Semtech Corporation (SMTC) Q2 2019 Earnings Conference Call Transcript

Semtech Corporation (NASDAQ: SMTC)Q2 2019 Earnings Conference CallAug. 29, 2018, 5:00 p.m. ET

Prepared Remarks:

Operator

Good afternoon. My name is Mike and I will be your conference operator for today. At this time, I would like to welcome everyone to the Q2 FY '19 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 session. If you would like to ask a question during this time, press "*1" on your telephone keypad. If you would like to withdraw your question, press "#".

I will now turn the call over to Sandy Harrison, Director of Business Finance and Investor Relations. You may begin your conference.

Sandy Harrison -- Director of Business Finance and Investor Relations

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 Maheswaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release, as well as the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission.

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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. 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 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, Emeka Chukwu. Emeka?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Thank you, Sandy. Good afternoon, everyone. For Q2 fiscal 2019, GAAP net sales were $163.2 million, 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 for distribution represented approximately 68%. Distributor business remains very 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 markets.

Q2 bookings remained strong, equaling Q1 fiscal 2019 record bookings and resulted in a book-to-bill solidly above one. Those bookings accounted for approximately 39% of shipments during the quarter.

Q2 fiscal 2019 GAAP gross margin increased 650 basis points sequentially to 61.3% due to the non-recurrence of the Comcast warrant. Q2 fiscal 2019 GAAP operating expense decreased 10% sequentially due to the favorable impact from the $6.6 million in initial payments we received from the HiLight 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% to 11% due to no benefit expected from the HiLight settlement in Q3 and higher compensation expense driven by the TrackNet acquisition.

In Q2 fiscal 2019, GAAP tax rate was 19.4%, in line with our 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 non-recurring 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 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.

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 expenses increased 1% sequentially to $53.3 million, as lower payable 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%, in line with expectations. For the remainder of fiscal 2019, we expect our non-GAAP tax rate to be between 16% and 20%.

In Q2, cash flow from operations increased 41% sequentially to $49 million, or 30% of net sales. Free cash flow was 27% of net sales, in line with our revised target range of 25% to 30% of net sales. Our cash and investments was $311 million and our debt balance was approximately $219 million, resulting in a net cash position of $92 million.

We repurchased approximately 496,000 shares, of $24.4 million of our outstanding stock during the quarter. Our stock repurchase authorization now stands at approximately $247 million. 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 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 of 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.

Mohan Maheswaran -- President and Chief Executive Officer

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 2019 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 $163.2 million, driven by growth from the IoT, data center, and mobile markets. We posted non-GAAP gross margin of 61.5% 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% 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 quarter and represented 27% of total net revenues. Approximately 20% of high-end consumer net revenue was attributable to mobile devices and approximately 7% was attributable to other consumer systems. The communications end market increased over the prior quarter and represented 12% 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 benefited from the ongoing buildout 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 higher 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 meaningful 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 buildouts will be based on PAM4 modulation and Semtech's 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.

Semtech's FiberEdge PMV platforms, which complement our ClearEdge CDR platforms, are also seeing strong customer interest due to our leadership position in CDRs. Optical module designs utilizing ClearEdge CDRs often integrate the associated FiberEdge PMV products, which include TIA and laser drivers, to provide better performance and lower costs for optical module vendors. We expect this to continue, as our newest FiberEdge PMV 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, the 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 PON tenders in China are also expected to provide momentum for 2.5 gig PON 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 we expect to see 5G base station deployments to increase rapidly early next year.

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 FY '19, 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.

This 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 end market mix and higher gross margins. In Q3 of fiscal year 2019, 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.

LoRa's rapid global acceptance as the best technology for low power IoT networks and the increasing number of the IoT use cases using LoRa is contributing to the record revenues and we expect this momentum to continue for some time. LoRa Alliance partners in several key markets recently announced a number of LoRa-related initiatives. Some of them are significant, including Alibaba and China Towers announced a nationwide IoT network in China, in which LoRa will provide a key technology role. Alibaba also announced a LoRaWAN collaboration with China Unicom to standardize wireless network gateway interfaces to expand the LoRaWAN ecosystem and use cases in China.

Tencent 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 LPWAN 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 locks and alarms.

Comcast announced the activation of its machineQ platform in ten 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 machineQ IoT network to connect to the cloud. Comcast also announced a collaboration with Neptune Technology, a water technology company, to accelerate smart city projects focused on advanced water metering infrastructure. The solution combines machineQ's LoRaWAN network with Neptune's LoRa-enabled water meters and sensors to boost sustainability efforts.

Mydevices Inc. launched its IoT in a Box platform, together with Sprint, providing a turnkey LoRa-based IoT solution for a number of vertical markets. Kerlink 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.

Ahoy 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 protection, 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 city, 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 LoRa opportunities exceeds $400 million 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 FY '19 remain on track. As a reminder, by the end of FY '19, we anticipate there will be over 70 countries with public LoRaWAN networks deployed. We also anticipate that over 200,000 gateways will be deployed globally, which will include both macro and picocell gateways, and provide the capacity to support over 1 billion end nodes. We also expect that, by the end of FY '19, over 80 million LoRa end nodes will be deployed, representing a significant increase from approximately 50 million at the end of FY '18. Finally, we still anticipate that our LoRa-enabled revenues will be in the $80 million to $100 million range for FY '19.

We recently announced our intent to acquire TrackNet, a provider of LoRa-based end-to-end solutions 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 the end of October 2018.

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 and drive further growth in this business over the next several years.

In Q3 of fiscal year 2019, we expect net revenues from our Wireless and Sensing product group to increase, as our LoRa business is expected to deliver another record quarter.

Moving on to new products and design wins, in Q2 of fiscal year 2019, we released nine new products and we achieved 2,239 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 to be between $168 million and $178 million. To attain the midpoint of our guidance range, or approximately $173 million, we needed net turns orders of approximately 33% at the beginning of Q3. We expect our Q3 non-GAAP earnings to be between $0.58 and $0.64 per diluted share.

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

Questions and Answers:

Operator

At this time, I would like to remind everyone, in order to ask a question, press "*1" on your telephone keypad. We will pause for a moment to compile the Q&A roster.

Your first question comes from Craig Ellis from B. Riley FBR.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the question 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 and 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 5G to start impacting sales. Can you go into a little more color on exactly what you're seeing there and the timing of the inflection that those two might drive? Thank you.

Mohan Maheswaran -- President and Chief Executive Officer

Yeah, Craig, so we're starting to see early revenue from both of these areas. One 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. But, again, I think the large ramp will be next year when it becomes really meaningful.

Craig Ellis -- B. Riley FBR -- Analyst

And the follow-up question, also on revenue with the LoRa, it seems like there's been an absolute flurry of new deployment activity that we've seen in press releases and different use cases. As we stand here at mid-year and as you look at the full year target, can you provide some color on whether you think we're tracking more toward the midpoint of the fiscal '19 range or more toward the lower end or the higher end of that range?

Mohan Maheswaran -- President and Chief Executive Officer

Well, I think we're tracking to the range, Craig, is what I'll say. I think it's difficult to look at it from a 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 $1 billion LoRa 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're starting to see some smart home applications, smart kind of tracking and logistics applications 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.

Craig Ellis -- B. Riley FBR -- Analyst

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 the October timeframe.

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

So, yes, the OpEx guidance for Q3 does include some expenses for the TrackNet acquisition. I think if you look at the 8-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 expect -- we do know that the expenses that they bring onto us is about $500,000.00 to $1 million per quarter.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks, guys.

Mohan Maheswaran -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Harsh Kumar from Piper Jaffray.

Harsh Kumar -- Piper Jaffray -- Analyst

Yeah. Hey, guys. Congratulations. Strong numbers. Mohan, a couple of quarters ago, you actually gave us the range for LoRa 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 station versus end nodes. And I've got a couple of other questions.

Mohan Maheswaran -- President and Chief Executive Officer

So as I said, Harsh, we're still on the $80 million to $100 million 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 somewhere in that range. Most of the revenues are end node revenues. As I mentioned, by the end of this year, the goal is to have about 80 million units deployed. We had 50 million 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. But I would say most of it is end nodes.

Harsh Kumar -- Piper Jaffray -- Analyst

Okay. So just to clarify, most of the growth this year will be end nodes, correct?

Mohan Maheswaran -- President and Chief Executive Officer

Yes, that's correct.

Harsh Kumar -- Piper Jaffray -- Analyst

Okay. And then TrackNet 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 into the LoRa bucket or would it go into some other bucket?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

So, Harsh, at this point, there isn't any significant revenue associated with it. As Mohan did allude to, this is just a very strategic acquisition which should allow us to really accelerate the solutions that we're bringing into the LoRa ecosystem. So if we -- when we start to see revenues that are being driven by the activities of the TrackNet and the resultant IP, that would all be part of the LoRa-enabled revenue.

Harsh Kumar -- Piper Jaffray -- Analyst

Got it. Okay. And then last one and then I'll get back in line. Your Protection business, Mohan, 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 good, solid growth number there.

Mohan Maheswaran -- President and Chief Executive Officer

Yeah. 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 North America is good. And I would say, as I mentioned on the script, that Korea 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 businesses 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, 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, yeah.

Harsh Kumar -- Piper Jaffray -- Analyst

Congratulations, guys. Thank you.

Operator

Your next question comes from Rich Shafer from Oppenheimer.

Richard Shafer -- Oppenheimer -- Analyst

Yeah, thanks, and I'll add my congratulations, guys. Nice quarter. Couple questions. Maybe the first one's a kind of clarification, Mohan. If you look at the $400 million LoRa funnel that you've talked about -- I think you've called it in the past a two-year revenue funnel -- what's that mix look like? Thinking of it in hardware versus licensing revenue terms, because I know the longer term, you guys have talked about that being more of a licensing model in LoRa.

Mohan Maheswaran -- President and Chief Executive Officer

Yeah, the pipeline, Rick, is all hardware related. There's not much licensing or IP in that $400 million pipeline. That's mostly to do with proof of concepts that are going on, customers testing use cases, and that type of thing. 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, they typically take a little bit longer. But two years is the timeframe 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 timeframe.

Richard Shafer -- Oppenheimer -- Analyst

And, Mohan, to be clear, I think you've talked in the past about potentially doubling LoRa revenues again next year. So I think I'm hearing you correctly that really, whatever happens with LoRa growth next year, it's gonna be primarily hardware driven.

Mohan Maheswaran -- President and Chief Executive Officer

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 toward the back end of next year and then really start to pick up after that.

Richard Shafer -- Oppenheimer -- Analyst

Okay. Thanks. And then another follow-up on the 5G and the base station. I'm just curious. I think you've talked in the past a little about a content story there. Can you quantify what that looks like as we move, start deploying 5G base station, versus sort of what your content looks like today in 4G?

Mohan Maheswaran -- President and Chief Executive Officer

Yeah. So mostly it's PMD. It's amplifiers, drivers, those type 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 will 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 and the whole base station story, which is mostly driven out of China today, I think we have to wait and see how the tenders play out and how the volumes ramp up next year.

Richard Shafer -- Oppenheimer -- Analyst

Got it. And then just one last follow-up. I guess there are potentially two new North American flagship OLED smartphones supposedly coming this fall. Can you talk about Semtech's potential share in those phones and content maybe there? Thanks.

Mohan Maheswaran -- President and Chief Executive Officer

Yeah. Displays is still a good space for us. I mean, I mentioned in smartphones, we're doing quite well 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 now we feel good about that. But, yeah, 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.

Richard Shafer -- Oppenheimer -- Analyst

Okay. Thanks.

Operator

Your next question comes from Mitch Steves from RBC Capital Markets.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, guys, thanks for taking my questions. Two for me. First is kind of actually talking about January. So I realize you guys have record bookings and the January quarter has historically 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?

Mohan Maheswaran -- President and Chief Executive Officer

So, Mitch, yeah, we can't really look that far ahead. But I will tell you, the things that we would continue to expect to see positively are obviously LoRa. Signal Integrity product business typically is quite strong. The unknown really is on the more consumer side and particularly Samsung and how the other 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.

Mitch Steves -- RBC Capital Markets -- Analyst

Okay. Got it. And, secondly, on the margin front, it 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 gonna be additional volatility in the next couple quarters.

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Well, so, Mitch, if you look at the key driver for our gross margin is the mix of our revenue that we have. So, as we continue to see LoRa doing very well, driving up the industrial revenues, as we continue to see the industrial and automotive revenue contribution from our Protection doing very well, our expectation is that we should continue to see flies just slightly up, gross margin expectations on our part. And with regards to the operating margin, 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.

Mitch Steves -- RBC Capital Markets -- Analyst

Got it. Thank you.

Mohan Maheswaran -- President and Chief Executive Officer

Operator?

Operator

Your next question comes from Quinn Bolton with Needham and Company.

Quinn Bolton -- Needham and Company -- Analyst

Hey, guys. Congratulations on the nice results and outlook. I just wanted to come back to the PON market. It's clearly been strong here in the first half of the fiscal year. Wondering, as you look into the second half, do you see it sort of continuing to run about 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?

Mohan Maheswaran -- President and Chief Executive Officer

Yes, Quinn, 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 the 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 quarters shape up but I think in the second half, as you point out, it's likely to be similar to the first half.

Quinn Bolton -- Needham and Company -- Analyst

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 complete 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.

Quinn Bolton -- Needham and Company -- Analyst

Well, we see largely the same competitors. This is a space that requires a lot 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. But 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 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 the 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.

Quinn Bolton -- Needham and Company -- Analyst

Great. And then the last question, if I look at the Wireless and Sensing business, that's now almost a $50 million per quarter business. And I think more than half of that is probably LoRa and proximity sensors, but there's still probably roughly 40% that are other products. 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.

Mohan Maheswaran -- President and Chief Executive Officer

Yeah. It's fairly stable, Quinn. I think some of it is more mature products, older products. We don't expect any large shifts. Maybe one quarter it's down and the 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 offset any growth -- the growth that we get from LoRa and proximity sensing.

Quinn Bolton -- Needham and Company -- Analyst

Perfect. Thank you.

Operator

And, as a reminder, to ask a question, press "*1" on your telephone keypad. And your next question is from the line of Cody Acree from Loop. Your line is open.

Cody Acree -- Loop Capital -- Analyst

Thanks for taking my question and congrats on the progress. Mohan, just on the data center side, are you seeing deployment activity or is it primarily upgrade driven, the strength that you've been seeing?

Mohan Maheswaran -- President and Chief Executive Officer

I would say it's both, Cody. I think, as I mentioned, in China, it's new activity. But most of the data center activity here is just more 100 gig connectivity. More data centers also. There's 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 CDRs. If you recall from our Analyst Day, we explained that, as the bandwidth increases, more of the optical connections will require CDRs and that's one of the key factors in our growth.

Cody Acree -- Loop Capital -- Analyst

But the greenfield data center, I guess that activity, are you seeing that as a key driver or is that more ancillary?

Mohan Maheswaran -- President and Chief Executive Officer

I would say it's also a key driver. I would say both. Yeah.

Cody Acree -- Loop Capital -- Analyst

Okay. And then just on your comments around LoRa, you've obviously talked about geolocate as a potential driver longer term but that seems to be something that maybe has been deemphasized a bit. Can you just kind of speak to that?

Mohan Maheswaran -- President and Chief Executive Officer

Yeah, 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 toward the second half of next year. But 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 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.

Cody Acree -- Loop Capital -- Analyst

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?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

So kind of like we've said, depending on the market situation, we're going to be out there in the market and buying back our shares. And, as we did report, we'll continue to make some strategic investments, the TrackNet acquisition, and to fuel the investments in start-up companies, companies that are trying to take advantage of this phenom that we all refer to as LoRa. We will continue to make those investments. And then 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.

Cody Acree -- Loop Capital -- Analyst

Great. Thank you, guys.

Operator

And your next question comes from the line of Craig Ellis from B. Riley FBR.

Craig Ellis -- B. Riley FBR -- Analyst

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 ZTE. Can you talk about what happened with ZTE in the quarter and what the expectation is for ZTE in the outlook?

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Craig, so, in the quarter, I don't think -- we didn't have a significant impact from ZTE. In the coming quarters, I would just expect it to be back to normal run rates. Nothing out of the ordinary.

Mohan Maheswaran -- President and Chief Executive Officer

Yeah, for us, Craig, it was very much a fast 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 ZTE is back and now those other customers sort of slack off and we ship more to ZTE. So, from a net standpoint, we don't really think there was any impact.

Craig Ellis -- B. Riley FBR -- Analyst

Got it. Thanks, guys.

Operator

And that was our last question at this time. I will turn the call back over to the presenters.

Mohan Maheswaran -- President and Chief Executive Officer

In closing, we are pleased with our strong first 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 '19. With that, we appreciate our continued support of Semtech and look forward to updating you all next quarter. Thank you.

Operator

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

Duration: 44 minutes

Call participants:

Sandy Harrison -- Director of Business Finance and Investor Relations

Emeka Chukwu -- Executive Vice President and Chief Financial Officer

Mohan Maheswaran -- President and Chief Executive Officer

Craig Ellis -- B. Riley FBR -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Richard Shafer -- Oppenheimer -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Quinn Bolton -- Needham and Company -- Analyst

Cody Acree -- Loop Capital -- Analyst

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