Semtech Corporation Price & Performance (SMTC)

Thank you, operator. Good day, everyone, and welcome. I'm pleased to be joined today by Hong Ho, President and Chief Executive Officer. Today after market close, we released our unaudited results for the fourth quarter and fiscal year twenty twenty five. Which are posted along with an earnings call presentation to our investor website at investors.semtech.com. [indiscernible] Today's call will include various remarks about future expectations, plans and prospects, which comprise forward looking statements. [indiscernible] Please refer to today's press release and see Slide two of the earnings presentation as well as the Risk Factors section of our most recent annual report on Form 10 ks, which 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. Unless otherwise noted, all income statement related financial measures will be non GAAP other than net sales. Please refer to today's press release and see Slide three of the earnings presentation for important information regarding notes on our non GAAP financial presentation. The press release and earnings presentation will also include reconciliations of our GAAP non GAAP financial measures.

With that, turn the call over to Hong. Thank you, Mark. Good afternoon, everyone. Fiscal year twenty twenty five represented a year of a positive inflection on many fronts. For each quarter, we reported sequential growth in net sales gross margin, operating margin and earnings per share. Our signal integrity and Analog Mixed Signal and Wireless segments demonstrated strong sequential growth in each quarter of FY 2025. And our IoT systems and connectivity segment inflected to sequential growth in the second quarter of FY twenty twenty five. Aligning to one of our near term priorities of driving margin expenses through disciplined investment, innovation and efficiency on a year over year basis FY 2025 adjusted gross margin improved 200 basis points adjusted operating margin improved five seventy basis points, adjusted EBITDA margin improved six ten basis points and adjusted diluted earnings per share increased 529%. During FY 2025, we uncovered and aggressively pursued many opportunities through close customer engagement We were able to prudently shift investments to R and D programs that were better aligned to major market opportunities and accelerated product development supporting these opportunities. We also executed on our near term priority of balance sheet improvement. Substantially reducing our leverage and cash interest burden This in turn allowed us to increase focus on operational improvements and strategic direction.

We continue to prioritize divestitures of non core assets and we believe the reduction in total leverage during FY twenty twenty five and the stronger business fundamentals better positions Semtech in our ongoing portfolio optimization process. Remain focused on elevating our winning culture and I'm pleased with the marked improvement in our employee engagement metrics. In the new fiscal year, we are internally focused on three core priorities to position Semtech for future success.

First, portfolio optimization and simplification. Driving to completion the initiatives we started and focus on our core competencies. Second, strategic investment in R and D accelerating innovation to support broader customer programs and driving sustainable long term growth. While maintaining financial discipline. Third, driving margin expansion. Enhancing profitability through portfolio optimization leveraging AI for efficiency and productivity, and maximizing operational leverage on higher revenue. With the strong progress we made in FY 'twenty five, we aim to deliver even greater value to our shareholders in FY 2026. Moving to our end markets. For Q4, infrastructure net sales were $69,100,000 up 5% sequentially and up 75% year over year. Net sales for data center were a record $50,000,000 up 16% sequentially and up 183% year over year. And I'm pleased with the growth across our data center portfolio.

Regarding corporate ad use, in active copper cables, we are disappointed that the expected volume ramp would not materialize for FY 2026 due to rack architecture changes as we previously announced. We now expect copper edge demand at our unkaled customers to be lower than our prior expectations for three to four quarters based on our estimate of the new server rack deployment timeline [indiscernible] We continue to believe CopyrightEdge deployment will encompass broader applications including our ICs embedded in board designs and our ICs embedded in connectors in addition to our initial deployment in a cable application. CopperEdge at 1.6 aggregated was introduced about a year ago and we believe Semtech's advancements in low power, low latency solutions will be a significant differentiator in the ecosystem. We remain engaged with over 20 potential customers including hyperscalers, switch makers, and the cable suppliers for a number of use cases and expect this engagement to result in revenues from multiple customers and multiple by the latter part of FY twenty twenty six. Lastly, based on continued collaboration with our anchor customer, we expect our copper edge portfolio to be included in their future generation rack designs. For our fiber edge portfolio, net sales were at a record levels supporting 400 gig and 800 gig retimed optics across a broad market of module manufacturers and cloud service providers.

For linear pluggable optics, our LPO and a linear receive optics, or LRO we remain confident in adoption starting in the latter part of FY twenty twenty six. Test and qualification are progressing as expected at several module manufacturers for both 800 gig and 1.6 T applications. I look forward to the upcoming optical fiber communications conference or OFC, to be held in San Francisco the April. Semtech and our technology partners will have multiple product demos showcasing our TIA and laser driver components in numerous LPO and LRO modules. In addition, we are scheduled to show our 400 gig per channel test chips to support 3.2T aggregated bandwidth transceivers. I also look forward to participating in the CEO panel during the Optica Executive Forum at OFC. We Moving to our high end consumer end market, Net sales for Q4 were $35,400,000 up 10% year over year and for FY 2025, net sales were $147,000,000 up 17% year over year. In our high end consumer TV ads, our transient welded separation product line net sales for Q4 were $24,100,000 up 16% year over year and down 15% sequentially reflective of typical seasonality. FY 2025 net sales were $103,300,000 up 33% year over year.

Reflective of steady contributions from design wins and the market share expansion over the last year at the world's largest consumer electronics company and at other key North American and Korean companies. We believe our customers' increasing technical requirements move the market toward our differentiated products. USB Type C high power charging is a particular example of the need to increase protection capabilities while maintaining signal integrity of USB Type C high speed data traces. [indiscernible] [indiscernible] Our class leading per se our person sensing product continue to perform well in the market with a leading position in smartphones to address specific absorption rate or SAR standards With draft regulations introducing increasingly stringent requirements, Per se continues to gain market share as customers expand the use of Semtech ICs to achieve superior compliance to SAR standards without compromising device performance. Per se, in smart glasses, is another key application where our technology allows for responsive gesture control capabilities critical to accurate control for call, and message content capture and media settings A key customer characterized smart glasses at the potential next generation compute platform an EEI form factor. And we believe Semtech is well positioned to support its customer on current and future designs.

Moving to our industrial end market. For Q4, industrial net sales were $146,600,000 up 12% sequentially and up 21% year over year. Within the industrial end market, LoRa enabled solutions recorded Q4 net sales of $37,100,000 up 28% sequentially and up 205% year over year. Smartmeters are just one of the applications well suited for LoRa and we are pleased with the incremental smart meter wins in France Germany, The U. K. And China. For water and gas meters, we believe lower sensitivity which permits robust collection of readings through physical barriers and the ability to extend battery life over multiple years are key differentiators of our competing protocols. Our LoRa Gen two and Gen three products have been well received and are the predominant lower end volume. They offer smaller device footprints combined with improved video performance and an easier integration allowing ecosystem partners to reduce time to market. For example, LoRa Gen three includes the capabilities to integrate LoRa One inside the modem which reduce LoRa's specific design expert Semtech also released the first gen four chip in the LoRa plus family early this week. LoRa plus is a single chip solution that addresses use cases requiring a robust long distance link combined with the multiple protocol capabilities including Amazon Sidewalk, [indiscernible] and Z Wave.

The lower plus transceiver also supports terrestrial and satcom networks and its increased data rates support audio streaming and image transfer. Our IoT systems hardware business recorded Q4 net sales of $69,000,000 up 19% sequentially coupled with another quarter of a sequential increase in bookings. Our IoT Systems business pipeline benefited from the inclusion of a significant China based market participant on the Section 1260H list in January 2025. And we expect pipeline to convert to bookings throughout the year. During the same month, a Europe based participant announced that it was exiting the cellular IoT market. Providing another potential tailwind to the business. In Q4, we are pleased to have achieved the five gs Redcap Certification a significant milestone in collaboration with and T and Qualcomm This is AT and T's first five gs Redcap certification and we believe this positions us to make sustainable, scalable and cost effective solutions attainable for many industries. IoT Connected Services net sales were overall stable for this largely reoccurring revenue business. We are pleased that AirVantage Smart Sensing has been recognized with the M2M Innovation of the Year Award by IoT Breakthrough. AirVantage Smart Sensing offers a turnkey key LoRaWAN Sensor Network solution with a global cellular backhaul allowing our customers to efficiently manage the design and configuration of a secure and scalable sensor network.

In summary, I'm very pleased with Semtech's performance across our businesses. And thank our employees for [indiscernible] Which incorporates elements like transparent and frequent communications on our vision and priorities to drive alignment and leadership and employee development. All of which are aimed at bringing out the best from our employees. I'll now turn the call back to Mark for additional details on our financial results our outlook for the first quarter of FY twenty twenty.

Thank you, Hong. For Q4, we recorded net sales of $251,000,000 up 6% sequentially. [indiscernible] reportable segment and geographic region are included on Slide 16 of the earnings presentation. Adjusted gross margin was 53.2%, up 80 basis points sequentially and up four thirty basis points year over year. [indiscernible] Adjusted net operating expenses were $83,700,000 within our guidance range [indiscernible] with a sequential increase in research and development for what we believe to be prudent investments accelerate realization of market opportunities. Adjusted operating income was $49,800,000 resulting in an adjusted operating margin of 19.9%. Up 160 basis points sequentially and up ten seventy basis points year over year. [indiscernible] Adjusted EBITDA was $57,800,000 and adjusted EBITDA margin was 23% up 140 basis points sequentially and up ten fifty basis points year over year. [indiscernible] Adjusted gross margin adjusted operating margin and adjusted EBITDA margin all sequentially improved each quarter of FY 2025, representing sustained growth. [indiscernible] Adjusted net interest expense was $11,200,000 reflective of approximately two months of savings from our debt pay down [indiscernible] We recorded adjusted diluted earnings per share of $0.4 up from $0.26 in Q3 and up from a loss of $0.06 from Q4 of last year.

Operating and free cash flow for Q4 were $33,500,000 and $30,900,000 respectively. We ended Q4 with a cash and cash equivalents balance of $151,700,000 included principal payments of $10,000,000 on our credit facility that were incremental to payments from the equity offering. [indiscernible] At the end of FY 2025, net debt was $411,000,000 a reduction of $868,000,000 or 68% from the $1,300,000,000 as of the end of FY 2024 The I believe we executed well to our previously stated capital allocation priority of reducing leverage. To summarize benefits Semtech has and expects to realize from debt reduction, first, debt pay down enables Semtech to focus investment on our core business growth engines. Second, reduction in debt from the equity offering will provide annual cash savings of approximately $40,000,000 based on interest rates at the close of the offering which resulted in accretion on a non GAAP basis. [indiscernible] Third, we believe meaningful debt reduction suppliers and partners to improve financial solidity and return focus to operational and strategic priorities. Which we expect will lead to increased collaboration and market share gain. Now turning to our first quarter outlook. [indiscernible] We currently expect net sales of $250,000,000 plus or minus $5,000,000 up 21% year over year at the midpoint. [indiscernible] We expect net sales from the infrastructure end market to increase sequentially with data center applications leading to growth. [indiscernible] outlook incorporates the effect from CopperEdge related to previously discussed rack architecture changes. [indiscernible] We expect net sales from the high end consumer end market to be up slightly reflective of a seasonally stronger first quarter. [indiscernible] Expect the industrial end market to be down reflective of seasonality in our IoT portfolio. [indiscernible] Based on expected product mix and net sales levels, adjusted gross margin is expected to be 53%.

Plus or minus 50 basis points. Adjusted net operating expenses expected to be $87,000,000 plus or minus $1,000,000 resulting in an adjusted operating margin at the midpoint of 18.2%, a 600 basis point improvement year over year. [indiscernible] Adjusted EBITDA is expected to be $53,300,000 plus or minus $3,000,000 resulting in an adjusted EBITDA margin at the midpoint of 21.3%. [indiscernible] which will equate to a year over year increase of five twenty basis points. We expect adjusted net interest expense to be $6,300,000 reflective of leverage based pricing on our credit facility that reduces our term loan interest rate by 200 basis points. [indiscernible] Expect a normalized income tax rate of 15% consistent with our FY 2025 rate. [indiscernible] These amounts are expected to result in adjusted diluted earnings per share of $0.37 plus or minus $0.03 based on a weighted average share count of 90,100,000.0 shares. With that, I now would like to turn the call back over to the operator for Q and A. Thank you. At this time, we will be conducting a question and answer session. Ask that analysts limit themselves to one question and a follow-up so that others may have an opportunity to ask questions.

For participants using speaker equipment, it may be necessary to pick up your handset Our first question comes from Harsh Kumar with Piper Sandler. Please proceed with your question. [indiscernible] Mark, you guys have done a great job in the balance sheet, but you actually said something on the Copper Edge portfolio that my attention given the controversy around it. Hong, I was hoping that you could expand on your comment around what you're seeing in boards and connectors And also you mentioned your sort of lead customer is looking at it looking at components of these products in this technology for future generation, maybe also explain on that? And then sorry for the multipart question. You said you expect to be down or lower for a couple of quarters. I think you said three or four, but then you expect a pickup. So maybe talk about about all this and why you expect a pickup and what content are you seeing in these places, particularly with your large customer? Thank you, Harsh. And further questions, So first of all, just on copper edge, in Q3, we reported our revenue as a high single digit million dollars and we guided in our Q4 to be incremental increase We just did that And so we've announced previously in FY '26, the revenue for copper edge is going to be below $50,000,000 So as we reported on the data center revenue on this Q4 of the $50,000,000 copper edge portfolio added into a very broad data center portfolio is a nice addition So in the future, we do not intend to break out a copper edge contribution to the total revenue of the data center portfolio.

But as for the engagement, as I reported we have been engaging with over 20 customers This is a nascent business. It's a new product It's generating a lot of interest. And it was only released about a year ago, but it would take some time for customers to design them in in a different form factors. So the revenues to date applications in the active copper cables. But we have many use cases for different applications by different customers designing our copper edge product onto the board in the connectors. So we do see that it different pace of adoption in a qualification and testing status, but we are very confident that before the end of this year, we'll have revenue generated from more than our anchor customer [indiscernible] interconnector applications But as for the anchor customer, and we have been engaging with them very tightly In the immediate next generation after the current one, So we don't have content to interconnect the racks because it's a single racks solution. But going forward, we understand that our product is in their design. In the form of either on the board or in a cable form.

As for this air pocket of three, four quarters, it's I mean the most specifically for that one customer, one application The other applications and revenue could come sooner than that.

Understood. And Hong, I'm sorry for the long winded question, but thank you. Very, very helpful. And then I just wanted to ask on your core business. You've been growing when every other ML company has been down because primarily you entered correction earlier, you started correcting earlier.

Do you feel like you have good visibility on being able to call for call it, sequential growth from here on? Or are you at a point where maybe just like your industrial business, you're starting to see some you're starting to see where you've normalized and you normalize and comes into play? Or are we still looking at growth from here?

Yes, that's a good question, Harsh. So certainly, we are having been over indexed, I would say, on the attention on ACC or CopperEdge. And the data center growth. But we do indeed for Semtech has a broader portfolio So the other businesses and we have been seeing the inflection in the FY 2025. You look at the historic numbers, and have been we have been able to record quarter over quarter sequential growth We're going to be guided one quarter at a time And but we're seeing the trajectory As Mark gave the details, we will continue to see the data centric growth even a factor in the ACCO copper edge headwind and the consumer the high end consumer we will have the tailwind for the seasonality. But sequentially, in our guidance for Q1, the industrial part will probably see a little decline. But yes, the trajectory we see that business fundamental is there and very favorable. And we have taken care of the inventories issues. So I think whatever we see going forward is going to be the true fundamental from the business.

I'm very optimistic about that.

Congratulations guys and thank you for your answers.

Thank you, Harsh. Thanks, Harsh.

Our next question comes from Tim McHugh with UBS. Please proceed with your question.

Thanks a lot. I'm wondering if you can help us just on sort of pinpointing the timing on this upcoming step change in the revenue inside of data center. I know given this push out in AC [indiscernible] you are though winning on a couple of other platforms. So I'm just wondering if you can help us shape sort of in fiscal twenty twenty six, like when is that step change going to happen?

Thanks.

Thank you, Tim. So yes, as I said, the data center, we got a pretty broad portfolio copper edge and fiber edge and with tri edge product. And the fundamental of the CapEx spending by the CSP is still there. We expect the fiber edge continue to grow The copper edge is going to be a little bit bumpy.

Temporarily, we have air pocket. But once all the other customers they start kind of like ramping up in the volume, we'll see the accelerated growth. But all in all, if you look at the data center portfolio, we still expect quarter over quarter growth. As for the timing of the copper edge recovery, from that specific anchor customer I think is depend on the next generation rec design timing. That is a in a way I'd like to help whatever we can, but we can't control that timing.

Right, right. Okay. And then I guess the second question is, sort of an update on the portfolio rationalization plans. Is the current uncertainty in the market, obviously, what's happened in the last couple of weeks, I would assume that makes that maybe a little more challenging. And can you speak to sort of how price sensitive you'll be in this? I mean, is the idea just that you want to want to rationalize the portfolio, not any price, but I'm just kind of wondering how sensitive you'll be given some of the market uncertainty we've seen in the past couple of weeks?

Thanks.

Great, Tim.

So we don't have a specific timeline As you know that our balance sheet has been significantly strengthened And but from a longer run strategic point of view, we still would like to rationalize and kind of like do having that our portfolio aligned with our strategic vision and margin profile. So the business has been reflected and I think the good buyer, they will see the synergy for their side. So I will say this business need to be bought rather than be sold, namely that we don't have to sell it And but if the buyer see the strategic synergy for them in adding to their portfolio, being transformational and this can be a great addition to them. So we are patient but I know there are tailwinds [indiscernible] [indiscernible] and one industry participant based in China was put on the DoD 1260H list and another Europe based competitor and exited the cellular module business. So really the demand we're seeing the booking activities has accelerated. That's a really good business. It's contributing to positive EBITDA. And we are not in dire situation notes have to do the sale. This is not a distressed asset. We welcome buyers to see the synergy into their it's a nice addition to their business.

And that would be the basic principle for us to run this process. [indiscernible] Thank you.

Thank you.

Our next question comes from Quinn Bolton with Needham and Co. Please proceed with your question.

Hi, Hong and Mark. Congratulations on the nice results. I guess, Hong, maybe just quick clarification on your data center comment. You mentioned that business growing quarter on quarter despite the Copper Ridge Air Pocket Was that a comment specific to the April guide or is that a comment that you see continuing throughout all of fiscal twenty twenty six?

So good. Nice question. Good question. So I we will only give the guidance on one quarter at a time. That's a specific guide to our April quarter. But in general, we go with the market trend. If the CSP CapEx spending continue to be strong, we have been benefiting from that trajectory and have scored a very strong year over year growth from FY 'twenty four to 'twenty five If the CapEx continue to be [indiscernible] and I will not be surprised that we'll have a strong growth year over year as well.

Got it. And then the second question is, I'm not sure if you're willing, but was wondering if you might be able to give us some sense of the general breakdown of the data center business. You mentioned it was $50,000,000 in the January. Sounds like Copper Edge was probably a very high single digit million, maybe approaching But the rest of the business probably $40,000,000 plus Can you give us a sense how much of that $40,000,000 plus is FiberEdge just going into DSP based optical modules, how much maybe tri edge and then other revenue, just trying to get a sense of what that mix looks like?

Quinn, I think it's important for us to focus on our data center portfolio rather than individual SKUs. But I mean, needless to say, there's strong broad based growth across our portfolio. We did mention in our prepared remarks that fiber edge net sales for our fourth quarter at record levels. So definitely strong market acceptance and market adoption of that fiber edge portfolio.

Maybe Bartish, just a quick follow-up. Could you say is the majority or perhaps the vast majority of the [indiscernible] business driven by sort of 408 gig modules or is there a meaningful portion that may be targeting slower speed applications in the data Semtech? Just trying to get a sense, there's pretty strong demand for 400 gig, 800 gig and seeing to be 1.6 gig optical modules and just [indiscernible] try to get some sense how much of your business is exposed to those higher speed optical module? Quinn, broadly 400 gig, 800 gig. Yes. Broadly that's where we have a good sense of growth and then that slower speeds as well. But that 400 gig to 800 gig is a good growth for us.

Got it. Okay. Thank you. That's the sweet spot. And 1.6 is still early. More in the design phase and low volume So it's 400 gig and 800 gig there's a sweet spot of a fiber edge. Revenue contribution.

Thank you.

Thank you.

Our next question comes from Christopher Rolland with Susquehanna. Please proceed with your question.

Hey, guys. Thanks for the questions.

My first are on IoT and LoRa. So, I don't know if you guys can frame the impact of U Blocks and the block on the China list what that means for that business? And then Laura seems like a lot of upside there, that $37,000,000 number, like I is that just pure LoRa like modules or are there like routers and stuff in there? That seems like that was a big uptick. And is that sustainable moving forward? Thank you.

Thank you, Chris. So let me try to answer your Laura question. Question first. The $37,100,000 is all LoRa and we do not provide modules. We provide LoRa chips transceiver chips to the module manufacturers [indiscernible] provide additional functionality inclusion of different radio protocols to make the ecosystem partners use our product easier so that we enable provide that level of enablement Most of the LoRa devices at this point as end devices [indiscernible] Because they get a pretty good coverage and a gateway and also there are many different applications is point to point.

As for the IoT business, and certainly, you name the U Blocks and then we named the European participants. Yes, their announcement has provided a tailwind for us We share the same customers and we're getting the same customers calling us and asking for continued support and accelerated delivery. So that's totally helpful. Then China based company, the DoD list certainly provide another level of tailwind And there are some customers in the past they have shifted the effort to design our product into their routers and gateways but they took us as a approved vendor just in case they couldn't buy from that company. Will buy from us. But now we are seeing some tangible shift and because some of the for example, some of the applications they can use for commercial applications, they can be installed in the middle military base. Clearly, they wanted to use the same modules for both applications. And they wanted to source from Western sub suppliers like us. And we will be benefiting from that even more going forward. Right now, we're seeing more design wins that those design wins is going to be converted into orders and bookings throughout the year.

Excellent. And sorry for misspeaking on modules versus chips. I did know that, but is LoRa these levels sustainable from here? And then as a follow-up, for some handset related questions on either TVS or as you look out this year, next year, how do you view kind of your opportunity set in these markets moving forward? Would you consider them better than market growth or how would you consider them? Thank you.

Yes. Thank you. Yes, on the LoRa end, certainly the Q4 was very strong and there might be some factory in there for kind of like some project base that demand And but in general, if we zoom out a little bit year over year basis, we have been I will think based on the momentum, based on the customer engagement activities, based on the new use cases we learned from our creative eco systems and customer base, I I am pretty optimistic for the year over year growth from FY 'twenty six to FY 'twenty five to 'twenty six. For the TVS and per se product for cell phones and smartphones. I believe we are gaining shares in that that has been supported by the year over year revenue growth and double digit. And certainly, that is higher than the smartphone market itself. And quarter to quarter basis, you still to be seeing a little bit seasonality impact But in general, we are getting more design wins and we are gaining shares from our competition as well.

Thanks so much, Hong.

Our next question comes from Pudi Acree with Benchmark Company. Please proceed with your question.

Thanks guys and congrats on the progress. Mark, for you, if you can just talk about your gross margin expectations for the year. And maybe also if you can expand on into your OpEx expectations for the year?

Yes, Cody. We'll just emphasize we're only guiding one quarter out, so beyond our guide. We don't have that much commentary other than we've seen very strong year over year growth in our gross margins. And given that we are looking at some additional data center growth, we do see that those are typically higher than our corporate gross margin averages, so accretive to the to total gross margin. On OpEx, we've got it one quarter out would say that we're remaining prudent in our R and D spend. So R and D is prioritized to customer alignment and what we believe will be near term revenue growth.

Yes, if I can add some color. Cody, on the OpEx side, you see the incremental in increase in our Q1 compared to Q4. If we kind of like a double click on that, SG and A is going to be stay largely the same Over the year, we wanted to have more efficiency and leverage with increased revenue and we plan to use AI right now That is a hot topic, but we really see the benefits [indiscernible] for some efficiency and productivity improvement We do wanted to increase the R and D spending in FY 'twenty six compared to FY 'twenty five. And over the last three quarters since I took a position and we had conducted multiple critical reviews on the programs the return on the R and D programs we canceled a number of it. So that we can make the fund available to programs with better opportunities We did that and has been largely successful in FY '26. Going forward, we have more opportunities and just by shifting the focus a little bit, may not be enough. So we wanted to increase our R and D spending in this new fiscal year but as Mark said in a very disciplined fashion.

So we definitely wanted to make sure we will review the return on the investment will review the alignment with the market frequently so that if we need to do [indiscernible] we'll do it decisively. But in general, we see many opportunities and we wanted to really capture those opportunities to accelerate the growth.

So we'll see the R and D spending for the Q1 is going to be increasing a little bit from Q4. But other part of the OpEx we wanted to make sure we can get the efficiency out of them.

Thanks for that guys.

Hong, if you can just continue with that thought then can you elaborate on your product priorities then for 2026, where your R and D spend is going to be focused? And, where do you think your growth is going to be most derived from?

Good question, Cody. So we certainly wanted to focus our R and D in the area that we have [indiscernible] and we have a better alignment with the customers and we have opportunities identified. So the large [indiscernible] and in some selected IoT areas as well. And of course, the new emerging trend well, not an emerging trend, so among our portfolio like person sensing, is quite exciting because of the the SAR standards requirement. It's elevating that provide opportunities for us to provide solutions to our customers with our technical differentiation. And then the same product can be used in the gesture control for the smart wearable devices that is an emerging opportunity. And in the beginning, we were just like provide a solution to it. But now and that can be if it's really materialized can be the next generation compute platform with the AI form factor and then the robots. We know our person sensing product has been incorporated in many companies in their robots designs. So that's the pretty exciting opportunities. And we will be increasing R and D investment to create extended bandwidth in addressing the market need. For that application.

Great. Thank you, guys. Thank you.

Our next question comes from Tristan Gerra with Baird. Please proceed with your question.

Hi.

This is Tyler on for Tristan. Thanks for taking the questions. Maybe Maybe black on LoRa, could you provide an update on where LoRa inventories are? Do you think your ship shipping back in line with demand? And then also if you could help with the timing of the for the Mercedes factories, that would be helpful. Thanks.

Tyler, not just with LoRa, but across our portfolio, we are monitoring channel inventories. So try to keep channel inventories in line with expectations So that goes for LoRa too. So we're really shipping to what we believe is expected demand.

LoRa deployment across the industrial portfolio that example you provided that Mercedes deployment that that occurred already? But right now Laura is being deployed across a number of IoT [indiscernible] Metering, asset tracking, factory automation.

Great. And then maybe for my follow-up one on the data center. Could you just provide a little more color on where you're seeing LPO opportunities medium term?

Yes. So Tyler, the LPO opportunities near term, is it going to be primarily on the 800 gig or 100 gig per channel. So we have been providing our TIAs and driver solutions to many optical transceiver module manufacturers and there are some strong CSPs at the end user to drive the adoption for it. And as for 1.6 terabit I think at this point, the industry is primarily focusing on LRO solution, namely in the transmitting and they will still use DSP based real time solutions and the receiving end, they will use a linearized solutions So LRO, we will have our TIA in the receiving end. And but we don't have the driver typically come from the DSP side.

The 800 gig LPO on the other hand we will have the TIA content on the receiving end together with the driver content on the transmitting end. So at OFC, you're going be seeing multiple demos that our customers and the partners are using our solutions to design and and plan to go into the production on the 800 gig LPO and 1.6 LROs.

Great. Thanks again for taking the questions. Thank you, Tyler.

Our next question comes from Craig Ellis with B. Riley Securities. Please proceed with your question. Hi. This is Stacy Chu on for Craig. Thanks for taking the question. And I was wondering if you could just give a little clarification for the announcement with currently one competitor being placed on the annotated list How has that been like materialized so far? In lifting the Sierra business? And how would that like affect the business strategically?

Yes. So Stacy, thank you for that question. The one competitor was placed on the twelve sixty 1260H list. That means really many of our customer base when they have the product used for and do use situation, [indiscernible] do not wanted to use the modules from that supplier in China. So that's definitely has translated into a significant increase in booking. So and we as I said, that booking at this significantly increase in design wins and that design wins is going to be translated into the bookings over throughout the year.

Okay, got it. Thank you, Yifur. The question. And the second question, I guess, is going back to kind of the design process, like how long are these onboarding conferences can last? And how many AI server generations can that socket remain?

I see. So the design for onboard solutions is actually going to be shorter than the design in the cable because the onboard solution is typically done by the end customers directly. They don't need to go through third party supplier. So the design cycle like anything, typically six to eighteen months, it depends on the number of iterations they will have. So you probably will be learning more about the timing in the next week's conference they're going to be hosting.

Thank you. Our next question comes from Kyle Smith with Stifel. Please proceed with your question.

Hi, guys. This is Kyle on for Torrey at Stifel.

Congrats on two straight quarters of positive free cash flow So how should we think about free cash flow heading into fiscal twenty six? And maybe building off of that, if you could provide general expectations for both operating cash flow and capital expenditures, that would be great.

Hey, Kyle. Thanks for the question. We'll say that we're only guiding one quarter out. But you can see the strong cash flow generation that we had in Q4 and we had sequential increases in cash flow generation from Q4 to Q3. Definitely strong business fundamentals do help with the growing business, but also with our reduction in debt. We previously announced $40,000,000 in annual cash interest savings.

That's definitely a tailwind to our operating cash flow metrics. And that operating cash flow, we only had a partial quarter of benefit in our Q4. So you can expect or I expect that there's to be some incremental cash flow benefits over the year. Again, we're only guiding one quarter out but I think we think that historical CapEx is a reasonable proxy going forward for future CapEx requirements.

Great. Thank you. And as my follow-up, could you maybe provide an overview of the unbundling trend you seeing within the TIA market? And do you feel you can capture majority share within the unbundled TIA market in the next few years?

Yes. So definitely, we can see the prior commercial arrangement from the industry participants and usually leverage the availability and shortages of DSPs They wanted to sell DSP and TIA together. I think with the more availability of the DSP supplies and the number of providers out there this kind of bundling practice is no longer in place and that provide great opportunities for us [indiscernible] to play in the leveled market playing field. So we have been gaining market shares and but I think we still have ways to go. And good thing is our TIA has been broadly regarded the best solution in the industry serving 200 gig 400 gig, 800 gig and 1.6 T So we have multiple form factors and I anticipate that trend will continue.

Congrats on the quarter guys. Thank you.

Thank you.

Thank you.

Our next question comes from Harsh Kumar with Piper Sandler. Please proceed with your question.

Yes. Hi. Thanks for a chance to follow-up. I was curious, Mark or Hong, what is making LoRa jump up so significantly so fast? Are you seeing some kind of new deployment activity? And maybe you could help us understand what geo or what kind of applications without giving us too much specifics?

Yes.

So, Harsh, that's a great observation. We're really pleased with the results. And I think it's largely due to the customer focus And we the business in Lora has been auto piloting for a while. And now we put a very concerted effort and developing new products and provide enablement support and really engaging with the customers very closely. So, it is clear that in LoRa, at that has demonstrated a very strong differentiating capabilities compared to other RF protocols and customers are developing different applications There are a lot of innovation going on there. And when people talk about this is an auto lawnmower and robots and metering that's the space and we have been demonstrated a very strong demand, but there are new applications being developed. So I think we are accelerating the growth through new product offering and ecosystem enablement and the customer focus.

Understood. Thank you. Thanks and congratulations again. Thank you.

Our next question comes from Quinn Bolton with Needham and Co. Please proceed with your question.

Hey guys, just wanted to ask a quick question on the pawn business. Looking at the overall signal integrity revenue and your comment that data center was up to 50,000,000 looks like you probably saw a meaningful step down in the pond business. Wanted to see if you could confirm that. And if that's the case, is that just sort of timing between different tenders? Is that a seasonal effect? And then I've got a quick follow-up.

Yes, Quinn. So for Q4 results, was actually year over year the PON was growing. And as for our guidance, say in a SIP area, the signal integrity product overall is going to grow the data center is going to grow. So Pong and HSM timing thing related to the tender. Tender offers. Okay. Okay.

And then I'm not sure if you care comment, but your growth for signal integrity or data center in particular for the April. Just wondering, do you expect the copper age business to be effectively zero in that quarter? Because if so, it obviously implies some really strong growth out outside if the overall bucket is going to grow quarter on quarter But just wondering if you could just directionally, is copper edge still several million dollars Is it zero just any help? Just to sort of think about growth outside of the CopperEdge product Quinn, in our Q1 guide, we still expect to be recording Copper Edge net sales [indiscernible] [indiscernible] but it's just under our our prior expectations. At our customer. So as Song said, there's there's still design activity. We're engaged with over 20 customers we expect some revenue to pick up at the latter half of FY 2026.

Got it. Thank you, Mark.

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Mark Flynn for closing comments.

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