Semtech Corporation

Greetings. Welcome to the Semtech Corporation Q3 FY22 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 this conference is being recorded. I will now turn the conference over to your host, VP of Investor Relations, Sandy Harrison. You may begin.

Great. Thank you, Kyle. And welcome to CEMTAC's conference call to discuss our third quarter fiscal year 2022 financial 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 included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. All the references made to financial results in Mohan's and Emeka's prepared remarks during this call will refer to non-GAAP financial measures unless otherwise noted. A discussion of why the management team considers such non-GAAP financial measures useful, along with a detailed reconciliation of the non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. I will turn the call over to CEMTAC's Chief Financial Officer, Emeka Chukwu.

Emeka? Thank you, Sandy. Good afternoon, everyone. As is our practice, I will focus my comments on our non-GAAP financial results, unless otherwise noted. In Q3 fiscal year 22, the company delivered a very strong financial performance that included achieving a number of new financial records. including net sales of $194.9 million that increased 5% sequentially and 27% year-over-year and was above the midpoint of our guidance. Continued momentum and record results by several of our key growth platforms contributed to the strong net sales performance. In Q3, shipments into Asia, North America, and Europe represented 78% 12% and 10% respectively. While this represented the ship-to addresses for our distributors and customers, we estimate that approximately 45% 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 12% of net sales, and distribution net sales represented approximately 88%. Our distributed POS represented another quarterly record, and the business remains balanced with approximately 41%, 32%, and 27% of the total POS coming from the infrastructure, industrial, and high-end consumer ed markets, respectively. In Q3, bookings increased 16% year over year, and those bookings accounted for approximately 3% of our Q3 shipments. Q3 gross margin increased 110 basis points to 63.8%, which represented the upper end of our guidance range and the new quarterly record led by a more favorable product mix. Going forward, we expect our gross margin to continue to benefit from the richer mix of sales from our key growth platforms that include lower enabled our 10-gig PON, our triage PAN4 CDLs, and our broad-based industrial protection products. For Q4, we expect gross margin to continue to expand as we anticipate a more favorable mix due to a seasonally lower high-end consumer net sales. For planning and modeling purposes, we expect our gross margin to remain at current levels with an upward bias over the next several quarters. reflecting the benefit from the growth of our circular growth platforms. In Q3, operating expense increased 2% to $67.5 million, driven by higher new product development expenses. For Q4, we expect our operating expense to be in line to slightly above current levels. Looking ahead to fiscal year 23, we expect our operating expense to begin to trend back toward our target model of half the rate of net sales growth. In Q3, operating profit increased 14% sequentially, or nearly three times that of net sales, and increased 51% on a year-over-year basis, led by the higher gross margin, and represented a record operating profit. Operating margin expanded by 210 business points sequentially to 29.2%, and represented solid progress towards a 32% to 36% long-term target model. As expected, we are seeing the strong operating leverage expected from the success of our growth platforms. In Q3, cash flow from operations was a record $66.5 million, up 26% sequentially and represented 34% of net sales as a result of the record operating profit and good management of working capital. While free cash flow increased 33% sequentially to 31% of net sales. Free cash flow generation in fiscal year 2022 has been strong, despite the strategic actions to maintain higher levels of inventory. And we expect to end the year around the low end of our long-term free cash flow target of 25% to 30% of net sales, which will be a significant expansion from the prior year. In Q3, we repurchased approximately $30 million or 0.6% of our outstanding stock, resulting in $292 million remaining in our outstanding authorization. And we expect to continue to use our cash to opportunistically report to us our shares, make strategic investments, and pay down the debt. Q3 accounts receivable increased 2% sequentially to $74 million, while days of sales was flat with the prior quarter at 34 days and remains below our target range of 40 to 45 days. In Q3, net inventory in absolute dollar terms increased 2% sequentially And days of inventory increased four days sequentially to 133 days. We expect lead 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, the success of our growth engines are FLORA-enabled, our tri-edge PAMP4, 10-gig PON, 5G wireless and broad-based protection platforms. enabled us to deliver a record net sales, record gross margin, record operating profit, record earnings per share, and record cash flow in Q3. We expect a sustainable long-term growth from these key growth engines and the underlying circular drivers to continue to drive record financial performance for fiscal year 22 and provide a strong momentum as we move into fiscal year 23. I will now hand the call over to Moha.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year 22 performance by end market and by product group, and then provide our outlook for Q4 of fiscal year 22. In Q3, net revenue of $194.9 million grew 5% sequentially and 27% annually, and represented a new quarterly record. Higher demand from the industrial and high-end consumer markets contributed to Q3 growth. We posted record non-GAAP gross margin of 63.8 percent and record non-GAAP earnings per diluted share of 74 cents. In Q3, net revenue from the industrial end market increased 17 percent sequentially, led by record results from both our LoRa business and our broad-based protection business. and represented 35 percent of total net revenues. The infrastructure market decreased 1 percent sequentially as record pond revenues and stronger base station revenues were offset by lower data center revenues and represented 34 percent of total net revenues. The high-end consumer market increased 2 percent sequentially and represented 31 percent of total revenues with approximately 20 percent attributable to mobile devices and approximately 11 percent attributable to other consumer systems. I will now discuss the performance of each of our product groups. In Q3 of fiscal year 22, our signal integrity product group increased 3 percent sequentially and achieved a new revenue record led by growth from the PON and base station infrastructure markets. and represented 39% of total revenues. In Q3, revenue from our data center customers softened over the prior strong quarter. Our tri-edge PAM4 short reach platforms continue to gain solid design wind traction with key hyperscale customers. We expect this momentum to accelerate into FY23 as the power and cost benefits of tri-edge become realized across shorter reach links in the data center market. The excellent performance of our short-reach tri-edge platforms has also led to increasing interest in our longer-reach tri-edge PAM4 platforms, planned for release over the next several quarters. In FY22, we expect our data center PAM4 revenues to end in the high teens and increase over 100% in FY23. As new tri-edge products are released to production, We believe our complete portfolio of tri-edge PAM4 devices will enable very strong revenue growth over the next few years in 100 gig, 200 gig, and 400 gig PAM4 optical modules in the hyperscale data center market. In Q3 of FY22, revenue from the PON market achieved another record performance, led by record 10 gig PON revenues. as we continue to benefit from the most comprehensive PON PMD portfolio available in the market today. We expect our PON business, led by our 10 gig PON solutions, to continue to grow as global service providers accelerate their deployments of higher bandwidth access networks. In Q3 of FY22, demand from our wireless base station customers increased over the prior quarter. Several 5G China tenders have been announced and carriers in North America and Europe are expected to begin 5G infrastructure build-outs over the next 12 to 18 months. We are expecting demand for our 5G platforms to accelerate in FY23 due to a significant design in momentum for our 25G ClearEdge family. In addition, Our industry-leading 50 gigabit per second PAM4 tri-edge platform targeted at 50 gigabit per second front-haul modules is now being sampled for next-generation 5G wireless networks and receiving very positive feedback. The secular themes driving the global demand for greater bandwidth are expected to remain strong, and we believe our strong position in our key infrastructure markets will provide the sustainable tailwinds needed to drive double digit growth for our signal integrity product group over the next several years. In Q4 of fiscal year 22, we expect revenue from our signal integrity product group to increase and achieve another record driven by growth from the data center market. Moving on to our protection product group. In Q3 of fiscal year 22, net revenues from our protection product group increased 14% sequentially, and 36% year over year, and represented 29% of total revenues. In Q3, revenue from our consumer protection platforms increased sequentially, as expected, driven by North American and Asian consumer demand. While consumer demand remains strong, many of our customers are supply chain limited, which is impacting their ability to build complete systems. We anticipate that this constraint will remain for at least two more quarters. In Q3, demand for our protection devices used by the broad-based industrial markets grew 31% sequentially and 71% annually and achieved a new quarterly revenue record led by growth from our automotive, communications, and broad-based industrial customers. Our protection platforms deliver superior protection for systems using leading process geometry devices. We expect the secular trend to continue and contribute to the increased adoption of Semtex protection platforms across all technology sectors and help deliver double-digit growth with increasing gross margins over the next several years. In Q4 of fiscal year 22, we expect our protection revenues to decrease sequentially due to typical seasonality. Turning to our wireless and sensing product group. In Q3, revenues from our wireless and sensing product group grew 1% sequentially and 23% over the prior year and achieved another quarterly record and represented 32% of total revenues. In Q3, our LoRa-enabled platforms delivered another record performance, led by growth from the smart utility, smart building, industrial IoT, and smart agriculture segments. We are also seeing the early ramp of the smart home, smart neighborhood, and smart campus segments, which are driving further growth for our LoRa business, as we had anticipated. As a result of this continued positive momentum, We now expect our LoRa-enabled revenue in FY22 to exceed our 40% CAGR target. Our vision for LoRa is to see it deployed everywhere where low-powered sensors are needed, which we believe will result in a positive impact on managing or mitigating the impact of climate change. In Q3, we announced an initiative and goal to connect 1 billion LoRa-enabled sensors by 2026 that have a positive impact on climate change. We continue to see many use cases globally that will contribute to this goal. Some examples of these new use cases include a collaboration with Cloud Energy, a leading IoT solution provider in Asia, to develop and deploy LoRaWAN networks for rooftop wireless solar power systems. Riordan Corporation, a LoRa solution and network provider, announced a new zero-carbon solution featuring a Renesas microcontroller and our LoRa Edge platform to connect a battery-less sensor directly to the LoRa cloud, enabling geolocation capabilities for the tracking of personal valuables, logistics assets, animals, and healthcare assets. And IQ Nexus, an end-to-end IoT solutions and integration provider for building automation incorporated LoRa into its indoor air quality and environmental quality sensors, which reduce carbon dioxide emissions. These are just a few examples of the numerous LoRa use cases emerging to combat climate change. In Q3, Microsoft announced it has joined the LoRa Alliance and has accepted a seat on the LoRa Alliance board. Microsoft Azure is widely considered a Tier 1 enterprise cloud partner for many IoT deployments, and we expect their participation, along with other top-tier cloud providers like AWS, to further strengthen LoRa's presence in the LPWAN market. In Q3, our LoRa business metrics continued to make solid progress against our FY22 targets. The number of global LoRaWAN network operators grew to 163, and we are expecting 165 LoRaWAN network operators by the end of FY22. The cumulative number of LoRa end nodes deployed increased to 225 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 2.7 million and has already exceeded the goal we set for the full year. We now expect to have 3 million gateways deployed by the end of FY22. The LoRa opportunity pipeline increased to over $900 million and has also exceeded our FY22 year-end target. We are increasing our pipeline target for FY22 to $950 million. We anticipate that approximately 40% of the opportunities currently in the pipeline will convert to deployments on average over a 24-month timeline. We believe the momentum of our metrics, along with the increasing influence of the LoRa Alliance and its members, will help enable LoRa to become the de facto standard for the fast-growing LPWAN market. In Q3, demand for our proximity sensing platforms softened following last quarter's record revenues. Our sensing platforms provide the industry's most advanced and highly integrated SAR sensing technology for mobile and wearable devices. The increasing adoption of 5G phones and use of high-powered cellular and Wi-Fi radios is expected to result in more stringent RF power regulations globally. This trend is expected to contribute to increased demand for our proximity sensing platforms over the next few years, as we anticipate that several countries in Asia will enforce strict to SAR regulations over the next two years. For Q4 of fiscal year 22, we expect net revenues from our wireless and sensing product group to decrease as record results expected from our lower business are expected to be offset by seasonally lower consumer revenue. Moving on to new products and design wins. In Q3, we released 23 new products and achieved a record number of new design wins. of 3,792. Now let me discuss our outlook for the fourth quarter of FY22. We entered Q4 with record backlog and are currently estimating Q4 net revenues to be between $184 million and $194 million. To attain the midpoint of our guidance range, or approximately $189 million, we needed net terms orders of approximately 3% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between 65 and 73 cents per diluted share. I will now hand the call back to the operator, and Sandy and Mecca and I will be happy to answer any questions. Operator?

At this time, we will be conducting a question and answer session. If you'd 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'd 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 is from Tor Svanberg with Stifel. Please proceed with your question.

Yes, thank you, and congratulations on the record results. First question is on your comment about data center and specifically PAMF4. I believe you said PAMF4 will double next year. Could you maybe talk to some of the specific deployments there, Mohan? And it also sounds like sequentially that's going to drive the signal integrity business. So, again, I assume that's the beginning of some new deployments that you're benefiting from there.

Yeah, that's right, Tori. We've got quite a few things going on in the data center business, but specifically in the PAM4 area. For us, the only products we have out at the moment are the short-reach products that go into optical modules for mostly 200 gig, 4x50, and some 400 gig applications. We have, as I mentioned, a new series of products that are planning to come out over the next few quarters for longer reach. And I think when we have that broader portfolio, we're going to see even more momentum there. But the momentum on short reach alone is going to drive very, very significant growth for us next year. As I said, 100% growth and then beyond that for sure. So very excited about the opportunity there. And not only Tri-Edge PAM4 for our data center business, but also our 50 gigabit per second PAM4 Tri-Edge platform for base station optical modules is also getting extremely good feedback from the marketplace. So we're very optimistic about that also.

Very good. And as a follow-up, your pond business has been on a tier. It's been one of your stronger businesses on a year-over-year basis. Is there anything that you can share with us to give us conviction that, you know, there's still upgrade cycles happening there to sustain this momentum in 10-gig ponds?

Yes, for sure. I mean, PON in general, first of all, globally, I think one of the nice things about PON is it's become a lot more of a global technology. For a while, it was very much China that was driving the business and the deployments. But what we've seen, and while we've seen China tenders continue and driving good deployments, we're also starting to see North America and Europe now starting to drive tenders out there, and that's going to drive further growth. And we're definitely seeing that kind of globalization across many different OEMs now building pond platforms. So pretty excited by it. I think, obviously, access bandwidth is critical. You can have all the bandwidth you want coming to the access point, but if you have a bottleneck there, then that defeats the whole purpose. 10-gig pond is, you know, definitely seeing good growth and will continue to. And I think, you know, we're likely to see higher bandwidth pond developments over the next few years. So very encouraged by the growth in pond.

Just one last question on Laura. So, you know, it sounds like this smart home, smart neighborhood is starting to ramp. Is that primarily in North America or are you seeing that ramp in other regions as well?

We're seeing it ramped across the board, I would say. The majority of the strength is in North America. I would say that it's a number of different players. You know, obviously the Amazon Sidewalk initiative is yet to come. So that's still, I think, something that probably second half of next year we're going to see that ramp. But definitely we're seeing a whole bunch of other initiatives, including the helium rollout, You know, we've seen kind of this emergence of these campus networks now. One of the things that's really transpired and really exciting for us is that LoRa, which is predominantly a range-driven technology, a long-range-driven technology, but we're seeing in that kind of half a mile to five-mile range, LoRa really starting to to get adopted as well, which is pretty exciting because it opens up a whole bunch of use cases that makes the market essentially, the LPWAN market, become much bigger and I think will grow faster.

Thank you for that, Mohan, and congratulations again.

Thank you. Our next question is from Tristan Guerra with Robert W. Baird. Please proceed with your question.

Hi, good afternoon. You've talked about both PON and data center increasing sequentially. And I know you've mentioned, you just mentioned that PON is now diversifying away from China. So it looks like you're still weathering the China slowdown better than the way some other companies have characterized it recently. Could you talk about what you're seeing there in that geography and whether if indeed you're seeing a slowdown, it would have meant a higher outlook for this quarter at the top line?

Yeah, I think, Tristan, it's very segment dependent on which segment you're focused on. We've definitely seen, you know, slowing down in China, smartphones, for example, in the consumer business in general. I would say infrastructure is quite healthy still. I would say IoT is still quite healthy. So, you know, it really does depend on which segment. And I think that's, you know, we're seeing that across the board. And that's the beauty of being a balanced business like we are and having diversification and having end market diversification, but also geographical diversification. diversification is that when one area is doing weaker, other areas are strong. And so just having the diversification helps that. But to answer your question, I think it really is segment specific. And we've seen more weakness in the China consumer business than we have in other areas.

Great. And then could you talk about your expectation about pricing contributing to your top line over the next few quarters? You were mentioning earlier this year about your expectation for price increases in the second half, which also could benefit gross margin. And as those price increases perhaps continuing and with the ones that you've already done, is that going to contribute next year to the growth in addition to whatever you're going to see in units?

Possibly, Tristan, but I think most of our price increases have been really driven by increases in our supply chain costs. So we have focused very much on when we've had an increase in wafer costs or specifically costs for a specific product, whether it be FAB or assembly test related, you know, trying to pass that on to our customer base. So, and that is definitely, you know, helping us offset some of those supply chain cost increases by providing ASP increases. I don't think that we will necessarily continue to do that unless we are seeing more supply chain action. which is possible because, you know, supply chain cycle times are extremely long. When you have long cycle times like that, typically one of the things that does, that drives is higher pricing generally. So at least until all the capex and all the investments are in place and, you know, that typically takes several years. So it's possible we see it, but we're not counting on that.

Great. Thank you very much.

Our next question is from Harsh Kumar with Piper Sandler. Please proceed with your question.

Yeah. Hey, guys. First of all, congratulations. Very solid results. Mohan, I had two for you. You mentioned there was softness in the data center business last quarter that you just reported, and that you expect things to improve. I was curious, in your opinion, what might have caused that softness? And then also, what are you seeing that gives you the confidence that things are improving in the data center? Then I had to follow up.

So I think it's, from our standpoint, Harsh, a lot of the shift in what's going on in the market, so 100 gig optical modules, and maybe there's some excess inventory out there of products. But the newer PAM4 deployments where they have no inventory, I think we're starting to see those ramp up quite fast. And we have pretty much those design wins in the bag. And so it's really design driven. So I think we are fairly comfortable about where Q4 is and also next year for our data center business. It does tend to be lumpy. All the infrastructure businesses are a little bit lumpy. You'll get a quarter or two of deployments or CapEx spending and then You know, there'll be some management of inventory, and then you'll see it come back again. But for sure, at least for, you know, 100 gig PAM-4, 200 gig, 400 gig, and then 5G base stations, and for 10 gig PON, it's going to be up and to the right. There's no question that those deployments are going to continue to grow year on year. It's just a question of, you know, timing, right?

Hey, understood, Mohan. Thank you. And then I had a question on PON. I seem to recall in one of your presentations that the 10 gig pond, you guys are playing on both sides of the wire, whereas for one gig pond and two and a half, you were just on one side of the wire. So I'm curious if that is an accurate assessment, which would imply, if that's correct, that your content went up quite a bit. And then as a side question to that is, I was curious if you would be willing to give us how much pond is as a percentage of revenue.

So everything you said is accurate, Prakash. 10 gig PON, we are playing on both the central office end and the ONU end, the OLT end and the ONU side. And obviously, the ASPs are higher on the OLT side. So that's good. It also is, if you sell a broad chipset like that, the complete chipset, it gives you a very strong position with your customers. And so that's also a very good thing, I think. And so strategically, we're very comfortable with where we are. We've got to percentage that. Sandy, I don't know if you have that or if we can provide that. Let me see.

Yeah, so Harsh, the bond's typically been somewhere in sort of the low to mid teens. It's probably running at the upper end of that this year, year to date.

That's good enough for me. I'll get back in line. Congrats, guys. Thank you.

Thanks. Our next question is from Craig Ellis with B Reilly Securities. Please proceed with your question.

Yeah, thanks for taking the questions and congratulations on the very strong quarter and outlook. Mohan, I wanted to start just by getting some further color on what you're seeing with order activity and backlog growth. Backlog is clearly very strong with just about 3% turns coverage needed to meet guidance. So, what are you seeing there and are there particular areas of the business where you're seeing more significant order intake and backlog expansion?

Yeah, orders continue to be very strong. Backlog is obviously very healthy, given the, you know, what we've just mentioned on turns there. So everything is looking quite good there. I would say, you know, there are pockets of extremely very good strength, and PON is clearly one of those. Laura, obviously, is another area. You know, our protection ITA business, which is very broad, very, very strong. So there are some nice pockets. Areas of weakness, I mentioned China, smartphone consumer, not totally unexpected coming towards the end of the year. And, you know, it's kind of been a funky couple of years here. So some of the typical seasonality, you know, that's what we expect to see. So there's not totally unusual. But I would say, Craig, that at the moment, everything is still very, very strong.

That's real helpful. And then I wanted to go from there and just talk a little bit about the industrial activity inside of protection. So great to see the 31% sequential growth. And I was wondering if you could point out some of the things within that very broad end market that are seeing particular strength and how sustainable do you think that strength is as we look out into the first half of calendar 22 and and what do you think is driving that shrink?

Yeah, so I do think it's sustainable. You know, Q4 we'd expect to be a little bit soft, but I think as Q1, so in the first half of next year, I'd expect it to be strong again. It's in multiple segments, so it's communications, it's automotive, it's broad-based, you know, interfaces, USB-C, HDMI, so it's a very broad set of interfaces being protected as well as different segments. Automotive, particularly, I think is strong, and communications there is quite strong. Now, if you think about what's, you know, the kind of sustainability of it, this is really the mass market. It's not 10 customers, it's thousands of customers, and so what we're really seeing is the broad market now starting to use advanced lithography processors and controllers and And as they're starting to use those advanced lithography devices, I think it really kind of fits our strategy and the adoption of our protection into those segments very well. And so that's really what's driving it, Greg, the adoption of these leading-edge geometries and the need for our kind of high-end protection, which What we've been saying for a while, but, you know, we have obviously in the consumer segment we've proven that capability, but, you know, we've been waiting in a sense for the broader market to kind of come to us, and now I think it's coming.

Yeah, nice to see the market coming to you, especially one that has real nice margin characteristics. Don't want to ignore Ameca. Ameca, great to see the real strong gross margin. I just wanted to see if there was any further color you could provide. on some of the particular pluses in the quarter since we were at the very high end of guidance and at least 50 basis points above what I was expecting.

So thank you, Craig, and it's okay. I do not feel ignored at all. Our gross margin story has definitely been a highlight for us. And it's actually very pleasing to see these numbers playing out, given the expectations that we've had for a while. If you recall in the past, we've talked about the growth drivers, right, of Lora Enable, the Tengit Pond, the PAM4 CDLs, the broad-based protection devices. We've talked about all of that coming with much higher growth margins than the corporate average. So it's nice to see that playing out. And that's essentially the story, right? Our gross margin expansion story is pretty simple. It is just that of mix.

That's great. Thanks, guys. Appreciate it.

Our next question is from Christopher Roland with Susquehanna. Please proceed with your question.

Thanks, guys. I guess my questions are mostly around Laura. So I guess for Laura, in terms of like an innovation treadmill, what kind of improvements do you think we might be able to see with Laura? And then, you know, with Helium, for example, it's so backlogged right now. It seems like you guys would have a ton of pricing power, particularly for gateway chips. You know, maybe talk about your pricing power for those chips today. And remind me what the average ASP per base station is as well. Thank you.

Let me start with that, Chris. I think it varies, but I think for the lower end base stations, the kind of home base stations, we're talking between $5 and $30, depending on, you know, which version and things like that. And you're right, the pricing power is definitely with us, but remember, Our strategy is to deploy gateways everywhere in the world and get, you know, we want Helium's distributed wireless network to be very successful and to be essentially, you know, connectivity to be out there in every country in the world, in every neighborhood in the world, and more connectivity to be, you know, just not an issue for use cases. And that's always been the goal that we've had. That's why I comment on the number of gateways out there and the number of sensors that can be deployed. Because the real goal for us is to get sensors deployed and connected to those gateways. That can't happen if you don't have gateways. And so now the beauty about the Helium kind of decentralized network is it kind of allows really viral connectivity, if you like, to the network. And so we're very excited by it. I think if I look at all the other networks around the world today, they're now starting to get really utilized the way we had envisioned them being utilized. We've got roaming agreements. We've got companies using networks for private enterprise. We've got also public network stuff going on. It just really is starting to play out the way we had anticipated, so very excited by it. Yeah, clearly the helium network is momentum is very, very positive.

Yeah, I have been super impressed, Mohan. And I agree with the viral statement around helium. I have one minor. I love it. I have an order for three more out there. And that kind of brings up my second question here. And that is, in terms of LORA gateways, I guess entering the year, if my numbers are right, I think you had maybe 1.3 million gateways, and you're adding, that's in your entire existence, and now you're adding 1.7 this year, just massive growth on the gateway side. So I guess my question is, how confident are you into the visibility between what is actually helium and what are in these campus programs or neighborhood programs or industrial programs how confident are you that these aren't helium orders like for example the three that I have on backorder for example you know are you sure that if the helium network growth were to slow down that it really wouldn't affect, you know, the growth for Laura like we've been seeing?

Well, and, you know, I kind of answered that question, Chris, because our focus is on the sensor connectivity. You know, we just started an initiative, for example, to get a billion sensors connected to combat climate change as an example of that, you know, and the sensor connectivity can be, you know, obviously the macro gateways, which are the bigger gateways that sit out on a tower can connect to many more sensors and have much more range. And so I think it's more, for us, use case driven. We do have fairly good visibility into where the gateways are going and what they're doing. But frankly, I think it doesn't matter that much. I think it's more a question of, are there use cases? And are the use cases really starting to be utilized in a way that demonstrates the value of LoRa? Sidewalk is a good example of that. And Sidewalk, you know, obviously we're anticipating at some point here next year, you know, Amazon will start to roll it out and we'll start to get sensors connected to it. And then there'll be, you know, new use cases emerge. Because the beauty about LoRa and the world of LoRaWAN here and the LPWAN market that's going on is a lot of the use cases are just beginning. I mean, really just beginning. And people are starting to see, oh, I can use LoRa for this and I can use it for satellite connectivity, or I can use it for agriculture, or I can use it for smart home deployments, or I can use it for, you know, geolocation and tracking an asset. You know, and this type of kind of, as I said, viral use case offers the opportunity to really expand the market quickly and to make it very, very large, which is obviously our intent, right?

Yep. Well, great growth, and thank you, Mohan. Thank you.

Our next question is from Carl Ackerman with Cowen. Please proceed with your question.

Yes, two questions, please. Thank you, gentlemen. The first one is piggybacking on Laura. You know, it's great to see that Laura is now integrated into AWS and Azure, but is the go-to-market still predominantly driven by your own sales force? I'm curious, how do you see the go-to-market changing, if at all, now that you do have broader ecosystem support from the larger hyperscalers?

Yeah, I think, Carl, you know, our Salesforce obviously has a critical role to play in the adoption of LoRa and the marketing of LoRa and the communication of how LoRa is succeeding in the market. But we have a LoRa Alliance. So the Alliance has got, as I mentioned before, 400 to 500 members, including Microsoft and AWS and Cisco and IBM and many, many companies out there at all levels of the value chain. So you've got sensor companies, chip companies, gateway companies, software companies, system integrators. And so LoRa is just simply a technology. It's just a technology platform here. But the use cases typically require several members of the ecosystem to participate and get together and figure out an end-to-end solution. And so I think it's really the power of the alliance and the kind of pervasive nature of what's happening with Laura now that's driving the momentum. I don't know that it's, you know, if we added a sales guy or 10 salespeople, that that would necessarily, you know, have a, a massive additional benefit. I think it's more about getting the right system integrators in, getting the right use cases so people can look at the use case and say, hey, that's interesting. I want to do that. Getting the right sensor technologies out there, software, making sure there's no bottlenecks in the software. I always talk about bottlenecks in the ecosystem, and those bottlenecks have moved. It used to be sensors and it used to be hardware related now it's more software related and so the addition of Microsoft Azure and AWS really really does add a tremendous value because many companies would have struggled to build a back-end software platform for their use case but having the ability to go to Microsoft or to go to AWS and and partner with them to get that access I think really you know changes the time to market aspect of it

Yep, understood. That's helpful. My follow-up is more of a clarification. If HAM4 is high teens as a percent of sales this year, does that mean NRZ is equally as large this year? And is there a notable margin difference between the CDRs and optional ICs supporting each technology? Thank you.

Yeah, NRZ is larger. obviously it's been you know around for a while and I think that's the key point that to make is that you know when you look at Pam for it's at least for us it's fairly new platform you know try edges just really been released to production the short reach use cases and so we've got good design win momentum and really the point being that you know as we see get the momentum the growth in that business is fairly significant. And so we're expecting PAM-4, 200-gig PAM-4, 400-gig PAM-4 deployments next year to accelerate quite nicely.

Thank you.

Our next question is from Quinn Bolton with Needham & Co. Please proceed with your question.

Hey, guys. Congratulations on the nice results. Maybe just a quick follow-up on that last question on the PM4. One, did you say high teens in terms of absolute millions of dollars, or is it a high teen percentage of revenues? Maybe I missed it. And then is that only triage, or does it also include the FiberEdge PMDs? And then I've got a couple of follow-ups.

Yes, high teens in terms of millions of dollars, and that does include FiberEdge, but I would say the majority of the growth is coming from triage.

Got it. Thank you. And then, you know, looking to just the overall supply chain, I know you mentioned some of your business is constrained, especially on the consumer side, by component availability of other manufacturers. Just wondering if you're seeing any supply constraints in your own, you know, perhaps more back-end than front-end supply chain. But I know a number of analog companies through the fall had experienced, you know, shutdowns or COVID-related effects out of Southeast Asia. Wondering if that had any impact on your business this quarter?

Not really. I would say that it's kind of been pretty consistent for us over the last couple of quarters. Same type of issues. Obviously, some fabs are full and their cycle times are quite long. I would say in general, across the whole supply chain, cycle times have doubled over the last, you know, year or so. So we've gone from, you know, an average of 20 weeks to maybe 40 weeks cycle time. So that's significant, you know. And so that's across the board and that's an average. There are pockets where, you know, it's longer than that and there are pockets where it's not such a big problem. But I would say in general, you know, supply chain is still a major challenge. But we're okay. You know, obviously we built inventory. We planned on building inventory. We are using that inventory to continuously make sure our customers are, you know, the manufacturing lines are running and we're not the bottleneck. We do know, as I mentioned in my prepared remarks, that some of our customers are struggling to get all of the components to build a complete system. And so that's, you know, that has an impact on kind of a short-term demand impact, but I think in the medium term that will clear up.

Got it. My last question, Mohan, just any update on the

laura microservices uh part of the business yeah so the cloud services uh uh is going well i think uh you know obviously laurage is the platform there and uh you know bringing on board microsoft azure and now aws i think we have partners that we can work with very closely and our customers and we've started to now um you know look at what elements of the cloud service geolocation performance needs to be changed, you know, to make sure, you know, we have an end-to-end solution. But I think at the moment, you know, no real significant breakthroughs there, but I would say good momentum, and I think you're going to hear a lot more about that next year.

Great. Thank you.

Our next question is from Rick Schaefer with Oppenheimer. Please proceed with your question.

Hey, thanks, and I'll add my congratulations, guys. A lot of good questions already, but just if I could sneak one more in on Laura. I was hoping you could give a sense, maybe you've expected Laura linearity next year. I mean, it doesn't seem like seasonality is really relevant at this point for Laura. So if you kind of look at this, the run rate you're on now, it seems like 40% growth sort of makes sense, right, you know, next year or so. Just curious if you could comment on that and give a sense, you know, maybe what type of backlog or just general visibility you have on that business today.

Yeah, I think it's pretty good, Rick, I would say, for the first half. But a lot depends on the funnel and how quickly that funnel moves to deployments. Obviously, it's grown now to a large size, the funnel, and You know, we're anticipating some of those going to full deployments. But the momentum is very good, and I think everything we had anticipated in terms of, you know, design ends and design wins from the funnel, and I think in general the number of use cases that are emerging and starting to get deployed without our help I think is very encouraging. So, you know, I think the 40% for next year is looking pretty good as well.

Thanks for that one. And then just a quick follow up on gross margin. I mean, obviously, looks looks fantastic. It seems like mid 60s is sort of the new baseline. And I'm just curious there, you know, as we look forward to not that far out, I mean, looking at the kind of growth you guys are putting up, you know, you're not that far out from your billion dollar top line, you know, run rate kind of goal. So I'm curious sort of where you think or where you see gross margin once we're at that billion-run rate. And then just a quick clarification on next year. I know you talked about ASP, but I'm curious, do you see that as a tailwind for gross margin next year?

So, Rick, this is Emeka. So the gross margin, like I said before, and in my prepared remarks, is mostly being driven by the mix of revenue. As we're seeing a higher revenue contribution from our growth platforms, that is helping us to drive our gross margin expansion. You know, we are definitely looking at where we have our target range for gross margin at a billion dollars of revenue. You know, it is going to be driven by how that revenue is coming in. But in terms of mid-60s and stuff like that, that is a possibility, but we just have to We just have to wait before we start setting those expectations. We have to wait and see what's going on with the current supply chain environment, right? You know, there is, if we continue to see price increases from the supply chain, there is so much that our customers will be able to absorb. So that is something that we're keeping an eye on. But, you know, I share your sentiments that as we continue to see revenue contributions growing from the new product platforms that we've talked about that we should continue to see gross margins headed into the mid-60s and maybe beyond. But we're not going to sign up for those at this point.

I understand that. Thanks, Emeka. Thanks, Bob.

As a reminder, if you'd 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'd like to remove your question from the queue. Our next question is from Harsh Kumar with Piper Sandler. Please proceed with your question.

Yeah, Mohan, I had an interesting one, not specific to your company, but just more so in the industry. A lot of companies that have reported numbers, results, you know, in the last three to six months have basically buck seasonality. There's been, just because the demand's been so high, that it's kind of like up to the right. I noticed that you guys are guiding seasonal, particularly it seems like from consumer and a couple of other small things, but I'm curious if we are back to a demand supply situation where seasonality is coming into play, or is it just, do you think something specific to some of your businesses that you have?

Well, the seasonality is tied to consumer, as you noticed, Harsh, and I think that it's not a surprise Some of that, as I mentioned, I think, in my prepared remarks is our customers not being able to get all the parts they need, I think. So, there's a little bit of that playing into it. But I do think there's going to be some seasonality here. You're right, though. I mean, the demand environment is very strong. People are constrained. And so to some extent, you can play that game. We typically are shipping to consumption. That's what we're trying to do. We're not trying to do anything more than that. And we keep a very close eye on POS. And so that's kind of our thinking. If the channel is shipping into customers and demand continues to be strong, then Q1 will be very strong.

Appreciate it, Mohan. Thank you.

We have reached the end of the question and answer session, and I will now turn the call over to CEO and President Mohan Maswaran for closing remarks.

In closing, we were pleased to deliver a record performance in Q3 that included record net revenues, record gross margins, record operating income, record earnings per share, and record operating cash flow. The secular demand trends driving our growth engines in the infrastructure, smarter planet, and mobility markets remain strong and are expected to provide sustainable long-term growth. We expect our diverse and growing product offering and balanced end markets to drive a record financial performance in FY22 and provide strong momentum going into FY23. With that, we appreciate your continued support of CENTEC and look forward to updating you all next quarter. Thank you.

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