Semtech Corporation ($SMTC)

Good day, and thank you for standing by. Welcome to Semtech Corporation's Fourth Quarter and Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mitch Haws, Senior Vice President of Investor Relations for Semtech.

Thank you, and welcome to Semtech's Fourth Quarter and Fiscal Year 2026 Financial Results Conference Call. Participants on today's conference call are Hong Hou, our President and Chief Executive Officer; and Mark Lin, our Executive Vice President and Chief Financial Officer. Before we begin, I would like to highlight upcoming investor events, including the Optical Fiber Communications Conference starting tomorrow and the ROTH Technology Conference on March 23. Today, after market close, we released our unaudited results for the fourth quarter and fiscal year 2026, which are posted along with an earnings call presentation to our Investor Relations website at investors.semtech.com. Today's call will include various remarks about future expectations, plans and prospects, which comprise forward-looking statements. Please refer to today's press release and see Slide 2 of the earnings presentation as well as the Risk Factors section of our most recent annual report on Form 10-K for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on today's call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call. We will also be referring to results for our fourth quarter of fiscal year 2026, unless otherwise noted. Please see today's press release and Slide 3 of the earnings presentation for information regarding notes on our non-GAAP financial presentation. The press release and earnings presentation also include reconciliations of our GAAP and non-GAAP financial measures. With that, I will turn the call over to Hong.

Thank you, Mitch. Good afternoon to all of you joining today. Semtech closed fiscal year 2026 with a significant momentum, achieving a record $1.05 billion in net sales, a milestone that reflects the progress we have made and the trajectory we believe lies ahead. We drove strong sequential and year-over-year revenue and earnings growth, advanced our data center road map to capture compelling design wins opportunities and continue to optimize our product portfolio, all while executing on the R&D and expense initiatives we believe position Semtech for an exciting next chapter. Looking at Q4, net sales were $274.4 million, up 3% sequentially and up 9% year-over-year. For the year, revenues were $1.05 billion, representing annual growth of 15%, driven by continued strength in our data center and LoRa portfolios. Adjusted diluted earnings per share were $0.44, up 10% year-over-year. For fiscal year 2026, adjusted diluted earnings per share were $1.71, growth of 94% over the prior year. In addition to delivering strong revenue and earnings growth, portfolio optimization remains a key focus of execution. As announced earlier this month, we acquired HieFo Corporation, which represents an important strategic building block for Semtech. HieFo is a California-based manufacturer of high-efficiency indium phosphide-based optoelectronic devices, including Gain Chips and CW Laser Chips that are critical components in the optical transceivers powering today's data centers. Put simply, HieFo makes the light emitting building blocks that sit at the heart of high-speed optical interconnects. The strategic rationale is straightforward. As data center architectures evolve to 1.6T and 3.2T, the complexity of optical interconnect increases dramatically. By bringing HieFo's proven indium phosphide laser technology, together with Semtech's industry-leading TIA laser drivers, we can co-develop and co-optimize performance across the laser modulator driver interface and increase Semtech's content opportunity from high single-digit dollars in an 800-gig module to about $80 in a 3.2T module. We believe this combination will result in a more integrated, more efficient chipset, one that reduces system power consumption and gives the hyperscaler a differentiated solution for high-bandwidth optical transceiver modules. We have developed a comprehensive investment plan for the Alhambra, California facility to expand domestic capacity and accelerate product development. The integration of HieFo into Semtech's operation is underway with the transaction expected to be accretive to non-GAAP diluted earnings per share within the first year. We are genuinely excited about the people and technology joining Semtech, and we see significant untapped potential for high-efficiency lasers in different interconnect applications. Finally, we continue to make progress on the divestiture of the cellular module business, and we are increasingly encouraged by the level of interest and engagement. We remain confident this business represents a compelling opportunity for the right acquirer, and we remain focused on bringing this process to a successful conclusion. Now let me move to a discussion of our end markets. For Q4, infrastructure net sales were $86.3 million, up 11% sequentially and up 25% year-over-year, strongly supported by our data center business. For fiscal 2026, infrastructure net sales were $310 million, growth of 27% over the prior year. For Q4, net sales of data center were a record $63 million, up 12% sequentially and up 26% year-over-year, benefiting from strong demand for our broad portfolio, including our market-leading fiber edge ICs whose net sales set another record. In Q4, we also started shifting into LPO transceivers with revenues in line with the outlook we provided on the last quarter's earnings call. Fiscal year 2026, our data center revenues were a record $223 million, representing an annual growth of 58%. Our optical and copper product lines are firmly established with hyperscalers as a differentiated and high-performance offering. Power efficiency has become one of the defining constraints of the modern AI infrastructure. As hyperscalers major data center capacity in megawatts, the ability to move data faster while consuming less power at the networking layer is no longer just a differentiator, is an enabler. Our analog solutions address this directly, enabling operators to scale next-generation architectures at 800G, 1.6T and eventually 3.2T. Demand for 800G TIA solutions remain strong and broad-based with an increasing momentum throughout 2026. At 1.6T, we are engaged across a wide range of transceiver programs and expect volume ramps to build as hyperscalers roll out their new XPU and switch platforms using reduced power 1.6T transceivers throughout the year. On LPO, design wins with several leading U.S. hyperscalers validated our TIA and driver solutions in 800G transceivers. We are very excited to be a member of the new XPO MSA to define specifications and enable high-bandwidth, high-density and low-power switches. By combining with the low-loss copper interconnects such as flyover wires or linear re-driven PCB traces, some hyperscalers are becoming increasingly bullish on 1.6T LPO instead of using LRO for the first layer of the scale-up fabrics. We continue to expand our LPO IC portfolio with 1.6T LPO drivers and TIAs expected to come to market this year. In supporting further proliferation of low-power linear optics, Semtech, along with other industry leaders are developing NPO, near-package optics MSA for low-power, high-density and high-bandwidth solutions. Successful deployment of 800G LPO transceivers gives hyperscaler confidence in NPO as the next evolution of the optical solutions. We are excited by the increased content available to Semtech in NPO deployments. Active copper cable or ACC continues to gain significant traction. Customers evaluating ACCs against the incumbent solutions are seeing compelling performance advantage in the form of robust link margin and transformative power savings versus DSP-based solutions. Alongside our cable solutions, customers are increasingly evaluating our CopperEdge linear equalizers for onboard integration to enhance signal integrity across high-speed links, an opportunity we are confident will convert into design wins over the coming quarters. One of these use cases is active backbone using CopperEdge ICs, which our cable partners will demonstrate at OFC. Finally, we co-authored the ACC-MSA, helping establish ACC technology as a leading solution for low-power and high-performance copper links. Members of the MSA span IC, XPU and cable suppliers, all in partnership with major hyperscalers. We believe the ACC-MSA accelerates the adoption curve for the entire industry. By establishing common specifications, we reduce fragmentation, lower deployment risk for hyperscalers and make it easier for the ecosystem to develop around ACC as a standard, not just a proprietary solution that is good for customers, it's good for Semtech. We look forward to seeing many of you at OFC starting tomorrow. This year, we are showing live demos across several of our key product areas. They tell a clear story about where Semtech is positioned in the data center interconnect market. Starting with copper, we are demonstrating 1.6T ACCs running live traffic to NVIDIA's 224G SerDes. We are also showing next generation 448G per channel CopperEdge chips. As AI clusters scale, the demand for low-power and low latency copper interconnects continues to grow, and we think we are very well positioned to lead the market. On the optical side, we'll be demonstrating NVIDIA's 1.6T DR8 transceivers powered by Semtech's TIAs and laser drivers running NVIDIA switch platform. We'll also be demonstrating 100T Ethernet switch running live traffic over both single-mode and multimode fibers supporting FRO, LRO and LPO configurations across the Broadcom Tomahawk 6 platform, all built on Semtech silicon. We are thrilled to demonstrate the breadth of our optical portfolio across a multi-vendor ecosystem. We'll also be demonstrating our next generation 448G per channel modulator drivers and TIAs, addressing increasing bandwidth demand to support future generation AI workloads. We're also showcasing our indium phosphide CW Laser and Gain Chip technology for tunable laser applications with outstanding power efficiency over temperature performance and a far-field beam profile, products from our HieFo acquisition. Across copper and optical and both near term and next generation, OFC gives us a tremendous opportunity to show Semtech's position across the full hyperscale interconnect stack. We believe we are positioned for multi-year growth opportunities supported by our expanded portfolio. We expect to start shipping CopperEdge for the 1.6T ACC hyperscaler deployment this quarter with demand accelerating throughout the year. We also expect FiberEdge design wins for 1.6T transceivers with a significant ramp in the second half of the year. Additional revenue growth drivers in the near future are expected from additional design wins for ACC and other hyperscalers, linear equalizers onboard across multiple customers, Gain Chips and CW lasers in transceivers and our market-leading 400G FiberEdge and CopperEdge products for 3.2T interconnect solutions. Given the breadth of our data center portfolio and design-in traction across an expanding set of customers, we expect data center year-over-year revenue growth this fiscal year to exceed 50%. Now moving to our high-end consumer end market. Net sales for Q4 were $36.6 million, down 13% sequentially and up 3% year-over-year. Net sales for fiscal year 2026 were $155.1 million, up 5% year-over-year, driven by both our TVS and PerSe product portfolios. Our consumer TVS revenue continues to ramp well ahead of handset volume growth, and we expect another year of revenue and design win momentum. We expect consumer TVS revenues to increase next quarter, a function of improved seasonality and share gains at the leading handset manufacturers. In addition, PerSe continues to broaden its design win footprint with adoption expanding across smart glasses and smartphone platforms in supporting both current and upcoming product launches. The integration of the force sensing portfolio is progressing well with the initial product shipments already underway. Customer engagement and design win activities continue to build, and we are increasingly optimistic about the cross-selling opportunities this combination unlocks across our combined customer base. Moving to our industrial end market. Q4 industrial net sales were $151 million, up 3% sequentially and year-over-year. With another solid quarter for LoRa, for the full year, industrial revenue was $584 million, 13% growth over the prior year. LoRa-enabled net sales were $39.6 million, in line with Q3 and up 7% year-over-year, supported by continued expansion across several application verticals such as smart utilities, smart building, smart city and asset management. For the full year, LoRa revenues were $156 million, representing full year growth of 34%. We had a strong presence at CES this year, showcasing new LoRa application use cases. Four themes highlighted in our presence, Edge AI integration, multiprotocol connectivity, global network expansion and the convergence of industrial and consumer IoT, together reflecting a technology that is broadening its reach across a growing range of markets. Edge AI emerged as another defining trend as sensors increasingly process data locally for latency, privacy and bandwidth reasons, our collaboration with an ecosystem partner demonstrated how LoRaWAN and Edge AI work together to enable predictive maintenance in industrial environment. Demand for our solution that combines LoRa with multiple protocol flexibility is accelerating. In order to facilitate LoRa Plus adoption, we recently signed an agreement with a technology partner to support software development to activate and support other's protocols. We are rolling out the Z-Wave first with a Zigbee and a thread and matter to follow. We expect beta units will be available to deployment partners in Q2 of this year as multiple protocol smart home and security solutions. The markets move towards a single SKU solutions is exactly what LoRa Plus is designed to address, reducing complexity for customers while expanding our addressable market. Customers who purchase our LoRa Plus transceivers now get royalty-free access to an SDK and development tools, silicon and software together from a single source. Additionally, Amazon and Ring announced a new line of LoRa-powered sensors spanning security, safety and home control applications, all operating on Amazon Sidewalk. Ring plans to launch this product in the U.S. in March, followed by expansion across Canada, Mexico, Europe, Australia and Japan. This demonstrates LoRa's readiness for mass market consumer adoption at Amazon's scale, a significant evolution from its industrial and commercial roots. The ecosystem continues to scale, now spanning over 125 million LoRaWAN connected devices across 70 countries, well beyond early adoption and into mainstream deployment. With LoRa technology, we now have established 3 pillars of low-power connectivity platforms, LoRaWAN, LoRa Plus with multiple protocols and Amazon Sidewalk. With these growth vectors, we believe LoRa's long-term growth rate to be approximately 20% and quarterly sales to range from $35 million to $45. Our IoT Systems and Connectivity business recorded Q4 net sales of $89.9 million, up 2% sequentially and down 3% year-over-year. For fiscal 2026, revenues were $354 million, up 9% compared to last year. We continue to bring products to market that address gaps in how industrial customers connect remote infrastructure. In Q4, we launched the AirLink RX400 and EX400, the industry's first rugged 5G RedCap routers purposely built for mission-critical industrial deployments. These routers deliver 5G performance with less than 1 watt of the idle power, roughly 1/10 of the draw of standard 5G equipment, making solar and battery-backed deployment practical for the first time. This allows our utility, oil and gas and transportation customers to operate in remote locations where grid power is not always available. Customer engagement at the distribute pack in February reinforced our conviction that this product is well timed to address a real market need. Looking back on fiscal 2026, I'm proud of what the team has accomplished. We delivered strong revenue and earnings growth through disciplined execution, a differentiated portfolio and a relentless focus on the customers and the markets where Semtech can win. This was not just a strong year financially. It was a year in which we fundamentally strengthened Semtech's foundation. Looking at where we stand today, I'm more confident than ever in our positioning. The AI data center build-out is one of the most significant infrastructure investment in a generation, and we believe Semtech is well positioned with a broad purpose-built portfolio of solutions designed for 1.6T and 3.2T era. We believe our continued investment in our core assets through R&D and acquisitions helps ensure we are not just keeping pace with the next-generation technology. We are helping to define it. And importantly, we now have the financial flexibility to diligently evaluate and pursue the strategic investments that will accelerate our growth. We enter fiscal 2027 with momentum with clarity of purpose and with a stronger Semtech than we have had in years. I want to thank our employees, our customers and our shareholders for their continued confidence in us. We're just getting started and the opportunities ahead has never been more compelling. Our key focuses for 2027 fiscal year include, one, accelerating business growth by supporting customer ramps with sufficient availability and strong operational metrics as we compete in a capacity-constrained environment. Two, intensify R&D investment to add new growth drivers and solution differentiation by maintaining diligent governance of R&D investment with a goal of driving customer wins and delivering strong financial returns. Three, transforming Semtech by strengthening our winning culture and making major progress in portfolio optimization. With that, I will now turn the call to Mark for additional details on our financial results and our outlook for the first quarter of fiscal '27. Mark?

Thank you, Hong. For Q4, we recorded our eighth consecutive quarter of net sales growth with record net sales of $274.4 million, above the midpoint of our outlook and up 9% year-over-year. For the fiscal year, net sales were $1.05 billion, up 15% year-over-year. Net sales trends by end market, reportable segment and geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 51.6%, above the midpoint of our outlook. Total semiconductor products' gross margin was 61.7%, up 40 basis points sequentially and up 350 basis points year-over-year. Total semiconductor products' gross margin was above the high end of our outlook range, the result of favorable mix from our LoRa and data center portfolio. We expect gross margin contributions from new data center products from our copper and optical 1.6T portfolio ramping in the second half of this year will be accretive to both our semiconductor products and Signal Integrity Products gross margin. IoT Systems and Connectivity gross margin was reflective of mix related to net sales growth in cellular modules with Q4 at 31.6%. Adjusted net operating expenses were $91.5 million, slightly above the midpoint of our guidance range. Adjusted operating income was $50.0 million. Adjusted operating margin was 18.2%, adjusted EBITDA was $57.4 million and adjusted EBITDA margin was 20.9%, with all of these metrics above the midpoint of our guidance range. Reflective of capital structure changes, Semtech was in a net interest income position in Q4 at $0.1 million, which reflects a sizable change from the $11.2 million of net interest expense reported a year ago. For fiscal year 2026, adjusted net interest expense was $11.5 million compared to $70.6 million in fiscal year 2025. We recorded adjusted diluted earnings per share of $0.44, above the midpoint of our guidance and full year adjusted diluted earnings per share was $1.71. Operating cash flow for Q4 was $61.5 million, sequentially up 30% from $47.5 million and up 84% from $33.5 million a year ago. Free cash flow for Q4 was $59.1 million, sequentially up 32% from $44.6 million and up 91% from $30.9 million a year ago. Operating cash flow and free cash flow for the stand-alone fourth quarter each exceeded the amounts reported for all of fiscal year 2025, driven by improvements in both our capital structure and operating performance. Strong cash flow generation has allowed us the operational flexibility to invest in R&D projects as well as to invest strategically via tuck-ins. The increased R&D investment in our core data center, LoRa and sensing portfolio has yielded strong returns. The aggregate consideration for the force sensing portfolio we acquired in October 2025 and the Laser and Gain Chip business we acquired in March 2026 is less than the free cash flow we generated from Q4. I believe our balancing of R&D spending, along with prudent use of capital for capacity expansion and acquisitions positions us to generate meaningful long-term returns for our shareholders. We ended Q4 with a cash and cash equivalents balance of $195.2 million and debt was $503 million, unchanged from last quarter. Our adjusted net leverage ratio was 1.3 as of the close of Q4, down sequentially from 1.5 and down year-over-year from 2.3. Now turning to our outlook for the first quarter of fiscal year 2027. We currently expect net sales of $283 million, plus or minus $5 million, up 13% year-over-year at the midpoint. We expect net sales from our infrastructure end market to increase sequentially, supported by projected sequential data center growth of 12%, including initial copper-edge production shipments supporting a hyperscaler at the tail end of the quarter. We expect net sales from our high-end consumer end market to increase about 9% sequentially or about 13% year-over-year, benefiting from improved seasonal trends, market share gain in our TVS products and contributions from the force sensing portfolio we acquired in the fourth quarter. We expect net sales from our industrial end market to be about flat with LoRa increases offsetting decreases in IoT systems and connectivity. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 52.8%, plus or minus 50 basis points. Our gross margin outlook for our total semiconductor products is expected to be 60.4%, plus or minus 50 basis points, down 130 basis points sequentially and include initial ramp costs from the HieFo acquisition. Adjusted net operating expenses are expected to be $96.9 million, plus or minus $1 million, resulting in adjusted operating margin at the midpoint of 18.6%. Included in the higher first quarter adjusted operating expense outlook are R&D costs associated with the addition of the force sensing business, along with increased investment in support of our growing data center portfolio, including the HieFo acquisition. We have demonstrated strong returns on our R&D investment and expect incremental returns from these investments. Adjusted EBITDA is expected to be $59.5 million, plus or minus $3 million, resulting in adjusted EBITDA margin at the midpoint of 21%. We expect adjusted interest and other expense net to be approximately $0.5 million. We expect an adjusted normalized income tax rate of 17% for all of fiscal year 2027, an increase from 15% in fiscal year 2026 due to a geographical shift in pretax profits. These amounts are expected to result in adjusted diluted earnings per share of $0.45, plus or minus $0.03 based on a weighted average share count of 96.6 million shares.

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

[Operator Instructions] Our first question is from Sean O'Loughlin with TD Cowen.

Congrats on the solid results and continuing to execute on your strategy. I wanted to ask a question on the HieFo acquisition. I think the strategic rationale you laid out is pretty straightforward. But wondering if you could expand on the initial applications you're targeting. It sounds like mostly transceiver side. And then maybe more importantly, where are you for the indium phosphide-based products in the qualification or design cycles at some of your customers? And what should be our expectations for when some of that starts to fold into the model in a material way?

Yes. Thank you, Sean, for the question. So the HieFo initial product right now in production is the Gain Chip using tunable lasers. Those are the high-end lasers to support the transmission over 80 kilometers, 40 kilometers for metro and data center interconnect applications by leveraging about 4 decades of laser design experience, and they have been the leading supplier for Gain Chips for ITLA. This is a product already in volume production and demand is increasing. And right now, it's capacity limited. So this product for 2027 probably will be contributing roughly about a high-teen level of revenue. But we are adding capacity as we speak in the second week as a proud owner of this asset. We have also demonstrated, we'll showcase tomorrow at OFC, the intensity modulated direct drive lasers, our CW lasers used in optical transceivers. Those lasers are really well designed to support high conversion efficiency, for example, wall plug efficiency at the room temperature at 42%. That is much higher than a typical about 25%. Then our temperature performance is outstanding, and the far-field beam profile is outstanding. So that makes it much easier to couple into single-mode fiber our silicon photonics waveguide. And we do not have enough capacity right now to support the industry demand. After the announcement, you can just imagine, we got multiple customers reaching in and asking for samples. So we will be able to provide samples to the key customers to support the evaluation while we are building capacity to support the future growth. As for putting in the model, probably once we have a better understanding on the equipment lead time and the capacity in the future periods, we will provide more guidance on the revenue contribution from laser -- CW lasers. Right now, we are planning to intercept at 3.2T transceivers. Of course, it can support 1.6T transceiver as well.

Great. And I appreciate all the color there. If I could just ask a real quick follow-up maybe for Mark on that topic. How should we be thinking about the CapEx line as you talk about those capacity expansions at Alhambra. And I guess maybe Hong alluded to the answer to this question in his previous comment about understanding equipment lead times, but how -- everybody in the indium phosphide industry seems to be ramping capacity? And are you guys -- I guess, for lack of a better term, at the back of the line there?

Yes. So the CapEx intensity is moderate. And the fab already have the key capabilities. Right now, we just need to selectively add in capacity in some areas. So the -- I know the whole industry is ramping up and equipment in test equipment, fab equipment in high demand as well. But we will be very creative in combined with the new and used market and to look at the fab and test equipment. The intensity, I would say, of the CapEx can be easily supported with, say, for example, 1 quarter of the free cash flow as we have demonstrated in the past quarter.

Yes, Sean, the ramp is over multiple quarters, but I think Semtech's world-class operations team is on it. We had the planning during diligence. And the other good news is all of this CapEx, I believe, qualifies for Section 48 Investment Tax Credit, 35% and then there's some additional government grant programs that are available, especially to strengthen U.S. semiconductor manufacturing capacity.

Our next question is from Tore Svanberg with Stifel.

Congrats on the results. So my first question is on CopperEdge. So as that business now starts to ramp in fiscal '27, can you give us any sense for how big that could be, maybe tens of millions of dollars? And if you can't give us the size, perhaps you could at least give us the mix between actual ACC cables versus linear equalizers.

Yes. So Tore, thank you for the question. So we are supporting the ramp. We're getting forecast and we're getting the materials ready as we gave the guidance in our prepared remarks, towards the end of this fiscal year -- well, this fiscal quarter, in April time frame, we'll start shipping to the cable manufacturers who are our direct customers to support the rack level volume ramp in the mid of the year. So everything is on schedule. As for the mix between DAC and ACC, it's still -- they are in the process right now doing the rack level testing system validation. So we will be getting a better idea probably by in a month or 2 on the support. But we are getting the long-range forecast so that we can get the wafer starts in the fab and prepare the material readiness. As I indicated, that's a very key focus for our operations. So at this point, it's still too early to tell. But as for linear equalizer onboard, there are multiple customers supporting our activities and I do believe that some of those based on the level of engagement, it will be getting qualified within the coming quarters. So just on the linear equalizer, the ACC side, the MSA establishment with 11 -- 12 founding members are tasked and at work already start drafting the specifications. This is still the early stage of the ACC and some customers experiencing the -- different customers experiencing different performance. It is very important to have this MSA and to drive the specification and educate the industry that what to expect with a certain level of reach and gauge and data rate. So with the common understanding of MSA, I do believe this technology is going to be proliferate much faster. So we have already seen some other hyperscalers lining up to getting their rack designed by using ACC.

Yes, that's very helpful. And as my follow-up and maybe more of a clarification question. So you talked about LoRa growing 20% longer term. But then you talked about a $35 million to $45 million quarterly run rate. You just did $40 million. So what exactly is that $35 million, $45 million range? I mean, are you expecting some volatility this year? Or -- yes, if you could just clarify what you meant by that.

Yes. Thank you, Tore. So historically, we have been seeing the overall trend of LoRa revenue has been increasing. But quarter-to-quarter, it's a little bit bumpy due to the project-based deployment of demand. That's why we give a range of plus/minus $5 million. But you see that sliding scales continue to go up with the center point. So I feel like I have never been this excited about our LoRa strategy. It's really with dual band to increase the bandwidth to address edge AI applications with LoRa Plus to really get multiple applications in one SKU with the software and hardware all supported by us. And with Amazon, the Sidewalk and the mass market. So adding the value-added market with the mass market, really, we got multiple growth drivers. So I think that's why you're giving us conviction that 20% growth rate is very doable. When we can help the ecosystem to adopt the LoRa Plus protocol faster, we expect the growth rate to accelerate.

Our next question is from Christopher Rolland with Susquehanna.

I guess my first one is on the indium phosphide laser acquisition. I guess, first, a clarification. This is all going to be internally manufactured materials. Just wanted to clarify that. And secondly, if you could talk about maybe your go-to-market strategy here and maybe even some revenue synergies with some of your other parts. Are you going to kind of bundle this with FiberEdge? What -- are you going to perhaps go direct to hyperscalers? How are you going to approach this market?

Yes. Thank you, Chris. That's very good questions. To answer your first question, yes, the fab we acquired is vertically integrated, namely, we do the epi growth of epi wafers. We process wafers, we test it internally. And we do use the ecosystem on back-end packaging to increase the capacity. So that part, we are doing really well. These lasers because of the amount involved in regrowth process. So we do it internally, that's how we are able to get the superior performance in conversion efficiency and over temperature performance. As for your second question, go-to-market strategy, you are absolutely right. We know that 100G per lane in transition to 200G per lane, they already put so much stress into the ecosystem. So we're really challenging the device designers with the performance margin. And when we evolve the data rate to 400G per lane, there's really not a whole a lot of margin to give out. So the co-development and co-optimize is so key in order to get the best electronic component with the best optoelectronic component. So now we own 2 sides of the equation. So we'll be able to mix and match to provide the best integrated solution. And when we have that, we will provide the chipsets with the reference design to our customer base. This way we'll help to accelerate the time to market for them. And in return, we make our components more sticky, right? So you use this kind of electronic component like a TIA, a laser driver, modulator driver using our optical components, you will pretty much get a guarantee to work to deliver 400G performance. That's why we're saying we anticipate the major cutting point of 3.2T transceiver modules. It could be earlier than that.

That's great. That's a fantastic strategy. One question I get from investors is around the eventuality of CPO, particularly for scale-up. Jensen here at GTC was talking a little bit about the coexistence of both copper and optical in the rack. But some pushback I get from investors is around the role of copper, the closer that optical moves to the ASIC. Obviously, you're expanding your market with lasers here into the CPO world. But perhaps you could also address that kind of pushback on copper, where you see copper playing a role, not only in the next 2 years, but all the way through 2030, for example, even as you move CPO to the ASIC.

Great. Thank you, Chris. I listened to Jensen's call as well. So basically, what I was trying to say over the last year, but he clarified it so well. So copper scale up is always going to be there. And CPO scale up is only more -- making more sense in the multi-rack systems. For example, he was talking about Ultra NVL576 across 8 racks. That way, because you're using active copper cable, it's very hard to get 8 racks all point-to-point interconnected. So you use the first opportunity, the signal out of the XPU to convert into optical. Optical not only be able to interconnect within rack and -- but can also interconnect between racks. The same thing for the Kyber platform, he was talking about NVL1152. That's also an 8-rack system on the NVL144. And that -- the CPO scale-up makes sense. So in general, I think the copper scale up is going to be the mainstream, is going to be primarily used for within the rack. The CPO scale up is going to be used in multiple racks. So don't put a terminal value on the copper yet. And the industry also are formulating an NPO near package optics as a complement to CPO. So this way, CPO is one company thing, right? But NPO can define a specification to have specific geometry lay the I/O pinout and keep out zone to leverage the entire ecosystem's innovation to make it more scalable, more affordable. So in the CPO, we may not have much content in there, except for lasers. But in NPO, we will be all over the place with the laser drivers and TIAs and lasers and even silicon photonics modulator, as I mentioned, that is a very natural expansion of our portfolio by internal development.

Our next question is from Tristan Gerra with Robert W. Baird.

You've talked about the rising interest from hyperscalers about LPOs. Could you talk about the recent Arista XPO announcement and what it does to the LPO ecosystem? And any way to quantify what the ramp is going to look like medium term and when you expect the big inflection point in LPO revenue?

Great. Thank you, Tristan. So XPO, Arista just released that MSA. We are a very active member of the MSA. XPO defined high-density, low power and provide high reliability MSA for front panel switch, for example. to keep the same radix, but they will be able to collapse the form factor from essentially 4 RU into 1 without giving out any capacity. So it basically removes the packaging overhead because of liquid cooling is available, they can develop the cold plate so that get in between the optical transceivers. And that is just great and really that builds upon the confidence on LPO and build upon the innovation from the entire ecosystem with multiple module manufacturers. NPO, on the other hand, is a little bit more involved because that's involved the development of common specification on, say, geometry, keep out zone, the I/Os and the shoreline configurations. So essentially, NPO is in a way, XPO on board. XPO is this high-density package on the front panel of the box. In both configurations, we're going to be having a lot of content in there. Again, the lasers and the modulator drivers, the modulator itself and TIAs. And so we welcome this type of MSA. It's really going into our direction.

Okay. That's great color. And then for my follow-up, you've mentioned in the past some ACC opportunities on board. Could you provide maybe a little bit more feedback on what that is? What exactly is the use case for that and how meaningful that could get over time?

Yes. The CopperEdge linear equalizer onboard, our customers are defining 5, 6 different use cases in all to utilize the re-drive capability to extend the link and improve the link budget. So it can be on the switch, can be on the merchant GPU board, can be on the ASIC board of hyperscalers. It can also be on the backplane, in the active backplane by our cable partners.

Our next question is from Quinn Bolton with Needham & Company.

This is Robert on for Quinn here. Congrats on the quarter. Just one on -- you've been doing -- you've been active in doing acquisitions and have expressed intent to increase R&D with some of your capital up into this point. But any updates on potential divestitures? Last we heard, I think, ongoing and roughly in the third or fourth inning. So any update on that process would be great.

Yes, Robert, thanks for calling in. I'm not really good at sports analogies, but I think that we're making good progress. I'm optimistic in a good conclusion. At this point, I'd say that maybe incremental from last quarter, the interested parties are spending some dollars on external consultants, so financial due diligence and on legal costs. So we're at that stage. And when there's additional kind of skin in the game, I think that does point towards a successful conclusion with the cellular module divestiture in the near term.

And just as a follow-up, it sounds like there are many tailwinds coming across for LPO as well as copper. And I think last week, we kind of heard them ramping kind of in a similar time frame this year. Can you just refresh that for us as it sounds like ACCs could be ramping a little earlier now? And then which do you see as the larger revenue opportunity over kind of the coming 12 months?

Yes, Robert, so we gave the time line ACC ramp. It's on time, on schedule. And then the 1.6T FiberEdge product. And then beyond that, as I said, could be leading the ACC with other hyperscalers, linear equalizer onboard and lasers and 400G. So we like them all. And at this point, it is too early to call which one is a bigger opportunity, but we like them all and are going to be contributing pretty significant ways.

Our next question is from Joe Moore with Morgan Stanley.

You talked about 1.6T starting to grow in your TIA business and other places. Can you talk about the line of sight that you have to 800G still growing? I assume it's still growing for now and you're layering in the higher speeds on top of it. How long will that persist? And what point does it start transitioning over more?

That's right. So Joe, we did mention in the prepared remarks, the 800G is a foundation. The growth is strong, demand is strong and broad-based. So that's the given that goes very strong, at least throughout FY '27. And as for the industry rolling out new XPUs and then all the I/Os goes to 200G, so they're going to be evolving into 1.6T and in a low-power 1.6T optics, we are actually very well positioned, even better than 800G.

Our next question is from Craig Ellis with B. Riley Securities.

Congratulations on both the execution and a really strategic-looking acquisition. Hong, I think near the end of your prepared remarks, you commented that you thought data center year-on-year revenue this year could be up around 50%. One, just confirming that I heard that right. And two, can you help us understand what the biggest growth drivers are or rank the growth drivers that you see driving that degree of growth?

Yes. Thank you, Craig. Yes, you heard it right. Year-over-year, we expect the data center revenue to grow 50% this year. So the driver is ACC with hyperscaler, 1.6T FiberEdge second half of the year, and then there might be even linear equalizer on board contributing to the growth.

That's helpful. And then, Mark, congratulations on the strength and you too Hong on the strength in semi's gross margin and what we're seeing in Signal Integrity. It's really nice to see those mid-high 60s levels retained. The comments on accretive second half products, are we signaling that gross margin for the segment could start with a 7 handle later this year or next year? Or would you still expect to be in the 60s?

So the new products that we introduced do have accretive gross margins. So I'm very pleased with that. It's a great return on the R&D that we put into the products, and they do contribute to growing gross margin. But we still also have other products, so -- at 800G, right? So I'm not expecting it to be in the 7s, but firmly in the ZIP code.

Yes. Well, congratulations on where it is.

Our next question is from Cody Acree with The Benchmark Company.

Maybe just following up on Craig's question. You didn't mention LPOs among the drivers of that 50% data center growth. Any reason for leading that out? And maybe can you just talk about the breadth of expansion of your engagements with ACC and LPOs over the last few months and how you expect that to -- those to progress over the course of the year?

Thank you, Cody. So yes, the LPO continue to grow. And as we said, the Q4, we delivered just as we gave the guidance, mid-single digit and signaled the first ramp and it continue to ramp on the LPO, but we got them in the FiberEdge product category, so included in there. The LPO adoption is proliferating, and that's also build the confidence for this XPO and NPO strategy. Then ACC is also getting more and more accepted by the industry. I mentioned that the hyperscaler -- one hyperscaler start ramping midyear and then more hyperscalers are embracing this ACC as well. Linear equalizer with multiple customers, the engagement has been going really strong. So I do believe that we not only have growth drivers lined up for this year and have multiple growth drivers lined up for future periods beyond FY '27.

Great. Mark, any thoughts on your OpEx trends for the year?

Yes. So I'm pleased that we're able to have the flexibility to invest in the business. Our outlook for next quarter in OpEx growth is really R&D. So I believe we demonstrated strong returns on investment. And our investment in R&D certainly yields stronger returns than interest expense, for example. But we do remain disciplined in our R&D investments, focusing on our core data center portfolio on LoRa and PerSe. And the 2 recent acquisitions do add some incremental R&D, but these are in our core portfolios.

Our last question is from Scott Searle with ROTH Capital Partners.

Just real quick on LoRa. Wondering if you could provide a little bit more color in the past. China was such a big percentage of the mix. I'm wondering how it was in the quarter and the pipeline of opportunities there where you continue to diversify away from the Chinese marketplace. And as part of that, Sidewalk has cropped up from time to time as being a large opportunity. It's been, I think, slow to date. I'm wondering if you could calibrate when we might start to see that contributing in a more meaningful fashion. And as a follow-up, just on the protection and sensing side, I think you indicated that there was a large win that kicks in the first quarter. I wondered if you could just clarify that and provide any additional color.

Okay. LoRa, right now, the growth is broad-based across multiple regions. China certainly is a good driver. And in Europe and in North America, the growth is equally strong. It's all benefited from multiple growth drivers out there. So Sidewalk, certainly, it had a little bit of a false start several years ago. And -- but at OFC -- not OFC, CES in January, they had over 10 product demos, all embedded with LoRa chips inside. So they're going to be start deployed in March in North America, had a clear plan to proliferating into other countries. So we'll see this time, but that can be a pretty significant opportunity for Semtech. So I will let Mark address the TVS question.

Yes. So TVS, we're seeing growth above, let's say, a proxy of handset volumes, unit volumes. So we have a number of good design wins in TVS. And also, there's a little bit of a geopolitical tailwind that we believe is sustainable over a number of quarters. That's leading to our better-than-seasonal guide for Q1.

Thank you. I would now like to hand the call back over to Mitch Haws for any closing remarks.

That concludes today's call. Thanks to all of you for joining us today. We look forward to seeing you at various investor events over the coming weeks and at OFC starting tomorrow. Thank you.

We thank you again for your participation. You may now disconnect your lines.