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Semtech Corporation (NASDAQ:SMTC)
Q3 2019 Earnings Conference Call
November 28, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q3 FY19 Semtech Corporation evening's release. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. If you'd like to withdraw your question, press the # key. Thank you.

Sandy Harrison, Director of Business Finance and Investor Relations, you may begin your conference.

Sandy Harrison -- Director of Business Finance and Investor Relations

Okay. Thank you, Jesse and welcome Semtech's conference call to discuss our financial results for the third quarter of fiscal year 2019. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today and is available on our website, semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release and in the other risk factors section in our most recent periodic reports filed with a 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 and Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted.

With that, I will turn the call over Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Thank you, Sand. Good afternoon, everyone. For Q3 fiscal 2019, net sales were at $173.5 million, a 6% sequential increase and a 15% increase from the same period a year ago. In Q3, shipments into Asia represented 77% of net sales. North America represented 16% and Europe represented 7%.

Total direct sales represented approximately 31% and sales to distribution represented approximately 69%. Our distribution business remains balanced, with 59% of the total POS coming from the high-end consumer and enterprise computing end markets and 41% of total POS coming from the industrial and communications end markets.

Q3 bookings softened from the record levels of the previous two quarters and resulted in a book to bill below 1. Sales bookings accounted for approximately 37% of shipments during the quarter. Q3 GAAP gross margin came in as expected at 61.4% and Q3 GAAP operating expense decrease 4% sequentially, mostly driven by reduction in the fair value of contingent earnout obligations.

In Q4, we expect our GAAP operating expense to increase between 7% to 10%, due to the nonrecurrence of the favorable one-time items in Q3. In Q3, GAAP interest and other expense was $31.2 million compared to $1.7 million in Q2, reflecting the impairment of the investment in Multiphy. During the quarter, due to change in market expectations and changes in the competitive landscape, we concluded that the fair value of the equity of Multiphy did not support the book value. As a result, we wrote down the entire $30 million book value of the investment.

In Q3, GAAP tax benefit was 10.6%, driven by discreet benefits from transition taxes associated with the tax reform acts. For Q4 of 2019, we expect our GAAP tax provision to return to the normalized range of 19% to 23%. For modeling purposes, we expect our fiscal year 2020 tax rate to be in the same range.

Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition of related and other non-recurrent charges not tied to current operations. Note that as previously disclosed in our first quarter, we will no longer adjust net sales for the impact of the Comcast Warrant 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 and our press release.

Q3 fiscal 2019 non-GAAP gross margin increase 20 basis points sequentially to 61.7% as expected. We expect Q4 non-GAAP gross margin to increase by 30 basis points to 62% at the midpoint of our guidance due to a more favorable product mix. In fiscal 2020, we expect our gross margin to remain stable, driven mostly by end market mix.

Q3 non-GAAP operating expense increased 2% sequentially to $54.3 million in line with expectations. In Q4, we expect our non-GAAP operating expense to decline between 2% to 6% due to lower compensation expense, especially offset by higher project spending. For modeling purposes, we expect our non-GAAP operating expenses to grow at approximately half the rate of revenue growth in fiscal year 2020.

In Q3, our non-GAAP tax rate was 16.5% in line with expectations. We expect our Q4 non-GAAP tax rate to be between 16% and 20%. We expect our fiscal year 2020 tax rate to be in the same range. In Q3, cash flow from operations increased 94% from the same to the other year ago to $52 million on 30% of net sales.

Free cash flow was 28% of net sales and in line with our upwardly revised target range of 25% to 30%. Our cash on investments was $312 million and our debt balance was approximately $216 million, resulting in a net cash position of $96 million.

We repurchased approximately $30 million of our stock during the quarter. Our stock repurchase authorization now stands at approximately $217 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down our debt.

In Q3, accounts receivable increased 7% sequentially driven by high index sales and represented 43 days of sales, which is within our budget range of 40 to 45 days. Net inventory in absolute dollar terms increased 4% sequentially and days of inventory decreased by eight days to 82 days, which is well below our target range of 90 to 100 days. In Q4, we expect net inventory to be slightly up in absolute dollars and days, as we plan for the new growth that we expect in the first half of fiscal year 2020.

In summary, despite the macro headwinds, our growth drivers remain robust and the operating model is demonstrating the leverage that is expected to drive cash flow generation to record levels in fiscal 2019. We believe our focus and execution positions us nicely to continue our record financial performance in fiscal year 2020.

I will now hand the call over to Mohan.

Mohan Maheswaran -- President and Chief Executive Officer

Thank you, Emeka and good afternoon, everyone. I will discuss our Q3 fiscal year 2019 performance by end market and by product group and then provide our outlook for Q4 of fiscal year 2019. In Q3 of fiscal year 2019, net revenues increased 6% over the prior quarter to represent a new quarterly record of $173.5 million, driven by growth from the IoT, data center, and mobile markets.

We posted non-GAAP gross margin of 61.7% and a record non-GAAP earnings per diluted share of $0.63. In Q3 of fiscal year 2019, net revenues from the industrial end market increased over the prior quarter and represented 30% of net revenues. The enterprise computing end market increased over the prior quarter and represented 30% of total net revenues. The high-end consumer end market increased over the prior quarter and represented 29% of total net revenues. Approximately 20% of high-end consumer net revenue was attributable to mobile devices and approximately 9% was attributable to other consumer systems.

The communications end market also increased over the prior quarter and represented 11% of total net revenues. I will now discuss the performance of each of our product groups. In Q3 of fiscal year 2019, net revenues from our signal integrity product group increased 2% over the prior quarter and represented 40% of total net revenues. Continued strength in data center and stronger demand from the base station market contributed to growth and a new quarterly revenue record.

Our data center business continued its strength in Q3, led by demand for our industry-leading clear edge CDR platforms for 100 Gb NRZ optical modules. These clear edge CDR platforms are used in high-performance optical modules and active optical cables from 25 Gb/second to 400 Gb/second.

This quarter, we will sample our recently announced Tri-Edge CDR platform for PAM4 interfaces. This new low-power and low-cost CDR platform is targeted at 200 Gb and 400 Gb PAM4 data center interconnects, which are expected to ramp in calendar year 2020.

Our fiber edge PMD platform, which is targeting 100 Gb, 200 Gb, and 400 Gb optical modules is also sampling and also expected to ramp in calendar year 2020. Semtech continues to benefit from its leadership position in the optical connectivity market. We expect to sustain this leadership position as our new innovative optical platforms are well positioned in the fastest growing segments of the data center market.

In Q3, our PON business declined sequentially following a strong Q2 performance. ZTE continues to recover and reestablish its position in the PON market and we expect them to perform better in calendar year 2019. In addition, our leading 10 Gb PON solutions for both the OLT and ONU are expected to grow as more PON deployments transition to higher bandwidth connectivity over the next few years.

Our PON business continues to perform better than we had anticipated this year and we still expected FY19 to be a record year for our PON business. In Q3 2019, demand for our wireless base station solutions from both 4G and 5G systems increased. We continued to see support for 4G deployments and are pleased to see the early demand for 5G solutions. We expect 5G deployments to ramp throughout calendar year 2019 with high-volume deployments taking place in calendar year 2020. Our current expectation is that 5G base station volumes will be significantly higher than 4G.

Semtech's ClearEdge, Tri-Edge, and Fiber Edge solutions are well-positioned to benefit from the 5G ramp as they offer best-in-class performance and power consumption for the rigorous demands of high-speed 5G wireless connectivity. For Q4 of fiscal year 2019, we expect net revenues from our signal integrity product group to be approximately flat.

Moving on to our protection product group. In Q3 of fiscal year 2019, net revenues from our protection product group increased 15% over the prior quarter and represented 31% of total net revenues. The strong growth in Q3 was driven by strength from the consumer and industrial segments. In Q3, demand for our protection products from our Korean, Chinese, and North American smartphone customers all increased over the prior quarter.

During the quarter, the consumer market saw noticeable growth in the proliferation of USB 3.1 Type C and HDMI 2.0 protection across multiple end applications. In addition, our broad market protection business, which includes industrial, communications, and automotive applications grew nicely and achieved a new record.

Our non-handheld protection business now represents approximately 45% of our total protection business. Semtech's advanced protection platforms address the most demanding system needs by providing robust protection of sensitive, advanced lithography devices with high-speed interfaces.

Longer-term, we expect the diversification in our protection business to continue to drive a more balanced end market mix with lower handheld revenues offset by higher industrial and communications revenues, which should result in higher gross margins for our protection product group in the future.

In Q4 of fiscal year 2019, we expect our protection business to experience a stronger than seasonal decline as our smartphone customers are all experiencing a softer demand environment. In addition, we expect several of our largest handheld customers to reduce their inventory as is customary for their year end activity.

Turning to our wireless and sensing product group -- in Q3 of fiscal year 2019, net revenues from our wireless and sensing product group increased 4% sequentially and achieved a new quarterly revenue record and represented 29% of total net revenues. Our lower enabled revenues increased over the prior quarter and once again, achieved a new quarterly record. For FY19, our lower enabled revenues are currently tracking to the lower end of our $18 million to $100 million target range, which will represent approximately 90% year on year revenue growth.

LoRa's rapid global acceptance as the best technology for low-power IoT networks and the increasing number of IoT use cases using LoRa is contributing to the record revenues. We expect this momentum to continue for the next few years as the LPWAN industry starts to transition from its embryonic state today to one of the largest segments within the IoT sector.

During Q3, we announced the beta release of our first cloud-based LoRa geolocations service. This is Semtech's first LoRa cloud microservice and will be an important test for us to demonstrate our ability to monetize LoRa microservices in the future. Our commercial cloud-based geolocation service will be launched publicly in the second half of calendar year 2019 and will be followed with other microservices offerings.

We believe our LoRa cloud geolocation service will further enhance LoRa's position in the IoT market by providing system developers the critical building blocks, tools, and services needed to develop and quickly deliver compelling and more accurate LoRa-based geolocation solutions to their end customers.

Also in Q3 of FY19, we announced a strategic partnership with Alibaba. At the recent Alibaba cloud computing conference, Alibaba announced its goal to have every enterprise adopt the LoRa technology, which should significant expand the LoRa technology footprint in the China market. Initial target use cases include smart logistics and asset tracking, air quality monitoring, public safety applications.

In conjunction with the conference, Alibaba demonstrated the extensive capabilities of LoRa technology using the industry's first LoRa airship balloon, which connected sensors anywhere from 20 meters underground to 40,000 meters above ground. We expect more LoRa-related announcements from Alibaba, Tencent, and other alliance members in the near future.

We also recently announced several real use cases and initiatives with our LoRa alliance partners. These include the following -- SK Telecom in Korea announced the availability of LifeCare, a LoRa-based bio-capsule that allows the monitoring of animal health in real time.

Sensoterra announced a LoRa-based real time soil moisture measurement system for commercial farms with the goal of reducing water usage by 30%. GreenStream, an environmental technologies firm, helping to builds after communities, used Laura to develop its autonomous flood sensor system. A partner, a technology company focused on smart water utility systems incorporated LoRa technology into Costco's distribution centers and anticipate saving Costco millions in water usage costs.

Kaifa Metering, a China-based IoT solution developer incorporated LoRa technology into its smart utility metering products, enabling the optimization of energy usage, resulting in significant cost savings. Hex Safety, a fire prevention company in Taiwan incorporated LoRa technology into its dynamic evacuation system, which helps people navigate through hazardous environments in real time.

These are just a few examples where LoRa technology has been used to deliver unique value in global use cases. We continue to see many new LoRa use cases emerging as the excitement around LoRa continues to grow. As a result, our pipeline of LoRa opportunities continues to exceed $400 million. We anticipate that our conversion rate will exceed 50% as these opportunities transition to design wins and then revenue.

We also believe we are on track to achieve or beat the key LoRa milestones we establish for FY19. These include one, the deployments of public LoRa WAN networks in 70 countries. Two, the global deployment of 200,000 gateways, which include both macro and pico-cell gateways that will provide the capacity to support over 1 billion end nodes. We now believe we will end the year with at least 220,000 gateways deployed. And three, the deployment of over 18 million LoRa end ndoes, which represents a 60% increase from approximately 50 million end nodes deployed at the end of the last fiscal year.

We are very pleased with the progress of LoRa and believe we are well on the way to establishing LoRa as the de facto standard for LPWAN connectivity.

In Q3 of fiscal year 2019, our proximity sensing business delivered near record revenues. Our proximity sensing platforms are benefiting from the increasing number of high-powered radios being integrated into handheld and wearable devices and increasing regulations on radio energy transmission. We expect our proximity sensing business to continue to grow over the next several years, driven by these two trends.

In Q4 of fiscal year 2019, we expect net sales from our wireless and sensing product group to decrease slsightly as lower seasonal demand from our proximity sensing business is expected to offset continued growth in our LoRa business. Moving on to new products and design wins, in Q3 of fiscal year 2019, we released 21 new products and achieved a record POS.

Now, let me discuss our outlook for the fourth quarter of fiscal year 2019. Based on current bookings trends, normal seasonality, along with a softer smartphone demand environment, we are currently anticipating Q4 net revenues to be between $155 million and $165 million. To attain the midpoint of our guidance range or approximately $160 million, we needed net term orders of approximately 42% at the beginning of Q4. We expect that Q4 non-GAAP earnings to be between $0.53 and $0.57 per diluted share.

I will now hand the call back to the operator and Sandy, Emeka, and I will be happy to answer any questions. Operations?

Questions and Answers:

Operator

Thank you. As a reminder, if you would like to ask a question, press * and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Craig Ellis with B. Riley FBR. Your line is open.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the question and congratulations on the execution in a pretty dynamic environment out there. Mohan, I wanted to follow-up on some of the lower commentary. It's nice to see a lot of the metrics are on track for this year. With regard to the funnel opportunity at $400 million, given what we're seeing on the macro, I'm wondering if you could help us understand how some of the dynamics are playing out with the funnel.

Can you see any change with pacing with opportunities coming into the funnel? It seems like the conversion rate is still about as you'd expect at about 50%. Is that so? As you see, some of those funnel opportunities move into conversion. Can you help us understand what some of the end point size ranges are, more classic analog or are these turning into high-runner opportunities?

Mohan Maheswaran -- President and Chief Executive Officer

Craig, first I would say we haven't seen any real change. LoRa and LPWAN is relatively new. So, there's a lot of new use cases and new applications and a lot of them are use cases that result in cost savings or efficiency improvements or optimization enhancements. My sense is that regardless of the macro environment, the adoption of LoRa will continue to grow nicely.

Having said that, I think there are definitely two camps. There are the camps of the industrial applications, like metering, environmental, and agriculture that typically do take a longer time from opportunity to generating revenue. The nice thing about LoRa today is we are starting to see use cases such as smart home, tags, asset tracking, security that are more not consumer but they're more consumer-ish in the sense that they can ramp to volume quickly and generate volume quickly. These are fairly new use cases and new applications of technology. I wouldn't anticipate any loss of momentum given the current environment.

Craig Ellis -- B. Riley FBR -- Analyst

That's really helpful. Emeka, with regard to the gross margin outlook for the fiscal fourth quarter, very strong. Are there any special one-time items in there? If it's just mix, what specifically has happened on inter or intra-segment mix that's giving you some nice uplift in the quarter.

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Craig, it's essential what I said in my prepared remarks. It is the mix. If you look at the fourth quarter, we have a lower mix of handheld revenue. We go through the future years, we expect the continued growth from LoRa. The end market mix, when you look at it as far as where growth is supposed to come from the higher gross margin business we have.

Operator

Your next question comes from Harsh Kumar with Piper Jaffray. Your line is open.

Harsh Kumar -- Piper Jaffray -- Managing Director

Hey, guys. Congratulations. Good execution in a tough environment. Mohan, I think a quarter ago on the last call you talked about China data center opportunity. I'm curious how that's developing with all that's going on politically.

Mohan Maheswaran -- President and Chief Executive Officer

China continues to be a good opportunity for us. We look fro ways to partner and design our products. As you know, our products are high-end, high-performance analog products. They're not easy to copy or replicate. We've had Chinese competitors trying to do the same thing for all of our product lines. As long as the market keeps moving, I think we'll be fine. The question becomes how important are we to those customers.

I think in China, on the data center side, the midsize data centers, not so much the hyperscale data centers like Google, Amazon, and Facebook, but the midsize data centers, Alibaba, Tencent, Baidu, I think our products are a really good fit and timely. We have really good products that are available to them. My sense is it will continue to do quite nicely over the next few years.

Harsh Kumar -- Piper Jaffray -- Managing Director

You mentioned LoRa did record in October. I'm curious how your CDR products are faring from October to the January timeframe. Is that an area you're expecting to see growth overall?

Mohan Maheswaran -- President and Chief Executive Officer

We're coming off a record quarter, Harsh. Q4, we're expecting it to be a similar quarter. Our CDR products are doing very well, I would say, the more higher bandwidth products. One of the nice things as we see base stations now are probably going to deploy some of the interfaces where we require CDR functionality.

Clearly, the higher bandwidth connectivity within the data center, more of those modules use CDR. So, our CDR business continues to do nicely. There are some clear advantages that we have with our technology in our view. Both our ClearEdge and Tri-Edge families, which we're sampling now the PAM4 products, we believe will be very successful.

Harsh Kumar -- Piper Jaffray -- Managing Director

Thanks, guys.

Operator

Your next question comes from Mitch Steves with RBC Capital Markets. Your line is open.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, guys. I realize you guys can't give specific guidance, but when I look at 2020, is growth rate going to be similar to what we saw in '19 or should we take out expectations given that the first half [inaudible] of consumer softening.

Mohan Maheswaran -- President and Chief Executive Officer

That's a question of tough months at this point in time because we haven't gotten any visibility into the next four quarters beyond Q4. We'll say that we would expect LoRa, obviously, to continue to do very well and grow at very good rates. As Emeka mentioned, our optical business, we would expect that to grow very nicely. I think PON, we had a record year this year. Given some of the dynamics there, ZTE is going to be stronger and 10 Gb ramping up, there's no reason our PON business couldn't have a record again.

Base station has been relatively weak this year and we're starting to see a little pickup there. The unknown is really smartphones, the mobility sector and how that's going to play out. This year has not been a good year. As I mentioned, with all regions of the world, smartphones from all regions being relatively weak, it's difficult to call what next year is going to be, I would suggest it's going to be, at best, flat from this year. That's the challenge. If you factor that in, Semtech, we've got so many other growth drivers that we should see a good growth year.

Mitch Steves -- RBC Capital Markets -- Analyst

Then secondly on the LoRa business, this coming year FY20 being similar growth rates since you guys are expecting to grow 90% this year, should we expect that to grow at 90% next year as well or has anything changed?

Mohan Maheswaran -- President and Chief Executive Officer

Nothing has changed. My expectation is it's going to grow very fast and very well. We have opportunities. We have to convert the opportunities into revenues. I'll give probably guidance for FY20 next quarter and give you an idea of where we think we'll end up. We've got so many use cases that can move the needle quickly but some of them are more industrial in nature and some are more consumerish.

The key thing for us with our LoRa business is continue to grow the deployments of gateways, deployments of end nodes, number of people covered and countries covered, and continued to have the LoRa lines drive the LoRa technology across all use cases in all these countries. The revenue is just a result of all that activity, which is all positive at the moment.

Operator

Your next question comes from Cody Acree of Loop Capital. Your line is open.

Cody Acree -- Loop Capital Markets -- Managing Director

Thanks for taking my questions. Mohan, if we could go back to your comments about broader demand weakness. It sounds like that has been relegated just to wireless. Are you seeing any pressures in your other segments, whether they're tariff-related? How are you factoring that into your thinking?

Mohan Maheswaran -- President and Chief Executive Officer

I would say it's smartphones, for sure. The broader market, when you have parts of the legacy business and our mature products being a little bit softer, that tells me there's broad market weakness. In parallel with that, we have areas of strength. That's how I would look at it.

From a tariff standpoint, I don't think there's any real impact to us. There's a lot of uncertainty, customers aren't sure of things. Those uncertainties are there in any type of uncertain environment, but in terms of a direct impact at this point, I don't think I can point to anything specifically impacting our business. That can change, but at this point in time, we're probably in a group of peers in the high-performance analog space that have limited impact.

Cody Acree -- Loop Capital Markets -- Managing Director

In your discussions with customers, are you seeing any change in their buying patterns, whether it be distributors or direct players that are pulling in or is business continuing as normal given the uncertainties?

Mohan Maheswaran -- President and Chief Executive Officer

At this point in time, I couldn't connect any behavior change due to tariffs. If there is behavioral change, it's because of uncertainty in the demand environment, Christmas coming up, Chinese New Year coming up, end of year inventory, smartphones across the board are weak. I don't think that's really related to tariffs or anything like that. I couldn't point to any type of behavioral change due to tariffs at this point.

Cody Acree -- Loop Capital Markets -- Managing Director

Very good. Thank you.

Operator

Your next question comes from Stan Gara with Baird. Your line is open.

Stan Gara -- Robert W. Baird -- Analyst

Quick follow-up question -- you talked about a little bit of softness in some of your legacy mature products. Any color you can provide on the composition of those products and exposure as a percent of total revenue?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

It's relatively small on the legacy side. I would say probably in the order of probably 6% down on the legacy side.

Trista Gerra -- Robert W. Baird -- Analyst

Is that 5% of total revenue or is that the decline you're seeing year over year?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

From an annual standpoint, our legacy business is probably down about 18% this year. It's about 9% of total revenues.

Tristan Gerra -- Robert W. Baird -- Analyst

Great. That's very useful color. On the base station side -- sorry I missed the first few minutes of the call -- are you able to tell us the year over year growth you're seeing and whether you expect an acceleration of that growth?

Mohan Maheswaran -- President and Chief Executive Officer

So, base station for the year will be down from last year. That's what we had anticipated. Actually, we had projected base station would be down about 5% and that's where we're expecting the year to end. Next year, we're expecting to see a pick up. As I mentioned, we're driven by 5G but also seeing 4G starting to pick up a little bit. We'll get a little bit of visibility in Q4 and in the first half of FY20, we should start to see that pick up momentum.

Tristan Gerra -- Robert W. Baird -- Analyst

Last question -- was base station down year over year in the just reported quarter as well?

Mohan Maheswaran -- President and Chief Executive Officer

No, base station was up year over year.

Operator

Your next question is from Hamed Khorsand with BWS Financial. Your line is open.

Hamed Khorsand -- BWS Financial -- Analyst

You said LoRa is tracking to the lower end of your $80 million to $100 million expectation. Is that driven by a customer or service provider that didn't match up your expectations?

Mohan Maheswaran -- President and Chief Executive Officer

I would say it's more the transition of the opportunities to revenue. We have our opportunity pipeline converts figuring out and forecasting how that converts to revenue is difficult. If you go back three years ago, I projected the $80 million to $100 million three years ago and now we're here, to get to $80 million, I'm very pleased we're at the lower end here. That's with 90% growth from last year. I think it's phenomenal growth. I don't think you should get hung up on the $80 million to $100 million. You should focus on the momentum we have next year and beyond.

Hamed Khorsand -- BWS Financial -- Analyst

Given that you're suggesting gateways are still growing at a pretty nice clip, are you pretty much reliant on service providers to pus the end notes higher? Is that what you're expecting in calendar 19?

Mohan Maheswaran -- President and Chief Executive Officer

LoRa doesn't rely only on service operators. Gateways could be private networks, enterprise networks in addition to the global operators. Anyone who builds up a network and connects end nodes to those gateways would drive demand for us. I think it's a combination. We know a fairly sizable deployment that's going on in Europe now. I wouldn't call it an operator. It's more of an enterprise play.

Operator

Your next question comes from Scott Searle with ROTH Capital. Your line is open.

Scott Searle -- ROTH Capital Partners -- Managing Director

I just wanted to clarify a couple of things and had some follow-ups. I thought you indicated 45% of the protection mix was related to non-mobile, industrial, auto, etc. Is that correct? In terms of your comments and outlook for fiscal 20, it sounds like modest expectations on the smartphone front. Is that purely for protection or are you throwing proximity into that mix?

Mohan Maheswaran -- President and Chief Executive Officer

Yeah. Our smartphone business consists of protection and proximity sensing. If you combine the two, it's about 21% of our total revenues. Both of them are impacted by the softness in global smartphone sales. Within protection, our protection business, handheld, which is mostly smartphone, is about 55% of the business and 45% is non-handheld.

So, a significant impact on the protection business due to smartphone. The non-handheld piece, especially the ITA piece, which is really industrial, telecom, automotive is growing quite nicely. As I mentioned, it had a record quarter, would grow 20% annually. It's the reason the gross margins are also expanding. That is the summary, Scott.

Scott Searle -- ROTH Capital Partners -- Managing Director

Just to revisit LoRa, you had some comments related to geographic issues looking forward to calendar 19, really focused on better geographic coverage. I was wondering if you could provide a little bit of color of what the geographic mix looks like today. I know China has been a big component. From a geographic standpoint in 2019, what is the most important area we need more coverage? Is it North America/US or is it Europe. What's going to be most important in terms of driving that growth?

Mohan Maheswaran -- President and Chief Executive Officer

There are really two aspects to this. one is what drives the revenue. I think we have enough coverage now, we have enough networks, enough gateways out there to generate enough use cases and drive end sensor connectivity to drive the revenue profile. The question is what drives the billion-dollar plan.

That requires us to continue to have network deployment, both public and private in all the big regions of the world. China is doing very well, North America is starting to catch up, Europe has been doing well, but it's fragmented, some countries we have to penetrate. Then we're starting to see now for the first time other regions like India, South America, are starting to get really knowledgeable on LoRa and deploy real use cases.

That's one of the most important things for us to monitor over the next 12 months is how much traction we're getting in other regions of the world like South America and India. From a revenue standpoint, I think the momentum is already there. I don't think we need to focus on countries. I think 70 countries now are close to 70 countries. To me, I think we have the momentum there. Now, it's a question of getting them connected.

Operator

Your next question comes from Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton -- Needham & Company -- Managing Director

Thanks for taking my question. Mohan, I just wanted to come back to the LoRa business. It sounds like the pipeline continues to build. If anything, it sounds like your conversion rate, you expect it to be above 50%. So, both of those moving in the right direction. Should we be thinking about a roughly two-year conversion period for that pipeline into revenue or is that where you see a bigger standard deviation or greater volatility in terms of the timing of where that pipeline converts. Then I've got a follow-up.

Mohan Maheswaran -- President and Chief Executive Officer

I think two years is about the right timeline. We're just using data. We'll look at the data and that's what we see. There are some use cases, in my opinion, that can covert faster, 12 to 18 months, and there are others that will take 24-36 months. The more industrial use cases take a little bit longer.

The more consumerish, industrial but high-volume tend to be faster. We are going to see, as I mentioned, I think, the beginnings of this year, starting with the CES show, starting to see use cases related to the home and high-volume tags. That's going to happen in this calendar year. That could drive the acceleration of the time to revenue, but we have to prove that.

Quinn Bolton -- Needham & Company -- Managing Director

The second question -- with you guys writing down the book value of Multiphy, is that partnership effectively now dead or if not, can you give us an update on your efforts in the data center market to partner up with the PAM DSP providers for your fiber edge family of products? Might you consider partnering with other DSP providers? Thanks.

Mohan Maheswaran -- President and Chief Executive Officer

The answer to that question is we will partner with others and we are partnering with other DSP providers. The relationship has now gone in a different path. Multiphy is an independent company and driving its own strategy. We are an equity owner in the company.

From our standpoint, the reason why we started not to continue with the investment was we felt the architectural solution we have is better and more suited for the next three to five years in terms of what the 100 Gb, 200 Gb, and 400 Gb solutions are going to need in the market within the data center. We don't really have any development plans with Multiphy at this point in time, other than they would like to use our components on their reference design, we'd be happy to help them.

Operator

Your next question comes from Harsh Kumar with Piper Jaffray. Your line is open.

Harsh Kumar -- Piper Jaffray -- Managing Director

Hey, Mohan. I was hoping you can help us out here. I went back and looked at the April seasonality given your comments about uptick in the first half. Each of the last two years, there's one other segment that spikes up, but there wasn't a correlation from year to year. I'm curious based on what you see today, which of the areas are you most optimistic about, not the January quarter, but just the first half, where you might be more excited than other areas?

Mohan Maheswaran -- President and Chief Executive Officer

I think each of the product lines. The signal integrity product group for us, we are excited to see the reemergence of base station and some of the 5G momentum there. That's good. That could be a good driver for us. The PON business, obviously, I mentioned 10 Gb PON deployments and ZTE, who had a very unusual year this year coming back is going to provide a little bit more momentum.

So, in general, I would say signal integrity continues to be one area. Then of course LoRa is obviously very exciting for us regardless of the timeline you choose, just because of the momentum and things that are going on there. Those are the key ones.

Obviously, the smartphone area is tricky to call, as I mentioned. I don't think we are really that concerned about it, to be honest with you. I think it's a question of if that doesn't materialize and come back and we get the other growth engines, what is that going to do for our margins. That's the focus we have at the moment just because there are so many unknowns around smartphone business, I think.

Operator

There are no further questions at this time.

Mohan Maheswaran -- President and Chief Executive Officer

In closing, we are very pleased with the record Q3 performance led by growth from the IoT, data center, and mobile markets, record revenue, record operating income, record earnings, and record POS performance, along with our strong, strategic positions in the IoT, data center, and mobile segments demonstrate that Semtech is uniquely positioned to outperform the market in FY19 and in FY20.

In addition, LoRa's global adoption and momentum uniquely position Semtech in the overall technology industry. With that, we appreciate your continued support of Semtech and look forward to updated you all next quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 54 minutes

Call participants:

Sandy Harrison -- Director of Business Finance and Investor Relations

Mohan Maheswaran -- President and Chief Executive Officer

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Craig Ellis -- B. Riley FBR -- Analyst

Harsh Kumar -- Piper Jaffray -- Managing Director

Mitch Steves -- RBC Capital Markets -- Analyst

Cody Acree -- Loop Capital Markets -- Managing Director

Tristan Gerra -- Robert W. Baird -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Scott Searle -- ROTH Capital Partners -- Managing Director

Quinn Bolton -- Needham & Company -- Managing Director

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