Q3 2025 Semtech Corp Earnings Call
Good day, and thank you for standing by.
Welcome to some tech corporations third quarter 2025 earnings conference call.
At this time all participants are in a listen only mode. After management's remarks, there'll be a question and answer session.
Please be advised that today's conference call is being recorded.
Speaker Change: I would now like to hand, the conference over to Mark Allin, Executive Vice President and Chief Financial Officer. Please go ahead.
Mark Allin: Thank you operator, good day, everyone and welcome I am pleased to be joined today by Hong Cole President and Chief Executive Officer.
Mark Allin: After market close we released our unaudited results for the third quarter of fiscal year, 'twenty 25, which are posted along with an earnings call presentation to our investor website at investors <unk> Dot <unk> Dot com.
Mark Allin: 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 two of the earnings presentation as well as the risk factors section of our most recent annual report on Form 10-K for information on risk factors that could cause our actual results to differ materially from those made.
Mark Allin: On this call.
Mark Allin: Unless otherwise noted all income statement related financial metrics will be non-GAAP other than net sales.
Mark Allin: Please refer to today's press release and see slide three of the earnings presentation for important information regarding notes tornado 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.
Speaker Change: Thank you Mark good afternoon, everyone.
Speaker Change: And almost six months into my tenure at the South Texas C O and it has been a very productive period.
Speaker Change: My numerous engagements with some tech employees customers suppliers and partners and just the operational and financial progress. We have made so far gives me high confidence in South, Texas near and long term growth prospects.
Speaker Change: We achieved a very strong Q3 weeks out with.
Speaker Change: With net sales growth margin.
Speaker Change: And EPS at the high end of our guidance range.
Speaker Change: While operating income and operating margin exceeded the high end of our Sky Ranch.
Speaker Change: Further our Q4 outlook projects continued scale in each of those metrics.
Speaker Change: In the last earnings call I shared three near term priority.
Speaker Change: I'm happy to report that.
Speaker Change: We are making progress on all fronts.
Speaker Change: First.
Speaker Change: On strategy portfolio rationalization and balance sheet improvement.
Speaker Change: We have completed an evaluation of our portfolio Hu, our annual strategic planning process.
Speaker Change: The purpose of this evaluation <unk>.
Speaker Change: Expanded beyond delineation of core and noncore assets.
Speaker Change: Provided that more granular assessment Cory.
Speaker Change: Relating investment levels and priorities to multi year three upstairs.
Speaker Change: You know what might be a generational opportunity stemmed from I I agree, but the product demand.
Speaker Change: We'll be increasing investment in data center products.
Speaker Change: Which way project to be in long term and transformation Nokia engine for Fab Tech.
Speaker Change: And some other areas, where you expect sustaining good investment at current levels will suffice.
Speaker Change: And our focus is to improve the contribution margins of this business is.
And that in fact, it's prudent investment levels paired with.
Regular reviews on a forecasted return on investment.
Speaker Change: We are committed to making timely adjustment it was a market that rapidly change.
Speaker Change: Our portfolio broadly inflect it took note, but I want to ensure my message is clear.
I expect the influx in Tokyo will benefit valuation, but will not delay the portfolio rationalization process.
Speaker Change: I'm fully aware of the financial and nonfinancial benefits our portfolio rationalization.
Speaker Change: And we are particularly focused on opportunities that accelerate our debt repayment and decrease our leverage ratio.
Speaker Change: Second.
Speaker Change: On a salaried and geos and driving margin expansion.
Speaker Change: He had made swift changes to dentists advising engagement with our customers to provide technical and all personnel solutions.
Speaker Change: And our Q3 reads out and Q4 outlook demonstrates our effectiveness opposition they said initiatives.
Speaker Change: We continue to see strong tailwind.
Speaker Change: Customers and targeted market are moving toward us.
Speaker Change: We have instituted a disciplined investment plan.
Speaker Change: Leveraging our comprehensive and incorporating performance objectives from key customers and meeting their critical business needs.
Speaker Change: I believe we have achieved multi generational roadmap alignment with the key customers.
Speaker Change: And we aspire to become their partner of choice for key technical and product solutions, we provide.
Speaker Change: I expect this initiative will accelerate sustainable market share gains and Sam expansion.
Speaker Change: Another driver is some types of operational excellence.
<unk> has executed to meet customer delivery timelines in the current dynamic environment.
Speaker Change: With noteworthy instances in our data center and high end consumer end market.
Speaker Change: Some tax operational excellence in on time delivery and superior quality.
Speaker Change: It should be it's to our customer and supply chain, we said lately.
Speaker Change: I know to be highly rallied.
Speaker Change: In this area I would be remiss, if I did not acknowledge the contribution from some tech foundry Assembly and test partners.
Speaker Change: Ms Helen Zhang.
Helen Zhang: Thank you to our foundry partners.
Speaker Change: That have probably already types that would be interested that demand many times well with the natural lead times.
Thank you to our assembly and test partners.
Speaker Change: Who would have.
Quickly you just out additional capacity to support Alphaville.
Speaker Change: Third.
Speaker Change: On energizing our people.
Speaker Change: I'm a firm believer in promoting our high performance culture and I'm proud that we have launched some take rising.
Speaker Change: And that initiative incorporating employee development.
Mentorship recognition and pay for performance elements to bring out the best from our employee base and elevating our determination and drive to win.
Speaker Change: This initiative also elaborates his expertise from some board members.
We modified the chatter of our compensation committee to become the human capital and compensation Committee.
Speaker Change: We firmly believe this change Alex let extend important human capital development.
And that aligns with some type of focus on creating and fostering and diverse and vibrant workforce.
Speaker Change: In the coming quarters.
Speaker Change: The three priorities will continue to be my focus.
Speaker Change: Moving to end markets.
For Q3 infrastructure net sales were $65 $8 million.
Speaker Change: 24% sequentially and up 52% year over year.
Speaker Change: And that said it was the fact that data center were a record 43 point and $1 million.
58% sequentially and up 78% year over a year.
Speaker Change: Consistent with our outlook for Q3 shipments commenced on our copper at 200 gig linear read drivers use day 1.6 T active copper cable all ACC applications.
Speaker Change: <unk> net sales were in the high single digit million dollars.
We expect the Yanks fundamentally higher contribution you know Q4, followed by a ramp progressing through FY 'twenty six.
Speaker Change: There have been multiple reports regarding black well G. P. You rack designs and timing of volume shipments.
Speaker Change: It could potentially impact the Tam and timing of ACC market worldwide provide the key enabling IC components.
That's that allow me to provide some assurance is based on our ecosystem engagement.
Speaker Change: We haven't even that's the time went down customer and end users up their racks over the past few months.
Speaker Change: We reaffirm our expectation of exceeding the floor case provided a couple of quarters ago.
Speaker Change: Based on the firsthand the information from the ecosystem.
Speaker Change: I connected with the Madden C S T tabled.
Speaker Change: Cable manufactures and ecosystem participants at a very well attended open compute project.
Speaker Change: Oh C P Global summit last month.
Speaker Change: We're matter presented contributed and demonstrating on the shelf, Florida, It's Catalina platform.
Speaker Change: Catalina is that dual rack and the hours 36 design connected with our copper etch in lifeboat Acc's.
Speaker Change: This appears to be a major platform that multiple C. S piece will adopt in the near future for their AI data centers.
Several companies are currently conducting design work using a tougher etch chips.
Speaker Change: Yeah, 200 gig traces on the airports to improve signal integrity.
Rack designs.
Speaker Change: Have a very rich and will continue to vary as C. S. T. It's deployed various company races in their data centers.
Speaker Change: But oh C P global summits reading from that might be league that.
Speaker Change: Oh 200 gig ports conduct ages, two tables with a less of up to three meters.
Speaker Change: More relevant major copper etch Sam.
Speaker Change: At 200 gig.
Speaker Change: And our cable length. After three majors Hefei will mean 6 million integrity requirements not readily achievable with direct attached copper data cables.
Speaker Change: And at a lower latency lower a house and a much smaller power consumption required compared to D. S. P based retirement solutions.
Speaker Change: Some tax a low power low latency Cocker etch solutions have gained positive attention in their data center ecosystem.
Speaker Change: And our technical collaboration with a number of our CSP and the cable manufacturers has accelerated since last quarter.
Speaker Change: My team to engagement with the architecture decision makers.
Speaker Change: And I can tell you exactly.
Speaker Change: The ecosystem.
Speaker Change: They significantly streamlined the time between understanding our customers' challenges.
Speaker Change: And delivering some catch the proposed solutions.
Speaker Change: I believe they said that.
Speaker Change: This is proven to be.
Speaker Change: A positive differentiator in tougher etch proliferation and improve the same types of M. P I time to market.
Speaker Change: In addition to cover edge, our Tri edge palm for our products continue to contribute meaningful sequential and year over year Geos.
Speaker Change: Our lease customer commenced production runs.
Speaker Change: 400 gig and Youll see product in Q3.
Speaker Change: Demand remains robust for our fiber edge plus the impedance amplifier O T I a N a laser fibers.
Speaker Change: Data center deployments at 100 gig has been ramping up strongly and we believe we have captured incremental market share. Thanks.
Thanks to our closer engagement with our customers.
Speaker Change: And they'll all operations excellence.
Speaker Change: Moving to linear Blockable optics O L. P O.
Speaker Change: We haven't received any so T I a odors from several module manufacturers for test and qualification. Both 800 gig and then 1.6 T. L. P O Transceivers E S P.
D. S. T engagement has proven insightful it appears that L. P O. Our adaptability is meaningfully co related with a Saturday, it's signal to noise ratio at the host.
Speaker Change: Fortunately, both current and future generation of switches supply significantly improved the performance and this enables easier L. P O adoption in many specific use cases.
Speaker Change: Our confidence in L. P. O adoption has increased since last quarter with a meaningful net sales contribution from T. I H and then raise driver is expected by the latter portion of FY 'twenty six.
Speaker Change: Within the infrastructure, all telecom business, consisting of Pong and the backhaul reported Q3 net sales of $28 $5 million.
We have been supporting our pilot Butte.
Speaker Change: Our triple Gen 50 gig PON with a major Chinese carrier.
Speaker Change: And our carrier Capex noticeable leave for five at mass deployment is expected to nominally improve over the coming quarters.
Speaker Change: Moving to our high end consumer end market.
Net sales were $40 million, a sequential increase of 8%.
Speaker Change: Reflective of market share gains and consistent with your expectations of a seasonally stronger Q3.
Speaker Change: Net sales in high end consumer T V. S grew to $28 $3 million up 9% sequentially and up 7% year over a year, where the secret sauce.
Speaker Change: Each quarter of the current fiscal year.
We've communicated market share.
Speaker Change: Consumer T V S.
Last quarter.
Speaker Change: Oh from entering our prior commentary.
Speaker Change: Our expectation is for continued market share expansion at the worlds largest consumer electronics company.
Speaker Change: I know that other key north American and Korean companies.
Speaker Change: So not only on our design in activities for future generations of products, but also for some taxes the ability to deliver on time and to meet that demand upside.
Thanks to our technology leadership proven quality and fulfillment capabilities.
Speaker Change: We are among the first to be added to a bomb for many products in the pipeline. So we have much greater visibility into their design cycles are for next generation products.
Speaker Change: All Clos leading per se product continue to excite the market with design wins are cross device manufactured in smartphone computing and the Wearables.
Speaker Change: Do you believe per se. Its capabilities are also highly valued by device manufacturers to maintain compliance with a specific absorption rate or SAR regulations.
While minimizing effects on device performance.
Speaker Change: In this area the ability to detect and measure distance to a human allows that he likes to optimize our Africa eastern power and data throughput.
Speaker Change: We are pleased to be included in the leading smartphone chipsets wenders reference designs to meet SAR requirements.
Speaker Change: Moving to our industrial end market.
For Q3, industrial net sales were $131 million.
Speaker Change: And 5% sequentially.
Speaker Change: Well the intake industrial end market.
Speaker Change: Lora enabled solutions recorded Q3 net sales of $29 million.
Speaker Change: 1% quarter over quarter, and up 104% year over a year.
Encouragingly consumption for all recent generation Lora products has been increasing.
With sick notes market adoption I'm, just you didn't have the capability.
Speaker Change: Laura Chen to offer it as a smaller footprint and reduce the power consumption well Lora Gen history, the labor to improved retail performance and the further simplification of customer development to onboard Laura one provisioning capabilities.
Speaker Change: Supporting lower one.
Speaker Change: Remains a key company strategy.
Speaker Change: I have benefited greatly from visiting the things conference in September.
As I said during my presentation at the conference.
Speaker Change: Laura has demonstrated tremendous potential with a comprehensive ecosystem.
Speaker Change: First the lower from concept to product and now to our industry.
Speaker Change: I gained very constructive input well at their conference on how <unk> can support ecosystem ecosystem enablement and enhance what I believe to be centex already robust hardware and software roadmap.
Speaker Change: The infrastructure to cover our GAAP less coverage for Lora continues to gain momentum.
Speaker Change: In addition to Echostar coverage throughout Europe.
Speaker Change: Let the operators are considering offering a similar service for Americas.
Speaker Change: We expect stuff that availability of lower O N.
Speaker Change: We will create a bond less potential for asset tracking.
Speaker Change: Oh I O T systems business recorded Q3, net sales of $57 $9 million up 11% sequentially, yet another quarter of net sales coupled.
Speaker Change: Coupled with robust bookings and backlog.
Speaker Change: As previously discussed some Texas started addressing channel and end customer inventory rates earlier in the cycle.
And at the market and flex upwards, our guiltiest now muted by the churn that would kind of jetson.
Highlighting customer engagement for this business I believe warehouses as successful customer wrong table in October where our customers provided valuable insights and helped to shape our roadmap.
Speaker Change: The wrong table also allowed us to further highlight our in House Trade Agreement Act all T. A a capability.
Speaker Change: We expect a brief significant value that's a north American supplier to that critical infrastructure markets we serve.
Are we getting house P. A a capabilities have contributed to funnel orders backlog and sales to federal agencies.
Speaker Change: An area, where we have identified at the adjacent market.
And a renewed focus.
Speaker Change: In Q3, we launched the Australian instance, off Airlink management services.
Speaker Change: Australia is one of our stronger markets outside of North America, and this instance, meis.
Speaker Change: However, it gets ever stringent local data resiliency requirements.
Q3, net sales for Iot connected service that were $24 $6 million with a slight sequential and year over year drill for distant reoccurring revenue business.
Speaker Change: Air Vantage allows our customers a single panel to monitor lifecycle management.
Speaker Change: Sampson and Sim management, all packaged with a robust the API.
Speaker Change: All future loss expectations are bolstered by additional customer adoption chopper air blankets, including air Vantage state of insights.
Speaker Change: And it's AI enabled features to facilitate the analysis and decision making on connected equipment.
We also expanded our smart connectivity platform to add wife's over a L. T E coverage, which is now available in over 40 countries and territories.
Speaker Change: Industrial T V S. Nice sales in Q3 were $10 $2 million.
Speaker Change: I put a robust 7% sequentially.
We have noticed the current market sentiment in the industrial market, but we remain confident in south, Texas with our product offerings.
Speaker Change: Oh, your industrial products addressing protection for electronics deployed you're increasingly harsh industrial environments.
Speaker Change: Our sector is increasingly automate all customers are increasing their reliance on some type of solutions.
Speaker Change: Whereas E V O E S D challenge, it's a bump.
Speaker Change: In the automotive market demand has increased sequentially with a drilling problem of the legacy wired and wireless networks in automobiles.
Speaker Change: Also some tech has been a leading supplier of advanced display protection solutions in the high end consumer market.
Speaker Change: I felt display customer diversify into the automotive sector.
We believe we are seeing a disproportional benefit in the automotive display market.
Speaker Change: In summary, I'm very pleased with some type of execution and the performance across our businesses in Q3, and now I'll turn the call back to Mark for additional details on our financial results and our Q4 outlook.
Speaker Change: <unk>.
Mark Allin: Thank you all for Q3, we recorded net sales of $236 $8 million up 10% sequentially.
Mark Allin: Net sales trend by end market reportable segment and geographic region is included on slide 16 of the earnings presentation.
Mark Allin: Gross margin was 52, 4% up 200 basis points sequentially and up 110 basis points year over year.
Mark Allin: Operating expenses were $86 million slightly below the mid point over outlook, increasing 3% sequentially and representing what we forecast to be prudent investments in the business to accelerate realization of growth opportunities.
Operating income was $43 $4 million, resulting in an operating margin of 18, 3% up 410 basis points sequentially and up 810 basis points year over year.
Mark Allin: Adjusted EBITDA was $51 $1 million and adjusted EBITDA margin was 21, 6% up 280 basis points sequentially and up 760 basis points year over year.
Mark Allin: Gross margin operating margin and EBITDA margin all sequentially increased in each quarter of fiscal year 'twenty five demonstrating our operating leverage.
Mark Allin: We expect to finish the year with sequential improvements in each of these metrics based on the midpoint of our Q4 outlook.
Mark Allin: Net interest expense was $18 $4 million and reported net earnings per share of 26 cents up from 11 cents in Q2 and up from <unk> in Q3 of last year.
Mark Allin: Operating and free cash flow for Q3 was $29 $6 million and $29 $1 million respectively.
Mark Allin: We ended Q3 with a cash balance of $136 $5 billion, which included a principal payment of $5 million on our credit facility.
Mark Allin: Subsequent to the end of the quarter, we made a further principal payment of $10 million and these payments are consistent with our previously stated capital allocation priority of reducing debt.
Now turning to our Q4 outlook. We currently expect net sales of $250 million, plus or minus $5 million, a 6% sequential increase at the midpoint. We expect net sales from the infrastructure end market to increase sequentially with data center applications, leading the growth.
Infrastructure is expected to provide the strongest near term tailwind.
Mark Allin: We expect net sales from behind consumer market to be down reflective of typical seasonality. We have gained market share in this end market you do not believe channel inventory is a headwind to Q4 expectations.
Mark Allin: We expect industrial net sales to be up with increases across Lora and our solar Iot portfolio.
Mark Allin: Based on the expected product mix in that sales levels gross margin is expected to be 52, 8% plus or minus 50 basis points at.
At the midpoint of our outlook this will be a 40 basis point sequential improvement.
Mark Allin: Operating expenses are expected to be $82 $8 million, plus or minus $1 million growing at about half the rate of net sales growth at the midpoint and resulting in operating margin midpoint of 19, 7%, a 140 basis point sequential improvement.
Mark Allin: Adjusted EBITDA is expected to be $56 $9 million, plus or minus $2 $8 million, resulting in adjusted EBITDA margin at the midpoint of 22, 8%, which would equate to a sequential increase of 120 basis points.
We expect net interest and other expenses to be $19 million and expect an income tax rate 15%.
Mark Allin: These amounts are expected to result in a net earnings per share of 32 plus.
Mark Allin: Plus or minus <unk> <unk> based on a weighted average share count of 80 million shares.
Mark Allin: Our outlook at the midpoint contemplates another quarter of growth in net sales improving gross operating and adjusted EBITDA margins and higher diluted earnings per share.
Speaker Change: With that I know like to turn the call back over to the operator for Q&A.
Speaker Change: Thank you.
And at this time, we'll be conducting our question and answer session.
Speaker Change: Please limit yourselves to one question plus one related follow up question for each time that your Q.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue you.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question comes from Quinn Bolton with Needham <unk> Company. Please state your question.
Speaker Change: Hi, hung and Mark congratulations on the nice results and outlook, especially in the data center business I guess, how long I wanted to start with the data center business. It sounds like you continue to be very comfortable with the floor.
Speaker Change: Cam for E T six, but hoping you might be able to elaborate on that you mentioned are there.
Speaker Change: Catalina Iraq is an opportunity, but wondering if the ACC Tam that you see now starts to encompass other opportunities at am hyper scaler or CSP and so just wondering if you might be able to talk about some of the use cases, you see starting to contribute.
Speaker Change: To that 100 plus million dollar opportunity. Thanks.
Thank you Quinn.
Speaker Change: Yeah. So that's why I discussed at the Oc P who participated.
Speaker Change: Participated as well Camelina is it going to be the main platform. We know one major C. S piece is going to be used at the baseline for deployment in 2025 and beyond as long as they use at GBP 200 GPU processors.
Speaker Change: And we know that our standard is getting traction and but I haven't.
Speaker Change: Get the detailed confirmation on which C. S P. So using and what proportion.
Speaker Change: Another major progress I would say since the announcement of an ACC eat the awareness level by the C. S. Pete on this allergens capability and solution to improve the signal integrity and improve the link budget by.
Speaker Change: By adding very small fraction of the power consumption no latency.
Speaker Change: And a very little.
Speaker Change: Well the incremental cost.
Speaker Change: Well. So now we are seeing many it's several C S piece.
And EDA companies.
Speaker Change: Considering using the linear equalizer in their entire trees design can be on the board.
Speaker Change: Can be in the connectors can be in the cables as well so that gives me the confidence that after the O C. P that our floor case.
Speaker Change: Guided a couple of quarters ago is indeed, a floor case.
Speaker Change: Perfect and maybe just a quick follow up there just.
Speaker Change: For the CSP is looking to use linear drivers in cables are pcbs does that ramp in calendar 2020 five or do you think that that's a longer term opportunity and then my follow up is you seem to be more.
Speaker Change: Now about the L. P O opportunity I think he said you've you've got initial orders for key I as for L. P O starting to ramp in fiscal 'twenty six to the back half of fiscal 'twenty. Six can you talk about what types of applications, you're seeing L. P. O's I'm starting to be deployed this year. Thank you.
Speaker Change: Yeah, Let me, it's just a follow up on the first one on the ACC.
Speaker Change: So they are the applications you know you know on the on the board and the cable and even in our connectors.
Speaker Change: By the multiple C. S piece or are in the qualification phase and getting the demonstration phase so that typically a good thing about a copper based solutions is the qualification cycle is relatively short compared to the optic.
Speaker Change: Related products, so I would say are probably from.
Speaker Change: The mid of 2025 calendar year.
The other opportunities they lead the equalizer will start contributing to the revenue.
Speaker Change: As for the L. P O as I mentioned in the prepared remarks that we have already got orders and shipped in low volume, albeit there's there for 800 gig.
D R eight mm 100 gigabit.
Per second per trees, and one six T side are they primarily on T. I E.
Speaker Change: They are building transceiver modules in shipping to different customers for qualification and the applications are for both our scale up and scale out so the scale out its primarily a connecting the the.
Speaker Change: The Nic cards to Popper pop with Iraq, how end up in a row, our switches and scale up is to increase the cluster sites for a GPU compute cluster ASIC compute cluster by some csp's.
Speaker Change: Yeah.
Speaker Change: Perfect. Thank you for that additional color around.
Speaker Change: Thank you.
Our next question comes from harsh Kumar with Piper Sandler. Please state your question.
Speaker Change: Yeah, Hey, Mark Lyn Mark hung in the entire Symantec team.
Speaker Change: Congratulations on a very strong quarter, a very strong guide.
Speaker Change: I had one quick one on data center and another one on I'll feel I'm sure hung for you could you just give us an idea of.
Speaker Change: What you're thinking about the growth for ACC in the January quarter as Youre guiding and then when do you think it will steady out to a sort of a steady state sales format.
Speaker Change: Is it second half or will it continue to build through the year and then I will follow up.
I will let mark answer the agency question.
Speaker Change: Harsh.
Mark Allin: We said this in Q3 it was high single digit millions in Q3, so it's a nominal ramp in Q4, and then progressively ramps FY <unk> through FY 'twenty six Q1, Q3, Q and Q1, Q2, Q3 and Q4, so we've been pretty consistent with that messaging and we don't really see a change in that timing.
Yeah.
Speaker Change: Great. Thank you and then for my follow up if I can talk about maybe a very theoretical question hung so a lot of debate on I'll tell you. There's a lot of nonbelievers I think it'll never happen because of inter changeability is it possible in theory to have a compatible enter.
Tangible module using our P. R. I suggest here radically impossible could this eventually just take over the whole optical business.
Speaker Change: Yeah harsh that's a good question and I think the debate is still ongoing and even after two years and what I have found out is that the early sentiment developed nearby.
Speaker Change:
Speaker Change: Got it.
Speaker Change: Impossibility.
Speaker Change: So the L. P O for scale out it was largely done on the previous switch version, where we understand that signal to noise ratio from the host is not as good as our current generation say for example, Tomahawk five.
So if they did the L. P O and test it in a previous version certainties and there might be at very little margin and that's make interoperability very difficult, but in our current and future generations with switches Fortunately the host.
Speaker Change: That Mr. <unk> has demonstrated really pretty superb signal to noise ratio and so they L. P. O is like the ACC linear equalizer is essential part of it at the start so you know that Oh, that's a good signal to noise ratio and current and future.
Speaker Change: Yours are switches can use L. P O.
Speaker Change: But I'd say.
Speaker Change: Adopted adoption timeline getting closer and we noticed that in many C. S piece. They started pivoting to help our oh, so basically using one side or the linear rise the other side to re timed the solution to be safe because they do need a low power.
Speaker Change: 160 interconnect solutions to us we have the.
Speaker Change: Arguably the best driver a batch T I E on the receiving side. So we will benefit from either L. P. O L. L. R. One and that's our industry progress in getting better understanding.
Speaker Change: On the compatibility of different type of a host with a L. P O and O R. O capabilities I do believe this type of Transceivers can chip away a sizable total addressable market currently.
Speaker Change: Currently served by the D S P <unk> timing solutions.
Speaker Change: Congratulations guys. Thank you so much.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Cody Acree with the benchmark company. Please state your question.
Cody Acree: Yeah, Thanks for taking my questions and congrats on the progress.
Speaker Change: Guys could you really hung could you talk about.
Speaker Change: Specifically to the Blackwell opportunity, obviously, they've been talk about the 36 by two platforms discontinuation.
Speaker Change: Development support.
Speaker Change:
Speaker Change: It doesn't sound like that that's happening at a certain CSP that youre working with I Wonder if that's more of a one off in the industry is that something that you're seeing more broadly.
Speaker Change: <unk> continued to be adopted or is has there been a change and nvidia that is impacting the broader ACC opportunity.
Speaker Change: That.
Speaker Change: Customer program.
Speaker Change: But may not be impacting the long term opportunity beyond them.
Cody Acree: Yeah, So Cody I definitely have talked to many C S cheese, and and everyone. They have their views and but largely based on.
Cody Acree: How many are compute how much compute power. They want you to have in our clusters. So as right now 72 Gpus seem to be a I do cluster sites.
Cody Acree: But there's also bounded by their ability and their data center infrastructure to cool the Rex and 36 by two seem to be pretty ideal in for one leading C. S. P. We know that as their baseline for 2025, and 26 and for as long as they use Blackwell.
Cody Acree: And I have heard some others using in the 72 and where we don't have a the.
Cody Acree: The contribution for back flying, but there's a front end they either need to connect 160 ports.
800 gigabit ports to toppled Iraq, all end up their ROE switches I think that's where L. P. O I can really have a a a good provide very differentiating solutions because of the low power consumption. So I think that's probably why the industry is.
Cody Acree: Pushing very hard on the L. P O solutions, but I support a different variety of Rex we're gonna be continue to do here reports in the future. Just you know Friday aspiration to continue to increase the number of Gpus in the cluster to be able to handle more.
The model with more parameters and so it's gonna be dynamic that's why I wanted to really say I believe that counting the number of ports of our 200 gigabit per second will be a more relevant measure going forward rather than just stare at how many okay.
Cody Acree: The IL 36 racks out there.
Speaker Change: Alright, thank you very much for that color.
Speaker Change: Can you maybe just help frame your overall data center opportunity how much of that is is a fiber and tri edge in the future and delineate that from your ACC in your L. P O opportunity.
Yeah.
Speaker Change: Typically or historically, we haven't provided that delineation well, we gave a high single digit million figures for ACC, but I mean realistically the entire data center market is growing quite robustly for all of our products.
Speaker Change: See you know Pmt's triage and you know we expect window appeal those ramp you know it'll grow continue to Oh.
Speaker Change: That growth level.
Speaker Change: Thank you.
Speaker Change: And our next question comes from tourists Svanberg with Stifel. Please state your question.
Yes, Thank you and congratulations on the strong results.
Hung the copper rich revenue high single million four four for next quarter.
Speaker Change: So for this quarter.
Speaker Change: What's the mixture between two.
200 gig versus 100 gig it sounds like it's primarily 200 gig and as we think of fiscal 'twenty six well again, the majority of the mixed B 200 gig for life.
Speaker Change: Thank you Terry Yes are they are the revenue in Q3 uncover edge, it's primarily 200 gig and going forward. The 200 gig is going to be the primary driver as well we do have some contribution.
Speaker Change: For 100 gig, especially after the industry is aware of the capability that the linear equalizer is providing to improve the 6 million integrity. Some C. S piece are revisiting their architecture in the data center and start considering.
Using 100 gig ACC instead of tax tables, but the contribution we count and we guide is primarily 200 gig Troy, Let me just double click on that.
Speaker Change: Q3, but the 200 gig was substantially all of our corporate treatments.
Speaker Change: Perfect. Thank you for that and let me move on to our non data center question. So.
Speaker Change: You guys have done a good job to climb back to this billion run rate that you've got.
Speaker Change: <unk> four for the January quarter.
Speaker Change: Think about strategically you know.
Speaker Change: Because Hong you mentioned Youre still reassessing everything so.
Speaker Change: How much of that $1 billion should we think of as true strategic revenue.
Speaker Change: You know versus perhaps a segments of the business that are requiring less investments at this point.
Speaker Change: So that's a good question for the Q4 guidance, we break down the different the industrials segment. We are wait wait wait we have right now and so you can use that as a guideline.
Speaker Change: <unk>.
Speaker Change: Fair enough. Thank you.
Speaker Change: Thank you. Our next question comes from Tristan <unk> with Baird. Please state your question.
Speaker Change: Hi, good afternoon.
Speaker Change: A couple of edges whacking, how should we look at the free cash flow generation over the next few quarters and any update on that.
Speaker Change: This debt.
Speaker Change: Average ratio you'd expect to exiting next year.
Yeah, Let's say you know I'm quite pleased Tristan you know Q3 operating cash flow was $29 $6 million free cash flow was $29 $1 million. So you know cash flow definitely we've been inflicted are consistent with the consistent with the business and I'm pleased that you know cash flow is really.
Speaker Change: Generation was broad based across our businesses, we may have to build a little bit more inventory supporting demand, but we continue to generate cash and as you see that as soon as we generate the cash we delever right. We paid on principle in terms of what we're going to exit you know, we only guide one quarter, but you know you can you can maybe take a look at our EBITDA.
Speaker Change: That we reported this quarter kind of annualize that might give you an indication of a potential.
Speaker Change: Potentially where the or our leverage ratios are heading.
Speaker Change: Great. This is helpful.
Speaker Change: And then if I look at coherent.
Speaker Change: <unk> DSP.
Speaker Change: Back in September does.
Speaker Change: Does that create opportunities for your TIAA in terms of content in and is that a solution that eventually.
Speaker Change: Gets available outside of India and are you in that particular transceiver to reach additional customers.
Yeah, Tristan so for every D. S. P. A read times Transceivers, we should have content in there and we definitely are.
Our baseline data center revenue.
Speaker Change: Its been primarily driven by that DSP based transceivers.
Speaker Change: And Q3 is the first quarter, we had some meaningful revenue from the copper edge for ACC and but that DSP based transceivers will continue to drill we'll continue to benefit from that.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Our next question comes from Scott Searle with Roth Capital Partners. Please state your question.
Speaker Change: Hey, good afternoon, thanks for taking the questions and congrats on the data center performance, maybe I'll shift away from the data center since it seems like it's been covered hung on the PON front. It seems like it was another decent quarter still really China focused I'm wondering if you could give us some thoughts in terms of the incoming administration and any sort of impact on the PON business in China. If there is.
Speaker Change: Kind of how you're thinking about growth there and then specifically how you're seeing design activity outside of China, particularly as we start to talk about 10 gig and above.
Speaker Change: Thank you Scott so they are the pawn business.
Speaker Change: To this point has been primarily.
Scott: In China, and we expect another tender offers over the next quarter or two.
Scott: And we have the product ready for it we have a triple Gen demonstration in there and it can operate at 10, 25, and 50 gig and so that is really.
Scott: Setting the benchmark off that capability, we're the leading provider in that market.
Scott: As for what is a.
Scott: The future.
Scott: The political situation there you know.
Speaker Change: We are paying we are absolutely very mindful about that but so far we have not seen any impact.
Speaker Change: As for use issued a report about our calix and Louisiana. They got a that the beat our founding so we have been engaging with all the leading equipment manufacturers in the U S for the U S pawn opportunities as well so we're really.
Speaker Change: Well positioned for you know the global infra.
Speaker Change: The infrastructure upgrade.
Speaker Change: And beyond China, and the U S. We're trying to sue our module manufacturers address other part of the market, but those are the two major markets afford upon opportunities.
Speaker Change: Great very helpful and if I could follow up just on the lower front continuing to stay away from data center for a minute a nice recovery quarter I think of 29 million I think it is still below where you had peaked a couple of years ago, and the $40 million or so range I'm wondering if you could talk a little bit about some of the applications, where you're getting the traction I know there'd been.
Speaker Change: You know some tons in a wide buildout is being driven by guys like net more on Europe. It sounds like Theres some opportunities in the U S. But just kind of give us some high level thoughts in terms of where you see that design traction and how we should think about that growth rate going forward from these levels. Thanks.
Speaker Change: Thank you Scott so yeah. The previously in a couple of years ago. The Lora market has a noise about the helium you know so I think that noise dissipated and right now and we see them clear signal of the continued growth.
Speaker Change: Say Q2 to Q1, we had a strong growth in Q3 to Q2, we have the margin really.
Imagine a world where drill it's embedded year over a year basis, we had a strong growth all use cases right now I have spent a lot of time talking to ecosystem partners I'm just totally fascinated.
Speaker Change: Traditionally it has been smart metering, but is it connected spaces and for automation for.
Speaker Change: Asset tracking and now I see more and more use cases, and you mentioned about nine more they come out very strong they are.
Speaker Change: Aspired to consolidate and to have multiple.
Speaker Change: Territory and multiple on our country's presence and to proliferate their successful and rewarding use cases, I think that is really showing that the industries are maturing.
Speaker Change: And so far the major applications is a smart metering and asset tracking.
Speaker Change: The asset tracking is it going to be having a lot more applications.
Speaker Change: And then the smart homes smart factories and use cases has been more known right. Now there are a lot of Oh, well established solutions for those and I talked to several companies that you're seeing tremendous growth in their business in those.
Speaker Change: In those.
Speaker Change: Use cases.
Speaker Change: So we're very excited about the lora.
Geos perspective.
Speaker Change: And we will be having new product coming out Gen three and Gen four and make the development tons downstream integrated loosens easier.
Speaker Change: And we plan to use the Lora alliance to provide more enablement to the ecosystem and reached the level of awareness of the successful use cases.
Speaker Change: Okay, great. Thanks, so much and congrats on the quarter and outlook.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Craig Ellis B Riley Securities. Please state your question.
Speaker Change: Yeah, Hi, Mark congrats on the execution, especially around growth and.
Speaker Change: And margins hung I wanted to go back to the data center, but maybe approach it in.
Speaker Change: On a more longer term why are you. So I think it was at least three quarters ago that we started talking about what seem to be a single company more single product opportunity is having a 100 million dollar based opportunity to it that would be in the two.
Speaker Change: 'twenty five 'twenty six time frame. The question is this is as the business looks like it's gotten significantly broader customer and and application bubble.
Speaker Change: Exposure in design and potential how do we think about the size of this business two to three years down the road.
Speaker Change: Craig That's a great question, you know I think say opportunities started with as a single company single platform.
Speaker Change: And that is a great trailblazer.
Speaker Change: For this new product.
Speaker Change: Accelerated our time to market, but right now as humans and as we observed this capability, it's a broadly recognized and beyond that single company beyond the single platform. So that's why we have been thinking about it.
Speaker Change: And to quantify the opportunity by counting the number of 200 gigabit per second ports.
Speaker Change: The reason for that is that every word you have 200 gigabit per second transport you have the same challenge you had need the same solution for 6 million integrity and what is the Tomahawk six rolling out right around the corner well maybe six.
Speaker Change: Six to 12 months and all of the ports. It is going to be 200 gig and is only increasing our opportunities. So so far the application has been for scale up but with the scale out added into the opportunity pool, where you've got a tremendous opportunity.
Speaker Change: D. In there so probably a better a more relevant measure is to quantification of the number of 200 gigabit ports and then you can to put them out it player adoption ratio, you know, 30%, 50% or 70%.
Speaker Change: So we are in the process of establishing that model to quantify the opportunity so that people would not just stare.
Speaker Change: So how many and the IL 36 racks are being forecasted and are being built.
Speaker Change: So we will reevaluate that progress as we're making are a.
Good progress.
Speaker Change: That's helpful summary, thanks, very much Mark I wanted to cycle back to you you talked about are things happening in Hong talked about where we are on the calendar or planning cycle with expense management as we think beyond the fiscal fourth quarter and think through 2025 are there any.
Speaker Change: Continuity is coming with expense investment whether it be a matter of fact costs or other things and should we continue to expect that that R&D and opex would grow with some small coefficient of of revenue growth is.
Speaker Change: Is that reasonable or are there one time things coming.
Speaker Change: Yeah, Craig we don't see any onetime things coming we've gone through our strategic planning. So we do expect incremental investments, but I believe those incremental investments will have near term returns.
Speaker Change: The other areas.
Hong is absolutely stress theres no evergreen R&D projects. So if something were to turn in the market moves away from that particular application.
We don't mind, just just kind of the cost is sunk and redirecting our efforts in terms of growth. We've reiterated you know a number of times you know healthy growth as probably you know opex grows at half the rate of revenue growth and I think that's where we're sticking to our now just some of that operating expense investment will be redirected.
Speaker Change: In our prepared statements, probably a little bit more towards data center, but those are some near term growth opportunities there.
Speaker Change: Got it thanks for that Mark Thanks, Sean sure thing correct.
Speaker Change: Okay.
Speaker Change: And our next question comes from Christopher Rolland with Susquehanna International Group. Please state your question.
Speaker Change: Hey, guys. Thanks for the question I want to Echo my congrats on a on a fantastic quarter and guide.
Speaker Change: So my.
My first set of questions are around ACC, and I guess, maybe first level set how much of copper edge, where you're shipping in in Q2 or was that high single digits million are all incremental and then are the bulk of these shipments.
Speaker Change: Is this all to the big AI GPU guy directly and they're gonna be using it for like branded cables or are these going to like third party cable Oems for channel sales or to like the C. S. P's correct, you know via E. M S.
Speaker Change: How is the go to market here for for these shaking out and and and and how might you expect that to to change through our through the next 12 months.
Speaker Change: Yeah, Great question, Chris what we're looking at and when we when we mentioned that its high single digit millions of copper ridge effectively you can consider that 200 gig gig active.
Speaker Change: Out of copper cable and its really directed or our customer is a cable suppliers, but I think we get the demand from a moving.
Speaker Change: Moving from that large large company right. So at this point just with the demand for the cables I don't think really anything is going into channel, it's really point to a supply a rock shipments.
Speaker Change: And then just want to add to that.
Speaker Change: Just to add to that Chris you asked about Q2 Q2 basically it just is very minimal sample quantity. So that Q3, the high single digit million dollars.
Speaker Change: Is it the first volume how you consider that for you know one six T applications there Chris.
Speaker Change: Excellent. Thank you very much and then just a quick clarification was part of I guess PON was down if I'm doing my numbers right.
Speaker Change: But just just wanted a clarification, but but a better question perhaps.
Speaker Change: Bigger picture is around divestitures.
Speaker Change: Where do we stand there or are you guys still interested in selling parts of the business and and Conversely, what is the interest in and perhaps buying parts of your business as well.
Speaker Change: But that's an area of course, where we're a little bit sensitive we did in our prepared remarks, we did keep a kind of balance sheet and portfolio is the number one priority and we do believe order matters. So it is the number one priority.
Speaker Change: At this point I think all of our businesses have inflicted the growth. So you know as Hong mentioned in his prepared remarks, we believe that should help valuation, but that in no way will delay or you know or maybe impede or a desire to patel.
Speaker Change: Potentially divest these non.
Speaker Change: Non core businesses.
Speaker Change: Okay.
Excellent. Thank you guys.
Speaker Change: Thank you Chris.
Speaker Change: And our next question comes from tore Svanberg with Stifel. Please state your question.
Tore Svanberg: Yeah. Thanks, I just had a quick follow up for Mark Mark So 40 bits baseband to prevent gross margin for January how should we think about gross margin for fiscal 'twenty six is it mainly a mix at this point that will.
Tore Svanberg: We will drive the gross margin or <unk>.
Tore Svanberg: Is there all the other things you know maybe scale or anything like that that could potentially also lifted as well.
Speaker Change: Skilled definitely helps but.
Speaker Change: Definitely that is the primary driver.
Speaker Change: And our guide is mix. So it's up 40 bps improvement, but we did get a little bit of a tailwind from the culprit shipments this quarter right. So that was a that was definitely a tailwind, but you know as other portions of our business and flipped a port you know theres, a little bit lower margin.
Speaker Change: In Iot our systems hardware business.
Speaker Change: So that's a little bit lower you know will definitely take the gross profit rate, but definitely that business doesn't contribute quite the percentages, let's say our infrastructure business.
Speaker Change: Sounds good thank you alright.
Speaker Change: Okay.
Speaker Change: Thank you and there are no further questions at this time I'll hand, the floor back to Mark Allin for closing remarks.
Great. Thank you for joining and please visit our investor website at investors <unk> Com, where we posted upcoming investor conferences, where something will be in attendance have a great day.
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