Good day, and thank you for standing by. Welcome to Semtech Corporation's Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, operator. Good day, everyone, and welcome to all those joining today's call, including analysts, investors and my fellow employees. I am Mark Lin, Executive Vice President and Chief Financial Officer, and I'm joined today by Paul Pickle, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the fourth quarter and for fiscal year 2024, which are posted to our investor website at investors.semtech.com. Supplemental earnings materials, including net sales data by end market, reportable segment and geography, as well as the share count table reflecting potential share issuances for our convertible notes at various stock prices are also posted to our investor website. I encourage participants on the call to access these materials. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than net sales. A discussion of why the company considers such non-GAAP financial measures useful, along with reconciliations of such non-GAAP financial measures to the most comparable GAAP financial measures are included in today's press release. 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 Risk Factors section of our most recent periodic report filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current only as of today, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. With that, I'll turn the call over to Paul to discuss our business and end markets.

Thank you, Mark. Semtech reported fourth quarter financial performance generally within my expectations with net sales slightly above the midpoint of guidance. I'll provide a bit more color on end-market performance and note end-market consumption sequentially increased in each of our end-markets. For the fourth quarter, Infrastructure net sales were $39.4 million, a sequential decline of 9% and largely driven by an expected pause in North American hyperscale data center deployment, and our intent to normalize channel inventories. For the fourth quarter, infrastructure POS sequentially increased approximately 14% and channel inventories declined as anticipated. In data center, we had strong market interest to continue for our FiberEdge TIAs and laser drivers for 400-gig and 800-gig optical modules. Our market-leading 200 gig per lane product started production in Q1, with support from key hyperscalers, and we continue to support customers undertaking 1.6 optical module designs using our FiberEdge offerings. We are pleased to report design and activity for our newly announced Direct Edge platform of TIAs and laser drivers, enabling 800 gig linear pluggable optics or LPO modules. We demonstrated these products at the Optical Fiber Communication Conference this week with favorable market feedback, and we expect to begin shipping these products at the end of FY '25. In addition to recent advances in our data center optical portfolio, we are pleased with growing demand for our copper-edge linear re-drivers for 800-gig active copper cables, supporting AI and machine learning data center build-outs. Compared to DSP-based active electrical cables, our linear copper edge power requirements are over 80% lower, operates with significantly lower latency, and offers a cost advantage. We are currently sampling our 200 gig per lane copper edge chips and are very excited to be partnering on designs into 1.6 T ACC applications. We expect 1.6 T design-in activity…

Thank you, Paul. First, a few housekeeping items on our segment reporting. The primary change is our newly created analog, mixed signal and wireless segment, which combines the former APS segment with LoRa from the IoT Systems segment, and CBOE from the Signal Integrity segment. From a functional perspective, this change aligns similar development teams under one General Manager and streamlines allocation of R&D resources. The ISP segment now consists of our routers and modules business. Supplemental earnings materials reflect this change for all periods presented. Turning to our fourth quarter results. We recorded net sales of $192.9 million, slightly above the midpoint of our guidance. Paul discussed end-market net sales performance with infrastructure down 9% sequentially, high-end consumer down 15% sequentially, and industrial up 1% sequentially. These results were largely in line with our expectations and reflective of our objectives to support a healthier channel. Gross margin was 48.9% at the high-end of our guidance for the quarter, reflecting favorable overhead spending, offset by a higher mix of lower margin module sales. Operating expenses were $76.5 million, down 7% sequentially, but of guidance in total. R&D expense decreased 13% sequentially from $43.9 million in the third quarter to $38.2 million in the fourth quarter. SG&A declined slightly from $38.6 million in the third quarter compared to $30.3 million in the fourth quarter. SG&A came in above expectations with higher costs to support key customer engagements, and lower-than-expected vacation usage to support integration efforts, especially around our migration to a single ERP, which went live at the beginning of the first quarter. There were also some cost-savings modeled into operating expenses that we realized in cost of goods sold. Net interest expense was $19.9 million. Other expense, which consisted primarily of foreign exchange losses was $2 million. We recorded a…

[Operator Instructions]. Our first question is from Tristan Gerra with Baird.

First question is whether you could expand a little bit on the China tenders earlier this year. The timing in terms of revenue contribution, and what potentially does that mean in revenue and specifically for -- within the Signal Integrity business?

Yes. Thank you, Tristan. I would say that right now, the China tenders that came in, in the January time frame just to kind of rewind if we look back, we were kind of expecting them in the October, November time frame, which they typically do come in. It was announced it was going to be a delay. They went public in January, and the numbers are pretty good in them. I think if you kind of analyze the 2-year financial data, it looks like roughly flattish spend to the previous time frame, but we are coming off of a considerable low. And within that tender a couple of positives for us. So it's not necessarily more infrastructure. It's upgraded infrastructure as a lot of the tender was kind of skewed towards 10-gig PON. And that's good for us, higher ASPs, better margin, less competition. We've got about a 70% to 80% market share in that business, and so we're in a pretty good position. In terms of timing of contributions, it's relatively immediate for us, just kind of comes out of the gate. And not given a lot of visibility when those orders started coming in, but we should see some appreciable contribution. And I believe in the prepared remarks, we kind of talked about POS levels being roughly back to previous levels, pretty healthy demand if we look back in previous years. So not quite at the peaks, but very strong demand right out of the gate. So we expect immediate contribution.

Great. And then as a follow-up, if you could also expand on the opportunities in AI interconnect and trying to quantify the opportunity of the engagement you have in AI for knobby copper hedge technology? And is that multiple AI platform? Any color here would be appreciated.

Sure. If we -- I'd say right now, the market is really frothy. I've kind of said this before, that the fundamentals in data center are really strong, expect them to be strong, at least for the next 3 to 5. The Verizon looks really, really good. The pace at which adoption is happening, it seems to be slightly accelerated. If we look at previous -- no changes, we're on an accelerated cycle here. And we're looking at really technological changes that are happening in order to try and save power. So our engagement in ACC for us, this stands to be a considerable contributor if we look at next fiscal year. So this is really kind of a calendar year '25 phenomenon, but starts to ramp at the -- in the back half of '24. But to put a number on it, I'll say that we'll see a significant increase in demand this next year, and we're probably looking at 20-plus percent growth the year thereafter. So it's really kind of hard to put an exact quantity on it because the numbers that people are talking about just the peer, really high and difficult to make. And so, we want to kind of see those sockets get solidified and start to see those forecasts roll out. But it's -- the ramp is pretty stiff. So the question is just how stiff.

Our next question is from Quinn Bolton with Needham & Company.

Hey, Paul. I wanted to follow-up on Tristan's question, is sort of about the opportunity. We're starting to see 200 gig per lane being introduced within the data center. You've got B100 already 200 gig. I'm sure we'll see that from other optical DSPs and processors here over the next year. So I guess, can you sort of quantify, I mean, I think NVIDIA in its presentation back to GTC was kind of talking about being able to drive signals potentially as far as 2 meters that seems a lot longer than I've heard this week at OFC. And so, I guess, as you get to 200 gig per lane what do you think the reach is of 200-gig plan? How big is that ACC opportunity? And do you have multiple programs that you're engaged in for those ACCs or the linear equalizers?

Yes. So 200 gig ACC, definitely at 2 meters, we're demoing those products today. And we demoed a few solutions at OFC that as you're probably well aware. I think we can probably achieve up to 5 meters even possibly. We kind of need to see the specs kind of settle out and determine exactly where that's going to fall in play. But when you get into active copper, it's a nice intermediary or intermediate solution between copper interconnects and active electrical cables that would require retiming. And right now, you're talking about significantly lower power requirements as well, about 20% of what an ACC application would be. So right now, as we kind of look at power budgets, that's driving a lot. 800-gig, certainly a possibility. We're looking at $1.60 as well for ACC applications. There are -- there's multiple areas where those could go, multiple programs where those could go and its considerable upside opportunity as you kind of look beyond this calendar year.

Yes. I'm sorry, I was sort of meaning that the passive copper, it sounds like you can't drive the signal that far over passive copper you got to go at -- I assume you guys you kind of agree with that statement.

Yes. Yes. So you -- right now, they're running out of gas on just copper interconnects, and they can do that within the GPU cluster in a lot of cases. But if you're kind of looking at 1 meter to 5 meters, you're going to need an active copper solution.

Our next question is from Cody Acree with The Benchmark Company.

Congrats on the progress. I guess, Paul, just continuing on with that prior question. With what we're seeing from NVIDIA with their Spectrum solution and even guys like Broadcom that are definitely leaning into Ethernet, keeping things in copper as long as possible. How do you see the industry shifting or transitioning between copper and optical? And do you happen to have a benefit one way or the other?

Yes. It's going to be an optimization. Depending on who you talk to, you can see there's roughly half of the power budget in a data center that's dedicated to interconnects, transport of data. There's some people that would say 70% of the cost in the data center would come from optics alone. It's always going to be -- copper's got some significant advantages if you don't have to use fiber optics. Power is certainly one of those. If you look at thermal variances in terms of performance over a wider temperature range or under some intense thermal conditions, copper is going to have an advantage as well. And so, it just kind of comes down to what are the requirements. You're starting to see GPU clusters, those racks needing interconnectivity. Those are not -- they don't have to be plugged into a fiber plant. And so, they're looking at these kind of shorter reach interconnect solutions between the GPU clusters. But the fiber plant is not going away either anytime soon. So it's really just about optimizing. Optimizing cost, although cost is a secondary concern in AI today, but power certainly is one for the performance.

And from your competitive positioning, do you benefit one way or the other?

Not really. I think when you -- it kind of comes down to the portfolio once you get to a 200 gig node, and you can work out a really linear drive pattern then you've got some optimization around -- or some IP around that circuitry. It really kind of comes down to just knowing what the parameters are of the application, whether it be optics or whether it be copper. But copper is really interesting right now, and it fits right in our wheelhouse in terms of technical competency. But we can take that competency and apply it to optics as well.

Our next question is from Tore Svanberg with Stifel.

Paul, I had a question on the industrial market, I guess, in this case, the IoT hardware business. So there was a lot of moving parts there. I was just hoping you could clarify a little bit of exactly what's going on there, because certainly, that business held up pretty well this quarter, but it sounds like it's going to sit down next quarter. And then you also talked about there still being some inventories. So if you could just clarify a little bit some of the moving parts there, that would be really helpful.

Yes. So hardware definitely, we're kind of looking at Q1 as a bottom for us in the hardware business. I would like to think that Q1 is going to be a bottom. We don't have a ton of visibility there. So it's a little bit hard to say. With the federal budget and some government buying, we get some POS increases here that might kind of make Q1 the bottom and start to see a rebound in Q2. But I'm kind of looking at Q1 and Q2 somewhat flattish on hardware. Industrial applications and modules is picking up a little bit ahead of broadband. Broadband is mostly a direct business. So we've got less visibility on what the customer inventory is. But they've had some muted POS due to government buying as well. And so, it really kind of comes down to what is that end-market demand going to be for the router business. We should get a subsequent pickup in modules shortly after that as that channel or that customer inventory depletes. So it's a little hard to say at this point, but I would -- I am thinking that Q1 is going to be the bottom, and Q2 will be somewhat flattish to Q1.

That's very helpful. And my follow-up is for Mark. Mark, the sort of new segments, you went through that pretty quickly. I was just hoping you could talk a little bit more about that because you said you want those business to be other one General Manager. But yes, just explain to us again the specifics of the new segments?

Sure. I think the message is also that the ISP segment is now routers and modules. So we've moved more out of that segment. So there will be a little bit more visibility into what the legacy kind of Sierra businesses are. Routers and models will be in ISP. ICS remains unchanged. And then we moved the LoRa business, an IC business under the AMWU segment.

Our next question is from Craig Ellis with B. Riley Securities.

Yes. Maybe just starting off with a clarification on some of your comments, Paul, regarding the 1.6 T program that gets going late this year. The question is, how should we think about the share position the company has? And how should we think about the way that design win activity and engagement activity can diversify over time?

Yes, it's a good question. I think share is something that's going to be decided over time. I think it's reasonable to expect us to share that business with one of our largest competitors in the space, MACOM. Right now, we're in a very good position in both 100 gig and 200 gig. And we really kind of like the position that we're in, in terms of being first to address a market that's moving very, very quickly. But I do think that it's reasonable to expect to see some share there, as it settles down. I mean, in the beginning, it's definitely going to come down to performance, best performance is going to win, but eventually, everybody is going to want to secure those supply chains.

Got it. And then to…

In terms of the design win -- the design in and design win cadence -- sorry, I didn't answer that second half of the question. It's something where we get a spec. There's not a ton of visibility on what it exactly goes for. These programs are typically under NDA. We get a spec, we turn a device. They give us a sum up. They say they like it, and then we turn it into production material. Occasionally, you need some tweaks on the device. But right now, we're fairly confident where we sit.

Got it. Nice program. The question for you before I ask one, Mark, is I think if I look at just the arc of the business that you're describing, we're seeing some nice gains start to emerge here in fiscal first quarter, which is about a quarter earlier than I would have previously expected. And I think what you might have been mentioning previously with gains really coming in the second half of the fiscal year. So the question is this, Paul, are you just seeing a specific response to individual Semtech products or programs that's driving that? Or is inventory just in a little bit better shape than we might have feared and you're starting to see some natural demand pull through in a number of the markets that you serve? Any color there would be helpful.

Yes. I would separate my comments into 2 buckets. One, we kind of talk about recovery of business. We're definitely -- when we talk about PON, we're talking about recovery of business. When we talk about these new programs, we're talking about driving a road map, a revitalized road map in which we have new leadership on the engineering side, that engineering team is executing to. So it's moving a bit of a faster pace in terms of market adoption. The market dynamics are absolutely fantastic. I would separate that, though, from the recovery of the business. And so, the first half contribution from PON was something that we certainly were anticipating and looking forward to -- and it's just -- we knew that there was a budget that was being allocated out of the China government for infrastructure stimulus. We didn't know how big it was going to be, and it was obviously delayed. And so that moved things sideways a little bit for us. But right now, it looks like that's moving quite well. And then I would say from a new business standpoint, we're having increasing conversations with North American infrastructure companies, Comcast to be one of those where we are looking at high-speed PON projects in the U.S. as well. So I think PON's got a number of years. It's got lots of legs, lots of runway here that we're going to enjoy. But that near-term recovery was definitely needed. Hopefully, that gave you a little bit of color. Some of it is inventory drawdown, but it's not all inventory drawdown. It really kind of comes down to the SKU that we're looking at. In some cases, it's very lean. In some cases, there's channel inventory, and we just have to wait for that inventory to be depleted.

That's really helpful, Paul. Mark, if I could just wrap it up with you. As I look at gross margin in the fiscal first quarter, they are a little bit better than I expected. And it seems to be occurring, as you just realize a lot of optimization gains, whether it's getting the ERP system in or just doing things that result in positive operating and free cash flow. So can you just talk a little bit about how you see the underlying drivers to gross margin? Is this mix? Is it some optimization benefit? What is it? And how do we think about the way the art can play out beyond just fiscal 1Q?

Yes. Sure. Yes, we are pleased with our gross margin performance. We came in at 48.9% non-GAAP for Q4, kind of at the high-end of our guidance, and we're guiding to 49.5%. A large part of that is mixed though. So with the recovery in some of the businesses, especially in PON, right, those are above corporate gross averages. But that said, as long as we've gone up, I think we have a world-class operations team. We are driving costs down and optimizing for a few basis points there, too. So I'd say though, primarily mix, but definitely some operational improvements as well.

Our next question is from Anthony Stoss with Craig-Hallum Capital Group.

A question for you, Paul. I think your China PON business, if I'm not mistaken, back in 2022, a quarterly peak about $37 million. I think you guys disclosed maybe a quarter ago, it dropped to about 12%. Do you have any visibility on if you can get back towards the 2022 kind of run rate, and what kind of time frame? And then I had a follow-up.

Yes. If memory serves, I think we peaked closer to $39 million. But we're going to make some nice inroads towards that. I think you still have to consider that some of that buying back in that time frame, it was pretty frothy buying in a constrained supply environment. So I would probably discount some of those peaks just a little bit in terms of thinking what a normal run rate is. And then if you don't ask me to tell you what that normal run rate number is, I'd say that we're going to get right back to that normal run rate number. Maybe vesting it a little bit because the ASPs on the 10-gig is going to be a little bit higher. So not quite to the peak, because obviously, it was a frothy environment, but pretty close.

Got it. And if I could follow-up on kind of the cellular modular Sierra business. You talked a couple of quarters ago about backlog and the actions that the FCC was taking. I'm just curious, I think at that time, you talked about a bunch of design wins launching late calendar 2024. Can you maybe update us on that and what the backlog might look like?

Yes, still making progress. We're not seeing backlog in place today, if that's the question. We do expect this forward Q1 quarter, the quarter we're currently in. I said that I think that it's going to be the low point for the hardware business. I'm certainly hopeful that it's going to be the low point. We might get a little sideways action with Q2. And given -- I can't really point to share loss. And so, given some decent POS, underlying POS at our customers, end-market consumption, at our customers, we should see a pretty quick snapback on that business. But if I reflect on comments I made 3 quarters ago, I would still handicap the business around 460 annually once we get back into a more normative buying environment. So off of the peak of the COVID cycle, but a good 460 number with the ability to grow beyond that.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Paul for closing remarks.

Thank you for joining us, and have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.