Greetings. Welcome to the Semtech Corporation fiscal year 2020 second quarter conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.
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, Devin, and welcome to Semtech's conference call to discuss our financial results for the second quarter of fiscal year 'twenty. Speakers for today's call will be Mohan Mahaswarren, Semtech's President, Chief Executive Officer and Emeka Chuku, 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 fintech.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 the Safe Harbor statement included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities And Exchange Commission.
As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During the call, we will refer to non GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. Discussion of why the management team considers such non GAAP financial measures useful, along with detailed reconciliations of such non GAAP measures. To the most comparable GAAP financial measures are included in today's press release. All references to financial results in Mohan's and Emeka formal presentations on this call refer to non GAAP measures unless otherwise noted.
With that, I will turn the call over to Semtech Chief Financial Officer, Emeka Chuka. Emeka?
Thank you, Sandy. Good afternoon, everyone. For Q2 fiscal 2020, net sales increased 4% sequentially to $137,100,000, which was above the midpoint of our guidance. In Q2, shipments into Asia represented 74% of net sales. North America represented 16% and Europe represented 10%.
Total direct sales represented approximately 28% and sales to distribution represented approximately 72%. Our distribution business remains balanced. With 52% of the total POS coming from the high end consumer and enterprise computing end markets and 48% of total POS coming from the industrial like communications end markets. Bookings grew sequentially and resulted in a book to bill above 1. Total bookings accounted for approximately 41% of during the quarter.
As expected, Q2 GAAP gross margin was flat sequentially at 61.9%. Q2 fiscal 2020 GAAP tax rate was 63.4 percent and reflects a discrete $6,500,000 tax provision impact resulting from finalized or Treasury regulations related to 2017 U. S. Transition tax. We expect our GAAP tax rate for the rest of fiscal year 2020 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 and other nonrecurring charges. Q2 non GAAP gross margin was flat, suppression at 62.2% as expected. And we expect our Q3 non GAAP gross margin to decline 20 to 80 basis points due to lower absorption of manufacturing overhead we want to bring inventory down to target levels. In fiscal year 2021, we expect non GAAP gross margin to return to normal levels as overall demand strengthened, driven by our higher margin growth engines. Q2 non GAAP operating expense was $53,800,000, slightly higher than Q1 and in line with expectations.
In Q3, we expect non GAAP operating expense to be flat to down 3% sequentially, as higher new product expenses are offset by lower supplemental compensation expense. While maintaining our investments in our key growth drivers, We expect our non GAAP operating expense for fiscal year 2020 to be approximately flat or only modestly higher compared to the prior year. We expect our fiscal 2020 non GAAP tax rates to remain in the 14% to 18% range. In Q2, cash flow from operations increased and returned to more normalized levels at 24% of net sales compared to 5% of net sales in Q1. As a reminder, Q1 includes our annual disbursements for supplemental compensation.
We repurchased approximately 446,000 shares for approximately $20,000,000 during the quarter. And our stock repurchase authorization now stands at approximately $161,000,000. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down our debt. In Q2, accounts receivable decreased 12% sequentially due to improved shipment linearity and represented 42 days of sale 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 inventory to decline in both absolute dollars and days as we work to get inventory back in line with the target range. In summary, we 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 while the recent geopolitical challenges continue to contribute to near term customer uncertainty. We believe our diversified customer base and end markets, along with the secular nature of our growth engines position us well for the future growth.
I will now hand the call over to Mohan.
Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2020 performance by end market and by product group, and then provide our outlook for over the prior quarter to $137,100,000. We posted non GAAP gross margin of 62.2 percent and non GAAP earnings per diluted share of $0.38. In Q2 of fiscal year 2020, net revenues from the industrial end market increased 24% sequentially.
Led by very strong growth from 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 net revenues. Net revenues from the high end consumer market decreased 15% sequentially, driven by lower smartphone demand and represented 27 percent of total net revenues. Approximately 16% of high 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 2020, 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 pond market remains soft. In Q2 of fiscal year 2020, 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 Clear Edge CDRs used in 100 gigabit per second NRZ optical modules. We expect demand for our ClearEdge CDRs to continue to increase driven by Global Cloud And Mega Data Center Deployments.
In Q2, we were pleased with the progress of our Tri Edge PAM4 CDR platform. That we are now sampling to data center customers. We expect our first Tri Edge revenues in Q4 of this fiscal year with growth accelerating in the second half of next year. Our Tri Edge platform delivers low cost, no power, and low latency performance ideal for PAM4 based optical modules. In September, Centech will be part of the open eye MSA interop demonstration, 10 kilometer 50 gigabit per second PAM4 links.
The Open I MSA, which consists of 19 companies builds on key performance advancements of PAM4 CDRs and optics to enable lower costs and lower power PAM4 optical modules. Our FiberEdge PMV platform, which complements our Tri Edge and ClearEdge CDR platforms, also continues to gain momentum. With key data center PAM4 module customers, where we have collaborated with DSP partners targeting PAM4 optical modules. We expect to see our FiberEdge PAM4 revenues also ramp in FY21. In Q2 of fiscal year 2020, demand from the wireless base station market increased.
Semtech's market opportunity from 5G deployments is expected to triple compared to For the rest of FY 'twenty, we expect 4G and 5G deployments to increase modestly with much stronger growth from 5G platforms expected in FY 2021. In Q2 of FY20, our PON business, which is largely driven by China, remains soft due to lower China government investment in PON and the impact of the Huawei ban. We expect this weakness to continue through the second half due mostly to the Huawei ban. Over the next few years, we do expect the PON market demand to increase driven by 10 gig PON deployments. Centec remains the PON market leader, providing highly integrated solutions for 1 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 Semtech's ClearEdge, Tri Edge and FireBridge platforms. We expect this trend to continue, driven by the global expansion of cloud and hyperscale data centers. The global transition to 5G 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 AppProvision, are finally starting to see an opportunity to drive significant growth in this business.
Pro audio video industry from expensive proprietary equipment to standard IP based solutions through the adoption of software defined video over ethernet. The primary market focus has been healthcare, enterprise, industrial and entertainment. Recently, we received 1st silicon of our SD BOE 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 SDV OE for all Pro AD applications as customers realize the benefits of delivering uncompressed ultra high definition 4K TV content over a standard 10 gig ethernet network. We will update you on the progress of our Activision platform on future earnings calls.
For Q3 of FY20, 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 Huawei ban Moving on to our protection product group. In Q2 of fiscal year 'twenty, net revenues from our protection product group grew 4% over the prior 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 from our automotive business These were somewhat offset by lower Korean and China smartphone demand. Several of our newly released parts such as the R clamp 3324p deliver higher performance protection for the most advanced HDMI Ethernet and USB 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 Semtech's high performance protection products. In Q3 of fiscal year 'twenty, 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 'twenty, 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 LoRa business was offset by very weak demand Approximity Sensing products due to the Huawei ban. In Q2, our LoRa enabled business grew nicely. The momentum and interest in LoRa is very strong and we are seeing more and more IoT use cases emerge every day. LoRa is rapidly becoming acknowledged as a critical technology for low power IoT sensor networks. And we expect to see LoRa emerge as the defector standard for low power wide area networks over the next few years.
Some of the more recent noteworthy use cases include Comcast announced its partners universal parks and resource to deploy LoRaWAN Networks in its parks to increase operational efficiency in the parks. LoRa sensors will be used to monitor temperature, monitor energy consumption and track assets across the parks. Siloxet, a leading European IoT provider, has developed a LoRa smart meter and cloud platform to enable their customers to closely monitor energy usage real time. Customers using Saluxeit 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. ACCino, a European IT solutions integrator, added Laura into its smart refrigeration solution, used to track food temperature, helping customers reduce food wastage and ensuring food safety.
SkySense Turkish provider of IoT solutions is deploying 10,000 LoRa based sensors in its smart asset tracking solution at Istanbul Airport. Conserve, a leading IoT solutions provider for art and museum applications, has developed a smart conservation solution based on law up that utilizes low power sensors to provide museums with accurate, efficient, and simple art health metrics structure in India to deploy its smart agriculture solutions, enabling farmers to optimize their water usage and create smarter and more efficient farms. And LaCuna space in Europe announced that it has completed its 1st phase of testing in its mission to provide complete satellite IoT global coverage, for LoRa sensors anywhere in the world, however, remote. The Kuna's demonstration LoRa constellation will be completed by theendofthisyear. Nakuna also demonstrated a connectivity range of over three hundred miles.
These are just a handful of examples of new use cases emerging in the LoRa ecosystem. Interest in our recently announced cloud based LoRa Services, which includes our LoRa based geolocation services, has been very high as we We believe that customers will begin transitioning from testing Based on our anticipated growth in LoRa sensors, and we assumed the catch rates of sensor geolocation, asset tracking and other services We expect our LoRa cloud services to grow to $100,000,000 in recurring revenues within the next 5 years. Our LoRa 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 FY19. We expect 130 LoRa network operators by the end of fiscal year 2020.
The number of countries with LoRa networks grew to more than 82 countries By the end of FY20, we expect over 90 countries to have LoRa networks. The estimated number of LoRa gateways deployed increased to more than 350,000. These gateways will support approximately 1,500,000,000 connected end nodes. We expect the number of LoRa gateways deployed to exceed 500,000 by the end of FY20, supporting a LoRa end node capacity of over 2,000,000,000 end nodes. The cumulative number of LoRa end nodes deploy increased to 105,000,000 We now expect this number to reach $130,000,000 by the end of FY20.
The LoRa Opportunity pipeline is now over $475,000,000, with an additional $200,000,000 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 FY 2020, 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 $80,000,000 $100,000,000 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% CAGR over the next 5 years. And we continue to expect LoRa to become the defector standard for LP WAN use cases over the next few years in what we expect to be a multibillion unit industry. In Q2 of fiscal year 'twenty, demand for our proximity sensing platforms decreased as expected, driven by lower China smartphone demand due to the Huawei ban. While our Huawei smartphone business will continue to be a challenge, We believe our proximity sensing business will benefit from increasingly stringent global SAR regulations, as governments recognize the health risks associated with increasingly powerful 5G radios. Over the next few years, we expect the majority of smartphones and wearable devices to product group to increase due to stronger LoRa enabled demand.
Moving on to new products and design wins. In Q2 of fiscal year 'twenty, 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 2020. We are currently estimating Q3 net revenues to be between $135,000,000 $145,000,000. To attain the midpoint of our guidance range or approximately $140,000,000 we needed net $8.42 per diluted share.
Our Q3 guidance assumes no further direct shipments to Huawei. In this fiscal quarter.
Operator? Confirmation someone will indicate your line is in the question queue. Cody, your line is live.
Thank you very much for taking my question. Just to clarify on that last point, you're not shipping to Huawei this quarter any further this quarter. Are you zeroing out your Huawei expectations going forward? I don't and are you shipping as many other companies are in a portion of your prior revenue?
Yeah. Cody, we are shipping as Huawei requests us to ship and of course, if we're allowed to ship, The comment is that, we don't plan in our guidance to ship anything more even though we have backlog to Huawei. And that's really related to them. There's 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, a key component from another manufacturer, then they can't ship their system anyway. And so part of that is, you know, the kind of approaches assuming that they're going to have difficulty in assembling all the components they need to build their systems.
And then, just the Chinese versus the Huawei implications, how have you seen the ban or the trade conflicts impact your broader Chinese activity, particularly in the smartphone market, not necessarily porn, but just broadly, are you seeing any hesitation or are you seeing any share shifts that might give you encouragement that you could see China grow even if Huawei is not?
Yes, 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 has been was going on before the 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 Huawei ban is clearly a direct impact and that's really the major impact. Outside that, I think we still have pretty high expectations of growth in China.
Great. Thank you, guys.
Our next cap, our next question comes from the line of Tore Sandberg with Stifel. Please proceed with your question.
Yes, thank you. 1st of all, so just to close the loop on Huawei, so it's about 5% of your revenues last quarter, So roughly $7,000,000 and that's going to go away in the October quarter. Is that the math?
We've estimated about $10,000,000 impact this quarter Tom, from a direct standpoint, there may be additional indirect impact again that we're not aware of, but the direct impact for us is about $10,000,000.
Very good. That's helpful. And then as we sort of look at outside of China and Huawei. I know last quarter you talked about, you know, backlog kind of firming. You know, inventories were pretty low as you mentioned in the data center market.
As we now are here 90 days later, would you say that outside of China, the environment is still, relatively healthy?
Yeah, I think that's fair to say. I mean, I think the smartphone market is, a little bit skewed because of, Huawei's inability to ship. So we don't really know if someone else is going to pick that up or they're picking that up when we see a pick up there. So outside that though, I do think that the rest of the market's data center for sure, IoT for sure, are you know, doing reasonably okay. So it's 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 little bit about perhaps where you're seeing the geographic implementation there?
Yes, 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 break it out.
Great. Thank you very much.
Our next question comes from the line of Rich Schafer with Oppenheimer. Please proceed with your question.
Yes, thanks. Maybe my first question, Mohan, is on LoRa, just kind of going back to that. 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 can spend a second just kind of what's been the biggest surprise there versus your expectation, even 2 or 3 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, is I'm just curious what we should watch for, what kind of milestones on lower revs, as we track toward, I know you guys have talked about $500,000,000 to $1,000,000,000 in the next 3 to 5 years. That 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 stickier or just some if you could frame some of that, that'd be helpful. Thank you.
Yes. So, I think some key points is, we've been growing at 60% a 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 our revenue for lower is generated out of China. But 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 more geographically balanced, and there's a lot more different types of use cases. I think that's one thing to look out for. As I said in my remarks that, we're still anticipating 40 percent CAGR going forward for the next 5 years. You layer on top of that cloud services. It'll probably generate something like a 50 percent CAGR.
And so I think the key things to look out for are still the opportunity pipeline, the conversion rate The number of gate we deployed, which indicates really what the type of end node capacity we can support. The end node deployments themselves And then just general momentum. 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 buildings, smart home kind of use cases. That we think could be a real catalyst. And once we see that momentum go, I think it's going to be clearly obvious to everybody that Laurel will become the defector standard for LP WAN.
Obviously, we're still working hard at those use cases and still a ways to go, but we're fairly optimistic about them.
Thanks. And then just a quick follow-up, on shifting gears to base station. I think it's around sort of a mid single digit contributed to revenues. And I know you talked about that business growing modestly in the back half and I assume that's without Huawei. So is that really is that just a function of the higher content as you mentioned in your prepared remarks?
Is that share gains for you guys at the, at sort of the non Chinese wireless OEMs, like the Nokia's Ericsson Samsung's. So any color there would be great guys obviously have a great relationship with Samsung, for instance, on the handset side. So I didn't know if that was a a bad opportunity for you guys.
Yes, it's a bit of everything you mentioned. Rick, I think we are generally seeing a pickup in the demand because of 5G deployments, wouldn't say it's huge. I would say it's very modest, but it is a pickup. Obviously, Huawei is a bit of a headwind for us on that. But I think, as with smartphones, we do expect over time someone else pick up the, you know, the demand that while we can't ship.
So, you will see how that plays out, but yeah, that's 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'm clear on the Huawei effect, are you saying that there was $10,000,000 of Huawei revenue in the fiscal second quarter, but you don't expect there to be any. So that's the $10,000,000 sequential headwind.
Yeah, we've shipped, so we've shipped, some, already, Craig, but we're not expecting to ship anymore. And so the total impact is about 10,000,000 for us.
Got it. And then following up on some of the Laura questions, Mohan, so it seems as I look at the performance of the business versus targets, you're actually tracking, in network operators and countries potentially to exceed the targets that you had, set at the beginning of the year. And and yet, we did, reduce the end node target from 140,000,000 to 130,000,000, I and then you updated the revenue target. But if I look at that data, it would seem to suggest that the business is getting good traction outside China, but maybe not getting the at no deployments as fast as we had thought perhaps 3 6 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, and the proof of concepts turn into revenue. I mean, what the actual deployments And so it really is a guesstimate right now. As we look at it, at the moment, Laura, it's still a small business and it's still a sub $100,000,000 business. And so, a small change like China softness in smart metering, for example, can impact that.
But I think as the business starts to scale, and gets larger. And as I mentioned in the opportunity pipeline being more balanced, then those small changes, I think won't have such a significant impact. And And that's when we look at the opportunity pipeline being so large, if we can convert those, we're going to see the 40% or more CAGR that we're seeing.
Okay. That's helpful. And then switching over to signal integrity. So it seems like the company is pleased with the momentum it has with the clear edge parts and in the Tri Edge PAM 4 parts, you I think we're specific that we'd start to see revenues for some of those PAM4 parts in the 4th quarter, but then, really more again in the second half of calendar twenty, is the point there that you know, 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 and demand profile for your Clear Edge parts?
Yeah, I think it's more to write it to when, the market is ready for PAM4. 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 or 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 one's for Mecca. Mecca, I haven't haven't forgotten about you. The guidance, on gross margin was helpful, as it relates to the fiscal 'twenty one color ricing back towards more normal levels. The question is, you know, what is normal?
Would that be the 61% to 62% Rangers at 62% plus. And I take it that's driven by valuation, but would there be any micro services revenue included in that guidance? Thank you.
I think the the number of lovers that I'm responding to,
if you look at the last several quarters, we've been about 62% and above. So that's what I sort of consider as normal for us now. I would expect that as we go into the next fiscal year, and as we look at where we expect to get our growth from, you know, getting, growth from Laura, getting growth from a Hyperscale data center, getting growth from a proAV product, from, the industrial protection products. These are all, end markets that we know come with a much higher gross margin expectations. So, you know, that is why I do have to believe that as we get into the next fiscal year, and especially also as our demand overall strength in sand starts to come back to normal levels.
We can get back to the same levels of our manufacturing activity And so those are all the reasons why I do believe that we should get back to the normalized levels of 62% and above.
Thank you for the color.
Our next question comes from the line of Tristan Gerra with Baird. Please proceed with your question.
Hi, good afternoon. When you mentioned 5G content opportunity to triple Could you give us some color on how does that translate in dollars in terms of 5G content per base station? And also the pace of increase that you expect for next year?
Yes. Tristan, I think it's difficult to say bodies, you know, it depends on the architecture, how many front haul, backhaul, middle links there are, you know, in each, system deployment. What we are seeing obviously is that there's more demand for CDRs. And so that increase in content is obviously beneficial to us. Also, 5G architecture in general requires, more base stations.
And so we are just seeing, at least our customers are telling us that that's likely to be the case. So there'll be more, base stations, different types of base stations and, more CDRs. And so that drives the content. We're already starting to see, you know, modest pickup. As I mentioned, I think next year, again, we'll see if it out in the first half.
I think it's more likely to be a second half, but, there is definitely a pull from the market. So, I think the, the need is there. And just now a question of whether the technology is ready and whether the customers are ready to, service providers are ready 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 5G, but this time on the consumer side, does your protection business potentially benefit from the wiser 5G firms? Are there any changes that you expect in the regular environment for 5G modem power in phone that would have an impact on your content per cell phone?
Yeah, the main, shift would be on what we expect to have proximity sensing. As I mentioned in the call, that 5G radios are pretty powerful. And as you have more 5G radios and you're because of the range, you need to have an increase in power to get to more distance, as you have a higher 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, approximately sensing for SAR, functionality is fairly not so high.
I think for 5g phones, it's going to be much higher. And so that's really a good opportunity for us. In addition, protection from a, so that's for proximity sensing and from a protection standpoint, we see the same type of, improvements required, higher speed interfaces, more advanced processes, different displays, requiring protection. And it's just, a more challenging environment as everything is faster and more has more advanced lithography. So, a more advanced plays.
So again, protection and proximity sensing, we expect to do quite well going forward due to 5G also.
Great. And then last one, In terms of the growth for LoRa that you see for this year, how should we model China? I thought China would have a decline as a percentage of total lower revenue. Do you actually expect China to be flat to up year over year this year or is the new target embedding 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 anticipate it would be a much, you know, 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 opportunities being more balanced just for that reason. We just don't know where this whole tariff 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 end 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 in North America. Very good momentum in Europe. But yeah, for this year, the projection was that China would be growing faster and I think it's going to be fairly muted growth.
Okay, great. Very useful. Thank you.
Our next question comes from the line of Karl Ackerman with Cowen and Company. Please proceed with your question.
Hey, good afternoon. Anika or 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 obstacle components than peers. So What are you seeing here in terms of bookings for 100 ks, you know, for the second half of the year? And, you know, how should we think about the opportunity for your pawn business as 5G ramps later this year?
Well, Carl, I think you so separate PON from data center. So there's really 2 markets we play in PON is the one that's majority China, mostly China driven, mostly today 2.5 gig and 1 gig PON. We are seeing growth in 10 gig deployments. The challenge for us with PON is that Huawei is really been one of the key drivers of that business in China and obviously with the Huawei ban that puts some challenges, around that business. In addition to that, China has been the far, the main region for PON deployments.
There are other regions deploying, but China has been, by far, the highest volume. And so, you know, you combine slightly modest investments in reduction investments by the China government in PON, and then combine that with Huawei band, that puts, really, a headwind on the PON business. Now separate that from the data center business. The data center business, where talked about inventory builds in Q4 and Q1. We started to see that free up now in Q2, started to get more balanced and we expect rest of this year to be a little bit better for data center.
And most of those are 100 gig, 4 by 25 gig NRZ optical module deployments. And so that's where we see the benefit there on our CDRs.
Understood. For my last question, if I may, Could you elaborate on what you expect from the proximity sensing business for the back half of calendar 2019? I understand that Huawei is an overhang, but I guess I was under the impression that business outside of smartphone should grow at kind of a high teens or plus or minus clip. So if you may elaborate a bit more on what you're seeing in that market outside of Huawei Smartphone, that would be helpful. Thank you.
Yeah, the proximity sensing business is doing quite well outside China. It's also obviously Korea. 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 Korea and handful in Latin America and then China. We've done a really actually a phenomenal job of diversifying this business. It used to be all career driven. But China this year, obviously, because of Huawei, with who are the main drivers of our proximity sensing business in China have had challenges. And so now, the back half, thing, Samsung to pick up a little bit, haven't had a strong year to date.
I think there's indications that they may do better. And as I mentioned that, I think it's likely that, if Huawei can't ship phones outside China, that someone will pick up that demand, not clear who it will be, but we do expect that demand to benefit us in some shape or form in the proximity sensing world.
Thank you.
Our next question comes from the line of Harsh Kumar with Piper Jaffray.
Yeah. Hey, guys. Couple of questions. You guys called out Mohan and Emeka, you called out Laura and data center for growth. Laura historically, it's been highly China, but you saw some pretty, pretty strong growth in this July quarter you reported.
I'm curious if this growth that just came 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 based question. Are you seeing growth from data centers in US and Europe and not from China. And and further, maybe you could clarify between cloud enterprise or hyperscale.
Yes. So let's start with that first question, the last question first, Harsh. So data center is clearly being driven today mostly out of 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 data centers, but would say a mix of cloud as well, but, mostly hyperscale data centers. And then on the LoRa side, it's it is China. I would say a lot chunk of that is growth is China, but it's also rest of the world. As you know, Q1, we had a pretty weak lower 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, 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, like, some of the other companies, Mohan, that have reported, actually a lot of them already reported the June numbers and and even July, Most of them have said that China has bottomed out. Ex Huawei, of course. Would you say that you would share that settlement for your business?
Yeah, I would say that's probably true, Harsh, although Huawei is a significant influencer in the region. And so I think if you exclude them, then you have to look at the whole system around them. But I think outside that, yeah, I do think that China seems to be doing better now. As I mentioned, there are indications that, the China demand as a total is now starting to do better outside the tariff uncertainty which doesn't really impact our demands so much. I think it's just the uncertainty of it, kind of creates, you know, over shadowing, shadowing nervousness, but, I think outside that, I think China demand seems to be doing better.
Our next question comes from the line of Gary Mobley with Wells Fargo.
To start with a quick question for Emeka on the OpEx. So your Q3 OpEx guide implies a $2,000,000 year over year decrease. And just to get to the question of sustainability for that lower level, is that anything more than just lower bonus accruals or putting a cap on any sort of travel expenses, whatnot?
No. There's not that much more to it. I think as you can imagine, coming into the year, we actually have much better applications for the current year. So our bonus programs, we are very much aligned to those. But unfortunately, we're not seeing those.
And so we don't expect the programs to pay out as much as we had anticipated. You know, and overall, you know, managing operating expenses is something that we do very well. We probably still have about 20% to 25% of our operating expenses are variable. You know, so those are opportunities for us to keep things in in control. So, but there isn't anything, you know, that is extraordinary that we are doing, you know, to manage our burden responses.
Okay. Kind of a kind of an odd question. So one thing is this Huawei shipment band in the U. S. China trade issue has taught China companies is try to accelerate their and reduce their dependence on Western Chip Companies.
So as you, you know, sit here today driving 35 percent of your revenue from China, have you seen any sort of anti US sentiments as it relates to design with activity or maybe even adoption of what lower, which may be viewed as a U. S.-based technology.
Yes, actually that's a really good question. I think we have seen that, but I think that's nothing unusual. I mean, that was going on before, any tariffs situation, you know, the Chinese have been driving, you know, a whole, kind of vision of of having more component suppliers, in the, in the region. Fortunately for us, most of the stuff we do is really high end stuff. And I think, they're challenged.
I mean, there are companies that are challenged to do, you know, kind of, achieve the levels of performance we achieve. Now that said, because of some of the situations we have like the Huawei ban, it may drive the customers, the end customers to change their specifications to accommodate, you know, poor performing devices. And so, you know, we have to face be faced with that. I think that's just one of the, side 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 across both China and the rest of Asia and other regions of the world to still expand our Sam and our opportunity.
Our next question comes from the 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 2nd quarter and the guidance for continued growth into the second half of the calendar year. Do you think you're now sort of through all of the inventory correction? Or do you think even in the second half, you may still be shipping under end consumption of optical modules in the data centers?
Quinn, we think most of the inventory is now that, went through. I mean, I think, it's been two quarters now where we've seen softness in 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, yeah, in the second half, there's going to be a little bit stronger.
So I think an assumption from that is that, inventory mostly is reduced.
Okay, great. And then just a question on the smartphone business. I know historically the companies had very high share in the OLED display protection market. I think certainly that was the case with the Korean manufacturers. But if 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 she did with the Korean OLED manufacturers?
Yes, I think, so 1st of all, a lot of the Korean a lot of the China phones are still using, I think, Korean displays and we'll do so for quite some time, I think. And so, But yeah, we have a reasonable position. I wouldn't say it's as good as the career smartphone area, but obviously 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 LoRa business. You've sort of discussed that it was a little bit of a slower start this year and the new revenue target for fiscal 2020 sort of implies a low single digit to maybe a mid-twenty percent year on year increase, so below that forty percent kind of CAGR that you expect for the next 5 years. Should we think that to the extent we get into, a better economic environment 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 LoRa business is that the growth rate is going to be much closer to that 40% kind of off the fiscal 2020 base that you've just given us?
Yes. The way I would think about it, Quinn, so we have been growing at 60%, right. So, and that was our expectation coming into this year. And So, we've kind of reset that to a 40% CAGR. But as I mentioned, one of the things I've mentioned is that we are expecting a major catalyst or 2 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 set out to execute on it. We still need our customers to go through the POC process and demonstrate the value and then, indicate to us that that's something that they're going to do and it's gonna drive a lot of volume. So, for now, I think the 40% is a good number to model in.
Our next question comes from the line of Scott Searle with Roth Capital. Please proceed with your question.
Hey, good afternoon. Thanks for taking my question. Hey, quick clarification on the guidance. I just want to make sure I was clear. 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 in the last several quarters been running $10,000,000 to $14,000,000 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 a share loss or something else?
Are we 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 business? Yes. Correct. Yeah. Samsung, Samsung just hasn't been as strong for us in the first half.
I think, you know, I think, We're anticipating a little bit stronger, Q3 from them. But in the first half, you know, as as they've told us that demand hasn't been, strong as they had anticipated. And I think that's, 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 Huawei. But, yeah, I think maybe it's been because they have business in China and Asia and Huawei has had to become more aggressive in those regions, but I don't know. I I 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.
Got you. And to follow-up on a couple of earlier questions around data center, nice snapback in the 2nd quarter. Sounds like you're continuing to look for a sequential increase into the 3rd quarter. China had been expected to be a component of internal or domestic demand and consumption for new data centers being built out in Chinese 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 all being built from North America hyperscale cloud environments?
No, China is included in that. Just not Huawei. So, I think we include other China customers, yes.
Okay. And lastly, just to wrap up on LoRa. As you exit the 4th quarter more that $100,000,000 type run rate, China has been a big component of that. What is your expectation of what China is as a component of that $25,000,000 in the fourth quarter. And then just to follow-up on your earlier comment, you're expecting a big catalyst on the lower 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 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 but, you know, the other regions and Laura and those other locations, turning into revenue before we can move the shift change the shift in revenue profile geographically and it doesn't usually change that quickly. So, you know, China may go from 60% 58% or 55% or something like that until we see a big catalyst. The catalyst are many. I mean, I think there's not one.
I think there are a lot of consumer ish type, use cases, tags, and, things related to devices and, also, in 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, That's what we're referring to. And what that will do really for Laura is move it, from being kind of a industrial IoT sensor to being a true IoT for many different segments, including consumer and industrial and enterprise and that's what we're looking for, that type of catalyst.
Our next question comes from the line of Hamid Khorsand with BWS Financial. Please proceed with your question.
Hi. Just a couple of questions here on LoRa. Outside of China, are you seeing a pricing pressure that's creating this issue with revenue not growing as fast? To offset the weakness in China?
No, Hamed, we don't see any pricing pressure, really. I think it's small just conversion of POCs. You know, we are seeing momentum in other regions. It's just, you know, fast of revenue in China. China, one of the reasons why China has been more rapid, adopter of Laura and generating revenue faster is they typically have access to more system integrators, software, engineers, hardware engineers, sensors developers.
In the region and they tend to be very, very fast, you know, solving bottlenecks and providing a solution to issues that takes a it's a little bit more challenging in Europe and North America and other regions, but it's starting to get there.
And how much of a factor is the slowdown the automotive industry playing a role in your protection business?
Not really impacting our protection business at all. Amit, I think, our protection business is mostly today driven by smartphones. And then the automotive is growing quite nicely for us. So 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 ADAS and you know, new, applications emerging the vehicle that all need very high end protection because they have advanced lithographies in them.
And so our protection business is growing nicely now in that space. So, yeah, we we, 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.
Thanks for taking the follow-up question. Team, I just wanted to follow-up and see if I could ask a question about how you would look at the fiscal 4th quarter seasonality in this environment, given all of the macro cross currents. It's hard to think of any quarter's seasonality, but, to the extent that you have a view there, can at least share some of the positives and negatives that you would see from this early juncture? I'd appreciate the color. Thank you.
Yes. Tough to call, Craig, mostly because of Huawei, I would say, I think, you know, 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 their Q4 is not as as extreme downward. So that may be not as weak. I think data center will continue to be quite strong.
Obviously, we expect LoRa and IoT 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 and The Huawei ban is the one thing that obviously does impact us. We'd expect a similar type of impact in Q4, unfortunately. So, we'd have to look at that.
But, my sense is, you know, Q4 could be better than, you know, we normally would see it.
You mean, you mean just at the margin, there's a headwind or you mean there could be an incremental $10,000,000 headwind in the fiscal 4th quarter
No, I think the $10,000,000 we have is would be included 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. Would say probably it's not going to be down as much, but we'll see.
We have reached the end of our question and answer session. And I would like to turn the call back over to Mohan Mahushwan for any closing remarks.
In closing, despite the ongoing uncertainty and geopolitical headwinds that contributed to a slower first half and despite the ongoing Huawei 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 our growth engines, in the IoT, 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, and have a wonderful day.