Semtech Corp 2027 Q2 Earnings Call

Please go ahead. Thank you and welcome to Semtech's second quarter 2027 financial results conference call.

Participants on today's conference call are Hong Hou, President and Chief Executive Officer, and Mark Lin, Executive Vice President and Chief Financial Officer. Before we begin the prepared remarks, I would like to highlight upcoming investor events, including the Citi Global TMT Conference on September 8th and The Benchmark Company TMT and J.P. Morgan Rising Tech Leaders Forum, both on September 10th in New York City. In addition, we hope you'll attend our investor event in San Jose on October 15th, during which we'll provide an in-depth overview of Semtech strategy, differentiated technology portfolio, key growth opportunities, and long-term financial targets. The event will also feature panel discussion moderated by Morgan Stanley with industry luminaries from the 650 Group, Meta, and General Catalyst.

A question and answer session, product demonstration, and opportunities for in-person attendees to engage with members of the Semtech management will also be part of the agenda. Today, after the market close, we release our unaudited results for the second quarter ended July 26, 2026, which are posted along with an earnings call presentation to our investor relations website at investors.semtech.com. Today's call will include various remarks about future expectations, plans, and prospects, which comprise forward-looking statements. Please refer to today's press release and see slide 2 of the earnings presentation, as well as the risk factors section of our most recent annual report on Form 10-K for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on today's call. You should consider these risk factors in conjunction with our other forward-looking statements.

We will refer primarily to non-GAAP financial measures during today's call, and we'll also be referring to results for our second quarter of fiscal year 2027, unless otherwise noted. Please see today's press release and slides 3 and 4 of the earnings presentation for information regarding notes on our non-GAAP financial presentation. The press release and earnings presentation also include reconciliations of our GAAP and non-GAAP financial measures. With that, I will turn the call over to Hong.

Thank you, Mitch. Good afternoon to all of you joining today. The Semtech team executed exceptionally well this quarter, delivering record revenue across all our key focus areas, earnings leverage that continued to outpace revenue growth, and significant progress on portfolio optimization. Revenue was $342 million, growing 33% year-over-year, and we delivered strong operating leverage with earnings per share of $0.71, growing 73% year-over-year, more than twice as fast as revenue growth. We are at the center of one of the most significant infrastructure build-outs in history, and our portfolio plays an essential role. We are well aligned with the ramp to 1.6T, complementing 800G growth and demand signals that are strengthening across every part of data center portfolio: CopperEdge, FiberEdge, and photonics. We expect this momentum to carry through the second half of the year and into fiscal 2028.

We are also reshaping Semtech with purpose. The announced sale of our cellular module business is a significant step in our portfolio optimization, allowing us to more sharply focus on our core growth areas. We are growing in our focus areas, sharpening the portfolio and driving operating leverage with the same goal in mind, building a predictable high margin and high return business. Now let me move on our discussion to our end market. Infrastructure net sales were $124 million, up 25% sequentially and 69% year-over-year, driven by outstanding performance in our data center business. Data center revenue was a record $100 million, up 39% sequentially and 91% year-over-year, supported by continued strength in 800G, 1.6T CopperEdge, and the start of our 1.6T FiberEdge ramp.

Our FiberEdge TIA and driver solutions remain in exceptionally strong demand, and we continue to deepen our engagement across all the leading hyperscalers. We are now designing to every module provider in our target markets, several on a sole source basis, a reflection of our technology differentiation and the supply availability we bring across both fully retimed and linear architectures. We are also seeing increasing engagement from a broader array of customers on emerging technologies like MPO and XPO. As a networking ecosystem looks to us to align and help define the next generation of high density, low power optical architectures in our shared technology roadmap. On CopperEdge, we believe our linear equalizer solutions are the de facto industry standard. CopperEdge products up to 1.6T are solutions that are ready for volume deployment.

We are currently engaging across a number of hyperscalers in cable and onboard applications, and are in design-in phase at all bandwidth up to 3.2T. Thanks to linear equalizer's compelling advantage in link margin performance and power savings. Based on strong market demand and the design win momentum, we expect continued revenue growth of our 1.6T portfolio, with the FiberEdge expected to exceed 50% market share by the end of the fiscal year, and the CopperEdge already taking the lion's share of the linear equalizer market. We have made excellent progress in our photonic portfolio, broadening our customer base in both gain chips and high-power CW lasers, addressing both high-speed transceivers and CPO scale-up applications. Feedback from customer evaluations of our high-power CW laser for coherent light and 1.6T transceiver applications has been very positive, citing differentiating over temperature performance and power efficiency.

We expect revenue contribution of CW lasers for transceivers to start in the first half of fiscal 2028. We are also pleased to have brought onboard photodiode design resources, headed by an industry leader, expanding our photonic portfolio to PD arrays in the near future. Our combined PD and TIA design team has already engaged with the key customers, and we expect to deliver co-optimized high performance solutions. Our photonic portfolio now spans gain chips, high power lasers, Semiconductor Optical Amplifiers, and high-speed photodiodes for scale up, scale out, and scale across data center connectivity applications. With this expanded portfolio, we are positioned to develop new growth drivers and grow our content per transceiver from high single-digit dollars to high double-digit dollars as the industry transitions from 800G to 3.2T, cementing our position as a true solution provider.

On our capacity expansion plan, our team executed very well, securing equipment deliveries for this fiscal year and acquiring clean room space to fulfill strong customer demand. In less than six months, we completed a series of photonic acquisitions, procured fab equipment, expanded clean room space, and onboarded exceptional management and technical talent. We have established a solid foothold in the photonic space and set the path for strong future growth. Given record backlog we carry into the third quarter, we project a 45% sequential revenue growth in data center, representing approximately 160% growth over the same period last year. We expect accelerating year-over-year growth into fourth quarter and continued momentum throughout fiscal 2028. Now, moving to our high-end consumer end market. Net sales for Q2 were $39 million, up 2% sequentially and down 5% year-over-year.

Our TVS business grew sequentially and remains very resilient in light of memory constrained pricing across the industry. Revenue growth continue to benefit from our strong share at the premium brand handset manufacturers, where we are expanding our content per device. SurgeSwitch, our newest circuit protection solution, is opening a new layer of TVS opportunity, addressing a gap as rugged mobile devices and high performance portable systems push towards more demanding power and reliability standards. Our PerSe capacitive sensor design-in pipeline continues to grow in specific absorption rate, smart wearable, and other consumer applications, expanding with the lead customers on a broadening range of applications. The combined capacitive and force sensing offerings elevate our value proposition, strengthen customer retention, and are pulling through sensors and TVS sales within the same customer base. We expect our design win pipeline to support the long-term growth for this business.

Now, moving to our industrial end market. Q2 industrial net sales were $179 million, up 16% sequentially and up 25% year-over-year, driven by another record quarter for LoRa. LoRa-enabled net sales were $58 million, up 31% sequentially and up 58% year-over-year. Another all-time record. Our LoRa Gen 4 platform with the LoRa Plus other RF protocols continues to gain market traction, and we expect it will be a key driver for the future growth. Gen 4 also delivers dual-band capability and expands data throughput to 2.6 megabit per second while preserving the sensitivity, multi-protocol flexibility, and ultra-low power consumption that define the LoRa advantage. This feature set enables a new class of edge AI applications while maintaining the long battery life and the extended reach that our customers depend on and opens up incremental application verticals within smart home and security. We also continue to see LoRaWAN expanding into new use cases.

In public safety, sensors can now transmit high-fidelity audio for AI-based verification rather than simple alerts. In industrial environments, our work with industry leaders demonstrates how LoRaWAN and edge AI together enable predictive maintenance at a level of the detail that legacy low-power sensors could not support. Amazon Sidewalk continues to build momentum. Following Ring's launch of a new line of LoRa-based sensors in the U.S., Sidewalk is now expanding internationally, starting with Canada and Mexico, with Europe, Australia, and Japan expected to follow. This is a meaningful step towards mass market consumer adoption at Amazon's scale. Together, our three pillars, LoRaWAN for industrial and commercial deployments, LoRa Plus with a multi-protocol flexibility for smart home and security, and the Amazon Sidewalk for mass market consumer applications, continue to create a solid framework for growth.