Greetings, and welcome to Stentech Corporation's Q3 fiscal year 2021 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Sandy Harrison, vice president of Investor Relations. Thank you. You may begin.
Thank you, Devin, and welcome to Semtech's conference call to discuss our financial results for the third quarter of fiscal year 21. Peters for today's call will be Mohan Mahatthorn, Emtek's President and Chief Executive Officer and Emeka Tuku, 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. PemTech undertakes no obligation to update the information on this call, just back to circumstances change. During the call, we will refer to non GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. Discussion of why the management team considers such non GAAP financial measures useful along with the detailed reconciliations of such non GAAP measures to the most comparable GAAP financial measures are included today's press release.
As a reminder, all references to financial results from Mohan's and Emeka's formal presentations on this call will refer to non GAAP measures unless otherwise noted. With that, I will turn the call over to Semtech's Q Financial.
Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal year 2021, net sales increased 7% sequentially and 9% over the prior year to 150 $41,000,000, which was at the upper end of our guidance. In Q3, shipments into Asia represented 80% of net sales. North America represented 12% and euro represented 8%.
Total direct sales was approximately 18% and sales to distribution was approximately 82% of net sales. Our distribution business remains balanced with 39% of the total POS coming from the infrastructure end market and 30% from the industrial end market and 31% from the high end consumer end market. Bookings increased strongly over the prior quarter and resulted in a book to bill above 1. Those bookings accounted for approximately 25 percent of shipments during the quarter. Q3 GAAP gross margin decreased as expected by 40 basis points due to a higher mix of consumer revenue.
We expect our Q4 gross margin to be flattish sequentially. Q3 GAAP operating expense increased 4% sequentially due to higher performance based compensation expense offset by lower new product expenses. We expect our Q4 GAAP operating expense to increase 4% to 6% sequentially primarily due to it being a 14 week quarter and higher share based compensation expense, driven by higher stock price. Due to other expenses was $1,600,000 versus 2 point $9,000,000 in Q2. The decrease was primarily due to lower foreign exchange losses than those that were recognized in Q2.
In Q3, our GAAP tax expense was 7.9% as a result of a favorable regional mix of income and several discrete tax benefits. In Q4, we expect our tax to range between 10% 13%. 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. Gross margin was 61.5 percent and in line with expectations. Our gross margin remains stable with the key driver being end market revenue mix.
In Q4, we expect gross margins to remain flattish. Due to a higher mix of consumer revenue. In fiscal year 'twenty two, we expect to see gradual increases to our gross margin as we see an increase in revenue contribution from our higher margin growth drivers of lower enabled 5g Wireless Pond Data Center Infrastructure Platforms. Our Q3 non GAAP operating expense increased 6% sequentially on higher compensation expenses, offset by lower new product expenses. In Q4, we expect our non GAAP operating expense to increase 1% to 4% sequentially.
Primarily due to the January quarter being a 14 week quarter. For fiscal year 22, Consistent with our target, we expect operating expenses to increase at approximately half the rate of revenue growth. In Q3, our non GAAP tax rate came in at 14.8% and we expect our Q4 and fiscal year the 22 tax rates to be in the range of 15% to 17%. In Q3, cash flow from operations decreased to 18% of net sales due to the adverse impact of withholding taxes paid in Q3 related to the Q2 repatriation of cash to the US. We repurchased approximately 440,000 shares or $24,000,000 of stock in Q3 And our stock repurchase authorization now stands at approximately $44,000,000.
We expect to continue to use our cash to opportunistically repurchase our shares make strategic investments and pay down our debt. In Q3, due to higher net sales and timing of shipments during the quarter, accounts receivable increased 14% sequentially and represented 33 days of sales which remains well below our target range of 40 to 45 days. Net inventory in absolute dollar turns was approximately flat sequentially, while days of inventory decreased by 9 days to 118 days, which remains above our target range of 90 to 100 days. In Q4, we expect our net inventory to increase due to the strong demand and that we're seeing and the tightening supply lead times. In summary, we were pleased to deliver Q3 results that were at the end of our guidance.
We look forward to ending a very challenging year on a strong Note, we believe that our strong business fundamentals position us nicely to continue to deliver growth and solid Financial Results. I will now hand the call over to Mohan. Thank you, Micha. Good afternoon, everyone.
I will discuss our Q3 fiscal year 'twenty one performance by end market and by product group and then provide our outlook for Q4 of fiscal year 'twenty one. In Q3 of fiscal year 2021, net revenue increased 7% sequentially and 9% over the prior year, to $154,100,000. Stronger demand from the high end consumer and industrial end markets was offset by softer demand from the infrastructure end market. We posted non GAAP gross margin of 61.5%, and non GAAP earnings per diluted share of $0.47. In Q3 of fiscal year 2021, net revenue from the high end consumer market increased 43% sequentially and 21% over the prior year and represented 29% of total net revenues Approximately 19% of high end consumer revenue was attributable to mobile platforms and approximately 10% was attributable to other consumer systems.
The industrial end market net revenue increased 14% sequentially. And 4% over the prior year and represented 32% of total net revenues. Net revenues from the infrastructure end market decreased 13% sequentially and increased 6% over the prior year. And represented 39% of total net revenues. I will now discuss the performance of each of our product groups.
In Q3 of fiscal year 2021, as expected, our signal integrity product group decreased 14% sequentially, and increased 5% over the prior year and represented 40% of total net revenues. In Q3 of fiscal year 'twenty one, demand from our data center customers softened following the strength experienced in the first half of the year. We believe the demand for higher bandwidth data center connectivity remains very strong and our ClearEdge, FiberEdge and Tri Edge platforms all have significant design and momentum in 100 Gig, 200 Gig and 400 Gig optical modules being deployed in global cloud and Hyperscale data centers. Design activity for our Tri Edge PAM4 platform remains strong. And we now have customers working on almost 2 dozen design ins for use in 100 gig, 200 gig, and 4 100 gig PAM4 optical modules.
The lower cost, lower power and lower latency performance enabled by our Tri Edge analog CDR platform provides a significant advantage over existing DSP solutions. We believe the secular trends that have been driving growth in the data center market should continue to drive our data centers higher over the next few years. In Q3 of fiscal year twenty demand from the wireless base station market softened from the prior quarter's record as build outs in China slowed from first half levels. Global customers are increasingly deploying 25 gig optical modules for front haul links in 5g base stations. As a result, we are seeing increased design in activity for our high performance CDR and PMD platforms for 5G wireless base stations globally.
We expect 5G infrastructure spending to increase in fiscal year 2022 and expect this market to continue to grow for several years. In Q3 of fiscal year 2021, revenue from our PON customers was flat with the prior quarter. While demand for our PON platforms has been largely driven by China, we are continuing to see a number of new PON initiatives outside of China. Where PON is used to channel high speed data to the home, enterprise and campus networks. CEMTech remains the leading supplier of 10 gig PON platforms for the OAU and OLT markets, and we expect our latest innovative 10 gig products to enable us to despite the inherent lumpiness associated with the infrastructure markets, we believe the secular trend led by the upgrade of data center connectivity and the expansion of 10 gig PON and 5G wireless network capabilities should drive future demand for our optical platforms across all our target infrastructure markets.
For Q4 of fiscal year 2021, we expect net revenues from our Signal Integrity Product Group, to increase, driven by In Q3 of fiscal year 'twenty one, net revenue from our protection product group increased 25% sequentially, and 3% from the prior year and represented 27% of total net revenues. In Q3 of fiscal year 2021, demand from our Korean smartphone customers rebounded strongly from the COVID related issues that had impacted them in the first half of the year. Demand from our North American smartphone customers also remained solid. We expect our protection product group to continue to benefit from our ongoing diversification strategy, Many of today's high performance systems across all industry sectors are starting to incorporate advanced lithography devices and high speed interfaces such as USB C, 10 gigabit Ethernet and HDMI 2.1 resulting in the need for Semtech's high performance protection. We expect these trends to continue and contribute to the long term growth of our protection business In Q4 fiscal year 2021, we are expecting our protection revenue to increase led by growth from the broad based industrial and communications markets and stable smartphone demand in what is typically a seasonally weaker quarter.
Turning to our wireless and sensing product group. In Q3 of fiscal year 'twenty one, net revenue from our wireless and sensing product group increased 32% sequentially and 21% over the prior year and represented 33% of total net revenues. Resulting in a new experienced another record quarterly performance. In Q3 of fiscal year 2021, we continue to see excellent progress against the goals for our LoRa metrics we had targeted at the beginning of the year. These include the number of countries with LoRa Networks now stand at 99 Countries and we expect over 100 countries to have lower networks by the end of fiscal year 2021.
The number of public or private lower network operators grew to 148 and we expect 150 LoRa network operators by the end of fiscal year 2021. The number of LoRa gateways deployed grew to nearly $1,200,000 from the 642,000 gateways at the end of fiscal year 'twenty, and we are expecting the number of gateways deployed to increase to over $1,300,000 by the end of fiscal year 2021. The cumulative number of lower end nodes deployed increased to $167,000,000 from $135,000,000 at the end of fiscal year 2020. And we expect this number to exceed 180,000,000 cumulative end nodes by the end of fiscal year 2021. In Q3, we shipped a record number of LoRa devices Finally, the LoRa Opportunity pipeline, which includes both opportunities and leads, stands at approximately $500,000,000 with approximately $200,000,000 of leads feeding the future opportunity pipeline.
We expect the opportunity pipeline to increase rapidly in fiscal year 2022, as we anticipate the inertia associated with the global pandemic to gradually subside. 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 and the continued progress on our LoRa metrics related to our LoRa business. These include Amazon's use of LoRa in their new sidewalk network. Unique capabilities of LoRa extends the range of smart home networks to connect both indoor and outdoor sensors enabling new use cases.
These include smart lighting, smarter safety, pet trackers, asset tracking, smart irrigation, and many others. Use of LoRa in the SmartHome segment demonstrates the value and versatility of LoRa in low power land and low power wine segments of the IoT market. We believe that Amazon's use of LoRa in Sidewalk opens up a huge opportunity Centex LoRa enabled business starting in fiscal year 22. And Cisco's use of LoRaWAN for its industrial asset vision system, for enhanced visibility into physical spaces for IT and operational technology environments. This LoRa based system is a simple and secure solution for remote asset management equipped with a cloud based dashboard to monitor and manage the condition of assets and facilities that can be deployed in minutes using a simple QR code We also announced the availability of our LoRa Edge tracker reference design that includes our new LoRa cloud geolocation service.
Our LoRa Edge platform is our 1st LoRa based software defined radio platform that integrates WiFi and GPS sniffing along with LoRa. We are seeing a significant ramp in new design and activity and believe that LoRa Edge is the ideal platform for asset tracking and asset management use cases and will be the main enabler of our future cloud services revenues. We believe that the flexibility, long range and low power of LoRa based networks are critical components of any successful low power IoT deployment. With the record Q3 performance and anticipation of a record annual performance and with the exciting smartphone opportunity driven by Amazon, as well as numerous new industrial IoT opportunities. We continue to expect our lower enabled revenues to grow at 40% CAGR over the next 5 years.
And to become the de facto standard for the fast emerging LP WAN market. In Q3 of fiscal year 2021, Net sales from our proximity sensing platforms grew nicely over the prior quarter, helped by the recovery in the smartphone market. Along with several new design wins that move to production and should continue to ramp. We are also seeing increased design activity as global RF safety regulations become more stringent as new 5g5g based phones emerge. For Q4 of fiscal year 2021, we expect net revenues from our wireless and sensing product group to increase and achieve another quarterly record led by another record performance from our LoRa enabled business.
Moving on to new products and design wins. In Q3 of fiscal year 'twenty one, we released 12 new products and achieved 3397 new design wins, which also represented a new quarterly record. We While this year has presented its share of unique challenges, I believe that our key stakeholders, including our investors, customers suppliers and employees have all played a critical role in driving the company's growth and success. We remain committed to considering the impact of key environmental, social and governance factors in our decision making processes. We are also focused on developing products that will make the planet a smarter, more connected and more sustainable place to live.
Review our employees as the company's most important resource and have an established set of core values that hold each of us responsible and accountable for doing the right things for the company and each of its employees. I am excited about the company's future opportunities and believe that our vision, our strategy and our focus on providing products for a smarter, more connected planet and our commitment to a more diverse and inclusive workforce should enable the company to continue to be extremely successful. Now let me discuss our outlook for the fourth quarter of fiscal year 2021. We believe the underlying secular demand for our growth homes remained solid. Based on very strong bookings and record high starting backlog entering the quarter, we are currently estimating Q4 net revenues to be between $153,000,000 $163,000,000.
To attain the midpoint of our guidance range or approximately $158,000,000, we needed net turns orders of approximately 20% at the beginning of Q4. While we have been issued some licenses that allow us to ship to Huawei. Our guidance assumes no more shipments to Huawei or high silicon. We expect our Q4 non GAAP earnings to be between $0.45 $0.51 per diluted share. I will now hand the
Thank you. Your line is session. Our first question comes from the line of Rich Schafer with Oppenheimer. Please proceed with your question.
Well, I've got a question on
this on Laura. I mean, you've gained a lot of momentum there. I think after a slow start in 1Q, obviously COVID related, I mean, do you see continued linear ramp next year sort of in line with that 40% CAGR that you just mentioned or could we see a step function in revenues there next year as Laura sort of starts to hit a critical mass or it seems like it's critical mass?
Yes, I think correct the way we've always looked at it is that There are certain catalysts that can drive faster growth and that's why it will be voice projected a 40% CAGR just based on history. And then some of the new use cases that we now know are starting to get, real traction, which one of which is, of course, the Smart Home Initiative with the Amazon Sidewalk announcement. Certainly, if the pickup is good of that architecture and the network one would expect a very fast acceleration of sensors and we could see a definitely a step function increase whether that happens in FY 'twenty two, probably more FY 'twenty three, just because it takes time for, the gateways, the network, the, architecture to kind of get deployed and then sensors be developed. But I do expect that business alone, just on the Amazon sidewalk business to reach $100,000,000 business in 5 years. So for sure, that's going to be one of the catalysts.
And then as you as I mentioned, the industrial IoT space has been somewhat slow this year because of COVID related issues, but that's going to pick up. You know, it's just a question of time. A lot of the use cases are about creating a smarter planet about efficiency improvements. They're about greener initiatives and things like that. And so it's just a question of time, I think.
So yes, but to answer your question, we do expect some catalysts over the next year or 2 here with the smart home initiatives. And I should have asked just a quick
follow-up on that question, but
I mean, are there any capacity issues that you guys have there? I think in the past, you kind of plan catch up on the LoRa business this year. So is there any capacity supply constraints that you're seeing there or anything?
Well, there are supply constraints across the board. I would say it's definitely a tightening supply chain, as you know, across all segments. Nothing specific to to our LoRa business or anything like that. I just think, as a method mentioned, we are seeing some lead times on the supply side increase and that is challenging. But generally that means the beginning of an upcycle in the industry in my view.
And I think that's a good thing for us and for everyone.
If I
could sneak in a follow-up, I think most lower revenues today are still coming from hardware. I'm just curious when do you when do you sort of expect to start monetizing the services? I know we've talked about that in the past, but the license royalty opportunity that you see there? Thanks.
Yes. So there's 2 elements. 1 is the IP licensing royalties from our partners ST and Alibaba. We do expect next year we start to see some of that coming in. But also our cloud services, we did announce that this last quarter, our first cloud service using geolocation, again, using LoRa Edge platform.
And this is another area where we're expecting pretty good growth. It'll be a slow ramp initially, but the cloud services revenue will be recurring revenues, remember. So again, we're expecting, again, something between $50,000,000 $100,000,000 in 5 years on an annual basis. And, a lot depends on the quality of the geolocation and the other services we bring to market, but this is our first real initiative and we're very confident and feel very good about, the type of customers and the type of use cases and how quickly that could ramp in the future.
Our next question comes from the line of Quinn Bolton with Needham And Company. Please state your question.
When are you there?
Sorry guys, can you hear me now?
Yes.
Okay, great. Sorry about that. I was on mute. Just wanted to follow-up on the sidewalk question. With Amazon now announcing sidewalk and I believe the 4th generation Echo product, including that sidewalk network in the gateway.
Have you seen an increase in the end node activity for Sensors compatible with Sidewalk. And just wondering if you could give us an update on that design activity around Sidewalk?
More on the general side. It's really just starting Quinn. Amazon has made the announcement. They haven't yet talked about the sensors that are connected to it. They've talked about what they anticipate they will be, but they haven't yet rolled out their development platforms to enable companies to do that.
But that's pretty close, I think. And it's going to happen very soon. And so my expectation is by mid next year, we'll definitely start to see a real sidewalk networks sidewalk networks be deployed and sensors being attached and that type of thing.
Great. And then a follow-up question just on the 5G front haul side of the business. It sounds like it was a little softer for you in the October quarter on the following the record level and July, but it sounds like you're looking for growth in that business into the January quarter. I guess I'm a little surprised by that because we've heard from other that are sorry, other companies that the China 5G build out is sort of going through a pause between the 1st phase and the 2nd phase, yet you seem to be perhaps bucking that trend. So wondering just if you could talk about what you're seeing in China, 5G and maybe the timing of the next round of tenders for base station and front haul build out?
Thank you.
Yes. Well, I think, largely your comments are correct, Quinn. I would say that there's anticipation that next year is going to see some good growth and that starts Q1. And therefore, the build for us and the demand for us to pick up in Q4, which is what we're seeing. And so, Yeah, I think, it's just a timing thing.
We sell into module manufacturers, obviously, and then module guys sell into the base station guys. And so, some of that dynamic is, just timing. But, yeah, we're expecting a pretty strong FY 'twenty two. The other thing is not just China. I think that's one of the nice things about actually all of our infrastructure segments now is that fairly global, we're seeing opportunities in Europe and North American OEMs as well, both on the 5 g side and, on the PoNS side as well.
So, that's encouraging.
Great. Thank you.
Our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.
Yes, congratulations on the results. First question and back to Laura, do you have a range update for us for this calendar year, Mohan?
We're still, you're keeping that range $85,000,000 to $95,000,000. We're going to be in that range, I think, for this year. And we're still keeping our 40% CAGR going forward. You know, obviously a lot depends on the timing of Amazon sidewalk and some of the higher volume, faster time to market opportunities. But in general, I would say with the exception of kind of COVID related impact, we're seeing pretty good, industrial, momentum, not in new use cases, but as we see the new cases, kind of come out, we're seeing adoption across the globe So I think that again, the timing of when a proof of concepts move to revenue is challenging to really comment exactly how it's going to happen, but none of it starts to materialize.
And I think as I mentioned, if COVID, once COVID starts with it, we start to get some, return to normality in terms of manufacturing and industrial IoT think that's going to continue to also drive the revenue.
That's very helpful. And you talked about 5G coming back in the next quarter or, I mean, this quarter, what about data center? How are some of the dynamics being there? That obviously passed a little bit this last quarter, but are you starting to see that grow again as well?
We are. I wouldn't say it's as positive as the 5G story. I think there's more still inventory there, in the channel and then maybe the customers. But are starting to see that pick up also. And so I expect Q1 for sure to be up.
It's data center is probably going to be flattish for and then, I would say up in the Q1 timeframe, but yeah, positive signs. I'm not a design in activity there.
Lastly on the pawn business, you expect to start to see 10 gig. Is that going to be a fiscal 'twenty two event or is it going to be further out than that?
Actually, a 10 gig point is doing well already and I think it continues to do well. And you know, we're expecting Q4 to do quite well. This quarter to be quite strong upon. And next year, we're also projecting, good growth for PON. So, yeah, infrastructure just continues to make us give us good indications that FY 'twenty two is going to be another solid year for our SIP business.
Our next question comes from the line of Craig Ellis with B. Riley. Please proceed with your question.
Yeah, thanks for taking the question. I'll ask one that ties together a few points. So, you mentioned that, that inventory would be up quarter on quarter. And I can see that all the segments are are guided up, but Mohan, can you help us with some color on some of the gives and takes across the different segments Which would you expect to be growing more robustly, which are more muted? And and then within any of the segments, are there any sub segments where you'd expect a meaningful deviation to the broader overall segment trend?
Yes. So, as you know, Craig, the first half was extremely weak for consumer. I think we're seeing, the second half being quite strong relatively to for consumer. And I'd expect that to continue for at least obviously we're seeing Q4, which is typically seasonally down for us we're seeing a much stronger consumer business. So that I think is going to continue.
Then on the infrastructure side, as I mentioned, some some softness there, but mostly driven by a very strong first half. And, all the indications are that Most of the infrastructure segments we participate in are going to come back this quarter and certainly grow in Q1. And then on the wireless and sensing side for us, Obviously, LoRa continues to do great. And then on the proximity sensing side, I think, again, that's tied to consumer. We expect that to do quite well.
In Q4. On the inventory side, on the supply side, the areas that we're concerned about, obviously, there's a tightening supply chain Some of the end markets tend to have short lead times typically consumer. So we're taking a little bit more risk in building some internal inventory there. The demand seems to be extremely strong. We're pretty cautious about how we are participating in the market and making sure that we're not, over inventorying anything.
Our channel is very light at the moment. And my expectation is that if we manage it correctly, then I think we should see a good consumer growth next year as well. We won't see such a volatile demand coming from there.
Got it. And then turning to Laura, you mentioned in your prepared remarks, both Amazon and Cisco, and and I looked at Cisco's product announcement. It was actually very impressive, very impressive array of products that help create a real nice ecosystem. As you look at fiscal 22, what potential does does Cisco have, to really drive incremental sales for, or is that just much more of an analog by business where those would be the kind of classic low volume sign ins we would see with industrial versus anything high volume like Amazon?
Yes, I
think from
a revenue standpoint, it's more the latter, Craig,
but the important thing to remember is that once they have adopted LoRa and they build their infrastructure, based on LoRa, then that's there forever, right? It's going to be there for at least the next 10, 20 years. And I think drive, especially in the industrial sector, drive a ton of opportunity both for, additional sensors, but also potential cloud services, potentially new use cases. You know, so there's this that's the excitement we have behind, Laura and LP WAN. We're creating a whole new industry here and that's that's to me is the is the thing to take away not only from the standpoint of getting these tier 1 customers like Cisco and Amazon involved in in driving, or in helping us with the ecosystem.
But it, but what it says about the value that the technology brings to the market and enter these customers. So, yes, it's pretty exciting to have, both new use cases, but also Tier 1 company is really driving it for us.
Indeed. And if I could, just two clarifications. I'll throw them out at the same time. 1, You talked about rising gross margin in fiscal 2022. Can you give us a sense for the magnitude of that increase, for example, could we see gross margins up 100 basis points or so over a 4th quarter period.
And secondly, I thought I heard you mention that the 4th quarter was a 14 week quarter And if so, what's included in revenue and expense guidance for the extra week? Thank you.
So let me take the first one out with regards to gross margin. I think, like I said in my prepared remarks, when you think about where we're expecting our revenue growth to come from as we go into the next fiscal year, we're expecting our lower business to continue to grow very nicely. The data center business, I think, remains an area of growth, PON and the 5G wireless. Also, in addition industrial and automotive opportunity within our protection business. So all these businesses are really, very exciting for us because of a higher gross margin that they come with.
Is it really something that I can quantify right now? Probably not, but I would expect that to see something in the range of 50 to 100 basis points expansion throughout the year. So, but that was very good. With regard to the 14th Q4 14 weeks, you know, it's always hard on the revenue side really in the to estimate how much of the extra week is contributing to revenue. So, but I think, of course, there is a for it, but it's much easier on the operating expense side.
On the operating expense side, I think about 60% of our total operating expenses is sort of tied to time, right? So things like your salaries, your operating supplies, and stuff like that. So if you think about if you take 60% of operating expenses and then you linearize it over 14 weeks. That will give you a pretty good estimate of what the operating expense impact is.
Very helpful. Thank you.
Our next question comes from the line of Mitch Steets with RBC Capital Markets. Please proceed with your question.
Hey, guys. Thanks for taking my question. I just had a quick one, I guess, maybe a bigger one, bigger picture one just on the strategy for Semtech now, I know before you guys have talked about potentially kind of spinning out the lower business of being its own entity or potentially selling that piece of the business relative to Centec Hole. Can you maybe provide us an update on what kind of the view is now given that you've kind of survive to kind of this downturn in 2021 or sorry, 2019 2020, what the plan is for the lower business or Semtech as a whole relative to that asset?
Yeah, Mitch, you know, the fort has always been, that if Laura becomes the defector standard in, in the industry and we are generating, you know, around $100,000,000 of recurring cloud services revenues. Then we could, we could start to look at, some ideas about how to move that business to a even different level. And so that's the thought. And I would say we're still probably 2, 3 years away from that. You know, obviously every every day, we get good momentum and new announcements like the Amazon sidewalk and our announcement will get closer, but we're not there yet.
I think I would say 2 to 3 years still is the time frame. Yeah. And then can you provide us, so
you said cloud service kind of recurring revenue. What's what's kind of the revenue run rate now relative to kind of just the straight sales you guys are doing?
That's it's brand new. So we just we just announced that cloud services geolocation service. It's the first one. So it's very we're just starting to get contracts in place now and things like that. So I would say next year, end of next year would be a good measure for are we on track to do the $100,000,000 in 3 to 5 years?
And what's the what's the pickup and what's the value that we're bringing. It is dependent on our new platform, the lower edge platform, as I mentioned. And I think, we'll start to some good feeling for that as customers deploy their platform and give us feedback on the value.
Yes, I guess just one last one if I could just clarify those comments. So what would be kind of the first major customer major launch that you guys would expect call it in 'twenty one and 'twenty two. I'm not looking for logos or anything like that, but how should we think about the rollout of that new product or business line?
Well, the way to think about it is asset tracking and asset management is the is really the first target with geolocation. And so, obviously once our customers are testing and they feel that there's value, we'll start to talk more about the specific application, but I would think it's in those areas in asset management and asset tracking and, tied to use of LoRa Edge indoors and outdoors. You know, that's the beauty about LoRa and the LoRa Edge platform has Wi Fi sniffing and GPS sniffing. So the concept being you can track an asset from your home outdoors into a warehouse, into a manufacturing facility, for example, within buildings, deep indoors or in rural areas. And have one platform, which is utilizing and optimizing the battery power consumption effectively.
So, it's a very nice concept it's very, I think it's a very unique capability we have. But, you know, we have to get it out there and demonstrate the value, right?
Understood. Very helpful. Thank you.
Our next question comes from the line of Scott Searle with Roth Capital. Please proceed with your question.
Good afternoon. Thanks for taking my questions. Hey, just a couple of quick clarifications. I missed what you said about the sequential outlook for protection. Just want to know if that was up down flat.
And what Huawei was in the quarter? I know you were indicating, your guidance doesn't reflect any incremental contribution from Huawei Holly Silicon in the fourth quarter? And then I had a couple of follow ups.
So protection, we're expecting to continue to be up It was up in Q3 and we expect it to be up in Q4, driven mostly by the consumer space, but also in our industrial more broader industrial telecommunications, automotive sectors are all doing quite well. For us. So we're expecting that to grow in Q4 also. And then on Huawei, Huawei for this quarter, we're not expecting much at all. We haven't shipped much and we're not expecting to ship much in Q4.
So pretty, pretty minimal revenues from Huawei this quarter once obviously, we have some licenses I mentioned on the, prepared remarks, but it's fairly modest any revenues that come from that. And it's not clear to us whether Huawei has already built up inventory and so whether they need materials. So we essentially taking it out about our, guidance.
Great. Perfect. And, on wireless and sensing, absolutely huge quarter. You know, part of that, it sounds like a combination of of of proximity sensors and LoRa. I was wondering if you could parse that a little bit more up 32% sequentially, the smartphone market broadly in general was up about 20% plus, I think, on a global basis.
So you're benefiting from that. Was there something in there, was proximity bigger versus lower just to kind of get calibrated on that? Because given the performance of that segment, I would have thought you'd be at the higher end or even above the higher end of the range of $85,000,000 to $95,000,000 for lower this year.
Yeah, they're both doing extremely well, I would say. You know, obviously proximity sensing for us has been, you know, it's driven by mostly the smartphone business. And so, yeah, that has obviously done quite well in Q3 and, you know, we're expecting stronger, approximately something in Q4, as I mentioned, consumer tends to be, weak in Q4. But this year is unique in the sense that the first half is very, very weak. So we're starting to see maybe a little bit of, that effect kind of playing out here in Q4 timeframe.
But with Laura, it's more consistent. I mean, it's just continuous consistent growth and it's for the, with Laura, it's more about how fast the POCs are moving over to revenue, right? So we have plenty of pipeline. I mean, as I mentioned, we have $500,000,000 of pipeline. So it's only a question of how quickly those can move through the through the pipe to revenue.
And that's where something like the Amazon side walking out, I think, really starts to help in a way because, you know, Laura is a great technology for industrial. It's clearly proven in utilities already. It's clearly proven itself in some of the asset management and, broader kind of industrial use cases But where we have been hoping somewhat speculating, but now we have real evidence of it is the smart home use cases and some of the more consumer use cases, which drive revenue typically faster. Now they can be volatile as well. I mean, they can, you know, have shorter life cycles as well, but typically they can ramp up much faster.
So, as I said, I don't think we'll start to see it really until mid next year, the growth there, but it's coming
Gotcha. If I could, Mohan, follow-up on on the lower front as it relates to sidewalk. Could you talk a little bit about the ecosystem? That's that's building around it right now. Now you got the anchor, right?
You got the base station there in effect with, the Echo Dot. How is the rest of the ecosystem and design activity around that starting to form. And I was wondering if you could update as well on tags. I haven't heard a lot about that lately. I know that was out further out on the horizon, starting to talk about cloud and recurring opportunities.
What's the latest thoughts on tags?
Yes, I'm pretty excited about tags, but I think still early, we still have to get the price points down. And we do need, something like, a sidewalk network in place. For that to become an effective vehicle. With regards to the ecosystem, it's really driven by Amazon. I don't think we're participating obviously in helping facilitating.
But a lot of the momentum is going to be driven by them directly. And I think we'll continue to help drive that, that process. But what it when you look at the ecosystem, there's clear clearly an opportunity for sensor manufacturers, who want to connect to a gateway in the home. You know, in lighting area, in the tracking area, in the security area, in the safety area, irrigation, just a whole bunch of sensors. There's clearly opportunity for, software companies to to partner with, with Amazon and and figure out how to, to connect with them and their, site work network.
There's clearly opportunity for system integrators who want to connect to the home waste network and opportunity. There's just the whole ecosystem around the smart home, I think, comes into play quite nice And I think we'll start to see that for not probably the second half of next year, but as the network and start to get rolled out, and customers and consumers start to deploy sidewalk networks. I think that's when we really start to see the momentum.
And lastly, if I could, just on in in signal integrity PAM4 product line, I think some you're starting to see some 100 gig contribution. I thought in the 3rd and 4th quarters for see some initial revenues. So I wonder if you could update us on that front. And then looking forward to the 204100 gig, I thought there was design activity which would start to translate into revenue in the first half of fiscal 'twenty two. I was wondering if you could just update us
on those two fronts. Thanks.
Yeah. We're starting to see revenues now. You know, it's small, but we are seeing credit revenues now, PAM4 revenues, and we've got some very good momentum. As I mentioned, we have over 2 dozen design and opportunities that are in play. At various stages, some some early stage evaluation, some qualification type of stages.
And so that's going start ramping. And yes, next year should be a very good year for triage, I think.
Our next question comes from the line of Christopher Rome with Susquehanna. Please proceed with your question.
Hey guys, thanks for the question. I think Looat does a good one to then ask. So I'll just ask 2. I guess the first one here on the 5 g opportunity. Perhaps you can give us that it would grow.
I think most people are expecting that But perhaps you can give us a idea of the kind of growth rates we should expect in this business for the next couple of years. And then if you could break out perhaps units or ASPs, it sounds like you're moving to 25 gs. So I want to explore that opportunity a little more. Thanks.
Yes. So the main thing to remember with 5G for us, in the optical modules is that with 4G, there was typically just a PMD device of some sort with 5G, there'll be a CDR as well as a PMD device. So the opportunity for us in 5G is either clear edge CDR and fiber edge, PMV devices for 25 gig links. If they go to 50 gig links, you know, dry edge PAM4 and fiber edge, device for 50 gig links. So ASPs are just increased for us.
In addition, there's more, typically, with 5 g, there's gonna be more. I think, it kinda goes from 6 to 12. Front holdings. So there's significant, increase in the number of ports. It'll be, you know, going forward.
So increased content, more ports. But then I think the other thing that's, somewhat different for us is that and for everybody I think in 5G is that historically it's been China and I think for sure China will still be the predominant volume drive but we are starting to see some of the OEMs around the world, you know, really take a more aggressive stance in trying to be successful in this market and at least participate in some of that's geographical dependent on which regions are are driving the needs to have local suppliers, support their 5G infrastructure. But that will also drive opportunity for us, I think. And for 4G, we have about 30% share of the market. We think we can hold that share at least for 5G.
And so, that's that's kind of the thinking and it should grow double digits for sure over the next couple of years here, right?
Excellent. And then also if we could talk about the data center opportunity, at least the data center end market, more broadly there. Intel talked about perhaps a demand slowdown. I just wanted to see if you agreed with that or not. And then More specifically, if you could talk about your optical opportunity there with Tri Edge.
You know, you mentioned cost versus analog. You know, what is that discount that you get for analog and and perhaps discuss, how sales are are tracking on that side?
Yes. Well, data center had a very strong, but shouldn't be forgotten. So we had a record first half. So there was some expectation that technology was going to a little bit and that's really what's happened still on an annual year on year basis still up. And so and we'll continue to grow nicely I think next year.
So I think, we've seen, obviously, some of the softness in Q3 and expect Q4 to probably be flattish versus Q3. And then start to pick up again next year. Much like 5G, I mean, the hyperscale data center is a broad set of global customers. So it's a pretty broad range of customers. Are obviously selling into the optical module manufacturers and they're building their, modules and shipping into different data center customers and we've got good traction as I mentioned there.
And we did we expect to see production ramps for most of the 200 gig, 400 gig PAM4 modules over the next few quarters here. It's already started, but I think our next few quarters will start to see that. Essentially, you can take a 100 gig optical module today that uses, our cleavage CDRs and essentially replace it with a very similar module uses our Tri Edge CDRs and get double the bandwidth, for very little incremental cost in the module. And so, that's, that's the value we see and then that's what we the market to recognize.
Our next question comes from the line of Torez Venmer with Stifel. Please proceed with your question.
Yes, thank you. Just a quick follow-up. Mona, I've you said that, the sidewalk opportunity of loan could be $100,000,000 in the next 5 years. Is, is that, on chip revenue or is there some, you know, royalty or even services revenue in that, a number as well?
Yeah, I would say it includes everything, Tore. So mostly Chip and royalties.
Great. Thank you.
Our next question comes from the line of Harsh Kumar with Piper Stanley. Please proceed with your question.
Yeah. Hey, guys. First of all, congratulations. Solid guide. Solid results.
So, we appreciate it. And then I had two questions, Mohan. Right before the ban, I think you had you were pretty opt very optimistic on the opportunities in China, with perhaps a new presidency. Can you talk about, you talked some about 5G, but could you just lay out for us the framework of how SunTech would view the opportunities in China should the gates open up for trade again.
Well, I think, we've always been bullish on China. Obviously, we invested in China for the last 15 years. And so It's hard to walk away from the region that has driven so much growth and continues to have so much comments going forward. So, but I would look at the Huawei situation, the union situation, obviously the ban on Huawei has impacted us significantly. But that's kind of done now and we're we've been through that.
The bigger challenge now is just, are we going to see a opportunity to continue to grow in all of our businesses in China? Or is there going to be this, further kind of, disaggregation between U. S. And China? And that's still a memo.
And I think that's where we're waiting to see, but for sure, any, any positive, relationship, improvements, I think, is a, is a positive for our business, for sure. Because just because of the success and the momentum and the relationships and all of that we have across all of our segments. But that said, we're not counting on it. As I mentioned, a lot of these markets like 5G and PON are becoming a little bit more globalized in the sense that other regions are starting to recognize the need to have their own infrastructure players and they can't depend necessarily on the Chinese manufacturers to support them and be there when they need them and those type of things. So, it's a little bit of both, but I definitely think if things improve on the relationship front, at a government level, then for sure that should help our business longer term.
Mohan, so a follow-up on that one and then I'll ask my question as well. Do you see opportunities? You used to have opportunities, I believe, for data center business in in China. Do you see that, perhaps opening up again for you, for Semtech in, in, in China, the data center? And then secondly, But with regards to Amazon Sidewalk and Laura, you you I think you were the only supplier of baseband ICs for the gateways and the, that you guys deploy on the infrastructure side.
Is that still the case And will it will the typical consumer be relying on utility Amazon infrastructure that'll be laid out in the city or will will the consumer have to buy, their own sort of gateway which comes in a dot or echo or something else?
So let me ask answer that first and then we'll go to the data center. So Amazon's side worker, yeah, for sure there will be connectivity through a gateway, which will be an echo. So, and Amazon obviously will supply the echoes and so the connectivity will be to the echo and then how, different echoes connect with each other and how the roaming done. That's all going to be driven by by Amazon. That's an Amazon decision.
And so, we'll we'll obviously help them with that. But, you know, the main thing is getting is really targeted within the home, the smart home and the periphery of the home is kind of the initial thinking and then tracking of your pets and things like that, outside the home and then connecting different echoes together and those types of things I think is a broader vision, right? So we'll see how that plays out. And then on the data center side, for sure, yeah, all of the Chinese, data center hyperscale data center guys are our partners, customers, you know, potential opportunities for Tri Edge. For sure.
And we are working with them. We continue to work with them. We don't see any, any real issues at the moment. I don't think that there will be, but Yes, we have very close relationships and expect to see some good growth there.
Thanks, Mohan. Thank you, guys.
Our next question comes from the line of Christian Joe with B. Please do with your question.
Hi guys. Thanks for letting me in. You've mentioned that Amazon was a 10 to 20 year opportunity. So clearly there's a long term investment. Could you give us a sense of what's the magnitude of those a large potential and customer like Amazon.
And given those investments, is there an incentive for them to eventually use the same technology in other platforms outside of consumer, Amazon, for example, is also going to have pushing IoT solution in industrial. Is that an opportunity that you see not specific to this customer, but elsewhere versus a sit at a base network and generally what's the incentive large customers have to one thing that's still lower to leverage that into different end markets?
Yes, Tristan, I think all of the companies we deal with. We mentioned Cisco earlier in Amazon and other companies are starting to understand the value that Laura brings It's not the value is increased actually when Laura is combined with other technology So when you combine with Bluetooth or Wi Fi or GPS, as I mentioned, more edge, one of the reasons why we developed the platform so that it has Wi Fi sniffing and GPS sniffing. And Laura is that Laura on its own has some limitations in the sense that it's it's not a high bandwidth connectivity, right. So, but I think as these use cases start to get deployed, there's going to be use cases across the board in all segments. And industrial is where I think the biggest value, the largest value is for sure because of the very low power and the range But then when you see the smart home initiative, that this is really driven through the sidewalk initiative, it really is going to change the way, home automation and smart home is thought about.
When you start to look at the peripheries of your home and you go into the attic or into the garage or into the basement or into the outdoors, into the yard, and can then put smart automation around that. That really starts to change the dynamic a little bit. So I think there's a huge opportunity. We'll see it's baby steps as I said, but we have some big hitters that are behind the technology pushing it, right.
Great. And then just a quick follow-up. So you've mentioned a little bit earlier about lean inventories in the channel and tightness in by across the board and you mentioned nothing specific to lower. Are you shipping exactly in line with end demand in law or are you still catching up for what was following supply chain disruptions earlier in the year? Just trying to see if there is any catch up revenue or it fits really just linear with end demand?
Yes, I would say, if the question is specifically about LoRa, I think we're shipping to demand, I think it's in good shape. I think there. The real question there is in FY22 if the consumer demand picks up rapidly, then hopefully we'll be able to supply to that. And I think we can, so we're in fairly good shape. With regard to the rest of the business, demand is extremely strong.
Bookings have been extremely strong. So we're a little bit cautious, particularly on the consumer side, with regard to making sure we understand how much inventory is being built and trying to maintain some balance there by keeping our channel lean and things like that. So it's hard to know, to be honest with interest in exactly, but we'll see it play out. We're expecting a very strong Q4. We're expecting a strong Q1.
I think the first half of next year looks like it's going to be strong. Then the question is, what does second half look like, right? But we'll see by then.
Our next question comes from the line of Carl Ackman with Cowen. Please proceed with your question.
Yes. Thank you for, for squeezing me in. Your single integrity business will grow mid teens at least in fiscal 2021. How do you think about the trajectory of that business entering fiscal 2022 in the context of your longer term 12. I ask because it would seem another healthy year with 10 gig PON is on the come.
Demand remains healthy, for 25 gig and 100 gig golf ball products in Asia. Yet at the same time, you know, proponents of 4 100 Gigcamp 4 would argue, you know, the second half of twenty twenty one will begin the demise of NRC. For short reach applications. So just we'd love to hear your thoughts on that.
Modules and connectivity will continue for some time. I don't think there will be a demise. It may start to flatten And PAM4 and 200 gig and 400 gig PAM4 modules will start to pick up for sure. We're hoping to participate in that. Of course, with Tri Edge and we see good design and momentum as I said.
So to answer your question, we think all the infrastructure segments are going to do quite well next year. Part of that is working from home and all of the COVID related dynamics that have driven infrastructure investments and the need for more bandwidth and all those things. So, you know, yes, if single integrity product group works putting pretty good growth next year across the board. And this year has been an extremely weak year for video, for example, as well. So We're expecting FY 'twenty two to see that pickup also, that segment.
You know, how we anticipate that to continue. Contribute to the growth next year also.
Understood. Last question, if I may. You know, what order trends are you seeing by Asia based data center customers? I asked because your primary fear spoke about that strength for 25 gig and 100 gig products. Again, just a double click on the channel inventory commentary, you know, we've kind of heard some commentary, but I appreciate your thoughts on how you feel about situation for obstacle components, particularly for data center and long haul.
Thank you.
For us, it's we channel is pretty, pretty light. It's not, you know, it's certainly in the range, we feel comfortable with. Demand is very strong as I mentioned. Bookings are strong. Indications are Q1 I mentioned that Q4 was going to continue to be a little bit like for data center up of flattish 5G is going to be a little bit stronger and then we expect PON to be stronger in Q4.
And then we expect infrastructure segments to do nicely in Q1. So Yeah, at this point, channel is light, I think, relatively and demand continues to be strong and bookings are strong. So we think we're in pretty good
Thank you.
And our final question comes from the line of Greg Ellis with B Riley. Please proceed with your question.
Thanks for coming back to me and getting in before we wrap up. Mohan, I really appreciate all the that you give with Laura and the transparency they provide. But I missed what you said about the opportunity funnel. So one, can you repeat that number And 2, did it change from the last quarter 3? When we go through a period that says dynamic is what we've seen year to date where the whole world is, is turned upside down with a COVID crisis.
How does the company manage? It's funnel and and kinda quality check and and resiliency check, the the items that are in that funnel as we get to the other side now. Are looking at what should be a global recovery. But can you just walk us through how you maintain that funnel line and where it stands currently versus prior expectations?
Yes. So currently the pipeline is about $500,000,000. We look at the leads that drive the pipeline. It's about $200,000,000. So there's there's a pretty sizable pipeline compared to what our current revenue is and the main area of focus is conversion of those pipeline opportunities to revenue.
That's been the key, kind of key focus for us is how do we make sure enable that, to occur. It's fairly well balanced. As you know, the pipeline has some, a funnel in the funnel about 21% is China and then about 70% is Europe And Americas. Which is good because that's better balance than revenue today. The revenue is about 49% China and and 40% Europe and Americas.
So we want to get that balance, more balanced. And if we execute it, the funnel turns over to revenue as we expect it to in time, then that would be a nice thing, to, to have, just more balance. Also, lots of use cases, lots of different use cases. So it's obviously now a hefty smart home component that's also in that funnel. Utilities, asset management, smart city and building.
So fairly well balanced there. Yeah, this year obviously has been a tough year for for customers to prioritize new initiatives. And that's been really the the difficulty we've had, where most of our company customers have been focused on, just making sure people are have jobs and those types of things, putting a priority on a new technology and a new market and a new initiative has been challenging, but it's starting to get turned around. And I think, as I mentioned, with the Amazon sidewalk to, that's, initially, is significantly going to be announced much earlier, but was pushed out and now is out there. And I think, we're going to see more of the, more of this type of thing as, our customers start to get a handle and countries start to get a handle on the pandemic and the way forward.
So, expectation is next year, the opportunities will increase rapidly. Thanks, Mohan. Okay.
And with that,
And with yeah. With that, we've reached the end of our question and answer session. I would like to turn the floor back over to management for any closing remarks.
Thank you. In closing, we were pleased to deliver another solid quarter and remain encouraged that our strategies for multi sourcing our investments in IT operations and sales infrastructure and systems continue to limit the impact of COVID on our business operations. I want to once again acknowledge all of the talented and committed Semtech employees across all our global locations and thank them for their ongoing efforts. We believe our strategy, along with our diverse offerings, balanced end market approach and strong customer relationships. Should enable us to continue to deliver growth.
With that, we appreciate your combined continued support of Semtech and look forward to updating you all next quarter.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.