Semtech Corporation

Greetings. Welcome to SEMTECH Corporation conference call to discuss the fourth quarter and fiscal year 2022 financial results. Speakers for today's call will be Mohan Maheswaran, SEMTECH's President and Chief Executive Officer, and Emeka Chukwu, SEMTECH's Executive Vice President and Chief Financial Officer. Please note this conference is being recorded. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. I will now turn the call over to CEMTAC's Executive Vice President and Chief Financial Officer, Emeka Chukwu.

Emeka Chukwu Thank you, Alex. The 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 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 Seth Harbaugh 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 calls are current as of today only, and CENTAC undertakes no obligation to update the information from this call should facts or circumstances change. All references made to financial results in my prepared remarks and Mohan's prepared remarks during this call were referred 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. In Q4 fiscal 22, the company delivered net sales of $190.6 million. a decrease of 2% sequentially, and an increase of 16% year-over-year, and was once again above the midpoint of our guidance. Fiscal 22 revenues grew 24% to a record $740.9 million, while ETS grew 49% to a record $2.61, or more than two times the rate of net revenues growth. The strength of the secular drivers behind our growth engines contributed to the strong net sales performance, despite the challenges presented by COVID and supply constraints. In Q4, shipments into Asia, North America, and Europe represented 78%, 13%, and 9% respectively. While this represents the ship to addresses for our distributors and customers, we estimate that approximately 33% of our shipments are consumed in China, 29% in the Americas, 19% in Europe, and the balance over the rest of the world. Total direct sales represented approximately 11% of net sales, and distribution net sales represented approximately 89%. Our distributor POS represented another quarterly record, and the business remains balanced with approximately 42%, 32%, and 26% of the total POS coming from the infrastructure, industrial, and high-end consumer end markets, respectively. In Q4 of fiscal 22, net revenues from the high-end consumer market decreased 22% sequentially and 6% over the prior year, and represented 25% of total revenues. Approximately 13% of high-end consumer net revenues was attributable to mobile devices, and approximately 12% was attributable to other consumer systems. Net revenue from the industrial end market increased 10 percent sequentially and 38 percent over the prior year and represented 39 percent of total net revenues. Finally, the infrastructure end market increased 3 percent sequentially and 14 percent over the prior year and represented 36 percent of total revenues. Q4 bookings increased 35 percent sequentially And those bookings accounted for approximately 3 percent of our Q4 shipments. Q4 growth margin increased 70 basis points sequentially to 64.5 percent, which represented the upper end of our guidance range and the new quarterly record, driven by a higher mix of our growth drivers that include lower enabled 10 gig pound tri-edge PAM-4 CDLs, 5G wireless, and broad-based industrial protection products. For Q1, we expect growth margin to continue to expand, reflecting the benefits of continued strength of our growth engines. In fiscal 23, we expect our growth margins to trend higher by 100 to 200 basis points from a favorable richer mix of our growth platforms. Q4 operating expense increased slightly to $68.7 million, driven by higher new product development expenses. For Q1, we expect our operating expense to increase by 4% due to higher compensation expenses, which is typical at the start of the new calendar year. Looking ahead to fiscal 23, we expect our operating expense to trend back towards our target model of half the rate of revenue growth. In fiscal 22, operating profit grew 45%, approximately two times the rate of revenue growth, led by the higher gross margin, and represented a record operating profit. Operating margin expanded approximately 400 business points to 27.4%, and represented a solid progress towards 32% to 36%. percent long-term target model. As expected, we are seeing the strong operating leverage expected from the success of our growth platforms. Our fiscal 23 non-GAAP normalized tax rate is 12 percent, slightly lower than the 13 percent in fiscal 22 due to a more favorable mix of regional income. In fiscal 22, Cash flow from operations was a record $203 million, up 71% from fiscal 21 and was 27.4% of net sales, which represented a 740 basis points expansion from fiscal 21. This is the record of record operating profit and good management of working capital. Correspondingly, The free cash flow increased 105% to 24% of net sales. Around the low end of our long-term free cash flow target of 25% to 30% of net sales. Cash flow generation in fiscal 22 was very strong, despite the strategic actions to maintain higher levels of inventory because of strong demand and supply constraints. In Q4, we repurchased approximately $33 million of outstanding stock. And for the full year, we repurchased approximately $130 million, or 2.7% of outstanding stock, and resulted in approximately $259 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 our debt. Q4 accounts receivable decreased 4% sequentially to $72 million, while days of sales were in line with the prior quarter at 35 days. In Q4, net inventory in absolute dollars increased 8% sequentially, and days of inventory increased 13 days sequentially to 146 days. We expect net inventory to remain above our target range of 90 to 100 days to support the higher demand and the tighter supply chain environment. In summary, we are very pleased to deliver a record financial performance in fiscal 22, despite the supply chain constraints and continued pandemic headwinds. We are pleased to see our years of investment in technology platforms that enable a smarter, sustainable planet, drive record revenues, record gross margin, record earnings per share, and record cash flow from operations. The financial model is delivering strong leverage. In fiscal year 23, We believe the long-term circular nature of our growth engines of LoRa-enabled, Tri-Edge PAM-4, 10-gig PON, 5G wireless, and broad-based industrial protection platforms positions us nicely for another record financial performance in fiscal 23. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year 22 performance by product group. discuss our fiscal year 22 performance, and then provide our outlook for Q1 of fiscal year 23. In Q4 of fiscal year 22, net revenues of 190.6 million represented a 2.2% sequential decline, which was much better than our typical seasonality of 5 to 10% down. We posted record non-GAAP gross margins of 64.5% and non-GAAP earnings per diluted share of 70 cents. In Q4 of fiscal year 22, our signal integrity product group grew 21% over the prior year and achieved another quarterly record and represented 39% of total revenues. Record demand from our pond business contributed to the growth. Our data center demand remained soft as customers managed year-end inventory. However, Q4 data center bookings increased significantly in the quarter. and we are expecting data center revenues to rebound nicely in Q1, led by growth from our tri-edge short-reach PAM4 platform. We have continued to attain new tri-edge design wins across multiple geographies in 100 gig, 200 gig, and 400 gig PAM4 optical modules. In FY22, revenue from our tri-edge platform increased over 700% to approximately $14 million, And we now expect our data center triage revenues to triple in FY23 as more customers move to full production. And we increase our market share over DSP solutions in the 200 gig and 400 gig PAM4 segments. In addition, we are now sampling our long reach triage platform targeted at 200 gig FR4 optical modules. These new parts approximately double our SAM in the hyperscale data center market. We are confident that Tri-Edge's ultra-low power, low cost, and low latency, together with FiberEdge's higher performance, will enable us to continue to grow our hyperscale data center business over the next few years. In Q4 of FY22, Revenue from our pond business represented another quarterly record driven by continued strength from our GPON platforms as global demand for higher access bandwidth remained strong. While the China market continues to lead pond demand, US, Indian, and European service providers have all announced pond deployments, which we believe bodes very well for future pond demand growth globally. Semtech is the leading PMD supplier to the global PON market, providing the most comprehensive PON PMD portfolio. We recently announced our first 25 gig PON PMD device for 25 gig OLT applications, which has been designed to interface to Semtech's ClearEdge family of CDRs. As PON systems increase in bandwidth, we anticipate that the integration of CDR functions into pond modules will be necessary. We are also in development of advanced PMD technologies for 50 gig pond systems that will partner with our leading edge Tri-Edge PAM4 platform. As a result, we expect our pond business to continue to grow over the next few years. In Q4 of FY22, revenue from our wireless base station business was approximately flat from Q3. We continue to win new designs for both ClearEdge and TriEdge in 5G base station front-haul optical modules. We recently announced the industry's first 50-gig PAM4 CDR with integrated driver targeted at 5G wireless infrastructure, which is currently in field trials at several Tier 1 system vendors. We expect the wireless base station market to strengthen in FY23, And we believe our 5G momentum based on both our clear edge and tri-edge winds should enable our wireless base station business to deliver solid growth in FY23. The underlying secular demand strength we witnessed in FY22 driven by the quest for higher bandwidth at the lowest power across all infrastructure segments is expected to continue into FY23. In Q1, we expect our signal integrity product group revenues to increase and deliver another quarterly record. Moving on to our protection product group. In Q4 of fiscal year 22, net revenue from our protection product group decreased 7% sequentially as expected due to seasonality and increased 11% over the same period last year and represented 28% of total revenues. Demand from our consumer customers softened in Q4. However, as expected, bookings from the consumer market strengthened nicely, and we expect our consumer protection business to increase in Q1. In Q4, demand from our broad-based protection products grew 33% from a year ago. Our protection business continues to diversify into a broader range of segments, including industrial, communications, automotive, and IoT. As more systems designers use chips with advanced process geometries, we expect demand for CEMTEX high-performance protection to increase across all market segments. Our broad-based protection business continues to grow nicely and is a major contributor to our increasing gross margins. In Q1 of fiscal year 23, we expect our protection revenues to increase. Turning to our wireless and sensing product group, in Q4 of fiscal year 22, revenues from our wireless and sensing product group increased 13% over the prior year and represented 33% of total revenues. In Q4, our LoRa-enabled revenues achieved another quality record as the adoption of LoRa in low-power IoT applications continued to accelerate. During the quarter, we announced several exciting use cases, which included a joint initiative with Lacuna Space to further increase LoRaWAN coverage in areas of the world without cellular or Wi-Fi. Tencent Cloud, a leading technology company in China, announced it has integrated our LoRaCloud geolocation services into the Tencent Cloud platform. The city of Cary in North Carolina is leveraging new LoRaWAN sensor connectivity and predictive data analytics from system integrator SAS, together with Microsoft Azure, to better monitor flood levels and provide additional community services to its citizens. ICT International's precision environmental sensors are leveraging LoRaWAN to enable smarter monitoring of the urban forest based on a data-centric approach. And Elvexis, a designer of innovative energy transport and distribution networks in Europe, together with Oiken, a Swiss distributor of electricity, are leveraging LoRaWAN connectivity and integration into their existing SCADA system to monitor and fix power grid failures. Also in Q4, the LoRaWAN protocol was officially recognized as a global standard by the International Telecommunications Union, ITU. We expect this recognition to enable global interoperability and enable massive scaling of LoRaWAN. LoRa's low power, long range, and network flexibility is enabling the connection of billions of sensors to enable a smarter, more connected, and sustainable planet. In Q4 of fiscal year 22, revenue from our proximity sensing platforms softened as expected due to lower seasonal demand following the strong first half. Global RF regulations targeted at protecting users from increasingly more powerful radios are expected to drive more stringent radio power requirements on smartphone and wearable manufacturers. We expect an expansion of these regulations in Asia towards the end of this fiscal year, which will benefit our proximity sensing business as 5G mobile devices proliferate over the next few years. For Q1 of fiscal year 23, we expect net revenues from our wireless and sensing product group to increase and deliver another record quarter led by our LoRa business. Moving on to new products and design needs. In Q4 of fiscal year 22, we released 10 new products and achieved 3,237 new design wins. Now let me comment briefly on our fiscal year 22 performance. In fiscal year 22, net revenues increased 24% to a record $741 million, driven by strength from all of our product groups. In FY22, we had 55 new product releases and also achieved a record number of design wins of 13,083. representing a 16% increase from the prior year. In FY22, our signal integrity product business grew 14% over the prior year to achieve record revenues. Global infrastructure demand remained strong, leading to record pond revenues. Our SIPP product group achieved record bookings in FY22, and we expect our Signal Integrity product group to deliver another record in FY23, driven by strong growth from our tri-edge PAM4 products for the hyperscale data center market and 5G wireless base station market, and continued strength from the PON market. In FY22, our protection business grew 26% over the prior year, driven by our broad-based protection business, which grew 34% to achieve a new revenue record, We expect both our consumer protection and our broad-based protection businesses to continue to grow as the needs of the circular economy drive strong demand for Semtech protection products in the automotive, infrastructure, IoT, and consumer segments. We expect our protection business to achieve double-digit growth again in FY23 and deliver record revenues in FY23. In FY22, Our wireless and sensing business grew 39% over the prior year and achieved record revenues. Our LoRa-enabled revenues grew 53% annually to a record $134 million. In FY22, our LoRa business continued to make solid progress on the growth metrics we have established. These metrics included The number of LoRa network operators grew to 166 at the end of FY22 from 150 in FY21. We expect 180 LoRa network operators by the end of FY23. The number of LoRa gateways deployed increased 146% from 1.3 million gateways in FY21 to 3.2 million at the end of FY22. We expect the number of LoRa gateways deployed to increase to over 5 million by the end of FY23. We are delighted with the large increase in gateways deployed globally, as this LoRa infrastructure is critical to enable the broad range of industry use cases that are emerging. PicoCell gateway deployments increased over 190% versus FY22. This increase in PicoCell gateway deployments is being driven by the smart home and smart campus segments as Amazon Sidewalk Gateway deployments increased over 180% versus FY21. In addition, the Helium People's Network is growing very fast and deployment should accelerate nicely in FY23. Both Sidewalk and Helium networks should drive an acceleration in end device deployments over the next few years. In addition to PicoCell deployments, our macro gateway deployments increased 43% over FY21, driven by smart utility, smart logistics, and smart city initiatives globally. And this infrastructure increase should also drive a rapid acceleration in endpoint deployments over the next few years. The cumulative number of lower end nodes deployed increased to 240 million at the end of FY22 from 178 million at the end of FY21. We expect this number to exceed 300 million cumulative end nodes by the end of FY23. With continued network expansion globally, we expect end node deployments to accelerate rapidly over the next three to five years. The LoRa opportunity pipeline, which includes both opportunities and leads, ended FY22 at approximately $950 million. We anticipate that on average 40% to 50% of the opportunities currently in the pipeline will convert to real deployments over a 24-month timeline. Our opportunity pipeline remains well balanced with use cases primarily in smart utilities, smart logistics, and asset tracking, industrial IoT, smart home, and smart cities. At the end of FY23, we are anticipating our total opportunity pipeline to exceed $1.3 billion. For FY23, we are expecting another record year from our LoRa business and anticipate a 40% CAGR for our LoRa-enabled business over the next several years. We also expect our wireless and sensing product group to achieve another revenue record in FY23. Now we discuss our outlook for the first quarter of fiscal year 23. Following the very strong bookings in Q4 and entering Q1 with record backlog, we are currently estimating Q1 net revenues to be between $195 million and $205 million. To attain the midpoint of our guidance range, or approximately $200 million. We needed zero terms orders at the beginning of Q1. We expect our Q1 non-GAAP earnings to be between 72 and 80 cents per diluted share. I will now hand the call back to the operator, and Emeka and I will be happy to answer any questions. Operator?