Semtech Corporation

Thank you, operator. A press release announcing an audited resource was issued after the market closed today, and it's available on our website at CEMTECH.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 filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only, and Semtec undertakes no obligation to update the information from this call should facts or circumstances change. During this call, all references made to financial results other than net sales were referred to non-GAAP financial measures or less 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. Turning to Q2 fiscal 2024, the company delivered net sales of $238.4 million in line with the midpoint of our guidance and an increase of 1% sequentially and 14% year over year. Gross margin of 49.6% and earnings per share of 11 cents. was above the high end of our guidance range. In Q2, shipments into North America, China, Europe, and the rest of the world represented 24%, 29%, 14%, and 33% respectively. The addition of Sierra Wireless has increased our geographic mix towards North America and Europe. Total direct sales represented approximately 36 percent of net revenue, and distribution represented the remaining 64 percent. In Q2, gross margin was 49.6 percent above the guidance range, driven by some one-time benefits. For Q3, we expect gross margin to decrease approximately 160 basis points sequentially at the midpoint of our guidance. as the favorable impact of a higher mix of IC components revenue is offset by the one-time benefits in Q2 and lower absorption. Due to the softer demand environment and the subsequent lower absorption, we expect our gross margins for the rest of the year to remain around current levels. In Q2, operating expenses was $86 million, 6% below the midpoint of guidance. due to focused cost reduction actions in addition to synergies. We expect these cost reduction actions and incremental synergies to drive Q3 operating expense lower to between $81 million and $85 million. In Q2, cash flow from operations was a $12 million use of cash impacted by demand softness and interest expense on our debt. Our cash flow from operations will remain challenging Q3 due to a softer demand environment. Our growth debt at the end of Q2 was $1.4 billion or approximately 5.3 times leverage on a net basis. We expect our leverage levels to increase for the remainder of the year as we navigate this softer demand environment. We expect to be in compliance with the financial governance included in our debt agreement. The Q2 weighted average cash interest rate was approximately 6.37%. In summary, our financial performance continues to be impacted by macroeconomic headwinds. Meanwhile, we are taking focused actions to realign our operations to enable us not only to manage the current headwinds, but also to position us for strong earnings growth when the demand environment improves. I will now hand the call over to Paul. Thank you, Emeka.

While our net sales for the second quarter met expectations, I'm proud to note that our cost-saving measures enabled us to surpass estimates on both gross margin and EPS fronts. Yet, as we navigate today's economic climate, our Q3 outlook remains cautiously reserved, reflecting elevated channel and customer inventories. stemming from previously optimistic projections. We're intensifying our focus on cost control and operational enhancements in response. I see component sales after an initial dip this fiscal year is now showing stability with a 16% sequential growth in net sales. Further improvement is anticipated for the rest of the year and into the next due to customer design engagements being primed to boost consumption in the upcoming quarters. particularly in the infrastructure and consumer end markets. Our IoT systems product group witnessed an 11% sequential decline, bringing the total to $119 million on a pro forma basis. While we have experienced a decline in demand for both module and router products, modules revenue is presenting a particular challenge in the current quarter. However, we are seeing silver linings in the broadband module business horizon, with legislative discussions putting our low-cost APAC competitors under the spotlight. This presents us with an unexpected opportunity to expand our market share. In-quarter pipeline engagements have significantly increased as a result, and we're gearing up to seize this window to our advantage. Despite a minor drop in wireless radio-enabled component sales, LoRa end node sales increased slightly. LoRa's potential for private networks, especially where power, reach, and mobility are crucial, remains significant. While LoRa may not be a cellular infrastructure substitute, its unmatched value proposition for specialized private networks remains undebated. We're envisioning a more inclusive strategy to harness this vast potential, especially at the outer fringes of the IoT realm. Q2 IoT-connected services remained relatively consistent. At $24 million, a 20% year-over-year growth was achieved from smart and enhanced carrier connectivity. Given the relatively low attachment rates for our cloud services platform, we will be focusing on enhancing hardware revenue with a high margin software sales and a renewed focus for our IoT managed connectivity and cloud platforms. The Signal Integrity Products Group grew 12% sequentially in Q2 quarter to $46 million. Cloud hyperscale data center revenue was significantly up sequentially in the quarter, benefiting from the momentum in AI-driven applications. Product sales were driven by strong 100-gig, 200-gig, 400-gig data center and broadcast revenue. Tri-edge and fiber-edge applications all improved sequentially, with a large U.S. hyperscaler placing initial orders for a 400-gig active optical cable application. These gains were offset by weaker 10-gig China PON and wireless infrastructure revenue. Channel inventories remain high amidst improving, although cyclically weak, in-market demand. China infrastructure demand, although stable, remains muted. Our product portfolio in PON is well positioned and is poised to benefit when this market rebounds in the upcoming quarters. The advanced sensing and protection products grew 35% sequentially, primarily driven by anticipated production of new design and secured in smartphone applications. We are especially well positioned with new protection circuitry for North American smartphone vendors. Proximity sensing or our per se product was also up in the quarter ahead of anticipated regulations in China for specific absorption ratio limits starting in fiscal year 25. Per se is still in the early innings of the design cycle, but the penetration and early ramp is encouraging. We continue to make progress in diversifying our end markets for the advanced sensing and protection products group with approximately half of product revenue coming from industrial telecom and automotive applications. For Q3 2024, we project net sales between $190 million and $210 million. Non-GAAP earnings for Q2 are expected to range between minus 9 cents and plus 22 cents per diluted share. We're steadfast in our commitment to the synergy plan presented to investors earlier this year and aim to fulfill it ahead of schedule. Post my induction, I launched a robust cost reduction initiative which, along with other measures, has decreased our OpEx run rate by about $100 million compared to the last year's combined entity, Proforma. Further refinements are on the horizon. During my short tenure at Simtech, I've been immensely impressed by our team's dedication and talent. Our unique, state-of-the-art products create a competitive barrier, setting us apart. After extensive discussions with team members, I'm optimistic about navigating current market challenges. The tech industry is seeing fluctuations due to pandemic-driven demand, but the need for electronic advancements remains robust. At Simtech, our vision is clear. Enable a smarter, more connected planet. Our focus for the upcoming months will be to execute this vision. I'll now turn it over to the operator for Q&A. Thank you.

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. 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 keys. One moment please while we poll for questions. Thank you. Our first question comes from Craig Ellis with B Reilly Securities. Please proceed with your question.