Semtech Corporation (SMTC) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to Semtech Corporation's Q3 Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Sandy Harrison, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Dana, and welcome to Semtech's conference call to discuss our financial results for the third quarter of fiscal year 2021. 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 today only, 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 the detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures are included in today's press release. As a reminder, all references to financial results in Mohan's and Emeka's formal presentations on this call will refer to non-GAAP measures unless otherwise noted. With that, I’ll turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal year 2021, net sales increased 7% sequentially and 9% over the prior year to $154.1 million, which was at the upper end of our guidance. In Q3, shipments into Asia represented 80% of net sales, North America represented 12%, and Europe represented 8%. Total direct sales of approximately 18% and sales to distribution was approximately 82% of net sales. Our distribution business remains balanced with 39% of the total POS coming from the infrastructure end market and 30% from the industrial end market, and 31% from the high-end consumer end market. Bookings increased strongly over the prior quarter and resulted in a book-to-bill above 1. POS bookings accounted for approximately 25% of shipments during the quarter. Q3 GAAP gross margin decreased as expected by 40 basis points due to a higher mix of consumer revenue. We expect our Q4 gross margin to be flattish sequentially. Q3 GAAP operating expense increased 4% sequentially due to higher performance-based compensation expense offset by lower new product expenses. We expect our Q4 GAAP operating expense to increase 4% to 6% sequentially, primarily due to it being a 14-week quarter and higher share-based compensation expense driven by a higher stock price. Q3 GAAP other expenses was $1.6 million versus $2.9 million in Q2. The decrease was primarily due to lower foreign exchange losses than those that were recognized in Q2. In Q3, our GAAP tax expense was 7.9% as a result of a favorable regional mix of income, and several discrete tax benefits. In Q4, we expect our tax to range between 10% and 13%. 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, gross margin was 61.5% and in line with expectation. Our gross margin remains stable with the key driver being end market revenue mix. In Q4, we expect gross margins to remain flattish due to a higher mix of consumer revenue. In fiscal year '22, we expect to see gradual increases to our gross margin as we see an increase in revenue contribution from our higher margin growth drivers of LoRa-enabled 5G Wireless PON datacenter infrastructure platforms. Our Q3 non-GAAP operating expense increased 6% sequentially on higher compensation expenses, offset by lower new product expenses. In Q4, we expect our non-GAAP operating expense to increase 1% to 4% sequentially, primarily due to the January quarter being a 14-week quarter. For fiscal year '22, consistent with our projects, we expect operating expenses to increase at approximately half the rate of revenue growth. In Q3, our non-GAAP tax rate came in at 14.8% and we expect our Q4 and fiscal year '22 tax rates to be in the range of 15% to 17%. In Q3, cash flow from operations decreased to 18% of net sales due to the adverse impact of withholding taxes paid in Q3 related to the Q2 repatriation of cash to the U.S. We repurchased approximately 440,000 shares or $24 million of stock in Q3 and our stock repurchase authorization now stands at approximately $44 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down our debt. In Q3, due to higher net sales and timing of shipments during the quarter, accounts receivable increased 14% sequentially and represented 33 days of sales, which remains well below our target range of 40 to 45 days. Net inventory in absolute dollar terms was approximately flat sequentially, while days of inventory decreased by 9 days to 118 days, which remains above our target range of 90 to 100 days. In Q4, we expect our net inventory to increase due to the strong demand that we’re seeing and the tightening supply lead times. In summary, we are pleased to deliver Q3 results that were at the upper end of our guidance. We look forward to ending a very challenging year on a strong note, and we believe that our strong business fundamentals position us nicely to continue to deliver growth and solid financial results. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon everyone. I will discuss our Q3 fiscal year '21 performance by end market and by product group and then provide our outlook for Q4 fiscal year '21. In Q3 of fiscal year '21, net revenue increased 7% sequentially and 9% over the prior year to $154.1 million. Stronger demand from the high end consumer and industrial end markets was offset by softer demand from the infrastructure end market. We posted non-GAAP gross margin of 61.5% and non-GAAP earnings per diluted share of $0.47. In Q3 of fiscal year '21, net revenue from the high-end consumer market increased 43% sequentially and 21% over the prior year and represented 29% of total net revenues. Approximately 19% of high-end consumer revenue was attributable to mobile platforms, and approximately 10% was attributable to other consumer systems. The industrial end market net revenue increased 14% sequentially and 4% over the prior year and represented 32% of total net revenues. Net revenues from the infrastructure end market decreased 13% sequentially and increased 6% over the prior year and represented 39% of total net revenues. I will now discuss the performance of each of our product groups. In Q3 of fiscal year '21, as expected, our signal integrity product group decreased 14% sequentially and increased 5% over the prior year and represented 40% of total net revenues. In Q3 of fiscal year '21, demand from our datacenter customers softened following the strength experienced in the first half of the year. We believe the demand for higher bandwidth datacenter connectivity remains very strong and our ClearEdge, FiberEdge, and Tri-Edge platforms, all have significant design-in momentum in 100 gig, 200 gig, and 400 gig optical modules being deployed in global cloud and hyperscale datacenters. Design activity for our Tri-Edge PAM4 platform remains strong and we now have customers working on almost two dozen design-ins for use in 100 gig, 200 gig, and 400 gig PAM4 optical modules. The lower cost, lower power, and lower latency performance enabled by our Tri-Edge analog CDR platform, provides a significant advantage over existing DSP solutions. We believe the secular trends that have been driving growth in the data center market should continue to drive our data center plans over the next few years. In Q3 of fiscal year '21, demand from the wireless base station market softened from the prior quarter’s record, as build outs in China slowed from first half levels. Global customers are increasingly deploying 25 gig optical modules for front-haul links in 5G base stations. As a result, we are seeing increased design-in activity for our high-performance CDR and PMD platforms for 5G wireless base stations globally. We expect 5G infrastructure spending to increase in fiscal year '22 and expect this market to continue to grow for several years. In Q3 of fiscal year '21, revenue from our PON customers was flat with the prior quarter. While demand for our PON platform has been largely driven by China, we are continuing to see a number of new PON initiatives outside of China, where PON is used to channel high-speed data to the home, enterprise and campus networks. Semtech remains the leading supplier of 10 gig PON platforms for the ONU and OLT markets. And we expect our latest innovative 10 gig products to enable us to further benefit from the global trend toward increased PON deployments. Despite the inherent lumpiness associated with the infrastructure markets, we believe the secular trend led by the upgrade of data center connectivity and the expansion of 10 gig PON and 5G wireless network capabilities should drive future demand for our optical platforms across all our target infrastructure markets. For Q4 fiscal year '21, we expect net revenues from our signal integrity product group to increase, driven by all infrastructure segments and a recovering video market. Moving on to our protection product group. In Q3 of fiscal year '21, net revenue from our protection product group increased 25% sequentially and 3% from the prior year and represents a 27% of total net revenues. In Q3 of fiscal year ‘21 demand from our Korean smartphone customers rebounded strongly from the COVID-related issues that had impacted them in the first half of the year. Demand from our North American smartphone customers also remained solid. We expect that protection product group to continue to benefit from our ongoing diversification strategy. Many of today's high performance systems across all industry sectors are starting to incorporate advanced lithography devices and high-speed interfaces such as USB-C, 10 gigabit Ethernet and HDMI 2.1 resulting in the need for Semtech’s high-performance protection. We expect these trends to continue and contribute to the long-term growth of our protection business. In Q4 of fiscal year ‘21, we are expecting our protection revenue to increase, led by growth from the broad-based industrial and communications markets and stable smartphone demand in what is typically a seasonally weaker quarter. Turning to our wireless and sensing product group, in Q3 of fiscal year ‘21 net revenue from our wireless and sensing product group increased 32% sequentially and 21% over the prior year and represented 33% of total net revenues resulting in a new quarterly revenue record for our wireless and sensing product group. Our LoRa enabled platform continued its steady growth and experienced another record quarterly performance. In Q3 of fiscal year ‘21 we continued to see excellent progress against the goals for our LoRa metrics we had targeted at the beginning of the year. These include the number of countries with LoRa networks now stands at 99 countries and we expect over 100 countries to have LoRa networks by the end of fiscal year ‘21. The number of public or private LoRa network operators grew to 148 and we expect 150 LoRa network operators by the end of fiscal year ‘21. The number of LoRa gateways deployed grew to nearly 1.2 million from the 642,000 gateways at the end of fiscal year ‘20. And we are expecting the number of gateways deployed to increase to over 1.3 million by the end of fiscal year ‘21. The cumulative number of LoRa end-nodes deployed increased to 167 million from 135 million at the end of fiscal year ‘20. And we expect this number to exceed 180 million cumulative end-nodes by the end of fiscal year ‘21. In Q3, we shipped a record number of LoRa devices. Finally, the LoRa opportunity pipeline, which includes both opportunities and leads, stands at approximately $500 million with approximately $200 million of leads feeding the future opportunity pipeline. We expect the opportunity pipeline to increase rapidly in fiscal year ‘22 as we anticipate the inertia associated with the global pandemic to gradually subside. Our opportunity pipeline remains geographically well-balanced with approximately 70% of the opportunities now coming from the Americas and Europe, and includes an increasing number of use cases in the smart home, asset tracking and supply chain logistics markets. In addition to the record revenue and the continued progress on our LoRa metrics in Q3, we made several important announcements related to our LoRa business. These include Amazon's use of LoRa in their new Sidewalk network, unique capabilities of LoRa extends the range of smart home networks to connect both indoor and outdoor sensors, enabling new use cases. These include smart lighting, smart safety, pet trackers, asset tracking, smart irrigation, and many others. The use of LoRa in the smartphone segment demonstrates the value and versatility of LoRa in low power LAN and low power WAN segments of the IoT market. We believe that Amazon's use of LoRa in Sidewalk opens up a huge opportunity for Semtech's LoRa enabled business starting in fiscal year '22. And Cisco's use of LoRaWAN towards industrial asset vision system for enhanced visibility into physical spaces for IT and operational technology environments. This LoRa based system is a simple and secure solution for remote asset management, equipped well with cloud-based dashboard to monitor and manage the condition of assets and facilities that can be deployed in minutes using a simple QR code. We also announced the availability of our LoRa Edge tracker reference design that includes our new LoRa cloud geolocation service. Our LoRa Edge platform is our first LoRa based software defined radio platform that integrates Wi-Fi and GPS sniffing along with LoRa. We are seeing a significant ramp in new design-in activity, and believe that LoRa Edge is the ideal platform for asset tracking and asset management use cases and will be the main enabler of our future cloud services revenues. We believe that the flexibility, long range and low power of LoRa based networks are critical components of any successful low power IoT deployment. With the record Q3 performance and anticipation of a record annual performance, and with exciting smartphone opportunity driven by Amazon, as well as numerous new industrial IoT opportunities, we continue to expect that LoRa enabled revenues to grow at 40% CAGR over the next five years, and to become the de facto standard for the fast emerging LPWAN market. In Q3 of fiscal year '21, net sales from our proximity sensing platforms grew nicely over the prior quarter, helped by the recovery in the smartphone market, along with several new design wins that moved to production and should continue to ramp. We are also seeing increased design activity as global RF safety regulations become more stringent as new 5G base phones emerge. For Q4 fiscal year '21, we expect net revenues from our wireless and sensing product group to increase and achieve another quarterly record led by another record performance from our LoRa enabled business. Moving on to new products and design wins. In Q3 of fiscal year '21, we released 12 new products and achieved 3,397 new design wins, which also represented a new quarterly record. While this year has presented its share of unique challenges, I believe that our key stakeholders, including our investors, customers, suppliers, and employees have all played a critical role in driving the company's growth and success. We remain committed to considering the impact of key environmental, social and governance factors in our decision making processes. We also are focused on developing products that will make the planet be smarter, more connected and more sustainable place to live. We view our employees as the company's most important resource, and have an established set of core values that hold each of us responsible and accountable for doing the right things for the company and its employees. I'm excited about the company's future opportunities. I believe that our vision, our strategy and our focus on providing products for a smarter, more connected planet and our commitment to a more diverse and inclusive workforce, should enable the company to continue to be extremely successful. Now, let me discuss our outlook for the fourth quarter of fiscal year '21. We believe the underlying secular demand for our growth platforms remains solid. Based on very strong bookings and record highs starting backlog entering the quarter, we are currently estimating Q4 net revenues to be between $153 million and $163 million. To attain the midpoint of our guidance range or approximately $158 million we needed net terms orders of approximately 20% at the beginning of Q4. While we have been issued some licenses that allow us to ship to Huawei, our guidance assumes no more shipments to Huawei or HiSilicon. We expect our Q4 non-GAAP earnings to be between $0.45 and $0.51 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?

[Operator Instructions]. Our first question comes from line of Rick Schafer with Oppenheimer.

Mohan, I got a question on -- it’s on LoRa. I mean you’ve gained a lot of momentum there I think after a slow start in 1Q, obviously COVID related. I mean do you see continued linear ramp next year, sort of in line with that 40% CAGR that you just mentioned or could we see a step function in revenues there next year as LoRa sort of starts to hit a critical mass or it seems like its hitting critical mass?

Yes, I think Rick the way we've always looked at it is that there are certain catalysts that can drive faster growth and that's why we've always projected 40% CAGR just based on history and then some of the new use cases that we now know are starting to get real traction, which -- one of which is, of course, the smart home initiative, with the Amazon Sidewalk announcement. Certainly, if the pickup is good with that architecture and the network, one would expect a very fast acceleration in sensors and we could see definitely a step function increase. Whether that happens in FY '22, probably more FY '23, just because it takes time for the gateway, the network, the architecture to kind of get deployed and then sensors be developed. But I do expect that business alone just on the Amazon Sidewalk business to reach $100 million business in five years. So, for sure, that's going to be one of the catalysts. And then as I mentioned, the industrial IoT space has been somewhat slow this year because of COVID-related issues, but I believe that's going to pick up. It's just a question of time. A lot of the use cases are about creating smarter planet, about efficiency improvements. They're about greener initiatives and things like that. And so, it's just a question of time, I think. So, to answer your question, we do expect some catalysts over the next year or two here with the smart home initiatives.

I should have asked, just a quick follow-up on that question. I mean, are there any capacity issues that you guys have there, I mean in the past you kind of planned to catch up on the LoRa business this year, so, is there any capacity supply constraints that you're seeing in there or anything?

Well, there are supply constraints across the board. I would say, it's definitely a tightening of supply chain, as you know across all segments, nothing specific to our LoRa business or anything like that. I just think, as Emeka had mentioned, we are seeing some lead times on the supply side increase and that is challenging. But, generally that means the beginning of an upcycle in the industry in my view, and I think that's a good thing for us and for everyone.

If I could sneak in a follow-up, I think most LoRa revenues today are still coming from hardware. I'm just curious when do you sort of expect to start monetizing the services? I know we talked about that in the past, but the license and royalty opportunity that you see there. Thanks.

Yes. So there’s two elements there. One is the IP licensing royalties from our partners ST and [indiscernible]. We do expect next year we start to see some of that coming in, but also our cloud services, we did announce that this last quarter, first cloud service using geolocation, again using LoRa Edge platform, and this is another area where we're expecting pretty good growth. It'll be a slow ramp initially, but the cloud services revenues so will be recurring revenues, remember. So again, we're expecting -- again, something between $50 million and $100 million over the next five years on an annual basis, and a lot depends on the quality of the geolocation and the other services we bring to market. But this is our first real initiative and we're very confident and feel very good about the type of customers and the type of use cases and how quickly that could ramp in the future.

Our next question comes from the line of Quinn Bolton with Needham & Company. Please state your question.

Just wanted to follow up on the Sidewalk question. With Amazon now announcing Sidewalk and I believe the fourth generation Echo product including that Sidewalk network in the gateway, have you seen an increase in end-node activity for sensors compatible with Sidewalk and just wondering if you could give us an update on that design activity around Sidewalk, more on the end-node [ph] side?

It's really just starting Quinn. Amazon had made the announcement. They haven't yet talked about the sensors that are connected to it. They've talked about what they anticipate they will be, but they haven't yet rolled out their development platforms to enable companies to do that, but that's pretty close I think and it's going to happen very soon. And so, my expectation is by mid next year, we'll definitely start to see real Sidewalk networks be deployed and sensors being attached and that type of thing.

Great. And then a follow-up question just on the 5G front-haul side of the business. It sounds like it was a little softer for you in the October quarter on the -- following the record level in July, but it sounds like you're looking for growth in that business into the January quarter. I guess I'm a little surprised by that, because we've heard from other customers that are -- sorry, other companies that the China 5G build out is sort of going through a pause between the first phase and the second phase yet you seem to be perhaps bucking that trend. So wondering just if you could talk about what you're seeing in China 5G, and maybe the timing of the next round of tenders for base station and front-haul build out? Thank you.

Yes, well, I think largely your comments correct, Quinn. I would say that there's anticipation that next year is going to see some good growth and that starts in Q1. And therefore, the build for us suddenly, and the demand starts to pick up in Q4, which is what we're seeing. And so yes, I think it's just a timing thing. We sell into module manufacturers, obviously, and then their module guys sell into their base station guys. And so the some of that dynamic is just timing. But yes, we're expecting a pretty strong FY '22. The other thing is not just China, I think that's one of the nice things about -- actually all of our infrastructure segments now is that fairly global we're seeing opportunities in Europe and North American OEMs as well, both on the 5G side and on the PON side as well. So that's encouraging.

Our next question comes from line of Tore Svanberg with Stifel. Please proceed with your question

Yes. Congratulations on the results. First question, going back to LoRa. Do you have the range update for us for this calendar year Mohan?

We’re still keeping our range $85 million to $95 million. We're going to be in that range I think for this year. And we're still keeping our 40% CAGR going forward. Obviously a lot depends on the timing of Amazon Sidewalk and some of the higher volume, faster time to market opportunities. But in general, I would say with the exception of kind of COVID-related impact, we're seeing pretty good industrial momentum, a lot of new use cases. But as we see these use cases kind of come out, we're seeing adoption across the globe. So I think, again, the timing of when proof of concepts move to revenue, it’s challenging to really comment exactly how it's going to happen. But once it start to materialize and I think as I mentioned once COVID stops, and then we start to get some return to normality in terms of manufacturing and industrial IoT. I think that's going to continue to also drive the revenue.

That's very helpful and you talk about 5G coming back next quarter or I mean this quarter. What about data center? How are some of the dynamics being there because that obviously paused a little bit this last quarter, but are you starting to see that grow again as well?

Yes. I wouldn't say it's as positive as the 5G story. I think there's more -- still inventory there in the channel, and then maybe the customers. But we are starting to see that pick up also. And so I expect Q1 for sure to be up. Data center is probably going to be flattish for Q4 and then I'd say up in Q1 timeframe, but yes, positive signs, a lot of design-in activity there.

Lastly on the PON business, you expect to start to see 10 gig. Is that going to be a fiscal '22 event or is it going to be further out than that?

Actually our 10 gig PON is doing well already and I think continues to do well. And we expect in Q4 to do quite well, this quarter to be quite strong for PON, and next year we're also projecting good growth for PON. So yes, infrastructure just continues to make us -- give us good indications that FY ‘22 is going to be another solid year for our SIP business.

Our next question comes from the line of Craig Ellis with B. Riley.

I'll ask one that ties together a few points. So you mentioned that the inventory would be up quarter-on-quarter, and I can see that all the segments are guided up. But Mohan can you help us with some color on some of the gives and takes across your different segments, which would you expect to be growing more robustly, which are more muted? And then within any of the segments, are there any sub segments where you'd expect a meaningful deviation to the broader overall segment trend?

Yes, so, as you know, Craig, the first half was extremely weak for consumer. I think we're seeing the second half being quite strong relatively too for consumer. And I'd expect that to continue for obviously this in Q4, which is typically seasonally down for us. We're seeing very strong consumer business. So that I think is going to continue. Then on the infrastructure side, as I mentioned, some softness there, but mostly driven by a very strong first half and all the indications are that, that most of the infrastructure segments we participate in are going to come back this quarter and certainly grow in Q1. And then on the wireless and sensing side for us, obviously LoRa continues to do great. And, and then on the proximity sensing side, I think, again, that's tied to consumer, we expect that to do quite well in Q4. On the inventory side, on the supply side, the areas that we're concerned about, obviously there's a tightened supply chain. Some of the end markets tend to have short lead times, typically consumer. So we’re taking a little bit more risk in building some internal inventory there. There is -- demand seems to be extremely strong. We're pretty cautious about how we are participating in the market and making sure that we're not over inventorying anything. Our channel is very light at the moment. And my expectation is that if we manage it correctly, then I think we should see a good consumer growth next year as well. We won’t see such a volatile demand coming from there.

Got it. And then turning to LoRa, you mentioned in your prepared remarks, both Amazon and Cisco, and I've looked at Cisco's product announcement. It was actually very impressive -- very impressive array of products that help create a real nice ecosystem. As you look at fiscal ‘22, what potential does Cisco have to really drive incremental sales for LoRa? Or is that just much more of an analog type business where those would be the kind of classic volume design-ins we would see with industrial versus anything high volume like Amazon?

Yes. From a revenue standpoint, it's more the latter Craig. But the important thing to remember is that once they have adopted LoRa and they build their infrastructure based on LoRa, then that's there forever, right? It's going to be there for at least the next 10, 20 years. And I think drive -- especially in the industrial sector drive a ton of opportunity, both for additional sensors, but also potential cloud services, potential new use cases. So that's the excitement we have behind LoRa and LPWAN. We creating a whole new industry there and that to me is the thing to take away not only from the standpoint of getting these tier 1 customers like Cisco and Amazon involved in driving LPWAN and helping us with the ecosystem, but what it says about the value that the technology brings to the market and enter these customers. So yes, it's pretty exciting to have both new use cases, but also tier 1 companies really driving it for us.

And if I could on that just two clarifications, I'll throw them out at the same time one. You talk about rising gross margin in fiscal '22. Can you give us a sense for the magnitude of that increase? For example, could we see gross margins up 100 basis points or so over a four quarter period? And secondly, I thought I heard you mentioned that the fourth quarter was a 14-week quarter? And if so, what's included in revenue and expense guidance for the extra week?

So let me take this first one with regard to gross margin. I think like I said in my prepared remarks, when you think about where we're expecting our revenue growth to come from going into the next fiscal year, we’re expecting our LoRa business to continue to grow very nicely. Our data center business, I think remains an area of growth, PON and the 5G Wireless and also additional industrial and automotive opportunities within our protection business. So all these businesses are really very exciting for us because of the higher gross margin that they come with. Is it really something that I can quantify right now? Probably no, but I would expect that to see something in the range of 50 basis point to 100 basis point expansion throughout the year. So that’s very good. With regard to the 14th -- Q4 with 14-weeks, it's always hard on the revenue side to really to estimate how much of the extra week is contributing to revenue. So that, I think, of course, there is a contribution for it. But it's much easier on the operating expense side. On the operating expense side, I think about 60% of our total operating expenses is sort of tied to time, right? So things like your salaries, your operating supplies and stuff like that. So if you think about -- if you take 60% of operating expenses and then you realize it over 14 weeks, that will give you a pretty good estimate of what the operating expense impact is.

Our next question comes from Mitch Steves with RBC Capital Markets.

I just had a quick one, I guess really a bigger one -- bigger picture one, just on the strategy for Semtech now. I know before you guys have talked about potentially kind of spinning up the LoRa business of being its own entity or potentially selling that piece of the business relative to Semtech whole. Can you maybe provide us an update on what kind of the view is now given that you've kind of survived the kind of the downturn in 2021 -- I'm sorry, 2019 and 2020? What the plan is for LoRa business or Semtech as a whole relative to that effort?

Yes, Mitch, the thought has always been that if LoRa becomes the de facto standard in the industry, we are generating around $100 million of recurring cloud services revenues. Then we could start to look at some ideas about how to move that business to a different level. And so, that's the thought. And I would say we're still probably 2, 3 years away from that. Obviously every day we get a good momentum and new announcements like Amazon Sidewalk and LoRa Edge announcement get closer, but we're not there yet. I think I would say 2 to 3 years still is the timeframe.

Yes. And then, can you provide us, say, sort of cloud service kind of a recurring revenue. What's kind of the revenue right now, relative to kind of just the straight sales you guys are doing?

That’s -- it's brand new. So we just announced that cloud services, geolocation service. It's the first one. So it's very -- we're just starting to get contracts in place now and things like that. So, I would say next year, end of next year would be a good measure for, all be on track to do the $100 million in 3 to 5 years. And then, what's the pick-up and what's the value that we're bringing? It is dependent on our new platform the LoRa Edge platform, as I mentioned, and I think, we'll start to get some good feeling for that as customers deploy that platform and give us feedback on the value.

Yes. I guess just one last one, if I could, just to clarify those comments. So what would be kind of the first major customer, major launch you guys would expect, call it in '21 and '22? Not looking for logos or anything like that, but how should we think about the rollout of that new product or business line?

Well, the way to think about it is, the asset tracking and asset management is the -- is really the first target in geolocation. And so, obviously once our customers are testing and they feel that there's value, we'll start to talk more about the specific application, but I would think it's in those areas in asset management and asset tracking and tied to use of LoRa Edge indoors and outdoors, that's the beauty about LoRa and the LoRa Edge platform has Wi-Fi sniffing and GPS sniffing. So the concept being, you can track an asset from your home, outdoors into a warehouse, into a manufacturing facility for example or within buildings, deep in doors or in the rural areas and have one platform which is utilizing and optimizing the battery power consumption effectively. So, it's a very nice concept. It's a very -- I think it's a very unique capability we have. But we have to get it out there and demonstrate the value, right?

Our next question comes from line of Scott Searle with ROTH Capital. Please proceed with your question.

Just a couple of quick clarifications. I missed what you said about the sequential outlook for protection. Just wondering if that was up, down, flat? And what Huawei was in the quarter? I know you were indicating your guidance doesn't reflect any incremental contribution from Huawei, HiSilicon in the fourth quarter. And then I had a couple of follow-ups.

So protection, we're expecting continue to be up. It was up in Q3, and we expect it to be up in Q4, driven mostly by the consumer space, but also in our industrial -- more broader industrial telecommunications, automotive sectors are all doing quite well for us. So, we're expecting that to grow in Q4. So -- and then on Huawei, Huawei for this quarter we're not expecting much at all. We haven't shipped much and we're not expecting to ship much in Q4. So, pretty minimal revenues from Huawei this quarter once -- obviously we have some licenses as I mentioned in the prepared remarks but it's fairly modest any revenues that come from that. And it's not clear to us whether Huawei has already built up inventory. And so whether they need material, so we've essentially taken it out of our guidance.

Great, perfect. And on wireless and sensing, absolutely a huge quarter. Part of that, it sounds like a combination of proximity sensors and LoRa. I was wondering if you could parse that a little bit more, up 32% sequentially, the smartphone market broadly in general was up about 20% plus I think, on a global basis, so you're benefiting from that. Was there something in there, was proximity bigger versus lower just to kind of get calibrated on that? Because, given the performance of that segment, I would have thought you'd be at the higher end or even above the higher end of the range of $85 million to $95 million for LoRa this year?

Yes, they're both doing extremely well, I would say. The proximity sensing for us has been -- it's driven by mostly the smartphone business. And so it has obviously done quite well in Q3. And we're expecting stronger proximity sensing in Q4. As I mentioned, consumer tends to be weak in Q4. But this year is unique in the sense that first half is very weak. So we're starting to see maybe a little bit of that effect kind of playing out here in the Q4 timeframe. But with LoRa it's more consistent. I mean, it's just continuous consistent growth. With LoRa it's more about how fast the POCs are moving over to revenue, right? So we have plenty of pipeline. I mean, as I mentioned, we have $500 million of pipeline. So it's only a question of how quickly those can move through the pipe to revenue. And that's where something like the Amazon Sidewalk announced I think really starts to help in a way because, LoRa is a great technology for industrial, it's clearly proven in utilities already, it’s clearly proven itself in some of the asset management and broader kind of industrial use cases. But where we have been hoping and somewhat speculating, but now we have real evidence of it is the smartphone use cases and some of the more consumer use cases which drive revenue typically faster. Now, they can be volatile as well. I mean, they can have shorter life cycles as well. But typically, they can ramp up much faster. And so as I said, I don't think we'll stop to see it really till mid next year, the growth there. But it's coming.

If I could Mohan follow up on the lower front as relates to Sidewalk. Could you talk a little bit about the ecosystem that's building around it right now? Now you got the anchor, right, you have the base station there in effect with the Echo Dot. How is the rest of the ecosystem and design activity around that starting to form? I was wondering if you can update as well on tags. Haven't heard a lot about that lately, I know that was out -- further out on the horizon, but you're starting to talk about cloud and recurring opportunities. What's the latest thoughts on tags?

Yes, I'm pretty excited by tags. But I think it's still early, we still have to get the price points down. And we do need something like a Sidewalk network in place for that to become an effective vehicle. With regard to the ecosystem, it's really driven by Amazon. I don’t think -- we're participating obviously in helping and facilitating but a lot of the momentum is going to be driven by them directly and I think we'll continue to help drive that process. But when you look at the ecosystem, there is clearly an opportunity for sensor manufacturers who want to connect to a gateway in the home, in lighting area or in the tracking area and the security area and the safety area, irrigation, just a whole bunch of sensors. There's clearly opportunity for software companies to partner with Amazon and figure out how to connect with them and their Sidewalk network. There's clearly opportunity for system integrators who want to connect to home-based networking opportunities. They just -- the whole ecosystem around the smart home, I think comes into play quite nicely. And I think we'll start to see that and that’s most probably the second half of next year. But as the network starts to get rolled out, and customers and consumers start to deploy Sidewalk networks, I think that's when you really start to implementing.

And lastly, if I could just on in signal integrity PAM4 product line. I think you're starting to see some 100 gig contribution, I thought in the third and fourth quarter start to see some initial revenues. So wonder if you could update us on that front. And then looking forward to the 200 gig and 400 gig, I thought there was design activity, which would start to translate into revenue in the first half of fiscal '22. I was wondering if you could just update us on those two fronts. Thanks.

Yes, we’re starting to see revenues now. It's small, but we are seeing Tri-Edge revenues now, PAM4 revenues and we've got some very good momentum. As I mentioned, we have over 2,000 design-in opportunities that are in play at various stages, some early stage evaluation, some qualification type of stages. And so that's going to start ramping. And next year should be a very good year for Tri-Edge, I think.

Our next question comes from the line of Christopher Rolland with Susquehanna.

I think most of the good ones have been asked. So I'll just ask two. I guess the first one here, on the 5G opportunity. Perhaps you can give us -- you said it would grow. I think most people are expecting that. But perhaps you can give us an idea of the kind of growth rates we should expect in this business for the next couple of years. And then if you could break out perhaps units or ASPs, it sounds like you're moving to 25G. So I want to explore that opportunity a little more? Thanks.

Yes. So the main thing to remember with 5G for us in the optical modules is that with 4G, there was typically just a PMD device of some sort. With 5G, there'll be a CDR as well as a PMD device. So the opportunity for us in 5G is either ClearEdge CDR and FiberEdge PMD device for 25 gig links. If they go to 50 gig links, Tri-Edge PAM4 and FiberEdge device for 50 gig links. So ASPs obviously increase for us. And in addition, there's more -- typically, with 5G, there's going to be more pumped things. I think it kind of goes from 6 to 12 front-hauling. So there's significant increase in the number of ports that we’ll be going for. So increased content, more ports. But then I think the other thing that's somewhat different for us and for everybody, I think in 5G is that historically, it's been China. And I think for sure, China will still be the predominant volume driver. But we are starting to see some of the OEMs around the world really take a more aggressive stance in trying to be successful in this market and at least participate and some of that's geographical dependent on which regions are driving the need to have local suppliers support their 5G infrastructure. But that will also drive opportunity for us, I think. And for 4G, we have about 30% share of the market. We think we can hold that share at least for 5G. And so that's kind of the thinking. And it should grow double-digits, for sure, over the next couple of years herein?

Excellent. And then also, if you could just talk about the data center opportunity -- at least the data center end market more broadly there. Intel talked about perhaps a demand slowdown. I just wanted to see if you agreed with that or not? And then more specifically, if you could talk about your optical opportunity there with Tri-Edge. You mentioned cost versus analog. What is that discount that you get for analog? And perhaps you can discuss how sales are tracking on that side?

Yes. Well, data center had a very strong first half, shouldn't be forgotten. So we had a record first half. So there was some expectation that the second half was going to slow a little bit and that's really what's happened. Still on an annual year-on-year basis still up and so -- and we'll continue to grow nicely, I think, next year. So I think we've seen, obviously, a little bit of softness in Q3 and expect Q4 to probably be flattish versus Q3 and then start to pick up again next year. Much like 5G, I mean, the hyperscale data center is a broad set of global customers. So it's pretty a broad range of customers. We are obviously selling into the optical module manufacturers, and they're building their modules and shipping into different data center customers, and we've got good traction, as I mentioned there. And we expect to see production ramps for most of the 200 gig, 400-gig PAM4 modules over the next few quarters here. It's already started. But I think over the next few quarters, we'll start to see that. And essentially, you can take 100-gig optical module today that uses our ClearEdge CDRs and essentially replace it with a very similar module, uses our Tri-Edge CDRs and get double the bandwidth for very little incremental cost in the module. And so that's the value we see, and then that's what we expect the market to recognize.

Our next question comes from the line of Tore Svanberg with Stifel.

Just a quick follow-up. Mohan, I think you said that the Sidewalk opportunity alone could be $100 million over the next 5 years. Is that on chip revenue? Or is there some royalty or even services revenue in that number as well?

Yes. I would say it includes everything, Tore. So mostly chip and royalties.

Our next question comes from the line of Harsh Kumar with Piper Sandler.

First of all, congratulations, solid guide, solid results. So we appreciate it. And then I had 2 questions, Mohan. Right before the ban, I think you were pretty -- very optimistic on the opportunities in China with perhaps a new presidency. Can you talk about -- you talked some about 5G, but could you just lay out for us the framework of how Semtech would view the opportunities in China should the gates open up for trade again?

Well, I think we've always been bullish on China obviously because we invested in China for the last 15 years. And so it's hard to walk away from a region that has driven so much growth and continues to have some much [comments] going forward. So -- but I would look at the Huawei situation is a unique situation, obviously, the ban on Huawei has impacted us significantly. But that's kind of done now, and we've been through that. The bigger challenge now is just, are we going to see an opportunity to continue to grow in all of our businesses in China? Or is there going to be this further kind of disaggregation between U.S. and China. And that's still unknown and I think that's where we're waiting to see. But for sure, any positive relationship improvements, I think, is a positive for our business for sure, because just because of the success and the momentum and relationships and all that we have across all of our segments. But that said, we're not counting on it. As I mentioned, a lot of these markets like 5G and PON are becoming a little bit more globalized in the sense that other regions are starting to recognize the need to have their own infrastructure players. And they can't depend necessarily on the Chinese manufacturers to support them and be there when they need them and those type of things. So it's a little bit both, but I definitely think if things improve on the relationship front at a government level, then sure that should help our business longer term.

Mohan, so a follow-up on that one, and then I'll ask my next question as well. Do you see opportunities -- you used to have opportunities, I believe, for data center business in China. Do you see that perhaps opening up again for you, for Semtech in China the data center? And then secondly, with regards to Amazon Sidewalk and LoRa, you -- I think you were the only supplier of baseband ICs for the gateways that you guys deploy on the infrastructure side. Is that still the case? And will the typical consumer be relying on sort of the Amazon infrastructure that will be laid out in the city? Or will the consumer have to buy their own sort of gateway, which comes in a Dot or Echo or something else?

So let me answer that first, and then we'll go to the data center. So Amazon Sidewalk, yes, for sure, there will be connectivity through a gateway, which will be an Echo. So -- and Amazon, obviously, will supply the Echoes and so the connectivity will be to the Echo. And then how different Echoes connect with each other and how the roaming is done, that's all going to be driven by Amazon. That's an Amazon decision. And so we'll obviously help them with that. But the main thing is getting -- is really targeted within the home, the smart home and the periphery of the home is kind of the initial thinking and then tracking of your pets and things like that outside the home and then connecting different Echoes together and those type of things, I think, is a broader vision, right? So we'll see how that plays out. And then on the data center side, for sure, yes, all of the Chinese data center, hyperscale data center guys are our partners, customers, potential opportunities for Tri-Edge, for sure. And we are working with them. We continue to work with them. We don't see any real issues at the moment. I don't think that there will be. But yes, we have very close relationships and expect to see some good growth there.

Our next question comes from the line of Tristan Gerra with Baird.

You've mentioned that Amazon was a 10 to 20 year opportunity. So clearly, there's a long-term investment. Could you give us a sense of what's the magnitude of those large potential and customer like Amazon? And given those investments, is there any incentive for them to eventually use the same technology in other platforms outside of consumer, Amazon, for example, is also pushing IoT solution in industrial. Is that an opportunity that you see not specific to this customer but elsewhere versus cellular-based network? And generally, what's the incentive large customers have to, once they invest in LoRa, to leverage that into different end markets?

Yes. Tristan, I think all of the companies we deal with, we mentioned Cisco earlier and Amazon and other companies are starting to understand the value that LoRa brings. It's not -- the value is increased actually when LoRa is combined with other technologies. So when you combine with Bluetooth or Wi-Fi or GPS, as I mentioned, LoRa Edge, one of the reasons why we developed the platform so that it has Wi-Fi sniffing and GPS and thing. And LoRa is that -- LoRa on its own has some limitations in the sense that it's not a high bandwidth connectivity, right? So -- but I think as these use cases start to get deployed, there's going to be use cases across the board in all segments. And industrial is where I think the biggest value -- the largest value is, for sure, because of the very low power and the range. But then when you see the smart home initiative that this is really driven through the Sidewalk initiative, it really is going to change the way home automation and smart home is thought about when you start to look at the peripheries of your home and you go into the attic or into the garage or into the basement or into the outdoors, into the yard and can then put smart automation around that. That really starts to change the dynamic a little bit. So I think there's a huge opportunity. We'll see -- it's baby steps, as I said, but we have some big hitters that are behind the technology pushing it, right?

Great. And then just a quick follow-up. So you've mentioned a little bit earlier about lean inventories in the channel and tightness in supply across the board and you mentioned nothing specific to LoRa. Are you shipping exactly in line with the demand in LoRa? Or are you still catching up for what was following supply chain disruptions earlier in the year? Just trying to see if there is any catch up revenue or if it's really just linear with end demand?

Yes. I would say if the question is specifically about LoRa, I think we're shipping to demand. I think it's in good shape. I think there the real question there is in FY '22, if the consumer demand picks up rapidly, then hopefully we'll be able to supply to that and I think we can. So we're in fairly good shape. With regard to the rest of the business, demand is extremely strong. Bookings have been extremely strong. So we're a little bit cautious, particularly on the consumer side with regard to making sure we understand how much inventory is being built and trying to maintain some balance there by keeping our channel lean and things like that. So it's hard to know, to be honest with you, Tristan, exactly, but we'll see it play out. We're expecting a very strong Q4. We're expecting a strong Q1. I think the first half of next year looks like it's going to be strong. Then the question is, what does second half look like, right? But we'll see by then.

Our next question comes from the line of Karl Ackerman with Cowen.

Yes. On your signal integrity business will grow mid-teens at least in fiscal 2021. How do you think about the trajectory of that business entering fiscal 2022 in the context of your longer-term 12% growth rate? I asked because it would seem another healthy year with 10-gig PON is on the come. Demand remains healthy for 25 gig and 100-gig optimal products in Asia. Yet at the same time, proponents of 400-gig would argue the second half of 2021 will begin the demise of NRC for short reach applications. So just would love to hear your thoughts on that.

Well, we think 100 gig modules and connectivity will continue for some time. I don't think there will be a demise. It may start to flatten out and PAM4 and 200-gig and 400-gig PAM4 modules will start to pick up for sure. But we're hoping to participate in that. Of course, with Tri-Edge, and we see good design and momentum, as I said. So to answer your question, we think all the infrastructure segments are going to do quite well next year. Part of that is working from home and all of the COVID-related dynamics that have driven infrastructure investments and the need for more bandwidth and all those things. So yes, signal integrity product group, we're expecting pretty good growth next year across the board. This year has been an extremely weak year for video, for example, as well. So we're expecting FY '22 to see that pick up also in that segment. We anticipate that to contribute to the growth next year also.

Understood. Last question, if I may. What order trends are you seeing by Asia-based data center customers? I asked because your primary peer spoke about that strength for 25-gig and 100-gig products. Again, just to double-click on the channel inventory commentary. We've kind of heard some mix commentary, but I’d appreciate your thoughts on how you feel about the situation for optical components, particularly for data center and long haul?

For us, it's -- the channel is pretty light. It's not -- it's certainly in the range we feel comfortable with. Demand is very strong, as I mentioned. Bookings are strong. Indications are Q1 -- I mentioned that Q4 was going to continue to be a little bit light for data center, probably flattish. 5G is going to be a little bit stronger, and we expect PON to be stronger in Q4. And then we expect infrastructure segments to do nicely in Q1. So yes, at this point, channel is light, I think, relatively, and demand continues to be strong, and bookings are strong. So we think we're in a pretty good shape.

And our final question comes from the line of Craig Ellis with B. Riley.

Mohan, I really appreciate all the metrics that you give with LoRa and the transparency they provide. But I missed what you said about the opportunity funnel. So one, can you repeat that number? And two, did it change from the last quarter? And three, when we go through a period that’s as dynamic as what we've seen year-to-date, where the whole world has turned upside down with a COVID crisis, how does the company manage its funnel and kind of quality check and resiliency check, the items that are in that funnel as we get to the other side and now, are looking at what should be a global recovery? But can you just walk us through how you maintain that funnel and where it stands currently versus prior expectations?

Yes. So currently, the pipeline is about $500 million. We look at the leads that drive the pipeline, it's about $200 million. So there's a pretty sizable pipeline compared to what our current revenue is and the main area of focus is conversion of those pipeline opportunities to revenue. That's been the key -- kind of key focus for us is how do we make sure and enable that to occur. It's fairly well balanced. As you know, the pipeline has a funnel -- in the funnel, about 21% is China and then about 70% is Europe and Americas, which is good because that's a better balance in revenue today. The revenue is about 49% China and 40% Europe and Americas. So we wanted to get that balance -- more balanced. And if we execute it, if the funnel turns over to revenue as we expected to in time, then that would be a nice thing to have just more balance. Also lots of use cases -- lots of different use cases. So there's obviously, now a hefty smart home component that's also in that funnel. Utilities, asset management, smart city and building. So fairly well balanced there. Yes, this year, obviously, has been a tough year for customers to prioritize new initiatives. And that's been really the difficulty we've had, where most of many of our company -- customers have been focused on just making sure people are safe and people have jobs and those type of things. Putting a priority on a new technology and a new market and a new initiative has been challenging. But it's starting to get turnaround. And I think as I mentioned with the Amazon Sidewalk initiative, that's -- initially is significantly going to be announced much earlier, but was pushed out and now is out there. And I think we're going to see more of this type of thing as our customers start to get a handle and countries start to get a handle on the pandemic and the way forward. So expectation is next year the opportunities will increase rapidly.

And with that, we’ve reached the end of our question-and-answer session. I would like to turn the floor back over to management for any closing remarks.

Thank you. In closing, we were pleased to deliver another solid quarter and remain encouraged that our strategies for multi-sourcing, our investments in IT, operations and sales infrastructure and systems continue to limit the impact of COVID on our business operations. I want to once again acknowledge all of the talented and committed Semtech employees across all our global locations. And thank them entailing for their ongoing efforts. We believe our strategy, along with our diverse offering, balanced end market approach and strong customer relationships should enable us to continue to deliver growth. With that, we appreciate your combined, continued support of Semtech and look forward to updating more next quarter. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.