Semtech - Earnings Call - Q2 2026

Executive Summary

• Record net sales of $257.6M (+20% YoY) and adjusted EPS of $0.41, while GAAP EPS was a loss of $0.31 due to a non-cash goodwill impairment; adjusted gross margin was 53.2%.
• Data Center net sales reached a record $52.2M (+92% YoY), with management highlighting strong traction in FiberEdge, emerging Linear Pluggable Optics (LPO) drivers, and CopperEdge ACC qualifications across hyperscalers and enterprises.
• Q3 FY26 guidance: revenue $266M ±$5M, adjusted EPS $0.44 ±$0.03, adjusted gross margin ~53% and adjusted EBITDA ~$60M; high-end consumer expected to be seasonally up, infrastructure to increase, industrial slightly up.
• Balance sheet strengthened: cash $168.6M, free cash flow $41.5M, net debt cut to $359.1M and net leverage down to 1.6x; interest expense reduced ~80% YoY, enabling more R&D and growth investment.

What Went Well and What Went Wrong

What Went Well

• Record revenue and broad-based growth with sequential improvement in adjusted operating income and EPS; “record net sales” and continued margin expansion underscore execution.
• Data Center momentum: multiple LPO design wins, engagement with three leading hyperscalers, expected revenue ramp beginning in Q4; “we believe we have secured the lion’s share of TIAs” and have the “only compliant driver” for 800G LPO.
• Strong cash generation and deleveraging: free cash flow of $41.5M, optional $25M term loan prepayment, adjusted net leverage at 1.6x, down from 8.8x a year ago.
• IoT systems hardware bookings up >40% YoY, Verizon Frontline Verified status for key routers (XR60) enabling public safety network SLICE; ecosystem and solution-provider strategy gaining traction.

What Went Wrong

• GAAP loss driven by a non-cash goodwill impairment of $42.0M related to the Connected Services business, as results did not meet internal earnings forecasts.
• Semiconductor gross margin declined sequentially (63.7% → 60.7%) on product mix shift (higher telecom and forecasted copper decline); consolidated adjusted gross margin down 30bps QoQ.
• CopperEdge revenue softness vs prior expectations persists near-term due to anchor customer rack architecture timing; broader ramps expected later and into FY27, adding uncertainty to timing.

Transcript

Speaker 6

Good day and thank you for standing by. Welcome to Semtech Corporation's second quarter fiscal year 2026 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the call over to Mitchell Haws, Senior Vice President of Investor Relations for Semtech.

Speaker 3

Thank you.

Speaker 6

Please go ahead.

Speaker 8

Thank you and welcome to Semtech's second quarter 2026 financial results conference call. Participants on today's call are Hong Hou, our President and Chief Executive Officer, and Mark Lin, our Executive Vice President and Chief Financial Officer. Before we begin the prepared remarks, I would like to highlight 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 released our unaudited results for the second quarter fiscal year 2026, which are posted along with an earnings call presentation to our investor relations 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 Slide 2 of the earnings presentation as well as the Risk Factors section of our most recent annual report on Form 10-K for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on this call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call. Please see today's press release and Slide 3 of the earnings presentation for important information regarding notes on our non-GAAP financial presentation. Press release and earnings presentation also include reconciliations of our GAAP and non-GAAP financial measures. With that, I will turn the call over to Hong.

Speaker 3

Thank you, Mitch, and good afternoon to all of you. Joining today, the Semtech team made solid progress again this quarter with the sequential increases across each end market leading to record net sales. We also delivered sequential improvement in adjusted gross profit, operating income, and earnings per share, strengthening our financial profile while executing on the R&D roadmap that we believe establishes a foundation for long term growth. I completed my one year tenure as Semtech CEO, and reflecting on the three priorities I outlined in our earnings call a year ago, we have made tremendous progress.

First, on strengthening the balance sheet, at the end of Q2 we have reduced debt by $879 million from the time I started as CEO, resulting in a year over year quarterly interest expense reduction of 80% and a substantial net leverage ratio improvement, 1.6 times at the close of Q2 2026 compared to 8.8 times a year ago. This strong improvement to our financial foundation allows us to focus on growth drivers for our business. Second, on rationalizing the portfolio and increasing investment in the core assets. I'm happy to report that the core assets we have delineated, namely Data Center, LoRa, and PerSe, each strongly contributed to our net sales momentum throughout the year. With increased R&D investment into the core areas, we anticipate further acceleration of our momentum. Third, revitalizing our winning culture. This is an area of progress of which I'm most proud.

By strong engagement with employees through frequent site visits, interactive information sessions, small group and one on one meetings, as well as regular and transparent communications, we provided much needed clarity in the company's vision, strategy, and priorities following a call to action. By instilling a culture of customer intimacy, operational discipline, and strong execution, we believe we have made great progress on achieving roadmap alignments with our key customers through significantly improved customer engagement, securing new product design wins, and delivering strong financial performance. I'd like to extend my sincere gratitude to the senior leadership and all of our fellow employees for their resilience, dedication, and commitment to Semtech's rising initiative. Going forward, the priority of portfolio optimization is further elevated.

We have managed our non-core assets back to a growth trajectory, and combined with the market tailwinds, we believe these assets represent a very compelling business to the right suitor. We believe we are well positioned to further transform Semtech into a higher growth and more profitable company. Now let me move the discussions to our end markets. For Q2, Infrastructure net sales were $73.4 million, up 1% sequentially and up 39% year over year. Infrastructure revenue growth benefited from record revenues in our Data Center business. Net sales for Data Center reached a record of $52.2 million, up 1% sequentially and up 92% year over year. Benefiting from our broad portfolio, FiberEdge products achieved record net sales, offsetting the CopperEdge air pocket from the initial RAC deployment at our end customer.

Based on Q2 performance, we expect continued strong opportunities for FiberEdge demand for the remainder of calendar year 2025 and beyond from our optical module customers serving North America cloud service providers, or CSPs. This conviction is supported by our direct ecosystem engagement, which correlates with increases in the data center CAPEX forecast from multiple hyperscalers, sovereignty operators, and enterprises. During Q2, bookings and forecasts from optical module customers serving China-based CSPs were generally cautious due to limits on CPU availability. That said, we have started seeing accelerated data center bookings over the past several weeks for this market. Looking ahead to the next several quarters, we expect the data center market to continue its multiyear growth cycle. The market is shifting to higher data rates to support increased compute and network interconnect bandwidth, resulting in strong demand for FiberEdge 800G PIAs, moving rapidly from 400G.

Beyond 800G, we are supporting multiple customers on their 1.6T transceiver designs with both TIAs and drivers. We currently expect volume ramps to start in the first half of 2026, commensurate with a broad deployment of 1.6T switches. While the shift to higher speed to achieve high bandwidth is given, it is increasingly important to deliver this bandwidth using low power and a low latency network interconnect. Semtech's analog expertise allows CSPs to deliver high performance compute and increases storage capacity while constraining our budget for networking. On the optical side, we have secured several LPO design wins without TIAs in 400G and 800G transceivers. We believe we have secured the lion's share of the TIAs in most optical transceivers. Our 800G LPO laser drivers were specifically designed to comply with all LPO MSA requirements, and we believe it is the only compliant driver in the market.

Several optical module customers are conducting design-in and testing of our drivers on their transceivers. We are engaged with three of the leading hyperscalers with our 800G LPO solution and expect revenues to begin ramping.

Speaker 0

In Q4 of this year.

Speaker 3

We are accelerating our R&D roadmap and are targeting making 1.6T LPO drivers and TIAs available for sampling before the end of the year. Another high bandwidth and low power solution is CopperEdge for ACC and onboard linear equalizer. During the quarter we delivered 800G and 1.6T ACC cables to multiple hyperscaler and enterprise customers for testing and qualification. Those customers are seeing benefits of strong signal integrity, lower latency, and importantly much lower power consumption, as much as 90% below competing DSP-based AEC solutions, while offering lighter and more flexible cables as well as a significantly longer reach compared to direct attached copper cables. We continue close engagement with our major customer for their future rack platforms using CopperEdge and 1.6T optical transceivers using our FiberEdge product.

Speaker 0

We are on.

Speaker 3

Track and expect to launch ACC with U.S. hyperscaler customers during calendar year 2026. Currently, we are enabling all the major cable suppliers, all of which have begun initial qualification at multiple hyperscalers. As data center topology continues to evolve, we see Hopper remaining a foundational element to next generation data center unit to net, particularly for short reach links where its cost, power efficiency, speed, and reliability are unmatched. With the bandwidth requirements increasing from 400G to 800G, 1.6T and beyond, advances in active copper technologies are extending the reach and offering significant power savings, making copper an essential complement to optical solutions in high performance computing and AI clusters. Copper enables low latency, energy efficient connections at a rack and row level where optics address longer reach needs.

By leveraging our 20 plus years of experience in analog data center solutions, we are helping our customers achieve the performance, efficiency, and scalability demands of today's and tomorrow's data center with a comprehensive product portfolio addressing LAN speeds from 10G to 400G with a LAN count from one to eight channels. Moving forward, the momentum in FiberEdge combined with our emerging CopperEdge and LPO opportunities, all supported by the strong data center CAPEX spending, positions our data center business for strong growth. Now moving to our high end consumer end market. Net sales for Q2 were $41.2 million, up 16% sequentially and up 11% year over year. Net sales in consumer TVS were $29.9 million, up 22% sequentially and up 15% year over year, consistent with the seasonality associated with the smartphone unit ramps and our strong content across multiple customers.

This growth exceeds overall growth in the handset volumes, aligning with our belief that Semtech is gaining content and market share stemming from our market leading performance and supply chain excellence. Designed for ultra high capacitance sensitivity and fast response times, this device safeguards displays as well as high speed interfaces such as HDMI, USB, and display ports without compromising signal integrity or performance. This makes them ideal for use in smart TVs, game consoles, laptops, wearables, and mobile devices. Leading global consumer electronics brands integrate Semtech technology into their products to ensure device performance, durability, and reliability. In addition, our PerSe sensing technology is being increasingly deployed across a thrilling range of applications from consumer electronics to automotive and industrial markets.

In devices such as smartphones and laptop computers where specific absorption rate standards are becoming more stringent, PerSe enables intelligent power management by detecting proximity and optimizing RF performance to meet regulatory requirements without compromising the user experience. In addition, PerSe enables precise gesture control with ultra low power consumption, both of which are highly valued for wearables such as a headset and smart glasses. We are actively engaged in design discussions with a broad range of customers in both smart glasses and smartphone platforms, supporting both existing designs and new launches over the coming quarters. Moving towards industrial end market, Q2 industrial net sales were $143 million, up slightly sequentially in line with our outlook and up 14% year over year.

Within industrial, net sales of LoRa enabled solutions were $36.9 million, down 5% sequentially and up 29% year over year, supported by continued expansion across several end markets and in multiple applications. LoRa offers a unique combination of long range connectivity, low power consumption and robust performance in challenging environments. Its ability to transmit data over several kilometers while operating for years on a single battery charge makes it ideal for predictive maintenance, asset tracking, energy management and smart city infrastructure. It also enables cost effective and secure monitoring and control of equipment, infrastructure and the environmental conditions over large areas. We are seeing growth in applications including home security systems, smarter appliances, pattern personal chargers and community based environmental sensors. In addition, our recently generation LoRa chips offer dual-band capability, 2.4 GHz and ISM frequencies to enhance bandwidth.

This capability is supporting a new generation of connected devices that require reliable low power communication without the complexity and expenses of traditional networks. Dual-band capability is facilitating LoRa's adoption in emerging low-altitude economy including drone delivery, aerial surveying and emergency rescue. LoRa is especially well suited for this environment as it combines longer range communication, low power consumption and a strong signal resilience. Three factors critical for aerial operations, LoRa technology is used to provide a reliable telemetry and sensor data transmission even beyond visual line of sight. This allows operators to gather real-time insights without relying solely on high-bandwidth short-range video links. Our IoT systems hardware business recorded Q2 net sales of $64.8 million, up 2% sequentially and up 24% year over year.

Bookings in our hardware business continue to be strong, over 40% year over year, due to the broad market recovery as well as our position as a leading North American supplier. We see strong 5G momentum as IoT transitions from 4G, with a growth in both bookings and design wins. We believe we hold a leadership position with the 5G RedCap and are progressing well in launching Qualcomm-based platforms in the coming year. We continue to lead in 5G LPWA, advancing satellite IoT through non-terrestrial network on NTN, which opens up new opportunities for global connectivity for routers and gateways. Our partnership ecosystem continues gaining momentum. As announced in June, several of our products, including our flagship XR65G router, achieved Verizon Frontline Verified status. We now support Verizon Frontline's Network Slice, a dedicated 5G highway for the first responders.

This opened up significant opportunities in public safety where mission-critical connectivity is paramount. In July, we hosted an Airlink Partner Summit in Dallas. We shared our product roadmap and showcased a range of compelling use cases in public safety, public transit, utility, oil and gas, as well as government applications. Our various partnerships represent fundamental steps as we evolve from a product vendor to a 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 strategy. At the same time, we continue to invest in our R&D, which will fuel future growth, ensuring our technology remains at the forefront of the market requirement and the customer expectations.

With that, I will now turn the call to Mark for additional detail on our financial results and our outlook for the third quarter of FY2026. Mark.

Speaker 7

Thank you, Hong. I am pleased to report that for Q2, net sales were a record $257.6 million, above the midpoint of our outlook, up 20% year over year and the sixth consecutive quarter of growth. Net sales trends by end market, reportable segment, and geographic region are included on Slide 16 of the earnings presentation. Adjusted gross margin was 53.2%, down 30 basis points sequentially and up 280 basis points year over year and above the.

Speaker 3

Midpoint of our outlook.

Speaker 7

Semiconductor products adjusted gross margin was 60.7%, down sequentially from 63.7% and up year over year from 59.2%. Looking at the adjusted gross margin dynamics in more detail, high end consumer sales were seasonally higher in Q2, which has a modest negative impact on product mix. Product mix within signal integrity was impacted by higher sales of telecommunications products as well as a forecasted decline in CopperEdge revenue, IoT systems, and connectivity. Adjusted gross margin benefited from higher sales of routers and gateways, with Q2 at 39.5%, improving sequentially from 34.4% and up year over year from 35.4%. Adjusted net operating expenses were $88.4 million within our guidance range. Adjusted operating income was $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, up 39% year over year, and adjusted EBITDA margin was 21.9%, up 310 basis points year over year. Adjusted net interest expense was $4.1 million, down 80% year over year. Annualizing the Q2 amount, adjusted net interest expense is well under a single quarter's expense from just a year ago. This has allowed us to accelerate investment in strategic high growth areas of our business while driving earnings growth and cash flow. Q2 adjusted net interest expense decreased sequentially from $5 million, reflective of our continued prioritization of using free cash flow to repay debt. Other net non-operating expenses were $1.3 million, primarily from foreign exchange revaluation losses reflective of a weaker U.S. Dollar. During the quarter, we recorded adjusted diluted earnings per share of $0.41, up from $0.38 in Q1 and a substantial improvement from $0.11 recorded a year ago.

In the second quarter, we recorded a non-cash $41.9 million goodwill impairment charge from our connected services business that is 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 meet our internal earnings forecasts and resulted in a reassessment of this business's goodwill balance. Operating cash flow for Q2 was $44.4 million, sequentially up 60% from $27.8 million and up from negative $5 million a year ago. Free cash flow for Q2 reflected similar growth at $41.5 million, sequentially up 59% from $26.2 million and up from negative $8.4 million a year ago.

Speaker 0

We ended Q2 with a cash and.

Speaker 7

Cash equivalents balance of $168.6 million, up $12.1 million from Q1 while making optional principal prepayments of $25 million on our term loan. At the end of Q2, net debt sequentially decreased $37.1 million to $359.1 million. Along with debt reduction, strong business performance contributed to an adjusted net leverage ratio of 1.6 as of the close of Q2, down sequentially from 1.9 and down year over year from 8.8. Now turning to our third quarter outlook, we currently expect net sales of $266 million plus or minus $5 million, up 12% year over year at the midpoint. We expect net sales from an infrastructure end market to increase sequentially, including growth in Data Center. We expect net sales from our high end consumer end market to be up, reflective of typical seasonality as well as content gains.

We expect net sales from our industrial end market to be slightly up, with LoRa about flat sequentially combined with growth in our IoT cellular business. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 53.0% plus or minus 50 basis points, a 60 basis point improvement year over year.

Speaker 3

At the midpoint.

Speaker 7

Adjusted net operating expenses are expected 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 expected to be $60 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 expense net to be $5 million, benefiting from leverage-based pricing on a term loan. Fed aligns a lower interest rate to a lower leverage ratio. We expect an adjusted normalized income tax rate of 15%, consistent with Q2. These amounts are expected to result in adjusted diluting earnings per share of $0.44 plus or minus $0.03 based on a weighted average share count of 91.6 million shares.

Speaker 8

Thank you, Mark. We can now turn the call back over to the operator for the question and answer session.

Speaker 3

Thank you.

Speaker 6

With that, we will now be conducting a question and answer session. If you'd like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star two 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.

First of all, congratulations on very solid, very steady results. Hong, I did have a question on LPO opportunity and the timing for it. Not too long ago a competitor sort of suggested that that timing may be imminent, that they were basically in commercial production. I was curious, you know, you're talking about fourth quarter, so I was curious about how you see the progression through the year. Is there a possibility that LPO could be preponed? Maybe it could come earlier? Or are you just in different sort of customers and maybe with a different, slightly different timeline.

Speaker 0

Thank you for the question. Yeah, LPO, we have been engaging with a broader customer base for applications for CSPs in the U.S. and in China, and they are at a different stage of testing and qualification. One thing is good that our TIAs have been in pretty much every transceiver manufacturer's design and qualification. As for timing, some of them will start deploys in Q4 and some, I wouldn't say they're imminent right now, it's the small, small volume. Because we have a broad product portfolio and now TIA has already been designed in the DSP-based real-time solution already, we don't see the incrementally higher demand due to the LPO just yet. We do expect that Q4 they will start deploy. We have the design wins in.

Speaker 3

800G and also 400G for data centers.

Speaker 0

That one may already start in a volume.

Understood, Hong. Maybe I could ask you about the general state of the data center spend. You're sort of a networking player. You have pods and modules and cables.

Speaker 3

You talk to obviously a lot of large companies.

I was curious, I wanted to see where your level of enthusiasm is on the continued data center spend these days as you talk to these large hyperscalers and the large networking players.

Speaker 0

Yeah, thank you for that question. Yes, we do engage with our direct customers, which are the module manufacturers, but we also engage with the CSPs in the U.S. and also in China. We all read the same news and earnings report. The CSPs, they have strong conviction and forecast to increase the CAPEX spending to expand the data center capacity and upgrade for AI capability. We are seeing that from our direct customers, a very strong forecast for 2026 and beyond. We would be benefiting from this tremendous backdrop. On the other hand, in China, the CSPs, as I discussed in the prepared.

Speaker 3

Remark the first part of the Q2.

Speaker 0

They tend to be a little bit cautious due to the limit to the GPU availability. In the last several weeks, they have come back and the booking activity has improved pretty significantly, and the forecast for the 2025 for remaining of 2025 and 2026, it's very optimistic as well. We see the market really has a very optimistic tone and we're seeing the result from the new business opportunities and the bookings. Because we are supplying electronic components, you may hear some pockets they were limited by EML or other components, but it's not for us. Our PMD physical media devices are designed to support wixels, support EML, and also support silicon photonics modulators. We don't see the constraint at this point. We do plan ahead to add more testers and backend offset his capacity in anticipation of pretty significant ramp for 2026 and beyond.

Understood.

Speaker 8

Hong, thank you so much.

Speaker 3

Thank you, thank you.

Speaker 6

Our next question comes from the line of Joseph Moore with Morgan Stanley. Please proceed with your question.

Speaker 8

Great, thank you. You talked about your outlook for CopperEdge. Can you give us a little bit more color? How confident are you in seeing broader adoption? When you talked about hyperscale customers.

Speaker 3

You know what types of projects are.

Speaker 8

You working on there?

Speaker 3

Thank you.

Speaker 0

Thank you, Joe. We have been talking to customers over the last three, four quarters and we covered a pretty broad ground, have been engaging with over 20 customers in the entire ecosystem. Certainly the awareness level right now has significantly increased. We work with our cable customers very closely. The four or five key ones, they all have our 100 gig per lane or 800G cables and 200G.

Speaker 3

Per lane or 1.6T cables.

Speaker 0

They sample to different CSPs and enterprise customers. We see strong traction. They definitely see the advantage of low power, more flexible, and higher signal integrity.

Speaker 3

A longer reach than DAC cable.

Speaker 0

They are designed in one.

Speaker 3

Case for scale up similar to ours.

Speaker 0

Anchor customer to interconnect the different processors, ASICs in one cluster and more applications in scale out to interconnect, say, from the servers to top of the rack. It also served at the backplane to replace the DAC cables. We see the use cases, you replace DAC cable, we see the use cases to replace AECs. All of these applications are to take advantage of the unique property like low power consumption, high signal integrity, and extended reach compared to the DAC. We also have customers use the leader equalizers for onboard applications to improve the signal integrity and stretch the reach from the ASIC to, say, front of the.

Speaker 3

Panel of pluggable ports.

Speaker 0

We will see probably a couple of.

Speaker 3

Hyperscalers to drive to the high volume.

Speaker 0

Ramp first in either Q4 or the beginning of 2026. For 1.6T cables, the timing of ramp will coincide with a switch. If you don't have 200 gig port, you don't really need a connectivity to connect the ports. For 800G or 100G per lane cables, we start seeing some of the demand and are getting preparation for the latter part of this year.

Speaker 8

Great, thank you for that. Separately, are you seeing any supply constraints on 1.6T optics?

Speaker 0

The 1.6T optics, Joe, at this point we don't see the strong volume demand yet. Every module manufacturer is designing their optical modules using different DSPs, using different PMDs, which we provide. Their customers all require different pitches and different configuration for packaging. We support a wide range of demand. The volume ramp is going to be like in 2026 at this point, the port that would require 1.6T connectivities. There are only two from two major ASIC manufacturers. One is making GPU, one's making switches. You can imagine the timing of when they start the volume deployment.

Speaker 3

Great, thank you.

Speaker 0

The bottom line, we don't see the constraint from outside.

Speaker 3

Thank you. Thank you.

Speaker 6

The next question comes from Timothy Artieri with UBS. Please proceed with your question.

Speaker 3

Hi, this is Dino on for Tim.

Speaker 7

Just a question on LoRa, it.

Speaker 3

Looks like results came in strong ahead of the $30 to $35 million range you previously mentioned. Are you seeing significant contributions from other applications of LoRa? Do you expect to see LoRa?

Speaker 7

Performing at the same level in the next few quarters?

Speaker 0

Yeah, thank you for the question. That's a great question. Certainly we are very pleased about the demand of LoRa. We think we are on the right track in providing enhanced capability by the new product. For example, the dual-band, in addition to ISM baseband, we provide the device capability to run on 2.4 GHz band as well. What that does is to provide enhanced bandwidth data rate, at a trade off of transmission distance. The LoRa already had cover hundreds of kilometers, so it's not a big trade off. By increasing the bandwidth, we unlock a range of applications. For example, the low-altitude economy, drone deliveries, and even some applications related to AI and, for example, parking meters. You can get a still picture snap and use the enhanced bandwidth to transmit the pictures back in archive.

Speaker 3

We also have the LoRa plus that basically LoRa plus other RF protocols.

Speaker 0

By combination, you can address different applications that traditionally LoRa alone cannot address. This new technologies really opened up new market opportunities. We are very pleased to see that the LoRa continue to have a very strong demand.

Speaker 3

We didn't mention that. As a matter of fact, the end.

Speaker 0

Node, number of end node we shipped last quarter is a historic record.

Speaker 3

Going forward, we think you.

Speaker 0

Right now, give us a confidence and conviction. We expect the LoRa revenue on a quarterly basis to be between $30 million to $40 million. It's going to be an increase from our original belief from $30 million to $35 million.

Speaker 7

Great, thank you.

Speaker 0

Thank you.

Speaker 6

Our next question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Hey guys, thanks for taking my questions. Congratulations on the results and outlook.

Speaker 8

I wanted to follow up.

On the ACC opportunity, just to understand timing, it sounds like you still expect some ACC revenue potentially in the fiscal fourth quarter ending January. If I heard your answer to the previous question, it sounds like 800G or 100G per lane ACC potentially for scale up is the first application to rank.

Speaker 0

Quinn, that may confuse you that for 800G is if for the interconnect, in the backplane and also between racks. Historically, they use that DAC cable. They can reach the data rate of 100 gigabit, even 200 gigabit per lane, but the cable was a 26 gauge, very rigid, using their words, as rigid as a rod. When you bend a little bit, you compromise the signal integrity. In that, they will still call the scale out applications for different interconnected, different switches. Right now, the one we designed in for 200 gig per lane and 1.6T application, it's a scale up between different racks for ASICs and the customers finding more applications in scale out to, you know, in the backplane to interconnect, say for example from the NIC card.

Speaker 3

To the top of the racks.

Speaker 0

In many cases, within the topology of the switch fabric, they are just replacing the DAC cable with ACC because of the flexibility, better signal integrity, and incrementally higher power than DAC cable. It's not really taking out any additional power budget.

Okay, I guess just so I'm clear, the 1.6T or 200 gig per lane cables, I thought a lot of those would depend on Broadcom's Tomahawk 6 switch that enable 200 gig per lane. Are there applications for 1.6T ACCs that ramp before availability of that switch? Do your 100 gig designs ramp in the fourth quarter before availability of that Ethernet switch platform from Broadcom?

Speaker 3

Right.

Speaker 0

The volume demand will start from 100G first per lane in Q4. The 200G first applications to volume is going to be the scale up between ASICs. That will be followed by 200G per lane scale out application. As you correctly pointed out, when the switch die are more available in volume and you need to be interconnecting between the NIC card to the top of the rack.

Speaker 3

Got it. Okay, that makes sense. I wanted to switch.

I know the data center business is driving a lot of growth, but you mentioned the PerSe business and engagements in sort of new smart glass platforms as well as smartphone platforms. I'm just wondering if you could give us your outlook for the ramp of PerSe. I think you've got a smart glass platform that you're on today that's already achieved high volume. Do you see continued growth in smart glasses, and any comments you can make on PerSe adoption in the smartphone segment would be helpful.

Thanks, Helen. Thank you.

Speaker 0

Yeah. So PerSe devices have been the industry standard for smartphone and you know that for almost all the smartphone manufacturers we're there. We're in the process of getting into the last one and the major one. As for the applications in the smart wearable, the smart glasses, certainly our lead customer is this Meta Ray-Ban glasses and there are several other platforms. They use basically the same functionality but do the different ways link to their own large language model for AI applications. We are there and the smart wearable continue to evolve and demand more functionalities, and so we are engaging this broad range customers and designing next generation products. That is the area we feel like it can evolve into a pretty sizable market and we're in the forefront of it.

Speaker 7

Excellent.

Speaker 3

Thank you, Ang.

Speaker 7

Thank you, Mark.

Speaker 3

Thank you. Thank you.

Speaker 6

Our next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed with your question.

Hi guys, thanks for the question.

Speaker 3

I do know it might be.

A little early for January guidance, but seasonally I do believe historically that's been down. Is there a wide way or broad way to think about kind of how seasonality or how we should think about January? Like could you outgrow typical seasonality given the LPO ramp or the ACC ramp? Just any broad kind of milestones or things to think about for January.

Speaker 7

Yeah, Chris, you know, we provided our outlook for Q3 and our end market commentary should help investors formulate thoughts for growth in the out periods. You're correct. High end consumer sales do trail down in Q4. We don't really see a change to that particular trend. High end consumer net sales were $41.2 million in Q2. That's a multi-year high, up 16% sequentially, up 11% year over year. While we're gaining design wins and market share, which allows us to grow above market rates, I still view Q4 as just a seasonally trail down, not a weakness at all in any of the business. Our industrial end market is performing well. We've heard from some industry bellwethers on these trends. ISC business is performing well with the 4G to 5G transition as a tailwind there. In infrastructure, data centers is definitely a growth engine.

All the commentary that Hong has provided in our prepared remarks and for the Q and A up until now, we do have a very broad portfolio. FiberEdge shipments were up about three times compared to a year ago. Anything that we talk about in terms of LPO would be incremental, and ACC is definitely incremental to that ramp.

That's fantastic. Thank you so much. Maybe for my second question, I think you guys said you were down to 1.6 times leverage. Pretty incredible from where you guys were just a couple years ago. My specific question is what does this mean for the odds of doing a potential acquisition and what does this mean for the odds for doing a potential divestiture.

Thanks.

Speaker 3

Yeah.

Speaker 0

Chris, that's definitely. We're pretty excited about the progress we have made. Not a couple years ago, even as recent as a year ago our leverage ratio was at 8.8x. Certainly that's a huge improvement. This improved financial foundation allows us to go more aggressive in capturing the opportunities of growth through close engagement with the customers. We have identified many great growth opportunities and we have been able to balance the R&D spending with our bottom line over the last year. I think we're striking a right balance and we're increasing R&D spending in a core area by 20% sequentially while still maintaining delivering the good bottom line performance going forward. We'll continue to invest in the core areas and there might be some opportunities. When we analyze our portfolio we see we can apply, you know, technology leverage, customer leverage or operational leverage.

We see in some voyage we have some capability to do small tuck ins but, you know, the highest priority for us is still the portfolio optimization. We decide, you know, what the areas we wanted to get in. We have the board support. We'll continue the strategy going forward. Hopefully that answers your question. Definitely the core non-core delineation is not as a paper exercise.

Speaker 3

It's really a North Star to set the priority for us.

Thanks, Hong, and congrats on the results.

Speaker 0

Thank you.

Speaker 6

Our next question comes from the line of Richard Schafer with Oppenheimer & Co. Please proceed with your question.

Speaker 3

Yeah, thanks. Thanks. Hong, I've got a question on Tri-Edge. I'm just curious what the outlook is for the PAM4, the Tri-Edge business, as the industry sort of seems to be focusing more on 100G and 200G lanes, and you know, I.

Speaker 7

How do you, what are your.

Speaker 3

Plans for that business? How do you view that Tri-Edge opportunity? I mean, is PAM4 going to be a growth driver for Semtech?

Speaker 0

Rich, thank you for your great question. The Tri-Edge has been our traditional offering. It is basically an integrated product with drivers and TIAs integrated with our clock and data recovery one. You can almost say it's an oxymoron that the analog version of the DSP. We offered our product at a 50 gig per lane, so a 4-channel will be 200 gig aggregated bandwidth and if 8-channel, it will be 400 gig aggregated bandwidth. Our customers, more particularly in China and also one of the CSPs in the U.S., have been using our Tri-Edge in the AOC cables, active optical cables, for 400 gig and 200 gig. That has been going on in a limited basis, but one big CSP in the U.S. is giving us the forecast and starting to ramp up by using the Tri-Edge in the AOC applications for 400 gig.

Our plan is that we'll continue to push that envelope to make the PAM4 50 gig move up to 200 gig. We're going to be skipping 100 gig PAM4 because this is a little too late for that. The beauty of the 200G Tri-Edge CDR-based is going to be continuing to deliver low power consumption and has the advantage of both equalizing in the frequency domain and retiming in the time domain. That is a roadmap and under development. We believe when the 1.6T transceivers are launched, the very next thing you know, they will be first driving for volume and then later on driving for cost reduction and power reduction. We will catch that wave, providing low cost, low power versions of the Tri-Edge.

Speaker 3

Have you taken a swing at sort of what that opportunity looks like and any sense of how big that market could be, or is it just too early? Right now is a little.

Speaker 0

Early to do that, but we will be basically using when we were evaluating market opportunity in order to determine if this is a viable R&D project. We just make the assumption, say for example if we can chip away 5% to 10% of 1.6T transceiver market from the retime solutions that will be well worthwhile for, you know, the market opportunity. It's really, really, really great for as a, as an alternative to the DSPs. I think, you know, it's going to be as customers seeing a better signal integrity, lower power performance. Again, just like the LPO, there's going to be more acceptance and because the low power is a key attribute to the optical connectivity in the future.

Speaker 3

Great. Thanks a lot. Thank you.

Speaker 8

Next question. Thank you.

Speaker 6

Our next question comes from the line of Cody Acree with The Benchmark Company. Please proceed with your question.

Speaker 8

Yeah, thanks Mark for taking my questions and congrats on the progress.

Speaker 3

Hong, can you just go back to.

Speaker 8

Your ACC commentary on the cloud service providers, you mentioned expecting that to begin early 2026. Is that any reset of timing from earlier expectation of ACC diversification in Q4, or was that always the case, the delineation between CSPs and the cable providers?

Speaker 0

Cody, thank you for the question. We are always at the timing wise for the volume ramp. It is going to be going through the platform architecture, the platform architecture of our customers, and will go with appliance they need in there. For example, in this case, the switch timing of the switch availability, as you probably know and heard, is going to.

Speaker 3

Be pushed out a little bit.

Speaker 0

That is one thing we found during Q2. As I said, there are two other use cases, for example, 100 gig per lane, 800G ACC cable that's independent of that timing.

Speaker 3

We believe that ramp will start in.

Speaker 0

Q4 for that flavor. Another one is a 200G per line and 1.6T cable for scale up between different racks of ASICs that will also march along the timeline in Q4. When you start ramping back, you know from very low level to pretty sizable level, the timing does matter a lot because this ramp up slope is pretty high. The good thing is that we have gone through that type of ramp in the past in supporting the anchor customer. We have the confidence that we'll be able to support the market adequately.

Speaker 8

Excellent. Thanks for that. Mark, can you give us any of your outlook on your gross margin expectations for the next couple of quarters and also your OpEx spending trends.

Speaker 7

We have the guide for the following quarter and really as we've stated we're very mix driven. The good part there, Cody, is that the faster growing portion of our business are accretive to mix, especially within data center. That said, we also provide the areas of growth for our IoT cellular business, which is a little bit of a headwind. Also, within Q3, we do have a little bit of a headwind from high-end consumer, but overall that particular business does support the industrial TVS business as well, which has pretty good gross margin. Overall, pretty good operating margin. Again, mix driven OpEx. I think our commentary is that we do look at opportunities to invest in near-term growth areas. We have a pretty strong portfolio that we're developing, but we are very cognizant of R&D spend and we'll try to keep that under control.

Again, there's some really, really great opportunities out there for us to invest in some very good organic growth opportunities.

Speaker 8

Any thoughts on R&D growth as you go forward?

Speaker 3

Cody?

Speaker 7

We have about that one quarter. You can just expect us to be prudent and not overspend, and maybe we'll see about that.

Speaker 3

Okay, thank you guys. Thank you.

Speaker 6

Our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Speaker 3

Yes, thank you. Hong, Mark, I wanted to just take a step back and ask about sort of the general business environment from a linearity perspective. Is there sort of any color you could share with us on linearity of sales and especially on bookings?

Speaker 0

Yeah. Tory, thank you for your question. We are seeing pretty strong booking activities. Data center area, LoRa, and PerSe, even a consumer high-end consumer TVS is very strong. The industrial for the modules, we have the tailwind, the booking activity is very strong. As for the linearity, you know from quarter to quarter you always have this different product mix thing. I would say, you know, very rarely you have a few things all seem to be lining up in supporting a very positive momentum and that is now and I feel like I'm really good about to future quarters.

Speaker 3

Very good. As a follow up, I had a sort of clarification question. LPO. You said you expect three leading hyperscalers to be in 800G production in Q4 of this year. Are those three hyperscalers all U.S. or is that U.S. and China?

Speaker 0

Three hyperscalers, two are in the U.S. and one in China. First, the LPO. This is really just the early ending and LPO transition into takeover. Some of the DSP-based transceiver market share is inevitable, and the beauty for that for us is, you know, if it stays with a DSP-based, we have TIA content. If it transitions over to LPO-based, our SAM is going to be doubled, you know, we will have the driver content as well. The timing to us is important, but it's not as super sensitive because we are already an incumbent for DSP-based transceivers.

Speaker 3

Sounds good, and congrats on the results. Thank you. Thank you.

Speaker 6

Our final question comes from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Thanks for speaking me in, guys. Hong, I wanted to go back to the opening part of your prepared comments where you talked about things accomplished in your first year. I really use that as an opportunity to ask you what you would like to see the business accomplish in your second year, especially as you look at the infrastructure business from where you are today. What would you be happy with the business accomplishing over the next four quarters, either from a product standpoint, a scale up standpoint, et cetera? Just some qualitative color on where we would be from where we are would be really helpful.

Speaker 3

Thank you.

Speaker 0

Thank you, Craig. If I say largely broad brush the second year because of that or improved financial foundations, we can go more aggressive in the first year, even some of the opportunities we uncovered. We have to balance the bottom line with the investment in R&D, and that's one thing. The second thing is some of the R&D spending we have in the first year is going to start showing the results and momentum for the second year. I don't want to miss again if the first year we play some catch up game. The second year I wanted to be outright lead the market with the solutions out there.

Speaker 8

Got it.

As you look at the breadth of the business, Hong, or the strength of the business across its different product groups, whether it be CopperEdge, FiberEdge, etc., are there any significant evolutions we should be looking at that you're trying to drive?

Speaker 0

I think what we focus instead of focus each on each product lines and we fortunately we have a broader portfolio, we focus on one simple principle: with the market needs higher bandwidth, lower power, lower latency, and lower cost. That entire offering of our portfolio is focused on the very fundamental attributes we can offer to the customers.

Thanks Hans.

Thank you.

Speaker 3

Thank you.

Speaker 6

With that, there are no further questions at this time. I would like to turn the call back to Mitchell Haws for closing remarks.

Speaker 8

That concludes today's call. Thanks to all of you for joining us today, and we look forward to seeing you at various investor events over the coming weeks.

Speaker 3

Thank you.

Speaker 6

This does conclude today's teleconference.

Speaker 3

Thank you for your participation.

Speaker 6

You may disconnect your lines at this time. Have a wonderful day.