Welcome back, everybody. I'm Joe Moore, Morgan Stanley Semiconductor Research. Very happy to have the executive team of Semtech, Hong Hou and Mark Lin, with apparently some breaking news, I'm told, around facility acquisition. Maybe you could give us an overview of what you just announced in the last few minutes.
Sure. Thank you, Joe. Good afternoon, everyone. You probably haven't get a chance to read the news yet. It just crossed the wire. We acquired a semiconductors laser company, Indium Phosphide-based lasers designed for high efficiency for optical transceivers and more ideally in the CPO, MPO modules, and also for the tunable lasers for metro and DCI applications. This leverage more than four decades of the innovations from the good old, for us, being around for a long time, Ortel, and was founded in 1980. It was the first company commercialized the DFB lasers. Ortel was bought by Lucent. That division was bought by EMCORE when I was the CEO there. Now going a full circle, we just acquired that-
Yeah
company called HieFo.
Okay. Maybe help us with what does that unlock for you guys? Obviously, you have a very strong business in sort of copper capable technologies. Does this push into optical? What does it, what does it hold?
Yeah. Definitely, we have been focusing on growing our business in the core asset area. You know, data center is one of them. For optical transceiver space, Semtech is known to be a provider of the best TIAs for high bandwidth optical transceivers. With the data rate creeping up from 100 Gb per lane to 200 Gb to 400 Gb, and also, the pursuit for low power solutions, you know, the LPO and also the DSPs with the manufacturers are high at the advanced nodes that require driver solutions as well. We are expanding our play, our content in optical transceivers with the drivers. That's about it for the electrical space.
On the optical side, you know, this really set a strong pillar for us to build a platform to provide comprehensive, component solutions with the lasers, and then we can get into the modulators and, in the future, even photo detectors. The lasers, technology we bought and the fab, we have, the Indium Phosphide-based, high efficiency and provide wall-plug efficiency well over 40%. That's about the best, most efficient lasers in the industry. Certainly that give us a, an anchor to really, build this comprehensive portfolio for 3.2T optical transceivers in CPO and MPO, you know, where they would also need high power lasers.
That's great. Thank you. I always appreciate breaking news at our conference. Thank you for that. Maybe we could wrap that into a discussion about your data center business. Can you talk about your overall positioning within data center and give us an overview of some of the products? You know, feel free to wrap in anything that you just acquired into that.
Yep. We have a pretty diverse portfolio in TIA and Tri-Edge business and TIAs in the FiberEdge category. As we are reading the same report, there's gonna be a very strong increasing demand for 800 Gb optical transceivers. For single mode, we have a pretty good market share, about 50%. That demand is growing, and that's a baseline. LPO introduction, we announced in the last earnings call that it's gonna be a milestone for the industry to move to high power efficiency, low power consumption solutions like LPO. That start ramping, so adding a growth driver on it. The important of LPO also that's a prelude, in my view, is the MPO or CPO because all gonna be DSP-less solution.
Then, you know, we have the copper product, as you alluded early on, the CopperEdge to provide redrive solutions to extend the reach in the cable or in the copper trace on the PCBs. The ramp for hyperscalers, you know, is gonna start mid-year this year. That's adding another step function. 1.6T, the early deployment, we had a very minimal play in there. The industry is moving from 5 nanometer DSP to three to 2 nanometer DSPs. In the second design cycle, we are front and center in there. That's representing, you know, the step function on top of this baseline into a couple of incremental growth drivers. Now, with the high power lasers, we'll be able to provide optical solution co-optimized with our drivers and TIAs.
It's gonna be good for the industry.
Okay. Very helpful. Thank you. Looking at the TIA market, you know, we've seen really strong market for optical transceivers. There was other breaking news at this conference about pre-purchases of optical components. You know, where do you stand within that supply chain? Are you tight? Is other components that are tight around that? You know, the, that shortage of optical transceiver seems to be not quite at DRAM, HDD levels of seriousness, but approaching that.
It's pretty tight.
Yeah.
We anticipated this because we have been engaging with our customer's customer very closely, like cloud service providers and GPU and CPU companies and ASIC designers as well. We know this is coming. In my last earnings call three months ago, one of the priorities is make capacity available. The current manufacturing partners, they are in allocation mode for the capacity. The good thing is, we build ahead a little bit, and that create a little briefing room and buffer that give us time to qualify additional foundry capabilities and capacity. We'll be all right, for the next 12 months, 18 months-
Mm-hmm.
as we see the trajectory in our forecast.
Okay. I guess you're getting visibility into the next 18 months given the pre-purchasing activity and things like that.
That's right. We have this long-term system called a co-planning process with the lead customers. Their supply chain has the key interest to make sure that their suppliers, their supply chain is robust. They give us forecast. We're able to get a wafer started way before their demand. We have certain level of commitment, mutual commitment. That model has worked out very well. We have expanded the co-planning process from a year ago, one customer, to currently seven customers.
Wow. Okay.
So.
Is that growth also strong in 800 Gb and 1.6T both?
Yeah. 800 Gb, we had visibility early on.
Yeah.
We were more prepared. 1.6T is coming very strong.
Yeah.
That's a part, you know, we have additional capacity in the fab partner, foundry qualified.
Okay. That growth comes on top of what's still growing 800 Gb.
Exactly.
Yeah.
Yeah. Mm-hmm.
Okay. Yeah, hopeful. Thank you. Some of the new opportunities you talked about, CopperEdge and ACCs, can you talk about the advantages of ACCs and where you're seeing initial traction there?
Yeah. The ACC compared to the counterpart, DAC, the Direct Attach Copper, you know, it can only go up to about a 1 meter long. That's amazing, actually, you think about it.
Mm-hmm.
That a 200 Gb per lane, but cannot go longer than that. The alternative is ACC or AEC. We know AEC has been very successful demonstrated.
Yeah.
ACC consume 90% less power. That is really very compelling to this hyperscaler. We worked with them a few months ago. It takes, you know, a lot of effort for them to qualify for platforms. Now, you know, we are finally get about ready to ramp on the supporting their multiple applications, primarily used in the backplane.
Okay.
The CopperEdge, in the meantime, it doesn't have to be integrated in the ACC cables. It can be integrated on the board to redrive, to stretch the reach of the high-speed signal across the board and between boards. I'm just so excited when every time when I talk to my product marketing guys. About a year ago, when we were start doing e-evangelical work, you know, and people were very skeptical, and we turned them to somewhat curious. Now it's fully engaged. I would say, you know, by this time next year when we talk again.
Mm-hmm.
I would definitely, you know, project the linear equalizer CopperEdge on board is gonna be a pretty substantial part of the revenue contribution.
You have one kind of initial customer, but you think by this time next year, we'll be talking about more than one.
One initial customer on the cable for high volume.
Yeah.
We got three.
Okay.
Smaller volume customers, but the linear equalizer on board, we got multiple major customers ongoing right now.
Okay. Did that business participate in the NVIDIA ecosystem, or is it mostly an ASIC thing?
It can be. It can be.
Okay.
Yeah. The ASICs and GPUs and, you know, even the switches, wherever. It is fundamentally when you have a link budget issue, challenges-
Mm-hmm.
say from bump to bump, either 35 dB or 50 dB, and every twist and turns, you have losses. How are you gonna be bridge that link budget? Well, you can use redriver or retimer. You know, it's obvious redriver is just a very seamless and consume a lot less power than redriver. I think that's based on that fundamental, you know, is gonna be used in many different platforms by many customers, and the industry is getting more educated. They feel more increasingly comfortable with the redriver solution by closely working with us, starting from modeling to test to qualification corner test into eventually the volume deployment.
Okay. How durable is that opportunity? I mean, it seems like some of that may migrate to optical over time as well.
Yeah. Recently, I heard something like you say, "Oh, we need to put a terminal value on copper because this is gonna be all optics." I can assure you know, that was my thinking about 20 years ago. We try to kill copper.
Yeah.
The copper is getting stronger and stronger. For scale up, it's always gonna be copper is the predominant media.
Yeah.
You know, you have a printed circuit board. I don't know, printed fiber optics board. No. In the shorter distance, you are gonna be using copper. This transition from copper to optics, you pay overhead. I would say probably up to 800 Gb, you know, you don't need optics to scale up.
Yeah.
The Co-Packaged Optics CPO is totally legit. They co-package with a switch die. You know, now the industry has a comprehensive ecosystem. It can support liquid cooling, and with one rack can consume 600 kW or higher. They can put a switch, the first level switch in a fabric in the rack, and that's Co-Packaged Optics is first in scale out, right? Scale up, you know, in special use cases, it may be happening in two years, three years.
Yeah.
Right now, I think.
Maybe longer than that even. I mean, it seems like-
It could be.
a lot of the decisions around that have not been finalized yet.
Right. Right.
Who's using what scale up?
Right. The good news is we have solution for copper, we have solution for fiber as well.
Yeah. Yeah.
If they move from copper scale up to fiber scale up, fine.
Yeah.
We have TIAs, we have drivers, now we have lasers as well.
Yeah.
With the lasers, we can build, silicon photonics modulator because our laser has the best far-field pattern. What that means is our laser light can couple into, silicon photonics waveguide with very minimal loss.
Okay. Great. Then LPO, you've talked about in your initial comments, you know, where are we with regards to potential adoption?
The LPO adoption is a little different compared to ACC. ACC is more tied to a new platform design.
Mm-hmm.
If they decide to use ACC and combine with the DAC, then that's how the back plane is gonna be constructed that way. The LPO is more like a, the customers have been use it opportunistically. For example, you know, in their system design, they all of a sudden found, oh, they're 2 KW, 3 kW shy in power budget. You know, they can say, "Hey, look, this is same form factor, totally interchangeable." For shorter reach, you know, they can replace the retimed transceivers with LPO transceivers. We're seeing the ramps from the quarter we just finished, and we see this gonna be continue, but it's a gradual ramp.
Mm-hmm.
The significance of LPO is really building the confidence. The industry is evolving into this MPO, Near-Packaged Optics solution. You don't have to commit, you know, pin out and the other parameters for, you know, XPU for co-package, but they leave the socket open and bring all the optics near the XPU. When your XPU ready, it just drop in. You need to clear definitions through multi-source agreement, whether it's a geometry pin out, keep out zone, shoreline density, all of that. We're very active in participating that MSA. MPO is stemmed from the good success of LPO in terms of Signal Integrity.
Okay. Great. You have a lot of growth drivers in data center.
Yes.
TIAs.
I'm very excited, you know-
Yeah
about-
I mean, I feel like six months ago, we were talking more about new products, but the TIA market also looks very exciting-
Exactly.
at this point. Yeah.
After 200 Gb, we have 400 Gb.
Mm-hmm.
The industry is continuing to push for the innovation. In the upcoming OFC in the next two weeks, three weeks, we're gonna showcase multiple chips, you know, from TIAs to drivers to linear equalizers, operating at 200 Gbps .
Okay. Great. Well, thank you for that. Turning to industrial, LoRa was pretty strong in Q3. Can you talk about the outlook for that business and help us sort of size this exposure?
Yeah. LoRa continue to be very strong. Traditionally, the LoRa has been used, widely used in three vertical market. Smart metering, you know, for water meter, gas meter, is really long range, low power, and very robust connectivity, serves very well. That continue to be strong, you only have so many meters and the battery works for 15 years. We'll continue to have a good business on that, asset tracking and connected spaces. The most recent application, drone, has been really fantastic. You know, the commercial drone. You know, our product manager show the display, the Chinese New Year, they don't light up the fireworks anymore. They launch a drone show. Each fleet, they get a 20,000 drones. It can change the pattern and all the different colors. It's fantastic.
Of course, you know, this low altitude economy in China. That's very fertile ground for a lot of innovations. Drone is fourth vertical. Because of the bandwidth increase using dual-band, we're not only using LoRa to send control signals, but it can transport with a very respectable bandwidth. Right now is at 1.6 Mbps.
Mm.
That's increase from, 10 Kbps, 15 Kbps . Combined with some compression technology, it people are developing use cases for Edge AI. They can take snapshot, still pictures, send it back for archiving and for shorter distance, like within a couple 100 meters, you can even have the live video we demonstrated at the CES-
Mm-hmm.
, a month ago. That's, high bandwidth. We benefited from that and, unlock another vertical with Edge AI. This Gen4 LoRa Plus. It's a LoRa Plus another protocol, unlocked some other applications like a security in smart homes. We'll continue to expand the application use cases in different market verticals. We can easily see that business continue to grow at a 15%-20% year-over-year growth rate.
Okay. Can you give us a little bit more color on the Gen4 multi-protocol, what that does?
Gen4, basically, people like the LoRa and, they wanted to have some other, like a BLE protocol to say, you know, the building managers, they wanted to send out, kind of like a command to lock out all the doors in the building, and that's works really well. You know, it has a little bit latency. You combine with another protocol like a BLE in there. The short range is BLE.
Okay.
But you're now losing the LoRa feature. You basically have two IoT protocols in one.
I see.
We have LoRa plus BLE, Zigbee, Thread, Matter, and Z-Wave, you know. Of course, each protocol you need a software development kit to activate it, and we're doing one after another.
Like a mini Silicon Labs within.
In a way. Yes.
Okay. Great. Then maybe just to round out the markets, high-end consumer, a lot of anxiety about memory constraints and what that might mean for the for some of the consumer businesses. Can you talk about that?
Sure.
Yeah, Mark, you wanna.
We're still pleased with our high-end consumer end market. In this area, we've been outpacing, let's say, just handset unit growth. This is really due to Semtech's ability to capture market share and increase our content within the device. The last quarter, we've talked about various TVS, transient voltage suppression devices. These aren't commodity devices. You know, we're really protecting high-speed ports and to be able to clamp down a voltage and meet our customers' requirements on a high-speed data line. It's not something easy to do. In that case, we still feel very strongly about that market. We also have within that high-end consumer market is our PerSe Sensing portfolio.
within that portfolio, we, you know, we have what we believe is a leading-edge product there for sensing. Traditionally, it's been used in handsets to detect, you know, how close the handset is to a person's body, kinda lower the power, beam form away, meet Specific Absorption Rate requirements. This is also an area where we had a nice small tuck-in acquisition at the beginning of the quarter. We're adding not only our PerSe product, we're adding a force sensing product, a force touch product. It's a really nice combination of two areas. This force sensing product, it was really on our product roadmap.
This was a clear way of, you know, maybe expanding on the make, buy versus make thesis, right? Rather than wait three years, we had a portfolio that was available to us at quite a reasonable price. I think last quarter we said it's, you know, well under one-quarters of operating cash flow.
Okay. That was from Qorvo?
Correct.
Yeah.
Any other acquisition targets that you guys think about or any capabilities that you might need within really any of the businesses, but just, you know.
Yeah. We're constantly looking at the, you know, our roadmap and the most of the ideas and project and desire stem from the interaction with the customers. You know, when we provide a solution, they ask, "Well, do you have that? What about this?" Okay, that defines our roadmap. Mark mentioned about this force sensor. It was on our roadmap, and you come to make or buy, you know, opportunistically when that asset became available, we just, snapped it. Here, this acquisition we just did at HieFo, in that category as well, there has been a little bit longer pursuit. We know that for the data center growth, in order to grow the content, for example, we have the aspiration for 800 Gb optical transceivers. We provide TIAs. Our content is only high single digit.
I wanted to be growing to high double digits by 3.2T. We've got to grow, but you can't really do the me too to chase the market-
Yeah.
especially the one the market grows so rapidly. We have to be able to-
Think ahead and build some differentiations. That's on our roadmap, and we pursued others and didn't come through, but this one we drove to the finish line. This is a very exciting opportunity for us to put another anchor to build a platform. I use that analogy. As for other target, you know, certainly we are having strong aspiration. We got more ideas to grow, but not nothing at this point.
Mm-hmm.
It's, it's close to close, yeah.
Sure. I think we know we've been pretty prudent-
Yeah
in selective in our targeting on acquisitions. We're bringing that same muscle memory from how we invest in our organic R&D. R&D is, you know, we increase R&D, but the return on this investment for our R&D, it's been proving out LoRa data center PerSe. You know, this acquisition that we just announced today, consideration's about $34 million.
Mm-hmm.
Very, very prudent use of capital, to really expand Semtech's market share, markets.
Yeah. That's great. Maybe we could talk about the Sierra Wireless situation. You know, how do you think about the outlook for IoT cellular, and is a divestiture of non-core assets still something that you're
Yeah. Maybe I'll address the divestiture. This is of the cellular module business, which we've spoken about, and we discussed on our last call. This business is still performing quite well. Backlog and order rates are still quite strong. This business, though, has about a 20% gross margin, so it just doesn't fit in Semtech's portfolio. It's a great business that fits in someone else's portfolio. The process for divestiture is ongoing. It's an active process, and we have multiple touch points a week and diligence calls and whatnot. It's difficult for me to peg a time because it moves at deal speed.
I believe that the, you know, the deal is pending, optimistic that we can get this, to a close.
Okay. What do you think the gross margin profile of the company looks like post-divestiture?
Sure. Just historically, if you strip out this.
Yeah
We're approaching close with striking distance of 60% gross margins. What Hong was talking about in these growth areas, especially in data center, right? It's accretive to that well, very accretive to that 60% gross margin. Last quarter, we reported that our Signal Integrity Products segment had a 65% gross margin. You know, new product introductions would be accretive to that 65%. You know, really, kind of for a company in our space, having a gross margin starting with a six is-
Yeah.
really where we should be.
Yeah. Yeah. Great. Well, look, you've had a great tenure as CEO. Maybe just I'll open it up for questions, but just to close for me, you know, the opportunity that you've delevered the company and now you're able to focus on these growth drivers, seems apparent that that sort of, that delevering process was a, was a major focus in the beginning. At this point, you're really focused all forward on growth.
That's right.
Et cetera.
That's right. Yeah. We have come a long way.
Yeah.
in a short time. Certainly, when I started about 20 months ago, as the CEO, we kind of map out the three stages. It's a little bit tongue in cheek, you know, we say Semtech Rising. We need to absolutely beef up our balance sheet. To fix the balance sheet, we had a leverage ratio of 9.5x, you know, $1.3 billion net debt. We did not have any operation freedom to do anything aggressive. Mark Lin has led the effort. We benefited from, you know, the good market as well. We did the financing. We now today totally fixed the balance sheet. We have well over $600 million liquidity. We can do things somewhat more aggressive.
Even in that time, the second pillar of the Semtech Rising is we're a technology company. We have to delineate what is the core, non-core and invest, accelerated invest in a core area. That's why we were able to gain market share in the data center. That's why we were able to expand our portfolio with a limited financial capability. The third thing is the employee morale. You know, they were not sure, you know, what the future of the company is. Through the Semtech Rising initiative, we build the transparency, build the trust in getting the whole company rowing into the same direction. That has been great. What? The second step, which is Semtech Transforming. It's again, tongue in cheek, but it's really significant. We wanted to optimize our portfolio. Some non-core asset we're doing divestiture.
You know, I would say we're well within 20 yard line. You know, and, I'm optimistic it's gonna happen. Then we're adding things in a core asset area and to really evolving ourselves from the commodity component second source supplier to the leading solution provider. We wanted to be in a room when a new standard, new solutions come about. You know, for example, last week we instigated and founded the MSA for ACC. That's drive a standard and benchmark how to do test, what kind of performance you should expect. We're gonna do the same thing on MPO side. Then, you know, we have, again, as I said, have a pretty aggressive plan and very exciting roadmap. We're gonna increase the R&D investment.
We have the capability, we can do that, and we're gonna continue to look around some tuck-in opportunities. The third step, we wanted to be the industry leader in the, in the area we are in. It's Semtech Excelling, you know, deliver higher growth rate than peers, deliver higher operating margin than peers. I think we're well underway. I'm pretty excited about what's ahead of us.
That's helpful. I actually have one additional question. Just your relationship with hyperscalers, that seems really important when you're sort of pushing in these data center markets. Are they coming to you with projects, things that they want, sharing their roadmap with you?
Yes. It's not easy. You know, sometimes it seems to take the persistence, but the overarching principle is the customers, they are so busy. They don't want to meet you if you don't add value.
Yeah.
You know, good thing is, in the beginning, you know, I had a good connection, you know, and I was able to kick the doors open. When I get my guys in, you know, they really see the analog design is not easy. We are really known. That gentleman in the back was telling me that. I was so happy to hear that. We were able to do modeling, end-to-end signal integrity. In the beginning, you know, you must have model, well, we have model as well. Now they realize, you know, Semtech has a really very robust model. Before they define a platform architecture, they wanted to check what are the boundary conditions, can this be achieved or not? We're the guy, and that's really a great position to be.
Great. With that, let me see if there's questions from the audience. If not, we'll wrap it up there. Thank you so much.
Thank you.
Thank you, Joe.
Thank you.