Semtech Corporation (SMTC) Q3 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to the Semtech Corporation Fiscal Year 2020 Third Quarter Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Sandy Harrison, Director of Business Finance and Investor Relations. Mr. Harrison, you may begin.

Thank you, and welcome to Semtech's conference call to discuss our fiscal results for the third quarter of FY '20. 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 and in the other Risk Factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of only -- as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal year '20, net sales increased 3% sequentially to $141 million, which was above the midpoint of our guidance. In Q3, shipments into Asia represented 75% of net sales; North America represented 16%; and Europe represented 9%. Total direct sales represented approximately 24%, and sales to distribution represented approximately 76%. Our distribution business remains balanced, with 55% of the total POS coming from the high-end consumer and enterprise computing end markets, and 45% of total POS coming from the Industrial and Communications end markets. Bookings declined sequentially that resulted in a book-to-bill above 1. Those bookings accounted for approximately 42% of shipments during the quarter. Q3 GAAP gross margin declined 70 basis points sequentially to 61.2% due to lower absorption associated with our efforts to reduce our inventory levels. Q3 GAAP operating expense decreased 8% sequentially due to lower performance-based compensation expense and the non-recurrence of restructuring charges that occurred in Q2. In Q4, we expect GAAP operating expense to increase between 5% to 8% sequentially, primarily due to higher share-based compensation expenses. Q3 GAAP tax rate was 16.4%, down from 63.3% in Q2, which reflected additional reserves resulting from the issuance of final tax regulations related to the 2017 U.S. tax law changes. We expect our GAAP tax rate for Q4 to be in the range of 12% to 16% and to remain in this range for fiscal year 2021. Our GAAP tax rate forecasted excludes consideration of any impact from discrete items, including excess tax benefit or deficiency from the exercise of stock options. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related and other nonrecurring charges. As expected, Q3 non-GAAP gross margin declined 50 basis points sequentially to 61.6%, and we expect our Q4 non-GAAP gross margin to decline slightly approximately 10 basis points at the midpoint of guidance due to a higher mix of consumer revenue. In fiscal year 2021, we expect our non-GAAP gross margin to return to more normalized levels as demand from our higher gross margin growth engines recover and overall demand improves. Q3, non-GAAP operating expense decreased 2% sequentially to $52.9 million due to lower performance-based compensation. In Q4, we expect our non-GAAP operating expense to be flat sequentially. For planning purposes, we are expecting our fiscal year 2021 non-GAAP operating expenses to increase at roughly half the rate of revenue growth, which is consistent with our target operating model. We expect our fiscal year 2021 non-GAAP tax rate to remain in the 14% to 18% range. In Q3, cash flow from operations remained solid at 24% of net sales. We repurchased approximately 447,000 shares for approximately $22.5 million during the quarter, and our stock repurchase authorization now stands at approximately $138 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 5% sequentially due mainly to higher net sales and represented approximately 39 days of sales, which is slightly below our target range of 40 to 45 days. Net inventory in absolute dollar terms decreased 7% sequentially, and days of inventory decreased 8 days to 121 days, which remains above our target range of 90 to 100 days. In Q4, we expect net inventory to be flat in dollars and days. In summary, we were pleased to deliver Q3 results above the midpoint of guidance despite the difficult macro environment. We remain focused on execution, and continue to believe the secular strength of our growth engines position us to return to growth in fiscal year 2021. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year '20 performance by end market and by product group, and then provide our outlook for Q4 fiscal year '20. In Q3 of fiscal year '20, net revenues increased 3% over the prior quarter to $141 million. We posted non-GAAP gross margin of 61.6% and non-GAAP earnings per diluted share of $0.41. In Q3 of FY '20, the enterprise computing market increased 16% sequentially, driven by a strong rebound in PON demand and represented 31% of total net revenues. The industrial market demand decreased 2% sequentially as growth from our LoRa business was offset by broad industrial weakness, and represented 34% of total net revenues. Net revenues from the high-end consumer market decreased 3% sequentially and represented 25% of total net revenues. Approximately 16% of high-end consumer net revenue was attributable to mobile devices, and approximately 9% was attributable to other consumer systems. Net revenues from the communications end market decreased 1% over the prior quarter and represented 10% of total net revenues. I will now discuss the performance of each of our product groups. In Q3 of fiscal year '20, net revenues from our Signal Integrity Product Group increased 6% over the prior quarter, and represented 42% of total net revenues. Stronger demand from the hyperscale data center and PON segments were offset by weakness from the base station and broader industrial markets. In Q3, we made significant progress with our Tri-Edge PAM4 platform. Customer interest and activity is strong, as our Tri-Edge platform delivers low cost, low power and low-latency performance, ideal for emerging PAM4-based optical modules. At the recent European conference on optical communications, the interoperability and power savings of our Tri-Edge PAM4 platform was demonstrated. Our first Tri-Edge silicon is currently sampling and in system trials in 200-gig and 400-gig PAM4 applications with Tier 1 data center customers. We expect to have Tri-Edge production silicon in Q1 of fiscal year '21, and our first PAM4 production revenues in Q2 of fiscal year '21. We are very excited about the prospects for our analog PAM4 solutions. Our FiberEdge PMD platform also continued its positive momentum at PAM4 optical module customers. We recently announced our FiberEdge Linear EML driver, targeting 100-gig and 400-gig PAM4 optical modules. This product joins our 4 platform of linear TIAs that are currently shipping, which are also targeted at 100-gig and 400-gig PAM4 optical modules. Our FiberEdge products complement our Tri-Edge and ClearEdge CDR platforms, and we expect to see FiberEdge continue to ramp nicely in fiscal year '21. In Q3 of fiscal year '20, our PON business, which is largely driven by China, rebounded strongly following a weak first half performance. We recently introduced our 10-gig XGSPON OLT chipset that is expected to be a key driver for next-generation PON deployments in China. The overall PON market demand is expected to improve next year as fiber to the home and enterprise deployments increased in conjunction with 5G infrastructure deployments. Semtech remains a PON PMD market leader, providing highly integrated solutions for 1-gig, 2.5-gig and 10-gig PON systems. In Q3 of fiscal year '20, demand from the wireless base station market weakened slightly over Q2. While base station demand in FY '20 has been weak, we do expect both 4G and 5G deployments to be stronger in fiscal year '21. We believe our 5G market opportunity could triple versus 4G due to the higher 5G base station volumes and additional CDR content. Our current 5G front haul solutions are gaining good momentum, with several design wins at top-tier module suppliers. Our SIP product group recently announced its new Pro Audio/video chip platform, which is focused on transitioning the Pro AV industry from expensive proprietary equipment to standard 10 gigabit per second IP-based equipment, using software-defined video over Ethernet, or SDVoE . We believe this new chip platform will be a key enabler in driving the industry transition due to its lower power and cost. The primary target markets for our Pro AV business are enterprise, health care, and eSports infrastructure, and we expect our new chip platform to enable this business to grow significantly in fiscal year '21. The ever-increasing demand for higher data rates is driving greater demand for Semtech's Signal Integrity products. We expect this secular trend to continue, driven by the global expansion of hyperscale data centers, the global transition to 5G base stations, the acceleration of 10-gig PON and the emergence of software-defined video over Ethernet. We expect our SIP product group to benefit from this trend over the next several years, despite significant headwinds in the fiscal year. For Q4 of fiscal year '20, we expect net revenues from our Signal Integrity Product Group to decline driven by broad-based weakness across all segments. Moving on to our Protection Product Group. In Q3 of fiscal year '20, net revenues from our Protection Product Group were flat over the prior quarter, and represented 28% of total net revenues. Our protection business benefited from strength from our mobile business and increasing penetration of the industrial and automotive markets, while our broader consumer business softened. Demand for higher performance protection from the Automotive segment continues to grow as an increasing number of high-speed interfaces are deployed in new vehicles. Semtech devices targeted at Advanced Driver Assist systems, controller area network and local interconnect network interfaces, continue to see strong design win momentum. In addition, we are seeing strong design win momentum from all the leading smartphone manufacturers across the globe, with the exception of China smartphones, where our position continues to be negatively impacted by the Huawei brand. In Q4 of fiscal year '20, we expect our Protection business to be down slightly due to the customary end-of-year inventory reductions at our Korean smartphone customers. Turning to our Wireless and Sensing Product Group. In Q3 of fiscal year '20, net revenues from our Wireless and Sensing Product Group increased 1% sequentially, led by growth in our LoRa business and represented 30% of total net revenues. The adoption of LoRa in numerous new IoT use cases across the globe, demonstrates tremendous value of LoRa in the fast emerging LPWAN market. In Q3, notable additions to the LoRa Alliance included Amazon, Intel and DISH, who are all respective leaders in their industries. Also in Q3, the wireless broadband alliance, together with the LoRa Alliance, released a joint white paper articulating numerous use cases that require both WiFi and LoRa WAN connectivity. The primary use cases included smart building, smart homes, smart city, smart transportation and smart asset tracking applications. We are already seeing new opportunities emerge globally, driving more WAN and WiFi functionality to be integrated into the same gateway, and we will comment on these opportunities and wins on future earnings calls. Some examples of recent LoRa use cases include Alibaba released its Beagle GPS-free tracker system based on LoRaWAN, that provides consistent geolocation data without GPS or cellular connectivity, simplifying deployment at very low-cost and power. Radio Bridge, an industry-leading supplier of IoT sensors, released its new LoRaWAN-based sensor platform. The Armored Sensor enables the tracking of accurate real-time data for a variety of industrial applications, including oil and gas, air quality and utility monitoring. Digimondo, a leading provider of secure IoT software solutions, announced a new end-to-end smart utility starter package based on LoRaWAN, which provides customers the software and hardware necessary to create smarter, more efficient and lower cost utility networks. IHM Pacific, a developer of IoT technologies for the smart Utility and Building segments, together with Andrea Informatique, developed a new LoRaWAN-based electricity metering solution for utilities and submetering use cases targeted at Asia and Europe. And CAHORS Group, a leading solutions provide for smart energy grids, announced its new LoRaWAN-based Sentinel system that monitors faults and predicts failures in overhead voltage lines. In addition to these use cases, numerous other partners announced solutions targeting smart home, smart utility, smart agriculture and industrial IoT applications. Along with the increasing number of use cases, LoRa's momentum is also being underscored by the key LoRa metrics we track. Our key metrics update includes the number of countries with LoRa networks increased to more than 83 countries. By the end of fiscal year '20, we expect around 90 countries to have LoRa networks, which is up from 70 at the end of fiscal year '19. The number of public or private LoRa network operators increased in Q3 to approximately 123, and we now expect 133 LoRa network operators by the end of fiscal year '20, up from 101 at the end of fiscal year '19. The estimated number of LoRa gateways deployed increased to more than 500,000. These gateways will support approximately 2 billion connected end nodes. We expect the number of LoRa gateways deployed to exceed 550,000 by the end of fiscal year '20. The cumulative number of LoRa end nodes deployed increased to 117 million, and is trending to 135 million by the end of fiscal year '20. And the LoRa opportunity pipeline is now over $500 million, with an additional $200 million of leads feeding the opportunity pipeline. We anticipate that, on average, 40% to 50% of this pipeline will eventually convert to full deployment over a 24-month time line. Our pipeline of opportunities remains geographically well balanced, with over 65% of the opportunities coming from the Americas and Europe, and includes a growing number of consumer use cases, where the volumes could be significantly higher and could move to deployment more rapidly than those use cases in the industrial markets. Several of these volume use cases moved out from fiscal year '20 to fiscal year '21, and as a result, we are expecting our LoRa-enabled revenues to end fiscal year '20, between $70 million and $80 million. We expect to exit the year at a quarterly run rate above the high end of this range. Despite the weaker-than-anticipated fiscal year '20, based on a record LoRa POS in Q3, and the continued positive global adoption of LoRa, we still anticipate a 40% CAGR over the next 5 years, as LoRa becomes the de facto standard for LPWAN use cases, in what we expect to be a multibillion unit industry. In Q3 of fiscal year '20, demand for our proximity sensing platforms was stable. While our Huawei smartphone business will continue to be a challenge, our proximity sensing business is benefiting from increasingly stringent global SAR regulations as health risks associated with increasingly powerful 5G radios become fully understood. Over the next few years, we expect the majority of smartphones and wearable devices shipped to North America and Europe to have SAR sensors included in their system designs. For Q4 of fiscal year '20, we expect net revenues from our Wireless and Sensing Product Group to be down slightly, as stronger LoRa-enabled demand will be offset by broad-based market weakness. Moving on to new products and design wins. In Q3 of FY '20, we released 24 new products and achieved 2,381 new design wins. In Q3, our [ disti PoE ] POS also achieved a new record. Now let me discuss our outlook for the fourth quarter of fiscal year '20. We are currently estimating Q4 net revenues to be between $130 million and $140 million. To attain the midpoint of our guidance range, or approximately $135 million, we needed net turns orders of approximately 35% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.33 and $0.39 per diluted share. Our Q4 guidance assumes no further direct shipments to Huawei in this fiscal quarter. I will now hand the call back to the operator. And Sandy, Emeka and I will be happy to answer any questions. Operator?

[Operator Instructions] Our first question is from Tore Svanberg, Stifel.

First question, Mohan, you talked about the funnel or pipeline opportunity of LoRa being about $500 million plus. So it sounds like that's growing, and it also sounds like consumer is potentially adding to at least that $100 million. Could you elaborate a little bit more on that? Can you maybe give us some examples in consumer where you're starting to see more LoRa adoption?

Yes Tore. It is -- of the pipeline, a significant part of the pipeline are tied to smart home use cases, and I would say mostly in Americas, but also in Europe. And the smart home is really a replacement of Zigbee, a replacement of Z-Wave, getting longer-range beyond just the interior of the house, outside the house. So that's a number of use cases, including lighting, smart lighting and security, but also smart irrigation, things like that. So we're seeing a lot of those across the globe, I would say, but the vast majority, I think, are in North America and Europe.

Sounds good. And as my follow-up, you mentioned that Signal Integrity. And I mean, PON, obviously, was pretty strong this quarter, but I think you mentioned most segments are going to be down next quarter. Is that just seasonal? Or is there anything else going on? Because we thought that, especially data center PON was starting to turn a corner, but it seems like that's not sustainable just yet?

Yes, I would say that they're all doing okay, Tore. Data centers are pretty reasonably healthy. I wouldn't say it's -- there's any significant issues there. I would say PON has been soft all year and is starting to come back and I think next year, we are viewing that as being potentially a very good growth year for PON. Base station, as I mentioned, I think, it's starting to pick up. It's just general market kind of softness, I would say, tied to just kind of more legacy equipment and things like that, that are kind of bringing the number down a little bit. But I don't -- I think it's a one-quarter event. I think next year, we should see all the segments, the main segments that I talked about pick back up.

Our next question is from Mitch Steves, RBC Capital Markets.

Okay. Yes. Sorry. I just wanted to circle back to kind of like the 5G ramp up and kind of the smartphone sales you're seeing? You guys are seeing a little bit of a lighter guide for Q1 or Q4, however you want to phrase it right, that looked, I guess, the end of the year and early next year. But can you maybe comment on what you're seeing on the smartphone handset side? Do you expect that to improve throughout '20? Or what type of trajectory do you guys expect in calendar '20?

Yes. So first of all, I think the smartphone market in general is doing okay. We see pockets of strength, but I would say that all of the regions are doing reasonably well. We do expect as normal in Q4 that the Korea -- particularly Korea smartphone manufacturers tend to bring their inventory down. So we're anticipating some of that in our Q4 guidance. Obviously, we have some unique issues going on with China, with Huawei as well. So there's those 2 impacts, I think, in general. But other than that, I would say, it's fairly -- it seems like fairly healthy smartphone business, and certainly, looking into next year, it looks like it's going to be a better year next year.

Our next question is from Karl Ackerman, Cowen.

Two questions, if I may. First question, I was hoping one of you may discuss what sort of adoption or design wins you have garnered for your analog-based PAM4 modules, now that Open Eye has released a 53-Gbps single-mode spec. And I think one of the misperceptions by investors is that if DSPs do become the predominant approach to PAM4, you're out of luck. But I think you have partnerships with at least the leading DSP provider. So if you could just address perhaps that investor concern and kind of where you are with regard to Open Eye MSA, that would be appreciated. Then I have a follow-up.

Yes. So let's start with the DSP approach. Obviously, we have FiberEdge, which is our PMD platform for TIAs, laser drivers and those type of products that are partnered with DSP partners, and we are seeing some momentum there. The Tri-Edge PAM4 products, as I mentioned, we're just sampling now. We're very confident that once we have full production release parts, which will be in Q1 of this year -- Q1 of next year, that those are going to get good momentum. We are sampling Tier 1 data center customers, as I mentioned. And we just think the value proposition is significant over current DSP solutions. So but we have to produce the products and get them out into production and get them designed in. So that's going to be the goal in the first half of fiscal year '21, and then we'll see how that plays out. It's our belief also that most of the customers have moved out their time line until towards the end of next year most of the -- within the data center PAM4 deployments, and so I think our timing is quite good. We'll see how it plays out. But I think that's the view we have.

I appreciate that. As my follow-up, one of your LoRa members -- recently LoRa members, introduced a new LPWAN dubbed Sidewalk. Do you view that as complementary or cannibalistic to your LoRa offerings? And if that is additive, is -- would that be additive to this $70 million to $90 million of LoRa revenue opportunity you have for calendar '19?

So let me first of all say, we can't talk about specific customers or specific partners in the ecosystem, alliance. We can't do that. But what I can say is that every LoRa business that's out there benefits Semtech in some shape or form, either through direct chips, either through licensing, IP royalties or cloud services or something like that. So that's the first thing to remember. Second thing is, I think that part of our belief in why this is going to be a $0.5 billion business in 4 to 5 years and go beyond that to become a $1 billion business, is because of the value proposition that LoRa brings to things like the smart home. Smart home, as an example, is an extremely competitive space. It's very difficult to penetrate but the value proposition of LoRa in terms of the range and the power and the cost and the network flexibility and the type of things it can do just -- it's just a question of time versus if. And so yes, we do believe the pipeline -- we talk about the pipeline a lot, because it is rather large but we're confident in the fact that we can turn that pipeline into revenue and that's what drives our confidence level. So -- and as I mentioned, today, most of the revenue is still -- I mean, 60% of the revenue is from China. The pipeline is nicely balanced. And if you consider that 65% of that pipeline is now outside of China, that's really quite -- it bodes quite well for our future revenue growth. So therein lies the 40% CAGR growth vector that we plan on executing on for the next 4 years.

Our next question is from Craig Ellis, B. Riley.

Mohan, I wanted to go back to the point you made about the expectation for revenue this year. So it looks like the thought is that the lower revenue could go from a kind of a $90 million midpoint down to $75 million, and I think you signaled that, that was some consumer-related push-outs. Could you provide some further color on what those were and the extent to which there might have been a -- been any common denominators and the things that are going on out in the deployment base for what you saw?

Yes, I would say, Craig, it's largely to do. When we have gateways installed, and as you know, you can see the number of gateways increased dramatically, there's an expectation that endpoints will follow. We know there's that many POCs going on and the opportunities are there, but the timing of exactly when and how they're deployed, it's just difficult to call. We try to make a stab at it every year and project how the year is going to play out. To be honest with you, this year was largely impacted by the first half, which was very weak -- and particularly the first quarter, which was very weak, mostly driven out of China. So it's just been difficult to kind of recover that. But that, combined with some push-outs into next year or some higher volume use cases, I think, has made this year a challenging year, but I do think that we'll see that benefit next year.

Yes. And just a follow-up related to that, Mohan. As we think about the 40% compound growth over a 4- to 5-year period of time. So clearly, there's still a huge opportunity here. There's some big blue chips that are joining the LoRa Alliance. The question for next year is, if we have some business that moves from '19 to '20, does that give you a discontinuity with atypically large growth next year? Or is the global macro, such that we should have expectations that would be closer to 40%, where the incremental $15 million doesn't overlay what would be an underlying expectation for 40% growth in the rest of the business?

Yes, I think, what's difficult to call is China, to be honest with you, I think, how that demand is going to look next year. This year has been a challenging year for many reasons and calling out what it's going to look like next year. But we're kind of confident about our 40% growth based on our current opportunity pipeline and the momentum we have, both within China and outside China. So that's the way I would look at it. We think that, obviously, there still needs -- there's some broader macro IoT kind of industrial use cases that we're relying on. But I think in general, our confidence is quite high still that we can drive the 40% growth next year based on current market outlook.

Our next question is from Scott Searle, ROTH.

Just a quick clarification. First off, was there any Huawei in the quarter end? I thought I heard there was no Huawei in terms of the outlook and expectations for the fourth quarter. And an additional clarification, did you mention in terms of your China exposure, on the smartphone front, either in protection or proximity sensors? And then I have a follow-up.

Yes. So Scott, what we have said is that we don't need any more Huawei turns bookings to make our quarter number guidance. And the reason why we do that, and I said it last quarter as well, is that there's just too much uncertainty around the Huawei business from a day-to-day standpoint, to build it into our guidance. Obviously, that provides upside if the Huawei ban was to go away. But if it doesn't, then I think we've already built it into our guidance -- the risk into the guidance. And then the -- what was the second part of the question?

How much was it, or did we have it in Q3 and what could Q4 look like?

So the Q4 guidance builds in about 3 million. We've shipped about 3 million or about 1.5 million into that. So that's what we have on backlog, and that's currently the position.

Got you. And then looking out to fiscal '21, I don't think you gave us an aggregate number that you're looking for in terms of growth, but certainly, they're starting to see some improvements in certain areas. And I was wondering if you could kind of put some benchmarks around some of the key product growth areas, specifically data center. It looks like we're starting to more normalize. Do we get back to 20%-plus growth when you start to figure in consumer -- or excuse me, commercial revenues on the PAM4 product lines and some of the other new product portfolios? What does LoRa look like? It sounds like we're starting to see that recovery. Is fiscal '21 then a 40% growth year. And smartphones, are we flat? Are we up? Are we down? How do you feel and particularly, given as you should be having more content sort of going into a 5G cycle?

Yes, FY '21, obviously, it's a bit early to guide to what's going to happen in FY '21. But currently, if we kind of layer out the different markets and opportunities, clearly, data center, as you say, is -- has been -- inventory has been kind of normalized now, and I think that's coming back and should have a good year, especially the hyperscale segment. And we're confident in both our ClearEdge and Tri-Edge and PAM4 and FiberEdge platforms there. PON has had a difficult year this year, we expect that to come back next year. As I mentioned, more fiber to the home, more fiber to the enterprise deployments, particularly in China, but also the 10-gig PON starting to accelerate. We feel good about our position there and the growth prospects there. Base stations, I'm sure you've heard it from others as well that we think next year is going to be a little bit better than this year and both for 4G and for 5G but mostly, obviously for 5G growth. And then our Pro AV products and the SIP business should start to really accelerate. That's a small business for us today, but we're expecting very strong growth in that business for FY '21. LoRa, as I mentioned, we're expecting that to grow nicely next year. And then on the Protection side, yes, a little bit more challenging to really call out what's going to happen on the smartphone side, but as I mentioned, there are good design wins across the globe, and we feel pretty good about the Tier 1 smartphone manufacturers shipping more volume and with the 5G -- with the growth in the 5G side, we should see a good mobile year next year as well. So again, a lot depends on China. A lot depends on the macro, but we feel good about where we are today.

Our next question is from Quinn Bolton, Needham & Company.

Just a quick clarification, perhaps I missed it. Did you say what types of applications had pushed from CY '19 to CY '20 in LoRa business? Was that more some of the traditional China or smart metering? Or is that some of the newer consumer applications? And then I've got a couple of follow-ups.

Yes, I would say it's more the consumer applications, Quinn. The China LoRa business was really weak in the first half. It came back, I think, to more normal levels in the second half. And it's more industrial, it's more metering environment. And those markets tend to take longer time anyway, but they -- once they're there, they just will go on for quite some time. I think the more consumer, smart homes, smart asset tracking, a little bit more difficult to predict the timing of those. But when they come, I think it will be significant.

Great. And second question was, you mentioned growing demand in the 5G front haul for your ClearEdge product family. Just wondering, are those typically going into CWDM4-type modules? Are they single lanes at 25? How big is that opportunity as we deploy the 5G networks in much greater scale next year?

Yes. I think it's -- actually, all the links, the front haul and mid-haul links will probably require CDRs. And so it's more content for us. That's probably the main driver versus 4G base stations. And then, I think just a number of base stations drives more of a volume increase as well. It's early days but we feel good about the fact that these are -- these 25-gig links follow are going to use ClearEdge platform, which is a proven platform for us in the data center market. And so we feel really good about our CDR position in the base stations. And most of these have integrated drivers and things like that. So really, the differentiation is quite clear for us in the market. So yes, I think we're in good shape.

And then do you see any applications for the FiberEdge or the PAM4-based modules in that front haul, mid-haul? Or do you think that's mostly NRZ signaling for the foreseeable future?

No, we see FiberEdge as well. I think again, front haul, promotionally, I think at the moment, we are seeing ClearEdge and FiberEdge as being the opportunity in base station. Eventually, we think also Tri-Edge and the PAM4 CDRs will play a role in the base station as well.

Our next question is from Christopher Rolland, Susquehanna.

So on LoRa and I guess China, in particular. I know you said it was a bunch of maybe non-China consumer. But just looking over the past year, would you say that trade tensions and this Chinese domestic semiconductor policy, do you think that, that played into adoption for LoRa for this year? And then also, if you could give us an update on where you think Comcast is in the U.S. and the network build-out here as well, that would be great.

Yes, the China issues are obviously a concern and continue to be a headwind for us in all of our business, to be honest with you. I don't think it's just LoRa. And LoRa is not immune to that. I think even though we have good momentum in China, there are NB-IoT and competitive pushes on more local kind of Chinese technologies that give us some headaches. But I think the LoRa value proposition is very clear. The Chinese end customers clearly are supporting the design-ins and continued design-ins of LoRa. So I don't see any long term issues. But for this year, for sure, there was some impact in the first half. That seems to have gone away now. I think we've come through that and we should see continued growth in China. But that's one of the reasons I point out that the opportunity pipeline, which is very large is quite -- it's a little bit better balanced, and I think 60% of opportunity -- 65% of opportunities being in Americas and Europe, enables that to kind of create a better revenue profile for us going forward on LoRa.

And on Comcast?

On Comcast, Comcast is really focused on the enterprise space now. And I think is focused on building out partnerships with enterprise, larger enterprise customers in those markets, not only in the markets where they have a network, but in other segments of the market. I think it's still early days. I think the use cases are still playing out for them, but they do have pockets of very nice success, where they have some value that they bring to the market, such as in the theme parks and enterprise play where they already have partnerships in those locations. So it's still early days, but moving well on the enterprise front, I think.

Great. And then also, if I heard you correctly, I think just the -- at 76%, that seemed a little bit high. I guess, what's behind that? Were there some direct customers that typically weren't there in the quarter? Or was disti particularly heavy for a reason, for some reason or another. Just what's behind that?

Yes, Chris, I think that was just a portion of the slow business that we have with Huawei. Huawei has, for the most part, been a direct account for us. And so with them -- with the business with them not being as strong as it's been in the past because of the ban situation, the different mix of our revenue is somewhat elevated as a result of that.

Our next question is from Harsh Kumar, Piper Jaffray.

So a quick question on the LoRa side. You mentioned a couple of the wins had gotten pushed out from, call it, this year into the next -- to the next year. Curious if you expect kind of a quick ramp, i.e., a ramp in the first fiscal half? Or would you expect most of these consumer-type U.S. and European wins to ramp in the second half of fiscal '21?

That's a difficult one to call, Harsh. I would say, we'll start to see the momentum in Q2, probably, and then probably the real volume ramp will be in the second half year.

Great. And then I had another one. So we are hearing from the guys that do RFs, that the Chinese Tier 2 OEMs are sort of gearing up for export-quality phones for European market with the 5G applications. I'm curious they're not deploying your products for protection and even proximity sensing. Would you say that, that -- do you think that's a function because you there's some local Chinese competition in those products for you? Or is there something else going on? Or it's just an opportunity that hasn't happened for you yet?

I think it's an opportunity that's happening, Harsh. But a lot of these guys, they don't understand the value of protection. They don't understand the value of SAR yet. I think they're starting to get educated on it. And especially for outside China region, a lot of them haven't been successful in North America and Europe. And so when they start to deploy phones in these regions, I think they'll realize that they need a better quality phone, a phone that doesn't -- that hadn't met the SAR regulations, for example, and in some cases, phones that can last longer and are protected well. And so there's a little bit of a learning process. If you recall, if you go back in history, there are times when customers have taken out protection, Semtech protection, they've taken out the protection to save cost and then realize that they're getting a lot of returns back and then they have to go back and put this protection in and things like that. So it's not a surprise to us that not all the manufacturers will put the protection in or put the proximity sensing in for SAR, but they will eventually get there, we think.

Our next question is from Hamed Khorsand, BWS Financial.

Just a couple of questions. One is on the Tri-Edge. Is that -- are you seeing customers take longer with the trials? Or is there just a delay in adopting the technology and deploying it?

Well, no. We're just sampling now, Hamed. So it's the first products we did some demonstrations at the recent ECOC show, and we're now sampling it. And so we have -- we don't have production silicon yet. We will have it in Q1. So it's really -- the timing is such that I think we have an opportunity because PAM4 has been pushed out within the data center, and I think now is the time to get the customers starting to use Tri-Edge and testing it out in a system test. These are real system trials going on. So once they're comfortable, I'm sure we'll see some ramp-up in the second half of the year.

Okay. Okay. And then last quarter, you were suggesting that you might see revenue in Q4. That's what I was asking.

Yes. I think just some kind of engineering sample revenue, very small. But I think the production ramps will be in Q2 and beyond.

And my last question was regarding LoRa, the pipeline you're talking about is now 65% outside of China. Is that due to acceleration from outside of China? Or is that just purely some weakness in China? And them taking in some of the back pipeline?

I would say it's more acceleration outside China. We have, if you recall, one of the reasons why China has been so strong for us in LoRa is just they were very early adopters of the technology and they used it in metering, used it in a number of different use cases in China very early on. And that's why we are -- they have a more significant revenue driver for us today. The other regions, particularly North America, has been a little bit late to really understand the value of the technology and adopt the technology. But it's coming, and it's, in our view, it's going to be significantly larger once it occurs and once the really larger companies start to roll out their use cases in America and Europe.

Our next question is from Tristan Gerra, Baird.

So looking at your January quarter guidance, it's actually a bit better than seasonal. So it sounds like it's all driven by a continued rebound in LoRa revenue sequentially, even though your implied revenue guidance for LoRa is a bit down for -- or a little bit lower than what you provided a quarter ago. Is there anything else in terms of puts and takes driving the guidance?

No, I think, Tristan, that's a fair comment. I think our SIP business, the base station is still a little bit weak, although coming back up, and I think PON is going to come back up, but still waiting on tenders and things like that. So in Q4 is kind of a little bit of unknown. And then on the smartphone side, a lot depends on how much inventory Samsung brings down. It's reasonable -- usually, Q4 is the quarter where it brings down its end-of-year inventory and just how much is going to happen, and what the impacts of that are. So I would say those are the kind of main things we're not sure about. We'll wait and see how that plays out. Obviously, the Huawei ban continues, and we've kind of taken that out of our guidance as well. But yes, we have a few things going positive as well, and should be beyond Q4, and I think, certainly, after Q1, we expect next year to be pretty good.

Okay. And then as a follow-up, I know you guide only a quarter at a time but based on current visibility and backlog, is there any reason to believe that the April quarter will track differently than normal seasonality at this point? Or is there any new program ramps that will make that seasonality -- or that will make the outlook look different than normal seasonality?

Not really. I would say there's a lot of good positive things going on. The uncertainties are still around the kind of macro environment. The trade war stuff and China-related stuff and the Huawei ban related stuff. But outside those, I don't see there's any major reason to be concerned about the business.

Our next question is from Tore Svanberg, Stifel.

Just 2 quick follow-ups. First of all, you talked about the Broadband Alliance sort of WiFi and LoRa now working closer together. Could you maybe elaborate on what that could mean for LoRa adoption down the road? And maybe you can give some examples of where this is happening?

Yes. There's a white paper that the joint alliances did, and it kind of covers quite a few of the use cases and things like that. But fundamentally, the thinking is that there are plenty of WiFi boxes already established out there, and WiFi usually is being used for higher bandwidth Internet connectivity and video streaming and those type of things. Adding LoRa to those boxes enables a lot of smart functioning around the enterprise spaces or retail outlets and things like that. Things like security, things like lighting, things like just occupancy, just smart building kind of things. So there's a lot of use cases where LoRa makes a lot of sense rather than using WiFi, which has limitations when it comes to range and when it comes to the power consumption of the end node. So if you think about an area where you may want to have a -- where you already have a WiFi installation, like an airport or somewhere like that, but you would like to start doing IoT connectivity for low power end nodes, adding LoRa makes a lot of sense versus trying to do that in WiFi.

Very good. And my follow-up, you mentioned you're starting to see some share gains for LoRa at the expense of Z-Wave and Zigbee. Is that primarily in the lighting area or in other devices as well?

I would say it's across the board, Tore. The limitations of Zigbee are really the range and the power consumption associated with the end devices. And so where you have those requirements, and you need more range or you need more lower power devices and things like that, then it just -- it's only a question of time that LoRa will probably replace the technology. It's going to take time, but I think eventually, that's what -- that's what will happen.

Our next question is from Harsh Kumar, Piper Jaffray.

Actually, my question has been answered.

We've now reached the end of the question-and-answer session. I will now turn the call back over to Mohan Maheswaran for closing remarks.

In closing, despite macro headwinds and the ongoing uncertainty from the geopolitical headwinds and weakness from the Huawei ban, we remain confident in the underlying strength of the secular drivers behind our growth engines in the IoT, data center and mobile markets, and we remain confident that our overall end market, geographical and product balance, should enable us to deliver double-digit growth in fiscal year '21. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.