Semtech Corporation (SMTC) Earnings

Management highlights

- Overall Financial & Strategic Position * Delivered 9th consecutive quarter of net sales growth, with record Q1 revenue, strong bookings and backlog, and robust year-over-year earnings growth. * The divestiture process for the cellular module business is in final stages, with transition/integration discussions progressing well. * Core 2027 priorities are: accelerating growth via supply availability and operational excellence in a capacity-constrained market, intensifying R&D for new growth drivers and differentiation, and completing portfolio optimization while strengthening internal culture. - Data Center Business * 800G FiberEdge portfolio is the current core growth driver, with strong demand for TIA solutions, new design wins including multiple sole-source sockets, and growing sequential LPO (linear pluggable optics) revenue from leading hyperscalers in the U.S. and China. * 1.6T optical has secured significant design wins with major module makers, with strong bookings and backlog to support ramps in H2 FY2027; 1.6T LPO/LRO is increasingly preferred by hyperscalers for power savings. * CopperEdge ACC (Active Copper Cable) solutions gained traction, with initial shipments of 1.6T ICs to a U.S. hyperscaler, growing momentum for onboard linear equalizer solutions for active backplane applications, and a large multiyear pipeline of opportunities. * The March 2026 HIFU acquisition adds strategic indium phosphide photonic products for 1.6T and 3.2T modules; GaN chips for tunable lasers have demand exceeding current supply, with capacity expansion on schedule. Differentiated narrow linewidth CW lasers are being evaluated by major module manufacturers for coherent applications. * Semtech is developing components for next-generation architectures including NPO/MPO, XPO (a compelling alternative to CPO), and DWDM lasers for CPO per the new OCI MSA standard, building a full portfolio spanning all current and future hyperscale interconnect architectures. - High End Consumer Business * TVS circuit protection business outperforms handset volume growth, gaining share at premium handset manufacturers; the new SurgeSwitch solution expands the TVS franchise into higher-value high voltage power delivery applications beyond core handset markets. * PerSe capacitive sensors and the acquired force sensor business deliver expected synergies, expanding application verticals and pulling through additional PerSe and TVS sales. - Industrial & LoRa Business * LoRa delivered another strong quarter, with the new 4th generation LoRa+ platform enabling 2.6 Mbps throughput (a step change increase) while maintaining ultra-low power and long range, unlocking new AI-enabled use cases including high-fidelity public safety sensors, visual confirmation for healthcare systems, and detailed predictive maintenance. * Three complementary low-power connectivity pillars (LoRaWAN for industrial/commercial, LoRa+ for smart home/security, Amazon Sidewalk for mass consumer) are driving accelerated LoRa growth. * New 5G AirLink RX-400 and EX-400 routers for mission-critical applications have received strong positive customer feedback, with growing momentum for this high-margin IoT business.

Guidance

- Total company Q2 FY2027 net sales guidance is $328 million ±$5 million, up 13% sequentially and 27% year-over-year at the midpoint, with growth expected across all three segments. - Data center segment is projected to deliver 35% sequential revenue growth, which would equal 85% year-over-year growth, driven by accelerating 800G and 1.6T component shipments. - LoRa revenue is guided to greater than 15% sequential growth in Q2, targeting an all-time revenue high. - Adjusted gross margin is expected to be 54% ±50 bps, up 100 bps sequentially and 80 bps year-over-year at the midpoint, reflecting a favorable mix of higher-margin data center and LoRa products; total semiconductor gross margin is projected at 62.1% ±50 bps, up 140 bps sequentially and year-over-year. - Adjusted net operating expenses are expected to be ~$105.2 million ±$2 million, with the majority of incremental spending allocated to R&D for core data center and LoRa projects, while SG&A declines as a percentage of revenue. - Adjusted diluted earnings per share is guided to $0.61 ±$0.02, up 20% sequentially and 49% year-over-year at the midpoint. - Management expects accelerating data center growth throughout FY2027 and beyond, driven by strong backlog, expanding design wins, and 1.6T product inflection in H2; year-over-year data center growth for full year FY2027 is expected to be materially above the prior 50% floor guidance.

Segment performance

Semtech reported total Q1 FY2027 net sales of $291 million, up 6% sequentially and 16% year-over-year, broken out by end market segment: 1) Infrastructure/ Signal Integrity: Net sales of $98.8 million, up 14% sequentially and 36% year-over-year. Within this segment, data center sales hit a record $71.6 million, up 14% sequentially and 39% year-over-year, contributing ~24.6% of total company revenue. Segment gross margin was 62.7%. 2) High End Consumer: Net sales of $38.4 million, up 5% sequentially and 8% year-over-year, contributing ~13.2% of total company revenue. 3) Industrial/ IoT Systems and Connectivity: Total industrial net sales of $153.9 million, up 2% sequentially and 8% year-over-year, contributing ~52.9% of total company revenue. Within this segment, LoRa enabled net sales were $44.5 million, up 12% sequentially and 14% year-over-year; IoT systems and connectivity net sales were $88.3 million, down 2% sequentially and up 2% year-over-year. IoT systems and connectivity segment gross margin was 35.8%, up 420 basis points sequentially. Aggregate adjusted gross margin for the company was 53%, with total semiconductor products gross margin at 60.7%. Adjusted operating income was $59.3 million, with an adjusted operating margin of 20.4%.

Risks & headwinds

- Supply capacity constraints: Current demand for GaN chips from the HIFU acquisition exceeds existing supply by approximately 3x, which could limit near-term sales if expansion is delayed. - ACC adoption uncertainty: Finalization of industry MSA specifications for ACC is still ongoing, and lack of finalized interoperability standards could slow broader market adoption until complete. - Product development risk: Next-generation products including BiDi linear equalizers for backplanes and CPO laser components are still in development, with timing dependent on customer roadmap alignment and technical milestones that could be delayed. - Uncertain customer adoption of new architectures: The timing and scale of customer adoption of new optical architectures including 1.6T, LPO/LRO, CPO, and XPO could differ from current management projections, impacting revenue growth.

Analyst Q&A

• Q: When will ACC MSA specs be finalized, and could that act as a catalyst for broader adoption? Is interoperability currently slowing the ACC ramp? /

  A: The MSA is still working to finalize specifications, working through common standards across different cable manufacturers' designs and production processes. When all industry participants align on a shared standard, it will act as a catalyst to accelerate ACC adoption.

• Q: Can Semtech meet the accelerating demand with current capacity, and what are plans for further capacity expansion? /

  A: Semtech began expanding capacity 18 months ago, and currently has enough availability to meet existing demand even for unexpected drop-in orders, which has supported its strong recent momentum. To meet projected future growth, Semtech is already working with foundry and OSAT partners to add 2x to 3x additional current capacity to support future upside.

• Q: How will incremental OpEx growth in Q2 be allocated, and what is the focus of this spending? /

  A: Nearly all incremental OpEx growth goes to high-conviction R&D programs, primarily for data center products, with additional support for LoRa. SG&A as a percentage of revenue continues to decline steadily, with operational leverage achieved on G&A costs even as sales and field engineering teams grow. R&D spending increased 17% year-over-year in Q1, versus a 200 basis point year-over-year drop in SG&A as a share of sales.

• Q: What is the outlook for full year FY2027 data center growth, compared to the prior 50% year-over-year growth floor? /

  A: Management confirmed that the prior 50% was a floor, and they will not cap upside for full year growth. With 35% sequential Q2 growth already locked in, and accelerating growth expected in H2 from 1.6T FiberEdge, CopperEdge, and HIFU components, FY2027 will deliver unprecedented year-over-year data center growth.

• Q: How much does current strong growth reflect market expansion versus market share gains for LPO/LRO? /

  A: Growth is primarily driven by a broad market shift from fully retimed optics (FRO) to LPO/LRO, as hyperscalers re-evaluate topologies to cut power consumption. Management expects linearized solutions will make up ~25% of total transceiver mix within the next 1-2 years.