SMTC - NASDAQ

Good day. Thank you for standing by. Welcome to Semtech Corporation's Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following our prepared remarks, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the 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 Third 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.

But before we begin, I would like to highlight upcoming investor events, including the UBS Technology Conference in December, the Consumer Electronics Show in January, and the Needham Growth Conference in January. Today, after market close, we released our unaudited results for 2026, which are posted along with an earnings call presentation on 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 2 of the earnings presentation as well as the Risk Factors section of our most recent Annual Report on Form 10-Ks, for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on today's call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call. 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. Good afternoon to all of you joining the call today. The Semtech team made solid progress again this quarter, driving strong sequential and year-over-year revenue and earnings growth. Aligning our data center roadmap to capture major growth and design win opportunities ahead, further strengthening our financial profile all while executing on the R&D roadmap and portfolio expansions we believe establish a foundation for growth. Looking at Q3, net sales were $267 million, up 4% sequentially and up 13% year-over-year, driven by the momentum of our data center and LoRa portfolio. Adjusted operating margins grew 180 basis points sequentially and 230 basis points year-over-year. Adjusted diluted earnings per share were 48¢, up 17% sequentially and 85% year-over-year. Again, this quarter, the core assets we have delineated, namely data center, LoRa, and Perse, together strongly contributed to our revenue deals. We continue leveraging our R&D resources to expand our portfolio, including in LoRa, with multiple protocol integration showcasing WiSAN and LoRaWAN synergy for smart infrastructure. And the new TIA and driver building blocks that establish new performance standards for 1.6 multimode optical transceivers in AI data centers. In addition to our strong financial performance, we further optimized our capital structure with a successful convertible offering. The collective actions taken over the past few quarters have provided Semtech significant balance sheet flexibility, resulting in nominal interest expenses and a much improved cash flow generation. This improved financial position allows us to accelerate investments in our core technologies. Finally, portfolio optimization remains a key focus. At the beginning of our fourth quarter, we completed the acquisition of the Force Sensing business, including its technology products, and key employees from Provo. By leveraging Semtech's customer penetration, global sales, and support network, and our existing capacitive sensing product portfolio, we expect to accelerate the proliferation of the advanced force sensing human-machine interface solutions and the MEMS sensors by targeting leading computing, smartphone, wearable, and automotive applications. In addition, we are making solid progress on the divestiture of noncore assets. With our new financial adviser, we have engaged in diligence conversations with a number of interested parties, which has generated multiple indications of interest. We believe this asset represents a very compelling synergistic value to these potential acquirers. Now let me move the discussion to our end markets. From Q3, infrastructure net sales were $77.9 million, up 6% sequentially and up 18% year-over-year, strongly supported by our data center business. Net sales for data center were a record $56.2 million, up 8% sequentially and up 30% year-over-year, benefiting from strong demand for our broad portfolio including our market-leading fiber edge TIAs, whose net sales set another record. Moving into Q4 and the next fiscal year, we expect an acceleration of sequential and year-over-year growth for the data center business. This conviction is supported by our expectation of continued increases in AI CapEx, expanding customer engagement, and a strong demand pipeline for high-performance, low-power solutions, including the incremental contributions from linear pluggable optics or LPO and the coverage linear equalizers. We believe our low-power analog solutions are a core enabler for making next-generation data centers scalable at 800 gig and 1.6 t. With hyperscale and AI data centers capacity, major down electric consumption every incremental watt saved in networking connectivity, multiplied by tens of millions of ports, will enable a meaningful increase in compute capacity. By delivering best-in-class efficiency and sync signal integrity at the physical layer, analog solutions give cloud and AI operators the flexibility to adopt new 1.6 base of topologies. Whether that is the higher density switches, new optics architectures, or more disaggregated racks, while staying within strict power, thermal, and transmission latency envelopes. To support data center build-outs, we are seeing broad-based demand acceleration, supported by customer forecasts for 800 gig TIAs through 2026. Beyond 800 gig, we are actively supporting a wide range of customers on their 1.6 t transceiver designs and deployment with both TIAs and drivers. And we expect 1.6 volume ramps to begin early in calendar year 2026, concurrent with the deployment of 1.6 switches. Regarding LPO, we have secured design wins with several leading US hyperscalers with our TIAs and drivers in 800 gig transceivers and AOCs. And we continue expanding our customer pipeline through engagement with our optical module customers. We expect a meaningful revenue contribution from TIAs for LPOs starting in Q4, and the momentum to build into calendar 2026. In parallel, we are accelerating our R&D roadmap and targeting initial sampling of 1.6 LPO drivers and TIAs before year-end. Regarding active copper cables, customers benchmarking ACCs against the competing technologies are seeing clear advantages. Excellent signal integrity, lower latency, and more importantly, power consumption up to 90% lower than DSP-based AEC solutions. We expect to ramp ACCs with a major hyperscaler during calendar year 2026. With this deployment transitioning, incorporating ACCs in place of AEC or DACs, we anticipate broader market penetration. As this hyperscaler demonstrates ACC's benefit versus the incumbent technologies, our engagements with additional ACC customers are intensive and broad-based. And we anticipate more design wins over the coming quarters. In addition, a number of customers, including our Android customer, are evaluating the integration of our copper edge linear equalizers on their PCB boards and connectors to improve signal integrity of the high-speed links. We anticipate designing of onboard copper edge use cases over the coming quarters. Moving forward, we believe our broad portfolio of fiber HTIAs and our rapidly emerging copper edge and LPO solutions position us for accelerating data center revenue growth throughout 2026. Now moving to our high-end consumer end, net sales for Q3 were $41.9 million, up 2% sequentially and up 5% year-over-year. Year-to-date, net sales were $118.5 million, up 6% compared to the same period last year. Drills from a high-end consumer portfolio are outpacing market metrics, such as worldwide handset unit volume deals by a considerable margin, demonstrating market share gains, customer adoptions of our differentiated solutions, and the strong supply chain execution. In addition, our per se sensing technology continues to be designed in a growing range of applications, including smart glasses and smartphone platforms supporting both existing designs and new launches over the coming quarters. As I referenced earlier, we completed the acquisition of the leading force sensing portfolio from QUVO at the '4. The integration is well underway, with our first product shipped starting last week, and we look forward to this company's expanding our sensor portfolio with a proven IP and paired with our global go-to-market engine unlocking cross-selling opportunities across a diverse array of leading customers. The combination of these unique capabilities provides a robust set of touch and gesture detection capabilities. Moving to our industrial end market, Q3 industrial net sales were $147.2 million, up 3% sequentially and up 12% year-over-year, driven by another quarter of strong LoRa performance. LoRa-enabled solutions net sales were $40 million, up 10% sequentially and up 40% year-over-year, supported by the continued expansion across several end markets and multiple applications in verticals such as smart utilities, smart buildings, smart city, and asset management. Looking ahead, we believe we are well-positioned to drive LoRa adoption with additional capabilities and features. Our recently launched Gen 4 LoRa plus transceivers offer integrated multiprotocol connectivities in addition to the LoRa LoRaWAN capabilities in a single chip across both sub-gigahertz and 2.4 gigahertz frequency bands. This simplifies hardware design, lowers the bond cost, and enables customers to create a unified design supporting multiple protocols, thus enabling deployments for customers rolling out solutions across different geographies and regions. The LoRa plus transceiver now delivers data rates of up to 2.6 megabits per second on both sub-gigahertz and 2.6 gigahertz bands. This capability enables faster transfer of video images and richer sensor data while maintaining ultra-low power consumption and enables applications that were not practical before. We are also continuing to see good traction in commercial drones. LoRa enables long-range communication up to 10 kilometers for applications like agriculture monitoring, livestock tracking, and infrastructure inspection. With Gen 4's higher data rate, drones can now transmit images and sensor data in real-time while covering larger areas efficiently. Our IoT systems and connectivity business recorded Q3 net sales of $88.3 million, down 1% sequentially and up 7% year-over-year. We see strong design win momentum as IoT transitions from 4G to 5G, leveraging our market leadership. As of this quarter, we have completed all the necessary certifications for 5G REDCap modules, and the products are now commercially available. The business pipeline continues to be strong, thanks to the broader market recovery and the favorable geopolitical environment for this business. Networking solutions with routers, gateways, and services in the portfolio had a strong execution quarter, advancing strategic initiatives across the carrier partnerships, software platform innovation, and market positioning. We expanded our 5G standalone capabilities with support for network slicing, enabling dedicated first responder network slices on T-Mobile's key priority and Verizon's frontline networks. We believe this persistent AirLink as a differentiated solution for mission-critical public safety communications where quality of service and network prioritization are essential. We launched the AI-powered support tools, delivered our next-generation management platform supporting both cloud and on-prem customer requirements, and announced a strategic partnership with the GTEC, extending our reach by embedding AirLink connectivity into their rugged computing ecosystem. The mission-critical cellular router market continues growing in double digits with accelerating 5G refresh cycles, and we believe we are well-positioned to capture share through our carrier relationships, ecosystem partnerships, and differentiated rocket science and lessons. We also launched the industrial first single vendor offering with Skylow, providing access to terrestrial and satellite networks through a single SIM and delivering the industry's first complete device-to-cloud terrestrial and satellite IoT solution from a single partner. Our strong results this quarter reflected the impact of our focus on growth of our core assets, disciplined R&D investments, and the deep and expanding partnerships we are building with our customers. As power constraints intensify for our customers across all our end markets, we believe Semtech is uniquely positioned to lead a world of web ultra-power efficient solutions spanning high-bandwidth data center networking, LoRa connectivity for rapidly expanding IoT use cases, and sensing technologies that enable the functionality of next-generation AI interfaces. We see significant opportunities ahead and are focused on executing against them while continuing to create long-term value for all of our stakeholders. Now let me lay out my priorities for the next few months. First, capture growth opportunities in our core assets. Through selective strategic investments, we plan to fill key capability gaps leveraging our operational excellence. We will also focus on ensuring capacity availability, particularly against the backdrop of tight supply and geopolitical uncertainties. Second, focus on the divestiture of noncore assets. This will help address margin disparities and enable us to focus fully on our core business priorities. Third, strengthen our winning culture and elevate our company mindset to work great as a new normal. In the year of Semtech rising, we fixed the balance sheet, aligned our core portfolio with market growth drivers, and built a strong foundation of winning culture. Building on the momentum of these successes, we are now embarking on the journey of the Semtech transforming, paving the way towards Semtech excellence and solidifying our position as a global leader in enabling next-generation data center, LoRa-based IoT, and our expanded sensing portfolio. With that, I will now turn the call over to Mark for additional details on our financial results and our outlook for 2026.

Thank you, Hong. For Q3, we recorded our seventh consecutive quarter of net sales growth, with record net sales of $267 million above the midpoint of our outlook, up 13% year-over-year. Net sales trends by end market reportable segment, geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 53%, at the midpoint of our outlook. Total semiconductor products gross margin was 61.3%, up sequentially from 60.7% and up year-over-year from 59.9%. Total semiconductor products gross margin reflects meaningful sequential and year-over-year net sales gains in data center and LoRa. IoT systems and connectivity gross margin was reflective of mix related to net sales growth in cellular modules, with Q3 at 36.6%, compared to 39.5% in Q2 and 41% in the prior year period. Adjusted net operating expenses were $86.5 million, below the midpoint of our guidance range, benefiting from prudent cost control and a relatively stronger U.S. Dollar. Adjusted operating income was $54.9 million, up 13% sequentially and up 26% year-over-year, resulting in an adjusted operating margin of 20.6%, up 180 basis points sequentially and up 230 basis points year-over-year. Adjusted EBITDA was $62.7 million, up 11% sequentially and up 23% year-over-year. Adjusted EBITDA margin was 23.5%, up 160 basis points sequentially and up 190 basis points year-over-year. Adjusted net interest expense was $2.5 million, down 86% year-over-year. The capital structure changes completed in October were in effect for only two weeks of the quarter, so the bulk of the benefit will be realized starting in Q4. To summarize these changes, we issued a $402.5 million convertible note, inclusive of the green shoe, due November 2030, with a coupon of 0%, and a conversion premium of 42.5%. Along with the offering, we entered into cap calls which increased the conversion premium to 100%. As such, until we reach an effective conversion stock price of $141.82, the 2030 note will not factor into non-GAAP dilution. And of course, cash interest is due on the note. Net proceeds from the 2030 note along with the issuance of 5.3 million shares, and $3.5 million in balance sheet cash, were used to fully retire our 2028 notes with a coupon of 4% and about $219 million of the 2027 notes with a coupon of 1.625%. We also fully repaid our term loan, for which we were incurring cash interest at about 5.8%. Our debt currently consists of $402.5 million of the 2030 notes and $100.5 million of the 2027 notes. Currently, annualized interest expense is under $3 million, compared to $75 million for the third quarter of last year. Our significantly reduced cash burden from interest allows us to continue our acceleration of investments in strategic, high-growth areas of our business, while driving earnings growth and positive cash flow. We were well-positioned for the Force Sensing portfolio acquisition, which closed at the beginning of Q4, which we expect will integrate very well into our sensing portfolio. Other net non-operating expenses were $400,000, primarily from foreign exchange revaluation losses. We recorded adjusted diluted earnings per share of 48¢, up 17% sequentially from $0.41 and up 85% from 26¢ recorded a year ago. Our income statement results have translated to strengthening cash flow. Operating cash flow for Q3 was $47.5 million, sequentially up 7% from $44.4 million and up 60% from $29.6 million a year ago. Free cash flow for Q3 was $44.6 million, sequentially up 8% from $41.5 million and up 53% from $29.1 million a year ago. We ended Q3 with a cash and cash equivalents balance of $164.7 million. At the end of Q3, net debt sequentially decreased $20.8 million to $338.3 million. Along with debt reduction, strong business performance contributed to an adjusted net leverage ratio of 1.5 as of the close of Q3, sequentially from 1.6 and down year-over-year from 7.2. Now turning to our fourth quarter outlook. We currently expect net sales of $273 million, plus or minus $5 million, up 9% year-over-year at the midpoint. We expect net sales from our infrastructure end market to increase sequentially, supported by projected sequential data center growth of approximately 10%. We expect net sales for our high-end consumer end market to decrease about 3% sequentially. Typical seasonality in this end market is expected to be partially offset primarily by market share gains, but also from projected contributions from the newly acquired Force Sensing portfolio. We expect net sales from our industrial end market to be about flat, with LoRa decreases offset by growth in IoT systems and connectivity. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 51.2%, plus or minus 50 basis points. Our consolidated adjusted gross margin outlook reflects sequential mix changes in the industrial end market. We project strong net sales growth from cellular modules, a part of our IoT systems and connectivity business, with gross margins that are considerably below the corporate average. Lower net sales with gross margins considerably above the corporate average are expected at about the midpoint of the $30 million to $40 million range we provided during last quarter's call. That said, our gross margin outlook for our total semiconductor products is expected to be 60.5%, plus or minus 50 basis points, up 220 basis points year-over-year at the midpoint, and incorporates our projections of data center net sales growth. Adjusted net operating expenses are expected to be $91.2 million, plus or minus $1 million, resulting in an adjusted operating margin at the midpoint of 17.8%. Included in the higher fourth quarter adjusted operating expense outlook are R&D costs associated with the addition of the Force Sensing business, along with increased investment in support of our growing data center portfolio. We have demonstrated strong returns on our R&D investment and expect incremental returns from our future investments. Adjusted EBITDA is expected to be $56 million, plus or minus $3 million, resulting in an adjusted EBITDA margin at the midpoint of 20.5%. We expect adjusted interest and other expense net to be approximately $5 million. We expect an adjusted normalized income tax rate of 15%, consistent with Q3. These amounts are expected to result in adjusted diluted earnings per share of $0.43, plus or minus $0.03, based on a weighted average share count of 95.7 million shares.

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

Thank you. And with that, we will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. The confirmation tone will indicate that your question is in the queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment while we poll for questions. And our first question comes from the line of Rick Schafer with Oppenheimer and Company. Please proceed with your question.

Thanks. And congrats, you guys. My first question, I guess, is really on CopperEdge. It sounds like ramping with your lead CSP this quarter. And I'm just really curious, sort of, I mean, that's breaking the ice. I mean, does that how does that set you up with other CSPs next year? You know, basically, does this validation from this lead customer speed deployments or wins with other CSPs? And is there any sense that you have today or maybe it's just too early to know, but any sense of how many ACC or CopperEdge customers you expect to ship to next year?

Rick, thank you very much for your questions. So for the CopperEdge in the ACC to supporting a leading hyperscaler, they have the product designed into three programs. And then anticipate the ramp to start in 2026. But we supply our CopperEdge ICs to cable manufacturers, so they certainly need the product earlier than that. And we, right now, have all the things ready to go and based on the forecast they provided. So we need to make capacity available to support their very rapid ramp. And in our Q4, our revenue is just a starting point for that customer. But the substantial ramp is going to be throughout the fiscal year 2026. As for you mentioned about, yeah, there's about icebreaking adoption. Definitely, we view this as a catalyst because the benefits of the ACC over the competing technology are very obvious, especially in the power savings. And it's when we engage with the different hyperscalers, we sense that, you know, ACC is typically adopting the platform design. So, certainly, now we see the broader base awareness of this advantage and the deployment by this hyperscaler certainly will provide a strong reference point for other hyperscalers to use in their future platform designs. As for how many, we have been working with our cable partners and engaging pretty much with every hyperscaler out there. I do expect more design wins in the coming quarters.

Thanks, Hong. And maybe for my follow-up, you know, it's just a question I think we all get a lot, and you do too, I'm sure, is just sort of how do you approach sizing the ACC opportunity? I mean, is a good product sort of the roughly $100 million, you know, DAC cable market? Or, you know, I guess just sort of a starting point some way to kind of size that market and as part of your answer, I'd be curious just to understand better where we clearly see the benefits in terms of latency and power of AC but where like, what kind of workloads or what kind of designs where does win versus AEC? Like, where's some of the lowest hanging fruit you know, for Semtech there?

Yeah. So what we see, the ACC, it's positioned in a sweet spot. Between DAC, which had a signal integrity limitation for transmitting over a longer distance at a high speed. Then AEC, which is certainly can transmit with a longer distance, but with a significantly higher power consumption. So, certainly, if you look at the AEC plus DAC is a huge TAM. And, ACC, as I said, is so uniquely positioned. It will chip away a substantial portion of it as we start deploying the hyperscalers. So over time, we'll have a better idea how do we quantify the opportunity in the future.

Thanks a lot.

Thank you.

Thank you. And our next question comes from the line of Sean O'Laughlin with TD Cowen and Company. Please proceed with your question.

Hey. Thanks, guys. Thanks for letting me ask a question, and congrats on the solid results here. You mentioned Hong, you mentioned Q4 growth in data center. Think you used the word meaningful contribution from LPO in the quarter. Maybe you could just either talk about that deployment specifically, or if you can't get into any details onto that deployment, but in general, how do you envision LPO coming to the market? Is it sort of like on the ACC side where it's very project-specific and therefore kind of concentrated and lumpy? Or do you sort of envision it to fold into the mix over time like the, you know, like a CPU server chip of all would have been to the new generations.

Yeah. Hi, Sean. Thank you for the question. So we see a strong sequential growth opportunity in Q3 for Q4 for our data center business. As we mentioned, we anticipate approximately 10% quarter-over-quarter growth. That's on top of 8% sequential growth from Q2 to Q3. And the majority of the growth is going to be on the fiber edge product. In LPO, we are gaining more hyperscaler design wins. We anticipate a meaningful contribution for LPO. If I have to say meaningful, you know, for, you know, Q4, mid-single-digit level. And, ACC contribution now Q4 is still going to be very nominal. As I mentioned early on that, the hyperscaler ramp in volume in their racks for the interconnect is going to be starting in 2026. We'll probably be three to four months prior to that, getting the ramp going to supply to cable manufacturers to get the ACCs ready.

Great. Thanks for that, Hong. And then I just had a quick question for Mark. On the gross margin side in Q4, understood on the mix shift within IoT, I guess, of two questions around that. Is this sort of a permanent mix shift that you're anticipating or is this just sort of a temporary LoRa was strong in Q3, going to dip a little bit in Q4, so that'll balance out longer term. And then, well, I guess, maybe this part is I don't know if this is a Hong question or a Mark question, but one of the suppliers on the foundry side in your space talked about, you know, some significant CapEx that they were anticipating on the silicon photonics, but especially the silicon germanium side. And just wondering if you anticipate any sort of headwinds on that side as, you know, the as you mentioned, the entire market goes through a capacity constraint environment here.

Thanks for your question, Sean. Let me try to address gross margin first and clarify there. On the positive side, semiconductor gross margins driven by data center and LoRa, you know, up was 61.4% in Q3, 140 basis points year-over-year, up 60 basis points quarter-over-quarter. SIP gross margin signal integrity products, which encompasses data center, it was gross margin for Q3 was 65.1%. Up 70 basis points quarter-over-quarter, 200 basis points year-over-year. And the reason I'm providing these statistics is, you know, what we have what we've delineated as our core portfolio. Right, of data center, or per se, those are our faster-growing markets. And those gross margins, hopefully, you can see it, are above the corporate gross margin averages. So as those businesses, we believe, will continue to ramp, we believe they'll be accretive to the gross margins. On the IoT systems and connectivity side, we mentioned that we're going to have growth in cellular modules, where, you know, gross margin is less than a third of our semiconductor products. And we also have normally lower sales from LoRa. In terms of where that's heading, you know, we've talked about what's in our core portfolio and what is not in our core portfolio. And I think from what Hong mentioned, one of the top priorities is we're looking at portfolio rationalization there, partially to remove that margin disparity. On your question on foundry,

Maybe I can answer that one. Yeah, Sean. You are right. The silicon germanium technology platform right now is widely used in making physical media devices. The TIAs and drivers, but also in silicon photonics. That is why my first priority over the next few months is to make capacity available. That foundry is our close partner. We have a long-standing relationship over the last decade and a half. And they have been providing excellent support to us. Another nuance related to the component availability is a co-planning process with our customers and with our customers' customers sometimes. And that is a process we have implemented a few quarters ago. It has been working extremely well. So even they share their visibility even in a business development stage. And based on the understanding and based on our triangulation, we have the wafer start in the fab. And typically, the lead time is six months plus or minus. But with the planning process, we gained the visibility. We can start earlier and we have never really let our customers down with our key components.

Great. Thanks, guys. Congrats again.

Thank you. And our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.

Yeah. Hey. Thank you, Hong. Hong, last call, I think I was giving you a little of a hard time on lack of sequential growth in the data center business. And I think suffice to say, you've fixed that, going forward. But I did have a question on that. My question is, LPO seems to be a little bit earlier than ACC and it seems to be coming on. You're excited about it. But almost everybody I know struggles with the scope and size of that market. So maybe if I can ask you again, or not again, but if I can ask you to just help us understand how big can LPO be as a business, and maybe what is your positioning in the LPO business. And then as a follow-up on the ACC side, I wanted to ask you ACC, are you seeing applications that replace ACC? I'm sorry. AEC. Or just brand new applications.

Yep. Thank you, Harsh. So first of all, on the data center growth, yes, so we're seeing very strong momentum and booking and outlook and forecast is very strong throughout 2026. And the LPO is we're pretty excited about the first meaningful ramp in our Q4. And as I mentioned before, the LPO gives us an incremental opportunity to bring more content in the transceivers. So we benefited from a strong backdrop of the transceiver demand. With the real-time solutions where we provide market-leading TIAs, by offering LPO, we have opportunities to offer drivers in addition to TIAs. So that will increase our TAM by 150%. So we certainly welcome that transition and definitely the rollout of MNP LPO will cannibalize the DSP-based solutions. But, will they do it any day with the increased TAM? ACC, on the other hand, is a net gain. So right now, with the air pocket, we're experiencing from the early adoption in the rack interconnects, the ramp with these hyperscalers is going to be giving us an acceleration of data center revenue. The adoption dynamics for LPO and ACC is a little different. LPO tends to be gradual. Because in their switch fabric, they can as soon as they as long as they have the confidence in the signal integrity on the host they plug into, they can use LPO. ACC, on the other hand, is more the platform-based. When they design the new rack platform, and they will have the power consumption envelope and ACC provides, you know, 90% of power saving compared to AEC. That is a huge amount. When you look at it as rack design right now, any rack, they probably have anywhere from 100 to 200 cables inside. So, each connector, you know, each cable has two connectors on each end. That you can translate into significant power savings. So ACC is encroaching into the established AEC market. But also DAC market. And because the short connects are predominantly DAC-based. But with the ACC availability, especially for 200 gigabit per line, and ACC is expected to be mainstream for longer than meter reach in the future.

Understood. Very helpful as always. And my next question was the Force Sensing acquisition. I don't know much about it. Maybe you could tell us just really quickly, given this is an earnings call, just really quickly what the product does and how you intend to use it, and how much revenue and kind of OpEx you had because OpEx jumped up quite a bit.

Yeah. So the Force Sensing is a capability, you know, you need to touch it and to activate it. We have the capacitive sensing that based, you know, when you have your human body close to the sensors, you change the dielectric constant, you can activate the sensing. But with the Force Sensing, you need to apply the force to activate it. It combines with capacitive sensing very nicely to offer broader capabilities for smart wearable and computing and automotive platforms. The asset we acquired from QUVO was originally at a company called Next Input. They were founded in 2012. And about four and a half years ago, it was acquired by QUVO. And the technology is very differentiating. They have over 175 patents issued and under applications. When we were looking at how to grow the core asset, and how do we fill the gaps in capabilities, the Force Sensing was on our roadmap. And just optimistically, we found this asset available. So we got them acquired and got them nicely integrated. The acquisition happened slightly less than a month ago, but as I mentioned, the integration has already been very successful. So we made the first shipment of the product with our fulfillment infrastructure last week. As for the incremental R&D increase, it's still a lot better to buy this asset than otherwise internally investing. And so it's largely a technology tuck-in. The revenue contribution at this point is immaterial. But we do project a very healthy synergy and a very healthy contribution of this technology and asset to our future revenue.

And, Harsh, just to double-click on OpEx. While there is incremental OpEx from our sensing portfolio, including this force sensing product, we're also increasing R&D in the data center. So the areas where we're investing, the core areas and these assets isn't changing. And we've been able to deliver some pretty good returns in data center, LoRa, and sensing with some nominal increases in OpEx. We expect to be doing the same in Q4.

Thank you so much.

Thank you. And our next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed with your question.

Hi. Thanks for the question, guys. And congrats on the results. I guess, first, a clarification and then a question. The first clarification is you talked about a customer integrating linear equalizers on PCB in the coming quarters. If you could talk a little bit about that, is that a high-volume win or more of a test case? And then just a clarification, you said that you are ramping LPO with several leading US hyperscalers. Are those the same two that you were talking about last quarter, or are there additionals for LPO? Thank you.

Yeah. Thank you, Chris, for the questions. First, on the customers evaluating the linear equalizer in the PCBs or connectors. Those are for the high-volume applications for the high-speed traces. And some customers are planning to do it in the PCBs. And some other customers are seeing the marginal loss of signal integrity from the host, from the ASIC to the port. So, they are evaluating using a linear equalizer to bridge the signal integrity. And it's pretty exciting. So there's a pretty broad base and one of the three, four customers. Those type of applications. As for the LPOs, we stopped counting how many hyperscalers are planning to use it. I will say, at this point, the conversation almost saying, you know, when I was talking to the teams and when I was engaging with our customers, doing the optical modules, the CIOE in Shenzhen and ECOC in Copenhagen. And we were joking. It's more like a who are not planning of using LPO and why? So I would say this technology, at this point, is not if, but more like a when. And what platform they're going to be using it. And we're really excited about the marked starting point of the ramp, but we do expect acceleration throughout 2026.

That's fantastic, Hong. And then secondly, I'll leave it up to you at Dealer's Choice. Either Pawn in China and when we should get confirmed tenders and what you're hearing there. Or, LoRa, kind of your outlook there. It seems like this Gen 4 has some new use cases, which is pretty cool. You can answer either or both.

LoRa, one question, LoRa. So yes, Gen 4 is gaining tremendous momentum. And the multiprotocol is really very exciting. So we plan to provide SDK and software stack to enable WiSAN first and to enable a security application, combined with a LoRaWAN.

Thank you. Very cool.

Thank you. And our next question comes from the line of Tim Arcuri with UBS. Please proceed with your question.

Thanks a lot. Hong, your tone on divestiture has definitely changed versus what it was three or so months ago. It was sort of put on hold a little bit, and now sounds like you have another adviser, and you have some folks who are interested. And so can you just like, what changed and was it you weren't getting the price you wanted? And now these buyers are more interested in engaging at a price that you're happy with. What's can you just walk through, like, the evolution of what sort of change there, and maybe how close are you to do you think executing something?

Thank you for the question, Tim. So the simple answer is nothing has changed. So this time around, you know, we definitely have more dedicated mind share from the potential acquirers. And because the geopolitical situation is a little bit more settled, and also, they're seeing some of the tailwinds playing into the reality. And into the new business opportunities, the backlog, and also what projected Q4 sequential growth. So, you know, to the right acquirers, this really represents a pretty significant synergistic value to them. And as for the timing, we really cannot predict. But rest assured, this is my top priority.

Okay. And then, just on the rack, so it sounds I mean, you're kind of it sounds like you're semi promising Kyber in 2027. And I just want to make sure, do you have a lot of visibility on that just given what happened this year with the black ball racks? I just want to talk through how much confidence that you actually have on that that you would be ramping on Kyber in '27 because it does sound like you're kind of semi promising that. Thanks.

Tim, I would shy away from the specific platform, but go back to the fundamentals. So there's really not a whole lot of different ways to improve the signal integrity, especially when you get the high-speed signal launched into very thin metal traces. So you're going to lose the signal strength. You're going to distort the signal and you need to condition that. And there's no better or more seamless way than getting a linear equalizer integrated on the board. If they have other ways to do it, they would do it as well. So that's a fundamental belief. And that's the use case that we've seen with the multiple customers who are interested in incorporating linear equalizer on PCBs.

Okay. Thank you.

Thank you. And our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.

Yes. Thank you, Hong. Thank you, Mark. Hong, my first question is on ACC. You mentioned the three programs there with the lead customer ramping in '26. I know you can't talk about specifics, but could you at least confirm that all three programs are, you know, either cable or PCB board? And are they all based on the same speeds? And if so, what are the speeds?

Hey, Tore. Thank you for the question. All three programs are for 200 gigabit per second trace. And they are all in cable forms. Three programs, of them are the chip onboard.

Yeah. Thank you for confirming that. And as my follow-up, and sort of back to the Sierra Wireless gross margins, they've been under quite a bit of pressure. I mean, I understand the mix of modules versus services and so on and so forth. But you know, we're also hearing about, you know, component costs going up, whether it's memory or, you know, modem chips or anything like that. So how should we think about that gross margin not just next quarter, but, you know, over the next few quarters?

Yeah. So, Mark, you want to Yeah. So on the gross margin for that the ISC business, so you mentioned memory. Maybe I'll just get to the point. In terms of let's say, inflationary cost on the palm, we're not experiencing that. Especially memory. We have a few choices there in terms of suppliers. So in their for ISC, it really is mix. That's the primary driver of gross margins. As we as cellular modules is a higher percentage, the gross margin goes down. And, you know, if we have more in terms of services or a router business, gross margin of that business goes up. But at this point, as we're guiding next quarter, we're seeing really strong orders and expectations for customer delivery ramps into Q4.

So, Mark, this so this this is basically 5G modules that are ramped this quarter. And because they're lower margin than services and software, that's basically what's weighing on it.

That's right. But it's both 4G and 5G. But, of course, 5G is definitely a tailwind. Correct.

Yeah. Great. Thank you very much. Congrats.

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

Yes. Thanks for taking my question. I wanted to follow-up on that last question. Just, Mark, maybe you can level set us. I think you said the semiconductor gross margin for the fourth quarter would be 60.5. Don't know if you gave an ISC gross margin, but it looks like it's got to be pretty materially below the 36.6 that you did in the third quarter. So just wondering if you could give us some range where you think that ISC gross margin comes out in the fourth quarter.

Yes. At this point, I'll just say that the ISE gross margin will be lower primarily due to the drivers we talked about with cellular modules. On the again, on the positive side, semiconductor gross margins, was 60.5%, plus or minus 50 basis points. So still quite healthy, and we expect that to continue to grow. Well, we're only guiding on one quarter. Right? The drivers of gross margin between data center, LoRa, and per se, our sensing business now is expected to be accretive to the gross margin.

Got it. And then I'm not sure if it's for Mark or Hong. It does sound like you may be getting closer to a potential divestiture based on your comments in the script. I think in the past, you described a divestiture of noncore assets as being nondilutive to EPS because you would take deal proceeds and pay down high-interest rate term loan debt. Well, you've now done that interest expense annually is less than $3 million. So I guess I'm hoping you could comment now without the balance sheet, would a divestiture of noncore assets be dilutive to EPS?

At this point, we're looking at the lower gross margin portions of our business. So that would be something that, at this point, without naming all the specific assets that we're looking at, let's say it's nominal impact to an immaterial impact.

Okay. Thank you.

Thank you. And our final question comes from the line of Cody Acree with The Benchmark Company. Please proceed with your question.

Yeah. Thanks, guys, for taking my questions. Hong, if any, maybe go back to the ACC opportunity for a minute. Can you talk to some of the market's concerns around the reliability of ACC? In earlier testing. Is that contributing to any of the hyperscaler what it looks like to be maybe incremental delays in the program ramp I believe was expected to begin here in Q4, and now it's like a more into next year.

Cody, yeah, thanks for the question. I'm not aware of any reliability you were mentioning about the ACC. So there's some chattering. Like, this is more like a couple of years ago by not really the players no longer active in the industry, and there's some false start but false start but there are no any issues we are aware of, and we have deployed a significant amount of ACCs in the industry. So I mean, we haven't heard anything bad. And then with the hyperscalers, they have gone through months of qualification. And reliability testing, system validation process. They're very careful, and they're very technically capable. We haven't heard any concern about that.

Alright. Great. Thanks for that clarification. Can we go to your discussion of ensuring capacity availability you just talk about some of the strategies that you might be able to employ specifically on the wafer side you mentioned earlier?

Yeah. So, in a way, talk about silicon photonics silicon germanium semiconductor platform to support silicon photonics and our PMD physical media devices. And there are more than one location. And we try to make mark capacity available by engaging and qualifying manufacturing from other sites and other countries. So that not only unlocks some additional opportunity, capacities, but also makes it more robust from the geopolitical point of view. So that's what I mean. That's the focus for the near term.

Would you look at anything like, dedicated capacity commitment, or investment on your part?

So the capacity, you know, certainly, we have been increasing the CapEx investment in the back end. Example, testing. But for the foundry capacity, we are primarily working with our partners to qualify their foundry from different locations.

Alright. Great. Thank you, guys.

Thank you. Thank you, Cody.

Thank you. And with that, there are no further questions at this time. I would like to turn the call back over to Mitch Haws for closing remarks.

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