Good afternoon. My name is Mike and I will be your conference operator today. To FY19 Semtech Corporation Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I will now turn the call over to Sandy Harrison, Director of Business Finance And Investor Relations.
You may begin your conference.
Thank you, Mike, and welcome to Semtech's conference call to discuss our financial results for the second quarter of fiscal year 2019. Speakers for today's call will be Mohan Mahaswaran, Semtech's President, Chief Executive Officer and Matt Kachuku, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today, is available on our and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. A more detailed discussion of these risks and uncertainties, please review to 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 Centech undertakes no obligation to update the information from this call should fax or circumstances change.
During the call, we will refer to non GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the management team considers such non GAAP financial measures useful, along with detailed reconciliations of such non GAAP measures to the most comparable GAAP financial measures are included in today's press release. All references to financial results in Mohan's and EMECA's formal presentations on this call refer to non GAAP measures unless otherwise noted. With that, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chuka Ameka?
Thank you, Sandy. Good afternoon, everyone. For Q2 fiscal 2019, GAAP net sales were $163,200,000, a 25% sequential increase and a 7% increase from the same period a year ago and at the upper end of our guidance. In Q2, shipments into Asia represented 75% of net sales, North America represented 18% and Europe represented 6%. Total direct net sales represented approximately 32% and net sales to distribution represented approximately 68%.
Our distributable business remains very balanced with 57 percent of the total POS coming from the high end consumer and enterprise computing end markets. And 43% of total POS coming from the industrial and communications end markets. Q2 bookings remained strong, according to Q1 fiscal 2019 record bookings and resulted in a book to bill solidly above 1. 1000 bookings accounted for approximately 39 percent of shipments during the quarter. Q2 fiscal 2019 GAAP gross margin increased 6.50 basis points sequentially to 61.3% due to the nonrecurrence of the Comcast Water.
Q22 fiscal 2019 GAAP operating expense decreased 10% sequentially due to the favorable impact from the $6,600,000 in initial payment we received from the highlight settlement and lower supplemental compensation expenses partially offset by higher new product development expenses. In Q3 of fiscal 2019, we expect our GAAP operating expense to increase between 8 percent to 11% due to no benefits expected from the highlight settlement in Q3 and higher compensation and expense, driven by the TrackNet acquisition. In Q2, fiscal 2019, GAAP tax rate was 19.4%. In line with expectations. For the rest of fiscal 2019, we expect our GAAP tax rate to remain in the range of 19% to 21%.
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 not tied to current operations. Please note that as previously disclosed last quarter, we will no longer adjust net sales for the impact of the Comcast warrants for any comparable historical periods presented. Instead, we have provided a separate disclosure of the impact of the Comcast warrant on the financial statements in our Form 8 K filing our press release. Q2 fiscal 2019 non GAAP gross margin increased sequentially to 61.5%. And we expect our Q3 non GAAP gross margin to be slightly higher.
Q2 non GAAP operating expense increased 1% sequentially to $53,300,000. Our lower variable compensation expenses were offset by higher new product development spending. In Q3, we expect our non GAAP operating expense to increase slightly on higher compensation expense, driven by the TrackNet acquisition. In Q2, our non GAAP tax rate was 17.3 percent in line with expectations. For the remainder of fiscal 2019, we expect our non GAAP tax rate to be between 16% 20%.
In Q2, cash flow from operations increased 41% sequentially to $49,000,000 or 30 percent of net sales. Free cash flow was 27 percent of net sales. In line with our revised target range of 25 percent to 30 percent of net sales. Our cash and investments was $311,000,000, and our debt balance was approximately $219,000,000, resulting in a net cash position of $92,000,000. We repurchased approximately 496,000 shares or $24,400,000 of our outstanding stock during the quarter.
Our stock repurchase authorization now stands at approximately $247,000,000. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down the debt. In Q2, accounts receivable increased 20% sequentially, driven by higher net sales and the higher shipments in the back half of the quarter and represented 40 days of sales. Which is at the lower end of our target range of 40 to 45 days. Net inventory in absolute dollar terms decreased sequentially and days of inventory decreased by 15 days to 90 days, which is at the lower end of our target range of 90 to 100 days.
In Q3, we expect net inventory to increase slightly in absolute dollars, in response to a stronger demand environment. In summary, we are pleased with the strong financial performance in Q2 and the first half fiscal 2019. Our growth drivers are working. The operating model is demonstrating leverage and our cash flow generation is strong. We believe the continued momentum and the focus on execution position us to potentially deliver record financial results for fiscal year 2019.
I will now hand the call over to Mohan.
Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year twenty nineteen performance by end market and by product group and then provide our outlook for Q3 of fiscal year 2019. In Q2 of fiscal year 2019, net revenues increased over the prior quarter to $163,200,000, driven by growth from the IoT data center and mobile markets. We posted non GAAP gross margin of 61.5 percent and a record non GAAP earnings per diluted share of $0.55.
In Q2, our bookings matched the prior quarter's record levels, and we entered Q3 with record backlog. In Q2 of fiscal year 2019, net revenues from the enterprise computing end market increased over the prior quarter and represented 31 percent of total net revenues. The industrial end market increased over the prior quarter and represented 30% of net revenues. The high end consumer end market increased over the prior revenues. Approximately 20 percent of high end consumer net revenue was attributable to mobile devices, and approximately 7% was attributable to other consumer of total net revenues.
I will now discuss the performance of each of our product groups. In Q2 of fiscal year 2019, net revenues from our Signal Integrity Product Group increased 5% over the prior quarter and represented 42% of total net revenues. Continued strength in data center demand and increases from the PON base station and video markets all contributed to growth. In Q2 of fiscal year 2019, our Signal Integrity Product group benefited from the ongoing build out of cloud and hyperscale data center deployments. The high speed optical links used in these data center deployments require the increased use of CDRs contributing to high demand for our ClearEdge CDR platforms.
These CDR platforms are used in high performance optical modules. And active optical cables in applications ranging from 25 gigabit per second to 400 gigabit per second. SEMTech's ClearEdge CDR portfolio has established a strong position in the data center market for 25 gigabit per second, 50 gigabit per second, and 100 gigabit per second NRZ optical modules. And we expect this market to continue to grow nicely for the next few years. While North American data centers have historically dominated end demand, China data center demand is beginning to ramp, and we expect China will contribute meaningfully to growth in CDR demand next year.
Our Signal Integrity Product Group recently announced the Tri Edge CDR platform for PAM4 interfaces. We expect the next generation of data center build outs will be based on PAM4 modulation and Semtech Tri Edge platform is expected to provide lower power and lower cost versus competitive PAM4 solutions. Our Tri Edge platform is seeing very strong customer interest since being announced and will be demonstrated at the CIOE show in Shenzhen in September. Centex FiberEdge PMD platforms, which complement our ClearEdge CDR platforms, are also seeing strong customer interest. Due to our leadership position in CDRs.
Optical module designs utilizing Clear Edge CDRs often integrate the associated fiber edge PMD products, which in TIA's and laser drivers to provide better performance and lower costs for optical module vendors. We expect this to continue as our newest fiber edge PMD solutions are being well received by next gen PAM4 module makers. Semtech continues to maintain a leadership role in the optical module market. Driven by ongoing innovation in our ClearEdge, Tri Edge and FiberEdge platforms. In Q2 of fiscal year 2019, demand increased for our PON products as our 2.5 gig platforms benefited from network upgrades and the implementation of smart optical network units in the China market.
Recently awarded pond tenders in China are also expected to provide momentum for 2.5 gig pond demand in the second half of the year. We are also seeing the early ramp of 10 gig PON deployments, and we expect increased adoption of 10 gig PON deployments over the next several quarters. SEMTech has a full portfolio of high performance integrated 2.5 gig and 10 gig PON solutions that have solid traction in the market. Demand for our wireless base station solutions also increased in Q2. We are seeing early signs of 5G wireless deployments, primarily in Asia, and For Q3 of fiscal year 2019, we expect net revenues from our Signal Integrity Product Group to increase driven by continued data center demand.
Moving on to our protection product group. In Q2 of FY2019, net revenues from our protection product group increased 13% over the prior quarter and represented 28% of total net revenues. In Q2, our China and North American smartphone protection business increased, offsetting weaker Korean smartphone demand. We expect demand from all smartphone customers to increase in Q3. The Q2 growth in our protection business was also driven by solid demand from the industrial and automotive segments.
High speed interfaces such as USB 3.1 Type C 10 gig Ethernet and HDMI 2.0 are rapidly proliferating across all end markets and applications. Systems using these interfaces are typically implemented using industry leading geometries ranging from 20 nanometers to 10 nanometers. Necessitating the adoption of advanced protection solutions. The stronger demand from the industrial and automotive markets is a result of our ongoing diversification efforts in our protection business, and we expect this diversification to continue over the next few years. Resulting in a more balanced we expect our protection business to grow nicely, driven by growth from all end markets.
Turning to our wireless and sensing product group. In Q2 of fiscal year 2019, net revenues from our wireless and sensing product group increased 6% sequentially. And represented 30% of total net revenues. This represented a new quarterly record as both our LoRa enabled revenues and our proximity sensing revenues increased over the prior quarter and achieved new revenue records. Nora's rapid global acceptance as the best technology for low power IoT networks and the increasing number of our IoT use cases using LoRa is contributing to the record revenues and we expect this momentum to continue for some time.
Laura Alliance partners in several key markets recently announced a number of LoRa related initiatives. Some of the most significant include Alibaba and China Towers announced the nationwide IoT network in China. In which Laura will provide a key technology role. Alibaba also announced a Laura WAN collaboration with China Unicom, to standardize wireless network gateway interfaces to expand the LoRaWine ecosystem and use cases in China. 10¢ joined the LoRa Alliance and announced plans to build a LoRaWAN network in Shenzhen, along with local partners for IoT applications and end users, that included government public services.
LoWAN, a Chinese LP WAN solutions provider designed LoRa into its urban smart grid solutions, that provides real time data on energy usage in large urban areas. This same network enables users to deploy smart home solutions, including LoRa Connected Lock and alarms. Comcast announced the activation of its machine Q platform in 10 major North American cities, including the San Francisco Bay Area market. Startups and developers in these cities building enterprise grade IoT solutions can now leverage the Machine Q IoT network to connect to the cloud. Comcast also announced the collaboration with Neptune Technology, a water technology company to accelerate Smart City projects focused on Advanced Water Metering Infrastructure.
The solution combines machine fuze LoRaWAN network with Neptune's LoRa enabled water meters and sensors to boost sustainability efforts. My devices, Inc, launched its IoT in a box platform together with Sprint, providing a turnkey LoRa based IoT solution for a number of vertical markets. Curlink and Microshare unveiled the first ever seamless integration of carrier grade LoRaWAN solutions into Google Cloud's IoT architecture. Their innovative approach ensures complete security of data flowing from LoRaWAN devices to extended IoT networks. Ahoi systems announced the latest Smart Street lighting solution in India that uses LoRa to reduce Smart City operating costs and increase energy efficiency.
And PolySense announced the availability of a universal LoRa sensor platform targeted at a broad range of industrial IoT applications including smart buildings, bridges and railway structure monitoring, precision agriculture monitoring, preventative maintenance, fire detection, and many smart city applications. In addition to these announcements, there were many announcements made by global companies from a diverse range of industries and countries, including India, Thailand, Uruguay, Australia and Canada with use cases that include smart cities, smart grid, smart lighting, and smart parking applications. We continue to see many new LoRa use cases emerging, and the global excitement around LoRa continues to grow. Our pipeline of more opportunities exceeds $400,000,000, and we still anticipate that our conversion rate will exceed 50% as these opportunities transition to design wins and then revenue. Our LoRa metrics for FY2019 remain on track As a reminder, by the end of FY 2019, we anticipate there will be over 70 countries with public LoRaWAN Networks deployed.
We also anticipate capacity to support over 1,000,000,000 end nodes. We also expect that by the end of FY 2019, over $80,000,000 lower end nodes will be deployed. Representing a significant increase from approximately $50,000,000 at the end of FY 2018. Finally, we still anticipate that our LoRa enabled revenue will be in the $80,000,000 to $100,000,000 range for FY 2019. We recently announced our intent to acquire TrackNet, a provider of LoRa based end to end solution for a number of IoT applications.
We believe that this acquisition will help us to accelerate several of our strategic LoRa initiatives including our LoRa cloud microservices and LoRa tag offerings that we disclosed at our recent Analyst Day. The TrackNet acquisition is expected to close by theendofOctober2018. In Q2 of fiscal year 2019, our proximity sensing business also achieved record revenues. Our sensing platforms are winning new designs in tablets, smartphones, and wearables. Across an increasing number of geographic regions, including China as global carriers address more stringent radio energy transmission regulations.
This secular trend is expected to continue In Q3 of fiscal year 2019, we expect net revenues from our wireless and sensing product to increase as our LoRa business is expected to deliver another record quarter. Moving on to new products and we achieved 2200 and 39 design wins. Now let me discuss our outlook for the third quarter of fiscal year 2019. Based on bookings trends and our record backlog entering the quarter, we are currently estimating Q3 net revenues be between $168,000,000 $178,000,000 to attain the midpoint of our guidance range or approximately $173,000,000, we needed net terms orders of approximately 33% at the beginning of Q3. We expect our Q3 non GAAP earnings to be between $0.58 $0.64 per diluted share I will now hand
Your first question comes
and congratulations on the very strong execution in the quarter. Mohan, I wanted to start just by following up on two points you made on China. I think in talking about signal integrity to the potential for a data center ramp to help that business in 2019. And then I think in the base station commentary around the same segment, signal integrity we have potential for a 5G to start impacting sales. Can you, can you go into a little more color on exactly what you're seeing there and and the timing of the inflection that those 2 might drive?
Thank you.
Yes, Craig, so we're starting to see early revenue from both of these areas. 1 is 5G in the base station. Obviously, there's been some talk about 5G base stations and China seems to be ahead. And we're starting to see that. I think that realistically, it's going to be next year before we really see a ramp in that business, but we are seeing it.
And then the same is true of the data centers. We've seen activity from a design in standpoint, from the China data center guys. And now we're starting to see revenues. So But again, I think a large ramp will be next year when it becomes really meaningful.
And the follow-up question also on revenue would be on Laura. It seems like there's been an absolute flurry of, of new deployment activity. That we've seen in press releases and different use cases. As we stand here at midyear and as you look at the full year target, can you provide some some color on whether you think we're tracking more towards the midpoint of the, the fiscal 2019 range or more towards the lower end or the higher end of that range?
Well, I think we're tracking to the range, Craig, is what I would say. I think, it's difficult to look at it from a, you know, quarter to quarter standpoint, we see lots of activity. And the question is, how quickly those POCs transition into design wins and then revenue. But the momentum is very, very strong. It's across all regions as I mentioned.
As you point out, lots of use cases. Some of them are more, consumer ish and can ramp very quickly. Others are more industrial in nature and will take some time. So I think we're very confident about the growth and the continued goal to continue to double the revenues every year and get to a $1,000,000,000 lower revenue. If I look at most of the revenue today, it's generated from more industrial kind of applications, smart metering smart grid, smart cities, smart buildings, smart environment, smart water.
But we are seeing now we starting to see some smart home applications, smart kind of tracking and logistics application starting to emerge. And those are generating a little bit faster time to revenue. So I think we're still on track. We'll just monitor it and see
Thank you. And then the last question is for Emeka. Emeka, with regard to the OpEx guidance for the fiscal third quarter, Did you include something for TrackNet in there or does that exclude incremental expenses for TrackNet? And either way, how material could they be if the deal closed in October timeframe?
So yes, the OpEx guidance for Q3 does include some expenses for the TrackNet acquisition. Think if you look at the Eight K that we filed when we signed the agreement, even though the deal has not actually closed, We have actually brought on those employees, about 14 of those employees are actually now working for us. So we do we do know that the expenses that they bring on to us is about $500,000 to $1,000,000 per quarter.
Thank you.
Your next question comes from Harsh Kumar from Piper Jaffray.
Strong numbers. Mohan, a couple of quarters ago, you actually gave us the range for, lower run rate I was curious if you could indulge and give us that number. And also if you could tell us how much of that LoRa business today is base safe versus client. And I've got a couple of other questions.
So as I said, Hartaj, we're still on the $80,000,000 to $100,000,000 run rate. I mean, that's our range. I don't want to go into more detail than that. I think we're on track to achieve us in that somewhere in that range. Most of the revenues are end node revenues, as I mentioned, that by the end of this year, the goal is to have about 80,000,000 units deployed.
We had $50,000,000 at the end of last fiscal year. So most of the revenue is going to come from end nodes. But base stations is a significant portion as well and growing. So, but I would say most of it is end nodes.
Okay. So just to clarify, most of the growth this year will be in notes, correct?
Yes, that's correct.
Okay. And then, tracking at company, does it have any revenues associated with it? And how will you, if it does have any revenues associated with it, would it go and does really go into some of the bucket?
So, Harsh, at this point, there isn't any significant revenue associated with it. As Mohan did allude, this was this is just a very strategic acquisition that should allow us to really accelerate the solutions that we're bringing into the LoRa IO ecosystem. So if we when we start to see revenues that have been driven by the activities of the TrackNet and the resulting IP, that would all be part of the lower enabled revenue.
Got it. Okay. And then last one, then I'll get back in line. Your protection business, Ron, is up 13% year over year. That's a pretty significant bump up.
I was curious if you could, list some of the big factors that drove that I mean,
the big factor is the diversification of the business, really, both within smartphone and outside smartphone. So within smartphone, obviously our China momentum is good. And in North America, it's good. And I would say, as I mentioned on the script that, career is weak actually Samsung weakness is there. And yet we still had a very strong quarter.
So, that's good news. But the other real nice thing is that the diversification out of smartphone into the industrial and automotive business is doing very well. As we talked about during the Analyst Day, There's more higher speed interfaces going into some of those other segments now. And Semtech is doing very well in those areas. So as the more we see that, the more opportunity there is.
And I think, obviously, the higher gross margin, we get the benefit of the higher gross margin. From those segments as well. So all in all, protection is doing very well, yes.
Your next question comes from Rich Schafer from Oppenheimer.
Yes, thanks. And I'll add my congratulations guys. Nice quarter. A couple of questions. Maybe the first one's a kind of a clarification on, if you look at the 400,000,000 LoRa funnel that you've talked about, I think you've called it in the past, a 2 year revenue funnel.
What's that mix look like, hardware thinking of it in hardware versus license revenue terms? Because I know the longer term you guys have talked about that being more of a licensing model in LoRa?
Yes, the pipeline, Rick, is all hardware related. There's not much licensing or IP in that $400,000,000 pipeline. That's mostly to do with proof of concepts that are going on and customers doing, testing use cases and that type of thing. So and as I mentioned, a lot of it is coming from more industrial kind of smart metering, smart grid, smart city, smart buildings, smart environment, smart watering, those type of applications. And so as they transition into design wins, then they transition into revenue, typically take a little bit longer, but 2 years is the time frame we're seeing, from POC and from opportunity to turning into revenue.
There are some segments. I would say the more smart home related, some of the logistics, maybe some of the more safety, emergency kind of things that can transition faster into revenue. But still, I would say 18 months is probably a reasonable time frame.
And Mohan, to be clear, I think you've I think you've talked in the past about potentially doubling lower revenues again next year. So I'm thinking I'm hearing you correctly that really that whatever happens with lower growth next year, it's going to be primarily, primarily hardware driven.
Yeah, yeah, that's right. I think that's correct. Yeah. So I mean, we've got now the way to think about it is the LoRa Cloud Services some of the IP licensing and things like that will probably start to contribute towards the back end of next year and then really start to pick up after that.
Okay, thanks. And then another follow-up on the 5G, on the in the base station. I'm just curious. I think you've talked in the past a little bit about a content story there. You quantify what that looks like as we move, start deploying 5 D base station versus sort of what your content looks like today in 4G?
Yes, it's a so mostly today it's PMD. It's amplifiers, drivers, those types of things. We do believe that there will be more CDRs going into this segment. So, as with data centers, as the speeds go up, the need for signal integrity goes up. And so there'll be some applications where we believe we'll have a CDR play as well.
But it is an interesting opportunity for us. We're quite excited about it. But with the 5G story, all base station story, which is mostly driven out of China today. I think we have to wait and see how that, how the tenders play out and how the volumes ramp up next year.
Got it. And then just one last follow-up. I guess there are potentially 2 new North American flagship OLED smartphones supposedly come in this fall. Can you talk about Symtech's potential share of those in those phones and and content may be there? Thanks.
Yes. Displays is still a good space for us. I mean, I mentioned the smartphones were doing quite well in outside Korea, obviously historically, we've done very, very well in Korea. We're now starting to do very well in China and also North America, and we feel good about that. But Oled and displays has been a pretty good segment for us and our position is very strong and we hope that that will continue to be the case.
Okay, thanks.
Your next question comes from Mitch Steves from RBC Capital Markets.
Hey guys, thanks for taking my question. 2 for me. 1st is kind of actually I'm kind of talking about January. So I realize you guys have record bookings and that the January quarter is work we've been very volatile anywhere from flat sequentially to kind of down 10%. So I realize you guys can't really give us numbers, but is there any way to help in terms of relative to seasonality, how it should look?
So, Mitch, we can't really look that far ahead, but I will tell you the things that we would continue to expect to see positively, obviously, lower up, our Signal Integrity Product business typically is quite strong. The unknown really is on the more consumer side and particularly Samsung and how the smartphone manufacturers do. And that's kind of it's a little bit early to call that. So, I would say those are the kind of dynamics to look for.
Okay, got it. And then secondly on the margin front, looks like you guys are continuously taking up both the gross and operating margins going forward. So If we look out a few quarters, should we assume that the same kind of cadence continues, or is there going to be additional volatility in the next couple of quarters?
Well, so Mitch, if you look at, the key driver for our gross margin is the mix of our revenue that we have. So we continue to see LoRa doing very well, driving up industrial revenues as we continue to see the industrial and automotive revenue contribution from our protection doing very well. The our expectation is that we should continue to see flourish to slightly up, gross margin expectations on our part. And with regards to the operating margin, we, you know, as as you know, we've done a very good job of keeping our operating margin in line with how the top line is doing and we expect that to continue going forward.
Got it.
Operator?
Your next question comes from Quinn Bolton with Needham And Company.
Hey guys, congratulations on the nice results and outlook. Just wanted to come back to the pawn market, clearly been strong here in the first half of the fiscal year. Wondering if you look into the second half, do you see it sort of continuing to run about, you know, similar quarterly levels or do you anticipate some seasonal decline in that business in the second half of the fiscal year? And I guess for the year overall, is that still on track to be flat to up slightly on a year over year basis?
Yes, According, the answer is, we expect it to be slightly up for the year. And we expect the second half to be kind of similar to the first half, which was a surprise in sense of how strong it has been. So we are expecting, as I mentioned, 10 gig, to continue to accelerate and then 2.5 gig to just kind of continue the way it's been doing. The ZTE factor was a little bit of a quirk in the way that the quarter shape up, but I think in the second half, you pointed out, it's likely to be similar to the first half.
Great. And then just the data center business, it seems like at least one of your historical competitors increasingly seems to be focused on lasers and incomplete sort of, module reference designs. Wondering if you're seeing any change in the competitive landscape as you look at the clock data recovery and PMD segments of the market, whether there's been any change there and sort of how you see the competition?
Well, we see logic the same competitors. This is a space that requires a lot of kind of interfacing with the module manufacturers and the end customers. And so it's unlikely we'll see new entrants coming into the space and do well. I think that the players that are currently in it, I think they'll continue to try to figure out ways to differentiate and our game plan, as you know, is to focus very much on the analog side and to focus on bringing value, which in the form of lower power and lower cost and trying to get products to our customers that allow them to build the best modules. So we're not trying to do everything in the module.
And, we tend to like to partner with them and figure out how to get to end customers the best solution at the lowest price point and the highest performance. And that continues to be our strategy. So, we know some of our competitors have slightly different strategies, but we kind of believe our approach at the moment is doing quite well.
Great. And then the last question, if I look at the wireless and sense business that's now almost a $50,000,000 per quarter business. And I think more than half of that is probably LoRa and Proximity Sensors, but there's still probably roughly forty percent that are other products. Do you have any can you give us any general sense how the non LoRa non proximity sensor business within wireless and sensing trends over the next several quarters? Is that kind of a stable business?
Is it up? Is it down? Thanks
Yes, it's very stable, Quinn. I think, some of it is more mature products, older products. We don't expect any large shifts, maybe 1 quarter it's down. Next quarter it's kind of up. And that type of thing.
But in general, I don't expect that to be able to shift or to offset any growth the growth that we get from LoRa and Proximity Sensing.
And your next question is from the line of Cody Acree from Loop Your line is open.
Thanks for taking my question and congrats on the progress. Mohan, just on the data center side, Are you seeing a deployment activity or is it primarily upgrade driven, the strength that you've been seeing?
I would say it's both, Cody. I think as I mentioned in China, it's new kind of activity, but most of the day center activity here is just more, just more 100 gig, connectivity, more data centers also. Still demand, I think, there for more data centers. So we see more data centers. We see more 100 gig links within the data centers and all of that's driving, the need for more CDRs.
Recall from our Analyst Day, we explained that as the bandwidth increases, more of the optical connections will require CDRs and that's the one of the key factors in our growth.
But greenfield data center, I guess, so that activity, are you seeing that as as a key driver or is that more ancillary?
I would say that's also a key driver. I would say both. Yes.
Okay. And then, just on the, your comments around Laura, you've obviously talked about geolocate as a a potential driver longer term. But that seems to be something that that maybe has been deemphasized a bit. Can you just kind of speak to that?
Yes, it's not at all deemphasized. It is longer term. I would say we'll start to see I expect to start to see revenues from that maybe towards the second half of next year. One of the things that we mentioned at the Analyst Day is we really are focused on our cloud services aspect and that will include the geolocation. And so To me, that's really the strategy now is to focus on that area.
And that's one of the reasons why we did the TrackNet acquisition just to kind of help us accelerate that ability to provide our customers with, location information.
And then lastly, just, Emeka, on capital allocation, you're buying back shares. You've got a great balance sheet. So what are your thoughts on capital allocation going forward?
So Cody, like we've said, depending on situation, we're going to be out there in the market buying back our shares. And, as we did report, we'll continue to make some strategic investments in order track next up, acquisition and a few other investments in startup companies, companies that are trying to take advantage of this Finnom that we all refer to as Laura will continue to make those investments and then I just continue to pay down the debt regularly. So, There is definitely a whole lot of opportunities to use all the cash that we are generating.
And your next question comes from the line of Craig Ellis from B. Riley FBR.
Thanks for taking the follow-up. Just a clarification and sorry if I missed it, but there's been a lot of movement with respect to chip company shipments and then, adjustments around, shipment prohibitions with CTE. Can you talk about what happened with CTE in the quarter and what the expectation is for CTE in the outlook?
Craig, so in the quarter, I don't think we didn't really have a significant impact from ZTE and in the the coming quarters, we're just expecting to be back to normal run rates, nothing out of the ordinary.
Yes, for us, Craig, it was very much, balanced equation, if we couldn't ship to ZTE, when we couldn't ship to ZTE, I think because we have such a strong position Other customers just picked up the slack and we shipped more to them. And now ZTEs back, those other customers slack off and we shipped more ZTEs. So from a net standpoint, we don't really think there was any impact.
And that was our last questions.
In closing, we are pleased with our strong half performance led by the robustness and sustainability of our key growth engines, we believe our diverse product offering and diverse global customer base positions us well to continue to outperform the market and deliver what we believe will be a record financial performance for the company in FY 2019. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.
This concludes today's