Semtech Corporation

Greetings. Welcome to the Semtech Corporation quarter two fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to your host, Sandy Harrison. You may begin.

Thank you, John. And welcome to CEMTAC's conference call to discuss our second quarter fiscal year 22 results. Speakers for today's call will be Mohan Maheswaran, CEMTAC's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed 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 that's included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from the call should facts or circumstances change. All references made to financial results in Mohan's and Emeka's prepared remarks during this call, we refer to non-GAAP financial measures unless otherwise noted. A discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures are included in today's press release. I want to also highlight that Semtech will be hosting its first ever Tech Topic webinar that is scheduled for Wednesday, October 6th. where we will focus on our LoRa platform. More details on the event, including the agenda and sign-up information, will be coming soon. With that, I will turn the call over to CEMTAC's Chief Financial Officer, Emeka Chugu. Emeka?

Thank you, Sandy. Good afternoon, everyone. As is our practice, I will be focusing my comments on our non-GAAP financial results, unless otherwise noted. For Q2 fiscal year 22, Net sales grew 9% sequentially and 29% year-over-year to $185 million, which was above the midpoint of our guidance and represented a new quarterly record led by the circular momentum that contributed to new records achieved by several of our key growth platforms. In Q2, shipments into Asia Represented 81% of net sales, not America represented 11% and Europe represented 8%. Why these represent the shift to addresses for our distributors and. We estimate that approximately 35% of our shipments are consumed in China. 27% in the Americas and the balance over the rest of the world. Total direct sales represented approximately 13% of net sales, and sales to distribution represented approximately 87%. And our POS was another quarterly record. Our distribution business remains balanced with approximately 39% of the total POS coming from the infrastructure end market, 31% from the industrial end market, and 30% from the high-end consumer end market. Q2 bookings remained strong and increased 75 percent year-over-year and resulted in a book-to-bill well above 1. Those bookings accounted for approximately 3 percent of shipments during the quarter. Q2 growth margin increased 70 basis points sequentially to 62.7 percent, which was at the upper end of our guidance range due to a more favorable product mix. Our growth margin is benefiting from a higher mix of cells from our growth platforms, including LoRa-enabled, data center triage PAM4 CDRs, 10 gig POM, 5G wireless, and broadband industrial protection. For Q3, we expect the growth margin in the range of 62.8% to 63.8% as we anticipate a greater contribution from these growth drivers. Q2 operating expense increased 3% to $65.9 million, driven by higher variable compensation expenses, slightly offset by lower new product development expenses. For the rest of fiscal year 22, we expect our operating expense to be in line to slightly above current levels. In Q2, we were again pleased to see our operating profit on a sequential and year-over-year basis grow much faster than itself due to the gross margin expansion and stable operating expenses. This drove a 270 basis point sequential expansion of our operating margin to 27.1%. We expect continued operating leverage as we make progress towards our 32% to 36%. percent long-term target model. In Q2, cash flow from operations increased 63 percent sequentially to a record $53 million, or 29 percent of net sales, while free cash flow increased 71 percent sequentially to 25 percent of net sales, achieving the lower end of our long-term free cash flow target range of 25 percent to 30 percent of net sales. In Q2, we repurchased approximately 1% of our outstanding stock for $42 million, resulting in $322 million remaining in our outstanding authorization. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down debt. Accounts receivable in Q2 increased 10% from Q1, while days of sales decreased three days from Q1 to 34 days, and remains below our target range of 40 to 45 days. In Q2, net inventory in absolute dollar terms increased 10% sequentially, and days of inventory increased by three days to 129 days at the end of Q2. We expect our net inventory to remain above our target range of 90 to 100 days to support the stronger demand and the tighter supply chain environment. In summary, we are pleased with the strong first half momentum we are seeing from our higher margin growth engines, which we expect to continue in the second half. We believe the sustainable secular drivers behind our growth engines are expanding gross margins, stable operating expenses, and strong cash flow generation have positioned us well to deliver a record financial performance in fiscal year 22 and beyond. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q2 fiscal year 22 performance by end market and by product group, and then provide our outlook for Q3 of fiscal year 22. In Q2, net revenue increased 9% sequentially and 29% over the prior year to a record $185 million. Higher demand across all three of our end markets contributed to the Q2 growth. We posted non-GAAP gross margin of 62.7% and record non-GAAP earnings per share of 65 cents. In Q2, net revenue from the infrastructure market increased 10% sequentially. and represented 37% of total net revenues. Industrial market net revenue increased 5% sequentially and represented 31% of total net revenues. The high-end consumer market net revenues increased 10% sequentially and represented 32% of total net revenues. Approximately 21% of consumer net revenue was attributable to mobile devices, and approximately 11% was attributable to other consumer systems. I will now discuss the performance of each of our product groups. In Q2 of fiscal year 22, our signal integrity product group grew 10% sequentially and represented 39% of total revenues. Strength from the data center and the pawn markets drove the growth in our SIP business. In Q2, revenue from the data center market grew sequentially, led by record revenues from our PAM4 platforms. Strong design wind momentum in 100 gig, 200 gig, and 400 gig PAM4 optical modules is expected to contribute to a strong second half for our data center business. We are very pleased with the progress of our tri-edge short reach platforms, and we expect to introduce our new longer reach tri-edge platforms over the next 12 months that we believe will open up the full 200 gig and 400 gig PAM4 data center market to us. We remain confident in our strategy, and as we execute on delivering our tri-edge and fiber edge platforms that deliver lower power, lower cost, and lower latency, we should see continued growth in our data center business. in FY22 and beyond. In Q2 of FY22, revenue from our PON products grew sequentially and achieved a new revenue record. Demand for our 10 gig PON products remained very strong and achieved another record and now represents the largest revenue segment within our PON business. Semtech provides the most comprehensive PON PMV portfolio available in the market today. and we expect our pond business to continue to benefit from the global demand for higher bandwidth access solutions. We expect our pond business to remain strong over the next few years as global service providers accelerate their deployments of broadband access equipment. In Q2 of fiscal year 22, 5G demand slowed as expected following the prior quarter's record results. However, with several China tenders recently announced, and carriers in North America and Europe expected to begin 5G build-outs over the next 12 months. We expect to see demand for our 5G platforms pick up during the second half of this year. We continue to see design wins for both our 25-gig clear edge and 50-gig PAM4 tri-edge platforms in 5G front-haul optical modules, and we believe we are well-positioned to benefit from next-generation wireless network deployments. As users demand greater bandwidth, we expect the infrastructure segment to continue to grow and expect this to result in sustainable long-term growth for our signal integrity product group. In Q3 of fiscal year 22, we expect revenue from our signal integrity product group to increase and achieve another record driven by growth from all the infrastructure segments. Moving on to our protection product group, in Q2 of fiscal year 22, Net revenues from our protection product group increased 9% sequentially and increased 49% year-over-year and represented 27% of total revenues. In Q2, protection revenue from our consumer customers rebounded nicely over the prior quarter, led by growth at our North American and Korean customers as their supply constraints improved. Demand also increased across the broad-based industrial markets led by stronger demand from North American and European automotive and industrial customers. Many of today's automotive, IoT, and communication systems use advanced lithography chips that require higher performance protection. Our latest protection platforms deliver technology that prevents damage to these highly sensitive chips. In addition, As part of the industry's ongoing push on ESG, we are seeing an increased focus on the reduction of electronic wastage, which we believe will further accelerate the adoption of Centex protection products. We expect both these trends to continue to drive further adoption of Centex protection platforms across all market segments and enable us to deliver double-digit growth with increasing gross margins over the next several years. In Q3 of fiscal year 22, we expect our protection revenues to increase again nicely, led by continued strength from the broad-based industrial market. Turning to our wireless and sensing product group, in Q2, revenues from our wireless and sensing product group increased 7 percent sequentially and 61 percent over the prior year and achieved another quarterly record and represented 34 percent of total revenues. In Q2, our LoRa-enabled platforms delivered another quarterly revenue record, driven by the smart utility, smart city, and industrial IoT segments. The momentum from our LoRa platforms has really started to accelerate globally, and we expect to see continued growth this year in line with our long-term 40% CAGR forecast. We are also seeing a tremendous number of new LoRa-based use cases, globally that support future growth. Recently announced initiatives include LDT, a South Korean smart sensor network provider, integrated LoRa into its smart fire prevention system that provides real-time analytics, sensing, connectivity, and geolocation to protect commercial facilities such as shopping malls and local markets. Swiss Post have deployed its smart connected pens that leverage its nationwide LoRaWAN network to help digitally transform the Swiss Postal Service. Oxit, an IoT solutions expert, is collaborating with Semtech to support a number of new smart utility IoT initiatives targeted at the oil, gas, and communications industries. And Skylab, a supplier of wireless sensors and GPS tracking and measuring systems, will be using our LoRaEdge platform to develop a solution for indoor and outdoor asset management of vehicles, vessels, and containers. This is one of many asset tracking design wins based on our LoRa Edge platform that are expected to convert to revenue in the next 12 to 18 months. These are just a few of the new use cases that highlight the flexibility, scalability, and momentum of LoRa that is enabling a smarter, more connected, and sustainable planet. In Q2, our LoRa business metrics progressed very well against our FY22 targets. The number of LoRaWAN network operators grew to 156, and we are expecting 165 LoRa network operators by the end of FY22. The cumulative number of LoRa end nodes deployed increased to 208 million. and we expect this number to exceed 236 million cumulative end nodes by the end of FY22. The number of LoRa gateways deployed increased to over 2.2 million and has already exceeded the goal we set for the full year. As a result, we are increasing our gateway target for the year to 2.5 million. The LoRa opportunity pipeline increased nicely in the quarter, and now stands at over $850 million, which also exceeds the target we had set for the whole year. As a result, we are increasing our opportunity pipeline target for the end of the year to $900 million. We anticipate that approximately 40% of the opportunities currently in the pipeline will convert to deployments over a 24-month timeline. Our metrics demonstrate the growing adoption and deployment of LoRa, where the long range, low power, and low cost of LoRa is being leveraged. We believe that this momentum in our metrics, along with the increasing influence and efforts of the LoRa Alliance, will continue to enable LoRa to become the de facto standard for the fast emerging LPWAN market. In Q2, our proximity sensing platforms achieved another quarterly record. led by strength at our smartphone customers. Semtech's proximity sensing platforms provide the industry's most advanced and highly integrated proximity sensing technology for mobile and wearable devices. The growing adoption of 5G phones and the use of higher powered radios is contributing to an increasing number of social health concerns, resulting in more stringent RF power regulations globally. This trend is expected to result in increasing demand for our proximity sensing platforms over the next few years. For Q3 of fiscal year 22, we expect net revenues from our wireless and sensing product group to increase and deliver another record quarter led by another record from our LoRa business. Moving on to new products and design wins. In Q2 of fiscal year 22, we released 11 new products and achieved 3,018 new design wins. which represented a 16% increase over the previous year. Now let me discuss our outlook for the third quarter of FY22. Following very strong bookings in Q2 that increased 75% over the previous year and record POS, we entered Q3 with record backlog. We are currently estimating Q3 net revenues to be between $188 million and $198 million. To attain the midpoint of our guidance range, or approximately $193 million, we needed net terms orders of approximately 5% at the beginning of Q3. We expect our Q3 non-GAAP earnings to be between 68 and 76 cents per diluted share. I will now hand the call back to the operator, and Sandy, Emeka, and I will be happy to answer any questions. Operator?

Thank you. At this time, we would like to begin a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 while we poll for questions. Our first question, comes from the line of Tor Svanberg with Stifel. You may proceed with your question.

Yes, thank you, and congratulations on the record results. Mohan, I think you mentioned that LoRa is now basically on track growing at sort of 40% forecast. Does that mean this year is also now tracking for LoRa to be up 40%?

It is. It's tracking. I would say it's tracking ahead of that, actually. So that's our expectation, to be at least 40%. Yeah.

Very good. And as a follow-up, just to clarify, when you talk about protection business, you expect it to be a double-digit growth business going forward. Was that specifically for the non-consumer part, or was that for the entire category?

For the entire category. You know, consumer obviously grow faster, but it can also come down faster. It's a little bit more volatile. Our broader industrial protection is more stable growth, I would say. You're not going to see the very high and the very drop. It's just more Just kind of, you know, whatever the industry is growing at plus X percent. And I think one of the things about this business is that we are really just starting to play in the broader industrial protection business. So we have a lot of the ability to increase penetration there, I think, is much better for us as some of those trends I mentioned. go in our favor. So as a total, we think we can grow double digits nicely. The other thing to remember in this business is that the broader industrial protection business is much higher gross margin typically than the consumer protection. So that will definitely be a positive for us.

Very good. Thank you very much. Congrats again. I'll go back in line.

Thank you. Our next question comes from the line of Tristan Jera with Baird. You may proceed with your question.

Hi, guys. Congrats. About the 40% of the 900 million pipeline in Loa that you expect to deploy over the next 24 months, can you remind us of the average duration of those design wins?

So the opportunity funnel, Tristan, covers several years of design opportunity. Some of those will move faster and can turn to revenue in 12 months. Others might take 36 to 48 months, depending on what it is, if it's a meter relative to maybe a smart home application, as an example. we would say 40% of that total opportunity pipeline will convert over the next couple of years. Maybe the way to think about it is probably two to three year timeline. 40% of those opportunities will convert to design wins and revenue.

Okay. And then as a quick follow-up, if you could reconcile, obviously you have very strong visibility, very low net turns to meet your core guidance, but you're also raising inventories. internally, how much are you suffering from supply constraints right now and when would you expect, you know, a catch-up shipment relative to the real level of demand that you're seeing?

Well, we are shipping nicely to consumption, which is what we believe is the right thing to do, so we don't believe any of our customers and customers are short. There are pockets of supply constraints in certain businesses that are doing extremely well. But in general, we think we're quite comfortable. We built a good amount of inventory. We've anticipated the demand strength, and that's what we're doing. So I think we're good for this year to support the consumption that we believe is required. As we go into next year, we're going to have to take a close look at it. But, you know, we continue to believe the right thing to do is to build our own internal inventory and make sure that we are shipping to consumption levels.

Great. Thank you.

Our next question comes from the line of Quinn Bolton with Needham & Co. You may proceed with your question.

Hey, guys. Let me echo my congratulations as well. Mohan, I wanted to start with the LoRa opportunity pipeline, which is expanding nicely. Can you talk about, are you seeing a broadening out in that business and pipeline, or are there a couple of specific smart city, smart home applications that are really starting to drive a lot of the growth in the pipeline?

It's so I would say it's very broad, Quinn. And it's also regionally quite well balanced, which is important. So I would say in the Americas, it's smart home driven smart utilities and logistics. In China, It's smart utilities, smart city, and industrial IoT. And in Europe, it's smart utilities, logistics, and industrial IoT. So, you know, it's different segments driving most of the opportunities. Not a surprise that, you know, those segments are the ones that are driving the business because that's where LoRa fits very well into those categories. And so, that's what we expect and that's what we're seeing. not really a surprise. I think over the last couple of years, as you know, the pandemic and some of the China trade issues, the opportunity funnel hasn't increased the way we would have liked it to have done. But we're starting to see that now. And that's really a positive thing because that really will drive the future growth.

Great. And then a question for Rebecca.

Nice job on the gross margin expansion and particularly so on the guide. And I guess just Looking forward, it sounds like a lot of the growth are coming from the higher margin products. And so I guess it just begs the question, if you think you can be 62.8 to 63.8 in the October quarter, where do you think margins could go over the next one to two years? Do you think you could see 64 to 65? You know, what's the upper limit we should be thinking about?

Yeah, so, you know, when we look at our gross margin story, it is actually very pleasing to see it playing out the way we had expected, right? We've always talked about these high gross margin growth engines that we have. You know, you look at LoRa, you look at the TriEdge platform, you look at our 10-gig PON, our 5G, you know, wireless. So those things are really, and our industrial, broad-based industrial protection. So, they are really tracking very nicely. If you look at those just by themselves alone, you will definitely make the case for continued gross margin expansion. The one headwind that we have, I think we have managed it very well so far, is all these supply constraints we have right now and the fact that it's driving a whole lot of Price increases in terms of where for pricing and the back end present as well. So, so far so good. We've been able to manage that. But as you probably know, there's been a lot of news in that space lately that there's going to be additional increases in that area. So we'll just have to see how that plays out. But my expectation, and this is a long winded way of saying this, but my expectation is that. we should continue to see some gross margin expansion being driven by these new growth engines that are really beginning to scale for us.

Great. Thank you.

Our next question comes from the line of Carl Ackerman with Cowen. You may proceed with your question.

Yes. Good afternoon, gentlemen. Two questions for me, please. First, could you discuss your ability to secure additional wafer capacity over the last 90 days and whether that might improve for the October quarter? Additionally, what kind of visibility do you have into your bookings pipeline across each line into the second half of your fiscal year?

So, Carl, let me start with that first. The visibility is very good. We have obviously very good visibility into Q3. That's why the terms number is relatively low for us. We also have pretty good visibility, I think, into Q4. Bookings are very strong, so customers are giving us the visibility into what they need into really throughout the rest of this year, which is good and helpful for us. On the supply side, as you know, we've built inventory over the last couple of years. We made it a strategic goal to do that. We knew this was going to happen, and so we're in pretty good shape, I would say. But the other thing that we have done over the last couple of years is to build and try and build as much as we can parallel supply chains and mitigate against the, you know, one way for fab or one back end supply chain. either struggling through pandemic issues or, in this case, your question, capacity constraints, right? So we've been able to do a pretty good job there. It's not the case in all products, but in most cases, we do have multiple supply chains. Now, that said, you know, everybody seems to be very tight on supply. So I don't think there's one foundry or one backend partner. It's really everybody in the industry seems to be very tight at the moment. Our job is to just kind of keep working through it and that's why I said we are shipping to consumption. A very important point that is that we are shipping to what we believe our customers need and to ensure that they can build their products and that's what our continuing goal will be for the rest of this year is to make sure we ship to consumption so that they, you know, they're not building inventory and our channel is not building inventory and, you know, it's a healthy pipeline, operational pipeline.

Very helpful. For my follow-up, I was curious what portion of your optical products now address PAM4 because it does appear that you continue to win incremental designs for higher transmission rates. And then secondarily, I was curious, I guess as you addressed that question, I was hoping you might discuss the demand outlook you are seeing from module makers who sell into the recently awarded 700 megahertz and 2.1 gigahertz tenders in China, and perhaps how you would characterize the current spending environment for telecom operators outside of China. Thank you.

Again, I'll start with that. We're seeing, obviously, there's a lot of potential growth here in 5G. China is still the driving force for this year, I think, starting to see more growth in other regions, But certainly next year, we expect that to ramp up. And I would say still today that the rest of the world is catching up a little bit in terms of the service providers and even the OEMs. But that globalization, I think, is really beneficial for companies like us because we are shipping into all of the module manufacturers, and we would like to see a more balanced geographical landscape for 5G in terms of opportunity. So I think that's good. Coming back to the PAM4 question, you know, we've invested heavily in our fiber edge and tri-edge PAM4 products. I mean, both for 5G wireless and for data center, as you know. And I think now we are just starting to release those products to production, get design wins, and we're starting to see the ramp of those. And, you know, there's limitations at this point because our products are mostly short reach. at least on the tri-edge side of things. And we have to release our longer reach products, as I mentioned. But as we do that, I think we'll start to get more penetration of 200 gig and 400 gig PAM4 modules and start to see a little bit more of a balanced approach there in terms of growth in some of those pretty attractive segments. Again, the focus of our strategy on the PAM4 side is, analog side of things, so we are focused very much on lower cost, lower latency, lower power, and that's what our strategy is for now, and that's what we'll continue to do.

Very helpful. Thank you.

Our next question comes from the line of Scott Searly with Roth Capital. You may proceed with your question.

Hey, good afternoon. Thanks for taking my questions. Nice quarter. Hey, Mohan, just real quickly, I wanted to get a clarification on the $850 million lower opportunity pipeline. I just wanted to get a clear definition in terms of how you're defining that again. Is it over the lifetime of the expected design win? Is there a specific time period associated with it once it goes live? Also, I'm not sure if you provided a percentage outside of China on that opportunity pipeline. I recall in the past, I think you've gotten over 50%, just kind of wondering if we're in that same sort of ballpark. And then as it relates to the applications, on the lower front. It sounds like more and more, it's expanding beyond what were more localized and campus applications into more pan-regional opportunities, be smart city and otherwise. I was wondering if you could comment on kind of the evolution of how that's going from, I guess, a geographic coverage standpoint.

Okay, so there's a lot of questions there. Scott, let me see if I can remember them. So the first was, The pipeline itself, yes, so the $850 million covers everything in our pipeline. So it's from concept, through design, through the production stage, to the end of production. So we capture everything. Of course, once it's gone into design wins, our confidence level starts to increase quite dramatically. That opportunity pipeline is going to lead to revenue. But until it does, we don't really consider it to be revenue. That's why I say 40% typically is converting. Obviously, once it gets into production, then our confidence level gets very high, and then we monitor the production ramp. So that's the first thing. And then on the geographical scale, yeah, I think, you know, revenue-wise, about 50% of our business is from China. And about... The rest is the rest of the world, Europe and North America. Important to note that about 35% is consumed in China. So even though we're building in China, a lot of that may be shipped outside. But the funnel is interesting because a lot of the opportunity, about 75%, I would say, is outside of China. And part of that is just the maturity of some of the regions now. North America is starting to really ramp its design and activity on LoRa as is Europe. And, you know, as I mentioned, some of the use cases, for example, in America's smart home is a very big opportunity in the Americas, smart utilities, logistics, very big in the Americas. In China, smart utilities continues to be very big, but smart city also is a very big opportunity in China, and industrial IoT. And then in Europe, it's utilities, logistics, and industrial IoT. So it's a little bit of a mixed bag across each different region, which is very nice to see, actually. And these are just some of the segments. I mean, obviously, I'm naming the big ones, but we have a lot of other opportunities, you know, healthcare and agriculture and all those types of things. But these are the big ones. And I think that really starts to, you know, again, put a real, some real clarity behind why we believe LoRa is going to be extremely successful.

Great. Very helpful. And if I could, on the protection front, I think historically it's been more skewed towards smartphones, mobile devices. I wonder if you could calibrate us in terms of where that mix is today and where, when you would expect non-mobile applications to surpass mobile applications on the protection front. And lastly, seasonality. Fourth quarter typically is seasonally a little bit down. It's been anywhere from, you know, I think 4% to 9% depending on the year. This is certainly an unusual set of circumstances given demand and supply headwinds. So I'm wondering what your early thoughts are as we're starting to look out into that fiscal fourth quarter. Thanks.

Yeah, so protection business, 65% is a consumer, 35% is broader industrial, roughly just kind of, you know, kind of high level. And those broader industrial include calm, include IOT, include automotive, so anything that's non-consumer, really. And so, as we see, a lot of our investments historically have been in the consumer protection space. We've now kind of switched that, and a lot of our investments are going into the broader industrial protection space, especially automotive and com and IOT. And so, I expect that you know, mixed to shift slightly. So, you know, probably 40, 45% protection business eventually and, you know, maybe 55 consumer. But it's going to take time. And one of the reasons why it's going to take time, we're doing extremely well still in consumer. And we're not, you know, shying away from that business. And we are continuing to do very well. And some of the trends are going in our favor. So we'll see how it plays out. But, yeah, that's the goal is to try to get a little bit better balance in terms of, you broader industrial versus consumer. Seasonality. Oh, the seasonality. Yeah, I mean, so the seasonality typically for us, Q4, will come down, and a lot of that is driven by the consumer business. You know, guys like Samsung will bring down their inventory levels, and, you know, end of year, that tends to be the case in consumer. We'll start to see companies, you know, reducing inventory levels and things like that. As you said, this year is going to be different, I think, probably because of lead times on supplies. So I'm not sure that we're going to see such an aggressive reduction. So we'll still expect some decline in Q4, but I don't know exactly how much.

Great. Thank you.

Our next question comes from the line of Rick Schaefer with Oppenheimer. You may proceed with your question.

Thanks all in my congrats. So, Pam force picking up nicely. Obviously, I'm curious if you could level set us. I think last quarter you talked about triage. I think it was a 24 evaluations and just was curious if you could maybe update us on what that number looks like. Now, maybe get some color around. what either in terms of design wins or revenue pipeline might look like for triage in particular. And I don't know, as part of your answer, if you could kind of also level set us on sort of what your expectations are for the analog PAM4 market. I mean, how big you'd expect it to be compared to DSP and sort of what realistic share assumptions are for you guys, given, I mean, you're such a dominant position in data center today and things like CDR. So it seems like you're kind of getting off on the right foot there. So I'm just curious. There's several questions in there, but I'd be curious what you think.

Yeah. So, you know, it's early days for us, Rick. I would say we are getting a lot of good design wins. The momentum is good, particularly on the shorter reach, obviously the shorter reach AOC kind of stuff. It's fairly global as well. We're doing quite well in Asia. We're doing quite well in North America and some of the hyperscale computing kind of related stuff. I think where analog wins and where we have a good chance is where there's latency needs and when the cost requirements are low and when the power is important. And those three, if those are three critical elements of deployment, then we stand a very good chance with the analog PAM-4 products we have. And Tri-Edge is doing well. FiberEdge also, which complements DSP, also is doing well for us. I think once we get our longer reach platforms out, which is towards the, some towards the end of this year, maybe some early next year, I think We then will open up the 200 gig and 400 gig market, you know, to the whole market. And then we'll really be able to sit down and evaluate what we think our long-term position in this market will be. But for now, I think it's just kind of getting out there and blocking and tackling, trying to win as many as we can in the shorter reach use cases and I'm delighted with the progress. I mean, obviously this is going to be a nice growing business for us, at least for this year and for next year, quite a rapid growth. We're expecting some good share there. So we'll see how it plays out.

Thanks, Nolan. And maybe one for Rebecca, if I could. I mean, you know, as your top line is accelerating to that sort of $1 billion, you've talked about being optimized for, I think, in annual revenues. Is there any reason as we start looking out, I know you're not guiding to calendar 22 or 23, but any reason to see investment pick up, you know, as you guys, let's say, need to add more capacity or should we think sort of for the foreseeable that OpEx kind of continues to grow sort of roughly half top line? Thanks.

Yeah, so Rick, that is our model. It's worked out for us very nicely, and we've been able to maintain that model for the most part. So that's what we still expect, is to continue to see very nice top-line growth from all the growth drivers that we've been talking about, see growth margin expansion, and then have operating expenses come in about half the rate of revenue growth. That's how we manage the company, and we expect to continue to do that.

Great. Thanks, Raquel.

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

Yeah, hey, guys. First of all, strong congratulations. You know, very nice quarter, very nice guide. Mohan, I had one for you. You had a very impressive, something had a very impressive infrastructure increase. I was curious if 10 gigabit pond is a bigger driver of that increase, or is it the data center side? And then as a part of the data center side, Are you able to sell to Huawei at this time? We've heard a couple of companies selling optical components there. And maybe just give me an idea of is your data center business more so U.S.-centric or China-centric?

So let me take that first, Harsh. It's mixed. It's actually quite well-balanced between Americas and Asia. Asia probably have more design wins, and I think momentum is good there. On the PON side, PON is extremely strong at the moment. 10-gig PON particularly is very, very strong. I would say that's probably the strongest outside LoRa, the strongest growth area for us. And then data center is also doing extremely well. And, you know, in the pockets, of course, more so in the 200-gig area, PAM4 area is growing nicely. But yeah, I think across the board, we're very pleased with the infrastructure growth. And I think we anticipate that it's going to continue to grow, whether it's on the access side, which will help PON, whether it's on the kind of base station side as 5G deployments occur, or on the data center side. We would expect those three areas to continue over the next three to five years to get quite sizable investments around the world just for more bandwidth and we should see the benefit of that.

Mohan, I also had a question about Huawei. Are you able to sell to Huawei at this point? Are they a part of the revenues?

Yeah, each one is. Actually, Huawei is very little revenue for us at this point in time. I think, you know, each product we apply for a license, and it's hit and miss, actually. We don't really understand how the decisions are being made. But I would say most of the businesses at the moment are we're not shipping a lot into Huawei themselves. I think, yeah, that's probably the case, right? Maka, do you have a?

Got it. And for my last one, so Laura, you had records all around. I was wondering if you could address the U.S.-based activity with large customers. And, you know, if you feel like the U.S. revenues have started to kind of mobilize in a meaningful way, are we there at this point? Or you feel like you still have to wait for a little bit of momentum in the U.S. market from a revenue standpoint?

So, in the U.S., there's a lot of activity across the board, utilities, logistics, smart home is all going very well. I would say that we haven't yet seen the benefit, really, of the activity. And I anticipate that really it's probably going to be first half of next year, maybe when we start to see it. We're starting to see some this second half, I think. But I think the real pickup is going to be next year. So, yeah, I think it's still a lot of activity, a lot of good activity, lots of momentum. For sure you'll see and hear some announcements over the next quarter here of more things that are going on. But in terms of revenue, I think relatively small today.

Yeah, still small, huh?

Our next question comes from the line of Gary Mobley with Wells Fargo. You may proceed with your question.

Hey, guys. Let me extend my congratulations on strong results. I had just one multipart question for you guys, and that relates to supply chain constraints and the price increases we've all been hearing and reading about coming out of Taiwan. I presume, correct me if I'm wrong, but I presume that that isn't going to immediately pose a margin pressure for you given that you were able to grow your inventories and you're maintaining inventories above historical ranges. But when that day comes that you start to face these inflationary pressures from your supply chain, have you communicated to customers, you know, the possibility of raising prices? And can you maybe share with us what the feedback has been from those customers?

So Gary, yeah, that's a very good question. And I think, you know, I'd like to answer it by saying that so far this year, we've actually received price increases from some of our front-end partners and back-end partners. And I think for the most part, we have been successful in sharing that burden with our customers. With regards to some of the new announcements coming out of Taiwan, like you mentioned, it just came out. We don't expect that to impact our current quarter. But the expectation is that we are going to handle it the same way. We're going to try to share some of that, you know, with our customers. And hopefully we can see the same type of success that we saw before. But, of course, it has to play out.

Okay. And, Micah, for clarification, you said your days of inventory were 129 days. That was up three days sequentially. Is that right?

Yes.

All right, great. Thank you, guys.

Our next question comes from the line of Craig Ellis with B. Reilly Securities. You may proceed with your question.

Hey, guys. Thanks for including me, and nice job with the quarterly execution. Mohan, I wanted to start just by following up on part of the question that was recently asked, and it's about Laura. So, you know, it seems like... After some of the work that was done to get the LoRa pipeline in place in US and Europe, we had COVID and we're coming off of that with continued strong pipeline growth and we're entering a period of acceleration. And I think you mentioned that your expectation is that LoRa would grow above 41 or excuse me, above 40% this year. So above that long-term CAGR. The question is this, if we now have two big geographies, the US and Europe that are hitting their stride in uptake acceleration and given that with wireless technologies, you know, that part of the adoption curve can accelerate on a multi-year basis. What are the gives and takes before actually performing above the 40% CAGR when we look out to next year calendar 22-year fiscal 23?

Yeah, I think that's a good question, Craig, because, you know, if you go back to the past, certainly over the last five years, know i've always been saying that i expect them this business to double every year for a long time and obviously the last couple years it didn't it didn't grow that well um for pandemic reasons and you know the china related issues and whatever so i'm a little bit more cautious about how i project the growth but what i would say is that when you look at the market the lp wan market a lot of the um lp wan drivers are things like climate change, environment, efficiencies, utility management, you know, things like that, which, you know, around the world, you just see it every day that there's a need for it. And that's what's transpiring in my view is that it's going from being a nice-to-have to a real need. And that need, I think, is going to drive, you know, a faster adoption of some of the LPWAN technologies. And I think Laura is the best and the most capable And so that's what I think is going to drive the growth. In addition to that, you know, if we look at new segments like the smart home segments, you know, we talk about Sidewalk and Amazon, we don't even consider that to be LPWAN. We consider that to just be low-power wireless market. We're seeing that LoRa is starting to find its way into other low-power wireless segments. You know, I do think the growth can be greater, but I think we will stick with the 40% CAGR as our goal and, you know, make sure we execute on that, right?

Yeah, that makes a ton of sense. And then, Emeka, I just wanted to clarify that I was hearing you correctly in terms of how you were characterizing the impact of the various supply chain issues that are out there. And admittedly, I missed the prepared script part of the call, but I think what I gathered was that you are conveying that there is an impact to gross margin in the business, even though you do have some success in sharing some of the price increases that are starting upstream from you with your customers. But I thought I heard you say that there wasn't a revenue impact in either the quarter or the outlook. Is that correct? And if not, please set me straight. Thank you.

Okay. So what I was saying was that we have, actually had price increases so far this year, right? And that we have been able, for the most part, been able to pass that on to our customers. We've been able to share that burden with them. And so the answer that I was given was saying that, you know, as we go forward with some of the new news, very new news that is out there, especially out of Taiwan, that they are going to increase their wafer prices. You know, that our expectation will be that we should see the same kind of success that we saw in the past with regards to how we share that burden with our customers. Obviously, we have to see how it plays out, right? But we're very hopeful that that is something that should not significantly impact our gross margin expectations.

One of the things to remember, Craig, is that when you look at a lot of our growth, as Emeka pointed out, it's coming from new platforms that really are driving higher ASPs for us. You know, the 10-gig pawn is an example of that. The data center products, you know, the triage in 5G wireless, IoT, all the LoRa-related products, you know, and protection, broader protection products. So as we see these supply chain increases, you know, part of our goal is to make sure that we are pricing appropriately, right? So because we have new products coming out at the same time, I think that's – an opportunity for us to take advantage of that.

Yeah, certainly the strong new product cadence is something you can leverage in this environment. I appreciate the input, guys. Thank you very much and good luck.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Our next question comes from the line of Tor Svanberg with Stifel. You may proceed with your question.

Yes, thank you. I just had a follow-up on Laura and on one of the metrics. The one metric that really caught my attention was the gateways. It's gone up quite dramatically the last two quarters. Mohan, is that simply because Laura is becoming more and more of a consumer technology?

I would say it's a little bit of both, Tori. I would say that it's not so much consumer, but we are getting some smart home deployments. And, of course, if you think about echoes in the home or if you think about the helium gateways, which are really smart home type of initiatives. that drives a higher volume of gateways. But yeah, you're right. I mean, even for us, it's a surprise to see quite aggressive growth there. We had, as you mentioned, the target for the year was 2 million gateways, and we're already at 2.2 million gateways. So we've raised that to 2.9 million. But, you know, I mean, to me, The beauty about the gateway deployments is it really just drives the capacity to support billions of sensors, and that, to me, is the key. So if you have infrastructure out there, then it's just a question of time for the sensors and the use cases to catch up. There's a couple of bottlenecks still. I mean, software is a bottleneck, and I think sensors is a bottleneck in some cases. But as those bottlenecks get removed, then There's no reason to question the growth in the opportunity there.

Very helpful. Thank you.

At this time, there are no more questions. I'd like to pass the call back over to management for any closing remarks.

In closing, we are pleased with the strong first half results. as we saw increased adoption of our growth engines in the infrastructure, smarter planet, and mobility markets that should provide sustainable long-term growth. We have been successfully navigating the challenging supply chain environment and expanding on our sustainability efforts, including our commitment to human capital development. Given our diverse and growing product offering, balanced markets, and strong customer relationships, We expect to deliver a stronger second half and record financial performance in FY22. With that, we appreciate your continued support of STEMTech and look forward to updating you all next quarter. Thank you. Operator?

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

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