Semtech Corporation (SMTC) Q2 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the Semtech Corporation Quarter Two 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. You may begin.

Thank you, John, and welcome to Semtech's conference call to discuss our second quarter fiscal year '22 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 the call should facts or circumstances change. 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. I want to also highlight that Semtech will be hosting its first ever tech topic webinar that is scheduled for Wednesday, October 6th, where we will focus on our LoRa platform. More details on the event, including the agenda and sign of information will be coming soon. With that. I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu, Emeka?

Thank you, Sandy. Good afternoon, everyone. As is our process, I'll be focusing my comments on our non-GAAP financial results unless otherwise noted. For Q2 of fiscal year '22, net sales grew 9% sequentially and 29% year-over-year to $185 million, which was above the midpoint of our guidance and represented a new quarterly record led by the secular momentum that contributed to new records achieved by several of our growth -- of our key growth platforms. In Q2, shipments into Asia represented 81% of net sales. North America represented 11% and Europe represented 8%. While these represent the shift to addresses for our distributors and OEMs, we estimate that approximately 35% of our shipments are consumed in China, 27% in the Americas and the balance over the rest of the world. So direct sales represented approximately 13% of net sales and sales to distribution represented approximately 87% and our POS was another quarterly record. Our distribution business remains balanced with approximately 39% of the total POS coming from the infrastructure end market, 31% from the industrial end market and 30% from the high end consumer end market. Q2 booking remained strong and increased 75% year-over-year and resulted in a book-to-bill well above one. Turns bookings accounted for approximately 3% of shipments during the quarter. Q2 gross margin increased 70 basis points sequentially to 62.7%, which was at the upper end of our guidance range due to a more favorable product mix. Our gross margin is benefiting from a higher mix of sales from our growth platforms, including lower enabled data center plan for CDRs, 10-gig PON, 5G wireless, and broad-based industrial protection. For Q3, we expect gross margin in the range of 62.8% to 63.8%. As we anticipate a greater contribution from these growth drivers. Q2 operating expense increased 3% to $65.9 million driven by higher variable compensation expenses, slightly offset by lower new product development expenses. For the rest of fiscal year '22, we expect our operating expense to be in line just slightly above current levels. In Q2, we were again pleased to see our operating profit on a sequential and year-over-year basis grow much faster than sales due to the gross margin expansion and stable operating expenses. These drove the 270 basis points separation expansion of operating margin to 27.1%. We assessed the continued operating leverage as we make progress towards our 32% to 36% long-term target model. In Q2, cash flow from operations increased 63% sequentially to a record $53 million or 29% of net sales, while free cash flow increased 71% sequentially to 25% of net sales achieving the lower end of our long-term free cash flow target range of 25% to 30% of net sales. In Q2, we repurchased approximately 1% of our outstanding stock for $42 million resulting in $322 million remaining in our outstanding authorization. We expect to continue to use our cash to opportunistically repurchase our shares make strategic investments and pay down debt. Accounts receivable in Q2 increased 10% from Q1 while days of sales decreased three days from Q1 to 34 days and remains below out target range of 40 days to 45 days. In Q2 net inventory in absolute dollar terms increased 10% sequentially and days of inventory increased by three days to 129 days at the end of Q2. We expect our net inventory to remain above our target range of 90 to a 100 days to support the stronger demand and the better supply chain environment. In summary, we are pleased with the strong first half momentum we are seeing from our higher margin growth engines, which we expect to continue in the second half. We believe the sustainable secular drivers behind our growth engines, our expanding gross margins, stable operating expenses, and strong cash flow generation have positioned well to deliver a record financial performance in fiscal year '22 and beyond. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year '22 performance by end market and by product group, and then provide our outlook for Q3 of fiscal year '22. In Q2, net revenue increased 9% sequentially and 29% over the five year to a record, $185 million. Higher demand across all three of our end markets contributed to the Q2 growth. We posted non-GAAP gross margin of 62.7% and record non-GAAP earnings per share of $0.65. In Q2, net revenue from the infrastructure market increased 10% sequentially and represented 37% of total net revenues. Industrial market net revenue increased 5% sequentially and represented 31% of total net revenues. The high end consumer market net revenues increased 10% sequentially and represented 32% of total net revenues. Approximately 21% of consumer net revenue was attributable to mobile devices and approximately 11% was attributable other consumer systems. I will now discuss the performance of each of our product groups. In Q2 of fiscal year '22, our Signal Integrity Product group grew 10% sequentially and represented 39% of total revenues. Strength from the data center and the PON markets drove the growth in our business. In Q2,, revenue from the data center market grew sequentially led by record revenues from our PAM4 platforms. Strong design momentum in a 100 gig, 200 gig and 400 gig PAM4 optical modules is expected to contribute to a strong second half for our data center business. We are very pleased with the progress about Tri-Edge Short Reach platforms, and we expect to introduce our new longer reach Triage platforms over the next 12 months that we believe will open up the full 200 gig and 400 gig PAM4 data center market to us. We remain confident in our strategy and as we execute on delivering our Tri-Edge and fiber edge platforms that deliver lower power, lower cost and lower latency, we should see continued growth in our data center business in FY'22 and beyond. In Q2 of FY'22, revenue from our PON products grew sequentially and achieve a new revenue record. Demand for our 10 gig PON products remained very strong and achieved another record and now represents the largest revenue segment within our PON business. Semtech provides the most comprehensive PON PMD portfolio available in the market today and we expect our PON business to continue to benefit from the global demand for higher bandwidth access solutions. We expect our PON business to remain strong over the next few years as global service providers accelerate their deployment of broadband access equipment. In Q2 of fiscal year '22, 5G demand slowed as expected following the prior quarter's record results. However, with several China tenders recently announced and carriers in North America and Europe expected to begin 5G build-outs over the next 12 months, we expect to see demand for our 5G platforms pick up during the second half of this year. We continue to see design wins for both our 25 gig ClearEdge and 50 gig PAM4 Tri-Edge platforms in 5G frontal optical modules. And we believe we are well positioned to benefit from next generation wireless network deployments. As users demand greater bandwidth, we expect the infrastructure segment to continue to grow and expect this to result in sustainable long-term growth for our signal integrity product group. In Q3 of fiscal year '22, we expect revenue from our signal integrity product group to increase and achieve another record driven by growth from all the infrastructure segments. Moving on to our Protection Product group, in Q2 of fiscal year '22, net revenues from our Protection Product group increased 9% sequentially and increased 49% year-over-year and represented 27% of total revenues. In Q2, protection revenue from our consumer customers rebounded nicely over the prior quarter led by growth as our North American and Korean customers as their supply constraints improved. Demand also increased across the broad-based industrial markets led by stronger demand from North American and European automotive and industrial customers. Many of today's automotive, IOT and communication systems use advanced lithography chips that require higher performance protection. Our latest protection platforms deliver technology that prevents damage to these highly sensitive chips. In addition, as part of the industry's ongoing push on ESG, we are seeing an increased focus on the reduction of electronic wastage, which we believe will further accelerate the adoption of Semtech's protection products. We expect both these trends to continue to drive further adoption of Semtech's protection platforms across all market segments and enable us to deliver double digit growth with increasing gross margins over the next several years. In Q3 of fiscal year '22, we expect our protection revenues to increase again nicely led by continued strength from the broad-based industrial market. Turning to our Wireless and Sensing product group, in Q2 revenues from our Wireless and Sensing product group increased 7% sequentially and 61% over the prior year and achieved another quarterly record and represented 34% of total revenues. In Q2, our LoRa-enabled platforms delivered another quarterly revenue record driven by the smart utility, smart city and industrial IOT segments. The momentum from our LoRa platforms has really started to accelerate globally, and we expect to see continued growth this year in line with our long-term 40% CAG forecast. We are also seeing a tremendous number of new LoRa-based used cases globally that support future growth. Recently announced initiatives include LDT, a South Korean smart sensor network provider integrated LoRa into its smart fire prevention system that provides real-time analytics, sensing, connectivity and geolocation to protect commercial facilities such as shopping malls and local markets. Swiss Post have deployed it's smart connected pens that leverage its nationwide LoRaWAN network to help digitally transform the Swiss Postal Service. Oxfit [ph] an IOT solutions expert is collaborating with Semtech to support a number of new smart utility IOT initiatives targeted at the oil, gas and communications industries and Skylab, a supplier of wireless sensors and GPS tracking and measuring systems, will be using our LoRa Edge platform to develop a solution for indoor and outdoor asset management of vehicles, vessels and containers. This is one of many asset tracking design wins based on our LoRa Edge platform that are expected to convert to revenue in the next 12 to 18 months. These are just a few of the new used cases that highlight the flexibility, scalability and momentum of LoRa that is enabling a smarter, more connected and sustainable planet. In Q2, our LoRa business metrics progressed very well against our FY '22 targets. The number of LoRaWAN network operators grew to 156 and we are expecting 165 LoRa network operators by the end of FY'22. The cumulative number of LoRa end nodes deployed increased to 208 million and we expect this number to exceed 236 million cumulative end nodes by the end of FY'22. The number of LoRa gateways deployed increased to over 2.2 million and has already exceeded the goal we set for the full year. As a result, we are increasing our gateway target for the year to 2.5 million. The LoRa opportunity pipeline increased nicely in the quarter and now stands at over $850 million, which also exceeds the target we had set for the whole year. As a result, we are increasing our opportunity pipeline target for the end of the year to $900 million. We anticipate that approximately 40% of the opportunities currently in the pipeline will convert to deployments over a 24 month timeline. Our metrics demonstrate the growing adoption and deployment of LoRa with a long range, low power and low cost of LoRa is being leveraged. We believe that this momentum in our metrics, along with the increasing influence and efforts of the LoRa Alliance will continue to enable LoRa to become the defacto standard for the fast emerging LPWAN markets. In Q2, our proximity sensing platforms achieved another quarterly record led by strength at our smartphone customers. Semtech's proximity sensing platforms provide the industry's most advanced and highly integrated proximity sensing technology for mobile and wearable devices. The growing adoption of 5G phones and the use of higher powered radios is contributing to an increasing number of social health concerns resulting in more stringent RF power regulations globally. This trend is expected to result in increasing demand for our proximity sensing platforms over the next few years. For Q3 of fiscal year '22, we expect net revenues from our wireless and sensing product group to increase and deliver another record quarter led by another record from our LoRa business. Moving on to new products and design wins, in Q2 of fiscal year '22, we released 11 new products and achieve 3,018 new design wins, which represented a 16% increase over the previous year. Now let me discuss our outlook for the third quarter of '22, following very strong bookings in Q2 that increased 75% over the previous year and record POS, we entered Q3 with record backlog. We are currently estimating Q3 net revenues to be between $188 million and $198 million. To attain the midpoint of our guidance range or approximately $193 million, we need a net terms orders of approximately 5% at the beginning of Q3. We expect our Q3 non-GAAP earnings to be between $0.68 and $0.76 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?

Yeah. At this time, we would like to begin a question-and-answer session. [Operator instructions] Our first question comes from the line of Tore Svanberg with Stifel. You may proceed with your question.

Thank you. And congratulations on the record results. Mohan, I think you mentioned that LoRa is now basically on track growing at the sort of 40% forecast. Does that mean this year is also now tracking for LoRa to be up 40%?

It is tracking, I would say it's tracking ahead of that actually. So that's our expectation to be at least 40%. Yes.

Very good. And as a follow-up, but to clarify, when you talk about protection business you expect it to be a double-digit growth business going forward. Was that specifically for the non-consumer part or was that for the entire category?

For the entire category? I think, consumer obviously grow faster, but it can also come down faster. It's a little bit more volatile. Our broader industrial protection is more stable growth. I would say, it's not going to, you're not going to see the it's very high and drop it just more just kind of, whatever the industry is growing at plus X% and I think one of the things about this business is that we are really just starting to play in the broader industrial protection business. So we have a lot of the ability to increase penetration there, I think is much better for us as some of those trends, I mentioned go in our favor. So as a total, we think we can grow double digits nicely. The other thing to remember in this business is that the broader industrial protection business is much higher gross margin typically than the consumer protection. So that will definitely be a positive for us.

Very good. Thank you very much. Congrats again. I'll go back in line.

Thank you. Our next question comes from the line of Tristan Gerra with Baird. You may proceed with your question.

Hi. Yeah, congrats. About the 40% of the $900 million pipeline in LoRa that you expect to deploy over the next 24 months, can you remind us of the average duration of those design wins?

So the opportunity funnel Tristan covers several years of design opportunity. Some of those will move faster and can turn to revenue in 12 months. Others, may take 36 to 48 months depending on what it is. If it's a meter relative to maybe a smart home application as an example. So on average we would say 40% of that total opportunity pipeline will convert over the next couple of years. Maybe the way to think about it is probably two to three year timeline, 40% of those opportunities will convert to design wins and revenue.

Okay. And then as a quick follow up, if you could reconcile, obviously you have very strong visibility, very low net turns to meet your core guidance, but you're also raising inventories internally. How much are you suffering from supply constraints right now? And when would you expect catch-up shipments relative to the real level of demand that you're seeing?

Well, we're shipping nicely to consumption, which is what we believe is the right thing to do. So we don't believe any of our customers -- end customers are short. There are pockets of supply constraints in certain businesses that are doing extremely well. But in general, we think we're quite comfortable. We built good amount of inventory. We've anticipated the demand strength and that's what we're doing. So I think we're good for this year to support the consumption that we believe is required. As we go into next year, we're going to have to take a closer look at it, but we continue to believe the right thing to do is to build our own internal inventory and make sure that we're shipping to consumption levels.

Our next question comes from the line of Quinn Bolton with Needham and Co. You may proceed with your question.

Hey guys. Firstly, echo my congratulations as well. Mohan one, start with the LoRa opportunity pipeline, which is expanding nicely. Can you talk about, is -- are you seeing a broadening out in that business and pipeline or are there a couple of specific smart city, smart home applications that are really starting to drive a lot of the growth in the pipeline?

So, I would say it's very broad Quinn and it's also regionally quite well balanced which is important. So I would say in the Americas, it's smart home driven, smart utilities on logistics in China, it's smart utilities, smart city and industrial IOT. And in Europe, it's smart utilities, logistics and industrial IOT. So, it's different segments driving most of the opportunities not a surprise that those segments are the ones that are driving, driving the business because that's where LoRa fits very well into those categories. And so that's what we expect and that's what we're seeing. So not really a surprise. I think over the last couple of years, with the pandemic and some of the China trade issues, the opportunity funnel hasn’t increased the way we would have liked it to have done. But we're starting to see that now. And that's really a positive thing because that really will drive the future growth.

Nice job on a gross margin expansion and particularly so on the guide. And I guess just looking forward, it sounds like a lot of the growth are coming from the higher margin products. And so I guess it just begs the question, if you think you can be 62.8 to 63.8 in the October quarter, where do you think margins could go over the next one to two years? Do you think you could see 64 to 65? What's the upper limit we should be thinking about?

Yeah. So when we look at our gross margin story, it's actually very pleasing to see it playing out the way we had expected, right? We've always talked about these high gross margin growth engines that we have in our look at LoRa. You look at the Tri-Edge platform, you look at our 10 gig PON, our 5G wireless. So those things are really and our broad based industrial application. So they're really tracking very nicely. If you look at those just by themselves alone, you would definitely make the case for continued gross margin expansion. The one headwind that we have what I think we have managed it very well so far is all these supply constraints we have right now and the fact that it's driving a whole lot of pricing cruisers in terms of wafer pricing and the back end pricing as well. So, so far so good. We've been able to manage that, but as you probably know, there's been a lot of news in that space lately that there's going to be additional increases in that area. So we just have to see how that plays out, but my expectation, and this is a long-winded way of saying this, but my expectation is that we should continue to see some gross margin expansion being driven by these new growth engines that are really beginning to scale for us.

Our next question comes from the line of Karl Ackerman with Cowen. You may proceed with your question.

Yes. Good afternoon, gentlemen. Two questions for me, please. First, could you discuss your ability to secure additional wafer capacity over the last 90 days and whether that might improve for the October quarter? Additionally, what kind of visibility do you have into your bookings pipeline across each line into the second half of our fiscal year?

So Karl let me start with that first. The, visibility is very go. We have obviously very good visibility into Q3. So the tons numbers relatively low for us? We also have pretty good visibility, I think, into Q4. Bookings are very strong, so customers are giving us the visibility into what they need into really throughout the rest of this year, which is good and helpful for us. The supply side is you know, we built inventory over the last couple of years. We made it a strategic goal to do that. We knew this was going to happen and so we're in pretty good shape, I would say. But the other thing that we have done over the last couple of years is to build and try and build as much as we can parallel supply chains and mitigate against the one wafer fab or one backend either struggling through pandemic or issues or in this case, your question capacity constraints, right? So we've been able to do a pretty good job there. It's not the case in all products, but in most cases we do have multiple supply chains. Now that said, everybody seems to be very tightened supply. So I don’t think there's one foundry or one backend partner. It's really everybody in the industry seems to be very tight at the moment. So our job is to just kind of keep working through it. And that's why I said, we are shipping to consumption. A very important point that is that we are shipping to what we believe our customers need and to ensure that they can build their products. And that's what our continuing goal will be for the rest of this year is to make sure we ship to consumption so that they're not building inventory and our channel is not building inventory and it's a healthy pipeline, operational pipeline.

No, very helpful. For my follow-up what -- I was curious, what portion of your optical products now address PAM4 because it does appear that you continue to win incremental designs for higher transmission rates. And then secondarily, I was curious, you could, I guess, as you address that question, I was hoping you might discuss the demand outlook you are seeing from module makers who sell into the recently awarded 700 megahertz and 2.1 gigahertz tenders in China and perhaps how you would characterize the current spending environment for telecom operators outside of China. Thank you.

Again, I'll start with that. We're seeing -- obviously there's a lot of potential growth here in 5G. China is still the driving force for this year. I think starting to see more growth in other regions but certainly next year we expect that to ramp up. And I would say still today that the rest of the world is catching up a little bit in terms of the service providers and even the OEMs. But, that globalization, I think is really beneficial for companies like us with we are shipping into all of the module manufacturers and we would like to see a more balanced geographical landscape for 5G in terms of opportunities. So I think that's good. Coming back to the PAM4 question, we've invested heavily in our Fiber Edge and Tri-Edge PAM4 products, both for 5G wireless and for data centers as you know and I think now we are just starting to release those products to production, get design wins, and we're starting to see the ramp of those and there's limitations at this point because our products are mostly short reach, at least on the Tri-Edge side of things. And, we'll have to develop -- we have to release our longer reach products as I mentioned, but as we do that, I think we'll start to get more penetration of 200 gig and 400 gig PAM4 modules and, and start to see a little bit more of a balanced approach there in terms of growth in some of those pretty attractive segments. Again, the focus of our strategy on Pan4 side is analog side of things. So we are focused very much on lower cost, lower latency, lower power and that's what our strategy is for now. And that's what we'll continue to do.

Our next question comes from the line of Scott Searle with ROTH Capital. You may proceed with your question.

Good afternoon, thanks for taking my questions. Nice quarter. Hey Mohan, just real quickly, I wanted to get a clarification on the $850 million LoRa opportunity pipeline. I just wanted to get a clear definition in terms of how you're defining that again, is it over the lifetime of the expected design win? Is there a specific time period associated with it once it goes live? Also, I'm not sure if you provided a percentage outside of China on that opportunity pipeline. I recall in the past, I think you'd gotten over 50%. Just kind of wondering if we're in that same sort of ballpark. And then as it relates to the applications on the LoRa front, it sounds like more and more it's expanding beyond what we're more localized in campus applications into more PAN regional opportunities, be smart city and otherwise. I was wondering if you could comment and kind of the evolution of how that's going from I guess, a geographic coverage standpoint.

Okay. So a lot of questions there. Scott, let me see if I can remember him. So the first was the pipeline itself. Yes. So the $850 million covers everything in our pipeline. So it's from concept through design, through the production stage, to the end of production. So we capture everything. Of course, once it's gone into design wins, our confidence level starts to increase quite dramatically that that opportunity pipeline is going to lead to revenue. But until it does, we don't, really consider it to be a revenue. That's why I say 40% typically is converting. Obviously once it gets into production, then our confidence level gets very high and then we monitor the production ramp. So, that's the first thing. And then on a geographical scale, yeah, I think revenue wise about 50% of our business is from China. And about the rest is the rest of the world, Europe and North America. Important to note that about 35% is consumed in China. So even though it building in China, a lot of that may be shipped outside, but the funnel is interesting because a lot of the opportunity about 75%, I would say is outside of China. And part of that is just the maturity of some of the regions now. North America is starting to really ramp it's designing activity on LoRa as in Europe. And, as I mentioned, some of the used cases, for example, in Americas, smart home is a very big opportunity in the Americas, smart utilities logistics very big in the Americas. In China smart utilities continues to be very big, but smart city also is a very big opportunity in China and industrial IOT. And then in Europe, it's utilities logistics and industrial IOT. So it's a little bit of a mixed bag across each different region, which is very nice to see actually and these are just some of the segments. Obviously I'm naming the big ones, but we have a lot of other opportunities, healthcare and agriculture and all those types of things, but these are the big ones. And I think that really starts to again, put a real -- some real clarity behind why we believe LoRa is going to be extremely successful.

Great, very helpful. And if I could on the protection front I think historically it's been more skewed towards smartphones, mobile devices. I'm wondering if you could calibrate us in terms of where that makes us today and where, when you would expect non-mobile applications to surpass mobile applications on the protection front, and lastly, seasonality fourth quarter, typically seasonally a little bit down it's been anywhere from, I think 4% to 9%, depending on the year, this is certainly an unusual set of circumstances, given demand and supply headwinds. So I'm wondering what your early thoughts are as we're starting to look out into that fiscal fourth quarter. Thanks.

Yeah. So Protection business, 65% is consumer, 35% is broader industrial, roughly just kind of high level and those broader industrial include com, crude IOT, cruise automotive. So anything that's non-consumer really. And so as we see a lot of our investments historically have been in the consumer protection space. We've now kind of switched that and a lot of our investments are going into the broader industrial protection space, especially automotive and com and IOT. And so I expect that mix to shift slightly. So, probably 40%, 45% protection business eventually, and maybe a 55% consumer, but it's going to take time. And one of the reasons why things take time, we're doing extremely well still in consumer, and we're not shying away from that business and we are continuing to do very well and some of the trends are going in our favor. So we'll see how it plays out. But yeah, that's the goal is to try to get a little bit better balance in terms of broader industrial versus consumer and then the seasonality. Oh yeah. So the seasonality typically for us Q4 will come down and a lot of that is driven by the consumer business. You guys like Samsung will bring down their inventory levels and end of year that tends to be the case in consumer. We'll start to see companies reducing inventory levels and things like that. As you said, this year is going to be different, I think probably because of lead times on supplies. So I'm not sure that we're going to see such an aggressive reduction. So we still expect some decline in Q4, but I don't know exactly how much.

Our next question comes from the line of Rick Schafer with Oppenheimer. You may proceed with your question.

Thanks. I'll add my congrats. So PAM4 is picking up nicely, obviously I'm curious, Mohan, if you could level set as I think last quarter, you talked about Tri-Edge, I think, it was a 24 evaluations. And just was curious if you could maybe update us on what that number looks like now, and maybe give some color around what either in terms of design wins or revenue pipeline might look like for Tri-Edge in particular. And I don't know, as part of your answer, if you could kind of also level set us on sort of what your expectations are for the analog PAM4 market. How big you'd expect it to be compared to DSP and sort of what realistic share assumptions are for you guys given, you're such a dominant position in data center today and things like CDR. So it seems like you're kind of getting off on the right foot there. So I'm just curious, I know there's several questions in there, but I'd be curious with you what you think.

Yeah. So, it's early days for us, Rick. I would say we are getting a lot of good design wins. The momentum is good, particularly on the shorter reach, obviously the shorter reach AOC kind of stuff. It's fairly global as well. We're doing quite well in Asia, we are doing quite well in North America and some of the hyper-scale computing kind of related stuff. I think were analog wins and where we have a good chance is where there's latency needs. And when the cost requirements are low and when the power is important and those are three critical elements of a deployment, then we stand a very good chance with the analog PAN4 products we have and Tri-Edge is doing well, Fiber-Edge also which compliments DSP also is doing well for us. I think once we get our longer reach platforms out, which is towards -- some towards the end of this year and maybe some early next year, I think we then we'll open up the 200 gig and 400 gig market to the whole market. And then we'll really be able to sit down and evaluate what we think our long term position in this market will be. But for now, I think it's just kind of getting out there and blocking and tackling, trying to win as many as we can, and they shorter reach use cases. And I'm delighted with the progress. Obviously this is going to be a nice growing business for us, at least for this year and for next year quite rapid growth we're expecting some good share there, so we'll see how, how it plays out.

Thanks. And maybe one for Emeka if I could. As your top line is accelerating to that sort of $1 billion, you've talked about being optimized for thinking annual revenues. Is there any reason as we start looking out, I know you're not guiding to calendar '22 or '23, but any reason to see investment pick up, as you guys let's say need to add more capacity or should we think sort of for the foreseeable that OpEx kind of continues to grow sort of roughly half past top line. Thanks.

Yeah. So Rick that is our model. It's worked out for us pretty nicely and we've been able to maintain that for the most part. So that's what we still expect is to continue to see very nice top-line growth from all the growth drivers that we're talking about. See gross margin expansion and then have operating expresses coming about half the rate of revenue. That's how we manage the company and we expect to continue to do that.

Our next question comes from the line of Harsh Kumar with Piper Sandler. You may proceed with your question?

Yeah. Hey guys. First of all strong congratulations, very nice quarter, very nice guide. Mohan, I had one for you. You had a very impressive something kind of very impressive infrastructure increase. I was curious if 10 gigabit PON is a bigger driver of that increase or is it the data center side, and then as a part of the data center side, are you able to sell to Wiley at this time? We've heard a couple of companies selling optical components there and maybe just give me an idea of as your data center business more so US centric or China centric?

So let me take that first, Harsh, it's mixed it's actually quite well balanced between America and Asia, Asia probably have more design wins and I think momentum is good there. On the PON side, PON is extremely strong. At the moment 10 gig PON particularly is very, very strong. I would say that's probably the strongest outside LoRa the strongest growth area for us. And then data center is also doing extremely well and in pockets are of course, more so in the 200 gig and area PAN4 area is growing nicely. But yeah, I think across the board, we're very pleased with the infrastructure growth. And I think we anticipate that it's going to continue to grow, whether it's on the access side which will help PON whether it's on the kind of base station side as 5G deployments occur or in the data center side, we would expect those three areas to continue over the next three to five years to get quite sizeable investments around the world, just for more bandwidth and we should see the benefit of that.

Mohan I also had a question about Wiley, are you able to sell to Wiley at this point where they are part of their earnings?

Yeah. Each one is actually Wiley is very little revenue for us at this point in time. I think, each product we apply for a license and it's hit and miss actually, we don't really understand how the decisions are being made, but I would say most of the -- most of the businesses at the moment we're not shipping a lot into Wiley themselves, I think yeah, that's probably the case, right. Emeka, do you have…

For your last phone so LoRa, you had records all around. I was wondering if you could address the US-based activity with large customers and if you feel like the US revenues have started to kind of mobilize in a meaningful way, are we there at this point or you feel like you're still -- we still have to wait for a little bit of momentum in the US market from a revenue standpoint.

So the US there's a lot of activity across the board; utilities, logistics, smart home is all going very well. I would say that we haven't yet seen the benefit really all from the activity. And I anticipate that really, it's probably going to be first half of next year, maybe when we start to see it. We're starting to see some, this second half I think, but I think the real pickup is going to be next year. So yeah, I think it's still a lot of activity, a lot of good activity, lots of momentum yeah, for sure. You'll see and hear some announcements over the next quarter here of more things that are going on, but in terms of revenue, I think relatively small today.

Our next question comes from the line of Gary Mobley with Wells Fargo. You may proceed with your question.

Hey guys, let me extend my congratulations on strong results. I had just one multi-part question for you guys, and that relates to supply chain constraints and the price increases. We've all been hearing and reading about coming out of Taiwan. I presume correct me if I'm wrong, but I presume that that isn't going to immediately pose a margin pressure for you, given that you were able to grow your inventories and you're maintaining inventories above historical ranges. But when that day comes that you start to face these inflationary pressures from your supply chain, have you communicated to customers, the possibility of raising prices? And can you maybe share with us what the feedback has been from those customers?

So, Gary, yeah, that's a good question. I pick, like aside by saying that so far this year we've actually received price increases from some of our partners and backend partners. And I think for the most part, we have been successful in sharing that board with our customers. With regards to some of the new announcements coming out of Taiwan, like you mentioned, it is still, it just came out. We've don’t expect that to impact our current quarter but the expectation is that we are going to handle it the same way. We're going to try to share some of that with our customers and hopefully we can see the same type of success that we saw before but of course it has to play out

And Emeka for clarification, you said your days of inventory were 129 days. That was up three days sequentially, is that right?

Yes.

Our next question comes from the line of Craig Ellis with B. Riley Securities. You may proceed with your question.

Hey guys, thanks for including me and nice job with the quarterly execution. Mohan, I wanted to start just by following up on part of the question that was recently asked, and it's about LoRa. So, it seems like after some of the work that was done to get the LoRa pipeline in place in US and Europe, we had COVID and we're coming off of that with continued strong pipeline growth and we're entering a period of acceleration. And I think you mentioned that your expectation is that LoRa would grow above 41%, or excuse me, above 40% this year. So above that longterm CAGR. The question is this, if we now have two big geographies, the US and Europe that are hitting their stride in uptake acceleration and given that with wireless technologies, that part of the adoption curve can accelerate on a multi-year basis. What are the gives and takes with LoRa actually performing above the 40% CAGR when we look out to next year calendar '22 or fiscal '23?

Yeah, I think that's a good question Craig, if you go back to the past certainly over the last five years, I've always been saying that I expect this business to double every year for a long time. And obviously in the last couple of years, it didn't grow that well for pandemic reasons and the China related issues and whatever. So I'm a little bit more cautious about how I project the growth. But what I would say is that when you look at the market, the LP WAN market, a lot of the LP WAN drivers are things like climate change environment efficiencies, utility management, things like that, which, around the wall, you just see it every day that there's a need for it and that's what's transpiring in my view is that it's going from being a nice to have, to a real need. And that need is, I think, is going to drive a faster adoption of some of the LP WAN technologies. And I think LoRA is the best and the most capable technology and so that's what I think is going to drive the growth. In addition to that, if we look at new segments, like the smart home segments, we talk about Sidewalk and Amazon, we don't even consider that to be LPWAN. We consider that to just be low power wireless market. We're seeing in the LoRa is starting to find its way into other low power wireless segments. And so, I do think the growth can be greater, but I think we will stick with the 40% CAGR as our goal and make sure we execute on that, right?

Yeah. That makes a ton of sense. And then Emeka, I just wanted to clarify that I was hearing you correctly in terms of how you're characterizing the impact of the various supply chain issues that are out there. And admittedly, I missed the prepared script part of the call, but I think what I gathered was that you were conveying that there is an impact to gross margin in the business, even though you do have some success ensuring some of the price increases that are starting upstream from you, with your customers. But I thought I heard you say that there wasn't a revenue impact in either the quarter or the outlook, is that correct? And if not, please set me straight. Thank you.

Okay. So what I was saying was that we have actually had price increases so far this year, right? And that we have been able for the most part, have been able to pass that onto our customers. We've been able to share that to boarding with them. And so the answer that I was giving was saying that, as we go forward with some of the new news, but in new news that is out there, especially out of Taiwan, that they are going to increase their wafer prices. That our expectation will be that we should see the same kind of success that we saw in the past with I guess to how we share that burden with our customers. Obviously we have to see how it plays out, right. But we're very hopeful that that is something that should not significantly impact our gross margin expectations.

Well, one of the things to remember Craig is that when you look at a lot of our growth as Emeka pointed out, it's coming from new platforms that really drive -- are driving higher ASP's for us, you know, the 10 gig PON is an example of that. The data center products, the Tri Edge and 5G wireless, IOT that was a LoRa related products and Protection broader Protection products. So as we see the supply chain increases, part of our goal is to make sure that we are pricing appropriately, right? So because we have new products coming out at the same time, I think that's an opportunity for us to take advantage of that.

Yeah. Certainly the new -- the strong new product cadence is something you can leverage in this environment. I appreciate the input guys. Thank you very much and good luck.

[Operator instructions] Our next question comes from the line of Tore Svanberg with Stifel. You may proceed with your question.

Yes. Thank you. I just had a follow-up on LoRa and on one of the metrics. The one metric that really caught my attention was the gateways it's gone up quite dramatically the last two quarters. Mohan is that simply because LoRa is becoming more and more of a consumer technology?

I would say it's a little bit of both Tore. I would say that it's not so much consumer, but we are getting some smart home deployments and of course, if you think about echos in the home, or if you think about the helium gateways, which are really smart home type of initiatives that drives a high volume of gateways. But yeah, you're right, even for us, it's a surprise to see quite aggressive growth there. We had as you mentioned the target for the year was 2 million gateways, and we're already at 2.2 million gateways. So we've raised that to 2.9 million. But, to me, the beauty about the gateway deployments is really just drives the capacity to support billions of sensors and that to me is the key. So if you have infrastructure out there then it's just a question of time for the census and the used cases to catch up. There's a couple of bottlenecks still. Software, there's a bottleneck, and I think census is a bottleneck in some cases, but as those bottlenecks get removed, then there's no reason to question the growth in the opportunity though.

At this time, there are no more questions. I'd like to pass the call back over to management for any closing remarks.

In closing, we are pleased with the strong first top results. As we saw increased adoption of our growth engines in the infrastructure, smarter planet and mobile mobility markets that should provide sustainable long-term growth. We have been successful in navigating the challenging supply chain environment and expanding on our sustainability efforts, including our commitment to human capital development. Given our diverse and growing product offering, balanced markets and strong customer relationships, we expect to deliver a stronger second half and record financial performance in FY'22. With that, we appreciate your continued support of Semtech and I look forward to updating you all next quarter. Thank you. Operator?

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