Q4 2023 Semtech Corp Earnings Call
Speaker 1: Her.
Speaker 2: Welcome to Semtech Corporation's conference call to discuss the fourth quarter of fiscal year 2023 financial results.
Speaker 2: The speaker for today's call will be Mohan Mahashwaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, Semtech's Executive Vice President and Chief Financial Officer. Please note this conference call is being recorded.
Speaker 2: 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 Semtech's Vice President of Investor Relations, Anoj Shah. Please begin. In this session, we areMobile Scholarship prophets-people from prov Shooters of Truth.
Speaker 3: Thank you, Sheri. A press release announcing our unaudited results was issued after the market closed today and is available on our website at STEMTECH.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.
Speaker 3: For a more detailed discussion of these uncertainties, please review the Safe Harbor statement included in today's press release and in the other risk factor section of our most recent periodic report filed at the SEC.
Speaker 3: As a reminder, comments made on today's call are current as of today only, and Cemtec undertakes no obligation to update the information from this call should facts or circumstances change. During this call, all references made to financial results in our prepared remarks will refer to non-GAAP financial measures unless otherwise noted.
Speaker 3: A discussion of why the management team considers such non-GAAP financial measures useful, along with the detailed reconciliation of such non-GAAP measures to the most comparable GAAP financial measures, is included in today's press release.
Speaker 3: Finally, for our prepared remarks today, we will use the phrase STEMTECH organic to refer to STEMTECH's standalone results before the inclusion of Sierra Wireless. And with that, I'll turn it over to our Chief Financial Officer, Emeka Cukwu. Emeka? Emeka, do you begin?
Speaker 4: Thank you, Anoja. Good afternoon, everyone. In Q4 of fiscal 2013, the company delivered net sales of $167.5 million, down 6% sequentially and 12% year-over-year. One year-over-year also
Speaker 4: These results included $15 million of revenue from the Sierra YNX acquisition we completed on January 12th. This is a test that was conducted in the
Speaker 4: Fiscal year 23 revenue was a record $741.5 million for organic Centec.
Speaker 4: and $756.5 million including Sierra Wireless.
Speaker 4: For Centech Organic, Q4 shipments into Asia, North America and Europe represented 68%
Speaker 4: 13% and 19% of revenue respectively.
Speaker 4: While this represents the SHIP2 addresses for our distributors and customers.
Speaker 4: We estimate that in fiscal year 23, approximately 33% of our shipments were consumed in China.
Speaker 4: 27% in the Americas.
Speaker 4: 22% in Europe and the balance over the rest of the world.
Speaker 4: Our efforts to diversify our revenue geographically are showing signs of success.
Speaker 4: We see a special in North America and Europe for Tri-H, PawnX and LoRa.
Speaker 4: On a go-forward basis, we expect the inclusion of Sierra to reduce our exposure to China.
Speaker 4: In Q4, net sales through distribution represented approximately 78 percent of revenue for the combined market. monitor understanding and speed of process. Okay.
Speaker 4: company, while direct represented 22% of net sales.
Speaker 4: Going forward, we expect to have a more balanced mix due to the addition of Sierra.
Speaker 4: Looking at our end markets for the Centec organic business.
Speaker 4: Our infrastructure and market fell 18 percent over the prior year and 20 percent sequentially and represented 37 percent of total net revenues.
Speaker 4: Net revenue from the industrial end market declined 18% year over year and 15% sequentially and represented 40% of total net revenues.
Speaker 4: Revenues for high-end consumers decreased 26 percent over the prior year.
Speaker 4: but were offered approximately 1% sequentially and represented 23% of total net revenues.
Speaker 4: Approximately 9% of high-end consumer net revenues was attributable to mobile devices.
Speaker 4: And approximately 14 percent was attributable to other consumer systems.
Speaker 4: Our Suntech Organic POS remains balanced with approximately 49 percent.
Speaker 4: 29% and 22% of the total POS coming from infrastructure, industrial and high end consumer end markets respectively. With the addition of the Sierra Wireless portfolio, we will see a greater mix of IoT revenue, a new segment for us that will include the lower.
Speaker 4: points sequentially to 64.7%.
Speaker 4: driven primarily by a richer mix of higher consumer and market revenue.
Speaker 4: In fiscal 23 for organic Centech.
Speaker 4: Our growth drivers of data center, LoRa enabled.
Speaker 4: drivers of data center, LoRa-enabled, Pawn.
Speaker 4: Broad protection industrial and automotive platforms drove record non-GAAP gross margin of 65.1% up 180 business points.
Speaker 4: With the full quarter of Sierra, we expect our Q1 growth margin to average 48.5% at the midpoint of guidance.
Speaker 4: For the remainder of the year, we expect to see 100 to 150 basis point improvement in gross margin. This is a test for the
Speaker 4: driven by a higher mix of Centec organic revenue.
Speaker 4: and the achievement of material cost synergies.
Speaker 4: We expect to achieve a long-term gross margin target of 58% to 63% through…
Speaker 4: One, sustained growth of data center, 5G wireless base stations.
Speaker 4: networks, broad protection industrial and automotive product platforms.
Speaker 4: Two, accelerated deployment of lotar endpoints from improved cellular connectivity.
Speaker 4: And three, growth in annual recording revenue from Sierra's managed connectivity, software services and lower cloud.
Speaker 4: in annual recording revenue from Sierra's managed connectivity, software services and LoRa Cloud services.
Speaker 4: We are successfully managing our operating expenses in this challenging revenue environment.
Speaker 4: Q4 Combined Operating Expenses was $67 million.
Speaker 4: In Q4, operating expenses for Centec Organic were down 13% sequentially to $59 million.
Speaker 4: driven by a reduction in headcount and other variable compensation.
Speaker 4: In Q1 fiscal 24, we expect operating expenses of approximately $99 million at the midpoint of guidance.
Speaker 4: reflecting a full quarter of Sierra and the customary increase in compensation expenses typical at the start of a new year.
Speaker 4: We now expect to achieve about $50 million of annualized operating expense synergies by the end of the fiscal year.
Speaker 4: As a result, for the remainder of the year, we expect operating expenses to be flat to slightly down on a sequential basis, reflecting the achievement of the expected synergies.
Speaker 4: fiscal year 23 operating profit was a record $210.7 million for the combined
Speaker 4: operating profit was a record $210.7 million for the combined company.
Speaker 4: Centec Organic delivered a record operating profit of $212.7 million.
Speaker 4: up 5% of the prior year with minimal revenue growth due to gross margin expansion and controlled expenses. And to universal rates of access to 100% of the prior year with HERA in the market with a narrow cost range of! fund.
Speaker 4: Why fiscal year 24 demand is starting off weak.
Speaker 4: We still expect that with the anticipated second half recovery, the Sierra acquisition will be accretive to our fiscal year.
Speaker 4: For 24 earnings.
Speaker 4: In addition, over time, as the current business climate improves and we execute on the vision behind the theater acquisition of drive and lot of end point proliferation.
Speaker 4: We expect to achieve our long-term operating margin target of 32% to 36%.
Speaker 4: Our fiscal 23 non-GAAP normalized tax rate is 12%.
Speaker 4: and we expect it to remain the same in fiscal 24.
Speaker 4: In fiscal 23
Speaker 4: million or 17% of revenue.
Speaker 4: compared to the $203 million in the prior year.
Speaker 4: The decline was primarily due to the experiences associated with the acquisition of Sierra.
Speaker 4: For fiscal 24, we expect cash flow from operations to be pressured by transaction and acquisition related expenses. For more information, visit www.fema.gov
Speaker 4: and lower profits due to the weak demand environment.
Speaker 4: Our debt at the end of fiscal 2023 was $1.3 billion or 3.4 times leverage on a net basis.
Speaker 4: We expect to see an increase in net leverage as we navigate through this software demand environment. We expect to see an increase in net leverage as we navigate through this software demand
Speaker 4: We proactively negotiated an amendment.
Speaker 4: to our credit agreement to get some relaxation to our leverage ratio and interest expense coverage ratio governance.
Speaker 4: The weighted average interest rate is currently approximately 5.64%.
Speaker 4: As we have said before, the main priority for free cash flow will be to pay down debt.
Speaker 4: In summer, fiscal year 23 has been a year of significant change for CELTEC.
Speaker 4: We delivered record revenue and operating income and closed all the largest acquisitions in our history.
Speaker 4: While fiscal year 24 we have these challenges, I'm very excited about the opportunities at Centec at this moment in our history. Let me summarize what I see now.
Speaker 4: we have these challenges. I'm very excited about the opportunities at Centec at this moment in our history. Let me summarize what I see now. One foot.
Speaker 4: We expect to see our growth drivers of data center, Pong, 5G wireless regain their growth momentum as the business environment normalizes.
Speaker 4: But more importantly, become more regionally balanced as we see revenue run for these products in North America later this year.
Speaker 4: Second, Sierra's cellular capabilities combined with a high margin LoRa and LoRaCloud.
Speaker 4: technology we open up new market opportunities for both
Speaker 4: opportunities for both technologies.
Speaker 4: driving increased revenues, gross and operating margins for the company.
Speaker 4: And finally, once we have executed on our synergies and portfolio review, we expect that in fiscal year 25, we will start seeing much improved margin expansion and EPS growth.
Speaker 4: I will now hand the call over to Mohan.
Speaker 5: from Semtech. The last 17 years have been an incredible journey for me. I'm very proud of the growth and transformation of Semtech and our many accomplishments during this time.
Speaker 5: As we approach the next phase of growth, this is the right time to appoint the next leader of this highly innovative technology company.
Speaker 5: To assure a smooth transition, I am committed to staying involved until a new CEO is appointed and will continue to be an advisor for a period of time as needed.
Speaker 5: On January 12th, we closed the acquisition of Sierra Wireless. This was the largest and most strategic acquisition in Centex history.
Speaker 5: Our Q4 FY23 and FY23 numbers include 18 days of Sierra Wireless.
Speaker 5: I will now discuss our Q4 Fiscal Year 23 performance by product group, our Fiscal Year 23 performance.
Speaker 5: then provide our outlook for Q1 of fiscal year 24.
Speaker 5: In Q4 of fiscal year 23, net revenues were $167.5 million.
Speaker 5: Organic Semtech contributed $152.5 million, slightly above the midpoint of our guidance.
Speaker 5: In Q4, organic Semtech posted non-GAAP gross margins of 64.7% and non-GAAP earnings per diluted share of $0.50.
Speaker 5: For the combined company, non-GAAP EPS was $0.47 per share.
Speaker 5: In Q4 of FY23, our Signal Integrity Product revenue was down 21% sequentially and represented 36% of total revenues. The decline was driven mostly by the economic slowdown in China.
Speaker 5: excess inventory as customer consumption declined. We saw reduced demand from all our infrastructure segments.
Speaker 5: across all geographies.
Speaker 5: with China Data Center and China Wireless Space Station being particularly weak.
Speaker 5: Despite the softer demand, we continue to see new design and activity for our triage and copper edge platforms in both optical modules and active copper cables.
Speaker 5: As we mentioned last quarter, Tri-Edge has been selected by a major North American hyperscaler in a new high-volume multi-year program to enable lower power, lower latency, and lower cost interconnects within their data centers.
Speaker 5: This is our first major North American hyperscaler triage win, and qualifications are progressing well and we expect production ramps to begin in the second half of FY24.
Speaker 5: The benefits of triage align well with the long-term goals of hyperscalers focused on lowering the power and cost of interconnects within their data centers.
Speaker 5: At the Optical Fiber Conference earlier this month, we demonstrated a 200G per lane optical transmission link enabled by Centex's latest FiberEdge 200G PAM4 platform.
Speaker 5: Broadcom's latest DSP platform. We remain confident that our full portfolio of data center platforms including ClearEdge and Tri-Edge CDRs, FiberEdge PMDs and CopperEdge Redrivers will enable us to rapidly grow our hyperscale data center business.
Speaker 5: nicely over the next several years.
Speaker 5: While we saw a sequential decline in our overall POM business in Q4,
Speaker 5: Our 10 gig PON business reached a new quarterly revenue record.
Speaker 5: Our pond business continues to grow outside of China and we remain confident our pond business will grow over the next several years as global demand for higher access bandwidth drives an increase in global pond deployments.
Speaker 5: At OFC, we demonstrated both a 25 gig and 50 gig PON system and are sampling products
Speaker 5: for both systems now. Revenue from our wireless base station business was down in Q4 both on a sequential and year-over-year basis.
Speaker 5: Again, despite the current softness, we have numerous 5G base station design ins with both our ClearEdge and Tri-Edge platforms, and we expect continued adoption of both platforms in front-haul optical modules throughout FY24 and beyond as 5G deployments accelerate.
Speaker 5: We recently announced several new innovative products that extend our leadership position in PMD and CDR platforms targeted at the data center, wireless space station and PON segments.
Speaker 5: These new products provide customers with a lower power, low cost, and low latency needed for advanced infrastructure applications. While our signal integrity product bookings improve sequentially, the weak macro environment, particularly in China, is resulting in lower infrastructure demand in Q1 across all subsegments.
Speaker 5: As a result, we expect our signal integrity product revenues to be down significantly in Q1 of fiscal year 2014.
Speaker 5: Moving on to our Advanced Protection and Sensing product group. In Q4, we merged our Proximity Sensing product group into our Protection product group and created a new Advanced Protection and Sensing product group.
Speaker 5: We made this shift to align our system protection and sensing roadmaps for our high-end consumer customers.
Speaker 5: Q4 net revenue from our Advanced Protection and Sensing product group decreased 6% sequentially and 32% annually and represented 29% of total revenues.
Speaker 5: The decline was due to ongoing weakness from the consumer segment, including from smartphones, wearables and PCs.
Speaker 5: Consumer demand for both China and Korea remains extremely soft. We continue to diversify our advanced protection and sensing business into the broader industrial, telecommunications and automotive sectors, which we call ITA.
Speaker 5: where we see relative stability with modest growth from the automotive market.
Speaker 5: In addition, our increasing design wins for USBC protection across all end markets position our protection business for growth as USBC becomes the high-speed interface of choice across the high-end consumer and ITA segments.
Speaker 5: In Q4, new SAR regulations were finally passed in China, increasing the market opportunity for our proximity sensing portfolio, as smartphone customers will now need to integrate proximity sensing functions into their phones being sold into China. We expect both our protection and sensing businesses to rebound.
Speaker 5: down significantly in Q1.
Speaker 5: in Q1.
Speaker 5: Our newly formed IoT product group has two sub-business groups. The first business is the IoT System Product Group, which is made up of Semtech's LoRa enabled business. The second business is the IoT System Product Group, which is made up of Semtech's LoRa
Speaker 5: Sierra's IoT Module Business and Sierra's IoT Router Business. This business also includes the Sierra broadband module business.
Speaker 5: The second business is our new IoT Connected Services business.
Speaker 5: which includes Sierra's managed connectivity services business and Semtech's LoRa cloud services business.
Speaker 5: This services business is a recurring revenue business.
Speaker 5: In Q4, total IoT revenues were $58.8 million, 18% higher sequentially and 34% higher on an annual basis and represented 35% of total STEMtech revenues.
Speaker 5: Our IoT revenues included approximately $15 million of Sierra Wireless revenue.
Speaker 5: In Q4, our LORA-enabled revenues were down 12% sequentially and flat over the previous year due to softer demand from China and a significant drop in helium revenues.
Speaker 5: We do not expect any more material revenues from helium.
Speaker 5: The adoption of LoRa continues to grow across many IoT use cases globally.
Speaker 5: especially in North America and Europe , where we are starting to see larger LP WAN deployments.
Speaker 5: Some of the most recent, more exciting announcements include, Itel Gas in Italy issued an RFP for 2.6 million LoRaWAN gas meters and we're seeing similar requests for LoRaWAN-based systems.
Speaker 5: recent more exciting announcements include Italgas in Italy issued an RFP for 7.6 million LoRaWAN gas meters and we're seeing similar requests for LoRaWAN based systems in utility tenders all over the world
Speaker 5: The Things Network Industries announced it has achieved 1 million connected LoRaWAN devices. The LoRa Alliance announced it has now certified 620 LoRaWAN devices.
Speaker 5: Yesterday, Amazon announced that they are expanding their commitment to LoRa with the opening of the Amazon Sidewalk network.
Speaker 5: to device makers and developers with new tools and new AWS services for both LoRa and LoRaWAN developers to make it easier to deploy.
Speaker 5: The law of technology plays a critical role in enabling long-range community coverage with Amazon Sidewalk, which now covers approximately 90% of the US population.
Speaker 5: We announced the first third-party products based on Amazon Sidewalk from Roanne, Device Roy,
Speaker 5: Meshify, and new Cosmos are now available. Additionally, we have partnered with other industry leaders on development kits and modules based on Semtex LoRa technology that will enable device makers and developers to rapidly create new Amazon sidewalk devices.
Speaker 5: And finally, Frost and Sullivan recognized Centec as the 2022 Global Company of the Year for innovative IoT hardware based on the progress of LoRa.
Speaker 5: We are now in the process of integrating Sierra Wireless into Semtech so we can execute on our vision of transforming the entire low-power IoT industry by bringing together the ultra-low power and long-range connectivity benefits of LoRa technology.
Speaker 5: together with the low latency, high bandwidth network connectivity benefits of cellular technology.
Speaker 5: The combination of LoRa and cellular technology is a highly strategic opportunity that positions Semtech as the clear leader in the fast-growing ultra-low power IoT market. Our goal is to enable IoT deployment simplification through end-to-end connectivity.
Speaker 5: deliver disruptive edge AI networks, and deliver a unique cloud-based sensing-as-a-service capability that helps customers accelerate their digital transition to the Internet of Everything.
Speaker 5: Our teams are unified under our new IoT leadership and we are currently reviewing our product portfolio to prioritize investments and identify non-strategic assets. Now let me comment on our fiscal year 2023 performance.
Speaker 5: In fiscal year 23, organic Semtech net revenues achieved a record $742 million.
Speaker 5: including Sierra Wireless revenues worth 757 million dollars. We achieved this record revenue amid significant macroeconomic headwinds.
Speaker 5: ongoing geopolitical challenges in China, COVID lockdowns in China, the war in Ukraine and softness in the global consumer market.
Speaker 5: In FY23, organic Semtech also achieved record gross margins of 65.1%, record operating income of $213 million and record EPS of $2.80.
Speaker 5: In FY23, our SIPP product group grew 4% annually and achieved record revenues of $304 million.
Speaker 5: driven by record PON revenues of $142 million, which grew 58% annually, and record 5G revenues of $11 million, which grew 18% annually.
Speaker 5: In FY23, our protection products business declined 8% over the prior year.
Speaker 5: However, the broader ITA protection business achieved record revenues of $80 million and grew approximately 9% year over year.
Speaker 5: In FY23, our organic, wireless and sensing business grew 40% to achieve a record $200 million.
Speaker 5: Our LoRa-enabled revenues also grew 40% for the year to achieve a record $187 million.
Speaker 5: In FY23, our lower business continues to make solid progress on the growth metrics we have established.
Speaker 5: These metrics included the number of LoRaWAN network operators, which grew to 181 at the end of FY23 from 166 in FY22.
Speaker 5: LoRa endpoints reached approximately 300 million connected devices in FY23, up from 240 million in FY22.
Speaker 5: The number of LoRa gateways deployed increased 84% from 3.2 million at the end of FY22 to 5.9 million at the end of FY23.
Speaker 5: We are delighted with the large increase in gateways deployed globally, and this lower infrastructure is critical to enable the broad range of industry use cases that are emerging.
Speaker 5: With continued network expansion globally, we expect end-node deployments to accelerate rapidly over the next 3 to 5 years, growing from the 300 million end devices deployed with LoR today.
Speaker 5: Once we have completed the integration of Sierra, we will be establishing a new set of IoT metrics that represent the new IoT vision and strategy that is now in place.
Speaker 5: Now let me discuss our outlook for the first quarter of fiscal year 24.
Speaker 5: The organic Semtech demand remains very weak, due mostly to a weak China and consumer demand.
Speaker 5: In addition, the Sierra wireless demand, which is typically seasonally weaker in Q1, is also being negatively impacted by the overall macro weakness in North America and Europe , resulting in both push-outs and some cancellations. As a result, we are currently estimating Q1 net revenues to be between $230 million and $240 million.
Speaker 5: The midpoint of $235 million includes projected revenues of approximately $135 million from Sierra Wireless and approximately $100 million from Organic Semtech.
Speaker 5: To attain the midpoint of our guidance range, or approximately $235 million, we needed 16% terms orders at the beginning of Q1.
Speaker 5: We expect our Q1 non-GAAP earnings to be between negative 11 cents and negative 4 cents for diluted share.
Speaker 2: I will now hand the call back to the operator and then Mako and I will be happy to answer any questions. Operator? Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
Speaker 2: 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 star keys.
Speaker 2: Our first question is from Scott Surley with RothMKM. Please proceed.
Speaker 6: Good afternoon. Thanks for taking the questions. Mohan, congratulations and best of luck. I know you're not going off to retirement tomorrow, but best of luck as you start to look down that road. Maybe just to dive in quickly on the last comment of Semtech Organic being about $100 million in the April quarter, I was wondering if you could dig into that a little bit more deeply. I know you went into the...
Speaker 6: is now moving from 40 million to 50 million. I wanted to clarify in terms of the OPEX of around 99 to 100 million in the April quarter if that's where we should be modeling taking out that 10 to 12 million as we get through those integrations. Thanks.
Speaker 5: Yes, let me start with the Q1 guidance comment question Scott. So across our different product areas we are seeing weakness obviously I mentioned China and consumer are probably the two greatest areas.
Speaker 5: all of our businesses are going to be down on an annual basis, something between 40 and 50 percent, I would say. And so it's pretty broad. It's not one specific area, but I would say consumer in China are definitely impacting us in a big way. We have in Laura the specific issue also with helium, which is…
Speaker 5: also come down. So there's some specific things there but largely I would say on the whole it's pretty broad. We do think we're near the bottom. I think that's important to understand is that what we are seeing now is booking starting to get a little bit better. You know the customers consuming
Speaker 5: indicating the consumption is going to start to increase. We haven't really seen that yet, but I think that's our expectation as we get into the second half. And that is really going to be the key. Obviously as demand comes down, inventory is the issue and I think we're seeing inventory across consumer markets and the infrastructure markets now. So until that inventory is absorbed.
Speaker 4: you know, the market will be soft. So we're expecting the first half to be fairly weak. Yeah, and Scott, on the OPEX, the $99 million that we get it to at the midpoint already factors in the synergies that we have achieved. You know, the team has actually done a very good job of integration so far, and we've been able to
Speaker 4: rate that we probably would achieve 100% of the $50 million target that we have provided.
Speaker 6: Gotcha. And one last one if I could, Mohan, on Sierra wireless it seems like they're actually performing pretty well if you're got into 135 million in the current quarter. You know there had been some channel inventory out there I think on the module front but it doesn't seem like it's that onerous at this point so I'm wondering as you start to look into the back half.
Speaker 6: where Sierra Wireless was peaking at 160 to 180 million a quarter. Is that something that's achievable as we look out to the end of this calendar year or early next year? Thanks. Yeah, I think so, Scott. You know, it's difficult. You know, even the Sierra business is down. Obviously, I mentioned on the...
Speaker 5: kind of 20%ish on an annual basis. So not as bad as this Semtech business, but still down. And their business is primarily North America and Europe . So, but yeah, I think we are still expecting the second half to be stronger across all segments. There's no indication of that.
in terms of hard bookings yet, but given where some of these markets have been soft for some time now, especially consumer and if you look at China, one would expect them to come back for sure. And then I think some of these other regional segments and like North American Europe infrastructure.
I think should, at least we should start to see some improvements in the second half.
should at least we should start to see some improvements in the second half. Great, thank you.
Our next question is from Craig Ellis with B Riley. Please proceed. Yeah, thanks for taking the question. And Mohan, I'll echo the congratulations on your transition into a new phase. It's been a tremendous pleasure working with you over the years. I wanted to follow up with a point that
Scott asked about just digging in more to the Semtech side of the revenue guidance. If I look at the 100 million and look back at my model, it seems like we are at revenue levels that we would not have seen since the fiscal 11 timeframe when the portfolio was a lot different and really didn't have the signal integrity contract.
quite acute here in the current quarter.
Yeah, I would say probably two quarters, Craig. You know, as I mentioned, you know, obviously if we look at FY23 and take our signal integrity product business as an example of that, it was a record $300 million, right? So when we now look at...
the current run rate and how fast that's come down, you know, we're on 160 kind of run rate. So it's definitely come down significantly. And I would suggest most of that is inventory. And some of that is related to China. And as I mentioned, we are expecting...
the second half some ramps and some specific drivers to bring that back. But it's across the board. You know our consumer business is similarly down. Our industrial parts of our industrial business are similarly down. I would say North America and Europe a little bit better.
China and consumer are the two major culprits, but across the board everything is down at least 15%, 15 to 20%.
And then the second question is one related to some of your comments near the end of your script. One of the things that you mentioned is you've got the teams together. They're working hard and collaboratively on integration and you'll be looking at things that are not strategic as opportunities to...
really prioritize resources around things that are. So with that said, can you comment any further on the scope of things that may not be strategic and given where we are with the global macro today versus where we are, where we were when we announced the deal, how do you look at the target 40 million in
in cost savings from the deal. Do you feel like there should be upside to that or does that remain a solid number given your sense of where the longer term opportunity is?
Well I'll start with the portfolio review Craig. I mean we do it regularly at Semtech anyway but I think now with the Sierra acquisition obviously a lot of the Sierra businesses are fairly new to us and so the board is engaged in kind of looking at what elements of the portfolio are really strategic for us and which are not and will make decisions based on what we find from
mentioned that as of now we have achieved about 80% of that from the numbers and we do expect
by the end of Q3 we would be at 100% of the $50 million.
Thanks for that guys. I'll hop back in the queue. Our next question is from Harsh Kumar with Paper Sandler. Please proceed.
Yeah, hey Mohan. I had a question on China. So you're in a fairly unique position of reporting an off quarter so you can talk about things at times that other companies cannot. So I was curious what you're seeing. Obviously everything looks kind of dire right now, but you sound pretty optimistic on China coming back in the back half. So I was curious what you're seeing.
that might drive your optimism about China coming back and just any kind of color would be helpful. Yeah, I think it's more harsh that, you know, when you look at some of these segments and some of the regional kind of balance here.
We've seen pretty weak China now for several quarters. And so, you know, I think, certainly Q3 and Q4 for us in our fiscal quarters, and now we're also seeing it in Q1. So after three quarters of sequential decline.
one anticipates that we are probably nearing the bottom. I would say Q1 or maybe Q2 is gonna be close and then I expect it to start to go the other way. We're also seeing, as I mentioned, bookings are starting to trend upwards a little bit.
We're starting to see some design inactivity that's been fairly quiet in China in some areas. And so just generally I would say that things are looking a little bit more positive, coming off a very low base though, right?
Fair enough, Mohan. And then on your Sierra violence integration, I mean, it seems like you guys have made tremendous progress on synergies already in a short timeframe. I was curious in terms of maybe you could update us strategically on products or anything else, any kind of
Any kind of positives and negatives that come to mind that you think are worth mentioning? Well, it's early days Harsh again. We're just obviously over an integration process and we're also in the roadmap planning process. I would say that the teams are getting together now and looking at how we can do things kind of quickly and
kind of the more longer term integration plans. But the strategic fit and the philosophy and the kind of the reason why we did the deal are all still there and we're very excited about it. It's just a question of now how quickly we can, we can, you know, bring out some of the new products and some of the new capabilities and how quickly we can engage customers and get things moving. I would say it's gonna take six to nine months for us, maybe even a year and you know, this year, FY24 is definitely going to be a year.
a little bit differently just because it's so weak, Mohan. I mean, you know, I think by now we would have expected to see some stabilization but, you know, it just keeps coming down every quarter every quarter. So is there an element here of some demand disruption just given the political climate or anything like that or, you know, should we just purely think of this as sort of
weak demand, inventory correction, and so on and so forth? Yeah, I think it's more the latter, Tori. I mean, it depends what you mean. I mean, you know, for example, I can tell you that the data center business in China is very weak. You know, some of that, you know, some of the big data center players in China have, you know, been pushing out their demand. So, we know it's there. We know that they want to deploy. We know that the government is...
still supportive but I think there's an element of kind of well is the government really supportive of large data center companies and things like that so it's a little bit of both of what you said but I don't think there's any reason to believe that there's a loss of demand I think it's more pushing out and we and we're anticipating that that will come back everything will come back
of gross margin improvement really play out? I assume mix kind of comes later, but if there's anything that you could share with us as far as the 150 basis points comment, coming from the three elements that you mentioned and you prepared your remarks. So, sorry, I think for this year, yeah, set for the rest of the year.
this way through and that will start to shift again up to the level of consumption. We also have some material cost synergies that we have identified but we'll have to see how the demand rolls in. That should also be a driver of the gross margin expansion for this year.
I think the three points that I made before was probably just more reflective of what to expect on a long-term basis, right? We know that as the market recovers and the same thing organic business recovers and that the growth drivers come in, those are very high growth margins. Those would definitely be a critic to the current market.
sort of window before we start seeing it, you know. And then the managed connectivity and a lot of cloud services is probably also about, you know, probably 24 months out and things like that. So the three drivers was probably a little bit more for the long term gross margin target level of 58.
When we announced the deal, we said we expected to see probably in five years' time, see us making progress towards the low end of that range. And we still believe that is the case, that probably five years from now, we should be much closer to the low end of that target range.
Just one last one for you, Emeka. So just based on the P&L and the interest expense, is it fair to say that the break-even point would be around $240 million?
Is that sort of a good number to use? I think about 240, 245, yes. That would be a good number to use.
Great, thank you so much. Our next question is from Quinn Bolton, Whitney, Domenic and Company. Please proceed.
Hey guys, Mohan let me also say congratulations on your leadership and it's been a pleasure working with you. I guess for both of you I wanted to come back to your comment about the Sierra Wireless transaction becoming a creative I think you said in the second half of the year as revenue recovers.
And I guess I'm just trying to do some quick math. It looks to me that Sierra Wireless is probably starting to hit that accretive level at somewhere in the $160 to $170 million range. And I'm using sort of a low to mid 30% gross margin, high $30 to $40 million of quarterly OpEx and probably about $18 million of interest expense on the business.
with the 1.3 billion I did. I just wanted to see if those numbers all sort of feel like the right ballparks for you when you look at that accretion estimate for Sierra Wireless.
Yeah, Queena, so you know there are usually a lot of moving parts to this, right? The synergies, the size of it, the cost reductions, all that stuff. But I'll probably think that at about $150 million of quarterly revenue, right? You know, the Sierra deal should start being a credit. Okay, thank you, Mecca. No, you are.
cluster, you know, is it short reach AOC replacement or longer reach optical module replacements? I'm not sure how much color you can give but it sounds like it's a important and long lasting win for the company and obviously the first win in North America seems seems to be pretty important.
Yeah, Quinn, I know all the details because I was with the team when they awarded us and we discussed and negotiated and we got the win, but I can't give you any details just because they don't want us to give out any details. I can tell you it's short reach.
And then maybe the last one, if I could just sneak it in. Amazon announced yesterday sort of opening up the Sidewalk network to third-party developers. How long do you think it will take to start to see deployment of those third-party end nodes on Sidewalk? Is that something investors should think is sort of a 6 to 12 month…
I think we mentioned a few in our press release, some of them tied to insurance, some of them tied to leak detection, some tied to just general broad connectivity and networks. But it is incredibly exciting. Of course, 90% coverage in the US, it's just a question of...
okay now can the Amazon machine work and the ecosystem work to build you know a plethora of devices and use cases actually around Amazon sidewalk and if it if that happens then yep that's that's kind of the dream right that's what we've been waiting for it's starting to play out
to tags and tracking and many other types of use cases that will emerge. And that's the question is how quickly the sensors can be developed and the end nodes can be developed, but also then the use case can be kind of proof concept.
how long it will take and then you know all the software required for it. But the good news is that Amazon is you know not only the sidewalk activity but also the AWS cloud activity is connected to this. So we have a you know pretty powerful partner behind it. Thank you. Thank you Mohan.
Our next question is from Tristan Ure with Baird. Please proceed. Hi. Good afternoon. And Mohan, wishing you best of luck in your future endeavors. On your commentary about gross margin improving this year on a higher mix of organic revenue, how should we look at consumer awareness revenue for the year?
The Sierra share equation at the moment has probably not changed much. Tristan, I think our goal, of course, is to try to expand in North America and Europe the business. It's another issue that Davi and a lot ofMer NOW is doing for Baronet.
that have been doing well in North America, but I think as the sensitivity towards.
you know, foreign modules and foreign technologies in critical infrastructure, and IoT I would consider to be critical infrastructure in many use cases anyway. I think once that awareness becomes clear, I think Sierra and now Semtech has a very good opportunity.
to really educate to the market and gain share, particularly on the security side and also on the supply chain side. So yeah, but for now I don't think the share has changed any from the historical amounts.
So, twisting with regards to my comments on the gross margin, I think Mohan had earlier made the comment that on the Semtech organic business that the number we're getting to is if it's not bottom, it's pretty close to bottom. The expectation is that as we go through the rest of the year, we're going to have to Extra guarantee for top 10 at the Rolling Composer. You might not people
that will start to have a situation where a lot of the inventory is moving through the channel. That is one. And also in the second half of the year, we pointed to some secular opportunities that we have that we think starts to move the middle back up towards our future.
what we have been used to in the past in terms of the organic business. And with that happening, then the Semtech organic business becomes a higher percentage of the revenue mix. And with that, because of the higher gross margin from Semtech organic, that would naturally provide an uplift for gross margin. Okay, and then for my follow-up.
I think Mohan you had talked about the opportunity of wiping Loa as a feature next to 5G in fewer wireless routers. Any metrics you could provide us with in terms of whether the units for those routers on an annual basis.
And once you have a 5G Loa integrated module...
What adoption rate percentage wise would you expect to get within CIR wireless wireless volumes just to kind of gauge what the opportunities in terms of incremental lower revenue generated directly by CIR wireless going forward?
Yeah, I think Tristan, it's work that's starting now. I don't think we've had time really to kind of look at what we can do there. But very simply, remember the routers, Sierra has a portfolio of routers from 5G routers to
to 4G and below. And our thought has always been the integration of LoRaWAN gateways and Sierra routers provides essentially end-to-end connectivity from the sensor endpoint all the way through to the um...
the cloud and we will be uniquely positioned to offer these combined routers which could be very low priced, they could be very high priced, they could be very high performance, could be mid-range performance, they could be a very broad set of integrated routers and so that work has to be done.
You know, I think, I don't think there's any rocket science to it, but I think we do have to pull it together and then combine that with our sensing as a service. And as I also mentioned, you know, putting intelligence onto the routers, one of the beauties about the Centec position in LoRa is that
You know, we have the gateway chips and therefore we can add integrated intelligence into these routers either in the chips or in the router themselves and I think provide some very interesting intelligent edge opportunities for IoT. So there's a whole portfolio of opportunity for us. We just need to go through it.
and see where are the biggest bang for the buck and where are the biggest opportunities and what are customers pulling on in the short term and medium term and long term. So, I'm very excited by all the opportunities, but we just have to go through the exercise.
Great. Thank you. As a reminder to star 1 on your telephone keypad if you would like to ask a question. Our next question is from Christopher Roland with Susquehanna. Please proceed. Welcome everyone.
Hey guys, thanks for squeezing me in. I guess my first questions are going to be around Laura. So I think you did 41 million in the quarter. I don't know if you can talk about, yeah, I think most things are going down next quarter, but if you could kind of give us an idea.
China and sometimes give metrics there as well. I don't know if you had any additional metrics you could give us. Yes, so, Chris, I mentioned on the call that we're going to review all the metrics and that's largely because now we have Sierra, we have a much larger pipeline.
And we have some opportunities obviously to really look at the metrics that are important for our now new IoT business. So we will be putting those together and then we will bring those out in a future discussion. But to answer your question, I mean we had a record FY23 for Laura is $187 million.
Of course, there was a lot of helium in that so our expectation is for FY24 is that without helium We're going to probably Laura's going to be probably flat to slightly down mostly because of China I think so if you take the helium out from FY 23 and Assume that's you know 40 to 50 million dollars of revenue something in that range
and some of the other things going on there, but I think we just, you know, we'll have a little bit of a headwind with the loss of helium.
Yep, understood. And then on the signal integrity side, that also sounds like it's going to be down, but was just wondering from a growth perspective, once this bounces back, are you most optimistic around data center, 5G, and Pawn?
And then just two quick ones for Emeka. Book to bill, I'm going to assume less than one, but if you have any other thoughts there, and then the turns needed in your guidance that you usually give as well. So let me just touch on the signal integrity product group.
kind of momentum. Yes, it's down Q4, it was down in Q1. Obviously we've got it to that being down again significantly. I would say most of that is just inventory situation and China. We have a lot of good design win momentum in our signal integrity product group across all three of the major
segments. So in hyperscale data center in North America, which is good, so it's not China. In our base station business, again, we have momentum in China, but we also have momentum outside China, which is also good. And then in our pond business, similarly, I think we're starting to see, you know, some growth outside China, although China is still very, very large consumer of our.
PON products. So yeah, I think signal integrity, you know, my sense is Q1 is going to be near the bottom and we're going to be coming out of that quite quickly would be the comment I would like.
And Chris on the booking side, the book to be was less than one, but on the positive side, the bookings were actually up about 10% during Q4.
You know, the bookings are still pretty much on the lower end of typical run rate, but it was very pleasing to see that it was up in Q4, and so far this quarter, it seems to be trending up sequentially as well. So those things are still pretty subdued, but at least it isn't...
Awesome, thanks guys.
We do have a follow-up question from Craig Ellis with B. Riley. Please proceed. Thanks for taking the follow-up, Emeka. I just wanted to go back to the gross margin point. I thought in your prepared remarks that you had said you had expected 150 to 180 basis points of gross margin.
Through this year so from 48 and a half to you know 50 ish, but then I thought later. I heard you say 150 to 180 basis points per quarter Which the semtech business really influx off this very unnaturally low level
would make sense. Can you just clarify if it's the former or the latter, and then I'll ask a follow-up. So what I did say was 100 to 150 basis points for the rest of the year. I think maybe what was confusing was the person who asked the question before sort of.
framed it as 100 to 150 per quarter. No, that's not what I guided to. I guided to 100 to 150 business points for the remainder of the year. Michael B And then that leads me to the follow-up question which is, if we're going to exit somewhere around 49.5 to 50% gross margin this year, as we look at fiscal 24, I know you've given us the three drivers to gross margin expansion towards the target model.
But how would you expect fiscal 24's margin acceleration to compare to what you'd expect this year? Or excuse me, fiscal 25 versus fiscal 24. I think that's what I'm talking about. I would expect to see continued gross margin expansion on an annual basis, you know, every year for the next several years. And I think, you know, for FY 25, I wouldn't be surprised. I'm not guiding to it, but I would...
Also, at those levels, some of the material cost synergies that we've identified on the CLL side will probably be completely achievable. In addition, also hoping that I will start to see any signs that
the acquisition that is cellular, the availability of cellular connectivity is leading to new use cases beginning to ramp. We should also expect to see the growth in the annual recording revenue for Sierra's business, their managed connectivity, and a little bit of the LoRa Cloud, in addition to the fact that the LoRa IP, which we have not really talked about a lot, which is actually now beginning to do very well, probably as we can have both.
$2 million a quarter should continue to also increase. So there are definitely a lot of opportunities, a lot of things that would really lend to seeing some decent gross margin expansion on annual basis from now going forward. That's helpful, Caller. Thank you, America. We have reached the end of our question and answer session. I would like to turn the conference over to the audience.
and look forward to updating you all next quarter. Thank you.
Thank you. This will conclude today's conference. You may disconnect your lines at this time, thank you for your participation.
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