Greetings, and welcome to the Semtech Corporation Conference Call to Discuss the Third Quarter Fiscal Year 2023 Financial Results. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, Semtech's Executive Vice President and Chief Financial Officer. Please note that this conference is being recorded. [Operator Instructions]

I will now turn the call over to Semtech's Vice President of Investor Relations, Anojja Shah. Thank you. You may begin.

Anojja Shah - Vice President of Investor Relations

Thank you, John. 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 this call, all references made to financial results in our prepared remarks will refer to non-GAAP financial measures, unless otherwise noted. A discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release.

And with that, I'll turn it over to our Chief Financial Officer, Emeka Chukwu. Emeka?

Emeka Chukwu - Executive Vice President and Chief Financial Officer

Thank you, Anojja. Good afternoon, everyone. In Q3 fiscal '23, in line with our guidance, Semtech delivered Q3 net revenue of $177.6 million, a sequential decrease of 15% and a year-over-year decrease of 9%. We faced a challenging macroeconomic environment and see sustained softness in the consumer market and overall weakness in China, but we are beginning to see signs of stability on several bright spots. Our focus on regional revenue diversification is showing signs of success. We see accelerating adoption in North America and Europe for Tri-Edge for LoRa and our broad-based industrial and automotive protection business due to our targeted growth efforts with end customers.

Overall, Q3 shipments into Asia, North America and Europe represented 71%, 15% and 14%, respectively. While this represented the ship-to addresses for our distributors and customers, we estimate that approximately 35% of our shipments are consumed in China, 28% in the Americas and 21% in Europe and the balance over the rest of the world. Looking at our end markets, our infrastructure end market grew 5% over the prior year, but declined 17% sequentially and represented 39% of total net revenues. Net revenue from the industrial end market also grew 7% year-over-year but declined 13% sequentially and represented 41% of total net revenues.

As I previously mentioned, we continue to see softness in consumer end markets where net revenues for high-end consumer decreased 43% over the prior year and 15% sequentially and represented 20% of total net revenues. Approximately 10% of high-end consumer net revenues was attributable to mobile devices, and approximately 10% was attributable to other consumer systems. Our sales channel remains consistent with distribution, representing approximately 83% of shipments and direct 17% of shipments. Our distributor POS declined during the quarter but remained balanced with approximately 38% of POS coming from infrastructure, 33% from the industrial segment and 29% coming from high-end consumer end market.

So far in Q4, we see signs that our POS is stabilizing and no longer declining. The Q3 bookings decreased sequentially and represented book-to-bill of less than one. Bookings were generally weaker across all regions and end markets. And just as in POS, we are beginning to see stability in bookings over the past month. Our gross margin remains resilient. In Q3, gross margin increased 30 basis points sequentially to 65.5%. This is a new quarterly record, driven mostly by a lower mix of consumer revenue. For Q4, we are projecting a small decline of gross margin to 64.5% at the midpoint, driven by lower absorption due to the softer overall demand environment. We expect gross margins to hover at current levels, plus or minus 100 basis points until demand recovers.

Q3 operating expenses decreased approximately 5% sequentially to $68 million as we took steps to respond to softening demand. For Q4, while maintaining our investments in new products, we will take additional measures to reduce operating expenses by approximately 10% sequentially in response to the weaker demand environment. Managing our cash flow is a focus in these challenging times. In Q3, cash flow from operations was unusually low at $18 million or 10% of revenue, reflecting elevated use of working capital as accounts receivable increased due to timing of shipments and as we continue to pay for prior period long lead time materials.

We expect our cash flow from operations to rebound in Q4 to normal seasonal levels. Cash, cash equivalents and marketable securities increased approximately $256 million to $618 million. The increase is primarily due to the $319.5 million in convertible notes we issued to help fund the proposed Sierra Wireless acquisition, slightly offset by a $203 million payment on our existing line of credit. The convertible notes resulted in net cash proceeds of approximately $280 million after expenses, sale of warrants and the cost of the convertible note hedge transactions we entered into in conjunction with the issuance of the notes. These convertible notes carry an interest rate of 1.625%, and will mature on November 1, 2027.

The conversion price of the notes, including the hedged transactions is $51.15. And on a non-GAAP basis, there will be no dilution below this price. In Q3, we did not repurchase any stock because of our pending acquisition of Sierra Wireless. We have approximately $209 million remaining in our share repurchase authorization. Going forward, we expect to primarily use our cash to pay down the expected debt from completing the Sierra Wireless acquisition. In Q3, accounts receivable increased 13% sequentially due to the timing of shipments and days of sales increased 9 days to 39 days.

In Q3, net inventory in absolute dollar terms was up slightly sequentially and days of inventory increased 27 days sequentially to 150 days as we continue to receive previously committed long lead time materials despite the decline in demand. We expect net inventory to be flat to slightly down in Q4, reflecting the weaker demand environment. As we look forward to the pending acquisition of Sierra Wireless, we remain excited about the growth potential of the two companies when combined. Sierra's reported revenue is consistent with our expectation. And when complete, the transaction is expected to be immediately accretive to Semtech's non-GAAP EPS.

In summary, our business continues to be adversely impacted by the broad slowdown in China and a sustained weakness in the consumer market. Maintaining our financial health is paramount during these uncertain times. We have a management team that has experience managing through industry downturns, and I'm confident that the proactive actions taken, our focus on new products, design wins, working capital management and geographic diversification will strengthen Semtech and prepare us well for the recovery.

I will now hand the call over to Mohan to share more details on the business.

Mohan Maheswaran - President and Chief Executive Officer

Thank you, Emeka. Good afternoon, everyone. Let me begin by providing a brief update on our proposed acquisition of Sierra Wireless and will then share details of our Q3 fiscal year '23 performance by product group and then provide details on our outlook for Q4.

With regards to our acquisition of Sierra Wireless, as previously announced, we received a second request from the U.S. Department of Justice. We are cooperating fully with the DOJ and providing them with their requested documents. In parallel, together with Sierra, we have made significant headway with integration planning and are prepared to close immediately when approval is accomplished.

We continue to be extremely excited by the transformation we can drive in the entire IoT industry by bringing together the ultra-low power, long-range sensor benefits of LoRa technology, together with the low latency, high bandwidth network benefits of cellular technology. Our goal is to enable IoT deployment simplification through end-to-end connectivity and deliver a cloud chip IoT services platform that will accelerate our customers' digital transition to the Internet of Everything. We continue to receive very positive feedback from our customers as they start to recognize the disruptive potential of the combination of the two companies. A combination of optimizing LoRa and cellular technology is a highly strategic opportunity that will position Semtech as the clear leader in the fast-growing ultra-low power IoT market.

Now turning to our Q3 performance. Our Q3 net revenue was $177.6 million, slightly above the midpoint of our guidance range. We posted record non-GAAP gross margins of 65.5% and non-GAAP earnings per diluted share of $0.65. Despite the challenging macro environment, we continue to execute well, have solid new product releases, and new design win momentum and are very excited by our future growth prospects across all our target market segments. Let me begin with our Signal Integrity Product Group. Revenue was up 2% from Q3 of fiscal year '22 and represented 44% of total revenues. As expected, the weak economic environment in China is impacting infrastructure demand negatively. Our hyperscale data center business slowed in Q3, following a strong first half performance.

Despite the softer demand, our FiberEdge revenues doubled over the previous quarter as we increased our PMD penetration in the 400-gig active optical cable segment. In addition to solid FiberEdge momentum, our Tri-Edge platform continues to make excellent design-in progress in global data centers, predominantly in North America. We are pleased to report Tri-Edge has been selected by a major North American hyperscale data center provider in a new high-volume multiyear program to enable low power, low latency and low cost interconnects within their data centers. We expect to be in production on this project in the second half of the fiscal year '24.

The benefits of Tri-Edge align well with the long-term goals of hyperscalers, focused on lowering the power and cost of their interconnects within their data centers. Tri-Edge and CopperEdge are starting to gain traction in advanced data centers in North America that are focused on leading edge, artificial intelligence or high-speed computing applications where both low cost and low latency are critical requirements. In addition to our current FiberEdge and Tri-Edge momentum, we continue to invest in new, higher-performance solutions that will enable further system-level innovation within the hyperscale data center market.

We recently demonstrated our first 200-gig per channel PAM4 FiberEdge platform. This innovative PMD platform will be used in 800 gigabit and 1.6 terabit optical modules deployed by hyperscalers. We also recently introduced our ultra-low power 50-gig per channel Tri-Edge solution for both ultra-low power 200-gig and 400-gig optical modules. In addition, we are starting to see great interest in our new CopperEdge ReDriver platform targeted at 100-gig per channel copper interconnects.

We expect to announce more significant CopperEdge, Tri-Edge and FiberEdge design wins throughout FY '24. We remain confident that our full portfolio of data center platforms, including ClearEdge and Tri-Edge CDRs, FiberEdge PMDs and CopperEdge ReDrivers will enable us to continue to rapidly grow our hyperscale data center business nicely over the next several years.

In Q3, our PON business also declined sequentially due to weakening demand in China, but was up approximately 36% on an annual basis and is on track to deliver another record year. We continue to see relative strength in 10-gig PON OLTs and ONUs while gigabit PON demand is weakening. While most of our PON revenues today are from China, we are starting to see increasing deployments of 10-gig PON outside China. In addition, we are actively engaged with leading PON system providers globally who are focused on higher bandwidth PON deployments. We expect global PON deployments to continue to accelerate as demand for higher access bandwidth is expected to increase in the future.

While weakness in China is a major headwind at this time, we remain confident this business will grow nicely over the next several years as other regions deploy PON solutions and as our China business recovers. Revenue from our wireless base station business was down in Q3, both on a sequential and year-over-year basis.

This was mostly driven by economic weakness in China, which negatively impacted 4G and 5G deployments. However, our 5G revenues grew 75% on an annual basis as European customers start to expand their 5G footprint. In Q3, we announced the production release of our Tri-Edge 5G base station platform, targeted at 50 gigabit per second PAM4 fronthaul links.

This Tri-Edge platform is a bidirectional analog PAM4 CDR with an integrated differential driver, offering ultra-low latency and low power and enables the use of low-cost 25-gigabit per second optics to operate at 50 gigabit per second. We already have numerous 5G base station design-ins with both our ClearEdge and Tri-Edge platforms and expect continued adoption throughout FY '24 and enough initial production revenues in the second half of FY '24.

While overall macroeconomic conditions continue to delay the rollout of 5G infrastructure, we are seeing more global deployments driven by European 5G vendors, which will provide more geographical balance in this business. As a result of demand weakness and excess inventory in China, we expect the infrastructure market to remain weak and expect our Signal Integrity Product Group revenues to decline in Q4. However, we still anticipate that our Signal Integrity Product Group will deliver record annual revenues for FY '23.

Moving on to our Protection Product Group. In Q3, our Protection revenues were down 27% sequentially and represented 22% of total revenues. Extreme softness from the high-end consumer market negatively impacted our business, lower revenues from our Asian smartphone customers and broad consumer weakness offset record revenues from our North American smartphone customers. We believe we are very well-positioned in the consumer protection market with a strong USB-C protection portfolio, which is expected to be the high-speed interface of choice across most future consumer segments. Our broader industrial protection business, which represents a wide range of end markets across all regions, showed resilience in the Americas and Europe markets.

We are seeing continued positive traction in the automotive segment as our Ethernet shield, display shield and antenna shield products are all gaining momentum as our customers integrate more advanced lithography technologies with higher-speed interfaces into their vehicles. Our Protection Shield solutions also have solid design win momentum at several of the top global EV makers, which is the fastest-growing sub-segment of the automotive market. We recently announced our new HotSwitch platform for industrial and communications applications. This truly innovative system protection platform provides new protection features that will safeguard systems, prolonging the lifespan of electronic devices and reducing electronic waste.

As the overall macro environment improves, we remain well-positioned to grow in the broader protection market with a well-rounded protection portfolio for high-speed interfaces, such as 10-gig Ethernet, USB Type-C, touch displays and antennas and expect our broader industrial protection business to deliver record revenues in FY '23. While we are starting to see demand levels stabilize due to high consumer inventory levels, we expect the protection business to further decline in the fourth quarter.

Turning to our Wireless and Sensing Product Group. In Q3, revenues from our Wireless and Sensing Product Group declined 3% from the same quarter a year ago and represented 34% of our total revenues. Our LoRa-enabled revenues grew 36% annually driven by growth from the smart building, industrial IoT and smart city segments. LoRa revenues increased nicely in North America and Europe, but remained weak in China due to ongoing COVID lockdowns and general economic softness in the region. LoRa continues to be utilized across a broad range of exciting use cases, and we are seeing increasing global adoption of LoRa due to its ultra-low power, long range and low cost connectivity.

Here are a few exciting announcements from this past quarter. Exeger is integrating Lora Edge with a unique solar cell technology for indoor and outdoor asset tracking and global supply chain logistics, combining Semtech's Lora Edge asset management platform with Exeger's Powerfoyle solar cell technology significantly extends the battery life of asset tracking and environmental sensing devices. CWD introduced a new module combining LoRa and Bluetooth to bring the LoRaWAN capabilities to hazardous work environments such as oil rigs, mines and construction sites where employee safety is the first priority. These easy-to-deploy IoT modules enable the tracking and monitoring of employee safety.

Intent Technologies announced its Lora-enabled smart property solution, which enables improvements in the operating performance of a building is being adopted by Nexity, a leading real estate service provider to optimize performance, improve quality of service and reduce the carbon footprint in residential and commercial properties. The platform has already achieved a 10% savings in overall building operational costs. Kiwi Technology introduced a new fully autonomous LoRaWAN-enabled network control unit or gas metering. This new comprehensive NCU will enable multiple remote meter reads per day and allows customers access to their real-time and historical gas consumption trends to identify cost savings and discover waste reduction opportunities.

The NCU also anticipates and remotely shuts off gas in potentially dangerous situations. Kiwi Technology expects these meters to remain fully autonomous for 10 years. This week, at Amazon's re:Invent conference, we announced that Amazon Web Services is integrating our LoRa Cloud geolocation capabilities into their AWS IoT core platform and launching a new service to simplify asset tracking solutions using AWS. Customer adoption is already beginning, and we will expect - and we expect this will enable the broad expansion of our LoRa Cloud geolocation services and our LoRa Edge silicon platform in the future.

LoRa's global adoption continues to make very positive progress and our metrics dashboard indicate solid momentum. These metrics include the number of public LoRaWAN network operators grew to 178, up from 173 at the end of Q2. In addition to public networks, private networks are also experiencing significant growth as evidenced by many new use cases and applications. We expect approximately 180 public LoRaWAN network operators by the end of FY '23. There were 5.6 million LoRa gateways deployed at the end of Q3, ahead of our FY '23 target of 5.5 million. This was driven by growth in Amazon Sidewalk gateway deployments, which were up 14% sequentially and up 120% annually, and private network gateway deployments, which increased 13% sequentially and 45% on an annual basis.

Macro gateway deployments also increased 10% sequentially and 33% on an annual basis. We expect these global gateway deployments to drive an acceleration in end device attach rates over the next several years as numerous new use cases increasingly adopt low-power sensor networks. The cumulative number of LoRa end nodes deployed increased 15% sequentially to 280 million at the end of Q3. We expect this number to exceed 300 million cumulative end nodes by the end of FY '23. With the increased interest in adopting digital technologies to monitor and preserve our natural resources and to help mitigate climate-related issues, we expect end node deployments to accelerate rapidly over the next three to five years.

Excluding China, we expect our FY '23 LoRa-enabled end nodes to increase on an annual basis by approximately 60%, confirming the increasing attach rate of LoRa end devices to installed gateways globally. Our LoRa opportunity pipeline at the end of Q3 was approximately $1.1 billion. We anticipate that, on average, 40% to 50% of the opportunities currently in the pipeline will convert to real deployments over a 24-month timeline. Over 82% of our LoRa opportunity funnel is currently from regions outside of China.

In Q4, we expect our Wireless and Sensing business to decline as weakness in China and a weak consumer business negatively impacted both our LoRa and proximity sensing business. However, driven by record LoRa-enabled revenues, which we will expect - which we expect will grow approximately 39% in FY '23, we anticipate our Wireless and Sensing business to deliver another record revenue year in FY '23 despite very weak consumer revenues. In Q3, we released 12 new products and achieved 2,189 new design wins, positioning us very well for future growth as macro trends improve.

Looking forward to the fourth quarter of fiscal year '23, we see continued demand challenges in China, resulting in weaker than normal seasonality. However, we are starting to see signs of stability in both demand and POS, including from China. As a result, we expect our Q4 net revenues to be between $145 million and $155 million. To attain the midpoint of our guidance range or approximately $150 million, we needed turn orders of approximately 27% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.44 and $0.52 per diluted share.

I will now hand the call back to the operator. Emeka Chukwu and I are happy to answer any of your questions. Operator?

Question & Answers

Operator

Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Tore Svanberg - Stifel - Analyst

Yes, thank you. The first question is on your current number there for the January quarter. So I think last quarter, I think you expected 0% churns, obviously now quite a bit higher. Does that mean, Mohan, that kind of like the supply and demand is back in balance? Because I think historically you turn about 20%, 30% on any given quarter. And as a follow-up to that, what gives you the confidence that you can actually achieve the 27% terms?

Mohan Maheswaran - President and Chief Executive Officer

Yes. I think that is correct, Tore. It's - supply lead times are starting to normalize and get back to what they kind of historically have been. There are also - there's also inventory in place. So, meeting short lead time orders is not going to be as difficult as it has been in the past. I think also with the POS stabilizing and the general feeling that consumer, for example, has been extremely weak for a long period of time and starting to see some improvement in bookings there gives us that confidence. And as you point out, yes, historically, we've turned 30%, 40% a quarter fairly frequently.

Tore Svanberg - Stifel - Analyst

Very good. And as a follow-up to Emeka, Emeka, when you talk about opex next quarter, you mentioned a 10% number. So is that total opex down 10% sequentially? And would this sort of be the new run rate going forward for as we model the rest of the year?

Emeka Chukwu - Executive Vice President and Chief Financial Officer

Yes, it is 10% down sequentially. As you know, Tore, when we start a new fiscal year, there are additional expenses that will come out, right, higher taxes and things like that. So the operating expenses I would expect going forward, it's probably going to be a little bit up in the first quarter and the first half of next year, but I think the run rate is going to be significantly down from what it was for fiscal year '23. As a matter of fact, I will probably expect the quarterly run rate to be about $63 million, $64 million a quarter.

Tore Svanberg - Stifel - Analyst

Very good. Just one last house-keeping one. You mentioned that 82% of the LoRa funnel is outside of China, which means 18% in the funnel is China. Why would - that would be currently as far as revenue is concerned?

Mohan Maheswaran - President and Chief Executive Officer

Revenues are closer to 45% to 50% of total revenues up from China, Tore. Obviously, I think in the last quarter, it's probably a little lower than that, but I think it's still - most of the - a lot of the revenue is up from China. The funnel obviously takes time to transition into revenue. But the important point there is that we are seeing a lot of success outside China. Now, China also is still doing very well and LoRa is growing in China. And I think it will continue to grow in China. But there are other regions, particularly North America, has taken a while to catch up. But I think now if the funnel - if we execute on the funnel transition to revenue, then we'll start to see a little bit more balanced geographical business for LoRa.

Tore Svanberg - Stifel - Analyst

Very good. Helpful. Thank you.

Operator

And our next question comes from the line of Richard Schafer with Oppenheimer. Please proceed with your question.

Wei Mok - Oppenheimer - Analyst

Hi. This is Wei Mok on the line for Rick. So in regards to your agreement to license to LoRa Cloud to AWS, I was wondering how this affects your end node forecast. And the long-term 40% CAGR, is this already embedded in - can we see an accelerated growth in your 40% CAGR?

Mohan Maheswaran - President and Chief Executive Officer

Well, yes, it's kind of embedded in the 40% CAGR, I think, because it drives a lot of end use connectivity. The whole goal here is to use AWS' channel and market power and presence to go out and drive more end node connectivity and more assets that need to be tracked and managed and we feel pretty good about the combined company's efforts here and the thinking here and the platform, but certainly, that's the expectation. Obviously, it will drive in addition to Lora Edge end devices, it would drive cloud services revenues for us and that's significant.

Wei Mok - Oppenheimer - Analyst

Great. My second question is on LoRa's spectrum. Is there any way you can help parse out how big LoRa is for the unlicensed sub-gigahertz spectrum? And how does this compare to the 2.4 gigahertz variety?

Mohan Maheswaran - President and Chief Executive Officer

Majority of the revenues are sub-gig. The 2.4 gig is relatively new. So I would say, yes, 90% and above is probably sub-gigahertz at the moment, yes.

Wei Mok - Oppenheimer - Analyst

Thank you.

Operator

And our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.

Harsh Kumar - Piper Sandler - Analyst

Yeah, hey Mohan and Emeka, I've got a couple. Mohan, I'm looking at your commentary. You talked about - both you and Emeka talked about signs of demand stabilization, but when I sort of square that against your commentary, I kind of concur that both industrial and infrastructure are down. So my question is, if you're seeing signs of stabilization, where are you seeing them? And do you think this is happening because of some of the new products that you guys are launching like Tri-Edge getting some traction and CopperEdge getting some traction? Or are you seeing sort of broadband or sort of broad-based sort of pickup in demand which suggests that maybe you're on your way up from here?

Mohan Maheswaran - President and Chief Executive Officer

Yes. I think obviously, Harsh, we guided down for Q4 and any bookings, POS demand stabilization is really going to impact the first half of next year, right? So as we start to look at it, I would say that the stabilization is more on the existing business, the existing business in China, looks like it's going to recover in the - starting to recover in the first half. The existing consumer business, which has been down most of the good part of the year, looks like it's starting to bottom out here. So hopefully, Q1 maybe Q2 will start to see pickup there. Now you add on top of that some of the new growth engines and design wins I talked about, we're starting to feel pretty good about certainly the second half of next year from a growth standpoint. But to answer your question, the comment on the stabilization is more on the existing revenues today.

Harsh Kumar - Piper Sandler - Analyst

Understood. And then you talked about a couple of growth rates for LoRa. So I just want to understand. You talked about, Mohan, I think you said all-in all-out, you ended up with about a 39% growth rate to LoRa for this year, which I think is pretty respectable given your exposure to China and what's really happening in China. And then you talked about a number ex-China of 60% that I didn't catch. Maybe you could clarify that. And then how are you thinking about - the real question is how are you thinking for growth for next year?

Mohan Maheswaran - President and Chief Executive Officer

Yes. So the 39% is our estimate for this year's growth. That's correct for LoRa-enabled business. The 60% now refers to end nodes and I simply commented on the fact that if you extract China, if you take out China where the growth has been a little bit slower, end nodes would have grown 60%. So end nodes are growing 60% in North America and Europe. And actually it's about 17% to 20% including China. So it's still pretty good, but I think it just shows that the acceleration in other regions is quite good.

Next year, a lot is going to depend on the second half. I mean, obviously China continues to be weak. And - but we have some very good things going on like the Amazon announcement we just made, we think Sidewalk and some of that is - some of those areas are starting to gain some momentum. We have a few headwinds, I mean, really what happened in the last couple of years with the Helium gateways is going to give us a little bit of a headwind for growth next year. But still, we haven't given up. We think next year should still be a reasonably good growth. It won't be close to the 40% CAGR, but I think if we can get some momentum on some of these other use cases, I think we'll still see good growth.

Harsh Kumar - Piper Sandler - Analyst

And Mohan, very helpful. And if you don't mind, I'll ask another one and I promise I'll get off the line after this. I had a question on the deal. You've got a second request. So that changes the timing of the deal. I guess my question is, where do you think the timing of the deal will lie? And then for Emeka, $319 odd million raised, do you think that's enough to close the deal? And then were you looking at converts the entire time or were you looking at straight debt? And then given the interest rates sort of pivoted to convert and if these are converts, would you have an intent to buy these bonds back so they actually don't convert and dilute?

Mohan Maheswaran - President and Chief Executive Officer

So let me start with the timing, Harsh, which is obviously out of our control to some extent. I can tell you what we're hoping, which is that towards the end of the year and early next year, we will be closed and we're ready to close and we're ready to move to integration. We're very well-prepared for that. We're excited about doing it. And so far, there's no indications that timeline shouldn't be achievable.

Emeka Chukwu - Executive Vice President and Chief Financial Officer

And so, Harsh, with regards to your question, we do have the financing that we need to close the transaction. We have a combination of our line of credit from our commercial banking partners. We have a term loan from our commercial banking partners and then we do have this convertible debt in addition to our internal cash. So the financing is pretty much in place for the acquisition. In terms of what we were looking at, we were looking at all the options. We were looking at everything and we were trying to - we had to make the decision that we thought was best in terms of the cost of capital and things like that. With regards to being able to retire the debt, we just have to see how things play along here. So - but we do have a lot of options on what we can do with regards to the convertible debt, but we'll make those decisions at the right time.

Harsh Kumar - Piper Sandler - Analyst

Appreciate it, guys. Thank you.

Operator

And our next question comes from the line of Trevor Janoskie with Needham. Please proceed with your question.

Trevor Janoskie - Needham - Analyst

Yes. Hello. This is Trevor on for Quinn Bolton. Thanks for letting me ask a question here. So, given your comments on demand stabilization, does this mean you see fiscal 4Q and fiscal 1Q '24 as the possible revenue trough with the step-up in the second half of '24? Thank you.

Mohan Maheswaran - President and Chief Executive Officer

That is the hope from what we see today. We certainly see the second half as being sequentially up from the first half. If you look at FY '23, we had a very strong first half. Looks like it's going to be a relatively weak second half, but as you see from our comments that we expect FY '23 to be a record year for us. So when you look at it as a total, it looks like a pretty good year.

Now, going into next year, we know the first half is going to be relatively weak. The question is, how strong is the second half going to be if it comes back and how it comes back. And the main drivers of the weakness have been China and consumer. There's some inventory build-up, I think, from the very strong first half. So as those bleed through and China comes back and consumer starts to strengthen a little bit, we could hopefully see a stronger second half next year.

Trevor Janoskie - Needham - Analyst

Awesome. Thank you. And you spoke about relative resilience in North America and the EU in broad industrial. Do you expect this resilience to continue moving forward? And is automotive playing a big role in this as well?

Mohan Maheswaran - President and Chief Executive Officer

Well, automotive is one of the stronger segments today for sure and we expect it to continue to be. I would say, the other industrial markets in North America and Europe are holding up relatively well. It's all relative consumers. It's been extremely weak, particularly Asian consumer business. I guess, it's well-documented that China consumer and Samsung as an example have been very weak. And I would say that the broader consumer market and computing market, PCs, laptops, tablets is also very weak. And then China itself is definitely going through some challenges economically and through - still through COVID issues. And so demand is weak. I don't anticipate those will remain, but for sure, at the moment, North America and Europe are stronger regions.

Trevor Janoskie - Needham - Analyst

Alright. Thank you.

Operator

And our next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Craig Ellis - B. Riley Securities - Analyst

Yes. Thanks for taking the question and appreciate all the transparency on what you're seeing in the markets and with the different products groups, guys. Mohan, I wanted to start just digging a bit deeper into China to understand what you're seeing there. You were early in flagging the weakness that started in China back in August.

And in interpreting your comments, I'm trying to discern if the signs of stability that you may be seeing in consumer really related to Lunar New Year builds and therefore more of something that might be near-term oriented versus something that might be related to product cycles that would be up beyond that? So can you just go a little bit deeper into what's actually happening in China and the confidence that you have in consumer and elsewhere that we're near bottom there?

Mohan Maheswaran - President and Chief Executive Officer

Yes. I think I would say the key thing to remember, Craig, is that it's come down significantly, right? So consumer and China across the board has come down quite significantly in Q3, comes down again in Q4. So we guide down in Q4. And so the indications are that Q1 will start to stabilize and we're seeing demand stabilization. So demand has started to level off. We're also seeing POS starting to improve and also bookings.

So I would say it's fairly broad. I wouldn't say it's one specific thing, but just remember that it's off a very low base rate. So the hope is now we'll start to see, I think, inventory consumed, I think that's the key. So POS increasing and some of the - even our customers' inventory is starting to flow through over the next two quarters and then we'll start to see kind of more of a real demand/supply environment, I think, in the Q2, Q3 time frame hopefully.

Craig Ellis - B. Riley Securities - Analyst

That's helpful. And then the second question is more of an intermediate term question. As you look out over the course of calendar '23, really fiscal '24 for the company, what businesses in the portfolio, do you have confidence that can grow year-on-year? We clearly have a challenging start given where we exit fiscal '23. But as you look ahead, it seems like LoRa would be set up for good growth. You talked about some real momentum in Tri-Edge. What are the businesses that you think are going to be year-on-year growers next year?

Mohan Maheswaran - President and Chief Executive Officer

Yes. So I do think for us the data center business is - has a good chance of being a very strong grower next year, obviously second half driven, but we mentioned the significant wins actually we have in both Tri-Edge and FiberEdge in my script. And if you look at that, that second half can certainly drive growth in data center. On the wireless side, it's been fairly muted. So I think the question there is really more of a macro kind of comment on 5G base station deployments and some of the 4G stuff coming back again. China is a key player in that. But that could certainly grow. Again, it's been very weak this fiscal year. So next year could be a strong grow up.

PON has had - will have a record year in FY '23 for us. So not sure we'll see the same level of growth. So it will grow, but probably it will be a smaller, a lower grower - low growth rate versus the other segments. And then the consumer is the big question because I think it's had such a poor fiscal year '23 that one has to believe that that has a good chance to come back in FY '24 and that includes our protection business and our proximity sensing business in Asia, particularly in Korea. And then of course, LoRa, as I mentioned, if you take out the Helium challenge that we have, the business should grow.

Emeka Chukwu - Executive Vice President and Chief Financial Officer

And Craig, I also think our broad-based industrial and automotive protection, which is a record - which is expected to have a record this year, should also grow next year. That is the anticipation.

Craig Ellis - B. Riley Securities - Analyst

Great. And then my last question is for you, Emeka. And it's just a follow-up to comments made three months ago around the capital costs, so really the debt interest cost for the square deal. I think three months ago, you were thinking 5% to 5.5% would be a reasonable blended interest cost. Is that still the expectation or has it changed?

Emeka Chukwu - Executive Vice President and Chief Financial Officer

I think it's going to move slightly because of all the increase in the rates at this point depending on where the rates are. At the time we close the transaction, I'll probably expect it to be between 5.5% and 6%.

Craig Ellis - B. Riley Securities - Analyst

Okay. So pretty close, but a little bit hard. Got it. Thanks guys.

Mohan Maheswaran - President and Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of Christopher Rolland with Susquehanna. Please proceed with your question.

Christopher Rolland - Susquehanna - Analyst

Hey, guys. Thanks for the question. Either of you guys, you know perhaps you can illustrate the weakness we're seeing in China, perhaps you can illustrate it for us. I think for the full year, you're expecting 34% of end consumption to be in China. I guess the first question is, what's a more normalized number? And then where do you think this trough in Q4? Are we talking like 20%? Is it less than that? How sort of deep is this? I guess that's my first question.

Mohan Maheswaran - President and Chief Executive Officer

So with regards to the consumption by region, it is an estimate, right? We currently have a size that's 35% and it is still at that range. Maybe we'll just have to see how the POS and everything continues by the end of the year. But Chris, my gut feel at this time is that it is probably going to be at that level, maybe slightly lower, but I can't really give you a number at this point.

Christopher Rolland - Susquehanna - Analyst

Okay. Maybe you can talk about - I think you mentioned inventories in China. I don't know if that was for a specific product or not. But can you talk about that where you think inventories are? I know you've talked about demand weakness, but inventories, is that coming into play here as well? And the reason I mentioned that is April, I think, in - the April quarter for you guys can go either way, up or down. If there is some inventory being chewed through here, do you think that would indicate perhaps a positive sequential into April?

Mohan Maheswaran - President and Chief Executive Officer

Yes, I think so. I have to look at it by product group. For sure, in our infrastructure business and I'm just referring to China now. We had a very, very strong first half across all of our businesses. And I think particularly, PON has perhaps a little bit more inventory than the other segments. And that's reflected in a weaker Q4 expectation, I think. So yes, I would say, in China, it's infrastructure, data center, and PON mostly, a little bit of 4G wireless, I think, there. And then on the consumer side, again, that's both for protection and proximity sensing. Again, we had a pretty strong previous fiscal year.

And I think what we are seeing is that consumers have been fairly soft for the whole year, but particularly I would say in China and Korea. So those are the two main areas. On the LoRa front, there's - obviously there's some excess inventories from the Helium drop-off there. But I think that will eventually be utilized. The Helium gateway chips are the same chips that can be used for other gateways. So I'm not so concerned there. It's just more of a macro softness kind of thing for China. So we'll see how that plays out.

Christopher Rolland - Susquehanna - Analyst

Thanks so much, Mohan.

Operator

Okay. And at this time, I'm not seeing any further questions. I would like to turn the floor back over to management for any closing remarks.

Mohan Maheswaran - President and Chief Executive Officer

In closing, our global teams are executing well in a challenging economic environment. While we are facing more macroeconomic challenges in Q4, Semtech is a very resilient company and I am confident that with the solid progress of our exciting growth engines and the diversified nature of our business, we will successfully manage through the headwinds we currently faced and deliver yet another record year in FY '23. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you.

Operator

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Q3 2023

Earnings Transcript

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