Semtech Corporation

Greetings and welcome to the Semtech Corporation conference call to discuss the first quarter fiscal year 2024 financial results. Speakers for today's call will be Mohan Maheshwaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu with Semtech's Executive Vice President and Chief Financial Officer. Please note that this conference is being recorded. At this time, all participants are in a listen-only mode. The question and answer sessions will follow the formal presentation. I will now turn the call over to CEMTAC's Vice President of Investor Relations, Anosha Saw.

Thank you, Operator. 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 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 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, is included in today's press release. And with that, I'll turn it over to our Chief Financial Officer Emeka Chukwu. Emeka?

Emeka Chukwu Thank you, Anosha. Good afternoon, everyone. Before I begin, I trust you all saw the news that the Board has completed the search for our new CEO. We are pleased to welcome Paul Pickles to CEMTEC. Mohan will comment but we are all excited about Paul's impressive mix of semiconductor and IoT experience and look forward to his arrival later this month. And I also want to congratulate Mohan on his retirement. Mohan has led Semtech very successfully for the past 17 years, and we have all enjoyed working with him. Like the many Semtech employees, we wish you well on your next adventure. Turning to Q1 fiscal 24, the company delivered net sales of $236.5 million above the midpoint of our guidance and an increase of 41% sequentially and 17% year-over-year. These numbers include $136 million of revenue from our acquisition of Sierra Wireless. Our non-GAAP gross margin of 48.5% was in line with our guidance. and our earnings per share of two cents was above our guidance. In Q1, shipments into North America, China, Europe, and the rest of Asia represented 31%, 24%, 15%, and 30% respectively. The addition of Sierra Wireless has increased our geographic mix towards North America and Europe. Total direct sales represented approximately 39% of net revenue and distribution represented the remaining 61%. Turning to our end markets, as we mentioned last quarter, we expect to see macroeconomic challenges affect our business in the first half of fiscal 24, which we did see in Q1. Net revenues from the high-end consumer market decreased 38% sequentially and 55% versus the prior year. High-end consumer represented 9% of total net revenues. Net revenue from the industrial ed market increased 130% sequentially and 125% over the prior year due to the inclusion of Sierra Wireless. The industrial end market represented 75% of total net revenues. And finally, the infrastructure end market declined 30% sequentially and 49% over the prior year and represented 15% of total net revenues. In terms of POS, we saw the majority of POS, 60% coming from the industrial end market end market due to the addition of Sierra. The infrastructure and consumer end markets were balanced with 21% and 19% respectively. Q1 bookings grew 1% sequentially driven by strength in our advanced protection and sensing business units. Q1 non-GAAP gross margin was 48%. in line with the midpoint of our guidance. For Q2, we expect gross margin to stay roughly flat. For the remainder of fiscal 24, we expect our gross margins to trend higher through the year as material cost synergies are achieved and revenues in our higher margin Semtech organic businesses increase. These benefits will be slightly offset by lower absorption. as we work to reduce our internal inventory levels. We are still expecting a 100 to 150 basis point improvement in gross margin by Q4 of this year. In Q1, operating expenses were $93 million, $6 million below the midpoint of guidance due to our strict management of discretionary spending. For Q2, we expect further reductions to our operating expense, down another 2% sequentially, and expect to see continual declines throughout the remainder of the year as we execute on our integration plans and operate to optimize for financial performance. In Q1 of fiscal 24, non-GAAP operating margin was 9.3%, significantly better than expected, driven by actions we took to preserve operating profits. In Q1, cash flow from operations was a $90 million use of cash impacted by the fiscal year 23 annual bonus payout and the payment of acquisition-related expenses. We expect our cash flow to recover in the second half of the year as acquisition-related expenses taper off and demand improves. allowing us to improve profitability as current inventory levels are reduced. Our gross debt at the end of Q1 was $1.4 billion, or approximately 4.3 times leverage on a net basis. We expected to see an increase in net leverage in the first half of the year as we navigate this softer demand environment. We announced today that we negotiated another amendment to our credit agreement to get further relaxation to our leverage and interest expense coverage ratio covenants. Given our current projections for revenue and earnings, we now expect to have adequate cushion through fiscal 2025. The Q1 weighted average cash interest expense was approximately 5.65%. And as we have said before, The main priority for free cash flow would be to pay down our debt. In some way, Q1 performance was better than expected, but still impacted by macroeconomic headwinds. Looking ahead, we continue to make progress on our integration of Sierra Wireless. Our synergies are ahead of plan, and as a result, we still expect the Sierra acquisition to be accretive to earnings in fiscal year 24. We are getting good customer feedback on our cellular and LoRa integration plans. Overall, we are seeing higher design wins, and with the steps that we're taking to improve our financial performance, we believe that our business will thrive as demand improves and channel inventory gets back to normal levels. I will now hand the call over to Mohan.