Good afternoon. My name is Namby. I'll be your conference operator today. At this time, I would like to welcome everyone to the SimTech Corporation Quarter 1 FY18 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 Thank you. Sandy Harrison, you may begin your conference.
Thank you, operator. And welcome to Semtech's conference call to discuss our financial results for the first quarter of fiscal year 2018. Speakers for today's call will be Mohan Mahaswarren, 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. Excuse me.
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 safe harbor statement included in today's press release as well as 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 Moans and Emeka's formal presentations On this call, refer to non GAAP measures unless otherwise noted.
With that, I will turn the call over to Semtech's Chief Financial Officer, Ameka Tuku. Ameka?
Thank you, Sandy. Good afternoon, everyone. For Q1 of fiscal 2018, GAAP net sales were $143,800,000, an increase of 3% sequentially and 10% year over year. Q1 GAAP net sales included $5,300,000 expense for the Comcast wallet. Q1 GAAP gross margin decreased 60 basis points sequentially to 59 percent as the benefit of a more favorable product mix was offset by the impact of a higher sequential Comcast Warren's expense.
Q1 GAAP operating expense decreased approximately 2% sequentially due mainly to the timing of expenses. Q1 GAAP tax rate was 24.1% compared to 27.1 percent in Q4. For fiscal 2018, we expect our GAAP tax rates to be in the 22% to 26% range. Moving on to the non GAAP results, which exclude the impact of share based compensation, amortization of acquired intangibles, acquisition or disposition related other nonrecurring charges not tied to current operations. Q1 of fiscal 2018 net sales were 149 point $1,000,000, a 5% sequential increase on 14% increase year over year and represented a 6 A consecutive quarter of results are both the midpoint of our guidance.
In Q1, shipments into Asia represented 75% of total net sales. North America was 18% and Europe was 7%. The total sales to distribution represented approximately 64% and the red net sales represented approximately 36%. Q1 bookings again increased sequentially and year over year and resulted in a book to bill firmly above 1. Those bookings are accounted for approximately 41 percent of shipments during the quarter.
Q1 fiscal 2018 non GAAP gross margin was 60.9 percent, an increase of 40 basis points sequentially due to more favorable mix of products. We expect our Q2 fiscal 2018 non GAAP gross margin to be flattish to slightly higher sequentially. As a reminder, during our last call, we increased Non GAAP gross margin target range to 58% to 63% versus our prior range of 55% to 60%. We expect more of our growth to come from higher margin businesses and increased absorption from overall revenue growth and royalty and licensing revenue from LoRa should enable us to sustain this higher gross margin range. We also increased our non GAAP operating margin model to 28% to 32% accordingly.
And we expect we could begin to achieve the midpoint of this new range of 30% at a quarterly revenue run rate of $185,000,000. Q11 of fiscal 2018 non GAAP operating expense was $51,200,000, down 2% from Q4 levels due to the timing of expenses. In Q2, we expect our non GAAP operating expense to increase our likely 3% sequentially, mainly from higher variable compensation expense, driven by stronger demand. For modeling purposes, we continue to expect our non GAAP operating expenses for fiscal 2018 to be similar to fiscal 2017 and to average approximately $52,000,000 a quarter. In Q1 of fiscal 2018, our non GAAP tax rate was 20.5%.
We expect our fiscal 2018 a non GAAP tax rate to be between 19% 23% based on current assumptions regarding the regional mix of revenue. In Q1, cash flow from operations was approximately $10,000,000, as Q1 is typically a seasonally weaker quarter as we make our annual bonus payments. Cash and investments in Q1 were $282,000,000, and our debt balance at the end of Q1 was approximately $240,000,000, leaving us in a positive net cash position. In Q1, approximately 76% of our cash and investments were from the site in international accounts, and 24% was based in the U. S.
We repurchased approximately $10,000,000 or 300,000 shares of stock. Understanding stock repurchase authorization stands at approximately $52,000,000. The primary use of cash continues to be to pay down our debt make strategic investments and opportunistically repurchase our shares. In Q1 of fiscal 2018, Accounts receivable increased 9% sequentially due to higher net sales and the lower mix of shipments to distributors. Our days of sales outstanding decreased 3 days to 33 days and remains below the target range of 40 to 45 days due to better shipment linearity and the higher mix of shipments to distributors.
Net inventory in absolute dollar terms increased approximately 17% sequentially and represented 111 days of inventory above the target range of 90 to 100 days. In Q2, we expect our inventory to increase slightly in response to increasing demand. In summary, fiscal year 2018 is off to a great start for Centec. We delivered a 6th consecutive quarter of strong performance as our growth drivers and target markets are continuing to deliver solid results. Our gross margins are expanding and we are controlling our OpEx, which is delivering strong operating leverage.
All of this leads us to believe the company is poised to deliver a record financial performance in fiscal year 2018. I will now hand the call over to Mohan.
Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2018 performance by end market and by product group and then provide our outlook for Q2 of fiscal year 2018. In Q1 of fiscal year 2018, we achieved non GAAP net revenues of $149,100,000, an increase of 5% sequentially, and 14% over the same period a year ago. We posted non GAAP gross margin of 60.9% and non GAAP earnings per diluted share of $0.44.
In Q1 of fiscal year 2018, demand from the enterprise computing market increased over the prior quarter and represented 34% of total net revenues. Demand from the high end consumer market also increased from the prior quarter, and represented 29% of total net revenues. Approximately 23% of high end consumer net revenues was attributable to handheld devices and approximately 6% was attributable to other consumer systems. Demand from the industrial and communications markets declined over the prior quarter and represented 23% and 14% of total net revenues, respectively. I will now discuss the performance of each of our product groups, Beginning with our Signal Integrity Product Group.
In Q1 of fiscal year 2018, net revenues from our Signal Integrity Product Group increased 5% sequentially and represented 46% of total net revenues. Demand from the enterprise computing market increased sequentially. Our 100 gigabit per second clear edge platforms achieved a new quarterly revenue record, driven by demand from the cloud and hyperscale data center markets. Our 10 gigabit per second PON platforms also achieved a new quarterly revenue record, driven by fiber to the home and enterprise deployments, mostly in China. We expect the demand from these segments to continue to increase throughout this fiscal year.
Our Signal Integrity Product Group is a leading provider of clock data recovery circuits or CDRs and physical media devices or PMDs used in a wide range of optical modules spanning from 1 gigabit per second to 400 gigabit per second. We are benefiting from several trends led by an underlying demand for higher bandwidth. These trends are driving increased demand for our Clear Edge platforms that address the signal integrity issues associated with higher data rates. The higher demand for our CDRs along with strong demand for our PMD platforms is contributing to increased Centech content in optical modules across all of our markets. During the quarter, we announced several new high performance, low power and low cost ClearEdge platforms targeted at next generation 25 gig and 100 gig optical modules used in data center applications.
We also introduced our first 53 gigaboard PAM4 linear driver and TiH Chipset that provides a seamless interface to PAM4 optics. Tailored for 100 gig and 400 gig modules. We continue to make good progress on our single Lambda 100 gigabit second PAM4 platform. Through our partnership with MultiFire. And we believe we are well positioned in the emerging 100 gigabit per second single lander PAM4 market which is expected to gain traction and lowest power to the fastest growing segments of the enterprise computing and communications markets.
With a steady pace of new products, and a doubling of our SAM from our target markets expected over the next few years, we believe our Signal Integrity Product Group will continue to deliver double digit year on year revenue growth, which it has produced over the last 5 years. In Q2 of fiscal year 2018, we expect net revenues from our Signal Integrity Product Group to increase, led by demand from the data center and 10 gigabit PON markets. Moving on to our protection product group. In Q1 of fiscal year 2018, net revenues from our protection product group increased 2% sequentially 34% over Q1 of the prior year and represented 28% of total net revenues. Demand increased sequentially from the high end consumer and the industrial end markets.
Demand from our Korean smartphone customer increased significantly over the prior quarter driven by the ramp of new flagship smartphone models and the broader use of high end protection platforms in Q1. Our protection product group continues to benefit from several secular industry trends contributing to its growth. Use of more advanced chip lithography utilized in today's electronic systems has resulted in lower levels of on chip protection. Leading to the use of more off chip high performance protection. Additionally, mobile system manufacturers are demanding higher performance in smaller form factors, where Semtech's innovative Z platforms deliver the most compelling solutions.
Finally, in communications, industrial and automotive system, where lower performance discrete protection devices were once good enough, we are advanced protection platforms, where the low capacitance, robust transient voltage protection and high surge protection are now replacing these lower performance solutions. Our Protection Product Group is also focused on developing new products to help expand into new fast growing and emerging markets, including IoT, automotive, and data centers. During the quarter, we announced additions to our RClamp Protection Platform that can be used for protecting IoT gateways and end nodes from electrostatic discharge events. At the Automotive Ethernet Congress recently held in Munich we showcased our latest protection solutions targeting automotive systems that require reliable, robust performance with minimal maintenance. Cemtech's industry leading protection devices are able to safeguard these next generation automotive Ethernet ports from ESD threats.
Our Protection Product Group strategy are focusing on advanced lithography protection while diversifying the business is paying off, and we believe this should contribute to sustainable growth over the several years. In Q2 of fiscal year 2018, we expect our protection business to increase from the prior quarter on higher demand expected from our smartphone customers. Turning to our wireless and sensing product group. In Q1 of fiscal year 2018, net revenues from our wireless and sensing product group increased 32% sequentially, and increased 79% over Q1 of fiscal year 2017 and represented 19% of total net revenues. Q1 results represented a new quarterly revenue record for our wireless and sensing product group, led by record revenues from both our LoRa and proximity sensing platforms.
Our LoRa business achieved another revenue record and continues to exceed our expectations as the global LoRa ecosystem is transitioning from running proof of concepts and trials to deploying real IoT use cases. It has become clear that low power, long range, wide area networks are the enabler for a new generation of IoT use cases. That can be deployed quickly and inexpensively and has the potential to disrupt many existing industries. We believe that by the end of fiscal year 2018, there will be an estimated 60,000 outdoor LoRaWAN gateways installed globally. We believe that this network footprint will be able to support more than 250,000,000,000 LoRa based end nodes or sensors.
We anticipate the number of indoor, picoself and outdoor macro cell LoRaWAN gateways to continue to increase dramatically over the next few years, and enable connectivity of billions of LoRaWAN sensors within a few years. We are now seeing a steep increase in the availability of LoRaWAN sensors and end nodes being developed and announced. This is beginning to enable many new LoRa use cases. Some of the recent sensor announcements from our ecosystem and partners include Boutano 24, a Spanish company developing IO devices for energy and utility companies created a gas bottle sensor to measure the gas level within the bottle When the gas level gets low, a request for refill can be automatically triggered using LoRa. MaxTrack, a leader in vehicle tracker solutions, developed a solution that helps recover stolen vehicles and cargo in metropolitan areas of Brazil, where LoRaWAN Networks are now being deployed.
Eddie Home, an award winning manufacturer of residential water technologies, developed a LoRa based smart home water protection solution, designed to provide users 20 fourseven protection from slow leaks, burst pipes and other unforeseen circumstances. Global set demonstrated a large number of LoRa end node devices at embedded world designed for applications like smart buildings, smart agriculture, air quality, water leaks and vibration detection. These are a few of the many LoRaWAN sensors and M nodes currently under development. In addition to the increasing deployment of gateways globally and the increasing availability of LoRa sensors, we are also seeing the emergence of new exciting LoRaWAN use cases. Some of these use cases use advanced features such as GPS free geolocation, while others use the simplicity and low cost of LoRa to disrupt existing verticals.
The LoRa Alliance its global member footprint continues to grow with providers in over 50 countries having announced LoRa network trials or deployments. A notable addition to the LoRa Alliance in Q1 was Comcast, whose trials in the USA continued to progress very nicely. Comcast has been elected to the LoRa Alliance Board and will also host the next LoRa Alliance all members meeting in Philadelphia in June. We anticipate that Comcast will begin to communicate the progress of its Machine Q Laura WAN initiative at this meeting. In Q1, our proximity sensing business attempt to sense and control RF emissions.
We are seeing increasing demand for our proximity sensing platforms from smartphones and wearables as regulations against excessive radio emissions close to the human body become more stringent as the usage of high powered radios in mobile devices increases We believe that the use of Semtech's proximity sensing platforms will also increase. For Q2 of fiscal year 2018, we expect net revenues from our wireless and sensing product group to increase, driven by increased demand for our LoRa and Proximity Sensing platforms. Turning to our power product group decreased 23% sequentially and represented 7% of total net revenues. Demand across all our end markets from the prior quarter, driven mostly by seasonal trends. Our power and high rail business remains focused on delivering differentiated platforms for the automotive, industrial and wearable segments.
Semtech's wireless charging platforms deliver flexibility and versatility across numerous product segments by offering a programmable multi mode and scalable solution with power ranging from 100,000,000 watts to over 40 lots. Our link Charge family of wireless power products provides a range of solutions enabling wireless power for products used by consumers, infrastructure and industrial applications. Design win activity for wireless charging remains solid, and we expect industry adoption to increase significantly over the 12 to 18 months. Interest also remains strong for our newest NIO ISO switching platforms from customers developing self powered control systems used in IoT applications, such as smart thermostats, alarm panels and factory automation systems. Other customers are also using our Neo Weiser products replace designs that we're using older mechanical relays, and we expect this business to continue to grow as more systems continue this transition.
In Q1, our power and high rail product group released a record number of new products targeting a broad range of applications. These products included our newest family product family of load switches, as well as our link charge low power platform, used for charging multiple devices. We expect to continue to release more new power platforms in the next few quarters that is expected to drive revenue growth for this business over the next several years. In Q2 of fiscal year 2017, we expect net revenues from our power and high reliability product group to rebound nicely from the seasonally lower Q1. In Q1, the total company distribution POS was flat with the prior quarter's record performance.
Distributor inventory increased by 1 day from 69 days in Q4 to 70 days in Q1. And remains at the lower end of our targeted range of 70 to 80 days. Our distributed business remains very well balanced. With 57% 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. Moving on to new products and design wins.
In Q1 of fiscal year 2018, we released 24 new products, and we achieved 2173 new design wins. In addition, our design win dollars achieved a new quarterly record. Now let me discuss our outlook for the second quarter of fiscal year 2018. Based on current bookings trends, we are currently estimating Q2 non GAAP net revenues to be between $150,000,000 $160,000,000 to attain the midpoint of our guidance range or approximately $155,000,000, we needed net turns orders of approximately 31% at the beginning of Q2. We expect our Q2 GAAP earnings to be between and our Q2 non GAAP earnings to be between $0.43 $0.49 per diluted share.
I will now hand the call back to the operator and Sandy and Mack and I will be happy to answer any questions.
There. Your first question comes from the line of Cody Acree with Drexel Hamilton.
Congratulations on the continued progress. Mohan, maybe if you could talk a bit more about the Chinese OEM weakness of what kind of visibility do you have to that recovery? And, was it seasonality, your inventory excesses, I guess, what do you contribute that to?
Well, the only Chinese weakness we see is in the base station side mostly. I think, it just hasn't come back. It's not growing as fast as we'd like it to grow, but I don't think it's weak so much. Is it just we haven't seen any indications that it's going to grow anytime soon. But that I think is the only area in the infrastructure side that we see the weakness the pawn side, specifically the 10 gig pawner seems to be doing quite well.
I would say the lower bandwidth pawn is kind of slow, but that would be, I think, what we see. And then on the smartphone side, the China smartphone customers We're definitely weaker in Q1. We anticipate probably that we'll start to strengthen the end of Q2 and then second half probably there'll be a little bit stronger. But that's on the small fund side.
And thank you for that. Umeka, with that broad range of gross margin guidance, you've given, but obviously a lot of things trending towards the upper end of that. I guess what kind of scenario would you envision that could put you back into that lower in given what you're seeing your demand mix trends from?
Well, I think, Cody, our gross margin story just continues to mean, very simple, is mostly driven by the mix of revenues, enterprise computing our industrial and communications revenues do come with much higher gross margins than the high end consumer. So if at any time we see a much bigger mix of high end consumer revenue that could almost more to the lower end. But having said that, what we're anticipating is that the current mix of businesses that we have now and the end markets that we have right now allows us to stay at the current level of 60% to 61% gross margin, if you will, then what we expect in the next year to 18 months is that we'll start to see more revenue contribution for from the industrial and the automobile sections for our protection group of products. And that we start to see more revenue contributions for our power management from the industrial and communications in my case as well. So that actually would allow us to continue to move our gross margins forward.
We think those are the drivers that would take us about 61 to 60 2%. And like I said during the call, during my prepared remarks, when we start seeing a significant contribution from LoRa IP and the geolocation revenue. That is actually what takes us to the 62 the 63% gross margin range.
Perfect. Thank you for that. And then lastly, if you just have any comments about the expectations for seasonality for the
second half of the year?
Well, it's, it's tough to call Cody at the moment. We're anticipating a strong year. Certainly, our guidance for Q2 suggests a strong Q2 and currently our thoughts are that the second half is going to be reasonably strong as well. And as we talked about a record year, it kind of indicates that Q3 is probably going to be fairly strong and then Q4 is too far out to call, I think, but seasonally that's typically down, but it's a question of how far down, right? Thank you.
Your next question comes from the line of Harsh Kumar from Stephens Inc.
So far congratulations. Mohan, Emeka, Sandy, very good job on execution. I had a couple of questions. Emeka, I can ask you every now and then I see these payments to Comcast, I was curious, are they annual or are they goal based? Could you maybe clarify when we can them?
And also, how many cities is, is the gate or the gateways by Comcast rolled out in the U. S?
So, Harsh, yes, this is the asbestos that are tied to the warrants that we give to to Comcast, as they're getting with, trying to roll out a lot of platforms across the U. S. The expense is recognized on a quarterly basis and it's actually really driven by the amount of work that they've actually done. There are various milestones that is included in the agreement. And based on how much of the milestones they've actually achieved, then that's how we record net expenses.
So every quarter, there are 2 things that will drive the amount of the expense It is the amount of walk down and also any change in the stock price. So it's an expense that is recorded every quarter we anticipate that we're going to be doing this, all of fiscal 2018 2019. Our expectation for fiscal 2018 based on the agreement and the milestones is that we're probably going to pick up a total of about $20,000,000 of expense that related to this Comcast warrant. I think so far based on the Q1 results and what we've guided to in Q2, We've already recorded $8,000,000. The expectation is that the remaining amounts, which is about $12,000,000 is going to be, mostly backend loaded based on when we expect the milestones to be achieved.
Understood. Thank you, Emeka. And how many cities is this rolled out in yet?
So Harsh, the trial currently going on in, for the Dolphin, San Francisco, Chicago. And then, assuming those trials go well, then they will roll out into additional 10 cities and then follow on from then, 10 more and then end up with 30 cities was the commitment that they have made to us.
Understood. Mohan, if I can ask you one more, the data center piece, how large is that bucket I know you don't break it out quite like that, but I was curious, is it greater than 10%, mid teens or whatever can throw at me in terms of color? And then also, what is the growth rate that you are seeing in that bucket if you had a, if I had to make you guess that number?
Well, it's about mid teens, Harsh, you're right. We don't break it out. And we do have various contributors several of our business contributing into that business area, but the fastest growing is by far our ClearEdge CDR platforms, which are really doing very well. It's the quad CDRs, in the data center applications, and that is growing. Last year, it was over 100% growth, I think.
And this year, it's going to grow, double, very high end double digits, I think, probably in the 20% to 30% kind of growth.
Okay. Understood. And I was surprised to see the wireless charging, maybe it was down. I know it's not a big part of your business, but I was surprised to see it was down in the April quarter. Any specific reason for that, on, or was it just the way things shook out?
Yes, the power it was the whole power and high rail business. So it wasn't just the wireless charging piece of it. I think it was more seasonal, Harsha, I think some of our power business is more kind of core legacy kind of power business. So tied to the PC market and some of that stuff, the areas that are growing are the wireless charging, the near ISO, areas. And so I think, nothing to be concerned about.
My sense is that it's going to come back again in Q2.
Got it. And last one, Mohan, when I look at your company, I see several areas that are just in hyper growth such as LoRa and then maybe even the data center piece and several others that are coming back. How should I think of the correct growth rate of your company. I know that you, historically, you've said it's GDP plus something. And then I think the latest take was maybe closer to high single digits.
But when I look at these kind of growth sectors, a stable economy, what should I be thinking of as a correct growth rate, more appropriate growth rate for company?
Well, we've always said, Harsh, the plan has always been we take industry plus or minus plus 3% growth and that's kind of what we'll target. Obviously, with things going the way they are, we should achieve a record year this year and grow and outperform the industry again, which is good. Certainly, we rely on the data center, hyperscale and cloud growth, the mobile market, to continue to do well. And then, of course, the IoT space, the 3 key areas of end market growth for us, and that's what we focused on. And as long as those markets do well then we should have a very strong year.
The next question comes from the line of Mitch Steves from RBC Capital.
Hey guys, thanks for taking my question. So I wanted to kind of turn to the Signal Integrity and just talk about kind of the optical side of the business. Maybe give us an update? I know you guys said that off to about 80% of that segment. So what kind of trends are you guys seeing and how do you think it shapes out for the rest of the year?
Yes, the optical business is doing very well. Our optical business is mostly on the data center side, but we also have obviously, the 10 gig GPON, which I mentioned is doing very well as well. The base station, not so well, as I mentioned, And so I think we expect the data center side to continue to do quite well for the rest of the year. And our expectation is 10 gig PON as well is going to continue to do quite well, for the rest of the year. So we're expecting, and anticipate that the optical business to continue to have a very strong year.
Got it. And then secondly, just kind of circling back in the Lawrence and Laura. So is that $5,000,000 number essentially all Laura? And then are you guys still on track or expected to beat that $100,000,000 target you have out in 2018 or so?
Well, I'll take that question first and then Emeka can talk about the Comcast warrants. We had set up a path to achieve $100,000,000 of revenues from LoRa. Last couple of years, we've done very well. We grew our LoRa business quite nicely. And last year, we were in the $30,000,000 to $40,000,000 range.
This year, we're expecting to be in the $50,000,000 to $40,000,000 to $50,000,000 range, I think, and next year, hopefully in the $80,000,000 to $100,000,000 range, which is kind of the goal. The momentum is going very nicely. Obviously, I mentioned lots more great ways out there, lots more connectivity to those gateways. And then lots more use cases. So, it's going, I think, really better than we had anticipated.
The growth the vector at the moment. It's also very global. We have over 50 to 60 countries now rolling out LoRa Networks. And the Comcast initiative was a very important initiative, which we obviously announced last year, but it's starting to do quite well for us from the standpoint of the North America market where we do need the, connectivity. And so Comcast is a key partner for us there.
So that's why that's important. But, Matthew, you want
to Yes. So, Steve, the $5,000,000 is entirely due to the Comcast wallet, which is all for the deployment of LoRa in North America.
Your next question comes from the line of Craig Ellis from B. Riley And Company.
Thanks for taking the question and congratulations on the execution. Mohan, I wanted to follow-up on a couple of the prepared comments and just really focus on some of the longer term items. So one with respect to signal integrity, you mentioned that you have the opportunity to double your SAM over the next few years. Can you just lay out some of the stones to Sam expansion of that magnitude?
Yes, it's really driven by the use of CDRs in high speed connectivity. When you look at the 10 gig systems, there's just a lower percentage of CDRs being used. And as you go to 100 gig, the number of CDRs being used because of the signal integrity issues just increases dramatically. So signal integrity generally becomes a much bigger problem at higher bandwidth. And that's really the primary reason why the SAM grows.
In addition to the fact that the markets are growing quite nicely, And then we are also bringing out new products that are we haven't really had in some of these spaces before. So our as I mentioned, our first real play in 100 gig, 400 gig PMD products with our TiAs and drivers. These are the first PAM4 products that we have done on the PMD side. So that's also going to expand our SAM. So The combination of those three factors is really what's driving the SAM expansion.
That's helpful. And then secondly, respect to the protection business, it sounds like the large Korean customer may be taking protection to parts of the portfolio that that they hadn't at least last year. I don't know if we could go back further than that, but are you seeing that there's broader adoption with that customer And if so, what does that mean for what you'd expect to see with other customers given their leading edge process technology?
Yes. So that's exactly right, Craig. That's what's happening. And I think, quality has become a very key factor in the smartphone space, quality and robustness and making sure that phones are not returned. So obviously, Protection plays a key role in that.
And then you go to advanced lithography and they become more sensitive. And so we feel really good about where we are not only with our Korean customers, but also our China customers and other smartphone customers around the world are all starting to recognize, I think, the value of having, robust protection in their systems.
Lastly, one, perhaps for Emeka. With regards to the turns required to meet guidance, I think it was low 30s, 31%, 33%, something like that. That strikes me as a bit lower than normal, with more normalized being in the low 40s. Am I correct on that or am I reading that incorrectly?
Yes, I think you're correct that in Q1, the tons achieved was 41% and what we need to meet the midpoint guidance is 33% or so as you indicated, right? But I think that is more due to the fact that we came into the quarter with a a strong backlog. So we don't need as much terms.
Yes. 31% is the number that, of turns we need for this quarter to meet midpoint of our guidance, Greg.
Your next question comes from the line of Tristan Gerra from Baird And Company.
Given the decline in your industrial business in the quarter, which was a little bit in contrast with some peers, is it fair to in that the decline was driven by the power and high reliability product, given that industrial was up in the production group and maybe a little bit more color as to how do you expect that end market to trend, in in the next quarter and for the rest of the year for you?
Yes. So, industrial is doing well for us in general, and I think we'll continue to do quite well, mostly because of IoT, LoRa business is growing, and then some other areas. I would just I would say that in Q1, it was just overall kind of a number of different things. Our Video business was slightly down. I think General Industrial And Power And High Rail, as you rightly point out, but we are a the rest of the year to be pretty robust on the industrial side.
Great. And then obviously, very good traction in your LoRa business and certainly, the positive commentary is echoed by what we're hearing in the channel, how do you look at the initial 5G ecosystem, rising in a few years in terms of the lower dynamics, does that change anything in customer strategies, using an existing network or it doesn't matter because the power consumption is much higher. So if you could just provide some more long term color on those evolving standards.
Yes. So, we believe that they'll coexist the low power wide area network and any LTE or NB IoT or 5G kind of cellular infrastructure will coexist. And the reason is very simple. We think that there are 2 very different spaces. 1 requires very low power, very low cost kind of infrastructure and connectivity.
And the other one needs more high bandwidth. And so LoRa has a place today. And what we're finding is many IoT use cases are our new totally new use cases. They're just new applications that, you cannot use existing kind of approaches because they don't make economic sense or they just don't have the power. The low power required.
So, we're quite confident, and that's one of the reasons why if we look internationally and look at the different regions of the world that are using LoRa, and have started to adopt it. It's got some very powerful, kind of momentum. And these are with also with companies that will also roll out communications and telecommunication infrastructure. So I think the market is there, going to be big enough to accommodate multiple different approaches.
Your next question comes from the Oppenheimer.
Hi, this is Josh Buckhalter on behalf of Rick. Congrats on the results and thank you for taking my question. I just wanted to dig on the China handset commentary a little more. We've seen some other guys in the space mention a sharp snapback in the second quarter. And would you describe it as more of an inventory issue or is it end demand not picking up until the end of your second quarter?
I would say it's more that China has had a very strong ramp up in smartphones and it's now stabilizing So their share in the market, the global markets is kind of stabilizing. So they're just trying to figure out what is their real demand And so I think it's more just of a Q2, a Q2 phenomenon and probably we'll start in the second half to see China picking back up again.
Okay. Thank you. And then I wanted to dig a little on the protection business. I can understand conceptually how moving to advanced lithography fees requires more protection. But are there any metrics or on either attach rates or ASPs you can give us as we move further down process notes?
It's like similar to CDR?
Well, it's difficult because every, advanced chip is different and every system is different. But the point to make is that when you have advanced lithographies and the transistor sizes, really don't allow. And the chip doesn't really enable you to put on chip protection. You need to have it off chip. So almost every line that's coming every signal line that's coming into the advanced chips will have to be protected outside in some shape or form.
And that problem only gets worse as you go to 10 nanometer and 7 nanometer and beyond. So and if you don't protect them, then there's a good chance that your system will fail.
Thank you. That's very helpful. Congrats again.
Thank you.
No further audio questions at this time.
Okay. Any other questions in the queue operator?
There are no further audio questions at this time.
Great. Thank you. In closing, we are pleased that fiscal year 2018 is off to a strong start. We continue to deliver performance at the upper end of our guidance range driven by our strong positions in high growth markets, including cloud and hyperscale data centers, optical connectivity, mobile devices and IoT. Our increasing margins and continued spending discipline has enabled us to consistently deliver earnings growth well in excess of our revenue growth.
We believe that With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.
That does conclude today's conference call. You may now disconnect.