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Key Date for Earnings Call
Monday, Aug. 25, 2025 at 4:30 p.m. ET
Meet the Key Call Participants
President and Chief Executive Officer — Hong Hou
Executive Vice President and Chief Financial Officer — Mark Lin
Vice President, Investor Relations — Mitch Haws
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Identifying Business Risks
Goodwill Impairment— Mark Lin disclosed a significant noncash $41.9 million goodwill impairment charge within the connected services sector for fiscal Q2 2026 (GAAP). This charge was attributed to financial results that fell short of internal earnings expectations, indicating a need for careful monitoring of business performance.
Gross Margin Headwinds— Mark Lin indicated a slight negative effect on adjusted gross margin (non-GAAP) due to an increase in high-end consumer sales within the product mix for fiscal Q2 2026. Additionally, there was an impact from the Signal Integrity product mix, affected by a rise in telecommunications products and a projected drop in corporate revenue.
Sequential LoRa Softness— In the industrial segment, sales of LoRa-enabled solutions experienced a 5% sequential decline in fiscal Q2 2026, suggesting a need for strategic adjustments in this area.
Crucial Takeaways from the Earnings Call
Net Sales Highlights— Achieving $257.6 million in net sales marked a record for the quarter, representing a 20% year-over-year increase and the sixth consecutive quarter of growth, showcasing the company’s resilience and market demand.
Adjusted Gross Margin Performance— The adjusted gross margin for fiscal Q2 2026 stood at 53.2% (non-GAAP), reflecting a decline of 30 basis points sequentially but an increase of 280 basis points year over year, exceeding the midpoint of internal guidance and demonstrating effective cost management.
Infrastructure Net Sales Achievements— Recorded net sales of $73.4 million, representing a 1% sequential increase and a remarkable 39% year-over-year growth. Notably, data center revenue (non-GAAP) reached $52.2 million for fiscal Q2 2026, marking a record rise of 1% sequentially and an impressive 92% year-over-year surge.
High-End Consumer Net Sales Growth— Achieved net sales of $41.2 million, up 16% sequentially and 11% year over year, with TVS (non-GAAP) reaching $29.9 million for fiscal Q2 2026—up 22% sequentially and 15% year over year, reflecting strong market traction.
Industrial Net Sales Stability— Reported $143 million in industrial net sales, showing slight sequential growth and a 14% increase year over year, indicating steady demand in this sector.
LoRa-Enabled Solutions Revenue— Sales of LoRa-enabled solutions totaled $36.9 million for fiscal Q2 2026, down 5% sequentially but up 29% year over year. The company forecasts quarterly LoRa revenues of $30 million-$40 million going forward (non-GAAP), emphasizing growth potential.
IoT Systems Hardware Net Sales Growth— Achieved $64.8 million in net sales, reflecting a 2% sequential increase and a 24% year-over-year rise (non-GAAP), with bookings up over 40% year over year for fiscal Q2 2026, highlighting strong customer demand.
Adjusted Operating Income Improvements— Reported $48.6 million in adjusted operating income, resulting in an adjusted operating margin of 18.8% for fiscal Q2 2026 (non-GAAP), showcasing enhanced operational efficiency.
Adjusted EBITDA Growth— Achieved $56.5 million, a 39% year-over-year increase, with an adjusted EBITDA margin of 21.9%, up 310 basis points year over year for fiscal Q2 2026, indicating robust profitability.
Adjusted Diluted EPS Increase— Reported adjusted diluted earnings per share of $0.41, an increase from $0.38 in Q1 and up from $0.11 in fiscal Q2 2025, reflecting strong earnings growth.
Operating Cash Flow Enhancement— Operating cash flow reached $44.4 million, up 60% sequentially from $27.8 million in Q1, and improved from negative $5 million in fiscal Q2 2025, demonstrating effective cash management.
Free Cash Flow Surge— Reported free cash flow of $41.5 million, up 59% sequentially from $26.2 million CAD, and improved from negative $8.4 million in fiscal Q2 2025, highlighting financial health.
Net Debt Reduction— Reduced by $37.1 million sequentially to $359.1 million at the end of fiscal Q2 2026, with adjusted net leverage ratio improving to 1.6 times from 1.9 times sequentially and 8.8 times year over year as of the close of fiscal Q2 2026.
Adjusted Net Interest Expense Decline— Reported $4.1 million in adjusted net interest expense for fiscal Q2 2026, down 80% year over year and sequentially from $5 million. This reduction is attributed to the proactive use of free cash flow for debt repayment.
Q3 2026 Financial Outlook— Anticipated net sales (non-GAAP) of $266 million plus or minus $5 million for fiscal Q3 2026, representing a 12% year-over-year growth, with adjusted gross margin projected at 53% plus or minus 50 basis points for Q3 and adjusted operating margin at 19.6% for fiscal Q3 2026.
Data Center Demand Expectations— Management anticipates continued multiyear growth with new customer bookings accelerating, particularly in North America, and volume ramps for 1.6 terabit solutions expected to begin in calendar year 2026.
LPO Design Wins Overview— The company has secured numerous design wins with leading hyperscalers (two in the US and one in China) for 800 gig LPO solutions, with revenues expected to ramp up in Q4 2025 (non-GAAP).
ACC Cable Opportunities— Upcoming ACC product launches are anticipated in Q4 2025 and into calendar year 2026, driven by customer demand for both 800 gig (100 gig per lane) and 1.6 terabit (200 gig per lane) applications.
R&D Investment Strategy— Management has increased investment in core areas by 20% sequentially while maintaining profitability, highlighting a commitment to innovation and growth.
Key Financial Summary and Strategic Insights
Management emphasized a transition from an adjusted net leverage ratio of 8.8 times in fiscal Q2 2025 to 1.6 times in fiscal Q2 2026, driven by a significant $879 million debt reduction and an 80% reduction in quarterly interest expense year over year. The company highlighted securing “the lion’s shares of the TIAs in the most optical transceivers” and believes its 800 gig LPO laser driver is “the only compliant driver in the market.” Recent design wins in LPO and ACC products position Semtech(SMTC 0.14%) for incremental revenue growth in infrastructure, with deployment ramps beginning in Q4 2025 and accelerating in calendar year 2026. The adoption of digital sensing technology (PERSE) is expanding in both smart glasses and major smartphone platforms, representing a “pretty sizable market” opportunity for future growth.
Management noted that bookings in the industrial segment remain robust, driven by market recovery and increasing demand for IoT platforms, alongside rising design wins and greater adoption of 5G technologies.
President Hou stated, “we are well-positioned to further transform Semtech into a higher growth and more profitable company,” citing portfolio optimization and core asset delineation as critical strategies moving forward.
While the company expects seasonal fluctuations in the high-end consumer segment in fiscal Q4 2026, it views the industrial and infrastructure segments as vital growth drivers in the coming quarters.
Hong Hou emphasized, “the LPO transition into taking over some of the DSP-based transceiver market share is inevitable,” positioning Semtech to benefit regardless of whether deployments favor traditional DSP or LPO architectures.
Essential Industry Terminology
LPO (Linear-drive Pluggable Optics): An innovative optical transceiver architecture designed to lower power consumption and costs by omitting digital signal processing for specific links.
ACC (Active Copper Cable): A high-speed copper interconnect featuring integrated signal amplification and equalization, designed to extend range and minimize latency within data centers.
TIA (Transimpedance Amplifier): An essential analog front-end component for optical receivers, tasked with converting low-level photo currents into measurable voltage signals in optical modules.
PERSE: Semtech’s proprietary proximity and gesture sensing technology for smart devices, facilitating intelligent power management and compliance with regulatory standards.
TVS (Transient Voltage Suppression): A semiconductor protection device designed to safeguard electronic circuits from damaging voltage spikes.
PMD (Physical Media Device): A module responsible for managing data transmission between the physical transceiver and network components.
DSP (Digital Signal Processor): A specialized microprocessor engineered for real-time processing of digital signals in networking and communications equipment.
Comprehensive Conference Call Transcript
Hong Hou, our President and Chief Executive Officer, and Mark Lin, our Executive Vice President and Chief Financial Officer, are here with us today. Before we dive into the prepared remarks, I want to highlight some upcoming investor events, including the Deutsche Bank Technology Conference on August 27, the Benchmark TMT Conference on September 3, the JPMorgan Rising Tech Leaders Forum on September 4, and the Piper Sandler Growth Frontiers Conference on September 10. Today, after market close, we shared the run-out results for 2026, which are available along with an earnings call presentation on our Investor Relations website at investors.semtech.com. The discussions in today’s call will encompass various remarks about our future expectations, plans, and prospects, which include forward-looking statements.
We encourage you to refer to today’s press release and Slide two of the earnings presentation, along with the risk factors section of our most recent annual report on Form 10-K. Several risk factors could cause our actual results and events to differ materially from those anticipated or projected during this call. It is essential to consider these risk factors alongside our forward-looking statements. Today’s call will primarily reference non-GAAP financial measures; please see today’s press release and slide three of the earnings presentation for important notes regarding our non-GAAP financial presentation. The press release and earnings presentation also include reconciliations of our GAAP and non-GAAP financial measures.
With that, I will hand the call over to Hong.
Hong Hou: Thank you, Mitch. Good afternoon to everyone joining us today. The Semtech team has made substantial progress this quarter, with sequential increases across every end market leading to record net sales. We also witnessed sequential improvements in adjusted gross profit, operating income, and earnings per share, thereby strengthening our financial profile while executing on the R&D roadmap that lays the groundwork for long-term growth. As I complete my one-year tenure as Semtech CEO, I reflect on the three priorities I outlined in our earnings call a year ago, and I am pleased to report that we have made tremendous progress.
First, concerning strengthening the balance sheet, at the end of Q2, we successfully reduced debt by $879 million since I took on the CEO role, resulting in an 80% year-over-year reduction in quarterly interest expense and a substantial improvement in our net leverage ratio to 1.6 times at the close of Q2 2026, down from 8.8 times a year ago. This significant enhancement to our financial foundation enables us to concentrate on growth drivers for our business. Second, we have focused on rationalizing the portfolio and increasing investment in our core assets. I am pleased to report that the core assets we have delineated, specifically in data center, LoRa, and PERSE, have each significantly contributed to our net sales momentum throughout the year.
With increased R&D investments in these core areas, we anticipate further acceleration of our momentum. Third, revitalizing our winning culture is an area of progress that I am particularly proud of. Through strong engagement with employees, including frequent site visits, interactive information sessions, small group and one-on-one meetings, as well as regular and transparent communications, we have provided clarity on the company’s vision, strategy, and priorities following a call to action. By fostering a culture of customer intimacy, operational discipline, and a strong excuse, we believe we have made great strides in achieving roadmap alignments with our key customers through significantly improved customer engagement, securing new product design wins, and delivering strong financial performance.
I extend my sincere gratitude to our senior leadership and all employees for their resilience, dedication, and commitment to Semtech’s growth initiative. Moving forward, the priority of portfolio optimization is elevated further. We have successfully managed our non-core assets back to a growth trajectory, and combined with favorable market conditions, we believe these assets represent a compelling business opportunity. We are well-positioned to further transform Semtech into a higher growth and more profitable company. Now, let’s discuss our end market performance. For Q2, infrastructure net sales reached $73.4 million, which represents a 1% sequential increase and a 39% year-over-year growth.
Infrastructure revenue growth was driven by record revenues in our data center business. Net sales for data centers reached a record high of $52.2 million, reflecting a 1% sequential increase and a staggering 92% year-over-year growth, benefitting from our broad product portfolio. Our CyberEdge products achieved record net sales, compensating for initial deployment challenges in the copper edge segment. Based on Q2 performance, we expect strong opportunities for fiber edge demand to persist through the remainder of calendar year 2025 and beyond, particularly from our optical module customers serving North American cloud service providers (CSPs). This conviction is bolstered by our direct engagement with the ecosystem, which aligns with increased data center CapEx forecasts from multiple hyperscalers, network operators, and enterprises.
During Q2, bookings and forecasts from our optical module customers serving China-based CSPs were generally cautious due to limitations on GPU availability. However, we have recently observed accelerated data center bookings within this market. Looking ahead to the next several quarters, we anticipate the data center market will continue its multiyear growth cycle. The industry is shifting towards higher data rates to support increased computational and network interconnect bandwidth, driving strong demand for fiber edge 800 gig TIAs as we transition rapidly from 400 gig. Beyond 800 gig, we are collaborating with multiple customers on their 1.6 terabit designs, including both TIAs and drivers.
We currently expect volume ramps to begin in 2026, coinciding with the deployment of 1.6 T switches. While the transition to higher speeds for enhanced bandwidth is inevitable, it is increasingly crucial to deliver this bandwidth utilizing low power and low-latency network interconnections. Semtech’s analog expertise enables CSPs to achieve high-performance computing while expanding storage capacity, all while keeping networking budgets in check. From the optical perspective, we have secured several LPO design wins without TIAs in both 400 gig and 800 gig transceivers. We believe we hold a significant share of the TIAs in the most optical transceivers.
Our 800 gig LPO laser drivers have been specifically engineered to comply with our LPO MSA requirements, and we believe they are the only compliant drivers available in the market. Several optical module customers are currently conducting design and testing of our drivers on their transceivers. We are actively engaged with three leading hyperscalers utilizing our 800 gig LPO solution, and we anticipate revenues to begin ramping in Q4 of this year. We are advancing our R&D roadmap and aim to have 1.6 LPO drivers and TIAs available for sampling before the end of the year. Another key component is the copper edge for ACC and onboard leading equalizer.
During the quarter, we successfully delivered 800 gig and 1.6 g ACC cables to several hyperscaler and enterprise customers for testing and qualification. These customers are experiencing benefits in terms of strong signal integrity, lower latency, and significantly reduced power consumption—up to 90% lower than competing DSP-based AEC, while also offering lighter, more flexible cables and considerably longer reach compared to direct-attached copper cables. We continue to engage closely with our entry customer for their future RAC platforms utilizing CopperEdge and 1.6 optical transceivers with our FiberEdge product. We are on track to launch ACC with US hyperscaler customers during calendar year 2026.
We are currently enabling all major cable suppliers, all of whom have begun initial qualification with multiple hyperscalers. As data center topology evolves, we recognize copper’s foundational role in next-generation data center interconnects, particularly for short-reach links, where its cost, power efficiency, speed, and reliability are unmatched. With bandwidth requirements transitioning from 400 gig to 800 gig, 1.6, and beyond, advancements in active copper technologies are extending reach and providing significant power savings, establishing copper as a vital complement to optical solutions. In high-performance computing and AI clusters, copper enables low-latency, energy-efficient connections at the rack and row level, while optics address longer reach requirements.
With over twenty years of experience in analog data center solutions, we are supporting our customers in meeting their performance, efficiency, and scalability demands for today’s and tomorrow’s data centers, offering a comprehensive product portfolio that addresses line speeds from 10 gig to 400 gig with channel counts ranging from one to eight channels. Moving forward, the momentum in fiber edge, combined with our emerging copper edge and LPO opportunities, all supported by robust data center CapEx spending, positions our data center business for strong growth. Now shifting to our high-end consumer end market, net sales for Q2 were $41.2 million, reflecting a 16% sequential increase and a 11% year-over-year rise.
Net sales in consumer TVS reached $29.9 million, up 22% sequentially and 15% year over year, consistent with the seasonal trends associated with smartphone unit ramps and our strong product content across multiple customers. This growth outpaces the overall growth in handset volumes, aligning with our belief that Semtech is capturing market share and increasing content, thanks to our market-leading performance and supply chain excellence. Designed for ultra-high capacitance sensitivity and rapid response times, this device protects displays and high-speed interfaces such as HDMI, USB, and display ports without compromising signal integrity or performance. This positions them as ideal components for smart TVs, game consoles, laptops, wearables, and mobile devices.
Leading global consumer electronics brands are integrating Semtech’s TVS technology into their products to ensure device performance, durability, and reliability. Additionally, our PERSE sensing technology is increasingly deployed across a diverse range of applications, from consumer electronics to automotive and industrial markets. In devices such as smartphones and laptops, where specific absorption rate standards are becoming more stringent, PERSE enables intelligent power management by detecting proximity and optimizing RF performance to align with regulatory requirements without compromising user experience. Furthermore, PERSE facilitates precise gesture control with ultra-low power consumption, both of which are highly valued for wearables like headsets and smart glasses.
We are actively engaging in design discussions with a wide array of customers in both smart glasses and smartphone platforms, supporting both existing designs and new launches anticipated in the upcoming quarters. Transitioning to the industrial end market, Q2 industrial net sales reached $143 million, showing slight sequential growth in line with our expectations and a 14% year-over-year increase. Within the industrial segment, net sales of LoRa-enabled solutions amounted to $36.9 million, down 5% sequentially but up 29% year over year, supported by ongoing expansion across several end markets and various applications. LoRa technology offers a unique combination of long-range connectivity, low power consumption, and robust performance in challenging environments.
Its capability to transmit data over several kilometers while operating for years on a single battery charge makes it an ideal solution for predictive maintenance, asset tracking, energy management, and smart city infrastructure. Moreover, it enables cost-effective and secure monitoring and control of equipment, infrastructure, and environmental conditions over extensive areas. We are witnessing growth in applications such as home security systems, smart appliances, personal tractors, and community-based environmental sensors. Additionally, our latest generation LoRa chips provide dual-band capability, operating at 2.4 gigahertz and ISM frequencies, enhancing bandwidth and supporting a new generation of connected devices that require reliable low-power communication without the complexity of traditional networks.
This capability is facilitating LoRa’s adoption in emerging low-altitude economies, including drone delivery, aerial surveying, and emergency rescue operations. LoRa technology is particularly well-suited for these environments, as it combines long-range communication, low power consumption, and strong signal resilience—three critical factors for aerial operations. LoRa technology is employed to provide reliable telemetry and sensor data transmission, even beyond visual line-of-sight, allowing operators to gather real-time insights without solely relying on high-bandwidth short-reach video links. Our IoT systems hardware business recorded Q2 net sales of $64.8 million, reflecting a 2% sequential increase and a 24% year-over-year rise.
Bookings in our hardware business remain strong, exceeding 40% year over year, driven by both broad market recovery and our position as a leading North American supplier. We observe a robust transition from 4G to 5G within the IoT sector, with growth in both bookings and design wins. We believe we are well-positioned in the 5G red cap segment and are making progress towards launching Qualcomm-based platforms in the coming year. We continue to lead in 5G LPWA technologies and are advancing satellite IoT to non-terrestrial networks (NTN), opening new opportunities for global connectivity. For routers and gateways, our partnership ecosystem continues to gain momentum.
As announced in June, several of our products, including our flagship XR 60 5G router, have achieved Verizon frontline verified status. We now support Verizon’s frontline network slice, a dedicated 5G highway for first responders, creating significant opportunities in public safety where mission-critical connectivity is paramount. In July, we hosted an AirLink partner summit in Dallas, where we shared our product roadmap and showcased a variety of compelling use cases in public safety, public transit, utilities, oil and gas, and government applications. Our various partnerships represent fundamental steps as we transition from being a product vendor to the solution provider of choice for mission-critical applications.
In summary, we delivered another quarter of strong financial performance in Q2, reflecting both the strength of our core business and the disciplined execution of our strategic initiatives. Simultaneously, we continue to invest in R&D to fuel future growth, ensuring our technology remains at the forefront of market requirements and customer expectations. With that, I will now turn the call over to Mark for additional details on our financial results and outlook for 2026.
Mark Lin: Thank you, Hong. I am pleased to report that for Q2, net sales reached a record $257.6 million, exceeding the midpoint of our outlook, representing a 20% year-over-year growth and marking the sixth consecutive quarter of growth. Details of net sales trends by end market, reportable segment, and geographic region are available on slide 16 of the earnings presentation. The adjusted gross margin was 53.2%, down 30 basis points sequentially but up 280 basis points year over year, and above the midpoint of our outlook. The adjusted gross margin for semiconductor products was 60.7%, decreasing sequentially from 63.7% while improving year over year from 59.2%.
Examining the dynamics of adjusted gross margin in greater detail, high-end consumer sales in Q2 were seasonally higher, which had a modest negative impact on the product mix. Additionally, the product mix within Signal Integrity was affected by higher sales of telecommunications products coupled with a projected decline in corporate revenue. Adjusted gross margin for IoT Systems and Connectivity benefited from increased sales of routers and gateways, with Q2 margins at 39.5%, improving sequentially from 34.4% and up year over year from 35.4%. We recorded adjusted net operating expenses of $88.4 million, which falls within our guidance range. Adjusted operating income reached $48.6 million, resulting in an adjusted operating margin of 18.8%, up 460 basis points year over year.
Adjusted EBITDA was $56.5 million, reflecting a 39% year-over-year increase, with an adjusted EBITDA margin of 21.9%, marking a 310 basis points increase year over year. Adjusted net interest expense was $4.1 million, down 80% year over year. Annualizing the Q2 amount, the adjusted net interest expense is significantly below a single quarter’s expense from just a year ago. This reduction has enabled us to accelerate investments in strategic, high-growth areas while driving earnings growth and improving cash flow. In Q2, we also recorded non-operating expenses of $1.3 million, primarily due to foreign exchange revaluation losses linked to a weaker U.S. dollar during the quarter. We reported adjusted diluted earnings per share of $0.41, up from $0.38 in Q1 and a significant improvement from $0.11 recorded a year ago. In the second quarter, we recorded a noncash $41.9 million goodwill impairment charge from our connected services business reflected in our GAAP results. While net sales for this business remained stable, down 1% year over year and up 3% sequentially, these results did not align with our internal earnings forecast and triggered a reassessment of this business’ goodwill balance. Operating cash flow for Q2 was $44.4 million, reflecting a sequential increase of 60% from $27.8 million and an improvement from negative $5 million year over year.
Free cash flow for Q2 demonstrated similar growth, reaching $41.5 million, up 59% sequentially from 26.2 million CAD and improving from negative $8.4 million year over year. We concluded Q2 with a cash and cash equivalents balance of $168.6 million, reflecting an increase of $12.1 million from Q1, while also making optional principal prepayments of $25 million on our term loan. As of the end of Q2, net debt decreased by $37.1 million sequentially to $359.1 million, with a concurrent improvement in adjusted debt leverage ratio to 1.6 as of the close of Q2, down from 1.9 and from 8.8 year over year. Now, turning to our third-quarter outlook.
We currently anticipate net sales of $266 million, plus or minus $5 million, reflecting a 12% year-over-year growth at the midpoint. We expect net sales from the infrastructure end market to increase sequentially, including growth in data centers. We also project net sales from our high-end consumer end market to rise, reflective of typical seasonality and content gains. Net sales from the industrial end market are expected to show slight growth, with LoRa remaining approximately flat sequentially, combined with expansion in our IoT cellular business. Based on expected product mix and net sales levels, we forecast adjusted gross margin at 53%, plus or minus 50 basis points, a 60 basis point improvement year over year at the midpoint.
Adjusted net operating expenses are anticipated to be $88.8 million, plus or minus $1 million, resulting in an adjusted operating margin at the midpoint of 19.6%, a 130 basis point improvement year over year. Adjusted EBITDA is projected to be million, plus or minus $3 million, resulting in an adjusted EBITDA margin at the midpoint of 22.5%, a 90 basis point improvement year over year. We expect adjusted interest and other expenses to be netted at $5 million, benefiting from leverage-based pricing on a term loan that aligns a lower interest rate with a lower leverage ratio. We anticipate an adjusted normalized income tax rate of 15%, consistent with Q2.
These projections suggest adjusted diluted earnings per share of $0.44, plus or minus $0.03, based on a weighted average share count of 91.6 million shares.
Mitch Haws: Thank you, Mark. We can now turn the call back over to the operator for the question-and-answer session.
Operator: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.
Harsh Kumar: First of all, congratulations on your solid and consistent results. Hong, I have a question regarding the LPO opportunity and its timing. Recently, a competitor suggested that their timing may be imminent, indicating they were in commercial production. I’m curious about your perspective on the progression through the year. Is there a possibility that LPO could be introduced earlier than expected, or are you operating with different customers on a slightly varied timeline?
Hong Hou: Harsh, thank you for your question. Yes, we have been engaged with a broader customer base for LPO applications, including CSPs in both the US and China. They are at different stages of testing and qualification. One positive note is that our TIAs have been integrated into nearly every transceiver manufacturer’s design and qualification process. Regarding timing, some will start deploying in Q4, while others may not be as imminent at this stage due to small volumes. However, we have a broad product portfolio, and our TIAs have already been designed into traditional DSP-based real-time solutions. Thus, we don’t yet see a substantial increase in demand due to LPO.
However, we do expect that deployments will commence in Q4, and we have design wins in both 800 gig and 400 gig for DR4s, with some already beginning to scale in volume.
Harsh Kumar: I understand, Hong. Additionally, I’d like to ask about the general state of data center spending. As a networking player, you interact with many large companies. How confident are you regarding the continued data center spending, especially when speaking with large hyperscalers and networking players?
Hong Hou: Thank you for your question. Yes, we engage directly with our customers, including module manufacturers as well as CSPs in both the US and China. We all read the same news and earnings reports, and CSPs express strong conviction and forecasts regarding increased CapEx spending to expand data center capacity and enhance AI capabilities. We are seeing strong forecasts for 2026 and beyond from our direct customers, indicating that we will benefit from this favorable backdrop.
Conversely, in China, CSPs have been somewhat cautious, as mentioned earlier, due to limits on GPU availability. However, we have begun to see a significant uptick in booking activity in recent weeks for this market. Consequently, we perceive a very optimistic tone in the market, which is reflected in new business opportunities and bookings. Although you may hear about some constraints in electronic components, this does not apply to us. Our PMD, physical media devices, are designed to support VCSELs, EML, and silicon photonics modulators, thus we do not face current constraints. Nonetheless, we are proactively planning to add more testers and back-end OSAT capacity in anticipation of significant ramp-up in 2026 and beyond.
Harsh Kumar: Understood, Hong. Thank you very much.
Hong Hou: Thank you.
Operator: Thank you. Our next question comes from the line of Joseph Moore with Morgan Stanley. Please proceed with your question.
Joseph Moore: Great, thank you. You mentioned your outlook for the Copper Edge. Could you provide more context? How confident are you in broader adoption? When discussing hyperscale customers, what types of projects are you currently working on?
Hong Hou: Thank you, Joe. Over the past three to four quarters, we have engaged with a diverse range of customers throughout the ecosystem. The level of awareness has significantly increased. We work closely with our key cable customers, and the four or five primary ones are developing 100 gig per lane and 800 gig cables. We are also sampling 200 gig per lane and 1.6 T cables to different CSPs and enterprise customers. We are witnessing strong traction as customers recognize the benefits of low power, greater flexibility, and superior signal integrity along with extended reach compared to DAC cables.
We see applications ranging from scale-up, similar to our Android customer, connecting different processors and ASICs within a cluster, to scale-out applications that interconnect servers to the top of the rack. Additionally, we are seeing use cases where we are replacing DAC cables due to their limitations. We anticipate a couple of hyperscalers will lead the high-volume ramp, expected in either Q4 or 2026. For 1.6 TEE cables, the timing will coincide with switch availability; if there isn’t a 200 gig port, there won’t be connectivity needs. However, we are beginning to see demand for both 800 gig and 100 gig per lane cables, and we’re preparing for this demand in the latter part of this year.
Joseph Moore: Thank you for that insight. Additionally, are you facing any supply constraints regarding 1.6 optics?
Hong Hou: Regarding 1.6 optics, at this point, we do not see strong volume demand. However, every module manufacturer is designing their optical modules with different DSPs and PMDs, which we provide to meet their specific requirements. We support a wide range of demands, but the volume ramp will likely begin in 2026. Currently, volume deployments for ports requiring 1.6 T connectivity are limited to two major ASIC manufacturers, one focused on GPUs and the other on switches. Hence, the timing for volume deployment is contingent on their schedules.
Joseph Moore: Great, thank you.
Hong Hou: In summary, we do not foresee constraints from external sources.
Joseph Moore: Thank you.
Operator: Thank you. Our next question comes from Timothy Arcuri with UBS. Please proceed with your question.
Timothy Arcuri: Hi, this is Dino on behalf of Tim. I have a question regarding LoRa. It appears results surpassed the $30 million to $35 million range you previously mentioned. Are you experiencing significant contributions from other applications of LoRa? Do you anticipate LoRa to perform consistently at this level over the next few quarters?
Hong Hou: Thank you for your question. We are indeed pleased with the demand for LoRa. We are on the right track in enhancing capabilities with new products. For instance, we are providing dual-band capabilities in addition to ISM baseband, allowing devices to operate on the 2.4 gigahertz band. This enhancement unlocks a range of applications, including those in the low-altitude economy, such as drone delivery and even applications related to smart city initiatives.
For example, parking meters can capture images and transmit them back for archiving purposes using our enhanced technology. We have also introduced LoRa plus, which integrates LoRa with other RF protocols, enabling us to address diverse applications that traditional LoRa alone cannot cover. We are thrilled to see sustained strong demand for LoRa, with the number of end nodes shipped last quarter reaching historic levels. Looking ahead, we project LoRa revenue on a quarterly basis to be between $30 million to $40 million, reflecting an increase from our original expectations.
Timothy Arcuri: Great, thank you.
Hong Hou: Thank you.
Operator: Our next question comes from Quinn Bolton with Needham and Company. Please proceed with your question.
Quinn Bolton: Hi, thank you for taking my questions. Congratulations on the results and outlook. I wanted to follow up on the ACC opportunity to clarify its timing. It sounds like you expect some ACC revenue potentially in fiscal Q4 ending January. If I understood your previous answer correctly, it seems that 800 gig or 100 gig per lane ACC will ramp first.
Hong Hou: Quinn, it may have been confusing. The 800 gig is intended for interconnects, such as in the backplane and between racks. Historically, these applications relied on DAC cables but can now achieve data rates of 100 gig and even 200 gig per lane. However, the cables were rigid and limited signal integrity. Consequently, we still refer to them as scale-out applications. Currently, the 200 gig per lane and 1.6 T applications are primarily for scale-up purposes, interconnecting different racks of ASICs. We are also finding more applications for scale-out, particularly in the backplane, aiming to replace DAC cables with our ACC, which offers greater flexibility and improved signal integrity while remaining within existing power budgets.
Quinn Bolton: Understood. So, to clarify, the 1.6 or 200 gig per lane cables will largely depend on Broadcom’s Tomahawk six switch, enabling 200 gig per lane applications. Will there be any applications for 1.6 T ACCs ramping before the switch is available, or do your 100 gig designs ramp in Q4 ahead of that platform?
Hong Hou: The volume demand for 100 gig will begin first, likely in Q4. The first applications for 200 gig will focus on scale-up between ASICs, followed by scale-out applications once broader availability of the switch dies occurs, as you rightly pointed out.
Quinn Bolton: Got it. That makes sense. I also wanted to shift focus. While the data center business is driving substantial growth, you mentioned the PERSE business and engagements in new smart glass platforms as well as smartphone platforms. Can you provide your outlook for PERSE’s ramp? I believe you have a smart glass platform that has already achieved high volume. Do you foresee ongoing growth in smart glasses, and can you comment on PERSE adoption in the smartphone segment?
Hong Hou: Certainly, Quinn. The PERSE devices have become the industry standard for smartphones, and we are in the process of collaborating with nearly all major smartphone manufacturers. Our lead customer for smart glasses is the Matter Rebound glasses, but we are also engaging with several other platforms, each utilizing similar functionalities but connecting to their unique large language models for AI applications. The smart wearable market continues to evolve, demanding more functionalities, and we are actively engaging with a broad range of customers to design next-generation products that hold promise for significant market growth.
Quinn Bolton: Excellent. Thank you, Hong. Thank you, Mark.
Hong Hou: Thank you, Victor.
Operator: Thank you. Our next question comes from Christopher Rolland with Susquehanna International Group. Please proceed with your question.
Christopher Rolland: Hi, thank you for taking my question. While it may be early for January guidance, historically, it has been a down quarter. Can you provide any insights into how we should think about January, particularly in light of potential outperformance driven by LPO ramp or ACC ramp? What milestones should we consider for January?
Mark Lin: Yes, Chris. We have provided our outlook for Q3, and our commentary on end market trends should help investors form expectations for growth in the upcoming periods. You are correct that high-end consumer sales typically decline in Q4. We do not foresee any change in that seasonal trend. High consumer net sales were $41.2 million in Q2, marking a multiyear high with a 16% sequential increase and a 11% year-over-year rise. While we are gaining design wins and market share, which positions us to grow above market rates, we still view Q4 as a seasonal decline rather than a sign of weakness in any of our business areas. The industrial end market is performing well, and we have heard positive trends from industry bellwethers.
Our ISC business is also performing well due to the transition from GS to 5GS, which acts as a tailwind. In infrastructure, the data center segment is undoubtedly a growth engine. All the comments provided by Hong in our prepared remarks and throughout the Q&A highlight our broad portfolio. FiberEdge shipments have increased approximately threefold compared to a year ago, and anything we discuss regarding LPO or ACC will be incremental to that growth.
Christopher Rolland: That sounds fantastic. Thank you very much. Additionally, I noticed you mentioned your leverage ratio has dropped to 1.6 times, which is impressive considering where it was just a couple of years ago. What does this mean for potential acquisitions or divestitures?
Hong Hou: Thank you, Chris. We are excited about the progress made, especially considering that a year ago our leverage ratio was at 8.8 times. This improvement in our financial foundation allows us to be more aggressive in capturing growth opportunities. Through close engagement with customers, we have identified numerous promising growth opportunities, and we have managed to balance R&D spending with our bottom line over the past year. We believe we are striking the right balance, increasing R&D spending in core areas by 20% sequentially while still delivering solid bottom-line performance.
Going forward, we will continue to invest in these core areas, and there may be opportunities for portfolio analysis. We may explore options where we can apply technology leverage, customer leverage, or operational leverage. We see some possibilities for small tuck-in acquisitions, but our highest priority remains portfolio optimization. We are committed to determining which areas we want to enter. Our board supports our strategy moving forward.
Christopher Rolland: Thank you, Hong, and congratulations on the results.
Hong Hou: Thank you.
Operator: Thank you. Our final question comes from Rich Schafer with Oppenheimer. Please proceed with your question.
Rich Schafer: Thank you. I have a question regarding Tri Edge. What is the outlook for the PAM4 Tri Edge business, particularly as the industry seems to be shifting focus towards 100 G and 200 G lanes? How do you view the Tri Edge opportunity? Is PAM4 expected to be a growth driver for Semtech?
Hong Hou: Thank you for your question, Rich. The Tri Edge has been our traditional offering, featuring an integrated product with drivers and TIAs combined with clock and data recovery. You could consider it an analog version of DSP technology. We offer our product at 50 gig per line, which can aggregate to 200 gig bandwidth for four channels and 400 gig for eight channels. Our customers, particularly in China and one CSP in the US, have been utilizing our Tri Edge in AOC cables for 400 gig and 200 gig applications.
While this has been on a limited basis, one major CSP in the US is forecasting substantial ramp-up for Tri Edge in AOC applications for 400 gig. Our plan is to continue pushing the envelope, moving the PAM4 from 50 gig to 200 gig, effectively skipping 100 gig PAM4. This leap is crucial as it may be too late for 100 gig. The advantage of the 200 gig Tri Edge CDR is that it continues to deliver low power consumption while providing both frequency domain equalization and time domain retiming.
This product is on our roadmap and under development. We believe that once the 1.6 transceivers are launched, we will first drive volume and subsequently focus on cost and power reduction. We will ride the wave of providing low-cost, low-power versions of the Tri Edge.
Rich Schafer: Have you assessed the potential market size for this opportunity, or is it too early for that?
Hong Hou: At this stage, it’s a bit early for that. However, we typically evaluate market opportunities to determine the feasibility of R&D projects. For instance, if we can capture even 10% of the 1.6 T transceiver market with our real-time solutions, it would be highly worthwhile given the vast opportunity. The potential is genuinely significant as customers recognize the benefits of better signal integrity, lower power performance, and similar attributes as seen with LPO, leading to greater acceptance.
Rich Schafer: Thank you very much.
Hong Hou: Thank you.
Operator: Thank you. Our next question comes from Cody Acree with The Benchmark Company. Please proceed with your question.
Cody Acree: Thank you for taking my questions, and congratulations on the progress made. Hong, could you revisit your ACC commentary concerning cloud service providers? You mentioned that you expect revenue to begin early in 2026. Is this a reset in timing compared to earlier expectations for diversification in Q4? Or has this always been the timeline, distinguishing between CSPs and cable providers?
Hong Hou: Cody, thank you for the question. The timing for the LPO ramp has always been contingent on the platform architecture of our customers. In this case, the switch availability has shifted slightly. However, there are two other use cases for 100 gig per lane and 800 gig ACC cables that are independent of that timing, and we anticipate that ramp will commence in Q4 for those variants. Additionally, 200 gig per lane and 1.6 T cables intended for scale-up between different racks of ASICs will also progress along the Q4 timeline. When we initiate the ramp, we will move from very low levels to a significantly larger scale, and timing is crucial as the ramp-up slope is steep. Fortunately, we have previously undergone a similar ramp supporting our anchor customer, giving us confidence in our ability to adequately support the market.
Cody Acree: Excellent, thank you for that insight. Mark, could you share your outlook on gross margin expectations for the upcoming quarters, as well as trends in your operating expenses?
Mark Lin: We have outlined our guidance for the forthcoming quarter, and as we’ve stated, our performance is heavily influenced by product mix. The positive aspect is that the faster-growing segments of our business significantly contribute to this mix, particularly within data centers. However, we do anticipate some headwinds from our IoT cellular business, and we expect a slight headwind from the high-end consumer segment in Q3. Nevertheless, the overall operating margin appears promising. As for operating expenses, we are actively looking for opportunities to invest in near-term growth areas. We have a robust portfolio under development, but we remain very mindful of R&D spending. We aim to keep that under control while exploring valuable organic growth opportunities.
Cody Acree: Any thoughts on R&D growth moving forward?
Mark Lin: Cody, we aim to be prudent and avoid overspending. We will leave it at that for now.
Cody Acree: Thank you, everyone.
Operator: Thank you. Our next question comes from Tore Svanberg with Stifel. Please proceed with your question.
Tore Svanberg: Thank you, Hong and Mark. I wanted to take a step back and ask about the general business environment, particularly regarding sales linearity. Could you provide any insights on the linearity of sales and bookings?
Hong Hou: Yes, Tore, thank you for your question. We are experiencing robust booking activity across data center segments, LoRa products, and PERSE, while bookings for high-end consumer TVS are also strong. The industrial module bookings are also performing well. As for linearity, there is often variation in product mix from quarter to quarter. However, I can say that it is uncommon for so many factors to align positively, and that is precisely what we are witnessing right now. I feel optimistic about the future quarters.
Tore Svanberg: Excellent. As a clarification, regarding LPO, you indicated that you expect three leading hyperscalers to enter 800 gig production in Q4 of this year. Are these three hyperscalers all based in the US, or do they include entities in both the US and China?
Hong Hou: The three hyperscalers include two from the US and one from China. The LPO transition is in its early stages, and the shift from DSP-based transceivers to LPO is inevitable. The advantage for us is that whether it remains DSP-based, we gain TIA content, and if we transition to LPO-based, our serviceable addressable market will effectively double, as we will have the driver content as well. The timing is important to us, but it is not overly sensitive since we are already established incumbents in the DSP-based transceiver market.
Tore Svanberg: Sounds good, and congratulations on your results.
Hong Hou: Thank you.
Operator: Thank you. There are no further questions at this time. I would now like to turn the call back to Mitch Haws for closing remarks.
Mitch Haws: That concludes today’s call. Thank you all for joining us today, and we look forward to seeing you at various investor events in the coming weeks.
Operator: Thank you. This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.
