Semtech Corporation

Welcome to CEMTEC Corporation's first quarter 2027 earnings conference call. At this time, all participants are in a listen-only mode. Following our prepared remarks, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mitch Haas, Senior Vice President of Investor Relations for CEMTEC. Please go ahead.

Thank you and welcome to CEMTEC's first quarter 2027 financial results conference call. Participants on today's conference call are Hong Ho, President and Chief Executive Officer, and Mark Lin, Executive Vice President and Chief Financial Officer. Today, after the market closed, we released our unaudited results for the first quarter end at April 26, 2026, which are posted along with an earnings call presentation to our investor relations website at investors.semtech.com. Today's call will include various remarks about future expectations, plans, and prospects, which comprise forward-looking statements. Please refer to today's press release and see slide 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 actual results and events to differ materially from those anticipated or projected on today's call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call, and we'll also be referring to results for our first quarter of fiscal year 2027, unless otherwise noted. Please see today's press release and slides three and four 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. Good afternoon to all of you joining today. Semtech is off to an exceptional start in fiscal year 2027, delivering record quarterly revenue supported by very strong bookings and backlog. We drove strong sequential and year-over-year revenue and earnings growth. expanded our data center, and lower design wind pipeline, all while advancing our R&D and strategic initiatives. We believe we have built a robust foundation to solidify and expand our presence in key markets. My strong conviction in Semtech's positioning is rooted in the transformation we have seen across Semtech employees. Motivation to engage in the partner across the ecosystem, and an appreciation for the benefits of collaboration. The time I have invested has been energizing, and I have appreciated opportunities to join my Semtech colleagues in meeting with hyperscalers, device designers, end customers, module manufacturers, and our technical partners to understand their technology roadmap firsthand Those conversations shaped our R&D priorities and gave us first insights into where the industry is heading and how Semtech can remain at the forefront. My team and I spent time with the key suppliers and distributors to round out our understanding of how Semtech can partner with our customers to win from design to delivery. Looking at the Q1, Revenue was $291 million, up 6% sequentially and up 16% year over year, driven by continued outperformance in both data center and Elora. Adjusted diluted earnings per share were 51 cents, up 34% year over year. In addition to delivering strong revenue and earnings growth, we're laser focused on executing our portfolio optimization initiatives. We are pleased to report that the investiture process for our cellular module business is at its final stages. Discussions which are transition and integration in nature are progressing well. We remain confident this business is a compelling opportunity for the right acquirer, and we look forward to bringing this process and transaction to a successful close. Now let me move on to a discussion of our end markets. For Q1, infrastructure net sales were $98.8 million, up 14% sequentially, up 36% year over year, strongly supported by our growing data center business. Our net sales for data centers in Q1 were a record $71.6 million, up 14% sequentially, and up 39% year over year. Benefiting from strong demand across our broad portfolio, the result of sustainably increased customer engagement, portfolio alignment, and supply assurance. The strength is anchored by our strong position in our 800 gig fiber edge portfolio. Demand for leading PIA solutions is exceptionally strong, growing across a wide range of transceiver programs. Based on our differentiated technology and ability to supply, both established and emerging module suppliers have qualified us on several new sockets, some on a sole-source basis. We understand these module suppliers are winning shares in key megadata center deployments. On 800-gig linear pluggable optics, or LPO, our fiber edge linear TIA and driver solutions are deployed by several leading hyperscalers across both the US and in China, which contributed to sequential LPO revenue growth, a trend we expect to accelerate over time. We remain confident Our foundation in 800 gig will continue to drive revenue growth throughout this year, further augmented by significant opportunities at our 1.6T shipments, launching in Q2 and gaining momentum in the second half of the year. On 1.6T optical, we generated significant design wins with the major optical module makers for their 1.6T transceivers incorporating the latest generation DSPs. This contributed to exceptionally strong bookings and backlog to support module ramps in the second half of the year. We're also seeing increased convection from hyperscalers around 1.6T linear receive optics or LRO and LPO as a preferred solution for a first layer scale of fabric due to the substantial power savings. Looking further ahead, we are participating in the development of the MPO, or Near Package Optics MSA. And to see MPO as a meaningful content expansion opportunity for Semtech, that's 800 gig and 1.60 successes in LPO and LRO give hyperscalers confidence in the next evolution of high-density and low-power optical solutions. We're also developing derivative components with the same core IP in different form factors to support several MPO projects for leading hyperscalers. We are actively participating in and support the XPO MSA, and the many XPO module designs incorporate our FiberEdge chips as they do in OSLP modules. We believe XPO provides a very compelling alternative to CPO scale-out. By leveraging liquid-cooled capabilities, proven technologies and components, and establish the innovative optical module ecosystem, XPO can provide significant rack space savings along with improved serviceability and better reliability. On the Copper side, we are very enthusiastic on Copper Edge deployment. ACC continues to gain meaningful traction. Customers evaluating ACC against incumbent solutions are seeing compelling advantages in link margin versus direct attached and power savings versus DSP-based solutions. Consistent with our expectations, in Q1, we started shipping CopperEdge 1.60 ICs to our cable partners for deployment at a US hyperscaler. In onboard integration applications, including active backplane, CopperEdge linear equalizers are gaining momentum. Just as we were confident of ACC's acceptance and ramp in the market, we have increased confidence this engagement will convert into design wins and widespread market adoption. Based on our engagement across different sectors of the industry, we believe we are creating a multi-year pipeline of corporate edge opportunities, design wins, and revenue. Looking forward, We are excited by the opportunity from the HIFO acquisition we completed in March. HIFO is reported in our signal integrity product segment, and its indium phosphide photonic products are reported in the data center and market. These products are a strategic building block in 1.6T and 3.2T optical modules. and a key pillar in our strategy to support next-generation data center requirements. We believe our GaN chips has become the industry standard, providing higher power and serving as reliable building blocks in tunable lasers for coherent modulation applications in metro and data center interconnects. GaN chip demand currently exceeded our supply, but our capacity expansion plan is on schedule. We believe our continuous wave of CW laser design is uniquely differentiated to deliver higher conversion efficiency, superb far-field beam profile and over-temperature performance, and narrower land width. These lasers have been sampled to and evaluated by several major module manufacturers for coherent light modules in scale across applications. concurrently we are optimizing our laser drivers and tias for coherent light applications we plan to provide a comprehensive suite of photonic and electronic component solutions for this emerging high volume applications in addition we're also working with the key customers to make dense wavelength division multiplexing of DWDM lasers optimized for emerging CPO scale-up applications based on the newly established OCI MSA. This is exactly the kind of strategic investment we believe creates durable and compounded value. Not just a single product win, but a platform capability that strengthens our position across a broad spectrum of optical architectures our customers are building to work. STEMTech is uniquely positioned at this intersection with a portfolio that spans scale-up, scale-out, and scale-across, addressing the full hyperscale interconnect stack across both near-term deployment and next-generation architectures at 800G, 1.6T, 3.2T, and beyond. Finally, given the strength and depth of our backlog, expanding design wind momentum and the 1.6T fiber edge and copper edge inflection building into the second half, we are targeting 35% sequential revenue growth in Q2 for data center, which would represent 85% growth over the same period last year. Based on the current order trend, we expect accelerating demand throughout fiscal year 2027 and beyond. Now, moving to the high-end consumer end market. Net sales for Q1 was $38.4 million, up 5% sequentially and up 8% year over year. Our TVS business continues to demonstrate impressive resilience and momentum, with the revenue growth outpacing underlying handset volumes. We continue winning shares and expanding content at the premium brand handset manufacturers. Our differentiated technology is aligned with the right customers and the alignment is translating into consistent design with momentum that we expect to continue. Beyond handsets, we are actively expanding the TVS franchise into higher value applications. Our newest surge switch solution is the industry's first circuit protection device to deliver near-constant clamping voltage for high-voltage power delivery applications, addressing a meaningful protection gap at the more demanding power standards extending into rugged mobile devices and high-performance portable systems. These are elements that require consistent reliable protection across extreme temperature range and operating conditions. And our solution is purpose-built to meet that bar. We see this as a natural and incremental content expansion that broadens the TVS opportunity beyond our core handset market. We continue to expand our per se capacitive sensor design wins in specific absorption rate and smart variable applications. The addition of the four-center business enriches our high-end consumer portfolio, expands application verticals, and pulls through some cap and TVS sales with the same customer base. The synergies have played out as we planned. For the high-end consumer end market, we expect sequential revenue growth driven by improving seasonality layered on top of the share and content gains that are becoming a defining characteristic of this business. Moving to our industrial end market, Q1 industrial net sales were $153.9 million, up 2% sequentially and up 8% year over year, driven by another great quarter for LoRa. LoRa enabled net sales were $44.5 million, up 12% quarter over quarter, and up 14% year over year, supported by continued expansion across several application verticals, such as smart utilities, smart building, smart city, and asset management. As Edge AI transitions from concept to deployment reality, LoRa Plus is emerging as a key enabler. Our fourth-generation LoRa platform delivers dual-band capability while dramatically expanding data throughput to 2.6 megabits per second, a step-change increase that unlocks new AI application classes. At the same time, LoRa Plus maintains the best-in-class sensitivity, multi-protocol flexibility, and ultra-low power consumption that define the LoRa advantage. preserving the extended reach and the long battery life our customers depend on. We are seeing LoRa Plus gaining traction across a broad set of use cases. LoRa connected public safety sensors can now transmit high fidelity audio and AI verification rather than simple alert. In health care, fault detection systems can relay visual confirmation before dispatching responders. In industrial environments, predictive maintenance sensors can analyze vibration, thermal, and acoustic profile with a level of detail that legacy low-power sensors could not support. We have established three distinct and complementary pillars of low-power connectivity platforms. LoRaWAN for industrial and commercial deployments, LoRa Plus with multiple protocol flexibility for smart home and security market, and Amazon Sidewalk for mass market consumer applications. Together, these growth vectors give rise to accelerated growth in our LoRa business as we target LoRa revenue at an all-time high with greater than 15% sequential quarterly revenue growth for Q2. Our IoT systems and connectivity business recorded Q1 net sales of $88.3 million, down 2% sequentially and up 2% year over year. Our newly released AirLink RX400 and EX400 routers are generating strong industry reception. These are industry-leading low-power 5G cellular systems, purpose-built for mission-critical applications, and the feedback from customers has been consistently positive. I recently attended our annual Airlink Partner Summit alongside national carriers, integration partners, and value-added resellers. And the enthusiasm for both the router performance and our upgraded Airlink management software was clear. The close collaboration with our channel partners position us to scale successful use cases from regional to national deployment and accelerate this high margin business. We are off to a strong start, and the momentum is building. Our data center business is firing on all cylinders. LoRa is entering a new chapter of growth, and the strategic decisions we have made in prioritizing key R&D efforts Enhancing supply assurance and portfolio optimization are all translating into tangible results and the financial flexibility to pursue strategic opportunities. Our priority for fiscal 2027 are straightforward. First, accelerating growth by supporting customer ramps with availability and operational excellence required to compete in this capacity-constrained environment. Second, intensifying R&D investment to add new growth drivers and deepen our solution differentiation, specifically in component offerings for coherent light, CPO, LoRa, and sensors. And third, continuing to transform Semtech by strengthening our culture and completing the initial steps of portfolio optimization. We are just getting started, and the opportunities ahead have never been more compelling. With that, I will turn the call over to Mark for additional details on our financial results and our second quarter outlook. Mark?

Thank you, Hong. For Q1, we recorded our ninth consecutive quarter of net sales growth, with record net sales of $291 million, above the high end of our outlook range. Net sales grew 16% year-over-year, while adjusted diluted earnings per share of $0.51 increased 34% year-over-year. Net sales trends by end market, reportable segment, and geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 53%, 20 basis points above the midpoint of our outlook, and total semiconductor products gross margin was 60.7%, 30 basis points above the midpoint of our outlook. Both reflective of a favorable mix from our data center and lower portfolio. For our signal integrity product segment, Q1 gross margin was 62.7% compared to 67.4% in Q4. Q1 is the first quarter of operating our recently acquired Indium Phosphide facility. This facility is in ramp mode to meet very strong customer demand, and I'm pleased with the integration team's progress in meeting its operating and financial targets. We continue to expect gross margin contributions from our 1.6T data center portfolio to be accretive to both our total semiconductor products and Signal Integrity Products gross margin. Gross margin for IoT systems and connectivity was 35.8%, up sequentially from Q4's 31.6%. Adjusted net operating expenses were $95.1 million, slightly favorable to the low end of our guidance range, selective of timing on project-related expenses. Demonstrating the operating leverage in our business, a number of metrics were favorable to the high end of our guidance range, including adjusted operating income of $59.3 million adjusted operating margin of 20.4%, adjusted EBITDA of $66.4 million, and adjusted EBITDA margin of 22.8%. Reflective of capital structure changes, Semtech remained in a net interest income position in Q1. We recorded adjusted diluted earnings per share of 51 cents, above the high end of our guidance range. Operating cash flow for Q1 was $36.2 million, sequentially down 41% from $61.5 million and up 30% from $27.8 million a year ago. Free cash flow for Q1 was $28 million, sequentially down 53% from $59.1 million and up 7% from $26.2 million a year ago. Q1 operating and free cash flow reflect fiscal year 2026 annual bonus payments. In addition, net acquisition consideration of $29.2 million is reflected in our Q1 ending cash and cash flow equivalence balance of $163.3 million. Principal amount of debt was $503 million, unchanged from last quarter. Now, turning to our outlook for the second quarter of fiscal year 2027. We currently expect net sales of $328 million, plus or minus $5 million, up 13% sequentially, and up 27% year-over-year at the midpoint, with growth expected across each of our three segments. We expect net sales from our infrastructure and market to increase sequentially, with projected sequential data center growth of 35%, supported by accelerating shipments of 800 gig and 1.60 components. We expect net sales from our high-end consumer end market to increase, benefiting from improved seasonal trends, market share gain on our TVS products, and contributions from our sensing portfolio. We expect net sales from our industrial end market to broadly grow with accelerating contributions from LoRa, IoT systems and connectivity, and industrial TVS. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 54%, plus or minus 50 basis points. At the midpoint, this equates to an increase of 100 basis points sequentially and 80 basis points year-over-year. Our gross margin outlook for our total semiconductor products is expected to be 62.1%, plus or minus 50 basis points. At the midpoint, this equates to an increase of 140 basis points sequentially and year-over-year, reflective of stronger data center and lower mix. Adjusted net operating expenses are expected to be $105.2 million, plus or minus $2 million. Included in this outlook is increased R&D spend to accelerate time to market on key data center projects, along with SG&A that declines as a percentage of revenue. We have demonstrated strong returns on our R&D investment and believe we remain prudent on SG&A spend. This results in adjusted operating margin at the midpoint of 21.9%, up 150 basis points sequentially, and up 310 basis points year over year. Adjusted EBITDA is expected to be $79.2 million, plus or minus $2.3 million, resulting in adjusted EBITDA margin at the midpoint of 24.2%, up 140 basis points sequentially, and up 230 basis points year over year. We expect adjusted interest and other expenses net to be approximately half a million dollars. We expect an adjusted normalized income tax rate of 17%, consistent with last quarter's outlook. These amounts are expected to result in adjusted diluted earnings per share of $0.61, plus or minus $0.02, up 20% sequentially, and up 49% year over year at the midpoint, based on a weighted average share count of 97.7 million shares.

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

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Rick Scafer with Oppenheimer and Company. Please proceed with your question.

Thanks, guys, for letting me ask a question. Congrats on another good quarter. As long as I could, maybe my first question, I didn't hear you mention it on the call, and I'm sorry if I missed it, but where do we sit now with ACC MSA specs, and when do you expect that we'll get those specs finalized? Because I'm really curious if you think interoperability is holding back the ACC ramp at all, and if you think ratification, I mean, did that create sort of that dam burst moment with some of the other CSPs? So that's my first question. I'm just curious what you think about that.

Yeah, Rick, thank you. That's a good question. I did not mention in my prepared script, but that's a good point. So MSA, they announced right around the design time. they're still working on finalizing the specification. You are right. When every industry participants, they're on the same page, it will help to accelerate the adoption of the ACC. Currently, they are working on the common denominators, as you can imagine, from different cable manufacturers. There are some related to the cable design. There's some performance related to the manufacturing processes. They just wanted to segregate those different impacts and define a standard and specification that every cable manufacturer can go with and sign off for. So, yeah, that can be a catalyst for more accelerated adoption of ACC.

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

Thanks. Yeah, Rick, that's a great question. This is a time capacity is king. So we anticipated that we started working on the capacity and availability. You hear me like a broken record to talk about making it available over the past quarters. And we started about 18 months ago. I am so happy to say that in this very supply-constrained environment, we're doing quite well. We have the availability. We have the right product. We have the right customer engagement. We can support even the drop-in orders. That's why our momentum is building so fast. Going forward, Looking into the visibility, the booking and outlook opportunities, clearly the capacity we have put in place is not going to be serving us well going forward. And we have already started to effort lining up with our foundry and OSAT partners, adding capacity in testing. So we are building capacity further, double or triple the current capacity. And that's how our conviction is supporting our current planning process.

Thank you. Our next question comes from the line of Sean O. Laughlin with Cowan & Company. Please proceed with your question.

Great. Thanks, gentlemen. Good afternoon, and thanks for letting me hop on and ask a question here. Congrats on obviously the really solid results and guidance. Hong, one of the things that I perked up at during your prepared remarks was you mentioned the narrow line with CW lasers in the context of coherent light, but then you talked about DWDM and the OCI MSA. in the CPO scale up side. And I thought that was interesting because I think that, you know, the CW and ultra high power lasers is kind of how we're going about CPO for scale up today, but maybe you're anticipating a shift in how we're going after that in the future. And I was just wondering if you could expand on that and talk about sort of where, you know, the hypho, business is investing their time and where they're, you know, is this an organic investment that's coming out of the asset that you acquired or is there still more to go on either the hiring front or the capex front to make this a reality?

Sean, thank you. That was a very good question. Well, good questions first. The coherent light clearly is going to be a major application. As data centers right now consume a lot of power, you cannot build this mega data center in isolation, in more a cluster of data centers. So scale across to be able to interconnect with high bandwidth to different data centers is very, very important applications. I mentioned about my customer sensing trips and talked to 10 different leading module manufacturers. They are all supporting our conviction and the vision of the coherent light is going to be ramping up in the mid-2028 in production. We, through the acquisition of HIFO, have the right product. Our DFB laser, CW lasers, has a narrow line width. well below 300 kilohertz. That is so perfect for coherent light applications. As I mentioned, we have sampled to some key module manufacturers and getting great feedback. So we're in a qualification process for that, building upon the acquired product from HIFO. As for CPO, that's clearly is going to be high-density, low-power, high-bandwidth transport solutions, right, for future scale-out and scale-up. As I mentioned in the past, just the current way of the CPO, our fiber edge product is going to be, it's not going to be, it's not an opportunity for fiber edge product because the customers will be using integrated solutions. So we have to be developing applications to participate meaningfully in this huge emerging opportunity. This so happened that the HIFO acquisition, the lasers we bought, and also the game chips and semiconductor optical amplifiers can really serve the part of the light sources for CPO scale-up applications. So we're working internally, we're also working with the partners to provide high-power DWDM CPO laser source solutions. This is more for 2028 opportunities. So you see our pattern, we're not only investing in the current generation, not only investing in the gross driver for the immediate next year, but a year after that as well. So we got a very healthy pipeline of new products and broaden our portfolio serving the high bandwidth AI data center connectivity space.

Awesome. Thanks for all that color on very clear. Wanted to ask Mitch, I mean, guiding for I think more than $10 million sequentially in OpEx. Presumably, that's, you know, not necessarily all going to snacks for the break room, but maybe you could just talk about You mentioned R&D spend, and SG&A was coming down as a share of total sales. But where are your focus points? Is it going to hiring? Is it going to, you know, are there maybe non-CAPEX-type expenses, prepayments, anything like that? That would be helpful. Thanks.

Sean, you know, we expect to continue to invest in the business. We've said that that's kind of our number one use of capital in capital allocation. And the vast majority of the incremental spend is going towards high conviction R&D programs, largely in data center, but also supporting LoRa. And it's not an SG&A. So maybe just allow me to add some percentages to that color, right? So R&D in Q1, the Q1 that we just closed, R&D was 17.6% of net sales. That's 20 basis points higher than a year ago, and up 17% year over year. But when I compare that to to SG&A. In this Q1 that we just closed, SG&A was 15.1% of sales. That's a decrease of 200 basis points. And SG&A as a percentage of sales has been in a steady decline, and we project this decline to continue in Q2. So our OPEX growth is really grounded in organic investment in our core products, data center and LoRa. In terms of the composition of spending, there's hiring and there's product spend as well. But really, I think the key is that we see some very good returns on this R&D investment.

If I may double-click, the 15% SG&A is actually sales and field application engineering are increasing sequentially. So what gets squeezed of getting more operational leverage is the G&A cost.

Thanks, guys. Really helpful and congrats again. Thank you.

Thank you. Our next question comes from the line of Christopher Rowland with Susquehanna. Please proceed with your question.

Thanks, guys, and I want to echo my congrats as well. I did want to double-click on optical, perhaps a question for you, Hong. If you could talk a little bit more about the contributors to growth there in particular, how much of this is LPO, how much of this is, you know, a single module maker versus a broad 1.6T deployment, and any update on timing for CW and CIFO chips would be great as well.

Thank you, Chris. Thank you for your questions. For Q1, the predominant data center revenue are the 800 gig, FRO, and LPO. We do see a clear trend of sequential increase from a single digit reported in Q4 for LPO. We're seeing sequential increase, and the 800 gig is the main driver for the revenue for Q1. Into Q2, we're going to be having the early, the Q1 we also have the early ramp of the copper edge revenue to support the second half of significant ramp in the cable demand. So in Q2, we are going to be seeing the continued strength of 800 gig fiber edge for both FRO and LPO. We're going to be continuing to see the ramp of 1.6T copper edge to support ACC for the second half, and we're going to be for the first time seeing the fiber edge revenue to support 1.6T optical transceivers in the new DSP designs. As for the revenue source, it's very broad-based. We, as I mentioned, have qualified with almost all module manufacturers, established and emerging ones, and we were able to serve some drop-in demand, even in Q1, because they were not in the forecast, and they are very important strategically for us to go forward, and we wanted to support their initial volume even well within the lead time. Excellent.

Yeah, sorry, go ahead.

No, no, no, hopefully that answers your question for those, yeah.

Yeah, that did. Maybe switching to the copper side, I think you answered a bunch on ACC's. I guess my only question there is maybe diversification beyond your main customer, how is that progressing? And then in your presentation, you mentioned linear equalizers, I think, on PCB about active backplane applications. If you can speak a little bit more there on the opportunity, that would be great.

Yeah. Thank you. So, on the ACC diversification, we continue to having samples being evaluated by multiple hyperscalers. enterprise customers and that reception has been going well and as Rick early on asked you know the MSA for ACC is going to help as well and we were actually also see the exciting opportunities from problem multiple physical customers on the linear equalizer on board and Those are for the real programs, and we have the hyperscaler engagement. We have their manufacturing partner, ODMs, close engagement as well. So this is really going well. We do expect, as I said, from linear equalizer, onboard, on the backplane, and also ACC cables, additional design wins in coming quarters. You know, early on, people have some doubt and speculation on, oh, copper is to the end of the life. We need to put a terminal value on it. Just not yet. This is going not only strong, it's very strong on higher data rate as well. Beyond 224 gig, we're engaging with customers who support higher data rate as well. So, we're very optimistic about CopperEdge product for its growth potential in the future.

Thanks, Hong. Congrats again.

Thank you. Thank you, Chris.

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

Hey, guys. Also, I'll offer my congratulations on the nice results and outlook. I just wanted to follow up on Chris's question there on the onboard linear equalizer opportunity. You mentioned hyperscalers. But I was going to ask kind of from a signaling perspective, are you guys seeing demand for linear equalizers for both unidirectional SERDs? on those backplanes as well as bidirectional CERTIs? Can you just talk about your ability to support both UNIDI and bidirectional CERTIs on those backplanes? And then I'm going to follow up.

Yeah. Thank you, Quinn, for that question. Yes, we did get request for that BIDI linear equalizer as well. So our current CopperEdge portfolio can only support unidirectional And our engineers have been put on a drawing board. We have a preliminary architecture formulated to be able to do bi-die on one chip and to support the future more compact interconnect topology.

And any idea when that might be ready? Would that be ready calendar 27?

So once the process is once we Define the product and product definition will go through the simulation stage clearly by that integrated in one package need to be very carefully balanced so that they don't have the crosstalk and introducing additional noise, but it's totally doable and We just start looking at the different competing priorities and getting that defined so we are in a stage of engaging with the customers and and trying to sync up with the model. And therefore, after that, we will allocate resources and start doing the development. The good news is the key building blocks of IP, we already have that in existence. The Copper Edge product, we have three generations in going for different noise suppression and different frequency domain equalization schemes. And we have rich building block IPs available to drag and drop and getting a product put together pretty quickly.

Thank you, Hong. And then I guess either for Mark or Hong, you talked about expecting data center growth to accelerate, if I've got my numbers right. Looks like with the 35% sequential growth in the July quarter, your data center business in the first half of 27 will be up about 62% versus the first half of 26%. Would you care to give us some sense? Do you think the entire data center business, could that grow 70, maybe 75% year-on-year in fiscal 27? I think last quarter you had expressed confidence in 50% year-on-year growth for data center.

Yeah, Quinn, so you're right. In last quarter, you know, that floor number, you know, certainly created some confusion. I will not let our growth potential or aspiration, I will not cap that for the year over year. As I said, Q2 to Q1, we are very comfortable about the crystal 35% quarter over quarter growth, and based on the visibility, the backlogs, and the booking we have, we can comfortably say in that second half The growth rate is going to be accelerating because of the additional growth drivers in 1.6T copper etch and fiber etch 1.6T and hyphal optical components. So it's going to be an exciting year in FY27, and we'll be having the unprecedented year-over-year growth.

Looking forward to it. Thank you. Thank you.

Thank you. Our next question comes from the line of Cody at Cree with the Benchmark Company. Please proceed with your question.

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

Yeah, so, Cody, thank you. The 1.6T, the current design wins we have from multiple major module suppliers in serving different end markets. They're either hyperscalers or a GPU company providing the system solutions. So, the initial ramp is going to be FRO, fully retimed optics. And we do have the linearized drivers and TIAs provided to the module customers. They're in an evaluation to do LRO or LPO at 1.6T. But the initial volume ramp is going to be FRO. And we do have the right product in the pipeline to be evaluated by our module customers.

And Hong, can you maybe help us reframe the total available addressable market for both ACC's and LPO's as you exit this year and look into next?

Yeah. So, Cody, I think, you know, we will probably when we think that portfolio cleaned up, we're going to be having a tech day or analyst day. And at that time, we'll be providing more comprehensive TAMs. projection and for our broad product portfolio. So at this point, we are just aggressively attacking the opportunities ahead of us. We will be having more quantitative information provided in the future.

Excellent. Thank you, guys. Thank you.

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

Hi. Good afternoon. Given the commentary about Broadcom's CPO ramping in main volume not until 2029 and the potential for ACC to be at 800 gig per lane, How should we look at the duration of the double-digit growth that you see in ACC? Obviously, the business is very strong now, but, you know, do you think that that business continues to grow three, four years from now, and how well positioned you are from a technology standpoint, particularly as we get new waves of switches that have stronger surrogates?

Yeah, Tristan, thank you for the question. So yeah, Broadcom clearly their industry leader. It provides outstanding service quality and with a good signal integrity that has been the essential performance enabler for the linear re-driver. And because if the signal come out not very good, linear re-driver cannot make it hold a lot better. So we are the pure beneficiary of the Broadcom Good 30s rather than a victim. Their 100 gig, 200 gig, and going to 800 gig per lane in the future, they can go for certain distance, the so-called bump-to-bump link budget. The re-driver linear equalizer can only make it better to stretch the reach to improve the signal integrity compared to the cables or trees without it. So this is really a complimentary capability. It's not like they're better service would not need a linear equalizer in a way, as you know, that the current ACC cable customer, they are using Broadcom service as well. And we have our linear equalizer in the ACC cable to support the interconnects. And their CPO is primarily, my understanding, the current roadmap is support CPO scale out. They're the leading switch provider anyway without a CPO or with CPO. So motivation for them to do CPO could be a little bit different from the other leader in the industry. That's for 800 gig per line, and that is two generations ahead. And in general, as the data rate goes up and the transmission distance is shortened. And the rack, on the other hand, is going to be going bigger. So the topology will have to require a longer length So you can do CPO to have the optical scale up, but you always have some traces. It's just too overkill to use optical scale up. And by putting a read driver in between, you may as well just extend the reads long enough to allow the copper scale up. So this is a complementary capability. I think it's going to be there for a long while.

Okay, thank you. That's very useful. And then could you talk about your medium-term views on LOA? Clearly, it's rebounding. We're past the inventory accumulation that we saw a year and a half ago. You know, where could this business grow in the next few years? How does that improve the mix? And also, any update on whether the deployments that you see this year and next year are primarily driven on the base station side or the actual sensor side? And I don't know if there's any numbers, you know, to back up versus base station product for LOA.

Yeah. So, yeah, there's several questions. Let me try to address a couple of them. First of all, the growth potential we see is really exciting. As we mentioned, the three things we did in increasing the bandwidth and increasing the LoRa capability by adding other RF protocols to unlock new application verticals like security, like a smart building, and the mass market like Amazon Sidewalk. Those are all bringing new growth drivers to LoRa. The second question is really a good one. Tristan, you know this market well. And we see, if a year ago, Alora drills had been primarily on the end nodes. So we are increasing the end node right now to, what, 150 million end nodes? But started from last nine months, 12 months ago, and all integrators have been commenting, oh, they are adding new gateways. That means they have more sensor devices, and they need to improve the coverage and the capacity. So that's where the gateway increase, and they will be just pulling in more capacity for end use, end node applications. So that's why we see this lower driven by the three pillars is going to be sustainable. One wild card is the Edge AI application. So it's an exciting opportunity, and we're just starting. So we have been helping the market and generating a lot of collateral and making the market enablement effort to accelerate the growth on that. Thank you, Tristan.

Great. Thank you very much.

Thank you. Our next question comes from the line of Kyle Smith with Stiefel. Please proceed with your question.

Hey, everyone. This is Kyle Smith on for Tori Sponberg at Stiefel. I'll also echo my congratulations on the really strong print and guide. I think in your prepared remarks, you mentioned that gainship demand currently exceeds your supply. So a bit of a two-parter. One, it would be really helpful if you could kind of quantify the degree to which that demand exceeded the supply. And then secondly, I know you mentioned that your capacity expansion plan is well on track, but maybe when do you kind of expect your increase in capacity to intersect with the demand that you're seeing from the market?

Thank you, Kyle. The GaN chip, as you know, HIFO and its predecessor, mCore, has been a leading supplier of GaN chip integrated into the tunable laser for natural and coherent applications. We have a solid customer base, and after the acquisition of HIFO by Semtech, we have a lot of inbound interest from the customers that HIFO has not been able to serve. So you aggregate the demand. We'll probably outpace the capacity by about 3x also. So we clearly are adding capacity by adding more shift, by adding more manufacturing space, which primarily clean room, and by adding more process equipment. So we are doing very creative ways to expand the capacity. We expect by the end of this year, we can get the capacity increased by about 3, 4x. And end of next year, it's going to be another 3, 4x. So to serve the high-end coherent market.

That's really helpful, Culler. Thank you. And I guess pivoting over to LPO and LRO, I mean, it's pretty clear that the market is growing and the opportunity just continues to expand. So I guess from your position today, you know, based on the outlook kind of that you provided on the call, so what degree do you feel that that raised guide is coming from potential market share gains? And then to what degree do you feel It's more so coming from just the market as a whole expanding meaningfully as we kind of see these deployments take shape.

Yeah, Kyle, I think the LPOLRO, we see the growth is primarily driven by the customer shift from FRO to the LPOLRO. The reason for that is that they evaluated their connectivity topology and to see where they can save power. And we do expect in a year or two time frame, the linearized solution will account for 25% plus minus of the total transceiver mix.

Thank you, and congratulations again.

Thank you.

Thank you. And our final question comes from the line of Craig Ellis with BYD Securities. Your line is now live.

Yeah, thanks for sneaking me in. And guys, congratulations on the strong results. I wanted to start off just with a clarification. So clearly we're seeing much higher growth here than we were expecting three months ago with the business seemingly tracking in the 70s range now versus a floor of 50% earlier. The question is this, where across TIAs, LTOs and ACC are we seeing the greatest acceleration versus what we were expecting three months ago?

Yeah, correct. That's a great question. We were on the road, you know, right after OFC. the dynamic has picked up pretty dramatically. The demand across the board, not on just one product, across the board for fiber edge, copper edge, 800 gig, 1.6T, LPO, LRO, and lasers, they all have demonstrated such a strong demand. So it's broad-based.

That's very helpful, Han. Thanks. One of the things that's clear from your prepared remarks in here in the Q&A is just the significant visibility you have in the back half of the year. Can you characterize across the different product groups? To what extent does that extend? Are you actually getting visibility in the fiscal 28 or is it really at different points into the back half of this fiscal year? Thank you.

Yes, back half of this year into the first half of fiscal 28.

Got it. Thanks, guys.

Thank you very much.

Thank you. And we have reached the end of the question and answer session. Therefore, I'll now turn the call back over to Mitch Halls for closing remarks.

That concludes today's call. Thanks to all of you for joining us today. And we look forward to seeing you at various investor events over the coming weeks. Good night.