Earnings Call Transcript - SMTC Q4 2020

Operator, Operator

Greetings, and welcome to the Semtech Corporation Fiscal Year '20 Fourth Quarter Conference Call. As a reminder, this conference is being recorded.

Sandy Harrison, Investor Relations

Thank you, Hector, and welcome to Semtech's conference call to discuss our financial results for the fourth quarter and fiscal year '20. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release and in the other Risk Factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call, should facts or circumstances change.

Emeka Chukwu, CFO

Thank you, Sandy. Good afternoon, everyone. For Q4 fiscal year '20, net sales decreased 2% sequentially to $138 million, which was above the midpoint of our guidance. Fiscal year '20 net sales decreased 13% over the prior year, driven by the challenging macro environment the overall industry faced for much of the year, fueled by the China tariffs and Huawei ban. In Q4, shipments into Asia represented 78% of net sales. North America represented 13% and Europe represented 9%. Total direct sales represented approximately 24%, and sales through distribution was approximately 76%. Our distribution business remains balanced, with 55% of the total POS coming from the high-end consumer and enterprise computing end markets and 45% of total POS coming from the industrial and communications end markets. While bookings declined slightly over the prior quarter, book-to-bill was above 1. Turns bookings accounted for approximately 37% of shipments during the quarter. Q4 GAAP gross margin came in as expected at 61.1%, and we expect our Q1 gross margin to be relatively flat sequentially. Q4 GAAP operating expense increased 8% sequentially due to higher pension expense, share-based compensation expense and new product expense. In Q1, we expect GAAP operating expense to decrease between 8% to 12% sequentially, primarily due to lower amortization of intangibles, lower share-based compensation expense, lower pension expense and lower new product expenses. Q4 GAAP interest and other expenses increased to $3.1 million from $1.5 million in Q3, driven by the impairment of some of our minority investments and the write-off of previously capitalized debt issuance cost from our refinanced debt. Q4 GAAP tax rate was approximately 59%, up from 16% in Q3, primarily due to the impact of an internal asset transfer between tax jurisdictions. Note that there was no significant cash tax impact from this action. We expect our GAAP tax rate for Q1 of fiscal year '21 to be in the range of 23% to 27%. Our GAAP tax rate forecast excludes consideration of any impact from discrete items, including excess tax benefit or deficiency from the exercise of stock options. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related and other nonrecurring charges. As expected, Q4 non-GAAP gross margin declined slightly over the prior quarter to 61.5%. And we expect our Q1 non-GAAP gross margin to be generally flat with Q4 levels. In fiscal year '21, we expect our non-GAAP gross margin to strengthen through the year, as demand from our higher-margin growth engines recover and overall demand improves. Q4 non-GAAP operating expense increased 2% sequentially to $53.9 million due to higher new product expenses. In Q1, we expect non-GAAP operating expense to be flat to down 4% sequentially, mostly due to the timing of new product expenses. For fiscal year '21, we expect our non-GAAP operating expenses to increase at roughly half the rate of revenue growth, which is consistent with our target operating model. In Q4, our non-GAAP tax rate decreased to approximately 9%, reflecting a favorable mix of regional income. We expect our Q1 and fiscal year '21 non-GAAP tax rates to remain in the 14% to 16% range. In Q4, cash flow from operations increased to 33% of net sales, up from 24% in Q3. We repurchased approximately 546,000 shares or $27.6 million of stock in Q4 and approximately 1.5 million shares or $70.2 million of stock in fiscal year '20. And our stock repurchase authorization now stands at approximately $110 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down debt. In Q4, our cash and investment balance was $293 million and our debt balance was approximately $197 million, resulting in a net cash position of $96 million. In Q4, accounts receivable represented 41 days of sales, which is at the lower end of our target range of 40 to 45 days. Net inventory was sequentially flat at 121 days and remains above our target range of 90 to 100 days. In Q1, we expect net inventory to increase slightly because of the macro-driven uncertainties in demand. In summary, we were pleased to deliver strong Q4 results despite all the macro uncertainties. Looking ahead, we believe that our secular growth drivers of hyperscale data center, 5G infrastructure and Internet of Things, our stable gross margin, our well-controlled operating expenses, our strong cash flow generation and our efficient capital allocation provide us the platform for a strong financial performance in fiscal year '21.

Mohan Maheswaran, CEO

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q4 fiscal year '20 performance by end market and by product group, discuss our fiscal year '20 performance and then provide our outlook for Q1 of fiscal year '21. In Q4 of fiscal year '20, net revenues decreased 2% over the prior quarter to $138 million. Softer demand from the industrial and consumer end markets was offset by stronger demand from the enterprise computing and communications end markets, which contributed to better than seasonal results for Q4. We posted non-GAAP gross margin of 61.5% and non-GAAP earnings per diluted share of $0.40. In Q4 of fiscal year '20, net revenues from the enterprise computing end market increased sequentially and represented 32% of total net revenues. Net revenues from the communications end market increased sequentially and represented 10% of total net revenues. Net revenues from the industrial end market decreased sequentially and also represented 32% of total net revenues. Net revenues from the high-end consumer market decreased slightly over the prior quarter and represented 26% of total revenues. Approximately 18% of high-end consumer net revenues was attributable to mobile devices and approximately 8% was attributable to other consumer systems. I will now discuss the performance of each of our product groups. In Q4 of fiscal year '20, net revenues from our Signal Integrity Product Group increased 1% sequentially and represented 43% of total revenues. Stronger demand from the data center and base station segments contributed to the sequential growth. In Q4, demand from the data center market increased nicely over the prior quarter, led by record revenues from our CDR platforms. Strong demand for our ClearEdge CDRs used in 100-gig NRZ modules was driven by our hyperscale and cloud customers. We expect this strength to continue throughout fiscal year '21. Interest in our new Tri-Edge PAM4 CDRs remains very high. This week, we received our first production order for our Tri-Edge products and we already have numerous customers going through system tests with our latest Tri-Edge PAM4 silicon. The advantages of analog PAM4 implementations are very clear as the lower power, lower cost and lower latency provides our data center customers with a compelling advantage over existing solutions. We expect to see our Tri-Edge revenues ramp throughout the year at hyperscale data center customers deploying 100-gig, 200-gig and 400-gig optical modules that require lower latency and lower power. The Open Eye MSA consortium that was formed to support and promote interoperability of analog CDR platforms has seen its membership more than double to 40-plus companies since its founding and includes key chip companies as well as software and systems vendors of next-generation PAM4 optical systems. Our FiberEdge PMD devices also continue winning designs in PAM4 modules, where we have collaborated with DSP providers to deliver optical module vendors a highly optimized solution. We recently announced the production of our newest quad linear 100-gig per channel TIA platform for 400-gig optical modules targeted at hyperscale data centers. Our FiberEdge products complement our ClearEdge and Tri-Edge CDR platforms, which we expect to continue to ramp this year. Following a relatively weak fiscal year '20 performance, we expect to see much stronger growth from the hyperscale data center market in fiscal year '21. In Q4 of fiscal year '20, our PON business declined sequentially. Semtech remains a leading supplier to the PON market, providing comprehensive offerings for 1-gig, 2.5-gig and 10-gig PONs, OLT and ONU systems. Recent macro events in China have limited our near-term visibility, but we expect the ongoing rollout of 10-gig PON deployments to accelerate in conjunction with 5G infrastructure build-outs and to drive growth in our PON business in fiscal year '21. We anticipate a 100% increase in 10-gig PON deployments in fiscal year '21, driven by China, Europe and the U.S. In Q4 of fiscal year '20, demand from our wireless base station market increased sequentially, as 5G infrastructure deployments start to accelerate. Our ClearEdge CDR platforms are gaining solid momentum in the 5G market, and we have begun early shipments of our ClearEdge CDRs into 5G base station, front-haul and mid-haul optical modules. We expect both our ClearEdge and Tri-Edge platforms to gain momentum in 5G base stations, as 5G infrastructure deployments increase globally. In fiscal year '21, we expect our base station revenues to increase, as we expect to see continued 4G spending and a meaningful increase in spending for 5G where our market opportunity could triple versus 4G. The ever-increasing demand for higher data rates by data centers, passive optical networks and wireless broadband networks is driving greater demand for Semtech's Signal Integrity Product platforms, which is a secular trend we expect to continue for some time, and we remain very confident in our strategy and position in our target markets. In Q1 of fiscal year '21, we expect net revenues from our Signal Integrity Product Group to decline, driven by softer demand across all segments, driven primarily by the impact of the coronavirus. Moving on to our Protection Product Group. In Q4 of fiscal year '20, net revenues from our Protection Product Group declined 6% sequentially and represented 27% of total revenues. In Q4 of fiscal year '20, our high-end consumer protection business experienced the typical seasonal inventory reductions. While near-term smartphone demand has been impacted by macro events, the prospects for our protection platforms in mobile devices, displays and accessories remain positive, as 5G smartphones integrate higher performance interfaces and more advanced lithography devices. Our protection business continues to benefit from its successful diversification into key industrial markets, including automotive, IoT and broad-based industrial applications. In Q4, our Protection Product Group announced the latest member of its RClamp platform, a multi-line protection array that delivers outstanding protection for a broad range of high-speed interfaces and ports in industrial, IoT and telecommunications applications. In Q1 of fiscal year '21, we are expecting our Protection revenues to be approximately flat. Turning to our Wireless and Sensing Product Group. In Q4 of fiscal year '20, net revenues from our Wireless and Sensing Product Group decreased 2% sequentially and represented 30% of total revenues. Q4 was another quarter of strong achievements by our LoRa business. We recently announced several new use cases and partnerships that demonstrate the benefits and efficiencies of LoRa. A few of these announcements in Q4 included Wilhelmsen, the largest marine networking operator on the planet, announced the use of 2.4-gigahertz LoRa to deliver IoT solutions to the maritime shipping industry on both land and at sea. LoRa will be deployed in ships for predictive maintenance, temperature monitoring, asset management and asset tracking. Smart Seoul Network or S-Net announced a LoRaWAN network to provide smart parking, smart street lighting solutions and geolocation use cases in Seoul, Korea. Helium announced a new nationwide LoRaWAN network in the U.S. Their current network supports over 745 cities in the U.S. NSOFT, an Indian solutions provider, is using LoRa to convert older metering solutions to new advanced metering infrastructure, reducing waste and cost while increasing efficiency. And Elmeasure, a utility metering developer; and ClodPi, a maker of long-range sensor networks, developed a new line of prepaid smart meters based on LoRa technology that tracks and reports usage data in real time for precise billing and reduced energy wastage. These are just a few examples of the many new use cases introduced during the quarter that demonstrate the value of LoRa technology in enabling a smarter and more sustainable planet. In Q4 of fiscal year '20, demand for our proximity sensing platforms increased, as global RF regulations and awareness of the dangers of RF signals continue to increase. We expect our proximity sensing business to grow in fiscal year '21, as we see solid design win progress in new 5G smartphones, where there is an increase in the number of high-performance radios used. For Q1 of fiscal year '21, we expect net revenues from our Wireless and Sensing Product Group to decrease due to the impact of the coronavirus. Moving on to new products and design wins. In Q4 of fiscal year '20, we released 26 new products and achieved 2,184 new design wins. Now let me comment briefly on our fiscal year '20 performance. In fiscal year '20, net revenues declined 13% over the prior year's record performance, driven primarily by geopolitical headwinds, which negatively impacted all of our product groups. In fiscal year '20, we had 74 new product releases and achieved another design win record of 9,909 new design wins. In FY '20, our Signal Integrity Product Group introduced several new disruptive platforms that should contribute to our long-term growth. These include our Tri-Edge PAM4 CDRs and FiberEdge PMD platforms for the data center and 5G wireless markets, our 10-gig PON platforms and our new Software Defined Video over Ethernet platform targeted at the Pro AV market. In FY '20, our Protection Product Group continued its diversification into new broad-based industrial verticals, including the automotive and IoT markets, where the increasing use of advanced photography devices are making systems more susceptible to damage from transient events such as voltage spikes. In addition, our protection business from U.S.-based smartphone manufacturers achieved a new annual revenue record, further diversifying our mobile revenues geographically. In FY '20, our Wireless and Sensing Product Group made significant progress in advancing Semtech's LoRa technology to be the global de facto standard for the LPWAN market. Our LoRa-enabled revenue declined approximately 5% to $74 million from $78 million in fiscal year '19 due to lower revenues from China. However, our LoRa-enabled POS grew by 7% from fiscal year '19 and represented a new POS record. In FY '20, our LoRa business met or exceeded all the metrics we targeted at the beginning of the year. These metrics included: one, the number of countries with LoRa networks grew to more than 91 countries from 70 at the end of fiscal year '19. By the end of fiscal year '21, we expect over 100 countries to have LoRa networks. Two, the number of public or private LoRa network operators grew to 133 at the end of fiscal year '20 from 101 in FY '19. We expect 150 LoRa network operators by the end of fiscal year '21. The number of LoRa gateways deployed grew 164% from 243,000 gateways in fiscal year '19 to 642,000 gateways at the end of fiscal year '20. These gateways are capable of supporting approximately 2.5 billion connected end loads. We expect the number of LoRa gateways deployed to increase to over 1 million by the end of fiscal year '21. The cumulative number of LoRa end nodes increased 55% to 135 million at the end of fiscal year '20 from 87 million at the end of fiscal year '19. We expect this number to continue to grow rapidly and exceed 180 million cumulative end nodes by the end of fiscal year '21. Five, the LoRa opportunity pipeline exceeded $500 million at the end of fiscal year '20, with an additional $200 million of leads feeding the opportunity pipeline. We anticipate that, on average, 40% to 50% of this pipeline will convert to full deployment over a 24-month timeline. Our pipeline remains geographically well balanced, with approximately 65% of the opportunities coming from the Americas and Europe, and includes a growing number of use cases in the smart home and consumer markets, where the volumes could be significantly higher and could drive deployments more rapidly than from industrial markets. At the end of fiscal year '21, we are anticipating our opportunity pipeline will exceed $700 million, with an additional $300 million of leads feeding these opportunities. We expect the strong momentum in our LoRa metrics to continue in fiscal year '21, as the LPWAN market starts to grow rapidly and as our new LoRa technology platforms are adopted. These new LoRa platforms include our LoRa Smart Home platform designed for LPWAN-based smart home, community and consumer applications, providing low power, broad coverage for indoor, neighborhood and campus area IoT devices used for safety, environmental and convenience use cases. Our LoRa global platform that uses a 2.4-gigahertz version of LoRa to enable global use cases requiring higher bandwidth. And our LoRa Edge platform, which is a highly versatile and extremely low-power, software-defined LoRa platform that enables a broad range of asset management applications targeted at industrial, building, home, transportation and logistics segments. Our LoRa Edge platform includes Wi-Fi sniffing and GPS location features, enabling the most versatile LPWAN geolocation platform in the industry. This platform will also drive our future cloud services business, with the first service being a geolocation service for asset tracking applications. Armed with these new platforms, along with the increasing influence and momentum of the LoRa Alliance, we expect to continue to drive LoRa to become the de facto standard for the global LPWAN market in what we expect to be a multibillion unit industry in the next 5 years. For FY '21, we are expecting our LoRa-enabled revenues to be between $90 million and $120 million. Despite the ongoing headwinds in China and the uncertainties associated with the coronavirus, with the positive momentum from our LoRa metrics and growth in our opportunity funnel, we continue to anticipate a 40% CAGR for our LoRa-enabled business over the next 5 years. Now let me discuss our outlook for the first quarter of fiscal year '21. While the near-term visibility remains challenging and despite the ongoing headwinds associated with China demand, the Huawei ban and the uncertainty associated with the coronavirus, we believe the underlying demand for our products remains very strong. Based on our backlog entering the quarter, we are currently estimating Q1 net revenues to be between $125 million and $135 million. This guidance assumes a $10 million negative impact due to the coronavirus and assumes no more direct shipments to Huawei this quarter. To attain the midpoint of our guidance range or approximately $130 million, we needed net turns orders of approximately 27% at the beginning of Q1. We expect our Q1 non-GAAP earnings to be between $0.30 and $0.36 per diluted share.

Operator, Operator

Your first question comes from Christopher Rolland with Susquehanna Financial Group.

Christopher Rolland, Analyst

Yes, just any more details on LoRa, what percentage of LoRa today is China and where did it peak out? I'm just trying to get a sense of how this is diversifying outside of China. And what gives you confidence in your outlook looking forward?

Mohan Maheswaran, CEO

Well, LoRa used to derive about 60% of its revenue from China, and I believe it's still around that figure. However, it is diversifying now. Currently, about 65% of our opportunity pipeline is outside of China, indicating that we are seeing diversification across different regions. Nonetheless, China, which was a headwind for us last year, is showing strength as we look ahead. Bookings are improving, and I believe China may be the first region to overcome the main issues caused by the coronavirus. As capacity begins to come back online, we are noticing an increase in demand in China. It's hard to predict how the next year will unfold, but moving forward, with opportunities becoming more geographically balanced, we anticipate seeing a more even distribution of revenue across different regions in the coming years.

Christopher Rolland, Analyst

Great. And then your guidance, it kind of looks like it's in line with others in terms of the effects from the virus. You also called out that this was probably mostly supply chain and less about demand disruption. Maybe you can talk about the supply chain, what you're seeing there. Is it upstream? Is it downstream? And also, what gives you confidence that, that demand comes back and that there's no actual demand disruption in the end?

Mohan Maheswaran, CEO

Yes, I would say that we haven't really experienced any significant supply chain issues yet. It's evident that China is facing challenges due to the coronavirus, and the shift of the Chinese New Year has definitely affected overall demand. However, things are gradually getting back to normal, currently operating at about 70% to 80% capacity. Demand hasn’t fully recovered, but before the coronavirus outbreak, signs pointed to a strong demand for the first quarter, which still appears to be relatively robust. Our bookings have been quite healthy, and our required turns are low compared to historical levels, which gives us a positive outlook. In the segments we operate in, we see strength in data centers, 5G infrastructure, and generally strong performance in infrastructure areas. Additionally, we anticipate potential stimulus measures in Asia and possibly other regions, which could further boost infrastructure. Therefore, once the demand environment stabilizes post-coronavirus, we expect demand to increase again.

Operator, Operator

Your next question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton, Analyst

I guess I just wanted to follow up on that. It sounds like you haven't seen any major supply chain constraints. Bookings are starting to recover, especially in China, as coronavirus there seems to be getting a little bit more under control. So I guess, when we look at your April quarter guidance and the $10 million that you adjusted for coronavirus, where did that come from? Is that just sort of lost demand as factories were offline or just the near-term demand destruction within the China market in the month of February? Or are you anticipating potential cancellations or pushouts or something in the March and April order book that you may not have seen yet, but you're just being conservative and allowing for some potential pushouts or cancellations over the next couple of months? And then I've got a couple of follow-ups.

Mohan Maheswaran, CEO

Yes, Quinn, it's a little bit of everything you mentioned. There are some data points indicating that some of the PON tenders and proof-of-concepts on LoRa are experiencing slight delays. We haven't observed any cancellations or decreases in demand or revenue; it appears more like things are just being postponed. There is some softness due to the delayed Chinese New Year and the slow ramp-up of capacity in China, which had an impact. Additionally, there is some nervousness and uncertainty related to the coronavirus globally. All of these factors are something to consider as we plan for our Q1 numbers, and we expect approximately a $10 million impact, which is reflected in our figures.

Quinn Bolton, Analyst

Great. I wanted to discuss the data center market. It seems like you're anticipating a stronger year in fiscal '21. Could you confirm that I understood correctly? Additionally, regarding Tri-Edge, congratulations on receiving your first production order. As you consider fiscal '21 for Tri-Edge, do you expect it to ramp up to a significant level? Could it reach a few million dollars a quarter by the end of the year? Or will it be a slower ramp? Any insight into how quickly you believe that business will take off would be helpful.

Mohan Maheswaran, CEO

Yes, Quinn, the NRZ CDRs, as I mentioned, are performing very well, which indicates to us that the PAM4 developments might progress a bit slower. One of the key advantages of Tri-Edge is its lower power consumption and cost. Therefore, much will depend on how quickly our customers decide to transition. We had expected a stronger second half, possibly generating around $3 million to $4 million during that period, with significant growth anticipated next year.

Operator, Operator

Your next question comes from the line of Karl Ackerman with Cowen and Company.

Karl Ackerman, Analyst

2 questions, if I may. I know you guys don't want to go out on a limb and talk about a preliminary guide for fiscal '21, but I'm curious to the extent you could comment or willing to comment. It was too early to suggest that you can grow top line this year, just given the strong growth opportunity across LoRa and your data center business. And despite your view that OpEx will grow half the rate of sales, I guess, how flexible can OpEx be in the event growth turns out to be a little bit less than your current expectations? And I have a follow-up.

Mohan Maheswaran, CEO

Let me address the revenue aspects, and then Emeka can discuss OpEx. Looking at our overall portfolio, I expect our data center business to continue growing this year, coming off a relatively good fiscal year '20. We anticipate growth in 10-gig PON, largely driven by demand in China and other regions. While growth may be slower initially due to the impact of the coronavirus in the first half, I am confident the second half will show improvement. The rollout of 5G infrastructure is ongoing globally, and we expect growth in base station infrastructure compared to last year, although the timing remains uncertain. Additionally, we are still optimistic about growth in our IoT business and LoRa. We have a solid pipeline, and many LoRa use cases focus on energy efficiency, productivity enhancements, cost reductions, and smart health applications, which should allow for continued growth regardless of circumstances this year. In our protection business, we are diversifying geographically within the mobile area and in the industrial sector. We anticipate reasonable performance there, provided the broader economic conditions are favorable and distributors restock their inventory in the second half. Overall, we expect growth across all our product groups, although much hinges on the developments related to the coronavirus in the upcoming quarter. Signs from China indicate improvement, and we see positive demand signals. The sustainability of this trend and the duration remain to be seen, but currently, we hold a more positive outlook than negative.

Emeka Chukwu, CFO

So Karl, with regards to the operating expenses, one of the things that we've actually been able to do very well in the history of the company is manage our operating expenses in line with what the top line is growing. One of the key things that I've always tried to call investors' attention to is that about 20% of our operating expenses is variable. And so we do have a few opportunities that we can modulate, depending on what's going on with the top line. Having said that, though, we are really very excited about some of the growth opportunities that we have within the company, the investments we're making in those areas. And so we still believe and the expectation is that those growth drivers would start to come to fruition over here and there wouldn't be any need to take any drastic actions with regards to operating expenses.

Karl Ackerman, Analyst

I appreciate that, Mohan and Emeka. For my follow-up, if I may, double-clicking on circuit protection for a moment. Are there new opportunities you see growing in circuit protection and proximity sensing beyond your key South Korean OEM? You had mentioned on prior calls design wins around wearables. So I was curious if you've any updated thoughts there.

Mohan Maheswaran, CEO

Yes, that has been our strategy for some time. We have been strong in Korea for a while, but a few years ago, we made a conscious decision to aggressively diversify our smartphone business in China and North America, as well as expand our proximity sensing and protection businesses in these markets. I believe we have seen success with all of these strategies. If I look at our business today, we have a balanced geographical presence in protection for mobile devices across Korea, China, Asia, and specifically in North America. Additionally, our proximity sensing, which was initially focused only on Korea, is now expanding into Asia and other U.S. manufacturers, not just in smartphones but also in wearables. This continues to be our strategy, and we are achieving significant success with it.

Operator, Operator

Your next question comes from the line of Tore Svanberg with Stifel.

Tore Svanberg, Analyst

Let me start with a housekeeping. I think you mentioned 27% turns. Where is that number today more than a month into the quarter?

Mohan Maheswaran, CEO

Tore, we can't give you that number. But what I can tell you is that the bookings have been pretty strong and we feel very good about where we are.

Tore Svanberg, Analyst

Okay. So it's not like you've seen strong bookings at the beginning of the quarter and those are now tailing off. It kind of just seems...

Mohan Maheswaran, CEO

Correct.

Tore Svanberg, Analyst

In your remarks on LoRa, you provided comprehensive metrics for the fiscal year, which I appreciate. It appears that there is growth across all categories; however, your revenues did not increase. Can you explain this discrepancy? Is it due to specific customers in China transitioning to NB-IoT? Please help us understand why your business experienced a downturn while other metrics showed improvement for the year.

Mohan Maheswaran, CEO

Yes, it's important to note that our point of sale did grow by 7%, which reflects the deployment of end nodes. While we may recognize revenue at the time of shipping, if there is excess inventory in the channel, it might not provide a complete picture. The metrics I share are intended to illustrate momentum, which is a key indicator of future revenue. The increasing number of deployed gateways, use cases, and end nodes suggest that customers are likely to expand their deployments following successful proof-of-concept phases, ultimately driving revenue. Timing for revenue recognition can be tricky, as we experienced challenges last year in regions like China during the first half, making recovery in the latter half difficult. However, we anticipate more stability this year and expect reasonable growth moving forward.

Tore Svanberg, Analyst

Very good. Just one last question. Your pipeline revenue increased $200 million year-over-year. I was just hoping you could talk a little bit about the mix of that $200 million, again, from a geographic perspective. I do appreciate that there's a much higher percentage outside of China. But if you could add a little bit more color on North America versus U.S. versus other countries, that would be great.

Mohan Maheswaran, CEO

I would estimate that approximately 30% comes from the Americas, which consists of both North and South America. About 36% is from Europe. The remaining portion is around 11% to 12% from other parts of Asia, including Japan and Korea. Roughly 25% is from China. These figures are approximate, but they should give you an idea of the opportunity pipeline.

Operator, Operator

Your next question comes from the line of Gary Mobley with Wells Fargo.

Gary Mobley, Analyst

Congratulations on a strong finish to the year and a better-than-expected start to this fiscal year '21. My question concerns the turn business requirements included in your first quarter guidance. If I’m correct, you are anticipating about $10 million to $12 million in lower turn requirements as part of the midpoint of your revenue guidance, much of which seems to be related to Huawei. Did you generate any turn business from Huawei in the recently reported fourth quarter? What would be the best-case scenario for what you can shift to Huawei given the current restrictions?

Mohan Maheswaran, CEO

So remember, our guidance assumes no more shipments to Huawei. We don't need any more turns to Huawei to achieve our number. That said, we plan on shipping around $10 million to Huawei each quarter, which is what we did last quarter.

Emeka Chukwu, CFO

$9.5 million...

Mohan Maheswaran, CEO

About $10 million last quarter, and it's a mix of all the different products. It considers what we can and cannot ship. If the restrictions are not further tightened, we will need to reassess the situation. That's why I decided not to provide guidance at this time. We don’t require any additional shipments to Huawei to meet our targets because we are uncertain about how the restrictions will evolve. For our part, we are operating under the assumption that the restrictions will remain unchanged.

Gary Mobley, Analyst

Got you. Okay. And did I see a roughly $2 million restructuring in the non-GAAP reconciliation? And what does that relate to? Is that an actual headcount reduction? Or are you refocusing your investment in perhaps a different area?

Emeka Chukwu, CFO

No, it mostly relates to an actuarial valuation of our defined benefit obligations and a few other matters. However, there was no restructuring involving layoffs during the quarter.

Operator, Operator

Your next question comes from the line of Tristan Gerra with Baird & Company.

Tristan Gerra, Analyst

From the $10 million impact in the current quarter guidance from China, is that pretty much allocated across all the businesses you have in China? Or would you say a majority of that is actually related to LoRa? And in general, how much of a step back you think the situation in China is impacting your revenue growth assumptions for lower revenue this fiscal year?

Mohan Maheswaran, CEO

So Tristan, the $10 million is primarily due to the coronavirus impact, affecting mainly our Signal Integrity Product Group, which accounts for about 60% of the impact. The remaining portion is divided between our Protection and Wireless and Sensing businesses. It's a widespread effect that we've estimated. In response to your second question, we believe our LoRa-enabled business will perform strongly this year, and we anticipate a recovery in China, with early signs already emerging. However, it may take until the first quarter to see this fully, due to the Chinese New Year and some companies not returning at full capacity, leading to delays in proof-of-concepts. Additionally, travel restrictions and limited movement in China could push back some activities. This is why I mentioned that proof-of-concepts and new tenders might be delayed. Nonetheless, I don't believe this alters the fundamental demand or need in the market. Therefore, any dip in demand during the first quarter is likely to recover in the second half as conditions normalize.

Tristan Gerra, Analyst

Okay. That's useful. And then as my follow-up question, in your quarter guidance, what changes in distribution inventories are you assuming, if any? Are you assuming that inventories stay flat or on a relative basis at this stage? Or is your assumption for point of sale different from what's embedded in your guidance for disties?

Mohan Maheswaran, CEO

No, I think it's the same assumption. POS has been doing quite well. As I mentioned, LoRa grew last year, which is a positive sign. The one thing to remember is that if the supply chain is affected by coronavirus and we can't get enough material or lead times are extended, I would expect us to try to increase our inventory levels, both internally and in our channel. But at this point in time, I don't think there's any reason to do that. I think we would expect the same type of POS and channel inventory numbers.

Operator, Operator

Your next question comes from the line of Craig Ellis with B. Riley FBR.

Craig Ellis, Analyst

And guys, thanks for all the information on the call regarding LoRa and the other businesses. Mohan, I just wanted to start with a question with LoRa. First, just asking about the midpoint of this year's revenues at $105 million. As you've talked about the business potentially picking up some high-volume design wins, do you forecast that any of that type of revenue conversion would be in the $105 million? Or how do we think about when some of those higher volume wins might hit?

Mohan Maheswaran, CEO

Yes, we expect to see an increase in home consumer wins later in the year, and they aren't fully reflected in the current numbers. There is potential for growth there. The current guidance is based on continued positive progress in various applications like smart metering, smart building, and smart agriculture within industrial IoT. While growth remains strong, if smart home and smart consumer segments begin to contribute, it could affect the numbers. We believe that by the second half of the year, we'll start to observe some of those impacts.

Craig Ellis, Analyst

That's helpful. The second question is really about the end points of the range. So that $90 million in sales would represent an increase of about $16 million or 22% at 120, and $46 million or 62% year-on-year. As we consider those end points, what are some of the major factors influencing the range from low to high? Is it related to macroeconomic conditions, or is it about high-volume items before considering macro factors? If you could clarify that, it would be quite helpful.

Mohan Maheswaran, CEO

Yes, I don't believe the macro environment significantly affects us, except in cases of major shifts like what we experienced in China during the first half of last year. The impact is minimal. The more significant factors are the conversions and the proof of concepts in our pipeline, which is quite extensive. The challenge lies in converting these into actual deployments and revenue. We have noticed these processes can sometimes be delayed, particularly due to the coronavirus situation, which has caused some delays in our proof of concepts. I think this is more impactful than any other factor right now. We need to monitor how things evolve. However, we are optimistic that by the second half of the year, most macro issues will have been resolved, and we hope that the coronavirus situation will be stabilized. We expect to see a return to the normal growth we anticipate for our IoT and LoRa businesses.

Craig Ellis, Analyst

And then a couple of clarifications for Emeka. Emeka, regarding the new product impact to OpEx in the fiscal fourth quarter, was that mask set or was that something else? Can you just clarify what's going on there?

Emeka Chukwu, CFO

Yes, it mostly has to do with just the timing last year when we set at last start for take or share. Yes. So it had to do mostly with the mask sets.

Craig Ellis, Analyst

Great. And then with regards to gross margin, I think you had indicated from the first quarter, you'd expect gross margin to rise through the year. Can you provide some further color, giving us a sense for the magnitude of the increase that's possible? And it seems like Signal Integrity should build quite strongly through the year. Is that really the primary variable? Or would it be the degree to which LoRa is either at the low end or the high end of the range or other factors?

Emeka Chukwu, CFO

Yes. I'm excited about our gross margins as we examine the growth drivers we've discussed, such as LoRa, data centers, and industrial applications for protection, which are all expected to contribute to our gross margin expansion. The only challenge we face is that overall demand is currently lower, resulting in fixed expenses related to manufacturing equipment and personnel that we need to manage. I anticipate that an increase in revenue from our growth drivers, along with a rebound in overall demand, will positively impact our gross margins. While I can't provide an exact figure right now, I would expect our gross margin to trend towards 62%, and depending on future developments, we might even exceed that.

Operator, Operator

Your next question comes from the line of Mitch Steves with RBC Capital Markets.

Mitch Steves, Analyst

I had 2 questions. The first one, just to clarify, just on the guidance of the $10 million, I just want to be clear about what's in there. Is that entirely China? Or are you guys making an assumption that some demand will erode in the other geographies outside of China?

Mohan Maheswaran, CEO

That's the total global picture. It's not just China. I would say that because China was the first to be exposed to the coronavirus, the impact is more easily measurable since they delayed New Year by a week, and it's taken time for their capacity to come back online. Other regions haven't really been impacted yet, and I think that could still happen. Across the board, we've seen that $10 million is about the right number for our Q1 demand.

Operator, Operator

And then the second question is about the overall full year. I understand you won't provide full year guidance, but how are you considering the smartphone shipment environment for the calendar year 2020?

Mohan Maheswaran, CEO

Yes, smartphones present a challenge, Mitch, but we're actually quite optimistic that the evolving work landscape, as people become more mobile and perhaps engage less in social interactions, will increase the demand for more devices, particularly phones, tablets, and PCs. Currently, the demand appears to be relatively strong based on our observations. So yes, we're feeling more positive not only about mobile devices and smartphones but also about other peripherals, wearables, and accessories.

Operator, Operator

Your next question comes from the line of Harsh Kumar with Piper Sandler.

Harsh Kumar, Analyst

2 questions. A couple of the companies that have sort of preannounced have talked about demand in China going back to sort of normal levels or pre-coronavirus levels. I was curious if you have also seen that. Then I've got another question on LoRa.

Mohan Maheswaran, CEO

Yes, I would say, Harsh, that it's definitely improving. I'm not sure I would say it's back to pre-virus levels, but I think it's improving. Bookings are strong. The indications are strong. Indications of potential stimulus is also there for infrastructure. And as we know, typically when China invests in infrastructure, it's normally advanced technology kind of stuff. So we'd expect 5G and PON and data center and IoT and those type of things to get a heavy influx of monies. And so that would be helpful. But yes, I would say that it's improving. Remember, the coronavirus impact, China is just coming out of that. I mean at least get improving. And so they're not back at full capacity yet, and I think that's important to understand. So I don't think the demand levels are at quite what they were. I would say they're at best 70% to 80% at the moment.

Harsh Kumar, Analyst

Thank you, Mohan, for providing insights on LoRa by funnel types. Could you discuss the types of applications you are noticing a rise in, or anticipate will rise this year? Will these applications be primarily consumer-focused, or will they lean more towards industrial? Additionally, do you think this is the year we will observe a significant change in the U.S. market?

Mohan Maheswaran, CEO

The use cases are primarily in metering, smart buildings, smart environments, smart water, and industrial IoT applications. Currently, the opportunities we have indicate that we will quickly expand into the smart home segment, which is mostly driven by the U.S., with some activity in Europe. Additionally, supply chain logistics and smart logistics are primarily focused in Europe, which leads this segment. Smart city initiatives are also widespread. A positive aspect of LoRa is that it is truly a global technology, with use cases in various regions, including parts of Asia, Australia, Taiwan, Malaysia, and Singapore. This presents a wide range of applications and a broad geographical reach. There are significant opportunities that will act as catalysts, and once they come to fruition, we will notice their impact. However, at this moment, I would emphasize that the primary focus remains on the U.S. market.

Operator, Operator

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Vahid Khorsand, Analyst

This is Vahid for Hamed. First one, you were mentioning the LoRa growth out of China. I was wondering if you could provide some color on what the growth looks like outside of China right now.

Mohan Maheswaran, CEO

LoRa growth outside of China appears to be encouraging. While it is still relatively modest depending on the region, China remains the largest source of revenue for LoRa, which is why I emphasized it. Overall, LoRa is performing well in terms of the number of gateways and networks deployed, as well as the variety of use cases we're observing. The opportunity pipeline is extensive and geographically diverse. Excluding China, which accounts for about 23% to 25%, the remaining 75% is distributed across various regions, with Europe being the second largest, followed by the Americas and the rest of Asia. Okay. And then the next question, you've mentioned that there is a recovery in China. I'm curious what trends you're observing outside of China, Italy, and America, as well as in Europe in general, in the last few days. Outside of China, it's difficult to predict demand. Currently, we don't see a slowdown in the data center market or in IoT. However, the U.S. and Europe are still adjusting to the impacts of the coronavirus, which may lead to some softness in demand. This uncertainty is why we've adjusted our Q1 guidance down by $10 million to accommodate potential changes, though we can't determine exactly how much.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Mohan Maheswaran, CEO

So in closing, our fiscal year 2020 proved a challenging year for Semtech. We believe the strength of the secular drivers behind our key growth engines remain intact. We enter fiscal year '21 with a number of exciting new product platforms targeted at the data center, Internet of Things and mobile segments. Given our diverse product offering, balanced end market approach and strong customer relationships, we expect to see another strong financial performance in FY '21. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

Operator, Operator

This concludes today's conference. You may now disconnect. Thank you for your participation, and have a great day.