Earnings Call Transcript - SMTC Q3 2022

William Harrison, VP of Investor Relations

Thank you, Carl, and welcome to Semtech's conference call to discuss our third quarter fiscal year 2022 financial results. 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 involve risks and uncertainties that could cause actual results to differ materially from those anticipated. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement in today's press release and in the Risk Factors section of our most recent periodic reports filed with the Securities and Exchange Commission. Please note that comments made during today's call are current only as of today, and Semtech has no obligation to update the information should facts or circumstances change. All references to financial results in Mohan's and Emeka's prepared remarks will refer to non-GAAP financial measures unless noted otherwise. A discussion of why the management team finds these non-GAAP measures useful, along with detailed reconciliations to the most comparable GAAP financial measures, is included in today's press release. Now, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Emeka Chukwu, CFO

Thank you, Sandy. Good afternoon, everyone. As is our practice, I will focus my comments on our non-GAAP financial results, unless otherwise noted. In Q3 fiscal year '22, the company delivered a very strong financial performance that included achieving a number of new financial records, including net sales of $194.9 million, that increased 5% sequentially and 27% year-over-year and was above the midpoint of our guidance. Continued momentum and record results by several of our key growth platforms contributed to the strong net sales performance. In Q3, shipments into Asia, North America and Europe represented 78%, 12% and 10%, respectively. While this represented a shift to addresses for our distributors and customers, we estimate that approximately 35% of our shipments are consumed in China, 27% in the Americas and the balance over the rest of the world. Total direct sales represented approximately 12% of net sales, and distribution net sales represented approximately 88%. Our distributor POS represented another quarterly record, and the business remains balanced with approximately 41%, 32% and 27% of the total POS coming from the infrastructure, industrial and high-end consumer end markets, respectively. In Q3, bookings increased 16% year-over-year, and those bookings accounted for approximately 3% of our Q3 shipments. The Q3 gross margin increased 110 basis points sequentially to 63.8%, which represented the upper end of our guidance range and the new quarterly record, led by a more favorable product mix. Going forward, we expect our gross margin to continue to benefit from the retail mix of sales from our key growth platforms that include LoRa-enabled, our 10G PON, our Tri-Edge PAM4 CDRs and our broad-based industrial protection products. For Q4, we expect gross margin to continue to expand as we anticipate a more favorable mix due to a seasonally lower high-end consumer net sales. For planning and modeling purposes, we expect our gross margin to remain at current levels with an upward bias over the next several quarters, reflecting the benefit from the growth of our secular growth platforms. In Q3, operating expenses increased 2% to $67.5 million, driven by higher new product development expenses. For Q4, we expect our operating expense to be in line with to slightly above current levels. Looking ahead to fiscal year '23, we expect our operating expense to begin to trend back towards our target model of half the rate of net sales growth. In Q3, operating profit increased 14% sequentially, or nearly three times that of net sales, and increased 51% on a year-over-year basis, led by the higher gross margin and represented a record operating profit. Operating margin expanded by 210 basis points sequentially to 29.2% and represented solid progress towards our 32% to 36% long-term target model. As expected, we are seeing the strong operating leverage expected for the success of our growth platforms. In Q3, cash flow from operations was a record $66.5 million, up 26% sequentially and represented 34% of net sales as a result of the record operating profit and good management of working capital, while free cash flow increased 33% sequentially to 31% of net sales. Free cash flow generation in fiscal year 2022 has been strong despite the strategic actions to maintain higher levels of inventory. And we expect to end the year around the low end of our long-term free cash flow target of 25% to 30% of net sales, which will be a significant expansion from the prior year. In Q3, we repurchased approximately $30 million or 0.6% of our outstanding stock, resulting in $292 million remaining in our outstanding authorization, and we expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down the debt. The Q3 accounts receivable increased 2% sequentially to $74 million, while days of sales was flat with the prior quarter at 34 days and remains below our target range of 40 to 45 days. In Q3, net inventory in absolute dollar terms increased 2% sequentially, and days of inventory increased 4 days sequentially to 133 days. We expect net inventory to remain above our target range of 90 to 100 days to support the stronger demand and the better supply chain environment. In summary, the success of our growth engines of LoRa-enabled, our Tri-Edge PAM4, 10-gig PON, 5G wireless, and broad-based protection platforms enabled us to deliver a record net sales, a record gross margin, record operating profit, record earnings per share, and record cash flow in Q3. We expect the sustainable long-term growth from these key growth engines and the underlying secular drivers that continue to drive record financial performance for fiscal year '22 and provide strong momentum as we move into fiscal year '23. I will now hand the call over to Mohan.

Mohan Maheswaran, CEO

Thank you, Emeka. Good afternoon, everyone. I will discuss our Q3 fiscal year '22 performance by end market and by product group, and then provide our outlook for Q4 of fiscal year '22. In Q3, net revenue of $194.9 million grew 5% sequentially and 27% annually and represented a new quarterly record. Higher demand from the industrial and high-end consumer markets contributed to Q3 growth. We posted record non-GAAP gross margin of 63.8% and record non-GAAP earnings per diluted share of $0.74. In Q3, net revenue from the industrial end market increased 17% sequentially, led by record results from both our LoRa business and our broad-based protection business and represented 35% of total net revenues. The infrastructure market decreased 1% sequentially as record PON revenues and stronger base station revenues were offset by lower data center revenues and represented 34% of total net revenues. The high-end consumer market increased 2% sequentially and represented 31% of total revenues, with approximately 20% attributable to mobile devices and approximately 11% attributable to other consumer systems. I will now discuss the performance of each of our product groups. In Q3 of fiscal year '22, our Signal Integrity Product Group increased 3% sequentially and achieved a new revenue record, led by growth from the PON and base station infrastructure markets and represented 39% of total revenues. In Q3, revenue from our data center customers softened over the prior strong quarter. Our Tri-Edge PAM4 short-reach platforms continued to gain solid design win traction with key hyperscale customers. We expect this momentum to accelerate into fiscal year '23 as the power and cost benefits of Tri-Edge become realized across shorter reach links in the data center market. The excellent performance of our short-reach Tri-Edge platforms has also led to increasing interest in our longer reach Tri-Edge PAM4 platforms, planned for release over the next several quarters. In fiscal year '22, we expect our data center PAM4 revenues to end in the high teens and increase over 100% in fiscal year '23. As new Tri-Edge products are released to production, we believe our complete portfolio of Tri-Edge PAM4 devices will enable very strong revenue growth over the next few years in 100-gig, 200-gig, and 400-gig PAM4 optical modules in the hyperscale data center market. In Q3 of fiscal year '22, revenue from the PON market achieved another record performance, led by record 10-gig PON revenues as we continue to benefit from the most comprehensive PON PMD portfolio available in the market today. We expect our PON business, led by our 10-gig PON solutions, to continue to grow as global service providers accelerate their deployments of higher bandwidth access networks. In Q3 of fiscal year '22, demand from our wireless base station customers increased over the prior quarter. Several 5G China tenders have been announced, and carriers in North America and Europe are expected to begin 5G infrastructure build-outs over the next 12 to 18 months. We are expecting demand for our 5-gig platforms to accelerate in fiscal year '23 due to significant design win momentum for our 25-gig ClearEdge family. In addition, our industry-leading 50-gigabit per second PAM4 Tri-Edge platform targeted at 50-gigabit per second front-haul modules is now being sampled for next-generation 5G wireless networks and receiving very positive feedback. The secular themes driving the global demand for greater bandwidth are expected to remain strong, and we believe our strong position in our key infrastructure markets will provide the sustainable tailwinds needed to drive double-digit growth for our Signal Integrity Product Group over the next several years. In Q4 of fiscal year '22, we expect revenue from our Signal Integrity Product Group to increase and achieve another record driven by growth from the data center market. Moving on to our Protection Product Group. In Q3 of fiscal year '22, net revenues from our Protection Product Group increased 14% sequentially and 36% year-over-year and represented 29% of total revenues. In Q3, revenue from our consumer protection platforms increased sequentially, as expected, driven by North American and Asian consumer demand. While consumer demand remains strong, many of our customers are supply chain limited, which is impacting their ability to build complete systems. We anticipate that this constraint will remain for at least 2 more quarters. In Q3, demand for our protection devices used by the broad-based industrial markets grew 31% sequentially and 71% annually and achieved a new quarterly revenue record, led by growth from our automotive, communications and broad-based industrial customers. Our protection platforms deliver superior protection for systems using leading process geometry devices. We expect this secular trend to continue and contribute to the increased adoption of Semtech's protection platforms across all technology sectors and help deliver double-digit growth with increasing gross margins over the next several years. In Q4 of fiscal year '22, we expect our protection revenues to decrease sequentially due to typical seasonality. Turning to our Wireless and Sensing Product group. In Q3, revenues from our Wireless and Sensing Product Group grew 1% sequentially and 23% over the prior year and achieved another quarterly record and represented 32% of total revenues. In Q3, our LoRa-enabled platforms delivered another record performance, led by growth from the smart utility, smart building, industrial IoT and smart agriculture segments. We are also seeing the early ramp of the smart home, smart neighborhood and smart campus segments, which are driving further growth for our LoRa business, as we had anticipated. As a result of this continued positive momentum, we now expect our LoRa-enabled revenue in fiscal year '22 to exceed our 40% CAGR target. Our vision for LoRa is to see it deployed everywhere where low-powered sensors are needed, which we believe will result in a positive impact on managing or mitigating the impact to climate change. In Q3, we announced an initiative and goal to connect 1 billion LoRa-enabled sensors by 2026 that have a positive impact on climate change. We continue to see many use cases globally that will contribute to this goal. Some examples of these new use cases include: a collaboration with Cloud Energy, a leading IoT solution provider in Asia, to develop and deploy LoRaWAN networks for rooftop, wireless, solar power systems. Ryoden Corporation, a LoRa solution and network provider, announced a new zero carbon solution, featuring a Renesas microcontroller and our LoRa Edge platform to connect a batteryless sensor directly to the LoRa cloud, enabling geolocation capabilities for the tracking of personal valuables, logistics assets, animals and healthcare assets. And IQnexus and end-to-end IoT solutions and integration provider for building automation, incorporated LoRa into its indoor air quality and environmental quality sensors, which reduce carbon dioxide emissions. These are just a few examples of the numerous LoRa use cases emerging to combat climate change. In Q3, Microsoft announced it has joined the LoRa Alliance and has accepted a seat on a LoRa Alliance Board. Microsoft Azure is widely considered a Tier 1 enterprise cloud partner for many IoT deployments, and we expect their participation, along with other top-tier cloud providers, like AWS, to further strengthen LoRa's presence in the LPWAN market. In Q3, our LoRa business metrics continue to make solid progress against our fiscal year '22 targets. The number of global LoRaWAN network operators grew to 163, and we are expecting 165 LoRaWAN network operators by the end of fiscal year '22. The cumulative number of LoRa end nodes deployed increased to 225 million, and we expect this number to exceed 236 million cumulative end nodes by the end of fiscal year '22. The number of LoRa gateways deployed increased to over 2.7 million and has already exceeded the goal we set for the full year. We now expect to have 3 million gateways deployed by the end of fiscal year '22. The LoRa opportunity pipeline increased to over $900 million and has also exceeded our fiscal year '22 year-end target. We are increasing our pipeline target for fiscal year '22 to $950 million. We anticipate that approximately 40% of the opportunities currently in the pipeline will convert to deployments on average over a 24-month time line. We believe the momentum of our metrics, along with the increasing influence of the LoRa Alliance and its members will help enable LoRa to become the de facto standard for the fast-growing LPWAN market. In Q3, demand for our proximity sensing platforms softened following last quarter's record revenues. Our sensing platforms provide the industry's most advanced and highly integrated SAR sensing technology for mobile and wearable devices. The increasing adoption of 5G phones and use of high-powered cellular and WiFi radios is expected to result in more stringent RF power regulations globally. This trend is expected to contribute to increased demand for our proximity sensing platforms over the next few years as we anticipate that several countries in Asia will enforce stricter SAR regulations over the next 2 years. For Q4 of fiscal year '22, we expect net revenues from our Wireless and Sensing Product Group to decrease as record results expected from our LoRa business are anticipated to be offset by seasonally lower consumer revenue. Moving on to new products and design wins. In Q3, we released 23 new products and achieved a record number of new design wins of 3,792. Now let me discuss our outlook for the fourth quarter of FY '22. We entered Q4 with record backlog and are currently estimating Q4 net revenues to be between $184 million and $194 million. To attain the midpoint of our guidance range or approximately $189 million, we needed net terms orders of approximately 3% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.65 and $0.73 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 is from Tore Svanberg with Stifel.

Tore Svanberg, Analyst

Yes. Congratulations on the record results. First question is on your comment about data center and specifically PAM4, I believe you said PAM4 will double next year. Could you maybe talk to some of the specific deployments there, Mohan? And it also sounds like sequentially that's going to drive the Signal Integrity business. So again, I assume that's the beginning of some new deployments that you're benefiting from there.

Mohan Maheswaran, CEO

Yes, that's right, Tore. We've got quite a few things going on in the data center business, but specifically in the PAM4 area. For us, the only products we have out at the moment are the short-reach products that can go into optical modules for mostly 200-gig, its 4x50 and some 400-gig applications. We have, as I mentioned, a new series of products that are planned to come out over the next few quarters for longer reach. And I think when we have that broader portfolio, we're going to see even more momentum there. But the momentum on short reach alone is going to drive very, very significant growth for us next year, as I said, 100% growth and then beyond that, for sure. So we're very excited about the opportunity there. And not only Tri-Edge PAM4 for our data center business, but also our 50-gigabit per second PAM4 Tri-Edge platform for base station optical modules is also getting extremely good feedback from the marketplace. So we're very optimistic about that also.

Tore Svanberg, Analyst

Very good. And as a follow-up, your PON business has been on a tear. Really, it's been one of your stronger businesses on a year-over-year basis. Is there anything that you can share with us to give us conviction that there's still upgrade cycles happening there to sustain this momentum in 10-gig PON?

Mohan Maheswaran, CEO

Yes, for sure. I mean PON, in general, first of all, globally, I think one of the nice things about PON is it's become a lot more of a global technology. For a while, it was very much China that was driving the business and the deployments. But what we've seen, and while we've seen China tenders continue and driving good deployments, we're also starting to see North America and Europe now starting to drive tenders out there, and that's going to drive further growth. And we're definitely seeing that kind of globalization across many different OEMs now building PON platforms. So pretty excited about it. I think obviously, access bandwidth is critical. You can have all the bandwidth you want coming to the access point, but if you have a bottleneck there, then that defeats the whole purpose. And I think 10-gig PON is definitely seeing good growth, and will continue to. And I think we're likely to see higher bandwidth PON developments over the next few years. So very encouraged by the growth in PON.

Tore Svanberg, Analyst

Okay. Just one last question on LoRa. So it sounds like the smart home, smart neighborhood is starting to ramp. Is that primarily North America? Or are you seeing that ramp in other regions as well?

Mohan Maheswaran, CEO

We're seeing it ramp across the board, I would say. The majority of the strength is in North America. I would say that it's a number of different players. Obviously, the Amazon Sidewalk initiative is yet to come. So that's still, I think, something that probably second half of next year, we're going to see that ramp. But definitely, we're seeing a whole bunch of other initiatives, including the Helium rollout. We've seen kind of this emergence of this campus networks. Now one of the things that's really transpired and really exciting for us is that LoRa, which is predominantly a range-driven technology, low power long-range driven technology, but we're seeing in that kind of half a mile to 5-mile range, LoRa really starting to get adopted as well, which is pretty exciting because it opens up a whole bunch of use cases that makes the market, essentially the LPWAN market become much bigger, and I think will grow faster.

Tore Svanberg, Analyst

Congratulations again.

Mohan Maheswaran, CEO

Thank you.

Operator, Operator

Our next question is from Tristan Gerra with Robert W. Baird.

Tristan Gerra, Analyst

You mentioned that both PON and the data center have shown sequential growth. I understand that PON is diversifying beyond China. It seems you are managing the slowdown in China better than some other companies have suggested. Could you elaborate on what you're observing in that region? If there is indeed a slowdown, would it result in a more optimistic outlook for this quarter's top line?

Mohan Maheswaran, CEO

Yes, Tristan, it really depends on the specific segment you are looking at. For instance, we are observing a slowdown in the consumer business, particularly in the smartphone sector in China. However, infrastructure is still performing well, and the IoT sector remains strong. The situation varies significantly from one segment to another. This is the advantage of being a well-rounded business with both market and geographical diversification—a weakness in one area can be offset by strength in another. To address your question directly, it is indeed specific to each segment, and we've noticed more weakness in the China consumer business compared to other markets.

Tristan Gerra, Analyst

Great. And then could you talk about your expectation about price contributing to your top line over the next few quarters? You were mentioning early this year about your expectations for price increases in the second half, which also could benefit gross margin. And as those price increases, perhaps continuing and with the ones that you've already done, is that going to contribute next year to the growth in addition to whatever you're going to see in units?

Mohan Maheswaran, CEO

Possibly, Tristan. Most of our price increases have been driven by rising supply chain costs. We have concentrated on passing on any increases in wafer costs or specific product costs, whether related to fabrication or assembly and testing, to our customers. This has certainly helped us counter some of the supply chain cost increases through higher average selling prices. However, I don't think we will continue this practice unless we see further supply chain developments, which is possible due to the long cycle times involved. Typically, long cycle times can lead to higher pricing. It could happen until all the capital expenditures and investments are in place, but that usually takes several years, so while it’s a possibility, we’re not relying on it.

Operator, Operator

Our next question is from Harsh Kumar with Piper Sandler.

Harsh Kumar, Analyst

First of all, congratulations. Very solid results. Mohan, I had two for you. You mentioned there was softness in the data center business last quarter that you just reported, and then you expect things to improve. I was curious in your opinion, what might have caused that softness. And then also, what are you seeing that gives you the confidence that things are improving in the data center? And then I have a follow-up.

Mohan Maheswaran, CEO

From our perspective, there has been a significant shift in the market. There are 100-gig optical modules and possibly some excess inventory, but the new PAM4 deployments without inventory are starting to ramp up quickly. We are confident in our design wins for these products. Therefore, we feel positive about Q4 and next year for our data center business, although it can be unpredictable. Infrastructure businesses tend to have these fluctuations, experiencing periods of deployment or capital spending followed by inventory management, then a resurgence. However, we are certain that deployments for 100-gig, PAM4, 200-gig, 400-gig, 5G base stations, and 10-gig PON will increase year over year. The question remains about timing.

Harsh Kumar, Analyst

Understood, Mohan. And then I had a question on PON. I seem to recall in one of your presentations that the 10-gig PON, you guys are playing on both sides of the wire, whereas for 1-gig PON and 2.5, you were just on one side of the wire. So I was curious if that is an accurate assessment, which would imply, if that's correct, that your content went up quite a bit. And then as a side question to that is, I was curious you would be willing to give us how much PON is as a percentage of revenue?

Mohan Maheswaran, CEO

Everything you said is correct, Harsh. In terms of 10-gig PON, we are involved at both the central office and the ONU ends. The average selling prices are higher on the OLT side, which is a positive aspect. Selling a complete chipset like that strengthens our position with customers, which is beneficial. Strategically, we feel very comfortable with our current standing. Regarding the percentage, Sandy, I'm not sure if you have that information or if we can provide it. Let me check.

William Harrison, VP of Investor Relations

Yes. So Harsh, the PON's typically been somewhere in sort of the low to mid-teens. It's probably running at the upper end of that this year, year-to-date.

Harsh Kumar, Analyst

That's good enough for me. Congrats guys.

Operator, Operator

Our next question is from Craig Ellis with B. Riley Securities.

Craig Ellis, Analyst

Congratulations on the very strong quarter and outlook. Mohan, I wanted to start just by getting some further color on what you're seeing with order activity and backlog growth. Backlog is clearly very strong with just 3% turns coverage needed to meet guidance. So what are you seeing there? And are there particular areas of the business where you're seeing more significant order intake and backlog expansion?

Mohan Maheswaran, CEO

Yes. Orders continue to be very strong. Backlog is obviously very healthy given what we've just mentioned on turns there. So everything is looking quite good there. I would say, there are pockets of extremely very good strength, and PON is clearly one of those. LoRa, obviously, is another area. Our protection IPA business, which is very broad, very, very strong. So there are some nice pockets. Areas of weakness, I mentioned China, smartphone consumer, not totally unexpected coming towards the end of the year, and it's kind of been a funky couple of years here. So some of the typical seasonality. That's what we expect to see. So it's not totally unusual. But I would say, Craig, that at the moment, everything is still very, very strong.

Craig Ellis, Analyst

That's real helpful. And then I wanted to go from there and just talk a little bit about the industrial activity inside of protection. So great to see the 31% sequential growth. And I was wondering if you could point out some of the things within that very broad end market that are seeing particular strength? And how sustainable do you think that strength is as we look out into the first half of calendar '22? And what do you think is driving that strength?

Mohan Maheswaran, CEO

I believe it's sustainable. We anticipate that Q4 might be a bit weaker, but I expect a strong performance in Q1, particularly in the first half of next year. This growth spans multiple segments, including communications, automotive, and various broad-based interfaces like USB-C and HDMI. Automotive is especially strong, and communications are also performing well. The sustainability comes from the mass market rather than just a handful of customers; we are engaging with thousands of customers. We're observing that the broader market is starting to adopt advanced lithography processes, controllers, and DSPs. As these industries embrace advanced lithography, it aligns perfectly with our strategy and the need for our high-end protection solutions. We've established our capabilities in the consumer segment, and now it seems that the broader market is beginning to follow suit.

Craig Ellis, Analyst

Yes. Nice to see the market coming to you, especially one that has real nice margin characteristics. I don't want to ignore Emeka. Emeka, great to see the real strong gross margin. I just wanted to see if there was any further color you could provide on some of the particular pluses in the quarter since we were at the very high end of guidance and at least 50 basis points above what I was expecting.

Emeka Chukwu, CFO

So thank you, Craig. And it's okay, I do not feel ignored at all. But our gross margin story has definitely been a highlight for us. And it's actually very pleasing to see these numbers playing out given the expectations that we've had for a while. If you recall in the past, we've talked about the growth drivers, right, of LoRa-enabled, the 10-gig PON, the PAM4 CDRs, broad-based protection devices. We talked about all of that coming with much higher gross margins than the corporate average. So it's nice to see that playing out. And that's essentially the story, right? Our gross margin expansion story is pretty simple, it is just that of mix.

Operator, Operator

Our Next question is from Christopher Rolland with Susquehanna.

Christopher Rolland, Analyst

I guess my questions are mostly around LoRa. So I guess for LoRa, in terms of like an innovation treadmill, what kind of improvements do you think we might be able to see with LoRa? And then with Helium, for example, it's so backlogged right now. It seems like you guys would have a ton of pricing power, particularly for gateway chips. Maybe talk about your pricing power for those chips today. And remind me what the average ASP per base station is as well.

Mohan Maheswaran, CEO

Let me start with that, Chris. I think it varies, but for the lower end base stations, like home base stations, we’re talking between $5 and $30, depending on the version. You're right, the pricing power is definitely with us. However, our strategy is to deploy gateways worldwide so that Helium's distributed wireless network can be very successful. We want connectivity to be available in every country and neighborhood, making LoRa connectivity seamless for various use cases. That has always been our goal. This is why I emphasize the importance of the number of gateways and sensors that can be deployed because our true objective is to get sensors connected to those gateways, which can't happen without them. The beauty of the Helium decentralized network is that it enables viral connectivity to the network. We are very excited about this. If I look at other networks worldwide today, they are beginning to be utilized as we had envisioned. We have roaming agreements, and companies are using networks for private enterprises, along with public network initiatives. Everything is unfolding as we anticipated. So we are very excited, and indeed, the momentum for the Helium network is very positive.

Christopher Rolland, Analyst

Yes, I have been very impressed, Mohan, and I agree with your comments about Helium. I have one miner, and I love it. I also have an order for three more. This leads me to my second question regarding LoRa gateways. If my numbers are correct, at the beginning of the year, you had around 1.3 million gateways, and now you're adding 1.7 million this year, which shows significant growth in that area. So, how confident are you in understanding what constitutes Helium, and what falls under campus, neighborhood, or industrial programs? Are you certain that these aren't Helium orders, similar to the three I have on back order? Do you believe that if the Helium network growth were to slow down, it wouldn't impact the growth of LoRa in the same way we've observed?

Mohan Maheswaran, CEO

Our focus is on sensor connectivity. We just initiated a project to connect a billion sensors to help combat climate change. Sensor connectivity involves macro gateways, which are larger gateways that can connect to many more sensors over a greater range. For us, the approach is driven by use cases. We have decent visibility into where the gateways are heading and their activities, but I believe what's important is the presence of use cases and whether they are being utilized effectively to showcase the value of LoRa. Sidewalk is a prime example; we expect Amazon to begin its rollout next year, allowing more sensors to connect and leading to the emergence of new use cases. The advantages of LoRa and the LoRaWAN and LPWAN markets are that many use cases are just starting to surface. People are realizing they can apply LoRa for various purposes, such as satellite connectivity, agriculture, smart home setups, or tracking assets. This viral expansion of use cases presents the potential to significantly grow the market, which is clearly our goal.

Christopher Rolland, Analyst

Yes. well, great growth.

Operator, Operator

Our next question is from Karl Ackerman with Cowen.

Karl Ackerman, Analyst

Yes. Two questions, please. The first one is piggybacking on LoRa. It's great to see LoRa is now integrated into AWS and Azure. But is the go-to-market still predominantly driven by your own sales force? I'm curious how do you see the go-to-market changing, if at all, now that you do have broader ecosystem support from the larger hyperscalers?

Mohan Maheswaran, CEO

I believe our sales force plays an essential role in promoting and communicating the success of LoRa in the market. Additionally, we have the LoRa Alliance, which consists of approximately 400 to 500 members, including major companies like Microsoft, AWS, Cisco, and IBM, as well as various sensor, chip, gateway, and software companies. LoRa is fundamentally a technology platform, but implementing its use cases often requires collaboration among multiple ecosystem members to develop comprehensive solutions. The strength of the alliance and the widespread progress of LoRa are driving its momentum. I don’t think simply adding more sales personnel would significantly enhance our impact. Instead, it’s about engaging the right system integrators and focusing on compelling use cases that encourage adoption. We also need to ensure that the relevant technologies and software are available without any bottlenecks. Previously, the bottlenecks were mostly related to sensors and hardware, but now they’ve shifted towards software. The involvement of Microsoft Azure and AWS adds substantial value, as many companies would have found it challenging to create backend software for their use cases. Partnering with these major players can greatly accelerate our time-to-market.

Karl Ackerman, Analyst

Yes, understood. That's helpful. My follow-up is more of a clarification. If PAM4 is high teens as a percent of sales this year, does that mean NRZ is equally as large this year? And is there a notable margin difference between the CDRs and optical ICs supporting each technology?

Mohan Maheswaran, CEO

Yes, NRZ is larger. It's been established for some time, and the important thing to note is that PAM4 is a relatively new platform for us. Tri-Edge has just been released for production, focusing on short-reach use cases. We are experiencing positive design win momentum, and as we gain traction, the growth in that sector is quite substantial. We anticipate that PAM4, specifically 200-gig and 400-gig deployments, will see significant acceleration next year.

Operator, Operator

Our next question is from Nathaniel Bolton with Needham & Co.

Nathaniel Bolton, Analyst

Congratulations on the strong results. I have a quick follow-up regarding the PAM4. When you mention high teens, are you referring to absolute millions of dollars, or a high-teen percentage of revenues? If I missed that, I apologize. Additionally, does this pertain only to Tri-Edge, or does it also encompass the FiberEdge PMDs? I have a few more follow-up questions.

Mohan Maheswaran, CEO

Yes, it's high teens in terms of millions of dollars, and that does include FiberEdge, but I would say the majority of the growth is coming from Tri-Edge.

Nathaniel Bolton, Analyst

Got it. And then looking to just the overall supply chain, I know you mentioned some of your business is constrained, especially on the consumer side by component availability of other manufacturers. Just wondering if you're seeing any supply constraints in your own perhaps more back-end and front-end supply chain. And I know a number of analog companies through the fall had experienced shutdowns or COVID-related effects out of Southeast Asia, wondering if that had any impact on your business this quarter?

Mohan Maheswaran, CEO

Not really. I would say that it's been fairly consistent for us over the last couple of quarters, with similar issues. Some fabs are full, and their cycle times are quite long. Generally, across the entire supply chain, cycle times have doubled over the past year. We've gone from an average of 20 weeks to around 40 weeks cycle time, which is significant. This is an average, so there are areas where it takes longer and others where the issue is less severe. However, overall, the supply chain remains a major challenge. We're managing fine; we've built up inventory and intend to continue doing so. We're utilizing that inventory to ensure our customers' manufacturing lines are running smoothly without bottlenecks. As I mentioned in my prepared remarks, some customers are having difficulties obtaining all the components needed to build a complete system, which has a short-term impact on demand. However, I believe that will resolve itself in the medium term.

Nathaniel Bolton, Analyst

Got it. And my last question, Mohan. Just any update on the LoRa microservices part of the business?

Mohan Maheswaran, CEO

Yes. So the cloud services is going well. I think, obviously, LoRa Edge is the platform there and bringing on board Microsoft Azure and now AWS, I think we have partners that we can work with very closely and our customers, and we've started to now look at what elements of the cloud service geolocation performance needs to be changed to make sure we have an end-to-end solution. But I think at the moment, no real significant breakthroughs there, but I would say good momentum. And I think you're going to hear a lot more about that next year.

Operator, Operator

Our next question is from Rick Schafer with Oppenheimer.

Richard Schafer, Analyst

Congratulations, everyone. There have already been many good questions. If I could add one more about LoRa, could you provide some insight into the expected linearity of LoRa for next year? Is seasonality becoming less significant for LoRa? Based on the current run rate, it looks like 40% growth seems reasonable for next year. Could you share your thoughts on that and what kind of backlog or visibility you currently have for that business?

Mohan Maheswaran, CEO

Yes, I believe the first half looks promising, Rick. However, a lot hinges on the funnel and the speed at which it transitions to deployments. The funnel has grown significantly, and we expect many of those opportunities to move into full deployments. The momentum is strong, and we are seeing everything we expected in terms of design-ins and design wins from the funnel. Additionally, the increasing number of use cases that are being deployed independently is very encouraging. Overall, a 40% growth for next year seems quite feasible.

Richard Schafer, Analyst

And then just a quick follow-up on gross margin. I mean obviously, looks fantastic. I mean, it seems like mid-60s is sort of the new baseline. And I'm just curious there, as we look forward to not that far out, I mean looking at the kind of growth you guys are putting up, you're not that far out from your $1 billion top line run rate kind of goal. So I'm curious sort of where you think or where you see gross margin once we're at that $1 billion run rate? And then just a quick clarification on next year. I know you talked about ASP. But I'm curious, do you see that as a tailwind for gross margin next year?

Emeka Chukwu, CFO

So Rick, this is Emeka. The gross margin, as I mentioned earlier, is primarily influenced by the revenue mix. With a higher contribution from our growth platforms, we are seeing an expansion in our gross margin. We're closely monitoring how our gross margin target of $1 billion in revenue will be affected by the manner in which this revenue comes in. While aiming for mid-60s and similar figures is a possibility, we need to be cautious and watch the current supply chain situation before setting those expectations. If we continue to encounter price increases from the supply chain, there is a limit to how much our customers can absorb. This is something we're keeping track of. I agree that as we see more revenue coming from the new product platforms we've discussed, we should see gross margins moving towards the mid-60s and possibly higher. However, we are not able to commit to those expectations at this moment.

Operator, Operator

Our next question is from Harsh Kumar with Piper Sandler.

Harsh Kumar, Analyst

Yes, Mohan, I found this quite interesting. It's not solely about your company but more about the industry as a whole. Many companies that have reported their results in the past 3 to 6 months have defied seasonal trends due to high demand, which appears to be consistently increasing. I've noticed that your guidance indicates seasonal trends, especially regarding consumer demand and a few other smaller factors. I'm curious if we are returning to a demand-supply scenario where seasonality is becoming significant again, or if this is something unique to certain aspects of your business.

Mohan Maheswaran, CEO

Well, the seasonality is tied to consumer, as you noticed, Harsh. And I think that it's not a surprise. Some of that, as I mentioned, I think in my prepared remarks, is our customers not being able to get all the parts they need, I think. So there's a little bit of that playing into it. But I do think there's going to be some seasonality here. You're right, though. I mean, the demand environment is very strong. People are constrained. And so to some extent, you can play that game. We typically are shipping to consumption. That's what we're trying to do. We're not trying to do anything more than that. And we keep a very close eye on POS, and so that's kind of our thinking. If the channel is shipping into customers and demand continues to be strong, then Q1 will be very strong.

Operator, Operator

We have reached the end of the question-and-answer session, and I will now turn the call over to CEO and President, Mohan Maheswaran, for closing remarks.

Mohan Maheswaran, CEO

In closing, we were pleased to deliver a record performance in Q3 that included record net revenues, record gross margins, record operating income, record earnings per share and record operating cash flow. The secular demand trends driving our growth engines in the infrastructure, smarter planet, and mobility markets remain strong and are expected to provide sustainable long-term growth. We expect our diverse and growing product offering and balanced end markets to drive a record financial performance in FY '22 and provide strong momentum going into FY '23. 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, and you may disconnect your lines at this time. Thank you for your participation.