Semtech Corp Q3 FY2020 Earnings Call

Greetings. Welcome to the Semtech Corporation Fiscal Year 2020 Third Quarter Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Sandy Harrison, Director of Business Finance and Investor Relations. Mr. Harrison, you may begin.

Thank you, and welcome to Semtech's conference call to discuss our fiscal results for the third quarter of FY '20. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.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 only as of today, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted. With that, I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal year '20, net sales increased 3% sequentially to $141 million, which was above the midpoint of our guidance. In Q3, shipments into Asia represented 75% of net sales; North America represented 16%; and Europe represented 9%. Total direct sales represented approximately 24%, and sales to distribution represented approximately 76%. Our distribution business remains balanced, with 55% of the total POS coming from the high-end consumer and enterprise computing end markets, and 45% of total POS coming from the Industrial and Communications end markets. Bookings declined sequentially that resulted in a book-to-bill above 1. Those bookings accounted for approximately 42% of shipments during the quarter. Q3 GAAP gross margin declined 70 basis points sequentially to 61.2% due to lower absorption associated with our efforts to reduce our inventory levels. Q3 GAAP operating expense decreased 8% sequentially due to lower performance-based compensation expense and the non-recurrence of restructuring charges that occurred in Q2. In Q4, we expect GAAP operating expense to increase between 5% to 8% sequentially, primarily due to higher share-based compensation expenses. Q3 GAAP tax rate was 16.4%, down from 63.3% in Q2, which reflected additional reserves resulting from the issuance of final tax regulations related to the 2017 U.S. tax law changes. We expect our GAAP tax rate for Q4 to be in the range of 12% to 16% and to remain in this range for fiscal year 2021. Our GAAP tax rate forecasted excludes consideration of any impact from discrete items, including excess tax benefit or deficiency from the exercise of stock options. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related and other nonrecurring charges. As expected, Q3 non-GAAP gross margin declined 50 basis points sequentially to 61.6%, and we expect our Q4 non-GAAP gross margin to decline slightly approximately 10 basis points at the midpoint of guidance due to a higher mix of consumer revenue. In fiscal year 2021, we expect our non-GAAP gross margin to return to more normalized levels as demand from our higher gross margin growth engines recover and overall demand improves. Q3 non-GAAP operating expense decreased 2% sequentially to $52.9 million due to lower performance-based compensation. In Q4, we expect our non-GAAP operating expense to be flat sequentially. For planning purposes, we are expecting our fiscal year 2021 non-GAAP operating expenses to increase at roughly half the rate of revenue growth, which is consistent with our target operating model. We expect our fiscal year 2021 non-GAAP tax rate to remain in the 14% to 18% range. In Q3, cash flow from operations remained solid at 24% of net sales. We repurchased approximately 447,000 shares for approximately $22.5 million during the quarter, and our stock repurchase authorization now stands at approximately $138 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down our debt. In Q3, accounts receivable increased 5% sequentially due mainly to higher net sales and represented approximately 39 days of sales, which is slightly below our target range of 40 to 45 days. Net inventory in absolute dollar terms decreased 7% sequentially, and days of inventory decreased 8 days to 121 days, which remains above our target range of 90 to 100 days. In Q4, we expect net inventory to be flat in dollars and days. In summary, we were pleased to deliver Q3 results above the midpoint of guidance despite the difficult macro environment. We remain focused on execution, and continue to believe the secular strength of our growth engines position us to return to growth in fiscal year 2021.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year '20 performance by end market and by product group, and then provide our outlook for Q4 fiscal year '20. In Q3 of fiscal year '20, net revenues increased 3% over the prior quarter to $141 million. We posted non-GAAP gross margin of 61.6% and non-GAAP earnings per diluted share of $0.41. In Q3 of FY '20, the enterprise computing market increased 16% sequentially, driven by a strong rebound in PON demand and represented 31% of total net revenues. The industrial market demand decreased 2% sequentially as growth from our LoRa business was offset by broad industrial weakness, and represented 34% of total net revenues. Net revenues from the high-end consumer market decreased 3% sequentially and represented 25% of total net revenues. Approximately 16% of high-end consumer net revenue was attributable to mobile devices, and approximately 9% was attributable to other consumer systems. Net revenues from the communications end market decreased 1% over the prior quarter and represented 10% of total net revenues. I will now discuss the performance of each of our product groups. In Q3 of fiscal year '20, net revenues from our Signal Integrity Product Group increased 6% over the prior quarter, and represented 42% of total net revenues. Stronger demand from the hyperscale data center and PON segments were offset by weakness from the base station and broader industrial markets. In Q3, we made significant progress with our Tri-Edge PAM4 platform. Customer interest and activity is strong, as our Tri-Edge platform delivers low cost, low power and low-latency performance, ideal for emerging PAM4-based optical modules. At the recent European conference on optical communications, the interoperability and power savings of our Tri-Edge PAM4 platform was demonstrated. Our first Tri-Edge silicon is currently sampling and in system trials in 200-gig and 400-gig PAM4 applications with Tier 1 data center customers. We expect to have Tri-Edge production silicon in Q1 of fiscal year '21, and our first PAM4 production revenues in Q2 of fiscal year '21. We are very excited about the prospects for our analog PAM4 solutions. Our FiberEdge PMD platform also continued its positive momentum at PAM4 optical module customers. We recently announced our FiberEdge Linear EML driver, targeting 100-gig and 400-gig PAM4 optical modules. This product joins our 4 platform of linear TIAs that are currently shipping, which are also targeted at 100-gig and 400-gig PAM4 optical modules. Our FiberEdge products complement our Tri-Edge and ClearEdge CDR platforms, and we expect to see FiberEdge continue to ramp nicely in fiscal year '21. In Q3 of fiscal year '20, our PON business, which is largely driven by China, rebounded strongly following a weak first half performance. We recently introduced our 10-gig XGSPON OLT chipset that is expected to be a key driver for next-generation PON deployments in China. The overall PON market demand is expected to improve next year as fiber to the home and enterprise deployments increased in conjunction with 5G infrastructure deployments. Semtech remains a PON PMD market leader, providing highly integrated solutions for 1-gig, 2.5-gig and 10-gig PON systems. In Q3 of fiscal year '20, demand from the wireless base station market weakened slightly over Q2. While base station demand in FY '20 has been weak, we do expect both 4G and 5G deployments to be stronger in fiscal year '21. We believe our 5G market opportunity could triple versus 4G due to the higher 5G base station volumes and additional CDR content. Our current 5G front haul solutions are gaining good momentum, with several design wins at top-tier module suppliers. Our SIP product group recently announced its new Pro Audio/video chip platform, which is focused on transitioning the Pro AV industry from expensive proprietary equipment to standard 10 gigabit per second IP-based equipment, using software-defined video over Ethernet, or SDVoE. We believe this new chip platform will be a key enabler in driving the industry transition due to its lower power and cost. The primary target markets for our Pro AV business are enterprise, health care, and eSports infrastructure, and we expect our new chip platform to enable this business to grow significantly in fiscal year '21. The ever-increasing demand for higher data rates is driving greater demand for Semtech's Signal Integrity products. We expect this secular trend to continue, driven by the global expansion of hyperscale data centers, the global transition to 5G base stations, the acceleration of 10-gig PON and the emergence of software-defined video over Ethernet. We expect our SIP product group to benefit from this trend over the next several years, despite significant headwinds in the fiscal year. For Q4 of fiscal year '20, we expect net revenues from our Signal Integrity Product Group to decline driven by broad-based weakness across all segments. Moving on to our Protection Product Group. In Q3 of fiscal year '20, net revenues from our Protection Product Group were flat over the prior quarter, and represented 28% of total net revenues. Our protection business benefited from strength from our mobile business and increasing penetration of the industrial and automotive markets, while our broader consumer business softened. Demand for higher performance protection from the Automotive segment continues to grow as an increasing number of high-speed interfaces are deployed in new vehicles. Semtech devices targeted at Advanced Driver Assist systems, controller area network and local interconnect network interfaces, continue to see strong design win momentum. In addition, we are seeing strong design win momentum from all the leading smartphone manufacturers across the globe, with the exception of Chinese smartphones, where our position continues to be negatively impacted by the Huawei brand. In Q4 of fiscal year '20, we expect our Protection business to be down slightly due to the customary end-of-year inventory reductions at our Korean smartphone customers. Turning to our Wireless and Sensing Product Group. In Q3 of fiscal year '20, net revenues from our Wireless and Sensing Product Group increased 1% sequentially, led by growth in our LoRa business and represented 30% of total net revenues. The adoption of LoRa in numerous new IoT use cases across the globe demonstrates tremendous value of LoRa in the fast-emerging LPWAN market. In Q3, notable additions to the LoRa Alliance included Amazon, Intel, and DISH, who are all respective leaders in their industries. Also in Q3, the wireless broadband alliance, together with the LoRa Alliance, released a joint white paper articulating numerous use cases that require both WiFi and LoRa WAN connectivity. The primary use cases included smart building, smart homes, smart city, smart transportation, and smart asset tracking applications. We are already seeing new opportunities emerge globally, driving more WAN and WiFi functionality to be integrated into the same gateway, and we will comment on these opportunities and wins on future earnings calls. Some examples of recent LoRa use cases include Alibaba released its Beagle GPS-free tracker system based on LoRaWAN, that provides consistent geolocation data without GPS or cellular connectivity, simplifying deployment at very low cost and power. Radio Bridge, an industry-leading supplier of IoT sensors, released its new LoRaWAN-based sensor platform. The Armored Sensor enables the tracking of accurate real-time data for a variety of industrial applications, including oil and gas, air quality, and utility monitoring. Digimondo, a leading provider of secure IoT software solutions, announced a new end-to-end smart utility starter package based on LoRaWAN, which provides customers the software and hardware necessary to create smarter, more efficient and lower-cost utility networks. IHM Pacific, a developer of IoT technologies for the smart Utility and Building segments, together with Andrea Informatique, developed a new LoRaWAN-based electricity metering solution for utilities and submetering use cases targeted at Asia and Europe. And CAHORS Group, a leading solutions provider for smart energy grids, announced its new LoRaWAN-based Sentinel system that monitors faults and predicts failures in overhead voltage lines. In addition to these use cases, numerous other partners announced solutions targeting smart home, smart utility, smart agriculture, and industrial IoT applications. Along with the increasing number of use cases, LoRa's momentum is also being underscored by the key LoRa metrics we track. Our key metrics update includes the number of countries with LoRa networks increased to more than 83 countries. By the end of fiscal year '20, we expect around 90 countries to have LoRa networks, which is up from 70 at the end of fiscal year '19. The number of public or private LoRa network operators increased in Q3 to approximately 123, and we now expect 133 LoRa network operators by the end of fiscal year '20, up from 101 at the end of fiscal year '19. The estimated number of LoRa gateways deployed increased to more than 500,000. These gateways will support approximately 2 billion connected end nodes. We expect the number of LoRa gateways deployed to exceed 550,000 by the end of fiscal year '20. The cumulative number of LoRa end nodes deployed increased to 117 million, and is trending to 135 million by the end of fiscal year '20. And the LoRa opportunity pipeline is now over $500 million, with an additional $200 million of leads feeding the opportunity pipeline. We anticipate that, on average, 40% to 50% of this pipeline will eventually convert to full deployment over a 24-month timeline. Our pipeline of opportunities remains geographically well balanced, with over 65% of the opportunities coming from the Americas and Europe, and includes a growing number of consumer use cases, where the volumes could be significantly higher and could move to deployment more rapidly than those use cases in the industrial markets. Several of these volume use cases moved out from fiscal year '20 to fiscal year '21, and as a result, we are expecting our LoRa-enabled revenues to end fiscal year '20 between $70 million and $80 million. We expect to exit the year at a quarterly run rate above the high end of this range. Despite the weaker-than-anticipated fiscal year '20, based on a record LoRa POS in Q3, and the continued positive global adoption of LoRa, we still anticipate a 40% CAGR over the next 5 years, as LoRa becomes the de facto standard for LPWAN use cases, in what we expect to be a multi-billion unit industry. In Q3 of fiscal year '20, demand for our proximity sensing platforms was stable. While our Huawei smartphone business will continue to be a challenge, our proximity sensing business is benefiting from increasingly stringent global SAR regulations as health risks associated with increasingly powerful 5G radios become fully understood. Over the next few years, we expect the majority of smartphones and wearable devices shipped to North America and Europe to have SAR sensors included in their system designs. For Q4 of fiscal year '20, we expect net revenues from our Wireless and Sensing Product Group to be down slightly, as stronger LoRa-enabled demand will be offset by broad-based market weakness. Moving on to new products and design wins. In Q3 of FY '20, we released 24 new products and achieved 2,381 new design wins. In Q3, our POS also achieved a new record. Now let me discuss our outlook for the fourth quarter of fiscal year '20. We are currently estimating Q4 net revenues to be between $130 million and $140 million. To attain the midpoint of our guidance range, or approximately $135 million, we needed net turn orders of approximately 35% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.33 and $0.39 per diluted share. Our Q4 guidance assumes no further direct shipments to Huawei in this fiscal quarter.

I will now hand the call back to the operator. And Sandy, Emeka and I will be happy to answer any questions. Operator?

First question, Mohan, you talked about the funnel or pipeline opportunity of LoRa being about $500 million plus. So it sounds like that's growing, and it also sounds like consumer is potentially adding to at least that $100 million. Could you elaborate a little bit more on that? Can you maybe give us some examples in consumer where you're starting to see more LoRa adoption?

Yes, Tore. A significant portion of the pipeline is associated with smart home applications, primarily in the Americas but also in Europe. The smart home sector is largely replacing Zigbee and Z-Wave, extending its range beyond just the interior of homes to outdoor usage. This includes various applications such as lighting, smart lighting, security, and smart irrigation, among others. We are observing numerous opportunities globally, with the majority concentrated in North America and Europe.

Sounds good. And as my follow-up, you mentioned that Signal Integrity. And I mean, PON, obviously, was pretty strong this quarter, but I think you mentioned most segments are going to be down next quarter. Is that just seasonal? Or is there anything else going on? Because we thought that, especially data center PON was starting to turn a corner, but it seems like that's not sustainable just yet?

Yes, I would say that they're all doing okay. Data centers are performing reasonably well, and I wouldn't identify any significant issues there. PON has been soft throughout the year but is starting to recover, and we anticipate that next year could be a very strong growth year for PON. Regarding base stations, I believe they are beginning to improve. There’s a general market softness related to more legacy equipment, which is slightly affecting the numbers. However, I think this is just a temporary issue for one quarter. Next year, we should see all the main segments I mentioned rebound.

Okay. Yes. Sorry. I just wanted to circle back to kind of like the 5G ramp up and kind of the smartphone sales you're seeing? You guys are seeing a little bit of a lighter guide for Q1 or Q4, however you want to phrase it right, that looked, I guess, the end of the year and early next year. But can you maybe comment on what you're seeing on the smartphone handset side? Do you expect that to improve throughout '20? Or what type of trajectory do you guys expect in calendar '20?

Yes. Overall, the smartphone market seems to be performing adequately. We observe some areas of strength, and most regions are managing reasonably well. As is typical in the fourth quarter, we anticipate that Korean smartphone manufacturers will reduce their inventory, which we are factoring into our guidance for Q4. Additionally, we are facing specific challenges in China, particularly regarding Huawei. Nevertheless, aside from these issues, the smartphone business appears to be fairly healthy, and we expect next year to show improvement over this year.

Two questions, if I may. First question, I was hoping one of you may discuss what sort of adoption or design wins you have garnered for your analog-based PAM4 modules, now that Open Eye has released a 53-Gbps single-mode spec. And I think one of the misperceptions by investors is that if DSPs do become the predominant approach to PAM4, you're out of luck. But I think you have partnerships with at least the leading DSP provider. So if you could just address perhaps that investor concern and kind of where you are with regard to Open Eye MSA, that would be appreciated. Then I have a follow-up.

Yes. Let's begin with our DSP approach. We have FiberEdge, which is our PMD platform designed for TIAs, laser drivers, and similar products in collaboration with DSP partners, and we're experiencing some progress there. We're currently sampling the Tri-Edge PAM4 products, and we're optimistic that once we have fully produced parts available in the first quarter of next year, they will gain strong traction. We are also sampling with Tier 1 data center customers, and we believe our value proposition significantly surpasses existing DSP solutions. Our focus now is on producing these products, getting them into production, and integrating them. This will be our main objective in the first half of fiscal year '21, and we will assess the results as they develop. Additionally, we believe most customers have extended their timelines for data center PAM4 deployments until late next year, which aligns well with our plans. We'll see how it unfolds, but that's our current perspective.

I appreciate that. As a follow-up, one of your recent LoRa members introduced a new LPWAN called Sidewalk. Do you see that as complementary or competitive to your LoRa offerings? If it is indeed complementary, would that add to the $70 million to $90 million of LoRa revenue opportunity you expect for calendar '19?

We cannot discuss specific customers or partners within our ecosystem. However, it is important to note that every LoRa business contributes to Semtech in some manner, whether through direct chip sales, licensing, IP royalties, or cloud services. Our belief in the potential for this to become a $0.5 billion business in 4 to 5 years, and eventually reach $1 billion, stems from LoRa's value proposition, particularly in the competitive smart home market. While penetrating this space is challenging, LoRa offers significant advantages in range, power, cost, and network flexibility. We are confident in our ability to transform our substantial pipeline into revenue, which underpins our confidence. Currently, 60% of our revenue comes from China, but the pipeline is well-balanced, with 65% of it outside China, indicating promising future revenue growth. This forms the basis for our projected 40% CAGR growth over the next 4 years.

Our next question is from Craig Ellis, B. Riley.

Mohan, I wanted to revisit the point you made about the revenue expectations for this year. It seems that the forecast for revenue has shifted from a midpoint of $90 million down to $75 million, which you indicated was influenced by some consumer-related delays. Could you elaborate on what those were and if there were any common factors related to the activities occurring in the deployment base that you observed?

Yes, I would say that it is largely related to the installation of gateways. As you know, the number of gateways has increased significantly, leading to the expectation that endpoints will also increase. We are aware of numerous proof of concepts taking place and there are plenty of opportunities, but predicting the exact timing and deployment is challenging. We attempt to estimate how the year will unfold, but this year was primarily affected by a weak first half, particularly the first quarter, which was mostly due to issues in China. Recovering from that has been difficult. Additionally, some deployments have been pushed to next year, or we are seeing higher volume use cases, which has made this year particularly tough. However, I believe we will see positive results next year.

Yes. And just a follow-up related to that, Mohan. As we think about the 40% compound growth over a 4- to 5-year period of time. So clearly, there's still a huge opportunity here. There's some big blue chips that are joining the LoRa Alliance. The question for next year is, if we have some business that moves from '19 to '20, does that give you a discontinuity with atypically large growth next year? Or is the global macro, such that we should have expectations that would be closer to 40%, where the incremental $15 million doesn't overlay what would be an underlying expectation for 40% growth in the rest of the business?

Yes, I think it's difficult to predict the demand in China for next year. This year has presented challenges for various reasons, making it hard to forecast next year's outlook. However, we are confident in our goal of achieving 40% growth based on our current opportunity pipeline and the momentum we have both within and outside of China. We believe there are still broader macro IoT industrial use cases that we depend on. Overall, we remain quite confident that we can achieve the 40% growth next year based on the current market outlook.

Just a quick clarification. First off, was there any Huawei in the quarter end? I thought I heard there was no Huawei in terms of the outlook and expectations for the fourth quarter. And an additional clarification, did you mention in terms of your China exposure, on the smartphone front, either in protection or proximity sensors? And then I have a follow-up.

Yes. What we have indicated is that we do not require any additional Huawei bookings to meet our quarterly guidance. The reason for this, which I mentioned last quarter as well, is that there is too much uncertainty surrounding the Huawei business on a day-to-day basis to include it in our guidance. This could provide an upside if the Huawei ban were to be lifted. However, if it remains in place, we have already accounted for that risk in our guidance. What was the second part of the question?

How much was it, or did we have it in Q3 and what could Q4 look like?

So the Q4 guidance builds in about 3 million. We've shipped about 3 million or about 1.5 million into that. So that's what we have on backlog, and that's currently the position. Yes, it's a bit early to predict what will happen in fiscal year 2021. However, looking at the various markets and opportunities, the data center segment is showing signs of normalization in inventory and is expected to perform well, particularly in the hyperscale sector. We are confident in our ClearEdge, Tri-Edge, PAM4, and FiberEdge platforms. The PON market has faced challenges this year, but we anticipate a rebound next year, driven by increased fiber to the home and enterprise deployments, especially in China, along with an acceleration of 10-gig PON. We are optimistic about our position and growth potential in this area. For base stations, we expect next year to improve compared to this year, with growth mainly coming from 5G. Our Pro AV products and the SIP business, though currently small for us, are projected to experience significant growth in fiscal year 2021. We also expect solid growth in LoRa next year. On the Protection side, it's harder to predict outcomes for the smartphone market, but we are seeing promising design wins globally and are optimistic about Tier 1 smartphone manufacturers increasing their shipments, particularly with the growth of 5G. Overall, much hinges on developments in China and the macroeconomic environment, but we feel positive about our current situation.

Just a quick clarification, perhaps I missed it. Did you say what types of applications had pushed from CY '19 to CY '20 in LoRa business? Was that more some of the traditional China or smart metering? Or is that some of the newer consumer applications? And then I've got a couple of follow-ups.

Yes, I would say it's more about the consumer applications. The China LoRa business was quite weak in the first half, but it recovered to more normal levels in the second half. It's primarily industrial, especially in metering environments, which typically take longer to develop. However, once established, these markets can remain strong for a considerable time. The consumer areas, such as smart homes and asset tracking, are a bit harder to predict in terms of timing. However, when they do emerge, I believe they will be substantial.

Great. And second question was, you mentioned growing demand in the 5G front haul for your ClearEdge product family. Just wondering, are those typically going into CWDM4-type modules? Are they single lanes at 25? How big is that opportunity as we deploy the 5G networks in much greater scale next year?

Yes. I believe that all the front haul and mid-haul links will likely require CDRs, which means more content for us. This is probably the main factor compared to 4G base stations. Additionally, an increased number of base stations will contribute to a volume increase. While it's still early, we are confident that these 25-gig links will utilize the ClearEdge platform, which has a solid track record in the data center market. Therefore, we are very optimistic about our CDR position in the base stations, and most of these come with integrated drivers and similar components. The differentiation in the market is quite clear for us, so I believe we are in a strong position.

And then do you see any applications for the FiberEdge or the PAM4-based modules in that front haul, mid-haul? Or do you think that's mostly NRZ signaling for the foreseeable future?

No, we see FiberEdge as well. I think again, front haul, promotionally, I think at the moment, we are seeing ClearEdge and FiberEdge as being the opportunity in base station. Eventually, we think also Tri-Edge and the PAM4 CDRs will play a role in the base station as well.

So on LoRa and I guess China, in particular. I know you said it was a bunch of maybe non-China consumer. But just looking over the past year, would you say that trade tensions and this Chinese domestic semiconductor policy, do you think that that played into adoption for LoRa for this year? And then also, if you could give us an update on where you think Comcast is in the U.S. and the network build-out here as well, that would be great.

Yes, the issues in China are certainly a concern and continue to pose challenges for all our businesses. It's not limited to LoRa, which is also affected. Despite having good momentum in China, we face competition from NB-IoT and local Chinese technologies that create some difficulties. However, the value of LoRa is clear, and Chinese customers are actively supporting its design-ins. I don't foresee any long-term problems, but this year we did experience some impact in the first half, which seems to have diminished now. We expect to see continued growth in China. One reason I mention the opportunity pipeline, which is quite large, is that it's more balanced, with around 60% or 65% of opportunities in the Americas and Europe. This balance should help us establish a better revenue profile for LoRa moving forward.

And on Comcast?

On Comcast, Comcast is really focused on the enterprise space now. And I think is focused on building out partnerships with enterprise, larger enterprise customers in those markets, not only in the markets where they have a network, but in other segments of the market. I think it's still early days. I think the use cases are still playing out for them, but they do have pockets of very nice success, where they have some value that they bring to the market, such as in the theme parks and enterprise play where they already have partnerships in those locations. So it's still early days, but moving well on the enterprise front, I think.

Great. If I understood you correctly, the 76% figure seemed a bit high. Can you explain what contributed to that? Were there some direct customers that usually don't participate in the quarter, or was there unusually high distribution for some reason? What’s the explanation behind that?

Yes, Chris, I believe that was just a part of the decline in business with Huawei. Huawei has primarily been a direct account for us. With their business not being as strong as it has been in the past due to the ban situation, our revenue mix is somewhat elevated as a consequence.

I have a quick question regarding the LoRa segment. You mentioned that a few of the wins have been delayed from this year to next year. Do you anticipate a quick ramp-up in the first half of the fiscal year? Or do you think the majority of these consumer-focused wins in the U.S. and Europe will occur in the second half of fiscal '21?

That's a difficult one to call, Harsh. I would say, we'll start to see the momentum in Q2, probably, and then probably the real volume ramp will be in the second half year.

We are hearing that the Chinese Tier 2 OEMs are preparing for export-quality phones aimed at the European market with 5G applications. I'm curious as to why they are not using your products for protection and proximity sensing. Do you think it's due to local Chinese competition in those products or is there something else at play? Or is it simply an opportunity that has not yet materialized for you?

I believe there is an opportunity unfolding. However, many of these manufacturers do not yet grasp the importance of protection and SAR value. They are beginning to understand it, particularly in regions outside of China. Many have not had success in North America and Europe, and as they start to release phones in these areas, they will likely recognize the need for higher quality devices that comply with SAR regulations and have enhanced durability. This is part of a learning curve. Historically, there have been instances where customers opted out of Semtech protection to save costs, only to find themselves dealing with a high rate of returns, prompting them to reintroduce the protection. Therefore, it's not surprising that not all manufacturers include protection or proximity sensing for SAR at this time, but we believe they will ultimately reach that point.

I have a couple of questions. One is about the Tri-Edge. Are you noticing that customers are taking longer with the trials, or is there simply a delay in adopting and deploying the technology?

We're currently in the sampling phase for Tri-Edge. We showcased some of the products at the recent ECOC show, and we're now in the process of sampling them. We don’t have production silicon available yet, but we expect to have it by Q1. The timing is favorable since PAM4 deployment in data centers has been delayed, which gives us a chance to get customers to start using Tri-Edge and testing it in system trials. These are legitimate system trials taking place. Once customers are comfortable with the technology, I anticipate we will see an increase in uptake during the second half of the year.

Okay. Okay. And then last quarter, you were suggesting that you might see revenue in Q4. That's what I was asking.

Yes. I think just some kind of engineering sample revenue, very small. But I think the production ramps will be in Q2 and beyond. I would say it's primarily the consumer applications that are affected. The China LoRa business was quite weak in the first half, but I believe it returned to more typical levels in the second half. The focus is more on industrial and metering environments, which generally take longer to develop. However, once these markets are established, they tend to have long-lasting viability. In contrast, consumer segments such as smart homes and smart asset tracking are harder to predict in terms of when their growth will occur. Nevertheless, when they do take off, I expect the impact to be significant. I would say, Craig, it's largely to do with the installation of gateways. As you know, the number of gateways has increased dramatically, creating an expectation that endpoints will follow. We know there are numerous POCs underway and plenty of opportunities, but it's challenging to predict the exact timing and deployment. We make annual projections about how the year will unfold, but to be honest, this year was significantly impacted by a very weak first half, particularly the first quarter, which was primarily affected by conditions in China. As a result, it's been difficult to recover. Additionally, some projects have been postponed until next year, or there are higher volume use cases anticipated, which has made this year challenging. However, I believe we will see benefits in the next year. On Comcast, Comcast is really focused on the enterprise space now. And I think is focused on building out partnerships with enterprise, larger enterprise customers in those markets, not only in the markets where they have a network, but in other segments of the market. I think it's still early days. I think the use cases are still playing out for them, but they do have pockets of very nice success, where they have some value that they bring to the market, such as in the theme parks and enterprise play where they already have partnerships in those locations. So it's still early days, but moving well on the enterprise front, I think. We cannot discuss specific customers or partners in detail. However, I can say that every LoRa business contributes to Semtech in some way, whether through direct chip sales, licensing, IP royalties, or cloud services. It's important to keep this in mind. Additionally, we believe that this will grow into a $0.5 billion business in the next 4 to 5 years and potentially reach $1 billion, thanks to the value LoRa brings to areas like the smart home. The smart home sector is very competitive and challenging to enter, but LoRa's advantages in range, power, cost, and network flexibility make it a matter of when, not if. We are confident in converting our substantial pipeline into revenue, which reinforces our confidence. Currently, 60% of our revenue comes from China, but the pipeline is well balanced, with 65% now coming from outside China, which is promising for future revenue growth. This underpins our goal of achieving 40% CAGR growth over the next four years. In closing, despite macro headwinds and the ongoing uncertainty from the geopolitical headwinds and weakness from the Huawei ban, we remain confident in the underlying strength of the secular drivers behind our growth engines in the IoT, data center and mobile markets, and we remain confident that our overall end market, geographical and product balance should enable us to deliver double-digit growth in fiscal year '21. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.