Semtech Corporation

Welcome to Semtech's fourth quarter and fiscal year 2026 financial results conference call. Participants on today's conference call are Hong Ho, our President and Chief Executive Officer, and Mark Lin, our Executive Vice President and Chief Financial Officer. Before we begin, I would like to highlight upcoming investor events, including the Optical Fiber Communications Conference starting tomorrow and the Roth Technology Conference on March 23rd. Today after market close, we released our run out of results for the fourth quarter and fiscal year 2026, which are posted along with the earnings call presentation to our investor relations website at investors.sumtech.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-K for a number of risk factors that could cause our action results and events to differ materially from those anticipated or projected on today's call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call. We'll also be referring to results for our fourth quarter of fiscal year 2026 unless otherwise noted. Please see today's press release and slide three of the earnings presentation for 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. Good afternoon to all of you joining today. SEMTEX closed the fiscal year 2026 with a significant momentum. achieving a record $1.05 billion in net sales, a milestone that reflects the progress we have made and the trajectory we believe lies ahead. We drove strong sequential and year-over-year revenue and earnings growth, advanced our data center roadmap to capture compelling design wins opportunities, and continue to optimize our product portfolio. all while executing on the R&D and expensive initiatives, we believe position Semtex for exciting next chapter. Looking at Q4, net sales were $274.4 million, up 3% sequentially and up 9% year over year. For the year, revenues were $1.05 billion, representing annual growth of 15% driven by continued strength in our data center and Elora portfolios. Adjusted diluted earnings per share were 44 cents, up 10% year-over-year. For fiscal year 2026, adjusted diluted earnings per share were $1.71, growth of 94% over the prior year. In addition to delivering strong revenue and earnings growth, portfolio optimization remains a key focus of execution. As announced earlier this month, we acquired HIFO Corporation, which represents an important strategic building block for Semtech. HIFO is a California-based manufacturer of high-efficiency indium-phosphate-based optoelectronic devices, including game chips, and the CW laser chips that are critical components in the optical transceivers are in today's data centers. Put simply, HIFO makes the light-emitting building blocks that sit at the heart of high-speed optical interconnects. The strategic rationale is straightforward. As data center architectures evolve to 1.6T and 3.2T, the complexity of optical interconnects increases dramatically. By bringing HIFO's proven indium phosphate laser technology together with the Semtex industry-leading TIAs and laser drivers, we can co-develop and co-optimize performance across the laser modulator and driver interface, and increase Semtex content opportunity from high single-digit dollars an 800 gig module to about $80 in a 3.2T module. We believe this combination will result in a more integrated, more efficient chipset, one that reduces system power consumption and give the hyperscaler a differentiated solution for high bandwidth optical transceiver modules. We have developed a comprehensive investment plan for the Alhambra, California facility to expand domestic capacity and accelerate the product development. Integration of HIFO into some tax operation is underway, with the transaction expected to be accretive to non-GAF diluted earnings per share within the first year. We are genuinely excited about the people and technology joining Semtech, and we see significant untapped potential for high-efficiency lasers in different interconnect applications. Finally, we continue to make progress on the divestiture of the cellular module business, and we are increasingly encouraged by the level of interest and engagement. We remain confident this business represents a compelling opportunity for the right buyer, and we remain focused on bringing this process to a successful conclusion. Now, let me move to a discussion of our end markets. For Q4, infrastructure net sales were $86.3 million, up 11% sequentially and up 25% year over year. strongly supported by our data center business. For fiscal 2026, infrastructure net sales were $310 million, growth of 27% over the prior year. For Q4, net sales of data center were a record $63 million, up 12% sequentially and up 26% year over year. benefiting from strong demand for our broad portfolio, including our market-leading fiber edge ICs, whose net sales set another record. In Q4, we also started shipping into LPO transceivers with revenues in line with the outlook we provided on the last quarter's earnings call. Year 2026, our data center revenues were a record $223 million, representing an annual growth of 58%. Our optical and copper product lines are firmly established with hyperscalers as a differentiated and high-performance offering. Power efficiency has become one of the defining constraints of the modern AI infrastructure. As hyperscalers measure data center capacity in megawatts, The ability to move data faster while consuming less power at the networking layer is no longer just a differentiator. It's an enabler. Our analog solutions address this directly, enabling operators to scale next-generation architectures at 800 gig, 1.6T, and eventually 3.2T. Demands for 800 gig PIA solutions remain strong and broad-based. with an increasing momentum throughout 2026. At 1.60, we are engaged across a wide range of transceiver programs and expect volume runs to build as hyperscalers roll out their new XPU and switch platforms using reduced power 1.60 transceivers throughout the year. On LPO, design wins with several leading U.S. hyperscalers, validated our TIA and driver solutions in 800-gig transceivers. We are very excited to be a member of the new XPO MSA to define specifications and enable high bandwidth, high density, and low-power switches. By combining with the low-loss copper interconnects, such as flyover wires of linear re-driven PCB traces, some hyperscalers are becoming increasingly bullish on 1.60 LPO instead of using LROs for the first layer of the scale-up fabrics. We continue to expand our LPO IC portfolio with 1.60 LPO drivers and TIAs expected to come to market this year. In supporting further proliferation of low-power linear optics, Semtech, along with other industry leaders, are developing MPO, or Near Package Optics, MSA, for low-power, high-density, and high-bandwidth solutions. Successful deployment of 800-gig LPO transceivers gives hyperscalers confidence in MPO as the next evolution of the optical solutions. We are excited by the increased content available to Semtech in NPO deployments. Active Copper Cable, or ACC, continues to gain significant traction. Customers evaluating ACC's against the incumbent solutions are seeing compelling performance advantage in the form of a robust link margin and transformative power savings versus DSP-based solutions. Alongside our cable solutions, customers are increasingly evaluating our CopperEdge linear equalizers for onboard integration to enhance signal integrity across high-speed links, an opportunity we are confident will convert into design wins over the coming quarters One of these use cases is active backbone using copper-etched ICs, which our cable partners will demonstrate at OFC. Finally, we co-authored the ACC MSA, helping establish ACC technology as a leading solution for low-power and high-performance copper links. Members of the MSA spent IC, XPU, and cable suppliers all in partnership with major hyperscalers. We believe the ACC MSA accelerates the adoption curve for the entire industry. By establishing common specifications, we reduce fragmentation, lower deployment risk for hyperscalers, and make it easier for the ecosystem to develop around ACC as a standard, not just a preparatory solution that is good for customers is good for Semtech. We look forward to seeing many of you at OFC starting tomorrow. This year, we are showing live demos across several of our key product areas. They tell a clear story about where Semtech is positioned in the data center interconnect market, starting with copper. We are demonstrating 1.6 TACCs running live traffic to NVIDIA's 224 gig 30s. We are also showing next generation 448 gig per channel copper edge chips. As the AI clusters scale, the demand for low power and a low latency copper interconnects continues to grow. And we think we are very well positioned to lead the market. On the optical side, we'll be demonstrating NVIDIA's 1.6T DRA transceivers powered by SEMTECH's TIAs and laser drivers running live in NVIDIA switch platform. We'll also be demonstrating a 100T Ethernet switch running live traffic over both single-mode and the multi-mode fibers supporting FRO, LRO, and LPO configurations across the Tomahawk 6 platform, all built on Semtech silicon. We are thrilled to demonstrate the breadth of our optical portfolio across a multi-vendor ecosystem. We'll also be demonstrating our next generation 448 gig per channel modulator drivers and TIAs, addressing increasing bandwidth demand to support future generation AI workloads. We're also showcasing our indium phosphide CW laser and the GaN chip technology for tunable laser applications with outstanding power efficiency over temperature performance and the far field beam profile products from our HIFO acquisition. Across copper and optical and both near term and next generation, OFC gives us a tremendous opportunity to show Semtech's position across the full hyperscale interconnect stack. We believe we are positioned for multi-year growth opportunities supported by our expanded portfolio. We expect to start shipping CopperEdge for the 1.60 ACC hyperscaler deployment this quarter, with demand accelerating throughout the year. We also expect fiber edge design wins for 1.6T transceivers with a significant ramp in the second half of the year. Additional revenue growth drivers in the near future are expected from additional design wins for ACC and other hyperscalers, linear equalizers on board across multiple customers, gain chips and CW lasers in transceivers, and our market-leading 400-gig fiber edge and copper edge products for 3.2T interconnect solutions. Given the breadth of our data center portfolio and design interaction across an expanding set of customers, we expect data center year-over-year revenue growth this fiscal year to exceed 50%. Now moving to our high-end consumer end market. Net sales for Q4 were $36.6 million, down 13% sequentially and up 3% year-over-year. Net sales for fiscal year 2026 were $155.1 million, up 5% year-over-year, driven by both our TVS and per se product portfolios. Our consumer TVS revenue continues to ramp well ahead of handset volume growth, and we expect another year of revenue and design win momentum. We expect consumer TVS revenues to increase next quarter, a function of improved seasonality and share gains at the leading handset manufacturers. In addition, Persei continues to broaden its design win footprint. with adoption expanding across smart glasses and smartphone platforms in supporting both current and upcoming product launches. The integration of the force sensing portfolio is progressing well with the initial product shipments already underway Customer engagement and design wind activities continue to build, and we are increasingly optimistic about the cross-selling opportunities this combination unlocks across our combined customer base. Moving to our industrial end market, Q4 industrial net sales were $151 million, up 3% sequentially and year over year. With another solid quarter for LoRa, for the full year, industrial revenue was $584 million, 13% growth over the prior year. LoRa-enabled net sales were $39.6 million, in line with the Q3, and up 7% year-over-year, supported by continued expansion across several application verticals, such as smart utilities, smart building, smart city, and asset management. For the full year, LoRa revenues were $156 million, representing full year growth of 34%. We had a strong presence at the CES this year, showcasing new LoRa application use cases. Four themes highlighted in our presence, edge AI integration, multiple protocol connectivity, global network expansion, and the convergence of industrial and consumer IoT, together reflecting a technology that is broadening its reach across a trillion range of markets. Edge AI emerged as another defining trend, as the sensors increasingly processed data locally for latency, privacy, and bandwidth reasons our collaboration with an ecosystem partner demonstrated how LoRaWAN and Edge AI work together to enable predictive maintenance in industrial environments. Demand for a solution that combines LoRa with a multiple protocol flexibility is accelerating. In order to facilitate LoRaPlus adoption, we recently signed an agreement with a technology partner to support software development to activate and support others' protocols. We are rolling out a Z-Wave first with a Zigbee and a threat and matter to follow. We expect beta units will be available to deployment partners in Q2 of this year as a multiple protocol smart home and security solutions. The markets move towards a single-skill solutions is exactly what LoRa Plus is designed to address, reducing complexity for customers while expanding our addressable markets. Customers who purchase our LoRa Plus transceivers now get royalty-free access to an SDK and development tools, silicon and software together from a single source. Additionally, Amazon and Ring announced a new line of LoRa-powered sensors, spanning security, safety, and home control applications, all operating on Amazon's sidewalk. Ring plans to launch this product in the U.S. in March, followed by extensions across Canada, Mexico, Europe, Australia, and Japan. This demonstrates LoRa's readiness for mass market consumer adoption at Amazon scale, a significant evolution from its industrial and commercial roots. The ecosystem continues to scale, now spanning over 125 million LoRaWAN-connected devices across 70 countries, well beyond early adoption and into mainstream deployment. With LoRa technology, we now have established three pillars of low-power connectivity platforms. LoRaWAN, LoRaPlus with multiple protocols, and Amazon Sidewalk. With these sales vectors, we believe LoRa's long-term sales rate to be approximately 20% and quarterly sales to range from $35 to $45 million. Our IoT systems and connectivity business recorded Q4 net sales of $89.9 million, up 2% sequentially and down 3% year-over-year. For fiscal 2026, revenues were $354 million, up 9% compared to last year. We continue to bring products to market that address gaps in how industrial customers connect to remote infrastructure. In Q4, we launched the AirLink RX400 and the EX400, the industry's first rugged 5G REDCap routers purposely built for mission-critical industrial deployments. These routers deliver 5G performance with less than one watt of the idle power, roughly one-tenth of the draw of standard 5G equipment. making solar and battery-backed deployment practical for the first time. This allows our utility, oil and gas, and transportation customers to operate in remote locations where grid power is not always available. Customer engagement at the distribution pack in February reinforced our conviction that this product is well-timed to address a real market need. Looking back on fiscal 2026, I'm proud of what the team had accomplished. We delivered a strong revenue and earnings growth through disciplined execution, a differentiated portfolio, and a relentless focus on the customers and the markets where Semtech can win. This was not just a strong year financially. It was a year in which we fundamentally strengthened Semtech's foundation. Looking at where we stand today, I'm more confident than ever in our positioning. The AI data center build-out is one of the most significant infrastructure investments in a generation. And we believe Semtech is well positioned with a broad purpose-built portfolio of solutions designed for 1.6T and 3.2T era. We believe our continued investment in our core assets through R&D and acquisitions helps ensure we are not just keeping pace with the next generation technology. We are helping to define it. And importantly, we now have the financial flexibility to diligently evaluate and pursue the strategic investments that will accelerate our growth. We enter fiscal 2027 with the momentum with a clarity of purpose and with a stronger syntax than we have had in years. I want to thank our employees, our customers, and our shareholders for their continued confidence in us with just getting started and the opportunities ahead has never been more compelling. Our key focuses for 2027 fiscal year include, one, accelerating business growth by supporting customer runs with sufficient availability and strong operational metrics as we compete in a capacity-constrained environment. Two, intensify R&D investment to add new drill drivers and solution differentiation by maintaining diligent governance of R&D investment with a goal of driving customer wins and delivering strong financial returns. transforming Semtech by strengthening our winning culture and making major progress in portfolio optimization. With that, I will now turn the call to Mark for additional details on our financial results and our outlook for the first quarter of fiscal 27. Mark?

Thank you, Hong. For Q4, we recorded our eighth consecutive quarter of net sales growth, with record net sales of $274.4 million. above the midpoint of our outlook and up 9% year-over-year. For the fiscal year, net sales were $1.05 billion, up 15% year-over-year. Net sales trends by end market, reportable segment, and geographic region are included in the accompanying earnings presentation. Addressed gross margin was 51.6%, above the midpoint of our outlook. Total semiconductor products gross margin was 61.7%, up 40 basis points sequentially and up 350 basis points year-over-year. Total semiconductor products gross margin was above the high end of our outlook range, the result of favorable mix from our LoRa and data center portfolio. We expect gross margin contributions from new data center products from our copper and optical 1.6T portfolio ramping in the second half of this year will be accretive to both our semiconductor products and signal integrity products gross margin. IoT systems and connectivity gross margin was reflective of MIX-related net sales growth in cellular modules, with Q4 at 31.6%. Adjusted net operating expenses were $91.5 million, slightly above the midpoint of our guidance range. Adjusted operating income was $50.0 million, adjusted operating margin was 18.2%, adjusted EBITDA was $57.4 million, and adjusted EBITDA margin was 20.9%. with all of these metrics above the midpoint of our guidance range. Reflective of capital structure changes, CEMTEC was in a net interest income position in Q4 at $0.1 million, which reflects a sizable change from the $11.2 million of net interest expense reported a year ago. For fiscal year 2026, adjusted net interest expense was $11.5 million compared to $70.6 million in fiscal year 2025. We recorded adjusted diluted earnings per share of 44 cents above the midpoint of our guidance and full year adjusted diluted earnings per share was $1.71. Operating cash flow for Q4 was $61.5 million, sequentially up 30% from $47.5 million and up 84% from $33.5 million a year ago. Free cash flow for Q4 was $59.1 million, sequentially up 32% from $44.6 million and up 91% from $30.9 million a year ago. Operating cash flow and free cash flow for the standalone fourth quarter each exceeded the amounts reported for all of fiscal year 2025, driven by improvements in both our capital structure and operating performance. Strong cash flow generation has allowed us the operational flexibility to invest in R&D projects as well as to invest strategically via Tuckins. The increased R&D investment in our core data center, LoRa, and sensing portfolio has yielded strong returns. The aggregate consideration for the four sensing portfolio we acquired in October 2025 and the laser engagement business we acquired in March 2026 is less than the free cash flow we generated from Q4. I believe our balancing of R&D spending along with prudent use of capital for capacity expansion and acquisitions positions us to generate meaningful long-term returns for our shareholders. We ended Q4 with a cash and cash equivalence balance of $195.2 million and debt was $503 million, unchanged from last quarter. Our adjusted net leverage ratio was 1.3 as of the close of Q4, down sequentially from 1.5 and down year-over-year from 2.3. Now turning to our outlook for the first quarter of fiscal year 2027. We currently expect net sales of $283 million, plus or minus $5 million, of 13% year-over-year at the midpoint. We expect net sales from an infrastructure end market to increase sequentially, supported by projected sequential data center growth of 12%, including initial Copper Ridge production shipments supporting a hyperscaler at the tail end of the quarter. We expect net sales from our high consumer end market to increase about 9% sequentially, or about 13% year-over-year, benefiting from improved seasonal trends, market share gain in our TVS products, and contributions from the force sensing portfolio we acquired in the fourth quarter. We expect net sales from our industrial end market to be about flat, with LoRa increases offsetting decreases in IoT systems and connectivity. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 52.8%, plus or minus 50 basis points. Our gross margin outlook for our total semiconductor products is expected to be 60.4%, plus or minus 50 basis points, down 130 basis points sequentially, and include initial ramp costs from the HIFO acquisition. Adjusted net operating expenses are expected to be $96.9 million, plus or minus $1 million. resulting in adjusted operating margin at the midpoint of 18.6%. Included in the higher first quarter adjusted operating expense outlook are R&D costs associated with the addition of the force sensing business along with increased investment in support of our growing data center portfolio, including the HIFO acquisition. We have demonstrated strong returns on our R&D investment and expect incremental returns from these investments. Adjusted EBITDA is expected to be $59.5 million plus or minus $3 million, resulting in adjusted EBITDA margin at the midpoint of 21%. We expect adjusted interest and other expense net to be approximately half a million dollars. We expect an adjusted normalized income tax rate of 72% for all of fiscal year 2027, an increase from 15% in fiscal year 2026 due to a geographical shift in pre-tax profits. These amounts are expected to result in adjusted diluted earnings per share of 45 cents plus or minus 3 cents based on a weighted average share count of 96.6 million shares.