Q2 2023 Semtech Corp Earnings Call
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Greetings and welcome to the Semtech Corporation conference call to discuss the second quarter fiscal year 2023 financial results. Speakers for today's call will be Bohan Maraswaran, Semtech's President and Chief Executive Officer, and Emeka Tugu, Semtech Executive Vice President and Chief Financial Officer.
Please note this conference is being recorded. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. I will now turn the call over to Cemtech's Executive Vice President and Chief Financial Officer, Meiko Chukwu.
Thank you, operator.
The press release announcing our audited results was issued after the market closed today and is available on our website at suntech.com.
Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements.
For a more detailed discussion of these risks and uncertainties, please review the Safe Harbor Statement included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission.
As a reminder, comments made on today's call are current as of today only.
And CEMTIC undertakes no obligation to update the information from this call should facts or circumstances change.
During this call, all references met the financial results in my prepared remarks and Mohan's prepared remarks will refer to non-GAAP financial measures unless otherwise noted.
A discussion of why the management team considers such non-GAAP financial measures useful along with detailed recommendations of such financial measures.
The most comparable GAAP financial measures are included in today's press release.
In Q2 fiscal 23, the company delivered record net revenue of $209.3 million.
A sequential increase of 3.5% and an increase of 13.1% year over year.
While in a challenging business environment, we focus on operational execution.
and were able to grow our...
earnings at approximately twice the rate of revenue growth and delivered non-GAAP earnings per share growth of 9% sequentially and 34% year-over-year.
Our business is seeing continued relative strength in North America and Europe and a bigger shift to the industrial and data center segment.
This shift is aligned with our strategy to diversify our geographic and end markets.
We saw significant growth in the infrastructure and market, growing 11 percent sequentially and 25 percent over the prior year and represented 40 percent of net revenues.
Let's revenue from the industrial
The L market also grew nicely, up 7% sequentially and 44% over the prior year and represented 40% of total net revenues.
Like many, we are seeing softness in consumer end markets when net revenues for high-end consumers decreased 14 percent sequentially and 31 percent over the prior year and represented 20 percent of total net revenues.
Thank you.
Approximately 9% of high-end consumer net revenues was attributable to mobile devices.
And approximately 11% was attributable to other consumer systems.
Overall, Q2 shipments into Asia, North America and Europe represented 72%, 16% and 12% respectively.
While this represented the SHIP2 addresses for our distributors and customers.
We estimate that approximately 35 percent of our shipments are consumed in China.
28% in the Americas and 21% in Europe and the balance over the rest of the world.
Total direct sales are stable at approximately 12 percent of net revenue and distribution represented approximately 88 percent.
Our distributor POS declined during the quarter but remained balanced.
With approximately 45 percent of POS coming from infrastructure.
31% from the industrial segment and 24% of the total POS coming from high-end consumer end market.
Q2 bookings decreased sequentially and represented book to bill of less than one.
In addition to inflation, recession fears and continued supply chain challenges, the effects of COVID are still driving some of the downturn we see in China.
Q2 growth margin increased 40 basis points sequentially to 65.2%, a new quarterly record driven by a higher mix of our growth engines.
For Q3, we expect gross margin to expand to another record, reflecting the benefit of lower mix of consumer revenue.
We expect.
This trend will continue and in fiscal 2023 we expect our gross margins to trend higher 100 to 20 basis points for a favorable richer mix of our growth platforms.
Q2 operating expense increased slightly to $71.9 million.
Draven by new product introduction as best as.
For Q3, we expect our pregnant expenses to decrease approximately 7% sequentially as we manage through and respond to a weaker demand environment.
We will, however, continue to invest in their new product innovation.
to sustain our market positions and our long-term growth.
In Q2 fiscal 23 operating profit grew 7% sequentially, approximately two times the rate of net revenue grew.
reflecting the higher gross margin and modest increase in operating expense.
This...
Strong operating leverage drove an expansion of operating margin to approximately 30.8%.
This represents a sequential expansion of 100 basis points and 370 basis points from the same quarter last year.
In Q2, cash flow from operations was a record $77 million, up 46% from the same quarter last year.
The free cash flow increased 52% year over year.
Cash flow generation has benefited from record operating profits and our focus on exceptional management of working capital.
In Q2, we did not report any stock because of our pending acquisition of Sierra Wireless.
We have approximately $209 million remaining in our shared report just authorization.
Going forward, we expect to primarily use our cash to pay down the expected debt.
from completing the Sierra acquisition.
Q2 accounts receivable increased 7% sequentially due to higher sales and the days of sales declined slightly to 30 days.
In Q2, net inventory in absolute dollar terms was up slightly sequentially and days of inventory decreased 7 days to 133 days.
We expect net inventory to increase in Q3, reflecting the weaker demand environment.
In summary, we are very pleased to deliver another record financial performance in Q2.
As we look ahead to a much softer second half of the year driven by micro issues.
We expect to see stable growth margins.
and the reduction of operating expenses to help mitigate the impact of weaker demand on operating profit.
We will continue to invest in product innovation to take advantage of our strong market positions and sustain our long term growth.
Before I hand over to Mohan.
I want to provide an update on the status of the proposed acquisition of Sierra Wireless.
We are still on track to close the acquisition in the second half of this year.
As previously announced
We have fully committed debt financing for the transaction and are currently in a syndication process to achieve an optimal debt.
Structure and cost of capital
We are excited about the strategic opportunities that this proposed acquisition brings to us.
We look forward to closing the transaction as soon as possible and getting to work delivering on our vision. I will now hand the call over to Mohan.
Thank you, Emeka. Good afternoon, everyone. I will now discuss our Q2 fiscal year 23 performance by product group and provide our outlook for Q3 of fiscal year 23.
Our Q2 fiscal year 2020 net revenue was a record $209.3 million, representing a 3.5% sequential increase and a 13% year-on-year growth.
We posted record non-gap gross margins of 65.2% and record non-gap earnings per day to share 87 cents.
Our Signal Integrity Product Group, 19.5% annually, and achieved a fifth consecutive quarterly revenue record and represented 42% of our total revenues.
Growth was driven by strength from the pawn and data center markets.
In Q2, our hyperscale data center business was strong that by growth from 100 gig optical modules.
of our Triage Short Reach platform for 200GB and 400GB PAM4 optical modules continue to gain momentum globally.
Our customers are also giving us positive feedback on our long-reach triage samples.
Targeted at 200G FR4 optical modules.
This will be another growth driver for us over the next few years.
this new longer reach platform increases our data center SAM by over 50%.
We expect strong growth from triage over the next few years.
We recently announced our new highly innovative copper edge platform targeted at short reach interconnects and active copper cables used in data centers.
This is a new product portfolio targeted at 400 gig and 800 gig data center applications.
represents a completely new sound for Semtech.
The first product in this report folio is a quad 112 gig PAM4 linear equalizer offering lower power and lower latency
We are sampling this new product now and will be showcasing its performance at the European Conference on Optical Communications next month.
We remain confident that our full portfolio of data center products
including clear edge and triage CDRs, 5-RH PMDs and Copper-RH equalizers.
will enable us to continue to grow our hyperscale data center business over the next several years.
In Q2, our PON business achieved a seventh consecutive record revenue quarter, driven by notable strength from our PON X 10GB PON platform.
as global demand for higher access bandwidth grows.
and new global palm deployments and use cases emerge.
Our comprehensive pond portfolio, together with our innovative roadmap, positions us extremely well in the global pond market.
The pond market is growing rapidly and we expect new pond tenders in the second half of FY23 to stimulate further market growth.
Our POM business continues to show strength.
And we remain confident this business will grow nicely over the next several years as PON deployments and PON bandwidths increase worldwide.
In Q2 of FY23, revenue from our wireless base station business showed solid annual growth on the strength of 5G base station deployments.
We continue to win new designs for both Clear Edge and Tri Edge in 5G base station front hall optical modules.
We expect our 5G wireless space station business to continue to grow in the second half of FY23.
and accelerate over the next few years as global 5G system deployments increase.
driven by new 5G tenders in the first half of FY24.
We also expect to see our first triage revenues from the 5G base station market in the first half of FY24.
Despite the secular demand strength and strong design with momentum associated with our infrastructure with our platforms.
The macro environment is showing signs of slowing, and we continue to experience COVID-related issues in China.
As a result, we expect infrastructure demand to decline in the second half relative to the first half of FY23.
We expect the single integrity product group revenues to decrease slightly in Q3.
Moving on to our protection product group.
In Q2 of fiscal year 23, net review from our protection product increased 10% over the same period last year.
Representing 26% of total revenues.
consumer protection business remains soft during the quarter.
as strength from our North American smartphone customers.
was offset by smartphone weakness from both China and Korea.
North America now represents the largest region for our smartphone protection business.
surpassing both Korea and China for the first time in Q2.
Our efforts to diversify our protection business continue to be successful.
our growing revenues from the automotive, communications and industrial segments now represent approximately 42% of our total protection business.
Our high performance protection products continue to see greater market acceptance.
across all industry market segments.
as system designers increasingly utilize advanced process geometries and higher speed interfaces.
In Q3 of fiscal year 23, we expect our protection revenue to decrease due to a weaker consumer market driven by ongoing weakness from our Asian smartphone customers.
Turning to our wireless and sensing product group.
In Q2 of fiscal year 23, revenues from our wireless and sensing product group increased 8.1% over the prior year and represented 32% of our total revenues.
and delivered another record revenue.
Our LoRa-enabled revenues achieved another record in 2-2.
and remain on track to grow approximately 40% this year.
We continue to expect our LoRa-enabled revenues to grow at a 40% CAGR over the next five years.
Strong gateway deployments have set a solid infrastructure foundation, which should enable the proliferation of ultra-low power sensor networks across numerous use cases.
Global customers are recognizing the importance of deploying ultra-low power IoT center networks.
to accelerate the digitization of their industrial assets.
or to mitigate against climate change impacts.
Here are some recent examples of lower use cases.
City Light launched a new Smart City Lighting platform using LoroWan.
City-like noted that they have saved 1.29 billion kilowatt hours of energy through the implementation of smart street lighting in more than 100 cities.
And this new platform will help them further accelerate their global expansion plans.
cranberry, analytics, and out new Laura-based smart water meters.
which allows for effective planning of water distribution, as well as real-time monitoring, leakage analysis, and mitigating water waste.
Wi-Frax, new intelligent track and trace platform.
which uses both LoRaWAN and cellular connectivity.
is providing a new cold chain asset tracking and management solution.
Skylab and HeNet
which leverages Centex 2.4 GHz solution, is using LoRa to optimize global maritime logistics.
and sea condition monitoring for passenger vessels.
We recently invested in Dryad and their Silvernet early wildfire detection and forest monitoring system.
based on solar-powered LoRa-based mesh networking.
wildfires have become a major driver of climate change.
generating up to 20% of global CO2 emissions.
while costing the global economy approximately $140 billion to date.
The Dryadz LoRa-based solution aims to provide an innovative monitoring system.
to help mitigate against wildfire damage.
These are just a few examples of exciting new lower use cases being deployed globally today.
In Q2, the LoRa Alliance recently held their global expo with excellent attendance and solid media coverage reaching over 3.5 million business leaders with exposure to LoRaWAN.
The LoRa ecosystem continues to expand as measured by new service providers, OEMs, and system integrators joining the LoRa Alliance. And we expect the Alliance and ecosystem to continue to grow for many years to come.
Our lower metrics also continue to make very positive progress.
The number of public Loraland Network operators grew to 173, up from 170 at the end of Q1.
Private networks are also experiencing significant growth as evidenced by many new use cases and applications. In addition to the new use cases, private networks are experiencing significant growth as evidenced by many new use cases and applications.
We expect approximately 180 public LoRaWAN operators by the end of FY23 and expect to have near nationwide LoRaWAN coverage in 20 of the top 30 GDP countries by the end of this fiscal year.
LoRa gateway deployments continued to grow and achieved a record 5 million gateways deployed at the end of Q2 versus 4.2 million at the end of Q1.
PicoCell gateway deployments continue to increase nicely, driven by smart home and smart campus segments as Amazon Sidewalk gateway deployments increased 23% and Helium gateway deployments increased 18% sequentially this quarter.
Both sidewalk and helium networks should drive an acceleration in end device deployments over the next several years as the smart home and campus segments increasingly adopt low power sensor networks.
In addition, our macro gateway deployments increased 8% sequentially, demonstrating the continued deployment of LoRa for wide area network use cases.
We expect LoRa gateway deployments to achieve approximately 5.5 million by the end of FY23.
The cumulative number of lower end nodes deployed increased to 270 million at the end of Q2, from 256 million at the end of Q1.
We expect this number to exceed 300 million cumulative M nodes by the end of FY23.
With continued network expansion globally, we expect end-node deployments to accelerate rapidly over the next three to five years.
Our LoRa pipeline continues to be strong.
ending the quarter at approximately $1.1 billion.
We anticipate that on average 40% to 50% of the opportunities currently in the pipeline will convert to real deployments over a 24-month timeline.
We continue to see growth in sustainability and smarter planet initiatives in areas like smart utilities, smart logistics, asset tracking, industrial IoT, smart home and smart cities where innovative solution providers are using LoRa to monitor, measure and manage resources more efficiently.
Opportunities continue to drive geographical diversification in our lower revenues as we continue to see our lower momentum accelerate in the Americas and Europe .
Over 82% of our LoRa opportunity funnel is currently from regions outside of China.
In Q2, revenue from our proximity sensing platforms declined due to Asia's smartphone softness.
some ongoing pandemic related challenges in China.
While we are seeing proximity sensor design wins in both smartphones and the consumer wearable market, we are expecting a weaker second half demand environment for our consumer related products including proximity sensors.
For Q3 of fiscal year 23, we expect net revenues from our wireless and sensing product group to be down due to macroeconomic softness and a weaker consumer market.
The Semtech innovation engine continues to deliver new and disruptive technologies to our customers.
across several end markets. And in Q2, we released 14 new products and achieved 3,200 new design wins.
This quarter, we entered into a definitive agreement to acquire Sierra Wireless.
This transformative acquisition will bring together the ultra-low power, long range and network flexibility benefits of LoRa technology.
together with the low latency, high bandwidth, and global network coverage benefits of cellular technology.
The combination of optimizing LoRa and cellular technology is a highly strategic decision to position Semtech as the leader in the fast growing ultra low power IoT market.
We aim to bring solution simplification to a disruptive chip-to-cloud IoT services platform.
that helps our customers accelerate their digital transition to the Internet of Everything.
The acquisition will approximately double the scale of Semtech, be non-GAAP earnings accretive immediately, and expand our IoT addressable market to almost $10 billion by 2027. With that … how will Resources exceed ourBothse? composite, is there a strategic investment in eating a piece of soy sauce that could work globally? And just how differentields will score in a minus head foreign to a cheap reminding a bigger, cheaper, more reliable product? If you reached out to us, you submitted the video survey. Or have the surf segment in your inbox, or could be a bit more viscous. The rubric could be past the conversation. What would be the
We expect the transaction to close in the second half of FY23.
Looking forward to the third quarter of fiscal year 23.
We are seeing the effects of a softening macro environment.
ongoing COVID-related issues in China, and a very weak consumer market.
We also continue to have pockets of supply chain challenges in specific areas.
As a result, we are currently estimating our Q3 revenues to be between $170 million and $180 million.
To attain the midpoint of our guidance range, or approximately $175 million, we need to return orders of approximately 6% at the beginning of Q3.
We expect our Q3 non-GAAP earnings to be between 60 and 66 cents per diluted share.
I will now hand the call back to the operator.
And Mecco and I are happy to answer any of your questions.
Operator.
At this time, we'll be conducting a question and answer session.
If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys.
One moment please while we poll for questions.
Our first question comes from the line of Torrey Swanberg with Steve-O. Please proceed with your question.
Yes, thank you. I wanted to ask a question about your gross margin comment on fiscal 23. Sounds like you're expecting some upside driven by mix. And I'm just wondering, you know, what's driving that change? I do suspect that, you know, maybe the protection business and especially the smartphone part of the protection business is probably going to continue to decline. But if you can elaborate a little bit more on what's driving that higher growth. Gross margin outlook for fiscal 23. Thank you.
Hi, Troy. This is Michael here. Our gross margin story has definitely been a highlight because it's been pretty stable. It's coming almost exactly as we anticipated. I think if you remember in the past, we've always talked about the growth drivers that we have for the company. We've talked about lower and having gross margins above the corporate average. Our PON business, especially as a 10-gig PON platform.
has a pretty good gross margin. The data center business is good gross margin. The wireless base station, good gross margins. And then like you mentioned, within protection, we continue to see the industrial and automotive revenues being a higher mix of the protection revenue and that gross margin is pretty good. So as we go into the October quarter here and with this expectation of continued weakness in the consumers'
sector, we think that actually would be a creative to our growth margin.
Very good. And as a follow-up, I know you're expecting all three product segments to be down sequentially, but are there any of those that are perhaps going to be up sequentially? I'm thinking maybe LoRa, maybe Pond, or is this at this point basically all products down sequentially? I'm thinking most comfortably, and I know the back of the Oss OR Christen is saying
So, I think, Tori, all the product groups as a whole will be down probably sequentially. I think some of them, some of the subgroups may be flat to slightly up on an annual basis. And I think you mentioned PON as being one of them. I think data centers, possibly another one. Within the industrial segment, there are some areas there that are a little bit, you know, less weak than others, I would say.
The biggest challenge we have is probably China. China is, that's a fairly broad market opportunity for us obviously and our revenues are, you know, 35% consumed in China. So there is certainly softness across all of our segments there. But I would say in order of kind of magnitude, it's consumer, China consumer, and then the other segments. So turn around and have fun.
Great. Just one last question as we think about this sort of correction here. Care to comment on the timing? I know there's a lot of different dynamics, right? I mean, supply, there's shutdowns, there's also sell-through softening. So any sort of guess as to how long this correction will persist, if you have any comment. Thanks.
Yeah, well we've seen, I mean throughout Q2, you know, bookings have been softening, I think, and so consumption was softening. So that's what we anticipate for Q3, softening, you know, consumption to be weaker. Q4 typically is a weaker quarter for us and certainly consumer normally is down. A lot depends on how weak Q4 is, I think. Our expectation is as we go into next year that a lot of the...
Our inventory will start to bleed off in the kind of second half of this year, so we should start to see strengthening early next year.
Very helpful, thank you.
Our next question comes from the line of Craig Ellis with B Riley. Please proceed with your question.
Thanks for taking the question. I wanted to follow up on the comments that Tori had or the inquiry that Tori had and just really understand more about what the company has been seeing. Mohan, you look at guidance that's down, I think it's 16.5% quarter on quarter. How much of that is order weakness that you've seen quarter to date?
versus
a desire to try and get in front of the macro trends that you talked about. When I look back at your commentary on signal integrity, it sounds like that business is holding up pretty well and then within wireless sensing, Laura is very strong. I am just trying to reconcile some of the strength you have seen very recently and the numbers that were reported with the magnitude of decrease that we are looking for in the fiscal third quarter and just helping you can provide some segment or sub-segment color on what the bigger drivers are there.
Yeah, so for sure I would say consumer in Asia is definitely very weak and that's probably the weakest area. And then I would name within Asia, you know, obviously the smartphone business in Korea and in China is extremely weak. I think those are well-known kind of things out there. On the rest of the consumer space, I would say that, you know, North America is a little bit stronger but starting to also show softness, I would say.
And then if we take out, go out of sight consumer, the industrial infrastructure segments in the first half have been very strong. I think what we saw in Q2 is starting to see softness in the bookings there as well. Even though we have fairly good backlog, I think the booking softness and then the consumption weakness is starting to obviously demonstrate that, you know, the end demand is now starting to...
to go back into balance. Maybe the supply demand equilibrium is now going the other way a little bit, which is normal in our cyclical industry as you know. So within infrastructure and industrial, I would say infrastructure and industrial, North America and Europe are relatively strong and China and Asia are relatively weak.
Then, a clarification on the comments regarding the fourth quarter, which I think we all know is typically a seasonally weaker quarter in part because of what happens with inventory and consumer markets. Can you or Emeka refresh our memories on what typical seasonality would be and if we have an inventory correction, how you think about the magnitude of that relative to seasonality?
You know, Craig, so I think typically we've seen softness probably in the range of 5 to 10 percent in the fourth quarter. You know, it depends on a lot of things. You know, the consumer space, you know, the consumer inventory balance is also very well known. You know, however, you know, the potential upside to that could be what happens in the infrastructure space, right? You know, as you know, when things really go soft in China, there's always...
softness declining in the fourth quarter.
Yeah, which seems like you might be getting in front of that with the down 16% in the third quarter, but we'll see. If I could just follow up with a clarification on your prepared remarks, Emeka, you mentioned that you expect the deal to close this fiscal second half and also that you had committed debt financing. Can you provide any color on the rate you'd expect for that committed debt financing?
You know, we're looking at different structures, you know, terminal A's going after the commercial bands, going after the convert markets. We're looking at different things and hopefully by the time that we're done here we should probably see a cost of capital in the 5 to 5.5% range.
Thanks for the color guys.
Our next question comes from the line of Richard Scafford with Oppenheimer. Please proceed with your question.
Thanks guys. Maybe just to start with a quick clarification question. Maybe I missed it. Bookings dropped I think over 20% last quarter, the prior call.
So maybe I missed it, but how much we're looking down heading into 3q?
Bookings are down significantly, Rick, and continue to be weak in Q3. So you know, as we mentioned, the Book2Build is less than one. We continue to see fairly soft bookings in Q3. And that's part of the challenge for us. So as we look at, even though backlog is still relatively strong, you know, so the turns number we require in Q3 is, you know, a relatively low number for us versus historical.
a large incumbent position there. So I'm curious, you know.
how much of that business for you guys is sort of cloud versus enterprise? Like what that rough split might look like and is there anything to call out there within that? You know, so is enterprise maybe a little softer, cloud a little better? Is there any kind of any color that you could provide with what you're seeing there?
I would say hyperscale cloud is where the strength is Rick. You know we're anticipating the second half to be weaker than the first half but really in the scheme of things you know probably up from last year so relatively strong. We got a lot of new stuff going on there as well so a lot of new products and a lot of new areas of opportunity but in general I think that you know even infrastructure market unless there's a Mecca pointed out that you know we get a new stimulus packaging.
to China that might kick in or something like that, one is expecting that to maybe be Q4 or early next year before we start to see it really going up again.
Thanks, and if I could, I'll just ask one on triage and appreciated the update there. I was just curious if we could get any more color on like an update on the number of trials you have ongoing or number of wins, like what the revenue funnel might look like, something like that. And then I know you mentioned the long reach triage increases, Sam, about 50%. I was just curious if you could level set us on what that existing Sam is.
Yes, so Triage for us is doing extremely well, I would say, across not only data center, but also the base station market, 5G base station, front-haul market. And now we have, now we're starting to bring out our newer products. We have short-reach Triage, which is doing well, expecting very good growth from that business next year. It will grow nicely this year, but also next year, I think we'll continue to see the acceleration fall from this year.
triage revenues there. And then the longer-reach products are sampling now. So that's, you know, kind of at a high level an additional $100 million SAM for us really. And then the base station market adds, you know, additional SAM for our triage platform. And I mentioned the copper edge we announced as well, which also gives us more SAM in the data center market. So, you know, total SAM for data center, you know, we look at maybe a billion dollar SAM.
FY 27 kind of the way we look at it and, you know, our goal is to get 30 to 40 percent share in that space.
Thanks a lot, mine. Appreciate it.
Our next question comes from the line of Tristan Gera with Baird. Please proceed with your question.
Hi, good afternoon. So you've made it very clear that consumer spending is very weak in China. How do I dissociate that from perhaps lingering impact of the COVID-related shutdown in the April and May timeframe? Is that really a factor in the weakness because there's still some bottlenecks in the supply chain or is it...
basically a flowing supply chain, but it's purely consumer weakness at this.
Well, I think there's different elements, Tristan. First of all, I think that China consumer consumption in terms of China and demand is weak also. China as an economy is weakening, and that is a challenge for China smartphone manufacturers, I think. Then we have the issue of COVID shutdowns and lockdowns and
and all of that sort of thing, which doesn't help. I don't know if I can quantify what percentage is related to that, but it doesn't help for sure. And then I think there's other consumer pockets of weakness elsewhere. So I think we're seeing that because we see obviously we have fairly broad penetration of the smartphone market with the Korean smartphone and North America and China. And China is definitely very weak, and I would say Korea is relatively weak as well. North America not so bad. And then...
If you take other kind of outside the smartphone space and look at other elements of consumer, they are also relatively weak across the board.
Okay, and then back to the earlier question, you know, given your guidance for the quarter, by how much you think you're under shipping real land demand and if you could talk about, you know, how much inventory deleveraging is happening in Asia, I'm assuming that your guidance doesn't reflect really what the end demand is going to be in terms of sequential changes.
Well, we are, you know, part of the thing we do is we look at consumption, Tristan, so we look at, you know, how much is being consumed and when we see that trending downwards, then that concerns us, right? So we start to look at that being an early indicator of softness and certainly over the last quarter, you know, it's been weakening. So we have a consumption weakness, you have bookings weakness and therefore, you know, unexpected demand weakness also.
If you, you know, there are pockets of relative strength as I mentioned. I would say North American, Europe , industrial infrastructure seem to be relatively strong compared to consumer but even those areas are also showing signs of some softness.
Okay, thank you.
Now, our next question comes from the line of Irish Kumar with Piper Sandler. Please proceed with your question.
Yeah, hey Mohan. I wanted to get into your your weakness for the guidance. Let's say, you know, hypothetically let's assume you're about 40 million off. It's just easier for us to understand from the aspect of end markets such as industrial, consumer, and infrastructure rather than your product groups. If I asked you hypothetically to break down, call it 40 million weakness.
into the end markets, my assumption is that consumer would be the biggest spot, but would you just humor us and kind of give us an idea of how much of that 40 million weakness is coming from consumer and how much coming from industrial versus infrastructure and then I've got to follow up. business.
Yeah, so I think as you can imagine from the questions that we've asked before, if you were to rank all of those, I'll probably say that of course a consumer is leading that. And then there's probably a little bit of industrial, a little bit, and then the electrical infrastructure side. But I think most of it, the bulk of it is coming out of the consumer space.
Okay, so when I look at, so my follow-up is, you know, when I look at your latest quarter, I think hands-on consumers only 20% of sales, so is the bottom just falling out on that business? I mean, is it fair to assume that business is down like 50-60% or am I way off here in my assumption?
The consumer space is down significantly. I don't know that I can give you the percentages like you're trying to get, but if you look at – remember that our consumer business is made up of proximity sensing. Our product is going into the smartphone space and that is down significantly. The protection consumer business as well, we're expecting it to be down in the next quarter as well. So –
And then if you look at the other segments, a little bit on the infrastructure side and a little bit on the industrial side. So definitely the bulk of that is coming from the customer space.
Okay, can I ask just one more follow-up? And Michael, Mohan, I know that you guys do business. You have historically been very strong in data center in China historically. And also maybe to some degree I can say that's super industrial. Let's say we put aside the weakness in China as something specific to COVID for now that let's just say we assume that it gets fixed down the line next year. Would you say that that's?
accounting for the bulk of your weakness in those two areas. And that I think you mentioned US is holding a relatively well. Is that a fair way to look at it?
Yeah, I think that's probably correct, Harsh, that China is definitely both on the infrastructure side, elements of the infrastructure side are pushed out. Of course, as Maca pointed out, that could come back in Q4 quite strong depending on the investments going in that area, but that for sure in Q3, that is part of it. I would say the industrial, China industrial is also part of it and consumer is obviously the bulk of it. We're seeing pockets of weakness elsewhere as well, other regions are starting to get softer.
But I would say China is by far the bulk of it. I appreciate the color guys. Thank you so much. I'll get back to mine.
And as a reminder, if anyone has any questions, you may press star 1 on your cell phone keypad to join the question and answer queue. Our next question comes from the line of Christopher Rowland with Susquehanna International Group. Please proceed with your question.
Hey guys, thanks for the question. So it's around proximity sensing. You know, you guys called it out and you prepared the most. I thought that this was a much smaller product for you guys after the Huawei issues. Perhaps you can level set us for what it was in Q3. And the reason I'm asking is I think I'm down, you know, maybe 15 to 20 million sequential for the wireless and sensing segment.
And I'm trying to figure out how much of that is proximity, how much of that is lore, and how much of that is other. And I think maybe you can help us just with some broad strokes, kind of figure that out. Thanks.
So, the proximity sensing is a number of different companies. Chris, I think, you know, Samsung is a big piece of that, as well as China. So those two are contributing definitely to weakness. There is some excess inventory out there as well. So there's some of that demand was very strong, you know, around kind of COVID timeframe and then came down. So I would say that the big piece of it is the...
also weak and then we have some weakness and as I mentioned on my prepared remarks on some of the gateway deployments, obviously that's lumpy anyway. Infrastructure tends to be a little lumpy. As you know, helium has definitely weakened as well. So there's some elements there. So within WIS and sensing, I would say it's proximity sensing and then both Korea and China and then some of the LoRa in China and in helium gateways.
Great. Okay. Thank you for that. And then my second question is on LoRa. Can you remind us what an ASP is for a LoRa node? And congratulations on all the growing content you have at Amazon, for example. Should we assume kind of the same ASP for that node in Sidewalk considering it?
it's such a big volume or is it more considerably discounted?
Thanks. Well, you have to separate the gateway deployments, so what goes into an Echo, for example, versus what goes into the end nodes. The end nodes are the sensors that connect to them. So typically, we use a reference point of about a dollar for an end node, kind of ASP, could be higher, could be two to three dollars, could be lower depending on volume, and what type of, which device it is. But that's where the opportunity is for LoRa, and that's what we're hoping to see now over the next three to five years.
We have a lot of gateways out there and now it's all about connecting end devices. But that's where I think that we're going to see the world is going to need LoRa as we've talked about several times that the value of the lower power sensing and the connectivity that brings together a complete IoT and sensing network is really the value of LoRa. So...
To us that's the real opportunity. But to answer your question, yeah, we typically think of an end node in the dollar to two dollar range.
And I guess just to follow up there, should we think about the content for like an Echo, the Gateway content in an Echo, how should we think about that when compared to the content for, I would assume it's a more robust Gateway for like a helium hotspot or something like that? How do we broadly think about the content differences in magnitude? Think about a macro Gateway as typically being $10 to $20.
Great, thanks guys.
Our next question comes from the line of our school mar with Piper Sandler. Please proceed with your question.
Yeah, actually my question was just answered. I appreciate the opportunity again. Thank you.
And our next question comes to the line, Scott Cyril with ROSC capital. Please proceed with your question. Thank you very much, Scott.
Hey, good afternoon. Thanks for taking my questions. Mohan, maybe just to follow up on some of the earlier questions, certainly consumer smartphone is a big area of the weakness that's going on right now in China and globally. But I'm not sure if I heard a level of inventory, channel inventory that you think is out there, either distributors or the customers themselves. I just want to clarify kind of how much of this is inventory, channel absorption versus demand and are you losing share from a design perspective because you look from a macro standpoint.
you know, the market being down 5 to 10 percent or so in terms of units this year, and clearly you're going through looks like a bigger trough than that. So just trying to trying to figure out that aspect. And also on the lower front, I'm not sure if you gave an indication of what that looks like sequentially. Will it be sequentially up in the current quarter? Because it sounds like you're still looking for that 40 percent growth in fiscal 23.
Well, let me start with that one, Scott. So I think, you know, in the first half of the year, Laura has grown, you know, versus last year, I think it's over 70%. So, you know, obviously, we couldn't expect that rate to continue. So for the year, we're still projecting 40% growth for Laura. But in the second half, it'll be weaker. And I think part of that is China, China weakness. And then part of that, as I mentioned, is the helium, a little bit of weakness there as well. So that's what the expectation is for Laura.
We don't believe we're losing share in any of our businesses or any segment. We actually, if anything, I think we're actually gaining share in some areas. I think the weakness we see today, you mentioned channel inventory, is really tied to consumption. So if consumption comes down, obviously your channel inventory increases because it's not moving from the channel. And so that's what I'm saying is we see that weakness we have to...
we have to bring down our expectations. And so once that consumption increases again, that'll give us a more positive feeling about guiding more aggressively. So I think, yeah, that's the way we look at it. And if you look at the details behind that, a lot of it is consumer, a lot of it is China. Some of it, as I mentioned, is tied to still China lockdowns and things like that. So I think those will come back. But even the other segments like infrastructure and industrial now are starting to show.
Yeah, I mean, the CIRA wireless acquisition has always been a very strategic one, but very tactical in the sense that because customers are the ones that really drove the thinking behind it for many reasons. One is the kind of global connectivity aspect of it that immediately you have the ability to connect LoRa sensors and networks to already established global cellular networks that are out there.
So that provides network coverage for all IoT use cases. So that's definitely a plus point for customers. You have end-to-end IoT capabilities, so Semtech can go out there and talk about how to connect a sensor to the network, to the cloud. And that's going to be very, very positive for many customers we're already talking to. Because they see the ability to reduce energy, reduce cost, to get global connectivity. So that's definitely a plus point for customers.
and be able to connect their industrial assets to the internet, so that's definitely a positive. And then I think the cloud is kind of the silver lining on this, it's gonna be very, very exciting, but obviously, Sierra's cloud platform is already established, they already have it out there, and us bringing our lower cloud capability and connecting the two and providing that total solution to customers is enabling them to really think about new use cases and new ideas of bringing.
ultra low power, long range, LoRa together with low latency, high bandwidth capabilities of cellular. And if you think about the use cases, I mean, there's just so many. Mobile asset tracking, cold chain, fleet management, public safety, security, smart cities, smart utilities, industrial IoT, all of these use cases and applications will use ultra low power sensing with cellular connectivity maybe on the back hall side. So I think...icter.com
Yeah, we just can't wait really to get into the integration, get the deal closed and then integrate the two companies and really start to provide a total solution offering to our customers. It's going to be pretty exciting. Thank you very much for joining us and have a great afternoon. Thank you. Thank you.
Great, thanks. And we have reached the end of the question and answer session. I will now turn the call back over to management for close remarks. Thank you. In closing, we were very pleased with our record Q2 results. We have demonstrated a commitment to excellence and innovation and have delivered excellent financial performance despite many headwinds over the last few years. While we are facing some short-term macroeconomic challenges, Semtech is a very resilient company and I'm confident that we will successfully manage through the current headwinds.