Semtech Corp

NASDAQ:SMTC

Earnings Call Analysis

Solid Financial Performance and Positive Outlook

In the second quarter, the company recorded net sales of $215.4 million, a 4% sequential increase. The gross margin improved to 50.4%, and operating expenses were reduced by 9% year-over-year. This resulted in an operating margin increase to 14.2% and net earnings per share of $0.11. For the third quarter, net sales are expected to rise to approximately $233 million, with a gross margin around 52% and operating margin at 17.2%. Adjusted EBITDA is projected to be about $40.7 million, anticipating a strong sequential increase. The company also aims to reduce debt and enhance revenue growth through strategic investments.

A Promising Quarter with Revenue Growth

In the second quarter, Semtech Corporation reported net sales of $215.4 million, a 4% increase sequentially. This upward trend demonstrates a healthy demand across various market segments. Notably, the Infrastructure segment, which includes vital products for data centers, reported notable growth with sales jumping 28% sequentially and 37% year-over-year. This robust demand reflects a strategic positioning to capitalize on the ongoing needs within data centers, attributed to heightened data traffic and innovations in AI.

Improving Margins and Operating Efficiency

The company's gross margin sustained a positive trajectory, reaching 50.4%, an increase of 60 basis points quarter-over-quarter and 80 basis points year-over-year. This improvement can be credited to better product mix and effective cost management, underlining the company's operational efficiency. Operating income also saw a healthy uplift, amounting to $30.5 million, leading to an operating margin of 14.2%, which is an improvement of 200 basis points sequentially. Overall, the focus on cost control and optimizing operations is paying off, enhancing profitability.

Cash Flow and Balance Sheet Position

Despite an $8.4 million use of cash in free cash flow due to fluctuations in working capital, Semtech maintains a solid cash balance of $115.9 million. The management indicated that the principal outstanding debt is $1.2 billion, a significant factor the company is focused on reducing through strategic asset sales. This highlights a commitment to strengthening the balance sheet while continuing to make prudent investments in growth areas.

Positive Outlook with Strong Guidance for Q3

For the third quarter, Semtech expects net sales to be approximately $233 million, with a guidance range of plus or minus $5 million. This is indicative of a sequential growth plan, particularly driven by increased sales in infrastructure and consumer markets. The company anticipates gross margins to hit approximately 52%, which marks a 160-basis point increase from the previous quarter. Operating expenses are forecasted to rise slightly to $81 million, translating to an operating margin of about 17.2%, with an expectation for continued margin improvement.

Emergence of New Market Opportunities

A significant point of interest is Semtech's active development in the Active Copper Cable (ACC) segment. The total addressable market for ACC is projected to be greater than previously anticipated, exceeding $100 million. Semtech's engagement with multiple customers in the AI connectivity space highlights a strategic shift that positions the company well to meet expanding market demands. Initial shipments are planned for Q3, with expectations for a broader ramp in sales and production in fiscal year 2026.

Growth in Specific Market Segments

In the LoRa segment, which is crucial for industrial IoT applications, Semtech reported sales of $28.7 million, reflecting a robust increase of 34% sequentially and 72% year-over-year. This growth underscores the increasing adoption of LoRa technology in various sectors, including automotive and smart utilities, further validating Semtech's innovative edge and customer engagement strategies.

A Strategic Focus for Future Growth

Looking ahead, Semtech's strategic focus on enhancing its product portfolio and meeting customer requirements places it in an advantageous position. The commitment to improve balance sheet health through asset sales while simultaneously investing in high-growth areas speaks to a disciplined capital allocation approach. As the demand for low-latency, low-power solutions grows, Semtech’s ability to innovate and engage directly with customers will guide its competitive positioning in the semiconductor market.

Earnings Call Transcript 2025-Q2

[Operator]

Greetings, and welcome to the Semtech Corporation's Second Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions] 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.

[Mark Lin, executive]

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 items 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 recording 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.

[Hong Hou, executive]

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 and Semtech's global locations and taking 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, did not miss a bit in execution and serving the needs of our customers during the leadership transition.

And I also like to share with you a few of my initial operations 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 stabilize our financial foundation. There's still more to do, of course, but this 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 the analog and mixed signal design, LoRa ILT WAN and a superb reputation in mission-critical cellular systems and outstanding R&D efforts helped by Mike Wilson, our Chief Technology Officer with an almost 30 years tenure at this 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 methods 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 a semiconductor industry and almost 15 years tenure in the company and his team.

Fourth, our customers value our core technologies and asking for our partnership in driving collaborative innovations. They believe our innovative solutions can enable them to win and grow their business.

Building on this great foundational element, 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 and 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 occurred, however, we will continue to invest in the business, both to enhance value and to fully support our customers. To maximize the potential transaction values, I will respectfully limit further public comments on the topic. For instance, what assets and the 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 product, technology and services.

Through disciplined investment, innovation and efficiency we will 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 gains and margin expenses.

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 the sequential revenue results across each of our business units and the favorable outlook for our third quarter that forecast 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 our FiberEdge Transimpedance Amplifier or TIA and Laser Drivers for 400-gig and 800-gig active optical modules and Tri-Edge at 50 gig PAM4 product in 200-gig and 400-gig active optical cables.

We have noted the 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 data center ecosystem since joining as CEO confirms my belief that states, [indiscernible] of bids within data center has by far the greatest power optimization opportunities. Lower power consumption and latency reduction for transport are key considerations for AI computing.

Delivering on this transport opportunities will allow a greater allocation of power to compute and memory and the Semtech team has every intention on delivering our low-power, low latency solutions through embedded customer engagement and our depth of analog expertise.

Semtech's top edge continues time linear equalizers have a well-documented application, where we partnered with NVIDIA to implement low-power, low-latency active cart cables on ACC for Blackwell rec and Pat.

For our 200G copper at linear re-drivers, we have received the purchase orders from ACC cable manufacturers and expect shipments to start in our fiscal third quarter in limited quantities, a nominal ramp in the fourth quarter and acceleration in the next fiscal year.

Qualifications are on schedule, and we currently estimate our annual opportunities specific to the single platform exceeds the floor case we provided last quarter. That said, Semtech's ACC opportunities extend beyond the single platform and a single customer.

We estimate data centers currently deploy tens of millions of direct top copper cables or deck cables per year. This deck cables are passive. And at data rates and cable lens increase, we expect there will be a natural progression from deck cable to ACC to meet signal integrity requirements.

The market is moving towards us and a replacement of only a small fraction of deck 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 standard bodies in MSAs have their place in this market to promote interoperability and backwards compatibility, the time to develop and approve those standards in inevitably extend 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 a direct engagement will accelerate Semtech's time 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 leverage situation as well as in the highly cost-conscious EMS environment well informed my disease-making process in prioritizing disciplined investments.

My expectation in these investments 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 shipments by the latter portion of FY '26.

Similar to active copper cables, LPO represents an opportunity to deploy a 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 represent a substantial SAM expansion to Semtech.

A world-class TIA is the key to successful LPO deployment and uncertain Semtech's TIA fits the requirement. I have firsthand knowledge having selected Semtech as my first choice TIA supplier to support silicon photonics product 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 patients where LRO is suited to meet customers' interoperability requirements.

Moving to PON. Net sales were $20.4 million, within expectation following a robust first quarter and up 49% year-over-year. PON demand, especially the 10 gig remains strong with the total consumption increased 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 remained within expectations.

In wireless, we're continuing in qualification process with our Tri-Edge and FiberEdge wireless platforms for 5G advanced and are actively engaging with key partners like Ericsson and Nokia, which then ready when this market rebounds. There are few other small sequential net sales declines resulting in a 5% sequential decline but the data center and Signal Integrity segment 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 up 42% year-over-year. Our market share in consumer TVS grew at a double-digit rate compared to last year, and we believe we are winning on technological and operational performance. I'm very pleased this 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 search 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 company, but in other North American and Korean companies as well. Indeed, our consumer TVS engagement in Korea reasonably result in design wins in the industrial and automotive space where this key customer is winning shares. This is a great example of how our direct customer engagement approach is solving customers' problems across a number of their markets and result in increased 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 class-leading 3D sensing and auto-feed sensitivity is meeting or exceeding end customer requirements for gesture control features in variables, 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 prior year.

LoRa consumption in industrial applications continue to grow, and I'm pleased that the momentum over a broad range of applications from health care, smart utilities and smart city to factory automation with the recent deployment in automotive facilities.

On LoRaWAN on expert from Mercedes Benz presented his company's success story at LoRaWAN live event in June. Their implementation resulted in what they characterized as enormous cost savings. It gives me great pleasure when the end customer becomes a LoRa advocate and demonstrate use cases at Mercedes are just one reason as to why I'm excited in LoRa's future and why Semtech is fully committed to LoRa and its continued innovation and ecosystem expansion.

I plan to attend to the SINS conference in Amsterdam in late September to meet with the ecosystem leaders and strategize our path to democratize the LoRa standard and accelerate proliferation.

Our IoT systems business recorded a second quarter net sales of $52.3 million, up 8% sequentially and consistent with our analysis that the business has reached the bedrock last quarter. Bookings in the first quarter had a healthy sequential growth and second quarter bookings grew from there.

Also, channels and customer inventory levels has overall reached the normalized levels. In our module business, we had a number of red cap design wins, demonstrating continued trust in Semtech's product across a number of core network equipment customers that demand near perfect uptime and performance.

Geopolitical consideration remains a tailwind for this business on a number of fronts, and we are experiencing renewed engagement with some customers, we believe, due to these matters.

Our business in asset-tracking applications has benefited especially at the 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 a 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 with Semtech's cellular system solutions.

Lastly, we started production of our own TAA Qualified Facility to serve increased demand for TAA-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, sleep tracking and health care. 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 AirVantage service.

We believe this collaboration underscores the commitment to offer best-in-class network quality.

In industrial TVS, solutions are required to address increasingly harsh ESD environment 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.

[Mark Lin, executive]

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 control 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 the 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 $7.5 million or 5% sequentially, in part to support higher expected third quarter shipments and to carry a normal 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, reflected the 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 consumer market to be up with typical seasonality benefiting in 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 will 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 debt reduction and a tax rate of 15%. These amounts are expected to result in a net earnings per share at $0.23, plus or minus $0.03 based on a weighted average share count of 70.6 million shares.

Adjusted EBITDA is expected to be $40.7 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.

[Operator]

[Operator Instructions] Our first question is from Cody Acree with The Benchmark Company.

[Cody Grant Acree, analyst]

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 that was given by Paul before his departure, if you can maybe go through the elements of that TAM calculation, whether that's unit volume and ASP basis or just a total available addressable market would be great.

[Hong Hou, executive]

Cody, thank you very much. So, thank you for recognizing our position and role in this very exciting market opportunities. And as I mentioned in the prepared remarks that in the last quarter, we gave a floor case based on the number of recs and expected ASP share allocation for a specific use case from a specific customer.

Since then, we have expanded our engagement with our customers. And right now, we have several customers discussing with us on the ACC opportunities. And we are very excited about the total availability and total opportunity is above and beyond the floor case we guided. And we will see this ACC opportunities continue to expand.

As you know that there are a lot of deck cables today, passive copper cable in the data center and its installation base, it might be tens of millions. And, as the data rate goes higher as connection lens goes, extended, the 6 million integrity is going to be a challenge.

So, the progression from ACC or progression from that cable to ACC is going to be inevitable. So, very excited about the opportunities. And let's see, we will start seeing some revenue contribution from Q3 as we guided and then we'll be ramping from there.

[Operator]

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

[Quinn Bolton, analyst]

Let me offer my congratulations on a great quarter and a very strong outlook. I guess, Hong, I just wanted to follow up on Cody's question, just really to try to clarify that opportunity for the ACC TAM.

It sounds like you said you're 4Ks 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.

[Hong Hou, executive]

Sure. Quinn, thank you very much. Yes. Now, let me first clarify, the TAM I mentioned in the prepared remarks is with respect to the single platform, single customer situation. I feel that our actual opportunities is going to be higher than the floor case.

In addition to that, we're engaging with multiple customers in the similar AI connectivity ecosystem for the similar purpose of low-latency, low-power extended reach applications. And those opportunities are not accounted in what I would say, increased opportunity compared to the floor case.

[Quinn Bolton, analyst]

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 sort of 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?

[Hong Hou, executive]

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 shared the same characteristic as the ACC cables, low latency, low power consumption and when you need extended reach, you go through electrical to optical conversion transmit over fiber than the other end optical to electrical conversion.

That conversion only consume incremental amount of power. But the power consumption and latency are really similar to ACC. So, the LPO can be used to scale out a cluster. But in the meantime, when you need the Ethernet scale up, the LPL can be used to replace the DSP-based retimed transceivers as well.

And right now, as you know, that every year, the industry consumed about 25 million to 30 million units of optical transceivers is largely based on DSP retime solutions. If the LPO can chip away even a fraction of that market, the opportunity is going to be tremendous. So, that's why we're very excited about the LPO opportunities as well.

And, as I mentioned, we have been engaging very closely with the ecosystem partners and our TIA is commonly considered the best in the industry. We hope our next refinement in the near term of the 200 gigabit re-driver will provide the extended performance and the functionality that the industry needs. And I'm still very confident that in the latter part of FY '26 will be entered into the production with the limited quantities for LPO.

[Operator]

Our next question is from Tore Svanberg with Stifel.

[Tore Svanberg, analyst]

Welcome onboard 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. It was very strong in the quarter. It sounds like the momentum is there, 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?

[Hong Hou, executive]

Tore, thank you very much. Yes, that's a good question. I would say both and first of all, the industry demand is resuming after the depletion of the inventory in the channels.

As we reported, the PLS increases and the inventory in the channel decreases from the last quarter, and it's very natural that this market demand is bouncing back. The second reason of the [indiscernible], as I talked about in Mercedes Benz use case and our development partners are finding new use cases and because the unique capability of the lower one in, it can translate into tremendous savings and the functionality enhancement in the system design.

And I believe this is really our key for the revenues even beyond the current level, current pace. And that's why I'm very excited to attending the same conference in Amsterdam, and I got my days out lined up to meet with the executives of the ecosystem and to mobilize the entire systems, creating more use cases like the Mercedes Benz and utilizing the capability that lower one can offer.

So, that is a great opportunity for us, and it has been a good engine for our growth.

[Operator]

Our next question is from Christopher Rolland with Susquehanna.

[Christopher Rolland, analyst]

Welcome Hong. My question was also actually on LPO and you also mentioned LRO as well. So, I just wanted to know what the opportunity in LRO was, 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?

[Hong Hou, executive]

Yes, Chris, thank you very much, and that's a great question. So, the LPO certainly is analog on the transmitting side and on the receiving side. And there is some concerns in the industry, especially from the Cloud Service Providers or CSPs on LPO.

Their primary concern is that if the solution will be providing enough link budget for them to choose different silicones on the switch side and then choose different optical transceivers on the optical transport side.

And they have been benefiting from that optimality and multisource agreement over the last decades because they need a lot of transceivers when they deploy a new data center. They need a lot of switches. They don't want it to be just locked by one supplier.

So, that has been the primary concern. And they have all recognized that the LPOs provide low latency, low power consumption, and even lower cost, the higher value.

They have no denial on that but it's just not sure that the linked budget will allow them to exercise this option for multisource agreement. And when I talk to many key architects and some of them, they say, you know what, we are pretty sure that the receiving side, we can do that. But the transmitting side, in the worst case, we do DSP-based 3x solution on transmitting side.

That's still translated into tremendous power savings. That's LRO. For us, either way is a winning for us because when they do LRO or LPO, they tend to choose the best-in-class TIA product. I would say, at this point that Semtech product will benefit from both.

As for your second part of the question, is LPO is going to be representing an even bigger opportunity than ACC? I believe, yes, it's a good opportunity out there to replace, as I said, DSP, the re-timer is an opportunity.

But ACC, it can replace the deck cable. When the line read increased to 100 gigabit per second and connection distance exceeding 2 meters for 100 gig, that cable really cannot maintain the integrity needed. So, both products are great opportunities in this AI-based connectivity era and has many years of run rate

[Operator]

Our next question is from Harsh Kumar with Piper Sandler.

[Harsh Kumar, analyst]

Congratulations on the guide as well. My question is sort of on ACC. Could you help me sort of understand the scope and the size of this business? Are you the leader using 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, technology evolves. This is the first generation of ACC. What do you think or do you think Semtech has the goods to stay competitive in this market as other people look to get into the game? And maybe you could just help us get around what's needed to stay in front of this technological change.

[Hong Hou, executive]

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 use the multi-source and we are 1 of the 2 sources, as I understand at this point.

And certainly, the guidance we provided is based on 50%- 50% allocation but we have every intention to exercise our technologies differentiation and more importantly, at this point of time, the operations excellence.

So, to really provide the customers with shorter lead time, better on-time delivery performance, better quality, and that has been a hallmark of the operations. That's what I made the comments on initial observation of the differentiation of Semtech.

So, we hope we will be earning more than our fair share allocation in this. And so far, it looks very promising.

As for the second part of your question, how do we stay competitive? I think this part, the ACC from the beginning of the engagement, the ecosystem was not sure that we will be able to deliver the performance of signal integrity as needed.

Simulation sells good but when you have the real IC integrated into the real product, it may not deliver the performance as stimulated, but that's already behind us. And right now, looking really, really good performance, and we are in the process of finishing system validation and product qualification. So, we are preparing ourselves to ramp.

As we do that, I hand that over to the operations. Our R&D team already started to get in the next-generation product like 400 gigabit per channel. How do we do that? And I think we can all count on the industry, we will continue to push forward with a higher data rate, lower latency requirements, low power requirement. And this is a sweet spot and the market is moving towards us.

As we continue to innovate, I do believe the best defense for the position is the aggressive development and the engagement with the customers to provide the solutions they need at the time they need. So, I have the high confidence that we'll continue to lead in this area for a while.

[Operator]

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

[Scott Searle, analyst]

Hong and Mark, congrats on the quarter and the outlook. Mark, real quickly, I was wondering if you could repeat the lower 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 bit ahead of expectations with NVIDIA and the 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. And a lot of the conversation has been around the opportunity versus DAC. But I'm wondering where AEC fits into the equation as well.

[Hong Hou, executive]

So, Mark, you wanted to go first on the LoRa numbers?

[Mark Lin, executive]

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

[Hong Hou, executive]

Then I can address, Scott, your question about the timing of ACC ramp. And as I mentioned that right now, we're finishing up the system validation and the product qualification. Those are the last 2 days before the volume production.

So, in Q3, we expected the shipment in limited quantities, not gated by the demand, but there is going to be a cycle time from the far way. We have already anticipated that, and we got the wafer bank and BI bank build beforehand but the real meaningful ramp is going to be in our Q4, fiscal year Q4 and then throughout the 2026 FY, and we expect pretty healthy demand based on the current PL1 forecast.

And then you mentioned about AEC, you're right. So, the ACC will probably first and foremost encroach into the AEC market, and that's where the ACC provides the signal integrity requirement but reduce the power and reduced latency.

And then the deck cables and a lot of backplane on the new switch, 100 T switch deployed, they will be having a 224 gigabit service in the ports. So, 200 gig become the Ethernet port, I would imagine the scale out, they will need a lot of -- even the back point connectivities is the ACC cable, which will provide the signal integrity they need and low power consumption they need.

[Scott Searle, analyst]

But, Hong, just for clarification, you've achieved a system-level verification then with the current customer?

[Hong Hou, executive]

Yes. So, for the connectivity piece, yes, yes. But, of course, their system involved in many other things is way above and beyond just the connectivity. So, that is a value base there to be.

[Operator]

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

[Craig Ellis, analyst]

Hong, I'll echo the congratulations on the 10-year 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 that 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 #2 that you mentioned in your prepared script, if we were to look at what's possible for these businesses as you exercise some of your expertise in how they're directed. If we look out 2 to 3 years, how much bigger can the business be than where it will be as we look at it next year?

[Hong Hou, executive]

Yes, Craig, thank you very much. Great talking to you. Thanks for your question. So, on the ACC beyond the specific customer, beyond the specific platform, we are in the early stage of the engagement at this point. But we're excited about the engagement with the customers, they present their challenges and high-value problems.

We think that is riding our ally of the solutions we can provide on the ACC. So, we are still in the stage of understanding their requirements and quantify the opportunities and it might be a little too early for me to give you a number for the next 2, 3 years, what the opportunity is going to be. But directionally, I'm very excited about that.

And I think in my alley, I have a really extensive contact and the connections in the industry. We're going to continue to expand our reach and engagement with the industries. And maybe in the next earnings call, we'll have a better idea on the future opportunities of ACC beyond one platform, one customer.

[Operator]

Our next question is from Gus Richard with Northland Capital.

[Auguste Richard, analyst]

Congratulations on the results. I just want to ask about the competitive environment. Clearly, there's DSP versus analog. And I can think of Inphi, MACOM, you guys as competitors on the analog side in these high-speed interfaces.

Is there anybody else coming up that you see anybody with a similar type of capability beyond the companies I mentioned? I'm just trying to get a better handle on the competitive environment.

[Hong Hou, executive]

Thank you, Gus, for your question. I think for the analog expertise, you got it. Those are the 3 companies, I would say, on the first tier, I'm sure there is a new up-and-comers, they are excited about the opportunities as well. It takes a while to establish this capability from the design to testing to many other things in the ecosystem.

So, in the operations is another thing and I think we are at the right point, right time, and right place here to capture the enormous opportunities ahead of us. But as for the competitive landscape, you got it right. And I think both of the companies are very formidable and we can never kind of like take it easy.

So, I told my team, we need to be comfortably paranoid and tell into ourselves to continue to run fast and the only way to get our unfair share is by the fair performance, the super performance in technology and in operations.

[Operator]

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

[Mark Lin, executive]

All right. 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.

[Operator]

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