Greetings and welcome to the Semtech Corporation Conference Call to discuss the First Quarter Fiscal Year 2024 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 that 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, Vice President of Investor Relations, Anojja Shah.

Thank you, operator. 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 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. During this call, all references made to financial results in our prepared remarks 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 financial measures is included in today's press release. And with that, I'll turn it over to our Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Anojja. Good afternoon, everyone. Before I begin, I trust you all saw the news that the board has completed its search for our new CEO. We are pleased to welcome Paul Pickle to Semtech. Mohan will comment further, but we are all excited about Paul's impressive mix of semiconductor and IoT experience and look forward to his arrival later this month. And I also want to congratulate Mohan on his retirement. Mohan has led Semtech very successfully for the past 17 years, and we have all enjoyed working with him. Like many Semtech employees, we wish you well on your next adventure. Coming to Q1 fiscal 2024, the company delivered net sales of $236.5 million, above the midpoint of our guidance and an increase of 41% sequentially and 17% year-over-year. These numbers include $136 million of revenue from our acquisition of Sierra Wireless. Our non-GAAP gross margin of 48.5% was in line with our guidance, and our earnings per share of $0.02 was above our guidance. In Q1, shipments into North America, China, Europe, and the rest of Asia represented 31%, 24%, 15%, and 30% respectively. The addition of Sierra Wireless has increased our geographic mix towards North America and Europe. Total direct sales represented approximately 39% of net revenue and distribution represented the remaining 61%. Turning to our end markets. As we mentioned last quarter, we expect to see macroeconomic challenges affect our business in the first half of fiscal 2024, which we did see in Q1. Net revenues from the high-end consumer market decreased 38% sequentially and 55% versus the prior year. High-end consumers represented 9% of total net revenues. Net revenue from the industrial end market increased 130% sequentially and 125% over the prior year due to the inclusion of Sierra Wireless. The industrial end markets represented 75% of total net revenues. Finally, the infrastructure end market declined 30% sequentially and 49% over the prior year and represented 15% of total net revenues. In terms of POS, we saw the majority of POS, 60% coming from the industrial end market due to the addition of Sierra. The infrastructure and consumer end markets were balanced with 21% and 19%, respectively. Q1 bookings grew 1% sequentially, driven by strength in our Advanced Protection and Sensing Business Unit. Q1 non-GAAP gross margin was 48.5%, in line with the midpoint of our guidance. For Q2, we expect gross margin to stay roughly flat. For the remainder of fiscal 2024, we expect our gross margins to trend higher through the year, as material cost synergies are achieved, and revenues in our higher margin Semtech organic businesses increase. These benefits were slightly offset by lower absorption, as we work to reduce our internal inventory levels. We expect a 100 basis points to 150 basis points improvement in gross margin by Q4 of this year. In Q1, operating expenses were $93 million, $6 million below the midpoint of guidance due to our strict management of discretionary spending. For Q2, we expect further reductions to our operating expense, down another 2% sequentially. We expect to see continued declines throughout the remainder of the year as we execute on our integration plans and optimize for financial performance. In Q1 of fiscal 2024, non-GAAP operating margin was 9.3%, significantly better than expected, driven by actions we took to preserve operating profit. In Q1, cash flow from operations was a $90 million use of cash, impacted by fiscal year 2023 annual bonus payouts and the payment of acquisition-related expenses. We expect our cash flow to recover in the second half of the year, as acquisition-related expenses taper off and demand improves, allowing us to improve profitability as current inventory levels are reduced. Our gross debt at the end of Q1 was $1.4 billion or approximately 4.3 times leverage on a net basis. We expect to see an increase in net leverage in the first half of the year as we navigate this softer demand environment. We announced today that we negotiated another amendment to our credit agreement to get further relaxation through our leverage and interest expense coverage ratio covenants. Given our current projections for revenue and earnings, we now expect to have an adequate cushion through fiscal 2025. The Q1 weighted average cash interest expense was approximately 5.65%. As we have said before, the main priority for free cash flow will be to pay down our debt. In summary, Q1 performance was better than expected, but still impacted by macroeconomic headwinds. Looking ahead, we continue to make progress on the integration of Sierra Wireless. Our synergies are ahead of plan, and as a result, we still expect the Sierra acquisition to be accretive to earnings in fiscal year 2024. We are getting good customer feedback on our cellular and LoRa integration plans. Overall, we are seeing higher design wins, and with the steps that we're taking to improve our financial performance, we believe that our business will thrive as demand improves and channel inventory gets back to normal levels. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon everyone. Thank you for joining today. On May 30, we announced that Paul Pickle will join as the new President and Chief Executive Officer for Semtech. I will ensure a smooth transition with Paul and support him and the board as needed for the next 16 months. Thank you all for your support and interest in Semtech over my tenure as CEO over the last 17 years. I've enjoyed working with you all and I'm counting on you to continue to support Semtech through the next phase of growth. Today marks my last earnings call as Semtech's President and Chief Executive Officer. Onto our Q1 fiscal year 2024 performance by product group, as well as the outlook for Q2 of fiscal year 2024. In Q1, our quarterly net revenue increased 41% sequentially and achieved a new record of $236.5 million, slightly above the midpoint of our guidance. We also posted non-GAAP earnings per share of $0.02, driven by lower operating expenses as synergies were ahead of expectations. Both net revenue and EPS were better than guidance, while inventories remained high, Q1 bookings for the organic Semtech business were up sequentially, increasing our confidence that the organic Semtech business has stabilized, albeit at much lower levels. In Q1, our Signal Integrity Product Group revenue was down 32% sequentially and represented 18% of total revenues. As expected, all our infrastructure businesses were very weak in Q1. Our China PON and base station businesses were especially weak in Q1, as overall demand softened and inventories remained high. Our hyperscale data center business was also weak in Q1, but we expect this business to rebound modestly in Q2 as inventories reduce. We anticipate a strong second-half performance from our data center business, driven by our North American design wins. AI is driving significant demand at hyperscalers and our SIP portfolio is primed to take advantage of the upcoming data center buildouts. Our Tri-Edge, FiberEdge, and CopperEdge platforms deliver lower power and lower latency advantages over DSP solutions, which are key requirements for future AI data centers. We are growing our data center footprint with North American partners, and we are already well positioned in China, where we believe that data center build-outs will regain momentum in the next 12 months. In Q1, we announced the industry's first 200 gig per channel FiberEdge type TIAs, which are generating positive interest and design wins with Tier-1 customers in North America. In addition, our CopperEdge platform is in the early stages of penetrating the 100 gig and 200 gig per channel active copper cable segment in North America, which we believe has tremendous potential in the data center market. We remain confident that our full portfolio of data center platforms, including ClearEdge and Tri-Edge CDRs, FiberEdge PMDs, and CopperEdge re-drivers, will enable us to rapidly grow our hyperscale data center business over the next several years. While our PON business saw a sequential decline in Q1, we believe excess inventories are starting to reduce. Increasingly we are seeing service providers outside of China, starting to deploy PON systems, which is encouraging for our future PON business. Our PON portfolio has recently been expanded with the industry's first 50 gig PON OLT chipset, which already has design wins at Tier-1 European customers. We believe our 2.5 gig, 10 gig, 25 gig, and 50 gig PON PMD portfolio offers customers the broadest and the highest performance PON PMD portfolio in the industry and we expect that PON business to return to growth in the second half. Revenue from our wireless base station business was also down in Q1, both on a sequential and year-over-year basis, as the macroeconomic slowdown in China has impacted demand for both 4G and 5G base stations. However, new tenders recently issued in China should drive meaningful growth in this segment in the second half of FY 2024 and FY 2025. In Q2 of FY 2024, we expect a continued reduction of customer and channel inventories across our infrastructure businesses, and we expect a modest improvement in revenues from China, as our Chinese demand begins to recover. As a result, we expect our Signal Integrity Product Group revenues to increase sequentially in Q2. Moving on to our Advanced Protection and Sensing Product. Q1 net revenue from our Advanced Protection and Sensing Products Group decreased 25% sequentially and represents 15% of total revenues. The drop was driven by lower demand from the consumer segment as we faced high inventories in both China and Korean smartphone markets. We expect inventory digestion to continue for several quarters. However, we continue to achieve solid design wins on new smartphones with our leading USB-C protection platform across all Tier-1 global smartphone customers. In Q1, we announced the expansion of our PerSe Product portfolio with the release of a new SaaS sensor for 5G mobile devices. Semtech's PerSe technology senses human proximity and enables smartphones to implement RF power control. New regulations in China starting in FY 2025 are beginning to be a catalyst for new proximity sensing growth, with bookings and POS up significantly from Q4. We expect this to increase, as adoption of our sensors continues in the second half of FY 2024. On the broader market for our protection products, we are seeing strong demand from the automotive segment, as adoption of our high-performance system protection portfolio is accelerating. Specifically, we are seeing increasing adoption of Ethernet, USB-C, and antenna protection from the automotive segment. In Q1, for the first time in our history, our broader protection business exceeded our consumer protection business and represented approximately 55% of the total protection business. In Q2, we expect our Advanced Protection and Sensing business to see revenues grow sequentially. Turning to our IoT business. As a reminder, our new IoT business has two sub-businesses. The first is the IoT Systems Product Group, which is made up of Semtech's LoRa business, the Sierra Wireless Module business, and the Sierra Wireless Routers business. The second product group is the IoT Connected Services Group, which includes Sierra's Managed Connectivity business and Semtech's LoRa Cloud Services business. In Q1, total IoT revenues increased 170% sequentially to approximately $159 million or 67% of total revenues. While our LoRa-enabled revenues were down in the quarter, driven by the lower demand for helium gateway chips, our LoRa end node POS volume grew 29% sequentially with strong growth in Europe, Japan, and China. This is a strong indication that our strategy is working. We expect future LoRa end node deployments to continue to increase, as the demand for low-power sensor networks incorporating Edge AI routers becomes mainstream in the IoT world over the next few years. The adoption of LoRa continues to grow across many IoT use cases globally, especially in North America and Europe. Some of the recent exciting announcements this quarter included Sustainable Harvest deployed LoRa-enabled sensors and LoRaWAN-based gateways across its Durian fruit farms in Malaysia to improve farming practices, lower operational costs, and increase crop yields. Durian is a challenging crop that needs 24/7 maintenance for high yield, and LoRa-enabled sensors give farmers real-time data for the health of their farms every step of the growth cycle. A large European-based IT systems solution provider announced that they have joined the LoRa ecosystem and will incorporate LoRaWAN into their strategic portfolio, targeting the retail, manufacturing, logistics, healthcare, and public infrastructure segments. Lacuna Space, the direct satellite LoRaWAN company, launched its latest satellite on SpaceX, raising its number of satellites to seven to bring low-cost connectivity to the most remote parts of the world. In Q1, we launched a new multiband LoRa transceiver for use in IoT endpoints, enabling a single, low-power device to be used anywhere in the world. The highly integrated LoRa Connect platform provides LoRaWAN connectivity for terrestrial low-power wide area networks as well as supports LoRa 2.4 gigahertz for global connectivity and S-band for direct connection to satellites. This new multiband LoRa radio is perfect for global logistics and asset management use cases. And in Q1, the LoRa Alliance launched a new LoRaWAN-accredited professional program to support the IoT industry's need for skilled LoRaWAN engineers and developers. New LoRa opportunities continue to emerge across multiple end markets, including smart utilities, smart logistics, and asset management and connected spaces. While our LoRa-enabled business is expected to decline this year due to the negative impact of our Helium gateway business and a weak China, we expect LoRa end node deployments to continue to increase globally, and we expect our LoRa-enabled business to return to strong growth in FY 2025. In Q1, the Sierra Wireless IoT Module business increased 31% sequentially, as demand for IoT LPWAN connectivity solutions increased. Interest in Sierra's routers in the public safety and industrial IoT segments continues to increase. Specifically, we are seeing increased adoption of our routers for utility monitoring, EV charging, and precision agriculture. In addition, we are pleased with the strong growth of our IoT-connected services business, which grew 10.3% annually. As we grow our managed connectivity subscriber base, we see a massive opportunity to deliver value-added IoT services to our customers. We are investing in both our IoT-managed connectivity platform and our future IoT cloud services platform. As we start to marry our LoRa ecosystem strategy together with our IoT module router and services strategies, we expect to deliver a uniquely differentiated and highly attractive IoT portfolio to the low power IoT industry over the next few years. In Q2, we expect our IoT business to decline sequentially, as we continue to face high channel inventories and relatively weak demand across all our IoT hardware businesses. In Q1, Semtech's overall design win volume was up 32% sequentially, and our module design win value was up 50% sequentially. Both of these metrics bode well for a strong FY 2025. Now let me discuss the outlook for the company for the second quarter of fiscal year 2024. As a result of our LoRa revenues and our increased leverage, we are taking action to ensure our operating profits remain at acceptable levels. These actions are on top of our planned synergies. In addition, the Semtech board continues to carry out a detailed portfolio review and will discuss its findings and any actions with the new CEO, who will be joining Semtech approximately June 30th. We are currently estimating Q2 net revenues to be between $233 million and $243 million. To attain the midpoint of our guidance range or approximately $238 million, we need turns orders of 39% at the beginning of Q2. We expect our Q2 non-GAAP earnings to be between minus $0.02 per share and plus $0.06 per diluted share. I will now hand the call back to the operator, and Emeka and I will be happy to answer any questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Craig Ellis with B. Riley. Please go ahead with your question.

Yes. Thanks very much for taking the questions. Mohan, I was hoping you could just start by providing a little bit more color on some of the things you're seeing out in the end markets. Can you comment on what you've seen with order activity quarter-to-date? What are the pluses and what are the weaknesses, and in areas where per the press release, you're seeing signs of stability, where do you and the people in the sales team feel more confident that things have stabilized, where are things still relatively weaker or richer in inventory?

The consumer business in China is beginning to show some signs of improvement, although it is still at low levels. It's expected to turn around, and we are starting to see better order activity from that sector. There have also been improvements in the automotive industrial area, which has been performing stronger. Overall, those are the two positive areas, while other sectors remain relatively weak, with bookings still low. It's important to note that there is a lot of inventory in the market, and we see some positive indicators related to point of sale and inventory levels, especially in infrastructure and data centers, as well as in the broader protection business.

Got it. That's helpful. And then Emeka, I wanted to follow up. So a quarter ago, we were pacing very well on cost savings and I think you raised the cost savings target from $40 million to $50 million. Now, we've had better operating expense in the quarter, it's better than what I expected in the guide. So how should we look at that prior $50 million expense reduction target and the potential for that to move up either now or with time?

Yeah, so Craig, we're definitely doing very well on the synergies front; the numbers that we're seeing is a little bit above the $50 million that we had upsized to last quarter. I'm not really at this point to quantify that it is coming in nicely above that number. We've also definitely, like I said in my prepared remarks, we are definitely watching every penny of OpEx at this point. Our discretionary spend is something that we're keeping a very close eye on; the traveling expenses, and some of other discretionary supplemental compensation we are keeping an eye on all of that. So we are definitely very pleased with what we have seen in the first quarter in terms of our ability to manage operating expenses, and given where the business is right now. Like Mohan said in his prepared remarks, we are looking at all the things, and hopefully we'll continue to do a good job on that.

That's good. And then if I could just sneak in one more. You mentioned that you had achieved some incremental covenant flexibility. Can you just talk more specifically to that point? And was there any incremental cost to interest rates on the debt you have out or was that achieved with some other means? Thanks so much, guys.

Yes. So definitely on the covenant side, obviously, just given the outlook for the business, other macroeconomic issues that we're seeing. The fact that our inventory and channel continues to remain stubbornly high. We sort of anticipated that the covenants might be challenged in the second half of the year. So we took proactive steps to get back to our banking group to work with them. So, yes, there was an incremental cost. It cost us probably about 50 basis points in terms of amendment fees. And because the leverage is anticipated to be higher, the interest rate associated with those are going to be a little bit higher than what we originally had communicated, and the original agreement that we had out there. But having said that, I think our expectation is that, with all the synergies, the fact that we're running ahead on synergies, and also looking at things, continuously getting better in terms of demand in the second half of the year. We continue to believe that the acquisition is going to be accretive to our earnings in fiscal year 2024.

Thanks, Emeka. Thanks, Mohan.

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

Hey, good afternoon. Thanks for taking my questions. Nice job in the quarter. And Mohan, I want to wish you all the best again in your future endeavors. It's been a pleasure working with you over the past couple of years.

Thank you, Scott.

And maybe just to follow up on Craig's question on the covenant front, and like I just want to clarify a couple of things. It sounds like there were some small penalties, and there is an increase in interest rate. But I want to make sure in terms of the guidance that you gave for the second quarter that is included, right? That interest expense is already included in there. And then going forward, in terms of further reductions in the OpEx structure and/or evaluation of the portfolio and potential asset sales, that is not being mandated by the bank, that is in fact just part of your general pruning of operations and optimizing things going forward, is that correct?

Yes, I'll address the second question. This is just what any good business would do in circumstances like these, and we already have it in progress. It wasn't something required by the banks. Concerning the interest expense, our guidance has included the new agreement. In the first quarter, the weighted cash interest rate was approximately 5.65%, and in the second quarter, we expect it to be around 6.1%.

Thank you for the helpful information. I would like to inquire about two end markets. First, regarding IoT modules, it seems you're still addressing some inventory challenges. Mohan, if I understood your comments correctly, you expect some improvement in the inventory workflow in the second half of this year. The design activity appears to be robust, indicating a return to normal conditions. Additionally, I would like to clarify your statements about the data center; there is significant interest and activity related to AI and its impact on data center demands. Considering your new products and these demand trends, do you think you will approach the levels experienced two or three quarters ago by the end of this fiscal year and as you enter fiscal year 2025? Thank you.

Yes, Scott. Let me begin with the IoT aspect. Semtech's IoT business has experienced some decline in China; we noticed a general downturn a bit earlier. The Sierra business has also encountered weaknesses, particularly in the modules, routers, and hardware, which partly stems from North America and Europe adjusting to the softness observed in Asia. We anticipate this trend to continue in Q2 and possibly Q3. However, after that, I believe we will begin to see some positive momentum. This relates to the traditional Sierra modules that have been sold. There is considerable activity regarding design wins associated with our new approach to modules, which could create promising opportunities moving forward. As for the data center, our expectation is that Q2 will show stronger performance, and we foresee the second half being better than the first half. Whether we can return to the levels of the first half of last year depends on our ongoing design wins. We have strong momentum in North America, and there are new prospects with CopperEdge, which I mentioned earlier; they're likely more relevant for FY 2025, but we hope to see some of that impact towards the end of this year.

Great. Thanks so much, and best of luck going forward.

Thank you.

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

Yes, Mohan, I also want to wish you the best of luck with your retirement. I've enjoyed working with you all these years. I have a couple of questions. First, if you had to estimate, how many quarters of inventory do you think there is in total for Semtech and Sierra Wireless combined? Is it about a quarter or two? Additionally, are you losing any design wins, or is the slowdown solely due to excess inventory in the channel?

I’m not aware of any design wins we've lost. I believe the situation mainly stems from inventory buildup. It’s essential to consider consumption alongside inventory, as an increase in consumption leads to a decrease in inventory, revealing opportunities. In the consumer sector, where most of the inventory seems to be, we are beginning to observe some positive signs, particularly with the China consumer market showing some improvement. If consumer spending rebounds quickly, it can significantly reduce inventory levels. Similarly, this applies to the infrastructure sector, especially in the PON business and base station business, where we also have excess inventory. These can be absorbed quickly if there’s a rise in tenders and demand in China. Currently, we see the strongest demand in the data center segment within the infrastructure sectors. On the industrial front, the automotive sector remains strong, although the consumer sector has been notably weak for an extended period, which isn’t surprising.

Yes, I have a follow-up question. Regarding the LoRa side, do you believe Helium has reached its limits and is it at the lowest point according to your guidance? What would lead to a recovery? Are you observing significant design activity? Additionally, if I were to state that your business may have hit its lowest point last quarter, would you agree with that assessment based on your comments, or do you think more explanation is needed?

No, I think the Semtech organic business has likely reached its lowest point in Q1. I don't expect any further decline from that. This is clearly why we're guiding for a slight increase in Q2, which reflects improvements in the Semtech organic business. The same applies to the LoRa side. Helium was an opportunistic business that has now ended, and we've excluded it from our guidance. While there's a possibility it could return, we’re not counting on that. The strategy for LoRa has always focused on the growth of low-power IoT sensors. LoRa end node demand is still high, and there are numerous global use cases being deployed. All the dashboard metrics I’ve provided over the years are still performing well. However, it's important to note that China is currently weak, and the situation with Helium has affected the metrics negatively. As we integrate Sierra, our strategy involves looking at a much larger opportunity with a broader portfolio. This should be the perspective moving forward. To directly answer your question, any weakness related to Helium is already reflected in our guidance.

I appreciate it, Mohan, and best of luck. Thank you.

Thank you.

Our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Yes, thank you. Congratulations on your retirement, Mohan. It has been a pleasure working with you for the past 17 years. I would like to start with a comment on working capital. The team has done an excellent job. Inventory days are now down to 159, and the DSOs are 56. As we consider the new combined entity, what would be the ideal metrics for these areas? Emeka, you mentioned your intention to further reduce internal inventory, but what do you anticipate for the business regarding DSOs and inventory days in the future?

So, Tore, as we continue to get very familiar with the new Sierra business, my expectation would be that the inventory days will continue to come down, both in terms of Sierra's inventory and Semtech organic inventory, right? Probably I wouldn't be surprised to see those days of inventory probably get down to the 120s or something like that by the end of the year, given the plans that we have. So we just have to see how it plays out. Of course, demand is going to be a key factor in that equation. With regards to receivables, Sierra typically has longer payment terms for their customers than the Semtech organic business does, 59 days is not that bad, but I think I would like to see that come down to 50 or 55 days.

Great perspective. Mohan, you spoke about growth expectations for the second half of the year in the data center, which makes sense considering all the dynamics involved. You also mentioned that you anticipate growth in base stations. Do you have any data points to support that confidence?

We are aware of new tenders in China, but we're uncertain about their impact on our business at this time. In the base station and PON sectors, everything revolves around service providers, tenders, and the number of systems that will be deployed. When tenders are issued and specific quantities are revealed, it essentially becomes a matter of how market shares will be distributed. We have established strong relationships and good market penetration in most of the 5G and 4G systems in China, as well as on the PON side. Therefore, we expect that if these tenders develop as anticipated—though timing is always a variable—the second half of the year will see stronger performance, and if not, FY 2025 should be very promising.

Great. Thank you. I'll go back in line.

Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Hey, everyone. I will echo my congratulations and great working with you. Wanted to start just on a follow-up on Tore's question on the base station business. I think in the past you guys have said you get much higher content in sort of the 3 gigahertz to 6 gigahertz bands rather than the 700 megahertz band, just wondering if these tenders are going out in China or in those higher frequency bands where you might have greater dollar content in those base stations?

Yeah. I believe so, Quinn. So I don't know exactly the detail, but I believe they are.

Perfect. And then on the turns percentage. I may have missed what turns was in fiscal Q1, but 39% I think is back up towards the higher end of certainly recent ranges, with visibility still being pretty low. How comfortable are you with turns up near 40% for the second quarter?

Yes, I think actually this is kind of closer to our historical levels. If you go back pre-COVID, we were returning 40%, 50%, as you know, in the consumer business that's kind of normal. So this is kind of getting back to normal levels, I think. So, we're quite comfortable. Obviously, we have a mechanism. We look at backlog; we look at what's on the books. We look at channel inventory and we have to make some adjustments there depending on what we expect to happen to POS in the consumption levels. But that's driving the turns number, but we are quite comfortable, yes.

Great. Then lastly, quick one for Emeka, just on the OpEx reductions. It looks like they're coming in nicely ahead of plan. How much of that is in the near-term just lower variable comp or lower selling expense? You mentioned watching travel expenses pretty closely; that as the business recovers may come back versus cuts that are more permanent, whether it's headcount reductions or just you're being streamlining R&D expenses, and those expenses don't necessarily come back as the business recovers?

I think it's roughly equal, Quinn, in terms of us seeing higher levels of synergies and then some of the other opportunities that I spoke to. But I think, even if anything is going to come back, we're not expecting them to come back in this current fiscal year. We are definitely managing things on a very tight basis for the rest of the year.

I want to emphasize that, as you know, our history shows that a significant portion of our variable compensation is linked to our ability to achieve profitability. This is influenced by our revenue and its growth. Consequently, many of those expenses will not return if revenue does not improve.

Got it, okay. Thank you.

Our next question comes from Matt Ramsay with Cowen. Please proceed with your question.

Yes, thank you very much, guys. I appreciate you taking the questions. I guess the first one that I wanted to get to and obviously, there is some with the new CEO coming in and the board doing different evaluations of things. I wanted to ask sort of a nuts and bolts question. Just with the non-IoT business, so the signal integrity and the protection and sensing segments, what's the operational overlap between those two business segments from an R&D perspective, from a go-to-market and sales perspective, from FAE perspective? I'm just trying to understand that there are obviously synergies and things, but how independent are those businesses or how integral do they need to be to run together, just general big picture thing? Thanks.

Yes. So, Matt, if you look back at Semtech's history, our businesses have always been mostly separate, as is typical for analog companies. We operate a portfolio of different analog businesses, and we typically don’t cover the entire system; we focus on analog functions. For example, Advanced Protection involves advanced sensing and protection functions. In our SIP business, we provide CDRs and PMDs, but we don’t handle some of the digital aspects. This is how we operate. Each business is quite distinct and doesn’t share much in common. We aim for attractive markets, which is standard for high-performance analog companies, and seek opportunities to grow these businesses. This approach has been applied to our integrity product business, which we acquired, and our protection business over the years. The IoT segment initially focused mainly on low power radio technology with LoRa, alongside some related analog functions. However, following the acquisition of Sierra, we incorporated a modular router and software-as-a-service offerings. As we developed LoRa, we expanded our focus from radio technology to gateways and systems connectivity and began to explore cloud services as a potential avenue. The intent with acquiring Sierra was to enhance our capabilities, particularly in sensing services and edge technologies. While these aspects differ from our typical chip business model, they have the potential to elevate Semtech significantly, which motivated the acquisition. Nonetheless, the protection business, the Signal Integrity Product division, and the IC side of IoT are indeed quite different entities.

Thank you for that. I appreciate the perspective. I guess as my follow-up question in the IoT business largely came from Sierra. There were obviously cloud infrastructure pieces or connected services business that were affiliated with the old LoRa business and also with the big IoT franchise that came in from Sierra. Is the intention to integrate those cloud platforms into one, and how has that evaluation started and is progressing well? I guess what kind of overlap is there, and opportunity to sort of put those two cloud platforms together? Thanks.

When considering the Sierra software-as-a-service business, it primarily focuses on managed connectivity and managed network services, along with associated services. With Semtech, our focus is on the end nodes and their management, particularly regarding sensors. By integrating these two aspects, we're essentially developing a higher value platform for our customers. For instance, a customer looking to establish a private network to manage their sensors should be able to access managed connectivity and identify security vulnerabilities, as well as monitor the provisioning, location, and health of those sensors. This is the ultimate goal for us. We currently have a robust platform to achieve this with the Sierra advantage platform, which has been in place for many years, in conjunction with our LoRa cloud platform. There is still work to do on integration, but once that is complete, I believe we will have a very unique and differentiated platform.

All right. Thank you very much, guys. I appreciate it.

We have a follow-up question from the line of Tore Svanberg with Stifel. Please proceed with your question.

Yes, thank you. Just two quick follow-ups. The turns 39% that was at the beginning of the quarter, how would that number be now, as you're almost halfway through the quarter?

Yes, we don't normally give that, Tore. Sorry if I had given that number out. We normally talk about the turns of the beginning of the quarter. I would just tell you that we're confident that we will make our guidance, right?

Got it. But I mean, it's safe to say that the world is back to turns, right? Because, obviously, the industry has had a lot of turns in the last two years, so we're sort of back to that, right?

Yes, during COVID, the turns dropped to zero, which created an unrealistic situation. Now, we are getting closer to the pre-COVID levels where we were regularly achieving a 45% turn rate each quarter, but we're not quite there yet.

Got it. And the 67% that's now IoT, what percentage of that is services at this point?

Let's see, do you have that number, Emeka?

No, I don't have that number. Sorry, but I can get it to you.

Okay. That's fine. We can follow up. Thank you.

Yes. Okay.

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

Hi, this is Way Mark in for Rick. I wanted to wish you the best in your retirement. It's been a pleasure working with you. My first question is regarding your prepared remarks, where you mentioned bookings increased 1% quarter-over-quarter from the organic Semtech, particularly from the advanced protection and sensing segment. Could you elaborate on that a bit more? Are you observing stronger performance from the protection business or more from the proximity sensing side?

We see both actually. The consumer business in general has been really soft over the last few quarters as you know, particularly in China. I would say that we're starting to see improvements in both the consumer protection business and consumer sensing business. But I would say on the proximity sensing business, a lot of it now as I mentioned in China, the new regulations for FY 2025 are driving more design wins. So I would say that the consumer protection business is what's driving the current demand increase.

Got it. Great. Thanks. As for my follow-up, particularly within the protection, it looks like the broad market side reached 55% of your protection business of that mix. But given the higher growth of this segment, do you expect this mix to reshape for the rest of the year compared to the consumer side?

No, I expect consumer to come back actually and be a larger percentage again. I think what it demonstrates is the value of having that diversity, and the fact that we have momentum in the broader protection business bodes really well for the future. Because that's a business that I think will go on for the next 10 years growing as we start to get broader industrial penetration. The consumer business, of course, is very volatile; it goes up and it goes down. Currently, it's very down, which is why our protection industrial businesses got a larger percentage. But I do think that once that protection businesses and we've got good design wins, so once the demand comes back, I think that will come back quite quickly and be a larger percentage.

Great. Thank you.

We have a follow-up question from the line of Craig Ellis with B. Riley. Please proceed with your question.

Yes. Thanks for taking the follow-up and since I missed it in the initial round, Mohan. Congratulations, great pleasure working with you and good luck in your next phase. I wanted to follow-up on a couple of longer-term things. One, I think China is implementing proximity sensing standards that go into effect in January of 2024. As the team works with smartphone companies around designs for early next year, what are you seeing in terms of content and proximity sensing win rates versus where you might have been in other generations of phones, et cetera? Is this looking something that could be a meaningful incremental driver, or does it just support the run rate of the business as you have it?

Yes. So first of all, it's something that we've been working towards and hoping for quite a few years now. It's been actually probably two years later than we'd liked, but it's finally coming to fruition. The main reason for that and the reason why it's valuable for us is, it means that most of the smartphone manufacturers that sell into China will now include proximity sensing or SAR functionality in their phones. As you know, with Samsung and some of the companies that we have partnered with and have penetration with, they have multiple phones, and some of their phones that don't have proximity sensing and they ship into China, but now that will change. So we are starting to see that momentum already in China and outside China, so that's good. So it's more design win. Of course, we don't have to see momentum from a revenue standpoint, but I expect to see that in FY 2025 for sure.

That's helpful. And then from time to time, we talk about the Amazon Sidewalk initiative, and I know it's something that the company has worked on. Just any color on how you feel like the team is progressing with Amazon and prospects for that to monetize as we go through the year?

Yes, regarding Sidewalk, I think it's still early, but the smartphone world in IoT is just starting to develop in many ways. We have always supported Amazon's vision and their Sidewalk initiative, and we feel positive about it. As we start to see some of the use cases and applications emerging, we are excited. Our excitement about it comes from the smartphone perspective, independent of Amazon Sidewalk. I believe we'll continue to see LoRa becoming a mainstream technology in smart home connected spaces. We are optimistic about Sidewalk's potential for success. There have been many gateways in their ecosystems, and now the focus is on end devices. Although we don't have major updates yet, we remain very positive about it.

Got it. Thank you very much, Mohan.

Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. Before we close, I want to share that we delivered our inaugural ESG report this quarter, showcasing the many ways our low-power products are having a significant impact on society, as the world adopts technology to monitor and manage our scarce natural resources. You can find this report on our website. In closing, our global teams are executing well in a challenging economic environment. I know I'm leaving the company in excellent hands with the arrival of Paul Pickle as the next Semtech President and CEO. Thank you all again for the many years of support. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.