Greetings and welcome to the Semtech Corporation Conference Call to discuss the Third 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 that 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 Vice President of Investor Relations, Anojja Shah. Thank you. You may begin.

Thank you, John. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current, as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During this call, all references made to financial results in our remarks 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 financial measures are included in today's press release. And with that, I’ll turn it over to our Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Anojja. Good afternoon, everyone. In Q3 fiscal 2023, in-line with our guidance, Semtech delivered Q3 net revenue of $177.6 million, a sequential decrease of 15% and a year-over-year decrease of 9%. We face a challenging macroeconomic environment and see sustained softness in the consumer market and overall weakness in China, but we are beginning to see signs of stability on several bright spots. Our focus on regional revenue diversification is showing signs of success. We see accelerating adoption in North America and Europe for TriEdge for LoRa and our broad-based industrial and [automotive flotation] [ph] business due to our targeted growth efforts with end customers. Overall, Q3 shipments into Asia, North America, and Europe represented 71%, 15%, and 14% respectively. While this represented a [ship to addresses] [ph] for our distributors and customers, we estimate that approximately 35% of our shipments are consumed in China, 28% in the Americas, so 21% in Europe, and the balance over the rest of the world. Looking at our end markets, our infrastructure end market grew 5% over the prior year, but declined 17% sequentially and represented 39% of total net revenues. Net revenue from the industrial end markets also grew 7% year-over-year, but declined 13% sequentially and represented 41% of total net revenues. As I previously mentioned, we continue to see softness in consumer end markets, where net revenues for high-end consumer decreased 43% over the prior year and 15% sequentially and represented 20% of total net revenues. Approximately 10% of high-end consumer net revenues was attributable to mobile devices and approximately 10% was attributable to other consumer systems. Our sales channel remains consistent with distribution representing approximately 83% of shipments and direct 17% of shipments. Our distributor POS declined during the quarter, but remained balanced with approximately 38% of POS…

Thank you, Emeka. Good afternoon, everyone. Let me begin by providing a brief update on our proposed acquisition of Sierra Wireless. I will then share details of our Q3 fiscal year 2023 performance by product group, and then provide details on our outlook for Q4. Regard to our acquisition of Sierra Wireless, as previously announced, we received a second request from the U.S. Department of Justice. We are cooperating fully with the DOJ and providing them with their requested documents. In parallel, together with Sierra, we have made significant headway through integration planning and are prepared to close immediately when approval is accomplished. We continue to be extremely excited by the transformation we can drive in the entire IoT industry by bringing together the ultra-low power long range sensor benefits of LoRa technology together with the low latency, high bandwidth network benefits of cellular technology. Our goal is to enable IoT deployment simplification through end-to-end connectivity and deliver a cloud to chip IoT services platform that will accelerate our customers' digital transition to the Internet of everything. We continue to receive very positive feedback from our customers as they start to recognize the disruptive potential of the combination of the two companies. Combination of optimizing LoRa and cellular technology is a highly strategic opportunity that will position Semtech as the clear leader in the fast growing ultra-low power IoT market. Now, turning to our Q3 performance. Our Q3 net revenue was $177.6 million, slightly above the midpoint of our guidance range. We posted record non-GAAP gross margins of 65.5% and non-GAAP earnings per diluted share of $0.65. Despite the challenging macro environment, we continue to execute well, have solid new product releases, and new design in momentum and are very excited by our future growth prospects across all our target…

Thank you, sir. [Operator Instructions] Our first question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Yes, thank you. The first question is on your current number there for the January quarter. So, I think last quarter, I think you expected 0% churns, obviously now quite a bit higher. Does that mean Mohan that kind of like the supply and demand is back in balance? Because I think historically you turn about 20%, 30% on any given quarter. And as a follow-up to that, what gives you the confidence that you can actually achieve the 27% terms?

Yes. I think that is correct, Tore. Its supply lead times are starting to normalize and get back to what they kind of historically have been. There are also – there's also inventory in place. So, meeting short lead time orders is not going to be as difficult as it has been in the past. I think also with the POS stabilizing and the general feeling that consumer, for example, has been extremely weak for a long period of time and starting to see some improvement in bookings there gives us that confidence. And as you point out, yes, historically, we've turned 30%, 40% a quarter fairly frequently.

Very good. And as a follow-up to Emeka, Emeka when you talk about OpEx next quarter, you mentioned a 10% number, so is that total OpEx down 10% sequentially? And would this sort of be the new run rate going forward for as we model the rest of the year?

Yes, it is 10% down sequentially. As you know, Tore, when we start a new fiscal year, there are additional expenses that will come out, right, higher taxes and things like that. So, the operating expenses I would expect going forward, it's probably going to be a little bit up in the first quarter and the first half of next year, but I think the run rate is going to be significantly down from what it was for fiscal year 2023. As a matter of fact, I will probably expect your quarterly run rate to be about $63, $64 million a quarter.

Very good. Just one last house-keeping one, you mentioned that 82% of the LoRa funnel is outside of China, which means 18% in the funnel is China. Why would that would be currently as far as revenue is concerned?

Revenues are closer to 45% to 50% of total revenues up from China, Tore. Obviously, I think in the last quarter, it's probably a little lower than that, but I think it’s still – most of the – a lot of the revenue is up from China. The funnel obviously takes time to transition into revenue, but the important point there is that we are seeing a lot of success outside China. Now, China also is still doing very well and LoRa is growing in China and I think it will continue to grow in China. But there are other regions, particularly North America, has taken a while to catch up. But I think now if the funnel – if we execute on the funnel transition to revenue, then we'll start to see a little bit more balanced geographical business for LoRa.

Very good. Helpful. Thank you.

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

Hi. This is [indiscernible] on the line for Rick. Thanks for letting me ask a question. So, in regards to your agreement to license to LoRa Cloud to AWS, I was wondering how this affects your end node forecast and the long-term 40% CAGR, is this already embedded in – can we see in the accelerated growth in your 40% CAGR? Thanks.

Well, it's kind of embedded in the 40% CAGR, I think because it drives a lot of end use connectivity. The whole goal here is to use AWS' channel and market power and presence to go out and drive more end node connectivity and more assets that need to be tracked and managed and we feel pretty good about the combined company's efforts here and the thinking here and the platform, but certainly, that's the expectation. Obviously, it will drive in addition to lower edge end devices, it would drive cloud services revenues for us and that's significant.

Great. Thank you. My second question is on Laura Spectrum. Is there any way you can help parse out how big LoRa is for the unlicensed sub gigahertz spectrum? And how does this compare to the 2.4 gigahertz variety? Thanks.

Majority of the revenues are sub gig. The 2.4 gig is relatively new. So, I would say, yes, 90% and above is probably sub gigahertz at the moment, yes.

Thank you.

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

Yeah. Hey, Mohan and Emeka, I've got a couple. Mohan, I'm looking at your commentary. You talked about, both you and Emeka talked about signs of demand stabilization, but when I sort of square that against your commentary, I kind of concur that both industrial and infrastructure are down. So, my question is, if you're seeing signs of stabilization, where are you seeing them? And do you think this is happening because of some of the new products that you guys are launching like TriEdge getting some traction and CopperEdge getting some traction, or are you seeing sort of broadband or sort of broad based, sort of pickup in demand which suggests that maybe you're on your way up from here?

Yes. I think obviously, Harsh, we guided down for Q4 and any bookings, POS demand stabilization is really going to impact the first half of next year, right. So, as we start to look at it, I would say that the stabilization is more on the existing business, the existing business in China, looks like it's going to recover in the – starting to recover in the first half. The existing consumer business, which has been down most of the good part of the year. Looks like it's starting to bottom out here. So, hopefully Q1, maybe Q2 will start to see pick up there. Now, you add on top of that some of the new growth engines and design wins I talk about with starting to feel pretty good about certainly the second half of next year from a growth standpoint. But to answer your question, the comment on the stabilization is more on the existing revenues today.

Understood. And then you talked about a couple of growth rates for LoRa. So, I just want to understand, you talked about Mohan, I think you said all-in all-out, you ended up with about a 39% growth rate to LoRa for this year, which I think is pretty respectable given your [indiscernible] to China and what's really happening in China? And then you talked about a number ex-China of 60% that I didn't catch. Maybe you could clarify that. And then how are you thinking about – the real question is how are you thinking for growth for next year?

Yes. So, the 39% is our estimate for this year's growth. That's correct for LoRa-enabled business. The 60% now refers to end nodes, and I simply commented on the fact that if you extract China, you take out China where the growth has been a little bit slower, end nodes would have grown 60%. So, end nodes as growing 60% in North America and Europe. It actually is – it's about 17% to 20%, including China. So, it's still pretty good, but I think it just shows that the acceleration in other regions is quite good. Next year, a lot is going to depend on the second half. I mean, obviously China continues to be weak. And – but we have some very good things going on like the Amazon announcement we just made, we think sidewalk and some of that is – some of those areas are starting to get some momentum. We have a few headwinds, I mean, really what happened in the last couple of years with the helium gateways is going to give us a little bit of a headwind for growth next year, but still, we haven't given up. We think next year should still be a reasonably – the growth, it won't be close to the 40% CAGR, but I think if we can get some momentum on some of these other used cases, I think we'll still see good growth.

Hey Mohan, very helpful and if you don't mind, I'll ask another one and I promise I'll get off the line after this. I had a question on the deal. You've got a second request. So, that changes the timing of the deal. I guess my question is, where do you think the timing of the deal will lie? And then for Emeka, 319 odd million raised, do you think that's enough to close the deal? And then were you looking at converts the entire time or were you looking at straight debt? And then given the interest rates, you sort of pivoted to convert and if these are converts, would you have an intent to buy these bonds back so they actually don't convert and dilute?

So, let me start with the timing Harsh, which is obviously out of our control to some extent. I can tell you what we're hoping, which is that towards the end of the year and early next year, we will be closed and we're ready to close and we're ready to move to integration. We're very well prepared for that. We're excited about doing it. And so far, there's no indications that that timeline shouldn't be achievable.

And so Harsh with regards to your question, we do have the financing that we need to close the transaction. We have a combination of our line of credit from our commercial banking partners. We have a term loan from our commercial banking partners and then we do have this convertible debt in addition to our internal cash. So the financing is pretty much in place for the acquisition. In terms of what we were looking at, we were looking at all the options. We were looking at everything and we were trying to – we had to make the decision that we thought was best in terms of the cost of capital and things like that. With regards to being able to retire the debt, we just have to see how things play along here. So that we do have a lot of options on what we can do with regards to the [comparable debt] [ph], but I will make those decisions at the right time.

Appreciate it, guys. Thank you.

And our next question comes from the line of Trevor Janoskie with Needham. Please proceed with your question.

Yes. Hi. This is Trevor on for Quinn Bolton. Thanks for letting me ask a question here. So, given your comments on demand stabilization, does this mean you see fiscal 4Q and fiscal 1Q 2024 as the possible revenue trough, with the step-up in the second half of 2024? Thank you.

That is the hope from what we see today. We certainly see the second half as being sequentially up from the first half. If you look at FY 2023, we had a very strong first half. Looks like it's going to be a relatively weak second half, but as you see from our comments that we expect FY 2023 to be a record year for us. So, when you look at it as a total, it looks like a pretty good year. Now, going into next year, we know the first half is going to be relatively weak. The question is, how strong is the second half going to be if it comes back and how it comes back. And the main drivers of the weakness have been China and Consumer. There's some inventory build-up I think from the very strong first half. So, as those bleed through and China comes back and consumer starts to strengthen a little bit, we could hopefully see a stronger second half next year.

Awesome. Thank you. And you spoke about relative resilience in North America and the EU and broad industrial. Do you expect this resilience to continue moving forward? And is automotive playing a big role in this as well?

Well, automotive is one of the stronger segments today for sure and we expect it to continue to be I would say, the other industrial markets in North America and Europe are holding up relatively well. It's all relative consumers. It's been extremely weak, particularly Asian consumer business, I guess, it's well documented that China consumer and Samsung as an example have been very weak. And I would say that broader consumer market and computing market, PCs, laptops, tablets is also very weak. And then China itself is definitely going through some challenges economically and through – still through COVID issues. And so demand is weak. I don't anticipate those will remain, but for sure, at the moment, North America and Europe are stronger regions.

Alright. Thank you.

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

Yes. Thanks for taking the question and appreciate all the transparency on what you're seeing in the markets and with the different products group guys. Mohan, I wanted to start just digging a bit deeper into China to understand what you're seeing there. You were early in flagging the weakness that started in China back in August and in interpreting your comments, I'm trying to discern if the signs of stability that you may be seeing in consumer really related to Lunar New Year builds and therefore more of something that might be near term oriented versus something that might be related to product cycles that would be up beyond that? So, can you just go a little bit deeper into what's actually happening in China and the confidence that you have in consumer and elsewhere that we're near a bottom there?

Yes, I think, I would say the key thing to remember, Craig, is that it's come down significantly, right. So, consumer and China across the board has come down quite significantly in Q3, comes down again in Q4, so we guide down in Q4. And so, the indications are that Q1 will start to stabilize and we're seeing demand stabilization. So, demand has started to level off. We're also seeing POS starting to improve and also bookings. So, I would say it's fairly broad. I wouldn't say it's one specific thing, but just remember that it's off a very low base rate. So, the hope is now we'll start to see, I think inventory consumed, I think that's the key. So, POS increasing and some of the – even our customers' inventory is starting to flow through over the next two quarters and then we'll start to see, kind of more of a real demand supply environment I think in the Q2, Q3 timeframe hopefully.

That's helpful. And then the second question is more of an intermediate term question. As you look out over the course of calendar 2023, really fiscal 2024 for the company, what businesses in the portfolio, do you have confidence that can grow year-on-year? We clearly have a challenging start given where we exit fiscal 2023. But as you look ahead, it seems like Laura would be set up for good growth. You talked about some real momentum in TriEdge. What are the business that you think are going to be year-on-year growers next year?

Yes. So, I do think for us the data center business is a good chance of being a very strong grower next year, obviously second half driven, but we mentioned the significant wins actually we have in both TriEdge and FiberEdge in my script. And if you look at that, that second half can certainly drive growth in data center. On the wireless side, it's been fairly muted. So, I think the question there is really more of a macro, kind of comment on 5G base station deployments and some of the 4G stuff coming back. Again, China a key player in that. But that could certainly grow. Again, it's been very weak this fiscal year. So, next year could be a [strong roll up] [ph]. PON has had – we'll have a record year in FY 2023 for us. So, I'm not sure we'll see same level of growth. So, it will grow, but probably it will be a smaller, a lower growth rate versus the other segments. And then the consumer is the big question because I think it's had such a poor fiscal year 2023 that one has to believe that that has a good chance to come back in FY 2024 and that includes our protection business and our proximity sensing business in Asia, particularly in Korea. And then of course, [LoRa] [ph], as I mentioned, if you take out the Helium challenge that we have, the business should grow.

And Craig, I also think our broad-based industrial and automotive protection, which is a record – which is expected to have a record this year, should also grow next year. That is the anticipation.

Great. And then my last question is for you, Emeka. And it's just a follow-up to comments made three months ago around the capital costs to really the debt interest cost for the square deal. I think three months ago you were thinking 5% to 5.5% would be a reasonable blended interest cost, is that still the expectation or has it changed?

I think it's going to move to slightly because of all the increase in the rates at this point depending on where the rates are. At the time we close the transaction, probably expect it to be between 5.5% and 6%.

Okay. So, pretty close, but a little bit hard. Got it. Thanks guys.

Thank you.

And our next question comes from the line of Christopher Rolland with Susquehanna. Please proceed with your question.

Hey, guys. Thanks for the question. Either of you guys, you know perhaps you can illustrate the weakness we're seeing in China, perhaps you can illustrate it for us. I think for the full-year, you're expecting 34% of end consumption to be in China. I guess the first question is, what's a more normalized number? And then where do you think this trough in Q4? Are we talking like 20%, is it less from that, how sort of deep is this? I guess that's my first question.

So, with regards to the consumption by region, it is an estimate, right. We currently have a size that 35% and it is still at that range. Maybe we'll just have to see how the POS and everything continues by the end of the year. But Chris, my gut feel at this time is that it is probably going to be at that level, maybe slightly lower, but I can't really give you a number at this point.

Okay. Maybe you can talk about, I think you mentioned inventories in China, I don't know if that was for a specific product or not, but can you talk about that where you think inventories are? I know you've talked about demand weakness, but inventories, is that coming into play here as well? And the reason I mentioned that, is April I think in – the April quarter for you guys can go either way up or down, if there is some inventory being chewed through here, do you think that would indicate perhaps a positive sequential in the April?

Yes, I think so. I have to look at it by product group. For sure, in our infrastructure business. And I'm just referring to China now. We had a very, very strong first half across all of our businesses. And I think particularly, PON has perhaps a little bit more inventory than the other segments. And that's reflected in a weaker Q4 expectation, I think. So, yes, I would say, in China, it's infrastructure, data center, and PON mostly a little bit of 4G wireless I think there. And then on the consumer side, again, that's both for protection and proximity sensing. Again, we had a pretty strong previous fiscal year. And I think what we are seeing is that consumers have been fairly soft for the whole year, but particularly I would say in China and Korea. So, those are the two main areas. On the LoRa front, there's – obviously there's some excess inventories from the Helium drop-off there, but I think that will eventually be utilized. The Helium gateway chips are the same chips that can be used for other gateways. So, I'm not so concerned there. It's just more of a macro softness, kind of thing for China. So, we'll see how that plays out.

Thanks so much, Mohan.

Okay. And at this time, I'm not seeing any further questions. I would like to turn the floor back over to management for any closing remarks.

In closing, our global teams are executing well in a challenging economic environment. While we are facing more macroeconomic challenges in Q4, Semtech is a very resilient company and I'm confident that with the solid progress of our exciting growth engines, and the diversified nature of our business, we will successfully manage through the headwinds we currently faced and deliver yet another record year in FY 2023. 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.