Greetings and welcome to the Semtech Corporation Conference Call to discuss the Second Quarter Fiscal Year 2023 Financial Results. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, Semtech's Executive Vice President and Chief Financial Officer. Please note, this conference is being recorded. At this time all participants are in a listen-only made. A question-and-answer session will follow the formal presentation. I will now turn the call over to Semtech's Executive Vice President and Chief Financial Officer, Emeka Chukwu.

Thank you, operator. The press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current, as of today only, and Semtech undertakes no obligation to update the information from this call should factor circumstances change. During this call, all the prices made the financial results in my prepared remarks and Mohan's prepared remarks, we 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 financial measures are included in today's press release. In Q2 fiscal 2023, the company delivered record net revenue of $209.3 million, a sequential increase of 3.5% and an increase of 13.1% year-over-year. While in a challenging business environment, we focus on operational execution and we're able to grow our earnings at approximately twice the rate of revenue growth and delivered non-GAAP earnings per share growth of 9% sequentially and 34% year-over-year. Our business is seen continued relative strength in North America and Europe, and the bigger shift to the industrial and data center segment. This shift is aligned with our strategy to diversify our geographic and end markets. We saw significant growth in the infrastructure end market growing 11% sequentially and 25% over the prior…

Thank you, Emeka. Good afternoon, everyone. I will now discuss our Q2 fiscal year 2023 performance by product group and provide our outlook for Q3 of fiscal year 2023. At Q2 fiscal year 2023, net revenue was a record $209.3 million, representing a 3.5% sequential increase and a 13% year-on-year growth. We posted record non-GAAP gross margins of 65.2% and record non-GAAP earnings per diluted share of $0.87. Our Signal Integrity Product grew 19.5% annually and achieved a fifth consecutive quarterly revenue record and represented 42% of our total revenues. Growth was driven by strength from the PON and data center markets. In Q2, our hyperscale data center business was strong, led by growth from 100-gig optical modules. Design wins of our Tri-Edge short reach platform for 200-gig and 400-gig PAM4 optical modules continued to gain momentum globally. Our customers are also giving us positive feedback on our long reach Tri-Edge samples, targeted at 200-gig FR4 optical modules. This will be another growth driver for us over the next few years as this new longer reach platform increases our data center PAM by over 50%. We expect strong growth from Tri-Edge over the next few years. We recently announced our new, highly innovative CopperEdge platform targeted at short reach copper interconnects and active copper cables used in data centers. This is a new product portfolio targeted at 400-gig and 800-gig data center applications and represents a completely used sound for Semtech. The first product in this new portfolio is a quad 112-gig PAM4 linear equalizer offering lower power and lower latency. We are sampling this new product now and we'll be showcasing its performance at the European conference on optical communications next month. We remain confident that our full portfolio of data center products, including ClearEdge and Tri-Edge CDRs FiberEdge…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Yes. Thank you. I wanted to ask a question about your gross margin comment on fiscal 2023. Sounds like you're expecting some upside driven by mix. And I'm just wondering what's driving that change. I do suspect that maybe the Protection business and especially the smartphone part of the Protection business is probably going to continue to decline. But if you can elaborate a little bit more on what's driving that higher gross margin outlook for fiscal 2023. Thank you.

Hi, Tore. This is Emeka here. So, our gross margin story has definitely been a highlighter because it's been pretty stable. It's coming at almost exactly as we anticipated. I think if you remember in the past, we've always talked about the growth drivers that we have for the company. We've talked about LoRa being, having gross margins above the corporate average, even our PON business, especially as our 10 gig PON-X platform has a pretty good gross margins. The data center business is good gross margins; the wireless base station, good gross margins. And then, like you mentioned, within Protection, we continue to see the industrial and automotive revenues being a higher mix of the Protection revenue. And that gross margin is pretty good. So, as we go into the October quarter here and with this expectation of continued weakness in the consumer sector, we think that actually would be accretive to our gross margin.

Very good. And as a follow up, I know you're expecting all three product segments to be down sequentially, but are there any of those that are perhaps going to be up sequentially, I'm thinking maybe LoRa, maybe PON, or is this at this point, basically all products down sequentially.

So, I think, Tore, all the product groups as a whole will be down probably sequentially. I think, some of them -- some of the subgroups maybe flat, slightly up on an annual basis. And I think you mentioned PON as being one of them. I think data center is possibly another one. Within the Industrial segment, there are some areas there that are a little bit less weak than others. I would say, the biggest challenge we have is probably China. China is -- that's a fairly broad market opportunity for us obviously, and our revenues are 35% consumed in China. So, there are certainly softness across all of our segments there, but I would say in order of kind of magnitude it's consumer, China consumer, and then the other segments.

Great. Just one last question, as we think about this sort of correction here, care to comment on the timing. I know there's a lot of different dynamics, right? I mean, supply, there's shutdowns, there's also sell through softening. So, any sort of guess as to how long this correction will persist, if you have any comment. Thanks.

Yeah. Well, we've seen, I mean, throughout Q2, bookings have been softening I think and so consumption softening. So that's what we anticipate for Q3 softening consumption to be weaker. Q4 typically is a weaker quarter for us. And certainly consumer normally is down, lot depends on how weak Q4 is, I think, but our expectation is as we go into next year, that a lot of the inventory will start to bleed off in the kind of second half of this year. So, we should start to see strengthening next -- early next year.

Very helpful. Thank you.

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

Yeah. Thanks for taking the question. I wanted to follow up on the comments that Tore had or the inquiry that Tore had, and just really understand more about what the company's been seeing. So, Mohan, is you look at guidance that's down. I think it's 16.5% quarter-on-quarter. How much of that is order weakness that you've seen quarter to date versus a desire to try and get in front of the macro trends that you talked about? When I look back at your commentary on Signal Integrity, it sounds like that business is holding up pretty well. And then within wireless sensing, LoRa is very strong. So, I'm just trying to reconcile some of the strength you've seen very recently and the numbers that were reported with the magnitude of decrease that we're looking for in the fiscal third quarter, and just hoping you can provide some segment or subsegment color on what the bigger drivers are there.

Yeah. So, for sure, I would say consumer in Asia is definitely very weak and that's probably the weakest area. And then I would name within Asia, obviously the smartphone business in Korea and in China is extremely weak. I think those are well known kind of things out there. On the rest of the consumer space, I would say that North America's a little bit stronger, but starting to also show softness, I would say. And then, if we take out -- go out of side consumer, the industrial and infrastructure segments in the first half have been very strong. I think what we saw in Q2 is starting to see softness in the bookings there as well, even though we have fairly good backlog, I think the booking softness and then the consumption weakness is starting to obviously demonstrate that the end demand is now starting to go back into balance. Maybe the supply demand equilibrium is now going the other way a little bit, which is normal in our cyclical industry, as you know. So, within infrastructure and industrial, I would say, infrastructure and industrial North America and Europe are relatively strong and China and Asia are relatively weak.

Got it. A and then a clarification on the comments regarding the fourth quarter, which I think we all know is typically a seasonally weaker quarter in part, because of what happens with inventory and consumer markets. But can you or Emeka refresh our memories on what typical seasonality would be. And if we have an inventory correction, how you think about the magnitude of that relative to seasonality?

No, Craig, so I think typically, we've seen soft net probably in the range of 5% to 10% in the fourth quarter. It depends on a lot of things, the customer space, the consumer inventory rebalancing is also very well known. However, the potential upside to that could be what happens in the infrastructure space, right, that are -- as you know, when things really go soft in China, there's always talk about stimulating the economy by infrastructure spending. And so, we'll have to -- we've heard news about that, but we not know when that's going to happen. We have to keep an eye if that happens. And the tender go out and the orders are placed. That could be an uplift for the fourth quarter. But at this point, we are not banking on that. So, we just have to see there whole lot of puts and takes, but overall we typically see about a 5% to 10% softness decline in the fourth quarter.

Yeah. Which seems like you might be getting in front of that with the down 16% in the third quarter, but we'll see. If I could just follow up with a clarification on your prepared remarks. Emeka, you mentioned that you expect the deal to close this fiscal second half, and also that you had committed debt financing. Can you provide any color on the rate you'd expect for that committed debt financing?

We're looking at different structures. Term loan is going after the commercial banks, going after the convert markets, we're looking at different things. And hopefully, by the time that we're done here, we should probably see a cost of capital in the 5% to 5.5% range.

Got it. Thanks for the color guys.

Our next question comes from the line of Richard Schafer with Oppenheimer. Please proceed with your question.

Thanks guys. Maybe just to start with a quick clarification question, maybe I missed it. I know bookings dropped, I think over 20% last quarter, the prior call. So, maybe I missed it, but how much are bookings down heading into 3Q?

Bookings are down significantly, Rick, and continue to be weak in Q3. So, as we mentioned, the book-to-bill was less than one. We continue to see fairly soft bookings in Q3. And that's part of the challenge for us. So, as we look at -- even though backlog is still relatively strong, so the tons number we require in Q3 is relatively low number for us versus historical. Bookings rate is still soft. And a lot of that is China. A lot of that is consumer. But yeah, the reality is I think all segments are starting to weaken a little bit.

Okay. Thanks for that clarification. So, my first question is, is really just on data center. It sounds like you kind of called that out. And answered to an earlier question as being relatively strong, up potentially here in the third quarter if I heard that correctly. You guys obviously have a large income position there. So, I'm curious, how much of that business for you guys is sort of cloud versus enterprise, like what that rough split might look like. And is there anything to call out there within that, so enterprise maybe a little softer, cloud a little better? Is there any kind of -- any color that you could provide? What you're seeing there?

I would say hyperscale cloud is where the strength is, Rick. We're anticipating the second half to be weaker than the first half. But really in the scheme of things, probably up from last year. So, relatively strong. We got a lot of new stuff going on there as well. So, a lot of new products and a lot of new areas of opportunity, but in general, I think that even infrastructure market, unless as Emeka pointed out that -- we get a new stimulus package in China that might kick in or something like that. One is expecting that to maybe Q4 or, early next year before we start to see it really going up again.

Thanks. And if I could, I'll just ask one on Tri-Edge and appreciated the update there. I was just curious if we could get any more color on -- like an update on the number of trials you have ongoing or number of wins, like what the revenue funnel might look like, something like that. And then I know you mentioned the long reach Tri-Edge increases, SAM about 50%. I was just curious if you could level set on what that SAM -- what that existing SAM is.

Yeah. So, Tri-Edge for us is doing extremely well, I would say across not only data center, but also the base station market, 5G base station frontal market. And now we have -- now we're starting to bring out our newer products. So, we have short reach Tri-Edge, which is doing well, expecting very good growth from that business next year. It will grow nicely this year, but also next year, I think we'll continue to see the acceleration of Tri-Edge revenues there. And then the longer reach products are sampling now. So that's kind of at a high level and additional $100 million SAM for us really. And then the base station market adds additional SAM for our Tri-Edge platform. And I mentioned the CopperEdge we announced as well, which also gives us more SAM in the data center market. So, total SAM for data center, we look at maybe a $1 billion SAM in FY 2027, kind of the way we look at it. And our goal is to get 30% to 40% share of in that space.

That's great color. Thanks a lot. Appreciate it.

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

Hi. Good afternoon. So, you you've made it very clear that consumer spending is very weak in China. How do I disassociate that from perhaps lingering impact of the COVID-related shutdown in the April and May timeframe? Is that really a factor in the weakness because there's still some bottlenecks in the supply chain, or is it basically a flowing supply chain, but it's purely consumer weakness at this point?

Well, I think there's different elements, Tristan. First of all, I think, China consumer consumption in terms of China end demand is weak. Also China as a economy is weakening. And that is a challenge for China smartphone manufacturers I think. Then we have the issue of COVID shutdowns and lockdowns and all of that sort of thing, which doesn't help. I don't know if I can quantify what percentage is related to that, but it doesn't help, for sure. And then, I think there's other consumer pockets of weakness elsewhere. So, I think, we we're seeing that because we see -- obviously we have a fairly broad penetration of the smartphone market with Korean smartphone and North America and China and China is definitely very weak. And I would say Korea is relatively weak as well. North America, not so bad. And then if you take -- other kind of outside the smartphone space and look at other elements of consumer, they are also relatively weak across the board.

Okay. And then, back to earlier question, given your guidance for the quarter, by how much you think your under shipping LoRa demand, and if you could talk about how much inventory delevering is happening in Asia, I'm assuming that your guidance doesn't reflect really what the end demand is going to be in terms of sequential changes.

Well, we are -- part of the thing we do is we look at consumption, Tristan. So, we look at how much is being consumed and when we see that trending downwards, then that concerns us, right? So, we start to look at that being an early indicator of softness and certainly over the last quarter, it's been weakening. So we have a consumption weakness. We have bookings weakness, and therefore, one expects demand weakness also. If you -- there are pockets of relative strength. As I mentioned, I would say North America and Europe, industrial infrastructure seem to be relatively strong compared to consumer, but even those areas are also showing signs of some softness.

Okay. Thank you.

Now our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.

Yeah. Hey, Mohan. I wanted to get into your weakness for the guidance. Let's say, -- hypothetically let's assume you're about $40 million off. It's just easier for us to understand from the aspect of end market such as industrial, consumer and infrastructure rather than your product group. So, if I asked you hypothetically to break down, call it $40 million weakness into the end markets. My assumption is that consumer would be the biggest part, but would you just and kind of give us an idea of how much of that $40 million weakness is coming from consumer and how much coming from an industrial versus infrastructure. And then I've got a follow up.

Yeah. So, Harsh, I think, as you can imagine from the questions that we've asked before, if you were to rank all those, I'll probably say that, of course, consumer is leading that. And then, from a little bit of industrial a little bit and then the infrastructure side, but I think most of it, the bulk of it is coming out of the consumer space.

Okay. So, when I look at -- so, my follow up is, when I look at your latest quarter, I think hand setting consumers only 20% of sales. So, is the bottom just falling out on that business? I mean, is it fair to assume that business is down like 50%, 60% or am I way off here in my assumption?

The consumer space is down significantly. I don't know, but I can give you the percentages like you're trying to get. But if you look at -- I remember that our consumer business is made up of our proximity sensing, products going into the smartphone space, and that is down significantly the protection consumer business as well. We are expecting it to be down in the next quarter as well. So -- and then if you look at the other segments, in a little bit on the infrastructure side and a little bit on the industrial side, so definitely the bulk up that is coming from the customer space.

Okay. Can I ask just one more follow up? Emeka or Mohan, I know that you guys do business -- you have historically been very strong in data center in China, historically. And also maybe to some degree, I can say that's super industrial. Let's say we put aside the weakness in China is something specific to COVID for now that let's just say we assume that it gets fixed down the line next year. Would you say that that's accounting for the bulk of your weakness in those two areas? And that -- I think you mentioned U.S. is holding relatively well, is that a fair way to look at it?

Yeah. I think that's probably correct, Harsh, that China is definitely both on the infrastructure side -- elements of the infrastructure side have pushed out. Of course, as Emeka pointed out that could come back in Q4 quite strong, depending on investments going in that area, but that for sure in Q3, that is part of it. I would say the industrial, China industrial was also part of it. And consumer is obviously the bulk of it. But we are seeing pockets of weakness elsewhere as well. Other regions are starting to get softer, but I would say China is by far bulk of it.

Appreciate the color guys. Thank you so much. I'll get back in line.

[Operator Instructions] Our next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed with your question.

Hey, guys. Thanks for the question. So, it's around proximity sensing, you guys called it out in your prepared remarks. I thought that this was a much smaller product for you guys after the [indiscernible] issues. Perhaps you can level set us for what it was in Q3. And the reason why I'm asking is I think I'm down maybe $15 million to $20 million sequential for the wireless and sensing segment. And I'm trying to figure out how much of that is proximity? How much of that is LoRa and how much of that is other? Emeka, maybe you can help us just with some broad strokes, kind of figure that out. Thanks.

So, proximity sensing is -- a number of different companies, Chris. I think Samsung is a big piece of that, as well as China. So those two are contributing definitely to weakness. There is some excess inventory out there as well. So, some of that demand was very strong around kind of COVID timeframe and then came down. So, I would say that the big piece of it is the proximity sensing. And then if you look at industrial and LoRa, obviously we're starting to see weakness in the second half on -- from China. Again, China still contributes is a -- probably 50% of the revenues for our LoRa-enabled business. So, there is definitely some weakness there as well. Some of that's COVID related, and I think maybe will get stronger towards the end of the year, but for now, that's also weak. And then we have some weakness in, as I mentioned on my prepared remarks on some of the gateway deployments, obviously that's lumpy. Anyway, infrastructure tends to be a little lumpy. As you know, Helium is definitely weakened as well. So, there's some elements there. So within wireless and sensing, I would say it's proximity sensing, and then both the Korea and China, and then some of the LoRa China and in Helium gateways.

Great. Okay. Thank you for that. And then my second question is on LoRa. Can you remind us what an ASP is for LoRa node? And congratulations on all the growing content you have at Amazon, for example. Should we assume kind of the same ASP for that node in Sidewalk considering it's such big volume or is it more considerably discounted? Thanks.

Well, you have to separate the gateway deployments. So what goes into an Echo for example, versus what goes into the end nodes, the end nodes are the sensors that connect to them. So typically we use a reference point of about a dollar for an end node, kind of ASP could be higher, could be $2 to $3, or could be lower depending on volume. And what type of -- which device it is, but that's where the opportunity is for LoRa. And that's what we're hoping to see now over the next three to five years. We have a lot of gateways out there and now it's all about connecting end devices. But that's where I think that we're going to see -- the world is going to need LoRa. As we've talked about several times that the value or the lower power sensing and the connectivity that brings together a complete IoT and sensing network is really the value of LoRa. So, to us that's the real opportunity. But to answer your question, yeah, we typically think of an end node in the $1 to $2 range.

And I guess just the follow up there, should we think about the content for like an Echo, the gateway content in an Echo? How should we think about that when compared to the content for -- I would assume it's a more robust gateway for like a Helium hotspot or something like that? How do we broadly think about the content differences in magnitude?

Think about a macro gateway as typically being $10 to $20 of chip content, a PicoCell gateway, typically $5 to $10, something in that range. And obviously, we're not going to speak about specific customer partnerships we have, but in some of our strategic partners, we may do have lower ASP in order to try to proliferate the networks.

Great. Thanks guys.

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

Yeah. Actually my question was just answered. I appreciate the opportunity again. Thank you.

And our next question comes to the line of Scott Searle with Roth Capital. Please proceed with your question.

Hey, good afternoon. Thanks for taking my questions. Mohan, maybe just to follow up on some of the earlier questions. Certainly, consumer smartphone is a big area of the weakness that's going on right now in China and globally. But I'm not sure if I heard a level of inventory -- channel inventory that you think is out there either distributors or if the customers themselves, I just want to clarify kind of how much of this is, is inventory channel absorption versus demand. And are you losing share from a design perspective, because look from a macro standpoint the market being down 5% to 10% or so in terms of units this year, and clearly you're going through looks like a bigger trough than that. So, just trying to figure out that aspect. And also on the LoRa front, I'm not sure if you gave an indication of what that looks like sequentially -- will be sequentially up in the current quarter, because it sounds like you're still looking for that 40% growth in fiscal 2023.

Well, let me start with that one, Scott. So I think, in the first half of the year, LoRa has grown versus last year I think it's over 70%. So, obviously, we couldn't expect that rate to continue. So for the year we're still projecting 40% growth for LoRa. But in the second half it'll be weaker. And that, I think part of that is China, China weakness. And then part of that, as I mentioned is the Helium, a little bit of weakness there as well. So that's what the expectation is for LoRa. We don't believe we're losing share in any of our businesses or any segment. We actually -- if anything, I think we're actually gaining share in some areas. I think the weakness we see today -- you mentioned channel inventory is really tied to consumption. So, if consumption comes down, obviously your channel inventory increases, because it's not moving from the channel. And so, that's what I'm saying. As we see that weakness, we have to bring down our expectations. And so, once that consumption increases again, that'll give us a more positive feeling about guiding more aggressively. So, I think, yeah, that's the way we look at it. And if you look at the details behind that, a lot of it is consumer. A lot of it is China. Some of it, as I mentioned is tied to still China lockdowns and things like that. So, I think those will come back. But even the other segments like infrastructure and industrial now are starting to show some signs of weakness. Definitely the bookings are not as strong, as one -- as we've seen over the last few years.

Okay. Very helpful. And if I could -- just from a follow-up perspective, in terms of Sierra Wireless, I'm wondering what you're seeing from your customer base in terms of cross-platform interest like LoRa and cellular kind of being built into the same solution and what the general feedback is in interest level that you getting from customers in the early going here. Thanks.

Yeah. I mean, Sierra Wireless acquisition has always been very strategic one, but very tactical in the sense that because customers is the -- are the ones that really drove the thinking behind it. For many reasons, one is the kind of global connectivity aspect of it that -- immediately you have the ability to connect LoRa sensors and networks to already established global cellular networks that are out there. So that provides network coverage for all IoT use cases. So, that's definitely a plus point for customers. You have end to end IoT capability. So Semtech can go out there and talk about how to connect a sensor to the network, to the cloud. And that's going to be very, very positive for many customers. We're already talking to. Because they see the ability to reduce energy, reduce cost to get global connectivity and be able to connect their industrial assets to the internet. So that's definitely a positive. And then I think the cloud is kind of the silver lining on, this is going to be very, very exciting, but obviously Sierra's cloud platform is already established. They already have it out there and us bringing our LoRa cloud capability and connecting the two and providing that total solution to customers is enabling them to really think about new use cases and new ideas of bringing ultra low power, long range LoRa, together with low latency, high bandwidth capabilities of cellular. And if you think about the use cases, I mean, there's just so many, mobile asset tracking, coal chain, fleet management, public safety, security, smart cities, smart utilities, industrial IoT, all of these use cases will, and applications will use ultra low power sensing with cellular connectivity maybe on the back haul side. So, I think, yeah, we just can't wait really to get into the integration, get the deal closed and then integrate the two companies and really start to provide a total solution offering to our customers. It's going to be pretty exciting.

Great. Thanks.

And we have reached the end of the question-and-answer session. Now I turn the call back over to management for closing remarks. End of Q&A:

Thank you. In closing, we were very pleased with our record Q2 results. We have demonstrated commitment to excellence and innovation, and have delivered excellent financial performance, despite many headwinds over the last few years. While we are facing some short-term macroeconomic challenges, Semtech is a very resilient company and I'm confident that we will successfully manage through the current headwinds we face. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

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