Semtech Corporation

Greetings and welcome to the Semtech Corporation conference call to discuss the third 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 that this conference is being recorded and 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 CEMTEC's Vice President of Investor Relations, Anoja Shah. Thank you. You may begin.

Thank you, John. A press release announcing our unaudited results was issued after the market closed today and is available on our website at CEMTEC.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 recent uncertainties, please review the safe harbor statement included in today's press release and in the other risk factor 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 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 our prepared remarks 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 detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. And with that, I'll turn it over to our Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Anoja. Good afternoon, everyone. In Q3 fiscal 23, in line with our guidance, Centec delivered a Q3 net revenue of $177.6 million, a sequential decrease of 15% and a year-over-year decrease of 9%. We face a challenging macroeconomic environment and see sustained softness in the consumer market and overall weakness in China, but we are beginning to see signs of stability and several bright spots. Our focus on regional revenue diversification is showing signs of success. We see accelerating adoption in North America and Europe for triage, flora, and our broad-based industrial and automotive protection business due to our targeted growth efforts with end customers. Overall Q3 shipments into Asia, North America and Europe represented 71%, 15% and 14% respectively. While this represented a shift to addresses for our distributors and customers, we estimated that approximately 35% of our shipments are consumed in China, 28% in the Americas and 21% in Europe and the balance over the rest of the world. Looking at our end markets, our infrastructure end market grew 5 percent over the prior year, but declined 17 percent sequentially and represented 39 percent of total net revenues. Net revenue from the industrial end market also grew 7 percent year over year, but declined 13 percent sequentially and represented 41 percent of total net revenues. As I previously mentioned, we continue to see softness in consumer end markets, where net revenues for high-end consumer decreased 43% over the prior year and 15% sequentially and represented 20% of total net revenues. Approximately 10% of high-end consumer net revenues was attributable to mobile devices, and approximately 10% was attributable to other consumer systems. Our sales channel remains consistent with distribution representing approximately 83% of shipments and direct 17% of shipments. Our distributor POS declined during the quarter but remained balanced with approximately 38% of POS coming from infrastructure, 33% from the industrial segment and 29% coming from high-end consumer end markets. So far in Q4, we see signs that our POS is stabilizing and no longer declining. The Q3 bookings decreased sequentially and represented book-to-bill of less than one. Bookings were generally weaker across all regions and end markets. And just as in POS, we are beginning to see stability in bookings over the past month. Our gross margin remains resilient. In Q3, gross margin increased 30 basis points sequentially to 65.5%. This is a new quarterly record, driven mostly by a lower mix of consumer revenue. For Q4, we are projecting a small decline of gross margin to 64.5% at the midpoint, driven by lower absorption due to the softer overall demand environment. We expect gross margins to hover at current levels plus or minus 100 basis points until demand recovers. Q3 operating expenses decreased approximately 5% sequentially to $68 million as we took steps to respond to softening demand. For Q4, while maintaining our investments in new products, We will take additional measures to reduce operating expenses by approximately 10% sequentially in response to the weaker demand environment. Managing our cash flow is a focus in these challenging times. In Q3, cash flow from operations was unusually low at $18 million or 10% of revenue. Reflecting elevated use of working capital, as accounts receivable increased due to timing of shipments and as we continue to pay for prior period long lead time materials. We expect our cash flow from operations to rebound in Q4 to normal seasonal levels. Cash, cash equivalents and marketable securities increased approximately $256 million to $618 million. The increase is primarily due to the $319.5 million in convertible notes we issued to help fund the proposed Sierra Wireless acquisition, slightly offset by a $23 million payment on our existing line of credit. The convertible notes resulted in net cash proceeds of approximately $280 million after expenses sell-off warrants and the cost of the convertible note hedge transactions we entered into in conjunction with the issuance of the notes. These convertible notes carry an interest rate of 1.625% and will mature on November 1, 2027. The conversion price of the notes, including the hedge transactions, is $51.15. And on a non-GAAP basis, there will be no dilution below this price. In Q3, we did not repurchase any stock because of our pending acquisition of Seattle Wireless. We have approximately $209 million remaining in our share repurchase authorization. Going forward, we expect to primarily use our cash to pay down the expected debt from completing the Seattle Wireless acquisition. In Q3, accounts receivable increased 13% sequentially due to the timing of shipments, and days of sales increased nine days to 39 days. In Q3, net inventory in absolute dollar terms was up slightly sequentially, and days of inventory increased 27 days sequentially to 160 days, as we continue to receive previously committed long lead time materials, despite the decline in demand. We expect net inventory to be flat to slightly down in Q4, reflecting the weaker demand environment. As we look forward to the pending acquisition of Sierra Wireless, we remain excited about the growth potential of the two companies when combined. Sierra's reported revenue is consistent with our expectation. When complete, the transaction is expected to be immediately accretive to Centec's non-gap EPS. In summary, our business continues to be adversely impacted by the broad slowdown in China and the sustained weakness in the consumer market. Maintaining our financial health is paramount during these uncertain times. We have a management team that has experience managing through industry downtown. And I'm confident that the proactive actions taken, our focus on new products, design wins, working capital management, and geographic diversification will strengthen Semtech and prepare us well for the recovery. I will now hand the call over to Mohan to share more details on the business.