Welcome to Semtech Corporation's first quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to your host, Sandy Harrison, Head 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 first quarter of fiscal year 2021. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release, and in the Other Risk Factors section of our most recent periodic reports filed with the Securities and Exchange Commission.
As a reminder, comments made on today's call are current as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. 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 measures, are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted. Also, beginning this quarter, we will be reporting our business under three end markets compared to the four previously, which we believe better reflects the ongoing consumption of our products.
We have combined what was previously our enterprise computing and communications end markets together to form the infrastructure end markets, while our high-end consumer and industrial end markets are largely unchanged. With that, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?
Thank you, Sandy. Good afternoon, everyone. For Q1 fiscal year 2021, net sales decreased 4% sequentially and increased 1% over the prior year to $132.7 million, which was above the midpoint of our guidance. In Q1, shipments into Asia represented 80% of net sales. North America represented 12%, and Europe represented 8%. Total direct sales was approximately 22% of net sales, and sales to distribution was approximately 78%. Our distribution business remains balanced, with 40% of the total POS coming from the infrastructure end market, 34% from the industrial end market, and 26% from the high-end consumer end market. Bookings increased strongly over the prior quarter and resulted in a book-to-bill significantly above one. Total bookings accounted for approximately 34% of shipments during the quarter. Q1 GAAP gross margin declined 20 basis points to 60.9% due to lower absorption associated with COVID-19 shutdowns.
We expect our Q2 gross margin to improve slightly as impact of higher mix of infrastructure revenue is slightly offset by COVID-19-driven lower absorption. Q1 GAAP operating expense decreased 12% sequentially as expected, due to lower share-based compensation and pension expense. In Q2, we expect GAAP operating expense to increase between 2%-5% sequentially, primarily due to higher share-based compensation expense. Q1 GAAP other expenses increased to $4.8 million from $3.1 million in Q4. In Q1, we wrote down the value of some of our minority investments by $3.6 million due to COVID-19-driven liquidity concerns. Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition related and other non-recurring charges. Q1 non-GAAP gross margin declined 20 basis points sequentially to 61.3% due to lower absorption associated with the shutdowns.
We expect our Q2 non-GAAP gross margin to improve slightly as impact of a higher mix of infrastructure revenue is slightly offset by lower absorption. Q1 non-GAAP operating expenses decreased 1% sequentially to $53.2 million. In Q2, we expect our non-GAAP operating expense to be flat to 3% higher. For the remainder of fiscal year 2021, we expect our non-GAAP operating expenses to be flat to slightly up from current levels. In Q1, cash flow from operations was unseasonably strong at 20% of revenue due to shorter cash conversion cycle and lower fiscal year 2020 annual bonus payments. We repurchased approximately 855,000 shares, or $30 million of our stock in Q1, and our stock repurchase authorization now stands at approximately $81 million. We expect to continue to use our cash to opportunistically repurchase our shares, make strategic investments, and pay down our debt.
In Q1, accounts receivable decreased 20% sequentially due to lower net sales and improved linearity of shipments, and represented 38 days of sales, which is below our target range of 40-45 days. To support our strong Q2 demand, net inventory in absolute dollar terms increased 5% sequentially, and days of inventory increased by 10 days to 131 days, which remains above our target range of 90-100 days. In Q2, we expect our net inventory to remain flat in absolute dollars, but to decline in days. In summary, we are pleased to deliver Q1 results that were once again above the midpoint of our guidance, and we are expecting a strong sequential growth in Q2. Despite the ongoing challenges presented by COVID-19, the secular trends behind our growth engines remain very solid.
Our gross margin is stable, our operating expenses are under control, cash flow is healthy, and liquidity is strong. We believe we are very well-positioned to deliver solid financial results in fiscal year 2021. I will now hand the call over to Mohan.
Thank you, Emeka. Good afternoon, everyone. I will discuss our Q1 fiscal year 2021 performance by end market and by product group, and then provide our outlook for Q2 of fiscal year 2021. Before I go over our Q1 performance, I want to take a moment to discuss some of the areas where COVID-19 has impacted Semtech, and what we have done to address the challenges from this terrible pandemic. As a global company, Semtech was impacted by the actions taken by different countries, and we have operated under the direction of the various regions where our employees are located, and we will continue to follow their guidelines for the safety of all of our employees.
Over the last several years, we have invested heavily in dual sourcing strategies and in IT, operations, and sales infrastructure and systems to provide a collaborative environment for our employees and to attract and retain the best talent. These investments have enabled and will continue to enable us to minimize the impact of site closures and supply chain disruptions to our overall business. In Q1 of fiscal year 2021, net revenues decreased 4% sequentially to $132.7 million. Stronger demand from the infrastructure end market was offset by softer demand and some temporary supply constraints in the high-end consumer and industrial end markets. We posted non-GAAP gross margin of 61.3% and non-GAAP earnings per diluted share of $0.35. In Q1 of fiscal year 2021, net revenue from the infrastructure market increased 1% sequentially and 24% over the prior year and represented 43% of total revenues.
Net revenues from the industrial market decreased 9% sequentially and represented 30% of total revenues. While net revenues from the high-end consumer end market decreased 5% over the prior quarter and represented 27% of total net revenues. Approximately 16% of high-end consumer net revenues was attributable to mobile devices and approximately 11% was attributable to other consumer systems. I will now discuss the performance of each of our product groups. In Q1 of fiscal year 2021, net revenue from our signal integrity product group increased 2% sequentially and 19% over the prior year and represented 45% of total net revenues. Continued strength from our hyperscale data center customers and record demand for 10G PON and 5G PMD products contributed to the growth. In Q1 of fiscal year 2021, strength from the data center market continued, driven by our ClearEdge CDRs used in 100G optical modules.
Our hyperscale data center customers are increasing their demand for 100G optical modules as the global shift to working from home places an increasing bandwidth and analytics burden on cloud-based infrastructure. We expect the demand for 100G optical modules to continue to increase. Customer interest for our Tri-Edge PAM4 platform also remains very high, and we recently recorded our first design win for our first Tri-Edge PAM4 chipset for use in 200G and 400G PAM4 optical modules. We have customers in multiple regions at various stages of system tests using Tri-Edge, and we expect to see many more design wins over the next few quarters.
We expect our Tri-Edge revenues to ramp up over the next few years as hyperscale data center customers deploying 100 Gig, 200 Gig, and 400 Gig optical modules recognize the clear benefits of using an analog PAM4 implementation. That includes lower cost, lower latency, and lower power than alternative solutions. We expect the positive trends in the data center market together with our new product platforms to provide nice growth for our data center business in FY 2021 and beyond. In Q1 of fiscal year 2021, our PON business grew nicely over the prior quarter, led by record 10G PON revenues. Semtech remains a leading supplier to the PON market, providing comprehensive offerings for 1G, 2.5G, and 10G PON systems.
We expect strong growth from our new PON-X 10G PON products this year, led by a number of new global carrier PON initiatives that enable gigabit to the home, enterprise, and campus networks. Increasingly, carriers building out 5G infrastructure are looking at PON-X-driven systems to offload high bandwidth data for these access networks. In Q1 of FY 2021, overall demand from the wireless base station market remained healthy as 5G infrastructure deployments increased. Our ClearEdge CDRs and our FiberEdge PMD platforms are being used in front-haul and mid-haul optical modules. During Q1, we announced the production release of our newest ClearEdge integrated CDR with DML driver for 5G wireless base stations, 25 gigabit per second front-haul applications. In Q1, our FiberEdge PMD devices delivered record revenues as emerging 5G base station opportunities accelerate. Our FiberEdge PMD products complement our ClearEdge NRZ and Tri-Edge PAM4 CDR platforms.
As 5G infrastructure deployments increase globally, we expect our 5G opportunity to triple versus that of 4G. As network providers work to upgrade and increase the capabilities of their data center, PON, and wireless networks, we expect the secular demand for our higher bandwidth, higher data rate platforms to drive growth across Semtech Signal Integrity product platforms. We remain very confident in our strategy and position in all our target markets. For Q2 of fiscal year 2021, we expect net revenues from our Signal Integrity product group to increase strongly, driven by anticipated record revenues from the data center end market and strong revenues from the 5G base station market. Moving on to our Protection product group. In Q1 of fiscal year 2021, net revenues from our Protection product group increased 5% sequentially and represented 30% of total net revenues.
Our diversification strategy, targeting a broader set of industrial applications, continued to yield dividends in Q1 as we saw strong sequential and annual growth from the broader market. This strength in demand helped offset a weaker high-end consumer market. We are seeing an increasing number of opportunities for our protection solutions as new high-speed interfaces such as USB-C, HDMI 2.1, and 10 GB Ethernet proliferate into multiple end applications that are also using more advanced lithography processes. These trends, combined with our own acceleration of new protection products targeted at broader markets, is fueling further growth for our protection business. In Q2 of fiscal year 2021, we are expecting our protection revenues to decline modestly as strength from our broad-based industrial market is expected to be offset by continued softness from the high-end consumer market. Turning to our wireless and sensing product group.
In Q1 of fiscal year 2021, net revenues from our wireless and sensing product group decreased 20% sequentially and represented 25% of total net revenues. In Q1, our wireless and sensing business was negatively impacted by several regional shutdowns associated with COVID-19. The shutdowns impacted both demand and supply. We believe that most of these issues are behind us, and we expect to see a meaningful rebound in Q2 for our wireless and sensing product group. Q1 was another quarter of strong achievements in our LoRa business, including record quarterly bookings. Interest in our LoRa technology has continued to expand, and most recently, we have seen an increase in LoRa opportunities associated with COVID-19, where LoRa is ideally suited for applications such as contact tracing, distance tracking, hygiene and health monitoring, and occupancy management.
Several examples of use cases in this area that have recently been announced include LoRa Cloud-based platforms in China from Alibaba and Tencent for quarantine scenarios to help provide healthcare workers with community health data. Polysense Technologies developed a smart cloud-based human body temperature monitoring system using LoRa to provide real-time temperature sensor data to screen individuals with a high temperature. The system is initially being deployed in Italy. Everynet is working with its partners to deliver LoRaWAN solutions over a secure wireless IoT network to connect urgent care facilities in Spain.
Kerlink, together with Microshare, announced a simple, low-cost contact tracing system using LoRa and Bluetooth-enabled badges, key rings, or wristbands that enables worker proximity detection. The flexibility, low cost, long range, and low power of LoRa networks are critical components of any successful LPWAN IoT deployment, and we expect to see more use cases emerge as local governments, municipalities, and enterprises look to execute on their COVID-19 management strategies. We also continue to see other emerging use cases announced that demonstrate the benefits and efficiencies of LoRa. These announcements included the Pallet Alliance, an innovator in pallet management programs, integrated LoRa into its IntelliPallet, the first of its kind in the logistics industry, that enables scalable pallet location and environmental sensors to be built into wooden pallets.
Sweden-based iiOOTE introduced new functionalities to its WebIoT platform using LoRa with AI algorithms to detect mold and humidity in at-risk locations in homes and businesses. EasyReach Solutions developed its EasyPlug platform that leverages LoRa to detect changes to the usage status of various appliances. These are just a few of the examples of recent use cases introduced that demonstrate the value of LoRa technology in enabling a smarter, more connected, and more sustainable planet. We recently announced our LoRa Edge platform. That is our first software-defined radio platform that enables true silicon-to-cloud connectivity. LoRa Edge includes Wi-Fi and GPS sniffing functions that uniquely position this platform for asset tracking and asset management use cases. We expect this platform to enable a large number of new opportunities for LoRa over the next few quarters.
In Q1 of fiscal year 2021, we were pleased with the progress we made against the LoRa metrics we targeted at the beginning of the year, despite the COVID-19-related challenges and shutdowns. These metrics included the number of countries with LoRa networks grew to more than 92 countries from 91 countries at the end of FY 2020, and we expect over 100 countries to have LoRa networks by the end of FY 2021. The number of public or private LoRa network operators grew to 137 from 133 at the end of FY 2020, and we expect 150 LoRa network operators by the end of FY 2021. The number of LoRa gateways deployed grew to over 800,000 from the 642,000 gateways deployed at the end of FY 2020, and we expect the number of LoRa gateways deployed to increase to over one million by the end of FY 2021.
The cumulative number of LoRa end nodes increased to 145 million from 135 million at the end of FY 2020, and we expect this number to exceed 180 million cumulative end nodes by the end of FY 2021. The LoRa opportunity pipeline, which includes both opportunities and leads, remains at approximately $500 million at the end of Q1, with approximately $200 million of leads feeding the opportunity pipeline. We anticipate that on average, 40%-50% of this pipeline will convert to full deployment over a 24-month timeline. At the end of FY 2021, we are anticipating our opportunity pipeline will exceed $700 million with an additional $300 million of leads feeding these opportunities.
Our opportunity pipeline remains geographically well-balanced with approximately 68% of the opportunities now coming from the Americas and Europe and includes an increasing number of use cases in the smart home and consumer markets, where the volumes could be significantly higher. For FY 2021, we continue to expect our LoRa-enabled revenues to be between $90 million and $120 million. While the impact of COVID-19 in Q1 led to a slower start to the beginning of the year, we believe the positive momentum from our LoRa metrics and the geographic diversity of our opportunity funnel should drive our LoRa-enabled business to grow at 40% CAGR over the next five years and become the de facto standard for the global LPWAN market in what we expect to be a multi-billion-unit industry in the next five years.
In Q1 of fiscal year 2021, revenue from our proximity sensing platforms was lower due to a softer smartphone market. Customer interest remains high for our proximity sensing platforms in smartphones as well as other mobile systems as global RF regulations and awareness of the dangers of high-power RF signals increases. We also continue to see solid design win activity in new 5G smartphones, where there is an increase in the number of high-performance radios used. We do anticipate the weak smartphone market to continue into Q2. For Q2 of fiscal year 2021, we expect net revenues from our wireless and sensing product group to increase strongly, led by anticipated record revenues from our LoRa-enabled business. Moving on to new products and design wins. In Q1 of fiscal year 2021, we released 10 new products and achieved 2,202 new design wins.
Let me discuss our outlook for the second quarter of fiscal year 2021. Despite the geopolitical and macroeconomic concerns associated with COVID-19, we believe the underlying secular demand for our key growth platforms remains solid. Based on our strong Q1 bookings and much higher backlog entering the quarter and our record POS in Q1, we are currently estimating Q2 net revenues to be between $138 million and $146 million. To attain the midpoint of our guidance range, or approximately $142 million, we needed net turns orders of approximately 20% at the beginning of Q2. Our guidance assumes no more shipments to Huawei this quarter and also takes into consideration the additional Entity List restrictions put in place recently by the federal government. We expect our Q2 non-GAAP earnings to be between $0.40 and $0.44 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?
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please as we call for questions. Our first question comes from the line of Tore Svanberg with Stifel. Please see what's your question.
Yes. Thank you, congratulations on the results. First question is on your bookings and kind of linearity. We've heard from a lot of companies that have actually gone into their future quarters with high backlog. How about Semtech? Have you continued to see solid bookings, even so far in the month of May?
Yeah, Tore, bookings continue to be strong for us. It's obviously a mixed bag. Obviously, the infrastructure segments and IoT appear to be strong. Consumer appears to be fairly weak. Again, mixed bag even within consumer. I would say industrial is fairly weak at the moment. Bookings at the moment still appear to be quite strong.
Very good. As a follow-up, it sounds like LoRa's going to have a pretty good quarter here in July. You did note that it was a little bit weaker than expected this last quarter. If we look at the strength, is it coming from sort of a catch-up, or are you now really far, starting to see some new deployments actually drive that strength?
A little bit of both, Tore. I think, remember in February and March, China was essentially shut down. I mean, literally shut down. There wasn't much going on at all. I think, in April, we saw some catch-up there, and then obviously continuing May. I think in general, what's happening with LoRa now is that we're starting to see some broader usage, more and more use cases. Actually, as I mentioned in my script here, that COVID-19 also is potentially driving some pickup in opportunities. As I mentioned before, that we're starting to see a broader set of geographical use cases as well. More in North America, and in Europe as well. Those tend to be different use cases in the metering and smart building use cases in China. Just generally quite positive for LoRa at the moment, yeah.
Sounds good. I'll go back in queue. Thank you.
Our next question comes from the line of Scott Searle with Roth Capital. Please see what's your question.
Good afternoon, thanks for taking my questions. Nice quarter. Hey, just to dig in on the protection front, Mohan, you indicated that it would be flat to down for the year. I was wondering if you could give us some clarity on how that looks going into June and maybe give us an idea, differentiate between domestic China and non-China shipments. As well, on LoRa, it sounds like we get a nice snapback in the June quarter, but you have the range out there for fiscal 2021 of $90 million-$120 million. Can you give us an idea about what has to happen? What kind of inflection do we need to see to get to the higher end of that range? Thanks.
Let's start with protection. Protection, you break it down into two segments, really. The consumer business, which is mostly smartphone, the non-consumer business, which is doing quite well. It's broader kind of market, all the rest of the markets, including comm and industrial, which is doing very well at the moment for us. The consumer side, specifically obviously smartphone, which is the largest piece of our business within consumer, it's a mixed bag within the smartphone business. I would say that Q1 was definitely weaker for China smartphones. Korea smartphones was about flat, North America was actually better than expected. In Q2, we're expecting a little bit of a increase in China smartphones. We expect probably Korea to be again flat to maybe down, North America to be okay.
The second half, we are anticipating that most of the smartphone business, at least in Q3, will be down, and some of that is supply constraints from some of our customers that we've been hearing about. Again, all COVID-19 driven. That could change in a heartbeat, as you know, and that could strengthen the second half, at the moment, consumer is looking weak. In the general, the rest of our broader protection business is looking quite good. I don't know if it can offset the consumer weakness, though, so we'll just have to wait and see. On the LoRa front, we haven't yet seen any pickup from our smart home, real catalyst of smart home business that I've been talking about for a while. We do anticipate that in the second half to start growing nicely. Again, with COVID-19, maybe that gets delayed.
We don't know. A lot depends, I think, on those kind of more consumerish segments. I'll call smart home, smart consumer, and maybe even asset tracking and logistics to be in that category to determine whether we get to the high end of the range. My sense is things are going in the right direction. I think, obviously last year was a disappointing year for us because of the China issues, but I think we're starting to see the momentum across the board, across all regions and across many different use cases. As I mentioned, COVID-19 is actually driving its own set of use cases for us, which is quite encouraging if those pick up as well. We'll see.
Great. Thank you.
Our next question comes to the line of Quinn Bolton with Needham & Company. Please cue to question.
Hey, guys. Let me also say congratulations on the nice results and outlook. I guess, first quarter with record POS, record bookings, just wondering if you have any sense whether your customers are buying ahead or trying to build buffer inventories given the COVID outlook, or do you think most of this product is moving through to end use applications?
We've been looking at that very closely, Quinn, and I think the encouraging thing for us is it's across multiple product lines, across multiple geographies and across multiple end markets. If we look at base station, 5G base station is strong. PON, 10G PON is strong. Data center obviously is strong. Some of those segments all cut across different regions of the world, some in China, some in North America, some in different parts of Europe. Obviously LoRa is also pretty broad. We don't think there's much. We haven't seen much cancellations or push-outs or anything to suggest that it's weakening at all. I think infrastructure is very much going to continue to see growth, and I think that's where we're seeing most of the strength, both in the POS side and the booking side.
Great. Second question, just to follow up on Scott's question about the more consumer use cases or smart home use cases for North America. You mentioned you continue to see or expect that ramp to begin in the calendar second half. I guess, to the extent that these are devices that have to go through DVT and EVT testing, I would think that a lot of those devices are well into that process right now. Do you see that testing activity taking place and that's what gives you the confidence that these devices are still on track for second half? Or have you seen some COVID-related delays in the testing and qualification of those products, just given mobility and flight restrictions and that kind of leads you to the comment that there may be some delays due to COVID?
Yeah. The answer to that is yes and yes, Quinn, to be honest with you. I think we have seen testing. We do see that stuff is going on and see the progress. COVID-19 is a very unique phenomenon, obviously, and we just don't know whether customers are equipped and ready to kind of drive the strategy the way that they were driving the strategy. There's nothing to suggest anything's changed. I just think a quarter delay, given what's happened with COVID-19 around the world, wouldn't be a surprise. That's not what we're hearing at the moment. We're hearing everything's on track and things are going quite well. I just want to caution you that with COVID-19, there's just so many unknowns. There's too many uncertainties on supply. There's too many uncertainties on regional shutdowns. There's a lot of uncertainties around the macro events surrounding us.
If you take those out of the equation, I think things are on track.
Great. Thank you.
Our next question comes to the line of Christopher Rolland with Susquehanna. Please cue for question.
Hey, thanks, guys. I think you guys are the first to report since the Department of Commerce broadened the Entity List. I guess first of all, if you could remind us what you were shipping to Huawei last quarter and why you decided to ship nothing to Huawei this quarter. Then secondly, the broadening of the Entity List, what's the revenue impact from that? Perhaps you can help us size that. Thank you.
Yeah. I said in my prepared script, my remarks, that that's all built into our guidance. We looked at the Entity List, the extended Entity List, and there is a minor impact, and we included that in our numbers. The guidance takes that into consideration. It's fairly small. From a Huawei perspective, we shipped about $9 million-$10 million in Q1. Our guidance assumes no more shipments into Huawei this quarter. That's the comment I'd make. From our perspective, the risk is taken out of our guidance. Yeah, we still expect to ship some revenue into Huawei. I think it's more a question of can they ship their systems? Do they need the products and those type of things with the increased restrictions on them? As far as we're concerned, we've pretty much de-risked Huawei business from our numbers as best as we can.
Okay. Just to make sure, guys like FiberHome and some of the other entity guys, just wanted to make sure those aren't going to affect any of your businesses. Separately, just talking about data center demand, if you could talk about that a little bit more, particularly around the PAM4 opportunity, the analog short range side that you guys are more focused on. Maybe you can talk about how that market's developed. Thank you.
As I said, FiberHome and all the other companies on the Entity List, at this point in time, we don't see any issue for us. Obviously, things change daily on that front. At this point in time, at least for Q2, we don't expect any impact. It's all built into our guidance anyway. If there is an impact, it's fairly small, I would say, even for companies like FiberHome. Coming back to the data center side. Data center business is going well. Our 100G modules are ramping up nicely. As I said, with ClearEdge doing very well. Now we're starting to sample our Tri-Edge platform. This is our first PAM4 platform, which goes together with our FiberEdge PAM4 PMD products. We're starting to see some good interest there, both on the 200G and 400G side.
We'll also have longer reach products out this year. My sense is we'll be able to expand our PAM4 portfolio and get a little bit more momentum there. Obviously this year the revenues will be fairly small, but next year we're expecting that to ramp quite nicely. Yeah, good progress generally. We'll just have to wait and see as we still think at the moment, 100G is the primary market for us to focus on. 200G and then eventually, probably end of this year, 400G, we'll start to see some revenues and then next year.
Great. Thank you, Mohan.
Our next question comes from the line of Rick Schafer with Oppenheimer. Please proceed with your question.
Yeah, thanks. Let me add my congratulations, guys. I just have a couple of follow-ups I guess. The first is back to Quinn's question. I'm curious, can you describe that your approach or give some color on the way you approach vetting your order book? How do you scrub for the potential for double orders? How do you look and see what's a pull-in versus a normal order from a customer? That's a broad question, I know. I'm just curious how you guys do that.
Yeah, it is a broad question, and it's a tough question, as you know, Rick. I think what we tend to do is we do go talk to the end customers. We do look at tenders that are out there, for example, on 5G that we know about, and the number of, for example, base stations that are going to be built, and then who's going to get those base stations and how many optical modules that drives and how many ports that drives for us. You can kind of get a feel for that. We can do the same on the PON side. You can start to do it that way. I think it's more difficult when you have a broader market area like in the industrial side for our protection business, for example, where it's more mass market and distribution focused.
It's a little bit more tricky, but in general you can. Typically what you see, if you're getting a lot of double ordering, you'll start to see more cancellations as things fall off for one guy, or they don't want to be left with a lot of inventory. You'll start to see that, and you'll start to see push outs of orders and things like that. I would say that outside the consumer space, we haven't really seen that. I would say some industrial, but mostly consumer, we see that a little bit, but not so much in the infrastructure side. My commentary, and I think this is validated by the bookings being stronger on the infrastructure side, is I do think it's driven by real demand and need out there. Also, POS being strong indicates that as well.
Well, thanks, Mohan. Maybe just another follow-up, and it's on PAM4. I'm just curious because you think you have a pretty unique perspective. You guys obviously the incumbent in 4x25 CDR, large market share there. I'm curious, why has DSP dominated that PAM4 market to date? I'm curious how you see that market evolving over time. Thanks. Maybe just at the very end of that question, I'm curious, I know you talked about Tri-Edge really picking up next year. Can it be a material revenue driver for you guys next year in fiscal 2022?
Let me answer that first. I think it will be. I think Tri-Edge this year is the test year, really, for design wins and design-ins and validating the performance of the technology and making sure our assumptions are correct and things like that. I expect we'll have design wins this year, and I think it will become meaningful revenue probably towards the latter part of this year and then certainly next year. That's the first comment. The second comment is on DSP. As you know, we invested in DSP. We went down that path and then chose not to continue down that path. The incumbents are there, and they have a leading position, and I think it's the first technology to implement PAM4, and I think that's the reason for the success there.
It was a strategic decision to continue down the analog path, and I think we have to demonstrate that it was the right, good decision for us, and I think we can. I think certainly for 200G and 400G, we will over the next six months here demonstrate that value.
Thanks, congrats again.
Our next question comes from the line of Gary Mobley with Wells Fargo. Please proceed with your question.
Hey, guys. Let me extend my congrats as well. If my math serves me correct, you are expecting your July quarter sales to grow, what, roughly 10% sequentially, netting out the headwind from Huawei. Just to sort of clarify what's driving that, it's a bounce back in the LoRa business, it's telco and data center related booking strength and whatnot. If I'm not mistaken, the new tighter export restrictions don't kick in until the end of June. Any chance of generating turns business with Huawei between now and then?
Huawei, the way we are planning doing business with Huawei is somewhat opportunistically. As I said, I've taken it out of the guidance for Q2. We're not expecting any more shipments, but if it comes in, we'll look at it and if we can ship. Largely most of our products we can ship to them. There are a few that we cannot ship, but most of the products we can ship. The issue is more, can they get the components from other suppliers, or are there other restrictions, especially with the recent, more restrictive approach, in terms of what they can HiSilicon, for example, not being able to ship, I think, or not being able to get access to some foundries is more of a challenge. I think, in general, I would say the impact of the additional restrictions is somewhat minimal to us.
Unless things change, we don't see any change to that.
Okay. All right. Let's move on to strength and market demand. Your point of sales significantly exceeded your reported sales. Can you share with us by how much and what the net impact was to the channel inventory?
POS was a record for us in Q1. Obviously, because of the record, the channel inventory came down. Channel inventory is in good shape for us. The good thing about the POS, both the POS and I think our bookings, it's fairly broad for us. Base station, as I mentioned, is looking good, driven by 5G. We know of the tenders out there, and we know that we have a significant opportunity to get a large chunk of that business. That's going quite well, and that's driven stronger bookings for us for, obviously, for shipments in Q2 and beyond. The PON business, as I mentioned, the 10G PON is doing very well, continues to be going quite strong. Data center is clearly, probably, outside LoRa, the strongest area of growth at the moment.
Both 100G, also FiberEdge for PAM4 side, that's doing quite well. LoRa, as I mentioned, booking is very strong, and we expect a strong Q2 there as well.
Okay. Thanks for the color, Mohan.
Our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.
Hey, guys. First of all, congratulations. Very, very strong results. Actually, when I look at your guidance, it's, I think, a little bit better than most of the companies are reporting for this time. I heard all the questions on double ordering. I'm trying to understand, for as long as I can remember, you've had turns in the about 34%-35% range. My understanding, listening to you, is that you're 80% booked. I think you said the turns were estimated at about 20% this year. Question for you is, why not guide higher and/or alternatively, is this the sort of padding in terms, in case cancellations do happen?
Yeah. Harsh, first of all, the 20% is accurate. That's all the turns we need. It's probably the lowest percentage of turns since I've been with the company, CEO of the company, and that's 15 years. It's obviously a relatively low number to what we're used to achieving. Having said that, there are a lot of unknowns. I think there is a lot of uncertainty around still the consumer business. I think the broader industrial and COVID-19, is there going to be another resurgence of cases, especially here in North America, that's just starting to get back to normal, I think. There's still uncertainty, and we just took the approach that I think several other companies have taken, which is just to make sure that we plan conservatively and guide conservatively, and that's what we've done.
Thanks, Mohan. Thank you for the color. I had a question on LoRa. First of all, was LoRa the fastest sort of bookings area for you in this second quarter, going into the second quarter? Do you think the reason is that because China is back and that hurdle got removed, that the bookings ramped up dramatically? As we look at the landscape, the tensions are flaring up again. I know this is an open-ended question and nobody knows the answer, but is there a possibility that LoRa could get caught up in that, or do you think because it's outside of infrastructure, that it would probably get saved or set aside?
Let me start with the first part first, Harsh. The bookings were strong across the board, especially on the infrastructure side. Data center was very strong, base station was very strong, and LoRa was very strong for us, as well as on the broader protection business. Those are the four main areas. Within the LoRa domain, obviously still today, 50%, 55% of our revenues of LoRa are from China. Remember that February and March, China was really shut down. For a large part of February and March, it was shut down. As I said, it did pick up in April, came back.
I would say, as I've said, now the opportunity pipeline for LoRa and where we're seeing a lot of the new revenue is, and I'd say new revenue versus old revenue, is not smart metering and smart buildings and smart cities, but it's starting to look like smart home, smart logistics, some other areas are going to pick up and do quite well. The other thing that I mentioned is that COVID-19 itself is driving some use cases that, it's not material yet, but could be quite significant and quite soon, I think if they start to play out, then smart health and smart temperature monitoring and things like that start to come into play. A lot of different use cases. Yeah, I think we're not really that worried about additional restrictions. Of course, you can never say no.
Something could happen and things could get worse, most of our opportunity pipeline, about 80%, is outside China now. While we continue to work with China and continue to do well in terms of new design wins and working with our partners there, we also have a lot of opportunity outside China that's going to drive growth for us.
Thank you, Mohan. You can back in line.
Our next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed with your question.
Hi, good afternoon. Given the restrictions that HiSilicon is going to have, notably not being able to build NB-IoT chips at TSMC, and knowing that the Chinese government has pushed NB-IoT, and I know that it's obviously not a perfect overlap with LoRa, does that change the competitive landscape longer term, where to the extent that China's own NB-IoT and IoT efforts are potentially impaired for a longer amount of time, that it could actually create more demand for LoRa in the medium term?
I'd like to think so, Tristan, we're not depending on that. For us, the use cases drive really where LoRa is winning. The Chinese government's going to continue to push NB-IoT. The cellular guys around the world will continue to push for NB-IoT. We're not going to stop that. I think that's not going to be our strategy. Our strategy is always deliver the technology to provide the best use case implementation as for our customers, that they really can get the lowest battery life, and use the technology to deploy the system that they need to deploy in an efficient way.
What our feeling is, as we get more and more of our new products out, like LoRa Edge, we're just going to create quite a large gap between what LoRa can do in certain use cases and what NB-IoT or any other technology can do. That's really the way to win, and I think that's what we will do, even in China.
A quick follow-up on LoRa. In fiscal last year, we basically saw a little bit of a decline in your average node per gateway based on the data that you're providing. Given the re-acceleration that you see for LoRa this year, should we expect the number of nodes per gateway to actually increase year-over-year? Also, given again that LoRa was probably pretty weak earlier this year in China, do you expect this coming quarter for LoRa to be up year-over-year?
Yes, I do expect LoRa to be up year-over-year. The other comment on end nodes per gateway, remember, gateway deployments are doing very well, actually. That's another metric that we look at, obviously, around the world, how many gateways are being deployed. As I mentioned in Q1, 800,000 gateways from 640,000 the end of FY 2020. Significant increase in gateways. That tells us that the use cases, all the opportunities that we have are starting to get into their proof of concepts, and they're moving from proof of concept to deployment. That's really what drives the end nodes. You can look at it on a real-time basis and say how many end nodes we have deployed and how many gateways, but the gateways allow a lot more end nodes to be connected. At the moment, 800,000 gateways drives around 3 billion sensors.
3 billion sensor nodes or end nodes can be connected to those gateways. There's plenty of capacity out there, and that's the goal we have, is to drive enough capacity, and then the end nodes will follow. That's just the use case driven. As the use cases start to get deployed and emerge, then you'll start to see more and more end nodes deployed.
Okay, great. Thank you.
Our next question comes to the line of Craig Ellis with B. Riley Securities. Please proceed with your question.
Yep. Thanks for sneaking me in, congratulations on the good quarterly execution, guys. I was hoping I could just start with a clarification before a couple questions. The clarification is, I think I heard you say that wireless sensing was down 20% quarter-on-quarter. Within that, can you tell us how proximity sensing performed versus LoRa?
They both were down quite significantly. Do you have. Okay. Let's see. Just hold on a minute. I'll give you that information. Yeah, both were down. Both quite down by about the same amount, I think from a percentage standpoint, Craig. I think proximity sensing coming down was driven by, obviously, a lot of smartphones, more consumer. LoRa enabled mostly was down because of China was shut down for February and March. Two different dynamics going on, but both came down significantly.
That's helpful. Thank you.
Yeah. The other thing, Craig, sorry, is that there was some supply constraints that really drove, mostly in the proximity sensing and in some other areas of our business, the wireless sensing business, that drove that business to be down.
Got it. For the first question, Mohan, it sounded like, as you went through the different LoRa metrics, that you've retained all your metric targets for calendar 2020. Congratulations on that. My question is, with a retained revenue range of $90 million-$120 million, what would make the difference between the business coming in closer to the low end, the $90, versus coming at the high end, the $120?
The main delta will be the emergence of some new use cases. I mentioned a little bit more consumerism, more smart home, that we know are in play. They're scheduled for Q2. We'll see if things happen in Q2, and if they do, they should drive us probably towards the, I would say, more the mid to high end, but we'll see. A lot depends on the pickup and how those use cases are adopted and how quickly. As I mentioned, with COVID-19, the difficulty is, we don't think it's going to have a long-term impact to the business. It's just the timing of some of the things that are going on, and whether consumers and smart home and even some enterprises doing smart logistics are going to delay programs by a quarter or two.
I don't think it's going to be that significant, it may delay by a quarter, and if it does, it moves into next year. We'll see. We'll have to monitor it, and I'll report on it as it happens.
Okay, that's helpful. Lastly for you, I think in your answer to an earlier question, you noted that within signal integrity, it looked like the hyperscale part of the business, the data center part of the business, was the strongest of the different opportunities in the near term ahead of PON, ahead of base station. The question is, given that investors are worried about the duration of near-term strength for chip companies, where do you have the greatest confidence as you look out into the back half of the year that some of this near-term strength can be maintained?
Yeah, the back half being Q4 is difficult to project now. I think we're getting indications that Q3 will be okay, and I think part of that is knowing that the base station market, for example, in China, we know they're deploying a certain amount. We know that they're going to do it this year. We know how the different customers are planning, and we know our position in those customers, and we think we have a very good position in that market. We think that's going to play out this year. The PON business, as we know, as I mentioned, one of the nice things about PON, especially the PON-X 10G play that we have, is that becomes a kind of a handoff to the 5G for a lot of the 5G networks.
That's really a new thought, a new architectural kind of value that PON brings. That's very encouraging. I think the other thing that's really often not really understood is that both base station and PON, while China is clearly by far the biggest opportunity today, we're starting to see now AT&T, Verizon talking about gigabit PON, and we're starting to see, obviously, the U.S. market and European markets talking about 5G and deployments. A broadening of the opportunity geographically, which I think is very encouraging and very good as well. We don't see much slowdown, even the second half, to be honest with you. Obviously a lot depends on COVID-19, but from a need standpoint, the need is clearly there for more bandwidth, for consumers, for enterprise, and so that drives more base station, that drives more PON, clearly drives more data center.
At least for this year, we think that will continue.
That makes sense. If I could sneak one in for Emeka, I feel like he's been a bit neglected. Emeka, you mentioned that with the second quarter gross margin, mix would be a tailwind, but absorption would be a headwind or utilization would be a headwind. I guess that's the flow-through effect of the first quarter revenue. As we look beyond the fiscal second quarter, do you get both of those things working your way, and could we see gross margins getting to the 62% level as we exit this year? Thanks, guys.
Yeah. Craig, I think that is the expectation. As you listen to all the growth areas that we have, a lot of those are coming with pretty high gross margins. The data center, the 5G, the 10G PON, and then the protection industrial applications as well. We think a higher mix of those type of revenues and demand staying strong and going up, driving higher absorptions, allows us to move our gross margins up to around the 62% level.
That's helpful. Thanks, guys.
Our next question comes from the line of Karl Ackerman with Cowen and Company. Please proceed with your question.
Hey, thank you. Good afternoon, gentlemen. Two quick ones, if I may. Mohan, just kind of curious, how do you think about the FCC decision to make available the 6 GHz band for Wi-Fi? I'm just kind of curious, some investors have been a little bit worried that this may limit the 40% annual CAGR of LoRa adoption in consumer environments as consumers opt for higher performance, but much more expensive routers for in-home connectivity. I was just kind of hoping that you could talk about that, how it would impact your consumer LoRa business longer term.
Yeah. The way to think about it really is that they're different use cases and they're complementary. Actually, Wi-Fi is a great complement to LoRa in many ways, thinking about how they operate and even our latest platform, our LoRa Edge platform, has Wi-Fi sniffing function, but still needs Wi-Fi routers and those type of systems to enable each use case. Really no impact at all. I would say, if anything, Wi-Fi and LoRa are becoming more complementary, and we're seeing more and more use cases where a high bandwidth Wi-Fi capability plus LoRa for low power sensing and monitoring and things like that is really valuable to most use cases. Just much like 5G plus LoRa or Bluetooth plus LoRa, we don't really see that as a competitive issue. We see it more as a complementary.
Very helpful. Just one last one, if I may. On your Tri-Edge opportunity, there is a competitor who appears to have won maybe most of the early designs in PAM4, just given the fact it's largely relegated to one hyperscale customer. First, do you expect more diversified cloud adoption in the U.S. of PAM4 interconnects inside the data center this year, where you have the opportunity to be a strong number two provider? Second, you noted that Tri-Edge could be more material for next year, but I was just hoping you could speak to your, perhaps, relative position and quantify the opportunity as the market transitions to both 200G and 400G solutions. Thank you.
Yeah. The first important thing is we just started to sample the Tri-Edge platform. It is very early days for us, and I think that has to be noted. We do have a pretty good position in the data center space, and we know the customers, and we know what's needed, and we have a very strong 100G position. Now the question is, moving those customers to use our platform for 200G and 400G, initially for short reach and then for longer reach applications is the goal that we have. Yeah, we know that there's some work to do here. It's not a slam dunk, and there's a lot of challenges. We do think, we made the strategic decision to go the analog PAM-4 route because we felt that power was extremely important.
We felt that the cost was very important. We felt in a lot of the use cases, latency was very important. That was the reason why we chose this path, and now we have to go make sure that the fact that we are somewhat late to the PAM4 space, I think we have to kind of catch up that. That's the goal this year, is to get more design wins, and then next year, we should see that ramp up nicely. We'll see revenues this year. I just don't think there'll be huge revenues this year. I think next year will be much stronger.
Our next question comes to the line of Mitch Steves with RBC Capital Markets. Please proceed with your question.
Hey, guys. Thanks for taking my question. Looks like pretty substantial beat and raise here. I had a question, just more on kind of like 2021 and 2022. I think that's a big investor debate. It sounds like you guys had some sort of view of what the back half looks like. Is there any way to at least give us maybe a qualitative metric in how to model out the back half of the year, if it should be similar to July growth or something that's going to decelerate or accelerate? Anything that would help there, I think, would be very useful.
Yeah, Mitch, I think, from everything that we see right now, we still expect to have a decent second half of the year. However, there are still things out there that we know we're not in control of, right? There is a talk of a recession and things like that, and like Mohan said before, with regards to COVID-19, nobody really knows how that whole thing is going to play out. We feel very good about the second half, but also just have a little bit of a hint of caution around it. My expectation would be that we'll probably see maybe some sort of a flourish to a slightly up second half of the year.
Okay, that's very helpful. Just a follow-up real quick on LoRa. You guys talked to $90 million-$120 million. It sounds like there wasn't much in April, hence the pretty significant contribution to July. When we look out at the next, let's call it 2022 and 2023, are you guys still sticking with kind of like the 40%-50% growth rate because it's just infrastructure build-out, or has that changed, got pushed out in any meaningful way?
No, we'll stick with the 40% CAGR over the next five years. It's really driven not only by our belief that these gateways that are being deployed have a lot of use cases. There's plenty of capacity out there. We're really seeing the need for low power sensing. The low power wide area network market, which is tiny today, we're starting to see it grow. There are clearly some emerging use cases. I think, as I mentioned, if the smart home, smart consumer, smart logistics, smart asset tracking start to take off, which we believe they will, I think we'll start to see a much more higher volume of connectivity to gateways. That will drive the FY 2022, FY 2023 number and the 40% CAGR.
Understood. Thank you.
Our next question comes to the line of Hamed Khorsand with the BWS Financial. Please proceed with your question.
Hi. Just one question. Okay. Can you quantify the sales slippage from Q1 to Q2? Was it from all the supply constraints, and is it all in wireless and sensing?
Hamed, when you say sales slippage, I think Q1-
Disclosing your 10-Q. Towards the bottom of the 10-Q, you were talking about there was an impact to Q1 sales, and you were shifting it to Q2 on the guidance. I'm just trying to get clarity on that.
Yeah, we had some areas of supply constraint. For example, our facilities in Mexico for our hi-rel business was shut down. We couldn't build anything. Clearly, we're not planning actually to start that facility again until June. That's still shut down, so we can't ship anything from that. That has some impact. It's fairly small, I would say, $3 million-$4 million. We have reduced capacity in some of our operations, in our protection business. Again, a few million dollars, from a standpoint of capacity. Malaysia shut down. There's some constraints there. It's broad, fairly numerous, different sites and locations. All in all, it adds up and I don't think it's so significant that it's going to make a material difference in Q2. We should be able to pick most of it up.
Okay. Thank you.
Our next question comes to the line of Tore Svanberg with Stifel. Please proceed with the question.
Yes. I just have two quick follow-ups. First of all, just to sort of reconcile, you had record POS, yet you're guiding about $30 million, lower than your historical record on the top line. Is that again, just you being careful with the economy? Is it some related to Huawei? Help us understand what that $30 million. I know it's not perfect science, right, POS versus sales, but it's still a fairly large number.
Yeah. I think all of the above, Torsten. Some constraints in terms of, look, we're not going to guide, put any more Huawei shipment in the guide. I've done that in the last two quarters, and I think that's the way to do it, because we just don't know what new regulations will come out or what new restrictions will come out. It doesn't really matter. The guide assumes no more shipments into Huawei. That's the first one. I think the other aspect is obviously we have a lower turns percentage required in the quarter.
As I said, part of that is not really knowing enough about how COVID-19 is going to play out in the different regions and, from a demand standpoint, as North America and Europe come back and start to go back to work, whether we're going to see another virus impact and we're going to be shut down again, or is it going to continue to be okay? Some conservatism there. In general, I would say that we feel good about our guidance and could we have guided more aggressively? I think probably we could have done, but I think with the supply constraints and the uncertainties in the demand, we still have one of our sites shut down and another one at 50% capacity, things like that, you don't want to be too bullish out there, right?
Yeah, that's fair. One, just a last question. Sounds like you're seeing quite a bit of activity on the healthcare side, with LoRa. I was just wondering if you're seeing enough where you may actually dedicate a business unit towards LoRa Smart Healthcare. Seems like a lot of companies are using the healthcare market as a big opportunity during the downturn. Just wondering if you guys are being a bit more dedicated to healthcare there too with LoRa. Thanks.
Yeah, that's a good question, Tore, I'm not sure of the answer to that yet. We are starting to see use cases, as I said, we've got customers deploying LoRa around the world, to help with COVID-19. I mentioned contact tracing, remote temperature sensing, LoRa's perfect for that, occupancy management with smart quarantining. I'm more of a believer of just kind of thinking through strategically whether longer term it makes sense or whether it's a short-term opportunity. The nice thing is I think we have some good partners working on this, they'll start to indicate to us if LoRa is really being successful in this area. That will then probably drive a kind of a separate set of strategic thinking in that area.
Our new LoRa Edge platform that we just brought to market, we just announced, which has both Wi-Fi sniffing, GNSS sniffing, and the LoRa function. Three separate radios, all in the same chip. Actually, we designed it and the focus is on smart logistics and asset tracking, which we think is going to be a huge market. That same platform, I think, has got a really good opportunity in the smart health market. We'll see, especially for contact tracing and things like that. We'll see how it plays out. It's one of those areas that we have to keep a close eye on to see if the market is going to adopt it and accelerate.
Sounds good. Thank you very much.
Our final question comes from the line of Christopher Rolland with Susquehanna. Please proceed with your question.
Hey, guys. Thanks for the follow-up, just kind of a follow-up also to Tore's. On the booking side of things, we've kind of noticed a correlation between book-to-bill and Huawei previously as a customer, from some of your competitors. I think you guys said you had a strong book-to-bill. I don't know if you guys would maybe want to describe what that is a little bit further. Was it 1.3 or above? Just as you think about those extra marginal bookings, were they long dated? Are they cancelable? Is there anything about that's different than otherwise?
Chris, our book-to-bill was pretty much up there in sort of the range that you have referred to. The bookings have been strong. Like Mohan said on the call, they've actually continued. I think one of the things that we do consistently is to track how much cancellations we're getting, how much push-out requests that we're getting. So far, we have not seen anything that is apart from the ordinary. We've been very pleased with all the indications that we're seeing is that the bookings are really something that is being driven by actual demand.
Yeah, I would point out that a lot of the strength, as I mentioned, was the booking strength has been in infrastructure and IoT related areas. We're not seeing the same in some other segments. Within the infrastructure, it's been fairly broad. Normally, you see one or two areas where you see a lot of strength, but it's fairly broad within infrastructure, I would say. It's base station, it's data center, it's PON, it's broad communication and IoT.
Thank you very much, guys.
Since there are no further questions left at this time, I would like to turn the floor back over to management for any closing remarks.
In closing, COVID-19 has provided us all with its fair share of challenges. I want to thank all of our employees and partners for their efforts to quickly adjust to the challenges faced from this global pandemic. They have adapted and responded and leveraged the infrastructure we have built over the last several years, resulting in limited impact to our business operations. We believe our diverse product offering, balanced end market, and balanced geographical approach, along with our strong customer relationships, should help us outperform our peers in this uncertain times. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.