Semtech Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 25, 2025

Key Takeaways

  • Positive Sentiment: Semtech reduced debt by $879 million since the CEO’s start, cutting interest expense by 80% and lowering net leverage to 1.6× from 8.8× a year ago.
  • Positive Sentiment: Q2 net sales hit a record $257.6 million, up 20% YoY, with a 53.2% adjusted gross margin and adjusted EPS of $0.41, marking the sixth consecutive quarter of growth.
  • Positive Sentiment: Infrastructure net sales reached $73.4 million (+39% YoY) driven by record $52.2 million in data center revenue, and key LPO design wins set to ramp in Q4.
  • Positive Sentiment: CopperEdge ACC cables (800 Gb/s and 1.6 Tb/s) delivered up to 90% lower power consumption and greater flexibility than DACs, with hyperscaler launches planned for 2026.
  • Negative Sentiment: The company took a $41.9 million non-cash goodwill impairment charge in its Connected Services business after results fell short of forecasts.
AI Generated. May Contain Errors.
Earnings Conference Call
Semtech Q2 2026
00:00 / 00:00

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Operator

Good day, and thank you for standing by. Welcome to Semtech Corporation's Second Quarter Fiscal Year twenty twenty six 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.

Operator

I would now like to hand the call over to Mitch Hawes, Senior Vice President of Investor Relations for Semtech. Thank you. Please go ahead.

Mitch Haws
Mitch Haws
SVP - IR at Semtech

Thank you, and welcome to Semtech's Second Quarter twenty twenty six Financial Results Conference Call. Participants on today's call are Hong Ho, 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 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.

Mitch Haws
Mitch Haws
SVP - IR at Semtech

Please refer to today's press release and Slide two of the earnings presentation as well as the Risk Factors section of our most recent Annual Report on Form 10 ks 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 three of the earnings presentation for important information regarding notes on our non GAAP financial presentation. The press release and earnings presentation also include reconciliations of our GAAP and non GAAP financial measures.

Mitch Haws
Mitch Haws
SVP - IR at Semtech

With that, I will turn the call over to Hong.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you, Mitch, and good afternoon to all of you joining today. The Semtech team made solid progress again this quarter with a 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 and D roadmap that we believe establishes a foundation for long term growth. I completed my one year tenure as SunTek's 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

At the end of Q2, we have reduced debt by $879,000,000 from the time I started as a 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 twenty twenty six compared to 8.8 times a year ago. This strong improvement to our financial foundation allowed 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 Persei, each strongly contributed to our net sales momentum throughout the year. With increased R and D investments into these core areas, we anticipate further acceleration of our momentum. Third, revitalizing our winning culture.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

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 a strong execution, we believe we have made a 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

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 shooter. 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 $73,400,000 up 1% sequentially and up 39% year over year. Infrastructure revenue growth benefited from record revenues in our data center business.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Net sales for data center reached a record $52,200,000 up 1% sequentially and up 92% year over year, benefiting from our broad portfolio. FiberEdge products achieved record net sales, offsetting the copper edge air pocket from the initial rack deployment at our anchor customer. Based on Q2 performance, we expect continued strong opportunities for fiber edge 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 the increases in the data center CapEx forecast from multiple hyperscalers, sovereign operators and enterprises. During Q2, bookings and forecasts from our optical module customers serving China based CSPs were generally cautious due to limits on GPU availability.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

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 multi year growth cycle. The market is shifting to higher data rates to support the increased compute and network interconnect bandwidth, resulting in strong demand for our fiber edge 800 gig TiAs moving rapidly from 400 gig. Beyond 800 gig, 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 2026 commensurate with the broader deployments of 1.6T switches.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

While the shift to higher speed to achieve high bandwidth is a 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 increase storage capacity while constraining our budget for networking. On the optical side, we have secured several LPO design wins with our TIAs in 400 gig and 800 gig transceivers. We believe we have secured the lion's shares of the TiAs in the most optical transceivers. Our 800 gig LPO laser drivers were specifically designed to comply with our LPO MSA requirements, and we believe it is the only compliant driver in the market.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Several optical module customers are conducting designing and testing of our drivers on their transceivers. We are engaged with three of the leading hyperscalers with our 800 gig LPO solution and expect revenues to begin ramping in Q4 of this year. We are accelerating our R and D roadmap and are targeting making 1.6 LPO drivers and TIAs available for sampling before the end of the year. Another high bandwidth and low power solution is a copper edge for ACC and onboard linear equalizer. During the quarter, we delivered 800 gig and 1.6 T ACC cables to multiple hyperscaler and enterprise customers for testing and qualification.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

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 significantly longer reach compared to direct attached copper cables. We continue close engagement with our entry customer for their future RAC platforms using CopperEdge and 1.6 T optical transceivers using our fiber etch product. We are on track and expect to launch ACC with US hyperscaler customers during calendar year 2026. Currently, are enabling all the major cable suppliers, all of which have begun initial qualification at the multiple hyperscalers. As data center topology continues to evolve, we see copper remaining foundational elements of next generation data center interconnects, particularly for short reach links where its cost, power efficiency, speed, and reliability are unmatched.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

With the bandwidth requirements increasing from 400 gig to 800 gig, 1.6, and beyond, advances in active copper technologies are extending the reach and offering significant power savings, making copper a essential complement to optical solutions. In high performance computing and AI clusters, copper enables low latency, energy efficiency connections at a rack and row level where optics address longer bridge needs. By leveraging our twenty plus years of experience in analog data center solutions, we are helping our customers achieve the performance, efficiency, and the scalability demands of today's and tomorrow's data center with a comprehensive product portfolio, addressing line speeds from 10 gig to 400 gig with a line count from one to eight channels. Moving forward, the momentum in fiber edge combined with our emerging copper edge 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Net sales for Q2 were $41,200,000 up 16% sequentially and up 11% year over year. Net sales in consumer TVS were $29,900,000 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 is safeguard 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Leading global consumer electronics brands integrate Semtech's TVS technology into their products to ensure device performance, durability and reliability. In addition, our per se sensing technology is being increasingly deployed across a growing 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, Persei enables intelligent power management by detecting proximity and optimizing RF performance to meet regulatory requirements without compromising the user experience. In addition, Persei 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Moving towards industrial end market, Q2 industrial net sales were $143,000,000 up slightly sequentially in line with our outlook and up 14% year over year. Within the industrial, net sales of LoRa enabled solutions was $36,900,000 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 a smart city infrastructure. It also enables cost effective and a secure monitoring and control of equipment, infrastructure and environmental conditions over large areas.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

We are seeing growth in applications including home security systems, smart appliances, pad and personal treasures, and community based environmental sensors. In addition, our recent generation LoRa chips offer dual band capability, 2.4 gigahertz 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. FuelBand 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 long range communication, low power consumption, and a strong signal resilience, three factors critical for aerial operations.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

LoRa technology is used to provide a reliable telemetry and sensor data transmission even beyond the 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 $64,800,000 up 2% sequentially and up 24% year over year. Bookings in our hardware business continues to be strong, over 40% year over year due to both the broad market recovery as well as our position as a leading North American supplier. We see strong five gs momentum as IoT transitions from four gs with growth in both bookings and design wins.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

We believe we hold a leadership position with the five gs RedCap and are progressing well in launching Qualcomm based platforms in the coming year. We continue to lead in five gs LPWA, advancing satellite IoTs through non terrestrial network or NTN, which opens up new opportunities for global connectivity. For router and gateways, our partnership ecosystem continues gaining momentum. As announced in June, several of our products, including our flagship XR60 five gs router achieved Verizon Front Line Verified status. We now support Verizon's Front Line Network SLICE, a dedicated five gs highway for the first responders.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

At the same time, we continue to invest in our R and 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 2026. Mark?

Mark Lin
Mark Lin
EVP & CFO at Semtech

Thank you, Hong. I am pleased to report that for Q2, net sales were a record $257,600,000 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 two eighty basis points year over year and above the midpoint of our outlook. Semiconductor products adjusted gross margin was 60.7, down sequentially from 63.7% and up year over year from 59.2%.

Mark Lin
Mark Lin
EVP & CFO at Semtech

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 copper revenue. IoT Systems and Connectivity adjusted gross margin benefited from higher sales of routers and gateways with Q2 at 39.5%, improving sequentially from thirty four point four percent and up year over year from 35.4%. Adjusted net operating expenses were $88,400,000 within our guidance range. Adjusted operating income was $48,600,000 resulting in an adjusted operating margin of 18.8%, up four sixty basis points year over year.

Mark Lin
Mark Lin
EVP & CFO at Semtech

Adjusted EBITDA was $56,500,000 up 39% year over year and adjusted EBITDA margin was 21.9%, up three ten basis points year over year. Adjusted net interest expense was $4,100,000 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 $5,000,000 reflective of our continued prioritization of using free cash flow to repay debt.

Mark Lin
Mark Lin
EVP & CFO at Semtech

Other net non operating expenses were $1,300,000 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 $41,900,000 goodwill impairment charge from our Connected Services business that is reflected in our GAAP results.

Mark Lin
Mark Lin
EVP & CFO at Semtech

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' goodwill balance. Operating cash flow for Q2 was $44,400,000 sequentially up 60% from $27,800,000 and up from negative $5,000,000 a year ago. Free cash flow for Q2 reflected similar growth at $41,500,000 sequentially up 59% from $26,200,000 and up from negative $8,400,000 a year ago. We ended Q2 with a cash and cash equivalents balance of $168,600,000 up $12,100,000 from Q1, while making optional principal prepayments of $25,000,000 on our term loan. At the end of Q2, net debt sequentially decreased $37,100,000 to $359,100,000 Along with debt reduction, strong business performance contributed to an adjusted debt leverage ratio of 1.6 as of the close of Q2, down sequentially from 1.9 and down year over year from 8.8.

Mark Lin
Mark Lin
EVP & CFO at Semtech

Now turning to our third quarter outlook. We currently expect net sales of $266,000,000 plus or minus 5,000,000 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 lower about flat sequentially combined with growth in our IoT cellular business.

Mark Lin
Mark Lin
EVP & CFO at Semtech

Based on expected product mix and net sales levels, we expect adjusted gross margin to be 53% plus or minus 50 basis points, a 60 basis point improvement year over year at the midpoint. Adjusted net operating expenses are expected to be $88,800,000 plus or minus $1,000,000 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 $60,000,000 plus or minus $3,000,000 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 $5,000,000 benefiting from leverage based pricing on our term loan that aligns a lower interest rate to a lower leverage ratio. We expect an adjusted normalized income tax rate of 15% consistent with Q2.

Mark Lin
Mark Lin
EVP & CFO at Semtech

These amounts are expected to result in adjusted diluted earnings per share of $0.44 plus or minus $03 based on a weighted average share count of 91,600,000.0 shares.

Mitch Haws
Mitch Haws
SVP - IR at Semtech

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

Operator

Thank you. With that, we will 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 that your line is in the question queue. You may press 2 to remove yourself from the queue.

Operator

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

Harsh Kumar
Harsh Kumar
MD & Senior Research Analyst at Piper Sandler Companies

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 of you're talking about fourth quarter. So I was curious about how you see the progression through the year.

Harsh Kumar
Harsh Kumar
MD & Senior Research Analyst at Piper Sandler Companies

Is there a possibility that LPO could be pre born? Maybe it could come earlier? Or are you just in different sort of customers and maybe with a different slightly different timeline?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Harsh, thank you for the question. Yes, 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

But one thing is good that our TIAs have been in pretty much every transceiver manufacturers design and qualification. As for timing that there are some of them will start deploy in Q4 and some I wouldn't say the imminent right now is the small volume and because we have a broad product portfolio and our TIA has already been designed in a DSP based real time solution already. We don't see the incrementally higher demand due to that LPO just yet, but we do expect that Q4 they will start deployed. So we have the design wins in 800 gig and also 400 gig for Doctor. 4s and that one may already start in volume.

Harsh Kumar
Harsh Kumar
MD & Senior Research Analyst at Piper Sandler Companies

Understood, Hong. And then maybe I could ask you about the general state of the data center spend. You're sort of a networking player. You have parts and modules and cables. You talk to, obviously, a lot of large companies.

Harsh Kumar
Harsh Kumar
MD & Senior Research Analyst at Piper Sandler 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?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Yes, thank you for that question. Yes, we do engage with our direct customers, which are the module manufacturers, but we also engage with CSPs in The U. S. And also in China. We all read the same news and earnings report that CSPs, they have strong conviction and forecast to increase the CapEx spending to expand the data center capacity and upgrade for AI capability.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

And we're seeing that from our direct customers, a very strong forecast for 2026 and beyond. So we will be benefiting from this tremendous backdrop. On the other hand in China, the CSPs as I discussed in the prepared remarks, the first part of the Q2, they tend to be a little bit cautious due to the limit to the GPU availability. But in the last several weeks and they have come back and the booking activity has improved pretty significantly and the forecast for the remaining of 2025 and 2026 is very optimistic as well. So we see the market really has a very optimistic tone and we're seeing the result from the new business opportunities and the bookings.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

And because we are supplying electronic components, you may hear some pockets, they were limited by so EML or other components, but it's not for us. Our PMD physical media devices are designed for to support VCSELs, support EML and also support silicon photonics modulators. So we don't see the constraint at this point, but we do plan ahead to add more testers and back end OSAT capacity in anticipation of pretty significant ramp for 2026 and beyond.

Harsh Kumar
Harsh Kumar
MD & Senior Research Analyst at Piper Sandler Companies

Understood, Hong. Thank you so much.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you.

Operator

Thank you. And our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

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?

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

And when you talked about hyperscale customers, what types of projects are you working on there? Thank you.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Yes. Thank you, Joe. Yes, so we have been talking to customers over the last three, four quarters and we covered a pretty broad ground to have been engaging with over 20 customers in the entire ecosystem. So certainly the awareness level right now has significantly increased and we work with our cable customers very closely. The four or five key ones, they all have our 100 gig per line or 800 gig cables and 200 gig per line of 1.6T cables, they sample to different CSPs and enterprise customers.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

We're seeing strong traction. They definitely see the advantage of low power, more flexible and higher signal integrity and a longer reach than deck cable. And they are designed in one case for scale up similar to our 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 and also serve it at the back plane to replace the deck cables. So, we see the use cases, you replace the deck cable, see the use cases to replace AEC's and 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 panel or pluggable ports.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So we'll see probably a couple of hyperscalers to drive to the high volume ramp first and either Q4 or the 2026. For 1.6T cables, the timing of ramp will be coincide with a switch. If you don't have 200 gig ports, you don't really need a connectivity to connect the ports. But for 800 gig or 100 gig per lane cables, we start seeing some of the demand and getting preparation for the latter part of this year.

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

Great. Thank you for that. And then separately, are you seeing any supply constraints on 1.6?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

The 1.6, Joe, at this point, we don't see the strong volume demand yet. And but 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. So we support a wide range of demand, but the volume ramp and it's going to be like in 2026. At this point, the ports that would require 1.6 connectivities, they're only from two major ASIC manufacturers. One is making GPU, one is making switches.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So you can imagine the timing of when they start the volume deployment.

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

Great. Thank you.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So the bottom line, we don't see the constraint from outside. Thank you.

Operator

Thank you. And the next question comes from Timothy Arcuri with UBS. Please proceed with your question.

Analyst

This is Dino on for Tim. So just a question on LoRa. It looks like results came in strong ahead of the 30,000,000 to $35,000,000 range you previously mentioned. Are you seeing significant contributions from other applications of LoRa? And do you expect to see LoRa performing at the same level in the next few quarters?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Yes. 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.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

For example, the dual band, in addition to ISM baseband, we provide the device capability to run on 2.4 gigahertz band as well. What that does is to provide enhanced bandwidth data rate, but at a trade off a transmission distance, but a LoRa can already cover hundreds of kilometers. So it's not a big trade off and by increase the bandwidth, we unlocked a range of applications. For example, just low altitude economy, drone deliveries and so even some applications related to H AI and for example parking meters and they can getting a still pictures net and using the enhancement was to transmit the pictures back in as an archive. So we also had the LoRa plus that basically LoRa plus other RF protocols by companies and you can address different applications that traditionally LoRa alone cannot address.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So this new technology is really opened up new market opportunities and we are very pleased to see that the LoRa continue to have a very strong demand. We didn't mention that as a matter of fact, the end node, number of end node was shipped last quarter, it's a historic record. So going forward, we think, right now give us a confidence and conviction, we expect the LoRa revenue on a quarterly basis to be between 30,000,000 to $40,000,000 So certainly it's going to be an increase from our original belief from 30,000,000 to 35

Analyst

Great. Thank you.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you.

Operator

And our next question comes from the line of Quinn Bolton with Needham and Company. Please proceed with your question.

Quinn Bolton
Quinn Bolton
Senior Analyst at Needham & Company

Congratulations on the results and outlook. I guess I wanted to follow-up on the ECC opportunity just to understand timing. It sounds like you still expect, Tong, some ACC revenue potentially in the fiscal fourth quarter ending January. And if I heard your answer to the previous question, it sounds like 800 gig or 100 gig per lane ACC potentially for scale up is the first application to ramp?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So, Quinn, that may confuse you. For 800 gig, it's for the interconnect, yes, in the back plane and also between racks. Historically they use that deck 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 like as rigid as a rod. So when you bend a little bit, you compromise the signal integrity. So in that, they will still call the scale out applications for different interconnect, the different switches.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

But right now, the one we designed in for 200 gig per lane and 1.6 application is a scale up between different racks for ASICs. And the customers finding more applications in scale out to in the back plane to interconnect say for example from the next card to the top of the rack. In many cases, within that topology of the switch fabric, they are just replacing the DAC cable with ACC because of the flexibility, better signal integrity incrementally higher power than that cable, but it's not really taking out any additional power budget.

Quinn Bolton
Quinn Bolton
Senior Analyst at Needham & Company

Okay. Guess, just so I'm clear, the 1.6 t or 200 gig per lane cables, I thought a lot of those would depend on Broadcom's Tomahawk six switch that enabled 200 gig per lane. So are there applications for one point T ACCs that ramp before availability of that switch? Or do your 100 gig designs ramp in the fourth quarter before availability of that Ethernet switch platform from Broadcom?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Right. So the volume demand will start from 100 gig first per lane, I would say in Q4 and then the 200 gig first applications to volume is going to be the scale up between ASICs. Then that will be followed by 200 gig 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.

Quinn Bolton
Quinn Bolton
Senior Analyst at Needham & Company

Got it. Okay. That makes sense. And then I guess I wanted to switch. I know the data center business is driving a lot of growth, but you mentioned the per se business and engagements in sort of new smart glass platforms as well as smartphone platforms.

Quinn Bolton
Quinn Bolton
Senior Analyst at Needham & Company

I'm just wondering if you could give us your outlook for the ramp of per se. 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 per se adoption in the smartphone segment would be helpful. Thanks, Han.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Yes, thank you. Yes, so, CoinJay, per se devices has been the industry standard for smartphone and you know that for almost all the smartphone manufacturers were there and were in the process of getting in to 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 Rebound glasses and there are several other platforms they use basically the same functionality and but do the different ways and link to their own large language model for AI applications and 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 generations.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So that's next generation products. So that is the area we feel like it can evolve into a pretty sizable market and we're in the forefront of it.

Quinn Bolton
Quinn Bolton
Senior Analyst at Needham & Company

Excellent. Thank you, Yong. Thank you, Mark.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thanks, Vikram.

Operator

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

Christopher Rolland
Christopher Rolland
Senior Equity Analyst - Semiconducters at SIG Group

Hi, guys. Thanks for the question. So I do know it might be a little early for January guidance, but seasonally, I do believe historically that's been down. Are there 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?

Christopher Rolland
Christopher Rolland
Senior Equity Analyst - Semiconducters at SIG Group

Just any broad kind of milestones or things to think about for January.

Mark Lin
Mark Lin
EVP & CFO at Semtech

Yes, Chris. So 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 $41,200,000 in Q2, that's a multi year high, up 16% sequentially, up 11% year over year.

Mark Lin
Mark Lin
EVP & CFO at Semtech

So 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 some industry bellwethers on these trends. ISC business is performing well for the four gs to five gs transition as a tailwind there. And in infrastructure, data center is definitely a growth engine and all the commentary that Hong has provided in our prepared remarks and for the Q and A up until now.

Mark Lin
Mark Lin
EVP & CFO at Semtech

We do have a very broad portfolio. FiberEdge shipments were up about three times compared to a year ago. And anything that we talk about in terms of LPO would be incremental and ACC is definitely incremental to that ramp.

Christopher Rolland
Christopher Rolland
Senior Equity Analyst - Semiconducters at SIG Group

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

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Yes. So Chris, that's definitely we're pretty excited about the progress we have made, not a couple of years ago, as recent as a year ago, our leverage ratio was at 8.8x. So 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 and D spending with our bottom line over the last year. And I think we are striking a right balance and we're increasing R and D spending in a core area by 20% sequentially, while we're 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're seeing we can apply technology leverage, customer leverage or operational leverage. We see in some voyage and we have some capability to do small tuck ins and but that's the highest priority for us is still the portfolio optimization. We decide what the areas we wanted to get in, we have the Board support, we'll continue the strategy going forward.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So hopefully that answers your question. Definitely the core and non core delineation is not just a paper exercise, it's really our North Star to set the priority for us.

Christopher Rolland
Christopher Rolland
Senior Equity Analyst - Semiconducters at SIG Group

Thanks, Hong, and congrats on the results.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you.

Operator

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

Rick Schafer
MD - Semiconductor Equity Analyst at Oppenheimer & Co. Inc.

Yes. Thanks. Thanks, Hong.

Rick Schafer
MD - Semiconductor Equity Analyst at Oppenheimer & Co. Inc.

I've got a question on Tri Edge. I'm just curious what the outlook, you know, is for the PAM4, you know, the Tri Edge business as the industry sort of seems to be focusing more on 100 g and 200 g lanes. You know, I guess, how do you you know, what are your plans for that business? How do you view that Tri Edge opportunity? I mean, is PAM4 going to be a growth driver for Fintech?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Rich, thank you for your great question. So the Tri Edge has been our traditional offering. It's basically integrated product with drivers and TIAs integrated with our cloud and data recovery one. So you can almost say it's oxymoron that the analog version of the DSP. We offered our product at a 50 gig per line to give say four channel will be 200 gig aggregated bandwidth and if it is eight channel will be 400 gig aggregated bandwidth.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So our customers more particularly in China and also one of the CSPs in The U. S. Has been using our Tri Edge in the AOC cables, active optical cables for 400 gig and 200 gig. So that has been going on in a limited basis and but one big CSPs in The U. S.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

And are giving us a forecast and start ramping up by using the Tri Edge in the AOC applications for 400 gig. So our plan is that we'll continue to push that envelope to make the PAM-four 50 gig move up to 200 gig. We're going to be skipping a 100 gig PAM-four because this is a little too late for that. The beauty of the 200 gig Tri Edge CDR based is going to be continue to deliver low power consumption and had advantage of both equalizing in the frequency domain and retiming in time domain. So that is on our roadmap and under development.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

We believe when the 1.6 transceivers are launched and very next thing they will be first driving for volume and then later on driving for cost reduction and the power reduction. So we will catch that wave providing low cost, low power version of the Tri Edge.

Rick Schafer
MD - Semiconductor Equity Analyst at Oppenheimer & Co. Inc.

Holger, 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?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So Rich, right now it's a little 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 and D project, we just make the assumption say, for example, if we can chip away 5% to 10% of 1.6 transceiver market from the real time solutions that will be well worthwhile for the market opportunity. It's really, really great for as alternative to the DSPs. So, I think 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 of the low power is a key attribute to the optical connectivity in the future.

Rick Schafer
MD - Semiconductor Equity Analyst at Oppenheimer & Co. Inc.

Great. Thanks a lot.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you. Operator, next question.

Operator

Thank you. And our next question comes from the line of Cody Acree with The Benchmark Company. Please proceed with your question.

Cody Acree
Equity Research Analyst at The Benchmark Company LLC

Yeah. Thanks guys for taking my questions and congrats on the progress. Hong, can you just go back to your ACC commentary on the cloud service providers? You mentioned expecting that to begin early twenty six. Is that any reset of timing from earlier expectation of ACC diversification in Q4?

Cody Acree
Equity Research Analyst at The Benchmark Company LLC

Or was that always the case, the delineation between CSPs and the cable providers?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Cody, thank you for the question. So we are always at the timing wise for the volume ramp is going to be going through the platform architecture. The platform architecture of our customers 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 be pushed out a little bit. So that is the one thing we found during Q2.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

And but as I said, there are two other use cases. For example, 100 gig per lane 800 gig ACC cable that's independent of that timing. We believe that ramp will start in Q4 for that flavor. Another one is a 200 gig per lane and 1.6 T cable for scale up between different racks of ASICs that will also march along the line timeline in Q4. So when you start ramping back from very low level to pretty sizable level.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

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.

Cody Acree
Equity Research Analyst at The Benchmark Company LLC

Excellent. Thanks for that. And 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?

Mark Lin
Mark Lin
EVP & CFO at Semtech

So we have the guide for the following quarter. And really, as we've stated, we're very mix driven. But the good part is there, Cody, is that the strong the faster growing portion of our business are accretive to mix, especially within data center. But that said, we also provide the areas of growth for our IoT cellular business, which is a little bit of a headwind. And also within Q3, we do have a little bit of a headwind from high end consumer.

Mark Lin
Mark Lin
EVP & CFO at Semtech

But overall, that particular business does support the industrial TBS business as well, which has pretty good gross margin. So overall, pretty good operating margin, but 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 and D spend and we'll try to keep that under I should say, we expect to keep that under control. But again, there's some really, really great opportunities out there for us to invest in some very good organic growth opportunities.

Cody Acree
Equity Research Analyst at The Benchmark Company LLC

So any thoughts on R and D growth as you go forward?

Mark Lin
Mark Lin
EVP & CFO at Semtech

Cody, so we've got it out that one quarter. You can just expect us to be prudent and not overspend, and maybe we'll just leave it at that.

Operator

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

Tore Svanberg
Tore Svanberg
MD - Semiconductors at Stifel Financial

Yes. Thank you, Hong, Mark. I wanted to 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?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Yes. So, Tore, thank you for your question. So, we are seeing pretty strong booking activities, data center area, in per se, even the consumer high end consumer TVS is very strong. The industrial for the modules, we have the tailwind. The booking activity is very strong.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So as for the linearity, from quarter to quarter, you always have this different product mix thing, but I would say, with 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 really good about the future quarters.

Tore Svanberg
Tore Svanberg
MD - Semiconductors at Stifel Financial

Very good. And as my follow-up, had a sort of clarification question on LPO. So you said you expect three leading hyperscalers to be in 800 gig production in Q4 of this year. Are those three hyperscalers all U. S. Or is that U. S. And China?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So, three hyperscalers, two are in The U. S. And one in China. So, first the LPO, this is really this early inning and LPO transition and to take over some of the DSP based transceiver market share is inevitable And the beauty for that for us is, if you stay with the DSP based, we have TIA content. If transitioned over to LPO based, our SAM is going be doubled, we will have the driver content as well.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So the timing to us is important, but it is not as super sensitive because we already incumbent for DSP based transceivers.

Tore Svanberg
Tore Svanberg
MD - Semiconductors at Stifel Financial

Sounds good and congrats on the results.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you.

Operator

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

Craig Ellis
Director - Research at B Riley Financial

Thanks for sneaking 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, but 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, etcetera? Just some qualitative color on where we would be from where we are would be really helpful. Thank you.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

Thank you, Craig. If I say largely broad brush, the second year because of better improved financial foundations, we can go more aggressive. And the first year, even some of the opportunities we uncovered, but we have to balance the bottom line with the investment in R and D. And so that's one thing. The second thing is some of the R and D spending we have in the first year is going to be start showing the results and momentum for the second year.

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

So 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.

Craig Ellis
Director - Research at B Riley Financial

Got it. If 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, etcetera, any significant evolutions we should be looking at that you're trying to drive?

Hong Hou
Hong Hou
President, CEO, Director & Member - Technology and Strategy Committee at Semtech

I think what we focus instead of focus each on the each product lines and we fortunately 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.

Craig Ellis
Director - Research at B Riley Financial

Thanks, Hong.

Mark Lin
Mark Lin
EVP & CFO at Semtech

Thank you.

Operator

Thank you. And with that, there are no further questions at this time. I would like to turn the call back to Mitch Hoss for closing remarks.

Mitch Haws
Mitch Haws
SVP - IR at Semtech

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.

Operator

Thank you. And with that, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.

Executives
    • Mitch Haws
      Mitch Haws
      SVP - IR
    • Hong Hou
      Hong Hou
      President, CEO, Director & Member - Technology and Strategy Committee
    • Mark Lin
      Mark Lin
      EVP & CFO
Analysts
    • Harsh Kumar
      MD & Senior Research Analyst at Piper Sandler Companies
    • Joseph Moore
      Managing Director at Morgan Stanley
    • Analyst
    • Quinn Bolton
      Senior Analyst at Needham & Company
    • Christopher Rolland
      Senior Equity Analyst - Semiconducters at SIG Group
    • Rick Schafer
      MD - Semiconductor Equity Analyst at Oppenheimer & Co. Inc.
    • Cody Acree
      Equity Research Analyst at The Benchmark Company LLC
    • Tore Svanberg
      MD - Semiconductors at Stifel Financial
    • Craig Ellis
      Director - Research at B Riley Financial
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