The News: Semtech Corporation, the high-performance semiconductor, IoT systems, and cloud connectivity service provider, reported unaudited financial results for its second quarter (Q2) of fiscal year (FY) 2024, which ended July 30, 2023. Semtech reported net sales of $238.4 million for the quarter, an increase of 0.8% sequentially quarter-over-quarter (QoQ) and 13.9% year-over-year (YoY), with cloud data center net sales growing 114% sequentially and high-end consumer net sales growing 58% sequentially. Read the full Press Release on the Semtech website.
Semtech Q2 FY 2024: Recovery Incoming but Inventory Bloat Still a Drag
Analyst Take: Semtech delivered net sales of $238.4 million, which is in line with the company’s midrange guidance, in Q2 FY 2024, an increase of only 0.8% sequentially but 14% YoY. Gross margin was healthy at 49.6%. Overall, although QoQ growth was almost stagnant and weaker than YoY performance, we continue to slide every positive growth into the good column while the tech sector continues to emerge from its stubborn post-COVID slump. That being said, we would have liked to see sequential growth outperforming YoY growth—understanding why it did not is worthy of a little digging.
Per Paul Pickle, Semtech’s recently minted president and CEO, the primary reason for this persistent drag on revenue is that elevated channel and customer inventories, stemming from what he characterizes as “previously optimistic projections,” continue to act as a brake on demand. Case in point: the Semtech IoT systems product group’s 11% sequential decline (down to $119 million) can be mostly attributed to continued softness in demand for router and module products, and especially modules. Fortunately, Semtech’s modules business, which is 3 times the size of its router business, is about 80% direct-to-customer, so the company has a clear picture of what is happening in the channel. Confirming our suspicions, the earnings call highlighted that a significant portion of the company’s direct customers is still sitting on substantial inventories. Pickle suggests that this inventory bloat will continue creating drag on hardware demand for several more quarters until it finally burns off, presumably mid-year 2024.
On a positive note for the group, integrated circuit (IC) component sales grew 16% QoQ, showing encouraging rebound potential after some softness in Q1. Pickle highlighted that the customer design pipeline looked robust for the next few quarters, driven primarily by infrastructure and consumer end markets. Product sales in Q2 were driven by strong 100 gig, 200 gig, and 400 gig data center as well as broadcast revenue.
There is a downside, however. Weak 10 gig China passive optical network (PON) and wireless infrastructure revenue offset those gains. Drilling a little deeper, we note that China infrastructure demand remains relatively stable yet meek, and we feel that Semtech’s potent PON portfolio stands to perform fairly well when the market finally rebounds, presumably in the next two to four quarters.
Speaking of China, Semtech’s PerSe proximity sensing product saw an uptick in Q2, presumably boosted by upcoming (second half [H2] 2024) regulatory updates in China regarding absorption ratio limits. PerSe is a relatively young product but looks promising, especially against Semtech’s efforts to diversify its portfolio of end markets for advanced sensing and protection products, which grew 35% QoQ. New design wins in secured and smartphone applications are partly responsible for this sequential growth, but it is important to keep in mind that roughly 50% of product revenue from this segment of the business comes from industrial, telecom, and automotive applications.
The company’s Signal Integrity Products group also reportedly grew a respectable 12% sequentially in Q2 to $46 million, and Pickle reported that cloud hyperscale data center revenue was noticeably up QoQ thanks to growing momentum in AI-driven applications.
Oddly, Pickle downplayed Q2 performance for Semtech’s $24 million IoT Connected Services despite delivering 20% YoY growth, driven by smart and enhanced carrier connectivity. To strengthen that segment of its business and address relatively low attachment rates for its cloud services platform, Semtech plans to enhance hardware revenue with high margin software sales and a renewed focus for IoT-managed connectivity in cloud platforms.
Another interesting sliver of Semtech’s business that caught our eye this past quarter is LoRa. For reference, Semtech’s LoRa is a long-range, low-power wireless platform broadly used in IoT applications. Although LoRa is not a cellular infrastructure substitute, its opportunity is uniquely aligned with specialized private network use cases, where power reach and mobility can be critical. What makes LoRa especially interesting right now is that even though wireless radio-enabled component sales have generally struggled recently (again partly due to high levels of inventory in the channel), LoRa end-node sales have increased slightly during the quarter. Something to keep an eye on.
One of the points of discussion during the earnings call that caught our attention was how Semtech’s broadband module business might stand to benefit from ongoing US legislative attention on the company’s low-cost Asia-Pacific (APAC)-based competitors. Pickle expressed that this legislation might present Semtech with an opportunity to expand its market share, and he is not wrong. Case in point: pipeline engagements have reportedly been quick to pick up lately as questions about possible updates to the entity exclusion list, which could happen without much warning. To be clear, no significant legislative or regulatory action is expected to shake up the vendor landscape anytime soon, but the market is definitely considering its options, risk-wise, and likely seeing advantages to working with a vendor that promises zero entity exclusion list headaches. Semtech also can put Telecommunications Industry Association (TIA)-compliant modules in place, should that ever become a requirement.
Echoing the prevailing sentiment across the sector, Pickle delivered words of guarded optimism regarding early signs of an overall recovery: “While we remain cautious given the current challenges of broader economic uncertainties and high channel inventory, I am confident that our ongoing operational refinements and strong presence in key markets keep us poised to recover as economic conditions evolve.” Again, we generally agree with that assessment.
In addition to improving economic and demand pipeline conditions, Semtech’s positioning in the high-performance analog and IoT sectors puts the company on solid ground going into Q3. Projected net sales between $190 million and $210 million for Q3 seems like a reasonable range as the market dusts itself off and continues to emerge from its post-inventory-pileup slump. Although hardware looks to struggle for now, we expect to see continued improvement across high-margin semiconductor segments, with inventory bloat finally burning off next year, easing the brake on demand for modules and routers.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
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Author Information
Research Director Olivier Blanchard covers edge semiconductors and intelligent AI-capable devices for Futurum. In addition to having co-authored several books about digital transformation and AI with Futurum Group CEO Daniel Newman, Blanchard brings considerable experience demystifying new and emerging technologies, advising clients on how best to future-proof their organizations, and helping maximize the positive impacts of technology disruption while mitigating their potentially negative effects. Follow his extended analysis on X and LinkedIn.
