Semtech - Q3 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to Semtech Corporation's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After management remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Thank you, sir. Please go ahead.

Mark Lin (EVP and CFO)

Thank you, operator. Good day, everyone, and welcome to all those joining today's call, including analysts, investors, and my fellow employees. I'm 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 third quarter of 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 a share count table reflecting potential share issuances from our convertible notes at various stock prices, are also posted to our investor website. 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 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 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 will turn the call over to Paul to discuss our business and end markets.

Paul Pickle (President and CEO)

Thank you, Mark. Semtech's Q3 financial performance generally met my expectations, with net sales slightly above the midpoint of guidance. I'll provide a bit more color on end market performance, which we believe improves understanding and comparability of our business, before turning the call back to Mark. Infrastructure net sales were $43.2 million, a sequential increase of 2%. Hyperscale Data Center applications benefited from continued momentum of AI-driven applications and grew both sequentially and year-over-year. We recorded growth in general compute data center applications as well. We had record shipments in 200 gig, 400 gig, and 800 gig applications, with our Tri-Edge and FiberEdge products having been well-received in data centers around the world.

Net sales for other products in the infrastructure end market, including passive optical network, wireless, and infrastructure-focused transient voltage suppression, faced a headwind from elevated channel inventories, though POS for each of these products grew sequentially. As stated previously, PON tenders are expected in our fiscal fourth quarter, and we have seen some early channel pulls in anticipation of this timing. We believe we continue to lead the PON space. Last March, we announced the world's first 50G PON chipset, which enables multi-gigabit broadband services for multi-tenant locations and will drive new use cases for the PON market, including enterprise applications for small business needs. This chipset is currently sampling with module vendors and system integrators with positive feedback. We have also started sampling 1.6 terabit in linear pluggable optics applications at optical module vendors and system integrators with early success.

We believe our technology solutions have meaningful advantage in AI applications, offering lower cost, lower power, and lower latency. Net sales from these leading-edge applications are expected to begin in the second half of calendar year 2024. On the automotive front, while net sales are currently small, we believe we are making inroads with the next-generation Ethernet protection devices. Adoption of automotive Ethernet continues to accelerate, and our leading products in this space are positioning us for future growth. For the fourth quarter, we expect net sales from the infrastructure end market to be flat to slightly down as the market further digests channel inventory. High-end consumer net sales were $37.6 million, a sequential increase of 10%, benefiting from seasonality in TVS products primarily directed at smartphone applications.

Sales from these TVS products increased both sequentially and year-over-year, with corresponding increases in POS. Strength in the quarter was driven by measurably greater protection content in current generation products at a leading North American smartphone manufacturer compared to prior generations. Design wins also grew 10% sequentially for handheld devices and wearables, further validating our recent innovations in this space. Sales from proximity sensing products declined slightly on a sequential basis, but grew year-over-year, while encouragingly, POS grew on both a sequential and year-over-year basis. Our PerSe sensing solution provides capacitive touch and user-sensing capabilities. For wearables, PerSe sensors improve the user experience by providing automated functionality and rapid response interactions, such as smart assistant activation, noise cancellation control, and media player management. Our PerSe sensors also provide the industry's best performance of minimizing end users' exposure to RF energy....

This allows equipment manufacturers to achieve compliance with specific absorption rate, or SAR regulations, while maintaining optimal signal connectivity. While PerSe is well known in the smartphone space, efforts to reduce SAR have opened opportunities and design-ins for applications, including notebook computers, tablets, and wearables. For the fourth quarter, we expect net sales from the high-end consumer market to be down due to the aforementioned seasonality and channel inventory digestion. Industrial net sales were $120.2 million, down 26% sequentially, but within expectations, with the bulk of the decrease in the IoT modules business. Semtech delivers product leadership in low-power wide area and broadband applications, and will continue to leverage these areas to return the business to growth.

IoT Connectivity Services reported net sales of $24.2 million, up 1.4% sequentially, highlighting the stickiness and relative stability of this recurring revenue stream. Within AirVantage Smart Connectivity, we continue to see growth in our Advanced service line, while, which offers global access through a Multi-IMSI, multi-profile, single SIM solution. Our Carrie offering, which simplifies regional deployments with multiple Tier one carriers, is showing growth, particularly in Australia and New Zealand. These growth areas are partially offset by the sunsetting of legacy technologies, but nets to stable sales. Net sales of LoRa-enabled industrial products declined sequentially, but POS and bookings increased, providing some indication of market recovery. Connected gateways increased 3% sequentially, and we are encouraged by substantive increases in POS for end-node products.

Adoption of LoRa-based solutions in the utility space gained further traction in Q3, with multiple European-based utilities announcing RFPs with a requirement for a LoRa solution. We are also integrating LoRa into custom SOCs for a customer, which has expanded opportunities in hearing aid applications. Returning to our hardware business and expanding on the regulatory environment I discussed in our last quarter's earnings call. As the largest North American module supplier, Semtech is definitely seeing a meaningful share shift in pipeline from our competitors to us, and pipeline is translating to design wins. Customers in this market have varying degrees of risk tolerance. Most sensitive is critical infrastructure, such as industrialized laptops used by first responders and cellular routers used by utilities. We are now benefiting from the next wave of concern with applications that involve payments or personal identifiable information.

Point-of-sale devices are a prime example, where there was perhaps a hyper-focus on cost for point-of-sale applications. The security of Semtech as a North American supplier has resulted in design wins that translates to revenue in the second half of next year. Our near-term headwind for our router business is government spending constraints under the current federal budget situation, with traditional end-of-year public sector spend lower than trend. For the fourth quarter, we expect industrial net sales to be flat to slightly down, with continued inventory digestion and the aforementioned public sector headwind, but stable net sales from our managed connectivity offerings. Now I'll turn the call back over to Mark.

Mark Lin (EVP and CFO)

Thank you, Paul. Turning to our Q3 results, we recorded net sales of $200.9 million, slightly above the midpoint of our guidance. Paul discussed end market net sales performance with infrastructure up 2% sequentially, high-end consumer up 10% sequentially, and industrial down 26% sequentially. I'll refer participants to our investor website for the last five quarters of net sales data by end market, reportable segment, and geography. Gross margin was 51.3%, a sequential increase of 170 basis points and above the high end of our guidance for the quarter. Gross margin reflected well-negotiated supplier concessions to reduce third quarter manufacturing costs, offset by incremental inventory reserves and unfavorable mix. Supplier agreements particularly benefited IoT systems for the third quarter. Netting these items, consolidated gross margin would have approximated the midpoint of guidance.

Operating expenses were $82.5 million, favorable to the midpoint of guidance, with R&D expense sequentially increasing about $900,000 and SG&A sequentially decreasing by $4.1 million. Net interest expense was $22.3 million, with only about 1 week's benefit from the capital structure change completed at the end of October. We recorded net earnings per share of $0.02, based on a diluted share count of 64.3 million shares. Changing gears to the balance sheet, we ended Q3 with a cash balance of $123.8 million and undrawn revolver capacity of $280 million. Working capital moved in a favorable direction, with inventories decreasing $19.6 million.

Principal outstanding on our debt was $1.4 billion, with a weighted average interest rate of 5.57%. At the end of our third quarter, our consolidated net leverage ratio, calculated in accordance with our credit facility, was 6.49, and we expect to maintain compliance with our debt covenants for the next twelve months. Including the effects of our convertible notes and interest rate swaps, loan principal was about 83% fixed and 17% floating at the end of Q3, and all of the loan principal was long term. At the end of Q3, there were no scheduled principal payments on our senior secured credit facility until January 2028, and no scheduled principal payments on our convertible debt until November 2027.

I'd like to discuss the 5-year, $250 million, 4% convertible note we issued this past October. In addition to the benefits of increasing our mix of fixed to floating rate debt and eliminating scheduled principal payments on our term loan, we placed emphasis on reducing cash interest costs. A Federal Reserve rollback in interest rates may occur, but when I turn on the high beams, I expect to be in a protracted, elevated interest rate environment. As I mentioned, all of our loan principal is long-term. While deleveraging is a key use of excess cash, the convert eliminated $67 million in scheduled principal payments next fiscal year, providing optionality. Also, addressing dilution, please refer to the convertible notes dilution table posted to the Semtech investor website. This table provides incremental dilutive shares on both the 2027 and 2028 convertible notes.

On both the notes, par value or principal is paid in cash, and conversion of low par is settled in cash or shares at Semtech's discretion. Assuming the conversion of both notes was settled in shares, dilution of 20% is reached at a stock price a bit above $85, with no effect on diluted shares today. On the date we priced the 2028 notes offering, a $250 million raise would be the equivalent of 15.6 million shares, or an immediate 24% dilution, which I do not believe counteracts the benefit of reduced interest expense. I hope this extended explanation provides some insight into management's calculus in issuing the convert. Free cash flow was a $12.4 million use of cash, reflecting ongoing restructuring and integration activities, but sequentially improved $6.5 million.

Adjusted EBITDA was $28.1 million, compared to $39 million in the second quarter. Now turning to fourth quarter guidance. We currently expect net sales of $190 million, ±$10 million. Our industrial end market is expected to be flat to slightly down. The high-end consumer end market is expected to be seasonally down, and the infrastructure end market is expected to be flat to slightly down. While end customer demand, consisting of direct shipments plus POS, has improved, our net sales guidance reflects a thoughtful reduction in channel inventories. Based on expected product mix, gross margin is expected to be 48%, ±100 basis points.

Operating expenses are expected to decrease 10% at the midpoint to $74 million, ±$2 million, primarily reflective of cost reduction actions we already implemented in the third quarter. SG&A is expected to sequentially decline 13% to $33.5 million at the midpoint. Research and development expense is expected to sequentially decline 8% to $40.5 million at the midpoint, and we do not believe we have materially impacted projects that will result in near-term revenue or materially affect any of our customers' roadmaps. Net interest expense is expected to be $21 million, reflective of timing of interest rate reset periods relative to quarter end. These amounts are expected to result in a diluted loss per share of $0.05, ±$0.06.

I'd now like to turn the call back over to the operator for Q&A.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, and we ask that you please limit yourself to one question and one follow-up. Thank you. One moment while we pull for questions. The first question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Quinn Bolton (Managing Director, Equity Research)

Hey, guys, thanks for taking my question. I guess the first question, Paul, you talked about the growing pipeline on the module side for North American operators. Just wondering, can you give us a sense, how big is that total TAM? How much of the North American market may be currently supplied by the Chinese module vendors? You know, just trying to get a sense of how big this opportunity is. I think you sized it last quarter at $200 million. It sounds like it's bigger than that now. And then I've got a follow-up for Mark. Thanks.

Paul Pickle (President and CEO)

Yeah. Thank you, Quinn. By the way, I vote... I think you got the best title on, you know, love the Harry Potter reference on your note this past quarter. Okay-

Quinn Bolton (Managing Director, Equity Research)

Thank you.

Paul Pickle (President and CEO)

Getting to your question on the pipeline, you know, I would put that market worldwide just over $6 billion. If you wanna kinda strip out APAC and automotive in particular, you're talking about just north of $3 billion. I'd be excluding NB-IoT in that as well. So if you look at the North American portion of that, there's a significant automotive number in North America, and another analyst put Quectel at about about $4 billion over 5 years in terms of revenue into North America. So excluding automotive, we look at it about a $400 million opportunity.

Quinn Bolton (Managing Director, Equity Research)

On an annual basis?

Paul Pickle (President and CEO)

Yes.

Quinn Bolton (Managing Director, Equity Research)

Got it. Perfect. And then, Mark, you know, guided the gross margin to 48%, down from over 51%. I'm just, I guess, having a little bit of difficulty, you know, kind of, you know, reconciling the quarter-to-quarter change. It sounds like there were, you know, potentially some benefits in the fiscal third quarter that may not repeat, but it also sounded like there were some inventory charges that you took in the third quarter. So can you walk us through what are the major puts and takes going into the fourth quarter from either, you know, increased inventory reserves, mix, you know, among the product buckets, and, you know, whatever else might account for the change quarter to quarter. Thank you.

Mark Lin (EVP and CFO)

Yeah. Thanks, Quinn. I'll also point out that our guide for Q3 was a 48% gross margin, so we're guiding the equivalent margin. So there's quite a bit of noise going kind of up and down, but and we're quite a bit mix sensitive. But if you take the mix, you know, normalize mix at 48%, that translates to the 48% target for the next quarter.

Quinn Bolton (Managing Director, Equity Research)

Really, 300+ points of benefit in Q3 that you don't expect to repeat in Q4?

Mark Lin (EVP and CFO)

That's right.

Quinn Bolton (Managing Director, Equity Research)

Okay. Got it. Thank you.

Operator (participant)

The next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Tore Svanberg (Managing Director, Senior Semiconductor Analyst)

Yes, thank you, Paul, Mark. So it sounds like POS is starting to improve, just broadly speaking, but it also sounds like there's still some channel inventory out there. So, could you maybe quantify that for us, you know, either in weeks or, you know, percentages or anything like that? Because it, you know, does sound like POS is the really encouraging data at this point.

Paul Pickle (President and CEO)

Yeah, I think, if you reflect on my comments from the last earnings call, we talked about an improving bookings trend over the last 4 quarters. I'd say at this point, we're 5 quarters in, if we look at just the IC portion of the business, and the component portion. So hardware, we obviously took a significant decline this past quarter, so it's a little hard to judge where that's going to settle out. So I'll separate the two for the time being. If we look at it, there's, in some cases, the channel's quite lean. We're well positioned to respond to any kind of market demand or market upside. In other cases, you know, consumer, we've seen that come back. The inventory pulls have been quite good, so the channel's relatively healthy.

It's hard for me to put a number on it overall because it really does depend on the product line. But, you know, if I were to speak philosophically, we would want roughly 8-12 weeks in the channel. In some cases, we're right at that 12-week number, and in some cases, we're over that number, and we're really kind of watching POS. Lastly, on the component portion, I would say that, you know, for the first time, we've kind of crossed that 1-to-1 Book-to-Bill threshold, so that's very encouraging for us in terms of where we sit in the recovery. On the hardware side, I have less visibility on the module business, that's seen a significant decline this past quarter.

And the reason for that is it's largely a direct business, and those customers don't report the inventory numbers back to us. We obviously do talk to them, and we do hear what they're saying in terms of what their inventory levels are. But we've seen some decline in the industrial end market, similar to what we've seen in routers, roughly 30%. We think our customers are experiencing the same. As a result, the inventory levels, in terms of weeks on demand, or weeks on hand, have kind of gone up. And so I think it's still a little early to kind of look at what we might characterize as a correction there, but we would expect that to play out over the next quarter or two.

Tore Svanberg (Managing Director, Senior Semiconductor Analyst)

No, that's helpful color. As my follow-up on the infrastructure business, I appreciate the guidance there, flat to down. But could you maybe talk about some of the subsegments there and what you're expecting? Especially, you know, data center, is that expected to still grow, and perhaps that's being offset by still, you know, weak PON and wireless?

Paul Pickle (President and CEO)

Yeah. So, if the data center, definitely, we're still expecting some positive things. I, I will highlight that we're fairly early on, though, with no change in data center. So the traction's been quite good. The channel's been pulling those orders in anticipation of usage, and most of the stronger production ramps are really kind of slated for Q1 calendar. So while we're seeing a nice uptick, you know, last quarter, we saw a 112% increase in terms of data center numbers. We saw an increase this quarter in terms of data center numbers. I would expect a little bit of absorbing the pulls and then kind of a resumption of growth as we kind of look at next calendar year. So the data center numbers are going quite well.

PON is a little bit steady state until we get a look at those tenders. We're expecting those tenders to come in, in the January timeframe. That's, that's about a one-month delay, still ahead of Chinese New Year, but we were expecting to kind of see those in December. It's now been moved to January, so we'll see those, those tenders, and we'll be able to, to respond accordingly. But overall, I'd say infrastructure is, is fairly well positioned. There's some bright spots. Most of it's moving sideways and, but those increases that we're seeing definitely offset as we kind of look at, the module business. Although I don't expect significant further decline, we just expect that to move sideways at this point.

Tore Svanberg (Managing Director, Senior Semiconductor Analyst)

Sounds good, and congrats on the progress. Thank you.

Paul Pickle (President and CEO)

Thank you.

Operator (participant)

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

Craig Ellis (Director of Research, Senior Semiconductor and Capital Equipment Analyst)

Yeah, thanks for taking the question. And Mark, thanks for the additional transparency with the convert dilution things that you've posted on the website. So Paul, I wanted to start off with one for you and follow up a little bit on Tore's question, but maybe take a longer-term view. What would be helpful if you could provide some more color on things that you see as we look out over the course of calendar 2024 in data center, for example, what are some of the things that you're really excited about in traditional data center versus hyperscale? And then similarly, what are some of the things you have your eyes on in base station and then in PON?

Paul Pickle (President and CEO)

Okay. Yeah, thank you for that question. I will say the data center, we're pretty excited. I'm personally pretty excited about data center. What we're seeing there is just an absolutely rapid SAM expansion, rapid expansion, in data center. And I would really kind of bifurcate data center or hyperscale data centers into a general compute bucket and an AI bucket. Those are two very different applications. They have different needs and right now, the appetite in AI is pretty insatiable. So we're making grounds in general compute in 4 by 100 applications as well, as you kinda look at, you know, just breakneck speeds in AI. And so, most of the volume that we ship today really is, you know, more 50 gig single lambda.

I know we kinda throw out 400 gig, 800 gig, but we kinda look at, for us, it's a generational device thing. We look at 50 gig devices, we're shipping 100 gig devices, and we've got out in the market, but are not shipping against those devices quite yet today, 200 gig single lambda, that's performing quite well in POCs. So as I kinda look out over the next several years, you know, the massive growth that we expect to happen in AI, AI-driven data centers is you know, just a significant upside opportunity for us, and we're well-positioned to take advantage of that. So to me, this is across the board, small customer set, very exciting opportunity, to say the least.

Craig Ellis (Director of Research, Senior Semiconductor and Capital Equipment Analyst)

Got it. And then you talked a little bit about needing to see tenders in PON, but, on the base station side of the business, anything standing out as you look at 2024?

Paul Pickle (President and CEO)

Yeah. You know, if you go back to ECOC, we did a 1.6 terabit test case with Coherent, I should say, demonstration. And this was for 10 km, let's call it, you know, mid-haul type applications. So, you know, in terms of pushing up the speed or, you know, the availability to implement high-speed connections in both short reach as well as mid-reach or long-reach applications, both of them, we're well-positioned to take advantage of. So as infrastructure just drives, you know, data connectivity up, and, you know, there's that last mile that will happen naturally as well in both European and North American countries as well. China's important to us or has been, with all the infrastructure growth and multi-tenant dwelling growth there, data connectivity has been really key.

We would expect share in North America and Europe to creep up as they look to implement higher speed applications as well. So just released the 50 gig part as well. We're looking at 25 gig adoption, but I think from my standpoint, the tenders in January are going to give us a bit of a near-term effect as we continue to gain market share in other territories, which will give us a little bit more of a long-term tail as well.

Craig Ellis (Director of Research, Senior Semiconductor and Capital Equipment Analyst)

Got it. And then I'll flip it over to Mark for the second topic, and it's on operating expense. So Mark, very impressive guide, decreasing OpEx by 10% quarter-over-quarter to $75 million. And it sounds from the color that you provided that that decrease is structural, but I wanted to confirm that. And then if you could, just any color on things we should expect as we look to 2024 with OpEx, for example, you know, FICA impacts early in the year or any other optimizations that you might see coming. Thank you so much.

Mark Lin (EVP and CFO)

Sure. Thanks for the question, Craig. It's the—we've got it $74 million for next quarter, and we're pretty confident in hitting that number because the actions that we need to hit that number have already been taken. There, of course, there's gonna be seasonality and, you know, the calendar Q1 with things like, like FICA resets. You know, but we're, we're pretty comfortable staying at, in around this neighbourhood, in terms of OpEx. There may be some incremental increases, slight incremental increases in R&D, but that's just really timing.

Craig Ellis (Director of Research, Senior Semiconductor and Capital Equipment Analyst)

Got it. Guys, congratulations on the progress. Thank you.

Paul Pickle (President and CEO)

Thank you.

Mark Lin (EVP and CFO)

Thanks.

Operator (participant)

The next question comes from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

Anthony Stoss (Senior Research Analyst, Technology)

Hey, guys. Paul, I wanted to follow up on the whole cellular module side of the business in your commentary. I'm just curious, a lot of these design wins that you're lapping up now, when do they turn to production? And I'm curious if any of those customers are contemplating or having conversations with you about rip and replace kind of existing products that they already have with, say, Quectel, or is it just kinda go-forward products? And then a follow-up.

Paul Pickle (President and CEO)

Yes. So as we kinda look at it, most of the programs today that we're bidding on or have captured, they're really kinda talking about the production starts near the end of the calendar year. So I would not characterize those as rip and replace. However, I will note that on the customer side, there's a little bit of hesitancy in terms of forecasting just because of you know, some market uncertainty. So if there's a little bit of bolstering in, you know, market confidence, I think people will start to march some of these a little bit early. But right now, they're kinda slated at the end of the calendar year. And there are additional wins and pickups that we're noting, not additional follow-on programs that we've classically held.

If we get some additional scrutiny out of the China Select Committee, it's highly possible that we'll see some of those critical infrastructure applications look for an acceleration of next gen or that next design. You know, that I would characterize a little bit more in terms of rip and replace, 'cause I don't think somebody will pull a module out of existing hardware without refreshing that hardware, as well, at least at this point.

Anthony Stoss (Senior Research Analyst, Technology)

Got it. And then just a broader question on visibility, and also if you think your January revenue guide down a little bit sequentially, do you think that marks the low on a quarterly basis going forward?

Paul Pickle (President and CEO)

Yeah. So, I think, you know, I'm remembering my comments from last earnings call. I was pretty confident on the last earnings call that we hit a bottom on the IC business. We continue to see that we're making progress and moving forward on the IC business. I think, you know, even though some of our peers maybe are not seeing that, we corrected it a little bit earlier in the cycle, and we continue to see that strength. At this point, I don't anticipate the hardware business getting any worse. I can say that, you know, the last quarter was a little early. We're just starting to see that decline. We've seen some pretty good, you know, let's say, steady numbers out of the routers business.

The modules business did pull back as we saw a little bit of a knee-jerk reaction out of the customer base, where a lot of that direct business is had. And the Fed buying, I think, was a little bit of a surprise as well for some of that customer base where our product goes into. We've seen a little bit of sluggishness coming into, you know, the Fed buying season. And so I don't anticipate it getting worse. If anything, we might get a little bit of a pickup sooner rather than later, but I think it's a little bit early to tell.

Anthony Stoss (Senior Research Analyst, Technology)

Very good. Best of luck, guys.

Paul Pickle (President and CEO)

Thank you. Thank you.

Operator (participant)

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

Christopher Rolland (Senior Equity Analyst, Semiconductors)

Hey, guys. Thanks for the question. I wanted to talk on AI as well, just given the attention it's all getting. So last quarter, you guys mentioned a large US hyperscaler, I think, who had placed some initial orders for some CDRs and TIAs for AOCs. A lot of TLAs there, sorry. But would love an update there on any purchasing. And then, you talked about sampling some 1.6 products. Were those linear direct drive, analog PAM4 CDRs? And just maybe talk about your 800 and 1.6 opportunities as you see it.

Paul Pickle (President and CEO)

Yeah, I think, so last quarter, we talked about initial orders, but we actually saw some shipments for that large U.S.-based hyperscaler. So that is a 400 gig application. Those, and I'll be a little bit cautious in terms of their ramp. You know, the first half is gonna be a bit sluggish, but we expect it to pick up as it goes through the end of the year. December was final qualification hardware, and then it sets the forecast. You know, the forecast gets set according to that. So right now, things are moving rather nicely for that.

That's, you know, let's say roughly a $30 million annualized upside once it gets to, you know, full production, and we would expect that to, you know, that sales cycle to span 3-5 years or so. So things are moving rather nicely there. You know, in terms of looking at, you know, we will see occasionally, we do see 4 by 100s. We do see occasionally 8 by 100s. But, really, the next node in AI that we're talking about is 200 gig Single Lambda devices. That's where you'd start to see 1.6 terabits in any appreciable volume. We're looking at those, those speeds at both, mid-reach, you know, 10K type applications, as well as short reach. But, right now, it's just a really frothy opportunity environment.

For me to put a number on when those things start to translate to volume, I think it's a little bit early, but we're seeing, you know, some really nice numbers coming out of the POCs and some demonstrations. So, given the environment, I think it's gonna be... I would expect this to be pretty quickly picked up. But I see that more of a second half calendar year 2024 phenomenon, rather than something in the short term. But we're gonna see steady uptick of the 400 gig modules, certainly in the first half of the year, and then it'll strengthen in the second half, and then that's when we'll start to see some really nice plans around 800 gig.

Christopher Rolland (Senior Equity Analyst, Semiconductors)

Excellent. Good progress there. I wanted to look at your segments also another way here. If I'm reading kind of the tea leaves right here, on the signal integrity side, you'd expect that to fall, and then protection sensing maybe up and the other two IoT related down. Is that kinda how we think about it?

Paul Pickle (President and CEO)

Yeah, I think if we look at APAC, we saw some strong pulls, a little bit of digestion, you know, into that ramp for that smartphone North American smartphone manufacturer. I think we'll see a little bit of pullback, but largely due to some seasonality. You know, that's really strong pulls up until the launch, and then a little bit of pullback. So that's PerSe. PerSe should have a baseline component that's gonna steadily improve from here. So we've seen some nice stability in the base numbers, especially as it relates to proximity detection, and so we'll see that slowly strengthen. I kinda look at a 13-week booking average by product line, and it's just been steadily improving.

Not really snapping back, but just steady improvements as those inventories come off, and our channel partners kinda anticipate some of those production runs. So, SIP is a little bit of a digestion. Signal integrity is a little bit of digestion on a really strong data center number. You know, we could probably see some surprises to the upside, but I would right now we're anticipating, you know, our revenue being a little bit softer on that channel inventory digestion. For the initial launch, they usually like to validate the hardware and the numbers that they're seeing, and then they kinda resume an additional schedule. So, protection and SIP both kinda moving a little bit sideways at this point, but slightly down.

Harsh Kumar (Managing Director, Senior Research Analyst, Semiconductors)

Thanks so much, Paul. Appreciate it.

Operator (participant)

The next question comes from the line of Rick Schafer with Oppenheimer & Company. Please proceed with your question.

Rick Schafer (Managing Director, Senior Analyst, Semiconductors)

Yeah, thanks, Paul. Thanks, Mark. I guess my first question, if I could, just maybe a high level. And Paul, I was just hoping that you could share a little more about your strategic, you know, kind of vision for Semtech and, and what the company you think it's gonna look like, or you expect it to look like, say, in, you know, three years from now. I mean, what, what role do modules, in, in particular, play long term? And, you know, are the growth opportunities there? I mean, do they, do they justify the, the associated margin pressure, or do you see a path to, to maybe improving those margins, you know, demonstrably, sort of more to kind of classic, you know, Semtech, you know, you know, corporate average?

Paul Pickle (President and CEO)

So that's a good question, and you're putting me on the spot, so I certainly appreciate that. So what do we look like three years from now? There's no doubt that, you know, our core competencies really does kinda come from components. And I do think that it makes sense to move into module products, as long as you can pick up additional stacking margins. So to have to produce a module that essentially has component content that you produce, does make sense. You know, I've participated in businesses before, where a lot of times you have to produce a reference design. In some cases, it just makes sense to go off and sell that reference design, commercialize it, manufacture and sell it.

You know, this gets a little bit more complicated, and that's generally speaking, from a semiconductor standpoint. It gets a little bit more complicated when you start talking about IoT. Because of the diversity of use cases, you end up having to pull a lot, a broad range of technologies through, in order to produce an entire solution. If I had to be a module maker, in and of itself, today, you know, the business model would be very different, and I think my investor base would be very, very different. So does it justify, in and of itself, the margin pressure? I think the answer to that is no.

But if we can pull together a bit more of a comprehensive IoT strategy, in which it becomes an enabling component on higher margin sales, then yes, I think, you know, it's quite possible that that can happen. It doesn't necessarily mean that we have to own it, you know, for the entirety of that three-year five-year play. But you know, cellular backhaul is always going to be a part of an IoT strategy. And I do think that we have a rather large IoT opportunity in front of us, that we need to kinda reimagine that strategy and how we're going to capture that in the marketplace. So if we can combine it, and it becomes a part of the story, along with software, along with components, then I think it makes...

It's perfectly fine, makes sense. In and of itself, no, it doesn't justify the margin pressure. In the meantime, we would look to continue to capture the opportunity. I do think that there's tremendous upside opportunity associated with modules. In some cases, when you're engaging with utility companies, they'll want an LPWA solution, or they might gravitate towards a private network, like LoRa solution. So having the opportunity to do both is an advantage as well, as long as you build together a bit more of a broader product offering or solution in story. So hopefully, that gives you a little bit of a color without you know, specifically nailing everything down after five months.

Rick Schafer (Managing Director, Senior Analyst, Semiconductors)

No, I, I appreciate that, and there's a lot of color, Paul, and it actually is a great segue to my next question, which is LoRa. If you could—you wouldn't mind maybe give a, a little bit more on the order trend side, sort of order velocities, however you wanna describe it. But I'm curious, it sounded like that business was starting to pick up. I, I believe it's... Last call, I think you talked about it being stable, sort of around $100 million or so a year. I'm curious if that's still kinda where you see that business for the foreseeable?

And if you could talk at all about sort of your strategy, you know, if you feel comfortable, you know, talking about a strategy to grow that business, maybe even a sense of revenue funnel, if you're sharing those kind of metrics?

Paul Pickle (President and CEO)

... Thanks. So are you talking about LoRa in particular?

Mark Lin (EVP and CFO)

That was a LoRa-specific question, yeah.

Paul Pickle (President and CEO)

Yeah. So I kind of bill LoRa as about a $100 million business, so thank you for that. Yeah, so I do think as we kind of look, there's a significant opportunity for components or semiconductor content in IoT. And it becomes, because of the diversity of use cases, it really becomes a multipronged strategy. You do have to have a software component. This is where we do have a rather mature cloud platform. We do have a rather mature, let's call it gateway software team as well.

And so as we kind of look at that, you know, there's, there's an overall theme that I do think that there's an opportunity for us to capture, but we need to, we need to adopt this tenet of making private network deployment a lot easier. If we look at the connected end node, connected gateway, numbers, those increased sequentially this past quarter. It further shows that there is a rather large opportunity and continued wave, even through a downturn, we're still seeing numbers from an end market standpoint that continue to migrate up, where people are wanting an alternative of connectivity for, let's say, low bandwidth, low power devices. And so that is still an opportunity that we believe in.

However, I believe I've said this before, that we need to fill out the technology portfolio. Part of the reorganization that we're going through is to kind of group R&D competencies for us to take advantage of that. And so we're in the middle of formulating that strategy in order to capture that vision of what we see, making private network deployment very easy. And part of that story is certainly LoRa, along with a few other components in the technology portfolio.

We're formulating that today, and we'll be working on that over the next couple of quarters, reorganizing around it, and then at the appropriate time, we'll be laying it out, so that we can kind of talk about what that market opportunity looks like, exactly why we have a right to win that market opportunity, and what that timeline looks like. In terms of overall opportunity, I know that it's been said that it's, you know, roughly, you know, we had a $1.1 billion pipeline in the past. You know, rather than qualifying that number, I'd say, roughly today, we're around $400 million, you know, on that, LoRa-based pipeline, and we continue to work it. We continue to see the opportunity and the use cases.

We need to look for use cases that have a lot of commonality in solution, product solution, and then we need to start to work on delivering a standard solution to that end market rather than just simply a component.

Mark Lin (EVP and CFO)

Thanks a lot for the call, Paul. Good luck.

Operator (participant)

The next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed with your question.

Tristan Gerra (Managing Director, Senior Research Analyst, Semiconductors)

Hi, good afternoon. Just as a follow-up to your commentary on Sierra Wireless, just looking at where we could see the revenue run rate before any type of synergies, including with LoRa, it looks like your quarterly run rate right now is probably a bit below what it was two years ago before the big ramp up of last year. So, you've talked about, you know, the October quarter being presumably a trough. So is $100 million a quarter kind of a good base from which we should be basing assumptions before you build any cross-selling opportunities? And then, if you could elaborate a little bit on the share shift within the different businesses for Sierra Wireless. Thank you.

Paul Pickle (President and CEO)

Yeah. So, I'll comment on the share shift. I don't think we've noted any share loss or share shift. If anything, we would expect to gain some share in modules especially. If we look at the routers, that's pretty steady. The one piece, if you wanna call Sierra Wireless a $400 million business, I said on the last earnings call, I believe after it recovered, I would put it right around $460. I still think that's probably a good number, although in the short term, I think your number is probably a little bit better. But, you know, so let's take the $400 million. Basically, $100 million of it is gonna be pretty steady, very predictable. It's that connectivity business. It's recurring, great visibility.

We're growing it. It's not gonna be a barn-burner in terms of growth rate, but it's just, it's just gonna be steady pickup, good gross margin and contribution. So the routers, right now we've seen about a 30% pullback. I'd say that's largely industry-wide. I would expect that recovery to bounce back a little bit from that, from that base, but certainly not be what it was, the previous, you know, the previous year. If you go back a little over a year, those numbers were a little bit elevated in a frothy buying season. And the modules, you know, that, that has fluctuated quite a bit. You know, we'd probably put it somewhere around 260 or so on a normalized basis and with some potential upside.

We look at it about a $390-$370 million upside opportunity in North America, but we don't expect to get 100% of that business. So we'll be pursuing that rather aggressively. It will take some time for us to realize that, and we would probably look to deliver those in, you know, two years out.

Tristan Gerra (Managing Director, Senior Research Analyst, Semiconductors)

... Great, very useful. And then, from a follow-up question, so you mentioned making private network adoption much easier as an opportunity for LoRa. Is that really 100% of your focus on LoRa right now? As it sounds like the bulk of the inventory correction associated with Helium is behind. The feedback, notably from the Things Conference, is that there is basically much easier access to LoRa implementation than just a few years ago, and with a fairly clear path of kind of a 1-2-year ROI, you know, from customers who want to implement LoRa.

So could you expand a little bit on, you know, what you think is still holding LoRa at a revenue run rate that admittedly is lower than the prior management team was guiding for a few years ago? And any elaboration on where you see opportunities to improve the adoption?

Paul Pickle (President and CEO)

Yeah, I will say this, that I think the execution in LoRa is pretty good. Let's say below expectations that were set by prior management, but I still think, you know, anytime you grow a business from 0 to $100 million in 4 years in semiconductor land, that's usually pretty special. So it's a unique technology. Obviously, it's a technology that the market is there ready to adopt. When you start bringing together a large ecosystem set of partners that all have to work together to drive a solution, it definitely is going to slow down. But as we look at adoption, it continues to pick up.

There's a little bit of a blip in there in terms of Helium gateways that, you know, maybe was a contributor to the numbers being a little bit larger than what actual market adoption showed, so during that frothy buying season. But I still look at it as good, steady adoption. Overall, the market needs something that's easy to implement. If we talk to customers that are looking for something that's LoRa-based, they're not necessarily in IoT, they're not necessarily somebody that has, you know, the breadth of R&D in order to implement something from womb to tomb. So this is where we have taken initiatives in the past in order to make LoRa easier to adopt.

We are licensing the technology out in order to further that adoption, and we'll continue to evolve and, you know, deliver to the market tools necessary to speed up that adoption. But I do think that there's a couple of holes in the delivery of that solution that we could fortify in order to speed things up.

Tristan Gerra (Managing Director, Senior Research Analyst, Semiconductors)

Great. Thank you very much.

Operator (participant)

The next question comes from the line of Christopher Roland with Susquehanna. Please proceed.

Christopher Rolland (Senior Equity Analyst, Semiconductors)

Hi, guys. Just a quick follow-up. The amount of turns business you guys expect to get to guidance in the quarter, POS turns?

Paul Pickle (President and CEO)

Yeah, I think so-

Christopher Rolland (Senior Equity Analyst, Semiconductors)

Or, sorry, turn.

Paul Pickle (President and CEO)

Yeah, the last quarter-

Christopher Rolland (Senior Equity Analyst, Semiconductors)

Yeah, go ahead.

Paul Pickle (President and CEO)

... we were just over 50%. We're slightly less than that this quarter. It's not something that, you know, we'll be tracking and reporting on, but it's slightly better than it was last quarter.

Christopher Rolland (Senior Equity Analyst, Semiconductors)

Thanks so much.

Operator (participant)

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

Harsh Kumar (Managing Director, Senior Research Analyst, Semiconductors)

Yeah. Hey, guys. Thanks for sliding me in. Quick question, Mark. So in the analog space in the industry, we're seeing a variety of companies, basically all of them, start to guide down. I guess looking at your results, you're faring much better. My question to you is: Why is that? Is that a function of data center offsetting a lot of your traditional analog businesses? Or is it because you started the correction early, or is there something else going on that is perhaps helping you do better?

Mark Lin (EVP and CFO)

Yeah, it's both. I'll have Paul, you know, he provided a lot of color on the end markets and for data center. But it is, you know, we did start to guide down before our peers and that group, so I think that's another big portion of why we're guiding down from $200 million to $190 million.

Paul Pickle (President and CEO)

Yeah, I think I said it in a set of investor meetings one time. You know, the bane of our existence is an operations team that's really good. So when we got all the orders that our team had been able to secure the capacity and deliver on it, and I'm saying that, of course, tongue in cheek, they're phenomenal-

Mark Lin (EVP and CFO)

Yeah

Paul Pickle (President and CEO)

... phenomenally efficient team. But we were able to secure that capacity and deliver it. As a result, we shipped it all and saw the correction a little bit early. As a result, we're seeing the rebound a little bit early, but we are getting helped out with a couple of key markets where we do have beachheads. One, surprisingly enough, is TVS, where we continue to innovate on the next-generation interfaces. We got some of the best specs out there, and yes, you do kinda share this with competition over time, but right now, we're the only guy who can deliver, and we're seeing upside as a result. And AI is just a gift. It's a, it's phenomenal SIM expansion.

Harsh Kumar (Managing Director, Senior Research Analyst, Semiconductors)

So on that, on the AI stuff, can I ask you if your visibility is extremely solid? In other words, you Are you seeing orders just pile up and you know, for multiple quarters visibility? Or is it a situation where, of course, you're hand-to-mouth, but the orders are coming in kind of spurts of a quarter?

Paul Pickle (President and CEO)

Yeah, I wouldn't say it's the orders are piling up. The design wins are piling up, and we anticipate the orders piling up. We did see a nice bookings increase this quarter. So it's early on in that trend. It will strengthen this next year as it rolls out, but ECOC was a nice validation on a few fronts. I think you might have seen some of the press releases that we put out, but just had some amazing feedback that came back from that. Our 200 gig single lambda device is very well received, very well positioned. And the industry does have a decision on which data center architectures they're going to implement, and every hyperscaler has a tendency to be a little bit different.

But the bottom line is, it really doesn't matter what direction they go, you know, retimed, direct, it's all gonna add up to additional SAM and growth for us. Even, you know, it could be a bit more explosive if they choose a particular route, but overall, it's just a very nice, frothy environment. And so we would be starting the discussions in terms of capacity, securing the capacity for this next year. That would be happening today, and then orders would follow.

Harsh Kumar (Managing Director, Senior Research Analyst, Semiconductors)

If I can ask one last one. Do you think, Paul, that you're done cutting at this point in time? You've reached a pretty happy threshold, if you will?

Paul Pickle (President and CEO)

I'd say, you know, my, my goal was, I intimated that we probably had another $40 million to go. We did do that. You know, at this point, we've pulled out $140 million out of the business. And that was done thoughtfully with, with historical, budgeting exercises. So if you go back in time, you know, you look at 2017, you look at what the budgets were, we're at those appropriate stages. And I think everything kinda comes down to just continual refinement and improvement at this juncture. I'm comfortable with the cuts that we made. Anything that we do will just be, to refine and improve our chances, for growth in the future.

Harsh Kumar (Managing Director, Senior Research Analyst, Semiconductors)

Great. Thank you, Paul. Thanks so much.

Paul Pickle (President and CEO)

Thank you.

Operator (participant)

The next question comes from the line of Cody Acree with Benchmark. Please proceed with your question.

Cody Acree (Managing Director, Senior Equity Research Analyst, Semiconductors)

Yeah, thank you, guys, for taking my question. The next one, I guess, just a follow-up to Harsh's question. Paul, what other segments are you—I said you're reviewing today, that you believe are near the bubble to require less investment going forward?

Paul Pickle (President and CEO)

So I'd say that I've got a practice or a cadence in my management that I've always implemented. I review everything on an annualized basis. So if we don't have good projects to invest in, we don't just assign budgeting to a business unit just because they had it before. So every project requires a justification, and every project would have an opportunity attached to it. So at this point, I scrutinize everything on a regular basis. Obviously, I can look at market expansion in certain areas and certainly feel a lot more comfortable about the risk profile associated with that investment. But we would look to, as we kinda pull back OpEx overall, we'd look to refortify in the beachheads.

If those beachheads have, you know, some, let's say, some sunsetting attached to them, we would look to take those investments and put them in other areas that are a bit stiffer top-line growth.

Cody Acree (Managing Director, Senior Equity Research Analyst, Semiconductors)

Thank you for that. And, I guess, secondly, just if you can summarize the improving demand that you noted in the press release about your high-end consumer business and data center. How much of that is for near-term visibility for the current quarter or the next six months? And, to what detail can you provide that's offsetting those two businesses? I think your guidance for both was flat to sequentially down.

Paul Pickle (President and CEO)

Yeah, yeah, that is correct. You know, I'd, I'd say data center came in a bit, a bit higher this in Q3 than we, you know, I fully anticipated. When I, when I speak to improving demand, I'm really not talking about revenue, I'm talking about end market consumption, so that'd be direct shipments plus POS. And so you just have to kind of qualify that. To me, that's the best measure of where our business is going, and it, it eliminates all the channel inventory noise. So when I say we have an improving demand, it's it's modest, sequential, improving demand that has been, for the most part, improving over the last four quarters.

That I'd look to see corresponding booking rates, that 13-week trailing average booking rates that that match that, and I'm seeing that correlation. So anything that I give you is not forecasted, it's in the rearview mirror. It's demand continually, sequentially, improving demand that we've seen over the last 4 quarters at least.

Cody Acree (Managing Director, Senior Equity Research Analyst, Semiconductors)

All right. Thank you very much.

Operator (participant)

The next question comes from the line of Scott Searle with Roth MKM. Please proceed with your question.

Scott Searle (Managing Director, Senior Research Analyst)

Good afternoon, thanks for taking my questions and sneaking me in. Nice job on the restructuring efforts.

Paul Pickle (President and CEO)

Thank you.

Scott Searle (Managing Director, Senior Research Analyst)

Hey, Paul, maybe go back to modules. You know, it sounds like you don't necessarily need any sort of a formal exclusion list on Quectel to win business, because it seems like customers are diversifying away from that anyway. But I'm wondering, I don't think I heard any comments on that front. Is there an update on that front? And it sounds like based on the normalization of that business at around $260 million or so, you know, that you're basically running at less than half that rate right now. When would you expect normalization on that front? I think last quarter you talked about the middle of calendar 2024. Is that what we should still be thinking about?

So in the second half of 2024, we're getting back to levels like that before you start to add on some incremental Quectel business?

Paul Pickle (President and CEO)

Yeah, I was trying to give you color in terms of what the calendar year is going to do for us. So if you do the math on that $260, I'm kinda tipping my hand on when I, when I think that this is going to recover, and I'd put it in the second half. So this is after some feedback from customers, what we expect, as well as some additional uptake from new design ins. So, you know, on the exclusion list front, no, we don't need Quectel, Fibocom to be officially excluded in order to benefit from this. We are benefiting from it. We will continue to benefit from it.

I think it has -- even if the China Select Committee came out tomorrow and said, "Okay, everything's fine, we're not gonna put them on the list," we're still going to benefit from this. There's been enough shift because of the overall tensions that exist with China and the US, especially around networking equipment, and it's been going on for years. So it's just now finally coming to a head where people are not willing to jeopardize their company's business on the basis of using a particular supplier that might be ten cents cheaper. It just doesn't make any sense. So we're getting a lot of pickup. Not to mention, we have good relationships with Qualcomm.

I come with those relationships, because of the previous work done in Compute, and so we're leveraging that in order to pick up very heavily on those leads. And I should mention that we also sell quite a few Sony chipsets with the LPWA modules as well. Have a fantastic relationship there.

Scott Searle (Managing Director, Senior Research Analyst)

Great. And lastly, maybe to just wrap up on the LoRa front, you know, thanks for calibrating. Sounds like the annualized run rate now is down at about $100 million. I'm wondering what the growth rate on that business looks like and what the composition of that is today in terms of sales outside of China. I know that's where a lot of design activity has been going, but I'm wondering how that's building at this point in time. And lastly, just on the assets for sale front, I know you guys were reluctant to do anything, essentially under pressure of the balance sheet, but now that you've solved the covenant issues for the immediate future, you know, are there some assets now that you're starting to reevaluate that may not be part of the long term, Semtech?

Thanks.

Paul Pickle (President and CEO)

Okay. Yeah, on LoRa, I will say, you know, we will probably still report very strong China-based number just because of where manufacturing typically is. But if I look at that, where that revenue originates, we're seeing quite a bit of adoption outside of APAC in particular. And so what would the growth rate be? I definitely expect it to be on the order of 10%-15% in the near term. We could see some acceleration of that as a couple of technology pieces come together, and it becomes a little bit easier to implement. But we've seen steady adoption in infrastructure applications, especially outside China. We do have some China-based wins as well, but Europe, definitely seeing some nice adoption there as well.

So 10%-15%, I think, is our long-term growth rate that we would probably target for that, and we can adjust that as time goes on. In terms of balance sheet, we are definitely hyper-focused on getting the leverage ratio down. We will continue to be. I won't comment on any particular asset sale, but I'll just say that all cards are on the table in terms of driving that leverage ratio down to the benefit of our shareholders.

Scott Searle (Managing Director, Senior Research Analyst)

Great. Thank you.

Operator (participant)

There are no further questions at this time, and I'd like to turn the floor back over to management for any closing comments.

Paul Pickle (President and CEO)

Thank you for joining, and have a good day.

Operator (participant)

That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.