SMTC - NASDAQ

Good day, and thank you for standing by. Welcome to Semtech Corporation's fourth quarter and fiscal year 2026 earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mitchell J. Haws, Senior Vice President of Investor Relations for Semtech Corporation. Please go ahead.

Thank you, and welcome to Semtech Corporation's fourth quarter and fiscal year 2026 financial results conference call. Participants on today's conference call are Hong Q. Hou, our President and Chief Executive Officer, and Mark Lin, our Executive Vice President and Chief Financial Officer. Before we begin, I would like to highlight upcoming investor events, including the Optical Fiber Communications Conference starting tomorrow and the ROTH Technology Conference on March 23. Today after market close, we released our unaudited results for the fourth quarter and fiscal year 2026, which are posted along with our earnings call presentation to our investor relations website at investors.semtech.com. Today's call will include various remarks about future expectations, plans, and prospects, which comprise forward-looking statements. Please refer to today's press release and see slide two of the earnings presentation as well as the Risk Factors section of our most recent Annual Report on Form 10-K for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on today's call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call. We will also be referring to results for fiscal 2026 unless otherwise noted. Please see today's press release and slide three of the earnings presentation for information regarding notes on our non-GAAP financial presentation. The press release and earnings presentation also include reconciliations of our GAAP and non-GAAP financial measures. With that, I will turn the call over to Hong.

Thank you, Mitch. Good afternoon to all of you joining today. Semtech Corporation closed fiscal year 2026 with significant momentum, achieving a record $1,050,000,000 in net sales, a milestone that reflects the progress we have made and the trajectory we believe lies ahead. We drove strong sequential and year-over-year revenue and earnings growth. We advanced our data center road map to capture compelling design win opportunities and continued to optimize our product portfolio, all while executing on the R&D and expense initiatives we believe position Semtech Corporation for an exciting next chapter. Looking at Q4, net sales were $274,400,000, up 3% sequentially and up 9% year over year. For the year, revenues were $1,050,000,000, representing annual growth of 15% driven by continued strength in our data center and the LoRa portfolios. Adjusted diluted earnings per share were $0.44, up 10% year over year. For fiscal year 2026, adjusted diluted earnings per share were $1.71, growth of 94% over the prior year. In addition to delivering strong revenue and earnings growth, portfolio optimization remains a key focus of execution. As announced earlier this month, we acquired HIFU Corporation, which represents an important strategic building block for Semtech Corporation. HIFU is a California-based manufacturer of high-efficiency indium phosphide-based optoelectronic devices, including gain chips and CW laser chips that are critical components in the optical transceivers powering today's data centers. Put simply, HIFU makes the light-emitting building blocks that sit at the heart of high-speed optical interconnects. The strategic rationale is straightforward. As data center architectures evolve to 1.6T and 3.2T, the complexity of optical interconnect increases dramatically. By bringing HIFU's proven indium phosphide laser technology together with Semtech Corporation's industry-leading TIAs and laser drivers, we can co-develop and co-optimize performance across the laser, modulator, and driver interface, and increase Semtech Corporation's content opportunity from high single-digit dollars in an 800G module to about $80 in a 3.2T module. We believe this combination will result in a more integrated, more efficient chipset, one that reduces system power consumption and gives the hyperscaler a differentiated solution for high-bandwidth optical transceiver modules. We have developed a comprehensive investment plan for the Alhambra, California facility to expand domestic capacity and accelerate product development. Integration of HIFU into Semtech Corporation operations is underway, with the transaction expected to be accretive to non-GAAP diluted earnings per share within the first year. We are genuinely excited about the people and technology joining Semtech Corporation, and we see significant untapped potential for high-efficiency lasers in different interconnect applications. Finally, we continue to make progress on the divestiture of the cellular module business, and we are increasingly encouraged by the level of interest and engagement. We remain confident this business represents a compelling opportunity for the right buyer, and we remain focused on bringing this process to a successful conclusion. Now let me move to a discussion of our end markets. For Q4, infrastructure net sales were $86,300,000, up 11% sequentially and up 25% year over year, strongly supported by our data center business. For fiscal 2026, infrastructure net sales were $310,000,000, growth of 27% over the prior year. For Q4, net sales of data center were a record $63,000,000, up 12% sequentially and up 26% year over year, benefiting from strong demand for our broad portfolio, including our market-leading FiberEdge ICs, whose net sales set another record. In Q4, we also started shipping into LPO transceivers, with revenues in line with the outlook we provided on the last quarter's earnings call. In fiscal 2026, our data center revenues were a record $223,000,000, representing annual growth of 58%. Our optical and copper product alliances are firmly established with hyperscalers as a differentiated and high-performance offering. Power efficiency has become one of the defining constraints of the modern AI infrastructure. As hyperscalers measure data center capacity in megawatts, the ability to move data faster while consuming less power at the networking layer is no longer just a differentiator; it is an enabler. Our analog solutions address this directly, enabling operators to scale next-generation architectures at 800G, 1.6T, and eventually 3.2T. Demand for 800G PIA solutions remains strong and broad based, with increasing momentum throughout 2026. At 1.6T, we are engaged across a wide range of transceiver programs and expect volume ramps to build as hyperscalers roll out their new XPU and switch platforms using reduced-power 1.6T transceivers throughout the year. On LPO, design wins with several leading U.S. hyperscalers validated our TIA and driver solutions in 800G transceivers. We are very excited to be a member of the new XPO MSA, to define specifications and enable high-bandwidth, high-density, low-power switches. By combining with a low-loss copper interconnect, such as flyover wires or linear re-driven PCB traces, some hyperscalers are becoming increasingly bullish on 1.6T LPO instead of using LRIs for the first layer of the scale-up fabrics. We continue to expand our LPO IC portfolio, with 1.6T LPO drivers and TIAs expected to come to market this year. In supporting further proliferation of low-power linear optics, Semtech Corporation, along with other industry leaders, is developing NPO, our Near Package Optics MSA, for low-power, high-density, high-bandwidth solutions. Successful deployment of 800G LPO transceivers gives hyperscalers confidence in NPO as the next evolution of optical solutions. We are excited by the increased content available to Semtech Corporation in NPO deployments. Active copper cable, or ACC, continues to gain significant traction. Customers evaluating ACC against the incumbent solutions are seeing compelling performance advantages in the form of robust link margin and transformative power savings versus DSP-based solutions. Alongside our cable solutions, customers are increasingly evaluating our copper linear equalizers for onboard integration to enhance signal integrity across high-speed links, an opportunity we are confident will convert into design wins over the coming quarters. One of these use cases is active backplane using CopperEdge ICs, which our cable partners will demonstrate at OFC. Finally, we co-authored the ACC MSA, helping establish ACC technology as the leading solution for low-power and high-performance copper links. Members of the MSA span IC, XPU, and cable suppliers, all in partnership with major hyperscalers. We believe the ACC MSA accelerates the adoption curve for the entire industry. By establishing common specifications, we reduce fragmentation, lower deployment risk for hyperscalers, and make it easier for the ecosystem to develop around ACC as a standard, not just a proprietary solution. That is good for customers, and it is good for Semtech Corporation. We look forward to seeing many of you at OFC starting tomorrow. This year, we are showing live demos across several of our key product areas. They tell a clear story about where Semtech Corporation is positioned in the data center interconnect market. Starting with copper, we are demonstrating 1.6T ACCs running live traffic to NVIDIA's 224G SerDes. We are also showing next-generation 448G per-channel CopperEdge chips. As AI clusters scale, the demand for low-power and low-latency copper interconnect continues to grow, and we think we are very well positioned to lead the market. On the optical side, we will be demonstrating NVIDIA's 1.6T DR4 transceivers powered by Semtech Corporation TIAs and laser drivers running live in NVIDIA's switch platform. We will also be demonstrating a 1.0T Ethernet switch running live traffic over both single-mode and multimode fibers, supporting FR4, LR4, and LPO configurations across the Broadcom Tomahawk 6 platform, all built on Semtech Corporation silicon. We are thrilled to demonstrate the breadth of our optical portfolio across a multivendor ecosystem. We will also be demonstrating our next-generation 448G per-channel modulator drivers and TIAs, addressing increasing bandwidth demand to support future-generation AI workloads. We are also showcasing our indium phosphide CW laser and gain chip technology for tunable laser applications with outstanding power efficiency, over-temperature performance, and far-field beam profile—products from our HIFU acquisition. Across copper and optical, and both near-term and next-generation, OFC gives us a tremendous opportunity to show Semtech Corporation’s position across the full hyperscale interconnect stack. We believe we are positioned for multiyear growth opportunities supported by our expanded portfolio. We expect to start shipping CopperEdge for the 1.6T ACC hyperscaler deployment this quarter, with demand accelerating throughout the year. We also expect FiberEdge design wins for 1.6T transceivers, with a significant ramp in the second half of the year. Additional revenue drivers in the near future are expected from additional design wins for ACC at other hyperscalers, linear equalizers onboard across multiple customers, gain chips and CW lasers in transceivers, and our market-leading 400G FiberEdge and CopperEdge products for 3.2T interconnect solutions. Given the breadth of our data center portfolio and design-in traction across an expanding set of customers, we expect data center year-over-year revenue growth this fiscal year to exceed 50%. Now moving to our high-end consumer end market. Net sales for Q4 were $36,600,000, down 13% sequentially and up 3% year over year. Net sales for fiscal year 2026 were $155,100,000, up 5% year over year, driven by both our TVS and PerSe product portfolios. Our consumer TVS revenue continues to ramp well ahead of handset volume growth, and we expect another year of revenue and design win momentum. We expect consumer TVS revenues to increase next quarter, a function of improved seasonality and share gains at a leading handset manufacturer. In addition, PerSe continues to broaden its design win footprint, with adoption expanding across smart glasses and smartphone platforms, supporting both current and upcoming product launches. The integration of the force sensing portfolio is progressing well, with initial product shipments already underway. Customer engagement and design win activities continue to build, and we are increasingly optimistic about the cross-selling opportunities this combination unlocks across our combined customer base. Moving to our industrial end market. Q4 industrial net sales were $151,000,000, up 3% sequentially and year over year, with another solid quarter for LoRa. For the full year, industrial revenue was $584,000,000, 13% growth over the prior year. LoRa-enabled net sales were $39,600,000, in line with Q3 and up 7% year over year, supported by continued expansion across several application verticals such as smart utilities, smart building, smart city, and asset management. For the full year, LoRa revenues were $156,000,000, representing full-year growth of 34%. We had a strong presence at CES this year, showcasing new LoRa application use cases. Four themes highlighted in our presence: EdgeAI integration, multiprotocol connectivity, global network expansion, and the convergence of the industrial and the consumer IoT—together reflecting a technology that is broadening its reach across a growing range of markets. EdgeAI emerged as another defining trend, as sensors increasingly process data locally for latency, privacy, and bandwidth reasons. Our collaboration with an ecosystem partner demonstrated how LoRaWAN and EdgeAI work together to enable predictive maintenance in industrial environments. Demand for a solution that combines LoRa with multiprotocol flexibility is accelerating. In order to facilitate LoRa+ adoption, we recently signed an agreement with a technology partner to support software development to activate and support other protocols. We are rolling out

Thank you, Hong. For Q4, we recorded our eighth consecutive quarter of net sales growth, with record net sales of $274,400,000 above the midpoint of our outlook, up 9% year over year. For the fiscal year, net sales were $1,050,000,000, up 15% year over year. Net sales trends by end market, reportable segment, and geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 51.6%, above the midpoint of our outlook. Total Semiconductor Products gross margin was 61.7%, up 40 basis points sequentially and up 350 basis points year over year. Total Semiconductor Products gross margin was above the high end of our outlook range, the result of favorable mix from our LoRa and data center portfolio. We expect gross margin contributions from new data center products from our copper and optical 1.6T portfolio ramping in the second half of this year will be accretive to both our Semiconductor Products and Signal Integrity Products gross margin. IoT Systems and Connectivity gross margin was reflective of mix-related net sales growth in cellular modules, with Q4 at 31.6%. Adjusted net operating expenses were $91,500,000, slightly above the midpoint of our guidance range. Adjusted operating income was $50,000,000, adjusted operating margin was 18.2%, adjusted EBITDA was $57,400,000, and adjusted EBITDA margin was 20.9%, with all of these metrics above the midpoint of our guidance range. Reflective of capital structure changes, Semtech Corporation was in a net interest income position in Q4 at $100,000, which reflects a sizable change from the $11,200,000 of net interest expense reported a year ago. For fiscal year 2026, adjusted net interest expense was $11,500,000 compared to $70,600,000 in fiscal year 2025. We recorded adjusted diluted earnings per share of $0.44, above the midpoint of our guidance, and full-year adjusted diluted earnings per share was $1.71. Operating cash flow for Q4 was $61,500,000, sequentially up 30% from $47,500,000 and up 84% from $33,500,000 a year ago. Free cash flow for Q4 was $59,100,000, sequentially up 32% from $44,600,000 and up 91% from $30,900,000 a year ago. Operating cash flow and free cash flow for the standalone fourth quarter each exceeded the amounts reported for all of fiscal year 2025, driven by improvements in both our capital structure and operating performance. Strong cash flow generation has allowed us the operational flexibility to invest in R&D projects as well as to invest strategically via tuck-ins. The increased R&D investment in our core data center, LoRa, and sensing portfolio has yielded strong returns. Aggregate consideration for the force sensing portfolio we acquired in October 2025 and the laser and gain chip business we acquired in March 2026 is less than the free cash flow we generated in Q4. I believe our balancing of R&D spending, along with prudent use of capital for capacity expansion and acquisitions, positions us to generate meaningful long-term returns for our shareholders. We ended Q4 with a cash and cash equivalents balance of $195,200,000, and debt was $503,000,000, unchanged from last quarter. Our adjusted net leverage ratio was 1.3 as of the close of Q4, down sequentially from 1.5 and down year over year from 2.3. Now turning to our outlook for the first quarter of fiscal year 2027. We currently expect net sales of $283,000,000 plus or minus $5,000,000, up 13% 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 12%, including initial CopperEdge production shipments supporting a hyperscaler at the tail end of the quarter. We expect net sales from our high-end consumer end market to increase about 9% sequentially or about 13% year over year, benefiting from improved seasonal trends, market share gain in our TVS products, and contributions from the force sensing portfolio we acquired in the fourth quarter. We expect net sales from our industrial end market to be about flat, with LoRa increases offsetting decreases in IoT Systems and Connectivity. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 52.8%, plus or minus 50 basis points. Our gross margin outlook for Total Semiconductor Products is expected to be 60.4%, plus or minus 50 basis points, down 130 basis points sequentially and including initial ramp costs from the HIFU acquisition. Adjusted net operating expenses are expected to be $96,900,000, plus or minus $1,000,000, resulting in adjusted operating margin at the midpoint of 18.6%. Included in the higher first-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, including the HIFU acquisition. We have demonstrated strong returns on our R&D investment and expect incremental returns from these investments. Adjusted EBITDA is expected to be $59,500,000, plus or minus $3,000,000, resulting in adjusted EBITDA margin at the midpoint of 21%. We expect adjusted interest and other expense, net, to be approximately $500,000. We expect an adjusted normalized income tax rate of 27% for all of fiscal year 2027, an increase from 15% in fiscal year 2026, due to a geographical shift in pretax profits. These amounts are expected to result in adjusted diluted earnings per share of $0.45, plus or minus $0.03, based on a weighted average share count of 96,600,000 shares.

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

Thank you. We will now be conducting a question-and-answer session. One moment while we poll for questions. Our first question is from Sean O'Laughlin with TD Cowen.

Hey, guys, congrats on the solid results and continuing on your strategy. I wanted to ask a question on the HIFU acquisition. I think the strategic rationale laid out is pretty straightforward, but wondering if you could expand on the initial applications you are targeting. It sounds like mostly transceiver side. And then, maybe more importantly, where are you for the indium phosphide-based product in the qualification or design cycles at some of your customers? And what should be our expectations for when some of that starts to fold into the model in a material way?

Thank you, Sean, for the question. So the HIFU initial product right now in production is a gain chip used in tunable lasers. Those are the high-end lasers to support the transmission over 80 kilometers, 40 kilometers for metro and data center interconnect applications. By leveraging about four decades of laser design experience, they have been the leading supplier for gain chips for ILA. This is a product already in volume production, and demand is increasing. Right now, it is capacity limited. So this product, for fiscal 2027, probably will be contributing roughly about a high-teen level of revenue. But we are adding capacity as we speak. In the second week as a proud owner of this asset, we have also demonstrated—will showcase tomorrow at OFC—the intensity-modulated direct drive lasers, our CW lasers used in optical transceivers. This laser is really well designed to support high conversion efficiency; for example, wall-plug efficiency at room temperature is 42%. That is much higher than a typical about 25%. And our temperature performance is outstanding, and the far-field beam profile is outstanding. So that makes it much easier to couple into single-mode fiber or silicon photonics waveguide. We do not have enough capacity right now to support the industry demand. After the announcement, you can just imagine we got multiple customers reaching in and asking for samples. So we will be able to provide samples to the key customers to support the evaluation while we are building capacity to support future growth. As for putting it in the model, probably once we have a better understanding on the equipment lead time and the capacity, in a future period, we will provide more guidance on the revenue contribution from CW lasers. Right now, we are planning to intercept at 3.2T transceivers; of course, it can support 1.6T transceivers as well.

Great, thanks, and I appreciate all the color there. If I could just ask a real quick follow-up, maybe for Mark on that topic: How should we be thinking about the CapEx line as you talk about capacity expansions at Alhambra? I guess maybe Hong alluded to the answer to this question in his previous comment about understanding equipment lead times, but everybody in the indium phosphide industry seems to be ramping capacity, and are you guys, for lack of a better term, at the back of the line there?

So the CapEx intensity is moderate, and the fab already has the key capabilities. Right now, we just need to selectively add capacity in some areas. The whole industry is ramping up, and epi equipment, fab equipment is in high demand as well. But we will be very creative in combining the new and used market to look at the fab and test equipment. The intensity, I would say, of the CapEx can be easily supported with, say, for example, one quarter of the free cash flow as we have demonstrated in the past quarter.

Yes, Sean. And the ramp is over multiple quarters, but I think Semtech Corporation's world-class operations team is on it. We really had the planning during diligence. And the other good news is all of this CapEx, I believe, qualifies for Section 48 investment tax credit of 35%, and then there are some additional government grant programs that are available, especially to strengthen U.S. semiconductor manufacturing capacity.

Thanks, guys.

Thank you.

Our next question is from Tore Egil Svanberg with Stifel.

Yes, thank you, Hong, Mark, congrats on the results. So my first question is on CopperEdge. As that business now starts to ramp in fiscal 2027, can you give us any sense for how big that could be, maybe tens of millions of dollars? And if you cannot give us the size, perhaps you could at least give us the mix between actual ACC cables versus linear equalizers.

Tore, thank you for the question. We are supporting the ramp. We are getting forecasts and we are getting the materials ready. As we gave the guidance in our prepared remarks, toward the end of this fiscal quarter in the April time frame we will start shipping to the cable manufacturers who are our direct customers to support rack-level volume ramp in the middle of the year. So everything is on schedule. As for the mix between DAC and ACC, they are in the process right now of doing this rack-level testing and system validation. We will be getting a better idea probably in a month or two on the support. But we are getting the long-range forecast so that we can get wafer starts in the fab and prepare the material readiness. As I indicated, that is a very key focus for our operations. So at this point, it is still too early to tell. But as for linear equalizer onboard, there are multiple customers supporting our activities, and based on the level of engagement, I do believe some of those will be getting qualified within the coming quarters. Just on the linear equalizer and the ACC side, the MSA establishment with 12 founding members is tasked and at work already, starting to draft the specifications. This is still the early stage of ACC. Different customers are experiencing different performance. It is very important to have this MSA, to draft the specifications, and to educate the industry on what to expect with a certain level of reach, gauge, and data rate. With the common understanding of MSA, I believe this technology is going to proliferate much faster. We have already seen other hyperscalers lining up to get their racks designed by using ACC.

That is very helpful. Thank you. And as my follow-up, and maybe more of a clarification question: You talked about LoRa growing 20% longer term, but then you talked about a $35,000,000 to $45,000,000 quarterly run rate. You just did $40,000,000. So what exactly is that $35 to $45 range? Are you expecting some volatility this year? If you could just clarify what you meant by that. Thank you.

Thank you, Tore. Historically, we have been seeing the overall trend of LoRa revenue increasing, but quarter to quarter it is a little bit bumpy due to the project-based deployment of demand. That is why we give a range of plus or minus $5,000,000. But you see that sliding scale continue to go up with the center point. I have never been this excited about our LoRa strategy. With dual-band to increase the bandwidth to address EdgeAI applications, with LoRa+ to really get multiple applications in one SKU with the software and hardware all supported by us, and with Amazon Sidewalk and the mass market, we have multiple growth drivers. That is why we have conviction that a 20% growth rate is very doable. When we can help the ecosystem adopt the LoRa+ protocol faster, we expect the growth rate to accelerate.

Very clear. Thank you.

Thank you.

Our next question is from Christopher Rolland with Susquehanna.

Hey, guys. Thank you for the question. I guess my first one is on the indium phosphide laser acquisition. First, a clarification: This is all going to be internally manufactured materials? Just wanted to clarify that. And secondly, if you can talk about maybe your go-to-market strategy here, maybe even some revenue synergies with some of your other parts. Are you going to kind of bundle this with FiberEdge? Are you going to perhaps go direct to hyperscalers? How are you going to approach this market? Thank you.

Thank you, Chris. Those are very good questions. To answer your first question, yes, the fab we acquired is vertically integrated. Namely, we do the epi growth of epi wafers, we process wafers, we test internally, and we do use the ecosystem on backend packaging to increase capacity. The lasers involve a multi-step regrowth process, so we do that internally; that is how we are able to get the performance in conversion efficiency and over-temperature performance. As for your second question, go-to-market strategy, you are absolutely right. The transition from 100G per lane to 200G per lane already puts so much stress on the ecosystem, really challenging the device designers with the performance margin. And when we evolve the data rate to 400G per lane, there is not a lot of margin to give. So the co-development and co-optimization is key in order to get the best electronic component with the best optoelectronic component. Now we own two sides of the equation, so we will be able to mix and match to provide the best integrated solution. When we have that, we will provide the chipsets with a reference design to our customer base. This way, we help accelerate time to market for them, and in return we make our components more sticky. Using our electronic components—like a TIA, a laser driver, a modulator driver—together with our optical components, you will pretty much get a guarantee to work to deliver 400G performance. That is why we are saying the major inflection point is 3.2T transceiver modules. It could be earlier than that.

That is great. That is a fantastic strategy. One question I get from investors is around the eventuality of CPO, particularly for scale. Jensen here at GTC was talking a little bit about the coexistence of both copper and optical in the rack. But some pushback I get from investors is around the role of copper the closer that optical moves to the ASIC. Obviously, you are expanding your market with lasers here into the CPO world. But perhaps you could also address that pushback on copper—where you see copper playing a role not only in the next two years, but all the way through 2030, for example, even as you move CPO to the ASICs?

Great. Thank you, Chris. I listened to Jensen's call as well. Basically, what I was trying to say over the last year, he clarified so well. Copper scale-up is always going to be there, and CPO scale-up is only going to make more sense in multirack systems. For example, he was talking about Alravan and NVL576 across eight racks. Because you are using active copper cable, it is very hard to get eight racks all point-to-point interconnected. So you use the first opportunity, the signal out of the XPU, to convert into optical. Optical can interconnect within a rack and also interconnect between racks. The same thing for the Tiber platform; he was talking about NVL1152. That is also an eight-rack system on the NVLink 144. In those, the CPO scale-up makes sense. In general, copper scale-up is going to be the mainstream and primarily used within a rack. The CPO scale-up is going to be used in multiple racks. So do not put a terminal value on copper yet. The industry also is formulating NPO, Near Package Optics. It is a complement to CPO. CPO is one company thing, but NPO can define a specification to have specific geometry, layout at the I/O pinout, and keepout zone to leverage the entire ecosystem's innovation to make it more scalable and more affordable. In CPO, we may not have much content in there except for lasers. But in NPO, we will be all over the place—with laser drivers, TIAs, and lasers, and even silicon photonics modulators, as I have mentioned. That is a very natural expansion of our portfolio by internal development.

Thanks.

Thank you.

Our next question is from Tristan Gerra with Robert W. Baird.

Hi, good afternoon. You have talked about the rising interest from hyperscalers about LPOs. Could you talk about the recent Arista XPO announcement and what it does to the LPO ecosystem and any way to quantify what the ramp is going to look like medium term and when you expect the big inflection point in LPO revenue?

Great. Thank you, Tristan. Arista just released that MSA. We are a very active member of the MSA. XPO defines a high-density, low-power, and high-reliability MSA for front-panel switches. For example, to keep the same rails, they will be able to collapse the form factor from essentially 4RU into 1RU without giving up any capacity. It basically removes the packaging overhead. Because liquid cooling is available, they can develop the cold plate so that there is a gradient between the optical transceivers. That is just great and really builds upon the confidence in LPO and upon the innovation from the entire ecosystem with multiple module manufacturers. NPO, on the other hand, is a little bit more involved because that involves the development of common specifications on geometry, key parts on the I/Os, and the shoreline configurations. Essentially, NPO is, in a way, XPO onboard. XPO is just a high-density package on the front panel of the box. In both configurations, we are going to have a lot of content in there—again, the lasers, the modulator drivers, the modulators themselves, and TIAs. We welcome this type of MSA. It is really going in our direction.

Okay, that is great color. And then for my follow-up, you have mentioned in the past some ACC opportunities onboard. Could you provide maybe a little bit more feedback on what exactly is the use case for that and how meaningful that could get over time?

The CopperEdge and linear equalizer onboard—our customers are defining five or six different use cases, all to utilize the redrive capability to extend the link and improve the link budget. It can be on the switch, on the merchant GPU board, on the ASIC board of hyperscalers. It can also be on the backplane, in an active backplane, by our cable partners.

Great.

Thank you very much.

Thank you.

Mhmm.

Our next question is from Nathaniel Quinn Bolton with Needham & Company.

Hi, this is Robert on for Quinn here. Congrats on the quarter. You have been active in doing acquisitions and have expressed intent to increase R&D with some of your capital up to this point, but any updates on potential divestitures? Last we heard, ongoing and, you know, roughly in the third or fourth inning. So any update on that process would be great.

Yeah, Robert, thanks for calling in. I am not really good at sports analogies, but I think that we are making good progress. I am optimistic about a good conclusion. At this point, I would say that maybe incremental from last quarter, the interested parties are spending some dollars on external consultants—so financial due diligence—and on legal costs. So we are at that stage. When there is additional skin in the game, I think that does point toward a successful conclusion of the cellular module divestiture in the near term.

Thanks. And just as a follow-up, it sounds like there are many tailwinds coming across for LPO as well as copper, and last week we heard them ramping kind of in a similar time frame this year. Can you just refresh that for us? It sounds like ACCs could be ramping a little earlier now. And then, which do you see as the larger revenue opportunity over the coming twelve months?

Robert, we gave the timeline. ACC ramp is on time, on schedule, and then the 1.6T FiberEdge product. Beyond that, as I said, could be ACC with other hyperscalers, linear equalizer onboard, and the lasers and 400G. We like them all. At this point, it is too early to call which one is the bigger opportunity, but we like them all and they are going to be contributing in pretty significant ways.

Sounds great. Thanks, guys.

Thank you.

Our next question is from Joseph Moore with Morgan Stanley.

Great, thank you. You talked about 1.6T starting to grow in your TIA business and other places. Can you talk about the line of sight that you have to 800G still growing? I assume it is still growing for now and you are layering in the higher speeds on top of it. How long will that persist and at what point do they start transitioning over more?

That is right. Joe, we did mention in the prepared remarks that 800G is the foundation. The growth is strong, demand is strong, and broad based. That is a given. That goes very strong, at least throughout fiscal 2027. As the industry rolls out new XPUs and all the I/Os go to 200G, they are going to evolve into 1.6T, and in low-power 1.6T optics we are actually very well positioned, even better than 800G.

Okay. Thank you.

Thank you.

Our next question is from Craig Andrew Ellis with B. Riley.

Yes, thanks for sneaking me in, and guys, congratulations on both the execution and a really strategic-looking acquisition. Hong, I think near the end of your prepared remarks, you commented that you thought data center year-on-year revenue this year could be up around 50%. One, just confirming that I heard that right. And two, can you help us understand what the biggest growth drivers are or rank the growth drivers that you see driving that degree of growth?

Thank you, Craig. Yes, you heard it right. Year over year, we expect data center revenue to grow 50% this year. The drivers are ACC with a hyperscaler, 1.6T FiberEdge in the second half of the year, and then there might be even linear equalizer onboard contributing to the growth.

That is helpful. Thank you. And then, Mark, congratulations on the strength—and you too, Hong—on the strength in semis gross margin and what we are seeing in Signal Integrity. It is really nice to see those mid-to-high sixties levels reattained. The comments on accretive second-half products—are we signaling that gross margin for the segment could start with a seven handle later this year or next year, or would you still expect to be in the sixties?

The new products that we introduced do have accretive gross margins. I am very pleased with that. It is a great return on the R&D that we put into the products. They do contribute to growing gross margin. But we still also have other products, at 800G. I am not expecting it to be in the sevens, but firmly in this

Well, congratulations on where it is. Thanks, guys.

Thank you.

Our next question is from Cody Grant Acree with Benchmark.

Thanks, guys, for taking my question. Maybe just following up on Craig's question, you did not mention LPOs among the drivers of that 50% data center growth. Any reason for leaving that out? And maybe can you just talk about the breadth of the expansion of your engagements with ACC and LPOs over the last few months and how you expect those to progress over the course of the year?

Thank you.

Cody, yes, the LPO continues to grow, and as we said, in Q4 we delivered just as we gave the guidance—mid-single-digit—and signaled the first ramp. It continues to ramp on LPO, but we have them in the FiberEdge product category, so it is included in there. The LPO adoption is proliferating, and that also builds the confidence for this XPO and NPO strategy. ACC is also getting more and more accepted by the industry. I mentioned that one hyperscaler starts ramping midyear, and more hyperscalers are embracing ACC as well. Linear equalizer with multiple customer engagements has been going really strong. I believe that we not only have growth drivers lined up for this year, but have multiple growth drivers lined up for future periods beyond fiscal 2027.

Thanks for that color. Mark, any thoughts on your OpEx trends for the year?

Yes. I am pleased that we are able to have the flexibility to invest in the business. Our outlook for next quarter in OpEx growth is really R&D. I believe we have demonstrated strong returns on investment, and our investment in R&D certainly yields stronger returns than interest expense, for example. But we do remain disciplined in our R&D investments, focusing on our core data center portfolio, on LoRa, and on PerSe. The two recent acquisitions do add some incremental R&D, but these are in our core portfolios.

Alright. Great. Thanks, guys.

Thank you. Thanks, Cody.

Our last question is from Scott Searle with ROTH Capital Partners.

Hey, guys. Thanks for sneaking me in under the wire. Just real quick on LoRa, wondering if you could provide a little bit more color. In the past, China was such a big percentage in the mix. I am wondering how it was in the quarter and the pipeline of opportunities there. We continue to diversify away from the Chinese marketplace. And as part of that, Sidewalk has cropped up from time to time as being a large opportunity. It has been, I think, slow to date. I am wondering if you could calibrate when we might start to see that contributing in a more meaningful fashion. And as a follow-up, just on the protection and sensing side, I think you indicated that there was a large win that kicks into the first quarter. I wondered if you could just clarify that and provide any additional color. Thanks.

Thank you. LoRa right now is broad based across multiple regions. China certainly is a good driver. In Europe and in North America, the growth is equally strong. It is all benefited from multiple growth drivers out there. Sidewalk certainly had a little bit of a false start several years ago, but at CES in January they had over 10 product demos, all embedded with LoRa chips inside. They are going to start deploying in March in North America and have a clear plan to proliferate into other countries. We will see this time, but that can be a pretty significant opportunity for Semtech Corporation. I will let Mark address the TVS question.

Yes, so TVS—we are seeing growth above, let us say, a proxy of handset unit volumes. We have a number of good design wins in TVS, and there is also a little bit of a geopolitical tailwind that we believe is sustainable over a number of quarters that is leading to our better-than-seasonal guide for Q1.

Great. Thanks so much. Nice job on the quarter. Thanks, guys.

Thank you.

I would now like to hand the call back over to Mitchell J. Haws for any closing remarks.

That concludes today's call. Thanks to all of you for joining us today. We look forward to seeing you at various investor events over the coming weeks and at OFC starting tomorrow. Thank you.