Semtech (SMTC) Q1 2027 Earnings Transcript

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DATE

Tuesday, May 26, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Hong Q. Hou
• Executive Vice President and Chief Financial Officer — Mark Lin
• Senior Vice President of Investor Relations — Mitchell J. Haws

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TAKEAWAYS

• Revenue -- $291 million, up 6% sequentially and up 16% year over year, with record levels driven by data center and LoRa performance.
• Adjusted diluted EPS -- $0.51, an increase of 34% year over year.
• Adjusted gross margin -- 53%, 20 basis points above the midpoint of guidance.
• Data center net sales -- $71.6 million, up 14% sequentially and 39% year over year, benefiting from strength in 800G FiberEdge portfolio, LPO, and customer engagement.
• Infrastructure net sales -- $98.8 million, up 14% sequentially and 36% year over year, supported by data center growth.
• Signal integrity gross margin -- 62.7%, compared to 67.4% in the previous quarter, reflecting integration of the new indium phosphide facility.
• High-end consumer net sales -- $38.4 million, up 5% sequentially and 8% year over year, driven by TVS product wins and expanding sensor portfolio.
• Industrial net sales -- $153.9 million, up 2% sequentially and 8% year over year, with LoRa revenue growth and strong end-market expansion.
• LoRa net sales -- $44.5 million, up 12% quarter over quarter and 14% year over year, reflecting adoption in new application verticals and introduction of LoRa+ platform.
• IoT systems and connectivity net sales -- $88.3 million, down 2% sequentially and up 2% year over year; new AirLink routers contributed to customer and channel momentum.
• Adjusted net operating expenses -- $95.1 million, slightly below the low end of guidance, due to timing of project expenses.
• Adjusted operating income -- $59.3 million, with an adjusted operating margin of 20.4%.
• Adjusted EBITDA -- $66.4 million, with an adjusted EBITDA margin of 22.8%.
• Operating cash flow -- $36.2 million, down 41% sequentially, up 30% year over year.
• Free cash flow -- $28 million, down 53% sequentially, but up 7% year over year; first quarter figures impacted by annual bonus payments.
• Cash and cash equivalents -- $163.3 million after net acquisition outflow of $29.2 million.
• Debt -- Principal amount $503 million, unchanged sequentially.
• Q2 revenue outlook -- Expected $328 million plus or minus $5 million, up 13% sequentially and 27% year over year at the midpoint, with projected growth in all three segments.
• Q2 data center sequential growth guidance -- Management projects 35% sequential revenue growth, representing 85% year-over-year growth.
• Q2 gross margin outlook -- Expected adjusted gross margin of 54%, up 100 basis points sequentially and 80 basis points year over year, with semiconductor segment midpoint at 62.1%.
• Q2 adjusted operating margin guidance -- 21.9% at the midpoint, up 150 basis points sequentially and 310 basis points year over year, with increased R&D spending and declining SG&A as a share of sales.
• Q2 adjusted EBITDA outlook -- $79.2 million at the midpoint, representing a 24.2% margin, up 140 basis points sequentially.
• Q2 adjusted EPS guidance -- $0.61 plus or minus $0.02, up 20% sequentially and 49% year over year at the midpoint on 97.7 million shares.
• Portfolio optimization -- "We are pleased to report the divestiture process for our cellular module business is at the final stages. Discussions, which are transition and integration in nature, are progressing well."
• R&D allocation -- R&D spend in the first quarter was 17.6% of net sales, up 17% year over year; SG&A decreased to 15.1% of net sales, down 200 basis points year over year.
• Capacity expansion -- Capacity plans are underway to increase production two to three times current levels to meet demand, with near-term investments across foundry, OSAT, and testing partners.
• HIFU acquisition -- Integrated into signal integrity segment; indium phosphide and GaN products are expected to support 1.6T and 3.2T data center modules, and demand exceeds supply.
• ACC (Active Copper Cable) momentum -- Early shipments began for CopperEdge 1.6 ICs; MSA standardization is in progress and may serve as an adoption catalyst.
• LoRa+ platform -- Launched with dual-band support and 2.6 Mbps throughput, enabling new AI and critical IoT use cases across public safety, healthcare, and industrial markets.
• LPO and linear solutions -- 800G LPO revenue grew sequentially; multiple new design wins with hyperscalers and leading module makers across the U.S. and China.
• Outlook for linear and copper interconnects -- Management reports ongoing qualification for BiDi (bidirectional) linear equalizers and expanding modular partnerships.

SUMMARY

Management highlighted all-time high sales and profitability, citing broad momentum across data center, LoRa, and industrial markets. Strategic divestiture of the cellular module business is moving to completion, enhancing portfolio alignment. Raised guidance signals accelerating demand, with future revenue weighted to data center and optical module ramps. The company confirmed aggressive R&D investment and capital allocation to expand design win pipelines and future-proof technology platforms.

• Semtech (NASDAQ:SMTC) forecasts its data center business will accelerate further in the second half of the year, driven by 1.6T CopperEdge, FiberEdge, and integration of newly acquired optical components.
• CEO Hou stated, "Based on the current order trend, we expect accelerating demand throughout fiscal year 2027 and beyond," indicating robust visibility into backlog and bookings through the first half of fiscal 2028.
• HIFU's GaN chip demand outpaces current supply by approximately three times, with expanded capacity expected by year-end and continued scaling into next year.
• Management expects linear-based network solutions, including ACC, LPO, and LRO, will represent over 25% of transceiver mix within two years, based on rising power efficiency priorities at hyperscale clients.
• LoRa+ adoption supports higher-value AI and mission-critical IoT deployments, contributing to management's forecast of over 15% sequential LoRa revenue growth next quarter.
• The pipeline of onboard linear equalizer and active backplane projects is expanding, with design wins expected across multiple hyperscalers and ODM partners.

INDUSTRY GLOSSARY

• LoRa: A proprietary low-power, long-range wireless platform used for connectivity in IoT, smart utilities, building, and industrial applications.
• LPO (Linear Pluggable Optics): Optical modules using linear amplifiers to reduce power use in high-bandwidth data center applications.
• ACC (Active Copper Cable): High-speed copper interconnects using built-in amplifiers or equalizers to extend signal reach and bandwidth in data centers.
• MSA (Multi-Source Agreement): Industry consortium standardizing component specifications to ensure interoperability across vendors.
• FiberEdge: Semtech's portfolio of optical transceiver and driver products targeting high-speed data center infrastructure.
• HIFU: Recent Semtech acquisition specializing in indium phosphide photonics and GaN chips for advanced optical and coherent data center systems.
• CPO (Co-Packaged Optics): Integration of optical modules directly with switch ASICs to reduce system power and increase bandwidth density.
• TVS (Transient Voltage Suppression): Semiconductor devices protecting electronic circuits from voltage spikes, deployed in high-reliability mobile, industrial, and consumer applications.
• LRO (Linear Receive Optics): Next-generation optical modules focused on low-power, high-speed data center connectivity.
• FRO (Fully Retimed Optics): Optical transceivers with digital signal processing to fully recover and retransmit clock/data.
• GaN (Gallium Nitride): A semiconductor material used for high-power, high-frequency, and efficient optoelectronic devices.
• OSI MSA: Optical Interconnect multi-source agreement targeting standardization for dense wavelength division multiplexing lasers in scale-out applications.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to Semtech Corporation's First Quarter Fiscal 2027 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following our prepared 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 conference over to Mitchell J. Haws, Senior Vice President of Investor Relations for Semtech. Please go ahead.

Mitchell J. Haws: Thank you, and welcome to Semtech's First Quarter Fiscal 2027 Financial Results Conference Call. Participants on today's conference call are Hong Q. Hou, President and Chief Executive Officer and Mark Lin, Executive Vice President and Chief Financial Officer. Today after the market closed, we released our unaudited results for the first quarter ended 04/26/2026. 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 see Slide 2 of the earnings presentation as well as the Rick 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 today's 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, and we will also be referring to results for our first quarter of fiscal year 2027 unless otherwise noted.

Please see today's press release and Slides 3 and 4 of the earnings presentation 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. With that, I will turn the call over to Hong.

Hong Q. Hou: Thank you, Mitchell. Good afternoon to all of you joining today. Semtech is off to an exceptional start. In fiscal year 2027. Delivering record quarterly revenue supported by very strong bookings and backlog. We drove strong sequential and year over year revenue and earnings growth. Extended our data center and LoRa design win pipeline, all while advancing our R&D and strategic initiatives. We believe we have built a robust foundation to solidify and expand our presence in key markets. My strong conviction in Semtech's positioning is rooted in the transformation we have seen across Semtech employees. Motivation to engage in the partner across the ecosystem, an appreciation for the benefits of collaboration. The time I have invested has been energizing.

And I have appreciated opportunities to join my Semtech colleagues in meeting with hyperscalers device designers, and customer module manufacturers, and then tech and our technical partners. To understand their technology roadmap firsthand Those conversations shaped our R&D priorities, and gave us firsthand insights into where the industry is heading and how Semtech can remain at the forefront. My team and I spent time with the key suppliers and distributors to round out our understanding of how Semtech can partner with our customers to win from design to delivery. Looking at Q1, revenue was $291 million, up 6% sequentially and up 16% year-over-year, driven by continued outperformance in both data center and LoRa.

Adjusted diluted earnings per share were $0.51 up 34% year over year. In addition to delivering strong revenue and earnings growth, we are laser focused on executing our portfolio optimization initiatives. We are pleased to report the divestiture process for our cellular module business is at the final stages. Discussions, which are transition and integration in nature are progressing well. We remain confident this business is a compelling opportunity for the right acquirer. And we look forward to bringing this process and transaction to a successful close. Now let me move on to a discussion of our end markets. For Q1, infrastructure net sales were $98.8 million, up 14% sequentially up 36% year over year.

Strongly supported by our growing data center business. Our net sales for data centers in Q1 were a record $71.6 million, up 14% sequentially and up 39% year over year. Benefiting from strong demand across our broad portfolio the result of sustainably increased customer engagement, portfolio alignment, and supply assurance. The strength is anchored by our strong position in our 800G FiberEdge portfolio. Demand for our leading TIA solutions is exceptionally strong. Drilling across a wide range of transceiver programs, Some are differentiated technology and ability to supply both established and emerging module suppliers have qualified us on several new sockets.

Some on the sole source basis, We understand this module suppliers are winning shares in key mega data center deployments. On 800G linear pluggable optics, or LPO, our FiberEdge linear TIA and driver solutions are deployed by several leading hyperscalers, across both The US and in China. Which contributed to sequential LPO revenue growth. A trend we expect to accelerate over time. We remain confident our foundation in 800G will continue to drive revenue growth throughout this year. Further augmented by significant opportunities at 1.6T shipments launching in Q2 and gaining momentum in the second half of the year.

On 1.6T optical, we generated significant design wins with the major optical module makers for their 1.6T transceivers incorporating the latest generation DSPs. This contributed to exceptionally strong bookings and backlog to support module ramps in the second half of the year. We are also seeing the increased conviction from hyperscalers around 1.6 linear receive optics or LRO and LPO as a preferred solution for a first layer scale out fabric due to the substantial power savings. Looking further ahead, we are participating in development of the NPO or near package optics MSA.

And to see MPO as a meaningful content expansion opportunity for Semtech at 800G and 1.6 successes in LPO and LRO gave hyperscalers confidence in the next evolution of high density and the low power optical solutions. We are also developing derivative components with the same core IP in different form factors to support several MPO projects for leading hyperscalers. We are actively participating in and support the TO MSA, and the many XPO module designs incorporate our FiberEdge chips as they do in OSLP modules. We believe XPO produced provides a very compelling alternative to CPO scale out.

By leveraging liquid code capabilities, proven technologies and components, and establish the innovative optical module ecosystem XPO can provide significant rack space savings along with improved serviceability and better reliability. On the copper side, we are very enthusiastic on CopperEdge deployment. ACC continues to gain meaningful traction. Customers evaluating ACC against incumbent solutions are seeing compelling advantages in link margin versus direct attached and the power savings versus DSP based solutions. Consistent with our expectations in Q1, we started shipping CopperEdge 1.6 ICs to our cable partners for deployment at a U.S. hyperscaler. In onboard integration applications, including active backplane CopperEdge linear equalizers are gaining momentum.

Just as we were confident of ACC's acceptance and ramp in the market, we have increased confidence this engagement will convert into design wins and widespread market adoption. Based on our engagements across different sectors, of the industry, we believe we are creating a multiyear pipeline of CopperEdge opportunities. Design wins, and revenue. Looking forward, we are excited by the opportunity from the HIFU acquisition we completed in March. HIFU is reported in our signal integrity product segment and its indium phosphide photonic products are reported in the data center end market. These products are a strategic building block in 1.6T and the 3.2T optical modules. And the key pillars in our strategy to support next generation data center requirements.

We believe our GaN chips have become the industry standard providing higher power and serving as reliable building blocks in tunable lasers for coherent modulation applications in metro and data center interconnects. GaN chip demand currently exceeds our supply. But our capacity expansion plan is on schedule. We believe our continuous wave or CW laser design is uniquely differentiated to deliver higher conversion efficiency superb far field beam profile, and over temperature performance and narrower linewidth. This lasers have been sampled to and evaluated by several major module manufacturers for coherent light, modules in scale-across applications. Concurrently, we are optimizing our laser drivers and TIAs for coherent light applications.

We plan to provide a comprehensive suite of photonic electronic component solutions for this emerging high volume applications. In addition, we are also working with key customers to make dense wavelength division multiplexing or DWDM lasers optimized for emerging CPO scale-out applications. Based on the newly established OCI MSA. This is exactly the kind of strategic investment we believe creates durable and compounded value. Not just a single product win, but a platform capability that strengthens our position across the broad spectrum of optical architectures our customers are building to work.

Semtech is uniquely positioned at this intersection with a portfolio that spans scale-up, scale-out, and scale-across addressing the full hyperscale interconnect stack across both near term deployment and next generation architecture like 800G 1.6T, 3.2T, and beyond. Finally, given the strength and the depth of our backlog, expanding design win momentum, and 1.6 FiberEdge and CopperEdge inflection building into the second half we are targeting 35% sequential revenue growth in Q2 for data center which would represent 85% growth over the same period last year. Based on the current order trend, we expect accelerating demand throughout fiscal year 2027 and beyond. Now moving to the high end consumer end market.

Net sales for Q1 was $38.4 million up 5% sequentially and up 8% year over year. Our TVS business continues to demonstrate impressive resilience and momentum. With the revenue growth outpacing underlying handset volumes. We continue winning shares and expanding content at a premium brand handset manufacturers. Our differentiated technology, is aligned with the right customers and alignment is translating into consistent design win momentum that we expect to continue. Beyond handsets, we are actively expanding the TVS franchise into a higher value applications. Our newest SurgeSwitch solution is the industry's first circuit protection device to deliver near constant clamping voltage for high voltage power delivery applications.

Addressing a meaningful protection gap at the more demanding power standards extend to rugged mobile devices, and high performance portable systems. These are environments that require consistent reliable protection across extreme temperature ranges and operating conditions. And our solution is purpose built to meet that bar. We see this as a natural and incremental content expansion that broaden the TVS opportunity beyond our core handset market. We continue to expand our PerSe capacitive sensor design wins in specific absorption rate and smart variable applications. The addition of the force sensor business enriches our high end consumer portfolio. Expand application verticals, and pull through PerSe and TVS sales with the same customer base. Synergies have played out as we planned.

For the high end consumer end market, we expect sequential revenue growth driven by improving seasonality layered on top of the share and content gains that are becoming a defining characteristic of this business. Moving to our industrial end market. Q1 industrial net sales were $153.9 million up 2% sequentially and up 8% year-over-year, driven by another great quarter for LoRa. LoRa enabled net sales were $44.5 million up 12% quarter over quarter and up 14% year over year, supported by continued expansion across several application verticals such as smart utilities, smart building, smart city, and asset management. As HAI transitions from concept to deployment reality, LoRa+ is emerging as a key enabler.

Our fourth generation LoRa platform delivers dual band capability while dramatically expanding data throughput of 2.6 Mbps. A step change increase that unlocks a new AI application classes. At the same time, LoRa+ maintains the best in class sensitivity, multi-protocol flexibility, and ultra low power consumption that defines the LoRa advantage preserving the extended reach and the long battery life our customers depend on. We are seeing LoRa+ gaining traction across a broadened set of use cases. LoRa connected public safety sensors can now transmit high fidelity audio and AI verification rather than simple alert. In health care, fault detection systems can relay visual confirmation before dispatching responders.

In industrial environment, predictive maintenance sensors can analyze vibration thermal, and acoustic profile with a level of detail that legacy low power sensors could not support. We have established 3 distinct and complementary pillars of a low power connectivity platforms. LoRaWAN for industrial and commercial deployments, LoRa+ with multiple protocol flexibility for smart home and security market, and Amazon Sidewalk for mass market consumer applications. Together, these growth vectors give rise to accelerated growth in our LoRa business as we target LoRa revenue at an all-time high with greater than 15% sequential quarterly Revenue growth for Q2. Our IoT systems and connectivity business recorded Q1 net sales of $88.3 million. Down 2% sequentially and up 2% year over year.

Our newly released AirLink RX-400 and EX-400 routers are generating strong industry reception. These are industry leading low power 5G cellular system purpose built for mission critical applications and the feedback from customers has been consistently positive. I recently attended our annual AirLink partner summit alongside national carriers integration partners, and the value added resellers. And the enthusiasm for both the router performance and now upgraded AirLink management software was clear. The close collaboration with our channel partners position us to scale successful use cases from regional to national deployment and accelerate this high margin business. We are off to a strong start, and the momentum is building. Our data center business is firing on all cylinders.

Laura is entering a new chapter of growth. And the strategic decisions we have made in prioritizing key R&D efforts enhancing supply assurance and portfolio optimization, are all translating into tangible results and the financial flexibility to pursue strategic opportunities. Our priority for fiscal 2027 are straightforward. First, accelerating growth by supporting customer ramps with the availability and operational excellence required to compete in this capacity constrained environment. Second, intensifying R&D investment to add new growth drivers and deepen our solution differentiation. Specifically in component offerings for coherent light, CPO, LoRa, and sensors. And third, continuing to transform Semtech by strengthening our culture and completing the initial steps of portfolio optimization. We are just getting started.

And the opportunities ahead have never been more compelling. With that, I will turn the call over to Mark for additional details on our financial results and our second quarter outlook. Mark?

Mark Lin: Thank you, Hong. For Q1, we recorded our ninth consecutive quarter of net sales growth. With record net sales of $291 million above the high end of our outlook range. Net sales grew 16% year-over-year, while adjusted diluted earnings per share of $0.51 increased 34% year over year. Net sales trends by end market reportable segment, and geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 53%, 20 basis points above the midpoint of our outlook, and total semiconductor products gross margin was 60.7%, 30 basis points above the midpoint of our outlook. Both reflective of favorable mix from our data center and LoRa portfolio.

For our signal integrity product segment, Q1 gross margin was 62.7%, compared to 67.4% in Q4. Q1 is the first quarter of operating our recently acquired indium phosphide facility. This facility is in ramp mode to meet very strong customer demand and I am pleased with the integration team's progress in meeting its operating and financial targets. We continue to expect gross margin contributions from our 1.6T data center portfolio to be accretive to both our total semiconductor products signal integrity products gross margin. Gross margin for IoT systems and connectivity was 35.8%. Up sequentially from Q4's 31.6%.

Adjusted net operating expenses were $95.1 million slightly favorable to the low end of our guidance range, reflective of timing on project related expenses. Demonstrating the operating leverage in our business, a number of metrics were favorable to the high end of our guidance range. Including adjusted operating income of $59.3 million adjusted operating margin of 20.4%, adjusted EBITDA of $66.4 million and adjusted EBITDA margin of 22.8%. Reflective of capital structure changes, Semtech remained in a net interest income position in Q1. We recorded adjusted diluted earnings per share of $0.51 above the high end of our guidance range.

Operating cash flow for Q1 was $36.2 million sequentially down 41% from $61.5 million and up 30% from $27.8 million a year ago. Free cash flow for Q1 was $28 million sequentially down 53% from $59.1 million and up 7% from $26.2 million a year ago. Q1 operating and free cash flow reflect fiscal year 26 annual bonus payments. In addition, net acquisition consideration of $29.2 million is reflected in our Q1 ending cash and cash equivalents balance of $163.3 million Principal amount of debt was $503 million, unchanged from last quarter. Now turning to our outlook for the second quarter of fiscal year 27.

We currently expect net sales of $328 million plus or minus $5 million up 13% sequentially and up 27% year over year at the midpoint. With growth expected across each of our 3 segments. We expect net sales from our infrastructure end market to increase sequentially projected sequential data center growth of 35%. Supported by accelerating shipments of 800G and 1.6T components. We expect net sales from our high end consumer end market to increase benefiting from improved seasonal trends, market share gain on our TVS products, and contributions from our sensing portfolio. Expect net sales from our industrial end market to broadly grow with accelerated contributions from LoRa, IoT Systems and Connectivity, and Industrial TVS.

Based on expected product mix and net sales levels, we expect adjusted gross margin to be 54%. Plus or minus 50 basis points. Midpoint equates to an increase of 100 basis points sequentially and 80 basis points year over year. Our gross margin outlook for our total semiconductor products is expected to be 62.1%, plus or minus 50 basis points. At the midpoint, this equates to an increase of 140 basis points sequentially and year over year. Reflective of stronger data center and LoRa mix.

Adjusted net operating expenses are expected to be approximately $105.2 million plus or minus $2 million Included in this outlook is increased R&D spend to accelerate time to market on key data center projects, along with SG&A that declines as a percentage of revenue. We have demonstrated strong returns on our R&D investment and believe we remain prudent on SG&A spend. This results in adjusted operating margin at the midpoint of 21.9%, up 150 basis points sequentially and up 310 basis points year over year. Adjusted EBITDA is expected to be $79.2 million plus or minus $2.3 million resulting in adjusted EBITDA margin at the midpoint of 24.2%.

Up 140 basis points sequentially and up 32 basis points year over year. We expect adjusted interest and other expenses net to be approximately $0.5 million. We expect an adjusted normalized income tax rate of 17%. Consistent with last quarter's outlook. These amounts are expected to result in adjusted diluted earnings per share of $0.61, plus or minus $0.02 up 20% sequentially and up 49% year over year at the midpoint. On a weighted average share count of 97.7 million shares.

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

Operator: Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press *2 to remove yourself from the queue. For participants using speaker equipment, may be necessary to pick up the handset before pressing the star keys. 1 moment, please, while we pull for questions. Our first question comes from the line of Rick Schafer with Oppenheimer and Company. Please proceed with your question.

Analyst (Rick Schafer): Thanks, guys, for letting me ask you a question. Congrats on another good quarter. As long as if I could, maybe my first question, I did not hear you mention it on the call, and I am sorry I missed it. But where do we sit now with ACC, you know, MSA specs and when do we when do you expect that we will get those specs finalized? Because I am really curious if you think interoperability is holding back the ACC ramp at all and if you think ratification I mean, does that create sort of that dam burst moment with sort of the other CSPs? So that is my first question.

I am just curious if what you think about that?

Hong Q. Hou: Yes, Rick. Thank you. that is a good question. I did not mention in my prepared script. But that is a good point. So MSA, they announced that right around the design time. They are still working on finalizing the specification. You are right. When every industry participants are on the same page, it will help to accelerate the adoption of the ACC. Currently, they are working on the common denominators, as you can imagine, from different cable manufacturers. There are some related to the cable design. there is some performance related to the manufacturing processes.

They just wanted to segregate those different impacts and define a standard and specification that every cable manufacturer can go with and sign off for. So, yeah, that is a-- that can be a catalyst for more accelerated adoption of ACC.

Analyst (Rick Schafer): Thanks, Hong, and for my follow-up, you know, just on a on a supply side, I mean, you guys are clearly seeing a step up in 2Q. I heard you loud and clear talk about acceleration through the year. On the top line. So my big question is, I mean, do you see any curves on your ability to capture some of that upside that is coming through, capture some continue to capture share like you are doing. I mean, and maybe if you could level set us on what top line, you know, basically, top line currently your current capacity actually supports. Thanks.

Hong Q. Hou: Rick, that is a great question. This is a time capacity is king. So we under anticipated that we started working on the capacity and availability. You hear me, like, a broken record to talk about making it available over the past quarters. And we started about 18 months ago. I am so happy to say that in this very supply constrained environment, we are doing quite well. We have the availability. We have the right product. We have the right customer engagement. We can support even the drop in orders. that is why, our momentum is building so fast. Going forward, looking into the visibility, the booking, and the outlook opportunities.

Clearly the capacity we have put in place is not going to be serving us well going forward. And we have already started effort lining up with our foundry and OSAT partners adding capacity in testing. So are building capacity further to 2x or 3x the current capacity. And, that is how our conviction is, supporting our current planning process. Nice 1.

Operator: Thank you. Our next question comes from the line of Tore Svanberg with Stifel and Company. Please proceed with your question.

Analyst (Sean O'Laughlin): Great. Thanks, gentlemen. Good afternoon, and thanks for letting me hop on and ask a question here. Congrats on, obviously, the really solid results and guidance. Hong, 1 of the things that I perked up at during your prepared remarks was you mentioned the narrow line width CW lasers in the context of coherent light, but then you talked about DWDM and the OCI MSA.

Hong Q. Hou: In the in the CPO scale up side. And thought that was interesting because I think that, you know, the CW and ultra high power lasers is kind of how we are going about CPO for scale up today, but maybe you are anticipating a shift in how we are going after that in the future.

And I was wondering if you could expand on that and talk about sort of where you know, the HIFU business is investing their time and where they are you know, is this a organic investment that is coming out of the asset that you acquired, or is there still more to go on either the hiring front or the CapEx front to make this a reality? Good, Sean. Thank you. That was very good question. First, the coherent light clearly is gonna be a major application. As a data center right now consume a lot of power, you cannot build this mega data center as in isolation.

It more a cluster of, data centers So scale across to be able to interconnect with a high bandwidth, the different data centers very, very important applications I mentioned about my customer sensing trips and talk to 10 different leading module manufacturers. They all supporting our conviction and the vision of the coherent light is gonna be, ramping up in the mid 2 thousand 28 in production. We, through the acquisition of HIFU, have the right product Our DFB lasers, CW lasers, have a narrow linewidth, Well below 300 kilohertz. That is so perfect for coherent light applications. As I mentioned, we have sampled to some key module manufacturers in getting great feedback.

So we are in a qualification process for that building upon the acquired product from HIFU. As for CPO, that is clearly is going to be high density high density, low power, high bandwidth transport solutions, right, for a future scale out and scale up. As I mentioned in the past that the current way of the CPO, our FiberEdge product is gonna be-- it is not going to be a-- it is not a opportunity for FiberEdge product because they So we the customers will be using integrated solutions. have to be developing application to participate meaningfully in this huge emerging opportunities.

It so happened that the HIFU acquisition, the lasers, we bought and also the GaN chips and semiconductor optical amplifiers can really serve the part of the light sources for CPO scale-out applications. So we are working internally. We are also working with the partners to provide high power DWDM CPO laser source solutions. This is more for 2028 opportunities. So you see our pattern. We not only investing in the current generation, not only investing in the growth driver for the immediate next year, but the year after that as well. So we have got a very healthy pipeline of new products and broaden our portfolio serving the high bandwidth, AI data center connectivity space.

Analyst (Sean O'Laughlin): Awesome. Thank thanks for all that color, Hong. And very clear. Wanted to ask Mark. I mean, guiding for, I think, more than $10 million sequentially in OpEx, Presumably, that is you know, not necessarily all going to snacks for the break room, but maybe you could just talk about you mentioned R&D spend and SG&A was coming down as a share of total sales. But where are your focus, points? Is it going to hiring? Is it going to you know, are there are there maybe non CapEx type expenses, prepayments, anything like that? Be helpful. Thanks.

Mitchell J. Haws: Sean, you know, we expect to continue to invest in the business. We have said that is kind of our number 1 use capital for in capital allocation. And the vast majority of the incremental spend is going towards high conviction R&D programs. Largely in data center but also supporting LoRa. And it is it is not an SG&A.

Hong Q. Hou: So maybe just allow me to add some, you know, percentages to that color.

Mitchell J. Haws: Right? So R&D in Q1, the Q1 that we just closed, R&D was 17.6% of net sales. that is 20 basis points higher than a year ago. And up 17% year over year. But when I compare that to SG&A, in this Q1 that we just closed, SG&A was 15.1% of sales. that is a decrease of 200 basis points. So in SG&A as a percentage of sales has been in a steady decline and we project this decline to continue in Q2. So our OpEx growth is really grounded in organic investment in our core products. Data center and LoRa.

Hong Q. Hou: In terms of the composition of spending, there is hiring, and there is product spend as well. But really, it I think the key is that we see some very good returns on this R&D investment. If I may double click on the 15% SG&A is actually sales and field application engineering are increasing sequentially. So what gets squeezed are getting more operational leverage on the G&A cost.

Analyst (Sean O'Laughlin): Thanks, guys. Really helpful, and congrats again.

Hong Q. Hou: Thank you. Thank you.

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

Analyst (Christopher Rolland): Thanks, guys, and I want to echo my congrats as well I did want to double check, double-click on optical, perhaps, a question for you, Hong.

Hong Q. Hou: If you could talk a little bit more about the contributors to growth there in particular, how much of this is LPO? How much of this is you know, a single module maker versus a broad 1.6T deployment and any update on timing for CW and HIFU chip would be great as well.

Analyst (Christopher Rolland): Great.

Hong Q. Hou: Thank you, Christopher. Thank you for your questions. For Q1, the predominant data center revenue or the 800G FRO and LPO. We do see a clear trend of sequential increase from mid single digit reported in Q4 for LPO we are seeing sequential increase. And the 800G Is the main driver for the revenue for Q1. Into Q2, we are going to be having the early ramp-- oh, in Q1, we also have the early ramp of the CopperEdge revenue to support the second half of significant ramp in the cable demand. So in Q2, we are gonna be seeing the continued strength of 800G FiberEdge for both FRO and LPO.

We are gonna be continuing to see the ramp of 1.6T CopperEdge to support ACC for the second half. And we are gonna be, for the first time, seeing the FiberEdge revenue to support 1.6 up transceivers in the new DSP designs. As for the revenue source, it is very broad based. We as I mentioned, have qualified with almost all module manufacturers established and emerging ones. And we were able to serve some drop in demand even in Q1 because they were not in a forecast. And they are very important strategically for us to go forward. And we wanted to support their initial volume even within well within the lead time.

Analyst (Christopher Rolland): Excellent. Yeah. Sorry. Go ahead, No.

Hong Q. Hou: No, no. Hopefully, that answered your questions for those. Yeah. Yep. That did.

Analyst (Christopher Rolland): May maybe switching to the copper side, I think. You answered a bunch on ACCs. I guess my only question there is maybe diversification beyond your main customer? How is that progressing? And then in your presentation, you mentioned, linear equalizer, I think, on PCB, about active backplane applications. If you can speak a little bit more there and the opportunity, that would be great.

Hong Q. Hou: Yeah. Thank you. So on the ACC we continue to having samples being evaluated by multiple hyperscalers and enterprise customers, And, that reception has been going well in as Rick early on asked, you know, the MSA for ACC, is gonna help as well. And we were actually also see the exciting opportunities from multiple potential customers on the linear equalizer onboard Those are for the real programs, and we have hyperscaler engagement. We have their manufacturing partner ODM's close engagement, as well. So this is really going well. We do expect, as I said, some linear equalizer onboard on the backplane and also ACC cables, additional design wins in coming quarters.

You know, early on, people have some doubt and or speculation on, oh, copper is to the end of the life. Need to put a terminal value on it. Just not yet. It is going not only strong, it is very strong on higher data rate. As well beyond 224G. We are engaging with customers to support higher data rate as well. So, we are very optimistic about CopperEdge product for its growth potential in the future. Thanks, Congrats again.

Analyst (Christopher Rolland): Thank you. Thank you, Christopher.

Operator: Thank you. Our next question comes from the line of Quinn Bolton with Needham and Company. Please proceed with your question.

Analyst (Quinn Bolton): Hey, guys. I will also offer my congratulations on the nice results just wanted to follow-up on Christopher's question there on the onboard linear equalizer opportunity.

Hong Q. Hou: You mentioned hyperscalers. I was gonna ask kinda from a signaling perspective, are you guys seeing demand for linear equalizers for both uni direction SerDes on those backplanes as well as bidirectional SerDes? Can you just talk about your ability to support both UniDi and bidirectional SerDes on those backplanes?

Analyst (Quinn Bolton): And then I have got a follow-up.

Hong Q. Hou: Yeah. Thank you, Quinn, for that question. Yes. We did get request for BiDi equalizer as well. So our current CopperEdge portfolio can only support unidirectional, but our engineers have been put on a drawing board. We have a preliminary architecture formulated to be able to do BiDi on 1 chip and to support the future more compact interconnect topology.

Analyst (Quinn Bolton): And any idea when that might be ready? Would that be ready in calendar 2027?

Hong Q. Hou: So once, once we define the product definition, we will go through the simulation stage Clearly, BiDi integrated in 1 package needs to be very carefully balanced. So that they do not have the crosstalk and introducing additional noise But it is totally doable. And, we just looking at the different competing priorities and, you know, that defined. So we are in a stage of engaging with the customers and trying to sync up with the model And, therefore, after that, we will allocate resources and start doing the development. The good news is the key building blocks of IP we already have that in existence.

The CopperEdge product, we have 3 generations in going for different noise suppressing and, different frequency domain equalization schemes. And we have rich building block IPs available to drag and drop and getting a product put together pretty quickly.

Analyst (Quinn Bolton): Got it. Thank you, Hong. And then, I guess either for more for Hong, just you talked about expecting data center growth to accelerate if I have got my numbers right. Looks like with the 35% sequential growth in the July quarter, your data center business in the first half of 27 will be up about 62%. Versus the first half of 26. Would you care to give us some sense? Do you think the entire data center business, could that grow 70, maybe 75% year on year in fiscal 27? I think last quarter, you would expressed confidence in 50% year on year growth for data center.

Hong Q. Hou: Yeah, Quinn, so you are right. In last quarter, you know, that floor number certainly created some confusion. I will not let out your potential or aspiration you know, I will not cap that, for the year over year. As I said, Q2 to Q1, we are very comfortable about 35% quarter over quarter growth. And based on the visibility, the backlogs, and the booking we have, we can comfortably say in the second half the growth rate is gonna be accelerating because of the additional growth drivers in 1.6T CopperEdge and FiberEdge 1.6T and HIFU optical components. So it is gonna be an exciting year in FY 2027, and we will be having the unprecedented year over year growth.

Analyst (Quinn Bolton): Excellent. Looking forward to it. Thank you.

Hong Q. Hou: Thank you.

Operator: Thank you. Our next question comes from the line of Cody Grant Acree with The Benchmark Company. Please proceed with your question.

Analyst (Cody Acree): Hey, guys. Thanks for taking my questions, and congrats on a very strong quarter outlook. Maybe, Hong, can you maybe just talk about your LPO and 1.6T optical expectations, whether that be through module partners or is that more hyper scale driven?

Hong Q. Hou: Yeah. So, Cody, thank you. The 1.6, the current design wins we have, from multiple major module suppliers and serving different end markets. They are either hyperscalers or they GPU company providing the system solutions So the initial ramp is gonna be FRO, fully retimed optics. And we do have the linearized drivers and TIAs provided to the module customers. They are in a evaluation to do LRO or LPO at a 1.6 t. But the initial volume ramp is gonna be FRO, and we do have the right product in the pipeline, to be evaluated by our module customers.

And, Hong, can you maybe help us reframe the total available addressable market for both ACCs and LPOs as you exit this year and look into next Yeah.

Analyst (Cody Acree): So, Cody, I think, you know, we will probably when we think that portfolio cleaned up, we are gonna be having a tech day or analyst day And at that time, we will be providing more comprehensive TAMs. Projection and for our broad product portfolio.

Hong Q. Hou: So at this point, we are just aggressively attacking the opportunities ahead of us we will be having more quantitative information provided in the future.

Analyst (Cody Acree): Excellent. Thank you, guys.

Hong Q. Hou: Thank you.

Operator: Thank you. Our next question comes from the line of Tristan Gerra with Baird. Please proceed with your question.

Analyst (Tristan Gerra): Hi. Good afternoon. Given the commentary about Broadcom, CPO ramping in any volume not until 2029, and the potential for ACC to be at 800G per lane.

Hong Q. Hou: How should we look at, the duration of the double-digit growth that you see in ACC, your business is very strong now. But, you know, do you think that business continues to grow 3, 4 years from now? And how well positioned you are from a technology standpoint, particularly as we get new ways of switches that have stronger SerDes.

Analyst (Tristan Gerra): Yeah. Tristan, thank you for the inform for the question.

Hong Q. Hou: So, Broadcom clearly, they are the industry leader It provides outstanding service quality. And with the good signal integrity that has been the essential performance, enabler for the linear redriver. And because if the signal come out not very good, linear redriver cannot make it whole a lot better. So we are the pure beneficiary of the Broadcom's good SerDes rather than the victim. Their 100-gig, 200-gig, and go into 800G per lane in the future, they can go for a certain distance, the so called bump to bump linked budget, The read driver linear equalizer can only make it better to stretch the reach to improve the signal integrity compared to the cable, the trace without it.

So this is really complementary capabilities, not like their better service does not need a linear equalizer. In a way, as you know, that the current ACC cable customer, they are using Broadcom SerDes as well. And, we have our equalizer in the ACC cable to support the interconnects. And their CPO is primarily on my understanding, the current road map is support CPO scale out. They are the leading switch provider anyway with or without a CPO or with CPO. So motivation for them to do CPO could be a little bit different from the other leader in the industry.

Analyst (Tristan Gerra): that is for 800G per lane, and that is 2 generations ahead. And in general, as the data rate goes up, and the transmission distance is shortened, And the rack, on the other hand, is gonna be going bigger So the topology has to require a longer length So you can do CPO to have the optical scale up but you always have some traces it is just too overkill to use optical scale up. And by putting a redriver in between, you may as well just extend the reach well long enough to allow the copper scale up. So this is a complementary capability. I think it is gonna be there for a long while.

Hong Q. Hou: Okay. Thank you. that is very useful.

Analyst (Tristan Gerra): And then could you talk about your medium term views on LoRa? Clearly, it is rebounding. we are past the inventory accumulation that we saw year and a half ago. You know, where could this business grow in a few years? How does that improve the mix? And also, any update on whether the deployments that you see this year and next year primarily driven on the base station side or the actual sensor side? And I do not know if there is any numbers, you know, to back up versus base station product to follow-up.

Hong Q. Hou: Yep. So, yeah, there is several questions. Let me try to address a couple of them. First of all, the growth potential we see is really exciting. As we mentioned to the 3 things we did, and increasing the bandwidth, and increasing the LoRa capability by adding other RF protocols to unlock new application verticals like security, like a smart building, and, the mass market. Like Amazon, sidewalk. Those are all bringing new growth drivers. To LoRa. The second question is really a good 1.

Analyst (Tristan Gerra): Tristan, you know this market well. And we see if a year ago, LoRa growth has been primarily on the end node, So we are increasing the end node right now to what, 150 million end nodes. But started from last 9 months, 12 months ago, and, all integrators has been commenting, oh, they are adding new gateways. That means they have more sensor devices, and they need to improve the coverage and the capacity. So that is with the gateway increases, and they will be just pulling in more capacity for end-use end-node applications. So that is why we see this LoRa growth driven by the 3 pillars is gonna be sustainable.

Hong Q. Hou: 1 wild card is the edge AI application. So it is exciting opportunity and we are just starting. So we have been, helping the market and generating a lot of collaterals and making the market enablement effort to accelerate the curve on that. Thank you, Tristan.

Analyst (Tristan Gerra): Great. Thank you very much.

Hong Q. Hou: Thank you.

Operator: Our next question comes from the line of Kyle Smith with Stifel. Please proceed with your question.

Analyst (Tore Svanberg): Hey, everyone. This is Kyle Smith on for Tore. Egil Svanberg at Stifel. I will also echo my congratulations on the really strong print and guide. I think in your prepared remarks, you mentioned that GaN chip demand currently exceeds your supply. So a bit of a 2 parter. 1, it would be really helpful if you could kind of quantify the degree to which that demand exceeded the supply. And then secondly, I know you mentioned that your capacity expansion plan is well on track, but maybe when do you kind of expect your increase in capacity to intersect with demand that you are seeing from the market?

Hong Q. Hou: Thank you, Kyle. The GaN chip, as you know, HIFU, they predecessor, Afore, has been a leading supplier of GaN chip into integrated into the tunable laser for metro and coherent applications. They we have a solid customer base And after the acquisition of HIFU, by Semtech we have a lot of inbound interest from the customers that, HIFU has not been able to serve. So you aggregate those, the demand will probably outpace the capacity by about 3x or so. So we clearly are adding capacity by adding more shifts, by adding more manufacturing space, which primarily clean room, and adding more process equipment.

So we are doing very creative ways to expand the capacity We expect, by the end of this year, we can get the capacity increase by about 3x, 4x And end of next year, and it is gonna be another 3x, 4x. So to serve the high end coherent market.

Analyst (Tore Svanberg): that is really helpful color. Thank you. And I guess pivoting over to LPO and LRO, I mean, it is pretty clear that the market is growing, and the opportunity just continues to expand.

Hong Q. Hou: So I guess from your position today, you know, based on the outlook kind of that you provided on the call, to what degree do you feel that raised guide is coming from potential market share gains? And then to what degree do you feel it is more so coming from just the market as a whole expanding meaningfully as we kinda see these deployments take shape? Yeah, Kyle. I think, you know, the LPO, LRO, we see the growth is primarily driven by the customer shift from FRO to the LPO, LRO.

Analyst (Tore Svanberg): The reason for that is that they evaluated their connectivity topology and to see where they can save power. And we do expect in a year or 2 time frame the linearized solution will account for 25% plus or minus of the total transceiver mix. Thank you, and congratulations again.

Hong Q. Hou: Thank you. Thank you.

Operator: Our final question comes from the line of Craig Andrew Ellis with B. Riley Securities. Your line is now live.

Analyst (Craig Ellis): Yeah. Thanks for sneaking me in.

Hong Q. Hou: And, guys, congratulations on the strong results. I wanted to start off just with a clarification. So, clearly, we are seeing much higher growth here than we were expecting 3 months ago. With the business seemingly tracking in the 70s range now versus a floor of 50% earlier. The question is this, where across TIAs, LPOs, and ACC Are we seeing the greatest acceleration versus what we were expecting 3 months ago?

Analyst (Craig Ellis): Yeah, Craig, that is a great question. We were on this the road, you know, right after OFC. The dynamic has picked up pretty dramatically. The demand across the board, not on just 1 product, Across the board for fiber edge, copper edge, 800G, 1.6T, LPO, LRO lasers, they all have demonstrated such a strong demand. So it is broad based.

Hong Q. Hou: that is very helpful, Hong. Thanks. And then 1 of the things that is clear from your prepared remarks and here in the Q and A is just the visibility you have in the back half of the year. Can you characterize across the different product groups To what extent does that extend are you actually getting visibility into fiscal 28, or is it really at different points into the back half of this fiscal year?

Analyst (Craig Ellis): Thank you.

Hong Q. Hou: Yes. The back half of this year into the first half of fiscal 28.

Analyst (Craig Ellis): Got it. Thanks, guys.

Hong Q. Hou: Thank you very much.

Operator: Thank you. And we have reached the end of the question and answer session. Therefore, I will now turn the call back over to Mitchell J. Haws for closing remarks.

Mitchell J. Haws: That concludes today's call. To all of you for joining us today. We look forward to seeing you at various investor events over the coming weeks.

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