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Semtech Corporation (SMTC) Q1 2024 Earnings Call Transcript

Semtech Corporation (SMTC)

Q1 2024 Earnings Call Transcript

Company Participants

Anojja Shah - VP of IR

Emeka Chukwu - EVP and CFO

Mohan Maheswaran - President and CEO

Conference Call Participants

Craig Ellis - B. Riley Securities FBR

Scott Searle - Roth Capital

Harsh Kumar - Piper Sandler

Tore Svanberg - Stifel

Quinn Bolton - Needham & Company

Matthew Ramsay - Cowen

Presentation

Operator

Greetings and welcome to the Semtech Corporation Conference Call to discuss the First Quarter Fiscal Year 2024 Financial Results. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, Semtech's Executive Vice President and Chief Financial Officer. Please note that this conference is being recorded. At this time, all participants are in a listen-only mode, a question-and-answer session will follow the formal presentation.

I will now turn the call over to Semtech, Vice President of Investor Relations, Anojja Shah.

Anojja Shah

Thank you, operator. A press release announcing our unaudited results was issued after the market close 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 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 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 detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures is included in today's press release.

And with that, I'll turn it over to our Chief Financial Officer, Emeka Chukwu. Emeka?

Emeka Chukwu

Thank you, Anojja. Good afternoon, everyone. Before I begin, I trust you all saw the news that the board has completed its search for our new CEO. We are pleased to welcome Paul Pickle to Semtech. Mohan will comment further, but we are all excited about Paul's impressive mix of semiconductor and IoT experience and look forward to his arrival later this month. And I also want to congratulate Mohan on his retirement. Mohan has led Semtech very successfully for the past 17 years, and we have all enjoyed working with him. Like the many Semtech employees, we wish you well on your next adventure.

Coming to Q1 fiscal 2024, the company delivered net sales of $236.5 million, above the midpoint of our guidance and an increase of 41% sequentially and 17% year-over-year. These numbers include the $136 million of revenue from our acquisition of Sierra Wireless. Our non-GAAP gross margin of 48.5% was in line with our guidance and our earnings of -- and our earnings per share of $0.02 was above our guidance. In Q1, shipments into North America, China, Europe, and the rest of Asia represented 31%, 24%, 15%, and 30% respectively. The addition of Sierra Wireless has increased our geographic mix towards North America and Europe. Total direct sales represented approximately 39% of net revenue and distribution represented the remaining 61%.

Turning to our end markets. As we mentioned last quarter, we expect to see macroeconomic challenges affect our business in the first half of fiscal 2024, which we did see in Q1. Net revenues from the high-end consumer market decreased 38% sequentially and 55% versus the prior year. High-end consumers represented 9% of total net revenues. Net revenue from the industrial end market increased 130% sequentially and 125% over the prior year due to the inclusion of Sierra Wireless. The industrial end markets represented 75% of total net revenues.

And finally, the infrastructure end market declined 30% sequentially and 49% over the prior year and represented [15%] (ph) of total net revenues. In terms of POS, we saw the majority of POS, 60% coming from the industrial end market due to the addition of Sierra. The infrastructure and consumer end markets were balanced with 21% and 19%, respectively. Q1 bookings grew 1% sequentially, driven by strength in our Advanced Protection and Sensing Business Unit.

Q1 non-GAAP gross margin was 48.5% in line with the midpoint of our guidance. For Q2, we expect gross margin to stay roughly flat. For the remainder of fiscal 2024, we expect our gross margins to trend higher through the year, as material cost synergies are achieved, and revenues in our higher margin Semtech organic businesses increase. These benefits were slightly offset by lower absorption, as we work to reduce our internal inventory levels. We are still expecting 100 basis points to 150 basis points improvement in gross margin by Q4 of this year.

In Q1, operating expenses were $93 million, $6 million below the midpoint of guidance due to our strict management of discretionary spending. For Q2, we expect further reductions to our operating expense, down another 2% sequentially. And expect to see continued declines throughout the remainder of the year as we execute on our integration plans and operate to optimize for financial performance. In Q1 of fiscal 2024 non-GAAP operating margin was 9.3%, significantly better than expected, driven by actions we took to preserve operating profit.

In Q1, cash flow from operations was $90 million use of cash, impacted by the fiscal year 2023 annual bonus payouts and the payment of acquisition related expenses. We expect our cash flow to recover in the second half of the year, as acquisition related expenses taper off and demand improves, allowing us to improve profitability as current inventory levels are reduced.

Our gross debt at the end of Q1 was $1.4 billion or approximately 4.3 times leverage on a net basis. We expected to see an increase in net leverage in the first half of the year as we navigate this software demand environment. We announced today, that we negotiated another amendment to our credit agreement to get further relaxation through our leverage and interest expense coverage ratio covenants. Given our current projections for revenue and earnings, we now expect to have an adequate cushion through fiscal 2025. The Q1 weighted average cash interest expense was approximately 5.65%. And as we have said before, the main priority for free cash flow will be to pay down our debt.

In summary, Q1 performance was better than expected, but still impacted by macroeconomic headwinds. Looking ahead, we continue to make progress on our integration of Sierra Wireless. Our synergies are ahead of plan and as a result, we still expect the Sierra acquisition to be accretive to earnings in fiscal year 2024. We are getting good customer feedback on our cellular and LoRa integration plans. Overall, we are seeing higher design wins, and with the steps that we're taking to improve our financial performance, we believe that our business will thrive as demand improves and channel inventory gets back to normal levels.

I will now hand the call over to Mohan.

Mohan Maheswaran

Thank you, Emeka. Good afternoon everyone. Thank you for joining today. On May 30, we announced that Paul Pickle will join as a new President and Chief Executive Officer for Semtech. I will ensure a smooth transition with Paul and support him and the board as needed for the next 16 months. Thank you all for your support and interest in Semtech over my tenure as CEO over the last 17 years. I've enjoyed working with you all and I'm counting on you to continue to support Semtech through the next phase of growth. Today marks my last earnings call as Semtech's President and Chief Executive Officer.

Onto our Q1 fiscal year 2024 performance by product group, as well as the outlook for Q2 of fiscal year 2024. In Q1, our quarterly net revenue increased 41% sequentially and achieved a new record of $236.5 million, slightly above the midpoint of our guidance. We also posted non-GAAP earnings per share of $0.02, driven by lower OpEx as synergies were ahead of expectations.

Both net revenue and EPS were better than guidance, while inventories remained high, Q1 bookings for the organic Semtech business were up sequentially, increasing our confidence that the organic Semtech business has stabilized, albeit, at much lower levels. In Q1, our Signal Integrity Product Group revenue was down 32% sequentially and represented 18% of total revenues. As expected, all our infrastructure businesses were very weak in Q1.

Our China PON and base station businesses were especially weak in Q1, as overall demand softened and inventories remained high. Our hyperscale data business -- data center business was also weak in Q1, but we are expecting this business to rebound modestly in Q2 as inventories reduce. We are anticipating a strong second-half performance from our data center business, driven by our North American design wins.

AI is driving significant demand at hyperscalers and our SIP portfolio is primed to take advantage of the upcoming data center buildouts. Our Tri-Edge, FiberEdge, and CopperEdge platforms deliver lower power and lower latency advantages over DSP solutions, which are key requirements for future AI data centers. We are growing our data center footprint with North American partners and we are already well positioned in China, where we believe that data center build-outs will regain momentum in the next 12 months. In Q1 we announced the industry's first 200 gig per channel FiberEdge type TIAs, which are generating positive interest and design wins with Tier-1 customers in North America.

In addition, our CopperEdge platform is in the early stages of penetrating the 100 gig and 200 gig per channel active copper cable segment in North America, which we believe has tremendous potential in the data center market. We remain confident that our full portfolio of data center platforms, including ClearEdge and Tri-Edge CDRs, FiberEdge PMDs, and CopperEdge re-drivers will enable us to rapidly grow our hyperscale data center business over the next several years.

While our PON business saw a sequential decline in Q1, we believe excess inventories are starting to reduce, increasingly we are seeing service providers outside of China, starting to deploy PON systems, which is very encouraging -- which is a very encouraging sign for our future PON business. Our PON portfolio has recently been expanded with the industry's first 50 gig PON OLT chipset, which already has design wins at Tier-1 European customers.

We believe our 2.5 gig, 10 gig, 25 gig and 50 gig PON PMD portfolio offers customers the broadest and the highest performance PON PMD portfolio in the industry and we expect that PON business to return to growth in the second half. Revenue from our wireless base station business was also down in Q1, on both the sequential and year-over-year basis, as the macroeconomic slowdown in China has impacted demand for both 4G and 5G base stations. However, new tenders recently issued in China should drive meaningful growth in this segment in the second half of FY 2024 and in FY 2025.

In Q2 of FY 2024, we expect a continued reduction of customer and channel inventories across our infrastructure businesses, and we expect a modest improvement in revenues from China, as our Chinese demand begins to recover. As a result, we expect our Signal Integrity Product Group revenues to increase sequentially in Q2.

Moving on to our Advanced Protection and Sensing Product. Q1 net revenue from our Advanced Protection and Sensing Products Group decreased 25% sequentially and represents 15% of total revenues. The drop was driven by lower demand from the consumer segment as we are faced with high inventories in both China and Korean smartphone markets. We expect inventory digestion to continue for several quarters. However, we continue to achieve solid design wins on new smartphones with our leading USB-C protection platform across all Tier-1 global smartphone customers.

In Q1, we announced the expansion of our PerSe Product portfolio with the release of a new SaaS sensor for 5G mobile devices. Semtech's PerSe technology senses human proximity and enables smartphones to implement RF power control.

New [indiscernible] regulations in China starting in FY 2025 are beginning to be a catalyst for new proximity sensing growth, with bookings and POS up significantly from Q4. We expect this to increase, as adoption of our [indiscernible] sensors continues in the second half of FY 2024....

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