Semtech Corporation

Greetings and welcome to the Semtech Corporation second quarter fiscal year 2025 earnings call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

I'm moving towards us, driving up demand for Semtech's world-class portfolio of product, technology, and services. Through disciplined investment, innovation, and efficiency will develop even more differentiated solutions that entertain the critical business needs of our customers. In so doing, we expect to achieve solid organic growth, SAM expansion, market share gain, and margin expansion. Third, energize our people and elevate our winning culture. I have been hugely impressed with our talented and committed workforce and leadership, but we can do more. We will invest in our people, align around a clear vision and focused strategic imperatives to accelerate results with a winning mindset and high performance culture. Moving to our second quarter results, I believe Semtech has executed well to the established strategy, as demonstrated by solid second quarter financial performance, with a sequential revenue growth across each of our business units and a favorable outlook for our third quarter that forecasts acceleration of our growth. For the second quarter, infrastructure net sales were $52.9 million, with net sales for data center of 27.2 million, up 28% sequentially and up 37% year over year. In hyperscale data center applications, net sales more than doubled over last year and were well supported by strong demand for a fiber edge transimpedance amplifier or TIA and laser drivers for 400 gig and 800 gig optical modules and a tri-edge 50 gig PEM4 product in 200 gig and 400 gig active optical cables. We have noted increasing CAPEX targets reported by hyperscalers, and incrementally, AI data center markets are moving towards us. Our analog solutions provide substantially lower power and lower latency, as well as significantly greater value compared to the retimed DSP solutions. My meetings with the chief system architects in data center ecosystem since joining as CEO confirmed my belief that the transportation of bids within data center has by far the greatest power optimization opportunities. Lower power consumption and latency reduction for transport are key considerations for AI computing. Delivering on this transport opportunities will allow a greater allocation of power to compute and memory. And the Semtech team has every intention on delivering our low power, low latency solutions through embedded customer engagement and our depth of analog expertise. Semtech's CopperEdge continuous-time linear equalizers have a well-documented application, where we partnered with NVIDIA to implement low-power, low-latency active copper cables, or ACC's, for blackwell racks and pods. For our 200G CopperEdge linear re-drivers, we have received the purchase orders from ACC cable manufacturers and expect the shipments to start in our fiscal third quarter in limited quantities, a nominal ramp in the fourth quarter, and acceleration in the next fiscal year. Qualifications are on schedule, and we currently estimate our annual opportunities specific to the single platform exceeds the floor case we provided last quarter. That said, Semtech's ACC opportunities extend beyond a single platform and a single customer. We estimate data centers currently deploy tens of millions of direct attached copper cables or DAC cables per year. These DAC cables are passive and as data rates and cable length increase, we expect there will be natural progression from DAC cable to ACC to meet signal integrity requirements. The market is moving towards us, and replacement of only a small fraction of DAC cables to ACC will represent a substantial increase to Semtech's SEM. Indeed, Semtech is currently engaged with a number of companies in the AI ecosystem on just such opportunities. On this front, While we believe standards bodies and MSAs have their place in this market to promote interoperability and backwards compatibility, the time to develop and approve those standards inevitably extends the time to deploy. We believe the pace of data center innovation is optimized with Semtech's direct engagement with our end customers and allows us to create a purpose-built solution for hyperscalers to address their specific challenges, we are absolutely at the right moment to adopt this approach. I expect direct engagement will accelerate Semtech's time to revenue and enhance top-line organic growth. It is this top-line organic growth that allows for prudent investment and I believe my prior experience growing a business while operating in a leverage situation, as well as in a highly cost-conscious EMS environment, well informs my decision-making process in prioritizing disciplined investments. My expectation in this investment must deliver meaningful returns to shareholders. In linear pluggable optics, Based on our engagement with a number of our key partners, we believe we have a path to LPO shipment by the latter portion of FY26. Similar to active copper cables, LPO represents an opportunity to deploy a low latency, low power solution in the optical space. With any optical transceiver consumption at approximately 30 million units, a fraction of this market Converting to LPO represents a substantial expansion to Semtech. A world-class TIA is the key to successful LPO deployment, and I'm certain Semtech's TIA fits the requirement. I have firsthand knowledge, having selected Semtech as my first choice TIA supplier to support silicon photonics product at a prior company. Our class-leading TIA performance on the receiving end well positions us for LRO opportunities as well, and we recognize there are potential applications where LRO is suited to meet customers' interoperability requirements. Moving to Pong, net sales were 20.4 million within expectation following a robust first quarter and up 49% year-over-year. Palm demand, especially the 10 gig, remains strong, with a total consumption increase of 41% year over year. 50 gig is on the horizon, and we are looking to expand this business on a global level. Regarding other product in the infrastructure and market, wireless net sales declined but remain within expectations. In wireless, We're continuing in qualification process with our tri-edge and fiber-edge wireless platforms for 5G advanced and are actively engaging with key partners like Ericsson and Nokia. We stand ready when this market rebounds. There were a few other small sequential net sales declines resulting in a 5% sequential decline. but the data center and signal integrity segment each grow sequentially. Moving to our high-end consumer end market, net sales were 37.1 million, a sequential increase of 7% or up 9% year over year. POS ticked up sequentially and increased 34% year over year, ahead of what we expect to be seasonally strong Q3. Net sales in high-end consumer TVS grew to 26 million, up 4% sequentially and up 42% year-over-year. Our market share in consumer TVS grew at a double-digit rate compared to last year, and we believe we are winning on technological and operational performance. I'm very pleased this growth is broad-based as we expand on platforms and applications. The overall ESD threat environment has been increasing. Higher performance silicon reduces the amount of expensive on-chip real estate available to dissipate surge energy. This trend increases the importance of high performance off-chip protection Semtech offers. This is yet another example for how market are moving towards us. We continue to grow our market shares at not only the world's largest consumer electronics company, but in other North American and Korean companies as well. Indeed, our consumer TVS engagement in Korea recently resulted in design wins in the industrial and automotive space. where this key customer is winning shares. This is a great example of how our direct customer engagement approach is solving customers' problems across a number of their markets and resulting in increase of SEM for Semtech. Our class leading per se proximity sensing products continue to perform well with design wins at a key Korean smartphone manufacturer. While allowing our customers to meet specific absorption rate standards is a great use case for Persei, gesture controls are a substantial source of demand for this product. Persei's class-leading 3D sensing and auto-fire sensitivity is meeting our exceeding end customer requirements for gesture control features in wearables, mobile audio, and smart glasses. For the second quarter, industrial net sales were 125.3 million, up 8% sequentially. LoRa-enabled solutions had net sales of 28.7 million, a healthy 34% sequential increase, and a 72% increase over prior year. LoRa consumption in industrial applications continue to grow, and I'm pleased that the momentum over a broad range of applications from healthcare, smart utilities, and smart city to factory automation with recent deployment in automotive facilities. A LoRaWAN expert from Mercedes-Benz presented his company's success story at a LoRaWAN live event in June. Their implementation resulted in what they characterized as enormous cost savings. It gives me great pleasure when an end customer becomes a LoRa advocate and demonstrate use cases at a Mercedes are just one reason as to why I'm excited in LoRa's future and why Semtech is fully committed to LoRa and its continued innovation and ecosystem expansion. I plan to attend the Things Conference in Amsterdam in late September to meet with the ecosystem leaders and strategize our path to democratize the LoRa standard and accelerate a proliferation. Our IoT systems business recorded a second quarter net sales of 52.3 million, up 8% sequentially, and consistent with our analysis that the business has reached a bedrock last quarter. Bookings in the first quarter had healthy sequential growth and second quarter bookings grew from there. Also, channels and customer inventory levels has overall reached the normalized levels. In our module business, we had a number of red cap design wins, demonstrating continued trust in Semtex product across a number of core network equipment customers. that demand near perfect uptime and performance. Geopolitical consideration remain a tailwind for this business on a number of front, and we are experiencing renewed engagement with some customers we believe due to this matters. Our business in asset tracking applications has benefited especially as a government and a security related users constitute a meaningful portion of this market. Government end users are becoming more educated on risks, especially after realizing their vehicle fleets are being tracked with geopolitically sensitive components. We are pleased to have launched a Canadian instance of air link management service, which meets local data residency requirement, which is particularly important for government and public safety users. The government related business is a natural adjacent market with some tax cellular system solutions. Lastly, we started production of our own TAA qualified facility to serve increased demand for TAA compliant products. This facility allows us to better support continuity in supply and to elevate our support as we aggressively pursue US federal opportunities. Second quarter net sales for a connected services business were $24.3 million, with noteworthy design wins in remote monitoring, sleep tracking, and health care. Also of note, we collaborated with ConsoConnect, a leading network as a service platform to expand Semtech's connectivity coverage across the APAC region for our AirVantage service. We believe this collaboration underscores the commitment to offer best-in-class network quality. In industrial TVS, solutions are required to address increasingly harsh ESD environments as factories increasingly automate. This is where markets are moving towards us. We continue to expand our product portfolio with innovative solutions to address critical customer needs. Now, let me turn the call back to Mark.

Thank you, Hong. For the second quarter, we recorded net sales of $215.4 million, up 4% sequentially. Net sales trend by end market, reportable segment, and geographic region is included on slide 16 of the earnings presentation. Gross margin was 50.4%, up 60 basis points sequentially, and up 80 basis points year over year, reflecting favorable mix and cost-controlled overhead spending. Operating expenses were $78 million, a 9% year over year reduction. This resulted in operating income of $30.5 million and an operating margin of 14.2%. up 200 basis points sequentially and up 60 basis points year-over-year. Net interest expense was $20.5 million in line with guidance. We recorded net earnings per share of 11 cents based on the diluted share count of 71.8 million shares. Adjusted EBITDA was $40.5 million and adjusted EBITDA margin was 18.8%, up 270 basis points sequentially and up 240 basis points year-over-year. Moving to the balance sheet, we did the second quarter with a cash balance of $115.9 million, with working capital changes largely corresponding to revenue and cost of goods sold. Inventories increased $7.5 million, or 5% sequentially, in part to support higher expected third quarter shipments and to carry a nominal amount of wafer bank, supporting active copper cable orders, but are down 13% year over year. Principal outstanding on our debt was $1.2 billion, reflecting the convert liquidization completed at the end of the second quarter. Free cash flow for the second quarter was an $8.4 million use of cash, primarily reflective of working capital changes, and we did not draw on our revolver. Now turning to third quarter guidance, we currently expect net sales of $233 million, plus or minus $5 million. We expect net sales from the infrastructure and market to increase sequentially, with data center applications leading the growth. Infrastructure is expected to provide the strongest near-term tailwind. We expect net sales from the high-end consumer market to be up, with typical seasonality benefiting this end market. We expect industrial net sales to be slightly up, as recovering booking activity from the first quarter carried into the second quarter. Based on expected product mix and net sales levels, gross margin is expected to be 52%, plus or minus 50 basis points. At the midpoint of guidance, this would be a 160 basis point sequential improvement. Operating expenses are expected to be $81 million plus or minus $1 million, resulting in operating margin at the midpoint of 17.2%, which would result in a 300 basis point sequential improvement. We expect net interest expense to be $18.8 million, reflective of debt reduction and a tax rate of 15%. These amounts are expected to result in a net earnings per share at $0.23 plus or minus $0.03, based on a weighted average share count of 78.6 million shares. Adjusted EBITDA is expected to be $48.7 million plus or minus $2.8 million, resulting in EBITDA margin at the midpoint of 20.9%, which would equate to a sequential increase of 210 basis points. Guidance at the midpoint contemplates growth in net sales improving gross operating and adjusted EBITDA margins, and higher diluted earnings per share. With that, I'd now like to turn the call back over to the operator for Q&A.