Greetings. Welcome to the Semtech Corporation Q1 Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Sandy Harrison, VP of Investor Relations. Thank you. You may begin.

Thank you, Hillary, and welcome to Semtech's conference call to discuss our first quarter of fiscal year 2022 financial results. 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 close 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 as of today only and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. As a reminder, all references made to financial results in Mohan's and Emeka's prepared remarks, during the call, 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 reconciliations of such non-GAAP measures to the most comparable GAAP measures are also included in today's press release. With that, I’ll turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Sandy. Good afternoon, everyone. As Sandy stated, unless otherwise noted, I will be reviewing our non-GAAP financial results. And their reconciliation table is available in today's press release. For Q1 fiscal year 2022, net sales grew 3% sequentially and 28% over the same period a year ago to $170.4 million, and above the midpoint of our guidance, led by the continued strength of the secular themes driving our growth platforms. In Q1, shipments into Asia represented 78% of net sales. North America represented 13% and Europe represented 9%. We estimate that approximately 35% of our shipments are consumed in China. Total direct sales represented approximately 14% and sales to distribution represented approximately 86%, and our POS represented another quarterly record. Our distribution business remains balanced, with 31% of the total POS coming from the high-end consumer end market, 37% coming from the infrastructure end market, and 32% from the industrial end market. Q1 bookings increased on both a Q-over-Q and year-over-year basis. And once again, represented a new quarterly record and resulted in a book-to-bill well above one. Turns bookings accounted for approximately 17% of shipments during the quarter. Q1 non-GAAP gross margin increased 50 basis points sequentially to 62%, which was at the high end of our guidance range due to a more favorable product mix. For Q2 and fiscal year 2022, we continue to expect our gross margin to trend higher as we expect net sales growth to come from our growth platforms that tend to have higher margins. We believe that we can continue to mitigate the higher costs associated with the challenging global supply chain through slower customer pricing reductions or through price increases. Q1 non-GAAP operating expense increased 3% to $64.1 million, driven by the negative impact of the weaker US dollar and higher new product development expenses. For the rest of fiscal year 2022, due to the weaker US dollar, we expect our non-GAAP operating expense to be slightly above current levels. In Q1, we were pleased to see our operating profit on a sequential basis and year-over-year basis grow significantly faster than our revenue due to gross margin expansion and modest growth in operating expenses. We expect to see continued operating leverage as we go through the year, driven by revenue growth from our LoRa enabled, our Tri-Edge and our industrial protection platforms. As a reminder, beginning in fiscal year 2022, we started using a normalized non-GAAP tax rate of 13% for the full fiscal year that we believe reduces the variability in non-GAAP tax rates that can occur throughout the year. We will update this tax rate annually at the beginning of each fiscal year. In Q1, our cash flow from operations increased 20% sequentially to $33 million or 19% of net sales. Our free cash flow increased 61% sequentially to 16% of net sales, compared to our long-term free cash flow target of 25% to 30% of sales. In Q1, we repurchased approximately 361,000 shares of our outstanding stock for $25 million, resulting in $364 million remaining in our outstanding authorization that was expanded by our Board during the quarter. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down our debt. Accounts receivable in Q1 decreased 6% from Q4, while days of sales increased a day to 37 days and remains below our target range of 40 to 45 days. In Q1, net inventory in absolute dollar terms increased 7% sequentially, and days of inventory increased to 126 days from 116 days at the end of Q4 and remains above our target range of 90 to 100 days. We expect our net inventory to remain above our target range to support stronger demand and to address the tighter supply chain environment. In summary, fiscal year 2022 is off to a strong financial start. Our growth platforms are showing strength. Our gross margins are expanding, driven by those platforms. And our optimized operating expenses are leading to a rapidly expanding operating margin. Our cash flow generation remains strong, and we continue to focus on the execution of those things that we can control and believe the long-term secular nature of our growth engines position us nicely for strong growth and a record financial performance in fiscal year 2022 and beyond. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2022 performance by end market and by product group and then provide our outlook for Q2 of fiscal year 2022. In Q1, net revenue increased 3% sequentially and 28% over the prior year to $170.4 million. Higher demand across all three of our end markets drove the Q1 growth. We posted non-GAAP gross margin of 62% and non-GAAP earnings per diluted share of $0.53. In Q1, net revenue from the high-end consumer market increased 8% sequentially and 52% over the prior year and represented 32% of total revenues. Approximately 21% of consumer net revenue was attributable to mobile devices, and approximately 11% was attributable to other consumer systems. Net revenue from the industrial market increased 1% sequentially and 41% over the prior year and represented 32% of total net revenues. Net revenue from the infrastructure market increased 1% sequentially and 6% over the prior year and represented 36% of total revenues. I will now discuss the performance of each of our product groups. In Q1 of fiscal year 2022, our Signal Integrity Product Group grew 7% sequentially and represented 39% of total revenues. Demand increased across our data center, PON and wireless base station businesses. In Q1, revenue from the data center market increased as demand for 100 gigabit per second optical modules continued to increase. Data center bookings grew strongly in Q1, and we are expecting strong growth for the rest of the year, driven by 100 gigabit per second, 200 gigabit per second and 400 gigabit per second optical modules. Momentum for our Tri-Edge PAM4 CDRs in 100-gig, 200-gig and 400-gig optical systems is increasing, as the design wins transition to production over the next few quarters. Our Tri-Edge products experienced record bookings in Q1, as customers begin early deployments that are expected to ramp at global data center customers in the second half of this fiscal year. We expect our revenue from Tri-Edge optical modules to grow nicely in FY 2022 and over the next few years, as more programs move to production. Our FiberEdge PMD platforms are also doing well, as they complement our ClearEdge and Tri-Edge CDR platforms and DSP-based modules, where customers are taking advantage of the higher performance and increased integration provided by FiberEdge. We are pleased with our progress in the PAM4 optical module market and are increasingly confident that the lower power, lower cost and lower latency that Tri-Edge provides, together with FiberEdge's higher performance and integration, should enable our hyperscale data center business to continue to grow and achieve a revenue record in FY 2022. In Q1 of FY 2022, our PON business increased, led by another record quarter for 10-gig PON revenue. In Q1, we had record PON bookings, driven by demand from Chinese, European and North American service providers that we believe bodes well for future growth from our 2.5 gig and 10-gig PON platforms. Semtech provides the most comprehensive PON portfolio available in the market and is the leading provider of 10-gig PON solutions for both the ONU and OLT segments. We believe we are well-positioned to benefit from the increasing global demand for higher bandwidth, access connectivity and expect our PON business to grow nicely in FY 2022. In Q1 of FY 2022, revenue from wireless base stations increased as our 5G solutions achieved another revenue record. In Q1, we began sampling our recently announced 50-gigabit per second PAM4 Tri-Edge phone, targeted at front-haul optical modules for the 5G wireless market. We expect 5G wireless deployments to accelerate in the second half of fiscal year 2022 and continue to ramp for several years. In Q2, bookings for our Signal Integrity Product Group reached a new record as demand for high bandwidth global infrastructure continue to increase. We expect these businesses, along with our video business, and our emerging LIDAR business to drive sustainable long-term growth for our Signal Integrity Product Group. In Q2 fiscal year 2022, we expect our Signal Integrity revenues to increase and achieve a new quarterly revenue record on higher demand from the data center and PON markets. Moving on to our Protection Product Group. In Q1 of fiscal year 2022, net revenues from our Protection Product Group decreased 5% sequentially and increased 13% annually and represented 27% of total revenues. In Q1, Protection smartphone revenue declined as some smartphone customers experienced supply constraints, not related to Semtech, impacting their ability to build complete systems. Demand and bookings from our smartphone customers continues to increase, and we expect revenues to recover in the next few quarters. In Q1, demand for our Protection devices from the broad-based industrial market continued to grow and experienced record bookings as our diversification efforts into the broader Protection market, including the automotive and IoT markets, gained momentum. Many of today's high-tech systems are using more advanced process geometries that require robust high-performance Protection technology to prevent damage to their highly sensitive devices. We expect this secular trend to continue and drive increased adoption of Semtech's Protection platforms in mobile systems and increasingly across broad-based industrial, automotive and communication systems that should enable our Protection business to deliver double-digit growth over the next several years. In Q2 of fiscal year 2022, we expect our Protection revenues to increase nicely, driven by strength from all segments. Turning to our Wireless and Sensing Product Group. In Q1, revenues from our Wireless and Sensing Product Group increased 7% sequentially and 78% over the prior year and achieved another quarterly record and represented 34% of total revenues. In Q1, as expected, our LoRa-enabled platforms delivered another quarterly record as the LoRa momentum starts to accelerate globally across multiple use cases. We recently announced a number of new initiatives that further demonstrate the value that LoRa technology delivers to emerging IoT applications. These included EchoStar joining the LoRa Alliance and launching an initiative to use LoRa WAN networks to bring new lower-cost satellite-based connectivity services to the logistics, asset tracking, utility and agriculture segments. SAS, a leader in IoT software analytics and services, announced the use of LoRa WAN, together with its SAS AI platform and in conjunction with Microsoft Azure will offer a suite of end-to-end solutions to resolve real-world issues associated with flood prevention, precision agriculture, livestock wellness and smart energy. Inview, a global leader in retail systems announced the integration of LoRa WAN into its Inview live platform to improve the retail shopper experience. And the MXC foundation announced a LoRa WAN network using partial gateways, similar to the recently announced helium network, over which individuals can mine cryptocurrency. We are seeing more of this type of shared LoRa WAN network model emerge, which is contributing to the rapid growth in LoRa WAN gateway deployments. These are some examples of emerging use cases with a low-power, long-range and flexibility of LoRa enabling a smarter, more connected and sustainable planet. In Q1, our LoRa business metrics continued to progress well against our targets for FY '22. The number of LoRa network operators grew to 151, and we are expecting 165 LoRa network operators by the end of FY '22. The cumulative number of LoRa end nodes deployed increased to 191 million, and we expect this number to exceed 235 million cumulative end nodes by the end of fiscal year '22. The number of LoRa gateways deployed increased to more than 1.7 million, and we expect the number of LoRa gateways deployed to increase to over 2 million by the end of fiscal year '22. The LoRa opportunity pipeline now exceeds $700 million, and by the end of FY '22, we are anticipating our opportunity pipeline to exceed $850 million. We anticipate that, on average, 40% to 50% of the opportunities currently in the pipeline will convert to deployments over a 24-month timeline. Our opportunity pipeline remains geographically well balanced with use cases primarily in smart utilities, smart logistics, asset tracking, smart home and smart cities. These metrics demonstrate the growing adoption of LoRa across a broadening low power wireless landscape. With this strong momentum and along with the continued influence of the LoRa Alliance, we expect to continue to drive LoRa to become the de facto standard for the global LP-WAN market in what we expect to be a multibillion unit industry in the next 5 years. In Q1, we experienced record quarterly demand for our proximity sensing platforms, led by continued strength from our Asian smartphone customers. As global RF power regulations become more broadly adopted, driven by environmental and social health concerns, leading smartphone manufacturers competing on a global stage are implementing proximity sensing technology into their 5G devices. Semtech's leadership and highly innovative proximity sensing platform delivers the industry's most advanced, lowest power and highly integrated proximity sensing technology. With the increasing use of 5G phones and the increased deployment of high-powered radios across the whole mobile industry, we expect the demand for our proximity sensing platforms to increase over the next few years. For Q2 of fiscal year '22, we expect net revenues from our Wireless and Sensing Product Group to increase and deliver another record quarter, led by new records from our LoRa and proximity sensing businesses. Moving on to new products and design wins. In Q1 of fiscal year '22, we released 11 new products and achieved 3,036 new design wins, which represents a 38% increase over the previous year. Now let me discuss our outlook for the second quarter of FY '22. Driven by the record bookings in Q1, we entered Q2 with record backlog, and we are currently estimating Q2 net revenues to be between $177 million and $187 million. To attain the midpoint of our guidance range or approximately $182 million, we needed net terms orders of approximately 1% at the beginning of Q2. We expect our Q2 non-GAAP earnings to be between $0.57 and $0.65 per diluted share. I will now hand the call back to the operator. Sandy, Emeka and I will be happy to answer any questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question is from Tore Svanberg of Stifel. Please state your question.

Yes, thank you, and congratulations on the strong results. Mohan, you just indicated that you only need 1% turns to meet the midpoint of the guidance. I'm just wondering why you wouldn't guide higher? Is it simply because of capacity constraints? Because I honestly can't remember the last time you only did 1% turns?

I've been the CEO for over 15 years, and this is clearly the lowest number of turns we’ve seen. It's important to note that our bookings and demand are both very strong. We are closely monitoring consumption to ensure that everything we ship is actually being used. We definitely don’t need more turns, but we are keeping a close eye on our point-of-sale activity to confirm that our customers and distributors are consuming everything. This is why we are being cautious with the turns number in our guidance and outlook.

That's great. And as a follow-up, could you just elaborate a little bit on both 5G and data center? It sounds like your visibility is improving quite a bit there. Is that tied primarily to, obviously, continuous data center upgrades? But then also 5G deployments in North America, or is China still in the mix here?

So for 5G, for sure, it's all regions. I would say China is definitely in the mix still, and we are seeing some indications, the second half is going to be quite strong for 5G. And then on the data center side, yeah, it's a mixed bag, obviously, 100-gig is doing extremely well at the moment. We're expecting 200-gig to start to pick up in the second half and actually starting Q2 and then picking up nicely in the second half as well. So we expect data center to have a pretty good year.

Great. Thanks and congrats again.

Our next question is from Tristan Gerra of Baird. Please state your question.

Hi, good afternoon. Could you discuss the factors affecting gross margin in the second half? How much is influenced by product mix, particularly between data center and price increases? Also, could you remind us how the gross margin for your base station compares to the corporate average?

So Tristan, thanks. As I said in my prepared remarks, we are seeing a lot of gross margin uplift that we expected from our new product areas LoRa enabled, our Tri-Edge platforms, our industrial protection platforms, the wireless and others. And so we are seeing a lot of gross margin expansion from them. And the expectation is that, as we go through the second half of the year, we should continue to see accelerating revenues from those platforms. So my expectation is that we will continue to see gross margin expansions going forward. With regards to the Wireless side of stuff, the gross margins for the Wireless business is above the corporate average at this point.

Great. And are you supply-constrained currently?

There's pockets of supply constraints, Tristan. I think one thing about us is really about a year ago – over a year ago, we made the decision strategically to put in place more internal inventory, which you can see. We're above our target range, our model range in internal inventory, and that has helped us for sure. So we're in a position where we're quite comfortable for this year. We'll have the supply to grow significantly and probably for next year. Obviously, there are pockets of constraints where demand suddenly comes across us and we see a sudden increase in certain areas, and it's difficult to get the upside supply to support that. But in general, I think we're in pretty good shape.

Tristan, this is Emeka. I just wanted to make sure that my comment on gross margin and the Wireless that you understand that I'm talking about the Wireless base stations, right?

5G.

Correct. Correct, great. Thank you.

Our next question is from Karl Ackerman of Cowen. Please state your question.

Yes. Thank you. I have a few questions as well.

Hey, Karl, could you speak up, please? We're having a tough time hearing you.

Is this better?

Go ahead.

Great. Thank you. Could you discuss the number of designs you now have for PAM4, particularly around 200-gig and 400-gig that are expected to see and probably greater adoption at least across one major – or where this falls? So if you could just talk about just the number of designs you see there, that would be helpful.

Yes. We – I can't talk specifically, Karl, but we have about 25 kind of design in – design win activities going on at the moment. And I think some of those are starting to move to design wins and some of them even going to production. So – and obviously, we're getting orders now. So the momentum looks quite good. It's our first set of products that are coming out. Now we have the opportunity to bring more products out that have a little bit longer reach and a little bit more variance of our Tri-Edge platform now that we’ve gotten through kind of our first cycle of learning from them. So I expect over the next year, we'll release more products. And I think over the next few years, we'll have some good momentum in 100-gig, 200-gig or 400-gig and then beyond that, depending on what road map looks like at that point.

Great. Thanks for that. I guess for my follow-up, in your Protection business, I know you have historically been concentrated in mobile. But you highlighted, at least in your prepared comments, some opportunities within automotive and industrial, and I was hoping you could just detail that in a bit more detail that is supporting this business over the next couple of quarters. Thank you.

Yes, our Protection business has historically been very strong in the mobile segment. We have diversified within that segment, moving from a heavy reliance on Samsung to now including other North American smartphone manufacturers, Chinese manufacturers, wearables, and displays. Beyond mobile, we have shifted much of our R&D focus to high-performance interfaces in communications infrastructure, such as Ethernet ports, automotive infrastructure, IoT, HDMI 2.1 ports, and USB-C. We have noticed an increasing demand for these high-performance interfaces across the industrial communications and automotive sectors. As a result, about 35% of our Protection business is now focused on this area, which is growing positively. This also benefits our gross margins, and we are optimistic about the momentum. While growth in this segment may take time and is not rapid, it has a much longer life cycle, and we believe it will contribute to sustained growth for many years to come.

Thank you.

Our next question is from Quinn Bolton of Needham. Please state your question.

Hi, guys. This is Michelle on for Quinn. Thanks for taking the question and congrats on the results and solid execution. So my first one, just on the seasonality. If I'm not mistaken, you guys typically have a slightly more back half weighted year. But given the growth that you guys are expecting in the back half of fiscal 2022, particularly with Signal Integrity and LoRa businesses, would it be reasonable to think that the second half might actually be more than slightly above 50% of fiscal 2022 revenues, or would you think that revenues might be kind of in line with typical seasonality?

We are expecting a very strong second half, along with a solid first half. Our Q2 guidance shows that we feel confident about Q2. We have a substantial backlog that supports a strong Q3, and we're becoming comfortable with Q4 as well. The seasonality this year seems tricky to predict. Typically, we expect Q4 to see a decline, and that expectation somewhat remains. However, given the current state of our growth drivers and the strong performance anticipated in segments like 5G and data centers, we might experience less of a decline, although it's still too early to determine.

Yes, that's helpful. Thank you. For my follow-up, during the last call, you indicated that the Protection business was expected to grow, possibly in double digits for fiscal 2022. I'm curious if the recent weakness in the smartphone segment during the first quarter has affected your outlook for the year. Are you anticipating slightly lower growth for fiscal 2022? Any updates you can provide would be appreciated.

Yes. In fact, I feel even more confident that our Protection business will see significant growth this year. As I mentioned earlier regarding our consumer segment, especially in the smartphone area, there was a minor decline in our Protection business. However, this decline was not due to a lack of demand or customer interest; rather, it was caused by shortages of components from other suppliers. Therefore, it’s not a demand issue, and I believe we will see improvement as the year progresses. We still anticipate strong growth for our Protection business this year.

Okay, great. Thanks and congrats again.

Thank you.

Our next question is from Harsh Kumar of Piper Sandler. Please state your question.

Yes. Mohan, Emeka, and the team, great job here. I am really impressed with what is happening in your business. I have a strategic question, Mohan. Your company is performing well. When do you anticipate reaching scale? What potential do you see for a company and model like yours? At what revenue level do you think you might achieve around a 30% operating margin? Feel free to share any aspirational figures regarding operating margins.

Yes, this is Emeka. I'll address that. During our last Analyst day about two years ago, we mentioned our expectations for our operating margin on a non-GAAP basis to be between 32% and 36%. Given the progress we're experiencing with our growth platforms and the accompanying gross margins, as well as our management of operating expenses—which we expect to maintain despite current foreign exchange challenges—we believe that with $1 billion in revenue, we should be at the lower to middle part of that range.

Okay, Emeka, that's very helpful. Mohan, I've covered your company for over a decade, and I don't recall seeing you this optimistic about your business very often. It seems you feel very good about exceptional growth for the rest of the year. Can you reassure us that this is the case based on your visibility into bookings and backlog? Additionally, you mentioned the supply needed to support this level of exceptional growth. Can we expect consistent sequential growth of around 5% to 6% for the rest of the year, disregarding the traditionally weaker fourth quarter?

Let me address the supply issue first. We are confident in our supply capabilities. We have strategically built inventory for this situation, and it is benefiting us. While there are some mix challenges to manage and monitor, we currently feel well-positioned to meet the existing demand levels. On the demand side, we are very optimistic. A significant portion of our growth comes from long-term investments in platforms. Our investment in LoRa, for instance, has taken time, making it a long-term commitment. Building a strong foundation like this can lead to success, and although we've had to be patient, we are beginning to see positive developments in that area. We anticipate a 40% compound annual growth rate, and we are confident in that projection, especially for the LoRa-enabled business. Our other growth initiatives, such as proximity sensing, which has also been a long-term investment, are starting to gain traction due to advancements in 5G and high power radios, creating favorable trends. In the data center arena, we have made substantial investments in our 100-gig NRZ and PAM4 platforms, including Tri-Edge and FiberEdge, and they are performing well. Additionally, our significant investment in 10-gig PON has started to yield positive results, positioning it as a solid growth driver. The 5G wireless sector may be somewhat unpredictable, particularly with PAM infrastructure, but we expect positive outcomes there as well. Furthermore, in the Protection segment, we are pleased to see the benefits of diversification. The broader Protection business has significant potential in PON, and while it takes time to gain momentum, I am optimistic about its growth since it positively impacts gross margins. The more momentum we achieve in this area, the better it will be for the company.

Hey, thank you Mohan and congratulations, guys, once again.

Our next question is from Craig Ellis of B. Riley Securities. Please state your question.

Yes, thanks for taking the question and congratulations team on the great execution. So Mohan, I don't typically ask about the end markets, but I thought there was something interesting in them. So, I wanted to direct my first question that way. So great to see high-end consumer up 52%, industrial up 41%. The question around infrastructure which is up 6%, we can all see that the enterprise spending backdrop was really severely impacted post COVID in that we are far from firing on all cylinders with cloud and data center. But the question is this, with more and more reports suggesting an upturn in enterprise spending in the other 2 end markets, is it possible that we'll see in the achieving similar year-on-year growth rates, but maybe with 2, 4, 6 quarter delay to what we're now seeing in high-end consumer and industrial, especially given the product cycle what we're now seeing in high-end consumer and about through your prepared remarks and Q&A.?

Yes, Craig. We're very optimistic about infrastructure. I believe infrastructure performed well last year, which contributes to the year-on-year growth challenge. However, we're anticipating strong growth this year, particularly with 10-gig PON and PON in general, due to excess bandwidth. We also expect some growth in hyperscale data centers this year, which is noteworthy considering the inventory that has been built up. Generally, we are starting to see some segments of the infrastructure space rebound. These segments can be uneven, experiencing periods of significant investment followed by deployment, digestion, and then resurgence, but the overall trend will be upward. There is certainly a demand for infrastructure across all sectors we operate in, including hyperscale, 5G, and 10-gig PON. Additionally, when we consider other emerging segments, we can be confident that growth will continue.

Our next question is from Craig Ellis of B. Riley Securities. Please state your question.

Yes, thanks for taking the question and congratulations team on the great execution. So Mohan, I don't typically ask about the end markets, but I thought there was something interesting in them. So, I wanted to direct my first question that way. So great to see high-end consumer up 52%, industrial up 41%. The question around infrastructure which is up 6%, we can all see that the enterprise spending backdrop was really severely impacted post COVID in that we are far from firing on all cylinders with cloud and data center. But the question is this, with more and more reports suggesting an upturn in enterprise spending in the other 2 end markets, is it possible that we'll see in the achieving similar year-on-year growth rates, but maybe with 2, 4, 6 quarter delay to what we're now seeing in high-end consumer and industrial, especially given the product cycle what we're now seeing in high-end consumer and about through your prepared remarks and Q&A.?

Yes, Craig. We're very optimistic about infrastructure. I believe infrastructure performed well last year, which presents some challenges for year-on-year growth. However, we anticipate robust growth in 10-gig PON and general PON due to excess bandwidth. We are also looking for growth in hyperscale data centers this year, which is an interesting indicator given the inventory that has been built up. Overall, we are beginning to see some segments within the infrastructure space returning. These segments often experience bursts of investment followed by deployment and then a period of adjustment before they return to growth, but the trend is clearly upward. The demand for infrastructure across all our segments, including hyperscale, 5G, and 10-gig PON, is strong, and when we factor in other emerging segments, it's certain that growth will continue.

Our next question is from Craig Ellis of B. Riley Securities. Please state your question.

Yes, thanks for taking the question and congratulations team on the great execution. So Mohan, I don't typically ask about the end markets, but I thought there was something interesting in them. So, I wanted to direct my first question that way. So great to see high-end consumer up 52%, industrial up 41%. The question around infrastructure which is up 6%, we can all see that the enterprise spending backdrop was really severely impacted post COVID in that we are far from firing on all cylinders with cloud and data center. But the question is this, with more and more reports suggesting an upturn in enterprise spending in the other 2 end markets, is it possible that we'll see in the achieving similar year-on-year growth rates, but maybe with 2, 4, 6 quarter delay to what we're now seeing in high-end consumer and industrial, especially given the product cycle what we're now seeing in high-end consumer and about through your prepared remarks and Q&A.?

Yes, Craig. We're optimistic about infrastructure. It performed well last year, which adds to the challenge of year-on-year growth. However, we anticipate strong growth this year, especially in 10-gig PON and PON in general due to excess bandwidth. We also expect some growth in hyperscale data centers this year, making it an interesting data point considering the inventory built up. Overall, we're noticing some recovery in various infrastructure segments. These segments tend to fluctuate, with periods of investment followed by deployment and digestion before they rebound, but the trajectory will be upward. There's a definite demand for infrastructure across all segments we operate in, including hyperscale, 5G, and 10-gig PON, and when considering emerging segments, growth is likely to continue.

Our next question is from Craig Ellis of B. Riley Securities. Please state your question.

Yes, thanks for taking the question and congratulations team on the great execution. So Mohan, I don't typically ask about the end markets, but I thought there was something interesting in them. So, I wanted to direct my first question that way. So great to see high-end consumer up 52%, industrial up 41%. The question around infrastructure which is up 6%, we can all see that the enterprise spending backdrop was really severely impacted post COVID in that we are far from firing on all cylinders with cloud and data center. But the question is this, with more and more reports suggesting an upturn in enterprise spending in the other 2 end markets, is it possible that we'll see in the achieving similar year-on-year growth rates, but maybe with 2, 4, 6 quarter delay to what we're now seeing in high-end consumer and industrial, especially given the product cycle what we're now seeing in high-end consumer and about through your prepared remarks and Q&A.?

Yes, Craig. We are very optimistic about infrastructure. I believe it performed well last year, which presents some challenges for year-on-year growth. However, we are certainly expecting strong growth in 10-gig PON and in PON overall due to excess bandwidth. We also anticipate some growth in hyperscale data centers this year, which is interesting considering the inventory that has been built up. It seems we are beginning to see some recovery in various segments of the infrastructure space. These segments can be a bit unpredictable, characterized by bursts of investment followed by deployment periods and then digestion phases before they pick up again, but overall, the trend is upward. The demand for infrastructure in all the segments we operate in, such as hyperscale, 5G, and 10-gig PON, is definitely present. Furthermore, as we factor in emerging segments, I believe growth will continue.

Our next question is from Gary Mobley of Wells Fargo. Please state your question.

Hey, guys, thanks for taking my question. I wanted to ask about your inventories and maybe what they're signaling. So you're running, what, 26% above the high-end of the inventory days target and it's up sequentially, again, speaking of your own inventories. We don't know, however, what your distributor inventories are. And I know you don't normally disclose that, but can you give us a sense of the sequential direction in your distributor inventory? Seemingly, you're having a little bit easier time than some of your peers in securing some wafer supply and finished product and whatnot. And so my question related to all this is given that you seem to have adequate inventory, is there less motivation for your end customers or your distributors to double order or order more product than they actually need?

That's a great question. To address your inquiry about distributor inventory, our distributor inventory is quite low and continues to decrease. However, demand and bookings remain very strong. We closely monitor our point of sale data, which reflects shipments from our distributors to customers. We also communicate with our end customers to assess their consumption levels, which is crucial. As long as we are shipping in line with these consumption levels, which we believe we are and can maintain, we expect to continue experiencing growth in the business. That's our strategy. Emeka, do you have anything to add?

No, yes. I think just like I said in my remarks, Gary, like Mohan said, the bookings are very strong. The demand is very strong. So with regards to sort of the question you have is the multiplication for our distributors to maybe double book our stuff. I don't think we're seeing any evidence of that. What we are definitely seeing though is that the evidence of the concern about being able to get – have access to inventories in the long run. So we are seeing these guys placing orders and maybe requesting them out into the future and things like that. But like Mohan said, we are managing these things very clearly, very concisely. I think we're very happy with where we have – what we have in terms of the internal inventory means that we are very well positioned for the most part, to support the strong demand that we are seeing. But at the same time, trying to make sure that we're not just shipping to have stuff resting in terms of the distributor shelves, right?

Sure. I appreciate the color. So my follow-up I wanted to ask about your TIA, LiDAR products, in particular with your recently announced extension or perhaps a new relationship with Intel. Is this LiDAR for industrial applications? LiDAR for automotive applications? And in general, how would you size up your market opportunity for your TIAs, in particular in the LiDAR market?

So from an end market standpoint, it's very much a platform for Intel and Intel's use for all their applications, whether that be in industrial, I think the first target is industrial/consumer and then automotive, eventually. I would say that it's more of a longer term opportunity, Gary. We've obviously – we're working with them very closely, but there are still technology challenges and market validation and stuff like that. But the technology development is what we call one of our emerging growth engines. So if I look at our current portfolio of growth engines, which includes LoRa and proximity sensing and Tri-Edge and some of the products, those are all in growth phase, but we have a number of follow-on technologies that are coming on, and LiDAR is one of them, which we've invested in for several years now. We'll continue to invest in for another several years, I think. And hopefully, that will become a very good growth driver for us in the future. But I think it's early days, but it's good to be working with a partner like Intel, and hopefully, it will turn into real business for us.

Thanks, Mohan.

Our next question is from Christopher Rolland of Susquehanna. Please state your question.

Thanks, guys. Mohan, you had mentioned gateways and that 400,000 number, which was pretty impressive. Can you remind us on – or update us on content per gateway now? And then also, if you can talk about kind of the drivers of gateway, I think you hinted to some of those. But talk about the mix of revenue gateways versus nodes now and some of the changes that we've seen as of late and how you think those will trend?

Yes. So we have 191 million end nodes connected now. It's a cumulative number, still connected to those gateways. The number of gateways out there now with being 1.7 million, actually, that supports well over 5 billion sensors. So we have plenty of capacity out there for more sensors. So that's a good thing. The thing to remember about gateways, we have different types of gateways. We have macro gateways, which go on towers, 30-kilometer range. Those are $1,000 kind of gateways. On the other end of the scale, we have Picocell gateways that are $100 and very low cost and really target to that indoor use cases, support 5,000 sensors, things like that and about 1-mile range. So a range of different gateways. And every use case and every customer has a different application. They can deploy different types of gateways in some cases or where they're doing indoor and outdoor connectivity. So it very much varies, Chris. I think the key thing, though, that what's driving the sudden acceleration is one of the use cases I mentioned, is this concept of building up a network that then monetizes the person who is using the gateway or who has the gateway in their house or in their enterprise and that monetization through cryptocurrency. As you know, that's the Helium approach, and there are other companies now thinking about that and doing that. So that's pretty exciting for us. We'll see. It's a new use case. We don't know if it's going to really fly longer term, but it sounds like a very nice interesting opportunity. And one in which you're doing real stuff. I mean, people are using gateways for monitoring, tracking assets and tracking important things in their life or using it for special kind of monitoring of low power sensors. So, yes, it's a really interesting application. There are other use cases that are now starting to drive more gateway deployments, I think, across the globe. I think not only the smart home, but the smart asset tracking and logistics in general, I think, is driving the need for more gateways. So that also is another use case. So we're pretty excited by it. We'll see where it leads to.

Great. My focus is on orders and backlogs. It seems there is a multi-month backlog of gateways, with hundreds of thousands of units affected. Could you discuss this? Are there significant constraints? When do you anticipate reaching a balance between supply and demand? Additionally, can you confirm if there is between $100 and $1,000 worth of Semtech content in those gateways? Thanks.

No. The prices I mentioned are essentially retail prices. Our content is priced between $3 to $5 for small gateways and $30 for larger gateways. Regarding the supply and demand for gateways, the limitation is not with our devices. The real issue for manufacturers seems to be related to some microcontrollers, microprocessors, and other components that are essential for building the gateway. It’s important to note that we only develop the radios; while we have our materials, there are other components that are restricting availability.

Thank you.

Our next question is from Rick Schafer of Oppenheimer. Please state your question.

Thank you, and congratulations to everyone. I have one more question about LoRa. I know there’s been a lot of discussion, but it seems some industry experts are calling 2021 the year for LoRa to scale. I've heard that the number of LoRa-certified sensors has increased by about 35% to 40% over the past year. My question is whether we have finally reached a tipping point for LoRa. I believe you mentioned, Mohan, that you expect to exit this year with approximately an $850 million pipeline, with around 50% of that converting to revenue over the next couple of years. If I calculate that correctly, it’s significantly higher than the 40% compound annual growth rate you’ve mentioned for that business. I'm curious to know what changes are occurring and what additional insights you can provide. Also, how much of an issue is the supply constraint for you in leveraging that backlog?

So, Rick, I believe you understood correctly. I do think the momentum is picking up now. We are beginning to see some of that funnel really convert to deployment. The challenge for us has always been figuring out when our large funnel, with numerous proofs of concept and customers who appreciate the technology, will lead to actual deployment. We faced setbacks due to the pandemic and issues in China over the past couple of years. However, I think we are starting to realize that this technology truly adds value in areas related to climate change, pollution control, safety, asset tracking, logistics, smart home initiatives, and smart city projects. It is highly effective for these applications. What we are observing is that some of the proofs of concept that have been ongoing are beginning to eliminate the bottlenecks. You pointed out sensors, and software is another area. With the announcement regarding the AWS IoT call platform, it eliminates the requirement for software development and addresses some of those bottlenecks. Over time, those bottlenecks will be resolved, making it straightforward to deploy an end-to-end LoRa use case. As this unfolds, we expect that not only will our funnel grow larger, but we will also gain increased confidence in the conversion rate into revenue. Additionally, as I mentioned to Triston, we are witnessing some major players discussing our technology. Amazon has heavily focused on the sidewalk initiative this last quarter, an effort led largely by them rather than us, and we are starting to see others employ the technology and discuss their own systems. This is all encouraging for us, especially with the cloud services and other developments on the horizon. It instills great confidence in the direction of our business. We will continue to monitor progress and aim to increase the number of gateways, connected nodes, and services, along with the value they provide, which should lead to ongoing revenue growth for us.

Thanks for that insight. Another area that has made great progress for your team is proximity sensing. Can you share your perspective on the current penetration rate of proximity sensing and where we stand today?

Yes, most phone manufacturers offer a variety of models. High-end phones, especially 5G devices with multiple high-powered radios, are integrating proximity sensing more frequently. Additionally, if a company operates globally and ships to regions like Europe and North America, incorporating proximity sensing becomes essential due to regulatory requirements, which are expanding worldwide. Therefore, I believe there will be a growing demand for proximity sensing in higher-end phones in the future. Currently, I estimate that approximately 30% of phones have this feature.

Thanks for that color.

Our next question is from Scott Searle of ROTH Capital. Please state your question.

Hey, good afternoon. Thanks for taking my questions. Just to go back quickly to LoRa, I wanted a couple of clarifications, Mohan. I'm not sure if I heard it in your opening comments, but you talked about proximity sensors being at record levels. Was LoRa at record levels in the quarter? It certainly looks like it based on the numbers and kind of how you expect that to build over the course of this year. Should we be thinking about sequential growth or even flattish? Because it looks like you're basically honing in on 40% plus growth where we are today. And it doesn't sound like you're counting on any sort of large-scale consumer contribution outside of China kicking in, in the current fiscal year?

Yes, Scott. So yes, LoRa was record, and I expect Q2 to be a record. And actually, we expect every quarter, LoRa to have a record quarter this year and to achieve that 40% growth at least. That momentum is very good for LoRa as well as it is proximity sensing. And then, yes in general, I would say that the business is just kind of firing on all cylinders. It's been for the last couple of years, it's been challenging. I think there's been a lot of headwinds. But I think now we're starting to see that momentum build up, and that's just playing out well for us.

Great. And lastly, if I could, on the Protection side of the business, you talked about a long-term or intermediate-term double-digit growth rate. Now certainly, in the near term, the handset market has been challenged, been constrained by other component availability. And I would expect that to bounce back. But when you think about that 10% plus kind of growth and the mix of your current business being more skewed towards mobile, the smartphone market is expected to grow mid to low single digits on a normalized basis over the next several years. So are you expecting to grow faster than that in mobile or the nonmobile components in terms of industrial and auto, expected to see such strong double-digit growth, that's kind of how you get to the 10%-plus growth number? Thanks.

Yes, a little bit of both, Scott. We are anticipating more diversification within mobile. For instance, displays and wearables are included in mobile, so it's not solely focused on Samsung phones. We expect that segment to continue growing. However, most of our R&D investments are concentrated in the broader Protection market. We hope to see growth well above double digits. While the overall market may not expand quickly, the total addressable market is large, and various segments are converging, necessitating higher-end Protection due to advanced interfaces being integrated into their systems. I mentioned HDMI 2.1, USB-C, and Ethernet infrastructure. Some of these require more advanced protection. Our aim is to increase our overall business growth at a faster pace.

Great. Thank you. Great quarter.

Thank you.

Our final question is from Tore Svanberg of Stifel. Please state your question.

Yeah. Thanks. Just some follow-up. First of all, Mohan, now that Matter is unifying some of the other IoT standards, should we view ZigBee and some of these standards as still competitors to LoRa, or with Matter can you start to see more cooperation between LoRa and Matter? Because I know in the past, you talked about sort of LoRa plus Wi-Fi and LoRa plus Bluetooth, and I'm just wondering also if there is a way to see LoRa plus Matter?

We don't focus on who we partner with; it's driven by customer needs. If a customer suggests creating a system combining LoRa with ZigBee, Wi-Fi, or another technology, we'll collaborate with them. This approach is one reason we've licensed our intellectual property to various companies, enabling them to develop diverse solutions. Our objective is to establish LoRa as the primary standard for LP-WAN across the industry. There are multiple paths to achieving this goal. The distinctiveness of LoRa adds significant value as an additional radio in a system. For example, when combined with 5G wireless, you have a high bandwidth radio alongside a low-power sensor connectivity radio. Some technologies may have complementary features, but many, like ZigBee, Z-Wave, and Wi-Fi in relation to low-power sensor connectivity, may share more overlap than synergy. Most other radio technologies, however, are quite complementary.

That's very helpful. And just one last clarification one for Emeka. When you talked about the OpEx staying at this level, could you clarify what you meant by that? Is that a percentage of revenue? And how much of an impact is the exchange rate having on OpEx, I guess, from a percentage perspective?

Yeah. So my comment was actually more towards the absolute dollar amount of the OpEx. I think, for our second quarter, the Q2 guidance, I think non-GAAP operating expenses would get it $65 million or something like that, if I remember correctly. So that's what I'm referring to that, I should expect that the operating expenses for the rest of the year to stay somewhat around that area, those levels. With regards to the FX impact, it is actually, if you think about the operating expenses been slightly above half the rate of revenue growth that we've talked about before, which is our model. Most of that is being driven. Most of that excess, if you will, has been driven by the impact of the weak US dollar.

Very helpful. Thank you.

We have reached the end of the question-and-answer session. I will now turn the call back over to Mohan Maheswaran for closing remarks.

In closing, we are pleased with our Q1 results and the strong start to fiscal year 2022. The company is benefiting from the strength of our growth engines, addressing the infrastructure, smarter planet and mobility markets that we believe will produce – provide sustainable long-term growth. We have been successfully navigating through the pandemic and more recently, the challenging supply chain environment. We have also doubled down on our commitment to sustainability efforts and our human capital development. Given our diverse product offering, balanced end market approach and strong customer relationships, we expect to deliver a record financial performance in FY 2022. 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, and have a great day.