Semtech Corporation (SMTC) Q1 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the Semtech Corporation Q1 Fiscal Year 2022 Earnings 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 will now turn the conference over to your host, Sandy Harrison, VP of Investor Relations. Thank you. You may begin.

Thank you, Hillary, and welcome to Semtech's conference call to discuss our first quarter of fiscal year 2022 financial results. 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 close 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 and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. As a reminder, all references made to financial results in Mohan's and Emeka's prepared remarks, during the call, will refer to non-GAAP financial measures unless otherwise noted. A discussion of why the management team considers such non-GAAP financial measures useful along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP measures are also included in today's press release. With that, I’ll turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu, Emeka?

Thank you, Sandy. Good afternoon, everyone. As Sandy stated, unless otherwise noted, I will be reviewing our non-GAAP financial results. And their reconciliation table is available in today's press release. For Q1 fiscal year 2022, net sales grew 3% sequentially and 28% over the same period a year ago to $170.4 million, and above the midpoint of our guidance, led by the continued strength of the secular teams driving our growth platforms. In Q1, shipments into Asia represented 78% of net sales. North America represented 13% and Europe represented 9%. We estimate that approximately 35% of our shipments is consumed in China. Total direct sales represented approximately 14% and sales to distribution represented approximately 86%, and our POS represented another quarterly record. Our distribution business remains balanced, with 31% of the total POS coming from the high-end consumer end market, 37% coming from the infrastructure end market, and 32% from the industrial end market. Q1 bookings increased on both a Q-over-Q and year-over-year basis. And once again, represented a new quarterly record and resulted in a book-to-bill well above one. Turns bookings accounted for approximately 17% of shipments during the quarter. Q1 non-GAAP gross margin increased 50 basis points sequentially to 62%, which was at the high end of our guidance range due to a more favorable product mix. For Q2 and fiscal year 2022, we continue to expect our gross margin to trend higher as we expect net sales growth to come from our growth platforms that tend to have higher margins. We believe that we can continue to mitigate the higher costs associated with the challenging global supply chain through slower customer pricing reductions or through price increases. Q1 non-GAAP operating expense increased 3% to $64.1 million, driven by the negative impact of the weaker US dollar and higher new product development expenses. For the rest of fiscal year 2022, due to the weaker US dollar, we expect our non-GAAP operating expense to be slightly above current levels. In Q1, we were pleased to see our operating profit on a sequential basis and year-over-year basis grow significantly faster than our revenue due to gross margin expansion and modest growth in operating expenses. We expect to see continued operating leverage as we go through the year, driven by revenue growth from our LoRa enabled, our Tri-Edge and our industrial protection platforms. As a reminder, beginning in fiscal year 2022, we started using a normalized non-GAAP tax rate of 13% for the full fiscal year that we believe reduces the variability in non-GAAP tax rates that can occur throughout the year. We will update this tax rate annually at the beginning of each fiscal year. In Q1, our cash flow from operations increased 20% sequentially to $33 million or 19% of net sales. Our free cash flow increased 61% sequentially to 16% of net sales, compared to our long-term free cash flow target of 25% to 30% of sales. In Q1, we repurchased approximately 361,000 shares of our outstanding stock for $25 million, resulting in $364 million remaining in our outstanding authorization that was expanded by our Board during the quarter. We expect to continue to use our cash to opportunistically report just our shares, make strategic investments and pay down our debt. Accounts receivable in Q1 decreased 6% from Q4, while days of sales increased a day to 37 days and remains below our target range of 40 to 45 days. In Q1, net inventory in absolute dollar terms increased 7% sequentially, and days of inventory increased to 126 days from 116 days at the end of Q4 and remains above our target range of 90 to a 100 days. We expect our net inventory to remain above our target range to support stronger demand and to address the tighter supply chain environment. In summary, fiscal year 2022 is off to a strong financial start. Our growth platforms are showing strength. Our gross margins are expanding, driven by those platforms. And our optimized operating expenses are leading to a rapidly expanding operating margin. Our cash flow generation remains strong, and we continue to focus on the execution of those things that we can control and believe the long-term secular nature of our growth engines position us nicely for strong growth and a record financial performance in fiscal year 2022 and beyond. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2022 performance by end market and by product group and then provide our outlook for Q2 of fiscal year 2022. In Q1, net revenue increased 3% sequentially and 28% over the prior year to $170.4 million. Higher demand across all three of our end markets drove the Q1 growth. We posted non-GAAP gross margin of 62% and non-GAAP earnings per diluted share of $0.53. In Q1, net revenue from the high-end consumer market increased 8% sequentially and 52% over the prior year and represented 32% of total revenues. Approximately 21% of consumer net revenue was attributable to mobile devices, and approximately 11% was attributable to other consumer systems. Net revenue from the industrial market increased 1% sequentially and 41% over the prior year and represented 32% of total net revenues. Net revenue from the infrastructure market increased 1% sequentially and 6% over the prior year and represented 36% of total revenues. I will now discuss the performance of each of our product groups. In Q1 of fiscal year 2022, our Signal Integrity Product Group grew 7% sequentially and represented 39% of total revenues. Demand increased across our data center, PON and wireless base station businesses. In Q1, revenue from the data center market increased as demand for 100 gigabit per second optical modules continued to increase. Data center bookings grew strongly in Q1, and we are expecting strong growth for the rest of the year, driven by 100 gigabit per second, 200 gigabit per second and 400 gigabit per second optical modules. Momentum for our Tri-Edge PAM4 CDRs in 100-gig, 200-gig and 400-gig optical systems is increasing, as the design wins transition to production over the next few quarters. Our Tri-Edge products experienced record bookings in Q1, as customers begin early deployments that are expected to ramp at global data center customers in the second half of this fiscal year. We expect our revenue from Tri-Edge optical modules to grow nicely in FY 2022 and over the next few years, as more programs move to production. Our FiberEdge PMD platforms are also doing well, as they complement our ClearEdge and Tri-Edge CDR platforms and DSP-based modules, where customers are taking advantage of the higher performance and increased integration provided by FiberEdge. We are pleased with our progress in the PAM4 optical module market and are increasingly confident that the lower power, lower cost and lower latency that Tri-Edge provides, together with FiberEdge's higher performance and integration, should enable our hyperscale data center business to continue to grow and achieve a revenue record in FY 2022. In Q1 of FY 2022, our PON business increased, led by another record quarter for 10-gig PON revenue. In Q1, we had record PON bookings, driven by demand from Chinese, European and North American service providers that we believe bodes well for future growth from our 2.5 gig and 10-gig PON platforms. Semtech provides the most comprehensive PON portfolio available in the market and is the leading provider of 10-gig PON solutions for both the ONU and OLT segments. We believe we are well-positioned to benefit from the increasing global demand for higher bandwidth, access connectivity and expect our PON business to grow nicely in FY 2022. In Q1 of FY 2022, revenue from wireless base stations increased as our 5G solutions achieved another revenue record. In Q1, we began sampling our recently announced 50-gigabit per second PAM4 Tri-Edge phone, targeted at front-haul optical modules for the 5G wireless market. We expect 5G wireless deployments to accelerate in the second half of fiscal year 2022 and continue to ramp for several years. In Q2, bookings for our Signal Integrity Product Group reached a new record as demand for high bandwidth global infrastructure continue to increase. We expect these businesses, along with our video business, and our emerging LIDAR business to drive sustainable long-term growth for our Signal Integrity Product Group. In Q2 fiscal year 2022, we expect our Signal Integrity revenues to increase and achieve a new quarterly revenue record on higher demand from the data center and PON markets. Moving on to our Protection Product Group. In Q1 of fiscal year 2022, net revenues from our Protection Product Group decreased 5% sequentially and increased 13% annually and represented 27% of total revenues. In Q1, Protection smartphone revenue declined as some smartphone customers experienced supply constraints, not related to Semtech, impacting their ability to build complete systems. Demand and bookings from our smartphone customers continues to increase, and we expect revenues to recover in the next few quarters. In Q1, demand for our Protection devices from the broad-based industrial market continued to grow and experienced record bookings as our diversification efforts into the broader Protection market, including the automotive and IoT markets, gained momentum. Many of today's high tech systems are using more advanced process geometries that require robust high performance Protection technology to prevent damage to their highly sensitive devices. We expect this secular trend to continue and drive increased adoption of Semtech's Protection platforms in mobile systems and increasingly across broad-based industrial, automotive and communication systems that should enable our Protection business to deliver double-digit growth over the next several years. In Q2 of fiscal year 2022, we expect our Protection revenues to increase nicely, driven by strength from all segments. Turning to our Wireless and Sensing Product Group. In Q1, revenues from our Wireless and Sensing Product Group increased 7% sequentially and 78% over the prior year and achieved another quarterly record and represented 34% of total revenues. In Q1, as expected, our LoRa-enabled platforms delivered another quarterly record as the LoRa momentum starts to accelerate globally across multiple use cases. We recently announced a number of new initiatives that further demonstrate the value that LoRa technology delivers to emerging IoT applications. These included EchoStar joined the LoRa Alliance and launched an initiative to use LoRa WAN networks to bring new lower-cost satellite-based connectivity services to the logistics, asset tracking, utility and agriculture segments. SAS, a leader in IoT software analytics and services, announced the use of LoRa WAN, together with its SAS AI platform and in conjunction with Microsoft Azure will offer a suite of end-to-end solutions to resolve real-world issues associated with flood prevention, precision agriculture, livestock wellness and smart energy. Inview, a global leader in retail systems announced the integration of LoRa WAN into its Inview live platform to improve the retail shopper experience. And the MXC foundation announced a LoRa WAN network using partial gateways, similar to the recently announced helium network, over which individuals can mine cryptocurrency. We are seeing more of this type of shared LoRa WAN network model emerge, which is contributing to the rapid growth in LoRa WAN gateway deployments. These are the some examples of emerging use cases with a low-power, long-range and flexibility of LoRa is enabling a smarter, more connected and sustainable planet. In Q1, our LoRa business metrics continued to progress well against our targets for FY '22. The number of LoRa network operators grew to 151, and we are expecting 165 LoRa network operators by the end of FY '22. The cumulative number of LoRa end nodes deployed increased to 191 million and we expect this number to exceed 235 million cumulative end nodes by the end of fiscal year '22. The number of LoRa gateways deployed increased to more than 1.7 million and we expect the number of LoRa gateways deployed to increase to over 2 million by the end of fiscal year '22. The LoRa opportunity pipeline now exceeds $700 million and by the end of FY '22, we are anticipating our opportunity pipeline to exceed $850 million. We anticipate that, on average 40% to 50% of the opportunities currently in the pipeline will convert to deployments over a 24-month timeline. Our opportunity pipeline remains geographically well balanced with use cases primarily in smart utilities, smart logistics, asset tracking, smart home and smart cities. These metrics demonstrate the growing adoption of LoRa across a broadening low power wireless landscape. With this strong momentum and along with the continued influence of the LoRa Alliance, we expect to continue to drive LoRa to become the de facto standard for the global LP-WAN market in what we expect to be a multibillion unit industry in the next 5 years. In Q1, we experienced record quarterly demand for our proximity sensing platforms, led by continued strength from our Asian smartphone customers. As global RF power regulations become more broadly adopted, driven by environmental and social health concerns, leading smartphone manufacturers competing on a global stage are implementing proximity sensing technology into their 5G devices. Semtech's leadership and highly innovative proximity sensing platform delivers the industry's most advanced, lowest power and highly integrated proximity sensing technology. With the increasing use of 5G phones and the increased deployment of high-powered radios across the whole mobile industry, we expect the demand for our proximity sensing platforms to increase over the next few years. For Q2 of fiscal year '22, we expect net revenues from our Wireless and Sensing Product Group to increase and deliver another record quarter, led by new records from our LoRa and proximity sensing businesses. Moving on to new products and design wins. In Q1 of fiscal year '22, we released 11 new products and achieved 3,036 new design wins, which represents a 38% increase over the previous year. Now let me discuss our outlook for the second quarter of FY '22. Driven by the record bookings in Q1, we entered Q2 with record backlog, and we are currently estimating Q2 net revenues to be between $177 million and $187 million. To attain the midpoint of our guidance range or approximately $182 million, we needed net terms orders of approximately 1% at the beginning of Q2. We expect our Q2 non-GAAP earnings to be between $0.57 and $0.65 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?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tore Svanberg of Stifel. Please state your question.

Yes, thank you, and congratulations on the strong results. Mohan, you just indicated that you only need 1% turns to meet the midpoint of the guidance. I'm just wondering why you wouldn't guide higher? Is it simply because of capacity constraints, because I honestly can't remember the last time you only did 1% turns?

Yeah. So Tore, I think since I've been the CEO over 15 years now, that's been -- that's clearly the lowest number of turns. I think the key thing to remember, so bookings extremely strong. Demand is extremely strong. What we are monitoring very closely is consumption. We want to make sure that whatever we ship has been consumed. And so it's really -- we don't need any more turns for sure, but we are monitoring our POS activity to make sure that everything we see from our customers and our distributors who are servicing those customers is being consumed. And that really is why we are being fairly conservative on the turns number -- on the guidance and the outlook.

That's great. And as a follow-up, could you just elaborate a little bit on both 5G and data center? It sounds like your visibility is improving quite a bit there. Is that tied primarily to, obviously, continuous data center upgrades? But then also 5G deployments in North America, or is China still in the mix here?

So for 5G, for sure, it's all regions. I would say China is definitely in the mix still, and we are seeing some indications, the second half is going to be quite strong for 5G. And then on the data center side, yeah, it's a mixed bag, obviously, 100-gig is doing extremely well at the moment. We're expecting 200-gig to start to pick up in the second half and actually starting Q2 and then picking up nicely in the second half as well. So we expect data center to have a pretty good year.

Great. Thanks and congrats again.

Thank you.

Our next question is from Tristan Gerra of Baird. Please state your question.

Hi, good afternoon. Could you talk about the gross margin drivers in the second half? How much is that -- is driven by mix and presumably data center versus price increases? And also, if you could remind us where does your base station gross margin profile fits relative to the corporate average?

So Tristan, thanks. As I said in my prepared remarks, we are seeing a lot of gross margin uplift that we expected from our new product areas LoRa enabled, our Tri-Edge platforms, our industrial protection platforms, the wireless and others. And so we are seeing a lot of gross margin expansion from them. And the expectation is that, as we go through the second half of the year, we should continue to see accelerating revenues from those platforms. So my expectation is that we will continue to see gross margin expansions going forward. With regards to the Wireless side of stuff, the gross margins for the Wireless business is above the corporate average at this point.

Great. And are you supply-constrained currently?

There's pockets of supply constraints, Tristan. I think one thing about us is really about a year ago – over a year ago, we made the decision strategically to put in place more internal inventory, which you can see. We're above our target range, our model range in internal inventory, and that has helped us for sure. So we're in a position where we're quite comfortable for this year. We'll have the supply to grow significantly and probably for next year. Obviously, there are pockets of constraints where demand suddenly comes across us and we see a sudden increase in certain areas, and it's difficult to get the upside supply to support that. But in general, I think we're in pretty good shape.

Tristan, this is Emeka. I just wanted to make sure that my comment on gross margin and the Wireless that you understand that I'm talking about the Wireless base stations, right?

5G.

5G and stuff like that.

Correct. Correct, great. Thank you.

Our next question is from Karl Ackerman of Cowen. Please state your question.

Yes. Thank you. I have a few questions as well.

Hey, Karl, could you speak up, please? We're having a tough time hearing you.

Is this better?

Go ahead.

Great. Thank you. Could you discuss the number of designs you now have for PAM4, particularly around 200-gig and 400-gig that are expected to see and probably greater adoption at least across one major – or where this falls. So if you could just talk about just the number of designs you see there, that would be helpful.

Yes. We – I can't talk specifically, Karl, but we have about 25 kind of design in – design win activities going on at the moment. And I think some of those are starting to move to design wins and some of them even going to production. So – and obviously, we're getting orders now. So the momentum looks quite good. It's our first set of products that are coming out. Now we have the opportunity to bring more products out that have a little bit longer reach and a little bit more variance of our Tri-Edge platform now that we’ve gotten through kind of our first cycle of learning from them. So I expect over the next year, we'll release more products. And I think over the next few years, we'll have some good momentum in 100-gig, 200-gig or 400-gig and then beyond that, depending on what road map looks like at that point.

Great. Thanks for that. I guess for my follow-up, in your Protection business, I know you have historically been concentrated in mobile. But you highlighted, at least in your prepared comments, some opportunities within automotive and industrial, and I was hoping you could just detail that in a bit more detail that is supporting this business over the next couple of quarters. Thank you.

Yes. I mean, our Protection business, obviously, historically, it's been very strong in the mobile segment. And as you know, we diversified within that segment. We used to have a lot of exposure to Samsung. We now have exposure to other North American smartphone manufacturers, China manufacturers, wearables, display. So we've diversified within mobile. But outside mobile, which is where the focus of our R&D -- a lot of the focus of our R&D efforts been for interfaces, high-performance interfaces in communications infrastructure, like Ethernet ports, automotive infrastructure, IoT, HDMI 2.1 ports, USB-C. And what we found is across the whole industrial communications, automotive space, there is an increasing need for those high-performance interfaces in new systems. And so, that's what a lot of our focus is being put. We put a lot of focus into that area. And clearly, now, that's -- about 35% of our Protection business is now in that area. And so, it's starting to grow in the right direction. That's obviously accretive to gross margins as well. So we feel good about the momentum there. We just have to -- it takes time. That's not a segment that grows rapidly, but it's very -- has much longer life cycle. So I think it will just continue to drive good growth for us over many years.

Thank you.

Our next question is from Quinn Bolton of Needham. Please state your question.

Hi, guys. This is Michelle on for Quinn. Thanks for taking the question and congrats on the results and solid execution. So my first one, just on the seasonality. If I'm not mistaken, you guys typically have a slightly more back half weighted year. But given the growth that you guys are expecting in the back half of fiscal 2022, particularly with Signal Integrity and LoRa businesses, would it be reasonable to think that the second half might actually be more than slightly above 50% of fiscal 2022 revenues, or would you think that revenues might be kind of in line with typical seasonality?

Well, obviously, we're still -- we're anticipating a very strong second half, as well as a pretty strong first half. Actually, our Q2 guidance obviously indicates that we're comfortable with Q2. We have very strong backlog for supporting a very strong Q3 and even for Q4, we're starting to get very comfortable with that. So it's looking like, the seasonality this year will be tricky to kind of call. Normally, Q4, we would expect Q4 to come down. That's still the expectation to some extent. But given where most of our growth engines are at the moment and some of the anticipation that some segments like 5G and data center are probably going to continue to be quite strong in the back end, we may see less of a decline, but that's a long ways off yet.

Yes. Okay. That's helpful. Thanks. And then, just on my follow-up, on your -- on the last call, you guys had -- you mentioned the Protection business was expected to grow. I think you guys said double digits in fiscal 2022. Just wondering if the softness in the smartphone side of the business during the first quarter, if that has maybe changed your expectations for the year, if you're maybe expecting slightly lower growth or what have you and -- for fiscal 2022? Just any update that you might have there would be helpful.

Yes. Actually, to the contrary, I think we're even more comfortable that Protection is going to grow very nicely this year. Remember what I said in my prepared remarks, on the consumer business, particularly the smartphone business, most of the -- I mean, there was a slight decline in our Protection business, but a lot of that decline was driven by not demand and not by customers not wanting the materials, but they're not being able to get enough components from other suppliers. And so that's not a demand issue, and I think we'll see that pick up throughout the rest of the year. So, we're still expecting pretty good growth for our protection business this year.

Okay, great. Thanks and congrats again.

Thank you.

Our next question is from Harsh Kumar of Piper Sandler. Please state your question.

Yes. Hey Mohan and Emeka and the team, just a fantastic job here. I love what is happening in your business. I had a strategic question, Mohan. Your kind of -- your company is humming and going. The question is, when do you see yourself coming to scale? Is this a situation where -- what kind of possible do you feel with a company like yours and a model like yours? And what revenue do you start to maybe get into the 30% range for the op margin? And pick a number that you want to talk about, I guess, from aspirational standpoint and op margins.

Yes. So, Harsh, this is Emeka. Let me take that. I think the last Analyst day we had probably two years ago, something, we talked about our expectations of our operating margin on a non-GAAP basis to be in the 32% -- the 36% range. Given the traction that we are seeing from our growth platforms and the gross margins that they come with, and the way we've typically managed our operating expenses, which we do expect to continue despite the FX headwinds that we're seeing at this point. We do believe that at $1 billion of revenue, we should be at the low to the mid-point of that range.

Okay. Emeka, that's very helpful. And then, Mohan, I just want to say, I've never -- I've covered your company for over a decade. I don't think -- there were very few times that I've seen you this optimistic about your business. I think I get the message that you feel extremely good about exceptional growth for much of the remainder of the year. If you can just reassure us that, that's the case based on whatever visibility you have in terms of bookings and backlog? And also, you covered up on the supply to be able to meet this kind of exceptional growth. In other words, can we expect, call it, 5% to 6% sequential growth consistently through the rest of the year outside of the seasonally down fourth quarter?

So, let me take the supply part of that first, Harsh. I think we are comfortable with the supply. As I mentioned, we put in place inventory strategically for this scenario, and I think it's playing out to our advantage. Obviously, there are always mix issues, and so one has to continue to manage that and monitor that and things do change. So -- but at this point in time, we feel quite comfortable that we can supply to the current demand levels. And then on the demand side, yes, we are very confident. A lot of the growth is coming from platforms we've invested in for many years. As you know, LoRa has taken us quite a while, and it's not a short-term investment. This is something that's been invested -- we've invested in for many, many years. And when you build a foundation that's structured that way, it can be very successful. Obviously, as you know, we have had to be very patient, but things are starting to play out quite nicely now in that business. I feel very good about it. We've said, we expect 40% CAGR, and I think we're very comfortable with that number. So, the LoRa-enabled business is looking very strong. Our other growth engines, as you know, proximity sensing, again, another platform we've invested in for many years, starting to play out because of the 5G and high power radios. So, a lot of trends going in our favor there. The data center side, we've invested heavily in 100-gig NRZ platform. We've invested heavily in our PAM4 platform, the Tri-Edge and FiberEdge. And so those are playing out well as well. 10-gig PON is another growth area where we've invested in heavily for many, many years. And so that's playing out quite nicely. That's going to be another good growth driver for us. I mentioned 5G wireless. It's a little bit lumpy. As you know with PAM infrastructure, but I think that also is going to do quite well. And then on the Protection side, I think this is one of the areas where we're really pleased to start to see the diversification play out. And the broader Protection business has a much larger PON potential. It takes time, but as we start to see that gain momentum, I feel very good about that business because it's very accretive to gross margins, obviously. And I think the more momentum we get there -- I think the better for the company.

Hey, thank you Mohan and congratulations, guys, once again.

Our next question is from Craig Ellis of B. Riley Securities. Please state your question.

Yes, thanks for taking the question and congratulations team on the great execution. So Mohan, I don't typically ask about the end markets, but I thought there was something interesting in them. So, I wanted to direct my first question that way. So great to see high-end consumer up 52%, industrial up 41%. The question around infrastructure which is up 6%, we can all see that the enterprise spending backdrop was really severely impacted post COVID in that we are far from firing on all cylinders with cloud and data center. But the question is this, with more and more reports suggesting an upturn in enterprise spending in the other 2 end markets, is it possible that we'll see in the achieving similar year-on-year growth rates, but maybe with 2, 4, 6 quarter delay to what we're now seeing in high-end consumer and industrial, especially given the product cycle what we're now seeing in high-end consumer and about through your prepared remarks and Q&A.?

Yes, Craig. We're very positive about infrastructure. I think infrastructure did quite well last year. And so I think that's part of the challenge with the year-on-year growth. But definitely, 10-gig PON -- I mean, PON in general, I think so excess bandwidth, I think we're going -- we're expecting very strong growth this year. We're still expecting some growth in hyperscale data center this year. And so, for me that's an interesting data point given the inventory that was built up. And so, I think we're starting to see, in general, some of the infrastructure space segments coming back. And these segments tend to be a little bit more lumpy. You've got kind of a spate of investment and then a lot of deployment and then there's kind of a period of digestion and then it comes back again, but it will be up and to the right. There's no question that the need for infrastructure across all of our segments that we play in hyperscale, 5G, 10-gig PON, is there -- the need is there. And then when you add to that some of the other emerging segments, I think that, for sure, it's going to still continue to grow.

That's great. And then switching gears over to LoRa, and I'm surprised there wasn't a question already, although many good ones asked. But with regards to LoRa, there's been a lot of talk on call similar to this over the last three or four quarters about the potential for high volume, endpoint wins. And we do still have that nice year-end program bogey out there. So the question is this, how are you feeling about the potential with some of your bigger customers or partnerships to secure some high volume wins? And when would you expect to get some visibility that those might ramp?

Well, we feel good about it. I think my sense is we're going to have a very strong year, even without that. To be honest with you, Craig, I think we've got a lot of momentum in the business through -- just globally and some of the recovery from COVID from last year's issues. And so I think a combination of some use cases really starting to grow nicely. More new products that we -- with our LoRa Edge platform, that's driving new opportunities. And I think we're now -- with more gateways being deployed. If you do monitor the number of gateways deployed, you'll see a pretty large acceleration in the number of gateways. We had 1.3 million gateways deployed by -- at the end of FY 2021. At the end of FY 2022, we already have 1.7 million gateways deployed. So I think that all tells me that things are going in the right direction. And, yeah, we continue to work, obviously, with some very big guys who are working some very nice use cases, and we'll see -- always the proof is in the pudding. And if those use cases get deployed and how much business that can drive for us. In the end, I think when we look at LoRa, we look not just for one use case or one customer or one region, we're looking across the whole landscape of low power wireless connectivity and really monitoring the progress across the board. And I would say it's very exciting.

Good to hear. Thanks much, Mohan.

Our next question is from Gary Mobley of Wells Fargo. Please state your question.

Hey, guys, thanks for taking my question. I wanted to ask about your inventories and maybe what they're signaling. So you're running, what, 26% above the high-end of the inventory days target and it's up sequentially, again, speaking of your own inventories. We don't know, however, what your distributor inventories are. And I know you don't normally disclose that, but can you give us a sense of the sequential direction in your distributor inventory? Seemingly, you're having a little bit easier time than some of your peers in securing some wafer supply and finished product and whatnot. And so my question related to all this is given that you seem to have adequate inventory, is there less motivation for your end customers or your distributors to double order or order more product than they actually need?

Well, that's a good question. I think one of the things we're doing -- so first of all, to answer your question on distributor inventory, distributor inventory from our standpoint is pretty low, continues to reduce. Demand is extremely strong, though, and bookings are extremely strong. So the thing we do, Gary, is we monitor our POS very closely. So that's shipments out of our distributors to our customers. And we talk to our end customers, and we try to get a gauge on consumption. And the consumption is really the key, right? Because as long as you're shipping to consumption levels, which we believe we are and we believe we can continue to support consumption levels then I think we'll probably – we can continue to see growth in the business. And so that's the game that we're playing. I don't know if Emeka, you want to add anything to that?

No, yes. I think just like I said in my remarks, Gary, like Mohan said, the bookings are very strong. The demand is very strong. So with regards to sort of the question you have is the multiplication for our distributors to maybe double book our stuff. I don't think we're seeing any evidence of that. What we are definitely seeing though is that the evidence of the concern about being able to get – have access to inventories in the long run. So we are seeing these guys placing orders and maybe requesting them out into the future and things like that. But like Mohan said, we are managing these things very clearly, very concisely. I think we're very happy with where we have – what we have in terms of the internal inventory means that we are very well positioned for the most part, to support the strong demand that we are seeing. But at the same time, trying to make sure that we're not just shipping to have stuff resting in terms of the distributor shelves, right?

Sure. I appreciate the color. So my follow-up I wanted to ask about your TIA, LiDAR products, in particular with your recently announced extension or perhaps a new relationship with Intel. Is this LiDAR for industrial applications? LiDAR for automotive applications? And in general, how would you size up your market opportunity for your TIAs, in particular in the LiDAR market?

So from an end market standpoint, it's very much a platform for Intel and Intel's use for all their applications, whether that be in industrial, I think the first target is industrial/consumer and then automotive, eventually. I would say that it's more of a longer term opportunity, Gary. We've obviously – we're working with them very closely, but there are still technology challenges and market validation and stuff like that. But the technology development is what we call one of our emerging growth engines. So if I look at our current portfolio of growth engines, which includes LoRa and proximity sensing and Tri-Edge and some of the products, those are all in growth phase, But we have a number of follow-on technologies that are coming on and LiDAR is one of them, which we've invested in for several years now. We'll continue to invest in for another several years, I think. And hopefully, that will become a very good growth driver for us in the future. But I think it's early days, but it's good to be working with a partner like Intel, and hopefully, it will turn into real business for us.

Thanks, Mohan.

Our next question is from Christopher Rolland of Susquehanna. Please state your question.

Thanks, guys. Mohan, you had mentioned gateways and that 400,000 number, which was pretty impressive. Can you remind us on – or update us on content per gateway now? And then also, if you can talk about kind of the drivers of gateway, I think you hinted to some of those. But talk about the mix of revenue gateways versus nodes now and some of the changes that we've seen as of late and how you think those will trend?

Yes. So we have 191 million end nodes connected now. It's a cumulative number, still connected to those gateways. The number of gateways out there now with being 1.7 million, actually, that supports well over 5 billion sensors. So we have plenty of capacity out there for more sensors. So that's a good thing. The thing to remember about gateways, we have different types of gateways. We have macro gateways, which go on towers, 30-kilometer range. Those are $1,000 kind of gateways. On the other end of the scale, we have Picocell gateways that are $100 and very low cost and really target to that indoor use cases, support 5,000 sensors, things like that and about 1-mile range. So a range of different gateways. And every use case and every customer has a different application. They can deploy different types of gateways in some cases or where they're doing indoor and outdoor connectivity. So it very much varies, Chris. I think the key thing, though, that what's driving the sudden acceleration is one of the use cases I mentioned, is this concept of building up a network that then monetizes the person who is using the gateway or who has the gateway in their house or in their enterprise and that monetization through cryptocurrency. As you know, that's the Helium approach, and there are other companies now thinking about that and doing that. So that's pretty exciting for us. We'll see. It's a new use case. We don't know if it's going to really fly longer term, but it sounds like a very nice interesting opportunity. And one in which you're doing real stuff. I mean, people are using gateways for monitoring, tracking assets and tracking important things in their life or using it for special kind of monitoring of low power sensors. So, yes, it's a really interesting application. There are other use cases that are now starting to drive more gateway deployments, I think, across the globe. I think not only the smart home, but the smart asset tracking and logistics in general, I think, is driving the need for more gateways. So that also is another use case. So we're pretty excited by it. We'll see where it leads to.

Great. And my hot spot is on order and backlogged as well for that. But actually speaking about that, it does seem like there's -- from this supplier, at least there's a multi-month backlog of gateways in hundreds of thousands of units, actually. So maybe you can talk about that. Are you severely constrained there? When do you think you might be balanced out with demand -- supply-demand balance there? And then just to confirm, are you saying that there's between $100 and $1,000 of Semtech content in those cases -- in those gateways? Thanks.

No. So the gateways are -- the prices I was giving you is kind of the retail kind of price out there. Our content is $3 to $5 in the small gateways and $30 in the larger gateway. So that's our content. But coming back to the discussion on supply demand for gateways, yes, the constraint is not our devices. The constraint, I think, that manufacturers are having in some microcontrollers and microprocessors and other components that go -- that make up the gateway. Of course, we only develop the radios, right? So our -- we have materials, but I think there's other components that are limiting the availability.

Thank you.

Our next question is from Rick Schafer of Oppenheimer. Please state your question.

Thanks and I'll add my congratulations, guys. Maybe one more LoRa question. I know it's been a lot. But I know some industry folks are calling 2021 the year at scale for LoRa. I think the number of LoRa-certified sensors is something like 35% or 40% over the last year. Where I'm going with the question is, I mean, are we finally at that tipping point with LoRa here? I mean, I think if I heard you correctly, Mohan, you're talked about exiting this year at about $850 million pipeline. Something around 50% of that converting to revenue over the following couple of years. So, I mean, if you run the math on that, it's pretty significantly above your 40% CAGR you've talked about for that business. So, I'm just curious if you could maybe -- I could have misheard you too, I guess. But I'm just curious, what's changing and what kind of color you can add to that? And I guess back to just the question to go, how big of an issue is supply constraint for you in terms of capitalizing on that backlog?

So, Rick, I think you heard correctly. I do think momentum is accelerating now. And I think we're starting to see some of that funnel really convert to deployment. And that's always been the challenge for us is trying to figure out, okay, we have this huge funnel, and we have number of POCs and customers love the technology, when are they going to really deploy? And I think we obviously, were set back with pandemic and the China issues over the last couple of years. But I think now we're just starting to see that the realization is this technology really does add value to use cases that -- related to climate change, related to pollution control, related to safety, related to asset tracking, logistics, smart home initiatives, smart city initiatives, the technology is really good for it. And so I think what we're starting to see is just the realization that this is some of the POCs that have been going on are now starting to remove the bottlenecks. You mentioned sensors, software is another one. And with the announcement with AWS on the AWS IoT call platform, things like that, it really removes the need for software developments and removes some of those bottlenecks. And so I think over time, just those bottlenecks will be removed and then it's very simple to deploy an end-to-end LoRa use case. And I think as that happens, we're going to see really this whole funnel that we have, not only the funnel get larger, but I think the funnel will have -- we'll have a little bit more confidence about the conversion and the rate of conversion into revenue. And then you add to that, as I'd mentioned Triston. And with his question that we're starting to see some of the big guys really talk about good technology. Amazon really put a lot of discussion around sidewalk this last quarter, not something that was driven by us. It was pretty much them going out and talking about it. And we're starting to see others now utilize the technology and talk about their own systems. And so this is all positive for us and then we add to that some of the cloud services and other things that are coming along. It just makes us feel really good about where the business is and where it's headed. So, we'll keep monitoring. Obviously, we want to keep growing the number of gateways deployed, the number of N-nodes that are connected and the number of services that are connected and the value that those services provide and that should drive continued revenue growth for us.

Thanks for that color. And another area that's really hit and I feel like it's the stride for you guys is proximity sensing. Do you have a sense of what proximity sensing -- or what the penetration rate is today, kind of where we're at?

Yes. I think today, so most phone manufacturers, obviously, they have a range of different phones. And the high-end phones, particularly the 5G phones and the ones with multiple high-powered radios tend to be the ones that they are putting proximity sensing into and then -- so that's one dynamic is where you have more power -- high powered radios. And then the other thing is depending on where you ship those phones to. So, if you're a global player and you ship to Europe and North America, you almost certainly need to have proximity sensing in those phones just because of regulatory requirements. Those regulations are starting to expand globally, by the way. So, I do think that the -- there's going to be an increasing need for more proximity sensing on these higher end phones as we go forward. But today, I would guesstimate probably about 30% of the phone have proximity sensing.

Thanks for that color.

Our next question is from Scott Searle of ROTH Capital. Please state your question.

Hey, good afternoon. Thanks for taking my questions. Just to go back quickly to LoRa, I wanted a couple of clarifications, Mohan. I'm not sure if I heard it in your opening comments, but you talked about proximity sensors being at record levels. Was LoRa at record levels in the quarter? It certainly looks like it based on the numbers and kind of how you expect that to build over the course of this year. Should we be thinking about sequential growth or even flattish? Because it looks like you're basically honing in on 40% plus growth where we are today. And it doesn't sound like you're counting on any sort of large-scale consumer contribution outside of China kicking in, in the current fiscal year?

Yes, Scott. So yes, the LoRa was record, and I expect Q2 to be a record. And actually, we expect every quarter, LoRa to have a record quarter this year and to achieve that 40% growth at least. That momentum is very good for LoRa as well as it is proximity sensing. And then, yes in general, I would say that the business is just kind of kind firing on all cylinders. It's been for the last couple of years, it's been challenging. I think, there's been a lot of headwinds. But I think now we're starting to see that momentum build up, and that's just playing out well for us.

Great. And lastly, if I could, on the Protection side of the business, you talked about a long-term or intermediate term double-digit growth rate. Now certainly, in the near term, the handset market has been challenged, been constrained by other component availability. And I would expect that to bounce back. But when you think about that 10% plus kind of growth and the mix of your current business being more skewed towards mobile, the smartphone market is expected to grow mid to low single digits on a normalized basis over the next several years. So are you expecting to grow faster than that in mobile or the nonmobile components in terms of industrial and auto, expected to see such strong double-digit growth, that's kind of how you get to the 10%-plus growth number? Thanks.

Yes, a little bit of both, Scott. I think within mobile, we are expecting more diversification there. So we include displays in mobile, for example, we include wearables in mobile. So it's not just Samsung phones. So we expect that to continue to grow. But clearly, our investment -- most of our R&D investments are going into the broader Protection market. And, yeah, our hope is that, that can grow well above double digits. We'll see how -- the market itself may not be growing that fast, but the TAM is large, and it's converging a lot of the segments within that space are converging to the point where they need to use higher-end Protection because of some high performance interfaces that they're bringing into their systems. And I mentioned HDMI 2.1 USB-C, Ethernet infrastructure. And some of that requires more protection, higher-end protection. So that's our goal, is to try to grow our broader business at a faster rate.

Great. Thank you. Great quarter.

Thank you.

Our final question is from Tore Svanberg of Stifel. Please state your question.

Yeah. Thanks. Just some follow-up. First of all, Mohan, now that matter is unifying some of the other IoT standards, should we view ZigBee and some of these standards as still competitors to LoRa, or with Matter can you start to see more cooperation between LoRa and Matter? Because I know in the past, you talked about sort of LoRa plus Wi-Fi and LoRa plus Bluetooth, and I'm just wondering also if there is a way to see LoRa plus Matter?

Yeah. We don't really worry about or mind, who we're partnering with, and it's really driven by customers. If customer says, well, we want to build a system where it's LoRa plus ZigBee or LoRa plus Wi-Fi or whatever, we'll work with them. And that's one of the reasons we licensed the IP out to certain companies. And so they can build different solutions. Our goal is simply to make LoRa the de facto standard for LP-WAN in the industry. How we achieve that goal, there's obviously various ways to get there. So what -- when we look at LoRa, though, the uniqueness of LoRa makes it a very valuable additional radio to have in a system compared to -- when it's added to 5G wireless, for example, you have a very high bandwidth radio, and then you have a low power sensor connectivity radio. There are some technologies where there is some complement, but it's more of an overlap. And I would say ZigBee, Z-Wave and Wi-Fi as it pertains to low power sensor connectivity, I think are areas where there's maybe more overlap than complement. But most of the technologies, the other radio technologies are very complementary.

That's very helpful. And just one last clarification one for Emeka. When you talked about the OpEx staying at this level, could you clarify what you meant by that? Is that a percentage of revenue? And how much of an impact is the exchange rate having on OpEx, I guess, from a percentage perspective?

Yeah. So my comment was actually more towards the absolute dollar amount of the OpEx. I think, for our second quarter, the Q2 guidance, I think non-GAAP operating expenses would get it $65 million or something like that, if I remember correctly. So that's what I'm referring to that, I should expect that the operating expenses for the rest of the year to stay somewhat around that area, those levels. With regards to the FX impact, it is actually, if you think about the operating expenses been slightly above half the rate of revenue growth that we've talked about before, which is our model. Most of that is being driven. Most of that excess, if you will, has been driven by the impact of the weak US dollar.

Very helpful. Thank you.

We have 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, we are pleased with our Q1 results and the strong start to fiscal year 2022. The company is benefiting from the strength of our growth engines, addressing the infrastructure, smarter planet and mobility markets that we believe will produce – provide sustainable long-term growth. We have been successfully navigating through the pandemic and more recently, the challenging supply chain environment. We have also doubled down on our commitment to sustainability efforts and our human capital development. Given our diverse product offering, balanced end market approach and strong customer relationships, we expect to deliver a record financial performance in FY 2022. 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, and have a great day.