Semtech Corp Q2 FY2023 Earnings Call

Greetings and welcome to the Semtech Corporation Conference Call to discuss the Second Quarter Fiscal Year 2023 Financial Results. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, Semtech's Executive Vice President and Chief Financial Officer. Please note, this conference is being recorded. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the call over to Semtech's Executive Vice President and Chief Financial Officer, Emeka Chukwu.

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 financial results in my prepared remarks and Mohan's prepared remarks, we 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 Q2 fiscal 2023, the company delivered record net revenue of $209.3 million, a sequential increase of 3.5% and an increase of 13.1% year-over-year. While in a challenging business environment, we focused on operational execution and were able to grow our earnings at approximately twice the rate of revenue growth, delivering non-GAAP earnings per share growth of 9% sequentially and 34% year-over-year. Our business continues to see relative strength in North America and Europe, with a significant shift to the industrial and data center segment. This shift aligns with our strategy to diversify our geographic and end markets. We saw significant growth in the infrastructure end market, growing 11% sequentially and 25% over the prior year, representing 40% of net revenues. Net revenue from the industrial end market also grew nicely, up 7% sequentially and 44% over the prior year, representing 40% of total net revenues. Like many, we are seeing softness in consumer end markets, where net revenues for high-end consumer decreased 14% sequentially and 31% over the prior year, representing 20% of total net revenues. Approximately 9% of high-end consumer net revenues were attributable to mobile devices, and approximately 11% was attributable to other consumer systems. Overall, Q2 shipments into Asia, North America, and Europe represented 72%, 16%, and 12%, respectively. While this represented the shipping addresses for our distributors and customers, we estimate that approximately 35% of our shipments originate in China, 28% in the Americas, and 21% in Europe with the balance distributed across the rest of the world. Total direct sales are stable at approximately 12% of net revenue and distribution represented approximately 88%. Our distributor POS declined during the quarter but remained balanced, with approximately 45% of POS coming from infrastructure, 31% from the industrial segment, and 24% from the total POS coming from the high-end consumer end market. Q2 bookings decreased sequentially and represented a book-to-bill of less than one. In addition to inflation, recession fears, and continued supply chain challenges, the effects of COVID are still driving some of the downturn we see in China. Q2 gross margin increased by 40 basis points sequentially to 65.2%, a new quarterly record driven by a higher mix of our growth engines. For Q3, we expect gross margin to respond positively, reflecting the benefit of a lower mix of consumer revenue. We expect this trend to continue in fiscal 2023, where we expect our gross margins to trend higher by 100 to 120 basis points due to a favorable return mix of our growth platforms. Q2 operating expense increased slightly to $71.9 million, driven by new product introduction expenses. For Q3, we expect our operating expenses to decrease approximately 7% sequentially as we manage through and respond to a weaker demand environment. We will, however, continue to invest in new product innovation to sustain our market positions under our long-term growth. In Q2 fiscal 2023, operating profit grew 7% sequentially, approximately two times the rate of net revenue growth, reflecting the higher gross margin and modest increase in operating expense. This strong operating leverage drove an expansion of operating margin to approximately 30.8%. This represents a sequential expansion of 100 basis points and 370 basis points from the same quarter last year. In Q2, cash flow from operations was a record $77 million, up 46% from the same quarter last year. Free cash flow increased by 52% year-over-year. Cash flow generation has benefited from our record operating profit and our focus on exceptional management of working capital. In Q2, we did not report outstanding stock because of our pending acquisition of Sierra Wireless. We have approximately $209 million remaining in our share repurchase authorization. Going forward, we expect to primarily use our cash to pay down the expected debt from completing the Sierra acquisition. Q2 accounts receivable increased 7% sequentially due to higher sales, and the days of sales declined slightly to 30 days. In Q2, net inventory in absolute dollar terms was up slightly sequentially, and days of inventory decreased by seven days to 133 days. We expect net inventory to increase in Q3, reflecting the weaker demand environment. In summary, we are very pleased to deliver another record financial performance in Q2. As we look ahead to a much softer second half of the year driven by macro issues, we expect to see stable gross margins and the reduction of operating expenses to help mitigate the impact of weaker demand on operating profit. We will continue to invest in product innovation to take advantage of our strong market position and sustain our long-term growth. Before I hand over to Mohan, I want to provide an update on the status of the proposed acquisition of Sierra Wireless. We are still on track to close the acquisition in the second half of this year. As previously announced, we have fully committed debt financing for the transaction and are currently in a syndication process to achieve an optimal debt structure and cost of capital. We are excited about the strategic opportunities that this proposed acquisition brings to us. We look forward to closing the transaction as soon as possible and begin delivering on our vision. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone. I will now discuss our Q2 fiscal year 2023 performance by product group and provide our outlook for Q3 of fiscal year 2023. In Q2 fiscal year 2023, net revenue was a record $209.3 million, representing a 3.5% sequential increase and a 13% year-on-year growth. We posted record non-GAAP gross margins of 65.2% and record non-GAAP earnings per diluted share of $0.87. Our Signal Integrity Product grew 19.5% annually and achieved a fifth consecutive quarterly revenue record, representing 42% of our total revenues. Growth was driven by strength from the PON and data center markets. In Q2, our hyperscale data center business was strong, led by growth from 100-gig optical modules. Design wins of our Tri-Edge short reach platform for 200-gig and 400-gig PAM4 optical modules continued to gain momentum globally. Our customers are also providing us positive feedback on our long reach Tri-Edge samples, targeted at 200-gig FR4 optical modules. This will be another growth driver for us over the next few years as this new longer reach platform increases our data center PAM by over 50%. We expect strong growth from Tri-Edge over the next few years. We recently announced our new, highly innovative CopperEdge platform targeted at short reach copper interconnects and active copper cables used in data centers. This new product portfolio targets 400-gig and 800-gig data center applications and represents a complete shift for Semtech. The first product in this new portfolio is a quad 112-gig PAM4 linear equalizer offering lower power and lower latency. We are currently sampling this new product and will be showcasing its performance at the European conference on optical communications next month. We remain confident that our full portfolio of data center products, including ClearEdge and Tri-Edge CDRs, FiberEdge PMDs, and CopperEdge equalizers will enable us to continue to grow our hyperscale data center business over the next several years. In Q2, our PON business achieved a seventh consecutive record revenue quarter, driven by notable strength from our PON-X 10-gig PON platform. As global demand for higher access bandwidth grows and new global PON deployments and use cases emerge, our comprehensive PON portfolio along with our innovative roadmap positions us extremely well in the global PON market. The PON market is growing rapidly, and we expect new PON tenders in the second half of FY 2023 to stimulate further market growth. Our PON business continues to show strength, and we remain confident this business will grow nicely over the next several years as PON deployments and PON bandwidth increase worldwide. In Q2 of FY 2023, revenue from our wireless base station business showed solid annual growth on the strength of 5G base station deployments. We continue to win new designs for both ClearEdge and Tri-Edge in 5G base station PAM4 optical modules. We expect our 5G wireless base station business to continue to grow in the second half of FY 2023 and accelerate over the next few years as global 5G system deployments increase driven by new 5G tenders in the first half of FY 2024. We also expect to see our first Tri-Edge revenues from the 5G base station market in the first half of FY 2024. Despite the secular demand strength and strong design win momentum associated with our infrastructure platforms, the macro environment is showing signs of slowing and we continue to experience COVID-related issues in China. As a result, we expect infrastructure demand to decline in the second half relative to the first half of FY 2023. We expect the Signal Integrity Product group revenues to decrease slightly in Q3. Moving onto our Protection Product group. In Q2 of fiscal year 2023, net revenue from our Protection Product group increased 10% over the same period last year, representing 26% of total revenues. Our consumer protection business remains soft during the quarter, as strength from our North American smartphone customers was offset by smartphone weakness from both China and Korea. North America now represents the largest region for our smartphone protection business, surpassing both Korea and China for the first time in Q2. Our efforts to diversify our protection business continue to be successful, and our growing revenues from the automotive, communication, and industrial segments now represent approximately 42% of our total protection business. Our high-performance protection products continue to see greater market acceptance across all industry market segments, as system designers increasingly utilize advanced process geometries and higher speed interfaces. In Q3 of fiscal year 2023, we expect our Protection revenues to decrease due to a weaker consumer market driven by ongoing weakness from our Asian smartphone customers. Turning to our Wireless and Sensing Products group. In Q2 of fiscal year 2023, revenues from our Wireless and Sensing Products group increased 8.1% over the prior year and represented 32% of our total revenues, delivering another record revenue. Our LoRa-enabled revenues achieved another record in Q2 and remain on track to grow approximately 40% this year. We continue to expect our LoRa-enabled revenues to grow at a 40% CAGR over the next five years. Strong gateway deployments have set a solid infrastructure foundation, which should enable the proliferation of ultra-low power sensor networks across numerous use cases. Global customers are recognizing the importance of deploying ultra-low power IoT sensor networks to accelerate the digitization of their industrial assets or to mitigate climate change impacts. Here are some recent examples of LoRa use cases. CITiLIGHT launched a new smart city lighting platform using LoRaWAN. CITiLIGHT noted that they have saved 1.29 billion kilowatt hours of energy through the implementation of smart street lighting in more than a hundred cities. This new platform will help them further accelerate their global expansion plans. Cranberry Analytics announced new LoRa-based smart water meters, which allow for effective planning of water distribution as well as real-time monitoring leakage analysis and mitigating water waste. WITRAC's new intelligent track and trace platform, which uses both LoRaWAN and cellular connectivity, is providing a new code chain asset tracking and management solution. SkyLab and HeNet, which leverage Semtech's 2.4 gigahertz solution, are using LoRa to optimize global maritime logistics and sea condition monitoring for passenger vessels. We recently invested in Dryad and their Silvanet early wildfire detection and forest monitoring system based on solar-powered LoRa-based mesh networking. Wildfires have become a major driver of climate change, generating up to 20% of global CO2 emissions while costing the global economy approximately US$140 billion to date. Dryad's LoRa-based solution aims to provide an innovative monitoring system to help mitigate wildfire damage. These are just a few examples of exciting new LoRa use cases being deployed globally today. In Q2, the LoRa Alliance recently held their global expo with excellent attendance and solid media coverage reaching over 3.5 million business leaders with exposure to LoRaWAN. The LoRa Ecosystem continues to expand as measured by new service providers, OEMs, and system integrators, joining the LoRa Alliance, and we expect the Alliance and Ecosystem to continue to grow for many years to come. Our LoRa metrics also continue to make very positive progress. The number of public LoRaWAN network operators grew to 173, up from 170 at the end of Q1. Private networks are also experiencing significant growth as evidenced by many new use cases and applications. We expect approximately 180 public LoRaWAN operators by the end of FY 2023, and expect to have near nationwide LoRaWAN coverage in 20 of the top 30 GDP countries by the end of this fiscal year. LoRa gateway deployments continue to grow and achieved a record 5 million gateways deployed at the end of Q2 versus 4.2 million at the end of Q1. PicoCell gateway deployments continue to increase nicely, driven by smart home and smart campus segments as Amazon Sidewalk gateway deployments increase 23% and Helium gateway deployments increase 18% sequentially. This quarter, both Sidewalk and Helium networks should drive an acceleration in end device deployments over the next several years as the smart home and campus segments increasingly adopt low power sensor networks. In addition, our macro gateway deployments increased 8% sequentially, demonstrating the continued deployment of LoRa for wide area network use cases. We expect LoRa gateway deployments to achieve approximately 5.5 million by the end of FY 2023. The cumulative number of LoRa end nodes deployed increased to 270 million at the end of Q2 from 256 million at the end of Q1. We expect this number to exceed 300 million cumulative end nodes by the end of FY 2023. With continued network expansion globally, we expect end node deployments to accelerate rapidly over the next three to five years. Our LoRa pipeline continues to be strong, ending the quarter at approximately $1.1 billion. We anticipate that on average, 40% to 50% of the opportunities currently in the pipeline will convert to real deployments over a 24-month timeline. We continue to see growth in sustainability and smarter planet initiatives in areas like smart utilities, smart logistics, asset tracking, industrial IoT, smart home, and smart cities where innovative solution providers are using LoRa to monitor, measure, and manage resources more efficiently. Opportunities continue to drive geographical diversification in our LoRa revenues. As we continue to see our LoRa momentum accelerate in the Americas and Europe, over 82% of our LoRa opportunity funnel is currently from regions outside of China. In Q2, revenue from our proximity sensing platforms declined due to Asian smartphone softness and some ongoing pandemic-related challenges in China. While we are seeing proximity sensor design wins in both smartphones and the consumer wearable market, we are expecting a weaker second half demand environment for our consumer-related products, including proximity sensors. For Q3 of fiscal year 2023, we expect net revenues from our Wireless and Sensing Products group to be down due to macroeconomic softness and a weaker consumer market. The Semtech innovation engine continues to deliver new and disruptive technologies to our customers across several end markets, and in Q2, we released 14 new products and achieved 3,200 new design wins. This quarter, we entered into a definitive agreement to acquire Sierra Wireless. This transformative acquisition will bring together the ultra-low power, long-range and network flexibility benefits of LoRa technology together with the low latency, high bandwidth and global network coverage benefits of cellular technology. The combination of optimizing LoRa and cellular technology is a highly strategic decision to position Semtech as the leader in the fast-growing ultra-low power IoT market. We aim to bring solutions simplification to a disruptive chip-to-cloud IoT services platform that helps our customers accelerate their digital transition to the internet of everything. The acquisition will approximately double the scale of Semtech be non-GAAP earnings accretive immediately and expand our IoT addressable market to almost $10 billion by 2027. We expect the transaction to close in the second half of FY 2023. Looking forward to the third quarter of fiscal year 2023, we are seeing the effects of a softening macro environment, ongoing COVID-related issues in China, and a very weak consumer market. We also continue to have pockets of supply chain challenges in specific areas. As a result, we are currently estimating our Q3 revenues to be between $170 million and $180 million. To attain the midpoint of our guidance range or approximately $175 million, we needed term orders of approximately 6% at the beginning of Q3. We expect our Q3 non-GAAP earnings to be between $0.60 and $0.66 per diluted share.

I will now hand the call back to the operator. Emeka and I are happy to answer any of your questions. Operator? Thank you. We will now start the question-and-answer session. Our first question comes from Tore Svanberg with Stifel. Please go ahead with your question.

Yes. Thank you. I wanted to ask a question about your gross margin comment on fiscal 2023. Sounds like you're expecting some upside driven by mix. And I'm just wondering what's driving that change. I do suspect that maybe the Protection business and especially the smartphone part of the Protection business is probably going to continue to decline. But if you can elaborate a little bit more on what's driving that higher gross margin outlook for fiscal 2023. Thank you.

Hi, Tore. This is Emeka here. So, our gross margin story has definitely been a highlight because it's been pretty stable. It's coming in almost exactly as we anticipated. I think if you remember in the past, we've always talked about the growth drivers that we have for the company. We've talked about LoRa having gross margins above the corporate average, even our PON business, especially as our 10-gig PON-X platform has pretty good gross margins. The data center business has good gross margins; the wireless base station also shows good gross margins. And then, like you mentioned, within Protection, we continue to see the industrial and automotive revenues being a higher mix of the Protection revenue. And that gross margin is pretty good. So, as we go into the October quarter here and with this expectation of continued weakness in the consumer sector, we think that actually would be accretive to our gross margin.

Very good. And as a follow-up, I know you're expecting all three product segments to be down sequentially, but are there any of those that are perhaps going to be up sequentially, I'm thinking maybe LoRa, maybe PON, or is this at this point basically all products down sequentially?

I believe that all product groups will likely experience a sequential decline. However, certain subgroups might remain flat or see a slight increase on an annual basis, such as PON and possibly data center. Within the Industrial segment, some areas are showing less weakness compared to others. The most significant challenge we face is in China, which represents a substantial market opportunity for us, with 35% of our revenues coming from there. We are seeing softness across all segments, but in terms of magnitude, the order of impact is consumer, then China consumer, followed by the other segments.

Great. Just one last question, as we think about this sort of correction here, care to comment on the timing. I know there's a lot of different dynamics, right? I mean, supply, there's shutdowns, there's also sell-through softening. So, any sort of guess as to how long this correction will persist, if you have any comment. Thanks.

We have observed that bookings have softened during Q2, which indicates a decline in consumption. We expect this trend of weaker consumption to continue into Q3, and historically, Q4 is typically a weaker quarter for us, with consumer activity usually declining. Much will depend on the severity of the Q4 downturn, but we anticipate that by the second half of this year, much of the inventory will start to diminish. Therefore, we should begin to see improvements early next year.

Very helpful. Thank you.

Our next question comes from the line of Craig Ellis with B. Riley. Please proceed with your question.

Yeah. Thanks for taking the question. I wanted to follow up on the comments that Tore had or the inquiry that Tore had, and just really understand more about what the company's been seeing. So, Mohan, as you look at guidance that's down, I think it's 16.5% quarter-on-quarter. How much of that is order weakness that you've seen quarter to date versus a desire to try and get in front of the macro trends that you talked about? When I look back at your commentary on Signal Integrity, it sounds like that business is holding up pretty well. And then within wireless sensing, LoRa is very strong. So, I'm just trying to reconcile some of the strength you've seen very recently and the numbers that were reported with the magnitude of decrease that we're looking for in the fiscal third quarter, and just hoping you can provide some segment or sub-segment color on what the bigger drivers are there.

Certainly. The consumer market in Asia is showing significant weakness, particularly in the smartphone sector in Korea and China, which are among the weakest areas. In contrast, North America is slightly stronger but beginning to exhibit some softness. Outside of consumer, the industrial and infrastructure segments performed well in the first half, though we are seeing a decline in bookings starting in Q2. Despite having a solid backlog, the decrease in bookings and consumption suggests that end demand is returning to balance. This shift in the supply-demand equilibrium is typical for our cyclical industry. Overall, infrastructure and industrial sectors in North America and Europe remain relatively strong, while China and Asia are comparatively weak.

Got it. And then a clarification on the comments regarding the fourth quarter, which I think we all know is typically a seasonally weaker quarter in part because of what happens with inventory and consumer markets. But can you or Emeka refresh our memories on what typical seasonality would be? And if we have an inventory correction, how you think about the magnitude of that relative to seasonality?

No, Craig, typically we've observed a soft net decline of about 5% to 10% in the fourth quarter. This is influenced by various factors, including the customer landscape and consumer inventory adjustments. However, there is potential for a positive impact depending on developments in the infrastructure sector. When conditions in China become particularly soft, discussions often arise around stimulating the economy through infrastructure investment. While we've received some information regarding this, it's uncertain when it will actually take place. We need to monitor this situation closely, as it could lead to an increase in fourth-quarter orders if tenders are released. However, at this time, we are not relying on that scenario. Overall, we typically anticipate a decline in the range of 5% to 10% during the fourth quarter due to a variety of factors.

Yeah. Which seems like you might be getting in front of that with the down 16% in the third quarter, but we'll see. If I could just follow up with a clarification on your prepared remarks. Emeka, you mentioned that you expect the deal to close this fiscal second half, and also that you had committed debt financing. Can you provide any color on the rate you'd expect for that committed debt financing?

We're looking at different structures. Term loan is going after the commercial banks, going after the convert markets; we're looking at different things. And hopefully, by the time that we're done here, we should probably see a cost of capital in the 5% to 5.5% range.

Got it. Thanks for the color guys.

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

Thanks guys. Maybe just to start with a quick clarification question, maybe I missed it. I know bookings dropped, I think over 20% last quarter, the prior call. So, maybe I missed it, but how much are bookings down heading into 3Q?

Bookings have declined significantly, Rick, and remain weak in Q3. As we stated, the book-to-bill ratio is below one. We are still experiencing fairly soft bookings in Q3, which presents a challenge for us. Even though our backlog is relatively strong, the volume we anticipate in Q3 is lower compared to historical levels. Booking rates continue to be soft, largely due to factors in China and consumer behavior. Overall, it appears that all segments are starting to show some weakness.

Thank you for the clarification. My first question is about the data center. It seems you indicated that it is relatively strong and could potentially be up in the third quarter if I heard correctly. Since you have a significant position there, I would like to know how much of that business is divided between cloud and enterprise, and what that rough split looks like. Is there anything noteworthy in that regard, such as enterprise being a little softer while cloud is doing better? Any details you could share would be appreciated.

Hyperscale cloud is the area of strength for us, Rick. We expect the second half to be weaker than the first half, but overall it's likely to be an improvement from last year. There are many new initiatives and products in that space, opening up several opportunities. However, regarding the infrastructure market, it may not see significant growth unless, as Emeka mentioned, we receive a new stimulus package in China, which might not take effect until Q4 or early next year before we see any meaningful increase.

Thanks for the update on Tri-Edge. I would like to know if you could provide more details about the ongoing trials or wins, as well as what the revenue funnel looks like. Additionally, you mentioned that the long reach Tri-Edge increases the Serviceable Available Market by about 50%. Could you clarify what the existing Serviceable Available Market is?

Tri-Edge is performing exceptionally well for us, particularly in both the data center and the 5G base station market. We are beginning to launch our newer products, including the short reach Tri-Edge, which is showing strong growth potential for next year. We anticipate continued revenue growth from Tri-Edge this year as well. The longer reach products are currently in the sampling phase, contributing to an additional $100 million in serviceable available market for us. Moreover, the base station market expands our Tri-Edge platform's serviceable available market. We've also introduced CopperEdge, which enhances our presence in the data center market. Overall, we estimate a $1 billion serviceable available market in the data center for fiscal year 2027, with a goal to capture 30% to 40% market share in that area.

That's great color. Thanks a lot. Appreciate it.

Our next question comes from the line of Tristan Gerra with Baird. Please proceed with your question.

Hi. Good afternoon. So, you you've made it very clear that consumer spending is very weak in China. How do I disassociate that from perhaps the lingering impact of the COVID-related shutdown in the April and May timeframe? Is that really a factor in the weakness because there's still some bottlenecks in the supply chain, or is it basically a flowing supply chain, but it's purely consumer weakness at this point?

I believe there are several factors at play, Tristan. Firstly, consumer consumption in China is weak, and the overall Chinese economy is also weakening, which presents challenges for smartphone manufacturers in the country. Additionally, the impact of COVID shutdowns and lockdowns has not been helpful either. While I can't specify the exact percentage attributable to that, it definitely plays a role. There are also other areas of consumer weakness in different markets. Given our extensive presence in the smartphone market in both Korea and North America, we can see that China is particularly struggling, and Korea is also facing some challenges, though North America is performing relatively better. Furthermore, outside the smartphone sector, other consumer segments are generally showing weakness as well.

Okay. And then, back to an earlier question, given your guidance for the quarter, by how much do you think your under shipping LoRa demand, and if you could talk about how much inventory de-leveraging is happening in Asia, I'm assuming that your guidance doesn't reflect really what the end demand is going to be in terms of sequential changes.

We analyze consumption patterns, Tristan. When we observe a downward trend in consumption, it raises concerns for us. This serves as an early indicator of potential softness, and we have indeed seen this weakening over the last quarter. There is a decline in consumption and bookings, which typically suggests a decrease in demand as well. However, there are some areas of relative strength, particularly in North America and Europe, where industrial infrastructure appears stronger than the consumer sector, but even these regions are starting to show signs of weakness.

Now our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.

I wanted to discuss the weakness in your guidance. Let's say, hypothetically, if you're about $40 million short, it would help us understand better if we could look at it in terms of end markets like industrial, consumer, and infrastructure instead of just by product group. Could you break down that hypothetical $40 million shortfall by these end markets? I assume that consumer will be the largest segment, but how much of the $40 million weakness is attributed to consumer as opposed to industrial and infrastructure? I have a follow-up question as well.

Yeah. So, Harsh, I think, as you can imagine from the questions that we've asked before, if you were to rank all those, I'll probably say that, of course, consumer is leading that. And then, from a little bit of industrial a little bit and then the infrastructure side, but I think most of it, the bulk of it is coming out of the consumer space.

Okay. So, my follow-up is regarding your latest quarter. I noticed that hand-setting consumers account for only 20% of sales. Is that business declining significantly? Should I assume that it’s down by about 50% or 60%, or am I misunderstanding the situation?

The consumer space is down significantly. I can provide the percentages you're looking for. Our consumer business, which includes proximity sensing products for smartphones, is experiencing a substantial decline, and we also expect the consumer protection segment to be down in the next quarter. Furthermore, while there's a slight impact from the infrastructure and industrial segments, the majority of the decline is coming from the consumer space.

Okay. Can I ask just one more follow-up? Emeka or Mohan, I know that you guys do business and have historically been very strong in data centers in China, and I can also say that applies to a certain extent in the industrial sector. Putting aside the weakness in China, which we can attribute to COVID for now and assuming it gets resolved in the next year, would you say that accounts for the majority of your challenges in those two areas? Additionally, I think you mentioned that the U.S. market is holding up relatively well; is that an accurate interpretation?

I believe you are correct, Harsh, that China definitely has seen some delays on the infrastructure side. As Emeka mentioned, there could be a strong rebound in Q4 based on investments in that area, but in Q3, that is certainly part of the situation. I would say the industrial sector in China contributed to this as well, and the consumer sector is obviously the largest factor. However, we are noticing some weakness in other regions too. Other areas are beginning to soften, but I would emphasize that China accounts for the majority of the issue.

Appreciate the color, guys. Thank you so much. I'll get back in line.

Our next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed with your question.

Hey, guys. Thanks for the question. So, it's around proximity sensing. You guys called it out in your prepared remarks. I thought that this was a much smaller product for you guys after the issues. Perhaps you can level set us for what it was in Q3. And the reason why I'm asking is I think I'm down maybe $15 million to $20 million sequential for the wireless and sensing segment. And I'm trying to figure out how much of that is proximity, how much of that is LoRa and how much of that is other. Emeka, maybe you can help us just with some broad strokes, kind of figure that out. Thanks.

Proximity sensing is affected by several companies, including Samsung and China, both of which are contributing to the current weakness. There is also some excess inventory in the market. Demand was very strong during the COVID period but has since decreased. The main factor impacting us is proximity sensing. Additionally, in the industrial and LoRa segments, we are noticing weakness in the second half, especially from China, which accounts for about 50% of our LoRa-enabled business revenues. There's a noticeable decline there too, which is partly related to COVID, though we hope it may improve towards the end of the year. Currently, we are also seeing some weakness in gateway deployments, which tend to be variable, and Helium is showing signs of weakness as well. Overall, in the wireless and sensing area, the issues stem from proximity sensing, along with challenges from Korea and China, and also in LoRa and Helium gateways.

Great. Okay. Thank you for that. And then my second question is on LoRa. Can you remind us what an ASP is for a LoRa node? And congratulations on all the growing content you have at Amazon, for example. Should we assume kind of the same ASP for that node in Sidewalk considering it's such big volume or is it more considerably discounted? Thanks.

You need to distinguish between the gateway deployments. For instance, what's included in an Echo compared to the end nodes, which are the sensors that connect to the gateways. Typically, we estimate the cost of an end node to be around a dollar, but the average selling price might vary, potentially reaching $2 to $3 or even lower based on volume and the specific type of device. This is where LoRa has significant potential, and we anticipate seeing growth in this area over the next three to five years. We have many gateways deployed, and the focus now is on connecting end devices. This is where I believe the demand for LoRa will increase. We've highlighted before that the value lies in low-power sensing and the connectivity that allows for a comprehensive IoT and sensing network, which is the key advantage of LoRa. Therefore, that's where we see real growth. To directly answer your question, we generally consider the price range for an end node to be between $1 and $2.

Should we consider the content for an Echo, the gateway content in an Echo? How should we compare that to the content for a Helium hotspot or something similar? How do we generally understand the differences in content magnitude?

Think about a macro gateway as typically being $10 to $20 of chip content, a PicoCell gateway, typically $5 to $10, something in that range. And obviously, we're not going to speak about specific customer partnerships we have, but in some of our strategic partners, we do have lower ASP in order to try to proliferate the networks.

I appreciate the opportunity again. Thank you.

And our next question comes from the line of Scott Searle with Roth Capital. Please proceed with your question.

Good afternoon. Thank you for taking my questions. Mohan, I wanted to follow up on some earlier topics. The consumer smartphone market is facing significant weakness both in China and globally. However, I'm unclear about the level of channel inventory that exists with distributors or customers themselves. Could you clarify how much of this situation is due to inventory channel absorption versus actual demand? Additionally, are you losing market share from a design perspective? Given that the overall market is down by 5% to 10% in units this year, it seems that your decline may be more severe. I'm trying to understand this aspect better. Also, regarding LoRa, could you provide an update on what that looks like for the current quarter? It seems you're still targeting 40% growth in fiscal 2023.

Let me start with that, Scott. In the first half of the year, LoRa has grown by over 70% compared to last year. We didn't expect that growth rate to continue, so for the full year, we're projecting a 40% growth for LoRa, although the second half will be weaker. Part of this is due to weakness in China, as well as some issues with Helium. We don’t believe we are losing market share in any of our businesses or segments; if anything, we may be gaining share in some areas. The current weakness, particularly with channel inventory, is related to consumption. When consumption decreases, channel inventory builds up because products aren't moving through the channel. As a result, we need to adjust our expectations. If consumption picks up again, we will feel more confident in providing more aggressive guidance. The situation involves a lot of consumer factors, mainly in China, including ongoing impacts from lockdowns. We anticipate that these issues will improve. However, we are also starting to see signs of weakness in other segments like infrastructure and industrial, as the bookings are not as strong as they have been over the past few years.

I have a follow-up question regarding Sierra Wireless. I'm curious about the interest from your customer base in integrating cross-platform solutions, particularly with LoRa and cellular technology combined. What has been the general feedback and level of interest from customers so far? Thank you.

The Sierra Wireless acquisition has always been a strategic move, driven by customer needs. One significant advantage is the global connectivity it offers, allowing the connection of LoRa sensors and networks to existing global cellular networks. This enhances network coverage for various IoT applications, which is certainly beneficial for customers. We now possess end-to-end IoT capabilities, enabling Semtech to discuss how to connect sensors to networks and the cloud, which is highly appealing to many customers. They recognize the potential for reduced energy consumption and costs, along with increased global connectivity to link their industrial assets to the internet. Moreover, Sierra's established cloud platform is a considerable advantage. By integrating our LoRa cloud capability, we can deliver a comprehensive solution that inspires customers to explore new use cases. The combination of ultra-low power, long-range LoRa technology with the low-latency, high-bandwidth attributes of cellular connectivity opens up numerous applications. These include mobile asset tracking, cold chain monitoring, fleet management, public safety, security, smart cities, smart utilities, and industrial IoT. All these use cases will likely incorporate ultra-low power sensing alongside cellular backhaul connections. We are eager to close the deal, integrate our companies, and start offering a complete solution to our customers. Exciting times lie ahead.

Great. Thanks.

And we have reached the end of the question-and-answer session. Now I turn the call back over to management for closing remarks.

Thank you. In closing, we were very pleased with our record Q2 results. We have demonstrated commitment to excellence and innovation, and have delivered excellent financial performance, despite many headwinds over the last few years. While we are facing some short-term macroeconomic challenges, Semtech is a very resilient company, and I'm confident that we will successfully manage through the current headwinds we face. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

And this concludes today's conference, and you may disconnect at this time. Thank you for your participation.