Semtech Corporation (SMTC) Earnings

Management highlights

- **Data Center Leadership**: Semtech is capitalizing on the infrastructure build-out for 800G and 1.6T systems. The company holds >50% market share in 800G Fiber Edge TIA drivers and is becoming the de facto standard for Copper Edge linear equalizers. Engagement with hyperscalers has expanded to include sole-sourced designs. - **Photonic Portfolio Expansion**: Following the acquisition of Hypho, Semtech is broadening its photonic capabilities to include GaN chips, high-power CW lasers, and semiconductor optical amplifiers (SOAs). Revenue from CW lasers for transceivers is expected to start in H1 FY2028. - **Capacity Scaling**: To support unprecedented backlog, Semtech is rapidly expanding capacity by acquiring clean room space, procuring fab equipment, and qualifying additional manufacturing partners to mitigate geopolitical risks. - **LoRa Growth Drivers**: LoRa revenue hit an all-time high, driven by the Gen4 platform (LoRa Plus) gaining traction in smart home/security and Amazon Sidewalk expanding internationally via Ring sensors. - **Portfolio Optimization**: The company announced a definitive agreement to divest its cellular module business to sharpen focus on core growth areas. This transaction is expected to close in Q4 FY2027 and be EPS neutral. - **Strategic Focus**: Management emphasized three priorities: securing incremental capacity for FY2028+, intensifying R&D for next-gen solutions (3.2T, CPO, MPO/XPO), and continuing portfolio optimization.

Guidance

- **Q3 FY2027 Net Sales**: Expected to be $410 million (+/- $5 million), representing ~20% sequential growth and ~54% year-over-year growth at the midpoint. - **Data Center Segment**: Projected to grow 45% sequentially and 160% year-over-year, driven by the ramp of 1.6T copper and fiber edge solutions. - **Industrial Segment**: LoRa revenue expected to grow ~15% sequentially and ~65% year-over-year, reaching another all-time high. - **Gross Margin**: Consolidated adjusted gross margin expected to be 58.3% (+/- 100 bps). Excluding the held-for-sale cellular module business, adjusted gross margin is expected to be 63.9% at the midpoint. - **Operating Expenses**: Adjusted net operating expenses expected to be $112 million (+/- $3 million), including increased R&D spend for data center projects. - **Earnings Per Share**: Adjusted diluted EPS expected to be $1.05 (+/- $0.03), representing ~40% sequential growth and ~119% year-over-year growth. - **Multi-Year Outlook**: Management will provide a detailed financial framework and multi-year outlook at the October 15th investor event, highlighting structural margin improvements post-divestiture.

Segment performance

Semtech reported record total net sales of $342 million, representing a 33% year-over-year increase. The Infrastructure segment generated $124 million in net sales (up 69% YoY), driven by a record Data Center revenue of $100 million (up 91% YoY). The High-End Consumer segment contributed $39 million in net sales (down 5% YoY), while the Industrial segment recorded $179 million in net sales (up 25% YoY), bolstered by record LoRa revenue of $58 million (up 58% YoY). In terms of gross margin performance, Total Semiconductor Products Gross Margin reached 62.8%, up 210 basis points sequentially, reflecting strong contributions from 1.6T Fiber Edge, Copper Edge, and the LoRa portfolio.

Risks & headwinds

- **Supply Chain & Capacity Constraints**: Rapid revenue growth requires significant capacity expansion; failure to secure sufficient wafer and packaging capacity could limit upside. - **Geopolitical Risks**: Management is actively qualifying additional manufacturing partners to mitigate potential geopolitical risks associated with supply chain concentration. - **Execution Risk in New Technologies**: Success depends on the timely ramp of new products like 1.6T, MPO, XPO, and photonic components (lasers, PDs) into volume production. - **Divestiture Execution**: The sale of the cellular module business carries execution risk and regulatory approval requirements, though it is currently targeted for closure in Q4 FY2027.

Analyst Q&A

• Q: How does management view near-term capacity sufficiency for the accelerating data center business, particularly regarding the 160% YoY growth projected for Q3? /

  A: CEO Hong Hou stated that while current capacity supports the immediate customer ramp and drop-in orders, they anticipate needing more capacity for the second half of FY2028. They are working with manufacturing partners to increase back-end tester capacity and front-end wafer starts, leveraging their financial capability to jointly secure allocation. Regarding MPO/NPO solutions, Hou noted that high-density packaging is a key trend, and Semtech is engaging with 10-15 module manufacturers, leveraging its leadership in TIA arrays and laser arrays to co-optimize with incoming photodiode designs.

• Q: What are the primary drivers behind the striking sequential gross margin expansion, and how sustainable is this trend given pricing pressures? /

  A: CFO Mark Lin explained that over 500 basis points of improvement is structural, resulting from the upcoming divestiture of the low-margin cellular module business. The remaining 150-380 basis point sequential increases are driven by favorable product mix, specifically the ramp of high-margin 1.6T and strong LoRa growth. On pricing, Hou indicated there is no erosion expected in the near term due to high demand for availability; customers are prioritizing supply over cost, allowing Semtech to pass through slight cost increases while maintaining margins.

• Q: Can you clarify the timeline and magnitude of content increase per transceiver as the industry transitions to 3.2T, and how does LoRa's growth trajectory compare to previous expectations? /

  A: Hou clarified that 'high double-digit' content refers to $18-$19 per transceiver, not $80-$90. He stated that significant content increases will coincide with the 3.2T transition, expected to see meaningful deployment in about two years, with design windows opening in 12 months. For LoRa, Hou confirmed growth has smashed the previous 20% bogey, with Q3 showing ~65% YoY growth driven by three pillars: LoRaWAN for industrial, LoRa Plus for smart home/security, and Amazon Sidewalk for mass-market consumer adoption.

• Q: What is the visibility into the sustained strength of 800G versus the ramp of 1.6T, and how should investors think about the mix evolution? /

  A: Hou noted that industry forecasts for 800G transceivers have risen from 50 million to 80-90 million units annually, with Semtech holding a healthy backlog for its Fiber Edge solution. While 1.6T is just starting, Q3 will see 1.6T revenue surpass 50% of total data center revenue. Craig Ellis asked about mix evolution, and Hou confirmed that 1.6T's percentage of total mix will continue to grow north of 50%, although 800G remains very strong. Additionally, ACC adoption is expected to begin volume deployment in Q4, while LPO serves as a proof-of-concept for linear architectures that will integrate into future MPO/CPO forms.

• Q: How deep does the current backlog extend into FY2028, and what is the strategic importance of Amazon Sidewalk for LoRa's long-term growth? /

  A: Hou revealed that for the remainder of the current fiscal year, the target backlog is fully booked, and for the next fiscal year (FY2028), they are over 70% booked. This visibility allows them to confidently plan capacity expansions. Regarding LoRa, Scott Searle asked about Amazon's role. Hou stated that while Sidewalk is currently nominal revenue, it represents significant potential as it piggybacks into Amazon's scale. Currently, LoRa+ accounts for 20-25% of LoRa revenue, but Sidewalk is expected to become a major driver as international expansion proceeds.