Greetings and welcome to Semtech Corporation's Second Quarter FY 2021 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sandy Harrison, Vice President of Investor Relations. Thank you, Mr. Harrison. You may begin..

Thank you, Victor, and welcome to Semtech's conference call to discuss our financial results for the second quarter of fiscal year 2021. 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.

A 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 financial measures are also included in today's press release.

All references to financial results in Mohan's and Emeka's formal presentations on this call will refer to non-GAAP measures unless otherwise noted. With that, I’ll turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Emeka?.

Thank you, Sandy. Good afternoon, everyone. For Q2 fiscal year 2021, net sales increased 8% sequentially and 5% over the prior year to $143.7 million, which was above the mid-point of our guidance. In Q2, shipments into Asia represented 80% of net sales. North America represented 12%, and Europe represented 8%.

Total direct sales was approximately 19%, and sales to distribution was approximately 81% of net sales. Our distribution business remains balanced, with 40% of the total POS coming from the infrastructure end market, 27% from the industrial end market and 26% from the high-end consumer end market.

Bookings decreased over the prior quarter, but resulted in a book-to-bill above 1. Tolls bookings accounted for approximately 21% of shipments during the quarter. Q2 gross margin increased 50 basis points due to a higher mix of infrastructure revenue. We expect our Q3 gross margin to decline slightly due to a higher mix of consumer revenue.

Q2 GAAP operating expense increased 7% sequentially, due to higher share-based compensation expense. We expect Q3 GAAP operating expense to increase 1% to 4%, sequentially, primarily due to higher share-based compensation expense driven by higher stock price. Q2 GAAP order expenses was $2.9 million versus $4.8 million in Q1.

The decrease was primarily due to lower wrote down of our minority investments, slightly offset by higher foreign exchange losses on translation of foreign denominated liabilities. In Q2, our GAAP tax rate was 2.6% as a result of several discrete tax items.

Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition-related, and other non-recurring charges. In Q2 non-GAAP operating expense increased 1% sequentially as expected.

In Q3, we expect our non-GAAP operating expense to be flat to up 4% sequentially, primarily due to higher variable compensation and new product expenses. For modeling purposes, our Q4, the January quarter will be a 14-week quarter.

Q2 non-GAAP order expenses increased to $2.2 million from $1.1 million in Q1, due to higher foreign exchange losses on translation of foreign denominated liabilities. In Q2, our non-GAAP tax rate benefited from some discrete items and came in at 13.6%. We expect our Q3 of fiscal year 2021 tax rates to be in the 15% to 17% range.

In Q2, our cash flow from operations increased 43% sequentially, due to higher revenue and continued good management of working capital and represented 26% of revenue. Our CapEx was 5% of revenue in Q2 driving a free cash flow of 21% of revenue.

As a reminder, our target range is 25% to 30% of revenue, and we expect continued revenue growth to get us into that range. We repurchased approximately 233,000 shares or $12 million of stock in Q2. And our stock repurchase authorization now stands at approximately $68 million.

We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments and pay down the debt. In Q2, accounts receivable increased 4% sequentially, due to higher net sales and represented 42 days of sales, which remains below our target range of 40 days to 45 days.

Net inventory in absolute dollar terms was flattish sequentially, and days of inventory decreased by 4 days to 127 days, which remains our ballpark target range of 90 days to 100 days. In Q3, we expect net inventory to be flat. In summary, we were pleased to deliver strong Q2 results.

We grew earnings at almost three times the rate of revenue growth and significantly increased cash flow from operations. Our growth engines remain solid, our gross margin and operating expenses are stable, and our cash flow and balance sheet is strong.

We believe we are very well positioned to continue to deliver solid financial results in the second half of fiscal year 2021 despite the ongoing macro headwinds. I will now hand the call over to Mohan..

Thank you, Emeka. Good afternoon, everyone. I will discuss that Q2 fiscal year 2021 performance by end market and by product group and then provide our outlook for Q3 of fiscal year 2021. In Q2 of fiscal year 2021, net revenues increased 8% sequentially and increased 5% over the prior year to $143.7 million.

Stronger demand for the infrastructure end market was offset by softness from the high-end consumer market. We posted non-GAAP gross margin of 61.8% and non-GAAP earnings per diluted share of $0.43.

In Q2 of fiscal year 2021, net revenue from the infrastructure market increased 18% sequentially and increased 37% over the prior year, and represented 47% of total revenues. The industrial market net revenues increased 12% sequentially, and represented 31% of total revenues.

Net revenues from the high-end consumer market decreased 11% over the prior quarter and represented 22% of total net revenues. Approximately 14% of high-end consumer net revenue was attributable to mobile platforms, and approximately 8% was attributable to other consumer systems. I will now discuss the performance of each of our product groups.

In Q2 of fiscal year 2021, our signal integrity product group achieved a new quarterly revenue record and increased 20% sequentially, and increased 30% over the prior year, and represented 50% of total net revenues. Record revenues from our data center, wireless base station, and 10 gig PON businesses contributed to the very strong results.

In future of fiscal year 2021, record data center demand was led by strength from our global hyperscale data center customers. We experienced record demand for our ClearEdge CDR platform used in 100-gig optical modules as the need for higher bandwidth connectivity within data centers continues to increase.

We expect 100-gig optical modules to remain the workhorse technology for global cloud and hyperscale data centers over the next few years. Customer design activity for our new Tri-Edge PAM4 short-reach platform continue to accelerate in Q2 and we achieved additional design wins in 200-gig and 400-gig PAM4 optical modules.

We expect to release our longer-reach Tri-Edge platforms for both 200-gig and 400-gig optical modules, enabling up to 10 kilometers reach later this year.

We are expecting revenue from our Tri-Edge products to begin to ramp in the second half of this year and increase nicely next year, as a lower cost, lower power, and lower latency of Tri-Edge provides a significant advantage over DSP based solutions.

We believe the strong secular trends in the data center market should provide nice growth for our data center business over the next few years. In Q2 of FY 2021, we also saw record demand from the wireless base station market led by the emerging ramp 5G base stations.

Our ClearEdge CDR and FiberEdge PMD platforms are being used in 5G base stations, front-haul and mid-haul optical modules. Our 5G ClearEdge and FiberEdge portfolio continues to see solid design in activity. And we expect these designs to move to volume shipments later this year and throughout next year.

As 5G infrastructure deployments continue to increase globally, we expect to have 5G market opportunity to be triple that of 4G. In Q2 of fiscal year 2021, our 10-gig PON revenue also grew nicely over the prior quarter and achieved record revenues.

We are expecting growth from our 10-gig PON products this year, led by the build-out in China, as well as a number of new PON initiatives outside of China that enable gigabit to the home, enterprise, and campus networks.

Semtech has established itself as the leading supplier of 1-gig, 2.5-gig and 10-gig PON PMD platforms for the ONU and OLT markets and we expect our innovative products to allow us to continue to benefit from the growth in PON deployments globally.

While infrastructure deployments can be lumpy, we believe the ongoing secular trends driven by the upgrade of data center, PON, and wireless network capabilities should drive future demand for our higher bandwidth platforms across all our target infrastructure markets.

For Q3 of fiscal year 2021, we expect net revenues from our Signal Integrity products group to be down slightly as 5G wireless growth is offset by lower data center and PON demand following the very strong first half demand.

Moving on to our protection product group, in Q2 of fiscal y ear 2021 net revenues from our protection product group decreased 17% sequentially and represented 23% of total net revenues. In Q2 of fiscal year 2021, demand from our Korean smartphone customers declined, due to COVID-19 related issues.

We expect that Korean smartphone demand to recover beginning this quarter as new smartphones begin to ramp. Demand from our North American and Chinese smartphone customers remains solid through q2.

Our Protection Product Group continues to execute on its diversification strategy, focusing on applications in the industrial, automotive, and communications markets.

Our high performance protection solutions are gaining momentum in systems where high-speed interfaces such as USB-C, HDMI 2.1, and 10-gigabit Ethernet are being designed with advanced lithography processes. The faster interface speeds and use of more sensitive components are driving demand for higher performance protection solutions.

We expect these trends to continue and contribute to the further diversification of our protection business. In Q3 of fiscal year 2021, we are expecting our protection revenues to increase nicely led by stronger smartphone demand from North America and Korea, and growth from the broad based industrial and communications markets.

Turning to our Wireless and Sensing products group, in Q2 of fiscal year 2021, net revenues from our Wireless and Sensing products group, increased 18% sequentially led by record revenue from our LoRa enabled platforms, and represented 27% of total net revenues.

Our LoRa business continues to make excellent progress, despite the global challenges associated with COVID-19. In Q2 of fiscal year 2021, we made solid progress against the LoRa metrics we targeted at the beginning of the year. These included the number of countries with LoRa networks now stands at 92 countries.

And we expect over 100 countries to have LoRa networks by the end of fiscal year 2021. The number of public or private LoRa network operators grew to 143 and we expect 150 LoRa network operators by the end of fiscal year 2021.

The number of LoRa gateways deployed grew to over 1 million from the 642,000 gateways at the end of fiscal year 2020 and we are now expecting the number of LoRa gateways deployed to increase to over 1.3 million by the end of FY 2021. These 1 million deployed gateways enable a [sensor capacity] of approximately 5 billion end-nodes.

The cumulative number of LoRa end-nodes increased to 158 million from 135 million at the end of fiscal year 2020. And we expect this number to exceed 180 million cumulative end-nodes by the end of FY 2021.

Finally, the LoRa opportunity pipeline, which includes both opportunities and leads, stands at approximately $500 million, with approximately $200 million of leads feeding the future opportunity pipeline.

We continue to expect the opportunity pipeline to exceed $700 million, with an additional $300 million of leads feeding these opportunities by the end of fiscal year 2021.

This opportunity pipeline remains geographically well-balanced with approximately 70% of the opportunities now coming from the Americas and Europe, and includes an increasing number of used cases in the Smart Home, asset tracking, and supply chain logistics markets.

In addition to the record revenue performance, and the solid progress on our targeted metrics, Q2 also represented a quarter of many important achievements for LoRa. These include the recent release of our LoRa Edge platform has been met with extremely strong customer interest.

LoRa Edge is our first LoRa-based software defined radio platform that includes Wi-Fi sniffing and GPS sniffing functions, and enables true silicon to cloud connectivity. LoRa Edge is an ideal platform for asset tracking, and asset management used cases and is expected to be the enabler of our future cloud services revenues.

We recently announced a collaboration with Amazon Web Services, or AWS to offer asset tracking and smart building kits that integrates LoRaWAN straight into the Amazon cloud.

These kits will simplify IoT solution development by system integrators and enterprises that can now leverage AWS’ leading IoT services and network infrastructure to accelerate the introduction of new solutions. In addition to the hardware, the kits provide out of the box cloud dashboard capabilities.

The Asset Tracking Kit allows users to locate and track outdoor assets using a cloud dashboard, while the Smart Building Kit allows users to monitor doors and windows, manage occupancy, detect water leaks, detect fires, assess environmental conditions, detect chemical or other hazardous situations and ensure a quick and safe evacuation path.

We expect these initial offerings for Asset Tracking and Smart Buildings to pave the way for many other future industry verticals, such as smart utilities, smart homes, and smart healthcare to also deploy LoRa and AWS. Korea Expressway Corporation or KEC has built a LoRaWAN network for its expressways in Korea.

The network will monitor parking spaces, monitor trash and rest areas, monitor barriers, and monitor guardrails real time. In the future, the network will be expanded to provide detection of road freezing, tunnel management, and expressway like management.

Using LoRaWAN KEC expects to reduce operating costs by $2 million per year, and it is widely anticipated that 5G deployments in the region are expected to be an additional catalyst for lower demand.

H3C announced the integration of LoRaWAN into its new intelligent door lock applications to increase safety, efficiency, and convenient management of dormitories in schools. Use of LoRa enables entry via wireless fob or keycard and enables campus staff to monitor who enters and exits buildings.

YoSmart integrated LoRa Technology into its new YoLink line of residential IoT products that provide many advantages, including simple deployment and quick connectivity for a variety of home applications, including smart doors, security systems, electrical outlets, and water leak monitoring.

YoSmart’s LoRa devices enable smart home connectivity over half a mile, enabling a number of new smart home used cases. Finally, opportunities associated with COVID-19 where LoRa is ideally suited for applications such as contact tracing, distance tracking, hygiene monitoring, and occupancy management continue to expand.

We now have a fast growing catalogue of customers and partners that have announced LoRa Solutions for COVID-19 used cases in the emerging smart health market. The flexibility, low cost, long range, and low power of LoRa Networks are critical components of any successful LPWAN IoT deployment.

And we expect LoRa to continue to make in-roads in new markets that demand these benefits. Despite a record Q2 performance and anticipation of another record performance in Q3, for FY 2021, we are now expecting our LoRa-enabled revenues to be between $85 million and $95 million due to significant customer program push-outs related to COVID-19.

We continue to believe the momentum behind our LoRa metrics and the increasing geographic diversity in our opportunity funnel should enable our LoRa-enabled revenues to grow at our target of a 40% CAGR over the next five years, and enable LoRa to become the de facto standard for IoT LPWAN applications.

In Q2 of fiscal year 2021, net sales from our proximity sensing platforms remain soft due to the weak smartphone market. Despite this weakness, customer design-in activity remains high as global RF safety regulations are expected to become more stringent as new high power radios become deployed.

We have won several new design wins in new smartphones and wearable’s that should wrap nicely in the second half of this year and into FY 2022.

For Q3 of fiscal year 2021, we expect net revenues from our Wireless And Sensing Product Group to increase nicely led by another record performance from our LoRa-enabled business and stronger proximity sensing demand. Moving on to new products in design wins. In Q2 of fiscal year 2021, we released 16 new products and achieved 2,592 new design wins.

Now, let me discuss our outlook for the third quarter of fiscal year 2021. Despite the ongoing geopolitical challenges and the macroeconomic headwinds associated with COVID-19, we believe the underlying secular demand for our key growth platforms remains solid.

Based on our bookings and record high backlog entering the quarter, we are currently estimating Q3 net revenues to be between $145 million and $155 million. To attain the mid-point of our guidance range or approximately $150 million, we needed net terms orders of approximately 22% at the beginning of Q3.

Our guidance once again assumes no more direct shipments to Huawei or high silicon this quarter. We expect our Q3 non-GAAP earnings to be between $0.43 and $0.49 per diluted share. I will now hand the call back to the operator and Sandy, and Emeka, and I will be happy to answer any questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Tore Svanberg with Stifel. Please proceed with your question..

Yes, thank you and congratulations on the results.

I noticed that, you know, Huawei was still 4% of revenue in the quarter, I know you're guiding sort of zero Huawei going forward, but can you just talk a little bit about the dynamics there Mohan? You know, why were you able to still ship last quarter and what are some of the restriction issues for you going forward?.

Yeah, so Huawei is an ongoing dynamic situation Tore as you know, you know there they used to be a $80 million to $100 million account for us, so it's much, much lower now. The numbers are and what I choose to do on that guidance is essentially eliminate any risk for, you know, for our investor community, so we're assuming no more shipments.

That said, you know, we – it's an ongoing process to look at, see what we can ship and what they need, and what they – what products they want. And if they can, take the products, and if we can ship them, then we will, it's not a question of us not wanting to ship them.

You know, obviously, we're restricted to what we can ship at times and we have to go through that process. And the regulations as you know are changing quite frequently. So, we take the approach of let's be conservative and assume no shipments, but if we can, then we will, and of course that will be upside for us..

Very good. And as a follow up on LoRa, so you talked about these push-outs.

I'm just wondering, what needs to happen, you know, for those push-outs to go into production, and I mean, is this kind of getting the networks up and running? If you could add a little bit of color on how the push-outs are happening that'd be great?.

Yeah, I think it's more a question of just priorities, Tore. I don't think there's anything fundamental there. I think, you know, with COVID-19, a lot of companies are just kind of hunkering down and, you know, trying to figure out, you know, how to make sure their business operations are just running normally.

And so, some of the emerging programs of which, you know, IoT is one of them, some of these smart cities, and smart home used cases are just not quite getting the priority. I will say that, specifically for the bigger programs, I don't think there's any change to the value of the program or the needs and the want to execute on the program.

I just think it's more of a timing thing. And so, we're still anticipating most of these programs are going to, to ramp up, especially the consumer smart home ones, you know, in the second half of this year and maybe early next year..

Very good. Thank you, Mohan..

Thank you. Our next question comes from Harsh Kumar with Piper Sandler. Please proceed with your question..

Hey, guys, first of all, congratulations on solid quarter and guide.

I had a question on LoRa, to begin with, so you talked about the - you talked about the run rate you expect for the year, you talked about a lot of good activity, and then you also talked about push-outs, I'm trying to get the sense of like, all this activity, you know, why isn't it happening? And is it predominantly one or two kind of large players that you were anticipating in the United States that in the U.S.

had got pushed out? Or is it a bunch of just smaller push-outs as you saw, and then I had another follow-up?.

Yeah, I would say it's a little bit of both Harsh, obviously, the bigger ones affect the revenue in a larger way.

So, the – and they are, specifically one very big one in North America that has pushed out, but I think there's a lot of different POCs that are in place that are just going to take a little bit longer, and you know, some regions shut down, some regions, you know, our operation, some POCs their manufacturing operations not even just coming back to real manufacturing and now starting to, you know, deploy IoT has not been our highest priority, but I think it's starting to come back was definitely seeing across the globe, you know, more activity and some of these POCs now starting to generate revenue, but yeah, the main reason for the change in the range is specific to North America and some fairly large customers that have just pushed out the timeline..

Understood.

And did you have any idea Mohan on what – like how long the push-out is? Is it is it basically waiting for COVID to go away, which is sort of an uncertain timeline, or is it just pushed-out because they couldn't get the technical’s down, you know, in time, for basically call it [to set the mark of a launch]?.

Well, as far as I'm aware, the activity is still continuing. I think that, you know, the launch may – launches may have been pushed-out, but, you know, one of the metrics we look at is gateway deployments, and as you can see, you know, we increased quite dramatically this quarter from 800,000 gateways to over a million gateways.

The vast majority of that is actually tied to smart home activity. And so I think that's an indication that there's no real change to the ambition, I would say, it's more a question of, you know, just waiting for the right time point to execute on the launch..

Got it. I’ll now get back in line. Thank you..

Thank you. Our next question comes from Rick Schafer with Oppenheimer. Please proceed with your question..

Thanks and let me add my congratulations. I guess, I just had a couple questions.

The first is on the 5G brand market opportunity, I know you've mentioned it's up 3x versus 4G, and I was just curious how much of that is Semtech, you know, content gain versus or content growth versus share gains that you guys are winning in the market?.

Yeah, it's a bit of both. Rick, I would say the content gain is the fundamental architectural change from 4G to 5G, where 5G optical modules need a CDR. Whereas the 4G modules didn't necessarily need a CDR. So, we have more content, we have a PMD function and CDR function in the 5G base stations.

I would say also that typically on the 5G base stations there's more optical modules on the fronthaul side. So, you know, sometimes – actually double the number versus 4G, maybe even triple the number of versus 4G. So, more modules, more content and then I think we have a good portfolio of products, it's doing very well.

I just think we will take share in that space because of the capability of our products that are doing very well. Again, they're based on our ClearEdge, FiberEdge, and emerging Tri-Edge platform. So, which have all proven success in the data center market already? So, yeah, we feel pretty good about where we are in 5G..

Thanks, Mohan.

And then just a follow up on protection, if you could give some color on how big industrial is now for that segment, and maybe talk about the relative growth rate of the industrial, you know those industrial wins versus mobile, maybe, you know, how big – you know, how does the design pipeline split between industrial and mobile for kind of gage what’s coming? Thanks..

Yeah. So, our industrial business, I think it's about 30% to 35% of the total protection business.

So, consumer is still the largest part and one of the nice things there, Rick, even though our industrial business is growing nicely and the pipeline is good, and we've got lots of good wins in automotive, IoT common infrastructure, you know, really targeted by USBC, HDMI 2.1 10-gig Ethernet ports, but on the consumer side also, we've really done a pretty good job of diversifying within that business.

You know, North America was never really a strong participant in our protection business, but is now in the consumer space. And also, you know, on the wearable side, we're getting more traction. So, our consumer business in general has diversified nicely.

And then of course, we add to that the industrial business, which is really a combination of industrial communications, automotive, you know, video, those types of things is all doing quite well.

So, we feel pretty good about where we are, obviously last quarter, Q2 was challenging because of the drop-off of Korea mobile phones, smartphones, but I think now we expect that to come back this quarter and actually do quite well in the second half..

Great. Thanks Mohan..

Thank you. Our next question comes from Karl Ackerman with Cowen & Co. Please proceed with your question..

Good afternoon, gentlemen. Two questions, if I may. First, I wanted to go back to LoRa for a moment.

You know, it's nice to see the 200,000 unit increase in gateways this quarter, but if my model is right, and I'm wondering if it is, but if my model is right, it seems that you're still about half the level of your recently updated LoRa guide, year to date.

And so I guess, first is your implicit outlook for LoRa revenue assume a second half seasonal ramp of LoRa nodes from some of the Smart Home design wins you announced entering quarter. If you could just help me bridge the – perhaps the linearity of LoRa, that would be helpful. And I have a follow up..

Yeah, so I think Karl the way to think about remember that Q1 was really a soft quarter for LoRa.

China was shut down pretty much and you know, we had a very poor quarter, so when we set the range it was prior to COVID-19 and then we thought, you know, as we – last quarter we thought that the second half is going to be extremely strong and we just wanted to wait and see how it played out.

Q2 was a record quarter where we’re anticipating a record Q3 and even record Q4. I just don't think we can catch up and especially with these some of the larger program push-outs I mentioned, but I think the, you know the main thing to remember is the timing. There's two timing elements that are very critical.

One is, when the customers actually deploy their networks, whether that's a home network or whether that's a, you know, operator network. That's important. So that kind of demonstrates that they have now gone over the POC.

The POC is completed and they've decided to deploy a network and decided to deploy LoRa, but then the second aspect on the timing is when sensor nodes are connected to those network gateways, which is really when we start to generate the revenues.

Now, the deployments on the gateway side is really a precursor, right? It's really saying, okay, now we can expect end-nodes to be deployed. And the timing of that is usually dependent on software and other things, but you know, it's going to happen once the customers have deployed the gateway.

So, I think the most telling milestone this quarter is the very large increase in the gateway deployments, which is very encouraging for future n node devices..

Got it. Thanks. That’s helpful. For my follow-up, how would you characterize your level of visibility of 10-gig PON or PON in general within China in the second half? I ask because there appears to be several cross trends, I guess on one side, U.S.

carriers are upgrading [indiscernible] the home, and you've got Wi-Fi 6 ramping, but on the other side and number of Asia-based component suppliers have highlighted a slowdown in China, 5G deployments in the third quarter when I think you're suggesting that business will actually increase for you.

So, if you could just kind of address the puts and takes within PON, and I guess it's typically service providers in China that'll be very helpful. Thank you..

Yeah, I think the first thing to remember about 5G and 10-gig PON are they, they are both driving more bandwidth, right? And so that's not going to change. That requirement is not going to change.

We may have lumpiness from quarter-to-quarter, but the trend is going to be upwards and China, much like everybody else in the world wants to still be the first. The other thing to remember about 10-gig PON, it's a kind of a natural handoff for 5G. So, I think as 5G increases 10-gig PON will increase.

There is, obviously with the whole Huawei ban, there's some kind of question marks as to the timing of 5G rollouts in China. I don't think it's going to be a long drawn out kind of issue.

I think it's going to be one where we just have to monitor and see what happens, but that aside, I think, you know, one of the nice things that we have seen is the globalization of some of these platforms.

You know, as you mentioned, PON being deployed more in North America, Europe, certainly 5G now being picked up in Europe and North America, which I think is very encouraging for us.

So, to just see a little bit more geographical balance, but yeah, I think there’s still, you know, the way we look at Q3 is, currently that PON is likely to be down and 5G base stations slightly up, but you know, those metrics could change in Q4. We'll see what happens..

Thank you. Our next question comes from Craig Ellis with B. Riley. Please proceed with your question..

Yeah, thanks for taking the questions and congratulations on the results and strong overall guide guys. Mohan I just wanted to take a different look at the LoRa update on revenues. So, the new revenue mid-point is lower, but your range is much tighter than it was.

So, maybe speak to the confidence that you have in that new tighter range and within that range, what would dictate the high-end versus the low-end of the range as you look at the back half of the year?.

Yeah, I think Craig it’s still depending on customer rollouts, right. I mean, you know, we've got good momentum.

As I said, we're expecting another record in Q3, I'd expect another record in Q4, and that to continue the number of deployments, the end-nodes deployed is really driven by when customers decide to ramp out, you know, to kind of start connecting devices to their networks and how they do that.

The Smart Home initiative is the one – one of the capitalists for us, and I think, you know, good progress on the gateway and deployments on the kind of infrastructure side, but I think on the Smart Home side, we have to see kind of that really start to pick up, and to me that's going to be the, you know, the difference between the low-end and the high-end..

Got it. And then maybe one more for you before flipping to Emeka. There's been a lot of talk and a lot of press around a smartphone release timing this year, and certainly for some, but it's a little bit later than normal.

So, what does that mean for protection and proximity sensing, seasonal dynamics both in 3Q and 4Q? I think 4Q we would typically expect those to be down, but this model release timing mean that those two businesses could be up in 4Q?.

I think the answer is, yes Craig. You know, obviously we’ve had a very weak Q2, which is somewhat unusual and for sure with the Korean smartphone manufacturers that was mostly COVID-19 related. North America and China didn't have the same issue.

So, we're not expecting strong second half from China, but we are expecting pretty strong second half from Korea and North America. So, we'll see how that plays out. But I think you're right.

You know, one of the things that normally happens in Q4, of course, is everybody, especially in Korea, they bring their inventory way down, but it seems to me this year might be different, but we'll see. Yeah..

Great. Thanks for that. And then Emeka, I think a quarter ago, we had been looking for gross margin to rise through the year and it looks like it will be down a little bit, unless I've got something wrong in the fiscal third quarter. So, please correct me if I've got the inaccurate perception.

If I've read it right, then should we expect gross margin to be up in the fourth quarter and what would be a reasonable expectation beyond that? Can you continue with an upward trajectory or would there be any cross currents that we should be aware of into fiscal 2021?.

So, Greg, you know, one of the pleasing things about our gross margin has been how relatively stable it has been. I think for several quarters now we have guided to gross margins being between 60, on a non-GAAP basis being between 61% and 62%. And as you know, the key driver for our gross margin is the market mix, right.

So, when we get more revenue from the infrastructure market and industrial end-market as good for gross margins and the rest. We get more from consumer is somewhat of a headwind to our gross margin. So, I think you know, you're right.

A few months ago, probably in the last call, at that point the expectations for the infrastructure market was that it was still going to be on a [TA] was going to be a much higher mix of revenue from Mohan’s commentary, I think, yeah, he had guided through our SIP signal integrity business being flat to slightly down this quarter.

So, that is a headwind for gross margin. But my expectation is going to be that depending on the mix of revenue, where it's coming from, but as we go forward, I expect a whole lot of revenues coming from – continue to come from the PON market, from the 5G base station, from data center, and of course, a lot are continuing to grow.

So, I would hope, you know, I would think that starting from the fourth quarter, we'll see gross margin going back up again, and that would be my expectation that will continue to go up as we go into the next fiscal year..

Thanks Emeka and if I could just sneak in one more.

Any color on how we should think about the 14 weeks dynamic per revenue versus COGS and OpEx as we look to fiscal fourth quarter?.

Yeah, I think, you know, in terms of, in terms of your revenue, right, I think from Mohan’s prepared remarks, you know, typically the fourth quarter for us, we're usually down 5% to 10%, right? You know, but I think maybe because of probably because of the extra week, we are now sort of expecting maybe something that is flattish, not slightly up, slightly down, and we just have to see, and on the operational expense side of things on a non-GAAP basis, as I think about it, I think about 60% of our run rate operating expenses is linked to time, right.

So, you know, things like employees, salaries, you know, traveling supplies, those type of things. So, I would expect that the extra week will probably impact more on the 60% of our operating expenses..

Thank you. Good luck, guys..

Thank you. Our next question comes from Christopher Rolland with Susquehanna International. Please proceed with your question..

Hi, guys, it's David Haberle on behalf of Chris Rolland. Thanks for taking our questions. I guess just digging a little further on the 5G base stations side and we appreciate the magnitude of this opportunity for you guys.

So, we wanted to ask how the current tax rate is for CDRs and 5G and what sort of revenue you're generating from CDR versus PMD at this point.

Do they like sort of go hand-in-hand or are we still waiting on some of the CDR ramp, any color there that'd be great?.

So, the 5G optical modules typically are all using CDRs, and some of them have integrated drivers and some of them will use separate PMD functions, but they will all have some combination of a PMD and CDR, the 4G base stations don't, they only typically will use PMD devices.

So, yeah, you know, obviously, 4G base stations are still being sold and used. So, it's a mix there, but as 5G becomes the predominant base stations being deployed, we'd expect our revenues to increase nicely. And also, as I mentioned, on 5G, typically there's more frontal optical modules than in 4G base station.

So, we just see we're expecting that to increase as well. So yeah, as I said, that position is good. We have good products. It's just a question of timing..

Understood. Thank you there. And then on LoRa, seems like you guys are making good progress and kind of the cloud side and getting set up there.

I know, it's a longer-term opportunity for you, but how are you thinking about kind of a micro services side of LoRa business at this point, and how big it can be down the road here?.

Yeah, that's important. And I think, you know, one of the reasons I mentioned LoRa Edge, which is our kind of new platform that really is the enabler for our device to cloud services. It's getting really very good momentum, pipeline of opportunity has grown dramatically in just a handful of months. And so, yeah, we're very excited about it.

You know, it's still early days, but I think it's going to be a very important part of our strategy and revenues really starting next year, I think..

Great. Thank you..

Thank you. Our next question comes from Tristan Gerra with Robert W. Baird. Please proceed with your question..

Hi, good afternoon.

So, it sounds like you implied earlier that in base station, you see continued growth that will be primarily driven by geographic diversification, I just wanted to confirm that I heard this well, just in, you know, in relative to some other companies commentary about base station guidance’s for the quarter? And then, additionally, I was wondering given, you know, the transition away from Huawei on the base station side, once they went out of finished goods, do you expect – what is your timing in terms of when you think there's going to be a major pickup of non-Huawei base station vendors that are starting to ramp in China? And would you be benefiting from that?.

So, the – first of all the answer is, yes, we will benefit from that Tristan. The timing is very difficult to say because it really depends on how much inventory they have. And you know, how well equipped others are to take over and things like that. So, and how much, you know, business the operators are going to give them, right.

So that one is tricky to answer. I would say that our 5G revenues are still mostly based on China deployments, but we are seeing more and more opportunities outside of China, which I think is encouraging. So, and as you know, as I just talked about our content increase across the 5G space versus 4G is significant.

So, yeah, all-in-all, I think, you know as I mentioned, 5G is not going away, it's going to continue to grow. You know, there's going to be a little bit of lumpiness based on tenders that go out and volumes that get deployed, but I think in general, we're all expecting a pretty good year next year.

And my expectation is it will continue for quite a few years..

Okay, and then thank you that's useful and then a follow-up question on LoRa, so, it sounds like the pace of LoRa revenue recovery post, you know, the trough in China earlier this year was perhaps a little bit less than what you would have expected, but are you expecting if we are to adjust for the 14-week and just looking at, you know, normalized quarter for the January quarter, are you expecting LoRa to continue to increase sequentially or is it also, is your LoRa guidance also a function that perhaps you see this coming quarter is the near term peak in LoRa revenue before, you know, kind of comes down a little bit after what looks like there was a little bit of an inventory replenishment?.

I think Tristan, my expectation is LoRa grows every quarter, you know, we may see some seasonality, but I don't think that's the case, really for LoRa now, it doesn't have the scale yet to be impacted so much.

I think it's more a function of some of these new used cases, how quickly they, you know, kind of accelerate the connectivity side of sensors to the gateways. We have plenty of gateways now being deployed, and that's encouraging, but you know, we need the end devices connected as well.

And so, you know, the real issue for us has been COVID-19, where just customers and partners have just delayed that area of the whole system and so, but that's – I don't think that's going to last too much longer..

Great, thank you..

Thank you. Our next question comes from Gary Mobley with Wells Fargo. Please proceed with your question..

Hey, guys, thanks for taking my question.

The obvious questions have been asked, but I wanted to ask about drivers of revenue growth, and so sort of based on your commentary, it looks like [counting year] 2020 is going to be a good growth year for you, maybe in the mid-single-digit percent range, which is certainly better than your peer group [ex-memory].

And so, assuming the large part of that is function of strong data center CapEx, but as well, China presumably is a big component of your growth. And I know that has been an investment area for you guys over the last decade or so.

And so, can you parse out the contribution from China as it relates to your overall revenue growth based on sort of end demand dynamics?.

Yeah, I’ll try to do it by segment Gary. I mean, hyperscale data center is still mostly North America driven. I mean, we obviously may have module manufacturers in China, but the end-market is still mostly in North America. And you know, that's a significant part of our revenues.

Our 5G base station, I would say is mostly China driven, but the rest of the world is picking up. PON, mostly again 10-gig PON is again, mostly China, but the rest of the market is picking up. LoRa enabled, you know, 50% of our revenues are China today, but 70% of the pipeline is North America and Europe.

So, we expect that to kind of start to transition.

And then on the mobile side, you know, I think the encouraging thing really is that we've done very well in North America, done very well in Korea and continues to do well and so a lot of the mobile business, both on the protection side and the proximity sensing side is going to be, you know non-Chinese. So, I think there's a fairly good balance.

We continue to invest in China. We continue to feel good about the growth in China, but we have a fairly well balanced market and business position, I think. So, especially as it pertains to North America and Europe..

Okay, thanks for the color.

And a question for Emeka, I want to ask a regulatory question about inventories with the distribution channel, where does that stand today?.

Actually, from the way we tried to manage our inventory and the distribution channel, it is below our target range..

All right, thank you..

Thank you. Our next question comes from Quinn Bolton with Needham. Please proceed with your question..

Hi guys, this is [Michelle] on for Quinn. Most of my questions have been answered, but I just had one quick one for you guys.

So, with the size of the [LoRa design one funnel] increasing from over 500 million to over 700 million by the end of the year, and you know, the size the additional leads to 200 million to 300 million, I'm just wondering how you see that, you know, ramping over the second half, because, you know, with you guys entering the year at 500 million in design win funnel and it not growing yet, I'm just wondering if that's going to be driven by maybe some of these launches that you have going on in the second half that maybe, you know, increase adoption of LoRa or is there some other driver?.

Yeah, I think, so first thing Michelle, you know, this year is been a challenging one for opportunity pipeline, you know, I did expect it to grow fast and then it should have done and I think it ordinarily would have done, but when you shut down a whole country, you know, you just don't have a lot of opportunities growing from that.

So, that's partly the issue there for us, but of the pipeline that we do have, and the ones that I think are now starting to come back, and you know, countries that are starting to come back. We see there's no loss to the momentum of LoRa. No loss to the momentum in the operator area. No losses in the private network area.

No loss in terms of used cases. And in fact, some of the higher volume used cases are now starting to really pick up, and I think the key to that is looking at the gateway deployments. You know, companies are not going to deploy gateways if they don't have an intention of connecting things to those gateways.

And so, my sense is that that's going to be the real driver or future opportunity. And I think that could really quite quickly change that dynamic. We're still in a kind of a COVID-19; I think a recovery mode here in the second half, especially here in America and Europe.

And so, I think next year is going to be the real test, but I think, you know, we see enough positive signs to suggest that, you know, our revenues will keep growing in LoRa and we're not really concerned about the current, you know, issues associated with the range of revenue..

Okay. That's really helpful. Thanks, and congrats again on the results and the solid execution guys..

Thank you..

Thank you. Our next question comes from Mitch Steves with RBC Capital Markets. Please proceed with your question..

Yeah, thanks for taking my questions. Most might have been the answered, but I've got two quick follow-up though. Number one is just on the LoRa trajectory.

So, since you've kind of had similar revenues for two in a row, does that mean 2022 or fiscal year 2022 or calendar 2021 to be a significant growth year for you guys? Where you're going to see I guess, much higher than expected growth from the top line compounded by smartphone delays that got pushed-out to next year as well? And then secondly, is there any sort of number you guys can give us in terms of what you think COVID-19 did to fiscal year numbers this year in terms of either revenue or COGS? And that's it from me..

Well, let me talk about LoRa revenues first. Mitch, I think last year we did, I think about $74 million of revenue. So, you know, if we hit the midpoint of our range here, $90 million, you know, still not a bad growth year given all the dynamics and moving pieces and country shutting down and things like that.

So, I would say that's in good shape, and we're still keeping our 40% CAGR trajectory over the next five years here. So, we're not changing that. So, I think LoRa growth is still good. As your second part of the question COVID-19 related impact for us, it's been a mixed bag. I mean, there's some negative for sure.

You know, LoRa, from LoRa push-outs, I think the smartphone consumer market has been definitely impacted by COVID-19. Certainly Korea smartphones, things like that, but on the other hand, you know, the working from home, the need for bandwidth has definitely driven more data center, more base station, more PON, you know, a whole bunch of other areas.

So, I don't really think we can say we've been impacted so negatively by COVID-19, you know from a financial standpoint..

Okay, understood. Thank you..

Thank you. Our next question comes from Scott Searle with Roth Capital. Please proceed with your question..

Hey, good afternoon. Thanks for taking my questions. A couple of quick clarifications and then two quick questions. First, I want to make sure to correctly and Signal Integrities we're looking into the third quarter, I think you indicated sequentially down, wanted to confirm that.

And then Emeka as it related to the outlook for the fourth quarter, I thought I heard you say flattish. I wasn't clear if that was specific to protection or if that was, you know, for the entire Semtech business? And then I had a couple follow ups..

So, yes, Scott Signal Integrity products, we are expecting it to come down slightly in Q3. I think there's a little bit of over inventory and data center, somewhat offset by 5G base station. So, yeah, so that was the commentary there. And then Emeka just pointed out the Q4, typically for us to seasonally down.

We have a 14-week quarter, so we likely will have probably some offsetting revenues for that. So, probably flattish in Q4..

Great. And then on the 5G front, Mohan, you know, certainly seeing a big push within China right now to show global leadership on that front as you're seeing from a subscriber standpoint now as are well north of 100 million subscribers.

What is the visibility, though, that you're getting outside of China at this point in time? You've referenced it a couple of times, but I was wondering if you could think about looking at fiscal 2022, you know, the mix outside of China related to 5G and then had one LoRa lower question?.

You know, the visibility is pretty good from a design-in standpoint. The issue is not so clear from a CapEx operator standpoint, and that's something that I don't think we necessarily will get so much visibility until they're ready, and I think, but we know it's coming. It's just a question of time.

So, but, you know, we know the people who are building equipment are actively out there designing it, and so, you know, it's just a matter of time..

Great.

And lastly, on the lower front, still that big funnel, that big pipeline out there, timing seems to have been some of the issue that's been complicated with COVID and otherwise, but historically, if we looked at the business, it was more industrial driven, enterprise driven as opposed to consumer driven, now there are more applications that are starting to pop-up related to smart home and otherwise, I was wondering if you could give us some idea in color on that pipeline, in terms of how it looks between more traditional industrial applications versus consumer/smartphone types of applications, which have potentially larger unit volumes, but you know, are prone to some slippage.

And maybe as part of that as well, when I think about smart home applications to more localized as opposed to maybe an asset tracking application that requires much broader geographic coverage, if there's a way to think about how the pipeline is parsing out between more easily deployed, as opposed to requiring more broader network coverage? Thanks..

Yeah. Scott, that's a really good question. About 30%, I would say, of the funnel is kind of in that category of smart home asset tracking logistics, which should be easier to deploy.

I think the other metric to look at is that the – of the million gateways, which is a huge number really for us on LoRa gateways deployed, if compare to last quarter obviously 800,000, the vast majority of that increase is for this kind of smart home and smart logistics networks.

So, that's why we are pretty encouraged by the, you know the opportunity and how quickly they could – that could turn into real revenue for us in terms of end devices. So, but you know, the proof is in the [indiscernible].

We have to see you know, even smart home sometimes and smart logistics and some of the things we expect like consumer to be faster time to revenue, they sometimes also take time, and with COVID-19 you know, you just don't know how exactly predict that because we want to wait till the markets – we need to wait till the markets are back to some degree of normalcy here and you know, people going back to school and you know, going back to work and things like that, but it's going to happen..

Great. Thank you..

Thank you. Our next question comes from Hamed Khorsand with BWS Financial. Please proceed with your question..

Hi.

Just want to know what the 5G in proximity, does that help you guys as far as content and cost pricing? And on the flip side, because there's handsets coming out there are lower prices or handset makers pushing on lower pricing from you, is that started yet and what are you doing to counteract that if any?.

Yeah. So, on the proximity side. You know, the real trend that's helping us is just increased regulations on high powered radios for 5G phones, as you rightly said Hamed and I think the, is not just for the LTE radios, cellular radios, but also for Wi-Fi radios and other very powerful radios.

So, we are seeing more content and we are seeing more opportunities there across all the high-end smartphone manufacturers for proximity sensing. Pricing is always an issue in consumer. I mean, you have to be ready to, you know, address that through costs and new products, and that's the life we breathe when we go into this consumer business.

And we've been, we know how to play this game because of protection, and you know, we've been in the space for a while with our large customers, but the key is to keep bringing out new products innovate, and then, you know, help them help them bring down the overall price of their components and assist at the system level.

So, we'll continue to do that..

Okay, and then, quickly on LoRa, I know you've talked about the pipeline being mostly out into North America and Europe, but of the actual sales that you're generating, how much of that is outside of China right now?.

Well, 50% is China, about 50% is China. So, I'd say 30% is Europe. You know, 15% is America, something like that and the rest is Asia – rest of Asia..

Okay, great. Thank you..

Thank you. Our next question comes from Tore Svanberg with Stifel. Please proceed with your question..

Yes, thanks. I know it's been a long call, just two quick follow-ups.

First of all, Tri-Edge, Mohan you said some revenue contribution, second half of this year and then grants next year, is that sort of with a few customers or is that a fairly broad based [grant]?.

Well, we just released [the parts], right. Tore, we’re just sampling the Tri-Edge short reach parts now.

So, we've got some good wins and I think, you know, it's a relatively small group of customers at this point-in-time, but, you know, as we release the full product, and then we bring out our longer reach parts, my expectation is that that's going to increase quite nicely.

So yeah, I think, you know, our feeling is that we'll start to see early revenues this year and then ramp the next year..

Very good. Last question back to LoRa, so of the 90 million you’re expecting this year, how much of that would be asset tracking? Because it does sound like asset tracking is, you know, starting to ramp at least from a used case perspective. So, you know, just wondering if there's some rough percentages there..

Yeah, I think it'll be small Tore because we just released the LoRa Edge platform. So it's getting designed in, so I think this year's revenue will be relatively small for asset tracking and even smart home, but next year, I think it should be a serious contributor..

Great, thank you very much..

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks you may have..

Thank you. In closing, I want to once again thank all of our talented and committed employees across Semtech for their enduring efforts to limit the impact of the COVID-19 pandemic on our business operations.

We expect our multi-sourcing strategies, investments in our IT operations and sales infrastructure, and systems, along with our secular demand drivers, diverse product offering, balanced end-markets and strong customer relationships to enable us to deliver a solid performance in fiscal year 2021.

With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you..

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day..