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.