Semtech Corporation (NASDAQ:SMTC (NASDAQ:SMTX)), a leading supplier of high-performance analog and mixed-signal semiconductors and advanced algorithms, reported strong financial results for the third quarter of fiscal year 2025, with significant growth in net sales and earnings per share. CEO Hong Ho emphasized the company's focus on portfolio rationalization, growth acceleration, and workforce energization as strategic priorities.
Key Takeaways
- Semtech's Q3 net sales climbed to $236.8 million, marking a 10% increase from the previous quarter.
- The company saw a gross margin improvement to 52.4%, and operating income reached $43.4 million.
- Earnings per share rose to $0.26, up from $0.11 in the second quarter.
- Data center net sales hit a record $43.1 million, a significant increase both sequentially and year-over-year.
- The infrastructure segment also reported strong growth, with net sales of $65.8 million.
- For Q4, Semtech projects net sales of around $250 million and anticipates continued growth in infrastructure and data center applications.
Company Outlook
- Semtech expects Q4 net sales to be approximately $250 million, with a possible variation of $5 million.
- The company is looking to maintain its growth trajectory, particularly in the data center segment.
- A projected gross margin of 52.8% is anticipated for the next quarter.
- Earnings per share are expected to be around $0.32, with a possible variation of $0.03.
Bearish Highlights
- The company is exploring potential divestitures of non-core businesses as part of its portfolio rationalization strategy.
Bullish Highlights
- Record sales in the data center segment were driven by the commencement of Copper Edge ( ACC (NS:ACC)) shipments.
- Initial orders for Linear Pluggable Optics (LPO) transceivers indicate strong market interest.
- Strong performance in the infrastructure and high-end consumer segments supports overall growth.
Misses
- The company did not report any specific misses in this summary.
Q&A Highlights
- CEO Hong Ho discussed receiving initial TIA orders for test and qualification of 800 gig and 1.6 T LPO transceivers at CSPs.
- There is an ongoing effort to establish a model to quantify the ACC market opportunity, beyond just forecasting NDR36 regs.
- CFO Mark Lin indicated that while incremental investments are expected, they are believed to bring near-term returns.
In summary, Semtech Corporation's third-quarter performance highlighted the strength of its data center and infrastructure segments, with the company poised for continued growth in the coming quarter. Strategic investments, a focus on core business areas, and new initiatives aimed at employee development are expected to further bolster Semtech's position in the market.
Full transcript - Semtech Corporation (SMTC) Q3 2025:
Conference Operator: Good day, and thank you for standing by. Welcome to Semtech Corporation's Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's remarks, there will be a question and answer session. Please be advised that today's conference call is being recorded.
Would now like to hand the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Please go ahead.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Thank you, operator. Good day, everyone, and welcome. I'm pleased to be joined today by Hong Ho, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the Q3 of fiscal year 2025, which are posted along with an earnings call presentation to our investor 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 information on risk factors that could cause our actual results to differ materially from those made on this call. Unless otherwise noted, all income statement related financial measures will be non GAAP other than net sales. Please refer to today's press release and see Slide 3 of the earnings presentation for important information regarding notes to 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.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you, Mark. Good afternoon, everyone. I'm almost 6 months into my tenure as Semtech's CEO, and it has been a very productive period. My numerous engagements with Semtech employees, customers, suppliers and partners and the operational and financial progress we have made so far give me high confidence in Semtech's near and long term growth prospects. We achieved a very strong Q3 results with net sales, growth margin and EPS at the high end of our guidance range, while operating income and operating margin exceeded the high end of our guidance range.
Further, our Q4 outlook projects continued growth in each of these metrics. In the last earnings call, I shared 3 near term priorities and I'm happy to report that we are making progress on all fronts. First, on strategy, portfolio rationalization and balance sheet improvement, we have completed an evaluation of our portfolios through our annual strategic planning process. The purpose of this evaluation expanded beyond a delineation of core and non core assets, but provided a more granular assessment correlating investment levels and priorities to multiyear growth curves. In what might be a generational opportunity stemmed from AI driven product demand, we'll be increasing the investment in data center products, which we project to be a long term and transformational growth engine for Semtech.
In some other areas, we expect sustaining investment at a current level will suffice, and our focus is to improve the contribution margins of these businesses. The net effect is prudent investment levels paired with regular reviews on forecasted return on investment. We are committed to making timely adjustments to the market direction change. Our portfolio has broadly inflected to growth, but I want to ensure my message is clear. I expect the inflection to growth will benefit valuation, but will not delay the portfolio rationalization process.
I'm fully aware of the financial and the non financial benefit of portfolio rationalization, and we are particularly focused on opportunities that accelerate our debt repayment and decrease our leverage ratio. 2nd, on accelerating growth and driving margin expansion, we have made swift changes to intensify the engagement with the customers to provide technical and operational solutions. And our Q3 results and Q4 outlook demonstrated effectiveness of these initiatives. We continue to see strong tailwinds. Our customers and targeted markets are moving toward us.
We have instituted a disciplined investment plan, leveraging our design competency and the incorporating performance objectives from key end customers and meeting their critical business needs. I believe we have achieved multi generational roadmap alignment with the key customers, and we aspire to become their partner of choice for key technical and product solutions we provide. I expect these initiatives will accelerate sustainable market share gain and SAM expansion. Another growth driver is Semtech's operational excellence. Semtech has executed to meet customer delivery timelines in the current dynamic environment with noteworthy instances in our data center and high end consumer end markets.
Semtech's operational excellence in on time delivery and superb quality contributes to our customer supply chain resiliency, which I know to be highly valued. In this area, I would be remiss if I did not acknowledge the contribution from Semtech foundry, assembly and test partners amidst the current ramp. Thank you to our foundry partners that have prioritized our increased demand many times well with the natural lead times. Thank you to our assembly and test partners who have quickly installed additional capacity to support our growth. 3rd, on energizing our people.
I'm a firm believer in promoting a high performance culture, and I'm proud that we have launched Semtech Rising, an initiative incorporating employee development, mentorship, recognition and pay for performance elements to bring out the best from our employee base and elevating our determination and drive to win. This initiative also leverages expertise from Semtech's Board members. We modified the charter of our compensation committee to become the Human Capital and Compensation Committee. We firmly believe this change elevates the importance of human capital development and aligns with Semtech's focus on creating and fostering a diverse and vibrant workforce. In the coming quarter, these three priorities will continue to be my focus.
Moving to end markets. For Q3, infrastructure net sales were $65,800,000 up 24% sequentially and up 52% year over year. Net sales for the data center were a record $43,100,000 up 58% sequentially and up 78% year over year. Consistent with our outlook for Q3, shipments commenced on our copper edge 200 gig linear redrivers used in 1.60 active copper cable, our ACC applications. Copper etch net sales were in the high single digit $1,000,000 We expect incrementally higher contribution in our Q4 followed by a ramp progressing through FY 'twenty six.
There have been multiple reports regarding black well GPU rack designs and timing of volume shipment, which could potentially impact the TAM and timing of ACC market where we provide key enabling IC components. That said, allow me to provide some assurances based on our ecosystem engagement. We have invested time with our customer and end users of the racks over the past few months. We reaffirmed our expectation of exceeding the floor case provided a couple of quarters ago based on the first hand information from the ecosystem. I connected with many CSPs, table manufacturers and ecosystem participants at the very well attended Open Compute Project or OCP Global Summit last month, where Meta (NASDAQ:META) presented, contributed and demonstrated on the show floor its Catalina platform.
Catalina is a DURAC NDL36 design connected with a copper edge enabled ACCs. This appears to be a major platform that multiple CSPs will adopt in the near future for their AI data centers. Several companies are currently conducting design work using our copper edge chips in 200 gig traces on their boards to improve signal integrity. Rack designs have merit and will continue to vary as CSPs deploy various configurations in their data centers, but OCP Global Summit reaffirmed my belief that a count of 200 gig ports connected to cables with a length up to 3 meters is a more relevant measure of a copper edge SAM. At 200 gig and at a cable length up to 3 meters, copper edge will meet signal integrity requirements not readily achievable with direct attached copper of DAS cables.
And at a lower latency, lower cost and much smaller power consumption required compared to DSP based retime solutions. Semtech's low power, low latency copper edge solutions have gained positive attention in the data center ecosystem, and our technical collaboration with a number of CSP and cable manufacturers has accelerated since last quarter. Our team's engagement with architecture decision makers and technical executives in the ecosystem significantly streamlined the time between understanding our customers' challenges and delivering some tech proposed solutions. I believe this is proven to be a positive differentiator in copper edge proliferation and improved Semtech NPI time to market. In addition to copper edge, our tri edge PAM4 products continue to contribute meaningful sequential and year over year growth.
Our lead customer commenced a production ramp in 400 gig AOC products in Q3. Demand remains robust for our fiber edge transimpedance amplifier, our TIA and the laser fibers. Data center deployment at 100 gig has been ramping up strongly, and we believe we have captured incremental market shares, thanks to our closer engagement with our customers and our operations excellence. Moving to linear pluggable optics or LPO. We have received initial TIA orders from several module manufacturers for test and qualification of both 800 gig and 1.6 T LPO transceivers at CSPs.
CSP engagement has proven insightful. It appears that LPO adaptability is meaningfully correlated with the service signal to noise ratio at the host. Fortunately, both current and future generation switches supply significantly improved the performance, and this enabled easier LPO adoption in many specific use cases. Our confidence in LPO adoption has increased since last quarter with a meaningful net sales contribution from TIAs and the re drivers expected by the latter portion of FY 2026. Within the infrastructure, our telecom business consisting of PON and Backhaul reported Q3 net sales of $20,500,000 We have been supporting a pilot build of triple gen 50 gig pound with a major Chinese carrier.
And the carrier CapEx noticeably for 5 gs advanced deployment is expected to nominally improve over the coming quarters. Moving to our high end consumer end market. Net sales were $40,000,000 a sequential increase of 8%, reflective of market share gains and consistent with expectations of seasonally stronger Q3. Net sales in high end consumer TVS grew to $28,300,000 up 9% sequentially and up 7% year over year with the sequential growth in each quarter of the current fiscal year. We communicated market share growth in consumer TVS grew last quarter, augmenting our prior commentary.
Our expectation is for continued market share expansion at the world's largest consumer electronics company and at other key North American and Korean companies, based not only on our design in activities for future generations of product, but also for Semtech's ability to deliver on time and to meet demand upside. Thanks to our technology leadership, proven quality and fulfillment capability, we are among the first to be added to a BOM for many products in the pipeline. So we have much greater visibility into the design cycles of next generation products. Our cloud leading per se products continue to excite the market with design wins across device manufactured in smartphone, computing and wearables. We believe per se its capabilities are also highly valued by device manufacturers to maintain compliance with a specific absorption rate of SAR regulations, while minimizing effect on device performance.
In this area, the ability to detect and measure distance to a human allows the device to optimize RF transmission power and data throughput. We are pleased to be included in the leading smartphone chipset vendors reference designs to meet SAAR requirements. Moving to our industrial end market. For Q3, industrial net sales were $131,000,000 up 5% sequentially. Within the industrial end market, LoRa enabled solutions recorded Q3 net sales of $29,000,000 up 1% quarter over quarter and up 104% year over year.
Encouragingly, consumption for our recent generation LoRa product has been increasing, which signals market adoption of this enhanced capability. LoRa Gen 2 offers a smaller footprint and reduced the power consumption, while LoRa Gen 3 delivered improved radio performance and a further simplification of customer development to onboard LoRaWAN provisioning capability. Supporting LoRaWAN remains a key company strategy. I benefited greatly from visiting the Sains Conference in September. As I said during my presentation at the conference, LoRa has demonstrated tremendous potential with a comprehensive ecosystem that pushed LoRa from concept to product and now to industry.
I gained very constructive input while at a conference on how Semtech can support ecosystem enablement and enhance what I believe to be Semtech's already robust hardware and software roadmap. The infrastructure to cover gapless coverage for LoRa continues to gain momentum. In addition to EchoStar coverage throughout Europe, satellite operators are considering offering a similar service for Americas. We expect such availability of LoRaWAN will create a boundless potential for asset tracking. Our IoT Systems business recorded Q3 net sales of $57,900,000 up 11% sequentially, yet another quarter of net sales growth coupled with robust bookings and backlog.
As previously discussed, Semtech started addressing channel and end customer inventories earlier in the cycle. And as the market influx upwards, our growth is now muted by the channel congestion. Highlighting customer engagement for this business, I believe we held a successful customer roundtable in October, where our customers provided valuable insights and helped save our roadmap. The roundtable also allowed us to further highlight our in house Trade Agreements Act, our TAA capability, something we expect to bring significant value as a North America supplier to the critical infrastructure markets we serve. Our in house TAA capabilities have contributed to funnel orders, backlog and sales to federal agencies, an area where we have identified at the adjacent market and renewed our focus.
In Q3, we launched the Australian instance of Airlink Management Services. Australia is one of our stronger markets outside of North America and this instance meets ever stringent local data resiliency requirements. Q3 net sales for IoT Connected Services were $24,600,000 with a slight sequential and year over year growth for this reoccurring revenue business. AirVantage allows our customers a single panel to monitor lifecycle management, consumption and SIEM management, all packaged with a robust API. Our future growth expectations are bolstered by additional customer adoptions of AirVantage, including AirVantage Data Insights and its AI enabled features to facilitate analysis and decision making on connected equipment.
We also expanded our smart connectivity platform to add voice over LTE coverage, which is now available in over 40 countries and territories. In industrial TVS, net sales in Q3 were $10,200,000 up a robust 7% sequentially. We have noticed the current market sentiment in the industrial market, but we remain confident in some technical growth with our product offerings. Our industrial products address protection for electronics deployed in increasingly harsh industrial ESD environments. As factories increasingly automate, our customers are increasing their reliance on Semtech's solutions where severe ESD challenges abound.
In the automotive market, demand has increased sequentially with a growing prevalence of wired and wireless networks in automobiles. Also, Semtech has been a leading supplier of advanced display protection solutions in the high end consumer market. As our display customer diversify into the automotive sector, we believe we are seeing a disproportional benefit in the automotive display market. In summary, I'm very pleased with Semtech's execution and performance across our businesses in Q3. And now I'll turn the call back to Mark for additional details on our financial results and our Q4 outlook.
Mark?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Thank you, Hong. For Q3, we recorded net sales of $236,800,000 up 10% sequentially. Net sales trend by end market, reportable segment and geographic region is included on Slide 16 of the earnings presentation. Gross margin was 52.4%, up 200 basis points sequentially and up 110 basis points year over year. Operating expenses were $80,600,000 slightly below the midpoint of our outlook, increasing 3% sequentially and representing what we forecast to be prudent investments in the business to accelerate realization of growth opportunities.
Operating income was $43,400,000 resulting in an operating margin of 18.3%, up 4 10 basis points sequentially and up 8 10 basis points year over year. Adjusted EBITDA was $51,100,000 and adjusted EBITDA margin was 21.6%, up 2 80 basis points sequentially and up 7 60 basis points year over year. Gross margin, operating margin and EBITDA margin all sequentially increased in each quarter of fiscal year 2025, demonstrating our operating leverage. We expect to finish the year with sequential improvements in each of these metrics based on the midpoint of our Q4 outlook. Net interest expense was $18,400,000 and we recorded net earnings per share of $0.26 up from $0.11 in Q2 and up from $0.02 in Q3 of last year.
Operating and free cash flow for Q3 was $29,600,000 and $29,100,000 respectively. We ended Q3 with a cash balance of $136,500,000 which included a principal payment of $5,000,000 on our credit facility. Subsequent to the end of the quarter, we made a further principal payment of $10,000,000 and these payments are consistent with our previously stated capital allocation priority of reducing debt. Now turning to our Q4 outlook. We currently expect net sales of $250,000,000 plus or minus $5,000,000 a 6% sequential increase at the midpoint.
We expect net sales from the infrastructure end market to increase sequentially with data center applications leading to growth. Infrastructure is expected to provide the strongest near term tailwind. We expect net sales from the high end consumer market to be down reflective of typical seasonality. We have gained market share in this end market and do not believe channel inventory is a headwind to Q4 expectations. We expect industrial net sales to be up with increases across LoRa and our cellular IoT portfolio.
Based on expected product mix and net sales levels, gross margin is expected to be 52.8%, plus or minus 50 basis points. At the midpoint of our outlook, this would be a 40 basis point sequential improvement. Operating expenses are expected to be $82,800,000 plus or minus $1,000,000 growing at about half the rate of net sales growth at the midpoint and resulting in operating margin at midpoint of 19.7 percent, a 140 basis point sequential improvement. Adjusted EBITDA is expected to be $56,900,000 plus or minus $2,800,000 resulting in adjusted EBITDA margin at the midpoint of 22.8 percent, which would equate to a sequential increase of 120 basis points. We expect net interest and other expenses to be $19,000,000 and expect an income tax rate of 15%.
These amounts are expected to result in a net earnings per share of $0.32 plus or minus $0.03 based on a weighted average share count of 80,000,000 shares. Our outlook at the midpoint contemplates another quarter of growth in net sales, improving gross, operating and adjusted EBITDA margins and higher diluted earnings per share. With that, I'd now like to turn the call back over to the operator for Q and A.
Conference Operator: Thank you. And at this time, we'll be conducting our question and answer session. And our first question comes from Quinn Bolton with Needham and Company. Please state your question.
Quinn Bolton, Analyst, Needham and Company: Hi, Hung and Mark. Congratulations on the nice results and outlook, especially in the data center business. I guess, Hung, I wanted to start with the data center business. It sounds like you continue to be very comfortable with the floor TAM for ACCs, but hoping you might be able to elaborate on that. You mentioned the Catalina rack is an opportunity, but wondering if the ACC TAM that you see now starts to encompass other opportunities at hyperscalers or CSPs.
And so just wondering if you might be able to talk about some of the use cases you see starting to contribute to that $100 plus 1,000,000 opportunity. Thanks.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you, Quinn. Yes. So as we discussed at OCP, you participated as well. The Catalina is going to be the main platform. We know one major CSPs is going to be used at the baseline for deployment in 2025 and beyond as long as they use a GB200 GPU Processors.
And we know that standard is getting tractions and but I haven't get the detailed confirmation on which CSP is using in what proportion. Another major progress, I would say, since the announcement of ACC is awareness level by the CSPs on this elegant capability and solution to improve the signal integrity and improve the link budget by adding very small fraction of power consumption, no latency and a very little well incremental cost as well. So now we are seeing many several CSPs and other companies are considering using the linear equalizer in their entire TRiC design. It can be on the board, it can be in the connectors, it can be in the cables as well. So that give me the confidence that after the OCP, that our floor case guided a couple of quarters ago is indeed a floor case.
Quinn Bolton, Analyst, Needham and Company: Perfect. Maybe just a quick follow-up there. Just for the CSPs looking to use linear drivers in cables or PCBs, does that ramp in calendar 2025? Or do you think that that's a longer term opportunity? And then my follow-up is you seem to be more upbeat now about the LPO opportunity.
I think you said you've got initial orders for TIAs for LPO starting to ramp in fiscal 'twenty six, that's the back half of fiscal 'twenty six. Can you talk about what types of applications you're seeing, LPOs starting to be deployed this year? Thank you.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Yes. Let me just follow-up on the first one on the ACC. So the applications on the board and in the cable and even in the connectors by the multiple CSPs are in the qualification phase and in the demonstration phase. So the typically good thing about the copper based solutions is the qualification cycle is relatively short compared to the optical related products. So I would say probably from the mid of 2025 calendar year, the other opportunities on the linear equalizer will start contributing to the revenue.
As for the LPO, as I mentioned in the prepared remarks that we have already got orders and shipped in low volume albeit. There's a 4 800 gig DR8, 100 gigabit per second per trace and 1.6 t side, primarily on TIA. So they are building consumer modules and shipping to different customers for qualification. And applications are for both scale up and the scale out. So the scale out is primarily connecting the NIC (NASDAQ:EGOV) card to top of the rack or end of the row switches and scale up is to increase the cluster size for the GPU compute cluster or ASIC compute cluster by some CSPs.
Quinn Bolton, Analyst, Needham and Company: Perfect. Thank you for that additional color, Ron.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Thank you.
Conference Operator: Our next question comes from Harsh Kumar with Piper Sandler. Please state your question.
Harsh Kumar, Analyst, Piper Sandler: Yes. Hey, Mark, Lin, Mark, Hong and the entire Semtech team. Congratulations on very strong quarter, very strong guide. I had one quick one on data center and another one on LPO. So Hong, for you, could you just give us an idea of what you're thinking about the growth for ACC in the January quarter as you're guiding?
And then when do you think it will steady out to a sort of a steady state sales format? Is it second half or will it continue to build through the year? And then I have a follow-up.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: I will let Mark answer the ACC question.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Harsh, we said this in Q3 was high single digit millions in Q3. So it's a nominal ramp in Q4 and then it progressively ramps through FY 'twenty six Q1, Q3 and Q1, Q2, Q3 and Q4. So we've been pretty consistent with that messaging and we don't really see a change in that timing.
Harsh Kumar, Analyst, Piper Sandler: Great. Thank you. And then for my follow-up, if I can talk about LPO, maybe a very theoretical question, Hong. So a lot of debate on LPO. There's a lot of non believers that think it will never happen because of interchangeability.
Is it possible in theory to have a compatible interchangeable module using LPO? Or is that just theoretically impossible? Could this eventually just take over the whole optical business?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Yes. Harsh, that's a good question. And I think the debate is still ongoing even after 2 years. And what I have found out is that the early sentiment developed by the impossibility of the LPO for scale out was largely done on the previous switch version where we understand that signal noise ratio from the host is not as good as the current generation, say, for example, Tomahawk 5. So if they did the LPO and test it in the previous version, SerDes, and there might be a very little margin and that makes interoperability very difficult.
But in the current and future generations with switches, fortunately, the host has demonstrated really pretty superb signal noise ratio. And so the LPO is like ACC, a linear equalizer is an essential part of it at the start. So that's good signal noise ratio and the current and future switches can use LPO. But as they adopted adoption timeline getting closer and we noticed that many CSPs, they started pivoting to LRO. So basically using one side at a linearized, the other side retime the solution to be safe because they do need a low power, 1.60 interconnect solutions.
To us, we have the arguably the best driver best TIA on the receiving side. So we'll benefit from either LPO, LRO. And as industry progress and getting better understanding on the compatibility of different type of host with LPO and LRO capabilities, I do believe this type of transceivers can chip away a sizable total addressable market currently served by the DSP retime solutions.
Harsh Kumar, Analyst, Piper Sandler: Congratulations, guys. Thank you so much.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you. Thanks, Lars.
Conference Operator: Your next question comes from Cody Acree with The Benchmark Company. Please state your question.
Cody Acree, Analyst, The Benchmark Company: Yes. Thanks for taking my questions and congrats on the progress. Guys, could you Hong, could you talk about back specifically to the Blackwell opportunity? Obviously, there have been talk about the 36 by 2 platform discontinuation of development support. It doesn't sound like that that's happening at a certain CSP that you're working with.
I wonder now if that's more of a one off in the industry. Is that something that you're seeing more broadly continue to be adopted or has there been a change at NVIDIA (NASDAQ:NVDA) that is impacting the broader ACC opportunity at that customer program but may not be impacting long term opportunity beyond them?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Yes. So Cody, I definitely have talked to many CSPs and everyone, they have their views and but largely based on how many compute how much compute power they wanted to have in that cluster. So right now, 72 GPUs seem to be an ideal cluster size, but it's also bounded by their ability in the data center infrastructure to cool the racks. And 36x2 seem to be pretty ideal. And for one leading CSP, we know that is their baseline for 2025, 2026 and for as long as they use Blackwell.
And I have heard some others using NVL 72 and where we don't have the contribution for backplane, but the front end, they either need to connect 1.60 ports or 800 gigabit ports to top of the rack or end of the row switches. I think that's where LPO can really have a good provide a very differentiating solution because of the low power consumption. So I think that's probably why the industry is pushing very hard on the LPO solutions. But as for the different variety of racks, we're going to be continuing to hear reports in the future just for the aspiration to continue to increase the number of GPUs in the cluster to be able to handle more the model with more parameters. So it's going to be dynamic.
That's why I wanted to really I believe that counting the number of ports of 200 gigabit per second will be a more relevant measure going forward rather than just stare at how many of the NVL-thirty six racks out there.
Cody Acree, Analyst, The Benchmark Company: All right. Thank you very much for that color. Can you maybe just help frame your overall data center opportunity? How much of that is fiber and tri edge in the future and delineate that from your ACC and your LPO opportunity?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Typically or historically, we haven't provided that delineation where we gave a high single digit million figures for ACC. But realistically, the entire data center market is growing quite robustly for all of our products, ACC, PMDs, Tri Edge and we expect when LPO does ramp, it will continue to kind of support that growth level.
Conference Operator: Thank you. And our next question comes from Tore Svanberg with Stifel. Please state your question.
Tore Svanberg, Analyst, Stifel: Yes. Thank you and congratulations on the strong results. Hung, the copper rich revenue, high single $1,000,000 for next quarter sorry, for this quarter. What's the mix there between 200 gig versus 100 gig? It sounds like it's primarily 200 gig.
And as we think of fiscal 20 26, will again the majority of the mix be 200 gig per lane?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you, Tore. Yes, the revenue in Q3 on copper edge is primarily 200 gig. And going forward, the 200 gig is going to be the primary driver as well. We do have some contribution for 100 gig, especially after the industry is aware of the capability that the linear equalizer is providing to improve the signal integrity. Some CSPs are revisiting their architecture in the data center and start considering using 100 gig ACC instead of deck tables.
But the contribution we count and we guide is primarily 200 gig. Troy, let me just double click on that. In our Q3, the 200 gig was substantially all of our corporate shipments.
Tore Svanberg, Analyst, Stifel: Perfect. Thank you for that. And let me move on to a non data center question. So you guys have done a good job to climb back to this $1,000,000,000 run rate that you've guided for the January quarter. As we just think about strategically, because Hong, you mentioned you're still reassessing everything.
So how much of that $1,000,000,000 should we think of as true strategic revenue versus perhaps segments of the business that are requiring less investments at this point?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: So, Tore, that's a good question. For the Q4 guidance, we break down the different the industrial segments we have right now. And so you can use that as a guideline. Thank you.
Tore Svanberg, Analyst, Stifel: Fair enough. Thank you.
Conference Operator: Thank you. Our next question comes from Tristan Gerra with Baird. Please state your question.
Tristan Gerra, Analyst, Baird: Hi, good afternoon. Now that copper edge is ramping, how should we look at the free cash flow generation over the next few quarters? And any update on the type of debt leverage ratio you expect exiting next year?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Yes. I'm quite pleased Tristan, Q3 operating cash flow was $29,600,000 free cash flow was $29,100,000 So cash flow definitely we've inflected consistent with the business. And I'm pleased that cash flow is really generation's broad base across our businesses. We may have to build a little bit more inventory supporting demand, but we continue to generate cash. And as you see that as soon as we generate the cash, we delever, right?
We pay down principal. In terms of where we're going to exit, we only guide out 1 quarter, but you can maybe take a look at our EBITDA that we reported this quarter kind of annualized that might give you an indication of potentially where our leverage ratios are heading.
Tristan Gerra, Analyst, Baird: Great. This is helpful. And then if I look at coherent announcement of NVIDIA based DSP back in September. Does that create opportunities for your TIA in terms of content? And is that a solution that eventually gets available outside of NVIDIA and would allow you in that particular transceiver to reach additional customers?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Yes. Tristan, so for every DSP read time transceivers, we should have content in there. And we definitely our baseline data center revenue growth has been primarily driven by that the DSP based transceivers growth. And Q3 is the Q1, we had some meaningful revenue from the copper edge for ACC. And but that DSP based transceivers will continue to grow, will continue to benefit from that.
Great. Thank you.
Tore Svanberg, Analyst, Stifel: Thank you.
Conference Operator: Our next question comes from Scott Searle with ROTH Capital Partners (WA:CPAP). Please state your question.
Scott Searle, Analyst, ROTH Capital Partners: Hi, good afternoon. Thanks for taking the questions and congrats on the data center performance. Maybe I'll shift away from the data center since it seems like it's been covered. Hung, on the PON front, it seems like it was another decent quarter, still really China focused. I'm wondering if you could give us some thoughts in terms of the incoming administration, any sort of impact on the PON business in China, if there is any kind of how you're thinking about growth there?
And then specifically, how you're seeing design activity outside of China, particularly as we start to talk about 10 gig and above?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you, Scott. So the Pong business up to this point has been primarily in China. And we expect another tender offers over the next quarter or 2. And we have the product ready for it. We have a triple gen demonstration in there and it can operate at 10, 25 and 50 gig.
And so that is really setting the benchmark of the capability. We're the leading provider in that market. As for what is the future political situation there, I we're paying, we are absolutely very mindful about that. But so far, we have not seen any impact. As for, you issued a report about the Calix (NYSE:CALX) and Louisiana, they got the BEAT funding.
So we have been engaging with all the leading equipment manufacturer in the U. S. For the U. S. Pump opportunities as well.
So we're really well positioned for the global infrastructure upgrade. And beyond China and the U. S, we're trying to through our module manufacturers address other part of the market, but those are the 2 major markets for the PON opportunities.
Scott Searle, Analyst, ROTH Capital Partners: Great, very helpful. And if I could follow-up just on the lower front, continuing to stay away from data center for a minute. A nice recovery quarter, I think at $29,000,000 I think it's still below where you had peaked a couple of years ago in the $40,000,000 or so range. I wondered if you could talk a little bit about some of the applications where you're getting the traction. I know there have been some Continental wide build outs being driven by guys like Netmore in Europe.
It sounds like there's some opportunities in the U. S. But just kind of give us some high level thoughts in terms of where you're seeing that design traction and how we should think about that growth rate going forward from these levels? Thanks.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you, Scott. So, yes, previously in a couple of years ago, the LoRa market had some noise about the helium. So I think that noise dissipated. And right now, we're seeing clear signal of the continued growth. Say Q2 to Q1, we had a strong growth.
In Q3 Q2, we have marginally growth and marginable growth. But year over year basis, we had a strong growth. Our use cases right now, I have spent a lot of time talking to ecosystem partners. I'm just totally fascinated. Traditionally, it has been smart metering, but it's a connected spaces and for automation, for asset tracking.
And now I see more and more use cases. And you mentioned about NetMOR, they come out very strong. They are aspired to consolidate and to have multiple territory and multiple countries presence and to proliferate their successful and rewarding use cases. I think that is really showing that the industry start maturing. And so far, the major applications is smart metering and asset tracking.
I think the asset tracking is going to be having a lot more applications. And then the smart homes, smart factories and the use cases has been more known right now. There are a lot of well established solutions for those. And I talked to several companies, they are seeing tremendous growth in their business in those use cases. So we're very excited about the LoRa drills perspective.
And we will be having new product coming out Gen 3 and Gen 4 make the development of downstream integrated solutions easier. And we plan to use LoRa Alliance to provide more enablement to the ecosystem and raise the level of awareness of the successful use cases.
Scott Searle, Analyst, ROTH Capital Partners: Great. Thanks so much and congrats on the quarter and outlook.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you.
Conference Operator: Our next question comes from Craig Ellis, B. Riley Securities. Please state your question.
Craig Ellis, Analyst, B. Riley Securities: Yes. Hong and Mark, congrats on the execution, especially around growth and margins. Hong, I wanted to go back to data center, but maybe approach it in a more longer term way. So I think it was at least 3 quarters ago that we started talking about what seemed to be a single company or a single product opportunity as having a $100,000,000 base opportunity to it that would be in the 2025, 2026 timeframe. The question is this, as the business looks like it's gotten significantly broader customer and application level exposure and design in potential, how do we think about the size of this business 2 to 3 years down the road?
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Craig, that's a great question. I think the opportunity started with this single company, single platform and that is a great trailblazer for this new product that's accelerated our time to market. But right now, as you mentioned, as we observed, this capability, it's a broadly recognized and beyond that single company, beyond that single platform. So that's why we have been thinking about and to qualify the opportunity by counting the number of 200 gigabit per second ports. The reason for that is everywhere you have 200 gigabit per second transport, you have the same challenge.
You need the same solution for signal integrity. And with the Tomahawk 6 rolling out right around the corner, well, maybe 6 to 12 months and all the ports is going to be 200 gig and it's only increasing our opportunities. So, so far the application has been for scale up, but with the scale out added into the opportunity pool, we got a tremendous opportunity in there. So probably a better and more relevant measure is to quantification of the number of 200 gigabit ports. And then you can put a multiplier on adoption ratio, 30%, 50% or 70%.
So we are in the process of establishing that model to quantify the opportunity so that people would not just stare at so how many NDR36 regs are being forecasted and being built. So we will report that progress as we're making good progress.
Craig Ellis, Analyst, B. Riley Securities: That's a helpful summary. Thanks very much, Hung. Mark, I wanted to cycle back to you. You talked about things happening and Hung talked about where we are in the calendar planning cycle with expense management. As we think beyond the fiscal Q4 and think through 2025, are there any discontinuities coming with expense investment, whether it be mass set costs or other things?
And should we continue to expect that R and D and OpEx would grow at some small coefficient of revenue growth? Is that reasonable? Or are there one time things coming?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Yes, Craig, we don't see any one time things coming. We've gone through our strategic planning. So we do expect incremental investments, but I believe those incremental investments will have near term returns. And the other areas, Hong has absolutely stressed, there's no evergreen R and D projects. So if something were to turn and the market moves away from that particular application, we don't mind just kind of cost to sunk and redirecting our efforts.
In terms of growth, we've reiterated a number of times, healthy growth is probably OpEx grows at half the rate of revenue growth. And I think that's where we're sticking to. Now just some of that operating expense investment will be redirected as you heard in our prepared statements, probably a little bit more towards data center, but those are some near term growth opportunities there.
Craig Ellis, Analyst, B. Riley Securities: Got it. Thanks for that, Mark. Thanks, Han. Sure thing, Greg.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Thank you.
Conference Operator: And our next question comes from Christopher Rollie with Susquehanna International Group. Please state your
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation0: I want to echo my congrats on a fantastic quarter and guide. So my first set of questions are around ACC. And I guess maybe first to level set, how much of copper edge were you shipping in Q2? Or was that high single digits, million all incremental? And then the bulk of these shipments, is this all to the big AI GPU guy directly and they're going to be using it for like branded cables?
Or are these going to like 3rd party cable OEMs for channel sales or to like the CSPs direct via EMS? Like how is the go to market here for these shaking out? And how might you expect that to change through the next 12 months?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Great question, Chris. We're looking at when we mentioned that it's high single digit millions of Copper Edge. Effectively you can consider that 200 gig active copper cable and it's really directed our customer is cable suppliers, right, but I think we get the demand from really from that large company, right. So at this point, just with the demand for the cables, I don't think really anything is going into channel. It's really going to supply rack shipments.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: And then just to add to that, Chris, you asked Q2, Q2 basically just a very minimal sample quantity. So the Q3, the high single digit $1,000,000 is the first volume.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Yes. You consider that for 1.6 T applications there, Chris.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation0: Excellent. Thank you very much. And then just a quick clarification was PON I guess PON was down, if I'm doing my numbers right. But just wanted a clarification, but a better question perhaps bigger picture is around divestitures. Where do we stand there?
Are you guys still interested in selling parts of the business? And conversely, what is the interest in perhaps buying parts of your business as well?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Yes. That's an area, of course, where we're a little bit sensitive. We did in our prepared remarks, we did keep kind of balance sheet and portfolio as the number on priority. And we do believe order matters. So it is the number on priority.
At this point, I think all of our businesses have inflected to growth. So as Hong mentioned in his prepared remarks, we believe that should help valuation, but that in no way will delay or maybe impede our desire to potentially divest these non core businesses.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation0: Excellent. Thank you, guys.
Hong Ho, President and Chief Executive Officer, Semtech Corporation: Thank you, Chris.
Conference Operator: And our next question comes from Tore Svanberg with Stifel. Please state your question.
Tore Svanberg, Analyst, Stifel: Yes, thanks. I just had a quick follow-up for Mark. Mark, so 40 bps base plan to improve gross margin for January. How should we think about gross margin for fiscal 'twenty six? Is it mainly mix at this point that will drive the gross margin?
Or is there other things, maybe scale or anything like that that could potentially also lift it as well?
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Yes. Scale definitely helps, but definitely it's the primary driver in our guide is mix. So it's a 40 bps improvement. But we did get a little bit of a tailwind from the copperhead shipments this quarter, right? So that was definitely a tailwind.
But as other portions of our business inflect upward, there's a little bit lower margin in IoT, our systems hardware business. So that's a little bit lower. We'll definitely take the gross profit, right, but definitely that business doesn't contribute quite the percentages, let's say, our infrastructure business.
Tore Svanberg, Analyst, Stifel: Sounds good. Thank you. All right.
Conference Operator: Thank you. And there are no further questions at this time. I'll hand the floor back to Mark Lin for closing remarks.
Mark Lin, Executive Vice President and Chief Financial Officer, Semtech Corporation: Great. Thank you for joining and please visit our investor website at investors. Semtech.com where we post upcoming investor conferences where Semtech will be in attendance. Have a great day.
Conference Operator: Thank you. All parties may now disconnect.
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