Semtech Corporation (NASDAQ:SMTC) Q4 2025 Earnings Call Transcript

Semtech Corporation (NASDAQ:SMTC) Q4 2025 Earnings Call Transcript March 13, 2025

Semtech Corporation beats earnings expectations. Reported EPS is $0.4, expectations were $0.32.

Operator: Good day, and thank you for standing by. Welcome to Semtech Corporation’s Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management remarks, there will be a question and answer session. Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Please go ahead.

Mark Lin: Thank you, operator. Good day, everyone, and welcome. I’m pleased to be joined today by Hong Hou, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the fourth quarter and 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 two of the earnings presentation as well as the risk factors section of our most recent annual report on Form 10-Ks, for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on this call.

You should consider these risk factors in conjunction with our forward-looking statements. 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 three of the earnings presentation for important information regarding notes on our non-GAAP financial presentation. The press release and earnings presentation will also include reconciliations of our GAAP non-GAAP financial measures. With that, I turn the call over to Hong.

Hong Hou: Thank you, Mark. Good afternoon, everyone. Fiscal year 2025 represented a year of a positive inflection on many fronts. For each quarter, we reported sequential growth in net sales, gross margin, operating margin, and earnings per share. Our signal integrity and analog mixed signal and wireless segments demonstrated strong sequential results in each quarter of FY 2025. And our IoT systems and connectivity segment inflected to sequential growth in the second quarter of FY 2025. Aligning to one of our near-term priorities of driving margin expenses through disciplined investment, innovation, and efficiency on a year-over-year basis, FY 2025 adjusted gross margin improved 200 basis points. Adjusted operating margin improved 570 basis points.

Adjusted EBITDA margin improved 610 basis points, and adjusted diluted earnings per share increased 529%. During FY 2025, we uncovered and aggressively pursued many opportunities through close customer engagement. We were able to prudently shift investments to R&D programs that were better aligned to major market opportunities and accelerated the product development supporting these opportunities. We also executed on our near-term priority of balance sheet improvement, substantially reducing our leverage and cash interest burden. This in turn allowed us to increase focus on operational improvements and strategic direction. We continue to prioritize divestitures of non-core assets, and we believe the reduction in the total leverage during FY 2025 and the stronger business fundamentals better positions Semtech in our ongoing portfolio optimization process.

Q&A Session

We remain focused on elevating our winning culture, and I’m pleased with the marked improvement in our employee engagement metrics. In the new fiscal year, we’re internally focused on focusing on three core priorities to position Semtech for future success. First, portfolio optimization and simplification, driving to completion the initiatives we started and focus on our core competencies.

Mark Lin: Second,

Hong Hou: strategic investment in R&D, accelerating innovation to support broader customer programs and driving sustainable long-term growth while maintaining financial discipline.

Mark Lin: Third,

Hong Hou: driving margin expansion, enhancing profitability through portfolio optimization and leveraging AI for efficiency and productivity, and maximizing operational leverage on higher revenue. With the strong progress we made in FY 2025, we aim to deliver even greater value to our shareholders in FY 2026. Moving to our end markets. For Q4, infrastructure net sales were $69.1 million, up 5% sequentially and up 75% year over year. Net sales for data center were a record $50 million, up 16% sequentially and up 183% year over year. And I’m pleased with the growth across our data center portfolio. Regarding corporate ad use, in active copper cables, we are disappointed that the expected volume ramp would not materialize for FY 2026 due to rack architecture changes as we previously announced.

We now expect copper edge demand at our anchor customers to be lower than our prior expectations for three to four quarters based on our estimate of the new server rack deployment timeline. We continue to believe CopperEdge deployment will encompass broader applications including our ICs embedded in board designs and our ICs embedded in connectors, in addition to our initial deployment in a cable application. CopperEdge at a 1.60 aggregated bandwidth was introduced about a year ago, and we believe Semtech’s advancements in low power, low latency solutions will be a significant differentiator in the ecosystem. We remain engaged with over 20 potential customers, including hyperscalers, switch makers, and the cable suppliers for a number of use cases, and expect this engagement to result in revenues from multiple customers and multiple applications by the latter part of FY 2026.

Lastly, based on continued collaboration with our entire customer, we expect our CopperEdge portfolio to be included in their future generation rack designs. For our FiberEdge portfolio, net sales were at record levels supporting 400 gig and 800 gig retimed optics across a broad market of module manufacturers and cloud service providers. For linear pluggable optics or LPO, and a linear receive optics or LRO, we remain confident in adoption starting in the latter part of FY 2026. Test and qualification are progressing as expected at several module manufacturers for both 800 gig and 1.60 applications. I look forward to the upcoming optical fiber communications conference or OFC to be held in San Francisco the first week of April. Semtech and our technology partners will have multiple product demos showcasing our TIA and laser driver components in numerous LPO and LRO modules.

In addition, we are scheduled to show a 400 gig per channel test chips to support 3.2 T aggregated bandwidth transceivers. I also look forward to participating in the CEO panel during the Optica executive forum at OFC. Moving to our high-end consumer end market, net sales for Q4 were $35.4 million, up 10% year over year, and for FY 2025, net sales were $147 million, up 17% year over year. In our high-end consumer TVS, our trends in welded separation product line net sales for Q4 were $24.1 million, up 16% year over year and down 15% sequentially, reflective of typical seasonality. FY 2025 net sales

Mark Lin: were $103.3 million,

Hong Hou: up 33% year over year, reflective of steady contributions from design wins and the market share expansion over the last year at the world’s largest consumer electronics company and at other key North American and Korean companies. We believe our customers’ increasing technical requirements move the market toward our differentiated products. USB type C high power charging is a particular example of the need to increase protection capabilities while maintaining signal integrity of USB type C high-speed data traces. Our class-leading per se or person sensing product continues to perform well in the market, with a leading position in smartphones to address specific absorption rate or SAR standards. With draft regulations introducing increasingly stringent requirements, Per se continues to gain market share as customers expanded use of Semtech ICs to achieve superior compliance to SAR standards without compromising device performance.

Per se, in smart glasses, is another key application where our technology allows for hyper-responsive gesture control capabilities critical to accurate control for call and message content capture and media settings. A key customer characterized smart glasses as the potential next-generation compute platform and an EEI form factor, and we believe Semtech is well-positioned to support this customer on current and future designs. Moving to our industrial end market. For Q4, industrial net sales were $146.6 million, up 12% sequentially and up 21% year over year. Within the industrial end market, LoRa-enabled solutions recorded Q4 net sales of $37.1 million, up 28% sequentially and up 205% year over year. Smart meters are just one of the applications well-suited for LoRa, and we are pleased with the incremental smart meter wins in France, Germany, the UK, and China.

For water and gas meters,

Mark Lin: we believe LoRa’s sensitivity

Hong Hou: which permits robust collection of readings through physical barriers and the ability to extend battery life over multiple years are key differentiators over competing protocols. Our LoRa Gen two and Gen three products have been well received and are the predominant lower volume. They offer smaller device footprints combined with the improved video performance and an easier integration allowing ecosystem partners to reduce time to market.

Mark Lin: For example,

Hong Hou: LoRa Gen three includes the capabilities to integrate LoRaOne inside the modem which reduces the lower specific design expertise required to integrate LoRa into a device. Semtech also released the first gen four chip in the LoRa plus family early this week. LoRa plus is a single chip solution that addresses use cases requiring a robust long-distance link combined with the multiple protocol capabilities including Amazon Sidewalk, Wisen FSK, and Z Wave. The lower plus receiver also supports terrestrial and Satcom networks, and it is increased data rates support audio streaming, and image transfer. Our IoT systems hardware business recorded Q4 net sales of $69 million, up 19% sequentially. Coupled with another quarter of a sequential increase in bookings.

Our IoT systems business pipeline benefited from the inclusion of a significant China-based market participant on the section 1260 h list in January 2025. And we expect the pipeline to convert to bookings throughout the year. During the same month, a Europe-based participant announced that it was exiting the cellular IoT market, providing another potential tailwind to the business. In Q4, we are pleased to have achieved the 5G red caps certification, a significant milestone in collaboration with AT&T and Qualcomm. This is AT&T’s first 5G Redcap certification, and we believe this positions us to make sustainable, scalable, and cost-effective solutions attainable for many industries. IoT connected services net sales were overall stable for this largely reoccurring revenue business.

We are pleased that AirVantage smart sensing has been recognized with the M2M Innovation of the Year Award by IoT breakthrough. AirVantage Smart Sensing offers a turnkey LoRaWAN Sensor Network solution with a global cellular backhaul allowing our customers to efficiently manage the design and configuration of a secure and scalable sensor network. In summary, I’m very pleased with Semtech’s execution and performance across our businesses. And thank our employees for embracing our Semtech rising initiative, which incorporates elements like transparent and frequent communications on our vision priorities, to drive alignment and leadership and employee development. All of which are aimed at bringing out the best from our employees. I now turn the call back to Mark for additional details on our financial results and our outlook for the first quarter of FY 2026.

Mark Lin: Thank you, Hong. For Q4, we recorded net sales of $251 million, up 6% sequentially. Net sales trends by end market reportable segment and geographic region are included on slide sixteen of the earnings presentation. Adjusted gross margin was 53.2%, up 80 basis points sequentially and up 430 basis points year over year. The Adjusted net operating expenses were $83.7 million within our guidance range with a sequential increase in research and development for what we believe to be prudent investments to accelerate realization of market opportunities. Adjusted operating income was $49.8 million resulting in an adjusted operating margin of 19.9%, up 160 basis points sequentially and up 1070 basis points year over year. Adjusted EBITDA was $57.8 million and adjusted EBITDA margin was 23%, up 140 basis points sequentially and up 1050 basis points year over year.

Adjusted gross margin, adjusted operating margin, and adjusted EBITDA margin all sequentially improved in each quarter of FY 2025, representing sustained growth. Adjusted net interest expense was $11.2 million reflective of approximately two months of savings from a debt pay down. We recorded adjusted diluted earnings per share of 40 cents, up from 26 cents in Q3 and up from a loss of 6 cents from Q4 of last year. Operating and free cash flow for Q4 were $33.5 million and $30.9 million respectively. We ended Q4 with a cash and cash equivalents balance of $151.7 million which included principal payments of $10 million on our credit facility that were incremental to payments from the equity offering. At the end of FY 2025, net debt was $411 million, a reduction of $868 million or 68% from the $1.3 billion as of the end of FY 2024.

I believe we executed well to our previously stated capital allocation priority of reducing leverage. To summarize benefits Semtech has and expects to realize from debt reduction, we first, debt pay down enables Semtech to focus investment on our core business growth engines. Second, reduction in debt from the equity offering provides annual cash savings of approximately $40 million based on interest rates, at the close of the offering, which resulted in accretion on a non-GAAP basis. Third, we believe meaningful debt reduction demonstrates a strong commitment to our customers, suppliers, and partners to improve financial solidity and return focus to operational and strategic priorities, which we expect will lead to increased collaboration and market share gain.

Now turning to our first quarter outlook. Currently expect net sales of $250 million plus or minus $5 million, up 21% year over year at the midpoint. We expect net sales from the infrastructure end market to increase sequentially with data center applications leading to growth. This outlook incorporates the effect from copper edge related to previously discussed rack architecture changes. We expect net sales from the high-end consumer end market to be up slightly reflective of a seasonally stronger first quarter. We expect the industrial end market to be down reflective of seasonality in our IoT portfolio. Based on expected product mix and net sales levels, adjusted gross margin is expected to be 53%, plus or minus 50 basis points. Adjusted net operating expenses are expected to be $87 million plus or minus $1 million resulting in an adjusted operating margin at the midpoint of 18.2%, a 600 basis point improvement year over year.

Adjusted EBITDA is expected to be $53.3 million plus or minus $3 million resulting in an adjusted EBITDA margin at the midpoint of 21.3%, which will equate to a year over year increase of 520 basis points. We expect adjusted net interest expense to be $6.3 million reflective of leverage-based pricing on our credit facility that reduces our term loan interest rate 200 basis points. Expect a normalized income tax rate of 15% consistent with our FY 2025 rate. These amounts are expected to result in adjusted diluted earnings per share of 37 cents, plus or minus $0.03 based on a weighted average share count of 90.1 million shares. With that, I now would like to turn the call back over to the operator for Q&A.

Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. You may press star two if you would like to remove your question from the queue so that others may have an opportunity to ask questions.

Mark Lin: For participants using speaker equipment, it may be

Operator: One moment please while we poll for questions.

Mark Lin: Our first question comes from

Operator: Harsh Kumar with Piper Sandler. Please proceed with your question.

Harsh Kumar: Yeah. Hong and Mark, you guys have done a great job on the balance sheet, but you actually said something on the Copper Edge portfolio that caught my attention given the controversy around it. Hong, I was hoping that you could expand on your comment around what you’re seeing in boards and connectors. And, also, you mentioned your sort of lead customer is looking at components of these products and this technology for future generation, maybe also explain on that. And then sorry for the multipart question, you said you expect to be down or lower for a couple of quarters. I think you said three or four, but then you expect a pickup. So maybe talk about all this and why you expect a pickup and what content are you seeing in these spaces, particularly with your large customer?

Hong Hou: Thank you, Harsh. And further questions? So first of all, just on copper edge, in Q3, we reported our revenue as a high single-digit million dollars. And we guided in our Q4 to be marginally incrementally increased. We adjusted that and so we’ve announced that previously in FY 2026, the revenue for copper edge is gonna be below $50 million. As we reported on the data center revenue on this Q4, the $50 million copper edge portfolio added into a very broad data center portfolio is a nice addition. So in the future, we do not intend to break out a copper edge contribution to the total revenue of the data center portfolio. But as for the engagement, as I reported, we have been engaging with over 20 customers. This is a nascent business.

It’s a new product. It’s generating a lot of interest. And it was only released about a year ago, but it would take some time for customers to design them in different form factors. So the revenues to date have been primarily generated from the applications in the active copper cables. But we have many use cases for different applications by different customers designing our copper edge product onto the board or unit connectors. So we do see that a different pace of adoption in a qualification and testing status, but we are very confident that before the end of this year, we’ll have revenue generated from more than our anchor customer in a board interconnect your applications. But as for the anchor customer, we have been engaging with them very tightly.

In the immediate next generation after the current one, so we don’t have content to interconnect to racks because it’s a single rack solution. But going forward, we understand that our product is in their design in the form of either on the board or in a cable form. As for this air pocket of three, four quarters, it’s at, I mean, the most specifically for that one customer, one application. The other applications and revenue could come sooner than that.

Harsh Kumar: Understood. And Hong, I’m sorry for the long-winded question, but thank you. Very, very helpful. And then I just wanted to ask on your core business. You’ve been growing when every other ML company has been down because primarily you entered the correct. Do you feel like you have good visibility on being able to call for, call it, sequential growth from here on? Or are you at a point where maybe just like your industrial business, you’re starting to see some, you know, you’re starting to see where you’ve normalized and you’re in a normal seasonality comes into play. Are we still looking at growth from here?

Hong Hou: Yeah. That’s a good question, Harsh. So, certainly, we are having been over-indexed, I would say, on the attention that’s on ACC or Copper Edge. And the data-centric deals. But we do indeed for Semtech, have a broader portfolio. So, you know, the other businesses and we have been seeing the inflection in FY 2025. You look at the historic numbers, and we have been able to record quarter over quarter sequential growth. We’re gonna be guiding one quarter at a time, but we’re seeing the trajectory. As Mark gave the details, we will continue to see the data center growth even factoring in the ACCEL copper edge headwind. And the consumer, the high-end consumer, we will have the tailwind for the seasonality. But sequentially, you know, guidance for Q1, the industrial part will probably see a little decline.

But yeah, the trajectory we see that business fundamental is there and there’s a very favorable. And we have taken care of the inventories issues. So I think, well, whatever we see going forward is gonna be the true fundamental from the business. I’m very optimistic about that.

Harsh Kumar: Congratulations, guys, and thank you for your answers.

Hong Hou: Thank you, Harsh. Thanks, Harsh.

Operator: Our next question comes from Tim Acree with UBS. Please proceed with your question.

Tim Acree: Thanks a lot. I’m wondering if you can help us just on sort of pinpointing the timing on this upcoming step change in the revenue inside of the data center. I know, you know, given this push out in ACC, you are, though, winning on a couple of other platforms. So I’m just wondering if you can help us shape sort of in fiscal, you know, 2026, like, you know, when is that step change gonna happen? Thanks.

Mark Lin: Thank you, Tim. So, yeah, as I said, the data center, we got a pretty broad portfolio, copper edge and fiber edge and with tri-edge product. And the fundamental of the CapEx spending by the CSP is still there. We expect the fiber edge to continue to grow. The copper edge is gonna be a little bit bumpy, temporarily, you know, we have an air pocket. But once all the other customers, they start kinda, like, ramping up in the volume, we’ll see the accelerated growth. But all in all, if you look at the data center portfolio, we still expect quarter over quarter growth. As for the timing of the copper edge recur, from that specific anchor customer, I think, is dependent on the next generation rack design timing. That is a, in a way, I’d like to help on whatever we can, but we can’t control that timing.

Tim Acree: Right. Right. Okay. And then I guess the second question is, sort of an update on the portfolio rationalization plans. The current uncertainty in the market, obviously, what’s happened in the last couple of weeks, I would assume that makes that maybe a little more challenging. And can you speak to sort of how, you know, price sensitive you’ll be in this? I mean, is the idea just that you wanna, you know, rationalize the portfolio, not at any price, but I’m just kinda wondering how price sensitive you’ll be given some of the, you know, market uncertainty we’ve seen in the past, you know, couple weeks. Thanks.

Hong Hou: Great, Tim. So we don’t have a specific timeline. As you know, our balance sheet has been significantly strengthened, but from a longer-run strategic point of view, we still would like to rationalize and, you know, kinda like do having that our portfolio aligned with our strategic vision. And margin profile. So the business has been inflected and I think, you know, the good buyer, they will see the synergy on their side. So I will say this business needs to be bought rather than be sold. Namely, we don’t have to sell it. But if the buyer sees the strategic synergy for them in adding to their portfolio being transformational, and this can be a great addition to them. So we are patient, but you know, I know there are tailwinds because of that, you know, that as a, you know, prepared remark and one industry participant based in China was put on the DOD 1260 h list.

And another Europe-based competitor exited the cellular module business. So, really, the demand we’re seeing the booking activities has accelerated. That’s a really good business. It’s contributing to positive EBITDA. And we’re not in a dire situation to have to do the sale. This is not a distressed asset. We welcome buyers to see the synergy into their, you know, it’s a nice addition to their business. And that will be the basic principle for us to run this process.

Tim Acree: Perfect, thank you. Thank you. Yeah.

Operator: Our next question comes from Quinn Bolton with Needham and Co. Please proceed with your question.

Quinn Bolton: Hi, Hong and Mark. Congratulations on the nice results. I guess, Hong, maybe just a quick clarification on your data center comment. You mentioned that business growing quarter on quarter to air pocket. Was that a comment specific to the April guide, or is that a comment specific that you see continuing throughout all of fiscal 2026?

Hong Hou: So good. Nice question. Good question. So we will only give the guidance on one quarter at a time. That’s a specific guide to our April quarter. But in general, we go with the market trend. If the CSP CapEx spending continues, to be strong. You know, we have been benefiting from that trajectory and have scored a very strong year over year growth from FY 2024 to 2025. If the CapEx continues to be at the projected, and I would not be surprised that we’ll have a strong growth year over year as well.

Quinn Bolton: Got it. And then the second question is, I’m not sure if you’re willing, but was wondering if you might be able to give us some sense of the general breakdown of the data center business. You mentioned it was $50 million in the January quarter. Sounds like CopperEdge was probably, you know, a very high single-digit million, maybe approaching ten. But the rest of the business probably forty million plus. Can you give us a sense, you know, how much of that forty million plus is FiberEdge just going in optical modules, how much maybe tri-edge and then other revenue? Just trying to get a sense of what that mix looks like.

Mark Lin: Quinn, I think it’s important for us to focus on our data center portfolio rather than individual SKUs. But, I mean, needless to say, there’s strong broad-based growth across our portfolio. We did mention in our prepared remarks that fiber edge net sales for our fourth quarter were at record levels. So definitely strong market acceptance and market adoption of that fiber edge portfolio.

Quinn Bolton: Maybe, Barty, just a quick follow-up. Could you say is the majority or perhaps the vast majority of the non-CopperEdge business driven by sort of four hundred eight hundred gig modules, or is there a meaningful portion that may be targeting slower speed, you know, applications in the data center? Again, just trying to get a sense, you know, there’s pretty strong demand for four hundred eight hundred gig and seem to be one point six gig optical modules and just wanted to get some sense how much of your business is exposed to those higher speed optical modules.

Mark Lin: Quinn, broadly, four hundred gig, eight hundred gig. Yes. Broadly, that’s where we have a good sense of growth and then at slower speeds as well. But that four hundred gig to eight hundred gig is a good growth for us.

Quinn Bolton: Got it. Okay. Yeah. Thank you.

Hong Hou: That’s the sweet spot. One point sixty is still early. It’s more in the design phase and low volume. So it’s four hundred gig and eight hundred gig. There’s a sweet spot of a fiber edge. Revenue contribution.

Mark Lin: Thank you.

Quinn Bolton: Thank you.

Mark Lin: Our next question comes from Christopher Rolland.

Operator: With Susquehanna. Please proceed with your question.

Christopher Rolland: Hey, guys. Thanks for the questions. My first are on IoT and LoRa. So I don’t know if you guys can frame the impact of u blocks and the block on the China list, what that means for that business. And then LoRa seems like a lot of upside there that thirty-seven million number, like, is that just pure LoRa, like, modules, or are there, like, routers and stuff in there? It seems like that was a big uptick. And is that sustainable moving forward? Thank you.

Hong Hou: Thank you, Chris. So let me try to answer your LoRa question first. The $37.1 million, it’s all LoRa and we do not provide modules. We provide LoRa chips and transceiver chips to the module manufacturers in our different generations product. It just provides additional functionality inclusion of different video protocols to make the ecosystem partners use our product easier. So that we enable provide that level of enablement. Most of the LoRa devices at this point are end devices, not the gateway devices. Because they get a pretty good coverage. And a gateway, and also there are many different applications is point to point. As for the IoT business, and certainly, you name the u blocks and then we name the European participants.

Yeah. Their announcement has provided a tailwind for us. We share the same customers and we’re getting the same customers calling us and asking for continued support. And accelerated delivery. So that’s totally helpful. Then the China-based company, the DOD list certainly provides another level of tailwind. And there are some customers in the past they have shifted the effort to design our product and into their routers and gateways, but they took us as an approved vendor just when in case they couldn’t buy from that company, they will buy from us. But now we are seeing some tangible shift. And because, you know, some of the, for example, some of the applications they can use for commercial applications, they can be installed in the military base.

Clearly, they wanted to use the same modules for both applications. And they wanted to source from western suppliers. Like us. And we will be benefiting from that even more going forward. Right now, we’re seeing more defined wins and but those design wins are gonna be converted into orders and bookings throughout the year.

Christopher Rolland: Excellent. And sorry for misspeaking on modules versus chips. I did know that, but is LoRa these levels sustainable from here? And then as a follow-up, for some handset-related questions on either TVS or proximity sensing, you know, as you look out, you know, this year, next year, you know, how do you view kind of your opportunity set? In these markets moving forward? Would you consider them, you know, better than market growth? Or how would you consider them? Thank you.

Hong Hou: Yeah. Thank you. Yeah. On the LoRa end, certainly, the Q4 was very strong, and there might be some factory in there for kind of, like, some project-based demand. But in general, if we zoom out a little bit, year over year basis, we have been experiencing very strong growth. I will think based on the momentum, based on the customer engagement, activities, based on the new use cases we learn from our creative ecosystems and customer base. I am pretty optimistic for the year over year growth from FY 2026 to FY 2025 to 2026. For the TVS and per se product for cell phones and smartphones. I believe we are gaining shares in that that has been supported by the year over year revenue growth in double digits. And certainly, that is higher than the smartphone market itself.

And the quarter to quarter basis, you know, you still gonna be seeing a little bit seasonality impact. But in general, we are getting more design wins and we are gaining shares from our competition as well.

Mark Lin: Thanks so much, Tom. John.

Hong Hou: Thank you. Thank you, Chris.

Operator: Our next question comes from Cody Acree with Benchmark Company. Please proceed with your question.

Cody Acree: Thanks, guys, and congrats on the progress. Mark, for you, if you can just talk about your gross margin expectations for the year. And maybe also if you can expand on into your OpEx expectations for the year?

Mark Lin: Hey, Cody. We’ll just emphasize we’re only guiding one quarter out. So beyond our guide, we don’t have that much commentary other than we’ve seen very strong year over year growth in our gross margins. And, you know, given that we are looking at some additional data center growth, you know, we do see that those are typically higher than our corporate gross margin averages. So accretive to the total gross margin. On OpEx, we’ve got one quarter out would say that we’re remaining prudent in our R&D spend. So R&D is prioritized to customer alignment, and what we believe will be near-term revenue growth.

Hong Hou: Yeah. If I can add some color. Cody, on the OpEx side, you see the incremental increase in our Q1 compared to Q4. If we kind of like a double click on that, SGNA is gonna be largely the same. Over the year, we will want to have more efficiency and leverage with, you know, increased revenue. And we plan to use AI, you know, right now. That is a hot topic, but we really see the benefits for some efficiency and productivity improvement. We do want to increase the R&D spending in our FY 2026 compared to FY 2025. And over the last three quarters since I took the position, and we had conducted multiple critical reviews on the programs the return on the R&D programs we cancel the number of it and so that we can make the fund available to programs with better opportunities.

We did that and has been largely successful in FY 2026. Going forward, we have more opportunities. And just by shifting the focus a little bit, may not be enough. So we wanted to increase our R&D spending in this new fiscal year but as Mark said, in a very disciplined fashion. So we definitely wanted to make sure we will review the, you know, the return on the investment we’ll review the alignment with the market frequently so that if we need to do any adjustment and, of course, correcting, we’ll do it decisively. But in general, we see many opportunities and we wanted to really capture these opportunities to accelerate the growth. So we see the R&D spending for the Q1 is gonna be increasing a little bit from Q4. But other parts of the OPEX we wanted to make sure we can get the efficiency out of them.

Cody Acree: Thanks for that, guys. Hong, if you can just continue with that thought, then can you elaborate on your product priorities then for 2026? Where your R&D spending is gonna be focused and where do you think your growth is gonna be most derived from.

Hong Hou: Good question, Cody. So we certainly wanted to focus our R&D in the area that we have demonstrated very fast, like, growth and we have a better alignment with the customers, and we have opportunities identified. So, like, largely, in the data center, area, in a LoRa area, and in some selected IoT areas as well. And, of course, you know, the new emerging trend well, not an emerging trend. So among our portfolio, like, person sensing, it’s quite exciting because of the SAR standards requirement. It’s elevating that provide opportunities for us to provide solutions to our customers with our technical differentiation. And then the same product can be used in the gesture control for the smart wearable devices and that is an emerging opportunity.

And in the beginning, we were just like provide a solution to it, but now and that can be if it’s really materialized, can be the next generation compute platform with the AI form factor and then the robots. You know, we know our person sensing product has been incorporated in many companies in their robots designs. So that’s the pretty exciting opportunities, and we will be increasing R&D investment to create extended bandwidth in addressing the market need. For that application.

Cody Acree: Great. Thank you, guys.

Mark Lin: Thank you.

Operator: Our next question comes from Tristan Guerra with Baird. Please proceed with your question.

Tyler: Hi. This is Tyler on for Tristan. Thanks for taking the questions. Maybe back on LoRa. Could you provide an update on where LoRa inventories are? Do you think you’re shipping back in line with demand? And then also if you could help with the timing of the ramp for the Mercedes factories, that would be helpful. Thanks.

Mark Lin: Tyler, not just with LoRa, but across our portfolio, we are monitoring channel inventories. So we try to keep channel inventories in line with expectations. Right? So that goes for LoRa too. We’re really shipping to what we believe is expected demand. LoRa deployment across the industrial portfolio. You know, that example you provided that Mercedes deployment that occurred already. But right now, LoRa is being deployed across a number of IoT applications.

Tyler: Metering, asset tracking, factory automation.

Mark Lin: Great. And then maybe for my follow-up one on the data center, could you just provide a little more color on where you’re seeing LPO opportunities medium term?

Hong Hou: Yeah. So, Tyler, the LPO opportunities near term is gonna be primarily on the eight hundred gig or a hundred gig per channel. So we have been providing our TIA’s and driver solutions to many optical transceiver module manufacturers. And there are some strong CSPs at the end user to drive the adoption for it. And as for one point six terabit, I think at this point, the industry is primarily focusing on LRO solution, namely in the transmitting, and they will still use a DSP-based real-time solution. And the receiving end, they will use the linearized solutions. So LRO, we will have our TIA in the receiving end. And but we don’t have the driver, you know, driver typically come from the DSP side. The eight hundred gig LPO, on the other hand, we will have the TIAE content on the receiving end.

Together with the driver content on the transmitting end. So at the OFC, you’re gonna be seeing multiple demos that, you know, our customers and their partners are using our solutions to design and plan to go into the production on the eight hundred gig LPO one point sixty LROs.

Tyler: Great. Thanks again for taking the questions.

Mark Lin: Thank you, Tyler.

Operator: Our next question comes from Craig Ellis with B. Riley Securities. Please proceed with your question.

Stacy Chu: Hi. This is Stacy Chu on for Craig. Thanks for taking the question. And I was wondering if you could just give a little clarification for the announcement with currently one competitor being placed on the annotated list. How has that been, you know, like, materialized so far? In lifting the Sierra business? And how would that affect the business strategically?

Hong Hou: Yeah. So, Stacy, thank you for that question. The one competitor was placed on the 1260 h list that means, really, many of our customer base when they have the product used for in do use situation, they do not want it to use the modules from that supplier. In China. So that’s definitely has translated into a significant increase in booking. So and we as I said, that booking that’s significantly increased in design wins, and that design wins is gonna be translated into the bookings over throughout the year.

Stacy Chu: Okay. Got it. Thank you for the question. And the second question, I guess, is going back to the design process, like, how long are these onboarding conferences can last, and how many AI server generations can that socket remain?

Hong Hou: I see. So the design for onboard solutions is actually gonna be shorter than the design in the cable because the onboard solution is typically done by the end customers directly. They don’t need to go through a third-party supplier. So the design cycle, you know, like, anything, typically six to eighteen months. It depends on the number of iterations they will have. So you probably will be learning more about the timing in the next week’s conference they’re gonna be hosting.

Stacy Chu: Got it. Thank you so much.

Mark Lin: Thank you.

Operator: Our next question comes from Kyle Smith with Stifel. Please proceed with your question.

Kyle Smith: Hi, guys. This is Kyle on for Torrey at Stifel. Congrats on two straight quarters of positive free cash flow. So how should we think about free cash flow heading into fiscal 2026? And maybe building off of that, if you could provide general expectation for both operating cash flow and capital expenditures, that would be great.

Mark Lin: Hey, Kyle. Thanks for the question. We’ll say that we were only guiding one quarter out but you can see the strong cash flow generation that we had in Q4. And we had sequential increases in cash flow generation from Q4 to Q3. Definitely, strong business fundamentals do help, like, with the growing business, but also, you know, with our reduction in debt. We previously announced, you know, $40 million in annual cash interest savings. That’s definitely a tailwind to our operating cash flow metrics. And that operating cash flow, we only had one a partial quarter of benefit in our Q4. So you can expect or I expect that there’s going to be some incremental cash flow benefits over the year. Again, we’re only guiding one quarter out, but I think it was I would think that historical CapEx is a reasonable proxy going forward for future CapEx requirements.

Kyle Smith: Great. Thank you. And as my follow-up, could you maybe provide an overview of the unbundling trend you’re seeing within the TIA market? And do you feel you can capture majority share within the unbundled TIA market in the next few years?

Hong Hou: Yep. So definitely, we can see the prior commercial arrangement from the industry participants and usually leverage the availability and shortages of DSPs. They wanted to sell DSP and TIA together. Think with the more availability of the DSP supplies, and the number of providers out there, this kind of bundling practice is no longer in place, and that provides great opportunities for us to play in the leveled market. Playing field. So we have been gaining market shares, but I think we still have ways to go. And good thing is our TIAs have been broadly regarded as the best solution in the industry, serving two hundred gig, four hundred gig, eight hundred gig, and one point sixty. So we have multiple form factors, and I anticipate that trend will continue.

Kyle Smith: Congrats on the quarter, guys. Thank you.

Mark Lin: Thank you. Thank you.

Operator: Our next question comes from Harsh Kumar with Piper Sandler. Please proceed with your question.

Harsh Kumar: Yeah. Hi. Thanks for a chance with the follow-up. I was curious, Mark or Hong, what is making LoRa jump up so significantly, so fast? Are you seeing some kinda new deployments or activity? And maybe you could help us understand what Jio or what kind of applications without giving us too much specifics.

Hong Hou: Yeah. So Harsh, that’s a great observation. We’re really pleased with the results. And I think it’s largely due to the customer focus. And we the business in LoRa has been auto-piloting for a while. And now we put a very concerted effort into developing new products and provide enablement support and really engaging with the customers very closely. So it is clear that LoRa has demonstrated a very strong differentiating capability compared to other RF protocols and, customers are developing different applications. There are a lot of, you know, innovations going on there. And when people talk about this auto mow lawnmower, and then robots and a mismetering that’s the space and, you know, we have been demonstrated a very strong demand, but there are new applications being developed. So I think we are accelerating the growth through new product offering and ecosystem enablement and a customer focus.

Harsh Kumar: Understood. Thank you. Thanks and congratulations again.

Operator: Thank you. Our next question comes from Quinn Bolton with Needham and Co. Please proceed with your question.

Quinn Bolton: Hey, guys. Just wanted to ask a quick question on the pond business. Just looking at the overall signal integrity revenue and your comment the data center was up to $50 million. Looks like you probably saw a meaningful step down in the PON business. Wanted to see if you could confirm that. And if that’s the case, is that just sort of timing between different tenders? Is that a seasonal effect? And then I’ve got a quick follow-up.

Hong Hou: Yes. Clint, so for Q4 results, was actually year over year the pound was growing. And as for our guidance, say, in a SIP area, the signal integrity product, overall, is gonna grow. The data center is gonna grow. So Pong and the hassle and timing thing, related to the tender. Tender offers.

Quinn Bolton: Okay. And then I’m not sure if you’d be you care to comment, but your growth for signal integrity or sorry, data center in particular for the April quarter. Just wondering, do you expect the Copper Edge business to be effectively zero in that quarter? Because if so, it obviously implies some really strong growth outside if the overall bucket is gonna grow quarter on quarter. But just wondering if you just directionally is Copper Edge still, you know, several million dollars? Is it zero just any help? You know, just to sort of think about growth and you know, outside of the CopperEdge product.

Mark Lin: Quinn, in our Q1 guide, we still expect to be recording CopperEdge net sales. CopperEdge but it’s just under our prior expectations. At our customer. So as Song said, there’s you know, there’s still design activity. We’re engaged with over 20 customers. And we expect some revenue to pick up at the latter half of FY 2026.

Quinn Bolton: Got it. Thank you, Mark. Yeah.

Mark Lin: Thank you.

Operator: There are no further questions at this time. I would now like to turn the floor back over to Mark Flynn for closing comments.

Mark Lin: Thank you, everybody, 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.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.