Semtech Corporation

Greetings. Welcome to SEMTECH Corporation's conference call to discuss the fourth quarter and fiscal year 2023 financial results. Speaker for today's call will be Mohan Maheshwaran, SEMTECH's President and Chief Executive Officer, and Emeka Chukwu, SEMTECH's Executive Vice President and Chief Financial Officer. Please note this conference call 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 CEMTEC's Vice President of Investor Relations, Anoja Shah. Please begin.

Thank you, Sherry. 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 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 report filed with the SEC. As a reminder, comments made on today's poll are current as of today only, and CEMTAC undertakes no obligation to update the information from this poll 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 considered such non-GAAP financial measures useful, along with the detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, is included in today's press release. Finally, for our prepared remarks today, we will use the phrase Semtech Organic to refer to Semtech's standalone results before the inclusion of Sierra Wireless. And with that, I'll turn it over to our Chief Financial Officer Emeka Chukwu. Emeka?

Thank you, Anoja. Good afternoon, everyone. In Q4 of fiscal 2013, the company delivered net sales of $167.5 million. down 6% sequentially and 12% year over year. These results included $15 million of revenue from the Sierra Wireless acquisition we completed on January 12th. Fiscal year 23 revenue was a record $741.5 million for organic Semtech and $756.5 million including Sierra Wireless. For Semtech Organic, Q4 shipments into Asia, North America, and Europe represented 68%, 13%, and 19% of revenue, respectively. While this represents the ship-to addresses for our distributors and customers, we estimate that in fiscal year 23, approximately 33% of our shipments were consumed in China, 27% in the Americas, 22% in Europe, and the balance over the rest of the world. Our efforts to diversify our revenue geographically are showing signs of success. We see expansion in North America and Europe for triage, PON-X, and LoRa. On a go-forward basis, we expect the inclusion of Sierra to reduce our exposure to China. In Q4, net sales through distribution represented approximately 78% of revenue for the combined company, while direct represented 22% of net sales. Going forward, we expect to have a more balanced mix due to the addition of Sierra. Looking at our end markets for the Centec organic business, our infrastructure end market fell 18% over the prior year and 20% sequentially. and represented 37% of total net revenues. Net revenue from the industrial end market declined 18% year-over-year and 15% sequentially and represented 40% of total net revenues. Revenues for high-end consumer decreased 26% over the prior year, but were up approximately 1% sequentially and represented 23% of total net revenues. Approximately 9% of high-end consumer net revenues was attributable to mobile devices, and approximately 14% was attributable to other consumer systems. Our Semtech organic POS remains balanced with approximately 49%, 29%, and 22% of the total POS coming from infrastructure. industrial and high-end consumer end markets respectively. With the addition of the Sierra Wireless portfolio, we will see a greater mix of IoT revenue, a new segment for us that will include lower and less revenue in the consumer end markets. Q4 gross margin was 62.3% for the combined company. Q4 gross margin for organic Semtech declined 80 basis points sequentially to 64.7%, driven primarily by a return mix of a high-end consumer and market revenue. In fiscal 23 for organic Semtech, our growth drivers of data center, LoRa-enabled, PON, broad protection industrial and automotive platforms drove record non-GAAP gross margin of 65.1%, up 180 basis points. With a full portal of Sierra, we expect our Q1 gross margin to average 48.5% at the midpoint of guidance. For the remainder of the year, we expect to see 100 to 150 basis point improvement in gross margin, driven by a higher mix of CENTEC organic revenue and achievement of material cost synergies. We expect to achieve our long-term gross margin target of 58% to 63% through, one, sustained growth of data center, 5G wireless base stations, passive optical networks, broad protection industrial and automotive product platforms. Two, accelerated deployment of LoRa endpoints from improved cellular connectivity. And three, growth in annual recurring revenue from Sierra's managed connectivity, software services, and LoRa cloud services. We are successfully managing our operating expenses in this challenging revenue environment. Q4 combined operating expenses was $67 million. In Q4, operating expenses for Centec Organic were down 13% sequentially to $59 million, driven by a reduction in headcount and other variable compensation. In Q1 fiscal 24, we expect operating expenses of approximately $99 million at the midpoint of guidance, reflecting a full quarter of Sierra and the customary increase in compensation expenses typical at the start of a new year. We now expect to achieve about $50 million of annualized operating expense synergies by the end of the fiscal year. As a result, for the remainder of the year, we expect operating expenses to be flat to slightly down on a sequential basis, reflecting the achievement of the expected synergies. Fiscal year 23 operating profit was a record $210.7 million for the combined company. Centec Organic delivered a record operating profit of $212.7 million, up 5% versus the prior year with minimal revenue growth due to gross margin expansion and controlled expenses. While fiscal year 24 demand is starting off weak, We still expect that with the anticipated second half recovery, the Sierra acquisition will be accretive to our fiscal year 24 earnings. In addition, over time, as the current business climate improves and we execute on the vision behind the Sierra acquisition of driving lower endpoint proliferation, we expect to achieve our long-term operating margin target of 32% Our fiscal 23 non-GAAP normalized tax rate is 12%, and we expect it to remain the same in fiscal 24. In fiscal 23, cash flow from operations for the combined company was $127 million, or 17% of revenues. compared to the $230 million in the prior year. The decline was primarily due to the expenses associated with the acquisition of Sierra. For fiscal 24, we expect cash flow from operations to be pressured by transaction and acquisition-related expenses and lower profits due to the weak demand environment. Our debt at the end of fiscal 23 was $1.3 billion or 3.4 times leverage on a net basis. We expect to see an increase in net leverage as we navigate through this softer demand environment. We proactively negotiated an amendment to our credit agreement to get some relaxation to our leverage ratio and interest expense coverage ratio covenants. The weighted average interest rate is currently approximately 5.64%. As we have said before, the main priority for free cash flow will be to pay down debt. In summer, fiscal year 23 has been a year of significant change for CEMTECH. We delivered record revenue and operating income and closed on the largest acquisition in our history. While fiscal year 24, we have these challenges. I'm very excited about the opportunities at Centec at this moment in our history. Let me summarize what I see now. One, first, we expect to see our growth drivers of data center, Palm, 5G wireless regain their growth momentum as the business environment normalizes. But more importantly, become more regionally balanced. as we see revenue run for these products in North America later this year. Second, Sierra's cellular capabilities combined with our high-margin LoRa and LoRa Cloud technology, we open up new market opportunities for both technologies, driving increased revenues, growth, and operating margins for the company. And finally, once we have executed on our synergies and portfolio review, We expect that in fiscal year 25, we will start seeing much improved margin expansion and EPS growth. I will now hand the call over to Mohan.