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Thanks, Mark. I'm very happy to join the Semtech team look forward to engaging with all of you in the months and quarters ahead.
10m 32s
Today after market close, we released our unaudited results for the first quarter of fiscal twenty twenty six. We which are posted along with an earnings call presentation to our investor website at investor.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 two of the earnings presentation as well as the Risk Factors section of our most recent annual report on Form 10 ks for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on this call. You should consider these risk factors in conjunction with our forward looking statements. 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 also include reconciliations of our GAAP and non GAAP financial measures. With that, I will turn the call over to Hong. Thank you, Mitch.
11m 41s
Welcome aboard. Afternoon, everyone.
11m 45s
We reported Q1 results with net sales adjusted gross margin, adjusted operating margin, and adjusted diluted earnings per share each above the midpoint of our guidance. These results illustrate the resiliency of our business and offer another proof point of our operational excellence. Semtech's Q1 ended on April 27, So we closed the last month of the quarter during an extremely turbulent period. But we successfully navigated through dynamic tariff policies.
12m 24s
Superb coordination among our operations, sales, compliance teams was instrumental in mitigating the tariff situation for Semtech and our customers. Facilitating a stable flow of product across the global semiconductor supply chain. I extend my heartfelt thanks to these teams and recognize their efforts in helping us achieve our Q1 results and supports our conviction for the quarters ahead. Semtech's Q1 results also reflect our focus on core priorities. Including portfolio optimization, strategic investment in R and D, and driving margin expansion. While uncertainty in the market may impact the timing of some of our portfolio optimization initiative, we have strong conviction that we can operate these businesses to grow the top line, expand profit margins and improve overall financial metrics. We believe this will create more value for our shareholders. Moving to our end markets, For Q1, infrastructure net sales were $72,800,000 up 5% sequentially and up 30% year over year. Net sales for data center were a record $51,600,000 up 3% sequentially and up 143% year over year. Our expectations for a short term demand gap in copper edge remain consistent. That said, we expect our data center business to be a sustainable growth driver, especially given recent indications of capital expenditure growth by hyperscalers as well as from innovations in our copper and optical portfolios.
14m 27s
AI data centers face critical power and thermal challenges which will grow exponentially as compute workloads increase. Our analog solutions are well suited to address this address these challenges. CopperEdge enables a significant paradigm shift in connectivity. Delivering the signal integrity and the rich extension needed for next generation AI clusters. Compared to DSP based options, copper edge reduced power consumption by over 90% and also enables significantly longer reach than the direct attached copper [indiscernible] At OFC, we demonstrated a number of copper edge driven ACC applications. All with a bit error rate well below acceptable ranges. At 1.6, we successfully run traffic across a three meter 27 gauge cable using two twenty four gig [indiscernible] Our launch application at our anchor customer last year was a 1.1 meter cable. So this demonstration highlighted the high performance capabilities and the rich of our copper edge ICs. At 800 gig, the dominant rate of data center traffic, we demonstrated an extended reach five meter ACC connected to a Broadcom Tomahawk five switch. A prospective customer requested this configuration for use at the replacement to deck cables. Also connected to the Tomahawk five switch, [indiscernible] three meter 36 30 gauge cable.
16m 25s
That has significant benefits in airflow and bending radius Both characteristics valued by rec architects. We remain closely engaged with our copper edge anchor customer for applications in their future generation racks. In addition, hyperscalers switch vendors, and the cable manufacturers continue to show interest in copper edge ACCs. We have delivered ACC cables for testing and qualification to multiple customers and the expect the meaningful design wins at hyperscalers and enterprise customers leading to volume ramps before the end of this fiscal year. On the optical side, our LPO demonstration at OFC generated significant interest and our expectation of deployments in the second half of this fiscal year remains unchanged. We are pleased that the feedback from our customers indicates Semtech TIA for LPO offers superior performance, And we believe we are winning the lion's share in TIAs. We also released our LPL laser drivers last quarter. And are generating design in Traxin at multiple module suppliers. Moving to our high end consumer end market, Net sales for Q1 were $35,400,000 flat sequentially and up 3% year over year. Net sales in consumer TVS were $24,500,000 in line with our outlook for Q1 and up 2% sequentially. We expect a pattern of smartphone unit ramps fairly consistent with the past years.
18m 23s
With the increase in the second quarter and the successive increase in the third quarter. Within consumer TVS, we believe our innovation continues to result in increased content I'm pleased to highlight expanded design and activity of search switch a system level protection device across a number of manufacturers and platforms. SearchSwitch has the capability to simultaneously address expanded dimension of threat from ESD or electrostatic discharge our EOS, our electric electrical overstress, across a wide operating temperature range. Finer process geometry in advanced nodes for IC fabrication have increased the the demand for the type of rigorous off chip system level protection offered by search switch. For a per se a person sensing products, we have discussed use in smart glasses. An application we believe has a strong potential to be next generation AI interface platform. We have a growing field of opportunity and are actively engaged with a broad range of customers on both existing designs and on new launches.
19m 55s
In smartphones, Per Se addresses increasingly stringent specific absorption rate or SAR standards and is currently deployed on devices at the most leading manufacturers. Per se offers meaningfully lower power improved sensitivity, and best in class noise rejection. Process use of Semtech's novel packaging expertise. Also results in smaller footprint that allow us and our customers to develop a slicker form factors. Moving to our industrial end market. For Q1, industrial net sales were $142,800,000 down 3% sequentially in line with our outlook and up 24% year over year. Within the industrial end market, net sales of LoRa enabled solutions remained strong at $38,900,000 up 5% sequentially and up 81% year over year. Demand supporting new product launches and deployments remained robust. We recently announced that Sunnova a world leader in innovative health care solutions, chose Semtech as a technology partner to create an ultra small ultra low power wireless radio and power management IC. LoRa technology highlights Semtech's DPX expertise in ultra low power RF with the clear match for battery operated devices including hearing aids. Robotics and unmanned aerial vehicles are also a emerging market for LoRa. LoRa's ability to operate in dual band 2.4 gigahertz and ISM frequencies [indiscernible] Which is well suited for these applications.
22m 2s
In addition, low resolution scheme now paired with multiple protocols provided a capability of LoRa plus allows manufacturers to extend the end applications including safety, security, as well as smart building. Our IoT systems hardware business recorded Q1 net sales of $63,500,000 down 8% sequentially but within expectation of our outlook. And up 31% year over year. Bookings in the first quarter for this business increased for the seventh consecutive quarter Pipeline also increased substantially in Q1. Attributable to both the inclusion of a significant China based competitor on Samsung list and the strong indications of a broader market recovery. We expect a continued growth and improve the profitability in our IoT cellular portfolio based on stronger pipeline and the bookings. Growing five g adoption rates particularly in North America, is benefiting our hardware business. With the current deployments utilizing the first and second gen modules, In q one, we launched the two third gen five g modules. A cost optimized solution supporting broader five g adoption for value focused applications and the performance optimized solutions supporting five gs advanced to enable next generation edge based AI applications. IoT connected services net sales were overall stable for this largely recurring revenue business.
24m 4s
Our Connected Services business is a great example of Semtech's deployment of AI tools. As an example, anomaly detection highlights abnormal network activities and notifies our operating center And we believe this improved detection capabilities have prevented a security incidence for our customers. In summary, we have made significant strides in strengthening Semtech's financial foundation over the past year. Which allows us to sharpen our focus on improving profitability and investing in innovation and capabilities that position us for long term business growth. Our Q1 results reflect disciplined execution. At the same time, we recognize that there is still much work ahead of us to fully unlock the value of our unique technologies and to deliver sustainable long term returns for our shareholders. We must continue to solidify a winning culture accelerate innovation, and leverage our technology leadership and execution. All of which position us to deliver enhanced value to our shareholders with increased revenue and expanded margins. I now turn the call to Mark for additional details on our financial results and our outlook for the second quarter of fiscal twenty twenty six. Mark? Thank you, Hong. For Q1, net sales were record $251,100,000 above the midpoint of our outlook and up 22% year over year.
25m 59s
We do not believe our Q1 net sales reflect material pull ins due to tariffs. Net sales trends by end market reportable segment and geographic region is included on slide 16 of the earnings presentation. Adjusted gross margin, was 53.5% up 30 basis points sequentially and up three seventy basis points year over year. Adjusted net operating expenses were $86,600,000 below the midpoint of our outlook. Adjusted operating income was $47,600,000 resulting in an adjusted operating margin of 19%. Up six eighty basis points year over year. Adjusted EBITDA was $55,400,000 up 68% year over year adjusted EBITDA margin was 22.1%. Up 600 basis points year over year. Adjusted net interest expense was $5,000,000 down sequentially from $11,200,000 The decrease was primarily reflective of a full quarter of savings from our Q4 debt pay down. We recorded other net non operating expenses of $2,800,000 substantially reflective of foreign exchange revaluation losses. This amount stemmed from a weaker U. S. Dollar most notably in the month of April. We recorded adjusted diluted earnings per share of $0.38 up from $06 a year ago. Operating and free cash flow for Q1 were $27,800,000 and $26,200,000 respectively, and these amounts reflect variable compensation payments in Q1.
27m 40s
At the end of Q1, net debt sequentially decreased $14,800,000 $396,200,000 and comprised of approximately $171,000,000 in term loan and $382,000,000 in convertible notes. Offset by $156,000,000 in cash and cash equivalents. Along with debt reduction, strong business performance, contributed to an adjusted net leverage ratio below two as of the close of Q1. We continue to prioritize debt reduction with a $10,000,000 term loan prepayment in the first quarter, and an additional $15,000,000 to date. In the second quarter. On our revolving credit facility, I'm pleased we successfully amended the facility to increase our total borrowing capacity by $117,500,000 for a total revolving credit facility size of $455,000,000 No financial covenants or material terms were modified. As part of this amendment. As of today, the revolving credit facility remains undrawn except for previously outstanding letters of credit totaling about $3,000,000 Now turning to our second quarter outlook. Currently expect net sales of $256,000,000 plus or minus $5,000,000 up 19% year over year at the midpoint. We expect net sales from our infrastructure end market to increase sequentially including growth in data center. We expect net sales from our high end consumer end market to be up slightly reflective of typical seasonality.
29m 15s
We expect net sales from industrial end market to be flat to slightly down. With moderation in LoRa offsetting growth in our IoT cellular business. Based on expected product mix and net sales levels, expect adjusted gross margin to be 53%, plus or minus 50 basis points. A two sixty basis point improvement year over year at the midpoint. Adjusted net operating expenses are expected to be $87,500,000 plus or minus $1,000,000 resulting in an adjusted operating margin at the midpoint of 18.8% a four sixty basis point improvement year over year. Adjusted EBITDA is expected to be $56,000,000 plus or minus $3,000,000 resulting in an adjusted EBITDA margin at the midpoint of 21.9% a three ten basis point improvement year over year. We expect adjusted interest and other expenses net to be $5,500,000 reflective of leverage based pricing on our term loan. That reduces our interest rate. Another benefit of our lower leverage ratio. We expect an adjusted normalized income tax rate of 15%. These amounts are expected to result in adjusted diluted earnings per share of $0.40 plus or minus $03 based on a weighted average share count of 90,000,000 shares.
30m 40s
Thank you, Mark. We can now turn the call back over to the operator for the question and answer session.
30m 48s
Thank you. Ladies and gentlemen, if you would like to ask a question, please press 1 on your telephone keypad. And a confirmation tone will indicate your line is in the question queue. You may press 2 you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And due to the interest of time, we ask that you ask only [indiscernible] you ask only one question and one follow-up. Moment, please, while we pull for questions. And our first question comes from the line of Quinn Bolton with Needham and Company. Please proceed.
31m 27s
Hey, guys. Wanted to start off with a question on the cellular module business. I was, I guess, a little surprised to see that down, I think, after six quarters of increased bookings and Q1 being the seventh quarter. So wondered if there was anything specific to call out in the cellular module business in April. And, thank you for the additional gross margin disclosure in today's press release. But it does look like the gross margin on the cellular modules also came in down meaningfully both quarter on quarter and year on year. I'm just wondering if you could explain, what happened on the margins side of the cellular module business in the first quarter Yes, Quinn, hi. Thank you for your question.
32m 13s
Yes. So from our Q4 guidance, we expected some level of seasonality on our IoT system product.
32m 24s
And but you are right. This business is experiencing pretty significant tailwind as a as I provided during the prepared remarks, because of the SANKS list for our competitor based in China. And also the exit of U Blocks into the IoT cellular business. This tailwind is very evident from our booking activities.
32m 55s
And so we do expect this business going to be revenue is going to be accelerating in the quarters forward. But Q1 was a little low and we expected that from the guidance of the Q4.
33m 11s
And Quinn, just to address gross margins. This also came in within expectation. We had guided a little bit lower gross margin or we expect a little bit lower gross margin from the ISC business. But within this business, you also have a little bit of mix between modules and routers affecting the gross margin that we reported.
33m 32s
So so you saw mix shift more to modules away from routers, and that's that's why I came in lower than, say, the prior quarter or prior year.
33m 42s
That's correct. And there is also a onetime event on the inventory on the module side. So that is a kinda like a, you know, impacting the overall IoT system. Margin, adversely. That is that's onetime. Event.
34m 2s
Got it. So there's a a write off of obsolete or, excess inventory in that something like that that that was a was a further drag.
34m 12s
Patrick, it was more in Q4, we had a little bit of a tailwind that we didn't recur in Q1. [indiscernible] Thank you. I'll I'll get back in queue.
34m 24s
The next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed.
34m 31s
Hey, guys. Thanks for the question.
34m 34s
So mine is just around AI conic connectivity. It sounded like there was some progress here Maybe on the CopperEdge side, with engagements and revenue by the end of the year, perhaps you could expand on that and just more broadly talk about where we are in visibility around AI comic for you guys, overall.
35m 4s
Yeah. Chris, thank you for that question.
35m 7s
You know, our copper egg product we trailblazed that product into the market through the engagement with the anchor customer. Since then, we have reached out to more than 20 customers and having very close engagement with many of them. And it is really very encouraging to see that they finally recognize the unique advantage that ACC offers. Compared to AOC or AEC in terms of low power consumption, low latency And a number of them are taking our product prototype samples for qualification and testing. And so the use cases are going in for scale up of the ASIC interconnect and also for scale out, especially the first level of the switch fabric from Nick to top of the rack. And our demo at OF if you stop by a SYNNET, and really shows and give a lot of confidence for our customers. They come in, see and kick the tire know, wiggle the cables and see the bit error rate well below the acceptable limit.
36m 30s
And so for say 200 gigabit they could see our product can transmit over three meters [indiscernible] 30 gauge cable. That is really very desirable. So, as I said, we expect a number of the customers we're engaging is going to be finished qualification and start ramping by Q4 this year.
36m 57s
Excellent. Thank you, Hong.
37m
My second question is around LPO and op optical more generally for you guys. If you could describe what you're seeing there in terms of, like, TIAs, drivers, you know, for maybe regular optical, and then for, LPO and how that might ramp through the year that that that would be great. Thank you, guys.
37m 23s
Yeah. Thank you. So as you know, that some tech TIA is considered the gold standard for the industry.
37m 31s
For traditional retimed all LPO our TIA has been, designed in almost in every module manufacturer And LPO are coming out of the OFC you know, that MSAs, they finalize the specification.
37m 50s
So now the suppliers and the customers, cloud service providers they're all on the same sheet of music and having that same expectation on performance and there's no longer any argument Now it's really about the timing and what platform they started deployment. So this is a tremendous progress compared to a couple of years ago. As you know, this industry and tracking for a long time.
38m 18s
We're seeing 800 gig LPO links or a hundred gigabit per second is, gonna be, used the first by multiple cloud service providers. And we're designed in from on our TIAs, Our driver is a little bit late compared to our competitor and that we released the last quarter And our driver because of late reduction did the specific requirement that MSA dictated or authored So I will say our driver is a fully LPA, PO compliant driver and we are working with multiple module manufacturers in incorporation and So that will bring additional revenue, say, if I I will say, by Q4 this fiscal year. So in general, our fiber etch product had a pretty broad application that different data rates. And different applications and we are benefiting from the increase the CapEx spending of the industry. But also I believe we're gaining some market share. So that and will be continue to be a driver for our data center and overall revenue growth. For the color, Hong.
39m 44s
Thank you.
39m 48s
The next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed.
39m 53s
Yeah. Hey, guys. Welcome, Mitch. Good to talk to you again.
39m 58s
Hong, I had a quick question. I was curious if you could talk about your data center business the core business, excluding you know, futuristic outlook for LPO and maybe ACC Just your plain vanilla core data center business, how you see that business trending? Over the next, call it, six to twelve months? And then I had a follow-up.
40m 20s
Good. Thank you, Harsh. So you know that we disclosed there are air pocket in demand on ACC.
40m 30s
So from the end to end customer, But the very fact that we delivered a sequence of growth in Q1 versus Q4 on our data center product is due to the strength of our fiber edge product.
40m 45s
So the LPO certainly is in a design win stage It's not contributed to meaningful revenue yet. And based on the booking activities, and based on the our conversation with our customers, we hold a strong conviction for the second half of the year that the fiber etch and the plain plain vanilla, as you put it, PMDs we call physical media devices will continue to experience growth, maybe accelerated growth. I'm really optimistic about that.
41m 23s
Great. Thank you, Hong. And then, I was curious about Laura. Laura, I think in your guidance, Mark, you said Laura will be off a little bit. This is coming on the heels of some very strong growth over the last several quarters. You talked about some new end markets, robotics, hearing aids, etcetera. I was curious if you could help us understand why Laura is going to be off just a little bit. Is it just small stuff like timing or just coming off of hot growth? Or is there something else? And then when do you see these new markets materializing? And I'll get back in line after this.
41m 59s
Sure. Thanks for the question, Harsh. So Laura, in Q1, we reported $38,900,000 up from $37,100,000 in Q4. So very nice sequential growth. Last quarter, we were guiding more into the call it, the $30,000,000 to $35,000,000 range. So that's where we believe the market will kind of fall out in the next few quarters. We do believe that in our first quarter, there was a little bit of additional build. We've said that LoRa has some project spend. Also, we had a customer build additional units for in in anticipation of a product launch. So that's where where Laura is believe that LoRa next quarter will be coming down a little bit. But still quite a strong business. You know, dollars 38,900,000.0 is still up 81% year over year.
42m 50s
Understood. Thank you, Mark.
42m 53s
Laura, we do expect a comfortable 30 to $35,000,000 quarterly run rate. As Mark said, we disclosed a medical customer is ready to launch new product. In Q1, there are some additional orders from them to support a new product launch.
43m 12s
Understood. Thank you, guys.
43m 18s
The next question comes from the line of Timothy Arcuri with UBS. Please proceed. Thanks a lot. I also wanted to ask about the update on AI connectivity. I I I assume that CopperEdge pretty much is zero in July and October, and then like you get a pretty big step up in fiscal q four because of all these you know, all these engagements. Is that the right way to think about it?
43m 42s
So, Tim, that's a good question. Question.
43m 45s
We talked about the air pocket in demand due to the platform change with the anchor customer. That is unchanged and but we continue to engage with them for future generation either well in both cable form and, chips on board type of linear equalizer applications. That relationship continue to be very tight, but it didn't demand from them was lower, a lot lower than we already expected. But the engagement with other customers for the application of the copper edge product and really very, very exciting and encouraging. There are four or five different application and use cases go beyond just the, the scale up interconnect between different racks. Are materializing, and some of them are, completing the qualification and just waiting for the deployment in their, next generation platforms. We do believe, the revenue from other customers will come, in Q4 time frame and start ramping from there.
45m 6s
Thanks a lot. And then, Mark, can you talk left part in the I mean, this is kind of a nit, but revenue's up like, 5,000,000 sequentially and gross margin's down 50 bps. What what what's is is that just mix?
45m 18s
Yeah. So Semtech is is largely mix dependent. So the guide reflects what we believe the current mix will be. 53% in Q2, it's a two sixty basis point improvement. So in our financial in our press release, in earnings presentation, we do now break out our semiconductor products groups that consist of our signal integrity and our analog mixed signal and wireless segments. So we brought that disclosure in from our 10 Q. We felt it'd be helpful for investors to see it also in our earnings release and our earnings presentation. So within Semiconductor Products was 663.7% gross margin, up seven twenty basis points year over year, but largely mix dependent.
46m 4s
Thanks a lot. The next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.
46m 14s
Great. There was a line in your remarks, you sort of said when uncertainty in the market may impact timing of some of portfolio optimization initiatives. Can you just talk about what you mean by that and kind of it doesn't sound like you guys are overly impacted by tariffs You know, what kind of uncertainty is that creating for you?
46m 33s
I see. So Joe, thank you for the question. What I mean by that is not about the tariff related but it's just the overall macroeconomic uncertainties as you know the deal flow and people thinking about strategically is probably get a little bit deferred. But we continue to hold our strategic initiatives at a high priority, but because of the overall industry get distracted and getting focused on how to mitigate the tariff risk and activities on the strategic initiative is going to be get delayed. So that's what what what we mean. And, but we do provide more visibility in our gross margins from earnings release, so that you can see that we own the business and, as long as we own it, we'll continue to work hard to improve and deliver better results. That's the best way to create shareholders value. We control what we can control We can't do much on things we can't control.
47m 49s
So that's the macroeconomic environment.
47m 53s
Got it. Okay. Thank you.
47m 58s
The next question comes from the line of Tore Svanberg with Stifel. Please proceed.
48m 5s
Yes. Thank you, and welcome on board, Mitch. You. I had a question about the per se a proximity sensor for for the glasses. You talked a little bit about that, but how should we think about that business ramping? Would that happen second half fiscal twenty six? Or is that gonna be more of a fiscal twenty seven event?
48m 28s
Hi, Terry. That's a good question.
48m 29s
So we're really excited about the Perse product. And as you know, traditionally, that product has been designed for, the SAAR standards or specific absorption rate reduction. So, it come in really handy due to its low power and, high accuracy and also the noise rejection capabilities. For smart wearables I bought a meta ribbon, smart glasses. It was absolutely phenomenal. You know? It's just, taking pictures and recognize the different location and, do the translation in real time And we're seeing probably five, six of other customers we are engaging for similar devices. So from the get go, you know, I think cumulative, we have supported over a million smart glasses using this gesture control capability. Just imagine how many variable devices it can be have out there. And and using the smart glasses at AI interface. To link into the infrastructure. So we're very excited about that market perspective. We do believe, again, the second half of this year, they're gonna be more than meta jump on that bandwagon to provide smart glasses.
50m 2s
Yeah. That's great color. And and as my follow-up and specifically on Laura, you mentioned the medical customer or perhaps customers is is this still only gonna be the hearing aids, or are you seeing Laura perhaps penetrate other types of medical applications?
50m 23s
For now, it's just the hearing aids we're talking about, but I wouldn't be surprised that the people start using LoRa for other medical device that applications The beauty of that is just a very low power consumption and very robust connectivity. So, you know, for example, the robotics is a new application and that now, is being proliferated pretty widely and using the LoRa to interconnect a different robotics and, robots and to to build a network.
51m 3s
Very helpful. Thank you.
51m 5s
Thank you, Troy.
51m 9s
The next question comes from the line of Cody Acree with The Benchmark Company. Please proceed.
51m 15s
Yeah. Thanks, guys, for taking my questions, and congrats on the progress. Guys, could you talk about your expectations for seasonality into the second half across your various markets?
51m 27s
Yes. Cody, thank you for the question. The seasonality for our TVS product that's a high end consumer, you know, we know that it's coinciding with smartphone release schedule Other than that, I think the seasonality for at least for the next two, three quarters, we don't see the obvious seasonality We do see industrial side, the broader market recovery. We see in the data center side, everyone was concerned about the CapEx spending in AI area. But now, you know, many of the CSPs and also the industry persists participants in the broader ecosystem all show the strong confidence that a second half the CapEx spending is gonna be accelerating. We're seeing that from our booking activities LoRa side is the only one, I wouldn't call it a seasonality and it's just this this project based spending out, you know, they need more material for our q one. And but no, the end notes numbers are increasing, and we are shipping records number every quarter. We're creating more new record for number of end nodes. The new applications being discovered and new product our RIGI [indiscernible] mean in addition to LoRa protocol. We support other RF protocols. This significant for that, for example, BLE, the Bluetooth enhanced is that some applications, they wanted to use LoRa.
53m 21s
But they wanted to have the back end compatibility on their installed and deployed base. So what this compatibility of LoRa plus allow us allow the integrators to offer a product offer the back end of compatibility with the existing protocol but going forward, they can take advantage of the LoRa protocol. So LoRa plus is still to us is LoRa centric. That's will allow a range of new applications. I feel that, even though the Q2 revenue compared to Q1 will be slightly down, but that's not a seasonality.
54m 2s
Excellent. Thanks for the help there. And then just thoughts on your gross margin and OpEx drivers in the second half and what kind of trends can we expect Hey, Cody. So I think we've talked about product mix between our three end markets that will largely drive our gross margin into the second half. And for OpEx, just note for gross margin OpEx, we're only guiding out one quarter. But for OpEx, I believe we're making some very good investments in R and D. So we continue to focus on project spend and monitoring our product spend with R and D. That has not changed quarter over quarter. We believe we have some great opportunities in front [indiscernible] Other areas of OpEx growth, we are kind of filling out our commercial team and that commercial team is like a technical sales force. Right? So that team allows us to get some better information, better information exchange with our customers. And then, better aligns our r and d spend to what our customers need.
55m 4s
Alright.
55m 5s
Thanks for the help. The next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed.
55m 15s
Yes. Thanks for taking the question. And Mitch, great to be back in touch and having you onboard the Semtech team. Guys, I wanted to start just by getting a better understanding of what you're expecting within data center in the back half of the year. So it seems clear that we've got two significant things happening. We've got AI connectivity that seems to be coming up and coming back on multiple customer wins away from your key customer, and then we've got LPO that's starting to ramp up. The question is, can you help us dimension those two items as we exit the year, which will be the the bigger driver. And you should look at the arc of what's happening with each. Can you help us by characterizing what we should expect as those programs go from initial ramps to more meaningful volume. Thank you, Craig. Yeah. So as you know, we are we have a pretty broad product portfolio for our data center, connectivity. We've got fiber edge which is a the TIA and the drivers. We got a copper edge with a linear equalizer and then we got tri etch with the CDRs and basically integrated with a PMD So, this diverse portfolio does help us even when we experience a little bit air pocket in copper edge with the anchor customer, [indiscernible] in fiber edge and the tri edge, you know, overweight the drop or the decrease in demand on the copper edge.
57m 3s
But as I said, you know, we expect lot of good things happening in the later part of this fiscal year. With more than the anchor customer demand for copper etch, that's gonna be materialized LPO, that's incremental opportunity is gonna materialize. When the customers start deploy 1.6 optical transceivers, they likely to use drivers for lasers, and modulators. And because traditional 100 gig or below they could use integrated driver from DSP to drive EML and looks that the performance in order to get the link very robust, they need external driver. So that's an incremental opportunities for us. So if I have to take a step back look at the fiber edge, It's a strong product line in itself. Provide a very high level of demand. And then, you know, when this tailwind start coming in, playing in, and that's all incremental on top of it. The fiber as we benefit from as I said, CapEx spending from the CSP side. And that and also, I believe we're gaining some market share in there. So we get a strong growing base and you got three incremental opportunities superimposed on top of that and this really we feel like a broader portfolio to help to mitigate the exposure.
58m 42s
On the air pocket we described. Before.
58m 46s
Okay. So very broad based as we exit the year and participation from three key parts of the portfolio. The follow-up question was around a product that you spoke to in your prepared remarks on. You talked about surge switch as being an integrated product that, is more system level protection. I wanna understand what types of products is that getting designed into and how does the the dollar content for that product compare to what we would typically expect with protection, and how should we think about that product's ability to drive visible growth within that part of the business and high end consumer. Thank you.
59m 37s
Yeah, Craig. So my SearchSwitch, you're right. It is an integrated, device. So it's it provides additional protection and additional features So we've launched this in multiple customers. System level design does require a lot more customer intimacy. So we're very happy with the amount of engagement that we have with customers. And it does have some noticeable or some improvement in ASPs. But again, I think Semtech TVS products are not just commodity type products. So we we've already been enjoying or deserving, I should say, higher ASPs based on our technology. So search switch though, it it protects against electrical overstress in addition to electrostatic discharge over a wider temperature operating range. That's the benefit that our our users our users get when they design in SurfSwitch. [indiscernible] they used to protect the type c connectors. Now the type c is used everywhere. It's not only in the smartphone it's in the automotive, it's in a telecom, in a in a many different charge ports, so the circuits with just provide a lot more robust protection capabilities.
1h 1m 2s
Okay. So it's nicely semi expensive for you over time?
1h 1m 5s
Exactly. Yep. Mhmm.
1h 1m 8s
Got it.
1h 1m 9s
Thanks, Gus. Thank you.
1h 1m 14s
And the last question will come from the line of Scott Searle with ROTH Capital Partners. Please proceed.
1h 1m 20s
Afternoon. Thanks for taking my questions. Hey, maybe to just follow-up on the data center front. I was wondering if we could get calibrated if if we put LPOs to the side, starting to ramp up in third and fourth quarter. And some ACC traction starting by the end of this year and ramping into fiscal twenty seven. The portfolio outside of that, what sort of normalized growth rate think we should see over the next couple of years? It sounds like in the near term, we're starting to see Five Ridge continue drive that. I'm wondering if you could help us understand what that that normalized expansion looks like and your comfort level that customer inventories are at a pretty good level, so that we don't see any sort of air pockets or big drawdowns in the next couple of quarters, and I'll call it core data center before we get to LPOs and ACCs.
1h 2m 5s
Great. Thank you, Scott. So the normalized accruals rate I think we can track basically all the research report, you know, on the CapEx spending. Then, you know, for, a number of research, market research report, they even call out more specific optical transceivers As I said, our data center product and the main thing is fiber edge. If you track the volume increase of data center And as I think our growth rates would track that pretty well and probably higher than that. The LPO will bring incremental capability, incremental revenue for us because of the driver, because the premium on TIA side [indiscernible] you know, right now, where the anchor customer is not zero, but it's lingering and until the next generation But with other customers, it's gonna be start contributing meaningfully in Q4 and ramping in the next fiscal year. Then they try try etch product, which is a CDR, Alright. You know, we designed in major with the major CSPs for the reasons beyond our control. They delay the deployment and now they seem to be resuming. So that's why give us a strong [indiscernible] Do feel barring, you know, the rapid adverse change of the tariff policy or something else beyond our control.
1h 3m 57s
We do feel, the second half of the year is we are very well positioned.
1h 4m 3s
Okay. Very helpful. And and if I could conclude just on the on the solar module front, seasonally down quarter, you know, gross margins with utilization under a little bit of pressure. But you know, given given QuackTel's headwinds, within the North American markets and increasingly, I think, European markets, what we're seeing with the exit of uBlocks as well. I wonder if you could could talk a little bit more about the bookings, when you would expect that to inflect we start to see that more in the p and l. And really, realistically, realistically, what target gross margins could look like in that environment given that some of your competitors are going be facing pretty high bars in terms of tariff headwinds? Thanks.
1h 4m 44s
Hey, Scott. I'll take that one. So we as we reported, we've had seven consecutive quarters of bookings growth. So I think that's long term kinda sustainable bookings. We did have a down quarter in Q1, but again, was in line with expectations and we guided for Q2 the IoT cellular business to increase in revenue Gross margins, again, we should see step ups in gross margins. We are managing this business for margin expansion along with our other businesses.
1h 5m 21s
Great. Thanks so much. Thank you.
1h 5m 28s
This concludes the question and answer session. And I'd like to turn the call back to Mitch Hodge for closing remarks.
1h 5m 34s
Thanks, Joe. That concludes today's call. Thanks to all of you for joining us today.
1h 5m 41s
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Key Insights
Q1 net sales were a record $251.1M, up 22% year over year and above the midpoint of guidance; adjusted gross margin was 53.5%, adjusted operating margin was 19%, and adjusted diluted EPS was $0.38, all above guidance midpoints.
Data center net sales reached a record $51.6M (up 143% YoY), driven by strong demand for CopperEdge and FiberEdge products; significant customer engagements are expected to lead to volume ramps and meaningful design wins in Q4 FY26.
LoRa-enabled solutions in the industrial segment delivered $38.9M in Q1 sales (up 81% YoY); while Q2 LoRa sales are expected to moderate to a $30M–$35M quarterly run rate, new applications in medical, robotics, and smart building are emerging.
For Q2 FY26, the company guides net sales of $256M ± $5M (up 19% YoY at midpoint), adjusted gross margin of 53% ± 50bps, adjusted operating margin of 18.8%, adjusted EBITDA of $56M ± $3M, and adjusted diluted EPS of $0.40 ± $0.03.
Management highlighted strong bookings and pipeline in IoT cellular modules, ongoing portfolio optimization, and expects continued growth in data center and IoT businesses, with incremental revenue from LPO and CopperEdge products ramping in the second half of FY26.
