Earnings Call Transcript - SMTC Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to Semtech Corporation's First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mark Lin, Executive Vice President and Chief Financial Officer. Please go ahead.

Mark Lin, CFO

Thank you, operator. Good day, everyone, and welcome. In addition to Hong Hou, President and Chief Executive Officer, I'm thrilled to be joined by Mitch Haws, Senior Vice President of Investor Relations. Many of you know Mitch, given his breadth of semiconductor experience at AMD, Skyworks and Freescale and now Semtech. With that, I'll turn the call over to Mitch.

Mitch Haws, SVP of Investor Relations

Thanks, Mark. I'm very happy to join the Semtech team and look forward to engaging with all of you in the months and quarters ahead. Today, after market close, we released our unaudited results for the first quarter of fiscal year 2026, which are posted along with an earnings call presentation to our investor website at investors.semtech.com. Today's call will include various remarks about future expectations, plans and prospects, which comprise forward-looking statements. Please refer to today's press release and see Slide 2 of the earnings presentation as well as the Risk Factors section of our most recent annual report on Form 10-K for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on this call. You should consider these risk factors in conjunction with our forward-looking statements. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than net sales. Please refer to today's press release and see Slide 3 of the earnings presentation for important 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.

Hong Hou, CEO

Thank you, Mitch. Welcome aboard. Good afternoon, everyone. We reported Q1 results with net sales, adjusted gross margin, adjusted operating margin and adjusted diluted earnings per share each above the midpoint of our guidance. These results illustrate the resiliency of our business and offer another proof point of our operational excellence. Semtech's Q1 ended on April 27, so we closed the last month of the quarter during an extremely turbulent period, but we successfully navigated through dynamic tariff policies. Superb coordination among our operations, sales, compliance teams was instrumental in mitigating the tariff situation for Semtech and our customers, facilitating a stable flow of products across the global semiconductor supply chain. I extend my heartfelt thanks to these teams and recognize their efforts in helping us achieve our Q1 results and support our conviction for the quarters ahead. Semtech's Q1 results also reflect our focus on core priorities, including portfolio optimization, strategic investment in R&D, and driving margin expansion. While uncertainty in a market may impact the timing of some of our portfolio optimization initiatives, we have strong conviction that we can operate these businesses to grow the top line, expand profit margins and improve overall financial metrics. We believe this will create more value for our shareholders. Moving to our end markets. For Q1, Infrastructure net sales were $72.8 million, up 5% sequentially and up 30% year-over-year. Net sales for data center were a record $51.6 million, up 3% sequentially and up 143% year-over-year. Our expectations for short-term demand gap in CopperEdge remain consistent. That said, we expect our data center business to be a sustainable growth driver, especially given recent indications of capital expenditure growth by hyperscalers, as well as from innovations in our copper and optical portfolios. AI data centers face critical power and thermal challenges which will grow exponentially as compute workloads increase. Our analog solutions are well suited to address these challenges. CopperEdge enables a significant paradigm shift in connectivity, delivering the signal integrity and rich extension needed for next-generation AI clusters. Compared to DSP-based options, CopperEdge reduced power consumption by over 90% and also enables a significantly longer reach than the direct attached copper of DAC cables. At OFC, we demonstrated a number of CopperEdge driven ACC applications, all with the bit error rate well below acceptable ranges. At 1.6T, we successfully run traffic across a 3 meter 27 gauge cable using two 24 gig SerDes boards. Our launch application at our anchor customer last year was a 1.1 meter cable. So this demonstration highlighted the high performance capabilities and the reach of our CopperEdge ICs. At 800 gig, the dominant read of data center traffic, we demonstrated an extended reach 5 meter ACC connected to Broadcom Tomahawk 5 switch, a prospective customer requested this configuration for use at the replacement to DAC cables. Also connected to the Tomahawk 5 switch with ultrathin 3 meter 30 gauge cable that has significant benefits in airflow and bending radius both characteristics valued by architects. We remain closely engaged with our CopperEdge anchor customer for applications in their future generation. In addition, hyperscalers, switch vendors and cable manufacturers continue to show interest in CopperEdge ACCs. We have delivered ACC cables for testing and qualification to multiple customers and expect meaningful design wins at hyperscalers and enterprise customers leading to volume ramps before the end of this fiscal year. On the optical side, our LPO demonstration at OFC generated significant interest and our expectation of deployments in the second half of this fiscal year remains unchanged. We are pleased that the feedback from our customers indicate that Semtech's TIA for LPO offers superior performance and we believe we are winning the lion's share in TIAs, and we also released our LPO laser drivers last quarter and are generating design traction at multiple-module suppliers. Moving to our high-end consumer end market. Net sales for Q1 were $35.4 million, flat sequentially and up 3% year-over-year. Net sales in Consumer TVS were $24.5 million, in line with our outlook for Q1 and up 2% sequentially. We expect a pattern of smartphone unit ramps fairly consistent with the past years, with an increase in the second quarter and a successive increase in the third quarter. Within consumer TVS, we believe our innovation continues to result in increased content. I'm pleased to highlight expanded design activity of SurgeSwitch, a system-level protection device across a number of manufacturers and platforms. SurgeSwitch has the capability to simultaneously address expanded dimensions of threat from ESD, our electrostatic discharge, our EOS or electrical overstress across a wide operating temperature range. Final process geometry in advanced nodes for IC Fabrication has increased the demand for the type of rigorous off-chip system-level protection offered by SurgeSwitch. For our PerSe products, we have discussed use in smart glasses and application, we believe has a strong potential to be next-generation AI interface platform. We have a growing field of opportunity and are actively engaged with a broad range of customers on both existing designs and on new launches. In smartphones, PerSe addresses increasingly stringent specific absorption rate or SARS standards and is currently deployed on devices at most leading manufacturers. PerSe offers meaningfully lower power, improved sensitivity and best-in-class noise rejection. PerSe's use of Semtech's novel packaging expertise also results in a smaller footprint that allows us and our customers to develop slicker form factors. Moving to our industrial end market. For Q1, Industrial net sales were $142.8 million, down 3% sequentially in line with our outlook and up 24% year-over-year. Within the industrial end market, net sales of LoRa-enabled solutions remained strong at $38.9 million, up 5% sequentially and up 81% year-over-year. Demand supporting new product launches and deployments remained robust. We recently announced that Sonova, a world leader in innovative health care solutions, chose Semtech as a technology partner to create an ultra-small ultra-low power wireless radio and power management IC. LoRa technology highlights Semtech's deep expertise in ultra-low power RF with the clear match for battery-operated devices, including hearing aids. Robotics and unmanned aerial vehicles are also an emerging market for LoRa, given its ability to operate in both 2.4 gigahertz and ISM frequencies offering enhanced bandwidth, which is well suited for these applications. In addition, LoRa’s modulation scheme, now paired with multiple protocols providing the capability of LoRa Plus allows manufacturers to extend the end applications, including safety, security as well as smart buildings. Our IoT systems hardware business recorded Q1 net sales of $63.5 million, down 8% sequentially, but within expectation of our outlook and up 31% year-over-year. Bookings in the first quarter for this business increased for the seventh consecutive quarter. Pipeline also increased substantially in Q1, attributable to both the inclusion of a significant China-based competitor on a sanction list and the strong indications of a broader market recovery. We expect continued growth and improved profitability in our IoT cellular portfolio based on stronger pipeline and bookings. Growing 5G adoption rates, particularly in North America, are benefiting our hardware business, with the current deployments utilizing the first and second-gen modules. In Q1, we launched two third-gen 5G modules, a cost-optimized solution supporting broader 5G adoption for value-focused applications and the performance-optimized solutions supporting 5G advanced to enable next-generation edge-based AI applications. IoT connected services net sales were overall stable for this largely recurring revenue business. Our connected services business is a great example of Semtech's deployment of AI tools. As an example, anomaly detection highlights abnormal network activities and notifies our operating center, and we believe this improved detection capability has prevented security incidents for our customers. In summary, we have made significant strides in strengthening Semtech's financial foundation over the past year, which allows us to sharpen our focus on improving profitability and investing in innovation and capabilities that position us for long-term business growth. Our Q1 results reflect disciplined execution. At the same time, we recognize that there is still much work ahead of us to fully unlock the value of our unique technologies and to deliver sustainable long-term returns for our shareholders. We must continue to solidify a winning culture, accelerate innovation and leverage our technology leadership and execution, all of which position us to deliver enhanced value to our shareholders with increased revenue and expanded margins. I now turn the call to Mark for additional details on our financial results and our outlook for the second quarter of fiscal '26.

Mark Lin, CFO

Thank you, Hong. For Q1, net sales were a record $251.1 million, above the midpoint of our outlook and up 22% year-over-year. We do not believe our Q1 net sales reflect material pull-ins due to tariffs. Net sales trends by end market, reportable segment and geographic region are included on Slide 16 of the earnings presentation. Adjusted gross margin was 53.5%, up 30 basis points sequentially and up 370 basis points year-over-year. Adjusted net operating expenses were $86.6 million, below the midpoint of our outlook. Adjusted operating income was $47.6 million, resulting in an adjusted operating margin of 19%, up 680 basis points year-over-year. Adjusted EBITDA was $55.4 million, up 68% year-over-year, and adjusted EBITDA margin was 22.1%, up 600 basis points year-over-year. Adjusted net interest expense was $5 million, down sequentially from $11.2 million. The decrease was primarily reflective of a full quarter of savings from our Q4 debt paydown. We recorded other net non-operating expenses of $2.8 million, substantially reflective of foreign exchange revaluation losses. This amount stemmed from a weaker U.S. dollar, most notably in the month of April. We recorded adjusted diluted earnings per share of $0.38, up from $0.06 a year ago. Operating and free cash flow for Q1 were $27.8 million and $26.2 million, respectively, and these amounts reflect variable compensation payments in Q1. At the end of Q1, net debt sequentially decreased $14.8 million to $396.2 million and comprised of approximately $171 million in term loan and $382 million in convertible notes, offset by $156 million in cash and cash equivalents. Along with debt reduction, strong business performance contributed to an adjusted net leverage ratio below 2, as of the close of Q1. We continue to prioritize debt reduction with a $10 million term loan prepayment in the first quarter and an additional $15 million to date in the second quarter. On our revolving credit facility, I am pleased we successfully amended the facility to increase our total borrowing capacity by $117.5 million for a total revolving credit facility size of $455 million. No financial covenants or material terms were modified as part of this amendment. As of today, the revolving credit facility remains undrawn, except for previously outstanding letters of credit totaling about $3 million. Now turning to our second quarter outlook. We currently expect net sales of $256 million, plus or minus $5 million, up 19% year-over-year at the midpoint. We expect net sales from our infrastructure end market to increase sequentially, including growth in data centers. We expect net sales from our high-end consumer end market to be up slightly, reflective of typical seasonality. We expect net sales from the industrial end market to be flat to slightly down, with moderation in LoRa offsetting growth in our IoT cellular business. Based on expected product mix and net sales level, we expect adjusted gross margin to be 53.0%, plus or minus 50 basis points, a 260 basis point improvement year-over-year at the midpoint. Adjusted net operating expenses are expected to be $87.5 million, plus or minus $1 million, resulting in an adjusted operating margin at the midpoint of 18.8%, a 460 basis point improvement year-over-year. Adjusted EBITDA is expected to be $56 million, plus or minus $3 million, resulting in an adjusted EBITDA margin at the midpoint of 21.9%, a 310 basis point improvement year-over-year. We expect adjusted interest and other expenses nets to be $5.5 million, reflective of leverage-based pricing on our term loan that reduced our interest rate, another benefit of our lower leverage ratio. We expect an adjusted normalized income tax rate of 15%. These amounts are expected to result in adjusted diluted earnings per share of $0.40, plus or minus $0.03, based on a weighted average share count of 90 million shares.

Mitch Haws, SVP of Investor Relations

Thank you, Mark. We can now turn the call back over to the operator for the question-and-answer session.

Operator, Operator

Thank you. Our first question comes from Quinn Bolton with Needham & Company. Please proceed.

Quinn Bolton, Analyst

Hey, guys. Wanted to start off with a question on the cellular module business. I was, I guess, a little surprised to see that down I think after six quarters of increased bookings and Q1 being the seventh quarter. So wondering if there was anything specific to call out in the cellular module business in April. And thank you for the additional gross margin disclosure in today's press release. But it does look like the gross margin on the cellular modules also came in down meaningfully both quarter-on-quarter and year-on-year. I just wondered if you could explain what happened on the margin side of the cellular module business in the first quarter?

Hong Hou, CEO

Thank you for your question, Quinn. From our Q4 guidance, we anticipated some seasonality in our IoT system product. However, this business is currently benefiting from strong tailwinds due to the sanctions affecting our competitors in China and U Blocks exiting the IoT cellular market. This positive momentum is clearly reflected in our booking activities. We expect this business to continue accelerating revenue in the upcoming quarters, although Q1 was a bit lower than expected, which we had anticipated based on our Q4 guidance.

Mark Lin, CFO

And Quinn, just to address gross margins. This also came in within expectations. We had guided a little bit lower gross margin or we expect a little bit lower gross margin from the ISC business. But within this business, you also have a little bit of mix between modules and routers affecting the gross margin that we reported.

Hong Hou, CEO

So you saw a mix shift more to modules away from routers, and that's why it came in lower than, say, the prior quarter or prior year.

Mark Lin, CFO

That’s correct.

Hong Hou, CEO

And there's also a one-time event on the inventory on the module side. So that is impacting the overall IoT system margin adversely; that is a one-time event.

Quinn Bolton, Analyst

Got it. So there was a write-off of obsolete or excess inventory, something like that, that was a further drag.

Hong Hou, CEO

Actually, Quinn, we experienced a bit of a boost in Q4 that we did not see in Q1.

Quinn Bolton, Analyst

Okay. Thank you. I’ll get back in queue.

Operator, Operator

The next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed.

Christopher Rolland, Analyst

Hey, guys. Thanks for the question. So mine is just around AI connectivity. It sounded like there was some progress here maybe on the CopperEdge side with engagements and revenue by the end of the year. Perhaps you could expand on that and just more broadly talk about where we are in visibility around AI connectivity for you guys overall?

Hong Hou, CEO

Yeah. Chris, thank you for that question. Our CopperEdge product, we trailblazed that product into the market through engagement with the anchor customer. Since then, we have reached out to more than 20 customers and having very close engagement with many of them. It is really very encouraging to see that they finally recognize the unique advantage that ACC offers compared to AOC or AEC in terms of low power consumption, low latency, and a number of them are taking our product prototype samples for qualification and testing. And so, the use cases are going in for scale up of the ASIC interconnect and also for scale out, especially the first level of the switch fabric from NIC to top of the rack. Our demo at OFC used CNET and really shows and gives a lot of confidence for our customers. They came in, saw and kicked the tires, wiggled the cables and saw the bit error rate well below the acceptable limit. At 200 gigabit, they could see our product can transmit over 3 meters with a 30-gauge cable. That is really very desirable. So, as I said, we expect a number of the customers we're engaging with to finish qualification and start ramping by Q4 this year.

Christopher Rolland, Analyst

Excellent. Thank you, Hong. My second question is around LPO and optical more generally for you guys. If you could describe what you're seeing there in terms of TIAs, drivers for maybe regular optical and then for LPO and how that might ramp through the year? That would be great. Thank you, guys.

Hong Hou, CEO

Yeah. Thank you. So as you know, that the Semtech TIA is considered the gold standard for the industry. For traditional retimed or LPO, our TIA has been designed in almost every module manufacturer. And the LPO coming out of the OFC, that MSAs finalized the specification. So now the suppliers and the customers, the cloud service providers, they're all on the same sheet of music and having the same expectation on performance. There’s no longer any argument. Now it's really about the timing and what platform they start deployment. This is tremendous progress compared to a couple of years ago. As you know, this industry has been tracking for a long time. We're seeing 800 gig LPO links at 100 gigabit per second that are going to be used first by multiple cloud service providers. We are designed in on our TIAs. Our driver is a little bit late compared to our competitors, and we released it last quarter. Our driver, because of late reduction did incorporate the specific requirements that MSA dictated or altered. I would say, our driver is a fully LPO compliant driver, and we are working with multiple module manufacturers in incorporation and qualification. That will bring additional revenue, say, by Q4 this fiscal year. Our FiberEdge product has a broad application with different data rates and different applications, and we are benefiting from the increased CapEx spending of the industry, and we believe we're gaining some market share. This will continue to be a driver for our data center and overall revenue growth.

Christopher Rolland, Analyst

Thanks for the color, Hong.

Operator, Operator

The next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed.

Harsh Kumar, Analyst

Yeah. Hey, guys. Welcome, Mitch. Good to talk to you again. Hong, I had a quick question. I was curious if you could talk about your data center business, the core business, excluding futuristic outlook for LPO and maybe ACC. Just your plain vanilla core data center business, how you see that business trending over the next, call it, six to twelve months? And then I had a follow-up.

Hong Hou, CEO

Good. Thank you, Harsh. So, that we disclosed the air pocket in demand on ACC, so from the anchor customer. But the very fact that we delivered a sequence of growth in Q1 versus Q4 on our data center product is due to the strength of our FiberEdge product. The LPO certainly is in a design win stage; it has not contributed to meaningful revenue yet. Based on booking activities and conversations with our customers, we hold strong conviction for the second half of the year. The FiberEdge and plain vanilla, as we call it, PMDs, will continue to experience growth, maybe accelerated growth. I'm really optimistic about that.

Harsh Kumar, Analyst

Great. Thank you, Hong. And then, I was curious about LoRa. LoRa, I think in your guidance, Mark, you said LoRa will be off a little bit. This is coming on the heels of some very strong growth over the last several quarters. You talked about some new end markets, automotive, robotics, hearing aids, etc. I was curious if you could help us understand why LoRa is going to be off just a little bit? Is it just small stuff like timing or just coming off of hot growth or is there something else? And then when do you see these new markets materializing? And I'll get back in line after this.

Mark Lin, CFO

Sure. Thanks for the question, Harsh. So LoRa in Q1, we reported $38.9 million, up from $37.1 million in Q4. So very nice sequential growth. Last quarter, we were getting more into the, call it, the $30 million to $35 million range. So that's where we believe the market will kind of fall out in the next few quarters. We do believe that in our first quarter, there was a little bit of additional build. We said that LoRa has some project spend. Also, we had a customer build additional units in anticipation of our product launch. So that's where LoRa is, we believe that LoRa next quarter will be coming down a little bit, but still quite a strong business. $30.9 million is still up 81% year-over-year.

Harsh Kumar, Analyst

Understood. Thank you, Mark.

Hong Hou, CEO

On LoRa, we do expect a comfortable $30 million to $35 million quarterly run rate. As Mark said, we disclosed a medical customer is ready to launch a new product. In Q1, there are some additional orders from them to support a new product launch.

Harsh Kumar, Analyst

Understood. Thank you, guys.

Operator, Operator

The next question comes from the line of Timothy Arcuri with UBS. Please proceed.

Timothy Arcuri, Analyst

Thanks a lot. I also wanted to ask about the update on AI connectivity. I assume that CopperEdge is pretty much zero in July and October. And then, it sounds like you get a pretty big step up in fiscal Q4 because of all these engagements. Is that the right way to think about it?

Hong Hou, CEO

So Tim, that's a good question. We talked about the air pocket in demand due to the platform change with the anchor customer. That is unchanged, but we continue to engage with them for future generations in both cable form and chip board type of linear equalizer applications. That relationship continues to be very tight, but the demand from them was a lot lower than we already expected. However, the engagement with other customers for the application of the CopperEdge product is really very exciting and encouraging. There are four or five different applications and use cases going beyond just the scale-up interconnect between different rack architectures. Some of them are completing qualification and just waiting for deployment in their next-generation platforms. We believe the revenue from other customers will come in Q4 timeframe and start ramping from there.

Timothy Arcuri, Analyst

Thank you. Mark, could you explain the increase in net revenues by about $5 million sequentially and the 50 basis point drop in gross margins? Is that simply due to the mix?

Mark Lin, CFO

Semtech's performance is mainly influenced by product mix, and our guidance reflects our expectations for the current mix. In Q2, we anticipate a gross margin of 53.0%, which represents a 260 basis point improvement. In our financial disclosures, we do not separate our semiconductor product groups, which include signal integrity, analog mixed signal, and wireless segments. We included this information from our 10-Q in our earnings release and presentation to assist investors. Within semiconductor products, we expect a gross margin of 63.7%, an increase of 720 basis points year-over-year, although this is heavily dependent on product mix.

Timothy Arcuri, Analyst

Thanks a lot.

Operator, Operator

The next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.

Joseph Moore, Analyst

Great. Thank you. There was a line in your prepared remarks; you sort of said, when uncertainty in the market may impact timing of some portfolio optimization initiatives. Can you just talk about what you mean by that? And kind of, it doesn't sound like you guys are overly impacted by tariffs. What kind of uncertainty is that creating for you?

Hong Hou, CEO

I see. So Joe, thank you for the question. What I mean by that is not about the tariff related, but it's just the overall macroeconomic uncertainties. As you know, the deal flow and people thinking about strategically is probably getting a little bit deferred, but we continue to hold our strategic initiatives at a high priority. The overall industry is getting distracted and focused on how to mitigate the tariff risk and activities on the strategic initiative will get delayed. That’s what we mean. But we do provide more visibility in our gross margin from our earnings release, so that you can see that we own the business, and as long as we own it, we'll continue to work hard to improve and deliver better results. That's the best way to create shareholder value. We control what we can control, we can't do much with things we can't control. That is the macroeconomic environment.

Joseph Moore, Analyst

Got it. Okay. Thank you.

Operator, Operator

The next question comes from the line of Tore Svanberg with Stifel. Please proceed.

Tore Svanberg, Analyst

Yes. Thank you, and welcome on board, Mitch. I had a question about the PerSe proximity sensor for the glasses. You talked a little bit about that, but how should we think about that business ramping? Would that happen in the second half of fiscal '26 or is that going to be more of a fiscal '27 event?

Mark Lin, CFO

Hey, Tore. That's a good question. We're really excited about the PerSe product. Traditionally, that product has been designed for the standards or specific absorption rate reduction. It comes in handy due to its low power, high accuracy, and noise rejection capabilities for smart variables, I bought Meta Ray-Bans smart glasses, and it was absolutely phenomenal; taking pictures, recognizing different locations and doing translation in real-time. We're seeing probably five, six other customers we are engaging for similar devices. From the get-go, I think, cumulatively, we have supported over 1 million smart glasses using this gesture control capability. Just imagine how many variable devices can be out there and using the smart glasses as an AI interface to link into the infrastructure. We're very excited about that market perspective. We do believe, again, in the second half of this year, there are going to be more than Meta, jump on that bandwagon to provide smart glasses.

Tore Svanberg, Analyst

Yeah. That's great color. And another my follow-up, specifically on LoRa, you mentioned the medical customer or perhaps customers. Is this still only going to be the hearing aids, or are you seeing LoRa perhaps penetrate other types of medical applications?

Hong Hou, CEO

For now, it's just the hearing aid we're talking about, but I wouldn't be surprised that the people start using LoRa for other medical device applications. The beauty of that is just very low power consumption and robust connectivity. For example, robotics is a new application that is proliferating widely in using LoRa to interconnect different robots and to build the network.

Tore Svanberg, Analyst

Very helpful. Thank you.

Hong Hou, CEO

Thank you, Tore.

Operator, Operator

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

Cody Acree, Analyst

Yeah. Thanks, guys for taking the questions and congrats on the progress. Guys, could you talk about your expectations for seasonality into the second half across your various markets?

Hong Hou, CEO

Thank you for the question, Cody. The seasonality for our high-end consumer TVS product aligns with the smartphone release schedule. Looking ahead to the next couple of quarters, we don't expect significant seasonality. However, we are noticing a recovery in the broader industrial market. Initially, there were concerns about capital expenditures in the data center sector, particularly regarding AI, but many cloud service providers and others in the ecosystem now express strong confidence that we will see an increase in capital spending in the second half of the year, as evidenced by our booking activities. The LoRa segment is unique; the spending is project-based and requires more materials in Q1. We're seeing an increase in end node shipments, setting records each quarter. New applications and products are continuously emerging, including LoRa Plus, which supports additional RF protocols alongside the LoRa protocol. This is important as some applications that wish to use LoRa also require compatibility with existing systems. With LoRa Plus, integrators can create products that ensure compatibility while leveraging the advantages of the LoRa protocol. While we anticipate a slight decrease in Q2 revenue compared to Q1, this isn’t due to seasonality.

Cody Acree, Analyst

Excellent. Thanks for the help there. And then just thoughts on your gross margin and OpEx drivers in the second half and what kind of trends can we expect?

Hong Hou, CEO

Hey, Cody. I think we've talked about product mix between our three end markets that will largely drive our gross margin into the second half. For OpEx, we are making very good investments in R&D. We continue to focus on project spending and monitoring our product spending with R&D, which has not changed quarter-over-quarter. We believe we have some great opportunities in front of us. Other areas of OpEx growth, we are filling out our commercial team to better facilitate technical sales. This team allows us to get better information and better alignment between our R&D spending and our customers' needs.

Operator, Operator

The next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed.

Craig Ellis, Analyst

Yeah. Thanks for taking the question. And Mitch, great to be back in touch and having you on board the Semtech team. Guys, I wanted to start just by getting a better understanding of what you’re expecting within data center in the back half of the year. It seems clear that we've got two significant things happening. We've got AI connectivity that seems to be coming up and coming back on multiple customer wins away from your key customer. And then, we've got LPO that's starting to ramp up. The question is, can you help us dimension those two items as we exit the year? Which will be the bigger driver? And if you look at the arc of what's happening with these, can you help us by characterizing what we should expect as those programs go from initial ramps to more meaningful volume?

Hong Hou, CEO

Thank you, Craig. Yeah. As you know, we have a broad product portfolio for our data center connectivity. We've got FiberEdge with TIA and the driver. We've got a CopperEdge with a linear equalizer, and we also have the Tri-Edge CDRs, basically integrated with PMD. This diverse portfolio helps us even when we experience a little air pocket in CopperEdge with the anchor customer, the growth in FiberEdge and the Tri-Edge will outweigh the drop in demand for the CopperEdge. As I said, we expect a lot of good things happening in the latter part of this fiscal year with more than the anchor customer demand for CopperEdge, which will materialize. LPO will be the incremental opportunity when customers start to deploy 1.6T optical transceivers; they're likely to use drivers for lasers and modulators, and because the traditional 100 gig or below, they could use an integrated driver from DSP to drive EML. It looks like performance to get the link very robust requires external drivers. So that’s incremental opportunities for us. The FiberEdge represents a strong product line providing a high level of demand. Additionally, when these tailwinds come into play that will add incremental revenue on top of it. Overall, we feel well-positioned for the second half of the year.

Craig Ellis, Analyst

As we approach the end of the year, we're seeing broad participation across three key areas of our portfolio. I would like to follow up on the SurgeSwitch product you mentioned in your remarks, which offers integrated system-level protection. Can you elaborate on the types of products this will be incorporated into, and how its dollar value compares to typical protection products? Additionally, how should we assess this product's potential to drive noticeable growth in the high-end consumer segment of the business? Thank you.

Hong Hou, CEO

Yeah, Craig. So on SurgeSwitch, you're right, it is an integrated device. So it provides additional protection and digital features. We've launched this with multiple customers. System-level design does require a lot more customer intimacy, so we're very happy with the amount of engagement we have with customers. It does have noticeable improvements in ASPs. Semtech's TVS products are not just commodity type products, so we've already been enjoying higher ASPs based on our technology. SurgeSwitch protects against electro overstress in addition to electrostatic discharge over a wider temperature operating range, providing users better protection when they design in SurgeSwitch.

Mark Lin, CFO

And then they used to protect the Type-C connectors. Now the Type-C is used everywhere, not only in smartphones; it’s in automotive, telecommunications, and many different charge ports. So circuits which just provide a lot more robust protection capabilities.

Craig Ellis, Analyst

Okay. So it's nicely expansive for you over time?

Hong Hou, CEO

Exactly. Yeah.

Operator, Operator

And the last question will come from the line of Scott Searle with ROTH Capital Partners. Please proceed.

Scott Searle, Analyst

Good afternoon. Thanks for taking my questions. Hey, maybe to just follow up quickly on the data center front. I was wondering if we could get calibrated if we put LPOs to the side, starting to ramp up in the third and fourth quarters and some ACC traction starting by the end of this year and ramping into fiscal '27. The portfolio outside of that, what sort of normalized growth rate do you think we should see over the next couple of years? It sounds like in the near term, we're starting to see FiberEdge continue to drive that. I'm wondering if you could help us understand what that normalized expansion looks like and your comfort level that customer inventories are at a pretty good level so that we don't see any sort of air pockets or big drawdowns in the next couple of quarters, calling it core data center before we get to LPOs and ACCs.

Hong Hou, CEO

Great. Thank you, Scott. So the normalized growth rate, I think we can track basically out of the research reports on the CapEx spending. For a number of market research reports, they even call out more specific optical transceivers. As I said, our data center product, especially the FiberEdge, seems to track the volume increase of data center transceivers. I think our growth rate is likely to go higher than that. The LPO adoption will bring additional capability and revenue for us due to the driver and the premium on the TIA side. CopperEdge right now, with the anchor customer, is lingering, but we will see revenues from other customers contributing meaningfully in Q4 and ramping in the next fiscal year. The Tri-Edge product, which is a CDR, has been designed in with several major CSPs. For reasons beyond our control, they delayed deployment, but now they seem to be resuming. We do feel that barring any rapid adverse change in tariff policy or anything else beyond our control, we are well positioned for the second half of the year.

Scott Searle, Analyst

Okay. Very helpful. And if I could conclude, just on the cellular module front, seasonally down quarter, gross margins with utilization under a little bit of pressure. Given the headwinds within the North American markets and increasingly, I think, in European markets, what we're seeing with the exit of U Blocks as well. I wonder if you could talk a little bit more about the bookings and when we would expect that to inflect and we start to see that more in the P&L and really realistically, what target gross margins could look like in that environment, given that some of your competitors are going to be facing pretty high bars in terms of tariff headwinds? Thanks.

Mark Lin, CFO

Hey, Scott. I'll take that one. So, as we reported, we've had seven consecutive quarters of bookings growth. I think that's long-term sustainable bookings. We did have a down quarter in Q1, but that was in line with our expectations, and we guided for Q2 that IoT cellular business will increase in revenue. We should see step-ups in gross margins. We are managing this business for margin expansion along with our other businesses.

Operator, Operator

Thank you. This concludes the question-and-answer session, and I'd like to turn the call back to Mitch Haws for closing remarks.

Mitch Haws, SVP of Investor Relations

Thanks, Joe. That concludes today's call. Thanks to all of you for joining us today.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.