SMTC - NASDAQ

Good day, and thank you for standing by. Welcome to Semtech Corporation's Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the call over to Mitch Haws, Senior Vice President of Investor Relations for Semtech. Thank you. Please go ahead.

Thank you, and welcome to Semtech's Second Quarter 2026 Financial Results Conference Call. Participants on today's call are Hong Hou, our President and Chief Executive Officer; and Mark Lin, our Executive Vice President and Chief Financial Officer. Before we begin the prepared remarks, I would like to highlight upcoming investor events, including the Deutsche Bank Technology Conference on August 27, The Benchmark TMT Conference on September 3, The JPMorgan Rising Tech Leaders Forum September 4, and The Piper Sandler Growth Frontiers Conference on September 10. Today, after market close, we released the unaudited results for the second quarter of fiscal year 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 Slide 2 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 this 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. Please see today's press release and Slide 3 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. And good afternoon to all of you joining today. The Semtech team made solid progress again this quarter with a sequential increases across each end market leading to record net sales. We also delivered sequential improvement in adjusted gross profit, operating income and earnings per share, strengthening our financial profile while executing on the R&D road map that we believe establishes a foundation for long-term growth. I've completed my 1-year tenure as Semtech's CEO and reflecting on the three priorities I outlined in our earnings call a year ago, we have made tremendous progress. First, on strengthening the balance sheet. At the end of Q2, we have reduced debt by $879 million from the time I started as a CEO, resulting in a year-over-year quarterly interest expense reduction of 80% and a substantial net leverage ratio improvement 1.6x at the close of Q2 '26 compared to 8.8x a year ago. This strong improvement to our financial foundation allowed us to focus on drivers for our business. Second, on rationalizing the portfolio and increasing investment in the core assets. I'm happy to report that the core assets we have delineated namely data center, LoRa and PerSe, each strongly contributed to our net sales momentum throughout the year. With increased R&D investment into these core areas, we anticipate further acceleration of our momentum. Third, revitalizing our winning culture. This is an area of progress of which I'm most proud. By strong engagement with employees through frequent site visits, interactive information sessions, small group and one-on-one meetings as well as regular and transparent communications, we provided much needed clarity in the company's vision, strategy and priorities, following a call to action. By instilling a culture of customer intimacy, operational discipline and strong execution, we believe we have made great progress on achieving road map alignments with our key customers through significantly improved customer engagement, securing new product design wins and delivering strong financial performance. I'd like to extend my sincere gratitude to the senior leadership and all of our fellow employees for their resilience, dedication and commitment to Semtech's Rising Initiative. Going forward, the priority of portfolio optimization is further elevated. We have managed our noncore assets back to a growth trajectory. And combined with the market tailwinds, we believe these assets represent a very compelling business to the right shooter. We believe we are well positioned to further transform Semtech into a higher growth and more profitable company. Now let me move the discussion to our end markets. For Q2, infrastructure net sales were $73.4 million, up 1% sequentially and up 39% year-over-year. Infrastructure revenue growth benefited from record revenues in our data center business. Net sales for data center reached a record $52.2 million, up 1% sequentially and up 92% year-over-year, benefiting from our broad portfolio. FiberEdge products achieved record net sales, offsetting the CopperEdge air pocket from the initial rack deployment at our anchor customer. Based on Q2 performance, we expect continued strong opportunities for FiberEdge demand for the remainder of calendar year 2025 and beyond from our optical module customers serving North America cloud service providers or CSPs. This conviction is supported by our direct ecosystem engagement, which correlates with increases in the data center CapEx forecast from multiple hyperscalers, sovereign operators and enterprises. During Q2, bookings and forecast from our optical module customers serving China-based CSPs were generally cautious due to limits on GPU availability. That said, we have started seeing accelerated data center bookings over the past several weeks for this market. Looking ahead to the next several quarters, we expect the data center market to continue its multiyear growth cycle. The market is shifting to higher data rates to support the increased compute and network interconnect bandwidth, resulting in strong demand for FiberEdge 800-gig TIAs moving rapidly from 400 gig. Beyond 800 gig, we are supporting multiple customers on their 1.6T transceiver designs with both TIAs and drivers. We currently expect volume ramps to start in the first half of 2026, commensurate with the broad deployment of 1.6T switches. While the shift to higher speed to achieve high bandwidth is a given, it is increasingly important to deliver this bandwidth using low power and low latency network interconnect. Semtech's analog expertise allows CSPs to deliver high-performance compute and increase storage capacity while constraining our budget for networking. On the optical side, we have secured several LPO design wins with our TIAs in 400-gig and 800-gig transceivers. We believe we have secured the lion's share of the TIAs in the most optical transceivers. Our 800-gig LPO laser drivers was specifically designed to comply with our LPO MSA requirements, and we believe it is the only compliant driver in the market. Several optical module customers are conducting design-in and testing of our drivers on their transceivers. We are engaged with three of the leading hyperscalers with our 800-gig LPO solution and expect revenues to begin ramping in Q4 of this year. We are accelerating our R&D road map and are targeting making 1.6T LPO drivers and TIAs available for sampling before the end of the year. Another high bandwidth and low-power solution is the CopperEdge for ACC and onboard linear equalizer. During the quarter, we delivered 800 gig and 1.6T ACC cables to multiple hyperscaler and enterprise customers for testing and qualification. Those customers are seeing benefits of strong signal integrity, lower latency and importantly, much lower power consumption as much as 90% below competing DSP-based AEC solutions, while offering lighter and more flexible cables as well as significantly longer reach compared to direct attached copper cables. We continue close engagement with our anchor customer for their future rack platforms using CopperEdge and 1.6T optical transceivers using our FiberEdge product. We are on track and expect to launch ACC with U.S. hyperscaler customers during calendar year 2026. Currently, we are enabling all the major cable suppliers, all of which have begun initial qualification at multiple hyperscalers. As data center topology continues to evolve, we see copper remaining a foundational element of next-generation data center interconnect, particularly for short-reach links where its cost, power efficiency, speed and reliability are unmatched. With the bandwidth requirements increasing from 400 gig to 800 gig, 1.6T and beyond, advances in active copper technologies are extending the reach and offering significant power savings, making copper an essential complement to optical solutions. In high- performance computing and AI clusters, copper enables low latency, energy efficiency connections at the rack and row level where optics address longer reach needs. By leveraging our 20-plus years of experience in analog data center solutions, we are helping our customers achieve the performance, efficiency and scalability demands of today's and tomorrow's data center with a comprehensive product portfolio, addressing lane speeds from 10 gig to 400 gig with the lane count from one to eight channels. Moving forward, the momentum in FiberEdge, combined with our emerging CopperEdge and LPO opportunities, all supported by the strong data center CapEx spending, positions our data center business for strong growth. Now moving to our high-end consumer end market. Net sales for Q2 were $41.2 million, up 16% sequentially and up 11% year-over- year. Net sales in consumer TVS were $29.9 million, up 22% sequentially and up 15% year-over-year, consistent with the seasonality associated with the smartphone unit ramps and our strong content across multiple customers. This growth exceeds overall growth in the handset volumes, aligning with our belief that Semtech is gaining content and market share, stemming from our market-leading performance and supply chain excellence. Designed for ultra-high capacitance, sensitivity and fast response times, these devices safeguard displays as well as high-speed interfaces such as HDMI, USB and display ports without compromising signal integrity or performance. This makes them ideal for use in smart TVs, game consoles, laptops, wearables and mobile devices. Leading global consumer electronics brands integrate Semtech's TVS technology into their products to ensure device performance, durability and reliability. In addition, our PerSe sensing technology is being increasingly deployed across a growing range of applications, from consumer electronics to automotive and industrial markets. In devices such as smartphones and laptop computers, where specific absorption rate standards are becoming more stringent, PerSe enables intelligent power management by detecting proximity and optimizing RF performance to meet regulatory requirements, without compromising the user experience. In addition, PerSe enables precise gesture control with ultra-low power consumption, both of which are highly valued for wearables such as headsets and smart glasses. We are actively engaged in design discussions with a broad range of customers in both smart glasses and smartphone platforms, supporting both existing designs and new launches over the coming quarters. Moving towards industrial end market. Q2 industrial net sales were $143 million, up slightly sequentially, in line with our outlook and up 14% year-over-year. Within industrial, net sales of LoRa-enabled solutions were $36.9 million, down 5% sequentially and up 29% year-over-year, supported by continued expansion across several end markets and in multiple applications. LoRa offers a unique combination of long-range connectivity, low power consumption and robust performance in challenging environments. Its ability to transmit data over several kilometers while operating for years on a single battery charge makes it ideal for predictive maintenance, asset tracking, energy management and smart city infrastructure. It also enables cost-effective and secure monitoring and control of equipment, infrastructure and environmental conditions over large areas. We are seeing growth in applications, including home security systems, smart appliances, pad and personal trackers and community- based environmental sensors. In addition, our recent generation LoRa chips offer dual band capability, 2.4 gigahertz and ISM frequencies to enhance bandwidth. This capability is supporting a new generation of connected devices that require reliable low-power communication without the complexity and expenses of traditional networks. U-band capability is facilitating LoRa's adoption in emerging low-altitude economy, including drone delivery, aerial surveying and emergency rescue. LoRa is especially well suited for this environment as it combines long-range communication, low power consumption and a strong signal resilience, three factors critical for aerial operations. LoRa technology is used to provide a reliable telemetry and sensor data transmission even beyond visual line of sight. This allows operators to gather real-time insights without relying solely on high-bandwidth short-reach video links. Our IoT systems hardware business recorded Q2 net sales of $64.8 million, up 2% sequentially and up 24% year-over-year. Bookings in our hardware business continues to be strong, up over 40% year-over-year due to both the broad market recovery as well as our position as a leading North American supplier. We see strong 5G momentum as IoT transitions from 4G with the growth in both bookings and design wins. We believe we hold a leadership position with the 5G RedCap and are progressing well in launching Qualcomm-based platforms in the coming year. We continue to lead in 5G LPWA, advancing satellite IoT through non-terrestrial network or NTN, which opens up new opportunities for global connectivity. For router and gateways, our partnership ecosystem continues gaining momentum. As announced in June, several of our products, including our flagship XR60 5G router achieved Verizon Frontline-Verified status. We now support Verizon's Frontline Network Slice, a dedicated 5G highway for the first responders. This opened up significant opportunities in public safety where mission-critical connectivity is paramount. In July, we hosted an AirLink Partner Summit in Dallas. We shared our product road map and showcased a range of compelling use cases in public safety, public transit, utility, oil and gas as well as government applications. Our various partnerships represent fundamental steps as we evolve from a product vendor to a solution provider of choice for mission-critical applications. In summary, we delivered another quarter of strong financial performance in Q2, reflecting both the strength of our core business and the disciplined execution of our strategy. At the same time, we continue to invest in our R&D, which will fuel future growth, ensuring our technology remains at the forefront of the market requirement and customer expectations. With that, I will now turn the call to Mark for additional detail on our financial results and our outlook for the third quarter of FY '26. Mark?

Thank you, Hong. I am pleased to report that for Q2, net sales were a record $257.6 million, above the midpoint of our outlook, up 20% year-over-year and the sixth consecutive quarter of growth. Net sales trends by end market, reportable segment and geographic region are included on Slide 16 of the earnings presentation. Adjusted gross margin was 53.2%, down 30 basis points sequentially and up 280 basis points year-over-year and above the midpoint of our outlook. Semiconductor products adjusted gross margin was 60.7%, down sequentially from 63.7% and up year-over-year from 59.2%. Looking at the adjusted gross margin dynamics in more detail. High-end consumer sales were seasonally higher in Q2, which has a modest negative impact on product mix. Product mix within Signal Integrity was impacted by higher sales of telecommunications products as well as the forecasted decline in CopperEdge revenue. IoT Systems and Connectivity adjusted gross margin benefited from higher sales of routers and gateways with Q2 at 39.5%, improving sequentially from 34.4% and up year-over-year from 35.4%. Adjusted net operating expenses were $88.4 million, within our guidance range. Adjusted operating income was $40.6 million, resulting in an adjusted operating margin of 18.8%, up 460 basis points year-over-year. Adjusted EBITDA was $56.5 million, up 39% year-over-year, and adjusted EBITDA margin was 21.9%, up 310 basis points year-over-year. Adjusted net interest expense was $4.1 million, down 80% year-over-year. Annualizing the Q2 amount, adjusted net interest expense is well under a single quarter's expense from just a year ago. This has allowed us to accelerate investment in strategic high-growth areas of our business while driving earnings growth and cash flow. Q2 adjusted net interest expense decreased sequentially from $5 million, reflective of our continued prioritization of using free cash flow to repay debt. Other net nonoperating expenses were $1.3 million, primarily from foreign exchange revaluation losses, reflective of a weaker U.S. dollar during the quarter. We recorded adjusted diluted earnings per share of $0.41, up from $0.38 in Q1 and a substantial improvement from $0.11 recorded a year ago. In the second quarter, we recorded a noncash $41.9 million goodwill impairment charge from our connected services business that is reflected in our GAAP results. While net sales for this business remained stable, down 1% year-over-year and up 3% sequentially, these results did not meet our internal earnings forecast and resulted in a reassessment of this business's goodwill balance. Operating cash flow for Q2 was $44.4 million, sequentially up 60% from $27.8 million and up from negative $5 million a year ago. Free cash flow for Q2 reflected similar growth at $41.5 million, sequentially up 59% from $26.2 million and up from negative $8.4 million a year ago. We ended Q2 with a cash and cash equivalents balance of $168.6 million, up $12.1 million from Q1, while making optional principal prepayments of $25 million on our term loan. At the end of Q2, net debt sequentially decreased $37.1 million to $359.1 million. Along with debt reduction, strong business performance contributed to an adjusted net leverage ratio of 1.6 as of the close of Q2, down sequentially from 1.9 and down year-over-year from 8.8. Now turning to our third quarter outlook. We currently expect net sales of $266 million, plus or minus $5 million, up 12% year-over- year at the midpoint. We expect net sales from an infrastructure end market to increase sequentially, including growth in data center. We expect net sales from our high-end consumer end market to be up, reflective of typical seasonality as well as content gains. We expect net sales from industrial end market to be slightly up with LoRa about flat sequentially, combined with growth in our IoT cellular business. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 53.0%, plus or minus 50 basis points, a 60 basis point improvement year-over-year at the midpoint. Adjusted net operating expenses are expected to be $88.8 million, plus or minus $1 million, resulting in an adjusted operating margin at the midpoint of 19.6%, a 130 basis point improvement year-over-year. Adjusted EBITDA is expected to be $60 million, plus or minus $3 million, resulting in an adjusted EBITDA margin at the midpoint of 22.5%, a 90 basis point improvement year-over-year. We expect adjusted interest and other expense net to be $5 million, benefiting from leverage-based pricing on our term loan that aligns a lower interest rate to a lower leverage ratio. We expect an adjusted normalized income tax rate of 15%, consistent with Q2. These amounts are expected to result in adjusted diluted earnings per share of $0.44, plus or minus $0.03 based on a weighted average share count of 91.6 million shares.

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

[Operator Instructions] And our first question comes from the line of Harsh Kumar with Piper Sandler.

First of all, congratulations on very solid, very steady results. Hong, I did have a question on LPO opportunity and the timing for it. Not too long ago, a competitor sort of suggested that, that timing may be imminent that they were basically in commercial production. I was curious of -- you're talking about fourth quarter. So I was curious about how you see the progression through the year. Is there a possibility that LPO could be preponed, maybe it could come earlier? Or are you just in different sort of customers and maybe with a different -- slightly different timeline?

Thank you for the question. Yes, LPO, we have been engaging with a broader customer base for applications for CSPs in the U.S. and in China. And they are at a different stage of testing and qualification. But one thing is good that our TIA has been in pretty much every transceiver manufacturer's design and qualification. As for timing that some of them will start deployed in Q4 and some -- I wouldn't say the imminent right now is the small volume. And because we have a broad product portfolio and our TIA has already been designed in the DSP-based retime solution already. We don't see the incrementally higher demand due to the LPO just yet, but we do expect that Q4, they will start deploy. So we have the design wins in 800 gig and also 400 gig for DR4. And that one may already start in the volume.

Understood, Hong. And then maybe I could ask you about the general state of the data center spend. You're sort of a networking player. You have parts and modules and cables. You talk to obviously a lot of large companies. I was curious, I wanted to see where your level of enthusiasm is on the continued data center spend these days as you talk to these large hyperscalers and the large networking players.

Yes. Thank you for that question. Yes, we do engage with our direct customers, which are the module manufacturers, but we also engage with the CSPs in the U.S. and also in China. We all read the same news and the earnings report. The CSPs, they have strong conviction and the forecast to increase the CapEx spending to expand the data center capacity and upgrade for AI capability. And we're seeing from our direct customers, a very strong forecast for 2026 and beyond. So we will be benefiting from this tremendous backdrop. On the other hand, in China, the CSPs, as I discussed in the prepared remarks, the first part of the Q2, they tend to be a little bit cautious due to the limit to the GPU availability. But in the last several weeks, and they have come back and the booking activity has improved pretty significantly. And the forecast for the -- for remaining of '25 and 2026 is very optimistic as well. So we see the market really very -- has a very optimistic tone, and we're seeing the results from the new business opportunities and the bookings. And because we are supplying electronic components, you may hear some pockets, they were limited by so EML or other components, but it's not for us. Our PMD, physical media devices, are designed for -- to support VCSELs, support EML and also support silicon photonics modulators. So we don't see the constraint at this point. But we do plan ahead to add more testers and back- end OSAT capacity in anticipation of a pretty significant ramp for 2026 and beyond.

And our next question comes from the line of Joe Moore with Morgan Stanley.

You talked about your outlook for CopperEdge. Can you give us a little bit more color how confident are you in seeing broader adoption? And when you talk about hyperscale customers, what types of projects are you working on there?

Yes. Thank you, Joe. Yes. So we have been talking to customers over the last 3, 4 quarters, and we covered a pretty broad ground, have been engaging with over 20 customers in the entire ecosystem. So certainly, the awareness level right now has significantly increased. And we work with our cable customers very closely. There are four, five key ones, they all have our 100 gig per lane or 800 gig cables and 200 gig per lane or 1.6T cables, the sample to different CSPs and enterprise customers. We're seeing strong traction. They definitely see the advantage of low power, more flexible and higher signal integrity and a longer reach than deck cable. And they are designed in one case for scale up similar to our entry customer to interconnect the different processors, ASICs in one cluster and with more applications in scale-out to interconnect, say, from the servers to top of the rack and also serve the backplane to replace the deck cables. So we see the use cases, you replace deck cable, we see the use cases to replace AECs. And all of those applications are to take advantage of the unique property like low power consumption, high signal integrity and extended reach compared to the deck. We also have customers use the linear equalizers for onboard applications to improve the signal integrity and stretch the reach from the ASIC to, say, front of the panel or pluggable ports. So we'll see probably a couple of hyperscalers to drive to the high-volume ramp first and either Q4 or the beginning of 2026. For 1.6T cables, the timing of ramp will be coincide with the switch. If you don't have 200 gig ports, you don't really need the connectivity to connect the ports. But for 800 gig or 100 gig per lane cables, we start seeing some of the demand and are getting preparation for the latter part of this year.

Great. And then separately, are you seeing any supply constraints on 1.6T optics?

The 1.6T optics, Joe, at this point, we don't see the strong volume demand yet. But every module manufacturer is designing their optical modules using different DSPs using different PMDs, which we provide their customers, they all require different pitches and different configuration for packaging. So we support a wide range of demand. But the volume ramp and it's going to be like in 2026. At this point, the port would require 1.6T connectivities. There are only two -- from two major ASIC manufacturers. One is making GPU, one is making switches. So you can imagine the timing of when they start the volume deployment. So the bottom line, we don't see the constraint from outside.

And the next question comes from Timothy Arcuri with UBS.

This is Dino on for Tim. So just a question on LoRa. It looks like results came in strong ahead of the $30 million to $35 million range you previously mentioned. Are you seeing significant contributions from other applications of LoRa? And do you expect to see LoRa performing at the same level in the next few quarters?

Yes. Thank you for the question. That's a great question. Certainly, we are very pleased about the demand of LoRa. We think we are on the right track in providing enhanced capability by the new product. For example, the dual band in addition to ISM baseband, we provide the device capability to run on 2.4 gigahertz band as well. What that does is to provide enhanced bandwidth data rate, but at a trade-off, a transmission distance. But the LoRa can already cover hundreds of kilometers. So it's not a big trade-off. And by increase the bandwidth, we unlocked a range of applications. For example, the low altitude economy, drone deliveries, and so even some applications related to edge AI and for example, parking meters, they can getting a still picture snapped and using enhanced bandwidth to transmit the pictures back in as an archive. So we also had a LoRa Plus that basically LoRa plus other RF protocols. By combination, you can address different applications that traditionally LoRa alone cannot address. So these new technologies really opened up new market opportunities. We are very pleased to see that the LoRa continue to have a very strong demand. We didn't mention that. As a matter of fact, the end node -- number of end node we shipped last quarter, it's a historic record. So going forward, we think right now, give us a confidence and conviction, we expect the LoRa revenue on a quarterly basis to be between $30 million to $40 million. So certainly, it's going to be an increase from our original belief from $30 million to $35 million.

And our next question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the results and outlook. I guess I wanted to follow up on the ACC opportunity just to understand timing. It sounds like you still expect some ACC revenue potentially in the fiscal fourth quarter ending January. And if I heard your answer to the previous question, it sounds like 800 gig or 100 gig per lane ACCs potentially for scale up is the first application to ramp?

So Quinn, that may confuse you that for 800 gig is for the interconnect -- yes, in the backplane and also between racks, historically, they use that deck cable they can reach the data rate of 100 gigabit, even 200 gigabit per lane. But the cable was 26 gauge, very rigid using their words like as rigid as a rod. So when you bend a little bit, you compromise the signal integrity. So in that, they will still call the scale-out applications for different interconnect, different switches. And -- but right now, the one we designed in for 200 gig per lane and 1.6T application is a scale up between different racks for ASICs. And the customer is finding more applications in scale-out to -- in the backplane to interconnect, say, for example, from the NIC card to the top of the rack. And in many cases, within the topology of the switch fabric, they are just replacing the DAC cable with ACC because of the flexibility, better signal integrity, incrementally higher power than DAC cable, but it's not really taking out any additional power budget.

Okay. I guess, Hong, just so I'm clear, the 1.6T or 200 gig per lane cables, I thought a lot of those would depend on Broadcom's Tomahawk 6 switch that enables 200 gig per lane. So are there applications for 1.6T ACCs that ramp before availability of that switch? Or do your 100-gig designs ramp in the fourth quarter before availability of that Ethernet switch platform from Broadcom?

Right. So the volume demand will start from 100 gig first per lane, I would say, in Q4. And then the 200 gig first applications to volume is going to be the scale up between ASICs. Then that will be followed by 200-gig per lane scale-out application, as you correctly pointed out, when the switch die are more available in volume, and you need to be interconnecting between the NIC card to the top of the rack.

Got it. Okay. That makes sense. And then I wanted to switch. I know the data center business is driving a lot of growth, but you mentioned the PerSe business and engagements in sort of new smart glass platforms as well as smartphone platforms. I'm just wondering if you could give us your outlook for the ramp of PerSe. I think you've got a smart glass platform that you're on today that's already achieved high volume. Do you see continued growth in smart glasses? And any comments you can make on PerSe adoption in the smartphone segment would be helpful.

Yes. So Quinn, PerSe devices has been the industry standard for smartphone. And you know that for almost all the smartphone manufacturers, we're there, and we're in the process of getting into the last one, the major one. As for the applications in the smart wearable, the smart glasses, certainly, our lead customer is this Meta Ray-Ban glasses. And there are several other platforms they use basically the same functionality and -- but do the different ways linked to their own large language model for AI applications, and we are there. And the smart wearable continue to evolve and demand more functionalities. And so we are engaging with this broad range customers and designing next generations. So that's next-generation product. So that is the area we feel like it can evolve into a pretty sizable market, and we're in the forefront of it.

And our next question comes from the line of Christopher Rolland with Susquehanna International Group.

So I do know it might be a little early for January guidance, but seasonally, I do believe historically, that's been down. Are there -- is there a wide way or broad way to think about kind of seasonality or how we should think about January? Like could you outgrow typical seasonality given the LPO ramp or the ACC ramp? Just any broad kind of milestones or things to think about for January?

Yes, Chris, so we provided our outlook for Q3 and our end market commentary should help investors formulate thoughts for growth in the out periods. You're correct, high-end consumer sales do trail down in Q4. We don't really see a change to that particular trend. I mean high-end consumer net sales were $41.2 million in Q2. That's a multiyear high, up 16% sequentially, up 11% year-over-year. So while we're gaining design wins and market share, which allows us to grow above market rates, I still view Q4 as just a seasonally trail down, not a weakness at all in any of the business. Our industrial end market is performing well. We've heard from some industry bellwethers on these trends. ISC business is performing well for the 4G to 5G transition is a tailwind there. And in infrastructure, data center is definitely a growth engine in all the commentary that Hong has provided in our prepared remarks and for the Q&A up until now. We do have a very broad portfolio. FiberEdge shipments were up about 3x compared to a year ago. And anything that we talk about in terms of LPO would be incremental, and ACC is definitely incremental to that ramp.

That's fantastic. Maybe for my second question, I think you guys said you were down to 1.6x leverage. Pretty incredible from where you guys were just a couple of years ago. But my specific question is, what does this mean for the odds of doing a potential acquisition and/or what does this mean for the odds for doing a potential divestiture?

Yes. So Chris, that's definitely we are pretty excited about the progress we have made, not a couple of years ago, even as recent as a year ago, our leverage ratio was at 8.8x. So certainly, that's a huge improvement. This improved financial foundation allows us to go more aggressive in capturing the opportunities of growth. Through close engagement with the customers, we have identified many great growth opportunities, and we have been able to balance the R&D spending with our bottom line over the last year. And I think we're striking a right balance. We're increasing R&D spending in the core area by 20% sequentially, while still maintaining delivering the good bottom line performance. Going forward, we'll continue to invest in the core areas. And there might be some opportunities when we analyze our portfolio, we're seeing we can apply technology leverage, customer leverage or operational leverage. We're seeing some leverage. We have some capability to do small tuck-ins and -- but that's the highest priority for us is still the portfolio optimization. We decide what the areas we wanted to get in. We have the Board support. We'll continue the strategy going forward. So hopefully, that answers your question. Definitely, the core and noncore delineation is not just a paper exercise, it's really a North Star to set the priority for us.

And our next question comes from the line of Rich Schafer with Oppenheimer.

I've got a question on Tri-Edge. I'm just curious what the outlook is for the PAM4, the Tri-Edge business as the industry sort of seems to be focusing more on 100G and 200G lanes. And I guess, how do you -- what are your plans for that business? How do you view that Tri-Edge opportunity? I mean is PAM4 going to be a growth driver for Semtech?

Rich, thank you for your great question. So the Tri-Edge has been our traditional offering. It is basically integrated product with the drivers and TIAs integrated with our clock and data recovery ones. So you can almost say it's oxymoron that the analog version of the DSP. We offered our product at 50 gig per lane to give, say, four channel will be 200-gig aggregated bandwidth. And if the eight channel will be 400-gig aggregated bandwidth. So our customers more -- particularly in China and also one of the CSPs in the U.S. has been using our Tri-Edge in the AOC cable, active optical cables for 400 gig and 200 gig. So that has been going on in a limited basis and -- but one big CSPs in the U.S. and are giving us the forecast and start ramping up by using the Tri-Edge in the AOC applications for 400 gig. So our plan is that we'll continue to push that envelope to make the PAM4 50 gig move up to 200 gig. We're going to be skipping 100 gig PAM4 because this is a little too late for that. The beauty of the 200-gig Tri-Edge CDR based is going to continue to deliver low power consumption and have the advantage of both equalizing in the frequency domain and retiming in time domain. So that is on our road map and under development. We believe when the 1.6T transceivers are launched, and very next thing, they will be first driving for volume and then later on driving for cost reduction and power reduction. So we will catch that wave of providing low-cost, low-power version of the Tri-Edge.

And Hong, have you taken a swing at sort of what that opportunity looks like? And any sense of how big that market could be? Or is it just too early?

So Rich, right now, it's a little early to do that. But we will be basically using when we were evaluating market opportunity in order to determine if this is a viable R&D project. We just make the assumption, say, for example, if we can chip away 5% to 10% of 1.6T transceiver market from the retime solutions, that will be well worth a while for the market opportunity. It's really great for -- as an alternative to the DSPs. So I think it's going to be as customers seeing a better signal integrity, lower power performance, again, just like the LPO, there are going to be more acceptance and because of the low power is a key attribute to the optical connectivity in the future.

And our next question comes from the line of Cody Acree with The Benchmark Company.

Congrats on the progress. Hong, can you just go back to your ACC commentary on the cloud service providers? You mentioned expecting that to begin early '26. Is that any reset of timing from earlier expectation of ACC diversification in Q4? Or was that always the case, the delineation between CSPs and the cable providers?

Cody, thank you for the question. So we are always at the timing-wise for the LoRa brand is going to be going through the platform architecture. The platform architecture of our customers will go with the appliance they need in there. For example, in this case, the switch -- timing of the switch availability, as you probably know and heard, is going to be pushed out a little bit. So that is the one thing we found during Q2. And -- but as I said, there are two other use cases. For example, 100 gig per lane, 800 gig ACC cable, that's independent of that timing. We believe that ramp will start in Q4 for that flavor. Another one is a 200 gig per lane and 1.6T cable for scale up between different racks of ASICs that will also march along the line -- timeline in Q4. So when you start ramping back from very low level to pretty sizable level, the timing does matter a lot because the ramp-up slope is pretty high. The good thing is that we have gone through that type of ramp in the past in supporting the anchor customer, we have the confidence that we'll be able to support the market adequately.

Excellent. And Mark, can you give us any of your outlook on your gross margin expectations for the next couple of quarters and also your OpEx spending trends?

Yes. So we have the guide for the following quarter. And really, as we've stated, we're very mix driven. But the good part is there, Cody, is that the strong -- the faster-growing portion of our business are accretive to mix, especially within data center. But that said, we also provide the areas of growth for our IoT cellular business, which is a little bit of a headwind. And also within Q3, we do have a little bit of a headwind from high-end consumer. But overall, that particular business does support the industrial TBS business as well, which has pretty good gross margin. So overall, pretty good operating margin. But again, mix driven. OpEx, I think our commentary is that we do look at opportunities to invest in near-term growth areas. We have a pretty strong portfolio that we're developing, but we are very cognizant of R&D spend, and we'll try to keep that under -- I should say, we expect to keep that under control. But again, there's some really, really great opportunities out there for us to invest in some very good organic growth opportunities.

So any thoughts on R&D growth as you go forward?

Cody, so we've guided out that quarter. You can just expect us to be prudent and not overspend. And maybe we'll just leave it at that.

And our next question comes from the line of Tore Svanberg with Stifel.

I wanted to just take a step back and ask about sort of the general business environment from a linearity perspective. Is there sort of any color you could share with us on linearity of sales and especially on bookings?

Yes. So Tore, thank you for your question. So we are seeing pretty strong booking activities, data center area, LoRa and PerSe, even the consumer -- high-end consumer TVS is very strong. The industrial for the modules, we have the tailwind, the booking activity is very strong. So as for the linearity, from quarter-to-quarter, you always have this different product mix thing. But I would say, very rarely, you have a few things all seem to be lining up in supporting a very positive momentum, and that is now, and I feel like really good about the future quarters.

Very good. And as my follow-up, I had a sort of a clarification question on LPO. So you said you expect three leading hyperscalers to be in 800 gig production in Q4 of this year. Are those three hyperscalers all U.S.? Or is that U.S. and China?

So three hyperscalers, two are in the U.S. and one in China. So -- but the LPO, this is really just early inning. And the LPO transition and to take over some of the DSP-based transceiver market share is inevitable. And the beauty for that for us is -- if it stay with the DSP-based, we have TIA content. If transition over to LPO-based, our SAM is going to be double. We will have the driver content as well. So the timing to us is important, but it's not as super sensitive because we are already an incumbent for DSP-based transceivers.

Congrats on the results.

And our final question comes from the line of Craig Ellis with B. Riley Securities.

Hong, I wanted to go back to the opening part of your prepared comments where you talked about things accomplished in your first year, but really use that as an opportunity to ask you what you would like to see the business accomplish in your second year, especially as you look at the infrastructure business from where you are today. What would you be happy with the business accomplishing over the next 4 quarters, either from a product standpoint, a scale-up standpoint, et cetera? Just some qualitative color on where we would be from where we are would be really helpful.

Thank you, Craig. If I say largely broad brush, the second year, because of better improved financial foundations, we can go more aggressive. And the first year, even some of the opportunities we uncovered, but we have to balance the bottom line with the investment in R&D. And so that's one thing. The second thing is some of the R&D spending we have in the first year is going to be start showing the results and momentum for the second year. So I don't want to miss again. If the first year, we play some catch-up game, the second year, I wanted to be outright lead the market with the solutions out there.

Got it. And as you look at the breadth of the business, Hong, or the strength of the business across its different product groups, whether it be CopperEdge, FiberEdge, et cetera, any significant evolutions we should be looking at that you're trying to drive?

I think what we focus instead of focus on each product lines, and fortunately, we have a broader portfolio. We focus on one simple principle with the market needs higher bandwidth, lower power, lower latency and lower cost. That entire offering of our portfolio is focused on the very fundamental attributes we can offer to the customers.

And with that, there are no further questions at this time. I would like to turn the call back to Mitch Haws 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.