Semtech - Q2 2025

Transcript

Operator (participant)

Good evening, and welcome to the Semtech Corporation Second Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Mark Lin, Executive Vice President and CFO. Thank you, Mark. You may begin.

Mark Lin (EVP and CFO)

Thank you, operator. Good day, everyone, and welcome. I'm pleased to be joined today by Hong Hou, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the second quarter of fiscal year 2025, which are posted along with an earnings call presentation to our investor website at investors.semtech.com. Today's call will include various remarks about future expectations, plans, and prospects, which comprise forward-looking statements. Please refer to today's press release and see slide two of the earnings presentation for information on risk factors that could cause our actual results to differ materially from those made on this call. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than net sales. Please refer to today's press release and see slide three of the earnings presentation for important information regarding notes on our non-GAAP financial presentation.

The press release and earnings presentation will also include reconciliations of our GAAP and non-GAAP financial measures. With that, I will turn the call over to Hong.

Hong Hou (President and CEO)

Thank you, Mark. Good afternoon, and thank you all for joining us today. I'm excited to host my first Semtech earnings call. I would like to take a moment to thank the board of directors for giving me the opportunity to lead Semtech as President and CEO at this pivotal time, and to thank all our global employees and leaders for the warm welcome they have given me. Over the past two months, I have visited many of our customers, our suppliers, and Semtech's global locations, and taken great pleasure in talking to many people in person, getting to know them and hearing their comments and feedback. I'm especially proud of the Semtech team, did not miss a beat in execution and serving the needs of our customers during the leadership transition.

I'd also like to share with you a few of my initial observations since taking up my new role and what I see as the near-term priorities. First, we have made solid progress in rationalizing expenses and stabilized our financial foundation. There's still more to do, of course, but this allowed us to go on all fronts, and I look forward to capturing significant growth opportunities, given favorable market trends and alignment with our core competencies. Second, we have world-leading technologies and products developed and refined over decades in the analog and mixed signal design, LoRaWAN, and a superb reputation in mission-critical cellular systems, and outstanding R&D efforts helmed by Mike Wilson, our Chief Technology Officer, with an almost 30 years tenure at Semtech.

Third, we have world-class management processes and systems, and a proven track record of delivering global operations excellence, high quality, and on-time deliveries for our customers. These core methods that are key to Semtech's success were honed over time and consistently refined by Asaf Silberstein, our Chief Operating Officer, with 25 years in the semiconductor industry and almost 15 years tenure in the company, and his team. Fourth, our customers value our core technologies and asking for our partnership in driving collaborative innovations. They believe our innovative solutions can enable them to win and grow their business. Building on these great foundational elements, I view my near-term priorities as follows: First, focus on strategy, rationalize our portfolio, and improve the balance sheet. We continue to believe that some assets in our portfolio are not core to our long-term strategy, and our focus can be sharpened.

Both our management and the board are committed and remain focused on balance sheet improvements through reduction of debt. Using asset sale proceeds to reduce debt is our capital allocation priority. Until a potential sale occurred, however, we will continue to invest in the business, both to enhance value and to fully support our customers. To maximize potential transaction values, I will respectfully limit further public comments on the topic. For instance, what assets and the status and the timing of the process. Second, accelerate revenue growth and drive margin expansion. In my discussions with numerous customer senior executives, it's very clear that our customers and target markets are moving towards us, driving up demand for Semtech's world-class portfolio of product, technology, and services. Through disciplining the investment, innovation, and efficiency, we'll develop even more differentiated solutions that underpin the critical business needs of our customers.

In so doing, we expect to achieve solid organic growth, SAM expansion, market share gain, and margin expansion. Third, energize our people and elevate our winning culture. I have been hugely impressed with our talented and committed workforce and leadership, but we can do more. We will invest in our people, align around a clear vision and focused strategic imperatives to accelerate results with a winning mindset and high performance culture. Moving to our second quarter results, I believe Semtech has executed well to the established strategy, as demonstrated by solid second quarter financial performance, with a sequential revenue growth across each of our business units and a favorable outlook for our third quarter that forecasts acceleration of our growth.

For the second quarter, infrastructure net sales were $52.9 million, with net sales for data center of $27.2 million, up 28% sequentially and up 37% year-over-year. In hyperscale data center applications, net sales more than doubled over last year and were well supported by strong demand for our FiberEdge transimpedance amplifier, or TIA, and laser drivers for 400 GB and 800 GB optical modules, and a Tri-Edge 50 GB PAM4 product in 200 GB and 400 GB active optical cables. We have noted the increasing CapEx targets reported by hyperscalers and the incrementally AI data center markets are moving towards us. Our analog solutions provide substantially lower power and lower latency, as well as significantly greater value compared to the retimed DSP solutions.

My meetings with the chief system architects in data center ecosystem since joining as CEO confirmed my belief that the transportation of bits within data center has by far the greatest power optimization opportunities. Lower power consumption and latency reduction for transport are key considerations for AI computing. Delivering on these transport opportunities will allow a greater allocation of power to compute and memory, and the Semtech team has every intention on delivering our low power, low latency solutions through embedded customer engagement and our depth of analog expertise. Semtech's CopperEdge continuous time linear equalizers have a well-documented application, where we partnered with NVIDIA to implement low power, low latency, active copper cables, or ACCs, for Blackwell racks and pods.

For our 200 G CopperEdge linear redrivers, we have received the purchase orders from ACC cable manufacturers and expect the shipments to start in our fiscal third quarter in limited quantities, a nominal ramp in the fourth quarter, and acceleration in the next fiscal year. Qualifications are on schedule, and we currently estimate our annual opportunities specific to the single platform exceeds the floor case we provided last quarter. That said, Semtech's ACC opportunities extend beyond a single platform and a single customer. We estimate data centers currently deploy tens of millions of direct-attach copper cables, or DAC cables, per year. These DAC cables are passive, and as data rates and cable lengths increase, we expect there will be natural progression from DAC cable to ACC to meet signal integrity requirements.

The market is moving towards us, and replacement of only a small fraction of DAC cables to ACC will represent a substantial increase to Semtech's SAM. Indeed, Semtech is currently engaged with a number of companies in the AI ecosystem on just such opportunities. On this front, while we believe standards bodies and MSAs have their place in this market to promote interoperability and backward compatibility, the time to develop and approve those standards inevitably extend the time to deploy. We believe the pace of data center innovation is optimized with Semtech's direct engagement with our end customers and allows us to create a purpose-built solution for hyperscalers to address their specific challenges. We are absolutely at the right moment to adopt this approach. I expect direct engagement will accelerate Semtech's time to revenue and enhance top-line organic growth.

It is this top line organic growth that allows for a prudent investment, and I believe my prior experience growing a business while operating in a leveraged situation, as well as in a highly cost-conscious EMS environment, well informs my decision-making process in prioritizing disciplined investments. My expectation in this investment must deliver meaningful returns to shareholders. In linear pluggable optics, based on our engagement with a number of our key partners, we believe we have a path to LPO shipments by the latter portion of FY 2026. Similar to active copper cables, LPO represents an opportunity to deploy low-latency, low-power solutions in the optical space. With annual optical transceiver consumption at approximately 30 million units, a fraction of this market converting to LPO represents a substantial TAM expansion to Semtech.

A world-class TIA is the key to successful LPO deployment, and I'm certain Semtech's TIA fits the requirement. I have first-hand knowledge, having selected Semtech as my first choice TIA supplier to support silicon photonics product at a prior company. Our class-leading TIA performance on the receiving end well positions us for LRO opportunities as well, and we recognize there are potential applications where LRO is suited to meet customers' interoperability requirements. Moving to PON, net sales were $20.4 million, within expectation, following a robust first quarter and up 49% year-over-year. PON demand, especially the 10 GB, remains strong, with a total consumption increase of 41% year-over-year. 50 GB is on the horizon, and we are looking to expand this business on a global level. Regarding other products in the infrastructure end market, wireless net sales declined but remained within expectations.

In wireless, we're continuing in qualification process with our Tri-Edge and FiberEdge wireless platforms for 5G Advanced, and are actively engaging with the key partners like Ericsson and Nokia. We stand ready when this market rebounds. There were a few other small sequential net sales declines, resulting in a 5% sequential decline, but the data center and signal integrity segment each grew sequentially. Moving to our high-end consumer end market, net sales were $37.1 million, a sequential increase of 7% or up 9% year-over-year. POS ticked up sequentially and increased 34% year-over-year, ahead of what we expect to be seasonally strong Q3. Net sales in high-end consumer TVS grew to $26 million, up 4% sequentially and up 42% year-over-year.

Our market share in consumer TVS grew at a double-digit rate compared to last year, and we believe we are winning on technological and operational performance. I'm very pleased this growth is broad-based as we expand on platforms and applications. The overall ESD threat environment has been increasing. Higher performance silicon reduces the amount of expensive on-chip real estate available to dissipate surge energy. This trend increases the importance of high performance off-chip protection Semtech offers. This is yet another example of how markets are moving towards us. We continue to grow our market shares in not only the world's largest consumer electronics company, but in other North American and Korean companies as well. Indeed, our consumer TVS engagement in Korea recently resulted in design wins in the industrial and automotive space, where this key customer is winning shares.

This is a great example of how our direct customer engagement approach is solving customers' problems across a number of their markets and result in increased demand for Semtech. Our class-leading Percept proximity sensing products continue to perform well, with design wins at a key Korean smartphone manufacturer. While allowing our customers to meet specific absorption rate standards is a great use case for Percept, gesture controls are a substantial source of demand for this product. Percept's class-leading 3D sensing and auto far-field sensitivity is meeting or exceeding end customer requirements for gesture control features in wearables, mobile audio, and smart glasses. For the second quarter, industrial net sales were $125.3 million, up 8% sequentially. LoRa-enabled solutions had net sales of $28.7 million, a healthy 34% sequential increase, and a 72% increase over prior year.

LoRa consumption in industrial applications continue to grow, and I'm pleased that the momentum over a broad range of application from healthcare, smart utilities and smart city, to factory automation, with a recent deployment in automotive facilities. A LoRaWAN expert from Mercedes-Benz presented his company's success story at a LoRaWAN Live event in June. Their implementation resulted in what they characterized as enormous cost savings. It gives me great pleasure when an end customer becomes a LoRa advocate, and demonstrate use cases at a Mercedes are just one reason as to why I'm excited in LoRa's future, and why Semtech is fully committed to LoRa and its continued innovation and ecosystem expansion. I plan to attend the Things Conference in Amsterdam in late September to meet with the ecosystem leaders and strategize our path to democratize the LoRa standard and accelerate a proliferation.

Our IoT systems business recorded second quarter net sales of $52.3 million, up 8% sequentially, and consistent with our analysis that the business has reached a bedrock last quarter. Bookings in the first quarter had a healthy sequential growth, and second quarter bookings grew from there. Also, channels and end customer inventory levels has overall reached the normalized levels. In our module business, we had a number of RedCap design wins, demonstrating continued trust in Semtech's product across a number of core network equipment customers that demand near perfect uptime and performance. Geopolitical consideration remain a tailwind for this business on a number of front, and we are experiencing renewed engagement with some customers, we believe, due to this matters. Our business in asset tracking applications has benefited, especially as the government and the security-related users constitute a meaningful portion of this market.

Government end users are becoming more educated on risks, especially after realizing their vehicle fleets are being tracked with geopolitically sensitive components. We are pleased to have launched a Canadian instance of AirLink Management Service, which meets local data's residency requirement, which is particularly important for government and public safety users. The government-related business is a natural adjacent market with Semtech's cellular system solutions. Lastly, we started production of our own TAA-qualified facility to serve increased demand for TAA-compliant products. This facility allows us to better support continuity in supply and to elevate our support as we aggressively pursue U.S. federal opportunities. Second quarter net sales for our connected services business were $24.3 million, with noteworthy design wins in remote monitoring, fleet tracking, and healthcare.

Also of note, we collaborated with Console Connect, a leading network-as-a-service platform, to expand Semtech's connectivity coverage across the APAC region for our AirVantage service. We believe this collaboration underscores the commitment to offer best-in-class network quality. In industrial TVS, solutions are required to address increasingly harsh ESD environments as factories increasingly automate. This is where markets are moving towards us. We continue to expand our product portfolio with innovative solutions to address critical customer needs. Now, let me turn the call back to Mark.

Mark Lin (EVP and CFO)

Thank you, Hong. For the second quarter, we recorded net sales of $215.4 million, up 4% sequentially. Net sales trend by end market, reportable segment, and geographic region is included on slide 16 of the earnings presentation. Gross margin was 50.4%, up 60 basis points sequentially, and up 80 basis points year-over-year, reflecting favorable mix and cost-controlled overhead spending. Operating expenses were $78 million, a 9% year-over-year reduction. This resulted in operating income of $30.5 million and an operating margin of 14.2%, up 200 basis points sequentially, and up 60 basis points year-over-year. Net interest expense was $20.5 million, in line with guidance. We recorded net earnings per share of $0.11, based on the diluted share count of 71.8 million shares.

Adjusted EBITDA was $40.5 million, and adjusted EBITDA margin was 18.8%, up 270 basis points sequentially, and up 240 basis points year-over-year. Moving to the balance sheet, we ended the second quarter with a cash balance of $115.9 million, with working capital changes largely corresponding to revenue and cost of goods sold. Inventories increased $7.5 million, or 5% sequentially, in part to support higher expected third quarter shipments and to carry a nominal amount of wafer bank supporting active copper cable orders, but are down 13% year-over-year. Principal outstanding on our debt was $1.2 billion, reflecting the conversion completed at the end of the second quarter.

Free cash flow for the second quarter was an $8.4 million use of cash, primarily reflective of working capital changes, and we did not draw on our revolver. Now, turning to third quarter guidance, we currently expect net sales of $233 million, plus or minus $5 million. We expect net sales from the infrastructure end market to increase sequentially, with data center applications leading the growth. Infrastructure is expected to provide the strongest near-term tailwind. We expect net sales from the high-end consumer market to be up, with typical seasonality benefiting this end market. We expect industrial net sales to be slightly up as recovering booking activity from the first quarter carried into the second quarter. Based on expected product mix and net sales levels, gross margin is expected to be 52%, plus or minus 50 basis points.

At the midpoint of guidance, this will be a 160 basis points sequential improvement. Operating expenses are expected to be $81 million, plus or minus $1 million, resulting in operating margin at the midpoint of 17.2%, which will result in a 300 basis points sequential improvement. We expect net interest expense to be $18.8 million, reflective of debt reduction and a tax rate of 15%. These amounts are expected to result in a net earnings per share of $0.23, plus or minus $0.03, based on a weighted average share count of 70.6 million shares.

Adjusted EBITDA is expected to be $48.7 million plus or minus $2.8 million, resulting in EBITDA margin at the midpoint of 20.9%, which would equate to a sequential increase of 210 basis points. Guidance at the midpoint contemplates growth in net sales, improving gross, operating, and adjusted EBITDA margins, and higher diluted earnings per share. With that, I'd now like to turn the call back over to the operator for Q&A.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that participants limit themselves to one question. One moment, please, while we poll for questions. Thank you. Our first question is from Cody Acree with The Benchmark Company. Please proceed with your question.

Cody Acree (Equity Research Analyst)

Thanks, guys, for taking my question. And Hong, congrats on the good first quarter out of the gate, and welcome. Maybe, Hong, if you can talk about your active copper cable expectations. You mentioned a TAM that was larger than the TAM that was given by Paul before his departure. If you could maybe go through the elements of that TAM calculation, whether that's a unit volume, an ASP basis, or just a total available addressable market, would be great.

Hong Hou (President and CEO)

Cody, thank you very much. So thank you for recognizing our position and role in this very exciting market opportunity. And as I mentioned in the prepared remark, that in the last quarter, we gave a floor case based on the number of racks and expected ASP share allocation for a specific use case from a specific customer. Since then, we have expanded our engagement with the customers, and right now we have several customers that discussing with us on the ACC opportunities. And we're very excited about the total availability and total opportunity is above and beyond the floor case we guided. And we will see this ACC opportunities just continue to expand.

As you know, there are a lot of DAC cables in which the passive copper cable in the data center and installation base might be 10s of millions. And as the data rate goes higher, as the connection length goes extended, the signal integrity is gonna be a challenge. So the progression from ACC, a progression from the DAC cable to ACC is gonna be inevitable. So we're very excited about the opportunities, and let's see, you know, we will start seeing some revenue contribution from Q3 as we guide it, and then we'll be ramping from there. Thank you.

Operator (participant)

Thank you. Our next question is from Quinn Bolton with Needham and Company. Please proceed with your question.

Quinn Bolton (Senior Analyst)

Hey, guys. Let me offer my congratulations on a great quarter and very strong outlook. I guess, Hong, just wanted to follow up on Cody's question, just to really try to clarify that opportunity for the ACC TAM.

It sounds like you said your floor case at a single platform, single customer, you think now exceeds a $100 million. I just wanna clarify that. Or were you saying that you're seeing engagements beyond that first customer, and you're talking about a TAM of north of a $1OO million as you start to factor in some of these other ACC opportunities? And so if I could clarify that, and then I had a second question, if I could sneak that in.

Hong Hou (President and CEO)

Sure, Quinn, thank you very much. Yeah, no, let me first clarify. The TAM I mentioned in the prepared remark is with respect to the single platform, single customer situation. I feel that our actual opportunities is gonna be higher than the floor case. In addition to that, we're engaging with the multiple customers in the similar AI connectivity ecosystems for the similar purpose of low latency, low power, extended reach applications. And, those opportunities is not accounted in the in what I was saying, increased opportunity compared to the floor case.

Quinn Bolton (Senior Analyst)

Perfect. Thank you for that clarification. The question I had was about LPOs. You mentioned in the script that you see an opportunity for LPOs to perhaps begin shipments before the end of fiscal 2026. Wondering if you could go into sort of the use case you see for LPOs. Is that in back-end networks for GPUs or AI accelerators? Do you see that in general switch infrastructure, or are there other applications where you see LPOs potentially being adopted? Thank you, Hong.

Hong Hou (President and CEO)

Thank you, Quinn. So the LPO IC is more versatile, and it can be used to scale out, and they can be used to scale up as well. Because LPOs share the same characteristic as the ACC cables, low latency, low power consumption, and when you need extended reach, you go through electrical to optical conversion, transmit over fiber, and then the other end, optical to electrical conversion. That conversion only consume incremental amount of power, but the power consumption and latency are really similar to ACC. So the LPO can be used to scale out a cluster. And but in the meantime, when you need the Ethernet scale out, scale up, so you you scale out, I'm sorry. The LPO can be used to replace the DSP-based retimer, retimed transceivers as well.

You know, right now, as you know, every year the industry consumes about 25-30 million units of optical transceivers. It's largely based on DSP retimed solutions. If the LPO can chip away even a fraction of that market, the opportunity is gonna be tremendous. That's why we're very excited about the LPO opportunities as well. As I mentioned, we've been engaging very closely with the ecosystem partners, and our TIA is commonly considered the best in the industry. We hope our next refinement spin in the near term of the 200 GB redriver will provide the extended performance and the functionality that the industry needs. I'm still very confident that in latter part of FY 2026, we'll be entered into the production with the limited quantities for LPOs.

Operator (participant)

Thank you. Our next question is from Tore Svanberg with Stifel. Please proceed with your question.

Tore Svanberg (Managing Director)

Yes, thank you. Welcome on board, Hong, and congrats on the strong results here. I do recognize there's a lot of interest in the signal integrity business, but I was actually more surprised by your recovery in the LoRa revenue. It was very strong in the quarter. Sounds like the momentum is there, is gonna continue going forward. So could you just elaborate a little bit more on what's going on there? Is this basically inventory replenishment from, you know, from the last few, you know, years? Or are you seeing some big new programs actually adopting LoRa?

Hong Hou (President and CEO)

Tore, thank you very much. Yeah, that's a good question. I would say both. And first of all, the industry demand is resuming after the depletion of the inventory in the channels. And so, we are, you know, as we reported, the POS increases and the inventory in the channel decreases from the last quarter, and it's very natural that this market demand is bouncing back. The second part of the reason. The second reason of the growth, as I talked about the Mercedes-Benz use case, and our development partners are finding new use cases. And because the unique capability of the LoRaWAN, and it can translate into tremendous savings and the functionality enhancement in the system design. And I believe this is really our key for grow the revenues even beyond the current level, current pace.

That's why I'm very excited about attending the Things Conference in Amsterdam. I got my days all lined up to meet with the Executives of the ecosystem and to mobilize the entire ecosystem, creating more use cases like the Mercedes-Benz, and utilizing the capability that LoRaWAN can offer. That is a great opportunity for us, and it has been a good engine for our growth.

Tore Svanberg (Managing Director)

Thanks for the call.

Hong Hou (President and CEO)

Thank you, Tore.

Operator (participant)

Thank you. Our next question is from Christopher Rolland with Susquehanna. Please proceed with your question.

Christopher Rolland (Senior Equity Analyst of Semiconductors)

Hey, thanks for the question, and welcome, Hong. My question was also actually on LPO, and you also mentioned LRO as well. So I just wanted to know what the opportunity in LRO was. I assume it's also a high-grade TIA. But putting these opportunities together, do you think this could be a larger opportunity for you than ACCs or copper? And if so, you know, how much bigger? Thank you.

Hong Hou (President and CEO)

Yeah, Chris, thank you very much, and that's a great question. So the LPO certainly is analog on the transmitting side and on the receiving side, and there is some concerns in the industry, especially from the cloud service providers or CSPs, on LPO. Their primary concern is that if the solution will be providing enough link budget for them to choose the different silicons on the switch side, and then choose a different optical transceivers on the optical transport side. And they have been benefiting from that optionality and multi-source agreement over the last decades, because they need a lot of transceivers when they deploy a new data center. They need a lot of switches. They don't want it to be just locked by one suppliers. So that has been the primary concerns.

They have all recognized that the LPOs provide low latency, low power consumption, and even lower cost and higher value. They have no denial on that, and but it's just not sure, the link budget will allow them to exercise this option for multi-source agreement. And when I talk to many key architects, and some of them, they think, you know what? We are pretty sure the receiving side, we can do that, but, the transmitting side, you know, in the worst case, we do DSP-based retimer solution on transmitting side. That's still translating to tremendous power savings. That's a LRO. For us, either way is a winning for us because, you know, when they do LRO or LPO, they choose to, they tend to choose the best-in-class TIA product. I would say, at this point, that Semtech product will benefit from both.

As for your second part of the question, you know, is LPO gonna be representing an even bigger opportunity than ACC? I believe it's a good opportunity out there to replace, as I said, DSP-based retimer. It's an opportunity. But ACC, it can replace the DAC cable, you know, when the line rate increases to 100 GB per second and, you know, connection distance exceeding two meters, for 100 GB. The DAC cable really cannot maintain the signal integrity needed. So both products are great opportunities in this AI based connectivity era and has many years of runway.

Christopher Rolland (Senior Equity Analyst of Semiconductors)

Thank you. Thanks, Hong.

Operator (participant)

Thank you. Our next question is from Harsh Kumar with Piper Sandler. Please proceed with your question.

Harsh Kumar (Managing Director and Senior Research Analyst)

Yeah, Hong, let me add my welcome to you as well, and very strong commentary on the quarter, so congratulations on the guide as well. My question is sort of on ACC. Could you help me sort of understand the scope and the size of this business? Are you the leader, you think, in technology? Are you the sole provider, for example, to this one large customer that you mentioned? And then my other part of the same question is, you know, technology evolves. This is the first iteration of ACC. What do you think, or do you think Semtech has the goods to stay competitive in this market as other people look to get into the game? And maybe you could just help us help us get around what's needed to stay in front of this technological change.

Hong Hou (President and CEO)

Great. Thank you, Harsh, and thank you very much for your question. To address your first part of the question, for such a critical applications, I think our customers have to use a multi-source, and we are one of the two sources, as I understand, at this point. And certainly, the guidance we provided is based on 50%-50% allocation, but we have every intention to exercise our technologies, you know, differentiation, and more importantly, at this point of time, the operations excellence. So to really provide the customers with shorter lead time, better on time delivery performance, better quality, and that has to be in the hallmark of the operations. You know, that's what I made the comments and initial observation of the differentiation of Semtech.

So we hope we will be earning more than our fair share allocation in this, and so far it looks very promising. As for the second part of your question, how do we stay competitive? I think this part, the ACC, from the beginning of the engagement, the ecosystem was not sure on that we'll be able to deliver the performance and signal integrity as needed. Simulation shows good, and, but when you have the real IC integrated into the real product, it may not deliver the performance as simulated, but that's already behind us. And right now, looking really, really good performance, and, we are in the process of finishing system validation and product qualification. So we are preparing ourselves to ramp. As we do that, hand that over to the operations.

Our R&D team already started to get the next generation product, like 400 GB per channel. How do we do that? And, I think we can all count on the industry will continue to push forward with a higher data rate, lower latency requirement, low power requirement. And this is a sweet spot, and the market is moving towards us, and we continue to innovate. I do believe the best defense for the position is the aggressive development, in, you know, and engagement with the customers to provide the solutions they need at the time they need. So that's, I have the high confidence that we'll continue to lead in this area, for a while.

Harsh Kumar (Managing Director and Senior Research Analyst)

Excellent, Hong. Thank you so much.

Hong Hou (President and CEO)

Thank you, Harsh.

Operator (participant)

Thank you. Our next question is from Scott Searle with Roth Capital Partners. Please proceed with your question.

Scott Searle (Managing Director and Senior Research Analyst)

Good afternoon. Thanks for taking the questions. Hong and Mark, congrats on the quarter and the outlook.

Hong Hou (President and CEO)

Thank you, Scott.

Scott Searle (Managing Director and Senior Research Analyst)

Hey, Mark, real quickly, I was wondering if you could repeat the lower number. I thought I missed that. And then, Hong, on the ACC opportunity, it sounds like you're ramping in line to maybe a little bit ahead of expectations with NVIDIA and the Blackwell design. But I'm wondering if you could talk a little bit about the timeline for some of these other opportunities, when you would expect them to commercialize, given the current path. And a lot of the conversation has been around the opportunity versus DAC, but I'm wondering where AEC fits into the equation as well. Thanks.

Hong Hou (President and CEO)

So, Mark, you wanted to go first on-

Yeah.

the lower number?

Mark Lin (EVP and CFO)

Sure. The lower number, Scott, net sales for the quarter was $28.7 million. That's up 34% sequentially, up 72% over prior year. So very nice, healthy rebound, and we believe that is sustainable.

Scott Searle (Managing Director and Senior Research Analyst)

Okay, thank you.

Hong Hou (President and CEO)

Then I can address, Scott, your question about the timing of ACC ramp. And as I mentioned, that right now we're finishing up the system validation and the product qualification. Those are the last two gates before the volume production. So this quarter, well, in Q3, we expected the shipment in a limited quantities, not gated by the demand, but the, you know, there's gonna be a cycle time from the fab. We have already anticipated that, and, we got the wafer bank and die bank built, beforehand. So, but the real meaningful, ramp is gonna be in our Q4, fiscal year Q4, and then throughout the 2026, FY, and we expect, you know, pretty healthy demand based on the current PO and forecast. And then you mentioned about the AEC. You're right.

So the ACC will probably first and foremost encroach into the AEC market, and that's where the ACC provide the signal integrity requirement and, but reduced power and reduced latency. And then, you know, and the DAC cables and a lot of backplane, when the new switch, you know, 100T switch deployed, they will be hanging a 224 GB SerDes in the port. So 200 GB become the Ethernet port. I would imagine, the scale out, they will need a lot of even the backplane connectivities is using the ACC cable, which will provide the signal integrity they need and low power consumption they need.

Scott Searle (Managing Director and Senior Research Analyst)

Great. But, Hong, just for clarification, you've achieved a system-level verification then, with the current customer?

Hong Hou (President and CEO)

Yeah. So for the connectivity piece, yes. Yes.

Yes.

But of course, their system integrate, you know, involved in many other things, is way above and beyond just the connectivity. So that is a validation they're doing.

Scott Searle (Managing Director and Senior Research Analyst)

Okay, great. Thanks so much, and congrats on the quarter.

Hong Hou (President and CEO)

Thank you. Thank you, Scott.

Operator (participant)

Thank you. Our next question is from Craig Ellis with B. Riley Securities. Please proceed with your question.

Craig Ellis (Senior Managing Director and Director of Research)

Yeah, thanks for taking the question, and Hong, I'll echo the congratulations on a tenure well started with the strength in the print and the guide. I wanted to see if I could get your help on sizing one of the businesses that you identified. So it's great that we're doing well with the leading active copper cable customer, and you've framed up how big that business could be. I was hoping that you could give us some scope on how big the engagements with other customers could be next year.

And then to your point on strategy number two that you mentioned in your prepared script, if we were to look at what's possible for these businesses as you exercise some of your own expertise in how they're directed, if we look out two to three years, how much bigger can the business be than where it will be as we look at it next year? Thank you.

Hong Hou (President and CEO)

Yeah, Craig, thank you very much. Yeah, great talking to you. Thanks for your question. So on the ACC, beyond the specific customer, beyond the specific platform, we're in the early stage of engagement at this point. And but we're excited about, you know, the engagement with the customers. They present their challenges and high-value problems. We think that is right in our alley of the solutions we can provide on the ACC. So we are still in the stage of, you know, understanding their requirements and quantifying the opportunities. And it might be a little too early for me to give you a number for the next two, three years, what the opportunity is gonna be. But directionally, I'm very excited about that, and I think this is right in my alley.

I have a really extensive contacts and connections in the industry. We're gonna continue to expand our reach and the engagement with the industries, and maybe in the next earnings call, we'll have a better idea on the future opportunities of ACC beyond one platform, one customer. Thank you.

Operator (participant)

Thank you. Our next question is from Gus Richard with Northland Capital. Please proceed with your question.

Gus Richard (Senior Research Analyst and Managing Director)

Yes, thanks for taking the question, and congratulations on the results. I just want to ask about the competitive environment. Clearly, there's DSP versus analog, and I can think of Inphi, MACOM, you guys, as competitors on the analog side in these high-speed interfaces. Is there anybody else coming up that you see, anybody with, you know, a similar type of capability beyond the companies I mentioned? I'm just trying to get a better handle on the competitive environment.

Hong Hou (President and CEO)

Thank you, Gus, for your question. I think for the analog, expertise, you got it. Those are the three companies, I will say, on the first tier. I'm sure there's the new up-and-comers, you know, they're excited about the opportunities as well. It takes a while to, you know, establish this capability from the design to testing to many other things, in the ecosystem. So, and the operations is another thing, and, I think we are at the right point, right, time and right place here to capture the enormous opportunities, ahead of us. But, as for the competitive landscape, that's, you got it right. And I, I think both of the companies are very formidable, and, we can never, you know, kind of like a, you know, take it easy.

So I told my teams, "We need to be constantly paranoid and challenge ourselves, continue to run fast." And the only way to get our unfair share is by the fair performance and superb performance in technology and in operations.

Gus Richard (Senior Research Analyst and Managing Director)

Got it. Thanks so much.

Hong Hou (President and CEO)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mark Lin for any closing comments.

Mark Lin (EVP and CFO)

All right. Thank you, everybody, for joining, and please visit our investor website at investors.semtech.com for a list of upcoming financial conferences where Semtech will be in attendance. Have a great day.