Semtech Corporation

Welcome to CEMTAC's conference call to discuss our financial results for the third quarter of fiscal year 21. Speakers for today's call will be Mohan Mahaswaran, CEMTAC's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after March 1st of today and is available on our website at CEMTAC.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 and of today only. M-TECH undertakes no obligation to update the information on the call, should facts or circumstances change. During the call, we refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful.

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along with the detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. As a reminder, all references to financial results in Mohan's and Emeka's presentations on this call will refer to non-GAAP measures, unless otherwise noted. With that, I will turn the call over to SEM Tech to see financial results from Emeka.

Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal year 21, net sales increased 7% sequentially and 9% over the prior year to $154.1 million, which was at the upper end of our guidance. In Q3, shipments into Asia represented 80% of net sales. North America represented 12% and Europe represented 8%. Total direct sales was approximately 18% and sales to distribution was approximately 82% of net sales. Our distribution business remains balanced with 39% of the total POS coming from the infrastructure end market and 30% from the industrial end market and 31% from the high-end consumer end market. Bookings increased strongly over the prior quarter and resulted in a book-to-bill above 1. Town's bookings accounted for approximately 25% of shipments during the quarter. Q3 GAAP gross margin decreased as expected by 40 basis points due to a higher mix of consumer revenue. We expect our Q4 gross margin to be flourished sequentially. Q3 GAAP operating expense increased 4% sequentially due to higher performance-based compensation expense offset by lower new product expense. We expect our Q4 gap operating expense to increase 4% to 6% sequentially, primarily due to it being a 14-week quarter and higher share-based compensation expense driven by a higher stock price. Q3 gas tax expenses was $1.6 million versus $2.9 million in Q2. The decrease was primarily due to lower foreign exchange losses than those that were recognized in Q2. In Q3, our gas tax expense was 7.9% as a result of a favorable regional mix of income and several discrete tax benefits. In Q4, we expect our tax to range between 10 and 13 percent. Moving on to the non-GAAP results, which include the impact of share-based compensation, amortization of acquired intangibles, acquisition-related and other non-recurring charges. The gross margin was 61.5 percent and in line with expectation. Our gross margin remains stable with the key driver being end market revenue mix. In Q4, we expect gross margins to remain flourished due to a higher mix of consumer revenue. In fiscal year 22, we expect to see gradual increases to our gross margin as we see an increase in revenue contribution from our higher margin growth drivers of LoRa-enabled, 5G wireless, PON, data center infrastructure platforms. Our Q3 non-GAAP operating expense increased 6% sequentially on higher compensation expenses offset by lower new product expenses. In Q4, we expect our non-GAAP operating expense to increase 1% to 4% sequentially, primarily due to the general report being a 14-week quarter. For fiscal year 22, consistent with our target, we expect operating expenses to increase at approximately half the rate of revenue growth. In Q3, our non-GAAP tax rate came in at 14.8 percent, and we expect our Q4 fiscal year 22 tax rates to be in the range of 15 percent to 17 percent. In Q3, Cash flow from operations decreased to 18 percent of net sales due to the adverse impact of withholding taxes paid in Q3 related to the Q2 repatriation of cash to the U.S. We repurchased approximately 440,000 shares or $24 million of stock in Q3. And our stock repurchase authorization now stands at approximately $44 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down our debt. In Q3, due to higher net sales and timing of shipments during the quarter, accounts receivable increased 14% sequentially and represented 33 days of sales, which remains well below our target range of 40 to 45 days. Net inventory in absolute dollar terms was approximately flat sequentially, while days of inventory decreased by nine days to 118 days, which remains above our target range of 90 to 100 days. In Q4, we expect our net inventory to increase due to the strong demand that we're seeing and the tightening supply lead In summary, we were pleased to deliver Q3 results that were at the upper end of our guidance. We look forward to ending a very challenging year on a strong note, and we believe that our strong business fundamentals position us nicely to continue to deliver growth and solid financial results. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 21 performance by end market and by product and then provide our outlook for Q4 fiscal year 21. In Q3 of fiscal year 21, net revenue increased 7% sequentially and 9% over the prior year to $154.1 million. Stronger demand from the high-end consumer and industrial end markets was offset by softer demand from the infrastructure and market. We posted non-GAAP gross margin of 61.5% and non-GAAP earnings for diluted share of 47 cents. In Q3 of fiscal year 21, net revenue from the high-end consumer market increased 43% sequentially and 21% over the prior year and represented 29% of total net revenues. Approximately 19% of high-end consumer revenue was attributable to mobile platforms and approximately 10% was attributable to other consumer systems. The industrial and market net revenue increased 14% sequentially and 4% over the prior year and represented 32% of total net revenues. Net revenues from the infrastructure and market decreased 13% sequentially and increased 6% over the prior year and represented 39% of total net revenues. I will now discuss the performance of each of our product groups. In Q3 of fiscal year 21, as expected, our signal integrity product group decreased 14% sequentially and increased 5% over the prior year and represented 40% of total net revenues. In Q3 of fiscal year 21, demand from our data center customers softened following the strength experience in the first half of the year. We believe the demand for higher bandwidth data center connectivity remains very strong, and our ClearEdge, FiberEdge, and TriEdge platforms all have significant design and momentum in 100 gig, 200 gig, and 400 gig optical modules being deployed in global cloud and hyperscale data centers. Design activity for our Tri-Edge PAM-4 platform remains strong, and we now have customers working on almost two dozen design-ins for use in 100 gig, 200 gig, and 400 gig PAM-4 optical modules. The lower cost, lower power, and lower latency performance enabled by our Tri-Edge analog CDR platform provides a significant advantage over existing DSP solutions. We believe the secular trends that have been driving growth in the data center market should continue to drive our data center higher over the next few years. In Q3 of fiscal year 21, demand from the wireless base station market softened from the prior quarter's record, as build outs in China slowed from first half levels. Global customers are increasingly deploying 25 gig optical modules for frontal links in 5G base stations. As a result, we are seeing increased design and activity for our high-performance CDR and PMD platforms for 5G wireless base stations globally. We expect 5G infrastructure spending to increase in fiscal year 22 and expect this market to continue to grow for several years. In Q3 of fiscal year 21, revenue from our PON customers was flat with the prior quarter. While demand for our PON platforms has been largely driven by China, we are continuing to see a number of new PON initiatives outside of China, where PON is used to channel high-speed data to the home, enterprise, and campus networks. Semtech remains the leading supplier of 10-gig PON platforms for the ONU and OOT markets, and we expect our latest innovative 10-gig products to enable us to further benefit from the global trend toward increased PON deployments. Despite the inherent lumpiness associated with the infrastructure markets, we believe the secular trends led by the upgrade of data center connectivity and the expansion of 10 gig PON and 5G wireless network capabilities should drive future demand for our optical platforms.

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Across all our target infrastructure markets. For Q4 of fiscal year 21, we expect net revenues from our signal integrity product group to increase, driven by all infrastructure segments and a recovering video market. Moving on to our protection product group. In Q3 of fiscal year 21, net revenue from our protection product group increased 25% sequentially and 3% from the prior year and represented 27% of total net revenues. In Q3 of fiscal year 21, demand from our Korean smartphone customers rebounded strongly from the COVID-related issues that had impacted them in the first half of the year. Demand from our North American smartphone customers also remained solid. We expect our protection product group to continue to benefit from our ongoing diversification strategy. Many of today's high-performance systems across all industry sectors are starting to incorporate advanced lithography devices and high-speed interfaces, such as USB-C, 10 gigabit Ethernet, and HDMI 2.1, resulting in the need for Semtech's high-performance protection. We expect these trends to continue and contribute to the long-term growth of our protection business. In Q4 of fiscal year 21, we are expecting our protection revenue to increase led by growth from the broad-based industrial and communications markets and stable smartphone demand in what is typically a seasonally weaker quarter. Turning to our wireless and sensing product group, in Q3 of fiscal year 21, Net revenue from our wireless and sensing product group increased 32% sequentially, and 21% over the prior year, and represented 33% of total net revenues, resulting in a new quarterly revenue record for our wireless and sensing product group. Our LoRa-enabled platform continued its steady growth and experienced another record quarterly performance. In Q3 of fiscal year 21, we continued to see excellent progress against the goals for our LoRa metrics we had targeted at the beginning of the year. These include the number of countries with LoRa networks now stands at 99 countries, and we expect over 100 countries to have LoRa networks by the end of fiscal year 21. The number of public or private LoRa network operators grew to 148, and we expect 150 LoRa network operators by the end of fiscal year 21. The number of LoRa gateways deployed grew to nearly 1.2 million from the 642,000 gateways at the end of fiscal year 20, and we are expecting the number of gateways deployed to increase to over 1.3 million by the end of fiscal year 21. The cumulative number of LoRa end nodes deployed increased to 167 million from 135 million at the end of fiscal year 20, and we expect this number to exceed 180 million cumulative end nodes by the end of fiscal year 21. In Q3, we shipped a record number of LoRa devices. Finally, the LoRa opportunity pipeline, which includes both opportunities and leads, stands at approximately $500 million, with approximately $200 million of leads feeding the future opportunity pipeline. We expect the opportunity pipeline to increase rapidly in fiscal year 22, as we anticipate the inertia associated with the global pandemic to gradually subside. Our opportunity pipeline remains geographically well balanced with approximately 70% of the opportunities now coming from the Americas and Europe and includes an increasing number of use cases in the smart home asset tracking and supply chain logistics markets. In addition to the record revenue and the continued progress on our Laura metrics in Q3, we made several important announcements related to our Laura business. These include Amazon's use of LoRa in their new sidewalk network. The unique capabilities of LoRa extends the range of smart home networks to connect both indoor and outdoor sensors, enabling new use cases. These include smart lighting, smarter safety, pet trackers, asset tracking, smart irrigation, and many others. The use of LoRa in the smart home segment demonstrates the value and versatility of LoRa in low power land, and low-power LAN segments of the IoT market. We believe that Amazon's use of LoRa in Sidewalk opens up a huge opportunity for Semtech's LoRa-enabled business starting in fiscal year 22. And Cisco's use of LoRaWAN for its industrial asset vision system for enhanced visibility into physical spaces for IT and operational technology environments. This LoRa-based system is a simple and secure solution for remote asset management, equipped with a cloud-based dashboard to monitor and manage the condition of assets and facilities that can be deployed in minutes using a simple QR code. We also announced the availability of our LoRa Edge tracker reference design.

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Our LoRa Edge platform is our first LoRa-based software-defined radio platform that integrates Wi-Fi and GPS sniffing along with LoRa. We are seeing a significant ramp in new design and activity and believe that LoRa Edge is the ideal platform for asset tracking and asset management use cases and will be the main enabler of our future cloud services revenues. We believe that the flexibility, long range, and low power of LoRa-based networks are critical components of any successful low-power IoT deployment. With the record Q3 performance and anticipation of a record annual performance, and with the exciting smart home opportunity driven by Amazon, as well as numerous new industrial IoT opportunities, we continue to expect our lower-enabled revenues to grow at 40% CAGR over the next five years and to become the de facto standard for the fast-emerging LPWAN market. In Q3 of fiscal year 21, net sales from our proximity sensing platforms grew nicely over the prior quarter, helped by the recovery in the smartphone market, along with several new design wins that moved to production and should continue to ramp. We are also seeing increased design activity as global RF safety regulations become more stringent as new 5G-based phones emerge. For Q4 of fiscal year 21, we expect net revenues from our wireless and sensing product group to increase and achieve another quarterly record led by another record performance from our LoRa-enabled business. Moving on to new products and design wins. In Q3 of fiscal year 21, we released 12 new products and achieved 3,397 new design wins, which also represented a new quarterly record. While this year has presented its share of unique challenges I believe that our key stakeholders, including our investors, customers, suppliers, and employees have all played a critical role in driving the company's growth and success. We remain committed to considering the impact of key environmental, social, and governance factors in our decision-making processes. We are also focused on developing products that will make the planet a smarter, more connected, and more sustainable place to live. We view our employees as the company's most important resource and have an established set of core values that hold each of us responsible and accountable for doing the right things for the company and each of its employees. I am excited about the company's future opportunities. I believe that our vision, our strategy, and our focus on providing products for a smarter, more connected planet, and our commitment to a more diverse and inclusive workforce should enable the company to continue to be extremely successful. Now let me discuss our outlook for the fourth quarter of fiscal year 21. We believe the underlying secular demand for our growth platforms remains solid. Based on very strong bookings and record high starting backlog entering the quarter, we are currently estimating Q4 net revenues to be between $153 million and $163 million. To attain the midpoint of our guidance range, or approximately $158 million, we needed net terms orders of approximately 20% at the beginning of Q4. While we have been issued some licenses that allow us to ship to Huawei, our guidance assumes no more shipments to Huawei or HiSilicon. We expect our Q4 non-GAAP earnings to be between $0.45 and $0.51 per diluted share. I will now hand the call back to the operator, and Sandy and Michael and I will be happy to answer any questions.

Operator? Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation sign will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, as we poll for questions. Our first question comes from the line of Rich Schaefer with Oppenheimer. Please, do with your question.

Yeah, hi, guys, and congrats on a great quarter. I've got a question on Laura. you've gained a lot of momentum there, I think, after a slow start, one Q, obviously COVID-related. I mean, you know, do you see continued linear ramp next year, sort of in line with that 40% CAGR that you just mentioned? Or, you know, could we see a step function in revenues there next year as Laura sort of starts to hit a critical mass, or it seems like it's hitting critical mass?

Yeah, I think, correct, the way we've always looked at it, is that there are certain catalysts that can drive faster growth, and that's why we've always projected a 40% CAGR just based on history, and then some of the new use cases that we now know are starting to get real traction, one of which is, of course, the Smart Home Initiative with the Amazon Sidewalk announcement. Certainly, if the pickup is good of that architecture and the network, one would expect very fast acceleration of sensors and we could see it definitely a step function increase whether that happens in FY22 probably more FY23 just because it takes time for you know the gateways the network the architecture to kind of get deployed and and then sensors be developed but I do expect that business alone just on the Amazon sidewalk business to you know, reach $100 million business in five years. So for sure, that's going to be one of the catalysts. And then, as I mentioned, you know, the industrial IoT space has been somewhat slow this year because of COVID-related issues. But that's going to pick up. You know, it's just a question of time. A lot of the use cases are about creating a smarter planet, about efficiency improvements. You know, they're about... greener initiatives and things like that. And so, it's just a question of time, I think. So, yeah, but to answer your question, we do expect, you know, some catalyst over the next year or two here with the smart home initiatives.

And I should have asked just a quick follow-up on that question, but, I mean, are there any capacity issues that you guys have there? I think in the past you've been kind of playing some catch-up on the lore business this year. So, Is there any capacity supply constraints that you're seeing there or anything?

Well, there are supply constraints across the board. I would say it's definitely a tightening supply chain, as you know, across all segments. Nothing specific to our Laura business or anything like that. I just think, as Emeka had mentioned, we are seeing some lead times on the supply side increase, and that – is challenging. But generally, that means the beginning of an upcycle in the industry, in my view, and I think that's a good thing for us and for everyone.

If I could sneak in a follow-up, I think most more revenues today are still coming from hardware. I'm just curious, when do you sort of expect to start monetizing the services? I know we've talked about that in the past, but the license and royalty opportunity that you see there. Thanks.

Yeah, so there's two elements. One is the IP licensing royalties from our partners, ST and Alibaba. We do expect next year we start to see some of that coming in. But also our cloud services. You know, we did announce that this last quarter. Our first cloud service using geolocation, again using lower edge platform. And this is another area where we're expecting pretty good growth. It'll be a slow ramp initially, But the cloud services revenues will be recurring revenues, remember. So again, we're expecting, again, something between $50 and $100 million in the next five years on an annual basis. And a lot depends on the quality of the geolocation and the other services we bring to market. But this is our first real initiative. And we're very confident and feel very good about the type of customers and the type of use cases and how quickly that could ramp in the future.

Our next question comes from the line of Quinn Bolton with Ningham Company. Please share your question.

Quinn, you there?

Sorry, guys. Can you hear me now? Okay, great. Sorry about that. I was on mute. I just wanted to follow up on the Sidewalk question. With Amazon now announcing Sidewalk and I believe the fourth generation Echo product, including that Sidewalk network in the Gateway, have you seen an increase in the end node activity for sensors compatible with Sidewalk? And just wondering if you could give us an update on that design activity around Sidewalk.

It's really just starting, Quinn. Amazon have made the announcement. They haven't yet talked about the sensors that are connected to it. They've talked about what they anticipate they will be, but they haven't yet rolled out their development platforms to enable companies to do that. But that's pretty close, I think, and it's going to happen very soon. And so my expectation is by By mid-next year, we'll definitely start to see real sidewalk networks be deployed and sensors being attached and that type of thing.

Great. And then a follow-up question just on the 5G front hall side of the business. It sounds like it was a little softer for you in the October quarter following the record level in July, but it sounds like you're looking for growth in that business into the January quarter. I guess I'm A little surprised by that because we've heard from other companies that the China 5G build-out is sort of going through a pause between the first phase and the second phase, yet you seem to be perhaps bucking that trend. So I'm wondering just if you could talk about what you're seeing in China 5G and maybe the timing of the next round of tenders for base station and front-haul build-out. Thank you.

Yeah, I think largely your comments are correct, Quinn. I would say that there's anticipation the next year is going to see some good growth, and that starts in Q1, and therefore the build for us and the demand for us starts to pick up in Q4, which is what we're seeing. And so, yeah, I think, you know, it's just a timing thing. You know, we sell into module manufacturers, obviously, and then the module guys sell into the base station guys. The sum of that dynamic is just timing. But yeah, we're expecting a pretty strong FY22. The other thing is not just China. I think that's one of the nice things about actually all of our infrastructure segments now is they're fairly global. We're seeing opportunities in Europe and North American OEMs as well, both on the 5G side and on the PON side as well. So that's encouraging.

Great. Thank you.

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Our next question comes from the line of Torres Fanberg with Stifel. Please, suit your question.

Yes, congratulations on the results. First question, and back to Laura. Do you have a range update for us for this calendar year, Mohan?

We're still keeping our range. It's 85 to 95 million. We're going to be in that range, I think, for this year. And we're still keeping our 40% CAGR going forward. Obviously, a lot depends on the timing of Amazon Sidewalk and some of the higher volume faster time to market opportunities. But in general, I would say, with the exception of kind of COVID-related impact, we're seeing pretty good industrial momentum. A lot of new use cases, but as we see the new use cases kind of come out, we're seeing adoption across the globe. So I think that, again, the timing of when proof of concepts move to revenue is challenging to really, you know, comment exactly how it's going to happen. But once it does start to materialize, and I think, as I mentioned, once COVID starts, we start to get some return to normality in terms of manufacturing and industrial IoT. I think that's going to continue to also drive the revenue.

That's very helpful. And you talked about 5G coming back. in the next quarter or I mean this quarter. What about data center? How are some of the dynamics being there? Because that obviously paused a little bit this last quarter, but are you starting to see that grow again as well?

We are. I wouldn't say it's as positive as the 5G story. I think there's more still inventory there in the channel and maybe in the customers, but we are starting to see that pick up also. And so I expect Q1 for sure to be up. Data Center is probably going to be flat-ish for Q4 and then I would say up in the Q1 timeframe. But yeah, positive signs and a lot of design inactivity there. Great.

Lastly, on the Palm business, you expect to start to see 10 gig. Is that going to be a fiscal 22 event or is it going to be further out than that?

Actually, a 10 gig pond is doing well already, and I think it continues to do well, and we expect to do quite well, this quarter to be quite strong for pond, and next year we're also projecting good growth for pond. Yeah, infrastructure just continues to make us, you know, give us good indications that FY22 is going to be another solid year for our SIP business.

Great, thank you.

Our next question comes from the line of Craig Ellis with B Reilly. Please share with your question.

Yeah, thanks for taking the question. I'll ask one that ties together a few points. You mentioned that the inventory would be up quarter on quarter, and I can see that all the segments are guided up. But Mohan, can you help us with some color on some of the gives and takes across the different segments? Which would you expect to be growing more robustly, which are more muted? And then within any of the segments, are there any subsegments where you'd expect a meaningful deviation to the broader overall segment trend?

Yeah, so as you know, Craig, the first half was extremely weak for consumer. I think we're seeing the second half being quite strong relatively for consumer, and I'd expect that to continue for at least, obviously, we're seeing Q4, which is typically seasonally down for us. We're seeing a much stronger consumer business. So that, I think, is going to continue. Then on the infrastructure side, as I mentioned, some softness there, but mostly driven by a very strong first half. And all the indications are that most of the infrastructure segments we participate in are going to come back this quarter and certainly grow in Q1. And then on the wireless and sensing side for us, obviously, Laura continues to do great. And then on the proximity sensing side, I think, again, that's tied to consumer. We expect that to do quite well in Q4. On the inventory side, you know, and the supply side, you know, the areas that we're concerned about, obviously, there's a tightening supply chain. Some of the end markets tend to have short lead times, typically consumer. So we're taking a little bit more risk in building some internal inventory there. The demand seems to be extremely strong. We're pretty cautious about how we are participating in the market and making sure that we're not over-inventorying anything. Our channel is very light at the moment, and my expectation is that if we manage it correctly, then I think we should see a good consumer growth next year as well. We won't see such a volatile demand coming from there.

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Hey, Tex, can someone else get a turn?

Got it. And then turning to Laura, you mentioned in your prepared remarks both Amazon and Cisco, and I looked at Cisco's product announcement. It was actually a very impressive array of products that helped create a real nice ecosystem. As you look at fiscal 22, what potential does does Cisco have to really drive incremental sales for LoRa, or is that just much more of an analog-like business where those would be the kind of classic low-volume design ends we would see with industrial versus anything high-volume like Amazon?

Yeah, I think from a revenue standpoint, it's more the latter, Craig. But the important thing to remember is that once they have adopted LoRa and they build the infrastructure based on LoRa, then that's there forever, right? It's going to be there for at least the next 10, 20 years. And I think drive, especially in the industrial sector, drive a ton of opportunity, both for additional sensors, but also potential cloud services, potentially new use cases. So that's the excitement we have behind LoRa and LPWAN. We're creating a whole new industry here. And that, to me, is the thing to take away, not only from the standpoint of getting these tier one customers like Cisco and Amazon involved in driving LoRa and helping us with the ecosystem. But what it says about the value that the technology brings to the market and to these customers. So yes, it's pretty exciting to have both new use cases, but also tier one companies really driving it for us.

Indeed, and if I could, just two clarifications. I'll throw them out at the same time. One, you talked about rising gross margin in fiscal 22. Can you give us a sense for the magnitude of that increase? For example, could we see gross margins up 100 basis points or so over a four-quarter period? And secondly, I thought I heard you mention that the fourth quarter was a 14-week quarter. And if so, what's included in revenue and expense guidance for the extra week? Thank you.

So let me take the first one with regards to gross margin. I think, like I said in my prepared remarks, when you think about where we're expecting our revenue growth to come from as we get into the next fiscal year, we're expecting our lower business to continue to grow very nicely. The data center business, I think, remains an area of growth. PON and they are 5G wireless. And also, in addition, our industrial and automotive opportunity in our protection business. So all these businesses are really very excited for us because of the higher gross margin that they come with. You know, is it really something that I can quantify right now? Probably not, but I would expect that to see something in the range of 50 to 100 business points expansion throughout the year. So that was very good. With regards to the 14 weeks, it's always hard on the revenue side to estimate how much of the extra week is contributing to revenues. So I think, of course, there is a contribution for it, but it's much easier on the operating expense side. On the operating expense side, I think about 60% of our total operating expenses is sort of tied to time, right? So things like your salaries, your operating supplies, and stuff like that. So if you think about, if you take 60% of operating expenses and then you linearize it over 14 weeks, that will give you a pretty good estimate of what the operating expense impact is.

Very helpful. Thank you. Our next question comes to the line of Mitch Steeves with RBC Capital Markets. Please, Sue, it's your question.

Hey, guys. Thanks for taking my question. I just had a quick one, I guess maybe a bigger one, bigger picture one, just on the strategy for Semtech now. I know before you guys had talked about potentially kind of spinning out the lore of business as being its own entity or potentially selling that piece of the business relative to Semtech whole. Can you maybe provide us an update on what kind of the view is now, given that you've kind of survive the kind of this downturn in 2021 or sorry, uh, 2019 and 2020, what the plan is for the lower business or Semtech as a whole relative to that.

Yeah. You know, the thought has always been, um, that if Laura becomes the de facto standard in, um, in the industry, uh, and we are generating, you know, uh, around a hundred million dollars of recurring cloud services revenues. then we could start to look at, you know, some ideas about how to move that business to an even different level. And so that's the thought. And I would say we're still probably two, three years away from that. You know, obviously every day we get good momentum and new announcements like the Amazon sidewalk and, you know, our low-edge announcement will get closer. But we're not there yet. I think I would say two to three years still is the time frame.

Yeah, and then can you provide us, so you said cloud service kind of recurring revenue. What's kind of the revenue run right now relative to kind of just the straight sales you guys are doing?

It's brand new. So we just announced our cloud services geolocation service. It's the first one. So it's, you know, very, you know, we're just starting to get contracts in place now and things like that. So I would say next year, end of next year would be a good measure for, you know, are we on track to do the 100 million in three to five years and, you know, what's the what's the pickup and what's the value that we're bringing. It is dependent on our new platform, the lower edge platform, as I mentioned. And I think, you know, we'll start to get some good feeling for that as customers deploy the platform and give us feedback on the value.

Yeah, I guess just one last one, if I could just clarify those comments. So what would be kind of the first major customer, major launch that you guys would expect, call it in 21 and 22? I'm not looking for

logos or anything like that but how should we think about the rollout of that that new product or business line well the way to think about is asset tracking and asset management is the is really the first target with geolocation and so um you know obviously once our customers are testing and they feel that there's value we'll start to talk more about the specific application but I would I would think it's in those areas and asset management and asset tracking and You know tied to use of Laura edge indoors and outdoors You know, that's the beauty about Laura and the Laura edge platform has Wi-Fi sniffing and GPS sniffing so the concept being you can track an asset from your home outdoors into a warehouse into a manufacturing facility for example or you know within buildings deep indoors or in rural areas and have one platform which is utilizing and optimizing the battery power consumption effectively. So it's a very nice concept. I think it's a very unique capability we have. But we have to get it out there and demonstrate the value, right?

Understood. Very helpful. Thank you.

Our next question comes online with Scott Searle with Roth Capital. Please, see you with your question.

Hey, good afternoon. Thanks for taking my questions. Hey, just a couple of quick clarifications. I missed what you said about the sequential outlook for protection. I just want to know if that was up, down, flat. And what Huawei was in the quarter. I know you were indicating your guidance doesn't reflect any incremental contribution from Huawei, Holly Silicon in the fourth quarter. And then I had a couple of follow-ups.

So protection, we're expecting to continue to be up. It was up in Q3, and we expect it to be up in Q4, driven mostly by the consumer space, but also in our industrial, more broader industrial telecommunications automotive sectors are all doing quite well for us. So we're expecting that to grow in Q4 also. And then on Huawei, Huawei for this quarter, we're not expecting much at all. We haven't shipped much, and we're not expecting to ship much in Q4. pretty minimal revenues from Huawei this quarter. Obviously, we have some licenses I mentioned on the prepared remarks, but it's fairly modest, any revenues that come from that. And it's not clear to us whether Huawei has already built up inventory and so whether they need the materials. So we've essentially taken it out of our guidance.

Great. Perfect. And on wireless sensing, absolutely huge quarter. You know, part of that, it sounds like a combination of proximity sensors and lower. I was wondering if you could parse that a little bit more. You know, up 32% sequentially, you know, the smartphone market broadly in general was up about 20% plus, I think, on a global basis. So you're benefiting from that. Was there something in there? Was proximity bigger versus lower? Just to kind of get calibrated on that, because given... Given the performance of that segment, I would have thought you'd be at the higher end or even above the higher end of the range of $85 million to $95 million for lower this year.

Yeah, they're both doing extremely well, I would say. Obviously, proximity sensing for us has been driven by mostly the smartphone business, and so that has obviously done quite well in Q3, and we're expecting stronger proximity sensing in Q4. As I mentioned, consumer tends to be weak in Q4, but this year is unique in the sense that the first half is very weak. So, you know, we're starting to see maybe a little bit of that effect kind of playing out here in the Q4 timeframe. But with LoRa, it's more consistent. I mean, it's just continuous, consistent growth. And with LoRa, it's more about, you know, how fast the POCs are moving over to revenue, right? We have plenty of pipeline. I mean, as I mentioned, we have $500 million of pipeline. So it's only a question of how quickly those can move through the pipe to revenue. And that's where something like the Amazon.

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Sidewalk announcement, I think, really starts to help in a way because LoRa is a great technology for industrial. It's clearly proven in utilities already. It's clearly proven itself in some of the asset management and broader kind of industrial use cases. But where we have been hoping and somewhat speculating, but now we have real evidence of it, is the smartphone use cases. some of the more consumer use cases, which drive revenue typically faster. Now, they can be volatile as well. I mean, they can have shorter life cycles as well, but typically they can ramp up much faster. And so, as I said, I don't think we'll start to see it really until mid-next year, the growth there, but it's coming.

Gotcha. If I could, Mohan, follow up on the lower front as it relates to sidewalk. Could you talk a little bit about the ecosystem? that's building around it right now. Now you've got the anchor, right? You've got the base station there in effect with the Echo Dot. How is the rest of the ecosystem and design activity around that starting to form? And I was wondering if you could update as well on tags. Haven't heard a lot about that lately. I know that was further out on the horizon, but you're starting to talk about cloud and recurring opportunities. What's the latest thoughts on tags?

Yeah, I'm pretty excited by tax, but I think it's still early. We still have to get the price points down, and we do need something like a sidewalk network in place for that to become an effective vehicle. With regard to the ecosystem, you know, it's really driven by Amazon. I don't think, you know, we're participating, obviously, in helping and facilitating, but a lot of the momentum is going to be driven by them directly, and I think we'll continue to help drive that process. But when you look at the ecosystem, there's clearly an opportunity for sensor manufacturers who want to connect to a gateway in the home, in the lighting area, in the tracking area, in the security area, in the safety area, irrigation, just a whole bunch of sensors. There's clearly opportunity for software companies to partner with Amazon and figure out how to connect with them and their site network. There's clearly opportunity for system integrators who want to connect to home-based network and opportunity. There's just, you know, the whole ecosystem around the smart home, I think, comes into play. quite nicely, and I think we'll start to see that. It's probably the second half of next year, but as the network starts to get rolled out and customers and consumers start to deploy sidewalk networks, I think that's when we really start to see the momentum.

And lastly, if I could, just in signal integrity, PAMFOR product line, I think you're starting to see some 100-day contribution, I thought, in the third and fourth quarters, start to see some initial revenues. So I wonder if you could update us on that front. And then looking forward to the 200, 400 gig, I thought there was design activity, which would start to translate into revenue in the first half of fiscal 22. I was wondering if you could just update us on those two fronts. Thanks.

Yeah, we're starting to see revenues now. You know, it's small, but we are seeing triage revenues now, PAM4 revenues. And we've got some very good momentum. As I mentioned, we have over two dozen design opportunities that are in play at various stages. some early stage evaluation, some more qualification type of stages. And so that's going to start ramping. And, yeah, next year should be a very good year for triage, I think.

Thank you.

Our next question comes in the line of Christopher Rome with Susquehanna. Please start with your question.

Hey, guys. Thanks for the question. I think most of the good ones have been asked, so I'll just ask two. I guess the first one here on the 5G opportunity, perhaps you can give us – you said it would grow. I think most people are expecting that. But perhaps you can give us an idea of the kind of growth rates we should expect in this business for the next couple of years, and then if you could break out perhaps units or ASPs, it sounds like you're moving to 25G. I want to explore that opportunity a little more.

Thanks. The main thing to remember with 5G for us in the optical modules is that with 4G, there was typically just a PMD device of some sort. With 5G, there'll be a CDR as well as a PMD device. you know, the opportunity for us in 5G is either ClearEdge CDR and FiberEdge PMV device for 25 gig links. If they go to 50 gig links, you know, TriEdge, PAM4, and FiberEdge device for 50 gig links. So ASPs are just increased for us. In addition, there's more, typically with 5G, there's going to be more fun links. I think it kind of goes from 6 to 12. front holdings. So there's significant increase in the number of ports we'll be going for. So increased content, more ports. But then I think the other thing that's somewhat different for us and for everybody I think in 5G is that historically it's been China and I think for sure China will still be the predominant volume driver. But we are starting to see some of the OEMs around the world really take a more aggressive stance in trying to be successful in this market and at least participate. And some of that's geographical dependent on which regions are driving the need to have local suppliers support their 5G infrastructure. But that will also drive opportunity for us, I think. And for 4G, we have about 30% share of the market. We think we can hold that share at least for 5G. You know, that's kind of the thinking, and it should grow, you know, double digits for sure over the next couple of years here, right?

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Excellent. And then also, if we could talk about the data center opportunity, at least the data center and the market more broadly there. Intel talked about perhaps a demand slowdown. I just wanted to see if you agreed with that or not. And then more specifically, if you could talk about your optical opportunity there with Tri-Edge. You mentioned cost versus analog. What is that discount that you get for analog? And perhaps you can discuss how sales are tracking on that side.

Yeah, well, DataSend had a very strong first half. That shouldn't be forgotten. So we had a record first half. So there was some expectation that second half was going to slow down a little bit, and that's really what's happened. Still on an annual, year-on-year basis, still up, and will continue to grow nicely, I think, next year. So I think we've seen, obviously, a little bit of softness in Q3. We expect Q4 to probably be flattish versus Q3, and then start to pick up again next year. Much like 5G, I mean, Hyperscale Data Center is a broad set of global customers. So it's a pretty broad range of customers. We are obviously selling into the optical module manufacturers, and they're building their modules and shipping into different data center customers, and we've got good traction, as I mentioned there. And we expect to see production ramps for most of the 200 gig, 400 gig PAM4 modules over the next few quarters here. It's already started, but I think over the next few quarters we'll start to see that. And essentially, you know, you can take a 100 gig optical module today that uses our ClearEdge CDRs and essentially replace it with a very similar module that uses our TriEdge CDRs. and get double the bandwidth for very little incremental cost in the module. And so that's the value we see, and that's what we expect the market to recognize.

Thank you, guys.

Our next question comes to the line of Torres-Venberg with CFO. Please, deal with your question.

Yes, thank you. Just a quick follow-up. Mohan, you said that the sidewalk opportunity alone could be $100 million over the next five years. Is that on CHIP revenue, or is there some royalty or even services revenue in that number as well?

Yeah, I would say it includes everything, Tori, so mostly CHIP and royalties.

Great, thank you.

Our next question comes from the line of Harsh Kumar with Piper Sandman. Please start with your question.

Yeah, hey guys. First of all, congratulations. Solid guide, solid results. We appreciate it. And then I had two questions, Mohan. Right before the ban, I think you were very optimistic on the opportunities in China with perhaps a new presidency. Can you talk about You talked some about 5G, but could you just lay out for us the framework of how Semtech would view the opportunities in China should the gates open up for trade again?

Well, I think we've always been bullish on China. Obviously, we've invested in China for the last 15 years, and so it's hard to walk away from a region that has driven so much growth and continues to have so much promise going forward. But I would look at, you know, the Huawei situation is a unique situation. Obviously, the ban on Huawei has impacted us significantly. But that's kind of done now, and we've been through that. The bigger challenge now is just, you know, are we going to see an opportunity to continue to grow in all of our businesses in China, or is there going to be this further kind of disaggregation between the U.S. and China, and that's still unknown. I think that's where we're waiting to see. But for sure, any positive relationship improvements, I think, is a positive for our business, for sure, just because of the success and the momentum and the relationships and all of that we have across all of our segments. But that said, we're not counting on it. As I mentioned, a lot of these markets like 5G and PON are becoming a little bit more globalized in the sense that other regions are starting to recognize the need to have their own infrastructure players and they can't depend necessarily on the Chinese manufacturers to support them and be there when they need them and those type of things. You know, it's a little bit of both, but I definitely think if things improve on the relationship front at a government level, then for sure that should help our business longer term.

Mohan, so a follow-up on that one, and then I'll ask my next question as well. Do you see opportunities? You used to have opportunities, I believe, for data center business in China. Do you see that perhaps opening up again for you, for Semtech in China, the data center? And then secondly... With regards to Amazon, Sidewalk, and LoRa, I think you were the only supplier of baseband ICs for the gateways that you guys deploy on the infrastructure side. Is that still the case, and will the typical consumer be relying on sort of the Amazon infrastructure that will be laid out in the city, or will the consumer have to buy their own sort of gateway, which comes in a DOT or ECHO or something else?

So let me answer that first, and then we'll go to the data center. So Amazon Sidewalk, for sure there will be connectivity through a gateway, which will be an echo. And Amazon obviously will supply the echoes, and so the connectivity will be to the echo. And then how different echoes connect with each other and how the roaming is done, that's all going to be driven by Amazon. That's an Amazon decision. We'll obviously help them with that, but the main thing is getting this really targeted within the home, the smart home, and the periphery of the home is kind of the initial thinking, and then tracking of your pets and things like that outside the home, and then connecting different echoes together, and those type of things, I think, is the broader vision, right? So we'll see how that plays out. And then on the data center side, for sure, yeah, all of the Chinese data center, hyperscale data center guys are our partners, customers, you know, potential opportunities for triage, for sure. And we are working with them. We continue to work with them. We don't see any real issues at the moment. I don't think that there will be. But, yeah, we have very close relationships and expect to see some good growth there.

Thanks, Mohan. Thank you, guys.

Our next question comes to the line of Christian Jones. Please do with your question.

Hi, guys. Thanks for letting me in. You've mentioned that Amazon was a 10 to 20-year opportunity, so clearly there is a long-term investment. Could you give us a sense of what's the magnitude, you know, of those that have a large potential and customer like Amazon? And given those investments, is there an incentive for them to eventually use the same technology in other platforms outside of consumer? Amazon, for example, is also pushing IoT solution in industrial. Is that an opportunity that you see that's specific to this customer but elsewhere versus cellular-based network? And generally, what's the incentive large customers have to once they invest in LoRa to leverage that into different markets?

Yeah, Tristan, I think all of the companies we deal with, we mentioned Cisco earlier and Amazon and other companies are starting to understand the value that LoRa brings. It's not, the value is increased actually when LoRa is combined with other technologies. you know, when you combine with Bluetooth or Wi-Fi or GPS, as I mentioned, on LoRa Edge, one of the reasons why we developed the platform so that it has Wi-Fi sniffing and GPS sniffing and LoRa is that LoRa on its own has some limitations in the sense that it's not a high bandwidth connectivity, right? So, but I think as these use cases start to get, deployed you know there's going to be use cases across the board in all segments and industrial is where I think the biggest value the largest value is for sure because of the very low power and the range but then when you see the smart home initiative that this is really driven through the sidewalk initiative it really is going to change the way home automation and smart home is thought about. When you start to look at the peripheries of your home and you go into the attic or into the garage or into the basement or into the outdoors, into the yard, and can then put smart automation around that, that really starts to change the dynamic a little bit. So I think there's a huge opportunity. We'll see, you know, it's baby steps, as I said, but we have some big hitters that are behind the technology pushing it, right?

Great, and then just a quick follow-up. So you've mentioned a little bit earlier about lean inventories in the channel and tightness in supply across the board, and you mentioned nothing specific to Loa. Are you shipping exactly in line with on-demand in Loa, or are you still catching up for what was, you know, following supply chain disruptions earlier in the year? Just trying to see if there is any – you know, catch-up revenue or if it's really just linear with end demand?

Yeah, I would say if the question is specifically about LoRa, I think we're shipping to demand. I think it's in good shape. I think that, you know, the real question there is in FY22 if the consumer demand picks up rapidly, then, you know, hopefully we'll be able to supply to that And I think we can. So we're in fairly good shape. With regard to the rest of the business, demand is extremely strong. Bookings have been extremely strong. So we're a little bit cautious, particularly on the consumer side, with regard to making sure we understand how much inventory is being built and trying to maintain some balance there by keeping our channel lean and things like that. It's hard to know, to be honest with you, Tristan, exactly, but we'll see it play out. We're expecting a very strong Q4. We're expecting a strong Q1. I think the first half of next year looks like it's going to be strong. Then the question is, well, what does second half look like, right? But we'll see by then.

Great, Cutter. Thank you very much.

Our next question comes from the line of Carl Eggman with Calend. Please go with your question.

Yes, thank you for squeezing me in. Your signal integrity business will grow mid-teens, at least in fiscal 2021. How do you think about the trajectory of that business entering fiscal 2022 in the context of your longer-term 12% growth rate? I ask because it would seem another healthy year with 10 gig pond is on the come, demand remains healthy for 25 gig and 100 gig optimal products in Asia. Yet at the same time, you know, proponents of 400 gig would argue, you know, the second half of 2021 will begin the demise of NRC for short-reach applications. We'd love to hear your thoughts on that.

Well, we think 100-gig modules and connectivity will continue for some time. I don't think there will be a demise. It may start to flatten off, and PAM4 and 200-gig and 400-gig PAM4 modules will start to pick up for sure. But we're hoping to participate in that, of course, with Tri-Edge, and we see good design and momentum, as I said. So to answer your question, we think all the infrastructure segments are going to do quite well next year. Part of that is working from home and all of the, you know, COVID-related dynamics that have driven infrastructure investments and the need for more bandwidth and all those things. You know, yes, Signal Integrity Product Group, we're expecting pretty good growth next year across the board. And, you know, this year has been an extremely weak year for video, for example, as well. So we're expecting FY22 to see that pick up also, that segment. You know, we anticipate that to contribute to the growth next year also.

Understood. Last question, if I may, you know, You know, what order trends are you seeing by Asia-based data center customers? I ask because your primary peer spoke about that strength for 25 gig and 100 gig products. You know, again, just a double click on the channel inventory commentary. You know, we've kind of heard some mixed commentary, but I'd appreciate your thoughts on how you feel about the situation for optical components, particularly for data center and long haul. Thank you.

For us, the channel is pretty light. It's certainly in the range we feel comfortable with. Demand is very strong, as I mentioned. Bookings are strong. Indications are Q1. I mentioned that Q4 was going to continue to be a little bit light for data center, probably flattish. 5G is going to be a little bit stronger, and then we expect PON to be stronger in Q4, and then we expect infrastructure segments to do nicely in Q1. So, yeah, at this point, the channel is light, I think, relatively, and demand continues to be strong, and bookings are strong, so we think we're in pretty good shape.

Thank you. And our final question comes from Craig Ellis with Uber Island. Please do with your question.

Thanks for coming back to me and getting me in before we wrap up. Mohan, I really appreciate all the metrics that you give with Laura and the transparency they provide. But I missed what you said about the opportunity funnel. So one, can you repeat that number? And two, did it change from the last quarter? And three, when we go through a period that's as dynamic as what we've seen year to date, the whole world is turned upside down with a COVID crisis. How does the company manage its funnel and kind of quality check and resiliency check the items that are in that funnel as we get to the other side now are looking at what should be a global recovery. But can you just walk us through how you maintain that funnel and where it stands currently versus prior expectations?

Yes, so currently the pipeline is about $500 million. We look at the leads that drive the pipeline. It's about $200 million. So there's a pretty sizable pipeline compared to what our current revenue is. And the main area of focus is conversion of those pipeline opportunities to revenue. That's been the key focus for us is how do we make sure and enable that to occur. It's fairly well balanced. As you know, the pipeline has a funnel. In the funnel, about 21% is China, and then about 70% is Europe and Americas, which is good because that's better balanced than revenue today. The revenue is about 49% China and 40% Europe and Americas. So we want to get that balance, more balance, and if we execute it, the funnel turns over to revenue as we expect it to in time, then that would be a nice thing to have, just more balance. Also lots of use cases, lots of different use cases. So, you know, there's obviously now a hefty smart home component that's also in that funnel. Utilities, asset management, smart city and building. So fairly well balanced there. Yeah, this year obviously has been a tough year for you know, for customers to prioritize new initiatives. And that's been really the difficulty we've had, you know, where many of our customers have been focused on, you know, just making sure people are safe and making sure people have jobs, you know, and those types of things. You know, putting a priority on a new technology and a new market and a new initiative has been challenging, but it's starting to get turned around. And I think, you know, as I mentioned with the Amazon Sidewalk initiative, you know, that's initially, you know, is significantly going to be announced much earlier, but was pushed out and now, you know, is out there. And I think, you know, we're going to see more of this type of thing as our customers start to get a handle and countries start to get a handle on the pandemic and, you know, the way forward. So, the expectation is next year the opportunities will increase rapidly. Thanks, Mohan.

Okay.

Operator?

And with that, we've reached the end of our question and answer session. I would like to turn the floor back over to management for any closing remarks.

Thank you. We were pleased to deliver another solid quarter and remain encouraged that our strategies for multi-sourcing, our investments in IT operations and sales infrastructure and systems continue to limit the impact of COVID on our business operations. I want to once again acknowledge all of the talented and committed Semtech employees across all our global locations and thank them sincerely for their ongoing efforts. We believe our strategy, along with our diverse offering, balanced and market approach, and strong customer relationships should enable us to continue to deliver growth. With that, we appreciate your combined continued support of Semtech and look forward to updating you all next quarter. Thank you.