demand for our proximity sensing platforms decreased seasonally from the prior quarter's record performance, but increased over the same period a year ago. Our sensing platforms continue to win designs in tablets, smartphones and wearables across all regions. As radio transmission power increases in mobile systems, we expect the adoption of Semtech's proximity sensing platforms to increase to enable system compliance with regional regulations. In FY17, our proximity sensing revenues achieved record revenues and we anticipate that FY18 revenues will also achieve record levels. For Q1 of FY18, we expect net revenues from our Wireless and Sensing Product Group to increase significantly, driven by both our LoRa and proximity sensing businesses.

Turning to our Power and Hi-Rel Product Group. In Q4 of FY17, our Power and Hi-Rel Product Group declined 13% sequentially due to seasonality, but increased 23% over the same period last year and represented 10% of total net revenues. Demand from our enterprise computing end market increased, while demand from our high-end consumer, communications and industrial end markets decreased. Our Power and Hi-Rel business remains focused on delivering differentiated platforms for the automotive, industrial and wearable segments.

Semtech's wireless charging platforms deliver flexibility and versatility by offering a programmable, multi-mode and scalable power range from 100 milliwatts to over 40 watts. The flexibility and programmability of this platform allows customers to rapidly update their charging systems as industry standards evolve. Customer interest and design wins for our wireless charging platform remain solid.

In Q4, we announced several additions to Semtech's LinkCharge wireless charging platform. This family of wireless power products provides a range of solutions that target next-generation charging systems for consumer infrastructure and industrial applications. The family includes the LinkCharge 40 Series for 40-watt applications, the LinkCharge 20 Series for 20-watt applications and the LinkCharge CT for countertop and general industrial charging applications. This platform is compatible with all the major industry standards, ensuring that future mobile devices can potentially be charged from a single transmitter platform. The demand for wireless charging capabilities is expected to increase significantly over the next five years, as larger feature-rich and power-hungry mobile devices will need to be charged several times per day in different locations at different times without the need for cables.

Our Neo-Iso Switching Platform enjoyed another solid quarter in Q4 FY17, and we are seeing real custom interest in this platform, targeted at smart thermostats, alarm panels and factory automation systems. And Neo-Iso platforms allow customers to update and replace designs that were using older mechanical relays with smarter solid-state technologies. In Q1 of FY18, we expect our Power and High Reliability Product Group to decline slightly. In Q4, the total company distribution POS achieved a new quarterly record, increasing 6% from the prior quarter.

Distributor inventory in Q4 increased by 1 day to 71 days, up from 70 days in Q3 of FY17, and remains at the lower end of our 70 day to 80 day channel inventory model. Our distributor business remains balanced with 56% of the total POS coming from high-end consumer and enterprise computing end markets, and 44% of total POS coming from industrial and communications end markets. Moving on to new products and design wins. In Q4 of FY17, we released 27 new products and we achieved 2026 new design wins.

Now let me comment on our FY17 performance. In FY17, Semtech returned to growth with total non-GAAP net revenues increasing 12% over FY16 to approximately $550 million. In addition, our non-GAAP earnings per share increased 60% over FY16 to $1.38. Our Signal Integrity Product Group grew 15% over FY16 to achieve record revenues driven by record CDR revenues and record PMD revenues. Our Wireless and Sensing Product Group grew 15% over FY16 and also achieved record revenues driven by record LoRa and record proximity sensing revenues. Both product groups are expected to have double-digit growth and achieve record revenues again in FY18.

In FY17, our Protection Product Group grew 8%, which was the first annual increase in two years. And we expect FY18 to be another high single-digit growth year for our Protection Product Group. Finally, our Power and Hi-Rel Product Group also grew 7% versus FY16, and we expect this product group to also grow in FY18. In FY17, we continue to defocus or divest nonstrategic businesses including our Snowbush IP business and our timing synchronization business. We also executed on a number of strategic minority investments, including MultiPhy and myDevices, which help position us to drive future growth in our target market segments.

Other significant achievements in FY17 included maintaining our non-GAAP gross margins above the high-end of our 55% to 60% target range. And managing our OpEx to drive non-GAAP earnings growth at five times the rate of our non-GAAP net revenue growth. We achieved 7794 design wins, 88 new product releases and generated $118 million of cash from operations. We are pleased with our return to growth and the tremendous momentum we have from our product groups in several the industry's fastest growing and exciting end markets. Our increasingly diversified portfolio, balanced end markets and diverse customer base position Semtech very well to continue outperforming our peer group and industry in FY18.

Now, let me discuss our outlook for the first quarter of 2018. Based on the strength of recent bookings trends and our backlog entering the quarter, we are currently estimating Q1 non-GAAP net revenues to be between $142 million and $150 million. To obtain the mid-point of our non-GAAP range, or approximately $146 million, we needed net [termed] orders of approximately 34% at the beginning of Q1. We expect our Q1 non-GAAP earnings to be between $0.39 to $0.43 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Craig Ellis, B. Riley Financial.

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Craig Ellis, B. Riley & Co. - Analyst [2]

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Thanks. Wow, that sounded so official. Congratulations on the nice execution, guys, and what looks like very broad-based growth in the product portfolio [low han]. The first question is a follow-up on the increase in the intermediate term gross margin model. You mentioned that one of the factors causing the increase was the expected contribution from licensing and royalty. Can you provide more color on when you would expect those to be material, and the degree to which they contributed to what looks like a 300 basis point increase at the mid-point?

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Emeka Chukwu, Semtech Corporation - CFO [3]

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So Craig, how are you doing? This is Emeka. Thank you for the -- (multiple speakers)

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Craig Ellis, B. Riley & Co. - Analyst [4]

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Thank you, Emeka.

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Emeka Chukwu, Semtech Corporation - CFO [5]

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Yes, so if you recall during the Analyst Day that we held in June of 2016, we basically talked about the geo location revenue and its potential to help us track our gross margins up. So when you look at the gross margins, the increase in the target range, the three key drivers. The first one is the mix, as Mohan in his prepared remarks has talked about, all of the [growth engines] that we have, unfortunately for us, most of our growth engines are coming in with gross margins that are higher than our current level. So as we continue to see a ramp in those, we would expect that to drive to gross margin expansion.

The second thing that is driving the gross margin -- the increase in the target range, is just the overall business being higher, driving at much more increase in manufacturing activities and hence, higher absorption. And the third key driver, like you mentioned, is the license and royalty from LoRa. As we said during the Analyst Day back in June, we expect that the license and the royalty produced [to you] more of a two- to three-year cliff in order to get to a significant size, but we are very pleased with what we are seeing so far.

Right now, it is not contributing that much, but we do expect that in two or three years, that we should see a significant contribution for that. So the way I would expect to see us achieving this target is that in the next one to two years, driven by the higher mix of higher gross margin products and the increased absorption, I would expect that to take us to about a 61%, 62% range. And then in the next two to three years, that the licensing will take us to the high-end of the new target range.

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Craig Ellis, B. Riley & Co. - Analyst [6]

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Okay, that is really helpful. And then the follow-up question, I will flip it over to Mohan. Mohan, in talking about the product line dynamics, you talked about wireless charging. That has been a market where we have been waiting for some large players to move ahead with device and wireless charging; it looks like that may be happening. What is the sense you are getting from customers on the transmit side, and building out all the points that would assist your businesses as you look to scale on wireless charging?

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Mohan Maheswaran, Semtech Corporation - President, CEO [7]

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Well, Craig, what we see is generally a movement towards more wireless charging across the industry. You know, wearable -- increases in wearables is generally is driving it. Mobile devices, but even the kind of higher power industrial equipment and power drills and those type of things, as well as the automotive driving the need for more wireless charging functions.

Obviously, if the major mobile companies integrate wireless charging into their devices, it does help stimulate and catalyze the industry somewhat. But the beauty about our solutions and our approach is that we are not tied to one standard. We are -- we have programmability in the products, and so rapid changing of the functionality is possible. And so customers are moving with our solution, I think, can provide a pretty quick solution to customers who do come out with -- and devices with wireless charging.

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Craig Ellis, B. Riley & Co. - Analyst [8]

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And then final question, and then I will jump back in the queue. Emeka, I believe the target margin range was predicated on $180 million in sales, but that, I think, annualizes to something around $770 [million], if I got that right. It looks like what the Company is also saying with the intermediate term model and the revenue basis for that model, is that it is moving towards its $1 billion in annual sales goal. Is that the way we should read that, and what are some of the gives and takes as you look out more towards the longer-term to get to that longer-term target that you have for the Company?

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Emeka Chukwu, Semtech Corporation - CFO [9]

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Well, so I think I just took you through the gross margin expansion, which [are just leads] is going to be a key driver to achieving the operating margin target. I think on the other hand, well, you probably in terms of modeling, probably just need to look at it like what we tried to target as to see operating expenses may be growing at about half the rate of our revenue growth. So yes, as we -- as I look out and see how the -- we play out of this, I am assuming the $1 billion revenue target is definitely achievable within the next three, four, five years. And I am not sure that there is really anything else that is really going to be in terms of puts and takes. I think the two key things over there is going to be the gross margin expansion and the fact that our product expenses will be under control.

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Craig Ellis, B. Riley & Co. - Analyst [10]

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All right, thanks, guys.

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Operator [11]

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Harsh N. Kumar, Stephens Inc.

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Harsh Kumar, Stephens Inc. - Analyst [12]

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Hello, thank you. Hello, guys. Congratulations on (technical difficulty) -- excellent results and then congratulations on your new long-term target. Had a couple of questions. Emeka, one for you. Your OpEx was pretty well controlled, it looks like, it is going to be pretty well controlled, it looks like, if your guidance shakes out for the April as you have guided it. I was curious how much revenue can you do, without you having to seriously look to expand revenue from current levels? In other words, how much revenue leverage is possible at current levels of revenue -- current levels of OpEx?

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Emeka Chukwu, Semtech Corporation - CFO [13]

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No, so at this point, Harsh, the new models definitely assume that we are growing organically, all right? I think we have been talking about this, that even in the last two years, where we were going through our difficulties, one of the things that we did was we kept our eyes on the future. We continued to take care of our operating expenses, but in -- even though we were bringing them down, we were sure to ensure that we had everything, we left everything in the Company that we actually need to achieve the $1 billion of soft revenue target. I think the operating expenses we have right now is definitely the infrastructure we have. Everything that we have in the Company, it has all been sized up and poised to support a $1 billion of revenue. And like I mentioned to Craig, I would expect to see operating expenses maybe growing at about half the rate of revenue growth, and that is how we expect to get to the new model and to get to the high end of that model.

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Harsh Kumar, Stephens Inc. - Analyst [14]

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Okay, fair enough. And then maybe, Emeka, one more for you is if I look at your guidance on the top line on April versus maybe where the Street was. And maybe just even looking at how well you are growing in April, which theoretically, should be a seasonally down quarter. So how much of that is a function of the Samsung ramp? Because we have heard the Samsung phones coming out of the end of March, and you are probably going to benefit dramatically or to some degree from it. And then also, part two of the question is what else is growing in this April quarter, because in my opinion, it is somewhat [in seasonal]. And then how should we think about seasonality for your business anymore with all of these growing parts?

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Mohan Maheswaran, Semtech Corporation - President, CEO [15]

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So Harsh, I think -- first of all, let me comment on the growth in Q1. Certainly, our Signal Integrity Product Group is going to grow nicely in the quarter. We have data center growing nicely for us, that market is doing very well. I also mentioned that PON and Base Stations are recovering a little bit in Q1, so that is good. You have Protection growing in Q1, but we have been somewhat modest in our thinking about Samsung's strength and where they could do well. And I think the timing of that is going to be end of Q1, maybe more Q2, and certainly, Q3 timeframe.

So for Q1, I think it is a combination of the Signal Integrity Products, some Protection, but also our Wireless and Sensing is doing incredibly well. Obviously, LoRa is growing very nicely, and our Proximity Sensing is doing quite well across different mobile platforms, some of them -- some high profile platforms, but also in -- some customers that we have not historically penetrated with our Proximity Sensing. So in general, I would say it is pretty broad-based, our strength.

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Harsh Kumar, Stephens Inc. - Analyst [16]

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That is very helpful, Mohan. And could you address, maybe how we should look at seasonality for the next year or two years for you guys, with all of these fast-growing parts? Or is there even -- (multiple speakers)

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Mohan Maheswaran, Semtech Corporation - President, CEO [17]

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Yes, it is a little bit challenging because there -- something like LoRa, we are not quite sure about the seasonality there. But I would say for now, I think we expect the first half to be quite strong, and the second half, depending on the consumer business, particularly the Q3 timeframe. I think to be perhaps a little bit weaker, but it is early days, Harsh, and it is tough for us to really comment on the seasonality given that we have got so many kind of secular things going on.

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Harsh Kumar, Stephens Inc. - Analyst [18]

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Okay, thanks. And my last one, and then I will move back in the line. Would you, Mohan, give us some kind of an idea of Comcast implementation in the two cities, how it is going? And finally, when can we expect [flying] devices, I know there is a lot of infrastructure stuff in these -- in LoRa right now.

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Mohan Maheswaran, Semtech Corporation - President, CEO [19]

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Well, actually, the end devices now are starting to ramp up quite nicely. So we have gateways being deployed across the world, which was our strategy, and now we have end devices that are now connecting to those gateways, so it is actually a very nice path that is being followed. With Comcast, specifically, I think the progress is very good. They have two cities covered, as per the agreement. And so now they are running proof of concepts with attachments to those gateways in those cities, and proving out some verticals and the progress is good.

You know, I cannot really comment specific details about what they are doing and how they are doing it, but I can tell you that the progress is good. And as I mentioned in my script, that the anticipation is that by the end of the year, the milestone -- third milestone, which covers 10 cities will be achieved. And so that is a good positive sign, I think.

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Harsh Kumar, Stephens Inc. - Analyst [20]

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Congratulations, again.

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Mohan Maheswaran, Semtech Corporation - President, CEO [21]

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Thank you.

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Operator [22]

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Rick Schafer, Oppenheimer.

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Rick Schafer, Oppenheimer & Co. - Analyst [23]

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Thanks, and I will add my congrats on another nice result, you guys. I guess I will follow up on the Protection question for a second. I know it was up nicely again this quarter. What would growth have been without the Note7 headwind? And would that be kind of an indication of what we could look for, for expected growth rates? And maybe as part of that answer, do you see a scenario where growth actually accelerates from here with the move to smaller lithographies?

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Mohan Maheswaran, Semtech Corporation - President, CEO [24]

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So the -- in Q4, Rick, we had mentioned that -- on our previous call, that it was about a $4 million per quarter impact to us. So you could add $4 million, essentially, to our Q4 number. That is what the number would have been had the Note7 not been canceled.

Now having said that, it is difficult to say because they -- I think Samsung is still very aggressive in trying to win market share. They would maybe replace some of the Note7 phones with other phones, and so it is difficult to call. As you know, they are expecting to release some new phones this year, and we expect them to do quite well. But one of the things that we have done nicely, I think, is to diversify, so we are exposed to China's smartphones, as well as Korean smartphones, as well as other mobile devices. I think a high single-digit growth rate for this business is a good number to plan on.

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Rick Schafer, Oppenheimer & Co. - Analyst [25]

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Okay, and maybe a follow-up on LoRa, then, as well. Could you give any color on the current revenue distribution by region or by customer? Are you more concentrated in Europe? Sort of the few customers there, or -- and then maybe how does that look over the next year or two, as some of the new cities like in North America, for instance, start to ramp?

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Mohan Maheswaran, Semtech Corporation - President, CEO [26]

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Yes, so the way we look at it, Rick, is we look at infrastructure first. Once gateways are in place, it means that end modes are going to follow, once the vertical solutions are in place. And so our whole approach has been let us get as many gateways deployed, and these are public and private networks, and our new picocell gateway, and even consumer-based applications. I would say Asia is in the lead; now, that includes Korea and China and Taiwan. I would say Europe is on par, probably a little bit behind in terms of actual full deployments, but it is a little bit more fragmented with the countries -- different countries -- some countries are doing better than others.

USA, obviously, a lot depends on Comcast, but I think Comcast can catch up very quickly, and the US can catch up very quickly. Even outside Comcast, we have a lot of activity, more on the private networking side in the US, so I think the US is starting to move quite nicely for us. And then when the -- with the gateways deployed, I think it is going to be -- you are going to start hearing us -- hearing from us talking about attach rates. And attach rates to the different gateways, and what we expect from each region, so I think more to come. It is early days to do that now, but I would say probably by midyear, we will be starting to talk about that.

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Rick Schafer, Oppenheimer & Co. - Analyst [27]

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Okay, and maybe early days for this question then, too, but I mean, if you look out at a couple of years from now, when you are at $100 million in LoRa revenues. Would you hazard a guess what percent of those revenues would be license and royalty, looking out those two years from now?

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Mohan Maheswaran, Semtech Corporation - President, CEO [28]

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Yes, I think it will be quite small at that time, because it is the way to think about geo location, you need the gateways and then you need the end modes, and then the geo location service on top of that. So we had anticipated in -- we decided to get small revenues now, but within three-year timeframe, is more the timeframe where we will start to see the geo loc revenues really start to ramp up. That could change, you know, a lot of these use cases that are emerging are new markets. They really are new kind of applications that are opening up for -- using LoRa, for LPWAN kind of connectivity. And some of them are quite compelling that could generate much faster geo location revenue, but at this point, I would say it is probably closer two to three years out.

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Rick Schafer, Oppenheimer & Co. - Analyst [29]

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Okay, thanks a lot.

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Operator [30]

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Steve Smigie, Raymond James and Associates.

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Unidentified Participant, - Analyst [31]

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Thanks. This is Jim Celentano on for Steve. I just wanted to also say congratulations on the strong quarter and guide, and also a great job of diversification efforts in the handset space with the Chinese OEM. I was wondering what kind of content expansion do you expect for the Chinese handsets in 2017? In general, do you expect revenue growth to come from more of gaining traction in new OEMs, or is it more about getting more of your content on your existing customers?

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Mohan Maheswaran, Semtech Corporation - President, CEO [32]

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So initially, if I look at it at China, China is a new -- China smartphones, anyways, is really a new opportunity for us that we have been working for over the last year or so. And now, we are starting to see really good traction on. Historically, our penetration of the mobile market has been with protection devices. Now, we are starting to see revenues from both Protection and Proximity Sensing devices. So yes, our content increases; it is not a dramatic increase, but I would say it is an increase.

And then a lot depends on which phones are using the Proximity Sensing and Protection devices. Not all the phones will use Proximity Sensing. Some of the regions do not have as -- the regulations yet in place, or some customers do not ship into those regions where they have their important -- the compliance requirements. It varies, but I would say our content is increasing, and our expansion into China phones is also increasing.

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Unidentified Participant, - Analyst [33]

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Okay, perfect. And then switching over to the data center, it is a really exciting opportunity for you guys, especially if you transition over to single-lambda. As of right now, but for 100-G, specifically, how much of the total data center revenue would you say was that last year, and what are you targeting for this fiscal year as far as 100-G sales?

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Mohan Maheswaran, Semtech Corporation - President, CEO [34]

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Well, 100-G -- so first of all, let me clarify that it is not single-lambda, it is quad 25-gig at the moment, and that is what we see as being the predominant revenue driver for the next couple of years. 100-G single-lambda, we see as a FY19 kind of story, and it is ramping very fast. And this last year, it ramped up very fast, I would say now, it is about equal percentage, relative to the other bandwidths that are being shipped.

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Unidentified Participant, - Analyst [35]

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Okay, perfect. Thank you very much.

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Operator [36]

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Mitch Steves, RBC Capital Markets.

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Mitch Steves, RBC Capital Markets - Analyst [37]

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Hello, guys. Thanks for taking my question. I just want to feel around the LoRa product portfolio. I think we are trying to do some math, just trying figure out what the run rate is. Because I thought that it was supposed to be in the industrial segment, but then you are stating that the industrial segment was flattish year-over-year. I am just trying to reconcile the point to where LoRa sits in the entire -- both the end market side and the product segment side.

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Mohan Maheswaran, Semtech Corporation - President, CEO [38]

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Yes, we have our LoRa revenues in the industrial segment, Mitch. And so if industrial came down, it was probably as a result of one of the other businesses coming down, not LoRa.

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Mitch Steves, RBC Capital Markets - Analyst [39]

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Okay, and then from the product segment side, it is all the LoRa revenue is, essentially, Wireless Sensing and Timing?

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Mohan Maheswaran, Semtech Corporation - President, CEO [40]

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Yes, correct. Okay, got it. So we can basically try to back into the math on the industrial side of what the wireless side of that, so it kind of implies you are doing, maybe $10 million a quarter now on LoRa? No, LoRa revenue is closer to the $20 million to $30 million range in FY17. And we are expecting that to double to closer to somewhere between $40 million and $60 million in FY18, and then as we said, to get to $100 million in FY19 is the goal. That has always been the true goal. The revenues come from a contribution of gateway revenue, it is chips from gateway revenue, and chips from end mode devices, so the momentum is very good there.

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Mitch Steves, RBC Capital Markets - Analyst [41]

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Okay, perfect. Thank you.

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Operator [42]

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Cody Acree, Drexel Hamilton.

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Cody Acree, Drexel Hamilton - Analyst [43]

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Thanks for taking my questions, and congrats on the progress. Maybe Mohan, could you just go back and summarize quickly your thoughts on the end segment growth rates for 2018? You interspersed those, I think, in your prepared remarks, but if you could summarize those?

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Mohan Maheswaran, Semtech Corporation - President, CEO [44]

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For the product groups, I would say the Segment Integrity Product Group, we expect double-digit growth. I would say Wireless and Sensing, we expect double-digit growth; Protection will be high single-digits; and Power and Hi-Rel, low- to mid- single-digits.

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Cody Acree, Drexel Hamilton - Analyst [45]

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Thanks for that. And Emeka, you gave some delineation, some breakdown of the drivers of your gross and operating margin improvements. Can you really just talk about linearity of how you expect to get there? How -- it does not sound like the royalty revenues are going to be that big of a contributor in the near term, so just how should we think about the acceleration of those margin trends?

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Emeka Chukwu, Semtech Corporation - CFO [46]

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Right, so Cody, as you can imagine, a bulk of our gross margin and the expansion that I am talking about is going to be driven by mix, so it is always better to talk about the linearity when you are talking about mix. But I think what I tried to say in an earlier response was that I would expect that given the current mix improvements that we are expecting from our optical transceiver products and LoRa, and just the higher levels of manufacturing activity. That, that should allow us to maybe get to the 61%, 62% in the next one to two years, and then for the location revenue, the geo location, the [lasseus have] the royalty to take over the high-end in about three years time.

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Cody Acree, Drexel Hamilton - Analyst [47]

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Okay, perfect. And then lastly, I guess Mohan, could you just talk about success that you have had with diversification and protection with the Chinese OEMs? Any that you can single out, or any places that you are particular [server]?

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Mohan Maheswaran, Semtech Corporation - President, CEO [48]

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Well, we have been working with China smartphone angle and China mobile angle for, as I said, quite a while now; maybe the last couple of years. And have done a very good job, and I think had very good success, both with our Protection and our Proximity Sensing Devices. There are number of China mobile manufacturers, and we are fortunate to have relationships with a couple of them that are doing very well. I think that they will continue to do well, and our feeling is it is a nice balance to have -- obviously, we have success in Korea, we have success in China now. We have always had some success in the US market, not as much as we maybe would like, and there is an opportunity there in the future. But it does help us to have multiple customers now that are contributing to the business, versus just historically from Korea.

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Cody Acree, Drexel Hamilton - Analyst [49]

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I guess maybe another way, is there any of the leading Chinese OEMs that you are not working with?

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Mohan Maheswaran, Semtech Corporation - President, CEO [50]

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No.

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Cody Acree, Drexel Hamilton - Analyst [51]

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Okay, perfect. Thanks, guys.

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Operator [52]

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Lena Zhang, Summit Redstone.

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Lena Zhang, Summit Redstone - Analyst [53]

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Thank you, and congratulations, as well. And most of my questions have been answered, just the one on the foundry supply. Have you noticed a supply and deliver time, kind of a stretch recently?

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Mohan Maheswaran, Semtech Corporation - President, CEO [54]

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I think it depends area to area, which segment we are in, but supply is tight. It is not like there is a lot of capacity out there, so that is a healthy sign for the industry. Demand is strong, and so when demand is strong and supply is tight, one has to be very cautious about making sure you have the right balance in place and you are forecasting mix correctly and those type of things, but it does vary from segment to segment. Obviously, the segments that we are most concerned about are the high volume segments like the consumer segments. And at the moment, I think there is capacity there, but at -- if the mobile customers start to ramp up successfully in Q2 and Q3, and then cell phones successfully, then obviously, that is going to put a lot of pressure on the supply chain.

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Lena Zhang, Summit Redstone - Analyst [55]

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Okay, thank you. That is all I have.

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Operator [56]

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There are no further questions at this time. I will turn the call back over to the presenters.

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Mohan Maheswaran, Semtech Corporation - President, CEO [57]

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Thank you. In closing, FY17 was an exciting year that marked the growth and out performance that Semtech has come accustomed to in the last 10 years. We outperformed our peers in the industry while leading the industry in several of the fastest growing segments in the industry. We are off to a solid start in FY18, and are expecting several of our product groups to achieve record results in FY18 and beyond, and help drive the Company along its targeted path of getting to $1 billion in net revenues.

In addition, due to the confidence we have in our current strategy and our operational performance, we are increasing both our non-GAAP gross margin model range and a non-GAAP operating margin model range. With that, we appreciate your continued support of Semtech, and look forward to updating you all next quarter. Thank you.

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Operator [58]

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Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.