Semtech Corp Q1 FY2025 Earnings Call

Greetings. Welcome to Semtech's Q1 FY '25 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Mark Lin. You may begin.

Thank you, operator. Good day, everyone, and welcome. This is Mark Lin, Executive Vice President and Chief Financial Officer. And I'm joined today by Paul Pickle, President and Chief Executive Officer. Today, after market close, we released our unaudited results for the first quarter 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. Actual results may differ materially from the results anticipated in these statements due to various factors included in today's press release and presentation as well as in the Risk Factors section of our annual report on Form 10-K for the year ended January 28, 2024, filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current only as of today and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. 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 presentation materials posted at the Investor Relations section of our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. With that, I'll turn the call over to Paul to discuss our business and end markets.

Thank you, Mark. I'm pleased with Semtech's solid first quarter financial performance, with net sales above the high end of guidance, along with meaningful declines in channel inventories across each of our end markets. Now, moving to our first quarter end market results, starting with Infrastructure. For the first quarter, Infrastructure net sales were $56 million, a sequential increase of 42% and up 44% year-over-year. Results were at or above our expectations across each application. POS trajectory was similarly encouraging, up 33% sequentially and up 80% year-over-year. Channel inventories have largely normalized and are down 8% sequentially and down 18% year-over-year. Net sales for data center were $21.2 million, up 20% sequentially and up 61% year-over-year. In hyperscale data center applications, net sales more than doubled over last year with powerful secular trends in AI continuing to support our copper and optical portfolios. We believe AI is a trailblazer, which facilitates accelerated adoption of leading-edge technologies such as active copper cables, linear pluggable optics, and 1.6T optical modules in general compute applications. For our copper edge linear redrivers, our expectations for timing and market opportunity in 1.6T active copper cables remain consistent with last quarter. We are closely collaborating in the qualification process, which is largely progressing to plan. While qualifications are currently ongoing, cable suppliers have received purchase orders for designs specifying our chips, which we believe to be a good indication of progress. Accordingly, we reiterate our expectations of shipments beginning for these designs at the end of fiscal '25 with a substantive ramp starting in FY '26. We remain very excited by ACC opportunities and are also constructively engaged on a host of key projects as system vendors, ranging from retimed 50-gig solutions for AI and general compute applications, which we expect to substantially contribute to current year net sales, to retimed 100-gig solutions, which we expect to ramp this year, and retimed 200-gig solutions, which we expect to ramp starting in FY '26. We believe these opportunities equate to a very rewarding market over the next few years. FiberEdge TIAs and laser drivers for 400-gig and 800-gig optical modules continued to ramp in the first quarter. We also have FiberEdge design opportunities for 1.6T optical modules with sampling expected in early FY '26 and a ramp starting in the second half of FY '26. Design win activity and bookings increased across the number of customers, and we are also pleased with multiple 100-gig per lane design wins with Tier-1 and Tier-2 customers. We expect growth in this application to continue in the second quarter. Our Tri-Edge products are also performing well, with strong demand from key hyperscalers for 50-gig PAM4 and 200-gig and 400-gig AOCs for AI and cloud applications. Our 50-gig Tri-Edge products offering lower power and cost have consistently maintained strong share versus DSPs. In LPO, we remain engaged with several key partners in accelerating adoption of this technology. Net sales for passive optical network products were above our expectations at $27.2 million for the first quarter, a sequential increase of 88% and a year-over-year increase of 64%. The drivers of the strong results are consistent with what we communicated last quarter following the release of tenders. Robust demand for our XGPON and XGSPON reflect our first-to-market position, technical leadership, and superior product performance. Expected market drivers in the North American and EMEA markets are consistent with the prior quarter, and we are pleased with our continued engagement with several large network providers in both 10-gig and 50-gig applications. As there was a bit of a pent-up demand reflected in Q1, we expect net sales of PON to moderate in Q2. That said, based on our current analysis of booking POS trends, we expect solid results for PON throughout the year. Regarding other products in the Infrastructure end market, wireless demand has been consistent, but at low levels. That said, we are well positioned to lead 5G-Advanced front haul deployments with our Tri-Edge and FiberEdge 50-gig wireless platform and through our active participation in the Mobile Optical Pluggables Alliance, which includes our key partners Ericsson and Nokia. Our 50-gig front haul systems are in qualification, and we expect initial sales in the latter half of FY '25 for these products and production ramp in FY '26. For the first quarter, High-End Consumer net sales were $34.5 million, a sequential increase of 8% and up 60% year-over-year. POS was seasonally flat quarter-over-quarter and up 24% year-over-year. Consistent with our expectations, channel inventories continue to improve, down 11% sequentially and down 22% year-over-year. Net sales in consumer TVS grew within expectations to $24.9 million, up 20% sequentially and up 108% year-over-year and paired with channel inventory decline. We believe our market share at several leading consumer products companies continued to grow with design wins including handsets, wearables, and tablets. Our performance has been driven by customer preference of our first-to-market high-performance protection devices. Our demonstrated capabilities to reliably deliver to customer demand while maintaining extremely high levels of quality has enabled us to secure a top-tier scorecard rating at our largest consumer electronic customer. We expect these capabilities along with market-leading innovation allow us to meaningfully outperform market growth. We also continue to extend the frontiers of our capabilities through the deployment of innovative power management solutions that effectively combine over-voltage, over-current, over-temperature, and surge protection with traditional IEC ESD protection. We saw increased levels of interest and adoption for these products at key customers during the first quarter. Our class-leading PerSe proximity sensing products had healthy consumption, up 19% sequentially and up 62% year-over-year. One of the consumption drivers was the rollout of specific absorption rate standards that took effect earlier this year. This demand has been supplemented by PerSe design wins in several markets, covering tablets, earbuds, notebook computers and smartphones. We expect the consumption trend to strengthen, driven by widespread adoption of features such as gesture-control for earbuds and gesture-controlled smart glasses featuring bone conduction speakers. In line with our expectations, channel inventories for proximity sensing declined 26% sequentially and 5% year-over-year. For the first quarter, Industrial net sales were $115.6 million, down 5% sequentially and within expectations. Our IoT systems business recorded first quarter net sales of $48.4 million, down to 26% sequentially and down 57% year-over-year. Consistent with guidance, shipments for this business reflect our desire for healthier channel and end customer inventories. That said, this business is showing signs of recovery with first quarter bookings up 47% sequentially. For our router business, bookings more than doubled both sequentially and year-over-year. Router bookings were skewed towards our higher gross margin products, but we saw gains across all product families. Continuing its very strong launch pipeline and bookings from the XR60, the world's smallest rugged 5G router, continue to grow. We are pleased that we completed major network operator certifications on schedule and have commenced initial XR60 shipments for commercial programs, with second quarter shipments expected to sequentially double. XR60 pipeline expected to close in the current year is also very strong, with opportunities in government applications serving border security, public safety, and logistics, each have benefited from the passage of a US Federal budget. XR60 pipeline has also broadly increased in utility, transit, and medical applications. Lastly, routers saw channel inventories decline 27% sequentially and 47% year-over-year. Bookings in our module business were up 22% sequentially with growth driven by our 5G offerings and supported by further certifications at global network operators. Module bookings were particularly focused in enterprise networking applications, mirroring market growth. Pipeline also grew across a number of IoT markets, including payment processing, energy and fleet management. We are also very pleased to have announced along with key partners satellite non-terrestrial network support in our LPWA modules, further advancing our position in fleet and asset tracking. We believe the hardware business reached bedrock in the first quarter with stability in the second quarter and growth in the second half of FY '25. First quarter net sales for our connected services businesses were $24.1 million, effectively flat quarter-over-quarter and within expectations for this relatively stable stream of recurring revenue. Net sales of our RF industrial products, including LoRa-enabled solutions, increased 76% sequentially and 19% year-over-year. POS increased 25% sequentially and 16% year-over-year. The first quarter was characterized by further strengthening of LoRa adoption in both private and public LoRaWAN networks. In addition to traditional utility use cases, we saw greater momentum for our LoRa solutions targeting application and connected spaces, including building maintenance and energy management. We are also seeing increased opportunities in city management and citywide smart lighting control. In order to further simplify network deployment and reduce system cost, we are pleased to have introduced two technical enablers to the market, LoRa relay and the LoRa single channel hub. The hub was launched at the Embedded World Show held in April with demos of this product being co-hosted by several Semtech partner companies. We see this product as an important enabler for the adoption of LoRa technology into smart home applications. For TVS products in this end market, we continue to focus on our strategy to leverage customer engagement and adoption of best-in-class consumer products to capture meaningful SAM. In the first quarter, bookings for these products increased 61% sequentially with sequential net sales growth of 7%. Design wins reaching production in the first quarter span applications, including intelligent vehicle cockpits and advanced displays, vehicle antennas, medical equipment, industrial power over Ethernet, and body-worn cameras used by first responders. Now, I'll turn the call back over to Mark.

Thank you, Paul. For the first quarter, we recorded net sales of $206.1 million, up 7% sequentially and above the high end of our guidance range, with the Infrastructure end market contributing to the favorable results. Coupling net sales and channel inventory by end market and on a sequential basis, Infrastructure net sales were up 42% and channel inventory was down 8%; High-End Consumer net sales were up 8% and channel inventory was down 11%; Industrial net sales were down 5% and channel inventory was down 17%. Gross margin was 49.8%, up 90 basis points sequentially and up 130 basis points year-over-year, reflecting favorable mix and cost controlled overhead spending. Operating expenses were $77.4 million and at the low end of guidance. We continue to closely evaluate spending, and on a year-over-year basis, operating expenses declined $15.3 million or 17%. We believe current spending levels reflect a prudent level of cost control coupled with improved allocation of spending to drive near-term financial results. We are wholly committed to programs supporting customer projects. Operating income was $25.2 million and operating margin was 12.2%, a sequential increase of 300 basis points and a year-over-year increase of 290 basis points. Net interest expense was $20.5 million, in line with guidance. We recorded net earnings per share of $0.06 based on a diluted share count of 67.6 million shares. Adjusted EBITDA for the first quarter was $33.1 million and adjusted EBITDA margin was 16.1%. This compares to fourth quarter figures of $24 million and 12.5%, and prior-year first quarter figures of $30.8 million and 13%. Moving to the balance sheet, we ended the first quarter with a cash balance of $126.8 million. Working capital changes largely corresponded to revenue and cost of goods sold. Inventories nominally increased $3.5 million or 2% sequentially, in part to support second quarter shipments and to carry a nominal amount of wafer bank supporting active copper cable opportunities. Inventories are down 30% year-over-year. Principal outstanding on our debt was $1.4 billion, unchanged from the fourth quarter, with a weighted average interest rate of 5.86%. At the end of our first quarter, our consolidated net leverage ratio calculated in accordance with our credit facility was 9.5, and we expect to maintain compliance with our debt covenants for the next 12 months. Free cash flow for the first quarter was $1.4 million use of cash, reflective of working capital changes and we did not draw on our revolver. Now, turning to second quarter guidance, we currently expect net sales of $212 million, plus or minus $5 million. We continue to evaluate shipments into channel to maximize gross margin opportunities. We expect net sales from the Infrastructure end market to increase sequentially with data center applications leading the growth. As Paul mentioned, in the first quarter, net sales of PON were up 88% sequentially and we expect a bit of normalization for this application. We expect net sales from the High-End Consumer market to be slightly up with expected seasonality benefiting this market at the end of the second quarter through Q3. We expect Industrial net sales to be flat to slightly up, with bookings activity indicating a recovery in the second half of FY '25. Based on expected product mix and net sales levels, gross margin is expected to be 50%, plus or minus 50 basis points. Operating expenses are expected to be $77.5 million, plus or minus $1 million. We expect net interest expense to be $20.5 million, and a non-GAAP tax rate of 15%. These amounts are expected to result in a net income per share at $0.09, plus or minus $0.03, and adjusted EBITDA of $36.3 million, plus or minus $2.6 million. I'd now like to turn the call back over to the operator for Q&A.

Thank you. Our first question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.

Yeah. Hey, guys. First of all, congratulations on what appears to be a pretty good turnaround that you've instituted already. Paul, probably, the question that I get most often from investors is on the active copper cable opportunity. There seems to be a little bit of confusion whether you're playing in the vertical aspect or the horizontal aspect or both. Maybe you could clarify that and maybe help us understand if it's the same chipset that you will use for vertical and horizontal applications? Just a little bit more color on this opportunity?

We are involved in both vertical and horizontal aspects. Each rack will contain two sets of active copper cables, totaling 36 cables. However, we need to subtract the 5,000 direct attached cables from that total. The horizontal cabling between the racks presents a larger opportunity, which depends on the build or shipping configuration, potentially accommodating up to 162 cables for those horizontal NVLinks. Regarding chipsets, they are largely the same, though there are a few integrated circuits that differ.

I understand. Paul, I apologize for the follow-up, but when I consider turnarounds, it typically follows a similar playbook; management steps in, repairs the business, reduces costs, stabilizes cash flow, and then moves on to the next phase. You have completed these steps. Your business is nearly self-sustaining, but there's also the question of potential deleveraging in your situation. I'm wondering if you are beginning to explore that opportunity, or if it's still too early to discuss it?

Well, I'll kick this question over to Mark, if you don't mind, Harsh.

Yeah. Harsh, thank you for recognizing in our Q1 results that OpEx has stabilized. And based on our outlook, we really do expect an upswing in cash flows and EBITDA growth to improve our leverage metrics. That said, consistent with what Paul said in his first earnings call with Semtech, a reduction in the quantum of debt beyond free cash flow generation is something we all believe is important here. I'll also add that we evaluate capital structure alternatives in the ordinary course, including a refinancing of our debt in addition to potential asset sales at what I would consider appropriate values. I covered our covenant compliance outlook in my prepared remarks. And others know that any disposition will not be at a fire sale and we'll need to appropriately value the asset. You can understand we can't provide timelines or specifics, but transaction proceeds we'd use to reduce debt and improving leverage ratio and financial metrics are all factors that we consider in a potential divestiture.

Yeah. And if I could summarize that, I'd say all tools are at our disposal, all options on the table. We definitely are focused on reducing the overall debt load and we'll take a look at every option available to us.

I appreciate it, guys. I wasn't looking for timing. I know you can't give that, but I appreciate the fact that that option is still open at some point in time. Thanks, fellas. Thank you.

Thanks, Harsh.

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

Yes. Thank you, and congratulations on the continuous progress here. Back to the question on ACC, I think for 1.6T, Paul, you mentioned that the cable manufacturers are seeing POs and that you are qualified there. Could you just elaborate a little bit on that? And how should we think about timing there as far as when you would see that potential ramp?

Yeah, all right. So, as is kind of typical in hyperscale data center, we'll end up working with a lot of those hyperscalers as well as technology partners to spec product and build chips, collaborating on those chip definitions. As is often the case, they'll specify to us who they want us to utilize for fulfillment. A lot of times that does go to an active optical cable manufacturer, in this case, an active copper cable manufacturer. I'm not at liberty to say who those partners are, but there's two partners that have been designated. We're working with those partners for final qualification. And then, in terms of timing, it's still right now the timing is holding consistent with what we've said in the past, so the latter half of this fiscal year. And I would really kind of say that the ramp is next fiscal year, but we'd expect to see some early revenue this year.

Very good. Thanks. And as my follow-up for Mark, so the way I understand this now, Mark, is that the OpEx is now sort of at the right level. And going forward, it would grow at half the rate of sales. Is that how should we think about it? Or could there still be some further OpEx reductions this fiscal year?

Yeah. I'm pretty comfortable with where the OpEx levels are right now, but we are constantly looking at how to better spend the dollars, better allocate the dollars for near term. As revenues grow, there's going to be some OpEx growth, just within sales and marketing that can be expected. But the growth rate that you provided, I can sign off on that.

That's very helpful. Thank you. Congrats again.

Thank you.

Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Hello, everyone. I want to add my congratulations as well. I'm following up on the ACC opportunity, which I know will raise many questions. There seems to be a wide range of expectations regarding this opportunity, and I was wondering if you could clarify some of those expectations. Specifically, what would you consider a reasonable expectation for this business in fiscal '26? I understand there might be some revenue before production in fiscal '25, but as we look ahead to next year, how significant could this become?

So, rather than answer how big could it be, because to imagine the high end, it's a pretty big number, I would prefer to kind of focus on what I think is currently a bit more of a reasonable expectation, at least what we're kind of planning around. So, the number of cables that could be used is heavily dependent on both the rack configuration and NVL72 versus NVL36, and the number of horizontal connections, and obviously, the number of NVLs that we'll ship next year. So, it's heavy dependence on shipment configuration, but to just cut to the chase, we kind of size it at a $100 million opportunity, not as base case, I definitely don't want to put a high side case number out there. I think on that base case, it's reasonable to expect that we're going to share production between us and one other component supplier. And if you want to just put a slug in there for the share that we would see, you could call it 50-50. We were first to provide the chips, first to get design in. Maybe that gives us a slight first-mover advantage, but I think it's reasonable to expect this kind of settles out down to a 50% share split.

Got it. A quick clarification there, Paul. So, that $100 million, is that the opportunity for the total TAM that would then be split by you and the competitor, or is $100 million sort of the expectation for Semtech revenue? And then, I've got hopefully a follow-up.

So, that is total SAM and then we would get a share of that. And I'm looking at a particular program use case. So, two models, different configurations, but just one particular program.

Got it. Okay. Thank you for that. And then, you'd mentioned LPOs, some of the DSP vendors are suggesting that LPO activity may have slowed as you get the linear receive DSPs coming to market. Just wondering if you could sort of share your thoughts. Where are you seeing interest in LPOs? Do you see it in GPU back-end networks? Do you see it in general switch infrastructure and data centers? Are there other use cases where you're seeing interest in LPOs growing?

If I were a DSP vendor, I might downplay it too. However, the extent of GPU-based back-end networks is still uncertain. There is a GPU vendor that plans to use LPO, which represents a significant market opportunity. The question remains whether this will be adopted widely in general data center applications. It ultimately depends on operational parameters, and right now, it's based on lifetime data, which looks positive. The motivation to implement this technology is high, especially since it consumes one-fifth the power of a full retime solution, assuming cost isn't a concern. There are a few options available, including full retime solutions, half retimed or LCO solutions, and linear pluggable solutions. Regardless, the data center sector is projected to experience significant growth over the next three to five years, with various technology implementations. Success will depend on who can deliver the best performance given power constraints, which is why we remain optimistic about the opportunities.

Perfect. Thank you, Paul. Thank you, Mark.

I'll tag on one little quick answer to that answer I just gave. If you look at the really kind of compelling reason to use ACC and the reason why copper is coming back in terms of popularity is because if we look at a DSP-based solution versus copper solution as in an AEC versus an ACC, it's one-fifth the power. So, it's really compelling, works up pretty well in short reach, up to so many meters. But when you go beyond that, you're going to need retime solutions. So, I think everybody is going to have a play over the next three to five years.

Thank you.

Thank you. Our next question comes from the line of Rick Schafer with Oppenheimer & Company. Please proceed with your question.

Thanks, and I want to extend my congratulations. Paul, just to follow up on your last comment, do you have the capability or the intention to move into AEC to potentially achieve a longer reach than the current 2 meters of ACC?

I'm a strong advocate for the land and expand strategy. When you have a profitable relationship with a customer, it’s essential to explore other potential opportunities. I prefer a more technology-agnostic approach rather than companies being overly focused on specific technologies. Over the next five years, I believe we will concentrate on this strategy and work to address upcoming needs that we anticipate in the next four to five years. Different architectures for retimed data transport solutions will be necessary, and we will continue to expand our product portfolio.

Thank you for that. Can I ask a quick question about Tri-Edge? It seems like it gained traction in the quarter, if I understood your comments correctly. I'm trying to get a clearer picture of what contribution you anticipate this year and what the market opportunity looks like for you now compared to a couple of years from now. I'm really trying to grasp the potential here and where your analog panel will fit in, considering its lower power and lower cost.

Anytime someone can use an analog approach, it's beneficial. However, it does require some tuning. We have software that helps us fine-tune the solutions. In a context where precision is crucial, making it work with analog is advantageous. Analog also offers benefits in terms of latency. While a typical data center may not prioritize latency, AI applications certainly do. For instance, when connecting GPUs, NVLink cannot handle latency well. Additionally, we hold strong positions with Nokia and Ericsson in telecom front haul, where introducing latency is also not acceptable. There is definitely an opportunity there. I believe neither analog nor DSP-based solutions are the ultimate answer; each has its strengths. However, at this moment, we expect Tri-Edge to significantly improve and possibly double over the next quarter. We are observing a robust increase in data center demand overall.

Okay. Thanks a lot. I appreciate it, Paul.

Thank you. Our next question comes from the line of Cody Acree with The Benchmark Company. Please proceed with your question.

Thanks for the help. Paul, could you provide similar insights about your expectations for LPOs, as you did for active copper cables?

Yes. Currently, we are working on a design project with a specific technology partner, the same one we have for ACC, particularly for LPO. Additionally, we are collaborating with Broadcom as another tech partner to test solutions, and we're also conducting lifetime testing with another OEM. Progress is being made. As we examine some of the LPO products, they are being combined with in-house DSP solutions from various technology partners, which are not necessarily part of a standard product lineup. There is positive activity overall. For us, it's not essential to have it as LPO. These 200-gig per lane single lambda components will be applicable in numerous settings, whether they serve as strong linear TIAs and drivers in direct drive configurations or in half or full retimed setups. We expect our product line to perform very well.

So, what are your expectations around LPOs for next year?

Not currently. I think we're a little further along in the design and win curve with ACCs. I should be able to provide more details about our 200-gig single lambda product and 1.6T optical solutions in the next couple of quarters.

Okay. And then just lastly, can you just help us with the migration of the industry to 200-gig single lambda? Just where you're seeing the breadth of implementation today and where do you expect that to go?

It's interesting to note that while we're discussing 100-gig and 200-gig technologies, the majority of our revenue in fiscal year 2024 is still coming from 50-gig per channel. Currently, we're starting to transition into 100-gig, which is gaining traction and performing at least on par with 50-gig. However, I believe that 50-gig per lane will continue to dominate our revenue. This year, I see it as a transition period where general computing begins moving towards 100-gig solutions, but this shift is happening slowly. AI seems to be accelerating this process, moving almost directly from 100-gig to 200-gig. Therefore, it's challenging to predict what the revenue contribution from this transition will look like at this moment.

All right, great. Thanks, guys.

Thank you. Our next question comes from the line of Tristan Gerra with Baird. Please proceed with your question.

Hi, good afternoon. So, you've talked about ACC potentially moving to general-purpose data center in '26. In AI, how sustainable is that in future AI platform beyond this year? When do we see horizontal and vertical connection moving ultimately to optical? And if not, why not?

It could be possible, but let me address the last part of your question, Tristan, if you don’t mind. When we consider configuration, the closest connections have a relatively short reach. You don’t necessarily require optical for that. Where would it be logical to use optical? If we cannot implement 400-gig single-lane active copper cables, the natural progression would be to optical for certain distances. However, you have to think about whether the direct attached cables within the rack will need to be active or passive solutions. Many would argue yes at some speeds, but we need to wait and see how it develops. It heavily relies on the switch ASICs and the robustness of their drivers. I don’t believe active copper will be a short-term solution. The answer is clearly no; it will serve as another option in our toolkit, and it fundamentally depends on reach. If we can’t utilize 400-gig active copper at approximately 1.5 meters, then direct drive optical connections without latency would be the next sensible option instead of retiming, as we cannot afford to introduce latency into those NVLinks. Does that clarify your question?

Yes, very helpful. Thank you. My follow-up question is, looking at the gross margin catalyst for the second half of this year, is that just a function that's optical growing faster than the average, or should we be looking at other catalysts in terms of continued gross margin upside?

There are several catalysts to consider. Some of the end markets we mentioned are relatively weak, but telecom is definitely a strong contributor to gross margins when it rebounds. PON has also been a fair contributor, and LoRa offers good margins as well, making it a beneficial factor for us. However, the hardware and module businesses tend to have significantly lower margins. The routers business typically operates around the mid-50s in terms of margin. Overall, these trends should really enhance our performance. Mark, do you have anything to add?

It's primarily a matter of mix, but we observe that some of the faster growing businesses are in the higher margin range, offset a bit by the recovery of the hardware business in the second half.

Yeah. And consumer goods, it's been fairly strong for us. It's still we see support for consumer goods that has a tendency to be a little bit lower, a little bit more dilutive to corporate margins. So, if that backs off and something else fills its spot, you're going to see that gross margin go up.

Great. Thank you very much.

Thank you. Our next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Yeah. Thanks for taking the questions, guys, and congratulations on the progress. So, I was hoping, Paul, if we could just go back to some of the comments on active copper cable, and at the risk of getting the cart too far before the horse, if we think the opportunity may be $100 million opportunity in fiscal '26 that you'd be splitting, how do we think about the growth rate beyond that? I know a number of companies have put out chip-related AI growth rates that would be in the 30% to 50% CAGR range. Is that the range that this business could grow in or how do we think about what happens after fiscal '26?

I believe that the growth potential could exceed those chip rates, so the 30% to 50% growth rate might realistically be higher. However, it really hinges on the shipping configuration. If customers start implementing these systems in multi-rack setups to capitalize on the benefits of integrating multiple racks into large GPU clusters, it will largely depend on the specific use cases. If the trend is shifting towards favoring a massively parallel architecture, then the opportunity could be significant. Ultimately, it will depend on the details of that shipping configuration and how AI continues to develop and utilize available exaflops.

Got it. And that's really helpful. And then just going back to some of the other comments and thinking on a multiyear basis about Signal Integrity in total. So, we've got the base station business that's been pretty quiet, but bouncing along the bottom. China PON taking a breather this quarter, but has room to at least reaccelerate a bit. And then data center and its AI growth component looked pretty strong. So, as we look out beyond fiscal '25 to fiscal '26, it seems that all of your segments should be contributing to growth, or is there something that you see beyond this year within Signal Integrity that would cause one of the four big drivers to take a breather?

I don't see the drivers slowing down. One of the first things I did when I arrived was review 10-year trends for some product lines. Signal Integrity is one of those that has grown steadily, despite some clear cyclicality. However, if you look at the overall trend, it shows an 8% compound annual growth rate before factoring in AI as a growth opportunity for us. So, I expect it to increase from there, likely experiencing strong growth over multiple years. Overall, we should be in a good position at this time.

Got it. Thanks for the help. Good luck, guys.

Thank you.

Thank you. Our next question comes from the line of Scott Searle with ROTH Capital Partners. Please proceed with your question.

Hey, good afternoon. Thanks for taking the questions. And nice job on the quarter. Nice to see the recovery moving back in the right direction on the semi front.

Thank you, Scott.

Hey, Paul, maybe moving away from the optical side of the equation for a second, to follow up on the prior question on PON, it sounds like this quarter there's a little bit of digestion. I'm wondering if you could address the drivers. Are they specifically China right now? And have we seen a watermark? And as it relates to LoRa, it also had a similarly strong quarter. What's the long-term growth rate that you're thinking about for the LoRa opportunity going forward?

Okay. Scott, we had a little bit of a hiccup in your audio. What was the first question again?

Oh, my apologies. Just, PON, in terms of drivers, is it moving beyond China? And is it $27 million that you saw this quarter, is that kind of a high watermark for the next several quarters, or is that something we're going to breach as we get into fiscal '26? And on the lower front, when you came in, I think you recalibrated expectations of the long-term growth rate in that marketplace, but a nice recovery this quarter. I'm assuming that some of that is just a little bit of inventory backfill and channel demand snapping back a little bit. What is the long-term growth rate that you're thinking about for LoRa going forward?

I'll address your first question. Regarding PON, it is clear that China is a significant factor in the recent increase. PON had been down due to a delay in tenders in China. However, there are strong underlying trends in PON. When discussing the China PON business, many relate it to the real estate market, which is currently down, but this situation is more about infrastructure upgrades. Currently, about half of our numbers are coming from 10-gig, indicating that we are in a leading position. This upgrade cycle is expected to be very profitable for us, and while there may be some fluctuations quarter to quarter, I anticipate ongoing growth in PON and a continuation of the positive trend. I do not foresee any reasons for this growth to halt. As for the high watermark, we are likely at a solid figure now with $27 million. While it could increase, I'm not counting on that just yet. We're in a healthy position, but there is some order hesitancy and uncertainty regarding tenders, which will require stabilization. We had a strong quarter previously with significant bookings in January, and we worked hard to ship those products, resulting in a bit of a pullback as we catch up. Nevertheless, we are in a ramp-up cycle, and I expect growth to continue. In other markets, I want to highlight the broadband equity access and deployment initiatives from North America, or BEAD. This initiative represents a government subsidy aimed at rolling out communications infrastructure, particularly in rural markets. This presents a great opportunity for us as fiber becomes the preferred option over copper, which is becoming outdated and less desirable. People are still limited by 200-meg access when they could be getting 1-gig at home, and that needs to change. I have confidence in the trends we see with PON, and I don’t expect them to shift anytime soon. Regarding lower growth, I anticipate double-digit growth is easily achievable. We are eager to see the business recover and solidify our strategy. We are making positive advancements, including supporting new protocols with our next-generation chipsets and will soon support Wi-SUN. Expect announcements regarding this development in the coming quarters. We also have plans to introduce support tools, configuration tools, and device management tools to simplify deployment, and you should look for news on this in the next few quarters.

Great. Very helpful. BEAD is one of the better acronyms out there, sadly. But I have a quick question about modules. There has been a lot of pressure and channel inventory, but it seems like order trends are improving. I think it’s down about 70% from peak revenue levels. Could you give us a quick update on what the point of sale looks like and your expectations for the recovery in the second half of this year? Also, what would you consider a normalized number as we start to see some of those trends improve? I don’t expect us to return to where we were two years ago, but is there a normalized number you're considering? Thanks.

Yes. LPWA is leading the way, and we are witnessing an increase in municipal rollouts and adoption. This is interesting because, in the past, peak revenues were more reliant on broadband, but we have many design integrations on LPWA, which we're beginning to see in metering applications. I expect that market to recover at a quicker pace. It's still categorized under industrial, but broadband revenue has decreased primarily due to significant purchasing by our end customers without much visibility; this isn’t about channel inventory, but rather end customer inventory. As that decreases, they also experienced a dip in point of sale. Our industrial point of sale has declined, as has theirs. Consequently, the channel inventory metrics have widened as both components change. We're starting to see positive signs, although visibility remains limited. My comments are consistent with last quarter when I mentioned Q1 might be the lowest point. I anticipated Q1 was the bottom, with Q2 possibly being slightly lower or steady. This aligns with my previous assessment that Q1 was the low point. We have now reached a stable position, as mentioned in my earlier remarks. There is a slight uptick in Q2, and we do see some recovery in industrial point of sale and that market overall. This suggests a more rapid rebound in our hardware business, which I expect. I observed signs of improvement in routers, and our broadband module customers should also be noticing this improvement. Currently, things are proceeding as anticipated. In the second half, I expect a quicker recovery, although Q3 may be a bit slower, but we will gain better insight into those inventories. Regarding normalized expectations for modules, figures have reached as high as around 355, based on my recollection. I believe I previously indicated a normalized revenue target for ICS, routers, and modules at approximately $460 million. I've also mentioned $400 million as a projected run rate exit for this year. I still believe we are on track to reach that, and modules could certainly fall in the mid-200s range. More insights will be provided as time progresses.

Very helpful. Thanks so much and congrats on the quarter again.

Thank you.

Thank you. And our next question comes from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

Hi, guys. Nice execution. A lot of my questions have been asked, but Paul maybe I can follow up on, do you expect any of your business segments to be down sequentially in July? And I guess maybe just a leading question on the October quarter, do you think revenues in every business segment should be growing especially now that you've mentioned the CRP should be growing?

In terms of our segments, we've discussed that there tends to be some pauses at times. We experience fluctuations with product releases that need to be built, resulting in quarterly peaks and valleys. I wouldn't say any segment is currently down, as our results will vary from quarter to quarter, but we're bouncing back in several areas. However, telecom is still somewhat subdued. We have a lot of design activity, but I'm hesitant to express optimism until we observe trends in capital expenditures or budgeting in that area, which typically start to take shape when discussions about rolling out 5G become more prominent. For now, telecom remains muted, and I don't foresee any immediate changes. On a positive note, while our LoRa revenue is not quite at the desired level, we have reported positive point-of-sale data, indicating a good trend, and we expect those numbers to improve from a low base. Overall, I don't have any other segments to report as down.

Got it. And then just a quick follow-up on the ACC side. You talked about qualifications are ongoing. Any sense of how much longer it's going to take?

So, I think on my last call, I said we'd know in the next two quarters. We're reporting incremental progress with purchase orders at the cable manufacturers. I think we should hopefully find out in a quarter and have something to report.

Very good. Thanks, guys.

Thank you.

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Paul Pickle for closing remarks.

Thank you, Shalami. Appreciate you guys joining us today, and have a great evening.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.