Semtech Corp Q3 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to Semtech Corporation's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, operator. Good day everyone and welcome to all those joining today's call, including analysts, investors, and my fellow employees. I'm Mark Lin, Executive Vice President and Chief Financial Officer, and I'm joined today by Mr. Paul Pickle, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the third quarter of the fiscal year 2024 which are posted to our Investor website at investors.semtech.com. Supplemental earnings materials including net sales data by end market, reportable segment, and geography, as well as the share count table reflecting potential share issuances from our convertible notes at various stock prices are also posted to our Investor website. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than net sales. A discussion of why the company considers such non-GAAP financial measures useful along with reconciliations of such non-GAAP measures to the most comparable GAAP financial measures are included in today's press release. 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 Risk Factors section of our most recent periodic report filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current only as of today and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. With that, I will turn the call over to Paul to discuss our business and end markets.

Thank you, Mark. Semtech's Q3 financial performance generally met my expectations with net sales slightly above the midpoint of guidance. I'll provide a bit more color on end-market performance, which we believe improves understanding and comparability of our business before turning the call back to Mark. Infrastructure net sales were $43.2 million, a sequential increase of 2%. Hyperscale data center applications benefited from continued momentum of AI-driven applications and grew both sequentially and year-over-year. We recorded growth in general compute data center applications as well. We had record shipments in 200-gig, 400-gig, and 800-gig applications with our Tri-Edge and FiberEdge products having been well received in data centers around the world. Net sales for other products in the infrastructure end market including passive optical network, wireless, and infrastructure-focused transient voltage suppression faced a headwind from elevated channel inventories, though POS for each of these products grew sequentially. As stated previously, PON tenders are expected in our fiscal fourth quarter and we have seen some early channel pause in anticipation of this timing. We believe we continue to lead the PON space. Last March, we announced the world's first 50-gig PON chipset which enables multi-gigabit broadband services for multi-tenant locations and will drive new use cases for the PON market including enterprise applications for small business needs. This chipset is currently sampling with module vendors and system integrators with positive feedback. We have also started sampling 1.6 terabits in linear pluggable optics applications at optical module vendors and system integrators with early success. We believe our technology solutions have a meaningful advantage in AI applications offering lower cost, lower power, and lower latency. Net sales from these leading-edge applications are expected to begin in the second half of calendar year 2024. On the automotive front, while net sales are currently small, we believe we are making inroads with the next-generation Ethernet protection devices. Adoption of automotive Ethernet continues to accelerate and our leading products in this space are positioning us for future growth. For the fourth quarter, we expect net sales from the infrastructure end-market to be flat to slightly down as the market further digests channel inventory. High-end consumer, net sales were $37.6 million, a sequential increase of 10% benefiting from seasonality in TVS products primarily directed at smartphone applications. Sales from these TVS products increased both sequentially and year-over-year with corresponding increases in POS. Strength in the quarter was driven by a measurably greater protection content in current generation products at a leading North American smartphone manufacturer compared to prior generations. Design wins also grew 10% sequentially for handheld devices and wearables further validating our recent innovations in this space. Sales from proximity sensing products declined slightly on a sequential basis, but grew year-over-year, while encouragingly POS grew on both a sequential and year-over-year basis. Our PerSe Sensing solution provides capacitive touch end-user sensing capabilities. For wearables, PerSe sensors improve the user experience by providing automated functionality and rapid response interactions such as smart assistant activation, noise cancellation control, and media player management. Our PerSe sensors also provide the industry's best performance of minimizing end-user's exposure to RF energy. This allows equipment manufacturers to achieve compliance with specific absorption rate or SAR regulations while maintaining optimal signal connectivity. While PerSe is well known in the smartphone space, efforts to reduce SAR have opened opportunities and design-ins for applications including notebook computers, tablets, and wearables. For the fourth quarter, we expect net sales from the high-end consumer market to be down due to the aforementioned seasonality and channel inventory digestion. Industrial, net sales were $120.2 million down 26% sequentially, but within expectations with the bulk of the decrease in the ISP modules business. Semtech delivers product leadership in low power wide area and broadband applications and will continue to leverage these areas to return the business to growth. IoT Connectivity Services reported net sales of $24.2 million up 1.4% sequentially highlighting the stickiness and relative stability of this recurring revenue stream. Within AirVantage Smart Connectivity, we continue to see growth in our advanced service line, which offers global access through a multi-EMC multi-profile single SIM solution. Our carrier plus offering which simplifies regional deployments with multiple Tier 1 carriers is showing growth, particularly in Australia and New Zealand. These growth areas are partially offset by the sunsetting of legacy technologies, but net to stable sales. Net sales of LoRa-enabled industrial products declined sequentially but POS and bookings increased, providing some indication of market recovery. Connected gateways increased 3% sequentially and we are encouraged by substitutes, increases in POS for in-node products. Adoption of LoRa-based solutions in the utility space gained further traction in Q3 with multiple European-based utilities announcing RFPs with a requirement for a LoRa solution. We are also integrating LoRa into custom SoCs for our customer, which has expanded opportunities in hearing aid applications. Returning to our hardware business and expanding on the regulatory environment, I discussed in our last quarter's earnings call, as the largest North American module supplier, Semtech is definitely seeing a meaningful share shift in pipeline from our competitors to us and pipeline is translating to design wins. Customers in this market have varying degrees of risk tolerance, most sensitive as critical infrastructure such as industrialized laptops used by first responders in cellular routers used by utilities, we are now benefiting from the next wave of concern with applications that involve payments or personal identifiable information. Point-of-sale devices are a prime example where there was perhaps a hyper-focus on cost for point-of-sale applications, the security of Semtech as a North American supplier has resulted in design wins that translates to revenue in the second half of next year. Our near-term headwind for our router business is government spending constraints under the current federal budget situation with traditional end-of-year public sector spend lower than trend. For the fourth quarter, we expect industrial net sales to be flat to slightly down with continued inventory digestion and the aforementioned public sector headwinds, but stable net sales from our managed connectivity offerings. Now I'll turn the call back over to Mark.

Thank you, Paul. Turning to our Q3 results, we recorded net sales of $200.9 million slightly above the midpoint of our guidance. Paul discussed end market net sales performance with infrastructure up 2% sequentially, high-end consumer up 10% sequentially, and industrial down 26% sequentially. I'll refer participants to our investor website for the last five quarters of net sales data by end market, reportable segment, and geography. Gross margin was 51.3%, a sequential increase of 170 basis points and above the high end of our guidance for the quarter. Gross margin reflected well-negotiated supplier concessions to reduce third-quarter manufacturing costs offset by incremental inventory reserves and unfavorable mix. Supplier agreements particularly benefited IoT systems for the third quarter. Netting these items, consolidated gross margin would have approximated the midpoint of guidance. Operating expenses were $82.5 million favorable to the midpoint of guidance with R&D expense sequentially increasing about $900,000 and SG&A sequentially decreasing by $4.1 million. Net interest expense was $22.3 million with only about one week's benefit from the capital structure change completed at the end of October. We recorded net earnings per share of $0.02 based on a diluted share count of 64.3 million shares. Changing gears to the balance sheet, we ended Q3 with a cash balance of $123.8 million and undrawn revolver capacity of $280 million, working capital moved in a favorable direction with inventories decreasing $19.6 million. Principal outstanding on our debt was $1.4 billion with a weighted average interest rate of 5.57%. At the end of the third quarter, our consolidated net leverage ratio calculated in accordance with our credit facility was 6.49 and we expect to maintain compliance with our debt covenants for the next 12 months. Including the effects of our convertible notes and interest rate swaps, loan principal was about 83% fixed and 17% floating at the end of Q3 and all of the loan principal was long-term. At the end of Q3, there are no scheduled principal payments on our senior secured credit facility until January 2028 and no scheduled principal payments on our convertible debt until November 2027. I'd like to discuss the five-year $250 million, 4% convertible note we issued this past October. In addition to the benefits of increasing our mix of fixed to floating rate debt and eliminating scheduled principal payments on our term loan, we placed emphasis on reducing cash interest costs. A Federal Reserve rollback in interest rates may occur when I turn on the high beams, I expect to be in a protracted elevated interest rate environment. As I mentioned, all of our loan principal is long-term. While deleveraging is a key use of excess cash, the convert eliminated $67 million in scheduled principal payments next fiscal year providing optionality. Also addressing dilution, please refer to the convertible notes dilution table posted at the Semtech Investor website. This table provides incremental dilutive shares on both the 2027 and 2028 convertible notes. On both the notes par value or principal is paid in cash and conversion of par is settled in cash or shares at Semtech's discretion. Assuming the conversion of both notes was settled in shares, dilution of 20% is reached at a stock price a bit above $85 with no effect on diluted shares today. On the date we priced the 2028 notes offering, a $250 million raise would be the equivalent of 15.6 million shares or an immediate 24% dilution, which I do not believe counteracts the benefit of reduced interest expense. I hope this extended explanation provides some insight into management's calculus in issuing the convert. Free cash flow was $12.4 million use of cash, reflecting ongoing restructuring and integration activities, but sequentially improved $6.5 million. Adjusted EBITDA was $28.1 million compared to $39 million in the second quarter. Now turning to the fourth quarter guidance, we currently expect net sales of $190 million plus or minus $10 million. Our industrial end market is expected to be flat to slightly down. The high-end consumer end market is expected to be seasonally down and the infrastructure end market is expected to be flat to slightly down. While end customer demand consisting of direct shipments plus POS has improved, our net sales guidance reflects a thoughtful reduction in channel inventories. This unexpected product mix, gross margin is expected to be 48% plus or minus 100 basis points. Operating expenses are expected to decrease 10% at the midpoint to $74 million plus or minus $2 million primarily reflective of cost reduction actions we've already implemented in the third quarter. SG&A is expected to sequentially decline 13% to $33.5 million at the midpoint. Research and development expense is expected to sequentially decline 8% to $14.5 million at the midpoint and we do not believe we have materially impacted projects that result in near-term revenue or materially affect any of our customers' roadmaps. Net interest expense is expected to be $21 million reflective of timing of interest rate reset periods relative to quarter-end. These amounts are expected to result in a diluted loss per share of $0.05 plus or minus $0.06. I'd now like to turn the call back over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. The first question comes from Quinn Bolton with Needham and Company. Please go ahead with your question.

Hey, guys. Thanks for taking my question. I guess first question, Paul, you talked about the growing pipeline on the module side for North American operators. Just wondering, can you give us a sense, how big is that total TAM, how much of the North American market maybe currently supplied by the Chinese module vendors? Just trying to get a sense of how big this opportunity is. If you size it last quarter at $200 million. It sounds like it's bigger than that now and then I've got a follow-up for Mark. Thanks.

Thank you, Quinn. I really liked the Harry Potter reference in your note this past quarter. Now, regarding your question about the pipeline, I would estimate the global market to be just over $6 billion. If we exclude APAC and automotive, that figure drops to just over $3 billion, excluding NB-IoT as well. Looking specifically at North America, there is a substantial automotive market, and another analyst estimated the revenue potential at about $4 billion over five years for North America. Without considering automotive, we're looking at around a $400 million opportunity.

On an annual basis.

Yes.

Got it. Perfect. Mark, you mentioned that the gross margin is now projected at 48%, down from over 51%. I'm having some trouble understanding the quarter-to-quarter change. It seems there were some benefits in the fiscal third quarter that may not happen again, but there were also some inventory charges during that quarter. Could you explain the main factors influencing the changes as we move into the fourth quarter, particularly regarding increased inventory reserves and product mix? Thank you.

Thanks, Quinn. I'll also mention that our guidance for Q3 indicated a 48% gross margin. There’s a lot of variability, and we are sensitive to the mix. If we normalize the mix at 48%, it sets a target of 48% for the upcoming quarter.

So, really 300 plus points of benefit in Q3 that you don't expect to repeat in Q4.

That's right.

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

Yes. Thank you, Paul, Mark. So, it sounds like POS is starting to improve just broadly speaking, but it also sounds like there is still some channel inventory out there. So, could you maybe quantify that for us in either weeks or percentages or anything like that because it does sound like POS is really encouraging data at this point?

I think if you reflect on my comments from the last earnings call, we discussed an improving bookings trend over the last four quarters. Currently, we are five quarters in when looking at the IC portion and the hardware component of the business, which has seen a significant decline this past quarter. This makes it difficult to predict where things will stabilize. I'll separate these two areas for now. In some instances, the channel is quite lean, positioning us well to respond to any market demand or upside. In other cases, particularly in consumer, inventory levels have been quite good, resulting in a relatively healthy channel. It's challenging to put an overall number on this since it depends on the product line. However, ideally, we aim for roughly 8 to 12 weeks of inventory in the channel. In some instances, we are reaching the 12-week mark, and in others, we are surpassing it while closely monitoring point of sale data. Regarding the component portion, we have crossed the one-to-one book-to-bill threshold for the first time, which is encouraging for our recovery. On the hardware side, I have less visibility on the module business, which saw a significant decline this past quarter. This is mainly a direct business, and our customers do not report their inventory numbers back to us. We communicate with them and gather insights on inventory levels, but we've observed a decline in the industrial end markets similar to what we've seen in routers, around 30%. We believe our customers are experiencing similar issues, resulting in increased inventory levels in terms of weeks on demand or weeks on hand. It is still early to determine what we might call a correction in this area, but we expect that to unfold over the next quarter or two.

No, that's helpful color and as my follow-up on the infrastructure business, I appreciate the guidance, they are flat to down. But could you maybe talk about some of the sub-segments there and what you're expecting especially, data center is that expected to still grow and perhaps that's being offset by still weak PON and Wireless.

Yeah. So, yep, the data center, definitely we're still expecting some positive things. I will highlight that we're fairly early on though with no change in data centers. So, the traction has been quite good. The channel has been pulling those orders in anticipation of usage and most of the stronger production ramps are really kind of slated for Q1 calendar. So, while we're seeing a nice uptick, last quarter, we saw a 112% increase in terms of data center numbers. We saw an increase this quarter in terms of data center numbers. I would expect a little bit of absorbing the pools and then kind of a resumption of growth as we kind of look at next calendar year. So the data center number is going quite well. PON is a little bit steady state until we get a look at those tenders. We're expecting those tenders to come in, in the January timeframe. That's a bottom one-month delay, still ahead of Chinese New Year, but we were expecting kind of see those in December. It's now been moved to January. So, we'll see those tenders and will be able to respond accordingly. But overall, I'd say, infrastructure is fairly well positioned. There are some bright spots. Most of its moving sideways, but those increases that we're seeing definitely offset as we kind of look at the module business, although I don't expect significant further decline, we just expect that to move sideways at this point.

Sounds good and congrats on the progress. Thank you.

Thank you.

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

Yeah, thanks for taking the question. And Mark thanks for the additional transparency with the convert dilution things you posted on the website. So, Paul, I wanted to start off with one for you and follow up a little bit on Tore's question, but maybe take a longer-term view, would be helpful if you could provide some more color on things that you see as we look out over the course of calendar '24, in data center, for example, what are some of the things that you're really excited about in traditional data center versus hyperscale. And then similarly, what are some of the things you have your eyes on in base station and then in PON?

Thank you for the question. We are really excited about the data center sector. There is a significant expansion happening in this area. I can categorize data centers into two types: general compute and AI, which have distinct requirements. Currently, the demand for AI is extremely high. We are advancing in general compute applications as well, but the pace of growth in AI is remarkable. Most of the volume we are shipping right now is in 50-gig single lambda devices. While we are preparing to ship 100-gig devices and have plans for 200-gig single lambda, we are not quite there yet. Looking ahead, the growth expected in AI-driven data centers presents a substantial opportunity for us, and we are well-positioned to capitalize on it. Overall, this is an exciting time with a small customer base, but the potential is significant.

Got it. And then you talked a little bit about needing to see tenders in PON but on the base station side of the business, anything standing out look at 2024.

If you refer back to ECOC, we conducted a 1.6 terabit demonstration with Coherent, which was aimed at mid-haul type applications. This advancement enhances our capability to deliver high-speed connections across short-reach, mid-reach, and long-reach applications, positioning us well for growth. As infrastructure development boosts data connectivity, the last mile will evolve naturally in both European and North American markets, and China remains significant for us. With the ongoing infrastructure expansion and multi-tenant dwelling growth, data connectivity has become increasingly vital. We anticipate an increase in our market share in North America and Europe as they seek to implement higher-speed applications. We have also introduced a 50-gig product and are exploring 25-gig adoption. From my perspective, the tenders in January will have a near-term positive impact as we continue to capture market share in various regions, contributing to our long-term growth.

Got it and then I'll flip it over to Mark for the second topic and it's on operating expense. So, Mark, very impressive guide, decreasing OpEx by 10% quarter-on-quarter to $75 million, and it sounds from the color that you provided that that decrease is structural. But I wanted to confirm that. And then if you could just any color on things we should expect as we look to 2024 with OpEx for example FICA impacts early in the year, any other optimizations that you might see coming. Thank you so much.

Sure. Thanks for the question, Craig, it's, we've got $74 million for next quarter and we're pretty confident in hitting that number because the actions that we need to hit that number have really been taken. Of course, this could be seasonality in calendar Q1 with things like FICA resets, but we're pretty comfortable staying around this neighborhood in terms of OpEx. There may be some incremental increases, slight incremental increases in R&D, but that's just really timing.

Got it. Guys, congratulations on the progress. Thank you.

Thank you.

Thanks.

And the next question comes from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

Hey, guys, Paul, I wanted to follow-up on the whole cellular module side of the business in your commentary, I'm just curious, a lot of these design wins that you're lapping up now, when do they turn to production? And I'm curious if any of those customers are contemplating or having conversations with you about rip and replace kind of existing products that they already have say, with say Quectel or is it just kind of go-forward products and then I have a follow-up.

As we assess the situation, most of the programs we are bidding on or have secured are expected to begin production towards the end of the calendar year. I wouldn't describe these as rip and replace scenarios. However, on the customer side, there is some hesitance regarding forecasting due to market uncertainties. If market confidence improves, we might see some projects initiated a bit earlier, but currently, they are scheduled for the end of the year. We are also noting additional wins and pickups, rather than just more follow-on programs that we've traditionally had. If the China select committee applies further scrutiny, it is likely that we will observe an acceleration in critical infrastructure applications for next-generation designs, which could be more aligned with the rip and replace characterization. I doubt anyone will replace a module in existing hardware without updating that hardware as well, at least not at this time.

Got it. And then just a broader question on visibility, and also if you think your January revenue guide down a little bit sequentially. Do you think that marks the low on a quarterly basis going forward?

Yeah. So I think I'm remembering my comments from last earnings call, I was pretty confident on the last earnings call that we hit a bottom on the IC business, we continue to see that we're making progress in moving forward on the IC business I think even though some of our peers maybe are not seeing that we've corrected, a little bit earlier in the cycle and we continue to see that strength. At this point I don't anticipate the hardware business getting any worse. I can say that, last quarter was a little early. We're just starting to see that decline. We've seen some pretty good, let's say, steady numbers out of the routers business, the modules business did pull back as we saw a little bit of a knee-jerk reaction at the customer base, where a lot of that direct business has had and the Fed buying I think was a little bit of a surprise as well for some of that customer base, where our product goes into. We've seen a little bit of sluggishness coming into the Fed buying season. And so I don't anticipate it getting worse. If anything, we might get a little bit of pickup sooner rather than later, but I think it's a little bit early to tell.

Very good. Best of luck guys.

Thank you.

Thank you.

Thank you. And the next question comes from the line of Christopher Rolland with Susquehanna. Please proceed with your question.

Hey, guys. Thanks for the question. I wanted to talk on AI as well, just given the attention it's all getting. So last quarter you guys mentioned large US hyperscaler I think could place some initial orders for some CDRs and TIAs for AOCs, lot of TLAs there, sorry, but would love an update there on any purchasing and then you talked about sampling some 1.6T products, were those, was that linear direct drive analog PAM4 CDRs and just maybe talk about your 800 and 1.6 opportunities as you see it.

Last quarter, we discussed initial orders, and we have actually seen some shipments for that large US-based hyperscaler. This pertains to the 400-gig application, and I want to be cautious about the ramp-up; the first half will be a bit slow, but we anticipate it to gain momentum as we approach the end of the year. December was when the final qualification hardware was established, which will set the forecast. Currently, things are progressing well for this opportunity, which could lead to an annualized upside of approximately $30 million once we reach full production. We expect the sales cycle to last around three to five years. In terms of our offerings, we occasionally see 4 x 100s and 8 x 100s, but the next stage in AI that we are focusing on is the 200-gig single lambda devices. This is where we begin to achieve 1.6 terabits in any significant volume. We are exploring these speeds for both mid-reach and short-reach applications. However, it’s difficult to predict when these will convert to volume as we’re still in the early stages, although we are observing promising results from the POCs and demonstrations. Given the current environment, I believe demand will pick up quickly, but I expect this to become a reality more in the second half of calendar year '24 rather than immediately. We will definitely see a steady increase in the 400-gig modules in the first half of the year, and this will strengthen in the second half, leading to exciting plans for 800-gig.

Excellent. Good progress there. I wanted to look at your segments also another way here. If I'm reading kind of the tea leaves right here, on the signal Integrity side, you'd expect that to fall and then Protection and Sensing maybe up and the other two IoT related down, is that kind of how we think about it?

In our analysis of APS, we noticed strong demand followed by some normalization in response to the North American smartphone manufacturer's ramp-up. We anticipate a slight pullback, primarily due to seasonal factors. There were significant spikes in demand leading up to the launch, followed by a modest decline. However, the Protection segment is expected to have a baseline component that will progressively improve from this point onward. The base numbers have shown stability, particularly in proximity detection, and we expect that to gradually strengthen. My observation of a 13-week booking average by product line indicates steady improvement, not a rapid rebound, as inventory levels decrease and our partners prepare for upcoming production schedules. The SIP segment is experiencing some normalization, and there's a similar situation with signal integrity, particularly following a robust data center performance. We may see unexpected positive results, but currently, we're projecting softer revenue due to the digestion of channel inventory following the initial launch. Validation of hardware and performance data is a typical step before partners proceed with additional production schedules. As for the Protection and SIP segments, they are both currently moving slightly downwards, with some lateral movement.

Thanks so much, Paul. Appreciate it.

And the next question comes from the line of Rick Schafer with Oppenheimer and Company. Please proceed with your question.

Thanks, Paul. Thanks, Mark. I guess my first question if I could just maybe a high-level, and Paul, I was just hoping that you could share a little more about your strategic kind of vision for Semtech and what the Company you think it's going to look like you expect it to look like say in three years from now. I mean what role do modules in particular play long term and the growth opportunities there. I mean, do they justify the risk the associated margin pressure or do you see a path to maybe improving those margins demonstrably sort of more to kind of classic corporate average?

That's a good question, and I appreciate you asking it. Looking three years ahead, I believe our core strengths lie in components, and it’s logical for us to expand into module products as long as we can achieve better margins. It makes sense to create a module containing components we produce ourselves. In my previous experience, I've often needed to develop reference designs, and sometimes it’s best to market, manufacture, and sell those designs. The Semiconductor industry can become more complex, especially when we discuss IoT, due to the variety of use cases. This often requires a wide range of technologies to create a complete solution. If I were solely a module manufacturer today, my business model would differ significantly and my investor base would also change. Thus, on its own, it does not justify the margin pressures. However, if we can develop a more comprehensive IoT strategy where modules serve as enablers for higher-margin sales, then it becomes feasible. We don’t necessarily need to own the entire process over the next three to five years, but cellular backhaul will always be integral to an IoT strategy. I see a substantial IoT opportunity ahead, and we need to rethink our strategy to capitalize on it in the market. If we can integrate this into our broader narrative, alongside software and components, it becomes sensible. While the current margin pressure is not justified, we aim to seize the opportunity. There is significant potential associated with modules; for instance, when dealing with utility companies, they may prefer LPWA or private network solutions like LoRa. Therefore, having the capability to offer both is advantageous if we develop a more extensive product range and narrative. I hope this provides some insight without being overly definitive after five months.

No, I appreciate that. There's a lot of detail, Paul, and it actually leads nicely into my next question. If you could provide more information on the order trend, particularly regarding order velocity, that would be helpful. It seems like that business is starting to gain traction. In the last call, you mentioned it was stable at around $100 million a year. Is that still the expectation for the foreseeable future? Additionally, could you share your strategy for growing that business and any metrics related to revenue if you feel comfortable doing so? Thank you.

So you're talking about LoRa in particular.

That was a LoRa specific question. Yeah.

I see LoRa as a business around $100 million. There is a significant opportunity for components or semiconductor content in IoT, and given the diversity of use cases, it requires a multi-faceted strategy. We have a mature cloud platform and a solid gateway software team, which positions us to capture this opportunity. However, we need to make private network deployment easier. The numbers for connected nodes and gateways have increased sequentially this past quarter, indicating a large opportunity even during a downturn. There is ongoing demand for alternative connectivity for low bandwidth, low power devices. We believe in this opportunity, but we need to expand our technology portfolio. Part of our reorganization is aimed at aligning our R&D competencies to capitalize on this vision of simplifying private network deployment. LoRa will play a significant role in this strategy, along with other components in our technology portfolio. We are actively formulating this approach and will work on it over the next couple of quarters, at which point we will share more details about the market opportunity, our position to succeed, and the expected timeline. Regarding our overall opportunity, in the past, we mentioned a $1.1 billion pipeline. Currently, we estimate around $400 million in our LoRa-based pipeline, and we continue to see opportunities and use cases. We need to identify use cases with commonality in solutions and then work towards delivering a standardized solution for that market instead of just focusing on individual components.

Thanks a lot for all the color Paul. Good luck.

And the next question comes from the line of Tristan Gerra with Robert W Baird. Please proceed with your question.

Hi. Good afternoon. Following up on your comments about Sierra Wireless, I was wondering about the revenue run rate before any synergies, including with LoRa. It seems that your quarterly run rate is currently a bit lower than it was two years ago prior to last year's significant increase. You've mentioned that the October quarter is likely a low point. Is a quarterly rate of $100 million a reasonable baseline for our assumptions before any cross-selling opportunities? Additionally, could you provide more details on the market share changes within the various businesses for Sierra Wireless? Thank you.

I will comment on the shift in market share. I don't believe we've observed any loss or shift in share; if anything, we expect to gain some share in modules. The router business has remained steady. Regarding Sierra Wireless, I mentioned in the last earnings call that I estimated its value to be around $460 million after its recovery. While I still think that's a reasonable figure, in the short term, your estimate might be slightly higher. So, let's consider the $400 million, with around $100 million of that being a consistent and predictable connectivity business, which has great visibility and is recurring. We're experiencing growth, though it won't be rapid; instead, we expect steady improvement with good gross margins and contributions. Currently, router sales have seen about a 30% decline, which I believe is largely a trend across the industry. I anticipate a modest recovery from this base, but it won't reach the heights seen the previous year. Looking back a little over a year, those numbers were elevated due to a strong buying season. For modules, they have varied significantly, and we estimate a normalized figure of around $260 million, with some potential for growth. In North America, we see an opportunity for an upside of about $370 million to $390 million, though we don't expect to capture all of that market. We plan to pursue this aggressively, but it will take time to realize these gains, likely around two years out.

Great, very useful. And then from a follow-up question, so you mentioned making private network adoption much easier as an opportunity for LoRa, is that really 100% of your focus on LoRa right now, as it sounds like the bulk of the inventory correction associated with helium is behind. The feedback notably from the Things Conference is that there is basically much easier access to lower implementation than just a few years ago with a fairly clear path of kind of a one to two year ROI for customers who want to implement LoRa. So could you expand a little bit on what you think is still holding LoRa at a revenue run rate that admittedly is lower than the prior management team was guiding for a few years ago and any elaboration on where you see opportunities to improve the adoption?

Yeah, I will say this, and I think the execution in LoRa is pretty good, let's say below expectations that were set by prior management but I still think anytime you grow a business from zero to $100 million in four years in semiconductor land that's usually pretty special. So, it's a unique technology. Obviously, it's a technology that the market is there ready to adopt. When you start bringing together a large ecosystem set of partners that all have to work together to drive the solution, it definitely is going to slow down, but as we look at adoption, it continues to pick up. There's a little bit of a blip in there in terms of helium gateways that maybe was a contributor to the numbers being a little bit larger than what actual market adoption showed, so during that frothy buying season. But I still look at it as good steady adoption. Overall the market needs something that's easy to implement. If we talk to customers that are looking for something that's lower base, they're not necessarily in IoT, they're not necessarily somebody that has the breadth of R&D in order to implement something from womb to tomb. So this is where we have done taken initiatives in the past in order to make LoRa easier to adopt, we are licensing the technology out in order to further that adoption and we'll continue to evolve and deliver to the market tools necessary to speed up that adoption. But I do think that there are a couple holes in the delivery of that that solution that we could fortify in order to speed things up.

Great. Thank you very much.

And the next question comes from the line of Christopher Rolland with Susquehanna. Please proceed.

Hi, guys, just a quick follow-up, the amount of turns business you guys expect to get to guidance in the quarter, POS trends.

Yeah. Last quarter we were just over 50%, we're slightly less than that this quarter. It's not something that we will be tracking and reporting on, but it's slightly better than it was last quarter.

Thanks so much.

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

Thank you for taking my question, Mark. In the analog sector, many companies are revising their forecasts downwards. However, your performance appears to be more stable based on your results. Can you explain why that is? Is it due to the data center compensating for declines in your traditional analog businesses, or did you initiate the correction process earlier, or is there another factor that might be contributing to your better performance?

Yeah. It's both. I'll have Paul, he provided a lot of color on the end markets and for data center. But it is, we did sort of guide down before our peers in that group. So, I think that's another big portion of why we're cutting down from 200 to 190.

I think I've mentioned in previous investor meetings that one challenge for our operations team, which is very capable, is managing all the orders we received. Our team successfully secured the necessary capacity and delivered on it. I'm saying this partly in jest, as they are an outstandingly efficient team. We managed to secure that capacity and as a result, we shipped everything and experienced an early correction. Consequently, we are noticing an early rebound, aided by a couple of key markets where we have established a presence. One surprising market is TVS, where we continue to innovate with next-generation interfaces and have some of the best specifications available. Although over time competition may catch up, currently we are the only ones who can deliver, and we are seeing positive outcomes as a result. The expansion in artificial intelligence is a significant advantage for us.

Regarding the AI developments, can I ask if your order visibility is quite strong? Are you seeing a consistent accumulation of orders for multiple quarters, or is it more of a situation where you're managing on a short-term basis, with orders coming in sporadically each quarter?

I wouldn't say that the orders are accumulating rapidly, but we are seeing an increase in design-ins and expect orders to increase as well. This quarter, we experienced a nice rise in bookings, marking the early stages of that trend, which we anticipate will strengthen in the coming year. The ECOC event provided solid validation on several fronts, and the feedback we received was outstanding. Our 200-gig single lambda devices were well received and well positioned. The industry is making decisions on data center architectures, with some Hyperscale players adopting unique approaches. Regardless of the direction taken, whether re-timed or direct, it will contribute to additional market potential and growth for us, potentially at an accelerated pace if they choose a specific route. Overall, it’s a thriving environment, and we are beginning discussions on securing capacity for the next year, which will happen today, followed by incoming orders.

And if I can ask one last one, do you think, Paul, that you are done cutting at this point in time, reached a pretty happy threshold, if you will.

I'd say my goal was, I intimated that we probably had another $40 million to go. We did do that at this point. We pulled out $140 million out of the business and that was done thoughtfully with historical budgeting exercise. So if you go back in time, you look at 2017, you look at what the budgets were at those appropriate stages. And I think everything kind of comes down to just continual refinement and improvement at this juncture. I'm comfortable with the cuts that we made, anything that we do will just be to refine and improve our chances for growth in the future.

Yes, thank you guys for taking my question. The next one, I guess just a follow-up to Harsh's question, Paul what other segments you said you're reviewing today that you believe are near the bubble to require less investment going forward?

I have a management practice that involves reviewing everything on an annual basis. If we don’t have strong projects to invest in, we don’t automatically assign budgets to business units just because they had them previously. Every project requires a justification and has an opportunity attached to it. Currently, I scrutinize everything regularly. I can identify market expansion opportunities in certain areas and feel more comfortable with the associated risk profile of those investments. As we scale back operational expenses, we'll focus on reinforcing our established positions. If those positions are nearing a decline, we will reallocate those investments to areas that offer stronger topline growth.

Thank you for that. And I guess secondly, just if you can summarize the improving demand that you've noted in the press release about your high-end consumer business and data center, how much of that is for near-term visibility for the current quarter, in the next six months and to what detail can you provide that's offsetting those two businesses. I think your guidance for both was flat to sequentially down.

Yes, that's correct. I would say that the data center performance in Q3 was slightly better than we had expected. When I mention improving demand, I'm referring to end-market consumption, which includes direct shipments plus point of sale, and it's important to clarify that. I believe this is the best indicator of our business trajectory, as it filters out channel inventory fluctuations. So when I talk about improving demand, it's a modest sequential increase that has mostly been consistent over the past four quarters. I’m looking for corresponding booking rates, specifically the 13-week trailing average booking rates, to reflect that trend, and I do see a connection. Anything I can share is not a forecast, but rather past performance; we have witnessed continually improving demand over the last four quarters at least.

All right. Thank you very much.

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

Good afternoon, thanks for taking my questions and sneaking me in. Nice job on the restructuring efforts. Paul, maybe go back to modules, it sounds like you don't necessarily need any sort of a formal exclusion list on Quectel to win business because it seems like customers are diversifying away from that anyway, but I'm wondering, I don't think I heard any comments on that front. Is there an update on that front, and it sounds like based on the normalization of that business at around $260 million or so, that you're basically running at less than half that rate right now. When would you expect normalization on that front? I think last quarter you talked about the middle of calendar '24, is that what we should still be thinking about? So in the second half of '24 we're getting back to levels like that before you start to add on some incremental Quectel business.

I wanted to provide some insight into what we anticipate for the calendar year. Based on the figures around 260 million, I believe we are looking at recovery in the second half of the year. This is based on customer feedback and an increased uptake from new design-ins. As for the exclusion list, we don't require Quectel or FiberCom to be officially excluded to see benefits; we are already experiencing those benefits and will continue to do so. Even if the China Select Committee were to announce that everything is fine and not place them on the list, we would still benefit due to the shifts caused by the ongoing tensions between China and the US, particularly concerning networking equipment. This situation has been developing for years, and it's reached a point where companies are unwilling to risk their business by choosing a supplier simply because they might be a little cheaper. We are seeing significant interest, especially since we have strong relationships with Qualcomm, which I've developed through past work in computing. We are capitalizing on those leads and, additionally, we sell many Sony chipsets with LPWA modules, maintaining an excellent partnership there.

Great. And lastly, maybe to just wrap up on the LoRa front. Thanks for calibrating, it sounds like the annualized run rate now was down at about $100 million. I'm wondering what the growth rate on that business looks like and what the composition of that is today in terms of sales outside of China. I know that's where a lot of design activity has been going. But I'm wondering how that's built at this point in time. And lastly, just on the asset sale front, I know you guys are reluctant to do anything essentially under pressure of the balance sheet, but now that you solved the covenant issues for the immediate future, are there some assets now that you're starting to reevaluate that may not be part of the long-term Semtech? Thanks.

We will likely continue to report very strong numbers from China due to its manufacturing base, but there is notable adoption of our technology outside of the APAC region. I anticipate a growth rate in the range of 10% to 15% in the near future, with potential acceleration as certain technology advancements make implementation easier. We've witnessed steady adoption in infrastructure applications, particularly outside of China, with some successes also within China. Europe is experiencing promising adoption as well. Therefore, I believe a long-term growth target of 10% to 15% is reasonable, and we can reassess that over time. Regarding our balance sheet, we are focused on reducing our leverage ratio. While I won't comment on specific asset sales, I can say that everything is being considered to help reduce that ratio for the advantage of our shareholders.

Great. Thank you.

There are no further questions at this time. And I'd like to turn the floor back over to management for any closing comments.

Thank you for joining and have a good day.

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