Semtech Corp (SMTC) 2021 Q2 法說會逐字稿

Greetings, and welcome to the Semtech Corporation Second Quarter FY '21 Earnings Call. (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 '21.

The speakers for today's call will be Mohan Maheswaran, President -- 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 now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Thank you, Sandy. Good afternoon, everyone. For Q2 fiscal year '21, net sales increased 8% sequentially and 5% over the prior year to $143.7 million, which was above the midpoint 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 47% of 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 and resulted in a book-to-bill above 1. Turns bookings accounted for approximately 21% of shipments during the quarter.

Q2 [GAAP] (added by company after the call) gross margin increased 50 basis points due to a higher mix of infrastructure revenue. We expect our Q3 [GAAP] (added by company after the call) gross margin to decline slightly due to a higher mix of consumer revenue. Q2 GAAP operating expense increased 7% sequentially due to a 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 other expenses was $2.9 million versus $4.8 million in Q1. The decrease was primarily due to lower write-downs 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 nonrecurring 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 other 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 and fiscal year '21 tax rate 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 32 days of sales, which remains below our target range of 40 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 above our target range of 90 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 3x 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 '21, despite the ongoing macro headwinds.

I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon, everyone.

I will discuss our Q2 fiscal year '21 performance by end market and by product group, and then provide our outlook for Q3 of fiscal year '21. In Q2 of fiscal year '21, net revenues increased 8% sequentially and increased 5% over the prior year to $143.7 million.

Stronger demand from 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 '21, 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 '21, 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 Q2 of fiscal year '21, 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 continued 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 the 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 '21, we also saw record demand from the wireless base station market, led by the emerging ramp of 5G base stations. Our ClearEdge CDR and FiberEdge PMD platforms are being used in 5G base station, 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 our 5G market opportunity to be triple that of 4G.

In Q2 of fiscal year '21, 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 '21, we expect net revenues from our Signal Integrity Product 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 year '21, net revenues from our Protection Product Group decreased 17% sequentially and represented 23% of total net revenues.

In Q2 of fiscal year '21, demand from our Korean smartphone customers declined due to COVID-19-related issues. We expect our Korean smartphone demand to recover beginning this quarter as new smartphones begin to ramp. Demand from our North American and Chinese smartphone customers remained 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 '21, 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 Product Group. In Q2 of fiscal year '21, net revenues from our Wireless and Sensing Product 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 '21 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 '21.

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 '21.

The number of LoRa gateways deployed grew to over 1 million from the 642,000 gateways at the end of fiscal year '20. And we are now expecting the number of LoRa gateways deployed to increase to over 1.3 million by the end of FY '21.

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 '20. And we expect this number to exceed 180 million in cumulative end nodes by the end of FY '21.

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 '21. 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 use 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 WiFi sniffing and GPS sniffing functions and enables true silicon to cloud connectivity.

LoRa Edge is an ideal platform for asset tracking and asset management use 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 health care 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 guardrail's real time.

In the future, the network will be expanded to provide detection of road freezing, tunnel management and expressway light 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 LoRa demand.

H3C announced the integration of LoRaWAN into its new intelligent door lock applications to increase safety, efficiency and convenient management of dormitories and schools.

The use of LoRa enables entry via wireless key fob or key card 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 0.5 mile, enabling a number of new smart home use 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 catalog of customers and partners that have announced LoRa solutions for COVID-19 use 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 inroads in new markets that demand these benefits.

Despite a record Q2 performance and anticipation of another record performance in Q3, for FY '21, we are now expecting our LoRa-enabled revenues to be between $85 million and $95 million due to significant customer program pushouts related to COVID-19.

And 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 5 years and enable LoRa to become the de facto standard for IoT LPWAN applications.

In Q2 of fiscal year '21, 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 higher power radios are deployed.

We have won several new design wins in new smartphones and wearables that should ramp nicely in the second half of this year and into FY '22.

For Q3 of FY '21, 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 and design wins. In Q2 of fiscal year '21, 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 '21. 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 midpoint 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 HiSilicon 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, Emeka and I will be happy to answer any questions. Operator?

(Operator Instructions) Our first question comes from Tore Svanberg with Stifel.

And congratulations on the results. I noticed that Huawei was still 4% of revenue in the quarter. I know you're guiding sort of 0 Huawei going forward. But can you just talk a little bit about the dynamics there, Mohan? Why we're able to still ship last quarter? And what are some of the restriction issues for you going forward?

Yes. So Huawei's an ongoing dynamic situation, Tore, as you know, 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 the -- on our guidance is essentially eliminate any risk for our investor community. So we're assuming no more shipments.

That said, it's an ongoing process to see what we can ship and what they need and 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.

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 pushouts. I'm just wondering what needs to happen for those pushouts 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 pushouts are happening, that'd be great.

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

And so some of the emerging programs of which IoT is one of them, some of these smart city and smart home use 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 that most of these programs are going to ramp up, especially the consumer, smart home ones in the second half of this year and maybe early next year.

Our next question comes from Harsh Kumar with Piper Sandler.

First of all, congratulations on the 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 pushouts. So I'm trying to get the sense of like all this activity, why isn't it happening? And is it predominantly 1 or 2 kind of large players that you were anticipating in the United States that in the U.S. that got pushed out or is it a bunch of just smaller pushouts that you saw?

And then I had another follow-up.

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

Some regions shut down, some regions operations -- some POCs their manufacturing operations not even -- just coming back to real manufacturing and now starting to deploy IoT has not been our highest priority, but I think it's starting to come back. We're definitely seeing across the globe more activity and some of these POCs now starting to generate revenue.

But yes, the main reason for the change in the range is specific to North America and some fairly large customers that have just pushed out their time line.

Understood. And do you have any idea, Mohan, on what -- like, how long the pushout is? Is it basically waiting for COVID to go away, which is sort of an uncertain time line? Or is it just pushed out because they couldn't get the technicals down in time for basically kind of, call it, the September-October launch?

Well, as far as I'm aware, the activity is still continuing. I think that the launch -- launches may have been pushed out. But one of the metrics we look at is gateway deployments. And as you can see, we increased quite dramatically this quarter from 800,000 gateways to over 1 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 just waiting for the right time point to execute on the launch.

Our next question comes from Rick Schafer with Oppenheimer.

And let me add my congratulations. I guess, I just had a couple of questions. The first is on the 5G RAN market opportunity. I know you've mentioned it's up 3x versus 4G. And I was just curious how much of that is Semtech content gain versus -- or content growth versus share gains that you guys are winning in the market?

Yes, 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 front haul side. So sometimes, actually double the number versus 4G, maybe even triple the number versus 4G.

So more modules, more content. And then I think we have a good portfolio of products that'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 yes, we feel pretty good about where we are in 5G.

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 -- those industrial wins versus mobile. Maybe how big -- how does the design pipeline split between industrial and mobile for trying to kind of gauge what's coming?

Yes. So our industrial business, I think it's about 30%, 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, comm infrastructure, really targeted by USB-C, 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. North America was never really a strong participant in our protection business, but is now in the consumer space. And also 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, video, those type 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 phone, smartphones. But I think we expect that to come back this quarter and actually do quite well in the second half.

Our next question comes from Karl Ackerman with Cowen & Co.

Two questions, if I may. First, I wanted to go back to LoRa for a moment. 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, does your implicit outlook for LoRa revenue assume a second half seasonal ramp of LoRa nodes from some of these smart home design wins you announced in the quarter? If you could just help me bridge the -- perhaps the linearity of LoRa business that would be helpful. And I have a follow-up.

Yes. So I think, Karl, the way to think about it, remember that Q1 was really a soft quarter for LoRa. China was shut down pretty much. And we had a very poor quarter. So when we set the range, it was prior to COVID-19, and last quarter, we thought that the second half was 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 in the especially with the -- some of the larger program pushouts I mentioned.

But I think the main thing to remember is the timing, there's 2 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 an 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 networks, 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 end node devices.

Got it. 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 crosscurrents. I guess, on one side, U.S. carriers are upgrading fiber to the home and you've got Wi-Fi 6 ramping. But on the other side, a 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 specifically with service providers in China, that would be very helpful.

Yes. I think the first thing to remember about 5G and 10-gig PON, 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 handle 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 one of the nice things that we have seen is the globalization of some of these platforms. As you mentioned, PON being deployed more in North America and 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 yes, I think there's still -- the way we look at Q3 is currently that PON is likely to be down and 5G base stations is slightly up. But those metrics could change in Q4. We'll see what happens.

Our next question comes from Craig Ellis with B. Riley.

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 midpoint 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 should look at the back half of the year?

Yes. I think, Craig, it's still depending on customer rollouts, right? I mean, 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 -- to kind of start connecting devices to their networks and how they do that.

The smart home initiative is the one -- one of the catalysts for us. And I think 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 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 smartphone release timing this year and certainly, for some, it is a little bit later than normal.

So what does that mean for protection and proximity sensing's seasonal dynamics, both in 3 and 4Q? I think 4Q, we would typically expect those to be down, but this model release timing mean that those 2 businesses could be up in 4Q?

I think the answer is yes, Craig. Obviously, we had a very weak Q2, which is somewhat unusual. And for sure, with the Korean and 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 in 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. One of the things that normally happens in Q4, of course, is everybody, especially in Korea, the -- and they bring their inventory way down, but it seems to me this year might be different, but we'll see, yes.

Great. 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 crosscurrents that we should be aware of into fiscal '21?

So Craig, 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 [end] (added by company after the call) market mix, right? So when we get more revenue from the infrastructure market and the industrial end market that's good for gross margins. And as we get more from consumer is somewhat of a headwind to our gross margin.

So I think, you're right, a few months ago, probably in the last call, at that point that the expectations for the infrastructure market was that it was still going to be on ATA, it was going to be a much higher mix of revenue.

From Mohan's commentary, I think he had guided to 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, our LoRa continuing to grow.

So I would hope -- 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.

And if I could just sneak in one more. Any color on how we should think about the 14 weeks dynamic for revenue versus COGS and OpEx as we look to fiscal fourth quarter?

Yes. I think in terms of the revenue, right, I think from Mohan's prepared remarks, typically, the fourth quarter for us, we're usually down 5% to 10%, right? But I think maybe because of -- probably because of the extra week, we are now sort of expecting maybe something that is flattish, slightly up, slightly down. And we just have to see.

And on the operating 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 things like employees, salaries, 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.

Our next question comes from Christopher Rolland with Susquehanna International.

It's David Haberle on behalf of Chris Rolland. I guess just to dig in a little further on the 5G base station side, and we appreciate the magnitude of this opportunity for you guys.

We wanted to ask how the current attach 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 would 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 a separate PMD function, but they'll all have some combination of a PMD and CDR.

The 4G base stations don't. They already typically will use PMD devices. So obviously, 4G base stations are still being sold and used. So it's a mix there.

But as 5G becomes the predominant base station that's being deployed, we'd expect our revenues to increase nicely. And also, as I mentioned, on 5G, typically, there's more front haul optical modules than in the 4G base station.

So we just see -- we're expecting that to increase as well.

So yes, as I said, our position is good. We have good products. It's just a question of timing.

Understood. And then on LoRa it seems like you guys are making good progress in kind of the cloud side and getting setup there. I know it's a longer-term opportunity for you.

But how are you thinking about kind of the micro services side of a LoRa business at this point and how big it can be down the road here?

Yes, that's important. And I think 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 opportunities growing dramatically in just a handful of months. And so yes, we're very excited about it. 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.

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

So it sounds like you implied earlier that in base station, you see continued growth that will be primarily driven by a geographic diversification.

I just wanted to confirm that I heard this well just in relative to some other companies' commentary about base station guidances for the quarter.

And then additionally, I was wondering, given the transition away from Huawei on the base station side once they run out of finished good.

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 starting to ramp in China? And will you be benefiting from that?

So the -- first of all, the answer to that 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 how well equipped others are to take over and things like that.

So -- and how much business the operator is 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 all in all, I think, as I mentioned, 5G is not going away. It's going to continue to grow. 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 -- that's useful. And then a follow-up question on LoRa. So it sounds like the pace of LoRa revenue recovery post 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 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 as the near-term peak in LoRa revenue before it kind of comes down a little bit after what looks like there was a little bit of an inventory replenishment?

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

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

And so the real issue for us is being COVID-19 where just the 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.

Our next question comes from Gary Mobley with Wells Fargo.

Most of the 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 calendar 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 I'm assuming the large part of that is a 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?

Yes. 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 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, 50% of our revenues are China today, but 70% of the pipeline is North America and Europe.

So we're expecting that to kind of start to transition. And then on the mobile side, I think the encouraging thing really is that we've done very well in North America, done very well in Korea and continue 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 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. A question for Emeka. I want to ask you the obligatory question about inventories with the distribution channel. Where does that stand today?

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

Our next question comes from Quinn Bolton with Needham.

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 win funnel increasing from over $500 million to over $700 million by the end of the year.

And the size of the additional leads going from $200 million to $300 million. I'm just wondering how you see that ramping over the second half because -- with you guys entering the year at $500 million in the design win funnel and 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 increased adoption of LoRa or if there's some other driver?

Yes. I think -- so first thing, Michelle, this year has been a challenging one for opportunity pipeline. I did expect it to grow faster, and it should have done, and I think it ordinarily would have done. But when you shut down a whole country, you just don't have a lot of opportunities coming -- 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 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 loss in the private network area, no loss in terms of use cases.

And in fact, some of the higher volume use cases are now starting to really pick up. And I think the key to that is looking at the gateway deployments. 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 of future opportunity.

And I think that could really quite quickly change that dynamic.

We're still in a kind of COVID-19, I think, recovery mode here in the second half, especially here in America and in Europe. And so I think next year is going to be the real test.

But I think we see enough positive signs to suggest that our revenues will keep growing in LoRa, and we're not really concerned about the current issues associated with the range of revenue.

Our next question comes from Mitch Steves with RBC Capital Markets.

Yes. Most of mine have been answered, but I've got 2 quick follow-ups. So number one is just on the LoRa trajectory. So since you've kind of had similar revenues for 2 years in a row, does that mean 2022 or fiscal year '22 or calendar year '21 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 the fiscal year numbers this year in terms of either revenue or COGS? And that's it for me.

Well, let me just talk about the LoRa revenues first, Mitch. I think last year, we did, I think, about $74 million of revenue. So if we hit the midpoint of our range here of $90 million, it's still not a bad 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 5 years here. So we're not changing that.

So I think LoRa growth is still good.

As your second part of the question, the COVID-19-related impact for us, it's been a mixed bag. I mean, there's some negative, for sure, some LoRa pushouts. I think the smartphone consumer market has been definitely impacted by COVID-19. Certainly, Korea smartphones, things like that. But on the other hand, the working from home, the need for bandwidth has definitely driven more data center, more base station, more PON a whole bunch of other areas.

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

Our next question comes from Scott Searle with ROTH Capital.

A couple of quick clarifications and then 2 quick questions. First, I want to make sure I heard correctly on Signal Integrity as we're looking into the third quarter. I think you indicated sequentially down, I 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 for the entire Semtech business.

And then I had a couple of 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 in data center, somewhat offset by a 5G base station. And so yes, so that was the commentary there.

And then Emeka just pointed out that Q4 typically for us is 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, 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 they're 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 '22, the mix outside of China related to 5G? And then I had one other question.

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 yes, we know the people who are building equipment are actively out there designing it in. So yes, it's just a matter of time.

Great. And lastly, on the LoRa front, you still have 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 and color on that pipeline in terms of how it looks between more traditional industrial applications versus consumer/smart home types of applications, which have potentially larger unit volumes, but are prone to some slippage.

And maybe as part of that as well, when I think about smart home applications, they're 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.

Yes, 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 1 million gateways, which is a huge number really for us on LoRa gateways deployed.

If you compare it to the last quarter, where we said 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 opportunity and how quickly they could -- that could turn into real revenue for us in terms of end devices.

So -- but the proof is in the pudding. We have to see even smart home, sometimes in smart logistics and some of these things we expect, like consumer to be faster time to revenue, they sometimes also take time.

And with COVID-19, we just don't know how exactly to predict that because we want to wait until the markets. We need to wait until the markets are back to some degree of normalcy here and people going back to school and people going back to work and things like that, but it's going to happen.

Our next question comes from Hamed Khorsand with BWS Financial.

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

Yes. So on the proximity side, 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 -- it's not just for the LTE radios, satellite radios, but also for WiFi radios and other very powerful radios.

So we are seeing more content. 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 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 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 help them bring down their 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 would say 30% is Europe, 15% is Americas, something like that, and the rest is Asia, the rest of Asia.

Our next question comes from Tore Svanberg with Stifel.

I know it's been a long call. Just 2 quick follow-ups. First of all, Tri-Edge. Mohan, you said some revenue contribution second half of this year and then ramps next year. Is that sort of with a few customers? Or is that a fairly broad-based ramp?

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 it's a relatively small group of customers at this point in time. But 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 yes, I think our feeling is that we'll start to see early revenues this year and then ramp next year.

Very good. And 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 starting to ramp at least from a use case perspective.

So just wondering if there's some rough percentages there.

Yes. I think it will 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.

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 solid performance in fiscal year '21. 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.