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.

Thank you, Emeka. Good afternoon, everyone. Thank you for joining today. On May 30th, we announced that Paul Pickle will join as the new president and chief executive officer for Semtech. I will ensure a smooth transition with Paul and support him and the board as needed for the next 16 months. Thank you all for your support and interest in Semtech over my tenure as CEO over the last 17 years. I have enjoyed working with you all and I'm counting on you to continue to support Semtech through the next phase of growth. Today marks my last earnings call as CEMTEX President and Chief Executive Officer. Onto our Q1 fiscal year 2024 performance by product group, as well as the outlook for Q2 of fiscal year 2024. In Q1, our quarterly net revenue increased 41% sequentially and achieved a new record of $236.5 million, slightly above the midpoint of our guidance. We also posted non-GAAP earnings per share of two cents driven by lower OPEX, as synergies were ahead of expectations. Both net revenue and EPS were better than guidance. While inventories remain high, Q1 bookings for the organic Semtech business were up sequentially, increasing our confidence that the organic Semtech business has stabilized, albeit at much lower levels. In Q1, our signal integrity product group revenue was down 32% sequentially and represented 18% of total revenues. As expected, all our infrastructure businesses were very weak in Q1. Our China, PON, and base station businesses were especially weak in Q1 as overall demand softened and inventories remained high. Our hyperscale data center business was also weak in Q1. but we are expecting this business to rebound modestly in Q2 as inventories reduce. We are anticipating a strong second half performance from our data center business, driven by our North American design wins. AI is driving significant demand at hyperscalers, and our SIP portfolio is primed to take advantage of the upcoming data center build-outs. Our tri-edge, fiber-edge, and copper-edge platforms deliver lower power, and lower latency advantages over DSP solutions, which are key requirements for future AI data centers. We are growing our data center footprint with North American partners, and we are already well-positioned in China, where we believe that data center build-outs will regain momentum in the next 12 months. In Q1, we announced the industry's first 200 gig per channel fiber-edge-type TIAs, which are generating positive interest and design wins with Tier 1 customers in North America. In addition, our CopperEdge platform is in the early stages of penetrating the 100 gig and 200 gig per channel active copper cable segment in North America, which we believe has tremendous potential in the data center market. We remain confident that our full portfolio of data center platforms, including ClearEdge and TriEdge CDRs, FiberEdge PMDs, and CopperEdge Redrivers, will enable us to rapidly grow our hyperscale data center business over the next several years. While our pawn business saw a sequential decline in Q1, we believe excess inventories are starting to reduce. Increasingly, we are seeing service providers outside of China starting to deploy pawn systems, which is a very encouraging sign for our future pawn business. Our pawn portfolio has recently been expanded, with the industry's first 50 gig PON OLT chipset, which already has design wins at tier one European customers. We believe our 2.5 gig, 10 gig, 25 gig, and 50 gig PON PMD portfolio offers customers the broadest and highest performance PON PMD portfolio in the industry. And we expect our PON business to return to growth in the second half. Revenue from our wireless base station business was also down in Q1. on both a sequential and year-over-year basis, as the macroeconomic slowdown in China has impacted demand for both 4G and 5G base stations. However, new tenders recently issued in China should drive meaningful growth in this segment in the second half of FY24 and in FY25. In Q2 of FY24, we expect continued reduction of customer and channel inventories across our infrastructure businesses, and we expect a modest improvement in revenues from China as our China demand begins to recover. As a result, we expect our signal integrity product revenues to increase sequentially in Q2. Moving on to our advanced protection and sensing product group. Q1 net revenue from our advanced protection and sensing product group decreased 25% sequentially and represented 15% of total revenues. The drop was driven by lower demand from the consumer segment as we are faced with high inventories in both the China and Korean smartphone markets. We expect inventory digestion to continue for several quarters. However, we continue to achieve solid design wins on new smartphones with our leading USB-C protection platform across all Tier 1 global smartphone customers. In Q1, we announced the expansion of our Persei product portfolio with the release of a new SAR sensor for 5G mobile devices. Semtech's Persei technology senses human proximity and enables smartphones to implement RF power control. New SAR regulations in China, starting in FY25, are beginning to be a catalyst for new proximity sensing growth, with bookings and POS up significantly from Q4. We expect this to increase as adoption of our SAR sensors continues in the second half of FY24. On the broader market for our protection products, we are seeing strong demand from the automotive segment as adoption of our high-performance system protection portfolio is accelerating. Specifically, we are seeing increasing adoption of Ethernet, USB-C, and antenna protection from the automotive segment. In Q1, for the first time in our history, Our broader protection business exceeded our consumer protection business and represented approximately 55% of the total protection business. In Q2, we expect our advanced protection and sensing business to see revenues grow sequentially. Turning to our IoT business. As a reminder, our new IoT business has two sub-businesses. The first is the IoT Systems Product Group. which is made up of Semtech's LoRa business, the Sierra Wireless module business, and the Sierra Wireless router business. The second product group is the IoT connected services group, which includes Sierra's managed connectivity business and Semtech's LoRa cloud services business. In Q1, total IoT revenues increased 170% sequentially to approximately $159 million, or 67% of total revenues. While our LoRa enabled revenues were down in the quarter, driven by the lower demand for Helium gateway chips, our LoRa end POS volume grew, our LoRa end node POS volume grew 29% sequentially, with strong growth in Europe, Japan, and China. This is a strong indication that our strategy is working. We expect future LoRa end node deployments to continue to increase as the demand for low-power sensor networks incorporating edge AI routers becomes mainstream in the IoT world over the next few years. The adoption of LoRa continues to grow across many IoT use cases globally, especially in North America and Europe. Some of the recent exciting announcements this quarter included sustainable harvest, deployed LoRa-enabled sensors and LoRaWAN-based gateways across its durian fruit farms in Malaysia to improve farming practices, lower operational costs, and increase crop yields. Durian is a challenging crop that needs 24-7 maintenance for high yield, and LoRa-enabled sensors give farmers real-time data for the health of their farms every step of the growth cycle. Beckley, a large European-based IT system solution provider, announced that they have joined the LoRa ecosystem and will incorporate LoRaWAN into their strategic portfolio targeted at the retail, manufacturing, logistics, healthcare, and public infrastructure segments. Lacuna Space, the direct-to-satellite LoRaWAN company, launched its latest satellite on SpaceX, raising its number of satellites to seven to bring low-cost connectivity to the most remote parts of the world. In Q1, we launched a new multiband LoRa transceiver for use in IoT endpoints. enabling a single low-powered device to be used anywhere in the world. The highly integrated LoRa Connect platform provides LoRaWAN connectivity for terrestrial low-power wide area networks, as well as supports LoRa 2.4 gigahertz for global connectivity and S-band for direct connection to satellites. This new multi-band LoRa radio is perfect for global logistics and asset management use cases. And in Q1, the LoRa Alliance launched a new LoRaWAN accredited professional program to support the IoT industry's need for skilled LoRaWAN engineers and developers. New LoRa opportunities continue to emerge across multiple end markets, including smart utilities, smart logistics, and asset management and connected spaces. While our LoRa-enabled business is expected to decline this year due to the negative impact of our Helium Gateway business and a weak China, We are expecting LoRa end-node deployments to continue to increase globally, and we expect our LoRa-enabled business to return to strong growth in FY25. In Q1, the Sierra wireless IoT module business increased 31% sequentially as demand for IoT LPWAN connectivity solutions increased. Interest in Sierra routers, Sierra's routers in the public safety and industrial IoT segments, continues to increase. Specifically, we are seeing increased adoption of our routers for utility monitoring, EV charging, and precision agriculture. In addition, we are pleased with the strong growth of our IoT connected services business, which grew 10.3% annually. As we grow our managed connectivity subscriber base, we see a massive opportunity to deliver value-added IoT services to our customers. We are investing in both our IoT managed connectivity platform and our future IoT cloud services platform. As we start to marry our LoRa ecosystem strategy together with our IoT module, router, and services strategies, we expect to deliver a uniquely differentiated and highly attractive IoT portfolio to the low-power IoT industry over the next few years. In Q2, we expect our IoT business to decline sequentially, as we continue to face high channel inventories and relatively weak demand across all our IoT hardware businesses. In Q1, Semtech's overall design win volume was up 32% sequentially, and our module design win value was up 50% sequentially. Both of these metrics bode well for a strong FY25. Now let me discuss the outlook for the company for the second quarter of fiscal year 24. As a result of our lower revenues and our increased leverage, we are taking actions to ensure our operating profits remain at acceptable levels. These actions are on top of our planned synergies. In addition, the Semtech board continues to carry out a detailed portfolio review and will discuss its findings and any actions with the new CEO who will be joining Semtech approximately June 30th. We are currently estimating Q2 net revenues to be between $233 million and $243 million. To attain the midpoint of our guidance range, or approximately $238 million, we needed turns orders of 39% at the beginning of Q2. We expect our Q2 non-GAAP earnings to be between minus two cents per share and plus six 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?

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question 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 key. Our first question comes from the line of Craig Ellis with B. Reilly. Please proceed with your question.

Yeah, thanks very much for taking the questions. Mohan, I was hoping you could just start by providing a little bit more color on some of the things you're seeing out in the end markets that you serve. One, can you comment on what you've seen with order activity quarter to date? What are the pluses and what are the weaknesses? And in areas where per the press release you're seeing signs of stability, where do you and the people in the sales team feel more confident that things have stabilized, where are things still relatively weaker or richer in inventory?

Yeah, Craig, so I think obviously the consumer business now in China particularly is starting to show some signs of life. Of course, it's come down. It's very low levels. So that's not a surprise. It was going to turn around at some point. And we're starting to see improved orders from the consumer business, a little bit of improvement in the China business, particularly in consumer. And so that's, I would say, probably the primary area. I would say we're also seeing continued improvement in the automotive industrial area. That one has not been so bad. So I think in general, those are the two kind of strong areas. I would say the other areas in general are still relatively weak. Bookings are still relatively weak. But remember, there's a lot of inventory out there, so we're expecting it's really looking at POS and the digestion of that inventory. That's the key thing. And there are some positive signs there, as I mentioned, in the infrastructure side and the data center side specifically. And I think I would say also in the broader kind of protection business.

Got it. That's helpful. And then, Emeka, I wanted to follow up. So a quarter ago, we were pacing very well on cost savings, and I think you raised the cost savings target from $40 million to $50 million. Now we've had better operating expense in the quarter. It's better than what I expected in the guide. So how should we look at that prior $50 million target? expense reduction target and the potential for that to move up either now or with time?

Yeah, so Craig, we are definitely doing very well on the synergies front. The numbers that we're seeing is a little bit above the $50 million that we had upsized to last quarter. I'm not ready at this point to quantify that, but it's coming in nicely above that number. We've also Definitely, like I said in my prepared remarks, we are definitely watching every penny of OPEX at this point. Discretionary spending is something that we are keeping very close eyes on. The traveling expenses, some of other discretionary supplemental compensation, we're keeping an eye on all of that. We are definitely very pleased with what we have seen in the first quarter in terms of our abilities to manage our present expenses and given where the business is right now. And like Mohan said in his preferred remarks, we are looking at other things and hopefully we'll continue to do a good job on that.

That's good. And then if I could just sneak in one more, you mentioned that you had achieved some incremental covenant flexibility. Can you just talk more specifically to that point and And was there any incremental cost to interest rates on the debt you have out, or was that achieved with some other means? Thanks so much, guys.

Yeah, so definitely on the covenant side, obviously, just giving the outlook for the business or the microeconomic issues that we're seeing, the fact that our inventory in the channel continues to remain stubbornly high, we sort of anticipated that the covenants might be challenged in the second half of the year. So we took proactive steps to get back to our banking group to work with them. So, yes, there was incremental costs. It cost us probably about 50 basis points in terms of amendment fees. And because the leverage is anticipated to be higher, the interest rates associated with those are going to be a little bit higher than what we expected. originally had communicated and the original agreement that we had out there. But having said that, I think our expectation is that with all the synergies, the fact that we're running ahead on synergies, also looking at things continuously getting better in terms of demand in the second half of the year, we continue to believe that the acquisition is going to be accretive to our earnings in fiscal year 24.

Thanks, Emeka. Thanks, Mohan.

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

Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. And Mohan, I want to wish you all the best again in your future endeavors. It's been a pleasure working with you over the past couple of years.

Thank you, Scott. Thank you.

Maybe just to follow up on Craig's question on the Covenant front, and Becca, I just want to clarify a couple things. It sounds like there were some small penalties, there was an increase in the interest rate, but I want to make sure in terms of the guidance that you gave for the second quarter, that is included, right? That interest expense is already included in there. And then going forward in terms of further reductions in the OPEC structure and or evaluation of the portfolio and potential assets, that is not being mandated by the bank. That is in fact just part of their general pruning of operations and optimizing things going forward.

Is that correct? Yeah. So the second one, I'll just think that, yes, that is just, you know, it's what every good business would do in a time like this. And, you know, we already have that set in motion. It was not something that was mandated by the banks. And with regards to the interest expense, yes, our guidance has factored in the new agreement. I think, you know, In Q1, the weighted cash interest rate was about 5.65%. In Q2, we are anticipating that based on our guidance to probably be about 6.1%. Great.

Very helpful. Thank you. And if I could, just in two of the end markets, first in terms of IoT modules, it sounds like you're still working through some inventory issues there. Mohan, I'm not sure if I heard your comments there. looking into the second half of this year, but you're expecting some relief in the inventory workings at that point in time. Sounds like the design activity remains very high. So we're getting back on a path to normalcy. And then just to clarify your comments around data center, there's a tremendous amount of interest in activity as it relates to AI and what that's doing with demands of the data center. You know, do you get back to, given the new products that you have, given those demand dynamics, By the end of this fiscal year, entering fiscal year 25, do you start to get back or start to approach the levels that you had seen two or three quarters ago? Thanks so much.

Yes, Scott. So let me start on the IoT side. I think Semtech's IoT business, we saw softness in China. We saw softness in general probably a little bit earlier. The Sierra business now, has seen some weakness and continues to see some weakness, particularly on the modules and the router side and the hardware side. Some of that is North America and Europe catching up with the softness in Asia. And I think we're going to see that in Q2 and maybe Q3. But after that, I think we'll start to see a little bit more positive momentum. And this is speaking about kind of the traditional – Sierra modules that they've been selling. Obviously, there's a lot of design in activity around, you know, the new approach that we're taking now with modules and how we're thinking about things. And that could generate some interesting opportunities, I think, going forward. With regard to data center, I think, yeah, our expectation is that, you know, obviously Q2, Q1 was very weak. Q2 will be stronger. and we're expecting the second half to be stronger than the first half. Could we get back to the levels of the first half of last year? I think we need to see some of our design wins that we've got going on. We have good momentum in North America, as we've stated, and we have some new opportunities with CopperEdge, as I mentioned in the prepared remarks. They're probably more FY25 kind of drivers, But we're hoping to see some of that in the back end of this year.

Thanks so much, and best of luck going forward.

Thank you.

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

Yeah, Mohan, I want to also wish you best of luck with your retirement. Enjoyed working with you all these years. I just had a couple of questions. The first one, generally speaking, kind of, if I had to pin you down and say, you know, how many quarters of inventory do you think there is on an aggregate basis for Simtech plus Sierra Wireless combined? Would you be able to tell us, you know, is it a quarter or two quarters? And are you losing any design wins or is it just the slowdown is just purely a function of the fact that there is excess inventory in the channel?

Yeah, I'm not aware of any design wins we've lost, Harsh. I think most of it is just inventory buildup. And it's difficult to say, when you look at inventory, you obviously have to look at consumption parallel with inventory, right? Because as consumption increases, then inventory comes down and you start to see the opportunity. And that's kind of what we are seeing. So in consumer as an example of that, where I think most of the inventory is, We are starting to see a few positive signs there. As I mentioned, the China consumer is starting to look a little bit more positive. And as you know, if consumer comes back quickly, that can absorb inventory very quickly. So I think in the other areas like infrastructure, I think the same commentary applies to the pawn business where we have some inventory and base station business where we have some inventory. that those can be absorbed quite quickly depending on if tenders come out there and demand picks up in China, for example. I think where we're currently seeing demand, I would say data center is the strongest in the infrastructure areas. And I would say on the industrial side, it's probably still the automotive area and then the consumer area. And the consumer area has been extremely weak for a long time. So that's not a surprise, right?

Yeah, totally. And then Mohan had a follow-up, but I'll ask a two-part question if you don't mind. On Laura's side, is helium all completely played out and do you think it's bottomed out in your guidance at this point in time? And what would make it come back? So is it the funnel or are you seeing still pretty good design activity here? And then secondly, if I was to make a statement, this is part two of the question, that, you know, I think maybe your business is about bottomed out in the last quarter that happened. What would you say? Would you agree with that statement in general based on all the commentary, or would you say that maybe there's some color required there?

No, so I think the Semtech organic business is definitely, you know, Q1 was probably the bottom. I don't think it will see any further decline from that, and that's, you know, clearly why we're Guidant Q2 slightly up, and part of that is the improvement in the Semtech organic business. And that kind of narrative is the same on the Laura side. Yeah, the helium was kind of an opportunistic business, came, has now gone away, and so it's, yes, clearly in the guidance that it's not in there. Could it come back? We're not banking on helium coming back. I don't think that was ever the strategy. for LoRa, and we're banking on low-power IoT sensors growing, and as I mentioned, LoRa end nodes are growing. We're still seeing a lot of demand for LoRa across the globe. We're seeing a lot of use cases being deployed. All the dashboard metrics that I've been giving out for years and years now I think are still doing well. Obviously, China is weak at the moment, and because of what's happened with Helium, you know, the metrics don't look as good. But I think one of the things to remember anyway was part of the strategy as we integrate Sierra, you know, we're looking at a very different playing field now, the opportunity to go and attack a much larger space and with a broader portfolio. So I think that's the way you should think about it. But, yeah, to answer your question, I think it's pretty much built into the guidance. Any weakness from Helium?

Appreciate it, Mohan, and best of luck. Thank you. Thank you.

Our next question comes from the line of Tori Sevenberg with Stiefel. Please proceed with your question.

Yes, thank you. Congratulations on the retirement, Mohan. It's been great working with you these last 17 years. Let me start with a comment on working capital. You guys did a really good job there. Inventory days now back down to 159, DSOs 56. As we think about this new combined entity, what would those metrics ideally be? I know Emeka, you mentioned that you still expect to lower internal inventory somewhat, but where do you think eventually the business will land on DSOs and inventory days?

Tori, as we continue to get very familiar with the new Sierra business, My expectation would be that the inventory days will continue to come down, both in terms of Sierra's inventory and Centec organic inventory. I wouldn't be surprised to see those days of inventory probably get down to the 120s or something like that by the end of the year, given the plans that we have. We just have to see how it plays out. Of course, demand is going to be a key factor in that equation. With regards to receivables, Sierra typically has longer payment terms for their customers than the Semtec Organic business does. 59 days is not that bad, but I think I would expect to see that come down. I would like to see that maybe come down to 50 to 55 days.

That's a great perspective. And Mohan, you talked about, you know, expectations for growth resuming in data centers second half of the year. I mean, I think that makes sense given all the dynamics there. But you also mentioned you expect base station to actually grow in the second half. Any data points, you know, that gives you that conviction?

Just new tenders in China, Tori, that we know about. We don't know exactly how that's going to affect our business yet, but we know that it's happening. And, you know, whenever you hear... obviously in the base station business and the pond business, it's all about service providers and all about tenders and it's all about how many systems are going to be deployed. And so when you see tenders going out and you see quantities of unit volume quantities, then it just becomes a question of how the share is allocated. We're pretty much, as you know, in most of these 5G systems in China and 4G systems, we have very good relationships and very good penetration, and the same on the pond side. So I think our expectation is that if those come to fruition, and obviously that's always a question in terms of timing, then the second half will be stronger. If not, FY25 is going to be very strong.

Great. Thank you. I'll go back in line.

Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Hey, Maywan, I will echo my congratulations and great working with you. I wanted to search just on a follow-up on Tori's question on the base station business. I think in the past you guys have said you get much higher content in sort of the 3 to 6 gigahertz bands rather than the 700 megahertz band. Just wondering if these tenders going out in China are in those higher frequency bands where you might have greater dollar content in those base stations.

Yeah, I believe so. Quinn, so I don't know exactly the detail, but I believe they are.

Perfect. And then on the turns percentage, I may have missed what turns was in fiscal Q1, but 39%, I think, is back up towards the higher end of certainly recent ranges. With visibility still being pretty low, how comfortable are you with turns up near 40% for the second quarter?

Yeah, I think, you know, actually, this is kind of closer to our historical levels. So, you know, we actually, if you go back pre-COVID, I mean, we were turning, you know, 40, 50%. As you know, consumer business, that's kind of normal. So, you know, this is kind of getting back to normal levels, I think. So we're quite comfortable. Obviously, we have a mechanism we look at backlog we look at you know what's on the books we look at channel inventory and you know we have to make some adjustments there depending on what we expect to happen to pos and you know the consumption levels uh but that's uh that's driving the uh the terms number but we we are quite comfortable yep great then lastly a quick one for a mecca just on the optics reductions you know it looks like they're coming in nicely ahead of plan

How much of that is in the near term just lower variable comp or lower selling expense? You mentioned watching travel expenses pretty closely that as the business recovers may come back versus cuts that are more permanent, whether it's headcount reductions or just you're streamlining R&D expenses and those expenses don't necessarily come back as the business recovers.

I think it's roughly equal, Quinn, in terms of us seeing higher levels of synergies and then some of the other opportunities that I spoke to. But I think even if anything is going to come back, we're not expecting them to come back in this current fiscal year. We are definitely managing things on a very tight basis for the rest of the year.

I think the other point on that, Quinn, As you know, if you go back and look at our history, you know, a lot of the variable comp is driven by our ability to generate profitability. So it's dictated by the revenue, right, and the growth in the revenue. So, you know, a lot of those expenses won't come back if the revenue doesn't come back.

Got it. Okay. Thank you.

As a reminder, ladies and gentlemen, it is Star 1. They will ask a question. Our next question comes from the line of Matt Ramsey with Cowan. Please proceed with your question.

Yes, thank you very much, guys. I appreciate you taking the questions. I guess the first one that I wanted to get to, and obviously there's some with the new CEO coming in and the board doing different evaluations of things. I wanted to ask sort of a nuts and bolts question. Just with the non-IoT businesses, so the signal integrity and the protection and sensing segments, What's the operational overlap between those two business segments from a R&D perspective, from a go-to-market and sales perspective, from a FAE perspective? I'm just trying to understand. There's obviously synergies and things, but how independent are those businesses or how integral do they need to be to be run together? Just general big picture things. Thanks.

Yeah, so Matt, I think if you go back and look at Semtech's history, we've always had business that are, you know, largely discrete businesses that stand alone. That's what analog companies do. It's a portfolio of different analog businesses. And each of these analog businesses, we largely don't do the whole system. I mean, we are doing analog functions. So, you know, advanced protection has advanced sensing functions, advanced protection functions in our SIP business. We do CDRs and PMDs, but we don't do some of the digital functionality. So that's the way we run it. But they are very different independent businesses. They don't really have a lot in common with each other. But we target attractive markets. And as most high-performance analog companies do, you look for opportunities to continue to expand in those businesses. And that's what we've done with our integrity product business, which used to be the old Genom business that we acquired. That's what we've done with our protection business for many years now. And even the IoT business for Semtech, organic Semtech business, was largely just radio business, a low-power radio business with Laura. We had some other functions, analog functions around it. The difference now, of course, is with the acquisition of Sierra, we have brought in a module and router and a software and services business. But as those of you who have kind of kept aware of what we were doing with LoRa as we expanded from our radios, from our LoRa end node radios into gateway radios and connected to systems and networks, we started to look at cloud services as an opportunity. And part of the rationale, of course, for the Sierra business was to try to accelerate that and bring in a sensing service business. and really build on the edge capabilities that we have. And so those are slightly different than kind of the chip business approach that we have, but I think it can really take Semtech to a whole new level, and that's why we did the acquisition. But to answer your question, the protection business and the signal integrity product business and the IC business of IoT are very different businesses.

Thank you for that. I appreciate the perspective. I guess as my follow-up question, in the IoT business, largely it came from Sierra, there were obviously cloud infrastructure pieces or connected services business that were affiliated with the old Aura business and also with the big IoT franchise that came in from Sierra. Is the intention to integrate those cloud platforms into one, and how has that evaluation started, and is it progressing well? I guess what kind of overlap is there and opportunity to sort of put those two cloud platforms together. Thanks.

Yeah, so when you look at the Sierra software services business, it's really a managed connectivity business. It's a managed network business. It's really managed network services with some elements of services around the managed connectivity. With SEPTEC, it's all about the end nodes and managing those end nodes. and thinking about sensors. And so, you know, marrying the two together, we're essentially saying we're building a higher value platform for our customers. So a customer that wants to build a private network, for example, and manage its sensors on that network and have managed connectivity and understand where the security holes are and understand the provisioning of those sensors on the network and understand the you know, location of the sensors on the network and the health of the sensor. I mean, that's really the kind of end game, I think, for us. And I think we're in a, we really have a very nice platform to do that now. The Sierra Advantage platform, the software platform that they had, which they've had for many years, combined with our cloud, Laura Cloud platform. And, you know, obviously there's work to do on the integration side, but Really, once we've done that, I think it's going to be a very unique and very differentiated platform.

All right. Thank you very much, guys. I appreciate it.

We have a follow-up question from the line of Tori Svenberg with Stifel. Please proceed with your question.

Yeah, thank you. Just two quick follow-ups. The turns 39%, that was at the beginning of the quarter, How would that number be now as you're almost halfway through the quarter?

Yeah, we don't normally give that out, sorry. You know, I haven't given that number out. We normally talk about the terms at the beginning of the quarter. I would just tell you that we're confident that we'll make our, you know, guidance, right?

Got it. But I mean, it's safe to say that, you know, the world is back to terms, right? Because obviously the industry hasn't had a lot of terms the last few years. So we're sort of back to that, right?

Yeah, I think, you know, so you remember during COVID, I mean, the tons went to zero, right? So, you know, we basically had a backlog. And that was an unrealistic situation. And so now we're getting closer. I don't think we're quite there yet, but we're getting closer to the pre-COVID levels where, you know, we were routinely turning 45% a quarter, right? Got it. And the 67% that's now IoT?

What percentage of that is services at this point?

Let's see. Do you have that number?

No, I don't have that number. Sorry, but I can get it to you.

Okay. No, that's fine. We can follow up. Thank you. Yeah. Okay.

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

Hi, this is Wayne Locke on the line for Rick. Wanted to wish you the best in your retirement. It's been a pleasure working with you. For my first question, in your prepared remarks, you guys mentioned bookings increased 1% quarter over quarter from the organic SymTech and more particularly from advanced protection and sensing segments. I was wondering if you could parse that out a little bit further. Are you seeing more of this strength from the protection business or more from the proximity sensing side?

We're seeing both, actually. The consumer business in general has been really soft over the last few quarters, as you know, particularly in China. And I would say that we're starting to see improvements in both the consumer business, consumer protection business, and the consumer sensing business. But I would say on the proximity sensing business, a lot of it's now, as I mentioned, in China, you know, the new regulations are for FY25, the starting calendar year 24, are driving more design wins. So I would say that the consumer protection business is what's driving the current demand increase.

Got it, great, thanks. As for my follow-up, particularly within protection, it looks like the broad market side reached 55% of your protection business, that mix. But given the higher growth of this segment, do you expect this mix to shape out for the rest of the year compared to the consumer side?

No, I expect consumer to come back actually and be a larger percentage again. I think what it demonstrates is the value of having that diversity and the fact that we have momentum in the broader protection business bodes really well for the future. because that's a business that I think will go on for the next 10 years growing as we start to just get broader industrial penetration. The consumer business, of course, is very volatile, right? It goes up and it goes down. Currently, it's very down, which is why our protection industrial business has got a larger percentage. But I do think that once that protection business, and we've got good design wins, so once the demand comes back, I think that will come back quite quickly and be a larger percentage.

Great, thank you.

We have a follow-up question from the line of Craig Ellis with B. Reilly. Please proceed with your question.

Yeah, thanks for taking the follow-up, and since I missed it in the initial round, Mohan, congratulations. Great pleasure working with you, and good luck in your next phase. I wanted to follow up on a couple of longer-term things. I think China is implementing proximity sensing standards that go into effect in January of 2024. As the team works with smartphone companies around designs for early next year, what are you seeing in terms of content and proximity sensing, win rates versus where you might have been in other generations of phones, et cetera. Is this looking something like something that could be a meaningful incremental driver? Does it just support the run rate of the business as you have it?

Yeah, so first of all, it's something that we've been working towards and hoping for for quite a few years now. It's been actually probably two years later than we had liked, but it's finally coming to fruition. And the main reason for that and the reason why it's valuable for us is it means that most of the smartphone manufacturers that sell into China will now include proximity sensing or SAR functionality in their phones. As you know, with Samsungs and some of the companies that we have partnered with and have penetration with, they have multiple phones and some of their phones that don't have proximity sensing and they ship into China. But now that will change. So We are starting to see that momentum already in China and outside China. So that's good. So it's more design win. Of course, we don't see the momentum from a revenue standpoint, but I expect to see that in FY25 for sure.

That's helpful. And then, you know, from time to time, we talk about Amazon Sidewalk Initiative, and I know it's something that the company's worked on. Just any color on how you feel like the team is progressing with Amazon and prospects for that to monetize as we go through the year.

Yes, on the sidewalk side, Craig? Yeah, so I think it's early, but, you know, I think, you know, obviously the smart home world in IoT is really just beginning, I think, in many ways. And I think, you know, Amazon's vision and with their sidewalk initiative is something that we've always um, you know, supported and feel like, feel very good about. And I think as we start to see some of the use cases and applications that, uh, you know, they're, that are out there, uh, we're excited about it. Now we're excited about it from a smart home standpoint, regardless of Amazon sidewalk. So I think it, it's going to continue. We're going to continue to see Laura kind of, um, become a mainstream technology in the smart home connected spaces area. Uh, obviously, uh, we are really hopeful that the sidewalk, uh, also has tremendous success. They already have a lot of gateways out there in the ecosystems, and now it's about end devices. And so I haven't got any kind of major update, but I think that we're still very positive about it.

Got it. Thank you very much, Mohan.

Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. Before we close, I want to share that we delivered our inaugural ESG report this quarter, showcasing the many ways our low-power products are having a significant impact on society as the world adopts technology to monitor and manage our scarce natural resources. You can find this report on our website. In closing, our global teams are executing well in a challenging economic environment. I know I'm leaving the company in excellent hands with the arrival of Paul Pickle, As the next Semtech President and CEO, thank you all again for the many years of support.