Earnings Call
Semtech Corp (SMTC)
Earnings Call Transcript - SMTC Q1 2021
William Harrison, Head of Investor Relations
Thank you, Devin, and welcome to Semtech's conference call to discuss our financial results for the first quarter of fiscal year '21. 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. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP measures are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted. Also, beginning this quarter, we will be reporting our business under three end markets compared to the four previously, which we believe better reflects the ongoing consumption of our products. We have combined what was previously our enterprise computing and communications end markets together to form the infrastructure end markets, while our high-end consumer and industrial end markets are largely unchanged. With that, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?
Emeka Chukwu, CFO
Thank you, Sandy, and good afternoon, everyone. For Q1 fiscal year '21, net sales decreased 4% sequentially and increased 1% over the prior year to $132.7 million, which was above the midpoint of our guidance. In Q1, shipments into Asia represented 80% of net sales. North America represented 12% and Europe represented 8%. Total direct sales was approximately 22% of net sales, and sales to distribution was approximately 78%. Our distribution business remains balanced, with 40% of the total POS coming from the infrastructure end market, 34% from the industrial end market and 26% from the high-end consumer end market. Bookings increased strongly over the prior quarter and resulted in a book-to-bill significantly above 1. Tolls bookings accounted for approximately 34% of shipments during the quarter. Q1 GAAP gross margin declined 20 basis points to 60.9% due to lower absorption associated with COVID-19 shutdowns, and we expect our Q2 gross margin to improve slightly as the impact of a higher mix of infrastructure revenue is slightly offset by COVID-19-driven lower absorption. Q1 GAAP operating expense decreased 12% sequentially as expected due to lower share-based compensation and pension expense. And in Q2, we expect GAAP operating expense to increase between 2% to 5%, sequentially, primarily due to higher share-based compensation expense. Q1 GAAP order expenses increased to $4.8 million from $3.1 million in Q4. In Q1, we wrote down the value of some of our minority investments by $3.6 million due to COVID-19-driven liquidity concerns. 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. Q1 non-GAAP gross margin declined 20 basis points sequentially to 61.3% due to lower absorption associated with the shutdowns. We expect our Q2 non-GAAP gross margin to improve slightly as the impact of a higher mix of infrastructure revenue is slightly offset by lower absorption. Q1 non-GAAP operating expenses decreased 1% sequentially to $53.2 million. In Q2, we expect our non-GAAP operating expense to be flat to 3% higher. For the remainder of fiscal year 2021, we expect our non-GAAP operating expenses to be flat to slightly up from current levels. In Q1, cash flow from operations was unseasonably strong at 20% of revenue due to shorter cash conversion cycle and lower fiscal year '20 annual bonus payments. We repurchased approximately 855,000 shares or $30 million of our stock in Q1, and our stock repurchase authorization now stands at approximately $81 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down our debt. In Q1, accounts receivable decreased 20% sequentially due to lower net sales and improved linearity of shipments and represented 38 days of sales, which is below our target range of 40 to 45 days. To support our strong Q2 demand, net inventory in absolute dollar terms increased 5% sequentially and days of inventory increased by 10 days to 131 days, which remains above our target range of 90 to 100 days. In Q2, we expect our net inventory to remain flat in absolute dollars, but decline in days. In summary, we were pleased to deliver Q1 results that were once again above the midpoint of our guidance, and we are expecting a strong sequential growth in Q2. Despite the ongoing challenges presented by COVID-19, the secular trends behind our growth engines remain very solid. Our gross margin is stable. Our operating expenses are under control. Cash flow is healthy, and liquidity is strong. We believe we are very well positioned to deliver solid financial results in fiscal year '21. I will now hand the call over to Mohan.
Mohan Maheswaran, CEO
Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year '21 performance by end market and by product group and then provide our outlook for Q2 of fiscal year '21. Before I go over our Q1 performance, I want to take a moment to discuss some of the areas where COVID-19 has impacted Semtech, and what we have done to address the challenges from this terrible pandemic. As a global company, Semtech was impacted by the actions taken by different countries, and we have operated under the direction of the various regions where our employees are located, and we will continue to follow their guidelines for the safety of all of our employees. Over the last several years, we have invested heavily in dual sourcing strategies, and in IT operations and sales infrastructure and systems to provide a collaborative environment for our employees and to attract and retain the best talent. These investments have enabled and will continue to enable us to minimize the impact of site closures and supply chain disruptions to our overall business. In Q1 of fiscal year '21, net revenues decreased 4% sequentially to $132.7 million. Stronger demand from the infrastructure end market was offset by softer demand and some temporary supply constraints in the high-end consumer and industrial end markets. We posted non-GAAP gross margin of 61.3% and non-GAAP earnings per diluted share of $0.35. In Q1 of fiscal year '21, net revenue from the infrastructure market increased 1% sequentially and 24% over the prior year, representing 43% of total revenues. Net revenues from the industrial market decreased 9% sequentially and represented 30% of total revenues, while net revenues from the high-end consumer end market decreased 5% over the prior quarter and represented 27% of total net revenues. Approximately 16% of high-end consumer net revenues were attributable to mobile devices, and approximately 11% was attributable to other consumer systems. I will now discuss the performance of each of our product groups. In Q1 of fiscal year '21, net revenue from our Signal Integrity Product Group increased 2% sequentially and 19% over the prior year and represented 45% of total net revenues. Continued strength from our hyperscale data center customers and record demand for 10-gig PON and 5G PMD products contributed to the growth. In Q1 of fiscal year '21, strength in the data center market continued, driven by our ClearEdge CDRs used in 100-gig optical modules. Our hyperscale data center customers are increasing their demand for 100-gig optical modules as the global shift to working from home places an increasing bandwidth and analytics burden on cloud-based infrastructure. We expect the demand for 100-gig optical modules to continue to increase. Customer interest for our Tri-Edge PAM4 platform also remains very high, and we recently recorded our first design win for our first Tri-Edge PAM4 chipset, for use in 200-gig and 400-gig PAM4 optical modules. We have customers in multiple regions at various stages of system tests using Tri-Edge, and we expect to see many more design wins over the next few quarters. We expect our Tri-Edge revenues to ramp up over the next few years as hyperscale data center customers deploying 100-gig, 200-gig and 400-gig optical modules recognize the clear benefits of using an analog PAM4 implementation that includes lower cost, lower latency and lower power than alternative solutions. We expect the positive trends in the data center market, together with our new product platforms to provide nice growth for our data center business in FY '21 and beyond. In Q1 of FY '21, our PON business grew nicely over the prior quarter, led by record 10-gig PON revenues. Semtech remains a leading supplier to the PON market, providing comprehensive offerings for 1-gig, 2.5-gig and 10-gig PON systems. We expect strong growth from our new PON-X 10-gig PON products this year, supported by a number of new global carrier PON initiatives that enable gigabit to the home, enterprise, and campus networks. Increasingly, carriers building out 5G infrastructure are looking at PON-X-driven systems to offload high bandwidth data for these excess networks. In Q1 of FY '21, overall demand from the wireless base station market remained healthy, as 5G infrastructure deployments increased. Our ClearEdge CDRs and our FiberEdge PMD platforms are being used in fronthaul and mid-haul optical modules. During Q1, we announced the production release of our newest ClearEdge integrated CDR with DML driver for 5G wireless base stations, 25 gigabit per second fronthaul applications. Also in Q1, our FiberEdge PMD devices delivered record revenues as emerging 5G base station opportunities accelerated. Our FiberEdge PMD products complement our ClearEdge NRZ and Tri-Edge PAM4 CDR platforms. As 5G infrastructure deployments increase globally, we expect our 5G opportunity to triple versus that of 4G. As network providers work to upgrade and increase the capabilities of their data center, PON, and wireless networks, we expect the secular demand for our higher bandwidth, higher data rate platforms to drive growth across Semtech's signal integrity product platforms, and we remain very confident in our strategy and position in all our target markets. For Q2 of FY '21, we expect net revenues from our Signal Integrity Product Group to increase strongly, driven by anticipated record revenues from the data center end market and strong revenues from the 5G base station market. Moving on to our Protection Product Group. In Q1 of fiscal year '21, net revenues from our Protection Product Group increased 5% sequentially and represented 30% of total net revenues. Our diversification strategy, targeting a broader set of industrial applications continue to yield dividends in Q1 as we saw strong sequential and annual growth from the broader market. This strength in demand helped offset a weaker high-end consumer market. We see an increasing number of opportunities for our Protection Solutions as new high-speed interfaces, such as USB-C, HDMI 2.1, and 10-gigabit Ethernet proliferate into multiple end applications that are also using more advanced lithography processes. These trends, combined with our own acceleration of new protection products targeted at broader markets, are fueling further growth for our protection business. In Q2 of fiscal year '21, we are expecting our protection revenues to decline modestly as strength from our broad-based industrial market is expected to be offset by continued softness from the high-end consumer market. Turning to our wireless and sensing product business. In Q1 of fiscal year '21, net revenues from our wireless and sensing product group decreased 20% sequentially and represented 25% of total net revenues. In Q1, our wireless and sensing business was negatively impacted by several regional shutdowns associated with COVID-19. The shutdowns impacted both demand and supply. We believe that most of these issues are behind us, and we expect to see a meaningful rebound in Q2 for our wireless and sensing product group. Q1 was another strong quarter of strong achievements in our LoRa business, including record quarterly bookings. Interest in our LoRa technology has continued to expand, and most recently, we have seen an increase in more opportunities associated with COVID-19. When LoRa is ideally suited for applications such as contact tracing, distance tracking, hygiene and health monitoring, and occupancy management. Several examples of use cases in this area that have recently been announced include LoRa cloud-based platforms in China from Alibaba and Tencent for quarantine scenarios to help provide healthcare workers with community health data. Polysense Technologies developed a smart cloud-based human body temperature monitoring system using LoRa to provide real-time temperature data to screen individuals with a high temperature. The system is initially being deployed in Italy. Everynet is working with its partners to deliver LoRaWAN solutions over a secure wireless IoT network to connect urgent care facilities in Spain. And Kerlink, together with Microshare, announced a simple, low-cost contact-tracing system using LoRa and Bluetooth-enabled badges, gearings or wristbands that enables worker proximity detection. The flexibility, low cost, long-range and low power of LoRa networks are critical components of any successful LPWAN IoT deployment, and we expect to see more use cases emerge as local governments, municipalities, and enterprises look to execute their COVID-19 management strategies. We also continue to see other emerging use cases announced that demonstrate the benefits and efficiencies of LoRa. These announcements included the Pallet Alliance, an innovator in pallet management programs, integrated LoRa into its intelli pallet, the first of its kind in the logistics industry, that enables scalable pallet location and environmental sensors to be built into wooden pallets. Sweden-based IoT introduced new functionalities to its web IoT platform using LoRa with AI algorithms to detect mold and humidity in at-risk locations in homes and businesses. EasyReach developed its EasyPlug platform that leverages LoRa to detect changes to the usage status of various appliances. These are just a few examples of recent use cases introduced that demonstrate the value of LoRa technology in enabling a smarter, more connected, and more sustainable planet. We recently announced our LoRa Edge platform, which is our first software-defined radio platform that enables true silicon-to-cloud connectivity. LoRa Edge includes WiFi and GPS sniffing functions that uniquely position this platform for asset tracking and asset management use cases. We expect this platform to enable a large number of new opportunities for LoRa over the next few quarters. In Q1 of fiscal year '21, we were pleased with the progress we made against the LoRa metrics we targeted at the beginning of the year despite the COVID-19-related challenges and shutdowns. These metrics include the number of countries with LoRa networks grew to more than 92 countries from 91 countries at the end of FY '20, and we expect over 100 countries to have LoRa networks by the end of FY '21. The number of public or private LoRa network operators grew to 137 from 133 at the end of FY '20, and we expect 150 LoRa network operators by the end of FY '21. The number of LoRa gateways deployed grew to over 800,000 from the 642,000 gateways deployed at the end of FY '20. And we expect the number of LoRa gateways deployed to increase to over 1 million by the end of FY '21. The cumulative number of LoRa end nodes increased to 145 million from 135 million at the end of FY '20, and we expect this number to exceed 180 million cumulative end nodes by the end of FY '21. The LoRa opportunity pipeline, which includes both opportunities and leads, remains at approximately $500 million at the end of Q1, with approximately $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. At the end of FY '21, we are anticipating our opportunity pipeline will exceed $700 million with an additional $300 million of leads feeding these opportunities. Our opportunity pipeline remains geographically well balanced with approximately 68% of the opportunities now coming from the Americas and Europe and includes an increasing number of use cases in the Smart Home and consumer markets, where the volumes could be significantly higher. For FY '21, we continue to expect our LoRa-enabled revenues to be between $90 million and $120 million. While the impact of COVID-19 in Q1 led to a slower start to the beginning of the year, we believe the positive momentum from our LoRa metrics and the geographic diversity of our opportunity funnel should drive our LoRa-enabled business to grow at a 40% CAGR over the next 5 years and become the de facto standard for the global LPWAN market, in what we expect to be a multi-billion unit industry in the next 5 years. In Q1 of fiscal year '21, revenue from our proximity sensing platforms was lower due to a softer smartphone market. Customer interest remains high for our proximity sensing platforms in smartphones as well as other mobile systems as global RF regulations and awareness of the dangers of high-power RF signals increase. We also continue to see solid design win activity in new 5G smartphones, where there is an increase in the number of high-performance radios used. However, we do anticipate the weak smartphone market to continue into Q2. For Q2 of fiscal year '21, we expect net revenues from our wireless and sensing product group to increase strongly, led by anticipated record revenues from our LoRa-enabled business. Moving on to new products and design wins. In Q1 of fiscal year '21, we released 10 new products and achieved 2,202 new design wins. Now let me discuss our outlook for the second quarter of fiscal year '21. Despite the geopolitical and macroeconomic concerns associated with COVID-19, we believe the underlying secular demand for our key growth platforms remain solid. Based on our strong Q1 bookings, much higher backlog entering the quarter, and our record POS in Q1, we are currently estimating Q2 net revenues to be between $138 million and $146 million. To attain the midpoint of our guidance range or approximately $142 million, we needed net turns orders of approximately 20% at the beginning of Q2. Our guidance assumes no more shipments to Huawei this quarter and also takes into consideration the additional entity list restrictions put in place recently by the federal government. We expect our Q2 non-GAAP earnings to be between $0.40 and $0.44 per diluted share. I will now hand the call back to the operator, and Sandy, Emeka, and I will be happy to answer any questions.
Operator, Operator
Our first question comes from Tore Svanberg with Stifel.
Tore Svanberg, Analyst
Congratulations on the results. First question is on your bookings and kind of linearity. So we've heard from a lot of companies that have actually gone into their future quarters with high backlog, how about Semtech? Have you continued to see solid bookings even so far in the month of May?
Emeka Chukwu, CFO
Yes, Tore, bookings continue to be strong for us. It's obviously a mixed bag. Obviously, the infrastructure segments and IoT appear to be strong. Consumer appears to be fairly weak. Again, mixed bag even within consumer and I would say industrial is fairly weak at the moment. But bookings at the moment still appear to be quite strong.
Tore Svanberg, Analyst
Very good. And as a follow-up, it sounds like LoRa is going to have a pretty good quarter here in July. You did note that it was a little bit weaker-than-expected this last quarter. So if we look at the strength, is it coming from sort of a catch-up? Or are you now really starting to see some new deployments actually drive that strength?
Mohan Maheswaran, CEO
A little bit of both, Tore. In February and March, China was essentially shut down, so there wasn't much going on at all. In April, we saw some catch-up and this continued into May. Overall, what's happening with LoRa now is that we're starting to see broader usage and more use cases. Additionally, COVID-19 is potentially driving some new opportunities. We're also beginning to see a wider range of geographical use cases, especially in North America and Europe, which are different from the metering and small building use cases we see in China. Overall, the outlook for LoRa is quite positive at the moment.
Operator, Operator
Our next question comes from the line of Scott Searle with Roth Capital.
Scott Searle, Analyst
It was a good quarter. Regarding the protection side, Mohan, you mentioned it would be flat to down for the year. Could you provide some clarity on how that looks as we approach June and maybe differentiate between domestic China and non-China shipments? Additionally, it seems like we might see a nice recovery in the June quarter for LoRa, but you have the fiscal '21 range set at $90 million to $120 million. What needs to happen for us to reach the higher end of that range?
Mohan Maheswaran, CEO
Let's begin with protection. Protection can be divided into two segments: the consumer business, primarily focused on smartphones, and the non-consumer business, which is performing well. The non-consumer market, encompassing areas like communications and industrial, is currently thriving. On the consumer side, smartphones remain our largest segment, yet the performance is varied. In the first quarter, smartphone sales were weaker in China, remained flat in Korea, but exceeded expectations in North America. For the second quarter, we anticipate a slight increase in China smartphone sales, with Korea likely remaining flat or declining. North America is expected to perform reasonably well, but we predict a downturn in the smartphone business for the third quarter, largely due to supply constraints from some customers related to COVID-19. This situation could change rapidly, and we may see improvement in the second half. Overall, while the consumer side appears weak, our broader protection business remains strong, though it may not completely counterbalance the consumer decline. As for the LoRa sector, we have not yet witnessed growth from the smart home business catalyst I've mentioned previously, but we expect to see positive developments in the second half. However, COVID-19 may cause delays, and much depends on more consumer-oriented segments such as smart home, asset tracking, and logistics. These factors will influence whether we reach the high end of our projected range. Last year was disappointing due to challenges in China, but we are beginning to see broader momentum across various regions and use cases. Encouragingly, COVID-19 has created new use cases for us, and if these trends continue, we could see positive outcomes.
Operator, Operator
Our next question comes from the line of Quinn Bolton with Needham & Company.
Quinn Bolton, Analyst
Let me also say congratulations on the nice results and outlook. I guess the first quarter with record POS, record bookings, just wondering if you have any sense whether your customers are buying ahead or trying to build up inventories given the COVID outlook? Or do you think most of this product is moving through to end-use applications?
Mohan Maheswaran, CEO
Yes, we've been observing that closely, Quinn. The positive aspect for us is that it's happening across various product lines, geographies, and end markets. For instance, the 5G base station is performing well, as is the 10-gig PON and the data center sector. These segments span different regions worldwide, including China, North America, and various parts of Europe. Additionally, LoRa is also quite widespread. We haven't observed many cancellations or delays that would indicate a decline. We believe infrastructure will continue to grow, and that’s where we're seeing a lot of strength in both our point of sale and booking numbers.
Quinn Bolton, Analyst
Great. Second question, and just to follow-up on Scott's question about the more consumer use cases or smart home use cases for North America. You mentioned you continue to see or expect that ramp to begin in the calendar second half. I guess, to the extent that these are devices that have to go through DBT and EBT testing, I would think that a lot of those devices are well into that process right now. Do you see that testing activity taking place, and that's what gives you the confidence that these devices are still on track for the second half? Or have you seen some COVID-related delays in the testing and qualification of those products just given mobility, and flight restrictions, and that kind of leads you to the comment that there may be some delays due to COVID?
Mohan Maheswaran, CEO
Yes, the answer is yes, Quinn. We have observed testing and progress is being made. However, COVID-19 is a unique situation, and we can't be certain if customers are prepared to execute the strategy as they previously did. There's no indication that anything has changed. A delay of a quarter due to the impacts of COVID-19 worldwide wouldn't be surprising. Currently, we are hearing that everything is on track and progressing well, but I want to emphasize that with COVID-19, there are many unknowns. There are too many uncertainties regarding supply, regional shutdowns, and the broader macro events affecting us. However, if those factors are set aside, I believe things are indeed on track.
Operator, Operator
Our next question comes from the line of Christopher Rolland with Susquehanna.
Christopher Rolland, Analyst
I think you guys are the first to report since the Department of Commerce broadened the entity list. I guess, first of all, if you could remind us what you were shipping to Huawei last quarter and why you decided to ship nothing to Huawei this quarter? And then secondly, the broadening of the entity list, what's the revenue impact from that perhaps you can help us size that?
Mohan Maheswaran, CEO
Yes, I mentioned in my prepared remarks that our guidance encompasses all these factors. We reviewed both the entity list and the extended entity list, and determined there is only a minor impact, which we factored into our figures. Thus, our guidance reflects that. The impact is relatively small. In terms of Huawei, we shipped approximately $9 million to $10 million in the first quarter. Our guidance assumes no further shipments to Huawei this quarter. I want to clarify that we've effectively removed the risk associated with Huawei from our projections. However, we still anticipate some revenue from Huawei, depending on their ability to ship their systems and their need for our products amidst the new restrictions. Overall, we've done our best to mitigate the risk of Huawei business in our estimates.
Christopher Rolland, Analyst
Okay. And just to make sure, guys like Fiberhome and some of the other entity guys, just wanted to make sure those aren't going to affect any of your businesses? And then separately, just talking about data center demand, if you could talk about that a little bit more, particularly around the PAM4 opportunity. The analog short-range side that you guys are more focused on, maybe you can talk about how that market's developed?
Mohan Maheswaran, CEO
Yes, we currently do not foresee any issues with Fiberhome or the other companies on the entity list. While circumstances can change quickly, we do not anticipate any impact for Q2, as this has already been incorporated into our guidance. If there is any effect, it should be relatively minor, even for companies like Fiberhome. Regarding our data center business, it is performing well. Our 100-gig modules are seeing a significant increase, particularly with ClearEdge performing strongly. We have begun sampling our Tri-Edge platform, which is our first PAM4 platform that complements our FiberEdge PAM4 PMD products. There is growing interest in both the 200-gig and 400-gig offerings, and we will introduce longer reach products this year. I believe we can expand our PAM4 portfolio and gain more momentum. While revenue this year will be modest, we expect substantial growth next year. Overall, we are making good progress and will monitor developments closely. Currently, we see 100-gig as our primary focus, followed by 200-gig, and we anticipate starting to generate revenue from 400-gig by the end of this year and into next year.
Operator, Operator
Our next question comes from the line of Rick Schafer with Oppenheimer.
Richard Schafer, Analyst
Yes, and I want to congratulate everyone. I have a couple of follow-ups. First, regarding Quinn's question, could you elaborate on your method for evaluating your order book? How do you identify the risk of double orders? How do you differentiate between a pull-in and a regular order from a customer? I know this is a broad question, but I'm interested in how you handle it.
Mohan Maheswaran, CEO
Yes, it's a broad and challenging question. We usually engage with end customers and monitor tenders, such as those related to 5G, to assess the number of base stations being constructed and who will receive them. This helps us estimate the demand for optical modules and ports. We apply a similar approach for the PON side. However, it's more complicated in the industrial sector for our protection business, which is more mass market and distribution-driven. Generally, when there is a lot of double ordering, cancellations start to occur as companies aim to avoid excess inventory, leading to order push-outs. We've noticed some of this in the consumer space, particularly in industrial areas, but it's less common in infrastructure. My observation, which is supported by stronger bookings on the infrastructure side, is that there is genuine demand and need. Additionally, strong POS figures reinforce this perspective.
Richard Schafer, Analyst
I have a follow-up question regarding PAM4. Do you believe you have a unique perspective on this? You are the incumbent in 4x25 CDR with a large market share. I'm interested in why DSP has dominated the PAM4 market to this point and how you anticipate this market will evolve in the future. Additionally, do you think that Tri-Edge, which you mentioned will gain traction next year, could become a significant revenue driver for you in fiscal '22?
Mohan Maheswaran, CEO
Let me address that. This year is crucial for Tri-Edge as we focus on securing design wins and validating the technology's performance, ensuring our assumptions are accurate. I anticipate we will achieve design wins this year, likely leading to significant revenue in the latter part of this year and certainly next year. Regarding DSP, while we initially invested in that area, we decided not to pursue it further. The established players retain their dominant positions, especially since they were the first to implement PAM4, which contributes to their success. We made a strategic choice to stick with the analog approach, which I believe was the right decision for us. Over the next six months, we will demonstrate the value in the 200-gig and 400-gig markets.
Operator, Operator
Our next question comes from the line of Gary Mobley with Wells Fargo.
Gary Mobley, Analyst
Let me extend my congrats as well. If my math serves me correct, you are expecting your July quarter sales to grow, what, roughly 10% sequentially, netting out the headwind from Huawei. Just to sort of clarify what's driving that. It's a bounce back in the LoRa business. It's telco and data center-related bookings strength and whatnot. And if I'm not mistaken, the new tighter export restrictions don't kick in until the end of June, any chance of generating turns business with Huawei between now and then?
Mohan Maheswaran, CEO
We are approaching our business with Huawei opportunistically. I have excluded it from our Q2 guidance as we do not anticipate any further shipments. However, if opportunities arise, we will consider them. Most of our products are eligible for shipment to them, although a few are not. The main concern is whether they can acquire components from other suppliers, especially given the recent stricter regulations affecting their access, such as HiSilicon's challenges with foundries. Overall, I believe the impact of these additional restrictions is minimal for us, and unless there are changes, we do not expect this to alter our outlook.
Gary Mobley, Analyst
Okay. Let's move on to the strength in end-market demand. Your point of sales significantly exceeded your reported sales, but can you share with us the extent of that and what the net impact was on the channel inventory?
Mohan Maheswaran, CEO
So POS was a record for us in Q1. Obviously, because of the record, the channel inventory came down. So channel inventory is in good shape for us. And the good thing about the POS, both the POS and I think our bookings, it's fairly broad for us. So base station, as I mentioned, is looking good, driven by 5G. We know of the tenders out there, and we know that we have a significant opportunity to get a large chunk of that business. And so that's going quite well and that's driven stronger bookings for us for, obviously, for shipments in Q2 and beyond. The PON business, as I mentioned, the 10-gig PON is doing very well, continues to be going quite strong. And then data center is clearly probably outside LoRa, the strongest area of growth at the moment. Both 100-gig also FiberEdge for PAM4 side. So that's doing quite well. And then LoRa, as I mentioned, has bookings very strong, and we expect a strong Q2 there as well.
Operator, Operator
Our next question comes from the line of Harsh Kumar with Piper Sandler.
Harsh Kumar, Analyst
First of all, congratulations on the very strong results. When I look at your guidance, it seems a bit better than what most companies are reporting at this time. I’ve heard the questions about double ordering, and I’m trying to understand your typical turn rate, which has been around 34% to 35%. From what I gathered, you mentioned being 80% booked and estimated turns of about 20% this year. My question is, why not guide higher, or is this some sort of cushion in case cancellations occur?
Mohan Maheswaran, CEO
Yes, the 20% is accurate. It's all the turns we need. It's probably the lowest percentage of turns since I've been with the company, which has been 15 years. This number is relatively low compared to what we're accustomed to achieving. That said, there are many unknowns. There's still a lot of uncertainty in the consumer business, and regarding the broader industrial outlook and COVID-19, we wonder if there will be another resurgence of cases, especially in North America, which is just beginning to get back to normal. Therefore, there's still uncertainty, and we've decided to take a conservative approach to planning and guidance, which is what we've done.
Harsh Kumar, Analyst
I have a question about LoRa. Was LoRa the area with the fastest bookings for you in the second quarter? Do you think the increase in bookings is due to China being back in the market and that obstacle being removed? However, as we assess the current situation, tensions are rising again. While I know this is difficult to predict, is there a chance that LoRa could be affected by this? Or do you believe it will be insulated because it's outside of infrastructure?
Mohan Maheswaran, CEO
Let me start with the first part first, Harsh. The bookings were strong across the board, particularly in infrastructure. The data center, base station, and LoRa segments performed exceptionally well, alongside our broader protection business. These are the four key areas. Currently, 55% of our LoRa revenues come from China, but keep in mind that in February and March, China largely shut down. It did recover in April, but the emerging opportunity pipeline for LoRa is shifting. We're seeing new revenue sources moving towards smart home, smart logistics, and other areas, rather than traditional segments like smart metering, smart buildings, and smart cities. Additionally, COVID-19 is generating some use cases that, while not significant yet, could soon become important, including smart health and smart temperature monitoring. There are various potential applications. I'm not overly concerned about additional restrictions; while it's always possible for situations to worsen, around 80% of our opportunity pipeline is currently outside of China. We continue to collaborate with China and achieve new design wins there, but we also have substantial opportunities outside China that will support our growth.
Operator, Operator
Our next question comes from the line of Tristan Gerra with Robert W Baird.
Tristan Gerra, Analyst
So given the restrictions that HiSilicon is going to have notably not being able to build NB-IoT chips at TSMC and knowing that the Chinese government has pushed in the IoT, and I know that it's obviously not a perfect overlap with LoRa, but does that change the competitive landscape longer term, where to the extent that China's own NB-IoT and IoT efforts potentially are impaired for a longer amount of time that it could actually create actually more demand for LoRa in the medium term?
Mohan Maheswaran, CEO
I hope so, Tristan, but we are not relying solely on that. The use cases really determine where LoRa excels. The Chinese government will continue to promote NB-IoT, and cellular companies globally will also support it. We cannot change that, and it is not our approach. Our strategy focuses on delivering technology that provides the best implementation for our customers, enabling them to achieve the longest battery life and deploy their systems efficiently. As we introduce more of our new products like LoRa Edge, we anticipate establishing a significant gap between LoRa's capabilities in specific use cases and those of NB-IoT or other technologies. That is our path to success, and I believe we will achieve this even in China.
Tristan Gerra, Analyst
Okay. A quick follow-up on LoRa. Last fiscal year, we saw a decline in the average number of nodes per gateway based on the data you provided. Given the reacceleration expected for LoRa this year, should we anticipate an increase in the number of nodes per gateway year-over-year? Additionally, considering that LoRa might have been weak earlier this year in China, do you expect the upcoming quarter to show growth year-over-year for LoRa?
Mohan Maheswaran, CEO
So yes, I do. I expect LoRa to be up year-over-year. The other comment on end nodes per gateway. Remember, gateway deployments are doing very well, actually. And that's another metric that we look at, obviously, around the world. How many gateways are being deployed. As I mentioned, in Q1, we reached 800,000 gateways from 640,000 at the end of FY '20. So significant increase in gateways. And that tells us that the use cases, all the opportunities we have are starting to get into their proof of concepts, and they're moving from proof-of-concept to deployment. And that's really what drives the end nodes. So you can look at it on a real-time basis and say how many end nodes we have deployed and how many gateways, but the gateways allow a lot more end nodes to be connected. So at the moment, 800,000 gateways drive around 3 billion sensors. So 3 billion sensor nodes or end nodes can be connected to those gateways. So there's plenty of capacity out there. And that's the goal we have is to drive enough capacity. And then the end modes will follow. That's just the use case driven. So as the use cases start to get deployed and emerge, then you'll start to see more and more end nodes deployed.
Operator, Operator
Our next question comes from the line of Craig Ellis with B. Riley FBR.
Craig Ellis, Analyst
Yes. Congratulations on the good quarterly execution, guys. I was hoping I could just start with a clarification before a couple of questions. The clarification is, I think I heard you say that wireless sensing was down 20% quarter-on-quarter. But within that, can you tell us how proximity sensing performed versus LoRa?
Mohan Maheswaran, CEO
They both were down quite significantly. Do you have that?
Emeka Chukwu, CFO
No.
Mohan Maheswaran, CEO
Let's see. Just hold on a minute, I would need that information. Yes, both were down, and both decreased by about the same percentage, I think, Craig. The decline in proximity sensing was largely due to the increased use of smartphones among consumers. The drop in LoRa was mainly a result of the shutdowns in February and March. So there are two different reasons for these declines, but both were significant. Additionally, there were supply constraints that affected both areas, particularly in proximity sensing and other segments of the wireless and sensing business that contributed to the downturn.
Craig Ellis, Analyst
Got it. And then for the first question, Mohan, it sounded like as you went through the different LoRa metrics that you've retained all your metric targets for calendar '20. So congratulations on that. My question is with a retained revenue range of $90 million to $120 million, what would make the difference between the business coming in closer to the low end of $90 million versus coming at the high end, the $120 million?
Mohan Maheswaran, CEO
The main factor will be the emergence of some new use cases. I mentioned that we are seeing more consumer-focused and smart home applications that we expect to materialize in Q2. We'll see if these developments occur in Q2, and if they do, they may position us toward the mid- to high-end revenue range. However, a lot depends on how quickly these use cases are adopted. I also noted that while COVID-19 presents challenges, we do not believe it will have a long-term impact on our business; it's more about the timing of certain developments. There is a possibility that some consumer, smart home, and even enterprise logistics programs might be postponed by a quarter or two. I don't anticipate that the delay will be significant, but it could push things into next year. We will have to monitor the situation closely, and I’ll keep you updated as it unfolds.
Craig Ellis, Analyst
Okay. That's helpful. In your earlier response, you mentioned that within Signal Integrity, the hyperscale data center segment appears to be the most robust opportunity in the near term, outperforming PON and base station segments. Given investor concerns about the sustainability of near-term strength for chip companies, which areas do you feel most confident about maintaining this near-term strength as you look towards the latter half of the year?
Mohan Maheswaran, CEO
The latter half of Q4 is challenging to forecast at this time. However, we believe Q3 will perform adequately. This confidence stems from our knowledge of the base station market, especially in China, where there is an established deployment plan for this year. We have a clear understanding of our customers' strategies and our strong position within those accounts, which leads us to expect favorable outcomes in that market. Additionally, the PON business, particularly the PON-X 10-gig solution, offers a transition point to 5G for many networks, showcasing a new and significant architectural advantage that PON provides, which is encouraging. It's also important to note that, while China remains the largest opportunity, we are starting to see interest from AT&T and Verizon regarding gigabit PON, as well as discussions around 5G deployments in the U.S. and European markets. This expansion of opportunities globally is quite positive. We do not anticipate a significant slowdown in the second half of the year, although much hinges on the evolving COVID-19 situation. The demand for increased bandwidth among consumers and enterprises drives the need for more base stations, PON solutions, and data centers, and we expect this trend to continue throughout the year.
Craig Ellis, Analyst
That makes sense. And if I could sneak one in for Emeka, I feel like he's been a bit neglected. Emeka, you mentioned that with the second quarter gross margin mix would be a tailwind, but absorption would be a headwind or utilization would be a headwind. I guess that's the flow-through effect of the first quarter revenue. As we look beyond the fiscal second quarter, do you get both of those things working for your way? And could we see gross margins getting to the 62% level as we exit this year?
Emeka Chukwu, CFO
Yes. Yes. Craig, I think that is the expectation. I mean, as you listen to all the areas that we have, a lot of those are coming with very high gross margins. So the data center, the 5G, the PON, the 10-gig PON and then the protection industrial applications as well. So we think a higher mix of those types of revenues and demand stays strong and going up, driving higher absorptions allows us to move our gross margins up to around the 62% level.
Operator, Operator
Our next question comes from the line of Karl Ackerman with Cowen Company.
Karl Ackerman, Analyst
Two quick ones, if I may. Mohan, just kind of curious, how do you think about the FCC decision to make available the 6 gigahertz band for WiFi? I'm just kind of curious, some investors have been a little bit worried that this may limit the 40% annual CAGR of LoRa adoption in consumer environments. As consumers opt for higher performance, but much more expensive routers for in-home connectivity. I was just kind of hoping if you could talk about that, how it would impact your consumer LoRa business longer term?
Mohan Maheswaran, CEO
Yes. The way to think about it is that there are different use cases that complement each other. WiFi serves as a great complement to LoRa in many respects, especially regarding their operational characteristics. Our latest platform, the LoRa Edge platform, includes a WiFi sniffing function, but still relies on WiFi routers and similar systems to support various use cases. Therefore, there is really no impact at all. In fact, WiFi and LoRa are increasingly complementary, and we are witnessing more situations where the high bandwidth of WiFi combined with LoRa's low power sensing and monitoring capabilities is highly valuable. Just like 5G paired with LoRa or Bluetooth with LoRa, we do not view this as a competitive issue, but rather as a complementary one.
Karl Ackerman, Analyst
Very helpful. Just one last one, if I may. On your triage opportunity, there is a competitor who appears to have one, maybe most of the early designs in PAM4, just given the fact that it's largely relegated to one hyperscale customer. First, do you expect more diversified cloud adoption in the U.S. of PAM4 interconnects inside the data center this year where you have the opportunity to be a strong number two provider? Second, you noted that Tri-Edge would be more material for next year, but I was just hoping you could speak to your perhaps relative position and quantify the opportunity as the market transitions to both 200- and 400-gig solutions?
Mohan Maheswaran, CEO
Yes, we have just begun sampling the Tri-Edge platform, so it's still early for us. However, we have a solid presence in the data center market, and we understand our customers' needs, along with our strong position in 100-gig solutions. Our focus now is to encourage those customers to adopt our platform for 200-gig and 400-gig solutions, initially for short reach and eventually for longer reach applications. We recognize there is work to be done and that it won't be easy, as there are numerous challenges ahead. We made a strategic choice to pursue the analog PAM4 route because we prioritized power efficiency, cost, and latency for various use cases. Our aim this year is to catch up in the PAM4 space and secure more design wins, which we expect will lead to a stronger ramp-up next year. We anticipate revenue this year, but it won't be significant, with much more robust results expected next year.
Operator, Operator
Our next question comes from the line of Mitch Steves with RBC Capital Markets.
Mitchell Steves, Analyst
It looks like a pretty substantial beat raise here. But I had a question just more on kind of like '21 and '22, I think it's a big investor debate. So it sounds like you guys had some sort of view of what the back half looks like. So is there any way to least give us maybe a qualitative metric and how to model out the back half of the year, if it should be similar to July growth or something that's going to decelerate or accelerate? Anything that would help there, I think it would be very useful.
Emeka Chukwu, CFO
Yes, Mitch. Based on everything we see right now, we still expect to have a decent second half of the year. However, there are still factors beyond our control. There is talk of a recession and similar concerns. As Mohan mentioned earlier regarding COVID-19, no one really knows how that situation will unfold. We feel positive about the second half, but we also have a hint of caution. My expectation is that we will likely see flat to slightly increased performance in the latter half of the year.
Mitchell Steves, Analyst
Okay. That's very helpful. And then just a follow-up really quick on LoRa. You guys talked to $90 million to $120 million. It sounds like there wasn't much in April, hence, the pretty significant contribution to July. So when we look out the next, let's call it, '22 and '23, are you guys still sticking with kind of like the 40% or 50% growth rate because it's just infrastructure build out? Or has that change got pushed out in any meaningful way?
Mohan Maheswaran, CEO
No. We'll stick with the 40% CAGR over the next 5 years, and it's really driven not only by our belief that these gateways that are being deployed, have a lot of use cases, there's plenty of capacity out there. We're really seeing the need for low-power sensing. So the low-power wide area network market, which is tiny today, we're starting to see it grow. There are clearly some emerging use cases. And I think, as I mentioned, if the smart home, smart consumer, smart logistics, smart asset tracking start to take off, which we believe they will, then I think we'll start to see a much more higher volume of connectivity to gateways, and that will drive the FY '22, FY '23 number and the 40% CAGR.
Operator, Operator
Our next question comes from the line of Hamed Khorsand with BWS Financial.
Hamed Khorsand, Analyst
Just one question. Can you quantify the sales slippage from Q1 to Q2? And was it from all the supply constraints? And is it all in wireless and sensing?
Mohan Maheswaran, CEO
Hamed, when you say sales slippage, so I think...
Hamed Khorsand, Analyst
You disclosed in your 10-Q, towards the bottom of the 10-Q, you were talking about there was an impact to Q1 sales and you were shifting it to Q2 on the guidance. So I'm just trying to get clarity on that.
Mohan Maheswaran, CEO
Yes, we did experience some supply constraints. For instance, our facilities in Mexico for the High-Rel business were shut down, which prevented us from producing anything. We are not planning to reopen that facility until June, meaning we cannot ship anything from there. This will have some impact, but it's relatively minor, estimated at about $3 million to $4 million. Additionally, we've reduced capacity in some areas of our protection business, which also results in a few million dollars in lost capacity. There are constraints due to the shutdown in Malaysia as well, affecting various sites. Overall, while these issues are widespread, they are not significant enough to materially affect Q2. We expect to recover most of the lost production.
Operator, Operator
Our next question comes from the line of Tore Svanberg with Stifel.
Tore Svanberg, Analyst
Yes. I just have two quick follow-ups. First of all, and just to sort of reconcile, you had record POS, yet you're guiding about $30 million lower than your historical record on the top line. Is that, again, just you being careful with the economy, is it some related to Huawei? Help us understand what that $30 million. And I know it's not perfect times, right, POS versus sales, but it's still a fairly large number.
Mohan Maheswaran, CEO
Yes, I think all of those factors apply. We are not going to include any additional shipments to Huawei in our guidance. I've mentioned this in the last two quarters, and I believe it's the best approach since we cannot predict what new regulations or restrictions might emerge. Therefore, our guidance does not factor in any more shipments to Huawei. Additionally, we expect a lower turns percentage this quarter, but part of that uncertainty comes from not knowing how COVID-19 will evolve in different regions. As North America and Europe begin returning to work, we are unsure if we will face another virus outbreak that leads to shutdowns, or if the situation will remain stable. Given these uncertainties, we have taken a cautious stance. Overall, we are optimistic about our guidance. While we could have been more aggressive, the ongoing supply constraints and demand uncertainties, including having one site shut down and another at half capacity, lead us to be more conservative.
Tore Svanberg, Analyst
Yes, that's fair. Just one last question. It seems like you're experiencing significant activity in the health care sector with LoRa. Are you considering establishing a dedicated business unit for LoRa Smart Healthcare? Many companies are viewing the health care market as a major opportunity during this downturn. I'm curious if you are also becoming more focused on health care with LoRa.
Mohan Maheswaran, CEO
That's a great question, Tore, and I don't have a definitive answer yet. We are beginning to see applications for our technology, as I've mentioned, with customers implementing LoRa globally to assist with COVID-19. I've talked about uses like contact tracing, remote temperature monitoring, occupancy management, and smart quarantining. My approach is to think strategically about whether this represents a long-term opportunity or if it's more of a short-term gain. Fortunately, we have strong partners who will help us determine the success of LoRa in this area, which will guide our future strategic decisions. We recently introduced the LoRa Edge platform, featuring WiFi, GNSS, and LoRa capabilities all integrated into a single chip. This product is designed primarily for smart logistics and asset tracking, which we believe will become a significant market. However, I also see considerable potential for this platform in the smart health sector, especially for applications like contact tracing. We will monitor this closely to see if the market embraces and accelerates these solutions.
Operator, Operator
Our final question comes from the line of Christopher Rolland with Susquehanna.
Christopher Rolland, Analyst
And just kind of a follow-up also to Tore. On the booking side of things, we've kind of noticed a correlation between book-to-bill and Huawei previously as a customer from some of your competitors. I think you guys said you had a strong book-to-bill. I don't know if you guys would maybe want to describe what that is a little bit further? Was it 1.3 or above? And then just as you think about those extra marginal bookings, were they long dated? Are they cancelable? Or is there anything about that, that's different than otherwise?
Emeka Chukwu, CFO
So Chris, our book-to-bill was pretty much in the sort of the range that you have referred to. And the bookings have been strong, like Mohan said on the call, we have actually continued. And I think one of the things that we do consistently is to track how many cancellations we're getting, how many push-out requests that we're getting. And so far, we have not seen anything that is apart from the ordinary. We've been very pleased with all the indications that we're seeing is that the bookings are really something that is being driven by actual demand.
Mohan Maheswaran, CEO
Yes. I would highlight that much of the strength we've observed is in the booking activity related to infrastructure and IoT segments. Other areas are not experiencing the same level of strength. Within infrastructure, the strength is quite widespread. Typically, we might see one or two areas showing significant strength, but in this case, it spans various sectors including base station, data center, and PON, reflecting a broad demand in communication and IoT.
Operator, Operator
As there are no further questions left at this time, I would like to turn the floor back over to management for any closing remarks.
Mohan Maheswaran, CEO
In closing, COVID-19 has provided us all with its fair share of challenges. And I want to thank all of our employees and partners for their efforts to quickly adjust to the challenges faced from this global pandemic. They have adapted and responded and leveraged the infrastructure we have built over the last several years, resulting in limited impact to our business operations. We believe our diverse product offering, balanced end market and balanced geographical approach, along with our strong customer relationships, should help us outperform our peers in these uncertain times. 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 teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.