Semtech Corp Q2 FY2025 Earnings Call

Greetings and welcome to the Semtech Corporation Second Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Mark Lin, Executive Vice President and CFO. Thank you, Mark. You may begin.

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 second 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. Please refer to today's press release and see Slide 2 of the earnings presentation for information on risk factors that could cause our actual results to differ materially from those made on this call. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than net sales. Please refer to today's press release and see Slide 3 of the earnings presentation for important information regarding notes on our non-GAAP financial presentation. The press release and earnings presentation will also include reconciliations of our GAAP and non-GAAP financial measures. With that, I will turn the call over to Hong.

Thank you, Mark. Good afternoon and thank you all for joining us today. I'm excited to host my first Semtech earnings call. I would like to take a moment to thank the Board of Directors for giving me the opportunity to lead Semtech as President and CEO at this pivotal time and to thank all our global employees and leaders for the warm welcome they have given me. Over the past two months, I have visited many of our customers, our suppliers in Semtech global locations and taken great pleasure in talking to many people in person, getting to know them and hearing their comments and feedback. I'm especially proud of the Semtech team, who did not miss a beat in execution and serving the needs of our customers during the leadership transition. I'd also like to share with you a few of my initial observations since taking up my new role and what I see as the near-term priorities. First, we have made solid progress in rationalizing expenses and stabilized our financial foundation. There's still more to do, of course, but this has allowed us to go on offense, and I look forward to capturing significant growth opportunities given favorable market trends and alignment with our core competencies. Second, we have world-leading technologies and products developed and refined over decades in analog and mixed signal design, LoRa IoT and a superb reputation in mission critical cellular systems and outstanding R&D efforts helmed by Mike Wilson, our Chief Technology Officer with an almost 30 years tenure at Semtech. Third, we have world-class management processes and systems and a proven track record of delivering global operations excellence, high quality and on-time deliveries for our customers. This core method that are key to Semtech's success were honed over time and consistently refined by Asaf Silberstein, our Chief Operating Officer with 25 years in the semiconductor industry and almost 15 years tenure in the company and his team. Fourth, our customers value our core technologies and are asking for our partnership in driving collaborative innovations. They believe our innovative solutions can enable them to win and grow their business. Building on these great foundational elements, I view my near-term priorities as follows. First, focus on strategy, rationalize our portfolio and improve the balance sheet. We continue to believe that some assets in our portfolio are not core to our long-term strategy and our focus can be sharpened. Both our management and the Board are committed to remain focused on balance sheet improvements through reduction of debt. Using asset sale proceeds to reduce debt is our capital allocation priority. Until a potential sale occurs, however, we will continue to invest in the business, both to enhance value and to fully support our customers. To maximize potential transaction values, I will respectfully limit further public comments on the topic, for instance, regarding what assets, their status, and the timing of the process. Second, accelerate revenue growth and drive margin expansion. In my discussions with numerous customer senior executives, it's very clear that our customers and target markets are moving towards us, driving up demand for Semtech's world-class portfolio of products, technology and services. Through disciplined investment, innovation and efficiency, we'll develop even more differentiated solutions that underpin the critical business needs of our customers. In so doing, we expect to achieve solid organic growth, SAM expansion, market share gain and margin expansion. Third, energize our people and elevate our winning culture. I have been hugely impressed with our talented and committed workforce and leadership, but we can do more. We will invest in our people aligned around a clear vision and focused strategic imperatives to accelerate results with a winning mindset and high-performance culture. Moving to our second quarter results, I believe Semtech has executed well to the established strategy as demonstrated by solid second quarter financial performance with sequential revenue growth across each of our business units and a favorable outlook for our third quarter that forecasts acceleration of our growth. For the second quarter, infrastructure net sales were $52.9 million with net sales for data center of $27.2 million, up 28% sequentially and up 37% year-over-year. In hyperscale data center applications, net sales more than doubled over last year and were well supported by strong demand for a FiberEdge transimpedance amplifier or TIA and laser drivers for 400 gig and 800 gig optical modules and a triage 50 gig PAM4 product in 200 gig and 400 gig active optical cables. We have noted increasing CapEx targets reported by hyperscalers, and incrementally AI data center markets are moving towards us. Our analog solutions provide substantially lower power and lower latency as well as significantly greater value compared to the retimed DSP solutions. My meetings with the chief system architects in the data center ecosystem since joining as CEO confirmed my belief that the transportation of bits within data centers has by far the greatest power optimization opportunities. Lower power consumption and latency reduction for transport are key considerations for AI computing. Delivering on these transport opportunities will allow a greater allocation of power to compute and memory. And the Semtech team has every intention to deliver our low power, low latency solutions through embedded customer engagement and our depth of analog expertise. Semtech's copper edge continuous time linear equalizers have a well-documented application where we partnered with Nvidia to implement low power, low latency active copper cables or ACCs for Blackwell racks and pods. For our 200g copper edge linear redrivers, we have received purchase orders from ACC cable manufacturers and expect shipments to start in our fiscal third quarter in limited quantities, with nominal ramp in the fourth quarter and acceleration in the next fiscal year. Qualifications are on schedule, and we currently estimate that our annual opportunities specific to the single platform exceed the floor case we provided last quarter. That said, Semtech's ACC opportunities extend beyond a single platform and a single customer. We estimate data centers currently deploy tens of millions of direct attached copper cables or DAC cables per year. These DAC cables are passive, and as data rates and cable lengths increase, we expect there will be a natural progression from DAC cables to ACC to meet signal integrity requirements. The market is moving towards us, and a replacement of only a small fraction of DAC cables to ACC will represent a substantial increase to Semtech's SAM. Indeed, Semtech is currently engaged with a number of companies in the AI ecosystem on just such opportunities. On this front, while we believe standards bodies and MSAs have their place in this market to promote interoperability and backward compatibility, the time to develop and approve those standards inevitably extends the time to deploy. We believe the pace of data center innovation is optimized with Semtech's direct engagement with our end customers and allows us to create a purpose-built solution for hyperscalers to address their specific challenges. We are absolutely at the right moment to adopt this approach. I expect direct engagement will accelerate Semtech's prime to revenue and enhance top-line organic growth. It is this top-line organic growth that allows for prudent investment, and I believe my prior experience growing a business while operating in a leveraged situation as well as in a highly cost-conscious EMS environment well informs my decision-making process in prioritizing disciplined investments. My expectation in this investment must deliver meaningful returns to shareholders. In linear pluggable optics, based on our engagement with a number of our key partners, we believe we have a path to LPO shipment by the latter portion of FY 2026. Similar to active copper cables, LPO represents an opportunity to deploy low latency, low power solutions in the optical space. With annual optical transceiver consumption at approximately 30 million units, a fraction of this market converting to LPO represents a substantial SAM expansion for Semtech. A world-class TIA is the key to successful LPO deployment, and I'm certain Semtech's TIA fits the requirement. I have firsthand knowledge having selected Semtech as my first choice TIA supplier to support silicon photonics products at a prior company. Our class-leading TIA performance on the receiving end well positions us for LRO opportunities as well, and we recognize there are potential applications where LRO is suited to meet customers' interoperability requirements. Moving to PON, net sales were $20.4 million within expectations following a robust first quarter and up 49% year-over-year. PON demand, especially the 10 gig, remains strong with total consumption increasing 41% year-over-year. 50 gig is on the horizon, and we are looking to expand this business on a global level. Regarding other products in the infrastructure end market, wireless net sales declined but remain within expectations. In wireless, we're continuing in the qualification process with our Tri-Edge and FiberEdge wireless platforms for 5G advanced and are actively engaging with key partners like Ericsson and Nokia. We stand ready when this market rebounds. There were a few other small sequential net sales declines resulting in a 5% sequential decline, but the data center and signal integrity segments each grew sequentially. Moving to our high-end consumer end market, net sales were $37.1 million, a sequential increase of 7% or up 9% year-over-year. POS ticked up sequentially and increased 34% year-over-year, ahead of what we expect to be seasonally strong Q3. Net sales in high-end consumer TVS grew to $26 million, up 4% sequentially and 42% year-over-year. Our market share in consumer TVS grew at double-digit rates compared to last year, and we believe we are winning on technological and operational performance. I'm very pleased this growth is broad-based as we expand on platforms and applications. The overall ESD threat environment has been increasing. Higher performance silicon reduces the amount of expensive on-chip real estate available to dissipate surge energy. This trend increases the importance of high-performance off-chip protection Semtech offers. This is yet another example of how markets are moving towards us. We continue to grow our market shares at not only the world's largest consumer electronics companies but in other North American and Korean companies as well. Indeed, our consumer TVS engagement in Korea recently resulted in design wins in the industrial and automotive space where this key customer is winning shares. This sets a great example of how our direct customer engagement approach is solving customer problems across a number of their markets and resulting in an increase in SAM for Semtech. Our class-leading PerSe proximity sensing products continue to perform well with design wins at a key Korean smartphone manufacturer while allowing our customers to meet specific absorption rate standards is a great use case for PerSe. Gesture controls are a substantial source of demand for this product. PerSe's cross-leading 3D sensing and attofarad sensitivity are meeting or exceeding end customer requirements for gesture control features in wearables, mobile audio, and smart glasses. For the second quarter, industrial net sales were $125.3 million, up 8% sequentially. LoRa-enabled solutions had net sales of $28.7 million, a healthy 34% sequential increase and a 72% increase over the prior year. LoRa consumption in industrial applications continues to grow, and I'm pleased that the momentum over a broad range of applications is there, from healthcare, smart utilities, and smart city to factory automation with a recent deployment in automotive facilities. A LoRa WAN expert from Mercedes Benz presented his company's success story at a LoRa WAN live event in June. Their implementation resulted in what they characterized as enormous cost savings. It gives me great pleasure when an end customer becomes a LoRa advocate, and demonstrated use cases at Mercedes are just one reason as to why I'm excited about LoRa's future and why Semtech is fully committed to LoRa and its continued innovation and ecosystem expansion. I plan to attend The Things Conference in Amsterdam in late September to meet with the ecosystem leaders and strategize our path to democratize the LoRa standard and accelerate its proliferation. Our IoT systems business recorded second-quarter net sales of $52.3 million, up 8% sequentially, and consistent with our analysis that this business has reached a bedrock last quarter. Bookings in the first quarter had healthy sequential growth, and second-quarter bookings grew from there. Also, channels and end customer inventory levels have overall reached normalized levels. In our module business, we had several red-cap design wins, demonstrating continued trust in Semtech's products across a number of core network equipment customers that demand near-perfect uptime and performance. Geopolitical considerations remain a tailwind for this business on a number of fronts, and we are experiencing renewed engagement with some customers we believe are due to these matters. Our business in asset tracking applications has benefited, especially as government and security-related users constitute a meaningful portion of this market. Government end users are becoming more educated on risks, especially after realizing their vehicle fleets are being tracked with geopolitically sensitive components. We are pleased to have launched a Canadian instance of AirLink Management Service, which meets local data residency requirements, which is particularly important for government and public safety users. The government-related business is a natural adjacent market for Semtech's cellular system solutions. Lastly, we started production of our own TIA qualified facility to serve increased demand for TIA-compliant products. This facility allows us to better support continuity in supply and to elevate our support as we aggressively pursue U.S. federal opportunities. Second-quarter net sales for our connected services business were $24.3 million with noteworthy design wins in remote monitoring, fleet tracking, and healthcare. Also of note, we collaborated with Console Connect, a leading network as a service platform, to expand Semtech's connectivity coverage across the APAC region for our Air Vantage service. We believe this collaboration underscores our commitment to offer best-in-class network quality. In industrial TVS, solutions are required to address increasingly harsh ESD environments as factories increasingly automate. This is where markets are moving towards us. We continue to expand our product portfolio with innovative solutions to address critical customer needs. Now, let me turn the call back to Mark.

Thank you, Hong. For the second quarter, we recorded net sales of $215.4 million, up 4% sequentially. Net sales trend by end market reportable segment and geographic region is included on Slide 16 of the earnings presentation. Gross margin was 50.4%, up 60 basis points sequentially and up 80 basis points year-over-year, reflecting favorable mix and cost-controlled overhead spending. Operating expenses were $78 million, a 9% year-over-year reduction. This resulted in operating income of $30.5 million and an operating margin of 14.2%, up 200 basis points sequentially and up 60 basis points year-over-year. Net interest expense was $20.5 million in line with guidance. We recorded net earnings per share of $0.11 based on a diluted share count of 71.8 million shares. Adjusted EBITDA was $40.5 million and adjusted EBITDA margin was 18.8%, up 270 basis points sequentially and up 240 basis points year-over-year. Moving to the balance sheet, we ended the second quarter with a cash balance of $115.9 million, with working capital changes largely corresponding to revenue and cost of goods sold. Inventories increased by $7.5 million or 5% sequentially, in part to support higher expected third quarter shipments and to carry a nominal amount of wafer bank supporting active copper cable orders, but are down 13% year-over-year. Principal outstanding on our debt was $1.2 billion, reflecting the deferred equitization completed at the end of the second quarter. Free cash flow for the second quarter was an $8.4 million use of cash, primarily reflective of working capital changes and we did not draw on our revolver. Now, turning to third quarter guidance. We currently expect net sales of $233 million plus or minus $5 million. We expect net sales from the infrastructure end market to increase sequentially with data center applications leading to growth. Infrastructure is expected to provide the strongest near-term tailwind. We expect net sales from the high-end consumer market to be up with typical seasonality benefitting this end market. We expect industrial net sales to be slightly up as recovering booking activity from the first quarter carried into the second quarter. Based on expected product mix and net sales levels, gross margin is expected to be 52% plus or minus 50 basis points. At the midpoint of guidance, this would be a 160 basis point sequential improvement. Operating expenses are expected to be $81 million plus or minus $1 million, resulting in operating margin at the midpoint of 17.2%, which would result in a 300 basis point sequential improvement. We expect net interest expense to be $18.8 million, reflective of debt reduction and a tax rate of 15%. These amounts are expected to result in net earnings per share at $0.23 plus or minus $0.03 based on a weighted average share count of 78.6 million shares. Adjusted EBITDA is expected to be $48.7 million plus or minus $2.8 million, resulting in EBITDA margin at the midpoint of 20.9%, which would equate to a sequential increase of 210 basis points. Guidance at the midpoint contemplates growth in net sales, improving gross, operating and adjusted EBITDA margins and higher diluted earnings per share. With that, I'd now like to turn the call back over to the operator for Q&A.

Thank you. We'll now move into the question-and-answer session. One moment please, while we check for any questions. Thank you. Our first question comes from Cody Acree with the Benchmark Company. Please go ahead with your questions.

Thanks, guys, for taking my question. And Hong, congrats on the good first quarter out of the gate and welcome. Maybe Hong, if you can talk about your active copper cable expectations. You mentioned a TAM that was larger than the TAM given by Paul before his departure. If you could maybe go through the elements of that TAM calculation, whether that's a unit volume and ASP basis or just a total available addressable market, that would be great.

Cody, thank you very much. Thank you for recognizing our position and role in this very exciting market opportunity. As I mentioned in the prepared remarks, in the last quarter, we provided a floor case based on the number of racks and expected ASP share allocation for a specific use case from a specific customer. Since then, we have expanded our engagement with the customers, and right now we have several customers discussing with us on the ACC opportunities. We are very excited about the total availability and total opportunity being above and beyond the floor case we guided, and we will see these ACC opportunities continue to expand. As you know, there are a lot of direct attached copper cables, which are passive cables in the data center installation base. There might be tens of millions. As the data rate goes higher and as connection length becomes extended, the signal integrity is going to be a challenge. So the progression from active copper cables to direct attached copper is going to be inevitable. I'm very excited about the opportunities and we will start seeing some revenue contribution from Q3 as we guided, and then we'll be ramping from there. Thank you.

Thank you. Our next question is from Quinn Bolton with Needham & Company. Please proceed with your question.

Hey guys, let me offer my congratulations on a great quarter and very strong outlook. I guess Hong just wanted to follow up on Cody's question to clarify that opportunity for the ACC TAM. It sounds like you said your floor case at a single platform, single customer you think now exceeds $100 million. I just want to clarify that. Or were you saying that you're seeing engagements beyond that first customer and you're talking about a TAM of north of $100 million as you start to factor in some of these other ACC opportunities? So if I could clarify that and then I had a second question, if I could sneak that in.

Sure. Quinn, thank you very much. Now let me first clarify: the TAM I mentioned in the prepared remarks is with respect to a single platform, single customer situation, and I feel that our actual opportunities will be higher than the floor case. In addition to that, we are engaging with multiple customers in the similar AI connectivity ecosystems for the similar purpose of low latency, low power extended reach applications. And those opportunities are not accounted in what I was saying regarding the increased opportunity compared to the floor case.

Perfect. Thank you for that clarification. The question I had was about LPOs. You mentioned in the script that you see an opportunity for LPOs to perhaps begin shipments before the end of fiscal '26. Wondering if you could go into the use case you see for LPOs. Is that in back-end networks for GPUs or AI accelerators? Do you see that in general switch infrastructure or are there other applications where you see LPOs potentially being adopted? Thank you, Hong.

Thank you, Quinn. So the LPO IC is more versatile and it can be used to scale out, and they can be used to scale up as well because LPO has the same characteristics as ACC cables: low latency, low power consumption. And when you need extended reach, you go through electrical to optical conversion, transmit over fiber, and then at the other end, perform optical to electrical conversion. That conversion only consumes incremental amounts of power, yet the power consumption and latency are really similar to ACC. The LPO can be used to scale out a cluster, but in the meantime, when you need Ethernet, you scale up. So the LPO can be used to replace DSP based retimers as well. As you know, the industry consumes about 25 million to 30 million units of optical transceivers each year, which are largely based on DSP retime solutions. LPO has the potential to chip away even a fraction of that market. The opportunity is going to be tremendous, and that's why we're very excited about the LPO opportunities. As I mentioned, we have been engaging very closely with the ecosystem partners, and our TIA is commonly considered to be the best in the industry. We hope our next refinement spin in the near term for the 200-gigabit retriever will provide the extended performance and functionality that the industry needs. I'm still very confident that in the latter part of FY 2025 or FY 2026, we'll enter production with limited quantities for LPOs.

Thank you. Our next question is from Tore Svanberg with Stifel. Please proceed with your question.

Yes, thank you. Welcome aboard, Hong, and congrats on the strong results here. I do recognize there's a lot of interest in the signal integrity business, but I was actually more surprised by your recovery in the LoRa revenue, which was very strong in the quarter. Sounds like the momentum is there and is going to continue going forward. So could you just elaborate a little bit more on what's going on there? Is this basically inventory replenishment from the last few years, or are you seeing some big new programs actually adopting LoRa?

Tore, thank you very much. Yeah, that's a good question. I would say both. First of all, industry demand is resuming after the depletion of the inventory in the channels. We reported that POS increases and inventory in the channel has decreased from the last quarter. It's very natural that this market demand is bouncing back. The second part of the reason for the growth is, as I talked about the Mercedes Benz use case, our development partners are finding new use cases because of the unique capability of LoRaWAN, which can translate into tremendous savings and functionality enhancement in system design. I believe this is a key for growing revenues even beyond the current level and pace. That's why I'm very excited to attend The Things Conference in Amsterdam, where I have all my days lined up to meet with executives of the ecosystem and to mobilize the entire system, creating more use cases like the Mercedes Benz and utilizing the capability that LoRaWAN can offer. So that is a great opportunity for us and it has been a good engine for our growth.

Thanks for the call.

Thank you, Tore.

Thank you. Our next question is from Christopher Rolland with Susquehanna. Please proceed with your question.

Hey, thanks for the question and welcome, Hong. My question was actually on LPO and you also mentioned LoRa as well. So I just wanted to know what the opportunity in LoRaWAN is. I assume it's also a high-grade TIA, but putting these opportunities together, do you think this could be a larger opportunity for you than ACCs or copper? And if so, how much bigger? Thank you.

Yes, Chris, thank you very much. That's a great question. So the LPO certainly is analog on the transmitting side and on the receiving side. There are some concerns in the industry, especially from the cloud service providers regarding LPO. Their primary concern is whether the solution will provide enough link budget for them to choose different silicon on the switch side and then select different optical transceivers on the optical transport site. They have been benefiting from that optionality and multi-source agreement over the last decades because they need a lot of transceivers. When deploying a new data center, they need many switches and they don’t want to be just locked by one supplier. That has been the primary concern. They all recognize that LPOs provide low latency, low power consumption, lower costs, and higher value. There’s no denial of that, but they are just not sure the link budget will allow them to exercise this option for multi-source agreements. When I talked to many key architects, some say they are pretty sure the receiving side can achieve this, but on the transmitting side, they may have to use a DSP-based retimer solution. That still translates into tremendous power savings. That’s LRO for us. Either way, it is a win for us because when they do LRO or choose LPO, they tend to select the best in class TIA product. I would say at this point that Semtech products will benefit from both. As for your second part of the question—will LPO represent an even bigger opportunity than ACC? I believe it’s a valuable opportunity to replace DSP-based retimers. ACC can replace DAC cables when the line rate exceeds 100 gigabits per second, and connections longer than 2 meters for 100 gig cannot maintain the needed signal integrity. Therefore, both products present great opportunities in this AI-based connectivity era and have many years of runway.

Thank you. Our next question is from Harsh Kumar with Piper Sandler. Please proceed with your question.

Yes, Hong, let me add my welcome to you as well and very strong commentary on the quarter. So congratulations on the guide as well. My question regards ACC. Could you help me understand the scope and size of this business? Are you the leader, you think, in technology? Are you the sole provider, for example, to this one large customer that you mentioned? And then my other part of the same question is, as technology evolves, this is the first iteration of ACC. What do you think? Or do you think Semtech has what it takes to stay competitive in this market as other people look to get into the game? And maybe you could just help us understand what's needed to stay ahead of this technological change.

Great. Thank you, Harsh, and thank you very much for your question. To address your first part of the question, for such critical applications, I think our customers have to utilize multiple sources, and we are one of the two sources as I understand at this point. Certainly, the guidance we provided is based on a 50%, 50% allocation, but we have every intention to exercise our technology differentiation and, more importantly, at this point, operational excellence. We aim to provide customers with shorter lead times, better on-time delivery performance, and superior quality—this has to be a hallmark of our operations. That's what I made the comments and initial observations about the differentiation of Semtech. We hope to earn more than our fair share allocation in this market, and so far, it looks very promising. As for the second part of your question on how we stay competitive, ACC has always received some skepticism from the ecosystem regarding our capability to deliver the required performance and signal integrity. Simulation results looked good, but when you have a real IC integrated into a real product, it may not deliver the performance as simulated. That’s already behind us, and right now, everything is looking really good performance-wise. We are in the process of completing system validation and product qualification, preparing ourselves to ramp as we hand that over to operations. Our R&D team has already begun developing the next generation product like a 400 gigabit-per-channel solution. The industry will continue to push forward with higher data rates, lower latency, and lower power requirements. This remains Semtech's sweet spot, and the market is moving towards us. The way to continue innovating is by aggressively engaging with customers to provide them with the solutions they need at the right time. I am confident we will continue to lead in this area for a while.

Excellent. Hong, thank you so much.

Thank you, Harsh.

Thank you. Our next question is from Scott Searle with Roth Capital Partners. Please proceed with your question.

Good afternoon. Thanks for taking the questions, Hong and Mark, congrats on the quarter and the outlook.

Thank you, Scott.

Mark, real quick, I was wondering if you could repeat the LoRa number. I thought I missed that. And then Hong, on the ACC opportunity. It sounds like you're ramping in line to maybe a little ahead of expectations with Nvidia and Blackwell design. But I'm wondering if you could talk a little bit about the timeline for some of these other opportunities when you would expect them to commercialize, given the current path. A lot of the conversation has been around the opportunity versus DAC, but I'm wondering where AEC fits into the equation as well. Thanks.

Sure. The LoRa number, Scott, net sales for the quarter was $28.7 million. That's up 34% sequentially and 72% year-over-year, so very nice and healthy rebound, and we believe that is sustainable.

And I can address, Scott, your question about the timing of the ACC ramp. As I mentioned, we’re finishing up the system validation and product qualification—those are the last two gates before volume production. In Q3, we expect limited quantities to start shipping, not gated by demand, but there is going to be cycle time from the fab. We’ve already anticipated that by building wafer bank and die bank ahead of time. The real meaningful ramp is going to be in our Q4 fiscal year, and then throughout FY 2026, we expect pretty healthy demand based on the current PON and forecast. You mentioned AEC—you're right; the ACC will likely first and foremost encroach into the AEC market. That’s where the ACC will provide the signal integrity requirements but also reduced power and latency. When the new 100T switches are deployed, they will be requiring 200 gigabit connectivity, which will lead to a lot more demand for ACC cables to meet their signal integrity and low power consumption needs.

Great. But Hong, just for clarification, you've achieved systems-level verification then with the current customer?

Yes. For the connectivity piece, yes. Of course, their system integration involves many other things that are way above and beyond just connectivity. So that is the validation they're going through.

Great. Thanks so much and congrats on the quarter.

Thank you.

Thank you, Scott.

Thank you. Our next question is from Craig Ellis with B. Riley Securities. Please proceed with your question.

Yes, thanks for taking the question. Hong, I'll echo the congratulations on a tenure well started with the strength in the print and the guide. I wanted to see if I could get your help on sizing one of the businesses that you identified. So, it's great that we're doing well with the lead active copper cable customer and you framed up how big that business could be. I was hoping you could give us some scope on how big the engagements with other customers could be next year. And then to your point on strategy number two that you mentioned in your prepared script, if we look at what's possible for these businesses as you exercise some of your expertise in how they're directed, how much bigger can the business be than where it will be as we look at it next year? Thank you.

Yes, Craig, thank you very much. Great talking to you, and thanks for your question. Regarding ACC, beyond the specific customer or platform, we are in the early stages of engagement at this point. We are excited about the engagement with customers, who are raising their challenges and high-value problems. We believe it’s right in our area of solution capabilities in ACC. However, it may be too early for me to provide a specific number for the next two to three years on the opportunity. Directionally, I’m very excited about this, and I think this is great for my team. I have really extensive contacts and connections in the industry, and we'll continue to expand our reach and engagement with the industries. Maybe in the next earnings call, we will have better ideas on future opportunities for ACC beyond a single platform and customer. Thank you.

Thank you. Our next question is from Gus Richard with Northland Capital. Please proceed with your question.

Thank you for the question and congratulations on the results. I want to inquire about the competitive landscape. It's evident that there’s a distinction between DSP and analog. I see Infi and MACOM, among others, as competitors on the analog side regarding these high-speed interfaces. Are there any other emerging companies with similar capabilities that you observe apart from those I mentioned? I'm looking to gain a clearer understanding of the competitive environment.

Thank you, Gus, for your question. For analog expertise, you got it; those are the three companies I would consider on the first tier. I’m sure there are new up-and-comers that are excited about the opportunities as well. However, it takes time to establish capabilities from design to testing and many other things in the ecosystem. Also, operations is another critical aspect. I think we are at the right point, right time, and right place to capture the enormous opportunities ahead of us. Regarding the competitive landscape, that’s you’ve identified it correctly, and I think both of those companies are formidable competitors. We can never afford to be complacent. So, I told my teams that we need to stay constantly vigilant and challenge ourselves, continuing to run fast, as the only way to capture our unfair share is through exceptional performance in technology and operations.

Got it. Thanks so much.

Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mark Lin for any closing comments.

Hi. Thank you, everybody, for joining, and please visit our investor website at investors.semtech.com for a list of upcoming financial conferences where Semtech will be in attendance. Have a great day.

This concludes today's conference call. You may now disconnect your lines. Thank you for your participation.