Semtech Corporation

Good day, and thank you for standing by. Welcome to Semtech Corporation's third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Please go ahead.

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 third quarter of fiscal year 2025, which are posted along with an earnings call presentation to our investor 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 risk factors section of our most recent annual report on Form 10-K for information on risk factors that could cause our actual results to differ materially from those made on this call. 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 3 of the earnings presentation for important information regarding notes to 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, Mark. Good afternoon, everyone. I'm almost six months into my tenure as a Semtech CEO, and it has been a very productive period. My numerous engagements with Semtech employees, customers, suppliers, and partners have and the operational and financial progress we have made so far give me high confidence in Semtex's near and long-term growth prospects. We achieved very strong Q3 results, with net sales, growth margin, and EPS at the high end of our guidance range, while operating income and operating margin exceeded the high end of our guidance range. Further, Our Q4 outlook projects continued growth in each of these metrics. In the last earnings call, I shared three near-term priorities, and I'm happy to report that we are making progress on all fronts. First, on strategy, portfolio rationalization, and balance sheet improvement, we have completed and evaluation of our portfolios through our annual strategic planning process. The purpose of this evaluation expanded beyond a delineation of core and non-core assets, but provided a more granular assessment correlating investment levels and priorities to multi-year growth curves. In what might be a generational opportunity stemmed from AI-driven product demand, we'll be increasing investment in data center products, which we project to be a long-term and transformational growth engine for Semtech. In some other areas, we expect sustaining investment at a current level will suffice. And our focus is to improve the contribution margins of these businesses. The net effect is prudent investment levels paired with regular reviews on forecasted return on investment. We are committed to making timely adjustments to the market direction change. Our portfolio has broadly inflected to growth but I want to ensure my message is clear. I expect the inflection to growth will benefit valuation, but will not delay the portfolio rationalization process. I'm fully aware of the financial and the non-financial benefits of portfolio rationalization, and we are particularly focused on opportunities that accelerate our debt repayment and decrease our leverage ratio. Second, on accelerating growth and driving margin expansion, we have made swift changes to intensify the engagement with the customers to provide technical and operational solutions. And our Q3 results and Q4 outlook demonstrated effectiveness of these initiatives. We continue to see strong tailwinds. of customers and targeted market are moving toward us. We have instituted a disciplined investment plan, leveraging our design competency and incorporating performance objectives from key end customers and meeting their critical business needs. I believe we have achieved multi-generational roadmap alignment with the key customers. and we aspire to become their partner of choice for key technical and product solutions we provide. I expect this initiative will accelerate sustainable market share gain and SEM expansion. Another growth driver is SEMtech's operational excellence. SEMtech has executed to meet customer delivery timelines in the current dynamic environment. with noteworthy instances in our data center and high-end consumer end markets. Semtech's operational excellence in on-time delivery and superb quality contributes to our customer supply chain resiliency, which I know to be highly valued. In this area, I would be remiss if I did not acknowledge the contribution from Semtech's Foundry assembly and test partners amidst the current ramp. Thank you to our foundry partners that have prioritized and increased the demand many times well within natural lead times. Thank you to our assembly and test partners who have quickly installed additional capacity to support our field. Third, on energizing our people. I'm a firm believer in promoting a high-performance culture, and I'm proud that we have launched Semtech Rising, an initiative incorporating employee development, mentorship, recognition, and pay-for-performance elements to bring out the best from our employee base and elevating our determination and drive to win. This initiative also leverages expertise from SEMTEX board members. We modified the charter of our compensation committee to become the Human Capital and Compensation Committee. We firmly believe this change elevates the importance of human capital development and aligns with SEMTEX's focus on creating and fostering a diverse and vibrant workforce. In the coming quarter, The three priorities will continue to be my focus. Moving to ad markets. For Q3, infrastructure net sales were $65.8 million, up 24% sequentially and up 52% year over year. Net sales for the data center were a record $43.1 million. up 58% decreasingly, and up 78% year-over-year. Consistent with our outlook for Q3, shipment commenced on our Copper Edge 200-gig linear redrivers used in 1.60 active copper cable, our ACC applications. Copper Edge net sales were in the high single-digit million dollars. we expect incrementally higher contribution in our Q4, followed by a ramp progressing through FY26. There have been multiple reports regarding Blackwell GPU rack designs and timing of volume shipment, which could potentially impact the TAM and timing of ACC market where we provide key enabling IC components. That said, allow me to provide some assurances based on our ecosystem engagement. We have invested time with our customer and end users of the RECs over the past few months. We reaffirmed our expectation of exceeding the floor case provided a couple of quarters ago based on the firsthand information from the ecosystem. I connected with many CSPs, table manufacturers, and ecosystem participants at the very well-attended Open Compute Project of OCP Global Summit last month, where Meta presented, contributed, and demonstrated on the show floor its Catalina platform. Catalina is a dual-REC NVL36 design connected with a Copper Edge-enabled This appears to be a major platform that multiple CSPs will adopt in the near future for their AI data centers. Several companies are currently conducting design work using our copper edge chips in 200 gig traces on their boards to improve signal integrity. Rack designs have varied and will continue to vary. as CSPs deploy various configurations in their data centers. But the OCP Global Summit reaffirmed my belief that a count of 200 gig ports connected to cables with a length up to three meters is a more relevant measure of a copper edge SEM. At 200 gig and at a cable length up to three meters, copper edge will meet signal integrity requirements not readily achievable with direct attached copper or dash cables, and at a lower latency, lower cost, and a much smaller power consumption required compared to DSP-based re-timed solutions. Some types of low-power, low-latency copper-etched solutions have gained positive attention in the data center ecosystem. and our technical collaboration with a number of CSPs and cable manufacturers has accelerated since last quarter. My team's engagement with architecture decision makers and technical executives in the ecosystem significantly streamlined the time between understanding our customers' challenges and delivering some type of proposed solutions. I believe this has proven to be a positive differentiator in copper edge proliferation and improved Semtech's MPI time to market. In addition to copper edge, our tri-edge POM4 products continue to contribute meaningful sequential and year-over-year yields. Our lead customer commenced a production run in 400 gig AOC products in Q3. Demand remains robust for our fiber edge transimpedance amplifier, our TIA, and the laser drivers. Data center deployment at 100 gig has been ramping up strongly, and we believe we have captured incremental market shares thanks to our closer engagement with our customers and our operations excellence. Moving to linear pluggable optics, or LPO. We have received initial TIA orders from several module manufacturers for test and qualification of both 800 gig and the 1.6T LPO transceivers at CSP. CSP engagement has proven insightful. it appears that LPO adoptability is meaningfully correlated with the service signal-to-noise ratio at the host. Fortunately, both current and future generation switches supply significantly improved performance, and this enables easier LPO adoption in many specific use cases. Our confidence in LPO adoption has increased since last quarter. with a meaningful net sale contribution from TIAs and the redrivers expected by the latter portion of FY26. Within the infrastructure, our telecom business consisting of Pong and Backhaul reported Q3 net sales of $20.5 million. We have been supporting a pilot build of triple-gen 50-gig Pong with a major Chinese carrier. And the carrier CapEx noticeably for 5G advanced deployment is expected to nominally improve over the coming quarters. Moving to our high-end consumer end market, net sales were $40 million, a sequential increase of 8%, reflective of market share gains and consistent with expectations of seasonally stronger Q3. Net sales in high-end consumer TVS grew to $28.3 million, up 9% sequentially and up 7% year-over-year, with a sequential growth in each quarter of the current fiscal year. We communicated market share growth in consumer TVS through last quarter, augmenting our prior commentary Our expectation is for continued market share expansion at the world's largest consumer electronics company, and at other key North American and Korean companies, based not only on our design-in activities for future generations of products, but also for Semtech's ability to deliver on time and to meet demand upside. Thanks to our technology leadership, proven quality, and fulfillment capabilities. We are among the first to be added to a BOM for many products in the pipeline, so we have much greater visibility into the design cycles of next-generation products. Of close leading, per se, products continue to excite the market, with design wins across device manufacturers in smartphones, computing, and wearables. We believe Perseid's capabilities are also highly valued by device manufacturers to maintain compliance with the specific absorption rate of SAR regulations while minimizing effect on device performance. In this area, the ability to detect and measure distance to a human allows the device to optimize RF transmission power and data throughput. We are pleased to be included in the leading smartphone chipset vendors reference designs to meet SAR requirements. Moving to our industrial end market. For Q3, industrial net sales were $131 million, up 5% sequentially. Within the industrial end market, LoRa-enabled solutions recorded Q3 net sales of $29 million, up 1% quarter over quarter, and up 104% year over year. Encouragingly, consumption for our recent generation LoRa product has been increasing, which signals market adoption of this enhanced capability. LoRa Gen2 offers a smaller footprint and reduce the power consumption, while LoRa Gen3 delivered improved radio performance and a further simplification of customer development through onboard LoRaWAN provisioning capability. Supporting LoRaWAN remains a key company strategy. I benefited greatly from visiting the SYNC conference in September. As I said during my presentation at the conference, LoRa has demonstrated tremendous potential with a comprehensive ecosystem that pushed LoRa from concept to product and now to an industry. I gained very constructive input while at the conference on how Semtech can support ecosystem enablement and enhance what I believe to be Semtech's already robust hardware and software roadmap. The infrastructure to cover gapless coverage for LoRa continues to gain momentum. In addition to Echo Star coverage throughout Europe, satellite operators are considering offering a similar service for Americas. We expect such availability of LoRaWAN will create a boundless potential for asset tracking. Our IoT systems business recorded Q3 net sales of $57.9 million, up 11% sequentially, yet another quarter of net sales growth coupled with robust bookings and backlog. As previously discussed, Semtech started addressing channel and end customer inventories earlier in the cycle. And as the market influx upwards, our growth is now muted by the channel congestion. Highlighting customer engagement for this business, I believe we held a successful customer roundtable in October, where our customers provided valuable insights and helped shape our roadmap. The roundtable also allowed us to further highlight our in-house Trade Agreements Act, our TAA capabilities, something we expect to bring significant value as a North America supplier to the critical infrastructure markets we serve. Our in-house TAA capabilities have contributed to funnel, orders, backlog, and sales to federal agencies. an area where we have identified as an adjacent market and then renewed our focus. In Q3, we launched the Australian instance of Air Link Management Services. Australia is one of our stronger markets outside of North America, and this instance meets ever stringent local data resiliency requirements. Q3 net sales for IoT-connected services were $24.6 million, with a slight decrease in year-over-year growth for this reoccurring revenue business. AirVantage allows our customers a single panel to monitor lifecycle management, consumption, and SIEM management, all packaged with a robust API. Our future growth expectations are bolstered by additional customer adoptions of AirVantage, including AirVantage Data Insights and its AI-enabled features to facilitate analysis and decision-making on connected equipment. We also expanded our smart connectivity platform to add voice over LTE coverage, which is now available in over 40 countries and territories. In industrial TVS, net sales in Q3 were $10.2 million, up a robust 7% sequentially. We have noticed the current market sentiment in the industrial market, but we remain confident in some technical use with our product offerings. Our industrial products address protection for electronics deployed in increasingly harsh industrial ESD environments. As factories increasingly automate, our customers are increasing their reliance on some types of solutions, where severe ESD challenges abound. In the automotive market, demand has increased sequentially, with a growing prevalence of wired and wireless networks in automobiles. Also, Semtech has been a leading supplier of advanced display protection solutions in the high-end consumer market. As our display customers diversify into the automotive sector, we believe we are seeing a disproportionate benefit in the automotive display market. In summary, I'm very pleased with Semtech's execution and performance across our businesses in Q3. And now, turn the call back to Mark for additional details on our financial results and our Q4 outlook. Mark?