Semtech Corporation

Greetings. Welcome to the Semtech Corporation conference call to discuss the first quarter fiscal year 2023 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 CEMTEX Executive Vice President and Chief Financial Officer Emeka Chukwu.

Thank you, Operator.

The press release announcing our unaudited resource was issued after the market closed today and is available on our website at CEMTEX.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. with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only, and CEMTAC undertakes no obligation to update the information from this call should facts or circumstances change. During this call, all references made to financial results in my prepared remarks and Mohan's prepared remarks. who 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. In Q1 fiscal 23, the company delivered net revenue of $202.1 million, a sequential increase of 6% and an increase of 19% year over year and was once again above the midpoint of our guidance. These numbers include $2.9 million of revenue from our high reliability business that we diverted at the start of Q2. We continue to demonstrate the leverage in our model by growing earnings at approximately twice the rate of revenue growth. Non-GAAP earnings per share grew 14% sequentially and 51% year-over-year. The strength of the circular drivers behind our growth engines of LoRa, Tri-Edge, PON-X, 5G and systems protection platforms, contributed to the strong net revenue performance, despite the challenges presented by COVID and supply constraints. In Q1, shipments into Asia, North America, and Europe represented 76%, 13%, and 11% respectively. While this represented the ship-through addresses of 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 revenue, and distribution represented approximately 89%. Our distributed POS represented another quarterly record and the business remains balanced with approximately 40%, 35% and 25% of the total POS coming from the infrastructure, industrial and high-end consumer and markets respectively. Net revenues from the high-end consumer market increased 2% sequentially and decreased 11% over the prior year, and represented 24% of total net revenues. Approximately 12% 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 4 percent sequentially and 42 percent over the prior year and represented 39 percent of total net revenues. Finally, the infrastructure end market increased 11 percent sequentially and 24 percent over the prior year and represented 37 percent of total net revenues. Q1 bookings decreased 23% sequentially, and those bookings accounted for approximately 1% of our Q1 shipments. Q1 gross margin increased 30 basis points sequentially to 64.8%, a new quarterly record, driven by a higher mix of our growth engines. For Q2, we expect growth margin to expand to another record, reflecting the benefit of the continued strength of our growth engines. In fiscal 23, we expect our growth margins to trend higher, 100 to 200 basis points, from a favorable richer mix of our growth platforms. In Q1, operating expense increased slightly to $70.9 million, driven by higher staffing costs. For Q2, we expect our operating expense to increase slightly due to higher new product expenses. In Q1 of fiscal 23, operating profit grew 11% sequentially, approximately two times the rate of net revenue growth, reflecting the higher gross margin and the modest increase in operating expense. Sequentially, operating margin expanded approximately 130 business points to 29.8%. and expanded approximately 550 business points from the same quarter last year, representing solid progress towards our 32% to 36% long-term target model. We are seeing the strong operating leverage expected from the success of our growth platforms. In Q1, cash flow from operations was $50 million, up 54% from the same quarter last year. This is the result of the record operating profit and good management of working capital. Free cash flow increased 56% year over year. Cash flow generation in fiscal 23 is expected to be strong, despite the strategic decision to maintain higher levels of inventory because of strong demand and supply constraints. In Q1, we repurchased approximately $50 million or 1.2% of our standard stock. We have approximately $209 million remaining in our share repurchase authorization. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down debt. Q1 accounts receivable decreased 7% sequentially, and days of sales declined four days to 31 days. In Q1, our net inventory in absolute dollar terms decreased 6% sequentially, and days of inventory decreased six days sequentially to 140 days, primarily reflecting the value of the inventory reclassified as available for sale. as a result of the divestiture of our high reliability discrete business. We expect our 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 another record financial performance in Q1, despite the supply chain constraints and continued pandemic headwinds. We are pleased to see our years of investment in technology platforms that enable us a smarter, sustainable planet, drive record sales, record gross margin, and record earnings per share. Our cash flow generation remains strong. The financial model is delivering a strong leverage. In fiscal year 23, we believe the long-term circular nature of our growth engines, positions us nicely for another record financial performance in fiscal year 23. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will now discuss our Q1 fiscal year 23 performance by product group and provide our outlook for Q2 of fiscal year 23. Our Q1 of fiscal year 23 net revenues of $202.1 million represented a 6% sequential increase and a 19% year-on-year growth, and represented another exciting Semtech record. We posted record non-GAAP gross margins of 64.8% and record non-GAAP earnings per diluted share of 80 cents. These numbers include $2.9 million of revenue from our high reliability discreet business that we divested at the beginning of Q2. Our signal integrity product group grew 19% annually and achieved a fourth sequential quarterly revenue record and represented 40% of total revenues. As expected, growth was driven by the data center and PON markets. In Q1, our hyperscale data center business was strong, led by growth from our Tri-Edge PAM-4 short reach platform. Design-ins of Tri-Edge in 100 gig, 200 gig, and 400-gig PAM4 optical modules and active optical cables continue to gain momentum globally. In Q1, revenue from tri-edge increased over 100% over the prior quarter, and we continue to believe our hyperscale data center tri-edge revenues will 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. Our customers are also giving us positive feedback on our long-reach tri-edge samples, targeted at 200-gig FR4 optical modules. This will be another growth driver for us over the next few years. These new longer-reach devices approximately double our SAM in the hyperscale data center market. We remain confident that tri-edge's ultra-low power, low cost, and low latency together with Fibre Edge's high performance, will enable us to continue to grow our hyperscale data center business over the next several years. Our PON business grew approximately 14% sequentially and achieved a seventh consecutive record revenue quarter, driven by continued strength from our 10G and 2.5G PON platforms. Global demand for higher access bandwidth remains strong, with new deployments and new use cases emerging. In addition to the China market, which continues to lead pond demand, US, Indian, and European service providers have also announced pond deployments, which we believe bodes very well for future pond demand growth. Semtech is the leading PMD supplier to the global pond market, providing the most comprehensive pond PMD portfolio. We are now sampling to customers our latest innovative 25 gig burst mode transimpedance amplifier, part of our PONX platform, or next generation PON networks. Our PON business continues to show significant strength, and we are confident in this business will grow nicely over the next several years as PON bandwidths increase. In Q1 of FY23, revenue from our wireless base station business showed solid growth on the strength of 4G and 5G base station deployments. We continue to win new designs for both ClearEdge and Tri-Edge in 5G base station front-haul optical modules. We announced production release of the industry's first Tri-Edge PAM-4 platform for 5G front-haul optical modules. which has already achieved many design-ins. We expect qualifications to be completed and initial revenues to begin to grow later this year. We are also now sampling the industry's first tri-edge platform with integrated EML driver for 5G mid-haul applications. We expect our 5G wireless base station business to continue to grow in FY23 and accelerate over the next few years as global 5G system deployments accelerate, driven by new 5G tenders expected in the second half of fiscal year 23. 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 Q2, we expect our signal integrity product revenues to increase and deliver another quarterly revenue record. Moving on to our protection product group. In Q1 of fiscal year 23, net revenue from our protection product group increased 23% over the same period last year and represented 27% of total revenues. Our consumer protection business was approximately flat as weaker China and North American smartphone demand was offset by stronger Korean smartphone demand and broad consumer demand. The strategy to diversify our protection business into a broader range of segments is proving very successful. Our broad-based protection business increased nicely in Q1, driven by growth from the automotive, communications, and industrial segments. and now represents approximately 40% of our total protection business. As more system designers are using chips with advanced process geometries, we are seeing demand for Semtech's higher performance protection products increasing across all market segments. Particular bright spots are the automotive and infrastructure markets due to the growth of USB-C, Ethernet, and HDMI interfaces. These growth areas continue to also have a positive impact on Avro's margins. In Q2 of fiscal year 23, we expect our protection revenues to increase. Turning to our wireless and sensing product group. In Q1 of fiscal year 23, revenues from our wireless and sensing product increased 15% over the prior year and represented 33% of our total revenues. In Q1, Our LoRa-enabled business achieved another new record as the adoption of LoRa in low-power IoT applications across the globe continues to accelerate. We are seeing many new applications and use cases for LoRa. Some of the new innovative applications that are driving sustainability and enabling a smarter planet include ICT international use of LoRa for environmental applications, By integrating LoRa sensors into their water quality monitoring systems, they can now extract real-time data to improve crop health and yield while decreasing costs. Smart Paddock in Australia has integrated LoRa into smart tags for the livestock industry to analyze cattle behavioral data and solve real-world livestock management issues. This is another example of how LoRa is enabling the future of smart farming. Utility launched a new LoRa-based self-powered energy monitoring solution, which allows energy data to communicate directly from an electrical panel to the cloud. This is another example of how the adoption of LoRa is enabling the smart utility segment to deliver sustainable, efficient energy usage. And Communicate to Integrate announced a new innovative smart plant cloud-based solution for smart irrigation systems. This system monitors temperature, humidity, and other important metrics real-time to maintain the health of a plant, resulting in improved crop yields, water efficiency, and sustainability. These are just a few examples of exciting new LoRa cases being deployed. We are inspired by the growth of LoRaWAN-based networks and LoRaWAN-based sensors, and the plethora of new LoRa-based use cases emerging. Our LoRa metrics also continue to make very positive progress. The number of LoRaWAN network operators grew from 165 at the end of Q4 to 170 by the end of Q1. New LoRaWAN operators are launching networks in markets like Portugal, Germany, and Vietnam. At the same time, private networks are also experiencing explosive growth. This new landscape for LoRaWAN networks shows great growth in diversity of networks from public networks to community-based networks to satellite-based networks and to private networks, as well as hybrid network approaches, which is a key competitive differentiator for LoRaWAN. We expect approximately 180 public LoRa network operators by the end of FY23. The number of LoRa gateways deployed increased to 4.2 million gateways from 3.2 million at the end of fiscal year 22. 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 infrastructure is critical to enable the broad range of emerging use cases. PicoCell Gateway deployments continue to increase nicely, driven by smart home and smart campus segments, as Amazon Sidewalk Gateway deployments increased 35% versus Q4 of fiscal year 22. In addition, the Helium People's Network is growing very fast and was recognized in May by Fast Company as a world-changing idea in 2022, built on LoRa technology. Both sidewalk and helium networks should drive an acceleration in end device deployments over the next several years. In addition, our macro gateway deployments increased 6% over Q4 of FY22, driven by smart utility, smart logistics, and smart city initiatives globally. The cumulative number of lower end modes deployed increased to 256 million at the end of Q1, from 240 million at the end of FY22. 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 Q1 at just under $1 billion. 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 is growing rapidly with use cases primarily around sustainability and smarter planet initiatives in areas like smart utilities, smart logistics, asset tracking, industrial IoT, smart home, and smart cities. where innovative solution providers are using LoRa to monitor, measure, and manage resources more efficiently. At the end of fiscal year 23, we expect our total opportunity pipeline to exceed $1.3 billion. In Q1, we also announced the extension of our LoRa Edge device-to-cloud geolocation platform to enable the use of satellite-based networks. The addition of S-band connectivity to the platform enables direct satellite-connected IoT applications in supply chain management and logistics with seamless low-power geolocation on a global scale. Our LoRaEdge platform now enables LoRaWAN, satellite, and GNSS connectivity for outdoor geolocation and LoRaWAN and Wi-Fi connectivity for indoor geolocation. In Q1, revenue from our proximity sensing platforms remained flat due to seasonal softness and pandemic-related challenges in China. We are expecting increased SAR regulations in Asia later this year to drive proximity sensor growth in the 5G smartphone market over the next several years. Additionally, we are seeing traction in the consumer wearable market as customers utilize proximity sensors for gesture recognition and other applications aimed at enhancing user experience. For Q2 of fiscal year 23, we expect net revenues from our wireless and sensing product to be approximately flat, as continued positive momentum is offset by a weaker consumer proximity sensing business. In Q1, we announced nine new products, across our portfolio and achieved 3,200 new design ones. Looking forward to the second quarter of fiscal year 23, and following a very strong Q1, we are estimating revenue for Q2 between $203 million and $213 million. To attain the midpoint of our guidance range, or approximately $208 million, we needed zero terms at the beginning of Q2. We expect our Q2 non-GAAP earnings to be between 80 and 90 cents per diluted share. Note that our guidance no longer includes any high reliability discrete revenues. I will now hand the call back to the operator, and Mecca and I are happy to answer any of your questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate that your line is in the 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 Tory Zvanberg with Stiefel Nikolaus. Please proceed.

Yes. Hi, good afternoon. This is Jeremy calling for Tory. I guess, first of all, congratulations on the record quarter. A question on the protection of business. It's nice to really see that the broad base growing so nicely. You know, when do you expect to see or do you expect to see a crossover at some point to 50% plus? and which of those three sub-segments are driving that growth? Thank you.

That's a good question. It's something we're striving to achieve, but consumer protection design wins continue to be very positive as well. So, you know, obviously the automotive is probably the strongest at the moment, I would say communications, and then the broader industrial IoT within our protection business are all doing well. They do take longer. You know, the design wins to revenue to take longer in the broader market. So, you know, I think the percentages will be volatile, but it's trending that direction. So, you know, probably over the next three years, I would expect 50% to be kind of realized for each segment.

Great. And I guess maybe turning to the tri-edge product, this is your, I guess, your PAM4 analog solution. Can you give us, are there any partners that you can provide and any, I guess, which maybe regions or areas that you expect to see driving the most growth in this business?

Yeah, we're getting momentum across all regions, I would say. Obviously, very good momentum in China, very good momentum in North America, where the two biggest regions for data centers are today. That's where most of the SAM is. I think with our long-reach products that are now being sampled and getting good feedback, we'll get even more kind of balance across regions there. But, yeah, it's pretty broad at the moment.

And by long-reach, can you give us the, you know, the range?

Yeah, the shorter-reach products are kind of less than 100 meters, and the longer-reach are kind of in the 2 kilometers to 10 kilometer range.

Great. Thank you very much.

Our next question comes from Tristan Guerra with Robert W. Baird. Please proceed.

Hi, good afternoon. Follow-up question on your protection business, obviously very strong, driven by automotive and industrials. When I exclude the consumer piece of that, which is weakening, what is the sustainability, and could you elaborate a little bit on the longer-term drivers that you see for your protection business?

Yeah, so let me start with the consumer, Tristan. I think it's – I wouldn't say it's weakening. I would say it's more that's really driven by macro weakness. We're still doing very well in the consumer space. We get a lot of good design wins in that space. So as customers continue to use leading-edge lithographies, you know, we expect that business to continue to grow as long as the macro grows as well, of course. The broader protection business is really doing well, and I think partly that's because we're seeing more advanced lithographies being used in those segments now. If you look inside a vehicle, we've got a lot of different things going on in a vehicle from displays to Ethernet ports to communications to antennas to all USB ports, for example. So a lot more electronics going into the vehicle. And the same can be said of some of the other segments like industrial and IoT. And some of those segments are using advanced lithography processes, and that's where, you know, Centex protection really is quite strong. So I think given that this is a new focus area for us over the last couple of years, and we've got a lot more products coming out in this area, you know, my expectation is that this business is going to continue to grow. It's obviously higher gross margin. It's not as high volume as consumer, but not as volatile also, and I think a lot stickier. So Should be a very solid business for many, many years, I would think.

Great. And then for my follow-up question, how should I look at the impact of the lockdowns in China that you think you can recover in the second half of the calendar year versus just weak demand in China where there is a less clear outlook on when that is going to recover?

Yeah, I think there's different elements, Tristan. So first of all, bookings have been weaker definitely because China's been a little bit in shutdown mode. I would say contract manufacturing and some of the supply chain issues have also been a challenge. I think I expect both of those areas to kind of recover as the lockdowns, you know, kind of as China goes back out of lockdown and to more regular mode. Then there are some dynamics related to shipments out of China into Ukraine and Russia. So there's some demand softness there from, you know, in the smartphone area. I think that's something that may take a little bit longer to come back. But my sense is, yeah, China typically, once they've gone through a little period of not growing, we expect to see heavy investment in infrastructure. So that's what I'm expecting in the second half, kind of to catch up their kind of growth across the year. Yet to be seen, but that's what we're expecting.

Great. Thank you very much.

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

Yeah, thanks for taking the question. And I'll start with just a question for Emeka. Emeka, gross margins are tracking a little bit better in the outlook than I expected, albeit consistent with what I think you had called for previously with a 100 to 200 basis point gain this year. The question is, is there any benefit to gross margins from the divestiture, or are we just seeing the underlying mixed dynamics that you've been talking about just give us another leg up sequentially?

Yeah, definitely. There is a slight benefit to gross margin from the diversity, but given that that business is pretty small, it was probably about $14 million, $15 million a year type of business, the overall impact is not that huge. The key driver behind our gross margin expansion continues to remain the growth engines that we've talked about. So as we continue to see success with Laura, as we continue to see triage, gaining traction out there, and continue to increase as we continue to see the benefits of the diversification efforts in protection into industrial automotive. Ponex, our platform that has actually got gross margins around the corporate average. I think as we continue to see a higher mix of all of this as part of our revenue, you know, our growth margin should continue to see some slight expansion.

That's great. And then the follow-up question is for you, Mohan. Based on my tally of your comments on the LoRa metrics, it looks like everything's tracking to the metrics you provided a quarter ago. So, one, I just wanted to clarify that. And two, it does seem like across every one of them, there's good progress. So, is it fair to say that despite what is a very tumultuous macro environment, you continue to have strong engagement with customers deploying LoRa and with LoRa uptake. Thank you.

Yes, Craig. I think that is a fair conclusion. You know, our metrics are all on track, we believe. Good momentum. Very comfortable with, you know, the commentary I made on the expansion of the infrastructure, so lots of gateways. You know, I would say the funnel is very positive at the moment as well. You know, we have to make sure, and this is where the work is, is really ensuring that that funnel converts to revenue. You know, we say typically 24 months. You know, my expectation is if things get, you know, we go into a kind of a recessionary environment, that some of that timeline might push out. But the reality is when you look at the use cases, a lot of these use cases are about real smarter planet initiatives. They're about energy management, resource management, asset management and you know things that are going to help as the kind of smarter planet initiatives are driven across the globe so you know I don't expect any any type of slowdown at all and Laura is a it's just a fantastic complementary technology for smarter planet initiatives so we're keeping a very close watch on The different use cases across the different regions, and we have a pipeline that's pretty exciting. We just need to work with our customers to make sure there's not any major bottlenecks. Some of the bottlenecks could be sensors. Sometimes it's software, but working with those customers and the ecosystem to resolve those. It really will result, I think, in us kind of hitting our dashboard metrics, and then that drives, you know, the future growth. So pretty optimistic about it, yeah.

Got it. Thanks, guys.

Our next question comes from the line of Rick Schaefer with Oppenheimer. Please proceed.

Yeah, thanks. Excuse me, and congrats on a nice quarter, guys. Kind of a nice guy. Ex the divestiture. Maybe a follow-up question on Laura. I mean, by my math, you know, Laura, close to 50 million this past quarter, you know, up better than 50% kind of year over year, I think. Again, by my math, it seems to be either sort of in line with last year's growth rate or even accelerating. So, you know, I didn't know if you, you know, Basically, you know, it feels like, you know, the 40% growth target is covered this year. I was just curious if you guys could talk about where backlog is today and how far it extends out into next year, just trying to get a sense of your visibility into next year's kind of run rate. Thanks, Mohan.

Yeah, Rick, so next year is a little bit far out, I would say, Q1. But, you know, I think for the rest of most of this year, we're in pretty good shape. You know, obviously, we don't need any terms for Q2. You know, we're keeping a close watch on consumption. I think that's really the key. You know, obviously, Q1 was another record. We are on track. You know, we are very comfortable with our 40% CAGR performance. that we've given to you guys for the next few years, and we're on track, I think, to achieve that goal this year. And the key for us is really, as I mentioned, looking at the funnel and making sure the funnel is converting and some of those large opportunities in the funnel, which are fairly broad and more balanced in nature from geographical region standpoint, you know, they really become realized. And I think if they do, then, you know, we're very comfortable with, you know, the ongoing plans for next year. For this year, I think we're in pretty good shape. I don't see any real issues. I think obviously a lot depends on the macro, but so far I think we have pretty good visibility for most of this fiscal year.

Okay, thanks for that. And as my follow-up, I'm just curious, you know, everybody's talking about investing, prepaying, and future capacity. And you guys have done such a great job keeping costs down, expenses, you know, growing, I think, on average about half the top line. So I was just curious if you could level set us sort of what your plans are there. Is there anything kind of coming up that would cause OpEx to sort of accelerate or grow faster than the sort of targets we've seen? Thanks.

Hi, Rick. Thank you. Like you've noted, we've done a good job of managing our packs, and we've always done a good job of that. Now, as I look ahead, I don't really see anything out of the ordinary. We'll continue to make the investments in new products in some of the exciting growth areas that we have. We'll continue to make those investments. I think you know, given the environment these days of, you know, employees, you know, being able to change jobs and things like that, we are making sure that we are taking good care of our employees, you know, making sure that they're properly compensated. But there is nothing really out there that I would say that is going to drive a significant increase in operating expenses beyond the levels that we have publicly articulated.

Okay, great. Thanks for the call.

Our next question comes from the line of Trevor Janowski with Needham and Company. Please proceed.

Hey, guys. This is Trevor on for Quinn, and thanks for taking my question. Since we're hearing concerns about consumer weakness potentially carrying into other segments We're wondering if you could provide more color on the current data center demand. Like, has there been any changes that could be concerning? And perhaps, how is your visibility into the second half? Thanks.

So, Trevor, you started talking about consumer, and then your question asked about data center. So, data center is quite strong. We don't see any real issues there. Consumer, you know, is weak. Smartphones are definitely – You know, weak, and I would say PC and computing is a little bit weaker related to consumer. Some of that is, I think, people going back into the office and, you know, away from home and working in the office now. Some of that, as I alluded to, is related to the war and some of the areas there which are not being serviced from a demand standpoint, I think. And the demand is obviously not going to be there in the middle of a war. So you've got some of those pockets coming out. I would say it's very regional dependent. I mean, China is clearly going through some issues at the moment. But this thing could bounce back in the second half. A lot depends on the broader macro environment and inflation and things like that, which could drive consumer weakness in the second half. But if that becomes under control, then my sense is also that the semi-industry is to some extent still a little bit in this supply-constrained environment. So we could see, you know, that driving, you know, into the rest of this year. For the rest of this year, we could see strong demand, in other words. But at the moment, yeah, consumer is a little bit weak.

That's all I have. Thank you.

Our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed.

Yeah, hey guys, strong congratulations. Very good results and guide. Mohan, I was wanting a little bit more color on Laura. I was curious, now that your gateway business is humming with Amazon, I was curious if you would be able to provide us a rough split of revenues between nodes versus gateways, or give us some color if you don't want to give us the exact percentages.

so first of all we're not going to break out the details harsh and part of the reason is it's very different so you know macro gateways we sell devices for you know $15 a picosell gateway could be you know five dollars you know in Amazon's case it's it's less than that so their unit volume doesn't necessarily correlate in terms of when you try to kind of figure out you know how many gateways are and etc what I'll tell you is that across the board, the gateways are expanding very nicely. So I mentioned on my preferred remarks there that Amazon sidewall gateways grew 35%, macro gateways grew 6%, and helium gateways also grew over 40%. So, you know, we've got good growth in gateway deployments. As you know, you know, the gateways are just infrastructure, right? So, you know, the key is now getting sensors connected to those gateways, and that's really the key for future growth. So as we look forward, I don't think the gateways deployed and the number of gateways are really that relevant because we've got a lot of capacity out there. So now the question is, okay, so what's going to drive, which use cases are going to drive the sense of connectivity to those gateways. And that's really what we're focused on now.

Okay. Appreciate it, Mohan. Then I had maybe one or two for Emeka. Emeka, I'm not sure if I heard this correctly, but if I didn't, please correct me. But I thought you said the bookings were down 23-odd percent in one queue. And I was curious, was that just a function of turns, or is there something going on that maybe you could provide us some color on? And then my second part of the question was slightly separate. The buyback, you guys stepped up pretty big, obviously, to help the stock out. And you talked about 200 and something million remaining on your buyback. I guess I'd be curious about your view. Are you of the opinion that your stock is very cheap here, that you'd be very aggressive at these levels? And we should expect similar kind of, you know, take up in buyback from Semtech at this level? Just color, again, looking for color.

Sure, sure. Harsh, I think you heard it correctly. I did report that our bookings were down 23% in the quarter. But we started off the quarter with bookings being very strong and things kind of dropped off around the time that, you know, China started to shut down because of COVID, right? So I think, you know, a lot of the decrease is all COVID driven out of China. The expectation is that things start to open up. We're pretty excited. I think today or yesterday we heard that Shanghai is going to open back up and some parts of Beijing are also looking to open up. So the expectation is that things will start to get better in that area.

Let me add one other comment on the bookings, Harsh. Bookings have been extraordinarily strong for almost the last year or so. Remember, you know, we've got a lot of visibility at the moment. Backlog is very strong. So I don't know that bookings is a good metric at this point in time. You probably want to start looking at consumption as a better metric.

Right.

And, you know, I think that's a good point, Mohan. I just want to remind you that we reported that our Q1 POS was actually a record for the company. So the consumption is still doing very well. Moving on to the buyback, you know, what we've said in the past is that we're going to buy back shares to just keep pace with our dilution from our grants to employees. But with regards to valuation, you know, Harsh, we'll probably leave it up to you guys and investors to figure out the valuations, and all we know is that We have a business that is actually built on very strong fundamentals right now, as Mohan has said in the past. You know, this is the best this company has been positioned in terms of from a strategic point of view. We continue to believe that we're just at the beginning of a multi-year, double-digit growth cycles here. So with regards to what we are worth, what the valuation is, you know, we'll leave it up to you guys to make that call, but I will just continue to run the business and deliver the numbers.

America, I appreciate the color, guys, and strong execution. I very much appreciate it. Thank you.

Thank you.

Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Please proceed.

Hey, guys. Thanks for taking my question. I had just one question, and it's an extension of what Harsh was asking about. So I'm trying to reconcile the difference between a 23% decrease in bookings and what is essentially 5% sequential revenue growth adjusting for the sale of the high-rel business. And so I presume you're living a little bit off the backlog. And so my question is, will this slowdown in bookings, however long it will continue, manifest itself in the second half of the fiscal year? Thank you.

Gary, the answer to that is it depends. Probably it will start to, if it continues to be extremely weak, then it will start to have an impact in Q4, I would say. But more likely next year. Remember, we've had very strong bookings, as most of our peers in the industry, because of supply constraints. And so Most of the companies, including us, are fully booked in, and we have a lot of backlog. Obviously, we don't need any terms this quarter. Next quarter is in pretty good shape, I think. But Q4 and then going into next year and how next year looks like, I think, obviously, we need to keep some pace on the bookings. But it was unrealistic, actually, to have the bookings at the rate it was on. We were on... such a tremendous bookings rate previously that I think that was unrealistic. So I think the drop-off is now bringing some normalization back to that. And as I mentioned, I think the key thing is to watch consumption. You know, obviously, if customers are using the materials, which we're looking at very closely, then, you know, I think everything will be fine. So that's the key metric to look at.

Thanks, Mohan.

Our next question comes from the line of Scott Surley with Roth Capital. Please proceed.

Hey, good afternoon. Thanks for taking my questions, and I appreciate all the color on lower and some of the other businesses, particularly the reinforcement of the 40% CAGR. Maybe just to follow up on a couple of the earlier questions related to lower. Mohan, China had been a big portion of the mix in the past, and you guys have been diversifying away from that. I'm wondering if you could update us in terms of low-rose China contribution, how that factors into the mix. And then, you know, looking out to the remainder of this year, you're starting to see the ecosystem develop more and more around Amazon Sidewalk and Helium. I'm wondering how you're thinking about that in terms of the contribution to the model, you know, what you're kind of factoring in, how aggressive that is in terms of the build-out of the ecosystem for this current fiscal year.

Yeah. Scott, most of the smart home related opportunities in our funnel you know we don't have a tremendous amount of revenue yet from that segment and I would say that's true of the smart home and the smart campus segment so when you look at the revenues today most of the revenues are coming from you know the the use cases that have been in deployment for the last few years so smart utilities you know, smart city, industrial IoT, you know, smart ag, you know, those type of kind of more traditional industrial use cases. And a lot of that is China, of course, as we mentioned before, 50% of our business in Laura comes from China. But the funnel, the opportunity funnel, really starts to get interesting as you look at the details. A lot of that is smart home, it's smart asset tracking logistics, and driven out of both Europe and North America. So that's what we need to convert and make sure that, you know, that they realize revenue. We are quite comfortable now that the infrastructure is going in place. That's kind of the first major hurdle. But that seems to be overcome now, you know, obviously with gateways going out there. So we've got pretty good alignment there. Now it's a question of getting the other aspects use case resolved, and that's sensors and software and just the different economics around each one, which we're very confident about. A lot of it's tied to smarter planets and sustainability, so I think it's going to happen. It's just a question of timing, right?

Okay. Very helpful. Thanks for the color. And if I could, switching gears over to the data center front, some competitors have talked about the ecosystem and supply chain becoming a little bit more challenged, you know, with China lockdowns. I was wondering if you could update us on your thoughts, if you're seeing any impact as it relates to supply chain issues into the data center and markets, and also how we should be thinking about the growth rate in terms of your business for data center. You've got a lot of new products that are coming to market early but getting a lot of traction. You know, is this something that should be growing 20% plus, you know, over the next couple of years? And I had one last question.

Yeah, so on data center growth, definitely double-digit growth. Scott, I think high teens is probably kind of where we think of it. It'll depend on the uptick of PAM4 and specifically the long-reach products. We're doing very well in the short-reach, and that's going to grow at a much faster rate. But the longer-reach products, we have to get design-ins there. But we think we will, and so this is going to be a good growth driver for us. On the supply constraints, you know, I think it's not so much supply constraint as so much it is that contract manufacturers just not being able to build the quantities that they were, you know, the rates that they were building at. And so they've reduced their quantities. And now I think with the, as Emeka mentioned, we're starting to hear that things are getting better and, you know, going to get back to some degree of normalcy. We'll start to see that ramp up again. So that problem should go away. We're hoping, obviously, by the end of this quarter, we shouldn't see any of that. But, you know, a lot depends on the COVID situation in China. But I think at the moment, that's what we're anticipating.

Gotcha. And lastly, if I could, in recent history, you guys have not been acquisitive. You've been executing on the internal portfolio and doing a great job of getting on the right track in organic growth. How are you starting to think about, if at all, inorganic opportunities and how they kind of fit into the overall portfolio in the future. Thanks so much.

Yeah, that's a good question, Scott. We've always been acquisitive. We've also, you know, if you look at our businesses, they all come from acquisitions. For a period of time, certainly over the last five years, I would say with the instability in the geopolitical environment and with some of the macro events and then the pandemic and Things like that. You know, we haven't really put a lot of priority on that. I think as things start to stabilize, you know, we'll be looking at our balance sheet a little bit more and trying to figure out if there's strategic deals that we can do to help us even further. So it's always been part of our toolkit. I think I would say that, you know, we haven't been so much in the last five years, but I think going forward that's still part of our toolkit.

Great. Thanks so much. Nice quarter.

Our next question comes from the line of Christopher Rollin with Susquehanna. Please proceed.

Thanks for the question, guys. As you guys know, I've been into helium and mining helium for a couple years now. Unfortunately, the price of helium, like a lot of cryptos, has gone down pretty considerably. With that, the at least aftermarket price of a lot of gateways has also gone down. It's our opinion that gateway demand is also going to go down. We're trying to figure out what that headwind might be and some of the math that Mohan maybe you gave, $5 for a pico, $15 for a macro. I guess the first thing is are helium hotspots really kind of on the pico side of things? And then total helium deployments are almost 900,000, call it another 100,000 in the channel, so call it a million. Are we talking about a total helium sort of content of 5 million for that whole network or would you consider it larger than that? So if this were to slow, I guess my point is, is this kind of de minimis for your business? Is this really only a 5 million headwind or is it something larger?

Yeah, I think, Chris, the first thing is that, look, it varies. You know, we don't price it by, you know, every single gateway is the same. So I would say it's a little bit more than that. It's certainly more than 5 million. But I think the way to think about this is that the community-based networks have two values. One is the crypto side of it, but the other is that they create a community-based network. And those have real use cases that are very valuable for tracking of assets, for tracking pets, for decarbonization. I mean, there's much more value than just the crypto side of things. The crypto value doesn't buy us anything. From a company standpoint, we don't really look at that that much. Obviously, if you're generating crypto while you're using it for something that's of use to someone or some enterprise, then that's a benefit to you as you're mining. But, you know, I think that's the secondary way to look at it. So we expect, you know, over the next three to five years that the gateways will still continue to grow. It's probably not at the rate it has been growing. But as I point out that, you know, one of the things we look at is, okay, how much capacity is out there now to support sensor growth? Because what it does for us is really drive the opportunity now for every gateway that's out there to drive, you know, additional 30, 40, 50 sensors connected to them, right?

Yep, for sure. Also, I wanted to, you had mentioned two, I kind of might consider them free options or opportunities that I wanted to follow up on. The first was, you know, you guys have PAM for analog products and CDR products. I guess my first question is, have you considered or is there a technological opportunity to enter the active electrical cable market? And then my second question is around proximity sensing. You mentioned the Asian regulations over there. Would love to know what you think. in terms of maybe dollars or percentage growth, you know, how you could really re-accelerate that market?

Yeah. Let me touch on that one first, Chris. I think that market is definitely going to grow. The challenge is it's really driven by regulations. When you have regulations, the smartphone manufacturers are forced to include a SAR sensor into their phones. So for sure in North America and Europe, most of Europe, you know, they have to have them in there. But for many other countries in Asia, like China and India, you know, those regulations don't exist. They may be kind of recommended, but they're not mandatory. So what we're looking for is those regulations to drive, you know, to mandate essentially. You've got to have some way to reduce the radio power in your phones when you are close to the human body. And that's what we're looking for. And if that happens, and that was expected to happen last year, it got pushed out. You know, obviously with the pandemic and now with everything that's going on, you know, our hope is in the second half it happens. It may go into next year, but eventually it's going to, and then that's going to drive very positive growth, I think, again, probably in the high teens, double-digit growth. And then your question on... Active electricity.

active electrical cable market. I don't know if it's transferable or not, but would love your opinion.

Yeah, the answer is yes. Great.

Thank you. This concludes our question and answer session. I'd like to turn the call back to Mohan Maheswaran for any closing remarks.

Thank you. In closing, we were very pleased with our record Q1 results. Despite the challenging pandemic and supply chain environment, our multi-sourcing initiatives and our investments in inventory, infrastructure, and tools continue to enable us to support our best-in-class business operations. Our innovative growth engines driving our Smarter Planet initiatives are all doing very well. We expect FY23 to deliver another record year for Semtech. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.