Q3 2021 Semtech Corp Earnings Call
Greetings and welcome to Semtech Corporation Q.
Fiscal year 2021 earnings conference call at this time all.
All participants are in a listen only mode. A question and that's just a short follow the formal presentation. If anyone should require operator, that's just on the conference. Please press star zero on your total keypad. Please note. This conference is being recorded I would now, let's turn the call Geos and stuff.
Harrelson, Vice President of Investor Relations. Thank you you may begin.
Thank you, Doug and and welcome to Semtechs conference call to discuss our financial golf and.
Third quarter of fiscal year and 21.
Yes for today's call will be more on my part and.
President and Chief Executive Officer, and Mexico, Our Chief Financial Officer, a press release and out.
I think our unaudited results was issued after the Mark on the day is available on our website at <unk>.
Today's call will include forward looking statements include risks and.
Certainly and we could cause actual results to differ materially from a result, and they do.
Hey, Mike.
From a more detailed discussion on these risks and uncertainties. Please review the Safe Harbor statement included in todays press release and.
And then the other risk factor section of our most recent periodic reports filed with Securities and Exchange Commission. As a reminder, comments made on today's call are earn outs and they only semtech undertakes no obligation to update you raised from this call.
Exercise that age during the call we work hard and non-GAAP financial measures and are not prepared in accordance with generally accepted accounting principles.
Discussion on why the management team considers such non-GAAP financial measure is useful along with detailed reconciliations.
Non interest and the most comparable GAAP financial measures are included in today's press release.
As a reminder, all references to financial results and Mohan from Americas formal presentations on this call refer to non-GAAP measures unless otherwise noted.
That I will turn the call over to you.
Okay.
Thank you Sandy and good afternoon, everyone.
For Q3 fiscal year, two and toward.
Net sales in Korea so.
Per cent sequentially and 9% over the prior year to $154.4 million to $1 million.
Which was on the upper end up on cadence.
In Q3 shipments into Asia.
Represented 80 per cent up and that felt.
North America represented 12.
12% and Europe represented 8%.
Total direct sales of approximately 18 per se.
And first a distribution with approximately.
And 2% of net felt oh.
Oh distribution business remains a balance.
Reported a night the strength of your total Pos.
And coming from the infrastructure and market and 30% from industry and market on 41.
And from the higher income from my end market.
Bookings and create strong deal about a price Walter and resulted in a book to bill above warrant.
Both bookings and accounted for approximately 25% of shipments during the quarter.
Q3, GAAP gross margin decreased GAAP expected by 40 basis points due to a higher mix of course from a revenue from.
With respect to our Q4 gross margin took a flattish suppressed Shirley.
Q3, GAAP operating expenses increased 4% to fresh other due to higher performance based compensation expense.
Offset by lower and your point about this profit.
We expect our Q4 GAAP what progress thanks to increased 46% superficially primarily due to it being a 14 week quarter and the higher share based compensation expenses, driven by a higher stock price.
Q3, GAAP other expenses was $1.6 million and processed $2.9 million and Q2.
The decrease was primarily due to lower foreign exchange losses than those that were recognized in Q2.
In Q3, our GAAP tax expense was seven point and.
Night per Se I think there's also from favorable regional mix of income on several discrete.
The tax benefits and Q4, we had spent on our tax to range between 10 and Pelican per se.
Moving on to non-GAAP results, which assets to the impact on share based compensation on.
I'm working interest from acquired intangible assets acquisition related and other noted garden charger.
Gross margin was 61.5 per se and in line with expectation.
Our gross margin remained stable with the key driver being and market. The revenue mix and Q4, we expect gross margin to remain flattish day.
Due to a higher mix of consumer revenue.
In fiscal year 2002, we expect to see a gradual increases to our gross margin on.
We see on increasing revenue contribution from our higher margin growth driver awful lot and net bought from.
And your wireless Paul on the rough and tough infrastructure platforms.
Our Q3, and non-GAAP operating expenses increased 6% suppression on the higher compensation expenses offset by.
Well go on new product as profit.
In Q4, we had spent on non-GAAP operating expenses to increase from 1% to 4% sequentially.
Promoting and due to the general other ports are being a 14 week quarter flow.
For fiscal year 22.
Cost and stuff, we talk target, we expect operating expenses to increase at approximately half the rate of from revenue growth.
In Q3 on non-GAAP.
Tax rate came in at 14.8 per se.
Oh, we expect our Q4 fiscal yet the 22 and tax rates to be in the range on 15% to 17 per se.
In Q3.
Cash flow from on thresholds decreased to 18% of net sales due to the adverse impact on withholding taxes paid in Q3 and related to the Q2 repatriation of cash to the U.S.
We repurchased approximately 400 on Fourfour thousand shares on $24 million from stock in Q3 and.
And our stock repurchase authorization from now stands at approximately $44 million.
We expect to continue to use our cash to opportunistically repurchase our shares.
Make strategic investments and paid down our debt.
In Q3 due to higher.
And that's so I'm timing of shipments during the quarter accounts receivable increased 14% sequentially and represented for free days, Upsells, which remains well below our target range on 40 to 45 days.
Net inventory and absolute dollar.
Terms was approximately flat sequentially.
While days of inventory decreased by nine days to hold on to it in days, which remains a bolt on target range of 9300.
Days in Q4, we expect on net inventory to increase due to the strong demand and that we're seeing on the tightening supply.
And then.
Thanks.
It was somewhere.
We were pleased to deliver book you three and resolved with the upper end up on cadence.
We look forward to end in a very challenging year on a strong.
No we believe that our strong business fundamentals bullish on off nicely to consent to deliver growth and solid financial results.
We know home decor and what tomorrow.
Thank you and good afternoon, everyone I.
I will discuss our Q3 fiscal year 21 performance by end market and by product.
And then provide our outlook from Q4 fiscal year 21.
In Q3, Q on Q3 of fiscal year 21, net revenue increased 7% sequentially and 9% over the prior year $254.1 million stronger demand from the high end consumer and industrial end markets was offset by softer demand from the infrastructure and market.
We posted non-GAAP gross margin of 61.5% and non-GAAP earnings per diluted share on 47 cents.
In Q3 of fiscal year 21, net revenue from the high end consumer market increased 43% sequentially.
And 21% over the prior year and represented 29% of total net revenues.
Approximately 19% high and consumer revenue was attributable to mobile platforms on a per.
Fortunately, 10% was attributable to other consumer systems.
The industrial end market and net revenue increased 14% sequentially.
And 4% over the prior year.
And represented 32% of total net revenues.
Net revenues from the infrastructure and market decreased 13% sequentially.
And increased 6% over the prior year and represented 39% of total net revenues.
I will now discuss the performance of each of our product groups.
In Q3 of fiscal year 21, as expected our signal integrity product and decreased 14% sequentially and increased 5% over the prior year and represented 40% of total net revenues.
In Q3 of fiscal year 21 demand from our data center customers softened following the strength experience and the first half of the year.
We believe the demand for high bandwidth data center connectivity remains very strong and at Clearbridge fiber rich and try and platforms. All have significant design and momentum in 100 gig 200 gig and 400 gig optical modules being deployed and global cloud and Hyperscale data centers.
Design activity for our triage Pamfour platform remains strong.
And we now have customers working on almost two dozen design ins for use in 100 gig 200 gig and 400 gig pamfour optical modules and lower cost flow of power and low latency performance enabled by our try and analog Ctr platform provides a significant advantage over existing DSP. So.
Yes.
We believe the secular trends that have been driving growth and the datacenter market should continue to drive our data center business higher over the next few years.
In Q3 of fiscal year 21 demand from the wireless base station market softened from the prior quarter's record and build out from China slowed from first half levels.
Global customers are increasingly deploying 25 gig optical modules from from pool links you Fiveg base stations. As a result, we are seeing increased design activity for our high performance CDR and Pete PMT platforms for Fiveg wireless base stations globally.
We expect to Fiveg infrastructure spending to increase in fiscal year 22, and expect this market to continue to grow several years.
In Q3 of fiscal year 21 revenue from upon customers was flat with the price quota.
While demand crap on platforms has been largely driven by China. We are continuing to see a number of you put on initiatives outside of China, but on is used to channel high speed data to the home enterprise and campus networks.
Semtech remains the leading supply on 10 gig on platforms for the old and new and old T. markets and we expect our latest innovative 10 gig products.
To enable us to further benefit from the global trend towards increased PON deployments.
Despite the inherent lumpiness associated with the infrastructure markets. We believe the secular trends led by the upgrade of datacenter connectivity.
And the expansion of 10 gig PON and Fiveg wireless network capabilities should drive future demand for optical platforms across all our target infrastructure markets.
Well Q4 fiscal year 21, we expect net revenues from our signal integrity product.
The increase driven by all infrastructure segments, and a recovering video market.
Moving on to our protection product.
In Q3 of fiscal year 21, net revenue from our protection product group increased 25% sequentially.
And 3% from the prior year and represented 27% of total net revenues.
In Q3 of fiscal year 21 demand from our Korean smartphone customers rebounded strongly from the cobot related issues that impacted them and the first half of the year.
Demand from our North American smartphone customers also remain solid.
We expect that protection product growth to continue to benefit benefit from our ongoing diversification strategy.
Many of today's high performance systems across all industry sectors are starting to incorporate advanced lithography devices.
And high speed interfaces, such as USBC 10, gigabit Ethernet and HD My 2.1, resulting in the need for Semtechs high performance protection.
We expect these trends to continue and contribute to the long term growth of and protection business.
In Q4 fiscal year 2001.
We are expecting our protection revenue to increase led by growth from the broad based industrial and communications markets and stable smartphone demand and what is typically a seasonally weaker quarter.
Turning to our wireless and sensing product group in Q3 of fiscal year 21, net revenue from our wireless sensing products increased 32% sequentially and 21% over the prior year.
And represented 33% of total net revenues, resulting in a new quarterly revenue record for our wireless and sensing product.
Our Lora enabled platform continued its steady growth and experienced another record quarterly performance.
In Q3 of fiscal year 21, we continue to see excellent progress against the goals for our Lora metrics, we had targeted at the beginning of the year.
These include the number of countries with lower networks now stands at 99 countries and we expect over 100 countries to have more networks by the end of fiscal year 21.
A number of public or private Lora network operators grew 248, and we expect 150 Lora network operating by the end of fiscal year 21.
And number of Lora Gateway is deployed grew to nearly 1.2 million from the 642000 gateways at the end the fiscal year 20 and we.
I expect and the number of gateways deploy to increased over 1.3 million by the end of fiscal get 21.
The cumulative number of lower and Noach deployed increased to 167 million from 135 million at the end of fiscal year 2000, and we expect this number to exceed 180 million cumulative and knows by the end of fiscal year 21.
In Q3, we shipped a record number of more devices.
Finally, the more opportunity pipeline, which includes both opportunities and leads stands at approximately $500 million and approximately $200 million will lead feeding the future opportunity pipeline.
We expect the opportunity pipeline to increase rapidly in fiscal year 22, as we anticipate the inertia associated with the global pandemic to gradually subside.
Our opportunity pipeline remains geographically well balanced with approximately 70% of the opportunity is 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 and the continued progress on our Lora metrics in Q3, we made several important announcements related to our Lora business. These include.
Amazons use on Laura in net you sidewalk network unique capabilities of Laura extends the range of smart home networks to connect both indoor and outdoor senses, enabling new use cases. These include smart lighting smart safety pet trackers asset tracking smartly rigs.
Asian, and many others.
Use of Laura and the Smart home segment demonstrates the value and versatility of Laura and low power line and low power line segments of the I O T market we.
We believe the Amazons use of Lora and sidewall opens up a huge opportunity for Semtechs Lora enabled business starting in fiscal year 2002.
And cisco's use a lorawan courts industrial asset vision system.
For enhanced visibility into physical space and supply team and operational technology environments.
This lora based system is a simple and secure solution for remote asset management equipped with other cloud based dashboard to monitor and manage the condition of assets and facilities that can be deployed and minutes using a simple QR code.
We also announced the availability of our lower edge track a reference design and includes and you Lora cloud Geolocation service.
Our lower edge platform is our first Lora based software defined radio platform that integrates Wi Fi and GPS sniffing, along with Laura we are seeing a significant ramp and new design in activity and believed that more edge is the ideal platform for asset tracking and asset management use cases and will be the main and main.
On that future cloud services revenues.
We believe that the flexibility long range and low power Lora based networks are critical components of any successful low power I on TGP deployment.
With the record Q3 performance and anticipation of a record annual performance and with the exciting smartphone opportunity driven by Amazon as well as numerous new industrial I O T opportunities.
We continue to expect our Lora enabled revenues to grow at 40% CHG on over the next five years and to become the defacto standard for the fast emerging LP when market.
In Q3 of fiscal year 21, net sales from our proximity sensing platforms grew nicely over the prior quarter helped by the recovery in the smartphone market along with several new design wins that move to production and should continue to ramp we.
We are also seeing increased design activity as global RF safety regulations become more stringent and you Fiveg Fiveg based phones in March.
For Q4 fiscal year 21, we expect net revenues from our wireless sensing product.
To increase and achieve another quarterly record and.
Led by another record performance from our Lora enabled business.
Moving moving on to new products and design wins in Q3 of fiscal year 21, We released 12, new products and achieve 3397, new design wins, which also represented and new quarterly record.
While this year has presented its share of unique challenges I believe that our key stakeholders, including our investors customers suppliers and employees have all played a critical role in driving the company's growth and success.
We remain committed to considering the impact of key environmental social and government inspectors and now decision making processes.
We also focused on developing products that will make the planet a smarter more connected and more sustainable place to live.
We view our employees as the company's most important resource and have and establish set of core values that whole each of us responsible and accountable for doing the right things for the company and each of its employees I am excited about the company's future opportunities and believe that our vision and strategy and our focus on providing.
Yes from a smarter more connected planet.
And our commitment to a more diverse and inclusive workforce should enable the company to continue to be extremely successful.
Now, let me discuss our outlook for the fourth quarter of fiscal year 21.
We believe the underlying secular demand for our growth platforms remains solid.
Based on very strong bookings and record high stock and backlog entering the quarter. We are currently estimating Q4 net revenues to be between $153 million and $163 million to attain the midpoint of our guidance range or approximately $158 million.
Our loans, we needed net tons orders of approximately 20% at the beginning of Q4.
While we have been issued some licenses that allow us to ship to Wally.
Guidance assumes no more shipments to Wally or high silicon.
We expect our Q4 non-GAAP earnings to be between 45 cents and 51 cents per diluted share.
Ill now hand, the call back to the operator, and Sandy and Michael and I will be happy to answer any questions on.
Operator.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
That's how commissions on indicate your line is and the question queue you.
And we could start to feel free to move your question from the queue for.
For participants using speaker equipment, and maybe next year to pick up your hand simple per person to start Keith one moment. Please as we poll for questions.
Our first question comes from the line of Rick Schafer with Oppenheimer. Please proceed with your question.
Yes, hi, guys and congrats on a cash that's on a great quarter.
Yes, well and I've got a question on EPS on lore, I mean, you've gained a lot of momentum there I think after a slow start one Q, obviously cove and related I mean, you see continued linear ramp next year sort of in line with that 40% CAGR that you just mentioned.
Or could we see a step function.
In revenues there next year as more sort of starts to hit a critical mass for it seems like and city critical mass.
Yes, I think correct the way we've always looked at it is that.
And there are certain capitalistic and drive faster growth and that's why we'll be voice projected 40% Chr just based on history and then some other new use cases that we know we now know are starting to get to.
No real traction, which one of which is of course, the smart home initiative.
And with the Oems on sidewalk and.
Now spend.
Yeah, and suddenly and with it its a pickup as good of that architecture and the network.
I would expect a very fast acceleration sensors, and and we could see a definitely items a step function increase whether that happens that's why 22, probably more a flight 23, just because it takes time for.
The GAAP.
Outweighs the network the.
Architecture to kind of get deployed and and then sensors be developed but I do expect that business alone just on the Amazon sidewalk business to.
Reach a 100 million dollar business and five years, so for sure that's going to be one of the catalysts and then as you as I mentioned.
You know the industrial audio T space.
Has been somewhat slow this year because of covert related.
Issues, but I believe that's going to pick up you know, it's just a question of time a lot of the.
Use cases are about creating a smarter planet Alps and efficiency improvements there about.
Green.
And green on initiatives and things like that and so it's just a question on time I think so yeah, but to answer your question, we do expect.
Yes.
Some catalyst over the next year or two here with the smart on initiatives.
And I should have asked just a quick follow up on that question, but I mean are there any capacity issues that you guys have the recognition in the past youve kind of playing catch up on the lower business. This year. So is there any capacity supply so supply constraints that you're seeing and there anything.
Well there are supply constraints across the board I would say, it's definitely a tightening supply chain.
As you know cross sold sex segments, nothing specific to two on more business or anything like that I just think it.
As a method mentioned, we are seeing some lead times on the supply side increase and that.
Is challenging.
But generally that means the beginning of an up cycle and industry in my view and I think that's a good thing for us and for everyone.
If I could speak and a follow up I.
I think most more revenues today are still coming from hardware.
I'm just curious when do you when you sort of expect to start monetizing the services.
And we talked about that in the past, but on the license and royalty opportunity that you see there. Thanks.
Yes. So there's two elements one is the IP licensing and royalties from our partners S.T. and Alibaba. We do expect next year, we start to see some of that coming in but also a cloud services. We did announce that this this lost a.
Quarter from.
First a cloud service using geo location again, using more edge platform and this is another area, where we're expecting pretty good growth.
It will it will be a slow ramp initially.
The cloud services revenues will be recurring revenues from number. So again, we're expecting again something between 50 and under a million dollars and the next five years on.
On an annual basis and.
You know a lot depends on the on the quality of the Geo location on the other services, we bring to the market, but this is our first real initiative and we're very confident and feel very good about.
The type of.
Customers and the type of use cases, and how quickly that could ramp and the future.
Mark.
Our next question comes from the line of Quinn Bolton with Needham and company. Please state your question.
When you there.
Sorry, guys can you hear me now.
Yes.
Okay, great sorry about that I was on the income.
Just wanted to follow up on the sidewalk question with Amazon now and now it seems sidewalk and I believe the fourth generation ACO product.
Moving that sidewalk network and the gateway.
Have you seen an increase and the and node activity for sensors compatible with sidewalk and.
Just just wonder if you could give us an update on that design activity around <unk>.
Yes, it's it's you really just starting Quinn, Amazon and <unk> and made the announcement they haven't yet.
I talked about the senses on connected to it the they've talked about what their.
And the anticipate they will be but they haven't yet rolled out and the development.
Platforms to enable.
Companies to do that but that's pretty close I think and it's going to happen very soon and so my expectation is by mid next year, we will definitely start to see a real sidewalk networks sidewalk networks be deployed and sensors being attached and that type of thing.
Great and then a follow up.
And just on the five key front haul side and the business. It sounds like it was a little soft for you and the October quarter on the following a record level and.
July but it sounds like you're looking for growth and that business into the January quarter I guess on.
A little surprised by that because we've heard from other customers that are sort of other companies that.
The China five you build out is going through a pause between the first phase and the second phase you seem to be perhaps bucking that trend. So wondering just if you could talk about what you're seeing in China, Fiveg and maybe the timing of the next round of tenders for.
The station and from.
Thank you.
Yeah, well I think largely.
Largely your comments on correct CWI and I would say that there's anticipation that next year is going to see some good growth and that starts in Q1, and therefore, the build for us and the and the demand from starts to pick up in Q4, which is what we're seeing and so yeah.
Yeah I think.
It's just a timing thing you know we sell into module manufacturers, obviously, and then module guys on into the base station and guys and so some of that dynamic is just timing, but yeah, we're expecting a pretty strong EPS by 22.
And the other thing is not just China, I think thats one of the nice things about.
Actually all of our infrastructure segments now is that fairly global we're seeing opportunity from some.
In Europe, and North American Oems as well both on the Fiveg side and on the PON side as well so that's encouraging.
Great. Thank you.
Our next question comes from the line of tore Svanberg with Stifel. Please proceed with your question.
Yes, congratulations on the results.
First question on back to two lower do you have a range update for us for this calendar year Mohan.
We're still a your capex now range. It's 85 to 95 million were going to be in that range I think for this year and we're still keeping up 40% CHG are going.
Going forward.
Obviously, a lot depends on the timing of Amazon sidewalk and some of the higher volume.
A faster time to market opportunities, but in general I would say.
With the exception of the kind of Cove and related impact we're.
We're seeing pretty good.
Industrial momentum lot and new use cases, but.
As we see these new use cases kind of come out we're seeing adoption across the globe. So I think the again the timing of when these from.
Proof of concepts move to revenue is.
It's challenging to to really.
Comment exactly how it's going to happen, but once it does start to materialize and I think as I mentioned, if kobe once covert starts to get us and we start to get some.
Return to normality in terms of manufacturing and industrial.
On T. I think that's going to continue to also drive the revenue.
That's very helpful and you talked about Fiveg coming back and the next quarter or I mean, this quarter what about data center.
How are some other dynamics being there because that obviously pause for a little bit this last quarter, but are you starting to see that.
Grow again as well.
Well I wouldn't say, it's just as positive as the Fiveg story, I think there's more and still inventory there in the channel and and maybe the customers, but we are starting to see that pick up also and so I expect Q1 on the short to be up as they did on is probably going to be flattish for Q4, and then I would say up and.
Q1 time frame, but yes positive signs and lot of design in activity there.
Great and lastly on the PON business or you expect to start to see 10 gig.
Is that going to be a a fiscal and 22 events or.
Is it going to be further out than that.
Actually a 10 day point is doing well already and I think it continues to do well and.
You know we spent in Q4 to do quite well this quarter to be quite strong on and.
Next year, we're also projecting.
On a good growth coupon so yeah.
Infrastructure just continues to make us give us good indications from 22 is going to be another solid year for our Sip business.
Great. Thank you.
Our next question comes from the line of Craig Ellis with B. Riley. Please proceed with your question.
Yeah. Thanks for taking the question I'll ask one that ties together a few points so.
You mentioned that the.
<unk> inventory would be up quarter on quarter and.
And I can see that all the segments are guided up but Mohan can you help us with some color on some of the gives and takes across the different segments, which would you expect to be growing more robustly, which are more muted and and then within any of the segments are there any sub segments, where you had expected meaningful deviation to the broader.
Overall segment Trent.
Yes, so as.
As you know Craig and the first half was extremely weak for consumer I think we're seeing.
The second half being quite strong relatively to for consumer and I'd expect that to continue for at least and you. Obviously were seeing Q4, which is typically seasonally down for us.
We're seeing very strong consumer business. So so that I think is going to continue.
And then on the infrastructure side as I mentioned, some some softness there, but mostly driven by a very strong first half and.
All the indications other that's a much.
Most of the infrastructure segments, we participate and not going to come back this quarter and and suddenly grow and Q1 and then on on the wireless and sensing side for off some.
Obviously lower continues to do great and.
And then on the proximity sensing side I think again thats tied to consumer we expect that to do quite well and Q4.
On the inventory side and on the supply side, you know that the areas that we're concerned about obviously, there's a tightening supply chain.
Some of the <unk> and markets tend to have short lead times typically consumer. So we are taking a little bit more risk and building some in total inventory that there.
There is demand seems to be extremely strong we're pretty cautious about how we are participating in the market and making sure that we're not.
You know over Inventorying anything our channel is very light at the moment and <unk>.
And my expectation is that you know if we manage it correctly then I think we should see a good.
Consumer growth next year as well, we won't see on such a volatile.
Demand coming from that.
Got it and then turning to Laura you mentioned in your prepared remarks, both Amazon and Cisco and and I looked at Cisco's product announcement. It was actually very impressive very impressive array of products that help create a real nice ecosystem as you look at fiscal 22, what potential says does.
Cisco have to really drive incremental sales from our or is that just much more of an and liked like business, where those would be the kind of plastic bottle volume design hands free, but see within industrial versus anything high volume like Amazon.
Yeah, I think from a revenue standpoint, it's more the latter Craig but the important thing to remember is that once they have adopted lora and they build the infrastructure.
Based on Lora, then that's they have four of a REIT and its going to be there for at least on X 10, 20 years, and I think drive, especially and deduct industrial sector.
<unk> a ton of opportunity both for.
You know additional sensors, but also potential cloud services potentially new use cases.
So there's this that's the excitement we have behind Lora and LP, when we're creating a whole new industry, yet and that's that's to me is the is the thing to take away not on the free.
From the standpoint of getting these tier one customers like Cisco and Amazon involved in and driving more on and helping us with the ecosystem, but it but what it says about the value that the technology brings to the market and and to these customers. So yes.
Yes, it's pretty exciting to have.
And both new use cases, but also tier one companies really driving and for us.
Good day, and if I could I'm back I, just two clarifications on thrown out at the same time one you.
You talked about pricing and gross margin and fiscal 22 can you give us a sense for the magnitude of that increase for example, could we see gross margin, so 100 basis points or so over fourth a four quarter period, and secondly, I thought I heard you mention.
But the fourth quarter was a 14 week quarter and if so.
What's included in revenue and expense guidance for the extra week. Thank you.
Okay. So let me take the first one on with regards to gross margin Aspheric on like I said in my prepared remarks.
When you think about where with respect and on revenue growth to come from US we get into the next fiscal year, what to expect and are lumpy first a conservative growth very nicely.
Our debt our sensor business I think RMS and the area of growth Paul and on day are found your wireless I also in addition, our industrial and automotive opportunity within our protection.
Our business all this business is.
We're really very exciting for us because of a higher gross margin that come with.
Is it is that is there really something back and quantify right now probably not but I would expect that to see something on India range on 60 to a 100 basis points and Spanish and you know throughout the year.
So that was very good with regards to force change.
In Q4 with a fortune rigs, it's always hard on the revenue side are related and you know I too.
To estimate how much off the extra week its contributor and through a two revenue saw a bit.
Of course, there is a contribution for it but it's much easier on the operating expense side on the operating expenses side I think about 60% of our total operating expenses is sort of tied to a time right. So sales like your salary as youre operating supplies and stuff like that started if you think about the debt 50% up on.
Putting that passes on day linearly over 14 weeks that will give you a pretty good estimate of what the operating expense impact.
Very helpful. Thank you.
Oh.
Our next question comes from the line of Mitch Steves with RBC capital markets. Please state your question.
Hey, guys. Thanks for taking my question and I just had a quick one I guess, maybe a bigger one bigger picture on just on the strategy for Semtech now I know before you guys had talked about potentially kind of spinning out the Lord business it being it's on entity or potentially selling selling that piece of the business relative to semtech whole can maybe price.
And just an update on what what kind of the view is now given that you've kind of survive to kind of this downturn and 20 and 21 I'm sorry total.
19, and 2020, what the plan is for Lora business or Semtech as a whole relative to that asset.
Yes, Mitch you know that Ford has always been.
Net flora becomes the de facto standard then.
And the industry and we are generating you know around $100 million of recurring cloud services revenues, then we could we could start to look at.
Some some ideas about.
How to move that business to a different level and so that's the thought and I would say, we're still probably two three years away from that.
Obviously every every day, we get a good momentum and a new announcements like dams and sidewalk and you know our lower edge.
Announcement and get closer, but we're not there yet I think well I would say two to three years still is the timeframe.
Yeah, and then can you provide us a c. said a cloud service kind of recurring revenue, what's what's kind of the revenue run rate now.
Relative to kind of just the straight sales you guys are doing.
That's it's brand new so we just we just announced that cloud services Geo.
And your location service. It's the first one so it's it's a universe and we just starting to get contracts in place now and things like that so I would say next year end of next year would be a good measure for you know are we on track to do the on premise in three to five years and.
And what's the what's the pickup and whats the value that we're bringing it is dependent on our new platform and more edge platform as I mentioned and I think we'll start to get some good feeling for that as customers deploy that platform and and give us feedback on the on the volume.
Yes, I guess, just one last one if I could just clarify those comments so what would be kind of the the first major customer and major launch and guys would expect.
Call, It and 21, and 22 and allocate for logos or anything like that but how should we think about the rollout of that that new product or business line.
Well the way to think about is asset tracking and asset management is the is really the first target and geo location and so you know.
Just the one customers are testing and they feel that there's value will start to talk more about the specific.
Application, but I would I would think it's in those areas and asset management and asset tracking and tied to use of Laura edge.
Indoors and outdoors, you know thats, the beauty about lora and that and the mortgage platform has Wi Fi sniffing and GPS nothing so the concept being you can track and assets from your home outdoors into a warehouse in two ways.
Manufacturing facility for example.
Well you know within.
Buildings.
Deep and doors or in rural areas, and and you don't have one platform which is utilized.
Utilizing and optimizing the battery power consumption effectively so.
It's a very nice concept, it's very Oh, I think it's a very unique capability we have.
You know, we have to get it out there and and demonstrate the value right.
Understood very helpful. Thank you.
Our next question comes on line on Scottsdale with Roth Capital. Please proceed with your question did good afternoon, and thanks for taking my questions. Steve just a couple of quick clarifications on I I missed what you said about the sequential outlook for protection I, just wondered if that was up down flat.
And what while we work on the quarter I know you were indicating a your guidance doesn't reflect any incremental contribution from Wally holic silicon in the fourth quarter and then I had a couple of follow ups.
So protection and we're expecting to and they continue to be up and it was up in Q3, and we expect it to be up and Q4, driven mostly by the consumer space, but also in our industrial.
More broader industrial telecommunications automotive sectors are all doing quite well.
For us so so we're expecting that to grow and Q4 also and.
And then on wall way Wally for this quarter were not expecting much at all you know we.
We haven't shipped much and we're not expecting to shipments from Q4, so pretty pretty minimal revenues from walk away this quarter once a day.
You know obviously, we have some license as I mentioned on the.
Prepared remarks about is fairly modest and he revenues that come from that and it's not clear to us whether you know Wally is already built up inventory and so whether they need and materials. So so we've essentially taken it out of our.
No guidance, great perfect and on wireless and sensing absolutely huge quarter, you know part of that it sounds like a combination of of proximity sensors and lower I was wondering if you could parse that a little bit more you know up 32% sequentially. You know the smartphone market broadly in general was up about 20% plus I think on a global base.
So you're benefiting from that was was there something in there, which was approximately bigger versus lower and just to kind of get calibrated on that because given given the performance of that segment I would've thought you'd be at the higher and or even above the higher end of the range of 85 and 95 million for lower this year.
Yes, they're both doing extremely well I would say you know obviously proximity sensing for US has been it's driven by mostly the smartphone business and so yeah that has obviously done quite well and Q3 and.
Oh expecting stronger.
Proximity sensing and Q4 as I mentioned consumer tends to be share.
We can Q4, but this year is unique in the sense that to the first half was very very weak. So we're starting to see maybe a little bit of that affect kind of playing out here in Q4 time frame.
But the door and small consistent I mean, it's just continuous consistent growth and it's.
With cut with Laura it's more about how fast appeal she's a moving over to revenue right. So we have plenty of pipeline I mean, as I mentioned, we have $500 million and pipeline. So it's only a question of how quickly those could move through the.
Through the pipe to revenue.
And Thats, where something like the Amazon.
Sidewalk announcement I think really.
Stops to health and away because you.
Laura is a great technology for industrial it's clearly proven and utilities already it's clearly proven.
South and you know.
Some of the asset management and and.
Broader kind of industrial use cases, but where we have been hoping and somewhat speculating, but now we have real evidence all of it is the smart home use cases, and some of the more consumer use cases, which drive revenue typically foster now they can be volatile as well I mean, they can have shorter life cycles as well, but tip.
Typically they could ramp up much faster and so.
I as I said I don't think we'll start to see it really until mid next year the growth there, but when it's coming gosh, if I could mohan follow up on on the lower front as it relates to sidewalk could you talk a little bit about the ecosystem. That's that's building around and right. Now now you got the anchor and yet the base station, there and effect with the Echo.
Dot how is the rest of the ecosystem and design activity around that starting to form I just wonder if you could update as well on tags on haven't heard a lot about that later they know that without further out on the horizon, but you're starting to talk about cloud and other recurring opportunities.
What's the latest thoughts on tax.
Yeah, I I'm pretty excited by tax, but I think it's still early we still have to get the price price points down and we do need.
Something like a sidewalk network in place for that to become an effective vehicle.
On the ecosystem you know, it's really driven by Amazon I don't think we're participating obviously and helping and.
Facilitating.
But a lot of the momentum is going to be driven by by them directly and I think.
We'll continue to to help drive that that.
Process, but but what it well and you when you look at the ecosystem and is clearly clearly and opportunity for sense and manufacturers.
Who want to connect to a total gateway and in the home.
Oh, you know and lighting area and tracking area and the security area and a safety area and irrigation you and just a whole bunch of senses, there's clearly opportunity for.
On a software companies to.
To partner with.
With Amazon and and figure out how to to connect with them and their site network.
There's clearly opportunity per system integrators, who want to connect to the home home based network and opportunity.
There's just you know the whole ecosystem around the smart home I think comes into play quite nicely and I think we'll start to see that towards probably the second half of next year, but as the network and starts to get rolled out and customers and consumers start to deploy site networks I think that's when you really start to.
See the momentum.
And lastly, if I could just on and and signal integrity Pamfour product line I think so you're starting to see some 100 day contribution I thought in the third and fourth quarters sports see some initial revenues. So wonder if you could update us on that front and then looking forward to the 200 400 gig I thought that with design activity, which would start to translate into revenue and the first half.
Fiscal 22 was wonder if could just update us on those two fronts. Thanks.
Yet, we starting to see revenues now.
It's small, but we are seeing triage revenues now how pamfour revenues and we've got some very good momentum as I mentioned, we have over two two dozen design and opportunities that are in play at various stages. Some some early stage.
Evaluation, some more qualification type of stages and so that's going to start ramping and yell next year should be a very good year for triage I think.
Thank you.
Our next question comes on line of Christopher room with Susquehanna. Please proceed with your question.
Hey, guys and thanks for the question I think most other good ones have been asked so I'll just ask too.
I guess the first one here on the five g. opportunity on.
Perhaps you can give us I know you said it would grow a I think most people are expecting that but perhaps you can give us a better idea of the kind of growth rates. We should we should expect in this business for the next couple of years and then if you could break out perhaps euronets or A.S.P. is it sounds like you're moving.
25, G. here, so I want to explore the opportunity little more thank you.
Yes, so the the main thing to remember with Fiveg for us and the optical modules is that with Fourg and there was typically just a PMT device of some sort.
With Fiveg, there will be a CDR as well as the PMT device, so the opportunity for us and Fiveg is either.
Clear rich CDR and fiber rich.
PMT devices for 25 years links.
And they go to 50, Giggling say twice edge Pamfour and fiber edge.
Device for 50, Giggling. So ASP is obviously increase for us and in addition.
There's more typically with fiveg is going to be more from pole links and income kind.
And it goes from six to 12.
Oh from holdings, and so this significant increase and the number of ports that will be going.
Going forward so.
So increased content more ports, but then I think the other thing that some.
Somewhat different for us is that and for everybody I think and Fiveg is that a you know historically its been China and and I think for sure China will still be the predominant volume driver, but we are starting to see some of the Oems around the world you know really take a more aggressive stance and trying to.
Be successful on this market and net lease participate and some of that's a geographical dependent on which regions are driving the need to have local supply as support and fiveg infrastructure.
But that will also drive opportunity for us I think and you know for Fourg and we have about types and show the market. We think we can hold that share at least half of fiveg and so.
That's that's kind of the thinking and it should grow double digits for sure over the next couple of years here right.
Excellent and then also if we could talk about the data center opportunity and at least the data center and the market more broadly there Intel talked about perhaps a demand slowdown on.
Just wanted to see if you agreed with that or not and then more specifically if you could talk about your optical opportunity that would try edge.
You know you mentioned the cost versus analog you know what is that discount that you get from analog and and perhaps you can discuss how sales are tracking on on that side.
Yes, and they just on had a very strong first half, but shouldn't be forgotten. So we had a record first half. So there was some expectation and second half was going I was going to slow down a little bit and that and that's really what's happened still on an annual year on year basis is still up and so and then we will continue to grow nicely I think next year.
So you know I think.
And we've seen obviously from the real softness in Q3, and expect Q4 to probably be flattish from Q3.
And then start to pick up again next year.
Much like Fiveg I mean, the hub scale data center is broad set of global customers.
You know so it's a it's it's pretty broad range of customers, we obviously something into the optical module.
Manufacturers and building there.
Modules and and shipping into different data center customers and we've got good traction as I mentioned that on.
We expect to see production ramps. So for most of the 200 gig 400 gig pamfour modules over the next few quarters here, it's already started but I think over the next few quarters, we'll start to see that and and essentially you know you can take 100 gig optical module today that uses.
How clearbridge CD on us and essentially replace it with a.
Very similar module uses and try edge CD odds.
And get double the bandwidth for very little incremental cost and the module and so.
Yes, that's the value, we see and and Thats, what we expect a market to recognize.
Thank you guys.
Our next question comes on line up towards Greenberg with Stifel. Please proceed with your question.
Yes. Thank you I just a quick follow up more on I believe you said that the sidewalk opportunity alone could be.
$100 million on the next five years is that and.
On chip revenue or is there some royalty or even services revenue and that.
Number as well.
Yes, I would say its includes includes everything.
Tori, so so mostly chip and royalties.
Great. Thank you.
Our next question comes on line and harsh Kumar with Piper Sen. Please go with your question.
Hey, guys first of all congratulations solid guide solid results.
We appreciate it and then I have two question Mohan right before the ban I think you had you were pretty optum very optimistic on the opportunities in China I would perhaps a you know and new presidency can you talk about you know you talked some about five day, but could you just layout stressed the framework of how semtech with beauty opportunities and CCI.
China should the gates open up for trade again.
Well I think you know we've always been bullish on try and obviously, we invested in China for the last 15 years and so it's hard to walk away from and region that scrutiny on driven so much growth and continues to.
Have someone from us going forward, so, but I would look at the you know the always situation is unique situation. Obviously the ban on volume has impacted us significantly.
But thats kind of done now and where we've been through that the bigger challenge now is just and you know.
Are we going to see a opportunity to continue to grow and all of our businesses in China or is there going to be this from the kind of and desegregation between U.S. and try and our and that's still I'm alone and I think and that's where we'll wait and see but for sure any any positive relationship.
Improvements I think is a positive for our business for sure.
'cause just just because of the success and the momentum and the relationships and and all of that we have across all of our segments.
But that said, we're not counting on it you know as I mentioned a lot of these on markets like Fiveg and.
Paul on are becoming a little bit more globalized and the sense that other regions are starting to recognize the need to have their own infrastructure players and the calm dependent necessarily on.
The Chinese manufacturers to support them and and be there when they need them and and those type of things. So you know, it's it's a little bit both but I definitely think its and things improve on the relationship from on a government level then for sure that should help our business longer term.
[noise] line. So a follow up on that line and then I'll ask my next question as well do you see opportunities you used to have opportunities I believe for data center business and in China do you see that perhaps opening up again for you.
For some tech and in China, and the data center on and then secondly.
With regards to Amazon sidewalk and Laura you I think you were the only supplier on base span I sees for the gateways and the.
That you guys deploy on the infrastructure side is that still the case and will it will be typical consumer be relying on sort of the Amazon infrastructure that will be laid out in the city oval, both public and you have to buy there on sort of gateway, which comes on a dog or echo or something else.
So.
Let me on Us answer.
And so that first and then we'll go to the data center, so as I'm on slide walk it yet for sure there will be a connectivity to a gateway, which will be an echo so and Amazon, obviously will supply the echoes and and so the connectivity will be to the Echo and then how different.
Different echo's connect with each other and how the roaming is done that's all going to be driven by by Amazon and that's an Amazon decision and so I will will obviously help on with that but and.
The main thing is getting it.
Really targeted within the home the smart home and and the periphery of the home is kind of the initial thinking.
Thinking and then tracking of your pets and things like that.
Outside the home and then connecting different that goes together and those type of things I think is the broader vision right. So we'll see how that plays out.
And then on the data center side for sure Yeah, all of the Chinese day.
Notice and Hyperscale data center.
Guys are our partners customers, you know potential opportunities for price range for sure and and we are working with them. We continue to work with them, we don't see any.
And he really shoes at the moment I don't think that they will be but oh, yes, we have very close relationships and expect to see some good growth there.
And some on thank you guys.
Our next question comes the line of Christian Drew with Baird. Please proceed with your question.
Hi, guys. Thanks for letting me and.
You did mention debt and again with the 10 to 20 year opportunity. So clearly there is a long term investment could you give us a share and says.
What's the magnitude.
And those investments on and off.
<unk> potential in customer like Amazon.
And and given those investment and is there any incentive for them to lead and should be used.
Use the same technology and other platforms outside of consumer and essentially handle is also NAV per.
Moving on I O T solution and industrial and it.
Is that and but you need it actually see net specific to this cash similar but elsewhere.
We're supposed to see similar to base network and and generally what's the incentive for large customers have to one thing that you know on to leverage debt into a different end markets.
Yeah, Chris and I think I think all of the companies we deal with we mentioned Cisco earlier, and Amazon and and other companies are starting to understand the value that more borrowings.
It's not the value is increased actually when when Mora is combined with other technologies. So you know when you combined with Bluetooth or Wi Fi or or GPS as I mentioned on more edge one of the reasons why we developed the platform so that it.
Has wife, I, sniffing, and GPS and the thing and Lora is that more on its own has some limitations in the sense that it's a it's not a high balance the connectivity right. So but I think as these use cases start to get a.
Deployed you know there's going to be used cases, a across the board in all segments and and industrial is where I think the biggest value the largest value is official because of the very low power and the range, but then when you see the smart home initiative.
This is really driven through the sidewalk initiative. It really is going to change the way home.
Home automation and and Smart home is thought about when you start to look at the peripheries of your home and you go into the attic or into the garage and to the basement or into the outdoors and to the yard and can then put smart automation around that that really starts to change that dynamic a little bit. So I think it was a huge up.
Net units he will see you know, it's baby steps as I said, but we have some big hitters that are behind the technology pushing it right.
Great and then just one quick follow up and so you've mentioned it earlier about.
Lean inventories and the channel and and tightness in supply cost aboard and you mentioned nothing specific to Noah up are you shipping exactly in line with and demand in line or you see catching up for.
What was sort of and the supply chain disruptions earlier in the year just trying to see if there is any.
Catch up from 11, you or if it's really just a linear with and demand.
Yeah, I would say.
If the it's a question and specifically about Laura I think where we were shipping to demand I think it's in good shape.
I think there.
You know the real question there is enough why 22 if the.
Consumer demand picks up rapidly than than.
Hopefully, we'll be able to supply to that and I think we can so we're in pretty good shape with regard to the rest of the business demand is extremely strong bookings have been extremely strong. So so where we're a little bit cautious, particularly on the consumer side.
With regard to making sure we understand how.
How much inventory is being built and trying to maintain some balance there by keeping our channel lean and things like that so.
It's hard to know to be honest with interest and exactly but we'll see it play out we're expecting a very strong Q4, we're expecting a strong Q1 I think the first half of next year looks like it's going to be strong and then the question is will what the second half look like right, but we'll see we'll see by then.
Great color. Thank you very much.
Our next question comes on line of call. It from me with Cowen. Please proceed with your question.
Yes, Thank you for a for squeezing me and.
Youre seeing on integrity business will grow mid teens at least in fiscal 2021.
How do you think about the trajectory of that business entering fiscal 2022 in the context of your longer term, 12% growth rate I ask because it would seem another healthy year with 10 gig PON is on the com and demand remains healthy on for 25 gig and other gigoptix products and Asia.
Debt at the same time, you know proponents of 400 gig Pamfour would argue a you know the second half of 2021, and we'll begin the demise of NRC are for short reach applications. So just would love to hear your thoughts on that.
Well, we think 100 gig.
Modules and connectivity will continue for some time I don't think there will be a demise. It may may start to flatten off and Pam four and two on the getting 400 gig pamfour modules from start to pick up for sure but.
While we were hoping to participate in that and of course, we'll try engine and we see good design and momentum as I said so.
To answer your question, we think all the infrastructure segments are going to do quite well and next year.
And part of that is working from home and and all of the you know Cove and related dynamics that have driven.
Infrastructure investments and and the need for more bandwidth and and all those things and so you.
You know, yes, Sip a signal integrity product group, we're expecting pretty good growth next year across the board and this year has been extremely weak year for video for example, as well and so.
We're expecting if why 22 to see that pick up also that segment and.
Eric we anticipate that to continue on.
Attribute to the growth next year also.
Understood and last question. If I May you know you know what order trends are you seeing by Asia based data center customers I asked because your primary pure spoke about that strength for 25 gig and 100 gig products. You know again, just a double click on the channel inventory commentary.
We've kind of heard some mixed commentary, but I appreciate your thoughts on how you feel about the channel situation for optical components, particularly for data center and long haul. Thank you.
Oh for US. It's we have a channel is pretty pretty light. It's not a you know it's it's certainly.
In the range, we feel comfortable with the demand is very strong as I mentioned and bookings are strong indications on Q1, I mentioned that Q4 was going to continue to be a little bit like for datacenter public probably flattish fiveg is going to be olive is stronger and that we expect palm to be stronger.
In Q4.
And then we expect all of the infrastructure segments to to do nicely in Q1. So yes. At this point channel is a is liked a I think a relatively and demand continues to be strong and and bookings are strong. So we think we're in pretty good shape.
Thanks.
And our final question comes from the line of Craig Ellis with B. Riley. Please proceed with your question.
Hi, Thanks for coming back to me and and getting me on before we wrap up on Mohan I really appreciate all the metrics that you get but lora and the transparency they provide but I missed what you said about the opportunity funnel. So one can you repeat that number and two did it change from the last quarter and three <unk>.
When we go through a period that this dynamic is what we've seen year to date were.
The whole world is is turned upside down with a a cobot crisis, how does the company manage its its final and and kinda quality check and.
And resiliency check so the items that are in that on once we get to the other side and now are looking at what should be a global recovery, but can you just walk us through how you maintain that bundle line and where it stands currently versus prior expectations.
Yes. So currently the pipeline is about $500 million, we look at the leads and drive the pipeline a it's about 200 million. So this is oh pretty sizable pipeline compared to what I call on revenue is and the and the main area of focus is conversion on those per.
I plan on opportunities to revenue that's been the key okay.
Okay and key focus for US is how do we make sure and enable that.
To occur it's fairly well balanced as you know the pipeline has some a funnel.
From an old in the funnel.
About 21 percentage, China, and then about 70% is Europe, and Americas, which is good because that's that's a balance the revenue today. The revenue is about 40.
49%, China, and and 40% Europe and Americas, So we want to get that balance a more balance and if we execute it the funnel tons over to revenues, we expect it to and time then that would be a nice thing to have just more balance well also lets say use cases lots of different used cases so.
You know, there's obviously now on a hefty smart home component. That's also net funnel.
Utilities asset management small city and building, so fairly well balance that yeah. This year and obviously, it's been a tough year for.
You know for customers to prioritize view.
You initiatives and that's that's been really the trick or the difficulty. We had you know where most of many of our company customers have been focused on you know just making sure people are safe and making sure people are have jobs and you know and those type of things.
Putting a priority on a new technology on a new marketing and and you.
Initiative has been challenging, but it's starting to get turned around and I think you know as I mentioned and with Amazon Sidewalk initiative. You know that's initially and it was significantly going to be it's going to be announced a much earlier, but was pushed out and now you know is out there and I think.
We're going to see more of the more of this type of thing as custom and start to get a handle and countries start to get a handle on the on the pandemic and the way forward. So expectation is next year the opportunities will increase rapidly.
Thanks Mohan.
Okay and with that operator, we.
And with no debt, we reached the end of our question and answer session on let's turn the floor back over to management for any closing remarks.
Thank you and closing we were pleased to deliver another solid quarter and remain encouraged that our strategies for multi sourcing our investments in I T operations and sales infrastructure and systems continue to limit the impact of climate on our business operations I want to once again acknowledge all of the talented and committed semtech employees.
Across all our global locations and thank them sincerely from their ongoing efforts, we believe our strategy along with that diverse product offering balanced and market approach and strong customer relationships should enable us to continue to deliver growth with that we appreciate your combined continued support and Semtech and look forward to it.
Thank you on next quarter. Thank you.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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