Semtech Corporation

Good day, everyone, and welcome to all those joining today's call, including analysts, investors, and my fellow employees. I am Mark Lin, Executive Vice President and Chief Financial Officer, and I'm joined today by Paul Pickle, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the fourth quarter and for fiscal year 2024, which are posted to our investor website at investors.semtech.com. Supplemental earnings materials, including net sales data by end market, reportable segment, and geography, as well as the share count table reflecting potential share issuances from our convertible notes at various stock prices, are also posted to our investor website. I encourage participants on the call to access these materials. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than net sales. A discussion of why the company considers such non-GAAP financial measures useful along with reconciliations of such non-GAAP financial measures to the most comparable GAAP financial measures, are included in today's press release. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ maturely 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 risk factor section of our most recent periodic report followed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current only as of today, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. With that, I'll turn the call over to Paul to discuss our business and end markets.

Thank you, Mark. Semtech reported fourth quarter financial performance generally within my expectations, with net sales slightly above the midpoint of guidance. I'll provide a bit more color on end market performance and note end market consumption sequentially increased in each of our end markets. For the fourth quarter, infrastructure net sales were 39.4 million, a sequential decline of 9% and largely driven by an expected pause in North American hyperscale data center deployment and our intent to normalize channel inventories. For the fourth quarter, Infrastructure POS sequentially increased approximately 14% and channel inventories declined as anticipated. In data center, we had strong market interest continue for our fiber edge TIAs and laser drivers for 400 gig and 800 gig optical modules. Our market leading 200 gig per lane products started production in Q1 with support from key hyperscalers and we continue to support customers undertaking 1.6 T optical module designs using our fiber edge offerings. We are pleased to report design and activity for our newly announced direct edge platform of TIAs and laser drivers enabling 800 gig linear pluggable optics or LPO modules. We demonstrated these products at the Optical Fiber Communication Conference this week with favorable market feedback, and we expect to begin shipping these products at the end of FY25. In addition to recent advances in our data center optical portfolio, we are pleased with growing demand for our copper edge linear redrivers for 800-gig active copper cables, supporting AI machine learning data center build-outs. Compared to DSP-based active electrical cables, our linear copper edge power requirements are over 80% lower, operates with significantly lower latency, and offers a cost advantage. We are currently sampling our 200 gig per lane copper edge chips and are very excited to be partnering on designs into 1.6 TACC applications. We expect 1.6T design and activity for both ACC's and optical modules to support leading edge AI and ML data center deployments. Based on current design schedules and engagements with data centers, as well as with cable and module manufacturers, we expect shipments to begin to ramp for these 1.6T designs at the end of FY25. Moving to passive optical networks, we saw increased pond demand in the quarter. accelerating off of fairly low levels following the release of bidding tenders in the China market. Fourth quarter POS increased sequentially, and based on the first weeks of first quarter activity, average weekly POS is nearing FY23 levels. Based on our analysis of recent tenders, pawn demand includes both XG pawn and XGS pawn, supporting optical line terminal and optical network unit buildouts. Continued transition to 10 gig and higher speeds benefits Simtech based on our first market position, our technical leadership, and our superior product performance. We expect the global transition to 10 gig and higher speed PON will partially offset the slowdown in real estate development in China. We are also pleased with our engagements to support XGS PON deployments in North America. And though we are still in early innings, We expect demand trends requiring higher and higher speed access to the cloud will result in long-term market opportunities for SimTech in North America and EMEA. Regarding other products in the infrastructure and market, wireless demand remains muted, though we are leveraging our expertise in the data center market with demos at OFC aimed at 5G advanced, including tri-edge 50-gig combo drivers and copper-edge 50-gig ACC's. We are currently participating in qualifications of 50-gig front-haul systems and expect sales in the latter half of FY25 for these products. Further, we believe our recently announced products in the fiber edge family for 100-gig VR will provide groundbreaking improvements in network power efficiency and performance. For the first quarter of fiscal year 2025, we expect net sales from the infrastructure in market to increase sequentially. with pawn applications leading to growth. For the fourth quarter, high-end consumer net sales were 32.1 million, a sequential decrease of 15%, coming off of a third quarter seasonal high for TVS products. Encouragingly, high-end consumer POS increased nominally in the fourth quarter compared to the third quarter, with proximity sensing offsetting an expected decrease in consumer TVS from smartphone seasonality. On a year-over-year basis, high-end consumer POS increased approximately 28%. Revenue and POS trends indicate normalizing channel inventory levels, though we would like to see further reductions, primarily through expectations for stronger in-market demand. We believe market share for our consumer TVS products, particularly in USB Type-C applications, has increased as validated by fourth quarter POS levels that grew over 30% year over year and exceeded both the first and second quarters of FY24. Proximity sensing products benefited from specific absorption rate standards that went into effect in China at the beginning of the year. In what was expected to be a seasonally down quarter for handset production, fourth quarter proximity sensing sales and POS both increased sequentially and year over year, indicating market adoption of Simtech's industry-leading per se sensing solution. Fourth quarter proximity sensing bookings were at their highest point in the fiscal year. In Chinese handset manufacturers, we believe we have a majority of the SAM for sensing products and a substantially higher percentage in their high-end smartphone models. For the first quarter, we expect net sales from the high-end consumer market to be flat, slightly up, as we continue to evaluate channel inventory health. For the fourth quarter, industrial net sales were 121.5 million, up 1% sequentially and within expectations. IoT systems reported fourth quarter net sales of 65.5 million, up 11% sequentially. Encouragingly, fourth quarter net sales for modules were up over 20% sequentially, benefiting from customer requested shipments on certain end-of-life models and higher LPWA sales into smart metering and asset tracking applications. U.S. government focus on suppliers into critical infrastructures also garnering attention in the European market where we have increased opportunities in markets such as smart metering and payment processing. We believe CEMTEX advantages in ultra-low power consumption, Scalability through our selection of worldwide bands and high transmit power supplements our position as a trusted North American supplier. Module and customer inventories in many applications remained elevated, though, and visibility remains limited. As such, we believe time to meaningful recovery in this market will be extended. We continue to invest in the portfolio, though, expanding our 5G and Cat1bis offerings in the middle of FY25. For the fourth quarter, router net sales were down about 13% sequentially as we worked to address elevated channel inventories. Consistent with last quarter, lack of a U.S. federal budget freezes spending on all projects, federal and local, not deemed essential and mission critical. As such, a typical uptick in fourth quarter agency spending was muted. In the fourth quarter, consumption was at the high point for the fiscal year, and at the end of the quarter, channel inventory at the low point of the fiscal year. That said, we believe our router business is still moving toward a recovery phase in the second half of fiscal 25 as we continue to monitor channel inventory health. We are encouraged with the positive feedback on our recent launch of the XR60, the world's smallest rugged 5G router, and builds on our core markets of industrial and public safety. Pipeline for the XR60 is strong, and we expect this product to contribute to revenue growth in fiscal 25 and beyond. We are also encouraged from feedback at Distributech in the utility space where our product solutions support private networking spectrum and have resulted in sales and pipeline development. IoT connected services reported fourth quarter net sales of 24.2 million, flat sequentially and also within expectations for this relatively stable stream of recurring revenue. We continue to invest in our service platform, delivering reliable, high-quality connectivity and cloud-based services, including smart connectivity, device control, data insights, and fully managed solutions. Net sales of our RF industrial products, including LoRa-enabled solutions, declined about 14% sequentially, but POS increased approximately 13%, consistent with our goal of healthier channel inventories. Bookings in the fourth quarter sequentially increased over 30%, and have increased for the last six sequential quarters. Lastly, hearing aid applications, which integrate LoRa into custom SOCs, are expected to result in meaningful revenue in FY25. ITATVS faced a headwind from elevated channel inventory, but we are pleased with the progress of Search Switch, with customer count across a broad spectrum of industrial, medical, and automotive companies more than doubling in the last year. Our strategy leverages customer engagement and adoption of our best-in-class consumer products to capture meaningful SAM. We are pleased with healthy fourth quarter sequential growth in POS for ITATVS. Similarly, we are engaged in the industrial and automotive space for our sensing products and are encouraged by design wins in the fourth quarter. Our consumer products are gradually providing incremental momentum to the ITA flywheel. For the first quarter, we expect industrial net sales to be down with continued inventory digestion in modules and routers and the aforementioned public sector headwind, but stable net sales from our managed connectivity offerings and growing LoRa net sales. Now, I'll turn the call back over to Mark.

Thank you, Paul. First, a few housekeeping items on our segment reporting. The primary change is our newly created analog mixed signal and wireless segment. which combines the former APS segment with LoRa from the IoT Systems segment and a CVOE from the Signal Integrity segment. From a functional perspective, this change aligns similar development teams under one general manager and streamlines allocation of R&D resources. The ISP segment now consists of our routers and modules business. Supplemental earnings materials reflect this change for all periods presented. Turning to our fourth quarter results, we recorded net sales of $192.9 million, slightly above the midpoint of our guidance. Paul discussed end-market net sales performance with infrastructure down 9% sequentially, high-end consumer down 15% sequentially, and industrial up 1% sequentially. These results were largely in line with our expectations and reflective of our objectives to support a healthier channel. Gross margin was 48.9% at the high end of our guidance for the quarter. reflecting favorable overhead spending offset by a higher mix of lower-margin module sales. Auburn expenses were $76.5 million, down 7% sequentially, but low of guidance in total. R&D expense decreased 13% sequentially from $43.9 million in the third quarter to $38.2 million in the fourth quarter. SG&A declined slightly from $38.6 million in the third quarter compared to $38.3 million in the fourth quarter. SG&A came in above expectations with higher costs to support key customer engagements and lower than expected vacation usage to support integration efforts, especially around our migration to a single ERP, which went live at the beginning of the first quarter. There were also some cost savings modeled into operating expenses that we realized in cost of goods sold. Net interest expense was $19.9 million. Other expense, which consisted primarily of foreign exchange losses, was $2 million. We recorded net loss per share of $0.06, based on a diluted share count of 64.4 million shares. For fiscal year 2024, we recorded net sales of $860.8 million, gross margin of 49.5%, and diluted earnings per share of $0.14. Moving to the balance sheet, We ended the fourth quarter with a cash balance of $128.6 million. Working capital moved in a favorable direction with accounts receivables decreasing $22.3 million sequentially and inventories decreasing $15.6 million sequentially. Principal outstanding on our debt was $1.4 billion with a weighted average interest rate of 5.86%. At the end of our fourth quarter, our consolidated net leverage ratio calculated in accordance with the credit facility was 9.11%. Operating cash flow for the fourth quarter turned positive at $13.9 million and free cash flow was $12.2 million. Consistent with our capital allocation priority to reduce leverage, we made a $5 million optional prepayment on our credit facility in the fourth quarter. Adjusted EBITDA for the fourth quarter was $24 million compared to $20.1 million in the third quarter. Before I discuss our first quarter guidance, I'd like to touch upon the non-cash goodwill and intangibles impairment charge we recorded in the fourth quarter. In conjunction with our annual goodwill assessment, which occurs on the first day of the fourth quarter of each fiscal year, we recorded a non-cash impairment charge to goodwill and intangible assets of $605 million in the ISP and ICS segments. Our assessment of near-term headwinds and moderated outlook for ISP and ICS contributed to the charge. We will also report material weaknesses in our Form 10-K, which primarily relate to Sierra Wireless, and for which we believe a single ERP will substantially contribute to remediation. Now turning to first quarter guidance. We currently expect net sales of $200 million, plus or minus $5 million. Our infrastructure market is expected to be up sequentially, reflecting PON and data center gains. High-end consumer is expected to be flat to slightly up sequentially, as higher channel inventory levels on specific SKUs offset generally higher demand. The industrial end market is expected to be down, reflecting softness in the hardware business, partially offset by lower shipments. In the fourth quarter, end customer demand, consisting of direct shipments plus POS, improved sequentially across all of our end markets. That said, our net sales guidance for the first quarter continues to reflect our goal of a healthier channel. Based on expected product mix and revenue levels, gross margin is expected to be 49.5%, plus or minus 100 basis points. Operating expenses are expected to be $70.5 million, plus or minus $1.5 million. SG&A expenses are expected to be $36.5 million at the midpoint. Research and development expenses are expected to be $42 million at the midpoint, reflecting incremental investment supporting key products. We expect net interest expense to be $20.5 million and a non-GAAP tax rate of 12%. These amounts are expected to result in a net income per share at break-even, plus or minus 4 cents. I'd now like to turn the call back over to the operator for Q&A.