Semtech Corp (SMTC) Q1 2023 Earnings Call Transcript

Thank you, operator. The 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, as of today only, and Semtech undertakes no obligation to update the information from this call should circumstances change. During this call, all the prices made about the financial results in my prepared remarks and Mohan's prepared remarks 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 financial measures are included in today's press release. In Q1 fiscal '23, the company delivered net revenue of $202.1 million, a sequential increase of 6% and an increase of 19% year-over-year and was once again above the midpoint of our guidance. These numbers include $2.9 million of revenue from our High Reliability business that we divested at the start of Q2. We continue to demonstrate leveraging our model by growing earnings at approximately twice the rate of revenue growth. Non-GAAP earnings per share grew 14% sequentially and 51% year-over-year. The strength of the secular drivers behind our growth engines of LoRa, Tri-Edge, PON-X, 5G, and systems protection platforms contributed to the strong net revenue performance despite the challenges presented by COVID and supply constraints. In Q1, shipments into Asia, North America, and Europe represented 76%, 13%, and 11%, respectively. While this represented the shift to address our distributors and customers, we estimate that approximately 33% of our shipments are consumed in China. 29% in the Americas, 19% in Europe, and the balance over the rest of the world. Total direct sales represented approximately 11% of net revenue and distribution represented approximately 89%. Our distributor POS represented another quarterly record, and the business remains balanced with approximately 40%, 35%, and 25% of the total POS coming from the infrastructure, industrial, and high-end consumer end markets, respectively. In Q1, net revenues from the high-end consumer market increased 2% sequentially and decreased 11% over the prior year and represented 24% of total net revenues. Approximately 12% of high-end consumer net revenues was attributable to mobile devices, and approximately 12% was attributable to other consumer systems. Net revenue from the industrial end market increased 4% sequentially and 42% over the prior year and represented 39% of total net revenues. Finally, the infrastructure end market increased 11% sequentially and 24% over the prior year and represented 37% of total net revenues. Q1 bookings decreased 23% sequentially and those bookings accounted for approximately 1% of our Q1 shipments. Q1 gross margin increased 30 basis points sequentially to 64.8%, a new quarterly record, driven by a higher mix of our growth engines. For Q2, we expect gross margin to respond to another record, reflecting the benefit of the continued strength of our growth engines. In fiscal '23, we expect our gross margins to trend higher, 100 to 200 basis points, from a favorable mix of our growth platforms. In Q1, operating expense increased slightly to $70.9 million, driven by higher staffing costs. For Q2, we expect our operating expense to increase slightly due to higher new product expenses. In Q1 of fiscal '23, operating profit grew 11% sequentially, approximately 2 times the rate of net revenue growth reflecting the higher gross margin and the modest increase in operating expense. Sequentially, operating margin expanded approximately 130 basis points to 29.8% and expanded approximately 550 basis points from the same quarter last year, representing solid progress toward our 32% to 36% long-term target model. We are seeing the strong operating leverage expected from the success of our growth platforms. In Q1, cash flow from operations was $50 million, up 54% from the same quarter last year. This is the result of the record operating profit and good management of working capital. Free cash flow increased 56% year-over-year. Cash flow generation in fiscal '23 is expected to be strong despite the strategic decision to maintain higher levels of inventory because of strong demand and supply cost trends. In Q1, we repurchased approximately $50 million or 1.2% of our outstanding stock. We have approximately $209 million remaining in our share repurchase authorization. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down debt. Q1 accounts receivable decreased 7% sequentially and days of sales declined 4 days to 31 days. In Q1, our net inventory in absolute dollar terms decreased 6% sequentially and days of inventory decreased 6 days sequentially to 140 days, primarily reflecting the value of the inventory reclassified as available for sale as a result of the divestiture of our high-reliability discrete business. We expect our net inventory to remain above our target range of 90 to 100 days to support the higher demand and the tighter supply chain environment. In summary, we are very pleased to deliver another record financial performance in Q1 despite the supply chain constraints and continued pandemic headwinds. We are pleased to see our years of investment in technology platforms that enable us a smarter sustainable planet, drive record sales, record gross margin, and record earnings per share. Our cash flow generation remains strong. The financial model is delivering strong leverage. In fiscal year '23, we believe the long-term secular nature of our growth engines position us nicely for another record financial performance in fiscal year '23.

Thank you, Emeka. Good afternoon, everyone. I will now discuss our Q1 fiscal year '23 performance by product group and provide our outlook for Q2 of fiscal year '23. Our Q1 of fiscal year '23 net revenues of $202.1 million represented a 6% sequential increase and a 19% year-on-year growth and represented another exciting Semtech record. We posted record non-GAAP gross margins of 64.8% and record non-GAAP earnings per diluted share of $0.80. These numbers include $2.9 million of revenue from our high reliability discrete business that we divested at the beginning of Q2. Our Signal Integrity Product Group grew 19% annually and achieved a fourth sequential quarterly revenue record and represented 40% of total revenues. As expected, growth was driven by the data center and PON markets. In Q1, our hyperscale data center business was strong, led by growth from our Tri-Edge PAM4 short reach platform. Design-ins of Tri-Edge in 100-gig, 200-gig, and 400-gig PAM4 optical modules and active optical cables continue to gain momentum globally. In Q1, revenue from Tri-Edge increased over 100% over the prior quarter, and we continue to believe our hyperscale data center Tri-Edge revenues will triple in FY '23 as more customers move to full production and we increased our market share over DSP solutions in the 200-gig and 400-gig PAM4 segments. Our customers are also giving us positive feedback on our long-reach Tri-Edge, targeted at 200-gig FR4 optical modules. This will be another growth driver for us over the next few years. These new longer-reach devices approximately double our SAM in the hyperscale data center market. We remain confident that Tri-Edge's ultra-low power, low cost and low latency together with FiberEdge high performance will enable us to continue to grow our hyperscale data center business over the next several years. Our PON business grew approximately 14% sequentially and achieved a seventh consecutive record revenue quarter, driven by continued strength from our 10-gig and 2.5-gig PON platforms. Global demand for higher access bandwidth remains strong with new deployments and new use cases emerging. In addition to the China market, which continues to lead PON demand, U.S., Indian, and European service providers have also announced PON deployments, which we believe bodes very well for future PON demand growth. Semtech is the leading PMD supplier to the global PON market, providing the most comprehensive PON PMD portfolio. We are now sampling to customers our latest innovative 25-gig first mode transimpedance amplifier, part of our PON-X platform for next-generation PON networks. Our PON business continues to show significant strength, and we are confident that this business will grow nicely over the next several years as PON bandwidth increases. In Q1 of FY '23, revenue from our wireless base station business showed solid growth on the strength of 4G and 5G base station deployments. We continue to win new designs for both ClearEdge and Tri-Edge in 5G base station front haul optical modules. We announced production release of the industry's first Tri-Edge PAM4 platform for 5G front haul optical modules, which has already achieved many design-ins. We expect qualifications to be completed and initial revenues to begin to grow later this year. We are also now sampling the industry's first Tri-Edge platform with integrated EML driver for 5G mid-haul applications. We expect our 5G wireless base station business to continue to grow in FY '23 and accelerate over the next few years as global 5G system deployments accelerate, driven by new 5G tenders expected in the second half of fiscal year '23. The underlying secular demand strength we witnessed in FY '22, driven by the quest for higher bandwidth at the lowest power across all infrastructure segments is expected to continue into FY '23. In Q2, we expect our Signal Integrity Product Group revenues to increase and deliver another quarterly revenue record. Moving on to our Protection Product Group. In Q1 of fiscal year '23, net revenue from our Protection Product Group increased 23% over the same period last year and represented 27% of total revenues. Our consumer protection business was approximately flat as weaker China and North American smartphone demand was offset by stronger Korean smartphone demand and broad consumer demand. The strategy to diversify our protection business into a broader range of segments is proving very successful. Our broad-based protection business increased nicely in Q1, driven by growth from the automotive, communications, and industrial segments, and now represents approximately 40% of our total protection business. As more system designers are using chips with advanced process geometries, we are seeing demand for Semtech's higher performance protection products increasing across all market segments. Particular bright spots are the automotive and infrastructure markets due to the growth of USB-C, Ethernet, and HDMI interfaces. These growth areas continue to also have a positive impact on our gross margins. In Q2 of fiscal year '23, we expect our protection revenues to increase. Turning to our Wireless and Sensing Product Group. In Q1 of fiscal year '23, revenues from our Wireless and Sensing Product Group increased 15% over the prior year and represented 33% of our total revenues. In Q1, our LoRa-enabled business achieved another new record as the adoption of LoRa in low-power IoT applications across the globe continues to accelerate. We are seeing many new applications and use cases for LoRa. Some of the new innovative applications that are driving sustainability and enabling a smarter planet include ICT International's use of LoRa for environmental applications. By integrating LoRa sensors into their water quality monitoring systems, they can now extract real-time data to improve crop health and yield while decreasing costs. Smart planet in Australia has integrated LoRa into smart tags for the livestock industry to analyze cattle behavioral data and solve real-world livestock management issues. This is another example of how LoRa is enabling the future of smart farming. Utility launched a new LoRa-based self-powered energy monitoring solution, which allows energy data to communicate directly from an electrical panel to the cloud. This is another example of how the adoption of LoRa is enabling the Smart Utility segment to deliver sustainable, efficient energy usage and communicate to integrate, announced a new innovative smart plant, a cloud-based solution for smart irrigation systems. This system monitors temperature, humidity, and other important metrics in real-time to maintain the health of a farm, resulting in improved crop yields, water efficiency, and sustainability. These are just a few examples of exciting new LoRa cases being deployed. We are inspired by the growth of LoRaWAN-based networks and LoRaWAN-based sensors and the plethora of new LoRa-based use cases emerging. Our LoRa metrics also continued to make very positive progress. The number of LoRaWAN network operators grew from 165 at the end of Q4 to 170 by the end of Q1. New LoRaWAN operators are launching networks in markets like Portugal, Germany, and Vietnam. At the same time, private networks are also experiencing explosive growth. This new landscape for LoRaWAN networks shows great growth in diversity of networks from public networks to community-based networks to satellite-based networks and to private networks as well as hybrid network approaches, which is a key competitive differentiator for LoRaWAN. We expect approximately 180 public LoRa network operators by the end of FY '23. The number of LoRa gateways deployed increased to 4.2 million gateways from 3.2 million at the end of fiscal year '22. We expect the number of LoRa gateways deployed to increase to over 5 million by the end of FY '23. We are delighted with the large increase in gateways deployed globally as this infrastructure is critical to enable the broad range of emerging use cases. Picocell gateway deployments continue to increase nicely, driven by smart home and smart campus segments as Amazon Sidewalk gateway deployments increased 35% versus Q4 of fiscal year '22. In addition, the Helium Peoples network is growing very fast and was recognized in Fast Company as a world-changing idea in 2022, built on LoRa technology. Both Sidewalk and Helium networks should drive acceleration in end device deployments over the next several years. In addition, our macro gateway deployments increased 6% over Q4 of FY '22, driven by smart utility, smart logistics, and Smart City initiatives globally. The cumulative number of LoRa end nodes deployed increased to 256 million at the end of Q1 from 240 million at the end of FY '22. We expect this number to exceed 300 million cumulative end nodes by the end of FY '23. With continued network expansion globally, we expect end node deployments to accelerate rapidly over the next 3 to 5 years. The LoRa opportunity pipeline, which includes both opportunities and leads, ended Q1 at just under $1 billion. We anticipate that, on average, 40% to 50% of the opportunities currently in the pipeline will convert to real deployments over a 24-month timeline. Our opportunity pipeline is growing rapidly with use cases primarily around sustainability and smarter planet initiatives in areas like smart utilities, smart logistics, asset tracking, industrial IoT, smart home, and smart cities, where innovative solution providers are using LoRa to monitor, measure, and manage resources more efficiently. At the end of fiscal year '23, we expect our total opportunity pipeline to exceed $1.3 billion. In Q1, we also announced the extension of our LoRa Edge device-to-cloud geolocation platform to enable the use of satellite-based networks. The addition of S-band connectivity to the platform enables direct satellite connected IoT applications in supply chain management and logistics with seamless low-power geolocation on a global scale. Our LoRa Edge platform now enables LoRaWAN, satellite, and GNSS connectivity for outdoor geolocation and LoRaWAN and Wi-Fi connectivity for indoor geolocation. In Q1, revenue from our proximity sensing platforms remained flat due to seasonal softness and pandemic-related challenges in China. We are expecting increased SAR regulations in Asia later this year to drive proximity sensor growth in the 5G smartphone market over the next several years. Additionally, we are seeing traction in the consumer wearable market as customers utilize proximity sensors for gesture recognition and other applications aimed at enhancing user experience. For Q2 of fiscal year '23, we expect net revenues from our Wireless and Sensing Product Group to be approximately flat as continued positive LoRa momentum is offset by a weaker consumer proximity sensing business. In Q1, we announced 9 new products across our portfolio and achieved 3,200 new design wins. Looking forward to the second quarter of fiscal year '23 and following a very strong Q1, we are estimating revenue for Q2 between $203 million and $213 million. To attain the midpoint of our guidance range or approximately $208 million, we needed turns at the beginning of Q2. We expect our Q2 non-GAAP earnings to be between $0.80 and $0.90 per diluted share. Note that our guidance no longer includes any high reliability discrete revenues.

Yes, good afternoon. This is Jeremy calling for Tore. First of all, congratulations on the record quarter. I have a question about the protection business. It's great to see the broad base growing so well. When do you anticipate reaching over 50%? Also, which of the three sub-segments are contributing to that growth?

It's a good question. It's something we're striving to achieve, but our consumer protection design wins continue to be very positive as well. So obviously, the automotive is probably the strongest at the moment. I would say communications and then the broader industrial and IoT within our protection business are all doing well. They do take longer. The design wins to revenues take longer in the broader market. So I think the percentages will be volatile, but it's trending in that direction. So probably over the next 3 years, I would expect 50% to be kind of realized for each segment.

Great. Turning to the Tri-Edge product, which is your PAM4 analog solution, can you share any details about your partners and which regions or areas you expect to see the most growth in this business?

Yes. We're getting momentum across all regions, I would say. Obviously, very good momentum in China, and very good momentum in North America, where the two biggest regions for data centers are today. It's where most of the SAM is. I think with our long-reach products that are now being sampled and getting good feedback will get even more kind of balanced across regions there. But yes, it's pretty broad at the moment.

And by long reach, can you give us the range?

Yes, the shorter reach products are kind of less than 100 meters and the longer reach is kind of in the 2 kilometers to 10-kilometer range.

Great. Thank you very much.

Hi, good afternoon. Follow-up question on your protection business, obviously, very strong, driven by automotive and industrial orders. When I exclude the consumer piece of that, which is weakening, what is the sustainability? And could you elaborate a little bit on the longer-term drivers that you see for your protection business?

Let me start with the consumer aspect. I wouldn't say it's weakening; rather, it's mainly driven by macroeconomic challenges. We are still performing well in the consumer sector, with numerous successful design wins. As customers adopt advanced lithographies, we expect that segment to grow as long as the macro environment improves as well. The broader protection business is also thriving, partly due to the increased use of advanced lithographies in those areas. Inside vehicles, there are many features, from displays to Ethernet ports, communications, antennas, and USB ports, which means more electronics are being integrated. The same applies to other sectors like industrial and IoT. Some of these areas are utilizing advanced processes, where Semtech's protection solutions excel. Given that this has been a focus for us over the past couple of years and we have more products in the pipeline, I believe this business will continue to expand. While it has a higher gross margin, it isn't as high volume as the consumer segment, but it tends to be less volatile and more stable. Therefore, I anticipate it will be a strong business for many years to come.

Great. And then for my follow-up question, how should I look at the impact of the lockdowns in China that you think you can recover in the second half of the calendar year versus just weak demand in China where there is a less clear outlook on when that is going to recover?

Yes, there are different factors at play, Tristan. Firstly, bookings have been weaker primarily due to China being in a shutdown phase, along with challenges in contract manufacturing and supply chain issues. I anticipate that both areas will start to recover as China moves out of lockdown and returns to a more normal state. Furthermore, there are specific dynamics affecting shipments from China to Ukraine and Russia, which have led to softer demand in the smartphone sector. This situation may take longer to improve. However, generally, after experiencing a period of stagnation, China tends to invest heavily in infrastructure, so I expect to see growth catch up in the second half of the year. While it's still uncertain, that's the outlook we're anticipating.

Yes, thanks for taking the question. And I'll start with just a question for Emeka. Emeka, gross margins are tracking a little bit better in the outlook than I expected, albeit consistent with what I think you had called for previously with a 100 to 200 basis point gain this year. The question is, is there any benefit to gross margins from that divestiture? Or are we just seeing the underlying mix dynamics that you've been talking about, just give us another leg up sequentially?

Yes, definitely, there is a slight benefit to gross margin from the divestiture. But given that, that business is pretty small, it was probably about $14 million to $15 million a year type of business. The overall impact is not that huge. The key driver behind our gross margin expansion continues to remain the growth engines that we've talked about. So as we continue to see success with LoRa as we continue to see our Tri-Edge gaining traction out there and continue to increase our share, we'll continue to see the benefits of diversification efforts in protection into industrial, automotive, and PON-X, our PON platform that has actually got gross margins around the corporate average. I think as we continue to see a higher mix of all of this as part of our revenue, our gross margin should continue to see some slight expansion.

That's great. And then the follow-up question is for you, Mohan. Based on my tally of your comments on the LoRa metrics, it looks like everything is tracking to the metrics you provided a quarter ago. So one, I just wanted to clarify that? And two, it does seem like across every one of them, there's good progress. So is it fair to say that despite what is a very tumultuous macro environment, you continue to have strong engagement with customers deploying LoRa and with or uptake?

Yes, Craig. I believe that's a reasonable conclusion. Our metrics appear to be on track, and we feel there's good momentum. I am quite confident in the remarks I made regarding the expansion of the infrastructure. There are many gateways, and the current funnel looks very promising. We need to ensure that we effectively convert that funnel into revenue. Typically, we expect this conversion to take around 24 months. However, if we enter a recessionary environment, that timeline may extend. Nevertheless, the use cases we are observing, which focus on smarter planet initiatives, energy management, resource management, and asset management, will support growth as these initiatives become more prevalent globally. I don't anticipate any slowdown. Additionally, LoRa complements these smarter planet initiatives exceptionally well. We are closely monitoring the various use cases in different regions, and our pipeline is quite encouraging. It's essential to collaborate with our customers to eliminate any significant bottlenecks, which may relate to sensors or software. By addressing these challenges with our customers and the ecosystem, I believe we can achieve our dashboard metrics, driving future growth. I remain fairly optimistic about this.

Our next question comes from the line of Rick Schafer with Oppenheimer. Please proceed.

Yes, thanks. Congrats on a nice quarter, guys, a nice guide, ex the divestiture. Maybe a follow-up question on LoRa? I mean, by my math, LoRa close to $50 million this past quarter, up better than 50% kind of year-over-year, I think, again, by my math, it seems to be either sort of in line with last year's growth rate or even accelerating. So I don't know if you basically feels like the 40% growth target is covered this year. I was just curious if you guys could talk about where backlog is today and how far it extends out into next year? Just trying to get a sense of your visibility into next year's kind of run rate.

Yes, Rick. So next year is a little bit far out, I would say at Q1. But I think for the rest of most of this year, we're in pretty good shape. Obviously, we don't need any turns for Q2. We're keeping a close watch on consumption. I think that's really the key. Obviously, Q1 is another record. We are on track. We are very comfortable with our 40% CAGR. The guide that we've given to you guys for the next few years, and we're on track, I think, to achieve that goal this year. And the key for us is really, as I mentioned, looking at the funnel and making sure the funnel is converting and some of those large opportunities in the funnel, which are fairly broad and more balanced in nature from a geographical region standpoint, they really become realized. And I think if they do then we are very comfortable with the ongoing plans for next year. For this year, I think we're in pretty good shape. I don't see any real issues. I think obviously, a lot depends on the macro. But so far, I think we have pretty good visibility for most of this fiscal year.

Okay. And then as my follow-up, I'm just curious, everybody's talking about investing, prepaying and future capacity, and you guys have done such a great job keeping cost down expenses growing, I think, on average about half the top line. So I was just curious if you can level set us sort of what your plans are there? Is there anything kind of coming up that would cause OpEx to sort of accelerate or grow faster than the sort of targets we've seen?

Hi, Rick. Thank you. Like you've noted, we've done a good job of managing OpEx, and we've always done a good job of that. Now as I look ahead, I don't really see anything out of the ordinary. We will continue to make the investments in new products in some of the exciting growth areas that we have. We'll continue to make those investments. I think given the environment these days of employees being able to change jobs and things like that, we are making sure that we are taking good care of our employees, making sure that they are properly compensated. But there is nothing really out there that I would say that is going to drive a significant increase in our operating expenses beyond the levels that we have publicly articulated.

Our next question comes from the line of Trevor Janoskie with Needham & Company. Please proceed.

This is Trevor on for Quinn. And thanks for taking my question. Since we're hearing concerns about consumer weakness potentially carrying into other segments, we're wondering if you could provide more color on the current data center demand, like has there been any changes that could be concerning? And perhaps how is your visibility into the second half?

Trevor, you mentioned consumer trends and then followed up with a question about data centers. The data center segment remains strong, and we don't anticipate any significant problems there. However, consumer demand is weak, particularly in the smartphone sector, while PC and computing have also shown some weakness related to consumer spending. This decline is partly due to people returning to the office and not working from home, and also linked to the war, which has negatively impacted demand in certain regions. The overall situation is very regionally dependent, with China currently facing challenges. However, there is potential for a rebound in the second half of the year, though much will depend on the macroeconomic environment and inflation, which could contribute to ongoing consumer weakness. If inflation stabilizes, it's possible the semiconductor industry, which is still somewhat supply-constrained, may see increased demand for the rest of the year. Overall, consumer demand is currently a bit weak.

Strong congratulations. Very good results and guide. Mohan, I was wanting a little bit more color on LoRa. I was curious now that your gateway business is humming with Amazon. I was curious if you would be able to provide us a rough split of revenues between nodes versus gateways? Or give us some color if you don't want to give us the exact percentages?

We won't break out the specifics, Harsh, because it's quite different. For macro gateways, we sell devices for $15, and a picocell gateway might be $5. In Amazon's case, it's even less. Therefore, the unit volume doesn't necessarily provide a clear picture when estimating how many gateways there are. However, I can share that our gateways are seeing solid growth overall. As I mentioned earlier, Amazon Sidewalk Gateways grew by 35%, macro gateways by 6%, and Helium gateways by over 40%. So, we are experiencing positive growth in gateway deployments. It’s important to note that gateways serve as infrastructure, and the focus now is on connecting sensors to those gateways, which will drive future growth. Moving forward, I don't believe the number of deployed gateways is particularly significant since there’s plenty of capacity available. The key question is what will drive the use cases that lead to sensor connectivity with those gateways, and that’s our main focus at this time.

Appreciate it, Mohan. Then I had maybe one or two for Emeka. Emeka, I'm not sure if I heard this correctly, but if I didn't, please correct me. But I thought you said the bookings were down 23% in 1Q. And I was curious, was that just a function of turns? Or is there something going on that maybe you could provide us some color on? And then my second part of the question was slightly separate. The buyback, you guys stepped up pretty big, obviously, to help the stock out and you talked about $200-something million remaining on our buyback. I guess I'd be curious about your view. Are you of the opinion that you're stacking very cheap here that you'll be very aggressive at these levels, and we should expect similar kind of take-up in buyback from Semtech at this level? Just color, again, looking for color.

Sure. Sure. Harsh, I think you heard it correctly. I did report that our bookings were down 23% in the quarter. But we started out the quarter with bookings being very strong and things can have dropped off around the time that China started to shut down because of COVID. So I think a lot of the decrease is a COVID-driven out of China. The expectation is that our sales start to open up. We're pretty excited. I think today or yesterday, we heard that Shanghai has been in to open back up, and some parts of Beijing are also looking to open up. So the expectation is that things will start to get better in that area.

And let me add one other comment on the bookings, Harsh. Bookings have been extraordinarily strong for almost the last I would say the last year. So remember, we've got a lot of visibility at the moment. Backlog is very strong. So I don't know that bookings is a good metric at this point in time. You probably want to start looking at consumption as a better metric.

That's a great point, Mohan. I want to remind everyone that our first quarter point of sale was a record for the company, indicating that consumption remains strong. Regarding the buyback, we’ve previously mentioned that our intention is to repurchase shares in order to manage dilution from employee grants. As for valuation, Harsh, we believe it’s up to investors to determine that. We are confident that our business is currently supported by robust fundamentals, as Mohan has previously stated. The company is strategically well-positioned, and we believe we are only at the beginning of a multi-year period of double-digit growth. When it comes to our worth and valuation, we’ll leave that to you to assess while we focus on running the business and delivering results.

Hey guys. Thanks for taking my question. I had just one question, and it's an extension of what Harsh was asking about. So I'm trying to reconcile the difference between a 23% decrease in bookings and what is essentially 5% sequential revenue growth adjusting for the sale of the high rail business. And so if I presume you're living a little bit off the backlog. And so my question is, will this slowdown in bookings, however long it will continue, manifest itself in the second half of the fiscal year?

The answer to that is it depends. If the situation continues to be exceptionally weak, it could start affecting Q4, but it's more likely that we will see the impact next year. We've had strong bookings, similar to many of our industry peers, due to supply constraints. Most companies, including us, are fully booked and have a substantial backlog. We don't anticipate needing any turns this quarter, and next quarter looks promising. However, we do need to consider Q4 and how next year unfolds. It's essential to maintain some momentum in bookings, but it was unrealistic to expect the previous booking rate to continue, which was extraordinarily high. The recent drop-off is helping to normalize those figures. The crucial factor to monitor is consumption. If customers continue to use the materials, as we are closely observing, everything should be fine. That is the key metric to focus on.

Hey good afternoon. And thanks for taking my questions. And I appreciate all the color on LoRa and on some of the other businesses, particularly the reinforcement of the 40% CAGR. Maybe just to follow up on a couple of the earlier questions related to LoRa. Mohan, China had been a big portion of the mix in the past, and you guys have been diversifying away from that. I'm wondering if you could update us in terms of LoRa's China contribution, how that factors into the mix? And then looking out to the remainder of this year, you're starting to see the ecosystem develop more and more around Amazon Sidewalk and Helium. I'm wondering how you're thinking about that in terms of the contributions to the model, what you're kind of factoring in, how aggressive that is in terms of the build-out of the ecosystem for this current fiscal year?

Yes. Scott, most of the smart home-related opportunities in our funnel, we don't have a tremendous amount of revenue yet from that segment. And I would say that's true of the smart home and the smart campus segment. So when you look at the revenues today, most of the revenues are coming from the use cases that have been in deployment for the last few years. So smart utilities, smart city, industrial IoT, smart ag, those type of more traditional industrial use cases. And a lot of that is China, of course, as we mentioned before, 50% of our business in LoRa comes from China. But the funnel, the opportunity funnel really starts to get interesting as you look at the details. A lot of that is smart home, it's smart asset tracking logistics and driven out of both Europe and North America. So that's what we need to convert and make sure that they realize revenue. We are quite comfortable now that the infrastructure is going in place. That's kind of the first major hurdle, but that seems to be overcome now, obviously, with gateways going out there. So we've got pretty good alignment there. Now it's a question of getting the other aspects of the use case result, and that sensors and software and just the different economics around each one. So which we're very confident about. A lot of it started to type of smarter planet and sustainability. So I think it's going to happen. It's just a question of timing.

Okay. Very helpful. And if I could, switching gears over to the data center front. Some competitors have talked about the ecosystem and supply chain becoming a little bit more challenged with China lockdowns. I was wondering if you could update us on your thoughts if you're seeing any impact as it relates to supply chain issues into the data center end markets? And also, how we should be thinking about the growth rate in terms of your business for data center? You've got a lot of new products that are coming to market early but getting a lot of traction. Is this something that should be growing 20% plus over the next couple of years? And then I had one last question.

Yes, on data center growth, we definitely expect double-digit growth, likely in the high teens range. This will depend on the increase in PAM4 and specifically long reach products. We're performing well in the short reach segment, which is expected to grow at a faster rate. However, we still need to secure design-ins for the longer-reach products, and we believe we will achieve that. This will serve as a strong growth driver for us. Regarding supply constraints, the issue is less about actual supply and more about contract manufacturers being unable to produce at previous levels. They've scaled back their production, but as Emeka mentioned, we're starting to see improvements, and we anticipate a return to normal levels soon. We hope to eliminate these issues by the end of this quarter, although much will depend on the COVID situation in China. That's our current outlook. Yes, that's a good question, Scott. We've always been open to acquisitions, and if you examine our businesses, they all originated from acquisitions. Over the past five years, due to instability in the geopolitical environment, various macro events, and the pandemic, we haven't prioritized acquisitions. However, as conditions begin to stabilize, we will review our balance sheet more closely and explore potential strategic deals to enhance our position. While we haven't actively pursued acquisitions recently, they remain an important aspect of our strategy moving forward.

This concludes our question-and-answer session. I'd like to turn the call back to Mohan Maheswaran for any closing remarks.

Thank you. In closing, we were very pleased with our record Q1 results. Despite the challenging pandemic and supply chain environment, our multi-sourcing initiatives and our investments in inventory, infrastructure, and tools continue to enable us to support our best-in-class business operations. Our innovative growth engines driving our Smarter Planet initiatives are all doing very well. We expect FY '23 to deliver another record year for Semtech. 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. Thank you for your participation. You may now disconnect.