Semtech Corporation

and welcome to CEMTEC's second quarter 2027 financial results conference call. Participants on today's conference call are Hong Hou, President and Chief Executive Officer, and Mark Lin, Executive Vice President and Chief Financial Officer. Before we begin the prepared remarks, I would like to highlight upcoming investor events, including the Citibank Global TMT Conference on September 8th and the Benchmark TMT and JP Morgan Rising Tech Leaders Forum both on September 10th in New York City. In addition, we hope you'll attend our investor event in San Jose on October 15th during which we'll provide an in-depth overview of Semtech strategy, differentiated technology portfolio, key growth opportunities, and long-term financial targets. The event will also feature panel discussion moderated by Morgan Stanley with industry luminaries from the 650 Group, Meta, and General Catalyst. A question and answer session, product demonstration, and opportunities for in-person attendees to engage with members of the Semtech management will also be part of the agenda. Today, after the market close, we release our unaudited results for the second quarter end of July 26th, 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 other 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 second quarter of fiscal year 2027, unless otherwise noted. Please see today's press release and slides three and four 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. The Semtech team executed exceptionally well this quarter, delivering record revenue across all key focus areas, earnings leverage that continue to outpace revenue growth, and a significant progress on portfolio optimization. Revenue was $342 million, growing 33% year over year, and we delivered strong operating leverage with earnings per share of 71 cents, growing 73% year over year, more than twice as fast as revenue growth. We are the center of one of the most significant infrastructure build-outs in history, and our portfolio plays an essential role We are well aligned with the ramp to 1.60 complementing 800 gig grills and demand signals that we are strengthening across every part of data center portfolio. Copper, fiber, and photonics. We expect this momentum to carry through the second half of the year and into fiscal 2028. We're also reshaping Semtech with purpose. The announced sale of our cellular module business is a significant step in our portfolio optimization, allowing us to more sharply focus on our core growth areas. We are growing in our focus areas, sharpening the portfolio and driving operating leverage with the same goal in mind, building a predictable high margin and high return business. Now, let me move on a discussion to our end market. Infrastructure net sales were $124 million, up 25% sequentially and 69% year over year, driven by outstanding performance in our data center business. Data center revenue was a record $100 million, up 39% sequentially and 91% year over year. supported by continued strength in 800 gig, 1.60 copper edge, and the start of a 1.60 fiber edge rep. Our fiber edge TIA and drivers solutions remain in exceptionally strong demand. And we continue to deepen our engagement across all the leading hyperscalers. We are now designed into every module provider in our target markets. and several on a sole-sourced basis, a reflection of a technology differentiation and the supply availability we bring across both fully retimed and linear architectures. We're also seeing increasing engagement from a broader array of customers on emerging technologies like MPO and XPO. and the networking ecosystem looks to us to align and help define the next generation of high density, low power optical architectures in our shared technology roadmap. On CopperEdge, we believe our linear equalizer solutions are the de facto industry standard. CopperEdge products up to 1.6T are solutions that are ready for volume deployment. We are currently engaging across a number of hyperscalers in cable and onboard applications and in design interface at all bandwidth up to 3.2T. Thanks to linear equalizers compelling advantage in link margin performance and power savings. Based on strong market demand and the design wind momentum, We expect continued revenue growth of a 1.60 portfolio, with the fiber edge expected to exceed 50% market share by the end of the fiscal year, and the copper edge already taking the lion's share of the linear equalizer market. We have made excellent progress in our photonic portfolio, broadening our customer base in both game chips and high-power CW lasers. addressing both high-speed transceivers and CPO scale-up applications. Feedback from customer evaluations of our high-power CW laser for coherent light and 1.6T transceiver applications has been very positive, citing differentiating over temperature performance and power efficiency. We expect revenue contribution of CW lasers for transceivers to start in the first half of fiscal 2028. We're also pleased to have brought onboard photodiode design resources headed by an industry leader, expanding our photonic portfolio to PD arrays in the near future. Our combined PD and PIA design team has already engaged with the key customers and we expect to deliver a co-optimized high performance solutions. Our photonic portfolio now spans game chips, high power lasers, semiconductor optical amplifiers and the high speed photo dials for scale up, scale out and scale across data center connectivity applications. With this expanded portfolio, we are positioned to develop a new growth drivers and drill our content per transceiver from high single-digit dollars to high double-digit dollars at the industry transitions from 800 gig to 3.2T, cementing our position as a true solution provider. Our capacity expansion plan our team executed very well. securing equipment deliveries for this fiscal year and acquiring clean room space to fulfill strong customer demand. In less than six months, we completed a series of photonic acquisitions, procured fab equipment, expanded clean room space, and onboarded exceptional management and technical talent. We have established a solid foothold in the photonic space and set paths for strong future growth. Given record backlog we carry into the third quarter, we project a 45% sequence of revenue growth in data center representing approximately 160% growth over the same period last year. We expect accelerating year over year growth into fourth quarter and continued momentum throughout fiscal 2028. Now moving to our high-end consumer end market. Net sales for Q2 were $39 million, up 2% sequentially and down 5% year over year. Our TVS business grew sequentially and remains very resilient in light of memory-constrained prices across the industry. Revenue growth continues to benefit from our strong share and our premium brand Henset Manufactures, where we are expanding our content per device. Third switch, our newest circuit protection solution is opening a new layer of TVS opportunity, addressing a gap as a rugged mobile devices and high performance portable systems push towards more demanding power and reliability standards. Our per se capacitive sensor design and pipeline continues to grow in specific absorption rate, smart variable, and other consumer applications, expanding with the lead customers on a broadening range of applications. The combined capacitive and force sensing offerings elevate our value proposition, strengthen customer retention, and are pulling through sensors and TVS sales within the same customer base. We expect our design wind pipeline to support the long-term growth for this business. Now moving to our industrial end market. Q2 industrial net sales were $179 million, up 16% sequentially and up 25% year over year. driven by another record quarter for LoRa. LoRa enabled net sales were $58 million, up 31% sequentially and up 58% year over year, another all-time record. A LoRa Gen4 platform with LoRa Plus, other RF protocols continues to gain market traction and we expect it will be key driver for the future growth. BN4 also delivers dual band capability and expands data throughput to 2.6 megabit per second while preserving the sensitivity, multi-protocol flexibility, and ultra-low power consumption that define the LoRa advantage. This feature set enables new class of edge AI applications while maintaining the long battery life and the extended reach that our customers depend on and opens up incremental application verticals within smart home and security. We also continue to see LoRaWAN expanding into new use cases. In public safety, sensors can now transmit high fidelity audio for AI-based verification rather than simple alerts. and industrial environments. Our work with industry leaders demonstrates how LoRaWAN and Edge AI together enable predictive maintenance at a level of the detail that legacy low power sensors could not support. Amazon Sidewalk continues to build momentum. Following Ring's launch of a new line of LoRa-based sensors in the US, The Fed Walk is now expanding internationally, starting with Canada and Mexico, with Europe, Australia, and Japan expected to follow. This is a meaningful step towards mass market consumer adoption at Amazon's scale. Together, our three pillars, LoRaWAN for industrial and commercial deployments, LoRa Plus with a multi-protocol flexibility for smart home and security and the Amazon Sidewalk for mass market consumer applications continue to create a solid framework for growth. We project another all-time high for LoRa revenue in Q3 with a growth of about 15% sequentially equating to year-over-year growth about 65%. Our IoT systems and connectivity business recorded Q2 net sales of $98 million, up 11% sequentially and year-over-year. Our Air Link routers saw strong new business activity across mission-critical applications, driven by growing engagement with the national carrier partners on 5G standalone network slicing. This momentum was reinforced by our RX-400 and EX-400 5G REDCap routers moving into full-scale production this quarter, with wins continue to convert into shipment across a broad range of customers. We also continue to invest in AirLink the software platform to provide new security and device management capabilities. These capabilities are giving missing critical customers greater visibility and control as they manage larger, more complex deployments, reflecting our broader commitment to software R&D as a way to deliver more capability and values to our customers over time. In summary, our second quarter results reflected significant progress in Semtech's transformation including a strong winning culture. But to be clear, the progress we are making is just the foundation, not a finish line. Our priorities for fiscal 2027 remain the same and are straightforward. First, supporting our unprecedented backlog and the drill opportunities, we are actively securing incremental capacity for fiscal 2028 and beyond. Second, intensifying R&D investment to support customer technology roadmaps in a rapidly advancing market and then adding new growth drivers specifically in solution offerings for lasers, photo dials, drivers, and TIAs for 3.2T, coherent light, XPO, MPO, and CPO applications. And the third, continuing portfolio optimization. We see this as a continuous journey and there's more work ahead of us as we reshape Semtech. This is such an exciting time for Semtech. The business is just starting to inflect and the opportunities ahead has never been more compelling. With that, I will turn the call over to Mark for additional details on our financial results and our third quarter outlooks. Mark.

Thank you, Hong. For Q2, we recorded our 10th consecutive quarter of net sales growth with record net sales of $342 million above the high end of our outlook range. Net sales grew 17% sequentially and 33% year over year. Reflective of leverage in our operating model, we reported adjusted diluted earnings per share of 71 cents. which increased at over two times the rate of net sales growth on both the sequential and year-over-year basis. Net sales trends by end market, reportable segment, and geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 54.5%, up 150 basis points sequentially and at the high end of our outlook. Total semiconductor products gross margin was 62.8%, up 210 basis points sequentially and above the high end of our outlook. reflecting particularly strong contribution from 1.6T Fiber Edge and Copper Edge and continued growth from our LoRa portfolio. We announced the signing of a definitive agreement to divest our cellular module business, which is recorded as held for sale on the Q2 balance sheet. To facilitate comparability for our go-forward business, we added an adjusted gross margin disclosure in our earnings release and earnings presentation that excludes the held for sale business. Excluding the cellular module business Q2 adjusted gross margin was 59.7%, or 520 basis points above consolidated gross margin, reflecting the magnitude of the structural shift on top the 150 basis points of sequential consolidated gross margin improvement. We expect to provide a gross margin outlook including and excluding the cellular module business until the close of the divestiture, which is expected to occur in the fourth quarter of the current fiscal year. We also expect the transaction to be EPS neutral on a non-GAAP basis. Adjusted net operating expenses were $103 million below the low end of our guidance range, reflecting timing of 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 $84 million, adjusted operating margin of 24.4%, adjusted EBITDA of $91 million, and adjusted EBITDA margin of 26.6%. Collective of capital structure changes, CENTEC remained in a net interest income position in Q2. We recorded adjusted diluted earnings per share of 71 cents above the high end of our guidance range, up 39% sequentially and up 73% year over year. Operating cash flow for Q2 was $69 million, up 90% sequentially from $36 million and up 55% from $44 million a year ago. Free cash flow for Q2 was $61 million, up 119% sequentially from $28 million and up 48% from $42 million a year ago. CapEx was 2% of net sales and includes expenditures to grow fab capacity, supporting gainships and CW lasers. We expect CapEx to grow as a percentage of sales but to remain manageable and generally be below 5% of net sales. though timing of construction and equipment delivery could increase this percentage slightly on a single quarter basis. Our Q2 ending cash and cash equivalence balance was $204 million, and the principal amount of debt was $503 million, and net leverage ratio was 1.1. Now turning to our outlook for the third quarter of fiscal year 2027. We currently expect net sales of $410 million, plus or minus $5 million. up 20% sequentially and up 54% year-over-year at the midpoint, with growth expected across each of our segments. We expect net sales from our infrastructure and market to increase sequentially, with projected sequential data center growth of 45% or 160% year-over-year, with continued strong contribution from our HR gig portfolio and a meaningful ramp in 1.6T copper edge and fiber edge. We expect net sales from our high-end consumer and market to increase, benefiting from seasonal trends, market share gain in our TVS products, and contributions from our sensing portfolio. We expect net sales from our industrial end market to broadly grow with lower revenue increasing about 15% sequentially and 65% year-over-year. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 58.3%, plus or minus 100 basis points. At the midpoint, this equates to an increase of 380 basis points sequentially and 530 basis points year over year. Our gross margin outlook excluding the cellular module business is expected to be 63.9% at the midpoint, an incremental 560 basis points from the midpoint of the consolidated adjusted gross margin outlook. Adjusted net operating expenses are expected to be $112 million, plus or minus $3 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 consolidated adjusted operating margin at the midpoint of 31%, up 660 basis points sequentially, and up 1,040 basis points year-over-year. Addressed EBITDA is expected to be $134 million, plus or minus $4 million, resulting in adjusted EBITDA margin at the midpoint of 32.8%, up 620 basis points sequentially, and up 930 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 18%, reflecting geographic mix of income. These amounts are expected to result in adjusted diluted earnings per share of $1.05, plus or minus 3 cents, up 40% sequentially and up 119% year-over-year at the midpoint, more than two times revenue growth based on expected weighted average share count of 99 million shares. I look forward to providing our financial framework and multi-year outlook at our upcoming investor event on October 15th. We expect the framework will highlight the operating leverage in our business model, namely increasing gross margin reflecting strong contributions from data center and LoRa. Operating margin that grows with scale and with discipline spent in G&A hoping to support R&D investment. And structural shift in margins following the cellular module divestiture. All of which are expected to support strong EPS, EBITDA, and cash flow metrics. With that, I'll turn it back to Mitch.

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

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question 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. Thank you. Our first question is from Quinn Bolton with Needham and Company.

Hey guys, congratulations on the strong results. Hong, you mentioned needing to go out and secure capacity for fiscal 20, sorry, calendar 2028 and beyond, but the data center business, I think, have gotten up 160% year on year in the third fiscal quarter. Sounds like it accelerates in the fourth fiscal quarter. How are you feeling, you know, near term about capacity and your ability to support continued upside in the data center business? And then I've got a follow on data center question.

We anticipated a very rapid data center revenue growth. We started about a year and a half ago, and thanks to that work, we're able to have enough capacity in the near term to support the customer ramp and also some drop-in orders, so that allow us to expand our market share. Now, with a strong booking momentum and record backlog, we see the capacity we have secured may not be enough in supporting the FY28, especially second half of FY28. So working with our manufacturing partners, both for front-end and back-end, back-end means the O-set from testing to packaging and dye separation testing, working with the manufacturing partner to increase the capacity. The great news is that we have the financial capability to work with our partners to jointly increase the capacity allocation to Sumtech.

I just maybe quickly just, Hong, would you anticipate that requiring wafer pre-purchases or any kind of similar pre-purchases of My follow-on question was just, it seems like there's growing discussion of NPO solutions across the ASIC landscape, and I think even at the largest GPU provider as we look into the next 12 to 24 months. Can you just give us a brief outline of how Semtech is positioned to support the NPO market as it develops? Thank you.

Yeah, thank you. So yeah, the increase of capacity for the back end is primarily increase the tester capacity by adding more testers and also getting additional manufacturing partners qualified to mitigate the potential geopolitical risk. On the front end, we've been working with a leading partner in increasing capacity We are mobilizing all different ways in increasing the prepayment, the capex, or some other means. But I think our goals are the same, to bring additional capacity to support the growth. As for your question about MPO, yes, absolutely. That's a strong trend. The primary driver is to increase the bandwidth density. And as the data total capacity increases dramatically, while shoreline space is limited, they need to have the density, high density packaging. We're going to be benefiting from that. We're currently engaging, I don't know, 10, 15 different programs with all the module manufacturers, and some of them we directly tied to the end customers. So net-net, we're going to be benefiting from that. We are already a leading provider of TIA arrays and our laser arrays, especially the linearized version is excellent as well. So I just talked about our initiative to start photodiode arrays and by co-optimization between TIAs and photodiode, we're going to bring to our customers even better solutions. It's a great opportunity for us that can be translated into a new growth driver for us in the future.

Excellent. Thank you.

Thank you, Quinn.

Our next question is from Rick Schaefer with Oppenheimer and Company. Thanks.

I'll add my congratulations to you guys. Great quarter and an even better outlook. If I could, I'll just start a quick one on Laura. I mean, the run rate there was barely 150 million just a year ago. I mean, we heard your guide on that, Hong. I mean, that's close to 60 million a quarter now, so well over the 150 just in the last 12 months. So is 20% still the right bogey? Because I think you're going to be doing about three times that growth in the third quarter.

We certainly smashed the 20% ceiling With Q3, you know, if it's just at the, you know, we're saying sequential growth of 15% year over year will be translating into 65%. So that is a certainly higher than 20%. And we benefited from now three pillars of growth, not just the traditional lower one in supporting the industrial and commercial applications, but also LoRa Plus in security and smart homes, smart buildings. And now with the Amazon and Ring, you know, the Sidewalk and Ring's strong engagement and their plan to deploy internationally, start from North America, expanding into Europe and Australia, we see that is gonna be a strong growth driver as well. So I do expect year-over-year growth is going to be better than 20% going forward, and it's sustainable.

Thanks, Hong. And if I could, I'd love to just get a little bit more color on ISO. Obviously, you're investing in capacity there. I think you've talked about tripling that capacity by the end of the year. So I didn't know if you could level set us on where we are in the process, if there's any sense of a, you know, a design funnel or revenue funnel or anything you could share on that. And then as part of your answer, I'd be curious, I mean, you know, folks are talking about CW laser channel densities, you know, really rising, right, going up. So I'm curious, you know, how much does that pull the need or create the need for higher density drivers and TIAs and and then if so, what does that do to the complexity and the barriers to entry there for your competition?

Yeah, so first we start with the HIFO acquisition. Certainly, we have been the proud owner of that asset for the last five, six months. We have made tremendous progress in up We are able to upgrade the line and also getting more wafer starts reaching out to the customers. And with Suntec behind the asset, the customer confidence level has improved dramatically. So we're not only with the three anchor customers increasing their demand, but we are able to expand into other key customers on the game chips. Now we have been, as I mentioned in a prepared remark, sending high power lasers to five, six module manufacturers. They have been evaluating and really satisfied, really very excited about our best power conversion efficiency in the beam performance and over temperature performance. Those are pretty ideal in having one CW laser split into four channels or eight channels High bandwidth transceivers like 1.6T and 3.2T. We also have the product we start sampling to customers on semiconductor optical amplifiers. That's almost like a game chip. You get the push current through, you will get amplification. So that is the foundation we are using. And the capacity is limited, as I mentioned. We are going to be increasing capacity by bringing more testers in the back end first. Then for the FAB capacity, we're just fortunate to be able to acquire a already fully facilitated FAB in close proximity to the current facility. So that allows us to increase the FAB capacity by 3 to 4x by the end of the year. So we're on track for that. As for MPO, the high density, certainly when you do the high density, the spacing between different elements becomes smaller. When you go high speed, the crosstalk and all the other performance the packaging needs is different. It's representing another new set of challenges. That's why we expand not only from the fiber edge to photonics. that will allow us to do co-optimization to improve signal integrity. And definitely the industry is welcoming our move and we have increasing engagement with the module manufacturers and hyperscalers because of that expanded capability.

Thanks, Sean. Thank you, Rick.

Our next question is from Sean O'Loughlin with TD Cowen.

Hey guys, I'll add my congratulations on obviously some really strong momentum across the business here. I wanted to start with just a quick, just a high level question on data center strength, you know, really strong outlook in the forward quarter and talking about acceleration through the back half. But I think in your prepared remarks, both Hong and Mark, you both mentioned the I think that aligns with some of your past comments, but maybe you could just talk about how to think about the contributors to growth and how that aligns with some of your commentary on TIA share towards the end of this year on 1.6T. Thanks.

Thank you, Sean. And that's a good question. So maybe I will use this opportunity to just review the progress we have made in expanding our portfolio in the data center play. So we're certainly, you know, the reason the investment community over-indexing on CopperEdge is because that's the first time, I think, the investment community paid attention to Semtech. Two years ago, we developed this re-driver or leading equalizer solution which can be embedded in ACC cable to interconnect two adjacent racks. And so that continues to be a really de facto standard for the industry for 1.6T, 2.4T, 3.2T and going forward. Copper scale-up continues to gain momentum, especially linear equalizer onboard. So we get the multiple engagement and some of them will reach the finish line in the near term. Second area, the fiber edge. Two years ago, 800 gig, we had the market share about 18%. So over the two years, we have grown the market share well over 50% for 800 gig. 1.60, it's just inflecting. So 1.60, as I said in the prepared remarks, we are expecting to exit this fiscal year by January with better than 50% of market share. So now you see the fiber edge area. Not only we are gaining shares, the volume has increased dramatically for 800 gig, for example, transceivers from two years ago, what, 20, 20 million units a year to this year probably 90 million units a year. We gain in shares, we benefit from increased volume, and we are expanding the product offerings 800 gig and 1.60 and drivers. The driver revenue is to come. We got a wonderful product in the evaluation. We'll be contributing to the revenue very meaningfully. A few months ago, we acquired Hypho and marked the beginning of our journey into the photonic area, and we're going to be expanding and having meaningful play in that area as well. So now, I'd like to encourage everyone to look at the data center play for some tech is not just the Copper Edge. Copper Edge will definitely be a significant part of the data center revenue, but think about The Fiber Edge, the leading share of the TIA and drivers and photonics offering from game chip to lasers to photodiode to SOAs. So we're going to be continuing to expanding our portfolio to become a key player in this area.

Great. Thanks for all that, Collar Hong. If I could ask a follow-up and get Mark into the party here, the gross margin expansion quarter over quarter is striking, even if you're just looking at the consolidated and not isolating the held-for-sale business. Just wondering, I guess, questions on how much of that can be thought of as mix, and if data center continues to stay at this percent of revenue, is that something we should expect, levels that we should expect to to continue or is there some one-time thing? And then maybe as part of that, just talk about the capacity expansion and you've heard some of your suppliers talk about what they're seeing on the pricing side and what's giving you confidence on the margin sustainability.

Yeah, Sean, I can address that and try to address that. So the sale of a cellular module business I expect will result in over 500 basis points of gross margin improvement. That's the structural change. That's a significant structural change that we see in our gross margin profile.

And I provided some detail in my prepared remarks, but I think it's helpful to walk through those figures again.

So from Q1 to Q2, our consolidated adjusted gross margins increased from 53% to 54.5%.

That's 150 basis points largely on mix.

Q2 adjusted gross margin excluding modules was 59.7%, which is an incremental 520 basis point increase. Then we moved to our Q3 guide. Our consolidated adjusted gross margins are projected to increase from 54.5% to 58.3%, 380 basis point increase. And then on top of that, we had 560 basis points to arrive in adjusted gross margin guide excluding the modules at 63.9%. So you have the 500 basis point plus gross margin improvement just based on the structural change. But the 150 basis point to 380 basis points, that's mixed. I think a good starting point post-investiture is that 64% gross margin. And as you're seeing, the mix change. I mean, mix is quite a powerful driver for Semtech. As 1.6T continues to inflect, as LoRa continues to strong growth at 800 a gig, You know, maybe just to briefly address pricing, right?

We're not really seeing price erosion at 800 gig.

That all compounds into some very strong mix changes, which is that 150 to 380 basis points that we demonstrated in Q2 and Q3.

Thanks. Really helpful, and congrats again, guys. Thanks, Ron.

Our next question is from Christopher Rowland with Sushmahana.

Thanks for the question guys. So this was kind of asked but maybe more simply the data center guide or next quarter's guide driven by data center. What exactly are, like what did you not anticipate that is driving this? Is it The 1.6T cycle, is it LPO? Is it really that TIA attached that you're talking about or is it copper edge? What kind of drove the marginal upside versus perhaps your expectations or even the streets expectation, guys like me?

Yeah, Chris, that's a good question. So if you would look at the data center portfolio, we know 800 gig is going very well. We got a line shared and we continue the volume increase. We also know the copper etch 1.6T timing that has been largely on track and going with the schedule. If you say upside came from a little bit earlier inflection for 1.6T fiber etch, We know we are in intense engagement with all module manufacturers, as I said, and their customers. So we were just not very sure about the qualification timing and that's why we're a little conservative in guiding one for Q2 at a time. Now we have all the backlog and the customers want parts Tomorrow, so we definitely have a very high confidence and conviction for Q3 and Q4. So, you know, if you say what's different from a few months ago, I mean, it's just the qualification timing. When customers need a solution, they go out of the way, they accelerate the pace of new technology adoption. So I've seen that before, but this is really, in a way, unprecedented from the hyperscalers to module manufacturers to the technology providers, component providers, working all together to accelerate that pace.

Thank you, Hong. Does that make sense? Yeah, that totally makes sense. and then perhaps a follow-up just as you ramp HIFO and you have all these new products coming into this portfolio and you talked about getting to high double digit per transceiver content for you guys. Can you walk us through just a timeframe of when you expect these products to ship in volume to the market whether it's these high-power CW modules, photodiodes, SOAs, or anything else that that acquisition will be able to provide.

Yeah. So, Chris, we only got into this area, as I said, for five months or so. We certainly have a great plan and great ambition Right now, the ongoing product stripping in volume is a GaN chip, and we're going to be having the high-power CW lasers and SOA available for sampling and qualification from the customer side in a couple months. But the significant increase in content in optical transceivers As we said before, it's more like 3.2T. Because you will see the ramp of the fiber edge for 1.6T, that means the customers are already wrapping up the qualification and getting ready for volume production. If they don't have a solution now, they'll probably be late. We wanted to catch the next wave so that the 3.2T and the good old high-power CW laser works still is the most needed for that application. By then, we wanted to make a photodiode available as well, because when the data rate is going higher than 200 gig, you need every bit of help from electronic component and photonic component. So the co-optimization allows us to provide a cross-reference design solution to customers. that is also very much needed for 3.2T. So to answer your question, really the significant content increase in one optical transceiver will be coincide with a 3.2T transceiver cut-in.

Thank you, Hong.

Thank you.

Our next question is from Harsh Kumar with BMO Capital Market.

Yeah, hey, Hong, Mark, and Mitch, congratulations on stellar quarter and stellar guide. I had a one multi-part and then another follow-up. Hong, you talked about 3.2 being the catalyst for your product's catching growth. Could you talk about what the timing for 3.2 is as you see it in the field? And then I want to push back on your commentary a little bit as well. You talked about your content going from high single to kind of high double digits. But when I look at all that you have in the pipeline, photo detectors and game chips and drivers, et cetera, I would think the content would be more than teens. Are you just being somewhat cautious here or is there any other reason for that commentary?

First of all, Thank you for initiating the coverage and we look forward to working with you with your new platform. So probably I confused you that high double digit means 80, 90 instead of 18, 19.

Okay, okay, okay, okay.

So that's a content we're talking about.

Oh, no, no, thank you. Thank you for that clarification. Appreciate it. And 3.2T timing hall?

3.2 t timing I would say probably in 18 months or so but I think the design window will start opening up at about in 12 months period of time. So then the early movers will probably be 18 months from now but I think the meaningful deployment will start probably in two years. 1.60, even 800 gig will have a really very healthy runway over the next two years.

Thank you, Hong. And then for my follow-up, if I can ask you about ACC and LPO, you know, the reason why I'm asking you is you're coming out as the clear leader in those two technologies. You talked about it, I think, a little bit more positively in this call. Can you help us still get an idea of what we should expect the growth rate to be, let's say, exiting this year or at some point in time next year? What can these two businesses do?

So the ACC, we definitely have the clear visibility with the leading hyperscalers. We are going to be having the volume deployment start from... Q4, but right now, you know, all the cable manufacturers are ordering and increasing quarter over quarter, but the inflection is going to be start from the Q4. Then in the meantime, we see so many design activities of linear equalizer on board. So dynamics, we start understanding this emerging market better now. you know ACC adoption it's more coincide with a new platform design so they wouldn't be yanking out the AEC currently in use and to put in ACC but the linear equalizers on board design is happening on the board level so we got a lot of activities we continue to be very bullish on that market as for LPO It's almost, you know, we had a meaningful revenue from Q1, and that has been increasing moderately. But that deployment really gave the industry, gave them the confidence of the linear architecture, and it works really well. So that evolved into MPO and some form of CPO. Then even the XPO is including the LPO form with a linear equalizer. Well, the linear architecture instead of retimed. So I think even in the future, the LPO impact not only as a standalone transceiver, but also the proof of the concept approval technology getting incorporated in more integrated form factor like MPO. Understood. Thank you so much.

Congratulations again. Thank you, Harsh.

Our next question is from Joe Moore with Morgan Stanley.

Great. Thank you. Hi, Joe. Congratulations. Hey, guys. Can you talk about the strength in 800 gig? You talked about that persisting for a while. You know, what's your visibility into that? I know 1.60 is the big ramp, but 800 seems quite strong. Can you talk about that dynamic a little bit?

Yeah, so Joe, you know, we enter into the year for 800 gig. The industry is forecasting 50 million transceiver units to be consumed. Now we are hearing the number 80, 90 million. And we have a very healthy backlog for fiber edge to support 800 gig. And that is a continue. And we're just getting picked into our new booking report this morning. So existing customers, they're increasing the demand, now decreasing. In the meantime, the 1.6T is just starting. And so the Q3 will be the first quarter for us to really have a pretty significant revenue, as I said, between 1.6T fiber edge and 1.6T copper edge. will have that they will be surpassing 50% of total data center revenue. So 1.60 is gaining a lot of momentum and gaining momentum fast.

I think that's very helpful. Thank you. And then can you just discuss like for like pricing? Are you seeing any changes really in any part of your business, but there's particularly on the optical side, any change in pricing there to note?

Yeah, so pricing is very favorable. Typically, as I said before, you offer 2x performance, you may be able to get 100% premium in the beginning, but it settles at a lower level. But right now, availability is more important to the customers, and then the pricing. There's no erosion to be expected in the near term, and at least not for any orders we've booked in the backlog. Our cost is increasing slightly, and we are able to, in most of the cases, work with the customers and pass along the cost to them. But we are here to build a long-term relationship with our customers. We are very mindful of not being viewed as using the seller's advantage to gouge our customers. So we're working with them. in a partnership fashion. But we are able to pass along the cost increases. So that's why when Mark talked about the growth margin, we're expecting the trend to continue to grow because of favorable product mix. In the new product, we have a higher growth margin.

Thank you.

Thank you, Joe.

Our next question is from Tori Swanberg with Stifel.

Yes, thank you and congratulations on the record quarter. Hong, so you're going to be at a half billion run rate in data center next quarter. I'm just curious as we sort of think about a billion in data center revenue, how should we think about the mix between fiber edge, copper edge, and, you know, all the new products that are coming online?

So that's probably the one we're going to be providing more detail, you know, October Investor Day, because we plan to get the different, the time for the different applications and our market share, and so that you can have a more comprehensive view for multi-year model. I hope you can come to that event. Sorry.

Sounds good. And as a follow-up, and a similar question for Mark. So, you know, X modem, you know, will be at 64% gross margin. How should we think about the margin contribution from some of the newer products like PD, CW lasers, and so on and so forth? Are they going to be at that corporate average or perhaps even above?

Thanks. They should be above. So, all the areas that you just mentioned. CW Lasers especially. They're at a data center gross margin, which is accretive to that corporate gross margin average.

Perfect. Congrats again.

Thank you. Thank you.

Our next question is from Craig Ellis with B. Reilly Securities.

Yeah, congratulations on the stellar performance and thanks for sneaking me in, guys. I wanted to look at the business through the 1.6T lens, so this sort of Follows up on part of what you got to with Joe, but can you clarify what you're looking for as things get going in the third quarter as a percent of mix? And then, Hong, it sounds like we're starting stronger in fiber edge and copper edge comes along. So how would mix evolve for 1.6T as a percent of total as we look out to next year?

Craig, thank you for the question. In Q3, the 1.60 is already surpassing 50%. I can just only imagine that it's going to continue to grow north of 50%. But 800K continues to be very strong, and we have the tri-edge legacy product continue to kicking very strong. But the trend is going to be growing. The percentage of 1.60 is going to be higher and higher.

Got it. Thanks, Hong. And then I wanted to go back to your comments where you indicated that beyond the near-term 45% Q-on-Q growth for data center in the third quarter and the 160% year-on-year growth, we could see acceleration and the comment on backlog just suggests that you've got tremendous visibility out into fiscal 28. Can you comment on where that would be relatively greater and what some of the interactions are like with customers that are booking out that far? Is it really just you becoming a lot more strategic to the roadmap or is it that supply sufficiency point? Just help us see what you're seeing. Thanks so much.

Thank you, Craig. I think it's all of above. And I see that our product performance is great and we can provide availability and also we are providing excellent services. So that has been the key drivers for us to gain shares.

Thanks, Hong. Good luck, guys. Thank you.

Our next question is from Cody Ackrey with the Benchmark Company.

Hey, thanks guys for taking my questions and congrats on the progress. Hong, maybe just follow up on the last question. With the bookings and backlog accelerating here in the second half, any quick thoughts on what kind of, how long into 28 does that backlog extend and any thoughts on what kind of growth that might support next year?

So the backlog for the remaining of this fiscal year, I would say for a target, it's all booked. And for the next year, we're probably over 70% there. But the momentum is so strong, so we are going out to get more capacity secured. And so far, I would say the visibility side for the next fiscal year, we feel very confident about it.

Do you think, Hong, that you have upside with that capacity addition effort? Do you think there's room in the industry for you to secure more and to continue to service upside?

Yeah, between 50% and 100%, there's room for that. And we definitely wanted to be able to provide our customers for the product they need.

And then lastly, you've had a lot of success with your lead hyperscalers for ACC. Any thoughts on the expansion beyond that lead hyperscaler? How broadly do you think this gets adopted? And maybe what are some of the challenges left to full adoption? Is it interoperability, support, or table qualifications?

So yeah, at this point for them, the availability and interoperability is probably more important for them. We have not seen many activities in driving us to interoperability with other industry participants.

Any thoughts on breadth of adoption?

So it's going to be more, with time, you know, it's going to be broader and we'll start with the leading one and their multiple engagement is ongoing. Some of them is going to be reaching to the finish line. So I guess we're at the time, right? But I do encourage, I know we still have some in the queue, but come to our October 15th investors event. So we definitely wanted to provide very comprehensive information on our technology roadmap, differentiation, TAM or share and multi-year model. So that will help you to build a multi-year financial model for us. Thank you. Thank you.

Thank you. Our last question is from Scott Searle with Roth Capital Partners.

Hey, good afternoon. Thanks for sneaking me in. Congrats on the quarter and incredible outlook in terms of data center and lower up. Data center has been covered pretty thoroughly. So maybe hopping over to lower for a second. Just in terms of, could you calibrate us quickly? You've been moving away from the China mix. It had been down under 50%. I want to just have a better idea about how that was progressing in the July quarter. And looking at the growth that you've seen from the first quarter to guidance now in the third quarter, it's up 50%. How big is Amazon now factoring into that? Are they over a 10% customer and kind of stack ranking the guidance into the third quarter? Is that mostly Amazon? Is it lower plus? Is it something else that's really driving the outlook? And lastly, to follow up now on the IoT side of the equation with modules now on the path to be divested, other elements have arguably periodically been core and then non-core on the router gateway and the IoT platform front. I'm wondering what the current thoughts are in terms of their continued inclusion as a core portion of Semtech going forward. Thanks.

Thank you, Scott. On LoRa, and the majority of the revenue is still LoRa 1, and LoRa Plus is start kicking in, probably representing about 20% to 25% of total revenue mix. and Sidewalk is still at this point is nominal and this year will probably be high single-digit, but they get a lot of potential once we are able to piggyback into the consumer at an Amazon scale. As for the portfolio optimization as we mentioned, It's a continued journey, and so far we like the portfolio we have after the best picture, but we'll continue to evaluate additions or optimization effort. But we are focused on getting the current deal to the finish line, and so which lead to the closing of the sale of the cellular module business.

Great. Thanks so much, and congrats again.

Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mitch Hawes for any closing comments.

Thanks, Paul. That concludes today's call. We look forward to seeing you at various investor events during the quarter, including our analyst day on October 15th. With that, good afternoon, everyone.