Earnings Call
Semtech Corp (SMTC)
Earnings Call Transcript - SMTC Q4 2023
Anojja Shah, VP of Investor Relations
Thank you, Sherry. 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 and that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these uncertainties, please review the safe harbor statement included in today's press release and in the other Risk Factors section of our most recent periodic reports filed with the SEC. As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During this call, all references made to financial results in our prepared remarks will refer to non-GAAP financial measures unless otherwise noted. A discussion of why the management team considers such non-GAAP financial measures useful, along with the detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, is included in today's press release. Finally, for our prepared remarks today, we will use the phrase Semtech organic to refer to Semtech's stand-alone results before the inclusion of Sierra Wireless. And with that, I'll turn it over to our Chief Financial Officer, Emeka Chukwu. Emeka?
Emeka Chukwu, CFO
Thank you, Anojja. Good afternoon, everyone. In the fourth quarter of fiscal year '23, the company reported net sales of $167.5 million, which is a 6% decrease sequentially and a 12% decline year-over-year. This includes $15 million in revenue from the Sierra Wireless acquisition completed on January 12. For the entire fiscal year '23, our revenue reached a record $741.5 million for organic Semtech and $756.5 million including Sierra Wireless. In Q4, shipments from Semtech organic to Asia, North America, and Europe constituted 68%, 13%, and 19% of our revenue, respectively. While this indicates a shift in distribution and customer addresses, we estimate that about 33% of our shipments in fiscal year '23 were absorbed in China, 27% in the Americas, 22% in Europe, and the remainder in other regions. Our initiatives to diversify our geographical revenue are yielding positive results, particularly in North America and Europe for Tri-Edge, PON-X, and LoRa. Looking ahead, we anticipate that the inclusion of Sierra will lessen our reliance on China. In Q4, net sales through distribution accounted for around 78% of the combined company's revenue, with direct sales making up the remaining 22%. As we move forward, we expect to establish a more balanced sales mix thanks to Sierra's addition. Analyzing our end markets for Semtech organic, our infrastructure sector fell 18% from the previous year and 20% sequentially, representing 37% of total net revenues. Revenue from the industrial market also decreased by 18% year-over-year and 15% sequentially, making up 40% of total revenues. Revenue from high-end consumer products dropped 26% year-over-year but saw a slight increase of about 1% sequentially, accounting for 23% of total net revenues. Roughly 9% of high-end consumer revenue came from mobile devices, while approximately 14% stemmed from other consumer systems. Our Semtech organic product offering remains broadly diversified, with roughly 49%, 29%, and 22% of total sales coming from infrastructure, industrial, and high-end consumer markets, respectively. With the addition of Sierra Wireless, we will see a growing share of IoT revenue, including LoRa, while consumer market revenue diminishes. In Q4, our gross margin was 62.3% for the combined company. Organic Semtech's gross margin for Q4 fell by 80 basis points sequentially to 64.7%, primarily due to a shift in the revenue mix towards the high-end consumer sector. For fiscal year '23, organic Semtech's growth drivers—data centers, LoRa-enabled products, PON, broad protection, industrial, and automotive platforms—drove a record non-GAAP gross margin of 65.1%, which is up 180 basis points. With a full quarter of Sierra integrated, we anticipate our Q1 gross margin to average around 48.5% at the guidance midpoint. Throughout the remainder of the year, we expect a 100 to 150 basis point improvement in gross margin driven by a higher mix of organic Semtech revenue and the realization of material cost synergies. Our long-term gross margin target is 58% to 63%, which we aim to achieve through sustained growth in data centers, 5G wireless base stations, passive optical networks, broad protection, industrial, and automotive platforms; accelerated deployment of LoRa endpoints with better cellular connectivity; and growth in annual recurring revenue from Sierra's managed connectivity, software services, and LoRa Cloud services. We are effectively managing our operating expenses in this challenging revenue climate. Combined operating expenses for Q4 were $67 million. Operating expenses for organic Semtech decreased by 13% sequentially to $59 million, influenced by reductions in headcount and other variable compensation. We expect operating expenses of around $99 million in Q1 fiscal '24 at the midpoint, which accounts for a full quarter of Sierra and the typical rise in compensation expenses at the beginning of a new year. We project approximately $50 million in annualized operating expense synergies by the end of the fiscal year. Due to this, we predict that operating expenses will remain flat or slightly decrease sequentially, reflecting achieved synergies. The operating profit for fiscal year '23 was a record $210.7 million for the combined company. Organic Semtech reported a record operating profit of $212.7 million, which is a 5% increase compared to the previous year, driven by gross margin expansion and managed expenses despite minimal revenue growth. Although demand in fiscal year '24 is starting weak, we anticipate that the expected recovery in the second half will make the Sierra acquisition beneficial for our earnings. Over time, as the business environment improves and we work towards our vision of increasing LoRa endpoint usage, we expect to reach our long-term operating margin goal of 32% to 36%. Our non-GAAP normalized tax rate for fiscal '23 was 12%, and we expect it to stay the same for fiscal '24. In fiscal '23, cash flow from operations for the combined company was $127 million, or 17% of revenue, compared to $203 million in the previous year, mainly due to the costs linked to acquiring Sierra. For fiscal '24, we anticipate that cash flow will be stressed by transaction and acquisition-related expenses and diminished profits because of the weak demand environment. Our debt at the end of fiscal '23 was $1.3 billion, which corresponds to 3.4 times leverage on a net basis. We expect to see an increase in net leverage as we adjust to this weaker demand environment. We proactively negotiated an amendment to our credit agreement for some flexibility in our leverage ratio and interest expense coverage ratio covenants. The current weighted average interest rate is about 5.64%. As previously stated, our main focus for free cash flow will be on debt repayment. In summary, fiscal year '23 was a significant period of transformation for Semtech. We achieved record revenue and operating income while completing the largest acquisition in our history. While fiscal year '24 presents challenges, I remain optimistic about the opportunities for Semtech at this pivotal time. Let me highlight a few key points. First, we expect our growth drivers in data centers, PON, and 5G wireless to regain their momentum as the business climate stabilizes, and more importantly, to achieve better regional balance as we anticipate revenue from these products in North America later this year. Second, Sierra's cellular capabilities combined with our high-margin LoRa and LoRa Cloud technology will unlock new market opportunities for both, thereby boosting revenues and margins for the company. Finally, after executing our synergies and portfolio assessments, we foresee significant margin expansion and EPS growth starting in fiscal year '25. I will now pass the call to Mohan.
Mohan Maheswaran, CEO
Thank you, Emeka. Good afternoon, everyone. I'd like to briefly comment on my intention to retire from Semtech. The last 17 years have been an incredible journey for me, and I'm very proud of the growth and transformation of Semtech and our many accomplishments during this time. As we approach the next phase of growth, this is the right time to appoint the next leader of this highly innovative technology company. To ensure a smooth transition, I am committed to staying involved until a new CEO is appointed and will continue to be an adviser for a period of time as needed. On January 12, we closed the acquisition of Sierra Wireless. This was the largest and most strategic acquisition in Semtech's history. Our Q4 FY '23 and FY '23 numbers include 18 days of Sierra Wireless. I will now discuss our Q4 fiscal year '23 performance by product group, our fiscal year '23 performance and then provide our outlook for Q1 of fiscal year '24. In Q4 of fiscal year '23, net revenues were $167.5 million, organic Semtech contributed $152.5 million, slightly above the midpoint of our guidance. In Q4, organic Semtech posted non-GAAP gross margin of 64.7% and non-GAAP earnings per diluted share of $0.50. For the combined company, non-GAAP EPS was $0.47 per share. In Q4 of FY '23, our Signal Integrity Product Group revenue was down 21% sequentially and represented 36% of total revenues. The decline was driven mostly by the economic slowdown in China and excess inventory as customer consumption declined. We saw reduced demand from all our infrastructure segments across all geographies with China data center and China wireless base station being particularly weak. Despite the softer demand, we continue to see new design in activity for our Tri-Edge and copper edge platforms in both optical modules and active copper cables. As we mentioned last quarter, Tri-Edge has been selected by a major North American hyperscaler in a new, high-volume multiyear program to enable lower power lower latency and lower cost interconnects within their data centers. This is our first major North American hyperscaler Tri-Edge win, and qualifications are progressing well. We expect production ramps to begin in the second half of FY '24. The benefits of Tri-Edge align well with the long-term goals of hyperscalers, focused on lowering the power and cost of interconnects within their data centers. At the Optical Fiber Conference earlier this month, we demonstrated a 200-gig per lane optical transmission link, enabled by Semtech's latest FiberEdge 200-gig PAM4 platform and Broadcom's latest DSP platform. We remain confident that our full portfolio of data center platforms, including ClearEdge and Tri-Edge CDRs, FiberEdge PMDs and copper edge re-drivers will enable us to rapidly grow our hyperscale data center business nicely over the next several years. While we saw a sequential decline in our overall PON business in Q4, our 10-gig PON business reached a new quarterly revenue record. Our PON business continues to grow outside of China, and we remain confident our PON business will grow over the next several years as global demand for higher access bandwidth drives an increase in global PON deployments. At OFC, we demonstrated both a 25-gig and 50-gig PON system and our sampling products for both systems now. Revenue from our wireless base station business was down in Q4, both on a sequential and year-over-year basis. Again, despite the current softness, we have numerous 5G base station design-ins with both our ClearEdge and Tri-Edge platforms, and we expect continued adoption of both platforms in fronthaul optical modules throughout FY '24 and beyond as 5G deployments accelerate. We recently announced several new innovative products that extend our leadership position in PMD and CDR platforms targeted at the data center, wireless base station and PON segments. These new products provide our customers with a lower power, low cost and low latency needed for advanced infrastructure applications. While our Signal Integrity Product bookings improved sequentially, the weak macro environment, particularly in China, is resulting in lower infrastructure demand in Q1 across all subsegments. As a result, we expect our Signal Integrity Product Group revenues to be down significantly in Q1 of fiscal year '24. Moving on to our Advanced Protection and Sensing Product Group. In Q4, we merged our proximity Sensing Product Group into our Protection Product Group and created a new Advanced Protection and Sensing Product Group. We made this shift to align our system protection and sensing road maps for our high-end consumer customers. Q4 net revenue from our Advanced Protection and Sensing Product Group decreased 6% sequentially and 32% annually and represented 29% of total revenues. The decline was due to ongoing weakness from the consumer segment, including from smartphones, wearables and PCs. Consumer demand for both China and Korea remains extremely soft. We continue to diversify our Advanced Protection and Sensing Business into the broader industrial telecommunications and automotive sectors, which we call ITA, where we see relative stability with modest growth from the automotive market. In addition, our increasing design wins for USB-C protection across all end markets, position our protection business for growth as USB-C becomes the high-speed interface of choice across the high-end consumer and ITA segments. In Q4, new SAR regulations were finally passed in China, increasing the market opportunity for our proximity sensing portfolio as smartphone customers will now need to integrate proximity sensing functions into their phones being sold into China. We expect both our protection and sensing businesses to rebound as the overall consumer market improves in the second half of fiscal year '24. However, our consumer demand currently remains very weak and inventory levels remain high. As a result, we expect our Advanced Protection and Sensing Business to be down significantly in Q1. Turning to our IoT product group. Our newly formed IoT product group has 2 sub business groups. The first business is the IoT system product, which is made up of Semtech's LoRa-enabled business, Sierra's IoT module business and Sierra's IoT router business. This business also includes the Sierra broadband module business. The second business is our new IoT connected services business, which includes Sierra's managed connectivity services business and Semtech's LoRa Cloud services business. This services business is a recurring revenue business. In Q4, total IoT revenues were $58.8 million, 18% higher sequentially and 34% higher on an annual basis and represented 35% of total Semtech revenues. Our IoT revenues included approximately $15 million of Sierra Wireless revenue. In Q4, our LoRa-enabled revenues were down 12% sequentially and flat over the previous year due to softer demand from China and a significant drop in Helium revenues. We do not expect any more material revenues from Helium. The adoption of LoRa continues to grow across many IoT use cases globally, especially in North America and Europe where we are starting to see larger LPWAN deployments. Some of the most recent more exciting announcements include Italgas in Italy issued an RFP for 7.6 million LoRaWAN gas meters, and we're seeing similar requests for LoRaWAN-based systems in utility tenders all over the world. The Things Network Industries announced it has achieved 1 million connected LoRaWAN devices. The LoRa Alliance announced it has now certified 620 LoRaWAN devices. Yesterday, Amazon announced that they are expanding their commitment to LoRa with the opening of the Amazon Sidewalk network to device makers and developers with new tools and new AWS services for both LoRa and LoRaWAN developers to make it easier to deploy. LoRa technology plays a critical role in enabling long-range community coverage with Amazon Sidewalk, which now covers approximately 90% of the U.S. population. We announced the first third-party products based on Amazon Sidewalk from Browan, Deviceroy, Meshify, and New Cosmos are now available. Additionally, we have partnered with other industry leaders on development kits and modules based on Semtech's LoRa technology that will enable device makers and developers to rapidly create new Amazon Sidewalk devices. And finally, Frost & Sullivan recognized Semtech as the 2022 Global Company of the Year for innovative IoT hardware based on the progress of LoRa. We are now in the process of integrating Sierra Wireless into Semtech so we can execute on our vision of transforming the entire low-power IoT industry by bringing together the ultra-low power and long-range connectivity benefits of LoRa technology, together with the low latency, high-bandwidth network connectivity benefits of cellular technology. The combination of LoRa and cellular technology is a highly strategic opportunity that positions Semtech as the clear leader in the fast-growing ultra-low power IoT market. Our goal is to enable IoT deployment simplification through end-to-end connectivity, deliver disruptive edge AI networks and deliver a unique cloud-based sensing-as-a-service capability that helps customers accelerate their digital transition to the Internet of Everything. Our teams are unified under our new IoT leadership, and we are currently reviewing our product portfolio to prioritize investments and identify nonstrategic assets. Now let me comment on our fiscal year 2023 performance. In fiscal year '23, organic Semtech net revenues achieved a record $742 million. Including Sierra Wireless, revenues were $757 million. We achieved this record revenue amidst significant macroeconomic headwinds, ongoing geopolitical challenges in China, COVID lockdowns in China, the war in Ukraine, and softness in the global consumer market. In FY '23, organic Semtech also achieved record gross margins of 65.1%, record operating income of $213 million, and record EPS of $2.80. In FY '23, our SIP product group grew 4% annually and achieved record revenues of $304 million driven by record PON revenues of $142 million, which grew 58% annually and record 5G revenues of $11 million, which grew 18% annually. In FY '23, our Protection Products business declined 8% over the prior year. However, the broader ITA protection business achieved record revenues of $80 million and grew approximately 9% year-over-year. In FY '23, our organic Wireless and Sensing business grew 40% to achieve a record $200 million. Our LoRa-enabled revenues also grew 40% for the year to achieve a record $187 million. In FY '23, our LoRa business continued to make solid progress on the growth metrics we have established. These metrics included the number of LoRaWAN network operators, which grew to 181 at the end of FY '23 from 166 in FY '22. LoRa endpoints reached approximately 300 million connected devices in FY '23, up from 240 million in FY '22. The number of LoRa gateways deployed increased 84% from 3.2 million at the end of FY '22 to 5.9 million at the end of FY '23. We are delighted with the large increase in gateways deployed globally as this LoRa infrastructure is critical to enable the broad range of industry use cases that are emerging. With continued network expansion globally, we expect end node deployments to accelerate rapidly over the next 3 to 5 years, growing from the 300 million end devices deployed with LoRa today. Once we have completed the integration of Sierra, we will be establishing a new set of IoT metrics that represent the new IoT vision and strategy that is now in place. Now let me discuss our outlook for the first quarter of fiscal year '24. The organic Semtech demand remains very weak due mostly to a weak China and consumer demand. In addition, the Sierra Wireless demand, which is typically seasonally weaker in Q1, is also being negatively impacted by the overall macro weakness in North America and Europe, resulting in both pushouts and some cancellations. As a result, we are currently estimating Q1 net revenues to be between $230 million and $240 million. The midpoint of $235 million includes projected revenues of approximately $135 million from Sierra Wireless and approximately $100 million from organic Semtech. To attain the midpoint of our guidance range, or approximately $235 million, we needed 16% turns orders at the beginning of Q1. We expect our Q1 non-GAAP earnings to be between negative $0.11 and negative $0.04 per diluted share. I will now hand the call back to the operator, and Emeka and I will be happy to answer any questions.
Scott Searle, Analyst
Mohan, congratulations and best of luck. As you start to look down that road, maybe just to dive in quickly on the last comment of Semtech organic being about $100 million in the April quarter. I was wondering if you could dig into that a little bit more deeply. I know you went into the specific product categories. But how much is inventory related? What sort of a recovery should we be expecting as we go into the July and beyond quarters? And also as well, if I could, for Emeka, on the OpEx front, it sounds like you've talked about deal synergies now moving from $40 million to $50 million. I wanted to clarify in terms of the OpEx of around $99 million to $100 million in the April quarter, if that's where we should be modeling taking out that $10 million to $12 million as we get through those integrations?
Mohan Maheswaran, CEO
Let me start with the Q1 guidance comment, Scott. Across our different product areas, we are experiencing weakness, particularly in China and consumer sectors, which are the two most significant areas of concern. All our businesses are expected to see annual declines in the range of 40% to 50%. This impact is quite broad and not limited to one specific area, but consumer and China are definitely having a major effect. We also face a particular issue in LoRa related to Helium, which has also declined. However, overall, the weakness is quite widespread. We believe we are nearing the bottom, which is an important point to note. We are starting to see signs of improvement in bookings, and customers are indicating that consumption is expected to increase. We have not observed that increase yet, but it's our expectation as we move into the second half of the year. That will be crucial. As demand decreases, inventory becomes a concern, and we are witnessing inventory issues in both consumer and infrastructure markets now. The market will remain weak until that inventory is absorbed, so we anticipate the first half to be rather challenging.
Emeka Chukwu, CFO
Yes. And Scott, on the OpEx, the $99 million that we guided toward the midpoint already factors in the synergies that we have achieved. The team has actually done a very good job of integration so far. We've been able to drive a lot of the identified synergies. At this point, I'll probably estimate that about 80% of the identified synergies have already been achieved and baked into the numbers. And the expectation is that by Q3, we probably would achieve 100% of the $50 million target that we have provided.
Scott Searle, Analyst
Got you. And one last one, if I could, Mohan, on Sierra Wireless, it seems like they're actually performing pretty well if you're guiding to $135 million in the current quarter. There had been some channel inventory out there, I think, on the module front. But it doesn't seem like it's that onerous at this point. So I'm wondering, as you start to look into the back half, where Sierra Wireless was peaking at $160 million to $180 million a quarter, is that something that's achievable as we look out to the end of this calendar year or early next year?
Mohan Maheswaran, CEO
Yes, I think it's challenging. The Sierra business is experiencing a downturn. As I mentioned earlier, the first quarter is typically slower for them. However, we're noticing a bit more weakness than expected, along with some delays and cancellations. Their business is down around 20% annually, which is not as severe as the Semtech business, but still concerning. Their primary markets are in North America and Europe. Despite this, we are still anticipating stronger performance in the second half across all segments. Currently, we have not seen clear signs of improvement in hard bookings. Given the softness in certain markets for a while, especially in consumer segments, one would expect a rebound in China. Additionally, I believe we should start seeing some improvements in other regional segments, like North America and Europe infrastructure, during the second half.
Craig Ellis, Analyst
Mohan, I'll echo the congratulations on your transition into a new phase. It's been a tremendous pleasure working with you over the years. I wanted to follow up with a point that Scott asked about. Just digging in more to the Semtech side of the revenue guidance. If I look at the $100 million and look back in my model, it seems like we're at revenue levels that we would not have seen since the fiscal '11 time frame when the portfolio was a lot different and really didn't have the Signal Integrity contribution that it does now. So with that as the context for the question, the question is really this, to what extent do you feel like you're under shipping normalized demand to work through excess inventory? And how long would you expect that under shipment period to last because it does seem to be quite acute here in the current quarter?
Mohan Maheswaran, CEO
Yes, I would estimate probably two quarters. As I mentioned, if you consider our Signal Integrity Product business in FY '23, it reached a record $300 million. Now, when we look at the current run rate, it has decreased significantly to about $160 million. A lot of this decline is due to inventory, and some is related to China. We expect some recovery in the second half from certain drivers, but we are seeing declines across the board. Our consumer business is also down, and some parts of our industrial business are experiencing similar declines. North America and Europe are performing a bit better, but China and the consumer sector are the main issues, with everything down by at least 15% to 20%.
Craig Ellis, Analyst
Got it. The second question relates to some of your comments near the end of your script. One of the things you mentioned is that the teams are working hard and collaboratively on integration, and you will be prioritizing resources around opportunities that are not strategic. Can you provide more details on what those non-strategic areas might be? Given the current global macro environment compared to when the deal was announced, how do you view the target of $40 million in cost savings from the deal? Do you believe there is potential for exceeding that figure, or do you still consider that a reliable estimate in light of your long-term outlook?
Mohan Maheswaran, CEO
Well, I'll start with the portfolio review, Craig. I mean we do it regularly at Semtech anyway. But I think now with the Sierra acquisition, obviously, a lot of the Sierra businesses are fairly new to us. And so the Board is engaged in kind of looking at what elements of the portfolio are really strategic for us and which are not. And we'll make decisions based on what we find from that. It's early days though, we just really started that. I would give it 6 months here. And then Emeka, do you want to talk about the synergies?
Emeka Chukwu, CFO
Yes. With regards to the synergies, Craig, like I mentioned in my prepared remarks, we had estimated about $40 million on an annual basis. Now we've increased that number to $50 million, and I just mentioned that as of now, we have achieved about 80% of that on the run rate basis. And we do expect, by the end of Q3, we would be at 100% of the $50 million.
Harsh Kumar, Analyst
Mohan, I had a question on China. So you're in a fairly unique position of reporting in last quarter. So you can talk about things that times that other companies cannot. So I was curious what you're seeing, obviously, everything looks kind of dire right now, but you sound pretty optimistic on China coming back in the back half. I was curious what you're seeing that might drive your optimism about China coming back. And just any kind of color would be helpful.
Mohan Maheswaran, CEO
Yes, I believe the situation is quite severe when examining certain segments and regional dynamics. China has shown weak performance for several quarters now, and we are experiencing this trend in our fiscal Q3 and Q4, as well as in Q1. After three consecutive quarters of decline, it seems likely that we are approaching the lowest point. I would suggest that Q1 or possibly Q2 will be around this bottom, after which I expect to see an improvement. We are beginning to notice some upward trends in bookings and some design-in activity that has been relatively stagnant in China in certain areas. Overall, I would say that the outlook appears a bit more encouraging, albeit starting from a very low baseline. Well, it's early days, Harsh, again. We just obviously in an integration process, and we're also in the road map planning process. I would say that the teams are getting together now and looking at how we can do things kind of quickly and kind of the more longer-term integration plans. But the strategic fit and the philosophy and the kind of the reason why we did the deal are all still there, and we're very excited about it. It's just a question of now how quickly we can bring out some of the new products and some of the new capabilities and how quickly we can engage customers and get things moving. I would say it's going to take 6 to 9 months for us, maybe even a year. And this year, FY '24 is definitely going to be a year of just kind of consolidation and getting the road maps in line. The portfolio kind of cleaned up and just make sure we position ourselves really for a really strong FY '25 and FY '26.
Tore Svanberg, Analyst
I wanted to approach the question about China from a different angle. The situation seems quite weak, and by now, we would have anticipated some stabilization, yet the decline continues each quarter. Is there a possibility that demand has been impacted by the political climate, or should we consider this primarily as weak demand and an inventory correction?
Mohan Maheswaran, CEO
Yes. I think it's more of the latter. It depends on what you mean. For example, the data center business in China is very weak. Some of the major data center players in China have been delaying their demand. We know the demand is there, and they want to deploy, and the government remains supportive. However, there is some uncertainty about the government's actual support for large data center companies. So it's a bit of both, but I don't believe there's a real loss of demand. It's more about pushing the demand out. We're expecting that it will return, and everything will come back.
Tore Svanberg, Analyst
That's fair. And a question for Emeka. When it comes to gross margin. So you mentioned 150 basis points a quarter. First of all, would that be fairly linear over the next, I don't know, 6 to 8 quarters? And then how do the 3 elements of gross margin improvement really play out? I assume mix kind of comes later, but if there's anything that you could share with us as far as the 150 basis point comment coming from the 3 elements that you mentioned in your prepared remarks?
Emeka Chukwu, CFO
For this year, I expect to see 100 to 150 basis points, primarily driven by the rebound of the Semtech organic business. We anticipate that in the second half of the year, most of the inventory will have moved through, allowing us to start shipping again at the consumption levels. We have identified some material cost synergies, but we need to observe how demand evolves. This should contribute to gross margin expansion for the year. The three points I previously mentioned are more indicative of our long-term expectations. As the market recovers and the Semtech organic business improves, we expect high gross margins that will enhance our current levels. The integration with Sierra, as Mohan noted, along with the product roadmap and customer business development, will likely take around two years before we begin to see significant impacts. Managed connectivity on LoRa Cloud services will also take about 24 months. The three drivers I mentioned were aimed at our long-term gross margin target range of 58% to 63%. When we announced the deal, we indicated that over five years, we would progress towards the lower end of that range, and we still believe we will be much closer to that target in five years.
Tore Svanberg, Analyst
Good. Just one last one and still for you, Emeka. So just based on the P&L and the interest expense, is it fair to say that the breakeven point would be around $240 million. Is that sort of a good number to use?
Emeka Chukwu, CFO
I think, yes, about $240 million, $245 million, yes, that would be a good number to use.
Quinn Bolton, Analyst
Mohan, I want to congratulate you on your leadership, and it has been a pleasure working with you. I wanted to revisit your comment about the Sierra Wireless transaction becoming accretive, which you mentioned would occur in the second half of the year as revenue recovers. I am trying to estimate the figures, and it seems to me that Sierra Wireless might reach that accretive level at around $160 million to $170 million. I'm considering a gross margin in the low to mid-30% range, quarterly operating expenses in the high $30 million to $40 million range, and roughly $18 million in interest expense given the $1.3 billion debt. I wanted to know if these numbers align with your expectations for the accretion estimate for Sierra Wireless.
Emeka Chukwu, CFO
Yes, Quinn. There are usually many factors involved in this, including synergies, size, and cost reductions. However, I believe that around $150 million in quarterly revenue run rate, Sierra should begin to contribute positively.
Quinn Bolton, Analyst
Got it. And then for Mohan, congratulations on the Tri-Edge win in North America. I'm wondering if you might be able to spend a little time discussing the application. Is this sort of a NIC to top of Rack Switch Application? Is it more an AI cluster? Is it short reach AOC replacement or longer reach optical module replacements? I'm not sure how much color you can give, but it sounds like it's an important and long lasting win for the company. And obviously, the first win in North America seems to be pretty important.
Mohan Maheswaran, CEO
Yes, Quinn, I know all the details because I was with the team when they awarded us, and we discussed and negotiated and we got the win, but I can't give you any details just because they don't want us to give out any details. I can tell you it's short reach.
Quinn Bolton, Analyst
Okay. And then maybe last one, if I could just sneak it in. Amazon announced yesterday sort of opening up the Sidewalk network to third-party developers. How long do you think it will take to start to see deployment of those third-party end nodes on Sidewalk? Is that something investors should think is sort of 6 to 12 months? Could it take longer, might it ramp faster?
Mohan Maheswaran, CEO
Yes, that's a great question, Quinn. The reason we already have some products is that they've been working with certain alpha and beta customers and partners who have sensing devices on the Sidewalk. We mentioned a few in our press release, including those related to insurance, leak detection, and general connectivity. It's incredibly exciting, especially since there's 90% coverage in the U.S. The main question now is whether the Amazon ecosystem can create a wide variety of devices and use cases around Amazon Sidewalk. If that happens, it will be a significant achievement that we've been anticipating, and it's beginning to unfold. We'll see how quickly this develops; I don't believe the time for development is extensive. It's more about demonstrating the various use cases. Some will be straightforward, but there will also be many use cases related to tagging, tracking, and more that will surface. The key question is how quickly the sensors and end nodes can be developed and how long it will take to demonstrate these use cases, along with the necessary software. The good news is that Amazon's Sidewalk efforts are well-supported by AWS Cloud activities, giving us a strong partner in this initiative.
Tristan Gerra, Analyst
Mohan, wishing you the best of luck in your future endeavors. Regarding your comments about improving gross margin this year due to a higher proportion of organic revenue, how should we consider Sierra Wireless revenue for the year in terms of year-over-year change? Additionally, could you provide insights on Sierra Wireless's market share and how it is progressing compared to competitors? Any initial thoughts on the top line for the year?
Mohan Maheswaran, CEO
I'll address the last part, and then Emeka can discuss gross margins. I believe the situation regarding Sierra's market share has likely remained stable. Our objective is to grow the business in North America and Europe. We have some strong Asian competitors performing well in North America. However, as awareness of foreign modules and technologies in critical infrastructure, particularly in IoT, increases, Sierra and Semtech have a significant opportunity to educate the market and capture share, especially concerning security and supply chain. For now, I don't think our market share has changed from historical levels.
Emeka Chukwu, CFO
So Tristan, regarding my comments on the gross margin, Mohan previously mentioned that for the Semtech organic business, the number we’re approaching is close to the bottom, if it’s not the bottom already. The expectation is that as we progress through the rest of the year, we will start to see a situation where a lot of the inventories are moving through the channel. Additionally, in the second half of the year, we have pointed to some long-term opportunities that we believe will help improve the organic business back to previous levels. As this occurs, the Semtech organic business will represent a larger percentage of our revenue mix, which, due to its higher gross margin, will naturally provide an uplift to the overall gross margin.
Tristan Gerra, Analyst
Okay. And then for my follow-up, I think Mohan you had talked about the opportunity of ramping LoRa as a feature next in 5G Sierra wireless routers. Any metrics you could provide us with in terms of whether the units for those routers on an annual basis? And once you have a 5G LoRa-integrated module, what adoption rate percentage-wise, would you expect to get within Sierra wireless router volumes, just to kind of gauge what the opportunities in terms of incremental LoRa revenue generated directly by Sierra Wireless going forward?
Mohan Maheswaran, CEO
I believe, Tristan, the work is just beginning. We haven't truly assessed the potential there yet. To put it simply, Sierra offers a range of routers, from 5G to 4G and lower. Our vision has always been that by integrating LoRaWAN gateways with Sierra routers, we can achieve complete connectivity from the sensor endpoint to the cloud. This will give us a unique advantage in providing these combined routers, which could vary in price and performance. There will be a diverse array of integrated routers, but we need to complete this work. It's not overly complicated, but we need to coordinate it and merge it with our Sensing-as-a-Service. As I mentioned, we can incorporate intelligence into the routers. Semtech's role in LoRa gives us access to gateway chips, allowing us to embed intelligence into the routers themselves or within the chips. This opens up exciting intelligent edge opportunities for IoT. There are many opportunities available; we just need to evaluate where we can get the most value, what the greatest opportunities are, and what our customers are interested in for the short, medium, and long term. I’m very enthusiastic about all the possibilities, but we must go through this process.
Christopher Rolland, Analyst
My first questions are about LoRa. You reported $41 million for the quarter. Can you share what you expect for next quarter, considering that most things are declining? Additionally, do you have any longer-term metrics for LoRa or estimates for the full year? You've mentioned the opportunity pipeline outside of China before; do you have any updated metrics to share on that?
Mohan Maheswaran, CEO
Yes. I mentioned on the call that we will review all the metrics due to our larger pipeline with Sierra. We have opportunities to examine the metrics relevant to our new IoT business, and we will share those in a future discussion. To answer your question, we achieved a record fiscal year 2023 for LoRa at $187 million, although a significant portion comes from Helium. For fiscal year 2024, we expect LoRa revenues to be flat to slightly down without Helium, primarily due to challenges in China. If we exclude Helium from fiscal year 2023, which accounted for about $40 million to $50 million in revenue, we anticipate fiscal year 2024 to fall within a similar range, assuming continued weakness in China. We're starting the first quarter on a weak note, but I believe conditions will improve as we have strong momentum with LoRa, and there are developments like Amazon Sidewalk to consider. However, we do face some challenges due to the loss of Helium. Yes, there was a decline in Q4 and also in Q1. We anticipated this significant drop. Much of this is due to the inventory situation in China. However, we are experiencing strong design win momentum in our Signal Integrity product group across all major segments. This includes positive developments in hyperscale data centers in North America, indicating that it's not just about China. In our base station business, we see growth in China as well as outside of it, which is encouraging. Similarly, in our PON business, we are beginning to see growth outside of China, though China remains a major market for our PON products. I believe Q1 will likely be the low point, and we should recover from there quite rapidly.
Emeka Chukwu, CFO
And Chris, on the bookings side. The book-to-bill was less than 1. But on the positive side, the bookings were actually up for the legacy business was actually up about 10% during Q4. The bookings are still pretty much on the lower end of typical run rate, but it was very pleasing to see that it was up in Q4. And so far this quarter, it seems to be trending up sequentially as well. So those things are still pretty subdued, but at least it is encouraging to see that the bookings are beginning to show signs of life. And I think in Mohan's prepared remarks, he talked about us needing about 16% turns orders to achieve the midpoint of revenue guidance.
Mohan Maheswaran, CEO
Thank you. In closing, while we face more macroeconomic challenges in Q1, we do believe we are near the bottom. Semtech is a very resilient company, and I'm confident that we will successfully manage through the headwinds we currently face and deliver profitable growth in the years ahead. With that, we appreciate your continued support to Semtech and look forward to updating you on next quarter. Thank you.
Operator, Operator
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.