Q2 2021 Semtech Corp Earnings Call
And welcome to the Semtech Corporation second quarter 21 earnings call.
At this time, all fortress Ernie listen only mode.
Great question answer session will follow the formal presentation.
If anyone should require operator or technical assistance during the conference. Please press star zero and your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Sandy Harrison Vice President of Investor Relations. Thank you Mr. Hershey you may begin.
Thank you Vic and welcome to sounds like conference call to discuss our financial results for the second quarter fiscal year 21.
Speakers for today's call <unk>.
South, Texas, President and Chief Executive Officer, and that could you go to our Chief Financial Officer.
[noise] release announcing our unaudited results was issued after the market close today is available on our website.
[music].
Today's call will include forward looking statements that include risks or uncertainties that could cause actual results to differ materially.
Anticipated and make statements or more detailed discussion. These restaurants certainties. Please review the safe Harbor statement included in todays press release and the other risk factor section of our most recent periodic reports filed with Securities Exchange Commission.
Minor comments made on todays call our current as of today only it sounds like undertakes no obligation.
Oh sure facts or circumstances change during the call we refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting.
A discussion of why management considers such non-GAAP financial matters useful along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measure.
Also included in todays press release, all references to financial results in more buckets formal presentations on this call wait for the non-GAAP measures unless otherwise noted.
I'll now turn the call over to subjects Chief Financial Officer.
[laughter].
Thank you Sandy a good afternoon everyone.
For Q2 fiscal year throughout your one net sales increased preferred sequentially and five cents robotic process.
What about $43.7 million, which was above the midpoint of our guidance.
If you do shipments into Asia represented 80% off and that fell.
North America represented.
12% on Europe represented a perfect.
Total direct fell short of approximately nine people effect I'm supposed to distribution was approximately 81% Duff <unk> Phelps.
Our distribution business remains above what 47% they'll put appeal, where it's coming from the infrastructure end market.
27% somebody industry and more correct.
26%, probably higher consumer end market.
Bookings decreased over the prior fourth our bread resulted in a book to Bill both war.
Both booking of accounted for approximately 21% of shipments during the quarter.
Q2, gross margin increased 50 basis points due to a higher mix of infrastructure revenue.
We expect our Q3 gross margin to be blast slightly due to a higher mix of consumer revenue.
Q2, GAAP corporate express increased 7% sequentially due to a higher share based compensation expense.
We are ready.
Q3, GAAP operating expenses increased 1% to 4% sequentially.
My money to due to higher share best compressors Trust banks, driven by higher spot price.
Q2, GAAP all got a first piece was $2.9 million, that's a $4.8 million in Q1.
The decrease was primarily due to lower.
Well I don't if a minority investments slightly offset by higher foreign exchange losses on translational foreign denominated liabilities.
In Q2, our GAAP.
Tax rate was 2.6% off the result of several discrete.
I thought.
Moving on to the non-GAAP results.
It's clear the impact of share based compensation on what the question off I'm glad intangibles opposition related an awful lot of <unk>.
Charger.
In Q2.
Non-GAAP operating expenses increased 1% sequentially I suspect that.
If you bring with Brookdale non-GAAP operating expense to the flocks <unk> Oh <unk>.
Professor gradually.
Primarily due to a higher variable compensation, a new product, especially.
For modeling purposes, if all Q4 degenerate fourth or we'd be a 14 week.
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Q2, non-GAAP basis increased to $2.2 billion from $1.1 million in Q1 due to higher foreign exchange losses from translational foreign denominated liabilities.
In Q2, non-GAAP tax rate benefit there from some discrete items I came in at a 10.6%.
That's baked out Q3 fiscal year 21.
X rigs to be into 15% to 17% drayage.
In Q2, our cash flow from up restaurants increased 43% sequentially due to higher revenue continued good management of working capital and represented 26% of revenue.
Our capex was 5% of revenue in Q2, driving a free cash flow of 21 Percentof revenue.
A reminder, Oh I get the brand is 25 preventive people going up revenue.
We expect.
Continued revenue growth to get off into that range.
We repurchased approximately 200 and put a 3000 shares off $12 million thought in Q2.
Stock repurchase authorization, no styrofoam approximately $58 million.
We expect to continue to use our cash to opportunistically repurchase our shares make strategic investments on paid down did that.
In Q2 accounts receivable increased.
4% sequentially due to higher.
Let's start with that represented 42 days itself, which remains below our target range or 40 to 45 days.
Net inventory in absolute dollar terms was flattish sequentially and days off in banks or a decreased by four days 227 days, which remains our ballpark range of 9300, Dave.
In Q3, we expect.
Net inventory to be flat.
In summary, we were pleased to deliver strong Q2 results we grew on it.
Almost three times the rate of revenue abroad.
Significantly increased.
Cash flow from operations.
Our growth engines remained solid gross margin and all put enough breakfast are stable and our cash flow, but I.
And balance sheet is strong we believe we are very well positioned to continued to deliver solid financial results into second half of fiscal yet [noise].
I do want despite the ongoing macro headwinds.
I'll now hand, the call over to more huh.
Oh, Thank you I'm Mecca good afternoon, everyone.
I will discuss at Q2 fiscal year 21 performance by end market and by product group and then provide our outlook for Q3 in fiscal year 21.
Q2 fiscal year 21, net revenues increased 8% sequentially and increased 5% over the prior year $243.7 million.
Stronger demand from the infrastructure end market was offset by softness from the high end consumer market.
We posted non-GAAP gross margin of 61.8% and non-GAAP earnings per diluted share 43 cents.
In Q2 fiscal year 21, net revenue from the infrastructure market increased 18% sequentially and increased 37% over the prior year and represented 47% of total revenues.
The industrial market net revenues increased 12, 12% sequentially.
And represented 31% of total revenues.
Net revenues from the high end consumer market decreased loving percent over the prior quarter.
And represented 22% of total net revenues.
Approximately 14% of high end consumer net revenue was attributable to mobile platforms and approximately 8% was attributable to other consumer systems.
I will now discuss the performance of each of our product groups.
In Q2 fiscal year 21, our signal integrity product group achieved a new quarterly revenue record and increased 20% sequentially.
And increased 30% over the prior year and represented 50% of total net revenues.
Record revenues from our data center.
Wireless base station and 10 gig palm businesses contributed to the very strong results.
In Q2 fiscal year 21, WRECO data center demand was led by strength from our global Hyperscale datacenter customers.
We experienced record demand Frac Clearbridge CDR platform used in 100 gig optical modules as the need for higher bandwidth connectivity within data centers continues to increase.
We expect hundred gig optical modules to remain the what cost technology for global cloud and Hyperscale data centers over the next few years.
Customer design activity for our new try edge Pam four short reach platform continue to accelerate in Q2, and we achieved additional design wins in 200 gig and 400 gig pamfour optical modules.
We expect to release our longer reach try edge platforms for both 200 gig and 400 gig optical modules, enabling up to 10 kilometers reach later this year.
We are expecting revenue from our triage products to begin to ramp in the second half of this year and increased nicely next year as a lower cost lower power and lower latency try edge provides a significant advantage over DSP based solutions.
We believe the strong secular trends in the datacenter market should provide nice growth for our datacenter business over the next few years.
In Q4 in Q2 of them quite 21.
We also saw record demand from the wireless base station market led by the emerging ramp of Fiveg base stations.
How clearag CDR and fiber edge PMT platforms are being used in Fiveg base station frontal emit whole optical modules.
I'll fight GE, Clearbridge and fiber rich portfolio continues to see solid design in activity and we expect these designs to move to volume shipments later this year and throughout next year.
As Fiveg infrastructure deployments continue to increase globally, we expect that fiveg market opportunity to be triple that I'll fortune.
In Q2 fiscal year 21 out 10 gig on revenue also grew nicely over the prior quarter and achieved record revenues.
We are expecting growth from my 10 gig PON products. This year led by the build out in China as well as a number of you point initiatives outside of China that enable gigabit to the home enterprise on campus networks.
Semtech has established itself as the leading supplier of one gig 2.5 gig and 10 gig pawn pmdi platforms for the owing you and all T. markets and we expect our innovative products to allow us to continue to benefit from the growth in palm deployments globally.
Well it infrastructure deployments can be lumpy, we believe the ongoing secular trends driven by the upgrade of data center pawn and wireless network capabilities should drive future demand for our higher bandwidth platforms across all our target infrastructure markets.
For Q3 fiscal year 21, we expect net revenues from our signal integrity product to be down slightly as fiveg wireless growth is offset by lower data center and PON demand following the very strong first half demand.
Moving on to our protection product.
In Q2 fiscal year 21, net revenues from my protection product group decreased 17% sequentially and represented 23% of total net revenues.
In Q2 fiscal year 21 demand from our Korean smartphone customers declined due to covert 19 related issues.
We expect South Korean smartphone demand to recover beginning this quarter as you smartphones begin to ramp.
Demand from our North American and Chinese smartphone customers remained solid through Q2.
Our protection product group continues to execute on its diversification strategy focusing on applications in the industrial automotive and communications markets.
Our high performance protection solutions are gaining momentum in systems, where high speed interfaces, such as USBC HD My 2.1, and 10 gigabit Ethernet are being designed with advanced lithography processes.
The foster interface speeds and use of more sensitive components are driving demand for high performance protection solutions.
We expect these trends to continue and contribute to the further diversification of our protection business.
In Q3 at fiscal year 21, we are expecting out protection revenues to increase nicely led by strong the smartphone demand for North America, and Korea and growth from the broad based industrial and communications markets.
Turning to our wireless sensing product.
In Q2 fiscal year 21, net revenues from my wireless sensing product group increased 18% sequentially led by record revenue from our Lora enabled platforms.
Represented 27% of total net revenues.
Our Lora business continues to make excellent progress despite the global challenges associated covert 19.
In Q2 fiscal year 21, we made solid progress against the more metrics, we targeted at the beginning of year.
These included the number one number of countries with lower networks now stands at 92 countries and we expect over 100 countries to have more networks by the end of fiscal get 21.
The number of public or private Lora network operators grew 243, and we expect a 150 Lora network operators by the end of fiscal year 21.
The number of lower gateways deployed grew to over 1 million from the 642000 gateways at the end of fiscal year 20.
We are now expecting the number of more gateways deploy to increased over 1.3 million by the end up at White 21.
He is 1 million deploy gateways enable a sense the capacity of approximately 5 billion and nodes.
The cumulative number of lower end nodes increased 258 million from 135 million at the end of fiscal year 20.
And we expect this number to exceed 180 million cumulative nodes by the end of that by 21.
Finally, the lower opportunity pipeline, which includes both opportunities I'm leads stands at approximately $500 million with approximately $200 million of leads feeding the future opportunity pipeline.
We continue to expect the opportunity pipeline to exceed $700 million with an additional $300 million of lead speaking these opportunities by the end of fiscal year 21.
This opportunity pipeline remains geographically well balanced with approximately 70% of the opportunities now coming from the Americas and Europe and includes an increasing number of use cases, and the smart home asset tracking and supply chain logistics markets.
In addition to the record revenue performance and the solid progress on our targeted metrics Q2 also represented a quarter of many important achievements. Laura. These include the recent release of our lower edge platform has been met with extremely strong customer interest.
Our edge is our first Lora based software defined radio platform that includes wife, I sniffing, and GPS sniffing functions and enables to silicon to cloud connectivity.
Nor edge is an ideal platform asset tracking and asset management use cases and is expected to be the enabler about future cloud services revenues.
We recently announced a collaboration with Amazon Web services.
Double U.S. to offer asset tracking and smart building kits that integrates lorawan straight into the Amazon cloud.
These kids will simplify I O T I OTI solution development by system integrators and enterprises that can now leverage HW S is leading I O T services and network infrastructure to accelerate the introduction of new solutions.
In addition to the hardware the kits provide out of the box cloud dashboard capabilities.
Asset tracking kit allows users to locate and track outdoor assets using a cloud dashboard, while the spot building kit allows users to more users to monitor doors and windows manage occupancy detect water leaks detect choirs assess environmental conditions detect chemical or other hazardous situations and ensure a quick and safe.
Valuation Paul.
We expect these initial offerings for asset tracking smart buildings to pave the way for many other future industry verticals, such as smart utilities smart homes, and Smart health care to also deployed Laura and AAMC.
Korea ex Sprite Expressway Corporation or Kate you see has built a lorawan network, where its expressways in Korea.
The network will monitor parking spaces monitor trash rest areas, one is a barriers and monitored guard rails real time.
In the future network will be expanded to provide detection of road freezing tunnel management and expressway like management.
Using lorawan KBC expects to reduce operating costs by $2 million per year.
And it is widely anticipated that fiveg deployments in the region are expected to be an additional capital is for lower demand.
Hey, just receipt announced the integration of moral line into each new intelligent intelligent door lock applications to increase safety efficiency and convenient management of dormitories in schools use of more enables entry viral we have a buyer wireless key fault or Keith.
Todd and enables campus stop to monitor who enters and exits buildings.
You know smart integrated Lora technology into its new Yowling line of residential I O T products that provide many advantages, including simple deployment and quick connectivity for a variety of whom applications, including smart doors security systems, electrical outlets and water leak monitoring.
You know smarts more devices enable smartphone connectivity over half a mile enabling a number of new smart home use cases.
Finally opportunities associated with Cobot 19, Lora is ideally suited for applications such as contact tracing systems tracking hygiene monitoring and occupancy management continued to expand we now have a fast growing capital of customers and partners that have announced last solutions for cobot 19 use cases in the emerging smart.
Health market.
The flexibility low cost long range on low power more networks, a critical components of any successful LP when I O T deployment, and we expect large continued to make inroads in new markets that demand these benefits.
Despite a record Q2 performance and anticipation of another record performance in Q3 for F. Why 21, we're now expecting our lora enabled revenues to be between $85 million and $95 million due to significant customer program pushouts related to cope with 19.
We continue to believe the momentum behind our Lora metrics and increasing geographic diversity in our opportunity funnel should enable our lora enable revenues to grow at our target of a 40% CHG all over the next five years and enable Laura to become the Defacto standard I OTI LP wind applications.
In Q2 of fiscal year two inch one net sales from our proximity sensing platforms remains soft due to the week smartphone market. Despite this weakness customer design in activity remains high as global RF safety regulations are expected to become more stringent as you higher power radios become too.
Void.
We have won several new design wins, and you smartphones and Wearables that should wrap nicely in the second half of this year and into Fytwenty too.
For Q3 at fiscal year 21, we expect net revenues from our wireless and sensing product group to increase nicely led by another record performance from our Lora enabled business and stronger proximity sensing demand.
Moving onto new products and design wins in Q2 fiscal year 21, we really 16, new products and achieved 2592, new design wins.
Now, let me discuss our outlook for the third quarter fiscal year 21.
Despite the ongoing geopolitical geopolitical challenges and the macroeconomic headwinds associated with cobot 19.
We believe the underlying secular demand for our key growth platforms remain solid.
Based on our bookings and record high backlog entering the quarter.
We are currently estimate in Q3 net revenues to be between $145 million and a $155 million.
To attain the midpoint of our guidance range or approximately $150 million, we needed net turned orders of approximately 22% at the beginning of Q3.
Our guidance once again assumes no more direct shipments to walk away or high silicon this quarter.
We expect that Q3 non-GAAP earnings to be between 43 cents and 49 cents per diluted share.
I'll now hand, the call back to the operator, and Sandy America, and I will be happy to answer any questions.
Operator.
Thank you.
She will now have our question answer session, if you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation Tom will indicate that your line is in the question Q.
You May also press star to if you'd like to remove your question from the Q.
For those of you using speaker equipment it may be necessary for you to pick up your handset for pressing the star.
One moment, please probably not pull for questions.
Our first question comes from tore Svanberg with Stifel. Please proceed with your question.
Yes, Thank you and congratulations on the results I noticed that while it was still 4% of revenue in the quarter I.
I know, you're guiding a sort of zero, while way going forward, but.
You just talk a little bit about the dynamics there Mohan you know.
Why we're able to sister ship last quarter and what are some of the.
The strict initiatives for your going forward.
Yeah. So always you know an ongoing dynamic situation Tory as you know they used to be issued 100 million dollar account for us. So it's much much lower now the numbers are and what I choose to do on the on that guidance is essentially eliminate any risk.
For a you know for out Investor community. So we're assuming no more shipments that said, we it's an ongoing process to look at see what we can ship and what they allow what they need and what they.
What products they want and if they can take the products and if we can ship them. Then we will it's not a question of thus not wanting to ship them.
Obviously were restricted to what we can ship LS outside at times and we have to go through that process and then the regulations as you know a changing quite frequently. So so we take the approach of lets be conservative and as you know shipments, but if we can we will and of course of that'll be upside for us.
Very good and that's a follow up on on lower Oh, So you talked about these push outs.
I'm just wondering.
What needs to happen you know for those push ups to go into production and I mean, it's just kind of getting that networks up and running or if you could add a little bit of color on how how the push outs are happening that adequate.
Yeah, I think it's more a question of just priorities are Tory I don't think does anything fundamental there I think you know with covert 19 lot of companies I, just kind of hunkering down and.
I'm trying to figure out.
How to.
Make sure that business operations are just running normally and so some of the the emerging programs of which you know I O T is one of them.
Some of these smart.
City in Smart home use cases are just not quite getting the priority.
I will say that specifically for the bigger programs I don't think there's any change to the to the value of the program all the needs and wants to execute on the program I just think it's more of a timing thing and so now we're still anticipating that most of these programs are going to to ramp up, especially the consumer smartphone.
Ones you know in the second half of this year and maybe early next year.
Very good thinking a lot.
Thank you.
Our next question comes from harsh Kumar with Piper Sandler. Please proceed with your question.
Hey, guys first of all congratulations on solid quarter and I had a question a lot to begin that so you talked about she talked to the run rate you expect for the year you talked about a lot of good activity and then you also talked about push outs. So I'm trying to get the sense just like all this activity you know why isn't it.
And as it is it predominantly one or two kind of a large players that youre anticipating the United States that are in the U.S. I've got pushed out or is it a bunch of just smaller push outs at yourself and then I had another follow up.
Yeah, I would say, it's a little bit of both harsh obviously, the bigger ones affect the revenue and a large away. So so the.
And they are us specifically, one very big one in North America.
That has pushed out but I think there's a lot of different PEO sees that are in place that I.
Just just.
And to take a little bit longer and a you know some regions shut down some regions.
Oh operation some some PEO sees the manufacturing operations not not even.
Just coming back to real manufacturing and now starting to.
Deploy I O T has not been a highest priority, but I think it's starting to come back I'm was definitely seeing across the globe or no more activity in some of these PEO. She is now starting to generate revenue, but yes. The main reason for the change in the.
In the range is specific to North America, and some fairly large.
Customers that are just pushed out the timeline.
Understood.
And do you have any idea mohan on on what like how long the push out is it is that basically waiting for covert to go away, which is sort of an uncertain timeline or is it just pushed out because they couldn't get protect it goes down.
You know in time for a basically a college September October launch.
Well as far as I am aware the activity still continuing I think that.
Oh, you know the launch me.
Launches, maybe pushed out but one of the metrics, we look at his gateway deployments and as you can see.
We increased quite dramatically this quarter from 800000 gateways to over a million gateways. The vast majority of that is actually tied to smart home activity and so I think that's an indication that there's no real change to the to the ambition I would say it's more a question of you know just waiting.
For the right time 0.2 to execute on the launch.
Got it more and I'll get back in line. Thank you.
Thank you.
Our next question comes from Rick Schafer with Oppenheimer. Please proceed with your question.
Thanks, and let me add my congratulations.
I guess I just had a couple of questions. The first isn't on the Fiveg ran a market opportunity I know you've mentioned.
It's up three X versus Fourg I was just curious how much of that.
Fintech content gain versus or content growth versus versus share gains that you guys are way in the market.
Yeah, it's a bit of both the Rick I would say the content gain is the fundamental architectural change from Fourg to fiveg with Fiveg optical modules need a CDR, how whereas fourg modules didnt necessarily need a CD also so we have more content, we have a pmdi function and CDR function in the in the Fiveg base stations.
Sales so that.
Typically on the Fiveg base stations, there's more optical modules on front haul side. So.
Sometimes in the actually doubled the number versus fourg or maybe even triple the number of such as Fourg fourg.
So more modules more content and then I think we have a good portfolio products, that's doing very well I just thinking we will take share in that space because of the the capability of our products that are doing very well again, there based on our claridge fiber edge and emerging try edge platform, so which have all proven success and the datacenter mom.
Get already so.
Yeah, we feel pretty good about where we are in fiveg.
Okay. Thanks on and then just a follow up on protection.
Just some color on how big industrial is now for that segment.
And maybe talk about relative growth rate of the industrial ILS industrial wins versus mobile maybe you know how big how does the design pipeline split between industrial and Mobilefirst for trying to kind of gauge what what's coming.
Thanks, Yeah. So our industrial business is I think it's about 30, 35% of the of the total protection business. So consumers still the largest fought and no one of the nice things there Rick even though the <unk>, our industrial business growing nicely and the pipeline is good and we've got lots of good wins in automotive.
T E comm infrastructure.
Really targeted by USBC Hitachi My 2.1, 10 gig Ethernet ports, but on the consumer side also we've really done a pretty good job of diversifying within that business North America was never really a strong participant in our protection business, but is now in the consumer space.
And also you know on the wearable side, we're getting more traction so add to our consumer business in general has diversified nicely.
And then of course, we add to that the industrial business, which is really a combination of industrial communications automotive.
Video those type of things is all doing quite well so we.
We feel pretty good about where we are obviously last quarter Q2 was was challenging because of the drop off of Korea mobile phones smartphones, but I think.
No we expect that come back this quarter and actually do quite well in the second half.
Great. Thanks.
[noise]. Thank you.
Our next question comes from Karl Ackerman Kononenko. Please proceed with your question.
Good afternoon, gentlemen, two questions. If I may I first wanted to go back to more a for a moment.
[music].
I see that 200000 unit increase.
This quarter, but if my models right.
But if my models.
It seems that you're still about half the level of your recently updated Laura.
Year to date, and so I guess first as your implicit outlook for more revenue assuming second half seasonal ramp.
Lore notes from some of these smart home design wins, you announced inter quarter you just help me.
The perhaps a linear.
Oh.
Yeah. So I think a call the way to think about remember that Q1 was really a soft quarter for Laura.
China was shut down pretty much and we had a very.
Poor quarter, so someone we set in the range when it was prior prior to covert 19, and then we we fought so.
As we last quarter, we thought that the second half is going to extremely strong with just wanted to wait and see how it played out Q2 was a record quarter, where are you anticipating a record Q3 and even record Q4 I just don't think we can catch up and the.
Especially with these some of the larger program push outs I mentioned.
But I think the yes. The main thing to remember is the timing.
There's two to timing elements are very critical one is when the customers actually deploy their networks, whether that's a home network or whether that.
Operator network.
That's important so that kind of demonstrates that they have now going over the PRC. The Pos is completed and they've.
They've decided to deploy a network and just decided to deploy Nora then the second.
Aspect on the timing is when sensor nodes are connected to those networks gateways, which is really when we start to generate the revenues.
Now the deployments on the gateway side is really a precursor right. It's really saying, okay. Now, we can expect and nodes to be deployed.
On the timing of that is usually dependent on software and other things, but you know it's going to happen once the customers have deployed the gateway so.
I think the most telling milestone this quarter was the is the very large increase in the gateway deployments, which is very encouraging for future and load.
Devices.
Got it. Thanks, that's helpful for my follow up how would you characterize your level of visibility.
Oh.
Hi, good PON upon in general within China, and the second half.
I ask because there appears to be several cross currents I guess on one side U.S. carriers are upgrading harbor the home.
You got wife, I six ramping.
On the other side and number of your based component suppliers.
Hey, slowdown in China.
Deployments in the third quarter, what I think you're suggesting that business will actually increased.
So if you could just kind of address the puts and takes within PON and I guess, specifically sort of providers in China. There will be very helpful. Thank you.
Yeah, I think the first thing to remember about Fiveg and 10 gig pawn are they are both driving more bandwidth right and so that's not going to change that requirement is not going to change we may have lumpiness from quarter to quarter, but at the trend is going to be upwards and China much like everybody else in the world wants to still be the first.
The other thing to remember about 10 gig pawn, it's a kind of a natural handle for fiveg. So I think as Fiveg increases 10 gig porn will increase there is obviously with the whole hallway ban there's some kind of.
Question marks as to the timing of Fiveg Rollouts in China, I don't think it's going to be a long drawn out to kind of issue I think it's going to be one way or.
Just have to monitor ins and see what happens but.
Aside I think one of the nice things that we have seen is the globalization of some of these.
Platforms, you know as you mentioned pawn being deployed more in North America, Europe, certainly fiveg now being picked up in Europe, and North America, which I think is very encouraging for us so to just see a little bit more geographical balance.
But yeah I think there's still you know the way we look at Q3's curtain currently that PON is likely to be down.
And Fiveg base station slightly up but.
You know those metrics could could change in Q4, we'll see what happens.
Thank you.
Next question comes from Craig Ellis with B. Riley. Please proceed with your question.
Yeah, Thanks for taking the questions and congratulations on the results from abroad I touched Mohan I just wanted to take a different look at.
Oh, the Laura update on revenues so.
So the new revenue midpoint to start but your range as much tighter than it was so maybe speak to the confidence that you have in that new tighter range and and within that range what would dictate the high end versus the low end of the Rangers what kept backdrop yeah.
Yeah, I think Craig it's still depending on on customer Rollouts right. I mean, you know we got good momentum as I said, we expecting another record in Q3 I'd expect another record in Q4 and not to continue.
The number of deployments the unnoticed deployed is really driven by when customers decide to to ramp out.
To to kind of start connecting devices to the networks and how they do that.
Smart home initiative is the one one of the catalyst for us and I think.
Yes, good progress on the on the gateway deployments on the kind of infrastructure side, but I think on the on the smart home side, we have to see kind of that really start to pick up and to me that's going to be the yeah. The difference between the low end on the and the high end.
Got it and then maybe one more p. before flip into America Theres been a lot to talk and a lot of press around a smartphone release timing this year and certainly for somebody so little bit later than normal so what does that mean for protection and proximity sensor chains. So.
No dynamic spoken three and four Q I think Tortue, we would typically expect those to be down, but just model release timing mean that those two businesses could be up in import you.
Yeah, I think the answer is yes, Craig I you know obviously, we've had a we had a very weak Q2.
Which is somewhat unusual and for sure all with the Korean smartphone manufacturers that was mostly cobot 19 related.
North America, and the Chinese didn't have the same issue.
So we're not expecting strong second half from China, but we are expecting pretty strong second half from Korea.
In North America, So, we'll see how that plays out, but I think you're right one of the things that normally happens in Q4 courses everybody, especially in Korea the.
They bring their inventory way down, but it seems to me this year might be different but we'll see yeah.
Great. Thanks for that and then I'm back Oh, I think a quarter ago, we had.
And looking for gross margin to rise to the year and it looks like it will be down a little better must type got something wrong in the fiscal third quarter. So.
Please correct me if I, if I got that see an accurate perception, if if I read it right then should we expect gross margin to be up in the fourth quarter.
And what would be a reasonable expectation beyond back can you continue with an upward trajectory or or would there be any cross currents that we should be aware of into fiscal 21.
So Craig.
One other pleasing pay for about our gross margin is being how relatively simple. It has been asking for several quarters now we have guided to gross margin being between 60 on a non-GAAP rent is being between 61% of 62%.
And as you know the key driver for all gross margin if the market mix right. So when we get more revenue from the therefore structural markets and industrial end market vascular for gross margin offender asked we get more from consumer is somewhat of a headwind to our gross margin. So I think youre right a few months ago, probably in the last call.
About point I'd Ah, yes petitions for infrastructure why catwalk failure was to you're going to be honest tea area, what's going to be a much higher mix of revenue.
From a from more highest commentary I think he had to guide edraulic.
I'd be signal integrity business being flat to slightly down.
This quarter, so that if a headwind for gross margin, but my expectation is bigger interview that I, depending on the mix of revenue, where it's coming from but as we go forward I expect hold off revenues coming from continued to come from the upon market from the out Fiveg base station from data Center and of course, our Laura Clinton into gross.
So I would hope I know I would I would think that are starting from the fourth quarter, we'll see gross margin going back up again and that would be my expectation that we'll continue to go up as we go into the next fiscal year.
Thanks America, and then if I could just sneak in one mark or any color on harsh how we should think about the 14 weeks dynamic for revenue.
Versus Cogs and Opex as we look to fiscal fourth quarter.
Yeah, I think I know in terms of a in terms of your revenue right I think from a more hands prepared remarks, you know typically the fourth quarter far off where usually dollar 5% to 10% trite, but I think maybe because of our probably because of the extra week. We're now software split effecting maybe.
Something that is flattish slightly up slightly down I will just have to food and are on the operating as Beth side of fan for a non-GAAP, but if I think about it I think about 60% of fall a run rate top recognize best if if if lengths to time right. So you know if if like employees salaries.
You know traveling supplies those type of so I would expect the extra week will probably impact more under 50% off our operating expenses.
Thank you good luck guys.
Thank you.
Our next question comes from Christopher Nolan with Susquehanna International. Please proceed with your question.
Hi, guys, it's David having on behalf of Chris Rolland, Thanks for taking my questions I.
I guess is that the digging a little further on the Fiveg base station side. We appreciate the magnitude of this opportunity for you guys. We wanted to ask how the current attach rate as for CDR is in Fiveg and what sort of revenue you're generating from CDR aggressive PND at this point do they make sort of go hand in hand are we still waiting on some of the CDR ramp or any color there.
Great.
So the Fiveg optical modules typically are all using CDR house and some of them have integrated drive isn't and some of them.
You separate PMT function, but then we'll have some combination of a PMT and CDR. The Fourg base stations don't they already typically will use PMT.
Devices. So you know obviously fourg base stations are still being sold in U.S. So it's it's a mix there, but as fiveg becomes the predominant base stations being deployed we'd expect to our.
Revenues to increase nicely and also as I mentioned on Fiveg typically there's more there's more frontal optical modules than in the Fourg base station. So we just see we're expecting that to increase as well. So yeah. As I said that position is good we have the products.
It's the just a question of.
Timing.
Understood. Thank you there and then on a more seems like you guys are making good progress and kind of the cloud side and getting set up there I know, it's a longer turn opportunity for you, but how are you thinking about kind of a micro services side of the board business at this point and how big it can be down the road here.
Yeah, that's that's important to and I think a you know one of the reason I mentioned more edge, which is our kind of new platform that really is the enabler for our device to cloud services.
It's it's getting really very good momentum.
Pipeline of opportunities grown dramatically in just a handful of months and so.
Yeah, we're very excited about it you know it's still early days, but I think it's going to be a very.
Important part of our strategy and now revenues really starting next year I think.
Great. Thank you.
Thank you.
Our next question comes from trusting Gara with Robert W. Baird. Please proceed with your question.
Hi, good afternoon.
So it sounds like you even tighter already here that.
In the base station you see continued close that would be.
Even by geographic diversification I, just wanted to try and do they heard this well.
Interesting.
What a chance to some other companies come until you're about to be station guidances for the quarter.
In.
Additionally, I was wondering given.
You know to transition away from why way on the base station side one Steve.
Finished good.
Do you expect.
What is your timing in terms of when you think there's going to be a major pickup.
We base station vendors that are starting to.
China and would you be benefiting from that.
So the first of all the answer that yes, we will benefit from that Nutrisystem. The timing is very difficult to say because it really depends on how much inventory they have and.
How well equipped others ought to take over and things like that so I I and how much.
Business. The operator is going to give them right. So that's not once tricky to on so I would say that our five GE revenues are still mostly based on trying to deployments, but we are seeing more and more opportunities outside of China, which I think is encouraging so and as you know I as I just talked about our comp.
Tend to increase.
Across the Fiveg space versus Fourg is significant so.
Yes, all anymore I think you know as I mentioned Fiveg is not going away, it's going to continue to grow.
There's going to be a little bit of Lumpiness based on tenders that go out in volumes that get deployed but I think in general we're all expecting a pretty good net year next year.
And my expectation is it will continue for quite a few years.
Okay and then thank you that's useful and then a follow up question on it so it sounds like pace. This low I love you recovery pose to.
<unk>, China earlier this year.
Perhaps a bit less than what you would have expected.
But are you expecting if we ought to adjusts for the defaulting a week and just looking at nominates quarter for the generally corner or are you expecting lower too.
Do you need to increase sequentially or is it also is your lower LOE guidance. So a function that perhaps you should this coming quarter is do you have time peak.
Before we cannot.
Come sounded a bit after what looks like do seem to be does.
Inventory replenishment.
Yeah, I think a trust and I would just my expectation is Laura grows every quarter.
You know, we may see some seasonality, but I I don't think that's the case really for more now it's not doesn't have a scale yet to be impacted so much I think it's more a function of some of these new use cases, how quickly they kind of accelerate the connectivity side of sense as to the gateways, we have plenty of gateways.
Being deployed and that's encouraging and but we need the end devices connected as well and so.
No the real issue for US is being covert 19 were just to customers and partners of just delayed.
That that area are off of the.
The whole system and so.
But that's I don't think thats going to last two too much longer.
Great. Thank you.
Thank you.
Our next question comes from Gary Mobley with Wells Fargo. Please proceed with your question.
Hey, guys. Thanks for taking my question. What's the question. The all these questions have been asked but I wanted to ask about drivers of revenue growth and so sort of based on your commentary it looks like.
Tony Your 2020 is gonna be a good growth year for you maybe in the mid single digit percent range, which is certainly better than.
Your peer group X memory, and so I'm, assuming the large part of that is function of strong data center cutbacks that is well China, presumably is a big component of your growth and I know there has been investment area for you guys are the last decade, or so and so can you parse out the contribution.
From from China as it relates to your overall revenue growth based on sort of end demand dynamics.
Yeah, I'll try to do it by segment, so Gary I mean, Hyperscale data center still mostly North America, driven I mean, we obviously may have module module manufacturers in China, but the end market is still mostly North America.
And a you know that's a significant part of our of all of our revenues Fiveg base station I would say is mostly China, driven but the rest of the world is picking up.
On the mostly again tending point is again, mostly China, but the rest of the market is picking up on more enabled 50% about revenues, our China today, but 70% of the pipeline is.
North America in Europe, So we're expecting that takes a kind of start to transition.
And then on the mobile side, you know I think the encouraging thing really is that we've done very well in North America.
Very well in Korea, and continues to do well and so a lot of the mobile business both on the protection side and the.
Proximity sensing side is going to be a non Chinese so.
I think that's a fairly good balance so we continue to invest in China. We continue to feel good about the growth in China, but.
We have a fairly well balanced market and business position I think so.
Especially as it pertains to North America in Europe.
Okay. Thanks for the color a question for America.
And I see a regulatory question about inventories it you've just what's your distribution channel where that stands today.
Accurately.
From where we.
Try to manage our inventory and the distribution channel it is below our target range.
All right. Thank you.
Thank you.
Our next question comes from Quinn Bolton with Needham. Please proceed with your question.
Hi, guys. This is Sean Quinn, that's my questions have been answered, but I just had one quick one for you guys.
So with the size of the more sanguine funnel, increasing from over 500 million to over 700 million My answer to your and decide the additional lead Gen are going to 300 million I'm just wondering how you.
See that you know ramping over the second half because you know you would you got entering the year at 500 million and and design win funnel and I'm not going get I'm. Just wondering if that's going to be driven by maybe on some of these launches that you Act.
Going on second half that maybe you know increased adoption more.
Or if there's another driver.
Yeah, I think so first thing Michel you know this year is been a challenging won for opportunity pipeline. You know I did expected to grow fast and then it should have done and I think in ordinarily would have done but when you shut down a whole country. You know you just don't have a lot of opportunities that are coming growing from that so that's part of.
The issue there for us, but the of the pipeline that we do have and the ones that I think are now starting to come back and countries that are starting to come back we see there's no.
Most of the momentum of Laura no loss to the momentum in the operetta area no loss in the private network area.
No listen no loss in terms of use cases and in fact some of the higher volume use cases are now starting to really pick up and I think the key to that is looking at the gateway deployments.
The company's I'm not going to deploy gateways, if they don't have an intention of connecting things do those gateways and so my sense is that that's going to be the real driver of future opportunity and I think that could that could really quite quickly change that dynamic.
We're still in a kind of a cold with 19, I think recovery mode here in the second half, especially here in America in Europe, and so I.
I think next year is going to be the real test, but I, but I think we see enough positive signs to suggest that you know I revenues will keep growing and Laura and we're not really concerned about the current.
You know issues associated with.
The range of revenue.
Okay, and that's that's really helpful. Thanks, and congrats again on the results and that's all excuse you guys.
Thank you.
Thank you.
Our next question comes from Mitch Mitch Steves with RBC capital markets. Please proceed with your question.
Yeah. Thanks, Mike Thanks for taking my questions, most probably been answer but I've got two quick follow ups. So.
One is just on the at the lower trajectory. So since you you're kind of had similar revenues for two years to ROE does that mean 2020 to your fiscal year 22, or Todd or 21 should be a significant growth year for you guys.
Where you're going to see I guess much higher than expected growth it from the topline.
<unk> come compounded by smartphone delays that got pushed out next year as well and then secondly is there any sort of a number you guys can give us in terms of what you think October 19 did to fiscal year numbers. This year in terms of either revenue or or call. It and that's it for me.
Well, let me still about lower revenues first Mitch I think last year, we did a I think about $74 million of revenue.
So you know if we hit the midpoint of our range here $90 million, that's still still not a bad what about gross yeah, given all the dynamics and moving pieces and country shutting down and things like that so I would say that's that's in good shape and we still keeping our 40% CHG our trajectory over the next five years.
Yes, so we're not changing that so I think our Laura growth is still you still good as.
Your second part of the question covert 19 related.
Impact for us, it's it's been a mixed bag I mean, there's some negative for show you know Laura the more push outs I think the smartphone consumer market has been definitely impacted by covered 19.
Suddenly Korea smartphones things like that but any other hand, you know the working from home the need for bandwidth has definitely driven more data center more base station more upon you know.
Whole bunch of other area. So so I don't really think we can we can say we'd been impacted so negatively by like over 19.
From a from a financial standpoint.
Okay understood. Thank you.
Thank you.
Our next question comes from Scott Cerro with Roth Capital. Please proceed with your question Hey, Good afternoon. Thanks for taking my questions up couple couple of quick clarifications and then two quick questions.
First I want to make heard correctly and signal integrity is we're looking into the third quarter I.
I think you indicated sequentially down wanted to confirm that and then a mecca as it related to the outlook for the fourth quarter.
So I thought I heard you say flattish I wasn't clear if that was specific to protection or if that was Oh, you know for the entire.
Some tech business and then I had a couple of follow ups.
So yes go signal integrity product, we are expecting it to come down slightly in Q3.
I think there's little bit of over inventory and data center somewhat offset by Fiveg base station.
And so yes, so that was the commentary there and then in America, just pointed out the Q4 typically for us a seasonally down we have a 14 week quarter. So we likely will have probably some offsetting revenue for that so probably flattish from people great and then on the Fiveg front Mohan you know certainly.
Seeing a big push within China, right now to a to show global leadership on that front as you're seeing from a subscriber standpoint, those are well north of 100 million subscribers.
What is the visibility, though that you're getting outside of China. At this point time, you've referenced a couple of times, but I was wondering if you could think.
Think about looking at at fiscal 22, you know the mix outside of China related to to Fiveg and then add one lower question.
You know the mix the visibility is pretty good from a design standpoint. The issue is not no. So clear from a capex operator standpoint, and that that's something that I don't think we we necessarily will get so much visibility until they're ready in I think but but we know it's coming it's just a question of time so.
But yeah, we know the people who are building equipment are actively out the designing it in so yeah, just a matter of time.
Great and lastly on the lower front still that big funnel that big pipeline out there timing seems to have been some of the issue that's been complicated with cove and otherwise, but historically, if we looked at the business. There was more industrial driven enterprise driven as opposed to consumer driven now they're more applications that are starting to pop up related to smart home and otherwise I was.
Wondering if you could give us some idea and color on that pipeline in terms of how it looks between more traditional does.
Locations versus consumer slashed smartphone types of applications, which have potentially larger unit volumes, but you know are prone to some slippage and maybe as part of that as well I want to think about smart home applications to more localized as opposed to maybe an asset tracking application that requires much broader geographic coverage. If there is a way to think about how the pipeline is parsing out.
Between more easily deployed as opposed to requiring more broader network coverage. Thanks.
Yeah. So that's a really good question about 30% I would say of the funnel is kind of in that category, all small home asset tracking logistics, which which should be easier to deploy.
I think the other metric to look at is that the of the million gateways, which is a huge number really for for us on Lora gateways deployed.
If you compare to last quarter, what we said 800000.
The vast majority of that increase is for.
This kind of smart home and smart logistics.
Networks. So that's why we are pretty encouraged by the you know the opportunity and how quickly they could that could turn into real revenue for us in terms of end devices. So.
But you know the proof is in the putting we have to see you know even small home sometimes in smart logistics and some of those things, we expect like consumer to be faster time to revenue.
Hey, they sometimes also take time and with Covance 19, you know you. We just don't know how exactly predict that because we want to wait till the markets, we need to wait till the market. So back to some degree of normalcy here and you know people going back to school and you know going back to work and things like that but it's going to happen.
Great. Thank you.
Thank you. Our next question comes from Hamad Khorsand with Dws financial. Please proceed with your question.
Hi, just wanted to know what the five Ci and and proximity does that help you guys as far as content cost pricing and on the flip side, because theres handsets coming out the lower prices are handset makers.
Pushing on lower pricing from you is that started yet and what are you doing to counteract that if any.
Yeah, that's on the proximity side.
You know the real trend that's helping US is just increased regulations on high powered radios.
For Fiveg phones as you as you rightly said, how many them and I think the.
It's not just for the LTE radios southern radius, but also for wife I radios. Another very powerful radio. So we are seeing more content, we are seeing more opportunities there across all the high end smartphone manufacturers for our proximity sensing.
Pricing is always an issue in consumer I mean, you have to be ready to.
Address that through cost of new products and that's the life. We breed when we when we go into this consumer business and we've been we know how to play this game because of protection and we've been in the space for a while with our customers, but the key is to keep bringing out new products innovate and then.
Help them help them bring down there their overall price of their components and assist at the system level. So I will continue to do that.
Okay, and then I'll quickly on Laura I know you've talked about the pipeline being mostly out out into North America in Europe, but the actual sales that you're generating how much of that is outside of China right now.
Well, 50% is China about 50% is China. So.
I would say, 30% as you're up 15% as America's something like that and the rest of Asia the rest of Asia.
Okay, great. Thank you.
Thank you.
Our next question comes from tore Svanberg with Stifel. Please proceed with your question.
Yes. Thanks, I know, it's been a long call just two quick follow ups or first of all try edge.
Said some revenue contribution.
Second half of this year and then ramps next year.
Is that sort of with a few customers or is that a fairly broad based rent.
Well, we just released the parts right.
Tony We just something that triad short reach parts now so we've got some good wins and I think.
You know its is relatively small group of customers at this point in time.
Got you know as we leased the full product and then we bring out our longer reach Pops my expectation is that when thats going to increase quite nicely.
So yeah I think you know our feeling is that we'll start to see how do you revenues. This year and then ramp for next year.
Hi, Good last question back to Laura So the 90 million you're expecting this year, how much of that would be asset tracking because it does sound like asset tracking is starting to ramp at least from a use case perspective. So just just wondering if there's some rough percentages there.
Yeah, I think you'll be small Tory because there we just released the more edge platform. So it's getting designed in so I think this year's revenue will be relatively small for asset tracking and even smart home, but next year I think you should be a serious contributor.
Great. Thank you very much.
Thank you.
There are no further questions at this time I'd like to turn the floor back over to management for any closing remarks, you mean.
Thank you in closing I want to once again, thank all of that talented and committed employees across semtech for their enduring efforts to limit the impact the cobot 19 pandemic on our business operations, we expect our multi sourcing strategies investments in our I T operations and sales infrastructure and systems, along with our set.
Let demand drivers diverse product offering balanced end markets and strong customer relationships to enable us to deliver a solid performance in fiscal year 21 would that we appreciate your continued support of Semtech and look forward to update you on next quarter. Thank you.
Ladies and gentlemen. This concludes today's web conference you may now disconnect your lines at this time.
Thank you for your participation and have a great day.
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